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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR THE FISCAL YEAR ENDED NOVEMBER 30, 1999
[ ] 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 0-27046
QUINTEL COMMUNICATIONS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 22-3322277
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
ONE BLUE HILL PLAZA
PEARL RIVER, NEW YORK 10965
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
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REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (914) 620-1212
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TITLE OF CLASS EXCHANGE ON WHICH REGISTERED
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Securities registered pursuant to Common Stock NASDAQ National Market
Section 12(b) of the Act: $.001 Par Value
Securities registered pursuant to Common Stock
Section 12(g) of the Act: $.001 Par Value
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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-K (sec.229.405 of this chapter) is not contained herein, and
will not be contained, to the best of Registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [ ]
The number of shares outstanding of the Registrant's common stock is
15,816,483 (as of 2/23/00). The aggregate market value of the voting stock held
by nonaffiliates of the Registrant was approximately $53,657,000 (as of 2/23/00,
based upon a closing price of the Company's Common Stock on the Nasdaq National
Market on such date of $5.50).
DOCUMENTS INCORPORATED BY REFERENCE
None.
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QUINTEL COMMUNICATIONS, INC.
INDEX TO ANNUAL REPORT ON FORM 10-K
FILED WITH THE SECURITIES AND EXCHANGE COMMISSION
FOR THE FISCAL YEAR ENDED NOVEMBER 30, 1999
ITEMS IN FORM 10-K
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Facing page
PART I
Item 1. Business.................................................... 1
Item 2. Properties.................................................. 8
Item 3. Legal Proceedings........................................... 8
Item 4. Submission of Matters to Vote of Security Holders........... 9
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters......................................... 10
Item 6. Selected Financial Data..................................... 11
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 12
Item
7A. Quantitative and Qualitative Disclosures About Market
Risk........................................................ N/A
Item 8. Financial Statements and Supplementary Data................. 27
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... N/A
PART III
Item
10. Directors and Executive Officers of the Registrant.......... 28
Item
11. Executive Compensation...................................... 30
Item
12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 32
Item
13. Certain Relationships and Related Transactions.............. 33
PART IV
Item
14. Exhibits, Financial Statement Schedules and Reports on Form
8-K......................................................... 34
Signatures............................................................. 36
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FORWARD LOOKING INFORMATION
MAY PROVE INACCURATE
This Annual Report on Form 10-K contains certain forward-looking statements
and information relating to the Company that are based on the beliefs of
Management, as well as assumptions made by and information currently available
to the Company. When used in this document, the words "anticipate," "believe,"
"estimate," and "expect" and similar expressions, as they relate to the Company,
are intended to identify forward-looking statements. Such statements reflect the
current views of the Company with respect to future events and are subject to
certain risks, uncertainties and assumptions, including those described in this
Annual Report on Form 10-K. Should one or more of these risks or uncertainties
materialize, or should underlying assumptions prove incorrect, actual results
may vary materially from those described herein as anticipated, believed,
estimated or expected. The Company does not intend to update these
forward-looking statements.
ITEM 1. BUSINESS
OVERVIEW
During the fiscal year ended November 30, 1999, Quintel Communications,
Inc. and its consolidated subsidiaries (collectively, the "Company") began the
process of redefining the Company as an on-line direct marketing provider within
the Internet industry, while simultaneously striving to increase shareholder
value. This process included the culmination of the following events:
- The cessation in June 1999 of the Company's legacy 900 Pay-Per-Call
business.
- The June 1999 redemption of 1.3 million shares of the Company's common
stock at $1.35 per share.
- The commencement in August 1999 of the formation of the "Quintel
Network", a portfolio of strategic investments and marketing partnerships
with Internet marketing companies, E-commerce retailers and service
providers.
- The launching of two Internet websites, GroupLotto.com and
MultiBuyer.com, in November 1999 and December 1999, respectively.
GENERAL
During the fiscal year ended November 30, 1999, the Company engaged in
providing and marketing various telecommunications products and services, and
utilized its extensive database to facilitate direct marketing services for
residential long distance customer acquisition programs. The Company's revenues
from the foregoing were generated through fees paid for customer acquisitions
and ongoing commissions earned under revenue sharing arrangements with long
distance carriers. The Company is no longer actively marketing these products or
services. Nevertheless, the Company continues to collect commissions pursuant to
its revenue sharing agreements.
The Company is presently developing, operating, and entering into strategic
investments with Internet-based direct marketing companies. Although the Company
continues to implement its business strategy of recognizing revenues through the
offering of consumer products and services, in the latter part of the fiscal
year ended November 30, 1999, the Company began the process of shifting the
marketing aspect of these operations to the Internet through its creation of the
"Quintel Network," a portfolio of strategic marketing investments and marketing
partnerships with Internet marketing companies, e-commerce retailers and service
providers. Together, the companies that comprise the Quintel Network market a
wide variety of products and services aimed at the consumer audience. The
Company utilizes the Quintel Network's combined detailed database of profiled
consumers to offer products and services via direct permission-based e-mail
marketing, on-line promotions, free lottery participation offers, group
aggregation buying activities and loyalty and incentive customer retention
programs. See "-- Quintel Network."
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The Company, formerly known as Quintel Entertainment, Inc., was organized
in 1993 under the laws of the State of Delaware.
LEC BILLED PRODUCTS AND SERVICES SEGMENT
Enhanced Telephone Services (Terminated Service Offering)
During the fiscal year ended November 30, 1999, the Company continued to
service the subscribers of its various enhanced telephone services ("enhanced
services"), principally voice mail services. The Company no longer markets this
service, but continues to bill a decreasing residual membership base of
approximately 33,000 customers, with the average bill approximating $11.50 per
month. For the fiscal years ended November 30, 1999, 1998 and 1997, these
services collectively accounted for approximately 18%, 24% and 12%,
respectively, of the Company's net revenues. The Company expects a significant
decrease in enhanced service revenues in future fiscal periods and a
corresponding respective decrease to its percentage of total revenues as the
residual customer base continues to decrease.
Telephone Entertainment Services (Terminated Service Offering)
During the fiscal year ended November 30, 1999, the Company offered a
telephone entertainment service, which was billed on a periodic basis through
club memberships ("Club 900 Product"). The Club 900 Product entitled a member to
monthly entertainment services which consisted primarily of live psychic
consultations designed to capitalize on the popularity of "new age" themes. "New
age" refers to astrological and psychic phenomena which can be explained through
the use of horoscopes, tarot card and psychic readings and prognostications. For
the years ended November 30, 1999, 1998 and 1997, the Company's "900" telephone
entertainment services accounted for approximately 4%, 43% and 73%,
respectively, of the Company's net revenues.
Cessation of Services
In June 1999, the Company entered into a series of agreements
(collectively, the "Transaction Agreements") pursuant to which the Company
ceased offering its telephone entertainment services. Included in the
Transaction Agreements is the Agreement Regarding 900 Pay-Per-Call Psychic
Services (the "900 Agreement"), dated as of May 26, 1999, by and between the
Company and Access Resource Services, Inc. ("ARS"), pursuant to which the
Company agreed to refrain until January 17, 2001 from conducting, marketing,
advertising or promoting certain "stand alone" 900 Pay-Per-Call Psychic Services
described in the 900 Agreement (the "900 Psychic Services") directly or
indirectly through any affiliate. In addition, the Company agreed to cease the
conduct of the media buying operation which it conducted under the name "Quintel
Media" and ARS agreed to assume responsibility for the "Quintel Media" employees
and for the lease of the premises used by "Quintel Media" in Fort Lauderdale,
Florida, and to acquire the computer equipment and other furniture, fixtures and
leasehold improvements used by "Quintel Media" at such premises.
In consideration for the Company's acceptance of the terms of the 900
Agreement, ARS and any of its affiliates offering 900 Pay-Per-Call Psychic
Services and/or membership club services, agreed to pay to the Company certain
royalty fees relative to such service offerings. ARS is required to pay such
royalty fees from and after the consummation of the transactions contemplated by
the Transaction Agreements, and until January 17, 2001. For the fiscal year
ended November 30, 1999, these royalties amounted to approximately $2.8 million,
or 6% of the Company's net revenues. Other than these royalty fees, the Company
will not be receiving any revenue in any future fiscal years from telephone
entertainment services.
ARS is presently controlled by Steven Feder, who, until his
resignation in January 1999, was a member of the Company's Board of
Directors.
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Pay-Per-Call
The live psychic entertainment services previously marketed by the Company
permitted callers to engage in live one-on-one conversations with psychic
operators and to receive personalized information responsive to the caller's
requests. For the years ended November 30, 1998 and 1997, the Company's live
conversation "900" entertainment services accounted for approximately 26% and
67% of the Company's net revenues, respectively. The Company did not recognize
any revenues from this service during the fiscal year ended November 30, 1999 as
a result of the Company's termination of providing this service as an
independent revenue source in 1998.
During 1998, the Company experienced decreasing margins on its "900"
entertainment services, attributable to significant increases in marketing
expenditures related thereto and customer chargebacks. As a result, these
services were not providing positive operating results and cash flow.
Consequently, during the quarter ended August 31, 1998, the Company terminated
the marketing of such services as an independent revenue source and began using
them in conjunction with marketing the Company's other products and services,
including its residential distributor program agreement with LCI International
Telecom Corp., d/b/a Qwest Communications Services ("Qwest"). See " -- Customer
Acquisition Services Segment." Accordingly, as required by Statement of
Financial Standards No. 121 ("FAS 121"), the Company reviewed long-lived assets,
including goodwill, for impairment. The Company evaluated the recoverability of
its long-lived assets by measuring the carrying amount of the assets against
projected undiscounted future cash flows associated with them. The Company
determined that the "900" entertainment services could not be disposed of and
there was no predictable estimate of any future cash flows associated with any
alternative uses. Accordingly, the Company concluded that the intangibles,
primarily goodwill, associated with the Company's 1996 acquisition of the
remaining 50% interest in the limited liability company New Lauderdale, L.C.,
were impaired. As such, a non-cash charge of approximately $18.5 million,
representing the remaining balance of the intangibles, primarily goodwill
associated with the New Lauderdale acquisition, was recorded at May 31, 1998.
Access Resource Services, Inc.
Access Resource Services, Inc. and its subsidiaries and affiliates
(collectively, "ARS"), provided the Company with substantially all of its
psychic operators. ARS monitored and supervised the quality of independent
psychic operators provided to the Company. The Company paid ARS a per-minute fee
based on caller connection time. For the years ended November 30, 1999 (until
the Company ceased marketing its telephone entertainment services pursuant to
the consummation of the Transaction Agreements in June 1999), 1998 and 1997, the
Company paid aggregate fees of approximately $1,019,000, $7,600,000 and
$24,300,000, respectively, to ARS for such services.
CUSTOMER ACQUISITION SERVICES SEGMENT
Residential Long Distance Customer Acquisition Services (Terminated Service
Offering)
The Company concluded an agreement with the long distance carrier LCI
International Telecom Corp., d/b/a Qwest Communications Services ("Qwest"), in
the first quarter of fiscal 1998, pursuant to which the Company provided
marketing services to Qwest, primarily through outbound telemarketing and
broadcast media, directed at the acquisition of residential long distance
customers for Qwest. In addition to commissions paid to the Company for its
successful customer acquisitions on behalf of Qwest, the agreement also called
for the Company to participate in Qwest's net revenues earned from such acquired
customers' residential long distance usage.
From the time a customer authorized the Company to switch its long distance
telephone carrier to Qwest, the Company, Qwest, and the local exchange carriers
(the "LECs") conducted extensive screening processes to ensure such
authorizations were clear and unambiguous. This was done to prevent claims of
"slamming," the process whereby a customer's telephone company is switched
without that customer's authorization. As a result of this heavy screening
process, revenues generated from these residential long distance customer
acquisition services were virtually unencumbered by chargebacks.
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In November 1999, Qwest informed the Company that the customers being
acquired for it by the Company were not remaining Qwest customers long enough to
justify the acquisition costs Qwest was required to pay the Company, and,
accordingly, the Company should no longer solicit customers on Qwest's behalf.
Therefore, the Company will not realize any revenues from customer acquisitions
in future fiscal years, but will continue to be entitled to participate in
Qwest's net revenues earned from an acquired customer's future long distance
usage. Of the approximately $30.7 million of net revenues generated in the
fiscal year ended November 30, 1999 as a result of the Qwest agreement,
approximately $21.6 million were a result of successful customer acquisitions
and approximately $9.1 million resulted from long distance usage participation.
Prior to the Company's agreement with Qwest, the Company was a party to an
agreement with AT&T Communications, Inc. ("AT&T"), whereby it marketed AT&T's
long distance products. The Company commenced significant marketing efforts
under this agreement in the first quarter of fiscal 1997. The Company terminated
its strategic corporate partnership with AT&T late in the first quarter of
fiscal 1998.
During the fiscal year ended November 30, 1999, the net revenues generated
as a result of the Company's agreement with Qwest were approximately $30.7
million, or approximately 72% of the Company's total net revenues during such
period. During the fiscal year ended November 30, 1998, the net revenues
generated as a result of the Company's agreement with Qwest (which commenced in
February 1998) and AT&T (which terminated in January 1998) were approximately
$18.7 million and $5.4 million, respectively, aggregating approximately $24.1
million for the entire fiscal year ended November 30, 1998, or approximately 26%
of the Company's total net revenues during such period. During the fiscal year
ended November 30, 1997, the net revenues generated by the Company's strategic
corporate partnership with AT&T were approximately $26,300,000, or 14% of the
Company's total net revenues during such period.
Other Customer Acquisition Products and Services (Terminated Product and
Service Offering)
The Company offered other various customer acquisition products and
services during the fiscal year ended November 30, 1998, including prepaid
cellular telephone products and services. The Company was also involved in a
co-venture agreement with Paradigm Direct, Inc., whereby such venture acquired
conventional cellular phone customers, primarily through outbound telemarketing,
for the operation regions of both AT&T Wireless Services of Florida and AT&T
Wireless Services of Paramus, New Jersey. All of such other customer acquisition
products and services, when aggregated, accounted for approximately 6.6% of the
Company's net revenues during the fiscal year ended November 30, 1998. The
Company did not offer any of the foregoing products or services in 1999, and as
of November 30, 1998, the Company sold its interest in the Paradigm venture to
its co-venturer.
E-COMMERCE SEGMENT
Quintel Network (Continuing Product and Service Offering)
During the latter part of the fiscal year ended November 30, 1999, the
Company began the implementation of its strategy to create the Quintel Network,
a portfolio of marketing partnerships and strategic investments with Internet
marketing companies, E-commerce retailers and service providers, to allow for
the on-line marketing of different products and services to a detailed database
of profiled consumers.
Database Growth and Expansion
The first step in creating the Quintel Network was to grow the Company's
already extensive profiled consumer database. Towards this end, the Company has
made strategic investments in several companies. In tandem with each of these
investments, the Company entered into marketing agreements, entitling the
Company access to these entities' proprietary e-mail databases and other
marketing data. The entities in
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which the Company made these strategic investments (and to whose databases the
Company gained access) include the following:
- SkyMall, Inc., a publicly-traded company (Nasdaq-SKYM) with access to
e-mail addresses and other marketing information for over 3 million
consumers, that utilizes its website, SkyMall.com, and exclusive
agreements with several airline carriers and travel partners to offer a
wide array of products from a variety of vendors.
- Itarget.com, Inc. is a permission based direct e-mail marketing company
with over 1 million members that have given their consent to be marketed
for various products and services.
- The Innovation Factory, Inc., a development stage company, intends to
provide business development support, state of the art infrastructure and
necessary capital to promising new companies.
- GenerationA.com, Inc. provides Internet and other computer related
products and services to the over-50 generation.
- AtYourBusiness.com, Inc. provides a full-range of support services for
small businesses, including assistance with human resources, payroll,
office management and growth management.
- Montvale Management, LLC provides a full range of on-line mortgage
products and services to homeowners.
The Company is also acquiring additional marketing information from traffic
attracted to GroupLotto.com and MultiBuyer.com, two websites created by a
subsidiary of the Company.
- GroupLotto.com -- This website permits Internet users to play the lottery
free in exchange for providing their e-mail addresses. Players can win a
$2,000,000 jackpot by selecting the winning lottery numbers.
GroupLotto.com accommodates the public's interest in free lotteries by
offering the opportunity to participate in multiple weekly drawings at no
cost, while simultaneously serving as a valuable marketing information
source for the Company's other Internet activities. The Company has
obtained contingent prize based insurance for the first $1 million
jackpot payout.
- MultiBuyer.com -- This website is an online retail location where buyers
consolidate their purchasing power for a variety of offered products and
services and reap the benefits of reduced sales prices that generally
correlate to bulk purchases. On-line consumers can select the price that
they want to pay for a particular product or service. For the majority of
"MultiBuys," as the number of buyers for that product or service
increases, the asking price for the product or service decreases, until a
large enough number of purchasers are accumulated to allow the seller to
deliver such product at the buyers' asking price.
Based on the foregoing alliances that comprise the Quintel Network, the Company
estimates that it presently has access to in excess of 5 million opt-in e-mail
addresses.
Marketing of Products and Services
The second step in creating the Quintel Network is to utilize the extensive
database accumulated by the Quintel Network to generate revenue. The Company
believes this can be achieved by acquiring the right to market a wide array of
products and services to the large potential customer base that comprises the
Company's database. Towards this end, the Company recently entered into
marketing agreements with several different companies for the marketing of a
wide variety of products and services.
These include:
- Cellstar, Ltd., d/b/a Echostar, providers of the DISH 500 Satellite TV
System and service.
- SunDial Marketplace Corporation, providers of wireless telecommunications
services from AT&T, Cellular One, AllTel, OmniPoint and Airtouch, as well
as cellular handsets and accessories from Nokia, Motorola, Qualcomm,
Ericcson and Sony.
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- NextCard, Inc., which offers instant on-line approval for the NextCard(R)
Visa(R).
- GTC Telecom Corp., which offers 5 cent per minute long distance services.
- Mortgage.com, Inc., providers of various on-line mortgages and other
programs geared toward the homeowner.
- LCS Golf, Inc. (Nasdaq -- LCSGE), a company that offers golf related
products and services via its website, GolfUniverse.com.
CORPORATE AND OTHER
Other Products and Services (Terminated Product and Service Offering)
The Company offered other various products and services during the fiscal
year ended November 30, 1999, including telephone security equipment, list
rentals and financial information services. All of the foregoing other products
and services, when aggregated, accounted for less than 1.0% of the Company's net
revenues during the fiscal year ended November 30, 1999 and 1998.
SERVICE BUREAUS AND LOCAL EXCHANGE CARRIERS
West TeleServices Corporation ("West") and Federal Transtel, Inc.
("Transtel") have been the Company's primary providers of billing and collection
services in connection with the Company's LEC billed product and service
segment. This segment includes telephone entertainment products and services,
including the "900" pay-per-call royalty payments, Club 900 Products and voice
mail services. These billing service providers are the conduits between the
Company and the LECs. In addition, West provides other services, including call
processing, inbound and outbound telemarketing and production of pre-recorded
programs.
In November 1998, three of the LECs, Ameritech Corp., Bell Atlantic Corp.
and SBC Communications, Inc., refused to bill customers for enhanced services
provided by the Company. This was a result of what the LECs claim was excessive
complaints by customers for "cramming" (unauthorized charges billed to a
customer's phone bill) against the Company and its affiliates. This billing
cessation effectively prevented the Company from selling its enhanced services
in those areas serviced by such LECs. The remaining LECs did not alter their
billing practices for the Company's services and the Company continued to offer
its enhanced services in those areas through Transtel for the fiscal year ended
November 30, 1999.
As a result of such LEC imposed billing cessation, in November 1998, the
primary billing service provider for the Company's enhanced services, Billing
Information Concepts Corporation ("BIC"), terminated its arrangement with the
Company for providing billing for the Company's enhanced services. BIC continued
to service all data relating to post-billing adjustments to records billed prior
to BIC's self-imposed billing cessation. In December 1998, the Company entered
into an agreement with Transtel, whereby Transtel provided the billing services
previously provided by BIC. In effect, between the termination of the BIC
billing service arrangement and the commencement of billing under the agreement
with Transtel (approximately two months), the Company was unable to bill for any
enhanced services provided.
COMPETITION
The company faces intense competition in the marketing of its products and
services, particularly on the Internet. Many of the Company's competitors are
well established, have reputations for success in the development and marketing
of services and have significant financial, marketing, distribution, personnel
and other resources. These financial and other capabilities permit such
companies to implement extensive advertising and promotional campaigns, both
generally and in response to efforts by additional competitors to enter into new
markets and introduce new services.
In addition, because the Internet and e-commerce have no substantial
existing barriers to entry, competition is expected to continue to increase
significantly in the Company's target markets. The Company expects that direct
marketing companies that have developed or are developing new on-line marketing
strategies, as well as direct marketing companies using traditional media
outlets and other companies that
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have the expertise to allow the development of direct marketing capabilities,
may attempt to provide the products or services similar to those provided by the
Company. It is also possible for a small company to introduce a service or
program with limited financial and other resources through the use of the
Internet or third-party agencies.
INSURANCE
The Company may be subject to substantial liability as a result of claims
made by consumers arising out of services provided by the Company's servicing
contractors and their employees. The Company maintains a general liability
insurance policy that is subject to a per occurrence limit of $1,000,000 with a
$2,000,000 aggregate limit and an umbrella policy covering an additional
$10,000,000 of liability. In addition, the Company has errors and omissions
insurance with a limit of $5,000,000. The Company also maintains Directors and
Officers liability insurance policies providing aggregate coverage of
$12,000,000 for legal costs and claims. Such insurance may not be sufficient to
cover all potential future claims and additional insurance may not be available
in the future at reasonable costs.
GOVERNMENT REGULATION
On September 30, 1998, a letter was received from the Division of Marketing
Practices of the Federal Trade Commission (the "FTC") initiating an inquiry into
whether the Company has engaged in any unlawful marketing practices. In response
to the letter, documents were supplied to the Division by the Company and the
Company's regulatory counsel has held informational meetings with staff of the
FTC. The Company's regulatory counsel has been notified by the staff of the FTC
that the investigation has been terminated and no action would be instituted
against the Company.
In recent months, the Company's regulatory counsel has responded to
inquiries or subpoenas from the attorneys general of Vermont, Pennsylvania and
Kansas concerning the Company's marketing practices. In the more than seven
months since the information was sent to Kansas, there has been no follow-up.
Similarly, information was sent to Pennsylvania more than four months ago.
Recently, Pennsylvania requested additional information, but there has been no
other action by that office. The information was furnished to Vermont only
recently, and the Company continues to discuss Vermont's request for additional
data.
The Company recently has been asked to enter into a voluntary cease and
desist agreement with the Montgomery County (Maryland) Department of Housing and
Consumer Affairs. The genesis of this request were certain consumer complaints
about 900 services and club products dating from 1997 and 1998 that were
addressed at that time. In early 1999, that office requested additional
information from the Company, but when the Company asked to discuss the request,
the county office did not respond and was not in contact with the Company until
early 2000, when it presented the cease and desist agreement. The Company has
advised the county office that it has not engaged in 900 or other psychic
services since May 1998, and has asked the county office to reconsider its
request that the Company enter into any agreement.
To date, the Company has not been subject to any enforcement actions by any
regulatory authority. In the event the Company is found to have failed to comply
with applicable laws and regulations, the Company could be subject to civil
remedies, including substantial fines, penalties and injunctions, as well as
possible criminal sanctions, which would have a material adverse effect on the
Company.
THE YEAR 2000 PROBLEM
The Company's comprehensive review and preparedness programs for the Y2K
concerns yielded favorable results. The Company experienced no problems with its
computer programs or equipment. Additionally, the Company's reliance on third
parties for the operation of the Company's day to day operations experienced no
problems.
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EMPLOYEES
The Company currently employs 18 full-time employees, including four
executive officers, all of whom are located at the Company's executive offices
in Pearl River, New York. The Company believes that its relations with its
employees are satisfactory. None of the Company's employees are represented by a
union.
SEGMENT INFORMATION
Segment information is set forth in Note 12 to the Consolidated Financial
Statements referred to in the "Financial Statements and Supplementary Data"
section hereof and incorporated herein by reference.
TRANSACTIONS WITH MAJOR CUSTOMERS
Transactions with major customers and related economic dependence
information is set forth under the heading "Transactions with Major Customers"
in Note 1 to the Consolidated Financial Statements referred to in the "Financial
Statements and Supplementary Data" section hereof and incorporated herein by
reference.
ITEM 2. PROPERTIES
The Company leases approximately 15,000 square feet of space at One Blue
Hill Plaza, Pearl River, New York, all of which is currently used for the
Company's principal executive offices. The lease for such premises expires on
July 31, 2006. The current base rent is $21,875 per month, which amount
increases to $26,875 per month commencing on August 1, 2001, for the remainder
of the term of the lease.
ITEM 3. LEGAL PROCEEDINGS
On or about May 4, 1998, a complaint entitled "Joseph Chalverus, on behalf
of himself and all others similarly situated v. Quintel Entertainment, Inc.,
Jeffrey L. Schwartz and Daniel Harvey" was filed in the United States District
Court for the Southern District of New York; subsequently, a complaint entitled
"Richard M. Woodward, on behalf of himself and all others similarly situated v.
Quintel Entertainment, Inc., Jeffrey L. Schwartz and Daniel Harvey" was filed in
that same court, as was a complaint entitled "Dr. Michael Title, on behalf of
himself and all others similarly situated v. Jeffrey L. Schwartz, Jay Greenwald,
Claudia Newman Hirsch, Andrew Stollman, Mark Gutterman, Steven L. Feder, Michael
G. Miller, Daniel Harvey and Quintel Entertainment, Inc." (collectively, the
"Complaints"). In addition to the Company, the defendants named in the
Complaints are present and former officers and directors of the Company (the
"Individual Defendants"). The plaintiffs seek to bring the actions on behalf of
a purported class of all persons or entities who purchased shares of the
Company's Common Stock from July 15, 1997 through October 15, 1997 and who were
damaged thereby, with certain exclusions. The Complaints allege violations of
Sections 10(b) and 20 of the Securities Exchange Act of 1934, and allege that
the defendants made misrepresentations and omissions concerning the Company's
financial results, operations and future prospects, in particular, relating to
the Company's reserves for customer chargebacks and its business relationship
with AT&T. The Complaints allege that the alleged misrepresentations and
omissions caused the Company's Common Stock to trade at inflated prices, thereby
damaging plaintiffs and the members of the purported class. The amount of
damages sought by plaintiffs and the purported class has not been specified.
On September 18, 1998, the District Court ordered that the three actions be
consolidated, appointed a group of lead plaintiffs in the consolidated actions,
approved the lead plaintiffs selection of counsel for the purported class in the
consolidated actions, and directed the lead plaintiffs to file a consolidated
complaint. The consolidated and amended class action complaint ("Consolidated
Complaint") which has been filed asserts the same legal claims based on
essentially the same factual allegations as did the Complaints. On February 19,
1999, the Company and the Individual Defendants filed a motion to dismiss the
Consolidated Complaint. The District Court has denied the motion to dismiss. The
Company and the Individual Defendants have answered the Consolidated Complaint,
denying all liability and raising various affirmative defenses. Discovery has
commenced. The Company believes that the allegations in the Complaints are
without merit, and intends to vigorously defend the consolidated actions. The
Company maintains Directors and Officers liability insurance which the Company
believes adequately covers damages, if any, that may arise under the
8
<PAGE> 11
Complaints. No assurance can be given, however, that the outcome of the
consolidated actions will not have a materially adverse impact upon the results
of operations and financial condition of the Company. See "Forward Looking
Information May Prove Inaccurate".
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS
A Proxy Statement was mailed on or about August 23, 1999 to shareholders of
record of the Company as of August 20, 1999 in connection with the Company's
1999 Annual Meeting of Shareholders, which was held on September 21, 1999 at the
Company's executive offices, One Blue Hill Plaza, Pearl River, New York. At the
Meeting, the shareholders voted on three matters and all of such matters were
approved.
The first matter was the election of the members of the Board of Directors.
The eight directors elected and the tabulation of the votes (both in person and
by proxy) were as follows:
<TABLE>
<CAPTION>
NOMINEES FOR DIRECTORS FOR AGAINST WITHHELD
- ---------------------- ---------- ------- --------
<S> <C> <C> <C>
Jeffrey L. Schwartz 13,367,682 386,394 0
Jay Greenwald 13,367,682 386,394 0
Andrew Stollman 13,367,682 386,394 0
Michael G. Miller 13,367,682 386,394 0
Murray L. Skala 13,367,682 386,394 0
Mark Gutterman 13,367,682 386,394 0
Edwin Levy 13,367,682 386,394 0
Lawrence Burstein 13,367,682 386,394 0
</TABLE>
There were zero (0) broker held non-voted shares represented at the Meeting
with respect to this matter.
The second matter upon which the shareholders voted was the proposal to
ratify the appointment by the Board of Directors of PricewaterhouseCoopers LLP
as independent certified public accountants for the Company for 1999. The
tabulation of the votes (both in person and by proxy) was as follows:
<TABLE>
<CAPTION>
FOR AGAINST ABSTENTIONS
- ---------- ------- -----------
<S> <C> <C>
13,735,326 16,400 2,354
</TABLE>
There were zero (0) broker held non-voted shares represented at the Meeting
with respect to this matter.
The third matter upon which the shareholders voted was the proposal to
ratify and approve the Company's Second Amended and Restated 1996 Stock Option
Plan (the "Second Amended Plan"), amending the Company's Amended and Restated
1996 Stock Option Plan by increasing the maximum number of shares of the
Company's Common Stock for which stock options may be granted under the Second
Amended Plan from 1,850,000 to 2,850,000 shares. The tabulation of the votes
(both in person and by proxy) was as follows:
<TABLE>
<CAPTION>
FOR AGAINST ABSTENTIONS
- --------- ------- -----------
<S> <C> <C>
9,648,758 800,000 12,300
</TABLE>
There were 3,292,958 broker held non-voted shares represented at the
Meeting with respect to this matter.
9
<PAGE> 12
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
MARKET INFORMATION
Since December 1995, the Company's Common Stock has traded on the Nasdaq
National Market System under the symbol "QTEL". The following table sets forth
the high and low sales prices of the Common Stock as reported by NASDAQ for each
full quarterly period within the two most recent fiscal years.
<TABLE>
<CAPTION>
HIGH LOW
------- --------
<S> <C> <C>
Fiscal Year Ended November 30, 1999
First Quarter............................................. $ 2.875 $ 1.0625
Second Quarter............................................ 2.75 0.78125
Third Quarter............................................. 1.875 1.1875
Fourth Quarter............................................ 8.625 1.50
Fiscal Year Ended November 30, 1998
First Quarter............................................. $ 7.00 $ 3.8125
Second Quarter............................................ 6.50 5.25
Third Quarter............................................. 5.6875 1.50
Fourth Quarter............................................ 3.25 1.5625
</TABLE>
SECURITY HOLDERS
To the best knowledge of the Company, at February 23, 2000, there were 69
record holders of the Company's Common Stock. The Company believes there are
numerous beneficial owners of the Company's Common Stock whose shares are held
in "street name."
DIVIDENDS
Except for S corporation distributions made to the Company's stockholders
prior to December 5, 1995 (the effective date of the initial public offering of
the Company's Common Stock), the Company has not paid, and has no current plans
to pay, dividends on its Common Stock. The Company currently intends to retain
all earnings for use in its business.
10
<PAGE> 13
ITEM 6. SELECTED FINANCIAL DATA
The following table presents selected historical financial data of the
Company for each of the years in the five year period ended November 30, 1999.
The financial data set forth should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the financial statements of the Company.
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30,
---------------------------------------------------------------------
1999 1998 1997 1996 1995
----------- ------------ ------------ ----------- -----------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenue........................ $42,839,840 $ 94,690,251 $191,374,936 $86,666,768 $50,501,266
Costs of sales..................... 26,952,097 80,037,115 149,821,363 64,661,256 36,732,610
Gross profit....................... 15,887,743 14,653,136 41,553,573 22,005,512 13,768,656
Selling, general and administrative
expenses......................... 10,881,156 34,049,435 18,880,769 10,159,226 3,467,008
----------- ------------ ------------ ----------- -----------
Income (loss) from operations...... 5,006,587 (19,396,299) 22,672,804 11,846,286 10,301,648
Interest expense................... (70,701) (186,218) (80,763) (473,289) (334,318)
Other income, net.................. 1,446,494 2,212,435 1,841,356 760,413 485,250
Equity in earnings of joint
venture.......................... 4,939,653 2,860,304
----------- ------------ ------------ ----------- -----------
Income (loss) before provision for
income taxes (benefit)........... 6,382,380 (17,370,082) 24,433,397 17,073,063 13,312,884
Provision for income taxes
(benefit)........................ 2,458,520 (417,464) 10,069,616 4,898,633 220,335
----------- ------------ ------------ ----------- -----------
Net income (loss).................. $ 3,923,860 $(16,952,618) $ 14,363,781 $12,174,430 $13,092,549
=========== ============ ============ =========== ===========
Income before pro forma tax
provision........................ $13,312,884
Pro forma income tax provision..... 5,633,116
-----------
Pro forma net income............... $ 7,679,768
===========
Basic net income (loss) per
share............................ $ .26 $ (1.00) $ .77 $ .76
=========== ============ ============ ===========
Diluted net income (loss) per
share............................ $ .26 $ (1.00) $ .76 $ .76
=========== ============ ============ ===========
Pro forma net income per share --
basic............................ $ .64
===========
Pro forma net income per share --
diluted.......................... $ .64
===========
Common Shares outstanding
Basic............................ 15,119,610 17,034,531 18,560,064 16,145,445 12,000,000
Diluted.......................... 15,241,662 17,034,531 18,878,790 16,124,743 12,000,000
BALANCE SHEET DATA:
Working capital.................... $36,789,213 $ 34,138,388 $ 43,674,688 $25,423,442 $ 3,217,627
Total assets....................... 57,277,279 64,413,144 115,998,776 79,029,547 16,969,956
Total liabilities.................. 17,391,001 27,731,000 52,292,478 31,294,614 10,938,881
Stockholders' equity............... 39,886,278 36,682,144 63,706,297 47,734,933 6,031,075
</TABLE>
11
<PAGE> 14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Current Fiscal Year Developments
During the fiscal year ended November 30, 1999, Quintel Communications,
Inc. and its consolidated subsidiaries (collectively, the "Company") began the
process of redefining the Company as an on-line direct marketing provider within
the Internet industry, while simultaneously striving to increase shareholder
value. This process included the culmination of the following events:
- The cessation in June 1999 of the Company's legacy 900 Pay-Per-Call
business.
- The June 1999 redemption of 1.3 million shares of the Company's common
stock at $1.35 per share.
- The commencement in August 1999 of the formation of the "Quintel
Network", a portfolio of strategic investments and marketing partnerships
with Internet marketing companies, E-commerce retailers and service
providers.
- The launching of two Internet websites, GroupLotto.com and
MultiBuyer.com, in November 1999 and December 1999, respectively.
Prior to the commencement of the Company's strategic marketing redefinition of
this Internet initiative, all of the Company's products and services were sold
with the use of conventional marketing channels, specifically television
broadcast media, telemarketing, direct-mail and print advertising. The Company's
Internet initiative, and its underlying business plan and strategy, have caused
the Company to terminate the marketing of its legacy products and services,
which had previously been conducted within its LEC Billed products and services
segment, and its Customer Acquisition services segment. This Company-wide
redefinition should be considered when using the Company's historical results in
evaluating the possibilities of future operations, cash flows and financial
position.
General
During the fiscal year ended November 30, 1999, the Company was engaged in
providing and marketing various telecommunications products and services, and
utilizing its extensive database to facilitate direct marketing services for
residential long distance customer acquisition programs. The Company's revenues
from the foregoing were generated through fees paid for customer acquisitions
and ongoing commissions earned under revenue sharing arrangements with long
distance carriers. The Company is no longer actively marketing these products or
services. Nevertheless, the Company continues to collect commissions pursuant to
its revenue sharing agreements. Additionally, the Company continued to service
and bill its residual voice mail service customer base in the year ended
November 30, 1999. The active marketing of the voice mail service was terminated
in November 1998.
The Company's present focus, and entire resource base, is involved with
developing, operating, and entering into strategic investments with
Internet-based direct marketing companies. The Company continues to recognize
revenues through the offering of consumer products and services, but in the
latter part of the fiscal year ended November 30, 1999, the Company began the
process of shifting the marketing aspect of these operations to the Internet. As
part of this process, the Company created the "Quintel Network," a portfolio of
strategic marketing investments and marketing partnerships with Internet
marketing companies, E-commerce retailers and service providers. Together, the
companies that comprise the Quintel Network market a wide variety of products
and services aimed at the consumer audience. (See "-- Quintel Network.")
The Company's LEC Billed products and services segment, which historically
included revenues from voice mail services and telephone entertainment services
(principally comprised of psychic related 900 pay-per-call and club products and
services), are billed and collected through the use of service bureaus, which
act as conduits for the Local and Long Distance Exchange Carriers. The Company's
Customer Acquisition services segment, which has historically included revenues
from residential long distance customer acquisi-
12
<PAGE> 15
tions and related usage royalties, as well as prepaid and conventional cellular
phone customer acquisition services, were billed to and collected directly from
the parties to the agreements, and did not require service bureau intervention.
Historically, the services offered by the Company have evolved based on changing
consumer tastes, as well as the impact of telephone company billing practices,
governmental regulation, and most recently, the Internet.
Revenue from the Company's LEC Billed products and services segment's voice
mail and club product components have historically been recognized, net of an
estimated provision for customer chargebacks (which include refunds and
credits), as customers automatically renewed their monthly subscriptions. In
regard to the Company's LEC Billed products and services segment's telephone
entertainment services component, which consisted principally of the 900
pay-per-call activities, up to and including May 31, 1998 (see "-- Prior Year
Special Charges"), the Company recognized revenues from the telephone
entertainment services at the time the customer initiated a billable
transaction, net of an estimated provision for customer chargebacks.
In the case of its legacy revenues earned within its LEC Billed product and
service segment, the Company historically estimated the reserve for customer
chargebacks monthly, based on updated chargeback history, with any resulting
adjustments being charged against current revenue. The Company estimated
chargebacks and other provisions for new products and services without a
previous operating history, based on currently available experience with similar
products and services, and adjusted such estimates as further information became
available. Since reserves were established prior to the periods in which
chargebacks were actually expended, the Company's revenues may be adjusted in
later periods in the event that the Company's incurred chargebacks vary from the
estimated amounts.
Revenues from the Company's Customer Acquisition services segment were
recorded upon the achievement of certain events particular to the corresponding
program's fulfillment liability. Subsequent to the delivery of the initial sales
record to the respective long distance carrier, the Company may have been
required to provide to the customer certain products and services (fulfillment
liability), such as prepaid cellular telephones and/or complimentary airline
ticket redemption vouchers. These costs were estimated and accrued, as a
component of marketing expense, at the time the associated revenues were
recorded. This estimation is adjusted to actual amounts in subsequent periods.
There were no chargebacks from the Company's long distance customer acquisition
programs. The conventional cellular and prepaid cellular phone customer
acquisition programs were impacted by chargebacks in the years in which they
were in operation, principally in the fiscal year ended November 30, 1998.
Revenues from the Company's E-commerce segment for the year ended November
30, 1999 were immaterial, although such revenues are expected to comprise the
majority of future fiscal period revenues. Such subsequent period E-commerce
revenues will be recognized upon the completion of the performance of all of the
Company's obligations to a customer or vendor relative to the particular
activity, including delivery of products or services, delivery of advertising
impressions, recording of all product costs, discounts and fulfillment
obligations, and the recording of all other variable direct costs associated
with completing the Company's obligation to the customer or vendor. Such revenue
recognition will be subject to traditional provisions for returns and collection
losses.
The Company offered various other products and services, principally
telephone security equipment, list rental and financial information services, in
the fiscal years ended November 30, 1999, 1998 and 1997. These revenues are
included in the Company's Corporate and other segment reporting category, and in
the three years ended November 30, 1999, comprised an immaterial portion of the
Company's total net revenues.
TRANSACTION WITH MAJOR CUSTOMER AND TERMINATION OF ECONOMIC DEPENDENCE
Revenues from the Company's Customer Acquisition service segment were
earned entirely from the "Residential Distributor Program Agreement" with Qwest.
Such revenues accounted for approximately $30.7 million, 72% of the Company's
total revenue. In November 1999, Qwest informed the Company that the customers
being acquired for it by the Company were not remaining Qwest customers long
enough to justify the acquisition costs Qwest was required to pay the Company,
and, accordingly, the Company should no longer solicit customers on Qwest's
behalf. Therefore, the Company will not realize any revenues from
13
<PAGE> 16
customer acquisitions in future fiscal years, but will continue to be entitled
to participate in Qwest's net revenues earned from an acquired customer's future
long distance usage.
SEGMENT INFORMATION
The Company adopted SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information, as of November 30, 1999. The adoption of
SFAS No. 131 did not affect the results of operations or financial position of
the Company, but did require the Company to disclose its "management" approach
determined segments. The Company's segments operate exclusively in the United
States with an immaterial portion of revenue earned in Canada during the three
fiscal years ended November 30, 1999.
