UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM__________ TO _________.
COMMISSION FILE NUMBER 000-29927
IMPROVENET, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 77-0452868
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
8930 E. RAINTREE DRIVE, SUITE 300
SCOTTSDALE, ARIZONA 85260
(Address of principal executive offices)
(480) 346-0000
(Registrant's telephone number, including area code)
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $.001 par value per share
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-B is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [ ]
State issuer's revenues for its most recent fiscal year. $777,000.
The aggregate market value of the voting stock held by non-affiliates of
the registrant, based on the closing sale price of the common stock on March 31,
2003 was approximately $501,411.00. Shares of common stock held by each current
executive officer and director and by each person who is known by the registrant
to own 5% or more of the outstanding common stock have been excluded from this
computation in that such persons may be deemed to be affiliates of the Company.
This determination of affiliate status is not a conclusive determination for
other purposes.
The number of shares outstanding of the registrant's common stock, $.001
par value, was 39,110,428 as of March 31, 2003.
DOCUMENTS INCORPORATED BY REFERENCE
NONE.
IMPROVENET, INC.
FORM 10-KSB
FOR THE YEAR ENDED DECEMBER 31, 2002
INDEX
PAGE
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PART I
Item 1. Description of Business 2
Item 2. Description of Property 24
Item 3. Legal Proceedings 24
Item 4. Submission of Matters to a Vote of Security Holders 24
PART II
Item 5. Market for Common Equity and Related Stockholder Matters 24
Item 6. Management's Discussion and Analysis or Plan of Operation 25
Item 7. Financial Statements 31
Item 8. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 31
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance With Section 16(a) of the Exchange Act 32
Item 10. Executive Compensation 35
Item 11. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters 36
Item 12. Certain Relationships and Related Transactions 37
PART IV
Item 13. Exhibits and Reports on Form 8-K 37
Item 14. Controls and Procedures 37
SIGNATURES 38
i
RECENT DEVELOPMENTS
Effective December 23, 2002 (the "Effective Time"), Etech Acquisition, Inc.
("Merger Sub"), a newly formed Arizona corporation and wholly-owned subsidiary
of ImproveNet, Inc., a Delaware corporation ("ImproveNet" or "the Company"),
merged (the "Merger") with and into eTechLogix, Inc., an Arizona corporation
("eTechLogix") pursuant to an Agreement and Plan of Merger dated July 30, 2002
(the "Merger Agreement"). The description contained in this Item 1 of the
transactions consummated pursuant to the terms and conditions of the Merger
Agreement is qualified in its entirety by reference to the full text of the
Merger Agreement, and the amendments thereto, which are incorporated herein by
reference. The Merger Agreement is filed as Exhibit 10.39 to the Report on Form
8-K filed by the Company on August 6, 2002 and which provides additional
information regarding the Merger Agreement. Amendment No. 1 to the Merger
Agreement and Amendment No. 2 to the Merger Agreement which are filed herewith
as Exhibits 2.4 and 2.5.
At the Effective Time, each outstanding share of the common stock, no par
value per share, of eTechLogix ("Etech Common Stock") was converted into the
right to receive and became exchangeable for 5,555.555556 shares of common stock
of ImproveNet, par value $0.001 per share ("IMPV Common Stock"). A total of
35,417,750 shares of IMPV Common Stock were issued in the Merger to eleven (11)
different shareholders of Etech Common Stock. Of the holders of Etech Common
Stock, Jeffrey I. Rassas, Homayoon J. Farsi and Naser Ahmad, the directors of
Etech, (the "Etech Directors") collectively received 30,310,740 shares of IMPV
Common Stock in the Merger and have acquired control of ImproveNet. At the
Effective Time, the Etech Directors collectively held 57.06% of the outstanding
shares of IMPV Common Stock. There are no agreements between the Etech Directors
regarding their holdings of IMPV Common Stock.
ETechLogix is now a wholly-owned subsidiary of ImproveNet. However, as a
result of the change in control of ImproveNet, eTechLogix is the "acquiring"
entity and ImproveNet is the "acquired" entity for accounting and financial
reporting purposes.
In addition, each outstanding warrant which was exercisable to purchase
shares of Etech Common Stock was converted into a warrant to purchase a number
of shares of IMPV Common Stock equal to the number of shares of Etech Common
Stock that could have been purchased by exercising such warrant multiplied by
5,555.555556, at a price per share of IMPV Common Stock equal to the per share
exercise price of such warrant divided by 5,555.555556. Warrants to purchase
1,500,000 shares of IMPV Common Stock were issued in the Merger. Also, 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 IMPV
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 IMPV Common Stock equal to the per share exercise price of $0.05 per
share. Options to acquire 788,889 shares of IMPV Common Stock were issued in the
Merger of which 222,222 had vested as of December 23, 2002.
The Merger was intended to qualify as a tax deferred reorganization under
Section 368(a) of the Internal Revenue Code of 1986, as amended, and to be
accounted for on a purchase basis. Neither ImproveNet nor any of its affiliates,
directors, or officers or any affiliate of any of ImproveNet's directors or
officers had any material relationship with the holders of securities of
eTechLogix at or before the Effective Time. eTechLogix is a leading developer
and marketer of enterprise commerce management software applications for the
supply side of the building materials industry.
SPECIAL NOTE REGARDING FINANCIAL RESULTS RELATIVE TO THE BUSINESS OF THE ISSUER
As a result of the Merger which occurred late in 2002, eTechLogix is deemed
to be the "acquiring" entity and ImproveNet the "acquired" entity for accounting
and financial reporting purposes, and the financial reporting in this report on
Form 10-KSB primarily and almost exclusively reflects only the activity of
eTechLogix during the designated periods. With regard to the discussion in ITEM
1 DESCRIPTION OF BUSINESS set forth below, financial information regarding the
service provider matching services and marketing services, which comprises the
primary activity of ImproveNet, is not reflected in the financial results set
forth in ITEM 7 FINANCIAL STATEMENTS. The financial results primarily reflect
activities of eTechLogix and comprise sales of the business management software
and of the offerings to the manufacturers and distributors in the building
materials industry. Despite this fact, the activities of ImproveNet are a major
focus for us following the Merger, and through the first quarter of 2003, the
service provider matching services of ImproveNet are the primary revenue
generating component of the combined businesses of ImproveNet and eTechLogix.
SPECIAL NOTE ON FORWARD-LOOKING STATEMENTS
In addition to historical information, this Annual Report on Form 10-KSB
contains forward-looking statements based on our current expectations about our
company and our industry. You can identify these forward-looking statements when
you see us using words such as "expect," "anticipate," "estimate," "project" and
other similar expressions. These forward-looking statements are subject to
certain risks and uncertainties that could cause actual results to differ
materially from those reflected in these forward-looking statements. Factors
that might cause such a difference include, but are not limited to, those
1
discussed in the section entitled "Management's Discussion and Analysis of
Financial Condition and Results of Operations, Risk Factors that May Affect Our
Results of Operations and Financial Condition" and elsewhere in this report. We
undertake no obligation to publicly update any forward-looking statements for
any reason, even if new information becomes available or other events occur in
the future.
PART I
ITEM 1. DESCRIPTION OF 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.
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 Merger Sub 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. 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.
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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:
* 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.
* eTechLogix has developed intellectual property which it has marketed
under the brand name Smart Fusion(SM) 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.
* eTechLogix has developed intellectual property, marketed under the
brand name of eBusiness, 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.
* 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.
* 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.
BUSINESS OF ISSUER
ImproveNet, Inc. is a nationally recognized provider of home improvement
services. There are two major categories of home improvement services: service
provider matching services and marketing services. In addition, through our
wholly-owned subsidiary eTechLogix, we are a developer of and marketer of
Enterprise Commerce Management ("ECM") software sold under the product
servicemark of Smart Fusion(SM) 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 revenue for the Company. Since its inception, the Company has invested
quite heavily in establishing a pool of national remodeling contractors. The
Company considers 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 on-line customers.
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. We anticipate becoming a leading
Enterprise Commerce Software provider in that space, delivering solutions that
integrate seamlessly with legacy IT systems. Our solutions enable customers to
increase profitability through improved sales processes and reduce costs by
minimizing operating inefficiencies.
