1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTER ENDED OCTOBER 28, 2000 COMMISSION FILE NUMBER 001-15311 ENVISION DEVELOPMENT CORPORATION -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Florida -------------------------------------------------------------------------------- (State or other jurisdiction of incorporation or organization) 65-0981457 -------------------------------------------------------------------------------- (I.R.S. Employer Identification No.) 7341 Anaconda Avenue, Garden Grove, California 92841 -------------------------------------------------------------------------------- (Address of principal executive office) N/A -------------------------------------------------------------------------------- (Registrant's telephone number, including area code) 100 Nickerson Road, Marlboro, Massachusetts 01752 -------------------------------------------------------------------------------- (Former name or former address, if changed since last report) 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 twelve (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 ninety (90) days. Yes [X] No [ ] As of December 17, 2000, Envision Development Corporation had 12,066,000 shares of common stock, $0.01 par value, outstanding.

2 ENVISION DEVELOPMENT CORPORATION FORM 10-Q FOR THE QUARTER ENDED OCTOBER 28, 2000 TABLE OF CONTENTS PART I. FINANCIAL INFORMATION ITEM 1. Financial Statements Unaudited Condensed Consolidated Balance Sheets as of October 28, 2000 and January 29, 2000 Unaudited Condensed Consolidated Statements of Operations for the Three and Nine Months Ended October 28, 2000 and October 30, 1999 Unaudited Condensed Consolidated Statement of Cash Flows for the Nine Months Ended October 28, 2000 and October 30, 1999 Unaudited Notes to Condensed Consolidated Financial Statements ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ITEM 3. Quantitative and Qualitative Disclosures about Market Risk PART II. OTHER INFORMATION ITEM 1. Legal Proceedings ITEM 2. Changes in Securities and Use of Proceeds ITEM 5. Other Information ITEM 6. Exhibits and Reports on Form 8-K Signatures

3 CAUTIONARY STATEMENT REGARDING FORWARD LOOKING STATEMENTS AND ASSOCIATED RISKS This Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements include information concerning future results of operations and financial condition and are subject to known and unknown risks, uncertainties and other factors, some of which are beyond our control, that may cause the actual results, performance or achievements of Envision Development Corporation ("Envision" or the "Corporation") or its industry to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Statements that contain words such as"believes," "expects," "anticipates," "intends," "estimates," "continue," "should," "could," "may," "plan," "project," "predict," "will" or similar expressions are forward-looking statements. These forward-looking statements are based on our current expectations and are subject to a number of risks, uncertainties and assumptions relating to our operations, financial condition and results of operations, including, but not limited to: o Envision has ceased operations as discussed in the Management's Discussion and Analysis of Financial Condition and Results of Operations section of this document. o There are no significant operations remaining in the Corporation due to the foreclosures and dispositions as discussed in the Management's Discussion and Analysis of Financial Condition and Results of Operations section of this document. o Based on the value of Envision's assets and outstanding liabilities, it is unlikely that any shareholder would receive any cash from the sale of assets under a plan of liquidation, if such a plan were approved. The financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classifications of assets or the amounts and classifications of liabilities that resulted from the Corporation's subsequent decision to cease operations. o The ability to complete any plan of reorganization is dependent upon the ability of the Corporation to retain key personnel. Despite Envision's current inability to pay cash compensation, certain employees, officers and directors have continued to provide their services to the Corporation. There are no assurances that these individuals will continue to provide those services. o Due to the lack of funds, Envision was unable to engage accounting and legal professionals to review this document filed by us with the Securities and Exchange Commission ("SEC"). The Corporation has an obligation to continue to comply with the applicable reporting requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), even though compliance with such reporting requirements is economically burdensome. The Corporation may seek relief from the SEC from the reporting requirements under the Exchange Act. The Corporation anticipates that, if such relief is granted, it would attempt to continue to file current reports on Form 8-K to disclose material events along with any other reports that the SEC might require. o The delisting of Envision's common stock from the American Stock Exchange may materially impair the ability of the Corporation's stockholders to buy and sell shares. o Certain lawsuits and proceedings have been filed against us and others are threatened which, if determined or settled in a manner adverse to Envision, could further adversely affect the Corporation.

4 If any of these risks or uncertainties materialize, or if any of the underlying assumptions prove incorrect, actual results may differ significantly from results expressed or implied in any forward-looking statements made by Envision. These and other risks are detailed in the Annual Report on Form 10-K as of and for the year ended January 29, 2000 and in other documents filed by Envision with the SEC. Envision undertakes no obligation to update publicly any forward-looking statements for any reason, even if new information becomes available or other events occur in the future. Accordingly, for those statements, Envision claims the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. Envision undertakes no obligation to revise the forward-looking statements included in this report to reflect any future events or circumstances. Envision's actual results, performance or achievements could differ materially from the results expressed in, or implied by, these forward-looking statements. 2

5 PART I. FINANCIAL INFORMATION ITEM 1. Financial Statements ENVISION DEVELOPMENT CORPORATION Condensed Consolidated Balance Sheets (Unaudited) <TABLE> <CAPTION> October 28, January 29, 2000 2000 ------------- ------------- (Unaudited) <S> <C> <C> ASSETS Current assets: Cash and cash equivalents $ 15,795 $ 9,208,501 Accounts receivable 220,000 -- Prepaid expenses and other current assets 213,095 -- Net assets from discontinued operations -- 832,208 ------------- ------------- Total current assets 448,890 10,040,709 Property and equipment, net 989,155 -- Intangibles -- -- Other assets 209,699 -- ------------- ------------- Total assets $ 1,647,744 $ 10,040,709 ============= ============= LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY Current liabilities: Accounts payable and accrued expenses $ 2,853,522 $ 322,900 Notes payable to stockholders 4,088,397 -- Capital lease obligations 56,120 -- ------------- ------------- Total liabilities 6,998,039 322,900 ------------- ------------- Commitments and contingencies -- -- ------------- ------------- Stockholders' (deficit) equity: Preferred stock, $0.01 par value, 5,000,000 shares authorized, 0 shares issued and outstanding -- -- Common stock, $0.01 par value, 20,000,000 shares authorized, 12,066,000 and 7,500,000 shares issued and outstanding as of October 28, 2000 and January 29, 2000, respectively 120,660 75,000 Additional paid in capital 288,104,213 15,194,771 Deferred compensation (1,746,813) -- Accumulated deficit (291,828,355) (5,551,962) ============= ============= Total stockholders' (deficit) equity (5,350,295) 9,717,809 ============= ============= Total liabilities and stockholders' equity $ 1,647,744 $ 10,040,709 ============= ============= </TABLE> The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 3

6 ENVISION DEVELOPMENT CORPORATION Condensed Consolidated Statements of Operations (Unaudited) <TABLE> <CAPTION> Three Months Three Months Nine Months Nine Months Ended Ended Ended Ended October 28, 2000 October 30, 1999 October 28, 2000 October 30, 1999 ---------------- ---------------- ---------------- ---------------- <S> <C> <C> <C> <C> Revenue $ 293,515 $ -- $ 786,934 $ -- Operating expenses 4,285,741 -- 12,380,711 -- Legal settlement -- -- 9,850,000 -- Research and development -- -- 1,154,370 -- In-process research and development -- -- 4,119,000 -- Depreciation and amortization 13,171,842 -- 33,172,709 -- Impairment of intangibles 113,494,411 -- 235,796,819 -- ------------- ------------- ------------- ----------- Total operating expenses 130,951,994 -- 296,473,609 -- ------------- ------------- ------------- ----------- Loss from operations, before minority interest, interest income (expense) net, other income and results of operations from discontinued operations (130,658,479) -- (295,686,675) -- Loss on sale of stock by subsidiary -- -- (17,876,747) -- Loss on sale of assets (510,150) -- (510,150) -- Minority interest 2,351,856 -- 2,500,000 -- Interest expense, net (126,086) -- (12,188) -- Other income 262,120 -- 262,120 -- ------------- ------------- ------------- ----------- Loss from operations before results of operations from discontinued operations (128,680,739) -- (311,323,640) -- Income (loss) from discontinued operations -- (697,140) (1,083,675) (2,265,791) (Loss) Gain on sale of discontinued operations -- -- 26,130,922 -- ------------- ------------- ------------- ----------- Net loss $(128,680,739) $ (697,140) $(286,276,393) $(2,265,791) ============= ============= ============= =========== Basic and diluted loss per common share: Loss from continuing operations $ (10.68) $ -- $ (29.16) $ -- (Loss) income from discontinued operations -- (0.12) 2.35 (0.43) ------------- ------------- ------------- ----------- Net loss $ (10.68) $ (0.12) $ (26.81) $ (0.43) ============= ============= ============= =========== Weighted average number of common shares outstanding used in basic and diluted calculation 12,053,978 5,879,121 10,678,026 5,269,360 ============= ============= ============= =========== </TABLE> The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 4