The Company's reportable operating segments are aligned into three
fundamental areas: (1) Products and Services billed to consumers by Local
Exchange Carriers (LEC Billed products and services), (2) Customer Acquisition
Services billed directly to long distance carriers and wireless carriers
(Customer Acquisition services) and (3) Internet Commerce billed directly to
consumers and vendors (E-commerce). The balance of the Company's operations are
immaterial, both individually and in the aggregate, and are included as part of
Corporate and other. This business segment delineation is consistent with the
Company's management and financial reporting structure based on products and
services.
RESULTS OF OPERATIONS
The Company's net revenues, on a segmental basis, and with disclosure of
the individual segment components, for each of the three years in the period
ended November 30, 1999 are detailed in the following tables:
Segment Data -- Net revenues in total
<TABLE>
<CAPTION>
NET REVENUE
------------------------------------------
YEAR ENDED NOVEMBER 30, 1999 1998 1997
- ----------------------- ----------- ----------- ------------
<S> <C> <C> <C>
LEC Billed products and services................... $11,975,622 $64,002,365 $163,010,663
Customer Acquisition services...................... 30,687,009 30,364,096 27,163,621
E-commerce......................................... 7,634 -- --
Corporate and other................................ 169,575 323,790 1,200,652
----------- ----------- ------------
Total............................................ $42,839,840 $94,690,251 $191,374,936
=========== =========== ============
</TABLE>
Segment Data -- Net Revenues, by segment component
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30, 1999 1998 1997
- ----------------------- ----------- ----------- ------------
<S> <C> <C> <C>
LEC BILLED PRODUCTS AND SERVICE COMPONENTS
"900" Entertainment Services....................... $ -- $24,505,994 $128,925,620
"900" Entertainment Service termination
royalties........................................ 2,769,169 -- --
Club 900 Products.................................. 1,693,373 16,418,901 11,305,734
Enhanced Services, principally voice mail.......... 7,513,080 23,077,470 22,779,309
----------- ----------- ------------
Total LEC Billed products and services........... $11,975,622 $64,002,365 $163,010,663
=========== =========== ============
</TABLE>
14
<PAGE> 17
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30, 1999 1998 1997
- ----------------------- ----------- ----------- ------------
<S> <C> <C> <C>
CUSTOMER ACQUISITION SERVICE COMPONENTS
Qwest and AT&T Long distance customer
acquisitions..................................... $30,687,009 $24,104,551 $ 26,489,559
Conventional Cellular phone customers
acquisitions..................................... -- 4,558,478 9,380
Prepaid Cellular phone customer acquisitions....... -- 1,701,067 664,682
----------- ----------- ------------
Total Customer Acquisition services.............. $30,687,009 $30,364,096 $ 27,163,621
=========== =========== ============
TOTAL E-COMMERCE................................... $ 7,634 $ -- $ --
=========== =========== ============
CORPORATE AND OTHER COMPONENTS
Miscellaneous products, list revenue and other..... $ 169,575 $ 323,790 $ 1,200,652
=========== =========== ============
</TABLE>
The following table sets forth for the periods indicated the percentage of
net revenues represented by certain items reflected in the Company's statement
of income.
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30,
-----------------------
1999 1998 1997
----- ----- -----
<S> <C> <C> <C>
Net Revenue................................................. 100.0% 100.0% 100.0%
----- ----- -----
Cost of Sales............................................... 62.9 84.5 78.3
Gross Profit................................................ 37.1 15.5 21.7
Selling, general and administrative expenses................ 25.4 15.2 9.9
Special charges............................................. 0.0 20.8 0
Interest Expense.......................................... 0.2 0.2 0.0
Other Income, principally interest........................ 3.4 2.3 1.0
Net Income (loss)........................................... 9.2 (17.9) 7.5
</TABLE>
The following is a discussion of the financial condition and results of
operations of the Company for the years ended November 30, 1999, 1998 and 1997.
This discussion may contain forward looking-statements that involve risks and
uncertainties. The Company's actual results could differ materially from those
discussed herein. This discussion should be read in conjunction with the
consolidated financial statements of the Company, the notes thereto and other
financial information included elsewhere in this report.
YEAR ENDED NOVEMBER 30, 1999 COMPARED TO YEAR ENDED NOVEMBER 30, 1998
The Company's net revenues for its segmental operations for the year ended
November 30, 1999 and 1998 are presented below:
Net revenues -- by segment
<TABLE>
<CAPTION>
NET REVENUE
-------------------------- CHANGE-INC(DEC) CHANGE-INC(DEC)
YEAR ENDED NOVEMBER 30, 1999 1998 $$$ %%%
- ----------------------- ----------- ----------- --------------- ---------------
<S> <C> <C> <C> <C>
LEC Billed products and
services........................ $11,975,622 $64,002,365 $(52,026,743) (81)%
Customer Acquisition services..... 30,687,009 30,364,096 322,913 1%
E-commerce........................ 7,634 -- 7,634 100%
Corporate and other............... 169,575 323,790 (154,215) (48)%
----------- ----------- ------------ ---
Total........................... $42,839,840 $94,690,251 $(51,850,411) (55)%
=========== =========== ============ ===
</TABLE>
Net Revenue for the year ended November 30, 1999 decreased $51,850,411, or
55%, when compared to the year ended November 30, 1998. The significant portion
of the decrease in net revenues occurred in the Company's LEC Billed products
and services segment. The individual components of such decrease are described
below. The decrease was partially attributable to reductions in the Company's
enhanced service revenues of approximately $15.6 million, or 67%, when compared
with the prior year. This decline in enhanced service net revenue was the direct
result of the Company discontinuing the active marketing of
15
<PAGE> 18
such services in response to the November 1998 billing service agreement
termination by Billing Information Concepts, Inc.("BIC"), the Company's primary
enhanced service billing agent at that time. The Company continued to bill and
provide enhanced services to the member base that was in place at the time of
the billing cessation (approximately 500,000 subscribers). During the year ended
November 30, 1999, the Company recognized an approximate 93% reduction in such
residual member base. As a result of the termination of enhanced service
marketing and the above-referenced attrition rate, management believes that the
enhanced service portion of the Company's net revenues will continue to decline,
and be an immaterial component thereof, in the fiscal year ending November 30,
2000. (See "-- Service Bureau and Local Exchange Carriers").
The decrease in the LEC Billed product and service segment net revenue was
due also, in part, to reductions in the Company's Club 900 product net revenues
of approximately $14.7 million, or 90%, when compared with the year ended
November 30, 1998. The significant cause of such reduction in Club 900 net
revenues relates to (i) an agreement entered into between the Company and Access
Resources Services, Inc. ("ARS"), which eliminated the Company's active
participation in the "900" pay per call business (the "ARS Agreement"), and (ii)
the Company's intentional migration away from the "900" entertainment service
business (which was the exclusive avenue for Club 900 product marketing and
member procurement). This reduction was partially offset by royalty income of
approximately $2.8 million, earned in consideration for the termination of the
Company's active role in the "900" pay per call business. The royalty agreement
became effective June 1, 1999, and therefore, there was no comparative prior
year royalty revenue. The LEC Billed product and service segment's single
largest decrease related to the Company's "900" entertainment services,
specifically the pay-per-call portion. This decrease in net revenues amounted to
approximately $24.5 million, or 100%, when compared with the prior year, and is
directly related to both the cessation of the Company's active participation in
the "900" pay-per-call business as a result of the consummation of the ARS
Agreement, as well as the June 1998 repositioning of such revenue as an
offsetting component of the cost of sales of the Company's Customer Acquisition
services segment. See "-- Prior Year Special Charge".
Other reductions in the Company's net revenues were attributable to the
Customer Acquisition services segment, where decreases in conventional cellular
phone customer acquisitions approximated $4.6 million, or 100%, when compared to
the prior year, and a decrease in prepaid cellular phone customer acquisitions
of $1.7 million, or 100%, when compared to the prior year. The decrease in
conventional cellular acquisitions was the result of the Company's sale, on
November 30, 1998, of its interest in the consolidated majority owned entity
that provided such services. The decrease in prepaid cellular phone customer
acquisitions was the result of the Company's dissolution of its prepaid cellular
phone customer acquisition subsidiary, effective December 1, 1998.
The Company's net revenue decreases were partially mitigated by the
Customer Acquisition service segment, specifically from the long distance
customer acquisition component ("LDCA") of such segment. LDCA revenues and
related usage increased by approximately $6.6 million from the prior year's
comparable period, or 27%. The customer acquisition commission component
decreased from approximately $23.8 million in the year ended November 30, 1998
to approximately $21.6 million in the year ended November 30, 1999, for a
decrease of approximately $2.2 million, or 9.1%. Due to the cessation of the
Company's primary long distance customer acquisition program with Qwest,
effective July 31, 1999, and the complete cessation of all other Qwest marketing
efforts in November 1999 (See -- "Termination of Residential Long Distance
Customer Acquisition Marketing"), management anticipates that the long distance
acquisition commission revenues will be non-existent in subsequent fiscal
periods. The Company's net revenues earned pursuant to usage sharing agreements
with Qwest, whereby the Company earned a percentage of an acquired customer's
long distance telephone usage, increased to approximately $9.1 million in the
year ended November 30, 1999, from approximately $311,000 for the year ended
November 30, 1998, representing an increase of approximately $8.8 million. The
percentage of usage sharing revenues to which the Company will be entitled to in
future fiscal periods has been substantially reduced pursuant to the November
30, 1999 cessation of the Company's marketing efforts directed at acquiring new
long distance customers for Qwest. The usage sharing
16
<PAGE> 19
agreement revenues are a product of the telephone usage of previously acquired
customers. Pursuant to the Company's terminated marketing efforts, management
believes that the Company's net revenues under existing usage sharing agreements
will decline in future fiscal periods, and become a less meaningful component of
the Company's Customer Acquisition services segment revenues.
The Company's reported net revenues are a product of the gross revenues
generated within each reporting period less the provision for chargebacks for
the related reporting period, which is recorded as a direct reduction from such
gross revenues, except for revenues generated from royalties and long distance
acquisition commissions, which are not subject to provision for consumer
chargebacks.
The Company's gross revenues for its LEC Billed products and services
segment, Customer Acquisition services segment, E-commerce segment and Corporate
and other, for the year ended November 30, 1999 and 1998 are presented below:
Gross revenues -- by segment
<TABLE>
<CAPTION>
GROSS REVENUES
--------------------------- CHANGE-INC(DEC) CHANGE-INC(DEC)
YEAR ENDED NOVEMBER 30, 1999 1998 $$$ %%%
- ----------------------- ----------- ------------ --------------- ---------------
<S> <C> <C> <C> <C>
LEC Billed products and
services....................... $21,272,972 $118,231,326 $(96,958,354) (82)%
Customer Acquisition services.... 30,687,009 32,453,619 (1,766,610) (5)%
E-commerce....................... 7,634 -- 7,634 100%
Corporate and other.............. 169,575 501,918 (332,343) (66)%
----------- ------------ ------------ ----
Total.......................... $52,137,190 $151,186,863 $(99,049,673) (66)%
=========== ============ ============ ====
</TABLE>
The factors listed in the net revenue section describing the reasons for
the changes in net revenues for the year ended November 30, 1999, as compared to
the year ended November 30, 1998, are directly applicable to gross revenues as
well.
The provisions for chargebacks for the Company's four segments, where
applicable, are presented below for the years ended November 30, 1999 and 1998:
Chargebacks -- by segment
<TABLE>
<CAPTION>
CHARGEBACKS
------------------------- CHANGE-INC(DEC) CHANGE-INC(DEC)
YEAR ENDED NOVEMBER 30, 1999 1998 $$$ %%%
- ----------------------- ---------- ----------- --------------- ---------------
<S> <C> <C> <C> <C>
LEC Billed products and services... $9,297,350 $54,228,961 $(44,931,611) (83)%
Customer Acquisition services...... -- 2,089,523 (2,089,523) (100)%
E-commerce......................... 0 -- 0 100%
Corporate and other................ -- 178,128 (178,128) (100)%
---------- ----------- ------------ ----
Total............................ $9,297,350 $56,496,612 $(47,199,262) (84)%
========== =========== ============ ====
</TABLE>
The decrease in the provision for chargebacks is directly related to the
decrease in gross revenues, specifically the "900" pay-per-call business
cessation, the termination of enhanced service marketing, the ARS transactions
effective on the Club 900 product and the sale of the Company's conventional
cellular phone customer acquisition business. The actual chargebacks incurred
for services and programs that are no longer being marketed, are charged against
the previously established reserves, with any adjustment being reflected
currently.
The Company's cost of revenues, which are comprised of (i) marketing costs
directly associated with the procurement and retention of customers, which
includes direct response advertising costs, promotional costs and premium
fulfillment costs, and (ii) the related billing, collection and customer service
costs, both of which are offset by the net revenue generated from certain
premium offerings in conjunction with the marketing of other products and
services.
17
<PAGE> 20
The Company's cost of revenues for the years ended November 30, 1999 and
1998 are presented below:
Segment Data -- Cost of sales
<TABLE>
<CAPTION>
COST OF SALES
-------------------------- CHANGE-INC(DEC) CHANGE-INC(DEC)
YEAR ENDED NOVEMBER 30, 1999 1998 $$$ %%%
- ----------------------- ----------- ----------- --------------- ---------------
<S> <C> <C> <C> <C>
LEC Billed products and
services........................ $ 2,518,547 $46,886,761 $(44,368,214) (95)%
Customer Acquisition services..... 24,416,056 32,779,607 (8,363,552) (26)%
E-commerce........................ 2,084 -- 2,084 100%
Corporate and other............... 15,410 370,747 (355,337) (96)%
----------- ----------- ------------ ---
Total........................... $26,952,097 $80,037,115 $(53,085,018) (66)%
=========== =========== ============ ===
</TABLE>
Consolidated Cost of sales, by component
<TABLE>
<CAPTION>
COST OF SALES
-------------------------- CHANGE-INC(DEC) CHANGE-INC(DEC)
YEAR ENDED NOVEMBER 30, 1999 1998 $$$ %%%
- ----------------------- ----------- ----------- --------------- ---------------
<S> <C> <C> <C> <C>
Advertising, promotion and
fulfillment costs............... $29,207,076 $58,402,819 $(29,195,743) (50)%
Service Bureau fees, including
customer service and psychic
operators....................... 6,980,932 32,945,647 (25,964,715) (79)%
"900" Pay-per-call Premium net
revenues........................ (9,235,911) (11,311,351) 2,075,440 (18)%
Total........................... $26,952,097 $80,037,115 $(53,085,018) (66)%
</TABLE>
The decrease in cost of revenues in the fiscal year ended November 30, 1999
when compared to fiscal 1998, is a direct result of the Company's significantly
reduced, and in certain cases terminated, marketing efforts and the
corresponding decrease in the related expenditures. The reduction of these costs
resulted from the Company's cessation of marketing its enhanced services in
response to the termination, by BIC, of the billing services agreement in
November 1998 (see "-- Service Bureaus and Local Exchange Carriers"). In
addition, the Company significantly reduced its marketing efforts directed at
the Company's residential long distance customer acquisition activities, and
effective November 30, 1999, terminated such efforts due to (i) increased costs
incurred in acquiring long distance customers, (ii) associated fulfillment cost
increases and unfavorable redemption rates, and (iii) significantly increased
customer service costs. These three factors contributed to decreased margins in
the Company's long distance customer acquisition component of its Customer
Acquisition services segment. Additionally, the decreases in the cost of
revenues was attributable to the cessation of the Company's active marketing of
its "900" pay per call services (see "-- Prior Year Special Charge"), and the
commencement of offering such services as a premium to potential and acquired
long distance customers, with the net revenues earned therefrom recorded as a
reduction to advertising and marketing costs. Also, in accordance with the 900
Agreement, the Company terminated the marketing of its Club 900 product.
18
<PAGE> 21
The following table presents the major cost of sale components, distributed
over their applicable segments for the years ended November 30, 1999 and 1998,
and the changes in absolute dollars and percentage terms for such two-year
period:
Total Cost of sales -- by segment, by component
<TABLE>
<CAPTION>
COST OF SALES
--------------------------- CHANGE-INC(DEC) CHANGE-INC(DEC)
YEAR ENDED NOVEMBER 30, 1999 1998 $$$ %%%
- ----------------------- ----------- ------------ --------------- ---------------
<S> <C> <C> <C> <C>
LEC BILLED PRODUCTS AND SERVICES
Advertising, promotion and
fulfillment costs.............. $ 402,492 $ 24,732,314 $(24,329,822) (98)%
Service Bureau fees, including
customer service and psychic
operators...................... 2,099,415 22,154,447 (20,055,032) (91)%
----------- ------------ ------------ ----
Total LEC Billed products and
services.................... $ 2,501,907 $ 46,886,761 $(44,384,854) (95)%
----------- ------------ ------------ ----
CUSTOMER ACQUISITION SERVICES
Advertising, promotion and
fulfillment costs.............. $28,770,450 $ 33,392,581 $ (4,622,131) (14)%
"900" Pay-per-call Premium net
revenues....................... (9,235,911) (11,311,351) 2,075,440 (18)%
----------- ------------ ------------ ----
Net Advertising................ $19,534,539 $ 22,081,230 $ (2,546,691) (12)%
Service Bureau fees, including
customer service and psychic
operators...................... $ 4,881,517 $ 10,698,377 $ (5,816,860) (54)%
----------- ------------ ------------ ----
Total Customer Acquisition
services.................... $24,416,056 $ 32,779,607 $ (8,363,552) (26)%
----------- ------------ ------------ ----
E-COMMERCE AND CORPORATE AND
OTHER
Advertising, promotion and
fulfillment costs.............. $ 34,134 $ 277,924 $ (243,790) (88)%
Service Bureau fees, including
customer service............... $ -- $ 92,823 $ (92,823) (100)%
----------- ------------ ------------ ----
Total E-commerce and
Corporate................... $ 34,134 $ 370,747 $ (336,613) (91)%
=========== ============ ============ ====
</TABLE>
The Company's selling, general and administrative expenses ("SG&A") are
principally comprised of (i) compensation costs and related expenses for
executive, sales, finance and general administration personnel, (ii)
professional fees, (iii) insurance costs, (including director and officer
liability insurance with a current annual premium of approximately $528,000),
(iv) occupancy and other equipment rental costs, and (v) all other general and
miscellaneous corporate expense items.
The Company's SG&A expenses for the years ended November 30, 1999 and 1998
are presented, on a segment distribution basis, below:
Consolidated -- Selling, General and Administrative Expenses
<TABLE>
<CAPTION>
SG&A CHANGE-INC(DEC) CHANGE-INC(DEC)
YEAR ENDED NOVEMBER 30, 1999 1998 $$$ %%%
- ----------------------- ----------- ----------- --------------- ---------------
<S> <C> <C> <C> <C>
LEC Billed products and
services........................ $ 1,259,547 $ 6,041,218 $(4,781,671) (79)%
Customer Acquisition services..... 5,997,437 4,598,741 1,398,697 30%
E-commerce........................ 441,974 -- 441,974 100%
Corporate and other............... 3,182,198 3,716,933 (534,735) (14)%
----------- ----------- ----------- ---
Consolidated Totals............... $10,881,156 $14,356,892 $(3,475,736) (24)%
=========== =========== =========== ===
</TABLE>
19
<PAGE> 22
The decrease in SG&A expense in the year ended November 30, 1999, compared
to the prior year, is primarily attributable to the Company's reduction in
personnel (and all associated costs of insurance, payroll taxes and overhead
utilization). The Company commenced such personnel reductions in September 1998
and continued the reductions into the third quarter of the fiscal year ended
November 30, 1999. Additional reductions in SG&A are attributable to the terms
of the 900 Agreement, pursuant to which the Company (i) eliminated its media
buying operation, which included a staff of approximately twenty-one employees,
(ii) was released from continuing rent expense obligations under an assignment
of a lease for the office space occupied by such media department, and (iii)
disposed of all the media operation's property and equipment.
The Company's other income classification, primarily consisting of interest
income earned on the Company's debt based marketable securities, for the years
ended November 30, 1999 and 1998 are presented below:
<TABLE>
<CAPTION>
COST OF SALES
------------------------ CHANGE-INC(DEC) CHANGE-INC(DEC)
YEAR ENDED NOVEMBER 30, 1999 1998 $$$ %%%
- ----------------------- ---------- ---------- --------------- ---------------
<S> <C> <C> <C> <C>
Other income, primarily interest.... $1,446,494 $2,212,435 $(765,941) (35)%
</TABLE>
An additional source of interest income in fiscal 1999 and 1998 related to
interest income earned on funds held in reserve for future chargebacks, which
were escrowed by the Company's primary "900" entertainment service bureau. Such
escrowed reserves been have reduced to immaterial levels in fiscal 1999,
pursuant to the Company's termination of its offering of "900" entertainment
services resulting from the terms of the 900 Agreement, and will not contribute
significant amounts of interest income in subsequent fiscal periods.
The Company's effective income tax rate is a result of the combination of
federal income taxes at statutory rates and state taxes.
YEAR ENDED NOVEMBER 30, 1998 COMPARED TO YEAR ENDED NOVEMBER 30, 1997
Net Revenue for the year ended November 30, 1998 was $94,690,251, a
decrease of $96,684,685, or 51%, as compared to $191,374,936, for the year ended
November 30, 1997. The decrease was attributable to decreases in net revenues
from the Company's "900" entertainment services of $104,419,626, or 81%, and
decreases in net revenues of $21,052,460, or 80%, resulting from the termination
of the AT&T strategic corporate relationship. Such net revenue decreases were
partially offset by increases in net revenues from the Company's residential
long distance customer acquisition services under the Qwest agreement of
$18,667,452. See "-- Residential Long Distance Customer Acquisition Services."
Additionally, decreases were offset by increases in net revenues from the
Company's Club 900 Products of $5,113,167, or 45%, and increases in net revenues
from the Company's enhanced services of $1,382,717, or 6%. Further offsetting
increases were realized from the Company's net revenues from cellular phone
related activities, both on a conventional and prepaid basis, of $3,624,065, or
122%. These activities commenced, at significant levels, during the fourth
quarter of fiscal 1997 and such activities were discontinued during the fiscal
year ended November 30, 1998. For the year ended November 30, 1998, "900"
entertainment services, enhanced services, residential long distance customer
acquisition services (as provided to Qwest), Club 900 Product memberships, the
AT&T strategic corporate partnership and cellular phone activities and other
products approximated 26%, 24%, 20%, 17%, 6% and 7% of net revenues,
respectively. For the year ended November 30, 1997, "900" entertainment
services, enhanced services, Club 900 Product memberships, the AT&T strategic
corporate partnership and cellular phone activities and other products
approximated 67%, 12%, 6%, 14% and 1% of net revenues, respectively.
The provisions for chargebacks, recorded as a direct reduction to revenues,
for the year ended November 30, 1998 were $56,496,612, a decrease of
$47,101,191, or 45%, as compared to $103,597,803 for the year ended November 30,
1997. The decrease was primarily attributable to a decrease in chargebacks from
the Company's "900" entertainment services of $53,463,756, or 67%, when compared
to the prior year. This decrease in chargebacks resulted from the Company's
efforts to reduce marketing the Company's "900" entertainment services.
Additionally, during the year ended November 30, 1998, the Company's Club 900
Product chargebacks decreased by $4,008,277, or 29%, when compared to the prior
comparable year. This
20
<PAGE> 23
decrease was the result of improved chargeback rate experiences realized on the
Club 900 Product during the year ended November 30, 1998.
The Company's enhanced services' actual chargeback rate experience
increased during the year ended November 30, 1998 (45% of related gross sales)
when compared to the year ended November 30, 1997 (32% of related gross sales).
This increase in enhanced service chargebacks was attributable to significant
increases in customer service refunds and credits (chargebacks) being issued by
the Local Exchange Carriers, primarily in the nine-month period from March 1,
1998 to November 30, 1998, as compared to the prior year's comparable period.
The Company believes that the increase in such refunds and credits resulted from
changes in Local Exchange Carriers' customer refund policies. The Local Exchange
Carriers made such changes in response to concerns expressed by governmental
regulatory authorities regarding the necessity to make it easier for customers
to have charges which they claim were unauthorized removed from their telephone
bills. The Company believes that the customer service policy changes implemented
by the Local Exchange Carriers also contributed to the increased chargebacks
recognized on the Company's "900" entertainment services during the fiscal year
ended November 30, 1998.
The impact of certain items on the operations of the Company, namely, cost
of revenues, chargebacks and marketing expenses, can be better understood in
relation to gross revenues, as opposed to net revenues. Accordingly, such
information is provided in the paragraphs that follow.
During the year ended November 30, 1998, gross revenues from "900"
entertainment services were $50,270,718, with corresponding chargeback
allowances of $25,764,724, resulting in an approximate chargeback rate of 51%.
During the year ended November 30, 1997, gross revenues from the "900"
entertainment services were $208,154,100, with corresponding chargeback
allowances of $79,228,480, resulting in an approximate chargeback rate of 38%.
This chargeback rate increase of 13% was one of the primary factors contributing
to the Company's decision to discontinue marketing its "900" entertainment
services as an independent revenue source and use such services in conjunction
with the marketing of the Company's other products and services.
During the year ended November 30, 1998, gross revenues from enhanced
services and Club 900 Product memberships were approximately $41,892,878 and
$26,067,730, respectively, as compared to approximately $32,110,085 and
$24,962,840, respectively, for the year ended November 30, 1997, an increase of
$9,782,793, or 30.4%, and $1,104,890, or 4.4%, respectively. The chargeback
allowances recognized during the year ended November 30, 1998 for the Company's
enhanced services and Club 900 Product memberships were $18,815,409 (45% of
related revenues) and $9,648,829 (37% of related revenues), respectively, as
compared to $10,415,332 (32% of related revenues) and $13,657,106 (55% of
related revenues), respectively, for the year ended November 30, 1997. During
the year ended November 30, 1998, gross revenues from the Company's combined
prepaid and conventional cellular activity were approximately $8,860,000, with
chargebacks of approximately $2,275,000, representing a chargeback rate of 26%.
The Company's other products and services contributed an immaterial amount to
chargebacks during the years ended November 30, 1998, 1997 and 1996. The
Company's residential long distance customer acquisition service revenues and
the AT&T strategic corporate partnership revenues are not encumbered by
chargebacks.
Cost of revenues for the year ended November 30, 1998 was $80,037,115, a
decrease of $69,784,248, or 47%, as compared to $149,821,363 for the year ended
November 30, 1997. The decrease is directly attributable to reductions in
service bureau fees related to the decrease in revenues generated from the
Company's "900" entertainment services and decreases in advertising costs
expended in procuring such revenues. The service bureau fees, including the cost
of "psychic operators" related to the "900" entertainment services, were
approximately $26,800,000 and $69,200,000 for the years ended November 30, 1998
and 1997, respectively, accounting for approximately $42,400,000, or 61%, of the
total decrease in cost of revenues. In addition, the "900" entertainment
services advertising costs, principally from television broadcast media and
related commercial production costs, were approximately $17,700,000 and
$30,000,000 for the years ended November 30, 1998 and 1997, respectively,
accounting for approximately $12,300,000, or 18%, of the total decrease in the
cost of revenues. $11,300,000 of the decrease in cost of revenues was
attributable to the Company's implementation, during the quarter ended August
31, 1998, of its strategy to reposition the
21
<PAGE> 24
marketing emphasis of the "900" entertainment services, in response to
decreasing margins, increasing marketing costs and increasing chargebacks. The
cost of revenues in the fiscal year ended November 30, 1997 did not have a
comparable reduction. During the fiscal year ended November 30, 1998, the "900"
entertainment services were used in conjunction with the marketing of the
Company's other products and services (as opposed to an independent revenue
source). In accordance with this repositioning, any amounts received by the
Company in providing "900" entertainment services, net of estimated chargebacks,
were accounted for as a reduction to the cost of revenues for the Company's
other products and services. The effect recognized under such repositioning
during the year ended November 30, 1998 amounted to gross "900" entertainment
service revenues of approximately $20,900,000, net of corresponding chargebacks
of $9,600,000, being offset to cost of revenues for the reduction of
approximately $11,300,000 referenced above. The foregoing decreases to cost of
revenues were offset by increases in service bureau fees and marketing costs
related to increased gross revenues recognized from the Company's enhanced
services, Club 900 Product and residential long distance and conventional
cellular phone customer acquisition services. Additionally, the decrease in cost
of revenues was further offset by cost increases incurred in the Company's test
marketing of its prepaid cellular phone business, which approximated $4,300,000
during the year ended November 30, 1998. The Company discontinued the marketing
for new prepaid cellular phone customers during the third quarter of the year
ended November 30, 1998 and subsequently disposed of such portion of its
operations and liquidated the related inventories.
Cost of revenues as a percentage of net revenues increased to approximately
85% for the year ended November 30, 1998, from approximately 78% for the year
ended November 30, 1997. This gross margin deterioration was specifically
attributable to the Company's decreasing margins recognized on the Company's
"900" entertainment services. In response to the increased costs per unit of
sale generated for its "900" entertainment services, coupled with the
significant chargeback rate increases, as previously discussed, the Company has
discontinued marketing the "900" entertainment services as an independent
revenue source. Commencing in the quarter ended August 31, 1998, the "900"
entertainment services were repositioned and offered solely (i) for purposes of
acquiring marketing information for future marketing campaigns and (ii) as a
premium offering, given in conjunction with the Company's other products and
services.
Gross revenues for the year ended November 30, 1998 were approximately
$151,200,000, with total marketing costs of approximately $58,100,000, or 38% of
such gross revenues. Gross revenues for the year ended November 30, 1997 were
approximately $295,000,000, with marketing costs of approximately $81,600,000,
or 28% of such gross revenues. Such increase in marketing costs, when measured
as a percentage of gross revenues, was 7%, or an increase of 25% in comparative
percentage terms. This increase was primarily due to the decreasing returns
realized on the marketing expenditures of the Company in generating "900"
entertainment services gross revenues prior to its discontinuance as an
independent revenue source and to the customer acquisition costs incurred by the
Company in the conduct of its residential long distance customer acquisition
programs.
The remaining significant component of the cost of revenue is service
bureau fees. For the years ended November 30, 1998 and 1997, such service bureau
fees were approximately $27,800,000 and $53,200,000, respectively. This decrease
of approximately $25,400,000, or 48%, was primarily attributable to the
Company's decrease in "900" entertainment services revenues and its
corresponding reduction in service bureau usage. This decrease was partially
offset by increased service bureau fees relating to the Company's increase in
gross revenue activity from enhanced services, Club 900 Product memberships and
residential long distance customer acquisitions.
Selling, general and administrative expenses (SG&A) for the year ended
November 30, 1998 were $14,356,892, a decrease of $4,523,877, or 24%, as
compared to $18,880,769 for the year ended November 30, 1997. The reduction is
primarily attributable to a decrease in amortization expense of approximately
$1,535,000, pursuant to an impairment write-off of intangibles, primarily
goodwill, during the quarter ended May 31, 1998. The portion of intangibles
expensed by such impairment charge in the fiscal year ended November 30, 1998
was separately classified under the financial statement account heading "Special
Charges", with the amount of such write-off approximating $18,500,000. The
decrease further resulted from net reductions in officers' compensation of
approximately $1,260,000 and decreases in customer service costs
22
<PAGE> 25
of approximately $733,000. Increases in professional fees ($531,000), personnel
costs ($216,000) and occupancy costs ($139,000) offset the aforementioned
decreases.
During the year ended November 30, 1998, the Company recorded special
charges amounting to $19,692,543. The Company had no such special charges in the
year ended November 30, 1997. Included in these charges were (i) the non-cash
impairment charge of approximately $18,500,000, which represented the remaining
balance of the goodwill associated with the Company's 1996 acquisition of the
remaining 50% interest in New Lauderdale, L.C. and (ii) a charge for the
write-down of assets of approximately $1,178,000, relating to the Company's
developing and test marketing of an Internet telephony program, which commenced
and was discontinued within the year ended November 30, 1998.
Other income for the year ended November 30, 1998 and 1997 consisted
primarily of interest income. For the year ended November 30, 1998, other income
was $2,212,435, an increase of $371,079, or 20%, as compared to $1,841,356 for
the year ended November 30, 1997. The increase was attributable to interest
earned on the Company's marketable securities, consisting primarily of direct
U.S. government obligations and interest earned on funds held in reserve for
future chargebacks by the Company's primary "900" entertainment service bureau.
The Company's (benefit) provision for income taxes is the result of the
combination of federal statutory rates and required state statutory rates
applied to pre-tax income (loss). This combined effective rate was (2%) and 41%
for the years ended November 30, 1998 and 1997, respectively. Income tax benefit
for the year ended November 30, 1998 totaled $417,464 as compared to income tax
expense of $10,069,616 for the year ended November 30, 1997. The Company's
effective tax rate was higher than the federal statutory rate due to the
addition of state income taxes and certain expenses, principally goodwill
amortization, that are recognized for financial reporting purposes and are not
deductible for federal income tax purposes. In the year ended November 30, 1998,
the Company recorded an intangible impairment charge of approximately $18.5
million. As of November 30, 1998, the Company had a net operating loss carryback
of approximately $21,000,000. Also at November 30, 1998, the Company had
approximately $14,100,000 of future tax deductible amounts, principally arising
from the future deductibility of net chargeback reserves and the 1998 goodwill
impairment charge. Due to the uncertain realization, through carryforward,
regarding the state deferred tax assets, the Company has recorded a full
valuation allowance against such state deferred tax assets at November 30, 1998.
The remaining federal deferred tax assets were further reduced for a valuation
allowance. The federal valuation allowance reduces the federal deferred tax
assets to their realizable carryback value at November 30, 1998.
LIQUIDITY AND CAPITAL RESOURCES
At November 30, 1999, the Company had cash and cash equivalents of
approximately $7.9 million, reflecting an increase of approximately $5.8 million
when compared to the $2.1 million in cash and cash equivalents held at November
30, 1998.
During the year ended November 30, 1999, net cash provided by operating
activities was approximately $29.7 million. The significant components resulting
in this increase, when compared with the approximate $6.2 million of cash used
in operations for the year ended November 30, 1998, were (i) collections on
trade accounts receivable of approximately $25.5 million, (ii) income tax
refunds attributable to net operating loss carrybacks of approximately $9
million, (iii) reductions to prepaid expenses of approximately $1.5 million and
(iv) net income of approximately $3.9 million for the year ended November 30,
1999. Items that offset the increase in cash provided by operations during the
year ended November 30, 1999, were (i) payments on trade payables of
approximately $2.7 million and (ii) payments on accrued expenses of
approximately $1.4 million.
The approximately $22 million in net cash used in investing activities
during the year ended November 30, 1999 primarily resulted from marketable
security purchases. The Company's marketable securities increased approximately
$21.5 million during the year ended November 30, 1999, to approximately $36.6
million, compared to $15 million in marketable securities held at November 30,
1998. Additional funds used in investing activites during the year ended
November 30, 1999, were for strategic marketing investments in privately held
companies of approximately $2.1 million. Such investments were made by the
Company's
23
<PAGE> 26
E-commerce segment to establish and further enhance its competitive marketing
position in the Internet marketplace. The E-commerce segment also acquired
approximately $436,000 in capitalizable internal software during the year ended
November 30, 1999. As an offset to cash used in investing activities during the
year ended November 30, 1999, the Company received $258,808 in proceeds on the
sale of its media department's property and equipment in accordance with the 900
Agreement.
Cash used in financing investing activities during the year ended November
30, 1999 amounted to $1,843,560, of which (i) $301,870 was used for the
repurchase of the Company's common stock, currently held in treasury, and (ii)
$1,755,000 was used for the redemption and subsequent retirement of 1,300,000
shares of common stock at $1.35 per share.
Historically, the Company's primary cash requirements have been to fund the
cost of advertising and promotion. Additional funds have been used in the
purchasing of equipment and services in connection with the commencement of new
business lines and further development of businesses currently being test
marketed. During the fiscal year ended November 30, 1999, the Company began the
process or redefining itself as an on-line direct marketing provider of consumer
products and services, within the Internet industry. The Company's future plans
and business strategy call for its Internet based E-commerce segment to be its
sole operating focus, and the significant source of all future revenues. This
Internet initiative may have a significant impact on the Company's capital and
liquidity resources relating to the E-commerce segment's possible expenditures
for (i) marketing and advertising campaigns, (ii) the cost of additional
personnel required to occupy executive, operational and administrative
positions, (iii) product development costs, (iv) technology based costs, and (v)
other miscellaneous costs. Our Internet initiative, and its underlying business
plan and strategy, has caused the Company to terminate the marketing of its
legacy products and services. Accordingly, these services will no longer
contribute to the Company's cash flows in subsequent fiscal periods. This
Company wide redefinition should be considered when using the Company's
historical results in evaluating future operations, cash flows and financial
position.
Under currently proposed operating plans and assumptions (including the
substantial costs potentially attributable to the Company's Internet
initiative), management believes that projected cash flows from operations and
available cash resources will be sufficient to satisfy the Company's anticipated
cash requirements for at least the next twelve months. Currently, the Company
does not have any long-term obligations and does not intend to incur any
long-term obligations in the near future. As the Company seeks to extend its
reach into the E-commerce arena, as well as identify new and other consumer and
non-consumer product and services, the Company may use existing cash reserves,
long-term financing or other means to finance such diversification. See "Forward
Looking Information May Prove Inaccurate".
CONSUMMATION OF TRANSACTIONS IMPACTING CURRENT AND FUTURE FISCAL PERIODS
In June 1999, the Company entered into a series of agreements
(collectively, the "Transaction Agreements") pursuant to which the Company
ceased offering its telephone entertainment services. Included in the
Transaction Agreements is the Agreement Regarding 900 Pay-Per-Call Psychic
Services (the "900 Agreement"), dated as of May 26, 1999, by and between the
Company and Access Resource Services, Inc. ("ARS"), pursuant to which the
Company agreed to refrain until January 17, 2001 from conducting, marketing,
advertising or promoting certain "stand alone" 900 Pay-Per-Call Psychic Services
described in the 900 Agreement (the "900 Psychic Services") directly or
indirectly through any affiliate. In addition, the Company agreed to cease the
conduct of the media buying operation which it conducted under the name "Quintel
Media" and ARS agreed to assume responsibility for the "Quintel Media" employees
and for the lease of the premises used by "Quintel Media" in Fort Lauderdale,
Florida, and to acquire the computer equipment and other furniture, fixtures and
leasehold improvements used by "Quintel Media" at such premises.
In consideration for the Company's acceptance of the terms of the 900
Agreement, ARS and any of its affiliates offering 900 Pay-Per-Call Psychic
Services and/or membership club services, agreed to pay to the Company certain
royalty fees relative to such service offerings. ARS is required to pay such
royalty fees from and after the consummation of the transactions contemplated by
the Transaction Agreements, and until
24
<PAGE> 27
January 17, 2001. For the fiscal year ended November 30, 1999, these royalties
amounted to approximately $2.8 million, or 6% of the Company's net revenues.
Other than these royalty fees, the Company will not be receiving any revenue in
any future fiscal years from telephone entertainment services.
ARS is presently controlled by Steven Feder, who, until his resignation in
January 1999, was a member of the Company's Board of Directors.
PRIOR YEAR SPECIAL CHARGE
During the fiscal year ended November 30, 1998, the Company experienced
decreasing margins on its "900" entertainment services, attributable to
significant increases in marketing expenditures related thereto and customer
chargebacks. As a result, these services were not providing positive operating
results and cash flow. Consequently, during the quarter ended August 31, 1998,
the Company terminated the marketing of such services as an independent revenue
source and began using them in conjunction with marketing the Company's other
products and services, including its residential distributor program agreement
with Qwest. Accordingly, as required by Statement of Financial Standards No. 121
("FAS 121"), the Company reviewed long-lived assets, including goodwill, for
impairment. The Company evaluated the recoverability of its long-lived assets by
measuring the carrying amount of the assets against projected undiscounted
future cash flows associated with them. The Company determined that the "900"
entertainment services could not be disposed of and there was no predictable
estimate of any future cash flows associated with any alternative uses.
Accordingly, the Company concluded that the intangibles, primarily goodwill,
associated with the Company's 1996 acquisition of the remaining 50% interest in
the limited liability company New Lauderdale, L.C., were impaired. As such, a
non-cash charge of approximately $18.5 million, representing the remaining
balance of the intangibles, primarily goodwill associated with the New
Lauderdale acquisition, was recorded at May 31, 1998.
TERMINATION OF RESIDENTIAL LONG DISTANCE CUSTOMER ACQUISITION MARKETING
In November 1999, Qwest informed the Company that the customers being
acquired for it by the Company were not remaining Qwest customers long enough to
justify the acquisition costs Qwest was required to pay the Company, and,
accordingly, the Company should no longer solicit customers on Qwest's behalf.
Therefore, the Company will not realize any revenues from customer acquisitions
in future fiscal years, but will continue to be entitled to participate in
Qwest's net revenues earned from an acquired customer's future long distance
usage.
QUINTEL NETWORK
In November 1999, the Company began the implementation of its strategy to
create the Quintel Network, a portfolio of marketing partnerships and strategic
investments with Internet marketing companies, E-commerce retailers and service
providers, to allow for the marketing of different products and services to a
detailed database of profiled consumers.
