SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
AMENDMENT NO. 1
TO
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the year ended December 31,1999.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 000-28173
THE ENTERTAINMENT INTERNET, INC.
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(Exact name of registrant as specified in its charter)
Nevada 95-4730315
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(State of organization) (I.R.S. Employer
Identification No.)
5757 Wilshire Blvd., Suite 124, Los Angeles, CA 90036
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(Address of principal executive offices)
Registrant's telephone number, including area code (323) 904-4940
Securities registered pursuant to Section 12(b) of the Act,
None
Securities registered pursuant to Section 12(g) of the Act:
TITLE OF EACH CLASS
Common Stock, $0.001 par value per share
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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, and (2) has been subject to such filing requirements
for the past 90 days. Yes [ ] No [ X ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Issuer's revenues for its most recent fiscal year. $779,528
The aggregate market value of the Common Stock held by non-affiliates of the
registrant, based on the average of the high and low prices of the Common Stock
on the OTC Bulletin Board on March 1, 2000, was $12,551,085. For purposes of
this computation, all officers, directors, and 5% beneficial owners of the
registrant (as indicated in Item 12) are deemed to be affiliates. Such
determination should not be deemed an admission that such directors, officers,
or 5% beneficial owners are, in fact, affiliates of the registrant.
Number of shares of Common Stock, $0.001 Par Value, outstanding at March 1,
2000, was 48,212,567.
Documents incorporated by reference: None
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TABLE OF CONTENTS - 1999 FORM 10-KSB REPORT
Page
Numbers
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PART I
Item 1. Business 4
Item 2. Properties 8
Item 3. Legal Proceedings 8
Item 4. Submission of Matters to a Vote of Security Holders 11
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters 11
Item 6 Management's Discussion and Analysis of Financial
Condition and Results of Operations 14
Item 7. Financial Statements 29
Item 8. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 29
PART III
Item 9. Directors, Executive Officers, Promoters and
Control Persons; Compliance with Section 16(a)
of the Exchange Act 29
Item 10. Executive Compensation
Item 11. Security Ownership of Certain Beneficial Owners
and Management 40
Item 12. Certain Relationships and Related Transactions 42
Item 13. Exhibits and Reports on Form 8-K 43
Signatures 44
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PART I
Item 1. Business
BACKGROUND
The Entertainment Internet, Inc. (The "Company") is a Nevada corporation formed
on January 20, 1992 as West Tech Services, Inc. The name was changed by the
Board of Directors on August 3, 1998. The Company's principal place of business
is located at 5757 Wilshire Blvd., Los Angeles, California 90036. The Company
was organized to engage in any lawful corporate business purpose.
The Company formed a wholly-owned subsidiary in California as a California
corporation, The Entertainment Internet, Inc. (TEI-CAL) to be the operating
Company. On March 23, 1999, TEI-CAL was merged with Only Multimedia Network,
Inc., a California corporation (OMNI), with OMNI being the surviving
corporation.
The Company was in the developmental stage until shortly after its merger with
OMNI; in approximately April 1999, new management began implementing the
business plan of the Company and the Company moved out of the development stage.
The Company currently operates as the parent company for OMNI, which has done
business under the Castnet.com(TM) fictitious name since February 9, 1999.
Recently, the Company became aware that a third party was using the name
"Castnet Communications, Inc." It is the Company's contention that the described
use may infringe upon its trademark Castnet.com(TM). The Company has taken steps
to secure an agreement from Castnet Communications, Inc. to refrain from the use
of the name "Castnet", or to clearly identify that it is not associated with the
Castnet.com services provided by the Company; the Company does not expect
litigation regarding this matter, as the potentially infringing party does not
appear to compete with the business of the Company and does not appear to be a
significant concern.
When incorporated, the Company had authority to issue 25,000 shares of no-par
value stock. On April 3, 1998, the Articles of Incorporation of the Company were
amended to establish 60 million shares of stock, 50 million common and 10
million preferred. (See Amendment to Articles of Incorporation).
The Board of Directors has elected to begin implementing the Company's principal
business purpose, described below under "Item 2, Plan of Operation". As such,
the Company has become fully operational, expanding its basic Internet business
and seeking combinations with other businesses which will enhance the Company's
competitive ability and expand its operations into broader areas in both the
Internet and entertainment casting industries.
The Company is filing this registration statement on a voluntary basis, pursuant
to section 12(g) of the Securities Exchange Act of 1934 (the "Exchange Act"), in
order to ensure that public information is readily accessible to all
shareholders and potential investors, and to increase the Company's access to
financial markets. In the event the Company's obligation to file periodic
reports is suspended pursuant to the Exchange Act, the Company anticipates that
it will continue to voluntarily file such reports.
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RISK FACTORS
The Company's business is subject to numerous risk factors, including the
following
SHORT OPERATING HISTORY. The Company has only a short operating history and has
actively pursued and gained a market share of the Internet/casting market. The
Company will, in all likelihood, sustain higher operating expenses compared with
corresponding revenues, at least until current plans are implemented fully (see
Plan of Operation). There is no assurance that the Company will successfully
expand into the business opportunity described herein.
SPECULATIVE NATURE OF COMPANY'S PROPOSED OPERATIONS. The success of the
Company's proposed plan of operation will depend to a great extent on the
operations, financial condition, and management of both the Company and any
subsidiaries. While management also intends to seek business combinations with
entities having established operating histories, it cannot assure that the
Company will successfully locate candidates meeting such criteria. In the event
the Company completes a business combination, the success of the Company's
operations may be dependent upon management of the successor firm or venture
partner firm together with numerous other factors beyond the Company's control.
POSSIBLE SCARCITY OF AND COMPETITION FOR BUSINESS OPPORTUNITIES AND
COMBINATIONS. The Company is, and will continue to be, a participant in the
business of providing Internet casting resources and peripheral services. In
addition, it will be seeking, by way of expansion of its business, joint
ventures with, and acquisitions of small private entities. A large number of
established and well-financed entities, including venture capital firms, are
active in mergers and acquisitions of companies which may also be desirable
target acquisition candidates for the Company. Many such entities have greater
financial resources and technical management capabilities than the Company. The
Company could be, consequently, at a competitive disadvantage in identifying
possible business opportunities and successfully expanding its operations.
CONFLICTS OF INTEREST - GENERAL. The Company's officers and directors
participate in other business ventures which may compete directly with the
Company. Additional conflicts of interest and non "arms-length" transactions may
also arise in the event the Company's officers or directors are involved in the
management of any firm with which the Company transacts business. See also Item
5, below, entitled "Directors, Executive Officers, Promoters, and Control
Persons" for further details of management business activities outside the
Company.
REPORTING REQUIREMENTS MAY DELAY OR PRECLUDE ACQUISITION. Companies subject to
Section 13 of the Securities Exchange Act of 1934 (the "Exchange Act") must
provide certain information about significant acquisitions, including certified
financial statements for the company acquired, covering one or two years,
depending on the relative size of the acquisition. The time and additional costs
that may be incurred by some target entities to prepare such statements may
significantly delay or even preclude the Company from completing an otherwise
desirable acquisition. Acquisition prospects that do not have or are unable to
obtain the required audited statements may not be appropriate for acquisition so
long as the reporting requirements of the 1934 Act are applicable.
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LACK OF DIVERSIFICATION. In all likelihood, the Company's proposed operations,
even if successful, will result in a business combination with only one entity.
Consequently, the resulting activities will be limited to the entity's business.
The Company's inability to diversify its activities into a number of areas may
subject the Company to economic fluctuations within a particular business or
industry, thereby increasing the risks associated with the Company's operations.
REGULATION. Although the Company will be subject to regulation under the
Securities Exchange Act of 1934, management believes the Company will not be
subject to regulation under the Investment Company Act of 1940, insofar as the
Company will not be engaged in the business of investing or trading in
securities. In the event the Company engages in business combinations which
result in the Company holding passive investment interests in a number of
entities, the Company could be subject to regulation under the Investment
Company Act of 1940. In such event, the Company would be required to register as
an investment company and could be expected to incur significant registration
and compliance costs. The Company has obtained no formal determination from the
Securities and Exchange Commission as to the status of the Company under the
Investment company Act of 1940 and, consequently, any violation of such Act
would subject the Company to material adverse consequences.
Proposals to regulate the Internet. The Company is aware that there have been
proposals for either regulation or taxation of the Internet or business
activities on the Internet. There is the risk of uncertainty regarding such
proposed future Internet regulation, which could adversely affect the Company's
business. Proposals to tax or otherwise charge out-of-state or foreign access
users may have a negative impact upon the Company's subscriber base and future
subscriptions, including the ability of the Company to compete or to maintain a
saleable service. Any risks associated with regulation or taxation of the
Internet would, in the Company's opinion, be passed along to the subscriber
through increased costs to offset such costs to the Company.
POSSIBLE CHANGE IN CONTROL AND MANAGEMENT. A business combination involving the
issuance of the Company's common stock could result in shareholders of a public
or private company obtaining a controlling interest in the Company. Any such
business combination may require management of the Company to sell or transfer
all or a portion of the Company's common stock held by them, or resign as
members of the Board of Directors of the Company. The resulting change in
control of the Company could result in removal of one or more present officers
and directors of the Company and a corresponding reduction in or elimination of
their participation in the future affairs of the Company.
TAXATION. Federal and state tax consequences will, in all likelihood, be major
considerations in any business combination or operations the Company may
undertake. Typically, a combination transaction may be structured to result in
tax-free treatment to both companies, pursuant to various federal and state tax
provisions. If one is undertaken, the Company intends to structure any business
combination so as to minimize the federal and state tax consequences to both the
Company and the target entity. Management cannot assure that a business
combination will meet the statutory requirements for a tax-free reorganization,
or that the parties will obtain the intended tax-free treatment upon a transfer
of stock or assets. A non-qualifying reorganization could result in the
imposition of both federal and state taxes, which may have an adverse effect on
both parties to the transaction.
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REQUIREMENT OF AUDITED FINANCIAL STATEMENTS MAY DISQUALIFY BUSINESS
OPPORTUNITIES. Management believes that any potential target company must
provide audited financial statements for review, and for the protection of all
parties to the business combination. One or more attractive business
opportunities may forego a business combination with the Company, rather than
incur the expenses associated with preparing audited financial statements.
BLUE SKY CONSIDERATIONS. Because the securities registered in any combination
may not have been registered for resale under the blue sky laws of any state,
and the Company has no current plans to register or qualify its shares in any
state, holders of these shares and persons who desire to purchase them in any
trading market that might develop in the future, should be aware that there may
be significant state blue sky restrictions upon the ability of new investors to
purchase the securities. These restrictions could reduce the size of any
potential market. Accordingly, investors should consider any potential secondary
market for the Company's securities to be a limited one.
DEPENDENCE UPON KEY PERSONNEL. The business of the Company is greatly dependent
upon its present management and will for some time be dependent on the general
business acumen and experience of all its officers and directors and the
application of such skills to the business decisions required to be made on
behalf of the Company.
LACK OF MANAGEMENT EXPERIENCE. While the present executive officers and
directors have experience in the film industry, and Mr. Schuster has represented
other Internet companies as their legal counsel, none of the officers has any
direct experience with the Internet business.
EMERGING INDUSTRY. Although the Internet and the casting industries are
expanding rapidly, the Internet industry is still an emerging industry without
clear and certain areas of exploitation. Many Companies are entering this
business area, some with greater financial resources than the Company.
COMPETITION. In addition, the Company shall be competing in this new and
expanding industry with some more established and better financed companies. Due
to the competitive nature of the Company's business, it may be difficult for the
Company to meets its goals in the particular area of the Internet industry in
which it has chosen to compete.
WORKING CAPITAL CONSIDERATIONS AND NEED FOR ADDITIONAL CAPITAL. The Company has
a minimum of working capital. Management of the Company have attempted to make
their best estimates of the Company's capital needs for the foreseeable future.
But despite these estimates, funds available to the Company may not be adequate
for the Company to achieve all of its business objectives. Its ability to
continue its proposed operations and operate as a going concern is significantly
contingent upon its being successful at both financing its operations from
current sales and raising additional capital on terms favorable to the Company.
The Company may be unable to do either of the foregoing. There is no assurance
that funds will be available to the Company from any source, and if available,
that the costs or rate of interest for such funds, or the terms and conditions
of obtaining such funds will be prudent or acceptable for the Company. If not
available, it will be necessary for the Company to restrict its scope of
business operations accordingly.
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EMPLOYEES
The Company's employees at the present time are its officers and directors who
will devote as much time as the Board of Directors determine is necessary to
carry out the affairs of the Company. (See "Management" under Item 5, below.)
Daily operations are undertaken by employees previously hired by OMNI.
Item 2. Properties
The Company owns no real property at this time. The Company leases office space
at the address of 5757 Wilshire Boulevard, Suite 124, Los Angeles, CA 90036 and
5820 Wilshire Boulevard, Los Angeles, CA 90036. The Company believes it is
paying the customary rate for such space in that rental market. Terms of the
leases are: a twelve (12) month lease at $9,992.87 per month (including tenant
improvements), beginning March, 1999, and a twelve (12) month lease for $600.00
per month, expiring 12/31/99. The Company believes its rented space is adequate
for the immediately foreseeable future. No officer, director, or control person
related to the Company is a lessor, directly or indirectly, of the leased
premises. Copies of the lease agreements are attached and filed as exhibits
hereto.
Item 3. Legal Proceedings
The following is a summary, as of the date of this report, of material legal
proceedings involving the Company, which the Company believes were incurred in
the normal course of business:
Breakdown Services, Ltd., v. Only Multimedia Network, Inc./ Castnet.com
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Federal District Court for the Central District of California
Filed: May 6, 1998, No. CV 98-3500-GHK (BQRx)
The Company is presently engaged in one action involving a third-party claim for
copyright infringement and violation of an earlier settlement agreement that
included a stipulated injunction. The Company is vigorously defending the action
and earlier prevailed through house counsel's opposition to claimant's request
for an Order to Show Cause. The court ruled in EINI's favor that Breakdown
Services improperly applied for ex parte relief without satisfying the Local
Rule mandates for a prior meeting of counsel. Breakdown Services thereafter met
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with house counsel and outside counsel (engaged for the continued litigation)
and re-filed its motion, which is currently pending review by the court. The
Company believes the claimant is not entitled to relief, and asserts misuse of
copyright as a defense in the action. While the company doubts the merits of
claimant's action, the outcome of the action is uncertain and may materially and
adversely affect the financial condition and viability of the Company if such
outcome proves unfavorable to the Company.
Since the date of the Company's initial filing, the Company has been ordered to
show cause as to why it should not be found in contempt of court; the next
hearing on this matter is scheduled for May 8, 2000.
Wendy Pachter v. Only Multimedia Network, Inc.
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Los Angeles Superior Court, Central District
Filed July 21, 1999, No. BC 213855
The Company is presently engaged in one action involving a creditor for two
promissory notes, one for $175,000, and one for $100,000.00 which were not paid
when claimed to be due. Relief sought by the plaintiff includes principal,
interest, and costs and attorney fees, to be determined by the court. Discovery
is continuing on this matter, along with other aspects of the claim. The Company
takes a contrary position to that of claimant, asserting that payments were not
and are not presently due. In an effort to resolve this claim, the Company made
a settlement offer contingent upon the successful close of the proposed merger
with First Miracle Group; claimant failed to respond to this offer. The Company
subsequently and in March, 2000, offered to commence monthly payments of
principal and interest to the claimant without any admission of liability; that
offer was rejected. At present, litigation is continuing. The Company has asked
opposing counsel to schedule a settlement conference with the Court; these
conferences are available on any Friday. At the time of this filing, opposing
counsel had not yet responded to the Company's request. While the Company doubts
the merits of claimant's action, the outcome of the action is uncertain and may
materially and adversely affect the financial condition and viability of the
Company if such outcome proves unfavorable to the Company.
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Bragman, Nyman & Cafarelli v. The Entertainment Internet, Inc.
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Los Angeles Municipal Court, West Los Angeles District
Filed June 11, 1999, Case No. 99T01400
The Company is presently engaged in one action involving a creditor for services
allegedly rendered and unpaid for an amount less than $20,000. The Company is
investigating the history behind the alleged obligation, and presently believes
there was a failure of consideration, more specifically, that the claimant did
not provide services or perform in accordance with the alleged contract.
Discovery is continuing on this matter, along with other aspects of the claim.
The Company takes a contrary position to that of claimant, asserting that
payments were not and are not presently due. At present, litigation is
continuing. The claimant has been ordered to show cause on May 5, 2000, as to
why its claims should not be dismissed. While the Company doubts the merits of
claimant's action, the outcome of the action is uncertain and may materially and
adversely affect the financial condition and viability of the Company if such
outcome proves unfavorable to the Company.
Capital York, Inc. v. The Entertainment Internet, Inc., Scott MacCaughern, and
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MacCaughern Trade Development
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Superior Court of New Jersey, Monmouth County
Filed August 15, 1999, No. L406199
The Company is presently engaged in one action involving a creditor for services
allegedly rendered and unpaid in connection with management and advisory
services. The Company is investigating the history behind the alleged
obligation, and presently believes there was no contract between the parties.
Discovery is continuing on this matter, along with other aspects of the claim.
On October 6, 1999, the Company received written confirmation that plaintiff and
defendant MacCaughern were in the process of resolving their differences and
that plaintiff would take no further action against EINI during this process;
the litigation is "on hold" pending a settlement of the entire matter by one of
the named Defendants. The written confirmation also contained a stipulation
extending the time for EINI to answer the complaint, and a stipulation that
there would be no forthcoming action on the grounds of any failure to file an
answer during the time of negotiations. While the Company doubts the merits of
claimant's action, the outcome of the action is uncertain and may materially and
adversely affect the financial condition and viability of the Company if such
outcome proves unfavorable to the Company.
The Company received notice of a claim by a stock promoter (Chris Scoggin) for
one million shares of its common stock. The Company is investigating the history
of the alleged transaction. Prior management asserts that the promoter failed to
attend meetings, did not perform services and is not entitled to the shares
claimed. While the Company doubts the merits and legality of the claim, the
outcome of the action is uncertain and may materially and adversely affect the
financial condition and viability of the Company if such outcomes proves
unfavorable to the Company. As of the date of this filing, no lawsuit has been
filed regarding this claim.
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Item 4. Submission of Matters to a Vote of Security Holders
No items were submitted to a vote of the security holders by the Company during
the fourth quarter of 1999.
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters
From March 22, 1999 (the date of the Merger), the Company's common stock had
been quoted on the NASDAQ over-the counter bulletin board ("OTC BB") until
November 19, 1999. On that date it was temporarily de-listed from the OTC BB
quotation system pending becoming a reporting company that has cleared all
Securities and Exchange Commission ("SEC") comments. As of November 19, 1999,
the stock is quoted on the NASDAQ over-the-counter Electronic Quotation System
("pink sheets") market in the United States under the symbol EINI. The Company
registered its common stock on a Form 10-SB Registration Statement which became
effective on January 15, 2000. As of the date of this report, the Company is in
the process of responding to comments from the SEC and expects to resume
quotation on the OTC BB market in the near future.
The high and low interdealer prices for the calendar quarters since trading
began on March 22, 1999 (without retail markup, markdown or commission) are as
follows:
Quarter Ended High Low
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June 30, 1999 $ 4.06 $ 0.937
September 30, 1999 $ 1.437 $ 0.375
December 31, 1999 $ 0.531 $ 0.062
March 31, 2000 $ 1.85 $ 0.08
Effective August 11, 1993, the Securities and Exchange Commission adopted Rule
15g-9, which established the definition of a "penny stock", for purposes
relevant to the Company, as any equity security that has a market price of less
than $5.00 per share or with an exercise price of less than $5.00 per share,
subject to certain exceptions. For any transaction involving a penny stock,
unless exempt, the rules require: (i) that a broker or dealer approve a person's
account for transactions in penny stocks; and (ii) the broker or dealer receive
from the investor a written agreement to the transaction setting forth the
identity and quantity of the penny stock to be purchased. In order to approve a
person's account for transactions in penny stocks, the broker or dealer must (i)
obtain financial information and investment experience and objectives of the
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person; and (ii) make a reasonable determination that the transactions in penny
stocks are suitable for that person and that person has sufficient knowledge and
experience in financial matters to be capable of evaluating the risks of
transactions in penny stocks. The broker or dealer must also deliver, prior to
any transaction in a penny stock, a disclosure schedule prepared by the
Commission relating to the penny stock market, which in highlight form, (i) sets
forth the basis on which the broker or dealer made the suitability
determination; and (ii) that the broker or dealer received a signed, written
agreement from the investor prior to the transaction. Disclosure also has to be
made about the risks of investing in penny stocks in both public offerings and
in secondary trading, and about commissions payable to both the broker/dealer
and the registered representative, current quotations for the securities and the
rights and remedies available to an investor in cases of fraud in penny stock
transactions. Finally, monthly statements have to be sent disclosing recent
price information for the penny stock held in the account and information on the
limited market in penny stocks.
The National Association of Securities Dealers, Inc. (the "NASD"), which
administers NASDAQ, has recently made changes in the criteria for initial
listing on the NASDAQ Small Cap market and for continued listing. For initial
listing, a company must have net tangible assets of $4 million, market
capitalization of $50 million or net income of $750,000 in the most recently
completed fiscal year or in two of the last three fiscal years. For initial
listing, the common stock must also have a minimum bid price of $4 per share. In
order to continue to be included on NASDAQ, company must maintain $1,000,000 in
net tangible assets and a $1,000,000 market value of its publicly-traded
securities. In addition, continued inclusion requires two market-makers and a
minimum bid price of $1.00 per share.
Therefore, for the foreseeable future, any of the Company's stock quoted or
traded must be considered "penny stock" under current rules, as discussed above.
HOLDERS OF EQUITY AND OTHER RIGHTS
As of March 1, 2000, based on the Company's records and reports from
the Company's stock transfer agent, Alpha Tech Stock Transfer, there were 162
shareholders holding a total of 48,212,567 shares of the Company's common stock.
There were 40 shareholders holding a total of 5,400 shares of the Company's
preferred stock. There were 67 persons or entities in the aggregate holding
warrants or options to purchase shares of the Company's common stock; and 4
persons or entities holding promissory notes convertible to shares of the
Company's common stock.
DIVIDENDS AND DIVIDEND POLICIES
The Registrant has not paid or allocated any dividends to date, and has no plans
to do so in the immediate future. Future dividends will be dependent on such
factors as economic conditions and the profitability of the Company. It is
anticipated that for the foreseeable future, until the Company reaches its
economic goals, most, if not all of any earnings of the Company will need to be
retained as working capital.
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RECENT SALES OF UNREGISTERED SECURITIES
Between approximately September of 1998 and December of 1999, the Company made
the following issuance, sales, or exchanges of securities in reliance upon
certain exemptions from registration under the Securities Act of 1933 (the
"Act"):
Regulation D, Rule 504: The Company obtained a portion of its capital and
operating funds during the period extending third quarter 1998 through the close
of the second quarter 1999 by means of a limited offer and sale of its common
stock without registration under SEC Regulation D, Rule 504 of the 1933 Act.
Less than a total of $1,000,000 was subscribed through the offering for which a
total of 3,597,645 common shares were issued to subscribers at prices ranging
from $0.175 to $0.55 per share.
Regulation D, Rule 506: Pursuant to an agreement and plan of exchange and merger
with OMNI, the Company issued securities during the period approximately April
1, 1999 through October 31, 1999 by means of a Regulation D, Rule 506 exchange
to a total of 119 shareholders:
Common stock: a total of $1,549,149 representing shares of common stock was
issued.
Preferred stock: a total of $2,700,000 representing shares of preferred
stock was issued.
Convertible securities:
Options: a total of $3,682,100 in options to convert to common stock
Warrants: a total of $8,459,915 in warrants to purchase common stock.
Promissory notes: a total of $149,220 in promissory notes convertible
to common stock
Section 4(2) of the 1933 Act: The Company obtained a portion of its capital and
operating funds by means of the following transactions pursuant to section 4(2)
of the Securities Act of 1933, upon which the Company has relied: In February
1999 the Company entered into a financing arrangement for the following entities
to provide capital to the Company: Windsor Capital Fund VI, a Bermuda
corporation, and Packard Capital Limited, a British Virgin Islands corporation.
The Company issued long-term convertible promissory notes to these lenders in
the amount of US$500,000 each, for a total consideration of US$1,000,000. The
instruments accrue interest at the rate of 6% per annum until paid, or at the
option of the payee of the note, it may be converted to common stock at a
discounted rate of 40% of the "bid" price. The Company has the right for a
period of one year from the time any such stock is issued, to redeem any such
stock so issued through payment of an amount equal to the principal amount of
the note plus any accrued interest up to the time of conversion.
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On August 16, 1999, Mr. Mark Dilullo was issued 25,000 restricted shares in
consideration of consulting services and on December 30, 1999, was issued 75,000
restricted shares in consideration of further consulting services.
On December 30, 1999 Mr. Paul Marciano was issued 1,000,000 restricted shares of
common stock for $50,000 cash; this issuance represented the exercise of an
option to purchase such shares that was included in a consulting agreement
accepted by Mr. Marciano; the consulting agreement provides no direct
compensation to Mr. Marciano, other than the grant of the options previously
discussed.
Item 6 Management's Discussion and Analysis of Financial
Condition and Results of Operations
NOTE REGARDING PROJECTIONS AND FORWARD LOOKING STATEMENTS
This statement includes projections of future results and "forward-looking
statements". All statements that are included in this Registration Statement,
other than statements of historical fact, are forward-looking statements.
Although Management believes that the expectations reflected in these
forward-looking statements are reasonable, it can give no assurance that such
expectations will prove to have been correct. Important factors that could cause
actual results to differ materially from the expectations are disclosed in this
Statement, including, without limitation, in conjunction with those
forward-looking statements contained in this Statement.
Although these statements reflect management's current view of the Company
concerning future events, they are subject to certain risks, uncertainties and
assumptions, including, among many others: a general economic downturn, a
downturn in the securities markets, a general lack of public interest in either
the Company's products or securities, federal or state laws or regulations
having adverse effects on small business enterprises, and other risks and
uncertainties.
Should any of these risks or uncertainties materialize, or should underlying
assumptions prove incorrect, actual results may vary materially from those
described in this report as anticipated, estimated or expected.
PLAN OF OPERATION - GENERAL
The Entertainment Internet, Incorporated ("EINI" or "The Company") is a Nevada
corporation which acts as the holding company and parent corporation for Only
Multimedia Network, Inc. ("OMNI"), a California corporation.
Through Only Multimedia Network, Incorporated, EINI intends to establish itself
as the leading service provider of resources for the global entertainment
industry. The Entertainment Internet, Inc. operates a series of Internet-based
services using the Castnet.com(TM) service mark and trade name.
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For ease of further reference, The Entertainment Internet, Inc. and Only
Multimedia Network, Incorporated are interchangeably referred to herein as "the
Company" and/or "the Corporation."