7 ENVISION DEVELOPMENT CORPORATION Condensed Consolidated Statements of Cash Flows (Unaudited) <TABLE> <CAPTION> Nine Months Ended ------------------------------------- October 29, October 30, 2000 1999 ------------- ------------- <S> <C> <C> Cash flows from operating activities: Net loss $(286,276,393) $ (2,265,791) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 33,172,709 -- In process research and development 4,119,000 -- Impairment of intangibles 235,796,819 -- Loss on legal settlement 9,850,000 -- Loss on sale of subsidiary stock 17,876,747 -- Minority interest (2,500,000) -- Loss from discontinued operations 1,083,675 2,265,791 Gain of sale of discontinued operations (26,130,922) -- Loss from sale of assets 510,150 -- Changes in operating assets and liabilities, net of effect of acquisitions and dispositions: Decrease in accounts receivable 289,243 -- Increase in prepaid expenses 33,117 -- Increase in other assets (32,710) -- Decrease in deferred revenue (199,007) -- Increase in accounts payable 1,911,034 -- ------------- ------------- Net cash used by operating activities of continuing operations (10,496,538) -- Net cash used by operating activities of discontinued operations (2,320,545) (4,537,324) ------------- ------------- Net cash used by operating activities (12,817,083) (4,537,324) ------------- ------------- Cash flows from investing activities: Purchase of property and equipment (1,039,017) -- Advances to affiliates (891,000) -- Cash acquired from acquisitions 215,164 -- ------------- ------------- Net cash used in investing activities (1,714,853) -- ------------- ------------- Cash flows from financing activities: Payments on capital leases (15,744) -- Proceeds from issuance of stock 315,000 15,603,621 Issuance of subsidiary stock 12,077 -- Proceeds from notes to stockholders 5,160,000 -- Payments on notes to stockholders (132,103) -- ------------- ------------- Net cash provided by financing activities 5,339,230 15,603,621 ------------- ------------- Net decrease in cash and cash equivalents (9,192,706) 11,066,297 Cash and cash equivalents, beginning of period 9,208,501 100,000 ------------- ------------- Cash and cash equivalents, end of period $ 15,795 $ 11,166,297 </TABLE> The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 5

8 ENVISION DEVELOPMENT CORPORATION Notes to Condensed Consolidated Financial Statements (Unaudited) NOTE 1 - BASIS FOR PRESENTATION OF CONSOLIDATED FINANCIAL STATEMENTS The accompanying unaudited condensed consolidated financial statements of Envision Development Corporation ("Envision" or the "Corporation") include the accounts of Envision and its wholly and majority owned subsidiaries and have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions for Form 10-Q and Rule 10-01 of Regulation S-X. All intercompany accounts and transactions have been eliminated. They do not include all information and notes required by generally accepted accounting principles for complete financial statements and should be read together with the audited financial statements and notes for the fiscal year ended January 29, 2000 which are included in Envision's Annual Report on Form 10-K filed with the Securities and Exchange Commission. The balance sheet data as of January 29, 2000 was derived from audited financial statements, as adjusted to reflect the disposition of perfumania.com, inc. ("perfumania.com")(see Note 5). The financial information furnished reflects all adjustments, consisting only of normal recurring accruals, which are, in the opinion of management, necessary for a fair presentation of the financial position, results of operations and cash flows for the quarterly periods presented. The results of operations for the periods presented are not necessarily indicative of our future results of operations for the entire year. Certain prior year amounts have been reclassified in accordance with generally accepted accounting principles to conform with the current year presentation. Envision ceased operations in November 2000 (see Note 2). Envision provided professional services to companies wishing to utilize the Internet for electronic commerce until the operations of the professional services subsidiary, Envision Development Corporation, a Massachusetts corporation, ("Envision Massachusetts") were sold on October 31, 2000 (see Note 5). Envision holds a five percent equity stake in LiQ, Inc. ("LiQ"), a developer and provider of collaborative software. LiQ was previously a wholly-owned subsidiary of Envision (see Note 9). Envision also holds a 57% equity stake in Interosa, Inc. ("Interosa"), a developer and provider of technologies used to secure and manage e-mail communications. Interosa ceased operations in November 2000 to organize a restructuring plan and to seek alternative sources of financing. A creditor foreclosed on the Interosa assets in December 2000 (see Note 2). These financial statements were not reviewed by an independent public accountant and do not include any adjustments to reflect the possible future effects on the recoverability and classifications of assets or the amounts and classifications of liabilities that resulted from the Corporation's subsequent decision to cease operations. NOTE 2 - RECENT DEVELOPMENTS AND LIQUIDITY The Corporation has limited operating history with significant operating losses and its future capital needs and cash requirements exceed its current financial resources. Envision has historically relied on funding to finance operations under various financing arrangements with ZERO.NET, Inc. ("Zero.Net"), a significant shareholder, and Dominion Income Management Corporation ("Dominion"), a related company (see Note 7). These lending sources continued to provide loans until late November 2000 when the borrowings of the Corporation and its subsidiaries approached $5.0 million, including interest. At this point, further lending was terminated due to the delisting of Envision common stock from the American Stock Exchange and the Corporation's inability to meet revenue forecasts and other specific financial requirements of the lender. The loans were called by the lender. Efforts to establish alternative financing sources were unsuccessful. Certain lenders who had previously financed operations of the Corporation's subsidiary, Interosa, declined to support the borrowing requirements of the business earlier in the year. The inability of the Corporation to obtain additional financing moved the Corporation's Board of Directors to direct management to cease operations in November 2000. The Board of Directors at Interosa took similar action and directed that management team to cease operations in November 2000. The lender to Interosa 6

9 foreclosed on the Interosa assets on December 12, 2000. The lender has the right to complete a foreclosure proceeding against the assets of Envision as well. Due to the foreclosure of Interosa and the dispositions of Envision Massachusetts and LiQ, the Corporation has no significant operating assets. NOTE 3 - INITIAL PUBLIC OFFERING In September 1999, perfumania.com completed its initial public offering of its common stock (the "Offering"), in which perfumania.com and Perfumania sold 3.5 million shares of common stock at an offering price of $7.00 per share. Of the 3.5 million shares of common stock, 2.5 million shares of common stock were sold by perfumania.com. perfumania.com received proceeds of approximately $16.1 million, net of $1.4 million in underwriting discounts and commissions. perfumania.com used approximately $3.3 million of the proceeds to repay advances from Perfumania. Additionally, perfumania.com incurred approximately $512,000 in other costs in connection with the Offering. In connection with the Offering, perfumania.com granted common stocks warrants to the underwriters to purchase 350,000 shares of its common stock at an exercise price of $9.80 per share. The common stock warrants can be exercised at any time for a period of five years. NOTE 4 - ACQUISITIONS INTEROSA, INC. (SUCCESSOR TO QUI VIVE, INC.). On April 7, 2000, Envision completed the first stage of the acquisition of 80% of Interosa, Inc. (formerly Qui Vive, Inc.) ("Interosa"), a developer of proprietary "Interosa" technology which provides security features to email communications, pursuant to the terms of an Amended and Restated Stock Acquisition Agreement, dated as of March 31, 2000, among Envision, QV Acquisition Corporation, a Delaware corporation ("QV Acquisition"), Sundog Technologies, Inc., a Delaware corporation ("Sundog"), and RockMountain Ventures Fund, LP ("Rock") ("Interosa Agreement"). QV Acquisition, a wholly-owned subsidiary of Envision, acquired shares of Series A Preferred Stock and shares of Series B Preferred Stock of Interosa from Sundog and Rock. In consideration therefor, Envision issued shares of Envision common stock to Sundog and Rock. The total purchase price is valued at approximately $110.0 million, consisting of 1,813,000 shares of Envision common stock. Envision issued 1,492,500 shares of its common stock to Sundog and Rock to complete the first stage of the acquisition. An additional 320,500 shares of Envision common stock will be issued to Sundog and Rock to complete the second stage of the acquisition following the approval of Envision's shareholders. The additional shares are not subject to adjustment for subsequent fluctuations in the stock price. The shares issued by the Corporation in connection with the Interosa acquisition are not registered under the Securities Act of 1933 and are subject to restrictions on transferability for a period of 18 months from the date of issuance. The market value was calculated using the average of the closing price of the previous ten trading days of Envision common stock prior to consummation of the transaction. The number of shares of Envision common stock given in exchange for such shares of Interosa capital stock was determined by negotiations among the parties to the Interosa Agreement. The acquisition of Interosa has been accounted for using the purchase method of accounting, and, accordingly, the purchase price of the Interosa acquisition was allocated to the assets acquired and liabilities assumed based on their estimated fair values at the acquisition date. The results of operations for Interosa are included with those of the Corporation from the date of the acquisition. 7