Database Growth and Expansion
The first step in creating the Company's Quintel Network was to grow the
Company's already extensive profiled consumer database. Towards this end, the
Company has made strategic investments in several companies. In tandem with each
of these investments, the Company entered into marketing agreements, entitling
the Company access to these entities' proprietary e-mail databases and other
marketing data. The entities in which the Company made these strategic
investments (and to whose databases the Company gained access) include the
following:
- SkyMall, Inc., a publicly-traded company (Nasdaq-SKYM) with access to
e-mail addresses and other marketing information for over 3 million
consumers, that utilizes its website, SkyMall.com, and exclusive
agreements with several airline carriers and travel partners to offer a
wide array of products from a variety of vendors.
25
<PAGE> 28
- itarget.com, Inc. is a permission based direct e-mail marketing company
with over 1 million members that have given their consent to be marketed
for various products and services.
- The Innovation Factory, Inc., a development stage company, intends to
provide business development support, state of the art infrastructure and
necessary capital to promising new companies.
- GenerationA.com, Inc. provides internet and other computer related
products and services to the over-50 generation.
- AtYourBusiness.com, Inc. provides a full-range of support services for
small businesses, including assistance with human resources, payroll,
office management and growth management.
- Montvale Management, LLC provides a full range of on-line mortgage
products and services to homeowners.
The Company is also acquiring additional marketing information from traffic
attracted to GroupLotto.com and MultiBuyer.com, two websites created by a
subsidiary of the Company.
- GroupLotto.com -- This website permits Internet users to play the lottery
free in exchange for providing their e-mail addresses. Players can win a
$2,000,000 jackpot by selecting the winning lottery numbers.
GroupLotto.com accommodates the public's interest in free lotteries by
offering the opportunity to participate in multiple weekly opportunities
to play at no cost, while simultaneously serving as a valuable marketing
information source for the Company's other Internet activities. The
Company has obtained contingent prize based insurance for the first $1
million jackpot payout.
- MultiBuyer.com -- This website is an online retail location where buyers
consolidate their purchasing power for a variety of offered products and
services and reap the benefits of reduced sales prices that generally
correlate to bulk purchases. On-line consumers can select the price that
they want to pay for a particular product or service. For the majority of
"MultiBuys," as the number of buyers for that product or service
increases, the asking price for the product or service decreases, until a
large enough number of purchasers are accumulated to allow the seller to
deliver such product at the buyers' asking price.
Based on the foregoing alliances that comprise the Quintel Network, the
Company estimates that it presently has access to in excess of 5 million opt-in
e-mail addresses.
Marketing of Products and Services
The second step in creating the Quintel Network is to utilize the extensive
database accumulated by the Quintel Network to generate revenue. The Company
believes this can be achieved by acquiring the right to market a wide array of
products and services to the large potential customer base that comprises the
Company's database. Towards this end, the Company recently entered into
marketing agreements with several different companies for the marketing of a
wide variety of products and services.
These include:
- Cellstar, Ltd., d/b/a Echostar, providers of the DISH 500 Satellite TV
System and service.
- SunDial Marketplace Corporation, providers of wireless telecommunications
services from AT&T, Cellular One, AllTel, OmniPoint and Airtouch, as well
as cellular handsets and accessories from Nokia, Motorola, Qualcomm,
Ericcson and Sony.
- NextCard, Inc., which offers instant on-line approval for the NextCard(R)
Visa(R).
- GTC Telecom Corp., which offers 5 cent per minute long distance services.
- Mortgage.com, Inc., providers of various on-line mortgages and other
programs geared toward the homeowner.
- LCS Golf, Inc. (Nasdaq -- LCSGE), a company that offers golf related
products and services via its website, GolfUniverse.com.
26
<PAGE> 29
Service Bureaus and Local Exchange Carriers
In November 1998, three of the LECs, Ameritech Corp., Bell Atlantic Corp.
and SBC Communications, Inc., refused to bill customers for enhanced services
provided by the Company. This was a result of what the LECs claim was excessive
complaints by customers for "cramming" (unauthorized charges billed to a
customer's phone bill) against the Company and its affiliates. This billing
cessation effectively prevented the Company from selling its enhanced services
in those areas serviced by such LECs.
As a result of such LEC imposed billing cessation, in November 1998, the
primary billing service provider for the Company's enhanced services, Billing
Information Concepts Corporation ("BIC"), terminated its arrangement with the
Company for providing billing for the Company's enhanced services. BIC continued
to service all data relating to post-billing adjustments to records billed prior
to BIC's self-imposed billing cessation. In December 1998, the Company entered
into an agreement with Transtel, whereby Transtel provided the billing services
previously provided by BIC. In effect, between the termination of the BIC
billing service arrangement and the commencement of billing under the agreement
with Transtel (approximately two months), the Company was unable to bill for any
enhanced services provided.
GOVERNMENT REGULATION
On September 30, 1998, a letter was received from the Division of Marketing
Practices of the Federal Trade Commission (the "FTC") initiating an inquiry into
whether the Company has engaged in any unlawful marketing practices. In response
to the letter, documents were supplied to the Division by the Company and the
Company's regulatory counsel has held informational meetings with staff of the
FTC. The Company's regulatory counsel has been notified by the staff of the FTC
that the investigation has been terminated and no action would be instituted
against the Company.
In recent months, the Company's regulatory counsel has responded to
inquiries or subpoenas from the attorneys general of Vermont, Pennsylvania and
Kansas concerning the Company's marketing practices. In the more than seven
months since the information was sent to Kansas, there has been no follow-up.
Similarly, information was sent to Pennsylvania more than four months ago.
Recently, Pennsylvania requested additional information, but there has been no
other action by that office. The information was furnished to Vermont only
recently, and the Company continues to discuss Vermont's request for additional
data.
The Company recently has been asked to enter into a voluntary cease and
desist agreement with the Montgomery County (Maryland) Department of Housing and
Consumer Affairs. The genesis of this request were certain consumer complaints
about 900 services and club products dating from 1997 and 1998 that were
addressed at that time. In early 1999, that office requested additional
information from the Company, but when the Company asked to discuss the request,
the county office did not respond and was not in contact with the Company until
early 2000, when it presented the cease and desist agreement. The Company has
advised the county office that it has not engaged in 900 or other psychic
services since May 1998, and has asked the county office to reconsider its
request that the Company enter into any agreement.
To date, the Company has not been subject to any enforcement actions by any
regulatory authority. In the event the Company is found to have failed to comply
with applicable laws and regulations, the Company could be subject to civil
remedies, including substantial fines, penalties and injunctions, as well as
possible criminal sanctions, which would have a material adverse effect on the
Company.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATE
Reference is made to the Financial Statements referred to in the
accompanying Index, setting forth the consolidated financial statements of
Quintel Communications, Inc. and subsidiaries, together with the report of
PricewaterhouseCoopers LLP dated February 28, 2000.
27
<PAGE> 30
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS AND EXECUTIVE OFFICERS
Set forth below are the directors and executive officers of the Company,
their respective names and ages, positions with the Company, principal
occupations and business experiences during the past five years and the dates of
the commencement of each individual's term as a director and/or officer.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Jeffrey L. Schwartz.................. 51 Chairman of the Board and Chief Executive Officer
Jay Greenwald........................ 35 President, Chief Operating Officer and Director
Andrew Stollman...................... 34 Executive Vice President, Secretary and Director
Daniel Harvey........................ 41 Chief Financial Officer
Murray L. Skala...................... 52 Director
Edwin A. Levy........................ 60 Director
Lawrence Burstein.................... 57 Director
</TABLE>
Directors
Jeffrey L. Schwartz has been Chairman and Chief Executive Officer of the
Company since January 1995, Secretary/Treasurer from September 1993 to December
1994 and a director since inception of the Company in 1993. From January 1979
until May 1998, Mr. Schwartz was also Co-President and a director of Jami
Marketing Services, Inc. ("Jami Marketing"), a list brokerage and list
management consulting firm, Jami Data Services, Inc. ("Jami Data"), a database
management consulting firm, and Jami Direct, Inc. ("Jami Direct"), a direct mail
graphic and creative design firm (collectively, the "Jami Companies"). The JAMI
Companies were sold by the principals thereof in May 1998.
Jay Greenwald has been President and Chief Operating Officer of the Company
since January 1995, Vice President from August 1992 to December 1994 and a
director since inception. From January 1991 to August 1992, Mr. Greenwald was
Vice President of Newald Direct, Inc. ("Newald Direct") and, from July 1990 to
January 1991, President of Newald Marketing, Inc. ("Newald Marketing"),
companies engaged in direct response marketing.
Andrew Stollman was Senior Vice President, Secretary and a director of the
Company from January 1995 until February 15, 2000. On February 15, 2000, Mr.
Stollman's title was changed to Executive Vice President. In addition, Mr.
Stollman was the Company's President from September 1993 to December 1994. From
August 1992 to June 1993, Mr. Stollman was a consultant to Cas-El, Inc., from
November 1992 to June 1993, manager at Media Management Group, Inc., and from
December 1990 to August 1992, national marketing manager for Infotrax
Communications, Inc. and Advanced Marketing & Promotions, Inc., companies
engaged in providing telephone entertainment services.
Murray L. Skala has been a director of the Company since October 1995. Mr.
Skala has been a partner in the law firm of Feder, Kaszovitz, Isaacson, Weber,
Skala & Bass LLP since 1976. Mr. Skala is also a director of JAKKS Pacific,
Inc., a publicly-held company which develops, markets and distributes children's
toys.
Edwin A. Levy has been a director of the Company since November 1995. Mr.
Levy has been the Chairman of the Board of Levy, Harkins & Co., Inc., an
investment advisor, since 1979, and is also a director of Coastcast Corp., a
publicly-held company in the business of manufacturing golf club heads.
Lawrence Burstein has been a director of the Company since April 1999.
Since March 1996, Mr. Burstein has been Chairman of the Board and a principal
shareholder of Unity Venture Capital Associates, Ltd., a private venture capital
firm. For approximately ten years prior thereto, Mr. Burstein was the President,
a director and principal stockholder of Trinity Capital Corporation, a private
investment banking concern. Mr. Burstein is a director of five public companies,
being, respectively, THQ, Inc., engaged in the development and sale of games for
Sony and Nintendo game systems and software games for personal
28
<PAGE> 31
computers; Brazil Fast Food Corporation, which operates the second largest chain
of fast food outlets in Brazil; CAS Medical Systems, Inc., engaged in the
manufacture and marketing of blood pressure monitors and other medical products,
principally for the neonatal market; The MNI Group, Inc., engaged in the
marketing of specially formulated nutritional supplements; and Unity First
Acquisition Corporation, a publicly-held acquisition vehicle, of which Mr.
Burstein is also President.
The Company has agreed, if so requested by the underwriter of the initial
public offering of the Company's securities, Whale Securities Co., L.P.
("Whale"), to nominate and use its best efforts to elect a designee of Whale as
a director of the Company or, at Whale's option, as a non-voting adviser to the
Company's Board of Directors. The Company's officers, directors and four of its
existing principal stockholders have agreed to vote their shares of Common Stock
in favor of such designee. Whale has not yet exercised its right to designate
such a person. Such right of designation of Whale is in effect until December 5,
2000.
All directors hold office until the next annual meeting of stockholders and
the election and qualification of their successors. Directors receive no cash
compensation for serving on the Board of Directors other than reimbursement of
reasonable expenses incurred in attending meetings. Non-employee Directors of
the Company are compensated for their services and attendance at meetings
through the grant of options pursuant to the Company's Second Amended and
Restated 1996 Stock Option Plan.
Executive Officers
Officers are elected annually by the Board of Directors and serve at the
direction of the Board of Directors. Three of the Company's four executive
officers, Jeffrey L. Schwartz, Jay Greenwald and Andrew Stollman, are also
directors of the Company. Information with regard to such persons is set forth
above under the heading "Directors."
The remaining executive officer is Mr. Daniel Harvey, the Company's Chief
Financial Officer. Mr. Harvey has held such position since January 1997. He
joined the Company in September 1996. From November 1991 to August 1996, Mr.
Harvey was a Senior Manager with the accounting firm of Feldman, Gutterman,
Meinberg & Co. Mr. Harvey is a Certified Public Accountant.
The Company has obtained "key man" life insurance in the amount of
$1,000,000 on each of the lives of Jeffrey L. Schwartz, Jay Greenwald and Andrew
Stollman.
THE COMMITTEES
The Board has an Audit Committee, a Compensation Committee and a Stock
Option Committee. The Board of Directors does not have a Nominating Committee,
and the usual functions of such a committee are performed by the entire Board of
Directors.
Audit Committee. The functions of the Audit Committee include
recommendations to the Board of Directors with respect to the engagement of the
Company's independent certified public accountants and the review of the scope
and effect of the audit engagement. The current members of the Audit Committee
are Messrs. Levy, Burstein and Skala.
Compensation Committee. The function of the Compensation Committee is to
make recommendations to the Board with respect to compensation of management. In
addition, the Compensation Committee administers plans and programs, with the
exception of the Company's stock option plans, relating to employee benefits,
incentives and compensation. The current members of the Compensation Committee
are Messrs. Skala and Burstein.
Stock Option Committee. The Stock Option Committee determines the persons
to whom options are granted under the Company's stock option plans and the
number of options to be granted to each person. The current members of the Stock
Option Committee are Messrs. Levy and Burstein.
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<PAGE> 32
ATTENDANCE AT MEETINGS
From December 1, 1998 through November 30, 1999, the Board of Directors,
Stock Option Committee, Audit Committee and Compensation Committee each met or
acted without a meeting pursuant to unanimous written consent six times, one
time, one time and one time, respectively.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
To the best of the Company's knowledge, during the fiscal year ended
November 30, 1999 (i) Mark Gutterman, Daniel Harvey and Michael Miller each
untimely filed one report on Form 4, each reporting one late transaction; (ii)
Jeffrey L. Schwartz and Andrew Stollman each untimely filed two reports on Form
4, each reporting two late transactions; (iii) Jay Greenwald untimely filed
three reports on Form 4, reporting three late transactions; and (iv) Paul
Novelly untimely filed a Form 3 and Form 5. These individuals were executive
officers, directors and/or beneficial owners of more than 10% of the Common
Stock of the Company during the fiscal year ended November 30, 1999. To the best
of the Company's knowledge, all other Forms 3, 4 and 5 required to be filed
during the fiscal year ended November 30, 1999 were done so on a timely basis.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth the Company's executive compensation paid
during the three fiscal years ended November 30, 1999, 1998 and 1997 for the
Chief Executive Officer and the Company's four most highly compensated executive
officers of the Company (other than the Chief Executive Officer) whose cash
compensation for the fiscal year ended November 30, 1999 exceeded $100,000 (the
"Named Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
---------------------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
-------------------------------------------- ----------------------- -------
(A) (B) (C) (D) (F) (G) (I)
(E) RESTRICTED SECURITIES (H)
OTHER STOCK UNDERLYING PLAN
SALARY BONUS ANNUAL AWARDS OPTIONS PAYOUTS ALL OTHER
NAME AND PRINCIPAL POSITION YEAR ($) ($) COMPENSATION($) ($) (#) ($) COMPENSATION($)
- --------------------------- ---- -------- -------- --------------- ---------- ---------- ------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Jeffrey Schwartz........ 1999 $362,000 $100,000 0 0 0 0 0
Chairman and 1998 $453,750 0 0 0 8,750(2) 0 0
Chief Executive 128,495
Officer 1997 $412,500 $418,347 0 0 0 0 0
Jay Greenwald........... 1999 $362,000 $100,000 0 0 0 0 0
President and 1998 $453,750 0 0 0 8,750(2) 0 0
Chief Operating 128,495
Officer 1997 $412,500 $418,346 0 0 0 0 0
Andrew Stollman......... 1999 $266,000 $100,000 0 0 0 0 0
Executive Vice 1998 $302,500 0 0 0 8,750(2) 0 0
President and 96,260
Secretary 1997 $243,750 $418,346 0 0 0 0 0
Daniel Harvey(1)........ 1999 $155,800 $ 20,000 0 0 0 0 0
Chief Financial 1998 $127,000 $ 50,000 0 0 7,729(3) 0 0
Officer 1997 $111,000 $ 25,000 0 0 0 0 0
</TABLE>
- ---------------
(1) Mr. Harvey was first appointed the Company's Chief Financial Officer in
January 1997. Prior to that time, Mr. Harvey was not employed as an
executive officer of the Company.
(2) Represents shares underlying options issued in exchange for the surrender of
options to purchase 25,000 shares pursuant to the Company's 1998 Option
Exchange.
(3) Represents shares underlying options issued in exchange for the surrender of
options to purchase 26,000 shares pursuant to the Company's 1998 Option
Exchange.
30
<PAGE> 33
The following table sets forth certain information regarding options
exercisable during the fiscal year ended November 30, 1999 and the value of the
options held as of November 30, 1999 by the Named Officers.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUE
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
OPTIONS AT FISCAL YEAR-END(#) AT FISCAL YEAR-END(1)($)
----------------------------- ----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Jeffrey L. Schwartz....................... 8,750 $ 36,641
85,664 342,656
42,831 $171,324
Jay Greenwald............................. 8,750 36,641
85,664 342,656
42,831 171,324
Andrew Stollman........................... 8,750 36,641
64,174 256,696
32,086 128,344
Daniel Harvey............................. 7,585 31,763
145 608
</TABLE>
- ---------------
(1) The product of (x) the difference between $5.9375 (the closing price of the
Company's Common Stock at November 30, 1999, as reported by Nasdaq) and the
exercise price of the unexercised options, multiplied by (y) the number of
unexercised options.
EMPLOYMENT AGREEMENTS
The employment agreements between the Company and each of Jeffrey L.
Schwartz, Jay Greenwald and Andrew Stollman expired on November 30, 1998. Each
of such individuals have agreed to continue to work for the Company as
employees-at-will until such time as the Board of Directors has had an
opportunity to discuss and approve a compensation package for inclusion in
written employment agreements between the Company and such individuals. The
Company and Messrs. Schwartz, Greenwald and Stollman have agreed that each of
such individuals are entitled to receive compensation for their services
rendered of $400,000, $400,000 and $302,500 per annum, respectively, until such
time as written employment agreements between the Company and such individuals
have been executed. Notwithstanding the foregoing, Messrs. Schwartz, Greenwald
and Stollman voluntarily elected to receive compensation during the fiscal year
ended November 30, 1999 of $362,000, $362,000 and $266,000, respectively.
BOARD COMPENSATION
As a result of the Company's policy to compensate non-employee directors
for their services, the Company's Second Amended and Restated 1996 Stock Option
Plan (the "Plan") provides for an automatic one-time grant to all non-employee
directors of options to purchase 25,000 shares of Common Stock and for
additional automatic quarterly grants of options to purchase 6,250 shares of
Common Stock. The exercise prices for all of such non-employee director options
are the market value of the Common Stock on their date of grant.
COMPENSATION COMMITTEE INTERLOCK AND INSIDER PARTICIPATION
The Compensation Committee of the Company's Board of Directors from
December 1, 1998 through November 3, 1999 consisted of Mark Gutterman and Murray
L. Skala. On November 3, 1999, Mr. Gutterman resigned from the Company's Board
of Directors and the Committees thereof for which he was a member (including the
Compensation Committee). Mr. Gutterman's replacement on the Board and
31
<PAGE> 34
the Committees to which he was a member was Lawrence Burstein. See "Certain
Relationships and Related Transactions."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information, as of February 23, 2000, based
upon information obtained from the persons named below, regarding beneficial
ownership of the Company's Common Stock by (i) each person who is known by the
Company to own beneficially more than 5% of the outstanding shares of its Common
Stock, (ii) each director of the Company, (iii) each of the Named Officers, and
(iv) all executive officers and directors of the Company as a group.
<TABLE>
<CAPTION>
NAME AND ADDRESS OF NUMBER OF SHARES PERCENT
BENEFICIAL OWNER(1) BENEFICIALLY OWNED(2) OF CLASS(2)
- ------------------- --------------------- -----------
<S> <C> <C>
Jay Greenwald............................................. 2,709,959(3) 17.0%
Jeffrey L. Schwartz....................................... 2,492,279(4) 15.7
Michael G. Miller......................................... 2,391,823(5) 15.1
Andrew Stollman........................................... 1,120,156(6) 7.0
Edwin A. Levy............................................. 100,000(7) *
767 Third Avenue
New York, NY 10017
Murray L. Skala........................................... 67,750(8) *
750 Lexington Avenue
New York, NY 10022
Lawrence Burstein......................................... 43,750(9) *
245 Fifth Avenue
New York, NY 10016
All executive officers and directors as a group (7
persons)................................................ 6,548,979(10)(11) 40.2
</TABLE>
- ---------------
* Less than 1% of the Company's outstanding shares.
(1) Unless otherwise provided, such person's address is c/o the Company, One
Blue Hill Plaza, Pearl River, New York 10965.
(2) The number of Shares of Common Stock beneficially owned by each person or
entity is determined under the rules promulgated by the Securities and
Exchange Commission (the "Commission"). Under such rules, beneficial
ownership includes any shares as to which the person or entity has sole or
shared voting power or investment power. The percentage of the Company's
outstanding shares is calculated by including among the shares owned by
such person any shares which such person or entity has the right to acquire
within 60 days after February 23, 2000. The inclusion herein of any shares
deemed beneficially owned does not constitute an admission of beneficial
ownership of such shares.
(3) Includes 94,414 shares of Common Stock issuable upon the exercise of an
option held by Mr. Greenwald.
(4) Includes 94,414 shares of Common Stock issuable upon exercise of an option
held by Mr. Schwartz.
(5) Includes 58,615 shares of Common Stock issuable upon exercise of options
held by Mr. Miller.
(6) Includes 72,924 shares of Common Stock issuable upon exercise of an option
held by Mr. Stollman.
(7) Represents shares of Common Stock issuable upon exercise of options held by
Mr. Levy.
(8) Includes 63,750 shares of Common Stock issuable upon exercise of options
held by Mr. Skala.
(9) Represents shares of Common Stock issuable upon exercise of options held by
Mr. Burstein.
(10) Includes 15,085 shares of Common Stock issuable upon the exercise of
options held by Mr. Daniel Harvey, Chief Financial Officer of the Company.
(11) Includes 484,337 shares of Common Stock issuable upon the exercise of
options held by the executive officers and directors of the Company. See
footnotes (3), (4) and (6) through (10), above.
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<PAGE> 35
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Murray L. Skala, a director of the Company, is a partner in the law firm of
Feder, Kaszovitz, Isaacson, Weber, Skala & Bass LLP, the Company's attorneys
("Feder Kaszovitz"). The Company incurred charges of approximately $367,000
during the fiscal year ended November 30, 1999. Feder Kaszovitz continues to
provide services to the Company during its current fiscal year. Its fees are
based primarily on hourly rates. The Company believes that its relationship with
such firm is on terms no less or more favorable to the Company than could have
been obtained from unaffiliated third parties.
33
<PAGE> 36
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(A) FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES.
(i)Financial Statements:
See Index to Financial Statements.
(ii) Financial Statement Schedules:
Schedule of Valuation and Qualifying Accounts and Reserves
All other financial statement schedules have been omitted since either (i)
the schedule or condition requiring a schedule is not applicable or (ii) the
information required by such schedule is contained in the Consolidated Financial
Statements and Notes thereto or in Management's Discussion and Analysis of
Financial Condition and Results of Operation.
(B) REPORTS ON FORM 8-K.
The Company filed no Current Reports on Form 8-K during the fourth quarter
of the fiscal year ended November 30, 1999.
(C) EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
- -------
<S> <C>
3.1.1 Articles of Incorporation of the Company, as amended.(1)
3.1.2 Amendment to the Articles of Incorporation of the
Company.(2)
3.2 Bylaws of the Company.(3)
10.1 Second Amended and Restated 1996 Stock Option Plan.(4)
10.2 Lease of the Company's offices at One Blue Hill Plaza, Pearl
River, New York.(5)
10.3+ Billing and Collection Services Agreement between Federal
Transtel, Inc. and the Company.(5)(P)
10.4.1+ Telecommunications Services Agreement between LCI
International Telecom Corp., d/b/a Qwest Communications
Services, and the Company.(6)(P)
10.4.2+ Amendment to Telecommunications Services Agreement between
LCI International Telecom Corp., d/b/a Qwest Communications
Services, and the Company.(7)
10.4.3+ Amended and Restated Telecommunications Services Agreement
between LCI International Telecom Corp., d/b/a/ Qwest
Communications Services, and the Company.(7)
10.5.1 Agreement regarding 900 Pay-Per-Call Psychic Services
between the Company and Access Resource Services, Inc.(8)
10.5.2 Amendment No. 1 to Exhibit 10.5.1.(8)
10.6.1 Amendment No. 1 to Non-Competition and Right of First
Refusal Agreement between the Company and Steven L.
Feder.(8)
10.6.2+ Amendment No. 1 to Non-Competition and Right of First
Refusal Agreement between the Company and Peter Stolz.(8)
10.6.3+ Amendment No. 1 to Non-Competition and Right of First
Refusal Agreement between the Company and Thomas H.
Lindsey.(8)
10.7.1 Redemption Agreement among the Company, Steven L. Feder and
Defer Limited Partnership.(8)
10.7.2+ Redemption Agreement among the Company, Peter Stolz and the
P. Stolz Family Limited Partnership, L.P.(8)
</TABLE>
34
<PAGE> 37
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
- -------
<S> <C>
10.7.3+ Redemption Agreement among the Company, Thomas H. Lindsey
and Maslin Limited Partnership.(8)
10.8+ Indemnification Agreement among the Company, Access Resource
Services, Inc., Steven L. Feder, Peter Stolz, Thomas H.
Lindsey, Defer Limited Partnership, the P. Stolz Family
Limited Partnership, L.P. and Maslin Limited Partnership.(8)
10.9 Security Agreement between the Company and Access Resource
Services, Inc.(8)
10.10* Marketing Agreement between LCS Golf, Inc. and the Company.
10.11* Proposed Web Site Marketing Agreement between itarget.com,
Inc, and the Company.
10.12* Stock and Warrant Purchase Agreement between SkyMall, Inc.,
and the Company.
21* Subsidiaries of the Company
27* Financial Data Schedule
</TABLE>
- ---------------
* Filed herewith.
+ Confidential treatment requested as to portions of this Exhibit.
(1) Filed as an Exhibit to the Company's Registration Statement on Form 8-A
dated October 23, 1995 and incorporated herein by reference.
(2) Filed as an Exhibit to the Company's Quarterly Report on Form 10-Q for the
fiscal quarter ended August 31, 1998 and incorporated herein by reference.
(3) Filed as an Exhibit to the Company's Registration Statement on Form S-1
dated September 6, 1995 (File No. 33-96632) and incorporated herein by
reference.
(4) Filed as an Exhibit to the Company's Proxy Statement filed with the
Commission, dated August 23, 1999 and incorporated herein by reference.
(5) Filed as an Exhibit to the Company's Annual Report on Form 10-K for the
fiscal year ended November 30, 1996 and incorporated herein by reference.
(6) Filed as an Exhibit to the Company's Annual Report on Form 10-K for the
fiscal year ended November 30, 1997 and incorporated herein by reference.
(7) Filed as an Exhibit to the Company's Annual Report on Form 10-K for the
fiscal year ended November 30, 1998 and incorporated herein by reference.
(8) Filed as an Exhibit to the Company's Current Report on Form 8-K filed with
the Commission on June 4, 1999 and incorporated herein by reference.
(P) Filed by paper with the Commission pursuant to a continuing hardship
exemption.
35
<PAGE> 38
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
Dated: March 10, 2000 Quintel Communications, Inc.
By: /s/ JEFFREY L. SCHWARTZ
------------------------------------
Jeffrey L. Schwartz
Chairman and CEO
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------- ----- ----
<C> <S> <C>
By: /s/ JEFFREY L. SCHWARTZ Chairman and Chief Executive March 10, 2000
---------------------------------------------- Officer (Principal Executive
Jeffrey L. Schwartz Officer)
By: /s/ JAY GREENWALD President, Chief Operating March 10, 2000
---------------------------------------------- Officer and Director
Jay Greenwald
By: /s/ DANIEL HARVEY Chief Financial Officer March 10, 2000
---------------------------------------------- (Principal Financial and
Daniel Harvey Accounting Officer)
By: /s/ ANDREW STOLLMAN Executive Vice President, March 10, 2000
---------------------------------------------- Secretary and Director
Andrew Stollman
By: /s/ MURRAY L. SKALA Director March 10, 2000
----------------------------------------------
Murray L. Skala
By: /s/ EDWIN A. LEVY Director March 10, 2000
----------------------------------------------
Edwin A. Levy
By: /s/ LAWRENCE BURSTEIN Director March 10, 2000
----------------------------------------------
Lawrence Burstein
</TABLE>
36
<PAGE> 39
QUINTEL COMMUNICATIONS, INC.
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AS OF NOVEMBER 30, 1999 AND 1998
AND FOR EACH OF THE THREE YEARS IN THE
PERIOD ENDED NOVEMBER 30, 1999
<PAGE> 40
QUINTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULE
<TABLE>
<CAPTION>
PAGE
----------
<S> <C>
Report of Independent Accountants........................... F-1
Consolidated Balance Sheets as of November 30, 1999 and
1998...................................................... F-2
Consolidated Statements of Operations and Comprehensive
Income (Loss) for the years ended November 30, 1999, 1998
and 1997.................................................. F-3
Consolidated Statements of Shareholders' Equity for the
years ended November 30, 1999, 1998 and 1997.............. F-4
Consolidated Statements of Cash Flows for the years ended
November 30, 1999, 1998 and 1997.......................... F-5
Notes to Consolidated Financial Statements.................. F-6 - F-22
Schedule II -- Valuation and Qualifying Accounts and
Reserves.................................................. S-1
</TABLE>
<PAGE> 41
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
Quintel Communications, Inc.:
In our opinion, the consolidated financial statements listed in the
accompanying index present fairly, in all material respects, the financial
position of Quintel Communications, Inc. and its Subsidiaries (the "Company") at
November 30, 1999 and 1998, and the results of their operations and
comprehensive income (loss) and their cash flows for each of the three years in
the period ended November 30, 1999 in conformity with accounting principles
generally accepted in the United States. In addition, in our opinion, the
financial statement schedule listed in the accompanying index presents fairly,
in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements. These financial
statements and financial statement schedule are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
PRICEWATERHOUSECOOPERS LLP
Melville, New York
February 28, 2000
F-1
<PAGE> 42
QUINTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF NOVEMBER 30, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 7,939,567 $ 2,123,630
Marketable securities..................................... 36,511,925 15,019,233
Accounts receivable, trade................................ 5,711,967 31,230,579
Deferred income taxes..................................... 2,778,329 10,590,587
Due from related parties.................................. 550,112 754,089
Prepaid expenses and other current assets................. 688,314 2,151,270
----------- -----------
Total current assets................................... 54,180,214 61,869,388
Property and equipment, at cost, net of accumulated
depreciation.............................................. 816,533 1,143,901
Long-term investments, at cost.............................. 2,097,500 --
Deferred income taxes....................................... 183,032 1,399,855
----------- -----------
Total assets........................................... $57,277,279 $64,413,144
=========== ===========
LIABILITIES
Current liabilities:
Accounts payable.......................................... $ 1,793,631 $ 4,453,663
Accrued expenses.......................................... 5,548,876 6,897,246
Reserve for customer chargebacks.......................... 4,618,108 15,494,138
Due to related parties.................................... 368,176 140,756
Income taxes payable...................................... 4,365,104 745,197
Deferred income taxes..................................... 697,106 --
----------- -----------
Total current liabilities.............................. 17,391,001 27,731,000
Total liabilities...................................... 17,391,001 27,731,000
----------- -----------
Commitments and contingencies (Notes 6 and 8)
SHAREHOLDERS' EQUITY
Preferred stock -- $.001 par value; 1,000,000 shares
authorized; none issued and outstanding...................
Common stock -- $.001 par value; authorized 50,000,000
shares; issued and outstanding 15,469,590 shares and
16,679,746 shares, respectively........................... 15,469 16,679
Additional paid-in capital.................................. 37,482,479 38,955,275
Retained earnings (deficit)................................. 3,544,568 (379,292)
Accumulated other comprehensive income (loss)............... 1,045,662 (10,488)
Common stock held in Treasury, at cost, 942,853 and 773,066
shares, respectively...................................... (2,201,900) (1,900,030)
----------- -----------
Total shareholders' equity............................. 39,886,278 36,682,144
----------- -----------
Total liabilities and shareholders' equity............. $57,277,279 $64,413,144
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-2
<PAGE> 43
QUINTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
FOR THE YEARS ENDED NOVEMBER 30, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
----------- ------------ ------------
<S> <C> <C> <C>
Net revenue....................................... $42,839,840 $ 94,690,251 $191,374,936
Cost of sales..................................... 26,952,097 80,037,115 149,821,363
----------- ------------ ------------
Gross profit................................. 15,887,743 14,653,136 41,553,573
Selling, general and administrative expenses...... 10,881,156 14,356,892 18,880,769
Special charges................................... 19,692,543
----------- ------------ ------------
Income (loss) from operations................ 5,006,587 (19,396,299) 22,672,804
Interest expense.................................. (70,701) (186,218) (80,763)
Other income, primarily interest.................. 1,446,494 2,212,435 1,841,356
----------- ------------ ------------
Income (loss) before provision for income
taxes...................................... 6,382,380 (17,370,082) 24,433,397
Provision (benefit) for income taxes.............. 2,458,520 (417,464) 10,069,616
----------- ------------ ------------
Net income (loss)............................ 3,923,860 (16,952,618) 14,363,781
----------- ------------ ------------
Other comprehensive income (loss), net of tax:
Unrealized gain (loss) from available for sale
securities, net of income taxes of $704,100
for 1999, ($4,337) for 1998 and ($9,590) for
1997......................................... 1,056,150 (6,505) (14,264)
----------- ------------ ------------
Comprehensive income (loss).................. $ 4,980,010 $(16,959,123) $ 14,349,517
=========== ============ ============
Basic income (loss) per share:
Net income (loss)............................... $ 0.26 $ (1.00) $ 0.77
----------- ------------ ------------
Weighted average shares outstanding............. 15,119,610 17,034,531 18,560,064
----------- ------------ ------------
Diluted income (loss) per share:
Net income (loss)............................... $ 0.26 $ (1.00) $ 0.76
----------- ------------ ------------
Weighted average shares outstanding............. 15,241,662 17,034,531 18,878,790
=========== ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 44
QUINTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED NOVEMBER 30, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
ACCUMULATED
OTHER
COMMON STOCK ADDITIONAL RETAINED TREASURY STOCK COMPREHENSIVE
-------------------- PAID-IN EARNINGS ------------------------- INCOME
SHARES AMOUNTS CAPITAL (DEFICIT) SHARES AMOUNT (LOSS)
---------- ------- ----------- ----------- ---------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, NOVEMBER 30,
1996...................... 18,452,368 $18,452 $37,406,050 $10,300,150 $ 10,281
Common stock issued:
Stock option exercises.... 152,797 153 837,597
Warrant exercises......... 44,182 44 364,458
Tax benefit from exercise
of stock options.......... 419,595
Unrealized (losses) on
available for sale
securities................ (14,264)
Net income for the year.... 14,363,781
---------- ------- ----------- ----------- ---------- ------------ ----------
BALANCE, NOVEMBER 30,
1997...................... 18,649,347 18,649 39,027,700 24,663,931 (3,983)
Unrealized (losses) on
available for sale
securities................ (6,505)
Purchase of common stock,
held in treasury, at
cost...................... 2,742,667 $(10,065,030)
Retirement of stock held in
treasury.................. (1,969,601) (1,970) (72,425) (8,090,605) (1,969,601) 8,165,000
Net (loss) for the year.... (16,952,618)
---------- ------- ----------- ----------- ---------- ------------ ----------
BALANCE, NOVEMBER 30,
1998...................... 16,679,746 16,679 38,955,275 (379,292) 773,066 (1,900,030) (10,488)
Unrealized gains on
available for sale
securities................ 1,056,150
Stock option exercises..... 89,844 90 157,137
Tax benefit from exercise
of stock options.......... 123,767
Purchase of common stock,
held in treasury, at
cost...................... 169,787 (301,870)
Purchase and retirement of
common stock.............. (1,300,000) (1,300) (1,753,700)
Net income for the year.... 3,923,860
---------- ------- ----------- ----------- ---------- ------------ ----------
BALANCE, NOVEMBER 30,
1999...................... 15,469,590 $15,469 $37,482,479 $ 3,544,568 942,853 $ (2,201,900) $1,045,662
========== ======= =========== =========== ========== ============ ==========
<CAPTION>
TOTAL
SHAREHOLDERS'
EQUITY
-------------
<S> <C>
BALANCE, NOVEMBER 30,
1996...................... $47,734,933
Common stock issued:
Stock option exercises.... 837,750
Warrant exercises......... 364,502
Tax benefit from exercise
of stock options.......... 419,595
Unrealized (losses) on
available for sale
securities................ (14,264)
Net income for the year.... 14,363,781
-----------
BALANCE, NOVEMBER 30,
1997...................... 63,706,297
Unrealized (losses) on
available for sale
securities................ (6,505)
Purchase of common stock,
held in treasury, at
cost...................... (10,065,030)
Retirement of stock held in
treasury..................
Net (loss) for the year.... (16,952,618)
-----------
BALANCE, NOVEMBER 30,
1998...................... 36,682,144
Unrealized gains on
available for sale
securities................ 1,056,150
Stock option exercises..... 157,227
Tax benefit from exercise
of stock options.......... 123,767
Purchase of common stock,
held in treasury, at
cost...................... (301,870)
Purchase and retirement of
common stock.............. (1,755,000)
Net income for the year.... 3,923,860
-----------
BALANCE, NOVEMBER 30,
1999...................... $39,886,278
===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 45
QUINTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED NOVEMBER 30, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
------------- ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)............................. $ 3,923,860 $(16,952,618) $ 14,363,781
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities:
Depreciation and amortization.............. 249,073 1,284,039 2,620,146
Reserve for customer chargebacks........... (10,876,030) (22,701,976) 18,115,211
Deferred income taxes...................... 9,037,569 (2,471,838) (2,552,328)
Loss on disposal of fixed assets........... 255,783 -- --
Special charges............................ -- 19,692,543 --
Changes in assets and liabilities of
business:
Accounts receivable...................... 25,518,612 15,080,381 (28,280,877)
Due from related parties................. 203,977 (516,604) 406,683
Prepaid expenses and other current
assets................................ 1,462,956 1,729,104 (1,331,703)
Accounts payable......................... (2,660,032) (200,199) 2,088,479
Income taxes payable..................... 3,743,674 745,197 (4,131,303)
Accrued expenses......................... (1,404,453) (1,059,062) 4,917,798
Due to related parties................... 227,420 (838,649) (499,110)
------------- ------------ ------------
Net cash provided by (used in) operating
activities............................ 29,682,409 (6,209,682) 5,716,777
------------- ------------ ------------
Cash flows from investing activities:
Purchases of securities....................... (149,802,510) (72,275,879) (65,649,246)
Proceeds from sales of securities............. 130,054,586 81,976,511 55,500,000
Capital expenditures.......................... (436,296) (1,366,007) (847,053)
Purchases of long term investments............ (2,097,500) -- --
Proceeds from the disposal of fixed assets.... 258,808 -- --
------------- ------------ ------------
Net cash (used in) provided by investing
activities............................ (22,022,912) 8,334,625 (10,996,299)
------------- ------------ ------------
Cash flows from financing activities:
Proceeds from stock options exercised......... 213,310 -- 837,750
Proceeds from warrants exercised.............. -- -- 364,502
Purchase of common stock...................... (2,056,870) (10,065,030) --
------------- ------------ ------------
Net cash (used in) provided by financing
activities............................ (1,843,560) (10,065,030) 1,202,252
------------- ------------ ------------
Net increase (decrease) in cash and cash
equivalents................................... 5,815,937 (7,940,087) (4,077,270)
Cash and cash equivalents, beginning of year.... 2,123,630 10,063,717 14,140,987
------------- ------------ ------------
Cash and cash equivalents, end of year.......... $ 7,939,567 $ 2,123,630 $ 10,063,717
============= ============ ============
Supplemental disclosures:
Cash paid during the year for:
Interest................................... $ 70,701 $ 186,218 $ 80,763
Income tax (refunds)....................... (11,675,498) 910,000 13,613,887
</TABLE>
During fiscal 1999 and 1997, options and warrants for shares of common
stock were exercised by certain employees, directors and an underwriter. A tax
benefit of $123,767 and $419,595 in fiscal 1999 and 1997, respectively, was
recorded as an increase to additional paid-in capital and a reduction to income
taxes currently payable. No options and warrants were exercised in fiscal 1998.
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 46
QUINTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
During the fiscal year ended November 30, 1999, the Company began the
process of redefining itself as an on-line direct marketing provider, of
consumer products and services, within the Internet industry. The Company's
future plans and business strategy call for its Internet based E-commerce
segment to be its sole operating focus, and the significant source of all future
revenues. Prior to the commencement of this Internet initiative, all of the
Company's products and services were sold with the use of conventional marketing
channels, specifically television broadcast media, telemarketing, direct-mail
and print advertising. Our Internet initiative, and its underlying business plan
and strategy, has caused the Company to terminate the marketing of its legacy
products and services. Such legacy products and services consisted of (i) voice
mail services and psychic related pay-per-call and club products and services
that were previously conducted in our LEC Billed products and services segment,
and (ii) residential long distance customer acquisition services, as well as
prepaid and conventional cellular phone customer acquisition services that were
previously conducted in our Customer Acquisition services segment.
