<PAGE> 1
SCHEDULE 14A PRIVATE
(Rule 14A-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934
Filed by the Registrant
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[X] Preliminary Proxy Statement [ ] Confidential, for Use of the Com-
mission Only (as permitted by
Rule 14a-6(e)(2))
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
ENHANCED SERVICES COMPANY, INC.
------------------------------------------------
(Name of Registrant as Specified in Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[ ] $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1), or
14a-6(i)(2) or Item 22(a)(2) of Schedule 14A.
[ ] $500 per each party to the controversy pursuant to Exchange Act Rule
14a-6(i)(3).
[X] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and
0-11.
(1) Title of each class of securities to which transaction applies:
Common stock
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(2) Aggregate number of securities to which transaction applies:
Approximately 5.2 million shares*
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which
the filing fee is calculated and state how it was determined):
Value calculated on value of consolidation transaction for common,
preferred stock, cash, assets, and assumption of liabilities*
(4) Proposed maximum aggregate value of transaction:
30 million*
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(5) Total fee paid:
$6,000*
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[ ] Fee paid previously with preliminary materials.
[X] Check box if any part of the fee if offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
Preliminary Proxy Statement, filed September 30, 1998 (fee paid October 5,
1998)
(1) Amount Previously Paid:
$6,000
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(2) Form, Schedule or Registration Statement No.:
Schedule 14A Private
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(3) Filing Party:
Enhanced Services Company, Inc.
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(4) Date Filed:
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September 30, 1998
*Amounts shown are estimates only, for purposes of calculating the Fee Payable;
Shares to be issued to Registrant's stock holders are exempt; Subsequent
Registration Statement to be filed with respect to resale and distribution.
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ENHANCED SERVICES COMPANY, INC.
- --------------------------------------------------------------------------------
January 13th, 1999
Dear Stockholder:
The Company's Annual Meeting of Stockholders will be held on ____________, 1999
at 10:00 a.m. at the Ritz Carlton Hotel, 4375 Admiralty Way, Marina del Rey,
California. I hope that you will be able to attend in person. Following the
formal business of the Annual Meeting, Management will be providing an update on
our business operations and will be available to respond to your questions.
We realize that you are receiving only limited notice of the Annual Meeting, but
this has been a dynamic period for the Company and we have experienced some
delays in finalizing the information in this Proxy.
This year the agenda for the Annual Meeting includes: (i) the approval of the
transfer of the Company's state of incorporation from Colorado to Delaware
through a merger with a newly formed entity and, in connection therewith, to
approve a change of the Company's name to ZuluGroup.com, Ltd., and to establish
as the authorized capital of the surviving entity capital stock consisting of
100 million shares of Common Stock and 25 million shares of Preferred Stock, to
be issued in various series as designated (Proposal I); (ii) the approval of the
issuance of the Common Stock underlying the 1998 Preferred Stock issued in
connection with the March Transactions (defined in the accompanying Notice and
Proxy Statement) among the Company, Netvest Capital Partners, L.P. ("Netvest"),
a stockholder, and Zulu-tek, Inc. (Proposal II), (iii) the approval of the
issuance of the Common Stock underlying the Investor Preferred Stock (Proposal
III); (iv) the approval of the issuance of the Common Stock underlying the
1998(B) Preferred Stock issued in the September Transactions (as defined in the
accompanying Notice and Proxy Statement) with Zulu-tek (Proposal IV); (v) the
nomination and election of three persons to serve as Directors of the Company
until the next Annual Meeting of Stockholders; (vi) the approval of broadened
Awards and an increase in the number of options available for grant under the
Company's Amended and Restated 1992 Stock Option Plan; and (vii) the
ratification of the appointment of Schumacher & Associates as the Company's
independent auditors for the current fiscal year. We want you to know that the
Board endorses each of the nominees for Director and each of the Proposals. YOUR
VOTE IS IMPORTANT TO US.
Please sign, date and return your completed proxy promptly so your shares in the
Company can be represented, even if you plan to attend the Annual Meeting in
person. To accommodate the limited notice, the Company will accept facsimile
proxies at (201) 804-8017.
Finally, on behalf of the Company, we want to express our appreciation to
members of Management who are contributing their skills and enthusiasm to our
current corporate efforts and to thank each of you as stockholders for your
continued support of our endeavors.
Sincerely,
Board of Directors
ENHANCED SERVICES COMPANY, INC.
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PRELIMINARY PROXY
ENHANCED SERVICES COMPANY, INC.
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
Notice is hereby given that Enhanced Services Company, Inc. (the "Company") will
hold its Annual Meeting of Stockholders on ____________, 1999 at 10:00 a.m. at
the Ritz Carlton Hotel, 4375 Admiralty Way, Marina del Rey, California,
for the following purposes:
PROPOSAL I. To consider and vote upon the approval of the transfer of the
Company's state of incorporation from Colorado to Delaware, through a
merger with ZuluGroup.com, Ltd. ("ZuluGroup.com"), a newly formed, wholly
owned Delaware corporation which will be the surviving corporation and, in
connection therewith, to establish as the authorized capital of the
surviving entity, capital stock consisting of 100 million shares of Common
Stock, $.001 par value ("Common Stock") and 25 million shares of Preferred
Stock, $.001 par value, all of which would be deemed to have been issued
by the resulting Delaware corporation on an equal basis.
PROPOSAL II. To consider and vote upon the issuance of the Common Stock
underlying the Company's 1998 Preferred Stock (as hereinafter defined)
issued in connection with transactions undertaken among the Company and
Netvest in March 1998 ("March Transaction" or "March Transactions").
PROPOSAL III. To consider and vote upon the issuance of up to 10 million
shares of Common Stock underlying the Investor Preferred Stock (as
hereinafter defined).
PROPOSAL IV: To consider and vote upon the issuance of the Common Stock
underlying the 1998(B) Preferred Stock issued in the acquisition in
September 1998 of substantially all of the assets and liabilities of
Zulu-tek ("September Transaction" or "September Transactions").
NOTE: The Company was listed on the NASDAQ SmallCap Market until November
24, 1998, when the Common Stock was delisted from the SmallCap Market. The
Company's Common Stock is currently [traded on the NASDAQ (OTC: _____)].
The Company is appealing the delisting and, pending such appeal, is
continuing to comply with the broadened NASDAQ corporate governance
policies effective in February 1998. Therefore, Proposals II, III and IV
with respect to the issuance of Common Stock are being submitted to you to
comply with those requirements.
PROPOSAL V: To elect Directors of the Company.
PROPOSAL VI: To approve an amendment to the Amended and Restated (as of
April 1, 1996) 1992 Incentive Stock Option Plan (the "Plan") to broaden
the Awards and increase the number of options available for grant from
250,000 to 6 million.
PROPOSAL VII. To ratify the appointment of Schumacher & Associates as the
Company's independent auditors for the current fiscal year.
And, to act upon other matters that may properly come before the Annual
Meeting.
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The Board of Directors has fixed December 15, 1998 as the Record Date for the
determination of the stockholders entitled to notice of, and to vote at, the
Annual Meeting or any adjournment or postponement of the Annual Meeting. At the
Annual Meeting, each share of the Company's Common Stock represented at the
meeting will be entitled to one vote on each matter properly brought before the
Annual Meeting.
Representatives of Schumacher & Associates will be in attendance at the Annual
Meeting to respond to questions from stockholders.
Your attention is directed to the accompanying Proxy Statement. Stockholders who
do not expect to attend the Annual Meeting in person are requested to date, sign
and mail the enclosed proxy as promptly as possible in the enclosed envelope.
Additional copies of our Annual and Interim Reports are available upon request
by contacting Investor Relations at (310) 397-3003 or by visiting our website
www.zulumedia.com.
DATED: January 13th, 1999
BY ORDER OF THE BOARD OF DIRECTORS
YOUR BOARD OF DIRECTORS HAS REVIEWED AND CONSIDERED THE TERMS AND CONDITIONS OF
EACH OF THE PROPOSALS. THE BOARD BELIEVES THAT EACH OF THE PROPOSALS IS FAIR TO,
AND IN THE BEST INTEREST OF, THE COMPANY AND ITS STOCKHOLDERS, HAS UNANIMOUSLY
APPROVED THE PROPOSALS AND RECOMMENDS THAT STOCKHOLDERS VOTE "FOR" EACH OF THE
PROPOSALS AND TO ELECT THE PERSONS NOMINATED AS DIRECTORS.
IT IS IMPORTANT THAT ALL STOCKHOLDERS VOTE. WE URGE YOU TO SIGN AND RETURN THE
ENCLOSED PROXY WHETHER OR NOT YOU PLAN TO ATTEND THE ANNUAL MEETING. THE PROXY
MAY BE REVOKED AT ANY TIME PRIOR TO ITS EXERCISE. IN ORDER TO FACILITATE THE
PROVIDING OF ADEQUATE ACCOMMODATIONS, PLEASE INDICATE ON THE PROXY WHETHER YOU
PLAN TO ATTEND THE ANNUAL MEETING.
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TABLE OF CONTENTS
<TABLE>
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PROXY STATEMENT...........................................................................................................1
Summary....................................................................................................1
Proposals..................................................................................................3
Voting.....................................................................................................4
Revocability of Proxies....................................................................................5
Solicitation...............................................................................................5
Dissenter Rights of Appraisals.............................................................................5
Forward Looking Statements.................................................................................6
PROPOSAL I
APPROVAL OF THE TRANSFER OF THE JURISDICTION OF THE COMPANY TO DELAWARE AND, IN CONNECTION THEREWITH,
TO CHANGE THE NAME OF THE COMPANY TO ZULUGROUP.COM, LTD., AND TO ESTABLISH AS THE AUTHORIZED CAPITAL
OF THE SURVIVING ENTITY CAPITAL CONSISTING OF 100 MILLION SHARES OF DELAWARE COMMON STOCK AND
25 MILLION SHARES OF DELAWARE PREFERRED STOCK........................................................................7
Background.................................................................................................7
COMPARISON OF THE CORPORATE LAW OF COLORADO AND DELAWARE AND RIGHTS OF STOCKHOLDERS OF
"ZULUGROUP.COM, LTD." AND THE COMPANY...........................................................................9
COMPARISON OF CERTIFICATES AND BYLAWS...........................................................................9
Capital Stock..............................................................................................9
Board of Directors........................................................................................10
Indemnification...........................................................................................10
Special Voting Requirements and Amendment of Certificate and Bylaw........................................10
Comparison of the Corporate Laws of Colorado and Delaware.................................................11
PROPOSAL II
APPROVAL OF THE ISSUANCE OF SHARES OF COMMON STOCK UNDERLYING THE 1998 PREFERRED STOCK..............................19
Background of the March Transactions......................................................................19
Required Affirmative Vote.................................................................................21
PROPOSAL III.............................................................................................................22
APPROVAL OF THE ISSUANCE OF SHARES OF COMMON STOCK UNDERLYING THE INVESTOR PREFERRED STOCK..........................22
Issuance of the Investor Preferred........................................................................22
Required Affirmative Vote.................................................................................23
PROPOSAL IV
APPROVAL OF THE ISSUANCE OF SHARES OF COMMON STOCK
UNDERLYING THE 1998(B) CONVERTIBLE PREFERRED STOCK..................................................................24
The September Transactions:...............................................................................24
Required Affirmative Vote.................................................................................26
</TABLE>
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<TABLE>
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DISCUSSION OF MATTERS RELEVANT TO ACTION ON PROPOSALS II, III AND IV.....................................................27
BUSINESS.......................................................................................................27
NASDAQ Matters............................................................................................32
Corporate Structure.......................................................................................34
Description of Capital Stock of the Company...............................................................36
Capitalization after giving effect to the Proposals.......................................................39
Impact if Majority of Shareholders Do Not Approve Proposals...............................................39
Forward Looking Statements................................................................................39
SELECTED FINANCIAL AND OPERATING DATA....................................................................................40
Selected Historical Financial and Operating Data for the Company for the Five Years
Ended November 30, 1997 and for the Nine Month Periods Ended August 31, 1997 and 1998......................41
Selected Historical Financial and Operating Data for Zulu-Tek and its Predecessors
for the Five Years Ended December 31, 1997 and for the Eight Month Periods Ended
August 31, 1997 and 1998...................................................................................42
Selected Condensed Unaudited Pro Forma Consolidated Financial and Operating Data for Such
Five Year Periods for the Company after giving effect to the March and September Transactions..............43
Management's Discussion and Analysis of Financial Conditions and Results of Operations of
the Company for the Nine Months Ended August 1998 and 1997.................................................44
Management's Discussion and Analysis of Financial Conditions and Results of Operations of
Zulu-tek for the Eight Months Ended August 1998 and 1997...................................................46
PRO FORMA EFFECT OF THE MARCH AND SEPTEMBER TRANSACTIONS.................................................................48
Pro Forma Consolidated Financial Statements Giving Effect to the March and September Transactions............50
Notes To Pro Forma Consolidated Financial Statements.........................................................52
Management's Discussion and Analysis.........................................................................54
SELECTED INFORMATION RELATED TO THE COMPANY..............................................................................55
Description of Business......................................................................................55
Customers....................................................................................................57
Suppliers....................................................................................................57
Sales, Marketing and Distribution............................................................................57
Competition..................................................................................................57
Proprietary Rights...........................................................................................58
Employees....................................................................................................58
Property.....................................................................................................58
Legal Proceedings............................................................................................58
Market for Common Stock and Related Stock Matters............................................................58
SELECTED INFORMATION RELATED TO ZULU-TEK.................................................................................61
Description of Business......................................................................................61
Customers, Marketing and Distribution........................................................................64
Competitions.................................................................................................65
Proprietary Rights...........................................................................................65
Employees....................................................................................................65
Property.....................................................................................................65
Legal Proceedings............................................................................................66
Market for Common Stock and Related Stock Matters............................................................66
PERFORMANCE GRAPH FOR THE COMPANY'S COMMON STOCK.........................................................................68
TAX TREATMENT OF THE TRANSACTIONS CONTEMPLATED BY PROPOSALS I, AND PROPOSALS II, III, AND IV.............................69
A. The Merger.............................................................................................69
B. The Reorganization.....................................................................................70
C. Limitation on Use of Net Operating Loss Carryovers.....................................................71
PROPOSAL V
NOMINATION AND ELECTION OF DIRECTORS................................................................................73
Term of Office of Directors; Compensation.................................................................75
Indemnification of Directors and Executive Officers.......................................................76
Board Meetings and Committees.............................................................................76
Fiscal Year...............................................................................................76
Executive Compensation and Stock Options..................................................................76
Management Changes........................................................................................79
Security Ownership of Management and Principal Stockholders...............................................79
Transactions with Management and Others...................................................................82
PROPOSAL VI
PROPOSAL TO REVISE, RESTATE AND INCREASE THE SHARES RESERVED FOR ISSUANCE UNDER THE COMPANY'S
1992 INCENTIVE STOCK OPTION PLAN..................................................................................87
Summary of the Plan.......................................................................................87
Purpose...................................................................................................87
Administration............................................................................................87
Eligibility and Extent of Participation...................................................................88
Existing Option Grants....................................................................................88
Purchase Price and Exercise of Options....................................................................89
Expiration and Transfer of Options........................................................................89
Adjustment of Shares......................................................................................90
Amendments to and Termination of the Plan.................................................................90
</TABLE>
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Federal Income Tax Consequences...........................................................................90
Incentive Stock Options...................................................................................90
Non-Qualified Stock Options...............................................................................91
PROPOSAL VII.............................................................................................................92
RATIFICATION OF THE APPOINTMENT OF SCHUMACHER & ASSOCIATES AS INDEPENDENT AUDITORS..................................92
Requirements and Procedures for Submission of Proxy Proposals and Nominations of Directors by Stockholders...............93
Compliance with Section 16(A) of the Exchange Act........................................................................93
Availability of Annual and Interim Reports...............................................................................94
Other Matters............................................................................................................95
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APPENDICES
APPENDIX A...........CERTIFICATE OF INCORPORATION OF ZULUGROUP.COM, LTD.
APPENDIX B ..........BYLAWS OF ZULUGROUP.COM, LTD.
APPENDIX C ..........ARTICLES OF AMENDMENT OF ARTICLES OF INCORPORATION OF
ENHANCED SERVICES COMPANY, INC. CREATING SERIES 1998
RESTRICTED CONVERTIBLE PREFERRED STOCK
APPENDIX D ..........ARTICLES OF AMENDMENT OF ARTICLES OF INCORPORATION OF
ENHANCED SERVICES COMPANY, INC. CREATING INVESTOR PREFERRED
STOCK
APPENDIX E ..........ARTICLES OF AMENDMENT OF ARTICLES OF INCORPORATION OF
ENHANCED SERVICES COMPANY, INC. CREATING 1998(B)
PREFERRED STOCK
APPENDIX F ..........ARTICLES OF AMENDMENT OF THE ARTICLES OF INCORPORATION OF
ENHANCED SERVICES COMPANY, INC. CREATING 1998(C)
NON-CONVERTIBLE PREFERRED STOCK
APPENDIX G ..........SECURITIES ACQUISITION AND REORGANIZATION AGREEMENT BY AND
BETWEEN ENHANCED SERVICES COMPANY, INC. AND ZULU-TEK, INC.,
DATED AS OF SEPTEMBER 9, 1998, AS AMENDED AS
OF DECEMBER 21, 1998
APPENDIX H ..........ZULU-TEK, INC. AND CONSOLIDATED SUBSIDIARIES FINANCIAL
STATEMENTS (UNAUDITED) FOR THE EIGHT MONTH PERIODS ENDED
AUGUST 31, 1998 AND 1997
APPENDIX I ..........ZULU-TEK, INC. AND CONSOLIDATED SUBSIDIARIES FINANCIAL
STATEMENTS (UNAUDITED) FOR THE NINE MONTH PERIODS ENDED
SEPTEMBER 30, 1998 AND 1997
APPENDIX J ..........ZULU-TEK, INC. AND CONSOLIDATED SUBSIDIARIES FINANCIAL
STATEMENTS AND REPORTS OF INDEPENDENT CERTIFIED PUBLIC
ACCOUNTANTS FOR THE FISCAL YEARS ENDED DECEMBER 31, 1997
AND 1996
APPENDIX K ..........ZULU MEDIA, INC. FINANCIAL STATEMENTS AND REPORTS OF
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS FOR THE FISCAL
YEARS ENDED DECEMBER 31, 1997
APPENDIX L ..........SOFTBANK INTERACTIVE MARKETING, INC. FINANCIAL STATEMENTS
AND REPORTS OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS FOR
THE FISCAL YEARS ENDED DECEMBER 31, 1996 (FROM INCEPTION)
APPENDIX M ..........AMENDED AND RESTATED 1992 INCENTIVE STOCK OPTION PLAN OF
ENHANCED SERVICES COMPANY, INC.
iv
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PROXY STATEMENT
ANNUAL MEETING OF STOCKHOLDERS
OF ENHANCED SERVICES COMPANY, INC.
, 1999
The accompanying proxy is solicited by the Board of Directors of Enhanced
Services Company, Inc. (the "Company") for use at the Annual Meeting of
Stockholders of the Company (the "Annual Meeting") to be held on ,
1999 at the Ritz Carlton Hotel, 4375 Admiralty Way, Marina del Rey, California
at 10:00 a.m., and at any adjournments or postponements of the Annual Meeting.
SUMMARY
The following summary provides an overview of the development of the
Company's business strategy in 1998 and is qualified by reference to the more
detailed discussions in this Proxy, particularly in "Discussion of Matters
Related to Actions on Proposals II, III and IV, "Selected Information Related
to the Company" and "Selected Information Related to Zulu-tek."
The Company is organized as a Colorado Corporation. Until 1998, the
Company's business involved providing (through its Laptop Solutions, Inc.
subsidiary) technical repairs, asset maintenance, and technical and enhancement
services to the portable computer industry and providing (through its NB
Engineering, Inc. subsidiary) digital multi-media development services for
technical, strategic and other applications (See "Selected Information Related
to the Company" and "Discussion of Matters Relevant to Action on Proposals II,
III and IV).
In early 1998, the Board of Directors of the Company agreed to pursue
transactions directed at the acquisition of new business opportunities and
procuring financing for its operations since prospects for its operating results
and current business plan were not progressing effectively. Members of the Board
of Directors were asked to assist management in identifying entities with whom
the Company could enter into strategic, capital, or other transactions which
could provide new business opportunities, and the equity needed to meet
operating requirements and to preserve the Company's NASDAQ listing. These
efforts resulted in the March Transactions. In the March Transactions the
Company issued 220,000 shares of newly issued Common Stock and one million
shares of its newly authorized Series 1998 Preferred Stock, $3.00 par value per
share ("1998 Preferred Stock") in exchange for the 12 million common shares
$.001 par value ("Zulu-tek Common Stock") of Zulu-tek, and one million shares of
Zulu-tek's Series D Preferred Stock $.001 par value ("Zulu-tek Preferred") held
by Netvest. Proposal II is being submitted at the Annual Meeting to obtain
stockholder approval for the conversion of the 1998 Preferred Stock into
5,443,660 shares of Common Stock. (See "Proposal II - Approval of the Issuance
of Shares of Common Stock Underlying the 1998 Preferred Stock.")
As fully implemented, the March Transactions were intended to provide the
Company and its stockholders with access to an expanded business opportunity.
Management of both entities believed that this would facilitate capital
formation and attract investment and business interest from individuals and
entities that preferred, or were limited to, investing in or pursuing business
enterprises that traded on NASDAQ. (See "Proposal II - Approval of the Issuance
of Shares of Common Stock Underlying the 1998 Preferred Stock".)
Since the March Transactions, the Company and Zulu-tek and their
respective subsidiaries have been pursuing a strategic plan under the working
title of "Zulu Group" to build on the strategic similarities of the Company and
Zulu-tek and to allow for the refocusing of the business efforts of both
entities, as appropriate. Also, to meet the capital needs of the Company,
management has pursued several financings, including the issuance of $5,000,000
of Investor Preferred (as defined below) stock. As of the date hereof, that
class is fully subscribed. Proposal III is being submitted at the Meeting to
obtain stockholder approval for the conversion of the Investor Preferred into 10
million shares of Common Stock (See "Proposal III"). In addition, since the
March Transactions, and through January 5, 1999, approximately $10 million in
other capital funding has been provided to fund the business strategy being
pursued through the Company and through Zulu-tek and their respective
subsidiaries. To maintain the integrity of each of the corporate entities, since
the March Transactions, the funding has generally been raised and advanced by
the Company to Zulu-tek or Zulu-Media, Inc., Zulu-tek's principal operating
entity. (See "Discussion of Matter Related to Action on Proposals II, III and
IV" and "Selected Information Related to the Company".)
1
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In September, the Company and Zulu-tek entered into an Reorganization (as
defined below) in which the Company acquired all of the assets and liabilities
of Zulu-tek, including but not limited to all of Zulu-tek's physical, tangible
and intangible assets, and all of the issued and outstanding capital stock of
Echomedia Technologies, Inc, and Mediabank, Inc., which holds the shares of Zulu
Media, Inc. (formerly Softbank Interactive Marketing, Inc.), principally, in
exchange for the issuance of the 1998(B) Preferred Stock. Proposal IV is being
submitted at the Annual Meeting to obtain stockholder approval of the conversion
of the 1998(B) Preferred Stock into 5.2 million shares of Company Common Stock.
If Proposal IV is approved and the Zulu-tek stockholders approve the liquidation
of Zulu-tek, the holders of Zulu-tek Common Stock will be deemed to become
holders of the Company's Common Stock on the liquidation date. After giving
effect to the 10:1 stock split undertaken by Zulu-tek as of December 31, 1998,
the Zulu-tek stockholders will be deemed to have received one share of the
Company's Common Stock for each share of Zulu-tek Common Stock. (See "Proposal
IV -- Approval of the Issuance of Shares of Common Stock underlying the 1998(B)
Convertible Preferred Stock".)
Accordingly, if Proposals II, III and IV are approved and all Preferred
Stock is converted into Common Stock, and excluding the impact of the December
Investment in Zulu-tek (as defined below), the ownership interest of the
Company's current stockholders will be reduced from 100% to 27%, and net book
value per share of Common Stock will be reduced from $0.02 to ($0.19); after
giving effect to the 1 million shares of Company Common Stock to be issued in
connection with the December Investment, the ownership of the Company's current
stockholders will be reduced from 100% to 26% and the net book value per share
will be reduced from $0.02 to ($0.15).
The September Transaction was implemented to allow the Company and
Zulu-tek to continue to pursue a strategic plan as the "Zulu Group", to build on
the strategic similarities of the Company and Zulu-tek, and to allow for the
refocusing of the business efforts of both entities. Management believes that a
coordinated Internet focus, coupled with the acquisitions of e-commerce and
online shopping enterprises, will allow the resulting entity to effect a
convergence, under one umbrella, of diverse services focused specifically on the
Internet as a communications and transaction medium. The current management
strategy is to position the Company as a "one-stop" solution for companies that
want to generate commerce on the Internet and for potential users who want to
remain competitive in this environment by combining technology with e-commerce
and interactive advertising. For future planning, the Company is focused on
three business areas: ad sales, e-commerce and on-line shopping.
In that regard, on December 22, 1998, the Company announced that it had
acquired the ownership interests in Brands For Less, L.L.C. a privately held
Connecticut based company, founded in 1997, that currently offers consumers a
comprehensive e-commerce solution that delivers, in one location, access to over
sixty (60) of the world's online specialty retailers across popular consumer
product categories trade-named "e-partments(TM)." The purchase price consists of
cash, notes with a value approximately $35 million and, in addition, the
issuance, in early 1999 of warrants to acquire 3.2 million shares of Common
Stock. The Company is funding the current portions of the transaction through
the issuance of convertible securities and will fund the future portions through
future operating revenues or debt, common stock or other equity arrangements, as
available. The Company's obligations on the transaction notes are secured by the
ownership interests and assets of Brands For Less, L.L.C. Zulu-tek also has made
available to the Company the proceeds of the placement of additional Zulu-tek
Common Stock in December 1998. ("December Investment").
In order to have available sufficient shares of Common Stock to implement
Proposals II, III and IV, the Company must revise its capital structure to
increase the number of authorized shares of Common Stock. This could be
accomplished by amending the existing Articles of Incorporation of the Company,
as a Colorado corporation, but, in considering the matter, the Company's Board
of Directors decided it was preferable to recommend to the stockholders a
transfer of the organizational jurisdiction of the Company from Colorado to
Delaware and, in connection therein, to change the name of the surviving entity
to ZuluGroup.com, Ltd. and to establish as the authorized Capital of the
surviving entity, capital of 100 million shares of Delaware Common Stock and 25
million shares of Delaware Preferred Stock, (both as defined below). (See
"Proposal I").
Therefore, if the shareholders approve Proposals I, II, III and IV, the
Company and Zulu-tek will be positioned to implement a combined business
strategy through ZuluGroup.com, a newly organized Delaware corporation which, by
merger, will be the successor to the Company, with the current shareholders of
both the Company and Zulu-tek holding their equity in ZuluGroup.com, the
successor entity. However, if Proposal I is not approved, the Company will have
insufficient authorized capital shares to implement Proposals II, III and IV. If
any of Proposals II, III or IV are not approved, then there could be no
conversion into Common Stock of the 1998 Preferred Stock, the Investor
Preferred, or the 1998(B) Preferred Stock, respectively, and if Proposal IV is
not approved, the Reorganization with Zulu-tek could not be implemented.
If one or more of Proposals II, III or VI is not approved then the
applicable class of preferred stock would not be converted and Netvest, as the
holder of the 1998 Preferred Stock, the various holders of the Investor
Preferred, and Zulu-tek as the holder of the 1998(B) Preferred Stock,
repectively, would, as applicable, continue to hold non-voting preferred stock
until stockholder approval was received or an alternative arrangement was
implemented.
Also, the Reorganization with Zulu-tek and the distribution to the
Zulu-Tek stockholders of the Enhanced Common Stock would be jeopardized since
Zulu-tek would be holding shares of unregistered preferred stock which would not
be convertible into Enhanced Common Stock. As shown above, in "Capitalization
After Giving Effect to the Proposals", unless the specified Proposals are
approved at the Annual Meeting, the Common Stock issuable on conversion would
not be issued and the outstanding Commo Stock of the Company would remain at the
indicated levels.
As specified in the Notice of Meeting, in addition to the above corporate
capital transactions, at the Annual Meeting, the stockholders also will be asked
to vote on the usual annual meeting matters, including the election of
directors, approval of changes to the Company's Stock Option Plan and
the designation of the Company's auditor for the 1998 year.
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PROPOSALS
As summarized above, at the Annual Meeting, the following Proposals will be
submitted:
PROPOSAL I. To consider and vote upon the approval of the transfer of the
Company's state of incorporation from Colorado to Delaware, through a
merger with ZuluGroup.com, Ltd. ("ZuluGroup.com"), a newly formed, wholly
owned Delaware corporation which will be the surviving corporation and, in
connection therewith, to establish as the authorized capital of the
surviving entity, capital stock consisting of 100 million shares of Common
Stock, $.001 par value ("Common Stock") and 25 million shares of Preferred
Stock, $.001 par value, all of which would be deemed to have been issued
by the resulting Delaware corporation on an equal basis.
PROPOSAL II. To consider and vote upon the issuance of the Common Stock
underlying the Company's 1998 Preferred Stock (as hereinafter defined)
issued in connection with transactions undertaken among the Company and
Netvest in March 1998 ("March Transaction" or "March Transactions").
PROPOSAL III. To consider and vote upon the issuance of up to 10 million
shares of Common Stock underlying the Investor Preferred Stock (as
hereinafter defined).
PROPOSAL IV: To consider and vote upon the issuance of the Common Stock
underlying the 1998(B) Preferred Stock issued in the acquisition in
September 1998 of substantially all of the assets and liabilities of
Zulu-tek ("September Transaction" or "September Transactions").
NOTE: The Company was listed on the NASDAQ SmallCap Market until November
24, 1998, when the Common Stock was delisted from the SmallCap Market. The
Company's Common Stock is currently traded on the NASDAQ (OTC: _____). The
Company is appealing the delisting and, pending such appeal, is continuing
to comply with the broadened NASDAQ corporate governance policies
effective in February 1998. Therefore, Proposals II, III and IV with
respect to the issuance of Common Stock are being submitted to you to
comply with those requirements.
PROPOSAL V: To elect Directors of the Company.
PROPOSAL VI: To approve an amendment to the Amended and Restated (as of
April 1, 1996) 1992 Incentive Stock Option Plan (the "Plan") to increase
the number of Awards available for grant from 250,000 to 6 million.
PROPOSAL VII. To ratify the appointment of Schumacher & Associates as the
Company's independent auditors for the current fiscal year.
And, to act upon other matters that may properly come before the Annual
Meeting.
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The Board of Directors has fixed December 15, 1998 as the Record Date for
the determination of the stockholders entitled to notice of, and to vote at, the
Annual Meeting or any adjournment or postponement of the Annual Meeting. This
proxy statement and accompanying proxy will be mailed beginning on or about
January 13th, 1999 to give holders of the Company's Common Stock of record on
the Record Date an opportunity to vote at the Annual Meeting.
VOTING
The Board of Directors has designated Robert Smith, Chief Financial
Officer and Treasurer, and Justin Walker, Vice President and General Counsel, or
their designees to serve as proxies at the Annual Meeting. In voting, please
specify your choices by marking the appropriate spaces on the enclosed proxy,
signing and dating the proxy and returning it in the accompanying envelope. If
no directions are given and the signed proxy is returned, the proxy holders will
vote the shares for the election of all listed nominees, in favor of each of the
Proposals, and, at their discretion, on any other matters that may properly come
before the Annual Meeting. In situations where brokers are prohibited from
exercising discretionary authority for beneficial owners who have not returned
proxies to the brokers (so-called "broker non-votes"), the affected shares of
Common Stock will be counted for purposes of determining the presence or absence
of a quorum for the transaction of business but will not be included in the vote
totals. The approval of each Proposal, other than the election of directors,
requires the affirmative vote of a majority of the shares of Common Stock
represented at the Annual Meeting. Therefore, a failure by a holder to return a
proxy and indicate their vote on the Proposals, other than the election of
directors, will, in effect, be treated as a non-vote, since shares cannot be
counted as voting "FOR" the Proposals if a proxy is not returned.
A STOCKHOLDER HAS THE RIGHT TO APPOINT A PERSON (WHO NEED NOT BE A STOCKHOLDER)
TO ATTEND AND ACT FOR HIM AND ON HIS BEHALF AT THE ANNUAL MEETING OTHER THAN THE
PERSONS DESIGNATED IN THE ACCOMPANYING FORM OF PROXY. TO EXERCISE THIS RIGHT,
THE STOCKHOLDER MAY INSERT THE NAME OF THE DESIRED PERSON IN THE BLANK SPACE
PROVIDED IN THE PROXY AND STRIKE OUT THE OTHER NAMES OR MAY SUBMIT ANOTHER
PROXY.