10 The purchase price for the above acquisition was allocated as follows: Fair value of net assets acquired (net liabilities assumed): Prepaid expenses and other assets $ 176,751 Property and equipment, net 232,023 ----------- Total assets acquired 408,774 ----------- Accounts payable and accrued expenses (199,442) Notes payable to stockholder (998,175) ----------- Total liabilities assumed (1,197,617) ----------- Cash acquired 80,676 ----------- Net liabilities assumed $ (708,167) =========== The following is a reconciliation of the purchase price to the excess of the estimated fair value of net assets acquired allocated to intangible assets: Purchase price $110,026,436 Net liabilities assumed 708,167 ------------ Amount allocated to intangible assets $110,734,603 ============ Interosa, founded in 1998, was a development stage enterprise with no revenues. Based on a preliminary independent third party appraisal, approximately $3.95 million was allocated to in-process research and development and expensed in the accompanying condensed consolidated statement of operations. This amount was developed by estimating the stage of development of in-process research and development projects at the date of the acquisition, estimating incremental cash flows generated from such projects, and discounting the net cash flows back to their present value using a discount rate of 30%, which represents a premium to Envision's cost of capital to take into account the uncertainty surrounding the successful development of the purchased in-process technology. The projections were based on management's estimates of market size and growth, expected trends in technology, expected research and development and selling and general administrative expenditures, and the expected timing of new product introductions. Approximately $24.7 million of the total purchase price was allocated to existing technology, which is being amortized over three years. The value of the existing technology was developed based on similar assumptions using a discount rate of 30%. Approximately $1.4 million of the purchase price was allocated to the valuation of the assembled workforce, which is also being amortized over three years. The value of the workforce was developed by estimating the cost to replace each employee based on average hiring and training costs. Approximately $50,000 of the purchase price was allocated to domain names, which is being amortized over three years. The remaining amount of the purchase price was allocated to goodwill, which is being amortized on a straight-line basis over three years. The projections used in developing the values should not be considered an accurate predictor of future performance for several reasons, including the consideration of many factors outside the control of the Corporation. These intangible assets are subject to review of recoverability based on various factors including Envision's ability to generate future revenues sufficient to warrant the intangible amounts capitalized. This ability is subject to various risks and many factors outside the control of the Corporation. Based upon a change in circumstances and due to the subsequent events, including the Corporation's loss of funding and the inability to secure alternative financing, management reviewed the recoverability of the carrying value of the assets (see Note 6). VP IP, INC. On April 27, 2000, the Board of Directors of Envision approved the Amended and Restated Stock Purchase Agreement ("VP IP Agreement"), dated April 10, 2000, with VP IP, Inc. ("VP IP"), a Delaware corporation. Pursuant to the terms of 8

11 this Agreement, Envision acquired the software and URL of VP IP from the owners of VP IP, which were William J. Patch, director and former Chief Executive Officer of Envision, Mr. Patch's immediate family and Alex Adamopoulos, former officer of Envision. The total purchase price is valued at approximately $12.3 million, consisting of 200,000 shares of Envision common stock. The shares issued by the Corporation in connection with the VP IP acquisition are not registered under the Securities Act of 1933 and are subject to restrictions on transferability for a period of 12 months from the date of issuance. The market value was calculated using the average of the closing price of the previous ten trading days of Envision common stock prior to consummation of the transaction. The number of shares of Envision common stock given in exchange for the assets of VP IP was determined by negotiations among the parties to the VP IP Agreement. As a part of this acquisition, Mr. Patch and Mr. Adamopoulos entered into employment agreements with the Corporation (see Note 9). The acquisition of VP IP is an acquisition of assets, and, accordingly, the purchase price was preliminarily allocated to the assets acquired, primarily goodwill. Based upon the change in circumstances due to the departures of Mr. Patch and Mr. Adamopoulos during the second fiscal quarter, management reviewed the recoverability of the carrying amount of the assets (see Note 6). LIQ, INC. On May 5, 2000, the Board of Directors of Envision approved an Agreement and Plan of Merger Among Envision, LiQ Acquisition Sub, Inc., a Delaware corporation and a direct wholly owned subsidiary of Envision, LiQ, Inc. ("LiQ"), a Delaware corporation, and Syed Abbas Ali Shah ("LiQ Agreement"). LiQ integrates voice-enabled communications via VoIP, document sharing, and co-browsing over the Internet or corporate intranets. The LiQ IsoSpace platform enables live, Web-based communications, transactions, and real-time knowledge exchange. In consideration therefor, Envision issued 640,000 shares of its common stock in exchange for all of the issued and outstanding shares of LiQ. The total purchase price is valued at approximately $43.3 million. The shares issued by the Corporation in connection with the LiQ acquisition are not registered under the Securities Act of 1933 and are subject to restrictions on transferability for a period of 12 months from the date of issuance. The market value was calculated using the average of the closing price of the previous ten trading days of Envision common stock prior to consummation of the transaction. The number of shares of Envision common stock given in exchange for such shares of LiQ capital stock was determined by negotiations among the parties to the LiQ Agreement. The acquisition of LiQ has been accounted for using the purchase method of accounting, and, accordingly, the purchase price of the LiQ acquisition was allocated to the assets acquired and liabilities assumed based on their estimated fair values at the acquisition date. The results of operations for LiQ are included with those of the Corporation from the date of the acquisition. 9

12 The purchase price for the above acquisition was allocated as follows: Fair value of net assets acquired (net liabilities assumed): Prepaid expenses and other assets $ 123,497 Property and equipment, net 78,753 --------- Total assets acquired 202,250 --------- Accounts payable and accrued expenses (46,085) Note payable to Envision (141,000) Note payable to shareholders (427,261) Other liabilities (116,611) --------- Total liabilities assumed (730,957) --------- Cash acquired -- --------- Net liabilities assumed $(528,707) ========= The following is a reconciliation of the purchase price to the excess of the estimated fair value of net assets acquired allocated to intangible assets: Purchase price $43,316,032 Net liabilities assumed 528,707 ----------- Amount allocated to intangible assets $43,844,739 =========== LiQ, founded in 1999, was a development stage enterprise with no revenues. Based on a preliminary independent third party appraisal, approximately $169,000 was allocated to in-process research and development and expensed in the accompanying condensed consolidated statement of operations. This amount was developed by estimating the stage of development of in-process research and development projects at the date of the acquisition, estimating incremental cash flows generated from such projects, and discounting the net cash flows back to their present value using a discount rate of 30%, which represents a premium to Envision's cost of capital to take into account the uncertainty surrounding the successful development of the purchased in-process technology. The projections were based on management's estimates of market size and growth, expected trends in technology, expected research and development and selling and general administrative expenditures, and the expected timing of new product introductions. Approximately $6.7 million of the total purchase price was allocated to existing technology, which is being amortized over three years. The value of the existing technology was developed based on similar assumptions using a discount rate of 30%. Approximately $800,000 of the purchase price was allocated to the valuation of the workforce, which is also being amortized over three years. The value of the workforce was developed by estimating the cost to replace each employee based on average hiring and training costs. Approximately $100,000 of the purchase price was allocated to domain names, which is being amortized over three years. The remaining amount of the purchase price was allocated to goodwill, which is being amortized on a straight-line basis over three years. The projections used in developing the values should not be considered an accurate predictor of future performance for several reasons, including the consideration of many factors outside the control of the Corporation. These intangible assets are subject to review of recoverability based on various factors including Envision's ability to generate future revenues sufficient to warrant the intangible amounts capitalized. Based upon a change in circumstances and due to the subsequent events, including the Corporation's loss of funding and the inability to secure alternative financing, management reviewed the recoverability of the carrying value of the assets (see Note 6). In December 2000, a significant portion of the investment in LiQ was returned to the original shareholders as a part of a legal settlement (see Note 9). 10