HISTORICAL OVERVIEW
The Company, then operating as OMNI, initially focused its efforts on hosting
web-sites as an Internet service provider (ISP) and providing related services
to third parties in 1994 . The Castnet.com idea took shape sometime in early
1996, and by October, 1998, management determined it favorable to eliminate all
ISP activity and concentrate efforts on further development and marketing of its
Castnet.com(TM) web-site, which integrates motion picture, television and
theatrical talent casting and agent submission services for the entertainment
industry.
The reason for eliminating all ISP activity was an increased cost in advancing
internet technology; specifically, there would be a substantial cost to upgrade
the Company's hardware and software in order to be competitive, and this was a
cost the Company was unwilling to incur. When management eliminated all ISP
activity, it also abandoned the Company's then-most significant revenue stream,
leaving it unable to function without repeated infusions of capital. The
Company, at present, has significant debt from debt instruments, expenses,
leases, and salaries paid, all of which were incurred under prior management.
In May, 1998, significant capital was obtained through the efforts of Mr. Paul
Kessler and Bristol Asset Management, LLC, which funded critical operations
through use of a convertible debt instrument; the Board of Directors and certain
key officers were permitted to fund the Corporation on the same (or pari passu)
basis as Bristol Asset Management. Mr. Kessler sought alliances with several
entertainment industry representatives and successfully elected Marion Dougherty
and Roland Joffe to the Company's Board of Directors. Mr. Kessler allowed the
Company's management to continue operations for some time after conversion of
the Bristol debt, but learned, after the first quarter of 1999, that key
employees did not meet objectives and were not operating the Company in a manner
which would allow it to prosper. Shortly thereafter, Mr. Kessler sought a
management team capable of analyzing the Corporation's difficulties, resolving
the morass of claims threatened or levied against it and restructuring
operations.
During June, 1999, Mr. Kessler engaged Mr. Mohamed Hadid as the Company's
Interim Chairman of the Board of Directors. During the second and third quarters
of 1999, Mr. Hadid and Mr. Kessler worked together on a plan to manage the
Company's immediate financial and business needs, including the infusion of
additional capital. Mr. Hadid sought strategic alliances with Mr. Anthony
Cataldo and Mr. Jean Claude Van Damme and was successful in obtaining their
commitments to assist the Corporation with further development and expansion of
its Castnet.com(TM) services. Mr. Hadid has since resigned from the Company. On
July 1, 1999, the Company entered into an employment agreement with Anthony
Cataldo providing for Mr. Cataldo to be hired as president of the Company.
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The Company and Mr. Cataldo agreed on December 7, 1999, to terminate that
agreement. Mr. Cataldo left the Company, and the Board of Directors accepted Mr.
Cataldo's resignation.
On July 12, 1999, the Company and Mr. Van Damme entered into a consulting
agreement for Mr. Van Damme's services as a consultant. The contract was
executed by an entity owned and controlled by Mr. Van Damme, known as JCVD
Productions, Inc., a California corporation. JCVD also agreed to provide Mr. Van
Damme's services as a director. Mr. Jean Claude Van Damme has recently resigned
as a director and discontinued his association with the Company.
The Company obtained a renewal of the commitment of Thom Mount to serve on the
Company's Board of Directors and as the Company's liaison with the Producers
Guild of America. The Company also internalized the Corporation's legal affairs,
which were formerly administered by a number of outside counsel at great expense
to the company.
Third quarter efforts focused on restoration of financial integrity of the
corporation, apparently lost during the first quarter of 1999; these efforts
included forensic investigation of past financial transactions, installation of
a bookkeeper and CPA to take the place of the earlier terminated Chief Financial
Officer and to recreate the Company's 1999 general ledger and accounts payable,
communications and accommodations with creditors, investigation of creditor
claims, satisfaction of certain shareholder claims (see also Item 3, Legal
Proceedings), and re-negotiation of debt instruments that were due but not
payable by the Company due to its financial condition. Management also
scrutinized and took action in the areas of the corporation's legal affairs,
implementation of financial and human resource controls, restructuring of
Castnet.com(TM) services, expansion of service areas, design, implementation,
and rollout of new services, formation of strategic alliances, review of year
2000 compliance issues, design, evaluation, and programming of new relational
databases, and general programs calculated to increase sales revenue and market
share. During the period extending from July through October, 1999, several
employees were dismissed.
As the company entered the fourth quarter of 1999, efforts focused on
introduction of three new services: CastnetBabies.com, CastnetRealPeople.com,
and CastnetExtras.com, which the Company believes will significantly increase
its market share and allow for growth of its current subscriber base. The
company redesigned and reprogrammed its Castnet.com(TM) "front page" and
continued to develop a series of relational databases with technological
advances intended to increase efficiency and ease of use of the services
provided through Castnet.com. (TM) The company continues to develop strategic
alliances in domestic and foreign markets upon which it can capitalize as it
moves into the new millennium.
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OPERATING PLAN FOR NEXT 12 MONTHS:
During the next twelve months the Company's first area of business efforts and
emphasis will focus on the upgrading of its technology to tie together existing
Internet capabilities, the websites used by the Company and to integrate new
technologies. The Company will also focus on the integration of its three
newly-developed services: CastnetBabies.com, CastnetRealPeople.com, and
CastnetExtras.com, along with its core services already being provided to the
entertainment community.
CastnetBabies.com will emphasize casting opportunities to parents who want their
children to appear in commercials as child actors.
CastnetRealPeople.com will provide services and market to people who desire the
opportunity to serve in bit parts or as extras, such as in crowd scenes in film
or television. This area will not necessarily require any prior acting training
or experience for a person to qualify.
CastnetExtras.com will extend the internet wih real-time communication concept
for the entertainment industry to actors with credits or aspiring actors who
want to make their services available as extras. This area will require at least
some acting training or experience.
In the second area of emphasis, the Company will also strive to develop
strategic relationships with trade and other organizations important to or
having influence in the entertainment industry, with those relationships
designed to drive subscribership and hopefully improve the Company's revenue
stream.
The third area of emphasis and concern will be the need for the Company to
restructure outstanding debt and eliminate as many litigation claims as possible
which presently cause a serious threat to its existence.
The fourth area of emphasis will be on development of an integrated and scalable
marketing campaign. Initial steps have been taken to source and form a
relationship with an agency capable of meeting the Company's needs while working
with its limited capital resources. The agency or firm undertaking development
of the marketing campaign is expected to address all of the Company's image and
branding concerns and liaison with its website developers to define and achieve
common objectives.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion should be read in conjunction with our financial
statements and the accompanying notes that appear elsewhere in this filing. The
following discussion contains forward-looking statements that reflect our plans,
estimates and beliefs. Our actual results could differ materially from those
discussed in the forward-looking statements. Factors that could cause or
contribute to such differences include, but are not limited to, those discussed
below and elsewhere in this filing, particularly in "Risk Factors".
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RESULTS OF OPERATIONS-YEAR ENDED DECEMBER 31, 1999 vs. 1998
THE ENTERTAINMENT INTERNET, INC.
Revenues
Revenues consist of subscriber fees for Castnet.com services and the minimal
income derived from advertising revenue (e.g., banner advertisements appearing
on the Castnet.com websites for cash revenue, where the advertising plan has not
been fully framed or implemented). Subscribers pay a fee in advance for access
to the Castnet.com websites for an extended period of time, generally twelve
months. The fees are pro-rated and recorded as revenue over the period of time
of the subscription. Revenue for Internet access and web page development has
been reallocated to Loss from Discontinued Operations.
For the year ended December 31, 1999, revenues of $779,528 increased by
$197,973, or 34%, as compared to revenues of $51,555 for the year ended December
31, 1998. This was primarily the result of renewal of prior year subscriptions
and new management policies begun in the second quarter of 1999. The price of
membership was gradually reduced in 1999. This stimulated subscriptions in an
amount which more than compensated for the price reduction and therefore
increased revenue. Also, establishment of new markets in Chicago, Las Vegas and
San Francisco additionally increased revenue. With new management in 1999 and
implementation of management's plans in 2000, the Company expects to increase
revenue in the future.
Gross profit
Gross profit is calculated as revenues less the cost of sales, which consists
primarily of the cost of maintaining the Castnet.com Internet services and
technological infrastructure. These costs are telephone access, software and
hardware maintenance and depreciation of equipment. For the year ended December
31, 1999, gross profit of $87,155 decreased by $119,246, or 58%, as compared to
gross profit of $206,401 for the year ended December 31, 1998.
Gross margin decreased by approximately 24% for the year ended December 31,
1999, as compared to the year ended December 31, 1998. The decrease can be
attributed to replacement of the Company's telephone system, the charges
associated with expanded telephone access provided to subscribers in different
areas, increase usage of the Company's toll-free (WATS) lines, significant
upgrades to software and equipment (including Year 2000 upgrades), servicing of
equipment, and the replacement of computer equipment used support sales and the
Castnet.com websites. Management expects the gross margin to remain stable or
increase in the future. Any forecast increase in gross margin is expected to be
derived from consolidation efforts and application of the efforts of new
management.
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Selling, General and Administrative
Selling, General and Administrative ("SG&A") expenses consist of payroll and
related expenses for executive, finance and administrative personnel,
professional fees, commissions and other general corporate expenses. For the
year ended December 31, 1999, SG&A of $3,089,479 increased by $1,285,552, or
71%, as compared to SG&A expenses of $1,803,927 for the year ended December 31,
1998. Much of the increase in SG&A expenses for 1999 can be attributed to the
costs and fees associated with a merger transaction, the legal expenses incurred
for and resulting from that transaction, executive compensation and Board of
Director fees. SG&A expenses attributable solely to TEI were $1,579,144, while
SG&A expenses for OMNI were $1,454,153 (this represents a favorable change from
OMNI's 1998 SG&A expenses of $2,072,702, or a decrease of approximately 29%,
primarily attributable to efficiency and consolidation efforts undertaken by
management during the third and fourth quarters of 1999). The Company views the
merger-related expenses as "one time expenses," and does not expect such
expenditures in the future; as a result, the Company expects SG&A expenses to be
reduced during Year 2000.
RESULTS OF OPERATIONS-YEARS ENDED DECEMBER 31, 1998 vs 1997
ONLY MULTIMEDIA NETWORK, INC.
Revenues
Revenues consist of subscriber fees for Castnet.com services. Subscribers pay a
fee in advance for an extended period of time, generally twelve months. The fees
are prorated and recorded as revenue over that period of time. For the nine
months ended December 31, 1998, revenues of $581,555 increased by $489,623, or
533%, as compared to revenues of $91,932 for the year ended December 31, 1997. A
new marketing strategy, including seminars for Casting Directors and Actors in
addition to expansion of the data base, brought in more paid subscriptions for
membership. This had the desired effect, causing more Casting Directors to use
the service and more actors to purchase memberships.
Gross profit
Gross profit is calculated as revenues less the cost of sales, which consists of
the cost of providing telephone access, maintaining the software and hardware,
depreciation of equipment, promotion and commissions. For the year ended
December 31, 1998, gross profit of $206,401 increased by $223,273, or 222%, as
compared to gross loss of $16,872 for the year ended December 31, 1997. The
period from October of 1996 through the summer of 1997 was the development stage
of Castnet.com, where free usage was provided to Casting Directors to stimulate
interest on the part of actors, therefore incurring a negative gross profit.
Gross margin increased by 53% as the development phase came to an end and paid
sales increased.
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Selling, General and Administrative
Selling, General and administrative ("SG&A") expenses consist of payroll and
related expenses for executive, finance and administrative personnel,
professional fees and other general corporate expenses. For the year ended
December 31, 1998, SG&A expenses of $1,807,668 increased by $155,522, or 9%, as
compared to SG&A expenses of $1,652,146 for the year ended December 31, 1997.
Retirement of obsolete fixed assets of approximately fifty-three thousand
dollars ($53,000) contributed to the increase in expenses. In addition,
marketing expense increased by approximately sixty-five thousand dollars
($65,000).
LIQUIDITY AND CAPITAL RESOURCES
The Company presently does not have enough operating capital and projected
income to sustain its operations. In this regard, the fourth area of concern for
the next twelve months operations, is to secure commitments for capital in the
minimum amount of $4 Million, which should be sufficient for the remaining
portion of twelve months of operations.
EINI financed its operations primarily through the sale of its securities and
issuance of debt instruments. In this regard, the Company finalized two
significant financing agreements (ongoing debt transactions) in July, 1999, as
follows:
The Company entered into promissory note and finance agreements with Windsor
Capital Fund VI and Packard Capital, Ltd. which provide for receipt of funds by
The Entertainment Internet, Inc. in exchange for interest bearing obligations
(at 6%) interest, convertible to stock at a rate equivalent to a forty percent
(40%) discount from the lowest trading rate of the company's openly traded stock
(redeemable by the Company at any time during a one-year period upon payment of
principal and interest); the discount rate is applied to compensate for the
restricted nature of the stock, issued pursuant to Rule 144.
The Company also obtained a line of credit for future expansion and growth (see
press release); the line of credit is restricted and may not be used for
liquidation of prior-incurred debt or resolution of creditor claims.
A full discussion of capital raised or securities issued by the Company pursuant
to offerings deemed to be exempt from registration is set forth in Item 10,
below.
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Sources of Opportunities
The Company does not currently have any material commitments for the funding of
its capital expenditures other than a line of credit restricted for expansion
and future growth. The Company anticipates, however, that it will experience a
substantial increase in capital expenditures and lease commitments consistent
with its anticipated growth in operations and infrastructure, including various
capital expenditures associated with the expansion of operations into foreign
markets. The Entertainment Internet, Inc. anticipates that it will continue to
experience significant growth in its operating expenses for the foreseeable
future and that these expenses will be a material use of cash resources. The
Company believes that its existing cash will not be sufficient to meet its
anticipated cash needs for working capital and capital expenditures for the
coming months.
The Company contemplates the need to enter into a lease agreement for an ATM
Internet system from Pacific Bell with costs approximately the same as presently
incurred for dial-up services provided by the same carrier. The intent of the
ATM agreement is to provide greater bandwidth for Internet services while
eliminating costly dial-up and measured-rate services currently used. The
Company believes this service will not constitute a material expenditure it is
not already experiencing.
Further, assuming the Company does experience its anticipated growth, and there
is no assurance it will, the Company will need to seek and rent additional
executive office and administrative/operations space. There are no commitments
for such additional rented space.
Foreign markets. The Company anticipates use of the Castnet.com services in
foreign countries over an extended period of time. It is currently analyzing the
methods and means by which it can expand into foreign markets, the sequence or
priority of which foreign markets to exploit to its benefit, and costs and
capital needs associated with such expansion plans. The Company has not
formalized any plan to begin operations in any foreign country.
Revenue sources. The Company derives revenue in two ways: Through its
Castnet.com(TM) web-sites, the company charges actors for access to the
electronic community created by it. The company also derives minimal revenue
from advertisements placed on the Castnet.com(TM) websites. The Company has not
fully implemented its plans to develop a revenue stream from advertisements
included on its websites. The company is currently evaluating plans to isolate
several services offered, such as print communications routing and computer
technical support, and to transform them into profit centers for the company.
By using the term "profit center," the Company means, that in order to ensure
that any service or product provided by the Company would be, when isolated, a
profitable venture. By way of example, if the Company were to provide print
communications routing as referenced above, the "profit center" evaluation would
be employed and analyzed by management and any third party experts needed, which
would allow management to determine whether the proposed service would, if
standing alone as a business, serve as a profitable venture.
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The successful execution of the Company's initial interactive system,
Castnet.com(TM), brought the Company a strong cash flow system which charges an
all-inclusive annual fee for access to the system created by it. The
Castnet.com(TM) portal is currently being used by casting directors and talent
agents in Hollywood to submit actors and actresses for a wide variety of roles
in movies and television. The Castnet.com(TM) portal is set up so that it may be
tailored for the actor/actress, through inclusion of a variety of elements
including, but not limited to, audio tracks and video segments. The Company
feels its real-time communication services represent the future of casting and
believes the results of its actions are rapidly being recognized as useful to
the industry.
The Castnet.com(TM) portal allows aspiring actors, actors, agents and casting
directors to communicate with each other on a confidential basis on a moment's
notice. An enormously important part of the Castnet.com(TM) environment is the
efficient facilitation of unrecognized talent. The Company intends to vigorously
promote these services in the entertainment industry. Two industry unions have
praised the Company for its efforts in expanding the visibility of the personnel
portion of the industry. The Castnet.com(TM) system has further refinements and
offerings planned, including, but not limited to, integrated Castnet.com(TM)
sites and services for managers, producers, production crew, location scouts,
property owners, and voice talent. By expanding services to all strata of the
industry, the Company feels it will impact the industry in ways which will
greatly expand revenues. The Company feels that the design, depth and
sophistication of its products provides it with the ability to expand into all
areas of the entertainment industry.
In addition to this market penetration, the Company will seek a potential
business opportunity from all known sources, but will rely principally on
personal contacts of its officers and directors as well as indirect associations
between them and other business and professional people. It is not presently
anticipated that the Company will engage professional firms specializing in
business acquisitions or reorganizations.
Management, while not especially experienced in matters relating to the new
business of the Company, will rely upon their own efforts and, to a much lesser
extent, the efforts of the Company's directors or major shareholders, in
accomplishing the business purposes of the Company. Such efforts by these
persons may include: joining industry guilds or associations to promote the
visibility of the Company; scouting and recruiting possible directors,
management or key personnel as the Company expands; locating and introducing key
financing or banking sources or contacts for the Company. Such services would be
voluntary, unless the Board of Directors or management approves and agrees
otherwise on a case-by-case basis. The Company generally does not intend to
compensate directors or major shareholders for such activities on behalf of the
Company. Since the time of this initial filing, the Company developed an
association with the Producers Guild of America (see Exhibit __, press release);
this association did not and is not expected to result in a material change to
results of operations, although the Company feels the association will aid in
identifying it as a qualified, reputable service provider recognized by the
entertainment industry.
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The Company may use outside consultants or advisors, other than the Company's
legal counsel and accountants, to effectuate its business purposes described
herein. If the Company does retain such outside consultants or advisors, any
cash fee earned by such parties will need to be paid by the prospective
merger/acquisition candidate, as the Company has no cash assets with which to
pay such obligation. Outside legal counsel was consulted regarding the proposed
merger with First Miracle, as well as the prior acquisition of OMNI.
As is customary in the industry, the Company may pay a finder's fee for locating
an acquisition prospect. If any such fee is paid, it will be approved by the
Company's Board of Directors and will be in accordance with the industry
standards. Such fees are customarily between 1% and 5% of the size of the
transaction, based upon a sliding scale of the amount involved. Such fees are
typically in the range of 5% on a $1,000,000 transaction ratably down to 1% in a
$4,000,000 or more transaction. Management has adopted a policy that such a
finder's fee could, in certain circumstances, be paid to any employee, officer,
director or 5% shareholder of the Company, if such person plays a material role
in bringing a transaction to the Company.
The Company will not have sufficient funds to undertake any significant
development, marketing, and manufacturing of any product which may be acquired.
Accordingly, if it acquires the rights to a product, rather than entering into a
merger or acquisition, it most likely would need to seek debt or equity
financing or obtain funding from third parties, in exchange for which the
Company would probably be required to give up a substantial portion of its
interest in any acquired product. There is no assurance that the Company will be
able either to obtain additional financing or to interest third parties in
providing funding for the further development, marketing and manufacturing of
any products acquired.
EVALUATION OF OPPORTUNITIES
The analysis of new business opportunities in the Company's industry will be
undertaken by or under the supervision of the officers and directors of the
Company (see "Management"). Management intends to concentrate on identifying
prospective business opportunities which may be brought to its attention through
present associations with management. In analyzing prospective business
opportunities, management will consider, among other factors, such matters as:
1. the available technical, financial and managerial resources
2. working capital and other financial requirements
3. history of operation, if any
4. prospects for the future
5. present and expected competition
6. the quality and experience of management services which may be
available and the depth of that management
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7. the potential for further research, development or exploration
8. specific risk factors not now foreseeable but which then may be
anticipated to impact the proposed activities of the Company
9. the potential for growth of expansion
10. the potential for profit
11. the perceived public recognition or acceptance of products, services
or trades
12. name recognition
Company management will meet personally with management and key personnel of the
firm sponsoring the business opportunity as part of their investigation. To the
extent possible, the Company intends to utilize written reports and personal
investigation to evaluate the above factors. The Company will not acquire or
merge with any company for which audited financial statements cannot be
obtained.
Opportunities in which the Company participates will present certain risks, many
of which cannot be identified adequately prior to selecting a specific
opportunity. The Company's shareholders must, therefore, depend on management to
identify and evaluate such risks. Promoters of some opportunities may have been
unable to develop a going concern or may present a business in its development
stage (in that it has not generated significant revenues from its principal
business activities prior to the Company's participation). Even after the
Company's participation, there is a risk that the combined enterprise may not
become a going concern or advance beyond the development stage. Other
opportunities may involve new and untested products, processes, or market
strategies which may not succeed. Such risks will be assumed by the Company and,
therefore, its shareholders.
The process of combining or associating with other business opportunities is
controlled by the board of directors, which will evaluate a potential
combination following presentation by directors or employees of the Company. The
process will follow a defined course, which is: identification of the entity
with which a combination may be sought; research of the entity's current market
position and financial health; review of additional available due diligence
information; discussion among board members; and, assuming a favorable review,
further action to open negotiations.
The investigation of specific business opportunities and the negotiation,
drafting, and execution of relevant agreements, disclosure documents, and other
instruments will require substantial management time and attention as well as
substantial costs for accountants, attorneys, and others. If a decision is made
not to participate in a specific business opportunity the costs incurred in the
related investigation would not be recoverable. Furthermore, even if an
agreement is reached for the participation in a specific business opportunity,
the failure to consummate that transaction may result in the loss by the Company
of the related costs incurred.
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ACQUISITION OF OPPORTUNITIES
In expanding the Company's strategic position, the Company may become a party to
a merger, consolidation, reorganization, joint venture, franchise, or licensing
agreement with another corporation or entity. It may also purchase stock or
assets of an existing business. Once a transaction is complete, it is possible
that the present management and shareholders of the Company will not be in
control of the Company. In addition, a majority or all of the Company's officers
and directors may, as part of the terms of the transaction, resign and be
replaced by new officers and directors without a vote of the Company's
shareholders.
It is anticipated that securities issued in any such reorganization would be
issued in reliance on exemptions from registration under applicable Federal and
state securities laws. In some circumstances, however, as a negotiated element
of this transaction, the Company may agree to register such securities either at
the time the transaction is consummated, under certain conditions, or at a
specified time thereafter. The issuance of substantial additional securities and
their potential sale into any trading market which may develop in the Company's
Common Stock may have a depressive effect on such market.
While the actual terms of a transaction to which the Company may be a party
cannot be predicted, it may be expected that the parties to the business
transaction will find it desirable to avoid the creation of a taxable event and
thereby structure the acquisition in a so called "tax free" reorganization under
applicable Sections of the Internal Revenue Code of 1986, as amended (the
"Code"). In order to obtain tax free treatment under the Code, it may be
necessary for the owners of the acquired business to own 80% or more of the
voting stock of the surviving entity. In such event, the shareholders of the
Company, including investors in this offering, would retain less than 20% of the
issued and outstanding shares of the surviving entity, which could result in
significant dilution in the equity of such shareholders.
As part of the Company's investigation, officers and directors of the Company
will meet personally with management and key personnel, may visit and inspect
material facilities, obtain independent analysis or verification of certain
information provided, check references of management and key personnel, and take
other reasonable investigative measures, to the extent of the Company's limited
financial resources and management expertise.
The manner in which the Company would participate in an opportunity with a
target company will depend on the nature of the opportunity, the respective
needs and desires of the Company and other parties, the management of the
opportunity, and the relative negotiating strength of the Company and such other
management.
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With respect to any mergers or acquisitions, negotiations with target company
management will be expected to focus on the percentage of the Company which the
target company's shareholders would acquire in exchange for their shareholdings
in the target company. Depending upon, among other things, the target company's
assets and liabilities, the Company's shareholders will, in all likelihood, hold
a lesser percentage ownership interest in the Company following any merger or
acquisition. The percentage ownership may be subject to significant reduction in
the event the Company acquires a target company with substantial assets. Any
merger or acquisition effected by the Company can be expected to have a
significant dilutive effect on the percentage of shares held by the Company's
then shareholders.
Management has advanced, and will continue to advance, funds which shall be used
by the Company in identifying and pursuing agreements with target companies.
Management anticipates that these funds will be repaid from the proceeds of any
agreement with the target company, and that any such agreement may, in fact, be
contingent upon the repayment of those funds.
The Company has not, so far, realized any opportunities for business
combinations. This aspect of the Company's business operations is informal at
this stage of the Company's development, and has not been organized in any
systematic way or formally stated as a part of the Company's policy.
COMPETITION
The Company will be in direct competition with many entities in its efforts to
manage, market and expand its present CastNet.com system and in efforts to
locate suitable business opportunities in the industry. Included in this
competition will be other casting companies, Internet companies, as well as
business development companies, venture capital companies, venture capital
affiliates and investment bankers. Many of these entities will possess greater
financial resources and may be able to assume greater risks than those the
Company, with its limited capital, could consider.
YEAR 2000 COMPLIANCE
The year 2000 risk is the result of computer programs being written using two
digits rather than four digits to define the applicable year. Computer programs
that have sensitive software may recognize a date using "00" as the year 1900
rather than the year 2000. As a result, computer systems and/or software used by
many companies and governmental agencies may need to be upgraded to comply with
year 2000 requirements or risk system failure or miscalculations causing
disruptions of normal business activities.
Since the time of this initial filing, the critical date for year 2000 risks
passed without incident; it does not appear that the Company will be materially
affected by year 2000 risks.
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Based upon an internal assessment, The Entertainment Internet, Inc believes that
its software programs, both those developed internally and purchased from
material outside vendors, are year 2000 compliant. The Entertainment Internet,
Inc. began assessing its state of year 2000 readiness during or before July,
1999; this included reviewing the year 2000 compliance of the following:
o The Entertainment Internet Inc.'s internally developed proprietary
software incorporated into CastNet.com services
o Third party software vendors
o Third party hardware vendors
The Entertainment Internet. Inc. will continue to require its vendors of
material hardware and software to provide assurances of their year 2000
compliance.
To date, The Entertainment Internet, Inc. has incurred significant expenses in
identifying and evaluating year 2000 compliance issues. Most of the Company's
expenses have related to, and are expected to continue to relate to, the
operating costs associated with time spent by employees in evaluation of the
year 2000 compliance matters. At this time, the Company does not possess the
information necessary to estimate the potential costs of future revisions to
software relating to the CastNet.com network and web-site should further
revisions be required. Neither does the Company possess the necessary
information to evaluate whether the replacement of third-party software,
hardware, or services (if any) are mandated because they are non-year 2000
compliant. Although EINI believes that its software programs, both those
developed internally and those purchased from outside vendors, are either
already year 2000 compliant or will be within a reasonable time, failure to
identify non year 2000 compliant software could have a material and adverse
effect on the company's business, results of operations, and financial
condition.