THE COMMON STOCK REPRESENTED BY PROXIES IN FAVOR OF MANAGEMENT WILL BE VOTED ON
ANY BALLOT (SUBJECT TO ANY RESTRICTIONS THEY MAY CONTAIN) IN FAVOR OF THE
MATTERS DESCRIBED IN THE PROXY.
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REVOCABILITY OF PROXIES
Execution and delivery of a proxy will not affect a stockholder's right to
attend the Annual Meeting and to vote at the Annual Meeting in person. A
stockholder in whose name shares of Common Stock are registered as of the Record
Date and who has given a proxy may revoke it anytime before it is voted by
executing and delivering a written revocation to the Secretary of the Company,
by execution and delivery of a later dated proxy, or by attending the Annual
Meeting and voting by ballot. Attendance alone at the Annual Meeting, however,
will not revoke a proxy.
A stockholder who is a beneficial owner, but who is not a record
registered owner, as of the Record Date, can vote his or her shares of Common
Stock only if the stockholder's broker, bank or nominee in whose name the shares
are registered executes and delivers a proxy on the stockholder's behalf or if
the stockholder personally brings to the Annual Meeting a proxy or other
authorization to vote from the registered owner and the beneficial owner then
votes by ballot at the Annual Meeting.
Holders of record of Common Stock at the close of business on December 15,
1998, the Record Date, will be entitled to receive notice of and vote at the
Annual Meeting. Currently, the Company is authorized to issue 15 million shares
of Common Stock and 5 million Preferred Shares. On the Record Date, there were
5,854,908 shares of Common Stock and 1,630,209 shares of Preferred Stock issued
and outstanding. The holders of Common Stock are entitled to one (1) vote for
each share held. All matters presented to the Annual Meeting require approval by
simple majority of votes cast on the matter. If the stockholders approve
Proposals II, III and IV, any applicable conversions of the 1998 Preferred, the
Investor Preferred and the 1998 (B) Preferred will occur immediately after the
Annual Meeting and therefore the holders will not be entitled to vote as Common
Stockholders at the Annual Meeting.
SOLICITATION
The Company will bear the entire cost of the solicitation of proxies,
including preparation, assembly and mailing of this proxy statement, the proxy
and any additional material furnished to stockholders. Proxies may be solicited
by directors, officers and a small number of regular employees of the Company
personally or by mail, telephone or telegraph or telecopy, but such persons will
not be specially compensated for such service. In addition, the Company has
retained Corporate Investor Communications, Inc. at a cost of approximately
$5,000 (plus direct expenses), to assist in the solicitation of proxies. Copies
of solicitation material will be furnished to brokerage houses, fiduciaries and
custodians which hold shares of Common Stock of record for beneficial owners for
forwarding to such beneficial owners. The Company also may reimburse persons
representing beneficial owners for their costs of forwarding the solicitation
material to such owners.
DISSENTER RIGHTS OF APPRAISALS
Under the Colorado corporate law, shareholders of the Company will not be
entitled to exercise any dissenter's rights of appraisal with respect to the
Proposals. (See "Proposal I - Comparison of the Corporate Law of Colorado and
Delaware and Rights of Stockholders of "ZuluGroup.com, Ltd." and the Company").
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YOUR VOTE IS IMPORTANT. PLEASE RETURN YOUR MARKED PROXY PROMPTLY SO YOUR SHARES
CAN BE REPRESENTED, EVEN IF YOU PLAN TO ATTEND THE ANNUAL MEETING IN PERSON.
PROPERLY EXECUTED PROXIES RECEIVED BEFORE OR AT THE ANNUAL MEETING WILL BE
VOTED. IF A STOCKHOLDER INSTRUCTS HOW THE PROXY IS TO BE VOTED BY APPROPRIATELY
MARKING IT, IT WILL BE VOTED AS MARKED. IF SUCH INSTRUCTION IS NOT MARKED, IT
WILL BE VOTED (1) FOR THE PROPOSALS, (2) FOR THE ELECTION OF THE THREE DIRECTORS
NOMINATED BY THE BOARD OF DIRECTORS, AND (3) FOR RATIFICATION OF THE APPOINTMENT
OF SCHUMACHER AND ASSOCIATES AS THE INDEPENDENT AUDITORS FOR THE COMPANY FOR THE
CURRENT FISCAL YEAR. THE COMPANY IS NOT AWARE OF ANY OTHER MATTER INTENDED TO BE
PRESENTED AT THE ANNUAL MEETING.
THE APPROXIMATE DATE ON WHICH THIS PROXY STATEMENT AND THE ACCOMPANYING FORM OF
PROXY ARE BEING MAILED TO RECORD HOLDERS OF THE COMPANY'S COMMON STOCK ON
DECEMBER 15, 1998. IF OTHER MATTERS PROPERLY COME BEFORE THE ANNUAL MEETING, IT
IS THE INTENTION OF THE PERSONS NAMED IN THE PROXY TO VOTE ON THEM IN THEIR
DISCRETION.
FORWARD LOOKING STATEMENTS
The business discussion and financial information contained in the Proxy
Statement include forward-looking statements and financial projections that are
based on the current assumptions of the Company's management and their estimates
of future performance and economic conditions as well as the Company's and
Zulu-tek's interpretations of those assumptions and estimates. Such statements
are made in reliance upon the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995. Shareholders of the Company should be aware that
any forward-looking statements are subject to risks and uncertainties that may
cause actual results and future trends to differ materially from those
projected, stated, or implied by the forward-looking statements.
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PROPOSAL I
APPROVAL OF THE TRANSFER OF THE JURISDICTION OF THE COMPANY TO DELAWARE AND, IN
CONNECTION THEREWITH, TO CHANGE THE NAME OF THE COMPANY TO ZULUGROUP.COM, LTD.,
AND TO ESTABLISH AS THE AUTHORIZED CAPITAL OF THE SURVIVING ENTITY CAPITAL
CONSISTING OF 100 MILLION SHARES OF DELAWARE COMMON STOCK AND 25 MILLION
SHARES OF DELAWARE PREFERRED STOCK
The Certificate of Incorporation and Bylaws of ZuluGroup.com. Ltd. are attached
as Appendices A and B respectively and are incorporated herein by reference.
BACKGROUND
As described below, in March and September 1998, the Company entered into
the transactions involving the Company, certain of its stockholders, Netvest and
Zulu-tek (separately, the "March Transactions" and the "September Transactions,"
collectively the "March and September Transactions") and is currently pursuing a
combined business plan with Zulu-tek through Zulu Media. As confirmation of this
business plan, the Board of Directors of the Company has decided to seek
stockholder approval of the transfer of the Company's organizational
jurisdiction from Colorado to Delaware and, in connection therewith, to change
the name of the surviving entity to ZuluGroup.com, Ltd., and to establish as the
authorized capital of the surviving entity, capital consisting of 100 million
shares of Common Stock, $.001 par value ("Delaware Common Stock") and 25 million
shares of Preferred Stock ("Delaware Preferred Stock").
The Board of Directors believes that the relocation of the Company to a
corporate situs in Delaware will position the Company for long-term corporate
stability and growth as a public entity under the laws of Delaware, the
jurisdiction of preference for a majority of publicly held entities.
Under the corporate laws of Colorado and Delaware, the Company will
implement the change of jurisdiction through a merger (the "Merger") of the
Company (as a Colorado company) with ZuluGroup.com, Ltd. ("ZuluGroup.com"), a
newly formed Delaware corporation which has been organized as a wholly owned
subsidiary of the Company, to implement Proposal I.
If the Proposal is approved by the stockholders, the relocation of the
Company will be effective immediately on the date and time of the filing of the
Certificate of Merger in Delaware and Colorado ("Effective Time"), thereby in
effect causing the continuation of the Company as a Delaware corporation under
the name of ZuluGroup.com, with a capital structure consisting of 100 million
shares of Delaware Common Stock and 25 million shares of Delaware Preferred
Stock. As of the Record Date, and before giving effect to the adoption of
Proposals II, III and IV, the immediate conversion of the 1998 Preferred,
Investor Preferred and the 1998(B) Preferred, and the shares to be issued in
connection with the December Investment there would be 7,674,908 shares of
Delaware Common Stock outstanding and 1,630,209 shares of Delaware Preferred
Stock outstanding. References to the "Company" and to the capital stock of the
"Company" are intended to include ZuluGroup.com, as successor to the Company.
After giving effect to the conversion of the 1998 Preferred, the Investor
Preferred (assuming it is fully converted) and the 1998(B) Preferred issued in
the March and September Transactions,
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there will be 28,408,508 shares of Delaware Common Stock, exclusive of any
additional capital transactions including the issuance of Common Stock in
connection with the December Investment. Also, after giving effect to the
conversion of the 1998 Preferred, the Investor Preferred and the 1998(B)
Preferred, the number of outstanding shares of Delaware Preferred and the
1998(B) Preferred, there would be 10,209 shares of Delaware Preferred
outstanding, exclusive of any additional issuances in capital transactions since
the Record Date (see "Transactions with Management and Others"; "Description
of Capital Stock of the Company"; "Capitalization after Giving Effect to the
Proposals").
The statutory change of jurisdiction through the adoption of Proposal I is
not expected to have any negative impact on the business operations or prospects
of the Company, and, in Management's view, there may be a benefit to the Company
from the increased acceptance generally accorded entities formed under Delaware
law.
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COMPARISON OF THE CORPORATE LAW OF COLORADO AND DELAWARE AND RIGHTS OF
STOCKHOLDERS OF "ZULUGROUP.COM, LTD." AND THE COMPANY
If Proposal I is approved and implemented, the stockholders of the Company
will become stockholders of "ZuluGroup.com" and their rights will cease to be
defined and governed by the Articles of Incorporation of the Company (the
"Enhanced Articles") and the Bylaws of the Company (the "Enhanced Bylaws") and
will be defined and governed instead by the Certificate of Incorporation of
ZuluGroup.com (the "ZuluGroup.com Certificate") and the Bylaws of ZuluGroup.com
(the "ZuluGroup.com Bylaws"). Provisions of the ZuluGroup.com Certificate and
the ZuluGroup.com Bylaws will alter the present rights of the Company
stockholders and certain of these provisions are summarized below. In addition,
since the Company is a Colorado corporation and ZuluGroup.com is a Delaware
corporation, the corporate statutory rights of the current Company stockholders
will be governed by the provisions of the Delaware General Corporation Law (the
"DCGL") rather than the Colorado Business Corporations Act (the "CBCA"). Certain
statutory differences between the DGCL and CBCA are summarized below. These
summaries are qualified in their entirety by reference to the ZuluGroup.com
Certificate, the ZuluGroup.com Bylaws (which are included as Appendices A and B
to this Proxy Statement) and to the DGCL and the CBCA.
COMPARISON OF CERTIFICATES AND BYLAWS
CAPITAL STOCK
The Company. The Enhanced Articles authorize twenty million (20,000,000)
total shares to be issued, of which fifteen million (15,000,000) shares are
Common Stock and five million (5,000,000) shares are classified as Preferred
Stock. The Board of Directors of the Company is authorized to establish the
rights, preferences and limitations of Enhanced Preferred Stock if and when
issued, and therefore it can, without stockholder approval, authorize the
issuance of Enhanced Preferred Stock with terms giving the holders thereof
substantial voting power, conversion or other rights that can have the effect of
delaying or preventing a change in control of the Company or modifying the
rights of holders of Enhanced Common Stock. The Company's Board of Directors
also can utilize such shares for financing, possible acquisitions and other
uses.
ZuluGroup.com. The ZuluGroup.com Certificate authorizes one hundred
twenty-five million (125,000,000) total shares to be issued, of which one
hundred million (100,000,000) are shares of Common Stock, $.001 par value per
share and twenty-five million (25,000,000) are shares of Preferred Stock, $.001
par value. The Board of Directors of ZuluGroup.com is authorized to establish
the rights, preferences and limitations of ZuluGroup.com Preferred Stock if and
when issued, and therefore it could, without stockholder approval, authorize the
issuance of ZuluGroup.com Preferred Stock with terms giving the holders thereof
substantial voting power, conversion or other rights that could have the effect
of delaying or preventing a change in control of ZuluGroup.com or modifying the
rights of holders of ZuluGroup.com Common Stock. The ZuluGroup.com Board of
Directors also could utilize such shares for financing, possible acquisitions
and other uses.
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BOARD OF DIRECTORS
The Company. The Enhanced Bylaws provide that the Board of Directors of
the Company shall have not less than three (3) nor more than ten (10) directors
as set from time to time by a majority vote of the Board of Directors and that
directors are to be elected for a term of one (1) year by the stockholders of
Enhanced Common Stock at Annual Meetings of stockholders are to be held annually
for that purpose.
ZuluGroup.com. The ZuluGroup.com Certificate and the ZuluGroup.com Bylaws
provide that the first Board of Directors shall be elected by the Incorporator
of ZuluGroup.com and shall consist of at least three (3) directors and shall
serve until the first annual meeting of the stockholders which must be held
within thirteen months after the date of the organization. The Board of
Directors thereafter will be elected at the annual meeting of the stockholders
to be held within thirteen months after the date of the preceding annual meeting
and will consist of not less than three (3) nor more than ten (10) as set from
time to time by a majority vote of the Board of Directors and that directors are
to be elected for a term of one (1) year by the stockholders of Enhanced Common
Stock at Annual Meetings of stockholders are to be held annually for that
purpose.
INDEMNIFICATION
The Company. The Enhanced Articles provide that the Company may and shall
indemnify each director, officer, and any employee or agent of the Company, his
heirs, executors and administrators, against any and all expenses or liability
reasonably incurred by him in connection with any action , suit or proceeding to
which he may be a party by reason of his being or having been a director,
officer, employee or agent of the Company to the full extent required or
permitted by the CBCA, as amended.
ZuluGroup.com. The ZuluGroup.com Certificate allows ZuluGroup.com to the
fullest extent permitted by the provisions of DGCL, and particularly Section 145
of the DGCL, as the same may be amended and supplemented, to indemnify any and
all persons whom it shall have power to indemnify under said section from and
against any and all of the expenses, liabilities, or other matters referred to
in or covered by said section, while such indemnification shall not be deemed
exclusive of any other rights to which those indemnified may be entitled under
any Bylaw, agreement, vote of stockholders or disinterested directors or
otherwise, both as to action in his official capacity and as to action in
another capacity while holding such office, and shall continue as to a person
who has ceased to be a director, officer, employee, or agent and shall inure to
the benefit of the heirs, executors, and administrators of such a person.
SPECIAL VOTING REQUIREMENTS AND AMENDMENT OF CERTIFICATE AND BYLAWS
The Company. The Enhanced Articles do not contain any special provision
with respect to voting requirements for certain business combinations.
Therefore, approval of business combinations involving the Company is controlled
by the CBCA. The Enhanced Bylaws are subject to amendment, repeal or alteration
by vote of a majority of the Directors present at a
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meeting of the Board of Directors at which a quorum is present. To amend the
Certificate, Section 7-111-107 of the CBCA requires the affirmative vote of each
voting group entitled to vote, of at least a majority of the outstanding shares
to amend the Enhanced Certificate. See "Comparison of Corporate Laws of
Colorado and Delaware" below.
ZuluGroup.com The ZuluGroup.com Certificate provides that in addition to
any affirmative vote required by applicable law and any voting rights granted to
or held by holders of Preferred Stock, any alteration, amendment, repeal or
rescission of any provision of the ZuluGroup.com Certificate must be approved by
a majority of the directors of ZuluGroup.com then in office and by the
affirmative vote of the holders of a majority of the outstanding shares of
voting stock of the corporation.
The ZuluGroup.com Certificate provides that any Change (as defined in
Article XIII of the ZuluGroup.com Certificate) to Article II, Sections 2, 3 or 4
of the ZuluGroup.com Bylaws must be approved either by a majority of the
authorized number of directors and, in certain cases, by the affirmative vote of
the holders of a majority of the Common Stock.
COMPARISON OF THE CORPORATE LAWS OF COLORADO AND DELAWARE
The corporation laws of Colorado and Delaware differ in many respects.
Although all the differences are not set forth in this Proxy Statement, certain
provisions, which may materially affect the rights of Stockholders, are
discussed below.
Stockholder Approval of Certain Business Combinations. In recent years, a
number of states have adopted special laws designed to make certain kinds of
"unfriendly" corporate takeovers, or other transactions involving a corporation
and one or more of its significant Stockholders, more difficult. Under Section
203 of the DGCL, certain "business combinations" with Interested Stockholders of
Delaware corporations, as previously defined, are subject to a three-year
moratorium unless specified conditions are met. Section 203 prohibits a Delaware
corporation from engaging in a "business combination" with an interested
stockholder for three years following the date that such person or entity
becomes an interested stockholder.
A Delaware corporation to which Section 203 applies may elect not to be
governed by Section 203 and the ZuluGroup.com Certificate also includes an
election to not have the Delaware corporate takeover provisions and protections
apply to ZuluGroup.com. As a result, a potential acquirer may be more likely to
make a tender offer directly to the stockholders rather than to negotiate with
the Company's Board of Directors or to make a two-tiered bid in which all
stockholders might not be treated equally. Stockholders should note, however,
that the election out of Section 203 will preclude the Board or Directors from
rejecting a proposed business combination without stockholder input, will limit
the power of the Board to support entrenched management (without stockholder
agreement) and will increase the ability of a stockholder or group of
stockholders to change control. See "Stockholder Voting" herein.
Under Colorado law, a foreign corporation merging with or purchasing the
shares of a Colorado corporation must comply with certain sections of the CBCA.
Both corporations must
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adopt a plan of merger or share exchange which: (1) sets forth the name of each
corporation; (2)the terms and conditions of the share exchange; (3) the manner
and basis for exchanging the shares to be acquired; and (4) may set forth other
provisions relating to the share exchange. After the Board of Directors of each
corporation adopts the plan of merger or share exchange, each shall recommend
the plan to its stockholders unless it determines that, because of a conflict of
interest or other special circumstances, it should make no recommendation and
communicates the basis for its determination to the stockholders with the plan.
Each board of directors shall submit the plan to its stockholders for approval,
and, unless the article of incorporation, the bylaws, or the plan of merger or
share exchange is qualified by the Board of Directors to require a greater vote,
the plan shall be approved by each voting group entitled to vote separately on
the plan by a majority of all the votes entitled to be cast on the plan by that
voting group.
Removal of Directors. Under Colorado law, unless the articles of
incorporation provide otherwise, any Director or the entire Board of Directors
may be removed, with or without cause, with the approval of a majority of the
outstanding shares entitled to vote; however, if cumulative voting is in effect,
no individual Director may be removed if the number of votes cast against such
removal would be sufficient to elect the Director under cumulative voting, and
any Director elected by a voting group can only be removed by that voting group.
Under Delaware law, a Director of a corporation that does not have a
classified Board of Directors or cumulative voting may be removed, with or
without cause, with the approval of a majority of the outstanding shares
entitled to vote at an election of Directors. In the case of a Delaware
corporation having cumulative voting, if less than the entire Board is to be
removed, a Director may not be removed without cause if the number of shares
voted against such removal would be sufficient to elect the Director under
cumulative voting.
Indemnification and Limitation of Liability. Colorado and Delaware have
similar laws respecting indemnification by a corporation of its officers,
Directors, employees and other agents. The laws of both states also permit, with
certain exceptions, a corporation to adopt a provision in its articles of
incorporation or certificate of incorporation, as the case may be, eliminating
the liability of a Director to the corporation or its stockholders for monetary
damages for breach of the Director's fiduciary duty. There are nonetheless
certain differences between the laws of the two states respecting
indemnification and limitation of liability.
Colorado law does not permit the elimination of monetary liability for
breach of fiduciary duty as a Director where such liability is based on: (a)
breach of the Director's duty of loyalty to the corporation or its stockholders,
(b) acts or omissions not in good faith or which involve intentional misconduct
or a knowing violation of the law, (c) unlawful distributions, (d) any
transaction from which the Director directly or indirectly derived an improper
personal benefit, or (e) any act or omission occurring before the provision
eliminating liability became effective.
The limitations imposed on such a provision under Delaware law are
substantially similar to the limitations imposed by Colorado law as described in
the preceding paragraph.
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Colorado law permits indemnification of a person made party to a
proceeding because the person is or was a Director against liability incurred in
the proceeding if: (a) the person conducted himself or herself in good faith;
and (b) the person reasonably believed, in the case of conduct in an official
capacity with the corporation, that his or her conduct was in the corporation's
best interests, and in the all other cases, that his or her conduct was at least
not opposed to the corporation's best interests. Additionally, in the case of
any criminal proceeding, the person must have had no reasonable cause to believe
his or her conduct was unlawful. Notwithstanding the foregoing, under Colorado
law, a corporation may not indemnify a Director in connection with a derivative
action in which the Director was adjudged liable to the corporation, or in
connection with any other proceeding charging that the Director derived an
improper personal benefit, and in which proceeding the Director was adjudged
liable on the basis that he or she in fact derived such improper personal
benefit. Also, in a derivative action, indemnification is expressly limited to
the reasonable expenses incurred in connection with the proceeding.
Under Delaware law, a corporation may indemnify a Director against all
liability (including expenses) in an action other than a derivative action if
the person conducted himself or herself in good faith and in a manner he or she
reasonably believed to be in or not opposed to the best interest of the
corporation (without a distinction made, as in Colorado law, for actions taken
in "official capacity"), and with respect to criminal actions, he or she had no
reasonable cause to believe that his or her conduct was unlawful. In derivative
actions indemnification is may be made for those expenses actually and
reasonably incurred, with the additional restriction that if the Director is
adjudged liable to the corporation, the court deciding the proceeding must make
the special determination that the Director is entitled to indemnification of
expenses notwithstanding such adverse adjudication because such person is fairly
and reasonable so entitled in view of all the circumstances.
By comparison, under Colorado law, if a corporation elects not to
indemnify a Director against expenses incurred in connection with a derivative
action because the Director was found not to have acted within the requisite
standard of conduct, a court may nevertheless award expenses if the court
determines the Director is fairly and reasonably entitled to indemnification in
light of all of the circumstances.
Under both Colorado and Delaware law, officers, employees and agents (as
well as fiduciaries, under Colorado law) may be indemnified to the same extent
as Directors.
Under both Colorado and Delaware law, a corporation must indemnify the
person made party to a proceeding because such person was a Director against
expenses (including attorney's fees) where such person is successful on the
merits or otherwise in defense of such proceeding. Under Colorado law, this
mandatory indemnification may be limited by the articles of incorporation. Under
Delaware law, this mandatory indemnification is extended to persons made party
to a proceeding because such person was an officer, employee or agent of the
corporation; under Colorado law, the mandatory indemnification of expenses, as
may be further limited by the articles of incorporation, is only extended to
officers of the corporation.
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Under Delaware law, the corporation may advance the expenses incurred by a
Director in connection with proceedings prior to a final adjudication if the
Director executes an undertaking to repay such amounts if it is ultimately
determined that the Director is not entitled to indemnification. The Board may
set other terms and conditions for the advance of expenses on behalf of
employees and agents. Under Colorado law, in addition to the undertaking
referred to above (which must be an unlimited general obligation of the
Director, but need not be secured), the Director must furnish a written
affirmation of the Director's good faith belief that he or she has met the
requisite standard of conduct heretofore described.
Under both Delaware and Colorado law, a "determination" must be made,
based on the facts then known to those making the determination, that
indemnification would not be precluded under applicable law. The "determination"
is made by the affirmative vote a majority of Directors not party to the subject
proceeding, by independent legal counsel, or by the stockholders. Colorado law
allows for a determination by a committee where no quorum of non-party Directors
can be reached; Delaware law does not require a quorum of non-party Directors. A
determination is made by stockholders only if the Board directs, or cannot
approve because of a lack of non-party Directors; there is no such limitation on
stockholder approval under Delaware law. The "determination" must be made in
advance of indemnification and advancement of expenses under Colorado law while
no prior determination is required for the advancement of expenses under
Delaware law.
The laws of both Delaware and Colorado authorize a corporation's purchase
of insurance on behalf of Directors, officers, employees and agents, regardless
of the corporation's statutory authority to indemnify such person directly.
Colorado law specifically allows such insurance to be purchased from a company
in which the corporation has equity or other interests.
Under Colorado law, a corporation can indemnify officers, employees,
fiduciaries and agents (but not Directors) to a greater extent than provided in
the CBCA, subject to public policy concerns, if such rights are set forth in the
articles of incorporation, bylaws, or Board or shareholder resolution, or by
contract.
While Colorado law does not provide for extended indemnification of
Directors, under Delaware law, a Director's rights to indemnification are not
limited to those set forth in the DGCL, and may be expanded by the bylaws,
agreement, common law, or otherwise, though limitations could be imposed by a
court on grounds of public policy.
Dividends and Repurchases of Shares. Colorado law dispenses with the
concepts of par value of shares as well as statutory definitions of capital,
surplus and the like. The concepts of par value, capital and surplus are
retained under Delaware law.
Under Colorado law, a corporation may not make any distribution (including
dividends, or repurchases and redemptions of shares) if, after giving effect to
the distribution, (i) the corporation would not be able to pay its debts as they
become due in the usual course of business, or (ii) the corporation's total
assets would be less than the sum of its total liabilities plus (unless the
articles of incorporation permit otherwise) the amount that would be needed, it
the corporation were to be
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dissolved at the time of the distribution, to satisfy the preferential
liquidation rights of stockholders not receiving the distribution.
Delaware law permits a corporation to declare and pay dividends out of
surplus or, if there is no surplus, out of net profits for the fiscal year in
which the dividend is declared and/or for the preceding fiscal year as long as
the amount of capital of the corporation following the declaration and payment
of the dividend is not less than the aggregate amount of the capital represented
by the issued and outstanding stock of all classes having a preference upon the
distribution of assets. In addition, Delaware law generally provides that a
corporation may redeem or repurchase its shares only if the capital of the
corporation is not impaired and such redemption or repurchase would not impair
the capital of the corporation.
Stockholder Voting. Under Delaware law a majority of the stockholders of
both acquiring and target corporations must approve statutory merger, except in
certain circumstances substantially similar under both Colorado and Delaware
law. Also, under Delaware law a sale of all or substantially all of the assets
of a corporation must be approved by a majority of the outstanding voting shares
of the corporation transferring such assets.
With certain exceptions, Colorado law also requires that mergers, share
exchanges, certain sales of assets and similar transactions be approved by a
majority vote of each voting group of shares outstanding. In contrast, Delaware
law generally does not require class voting, except in certain transactions
involving an amendment to the certificate of incorporation that adversely
affects a specific class of shares. As a result, stockholder approval of such
transactions may be easier to obtain under Delaware law for companies, which
have more than one class of shares outstanding.
Interested Director Transactions. Under both Colorado and Delaware law,
certain contracts or transactions in which one or more of a corporation's
Directors has an interest are not void or voidable because of such interest
provided that certain conditions, such as obtaining the required approval and
fulfilling the requirements of good faith and full disclosure, are met.
With certain exceptions, the conditions are similar under Colorado and
Delaware law. The most significant difference between the DGCL and the CBCA is
that under Colorado law, a corporation cannot rely on ratification or
authorization of a disinterested Board of Directors regarding a loan or guaranty
benefiting a Director unless the stockholders have been given at least 10 days
written notice.
Stockholder Derivative Suits. Colorado law provides that the corporation
or the defendant in a derivative suit may require the plaintiff stockholder to
furnish a security bond if the stockholder holds less than five percent of the
outstanding shares of any class and such shares have a market value of less than
$25,000. Delaware does not have a similar bonding requirement.
Appraisal Rights. Under both Colorado and Delaware law, a stockholder of a
corporation participating in certain major corporate transactions may, under
varying circumstances, be entitled to appraisal rights pursuant to which such
stockholder may receive cash in the amount of the fair
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<PAGE> 24
market value of his or her shares in lieu of the consideration he or she would
otherwise receive in the transaction.
Appraisal rights are available in response to similar transactions under
both Delaware and Colorado law, except that under Colorado law, appraisal rights
are also available to a stockholder in the event of (i) a share exchange to
which the corporation is a party as the corporation whose shares will be
acquired (a transaction not specifically authorized by Delaware law); (ii) a
sale, lease, exchange or other disposition of all or substantially all of the
assets of a corporation or an entity which the corporation controls if a vote of
the stockholders is otherwise required; and (iii) a reverse stock split if the
split reduces the number of shares owned by the stockholder to a fraction of a
share or to scrip and such fraction or scrip is to be acquired for cash or
voided pursuant to the statutory procedure available under the CBCA. Under
Colorado law, shareholders of the Company will not be entitled to exercise
rights of appraisal or dissent with respect to the transactions to be submitted
to the Annual Meeting.
In addition, there are differences in the timing of payments made to
dissenting stockholders, the ability of a court to award attorneys' fees, and
the manner of determining "fair value" which may make Colorado law more
favorable from a shareholder's point of view.
Under both Delaware and Colorado law, stockholders or shareholders, as the
case may be, (i) must receive prior notice of their rights to dissent, (ii) must
deliver their notice of dissent prior to the corporate action given rise to
dissenter's rights, and (iii) are entitled to receive notice from the
corporation of the effectiveness of the corporate action within 10 days.
Under Delaware law, a dissenting stockholder has 120 days to obtain from
the corporation a settlement of the fair value of his or her shares. If no
settlement is reached at that time, the stockholder may petition the Delaware
Court of Chancery to determine the fair value of the shares, after which the
corporation will be instructed to pay to the dissenting stockholder the fair
value, as determined. The court costs will be allocated among the corporation
and dissenting stockholders, as equitable, and the legal fees for dissenting
stockholders who prosecute their claims may be spread among the dissenting
stockholders as a group. Finally, in determining "fair value" the Court of
Chancery is required to consider all relevant factors, and to include interest.
Under Colorado law, a dissenting stockholder may make a demand no later
than 30 days following the notice from the corporation of the maturity of his or
her appraisal rights. Upon receipt of such demand (or the effective date of the
transaction, whichever is later), the corporation must pay each dissenter who
has properly followed the procedure set forth in the CBCA an amount which the
corporation estimates to be the fair value of the dissenter's shares, plus
interest. In addition, the corporation must also deliver, among other things,
financial statements, a statement of the estimate of fair value, an explanation
of how interest was calculated, a statement of dissenters rights to demand an
additional valuation and a copy of the relevant DGCL provision. If the
dissenting stockholder is dissatisfied with this offer, he or she may then,
within 30 days, keep the payment, but reject the corporation's calculation of
fair value and present a counter-offer. If the corporation does not agree with
the dissenting stockholder's counter-offer, the corporation is forced to
commence an appraisal proceeding. A court will then determine the fair value of
the court can
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also assess legal fees not only among the class of dissenters as under Delaware
law, but against the corporation if it is determined that it is equitable to do
so and that the corporation did not substantially comply with the procedures set
forth in the CBCA.
The costs of the proceeding shall be assessed to the corporation but may
also be awarded to any party if the opposing party is found to have acted
arbitrarily, vexatiously or not in good faith.
Unlike in Delaware, the CBCA does not specifically prohibit the court from
taking into effect any appreciation in the fair value of the shares attributable
to the "accomplishment or expectation" of the transaction giving rise to
dissenter's rights. In addition, Colorado law is not well developed in the
context of valuing dissenter's shares. Thus, the fair value of dissenter's
shares assigned by a court interpreting the CBCA could differ significantly (and
could be significantly lower) from the value assigned by a Delaware court. The
procedure under Colorado laws will likely ensure that dissenters receive at
least some value from the corporation for their shares at an earlier date.
Dissolution. Under Colorado law, dissolution may be authorized by the
adoption of a plan of dissolution by the Board of Directors, followed by the
recommendation of the proposal to the stockholders (unless because of a conflict
of interest or other circumstances the Board determines it cannot make any
recommendation), then followed by the approval of a majority of stockholders
entitled to vote thereon.
Colorado law also provides for judicial dissolution of a corporation in an
action by a stockholder upon a showing that (i) the Directors are deadlocked in
management, the stockholders are unable to break the deadlock, and irreparable
injury to the corporation is threatened or being suffered, or the business and
affairs of the corporation can no longer be conducted to the advantage of the
stockholders generally, because of the deadlock; (ii) the Directors or those in
control of the corporation are acting or will act in a manner which is illegal,
oppressive, or fraudulent; (iii) the stockholder have been deadlocked over two
annual meetings in the election of Directors; or (iv) the corporate assets are
being misapplied or wasted. A Colorado corporation can also be dissolved
judicially upon other grounds in a proceeding by the attorney general, or in a
proceeding by creditors, as well as by the secretary of state.
Under Delaware law, unless the Board of Directors approves the proposal to
dissolve, the dissolution must be approved in writing by all of the Stockholders
entitled to vote thereon. Only if the dissolution is initially approved by the
Board of Directors may it be approved by a simple majority of the outstanding
shares of the corporation's stock entitled to vote. In the event of a
Board-initiated dissolution, Delaware law allows a corporation to include in its
certificate of incorporation a supermajority (greater than a simple majority)
voting requirement in connection with dissolutions. Delaware law provides for
dissolution by operation of law for abuse, misuse or nonuse of its corporate
powers, privileges or franchises.