Principles of Consolidation and Presentation
The consolidated financial statements of the Company include the accounts
of its wholly-owned subsidiaries. As all investments represent ownership
interests of less than 20% and do not result in control or provide significant
influence. All significant intercompany transactions and balances have been
eliminated in consolidation. Certain amounts for prior periods have been
reclassified to conform with current year presentations.
Revenue recognition
Revenue from the Company's legacy telecommunication products and services,
which have historically consisted of (i) various enhanced telephone services,
principally voice mail services and (ii) psychic theme-related club 900
products, is recognized, net of an estimated provision for customer chargebacks
(which include refunds and credits) as the related customers automatically renew
their monthly memberships. The legacy telecommunication product and service net
revenue has also included the Company's telephone entertainment services,
principally 900 pay-per-call activities, up to and including May 31, 1998 (see
Note 7). During such time, the Company recognized revenues from the telephone
entertainment services at the time the customer initiated a billable
transaction.
The Company, where applicable in the case of its legacy telecommunication
products and services, estimates the reserve for customer chargebacks monthly,
based on updated chargeback history, with any resulting adjustments being
charged against revenues. The Company estimates chargebacks and other provisions
for new products and services, without a previous operating history, on
currently available experience with similar products and services, and adjusts
such estimates as further information becomes available. Since reserves are
established prior to the periods in which chargebacks are actually expended, the
Company's revenues may be adjusted in later periods in the event that the
Company's incurred chargebacks vary from the estimated amounts. For the years
ended November 30, 1999, 1998 and 1997, the provision for chargebacks was
$11,968,645, $56,496,612, and $103,597,803, respectively.
The Company's customer acquisition services, which principally consist of
the residential long distance customer acquisition programs are recorded upon
the achievement of certain events particular to the corresponding program's
fulfillment liability. Subsequent to the delivery of the initial sales record to
the respective long distance carrier, the Company may be required to provide to
the customer certain products and services (fulfillment liability), such as
prepaid cellular telephones and/or complimentary airline ticket redemption
vouchers. These costs are estimated and accrued, as a component of marketing
expense, at the
F-6
<PAGE> 47
QUINTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
time the associated revenues are recorded. At November 30, 1999 and 1998,
accrued expenses included approximately $4.1 million and $1.4 million of such
costs, respectively. This estimation is adjusted to actual amounts in subsequent
periods. There are no chargebacks from such programs.
During the year ended November 30, 1999, the Company had recognized an
immaterial amount of revenue from its Internet related activities, and treated
such recognition based on collection. In subsequent fiscal periods, the Company
will recognize revenues from its Internet related activities upon the completion
of all events relative to the particular activity, including delivery of
products or services, delivery of advertising impressions, recording of all
product costs, discounts and fulfillment obligations, and the recording of all
other variable direct costs associated with completing the Company's obligation
to the customer or vendor. Such revenue recognition will be subject to
provisions based on the probability of collection of the particular underlying
revenue stream.
Concentration of credit risk
Financial instruments that potentially subject the Company to concentration
of credit risk consist principally of cash and cash equivalents, marketable
securities and accounts receivable.
The Company has historically invested a portion of its excess cash in debt
instruments and has maintained guidelines relative to diversification yielding
safety and liquidity. During the year ended November 30, 1999, the Company has
invested approximately $3.9 million, at cost, in equity based marketable
securities. At November 30, 1999, these marketable securities are classified as
available for sale securities, and accounted for approximately $5.6 million, or
approximately 15.3% of the market value of Company's total marketable
securities. At November 30, 1999 and 1998, the Company's marketable securities
were comprised primarily of direct obligations of the U.S. government and other
debt instruments, all of short-term maturities, and as such were insulated from
material market risk.
The Company's collections of its legacy telecommunication products and
services billings are received through three unrelated, unaffiliated service
bureaus. In conjunction with servicing the accounts receivable, the service
bureaus remit amounts based on eligible accounts receivable and withhold certain
cash receipts as a reserve. As a result, the Company's exposure to the
concentration of credit risk primarily relates to all collections on behalf of
the Company by these service bureaus.
Cash balances are held principally at three financial institution and may,
at times, exceed insurable amounts. The Company believes it mitigates its risks
by investing in or through major financial institutions. Recoverability is
dependent upon the performance of the institutions.
Transactions With Major Customers
Revenues from one long distance carrier amounted to 72% of total revenues
during fiscal 1999 and 20% during fiscal 1998. The Company commenced operations
with this carrier in fiscal 1998. Accounts receivable from such carrier was
approximately $1,020,000 and $8,728,000 at November 30, 1999 and 1998,
respectively.
Cash and cash equivalents
All short-term investments with an original maturity of three months or
less are considered to be cash equivalents.
Marketable securities
The Company accounts for its marketable securities using Statement of
Financial Accounting Standards No. 115 "Accounting for Certain Investments in
Debt and Equity Securities." The Company's marketable securities consist of
government and federal agency obligations, corporate commercial paper, real
estate
F-7
<PAGE> 48
QUINTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
investment trusts ("REITs") and an equity security, all of which are held for
varying and indefinite periods of time, pursuant to maturity dates, market
conditions and other factors. It is the Company's intent to maintain a liquid
portfolio to take advantage of investment opportunities; therefore, all
marketable securities are considered to be available for sale and are classified
as current assets. Accordingly, such securities are stated at fair value, with
unrealized gains and losses, net of estimated tax effects, included in other
comprehensive income (loss) as a separate component of shareholders' equity,
until realized. Realized gains and losses on such marketable securities are
included in earnings and are derived using the specific identification method
for determining the cost of securities.
Property and equipment
Property and equipment are stated at cost and are depreciated using the
straight-line method over a five to seven year useful life depending on the
nature of the asset. Leasehold improvements are amortized over the life of the
improvement or the term of the lease, whichever is shorter. Expenditures for
maintenance and repairs are expensed as incurred while renewals and betterments
are capitalized.
Upon retirement or disposal, the asset cost and related accumulated
depreciation and amortization are eliminated from the respective accounts and
the resulting gain or loss, if any, is included in the results of operations for
the period.
Long-lived assets
If events or changes in circumstances indicate that the carrying amount of
a long-lived asset may not be recoverable, the Company estimates: (a) the future
cash flows expected to result from the use of such asset over its remaining
useful life and (b) the potential cash flows realizable from its possible
disposition. If the sum of the expected future cash flows (undiscounted and
without interest charges) is less than the carrying amount of the long-lived
asset, an impairment loss is recognized as a difference between carrying amount
and the future discounted cash flow (See Note 9).
Income taxes
The Company recognizes deferred tax liabilities and assets based on the
expected future tax consequences of events that have been included in the
financial statements or tax returns. Deferred tax liabilities and assets are
determined based on the difference between the financial statement and tax basis
of assets and liabilities using enacted tax rates in effect for the year in
which the differences are expected to reverse. Valuation allowances are provided
against assets which are not likely to be realized (see Note 5).
Advertising and marketing expenses
The Company's advertising and marketing expenses have historically
consisted of television, broadcast media and related production costs,
telemarketing, direct mail and print media, with all such costs being charged to
operations at the time the related advertising and marketing occurred. Total
advertising and marketing expenses by segment for fiscal 1999, 1998, and 1997
were as follows:
<TABLE>
<CAPTION>
CONSOLIDATED ADVERTISING AND MARKETING COSTS
--------------------------------------------
YEAR ENDED NOVEMBER 30,
--------------------------------------------
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
LEC Billed products and services............ $ 402,492 $24,732,314 $66,437,263
Customer Acquisition services............... 19,534,539 22,081,230 14,673,370
E-commerce, Corporate and other............. 34,134 277,924 1,715,693
----------- ----------- -----------
Consolidated totals....................... $19,971,165 $47,091,468 $82,826,326
=========== =========== ===========
</TABLE>
F-8
<PAGE> 49
QUINTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Earnings per share
Earnings per share are calculated pursuant to Financial Accounting
Standards Board Statement No. 128 "Earnings per Share" ("SFAS No. 128").
Comprehensive Income
As of December 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS No. 130").
SFAS No. 130 establishes new standards for reporting and displaying statements;
however, the adoption of SFAS No. 130 has no impact on the Company's net income
and stockholders' equity. SFAS No. 130 requires unrealized gains and losses on
the Company's marketable securities to be reported as a component of
"Comprehensive income". Prior to adoption of this statement, such gains and
losses were reported separately in stockholders' equity. Prior year financial
statements have been reclassified to conform to the requirements of SFAS No.
130.
Segment Information
The Company adopted Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information" ("SFAS No.
131") effective November 30, 1999. This statement establishes standards for the
reporting of information about operating segments in annual and interim
financial statements and requires restatement of prior year information.
Operating segments are defined as components of an enterprise for which separate
financial information is available that is evaluated regularly by the chief
operating decision maker(s) in deciding how to allocate resources and in
assessing performance. SFAS No. 131 also requires disclosures about products and
services, geographic areas and major customers. The adoption of SFAS No. 131 did
not affect results of operations or financial position but did affect the
disclosure of segment information as presented in Note 12.
Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires the Company's
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates. The Company's most significant estimates relate to the reserve for
customer chargebacks, recoverability of long-lived assets, the realizability of
deferred tax assets, fulfillment accrual for customer acquisition costs and
valuations relative to long-term investments, in privately held companies, whose
market values are not readily determinable.
2. RELATED PARTY TRANSACTIONS
In prior fiscal periods the Company had purchased various mailing lists and
design, copyrighting and artistic development services from related entities
owned by certain of the Company's officers/shareholders. The agreements required
the Company to pay fees equal to 20% of rental revenues and a management fee of
10%, plus any fees in connection with processing and mailing lists. During
fiscal 1998 and 1997, costs of approximately $10,000 and $267,000, respectively,
were incurred by the Company for such services. During fiscal 1998, the related
entities were sold, thereby dissolving the related party relationship as of
November 30, 1998.
The Company incurred approximately $10,000, $90,800 and $107,000,
respectively, during fiscal 1999, 1998 and 1997, in accounting fees to a firm
having a member who was also a director of the Company up until the time of his
resignation in November 1999. In addition, the Company incurred approximately
$367,000,
F-9
<PAGE> 50
QUINTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
$431,000 and $372,000, respectively, during fiscal 1999, 1998 and 1997, in legal
fees to a firm having a member who is also a director of the Company.
The Company incurred approximately $125,000, $227,000 and $206,000 in
compensation expense during the fiscal years ended November 30, 1999, 1998 and
1997, respectively, related to an employment agreement that was executed in
connection with a prior year acquisition, consummated in fiscal 1996.
Simultaneous with this acquisition, such principal shareholder was elected as a
director of the Company and served in such capacity until his resignation in
January 1999. This employment agreement was terminated effective June 1, 1999,
commensurate with the Company's termination of its 900 entertainment services
business (See Note 7). The principal shareholder of this acquired entity was
also the principal shareholder of Psychic Readers Network, currently known as
Access Resource Services, Inc. ("ARS"). ARS had previously supplied the Company
with substantially all if its live psychic operators during the periods in which
the Company was most dependent on 900 entertainment services, principally from
inception to May 31, 1998. For the years ended November 30, 1999, 1998 and 1997,
the Company paid aggregate fees for these lives psychic services of
approximately $1,019,000, $7,023,000 and $24,300,000, respectively, under an
agreement with ARS, which was terminated in June of 1999 (See Note 7).
The Company received commissions of approximately $365,000, $685,000 and
$830,000 during fiscal 1999, 1998 and 1997, respectively, from ARS for
purchasing television media time on their behalf. As of November 30, 1998, the
Company had a receivable of $578,000, relating to such commission activity.
Effective June 1, 1999, pursuant to the Company's termination of its 900
entertainment services business, ARS assumed the responsibility for all media
buying personnel, therefore such revenue ceased to continue from that time and
the corresponding receivable was collected (See Note 7).
The Company had a consulting agreement with a director/shareholder, which
expired on November 30, 1998. Under the terms of such agreement, the
director/shareholder provided services in connection with identification and
engagement of celebrities to endorse the Company's services, engagement of
independent producers to produce commercials and infomercials and the
development of new entertainment services. The Company incurred approximately
$113,000, $151,000 and $137,000 in expense relating to this agreement in 1999,
1998 and 1997, respectively. Although the consulting agreement has expired, the
director/shareholder continued to provide consulting services to the Company.
Such arrangements have not been formally agreed to and were available for
termination by either party at will. Such consulting director/shareholder
resigned from all Company positions in January 2000.
On March 13, 1998, the Company purchased from a director of the Company,
1,969,601 shares of the Company's common stock for an aggregate purchase price
of $8,165,000, which was at a discount from the market value at the date of
transaction. At the same time, the seller's employment by the Company was
terminated and she resigned from all directorships and offices she had held at
the Company or any affiliate thereof. The shares reacquired were subsequently
retired.
F-10
<PAGE> 51
QUINTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. MARKETABLE SECURITIES
The carrying amount of the Company's marketable securities is shown in the
table below:
<TABLE>
<CAPTION>
NOVEMBER 30, 1999
----------------------------------------------------------
1999 1998
--------------------------- ---------------------------
COST MARKET VALUE COST MARKET VALUE
----------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
Available for sale securities:
U.S. government
obligations.............. $ 2,542,478 $ 2,540,032 $15,036,713 $15,019,233
REITs....................... 853,394 726,170 -- --
Corporate commercial
paper.................... 28,373,689 28,370,726 -- --
Equity security............. 3,000,000 4,874,997 -- --
----------- ----------- ----------- -----------
Total.................... $34,769,561 $36,511,925 $15,036,713 $15,019,233
=========== =========== =========== ===========
</TABLE>
Marketable securities shown in the above table with scheduled maturities
within one year were $30,916,167 and $15,036,713 for fiscal 1999 and fiscal
1998, respectively. At November 30, 1999, included in the net unrealized gain of
$1,742,364 are gross unrealized loss of $398,348.
Proceeds, realized gains, and realized losses from sales of securities
classified as available for sale for fiscal year 1999, 1998 and 1997 consisted
of the following:
<TABLE>
<CAPTION>
1999 1998 1997
------------ ----------- -----------
<S> <C> <C> <C>
Proceeds from sales of securities.......... $130,054,586 $81,976,511 $55,500,000
Gross realized gains....................... 64,718 124,822 --
Gross realized losses...................... (559,069) -- --
</TABLE>
4. PROPERTY AND EQUIPMENT
Property and equipment for the years ended November 30, 1999 and 1998
consists of the following:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Furniture and fixtures...................................... $ 173,929 $ 314,536
Computers and equipment..................................... 1,091,740 1,295,747
Leasehold improvements...................................... 33,113 51,146
---------- ----------
1,298,782 1,661,429
Less, accumulated depreciation and amortization........... 482,249 517,528
---------- ----------
$ 816,533 $1,143,901
========== ==========
</TABLE>
Depreciation and amortization expense for the years ended November 30,
1999, 1998 and 1997 was approximately $249,000, $302,000 and $150,000,
respectively.
F-11
<PAGE> 52
QUINTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. INCOME TAXES
The provision (benefit) for income taxes consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30,
----------------------------------------
1999 1998 1997
---------- ----------- -----------
<S> <C> <C> <C>
Federal:
Current.................................... $ 365,543 $ -- $10,201,378
Deferred................................... 1,813,018 (2,593,444) (1,761,002)
---------- ----------- -----------
2,178,561 (2,593,444) 8,440,376
---------- ----------- -----------
State:
Current.................................... 342,367 525,000 2,152,177
Deferred................................... (62,408) 1,650,980 (522,937)
---------- ----------- -----------
279,959 2,175,980 1,629,240
---------- ----------- -----------
Total provision......................... $2,458,520 $ (417,464) $10,069,616
========== =========== ===========
</TABLE>
The following is a reconciliation of the income tax expense computed using
the statutory federal income tax rate to the actual income tax expense and its
effective income tax rate:
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30,
----------------------------------------
1999 1998 1997
---------- ----------- -----------
<S> <C> <C> <C>
Income tax expense (benefit) at federal
statutory rate............................. $2,170,008 $(6,079,529) $ 8,551,689
State income taxes, net of federal income tax
benefit.................................... 184,774 341,250 1,059,006
Goodwill amortization........................ -- 3,623,519 179,636
Valuation allowance.......................... -- 1,679,082 --
Other, individually less than 5%............. 103,738 18,214 279,285
---------- ----------- -----------
$2,458,520 $ (417,464) $10,069,616
========== =========== ===========
</TABLE>
F-12
<PAGE> 53
QUINTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The components of net deferred tax assets are as follows:
<TABLE>
<CAPTION>
NOVEMBER 30,
--------------------------
1999 1998
----------- -----------
<S> <C> <C>
Deferred tax assets:
Current:
Accrued expenses and reserves not currently
deductible......................................... $ 2,514,414 $ 3,401,790
Net operating loss................................... -- 7,188,797
Capital loss carryforward............................ 263,915 --
----------- -----------
Total current assets............................... 2,778,329 10,590,587
----------- -----------
Noncurrent:
Fixed assets and intangibles............................ 120,624 2,006,164
Net operating loss...................................... 1,741,490 1,072,773
Valuation allowance..................................... (1,679,082) (1,679,082)
----------- -----------
Total noncurrent assets............................ 183,032 1,399,855
----------- -----------
Total assets....................................... 2,961,361 11,990,442
----------- -----------
Deferred tax liabilities:
Current:
Other................................................ 697,106 --
----------- -----------
Net deferred tax assets............................ $ 2,264,255 $11,990,442
=========== ===========
</TABLE>
A $1,679,082 valuation allowance, primarily for state tax net operating
losses, which can not be carried back by statutes, has reduced the deferred tax
assets to an amount, which the Company believes is more likely than not to be
realized.
The Company has approximately $1.7 million of state net operating losses
expiring through 2014.
6. REGULATORY ISSUES AND OTHER RISK CONSIDERATIONS
On September 30, 1998, a letter was received from the Division of Marketing
Practices of the Federal Trade Commission (the "FTC") initiating an inquiry into
whether the Company has engaged in any unlawful marketing practices. In response
to the letter, documents were supplied to the Division by the Company and the
Company's regulatory counsel has held informational meetings with Staff of the
FTC. The Company's regulatory counsel has been notified by the Staff of the FTC
that the investigation has been terminated and no action would be instituted
against the Company.
In recent months, the Company's regulatory counsel has responded to
inquiries or subpoenas from attorneys general of Vermont, Pennsylvania and
Kansas concerning the Company's marketing practices. In the more than seven
months since the information was sent to Kansas, there has been no follow-up.
Similarly, information was sent to Pennsylvania more than four months ago.
Recently, Pennsylvania requested additional information, but there has been no
other action by that office. The information was furnished to Vermont only
recently, and the Company continues to discuss Vermont's request for additional
data.
The Company recently has been asked to enter into a voluntary cease and
desist agreement with the Montgomery County (Maryland) Department of Housing and
Consumer Affairs. The genesis of this request was certain consumer complaints
about 900 services and club products dating from 1997 and 1998 that were
addressed at that time. In early 1999, that office requested additional
information from the Company, but when the Company asked to discuss the request,
the county office did not respond and was not in contact until early 2000, when
it presented the cease and desist agreement. The Company has advised the county
office that
F-13
<PAGE> 54
QUINTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
it has not engaged in 900 or other psychic services since May 1998, and has
asked the county office to reconsider its request that the Company enter into
any agreement.
To date, the Company has not been subject to any enforcement actions by any
regulatory authority. In the event the Company is found to have failed to comply
with applicable laws and regulations, the Company could be subject to civil
remedies, including substantial fines, penalties and injunctions, as well as
possible criminal sanctions, which would have a material adverse effect on the
Company.
7. NEW LAUDERDALE AND THE CESSATION OF 900 PAY-PER-CALL BUSINESS
In December 1994, the Company entered into an agreement with ARS, an
unrelated entity at that time, to establish a joint venture known as New
Lauderdale, L.C. New Lauderdale operated "900" entertainment services. On
September 10, 1996, the Company acquired the remaining 50% interest in New
Lauderdale. The acquisition was accounted for using the purchase method of
accounting and, accordingly, the purchase price was allocated to the assets
purchased based upon the fair values at the date of acquisition. As a result,
approximately $23,159,000 of the purchase price was allocated to goodwill,
customer lists and other intangibles which were being amortized on a
straight-line basis over a period from 1 to 15 years (See Note 9).
In accordance with the Company's business strategy of separating itself
from the 900 Pay-Per-Call business which is reported as a component of LEC
Billed products and services (see Note 12), on June 4, 1999, the Company entered
into an agreement (the "ARS Agreement") with ARS, pursuant to which the Company
agreed to cease conducting, marketing, advertising or promoting certain "stand
alone" 900 Pay-Per-Call Psychic Services described in the ARS Agreement (the
"900 Psychic Services") directly or indirectly through any affiliate, until
January 17, 2001. In addition, the Company agreed to cease its media buying
operations which it conducted under the name "Quintel Media" and ARS agreed to
assume responsibility for the "Quintel Media" employees and for the lease of the
premises used by "Quintel Media" in Fort Lauderdale, Florida, and to acquire the
computer equipment and other furniture, fixtures and leasehold improvements used
by "Quintel Media" at such premises. The ARS Agreement does not prohibit the
Company from offering psychic and psychic-related services, provided such
services are (a) not billed to the consumer as a "900" telephone billing record
or (b) offered as a free premium with or adjunct to the marketing or offering of
other products and services.
In consideration for the Company's agreement to suspend the offering of the
900 Psychic Services (and for the other covenants made and obligations
undertaken by the Company under the ARS Agreement), ARS and any of its
affiliates offering 900 Pay-Per-Call Psychic Services agreed to pay to the
Company certain royalty fees for each billable minute generated by 900
Pay-Per-Call Psychic Services on ARS' (or any of its affiliates') 900 numbers
and on ARS' (or any of its affiliates') billings to membership clubs from and
after the consummation of the transactions contemplated by the ARS Agreement and
until January 17, 2001, all as more fully described in the ARS Agreement.
The ARS Agreement was effective as of May 31, 1999. During the fiscal year
ended November 30, 1999, the Company has recorded royalty revenue under the
terms of the ARS Agreement amounting to $2.8 million, all of which has been
collected as of the date of this filing. Additionally, during the fiscal year
1999 the Company has received $258,808 in consideration for the sale of the
media department assets discussed above.
Amortization expense was $982,173 and $2,470,476 for the years ended
November 30, 1998 and 1997, respectively. During fiscal 1998, the Company
determined that the intangibles were impaired (See Note 9).
F-14
<PAGE> 55
QUINTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. COMMITMENTS AND CONTINGENCIES
Leases
The Company is obligated under a noncancelable real property operating
lease agreement that expires in fiscal 2006. Future minimum rents consist of the
following at November 30, 1999:
<TABLE>
<S> <C>
2000..................................................... $ 262,500
2001..................................................... 287,500
2002..................................................... 322,500
2003..................................................... 322,500
2004..................................................... 322,500
Thereafter............................................... 537,500
----------
$2,055,000
==========
</TABLE>
The leases contain escalation clauses with respect to real estate taxes and
related operating costs. The accompanying financial statements reflect rent
expense on a straight-line basis over the term of the lease as required by
generally accepted accounting principles. Rent expense was $312,000, $522,422
and $383,867 for fiscal 1999, 1998 and 1997, respectively.
Employment Agreements
The Company had executed employment agreements, which expired on November
30, 1998, with certain executive officers of the Company. In the event the
Company achieved certain pre-tax earnings targets, the Company may have granted
bonuses to such persons, subject to approval of the Compensation Committee of
the Board of Directors, in an aggregate amount not to exceed 5% of pre-tax
earnings for such year. Such bonuses amounted to approximately $1,305,000 at
November 30, 1997. No bonuses were granted during fiscal 1998. Each of the
individuals have agreed to continue to work as employees-at-will until a new
agreement is approved by the Board of Directors.
Litigation
On or about May 4, 1998, a complaint entitled "Joseph Chalverus, on behalf
of himself and all others similarly situated v. Quintel Entertainment, Inc.,
Jeffrey L. Schwartz and Daniel Harvey" was filed in the United States District
Court for the Southern District of New York; subsequently, a complaint entitled
"Richard M. Woodward, on behalf of himself and all others similarly situated v.
Quintel Entertainment, Inc., Jeffrey L. Schwartz and Daniel Harvey" was filed in
that same court, as was a complaint entitled "Dr. Michael Title, on behalf of
himself and all others similarly situated v. Jeffrey L. Schwartz, Jay Greenwald,
Claudia Newman Hirsch, Andrew Stollman, Mark Gutterman, Steven L. Feder, Michael
G. Miller, Daniel Harvey and Quintel Entertainment, Inc." (collectively, the
"Complaints"). In addition to the Company, the defendants named in the
Complaints are present and former officers and directors (the "Individual
Defendants"). The plaintiffs seek to bring the actions on behalf of a purported
class of all persons or entities who purchased shares of the Company's Common
Stock from July 15, 1997 through October 15, 1997 and who were damaged thereby,
with certain exclusions. The Complaints allege violations of Sections 10(b) and
20 of the Securities Exchange Act of 1934, and allege that the defendants made
misrepresentations and omissions concerning the Company's financial results,
operations and future prospects, in particular, relating to the Company's
reserves for customer chargebacks and its business relationship with AT&T. The
Complaints allege that the alleged misrepresentations and omissions caused the
Company's Common Stock to trade at inflated prices, thereby damaging plaintiffs
and the members of the purported class. The amount of damages sought by
plaintiffs and the purported class has not been specified.
F-15
<PAGE> 56
QUINTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
On September 18, 1998, the District Court ordered that the three actions be
consolidated, appointed a group of lead plaintiffs in the consolidated actions,
approved the lead plaintiffs selection of counsel for the purported class in the
consolidated actions, and directed the lead plaintiffs to file a consolidated
complaint. The consolidated and amended class action complaint ("Consolidated
Complaint") which has been filed asserts the same legal claims based on
essentially the same factual allegations as did the Complaints. On February 19,
1999, the Company and the Individual Defendants filed a motion to dismiss the
Consolidated Complaint. The District Court has denied the motion to dismiss. The
Company and the Individual Defendants have answered the Consolidated Complaint,
denying all liability and raising various affirmative defenses. Discovery has
commenced. The Company believes that the allegations in the Complaints are
without merit, and intends to vigorously defend the consolidated actions. The
Company maintains Directors and Officers liability insurance, which the Company
believes adequately covers damages, if any, that may arise under the action. No
assurance can be given, however, that the outcome of the consolidated actions
will not have a materially adverse impact upon the results of operations and
financial condition of the Company.
9. SPECIAL CHARGES
During 1998, the Company experienced increased chargebacks and marketing
expenditures relating to its "900" entertainment services. As a result, this
service was not providing positive operating results and cash flows and, as
such, the Company ceased marketing such services as an independent revenue
source. Accordingly, as required by Statement of Financial Accounting Standards
No. 121, the Company reviewed its long-lived assets, including goodwill, for
impairment. The Company determined that the "900" entertainment service could
not be disposed of nor was there a predictable estimate of any future cash flows
associated with any alternative use. The Company concluded that the intangibles,
primarily goodwill, arising from the acquisition of the remaining 50% interest
in New Lauderdale, L.C. were entirely impaired. As such, a noncash charge of
$18,514,435, representing the remaining balance of the intangibles, was recorded
in the second quarter of fiscal 1998.
In addition, the Company recorded a noncash charge of approximately
$1,178,000 associated with the writedown of assets relating to the decision to
abort an Internet telephony program during the fourth quarter of fiscal 1998.
10. EARNINGS PER SHARE
The following table sets forth the reconciliation of the weighted average
shares used for basic and diluted earnings per share:
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30,
--------------------------------------
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Denominator:
Denominator for basic earnings per share --
weighted average shares................... 15,119,610 17,034,531 18,560,064
Effect of dilutive securities:
Stock options................................ 122,052 -- 257,984
Warrants..................................... -- -- 60,742
---------- ---------- ----------
Denominator for diluted earnings per share --
adjusted weighted average shares.......... 15,241,662 17,034,531 18,878,790
========== ========== ==========
</TABLE>
Options and warrants to purchase 243,474, 1,579,796 and 90,000 shares of
common stock that were outstanding at November 30, 1999, 1998 and 1997,
respectively, were not included in the computation of diluted earnings per share
because their effect would be anti-dilutive.
F-16
<PAGE> 57
QUINTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. STOCK OPTION PLAN AND WARRANTS
During fiscal 1995, the Company implemented the 1995 Stock Option Plan (the
"Stock Option Plan") effective as of October 1995. The Stock Option Plan
provides for the grant of options to purchase up to 750,000 shares of the
Company's common stock either as incentive stock options ("Incentive Stock
Options") within the meaning of Section 422 of the United States Internal
Revenue Code or as options that are not intended to meet the requirements of
such section ("Nonstatutory Stock Options"). Options to purchase shares may be
granted under the Stock Option Plan to persons who, in the case of Incentive
Stock Options, are employees (including officers) of the Company, or, in the
case of Nonstatutory Stock Options, are employees (including officers),
consultants or nonemployee directors of the Company. The Stock Option Plan was
amended in September 1996, June 1997, and September 1999 to provide for the
granting of options to purchase an additional 500,000, 600,000 and 1,000,000
shares, respectively, of the Company's Common Stock. After these amendments,
grants are available under the Stock Option Plan to purchase a total of
2,850,000 shares of the Company's Common Stock.
The exercise price of options granted under the Stock Option Plan must be
at least equal to the fair market value of such shares on the date of grant, or,
in the case of Incentive Stock Options granted to a holder of 10% or more of the
Company's Common Stock, at least 110% of the fair market value of such shares on
the date of grant. The maximum exercise period for which Incentive Stock Options
may be granted is ten years from the date of grant (five years in the case of an
individual owning more than 10% of the Company's Common Stock).
In addition, the Company's Stock Option Plan provides for certain automatic
grants of options to the Company's nonemployee directors in consideration for
their services performed as directors of the Company and for attendance at
meetings. It provides for a one-time automatic grant of an option to purchase
25,000 shares of common stock at market value to those directors who were
serving on the Board of Directors at the inception of the Stock Option Plan and
also to those persons who become nonemployee directors of the Company in the
future, upon their appointment or election as directors of the Company. In
addition, the amended Stock Option Plan provides for quarterly grants to each
nonemployee director of the Company of options to purchase 6,250 shares of the
Company's common stock at the market value on the date of each grant. The
Company granted 150,000, 143,750 and 125,000 options to the nonemployee
directors during fiscal 1999, 1998 and 1997, respectively.
The Committee offered all option holders the right to have their options
repriced at $1.75 effective September 10, 1998. Total options available and
elected for repricing were 1,415,078 and 878,078, respectively. Total options
surrendered as a result of the repricing amounted to 587,949. The repricing of
the options is in compliance with the provisions of the Stock Option Plan.
A summary of the Company's stock options is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
--------------------------- --------------------------- --------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE
---------- -------------- ---------- -------------- --------- --------------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding,
beginning of year....... 1,304,978 $1.75 to 15.56 938,691 $4.75 to 15.56 653,850 $ 4.75 to 8.25
Granted................... 153,489 0.91 to 2.06 1,129,374 1.75 to 6.75 470,500 7.31 to 15.56
Exercised................. (89,844) 1.75 -- -- (152,797) 5.00 to 6.00
Cancelled or lapsed*...... (66,759) 1.50 to 2.69 (763,087)* 2.69 to 15.56 (32,862) 5.00 to 6.00
---------- -------------- ---------- -------------- --------- --------------
Options outstanding, end
of year................. 1,301,864 $0.91 to 15.56 1,304,978 $1.75 to 15.56 938,691 $4.75 to 15.56
========== ============== ========== ============== ========= ==============
</TABLE>
F-17
<PAGE> 58
QUINTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
1999 1998 1997
--------------------------- --------------------------- --------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE
---------- -------------- ---------- -------------- --------- --------------
<S> <C> <C> <C> <C> <C> <C>
Options exercisable, end
of year................. 1,006,387 666,563 645,952
========== ========== =========
Options available for
grant, end of year...... 1,279,794 373,307 731,144
========== ========== =========
Weighted-average fair
value of options granted
during the year......... $ 1.08 $ 1.17 $ 5.82
========== ========== =========
</TABLE>
- ---------------
* Includes 587,949 shares surrendered upon repricing.
The Company has elected to adopt the disclosure-only provisions of
Statement of Financial Accounting Standards No. 123 "Accounting for Stock-Based
Compensation." Accordingly, no compensation cost has been recognized with regard
to options granted under the Plan in the accompanying financial statements. If
stock-based compensation costs had been recognized based on the estimated fair
values at the dates of grant for options awarded during the years ended November
30, 1999, 1998 and 1997, the Company's net income (loss) and earnings (loss) per
share would have been as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---------- ------------ -----------
<S> <C> <C> <C>
Net income (loss) -- as reported............ $3,923,860 $(16,952,618) $14,363,781
========== ============ ===========
Net income (loss) -- pro forma.............. $3,758,078 $(18,369,678) $13,158,826
========== ============ ===========
Basic EPS -- as reported.................... $ .26 $ (1.00) $ .77
========== ============ ===========
Diluted EPS -- as reported.................. $ .26 $ (1.00) $ .76
========== ============ ===========
Basic EPS -- Pro forma...................... $ .25 $ (1.08) $ .71
========== ============ ===========
Diluted EPS -- Pro forma.................... $ .25 $ (1.08) $ .70
========== ============ ===========
</TABLE>
The weighted average fair value of each option has been estimated on the
date of grant using the Black-Scholes options pricing model with the following
weighted average assumptions used for all grants for volatility of 90% in 1999
and 65.4% in 1998 and 1997; risk-free interest rate ranging from 4.53% to 5.89%
in 1999 and 4.67% to 4.80% in 1998 and 1997; and expected lives of approximately
4.8 years for each of the three years in the period ended November 30, 1999.
The following table summarizes information about stock options outstanding
at November 30, 1999:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
RANGE OF REMAINING AVERAGE AVERAGE
EXERCISE CONTRACTUAL EXERCISABLE SHARES EXERCISABLE
PRICE OUTSTANDING LIFE PRICE EXERCISABLE PRICE
- ------------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
$0.91-$0.91 31,250 4.9 $ 0.91 31,250 $ 0.91
$1.50-$2.13 1,090,864 3.6 1.87 795,387 1.87
$2.63-$3.81 43,750 5.7 2.96 43,750 2.96
$4.75-$6.00 86,000 6.6 5.18 86,000 5.18
$9.38-$11.31 37,500 7.4 10.60 37,500 10.60
$15.56-$15.56 12,500 7.6 15.56 12,500 15.56
- ------------- --------- --- ------ --------- ------
$0.91-$15.56 1,301,864 4.0 $ 2.49 1,006,387 $ 2.66
============= ========= === ====== ========= ======
</TABLE>
F-18
<PAGE> 59
QUINTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
As of November 30, 1999 and 1998, there were 275,818 warrants outstanding
to purchase common stock at an exercise price of $8.25 per share. The warrants
are exercisable through December of 2000.
12. SEGMENT INFORMATION
The Company adopted SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information, as of November 30, 1999. Prior to such date
the Company had not met the "industry segment" reporting criteria as defined in
SFAS No. 14, "Financial Reporting for Segments of a Business Enterprise". The
adoption of SFAS No. 131 did not affect the results of operations or financial
position of the Company, but does require the Company to disclose its
"management" approach determined segments. The Company's segments operate
exclusively in the United States with an immaterial portion of revenue earned in
Canada during the three fiscal years ended November 30, 1999. The accounting
policies of the Company's segments are the same as those detailed in Note 1.
The Company's reportable operating segments are aligned into three
fundamental areas: (1) Products and Services billed to consumers by Local
Exchange Carriers (LEC Billed products and services), (2) Customer Acquisition
Services billed directly to long distance carriers and wireless carriers
(Customer Acquisition services) and (3) Internet Commerce billed directly to
consumers and vendors (E-commerce). The balance of the Company's operations,
individually immaterial and in the aggregate are included as part of Corporate
and other. This business segment delineation is consistent with the Company's
management and financial reporting structure based on products and services. The
Company evaluates performance based on many factors, with each segment's (a)
gross profit and (b) earnings before special charges, interest expense, interest
income, income taxes, depreciation and amortization (EBITDA) forming the primary
measurement criteria. The organization shares a common workforce and office
headquarters, which precludes an allocation of all overhead components. Overhead
items that are specifically identifiable to a particular segment are applied to
such segment and all other overhead costs are included in Corporate and other.
The following tables set forth the Company's financial results, by management
performance criteria, by operating segment. All revenues are from
non-intersegment sources; therefore no intersegment elimination applies.
Segment Data -- Net revenues
<TABLE>
<CAPTION>
NET REVENUE
YEAR ENDED NOVEMBER 30,
------------------------------------------
1999 1998 1997
----------- ----------- ------------
<S> <C> <C> <C>
LEC Billed products and services........... $11,975,622 $64,002,365 $163,010,663
Customer Acquisition services.............. 30,687,009 30,364,096 27,163,621
E-commerce................................. 7,634 -- --
Corporate and other........................ 169,575 323,790 1,200,652
----------- ----------- ------------
Consolidated totals...................... $42,839,840 $94,690,251 $191,374,936
=========== =========== ============
</TABLE>
F-19
<PAGE> 60
QUINTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SEGMENT DATA -- GROSS PROFIT (LOSS)
<TABLE>
<CAPTION>
GROSS PROFIT (LOSS)
YEAR ENDED NOVEMBER 30,
-----------------------------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
LEC Billed products and services............ $ 9,457,075 $17,115,604 $31,074,255
Customer Acquisition services............... 6,270,953 (2,415,511) 11,213,763
E-commerce.................................. 5,550 -- --
Corporate and other......................... 154,165 (46,957) (734,445)
----------- ----------- -----------
Consolidated totals....................... $15,887,743 $14,653,136 $41,553,573
=========== =========== ===========
</TABLE>
SEGMENT DATA -- EBITDA
<TABLE>
<CAPTION>
EBITDA
YEAR ENDED NOVEMBER 30,
-----------------------------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
LEC Billed products and services............ $ 8,197,531 $12,108,335 $22,037,344
Customer Acquisition services............... 339,046 (6,913,016) 10,066,879
E-commerce.................................. (427,253) -- --
Corporate and other......................... (2,853,664) (3,615,036) (6,811,273)
----------- ----------- -----------
Consolidated totals....................... $ 5,255,660 $ 1,580,283 $25,292,950
=========== =========== ===========
</TABLE>
SEGMENT DATA -- DEPRECIATION AND AMORTIZATION
<TABLE>
<CAPTION>
DEPRECIATION AND AMORTIZATION
YEAR ENDED NOVEMBER 30,
------------------------------------
1999 1998 1997
-------- ---------- ----------
<S> <C> <C> <C>
LEC Billed products and services................ $ -- $1,033,949 $2,520,704
Customer Acquisition services................... 65,530 101,236 3,995
E-commerce...................................... 9,171 -- --
Corporate and other............................. 174,372 148,854 95,447
-------- ---------- ----------
Consolidated totals........................... $249,073 $1,284,039 $2,620,146
======== ========== ==========
</TABLE>
SEGMENT DATA -- SPECIAL CHARGES
<TABLE>
<CAPTION>
SPECIAL CHARGES
YEAR ENDED NOVEMBER 30,
---------------------------
1999 1998 1997
---- ----------- ----
<S> <C> <C> <C>
LEC Billed products and services.......................... $-- $18,514,435 $--
Customer Acquisition services............................. -- -- --
E-commerce................................................ -- -- --
Corporate and other....................................... -- 1,178,108 --
--- ----------- ---
Consolidated totals..................................... $-- $19,692,543 $--
=== =========== ===
</TABLE>
F-20
<PAGE> 61
QUINTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SEGMENT DATA -- LONG-LIVED ASSETS
<TABLE>
<CAPTION>
LONG-LIVED ASSETS
YEAR ENDED NOVEMBER 30,
-------------------------------------
1999 1998 1997
-------- ---------- -----------
<S> <C> <C> <C>
LEC Billed products and services............... $ -- $ -- $20,023,676
Customer Acquisition services.................. -- 574,821 36,567
E-commerce..................................... 324,283 -- --
Corporate and other............................ 492,250 569,080 478,155
-------- ---------- -----------
Consolidated totals.......................... $816,533 $1,143,901 $20,538,398
======== ========== ===========
</TABLE>
SEGMENT DATA -- TOTAL ASSETS
<TABLE>
<CAPTION>
TOTAL ASSETS
YEAR ENDED NOVEMBER 30,
------------------------------------------
1999 1998 1997
----------- ----------- ------------
<S> <C> <C> <C>
LEC Billed products and services........... $ 8,411,901 $21,413,609 $ 71,917,965
Customer Acquisition services.............. 8,249,232 25,790,868 17,419,805
E-commerce................................. 7,610,364 -- --
Corporate and other........................ 33,005,782 17,208,667 26,661,005
----------- ----------- ------------
Consolidated totals...................... $57,277,279 $64,413,144 $115,998,775
=========== =========== ============
</TABLE>
13. SUBSEQUENT EVENTS
In January 2000, the Company increased its equity position to 15.9% of
itarget.com, Inc., a privately held on-line permission based e-mail marketing
and consumer data information company. The Company acquired the additional
approximate 12.2% equity interest pursuant to a stock swap agreement. The
agreement required that 229,862 of the Company's common shares be issued in
exchange for 42,372 newly issued Series B, convertible preferred shares of
itarget.com, Inc. In accordance with the terms of the stock swap agreement, the
cost to the Company is contingent on several events, but in no case can exceed
the equivalent of $2.02 million. The Company had previously acquired
approximately 3.7% of itarget.com, Inc. for $500,000, in cash in November 1999.