The Company is not currently aware of any significant year 2000 compliance
problems relating to the CastNet.com service or other software systems that
would have a material and adverse effect on business, results of operations, and
financial condition. However, there can be no assurance that the company will
not discover year 2000 compliance problems in its proprietary software or in
other third-party software that might require a substantial investment to
correct. The Company's potential inability to fix such hardware or software on a
timely basis could result in lost revenues, increased operating costs, and other
business interruptions, any of which could have a material and adverse effect on
the company's business, results of operations, and financial condition.
27
<PAGE>
Failure to adequately address year 2000 compliance issues in the Company's
proprietary software or third-party software could result in claims of
mismanagement, misrepresentation or breach of contract and related litigation,
which could be costly and time-consuming to defend. In addition, there can be no
assurance that utility companies, Internet network companies, Internet access
companies, third-party service providers and others outside the Company's
control will be year 2000 compliant. The failure by these entities to be year
2000 compliant could result in a systemic failure beyond EINI's control
including, for example, a prolonged Internet, telecommunications or electrical
failure, which could also prevent the Company from providing subscribers access
to the CastNet.com services. Such failure would have a material and adverse
effect on the company's business, results of operation, and financial condition.
Contingency Plan
Although the Company continues to evaluate its software for possible year 2000
compliance issues, the company believes that its software programs (both those
developed internally and purchased from material outside vendors), are already
year 2000 or will be within a reasonable time. Therefore, the Company does not
have a formal contingency plan for a major Year 2000 problem. The Company's
inability to locate or correct a significant year 2000 problem, if one exists,
could result in an interruption in or a failure of certain normal business
activities or operations. Additionally, Year 2000 problems may affect subsystems
of the Company's network and such failure could cause CastNet.com subscribers to
seek alternate providers for casting submissions service. This could require the
Company to incur significant unanticipated expenses to remedy and could divert
the Company management's time and attention, either of which could have a
material and adverse effect on business, results of operations and financial
condition.
To date the Company has not experienced any problems resulting from Year 2000
computer issues; any such issues were resolved prior to January 1, 2000.
REGULATION AND TAXATION
The Investment Company Act of 1940 defines an "investment company" as an issuer
which is or holds itself out as being engaged primarily in the business of
investing, reinvesting or trading securities. While the Company does not intend
to engage in such activities, the Company may obtain and hold a minority
interest in a number of other industry enterprises. The Company could be
expected to incur significant registration and compliance costs if required to
register under the Investment Company Act of 1940. Accordingly, management will
continue to review the Company's activities from time to time with a view toward
reducing the likelihood the Company could be classified as an "investment
company".
28
<PAGE>
Item 7. Financial Statements
The financial statements and supplemental data required by this Item 7 follow
the index of financial statements appearing at Item 13 of this Form 10-KSB.
Item 8. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
The Registrant has not changed accountants since its formation, and Management
has had no disagreements with the findings of its accountants.
Item 9. Directors, Executive Officers, Promoters and
Control Persons; Compliance with Section 16(a)
of the Exchange Act
The members of the Board of Directors of the Company serve until the next annual
meeting of the stockholders, or until their successors have been elected. The
officers serve at the pleasure of the Board of Directors, but may be removed by
a vote of the shareholders holding a majority of shares outstanding and entitled
to vote.
There are no agreements for any officer or director to resign at the request of
any other person, and none of the officers or directors named below are acting
on behalf of, or at the direction of, any other person.
The directors and executive officers of the Company as of the date of this
report are:
Name/Address Age Position
------------ --- --------
Michael Jay Solomon 62 Chairman/Director, CEO,
130 S. El Camino Drive President, Treasurer
Beverly Hills, CA 90218
Jeremy Schuster 36 Chief Operating Officer/
5757 Wilshire Blvd. Suite 124 Director
Los Angeles, CA 90036
Roland Joffe 54 Director
2854 Roscomare Road
Los Angeles, CA 90077
Marion Dougherty 76 Director
c/o Gary S. Kleinman Acctg. Corp.
10340 Santa Monica Blvd.
Los Angeles, CA 90025
29
<PAGE>
Name/Address Age Position
------------ --- --------
James Zelloe 40 Director
7601 Lewinsville Road, #250
McLean, VA 22102
Thom Mount 51 Director
6363 Sunset Blvd.
Los Angeles, CA 90028
Marilyn Foster Staubitz 34 Director
5757 Wilshire Blvd., Suite 124
Los Angeles, CA 90036
MICHAEL JAY SOLOMON - Chairman, CEO, President, Treasurer & Director
Michael Jay Solomon was elected Chairman, CEO and, President on December 27,
1999, effective January 1, 2000. His term as director is one year or until the
next election of directors. Mr. Solomon has over forty years experience in the
motion picture/television production and distribution/marketing business. He
began his career in 1956 with United Artists and eventually became one of the
most knowledgeable film and television marketers in the world. He founded
Telepictures Corporation in 1978, which merged with Lorimar in 1985; this
company produced such television hit programs as Dallas, Falcon Crest, Knot's
Landing, and many more. When Lorimar Telepictures was acquired by Warner Bros.
In 1989, Mr. Solomon became President of Warner Bros. International Television.
Mr. Solomon founded Telepictures Corporation in 1978 where he was Chairman and
CEO, which merged with Lorimar in 1985 of which he became President of
Lorimar-Telepictures.
Mr. Solomon is an owner of Channel 11 in Peru, and Iguana Productions, which
produces 520 hours of telenovelas (soaps). He is chairman of MAXX International,
Inc., a multimedia entertainment company that is publicly traded. Mr. Solomon is
a native of New York. He was educated at Boston's Emerson College, and New York
University's Evening School of Commerce (Stern School of Business); he was
awarded an honorary Doctor of Law degree from Emerson College.
Mr. Solomon is required to devote an estimated 51% of his time to the Company.
His current term as a member of the board of directors will expire at the next
annual shareholders meeting anticipated to be held on August 5, 2000, or as soon
thereafter as practical. It is Mr. Solomon's belief that his positions with
other companies does not offer a conflict of interest, in that those companies
do not compete with the Company's business.
30
<PAGE>
JEREMY SCHUSTER - Chief Operating Officer/Director
Jeremy Schuster was elected Director on August 5, 1999 and executed an
employment agreement providing for his services as Chief Operating Officer,
effective November 25, 1999 through December 31, 2003. His term as director is
for one year or until the next election of directors by shareholders following
the expiration of the one year term. Mr. Schuster is an attorney who pioneered
the concept of the "mobile law office," bringing computers onsite and onto the
set for film productions in the early 1990's. He has a strong background in
business and the entertainment industry, and has represented a wide variety of
talent in film and television as legal counsel.
Mr. Schuster's client list includes the multimedia personalities that recently
formed Dragon's Lair, LLC - Don Bluth, Rick Dyer, and David Foster. Mr. Schuster
has also served as production counsel for independent film companies and
currently maintains an active bi-coastal state and Federal court litigation
practice, while representing corporations including Virtual Image Productions,
Inc., TVNext.com, Inc., and Texas.com, LLC. Mr. Schuster also currently serves
on the Board of Directors of Virtual Image Productions, Inc.
Mr. Schuster graduated from Rochester Institute of Technology in 1986 with
Associate of Applied Science and Bachelor of Science degrees. He thereafter
received a Juris Doctor from Suffolk University School of Law. Mr. Schuster is a
member of the Orange County Peace Officers Association, the National Notary
Association, and the National Association of Flight Instructors.
For the past five years he has been employed as an attorney at law under the
firm name of Schuster & Associates. He was elected as a director on August 5,
1999; his current term expires at the annual shareholders meeting anticipated to
be held on August 5, 2000, or as soon thereafter as practical.
Mr. Schuster was recently appointed a director of Sector Communications, Inc.
("Sector"), a holding company that holds telecommunications concerns; Sector is
publicly traded (OTCBB symbol: SECT). Sector does not compete with the Company's
business. Mr. Schuster is also counsel and provides legal services to a number
of "dot com" companies (specifically including TVNext.com, a New Jersey and
Delaware company, which is currently developing interactive television and
broadcast programs, and Texas.com, which serves as a central resource or portal
for vendors servicing Texas visitors, conventions, etc.), none of which compete
with the Company.
ROLAND JOFFE - Director
Roland Joffe was elected as a director as of the effective date of the OMNI
merger, which was March 22, 1999; his current term expires on March 22, 2000 or
at the next meeting of shareholders at which directors are elected. Mr. Joffe is
a noted filmmaker whose Academy Award winning films include "The Killing Fields"
(1984), which won a total of three Academy Awards and seven British awards,
including "Best Picture," and "The Mission" (1986).
31
<PAGE>
Mr. Joffe currently is the executive producer of a groundbreaking new MTV
series, "MTV's Undressed," while his most recent feature film directing credit
was the 1999 thriller "Goodbye Lover," starring Don Johnson, Ellen DeGeneres,
and Dermot Mulroney. Mr. Joffe entered television at the BBC as a trainee
director, working his way up to directing Britain's most successful TV soap
opera, "Coronation Street," as well as segments of the current affairs program
"On the Line," and the documentary feature "ANA." Mr. Joffe also helmed a
13-part TV series, "The Stars Look Down," which received great acclaim.
In 1987, Mr. Joffe formed the Los Angeles-based film production company,
Lightmotive. Lightmotive produced a number of feature films, as well as a broad
range of television, and introduced Harrods of London to the Home Shopping
Network.
Mr. Joffe graduated with a Bachelor of Arts in English and Drama from Manchester
University. For the past five years he has been employed as chairman and chief
executive officer of Lightmotive, Inc. Mr. Joffe does not have any involvement
with any company competing with the Company, and therefore believes there are no
conflicts of interest.
MARION DOUGHERTY - Director
Marion Dougherty was elected Director as of the effective date of the OMNI
merger, which was March 22, 1999; her current term expires on March 22, 2000 or
at the next meeting of shareholders at which directors are elected. Ms.
Dougherty, senior vice president of talent at Warner Brothers, is considered to
be the "grand dame" of casting. Her first generation of young female assistants
in the 1950's, Juliet Taylor and Wally Nicit, went on to become the next rank of
top movie casting directors as well as tutors who passed on their techniques to
their own assistants. In the process, Ms. Dougherty virtually invented the
modern casting process and made it a female-dominated field.
Ms. Dougherty gave James Dean and Warren Beatty their first speaking parts
during this time, and has been instrumental in helping launch the careers of
other actors such as Robert Redford, Al Pacino, Robert Duvall, Dustin Hoffman,
and Martin Sheen. In 1964, Dougherty launched one of the country's first
independent casting offices.
Ms. Dougherty has cast over 50 motion pictures, including "Lethal Weapon 4,"
"Midnight Cowboy," "Taxi Driver," "Batman Returns," "Conspiracy Theory," and
"Bananas."
For the past five years she has been employed as a senior vice president at
Warner Brothers.. Ms. Dougherty has no involvement with any company competing
with the Company, and therefore believes she has no conflicts of interest.
32
<PAGE>
JAMES T. ZELLOE - Director
Mr. James Zelloe was elected as a director on August 5, 1999; his current term
expires at the annual shareholders meeting anticipated to be held on or about
August 5, 2000, or as soon thereafter as practical. Mr. Zelloe is an attorney
licensed in Virginia and Washington, D.C. He received a Bachelor of Science in
Business Administration and Economics in 1981 and was enrolled in a joint
Masters of Arts/Juris Doctor degree program at Catholic University thereafter.
Mr. Zelloe received his Juris Doctor degree from Catholic University Columbus
School of Law in 1984. He has lectured and been a teaching assistant at Catholic
University's Economics Department from 1982-1984. Mr. Zelloe is a member of the
Virginia Bar Association, the Fairfax Bar Association, and the D.C. Bar. He is
also a member of the Association of Trial Lawyers of America, of Phi Kappa Phi
Honor Society, and of Omicron Delta Epsilon, an Economics Honors Society. Mr.
Zelloe has been practicing law since graduating from law school in 1984.
For the past five years he has been employed as an attorney at law by the firm
of Kunnirickal & Zelloe.
Mr. Zelloe has been appointed a director of Sector Communications,
Inc.("Sector"), a holding company that holds telecommunications concerns, and
which is publicly traded (OTC BB symbol: SECT). Sector does not compete with the
Company; he believes he has no conflicts of interest.
THOM MOUNT - Director
Thom Mount was elected as a director on August 1, 1998; his current term expires
on August 1, 1999 or at the next meeting of shareholders at which directors are
elected. In 1974, at age 26, Mr. Mount became President of Universal Pictures.
At that time, Time Magazine and New York Magazine dubbed him a "baby mogul."
Mr. Mount holds a Bachelor of Arts degree from Bard College, and he graduated
with a Master of Fine Arts degree from the California Institute for the Arts in
1972. During his tenure at Universal, he launched such talents as Sean Penn,
Steve Martin, John Landis, Bill Murray, John Candy, Dan Akroyd, and Jonathan
Demme. He was responsible for such films as "Car Wash," "Coal Miner's Daughter,"
"The Jerk," "Animal House," "Smokey and the Bandit," "The Deer Hunter," and "The
Blues Brothers," among others.
Since leaving Universal, Mr. Mount founded the Mount Company. He has produced
fifteen films, including "Bull Durham," "Tequila Sunrise," "Frantic," "Can't Buy
Me Love," and Roman Polanski's "Death and the Maiden." Most recently, he
produced Sidney Lumet's "Night Falls on Manhattan." Mr. Mount currently serves
as the president of the Producers Guild of America.
For the past five years he has been employed as president of The Mount Company.
Mr. Mount is not involved with any company competing with the Company; he
believes he has no conflicts of interest.
33
<PAGE>
MARILYN FOSTER STAUBITZ - Director.
Ms. Marilyn Staubitz was elected as a director on August 5, 1999; her current
term expires at the annual shareholders meeting anticipated to be held on August
5, 2000, or as soon thereafter as practical. Ms. Marilyn Staubitz received a
Bachelor of Science and a Bachelor of Arts degree from Western New England
College in 1987. She has worked for Packard Capital Ltd. for the past six years
in the capacity of an executive assistant; previous to that she was employed by
Citicorp in Boston, Massachusetts and by Sekisui America in California. She does
not participate in any other business ventures in which other officers or
directors participate, other than acting as a shareholder of Sector
Communications, Inc., which does not compete with the Company's business; she
believes she has no conflicts of interest.
The Company knows of no family relationship between any of the officers and
directors of the Company. The Company's Board of Directors has established a
Compensation Committee.
CONFLICTS OF INTEREST
The Company does not currently have a right of first refusal pertaining to
opportunities that come to management's attention insofar as such opportunities
may relate to the Company's proposed business operations.
The officers and directors are, so long as they are officers or directors of the
Company, subject to the restriction that all opportunities contemplated by the
Company's plan of operation which come to their attention, either in the
performance of their duties or in any other manner, will be considered
opportunities of, and be made available to the Company and the companies that
they are affiliated with on an equal basis. A breach of this requirement will be
a breach of the fiduciary duties of the officer or director. Except as set forth
above, the Company has not adopted any other conflict of interest policy with
respect to such transactions.
Mr. Schuster renders legal services to Mr. Hadid, a former member of the board
of directors of the Company, as well as to the Company, from time to time. Mr.
Schuster also renders services to Mark Dilullo, a consultant to the Company,
from time to time.
Any other matters relating to potential conflicts of interest respecting the
officers or directors, are set forth above, in Item 9.
34
<PAGE>
INVESTMENT COMPANY ACT OF 1940
Although the Company will be subject to regulation under the Securities Act of
1934 and the Securities Exchange Act of 1934, management believes the Company
will not be subject to regulation under the Investment Company Act of 1940
insofar as the Company will not be engaged in the business of investing or
trading in securities. In the event the Company engages in business combinations
which result in the Company holding passive investment interests in a number of
entities, the Company could be subject to regulation under the Investment
Company Act of 1940. In such event, the Company would be required to register as
an investment company and could be expected to incur significant registration
and compliance costs. The Company has obtained no formal determination from the
Securities and Exchange Commission as to the status of the Company under the
Investment Company Act of 1940 and, consequently, any violation of such Act
would subject the Company to material adverse consequences.
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Section 16(a) of the Securities Exchange Act of 1934 requires that the Company's
officers and directors, and persons who own more than ten percent of a
registered class of the Company's equity securities, file reports of ownership
and changes in ownership with the Securities and Exchange Commission. The
Company was not subject to the reporting requirements of Section 16(a) during
fiscal 1999.
35
<PAGE>
Item 10. Executive Compensation
<TABLE>
<CAPTION>
Annual Compensation Long Term Compensation
---------------------------------------------- ------------------------------------------------
(a) (b) (c) (d) (e) (f) g) (h) (i)
Other Restricted
Annual Stock Options LTIP All Other
Position Year Salary ($) Bonuses($) Compensation Awards SARs Payouts ($) Compensation
- -------- ---- ---------- ---------- ------------ ---------- ------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Harvey Kibel, 1997 19,615
CEO 1998 3,000
John Sloatman, 1997 78,000 220,000
COO, Chairman 1998 8,584
Gene Davis, CFO 1997 78,125 20,000(5)
1998 48,000
1999 61,979
Phil Gustlin, CEO 1999 - 639,120
Tony Cataldo, 1999 - 500,000 sh
CEO/President
Kathryn Thyne, 1997 78,000
President 1998 39,450(1)
Paul Kessler, 1998 50,000(2) 500,000 sh 3,600,000(4)
President 1999 100,000(3)
Thom Mount, 1998 50,000(6) 500,000 sh
COO, Co-Chairman signing bonus
</TABLE>
- ------------------
(1) Mr. Kessler assumed the presidency in 1998.
(2) Mr. Kessler received options in lieu of salary for 1998; these options
expired under the ESOP plan because they were not exercised within three
months of cessation of employment.
(3) Mr. Kessler's salary for 1998 was for a partial year; the salary amount for
1999 was set at $100,000, which was taken in options; these options expired
under the ESOP plan because they were not exercised within three months of
cessation of employment.
(4) Mr. Kessler received 3,600,000 shares as consideration for the OMNI-TEI
introduction and plan.
(5) Mr. Davis claims additional options should have been issued; the Company is
currently researching this matter with Mr. Davis and prior management but
does not expect any material impact.
(6) Mr. Mount took the title of Chief Operating Officer and later transitioned
to co-chairman of the Board of Directors.
36
<PAGE>
For fiscal 2000, the Company has entered into employment agreements with key
executives on the terms described below:
MICHAEL SOLOMON. The Company entered into an employment agreement "CEO
Agreement") with Mr. Solomon providing for his services as Chairman of the Board
of Directors and Chief Executive Officer effective January 1, 2000 through
December 31, 2003. Pursuant to the CEO Agreement, Mr. Solomon is to receive an
annual salary of $250,000. As consideration for execution of the CEO Agreement,
Mr. Solomon is to receive 850,000 shares plus 850,000 warrants or options to
purchase shares, which have not, as of the date of this report, been issued.
The CEO Agreement also includes performance-based incentives which grant up to
1,400,000 shares in "one-time" bonuses (tied to achievement of specified stock
prices), and up to 300,000 shares as part of a recurrent bonus plan. The CEO
agreement provides for reimbursement of 50% of the salary paid to Mr. Solomon's
assistant, benefits for his assistant, and reimbursement of expenses, including
medical and dental insurance. Mr. Solomon may be granted additional bonuses or
shares at the discretion of the Board of Directors. The agreement provides for
conversion of any whole or portion of the Corporation's debt from the CEO
Agreement to be converted to stock or options. The CEO Agreement includes a
favored nations clause that applies to compensation and benefits. The CEO
Agreement includes provisions for mandatory use of alternative dispute
resolution procedures. The CEO Agreement may be terminated by Mr. Solomon by
written notice to the Company, effective 10 days from the date of deposit in the
U.S. mail; the Company may also terminate the agreement with or without cause,
subject to specific contractual provisions.
Mr. Solomon has not received any salary or stock from the CEO Agreement as of
the date of this report.
JEREMY SCHUSTER. The Company entered into an employment agreement ("COO
Agreement") with Mr. Schuster providing for his services as Chief Operating
Officer effective November 25, 1999 through December 31, 2003. Pursuant to the
COO Agreement, Mr. Schuster is to receive an annual salary of 200,000. As
consideration for execution of the COO Agreement, Mr. Schuster is to receive
warrants or options to purchase 100,000 shares on a favored nations basis, which
have not, as of the date of this filing, been issued. The COO Agreement provides
for a salaried assistant, a vehicle allowance (or for the Corporation to provide
a vehicle), and reimbursement of expenses, including medical and dental
insurance. The COO Agreement contains a change in control clause which allows a
majority of the Board of Directors or Mr. Schuster to sever the agreement
following a change in control or the composition of the Board of Directors;
exercise of such provision requires the Corporation to pay an amount equivalent
to the compensation and benefits that would otherwise be due Mr. Schuster under
this Agreement for the period extending from the date of election through the
expiration of one year thereafter. The agreement provides for conversion of any
whole or portion of the Corporation's debt from the COO Agreement to be
converted to stock in the same manner provided to other directors or promissory
note holders. The COO Agreement includes a favored nations clause that applies
to compensation and benefits, as well as other aspects of the Agreement. The
Agreement includes provisions for mandatory use of alternative dispute
resolution procedures. The COO Agreement is separate from any attorney-client
agreement; no attorney services are required to be provided under the COO
Agreement.
37
<PAGE>
Mr. Schuster has not received any salary or stock from the COO Agreement as of
the date of this report.
COMPENSATION TO DIRECTORS
The following grants of common stock and stock options to purchase common stock
were made to directors of the Company during fiscal 1999.
Common Stock Stock Options Granted
------------- -----------------------------------------
No of Shares
Director No. of Date of Underlying Exercise Expiration
Shares Grant Options Price Date
--------- -------- ------------ -------- ----------
Mohamed Hadid (1) 1,000,000 8/16/99 1,000,000* $1.00 8/16/09
Marion Dougherty 100,000 7/31/99 100,000* $1.00 7/31/09
Marilyn Foster 25,000 7/31/99 25,000* $1.00 7/31/09
Roland Joffe 100,000 7/31/99 100,000* $1.00 7/31/09
Jean Claude Van 500,000 7/31/99 500,000* $1.00 7/31/09
Damme(2)
Jeremy Schuster(3) 75,000 7/31/99 75,000* $1.00 7/31/09
James Zelloe 50,000 7/31/99 50,000* $1.00 7/31/09
- ----------------------
* The paperwork for the option agreements has not been completed as of the date
of this report.
(1) Following his resignation as interim Chairman during December, 1999, the
stock and options granted by the Company have been returned to the Company
by Mr. Hadid, but have not been canceled as of the date of this report.
(2) Shares are held in the name of JCVD Productions, Inc. On March 21,
1999,_Mr. Van Damme resigned as a director. The Company has requested the
return of the stock and options granted in 1999.
(3) Mr. Schuster has also received compensation for legal services provided to
the Company during 1999 (see Item 12 "Certain Relationships and Related
Transactions").
38
<PAGE>
EMPLOYEE STOCK OPTION PLAN
The Company adopted an employee stock option plan (the "Stock Option Plan") with
an effective date of March 1, 1999 and an expiration date of February 28, 2009,
which is administered by the Stock Option Committee, which recorded the results
of three meetings held during 1999:
In the June 1999 meeting, the employment agreements of key personnel Thom Mount
and Paul Kessler were approved; under these agreements, these key employees
would each receive 1,000,000 share options, vesting in 1/3 increments during a
three year period. Mr. Kessler left the Company's employ after the first year
and failed to exercise his options within three months after cessation of
employment, as required by the Stock Option Plan. As a result, his options were
canceled.
In the July 1999 meeting, five key personnel were granted a total of 180,000
share options at $1.25 each. These options were principally intended to
compensate personnel for prior services rendered; the agreements provide for
vesting over a number of years, however, in what is often termed a "golden
handcuff" for key employees.
In the November 1999 meeting of the Company's Stock Option Committee, fifteen
personnel were granted a total of 102,500 share options, subject to final
approval by the Compensation Committee Chairman. 20,000 of these share options
were granted at $1.00 each, and the remaining 82,500 share options were granted
at $1.25 each. These options were also principally intended to compensate
personnel for prior services rendered, with the agreements providing for vesting
of the options over a number of years in a "golden handcuff" for key employees.
The Company expects to offer options to several additional employees in an
effort to retain their special skills, abilities, and services. In any event,
additional share options must be granted as a result of certain employment
agreements.
The Company's Stock Option Plan provides for reservation of 3,000,000 common
shares for use in the Stock Option Plan. Approximately 1,505,325 share options
may be converted from OMNI to EINI options or may be administered through EINI
pursuant to the pre-existing Only Multimedia Incorporated Stock Option Plan.
39
<PAGE>
The foregoing transactions were not arms-length.
No retirement, pension, profit sharing, or other similar programs have been
adopted by the Company for the benefit of its employees.
Item 11. Security Ownership of Certain Beneficial Owners
and Management
The following table sets forth each person known to the Company, as of March 1,
2000, to be a beneficial owner of five percent (5%) or more of the Company's
common stock, by the Company's directors individually, and by all of the
Company's directors and executive officers as a group.
Except as noted, each person has sole voting and investment power with respect
to the shares shown.
Shares
Title of Beneficially Percentage
Class Name/Address of Owner Owned Ownership(1)
----- --------------------- ----- ------------
Common CEDE & Co. 9,300,380 19.29%
P.O. Box 222 Bowling Green
Station
New York, NY 10274
Common Packard Capital Limited 8,671,053 17.98%
1350 Beverly Road #115-339
McLean, VA 22101
Common Windsor Capital Fund VI 6,597,222 13.68%
129 Front Street
PH Suite
Hamilton HM 12 Bermuda
Common Bristol Asset Management, LLC 5,623,870 11.67%
1801 Century Park East
Suite 1131
Los Angeles, CA 90067
Common Paul Kessler 4,686,261 9.72%
1801 Century Park East
Suite 1131
Los Angeles, CA 90067
Common Marion Dougherty 100,000 *
c/o Gary S. Kleinman Acctg. Corp.