Action by Written Consent. Under Colorado law, unless the articles of
incorporation require that a particular action is to be taken at a meeting of
stockholders, any action to be taken by
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stockholders may be taken instead by the unanimous written consent of all
stockholders entitled to vote thereon.
Under Delaware law, action in lieu of a meeting is also allowed. Such an
action may be taken if allowed by a written consent signed by the holders of
outstanding stock having not less than the minimum number of votes that would be
necessary to authorize or take such action at a meeting at which all shares
entitled to vote thereon were present and voted in favor of the action. Those
stockholders not executing written consents (and who would otherwise be entitled
to notice of a meeting at which such action would have otherwise taken place)
must receive prompt written notice of the action taken. Some stockholders thus
could receive notice of certain matters after stockholder action has been taken
if a majority of stockholders deliver their prior consent to such action in lieu
of a meeting.
THE BOARD OF DIRECTORS OF THE COMPANY HAS CONCLUDED THAT THE CHANGE OF THE STATE
OF INCORPORATION FOR THE COMPANY TO DELAWARE AND, IN CONNECTION THEREWITH, THE
CHANGE OF THE NAME OF THE COMPANY TO ZULUGROUP.COM, INC., AND THE INCREASE OF
THE COMPANY'S AUTHORIZED CAPITAL TO 100 MILLION SHARES OF DELAWARE COMMON STOCK
AND TO 25 MILLION SHARES OF DELAWARE PREFERRED STOCK IS IN THE BEST INTERESTS OF
THE COMPANY AND ITS STOCKHOLDERS AND THEREFORE IT RECOMMENDS A VOTE "FOR"
PROPOSAL I.
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PROPOSAL II
APPROVAL OF THE ISSUANCE OF SHARES OF COMMON STOCK UNDERLYING THE 1998 PREFERRED
STOCK
THE BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED AND IS SUBMITTING FOR
STOCKHOLDER APPROVAL A PROPOSAL TO AUTHORIZE THE ISSUANCE OF 5,443,600 SHARES OF
COMMON STOCK, WHICH SHARES OF COMMON STOCK ARE ISSUABLE UPON CONVERSION OF THE
1998 PREFERRED STOCK.
CERTAIN ASPECTS OF PROPOSAL II AND THE DETAILS OF THE RIGHTS OF THE 1998
PREFERRED STOCK, AS SET FORTH IN THE CERTIFICATES OF DESIGNATION, ARE SUMMARIZED
BELOW. THE SUMMARY IS QUALIFIED BY REFERENCE TO THE FORMS OF CERTIFICATE OF
DESIGNATION WHICH ARE ATTACHED AS APPENDIX C AND INCORPORATED HEREIN BY
REFERENCE.
BACKGROUND OF THE MARCH TRANSACTIONS
In early 1998, the Board of Directors of the Company agreed to pursue
transactions directed at the acquisition of new business opportunities and
procuring financing for its operations since prospects for its operating results
and business plan were not progressing effectively. Members of the Board of
Directors were asked to assist management in identifying entities with whom the
Company could enter into strategic, capital, or other transactions which could
provide new business opportunities, the equity needed to meet operating
requirements and to preserve the Company's NASDAQ listing.
Initial meetings among representatives and principals of the Company and
of Netvest Capital Partners, LP, a Delaware limited partnership ("Netvest")
which then owned approximately 19.4% of the Zulu-tek Common Stock, were held in
mid-February. At these meetings, the Company and its representatives indicated
their interest in expanding and energizing the Company's business perspectives
and in finding business opportunities that would support public trading market
interest. The Board of Directors and management of the Company concluded that a
transaction with Netvest which would foster business synergies with Zulu-tek
would provide these opportunities and prospects for the Company.
By action of the Board of Directors of the Company, the Company entered
into a Securities Acquisition Agreement, dated as of March 3, 1998, pursuant to
which the Company entered into a series of transactions on March 6, 1998 with
Netvest, and Netvest entered into transactions with certain other investors and
affiliates of the Company ("March Transactions").
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<PAGE> 28
In the March Transactions, the Company issued 220,000 shares of newly
issued Common Stock and one million shares of its newly authorized Series 1998
Preferred Stock, $3.00 par value per share ("1998 Preferred Stock") in exchange
for the 12 million common shares $.001 par value ("Zulu-tek Common Stock") of
Zulu-tek, and one million shares of Zulu-tek's Series D Preferred Stock $.001
par value ("Zulu-tek Preferred") held by Netvest.
In the March Transactions, the investment valuation was determined based
upon the fair market value of the Company's Common Stock and the 1998 Preferred
Stock issued in the transaction. The value of the Company's Common Stock issued
to Netvest was determined to be an aggregate of $4,045,000 consisting of
$1,045,000 (220,000 shares of Common Stock at the then current market price)
plus $3 million value for the 1998 Preferred Stock (one million shares at a
stated value of $3.00 per share). This valuation was supported by the fact that,
at the time of the transaction, the market price of the Zulu-tek Common Stock
was in the range of $0.50 to $0.65 per share, so that, even after applying a
discount of 35%, the value of the 12 million shares of Zulu-tek Common Stock
acquired by the Company approximated the $4,045,000 investment recorded by the
Company. Accordingly, in the March Transactions, the Company did not need to,
and therefore did not, separately value the one million shares of the Zulu-tek
Preferred it received.
As fully implemented, the March Transactions were intended to provide the
Company and its stockholders with access to an expanded business opportunity.
Management of both entities believed that this combination would facilitate
capital formation and attract investment and business interest from individuals
and entities that preferred, or were limited to, investing in or pursuing
business enterprises that traded on NASDAQ. See "Discussion of Matters Relevant
to Action on Proposals II, III, and IV." for a discussion of the effects on the
business of the Company and Zulu-tek.
All of the securities issued and exchanged in the March Transactions are
restricted securities. Prior to the March Transactions, there were 1,131,474
shares of the Company's Common Stock outstanding and 283,973 shares of Common
Stock reserved for issuance for a total of 1,415,447 shares on a fully diluted
basis (with a result that the 220,000 shares of Common Stock issued in the March
Transactions constituted an issuance of approximately 19.4% of the Company's
Common Stock or 15.5% on a fully diluted basis at March 6, 1998).
On May 29, 1998, the Company effected a 100% stock dividend/2:1 stock
split and, unless otherwise noted, references in this proxy statement give
effect to that adjustment. As a result, each share of the 1998 Preferred Stock
is convertible on the basis of 5.5436 shares of the Company's Common Stock after
giving effect to the 100% stock dividend/2:1 stock split effected on May 29,
1998, solely at the option of the Company and only after receipt of stockholder
approval. This condition was adopted by the Company in issuing the 1998
Preferred Stock to assure compliance with the NASDAQ rules which, as described
below, require stockholder approval for any issuance of more than 20% of the
Company's outstanding shares. If stockholder approval of Proposal II is received
at this Annual Meeting, the 5,543,600 shares of the Company's Common Stock will
be issued as restricted securities but will be registered for resale in the same
SEC Registration Statement as the Common Stock which is expected to be
distributed to ZULU-tek stockholders in the liquidation described in Proposal
IV. See "NASDAQ Matters."
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The Zulu-tek Common Stock currently trades on NASDAQ (OTC: "ZULU"). As of
the Record Date, there were 51,917,263 shares of Zulu-tek Common Stock
outstanding and no shares of Zulu-tek Common Stock reserved for issuance. After
giving effect to Zulu-tek's 10:1 reverse stock split effective December 31, 1998
(and the rounding up of shares issued in the split) and the shares being issued
in connection with the December Investment, there are 5,291,868 shares of
Zulu-tek Common Stock outstanding. The Zulu-tek Preferred received in the March
Transactions is non-voting except in certain corporate reorganizations, mergers
and similar matters and in such instances, each share entitles the holder to
fifty votes per share. The terms and relative rights of the Common Stock issued
on conversion of the 1998 Preferred Stock are described below ("See Description
of Capital Stock of the Company").
REQUIRED AFFIRMATIVE VOTE
IN ACCORDANCE WITH THE PROVISIONS OF THE 1998 PREFERRED STOCK AND THE COMPANY'S
INTENT TO CONTINUE TO COMPLY WITH THE NASDAQ RULES PENDING ITS APPEAL OF THE
DELISTING, THE AFFIRMATIVE VOTE OF A MAJORITY OF THE OUTSTANDING VOTING POWER OF
THE COMPANY'S COMMON STOCK IS REQUIRED TO ADOPT PROPOSAL II SINCE UPON
CONVERSION OF THE 1998 PREFERRED STOCK, THE COMPANY WILL BE REQUIRED TO ISSUE
SHARES OF COMMON STOCK WHICH EXCEED 20% OF THE CURRENTLY OUTSTANDING COMMON
STOCK OF THE COMPANY.
THE BOARD OF DIRECTORS OF THE COMPANY CONCLUDED THAT THE MARCH TRANSACTIONS WERE
FAIR TO AND IN THE BEST INTERESTS OF THE COMPANY AND ITS STOCKHOLDERS. THE BOARD
OF DIRECTORS BELIEVES THAT THIS PROPOSAL II IS IN THE BEST INTEREST OF THE
COMPANY AND ITS STOCKHOLDERS. THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR"
PROPOSAL II TO ASSURE FULL COMPLIANCE WITH THE RULES OF THE NASDAQ STOCK MARKET.
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PROPOSAL III
APPROVAL OF THE ISSUANCE OF SHARES OF COMMON STOCK UNDERLYING THE INVESTOR
PREFERRED STOCK
THE BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED AND IS SUBMITTING FOR
STOCKHOLDER APPROVAL A PROPOSAL TO AUTHORIZE THE ISSUANCE OF UP TO 10 MILLION
SHARES OF COMMON STOCK, ISSUABLE UPON CONVERSION OF THE INVESTOR PREFERRED STOCK
WHICH MAY BE ISSUED FROM TIME TO TIME IN 1998 IN CONNECTION WITH A PRIVATE
PLACEMENT OF UP TO $5 MILLION TO CERTAIN INVESTORS.
CERTAIN ASPECTS OF PROPOSAL III AND THE DETAILS OF THE RIGHTS OF THE INVESTOR
PREFERRED, AS SET FORTH IN THE CERTIFICATES OF DESIGNATION, ARE SUMMARIZED
BELOW. THE SUMMARY IS QUALIFIED BY REFERENCE TO THE FORMS OF CERTIFICATE OF
DESIGNATION WHICH IS ATTACHED AS APPENDIX D AND INCORPORATED HEREIN BY
REFERENCE.
ISSUANCE OF THE INVESTOR PREFERRED
In May 1998, the Board of Directors considered and in August 1998, the
Board of Directors accepted a proposal from Netvest and certain other parties,
including Netvest participants and affiliates, to acquire up to 100,000 shares
of a newly authorized class of convertible preferred shares ("Investor
Preferred") at a per share price of $50.00 per share. In December 1998, certain
related parties agreed to convert $5,000,000 payable to them into the 100,000
shares of Investor Preferred. If Proposal II is approved at the Meeting, the
holders, at their option, will be entitled to convert the Investor Preferred on
the basis of one hundred shares of restricted Common Stock for each share of
Investor Preferred. Thus, if fully converted, the holders would be entitled to
an aggregate of 10 million shares of Common Stock, on a fully diluted basis.
The Investor Preferred was offered on these terms because there was no
assurance that there would be sufficient authorized shares of the Company's
Common Stock to allow for conversion to shares of restricted Common Stock, and
no assurance of conversion or registration could be provided. Since the number
of shares into which the Investor Preferred is convertible exceeds 20% of the
outstanding Common Stock, under the new NASDAQ Rules as described below (see
"NASDAQ Matters"), stockholder approval is required for the issuance of the
Common Stock upon conversion of the Investor Preferred Stock. Until Proposal I
is approved, resulting in an increase in the number of authorized shares of the
Common Stock to 100 million shares, the conversion of the Investor Preferred is
limited.
The other terms and relative rights of the Investor Preferred are
described below (see "Description of Capital Stock of the Company"). If the
Investor Preferred is converted into Common Stock, the shares of Common Stock
will be issued as restricted shares but the holders will be entitled to pendent
registration rights in registration
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<PAGE> 31
statements filed by the Company, including a registration statement filed in
connection with any consolidation, merger or other combination of the Company
and Zulu-tek.
REQUIRED AFFIRMATIVE VOTE
SINCE THE COMPANY INTENDS TO CONTINUE TO COMPLY WITH THE NASDAQ RULES PENDING
ITS APPEAL OF THE DELISTING, THE AFFIRMATIVE VOTE OF A MAJORITY OF THE
OUTSTANDING VOTING POWER OF THE COMPANY'S COMMON STOCK IS REQUIRED TO ADOPT
PROPOSAL III SINCE UPON CONVERSION OF THE 1998(B) PREFERRED STOCK, THE COMPANY
WOULD BE REQUIRED TO ISSUE SHARES OF COMMON STOCK WHICH EXCEED 20% OF THE
CURRENTLY OUTSTANDING COMMON STOCK OF THE COMPANY.
THE BOARD OF DIRECTORS OF THE COMPANY CONCLUDED THAT THE TERMS OF THE INVESTOR
PREFERRED WERE FAIR TO AND IN THE BEST INTERESTS OF THE COMPANY AND ITS
STOCKHOLDERS. THE BOARD OF DIRECTORS BELIEVES THAT THIS PROPOSAL IS IN THE BEST
INTEREST OF THE COMPANY AND ITS STOCKHOLDERS. THE BOARD OF DIRECTORS RECOMMENDS
A VOTE "FOR" PROPOSAL III.
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<PAGE> 32
PROPOSAL IV
APPROVAL OF THE ISSUANCE OF SHARES OF COMMON STOCK
UNDERLYING THE 1998(B) CONVERTIBLE PREFERRED STOCK
THE BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED AND IS SUBMITTING FOR
STOCKHOLDER APPROVAL, A PROPOSAL TO AUTHORIZE THE ISSUANCE TO ZULU-TEK, FOR
SUBSEQUENT DISTRIBUTION TO ITS STOCKHOLDERS, OF 5,200,000 SHARES OF COMMON
STOCK, WHICH SHARES OF COMMON STOCK ARE ISSUABLE UPON CONVERSION OF THE 1998(B)
PREFERRED STOCK.
CERTAIN ASPECTS OF PROPOSAL IV AND THE DETAILS OF THE RIGHTS OF THE 1998(B)
PREFERRED STOCK, AS SET OUT IN THE CERTIFICATES OF DESIGNATION, ARE SUMMARIZED
BELOW. THIS SUMMARY IS QUALIFIED BY REFERENCE TO THE FORM OF CERTIFICATES OF
DESIGNATION WHICH IS ATTACHED AS APPENDIX E AND F AND INCORPORATED BY REFERENCE
HEREIN. THE SECURITIES ACQUISITION AND REORGANIZATION AGREEMENT IS ATTACHED AS
APPENDIX G.
THE SEPTEMBER TRANSACTIONS:
Pursuant to the terms of a Securities Acquisition and Reorganization
Agreement ("Reorganization Agreement") dated as of September 9, 1998, the
Company and Zulu-tek have entered into a series of transactions (the
"Reorganization") in which, among other things, the Company issued (i) 520,000
shares of the newly authorized 1998(B) Preferred Stock which is convertible into
5.2 million shares of the Company's Common Stock, but only after such conversion
is approved by the stockholders of the Company at the Annual Meeting; (ii)
agreed to issue up to 10,209 shares of 1998(C) Preferred Stock to replace the
Series C Preferred Stock held by Softbank Holdings, Inc., OzEmail Limited and
certain other former stockholders of Zulu Media, Inc.; and (iii) agreed to
provide up to $374,800 for Zulu-tek to fund the repurchase of some or all of
Zulu-tek's outstanding Series A Preferred Stock.(1)
In the Reorganization, the Company acquired all of the assets and
liabilities of Zulu-tek, including but not limited to all of Zulu-tek's
physical, tangible and intangible assets, and all of the issued and outstanding
capital stock of Echomedia Technologies, Inc, and Mediabank, Inc., which holds
the shares of Zulu Media, Inc. (formerly Softbank Interactive Marketing, Inc.,
or "SIM"). (2) The Reorganization was approved by the Board of Directors of the
Company, as well as by the Board of Directors of Zulu-tek, for Zulu-tek and as
shareholders of the intermediate subsidiary which holds the Zulu Media shares,
and by a majority of the holders of Zulu-tek Common Stock (acting by written
consent).
- --------
(1) In December, 1998, Zulu-tek issued an additional 1 million shares of
Zulu-tek Common Stock in connection with the December Investment; the proceeds
from the December Investment were contributed by Zulu-tek to the Company in
exchange for 1 million shares of Company Common Stock.
(2) Pursuant to the terms of the 1996 Shareholders Agreement among the
individual shareholders of Zulu Media, Inc. (formerly SIM), Zulu Media has
exercised its right to repurchase the shares of Zulu Media not acquired by
Mediabank in December, 1997. Zulu-tek has provided the individual shareholders
with the Zulu Media audited financial statements and notified them that the
shares were being repurchased for no additional consideration; as of the date
of this proxy, the individuals have not returned their stock certificates to
Zulu-tek.
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The Reorganization Agreement provides that if the conversion of the
1998(B) Preferred Stock is not approved by the stockholders of the Company prior
to January 31, 1999, either party shall have the right to terminate the
transaction. The Reorganization Agreement also provides that certain of the
Reorganization matters, including arrangements with respect to the 1998(C)
Preferred Stock, are to be completed as post-closing matters and, if all of such
matters are not completed, the parties have a right to terminate the
Reorganization on or before January 31, 1999 and to return the parties to their
status prior to closing.
The 1998(B) Preferred Stock is not entitled to vote. The Company is
obligated, if the conversion has been approved by its stockholders, to register
the Common Stock underlying the 1998(B) Preferred Stock for resale and to have
the registration statement effective, as promptly as feasible, after the
stockholder approval.
In connection with the Reorganization, the Board of Directors of Zulu-tek
will adopt a plan of liquidation, contingent upon the approval of the conversion
of the 1998(B) Preferred Stock and approval of the plan of liquidation by the
Zulu-tek stockholders. The plan of liquidation as currently contemplated would
require Zulu-tek to distribute the 5.2 million shares of the Company's Common
Stock, the 1998(C) Preferred Stock and the cash, if any, (its only assets) to
the Zulu-tek stockholders and to liquidate no later than February 28, 1999.
Before giving effect to the December Investment, the Company holds 1.2 million
shares (23%) of the approximately 5.2 million shares of outstanding Zulu-tek
Common Stock; accordingly, subject to the negotiations with the holders of the
Zulu-tek Series A Preferred Stock and the Zulu-tek Series C Preferred Stock (in
which the Company may limit its right to participate in the exchange and make
its allotment available to holders of such classes), Zulu-tek stockholders other
than the Company and the stockholders who made the December Investment will be
entitled to receive 4 million shares (77% of the 5.2 million shares) of the
Company's Common Stock upon the liquidation of Zulu-tek in exchange for the
Zulu-tek Common Stock currently held by them. In addition, the stockholders who
made the December Investment will be entitled to receive 1 million shares of
Company Common Stock, on the same share for share basis as the other Zulu-tek
shareholders.
If Proposal IV is approved and the Zulu-tek stockholders approve the
liquidation, the holders of Zulu-tek Common Stock will be deemed to become
holders of the Company's Common Stock on the liquidation date, without regard to
the date or dates the certificates currently representing shares of Zulu-tek
Common Stock are physically surrendered for exchange. After giving effect to a
10:1 reverse stock split by Zulu-tek effective on December 31, 1998, the
Zulu-tek stockholders, including the stockholders who made the December
Investment, will be deemed to have received one share of the Company's Common
Stock for each share of Zulu-tek Common Stock. When the Zulu-tek certificates
are surrendered for transfer or reissuance, the Zulu-tek certificate will be
deemed to represent one share of the Company's Common Stock for each share of
Zulu-tek delivered for transfer. New certificates will be issued in due course
after the shares of Zulu-tek Common Stock are tendered to Corporate Stock
Transfer, Inc. which has been designated as the Company's exchange agent ("the
Exchange Agent") for exchange or transfer.
No fractional shares of the Company's Common Stock will be issued and any
fractional shares created by such a conversion will be rounded to the next
largest whole number. The Exchange Agent will be provided with sufficient shares
of unissued Common Stock to hold in trust and to use for those additional shares
issued in lieu of the fractional shares created by the transaction. Based on
information available to the Company, there are approximately 300 different
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<PAGE> 34
stockholders of Zulu-tek and, therefore, 5.2 million shares of Common Stock
should be sufficient to accommodate the required additional shares. Also, to the
extent that a stockholder presents more than one certificate representing
Zulu-tek Common Stock, the Exchange Agent may aggregate the ownership before
calculating whether rounding is needed.
The Reorganization is intended to constitute a tax free reorganization to
Zulu-tek, the stockholders of Zulu-tek and to the Company under Sections 354 and
368(a)(1)(D) of the Internal Revenue Code of 1986 as amended. (See "Tax
Treatment of the Transactions Contemplated by Proposal I and Proposals II, III
and IV.")
REQUIRED AFFIRMATIVE VOTE
SINCE THE COMPANY INTENDS TO CONTINUE TO COMPLY WITH THE NASDAQ RULES PENDING
ITS APPEAL OF THE DELISTING, THE AFFIRMATIVE VOTE OF A MAJORITY OF THE
OUTSTANDING VOTING POWER OF THE COMPANY'S COMMON STOCK IS REQUIRED TO ADOPT
PROPOSAL IV. UPON CONVERSION OF THE 1998(B) PREFERRED STOCK, THE COMPANY WOULD
BE REQUIRED TO ISSUE SHARES OF COMMON STOCK WHICH EXCEED 20% OF THE CURRENTLY
OUTSTANDING COMMON STOCK OF THE COMPANY.
THE BOARD OF DIRECTORS OF THE COMPANY CONCLUDED THAT THE TERMS OF THE 1998(B)
PREFERRED STOCK WERE FAIR TO AND IN THE BEST INTERESTS OF THE COMPANY AND ITS
STOCKHOLDERS. THE BOARD OF DIRECTORS BELIEVES THAT THIS PROPOSAL IS IN THE BEST
INTEREST OF THE COMPANY AND ITS STOCKHOLDERS. THE BOARD OF DIRECTORS RECOMMENDS
A VOTE "FOR" PROPOSAL IV.
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DISCUSSION OF MATTERS RELEVANT TO
ACTION ON PROPOSALS II, III AND IV
BUSINESS
BACKGROUND
The March and September Transactions have provided the Company with access
to Zulu-tek's interactive sales and marketing expertise and provided an
opportunity to expand the Company's business potential. As noted in the
discussion of Proposal II, in early 1998, the Company recognized that it needed
to identify a broader business strategy that had the potential to provide
stockholder value over the next several years. The Zulu-tek opportunity was
identified as the strategy to be pursued and it resulted in the March
Transactions.
Since March, the Company and Zulu-tek and their respective subsidiaries
have been pursuing a strategic plan known as the "Zulu Group" to build on the
strategic similarities of the Company and Zulu-tek and to allow for the
refocusing of the business efforts of both entities, as appropriate.
THE INTERNET STRATEGY
Management believes that a coordinated Internet focus, coupled with the
acquisitions of e-commerce and online shopping enterprises, will allow the
resulting entity to effect a convergence under one umbrella of diverse services
focused specifically on the Internet as a communications and transaction medium.
Management believes the combined enterprise can attain a unique market position
to answer the full range of business demands that result from the exploding
commercial reliance on the Internet. The current management strategy is to
position the Company as a "one-stop" solution for companies that want to
generate commerce on the Internet and for potential users who want to remain
competitive in this environment by combining technology with e-commerce and
interactive advertising.
The Company has pursued its internet strategy through its relationship
with Zulu Media, an interactive advertising sales and marketing company, with
its headquarters in Los Angeles. Prior to the acquisition of Zulu Media,
formerly SIM, by Zulu-tek in December 1997, SOFTBANK Holdings, Inc., a unit of a
multi-billion international corporation with varied high-technology interests,
had invested more than $28 million in proprietary technology, sales force
development, infrastructure and brand development for SIM. A pioneer of
interactive advertising sales and marketing, Zulu Media and its predecessors
have handled advertising sales for many of the largest, most established,
well-branded sites on the World Wide Web (the "Web"). Zulu Media believes that
it has been a key element in the growth of the Web as an accepted and effective
advertising medium. Through its sales force and marketing, technical and
administrative personnel, Zulu Media now can offer its clients marketing
sophistication, customer service and access to key decision makers within the
advertising and Internet communities.
However, the transition from Zulu Media's prior status as an entity fully
funded, on an as-needed basis by a major enterprise, to a stand-alone enterprise
expected to generate capital,
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<PAGE> 36
revenues and operating cash flow through a self-sustaining management team has
presented significant challenges. In addition, over the months following the
acquisition of Zulu Media, it became apparent that information concerning the
business and financial status of the enterprise received at the time of the
transaction were optimistic with respect to sales and minimized the payables in
Zulu Media. As a result, during 1998, a significant portion of corporate
energies have been devoted to restructuring Zulu Media, to establishing a new
management, technology and marketing team, and to addressing the disruptions and
financial pressures which frequently result from new corporate ownership. Since
the March Transactions, the Company, Zulu Media, Zulu-tek and Laptop have been
working together to develop long term synergies for the Company.
Management believes this strategy is consistent with industry
developments. The Web has established itself as the fastest growing major
communications medium in history. At the end of 1997, less than five years after
its initial development, the Web has over 50 million users. By way of
comparison, cable television took ten years, broadcast television took 13 years
and radio took 38 years to reach the same size audience.(3) Approximately 49
million people currently use the Web, up 33% in the last year, and the number of
users is forecast to grow almost threefold to 116 million users in 2002.(4)
Paralleling the growth of the Web as a major communications, information
and entertainment medium has been its development as a significant, broad-based
advertising and promotion medium. Online advertising spending, including cash
and barter, has grown from a mere $55 million in 1995 to almost $1 billion
forecast for 1997. Spending tripled from 1996 to 1997 and substantial future
growth is expected, with a compound rate of 54% from 1996 to 2002, reaching $7.7
billion.
It had been estimated that total on-line retail sales revenues will grow
from $2.4 billion in 1997 to approximately $17.4 billion in 2001 with 1998
fourth quarter sales estimated at $3.5 billion and with each of the projected 43
million on-line consumers spending approximately $400 a year.(5) Early reports
of 1998 holiday sales indicate approximately $2.4 billion in Internet sales, an
amount that was consistent with the $3.5 billion quarterly estimate.(6)
For future planning, the Company is focused on three business areas: ad
sales, e-commerce and on-line shopping. To accomplish this plan, management
believes it will be necessary to be continually sensitive to industry
developments, to develop well managed in-house technical support and to
complement its current offerings through acquisition and strategic arrangements
with enterprises in e-commerce based strategies. In addition, since the entire
Internet and interactive industry is developing so rapidly, management believes
it will need to be extremely flexible in addressing market changes and
expectations.
- ----------
(3) Source: Morgan Stanley research.
(4) Source: Jupiter Communications.
(5) Source: Forrester Research, Inc.
(6) Source: USA Today, January 6, 1999.
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LAPTOP SOLUTIONS INC.
Laptop Solutions Inc. ("Laptop") is an operating subsidiary of the Company
offering a broad base of technical and management services to the portable
computing market. Historically, most of Laptop's revenues have been derived from
portable computer services. It offers repair services as an authorized warranty
provider for Toshiba, Compaq, Panasonic, IBM, and Texas Instruments, as well as
non-warranty repairs on most other portable computers. Laptop also upgrades
laptop/notebook hard drives, processors and RAM. Its asset management services
include managing, tracking, replacing, inventorying and logistical support of
its customers' portable computers as well as end-of-life retirement and
refurbishment programs. Pre-delivery preparation and integration services
include the installation and testing of accessories, peripherals and
enhancements from various manufacturers, and by performing custom software
loads, custom data loads and burn-in of hardware, Laptop sets up and delivers
portable computers to its customers' individual requirements. Laptop's Solutions
Engineering Division designs, engineers, manufactures, installs and sells
portable computer accessories, peripherals and enhancements for its customers'
specific field automation projects. Laptop's C/VAR2000TM anti-reflective film
application is designed to greatly improve screen readability in sun and direct
light conditions. Laptop currently resells product only at the component level
and as a part of a larger product or service offering. Since the March
Transactions, Laptop's operations have been consolidated to Irvine, California,
where it designs, manufactures, assembles, installs, integrates and fulfills
specialty accessories, peripherals and enhancements for portable computers.
NB ENGINEERING, INC.
NB Engineering, Inc., dba NB Digital Solutions ("NB Engineering") was
closed down in May 1998. After the March Transactions, management of the
Company, Zulu-tek and Zulu Media analyzed the capital requirements of bringing
the NB Engineering products and concepts to a commercial level and the relative
long term returns from the NB Engineering endeavors. They concluded that the
future prospects for NB Engineering did not warrant the needed investments,
particularly since this would require a commitment of funds that were expected
to generate more substantial returns from the interactive business plan being
pursued by Zulu-tek.
PRODUCTS AND SERVICES
ZULU MEDIA
Zulu Media currently offers two major products to advertisers: The
Foundation Buy Program and the Zulu Network (formerly the SOFTBANK Network). The
Foundation Buy Program was the first product to be developed and is composed of
specific, well-branded Web sites. In this capacity, Zulu Media has represented
such well-known sites as Netscape, Playboy, Lycos, Yahoo!, Hotmail, Mapquest,
LookSmart and WSI Intellicast. Advertisers seeking branding and targeted
audience reach in specific editorial contexts benefit from the extensive reach
and frequency of The Foundation Buy Program sites, which together at the end of
1997 offered over 1.0 billion impressions per month. In its representation of
The Foundation Buy Program Web sites, Zulu Media generally functions as the
exclusive third-party sales agent, the Web sites control their
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<PAGE> 38
available advertising inventory and pricing, and Zulu Media earns commissions on
all advertising run on the site. During 1997, the first full year of operations
for Zulu Media, it generated nearly $39 million in advertising for its clients,
representing an estimated 10 to 15 percent of all cash advertising on the Web.
The Zulu Network, which serves a complementary role to The Foundation Buy
Program, operates in a somewhat different manner. Zulu Network affiliates make
available to Zulu Media a specified minimum and maximum volume of impressions,
which Zulu Media then aggregates into categories of complementary content. There
are currently nine content categories including: Travel, Arts & Entertainment,
Finance, College, Business, Sports, etc. Network advertising revenue generated
by Zulu Media is shared with the individual Web sites on predetermined bases;
however, Zulu Media's share of Zulu Network revenue is generally significantly
greater than The Foundation Buy Program commission percentages.
While large, well-branded sites such as those in The Foundation Buy
Program generate sufficient audience traffic to attract significant advertising,
and some can even support their own direct sales forces, medium-sized Web sites
often lack both the critical mass of audience and the necessary relationships
with major advertisers to generate material advertising revenue. Networks, such
as the Zulu Network, offer a cost-effective advertising sales solution for these
Web sites. By joining with a group of other sites, a Web site increases its
reach and offers advertisers the ability to access a larger audience with a
package buy across multiple sites. Additionally, as a network affiliate, a
mid-sized site gains access to the advertising relationships, experience and
professional reputation of a firm such as Zulu Media which would otherwise be
unavailable or unaffordable.
The Network model provides significant advantages to advertisers as well
as to the affiliate sites which make up the Network. Whereas Foundation Buy
Program sites perform their own ad serving, scheduling, trafficking and
invoicing, Zulu Media's ad serving capabilities advertisers can create extremely
focused campaigns. For example, campaigns can be targeted to Internet users by
geographic region, by Internet browser type (Internet Explorer or Netscape), or
by operating system (Windows, Unix, etc). Ads can be delivered at specific times
of the day or on specific days of the week. Ads can also be served in a given
sequence, or can be limited to a specified number of times they are displayed to
a given Internet user. Zulu Media's online reporting system also allows
advertisers to monitor the performance of their campaigns on a real time basis,
allowing them to make changes virtually on the fly.
While precise data as to the relative proportion of network and direct
advertising sales is unavailable, the acceptance of the Zulu Network and the
growth of DoubleClick Network (Zulu Media's primary network competitor) indicate
that network advertising is likely to become an ever more significant component
of all Web advertising expenditures.
Zulu Network contracts are non-exclusive, and most are for one year,
although some are for six months with an automatic one-year renewal. In contrast
to The Foundation Buy Program, Zulu Media has complete discretion when selling
advertising space in the Network. Zulu Media has full control over the rates it
charges advertisers and decides which sites receive which ads at what frequency
and at what time. Generally, Zulu Media receives 40% of all media sales revenue
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<PAGE> 39
derived from network advertisements that run on the site, and performs all the
billing and collecting for the Network. Zulu Media collects from the advertiser
and pays the site in which the Zulu Network received the revenue.