During the fiscal year ended November 30, 1999, the Company invested $3
million in SkyMall, Inc., ("SkyMall"), a publicly traded Company (Nasdaq: SKYM),
through a private placement offering. Simultaneously with the investment the
Company executed a promotional marketing agreement with SkyMall. In
consideration for the Company's investment, it received: (a) 428,571 shares of
SkyMall's common stock (which was registered in December 1999), and (b) 214,286
warrants, convertible into SkyMall common stock at $8.00 per share.
As of February 16, 2000, the Company has sold 240,000 shares of its SkyMall
common shares held, at an average price of $9.17, yielding total proceeds to the
Company of approximately $2.2 million. As of the date of this report the Company
continues to hold approximately 188,500 SkyMall common shares (with an allocated
cost of approximately $5.25 per share) and retains the entire 214,286 warrants
(with an allocated cost of approximately $3.49 per warrant), which expire in
November 2004.
On February 22, 2000, the Company entered into a strategic marketing
agreement with LCS Golf, Inc., (Nasdaq:LCSG), an owner and operator of
GolfUniverse.com, a highly visited website dedicated to the sport of golf. In
addition to the marketing agreement, which gives the Company access to LCS
Golf's proprietary "opt-in" e-mail database, the Company made a $500,000 loan to
LCS Golf, Inc., which is due in
F-21
<PAGE> 62
QUINTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
August 2000. This loan is convertible into 500,000 of LCS Golf common shares, at
the Company's election. Simultaneously with the above, LCS Golf, Inc. also
granted the Company options to acquire 200,000 of its common shares, at prices
ranging between $1.00 and $2.00 per share.
14. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of the unaudited quarterly results of operations
for fiscal 1999, 1998 and 1997:
<TABLE>
<CAPTION>
QUARTER ENDED
----------------------------------------------------------
NOVEMBER 30, AUGUST 31, MAY 31, FEBRUARY 28,
------------ ----------- ------------ ------------
<S> <C> <C> <C> <C>
1999:
Net revenues........................... $ 4,526,274 $ 8,084,023 $ 10,423,942 $19,805,601
Gross profit........................... 4,275,515 4,503,692 4,056,306 3,052,230
Income before income taxes............. 2,393,277 2,390,715 926,273 672,115
Net income............................. 1,669,073 1,298,190 555,289 401,308
Basic earnings per share............... .12 .09 .03 .03
Diluted earnings per share............. .11 .09 .03 .03
1998:
Net revenues........................... $20,285,085 $16,509,577 $ 21,259,988 $36,635,601
Gross profit........................... (2,296,938) 5,070,872 1,380,175 10,499,027
(Loss) income before income taxes...... (5,068,084) 2,055,824 (20,505,128) 6,147,306
Net (loss) income...................... (6,591,590) 1,460,902 (15,510,314) 3,688,384
Basic (loss) earnings per share........ (.41) .09 (.91) .20
Diluted (loss) earnings per share...... (.41) .09 (.91) .20
1997:
Net revenues........................... $49,302,822 $44,688,568 $ 53,323,734 $44,059,812
Gross profit........................... 10,072,085 4,152,170 13,786,298 13,543,020
Income before income taxes............. 5,420,442 307,049 9,660,751 9,045,155
Net income............................. 2,911,615 184,229 5,832,540 5,435,397
Basic earnings per share............... .16 .01 .31 .29
Diluted earnings per share............. .15 .01 .31 .29
</TABLE>
During the fourth quarter of fiscal 1998, the Company reduced the benefit
for income taxes by approximately $2,550,000 due to a change in estimate of the
amount of permanent differences, primarily goodwill due to its accelerated
writeoff, and deferred tax asset valuation reserves.
F-22
<PAGE> 63
QUINTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
<TABLE>
<CAPTION>
COL. A COL. B COL. C COL. D COL. E
- ------ ----------- ------------------------- ------------- -----------
ADDITIONS
-------------------------
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING COSTS AND OTHER DEDUCTIONS -- END OF
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DESCRIBE PERIOD
----------- ----------- ---------- ------------ ------------- -----------
<S> <C> <C> <C> <C> <C>
YEAR ENDED NOVEMBER 30, 1999
Reserve for customer
chargebacks.................. $15,494,138 -- $ 11,968,645(1) $22,844,675(3) $ 4,618,108
=========== == ============ =========== ===========
Reserve for fulfillment
costs........................ $ 1,405,248 -- $ 7,133,012(2) $ 4,405,451(4) $ 4,132,809
----------- -- ------------ ----------- -----------
YEAR ENDED NOVEMBER 30, 1998
Reserve for customer
chargebacks.................. $38,196,114 -- $ 56,496,612(1) $79,198,588(3) $15,494,138
=========== == ============ =========== ===========
Reserve for fulfillment
costs........................ $ -- -- $ 1,405,248(2) $ -- $ 1,405,248
----------- -- ------------ ----------- -----------
YEAR ENDED NOVEMBER 30, 1997
Reserve for customer
chargebacks.................. $20,080,903 -- $103,597,803(1) $85,482,592 $38,196,114
=========== == ============ =========== ===========
</TABLE>
- ---------------
(1) Charges against revenues.
(2) Charges against costs of sales.
(3) Chargebacks refunded to consumers during the year.
(4) Payments made to fulfillment vendors.
S-1
<PAGE> 64
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
- -------
<S> <C>
3.1.1 Articles of Incorporation of the Company, as amended.(1)
3.1.2 Amendment to the Articles of Incorporation of the
Company.(2)
3.2 Bylaws of the Company.(3)
10.1 Second Amended and Restated 1996 Stock Option Plan.(4)
10.2 Lease of the Company's offices at One Blue Hill Plaza, Pearl
River, New York.(5)
10.3+ Billing and Collection Services Agreement between Federal
Transtel, Inc. and the Company.(5)(P)
10.4.1+ Telecommunications Services Agreement between LCI
International Telecom Corp., d/b/a Qwest Communications
Services, and the Company.(6)(P)
10.4.2+ Amendment to Telecommunications Services Agreement between
LCI International Telecom Corp., d/b/a Qwest Communications
Services, and the Company.(7)
10.4.3+ Amended and Restated Telecommunications Services Agreement
between LCI International Telecom Corp., d/b/a/ Qwest
Communications Services, and the Company.(7)
10.5.1 Agreement regarding 900 Pay-Per-Call Psychic Services
between the Company and Access Resource Services, Inc.(8)
10.5.2 Amendment No. 1 to Exhibit 10.5.1.(8)
10.6.1 Amendment No. 1 to Non-Competition and Right of First
Refusal Agreement between the Company and Steven L.
Feder.(8)
10.6.2+ Amendment No. 1 to Non-Competition and Right of First
Refusal Agreement between the Company and Peter Stolz.(8)
10.6.3+ Amendment No. 1 to Non-Competition and Right of First
Refusal Agreement between the Company and Thomas H.
Lindsey.(8)
10.7.1 Redemption Agreement among the Company, Steven L. Feder and
Defer Limited Partnership.(8)
10.7.2+ Redemption Agreement among the Company, Peter Stolz and the
P. Stolz Family Limited Partnership, L.P.(8)
10.7.3+ Redemption Agreement among the Company, Thomas H. Lindsey
and Maslin Limited Partnership.(8)
10.8+ Indemnification Agreement among the Company, Access Resource
Services, Inc., Steven L. Feder, Peter Stolz, Thomas H.
Lindsey, Defer Limited Partnership, the P. Stolz Family
Limited Partnership, L.P. and Maslin Limited Partnership.(8)
10.9 Security Agreement between the Company and Access Resource
Services, Inc.(8)
10.10.* Marketing Agreement between LCS Golf, Inc. and the Company.
10.11* Proposed Web Site Marketing Agreement between itarget.com,
Inc., and the Company.
10.12* Stock and Warrant Purchase Agreement between SkyMall, Inc.,
and the Company.
21* Subsidiaries of the Company
27* Financial Data Schedule
</TABLE>
- ---------------
* Filed herewith.
+ Confidential treatment requested as to portions of this Exhibit.
<PAGE> 65
(1) Filed as an Exhibit to the Company's Registration Statement on Form 8-A
dated October 23, 1995 and incorporated herein by reference.
(2) Filed as an Exhibit to the Company's Quarterly Report on Form 10-Q for the
fiscal quarter ended August 31, 1998 and incorporated herein by reference.
(3) Filed as an Exhibit to the Company's Registration Statement on Form S-1
dated September 6, 1995 (File No. 33-96632) and incorporated herein by
reference.
(4) Filed as an Exhibit to the Company's Proxy Statement filed with the
Commission, dated August 23, 1999 and incorporated herein by reference.
(5) Filed as an Exhibit to the Company's Annual Report on Form 10-K for the
fiscal year ended November 30, 1996 and incorporated herein by reference.
(6) Filed as an Exhibit to the Company's Annual Report on Form 10-K for the
fiscal year ended November 30, 1997 and incorporated herein by reference.
(7) Filed as an Exhibit to the Company's Annual Report on Form 10-K for the
fiscal year ended November 30, 1998 and incorporated herein by reference.
(8) Filed as an Exhibit to the Company's Current Report on Form 8-K filed with
the Commission on June 4, 1999 and incorporated herein by reference.
(P) Filed by paper with the Commission pursuant to a continuing hardship
exemption.
<PAGE> 1
Exhibit 10.10
MARKETING AGREEMENT
AGREEMENT entered into as of the 16th day of February, 2000 by and between
Quintel Communications, Inc., a Delaware corporation with offices at One Blue
Hill Plaza, Pearl River, New York 10965 (hereafter referred to as "Quintel"),
and LCS Golf, Inc., a Delaware corporation with offices at 24 East 12th Street,
New York, New York 10003 (hereafter referred to as "LCSG"). Quintel and LCSG are
also sometimes referred to as a "Party" or the "Parties."
RECITALS:
A. WHEREAS, LCSG is engaged in the marketing of products and services related
to golf using the internet.
B. WHEREAS, Quintel is engaged in the development and operation of businesses
marketing a variety of products and services using the internet.
C. WHEREAS, Quintel and LCSG wish to develop programs to market products and
services to the visitors to and customers of LCSG's websites.
NOW, THEREFORE, for good and valuable consideration, receipt of which is
acknowledged by the parties, it is hereby agreed as follows:
1 Definitions.
1.1 "Agreement" means this agreement between Quintel and LCSG.
1.2 "Customer" means any Person acquiring products or services pursuant
to the Marketing Program.
1.3 "GAAP" means generally accepted U.S. accounting principles,
consistently applied and consistent with past practices of the Party
responsible for preparing the calculation.
1.4 "Governmental Regulations" means any federal, state or local
governmental rules and regulations governing the activities
conducted under this Agreement.
1.5 "Exclusive Quintel Products" means the product and service
categories identified on Schedule 1.5 annexed hereto.
1.6 "LCSG's Common Stock" means shares of LCSG's common stock with a par
value of $.001 per share.
1.7 "LCSG Data Base" means the information regarding the visitors to and
customers of the LCSG Websites and other persons otherwise available
to LCSG, including but not limited to, their names, telephone
numbers, addresses, and e-mail addresses.
1.8 "LCSG Products and Services" means any of the products and services
marketed by LCSG or any of its Affiliates during the Term.
1.9 "LCSG Websites" means any of the websites owned, sponsored or
controlled by LCSG now or at any time during the term of this
Agreement; LCSG's current websites are identified on Schedule 1.9
annexed hereto.
1
<PAGE> 2
1.10 "Marketing Materials" means advertisements in all media (including
the internet, print, television and radio), brochures, solicitation
materials, scripts, displays, or other information which describes
or otherwise relates to the Marketing Programs and used to solicit
customers for the Marketing Programs.
1.11 "Marketing Program" means any one of the Actual Quintel Programs or
LCSG Sales Promotions for the marketing of products and services
developed by the parties under this Agreement.
1.12 "Member Record Fee" means the fee of twenty-five cents ($0.25) for
every valid Name delivered to Quintel or its Affiliate for
registration in multibuyer.com, referred to in paragraph 2.9.1 of
this Agreement.
1.13 "Member Record" has the meaning set forth in paragraph 2.10.1 of
this Agreement.
1.14 "Multibuyer Record Fee"has the meaning set forth in paragraph 2.10.1
of this Agreement.
1.15 "Names" means the name, address (street, post-office box or e-mail),
telephone number or other means of identification of any individual,
person or entity identified in the LCS Data Base.
1.16 "Net Revenue" means gross revenues generated by a Sales Program,
less direct out-of-pocket costs of acquiring Program Products and
Services (including royalties or fees to third parties), the cost of
producing the Marketing Materials and all other expenses directly
related to the Actual Quintel Program incurred by either Party,
determined in accordance with GAAP.
1.17 "Option" has the meaning set forth in Section 4.1 of this Agreement.
1.18 "Parties" means Quintel and LCSG.
1.19 "Person" means any individual, corporation, partnership, trust, or
other entity.
1.20 "Program Data Base" means the information regarding the Customers of
the Marketing Program and the other Persons solicited by or
responding to the Marketing Materials, including but not limited to,
their names, telephone numbers, addresses, and e-mail addresses, and
any list of customers generated by the Marketing Programs by either
Party.
1.21 "Program Products and Services" means any of the Quintel Products or
Services marketed as part of a Sales Program conducted under this
Agreement.
1.22 "Quintel Banner Ads" has the meaning set forth in Section 2.2 of
this Agreement.
1.23 "Quintel E-Mail Promotions" has the meaning set forth in Section 2.1
of this Agreement.
1.24 "Quintel-Golf Hyper-Link" has the meaning set forth in Section 2.3
of this Agreement.
1.25 "Quintel Off-line Promotions" has the meaning set forth in Section
2.4 of this Agreement.
1.26 "Quintel Products and Services" means any Quintel's or its
Affiliates' products, services, or programs or marketing campaigns
(including those of Quintel's marketing partners or co-venturers),
which Quintel markets or which Quintel acquires the right to market
from time to
2
<PAGE> 3
time, and includes product or service offerings whose primary
purpose is to capture customer data rather than generate revenue.
1.27 "Quintel Promotion" means any of the Quintel Banner Ads, Quintel
E-Mail Promotions, Quintel-Golf Hyperlink or Quintel Off-line
Promotions.
1.28 " Sales Program" means a particular program using any of the Quintel
Promotions to market specific Quintel Products and Services under
the Marketing Program.
2 Marketing Program.
2.1 During the term of this Agreement, Quintel shall have the right to
transmit e-mail messages marketing or promoting Quintel Products and
Services to the LCS Database (such e-mail messages are referred to
as "Quintel e-mail Promotions"). The maximum per month that number
of e-mail messages to the Names in the LCSG Data Base equal to the
product of (i) four (4) multiplied by (ii) the daily average during
the immediately preceding month of the entire number of Names on the
LCS Data Base, As an example of the foregoing calculation, if the
number of names in the LCS Database equals 50,000 on the date
hereof, Quintel may transmit up to 200,000 e-mail messages to Names
in the LCS Database. If as of six months after the date hereof, the
number of names in the LCS Database equals 100,000, the total number
of e-mail messages which Quintel may transmit shall have increased
to a total of 400,000.
2.1.1 LCSG will permit Quintel at Quintel's option to transmit the
Quintel e-mail Promotions to the LCSG Data Base using
Quintel's own facilities and equipment.
2.2 During the term of this Agreement, LCSG will make banner
advertisements available to Quintel to for the marketing of the
Exclusive Quintel Products (hereafter such banner advertisements are
referred to as the "Quintel Banner Ads"). The banner advertisements
will be displayed prominently on the LCS Websites and in a manner so
that each visitor to an LCS website will see the banner
advertisement.
2.3 During the term of this Agreement, LCSG will permit Quintel to
create hyperlinks once per month on one of the LCSG Websites
selected by Quintel, to a Quintel Website designated by Quintel
(referred to as the "Quintel-Golf Hyperlink") using any of the
following methods: e-mail messages containing a Quintel-Golf
Hyperlink, a newsletter to subscribers, or through text messages on
the LCSG Website. The form and text of the methods used to create a
hyperlink will be Quintel Product and Service.
2.4 Quintel shall also have the right during the term of this Agreement
to market any Quintel Products and Services to those names in the
LCS Database which it deems appropriate using media other than the
internet once per month during the term of this Agreement. Such
solicitations may pertain to any Quintel Products and Services,
selected by Quintel in its discretion (such marketing referred to as
"Quintel Off-line Promotions").
2.5 Quintel will determine in its discretion the nature and terms of the
Quintel Products and Services to feature on the banner
advertisements. It is understood that the Quintel Products and
Services include products and services of Quintel's strategic
partners and other entities with which it has marketing
arrangements, including SkyMall, Inc., Cybergold and itarget, and
that the consent of
3
<PAGE> 4
such third parties will be required for Quintel to market any of
such products or services as part of the Marketing Program.
2.6 Quintel will prepare the Marketing Materials for the Sales
Promotions and submit them to LCSG for approval, which approval
shall not be unreasonably withheld or delayed. LCSG will respond to
any request by Quintel for approval hereunder within a reasonable
period of time (not to exceed five (5) days), and if the approval is
not granted, the Parties will attempt in good faith to promptly
resolve any objections. Failure to respond shall be deemed to be
approval.
2.6.1 Each Party grants the other a non-exclusive license during the
Term to use the name, logos and trademarks and trade names of
the other approved as part of the approved Marketing
Materials.
2.6.2 Following the end of the Term, each Party will have the right
to use the Marketing Materials as a basis for materials used
in the marketing of other products and services, provided that
the Party making use of the Marketing Materials does not use
the name, trademarks, trade names, logos or other Confidential
Information of the other Party.
2.7 Quintel will be responsible for the management and execution of each
Sales Program and will provide customer service for Quintel Products
and Services (and its direct out-of-pocket expenses incurred in
providing the foregoing services shall be borne equally by the
parties).
2.8 LCSG will provide at its expense any customer service required for
any LCSG Products and Services sold as part of a Sales Program.
2.9 LCSG will make available to Quintel the LCSG Web Sites for the
conduct of the Quintel Promotions and the Sales Programs and provide
Quintel with the LCSG Data Base.
2.10 LCSG will give all visitors to the LCSG Websites the opportunity to
opt-in to become a member of Quintel's the websites operated by
Quintel's subsidiary under the name "multibuyer.com." or
"grouplotto.com" as selected by Quintel. The Names of those persons
who opt-in will be delivered individually or in a batch as requested
by Quintel, in as fast a manner as possible (but at least once every
24 hours).
2.10.1 Quintel will pay LCSG twenty-five cents ($0.25) for every
valid Name delivered to Quintel or its Affiliate for
registration in multibuyer.com (hereafter each valid record
containing a Name is referred to as a "Member Record" and the
$0.25 fee is referred to as the "Multibuyer Record Fee"); such
payment will be made monthly within thirty (30) days after the
end of each month in which a Member Record is delivered.
2.10.2 Revenue derived by Quintel or its Affiliates from such
registrations will not be part of Net Revenue.
2.11 LCSG will permit Quintel to create a link for placement on the
golfuniverse.com website to a custom version of Quintel's
subsidiary's GroupLotto.com website, at which participants will be
given the opportunity to win a lottery prize in excess of
$1,000,000.00 (such custom version referred to as the "GroupLotto
Golf Link"). Revenue derived by Quintel or its Affiliates from the
GroupLotto Golf Link will not be part of Net Revenue, but the data
regarding Customers and visitors to the GroupLotto Golf Link will be
shared in accordance with Section 2.12 of this Agreement.
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2.12 All data regarding Customers and visitors captured from the
promotions or sales conducted by Quintel and LCSG pursuant to the
Marketing Programs shall be part of the Program Data Base, and all
information contained in or derived from the Program Data Base may
be used as either Party chooses, provided such use does not violate
Governmental Regulations and except as otherwise provided in this
Agreement.
2.12.1 Each Party agrees that it will not during the term use the
Names in the Program Data Base to offer for sale products or
services which compete with the products or services offered
by the other Party.
2.12.2 Notwithstanding the foregoing, LCSG shall not have the right
to lease, rent or otherwise transfer the information contained
in the Program Data Base to any third party.
2.13 Customers of and visitors to the LCSG Web Sites responding to the
Marketing Program will be properly informed, prior to the capture of
any personal information about them, that such information to be
included in the Program Data Base will be used for marketing
purposes and future solicitations.
2.14 Quintel will have the exclusive right during the Term to market the
Exclusive Quintel Products and Services to the LCSG Data Base.
2.15 If during the Term either Party is notified or otherwise becomes
aware of any complaint or formal investigation by any governmental
authority of an alleged unfair or deceptive business practice or any
other alleged violation of any Governmental Regulation with respect
to the Marketing Program ("Complaint"), it shall provide the other
Party with prompt written notice of the Complaint, and if the
Complaint is initiated on the basis of the approved Marketing
Materials, then such approved Marketing Materials shall be revised
immediately to resolve such Complaint or the use of such approved
Marketing Materials shall cease within five (5) calendar days of
notification to Quintel of a Complaint. If the Complaint arises from
a breach by a Party of its obligations under this Agreement, the
non-breaching Party shall have the right to terminate this Agreement
under the provisions of Paragraph 6.2 below.
2.16 LCSG hereby grants Quintel the exclusive option during the Term of
this Agreement to manage the LCSG Database on an exclusive basis on
terms no less favorable than those contained in the agreement
between ConsumerNet and LCSG executed by LCSG on June 21, 1999 (the
"ConsumerNet Agreement"). Such option is granted subject to
termination of the ConsumerNet Agreement, which LCSG represents is
terminable on 90 days notice by either LCSG or ConsumerNet. If
Quintel notifies LCSG that it exercises such option, LCSG will give
notice of termination of the ConsumerNet Agreement to ConsumerNet
and upon the termination of the ConsumerNet Agreement Quintel will
manage the LCSG Database on the terms referred to in this Paragraph
2.16 , provided, however, that the term of such Database management
agreement with Quintel shall expire one (1) year from its
commencement.
3 Revenues and Expenses; Fees to Quintel for LCSG Sales Promotions.
3.1 Net Revenue generated from the sale of Program Products and Services
during the Term will be shared equally by the Parties. Quintel will
account to LCSG for all revenue received from the sale of Program
Products and Services, and if LCSG receives any revenue from the
sale of Program Products and Services it will account for such
revenue to Quintel; it is acknowledged and agreed that it is
anticipated that all Net Revenue will be collected and distributed
by Quintel.
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Only that revenue directly resulting from the sale of a Quintel
Product or Service offered as part of a Sales Program will be
included in revenue which is subject to the sharing provisions of
this Section 3. Net Revenue subject to sharing under this Agreement
shall be paid and distributed quarterly by the Party responsible for
such payment and distribution, less reserves for bad debt and other
reserves prudent and customary for the Sales Programs conducted
under this Agreement.
3.1.1 Each payment of Net Revenue will be accompanied by a report
explaining the calculation of Net Revenue.
3.1.2 It is understood and agreed that if a Quintel Promotion is
used to drive traffic to a website of Quintel or one of its
Affiliates, the revenue derived from any subsequent sale of a
Quintel Product or Service will not be part of Net Revenue and
will not be shared by the Parties, and that the revenue
sharing arrangements described in this Agreement will only
apply to the sale of a Quintel Product or Service offered for
sale as part of a Quintel Promotion in a Sales Program
conducted by Quintel.
3.2 The costs and expenses incurred in the conduct of the Sales Programs
will be paid by Quintel and deducted by Quintel in determining Net
Revenues.
3.3 Each Party shall bear its own general corporate overhead and
administrative expenses in connection with the activities under this
Agreement. Without limiting the foregoing, the LCSG Data Base will
be provided by LCSG to Quintel for use in connection with the Sales
Programs developed under this Agreement without any charge or
expense.
3.4 Each Party or its independent certified public accounting firm will
have the right no more than once per calendar year during the Term
of this Agreement and the two year period following the end of the
Term to audit and/or cause an audit to be made of the separate
records (collectively, the "Records") of the other Party with
respect to the Marketing Program, including with respect to the
calculation of Net Revenues. A Party seeking examination will have
free and full access to the Records for such purpose on reasonable
notice and at a mutually convenient time. Each Party will retain the
Records for a period of three (3) years following its rendition of
any report or calculation of Net Revenue and amounts due to the
other Party under this Agreement. In the event of underpayment or
late payment of an amount due to a Party, the Party owing the amount
will be liable for interest on the unpaid amount at the prime rate
of interest announced as such in The Wall Street Journal, New York,
NY on the first date immediately preceding the date payment was due,
said interest to accrue from the date on which payment was due until
date of payment. A Party's receipt or acceptance of any of any
statements furnished hereunder or of any payments paid hereunder
shall not preclude a Party from questioning the correctness thereof
at any time, and in the event that any inconsistencies or mistakes
are discovered in such statements or payments, they shall be
immediately rectified and the appropriate payment shall be made,
with interest as provided for herein. In the event that any audit of
the Records indicates that amounts due a Party have been underpaid
in excess of $25,000.00, the underpaying Party will reimburse the
other Party to whom payment is due for its reasonable costs and
expenses for such audit with interest as provided for herein.
3.5 The provisions of this Section 3 shall survive the termination of
this Agreement
4 Options to Purchase LCSG Stock.
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4.1 In consideration for Quintel's entry into this Agreement, LCSG has
issued Quintel options (the "Options") to purchase up to 200,000
shares of LCSG's Common Stock exercisable for two (2) years from the
date of issuance at an exercise price of $1.00 per share for 100,000
of the Options, and an exercise price of $2.00 per share for 100,000
of the Options; the Options are in the form of the Option
Certificate annexed hereto as Schedule 4.
4.2 Concurrently with the execution of this Agreement, the Parties have
executed a Registration Rights Agreement with respect to the
Warrants in the form annexed hereto as Schedule 4-1.
5 Confidentiality.
5.1 A Party receiving information hereunder is hereinafter referred to
as the "Receiving Party" and the party disclosing information is
hereinafter referred to as the "Disclosing Party"; a Party's
officers, directors, employees, agents, professional advisors and
consultants are collectively referred to as "Representatives"). Both
Parties understand that each Party may provide the other Party with
certain proprietary and confidential information during the term of
this Agreement. All such proprietary and confidential information
furnished by the Disclosing Party or its Representatives to or on
behalf of the Receiving Party (irrespective of the form of
communication and whether such information is so furnished before,
on or after the date hereof) and all analyses, compilations, data,
studies, notes, interpretations, memoranda or other documents
prepared by the Disclosing Party or its Representatives containing
or based in whole or in part on any such furnished information is
collectively referred to herein as the "Confidential Information".
In addition, all such Confidential Information furnished by the
Disclosing Party to the Receiving Party or its Representatives,
(irrespective of the form of communication and whether such
information is so furnished before, on or after the date hereof) and
all analyses, compilations, data, studies notes, interpretations,
memoranda or other documents prepared by the Disclosing Party or its
Representatives containing or based in whole or in part on any such
furnished information are also collectively referred to as the
"Confidential Information." The term "Confidential Information"
shall not include any documents, data or other information which (i)
at the time of disclosure or thereafter is publicly available (other
than as a result of a disclosure by the Receiving Party or Receiving
Party's Representatives in violation hereof); (ii) was, is or
becomes available to Receiving Party on a non-confidential basis
from a source other than Disclosing Party or its advisors, provided
that such source was not known by Receiving Party to be prohibited
from disclosing such information to Receiving Party by a legal,
contractual or fiduciary obligation owed to Disclosing Party; (iii)
was or is already in Receiving Party's possession (other than
Confidential Information furnished by or on behalf of Disclosing
Party); or (iv) is independently developed by Receiving Party or on
Receiving Party's behalf without violating Receiving Party's
obligations of confidentiality hereunder. All Confidential
Information provided by either Party shall not be disclosed or
referred to publicly, or to any third party, except as permitted
below. The Receiving Party will disclose the Confidential
Information only to its Representatives directly concerned with the
evaluation of the proposed Marketing Agreement. In the event that a
Receiving Party or any of its Representatives become legally
compelled (by deposition, interrogatory, request of documents,
subpoena, civil investigative demand or similar process) to disclose
any of the Confidential Information of the Disclosing Party, the
Receiving Party or other such person from whom such Confidential
Information is being sought shall provide the Disclosing Party with
prompt prior written notice of such requirement so that the
Disclosing Party may seek a protective order or other appropriate
remedy and/or waive compliance with the terms of this Agreement. In
the event that such protective order or other remedy is not
obtained, or the Disclosing Party waives compliance with the
provisions hereof, the person required to provide such information
agrees to furnish only such portion of the Confidential Information
that is legally required to be furnished.
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5.2 Except as may be required by Governmental Regulations, neither Party
shall issue a press release or make any public announcement
regarding or relating to the Marketing Program without review by,
and the prior consent of, the other Party. Quintel and LCSG shall
consult with each other prior to any conference with the press or
other news media relating to the Marketing Program, including
consultation with regard to appropriate responses to questions from
the press or other media about the Marketing Program.
5.3 The provisions of this Section 5 shall survive the termination of
this Agreement
6 Representations and Warranties; Indemnification.
6.1 Each Party represents and warrants to the other Party that it is a
corporation, duly organized, validly existing and in good standing
under the laws of its jurisdiction of incorporation, and has the
corporate power and authority to execute and deliver this Agreement,
to consummate the transactions hereby contemplated, and to take all
other actions required to be taken by it pursuant to the provisions
hereof, and is not subject to, or a party to, any contract,
agreement, instrument, order, judgment or decree, or any other
restriction of any kind or character, which would prevent its entry
into or performance under this Agreement, and no consent of or other
action by or notice to any third party is required in connection
with the Party's entering into and performing under this Agreement,
and that this Agreement and the transactions described in this
Agreement have been duly authorized by all necessary corporate
action.
6.2 LCSG represents that the issuance and delivery of the Options and
execution and delivery of the Registration Rights Agreement have
been duly authorized by all necessary corporate action, that it has
reserved for issuance a sufficient number of shares of LCSG Common
Stock issuable upon exercise of the Options, that all of such shares
have been duly authorized, and when the Options are exercised and
the exercise price has been paid, will be fully paid and
non-assessable.
6.3 The Parties will be jointly and severally responsible for any
liabilities of or claims against either of them arising from the
conduct of the Marketing Program, provided the Party whose
activities give rise to the claim conducted such activities in
accordance with the approved Sales Programs and Marketing Materials.
6.4 Each Party will indemnify the other Party and hold the other Party
harmless from any liability, cost or expense arising solely from a
breach of its representations and warranties in Paragraphs 6.1 or a
breach by the Party of its obligations under paragraph 6.2.
6.5 A party entitled to indemnification under this Agreement shall be
referred to hereafter as an "Indemnified Party" and a party
obligated to provide indemnification shall be referred to hereafter
as an "Indemnifying Party". If at any time an Indemnified Party
shall claim indemnification from an Indemnifying Party for any Loss
or, in the reasonable judgment of the Indemnified Party, for what,
in the future, may result in a Loss ("Anticipated Loss") due to the
filing, at or before the time of such claim, of an action, claim or
suit with an arbitrator, mediator, court or other governmental
entity as to which the Indemnified Party is entitled to
indemnification under this Agreement ("Claim"), then the Indemnified
Party shall promptly send written notice of the same (a "Notice of
Claim") to the Indemnifying Party describing such Claim in
reasonable detail. A Notice of Claim shall specify the basis for
such Claim supported by relevant information and documentation.
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6.5.1 If the Indemnifying Party shall allege that the Indemnified
Party is not entitled to indemnification with respect to such
Claim, it shall give written notice of such objection (a
"Notice of Objection") to the Indemnified Party within 15
business days after receipt by the Indemnifying Party of the
Notice of Claim, specifying the basis of the objections. If
the Indemnifying Party does not give a Notice of Objection
within such 15 business days, or shall have agreed to pay such
Claim in whole or in part within such 15 business-day period,
the Indemnifying Party shall thereupon be liable for the
payment of all Losses relating to such Claim, except as
otherwise provided in Section 6.4.2 herein.
6.5.2 In the event that the Indemnified Party shall have timely
given a Notice of Objection in whole or in part to any Notice
of Claim, during the 20-day period following that date, the
Indemnified Party and the Indemnifying Party shall privately
attempt to resolve the Claim. If the Indemnified Party and the
Indemnifying Party shall have failed to resolve or compromise
or agree to postpone resolution of the Claim within such
20-day period, then the Claim shall be settled by arbitration
in New York, New York (the place in which the arbitration is
to be held shall be referred to as the "Arbitration Venue"),
as determined by the three arbitrators referred to in
Paragraph 6.4.3 below, in accordance with the rules of the
American Arbitration Association and the procedures set forth
below.
6.5.3 Each of (A) the Indemnified Party and (B) the Indemnifying
Party shall appoint one arbitrator, and the two arbitrators so
appointed shall then together appoint a third arbitrator
("neutral arbitrator") from a list of persons supplied by the
American Arbitration Association in the Arbitration Venue. If
one party shall fail to appoint the arbitrator to be appointed
by it within 15 days after the end of the 20-day period
provided for in Section 6.4.2 above, the arbitrator appointed
by the other party shall select from a list of persons
supplied by the American Arbitration Association a person who
shall serve as the single neutral arbitrator for purposes of
the arbitration. If each party shall have appointed one
arbitrator, but such designees cannot agree on the person to
act as the neutral arbitrator within a period of 15 days after
the appointment of the second arbitrator, then either party
may apply to the American Arbitration Association in the
Arbitration Venue, which shall appoint a neutral arbitrator.
The arbitrators shall conduct the arbitration with all
reasonable dispatch in accordance with the rules of the
American Arbitration Association, provided, however, that the
parties to such arbitration shall take such action and execute
such instruments as shall be necessary to cause the rules of
civil procedure of the state in which the Arbitration Venue is
located pertaining to pre-trial discovery to be applicable in
respect of such proceeding. The arbitrators shall render a
written award (the "Award") which shall be delivered to the
Indemnified Party and the Indemnifying Party. An Award
hereunder may be used as a basis for the entry of judgment in
any jurisdiction. In the event the parties have submitted a
Claim for an Anticipated Loss to arbitration under this
Section 6 then the arbitrators may, in their sole discretion,
postpone resolution of the Claim until the time which they
have determined, in their sole discretion, to be the time when
such Anticipated Loss shall have occurred or passed.
6.5.4 Prior to making the Award, the arbitrators shall direct the
Indemnified Party and the Indemnifying Party to submit
statements describing any element of Loss or Anticipated Loss
as to which a Claim is made that is attributable to attorneys'
fees, disbursements, and any similar costs incident to such
Loss or Anticipated Loss, supported by affidavits showing that
such costs actually have been or are likely to be incurred,
and all such attorneys' fees, disbursements and other costs
shall be apportioned as determined by the
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arbitrators. All fees of the arbitrator and administrative
expenses of the American Arbitration Association shall be
treated as costs for purposes of this Section 6. As a part of
each Award made pursuant to this Agreement, the arbitrators
shall allow interest thereon (other than on the portion of the
Award representing attorneys' fees, disbursements and costs)
from the date of the Loss or the date the Anticipated Loss
becomes a Loss to the date of payment at the rate of 10% per
annum.
6.5.5 The Award shall be a conclusive determination of the matter
and shall be binding upon the Indemnified Party and the
Indemnifying Party, and shall not be contested by either of
them. The Indemnifying Party shall satisfy its obligations to
pay an Award in cash.
6.5.6 If the subject of a Claim involves a third-party claim which
has not yet been determined, the arbitrators may in their
discretion make a separate determination solely as to whether
the third-party claim is one for which indemnification may be
had or may defer a determination as to whether indemnification
may be had pending the further development of information as
to the nature of the third-party claim. If the arbitrators
determine that the third-party claim is not subject to
indemnification, they shall set forth the basis of his
decision in detail, which decision shall be deemed to be an
"Award" hereunder.
6.5.7 If the Indemnified Party requests that the Indemnifying Party
defend it against a Claim involving an Anticipated Loss, then
the Indemnifying Party may, at its option, assume the defense
of the Indemnified Party against such Claim (including the
employment of counsel, who shall be counsel satisfactory to
the Indemnified Party,) and the payment of expenses. If the
Indemnified Party does not request the Indemnifying Party to
defend it against such Claim or the Indemnifying Party fails
to assume the defense of such Claim within a reasonable time
after having been requested by the Indemnified Party to assume
the defense, then the Indemnified Party shall have the right
to defend himself in any such action and, if appropriate under
Section 4(a) above, be indemnified for his costs and fees of
defense by the Indemnifying Party. The Indemnified Party, at
its own cost, may employ separate counsel to assert, based on
an opinion of counsel to the Indemnified Party, one or more
legal defenses available to it which are different from or
additional to those available to such Indemnifying Party; the
Indemnifying Party shall not have the right to direct the
defense of such action on behalf of the Indemnified Party in
respect of such different or additional defenses. The
Indemnifying Party shall not be liable to indemnify the
Indemnified Party for any settlement of any such action or
claim effected without the consent of the Indemnifying Party,
but if settled with the written consent of the Indemnifying
Party, or if there be a final judgment for the plaintiff in
any such action, the Indemnifying Party shall indemnify and
hold harmless the Indemnified Party from and against any Loss
by reason of such settlement or judgment and the Indemnifying
Party shall thereupon be liable for the payment of such Loss.
6.6 The provisions of this Section 6 shall survive the termination of
this Agreement.
7 Term; Termination.
7.1 The term of this Agreement shall commence on the date hereof and
continue for two (2) years thereafter, unless sooner terminated in
accordance with this Agreement.
7.2 Either Party may terminate this Agreement in the event of a default
by the other Party in the performance of any of its material
obligations under this Agreement which is not cured within
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thirty (30) days after notice of such default has been given to the
Party alleged to be in default by the other Party.
7.3 Either Party may give the other Party notice of its intention to
terminate this Agreement if at least one (1) Sales Program is not
being conducted during any twelve (12) month period after the date
hereof, and if a Sales Program is not approved or conducted within
the sixty (60) day period following such notice, the Party giving
the notice may terminate this Agreement on notice to the other
Party.
7.4 Either Party may terminate this Agreement upon notice to the other
Party if an "Event" occurs with respect to the other Party. For
purposes of this paragraph, an "Event" shall mean:
7.4.1 a Party liquidates, winds up its business, dissolves or
terminates it existence;
7.4.2 any voluntary proceeding by a Party is commenced under any
chapter of the Federal Bankruptcy Code or other law relating
to bankruptcy, bankruptcy reorganization, insolvency or relief
of debtors, or any such proceeding is commenced against a
Party and such proceeding is not dismissed within sixty (60)
days from the date on which it is filed or instituted; or a
Party shall make an assignment for the benefit of creditors or
admit in writing its inability to pay its debts as they mature
or that it is otherwise insolvent.
8 Miscellaneous.
8.1 Assignment. Neither Party may assign its rights and obligations
under this Agreement without the consent of the other Party.
8.2 Notices. Any notice or other communications required or permitted
hereunder shall be in writing and shall be deemed effective (a) upon
personal delivery, if delivered by hand and followed by notice by
mail or facsimile transmission; (b) one day after the date of
delivery by Federal Express or other nationally recognized courier
service, if delivered by priority overnight delivery between any two
points within the United States; or (c) five days after deposit in
the mails, if mailed by certified or registered mail (return receipt
requested) between any two points within the United States, and in
each case of mailing, postage prepaid, addressed to a party at its
address first set forth above, or such other address as shall be
furnished in writing by like notice by any such party.
8.3 Waiver. No waiver by a party of any breach of this Agreement by the
other shall be deemed to be a waiver of any preceding or subsequent
breach.
8.4 Entire Agreement. This Agreement contains the entire understanding
of the parties hereto with respect to the subject matter contained
herein.
8.5 No Third Party Beneficiaries. Each party hereto intends that this
Agreement shall not benefit or create any right or cause of action
in or on behalf of any person other than the parties hereto and the
other persons executing this Agreement.
8.6 "Force Majeure". Neither Party shall be considered to be in default
in the performance of any obligations under this Agreement when a
failure of performance shall be due to an uncontrollable force. The
term "uncontrollable force," as used in this Agreement, shall mean
an unanticipated event which is not reasonably within the control of
the affected Party and which
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by exercise of reasonable due diligence, such affected Party could
not reasonably have been expected to avoid, overcome or obtain or
cause to be obtained a commercially reasonable substitute therefor.