3
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 from the US Census, were at a seasonally adjusted annual rate of $165.8
billion, representing $119 billion on larger discretionary projects and $46.8
billion 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 includes 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. 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.
4
BUSINESS OBJECTIVES AND STRATEGIES
THE IMPROVENET STRATEGY
ImproveNet's strategy is to become one of America's premiere building
materials 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 qualified 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:
* Strengthen the pool of high quality information and content on our Web
sites;
* Strengthen the size and capabilities of our network of service
providers;
* Strengthen our relationships with suppliers through enhanced
co-branded opportunities and highly targeted advertising products; and
* 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:
* Upgrading and improving our Web based content to create better quality
home improvement jobs;
* Increasing participation by interested, responsive and screened
service providers;
* Offering tools and incentives to help ImproveNet service providers
compete more successfully;
* Developing tracking systems and procedures to identify wins that are
not reported to us by either the service provider or the homeowner;
and
* Initiating service provider recruitment programs to increase
participation in our network by utilizing call center operations
through existing relationships with companies in India and Bangladesh.
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 400 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
5
$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:
* Target the BMI one vertical segment at a time such as, WND, roofing,
plumbing, lumber, etc., providing a highly targeted solution;
* 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;
* Develop and market the best web-based solutions that solve pervasive,
urgent problems for customers;
* Ensure seamless integration to the BMI supply chain from end user to
manufacturer, enabling companies to leverage their existing IT
Infrastructure investment;
* Define a specific niche market segment utilizing a direct sales model,
while leveraging vertical partnerships to penetrate enterprise
customers;
* Deliver customer-driven value propositions based on deep domain
experience and understanding of our target market;
* Maintain technological expertise and competitive advantage to deliver
open solutions that are "Pure Internet"; and
* Create options for significant expansion (geographically, vertically
and with new products).
* 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:
* 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.
* 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, service providers must
6
have a clean credit and legal history, appropriate insurance 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.
* 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. For projects greater than
$500, our matching process often provides more than one service
provider, creating a competitive marketplace for their home
improvement bid.
* ONLINE FINANCING. In December 2000, we launched a new "Find a Lender"
program on our site where remodeling homeowners can apply online for
home equity loans and lines of credit and receive instant approval
decisions.
* PROJECT COMPLETION BY IMPROVENET. For selected projects and markets,
ImproveNet, Inc. will act as the general contractor to ensure a
nationally consistent quality approach to home improvement repairs.
The Company is currently providing such service in two major markets
in the United States.
FOR IMPROVENET SERVICE PROVIDERS:
* 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 needs and circumstances. Through our ImproveNetPro.com
website, we communicate job leads in near real-time to the selected
service providers.
* 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 30,000 eligible service providers in our network
who may receive qualified job leads from us.
* 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. Furthermore, through our SmartLeads
program, service providers in our network are able to gain business
and financial efficiencies that are not likely available to their
competitors.
FOR MANUFACTURERS, DISTRIBUTORS, AND SUPPLIERS OF HOME IMPROVEMENT PRODUCTS:
* 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.
Banners, buttons and other forms of advertising allow these suppliers
to target their message more efficiently and cost-effectively to a
highly responsive and focused audience. Moreover, through our
SmartLeads program, suppliers are able to reach service providers and
homeowners engaged in home improvement projects through targeted
messages.
* TARGETING ADVERTISING TO SERVICE PROVIDERS AND SITE ADVERTISING.
Through our SmartLeads program, we offer our suppliers the opportunity
to run highly targeted promotions to our network of service providers
based on detailed attributes including project type, cost, timing and
location. This focused advertising offers suppliers an effective
method of selling entire lines and specific products to highly
interested service providers at the time of purchase.
* 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.
* 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 Smart Fusion(SM) 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
7
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.
* ECOMMERCE SOFTWARE SOLUTIONS. Initially targeted for the window and
door manufacturers and distributors, our Enterprise Commerce GatewaySM
("ECG") provides WND manufacturers with an efficient, easy to deploy
and manage, sales oriented eCommerce solution. ECG 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
ECG automatically updates the back-office system without additional
input, eliminating errors and reducing order-processing time. ECG 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. ECG 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.
* EDISTRIBUTION SOFTWARE SOLUTIONS. We recognize that WND distributors
required an integrated back-office solution to facilitate eCommerce as
well. Therefore, we developed eDistribution, 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 ECG. 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.
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 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.
8
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 30,000 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.
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 detailed 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 30,000 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 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 30,000 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, many of whom are former trade professionals and contractors
themselves. We qualify these leads to ensure they are top quality, 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.
9
IMPROVENETPRO.COM
Our commercial Web site, 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.
SMARTLEADS AND SMARTPRO
In the course of helping homeowners manage home improvement projects, we
obtain timely and specific information from them regarding the nature of their
home improvement projects. With SmartLeads, and SmartPRO we offer our suppliers
of home improvement products the opportunity to send direct e-mail messages
about their products to service providers and homeowners who are making
purchasing decisions during the home improvement process. Currently, our service
providers cannot opt out of the SmartLeads program, while homeowners may request
that they not be included in the SmartLeads program. We charge suppliers a fee
for each message sent. We believe this is a targeted and cost-effective means
for suppliers to reach homeowners and service providers near the time of
purchase.
CUSTOMER SERVICE AND OPERATION FUNCTIONS
Currently all of our customer service and operation functions for
homeowners and service providers regarding the service provider matching
services are performed under the terms of a services agreement with an unrelated
corporation in Nova Scotia, Canada. The functions performed by the Canadian
corporation 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. The
services agreement is for a two-year period ending December 23, 2004. The
services agreement is subject to termination without cause, by us upon 90 days
written notice, and by the Canadian corporation upon 180 days written notice. A
transition plan for the customer service and operation functions will be
implemented with the cooperation of both parties following any such termination.
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 MARKET MAKER(SM) - 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.
Market Maker helps companies to:
* 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
* Define, develop and optimize your channel marketing efforts to deploy
best practice go-to-market activities and increase revenues
* 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
* 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
10
Market Maker contains five modules:
* Strategic market research services
* Channel development services
* Channel management services
* E-commerce software for manufacturers
* Web-based business management software for distributors
IMPROVENET STRATA(SM) - Strategic market research services
ImproveNet STRATA(SM) leverages the power of ImproveNet's market research
expertise with REAL TIME CONSUMER, DEALER AND CONTRACTOR MARKET RESEARCH to
determine the best markets for a building materials manufacturer or
distributor's products, the appropriate position in the market for those
products, and to understand the unique requirements of the manufacturer or
distributor's buyer. Our STRATA program allows a manufacturer or distributor to
gain critical insight into the future, help determine product launch schedules,
product life cycles, market acceptance and buyer behavior so that more effective
planning of branding, advertising and marketing activities, and more effective
creation of distribution strategies and programs that maximize channel
performance and increase sales.
IMPROVENET CHANNEL BUILDER(SM) - Manufacturer, distributor, dealer and
contractor development services
The ImproveNet Channel Builder(SM) program helps companies IDENTIFY,
RECRUIT and DEPLOY the right distribution channel for home improvement, remodel
and renovation products by facilitating the recruitment of the best contractors
and trade professionals to represent those products. With a national network of
over 350,000 licensed and pre-screened general, building and remodeling
contractors and trade professionals, we have one of the most comprehensive
contractor networks with coverage in most major metropolitan areas in the
country. With nearly a decade of expertise in recruiting top-notch contractors
and trade professionals, and tens of millions of dollars invested into this
market, we have some expertise regarding the more productive methods to reach
this audience. In addition, the communications between our customer service
center representatives and homeowners and service providers participating in our
service provider matching services offers a personal touch that can help to
enhance the effectiveness of the ImproveNet Channel Builder(SM) program for our
customers.
IMPROVENET CHANNEL OPTIMIZER(SM) - Channel management services
ImproveNet Channel Optimizer provides the opportunity to deliver highly
qualified home improvement job leads directly to manufacturer, distributor, and
dealer channel partners for accessing over $1.3B in annual renovation and
remodeling business. This program facilitates sales opportunities for the
specific products and applications that the channel is offering. Channel
Optimizer functions to identify customers who have indicated their readiness to
make purchases for their home improvement projects.