In addition to the Zulu Network and Foundations programs, Zulu Media also
offers its proprietary Sesame Ads which are a "Beyond the Banner" range of ads
featuring motion, video text and streaming video similar to TV ads.
Zulu Media receives a commission for all advertising run on a client's
site. Commission rates are negotiated separately with each client, but usually
the client pays a set commission rate until a certain negotiated level of
revenue has been reached and a higher percentage thereafter. Billing is either
by the client Web site with a subsequent commission payment to Zulu Media on a
predetermined 30-day basis or Zulu Media performs all the billing, collection
and client remittances on its own.
The Company's management believes that most retail and entertainment
enterprises and most businesses will have an interactive strategy, but it is
impossible to predict the form of that participation. Also, with respect to the
Company's services, it appears that some clients, have initially outsourced
these services to the Company and other service providers and then, as the
magnitude of their Internet requirements increased or they decided to pursue
direct Internet strategy, they have elected to develop an in-house capacity. If
this decision is part of an industry trend, it will require the Company to
develop a strategy to continually replenish its customer base or, in the
alternative, to provide appropriate incentives or "turnkey" benefits to retain
its customer base.
RECENT DEVELOPMENTS
On December 22, 1998, the Company announced that it had acquired the
ownership interests in Brands For Less, L.L.C. a privately held Connecticut
based brand name discount on-line shopping company. Brands For Less, L.L.C.
offers consumers a comprehensive e-commerce solution that currently delivers in
one location, access to over sixty of the world's online specialty retailers at
discount prices across popular consumer product categories trade-named
"e-partments(TM)." Brands For Less, L.L.C. is dedicated to simplifying Internet
shopping for the consumer by delivering an intuitive, informative, and efficient
shopping experience that brings together specialty retailers and brand names at
a lower price in a secure, private, and reliable Internet environment. Brands
For Less, L.L.C. currently offers over 1,500 brands, and over 200,000 products.
This acquisition solidifies the Company's position in the online shopping arena
and will allow the Company and Brands For Less, L.L.C. to benefit from the cost
savings derived through in-house advertising placement.
The transaction was undertaken pursuant to a Securities Acquisition
Agreement to which Enhanced Services Company, Inc., its wholly owned newly
formed subsidiary, BFL Acquisition Co., Inc. a Delaware Corporation
(collectively the "Company"); Brands For Less, L.L.C., a Delaware Limited
Liability Company ("BFL") and the members of BFL were the principal parties. In
the transaction effective December 9, 1998, as modified on December 15 and 21,
1998, the Company acquired all of the interests of the members of BFL, with 90%
of such interests delivered at the closing and the balance to be delivered or
otherwise converted on or about February 1, 1999.
The total consideration for the transaction, as modified, is approximately
$35 million, including: (i) up to $6.50 million in cash to be paid directly to
the members (of which $1.6 million was paid and the balance is be paid in
February); (ii) a $25 million promissory note, the proceeds of which are payable
to the members of BFL in 2002, with interest at the rate of 10% per annum,
payable quarterly, commencing on March 31, 1999; (iii) $3 million to fund BFL
operations for the three months from November 15, 1998; and (iv) obligations to
pay investment banking and other fees and costs.
Members of BFL will be issued Warrants to acquire 3.2 million shares of
Company common stock and have received a commitment from the Company to deliver,
on or before December 31, 1999, Warrants to acquire 1.8 million additional
shares of common stock or substitute consideration. The Warrants are exercisable
for a three year period, commencing in February 2000, at an exercise price which
is the lesser of $4 per share or the market price of the Company's common stock,
on the exercise date. In connection with the transaction, BFL entered into a new
employment agreement with George Russell to serve as President and Chief
Executive Officer of BFL. (See "Transactions with Management and Others.")
To date, the Company has funded the Brands For Less transaction, in part,
through the issuance of convertible securities and Warrants in private
placements to accredited investors and offshore institutions. Since October,
$5.5 million has been funded and the Company has agreed to issue Warrants to
acquire up to 560,000 shares of Company common stock at an exercise price of
$1.00 per share, subject to certain market price adjustments at the date of
exercise. In addition, the proceeds of the Zulu-tek December Investment of $1
million were advanced to the Company.
On December 30, 1998 the Company also announced the formation of Group
Omni-net.com, a new web advertising subsidiary which will initially support the
on-line advertising needs of Brands For Less and the longer term e-commerce
strategies which the Company plans to pursue.
The Company intends to continue to pursue acquisition opportunities,
particularly in e-commerce and online shopping, as capital funding allows.
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<PAGE> 40
NASDAQ MATTERS
Effective February 23, 1998, and while the March Transactions were being
negotiated, the NASDAQ SmallCap Market ("NASDAQ") implemented additional new
corporate governance requirements. Rule 4310(c)(25)(H) of the NASDAQ Stock Rules
provides that stockholder approval is required if a plan or arrangement to issue
common stock (or securities convertible into or exercisable for common stock) if
the shares being issued are equal to twenty percent (20%) or more of the common
stock of the listed company, or twenty percent or more of the voting power,
outstanding before the issuance, and the issuance is for less than the greater
of book or market value of the relevant common stock. The March Transaction was
structured with the intent to satisfy these requirements and, as noted above,
since the Company intends to continue to comply with the NASDAQ rules pending
the appeal, Proposals II, III and IV are being submitted to the stockholders for
approval.
However, subsequent to the March Transactions, NASDAQ requested
information with respect to the structure and technical aspects of the March
Transactions. After meetings and further correspondence with NASDAQ , NASDAQ
indicated in August that it intended to delist the Company absent a showing that
it could comply with the listing requirements. A Hearing was held on October 16,
1998 at which the Company undertook to confirm its compliance. However, the
Company's Common Stock was delisted from the NASDAQ SmallCap Market on November
25, 1998.
The delisting resulted from the conclusion of a NASDAQ Listing
Qualifications Panel that, principally in connection with the March and
September Transactions, the Company had not complied with NASDAQ's shareholder
approval rule by issuing shares which resulted in a change in control. In
addition, the Panel concluded that the transactions constituted a "reverse
acquisition" which required the Registrant to meet the requirements of NASDAQ
for initial inclusion in accordance with NASD Marketplace Rule 4330(f), that the
terms given to Zulu-tek with regard to the Preferred Stock constitute a
violation of NASDAQ's voting rights policy, that the Company's public statements
regarding the transactions with Zulu-tek in March 1998 failed to fully disclose
the transactions and other matters, and that the Company does not currently meet
the net tangible assets requirement for either initial or continued inclusion.
The Company has formally appealed the delisting of its Common Stock and
has been advised that Company submission must be made by March 10, 1999 after
which the Review Council will consider the appeal. In the interim, the Company
will undertake to continue to comply with the NASDAQ rules. The Company's Common
Stock has been traded on the over-the-counter market on the [OTC Bulletin Board]
[and on the pink sheets of the National Quotation Bureau from November 25,
1998 until ].
As a result of the delisting of the Company's Common Stock, investors
could find it more difficult to dispose of, or to obtain accurate quotations as
to the price of the Company's Common
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Stock. In addition, the Company's Common Stock is subject to rules promulgated
under the Exchange Act applicable to penny stocks. The Securities Exchange
Commission (the "Commission") has adopted regulations that generally define a
"penny stock" to be an equity security that has a market price (as determined
pursuant to regulations adopted by the Commission) or exercise price of less
than $5.00 per share, subject to certain exceptions. By virtue of being listed
on the NASDAQ SmallCap Market, the Company's Common Stock was exempt from the
definition of "penny stock." However, following the delisting of the Company's
Common Stock from the NASDAQ SmallCap Market, the Company's securities became
subject to the penny stock rules that impose additional sales practice
requirements on broker-dealers who sell penny stocks to persons other than
established customers and accredited investors. Those penny stock rules may
affect the ability of broker-dealers to sell the Company's Common Stock and may
affect the ability of purchasers of Company's Common Stock to sell such
securities in the secondary market.
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CORPORATE STRUCTURE
The following charts reflect the corporate structure and relationship
between the Company and Zulu-tek before and after giving effect to the March and
September Transactions, including the liquidation of Zulu-tek.
[CHART]
STRUCTURE AFTER MARCH TRANSACTIONS
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[CHART]
STRUCTURE AFTER SHAREHOLDER MEETING*
* BRANDS FOR LESS, L.L.C. WILL ALSO BE A WHOLLY OWNED INDIRECT SUBSIDIARY OF
THE COMPANY AND GROUP OMNI-NET.COM WILL BE A WHOLLY OWNED SUBSIDIARY OF
THE COMPANY.
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<PAGE> 44
DESCRIPTION OF CAPITAL STOCK OF THE COMPANY
As reflected in Proposals I, II, III and IV, the transactions being
submitted to the Company stockholders involve the authorization of additional
capital and the conversion of several classes of capital stock. For clarity, the
following section briefly summarizes these classes and the treatment of the
classes in the Reorganization and within the Company.
COMMON STOCK
There were 5,854,908 shares of Common Stock of the Company issued and
outstanding on the Record Date, all of which are fully paid and non-assessable,
and 1,820,000 shares reserved for issuance. All of the shares of Common Stock
rank equally as to voting rights, participation in the distribution of the
assets of the Company on a liquidation, dissolution or winding-up and the
entitlement to dividends. Each share of Common Stock entitles the holder to one
vote. In the event of the liquidation, dissolution or winding-up of the Company
or other distribution of assets of the Company, the holders of the Common Stock
will be entitled to receive, on a pro-rata basis, all of the assets remaining
after the Company has paid its liabilities. At the Record Date, the Company had
Options and Warrants outstanding which could result in the issuance of up to
3,801,250 shares of Common Stock. The Options have been granted to officers,
directors and employees and the Warrants have been issued as payment for
services rendered or in connection with the placement of debt securities.
Warrants and Options are non-transferable and adjusted in the event of a share
consolidation or subdivision or other similar change to the Company's capital.
If Proposal I is approved, all of these shares will automatically be deemed to
be Common Stock of the resulting Delaware corporation.
Also, in connection with attracting senior executives and the Brands For
Less transactions and subject to approval of Proposal I to increase the
authorized capital and certain other deliveries and approvals, the Company would
be obligated to issue options and warrants to acquire up to 5 million additional
shares.
PREFERRED STOCK
The Board of Directors of the Company currently is authorized to issue,
without stockholder action, up to 5 million shares of Preferred Stock. Preferred
Stock may be issued in one or more series, the terms of which may be determined
at the time of issuance by the Board of Directors, and may include voting rights
(including the right to vote as a series on particular matters), preferences as
to dividends and liquidation, conversion and redemption rights and sinking fund
provisions. To date, the Board of Directors of the Company has authorized or is
committed to authorize four classes of Preferred Stock which are summarized
below:
8.6% Preferred Stock. Effective January, 1997, the Board of Directors of the
Company authorized the 8.6 % Cumulative Preferred Stock ("8.6% Preferred") of
which 8,000 shares were issued and were outstanding until September 21, 1998,
when the holders and the Company agreed to convert all such shares into an
aggregate of 1.6 million shares of Common Stock. As of the date of this
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<PAGE> 45
Proxy Statement, all of the shares have been converted and the 1,600,000 shares
of Common Stock have been issued. The number of shares was calculated on the
basis of the current market price of the Company's Common Stock and was adjusted
for the 2:1 stock split, for accrued and unpaid dividends and to reflect the
conversion adjustment which results from accelerating the two year conversion
provision of the 8.6% Preferred.
1998 Preferred. There are currently 1 million shares of 1998 Preferred Stock
outstanding, all of which are held by Netvest. The 1998 Preferred Stock will be
converted into 5,443,600 shares of Common Stock if Proposal I is approved. The
1998 Preferred Stock ranks junior to the Company's previously outstanding 8.6%
Preferred and otherwise ranks equally with all other capital stock of the
Company with respect to dividend rights and distributions of assets upon
liquidation, dissolution or winding up of the Company, whether voluntary or
involuntary, except that the 1998 Preferred Stock is entitled to a liquidation
preference of $5.00 per share plus any accrued and unpaid dividends, subject to
adjustments for certain change of control and normal corporate reclassifications
and to pro rata distributions in the event that assets are insufficient to fully
fund the liquidation preference.
Investor Preferred. On August 18, 1998, the Board of Directors authorized the
issuance and placement of up to 100,000 shares of Investor Preferred with a
stated value of $50 per share and a par value of $.001 per share, all of which
were issued in connection with the capitalization of $5,000,000 of notes
payable. The Certificate of Designation for the Investor Preferred was
subsequently amended and restated to correct an error in the stated conversion
rate of Investor Preferred into Common Stock. The Investor Preferred ranks
junior to the Company's previously issued and outstanding 8.6% Preferred and
otherwise ranks prior to all shares of Common Stock of the Company with respect
to dividend rights and distributions of assets upon liquidation, dissolution or
winding up of the Company, whether voluntary or involuntary. In the event of any
liquidation, dissolution or winding up of the Company, either voluntary or
involuntary, holders of Investor Preferred would be entitled to receive (a) cash
or non-cash assets valued at $1,000 per share, plus (b) an amount equal to
accrued and unpaid dividends, if any.
The Investor Preferred will be immediately convertible into Common Stock
upon the request of the stockholder on the basis of one (1) share of Investor
Preferred for one hundred (100) shares of Common Stock, subject to adjustment in
the event of stock splits, stock dividends, reclassifications or capital
transactions, as applicable. The conversion of the Investor Preferred is limited
to no more than twenty percent (20%) of the then outstanding shares of the
Company's Common Stock, without the prior approval by the stockholders, and by
the availability of sufficient authorized Common Stock. Thus, until Proposals I
and III are approved, the conversion rights are limited.
1998(B) Preferred. On September 9, 1998, the Board of Directors authorized
520,000 shares of 1998(B) Preferred Stock with a par value of $.001 per share
all of which were issued to Zulu-tek in connection with the September
Transactions. The 1998(B) Preferred Stock is the subject of Proposal IV and is
automatically convertible into 5.2 million shares of Common Stock of
ZuluGroup.com which in turn will be distributed in the Zulu-tek liquidation. All
shares of 1998(B)
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Preferred Stock which remain unissued as of December 30, 1998 shall be retired
and shall become authorized but unissued stock of the Company.
Currently, the 1998(B) Preferred Stock ranks junior and inferior to the
Company's previously issued and outstanding 8.6% Preferred Stock and otherwise
ranks prior to all shares of Common Stock of the Company with respect to
dividend rights and distributions of assets upon liquidation, dissolution or
winding up of the Company. In the event of any liquidation, dissolution or
winding up of the Company, either voluntary or involuntary, holders 1998(B)
Preferred Stock would be entitled to receive (a) cash or non-cash assets equal
to the value of the 1998(B) Preferred Stock, on an as converted basis, plus (b)
an amount equal to accrued and unpaid dividends, if any. Conversion of the
1998(B) Preferred Stock is subject to adjustment in the event stock splits,
stock dividends, reclassifications or capital transactions, as applicable. Also,
in the event there is an insufficient amount of authorized but unissued Common
Stock available to cover the conversion of any shares of 1998(B) Preferred
Stock, conversion of such shares shall be deferred until the stockholders of the
Company have approved an increase in the authorized but unissued shares of the
Company's Common Stock.
1998(C) Preferred. The Board of Directors expects to authorize and issue 1998(C)
Preferred Stock ("1998(C) Preferred Stock"), the terms of which shall be
determined after negotiations between the Board of Directors and the holders of
Zulu-tek Series C Redeemable Preferred Shares, to whom such 1998(C) Preferred
Stock shall be distributed in connection with the liquidation of Zulu-tek. The
Company is negotiating terms and conditions which would allow the 1998(C)
Preferred Stock to be reflected as equity capital and not as a debt obligation
of the Company on the financial statements of the Company under current
accounting principles but there can be no assurances that the holders will agree
to such revised terms.
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<PAGE> 47
CAPITALIZATION AFTER GIVING EFFECT TO THE PROPOSALS
The following table sets forth the Common Stock of the Company which will
be outstanding and the percentage ownership of the Company's stockholders as of
the Record Date if the Stockholders approve only one of Proposals II, III and IV
or, in the alternative, if the Stockholders approve all of Proposals II, III and
IV. The table assumes that the Company will exercise its rights of conversion
with respect to the 1998 Preferred, that the holders of the Investor Preferred
will convert all of the shares and that the 1998(B) will be automatically
converted in accordance with its terms:
<TABLE>
<CAPTION>
Specified Proposal is approved
-----------------------------------------
Percent (%)
Held By
Company
Shares Outstanding(1) Stockholders
------------------ ------------
<S> <C> <C>
Proposal I is approved 7,674,908 100%
Proposal II is approved 13,218,520 58.06%
(5,543,612 shares issued)
Proposal III is approved 17,674,908 43.42%
(10,000,000 shares issued)
Proposal IV is approved 12,874,908 59.61%
(5,200,000 shares issued)(2)
All Proposals are approved 28,418,520 27.01%
</TABLE>
- ---------------
(1) Reflects Common Stock outstanding at the Record Date or issuable within
sixty (60) days thereof at the option of the holder.
(2) Excludes the 1 million shares of Common Stock to be issued in connection
with the December Investment.
Accordingly, if Proposals II, III and IV are approved and all Preferred Stock is
converted into Common Stock, and excluding the impact of the December
Investment, the ownership interest of the Company's current stockholders will be
reduced from 100% to 27%, and net book value per share of Common Stock will be
reduced from $0.02 to ($0.19); after giving effect to the 1 million shares of
Company Common Stock to be issued in connection with the December Investment,
the ownership of the Company's current stockholders will be reduced from 100% to
26% and the net book value per share will be reduced from $0.02 to ($0.15).
IMPACT IF MAJORITY OF SHAREHOLDERS DO NOT APPROVE PROPOSALS
As described in the Summary, if a majority of the Company stockholders
do not approve Proposal I, the other Proposals cannot be fully implemented since
the Company currently is authorized to issue 15 million shares of Common Stock
and 5,854,908 shares were issued, 1,820,000 shares were reserved for immediate
issuance and there were 3,801,250 outstanding options and warrants at the Record
Date.
If one or more of Proposals II, III or VI is not approved then the
applicable class of preferred stock would not be converted and Netvest, as the
holder of the 1998 Preferred Stock, the various holders of the Investor
Preferred, and Zulu-tek as the holder of the 1998(B) Preferred Stock,
respectively, would, as applicable, continue to hold non-voting preferred stock
until stockholder approval was received or an alternative arrangement was
implemented.
Also, the Reorganization with Zulu-tek and the distribution to
shareholders of the Enhanced Common Stock would be jeopardized since Zulu-tek
would be holding shares of unregistered preferred stock which would not be
convertible into Enhanced Common Stock. As shown above in "Capitalization After
Giving Effect to the Proposals", unless the specified Proposals are approved at
the Annual Meeting, the Common Stock issuable on conversion would not be issued
and the outstanding Common Stock of the Company would remain at the indicated
levels.
FORWARD LOOKING STATEMENTS
The business discussion and financial information contained in the Proxy
Statement include forward-looking statements and financial projections that are
based on the current assumptions of the Company's management and their estimates
of future performance and economic conditions as well as the Company's and
Zulu-tek's interpretations of those assumptions and estimates. Such statements
are made in reliance upon the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995. Shareholders of the Company should be aware that
any forward-looking statements are subject to risks and uncertainties that may
cause actual results and future trends to differ materially from those
projected, stated, or implied by the forward-looking statements.
39
<PAGE> 48
SELECTED FINANCIAL AND OPERATING DATA
The following tables set forth (i) selected historical financial and
operating data for the Company for the five years ended November 30, 1997 and
for the nine month periods ended August 31, 1997 and 1998, (ii) selected
historical financial and operating data for Zulu-tek and its predecessors for
the five years ended December 31, 1997 and for the eight month periods ended
August 31, 1997 and 1998, and (iii) selected pro forma consolidated unaudited
financial and operating data for such five year periods for the Company after
giving effect to the March and September Transactions. The selected data for the
Company for the five years ended November 30, 1997 have been obtained from the
Company's audited consolidated financial statements. The selected data for
Zulu-tek and its predecessors for the five years ended December 31, 1997 have
been obtained from the audited financial statements of Zulu-tek and its
predecessors, as appropriate. The selected financial and operating data for the
Company and Zulu-tek for the nine months and eight month periods, respectively
ended August 31, 1997 and 1998 have been obtained from unaudited financial
statements of each of the Company and Zulu-tek, and include, in the opinion of
the respective management of each company, all adjustments (consisting of normal
recurring adjustments) necessary to present fairly the results for such periods.
This selected financial and operating data should be read in conjunction with
the separate consolidated financial statements and notes thereto of the Company,
and Zulu-tek and its predecessors, and management discussions and analyses,
which are included as part of this Proxy Statement. See Appendices H, I, J, K
and L for financial statements of Zulu-tek and its predecessors. This historical
and pro forma selected financial and operating data is not necessarily
indicative of the results to be expected if the Proposals are approved.
40
<PAGE> 49
ENHANCED SERVICES COMPANY, INC.
SELECTED HISTORICAL FINANCIAL AND OPERATING DATA
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDED Periods Periods
ended ended
----------------------------------------------------------------- August 31, August 31,
1993 1994 1995 1996 1997 1997 1998
----------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Total Operating $ 1,655,267 3,445,526 6,210,996 5,051,296 5,689,074 4,533,411 2,369,305
Revenue
Operating expense 1,412,561 2,716,306 6,650,800 6,074,029 7,315,054 5,701,028 5,132,526
Operating income 242,706 729,220 (439,804) (1,022,733) (1,625,980) (1,167,617) (2,763,221)
Other 9,819 24,673 (20,830) (47,331) 629,315 747,619 (425,895)
income(expense)
Income taxes 82,481 249,137 0 0 0 0 0
Net income $ 170,044 504,756 (460,634) (1,070,064) (996,665) (419,998) (3,189,116)
Provision for 0 0 0 0 63,067 45,867 51,600
preferred
dividends
Net Income(Loss)
to common
Shareholder $ 170,044 $ 504,756 $ (460,634) $(1,070,064) $(1,059,732) $ (465,865) $(3,240,716)
Net Income per share:
Primary/Fully $ 0.24 $ 0.64 $ (0.51) $ (1.01) $ (0.95) $ (0.41) $ (1.05)
diluted
Weighted average number
shares outstanding 713,267 787,800 900,492 1,058,480 1,114,332 1,123,174 3,096,408
Cash/Equivalents 774,940 1,095,426 355,138 156,432 262,510 425,662 63,059
Total Assets 1,109,592 2,081,694 4,384,262 3,962,563 2,690,419 3,326,518 7,587,072
Long Term Debt 0 0 693,988 623,422 0 3,676 2,266,249
Stockholders Equity 1,010,391 1,515,147 2,524,708 1,722,857 1,496,050 2,084,538 3,177,483
</TABLE>
41
<PAGE> 50
ZULU-TEK, INC
SELECTED HISTORICAL FINANCIAL AND OPERATING DATA
<TABLE>
<CAPTION>
Periods Periods
FOR THE FISCAL YEAR ENDED ended ended
------------------------------------------------------------------------ August 31, August 31,
Income Statement Data: 1993 1994 1995 1996 1997 1997 1998
------------ ------------ ------------ ------------ ------------ --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Total Operating Revenue $ -- $ -- $ -- $ 4,508,018 $ 6,407,449 7,363 $ 1,749,287
Operating expense 100 100 807 9,673,049 26,325,906 408,382 11,545,309
Operating income (100) (100) (807) (5,165,031) (19,918,457) (401,019) (9,796,022)
Other income(expense) -- -- -- -- (141,786) (28,357) (71,471)
Income taxes -- -- -- -- -- -- --
Net income $ (100) (100) (807) (5,165,031) (20,060,243) (28,357) (9,867,493)
Provision for -- -- -- -- -- -- --
preferred dividends
Net Income(Loss)
to common shareholder $ (100) $ (100) $ (807) $ (5,165,031) $(20,060,243) (28,357) $ (9,867,493)
Net Income per share:
Primary/Fully $ (0.04) $ (0.04) $ (0.19) $ (817.51) $ (9.25) (0.01) $ (4.55)
diluted
Weighted average number
shares outstanding 2,318 2,318 4,318 6,318 2,167,609 2,167,609 2,167,609
500:1 reverse split,
convert 10:1
Cash/Equivalents 0 0 0 14,689 566,726 3,970 851
Total Assets 0 0 14,689 22,683,332 72,864 13,679,968
Long Term Debt 0 0 -- 10,209,000 -- 10,209,000
Stockholders Equity 18,197 18,097 17,290 11,428 (2,097,312) (211,284) (12,029,633)
</TABLE>
42
<PAGE> 51
ENHANCED SERVICES COMPANY, INC.
SELECTED PRO FORMA CONSOLIDATED UNAUDITED FINANCIAL AND OPERATING DATA
<TABLE>
<CAPTION>
Periods Periods
FOR THE FISCAL YEAR ENDED ended ended
---------------------------------------------------------------------- August 31, August 31,
Income Statement Data: 1993 1994 1995 1996 1997 1997 1998
----------- ----------- ------------ ------------ ------------ --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Total Operating $ 1,655,267 $ 3,445,526 $ 6,210,996 $ 9,559,314 $ 12,096,523 4,540,774 $ 4,088,248
Revenue
Operating expense 1,412,661 2,716,406 6,651,607 $ 15,747,078 $ 39,795,576 6,109,410 $ 15,749,843
Operating income 242,606 729,120 (440,611) (6,187,764) (27,699,053) (1,568,636) (11,061,595)
Other income(expense) 9,819 24,673 (20,830) $ (47,331) 487,529 719,262 272,894
Income taxes 82,481 249,137 0 0 0 0 0
Net income $ 169,944 504,656 (461,441) (6,235,095) (27,211,524) (849,374) (11,388,701)
Provision for 0 0 0 0 63,067 45,867 51,600
preferred dividends
Net Income(Loss)
to common shareholder $ 169,944 $ 504,656 $ (461,441) $ (6,235,095) $(27,274,591) (895,241) $(11,440,301)
Net Income per share:
Primary/Fully diluted $ 0.24 $ 0.64 $ (0.51) $ (5.86) $ (8.31) (0.27) $ (0.90)
Weighted average number
shares outstanding 715,585 790,118 904,810 1,064,798 3,281,941 3,290,783 12,651,256
Cash/Equivalents 774,940 1,095,426 355,138 171,121 829,236 429,632 84,829
Total Assets 1,109,592 2,081,694 4,384,262 3,977,252 25,373,751 3,399,382 16,793,028
Long Term Debt 0 0 693,988 623,422 10,209,000 3,676 10,209,000
Stockholders Equity 1,028,588 1,533,244 2,541,998 1,734,285 (601,262) 1,873,254 (5,593,138)
</TABLE>
43
<PAGE> 52
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF
OPERATIONS OF THE COMPANY FOR THE NINE MONTH PERIODS ENDED AUGUST 1998 AND 1997.
Overview
The Company historically, through it's Laptop subsidiaries, provided
certain services to the portable computing community. The Company, in a move to
consolidate and eliminate duplicate facilities moved all it's operations to
Irvine, California. Because of the consolidation of the Laptop Solutions
entities, the following discussion has been combined into one presentation and
will not be entirely comparable. The Company plans to concentrate more of its
efforts in the custom engineering products and services. The Company, until May
1998, offered digital video compression and DVD-Video services through it's NB
Digital Solutions subsidiary in Crofton, Maryland. NB Digital sustained
substantial losses since its acquisition in 1995 and in view of the investment
required to continue its operation and the uncertainty of achieving
profitability, the Company ceased NB Digital operations in May, 1998 and the
operating results are reflected as "Discontinued" in the following discussions.
The Company's third fiscal quarter ended August 31, 1998 and the nine-month
comparable period of 1997 are referred to in the discussions below as 1998 and
1997, respectively.
Combined operations of Laptop Solutions - California & Texas
Laptop Solutions - Results of operations for nine month period ended August
31, 1998 and 1997 are summarized and discussed below: The discontinued operation
of NB Digital Solutions, Inc. has been presented as other expense titled
"Discontinued operations"
<TABLE>
<CAPTION>
Change
1998 1997 %
----------- ----------- -----------
<S> <C> <C> <C>
Sales $ 2,369,305 $ 3,598,980 (34)%
----------- ----------- -----------
Cost of sales
(exclusive of depreciation
and salaries) 1,009,944 1,833,976 (45)%
----------- ----------- -----------
Gross Profit 1,359,361 1,765,004 (23)%
Operating &
Other Expenses 3,116,830 2,389,489 30%
----------- ----------- -----------
Net Operating Income (Loss) (1,757,469) (624,485) (181)%
Other Income 2,004 96,717 (97)%
----------- ----------- -----------
Net Income (Loss) $(1,168,288) $ (680,991) (72)%
----------- ----------- -----------
Discontinued Operation $(1,433,651) $ (611,338) (134)%
Net Loss $(3,189,116) $ (419,998) (659)%
=========== =========== ===========
</TABLE>
Sales: Revenue from upgrade and enhancement sales decreased $772,831 from
$1,394,867 in 1997 to $622,036 in 1998, a decrease of 55%, while the per unit
revenue and volume continue to decline as a result of competitive pressure and
technological change. Revenue from Compatibility Plus(TM) sales, the
44
<PAGE> 53
removable hard disk pak, decreased $205,780 to $71,790 in 1998, from $277,570 in
1997 as demand for the pak continues to decline. Revenues from repair and
contract maintenance services decreased from $683,296 in 1997 to $496,655 in
1998 from $1,179,951 in 1997, a decrease of 57%. Management believes the
decrease is a result of certain manufacturers extending the warranty period to
three years from one year and reducing the warranty reimbursement to the service
provider. Also, certain manufacturers have begun to compete with its service
provider for the repair business by opening depot repair facilities. Revenues
from engineered products that began shipping in the first quarter of 1998
amounted to $685.357. Demand for the product, a wireless modem that was custom
designed with Panasonic Personal Computer Company is expected to remain strong
through the third and fourth quarter of 1998. Revenue from CVAR 2000(TM)
decreased $132,250 in 1998 to $494,467 from $625,717 in 1997 as demand for the
anti-reflective film application declined.
Cost of Sales: Cost of sales of upgrade, enhancements, declined $398,090 in 1998
from $733,153 in 1997, a 54% decrease that was primarily the result of declining
demand. Cost of sales for the removable hard disk pak declined $121,794 to
$38,074 in 1998 from $159,868 in 1997, a decline of 76% as the hard disk pak
sales decline. Cost of sales of repair and contract services decreased $348,773
in 1998 to $159,113 from $507,886, a decrease of 69% as a result of declining
demand and competition. Cost of sales of CVAR 2000 decreased $160,586 from
$346,765 in 1997 to $186,179 in 1998 as a result of declining sales. All other
direct cost of sales, primarily freight expense, decreased $132,996 to $42,007
in 1998 from $175,003 in 1997, primarily as a result of the decline in the
volume of shipments.
Operating and Other Expenses: Salaries and related payroll cost in 1998 amounted
to $839,617 as compared to $1,118,022 in 1997, a decrease of 26%. The decrease
in personnel and related cost was primarily due to consolidating the Houston and
New Jersey facility to Irvine California. Insurance cost in 1998 amounted to
$86,552 as compared to $101,807 in 1997, a decrease of 15%. The decrease was
primarily the result of the facility consolidation. Advertising costs declined
$154,439 from $176,719 in 1997 to $22,280 in 1998, a decrease of 87%, due to
cancellation of ineffective advertising. Computer expense decreased $48,761 in
1998 to $39,945 from $88,706 in 1997 as a result of increasing the computer
network capacity and capabilities in 1997. Laptop Solutions-Texas was charged
rent for its office and warehouse space by the Company of $131,003 for 1997 when
the Company owned the building. The building was sold in August 1997 and Laptop
leased its existing space from the purchasers of the building for the then
market rate of $203,992, an increase of $72,989. The cost of the Houston lease
continued through August 1998. Also, the California facility size was increased
to accommodate the production of engineered products and CVAR 2000, resulting in
additional rent of $49,738 in 1998 to $113,516 from $63,778 in 1997.
Professional fees increased $61,952 to $114,115 in 1998 from $52,163 in 1997,
primarily as a result of increased legal and auditing cost. Consulting fees in
the amount of $150,000 in connection with the exercise of warrant, were expensed
in 1998.
Discontinued Operations: NB Digital Solutions operations were discontinued in
May 1998. Sales declined $628,510 in 1998 to $305,921 from $934,431 in 1997 and
gross profit from such sales declined $604,227 to $202,534 for the period.
Operating expenses amounted to $635,383 in 1998, a decrease of $628,213 from
$1,263,598 in 1997. Goodwill in the amount of $657,688 and loss on disposition
of assets amounted to $143,112. Cost of discontinuing the operation has been
estimated to be $200,000 and such amount has been reserved for that purpose.