10340 Santa Monica Blvd.
Los Angeles, CA 90025
Common Marilyn Foster Staubitz 25,000 *
5757 Wilshire Blvd., Suite 124
Los Angeles, CA 90036
40
<PAGE>
Shares
Title of Beneficially Percentage
Class Name/Address of Owner Owned Ownership(1)
----- --------------------- ----- ------------
Common Michael Jay Solomon 0 *
130 S. El Camino Drive
Beverly Hills, CA 90218
Common Roland Joffe 100,000 *
2854 Roscomare Road
Los Angeles, CA 90077
Common Thomas Mount 500,000 *
6363 Sunset Blvd., 4th Floor
Los Angeles, CA 90028
Common Jeremy Schuster 718,129(2) *
5757 Wilshire Blvd., Suite 1800
Los Angeles, CA 90036
Common James Zelloe 50,000 *
7601 Lewinsville Road, #250
McLean, VA 22102
Common All officers and directors as a 1,493,129 3.10%
group
(7 individuals)
- ---------------------
* less than one percent.
(1) Percentage Ownership is based on 48,212,567 shares issued and outstanding
as of March 1, 2000.
(2) Excludes 2,401,255 common restricted shares the Company issued to Chief
Operating Officer and director, Jeremy G. Schuster. The Company has
requested that Mr. Schuster forego a favorable provision for conversion of
the Company's unpaid charges for legal services to stock; Mr. Schuster
agreed to refrain from use of the conversion feature of his fee agreement
and offered the Company a discounted settlement for fees, which is
currently pending. Mr. Schuster presently has 718,126 shares in his
possession, which were issued as noted in Item 10, Executive Compensation;
the balance of 2,401,255 shares are being held by the Company pending
satisfaction of a discounted settlement for fees for legal services
rendered. If the Company pays Mr. Schuster as agreed and as scheduled, the
2,401,255 shares will be canceled.
41
<PAGE>
Item 12. Certain Relationships and Related Transactions
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Jeremy Schuster, an officer and director of the Company since August, 1999,
provided services as an outside counselor to the Corporation during 1999
pursuant to a reduced-rate fee agreement which provided for services to be
billed at two hundred fifty dollars per hour, with provision for conversion of
any unpaid balance to stock on the same terms provided to convertible promissory
note holders. Services included litigation in Federal and state court, response
to administrative proceedings, and general counsel to the Corporation. The
Corporation earlier paid outside counsel rates in excess of four hundred dollars
per hour and deemed the discounted, "no cash" arrangement beneficial. Mr.
Schuster also was granted stock options as compensation for legal services.
On November 7, 1999, Mr. Schuster elected to convert the unpaid balance for his
fees to stock. The Corporation, desiring to reserve the majority of the shares
which would otherwise be issued to Mr. Schuster for the unpaid balance,
negotiated with Mr. Schuster for a further reduction in the hourly billing rate
and forgiveness of a significant portion of its balance; Mr. Schuster agreed to
accommodate the Corporation and entered into a settlement agreement which
provided that the Corporation would issue the conversion shares and hold them in
trust, pending payment of the accrued fees over a four month period. The
settlement affected billings to occur through December 31, 1999. Mr. Schuster is
presently completing certain litigation assignments and requested the
Corporation to assign any new litigation to outside counsel or third parties.
The Company's policy is that the Company will seek an acquisition or merger on
fair market basis only. In any potential merger wherein company officers,
directors, or principal shareholders, affiliates, or associates have interest,
such interest shall be fully disclosed prior to merger.
42
<PAGE>
Item 13. Exhibits and Reports on Form 8-K
(a)(1) The following financial statements are contained on Pages F-1
through F-23:
Report of Independent Auditors Merdinger, Fruchter, Rosen & Corso,
Certified Public Accountants, dated April 9, 2000.
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statement of Shareholders' Deficiency
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
(a)(3) The following exhibits are filed as part of this report:
Exhibit
Number Description
- -------- -----------------------------
2.1 Plan of Merger by and among THE ENTERTAINMENT INTERNET, INC., and ONLY
MULTIMEDIA NETWORK INCORPORATED effective as of March 22, 1999 (filed
herewith)
3.1 Amended and Restated Articles of Incorporation of Registrant
(incorporated herein by reference to the Company's Registration
Statement on Form 10-SB 12(g), File No. 000-28173)
3.2 ByLaws of Registrant (incorporated herein by reference to the
Company's Registration Statement on Form 10-SB 12(g), File No.
000-28173)
4.1 The Entertainment Internet, Inc. Stock Option Plan (incorporated
herein by reference to the Company's Registration Statement on Form
10-SB 12(g), File No. 000-28173)
10.2 Michael Solomon Employment Agreement (filed herewith)
27.1 Financial Data Schedule (Amended)(filed herewith)
(b) Reports on Form 8-K
An 8-K Report was filed in April 2000, to report that on December
27, 1999, the Board of Directors approved an increase in the
authorized common stock of the corporation from 50 million shares
common to 75 million shares common.
43
<PAGE>
INDEPENDENT AUDITORS' REPORT
TO THE BOARD OF DIRECTORS
THE ENTERTAINMENT INTERNET, INC.:
We have audited the accompanying consolidated balance sheets of The
Entertainment Internet, Inc. as of December 31, 1999 and 1998, and the
statements of operations, shareholders' deficiency and cash flows for the years
then ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of The Entertainment
Internet, Inc. as of December 31, 1999 and 1998, and the results of its
operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1, the Company's
recurring losses from operations, negative cash flow from operations, its
negative working capital and its default on certain debt raise substantial doubt
about its ability to continue as a going concern. Management's plans concerning
these matters are also discussed in Note 1. The financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
MERDINGER, FRUCHTER, ROSEN & CORSO, P.C.
Certified Public Accountants
New York, New York
April 9, 2000
F-1
<PAGE>
THE ENTERTAINMENT INTERNET, INC.
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
December 31,
1999 1998
------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 12,714 $ 7,482
Accounts receivable, net of allowance for
doubtful accounts of $8,700 (1998) - 14,421
Prepaid expenses 838,431 -
------------ ------------
Total Current Assets 851,145 21,903
FURNITURE AND EQUIPMENT, net 401,446 336,591
OTHER ASSETS 11,228 14,247
------------ ------------
TOTAL ASSETS $ 1,263,819 $ 372,741
============ ============
LIABILITIES AND SHAREHOLDERS' DEFICIENCY
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 1,851,325 $ 1,372,175
Deferred revenue 256,103 387,782
Advances from Affiliate - 345,380
Notes payable, current portion 4,000 546,362
Debentures payable 437,000 484,500
Notes payable shareholders - current portion - 200,000
Convertible notes payable 334,000 -
Obligations under capital lease - current portion 55,169 62,976
------------ ------------
Total Current Liabilities 2,937,597 3,399,175
LONG-TERM LIABILITIES
Notes payable shareholders, less current portion 500,453 325,453
Convertible notes payable, less current portion - 152,500
Obligations under capital lease, less current portion 38,680 84,062
------------ ------------
Total Liabilities 3,476,730 3,961,190
------------ ------------
COMMITMENTS AND CONTINGENCIES (Note 8) - -
SHAREHOLDERS' DEFICIENCY
Preferred stock, no par value, 1,000,000 shares
authorized; 5,400 shares issued and outstanding 2,032,300 2,032,300
Common stock, $0.001, 75,000,000 shares
authorized; 44,581,978 and
8,842,279 issued and outstanding 44,582 8,842
Additional paid-in-capital 6,677,486 1,524,281
Accumulated deficit (10,967,279) (7,153,872)
------------ ------------
Total Shareholders' Deficiency ( 2,212,911) (3,588,449)
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS'
DEFICIENCY $ 1,263,819 $ 372,741
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-2
<PAGE>
THE ENTERTAINMENT INTERNET, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Year Ended
December 31,
----------------------------
1999 1998
------------ ------------
REVENUE $ 779,528 $ 581,555
COST OF REVENUE 692,373 375,154
------------ ------------
GROSS PROFIT 87,155 206,401
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES 3,089,478 1,803,927
------------ ------------
LOSS FROM OPERATIONS (3,002,323) (1,597,526)
INTEREST EXPENSE 613,066 174,916
------------ ------------
LOSS BEFORE INCOME TAXES (3,615,389) (1,772,442)
PROVISION FOR INCOME TAXES - -
------------ ------------
LOSS FROM CONTINUING OPERATIONS (3,615,389) (1,772,442)
LOSS FROM DISCONTINUED OPERATIONS
(net of applicable income tax effect of $0) - ( 271,048)
------------ ------------
NET LOSS (3,615,389) (2,043,490)
CUMULATIVE PREFERRED DIVIDENDS ( 198,018) ( 198,018)
------------ ------------
NET LOSS ATTRIBUTABLE TO COMMON
SHAREHOLDERS' $ (3,813,407) $ (2,241,508)
============ =============
LOSS PER SHARE - basic and diluted
Loss from continuing operations $ (0.18) $ (0.40)
Loss from discontinued operations $ - $ (0.06)
------------ ------------
Net loss $ (0.18) $ (0.46)
============ ============
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING - basic and diluted 21,473,217 4,421,140
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
THE ENTERTAINMENT INTERNET, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' DEFICIENCY
FOR THE YEAR ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
Additional Total
Preferred Stock Common Stock Paid in Accumulated Shareholders'
Shares Amount Shares Amount Capital Deficit Deficiency
--------- ---------- ---------- -------- ---------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1997 5,400 2,032,300 2,400,521 2,401 986,464 ( 4,912,364) ( 1,891,199)
Issuance of common stock for:
Conversion of convertible note
payable - - 6,441,758 6,441 586,059 - 592,500
Cost related to convertible note
payable - - - - ( 53,642) - ( 53,642)
Warrants issued for compensation - - - - 5,400 - 5,400
Net loss - - - ( 2,241,508) ( 2,241,508)
--------- ---------- ---------- -------- ---------- ------------ -------------
Balance at December 31, 1998 5,400 2,032,300 8,842,279 8,842 1,524,281 ( 7,153,872) ( 3,588,449)
Issuance of common stock for:
Merger with Only Multimedia - - 14,077,145 14,077 479,636 - 493,713
Conversion of notes payable - - 17,231,619 17,232 2,806,091 - 2,823,323
Compensation for services - - 3,062,514 3,063 1,453,588 - 1,456,651
Cash - - 1,368,421 1,368 326,890 - 328,258
Offering costs - - - - ( 74,000) - ( 74,000)
Warrants issued for services - - - - 161,000 - 161,000
Net loss - - - - - ( 3,813,407) ( 3,813,407)
--------- ---------- ---------- -------- ---------- ------------ -------------
Balance at December 31, 1999 5,400 $2,032,300 44,581,978 $ 44,582 $ 6,677,486 $(10,967,279) $( 2,212,911)
========= ========== ========== ========= ============= ============ =============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
THE ENTERTAINMENT INTERNET, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Year Ended
December 31,
1999 1998
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(3,813,407) $(2,241,508)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 144,187 131,395
Common stock issued for services 1,456,651 -
Stock warrants issued for services 87,000 5,400
(Gain) loss on disposal of assets ( 14,125) 60,322
Changes in assets and liabilities:
(Increase) decrease
Accounts receivable 14,421 11,899
Prepaid expenses 25,309 1,946
Other assets 3,019 76,793
Increase (decrease)
Accounts payable and accrued expenses 664,953 648,198
Deferred revenue ( 131,679) 162,713
----------- -----------
NET CASH USED IN OPERATING ACTIVITIES (1,563,671) (1,142,842)
----------- -----------
CASH FLOWS USED IN INVESTING ACTIVITIES
Purchase of furniture and equipment ( 177,941) ( 64,962)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Decrease in book overdraft ( 19,295) -
Advances from affiliate 199,888 345,380
Proceeds from issuance of notes payable 100,000
Payments for notes payable ( 541,100) ( 58,586)
Payments for debentures payable ( 9,000)
Offering cost for convertible note ( 29,449)
Proceeds from issuance of convertible notes payable 745,000
Proceeds from issuance of notes payable shareholder 1,818,629 -
Payments under capital lease obligations ( 39,536) ( 53,622)
Net proceeds from issuance of common stock 328,258 -
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 1,746,844 1,039,723
----------- -----------
NET INCREASE (DECREASE) IN CASH 5,232 ( 168,081)
CASH AND CASH EQUIVALENTS AT BEGINNING
OF YEAR 7,482 175,563
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 12,714 $ 7,482
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
THE ENTERTAINMENT INTERNET, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1999 AND 1998
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
For the years ended December 31, 1999 and 1998, the Company paid in cash
approximately $109,000 and $43,000, respectively, for interest, and paid no
income taxes.
NON-CASH INVESTING AND FINANCING TRANSACTION
For the years ended December 31, 1999 and 1998, the Company acquired
equipment of $16,972 and $12,855, respectively, under capital lease
obligations.
During the years ended December 31, 1999 and 1998, the Company issued
1,658,055 and 6,441,758 shares of its common stock for conversion of notes
payable at a conversion rate of $0.09 (as stipulated in the promissory
notes).
During the year ended December 31, 1999, the Company issued 15,573,564
shares of its common stock for the conversion of notes payable at various
conversion rates for an aggregate amount of $1,404,785 and $1,241,888 in
principal and interest, respectively. See the respective notes payable
notes for further details of these conversions.
During the year ended December 31, 1999, the Company issued 3,062,514
shares of its common stock for services rendered. The shares were valued at
an aggregate amount of $1,456,651. Also, during the year ended December 31,
1999, the Company issued warrants to purchase 279,545 shares of the
Company's common stock. The warrants were valued at an aggregate amount of
$161,000. See Note 9 "Stock Warrants and Options" for further details
regarding the fair value of these securities.
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
THE ENTERTAINMENT INTERNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Line of Business
---------------------------------
The Entertainment Internet, Inc. (the "Company") was a development
stage company until its acquisition of an operating subsidiary, which
is a provider of a range of Internet-related services to the
entertainment community. In 1997, the Company began the operations of
CastNet.com, a state-of-the-art application which enables casting
directors and actors to exchange high-speed information within a
closed "Intranet" and secured "Internet" system, providing instant
electronic access to text, audio and video profiles of actors
throughout the world. Prior to the start of CastNet.com, the Company's
main focus was being an Internet service provider (see Note 11 -
Discontinued Operations).
Subsidiary
----------
In March 1999, the Company formed The Entertainment Internet, Inc, a
California corporation ("TEI-CAL"). TEI-CAL was formed to acquire and
be the parent for Company's acquisition of Only Multimedia Network,
Inc. ("OMNI"). See "Acquisition" for further details.
Acquisition
-----------
In August 1998, the Company entered into an Agreement and Plan of
Merger (the "Merger") with OMNI. The merger, which was effective on
March 31, 1999, was structured so that TEI-CAL would be the acquirer
of OMNI. Since the Company and its subsidiary had no operations prior
to the merger, OMNI is the dominant operating company and the merger
was in substance a reverse acquisition. Accordingly, the transaction
has been treated for accounting purposes as a re-capitalization of
OMNI and, therefore, the historical and continuing financial statement
presentation will be a continuation of the legal subsidiary, TEI-CAL,
not the Company, the legal parent.
The exchange rate in the re-capitalization merger was one unit of the
Company's specified securities for one unit of like kind securities of
OMNI. The Company issued to TEI-CAL 8,852,279 shares of the Company's
Common Stock, 5,400 shares of the Company's Preferred Stock and a
certain number of warrants and options and convertible notes, which
were convertible into 5,854,721 shares of the Company's Common Stock.
TEI-CAL simultaneously exchanged on a one-for-one basis the securities
for OMNI's Common Stock, Preferred Stock, warrants, options and
convertible notes. Also, a certain individual is the majority
shareholder of both the Parent and the Company.
F-7
<PAGE>
THE ENTERTAINMENT INTERNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Basis of Consolidation
----------------------
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiary, TEI-CAL, and TEI-CAL's
subsidiary, OMNI. Accordingly, all references herein to the Company
include the consolidated results of its subsidiaries. All significant
inter-company accounts and transactions have been eliminated in
consolidation.
Basis of Presentation
---------------------
As reflected in the accompanying financial statements, the Company has
had recurring losses from operations, a negative cash flow from
operations and a negative working capital. These matters raise
substantial doubt about the Company's ability to continue as a going
concern.
In view of the matters described in the preceding paragraph,
recoverability of a major portion of the recorded asset amounts shown
in the accompanying balance sheet is dependent upon continued
operations of the Company which, in turn, is dependent upon the
Company's ability to continue to raise capital and generate positive
cash flows from operations. The financial statements do not include
any adjustments relating to the recoverability and classification of
recorded asset amounts or amounts and classifications of liabilities
that might be necessary should the Company be unable to continue its
existence.
Management plans to take the following steps that it believes will be
sufficient to provide the Company with the ability to continue in
existence:
o The Company is continuing to cut its operating overhead in order
to reduce the amount of cash needed to fund operations.
o Renegotiate debt instruments to reduce immediate payment
obligations and extend the payment date for outstanding
principal balances.
o Structure arrangements for the provision of services by
outside consultants and third party providers in a manner
which reserves the cash flow of the Company, such as through
agreements which require those consultants or service
provider to take a portion of any agreed-upon fee in stock
or stock options.
o Acquire capital financing in the amount of 4 million dollars
or more through a long-term debt instruments, short-term
convertible notes, private placements or other sales of the
Company's securities, as may be deemed appropriate by the
Company's Board of Directors.
F-8
<PAGE>
THE ENTERTAINMENT INTERNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Reclassification
----------------
Certain prior year amounts have been reclassified to conform to
current year presentation.
Concentration of Credit Risk
----------------------------
Financial instruments, which potentially subject the Company to
concentrations of credit risk, consist of cash. The Company places its
cash with high quality financial institutions and at times may exceed
the FDIC $100,000 insurance limit.
Cash and Cash Equivalents
-------------------------
Cash equivalents generally include all highly liquid investments with
original maturities of three months or less.
Furniture and Equipment
-----------------------
Furniture and equipment are stated at cost. Depreciation and
amortization is computed using the straight-line method over the
useful lives of the assets ranging from five to seven years and the
life of the lease for leasehold improvements.
Impairment of Long-Lived Assets
-------------------------------
In accordance with Financial Accounting Standards Board ("FASB")
Statement of Financial Accounting Standards (SFAS) No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of", long-lived assets are reviewed for
impairment whenever events or changes in circumstances indicate that
the carrying amounts of such assets may not be recoverable. Impairment
losses would be recognized if the carrying amounts of the assets
exceed the fair value of the assets.
Stock Based Compensation
------------------------
The Company accounts for employee stock options in accordance with
Accounting Principles Board Opinion No. 25 ("APB 25"), "Accounting for
Stock Issued to Employees". Under APB 25, the Company recognizes no
compensation expense related to employee stock options, as no options
are granted at a price below market price on the day of grant.
In 1996, FASB No. 123, "Accounting for Stock-Based Compensation",
became effective for the Company. FASB 123, which prescribes the
recognition of compensation expense based on the fair value of options
on the grant date, allows companies to continue applying APB 25 if
certain pro forma disclosures are made assuming hypothetical fair
value method, for which the Company uses the Black-Scholes
option-pricing model. See Note 9 for pro forma disclosures required by
FASB 123 plus additional information on the Company's stock options.
F-9
<PAGE>
THE ENTERTAINMENT INTERNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Stock Based Compensation (Continued)
------------------------
For non-employee stock based compensation the Company recognizes an
expense in accordance with FASB 123 and values the equity securities
base on the fair value of the security on the date of grant. For
stock-based awards the valued is based on the market value for the
stock on the date of grant and if the stock has restrictions as to
transferability a discount is provided for lack of tradability. Stock
option awards are valued using the Black-Scholes option-pricing model.
Revenue Recognition
-------------------
The Company recognizes revenue from the subscriber base of
CastNet.com. The subscribers pay an upfront fee at the beginning of
the contract period, generally one to two years, to be a part of the
CastNet.com database. The full fee is recognized as revenue pro rata
over the contract period.
Advertising Costs
-----------------
Advertising costs are expensed as incurred. Advertising expense
amounted to approximately $20,000 and $39,000 for the years ended
December 31, 1999 and 1998, respectively, and is primarily for print
advertising.
Research and Development
------------------------
Research and development costs are expensed as incurred. Research and
development costs amounted to approximately $90,000 and $298,000 for
the years ended December 31, 1999 and 1998, respectively, which have
been included in selling, general and administrative expenses.
Income Taxes
------------
Deferred income taxes result primarily from temporary differences
between financial and tax reporting. Deferred tax assets and
liabilities are determined based on the difference between the
financial statement bases and tax bases of assets and liabilities
using enacted tax rates. A valuation allowance is recorded to reduce a
deferred tax asset to that portion that is expected to more likely
than not be realized.
Use of Estimates
----------------
Management has made a number of estimates and assumptions relating to
the reporting of assets and liabilities to prepare these financial
statements in conformity with generally accepted accounting
principles. Actual results could differ from the estimates made.
F-10
<PAGE>
THE ENTERTAINMENT INTERNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Fair Value of Financial Instruments
-----------------------------------
The Company measures its financial assets and liabilities in
accordance with generally accepted accounting principles. For certain
of the Company's financial instruments, including cash and cash
equivalents, accounts payable and accrued expenses, the carrying
amounts approximate fair value due to their short maturities. The
amounts owed for notes payable, debentures payable and notes payable
to stockholders also approximate fair value because current interest
rates and terms offered to the Company for similar notes are
substantially the same.
Net Loss Per Common Share
-------------------------
The Company calculates net loss per share based on SFAS No. 128,
"Earnings Per Share". Basic loss per share is computed by dividing net
loss attributable to common stockholders by the weighted average
number of common shares outstanding. Diluted loss per share is
computed similar to basic loss per share except that the denominator
is increased to include the number of additional common shares that
would have been outstanding if the potential common shares had been
issued and if the additional common shares were dilutive. At December
31, 1999 and 1998, the weighted average shares outstanding would have
been increased by 5,321,380 and 4,409,335 shares of the Company's
common stock, respectively, if the issued and exercisable stock
options and warrants would have been dilutive.
Comprehensive Income
--------------------
In June 1998, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 130, "Reporting Comprehensive Income". SFAS No. 130
establishes standards for the reporting and display of comprehensive
income and its components in the financial statements. As of December
31, 1999 and 1998, the Company has no items that represent
comprehensive income and, therefore, has not included a schedule of
comprehensive income in the accompanying financial statements.
Impact of Year 2000 Issue
-------------------------
As of January 1, 2000, the Company did not have any significant issues
with the year 2000 and has not been informed of any of its customers
and suppliers having any significant issue that would effect the
Company's operations.
F-11
<PAGE>
THE ENTERTAINMENT INTERNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE 2 - FURNITURE AND EQUIPMENT
Furniture and equipment consisted of the following as of December 31,:
1999 1998
-------- --------
Computer equipment ........... $477,685 $481,558
Computer software ............ 97,085 33,148
Office furniture and equipment 17,657 16,360
Leasehold improvements ....... 65,873 2,300
-------- --------
658,300 533,366
Less: accumulated depreciation 256,854 196,775
-------- --------
Total ...................... $401,446 $336,591
======== ========
Depreciation expense was $113,558 and $131,395 for the years ended
December 31, 1999 and 1998, respectively.
NOTE 3 - ADVANCES FROM AFFILIATES
As of December 31, 1998, OMNI has received $345,380 from TEI. The
advances were to fund operations.
NOTE 4 - NOTES PAYABLE
Notes payable consisted of the following as of December 31,:
1999 1998
----------- -----------
Note payable for legal settlement. The note
bears interest at 8.0% per year and requires
monthly principal and interest payments of
$3,370 with all accrued interest and principal
due July 1999. $ - $ 23,124
Note payable for legal settlement. The note bears
interest at 8.0% per year and requires monthly
principal and interest payments of $500 (1999),
$2,000 (1998) with all accrued interest and principal
due January 2000. 4,000 23,238
Note payable. The note bears interest at 10% per
annum with all accrued interest and principal due
on December 31, 1998. Also, if the Company closes
one or more related or unrelated financing transactions
or closes one or more related or unrelated transactions
pursuant to which it sells substantially all of
its assets, or is merged or acquired, all accrued
interest and principal shall become due. Also,
the note is secured by substantially all assets of
the Company. - 500,000
----------- -------
4,000 546,362
Less: current portion 4,000 546,362
----------- -------
Long-term portion $ - $ -
=========== =======
F-12
<PAGE>
THE ENTERTAINMENT INTERNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE 5 - DEBENTURES PAYABLE
In 1996, the Company completed a debenture private placement for
aggregate proceeds of $1,950,000 for $1,852,500 of notes bearing
interest at 10% per annum and $97,500 of Class AA stock warrants. The
principal balance and all unpaid interest were due December 31, 1997.
In 1997, the Company and note holders agreed to convert the principal
and interest into the Company's Preferred Stock Series B (see Note
10). As of December 31, 1997, the note holders for $1,710,000 of the
notes effectively agreed to convert, with the remaining note holders
for $142,500 electing not to convert. However, in 1999, a holder
elected to convert $47,500 of principal and $11,517 of interest into
common stock in the amount of 62,500 shares of the Company's common
stock. The stock was valued at the current market value of the stock
on the date of the conversion, with any excess of fair market value
over the principal and interest treated as additional interest. As of
December 31, 1999 and 1998, the unpaid principal of $95,000 and
$142,500, respectively, and related interest is due and payable.
In 1997, the Company completed a debenture private placement for
aggregate proceeds of $390,000 for $351,000 of notes bearing interest
at 10% per annum and $39,000 of Class B stock warrants. The principal
balance and all unpaid interest were due on December 31, 1997. As of
December 31, 1997, the note holders for $207,000 of the notes agreed
to extend the maturity date to December 31, 1999, and the remaining
note holders for $144,000 did not elect to extend the maturity date.
In 1998, the Company made a payment of $9,000 to holder, so as of
December 31, 1999 and 1998, the unpaid principal of $342,000 along
with the related interest are due and payable.
In total debentures payable consist of $437,000 as of December 31,
1999.
NOTE 6 - NOTES PAYABLE - SHAREHOLDERS
Notes payable shareholders consisted of the following as of December
31,:
1999 1998
10% note payable with all accrued interest
and principal due January 15, 2001 $175,000 $200,000
6% note payable with all accrued interest
and principal due May 2006. (A) 50,000 50,000
6% note payable with all accrued interest
and principal due May 2006. (A) 275,453 275,453
-------- --------
500,453 525,453
Less: current portion -- 200,000
-------- --------
Long-term portion $500,453 $325,453
======== ========
F-13
<PAGE>
THE ENTERTAINMENT INTERNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE 6 - NOTES PAYABLE - SHAREHOLDERS (Continued)
(A) In the event that the Company completes (i) a firm commitment
initial public offering for gross proceeds of at least $7,500,000 or
the sale of the Company (by merger, exchange, or sale of the assets or
otherwise), then the Company shall be required to make equal monthly
payments of interest and principal in an amount equal to the monthly
payment necessary to fully amortize the outstanding balance of unpaid
principal and interest as of the date of the event over the remaining
term of the note. The note holder for $275,453 has asserted a claim
that the amortization event has occurred with the merger of the
Company and OMNI. The holder has requested that the Company make
payments of principal and interest as required by the note. The
Company has not complied with the note holder's request because
management does not agree that an event occurred under the agreement.