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:
SMART FUSION(SM) - Web-based configuration, order entry and e-commerce software
Smart Fusion(SM) is a web-based software solution that allows manufacturers to
increase revenues and profitability by streamlining order entry, simple and
complex product configuration, and bill of material generation (complete with
product visualizers). Smart Fusion(SM) allows manufacturers the ability to
leverage e-commerce functionality to provide an 'always on' sales and support
infrastructure to their customers. Smart Fusion(SM) 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 Smart Fusion(SM) automatically updates the back-office system without
additional input, eliminating errors and reducing order-processing time.
Smart Fusion's web-based infrastructure takes the business of our clients
to the next level, a level that exceeds the limitations of any client-server
software system available today. Customers are migrating to the Internet at a
rapid pace. Smart Fusion(SM) ensures customer loyalty for channel participants,
and ongoing support for sales of products offered. Smart Fusion(SM) ensures that
our clients will deliver value to your customers that exceeds their
expectations.
11
SMART FUSION EDISTRIBUTION(SM) - Web-based business management and e-commerce
software Smart Fusion eDistribution(SM) 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. Smart Fusion
eDistribution(SM) is an entirely web-based solution that improves productivity
and accelerates profitability.
Our Smart Fusion(SM) 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:
* 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.
* ONLINE REFERRAL COMPANIES. Some of our competitors such as
ServiceMagic.com, and iMandi offer a publicly accessible online
database and other companies such as BidExpress, and Contractor.com
have matching services but do not have national coverage.
Homestore.com, also offers a matching service.
* 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.
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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.
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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 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.
12
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HSSONLINE
Based in Alpharetta, Georgia, HSS provides homeowners and businesses across the
country with one-stop, convenient management and outsourcing of their
maintenance, repair and improvement projects. HSS has a national network of
reliable contractors who are pre-screened, appropriately licensed and insured.
The Company is a member-based organization and charges an annual fee of $48 per
year, to its residential members. Members gain access to HSS's network of
contractors, and receive special seasonal offers and value-added services.
Membership is not required for HSS Commercial Services.
HSS is available in over 130 major metropolitan markets across the U.S. All HSS
trade affiliates (contractors) warrantee their work. HSS also provides its
members with a safety net under the provisions of its Member Protection Plan. In
addition to scheduled maintenance, repairs and improvements, HSS offers members
an urgent response service on a 24/7 basis for emergencies.
Partners include: Sam's Club, AAA Mid Atlantic, True Value, BECU, The National
Business Association, Mortgage Accel, FSBOZoo.com and The National Association
for the Self Employed.
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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.
--------------------------------------------------------------------------------
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:
* 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;
* 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;
* 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;
* The ability to develop an effective process for handling a large
volume of homeowner requests and delivering a high level of customer
service;
* 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
* 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.
13
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.
--------------------------------------------------------------------------------
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.
--------------------------------------------------------------------------------
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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14
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.
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.
PARTNERSHIPS
We believe that partnering 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 online partnerships. We have entered into
these arrangements, which are generally performance based, one year in length or
cancelable with reasonable notice that obligate us to pay either a fixed monthly
fee, or a variable fee based on won jobs with:
* Frequently visited portals, such as Yahoo!, Google, Overture (covering
America Online, Lycos, InfoSpace, iwon, and others), LookSmart
(covering MSN, AltaVista, AskJeeves, June and others); and
* Web sites related to home improvements, such as Microsoft Home
Advisor, HomeTime, and Homestore.
In addition, we have supplemented our online advertising with offline
advertising in Yellow Pages, print media, national radio 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.
15
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:
* 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
* 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 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.
16
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, 2002, we employed 14 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.
FACTORS AFFECTING FUTURE PERFORMANCE, RESULTS OF OPERATION AND FINANCIAL
CONDITION
This document contains certain forward-looking statements. These statements
relate to future events or our future financial performance. In some cases, you
can identify forward-looking statements by terminology such as "anticipates',
"believes", "continue", "could", "estimates", "expects", "intends", "plans",
"potential", "predicts", "should" or "will" or the negative of these terms or
other comparable terminology which are intended to identify certain of these
forward-looking statements. The cautionary statements made in this document
should be read as being applicable to all related forward-looking statements
wherever they appear in this document. The Company's actual results could differ
materially from those discussed in this document. Factors that could cause or
contribute to such differences include those discussed below, as well as those
discussed elsewhere in this Annual Report on Form 10-KSB.
WE HAVE A RECENT HISTORY OF LOSSES, WE EXPECT FUTURE LOSSES, AND WE MAY NOT
ACHIEVE OR MAINTAIN PROFITABILITY.
The Company has continued to sustain losses for the past two years and has
negative working capital and negative 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, both revenue and operating
expenses will increase 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 during the second half of 2003 ImproveNet
will reach profitability.
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 2003 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 were 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.
OUR SUCCESS IS DEPENDENT UPON OUR ABILITY TO RAISE ADDITIONAL CAPITAL AND THERE
ARE NO ASSURANCES WE WILL FIND ADDITIONAL CAPITAL RESOURCES.
Our need for additional capital in the near term is critical. The necessity
for additional capital to support continued operations is essential. Since
inception we have funded operations with debt and equity capital. Our ability to
operate profitably under our current business plan is largely contingent upon
success in obtaining additional sources of debt and equity capital. There can be
no assurance that sources of capital will be available on satisfactory terms or
at all. Without additional capital we may not be able to fully implement our
business or operating and development plans. No assurance can be given that any
such financing, if obtained, will be adequate to meet our ultimate capital
needs. If adequate capital cannot be obtained or obtained on satisfactory terms,
our operations could be negatively impacted. In addition, we may seek to raise
additional funds, finance acquisitions or develop commercial relationships by
issuing equity or convertible debt securities, which would reduce the percentage
ownership of existing stockholders. Furthermore, any new securities could have
rights, preferences or privileges senior to those of our common stock.
17
WE FACE CHALLENGES IN THE INTEGRATION OF THE SEPARATE BUSINESSES OF IMPROVENET
AND ETECHLOGIX FOLLOWING THE MERGER.
We may not experience the anticipated 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 may not prove to be as advantageous as we expect. 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 MAY BE 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 were delisted from the Nasdaq National Market System.
Our stock is currently being traded on the Nasdaq Over-The-Counter Bulletin
Board; however, we believe that our liquidity will be significantly lower than
when it was 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. Effective sometime in 2003 or early 2004, the OTC Bulletin Board will no
longer offer companies a market on which to trade. The new BBX Exchange, which
is intended to replace the OTC Bulletin Board, will have stricter listing
standards. Management intends to apply to be listed on the BBX Exchange as soon
as applications become available but there is no assurance that we will meet the
minimum criteria required. If we fail to meet the BBX Exchange listing
requirements, then we will be forced to trade solely on the pink sheets, a
market with very limited liquidity and minimal listing standards. We cannot
assure our shareholders that a market for our stock will be sustained. There is
no assurance that our shares will have any greater liquidity than shares which
do not trade on a public market.
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 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, iMandi, Bid Express, 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.
18
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.
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.
19
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 DEPEND ON THIRD-PARTY RELATIONSHIPS TO ATTRACT VISITORS TO OUR WEB SITES.
We have entered into commercial contracts with suppliers of home
improvement products and services to generate revenues and increase the number
of visitors to our Web sites. Under these contracts, 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
ImproveNet.com. Web site traffic originated from AltaVista, Lycos, Microsoft
HomeAdvisor and Yahoo! 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.
WE DEPEND UPON A THIRD-PARTY RELATIONSHIP FOR THE CUSTOMER SERVICE AND
OPERATIONS OF OUR SERVICE PROVIDER MATCHING SERVICE.
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. There are no assurances that
the services agreement will be fully performed or that in the event of a
termination without cause, that the transition plan will be implemented
smoothly. There is an element of goodwill associated with the customer
relationship aspect of the customer service center which could be lost if the
services agreement was terminated. We could experience a disruption in customer
support, collections of accounts receivable and revenues.