Liquidity and Capital Resources
At August 31, 1998, the Company had stockholders' equity totaling
$3,177,483, as compared to $1,496,050 at November 30, 1997, an increase of
$1,681,433. The increase of $1,681,433 resulted from additional capital, offset
by operation losses. The capital included the issuance of 220,000 pre-dividend
common shares at the then market price of $4.75, and issuance of 1,000,000
shares of preferred stock, stated value of $3.00 per share for an aggregate of
$4,045,000. In addition, during the quarter: 75,000 pre-dividend common stock
purchase warrants at $2.00 per share were exercised pursuant to a consulting
agreement with Kennedy Miles and Associates resulting in gross proceeds of
$300,000 before a discount of $150,000 charged to current operations; a 50,000
pre-dividend common stock purchase warrants at
45
<PAGE> 54
$4.00 per share were exercised pursuant to a consulting agreement with Richard
A. Fisher resulting in net proceeds of $200,000; Creative Business Strategies
exercised 7,500 pre-dividend common stock purchase warrants at $2.00 per share
and 85,000 post-dividend common stock purchase warrants at prices from $1.00 to
$2.00 per share with net proceeds of $138,875. Wall Street Financial exercised
8,500 pre-dividend common stock purchase warrants at $3.00 per share and 83,000
post-dividend common stock purchase warrants at prices of $1.50 to $2.00 per
share resulting in net proceeds of $175,000; and, shares were issued pursuant to
the 1992 Stock Option Plan resulting in proceeds of $29,389. The loss for the
nine-month period ended August 31, 1998 amounted to $3,189,116.
The Company's working capital was $1,270,363 as compared to $337,799 on
November 30, 1997, a decrease of $481,130. The decrease was primarily the result
of a $2,293,756 increase in receivables and a $444,439 reduction in cash and an
increase of $849,805 in accounts payable and short-term notes.
The Company sought up to $50,000,000 in private placement and equity during
the second and third quarters but the financing was not successful, primarily
because the market did not respond to a placement premised on a combined
business plan by two separate entities. Consequently, as a result of the
incomplete financing and the advances to Zulu-tek, as well as costs of
consolidating the Laptop facilities, during the third quarter, the Company has
deferred certain payables, pending proceeds of additional funding being pursued
by the Company. On September 18, 1998, the Company entered into a letter of
intent for a private placement of up to $20,000,00 in preferred equity, of which
$5.5 million has been funded. The balance is expected to be funded during the
first and second quarter of 1999 and will be applied, along with operating funds
to the Company's operating obligations and to implement the combined business
plan and other capital needs. In that connection, effective September 14, 1998,
the Company announced the acquisition of the assets and certain liabilities of
Zulu-tek, Inc. in exchange for preferred stock to be converted to 5,200,000
shares of common stock, after shareholder approval at the shareholders meeting.
The Company has historically relied on cash from equity and debt funding
and the exercise of options and warrants to supplement its operating funds.
Management believes that revenue generated from operations, along with funds
generated by financing activities including the proceeds from the current
private placement of equity and debt securities will be sufficient to meet
Company needs and to support the business and strategic plan being undertaken by
the Company for at least the next 12 months. However, there can be no assurance
that anticipated operating results will be achieved or that the current private
placement of funds will be completed on favorable terms and at the levels
required. If the current fundings are not completed or are completed at levels
or on terms which do not provide sufficient funding on acceptable terms,
management will be required to modify Company strategy.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF ZULU-TEK FOR THE EIGHT MONTH PERIODS ENDED AUGUST 1998 AND 1997
The eight month periods ended August 31, 1997 and August 31, 1998 are referred
to as 1997 and 1998 respectively.
Revenue increased from $5,259 in 1997 to $1,748,287 in 1998, an increase of
33,000%. Advertising and Marketing increased from $17,407 in 1997 to $215,470 in
1998, an increase of 1,100%. Rent increased from $12,519 in 1997 to $281,904 in
1998, an increase of 2,150%. Salaries increased from $110,628 in 1997 to
$1,903,174 in 1998, an increase of 1,620%. Travel increased from $4,991 to
$470,302 in 1998, an increase of 9,320%. All other operating expenses increased
from $130,867 in 1997 to $8,673,459 in 1998, an increase of 6,520%.
Liquidity and Capital Resources
At August 31, 1998, Zulu-tek had stockholders' equity totaling $(11,540,905) as
compared to
46
<PAGE> 55
$(2,097,312) at December 31, 1997, a decrease of $9,062,434. This decrease
primarily resulted from a net loss of $9,796,022.
The Company secured a private placement funding commitment of $20,000,000
and plans to fund the short fall in Zulu-tek's liquidity. Management plans that
income generated from operations, along with the private placement funds, will
be sufficient to fund Zulu-tek's operations. However, should the funding
commitment not materialize, which can not be assured, additional funds will be
required for operations. Such funds will need to be provided through additional
debt financing and/or equity capital, and there can be no assurance that such
funds will be available, or, if available, on favorable terms.
47
<PAGE> 56
PRO FORMA EFFECT OF THE MERGER AND THE MARCH AND SEPTEMBER TRANSACTIONS
The following sets forth the effect, on a pro forma basis, at August 31,
1998, of Proposals I, II, III and IV. Financial statements for Zulu-tek and its
consolidated subsidiaries and for Zulu-Media are included as Appendices H, I,
J, K and L.
ZULUGROUP.COM, LTD.
PRO FORMA CAPITALIZATION TABLE
(Unaudited)
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK ADDITIONAL
----------------------------- ----------------------------- PAID-IN
NO./SHARES(1) AMOUNT NO./SHARES(1) AMOUNT CAPITAL
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Balance at August 31, 1998 1,008,000 $ 3,000,008 3,207,656 $ 3,209 $ 5,170,806
PRO FORMA TRANSACTIONS:
Conversion of 1998 Preferred to Common Stock(2) (1,000,000) (3,000,000) 5,443,600 5,444 2,994,556
September, 1998 issuance of 1998(B)
Preferred in exchange for all the assets
and liabilities of Zulu-tek and 520,000
September, 1998 issuance of 1998(C)
Preferred in exchange for Series C
Preferred Stock of Zulu-tek(4) (756,078)
Issuance of Common Stock underlying
Investor Preferred(3) 10,000,000 10,000 4,990,000
Conversion of 1998(B) Preferred Stock
to Common Stock(5) (520,000) 5,200,000 5,200 (5,200)
Dividends(7)
Additional paid in Capital(7) (8,243,600)
8,243,600
Shares returned to the Company and
cancelled(5) (1,200,000) (1,200) 1,200
Net loss for the eight month period
ended August 31, 1998
------------ ------------ ------------ ------------ ------------
Balance 8,000 $ 8 22,651,256 $ 22,653 $ 12,395,284
============ ============ ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
ACCUMULATED
(DEFICIT) TOTAL
------------ ------------
<S> <C> <C>
Balance at August 31, 1998 $ (4,996,540) $ 3,177,483
PRO FORMA TRANSACTIONS:
Conversion of 1998 Preferred to Common Stock(2)
September, 1998 issuance of 1998(B)
Preferred in exchange for all the assets
and liabilities of Zulu-tek and
September, 1998 issuance of 1998(C)
Preferred in exchange for Series C
Preferred Stock of Zulu-tek(4) (3,147,050) (3,903,128)
Issuance of Common Stock underlying
Investor Preferred(3) 5,000,000
Conversion of 1998(B) Preferred Stock
to Common Stock(5)
Dividends(7)
Additional paid in Capital(7)
Shares returned to the Company and
cancelled(5)
Net loss for the eight month period
ended August 31, 1998
(9,867,493) (9,867,493)
------------ ------------
Balance $(18,011,083) $ (5,593,138)
============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
48
<PAGE> 57
NOTES
(1) Proposal I, if approved, would change the name of Enhanced Services
Company, Inc. to ZuluGroup.com, Ltd., transfer the organizational
jurisdiction of the Company from Colorado to Delaware, establish as the
authorized capital; 100 million shares of $.001 par value Common Stock and
25 million shares of preferred stock.
(2) Proposal II, if approved, would convert the 1 million shares of 1998
Preferred Stock into 5,443,600 shares of Common Stock so that Netvest
would own a total of 5,883,600 shares of Company Stock or 20% of the
outstanding Common Stock after giving effect to implementation of
Proposals I, II, III, and IV and the issuance of Common Stock in
connection with the December Investment. Based on such ownership, Netwest
would be deemed to be an affiliate of the Company at that time.
(3) Proposal III, if approved, would authorize the issuance of 10 million
shares of Common Stock underlying the Investor Preferred. Since certain
related parties have converted a total of $5,000,000 of the amounts owed
to them into Investor Preferred, the Pro Forma gives effect to the
proposed issuance.
(4) Pursuant to the terms of a Securities Acquisition and Reorganization
Agreement dated September 7, 1998, the Company and Zulu-tek have entered
into a series of transactions in which among other things, the Company
issued 520,000 shares of newly authorized 1998 (B) Preferred Stock which
is convertible into 5.2 million shares of the Company's common stock,
subject to stockholder approval. In the reorganization, the Company
acquired all the assets and liabilities of Zulu-tek. The Company also
agreed to issue 10,209 shares of 1998(C) Preferred Stock to be
distributed on a one for one basis to the holders of the Series C
Preferred Stock in connection with the liquidation of Zulu-tek, Inc. Since
the 1998(C) Preferred Stock is mandatorily redeemable, it is not
classified as equity under current [SEC] accounting standards. The Company
has entered into discussions with the holders of the Zulu-tek Series C
Preferred Stock to eliminate the mandatory redemption features (which are
currently contained in both the Series C Preferred Stock and the 1998(C).
(5) Proposal IV, if approved, would authorize the issuance of 5.2 million
shares of common stock, which shares of common stock are issuable upon the
conversion of the 1998 (B) preferred stock. The 5.2 million would be
distributed to Zulu-tek shareholders.
(6) The 8,000 shares of 8.6% preferred shares recorded as $8 in preferred
stock and 199,992 in additional paid-in capital are convertible into 1.6
million common shares. The pro forma does not show the effects of this
conversion because it had not been converted as of August 31, 1998, and
the conversion is not directly attributable to the business combination
transaction.
(7) Dividends in the amount of $8,243,600 have been shown to give effect to
the favorable conversion factors related to the preferred stock. Since the
Company has no accumulated retained earnings, the dividends have been
charged to additional paid-in capital. The offset to the favorable
conversion factors is additional paid-in capital. Therefore the entry has
no net effect other than to disclose the favorable conversion terms.
The effect of the favorable conversion terms were computed as follows:
8.6% Preferred
The 8.6% preferred was issued for $800,000 ad was originally convertible
into 800,000 shares of common stock which was market value at that time.
During September, 1998 the conversion terms were renegotiated to be
convertible into 1,600,000 shares when the market value was $1.00 per
share resulting in a favorable conversion amount of $800,000.
1998 Preferred
There are 1,000,000 shares of 1998 preferred outstanding with a carrying
value of $3,000,000. These preferred are convertible into 5,443,600 shares
of common resulting in a favorable conversion factor of $2,443,600 based
on a $1.00 per share market value for the common stock.
Investor Preferred
In December, 1998, 100,000 shares of Investor Preferred were issued for
$5,000,000 consideration for forgiveness of advances made to the Company
and amounts payable by the Company. The preferred is convertible into
10,000,000 shares of common stock. The market price of the common stock
was $1.00 at the time of issuance resulting in a favorable conversion
factor of $5,000,000.
1998(B) Preferred
The 520,000 shares of 1998(B) Preferred was issued in September, 1998 for
the acquisition of the assets and liabilities of Zulu-tek and are
automatically convertible into 5,200,000 shares of common upon shareholder
approval. Since the September transaction is a reverse acquisition and the
preferred shares are automatically convertible into common upon
shareholder approval, the shares are essentially common stock equivalents
and are not subject to favorable conversion factors. The automatic
conversion feature terms were determined based on the respective market
values of the Zulu-tek and the Enhanced common stock. Since Zulu-tek is
the acquiring party for accounting purposes this transaction has been
accounted for as a reverse acquisition as of September 8, 1998 subject to
the approval of the shareholders.
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<PAGE> 58
ZuluGroup.com
PRO FORMA FINANCIAL STATEMENTS
UNAUDITED PRO FORMA BALANCE SHEET
August 31, 1998
<TABLE>
<CAPTION>
Enhanced
Services Pro Forma ZuluGroup.Com
Zulu-tek, Inc. Company, Inc. Adjustments Consolidated
------------- ------------ ------------ --------------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash $ 21,770 $ 63,059 $ 84,829
Accounts receivable, net 251,726 585,178 836,904
Inventory 254,826 254,826
Intercompany receivable 302,853 2,333,249 1 (2,636,102) 0
Other current assets 35,282 177,391 212,673
------------ ------------ ------------
Total current assets $ 611,630 $ 3,413,703 $ 1,389,231
Property and equipment, net of
accumulated depreciation 1,540,248 108,661 1,648,909
Investment in Zulu-tek, Inc. 4,045,000 2 (4,045,000) 0
Goodwill 11,394,341 3 2,190,084 2 2,757,968 13,584,425
4 (2,757,968)
Other Assets 150,755 19,708 170,463
------------ ------------ ------------
TOTAL ASSETS $ 13,696,974 $ 7,587,072 $ 16,793,028
============ ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities
Accounts Payable $ 7,385,107 $ 1,127,895 $ 8,513,002
Due to Related parties 7,093,573 908,500 1 (2,636,102) 9 (2,733,751) 2,632,220
Repurchase of Preferred Stock 6 374,800 374,800
Other current liabilities 106,945 106,945
Deferred Revenue 550,199 550,199
------------ ------------ ------------
Total current liabilities $ 15,028,879 $ 2,143,340 $ 12,177,166
Notes payable, related parties 2,266,249 9 (2,266,249} 0
Series C Redeemable Preferred (5) 10,209,000 5 10,209,000
------------ ------------ ------------
Total liabilities $ 25,237,879 $ 4,409,589 $ 22,386,161
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock 9 10,000 7 (27,264)
51,917 3,208 2 (12,000) 3 (3,208) 22,653
Preferred Stock 3,000,008 3 (3,000,000) 8
Series A/B Preferred 3,374,800 8 (3,000,000) 6 (374,800) 0
Series D Preferred 10,000 2 (10,000) 0
Investor Preferred 9 5,000,000 9 (5,000,000) 12,395,234
Additional paid in capital 3,033,461 5,170,806 3 (4,370,814) 7 27,264
3 4,567,567 2 (1,265,032) 7,405,284
8 3,000,000 4 (2,757,968)
Accumulated deficit (18,011,083) (4,996,539) 3 4,996,539 (18,011,083)
------------ ------------ ------------
Total stockholders' equity (deficit) $(11,540,905) $ 3,177,483 $ (5,593,138)
------------ ------------ ------------
Total Liabilities & Stockholders' Equity
(Deficit) $ 13,696,974 $ 7,587,072 $ 16,793,028
============ ============ ============
</TABLE>
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<PAGE> 59
Zulu Group.com
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
FOR THE EIGHT MONTHS ENDED AUGUST 31, 1998
<TABLE>
<CAPTION>
DISCONTINUED CONTINUING
ESVS Zulu-tek Consolidated Operations Operations
(11,12)
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales 2,675,226 1,749,287 4,424,513 336,265 4,088,248
Cost of sales 1,113,331 530,069 1,643,400 103,387 1,540,013
------------ ------------ ------------ ------------ ------------
Gross profit $ 1,561,895 $ 1,219,218 $ 2,781,113 $ 232,878 $ 2,548,235
Operating expenses 3,311,293 6,912,163 10,223,456 827,007 9,396,449
Goodwill amortization 710,304 (10) 4,103,077 4,813,381 4,813,381
------------ ------------ ------------ ------------ ------------
$ 4,021,597 $ 11,015,240 $ 15,036,837 $ 827,007 $ 14,209,830
Net operating loss $ (2,459,702) $ (9,796,022) $(12,255,724) $ (594,129) $(11,661,595)
------------ ------------ ------------ ------------ ------------
Other Income (729,414) (71,471) (729,414) (1,002,308) 272,894
------------ ------------ ------------ ------------ ------------
Net loss $ (3,189,116) $ (9,867,493) $(12,985,138) $ (1,596,437) $(11,388,701)
------------ ------------ ------------ ------------ ------------
Loss per share $ (0.50)
============
Pro forma shares outstanding 22,651,256
============
</TABLE>
Zulu Group.com
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
FOR THE 12 MONTHS ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
DISCONTINUED CONTINUING
ESVS ECHOMEDIA ZULUMEDIA ADJUSTMENTS CONSOLIDATED OPERATIONS OPERATIONS
------------ ------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
(11,12)
Net sales 5,689,074 36,815 6,370,634 12,096,523 1,277,576 10,818,947
Cost of sales $ 2,529,222 $ -- $ 6,250,711 8,779,933 $ 167,096 $ 8,612,837
------------ ------------ ------------ ------------ ------------ ------------
Gross profit 3,159,852 36,815 119,923 3,316,590 1,110,480 2,206,110
Operating expenses 4,627,984 8,041,909 18,033,286 30,703,179 3,817,951 26,885,228
Goodwill amortization 157,848 (10)6,154,616 6,312,464 6,312,464
------------ ------------ ------------ ------------ ------------ ------------
4,785,832 8,041,909 18,033,286 37,015,643 3,817,951 33,197,692
Net operating loss $ (1,625,980) $ (8,005,094) $(17,913,363) $ (6,154,616) $(33,699,053) $ (2,707,471) $(30,991,582)
------------ ------------ ------------ ------------ ------------ ------------
Other Income(Loss) 629,315 (141,786) 487,529 (141,786) 629,315
------------ ------------ ------------ ------------ ------------ ------------
Net loss $ (996,665) $ (8,146,880) (17,913,363) $(33,211,524) $ (2,849,257) $(30,362,269)
============ ============ ============ ============ ============ ============
Loss per share $ (1.34)
============
Pro Forma shares
outstanding 22,651,256
============
</TABLE>
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<PAGE> 60
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
The pro forma financial statements have been prepared based on the
assumption that the stockholders approve Proposals I, II, III and IV.
The preceding pro forma balance sheets of Zulu-tek and the Company as of
August 31, 1998, and the pro forma statements of income for Zulu-tek and the
Company for the eight and nine month periods, respectively, ended August 31,
1998, have been adjusted to give effect to the March and September Transactions
and the issuance of the Investor Preferred as if they had taken place on August
31, 1998.
The March and September transactions, as a whole, have been accounted for
as a "reverse acquisition" whereby the Zulu-tek stockholders become the majority
owner of the post-acquisition consolidated enterprise. In such transaction, the
assets, liabilities, revenues and expenses of the Company and of Zulu-tek are
included in the post-consolidated financial statements and the stockholders'
equity section of the post-consolidated balance sheet is that of Zulu-tek.
The individual transactions which give effect to the March and September
Transactions are as follows:
1. Intercompany accounts receivable and accounts payable between the
Company and Zulu-tek were eliminated;
2. The investment in Zulu-tek Common Stock and Series D Preferred Stock
of $4,045,000 was recorded on the Company's balance sheet and has
been eliminated, which results in the elimination of $22,000 of par
value of common stock and Series D Preferred Stock and $1,265,032 of
additional paid-in capital, and the establishment of $2,757,968 of
goodwill;
3. The September transaction with Zulu-tek and the Company is
being accounted for as a reverse acquisition. This pro forma entry
gives effect to the reverse acquisition and the conversion of the
$3,000,000 of 1998 Preferred to Company Common Stock. After the
reverse acquisition the former Zulu-tek stockholders will own
approximately 73% of the Company. The 27% of the Company owned by
the Enhanced stockholders after the reverse acquisition was valued
based upon a deemed 27% ownership in Zulu-tek, using the $0.25 per
share market price for the Zulu-tek Common Stock at September 9,
1998 which resulted in a purchase price of $4,567,567. Total
stockholders equity at August 31, 1998 of the Company was
$3,177,483. After giving effect to the conversion of the 1 million
shares of 1998 preferred stock carried at $3,000,000 and a reduction
of $800,000 for the carrying value of Enhanced Preferred Stock, the
common stockholders' equity at August 31, 1998 was $2,377,483. The
purchase price of $4,567,567 less the common stockholders' equity of
$2,377,483, results in goodwill of $2,190,084.
The purchase price has been allocated as follows:
<TABLE>
<S> <C>
Goodwill $2,190,084
Current assets 3,413,703
Property and equipment 108,661
Investment in Zulu-tek, Inc. 4,045,000
Other assets 19,708
Current liabilities (2,143,340)
Notes payable (2,266,249)
Preferred stock (800,000)
Consideration $4,567,567
</TABLE>
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<PAGE> 61
4. The goodwill of $2,757,968 which was created in the elimination of
the Company's investment in Zulu-tek (see Note #2) was eliminated
upon the consolidation of the Company and Zulu-tek.
5. See Note 4 to the Pro Forma Capitalization Table.
6. The Company, in connection with the September Transaction, agreed to
fund up to $374,800 to be used by Zulu-tek to redeem its outstanding
Series A Preferred stock.
7. To reclass the outstanding Common Stock of Zulu-tek to reflect
accounting treatment for a reverse acquisition.
8. Subsequent to September 30, 1998, the holder of the Series B
Preferred has agreed to waive its right to any amounts it would
otherwise receive upon the liquidation of Zulu-tek and Zulu-tek has
cancelled the shares; the entry reflects the elimination of
$3,000,000 of Series B Preferred.
9. Conversion of related party advances to the new Investor Preferred
and conversion of the Investor Preferred into 10,000,000 shares of
Company Common Stock, if Proposal III is approved. (See
"Capitalization After Giving Effect to the Proposals".)
10. The goodwill created as a result of the reverse acquisition has been
presented in both the 1997 and 1998 pro forma statement of
operations. An estimated life of 3 years was used in the
calculation. See Note 3 above.
11. NB Engineering, Inc., a subsidiary of Enhanced Services Company
discontinued its operations on May 31, 1998 and its results of
operations are included in the Consolidated Operations and
eliminated as Discontinued Operation in both the 1997 and 1998
Pro Forma statement of operations.
12. Echo Media, Inc. discontinued its operations in 1998, and its
results of operations are included in the Consolidated Operations
and eliminated as Discontinued Operation in both the 1997 and 1998
pro forma statement of operations.
13. On December 22, 1998, the Company announced that it had acquired
Brands For Less, L.L.C. for approximately $35 million in cash and
notes, and the issuance of warrants to acquire up to 5 million
shares of Common Stock. The acquisition will be accounted for as a
purchase of assets. A substantial portion of the purchase price will
be allocated to purchased technology and other intangible assets,
and goodwill; management anticipates that such amounts will be
amortized over a period of at least 5 years. The Company's
liabilities will be increased by $25 million, while its interest
expense will be increased by approximately $2.5 million for each of
1999, 2000 and 2001. (See "Discussion of Matters Relevant to
Proposals II, III and IV -- Recent Developments" and "Transactions
with Management and Others").
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<PAGE> 62
MANAGEMENT'S DISCUSSION AND ANALYSIS
Overview
The Pro Forma statement gives effect to the reverse acquisition transaction. The
following is management's discussion and analysis of the combined financial
position and results of operations:
Results of Operations
The Pro Forma statements of operations for the year ended December 31, 1997 and
the eight month period ended August 31, 1998 have been compiled on an unaudited
basis and present the combined results of the entities as if the business
combination had taken place on the first date of each period presented. The pro
forma statement of continuing operations for the eight month period ended August
31, 1998 shows net sales of $4,088,248, cost of sales of $1,540,013
and a gross profit of $2,548,235, operating expenses totaled $9,396,449,
amortization of goodwill of $4,813,381, other income of $272,894 and a net loss
of $11,388,701.
The pro forma statement of continuing operations for the year ended December 31,
1997 shows net sales net sales of $10,818,947, cost of sales of $8,612,837 and a
gross profit of $2,206,110, operating expenses totaled $20,885,228, amortization
of goodwill of $6,312,464, other income of $629,315 and a net loss of
$24,362,269.
During October and November 1998, the Company issued $2,550,000 of debentures
which are convertible into common stock. The conversion price is the lesser of
70% at the lower bid price during the preceding 22 trading days or $1.00, but
not less than $0.15 per share. As of the date hereof, they have not been
converted and cannot be converted until there is an effective Registration
Statement covering the underlying Common Stock. Had the conversion occurred as
of the date hereof, the Conversion Price would have been approximately $1.00
resulting in additional interest expense of 1,277,500 related to the beneficial
conversion feature and based on the market price of $1.50.
Liquidity and Capital Resources
The unaudited Pro Forma balance sheet presents the combined balance sheets of
the entities as if the transaction had taken place on August 31, 1998. Total
assets on a pro forma basis are $16,793,028, liabilities are $12,177,166 and
stockholders' equity is $4,615,854. Current assets totaled $1,389,231 and
current liabilities totaled $12,177,166, resulting in a working capital deficit
of $10,787,935.
On September 18, 1998, the Company entered into letter of intent for a private
placement of up to $20,000,000 in convertible securities, of which $5.5 million
had been funded since October 1998.
The Company has historically relied on cash from equity and debt funding and the
exercise of options and warrants to supplement its operating funds. Management
believes that revenue generated from operations, along with funds generated by
financing activities including the proceeds from the current private placement
of equity and debt securities will be sufficient to meet Company needs and to
support the business and strategic plan being undertaken by the Company and
Zulu-tek for at least the next 12 months. However, there can be no assurance
that anticipated operating results will be achieved or that the current private
placement of funds will be completed on favorable terms and at the levels
required. If the current fundings are not completed or are completed at levels
or on terms that do not provide sufficient funding on acceptable terms,
management will be required to modify Company strategy.
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<PAGE> 63
SELECTED INFORMATION RELATED TO THE COMPANY
DESCRIPTION OF BUSINESS
From 1992 until 1998, Enhanced Services Company, Inc. (the "Company")
provided (1) repair and maintenance, upgrade, fulfillment and related technical
and asset management services for users of portable computers, (2) certain
enhancement, accessory or peripheral products for portable computer
manufacturers, distributors, dealers and users , and (3) digital multimedia
development services for marketing, sales, training, entertainment, technical
reference, archival storage and other applications. Currently, the Company
continues to provide portable computer services and products through Laptop.
Multimedia services were formerly offered through NB Engineering. The NB
Engineering activities were closed down in May 1998.
Historically, most of the Company's revenues were from portable computer
services. Currently, Laptop has been consolidated in Irvine, California and it
continues to offer repair services as an authorized warranty provider for
Toshiba, Panasonic, IBM, and Texas Instruments, as well as non-warranty repairs
on most other portable computers. The Company also upgrades laptop/notebook hard
drive, processors and RAM. Its asset management services include managing,
tracking, replacing, inventorying and logistical support of its customers'
portable computers as well as end-of-life retirement and refurbishment programs.
Pre-delivery preparation and integration services include the installation and
testing of accessories, peripherals and enhancements from various manufacturers,
and by performing custom software loads, custom data loads and burn-in of
hardware, the Company sets up and delivers portable computers to its customers
individual requirements. The Company's Solutions Engineering Division designs,
engineers, manufactures, installs and sells portable computer accessories,
peripherals and enhancements for its customers' specific field automation
projects. The Company's C/VAR 2000(TM) anti-reflective film application is
designed to greatly improve screen readability in sun and direct light
conditions.
The NB Engineering multimedia services included specialized digital
video services to the corporate and entertainment markets. In the corporate
markets, services offered by the Company include CD-ROM title development, data
compilation and synthesis of its customers' CD-ROM titles, with interactive
features (such as touch screen, intelligent data branching, viewer testing and
speech input), for use in training, marketing, archival storage and other
purposes as well as Digital Versatile Disk (DVD-ROM) title authoring and
development. The services were offered on a custom basis by the Company and were
discontinued when management concluded that the long-term prospects for NB
Engineering did not warrant the future capital needs.
The Company, a Colorado corporation organized in 1987, acquired Laptop,
a Texas corporation, from Kenneth M. Duckman on September 30, 1992, and Mr.
Duckman became the Company's President and Chief Executive Officer, a director
of the Company and its controlling stockholder. The Company, in March 1995,
formed its wholly owned subsidiary, Laptop, a California Corporation. The
Company acquired NB Engineering, Inc., a Delaware corporation, on May 31, 1995
from a corporation of which Ralph LaBarge was the largest stockholder, and Mr.
LaBarge became President and Chief Executive and Technical Officer of NB
Engineering and a director and, beneficially, a stockholder of the Company. See
"Security Ownership of Management and Principal Stockholders."
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<PAGE> 64
The Company's portable computer support and maintenance services include
consulting with customers who need to put hundreds, and in some cases thousands,
of laptop computers into their field force, related engineering and
pre-delivery setup and configuration services as well as asset management and
maintenance support for the deployed units. Most of the Company's customers for
repair and maintenance and field automation related services are medium to large
sized companies. Portable computer services and products are offered by the
Company through its Laptop Solutions subsidiaries. It maintains a dedicated Web
server that can be accessed at http://www.laptopsolutions.com
Support and Maintenance Services. The Company's support and contract
maintenance services include warranty repair services as an authorized warranty
provider for Toshiba, Compaq, Panasonic, IBM, NEC and Texas Instruments, as well
as non-warranty repair services on most other portable computers. The Company
has the internal ability to repair LCD's (color and monochrome) and plasma
display screens for portable computers at a cost typically below replacement
cost. The Company's asset management services include managing the rollout,
tracking, fulfillment and logistical and technical support of its customers'
portable computers in the field, as well as designing and fulfilling
end-of-life, retirement and refurbishment programs. The Company also offers a
variety of hard drive, processor and RAM upgrade services and products
Fulfillment Services. Through its pre-delivery setup and configuration
fulfillment services, the Company delivers portable computers set up by the
Company to meet its customers' specific requirements. These services include
initial receipt of the customers' computers, accessories, peripherals and
enhancements from the various manufacturers, integration and testing of each
item, custom software loads, custom data loads, burn-in of hardware, testing of
software, and fulfillment to the end user, with full reports back to the
customer.
Custom Engineering Services and Products. Services offered by the
Company's Solutions Engineering Division include the design, engineering,
manufacture, integration and sale of portable computer accessories, peripherals
and enhancements for its' customers' field automation projects. It has received
an initial order for wireless modems, custom designed by the company from a
major Laptop computer manufacturer. Management believes that many of the skills
and disciplines required for its custom engineering services enable the Company
to develop, both internally and with the assistance of outside engineering when
necessary, "shrink-wrap" products for the broader market.
Compatibility Plus(TM) The Company's Compatibility Plus(TM) removable
hard drive pak has a current capacity of up to 5 gigabytes, for certain Toshiba
Tecra(TM) laptops. The Company is exploring the introduction of additional
products. There can be no assurances, however, that additional products will be
developed or introduced .
C/VAR 2000(TM) Anti-Reflective and Increased Contrast and Luminance LCD
Film. High resolution multi-color LCD screens used in most portables today are
highly reflective and difficult to read when in direct sunlight or strong
incandescent lighting conditions. This problem may create a significant
disadvantage for police forces, emergency services, hospital workers, real
estate agents, insurance adjusters, utility inspectors and military users. The
Company holds a non-exclusive (but, management believes, presently sole) license
to apply a film, manufactured by its licensor, designed to reduce an LCD
screen's reflectivity and glare thereby increasing its contrast ratio and
luminance. Application of this LCD film product requires a manufacturing
56
<PAGE> 65
process in a clean environment. Management estimates that a significant number
of portable computers are used in such direct light conditions.
CUSTOMERS
The Company has established a broad base of customers, representing a wide
range of industries throughout North America, with a small percentage of sales
generated overseas. Revenues from these customers are generally initiated by
different operational groups within the customer organization. No customer
accounted for more than 15% of the Company's revenue during its fiscal year
ended November 30, 1996 or November 30, 1997. The Company offers 30 day net
terms only to its most credit-worthy customers.
SUPPLIERS
The Company purchases hard disks, expansion boards, RAM chips, custom
cables and other components, and licenses software, from a variety of
manufacturers and distributors, and it is dependent on no one source.
Company-designed sub-components utilized in its upgrade services, such as
mounting brackets, short-run boards and custom cables, are manufactured by
sub-contractors to the Company's design and specifications or assembled by the
Company.
SALES, MARKETING, AND DISTRIBUTION
Currently, the Company provides portable computer upgrade, repair and
management services through Laptop Solutions. It seeks to become a strategic
supplier to its customers and to differentiate itself from its competitors by
offering a higher level of service. The Company has trained sales personnel,
engineers and technicians who are dedicated to working with customers and to
deliver service in a cost effective and timely fashion. The Company believes
that the technical services provided by its personnel are an important factor in
its sales of digital video compression and custom development services.
The Company sells its laptop enhancement and repair services directly
through a combination of customer service representatives and outside sales
staff. The Company also solicits business by advertising regularly in selected
trade publications, visits, the World Wide Web, mail, telephone and it attends
several large trade shows each year.
COMPETITION
The portable computer enhancement and repair market is highly competitive.