The Company has initiated negotiation with the holder, but has not
been able to come to an agreement. The Company believes that if they
are unsuccessful, the limit of its exposure is the principal and
accrued interest and any incidental legal fees, which management
estimates to be immaterial to the financial position of the Company.
NOTE 7 - CONVERTIBLE NOTES PAYABLE
In May 1998, the Company issued convertible promissory notes in the
aggregate amount of $745,000 to certain shareholders, officers,
directors and unrelated parties. At the request of the holder, the
principal and unpaid interest can be converted, at a rate of $0.09 per
share, into the Company's common stock. Also, these notes have an
interest rate of 7.333% and interest accrues up to the date of
conversion. The principal and all accrued and unpaid interest is due
in May 2003. In 1999 and 1998, $152,500 and $592,500, respectively,
have been converted into 1,658,055 and 6,441,758 shares, respectively,
of the Company's common stock.
NOTE 8- CONVERTIBLE NOTE PAYABLE - SHAREHOLDER
In 1999, the Company entered into financing agreements with two
companies. The financing agreements provide for the lenders to provide
funds, as deemed necessary, by the lenders. The Company is to pay
interest at a rate of 6% per annum, with principal due on demand. The
notes also call for any amount of the outstanding principal to be
converted into restricted shares of the Company's common stock at the
option of either the lenders or the Company. If the conversion feature
is evoked, the number of shares are to be calculated as follows: i)
conversion rate shall be calculated by taking 60% of the most
favorable closing price of shares of the Company's common stock during
the period extending from the first day of the calendar year prior to
the date of issuance of the shares; ii) dividing the principal amount,
being converted, by the conversion rate; and iii) any accrued and
unpaid interest will be waived by the lender. Also, the Company has
the right, within one year from the date of issuance of any shares
issued, to redeem the shares for the amount of principal, original
interest and interest which would have been due in the event the
conversion had not taken place.
F-14
<PAGE>
THE ENTERTAINMENT INTERNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE 8- CONVERTIBLE NOTE PAYABLE SHAREHOLDER (Continued)
As of December 31, 1999, two conversions have taken place with
principal amounts of $460,000 and $1,000,000 and interest of $5,000
and $35,000, respectively. The conversion rates used to calculate the
number of restricted share to be issued were $0.281 and $0.197. Since
the shareholder received a 40% discount from the fair market value,
the first 20% was attributed to the lack of tradability of the shares
due to restriction on sale and the second 20% was attributed to the
interest that will accrue over the one year period from date of
conversion to the expiration date of the buy back. The additional
amount of interest was calculated to be $833,952, of which $76,096 has
been expensed in 1999, and the remainder has been capitalized and is
being expensed proratably over the one-year period. At December 31,
1999, the Company has an outstanding balance of $334,000 due under
this agreement.
NOTE 9 - COMMITMENTS AND CONTINGENCIES
Leases
------
The Company's future minimum annual aggregate rental payments for
operating and capital leases that have initial or remaining terms in
excess of one year are as follows:
Year Ending December 31,:
2000 $ 64,939 $ 69,000
2001 25,692 71,000
2002 11,427 78,000
2003 4,486 78,000
2004 3,738 81,000
Thereafter ....................... -- 342,000
-------- --------
Total minimum lease payments ..... 110,282 $191,000
========
Less: amount representing interest 16,433
--------
Present value of minimum lease
payments ........................ 93,849
Less: current portion ........... 55,169
--------
Long-term portion ................ $ 38,680
========
Rent expense for the years ended December 31, 1999 and 1998 was
approximately $81,000 and $48,000, respectively.
The following is a summary of property held under the capital leases
as of December 31,:
1999 1998
-------- --------
Computer equipment ........... $267,721 $250,749
Computer software ............ 7,381 7,381
Office furniture and equipment 27,122 27,122
-------- --------
302,224 285,252
Less: accumulated depreciation 158,578 149,673
-------- --------
Total ...................... $143,646 $135,579
======== ========
F-15
<PAGE>
THE ENTERTAINMENT INTERNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE 9 - COMMITMENTS AND CONTINGENCIES (Continued)
Litigation
----------
The Company is involved with certain legal proceedings and claims,
which arise due to alleged non-performance of payment of existing
liabilities. These specific liabilities have been recorded in the
ordinary course of business. Any such claims will be settled in a
professional manner, and management does not anticipate that the
outcome of these matters will have a materially adverse effect on the
Company's financial position or results of operations, see Note 13
"Subsequent Events."
Employment Agreement
--------------------
In November 1999, the Company executed an employment agreement with
its COO. The agreement is for a three-year period with annual raises
of 15% each year. Also, in 2000, the Company will execute a stock
option for the purchase of 100,000 shares of the Company's common
stock with terms comparable to other employees of his status.
NOTE 9 - STOCK, WARRANTS AND OPTIONS
Preferred Stock
---------------
The Company is authorized to issue 1,000,000 shares of its preferred
stock in one or more series.
In 1997, the Company agreed with certain note holders to issue 5,400
shares of Preferred Stock Series B for the conversion of $1,710,000
and $232,300 of principal and interest, respectively, and cancellation
of 1,775,000 Class AAA warrants. Each share has the following rights:
i) liquidation preference of $500 per share, ii) receive an annual
dividend of $36.67, payable in additional shares of Preferred Stock
Series B, iii) convertible, at the holders option, into 100 shares of
the Company's common stock, iv) automatic conversion into 100 shares
of the Company's common stock upon the Company's common stock trading
at or above $5.50 per share for any five of ten consecutive trading
days and v) is redeemable at $500 per share at the option of the
Company.
Common Stock
------------
In May 1998, the Company issued a convertible promissory note for
$592,500, which was converted into 6,441,758 shares of the Company's
common stock as of December 31, 1998. The note had a rate of interest
at 7.333% up to the date of conversion. The Company has accrued
interest of approximately $9,200, which was not converted, and has
included it in accounts payable and accrued expenses at December 31,
1998.
For the year ended December 31, 1999, the Company had the following
significant transactions for its common stock:
o Issued 14,077,145 shares in the merger with Only Multimedia
Network, Inc. for $493,713 of its equity as of the date of the
merger.
o Issued 17,231,619 shares for the conversion for notes payable and
related interest. See the notes payable notes for detailed
descriptions of the issuances.
F-16
<PAGE>
THE ENTERTAINMENT INTERNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE 10 - STOCK, WARRANTS AND OPTIONS (Continued)
Common Stock (Continued)
------------
o Issued 3,062,514 shares as $1,456,651 of compensation for
services rendered. The shares were valued at the fair market
value of the shares as of the date of issuance, as determined by
the closing trading price of the Company's common stock. Also,
the closing trading price was discounted by 20% due to the lack
of tradability of the shares given the restrictions on
transferability.
o Issued 1,368,421 shares for cash proceeds of $328,258. Also, the
Company incurred $74,000 of offering cost related to a
commission, which was paid by the Company's issuance of a warrant
to purchase 54,545 shares of the Company's common stock for a
period of three years at $0.55 per share. See Stock Warrants for
the valuation of this warrant.
Stock Warrants
--------------
The fair value for the warrants was estimated at the date of grant
using a Black-Scholes option pricing model with the following weighted
average assumptions for 1999 and 1998: weighted average risk-free
interest rates of 5.5; dividend yields of 0%; weighted-average
volatility factors of the expected market price of the Company's
common stock of 256% (1999) and 277% (1998); and a weighted average
expected life of the option of 3 to 5 years (1999) and 3 years (1998).
The Company issued the following stock warrants, as follows:
For the year ended December 31, 1998:
o Two warrants as commission for finders fees relating the sale of
TEI's common stock. The warrants are for the purchase of 124,286
and 33,333 shares of the Company's common stock at $0.175 and
$0.15, respectively, for three years each. The warrants had an
aggregate fair value at date of grant of $375,415.
o A warrant in connection with the Company's employment agreement
with the majority stockholder to purchase 200,000 shares of the
Company's common stock at $0.25 per share through December 2003.
The warrant had a fair value at date of grant of $50,000.
For the year ended December 31, 1999:
o Issued a warrant as commission for finder's fees related to the
sale of common stock. The warrant is for the purchase of 54,545
shares of the Company's common stock at $0.55 per share for two
years. The warrant had a fair value at date of grant of $74,000.
o Issued a warrant for services rendered. The warrant is for the
purchase of 25,000 shares of the Company's common stock at $1.00
per share for a period of ten years. The warrant had a fair value
at date of grant of $18,000.
F-17
<PAGE>
THE ENTERTAINMENT INTERNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE 10 - STOCK, WARRANTS AND OPTIONS (Continued)
o Issued a warrant for service rendered. The warrant is for the
purchase of 200,000 shares of the Company's common stock at $1.00
per share for a period of ten years. The warrant had a fair value
at date of grant of $69,000.
The following table summarizes the stock warrants issued:
Weighted
Average
Exercise
Warrants Price
-------- ---------
Options outstanding, December 31, 1997 2,671,716 $ 3.25
Granted 357,619 $ 0.21
Exercised - $ -
Cancelled/expired - $ -
----------
Options outstanding and exercisable,
December 31, 1998 3,029,335 $ 2.89
Granted 329,545 $ 0.93
Exercised - $ -
Cancelled/expired ( 50,000) $ 2.46
----------
Options outstanding and exercisable,
December 31, 1999 3,308,880 $ 2.70
===========
The following table summarizes the outstanding and exercisable
warrants grouped by range of exercise prices as of December 31, 1999:
Weighted Weighted
Average Average
Exercise Remaining
Range of Exercise Prices Price Life
------------------------ ------- ----------
$0.01 to $0.25 $0.12 2.19
$1.00 to $2.60 $1.89 4.13
$6.00 $6.00 1.00
Stock Options
-------------
Effective March 1, 1999, the Company adopted an employee stock option,
which expires February 28, 2009. The exercise price for the options
shall be determined by the Plan administrator at the date of grant,
but shall not be less than the fair market value at the date of grant.
The plan has reserved a maximum shares to be issued under the option
plan not to exceed 3,000,000.
F-18
<PAGE>
THE ENTERTAINMENT INTERNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE 10 - STOCK, WARRANTS AND OPTIONS (Continued)
Stock Options (Continued)
Pro forma information regarding net income and earnings per share is
required by Statement 123, and has been determined as if the Company
had accounted for its employee stock options under the fair value
method of that Statement. The fair value for these options was
estimated at the date of grant using a Black-Scholes option pricing
model with the following weighted-average assumptions for 1999:
weighted- average risk-free interest rates of 5.5%; dividend yields of
0%; weighted-average volatility factors of the expected market price
of the Company's common stock of 1,473%; and a weighted average
expected life of the option of 3 years.
This option valuation model requires input of highly subjective
assumptions. Because the Company's employee stock options have
characteristics significantly different from those of traded options,
and because changes in the subjective input assumptions can materially
affect the fair value estimate, in management's opinion, the existing
model does not necessarily provide a reliable single measure of the
fair value of its employee stock options.
The Company has adopted only the disclosure provisions of SFAS No.
123, "Accounting for Stock-Based Compensation". It applies Accounting
Principles Bulletin ("APB") Opinion No. 25, "Accounting for Stock
Issued to Employees", and related interpretations in accounting for
its plans and does not recognize compensation expense for its
stock-based compensation plans other than for restricted stock and
options issued to outside third parties. If the Company had elected to
recognize compensation expense based upon the fair value at the grant
date for awards under these plans consistent with the methodology
prescribed by SFAS 123, the Company's net loss would be increased by
approximately $333,400 and $54,000 for the years ended December 31,
1999 and 1998, respectively, to the pro forma amounts indicated below.
1999 1998
--------------- -------------
Net Loss:
As reported $( 3,813,407) $( 2,241,508)
============= ============
Pro forma $( 4,146,807) $( 2,295,508)
============ ============
The effects of applying Statement 123 in this pro forma disclosure may
not be indicative of future amounts. Additional awards in future years
are anticipated.
F-19
<PAGE>
THE ENTERTAINMENT INTERNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE 10 - STOCK, WARRANTS AND OPTIONS (Continued)
Stock Options (Continued)
The following summarizes the Company's stock option transactions under
the stock option plan:
Weighted
Average
Stock Options Exercise
Outstanding Price
------------- --------
Options outstanding, December 31, 1997 1,425,000 $ 2.34
Granted - -
Expired ( 45,000) $ 1.89
------------
Options outstanding, December 31, 1998 1,380,000 $ 2.28
Granted 632,500 $ 1.10
-----------
Options outstanding, December 31, 1999 2,012,500 $ 1.51
==========
Options exercisable, December 31, 1998 1,346,250 $ 2.33
==========
Options exercisable, December 31, 1999 1,841,667 $ 2.33
==========
The weighted average remaining contract lives of stock options
outstanding are 2.5 years.
NOTE 11 - INCOME TAXES
The reconciliation of income taxes computed at the federal statutory
tax rate to income tax expense at the effective income tax rate is as
follows at December 31,:
1999 1998
------------- -----------
Federal statutory income tax
(benefit) rate ( 34.0)% ( 34.0)%
Effect of valuation allowance 34.0% 34.0%
------------ ------------
Effective income tax (benefit) rate -% -%
============ ============
The component of the net deferred tax asset is as follows at December
31,:
1999 1998
----------- ------------
Net operating loss carry-forwards $ 3,667,000 $ 2,299,000
Valuation allowance (3,667,000) (2,299,000)
----------- -----------
Net deferred asset $ - $ -
=========== ===========
F-20
<PAGE>
THE ENTERTAINMENT INTERNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE 11 - INCOME TAXES (Continued)
In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or all
of the deferred tax assets will not be realized. The ultimate
realization of deferred tax assets is dependent upon the generation of
future taxable income during the periods in which those temporary
differences become deductible. Based on projections of future taxable
income over the periods, which the deferred tax assets are deductible,
as of December 31, 1998, management believes it is likely that the
Company will not realize the benefits of these deductible differences,
and therefore a full valuation allowance is required. The net change
in the valuation allowance for the years ended December 31, 1999 and
1998 increased by approximately $1,368,000 and $767,000, respectively.
The Company has available at December 31, 1999 approximately
$10,786,000 of unused operating loss carry-forwards that may be
applied against future taxable income and that expire in various years
starting from 2010. However, the merger, as described further in Note
1, may place limitations as to the ability to use these operating loss
carryforwards.
NOTE 12 - DISCONTINUED OPERATIONS
In July 1998, the Company's management decided to discontinue the ISP
operations and focus the Company's resources on the operations of
CastNet. The plan to discontinue the ISP operations was to inform the
customers that as of September 1, 1998, they would not be provided
service, and as of October 1, 1998, the infrastructure was dismantled
and converted to other uses, such as the CastNet operations. As of
December 31, 1998, the shut down of the ISP operations was complete
and no additional costs were required. Following is summary financial
information for the Company's discontinued ISP operations:
For the Year Ended
------------------
1999 1998
--------- ------------
Net sales $ - $ 402,841
========= ============
Loss from discontinued operations:
Before taxes ( 402,841)
Provision for income taxes - -
--------- ------------
Net $( -) $( 402,841)
========= ============
F-21
<PAGE>
THE ENTERTAINMENT INTERNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE 13 - SUBSEQUENT EVENTS
Pacific Bell Settlement
-----------------------
In March 2000, the Company entered into an agreement to settle
outstanding amounts due to Pacific Bell ("Pac"). Over the last four
years, The Company had accrued fees that management anticipated would
be due to Pac based on contractual agreements entered into by the
Company. As of December 31, 1999, the Company had accrued expenses of
approximately $418,000. The settlement stipulates for the Company to
pay Pac approximately $8,500 over a six-month period. For the
consideration, Pac relieves the Company of any past due amounts
whether invoiced or not.
1996 Subordinated Debt Settlement
---------------------------------
In April 2000, the Company has entered into an agreement with the last
note holder of the 1996 debentures. The parties are awaiting the
approval of the courts. The Company will be required to make a $10,000
payment upon the approval of the agreement with the balance due one
year from the first payment. Also, the Company would be required to
make monthly interest payments at the rate of 10% per annum on the
unpaid balance.
Employment Agreement
--------------------
Effective January 2000, The Company executed an employment agreement
with its CEO. The agreement is for a three-year period with an annual
salary for 2000 at $250,000 with annual raises to the extent necessary
to ensure the CEO's salary is equal to the salary provided to other
comparable employees of the Company. As consideration for the
execution of this agreement the CEO shall receive 850,000 shares of
the Company's common stock and an option to purchase an equivalent
number of shares of common stock at a price of $0.50, exercisable for
5 years and vested in accordance with Employer's Stock Option Plan.
Also, the agreement calls for bonus payments to be made to the CEO in
the event the Company's common stock reaches certain trading levels
and sustains the same for a period of 30 days thereafter; such bonus
structure grants the CEO additional shares of the Company's common
stock ("shares") for exceptional performance in the following manner:
Sustained Stock Price CEO Receives
One dollar ($1.00): two hundred thousand (200,000) shares;
Two dollars fifty cents ($2.50); one hundred thousand (100,000) shares;
Five dollars ($5.00): three hundred thousand (300,000) shares;
Seven dollars fifty cents ($7.50): two hundred thousand (200,000) shares;
Ten dollars ($10.00): three hundred thousand (300,000) shares;
F-22
<PAGE>
THE ENTERTAINMENT INTERNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE 13 - SUBSEQUENT EVENTS
Employment Agreement (continued
--------------------
In the event of sale, acquisition, merger, and or changes in control
after which the services of the CEO are no longer desired, the Company
shall have the right to terminate this Agreement in exchange for
certain compensation to CEO
Employment Agreement
--------------------
In November 1999, The Company executed an employment agreement with
its COO. The agreement is for a three-year period with an annual
salary for 2000 at $200,000 with annual raises of 15% each year. Also,
in 2000, the Company will execute a stock option for the purchase of
100,000 shares of the Company's common stock with terns comparable to
other employees of his status.
F-23
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
THE ENTERTAINMENT INTERNET, INC.
Amendment No. 1 /s/ Michael Solomon
April 18, 2000 By: -----------------------
Michael Solomon
Chief Executive Officer &
Chief Financial Officer
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the Registrant and in the capacities and on the
dates indicated.
Signature Title Date
--------- ----- ----
/s/ Michael Solomon Director, CEO, CFO April 14, 2000
/s/ Jeremy Schuster Director, COO April 14, 2000
/s/ Marilyn Foster Director April 14, 2000
/s/ Thom Mount Director April 14, 2000
/s/ James T. Zelloe Director April 14, 2000
44
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description
- -------- -----------------------------
22.1 Plan of Merger by and among THE ENTERTAINMENT INTERNET, INC., and ONLY
MULTIMEDIA NETWORK INCORPORATED effective as of March 22, 1999 (filed
herewith)
3.1 Amended and Restated Articles of Incorporation of Registrant
(incorporated herein by reference to the Company's Registration
Statement on Form 10-SB 12(g), File No. 000-28173)
3.2 ByLaws of Registrant (incorporated herein by reference to the
Company's Registration Statement on Form 10-SB 12(g), File No.
000-28173)
4.1 The Entertainment Internet, Inc. Stock Option Plan (incorporated
herein by reference to the Company's Registration Statement on Form
10-SB 12(g), File No. 000-28173)
10.2 Michael Solomon Employment Agreement (filed herewith)
27.1 Financial Data Schedule (Amended) (filed herewith)
45
EXHIBIT 2.1
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER (this "Agreement"), is
made and entered into as of August 1, 1998, by and among THE ENTERTAINMENT
INTERNET, INC., a Nevada corporation ("EINI"), THE ENTERTAINMENT INTERNET,
INC., and California Corporation, dba CASTNET.com., a wholly owned subsidiary
of EINI ("CASTNET"), and ONLY MULTIMEDIA NETWORK INCORPORATED, a California
corporation ("OMNI"), with reference to the following facts:
RECITALS
A. WHEREAS, OMNI is a privately held California corporation
engaged in the business of providing internet casting services and EINI is a
Nevada corporation not currently engaged in any active business, which is
qualified to trade on the NASD Bulletin Board pursuant to a currently effective
Rule 15(c)(2)(11) filing with the Securities and Exchange Commission; and
B. WHEREAS, the Board of Directors of OMNI believes it would
be beneficial to OMNI's ability to finance its business to merge into a publicly
traded shell corporation such as EINI; and
C. WHEREAS, EINI received cash compensation of $125,000 (which
was paid out pursuant to a Consulting Agreement by EINI to Peter Berney or his
affiliates) as otherwise described herein, and the acquisition of an operating
business to enhance the trading market and value of its shares;
D. WHEREAS, the parties have determined it will be in the best
interest of the merged entity to be operated as a wholly owned subsidiary of
EINI; and
E. WHEREAS, subject to the terms and conditions of this
Agreement, OMNI will merge with and into CASTNET which will be the surviving
corporation (the "Merger"); and
F. WHEREAS, each outstanding option, warrant, convertible
note, and share of common and preferred stock of OMNI will be converted on a
one-for-one basis into an equal number options, warrants, convertible notes, and
shares of Rule 144 restricted common and preferred stock of EINI upon
consummation of the Merger; and
G. WHEREAS, the Boards of Directors of OMNI and EINI, deeming
the above described merger as desirable in the best interest of their respective
shareholders, have approved and authorized this merger subject to the terms and
conditions herein;
1
<PAGE>
AGREEMENT
NOW, THEREFORE, in consideration of the foregoing facts and the mutual
covenants, representations, warranties and agreements herein contained, the
parties hereto agree as follows:
ARTICLE I
(INTENTIONALLY OMITTED)
DEFINITIONS
ARTICLE 2
THE MERGER
2.1 The Merger .
(a) As of the date of this Agreement, EINI has outstanding 9,600,000 shares
of common stock held by approximately 35 shareholders. One of the shareholders
of EINI is Bristol Asset Management IV, LLC ("Bristol") which acquired (i)
2,400,000 shares of common stock from the pre-existing shareholders of EINI and
(ii) 3,000,000 restricted shares of common stock in contemplation of the merger
for consideration in the amount of $125,000 to EINI. EINI then paid $125,000 as
a fee to Peter Berney for services provided in contemplation of the merger.
(b) In connection with the formation of CASTNET, EINI will issue 8,852,279
shares of EINI Common Stock, 5,400 shares of EINI Preferred Stock to CASTNET and
warrants, option and convertible notes, convertible into 5,854,721 shares of
EINI Common Stock (the "New EINI Shares"). The New EINI Shares will be issued as
private placement shares subject to Regulation D as a private placement of
unregistered shares, and subject to legend and resale restrictions under Rule
144. The 8,852,279 shares of EINI Common Stock and 5,400 shares of EINI
Preferred Stock held by CASTNET, upon completion of the Merger, will be
exchanged for each share of OMNI Common Stock and OMNI Series B Preferred Stock
on a one-for-one basis as of the Effective Time.
(c) In connection with the Merger, each holder of warrants, options or
convertible notes of OMNI will receive an identical instrument in EINI, in terms
of all rights preferences and privileges, and CASTNET will be operated as a
wholly owned subsidiary of EINI, which shall own all of the issued and
outstanding shares of CASTNET. All debts, liabilities, obligations, contracts
and assets of OMNI will, by operation of law as of
SLE LADOCSU441261 13 60004 0001 01/20/99 -2-
<PAGE>
the Effective Time, become the debts, obligations, contracts, liabilities and
assets of CASTNET.
2.2 Certificate of Merger. A certificate of merger, (the
"Certificate of Merger"), shall be prepared, executed and delivered to the
Secretary of State of the State of California (the "California Secretg[y") for
filing on the Closing Date in accordance with the General Corporation Law of
the State of California (the "Corporation Law").
2.3 Effective Time. The Merger shall become effective upon
the filing of the Certificate of Merger with the California Secretary in
accordance with the provisions of the Corporation Law. The date and time of the
filing with the California Secretary is referred to herein as the "Effective
Time."
2.4 Tax-Free Merger. The parties intend that the Merger will
be treated as a tax-free reorganization and nonrecognition transaction under
Section 368 of the Internal Revenue Code of 1986, as amended.
ARTICLE 3
EFFECT OF THE MERGER
3.1 General. At the Effective Time, the separate existence of
OMNI shall cease and CASTNET shall continue as the surviving corporation,
subject to Section 3.6 (CASTNET sometimes is referred to hereinafter as the
"Surviving Corporation"), and shall possess all the rights, privileges, powers,
immunities and franchises, of a public as well as a private nature, of OMNI
(referred to hereinafter as the "Disappearing Corporation"); all property, real,
personal and mixed, and all debts due on whatever account, including
subscriptions for shares stock options and warrants, and all choices in action,
and all and every interest, of or belonging to or due the Disappearing
Corporation shall be taken and deemed to be transferred to and vested in the
Surviving Corporation without further act or deed; and the title to any real
estate, or any interest therein, vested in the Disappearing Corporation shall
not revert or be in any way impaired by reason of the Merger. From and after the
Effective Time, the Surviving Corporation shall be responsible and liable for
all the liabilities and obligations of the Disappearing Corporation so merged,
and any claim existing or Action or proceeding pending by or against the
Disappearing Corporation may be prosecuted as if the Merger had not taken place,
or the Surviving Corporation may be substituted in its place. The Surviving
Corporation shall have all the rights, privileges, immunities and powers and
shall be subject to all the duties and liabilities of a corporation organized
under the Corporation Law, and neither the rights of creditors nor any Liens
upon the property of the Disappearing Corporation shall be impaired by the
Merger, all with the effect set forth in the Corporation Law.
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3.2 Conversion of Securities. At the Effective Time, by
virtue of the Merger and without any action on the part of any Party or the
holder of any of the following securities:
(a) Each share of OMNI Common Stock issued and
outstanding immediately prior to the Effective Time and owned beneficially or of
record by OMNI shareholders shall be converted into and become one validly
issued, fully paid and nonassessable share of common stock, $.01 par value per
share, of EINI (the "New EINI Shares") in a 1: 1 exchange ratio.
(b) Each share of OMNI Common Stock issued and
outstanding immediately prior to the Effective Time and held by OMNI (including
shares held as treasury stock) or owned beneficially or of record by EINI or any
direct or indirect subsidiary of EINI shall be canceled and no consideration
shall be delivered in exchange therefor.
(c) Each share of OMNI Series B Preferred Stock
outstanding immediately prior to the Effective Time and owned beneficially or of
record by OMNI shareholders shall be converted into and become one validly
issued, fully paid and nonassessable share of EINI Series B Preferred Stock,
$500 par value per share (the "EINI Preferred Shares ").