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
20
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 establish a refund reserve at
the time of revenue recognition based on our historical experience. We may be
unable to adjust spending in a timely manner to compensate for any 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.
21
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, sabotage, intentional acts of
vandalism and similar misconduct. We do not have fully redundant systems, a
formal disaster recovery plan or 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. Our existing insurance coverage may not
cover all potential claims, may not adequately cover all costs incurred in
defense of potential claims, may not indemnify us for all liability that may be
imposed or may not be renewable in future periods or renewable on terms and
conditions satisfactory to us. In addition, claims, with or without merit, would
result in diversion of our financial resources and management resources.
22
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 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 possible that this tax moratorium will
not be renewed by October 21, 2001 or at all. 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.
23
ITEM 2. 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 payments of $6,322.79 per month on
a month-to-month tenancy with a ninety (90) day notice of termination.
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.
ITEM 3. 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 which we believe will be
resolved without material adverse consequences to our business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of our fiscal year ended December 31, 2002.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
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
sales prices of the Company's Common Stock for the periods indicated as reported
on the Nasdaq National Market System and Over-The-Counter Bulletin Board:
HIGH SALE LOW SALE
PRICE PRICE
----- -----
Year Ended December 31, 2001
First Quarter $1.19 $0.31
Second Quarter $0.49 $0.28
Third Quarter $0.45 $0.11
Fourth Quarter $0.22 $0.05
Year Ended December 31, 2002
First Quarter $0.11 $0.06
Second Quarter $0.23 $0.03
Third Quarter $0.13 $0.04
Fourth Quarter $0.16 $0.08
As of December 31, 2002, we had approximately 2,000 stockholders of record.
24
We have never paid any cash dividends on our stock, and we anticipate that
we will retain any future earnings, if any, for use in the operation and
expansion of our business and do not anticipate paying any cash dividends in the
foreseeable future.
NUMBER OF SECURITIES NUMBER OF SECURITIES
TO BE ISSUED UPON WEIGHTED-AVERAGE REMAINING AVAILABLE
EXERCISE OF EXERCISE PRICE OF FOR FUTURE ISSUANCE
OUTSTANDING OPTIONS, OUTSTANDING OPTIONS, UNDER EQUITY
WARRANTS AND RIGHTS WARRANTS AND RIGHTS COMPENSATION PLANS
------------------- ------------------- ------------------
Equity compensation plans approved
by security holders 1,092,991 $1.08 4,158,044
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis should be read with our consolidated
financial statements and notes included elsewhere in this Annual Report on Form
10-KSB. The discussion in this Annual Report on Form 10-KSB contains
forward-looking statements that involve risks and uncertainties, such as
statements of our plans, objectives, expectations and intentions. The cautionary
statements made in this Annual Report on Form 10-KSB should be read as applying
to all related forward-looking statements wherever they appear in this Annual
Report on Form 10-KSB. Our actual results could differ materially from those
discussed here. Factors that could cause or contribute to these differences
include those discussed in "Factors Affecting Future Performance, Results of
Operations and Financial Condition" in Part I--Item 1. Description of Business
as well as those discussed elsewhere.
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 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. 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 and has negative working capital and negative net worth.
The financial statements do not include any adjustments to reflect the
possible future effects of the recoverability and classification of assets or
the amounts and classifications of liabilities that may result from the
uncertainty of the Company's ability to continue as a going concern.
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.
25
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 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.
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.
26
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 10-KSB is as of
April 15, 2003, and ImproveNet, Inc. undertakes no duty to update this
information. Should events occur subsequent to April 15, 2003 that make it
necessary to update the forward-looking information contained in this Form
10-KSB, 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.
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.
27
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 and enrollment fees from new contractors joining the
ImproveNet network. 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. 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. Currently marketing revenues are comprised of cash
advertising.
CASH ADVERTISING
Cash advertising revenues generally are derived from short-term advertising
contracts in which the Company typically guarantees that a minimum number of
impressions will be delivered 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.
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. If the financial condition of ImproveNet's 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
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. The Company's consolidated statements of operations and
cash flows do not reflect operations for the home improvement services segment
as this segment was acquired effective December 31, 2002 through a merger
between ImproveNet and eTech.
RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2002 AND 2001
REVENUES
Our revenues increased from $479,000 to $777,000 in the years ended
December 31, 2001 and 2002. The increases from 2001 to 2002 were achieved by
increased sales of the company's Smart Fusion(SM) software product and
associated installation and integration services. It is anticipated that in 2003
revenues will increase significantly due to the merger with ImproveNet. The
addition of the service provider matching service will result in lead fees and
win fees from service providers in 2003.
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OPERATING EXPENSES
COST OF REVENUES
The cost of maintenance and research and development related revenues
consist principally of staff payroll and applicable overhead. Cost of revenues
in 2002 includes $68,000 of third party software that was resold.
Our cost of revenues increased from $204,000 to $240,000 in the years ended
December 31, 2001 and 2002 due primarily to the cost of third party software.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expense decreased slightly from
$882,000 to $855,000 in the years ended December 31, 2001 and 2002. The decrease
in selling, general and administrative expenses in 2001 was primarily
attributable to lower office rent expense partially offset by increased hiring
in anticipation of the merger.
It is anticipated marketing costs will increase significantly in 2003 as
the company will purchase leads for the service provider matching service and
will hire marketing personnel. Additionally the company has added administrative
personnel related to increased accounting and reporting requirements resulting
from the merger.
RESEARCH AND DEVELOPMENT EXPENSES
Our research and development costs include the payroll and related costs of
our technology staff as well as offshore contract developers.
Our research and development expenses increased from $50,000 to $87,000 in
the years ended December 31, 2001 and 2002
The increase in research and development expenses in 2002 was primarily
attributable to increased payroll and related costs. We expect product
development costs to remain at these levels or increase slightly for the
foreseeable future.
OTHER REVENUES AND EXPENSES
Interest expense and financing costs increased from $39,000 to $205,000 in
the years ended December 31, 2000 and 2001. The increase in interest expense was
primarily due costs associated with raising $500,000 in anticipation of the
merger and to interest related to the accrued furniture lease buyout.
The $51,000 loss on disposal of fixed assets related primarily to the
write-off of leasehold improvements in an office move.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents totaled $447,000 at December 31, 2002, an
increase of $415,000 from $32,000 at December 31, 2001. Most of the increase
came from the $500,000 proceeds from eTech Common Stock and convertible notes
payable.
Net cash used in operating activities was $375,000 in 2001 as compared to
net cash provided by operating activities of $77,000 in 2002. Net cash used in
2001 operating activities resulted primarily from our net loss. 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 investing activities was $1,000 in 2001 and $102,000 in
2002. 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 provided by financing activities was $20,000 in 2001 and $440,000
in 2002. Net cash provided by financing activities in 2001 was primarily due to
the net proceeds from the line of credit partially offset by debt payments on
capital lease obligations and notes payable. 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.
The Company has continued to sustain losses for the past two years and has
negative working capital and negative net worth.
29
During 2002 the Company has procured contracts for software sales of its
products and has various contracts pending. The Company anticipates increased
sales volume of their primary software products throughout 2003 and thereafter.
The Company also anticipates increased revenues from the home improvement
information services segment as a result of the synergies it expects to realize
through the Merger of ImproveNet and eTech. 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.
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, both revenue and operating
expenses will increase 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 during the second half of 2003 ImproveNet
will reach profitability.
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 2003 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 were 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.
RECENT ACCOUNTING DEVELOPMENTS
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 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
30
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. 145 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.