Such causes may include, without limitation, the following: flood,
earthquake, tornado, storm, fire, explosion, public emergency, civil
disobedience, labor dispute, labor or material shortage, sabotage,
restraint by court order or public authority (whether valid or
invalid), and action or non-action by or inability to obtain or keep
the necessary authorizations or approvals from any governmental
agency or authority; however, no Party shall be relieved of its
obligations hereunder, if its failure of performance is due to
removable or remediable causes which such Party fails to remove or
remedy using commercially reasonable efforts within a reasonable
time period. Either Party rendered unable to fulfill any of its
obligations under this Agreement by reason of an uncontrollable
force shall give prompt notice of such fact to the other, followed
by written confirmation of that notice, and shall exercise due
diligence to remove such inability with all reasonable dispatch. The
provisions of this paragraph, however, shall not affect a Party's
right to terminate this Agreement under the provisions of Paragraph
6.3 above.
8.7 Limitation of Liability. The exclusive measure of damages
recoverable from claims arising from, under or in connection with
the Agreement, whether arising by negligence, intended conduct or
otherwise shall be limited to actual damages only and such damages
shall be the sole and exclusive remedy hereunder and all other
remedies or damages are waived. In no event shall any Party be
liable for any incidental, consequential, punitive, exemplary or
indirect damages, lost profits or other business interruption
damages, lost or prospective profits, in tort, contract or
otherwise. The provisions of this Paragraph 7.6 shall survive the
termination of this Agreement.
8.8 Amendment. This Agreement may not be changed orally, but only by an
agreement in writing signed by the Party or parties to be charged
thereby.
8.9 Governing Law; Jurisdiction. This Agreement shall be governed by and
construed in accordance with the law of New York, including its
choice of law rules. Any judicial proceeding brought against any of
the parties to this Agreement on any dispute arising out of this
Agreement or any matter related hereto shall be brought in the
courts of the State of New York in New York County or in the United
States District Court for the Southern District of New York, and, by
execution and delivery of this Agreement, each of the parties to
this Agreement accepts for itself the jurisdiction of the aforesaid
courts, irrevocably consents to the service of any and all process
in any action or proceeding by the mailing of copies of such process
to such Party at its address provided for the giving of notices
under Section 13(c) above, and irrevocably agrees to be bound by any
judgment rendered thereby in connection with this Agreement. Each
Party hereto irrevocably waives to the fullest extent permitted by
law any objection that it may now or hereafter have to the laying of
the venue of any judicial proceeding brought in such courts and any
claim that any such judicial proceeding has been brought in an
inconvenient forum.
8.10 No Partnership or Agency. This agreement does not constitute a joint
venture or partnership by the parties, and each Party is entering
into this Agreement as a principal and not as an agent of the other.
8.11 Severability. This Agreement is intended to be performed in
accordance with, and only to the extent permitted by, all applicable
laws, ordinances, rules and regulations. In case any one or more of
the provisions contained in this Agreement or any application
thereof shall be invalid, illegal or unenforceable in any respect,
the validity, legality and enforceability of the remaining
provisions contained herein and any other application thereof shall
not in any way be affected or
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impaired thereby, and the extent of such invalidity or
unenforceability shall not be deemed to destroy the basis of the
bargain among the parties as expressed herein, and the remainder of
this Agreement and the application of such provision to other
Persons or circumstances shall not be affected thereby, but rather
shall be enforced to the greatest extent permitted by law.
8.12 Section Headings. The section headings appearing in this Agreement
are for convenience of reference only and are not intended, to any
extent or for any purpose, to limit or define the text of any
section.
8.13 Counterparts. This Agreement may be executed in several counterparts
and all counterparts so executed shall constitute one agreement
binding on all the parties hereto, notwithstanding that all the
parties are not signatory to the original or the same counterpart.
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed by
their respective duly authorized officers as of the date first written above.
Quintel Communications, Inc.
By: /s/
-----------------------------
Name: Jeffrey Schwartz
Title: Chmn & CEO
LCS GOLF, INC.
By: /s/
-----------------------------
Name: Michael Mitchell
Title: President
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SCHEDULE 1.5
Exclusive Quintel Products
Long distance telephone service
cellular telephone service
satellite dishes
mortgages
credit cards
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SCHEDULE 1.9
LCSG WEBSITES
golfuniverse.com
golfpromo.net
playgolfnow.com
universecybermall.com
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SCHEDULE 4
Option Certificate
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SCHEDULE 4-1
Registration Rights Agreement
THIS OPTION AND THE SECURITIES ISSUABLE UPON THE EXERCISE HEREOF HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR UNDER THE SECURITIES
LAWS OF ANY STATE AND MAY NOT BE SOLD, ASSIGNED OR TRANSFERRED UNLESS
REGISTERED UNDER SUCH ACT AND REGISTERED OR QUALIFIED UNDER APPLICABLE
STATE SECURITIES LAWS, OR PURSUANT TO AN EXEMPTION FROM REGISTRATION OR
QUALIFICATION THEREUNDER.
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Exhibit 10.11
Jan 19, 2000
TERM SHEET
PROPOSED WEB SITE MARKETING AGREEMENT
Quintel Communications, Inc. ("Quintel")
and
itarget.com, Inc. ("itarget")
1. Quintel proposes to develop and host a new home page on one of its
web-sites (the "New Website") using either a new brand name or a
co-branded name using Quintel's and itarget's names (the "Brand Name") to
market its GroupLotto program. Quintel's GroupLotto program involves the
registration of visitors in Quintel's subsidiary's MultiBuyer.com program
(the "Multibuyer Program"). The Brand Name will be selected by itarget's
subject to Quintel's approval, which shall not be unreasonably withheld or
delayed.
2. Quintel will be responsible for the following at its expense with respect
to the New Website:
a. design and technical implementation and maintenance;
b. Choice of products and services offered, subject to itarget's
approval, which shall not be unreasonably withheld or delayed;
initially the product/service will be a version of the GroupLotto
program now being offered by Quintel's subsidiary Multibuyer.com;
c. Marketing strategies and materials; provided that the manner of use
of itarget's name in any of such materials shall be subject to
itarget's approval, which shall not be unreasonably withheld or
delayed;
d. Customer service.
3. itarget will market the New Website as a promotional vehicle to its
marketing partners and affiliates to drive customers to their products and
services in the same manner in which itarget now markets its discount
telephone card, e.g., providing the telephone card free of charge to other
web site owners for their use as a premium offered to prospective
customers to capture data about the prospective customer. In addition,
itarget may market the New Website to customers and visitors to itarget's
websites. The price and other terms of the programs offered by the New
Website will be determined by Quintel. Quintel will have the right to
pre-approve the identity of the persons or other entities to which itarget
markets the New Website, such approval not to be unreasonably withheld or
delayed.
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4. Gross Profit with respect to revenues received by Quintel with respect to
the use of the New Website shall be shared as provided in this Section 4.
a. Quintel will pay itarget 50% of the Gross Profit (defined below) on
Direct Enrolled Program Revenues (defined below) earned by Quintel
on the revenues received by Quintel from Enrolled Customers (defined
below) obtained through the New Website. Quintel will pay itarget
twenty-five percent (25%) of the Gross Profit (defined below) earned
by Quintel on sales revenues from Enrolled Customers during the term
of the Marketing Agreement, other than Direct Enrolled Program
Revenues.
b. The term "Direct Enrolled Program Revenues" for purposes of this
Agreement means sales revenues earned by Quintel on orders by
Enrolled Customers for Quintel products or services made while the
Enrolled Customer is using the New Website.
c. The term "Enrolled Customer" means each unique, valid customer
enrolled as a customer in the MultiBuyer.com program from the New
Website.
d. As an example of the application of the provisions of Paragraph
4(a), if the Enrolled Customer logs on to the New Website directly
or through a link to the New Website provided on one of itarget's
websites, and purchases a product or service from Quintel while
logged on to the New Website, then itarget will be entitled to
receive 50% of the Gross Profit from such sales. If an Enrolled
Customer thereafter contacts or is otherwise directed to another
Quintel Website other than the New Website, then itarget will
receive 25% of the Gross Profit from the sales made to the Enrolled
Customer as a result of such contact.
e. Quintel will pay itarget nine cents ($.09) for each Enrolled
Customer.
f. Only direct expenses will be charged by Quintel in determining Gross
Profit, in accordance with generally accepted accounting principles,
consistently applied.
g. Payments due to itarget will be made monthly on a provisional basis
and reconciled quarterly and annually.
h. If Quintel obtains a customer from a third party who is identical to
an Enrolled Customer or other customer for which Quintel would
otherwise share revenues with itarget, and Quintel is obligated to
share with such third party the revenues or profits derived from
sales to such customer, then itarget shall not be entitled to
receive any share of the Gross Profit generated by Quintel from such
customer.
i. The definitive Agreement will contain procedures for record keeping
and audit of the calculation of Gross Profit.
j. Gross Profit will mean gross revenues received by Quintel for the
transactions referred to in this section 4, less Quintel's direct
product expenses, determined in accordance with generally accepted
accounting principles, consistently applied.
5. Quintel may continue to offer group lotto and any other programs or
services offered on the New Website on its other websites and through
other marketing vehicles. During the term of the
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Agreement, itarget will not offer or promote a game or promotion similar
to the GroupLotto or MultiBuyer program.
6. The New Website and the customers and database created using the New
Website (the " the New Website Database") will be shared jointly by
itarget and Quintel; provided, however, that itarget may use the New
Website Database only in the marketing of itarget's products and services
to prospective customers, and itarget shall not have the right to sell,
lease or license the New Website Database to any third party. If, however,
itarget sells one or more of its products or services to a customer first
identified by itarget from the New Website Database, following such sale,
information about such person thereafter obtained by itarget shall
constitute part of itarget's database.
7. The initial term of the Agreement shall be one (1) year, except that for a
period of six months following the end of the term, the New Website may
continue in existence to service continuing visitors, provided that the
parties will not engage in active marketing of the New Website.
8. The existing marketing agreement between Quintel and itarget dated
November _______, 1999 shall be amended in the following respects:
a. The provisions of Section 1.3 of such existing marketing agreement
shall be amended to provide that in the event of a Sale Transaction,
as defined in such Section 1.3, the right to terminate described in
such Section 1.3 may be exercised only after a minimum of one
million (1,000,000) customers have been enrolled in the Quintel
Marketing Programs.
b. If requested to do so by Quintel, customers enrolled by itarget in
Quintel's Marketing Programs conducted under the existing marketing
agreement shall be enrolled using the "opt-out" method, in which
they will be advised that they are being enrolled in the Quintel
Marketing Program, and the customer will be enrolled in such Program
unless the customer affirmatively indicates that it does not want to
be enrolled in the Program.
9. This term sheet is subject in all respects to the negotiation, execution
and delivery of a definitive agreement regarding the subject matter
hereof; provided, however, that until execution and delivery of such
agreement, this document shall constitute a binding agreement
QUINTEL COMMUNICATIONS, INC itarget.com, inc.
By: /s/ Andrew Stollman By: /s/ Jonathan Weisz
----------------------- ----------------------
1/19/00
-------
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<PAGE> 1
Exhibit 10.12
STOCK AND WARRANT PURCHASE AGREEMENT
STOCK AND WARRANT PURCHASE AGREEMENT ("Agreement") dated as of
November 2, 1999 between SkyMall, Inc., a Nevada corporation (the "Company"),
and each person or entity who executes a counterpart signature page to this
Agreement and is listed as an investor on Schedule I attached to this Agreement
(each individually an "Investor" and collectively the "Investors").
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, the Company desires to sell and issue to the Investors
listed on Schedule I, and the Investors listed on Schedule I desire to purchase
from the Company, up to an aggregate of 1,142,885 shares of Common Stock, $.001
par value per share (the "Common Stock"), of the Company on the terms and
conditions set forth herein; and
WHEREAS, each Investor listed on Schedule I will also receive
five-year warrants (the "Warrants"), in the identical form and substance of
Exhibit A attached hereto, to purchase that number of additional shares of
Common Stock equal to the product of 50% multiplied by the number of shares of
Common Stock purchased by such Investor at a per share exercise price equal to
S8.00 per share of Common Stock; and
WHEREAS, the Company has granted the Investors registration rights
with respect to the shares of Common Stock purchased hereunder and the shares of
Common Stock issuable upon exercise of the Warrants (the "Warrant Shares")
pursuant to the terms hereof,
NOW, THEREFORE, in consideration of the foregoing premises and the
covenants contained herein and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
agree as follows:
Certain Definitions. As used in this Agreement, the following terms
shall have the following respective meanings:
"Closing" and "Closing Date" shall have the meanings ascribed to
such terms in Section 1.3 herein.
"Commission" shall mean the Securities and Exchange Commission or
any other federal agency at the time administering the Securities Act.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended.
"Holder" and "Holders" shall include an Investor or Investors,
respectively, and any transferee of the shares of Common Stock, the Warrants or
the Warrant Shares or Registrable
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Securities which have not been sold to the public to whom the registration
rights conferred by this Agreement have been transferred in compliance with this
Agreement.
"Registrable Securities" shall mean: (i) the shares of Common Stock
and the Warrant Shares issued or issuable to each Holder or the respective
permitted transferee or designee; (ii) any securities issued (or upon the
conversion or exercise of any warrant, right or other security which is issued)
to each Holder as a result of any stock split, stock dividend, recapitalization
or similar event or upon the exchange of the shares of Common Stock, Warrants,
or Warrant Shares; or (iii) any other security of the Company issued as a
dividend or other distribution with respect to, in exchange of or in replacement
of Registrable Securities.
The terms "register", "registered" and "registration" shall refer to
a registration effected by preparing and filing a registration statement in
compliance with the Securities Act and applicable rules and regulations
thereunder, including without limitation, Rule 415 under the Securities Act or
any successor rule providing for offering securities on a continuous or delayed
basis, and the declaration or ordering of the effectiveness of such registration
statement by the Commission.
"Registration Expenses" shall mean all expenses to be incurred by
the Company in connection with each Holder's registration rights under this
Agreement, including, without limitation, all registration and filing fees,
printing expenses, fees and disbursements of counsel for the Company, blue sky
fees and expenses, reasonable fees and disbursements of Orrick, Herrington &
Sutcliffe LLP or other counsel for Holders (using a single counsel selected by a
majority in the interest of the Holders) for a "due diligence" examination of
the Company and review of the Registration Statement and related documents, and
the expense of any special audits incident to or required by any such
registration (but excluding the compensation of regular employees of the
Company, which shall be paid in any event by the Company).
"Registration Statement" shall have the meaning set forth in Section
4.1 (a) herein.
"Regulation D" shall mean Regulation D as promulgated pursuant to
the Securities Act, and as subsequently amended.
"Securities" shall mean the shares of Common Stock, the Warrants and
the Warrant Shares, collectively.
"Securities Act" or "Act" shall mean the Securities Act of 1933, as
amended.
"Selling, Expenses" shall mean all underwriting discounts and
selling commissions applicable to the sale of Registrable Securities, if any,
and all fees and disbursements of counsel for Holders not included within
"Registration Expenses".
ARTICLE I
Purchase and Sale of the Stock and Warrants
Section 1.1 Purchase and Sale. Upon the following terms and
conditions, the Company shall issue and sell to each Investor listed on Schedule
I severally, and each Investor listed on Schedule I severally shall purchase
from the Company, the number of shares of Common Stock and the number of
Warrants indicated next to such Investor's name on Schedule I attached hereto.
Section 1.2 Purchase Price. The per share purchase price for the
shares of Common Stock shall be equal to S7.00 per share of Common Stock (the
"Common Stock Purchase Price"). Each Investor listed on Schedule I will also
receive Warrants to purchase such number of shares of
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<PAGE> 3
Common Stock equal to the product of 50% multiplied by the number of shares of
Common Stock purchased at an exercise price equal to S8.00 per share of Common
Stock.
Section 1.3 The Closing. (a) The closing of the purchase and sale of
the Common Stock and Warrants (the "Closing"), shall take place at the offices
of Squire, Sanders Dempsey L.L.P, at 10:00 a.m., local time following acceptance
by the Company of subscriptions representing an aggregate of $8,000,200 of
shares of Common Stock, which acceptance shall not occur until the conditions
set forth in Article V hereof shall be fulfilled or waived in accordance
herewith. The date on which the Closing occurs is referred to herein as the
"Closing Date."
(b) On the Closing Date, the Company shall deliver to each Investor
certificates (with the number of and denomination of such certificates
reasonably requested by such Investor) representing the Warrants and the Common
Stock purchased hereunder by such Investor registered in the name of such
Investor or its nominee or deposit such Warrants and Common Stock into accounts
designated by such Investor, and such Investor shall deliver to the Company the
purchase price for the Warrants and Common Stock purchased by such Investor
hereunder by wire transfer in immediately available funds to an account
designated in writing by the Company. In addition, each party shall deliver all
documents, instruments and writings required to be delivered by such party
pursuant to this Agreement at or prior to the Closing Date.
ARTICLE II
Representations and Warranties
Section 2.1 Representations and Warranties of the Company. The Company
hereby makes the following representations and warranties to each of the
Investors from and as of the date hereof through the Closing Date:
(a) Organization and Qualification; Material Adverse Effect. The
Company owns 100% of the outstanding capital stock of each of Durham & Company,
a Utah corporation, Disk Publishing Inc., a Utah corporation, and skymall.com,
Inc. a Nevada corporation (collectively, the "Subsidiaries"). The Company does
not have any other direct or indirect subsidiaries. Each of the Company and its
Subsidiaries is a corporation duly incorporated and validly existing and in good
standing under the laws of its respective jurisdiction of incorporation and the
Company and the Subsidiaries each have the requisite corporate power to own its
properties and to carry on its business as now being conducted. Each of the
Company and each Subsidiary is duly qualified as a foreign corporation to do
business and is in good standing in every jurisdiction in which the nature of
the business conducted or property owned by it makes Such qualification
necessary other than those in which the failure so to qualify would not have a
Material Adverse Effect. "Material Adverse Effect" means any adverse effect on
the business, operations, properties, prospects, or financial condition of the
entity with respect to which such term is used and which is material to Such
entity and other entities controlling or controlled by such entity, taken as a
whole, and any material adverse effect on the transactions contemplated under
the Agreement or any other agreement or document contemplated hereby.
(b) Authorization; Enforcement. (i) The Company has the requisite
corporate power and authority to enter into and perform this Agreement and to
issue the Securities in accordance with the terms hereof and the terms of the
Warrants, (ii) the execution and delivery of this Agreement by the Company and
the consummation by it of the transactions contemplated hereby, including the
issuance of the Common Stock and the Warrants in accordance with the terms of
this Agreement and the Warrant Shares in accordance with the terms of the
Warrants have been duly authorized by all necessary corporate action, and no
further consent or authorization of the Company or its Board of Directors or
stockholders is required, (iii) this Agreement has been duly
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<PAGE> 4
executed and delivered by the Company, and (iv) this Agreement constitutes the
valid and binding obligations of the Company enforceable against the Company in
accordance with its terms.
(c) Capitalization. The authorized capital stock of the Company
consists of 50,000,000 shares of Common Stock and 10,000,000 shares of preferred
stock; without giving effect to this offerings, there are 9,279,958 shares of
Common Stock and no shares of preferred stock issued and outstanding,
respectively. All of the outstanding shares of the Common Stock have been
validly issued and are fully paid and non-assessable. No shares of Common Stock
or preferred stock are entitled to preemptive rights; Without giving effect to
this offering, 370,555 shares of Common Stock (including any shares of Common
Stock issuable upon the exercise of any outstanding options, warrants or rights
or upon the exchange or conversion of any exchangeable or convertible securities
of the Company) are entitled to registration rights (which registration rights
do not adversely impact the registration rights granted to the Investors); and
without giving effect to this offering, there are outstanding options for
1,672,149 shares of Common Stock and outstanding warrants for 104,700 shares of
Common Stock. Except for warrants issuable to Ryan, Beek & Co. Inc. ("Ryan
Beck") and warrants issuable to Shoreline Pacific Institutional Finance
("Shoreline") in connection with this offering and except as disclosed in the
prior sentence and as contemplated by this Agreement or disclosed in the SEC
Documents (as defined below), there are no other scrip, rights to subscribe for,
calls or commitments of any character whatsoever relating to, or securities or
rights exchangeable or convertible into, any shares of capital stock of the
Company, or contracts, commitments, understandings or arrangements by which the
Company is or may become bound to issue additional shares of capital stock of
the Company or options, warrants, scrip, rights to subscribe for, or commitments
to purchase or acquire, any shares, or securities or rights convertible into
shares, of capital stock of the Company. The Company represents and warrants
that it has no current plan or intention to sell or otherwise issue any shares
of Common Stock or securities convertible into or exercisable for shares of
Common Stock other than (i) up to 1,142,885 shares of Common Stock and up to
571,1444 Warrants to purchase shares of Common Stock being sold by the Company
to the Investors and (ii) up to an aggregate of 140,002 warrants (the "Placement
Warrants") to purchase Common Stock being issued to Ryan Beck and Shoreline in
connection with this offering (collectively such number of shares of Common
Stock, Warrants and Placement Warrants are referred to as the "Maximum Shares");
(d) Issuance of Warrant Shares. The Warrant Shares are duly
authorized and will be, as of the Closing Date, reserved for issuance and, upon
exercise in accordance with terms of the Warrants, such Warrant Shares will be
validly issued, fully paid and non-assessable, free and clear of any and all
liens, claims and encumbrances, and the holders of such Warrant Shares shall be
entitled to all rights and preferences accorded to a holder of Common Stock. The
outstanding shares of Common Stock are currently listed on the Nasdaq National
Market ("Nasdaq").
(e) No Conflicts. The execution, delivery and performance of this
Agreement by the Company and the consummation by the Company of the transactions
contemplated hereby do not and will not (i) result in a violation of the charter
or By-Laws of the Company or any Subsidiary or (ii) conflict with, or constitute
a default (or an event which with notice or lapse of time or both would become a
default) tinder, or give to others any rights of termination, amendment,
acceleration or cancellation of, any agreement, indenture, patent, patent
license or instrument to which the Company or any Subsidiary is a party, or
result in a violation of any Federal, state, local or foreign law, rule,
regulation, order, judgment or decree (including Federal and state securities
laws and regulations) applicable to the Company or any Subsidiary or by which
any property or asset of the Company or any Subsidiary is bound or affected
(except for such conflicts, defaults, terminations, amendments, accelerations,
cancellations and violations as would not, individually or in the aggregate,
have a Material Adverse Effect); provided that, for purposes of such
representation as to Federal, state, local or foreign law, rule or regulation,
no representation is made herein with respect to any of the same applicable
solely to the Investors and not to the Company or any Subsidiary. Neither the
business of the Company nor of any Subsidiary is being conducted in
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<PAGE> 5
violation of any law, ordinance or regulation of any governmental entity, except
for violations which either singly or in the aggregate do not and will not have
a Material Adverse Effect. The Company is not required under Federal, state,
local or foreign law, rule or regulation to obtain any consent, authorization or
order of, or to make any filing or registration with, any court or governmental
agency in order for it to execute, deliver or perform any of its obligations
under this Agreement or the Warrants or issue and sell the Common Stock or the
Warrants in accordance with the terms hereof or issue the Warrant Shares upon
exercise of the Warrants, except for the registration provisions provided for
herein, that, for Purposes of the representation made in this sentence, the
Company s assuming and relying upon the accuracy of the relevant representations
and agreements of the Investors herein.
(f) SEC Documents: Financial Statements. The Common Stock of the
Company is registered pursuant to Section 12(a) of the Exchange Act and the
Company has timely filed all reports, schedules, forms, statements and other
documents required to be filed by it with the Commission pursuant to the
reporting requirements of the Exchange Act, including material Filed pursuant to
Section 13(a) or 15(d), in addition to one or more registration statements and
amendments thereto heretofore filed by the Company with the Commission (all of
the foregoing including filings incorporated by reference therein being referred
to herein as the "SEC Documents"). The Company has delivered or made available
to the Investors true and complete copies of all SEC Documents (including,
without limitation, proxy information and solicitation materials and
registration statements) filed with the Commission since September 30, 1998. As
of their respective dates, the SEC Documents (as amended by any amendments filed
prior to the date of this Agreement or any Closing Date and provided to each
Investor) complied or will comply in all material respects with the requirements
of the Exchange Act and the rules and regulations of the Commission promulgated
thereunder and other Federal, state and local laws, rules and regulations
applicable to such SEC Documents, and none of the SEC Documents contained or
will contain any untrue statement of a material fact or omitted to state a
material fact required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they were made,
not misleading. The financial statements of the Company included in the SEC
Documents comply as to form in all material respects with applicable accounting
requirements and the published rules and regulations of the Commission or other
applicable rules and regulations with respect thereto. Such financial statements
have been prepared in accordance with generally accepted accounting principles
applied on a consistent basis during the periods involved (except (i) as may be
otherwise indicated in such financial statements or the notes thereto or (ii) in
the case of unaudited interim statements, to the extent they may not include
footnotes or may be condensed or summary statements) and fairly present in all
material respects the financial position of the Company as of the dates thereof
and the results of operations and cash flows for the periods then ended
(Subject, in the case of unaudited statements, to normal year-end audit
adjustments).
(g) Principal Exchange/Market. The principal market on which the
Common Stock is currently traded is Nasdaq.
(h) No Material Adverse Change. Since June 30, 1999, the date
through which the most recent quarterly report of the Company on Form 10-Q has
been prepared and filed with the Commission, a copy of which is included in the
SEC Documents, no event which had or is likely to have a Material Adverse Effect
has occurred or exists with respect to the Company or any Subsidiary, except as
otherwise disclosed or reflected in press releases or other SEC Documents
prepared through or as of a date Subsequent to June 30, 1999 and provided to the
Investors.
(i) No Undisclosed Liabilities. Neither the Company nor any
Subsidiary has any liabilities or obligations not disclosed in the SEC
Documents, other than those liabilities incurred in the ordinary course of its
respective business since June 30, 1999 or liabilities or obligations,
individually or in the aggregate, which do not or would not have a Material
Adverse Effect on the Company or the Subsidiaries, taken as a whole.
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(j) No Undisclosed Events or Circumstances. No event or circumstance
has occurred or exists with respect to the Company, any Subsidiary or their
respective business, properties, prospects, operations or financial condition,
which, under applicable law, rule or regulation requires public disclosure or
announcement by the Company but which has not been so publicly announced or
disclosed.
(k) No General Solicitation. None of the Company, the Subsidiaries
or, to the Company's knowledge, any of their respective affiliates or any person
acting on its or their behalf has engaged in any form of general solicitation or
general advertising (within the meaning of Regulation D) in connection with the
offer or sale of the Securities.
(l) No Integrated Offering. None of the Company, the Subsidiaries,
or, to the Company's knowledge, any of their respective affiliates, or any
person acting on its or their behalf has, directly or indirectly, made any
offers or sales of any security or solicited any offers to buy any security,
under circumstances that would require registration of any of the Securities.
(m) Intellectual Property. Each of the Company and the Subsidiaries
owns or has licenses to use certain copyrights and trademarks ("intellectual
property") associated with its respective business. Each of the Company and the
Subsidiaries has all intellectual property rights which are needed to conduct
its respective business as it is now being conducted or as proposed to be
conducted as disclosed in the SEC Documents. The Company has no reason to
believe that the intellectual property rights owned by the Company or any of its
Subsidiaries are invalid or unenforceable or that the use of such intellectual
property by the Company or the Subsidiaries infringes upon or conflicts with any
right of any third party, and neither the Company nor any Subsidiary has
received notice of any such infringement or conflict. The Company has no
knowledge of any infringement of the Company's or any Subsidiary's intellectual
property by any third party.
(n) No Litigation. Except as set forth in the SEC Documents
delivered to the Investors, no litigation or claim (including those for unpaid
taxes) against the Company or any Subsidiary is pending or, to the Company's
knowledge, threatened, and no other event has occurred, which if determined
adversely would have a Material Adverse Effect on the Company or any Subsidiary,
taken as a whole, or would materially adversely effect the transactions
contemplated hereby. The legal proceedings described in the SEC Documents will
not have an effect on the transactions contemplated hereby, and will not have a
Material Adverse Effect on the Company or the Subsidiaries, taken as a whole.
(o) Brokers. The Company has taken no action which would give rise
to any claim by any person, other than Ryan, Beck and Shoreline, for brokerage
commissions, finder's fees or similar payments by the Company relating to this
Agreement or the transactions contemplated hereby. The Company has taken no
action which Would give rise to any claim by any person for brokerage
commissions, finder's fees or similar payments by any Investor relating to this
Agreement or the transactions contemplated hereby.
(p) Forms S-3. The Company is eligible to file a Registration
Statement on Form S-3 under the Act and the rules promulgated thereunder, and
Form S-3 is permitted to be used for the transactions contemplated hereby under
the Act and the rules promulgated thereunder.
(q) Year 2000 Compliance. Each system which includes software,
hardware, databases or embedded control systems (microcompressor controlled,
robotic or other device) (collectively, a "System"), that constitutes any part
of, or is used in connection with the use, operation or enjoyment of, any asset,
property or leased premises of the Company or any Subsidiary (i) is designed (or
has been modified) to be used prior to and after January 1, 2000, (ii) to the
Company's knowledge, will operate without error arising from the creation,
recognition, acceptance,
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calculation, display, storage, retrieval, accessing, comparison, sorting,
manipulation, processing or other use of dates or date-based, date-dependent or
date-related data, including but not limited to century recognition,
day-of-the-week recognition, leap years, date values and interfaces of date
functionalities, and (iii) to the Company's knowledge, will not be adversely
affected by the advent of the year 2000, the advent of the twenty-first century
or the transition from the twentieth century through the year 2000 and into the
twenty-first century (collectively, items (i) through (iii) are referred to
herein as "Year 2000 Compliant"). No System that is material to the business,
finances or operations of the business of the Company or any Subsidiary receives
data from or communicates with any component or system external to itself
(whether or not such external component or system is the Company's, or any
Subsidiary's or any third party's) that is not itself Year 2000 Compliant. All
licenses for the use of any system-related software, hardware, databases or
embedded control system permit the Company or the Subsidiaries to make all
modifications, bypasses, debugging, work-arounds, repairs, replacements,
conversions or corrections necessary to permit the System to operate compatibly,
in conformance with their respective specifications, and to be Year 2000
Compliant. None of the Company nor any of the Subsidiaries has incurred, and
none of the Company nor any of the Subsidiaries has any reason to believe that
it may in the future incur, any expenses arising from or related to the failure
of any of its Systems as a result of not being Year 2000 Compliant.
Section 2.2 Representations and Warranties of the Investors. Each of
the Investors, severally and not jointly, hereby makes the following
representations and warranties to the Company as of the date hereof and on the
Closing Date:
(a) Authorization, Enforcement. (i) Such Investor has the requisite
power and authority, or the legal capacity, as the case may be, to enter and
perform this Agreement and to purchase the Securities being sold to such
Investor hereunder, (ii) the execution and delivery of this Agreement by such
Investor and the consummation by it of the transactions contemplated hereby have
been duly authorized by all necessary corporate or partnership action, as
required, and (iii) this Agreement constitutes the valid and binding obligation
of such Investor enforceable against such Investor in accordance its terms,
except as such enforceability may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium, liquidation or similar laws relating to,
or affecting generally the enforcement of creditors' rights and remedies or by
other equitable principles of general application.
(b) No Conflicts. The execution, delivery and performance of this
Agreement and the consummation by such Investor of the transactions contemplated
hereby do riot and will not (i) result in a violation of such Investor's
organizational documents, or (ii) conflict with any agreement, indenture, or
instrument to which such Investor is a party, or (iii) result in a violation of
any law, rule, or regulation or any order, judgment or decree of any court or
Governmental agency applicable to such Investor. Such Investor is not required
to obtain any consent or authorization of any governmental agency in order for
it to perform its obligations under this Agreement.
(c) Investment Representation. Such Investor is purchasing the
securities purchased hereunder for its own account and not with a view to
distribution in violation of any securities laws. Such Investor has no present
intention to sell the securities purchased hereunder and such Investor has no
present arrangement (whether or not legally binding) to sell the Securities
purchased hereunder to or through any person or entity; provided, however, that
by the representations herein, such Investor does not agree to hold any of the
Securities for any minimum or other specific term and reserves the right to
dispose of any of the Securities at any time in accordance with Federal and
state securities laws applicable to such disposition.
(d) Accredited Investor. Such Investor is an "accredited investor"
as defined in Rule 501 promulgated under the Act. The Investor has such
knowledge and experience in financial and business matters in general and
investments In particular, so that such Investor is able to evaluate
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the merits and risks of an investment in the securities purchased hereunder and
to protect its own interests in connection with such investment. In addition
(but without limiting the effect of the Company's representations and warranties
contained herein), such Investor has received such information as it considers
necessary or appropriate for deciding whether to purchase the Securities
purchased hereunder.
(e) Rule 144. Such Investor understands that there is no public
trading market for the Warrants, that none is expected to develop, and that the
Warrants must be held indefinitely unless exercised or unless such securities
are registered under the Act or an exemption from registration is available.
Such Investor understands that the Common Stock and the Warrant Shares must be
held indefinitely unless such securities are registered under the Act or an
exemption from registration is available. Such Investor has been advised or is
aware of the provisions of Rule 144 promulgated under the Act.
(f) Brokers. Such Investor has taken no action which would give rise
to any claim by any person for brokerage commissions, finder's fees or similar
payments by the Company relating to this Agreement or the transactions
contemplated hereby.
(g) Reliance by the Company. Such Investor understands that the
Common Stock and Warrants are being offered and sold in reliance on a
transactional exemption from the registration requirements of Federal and state
securities laws and that the Company is relying upon the truth and accuracy of
the representations, warranties, agreements, acknowledgments and understandings
of such Investor set forth herein in order to determine the applicability of
such exemptions and the suitability of such Investor to acquire the Securities.
ARTICLE III
Covenants
Section 3.1 Registration and Listing. Until the later of (i) such
time as no Warrants are outstanding or (ii) the expiration of the Effectiveness
Period (as hereinafter defined in Section 4.3), the Company will cause the
Common Stock to continue to be registered under Section 12(g) of the Exchange
Act, will comply in all respects, with its reporting and filing obligations
under the Exchange Act, and will not take any action or file any document
(whether or not permitted by the Exchange Act or the rules thereunder) to
terminate or suspend such reporting and filing obligations. Until the later of
(i) such time as no Warrants are outstanding or (ii) the expiration of the
Effectiveness Period, the Company shall use its best efforts to continue the
listing or trading of the Common Stock on Nasdaq or a principal exchange (which
consists exclusively of the NYSE or AMEX) and comply in all respects with the
Company's reporting filing and other obligations under the bylaws or rules of
Nasdaq or such principal exchange, as the case may be.
Section 3.2 Certificates on Exercise. Upon the exercise of any
Warrants in accordance with the terms of the Warrants, the Company shall issue
and deliver to such Investor (or the then holder) within two (2) business days
of the exercise date, (x) a Certificate or Certificates for the Warrant Shares
issuable upon such exercise and (y) a new certificate or certificates for the
Warrants of such Investor (or holder) which have not yet been exercised but
which are evidenced in part by the certificate(s) submitted to the Company in
connection with such exercise (with the number of and denomination of such new
certificate(s) designated by such Investor or holder).
Section 3.3 Replacement Certificates. The certificate(s)
representing the shares of Common Stock, Warrant Shares or the Warrants held by
any Investor (or then holder) may be exchanged by such Investor (or such holder)
at any time and from time to time for certificates with different denominations
representing an equal number of shares of Common Stock, Warrant Shares
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or Warrants, as the case may be, as reasonably requested by Such investor (or
such holder) upon surrendering the same. No service charge will be made for such
registration, transfer or exchange.
Section 3.4 Securities Compliance. The Company shall notify the
Commission and Nasdaq, in accordance with their requirements, of the
transactions contemplated by this Agreement and the Warrants and shall take all
other necessary action and proceedings as may be required and permitted by
applicable law, rule and regulation, for the legal and valid issuance of the
Securities. The Company covenants and agrees that it will not sell or otherwise
issue any shares of Common Stock or securities convertible into or exercisable
for shares of Common Stock which would violate NASD Rule 4460 (i)(1), and, In
particular, but not in limitation to the foregoing, the Company will not, during
the six (6) month period following the Closing of the sale of shares of Common
Stock and Warrants to the Investors, sell or otherwise issue any shares of
Common Stock or securities convertible into or exercisable for shares of Common
Stock in excess of the Maximum Shares without either (i) approval of such sale
or issuance by the stockholders of the Company, or (ii) a written advisory
opinion of the Nasdaq Stock Market that such approval is not necessary under
NASD Rule 4460 (i)(1) or any other applicable Nasdaq Stock Market or NASD rule
or a written waiver of any such requirement by the Nasdaq Stock Market, or (iii)
a written opinion of counsel to the Company that such stockholder approval is
not required.
Section 3.5 Notices. The Company agrees to provide all holders of
Warrants with copies of all notices and information, including, without
limitation, notices and proxy statements in connection with any meetings, that
are provided to the holders of shares of Common Stock, contemporaneously with
the delivery of such notices or information to such Common Stock holders.
Section 3.6 Reservation of Stock Issuable Upon Exercise. The Company
shall at all times reserve and keep available out of its authorized but unissued
Common Stock, solely for the purpose of affecting the exercise of the Warrants,
such number of shares of Common Stock as shall from time to time be sufficient
to effect the exercise of all outstanding Warrants.
ARTICLE IV
Registration
Section 4.1 Registration Requirements. The Company shall use its
best efforts to effect the registration of the Registrable Securities
(Including, without limitation, the execution of an undertaken, to file
post-effective amendments, appropriate qualification under applicable blue sky
or other state securities laws and appropriate compliance with applicable
regulations issued under the Securities Act) as would permit or facilitate the
public sale or distribution of all the Registrable Securities in the manner
including manner of sale) and in all states reasonably requested by the Holders.
Such best efforts by the Company shall include the following:
(a) The filing by the Company no later than fifteen (15) days after
the Closing of a registration statement or registration statements (as
necessary) with the Commission pursuant to Rule 415 under the Securities Act on
Form S-3) (or such other appropriate registration form if the Company is
ineligible to use Form S-3) covering tile resale of the Registrable Securities
acquired (or underlying the Securities so acquired) at the Closing
("Registration Statement(s)").
(b) Thereafter the Company shall use its best efforts to cause such
Registration Statement(s) to be declared effective by the Commission within
ninety (90) days following the Closing Date. In the event that such Registration
Statement is not declared effective within 90 days following the Closing Date,
then the Company shall until the Registration Statement is declared effective,
(in addition to any other remedies available to a Holder at law or in equity)
pay in cash to each Holder an amount equal to 2% of the respective purchase
price paid by such Holder (the "Damages") for each 30 day period beginning on
the 91" day following the Closing Date at which
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<PAGE> 10
the Registrable Securities were acquired (the "Default Period") that the
Registration Statement has not been declared effective; provided, however, that
the Default Period shall terminate and Damages shall cease to accrue on the date
upon which such Registrable Securities may be sold under Rule 144(k) in the
reasonable opinion ID of counsel to the Company (provided that the Company's
transfer agent has accepted an instruction from the Company to such effect). If
any applicable Default Period is less than 30 days such cash payment shall be on
a pro rata basis. The amount of such cash payment shall be calculated by the
Company on the earlier of (i) the effective date Of Such Registration Statement
or (ii) the last day of each Default Period, and a certified or bank check in
lawful money of the United States of America shall be sent within three (3)
business days of such calculation to the address of each Holder as listed in the
stock transfer ledger maintained by the Company or its transfer agent.
Notwithstanding the foregoing, if the Default Period commences from the failure
of the Company to cause to become effective the Registration Statement solely by
reason of the failure of any Holder to provide such information as (i) the
Company may reasonably request from such Holder to be included in the
Registration Statement or (ii) the Commission or Nasdaq may request in
connection with such Registration Statement (which request was provided to the
Holder in writing) (the "Late Holder"), the Company shall not be required to pay
such Damages to any of the Holders; provided, that the Company shall file the
Registration Statement excluding the Late Holder or take such other action as
necessary to cause the Registration Statement to be declared effective, within
two (2) business days after the initial day of the original Default C, Period,
provided that a new Default Period will commence three (3) business days after
the initial day of the original Default Period if the Registration Statement is
not effective. The Company agrees to promptly file an amendment to such
Registration Statement including the Late Holder once the requested information
has been provided.
(c) Prepare and File with the Commission such amendments (including
Post- effective amendments) and supplements to such Registration Statement and
the prospectus used in connection with such Registration Statement as may be
necessary to keep Such Registration Statement effective at all times during the
Effectiveness Period (as defined below) and comply with the provisions of the
Act with respect to the disposition of all securities covered by such
Registration Statement and notify the Holders of the filing and effectiveness of
such Registration Statement and any amendments or supplements. In the case of
amendments and supplements to a Registration Statement which are required to be
filed pursuant to this An the Company filing a report on Form 10-K, Form 10-Q or
Form 8-K or any analogous report under the Exchange Act, the Company shall have
incorporated such report by reference into the Registration Statement, if
applicable, or shall file such amendments or Supplements with the Commission on
the same day on which the Exchange Act report is filed which created the
requirement for the Company to amend or supplement the Registration Statement.
(d) Furnish to each Holder such numbers of copies of a current
prospectus conforming with the requirements of the Act, copies of the
Registration Statement, any amendment or supplement thereto and any documents
incorporated by reference therein and such other documents as such Holder may
reasonably require in order to facilitate the disposition of Registrable
Securities owned by such Holder.