(d) Each option, warrant, and convertible note of
OMNI outstanding immediately prior to the Effective Time shall be assumed by
EINI and shall be deemed to constitute an option, warrant or convertible note,
as the case may be, to acquire, on the terms and conditions as were applicable
under such option, warrant, or convertible note, the same number of EINI common
stock as the holder of such option, warrant or convertible note would have been
entitled to receive pursuant to the Merger had such holder exercised such option
or warrant, or converted such convertible note, in full immediately prior to the
Effective Time (not taking into account whether such option, warrant or
convertible note was in fact exercisable or convertible at such time). As soon
as practicable after the Effective Time, EINI shall deliver to each holder of an
OMNI option, warrant and convertible note an instrument in EINI, in
substantially identical terms of all rights, preferences and privileges as the
OMNI option, warrant and convertible note, as the case may be.
3.3 Dissenting Shares. Notwithstanding any provision of this
Agreement to the contrary, dissenting shares as defined in the Corporation Law
("Dissenting Shares") shall not be converted into the right to receive the New
EINI Shares at or after the Effective Time unless and until the holder of such
Dissenting Shares withdraws his or her demand for payment of the fair value of
such shares in accordance with Article 13 of the Corporation Law or becomes
ineligible for such payment. If a holder of Dissenting Shares shall withdraw his
or her demand for payment of the fair value of such shares in accordance with
Article 13 of the Corporation Law or shall become ineligible to receive such
payment, then, as of the later of the Effective Time or the occurrence of such
event, such holder's Dissenting Shares shall be automatically converted into and
represent the right to receive the New EINI Shares. OMNI
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<PAGE>
shall give EINI prompt notice of any notices of intent to assert dissenters
rights and to demand payment or withdrawals of notices of intent to assert
dissenters rights and to demand payment and will not, except with the prior
written consent of EINI, settle or compromise or offer to settle or compromise
any such notices, voluntarily make any payment with respect to any notice of
intent to demand payment for shares of OMNI Common Stock or Series B Preferred
Stock or approve any withdrawal of any such notice. Each holder of Dissenting
Shares shall have only such rights and remedies as are granted to such holder
under the Corporation Law.
3.4 Exchange of Certificates and EINI Exchange Fund.
(a) Prior to the Closing Date, EINI shall appoint its transfer agent to act
as exchange agent (the "Exchange Agent") in the Merger.
(b) Not later than five (5) business days prior to the Effective Time, EINI
shall deposit, or cause to be deposited, with the Exchange Agent, for exchange
in accordance with this Section 3.4, the requisite number of EINI Shares to be
exchanged equally for the Outstanding Shares (the "EINI Exchange Fund").
(c) As soon as practicable after the Effective Time, the Exchange Agent
shall mail to each holder of record a certificate or certificates which
represent Outstanding Shares (the "Certificates"), a letter of transmittal (the
"Letter of Transmittal") for use in effecting the surrender of the Certificates
in exchange for the EINI Shares. Upon surrender of a Certificate to the Exchange
Agent and a duly executed and completed Letter of Transmittal, the holder of
such Certificate (the "Holder") shall be entitled to receive in exchange
therefor as soon as practicable one share of EINI stock equivalent to the class
or series of OMNI Stock represented by the Certificate being surrendered. Each
Certificate surrendered shall forthwith be canceled. At the Effective Time, the
Holder of a Certificate shall have no rights with respect to shares of OMNI
Common Stock other than to surrender such Certificate pursuant to this Section
3.4 or, if the Holder holds Dissenting Share, to demand payment of the fair
value thereof pursuant to Article 13 of the Corporation Law or to exercise any
other rights under the Corporation Law.
(d) The Exchange Agent shall follow the same procedure with respect to
lost, stolen or mutilated Certificates as OMNI followed with respect to lost,
stolen or mutilated certificates prior to the Effective Time.
(e) Neither EINI, CASTNET nor any other Party hereto shall be liable to a
holder of OMNI Common Stock/Shares for any certificates delivered to a
Governmental Authority pursuant to applicable abandoned property, escheat and
other Laws.
3.5 No Transfers of Stock After Effective Time. After the
Effective Time, there shall be no transfers of any shares of OMNI Shares on the
stock transfer books of the Surviving Corporation. If, after the Effective Time,
Certificates are presented to the
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<PAGE>
Surviving Corporation, they shall be forwarded to the Exchange Agent and
exchanged in accordance with Section 3.4(c), subject to applicable law in the
case of Dissenting Shares.
3.6 Certificate of Incorporation and Bylaws.
(a) The Articles of Incorporation of CASTNET in effect at the Effective
Time shall be the Articles of Incorporation of the Surviving Corporation.
(b) The Bylaws of CASTNET in effect at the Effective Time shall be the
Bylaws of the Surviving Corporation.
ARTICLE 4
PROXY STATEMENT PROSPECTUS
4.1 Notice to OMNI Shareholders. OMNI shall, in accordance
with the Corporation Law and the Articles of Incorporation and Bylaws of OMNI,
give notice of the Merger and solicit the consent of its Shareholders to the
Merger by Written Consent of its shareholders as soon as practicable after the
date hereof (and in any event on or before February 26, 1999) for the purpose of
considering and taking action upon the approval of this Agreement and the
Merger. The notice to the OMNI Shareholders shall state that shareholders of
OMNI are entitled to assert dissenters' rights under Article 13 of the
Corporation Law. OMNI will include in the notice the recommendation of the Board
of Directors of OMNI that shareholders of OMNI consent to the approval of this
Agreement and the Merger by written consent in lieu of a special meeting. OMNI
will inform the shareholders that Bristol holds majority voting power of the
OMNI and EINI shares and that it intends to consent to the approval of this
Agreement and the Merger. OMNI will take all other actions reasonably necessary
to secure the approval of the Merger and this Agreement by OMNI's shareholders
under the Corporation Law.
4.2 EINI Shareholders' Consent.
EINI Shareholders Meeting. EINI shall, in accordance
with the corporation laws of the State of Nevada and the Articles of
Incorporation and Bylaws of EINI, solicit the consent of its shareholders (the
EINI Shareholder's Consent") as soon as practicable after the date hereof(and in
any event on or before February 26, 1999) for the purpose of considering and
taking action upon amendment to the Articles of Incorporation of EINI to
authorize the exchange of the new EINI Shares for the OMNI Exchangeable Shares,
the Merger and such other matters as may be deemed necessary or appropriate by
the Board of Directors of EINI.
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<PAGE>
ARTICLE 5
REPRESENTATIONS AND WARRANTIES OF OMNI
As a material inducement to EINI and CASTNET to enter into
this Agreement and to consummate the transactions contemplated hereby and
except as otherwise set forth in the OMNI Disclosure Schedules to be delivered
by OMNI to EINI and CASTNET, OMNI represents and warrants to EINI and CASTNET
as follows:
5.1 Organization and Qualification.
(a) OMNI is a corporation duly organized, validly existing and in good
standing under the laws of the State of California and has the requisite
corporate power and authority to carry on its business as it is now being
conducted.
(b) OMNI (i) does not, directly or indirectly, own any interest in any
corporation, partnership, joint venture, limited liability company, or other
Person and (ii) is not subject to any obligation or requirement to provide funds
to or to make any investment (in the form of a loan, capital contribution or
otherwise) in or to any Person.
(c) OMNI is duly qualified or licensed to do business and is in good
standing in each jurisdiction in which the nature of its business or the
properties owned or leased by it makes such qualification or licensing
necessary.
(d) OMNI has provided or will provide to EINI access to true and correct
copies of (i) the Articles of Incorporation and Bylaws and (ii) the complete
minute book and stock records of OMNI.
5.2 Capitalization
(a) The authorized capital stock of OMNI consists of (i) 60,000,000 shares
of stock ("OMNI Common Stock"), of which 8,852,279 shares are issued and
outstanding, and 5,854,721 shares are reserved for issuance upon the exercise of
outstanding options and warrants and conversion of preferred stock and notes,
and (ii) 1,000,000 shares of preferred stock, of which 5,400 shares are issued
and outstanding ("OMNI Series B Preferred"). All issued and outstanding shares
of OMNI Common Stock are validly issued and outstanding, fully paid and
nonassessable and free of preemptive rights. Other than such shares, options,
warrants, convertible preferred stock and convertible notes set forth above,
there are no shares of capital stock or other equity securities of OMNI
outstanding and no outstanding options, warrants, subscription rights (including
any preemptive rights), or commitments of any character whatsoever to which OMNI
is a party or is bound, requiring or which could require the issuance or sale by
OMNI of any shares of capital stock of OMNI or
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<PAGE>
any securities convertible into or exchangeable or exercisable for, or rights
to purchase or otherwise acquire, any shares of capital stock of OMNI.
5.3 Authority.
(a) OMNI has the requisite corporate power and authority to enter into each
OMNI Document, to perform its obligations thereunder, and to consummate the
transactions contemplated thereby. Except for the approval of shareholders of
OMNI, the execution and delivery of the OMNI Documents by OMNI and the
consummation by OMNI of the transactions contemplated thereby have been duly
authorized by all necessary corporate action on the part of OMNI. Each OMNI
Document has been duly executed and delivered by OMNI and constitutes a legal,
valid and binding obligation of OMNI, enforceable against OMNI in accordance
with its terms.
(b) Consent, approval, order or authorization of, notice to, registration
or filing with any Governmental Authority is necessary in connection with the
execution and delivery of the OMNI Documents by OMNI or the consummation by OMNI
of the transactions contemplated by the OMNI Documents.
5.4 Audited Financial Statement. The audited financial
statements of OMNI at December 31, 1997 (the " 1997 Financial Statements") were
prepared in accordance with GAAP and present fairly the financial position,
results of operations and changes in financial position of OMNI as of the dates
and for the periods indicated. Except as noted in the footnotes contained in the
Financial Statements, such Financial Statements and footnotes were rendered
without qualification or exception and were not subject to any contingency. The
Financial Statements reflect, as of the date thereof, the interest in the
assets, liabilities and operations of OMNI.
5.5 Intentionally Omitted.
5.6 Labor Matters. There are no present or, to the knowledge
of OMNI, threatened Actions or work stoppages relating to any OMNI Personnel.
OMNI is not a party to any collective bargaining agreement with respect to
employees and, to the Knowledge of OMNI, there are no activities of any labor
union seeking to represent or organize the employees of OMNI. No unfair labor
practice, or race, sex, age, disability or other discrimination, complaint is
pending, nor is any such complaint, to the Knowledge of OMNI, threatened against
OMNI before the National Labor Relations Board, Equal Employment Opportunity
Commission or any other Governmental Authority, and no grievance is pending, nor
is any grievance, to the knowledge of OMNI, threatened against OMNI.
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<PAGE>
5.7 Employee Benefit Plans. Since the date of the OMNI
Financial Statements, there has not been any adoption or amendment in any
material respect by OMNI of any bonus, pension, profit sharing, deferred
compensation, incentive compensation, stock ownership, stock purchase, stock
option, phantom stock, retirement, vacation, severance, disability, death
benefit, hospitalization, medical or other employee benefit plan, arrangement or
understanding (whether or not legally binding) providing benefits to any current
or former employee, officer or director of OMNI or any person affiliated with
OMNI under Section 414(b), (c), (m) or (o) of the Code (collectively, "OMNI
Benefit Plans"). All OMNI Benefit Plans, including any such plan that is an
"employee benefit plan" as defined in Section 3(3) of ERISA, are in compliance
with all applicable requirements of law, including ERISA and the Code, and OMNI
has no liabilities or obligations with respect to such OMNI Benefit Plan,
whether accrued, contingent or otherwise (other than obligations to make
contributions and pay benefits and administrative costs incurred in the ordinary
course), nor to the knowledge of OMNI are any such liabilities or obligations
expected to be incurred.
5.8 Transactions with Certain Persons. To the knowledge of
OMNI, no current OMNI Personnel, or any member of the immediate family of any
current OMNI personnel or any other Affiliate of OMNI is presently a party to
any material agreement, arrangement or other transaction with OMNI, other than
employment agreements or independent contractor agreements made available to
EINI and CASTNET, or has an interest in any party to such contracts.
5.9 Payments. OMNI has not, directly or indirectly, paid or
delivered any fee, commission or other sum of money or item of property, however
characterized, to any finder, agent, government official, governmental authority
or other person, in the United States or any other country, which is in any
manner related to the business or operations of OMNI which OMNI knows or has
reason to believe to have been illegal under any federal, state or local Law of
the United States or the laws of any other country having jurisdiction; and OMNI
has not participated, directly or indirectly, in any boycotts or other similar
practices affecting any of its actual or potential customers or which violate
any applicable law.
5. 10 Board Actions. The Board of Directors of OMNI (at a
meeting duly called and held) has resolved to recommend approval of this
Agreement by the shareholders of OMNI.
5. 11 Required Vote. Approval of the Merger and this Agreement
by shareholders of OMNI will require (a) the approval of a majority of the
outstanding shares of OMNI Common Stock and (b) the approval of a majority of
the outstanding shares of OMNI Preferred Stock.
5.12 Disclosure. The representations and warranties of OMNI
herein, or in any document, exhibit, statement, certificate or schedule
furnished by or on behalf of OMNI to EINI and CASTNET as required by this
Agreement, do not contain and will not contain any untrue statement of a
material fact and do not omit and will not omit to state any material fact
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<PAGE>
necessary in order to make the statements herein or therein, in light of the
circumstances under which they were made, not misleading. To the knowledge of
OMNI, there are no material facts or circumstances relating to OMNI which have
not been disclosed herein to EINI and Castnet. There is no fact known to OMNI
that has specific application to OMNI (other than .general economic or industry
conditions) and that materially adversely affects or, as far as OMNI can
reasonably foresee, materially threatens, the assets, business, prospects,
financial condition, or results of operations of OMNI (on a consolidated basis)
that has not been set forth in this Agreement or the schedules hereto.
The foregoing notwithstanding, OMNI makes no representations or warranties
regarding the impact or effect of any actions which EINI or CASTNET may take
before or after the Closing or which OMNI may take after the Closing.
ARTICLE 6
REPRESENTATIONS AND WARRANTIES OF EINI
6.1 Organization and Qualification
(a) EINI is a corporation duly organized, validly existing and in good
standing under the laws of the state of Nevada and has the requisite corporate
power and authority to carry on its business as it is now being conducted.
(b) Except for CASTNET, EINI (i) does not, directly or indirectly, own any
interest in any corporation, partnership, joint venture, limited liability
company, or other Person and (ii) is not subject to any obligation or
requirement to provide funds to or to 0 make any investment (in the form of a
loan, capital contribution or otherwise) in or to any Person.
(c) EINI is duly qualified or licensed to do business and is in good
standing in each jurisdiction in which the nature of its business or the
properties owned or leased by it makes such qualification or licensing
necessary, except for any such jurisdiction where the failure to so qualify or
be licensed, individually and in the aggregate for all such jurisdictions, would
not reasonably be expected to have a Material Adverse Effect.
(d) EINI has provided or will provide to OMNI access to true and correct
copies of the Articles of Incorporation and Bylaws and complete minute book.
6.2 Capitalization.
(a) The authorized capital stock of EINI consists of (i) 50,000,000 shares
of Common Stock, $0.01 par value per share, of which 9,600,000 shares are issued
and outstanding not including shares issued to CASTNET and no shares are
reserved for issuance
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<PAGE>
upon the exercise of outstanding options and warrants, and (ii) 10,000,000
shares of Preferred Stock, of which 5,400 shares are issued and outstanding and
held by CASTNET. All issued and outstanding shares of EINI Common Stock and
EINI Preferred Stock are validly issued and outstanding, fully paid and
nonassessable and free of preemptive rights. Other than such shares, options
and warrants listed on above, there are no shares of capital stock or other
equity securities of EINI outstanding and no outstanding options, warrants,
subscription rights (including any preemptive rights), calls, or commitments,
or convertible notes or instruments of any character whatsoever to which EINI
is a party or is bound, requiring or which could require the issuance, sale or
transfer by EINI of any shares of capital stock of EINI or any securities
convertible into or exchangeable or exercisable for, or rights to purchase or
otherwise acquire, any shares of capital stock of EINI. There are no stock
appreciation rights relating to EINI.
(b) The authorized capital of CASTNET consists of (i) 50,000,000 shares of
common stock, $.01 par value per share, of which 1,000,000 shares are issued and
outstanding and held by EINI. There are no classes of preferred stock or
outstanding options or warrants in CASTNET.
(c) Upon completion of the Merger the outstanding common stock of EINI
shall be held as follows: 3,600,000 to the pre-existing shareholders of EINI;
3,600,000 shares of restricted common stock to Bristol in consideration for a
payment of $125,000; 2,400,000 shares of restricted common stock acquired by
Bristol from the pre-existing shareholders of EINI, and 8,852,279 shares of
restricted common stock issued to the former common shareholders of OMNI and
5,400 shares of preferred stock issued to the former preferred shareholders of
OMNI. In addition, there shall be 5,854,721 shares reserved for issuance upon
the exercise of outstanding options and warrants on the same terms and
conditions as held by the former holders of such rights in OMNI.
6.3 Authority.
(a) EINI has the requisite corporate power and authority to enter into this
Agreement, to perform its obligations thereunder, and to consummate the
transactions contemplated thereby. The execution and delivery of this Agreement
by EINI and the consummation by EINI of the transactions contemplated thereby
have been duly authorized by all necessary corporate action on the part of EINI.
This Agreement has been duly executed and delivered by EINI and constitutes a
legal, valid and binding obligation of EINI, enforceable against EINI in
accordance with its terms.
(b) The execution and delivery by EINI of this Agreement does not, and the
consummation of the transactions contemplated thereby will not, (i) conflict
with, or result in a violation of, any provision of bylaws or other charter
documents of EINI, (ii) constitute or result in a breach of or default (or an
event which with notice or lapse of time, or both, would constitute a default)
under, or result in the termination or suspension of, or accelerate the
performance required by, or result in a right of termination, cancellation or
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<PAGE>
acceleration of any obligation or a loss of a benefit under, any note, bond,
mortgage, indenture, deed of trust, lease, permit, concession, franchise,
license, agreement or other instrument or obligation to which EINI is a party
or to which the properties or assets of EINI are subject, except for such
violations, conflicts, breaches, defaults, terminations or accelerations which
would not, individually or in the aggregate, have a material adverse effect,
(iii) create any lien upon any of the properties or assets of EINI, or (iv)
constitute, or result in, a violation of any law applicable to EINI or any of
the properties or assets of EINI.
(c) No consent, approval, order or authorization of, notice to,
registration or filing with any governmental authority or other person is
necessary in connection with the execution and delivery of this Agreement by
EINI or the consummation by EINI of the transactions contemplated by this
Agreement.
6.4 Financial Statements and Report. Since December 1, 1997,
EINI has timely filed all registrations, forms, reports, statements, notices,
schedules and documents required to be filed with the Commission, and all
amendments or supplements to any of the above (collectively, the "EINI
Reports"). Each of the EINI Reports, as of their respective filing dates,
complied in all material respects with the Securities Act and the Exchange Act.
As of their respective dates, the EINI Reports did not contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading. The audited financial
statements of EINI included or incorporated by reference in the EINI Reports
(the "EINI Financial Statements") were prepared in accordance with GAAP and
present fairly the financial position, results of operations and changes in
financial position of EINI as of the dates and for the periods indicated. Except
as noted in the footnotes contained in the EINI Financial Statements, such EINI
Financial Statements and footnotes were rendered without qualification or
exception and were not subject to any contingency. No event has occurred since
the preparation of the EINI Financial Statements that would require a
restatement of the EINI Financial Statements under GAAP other than by reason of
a change in GAAP. EINI has heretofore furnished to OMNI a complete and correct
copy of all amendments and modifications which have not been filed with the
Commission to all agreements, documents and other instruments which have been
previously filed by EINI with the Commission and which are in effect on the date
hereof.
6.5 Absence of Undisclosed Liabilities. EINI does not have any
liability or obligation (absolute, accrued, contingent or otherwise) of a nature
required by GAAP to be reflected on a corporate balance sheet or disclosed in
the notes thereto, except liabilities (a) stated or adequately reserved against
in the EINI Financial Statements or disclosed in the footnotes thereto; or (b)
(i) incurred after January 1, 1998, in the ordinary course of business
consistent with past practices, (ii) not prohibited by this Agreement and (iii)
not reasonably expected to have a material adverse effect.
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<PAGE>
6.6 Absence of Certain Changes or Events. Except to the
extent not material to EINI or in connection with the transactions contemplated
hereby, since January 1, 1998, there has not been any of the following:
(a) any event, damage, destruction or loss, whether covered by insurance or
not, which has had a material adverse effect;
(b) any entry by EINI into a commitment or transaction material to EINI,
which is not in the ordinary course of business consistent with prior practice;
(c) any change by EINI in accounting principles, methods or practices,
except insofar as may have been required by a change in GAAP;
(d) except as required by its terms, any declaration, payment or setting
aside for payment of any dividends or distributions in respect to shares of
capital stock of EINI, or any redemption, purchase or other acquisition of any
shares of capital stock of EINI;
(e) any cancellation of any debts or waiver or release of any right or
claim of EINI individually or in the aggregate material to EINI, whether or not
in the ordinary course of business;
(f) any revaluations by EINI of any of its assets or liabilities, including
without limitation, writing off notes or accounts receivable;
(g) other than in the ordinary course of business consistent with prior
practice, any increase in the rate or terms of compensation payable or to become
payable by EINI to its personnel; any bonus, incentive compensation, service
award or other benefit granted, made or accrued, contingently or otherwise, for
or to the credit of personnel of EINI; employee welfare, pension, retirement,
profit-sharing or similar payment or arrangement made or agreed to by EINI for
its personnel except for contributions in accordance with prior practice made
to, and payments made to employees under, plans and arrangements existing on
January 1, 1998;
(h) any Tax election or settlement or compromise by EINI of any federal,
state, local or foreign Tax liability;
(i) any adoption of a plan of liquidation or resolutions providing for the
liquidation, dissolution, merger, consolidation or other reorganization of EINI,
other than in connection with the transactions contemplated hereby;
(j) any purchase, acquisition or sale by EINI of any assets, other than in
the ordinary course of business consistent with prior practice;
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<PAGE>
(k) any amendment, cancellation or termination of any material contract,
including, without limitation, any license or sublicense, or other instrument to
which EINI is a party or to which EINI or any of the assets of EINI is bound;
(1) any failure to pay when due any material obligation of EINI;
(m) any failure to operate the business of EINI in the ordinary course with
an effort to preserve the business intact, to keep available to EINI the
services of its personnel, and to preserve for EINI the goodwill of its
customers and others having business relations with EINI;
(n) any commitment to borrow money entered into by EINI, or any loans made
or agreed to be made by EINI, involving more than $10,000;
(o) any liabilities incurred by EINI involving $10,000 or more, other than
liabilities incurred in the ordinary course of business consistent with past
practices;
(p) any payment, discharge or satisfaction of any liabilities of EINI or
any capital expenditure of EINI, other than (i) the payment, discharge or
satisfaction in the ordinary course of business consistent with prior practice
of liabilities reflected or reserved against in the EINI Financial Statements or
incurred in the ordinary course of business consistent with prior practice since
January 1, 1998 and (ii) any capital expenditures involving $10,000 or less,
other than in the ordinary course of business consistent with prior practice;
(q) any expenditures in excess of $10,000 made by EINI which are not
reflected as an asset in EINI's balance sheet accounts or are not deductible for
Federal income tax purposes other than in the ordinary course of business
consistent with prior practice;
(r) other than in the ordinary course of business consistent with prior
practice (i) any agreement, commitment or other transaction entered into by
EINI, other than any agreements involving an expenditure by EINI of not more
than $10,000 entered into in the ordinary course of business consistent with
past practices or (ii) any agreement or commitment entered into by EINI
involving more than $10,000 that, pursuant to its terms, is not cancelable
without penalty on less than thirty days' notice;
(s) other than in the ordinary course of business consistent with prior
practice any agreement by EINI to do any of the things described in the
preceding clauses (a) through (r) of this Section 6.6, other than as expressly
contemplated or provided for herein.
6.7 Title to Personal Properties. EINI has good and marketable
title to, or a valid and effective right to use, all of its respective personal
properties, including all personal properties reflected on the EINI Financial
Statements or acquired since the date of the EINI
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<PAGE>
Financial Statements (except property disposed of subsequent to that date in
the ordinary course of business and except other immaterial items). Such assets
and properties are not subject to any mortgage, pledge, lien, claim,
encumbrance, charge, security interest or title retention or other security
arrangement except for liens for the payment of federal, state and other taxes,
the payment of which is neither delinquent nor subject to penalties, and except
for other liens and encumbrances incidental to the conduct of the business of
EINI or the ownership of their assets or properties, which were not incurred in
connection with the borrowing of money or the obtaining of advances and which
do not in the aggregate materially detract from the value of the assets or
properties of EINI or materially impair the use thereof in the operation of
their respective businesses. All leases pursuant to which EINI leases any
substantial amount of personal property are valid and effective in accordance
with their respective terms.
6.8 Contracts and Commitments.
(a) Except as reflected in the EINI Financial Statements or incurred since
the date thereof in the ordinary course of business consistent with past
practice, no EINI Entity is a party to or subject to:
(i) any agreement or other commitment, except agreements or other
commitments which involve payments to or by EINI of $25,000 or less;
(ii) any agreement or other commitment with any Person containing
covenants limiting the freedom of EINI to compete in any line of business
or with any Person or in any geographic location or to use or disclose any
information in their possession;
(iii) any license agreement (as licensor or licensee);
(iv) any agreement of indemnification, other than indemnification
rights granted in the Bylaws of EINI;
(v) any agreement that contains a fixed penalty or liquidated damages
clause for late performance or other default by EINI;
(vi) any agreement or undertaking pursuant to which EINI is: (A)
borrowing or is entitled to borrow any money; (B) lending or has committed
itself to lend any money; or (C) a guarantor or surety with respect to the
obligations of any Person;
(vii) any agreement with any personnel of EINI (other than agreements
with former employees under which EINI has no obligations);
(viii) any powers of attorney granted by EINI; and
(ix) any leases of real property.
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<PAGE>
(b) EINI is not in violation or breach of any material contract. There does
not exist any event or condition that, after notice or lapse of time or both,
would constitute an event of default or breach under any material contract on
the part of EINI or, to the knowledge of EINI, any other party thereto or would
permit the modification, cancellation or termination of any material contract or
result in the creation of any lien upon, or any person acquiring any right to
acquire, any assets of EINI. To the knowledge of EINI, no other party to any
material contract is in default thereunder or breach thereof. EINI has not
received in writing any claim or threat that EINI has breached any of the terms
and conditions of any material contract.
(c) The consent of, or the delivery of notice to or filing with, any party
to a material contract is not required for the execution aid delivery by EINI of
this Agreement or the consummation of the transactions contemplated under the
Agreement.
6.9 Brokers: Finder's Fee. Other than the $125,000 fee
payable to Peter Berney or an affiliate, EINI has not entered into any
agreement/arrangement/understanding which will result in the obligation to pay
or finder's or other fee or commission (other than attorneys' accountants' and
investment bankers' fees) in connection with the transactions contemplated by
this Agreement.