ITEM 7. FINANCIAL STATEMENTS
Reference is made to the consolidated financial statements, the report
thereon and the notes thereto, and the supplementary data commencing at page F-1
of this Annual Report of Form 10-KSB, which financial statements, report, notes
and data are incorporated herein by reference.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On January 13, 2003, PricewaterhouseCoopers LLP resigned as independent
accountants of ImproveNet, Inc. The reports of PricewaterhouseCoopers LLP on the
financial statements for the past two fiscal years contained no adverse opinion
or disclaimer of opinion and were not qualified or modified as to uncertainty,
audit scope or accounting principle. However, the audit report for the financial
statements for the year ended December 31, 2001 contained an explanatory
paragraph in respect of substantial doubt about the Company's ability to
continue as a going concern. The resignation of PricewaterhouseCoopers LLP was
accepted by the board of directors. In connection with its audits for the two
most recent fiscal years and through January 13, 2003, there have been no
disagreements with PricewaterhouseCoopers LLP on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedure, which disagreements if not resolved to the satisfaction of
PricewaterhouseCoopers LLP would have caused them to make reference thereto in
their report on the financial statements for such years. During the two most
recent fiscal years and through January 13, 2003, there have been no reportable
events (as defined in Regulation S-K Item 304(a)(1)(iv)).
With the resignation of PricewaterhouseCoopers LLP as its principal
independent accountant, we engaged Semple & Cooper, LLP ("Semple") as the
Company's principal independent accountant. The Company's Board of Directors
approved the appointment of Semple as the Company's principal independent
accountants and auditors on January 15, 2003. During the two most recent fiscal
years and subsequent interim periods, the Company has not consulted with Semple
regarding (i) either the application of accounting principles to a specified
transaction, either completed or proposed, or the type of audit opinion that
might be rendered on the Company's financial statements, or (ii) any matter that
was either the subject of disagreement on any matter of accounting principles or
practices, financial statement disclosure or auditing scope or procedures or a
reportable event (as defined in Item 304 (a) (1) (v) of Regulation S-K). Semple
has served as the principal independent accountant during the two most recent
fiscal years for eTechLogix, Inc. which is a wholly-owned subsidiary of
ImproveNet as a result of the merger transaction on December 23, 2002 and
described on Form 8-K filed by the Company on January 7, 2003.
31
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(a) OF THE EXCHANGE ACT.
Information concerning the directors and executive officers of ImproveNet
is set forth below:
NAME AGE POSITION
---- --- --------
Jeffrey I. Rassas 40 Chief Executive Officer
Homayoon J. Farsi 49 Co-Chairman, President
Naser Ahmad 49 Co-Chairman, Chief Technology Officer
Ronald B. Cooper 48 Director
Jay Stead 39 Director
Kenneth S. Cragun 42 Chief Financial Officer
Jeffrey Perry 44 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, 49, 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.
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, 49, 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.
32
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, 40, 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. He remains a shareholder of both companies.
Mr. Rassas founded EBIZ Enterprises, Inc., a Linux solution provider and
computer cluster developer, in 1995. The common stock of EBIZ Enterprises is
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, 47, 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, 39, 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.
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.
KENNETH S. CRAGUN
Mr. Cragun, 42, served as chief financial officer of eTechLogix beginning
in December 2002 and of ImproveNet, Inc. beginning in January 2003. He brings
over 16 years of finance experience in the technology industry to the Company.
He served as Corporate Controller for NetCharge, Inc., an electronic invoicing
and payments company from 2000 to 2002. He was at C-Cube Microsystems Inc., a
semiconductor and systems company, from 1994 to 2000 and his most recent
position was Corporate Controller. He was part of the team that successfully led
C-Cube through an IPO and managed rapid growth from $24 million in annual
revenues to $400 million in annual revenues in a six-year period. He has held
key finance and accounting positions with Deloitte & Touche and 3Com
Corporation. Mr. Cragun is a CPA and a member of the Arizona Society of
Certified Public Accountants. He has a BS in accounting from the University of
Southern Colorado.
33
JEFFREY PERRY
Mr. Perry, 44, 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 are
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.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
The Officers, Directors and those beneficially owning more than 10% of
small business registrant's class of equity securities registered under Section
12 of the Exchange Act, shall file reports of ownership and any change in
ownership with the Securities and Exchange Commission. Copies of these reports
are to be filed with the registrant.
Based upon a review of the reports furnished for the most recently
completed fiscal year, we conclude that all such reports were timely filed.
34
ITEM 10. 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 concluded prior to year-end 2002.
The following table shows for the fiscal years ended December 31, 2000, 2001 and
2002 all compensation paid by ImproveNet, Inc. to Cooper, Crosby, Gaspar, and
Roof in all capacities:
Summary Compensation Table
LONG-TERM COMPENSATION
------------------------------------
ANNUAL COMPENSATION AWARDS
-------------------------------------- ------------------------------------
OTHER ANNUAL RESTRICTED SECURITIES UNDERLYING
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION STOCK AWARDS OPTIONS/SARS (#)
--------------------------- ---- ------ ----- ------------ ------------ ----------------
Ronald B. Cooper 2002 $162,328 $ 60,000 $177,707(6) $
President and 2001 $315,539 $ 80,000(2) $143,002(4) $ -- 200,000
Chief Executive Officer 2000 $296,154 $150,000(1) $ 0 $ -- 60,000
William Crosby 2002 $ 83,336 $ 12,800 $106,667(7) $ --
Senior Vice President, Editorial, 2001 $159,370 $ 54,280(2) $ 0 $ -- 50,000
Partnership Services 2000 $125,569 $ 41,448(1) $104,564(5) $ 6,901(3)
Donald Gaspar 2002 $102,196 $ 16,330 $136,080(8) $ --
Chief Technology Officer 2001 $203,934 $ 91,563(2) $ -- $23,408(3)
2000 $191,908 $ 61,104(1) $ -- $15,313(3) 3,000
Richard A. Roof 2002 29,026 13,608 85,050(9)
Senior Vice President, 2001 $169,944 $ 76,302(2) 23,552(3)
Project Services 2000 $159,923 $ 75,920(1) 104,564(5) 12,305(3) 5,000
----------
1. Represent amounts paid in 2000 for services rendered in 1999.
2. Represent amounts paid in 2001 for services rendered in 2000.
3. Represents the dollar value of shares awarded, calculated by multiplying
the market value on the date of grant ($0.4375) by the number of shares
awarded in fiscal years 2000 and 2001. In October 2000, the Board adopted
the Company's Restricted Share Grant Program pursuant to which the Named
Executive Officers were given the opportunity to exchange each unexercised
option for an equal number of shares of restricted common stock.
4. Amount represents forgiveness by the Company of interest accrued pursuant
to a loan to the Executive Officer.
5. Amounts represent forgiveness by the Company of loans to the Named
Executive Officer.
6. Represents $160,000 severance and $17,707 pursuant to the change of control
agreement. Mr. Cooper's employment as Chief Executive Officer concluded in
June 2002. Note subsequent to the merger, Mr. Cooper retains a seat on the
company's board of directors.
7. Represents $80,000 severance and $26,667 pursuant to the change of control
agreement. Mr. Crosby's employment concluded in June 2002.
8. Represents $102,060 severance and $34,020 pursuant to the change of control
agreement. Mr. Gaspar's employment concluded in June 2002.
9. Represents amount received for severance. Mr. Roof's employment concluded
in February 2002.
Option Grants in Last Fiscal Year
The Company granted no options to executive officers to purchase its shares
of common stock during the 2002 fiscal year.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION/SAR VALUES
NUMBER OF SECURITIES VALUE OF UNEXERCISED
SHARES UNDERLYING UNEXERCISED IN-THE-MONEY
ACQUIRED ON VALUE OPTIONS/SARS AT FY-END (#) OPTION/SARS AT FY-END ($)
NAME EXERCISE (#) REALIZED ($) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE (1)
---- ------------ ------------ ------------------------- -----------------------------
Ronald B. Cooper 0 0 206,033/31,069 0/0
35
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 20,000 shares of common stock upon commencement of service as a
director, which vest monthly over three years and 5,000 shares annually
thereafter, which will vest monthly over twelve months.
ITEM 11. 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 March 31, 2003 by: (i) all
those known by ImproveNet to be beneficial owners of more than five percent of
its common stock; (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., 8930 E Raintree
Drive, Suite 300 Scottsdale, AZ 85260.