(e) Use its best efforts to register and qualify the securities
covered by such Registration Statement under such other securities or "Blue Sky"
laws of such jurisdictions as Ca, shall be reasonably requested by each Holder;
provided that the Company shall not be required in connection therewith or as a
condition thereto to (i) qualify to do business where it: would not otherwise be
required to quality,, (ii) file a general consent to service of process in any
such states or jurisdictions, (iii) make any change in the Company's charter or
By-Laws, or (iv) subject itself to general taxation in any such Jurisdiction.
(f) Notify each Holder immediately of the happening of any event as
a result of which the prospectus (Including any supplement thereto or thereof)
included in such Registration
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Statement, as then in effect, includes an untrue statement of material fact or
omits to state a material fact required to be stated therein or necessary to
make the statements therein not misleading in light of the circumstances then
existing, and use its best efforts to promptly update and/or correct such
prospectus.
(g) Notify each Holder immediately of the issuance by the Commission
or any state securities commission or agency of any stop order suspending the
effectiveness of the Registration Statement or the initiation of any proceeding
for that purpose. The Company shall n use its reasonable best efforts to prevent
the issuance of any stop order and, if any stop order is issued, to obtain the
lifting thereof at the earliest possible time.
(h) Permit a smile firm of counsel, designated as Holders' Counsel
by the Holders of a majority of the Registrable Securities included in the
Registration Statement, to review the Registration Statement and all amendments
and supplements thereto within a reasonable period of time prior to each Filing,
and shall not File any document in a form to which such counsel reasonably
objects, provided such counsel shall provide Such Counsel's comments or
objection within five (5) business days after receipt of any document.
(i) As of the date the Registration Statement is declared effective
by the Commission, the Company shall have caused the Registrable Securities
covered by such Registration Statement to be listed with all securities
exchange(s) and/or markets on which the Common Stock is then listed, and
prepared and filed any required filings with the National Association of
Securities Dealers, Inc. or any exchange or market where the Common Stock is
traded.
(j) The Company shall make available for inspection by the Holders,
representatives of all the Holders together, any underwriter participating in
any disposition pursuant to a Registration Statement, and any attorney or
accountant retained by any Holder or underwriter, all financial and other
records customary for purposes of the Holders' due diligence examination of the
Company and all SEC Documents filed subsequent to the Closing Date, pertinent
corporate documents and properties of the Company, and cause the Company's
officers, directors and employees to supply all information reasonably requested
by any such representative, underwriter, attorney or accountant in connection
with such Registration Statement, provided that such parties agree to enter into
a Confidentiality Agreement in the form and substance annexed hereto as Exhibit
B.
(k) The term "best efforts" as used in this Agreement shall include,
without limitation, that the Company shall submit to the Commission, within five
(5) business days after the Company learns that no review of a particular
Registration Statement will be made by the staff of the Commission or that the
staff has no further comments on the Registration Statement, as the case may be,
a request for acceleration of effectiveness of such Registration Statement to a
time and date not later than 72 hours after the submission of such request.
Section 4.2 Expenses of Registration. All Registration Expenses
incurred in connection with any registration, qualification or compliance with
registration pursuant to this Section 4 shall be borne by the Company, and all
Selling Expenses of a Holder shall be borne by such Holder.
Section 4.3 Registration Period. In the case of the registration
effected by the Company pursuant to this Section 4, the Company will use its
best efforts to keep such registration effective (the "Effectiveness Period")
until the earlier to occur of (a) two years from the Closing Date, provided,
however, that the period of time which such Registration Statement Registration
is required to be effective shall be increased by the number of days that the
Registration Statement's effectiveness was suspended, if any, during the two
year period from the Closing Date, (b) the date on which all the Holders have
completed the sales or distributions of the Registrable Securities
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<PAGE> 12
included in the Registration Statement or, (c) the date on which such
Registrable Securities of all Holders may be sold without restriction under Rule
144(k) promulgated under the Securities Act (or any successor thereto) in the
reasonable opinion of counsel to the Company (provided that the Company's
transfer a(Tent has accepted an instruction from the Company to such effect and
will issue certificates representing such Registrable Securities without any
legend endorsed thereon).
Section 4.4 Obligation of Holder. It shall be a condition precedent
to the obligations of the Company to complete the registration pursuant to this
Agreement with respect to Registrable Securities of the Holder that:
(a) the Holder by such Holder's acceptance of the Registrable
Securities agrees to cooperate with the Company as reasonably requested by the
Company in connection with the preparation and filing of any Registration
Statement hereunder, unless the Holder has notified the Company in writing of
the Holder's election to exclude all of the Holder's Registrable Securities from
such Registration Statement.
(b) the Holder shall furnish to the Company such information
regarding the Holder, the Registrable Securities held by the Holder and the
intended method of disposition of the Registrable Securities held by the Holder
as shall be reasonably required to effect the registration of such Registrable
Securities and the Holder shall execute such documents as are customary in
connection with such registration as the Company may reasonably request.
Section 4.5 Indemnification.
(a) Company Indemnity. The Company will indemnify each Holder, each
of its officers, directors and partners, and each person controlling each
Holder, within the meaning of Section 15 of the Securities Act and the rules and
regulations thereunder with respect to which registration, qualification or
compliance has been effected pursuant to this Agreement, and each underwriter,
if any, and each person who controls, within the meaning of Section 15 of the
Securities Act and the rules and regulations thereunder, any underwriter,
against all Claims, losses, damages and liabilities (or actions in respect
thereof) arising out of or based on any untrue statement (or alleged untrue
statement) of a material fact contained in any prospectus, offering circular or
other document (including any related registration statement, notification or
the like) incident to any such registration, qualification or compliance, or
based on any omission (or alleged omission) to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading, or any violation by the Company of the Securities Act or any state
securities law or in either case, any rule or regulation thereunder applicable
to the Company and relating to action or inaction required of the Company in
connection with any such registration, qualification or compliance, and will
reimburse each Holder, each of its officers, directors and partners, and each
person controlling such Holder, each such underwriter and each person who
controls any such underwriter, for any legal and any other expenses reasonably
incurred in connection with investigating and defending any such claim, loss,
damage, liability or action, provided that the Company will not be liable in any
such case to a Holder to the extent that any such claim, loss, damage, liability
or expense arises out of or is based on any untrue statement or omission based
upon written information furnished to the Company by such Holder or the
underwriter (if any) therefor and stated to be specifically for use therein. The
indemnity agreement contained in this Section 4.5(a) shall not apply to amounts
paid in settlement of any such loss, claim, damage, liability or action if such
settlement is effected Without the consent of the Company (which consent will
not be unreasonably withheld).
(b) Holder Indemnity. Each Holder will, severally and not Jointly,
if Registrable Securities held by it are included in the securities as to Which
Such registration, qualification or compliance is being effected, indemnify the
Company, each of its directors, officers, partners, and each underwriter, if
any, of the Company's securities covered by such registration statement, each
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person who controls the Company or Such underwriter within the meanings of
Section 15 of the Securities Act and the rules and regulations thereunder, each
other Holder (if any), and each of their directors, officers and partners, and
each person controlling such other Holder(s) against all claims, losses, damages
and liabilities (or actions in respect thereof arising out of or based on any
untrue statement (or alleged untrue statement) of a material fact contained in
any such registration statement, prospectus, offering circular or other
document, or any omission (or alleged omission) to state therein a material fact
required to be stated therein or necessary to make the statement therein not
misleading, in each case only insofar as such untrue statement or alleged untrue
statement or omission relates to such Holder, and will reimburse the Company and
such other Holder(s) and their directors, officers and partners, underwriters or
control persons for any legal or any other expenses reasonably incurred in
connection with investigating and defending any such claim, loss, damage,
liability or action, in each case to the extent, but only to the extent, that
such untrue statement (or alleged untrue statement) or omission (or alleged
omission) is made in such registration statement, prospectus, offering circular
or other document in reliance upon and in conformity with written information
furnished to the Company by such Holder and stated to be specifically for use
therein, and provided that the maximum amount for which such Holder shall be
liable under this indemnity shall not exceed the net proceeds received by such
Holder from the sale of the Registrable Securities. The indemnity agreement
contained in this Section 4.5(b) shall not apply to amounts settlement of any
such claims, losses, damages or liabilities if such settlement is effected
without the consent of such Holder (which consent will not be unreasonably
withheld).
(c) Procedure. Each party entitled to indemnification tinder this
Article (the "Indemnified Party") shall give notice to the party required to
provide indemnification (the "Indemnifying Party") promptly after such
Indemnified Party has actual knowledge of any claim as to which indemnity may be
sought, and shall permit the Indemnifying Party to assume the defense of any
such claim in any litigation resulting therefrom, provided that counsel for the
Indemnifying Party, who shall conduct the defense of such claim or any
litigation resulting therefrom, shall be approved by the Indemnified Party
(whose approval shall not be unreasonably withheld), and the Indemnified Party
may participate in such defense at such party's expense, and provided further
that the failure of any Indemnified Party to give notice as herein shall not
relieve the Indemnifying Party of its obligations under this Article except to
the extent that the Indemnifying Party is materially and adversely affected by
such failure to provide notice. No Indemnifying Party, in the defense of any
such claim or litigation, shall, except with the consent of each Indemnified
Party, consent to entry of any judgment or enter into any settlement which does
not include as an unconditional term thereof the giving, by the claimant or
plaintiff to such Indemnified Party of a release from all liability in respect
to such claim or litigation. Each Indemnified Party shall furnish such
information regarding itself or the claim in question as an Indemnifying Party
may reasonably request in writing and as shall be reasonably required in
connection with the defense of such claim and litigation resulting therefrom.
4.6 Contribution. If the indemnification provided for in Section 4
herein is unavailable to the Indemnified Parties in respect of any losses,
claims, damages or liabilities referred to herein (other than by reason of the
exceptions provided therein), then each such Indemnifying Party, in lieu of
indemnifying such Indemnified Party, shall contribute to the amount paid or
payable by such Indemnified Party as a result of such losses, claims, damages or
liabilities as between the Company on the one hand and any Holder on the other,
in such proportion as is appropriate to reflect the relative fault of the
Company and of such Holder in connection with the statements or omissions which
resulted in such losses, claims, damages or liabilities, as well as any other
relevant equitable considerations. The relative fault of the Company on the one
hand and of any Holder on the other shall be determined by reference to. among
other things, whether the untrue or alleged untrue statement of a material fact
or omission or alleged omission to state a material fact relates to information
supplied by the Company or by such Holder.
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In no event shall the obligation of any Indemnifying Party to contribute tinder
this Section 4.6 ID exceed the amount that such Indemnifying Party would have
been obligated to pay by way of indemnification if the indemnification provided
for under Section 4.5(a) or 4.5(b) hereof had been available under the
circumstances.
The Company and the Holders agree that it would not be just and equitable if
contribution pursuant to this Section 4.6 were determined by pro rata allocation
(even if the Holders or the underwriters were treated as one entity for such
purpose) or by any other method of allocation which does not take account of the
equitable considerations referred to in the immediately preceding paragraphs.
The amount paid or payable by an Indemnified Party as a result of the losses,
claims, damages and liabilities referred to in the immediately preceding
paragraphs shall be deemed to include, subject to the limitations set forth
above, any legal or other expenses reasonably incurred by such Indemnified Party
in connection with investigating or defending any such action or claim.
Notwithstanding the provisions of this section, no Holder or underwriter shall
be required to contribute any amount in excess of the an amount which equals (i)
in the case of any Holder, the net proceeds received by such Holder from the
sale of Registrable Securities or (ii) in the case of an underwriter, the
underwriting discount applicable to the securities purchased by the underwriter.
No person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Securities Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation.
ARTICLE V
Conditions
Section 5.1 Conditions Precedent to the Obligation of the Company to
Issue and Sell the Stock arid Warrants. The obligation hereunder of the Company
to issue and sell the Common Stock and Warrants to the Investors is subject to
the satisfaction, at or before the Closing Date, of each of the conditions set
forth below. These conditions are for the Company's sole benefit and may be
waived by the Company at any time in its sole discretion.
(a) Accuracy of the Investors' Representations and Warranties. The
representations and warranties of each Investor shall be true and correct in all
material respects as of the date when made and as of the Closing Date as though
made at that time (except for representations arid warranties that speak as of a
particular date).
(b) Performance by the Investors. Each Investor shall have performed
all agreements and satisfied all conditions required hereby to be performed or
satisfied by such Investor at or prior to the Closing Date.
(c) No Injunction. No statute, rule, regulation, executive order,
decree, ruling or injunction shall have been enacted, entered, promulgated or
endorsed by any court or Governmental authority of competent jurisdiction which
prohibits the consummation of any of the transactions contemplated by this
Agreement.
Section 5.2 Conditions Precedent to the Obligation of the Investors
to Purchase the Stock and the Warrants. The obligation hereunder of each
Investor to acquire and pay for the Common Stock and Warrants is subject to the
satisfaction, at or before the Closing Date, of each of the conditions set forth
below. These conditions are for each Investor's sole benefit and may be waived
by each Investor at any time in its sole discretion.
(a) Accuracy of the Company's Representations and Warranties. The
representation and warranties of the Company shall be true and correct in all
material respects as of
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<PAGE> 15
the date where made and as of the Closing Date as though made at that time
(except for representations and warranties that speak as of a particular date).
(b) Performance by the Company. The Company shall have performed all
agreements and satisfied all conditions required to be performed or satisfied by
the Company at or prior to the Closing Date.
(c) Nasdaq. From the date hereof to the Closing Date, trading in the
Company's Common Stock shall not have been suspended by the Commission or Nasdaq
and trading in securities generally as reported by Nasdaq, shall not have been
suspended or limited, and the Common Stock shall not have been delisted from any
exchange or market where they are currently listed.
(d) No Injunction. No statute, rule, regulation, executive order,
decree, ruling, or injunction shall have been enacted, entered, promulgated or
endorsed by any Court or Governmental authority or competent Jurisdiction which
prohibits the consummation of any of the transactions contemplated by this
Agreement.
(e) Opinion of Counsel. At the Closing Date the Investors shall have
received an opinion of counsel to the Company in substantially the form attached
hereto as Exhibit C and such other opinions, certificates and documents as the
Investors or their counsel shall reasonably require incident to the Closing.
(f) Minimum Subscription. An aggregate of $8,000,200 of shares of
Common Stock shall have been purchased by the Investors pursuant to this
Agreement.
(g) Secretary's Certificate. The Company shall have delivered to the
Investors a certificate in form and substance reasonably satisfactory to the
Investors, executed by the Secretary of the Company on behalf of the Company,
certifying as to the satisfaction of all Closing conditions, incumbency of
signing officers, charter, By-Laws, good standing and authorizing resolutions of
the Company.
ARTICLE VI
Legend and Stock
Each certificate representing the Common Stock, the Warrants and the
Warrant Shares shall be stamped or otherwise imprinted with a legend
substantially in the following form:
THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT
OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND THEY MAY NOT BE OFFERED, SOLD,
PLEDGED, HYPOTHECATED, ASSIGNED OR TRANSFERRED EXCEPT (I) PURSUANT TO A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT WHICH HAS BECOME EFFECTIVE AND
IS CURRENT WITH RESPECT TO THESE SECURITIES OR (II) PURSUANT TO A SPECIFIC
EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT, BUT ONLY UPON A HOLDER
HEREOF FIRST HAVING OBTAINED THE WRITTEN OPINION OF COUNSEL OF THE ISSUER, OR
OTHER COUNSEL REASONABLY ACCEPTABLE TO THE ISSUER, THAT THE PROPOSED DISPOSITION
IS CONSISTENT WITH ALL APPLICABLE PROVISIONS OF THE SECURITIES ACT AS WELL AS
ANY APPLICABLE "BLUE SKY" OR SIMILAR SECURITIES LAW.
ARTICLE VII
Termination
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Section 7.1 Termination by Mutual Consent. This Agreement may be
terminated at any time prior to the Closing Date by the mutual written consent
of the Company and the Investors.
Section 7.2 Other Termination. This Agreement may be terminated by
action of the Board of Directors of the Company or by any of the Investors at
any time if the Closing Date shall not have been consummated by the fifth
business day following the date of this Agreement.
ARTICLE VIII
Miscellaneous
Section 8.1 Stamp Taxes; Agent Fees. The Company shall pay all stamp
and other taxes and duties levied in connection with the issuance of the Common
Stock and the Warrants pursuant hereto and the Warrant Shares issued upon
exercise of the Warrants.
Section 8.2 Specific Enforcement: Consent to Jurisdiction.
(a) The Company and the Investors acknowledge and agree that
irreparable damage would occur in the event that any of the provisions of this
Agreement were not performed in accordance with their specific terms or were
otherwise breached. It is accordingly agreed that the parties shall be entitled
to an injunction or injunctions to prevent or cure breaches of the provisions of
this Agreement and to enforce specifically the terms and provisions hereof, this
being in addition to any other remedy to which any of them may be entitled by
law or equity.
(b) The Company and each of the Investors (i) hereby irrevocably
submits to the exclusive Jurisdiction of the United States District Court, the
New York State courts and other courts of the United States sitting in New York
County, New York for the purposes of any suit, action or proceeding arising out
of or relating to this Agreement and (ii) hereby waives, and agrees not to
assert in any such suit, action or proceeding, any claim that it is not
personally subject to the Jurisdiction of such court, that the suit, action or
proceeding is brought in an inconvenient forum or that the venue of the suit,
action or proceeding is improper. The Company and each of the Investors consents
to process being served in any such suit, action or proceeding by mailing a copy
thereof to such party at the address in effect for notices to it under this
Agreement and agrees that such service shall constitute good and sufficient
service of process and notice thereof. Nothing in this paragraph shall affect or
limit any right to serve process in any other manner permitted by law.
Section 8.3 Entire Agreement, Amendment. This Agreement together
with the agreements and documents executed in connection herewith, contains the
entire understanding of the parties with respect to the matters covered hereby
and, except as specifically set forth herein, neither the Company nor any
Investor makes any representation,, warranty, covenant or undertaking with
respect to such matters. No provision of this Agreement may be waived or amended
other than by a written instrument signed by the party against whom enforcement
of any such amendment or waiver is sought.
Section 8.4 Notices. Any notices, consents, waivers or other
communications required or permitted to be given under the terms of this
Agreement Must be in writing and will be deemed to have been delivered: (i) upon
receipt, when delivered personally; (ii) upon receipt, when sent by facsimile
(provided confirmation of transmission is mechanically or electronically
generated and kept on file by the sending party); or (iii) one business day
after deposit with a nationally recognized overnight delivery service, in each
case properly addressed to the party to receive the same. The addresses and
facsimile numbers for such communications shall be:
16
<PAGE> 17
to the Company: SkyMall, Inc.
1520 East Pima Street
Phoenix, Arizona 85034
Telephone: 602-254-8620
Facsimile: 602-254-6544
Attn: Robert M. Worsley
Chief Executive Officer
with copies to: Squire, Sanders & Dempsey L.L.P.
Two Renaissance Square
40 North Central Avenue, Suite 2700
Phoenix, Arizona 85004-4498
Telephone: 602-528-4134
Facsimile: 602-253-8129
Attn: Gregory R. Hall, Esq.
to the Investors: To each Investor and its representative at
the addresses set forth on
Schedule I of this Agreement.
with copies to: Orrick, Herrington & Sutcliffe LLP
666 Fifth Avenue
New York, New York 10103)
Telephone: 212-506-5000
Facsimile: 212-506-5151
Attn: Rubi Finkelstein, Esq.
Any party hereto may from time to time change its address for notices by giving
at least 5 days written notice of such changed address to the other parties
hereto. Written confirmation of receipt (A) given by the recipient of such
notice, consent, waiver or other communication, (B) mechanically or
electronically Generated by the sender's facsimile machine containing the time,
date, recipient facsimile number and an image of the first page of such
transmission or (C) by a nationally recognized overnight delivery service shall
be rebuttable evidence of personal service, receipt by facsimile or receipt from
a nationally recognized overnight delivery service in accordance with clause
(i), (ii) or (iii) above.
Section 8.5 Indemnity. Each party shall indemnify each other party
against any loss, cost or damages (including reasonable attorney's fees but
excluding consequential damages) incurred as a result of such parties' breach of
any representation, warranty, covenant or agreement in this Agreement.
Section 8.6 Waivers. No waiver by any party of any default with
respect to any provision, condition or requirement of this Agreement shall be
deemed to be a continuing waiver in the future or a waiver of any other
provision, condition or requirement hereof, nor shall any delay or omission of
any party to exercise any right hereunder in any manner impair the exercise of
any such night accruing to it thereafter.
Section 8.7 Headings. The headings herein are for convenience only,
do not constitute a part of this Agreement and shall not be deemed to limit or
affect any of the provisions hereof.
Section 8.8 Successors and Assigns. Except as otherwise provided
herein, this Agreement shall be binding upon and inure to the benefit of the
parties and their successors and permitted assigns. The parties hereto may amend
this Agreement without notice to or the consent of any third party. The Company
may not assign this Agreement or any nights or obligations
17
<PAGE> 18
hereunder without the prior written consent of all Investors (which consent may
be withheld for any reason in their sole discretion), except that the Company
may assign this Agreement in connection with a merger, consolidation, business
combination or the sale of all or substantially all of its assets provided that
the Company is not released from any of its obligations hereunder, such
successor in interest or assignee assumes all obligations of the Company
hereunder, and appropriate adjustment of the provisions contained in this
Agreement is made, in form and substance satisfactory to the Investors, to place
the Investors in substantially the same position as they would have been but for
such assignment. Any Investor may assign this Agreement (in whole or in part) or
any nights or obligations hereunder without the consent of the Company in
connection with any sale or transfer of all or any portion of the Securities
held by such Investor, provided that no Investor may assign this Agreement prior
to the Closing Date without the Company's prior consent except to an affiliate
or affiliates of such Investor.
Section 8.9 No Third Party Beneficiaries. This Agreement is intended
for the benefit of the parties hereto and their respective permitted successors
and assigns and is not for the benefit of, nor may any provision hereof be
enforced by, any other person.
Section 8.10 Governing Law. This Agreement shall be governed by and
construed and enforced in accordance with the internal laws of the State of New
York without regard to such state's principles of conflict of laws.
Section 8.11 Survival. The representations and warranties and the
agreements and covenants of the Company and each Investor contained herein shall
survive tile Closing
Section 8.12 Execution. This Agreement may be executed in two or
more counterparts, all of which shall be considered one and the same agreement,
it being understood that all parties need not sign the same counterpart.
Section 8.13 Publicity. The Company agrees that it will not
disclose, and will not include in any public announcement, the name of any
Investor without its consent, unless and until such disclosure is required by
law or applicable regulation, and then only to the extent of such requirement.
Section 8.14 Severability. The parties acknowledge and agree that
the Investors are not agents, affiliates or partners of each other, that all
representations, warranties, covenants and agreements of the Investors hereunder
are several and not Joint, that no Investor shall have any responsibility or
liability for the representations, warrants, agreements, acts or omissions of
any other Investor, and that any rights granted to "Investors" hereunder shall
be enforceable by each Investor hereunder.
Section 8.15 Like Treatment of Holders. Neither the Company nor any
of its affiliates shall, directly or indirectly, pay or cause to be paid any
consideration, whether by way of interest, fee, payment for the redemption or
exchange of Securities, or otherwise, to an holder of Securities, for or as an
inducement to, or in connection with the solicitation of, any consent, waiver or
amendment of any terms or provisions of the Securities or this Agreement, unless
such consideration is required to be paid to all holders of Securities bound by
such consent, waiver or amendment whether or not such holders so consent, waive
or agree to amend and whether or not such holders tender their Securities for
redemption or exchange. The Company shall not, directly or indirectly, redeem
any Securities unless such offer of redemption is made pro rata to all holders
of Securities on identical terms.
18
<PAGE> 19
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed as of the date first above written.
SKYMALL, INC
By: /s/ Jonathan Weisz
-----------------------------
Name:
Title:
QUINTEL COMMUNICATIONS, INC.
By: /s/ Andrew Stollman
-----------------------------
Name:
Title:
Exact Name in Which Securities Should
be registered:
------------------------
19
<PAGE> 20
SCHEDULE I
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
No. of
Shares of
Name and Address of Common No. of
Name and Address of Investor Representative Purchase Price Stock Warrants
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
American High Growth Equities None $1,000,000 142,857 71,429
Retirement Trust
Trump Tower--24th Floor
725 5th Avenue
New York, New York 10022
- ----------------------------------------------------------------------------------------------------------------------
Special Situations Private Equity Fund L.P. David Greenhouse $1,199,800 171,400 85,700
- ----------------------------------------------------------------------------------------------------------------------
Special Situations Fund L.P. III David Greenhouse $1,350,300 192,900 96,450
153 E. 53rd Street
New York, New York 10022-1200
- ----------------------------------------------------------------------------------------------------------------------
Special Situations Cayman L.P. David Greenhouse $450,100 64,300 32,150
153 E. 53rd Street
New York, New York 10022-1200
- ----------------------------------------------------------------------------------------------------------------------
Quintel Communications, Inc. Geoffrey Bass $3,000,000 428,571 214,286
One Blue Hill Plaza c/o Feder, et al.
Pearl River, New York, 10965 750 Lexington Ave.
New York, NY 10022
- ----------------------------------------------------------------------------------------------------------------------
Robert Merrill Worsley and Christi Marie n/a $1,000,000 142,857 71,429
Worsley, as trustees of the Robert Merrill
Worsley and Christi Marie Worsley Family
Revocable Trust dated July 28, 1998
c/o SkyMall, Inc.
1520 E. Pima Street
Phoenix, Arizona 85034
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
20
<PAGE> 21
EXHIBITS AND SCHEDULES
Exhibit A Form of Warrant
Exhibit B Form of Confidentiality Agreement
Exhibit C Form of Opinion
<PAGE> 22
EXHIBIT A
FORM OF WARRANT
THE SECURITIES REPRESENTED BY THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS. THE
SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND MAY NOT BE OFFERED FOR SALE,
SOLD, TRANSFERRED OR ASSIGNED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION
STATEMENT FOR THE SECURITIES UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR
APPLICABLE STATE SECURITIES LAWS, OR AN OPINION OF COUNSEL EN A FORM REASONABLY
SATISFACTORY TO THE ISSUER THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT OR
APPLICABLE STATE SECURITIES LAWS OR UNLESS SOLD PURSUANT TO RULE 144 UNDER SAID
ACT. NOTWITHSTANDING THE FOREGOING, THIS WARRANT MAY BE PLEDGED IN CONNECTION
WITH A BONA FIDE MARGIN ACCOUNT.
SKYMALL, INC.
WARRANT TO PURCHASE COMMON STOCK
Warrant No.: Number of Shares:
Date of Issuance: November 2, 1999
SkyMall, Inc., a Nevada corporation (the "Company"), hereby certifies that, for
good and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, Quintel Communications, Inc., the registered holder hereof or its
permitted assigns (a "holder"), is entitled, subject to the terms set forth
below, to purchase from the Company upon surrender of this Warrant, at any time
or times on or after the date hereof, but not after 11:59 P.M. Eastern Time on
the Expiration Date (as defined herein) fully paid nonassessable shares of
Common Stock (as defined herein) of the Company (the "Warrant Shares") at the
purchase price per share provided in Section 2(a) below.
1. Definitions.
(a) Stock and Warrant Purchase Agreement. This Warrant is one of the
Warrants (the "Warrants") issued pursuant to the Stock and Warrant Purchase
Agreement dated as of November 2, 1999, among the Company and the Investors (as
such term in defined therein) (the "Agreement").
(b) Definitions. The following words and terms as used in this Warrant
shall have the following meanings:
(i) "Business Day" means any day other than Saturday, Sunday or
other day on which commercial banks in the City of New York are authorized or
required by law to remain closed.
(ii) "Closing Bid Price" means, for any security as of any date, the
last closing bid price for such security on the Principal Market (as defined
below) as reported by Bloomberg Financial Markets ("Bloomberg"), or, if the
Principal Market is not the principal trading market for such security, the last
closing bid price of such security on the principal securities exchange or
trading market where such security listed or traded as reported by Bloomberg, or
if the foregoing do not apply, the last closing bid price of such security in
the over-the-counter market on the electronic
1
<PAGE> 23
bulletin board for such security as reported by Bloomberg, or, if no closing bid
price is reported for such security by Bloomberg, the last closing trade price
for such security as reported by Bloomberg, or, if no last closing trade price
is reported for such security by Bloomberg, the average of the bid prices of any
market makers for such security as reported in the "pink sheets" by the National
Quotation Bureau, Inc. If the Closing Bid Price cannot be calculated for such
security on such date on any of the foregoing bases, the Closing Bid Price of
such security on such date shall be the fair market value as mutually determined
by the Company and the holder of this Warrant. All such determinations to be
appropriately adjusted for any stock dividend, stock split or other similar
transaction during such period.
(iii) "Closing Sale Price" means, for any security as of any date,
the last closing trade price for such security on the Principal Market (as
defined below) as reported by Bloomberg, or, if the Principal Market is not the
principal securities exchange or trading market for such security, the last
closing trade price of such security on the principal securities exchange or
trading market where such security is listed or traded as reported by Bloomberg,
or if the foregoing do not apply, the last closing trade price of such security
in the over-the-counter market on the electronic bulletin board for such
security as reported by Bloomberg, or, if no last closing trade price is
reported for such security by Bloomberg, the last closing ask price of such
security as reported by Bloomberg, or, if no last closing ask price is reported
for such security by Bloomberg, the average of the lowest ask price and lowest
bid price of any market makers for such security as reported in the "pink
sheets" by the National Quotation Bureau, Inc. If the Closing Sale Price cannot
be calculated for such security on such date on any of the foregoing bases, the
Closing Sale Price of such security on such date shall be the fair market value
as mutually determined by the Company and the holder of this Warrant. If the
Company and the holder of this Warrant are unable to agree upon the fair market
value of the Common Stock, then such dispute shall be resolved by the term
"Market Price" being substituted for the term "Closing Sale Price." All such
determinations to be appropriately adjusted for any stock dividend, stock split
or other similar transaction during such period.
(iv) "Common Stock" means (i) the Company's common stock, par value
5.001 per share, and (ii) any capital stock into which such Common Stock shall
have been changed or any capital stock resulting from a reclassification of such
Common Stock.
(v) "Expiration Date" means the date five (5) years from the date of
this Warrant or, if such date falls on a Saturday, Sunday or other day on which
banks are required or authorized to be closed in the City of New York or the
State of New York or on which trading does not take place on the principal
exchange or automated quotation system on which the Common Stock is traded (a
"Holiday"), the next date that is not a Holiday.
(vi) "Issuance Date" means, with respect to each Warrant, the date
of issuance of the applicable Warrant.
(vii) "Market Price" means, with respect to any security for any
date of determination, that price which shall be computed as the arithmetic
average of the Closing Bid Prices for such security on each of the five (5)
consecutive trading days immediately preceding such date of determination (all
such determinations to be appropriately adjusted for any stock dividend, stock
split or similar transaction during the pricing period).
(viii) "Person" means an individual, a limited liability company, a
partnership, a joint venture, a corporation, a trust, an unincorporated
organization and a government or any department or agency thereof.
(ix) "Principal Market" means the Nasdaq National Market.
(x) "Securities Act" means the Securities Act of 1933, as amended.
2
<PAGE> 24
(xi) "Warrant" means this Warrant and all warrants issued in
exchange, transfer or replacement thereof.
(xii) "Warrant Exercise Price" shall be equal to S8.00 per share.
(xiv) Other Definitional Provisions. Except as otherwise specified
herein, all references herein (A) to the Company shall be deemed to include the
Company's successors and (B) to any applicable law defined or referred to
herein, shall be deemed references to such applicable law as the same may have
been or may be amended or supplemented from time to time. When used in this
Warrant, the words "herein," "hereof," and "hereunder," and words of similar
import, shall refer to this Warrant, as a whole and not to any provision of this
Warrant, and the words "Section," "Schedule," and "Exhibit" shall refer to
Sections of. and Schedules and Exhibits to, this Warrant unless otherwise
specified. Whenever the context so requires, the neuter gender includes the
masculine or feminine, and the singular number includes the plural, and vice
versa.
2. Exercise of Warrant.
(a) Subject to the terms and conditions hereof, this Warrant may be
exercised by the holder hereof then registered on the books of the Company, in
whole or in part, at any time on any Business Day on or after the opening of
business on the date hereof and prior to 11:59 P.M. Eastern Time on the
Expiration Date by (i) delivery of a written in the form of the subscription
notice attached as Exhibit A hereto (the "Exercise Notice), of such holder's
election to exercise this Warrant, which notice shall specify the number of
Warrant Shares to be purchased; (ii) (A) payment to the Company of an amount
equal to the Warrant Exercise Price multiplied by the number of Warrant Shares
as to which this Warrant is being exercised (the "Aggregate Exercise Price") in
cash, certified or bank funds or wire transfer of immediately available funds or
(B) notifying the Company that this Warrant is being exercised pursuant to a
Cashless Exercise (as defined in Section 2(e)); and (iii) the surrender of this
Warrant (or a Lost Warrant Affidavit in substantially the form annexed hereto as
Exhibit C with respect to this Warrant in the case of its loss, theft or
destruction) to a common carrier for overnight delivery to the Company;
provided, that if such Warrant Shares are to be issued in any name other than
that of the registered holder of this Warrant, such issuance shall be deemed a
transfer and the provisions of Section 8 shall be applicable. In the event of
any exercise of the nights represented by this Warrant in compliance with this
Section 2(a), the Company shall on the second Business Day following the date of
receipt of the Exercise Notice, the Aggregate Exercise Price (or notice of a
Cashless Exercise) and this Warrant (or a Lost Warrant Affidavit in
substantially the form annexed hereto as Exhibit C with respect to this Warrant
in the case of its loss, theft or destruction) (the "Exercise Delivery
Documents"), credit such aggregate number of shares of Common Stock to which the
holder (or its designee) shall be entitled to the holder's (or its designee's)
balance account with The Depository Trust Company; provided, however, if the
holder who submitted the Exercise Notice requested physical delivery of any or
all of the Warrant Shares, then the Company shall, on or before the second
Business Day following receipt of the Exercise Delivery Documents issue and
surrender to a common carrier for overnight delivery to the address specified in
the Exercise Notice, a certificate, registered in the name of the holder (or its
designee), for the number of shares of Common Stock to which the holder (or its
designee) shall be entitled. Upon delivery of the Exercise Notice and Aggregate
Exercise Price referred to above or notification to the Company of a Cashless
Exercise referred to in Section 2(e), the holder of this Warrant (or its
designee) shall be deemed for all corporate purposes to have become the holder
of record of the Warrant Shares with respect to which this Warrant has been
exercised, irrespective of the date of delivery of this Warrant as required by
clause (iii) above or the certificates evidencing such Warrant Shares. In the
case of a dispute as to the determination of the Warrant Exercise Price or the
Market Price of a security or the arithmetic calculation of the Warrant Shares,
the Company shall promptly Issue to the holder (or its designee) the number of
shares of Common Stock that is not disputed and shall submit the disputed
determinations or arithmetic calculations to the holder via facsimile within one
Business Day of receipt of the holder's Exercise Notice. If the holder and the
Company are
3
<PAGE> 25
unable to agree upon the determination of the Warrant Exercise Price or the
Market Price or arithmetic calculation of the Warrant Shares within one day of
such disputed determination or arithmetic calculation being submitted to the
holder, then the Company shall immediately submit via facsimile (i) the disputed
determination of the Warrant Exercise Price or the Market Price to an
independent, reputable investment banking firm of nationally recognized
standing, mutually acceptable to both the Company and the holder or (ii) the
disputed arithmetic calculation of the Warrant Shares to an independent, outside
accountant, mutually acceptable to both the Company and the holder. The outside
Company shall cause the investment banking firm or the accountant, as the case
may be, to perform the determinations or calculations and notify the Company and
the holder of the results no later than forty-eight (48) hours from the time it
receives the disputed determinations or calculations. Such investment banking
firm's or accountant's determination or calculation, as the case may be, shall
be deemed conclusive absent manifest error.
(b) Unless the rights represented by this Warrant shall have expired or
shall have been fully exercised, the Company shall, as soon as practicable and
in no event later than two (2) Business Days after delivery of the Exercise
Delivery Documents and at its own expense, issue a new Warrant identical in all
respects to this Warrant exercised except it shall represent rights to purchase
the number of Warrant Shares purchasable immediately prior to such exercise
under this Warrant exercised, less the number of Warrant Shares with respect to
which such Warrant is exercised.
(c) No fractional shares of Common Stock are to be issued upon the
exercise of this Warrant, but rather the number of shares of Common Stock issued
upon exercise of this Warrant shall be rounded up to the nearest whole number.
(d) If the Company shall fall for any reason or for no reason to issue to
the holder within two (2) Business Days of receipt of the Exercise Delivery
Documents, a certificate for the number of shares of Common Stock to which the
holder (or its designee) is entitled or to credit the holder's (or designee's)
balance account with The Depository Trust Company for such number of shares of
Common Stock to which the holder (or its designee is entitled upon the holder's
exercise of thi Warrant for the number of shares of Common Stock to which such
holder is entitled pursuant to Section 2(b) hereof, the Company shall, in
addition to any other remedies under this Warrant or the Agreement or otherwise
available to such holder, including any indemnification under the Agreement, pay
as additional damages in cash to such holder on each day the issuance of such
Common Stock certificate or new Warrant, as the case may be, is not timely
effected, an amount equal to 0.5% of the product of (A) the sum of the number of
shares of Common Stock not issued to the holder (or its designee) on a timely
basis and to which the holder (or its designee) is entitled and/or, the number
of shares represented by the portion of this Warrant which is not being
converted, as the case may be, and (B) the average of the Closing Sale Price of
the Common Stock for the Five (5) consecutive trading days immediately preceding
the last possible date which the Company could have issued such Common Stock or
Warrant, as the case may be, to the holder without violating this Section 2.
(e) If, despite the Company's obligations under the Agreement, the Warrant
Shares to be issued are not registered and available for resale pursuant to a
registration statement in accordance with the Agreement, then notwithstanding
anything contained herein to the contrary, the holder of this Warrant may, at
its election exercised in its sole discretion, exercise this Warrant in whole or
in part and, in lieu of making the cash payment otherwise contemplated to be
made to the Company upon such exercise in payment of the Aggregate Exercise
Price, elect instead to receive upon such exercise the "Net Number" of shares of
Common Stock determined according to the following formula (a "Cashless
Exercise"):
Net Number = (A x B) - (A x C)
-----------------
B
4
<PAGE> 26
For purposes of the foregoing formula:
A = the total number of shares with respect to which this
Warrant is then being exercised.
B = the Market Price as of the date of the Exercise Notice.
C = the Warrant Exercise Price then in effect for the
applicable Warrant Shares at the time is Warrant or a new of
such exercise.
3. (a) Adjustment for Dividends in Other Stock and Property, Reclassifications.
In case at any time or from time to time the holders of the Common Stock (or any
shares of stock or other securities at the time receivable upon the exercise of
this Warrant) shall have received, or, on or after the record date fixed for the
determination of eligible shareholders, shall have become entitled to receive,
without payment therefor,
(1) other or additional stock or other securities or property
(other than cash) by way of dividend,
(2) any cash or other property paid or payable out of any
source other than retained earnings (determined in accordance with
generally accepted accounting principles), or
(3) other or additional stock or other securities or property
(including cash) by way of stock-split, spin-off, reclassification,
combination of shares or similar corporate rearrangement,
(other than (x) shares of Common Stock or any other stock or securities into
which such Common Stock shall have been exchanged or (y) any other stock or
securities convertible into or exchangeable for such Common Stock or such other
stock or securities), then and in each such case a holder, upon the exercise
hereof as provided in Section 2, shall be entitled to receive the amount of
stock and other securities and property (including cash in the cases referred to
in clauses (2) and (3) above) which such holder would hold on the date of such
exercise if on the Issuance Date such holder had been the holder of record of
the number of shares of Common Stock called for on the face of this Warrant, and
had thereafter, during the period from the Issuance Date to and including the
date of such exercise, retained such shares and/or all other or additional stock
and other securities and property (including cash in the cases referred to in
clause (2) and (3) above) receivable by it as aforesaid during such period,
giving effect to all adjustments called for during such period by Sections 3(a)
and 3)(b).
(b) Adjustment for Reorganization, Consolidation and Merger. In case of
any reorganization of the Company (or any other corporation the stock or other
securities of which are at the time receivable on the exercise of this Warrant)
or reclassification of its securities after the Issuance Date, or the Company
(or any such other corporation) shall consolidate with or merge into another
corporation or entity or convey or exchange all or substantially all its assets
to another corporation or entity, then and in each such case the holder of this
Warrant, upon the exercise hereof as provided in Section 2 at any time after the
consummation of such reorganization reclassification, consolidation, merger,
conveyance or exchange, shall be entitled to receive, in lieu of the stock or
other securities and property receivable upon the exercise of this Warrant prior
to such consummation, the stock or other securities or property to which Such
holder would have been entitled upon such consummation if such holder had
exercised this Warrant immediately prior thereto, all subject to further
adjustment as provided in Sections 3(a), (b), (c) and (d); in each such case,
the terms of this Warrant shall be applicable to the shares of stock or other
securities or property receivable upon the exercise of this Warrant after such
consummation.