6. 10 Litigation. There are no legal actions (a) pending or,
to the Knowledge of EINI, threatened against EINI or the transactions
contemplated by this Agreement or (b) pending or, to the Knowledge of EINI,
threatened against any current personnel of EINI. EINI is not subject to any
order, judgment, writ, injunction or decree of any governmental authority.
6. 11 lam. EINI has timely filed all material Tax Returns and
reports required to be filed by it (after giving effect to any filing extension
properly granted by a governmental entity having authority to do so). Each such
Tax Return is true, correct and complete in all material respects. EINI has
paid, within the time and manner prescribed by law, all material Taxes that are
due and payable.
6.12 Proprietary Rights. EINI has provided or will provide
OMNI with a true, accurate and complete list of all proprietary rights which are
owned or used by EINI. To the Knowledge of EINI, the use of the proprietary
rights by EINI has not infringed, is not infringing upon and is not otherwise
violating the rights of any Person in or to such proprietary rights or the
asserted proprietary rights of others. No notices have been received by EINI
that the use of the proprietary rights by EINI infringes upon or otherwise
violates any rights of a Person in or to such proprietary rights or the
proprietary rights of others. To the Knowledge of EINI, no person is infringing
on the proprietary rights owned by EINI.
6.13 Labor Matters. There are no present or, to the knowledge
of EINI, threatened Actions or work stoppages relating to any EINI Personnel.
EINI is not a party to any collective bargaining agreement with respect to
employees, and, to the Knowledge of
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<PAGE>
EINI, there are no activities of any labor union seeking to represent or
organize the employees of EINI. No unfair labor practice, or race, sex, age,
disability or other discrimination, complaint is pending, nor is any such
complaint, to the knowledge of EINI, threatened against EINI before the
National Labor Relations Board, Equal Employment Opportunity Commission or any
other Governmental Authority, and no grievance is pending, nor is any
grievance, to the Knowledge of EINI, threatened against EINI.
6.14 Employee Benefit Plans. Since the date of the EINI
Financial Statements, there has not been any adoption or amendment in any
material respect by EINI of any bonus, pension, profit sharing, deferred
compensation, incentive compensation, stock ownership, stock purchase, stock
option, phantom stock, retirement, vacation, severance, disability, death
benefit, hospitalization, medical or other employee benefit plan, arrangement or
understanding (whether or not legally binding) providing benefits to any current
or former employee, officer or director of EINI or any person affiliated with
EINI under Section 414(b), (c), (m) or (o) of the Code (collectively, "EINI
Benefit Plans"). Except as would not have any EINI Material Adverse Effect, (A)
all EINI Benefit Plans, including any such plan that is an "employee benefit
plan" as defined in Section 3(3) of ERISA, are in compliance with all applicable
requirements of law, including ERISA and the Code, and (B) EINI has no
liabilities or obligations with respect to such EINI Benefit Plan, whether
accrued, contingent or otherwise (other than obligations to make contributions
and pay benefits and administrative costs incurred in the ordinary course), nor
to the knowledge of EINI are any such liabilities or obligations expected to be
incurred.
6.15 Transactions with Certain Persons. To the knowledge of
EINI, no current EINI Personnel, or any member of the immediate family of any
current EINI personnel or any other Affiliate of EINI is presently a party to
any material agreement, arrangement or other transaction with EINI, other than
employment agreements or independent contractor agreements made available to
OMNI, or has an interest in any party to a material contract.
6.16 Payments. EINI has not, directly or indirectly, paid or
delivered any fee, commission or other sum of money or item of property, however
characterized, to any finder, agent, government official, governmental authority
or other person, in the United States or any other country, which is in any
manner related to the business or operations of EINI which EINI knows or has
reason to believe to have been illegal under any federal, state or local Law of
the United States or the Laws of any other country having jurisdiction; and EINI
has not participated, directly or indirectly, in any boycotts or other similar
practices affecting any of its actual or potential customers or which violate
any applicable Law.
6.17 Board Actions. The Board of Directors of EINI (at a
meeting duly called and held) has resolved to recommend approval by the
shareholders of EINI of: (i) this Agreement, and (ii) amendment of the Articles
of Incorporation of EINI designating a series of EINI Preferred Stock with the
same rights, preferences and privileges as those incident to the OMNI Series B
Preferred Stock.
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<PAGE>
6.18 Disclosure. The representations and warranties of EINI
herein, or in any document, exhibit, statement, certificate or schedule
furnished by or on behalf of EINI to OMNI as required by this Agreement, do not
contain and will not contain any untrue statement of a material fact and do not
omit and will not omit to state any material fact necessary in order to make
the statements herein or therein, in light of the circumstances under which
they were made, not misleading. To the Knowledge of EINI, there are no material
facts or circumstances relating to EINI which have not been disclosed herein to
OMNI. There is no fact known to EINI that has specific application to EINI
(other than general economic or industry conditions) and that materially
adversely affects or, as far as EINI can reasonably foresee, materially
threatens, the assets, business, prospects, financial condition, or results of
operations of EINI that has not been set forth in this Agreement or the
schedules hereto.
6.19 Real Property and Certain Other Matters.
(a) EINI has made or will make available to OMNI lists of all real property
owned by EINI. With respect to each such parcel of owned real property, except
for matters which would not have a material adverse effect:
(i) the owner has good and marketable title to the parcel of real
property, free and clear of any security interest, mortgage, deed of trust,
lien, claim, encumbrance, easement, covenant, or other restriction, except
for installments of special assessments not yet delinquent, recorded
easements, covenants, and other restrictions, and utility easements,
building restrictions, zoning restrictions, and other easements and
restrictions existing generally with respect to properties of a similar
character;
(ii) there are no outstanding options or rights of first refusal to
purchase the real property.
(b) EINI has made or will make available to OMNI lists of all real property
leased or subleased to EINI. Each lease and sublease listed is legal, valid,
binding, enforceable, and in full force and effect, except where the illegality,
invalidity, nonbinding nature, unenforceability, or ineffectiveness would not
have a material adverse effect.
(c) EINI has not received written notice from any landlord that EINI is in
default of any material terms, conditions", or provisions of any lease relating
to any property leased by EINI (other than written notices received in the past
as to alleged defaults which have been cured, waived or otherwise resolved). The
leases represent the entire agreement between EINI and the respective landlords
relating to the properties leased by EINI. EINI uses each such property in
accordance with its authorized use.
(d) The buildings and material equipment, fixtures, furniture, furnishings
and office equipment (and other material tangible personal assets and
properties) of
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<PAGE>
EINI presently used in their respective businesses are in good operating
condition and in a state of reasonable maintenance and repair, normal wear and
tear excepted. The equipment, fixtures and other tangible personal assets and
properties located in the properties leased by EINI are sufficient to operate
the business of EINI as currently operated.
6.20 Bonds. EINI has made available to OMNI all bonds,
guaranties, comfort letters and similar instruments currently maintained by or
on behalf of EINI.
6.21 Minute Books. The minute books of EINI accurately record
all material actions taken by its shareholders and directors.
6.22 Rule 504 Sales. From and after the date of this
Agreement, but prior to the Effective Date, EINI has issued press releases
regarding the proposed merger with OMNI. Share trading has taken place on the
open market in contemplation of such merger being consummated. In addition,
EINI has conducted sales of securities pursuant to Rule 504 in the approximate
amount of $700,000 at prices from 171/2 cents to 55 cents per share. Any such
share trading activity after the date of this Agreement shall not effect any of
the terms and conditions referenced in this Agreement.
6.23 Form l5c-2(11). The Form 15c-2(l1) provided by EINI to
OMNI and is currently on file and effective with the SEC.
ARTICLE 7
PRE-CLOSING COVENANTS
7.1 Operation of OMNI Business.
(a) Except as specifically provided in this Agreement between the date of
this Agreement and the Effective Time, OMNI shall:
(i) use all reasonable efforts to preserve intact its business
organization and existing relationships with suppliers, employees, agents
and any other Persons having business relations with it;
(ii) maintain its books of account and records in the usual and
ordinary manner, and in conformity with its past practices;
(iii) pay accounts payable and other obligations when they become due
and payable in the ordinary course of business consistent with past
practices except to the extent disputed in good faith;
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(iv) conduct its business in the ordinary course consistent with past
practices, or as required by this Agreement;
(v) pay all Taxes when due and file all Tax Returns on or before the
due date therefor except to the extent disputed in good faith;
(vi) make appropriate provisions in its books of account and records
for Taxes relating to its operations during such period (regardless of
whether such Taxes are required to be reflected in a tax return having a
due date on or prior to the Closing Date);
(vii) take no action that would have the effect of deferring any
liability for taxes to any taxable period ending after Effective Time
except in the usual and ordinary manner, in conformity with past practices;
and
(viii) withhold all taxes required to be withheld and remitted by or
on behalf of OMNI in connection with amounts paid or owing to any OMNI
Personnel or other person, and pay such taxes to the proper governmental
authority or set aside such taxes in accounts for such purpose.
(b) Without the prior written consent of EINI, between the date of this
Agreement and the Effective Time (or termination of this Agreement), OMNI shall
not:
(i) issue any capital stock (except for the issuance of OMNI Common
Stock upon the exercise of outstanding options, warrants or other
convertible instruments) or any options, warrants or other rights to
subscribe for or purchase any capital stock or any securities convertible
into or exchangeable or exercisable for, or rights to purchase or otherwise
acquire, any shares of the capital stock of OMNI;
(ii) directly or indirectly redeem, purchase, sell or otherwise
acquire any capital stock of OMNI;
(iii) grant any increase in the compensation payable, or to become
payable, to any OMNI Personnel or enter into any bonus, insurance, pension,
severance, change- in-control or other benefit plan, payment, agreement or
arrangement for or with any OMNI Personnel, except as consistent with past
practices in the ordinary course of business;
(iv) borrow or agree to borrow any funds, incur any indebtedness or
directly or indirectly guarantee or agree to guarantee the obligations of
others, or draw or borrow on any lines of credit that may be available to
OMNI other than in the ordinary course of business consistent with past
practices;
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<PAGE>
(v) enter into any agreement, contract, lease or other commitment,
other than in the ordinary course of business consistent with past
practices;
(vi) place or allow to be placed a lien on any of the assets of OMNI
other than in the ordinary course of business consistent with past
practices;
(vii) cancel, discount or otherwise compromise any indebtedness owing
to OMNI or any claims which OMNI may possess or waive any rights of
material value, except in the ordinary course of business consistent with
past practices;
(viii) sell or otherwise dispose of any assets of OMNI, except in the
ordinary course of business consistent with past practices;
(ix) commit any act or omit to do any act which will cause a breach of
this Agreement or any other material agreement, contract, lease or
commitment;
(x) violate any law or governmental approval;
(xi) make any loan, advance, distribution or payment of any type or to
any OMNI personnel or any member of the immediate family of OMNI personnel
or any Affiliate of OMNI, except as regular compensation for services
actually rendered;
(xii) amend its Articles of Incorporation or Bylaws;
(xiii) merge or consolidate with, or agree to merge or consolidate
with, or purchase substantially all of the assets of, or otherwise acquire
any business or any Person or division thereof;
(xiv) make any tax election or settle or compromise any Tax liability
other than in the ordinary course of business consistent with past
practices; or
(xv) purchase any material amount of assets or properties other than
in the ordinary course of business consistent with past practices.
7.2 Operation of EINI Business.
(a) Except as specifically provided in this Agreement between the date of
this Agreement and the Closing Date, EINI shall:
(i) use all reasonable efforts to preserve intact its business
organization and existing relationships with suppliers, employees, agents
and any other Persons having business relations with it;
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<PAGE>
(ii) maintain its books of account and records in the usual and
ordinary manner, and in conformity with its past practices;
(iii) maintain its present insurance in full force and effect, with
policy limits and scope of coverage not less than is now provided by its
present insurance;
(iv) conduct its business in the ordinary course consistent with past
practices, or as required by this Agreement;
(v) pay all taxes when due and file all Tax Returns on or before the
due date therefor except to the extent disputed in good faith;
(vi) withhold all taxes required to be withheld and remitted by or on
behalf of each EINI in connection with amounts paid or owing to any
personnel of any EINI Entity or other Person, and pay such taxes to the
proper Governmental Authority or set aside such Taxes in accounts for such
purpose.
(b) Without the prior written consent of OMNI, between the date of this
Agreement and the Effective Time (or termination of this Agreement), EINI shall
not:
(i) issue any capital stock (except for the issuance of EINI shares to
be exchanged for OMNI Exchangeable Shares or any options, warrants or other
rights to subscribe for or purchase any capital stock or any securities
convertible into or exchangeable or exercisable for, or rights to purchase
or otherwise acquire, any shares of the capital stock of EINI or Rule 504
sales referenced herein).
(ii) grant any increase in the compensation payable, or to become
payable, to any personnel of EINI or enter into any bonus, insurance,
pension, severance, change- in-control or other benefit plan, payment,
agreement or arrangement for or with any personnel of EINI, except as
consistent with past practices in the ordinary course of business;
(iii) borrow or agree to borrow any funds, incur any indebtedness or
directly or indirectly guarantee or agree to guarantee the obligations of
others, or draw or borrow on any lines of credit that may be available to
EINI other than in the ordinary course of business consistent with past
practices or in connection with the funding of the transactions
contemplated hereby;
(iv) cancel, discount or otherwise compromise any indebtedness owing
to EINI or any claims which EINI may possess or waive any rights of
material value, except in the ordinary course of business consistent with
past practices;
(v) sell or otherwise dispose of any assets of EINI except in the
ordinary course of business consistent with past practices;
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<PAGE>
(vi) commit any act or omit to do any act which will cause a breach of
this Agreement or any other material agreement, contract, lease or
commitment;
(vii) violate any law or governmental approval;
(viii) make any loan, advance, distribution or payment of any type or
to any personnel of EINI or any member of the immediate family of any
personnel of EINI or any Affiliate of EINI, except as regular compensation
for services actually rendered;
(ix) amend its Articles of Incorporation or Bylaws;
(x) make any tax election or settle or compromise any tax liability
other than in the ordinary course of business consistent with past
practices; or
(xi) purchase any material amount of assets or properties other than
in the ordinary course of business consistent with past practices.
For the purposes of this Section 7.2(b), whether a change has a material and
adverse impact on EINI shall be determined by EINI and OMNI or, if they are
unable to agree, by an independent investment banker reasonably acceptable to
OMNI and EINI, the cost of which shall be borne by EINI.
7.3 No Other Bids. OMNI agrees that neither OMNI nor any of
its officers, directors, Affiliates, representatives or agents will directly or
indirectly solicit, contact, encourage or provide information to, or cooperate
in any manner with, any Person (other than EINI) regarding any Competing
Transaction or act in a manner which would have the effect, directly or
indirectly, of frustrating the completion of the Merger on the terms hereof;
provided, however, should OMNI receive an unsolicited offer or inquiry regarding
a Competing Transaction ("Unsolicited Offer") in spite of the agreement in this
Section and the Board of Directors of OMNI is advised in good faith by outside
legal counsel (which may be OMNI's regularly engaged legal counsel) that their
fiduciary duty requires consideration of such Unsolicited Offer, then OMNI may
consider such Unsolicited Offer and provide the offeror information. Upon
receipt of any Unsolicited Offer, OMNI will immediately notify EINI orally and
in writing that an Unsolicited Offer was made and, unless OMNI is advised in
good faith in writing by counsel that to do so would be a breach of duty under
law, provide to EINI a copy of the Unsolicited Offer.
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<PAGE>
ARTICLE 8
ADDITIONAL AGREEMENTS
8.1 Access to Information.
(a) From the date hereof to the Effective Time, OMNI shall afford, and
shall cause its officers, directors, employees, representatives and agents to
afford, to EINI and to the officers, employees and agents of EINI reasonable
access during normal business hours to OMNI's officers, employees, agents,
representatives, properties, books, records and contracts, and shall furnish to
EINI all financial, operating and other data and information as EINI, through
its agents, officers, employees or other representatives, may reasonably
request.
(b) From the date hereof to the Effective Time, EINI shall afford, and
shall cause its officers, directors, employees, representatives and agents to
afford, to OMNI and to the officers, employees and agents of OMNI reasonable
access during normal business hours to EINI's officers, employees, agents,
representatives, properties, books, records and contracts, and shall furnish to
OMNI all financial, operating and other data and information as OMNI, through
its agents, officers, employees or other representatives, may reasonably
request.
(c) No investigation pursuant to Section 8. 1 (a) shall affect any
representations or warranties of the Parties herein or the conditions to the
obligations of the Parties,
8.2 Expenses and Taxes. The Parties shall each pay their
respective costs incurred in connection with the preparation, negotiation,
execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby, including, without limitation, the fees of
their respective attorneys, accountants and advisors.
8.3 News Releases. Except as provided by , any news releases
or other public disclosure pertaining to the transactions contemplated hereby
shall be reviewed and approved in writing by both EINI and OMNI or their
respective representatives, and shall be acceptable to them prior to the
dissemination thereof.
8.4 Additional Agreements. Subject to the terms and conditions
of this Agreement, each Party agrees to use all reasonable efforts to take, or
cause to be taken, all action and to do, or cause to be done, all things
necessary, proper or advisable under applicable Law to consummate and make
effective the transactions contemplated by this Agreement. If at any time after
the Effective Time any further action is necessary or desirable to carry out the
purposes of this Agreement or to vest the Surviving Corporation with full title
to all properties, assets, rights, approvals, immunities and franchises of
either of the Constituent Corporations, the proper officers and directors of
each such corporation shall take all such necessary or desirable action.
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<PAGE>
8.5 Notification of Certain Matters.
(a) OMNI shall give prompt notice to EINI of (i) any material inaccuracy in
any representation or warranty made by it herein, or (ii) any material failure
of OMNI to comply with or satisfy any covenant, condition or agreement to be
complied with or satisfied by OMNI under this Agreement; provided, however, that
no such notification shall affect the representations or warranties or covenants
or agreements of OMNI or the conditions to the obligations of EINI hereunder.
(b) EINI shall give prompt notice to OMNI of (i) any material inaccuracy in
any representation or warranty made by it herein, or (ii) any material failure
of EINI to comply with or satisfy any covenant, condition or agreement to be
complied with or satisfied by it under this Agreement; provided, however, that
no such notification shall affect the representations or warranties or covenants
or agreements of EINI or the conditions to the obligations of OMNI hereunder.
(c) OMNI and EINI shall each promptly advise the other orally and in
writing of any change or event having, or which, insofar as can reasonably be
foreseen, in the future would have, a material adverse effect.
8.6 Confidentiality.
(a) Each Party shall hold, and shall cause its officers, employees, agents
and representatives, including, without limitation, attorneys, accountants,
consultants and financial advisors who obtain such information to hold, in
confidence, and not use for any purpose other than evaluating the transactions
contemplated by this Agreement, any confidential information of another Party
obtained through the investigations permitted hereunder, which for the purposes
hereof shall not include any information which (i) is or becomes generally
available to the public other than as a result of disclosure by a Party or one
of its Affiliates in violation of its obligations under this subsection, (ii)
becomes available to a Party on a nonconfidential basis from a source, other
than the Party which alleges the information is confidential or its Affiliates,
which has represented that such source is entitled to disclose it, or (iii) was
known to a Party on a nonconfidential basis prior to its disclosure to such
Party hereunder. If this Agreement is terminated, at the request of a Party, the
other Party shall deliver, and cause its officers, employees, agents, and
representatives, including, without limitation, attorneys, accountants,
consultants and financial advisors who obtain confidential information of the
requesting Party pursuant to investigations permitted hereunder, to deliver to
the requesting Party all such confidential information that is written
(including copies or extracts thereof).
(b) If a Party or a Person to whom a Party transmits confidential
information of another Party is requested or becomes legally compelled (by oral
questions, interrogatories, requests for information or documents, subpoena,
criminal or civil investigative demand or similar process) to disclose any of
such confidential information, such
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<PAGE>
Party or other Person will provide the other Party with prompt written notice
so that such Party may seek a protective order or other appropriate remedy or
waive compliance with Section 8.6(a). If such protective order or other remedy
is not obtained, or if the applicable Party waives compliance with Section
8.6(a), the Party or Person subject to the request will furnish only that
portion of such confidential information which is legally required and will
exercise reasonable efforts to obtain reliable assurance that confidential
treatment will be accorded such confidential information.
8.7 Consents and Filing . The Parties shall, promptly after
execution of this Agreement, make all required filings and submissions with
respect to the Merger. Each Party will take all reasonable actions to obtain any
other consent, authorization, order or approval of, or any exemption by, any
Person required to be obtained or made in connection with the Merger and the
other transactions contemplated by this Agreement. Each Party will cooperate
with and promptly furnish information to the other Party in connection with
obtaining such consents or making any such filings and will promptly furnish to
the other Party a copy of all filings made with a Governmental Authority.
8.8 EINI SEC Filing . Between the date hereof and the Closing
Date, OMNI shall cooperate with EINI in connection with the preparation and
filing of, and provide to EINI for inclusion or incorporation by reference in,
any reports, filings, schedules or registration statements (including any
prospectus contained in any such registration statement) to be filed by EINI
with the Commission (the "EINI Filings"). Without limiting the foregoing, OMNI
shall take all reasonable actions requested by EINI to enable EINI to include or
incorporate by reference in the EINI Filings any Financial Statement of OMNI,
including, without limitation, all documents required for listing on the NASD
bulletin board and any auditors' report thereon.
8.9 Contemplated Post-Effective Management Structure. The
officers and directors of CASTNET shall consist of the same persons as EINI.
Each of the directors and officers shall hold office until the next scheduled
annual meeting of shareholders of EINI, scheduled for September 15, 1999.
ARTICLE 9
SECURITIES LAW MATTERS
9.1 Disposition of Shares. The New EINI Shares are being
acquired hereunder pursuant to a private placement under Regulation D, and
therefore, such securities shall not be sold or otherwise disposed of, except
(a) pursuant to an exemption from the registration requirements under the
Securities Act, (b) in accordance with Rule 144 under the Securities Act, or (c)
pursuant to an effective registration statement filed by EINI with the SEC under
the Securities Act. To the extent the Shareholders comply with the provisions of
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<PAGE>
Rule 144 under the Securities Act in effecting sales of the EINI Shares, EINI
agrees to provide its transfer agent with appropriate instructions and/or
opinions of counsel in order for the Shareholders to sell, transfer and/or
dispose of the EINI Shares in accordance with Rule 144.
9.2 Legend. The certificates representing the New EINI Shares
shall bear the following legend:
THE SHARES REPRESENTED BY THIS CERTIFICATE ARE
SUBJECT TO THE PROVISIONS OF RULE 144 PROMULGATED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
"ACT-), AND MAY NOT BE SOLD, TRANSFERRED OR OTHERWISE
DISPOSED OF BY THE HOLDER EXCEPT (A) PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT FILED UNDER THE ACT.
AND IN COMPLIANCE WITH APPLICABLE SECURITIES LAWS OF
ANY STATE WITH RESPECT THERETO, (B) IN ACCORDANCE
WITH RULE 144 UNDER THE ACT, OR (C) IN ACCORDANCE
WITH AN OPINION OF COUNSEL IN FORM AND SUBSTANCE
SATISFACTORY TO THE ISSUER THAT AN EXEMPTION FROM
SUCH REGISTRATION IS AVAILABLE.
EINI may, unless a registration statement is in effect covering such shares or
unless the proposed transfer comply with Rule 144, place stop transfer orders
with its transfer agent with respect to such certificates in accordance with
federal securities laws.
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<PAGE>
ARTICLE 10
CLOSING
10. 1 Closing.
(a) Unless this Agreement shall have been terminated and the transactions
herein contemplated shall have been abandoned pursuant to the provisions of
Section 11. 1, the closing of the transactions contemplated by this Agreement
(the "Closing") shall take place at the offices of Jeffer, Mangels, Butler &
Marmaro LLP, 2121 Avenue of the Stars, 10th Floor, Los Angeles, California, or
such other place as shall be mutually agreed to by OMNI and EINI, on or before
February 26, 1999, or at such other place, time and date as the Parties may
mutually agree. The date and time of such Closing are herein referred to as the
"Closing Date." Notwithstanding the Closing Date, the Effective Time shall be
deemed to have occurred only when (i) the matters provided for in Sections 2.2
and 2.3 shall have occurred and (ii) all of the certificates and other documents
required to be delivered at the Closing have been delivered (or the requirement
therefor waived), as specified in Sections 10.2 and 10.3 hereof.
(b) Notwithstanding any approval of this Agreement by the shareholders of
OMNI, no agreement among the Parties to change the place, time or date of the
Closing shall require the approval of the shareholders of OMNI.
10.2 Documents to be Delivered by EINI. At the Closing, EINI
shall deliver to OMNI the following:
(a) A certificate, executed by an officer of EINI in such detail as OMNI
shall reasonably request, certifying that all representations, warranties and
covenants herein are true and correct as of the Effective Time. The delivery
of such certificate shall constitute a representation and warranty of EINI as to
the statements set forth therein.
(b) A copy of the resolutions adopted by the shareholders and Board of
Directors of EINI approving this Agreement and the Merger, certified by its
Secretary.
10.3 Documents to be Delivered by OMNI. At the Closing, OMNI
shall deliver to EINI the following:
(a) A certificate, executed by the President of OMNI, in such detail as
EINI shall reasonably request, certifying that all representations, warranties
and covenants herein are true and correct as of the Effective Time. The delivery
of such certificate shall constitute a representation and warranty of OMNI as to
the statements set forth therein.
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<PAGE>
(b) A copy of the resolutions adopted by the Shareholders and Board of
Directors of OMNI approving this Agreement and the Merger, certified by this
Secretary,
ARTICLE 11
TERMINATION
11.1 Termination. This Agreement may be terminated at any
time prior to the Effective Time:
(a) by mutual written consent of each of the Parties hereto at any time
prior to the Closing;
(b) by EINI in the event of a material breach by OMNI of any provision of
this Agreement which has not been cured within 30 days after notice of such
breach is delivered to the breaching party;
(c) by OMNI in the event of a material breach by EINI of any provision of
this Agreement which has not been cured within 30 days after notice of such
breach is delivered to the breaching party;
(d) by either EINI or OMNI if the Closing shall not have occurred by
February 26, 1999 (the "Termination Date"); provided, however, the right to
terminate this Agreement under this Section 11. 1 (a) shall not be available to
any party whose failure to fulfill any obligation hereunder has been the cause
of, or results in, the failure of the Closing to have occurred on or before the
Termination Date; or
11.2 Effect of Termination. Except for the provisions of
Section 8.6 hereof (Confidentiality), which shall survive any termination of
this Agreement, in the event of termination of this Agreement pursuant to
Section 11. 1, this Agreement shall forthwith become void and of no further
force and effect and the Parties shall be released from any and all obligations
hereunder; provided, however, that nothing herein shall relieve any Party from
liability for the breach of any of its representations, warranties, covenants or
agreements set forth in this Agreement.