13 ENVISION DEVELOPMENT CORPORATION, A MASSACHUSETTS CORPORATION. On May 16, 2000, Envision acquired Envision Development Corporation, a Massachusetts corporation with the same name as the Corporation ("Envision Massachusetts"), pursuant to the terms of the First Amended and Restated Agreement and Plan of Merger, dated March 10, 2000, as amended by Amendment No. 1, dated May 12, 2000, Among Envision Development Corporation, a Florida corporation, perfumania.com, inc., a Florida corporation, Envision Acquisition Corporation ("EAC"), a Massachusetts corporation, Envision Development Corporation, a Massachusetts corporation, and the Stockholders of Envision Development Corporation, a Massachusetts corporation ("Envision Massachusetts Agreement"). Envision Massachusetts merged with and into EAC, a wholly owned subsidiary of the Corporation, with Envision Massachusetts surviving as a wholly-owned subsidiary of the Corporation. Envision Massachusetts is a professional services organization providing web site development and consulting services. Pursuant to Amendment No. 2 to the Envision Massachusetts agreement, the conversion ratio for the number of shares of Envision Massachusetts common stock to be converted into shares of Envision common stock was reduced to 1.91815 from 1.97711. Based on the amended conversion ratio, all the issued and outstanding common stock of Envision Massachusetts was converted into 1,467,953 shares of common stock, par value $0.01, of Envision, and all the issued and outstanding options for common stock of Envision Massachusetts were converted into 368,107 options for common stock of Envision with a weighted average exercise price of $14.40. The total purchase price is valued at approximately $102.6 million. The shares issued by the Corporation in connection with the Envision Massachusetts acquisition are not registered under the Securities Act of 1933 and are subject to restrictions on transferability for a period of 12 months from the date of issuance. The market value was calculated using the average of the closing price of the previous ten trading days of Envision common stock prior to consummation of the transaction. The number of shares of Envision common stock given in exchange for such shares of Envision Massachusetts common stock was determined by negotiations among the parties to the Envision Massachusetts Agreement. The acquisition of Envision Massachusetts has been accounted for using the purchase method of accounting, and, accordingly, the purchase price of the Envision Massachusetts acquisition was allocated to the assets acquired and liabilities assumed based on their estimated fair values at the acquisition date. The results of operations for Envision Massachusetts are included with those of the Corporation from the date of the acquisition. 11

14 The purchase price for the above acquisition was allocated as follows: Fair value of net assets acquired (net liabilities assumed): Accounts receivable $ 509,243 Property and equipment, net 436,259 Other assets 123,953 ----------- Total assets acquired 1,069,455 ----------- Value of stock options assumed (21,000,000) Accounts payable and accrued expenses (430,773) Note payable to Envision (750,000) Other liabilities (382,469) ----------- Total liabilities assumed (22,563,242) ----------- Cash acquired 134,488 ----------- Net liabilities assumed $(21,359,299) =========== The following is a reconciliation of the purchase price to the excess of the estimated fair value of net assets acquired allocated to intangible assets: Purchase price $ 102,582,600 Net liabilities assumed 21,359,299 ------------ Amount allocated to intangible assets $ 123,941,899 ============ The remaining amount of the purchase price was allocated to goodwill which is being amortized on a straight-line basis over ten years. These intangible assets are subject to review of recoverability based on various factors including Envision's ability to generate future revenues sufficient to warrant the intangible amounts capitalized. This ability is subject to various risks and many factors outside the control of the Corporation. Based upon the change in circumstances due to the events of the departures of certain management personnel and employees during the second fiscal quarter and revised revenue estimates for the current and future periods, management reviewed the recoverability of the carrying amount of the assets(see Note 6). On October 31, 2000, as part of Envision's strategy to reduce its burn rate, Envision sold the majority of the assets and transferred its customer obligations acquired from Envision Mass to a former employee of Envision (see Note 5). NOTE 5 - DISPOSITIONS PERFUMANIA.COM. On May 10, 2000, Envision sold its wholly-owned subsidiary, perfumania.com, to E Com Ventures, Inc. ("E Com Ventures"), formerly known as Perfumania, Inc., pursuant to the terms of a Stock Purchase Agreement, dated April 29, 2000, among Envision, Zero.Net and E Com Ventures. Envision sold all the common stock of perfumania.com in exchange for 400,000 shares of common stock of Envision from E Com Ventures. The 400,000 shares of Envision common stock were valued at approximately $28.2 million. The market value was calculated using the average of the closing price of the previous ten trading days of Envision common stock prior to consummation of the transaction. The 400,000 shares of Envision common stock were retired subsequent to the acquisition. As part of the transaction, Zero.Net acquired 100,000 shares of common stock of Envision from E Com Ventures for $2,500,000. The disposition is accounted for as a discontinued operation, and accordingly, amounts in the accompanying condensed consolidated financial statements and related notes for all periods shown have been restated to reflect discontinued operations accounting. Summarized results of the discontinued business are shown separately as 12

15 discontinued operations in the accompanying condensed consolidated financial statements. The net assets from discontinued operations are primarily comprised of inventory, net of liabilities. Revenue for the six months ended July 29, 2000 and July 31, 1999 approximated $1.0 million and $390,000, respectively. ENVISION MASSACHUSETTS. On October 31, 2000, Envision disposed of a majority of the assets of its wholly-owned subsidiary, Envision Massachusetts, pursuant to the terms of a letter agreement (the "Letter Agreement"), dated October 31, 2000, by and among Business Solutions Outpost Corporation, ("BSOC"), and Envision. Under this Letter Agreement, Envision disposed of certain computer equipment and was released from all of its client contract obligations and certain significant employment obligations, leases and other third party commitments. The acquirer, Robert R. Haskell II, President of BSOC, is the former Vice President of Sales for Envision. As a result of this transaction, Envision recorded a loss on the disposition of approximately $10.5 million, including a $10.0 million impairment of the remaining goodwill associated with the Envision Massachusetts acquisition. NOTE 6 - INTANGIBLES, NET As described in Note 4, the Corporation acquired Interosa, VP IP, LiQ and Envision Massachusetts during April 2000 and May 2000. The acquisitions have been accounted for using the purchase method of accounting, and, accordingly, the purchase price of the acquisitions was allocated to the assets acquired and liabilities assumed based on their estimated fair values at the acquisition date including among others, existing technology, workforce, domain names, etc. The remaining amount of the purchase price following the allocation was allocated to goodwill and will be amortized on a straight-line basis over three to ten years. The Corporation assesses long-lived assets for impairment under the Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of" ("SFAS 121"). Under SFAS 121, goodwill associated with assets acquired in a purchase business combination is included in impairment evaluations when events or circumstances exist that indicate the carrying amount of those assets may not be recoverable. This evaluation of recoverability is based on the undiscounted estimated future cash flows of the business acquired over the remaining amortization period. Should the review indicate that the goodwill is not recoverable, the carrying value of the goodwill would be reduced by the estimated shortfall of the estimated future cash flows on a discounted basis. Subsequent to the acquisitions of VP IP and Envision Massachusetts, the Corporation experienced significant changes related to the Envision Massachusetts and VP IP operations. Specifically, four executive officers of the Corporation, including William Patch and Alex Adampoulos, Chief Executive Officer and Executive Vice President, respectively, and a significant portion of the original Envision Massachusetts employees, primarily executives, management and administrative staff, either resigned or were terminated in the second fiscal quarter. Following the acquisition, executives of the original Envision Massachusetts were no longer involved in the operations. These executives had previously been involved in the day-to-day operations, including customer relations. Envision intensified its focus on the improvement of the operating performance of Envision Massachusetts. This focus led to revised estimates of future sales and future operating cash flows and several Envision Massachusetts employees were terminated to reduce operating expenses. The Corporation also cancelled the lease for the new corporate headquarters (see Note 9) due to revised projections of the number of employees and operating cash flows. These initial terminations, coupled with the change in management subsequent to the acquisition and the lease termination, were substantially disruptive to the remaining employees and to some of the customer relationships. Sales and operating cash flows were further revised and a new organizational structure was established to implement the strategic changes recommended by the Board of Directors of the Corporation. This new structure further reduced the number of employees through terminations and resignations. Mr. Patch and Mr. Adampoulos left the Corporation during this period. Mr. Patch and Mr. Adamopoulos were an integral part of the Envision Massachusetts acquisition as they negotiated the transaction and spent a significant portion of their time at the Corporation overseeing the Envision Massachusetts operations. Furthermore, Mr. Patch and Mr. Adamopoulos developed the VP IP software, URL and business plan and were an essential part of the planned implementation of the VP IP business plan. There is no alternative future use for the the VP IP software, URL or business plan. 13