NUMBER OF
SHARES OF
COMMON STOCK PERCENT
BENEFICIALLY BENEFICIALLY
NAME AND ADDRESS OF BENEFICIAL OWNERS(1) OWNED OWNED(1)
---------------------------------------- ----- --------
Jeffrey I Rassas 10,103,580 25.8%
Homayoon J. Farsi 10,103,580 25.8%
Naser Ahmad 10,103,580 25.8%
Jay Stead(2) 1,252,780 3.2%
Jeffrey R. Perry(3) 361,112 *
Ronald B. Cooper(4) 226,132 *
All executive officers and directors as a group 32,150,764 82.2%
----------
* Less than one percent.
1. This table is based upon information supplied by officers, directors and
principal stockholders and Forms 3, 4 and 5 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
39,110,428 shares outstanding on March 31, 2003, 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 March 31, 2003 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 1,250,000 shares owned indirectly through Oxley Ventures, LLLP,
and the right to directly acquire within 60 days, 2780 shares upon the
exercise of non-employee director options. Mr. Stead's family trust is a
general partner of Mokka Enterprises Partnership, the general partner of
Oxley Ventures, LLLP.
3. Includes 55,556 shares issuable at a per share exercise price of $0.05
pursuant to options that vest within 60 days.
4. Includes 3690 shares issuable at a per share exercise price of $0.25
pursuant to options that vest within 60 days and 2500 shares issuable at a
per share exercise price of $6.25 pursuant to options that vest within 60
days.
36
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
NONE.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) The exhibits to this report are listed in the Exhibit Index at the end
of this report.
(b) During the last quarter of the year ended December 31, 2002, we filed
reports on Form 8-K as follows:
October 15, 2002 for report dated October 10, 2002 regarding an amendment
to the Merger Agreement extending until December 31, 2002 the date by which the
closing date is to occur.
December 4, 2002 for report dated December 3, 2002 announcing a tender
offer to commence December 4, 2002.
December 19, 2002 for report dated December 13, 2002 correcting the
publication of the date of the completion of the tender offer to be January 2,
2003.
ITEM 14. CONTROLS AND PROCEDURES.
Within the 90 days prior to the filing date of this report, the Company
carried out an evaluation of the effectiveness of the design and operation of
the Company's disclosure controls and procedures pursuant to Exchange Act Rule
13a-14. This evaluation was carried out under the supervision and with the
participation of the Company's management, including the Company's Chief
Executive Officer along with the Company's Chief Financial Officer and Chief
Accounting Officer. Based upon that evaluation, the Company's Chief Executive
Officer along with the Company's Chief Financial Officer concluded that the
Company's disclosure controls and procedures are effective in timely alerting
them to material information relating to the Company required to be included in
the Company's periodic SEC filings. There were no significant changes in the
Company's internal controls or in other factors that could significantly affect
internal controls subsequent to the date the Company carried out its evaluation,
and there were no corrective actions with regard to significant deficiencies and
material weaknesses.
Disclosure controls and procedures are controls and other procedures that
are designed to ensure that information required to be disclosed in Company
reports filed or submitted under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the Securities and
Exchange Commission's rules and forms. Disclosure controls and procedures
include controls and procedures designed to ensure that information required to
be disclosed in Company reports filed under the Exchange Act is accumulated and
communicated to management, including the Company's Chief Executive Officer and
Chief Financial Officer as appropriate, to allow timely decisions regarding
required disclosure.
37
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the Registrant has duly caused this report to be signed, April 11, 2002 on its
behalf by the undersigned duly authorized.
IMPROVENET, INC.
(Registrant)
By: /s/ JEFFREY I. RASSAS
------------------------------------
Jeffrey I. Rassas
CO-CHAIRMAN & CEO
POWER OF ATTORNEY
Know All Persons By These Presents, that each person whose signature
appears below constitutes and appoints Jeffrey I. Rassas his true and lawful
attorney-in-fact and agent, with full power of substitution and resubstitution,
for him and in his name, place and stead, in any and all capacities, to sign any
and all amendments to this Annual Report on Form 10-KSB, and to file the same,
with all exhibits thereto, and other documents in connection therewith, with the
Commission, 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 connection therewith, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming our signatures as they may be signed by ours said attorney-in-fact
and any and all amendments to this Annual Report on Form 10-KSB.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Annual Report on Form 10-KSB has been signed by the following persons in the
capacities and on the dates indicated.
By: /s/ JEFFREY I. RASSAS
------------------------------------
Jeffrey I. Rassas
CO-CHAIRMAN & CEO
By: /s/ HOMAYOON J. FARSI
------------------------------------
Homayoon J. Farsi
CO-CHAIRMAN & PRESIDENT
By: /s/ NASER AHMAD
------------------------------------
Naser Ahmad
CO-CHAIRMAN & CTO
By: /s/ JAY STEAD
------------------------------------
Jay Stead
DIRECTOR
By: /s/ RONALD COOPER
------------------------------------
Ronald Cooper
DIRECTOR
Date: April 15, 2003
38
CERTIFICATIONS
I, Jeffrey I. Rassas, certify that:
1. I have reviewed this annual report on Form 10-KSB of ImproveNet, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
annual report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this annual report (the "Evaluation Date"); and
c. presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this annual report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: April 15, 2003 /s/ JEFFREY I. RASSAS
------------------------------------
Jeffrey I. Rassas
CO-CHAIRMAN & CEO
39
I, Kenneth S. Cragun, certify that:
1. I have reviewed this annual report on Form 10-KSB of ImproveNet, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
annual report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this annual report (the "Evaluation Date"); and
c. presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this annual report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: April 15, 2003 /s/ KENNETH S. CRAGUN
------------------------------------
Kenneth S. Cragun
CHIEF FINANCIAL OFFICER
40
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
(filed herewith)
2.5 Amendment No. 2 to Agreement and Plan of Merger dated November 12, 2002
(filed herewith)
3.1 Fourth Amended and Restated Certificate of Incorporation of the
Registrant. (1)
3.2 Amended and Restated Bylaws of the Registrant. (1)
4.1 Specimen Stock Certificate. (1)
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)
10.12 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)
41
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 (filed herewith)
16.1 Concurrence of PricewaterhouseCoopers LLP, former independent
accountants, regarding resignation. (5)
23.1 Consent of PricewaterhouseCoopers LLP, Independent Accountants. (3)
24.1 Power of Attorney. (see page 58) (3)
99.1 Tender Offer Statement and Offer to Purchase All Shares of Common Stock,
as amended. (6)
----------
(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.
* Confidential treatment requested
42
The following consolidated financial statements are filed as part of this
report:
PAGE
----
Independent Accountants Report F-1
Consolidated Financial Statements:
Consolidated Balance Sheets as of December 31, 2002 and 2001 F-2
Consolidated Statements of Operations for the years ended
December 31, 2002 and 2001 F-4
Consolidated Statements of Stockholders' Equity (Deficit) and Mandatorily
Redeemable Convertible Preferred Stock for the years ended
December 31, 2002 and 2001 F-5
Consolidated Statements of Cash Flows for the years ended December 31, 2002
and 2001 F-6
Notes to Consolidated Financial Statements F-8
43
IMPROVENET, INC.
CONSOLIDATED FINANCIAL STATEMENTS
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, 2002 and 2001, 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, 2002 and 2001, 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, 2002 and 2001. These
factors raise substantial 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, 2003
F-1
IMPROVENET, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2002 AND 2001
ASSETS
2002 2001
---------- ----------
Current Assets:
Cash and cash equivalents $ 446,833 $ 31,630
Accounts receivable, net 329,657 2,575
Receivable from stock transfer agent 594,715 --
Other receivables 1,000 --
Prepaid expenses 55,054 --
Income tax refund receivable -- 134,180
Costs and estimated earnings in excess of billings
on uncompleted software contracts 4,100 --
---------- ----------
Total Current Assets 1,431,359 168,385
Property and equipment, net 157,994 384,055
---------- ----------
Total Assets $1,589,353 $ 552,440
========== ==========
The Accompanying Notes are an Integral Part
of the Consolidated Financial Statements
F-2
IMPROVENET, INC.