While the Company is unaware of any dominant competitors in the portable
computer upgrade industry, there are few obstacles to market entry and
penetration other than minimal capitalization and the development of the
technological know-how. As a result, it must be anticipated that competitors and
potential competitors will focus future attention on the market with greater
resources than those of the Company. While management believes that its services
offer superior price/performance and are well-positioned in terms of market
recognition, it is possible that technological breakthroughs will enable a
competitor or potential competitor to enter the market and be in a position to
challenge the Company in its specialty niche markets.
Competition in the repair and maintenance of laptops and notebooks is
widespread. Many regional and local firms are authorized to provide warranty and
non-warranty service and maintenance for laptops and notebooks. The Company
considers it a competitive advantage that its repairs are typically completed
within a short time of receipt of the damaged unit. The
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<PAGE> 66
Company believes that they are well positioned to be competitive because of its
technical capabilities and because it has the infrastructure for rapid
turnaround times, a high priority to the laptop and notebook user.
PROPRIETARY RIGHTS
The Company considers the technology embodied in its hard disk and
processor upgrade services as valuable intellectual know-how and trade secrets,
which it seeks to protect with confidentiality and non-disclosure agreements.
The Company claims unregistered common law copyright protection on all source
code and documentation relating to its upgrade services and all software
developed in the course of custom-sponsored projects (except as licensed to the
customer for its specific application), to the extent that they contain
copyrightable subject matter. It is unlikely that the Company has the
availability of patent protection for any of its services or products. While the
Company exercises what it considers to be reasonable precautions through
confidentiality and non-disclosure agreements to protect its intellectual
property, there can be no assurance that it will not be misappropriated, copied
without authorization, or reverse engineered. In instances of unauthorized
misappropriation, legal remedies may prove to be inadequate or uneconomical to
protect the Company's intellectual property and competitive advantages. The
Company has no registered trademarks or other proprietary marks or property.
EMPLOYEES
As of November 30, 1998, the Company and Laptop together had 24 employees,
all of whom were full time. Of these employees, 6 persons are involved in
administration and sales and 18 are involved in production activities. Employees
are not represented by a labor union. Management believes that employee
relations are satisfactory.
PROPERTY
As of November 30, 1998, the Company has no owned properties but Laptop
was leasing 9,987 square feet in office and service facilities in Irvine,
California under a lease continuing until March 2000 as a base monthly rent of
$10,628, an amount which management believes is at or below current market
for comparable space and facilities. Management believes that its facilities are
suitable for the purposes for which they are used.
LEGAL PROCEEDINGS
Currently, the Company and certain officers and directors of the Company
and other individuals have been named as additional defendants in certain
proceedings arising principally on account of obligations existing in SIM on
December 31, 1997, the date of the acquisition of Zulu Media by Zulu-tek. Claims
involving matters existing at December 31, 1997, are discussed in the section
"Selected Information Related to Zulu-tek - Legal Proceedings" and reference is
made to that discussion. As noted in that discussion, as of the date hereof
there are outstanding judgments and settlement payments, arrangements on
accounts of claims and disputed claims which could require funding of up to
approximately $2.3 million. Funding of that amount will be an obligation of the
Company if the Reorganization is fully implemented. (See "Selected Information
Related to Zulu-tek -- Legal Proceedings").
In addition, NB Engineering has been named as a defendant or the Company
has been advised that certain vendors and creditors intend to assert claims
against NB Engineering or the Company with respect to amounts alleged to be due
from NB Engineering at the time its operations were discontinued, but, as of the
date hereof, no material claims have been filed with respect to NB Engineering.
In the future, the Company will be subject to the claims that arise in the
ordinary course in the conduct of a complex business in multiple locations and,
in addition, may be subject to claims that may arise with respect to
intellectual property and telecommunications issues relevant to the Internet
business, after the Reorganization.
MARKET FOR COMMON STOCK AND RELATED STOCK MATTERS
Market for Common Stock
The Company's Common Stock began trading on the NASDAQ Stock Market
on June 3, 1997 under the symbol ESVS. From December 1, 1991 to June 16, 1993
there were no reported trades of the Company's Common Stock. Set forth below are
the high and low bid and ask prices of the Company's Common Stock (adjusted for
the periods prior to May 20, 1996 to reflect a 1-for-5 reverse stock split
effected as of that date) as reported on the OTC Bulletin Board through June 2,
1997, on the NASDAQ Small Cap Market from June 3, 1997 until November 24, 1998
(when the Company's Common Stock was delisted from the NASDAQ SmallCap Market),
and on the NASDAQ Bulletin Board since November 24, 1998.
58
<PAGE> 67
<TABLE>
<CAPTION>
Bid Ask
--- ---
1996 High Low High Low
---- ---- --- ---- ---
<S> <C> <C> <C> <C>
Dec (1995) 6-7/8 1-7/8 8-3/4
- - Feb.
March - 5 1-1/4 6-9/16 2-1/2
May
June - 6-1/4 3-3/4 6-1/2 4-1/2
August
Sept. - 7-1/4 5-1/2 7-1/2 6-1/4
Nov.
Dec. - 5-1/2 2-1/2 6 3-11/16
Feb., 1997
1997
Mar. - 4-1/4 3 4-3/4 3-7/8
May
June - 3-3/4 1-3/4 4-1/4 2-3/8
Aug,
Sept. - 3-3/4 2-3/8 4-1/8 2-7/8
Nov.
Nov. - 4.875 1-3/4 5 2-1/4
Feb. (1998)
1998*
Mar. - 7-1/4 4.375 7.625 4.625
May
June - 4.3125 1.1875 4.375 1-1/4
Aug.
Aug. - 3.8125 3/4 3.9375 .8125
Nov. 24
</TABLE>
Nov. 25 - December 31
The prices presented are bid and ask prices which represent prices between
broker-dealers and do not include retail mark-ups and mark-downs or any
commissions to the broker-dealer. The prices do not reflect prices in actual
transactions.
- --------
* A 2:1 stock split was effected in May of 1998.
59
<PAGE> 68
Holders
As of the Record Date, there were 244 holders of record of the
Company's common stock. The Company believes that with the inclusion of holders
of stock held in street name, the estimated total number of shareholders is
approximately 400.
Dividends
The Company has not paid any dividends on its common stock and does not
expect to do so in the foreseeable future. Effective May 29, 1998, the Company
implemented a 2:1 split in its Common Stock.
60
<PAGE> 69
SELECTED INFORMATION RELATED TO ZULU-TEK
DESCRIPTION OF BUSINESS
Zulu-tek, Inc. (OTC:ZULU) ("Zulu-tek," formerly Netmaster Group, Inc.,
which in turn was formerly known as Star Medical Corporation) is the parent
company of EchoMedia, Inc. ("EchoMedia"), MediaBank, Inc. ("MediaBank") and Zulu
Ventures, Inc. ("Zulu Ventures"). MediaBank in turn is the parent company of
Zulu Media, Inc. ("ZuluMedia" formerly known as SIM). Together these enterprises
comprise the Zulu-tek companies which have together undertaken to become a
provider of Internet based advertising sales and marketing services.
In 1997, Zulu-tek identified the opportunity to become an Internet single
source provider for advertising sales and marketing products on the premise that
such a provider could capitalize on economies of scale, while also being able to
provide potential clients with a wide range of advertising and marketing
options. In August 1997, Zulu-tek acquired EchoMedia, a producer of innovative
Internet advertising software, to enable it to expose an Internet user to new
forms of Internet advertising.
In transactions undertaken in December of 1997, Zulu-tek acquired through
Mediabank, 75% of the capital stock of Zulu Media (formerly SIM), a company with
a well developed Internet advertising sales business which had been founded and
owned by Softbank Holdings, Inc., a subsidiary of Ziff-Davis, Inc. This
acquisition allowed Zulu-tek to expand directly into the sale of Internet based
advertising. Today, ZuluMedia has been organized as Zulu-tek's primary operating
subsidiary.
In March of 1998, Zulu-tek entered into the March Transactions with the
Company. (See "Proposal II" and "Discussions of Matters Related to Proposals II,
III and IV"). In September of 1998, Zulu-tek and the Company undertook the
Reorganization. They announced their intention to combine into a new enterprise
under the name ZuluGroup.com to allow the combined enterprise to develop into a
nationally traded, Internet advertising sales and marketing company, further
enhancing the ability of the new entity to raise equity capital and to develop
the Internet strategy being pursued by Zulu-tek. (See "Proposal III" and
"Discussion of Matters Relevant to Proposals II, III and IV").
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<PAGE> 70
Zulu-tek believes that its coordinated Internet focus is structured to
effect a convergence under one umbrella of diverse services focused specifically
on the Internet as a communications and transaction medium. As noted above,
Zulu-tek has primarily pursued its Internet strategy through Zulu Media. Prior
to the acquisition of Zulu Media by Zulu-tek, SOFTBANK Holdings, Inc. had
invested $28 million in proprietary technology, sales force development,
infrastructure and brand development for Zulu Media. A pioneer of interactive
advertising sales and marketing, Zulu Media and its predecessors have handled
advertising sales for many of the largest, most established, well-branded sites
on the World Wide Web (the "Web"). Zulu Media believes that it has been a key
element in the growth of the Web as an accepted and effective advertising
medium.
62
<PAGE> 71
PRODUCTS AND SERVICES
Zulu Media currently offers two major products to advertisers: The
Foundation Buy Program and the Zulu Network (formerly the SOFTBANK Network). The
Foundation Buy Program was the first product to be developed and is composed of
specific, well-branded Web sites. Advertisers seeking branding and targeted
audience reach in specific editorial contexts benefit from the extensive reach
and frequency of The Foundation Buy Program sites. In its representation of
The Foundation Buy Program Web sites, Zulu Media generally functions as the
exclusive third-party sales agent, the Web sites control their available
advertising inventory and pricing, and Zulu Media earns commissions on all
advertising run on the site.
The Zulu Network, which serves a complementary role to The Foundation
Buy Program, operates in a somewhat different manner. Zulu Network affiliates
make available to Zulu Media a specified minimum and maximum volume of
impressions, which Zulu Media then aggregates into categories of complementary
content. There are currently nine content categories including: Travel, Arts &
Entertainment, Finance, College, Business, Sports, etc. Network advertising
revenue generated by Zulu Media is shared with the individual Web sites on
predetermined basis; however, Zulu Media's share of Zulu Network revenue is
generally significantly greater than The Foundation Buy Program commission
percentages.
While large, well-branded sites such as those in The Foundation Buy
Program generate sufficient audience traffic to attract significant advertising,
and some can even support their own direct sales forces, medium-sized Web sites
often lack both the critical mass of audience and the necessary relationships
with major advertisers to generate material advertising revenue. Networks, such
as the Zulu Network, offer a cost-effective advertising sales solution for these
Web sites. By joining with a group of other sites, a Web site increases its
reach and offers advertisers the ability to access a larger audience with a
package buy across multiple sites. Additionally, as a network affiliate, a
mid-sized site gains access to the advertising relationships, experience and
professional reputation of a firm such as Zulu Media which would otherwise be
unavailable or unaffordable.
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<PAGE> 72
CUSTOMERS, MARKETING AND DISTRIBUTION
The Network model provides significant advantages to advertisers as well
as to the affiliate sites which make up the Network. Whereas Foundation Buy
Program sites perform their own ad serving, scheduling, trafficking and
invoicing, Zulu Media's ad serving capabilities advertisers can create extremely
focused campaigns. For example, campaigns can be targeted to Internet users by
geographic region, by Internet browser type (Internet Explorer or Netscape), or
by operating system (Windows, Unix, etc). Ads can be delivered at specific times
of the day or on specific days of the week. Ads can also be served in a given
sequence, or can be limited to a specified number of times they are displayed to
a given Internet user. Zulu Media's online reporting system also allows
advertisers to monitor the performance of their campaigns on a real time basis,
allowing them to make changes virtually on the fly.
To complement its core advertising sales business, Zulu Media also
offers in-house technology and creative capabilities, including web site
development, and banner design services. In particular, Zulu is developing
several proprietary technologies to improve ad performance and to offer improved
ecommerce capability, including 3-Speed Ad Banners and Sesame Ads. Three-speed
technology allows an Internet banner ad to be served to each individual Internet
user based on each individual's Internet connection speed, taking full advantage
of all available bandwidth. For example, a user who is connected at a slow speed
would be served a standard animated banner, whereas a user with a very fast
Internet connection could be served a highly animated, video ad, similar to TV
commercials. Sesame Ads permit commerce transactions to take place directly from
the banner, which offers the convenience of the Internet user of a quick
transaction without having to leave the site he is currently visiting.
Zulu Network contracts are non-exclusive, and most are for one year,
although some are for six months with an automatic one-year renewal. In contrast
to The Foundation Buy Program, Zulu Media has complete discretion when selling
advertising space in the Network. Zulu Media has full control over the rates it
charges advertisers and decides which sites receive which ads at what frequency
and at what time. Generally, Zulu Media receives a 40% commission of all media
sales revenue derived from network advertisements that run on the site. In
addition to ad serving, scheduling, trafficking, and reporting, Zulu Media also
performs all billing and collecting for ads running on the Zulu Network sites.
Zulu Media collects directly from the advertiser and pays each of the Network
sites for which Zulu received the revenue.
Zulu Media receives a commission for all advertising run on a client's
site. Commission rates are negotiated separately with each client, but usually
the client pays a fixed commission rate until a certain negotiated level of
revenue has been reached and a higher percentage thereafter. Billing is either
by the client Web site with a subsequent commission payment to Zulu Media on a
predetermined 30-day basis or Zulu Media performs all the billing, collection
and client remittances on its own.
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<PAGE> 73
COMPETITION
The markets for Internet advertising and related products and services
are intensely competitive and such competition is expected to continue to
increase because there are no substantial barriers to entry in this market. The
Zulu-tek business must compete for Internet advertising revenues with large Web
publishers and Web search engine companies, such as America Online, Yahoo!,
Excite and Infoseek. Further, the Zulu-tek Network competes with a variety of
Internet advertising networks, including 24/7 Media and the DoubleClick Network.
Zulu-tek also encounters competition from a number of other sources, including
content aggregation companies, advertising agencies, and other companies which
facilitate Internet advertising. Many of Zulu-tek's existing competitors, as
well as a number of potential new competitors, have longer operating histories,
greater name recognition, larger customer bases and significantly greater
financial, technical and marketing resources than Zulu-tek. As a result, they
may be able to respond more quickly to new or emerging technologies and changes
in customer requirements, or to devote greater resources to the development,
promotion and sale of their products and services than Zulu-tek. Such
competitors may be able to undertake more extensive marketing campaigns, adopt
more aggressive pricing policies and make more attractive offers to potential
employees, strategic partners, advertisers and Web publishers. The Internet, in
general, and Zulu-tek, in particular, also must compete for a share of
advertisers' total advertising budgets with traditional advertising media such
as television, radio, cable and print. Zulu-tek also expects that competition
may increase as a result of industry consolidation and because current and
potential competitors may establish cooperative relationships among themselves
or with third parties to increase the ability of their products or services to
address the needs of Zulu-tek's prospective advertising and Web publisher
customers. Increased competition is likely to result in price reductions,
reduced gross margins and loss of market share, any of which could have a
material adverse effect on Zulu-tek's business, results of operations and
financial condition.
PROPRIETARY RIGHTS
Zulu-tek regards its intellectual property as critical to its success,
and Zulu-tek relies or expects to rely upon patent, trademark, copyright and
trade secret laws in the United States and other jurisdictions to protect its
proprietary rights. Zulu-tek intends to pursue the protection of its trademarks
by applying to register the trademarks in the United States and (based upon
anticipated use) internationally. Also, legal standards relating to the
validity, enforceability and scope of protection of certain proprietary rights
in software and Internet-related industries are uncertain and still evolving,
and no assurance can be given as to the future viability or value of any
proprietary rights of Zulu-tek or other companies within the industry.
EMPLOYEES
As of November 30, 1998, Zulu-tek and Zulu-Media together had 29
full-time employees of whom 19 were involved in executive and administrative
roles and 10 were involved in sales, and six part-time employees all of whom
were involved in administrative. Employees are not represented by a labor
unions. Management believes that employee relations are satisfactory.
PROPERTY
As of November 30, 1998, Zulu-tek had leased facilities which it was
occupying in Los Angeles and New York City. The Los Angeles facility consists of
approximately 14,100 square feet of office facilities under a lease continuing
until September 30, 2003 at a base monthly rent of approximately $21,000, an
amount which management believes is at current market rates for comparable space
and facilities. The New York City facility consists of approximately 3900 square
feet of office facilities under a lease continuing until April 2001 at a base
monthly rent of approximately $8,800, an amount which management believes is at
current market rates for comparable space and facilities. The Los Angeles
facilities are suitable for the purposes for which they are used. Zulu-tek and
the Company are considering different space in the New York area which will be
adequate to meet the needs of the Company, Zulu-tek and BrandsForLess.com but no
space has been selected.
65
<PAGE> 74
LEGAL PROCEEDINGS
Currently, Zulu-tek is subject to a number of proceedings that arose principally
on account of obligations existing on the December 31, 1997, the date of the
acquisition of Zulu Media including proceedings with respect to amounts claimed
to be due under agreements entered into prior to Zulu-tek's acquisition of Zulu
Media. Resolution of the claims and payment of the settlements or judgments from
the claims, have, in certain cases, been delayed because of the lack of funding
and revenues from on-going operations. As of the date hereof, there are
outstanding judgments (exclusive of settlements or agreed payment arrangements
of approximately $800,000) aggregating approximately $75,000 in matters based on
actions and claims for arbitration from vendors and creditors involving
non-material amounts. In certain of the actions, the Company and officers and
directors of the Company or Zulu-tek and certain individuals have been named as
defendants; claims involving matters existing at December 31, 1997, are
discussed in this section even if the Company has been named. The following
matters which are pending and have not been settled or otherwise resolved,
individually involve liabilities or claims for more than $100,000 against
Zulu-tek, Zulu Media or echoMedia.
Geosystems Global Corporation v. Enhanced Services Company, Inc., Zulu Media
(formerly SIM), et al.; Los Angeles Superior Court Case No. BC 201898. This
action, arising out of an advertising sales representative agreement alleged
entered into as of June 1997 by SIM and Geosystems Global Corporation
("Geosystems") was filed on December 7, 1998 for breach of contract and common
counts against the Company and Zulu Media. Geosystems is seeking damages of
approximately $400,000, a temporary protective order and an attachment.
Lycos, Inc. v. Softbank Interactive Marketing, Inc., Suffolk
(Massachusetts) Superior Court Case No. 98-00704. Lycos filed an action in
1998 against SIM, a/k/a Zulu Media for contractual amounts due to
Lycos for periods prior to December 1997. Lycos obtained an Agreement for
Judgement in the amount of $553,856.41 and then obtained a sister-state judgment
in the Los Angeles County Superior Court in the amount of $556,430.52 (Case No.
BS 052102).
Softbank Holdings, Inc. v. Mediabank, Inc., and Zulu-Tek Media, Inc., Los
Angeles County Superior Court Case No. BC197397. Softbank Holdings, Inc.
("Softbank") filed an action in September 1998 against Mediabank, Inc. and
Zulu-Tek Media, Inc. for breach of an indemnification agreement, and breach of
an assumption and guarantee agreement regarding the bonus, severance and other
payments paid by Softbank to a former SIM officer and allegedly owed to Softbank
under the indemnification arrangement. Softbank seeks damages in the amount of
$436,198.90, with interest, costs and attorneys' fees. The parties are engaged
in settlement negotiations regarding the action.
Batkin, et al., v. Softbank Holdings, Inc., et al. Supreme Court of the
State of New York, County of New York, Index No. 601908/98. This action has been
filed by Andrew Batkin, Lawrence Howorth and Theodore West, former employees of
SIM and has been filed as a derivative and direct action on behalf of Zulu Media
(formerly SIM) as well as the individual plaintiffs. The action seeks damages
from Softbank in an amount of $200 million for Softbank's alleged breach of its
obligations to the individuals and to SIM for its alleged failure to fully fund
and support SIM. Softbank acquired its interest in SIM from the individual
plaintiffs and entities which they controlled in 1996 and the action relates to
that period. Softbank has undertaken the defense of this action and the action
is disclosed herein because of the derivative nature of the action which results
in Zulu Media being named as a nominal defendant and plaintiff. Softbank has
filed a Mortion to Dismiss, without prejudice, on which a decision is pending
but had not been rendered as of January 7, 1999.
In the future, to the extent that it maintains a separate existence, Zulu-tek
will be subject to the claims that arise in the ordinary course in the conduct
of a complex business in multiple locations and, in addition, may be subject to
claims that may arise with respect to intellectual property and
telecommunications issues relevant to the Internet business.
MARKET FOR COMMON STOCK AND RELATED STOCK MATTERS
The Zulu-tek common stock began trading on the non-NASDAQ Bulletin Board
on July 1, 1997, and has traded since then under the symbols of "NETZ" (from
August 15, 1997 to May 20, 1998) and "ZULU" (from May 20, 1998 to the present).
Set forth below are the high and low bid and ask prices (in dollars) of the
Zulu-tek's common stock as reported on the OTC Bulletin Board.
Zulu-tek
<TABLE>
<CAPTION>
Bid Ask
--- ---
<S> <C> <C> <C> <C>
1997
July 1 thru
Sept. 30 $ .8125 .125 1.75 .36
Oct. 1 thru
Dec. 31 .71 .16 .74 .17
1998
Jan. 2 thru
Mar. 31 1.15 .17 1.16 .175
Apr. 1 thru
June 30 .60 .32 .63 .33
July 1 thru
Sept. 30 .49 .085 .51 .0925
Oct. 1 thru
Dec. 31* .165 .051 .17 .054
</TABLE>
- --------
* A 10:1 reverse stock split was effected on December 31, 1998.
The prices presented are bid and ask prices (in dollars) which represent
prices between broker-dealers and do not include retail mark-ups and mark-downs
or any commissions to the broker-dealer. The prices do not reflect prices in
actual transactions.
Holders
66
<PAGE> 75
As of the Record Date, there were 291 holders of record of Zulu-tek's
common stock.
Dividends
Zulu-tek has not paid any dividends on its common stock and does not expect
to do so in the foreseeable future.
67
<PAGE> 76
PERFORMANCE GRAPH FOR THE COMPANY'S COMMON STOCK
The following performance graph reflects a comparison of the performance
of the Company's Common Stock to the common stock of the Standard & Poors Index,
the NASDAQ Market Index and the Standard Industrial Code Index:
<TABLE>
<CAPTION>
FISCAL YEAR ENDING
-------------------------------------------
COMPANY/INDEX/MARKET 6/03/97 11/30/97 11/30/98
- -------------------- ------- -------- --------
<S> <C> <C> <C>
Enhanced Services Co. 100.00 94.13 117.65
SIC Code Index 100.00 107.22 210.82
NASDAQ Market Index 100.00 114.69 141.78
S&P Composite 100.00 113.58 140.45
</TABLE>
ASSUMES $100 INVESTED ON JUNE 03, 1997
ASSUMES DIVIDEND REINVESTED
AND STILL INVESTED AT NOV. 30, 1998
The Company has compared its performance to the NASDAQ Market Index, the
Standard & Poors Index and the Standard Industrial Code Index because of the
continued development of the business and from a computer services enterprise to
a broader Internet strategy.
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<PAGE> 77
TAX TREATMENT OF THE TRANSACTION
CONTEMPLATED BY PROPOSAL I (THE MERGER) AND
PROPOSALS II, III AND IV (THE REORGANIZATION)
HOLDERS OF COMMON STOCK, WARRANTS OR OPTIONS IN THE COMPANY SHOULD CONSULT
THEIR OWN TAX ADVISORS AS TO THE PARTICULAR TAX CONSEQUENCES TO THEM OF THE
TRANSACTIONS DESCRIBED HEREIN INCLUDING THE APPLICATION OF STATE, LOCAL AND
FOREIGN TAX LAWS AND POSSIBLE FUTURE CHANGES.
The following discussion summarizes the material United States federal
income tax considerations arising from and relating to the Merger (Proposal I)
and the Reorganization (Proposals II, III and IV) that are generally applicable
to the Company and its respective stockholders, and option and warrant holders.
This summary is based upon current provisions of the Internal Revenue Code of
1986, as amended (the "Code"), applicable Treasury Regulations, judicial
authority and administrative rulings and practice. Legislative, judicial or
administrative changes or interpretations may be forthcoming that could alter or
modify the statements and conclusions set forth below. Any such changes or
interpretations may or may not be retroactive and could affect the tax
consequences to parties affected by the Merger and the Reorganization.
Accordingly, it is possible that the US federal income tax consequences of the
Merger and the Reorganization may differ from those described below. Moreover,
no assurance can be offered that the Internal Revenue Service (the "IRS") will
not take contrary positions, and no rulings from the IRS have been or will be
sought.
The discussion that follows is limited to US citizens or residents,
domestic corporations, domestic partnerships, estates subject to US federal
income tax on their income regardless of source, and trusts, but only if a court
within the US is able to exercise primary supervision over the administration of
such trust and one or more US fiduciaries have the authority to control all
substantial decisions of the trust, ("US Stockholder"). This summary does not
discuss all aspects of US federal income taxation that may be relevant to (a) a
particular US Stockholder (including, without limitation, potential application
of the alternative minimum tax), (b) non-US Stockholder, (c) to a particular
option or warrant holder, or (d) to certain types of investors subject to
special treatment under the US federal income tax laws (for example, banks, life
insurance companies, tax-exempt organizations, broker-dealers or holders who
received their Common Stock as compensation), nor does it discuss any aspect of
state or local tax laws.
A. THE MERGER
If Proposal I is ratified by the stockholders, the Company, a Colorado
corporation, will merge with and into ZuluGroup.com, a newly established,
wholly owned Delaware subsidiary, with ZuluGroup.com being the surviving
corporation. The Merger will qualify as a tax-free reorganization under Section
354 and 368(a)(1)(F) of the Code with the following results:
69
<PAGE> 78
1. No gain or loss will be recognized by the stockholders of the
Company upon the conversion of their shares of Common Stock or
Preferred Stock into Delaware Common Stock or Delaware Preferred
Stock;
2. The basis of the shares of Delaware Common Stock or Delaware
Preferred Stock received by each stockholder of the Company will be
the same as the basis of the shares of Common Stock or Preferred
Stock held by each stockholder immediately prior to the Merger;
3. The holding period of the shares of Delaware Common Stock or
Delaware Preferred Stock received by each stockholder of the Company
will include the holding period of the shares of Common Stock or
Preferred Stock held by each stockholder immediately prior to the
Merger, provided that such stockholder held such shares as capital
assets on the date of the Merger;
4. No gain or loss will be recognized by the holders of Company options
or warrants upon the conversion of such options or warrants into
Delaware options or warrants;
5. The basis of the Delaware options or warrants received by each
holder of Company options or warrants will be the same as the basis
of the options or warrants held by each such holder immediately
prior to the Merger;
6. ZuluGroup.com will succeed to the earnings and profits, net
operating losses, capital losses, and other tax attributes of the
Company; and
7. That portion of the taxable year of the Company prior to the Merger
Date and that portion of the taxable year of ZuluGroup.com on and
after the Merger Date will constitute a single taxable year, so that
the Company will not need to file a short period tax return for the
period November 1, 1998 through the Merger Date.
B. THE REORGANIZATION
If the stockholders approve Proposals II, III and IV at the Annual
Meeting, the 1998 Preferred Stock and the 1998(B) Preferred Stock will be
automatically converted into the Delaware Common Stock. In the March
Transactions, Netvest acquired approximately 19.4% of the issued and outstanding
Common Stock, and all of the 1998 Preferred Stock with the intent of seeking
approval for the conversion of the 1998 Preferred Stock into the Company's
Common Stock. In connection with the September Transactions, the Board of
Directors of Zulu-tek will approve the liquidation of Zulu-tek and the
distribution of the Company's Common Stock, the 1998(C) Preferred, and the cash,
if any, ("Reorganization Consideration") to the Zulu-tek stockholders, with such
liquidation being conditioned only upon the approval by the Company's
stockholders of Proposals II, III and IV and the approval of the liquidation by
the Zulu-tek stockholders. After the conversion and the liquidation, Zulu-tek
stockholders, together with Asian Trust Corporation, Ltd. and Netvest will hold
approximately 73% of the issued and outstanding Delaware Common Stock.
70
<PAGE> 79
Based upon certain representations and warranties made by the Company,
Zulu-tek and Netvest, the Company has been advised that while the conclusion is
not free from doubt, the March Transactions and the September Transactions
should be viewed as steps of an integrated transaction resulting in a transfer
by Zulu-tek of all of its assets to the Company and the assumption by the
Company of the liabilities of Zulu-tek, followed by a liquidation of Zulu-tek
with the Zulu-tek stockholders being in control of the Company after the
transfer and liquidation. In such case, the two transactions should qualify as a
tax-free reorganization under Sections 354 and 368(a)(1)(D) of the Code with the
following results:
1. Zulu-tek and the Company will each be "a party to a reorganization"
within the meaning of Code Section 368(b);
2. No gain or loss will be recognized upon the transfer by Zulu-tek of
its assets to the Company in exchange for the Company stock and the
assumption by the Company of Zulu-tek's liabilities;
3. No gain or loss will be recognized to the Company upon the receipt
of the assets of Zulu-tek in exchange for the Reorganization
Consideration;
4. The basis of the assets of Zulu-tek in the hands of the Company will
be the same as the basis of those assets in the hands of Zulu-tek
immediately prior to the transaction;
5. No gain or loss will be recognized to the stockholders of Zulu-tek
on the surrender of their Zulu-tek stock in exchange for the stock
of the Company, as described above;
6. The basis of the stock of the Company received by the Zulu-tek
stockholders will be the same as the basis of the Zulu-tek stock
surrendered in exchange therefor;
7. The holding period of the stock of the Company received by the
Zulu-tek stockholders will include the period during which the stock
of Zulu-tek surrendered in exchange therefor was held, provided the
Zulu-tek stock was held as a capital asset on the date of the
exchange; and
8. To the extent holders of Zulu-tek Series A Preferred elect to
receive cash in lieu of the Company's Common Stock, such cash will
be treated as having been received by the stockholder as a
distribution in redemption of their Zulu-tek Series A Preferred
subject to the provisions and limitations of Section 302.
C. LIMITATION ON USE OF NET OPERATING LOSS CARRYOVERS.
The Company has net operating losses carryovers ("NOLs") of approximately
$1,700,000 for US tax purposes as reflected on the US Federal income tax returns
it has filed for the tax years ending on or prior to November 30, 1997 while
Zulu-tek has NOLs of approximately $13,000,000 for
71
<PAGE> 80
the tax years ending on or prior to December 31, 1997. The Reorganization will
constitute an "ownership change" within the meaning of Section 382 of the Code
and a "reverse acquisition" under the consolidated tax return regulations.
Accordingly, the limitations imposed by Section 382 ("Section 382 Limitation")
will apply to the Company's NOLs and tax attributes rather than to Zulu-tek's
NOLs and tax attributes. The Company's ability to use its NOLs and other tax
attributes, for both regular tax and alternative minimum tax purposes, during
future tax years will be limited to 5.10% of the fair market value of the
Company's Common Stock immediately before the ownership change. To the extent
that taxable income of the Company and Laptop Solutions exceeds the Section 382
Limitation in any taxable year after the ownership change, such excess income
may not be offset by NOLs from years prior to the ownership change; to the
extent that the amount of taxable income in any subsequent year is less than the
Section 382 Limitation for such year, the Section 382 Limitation for future
years is correspondingly increased. There is generally no restriction on the use
of NOLs arising after the ownership change, although the Section 382 tests are
applied each time there is an ownership change.
72
<PAGE> 81
PROPOSAL V
NOMINATION AND ELECTION OF DIRECTORS
The current Bylaws of the Company provide for a Board of Directors of not
less than three nor more than ten directors, each of whom are to be elected
annually. Three directors will be elected at the Annual Meeting. The Bylaws for
the Company, as a Delaware corporation, provide for a minimum of three
directors. Therefore, if Proposal I is approved, stockholders will be asked to
vote for three directors each for a one-year term. Currently, the Board of
Directors consists of three directors, Paul Messina, Keith C. Montgomery and
Joseph L. Searles III, each of whom has been nominated by the Board for
re-election. In the event that any of the nominees are unable to serve as a
Director, the Proxy Holders will vote for the election of substitute nominees,
if any, designated by the Board of Directors. Also, in 1999, if the
Reorganization is approved and implemented, the Company expects to designate
additional directors with Internet and related electronic commerce experience,
including George Russell, who has agreed to become a director after February
1999.