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<PAGE>
ARTICLE 12
GENERAL PROVISIONS
12.1 Amendment. This Agreement may not be amended except by
an instrument in writing signed on behalf of each of the Parties.
12.2 Waiver. At any time prior to the Effective Time, whether
before or after approval of this Agreement and the Merger by OMNI's
shareholders, any Party may (a) extend the time for the performance of any of
the obligations or other acts of any other Party hereto or (b) waive compliance
with any of the agreements of any other Party or with any conditions to its own
obligations. Any such extension or waiver shall be valid only if set forth in an
instrument in writing signed on behalf of the Party making the waiver or
granting the extension by a duly authorized officer. No waiver of any of the
provisions of this Agreement shall be deemed or shall constitute a waiver of any
other provision hereof (whether or not similar), nor shall such waiver
constitute a continuing waiver unless otherwise expressly provided.
12.3 Assignment and Binding Effect. Neither this Agreement
nor any of the rights or obligations hereunder may be assigned by OMNI without
the prior written consent of EINI or assigned by EINI without the prior written
consent of OMNI; provided, however, EINI may assign any of its rights hereunder
to any direct or indirect wholly-owned subsidiary of EINI without the consent of
OMNI, although such assignment shall not release EINI of any of its obligations
hereunder. Subject to the foregoing, this Agreement shall be binding upon and
inure to the benefit of the Parties and their respective successors, transferees
and assigns, and no other Person shall have any right, benefit or obligation
hereunder.
12.4 Governing Law. Except as to matters relating to the
internal laws of a jurisdiction, this Agreement shall be governed by, and
construed in accordance with, the law of the State of California, without regard
to the conflicts of law principles thereof.
12.5 Entire Agreement. This Agreement constitutes the entire
agreement between the Parties pertaining to the subject matter hereof and
supersedes all prior agreements, understandings, negotiations and discussions,
whether oral or written, of the Parties with respect to the subject matter
hereof.
12.6 Severability. In the event that any one or more of the
provisions contained in this Agreement or in any other instrument referred to
herein, shall, for any reason, be held to be invalid, illegal or unenforceable
in any respect, then to the maximum extent permitted by law, such invalidity,
illegality or unenforceability shall not affect any other provision of this
Agreement or any other such instrument.
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<PAGE>
12.7 Titles. The titles, captions or headings of the Articles
and Sections herein are for convenience of reference only and are not intended
to be a part of or to affect the meaning or interpretation of this Agreement.
12.8 Attorneys' Fees. Should any Party institute any Action
to enforce any provision of this Agreement, including, without limitation, an
Action for declaratory relief, damages by reason of an alleged breach of any
provision of this Agreement, equitable relief or otherwise in connection with
this Agreement, or any provision hereof, the prevailing Party shall be entitled
to recover from the losing Party or Parties reasonable attorneys' fees and costs
for services rendered to the prevailing Party in such Action.
12.9 Multiple Counterparts. This Agreement' may be executed
in two or more counterparts, each of which shall be deemed an original, but all
of which shall constitute one and the same instrument.
12.10 Notices. Unless applicable Law requires a different
method of giving notice, any and all notices, demands or other communications
required or desired to be given hereunder by any Party shall be in writing.
Assuming that the contents of a notice meet the requirements of the specific
Section of this Agreement which mandates the giving of that notice, a notice
shall be validly given or made to another Party if served either personally or
if deposited in the United States mail, certified or registered, postage
prepaid, or if transmitted by telegraph, telecopy or other electronic written
transmission device or if sent by overnight courier service, and if addressed to
the applicable Party as set forth below. If such notice, demand or other
communication is served personally, service shall be conclusively deemed given
at the time of such personal service. If such notice, demand or other
communication is given by mail, service shall be conclusively deemed given
seventy-two (72) hours after the deposit thereof in the United States mail. If
such notice, demand or other communication is given by overnight courier, or
electronic transmission, service shall be conclusively deemed given at the time
of confirmation of delivery. The addresses for the Parties are as follows:
SLE LADOCS\2441261 13 60004 000101/20/99
<PAGE>
If to OMNI:
Only Multimedia Network, Inc. 5820 Wilshire Boulevard Suite 503 Los
Angeles, California 90036 Fax: (213) 964-1050 Attn: Paul Kessler,
President
with a copy to:
Jeffer, Mangels, Butler & Marmaro LLP 2121 Avenue of the Stars 10th
Floor Los Angeles, California 90067 Fax: (310) 203-0567 Attention:
Jeffrey E. Sultan, Esq.
If to EINI or Castnet:
The Entertairunent Internet, Inc. Douglas Ansell 1700 East Desert Inn
Road Suite 403 Las Vegas, Nevada 89109
with a copy to:
Shawn F. Hackman, a P.C. 1600 E. Desert Inn Suite 102 Las Vegas,
Nevada 89109 Fax: (702) 732-7516 Attention: Shawn F. Hackman, Esq.
Any Party may change such Party's address for the purpose of receiving notices,
demands and other communications as herein provided, by a written notice given
in the aforesaid manner to the other Parties.
12. 11 Incorporation by Reference. All Exhibits and Schedules
attached hereto or to be delivered in connection herewith are incorporated
herein by this reference.
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<PAGE>
IN WITNESS WHEREOF, each of EINI, Castnet and OMNI has caused
this Agreement to be executed as of the date first written above by its officer
thereunto duly authorized.
THE ENTERTAINMENT INTERNET, INC.
A Nevada Corporation
/s/ Tracy Sinclair
By:
Tracy Sinclair, President
/s/ Douglas Ansell
By:
Douglas Ansell, Secretary
ONLY MULTIMEDIA NETWORK, INC.
/s/ Paul Kessler
By:
Paul Kessler, Chairman
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<PAGE>
OFFICERS' CERTIFICATE
THE ENTERTAINMENT INTERNET, INC.,
a California corporation
Thom Mount and Paul Kessler do hereby certify that:
1. They are the duly elected and acting Vice-President and Secretary,
respectively, of The Entertainment Internet, Inc., a California corporation (the
"Corporation").
2. The Agreement of Merger in the form attached was duly approved on
behalf of the Corporation by its board of directors.
3. The principal terms of the Agreement of Merger in the form attached
were approved by the Corporation by the vote of a number of shares of each class
which equaled or exceeded the vote required, such classes, the total number of
outstanding shares of each class entitled to vote on the merger and the
percentage vote required of each class being as follows:
Total Number of
Outstanding Shares Percentage
Name of Class Entitled to Vote Vote Required
Common Stock 1,000 More than 50%
4. Equity securities of the Corporation's parent corporation, The
Entertainment Internet, Inc., a Nevada corporation, are to be issued in the
merger and the required vote of the shareholders of the parent corporation was
obtained.
Each of the undersigned further declares under penalty of perjury
under the laws of the State of California that he has read this Certificate and
knows the contents hereof and that the matters set forth in this Certificate are
true and correct of his own knowledge.
Dated: March 22, 1999
/s/ Thom Mount
Thom Mount, Vice President
/s/ Paul Kessler
Paul Kessler, Secretary
[Corporate Seal]
[GRAPHIC OMITTED]
<PAGE>
OFFICERS' CERTIFICATE
ONLY MULTIMEDIA NETWORK INCORPORATED,
a California corporation
than Mount and Paul Kessler do hereby certify that:
1. They are the duly elected and acting - Chairman and Secretary,
respectively, of Only Multimedia Network Incorporated, a California corporation
(the "Corporation").
2. The Agreement of Merger in the form attached was duly approved on
behalf of the Corporation by its board of directors.
3. The principal terms of the Agreement of Merger in the form attached
were approved by the Corporation by the vote of a number of shares of each class
which equaled or exceeded the vote required, such classes, the total number of
outstanding shares of each class entitled to vote on the merger and the
percentage vote required of each class being as follows:
Total Number
of Outstanding
Shares Entitled Percentage
Name of Class to Vote Vote Required
- ------------- ------- -------------
Common Stock 8,852,279 More than 50%
Preferred Stock 5,400 More than 50%
Each of the undersigned further declares under penalty of perjury under
the laws of the State of California that he has read this Certificate and knows
the contents hereof and that the matters set forth in this Certificate are true
and correct of his own knowledge.
Dated: March 22, 1999
/s/ Thom Mount
Thom Mount
Chairman of the
Board of Directors
/s/ Paul Kessler
Paul Kessler
Secretary
EMPLOYMENT AGREEMENT
This EMPLOYMENT AGREEMENT, ("Agreement") is entered into as of the first day of
December, 1999 by and between THE ENTERTAINMENT INTERNET, INC., a Nevada
corporation, ("Employer", "Corporation", and/or "TEI") and Michael Solomon
("Employee").
ARTICLE I
PRINCIPAL DUTIES
Employer agrees to employ Employee primarily in the capacity of Co-Chairman of
The Entertainment Internet, Inc. and Chief Executive Officer and President for
Employer.
In the foregoing capacities, Employee shall be responsible for advancement of
the objectives of the Employer as outlined and/or approved by the Chairman of
the Board of Directors (individually) and the Board of Directors (jointly); this
shall include, but not be limited to, consultation on operational and management
concerns of Employer, advancement of the Castnet.com services into major
domestic cities (e.g., New York, Chicago, Boston) and foreign territories
worldwide, obtaining a significantly increased market share in the production
and casting communities through exponential increase of membership enrollments,
increased media visibility, and providing the benefits of all expertise and
contacts developed during the extensive and distinguished career of Employee.
Employee expressly understands that Employee may be required to perform such
other duties and to work in such other capacities as Employer may deem necessary
or advisable and as may be assigned to Employee from time to time by Employer.
Employee agrees to duly undertake and perform all such work as may be required
by the positions assigned to Employee and to serve Employer faithfully,
diligently and to the best of his ability. Employee agrees during the term of
this Agreement to devote his best efforts, attention, energy and skill to the
performance of his employment duties and to furthering the interests of
Employer. Employee shall be subject to the oversight of and report to the
Chairman of the Board of Directors (individually) and/or the Board of Directors
(jointly).
ARTICLE II
COMMENCEMENT OF EMPLOYMENT
Employee's employment under this Agreement shall commence on January 1, 2000, or
such other time as the parties may mutually agree and continue through December
31, 2003, constituting three years (the "Contract Period"), unless sooner
terminated as hereinafter provided, Employee shall faithfully keep and observe
all of the rules which may be prescribed from time to time by the Employer or by
any political, governmental, or other authority, for the conduct, whether
personal or in the line of duty, of employees and other persons in and about the
area of employment.
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<PAGE>
ARTICLE III
AREA OF EMPLOYMENT
Employee's first assignment is expected to be worldwide.. However, Employee
resides in Los Angeles and shall not be required to change residence or to
travel frequently to other areas.
ARTICLE IV
COMPENSATION
4.1 Employer shall pay Employee an annual salary for year 2000 of two
hundred fifty thousand dollars ($250,000). Salary shall be pro-rated
for any partial year. Employer shall provide annual raises to the
extent necessary to ensure Employee's salary is equal to the salary
provided to Mohamed Hadid as its Chairman of its Board of Directors.
This salary will be paid by Employer to Employee in semi-annual
installment payment, less taxes payable. If Employer does not have the
funds available to make salary payments to Employee, the Board of
Directors of Employer shall make the payments in stock or options as
determined in their sole discretion.
4.2 Employer may, at its option, pay for a policy of key man life
insurance. Employer shall pay the premium for Employee's medical and
dental insurance. Employee agrees to fill out any forms and submit to a
medical examination, if required.
4.3 No bonus pay or other salary, other than as stated herein, shall be
required to be made to Employee, unless approved by Employer's Board
of Directors.
4.4 Employee shall be reimbursed for all reasonable business expenses,
including cell phone, travel, entertainment and other business
expenses.
4.5 As consideration for the execution of this Agreement Employee shall
receive eight hundred fifty thousand (850,000) shares of common stock
of Employer and options to purchase an equivalent number of shares of
common stock at a price of $0.50, exercisable for 5 years and vested in
accordance with Employer's Stock Option Plan. In the event that
Employer's Stock Option Plan is not at any time authorized to satisfy
the requirements hereof (i.e., necessary reservation of shares to be
granted hereunder), Employer shall use its best faith efforts to cure
and remedy such situation and, in the event such situation cannot be
cured within a reasonable period, to perform its remaining obligations
or any deficiency hereunder through the grant of sufficient warrants
(apart from Employer's Stock Option Plan) under fair and reasonable
terms.
4.6 Employee shall in all respects be afforded "favored nations" status
with respect to the compensation and benefits paid hereunder; in all
respects not otherwise addressed herein, Employee shall receive and
enjoy compensation and benefits on par with those paid to Mohamed Hadid
as its Chairman of its Board of Directors.
4.7 Employer and Employee discussed and agreed upon bonus payments to be
made to Employee in the event Employer's common stock reaches certain
trading levels and sustains the same for a period of thirty (30) days
thereafter; such bonus structure grants Employee additional shares of
Employer's common stock ("shares") for exceptional performance in the
following manner:
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<PAGE>
Sustained Stock Price Employee Receives
One dollar ($1.00): two hundred thousand (200,000) shares;
Two dollars fifty cents ($2.50); one hundred thousand (100,000) shares;
Five dollars ($5.00): three hundred thousand (300,000) shares;
Seven dollars fifty cents ($7.50): two hundred thousand (200,000) shares;
Ten dollars ($10.00): three hundred thousand (300,000) shares;
The foregoing bonuses are "one time only" stock grants and are not
repeated each time Employer's common stock price rises or falls.
4.8 Additionally, if Employer's common stock rises to and maintains a
trading value in excess of five dollars ($5.00) per share for a
sustained period of one (1) year (365 consecutive days), Employee shall
be granted one hundred thousand (100,000) shares; the foregoing bonus
shall be recurrent, meaning that Employee shall be granted one hundred
thousand (100,000) shares for each one (1) year (365 consecutive day)
period in which Employer's common stock maintains the trading value
described herein.
4.9 If Employer's stock rises above and maintains a trading value in excess
of ten dollars ($10.00) dollars for a sustained period of ninety (90)
consecutive days, Employee shall be granted fifty thousand (50,000)
shares. The foregoing bonus is recurrent but shall not apply to any
overlapped periods and shall be limited to application four (4) times
in each one (1) year (365 consecutive day) period. If, for example,
Employee is granted shares under this paragraph for a stock trading
value in excess of ten dollars ($10.00) for the first ninety (90) days
of year 2000, the next period for consideration of stock trading values
under this paragraph would commence no earlier than the day after the
expiration of the ninety (90) days of the first period for which the
previous grant was made hereunder.
By further illustration, this means if Employer's stock trades
in excess of the ten dollar ($10.00) threshold for the period
extending from January 15, 2000 through April 7, 2000, the
next period for bonus calculation under this section cannot
commence until April 8, 2000.
4.10 Employee shall be reimbursed for fifty percent (50%) of the fifty
thousand dollar ($50,000) annual salary actually paid to his assistant
during the term of this Agreement. In the event Employee's assistant is
paid a lesser annual salary, Employer shall reimburse Employee for
fifty percent (50%) of the salary amount actually paid during the term
hereof. Employee's assistant may participate in any benefits plan
afforded to Employer's other part-time employees in accordance with
TEI's previously adopted Employee Manual.
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<PAGE>
ARTICLE V
TREATMENT IN EVENT OF MERGER, SALE, OR DIRECTIVE OF CHAIRMAN
5.1 Employee understands Employer made preliminary contacts and has been
negotiating for potential sale, acquisition, merger, and/or changes in
control of Employer's corporation and that Employer desires to continue
to develop such contacts, negotiations, and talks without becoming
constrained by the existence or terms of this Agreement. For this
reason, Employer and Employee agree that Employer shall have the right
to continue the foregoing activities as it desires, subject to the
following "buy out" rights, which shall supersede all other provisions
of this Agreement:
5.2 In the event of sale, acquisition, merger, and or changes in control
after which the services of Employee are no longer desired, Employer
shall have the right to terminate this Agreement in exchange for the
following compensation to Employee:
5.2.1 Payment (Retention) in the form of the eight hundred fifty
thousand (850,000) shares referenced in paragraph 4.5
hereof;
5.2.2 Payment (Retention) by Employee of any monetary salary
(pro-rated) payments earned or made.
5.3.3 Reimbursement of any reasonable business expenses paid by
Employee, including, but not limited to, any pro-rated
payments which would otherwise be due for Employee's
assistant.
The foregoing provisions shall apply to the following persons, business entities
and their agents, successors, and assigns:
Creative Planet, John Valenti, Michael Kumin
Online Production Services (ONPS)
Sector Communications, Inc.
Sunburst III
The foregoing provisions shall additionally apply to any transactions for which
a formal agreement is executed within ninety (90) days from the execution
hereof.
ARTICLE VI
TERMINATION
6.1 Employer may terminate this Agreement at any time in accordance with
the provisions of Article V hereof, without further recourse by
Employee.
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<PAGE>
Apart from the provisions of Article V hereof, Employer may terminate
this Agreement with or without Cause at any time upon thirty (30) days
written notice to Employee specifying the effective date of
termination. If Employer terminates Employee's employment with Cause
then Employer shall not be required to continue the compensation or
benefits provided in Section 4 beyond such termination date. If
Employer terminates without cause, Employee shall retain all
compensation provided herein for a period of one (1) month after
termination.
6.2 As used herein, "Cause" shall mean any of the following occurrences:
(a) unexcused absences of Employee; or
(b) willful violation by Employee of any statute, regulation, or
ordinance of the United States or any state or local governing
authority in the United States, the compliance with which is
necessary for operation of the business of Employer; or
(c) material violations or breach by Employee of any of the
provisions of the Agreement; or
(d) commission by Employee of one or more acts of misconduct or
disobedience in connection with his duties as described in
writing by Employer or described hereunder, which, when
considered individually or in the aggregate, Employer deems
material; or
(e) failure to abide by the written rules and regulations of Employer
or its clients, or failure to observe general rules of good
conduct, in the line of business; or
(f) consistent failure of Employee to perform his duties in
reasonably proficient manner; or
(g) Employee being convicted of a felony; or
(h) mental or physical illness of Employee, which in Employer's good
faith judgment prevents, inhibits or impairs Employee's ability
to perform his duties in a reasonably proficient and safe manner;
or
(i) death or disability which prevents Employee from fulfilling his
duties.
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<PAGE>
6.3 Voluntary. Employee may terminate this Agreement prior to the end of
its term by written notice to Employer. A notice of voluntary
termination shall specify a proposed effective date or termination of
at least ten (10) days after the date of deposit in the U.S. mail.
Employer may accept the proposed termination date or may set in the
U.S. mail a sooner termination date by mailing notice of such earlier
date to Employee by U.S. mail. In the event Employee voluntarily
terminates this Agreement, he will receive the compensation and
benefits due hereunder through the effective date of termination and no
other compensation or benefits, except as earned on a pro-rated basis
as of the date of termination.
"Cause" shall be determined by the Employer's Board of Directors,
provided that Employee is given five (5) days written notice and
permitted to cure any purported violations (other than absences, which
shall not be entitled to a notice and cure period). If Employee deems
the matter cured, but Employer's Board of Directors disagrees, the
matter shall be submitted to mediation and/or arbitration under
Paragraph 9.4 hereof, but Employee's employment shall continue until
final determination by the arbitrators adverse to the Employee.
ARTICLE VII
OTHER ACTIVITIES
Employee shall devote such portion of his working time and efforts (estimated at
fifty one percent (51%) of normal working hours) during the Company's normal
business hours (reasonable vacations and sick leave excluded) to the business
and affairs of the company and to achieve the duties and responsibilities
assigned to him pursuant to this Agreement. Notwithstanding the foregoing,
Employee may devote a reasonable amount of his time to civic, community, or
charitable activities. Employee in all events shall be free to invest his assets
in such manner as will not require any substantial service by Employee in the
conduct of the businesses or affairs of the entities or in the management of the
assets in which such investments are made during normal business hours of
Employer. Employee may serve on the Board of Directors of other public
companies.
ARTICLE VIII
CONFIDENTIALITY
8.1 Employee agrees that he will not, at any time, in any fashion, form or
manner, either directly or indirectly, divulge, disclose or communicate
to any person, firm, corporation or other entity in any manner
whatsoever, any trade secret information of any kind, nature regarding
the Company obtained while in the employ of Employer, including all
matters known regarding Employer's operations.
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<PAGE>
8.2 For one (1) year (365 consecutive days) after the Contract Period ends,
Employee agrees that he will not, at any time, in any fashion, form or
manner, either directly or indirectly, divulge, disclose, or
communicate to any person, firm, corporation, or other entity in any
manner whatsoever, any information of any kind, nature or description
concerning any trade secret of or relating to the Company, or any other
business conducted by the Employer ("Confidential Information").
8.3 The parties hereto recognize and agree that in the event that the
Employee breaches any of the terms or provisions of paragraph eight (8)
of this Agreement, the nature and extent of the resulting damages to
the Employer will be difficult if not impossible, of exact computation
and calculation, and accordingly, the rights of the Employer hereunder
may be enforced by an injunction issued by a court of competent
jurisdiction enjoining the Employee from engaging in any activities or
practices which are a breach of this Agreement. The parties stipulate
and agree that if a mediator, arbitrator, or Court of appropriate
jurisdiction should find the duration and our extent of the agreements
herein made by the Employee to be unreasonable, then the same should
not be held void, but rather should be reformed to that which is
reasonable.
8.4 The provisions of Article VIII and all subparagraph shall survive
termination of this Agreement.
ARTICLE IX
MISCELLANEOUS PROVISIONS
9.1 Employee understands and agrees that all stock grants are subject to
approval by Employer's Board of Directors or Compensation Committee as
required. Employer acknowledges that the bonus structure included
herein is desired by Employee and by Mohamed Hadid as its present
Chairman of its Board of Directors, and agrees to seek approval from
its Board of Directors for inclusion of provisions for the same in this
Agreement.
9.2 Employee understands the grant and bonus provisions contained herein
would cause Employer to issue stock in excess of its presently
authorized number of shares and that Employer must seek and obtain an
amendment to its Articles of Incorporation (and Bylaws, as necessary)
to effect such issuances.
9.3 Additional Assurances, The provisions of this Agreement shall be
self-operative and shall not require further agreement by the parties
except as may be specifically proved to the contrary in this Agreement;
provided, however, at the request of Company, Employee shall execute
such additional instruments and take such additional acts as Company
may deem necessary to effectuate this Agreement.
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<PAGE>
9.4 Mediation/Arbitration. With the exception of Paragraph eight (8) of
this Agreement any dispute as to the rights and duties of the parties
under this Agreement or to its Construction, validity or enforcement
shall be submitted first to mediation and, only after and in the event
mediation fails, to binding arbitration through JAMS/Endispute in Los
Angeles pursuant to the rules discovery proceedings promulgated thereby
and using a single arbitrator only. The decision of the mediator and/or
arbitrator shall be enforceable in any court of competent jurisdiction.
The prevailing party in such mediation and/or arbitration or any
proceeding in respect thereof or challenging such mediation and/or
arbitration, shall be entitled to receive its or her attorney fees and
court incurred in connection therewith.
9.5 Waiver of Breach. The waiver by Company of Employee of a breach or
violation of any provision of this Agreement shall not operate as, or
be construed to be, a waiver by Company or Employee of any subsequent
breach of the same or other provision hereof.
9.6 Gender and Number. Whenever the context of this Agreement requires, the
gender of all words herein shall include the masculine, feminine, and
neuter, and the number of all words herein shall include the singular
and the plural. References to the "Chairman of the Board of Directors"
are intended to refer to Mohamed Hadid singularly.
9.7 Divisions and Headings. The division of this Agreement into sections
and the use of captions and headings in connection therewith are solely
for convenience and shall have no legal effect in construing the
provisions of this Agreement.
9.8 Severability. In the event that any of the provisions of this Agreement
shall be held invalid or unenforceable by any court of competent
jurisdiction, such invalidity or unenforceability shall not affect the
remainder of this Agreement and same shall be construed as if such
invalid or unenforceable provisions had never been a part hereof.
9.9 Notices. Any notices provided for in this Agreement shall be given in
writing and transmitted by personal delivery or prepaid first class
registered or certified U.S mail address as follows:
Employer: The Entertainment Internet, Inc.
5757 Wilshire Boulevard Suite 124
Los Angeles, CA 90036
Employee: Mr. Michael Solomon
130 S. El Camino Drive
Beverly Hills, CA 90212
(or to such addresses as Employer and/or Employee may designate).
8
<PAGE>
9.10 Successors to Employer. Except as otherwise provided herein, this
Agreement shall be binding upon the inure to the benefit of Employer
and any successor of Employer, including, without limitation, any
corporation or Corporations acquiring directly or indirectly all of
substantially all of the assets or business of Employer whether by
merger, consolidation, sale or otherwise (and such successor shall
thereafter be deemed "Employer" for the purposes of this Agreement),
but shall not otherwise be assignable by Employer.
9.11 Governing Law. This Agreement shall be governed by the laws of the
State of California.
9.12 Choice of Forum. The parties hereto agree that in the event that any
legal suits, actions, or proceedings arising out of this Agreement are
instituted by any party hereto, such suits, actions or proceedings
shall be instituted only in the state or federal courts in the County
of Los Angeles and the State of California. The parties hereto do
hereby consent to the jurisdiction of such courts and waive any
objection which they may now or hereafter have to the venue of any such
suits, actions or proceedings; provided, however, that any party hereto
shall have the right to institute proceedings in another jurisdiction
if the purpose of such proceedings is to enforce or realize upon any
final court judgment arising out of this Agreement.
9.13 Consent to Service. Service of any and all process which may be served
on any party hereto in any suit, action, or proceeding related to this
Agreement may be made by registered or certified mail to Employee or
Employer at their respective address for notice as set forth in Section
9.9, and service so made shall be taken and held to be valid personal
service upon such party by any party to this Agreement on whose behalf
such service is made.
9.14 Entire Agreement This Agreement constitutes the entire agreement
between the parties, superseding all prior understandings, arrangements
and agreements, whether oral or written, and may not be amended except
by a writing signed by the parties hereto. As used herein) unless the
context otherwise indicates, the term "this Agreement" includes any
renewals and/or amendments hereof.
9
<PAGE>
9.15 This Agreement shall not be amended or modified except by instrument in
writing signed by the parties hereto. No failure of either party to
insist upon the strict performance by the other of any provision of
this Agreement shall be construed to waive the right of such party to
subsequently insist upon strict performance of that or any other
provision.
IN WITNESS WHEREOF, Employer has, by its appropriate officers executed this
Agreement and Employee has executed this Agreement effective the date first
written above.
EMPLOYER:
/s/ Mohamed Hadid
By: ___________________________
Mohamed Hadid, Chairman, Board of Directors
The Entertainment Internet, Inc.
EMPLOYEE:
/s/ Michael Solomon
By: ___________________________
MICHAEL SOLOMON
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