CONSOLIDATED BALANCE SHEETS (CONTINUED)
DECEMBER 31, 2002 AND 2001
LIABILITIES AND STOCKHOLDERS' DEFICIT
2002 2001
----------- -----------
Current Liabilities:
Notes payable - current portion $ 12,592 $ 27,504
Obligations under capital leases - current portion 15,843 69,303
Line of credit 77,755 71,813
Related party note payable -- 12,000
Accounts payable 221,096 13,166
Accrued compensation 194,082 134,000
Accrued customer claims 137,080 130,446
Accrued furniture lease buyout 216,376 --
Accrued merger and tender offer redemption liabilities 2,378,029 --
Deferred revenue 35,958 42,000
Billings in excess of costs and estimated earnings
on uncompleted software contracts 89,250 --
Other liabilities and accrued expenses 23,453 17,672
----------- -----------
Total Current Liabilities 3,401,514 517,904
Long-Term Liabilities:
Notes payable - long-term portion 605 85,663
Obligations under capital leases - long-term portion 26,275 167,991
----------- -----------
Total Liabilities 3,428,394 771,558
----------- -----------
Commitments and Contingencies: -- --
Stockholders' Deficit:
Common stock, $.001 par value, 100,000,000 shares
authorized, 53,124,290 and 10,000 shares
issued and 53,124,290 and 3,600 (20,000,000 post
merger) shares outstanding at December 31, 2002
and 2001, respectively 53,124 10,000
Additional paid-in capital 482,570 --
Accumulated deficit (412,794) (119,118)
----------- -----------
122,900 (109,118)
Less: Treasury stock, at cost -- (110,000)
Treasury stock subscribed, at cost,
underlying 13,913,975 shares (1,961,941) --
----------- -----------
Total Stockholders' Deficit (1,839,041) (219,118)
----------- -----------
Total Liabilities and Stockholders' Equity $ 1,589,353 $ 552,440
=========== ===========
The Accompanying Notes are an Integral Part
of the Consolidated Financial Statements
F-3
IMPROVENET, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001
2002 2001
------------ ------------
Revenues $ 777,257 $ 478,660
Cost of Revenues 240,394 203,911
------------ ------------
Gross Profit 536,863 274,749
Selling, General and Administrative Expenses 855,282 881,881
Research and Development Expenses 86,801 50,000
------------ ------------
Loss from Operations (405,220) (657,132)
Other Revenues (Expenses):
Interest income 220 4,436
Interest expense and financing costs (204,773) (38,784)
Loss on disposal of fixed assets (51,294) --
Miscellaneous revenues 6,034 3,570
------------ ------------
Loss from Operations before Income Taxes and Extraordinary Gain (655,033) (687,910)
Benefit for Income Taxes -- 134,180
------------ ------------
Loss before Extraordinary Gain (655,033) (553,730)
Extraordinary Gain on Merger with eTech 361,357 --
------------ ------------
Net Loss $ (293,676) $ (553,730)
============ ============
Net Earnings (loss) per common share, basic and diluted:
Loss before extraordinary gain on Merger with eTech $ (0.02) $ (0.03)
Extraordinary gain on Merger with eTech $ 0.01 $ --
------------ ------------
Net loss per common share $ (0.01) $ (0.03)
============ ============
Weighted average common shares: basic and diluted 28,909,573 20,000,000
============ ============
The Accompanying Notes are an Integral Part
of the Consolidated Financial Statements
F-4
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001
TOTAL
COMMON STOCK TREASURY STOCK ADDITIONAL TREASURY RETAINED STOCKHOLDERS'
-------------------- ------------------ PAID-IN STOCK EARNINGS EQUITY
SHARES AMOUNT SHARES AMOUNT CAPITAL SUBSCRIBED (DEFICIT) (DEFICIT)
---------- -------- ------ --------- -------- ----------- --------- -----------
Balance at December 31, 2000 3,600 $ 10,000 6,400 $(110,000) $ -- $ -- $ 434,612 $ 334,612
Net loss -- -- -- -- -- -- (553,730) (553,730)
---------- -------- ------ --------- -------- ----------- --------- -----------
Balance at December 31, 2001 3,600 10,000 6,400 (110,000) -- -- (119,118) (219,118)
Conversion of a related party note
payable for stock 1,800 12,000 -- -- -- -- -- 12,000
Effect of Merger with eTech 53,118,890 31,124 (6,400) 110,000 482,570 -- -- 623,694
Tender offer of common shares -- -- -- -- -- (1,961,941) -- (1,961,941)
Net loss -- -- -- -- -- -- (293,676) (293,676)
---------- -------- ------ --------- -------- ----------- --------- -----------
Balance at December 31, 2002 53,124,290 $ 53,124 -- $ -- $482,570 $(1,961,941) $(412,794) $(1,839,041)
========== ======== ====== ========= ======== =========== ========= ===========
The Accompanying Notes are an Integral Part
of the Consolidated Financial Statements
F-5
IMPROVENET, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001
2002 2001
--------- ---------
Cash flows from operating activities:
Net Loss $(293,676) $(553,730)
Adjustments to reconcile net loss to net cash
provided by operations:
Depreciation and amortization 95,695 132,310
Loss on disposal of property and equipment 51,294 --
Consulting fees paid through the issuance of stock 25,000 --
Extraordinary gain (361,357)
Financing costs paid through the issuance of warrants 81,318 --
Interest expense recognized through the conversion of
convertible notes payable 17,376 --
Changes in assets and liabilities:
Accounts receivable, net (33,158) 1,630
Other receivables (1,000) 309,248
Prepaid expenses 43,910 --
Income tax refund receivable 134,180 (134,180)
Costs and estimated earnings in excess of billings on
uncompleted software contracts (4,100) --
Other current assets -- 2,382
Due to bank -- (10,750)
Accounts payable 98,488 (204,815)
Accrued compensation 60,082 134,000
Accrued customer claims 6,634 --
Accrued furniture lease buyout 67,563 --
Deferred revenue (6,042) (58,000)
Billings in excess of costs and estimated earnings on
uncompleted software contracts 89,250 --
Income taxes payable -- (11,367)
Other liabilities and accrued expenses 5,781 18,195
--------- ---------
Net cash provided by (used in) operating activities 77,238 (375,077)
--------- ---------
Cash flows from investing activities:
Purchase of property and equipment (1,372) (1,450)
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 (102,088) (1,450)
--------- ---------
The Accompanying Notes are an Integral Part
of the Consolidated Financial Statements
F-6
IMPROVENET, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001
2002 2001
---------- ----------
Cash flows from financing activities:
Proceeds from convertible notes payable 250,000 --
Proceeds from eTech Common Stock sale 250,000 --
Repayment of notes payable (19,526) (35,169)
Payments on capital lease obligations (46,363) (28,830)
Line of credit, net 5,942 71,813
Proceeds from related party note payable -- 12,000
---------- ----------
Net cash provided by financing activities 440,053 19,814
---------- ----------
Net increase (decrease) in cash and cash equivalents 415,203 (356,713)
Cash and cash equivalents at beginning of year 31,630 388,343
---------- ----------
Cash and cash equivalents at end of year $ 446,833 $ 31,630
========== ==========
Supplemental Disclosure of Cash Flow Information:
Cash paid during the year for:
Interest $ 81,080 $ 38,784
========== ==========
Income taxes $ -- $ 11,367
========== ==========
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 $ 250,000 $ --
========== ==========
Transfer of capital lease obligations to current assets $ 148,813 $ --
========== ==========
Extraordinary gain recognized on the Merger with eTech $ 361,357 $ --
========== ==========
The Accompanying Notes are an Integral Part
of the Consolidated Financial Statements
F-7
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 and has negative working capital and negative net worth.
During 2002 the Company has procured contracts for sales of its software
products and has various contracts pending. The Company anticipates increased
sales volume of their primary software products throughout 2003 and thereafter.
The Company also anticipates increased revenues from the home improvement
information services segment as a result of the synergies it expects to realize
through the Merger of ImproveNet and eTech. 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 classification of assets or 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.
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
F-8
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. At
December 31, 2002, the Company had uninsured cash of approximately $388,000. At
December 31, 2001, there were no uninsured cash balances.