16 As described in Note 2, the Envision's lender terminated the Corporations' lines of credit in November 2000 and called its loans. Management's efforts to obtain alternative sources of financing have not been successful. As a result of the significance of the aforementioned events and circumstances, management began an evaluation of the recoverability of the intangible assets of Envision Massachusetts, VP IP, Interosa and LiQ. Management concluded from the results of these evaluations that a significant impairment of intangible assets had occurred, as consequence impairment charges of $113.5 million and $122.3 million were recorded during the three months periods ended October 29, 2000 and July 29, 2000, respectively. Considerable management judgment is necessary to estimate the fair value. Accordingly, actual results could vary significantly from management's estimates. NOTE 7 - RELATED PARTY TRANSACTIONS On April 27, 2000, the Board of Directors of Envision approved the Amended and Restated Stock Purchase Agreement, dated April 10, 2000, with the owners of VP IP, which were Mr. William J. Patch, director and former Chief Executive Officer of Envision, Mr. Patch's immediate family and Alex Adamopoulos, former officer of Envision (see Note 4). On May 10, 2000, Envision sold perfumania.com (see Note 5). Prior to the acquisition by Envision, Interosa entered into three notes payable for $300,000 each with Zero.Net, a significant stockholder of Envision, on February 28, 2000, March 15, 2000 and March 30, 2000. A fourth note payable for $200,000 was entered into with Zero.Net in April 2000. Each note payable is due on demand and bears interest at LIBOR plus 350 basis points. The interest is due bi-annually commencing in the third fiscal quarter of 2001. On June 28, 2000, this total outstanding debt amount, plus interest and additional cash totaling $2.5 million, was converted into 1,432,662 shares of Series C Interosa preferred stock. This represents all of the issued and outstanding Series C preferred stock of Interosa, a subsidiary of Envision. The Series C Interosa preferred stock is convertible into common stock of Interosa and has voting rights. As a result of the issuance of the Series C preferred stock, the Corporation's interest in Interosa has been reduced from 82.0% to 57.3%. Envision has recorded a loss of $17.9 million on the sale of subsidiary stock related to the issuance of these shares. On June 29, 2000, LiQ entered into a promissory note in the amount of $200,000 with Zero.Net, a significant shareholder of Envision. The note shall bear interest at the prime rate as quoted in the Wall Street Journal. The full balance of the loan amount is due any time after December 29, 2000 upon demand. The interest is payable on March 30 and September 30 of each year, commencing on September 30, 2000, and upon the repayment of the principal amount of the note. In the event of a default, the note is secured by a security agreement dated June 29, 2000 for all property of LiQ, including, but not limited to, all tangible and intangible assets. There is no prepayment penalty. On August 10, 2000, Interosa entered into a promissory note in the amount of $640,000 with Zero.Net. The full balance of the loan amount, together with accrued interest from the date of the note, is due no later than August 10, 2001. Interest shall accrue on the unpaid principal balance at a rate per annum equal to the prime rate, as quoted within the Wall Street Journal, plus two percent. In connection with the note, Interosa issued warrants to acquire an aggregate amount of 183,381 shares of Series C Interosa stock at a cost of $0.01 per share. In the event of a default, the note is secured by a security agreement dated August 10, 2000 for all property of Interosa, including, but not limited to, all tangible and intangible assets. There is no prepayment penalty. On September 8, 2000, Envision entered into a promissory note in the amount of $540,000 with Dominion Income Management Corp, ("Dominion"), a related company to Envision. The full balance of the loan amount is due upon demand, or if no demand before August 31, 2001, together with interest from the date for this note on the unpaid balance. The note shall bear interest at the prime rate as quoted in the Wall 14

17 Street Journal computed on the basis of the actual number of days elapsed and a calendar year of 365 days. In the event of a default, the balance shall be accelerated without further notice, and interest shall accrue thereon at the rate of 18% per annum until paid in full. The note is secured by a security agreement dated September 8, 2000 for all property of Envision, including, but not limited to, all tangible and intangible assets. There is no prepayment penalty. On September 11, 2000, Envision entered into a promissory note in the amount of $650,000 with Dominion. The full balance of the loan amount is due upon demand, or if no demand before September 11, 2001, together with interest from the date for this note on the unpaid balance. The note shall bear interest at the prime rate as quoted in the Wall Street Journal computed on the basis of the actual number of days elapsed and a calendar year of 365 days. In the event of a default, the balance shall be accelerated without further notice, and interest shall accrue thereon at the rate of 18% per annum until paid in full. The note is secured by the aforementioned security agreement dated September 8, 2000 for all property of Envision, including, but not limited to, all tangible and intangible assets. There is no prepayment penalty. On September 11, 2000, Envision entered into a promissory note in the amount of $170,000 with Zero.net. This amount was advanced on July 29, 2000. On September 20 and October 5, 2000, Envision entered into promissory notes in the amount of $600,000 and $300,000, respectively, with Dominion. The notes are due upon demand, or if no demand before September 11, 2001, together with interest from the date for this note on the unpaid balance. The notes shall bear interest at the prime rate as quoted in The Wall Street Journal computed on the basis of the actual number of days elapsed and a calendar year of 365 days. In the event of a default, the balance shall be accelerated without further notice, and interest shall accrue thereon at the rate of 18% per annum until paid in full. The notes are secured by a security agreement dated September 11, 2000 for all property of Envision including but not limited to all tangible and intangible assets. There is no prepayment penalty. On September 29, 2000, Interosa entered into a promissory note in the amount of $460,000 with Dominion. The full balance of the loan amount is due upon demand, or if no demand before September 29, 2001, together with interest from the date for this note on the unpaid balance. The note shall bear interest at the prime rate as quoted in the Wall Street Journal computed on the basis of the actual number of days elapsed and a calendar year of 365 days. In the event of a default, the balance shall be accelerated without further notice, and interest shall accrue thereon at the rate of 18% per annum until paid in full. The note is secured by a security agreement for all property of Interosa, including, but not limited to, all tangible and intangible assets. There is no prepayment penalty. Payment was demanded on November 30, 2000 and the collateral repossessed on December 12, 2000. On October 31, 2000, Interosa entered into a promissory note in the amount of $250,000 with Dominion. The full balance of the loan amount is due upon demand, or if no demand before October 31, 2001, together with interest from the date for this note on the unpaid balance. The note shall bear interest at the prime rate as quoted in the Wall Street Journal computed on the basis of the actual number of days elapsed and a calendar year of 365 days. In the event of a default, the balance shall be accelerated without further notice, and interest shall accrue thereon at the rate of 18% per annum until paid in full. The note is secured by a security agreement for all property of Interosa, including, but not limited to, all tangible and intangible assets. There is no prepayment penalty. Payment was demanded on November 30, 2000 and the collateral repossessed on December 12, 2000. Pursuant to the acquisition of LiQ, Envision assumed two LiQ shareholder loans totaling approximately $527,000. The loans have no repayment terms or stated interest rate. Envision repaid approximately $132,000 during the second fiscal quarter. NOTE 8 - EARNINGS PER SHARE Basic loss per common share is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding. Diluted loss per common share is computed by dividing the loss available to common 15

18 shareholders by the weighted average number of common shares outstanding including the dilutive effect of stock options and warrants using the treasury stock method. Potentially dilutive shares for the three and nine months ended October 28, 2000 and October 30, 1999 have not been included in the diluted loss per share because their effects would be anti-dilutive due to the losses incurred by Envision. Accordingly, diluted loss per common share is the same as basic loss per common share for the periods presented. NOTE 9 - COMMITMENTS AND CONTINGENCIES EMPLOYMENT AGREEMENTS. Envision entered into employment agreements with four of its executive officers for a three-year period. Among the provisions of the employment agreements, the executive officers will receive aggregate salaries of $715,000, aggregate annual and sign-on bonuses of $722,500 and stock options to buy 1,346,547 shares of common stock at an exercise price ranging from $22.00 to $26.13 per share. William Patch and Alex Adamopoulos, two of the four executive officers, are no longer with the Corporation (see Legal Proceedings - William Patch, Alex Adamopoulos and Jill Haselman). The remaining officers of the corporation have deferred all compensation since November 2000. LEASE AGREEMENT. On April 20, 2000, the Board of Directors approved a lease for the new corporate headquarters in Bridgewater, Massachusetts. The lease was intended to commence on August 1, 2000 for a term of seven years with minimum lease payments of approximately $529,000 annually for years one to five and approximately $568,000 annually for years six and seven. In connection with the lease and the construction of leasehold improvements, the Corporation was required to provide a stand-by letter of credit in the amount of $650,000. The Corporation cancelled this lease in July 2000. Pursuant to a mutually agreed upon settlement with the landlord, the Corporation paid a cancellation penalty of $150,000 and was released from the stand-by letter of credit in August 2000. The unpaid amount has been included in the accompanying condensed consolidated balance sheet as restricted cash. The cancellation penalty is included in operating expenses in the accompanying condensed consolidated statement of operations. LEGAL PROCEEDINGS - BIZ2NET. On May 24, 2000 Envision received notice of a complaint filed by Biz2Net Corporation ("Biz2Net" or "Plaintiff") in the Superior Court, County of Worcester, Commonwealth of Massachusetts, naming Envision, certain of its officers, directors and others, as defendants. In its complaint, Biz2Net, among other things, sought injunctive relief and damages based on its allegations that certain of the defendants hired former Biz2Net personnel in violation of contracts, misappropriated Biz2Net's business plan and other proprietary and confidential information and took corporate opportunities away from Biz2Net. On May 31, 2000, a hearing was held in the Worcester County Superior Court, and the Judge denied the Plaintiff's request for injunctive relief. On August 22, 2000, Envision and Biz2Net agreed upon the form of a Settlement Agreement and Release ("Settlement Agreement"), having reached agreement in principle to resolve the dispute. No party to the lawsuit admitted or denied liability. The Settlement Agreement is and will remain confidential but for certain exceptions provided for in the agreement. Pursuant to the Settlement Agreement, Envision shall transfer 800,000 shares of Envision common stock to Biz2Net. The shares issued by the Corporation in connection with the Biz2Net settlement will not be registered under the Securities Act of 1933 and are subject to restrictions on transferability for a period of 12 months from the date of issuance. During the restriction period, the shares may not be voted except in matters that would dilute Biz2Net's ownership percentage. As of July 29, 2000, Envision had accrued an estimate of the settlement based on the transfer of 800,000 shares of Envision common stock to Biz2Net. The accrual was subsequently adjusted to reflect the market price of the stock using the average of the closing price of the previous ten trading days of Envision common stock prior to August 22, 2000, the date on which the terms of the Settlement Agreement were agreed 16