5
<PAGE> 27
(c) Adjustment for Certain Dividends and Distributions. If the Company at
any time or from time to time makes, or fixes a record date for the
determination of holders of Common Stock (or any shares of stock or other
securities at the time receivable upon the exercise of this Warrant) entitled to
receive, a dividend or other distribution payable in additional shares of (x)
Common Stock or any other stock or securities into which such Common Stock shall
have been exchanged, or (y) any other stock or securities convertible into or
exchangeable for such Common Stock or such other stock or securities, then and
in each such event
(1) the Warrant Exercise Price then in effect shall be
decreased as of the time of the issuance of such additional shares
or, in the event such record date is fixed, as of the close of
business on such record date, by multiplying the Warrant Exercise
Price then in effect by a fraction (A) the numerator of which is the
total number of shares of Common Stock issued and outstanding
immediately prior to the time of such issuance or the close of
business on such record date, and (B) the denominator of which shall
be the total number of shares of Common Stock issued and outstanding
immediately prior to the time of such issuance or the close of
business on such record date as the case may be, plus the number of
shares of Common Stock issuable in payment of such dividend or
distribution; provided, however, that if such record date is fixed
and such dividend is not fully paid or if such distribution is not
fully made on the date fixed therefor, the Warrant Exercise Price
shall be recomputed accordingly as of the close of business on such
record date, and thereafter the Warrant Exercise Price shall be
adjusted pursuant to this Section 3)(c) as of the time of actual
payment of such dividends or distributions; and
(2) the number of shares of Common Stock theretofore
receivable upon the exercise of this Warrant shall be increased, as
of the time of such issuance or, in the event such record date is
fixed, as of the close of business on such record date, in inverse
proportion to the decrease in the Warrant Exercise Price.
(d) Stock Split and Reverse Stock Split. If the Company at any time or
from time to time effects a stock split or subdivision of the outstanding Common
Stock, the Warrant Exercise Price then in effect immediately before that stock
split or subdivision shall be proportionately decreased and the number of shares
of Common Stock theretofore receivable upon the exercise of this Warrant shall
be proportionately increased. ff the Company at any time or from time to time
effects a reverse stock split or combines the outstanding shares of Common Stock
into a smaller number of shares, the Warrant Exercise Price then in effect
immediately before that reverse stock split or combination shall be
proportionately increased and the number of shares of Common Stock theretofore
receivable upon the exercise of this Warrant shall be proportionately decreased.
Each adjustment tinder this Section 3)(d) shall become effective at the close of
business on the date the stock split, subdivision, reverse stock split or
combination becomes effective.
4. Redemption at the Company's Election. The Company, upon thirty (30) days'
prior written notice to the holder, may elect to redeem all or part of this
Warrant at a price equal to $0.01 per Warrant Share Issuable upon the exercise
hereof, if, but only if: (i) the Closing Bid Price shall have exceeded $12.00
per share (as equitably adjusted to reflect any merger, consolidation or
reorganization of the Company or any stock split, subdivision, reverse stock
split or combination effected by the Company) on each of the twenty (20)
consecutive trading days ending not more than one Business Day prior to the date
on which the notice of redemption shall be delivered to the holder, (ii) the
registration statement required to be filed under Section 4.1 of the Agreement,
dated as of the date hereof, by and among the Company and the other parties
signatory thereto, shall be effective and permit the sale of all Warrant Shares,
and (iii) the Common Stock shall be listed and trading on the Nasdaq National
Market, AMEX or the NYSE. Any such redemption shall be effective on the
thirtieth day following the delivery of such notice, provided, however, that the
holder may elect at any time prior to the effective date of redemption to
exercise all or any portion
6
<PAGE> 28
of this Warrant in accordance with the terms hereof, and provided further, that
the Company's right to redeem this Warrant shall be suspended if, after the
notice has been delivered, the Warrant Shares may not be sold pursuant to an
effective registration statement for any reason whatsoever or the Common Stock
shall cease to be listed and trading on the Nasdaq National Market, AMEX or the
NYSE. The notice period shall then be extended for a period of time equal to the
number of days during the notice period during which the registration statement
shall not have permitted the sale of such Warrant Shares or the Common Stock
shall not have been so listed and trading, as the case may be; provided,
however, that the notice period shall not begin to run until such time as the
holder receives notice from the Company that the registration statement permits
the sale of the Warrant Shares and/or the Common Stock shall have been so listed
and trading, as the case may be. The redemption price shall be payable in full,
in cash, on the effective date of any redemption pursuant to this paragraph (4).
A redemption notice delivered by the Company pursuant to this paragraph (4)
shall be irrevocable. Notwithstanding the foregoing, the Company's right to
redeem all or part of this Warrant may not be exercised if on the date on which
the Company delivers notice of such exercise the Market Price shall be less than
S12.00 per share (as equitably adjusted to reflect any merger, consolidation or
reorganization of the Company or any stock split, subdivision, reverse stock
split or combination effected by the Company).
5. Covenants as to Common Stock. The Company hereby covenants and agrees
as follows:
(a) This Warrant is, and any Warrants issued in Substitution for or
replacement of thi Warrant will upon issuance be, duly authorized and validly
issued.
(b) All Warrant Shares which may be issued upon the exercise of the rights
represented by this Warrant will, upon issuance, be validly issued, fully paid
and nonassessable and free from all taxes, liens and char(Yes with respect to
the issuance thereof.
(c) During the period within which the rights represented by this Warrant
may be exercised, the Company will at all times have authorized and reserved at
least 100% of the number of shares of Common Stock needed to provide for the
exercise of the rights then n represented by this Warrant and the par value of
said shares will at all times be less than or equal to the applicable Warrant
Exercise Price.
(d) The Company shall secure the listing of the shares of Common Stock
issuable upon exercise of this Warrant upon each national securities exchange or
automated quotation any, upon which shares of Common Stock are then listed
within the time required by system, such exchange or quotation system's rules
and regulations and shall maintain, so long as any other shares of Common Stock
shall be so listed, such listing of all shares of Common Stock from time to time
issuable upon the exercise of this Warrant; and the Company shall so list on
each national securities exchange or automated quotation system within the time
required by such exchange or quotation system's rules and regulations, as the
case may be, and shall maintain such listing of, any other shares of capital
stock of the Company issuable upon the exercise of this Warrant if and so long
as any shares of the same class shall be listed on such national securities
exchange or automated quotation system.
(e) The Company will not, by amendment of its Certificate of Incorporation
or through any reorganization, transfer of assets, consolidation, merger,
dissolution, issue or sale of securities, or any other voluntary action, avoid
or seek to avoid the observance or performance of any of the terms to be
observed or performed by it hereunder, but will at all times in good faith
assist in the carrying out of all the provisions of this Warrant and in the
taking of all such action as may reasonably be requested by the holder of this
Warrant in order to protect the exercise privilege of the holder of this Warrant
against dilution or other impairment, consistent with the tenor and purpose of
this Warrant. Without limiting the generality of the foregoing, the Company (i)
will not increase the par value of any shares of Common Stock receivable upon
the exercise of this Warrant
7
<PAGE> 29
above the Warrant Exercise Price then in effect, and (ii) will take all such
actions as may be necessary or appropriate in order that the Company may validly
and legally issue fully pal and nonassessable shares of Common Stock upon the
exercise of this Warrant.
f) This Warrant will be binding upon any entity succeeding to the Company
by merger, consolidation or acquisition of all or substantially all of the
Company's assets and any such successive mergers, consolidations or
acquisitions.
6. Taxes. The Company shall pay any and all taxes which may be payable with
respect to the issuance and delivery of Warrant Shares upon exercise of this
Warrant; provided, however, that the Company shall not be required to pay any
tax that may be payable in respect of any transfer involved in the issue or
delivery of Common Stock or other securities or property in a name other than
that of the registered holders of this Warrant to be converted and such holder
shall pay such amount, if any, to cover any applicable transfer or similar tax.
7. Warrant Holder Not Deemed a Stockholder. Except as otherwise specifically
provided herein, no holder of this Warrant, solely by virtue of such holding,
shall be entitled to vote or receive dividends or be deemed the holder of shares
of the Company for any purpose, nor shall anything contained in this Warrant be
construed to confer upon the holder hereof, as such, any of the rights of a
stockholder of the Company or any right to vote, give or withhold consent to any
corporate action (whether a reorganization, issue of stock, reclassification of
stock, consolidation, merger, conveyance or otherwise), receive notice of
meetings, receive dividends or subscription rights, or otherwise, prior to the
issuance to the holder of this Warrant of the Warrant Shares which he or she is
then entitled to receive upon the due exercise of this Warrant. In addition,
nothing contained in this Warrant shall be construed as imposing any liabilities
on such holder to purchase any securities (upon exercise of this Warrant or
otherwise) or as a stockholder of the Company, whether such liabilities are
asserted by the Company or by creditors of the Company. Notwithstanding this
Section 6, the Company will provide the holder of this Warrant with copies of
the same notices and other information given to the stockholders of the Company
Generally, contemporaneously with the giving thereof to the stockholders.
8. Representations of Holder. The holder of this Warrant, by the acceptance
hereof, represents that it is acquiring this Warrant and the Warrant Shares for
its own account for investment only and not with a view towards, or for resale
in connection with, the public sale or distribution of this Warrant or the
Warrant Shares, except pursuant to sales registered or exempted under the
Securities Act; provided, however, that by making the representations herein,
the holder does not agree to hold this Warrant or any of the Warrant Shares for
any minimum or other specific term and reserves the right to dispose of this
Warrant and the Warrant Shares at any time in accordance with or pursuant to a
registration statement or an exemption under the Securities Act. The holder of
this Warrant further represents, by acceptance hereof, that, as of this date,
such holder is an "accredited investor" as such term is defined in Rule
501(a)(1) of Regulation D promulgated by the Securities and Exchange Commission
under the Securities Act (an "Accredited Investor").
9. Ownership and Transfer.
(a) The Company shall maintain at its principal executive offices (or such
other office or agency of the Company as it may designate by notice to the
holder hereof), a register for this Warrant, in which the Company shall record
the name and address of the person in whose name this Warrant has been issued,
as well as the name and address of each transferee. The Company may treat the
person in whose name any Warrant is registered on the register as the owner and
holder thereof for all purposes, but in all events recognizing any transfers
made in accordance with the terms of this Warrant.
8
<PAGE> 30
(b) This Warrant and the rights granted hereunder shall be assignable by
the holder hereof without the consent of the Company.
(c) The Company is obligated to register the Warrant Shares for resale
under the Securities Act pursuant to the Agreement and any holder of this
Warrant (and the assignees thereof) is entitled to the registration rights in
respect of the Warrant Shares as set forth in the Agreement.
10. Lost, Stolen, Mutilated or Destroyed Warrant. If this Warrant is lost,
stolen, mutilated or destroyed, the Company shall, on receipt of an executed
Lost Warrant Affidavit in substantially the form annexed hereto as Exhibit C
(or, in the case of a Mutilated Warrant, the Warrant), issue a new Warrant of
like denomination and tenor as this Warrant so lost, stolen, mutilated or
destroyed.
11. Notice. Any notices, consents, waivers or other communications required or
permitted to be given under the terms of this Warrant must be in writing and
will be deemed to have been delivered: (i) upon receipt, when delivered
personally; (ii) upon receipt, when sent by facsimile (provided confirmation of
transmission is mechanically or electronically generated and kept on file by the
sending party); or (iii) one Business Day after deposit with a nationally
recognized overnight delivery service, in each case properly addressed to the
party to receive the same. The addresses and facsimile numbers for such
communications shall be:
If to the Company:
SkyMall, Inc.
1520 East Pima Street
Phoenix, Arizona 85034
Telephone: 602-254-8620
Facsimile: 602-254-6544
Attention: Robert M. Worsley, President and Chief Executive Officer
With copy to:
Squire, Sanders & Dempsey L.L.P.
Two Renaissance Square
40 North Central Avenue, Suite 2700
Phoenix, Arizona 85004
Facsimile: 602-253-8129
Attention: Gregory R. Hall, Esq.
If to a holder of this Warrant, to it at the address and facsimile number set
forth on the Schedule of Investors to the Agreement, with copies to such
holder's representatives as set forth on such Schedule of Investors, or at such
other address and facsimile as shall be delivered to the Company by the holder
at any time. Each party shall provide five days' prior written notice to the
other party of any change in address or facsimile number. Written confirmation
of receipt (A) given by the recipient of such notice, consent, waiver or other
communication, (B) mechanically or electronically generated by the sender's
facsimile machine containing the time, date, recipient facsimile number and an
image of the first page of such transmission or (C) by a nationally recognized
overnight delivery service shall be rebuttable evidence of prove personal
service, receipt by facsimile or receipt from a nationally recognized overnight
delivery service in accordance with clause (i), (ii) or (iii) above,
respectively.
12. Date. The date of this Warrant is November 2, 1999. This Warrant, in all
events, shall be wholly void and of no effect after the close of business on the
Expiration Date, except that notwithstanding any other provisions hereof, the
provisions of Section 8 shall continue in full force
9
<PAGE> 31
and effect after such date as to any Warrant Shares or other securities issued
upon the exercise of this Warrant.
13. Amendment and Waiver. Except as otherwise provided herein, the provisions of
the Warrants issued pursuant to the Agreement may be amended and the Company may
take any action herein prohibited, or omit to perform any act herein required to
be performed by it, only if the Company has obtained the written consent of the
holders of Warrants representing 66.7% of the shares of Common Stock obtainable
upon exercise of the Warrants then outstanding that no such action may increase
the Warrant Exercise Price of the Warrants, decrease the number of shares or
class of stock obtainable upon exercise of any Warrants, or otherwise materially
adversely effect the rights of the holder of this Warrant without the written
consent of such holder.
14. Descriptive Headings; Governing, Law; Jurisdiction. The descriptive headings
of the several Sections and paragraphs of this Warrant are inserted for
convenience only and do not constitute a part of this Warrant. The corporate
laws of the State of New York shall govern. all issues concerning the relative
nights of the Company and its stockholders. All other questions concerning the
construction, validity, enforcement and interpretation of this Warrant shall be
Governed by the internal laws of the State of New York, without giving effect to
any choice of law or conflict of law provision or rule (whether of the State of
New York, or any other jurisdictions) that would cause the application of the
laws of any Jurisdictions other than the State of New York. Each of the parties
hereto irrevocably consents and submits to the nonexclusive jurisdiction of the
Supreme Court of the State of New York and the United States District Court for
the Southern District of New York in connection with any proceeding arising out
of or relating to this Warrant, waives any objection to venue in the County of
New York, State of New York, or such District, and agrees that service of any
summons, complaint, notice of other process relating to such proceeding may be
effected in the manner provided by Section 10 hereof.
[Signature Page Follows]
10
<PAGE> 32
SKYMALL, INC.
By:_________________________
Name:_______________________
Title:______________________
11
<PAGE> 33
EXHIBIT A TO WARRANT
SUBSCRIPTION FORM
TO BE EXECUTED BY THE REGISTERED HOLDER TO EXERCISE THIS WARRANT
SKYMALL, INC.
The undersigned holder hereby exercises the right to purchase
___________________ of the shares of Common Stock ("Warrant Shares") of SkyMall,
Inc., a Nevada corporation (the "Company"), evidenced by the attached Warrant
(the "Warrant"). Capitalized terms used herein and not otherwise defined shall
have the respective meanings set forth in the Warrant.
1. Form of Warrant Exercise Price. The Holder intends that payment of the
Warrant Exercise Price shall be made as:
____________ a "Cash Exercise" with respect to _________________
Warrant Shares; and/or
____________ a "Cashless Exercise" with respect to ______________
Warrant Shares (to the extent permitted by the terms
of the Warrant).
2. Payment of Warrant Exercise Price. In the event that the holder has
elected a Cash Exercise with respect to some or all of the Warrant Shares to be
issued pursuant hereto, the holder shall pay the sum of S to the Company in
accordance with the terms of the Warrant.
3. Delivery of Warrant Shares. The Company shall deliver to the holder
Warrant Shares in accordance with the terms of the Warrant.
Date:______________,_______
___________________________
Name of Registered Holder
By: ______________________
Name:
Title:
A-1
<PAGE> 34
EXHIBIT B TO WARRANT
FORM OF WARRANT POWER
FOR VALUE RECEIVED, the undersigned does hereby assign and transfer to
_______________, Federal Identification No. ________, a warrant to purchase
shares of the capital stock of SkyMall, Inc., a Nevada corporation, represented
by warrant certificate no. _____, standing in the name of the undersigned on the
books of said corporation. The undersigned does hereby irrevocably constitute
and appoint ______________________, attorney to transfer the warrants of said
corporation, with full power of substitution in the premises.
Dated: _______________,_______
___________________________________
By: __________________________
Its: __________________________
B-1
<PAGE> 35
EXHIBIT C TO WARRANT
FORM OF AFFIDAVIT OF LOSS
STATE OF )
)ss:
COUNTY OF )
The undersigned (hereinafter "Deponent"), being duly sworn, deposes and says
that:
1. Deponent is an adult whose mailing address is:
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
2. Deponent is the recipient of a Warrant (the "Warrant") from
SkyMall, Inc. (the "Company"), dated ___________________________________ for the
purchase of _________________________________ shares of Common Stock, par value
S.001 per share, of the Company, at an exercise price of
$_______________________ per share.
3. The Warrant has been lost, stolen, destroyed or misplaced, under
the following circumstances:
4. The Warrant was not endorsed.
5. Deponent has made a diligent search for the Warrant, and has been
unable to find or recover same, and Deponent was the unconditional owner of the
Warrant at the time of loss, and is entitled to the full and exclusive
possession thereof, that neither the Warrant nor the rights of Deponent therein
have, in whole or in part, been assigned, transferred, hypothecated, pledged or
otherwise disposed of, in any manner whatsoever, and that no person, firm or
corporation other than the Deponent has any right, title, claim, equity or
interest in, to, or respecting the Warrant.
6. Deponent makes this Affidavit Cor the purpose of requesting and
inducing the Company and its agents to issue a new warrant in substitution for
the Warrant.
7. If the Warrant should ever come into the hands, custody or power
of the Deponent or the Deponent's representatives, agents or assigns, the
Deponent will immediately and without consideration surrender the Warrant to the
Company, its representatives, agents or assigns, its transfer agents or
subscription agents for cancellation.
C-1
<PAGE> 36
8. The Deponent hereby indemnities and holds harmless the Company
from any claim or demand for payment or reimbursement of any party arising in
connection with the subject matter of this Affidavit.
Signed, sealed and dated: _________________________
______________________________
Deponent
Sworn to and subscribed before me this
______day of ________________,________
______________________________________
Notary Public
C-2
<PAGE> 37
FORM OF CONFIDENTIALITY AGREEMENT
SKYMALL, INC.
THIS AGREEMENT (the "Agreement") is entered into on _____________ ____,
1999 (the "Effective Date"), between SkyMall, Inc., a Nevada corporation
("SkyMall"), and ____________________________________ ("Company"). (SkyMall and
Company are hereinafter sometimes individually referred to as a "Party," and
collectively as the "Parties.")
1. Confidential Information. The parties hereby acknowledge and agree that
they will be disclosing to each other in their discussions and communications
with each other certain confidential information including, without limitation,
certain confidential information relating to their respective businesses,
business strategies, opportunities, operations and related information (the
"Confidential Information"). The term Confidential Information does not include
information which (1) was or becomes generally available to the public through
no fault of a Party, or (2) was or becomes available on a non-confidential basis
from a source other than the other Party, provided that such source was not
bound by a confidentiality agreement in respect thereof. The Parties agree that
the Confidential Information will be kept confidential and only disclosed to
each Party's representatives who have a need to know such information for the
purposes of evaluation any business opportunities and that, in any event, each
Party shall be ible for any breach of this Agreement by any such
representatives. response
2. Non-Disclosure of Confidential Information. In consideration thereof,
it is our mutual understanding and agreement that, except as hereafter
specifically authorized in writing by either Party, the other Party shall not
disclose to any person or entity any such Confidential Information and that each
Party will hold in the highest confidential manner and to maintain in trust at
all times any such Confidential Information received from the other. Each Party
shall not disclose the Confidential Information to any person other than as
permitted hereby and will take all reasonable and appropriate steps to safeguard
the Confidential Information from unauthorized disclosure. Each Party agrees to
promptly notify the other Party if it becomes aware of the unauthorized
disclosure of the other Party's Confidential Information. Each Party further
agrees that it will not use any Confidential Information in competition with the
other Party, nor use the Confidential Information in any manner that competes
with the other Party.
3. Enforcement of Agreement Provisions. The Parties acknowledge and agree
that any breach or threatened breach o this Agreement will entitle the other
Party to injunctive relief to enforce this Agreement including a temporary
restraining order or injunction without bond and without the necessity of
province actual damages. Nothing in this Section 3 shall limit or exclude any
and all other rights to money damages, granted by law or equity. If any court or
of competent jurisdiction shall refuse, in that jurisdiction, to enforce any
part or provision of this Agreement due to a determination of enforceability,
illegality or invalidity, it is gr expressly understood and agreed by the
Parties that neither this Agreement, nor any part thereof, shall be void and
only the particular restriction deemed to be unenforceable, illegal or invalid
shall then be reduced or otherwise modified by such court or tribunal, but only
to the minimum extent necessary to permit its enforcement. The agreements and
promises contained herein shall survive the termination of any relationship
between the parties. This Agreement shall be Governed by the laws of the State
of Arizona. The term "person" as used in this Agreement shall be broadly
interpreted to include, without limitation, any corporation, partnership,
individual, organization or other entity.
4. In the event that a receiving Party or any of its employees or agents
become legally compelled (by deposition, interrogatory, request of documents,
subpoena, civil investigative demand or similar process) to disclose any of the
Confidential Information of the disclosing Party, that receiving Party or person
from whom Such information is being sought shall provide the
1
<PAGE> 38
disclosing Party to whom such Confidential Information belongs, with prompt
prior written notice of such requirement so that such disclosing Party may seek
a protective order or other appropriate remedy and/or waive compliance with the
terms of this Agreement. In the event that such protective order or other remedy
is not obtained, or the disclosing Party waives compliance with the provisions
hereof, the receiving Party required to provide such information agrees to
furnish only such portion of the Confidential Information which is legally
required to be furnished.
IN, WITNESS WHEREOF, the parties hereto by their respective duly
authorized officers have caused this Agreement to be executed.
SKYMALL, INC. COMPANY:_________________________
Signature:________________________ Signature:_______________________
Name:_____________________________ Name:____________________________
(Printed) (Printed)
Title:____________________________ Title:___________________________
Date:_____________________________ Date:____________________________
2
<PAGE> 39
FORM OF OPINION
November 2, 1999
To The Investors Listed On
Schedule A to This Opinion
And
Ryan, Beck & Co., Inc.
200 Park Avenue
New York, New York 10166
Re: SkyMall, Inc.
Ladies and Gentlemen:
We have acted as counsel to SkyMall, Inc. (the "Company"), a Nevada
corporation, in connection with that certain Stock and Warrant Purchase
Agreement, dated as of November 1, 1999 (the "Purchase Agreement"), and the
transactions contemplated therein. Capitalized terms used herein, but not
otherwise defined, shall have the meanings given them in the Purchase Agreement.
This opinion letter (the "Opinion") is delivered to you pursuant to Section
5.2(e) of the Purchase Agreement.
In connection with the opinions set forth herein, we have examined (i) the
Purchase Agreement; and (ii) the Warrants (collectively, the "Transaction
Documents"). We have also examined originals or copies of (a) the Company's
Articles of Incorporation, as amended to date; (b) the Company's Bylaws, as
amended to date; and (c) the corporate proceedings of the Company relating to
the foregoing. In addition, we have examined originals or copies, certified or
otherwise identified to our satisfaction, of such other corporate records,
agreements, instruments and documents of the Company and the Subsidiaries and
certificates and other statements of public officials and corporate officers,
and have made such other investigations of fact and law, as we have deemed
necessary in connection with the opinions set forth herein. In our examination,
we have assumed the genuineness of all signatures, the authenticity of all
documents submitted to us as originals, the conformity to original documents of
all documents submitted to us as certified, facsimile, conformed or photostatic
copies, and the authenticity of the originals of such copies, and the accuracy
and completeness of all corporate records made available to us by the Company
and its representatives.
As to questions of fact material to these opinions, we have relied upon
certificates of officers and other representatives of each of the Company and
its Subsidiaries and upon Our examination of the documents referred to above,
and have assumed the current accuracy and completeness of the information
contained in Such certificates and obtained from public officials and public
records included in the documents referred to above. For purposes of the
opinions expressed in this letter, we have assumed, without independent
investigation, that all representations, warranties and statements with respect
to factual matters in the Transaction Documents and such other documents and
instruments we have examined are true and accurate as of the date of this
opinion letter and have
<PAGE> 40
Investors Listed on Schedule A to this Option November 2, 1999
And Page 2
Ryan, Beck & Co., Inc.
relied upon such documents and instruments in rendering such opinions. We have
made no independent investigations or other attempts to certify the accuracy of
any such information or to the existence or nonexistence of any other factual
matters; however, our Primary Lawyers (as defined below) have no Actual
Knowledge (as defined below) concerning the factual matters upon which reliance
is placed which would render such reliance unreasonable. For purposes hereof,
the term "Primary Lawyers" means those attorneys currently in this firm who have
given substantive legal attention to the representation of the Company or any
Subsidiary, and the term "Actual Knowledge" means the conscious awareness of
such Primary Lawyers of facts or other information without any further
investigation.
In rendering the opinions set forth herein, we also have assumed, with
your permission: (i) the due organization, valid corporate existence and good
standing of each party to the Transaction Documents, other than the Company and
its Subsidiaries; (ii) the power and authority of each party to the Transaction
Documents (other than the Company and its Subsidiaries) to execute, deliver and
perform the Transaction Documents to which it is a party; (iii) the due
authorization, execution and delivery by each party to the Transaction Documents
(other than the Company and its Subsidiaries) of the Transaction Documents to
which it is a party; and (iv) that each of the Transaction Documents is a legal,
valid and binding obligation of, and enforceable in accordance with its terms
against, each party thereto (other than the Company and its Subsidiaries).
We express no opinion as to the enforceability of a waiver of rights
granted by any federal or state statute or any decisional law, including any
waiver of notice or any opportunity for a hearing, to the extent that such
waiver is deemed to violate public policy.
Without limiting any other qualifications set forth herein, the opinions
expressed below are subject to the effect of any generally applicable laws that:
(i) limit the enforceability of provisions releasing, exculpating, or exempting
a party from, or requiring indemnification of a party for, liability for its own
action or inaction, to the extent the action or inaction involves gross
negligence, recklessness, willful misconduct or unlawful conduct; (ii) may,
where less than all of a contract may be unenforceable, limit the enforceability
of the balance of the contract to circumstances in which the enforceable portion
is not an essential part of the agreed exchange; (iii) govern and afford
judicial discretion regarding the determination of damages and entitlement to
attorneys' fees and other costs; or (iv) may permit a party who has materially
failed to render or offer performance required by a contract to cure that
failure unless permitting a cure would unreasonably hinder the aggrieved party
from making substitute arrangements for performance or it is important under the
circumstances to the aggrieved party that performance occur by the date stated
in the contract.
In addition to the foregoing, we expressly limit or qualify our opinion as
follows
A. Our opinions expressed in Paragraph 2 below as to the valid existence
and good standing of the Company and its Subsidiaries are based solely on
certificates of public officials. copies of which have been furnished to You,
and our opinions with respect to such matters are rendered as of the dates of
such certificates.
B. Our opinions expressed in Paragraph 2 below are given as to the Company
and each of its Subsidiaries only with respect to those jurisdictions in which
such Company or Subsidiary owns or leases property or conducts business, as set
forth in a certificate of the Company attached hereto as Exhibit A, and we have
made no independent investigation as to the accuracy of the jurisdictions
identified therein.
<PAGE> 41
Investors Listed on Schedule A to this Option November 2, 1999
And Page 3
Ryan, Beck & Co., Inc.
C. Our opinions expressed herein are qualified to the extent that the
enforceability of any of the provisions of the agreements, documents or
obligations referred to herein may be subject to or affected by (i) applicable
bankruptcy, insolvency, reorganization, moratorium, fraudulent transfer or
conveyance or other laws affecting the rights and remedies of creditors
generally, (ii) general equity principles (regardless of whether enforcement is
sought in a proceeding in equity or at law) and the discretion of the court
before which any proceeding may be brought, (iii) duties and standards of good
faith, reasonableness and fair dealing imposed on parties to contracts, (iv) the
limitation in certain circumstances of provisions imposing penalties,
forfeitures, late payment charges or an increase in interest rate upon
delinquency in payment or the occurrence of a default, and (v) a court
determination that any fees payable pursuant to a provision requiring the
payment of attorneys' fees is reasonable. We express no opinion as to the
validity or binding effect of any indemnification or contribution provisions
contained in the Transaction Documents or any other agreements to the extent
such provisions are limited by federal or state securities laws or the policies
underlying such laws.
D. Our opinions expressed herein are limited to the specific issues
addressed and to the laws existing on the date hereof. By rendering our opinion,
we do not undertake to advise you with respect to any other matter or of any
change in such laws or the interpretation thereof which may occur after the date
hereof.
E. In connection with the opinions expressed in Paragraph I hereof, we
note that any provisions of the Transaction Documents that permit the Investors
to take actions or make determinations, or to benefit from indemnities and
similar undertakings, may be subject to a requirement that such actions be taken
or such determinations be made, and that any action or inaction by the Investors
which may give rise to a request for payment under such an indemnity or similar
undertaking be taken or not taken, in a commercially reasonable manner and in
good faith. Based upon the foregoing, and subject to the qualifications set
forth herein, we are of the opinion that:
1. The execution, delivery and performance of the Transaction
Documents have been duly and validly authorized by the Company and the Agreement
is valid and binding upon the Company, enforceable in accordance with its terms.
The Warrants constitute valid and binding obligations of the Company to issue
and sell, upon exercise thereof in accordance with its terms, the number and
type of securities of the Company called for thereby. The securities to be
issued and sold by the Company in connection with the Agreement and the Warrants
(as the case may be) have been duly authorized and, when issued and paid for in
accordance with the Agreement and the Warrants (as the case may be), the
certificates representing each of the securities, will be validly Issued, fully
paid and non-assessable; the holders thereof are not and will not be subject to
personal liability to third parties solely by reason of being such holders, such
securities are not subject to the preemptive nights of any security holder of
the Company; and all corporate action required to be taken for the
authorizations issuance and sale of such securities has been duly and validly
taken by the Company. The Company has duly reserved 1,142,858 shares of Common
Stock for issuance upon exercise of the Warrants. The Common Stock, the Warrants
and the Warrant Shares conform in all material respects to the description
thereof contained in the Agreement. No transfer tax is payable by or on behalf
of the Company in connection with the issuance and sale of any of the Common
Stock, the Warrants and the Warrant Shares or the consummation of the Company's
obligations under the Transaction Documents.
<PAGE> 42
Investors Listed on Schedule A to this Option November 2, 1999
And Page 4
Ryan, Beck & Co., Inc.
2. The Company and each Subsidiary has been duly organized and is
validly existing as a corporation in good standing under the laws of its
jurisdiction of incorporation; the Company and each Subsidiary is duly qualified
and is in good standing as a foreign corporation to do business in each
jurisdiction in which its ownership or leasing of any properties or the
character of its operations requires such qualification, except where the
failure to so qualify would not have a Material Adverse Effect (as defined in
the Agreement); each of the Company and each Subsidiary has all requisite
corporate power and authority, and to our Actual Knowledge, all authorizations,
approvals, orders, licenses, certificates and permits of and from all state and
Federal governmental regulatory officials and bodies to own or lease its
properties and conduct its business, and, to our Actual Knowledge, each of the
Company and each Subsidiary is doing business in compliance with all such
authorizations, approvals, orders, licenses, certificates and permits and all
state and Federal laws, rules and regulations concerning the business in which
the Company or such Subsidiary is engaged, except where the failure to so comply
would not have a Material Adverse Effect (as defined in the Agreement).
3. All issued and outstanding been duly authorized and validly issued
and, based solely upon our review of the respective stock ledgers, minute books
and certificates of respective officers, are fully paid and non-assessable; the
holders thereof have no rights of rescission or preemptive rights with respect
thereto and are not subject to personal liability solely by reason of being
securityholders; and, none of such securities were issued in violation of any
statutory preemptive rights of any holder of any security of the Company or, to
our Actual Knowledge, any contractual preemptive rights of any party.
4. To our Actual Knowledge, except as set forth in the SEC Documents,
there is no material litigation or state or Federal Governmental proceeding
pending or threatened against, or involving the properties or business of the
Company or any Subsidiary.
5. To our Actual Knowledge, none of the Company nor any Subsidiary is
in breach of, or in default under, any term or provision of any indenture,
mortgage, deed of trust, lease, note, loan or credit agreement or any other
agreement or instrument evidencing an obligation for borrowed money, or any
other agreement or instrument known to us to which it is a party or by which it
or any of its respective properties may be bound or affected, except for where
such breach or default would not have a Material Adverse Effect. To our Actual
Knowledge, none of the Company nor any Subsidiary is in violation of any
provision of its charter or Bylaws or in violation of any franchise, license,
permit, judgment, decree or order, or in violation of any state or Federal
statute, rule or regulation. To our Actual Knowledge, neither the execution and
delivery of the Transaction Documents, nor the issuance and sale or delivery of
the Common Stock, the Warrants and/or the Warrant Shares nor the consummation of
any of the transactions contemplated in the Transaction Documents, nor the
compliance by the Company with the terms and provisions thereof, has conflicted
with or will conflict with, or has resulted in or will result in a breach of,
any of the terms and provisions of, or has constituted or will constitute a
default under, or has resulted in or will result in the creation or imposition
of any lien, charge or encumbrance upon any property or assets of the Company or
any Subsidiary or pursuant to the terms of any indenture, mortgage, deed of
trust, note, loan or credit agreement or any other agreement or instrument
evidencing an obligation for borrowed money, or any other agreement or
instrument known to us to which the Company or any Subsidiary may be bound or to
which any of the property or assets of the Company or any Subsidiary is subject;
nor will such action result in any violation of the provisions of the charter or
the Bylaws of the Company or any Subsidiary, any state or Federal statute or any
state or Federal order, rule or regulation applicable to the Company or any
Subsidiary of any court or other state or Federal regulatory authority having
jurisdiction over the Company or any Subsidiary.
<PAGE> 43
Investors Listed on Schedule A to this Option November 2, 1999
And Page 5
Ryan, Beck & Co., Inc.
6. Assuming that each Investor that purchases the Common Stock and the
Warrants is an Accredited Investor, that the representations made by the Company
and the Investors in the Purchase Agreement were true and correct on the date of
such Agreement and at the time of the Closing and that a Form D will be filed in
accordance with the provisions of Section 503) of Regulation D, no registration
under the Securities Act is required in connection with the sale and issuance of
any of the Securities. The offering and sale of the Securities in the manner
contemplated by the Purchase Agreement will not be integrated with any offering
made before the offer and sale of such Securities in a manner that would render
unavailable any exemption from registration under the Securities Act.
7. We have participated in conferences with officers and other
representatives of the Company, at which conferences we have made inquiries of
such officers and representatives, discussed the contents of the SEC Documents
(as defined in the Agreement), the Confidential Private Placement Memorandum
(together with the attachments thereto), dated as of September 27, 1999, as
supplemented (the "Memorandum"), and related matters and, although we are not
passing upon and do not assume responsibility for the accuracy, completeness or
fairness of the statements contained in the SEC Documents or the Memorandum, on
the basis of the foregoing no facts have come to Our attention which lead LIS to
believe that any of the SEC Documents or the Memorandum as of the date of this
opinion contained any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they were made,
not misleading (it being understood we are not expressing any opinion with
respect to the financial statements and schedules and other financial and
statistical data, including any financial forecasts or projections, included in
the SEC Documents or the Memorandum).
Attorneys involved in the preparation of this opinion are admitted to
practice law in the States of Arizona and we do not express any opinion herein
concerning any law other than the laws of the State of Arizona, the General
Corporation Law of the States of Nevada and Utah and the federal laws of the
United States of America (collectively, "Applicable Law"); however, the term
"Applicable Law" is limited to those laws and regulations that a lawyer
exercising customary professional diligence would reasonably recognize as
applicable in any material respect to the transactions contemplated by the
Transaction Documents, and does not include laws and regulations of county,
municipal, and special political subdivisions, whether state, regional,
municipal, or otherwise, provided the violation of any of the foregoing would
not result in a Material Adverse Effect. No opinion is expressed herein as to
matters governed by any other laws, statutes, rules, or regulations.
This opinion is intended solely for the benefit of the addressee hereof
any may not be relied upon in any manner by any other person without our express
prior written consent.
Respectfully submitted,
Squire, Sanders & Dempsey L.L.P.
<PAGE> 44
EXHIBIT A
Certificate of SkyMall, Inc
[Attached]
<PAGE> 45
SKYMALL, INC.
OFFICER'S CERTIFICATE
1, Christine A. Aguilera, Executive Vice President, General Counsel and
Secretary of SkyMall, Inc., a Nevada corporation (the "Corporation"), hereby
certify that:
(a) The Corporation does business in the States of Nevada and
Arizona.
(b) skyrnall.com, inc. does business in the States of Nevada,
Arizona
(c) Durham & Company does business in the States of Utah and
(d) Disc Publishing, Inc. does business in the State of Utah.
IN WITNESS WHEREOF, I have hereunto signed my name.
Dated: November 2, 1999
SKYMALL, INC.
-------------------------------
Christine A. Aguilera
Executive Vice President, General Counsel
and Secretary
<PAGE> 46
SCHEDULE A
LIST OF INVESTORS
<PAGE> 47
SCHEDULE I
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
No. of
Shares of
Name and Address of Common No. of
Name and Address of Investor Representative Purchase Price Stock Warrants
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
American High Growth Equities None $1,000,000 142,857 71,429
Retirement Trust
Trump Tower--24th Floor
725 5th Avenue
New York, New York 10022
- ----------------------------------------------------------------------------------------------------------------------
Special Situations Private Equity Fund L.P. David Greenhouse $1,199,800 171,400 85,700
- ----------------------------------------------------------------------------------------------------------------------
Special Situations Fund L.P. III David Greenhouse $1,350,300 192,900 96,450
153 E. 53rd Street
New York, New York 10022-1200
- ----------------------------------------------------------------------------------------------------------------------
Special Situations Cayman L.P. David Greenhouse $450,100 64,300 32,150
153 E. 53rd Street
New York, New York 10022-1200
- ----------------------------------------------------------------------------------------------------------------------
Quintel Communications, Inc. Geoffrey Bass $3,000,000 428,571 214,286
One Blue Hill Plaza c/o Feder, et al.
Pearl River, New York, 10965 750 Lexington Ave.
New York, NY 10022
- ----------------------------------------------------------------------------------------------------------------------
Robert Merrill Worsley and Christi Marie n/a $1,000,000 142,857 71,429
Worsley, as trustees of the Robert Merrill
Worsley and Christi Marie Worsley Family
Revocable Trust dated July 28, 1998
c/o SkyMall, Inc.
1520 E. Pima Street
Phoenix, Arizona 85034
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF QUINTEL COMMUNICATIONS, INC.
<TABLE>
<CAPTION>
STATE OF INCORPORATION
SUBSIDIARY OR ORGANIZATION
---------- ----------------------
<C> <S> <C>
1. MultiBuyer, Inc. Delaware
2. Quintelcomm, Inc. Delaware
3. Quintel Financial Information Services, Inc. Delaware
4. Calling Card Company, Inc. New York
5. New Lauderdale L.C. Florida
6. N.L. Corp. Delaware
7. Creative Direct Marketing, Inc. Delaware
8. Quintel Hair Products, Inc. Delaware
9. Quintel Products, Inc. Delaware
10. Quintelco., Inc. Delaware
11. Quintel Psychic Zone, Inc. Delaware
12. Quintel LaBuick Products, LLC Delaware
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary information extracted from the Quintel
Communications, Inc and Subsidiaries Consolidated Financial Statement as
presented in the Company's Form 10K for the year ended November 30, 1999 and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> NOV-30-1999
<PERIOD-START> DEC-01-1998
<PERIOD-END> NOV-30-1999
<CASH> 7,939,567
<SECURITIES> 36,511,925
<RECEIVABLES> 5,711,967
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 54,180,214
<PP&E> 1,289,611
<DEPRECIATION> 473,078
<TOTAL-ASSETS> 57,277,279
<CURRENT-LIABILITIES> 17,391,001
<BONDS> 0
0
0
<COMMON> 15,469
<OTHER-SE> 39,870,809
<TOTAL-LIABILITY-AND-EQUITY> 57,277,279
<SALES> 42,839,840
<TOTAL-REVENUES> 42,839,840
<CGS> 26,952,097
<TOTAL-COSTS> 26,952,097
<OTHER-EXPENSES> 10,881,156
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 70,701
<INCOME-PRETAX> 6,382,380
<INCOME-TAX> 2,458,520
<INCOME-CONTINUING> 3,923,860
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,923,860
<EPS-BASIC> 0.26
<EPS-DILUTED> 0.26
</TABLE>