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, 2002, the Company has established an allowance for uncollectible accounts
receivable of approximately $37,000. As of December 31, 2001, the Company has
not established an allowance for uncollectible accounts receivable, as it is the
Company's opinion that all amounts reflected as receivable at this date will be
collected. 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 products.
F-9
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 2002 and 2001, 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 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.
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
F-10
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 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 $11,000
and $18,000 for the years ended December 31, 2002 and 2001, 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.
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." The Company continues to recognize compensation costs using the intrinsic
value based method described in Accounting Principles Board Opinion ("APB") No.
25, "Accounting for Stock Issued to Employees."
F-11
For 2002 and 2001, 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.
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 form 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 consolidated
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 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
F-12
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 consolidated 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.
NOTE 2 - SOFTWARE CONTRACTS IN PROGRESS
At December 31, 2002, billings in excess of costs and estimated earnings and
costs and estimated earnings in excess of billings on uncompleted software
contracts consist of the following:
F-13
Costs incurred on uncompleted software contracts $ 53,746
Profit earned to date 138,204
---------
191,950
Less: billings to date (277,100)
---------
$ (85,150)
=========
Included in the accompanying balance sheet at December 31, 2002 are the
following captions:
Costs and estimated earnings in excess of billings on
uncompleted software contracts $ 4,100
Billings in excess of costs and estimated earnings on
uncompleted software contracts (89,250)
--------
$(85,150)
========
At December 31, 2001, 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, 2002 and 2001, property and equipment consist of the
following:
2002 2001
--------- ---------
Equipment $ 185,892 $ 184,520
Furniture and fixtures 231,985 231,986
Automobiles -- 169,987
Leasehold improvements -- 98,077
--------- ---------
417,877 684,570
Less: accumulated depreciation (259,883) (300,515)
--------- ---------
$ 157,994 $ 384,055
========= =========
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%, (7.00% at
December 31, 2002) and is due on demand. The Company had outstanding balances on
the line of credit of approximately $78,000 and $72,000 as of December 31, 2002
and 2001, respectively.
NOTE 5 - NOTES PAYABLE
As of December 31, 2002 and 2001, notes payable consist of the following:
F-14
2002 2001
--------- ---------
9.00% note payable to a bank, monthly payments of $1,100 including
principal and interest, secured by equipment, due May 2004 $ 13,197 $ 26,649
8.50% note payable to a bank, monthly payments of $2,000 including
principal and interest, secured by automobiles, due May 2006 -- 86,518
--------- ---------
13,197 113,167
Less: current maturities (12,592) (27,504)
--------- ---------
$ 605 $ 85,663
========= =========
The long-term portion of notes payable as of December 31, 2002 of $605 is due in
2003.
NOTE 6 - COMMITMENTS
CAPITAL LEASES
The Company leases furniture and equipment through 2005 under capital leases.
The following is an analysis of leased property under these capital leases:
December 31,
2002 2001
-------- ---------
Capitalized cost $ 72,259 $ 271,599
Less: accumulated depreciation (39,792) (99,069)
-------- ---------
Net carrying value $ 32,467 $ 172,530
======== =========
Depreciation expense on furniture and equipment under capital leases was
approximately $15,000 and $54,000 for the years ended December 31, 2002 and
2001, respectively.
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,
------------
2003 $ 20,416
2004 20,416
2005 8,506
---------
Total minimum lease payments 49,338
Less: imputed interest (7,220)
---------
Present value of net minimum lease payments 42,118
Less: current portion (15,843)
---------
Long-term portion $ 26,275
=========
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.
F-15
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.
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.
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.
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, 2002 and 2001, the Company incurred expenses from these companies
totaling approximately $38,000 and $50,000, respectively, which is included in
research and development expenses in the accompanying financial statements.
F-16
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 $190,000 and $134,000 at December 31, 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 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).
F-17
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 $361,357 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:
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
F-18
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 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 5% 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:
F-19
Weighted
Number of Average
Shares Exercise Price
------ --------------
Balances, January 1, 2002 and 2001 -- $ --
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
----------
Balances, December 31, 2002 1,092,991 $ 0.67
==========
As of December 31, 2002, there were 4,158,044 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, 2002:
Options Outstanding Options Exercisable
------------------------------------- ----------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Price Outstanding Life (Years) Price Outstanding Price
----- ----------- ------------ ----- ----------- -----
$ 0.04 25,000 9.5 $ 0.04 12,500 $ 0.04
$ 0.05 788,889 9.4 $ 0.05 222,222 $ 0.05
$ 0.25 177,102 6.3 $ 0.25 166,033 $ 0.25
$ 0.34 20,000 8.4 $ 0.34 7,917 $ 0.34
$ 6.25 60,000 7.3 $ 6.25 40,000 $ 6.25
$12.00 20,000 7.1 $12.00 14,583 $12.00
$15.00 2,000 7.2 $15.00 1,417 $15.00
---------- ---------
1,092,991 $ 1.08 464,672 $ 1.08
========== =========
FAIR VALUE DISCLOSURES
The fair value of each option granted by the Company during 2002 and 2001 has
been estimated on the date of grant using the minimum value method with the
following assumptions:
2002 2001
-------- --------
Weighted average fair values $ 0.10 $ 0.45
Assumptions:
Risk - free interest rate 4.30% 4.99% - 6.91%
Expected lives 4 years 4 years
Dividend yield -- --
Volatility 138.00% 151.00%
F-20
COMMON STOCK WARRANTS
A summary of common stock warrant activity is as follows:
Weighted
Number of Average
Shares Exercise Price
---------- --------------
Balances, January 1, 2002 and 2001 -- $ --
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
----------
Balances, December 31, 2002 2,767,596 $4.19
==========
The following table summarizes warrants outstanding at December 31, 2002:
Number of Exercise Term Expiration
Shares Price (Years) Date
---------- ------ ------- -----------------
5,000 $ 1.00 10.00 June 16, 2007
245,000 $ 0.01 5.00 November 23, 2004
100,000 $ 0.01 5.00 December 6, 2004
583,333 $13.50 5.00 December 6, 2004
75,000 $ 0.01 5.00 December 12, 2004
259,263 $13.50 5.00 December 12, 2004
1,500,000 $ 0.15 1.00 December 23, 2003
----------
2,767,596
==========
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-21
December 31,
2002 2001
--------- ---------
Deferred Income Tax Assets (Liabilities):
Allowance for doubtful accounts $ 16,000 $ --
Excess of book over tax depreciation (27,000) 19,600
Accrued officer's compensation -- 56,300
Federal net operating loss carryforwards 790,000 --
State net operating loss carryforwards 68,000 40,000
--------- ---------
Total deferred income tax asset 847,000 115,900
Valuation allowance (847,000) (115,900)
--------- ---------
Net deferred income tax asset $ -- $ --
========= =========
At December 31, 2002 and 2001, the Company had state net operating loss
carryforwards of approximately $843,000 and $497,000, respectively which expire
through 2007. At December 31, 2002, the Company had a federal net operating loss
of approximately $2,322,000, which expire at various times through 2022.
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
$1,000 for the years ended December 31, 2002 and 2001, respectively.
Subsequent to the Merger with eTech, the Company retained ImproveNet's already
existing 401(k) plan. The terms of ImproveNet's retirement plan are
substantially the same as that of the eTech plan described above. The Company
has not made any contributions to either of the plans described above subsequent
to the Merger.
NOTE 12 - CONTINGENCIES
As of December 31, 2002 and 2001, 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 $137,000 and $130,000 as of
December 31, 2002 and 2001, respectively, 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.
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
In January 2003, the Company's transfer agent disbursed funds to the pre-merger
shareholders of ImproveNet who elected to participate in the Tender Offer. A
total of approximately $1,962,000 was distributed to these shareholders
resulting in the repurchase of 13,913,975 shares of treasury stock.
In January 2003, warrants to purchase 100,000 shares of Common Stock at a price
of $0.01 per share and options to purchase 5,000 shares of Common Stock at a
price of $0.04 per share were tendered in conjunction with the Tender Offer.
In January 2003, the Company issued 660,000 options to employees at a strike
price equal to the market price on the date of the grant.
Subsequent to year-end, the Company's office lease expired. The company extended
the lease on a month-to-month basis.