Since the March Transactions, Robert Smith has continued as Chief Financial
Officer and Assistant Secretary of the Company and Kenneth M. Duckman and Ralph
LaBarge, who were formerly the chief executive officer and President and chief
technical officer, respectively, of the Company, have provided interim
consulting advice. Prior to the March Transactions, there were five directors of
the Company. Messrs. Duckman and LaBarge and Bertram Pariser, John Meaney and
Michael Bernard resigned as directors of the Company on March 9, 1998 and Bill
S. Murski resigned as a director in April 1998. Paul Messina, Keith C.
Montgomery and Joseph L. Searles III, the current directors, Steve Lair (who
resigned in April 1998), Roger Mincheff (who resigned as director in August and
as President effective November 23, 1998), and Robert H. Tourtelot (who resigned
in September 1998) were appointed on various dates since the March Transactions.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR EACH NAMED NOMINEE.
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<PAGE> 82
The following table sets forth certain information with respect to the
nominees for directors and certain executive officers of the Company as of
November 30, 1998:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
NOMINEES FOR DIRECTOR:
Paul Messina 48 Director
Keith C. Montgomery 45 Director
Joseph L. Searles III 56 Director
OTHER EXECUTIVE OFFICERS:
Robert E. Chmiel 38 Chief Operating Officer
Robert Smith 60 Chief Financial Officer, Treasurer and Assistant
Secretary
Justin Walker 34 Vice President, General Counsel and Secretary
</TABLE>
Paul Messina has been a Director of the Company since March 1998 and was
Chief Financial Officer of Zulu-tek, Inc. from March to September 1998. Mr.
Messina is a practicing certified public accountant in San Diego, California.
Previously, Mr. Messina served as Chief Financial Officer, North American Watch
Corporation, an international manufacturer and distributor of Piaget, Movado,
Concord, and Corum timepieces and as Controller, Severin Group, an international
manufacturer and distributor of Gucci timepieces.
Keith C. Montgomery has been a director of the Company since July 1998.
For the last two years he has been a financial planner for the Investor's Group
based in Winnipeg, Manitoba. Prior to that, Mr. Montgomery was a residential and
commercial real estate broker in Canada for more than ten years. He also served
as a senior staff member for the Premier of Ontario.
Joseph L. Searles III has been a director of the Company since July 1998.
For more than the last five years, Mr. Searles has been a self-employed
consultant in finance, real estate and urban development principally through a
national consulting firm based in New York and founded by him. Mr. Searles has
more than 30 years experience in finance and public affairs including
assignments as acting chairman and director of the State of New York Mortgage
Agency and as vice president of a major New York bank.
Robert E. Chmiel joined the company as Chief Operating Officer, in
October 1998. From May 1998 until its merger with Bertlesmann in October 1998,
Mr. Chmiel was Chief Financial Officer for barnesandnoble.com, the online book
selling division of Barnes & Noble, Inc. From 1992 until joining Barnes & Noble,
Inc., Mr. Chmiel worked for the Walt Disney Company in various capacities, most
recently he was Vice President, Finance and Operations for Disney Online. Mr.
Chmiel's background also includes capital market experience with Oppenheimer &
Company, Inc., Prudential-Bache and at the Dunn & Bradstreet Corporation.
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<PAGE> 83
Robert Smith has been Chief Financial Officer of Laptop and of the Company
since October 1993. Previously (from 1986 to 1993), Mr. Smith served as
President of Horizon Computer Resources, Inc., a full service consulting and
automation advisory firm. Prior to founding Horizon, Mr. Smith served as Chief
Financial Officer of Lynn Elliott Company (1980-1986), a diversified holding
company with 19 subsidiaries in the petrochemical industry. From 1960 to 1980,
Mr. Smith was a practicing certified public accountant.
Justin Walker, Esq., joined the Company in May, 1998, as Associate General
Counsel. In July, 1998, Mr. Walker was promoted to Vice President & General
Counsel of the Company. From May 1997 to May 1998, Mr. Walker was General
Counsel of iXL-Los Angeles, the Western headquarters of the nation's largest
World Wide Web Site development/new media company. He was Director of Business &
Legal Affairs at BoxTop Entertainment and BoxTop Interactive from October 1996
to May 1997. From May 1995 to May 1996, Mr. Walker was a talent and literary
agent with Newsbuster, a Miami, Florida agency. After graduating from law school
in 1994, Mr. Walker was an associate at the law firm of Metzger, Samuels &
Wayman from September 1994 to May 1995.
TERM OF OFFICE OF DIRECTORS; COMPENSATION
The Directors are elected at each Annual Meeting of the stockholders of
the Company, and the term of their office runs until the next Annual Meeting of
the Company's stockholders and until their successors have been elected. The
elected Directors will continue in office until such Director's successor is
elected and has been qualified, or until such Director's earlier death,
resignation or removal. The Bylaws for the Company, under both Colorado and
Delaware law, state that in any election of Directors, the persons receiving a
plurality of the votes cast, up to the number of Directors to be elected in such
election, shall be deemed to be elected. Shares represented by proxies marked
"withhold authority" for one or more nominees will be counted as a negative
vote. Members of the Board of Directors are elected by the holders of the Common
Stock of the Company and represent the interests of all stockholders. The Board
of Directors meets periodically to review significant developments affecting the
Company and to act on matters requiring Board approval. Although the Board of
Directors delegates many matters to others, it reserves certain powers and
functions to itself.
Although its Board members are not presently compensated, the Company
reserves the right to reasonably compensate the members of the Board for their
services. Until 1998, Directors who were not employees of the Company each
received non-qualified options to acquire 1,000 shares of Common Stock on the
date of their election and annually at the annual stockholders meeting.
Commencing in 1998, the Directors have been granted options to acquire 100,000
shares (50,000 shares before the 2:1 stock split) and will receive options to
acquire 2,000 (1,000 shares before the 2:1 stock split) shares of Common Stock
at each annual stockholders meeting. The options granted in 1998 to non-employee
directors were granted as non-qualified options and employee directors received
options as incentive qualified options, to the extent allowed under the
Company's Plan (as defined below) and to the extent Common Stock was available
under the Plan. The options granted in 1998 were immediately exercisable (upon
delivery) and were granted at an exercise price of $2.00, the market price on
the date of grant. (See "Executive Compensations and Stock Options" and
"Security Ownership of Management and Principal Stockholders").
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<PAGE> 84
INDEMNIFICATION OF DIRECTORS AND EXECUTIVE OFFICERS
The Company has agreed to indemnify each director, officer and any
employee or agent, his heir, executors and administrators, against any and all
expenses or liability reasonably incurred by him in connection with any action,
suit or proceeding to which he may be a party by reason of his being or having
been a director, officer, employee or agent of the Company to the full extent
required or permitted by Colorado law and by Delaware law, assuming Proposal I
is approved and the jurisdiction of the Company's successor is changed to
Delaware.
BOARD MEETINGS AND COMMITTEES
The Board of Directors of the Company held 4 formal meetings during the
fiscal year ended November 30, 1997. Each Director attended in person (or
participated by telephone) in more than 75% of the total number of Board of
Directors' meetings held during the last fiscal year. In addition, the Board
acted by unanimous consent on a number of occasions. The Board has a
Compensation Committee to assist it in reviewing the compensation levels of
officers and directors of the Company, including all stock option grants made
under the Company's Incentive Stock Option Plan. During 1997, the members of the
Compensation Committee were Michael Bernard, John Meaney and Bertram Pariser.
During 1997, the Compensation Committee held two meetings. Bill S. Murski and
Michael Bernard were members of the Audit Committee which met quarterly.
Currently, Joseph L. Searles III and Keith C. Montgomery are the members of the
Compensation Committee and Paul Messina and Keith C. Montgomery are members of
the Audit Committee.
FISCAL YEAR
On November 30, 1998, the Board of Directors took action to change the
fiscal year end to December 31, and will report on the thirteen month period of
December 1, 1997 to December 31, 1998 as its current fiscal year.
EXECUTIVE COMPENSATION AND STOCK OPTIONS
The Company had no executive officer as of November 30, 1997 that earned
in excess of $100,000 in compensation during the fiscal year then ended. During
that year, Kenneth Duckman received a salary of $75,000, the same salary he had
received in the prior year. During fiscal 1995, he received compensation of
$90,000. In none of those years did Mr. Duckman receive any bonuses or other
compensation. No options were granted to Mr. Duckman, the Company's chief
executive officer during the fiscal year ended November 30, 1997. In connection
with the March Transactions, Mr. Duckman's options to acquire 7,800 shares at an
exercise price of $4.13 lapsed without exercise.
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<PAGE> 85
SUMMARY COMPENSATION TABLE
The following table sets forth compensation granted to each of the Named
Executive Officers during the year ended November 30, 1997 and the period of
December 1, 1997 to November 30, 1998. On November 30, 1998, the Board of
Directors extended the current fiscal year to December 31, 1998 and will report
on a 13 month period.
<TABLE>
<CAPTION>
=========================================================================================================
Annual Compensation Long Term Compensation
--------------------------------- ----------------------------------
Awards Payouts
------------------------ ---------
Securities
Under
Options/ Restricted
SARs Stock
Name and Principal Granted Awards LTIP
Position Year Salary Bonus Other (#) ($) Payouts
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Kenneth M. Duckman (1), 20,192(1)
Chief Executive Officer
- ---------------------------------------------------------------------------------------------------------
Kevin Rogers (2), 33,125 50,000(2)
President - Laptop
Solutions
- ---------------------------------------------------------------------------------------------------------
Roger Mincheff (3), 88,213 70,000 200,000
President/Director
- ---------------------------------------------------------------------------------------------------------
Robert Chmiel (4), 41,824 125,000 1,000,000
Chief Operating Officer
- ---------------------------------------------------------------------------------------------------------
Robert C. Smith, 113,000 25,000 173,000
Chief Financial Officer
- ---------------------------------------------------------------------------------------------------------
Peggy Aizawa 82,306 25,580
Vice President
- ---------------------------------------------------------------------------------------------------------
Nick Waddell 73,333 26,709
Vice President
=========================================================================================================
</TABLE>
(1) For the period of December 1, 1997 until his resignation in March 1998.
(2) Includes compensation to Mr. Rogers from December 1997 to May 1998. Mr
Rogers was President of Laptop Solutions and was president of the Company
from March 1998 to May 1998 when he resigned. The $50,000 was paid to Mr.
Rogers in consideration for the termination of his contract
(3) For the period of March 1, 1998 to November 30, 1998. Mr. Mincheff resigned
as president effective November 23, 1998 but continues as a consultant to
the Company. He served as a director from March to August 1998.
(4) For the period from October 1, 1998, when Mr. Chmiel joined the Company to
November 30, 1998. Includes 500,000 options which are immediately
exercisable (upon delivery).
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<PAGE> 86
OPTION/STOCK APPRECIATION RIGHT ("SAR") GRANTS
DURING THE YEAR ENDED NOVEMBER 30, 1997
AND FOR THE PERIOD OF DECEMBER 1, 1997 TO NOVEMBER 30, 1998
The following table sets forth stock options granted under the Company's
Stock Option Plan ("the Stock Option Plan") to each of the Named Executive
Officers during the year ended November 30, 1997 and the period of December 1,
1997 to November 30, 1998 (and after giving effect to the 2:1 stock split). On
November 30, 1998, the Board of Directors extended the current fiscal year to
December 31, 1998 and will report for the 13 month period ended December 31,
1998.
<TABLE>
<CAPTION>
======================================================================================================
Individual Grants
- ------------------------------------------------------------------------------------------------------
% of Total Market Value of
Securities Options/ Securities
Under SARs Underlying
Options/ Granted to Exercise or Options/SARs
SARs Employees in Base Price on Date of Grant Expiration
Granted Fiscal Year ($/Security) ($/Security) Date
0%
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Robert C. Smith 133,000 7.25 2.00 211,470 3/24/2003
40,000 2.18 0.938 35,000 2/9/2003
- ------------------------------------------------------------------------------------------------------
Roger Mincheff (1) 100,000 5.45 2.00 350,000 7/23/2003
100,000 5.45 2.375 325,000 7/31/2003
Robert Chmiel 1,000,000 54.49 $1.50 $1,430,000 10/28/2003
======================================================================================================
</TABLE>
<TABLE>
<CAPTION>
=======================================================
Individual Grants Potential
- ---------------------- Realizable Value Alternative
at Assumed to
Annual Rates of Realizable
Stock Price Value:
Appreciation for Grant
Option Term Date Value
--------------------------------
Grant Date
5%($) 10%($) Present Value
($)
- -------------------------------------------------------
<S> <C> <C> <C>
Robert C. Smith 332,500 399,000
46,875 56,250
- -------------------------------------------------------
Roger Mincheff (1) 250,000 300,000
296,875 356,250
Robert Chmiel 1,875,000 2,250,000
=======================================================
</TABLE>
(1) For the period of March 1, 1998 to November 30, 1998, Mr. Mincheff was
President of the Company and was a director from March to August. Mr.
Mincheff resigned as president effective November 23, 1998 but continued as
a consultant to the Company.
TEN-YEAR OPTION/SAR REPRICINGS
<TABLE>
<CAPTION>
=====================================================================================================
Market Length of
Number of Price of Exercise Original Term
Securities Stock at Price at Remaining at
Underlying Time of Time of Date of
Options/SARs Repricing Repricing New Repricing
Repriced or or or Exercise or
Name Date Amended Amendment Amendment Price Amendment
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Robert C. Smith 2/9/98 9,500 1.75 2.50 1.875 4 years
4,000 1.75 3.75 1.875 5 years
=====================================================================================================
</TABLE>
78
<PAGE> 87
MANAGEMENT CHANGES
During 1998, the Company has been focused on planning with Zulu-tek and
moving toward an Internet based business strategy. That focus, coupled with the
Management transactions that often accompany significant corporate transactions
has been reflected in changes in the senior executives of the Company and
Zulu-Media. However, with the appointment of Robert Chmeil as chief operating
officer, the designation of George Russell to continue in an executive role at
BrandsForLess.com as well as the continued participation by Robert Smith as
Chief Financial Officer, and by other Laptop and Zulu-Media staff, the
management structure is stabilizing. As financial and business prospects allow,
the Company intends to recruit and designate a chief executive officer and to
assemble the technical, financial, marketing and sales team needed to fully
implement its longer term Internet strategy. The Company has identified certain
persons who offer the needed Internet and interactive media skills for possible
management assignments but no designations have been made or finalized and there
are no current contractual relationships that are not reflected herein. These
persons and their skills currently are in high demand and there is no assurance
that the Company will compete successfully in the hiring process. Also, to the
extent that the Company pursues acquisitions and strategic opportunities or
continues to refocus its strategy, its staffing needs will be adjusted
accordingly. In attracting and retaining senior staff and executives, the
Company will be required to compete with other larger and better financed
enterprises, some of which are also publicly held and all of which are in a
position to offer significant compensation to attract senior personnel. To be
competitive, the Company will be required to offer compensation, including
equity participation, on terms that are comparable to the industry and
appropriate to the individuals being recruited. (See "Executive Compensation and
Stock Options" and "Transactions with Management and Others.")
SECURITY OWNERSHIP OF MANAGEMENT AND PRINCIPAL STOCKHOLDERS.
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock as of the Record Date by (i) each
stockholder who is known by the Company to own beneficially more than 5% of its
Common Stock, (ii) each director of the
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<PAGE> 88
Company, and (iii) all directors and officers of the Company as a group. As of
November 12, 1998, there were 5,854,908 shares outstanding (excluding 1,820,000
shares reserved for issuance and 3,801,250 shares issuable upon the exercise of
options or warrants). (See "Description of Capital Stock of the Company";
"Pro Forma Capitalization Table" and "Proposal I" for additional information on
the issued and outstanding securities).
<TABLE>
<CAPTION>
NAME AND ADDRESS AMOUNT AND NATURE PERCENT OF
OF BENEFICIAL OWNER(1) OF BENEFICIAL OWNERSHIP(2) CLASS(2)
---------------------- -------------------------- ---------
<S> <C> <C>
Kenneth M. Duckman(3) 495,334(3)(5) 4.9%(3)
Netvest Capital Partners, LP(4) 5,883,600(5) 20.0%(5)
Asian Trust Corporation, Ltd.(4)(6) 10,000,000(6) 37.3%(6)
Paul Messina 100,000(7) 1%(7)
Keith C. Montgomery 100,000(7) 1%(7)
Joseph L. Searles III 100,000(7) 1%(7)
Roger Mincheff 200,000(8) 2%(8)
Robert C. Smith 219,643(9) 2.2%(9)
Robert E. Chmiel 500,000(10) 4.9%
Justin Walker 33,333(11) Nil
All officers and directors as a group (7 persons) 1,258,976 12.5%
</TABLE>
- ---------------
(1) Unless otherwise indicated, the address of each beneficial owner is
c/o the Company Services Company, Inc., Suite 500, 3415 South
Sepulveda, Los Angeles, California, 90034.
(2) Excludes shares of Common Stock in which a broker, dealer or
registered investment advisor has been granted certain discretionary
powers by the beneficial owner. Calculated based on 11,476,158 fully
diluted shares of Common Stock outstanding on December 15, 1998, the
Record Date, and including the 1,000,000 options granted to Messrs.
Chmiel and Russell since that date, which are exercisable within 60
days. (See "Transactions with Management and Others").
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<PAGE> 89
(3) Includes 400,000 shares of Common Stock conveyed to Mr. Duckman by
Netvest in exchange for their $250,000 participation in a note from
the Company to FCA Investment Company. (See "Transactions with
Management and Others"). The 95,334 shares are held by the Ken and
Jill Duckman 1992 Charitable Remainder Trust ("Duckman Trust") Mr.
Duckman and the Duckman Trust are referred to collectively as the
Duckman Interests. (See "Transactions With Management and Others").
(4) Includes the 5,443,600 shares of Common Stock that could be issued
to Netvest Capital Partners, L.P. (previously defined as "Netvest")
if the Proposal is approved and it exercises its right to convert
all of the 1998 Preferred; if the Proposal is not approved, Netvest
would hold 440,000 shares (4.3%), of the Common Stock, on a fully
diluted basis.
(5) On the date of the March Transactions, the General Partner of
Netvest was Netvest Capital Funding, Inc., a Delaware corporation.
The limited partners in Netvest included China International
Equities, Limited ("CIEL"), Global Circuit Enterprises, Ltd., Techno
Wizard Ltd., China Enhanced Ltd., Superior Solutions Ltd., China
Capital Funds Ltd., Inter-Fax Ltd., Asia Strategy Developments,
Ltd., Digital Age Enterprises, Ltd., and Asian Project Services,
Ltd. The Company has been advised that the general partner is now
CIEL which holds a deminimus interest as general partner and a 20%
interest as a limited partner; the remaining 80% of the interests
are allocated among the other nine limited partners, none of whom
own more than 10% of the partnership. As a result, CIEL which is a
corporation with an address at Shanghai Ming Li Law House, #503, 444
Guang Zhong Road, Shanghai, China owns beneficially approximately 4%
of the Company's Common Stock, and none of the other limited
partners hold beneficially more than 2% of the Company's Common
Stock. The Company had been advised that all of the limited partners
are existing entities held by various individual and corporate
entities and maintain an address at the same address as the general
partner. To the knowledge of the Company, none of these limited
partners are, on an individual basis, an affiliate of each other or
the Company. Netvest disclaims beneficial ownership in the shares
distributed to the limited partners and in the partnership. In
transactions undertaken with Mr. Duckman in July, 1998, Netvest
acquired 1,135,168 shares from Mr. Duckman; Netvest has advised the
Company that 400,000 of shares have been reconveyed to Mr. Duckman
(see Note 3 above) and the remaining 735,168 shares have been
distributed to Netvest limited partners and certain other parties
for their personal account.
(6) Reflects the 10,000,000 shares of Common Stock to be issued upon
conversion of the Investor Preferred to Asian Trust Corporation,
Ltd. ("ATC"), an Irish corporation organized in 1993. The Company
has been advised that Netvest and ATC are not under common ownership
control but that they are advised, in certain matters, by a common
financial adviser whom the Company has been advised directly holds
some interest in ATC. ATC maintains an address at 1700 Three Bentall
Ctr., 595 Burrard Street, Vancouver, Canada.
(7) Includes 100,000 warrants which are immediately exercisable at an
exercise price of $2.00 per share.
(8) Includes 200,000 options which are immediately exercisable of which
100,000 options are exercisable at an exercise price of $2.00 per
share and 100,000 options are exercisable at an exercise price of
$2.375 per share. Mr. Mincheff resigned as President, effective
November 23, 1998.
(9) Includes 200,000 options which are immediately exercisable at an
exercise price of $0.9375 per share.
(10) Includes 500,000 options which are immediately exercisable at an
exercise price of $1.50 per share.
(11) Includes 500,000 options which are immediately exercisable at an
exercise price of $3.33 per share.
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<PAGE> 90
TRANSACTIONS WITH MANAGEMENT AND OTHERS
As discussed earlier, in the March Transactions, the Company exchanged
220,000 shares of Common Stock (440,000 shares after giving effect to the 2:1
stock split/dividend) and 1 million shares of 1998 Preferred Stock for 12
million shares of Zulu-tek Common Stock and 1 million Zulu-tek Series D
Preferred Stock held by Netvest. As a result of that transaction, Netvest became
a significant stockholder of the Company. Also, in the March Transactions,
Kenneth Duckman, individually and through the Duckman Trust, a trust in which
Kenneth Duckman, the chief executive officer of the Company at that time, is a
co-grantor, Ralph LaBarge and his wife and Netvest entered into a voting trust
agreement and a related stock loan agreement ("Voting Trust") to which they
contributed essentially all of the Company stock owned by them at the time of
the March Transactions or, in the case of Netvest, acquired in the March
Transactions. Richard A. Fisher, Esq., was designated as voting trustee. The
Voting Trust, and the related Stock Loan Agreement and the Letter Agreement were
included in the March Transactions after the transaction was restructured to
address and accommodate Marketplace Rule 4310(c)(25)(H)(ii), which became
effective on February 27, 1998, during the negotiations between the Company and
Zulu-tek. The purpose of these elements of the transaction was to provide a
logical route to a change of control (when the 1998 Preferred Stock was
converted), to consolidate the voting power in the voting trustee to accommodate
continued NASDAQ listing, to provide a vehicle for limited liquidity for the
participants in the transaction and to address tax considerations for the
transferring the Company's stockholders. Under the terms of these documents, the
voting trustee was required to consult with the parties who had delivered their
stock before voting and, in all events, was required to vote the Company's
Common Stock in a manner that would preserve the Company's NASDAQ listing, even
if such vote was inconsistent with the requests of one or more of the parties.
In a series of transactions from July 13, 1998 until the date hereof
("July Transactions"), Netvest acquired 1,135,168 shares of Common Stock from
the Duckman Interests principally on behalf of certain of the limited partners
of Netvest. The acquisition was for $1,556,139, as evidenced by a promissory
note payable in installments due through June, 1999. In the transactions,
Netvest also acquired all of the participants' interests in the $500,000 note
from the Company to FCA Investment Company. As a result, the Company will repay
FCA Investment Company at maturity and Netvest, in turn, would be entitled to
payment from FCA Investment Company. The Duckman Interests, who held $250,000 of
the obligation received payment of their participating interest when Netvest
reconveyed 400,000 shares of the 1,135,168 shares of Common Stock to the Duckman
Interests. Netvest distributed the remaining 735,168 shares of Common Stock to
the Netvest limited partners and certain other parties to hold for their own
accounts. The $1,556,139 note is secured by 956,788 shares of the 1998 Preferred
Stock acquired by Netvest in the March Transaction. If Netvest were to default
on the note and the default is not cured, the Duckman Interests could effect a
transfer of the 1998 Preferred Stock and could exercise the conversion rights.
Except for agreeing to the assignment of the obligations under the $500,000 note
to Netvest, the Company was not a direct participant in this transaction. In
connection with the July Transactions with the Duckman Interests, the Voting
Trust with respect to the Duckman Interests was terminated.
In addition, the Duckman Interests have loaned the Company $100,000 for a
six-month term pursuant to a separate Loan Agreement, Security Agreement and
Promissory Note, in exchange for which the Company granted the Duckman Interests
a warrant to purchase one warrant
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<PAGE> 91
of the Company's Common Stock for each one dollar loaned at an exercise price
equal to the market value of such shares on the day that the Company receives
the proceeds from the loan.
On July 13, 1998, in a transaction that was concurrent with but
independent of the transaction between the Duckman Interests and Netvest, the
Company executed and delivered to the Duckman Trust, a promissory note in the
principal amount of $400,000 (the "Duckman Note") in exchange for a general
release of all claims that Duckman may have had against the Company, including
Mr. Duckman's right, negotiated in the March Transaction, to acquire, on terms
to be negotiated later, the assets or stock of NB Engineering or Laptop
Solutions, the Company's wholly owned subsidiaries at the time of the March
Transactions. The Duckman Note bears interest at 6 percent per annum and is due
on June 16, 1999, except that the Company is required to apply 10 percent of the
gross proceeds received by the Company from financings to prepay the Duckman
Note, with minimum prepayments of not less than $50,000. As of the date hereof,
no payments have been made.
As described above, in the September Transactions, the Company and
Zulu-tek undertook a transaction in which the Company acquired all of the assets
and liabilities of Zulu-tek in exchange for the 1998(B) Preferred Stock and
10,209 shares of 1998(C) Non-Convertible Preferred Stock. The 1998(B) Preferred
Stock is convertible into 5.2 million shares of the Company's Common Stock only
after the conversion has been approved at this Annual Meeting.
On September 21, 1998, the holders of the Company's 8.6% Preferred Stock
agreed to convert their shares into 1.6 million shares of Common Stock (See
"Current Capital Structure of the Company"). All of the 1.6 million shares have
been issued.
At the time of the March Transactions, Ralph LaBarge entered into a two
year consulting agreement to continue to provide services to the Company and in
particular to NB Engineering. The consulting agreement is payable whether or not
NB operations are continued. As described above, in May 1998, the operations of
NB Engineering were closed down and Ralph LaBarge has continued to be available
to the Company under his consulting agreement but had no specific assignments.
In May 1998, in connection with the consolidation of the operations of the
Company and to effect cost saving measures, the Houston, Texas and North Bergen,
New Jersey offices of Laptop were closed, and Laptop Solutions operations were
consolidated at the Irvine, California facility. The Company's offices in
Houston, Texas were also closed and consolidated with the Zulu Media and
Zulu-tek offices in Los Angeles, California.
In October and November 1998, the Company has issued debentures
aggregating $2,550,000 to independent institutional investors. The debentures
are convertible into Common Stock of the Company on or before October 8, 2001,
the maturity date, at the option of the holder and are automatically convertible
on the maturity date at the lesser of 70% of the lowest bid prices of the Common
Stock during the 22 trading days preceding the conversion date or $1.00, subject
to a minimum conversion rate $0.15 per share. Interest is payable semi-annually
or, in certain cases, at maturity. The holders are entitled to warrants on the
basis of 13.3%, exercisable for three years
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<PAGE> 92
at an exercise price of a $1.00 per share. The warrants are subject to a 13% fee
to the investment firm that arranged the debentures and a warrant to acquire
250,000 shares at an exercise price of $1.00. The remaining $2.6 million was
funded in December, and is being issued as convertible securities, which are
convertible after June 1999 at the option of the holder at a conversion price of
$2.50 per share, subject to certain quarterly readjustments if the stock price
is below $2.50. The Company can redeem the securities if the Common Stock is
above $9 at one hundred percent (100%) of the face value plus 8 percent (8%)
interests. In addition in December 1998, the Company received funding of $2.6
million through the issuance of convertible securities.
Since December 1, 1997, options and warrants to acquire an aggregate of
1,733,000 shares of the Company's Common Stock have been granted to officers and
directors of the Company, some of whom are no longer serving in those
capacities. Of these, 250,000 have been registered on Form S-8, which would
allow the holders to immediately dispose of the underlying shares of Common
Stock after exercise and payment. In addition to the options and warrants issued
to current and former officers and directors, during the current fiscal year the
Company has granted options and warrants for services to be rendered, as
described below.
On August 20, 1997 the Company entered into an agreement (the "97 CBS
Agreement") with Creative Business Strategies, Inc. ("CBS"), a beneficial
holder, on the exercise of warrants granted pursuant thereto, of 4.4% of the
Company's outstanding Common Stock. Pursuant to the Agreement, CBS is to provide
consulting services to the Company for an initial term of one year. As
consideration for all services to be rendered by CBS under the Agreement, the
Company issued to CBS Common Stock purchase warrants exercisable to purchase, in
the aggregate 65,000, 12,500 at $2.00 per share, 112,500 at $2.50 per share,
12,500 at $3.00 per share and 12,500 shares at $4.00 per share, 15,000 at the
average price as so reported for the three months ended August 20, 1998. At the
year ended November 30, 1997, all 65,000 remain unexercised. All of the warrants
have been exercised.
On August 20, 1997 the Company entered into an agreement (the "97 WSF
Agreement") with Wall Street Financial ("WSF"), on the exercise of warrants
granted pursuant thereto, of 4.4% of the company's outstanding Common Stock.
Pursuant to the Agreement, WSF is to provide consulting services to the Company
for an initial term of one year. As consideration for all services to be
rendered by WSF under the Agreement, the Company issued to WFS Common Stock
purchase warrants exercisable to purchase, in the aggregate 50,000, 12,500 at
$3.00 per share, 12,500 at $3.25 per share, 12,500 at $3.75 per share and 12,500
shares at $4.00 per share. At the year ended November 30, 1997, all 50,000
remain unexercised. All of the warrants have been exercised.
Effective April 1, 1998, the Company entered into an agreement with
Kennedy Miles Creative Communications, Ltd. ("KM"), pursuant to which KM agreed
to provide to certain consulting and oversight agreements with respect to the
business opportunities in the United Kingdom and the discontinuance of the
operations of the former office in London for an initial term of one year. As
consideration for all services to be rendered by KM under the Agreement, the
Company issued to KM Common Stock purchase warrants exercisable to purchase, in
the aggregate 75,000 shares at $2.00 (without giving effect to the 2:1 stock
split). As of May 31, 1998, all of the warrants had been exercised.
Effective April 1, 1998, the Company entered into an agreement with
Richard A. Fisher, Esq. ("RAF"), pursuant to which RAF agreed to provide certain
consulting, corporate finance and
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strategic services to the Company in connection with the consolidation of its
activities with Zulu-tek for an initial term of one year. As consideration for
these services to be rendered by RAF under the Agreement, the Company issued to
RAF Common Stock purchase warrants exercisable to purchase, in the aggregate
50,000 shares at $4.00 (without giving effect to the 2:1 stock split). As of the
date hereof, all of the warrants had been exercised. Since the March
Transactions, RAF has also provided advice on certain legal matters in his
capacity as counsel for Zulu-tek, a position he resigned on July 15, 1998, to
allow him to devote the principal portion of his time to other business
interests. Since that date, he has continued to provide services to the Company
and to Zulu-tek, and to certain of its affiliates, on an hourly basis.
Effective March 13, 1998, Roger Mincheff, who served as president until
November 23, 1998 and is now acting in a consulting capacity, entered into an
employment agreement with Zulu Ventures, Inc., an entity that was formed as a
subsidiary of Zulu-tek but did not engage in active operations. The Company has
fulfilled the obligations under the employment agreement. Consistent with the
employment agreement and actions by the Board of Directors, Mr. Mincheff has
served as President of the Company at a base annual salary of $125,000 plus cash
bonuses of $35,000 payable on each of March 20 and April 30, 1998. The
employment agreement is for a term of three years and is subject to termination
by mutual agreement, by voluntary termination, death or for cause. In connection
with his employment, Mr. Mincheff was granted options to acquire 300,000 shares
of Common Stock (upon delivery) of the Company of which 200,000 are currently
exercisable (100,000 at $2.375 per share and 100,000 at $2.00 per share).
Effective October 28, 1998 the Company entered into an employment
agreement with Robert E. Chmiel, hiring him as the Company's new Chief Operating
Officer. Mr. Chmiel's employment agreement provides for a base salary of
$325,000 per year for a period of 3 years. As additional incentives to join the
Company, Mr. Chmiel was granted a signing bonus of $250,000 (of which $125,000
has been paid) and options to acquire 1,000,000 shares of the Company's Common
Stock at $1.50 per share, 50% of which vested as of October 28, 1998 and the
remaining 50% of which will vest on October 28, 1999. Mr. Chmiel is also
eligible to receive incentive stock options under the Company's Incentive Stock
Option Plan based on specified increases in the Company's gross revenues and
increases in the market price of the Company's Common Stock. Mr. Chmiel's
Employment Agreement is subject to termination for cause, death and voluntary
termination.
In connection with the transactions with Brand For Less L.L.C., George P.
Russell was hired as President and Chief Executive Officer of Brand For Less
under an Employment Agreement that provides for a base salary of $300,000 per
year, a three year term and includes the usual executive benefits and a
continuance bonus of $200,000. Enhanced granted him options to acquire 1,000,000
shares of the Company's Common Stock at $1.50 per share, 50% of which vest as of
February 1999 and 25% of which vest on each of December 1, 1999 and 2000. In
addition, Mr. Russell may receive an annual bonus of incentive stock options
measured by increases in the gross revenues of Brands For Less L.L.C. and
increases in the market price of the Company's Common Stock. Mr. Russell's
Employment Agreement is subject to termination for cause, "Good Reason" as
defined therein and for death or voluntary termination.