19 to in principal, and is reflected in the accompanying condensed consolidated financial statements. LEGAL PROCEEDINGS - LIQ, INC. On July 26, 2000, Envision Development Corporation ("Envision") filed for declaratory judgment in the Superior Court, County of Middlesex, Commonwealth of Massachusetts against Syed Abbas Ali Shah and Ronald Keusch as shareholders of LiQ, Inc. ("LiQ") to have declared valid and enforceable the merger agreement or contract between Envision and LiQ. LiQ merged with Envision on May 8, 2000 pursuant to an Agreement and Plan of Merger (the "Merger Agreement") dated May 5, 2000 between Envision, LiQ and Mr. Shah. Mr. Shah was appointed to the Board of Directors of Envision pursuant to the Merger Agreement. Mr. Shah resigned from the Board of Directors of Envision prior to the filing of the aforementioned complaint. Mr. Shah and Mr. Keusch have been suspended as officers as LiQ. On September 1, 2000, the defendants removed the case to the United States District Court for the District of Massachusetts. On July 27, 2000, Envision received notice of a complaint filed by Mr. Shah, Mr. Keusch and Alan Nathan ("Plaintiffs") in the United States District Court, Southern District of New York, naming Envision and Andrew L. Evans as defendants. Plaintiffs are shareholders of Envision. The complaint was filed under seal by the plantiffs. In its complaint, LiQ, among other things, sought to rescind the merger between LiQ and Envision (see Note 4). On August 24, 2000, Envision moved to dismiss the matter on subject matter jurisdiction grounds. On December 5, 2000, a settlement was reached by all parties. Per the settlement, the Plantiffs shall transfer to Envision all of the shares of Envision common stock received as consideration in connection with the merger of Envision and LiQ. Envision will transfer 950 of the 1,000 shares of LiQ common stock to the Plantiffs and retain 50 shares of LiQ common stock which will represent a five percent ownership of LiQ. The defendants will also pay $200,000 to the Plantiffs. The Plantiffs also assumed approximately $300,000 in accounts payable from Envision. Per the Settlement Agreement, each former LiQ shareholder is not required to exchange their Envision common stock for LiQ common stock and may elect to retain their Envision common stock. LEGAL PROCEEDINGS - WILLIAM PATCH, ALEX ADAMOPOULOS AND JILL HASELMAN. On September 11, 2000, Envision received notice of a complaint filed by William Patch, Alex Adamopoulos and Jill Haselman, former executive officers of Envision, ("Plantiffs") in the Superior Court, County of Middlesex, Commonwealth of Massachusetts naming Envision Development Corporation, Dean Willard, Michael Amideo, Andrew Evans and Zero.Net as defendants. In their complaint, the Plantiffs, among other things, allege that Envision breached the employment contracts of each defendant and seek severance benefits. Envision believes that William Patch, Alex Adamopoulos, and Jill Haselman were terminated for cause. The ultimate outcome of the litigation cannot be ascertained at this time. LEGAL PROCEEDINGS. The Corporation is also involved in legal proceedings and litigation arising from the normal course of business. Losses with respect to these legal proceedings could be material to the Corporation's financial position. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the condensed consolidated financial statements and related notes herein included. This discussion contains forward-looking statements that reflect our plans, estimates, and beliefs and that involve risks and uncertainties (see Cautionary Statements Regarding Forward Looking Statements). Our actual results may differ materially from those anticipated in these forward-looking statements. RECENT DEVELOPMENTS On October 25, 2000, Envision was notified by the American Stock Exchange ("Exchange") that the Exchange intended to file an application with the SEC to delist our shares from the Exchange. On November 6, 2000, the Corporation's common stock ceased trading on the Exchange. The delisting was a result of our failure to meet certain Exchange requirements for continued listing. 17

20 On October 31, 2000, Envision disposed of a majority of the assets of its wholly-owned subsidiary, Envision Massachusetts, pursuant to the terms of a letter agreement (the "Letter Agreement"), dated October 31, 2000, by and among Business Solutions Outpost Corporation, ("BSOC"), and Envision. Under this Letter Agreement, Envision disposed of certain computer equipment and was released from all of its client contract obligations and certain other liabilities, including employee liabilities, leases and other third party commitments. The acquirer, Robert R. Haskell II, President of BSOC, is the former Vice President of Sales for Envision Massachusetts. As a result of this transaction, Envision recorded a loss on the disposition of Envision Massachusetts of approximately $10.5 million, including a $10.0 million impairment of the remaining goodwill associated with the Envision Massachusetts acquisition. The Corporation has limited operating history with significant operating losses and its future capital needs and cash requirements exceed its current financial resources. Envision has historically relied on funding to finance operations under various financing arrangements with ZERO.NET, Inc. ("Zero.Net"), a significant shareholder, and Dominion Income Management Corporation ("Dominion"), a related company (see Note 7). These lending sources continued to provide loans until late November 2000 when the borrowings of the Corporation and its subsidiaries approached $5.0 million, including interest. At this point, further lending was terminated due to the delisting of Envision common stock from the American Stock Exchange and the Corporation's inability to meet revenue forecasts and specific financial requirements of the lender. The loans were called by the lender. Efforts to establish alternative financing sources were unsuccessful. Certain lenders who had previously financed operations of the Corporation's subsidiary, Interosa, declined to support the borrowing requirements of the business earlier in the year. The inability of the Corporation to obtain additional financing moved the Corporation's Board of Directors to direct management to cease operations in November 2000. The Board of Directors at Interosa took similar action and directed that management team to cease operations in November 2000. The lender to Interosa foreclosed on the Interosa assets on December 12, 2000. The lender has the right to complete a foreclosure proceeding against the assets of Envision as well. Due to the foreclosure of Interosa and the dispositions of Envision Massachusetts and LiQ, the Corporation has no significant operating assets. On December 5, 2000, a Settlement Agreement and Release ("Settlement Agreement") was reached by all parties of the LiQ legal proceedings (see Note 9) which resulted in the effective transfer of 95% of Envision's investment in LiQ to the Plantiffs and the assumption of approximately $300,000 in accounts payable by the Plantiffs. The defendants will also pay $200,000 to the Plantiffs. FACTORS THAT MAY AFFECT FUTURE RESULTS Forward-looking statements in this document and those made from time to time by the Corporation through its senior management are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements concerning the expected future revenues or earnings or concerning projected plans, performance, product development, product release, as well as other estimates related to future operations are necessarily only estimates of future results and there can be no assurance that actual results will not materially differ from expectations. Factors that could cause actual results to differ materially from results anticipated in forward-looking statements are discussed in Cautionary Statement Regarding Forward Looking Statements. RESULTS OF OPERATIONS The sale of perfumania.com has been accounted for as a discontinued operation in accordance with Accounting Principles Board Opinion No. 30, "Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business and Extraordinary, Unusual and Infrequently Occurring Events and Transactions". Accordingly, results from continuing operations for the current and prior periods exclude the impact of the perfumania.com business. The net results for the prior periods are reflected in the loss from discontinued operations and for the current periods as gain (loss) from and gain on the sale of discontinued operations. 18

21 REVENUE. Revenues of approximately $294,000 and $787,000 for the three and nine months ended October 28, 2000, respectively, represent fees generated from professional services performed by Envision Massachusetts during the second and third quarters. Envision provides services on a time and material basis and fixed-price, fixed time-frame basis. When services are provided on a time and materials basis, revenue is recognized as costs are incurred. When services are provided on a fixed-price, fixed-timeframe basis, an internally developed process to estimate and propose fixed prices for such projects is used. The estimation process accounts for standard billing rates particular to each project, the technology environment and application type to be applied, and the project's timetable and overall technical complexity. An Envision management member must approve all fixed-price proposals. For these contracts, revenue is recognized using a percentage-of-completion method primarily based on costs incurred. Provisions for estimated losses on uncompleted contracts are made on a contract by contract basis and such provisions are recognized in the period in which the losses are determined. Financial results from professional services may fluctuate from quarter to quarter based on such factors as the number, complexity, size, scope and lead time of projects. More specifically, these fluctuations can result from the contractual terms and degree of completion of such projects, any delays incurred in connection with projects, employee utilization rates, the adequacy of provisions for losses, the accuracy of estimates of resources required to complete ongoing projects and general economic conditions. In addition, revenue from a large client may constitute a significant portion of total revenue in a particular quarter. On October 31, 2000, Envision disposed of a majority of the assets of Envision Massachusetts, the subsidiary which generated the revenue from professional services. In relation to the disposition, Envision was released from all of its client contract obligations and certain liabilities relating to employees, leases, and certain commitments to third parties. OPERATING EXPENSES. Operating expenses consist primarily of payroll and related expenses, severance, professional fees, facilities costs and other general corporate expenses. Operating expenses approximated $4.3 million and $12.4 million for the three and nine months ended October 28, 2000, respectively. LEGAL SETTLEMENT. Legal settlement consists of the fair market value of shares issued to Biz2Net in connection with the settlement agreement (see Note 9). RESEARCH AND DEVELOPMENT. Research and development for nine months ended October 28, 2000 was $1.2 million. This is primarily comprised of research and development expenses for the Interosa and LiQ products. IN-PROCESS RESEARCH AND DEVELOPMENT. Based on independent third party appraisals of Interosa and LiQ, approximately $4.1 million of the purchase price was allocated to in-process research and development. This amount was developed by estimating the stage of development of in-process research and development projects at the date of the acquisition, estimating incremental cash flows generated from such projects, and discounting the net cash flows back to their present value using a discount rate of 30%, which represents a premium to the Corporation's cost of capital to take into account the uncertainty surrounding the successful development of the purchased in-process technology. The projections were based on management's estimates of market size and growth, expected trends in technology, expected research and development and selling and general administrative expenditures, and the expected timing of new product introductions. DEPRECIATION AND AMORTIZATION. Depreciation and amortization, primarily amortization of intangible assets, for the three and nine months ended October 28, 2000 was $13.2 million and $33.2 million, respectively. Intangible assets are amortized on a straight-line basis over three to ten years. These intangible assets are subject to review of recoverability based on various factors including Envision's ability to generate future revenues sufficient to warrant the intangible amounts capitalized. The value of the intangible assets was impaired during the second and third fiscal quarters. 19

22 IMPAIRMENT OF INTANGIBLES. As a result of the significance of the events and circumstances described in Note 6 to the condensed consolidated financial statements, management began an evaluation of the recoverability of the assets of Interosa, LiQ, Envision Massachusetts and VP IP. Management concluded from the results of these evaluations that a significant impairment of intangible assets had occurred based on the methodology described in Note 6. An impairment charge was required because the estimated fair value was less than the carrying value of the assets. Impairment charges approximating $113.5 million and $225.8 million were recorded during the three and nine months ended October 28, 2000, respectively. OTHER INCOME. Other income of approximately $262,000 for the three months ended October 28, 2000 primarily relates to the disposition of the lease for the corporate headquarters in Marlboro, Massachusetts. DISCONTINUED OPERATIONS. Losses from discontinued operations approximated $1.1 million for the nine months ended October 28, 2000 compared to a loss of approximately $2.3 million for the same period in 1999. NET LOSS. As a result of the factors discussed above, primarily relating to impairment charges, depreciation and amortization and litigation charges, the net loss approximated $128.7 million and $286.3 million for the three and nine months ended October 28, 2000, respectively. LIQUIDITY AND CAPITAL RESOURCES Envision's principal capital requirements are for working capital purposes, including payroll and general operating expenses. At October 28, 2000, the Corporation had negative working capital of $5.4 million compared to working capital of $8.9 million (excluding assets from discontinuing operations of $832,000) at January 29, 2000. The decrease in working capital was due mainly to the decrease in cash used for operating expenses along with increase in accounts payable and accrued expenses and notes payable to stockholders. The results also reflect the consolidation of the acquisitions. During the nine months ended October 28, 2000, the Corporation used approximately $12.8 million in our operating activities. This was mainly the result of losses from continuing operations of $311.3 million offset by impairment and amortization of goodwill, losses on Biz2Net litigation, loss on sale of stock by subsidiary, an increase in accounts payables and accrued expenses and the gain on the sale of discontinued operations. Net cash used in investing activities approximated $1.7 million for the nine months ended October 28, 2000. These expenditures are primarily related to the purchase of computer hardware and software to support the operations and advances to affiliates. Net cash provided by financing activities approximated $5.3 million for the nine months ended October 28, 2000 was primarily provided by lenders (see Note 7). The Corporation has limited operating history with significant operating losses and its future capital needs and cash requirements exceed its current financial resources. Envision has historically relied on funding to finance operations under various financing arrangements with ZERO.NET, Inc. ("Zero.Net"), a significant shareholder, and Dominion Income Management Corporation ("Dominion"), a related company (see Note 7). These lending sources continued to provide loans until late November 2000 when the borrowings of the Corporation and its subsidiaries approached $5.0 million, including interest. At this point, further lending was terminated due to the delisting of Envision common stock from the American Stock Exchange and the Corporation's inability to meet revenue forecasts and specific financial requirements of the lender. The loans were called by the lender. Efforts to establish alternative financing sources were unsuccessful. Certain lenders who had previously financed operations of the Corporation's subsidiary, Interosa, declined to support the borrowing requirements of the business earlier in the year. The inability of the Corporation to obtain additional financing moved the Corporation's Board of Directors to direct management to cease operations in November 2000. The Board of Directors at Interosa took similar action and directed 20

23 that management team to cease operations in November 2000. The lender to Interosa foreclosed on the Interosa assets on December 12, 2000. The lender has the right to complete a foreclosure proceeding against the assets of Envision as well. Due to the foreclosure of Interosa and the dispositions of Envision Massachusetts and LiQ, the Corporation has no significant operating assets. YEAR 2000 READINESS Envision has not experienced any material problems with the network infrastructure, software, hardware and computer systems relating to the inability to recognize appropriate dates related to the year 2000. Envision is not aware of any Year 2000 problem with customers, suppliers or vendors. Accordingly, Envision does not anticipate incurring material expenses or experiencing any material operational disruptions as result of any Year 2000 issues. RECENT ACCOUNTING PRONOUNCEMENTS In June 1999, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 137, which delays the effective date of Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities"("SFAS 133"). Among other provisions, SFAS 133 establishes accounting and reporting standards for derivative instruments and for hedging activities. It also requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. SFAS 133 is effective for financial statements for fiscal years beginning after June 15, 2000. Management has not determined the effect, if any, of adopting SFAS 133. In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial Statements". SAB 101 provides guidance for revenue recognition under certain circumstances. The accounting and disclosures prescribed by SAB 101 will be effective for the fourth quarter of 2000. Management has not determined the effect, if any, of adopting SAB 101. FASB recently issued FASB Interpretation No. 44 ("FIN 44"), "Accounting for Certain Transactions Involving Stock Compensation: An Interpretation of APB Opinion No. 25". FIN 44 provides guidance regarding the scope of APB Opinion No. 25, "Accounting for Stock Issued to Employees", and its application to certain transactions. FIN 44 is effective on July 1, 2000. It applies on a prospective basis to events occurring after that date, except for certain transactions involving options granted to nonemployees, repriced fixed options and modifications to add reload option features. The adoption had a material effect on the Corporation's current consolidated financial statements for the acquisition of Envision Massachusetts and it may impact future accounting regarding stock option transactions. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. Envision is exposed to interest rate risk in the normal course of business. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The information set forth in Note 9, "Commitments and Contingencies" of the condensed consolidated financial statements included in Part I of this report is incorporated by reference into Part II of this report. ITEM 2. CHANGES IN SECURITIES AND USES OF PROCEEDS The information regarding the issuances of shares set forth in Note 4, "Acquisitions", and Note 9, "Commitments and Contingencies", of the condensed consolidated financial statements included in Part I of this report is incorporated by reference into Part II of this report. 21

24 ITEM 5. OTHER INFORMATION The information set forth in "Recent Developments" under Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations included in Part I of this report is incorporated by reference into Part II of this report. The information set forth in Note 2, "Recent Developments and Liquidity", Note 5, "Dispositions", Note 7, "Related Party Transactions" and Note 9, "Commitments and Contingencies" of the condensed consolidated financial statements included in Part I of this report is incorporated by reference into Part II of this report. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) The following exhibits are filed as a part of this report: 27.1 Financial Data Schedule 99.1 Press release, dated November 29, 2000, announcing the decision to temporarily cease operations 99.2 Press release, dated November 27, 2000, announcing the loss of funding 99.3 Press release, dated November 6, 2000, announcing the delistment from the American Stock Exchange 99.4 Press release, dated October 25, 2000, announcing the commencement of delisting procedures by the American Stock Exchange (b) Reports on Form 8-K On November 15, 2000, Envision filed a Current Report on Form 8-K dated October 31, 2000, to report certain information under Item 2, Acquisition or Disposition of Assets, regarding the disposition of Envision Massachusetts. On November 6, 2000, Envision filed a Current Report on Form 8-K dated November 6, 2000, to report certain information under Item 5, Other Events, to describe legal proceedings. On October 31, 2000, Envision filed a Current Report on Form 8-K dated October 31, 2000, to report certain information under Item 5, Other Events, to announce the resignations of Alan Rudd and Sunny Vanderbeck. On October 26, 2000, Envision filed a Current Report on Form 8-K dated October 25, 2000, to report certain information under Item 5, Other Events, to attach a press release describing the intention of the American Stock Exchange to file an application with the SEC to delist the Corporation's shares from the exchange. On August 9, 2000, Envision filed a Current Report on Form 8-K dated August 9, 2000, to report certain information under Item 5, Other Events, to attach a press release describing a corporate reorganization. On June 29, 2000, Envision filed a Current Report on Form 8-K dated June 23, 2000, to report certain information under Item 6, Resignation of a Director, to announce the resignation of Jake Weinstock. On June 2, 2000, Envision filed a Current Report on Form 8-K dated May 24, 2000, to report certain information under Item 5, Other Events, regarding the Biz2Net litigation. On May 30, 2000, Envision filed a Current Report on Form 8-K dated May 16, 2000, to report certain information under Item 2, Acquisition or Disposition of Assets, regarding its acquisition of Envision Development Corporation, a Massachusetts corporation. On July 31, 2000, Amendment No. 1 to such Current Report on Form 8-K was filed by Envision. On May 25, 2000, Envision filed a Current Report on Form 8-K dated May 10, 2000, to report certain information under Item 2, Acquisition or Disposition of Assets, regarding the disposition of perfumania.com, inc. 22

25 On May 22, 2000, Envision filed a Current Report on Form 8-K dated May 5, 2000, to report certain information under Item 2, Acquisition or Disposition of Assets, regarding its acquisition of LiQ, Inc., a Delaware corporation. On July 19, 2000, Amendment No. 1 to such Current Report on Form 8-K was filed by Envision. On May 3, 2000, Envision filed a Current Report on Form 8-K dated May 2, 2000, to report certain information under Item 4, Change in Registrant's Certifying Accountant, regarding the appointment of Grant Thornton LLP as the principal accountants. On May 3, 2000, Envision filed a Current Report on Form 8-K dated April 27, 2000, to report certain information under Item 2, Acquisition or Disposition of Assets, regarding its acquisition of VP IP, Inc. On July 7, 2000, Amendment No. 1 to such Current Report on Form 8-K was filed by Envision. On April 24, 2000, Envision filed a Current Report on Form 8-K dated April 7, 2000, to report certain information under Item 2, Acquisition or Disposition of Assets, regarding its acquisition of Interosa, Inc. On June 21, 2000, Amendment No. 1 to such Current Report on Form 8-K was filed by Envision. 23

26 ENVISION DEVELOPMENT CORPORATION SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused the report to be signed on its behalf by the undersigned, thereunto duly authorized. ENVISION DEVELOPMENT CORPORATION Registrant December 23, 2000 /s/ Dean M. Willard ----------------------------------- Dean M. Willard Chairman of the Board of Directors 24

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1 EXHIBIT 99.1 WEDNESDAY NOVEMBER 29, 11:30 AM EASTERN TIME PRESS RELEASE ENVISION DEVELOPMENT TO TEMPORARILY CEASE OPERATIONS PENDING RESOLUTION OF SOURCE OF FUNDS MARLBORO, Mass.--(BUSINESS WIRE)--Nov. 29, 2000--Envision Development Corporation (EDV) disclosed today that its board of directors has elected to temporarily cease the Company's operations pending a resolution of the corporation's source of funds. The Board is actively seeking alternative sources of funds--especially for its Interosa privacy e-mail operation-- following its sole lending source's decision to decline to increase its lines of credit to the Company. There cannot be any assurance that the Company will be successful in such efforts. The Board also determined to temporarily furlough its employees at the time. In addition, officers of the corporation will defer all cash compensation, effective immediately. This press release contains forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially from those set forth in the forward-looking statements. Such risks and uncertainties are described in the Company's filings with the SEC, including the Company's Annual Report on Form 10K and the Registration Statement on Form S-1. Envision Development Corporation (www.edvcorp.com) provides secure e-mail communication technologies to corporations and individuals, and specialized software for collaborative communications.

1 EXHIBIT 99.2 MONDAY NOVEMBER 27, 8:46 AM EASTERN TIME PRESS RELEASE ENVISION DEVELOPMENT'S CREDIT LINES WITHDRAWN BY ITS SOLE LENDING SOURCE MARLBORO, Mass.--(BUSINESS WIRE)--Nov. 27, 2000--Envision Development Corporation's (EDV) Chief Executive Officer, Michael E. Amideo, disclosed today that the corporation's sole lending source has declined to further increase its lines of credit to the Company. Envision's board of directors has called a special meeting to review the Company's alternatives. According to Mr. Amideo, Envision anticipates making a formal announcement within the next 24-48 hours. This press release contains forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially from those set forth in the forward-looking statements. Such risks and uncertainties are described in the Company's filings with the SEC, including the Company's Annual Report on Form 10K and the Registration Statement on Form S-1. Envision Development Corporation (www.edvcorp.com) provides secure e-mail communication technologies to corporations and individuals, and specialized software for collaborative communications.

1 EXHIBIT 99.3 MONDAY NOVEMBER 6, 1:19 PM EASTERN TIME PRESS RELEASE ENVISION DEVELOPMENT CORP. DELISTED FROM AMERICAN STOCK EXCHANGE MARLBORO, Mass.--(BUSINESS WIRE)--Nov. 6, 2000--Envision Development Corporation (AMEX:EDV - NEWS) today announced that it has ceased trading on the American Stock Exchange. The Company's Common Stock has been delisted from the Exchange effective with the opening of business on November 6, 2000. The delisting was a result of the Company's failure to meet certain Exchange requirements for continued listing. Envision's Common Stock is expected to be eligible for trading on the over-the-counter bulletin board (OTCBB). The OTCBB is currently reviewing the Company's eligibility and as such the Company's securities are not yet available for trading on the OTCBB. The OTCBB is a controlled quotation service that offers real time quotes, last sales prices and volume information in over-the-counter securities. Envision Development Corporation (www.edvcorp.com) provides secure e-mail communication technologies to corporations and individuals, professional service organization, and specialized software for collaborative communications. This press release contains forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially from those set forth in the forward-looking statements. Such risks and uncertainties are described in the Company's filings with the SEC including the Company's Annual Report on Form 10K and the Registration Statement on Form S-1

1 EXHIBIT 99.4 WEDNESDAY OCTOBER 25, 12:54 PM EASTERN TIME PRESS RELEASE ENVISION DEVELOPMENT CORP. ANNOUNCES COMMENCEMENT OF AMERICAN STOCK EXCHANGE DELISTING PROCEDURES MARLBORO, Mass.--(BUSINESS WIRE)--Oct. 25, 2000--Envision Development Corporation (AMEX:EDV - NEWS) today announced that the Company has been notified by the American Stock Exchange that the Exchange intends to file an application with the Securities and Exchange Commission to delist the Company's shares from the Exchange. The Exchange's decision is based on the Exchange's view that the Company does not currently meet certain listing criteria. After due consideration the Company has determined that it will not appeal the Exchange's decision, instead will focus its energy on building existing technologies and increasing the Company's financial performance. Envision's common stock is eligible for trading on the over-the-counter bulletin board (OTCBB). The OTCBB is a controlled quotation service that offers real time quotes, last sale prices and volume information in over-the-counter securities. While the Company regrets the Exchange's action, Envision wishes to emphasize that the delisting decision has no effect on the current operations of the Company. In addition, the Company intends to explore listing on an appropriate exchange or market at such time as the Company meets applicable listing requirements. Envision Development Corporation (www.edvcorp.com) provides secure e-mail communication technologies to corporations and individuals, professional service organizations, and specialized software for collaborative communications. This press release contains forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially from those set forth in the forward-looking statements. Such risks and uncertainties are described in the Company's filings with the SEC including the Company's Annual Report on Form 10K and the Registration Statement on Form S-1.