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Except for the above employment agreements, the Company does not currently
have any formal employment agreements with its other executive officers. The
Company does have employment agreements with certain non-executive officer and
managers and has announced that it is seeking to engage other senior corporate
officers and anticipates that those designations will be undertaken pursuant to
formal employment agreements.
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PROPOSAL VI
PROPOSAL TO REVISE, RESTATE AND INCREASE THE SHARES RESERVED FOR ISSUANCE UNDER
THE COMPANY'S 1992 INCENTIVE STOCK OPTION PLAN
In March 1992, the Company's Board of Directors and its stockholders
adopted the Company's 1992 Incentive Stock Option Plan (the "Plan"), which
provides for the grant of "incentive stock options" and "nonqualified stock
options" (collectively "Stock Options") within the meaning of Internal Revenue
Code of 1986 (the "Code"). Stock Options are issuable to certain officers,
directors, employees, consultants, advisors and representatives of the Company.
The Board has now amended and restated the Plan, subject to approval and
ratification by the Company's stockholders to provide for (i) grants of stock
options as well as other types of incentive awards ("Awards") that involve an
exercise for Common Stock or other conversion privileges or valuation of an
Award based on the Company's Common Stock, (ii) to increase the number of shares
reserved under the Plan to 6 million shares and (iii) to restate the Plan to
accommodate tax considerations and to reflect current trends and approaches to
director and incentive compensations in technology based entities. The amended
and restated Plan is annexed hereto as Appendix M.
The Plan is not subject to the Employee Retirement Income Security Act of
1974. If the Plan is approved Stock Options to acquire _____ shares of Common
Stock will be delivered on account of Stock Options previously granted in excess
of Stock Options previously available under the Plan.
SUMMARY OF THE PLAN
The following summary of the Plan is not intended to be complete, and is
qualified in its entirety by reference to the Plan itself, a copy of which may
be obtained without charge from the Company by requesting a copy from the
Company at 3415 South Sepulveda Boulevard, Suite 500, Los Angeles, California,
telephone (310) 397-3003, facsimile (310) 397-6132. Capitalized terms used
herein shall have the meaning ascribed to them in the Plan.
PURPOSE
The primary purpose of the Plan is to promote the growth and profitability
of the Company by providing, through the granting of options, incentives to
attract highly talented persons to positions with the Company and its
subsidiaries, to retain such persons and to motivate them to use their best
efforts on behalf of the Company and to attract skilled non-employee directors.
Awards that are granted to employees under the Plan may be either incentive
Stock Options or nonqualified Stock Options. Stock Options granted to
consultants and non-employee directors under the Plan will be nonqualified Stock
Options.
ADMINISTRATION
The Plan is administered either by (i) the Board or (ii) a Committee of no
less than two Board members, appointed by the Board. The Board and the Committee
each have full and absolute power and authority in its sole discretion to (i)
determine which Eligible Persons shall receive Awards, (ii) determine the time
when Awards shall be granted, (iii) determine the terms
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and conditions, of any Awards granted under the Plan, (iv) determine the number
of Shares which shall be subject to each Awards granted under the Plan, and (v)
interpret the provisions of the Plan and of any Awards granted under the Plan.
The interpretations and constructions by the Board or Committee of any
provisions of the Plan and of Awards granted thereunder, and such
determinations of the Board or Committee as they deem appropriate for the
administration of the Plan and of Awards granted thereunder, are final and
conclusive on all persons having any interest thereunder. The Board may from
time to time remove members from, or add members to, the Committee, and
vacancies on the Committee shall be filled by the Board. The Board may abolish
the Committee at any time and re-vest in the Board the administration of the
Plan.
ELIGIBILITY AND EXTENT OF PARTICIPATION
Awards may be granted only to employees, consultants, representatives,
advisors and directors of the Company and its subsidiaries. Incentive Stock
Options may be granted only to individuals who are employees (including officers
and directors who are also employees) of the Company or any parent or subsidiary
corporation (as defined in Section 424 of the Code) of the Company at the time
the Awards are granted. Non-Qualified Stock Options may be granted to
individuals who are consultants, representatives, advisors or directors of the
Company or any such parent or subsidiary corporation. As of December 30, 1998,
approximately 50 individuals were eligible to receive Awards, and Awards were
held by 30 individual(s) under the Plan. Subject to the terms of the Plan, the
Board and the Committee have full and final authority to determine the persons
who are to be granted Awards under the Plan and the number of Shares subject to
each Awards.
EXISTING OPTION GRANTS
During the fiscal year ended November 30, 1997, the Company granted 32,450
options (all of the discussion herein gives effect to the 2:1 stock split
effected in May, 1998) to 24 employees at exercise prices ranging from $.9375 to
$1.8750. Some of those options lapsed on various dates between June and
September, 1998. In February 1998, the Company repriced and extended the
termination date for 111,000 options including 60,000 non-qualified options held
by persons who are directors of the Company prior to the March Transactions.
During the current fiscal year, options to acquire 2,137,000 shares of Common
Stock have been issued to directors or employees of the Company, and options to
acquire 22,070 shares of Common Stock were exercised by employees of the
Company.
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As of December 15, 1998, options to purchase up to 461,250 shares were
outstanding, of which 453,748 were vested, under the Plan as follows:
<TABLE>
<CAPTION>
NUMBER OF OUTSTANDING NUMBER OF VESTED
EXERCISE PRICE OPTIONS OPTIONS
-------------- --------------------- ----------------
<S> <C> <C>
0.9375 178,000 173,331
1.000 2,000 0
1.2500 16,200 16,067
1.8750 1,050 350
2.000 233,000 233,000
2.2750 9,000 9,000
3.000 20,000 20,000
10.000 2,000 2,000
</TABLE>
PURCHASE PRICE AND EXERCISE OF OPTIONS
The purchase price for each Share issuable upon exercise of an Option are
to be determined by the Committee, but in the case of Incentive Stock Options
shall not be less than 100% of the fair market value of such Share on the date
the Option is granted, except that no Incentive Stock Option may be granted to
an individual if, at the time the Option is granted, such individual
beneficially owns stock possessing more than 10% of the total combined voting
power of all classes of stock of the Company or of its parent or subsidiary
corporation, within the meaning of Section 422(b)(6) of the Code, unless (i) at
the time such Option is granted the option price is at least 110% of the fair
market value of the Stock subject to the Option and (ii) such Option by its
terms is not exercisable after the expiration of five years from the date of the
grant. To the extent that the aggregate fair market value (determined at the
time the respective Incentive Stock Option is granted) of stock with respect to
which Incentive Stock Options are exercisable for the first time by an
individual during any calendar year exceeds $100,000, such excess Incentive
Stock Options are to be treated as Non-Qualified Stock Options.
An Option may be exercised in such amounts and at such times as may be
determined by the Board or the Committee at the time of grant of such Option. To
the extent that an Option is not exercised within the time period fixed by the
Committee, it will expire as to the then unexercised portion of the Option.
EXPIRATION AND TRANSFER OF OPTIONS
Options are non-transferable, except by will or by the laws of descent and
distribution. During the lifetime of each Option holder, only he or she may
exercise his or her Option.
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ADJUSTMENT OF SHARES
If any change is made in the Shares subject to the Plan, or subject to any
Option granted under the Plan, through merger, consolidation, reorganization,
recapitalization, stock dividend, stock split, combination of Shares, rights
offerings, change in the corporate structure of the Company, or otherwise, such
adjustment are to be made as to the maximum number of Shares subject to the
Plan, and the number of Shares and prices per share of stock subject to
outstanding Options as the Committee may deem appropriate.
AMENDMENTS TO AND TERMINATION OF THE PLAN
The Board may amend, suspend, alter, or terminate the Plan at any time. To
the extent necessary or desirable to comply with Rule 16b-3, the Code or any
other applicable law or regulation, the Company is required to obtain
stockholder approval of any amendment to the Plan only in such a manner and to
such a degree as required by applicable law.
The Board may amend the terms of any Option previously granted,
prospectively or retroactively; provided, however, that unless required by
applicable law, rule or regulation, no amendment of the Plan or of any Option
Agreement may, without the consent of any Optionee holding any such affected
Options, be permitted if such amendment would affect in a material and adverse
manner Options granted prior to the date of any such amendment.
FEDERAL INCOME TAX CONSEQUENCES
The following summary of the Federal income tax consequences of the grant and
exercise of Options, and the disposition of Shares purchased pursuant to the
exercise of Options, is intended to reflect the current provisions of the Code
and the regulations thereunder. This summary is not intended to be a complete
statement of applicable law, not does it deal with state and local tax
considerations.
INCENTIVE STOCK OPTIONS
No taxable income will be recognized by the Option holder at the time of a
grant or exercise of an Option. The excess of the fair market value of the
Common Stock over the option price at the date of exercise of an Option is an
adjustment for purposes of computing the alternative minimum tax under section
55 of the Code. If the requirements of section 422 of the Code are met by the
Option holder (including the requirement that no disposition of such Shares is
made by the Option holder for more than two years after the grant of the Option
and for more than one year after the exercise of such Option), then any gain or
loss realized by the Option holder upon disposition of such Shares will be
treated as long-term capital gain or loss (assuming such Shares are held as a
capital asset by the Option holder). If the requirements of section 422 of the
Code are met, the Company will not be entitled to any deduction for Federal
income tax purposes as a result of the issuance of such Shares pursuant to the
exercise of the Option. If Shares acquired on exercise of an Option are disposed
of prior to the expiration of either of the required holding periods described
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above (a "disqualifying disposition"), the Option holder will recognize ordinary
income in the year in which the disposition of such Shares occurs. The amount of
such ordinary income will be the excess of (a) the lower of the amount realized
on disposition of such Shares or the fair market value of such Shares on the
date of exercise of such Option, over (b) the Option price, so long as the
disposition is by sale or exchange with respect to which a loss, if sustained,
would be recognized.
In addition, long-term capital gain may be recognized by the Option holder
(assuming such Shares are held as a capital asset for more than six months by
the Option holder) in an amount equal to the excess of the amount realized on
the disqualifying disposition over the sum of the Option price and the ordinary
income recognized by the Option holder. The Company (or the employer of the
Option holder) will ordinarily be entitled to a deduction for Federal income tax
purposes at the time of the disqualifying disposition in an amount equal to the
ordinary income recognized by the Option holder.
If an Option is exercised by the estate of an Option holder, the holding
periods do not apply, and the estate will not recognize any ordinary income when
it disposes of the Shares acquired upon the exercise of such Option. The estate,
however, may recognize long-term capital gain, and the Company will not be
entitled to any deduction for Federal income tax purposes.
NON-QUALIFIED STOCK OPTIONS
No tax obligation will arise for the Optionee or the Company upon the
granting of either Incentive Stock Options or Non-Qualified Stock Options under
the Plan. Upon exercise of a Non-Qualified Stock Option, an Optionee will
recognize ordinary income in an amount equal to the excess, if any, of the fair
market value, on the date of exercise, of the stock acquired over the exercise
price of the option. Thereupon, the Company will be entitled to a tax deduction
in an amount equal to the ordinary income recognized by the Optionee. Any
additional gain or loss realized by an Optionee on disposition of the shares
generally will be capital gain or loss to the Optionee and will not result in
any addition tax deduction to the Company. The taxable event arising from
exercise of Non-Qualified Stock Options by officers of the Company subject to
Section 16(b) of the Securities Act of 1934 occurs on the later of the date on
which the option is exercised or the date six months after the date the option
was granted unless the Optionee elects, within 30 days of the date of exercise,
to recognize ordinary income as of the date of exercise. The income recognized
at the end of any deferred period will include any appreciation in the value of
the stock during that period and the capital gain holding period will not being
to run until the completion of such period.
THE BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS VOTE TO AMEND THE
COMPANY'S 1992 INCENTIVE STOCK OPTION PLAN TO INCREASE THE NUMBER OF OPTIONS
ELIGIBLE FOR GRANT TO 6 MILLION.
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PROPOSAL VII
RATIFICATION OF THE APPOINTMENT OF
SCHUMACHER & ASSOCIATES
AS INDEPENDENT AUDITORS
The Board of Directors has appointed Schumacher & Associates as the
Company's independent auditors for its current fiscal year and is seeking
stockholder ratification of the appointment. However, the Board of Directors may
appoint other auditors for the fiscal year at anytime without stockholder
approval if it determines that a change in auditors would be in the best
interests of the Company and its stockholders. Schumacher & Associates served as
auditors for the Company for the year ended November 30, 1997. Representatives
of Schumacher & Associates will be in attendance at the Annual Meeting to
respond to questions from shareholders.
THE BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS VOTE FOR THE RATIFICATION OF
THE APPOINTMENT OF SCHUMACHER & ASSOCIATES AS THE COMPANY'S INDEPENDENT
AUDITORS.
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INCORPORATION BY REFERENCE
In addition to the materials set forth herein, this Proxy Statement incorporates
by reference the following items previously filed with the SEC:
1. The Company's Annual Reports on Form 10-K and Form 10-KSB for the year
ended November 30, 1997, as amended to date;
2. The Company's Reports on Form 10-QSB for the quarters ended February 23,
March 31 and August 31, 1998, respectively, as amended by Forms 10-QSB-A
for the quarters ended March 31 and August 31, 1998; and
3. The Company's Reports on Form 8-K covering events on March 3, September 9,
November 24 and December 5, 1998, including the Reports on Form 8-KA with
respect thereto.
REQUIREMENTS AND PROCEDURES FOR SUBMISSION OF PROXY PROPOSALS AND NOMINATIONS OF
DIRECTORS BY STOCKHOLDERS
The Board of Directors has approved the change in the year end of the
Company from November 30 to December 31. The Annual Meeting of Stockholders of
the Company for the year ending December 31, 1998 (the "1999 Annual Meeting"),
is expected to be held in June 1999 with the mailing of proxy materials for such
meeting expected to be in May 1999. Any stockholder who intends to present a
proposal to be included in the Company's proxy materials to be considered for
action at the 1999 Annual Meeting must satisfy the requirements of the
Commission and the proposal must be received by the Secretary of the Company on
or before February 15, 1999 for review and consideration for inclusion in the
Company's proxy statement and proxy card relating to that Annual Meeting.
The chairman of the 1999 Annual Meeting may decline to allow the
transaction of any business or the consideration of any nomination which was not
properly presented in accordance with these requirements. The requirements with
respect to nomination of persons for director do not affect the deadline for
submitting stockholder proposals for inclusion in the proxy statement, nor do
they apply to questions a stockholder may wish to ask at a meeting. If the
Company changes the date of the 1999 Annual Meeting of stockholders,
stockholders will be notified in accordance with the Company's bylaws.
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Under the Exchange Act, the Company's directors, certain executive and
other officers, and any person holding more than ten percent (10%) of the
Company's Common Stock are required to report their ownership and any changes in
that ownership to the Commission and any exchange or quotation system on which
the Common Stock is listed or quoted. Specific due dates for these reports have
been established and the Company is required to report in this proxy statement
any
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failure to file by directors and officers and ten percent (10%) holders. Based
solely on a review of the copies of reports furnished to the Company as filed
with the Commission, the Company believes that its executive officers and
directors have complied with the filing requirements applicable to them for the
year ended November 30, 1997.
AVAILABILITY OF ANNUAL AND INTERIM REPORTS
The Company will furnish without charge to each stockholder who so
requests in writing a copy of the Company's Annual Report on Form 10-KSB for the
fiscal year ended November 30, 1997, copies of its quarterly reports on Form
10-QSB and 10-QSB-A and copies of reports on Form 8-K and 8-K-A covering the
March and September Transactions, all as filed with the Securities and Exchange
Commission. A copy of the Annual Report was previously mailed to all
stockholders of record on March 30, 1998. Requests for additional copies of the
Annual Report on Form 10-KSB should be sent to the Company at 3415 South
Sepulveda Boulevard, Suite 500, Los Angeles, California 90034, Attention:
Investor Relations. In addition, each of these reports is available in
electronic form on the EDGAR database at http://www.SEC.GOV/edaux/formlynx.htm;
Company - Enhanced Services.
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OTHER MATTERS
The Board of Directors knows of no other business that will be presented
for consideration at the Annual Meeting. If other matters are properly brought
before the meeting, however, it is the intention of the persons named in the
accompanying proxy to vote the shares represented thereby on such matters in
accordance with their best judgment.
DATED: January __, 1998
BY ORDER OF THE BOARD OF DIRECTORS
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APPENDIX A
CERTIFICATE OF INCORPORATION
OF
ZULUGROUP.COM, LTD.
The undersigned, for the purposes of forming a corporation under the
laws of the State of Delaware, does make, file and record this Certificate, and
does certify that:
ARTICLE I
NAME
The name of this corporation is ZuluGroup.com, Ltd. (the
"Corporation").
ARTICLE II
REGISTERED AGENT
Its Registered Office in the State of Delaware is to be located at
1013 Centre Road, Wilmington, Delaware 19805, in New Castle County. The
Registered Agent in charge thereof is Corporation Service Company.
ARTICLE III
PURPOSE
The purpose of the Corporation is to engage in any lawful act or
activity for which a corporation may be organized under the General Corporation
Law of Delaware (the "GLC").
ARTICLE IV
DURATION OF CORPORATION
The duration of the Corporation shall be perpetual.
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ARTICLE V
INCORPORATOR
The name and mailing address of the incorporator are as follows:
Name Mailing Address
Justin Walker 3415 S. Sepulveda Blvd.
Suite 500
Los Angeles, California 90034
ARTICLE VI
CAPITAL STOCK
The total number of shares of stock which the Corporation shall have
authority to issue is One Hundred and Twenty-five Million shares (125,000,000),
consisting of One Hundred Million shares (100,000,000) of common stock, with a
par value $.001 per share (the "Common Stock"), and Twenty-five Million shares
of preferred stock, with a par value of $.001 dollars per share (the "Preferred
Stock").
The Preferred Stock may be issued from time to time in one or more
series. A majority of the Board of Directors is expressly authorized to fix by
written consent without a meeting, or by resolution or resolutions, to provide
for the issue of any series of Preferred Stock, the number of shares included in
such series and the voting power, designations, par values, redemption values,
preferences and relative participating optional qualifications, limitations or
restrictions thereof, and except as otherwise provided in respect of any such
series (but not below the number of shares thereof then outstanding). In case
the number of shares of any such series shall be so decreased, the shares
constituting such decrease shall resume the status which they had prior to the
adoption of the resolution or resolutions originally fixing the number of shares
of such series. The number of authorized shares of Preferred Stock may be
increased or decreased (but not below the number of shares thereof then
outstanding) by the affirmative vote of the holders of a majority of the stock
of the Corporation entitled to vote.
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ARTICLE VII
BOARD OF DIRECTORS
Section 1. Number and Election. The Board of Directors of the
Corporation shall consist of not less than three (3) nor more than ten (10)
directors, with the exact number to be fixed from time to time in the manner
provided in the Corporation's Bylaws. The initial board of directors shall be
appointed by the Incorporator and shall serve until the next annual meeting of
the Corporation's stockholders following the date of incorporation. Except for
the initial directors, the directors shall be elected at the annual meeting of
the stockholders, as such are convened, or by or pursuant to the Bylaws, and
shall serve until the annual meeting at which their successor is duly elected
and qualified.
Section 2. Removal. Subject to the rights of the holders of any
Preferred Stock then outstanding, any director, or the entire board, may be
removed from office at any time, with or without cause and by the affirmative
vote of a majority vote of the shareholders then entitled to vote at an election
of directors.
Section 3. Vacancies. Subject to the rights of the holders of any
Preferred Stock, vacancies and newly created directorships resulting from any
increase in the authorized number of directors elected by all of the
stockholders having the right to vote as a single class may be filled by a
majority of the directors then in office, although less than a quorum, or by a
sole remaining director.
Section 4. Absence of Requirements of Ballots. The election of
directors need not be by written ballot unless the Bylaws of the Corporation
shall so provide.
Section 5. Power to Amend Bylaws. Any change as defined in the
Bylaws of the Corporation must be approved by a majority of the authorized
number of directors.
ARTICLE VIII
STOCKHOLDER VOTE
Any election or other action by stockholders of the Corporation may
be effected by written consent and without a meeting, except as limited by this
Certificate of Incorporation, the regulations of the National Association of
Securities Dealers or any other exchange or while the Corporation's Common Stock
is listed or traded and any other applicable regulations or laws.
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ARTICLE IX
SPECIAL MEETINGS
Special meetings of the stockholders of the Corporation for any
purpose or purposes may be called at any time by the Board of Directors or by a
majority of the members of the Board of Directors or by the request of
stockholders holding ten percent (10%) of the Corporations outstanding Common
Stock.
ARTICLE X
LIABILITY FOR BREACH OF FIDUCIARY DUTY
To the fullest extent permitted by the GCL, a director of the
Corporation shall not be liable to the Corporation or its stockholders for
monetary damages for breach of fiduciary duty as a director. In furtherance
thereof, a director of the Corporation shall not be personally liable to the
Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, except for liability (i) for any breach of the director's
duty of loyalty to the Corporation or its stockholders, (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) under Section 174 of the GCL, as the same exists or
hereafter may be amended, or (iv) for any transaction from which the director
derived an improper personal benefit. If the GCL hereafter is amended to
authorize the further elimination or limitation of the liability of directors,
then the liability of directors shall be eliminated or limited to the full
extent authorized by the GCL, as so amended.
ARTICLE XI
INDEMNIFICATION
The Corporation shall, to the fullest extent legally permissible
under the provisions of the Delaware General Corporation Law, as the same may be
amended and supplemented, shall indemnify and hold harmless any and all persons
whom it shall have power to indemnify under said provisions from and against any
and all liabilities (including expenses) imposed upon or reasonably incurred by
him or her in connection with any action, suit or other proceeding in which he
may be involved or with which he or she may be threatened, or other matters
referred to in or covered by said provisions both as to action in his or her
official capacity and as to action in another capacity while holding such
office, and shall continue as to a person who has ceased to be a director or
officer of the Corporation. Such indemnification provided shall not be deemed
exclusive of any other rights to which those indemnified may be entitled under
any Bylaw, Agreement or Resolution adopted by the shareholders entitled to vote
thereon after notice.
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ARTICLE XII
CREDITOR COMPROMISE OR ARRANGEMENT
When a compromise or arrangement is proposed between the Corporation
and its creditors or any class of them or between the Corporation and its
shareholders or any class of them, a court of equity jurisdiction within the
state, on application of the Corporation or of a creditor or shareholder
thereof, or on application of a receiver appointed for the Corporation pursuant
to the provisions of Section 291 of Title 8 of the Delaware Code or on
application of trustees in dissolution or of any receiver or receivers appointed
for the Corporation pursuant to provisions of Section 279 of Title 8 of the
Delaware Code order a meeting of the creditors or class of creditors or of the
shareholders or class of shareholders to be affected by the proposed compromise
or arrangement or reorganization, to be summoned in such manner as the court
directs. If a majority in number representing 3/4 in value of the creditors or
class of creditors, or of the shareholders or class of shareholders to be
affected by the proposed compromise or arrangement or a reorganization, agree to
a compromise or arrangement, the compromise or arrangement and the
reorganization, if sanctioned by the court to which the application has been
made, shall be binding on all the creditors or class of creditors, or on all the
shareholders or class of shareholders and also on the Corporation.
ARTICLE XIV
ELECTION WITH RESPECT TO SECTION 203
The Corporation expressly hereby elects not to be governed by the
provisions of Section 203 of Title 8 of the Delaware Code, or any successor
thereto, with respect to the statutory restrictions or transactions involving
certain possible business combinations.
ARTICLE XV
RIGHT TO AMEND THE CERTIFICATE OF INCORPORATION
In addition to any affirmative vote required by applicable law and
any voting rights granted to or held by holders of Preferred Stock, any
alteration, amendment, repeal or rescission (any "Change") of any provision of
this Restated Certificate of Incorporation must be approved by a majority of the
directors of the Corporation then in office and by the affirmative vote of the
holders of a majority of the outstanding shares of Voting Stock of the
Corporation.
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Dated on this 7th day of December, 1998.
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Incorporator
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APPENDIX B
BYLAWS
OF
ZULUGROUP.COM, LTD.
(THE "CORPORATION")
ARTICLE I
STOCKHOLDERS
1. CERTIFICATES REPRESENTING STOCK. Certificates representing
stock in the Corporation shall be signed by, or in the name of, the Corporation
by the Chairman or Vice-Chairman of the Board of Directors, if any, or by the
President or a Vice-President and by the Treasurer or an Assistant Treasurer or
the Secretary or an Assistant Secretary of the Corporation. In case any officer,
transfer agent, or registrar who has signed or whose signature has been placed
upon a certificate shall have ceased to be such officer, transfer agent, or
registrar before such certificate is issued, it may be issued by the Corporation
with the same effect as if he were such officer, transfer agent, or registrar at
the date of issue.
Whenever the Corporation shall be authorized to issue more than one
class of stock or more than one series of any class of stock, and whenever the
Corporation shall issue any shares of its stock as partly paid stock, the
certificates representing shares of any such class or series or of any such
partly paid stock shall set forth thereon the statements prescribed by the
Delaware General Corporation Law (the "DGCL"). Any restrictions on the transfer
or registration of transfer of any shares of stock of any class or series shall
be noted conspicuously on the certificate representing such shares.
The Corporation may issue a new certificate of stock or
uncertificated shares in place of any certificate theretofore issued by it,
alleged to have been lost, stolen or destroyed, and the Board of Directors may
require the owner of the lost, stolen, or destroyed certificate, or his legal
representative, to give the Corporation a bond sufficient to indemnify the
Corporation against any claim that may be made against it on account of the
alleged loss, theft, or destruction of any such certificate or the issuance of
any such new certificate or uncertificated shares.
2. UNCERTIFICATED SHARES. Subject to any conditions imposed by
the DGCL, the Board of Directors of the Corporation may provide by resolution or
resolutions that some or all of any or all classes or series of the stock of the
Corporation shall be uncertificated shares. Within a
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reasonable time after the issuance or transfer of any uncertificated shares, the
Corporation shall send to the registered owner thereof any written notice
prescribed by the DGCL.
3. FRACTIONAL SHARE INTERESTS. The Corporation may, but shall not
be required to, issue fractions of a share. If the Corporation does not issue
fractions of a share, it shall (1) arrange for the disposition of fractional
interests by those entitled thereto, (2) pay in cash the fair value of fractions
of a share as of the time when those entitled to receive such fractions are
determined, or in the alternative, adjust any such fractional shares to be
issued up to the nearest whole share, or (3) issue scrip or warrants in
registered form (either represented by a certificate or uncertificated) or
bearer form (represented by a certificate) which shall entitle the holder to
receive a full share upon the surrender of such scrip or warrants aggregating a
full share. A certificate for a fractional share or an uncertificated fractional
share shall, but scrip or warrants shall not unless otherwise provided therein,
entitle the holder to exercise voting rights, to receive dividends thereon, and
to participate in any of the assets of the Corporation in the event of
liquidation. The Board of Directors may cause scrip or warrants to be issued
subject to the conditions that they shall become void if not exchanged for
certificates representing the full shares or uncertificated full shares before a
specified date, or subject to the conditions that the shares for which scrip or
warrants are exchangeable may be sold by the Corporation and the proceeds
thereof distributed to the holders of scrip or warrants, or subject to any other
conditions which the Board of Directors may impose.
4. STOCK TRANSFERS. Upon compliance with provisions restricting
the transfer or registration of transfer of shares of stock, if any, transfers
or registration of transfers of shares of stock of the Corporation shall be made
only on the stock ledger of the Corporation by the registered holder thereof, or
by his attorney thereunto authorized by power of attorney duly executed and
filed with the Secretary of the Corporation or with a transfer agent or a
registrar, if any, and, in the case of shares represented by certificates, on
surrender of the certificate or certificates for such shares of stock properly
endorsed and the payment of all taxes due thereon.
5. RECORD DATE FOR STOCKHOLDERS. In order that the Corporation
may determine the stockholders entitled to notice of or to vote at any meeting
of stockholders or any adjournment thereof, the Board of Directors may fix a
record date, which record date shall not precede the date upon which the
resolution fixing the record date is adopted by the Board of Directors, and
which record date shall not be more than sixty nor less than ten days before the
date of such meeting. If no record date is fixed by the Board of Directors, the
record date for determining stockholders entitled to notice of or to vote at a
meeting of stockholders shall be at the close of business on the day next
preceding the day on which notice is given, or, if notice is waived, at the
close of business on the day next preceding the day on which the meeting is
held. A determination of stockholders of record entitled to notice of or to vote
at a meeting of stockholders shall apply to any adjournment of the meeting;
provided, however, that the Board of Directors may fix a new record date for the
adjourned meeting. In order that the Corporation may determine the stockholders
entitled to consent to corporate action in writing without a meeting, the Board
of Directors may fix a record date, which record date shall not precede the date
upon which the resolution fixing the record date is adopted by the Board of
Directors, and which date shall not be
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more than ten days after the date upon which the resolution fixing the record
date is adopted by the Board of Directors. If no record date has been fixed by
the Board of Directors, the record date for determining the stockholders
entitled to consent to corporate action in writing without a meeting, when no
prior action by the Board of Directors is required by the DGCL, shall be the
first date on which a signed written consent setting forth the action taken or
proposed to be taken is delivered to the Corporation by delivery to its
registered office in the State of Delaware, its principal place of business, or
an officer or agent of the Corporation having custody of the book in which
proceedings of meetings of stockholders are recorded. Delivery made to the
Corporation's registered office shall be by hand or by certified or registered
mail, return receipt requested. If no record date has been fixed by the Board of
Directors and prior action of the Board of Directors is required by the DGCL,
the record date for determining stockholders entitled to consent to corporate
action in writing without a meeting shall be at the close of business on the day
on which the Board of Directors adopts the resolution taking such prior action.
In order that the Corporation may determine the stockholders entitled to receive
payment of any dividend or other distribution or allotment of any rights or the
stockholders entitled to exercise any rights in respect of any change,
conversion, or exchange of stock, or for the purpose of any other lawful action,
the Board of Directors may fix a record date, which record date shall not
precede the date upon which the resolution fixing the record date is adopted,
and which record date shall not be more than sixty days prior to such action. If
no record date is fixed, the record date for determining stockholders for any
such purpose shall be at the close of business on the day on which the Board of
Directors adopts the resolution relating thereto.
6. MEANING OF CERTAIN TERMS. As used herein in respect of the
right to notice of a meeting of stockholders or a waiver thereof or to
participate or vote thereat or to consent or dissent in writing in lieu of a
meeting, as the case may be, the term "share" or "shares" or "share of stock" or
"shares of stock" or "stockholder" or "stockholders" refers to an outstanding
share or shares of stock and to a holder or holders of record of outstanding
shares of stock when the Corporation is authorized to issue only one class of
shares of stock, and said reference is also intended to include any outstanding
share or shares of stock and any holder or holders of record of outstanding
shares of stock of any class upon which or upon whom the Certificate of
Incorporation confers such rights where there are two or more classes or series
of shares of stock or upon which or upon whom the DGCL confers such rights
notwithstanding that the Certificate of Incorporation may provide for more than
one class or series of shares of stock, one or more of which are limited or
denied such rights thereunder; provided, however, that no such right shall vest
in the event of an increase or a decrease in the authorized number of shares of
stock of any class or series which is otherwise denied voting rights under the
provisions of the Certificate of Incorporation, except as any provision of law
may otherwise require.
7. STOCKHOLDER MEETINGS.
7.1 ANNUAL MEETING. The annual meeting of the stockholders
shall be held on the date and at the time fixed, from time to time, by the
directors, provided, that the first annual meeting shall be held on a date
within thirteen months after the organization of the
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Corporation, and each successive annual meeting shall be held on a date within
thirteen months after the date of the preceding annual meeting. A special
meeting shall be held on the date and at the time fixed by the directors.
7.2 SPECIAL MEETINGS. Subject to Article IX of the
Certificate of Incorporation, a special meeting of the stockholders for the
transaction of any proper business may be called at any time by the Board of
Directors, by the Chairman of the Board, by the President or by the holders of
record entitled to cast not less than ten percent (10%) of the votes at such a
meeting.
7.3 PLACE. Annual meetings and special meetings shall be
held at such place, within or without the State of Delaware, as the directors
may, from time to time, fix. Whenever the directors shall fail to fix such
place, the meeting shall be held at the registered office of the Corporation in
the State of Delaware.
7.4 CALL. Annual meetings and special meetings may be called
by the directors or by any officer instructed by the directors to call the
meeting.
7.5 NOTICE OR WAIVER OF NOTICE. Written notice of all
meetings shall be given, stating the place, date, and hour of the meeting and
stating the place within the city or other municipality or community at which
the list of stockholders of the Corporation may be examined. The notice of an
annual meeting shall state that the meeting is called for the election of
directors and for the transaction of other business which may properly come
before the meeting, and shall (if any other action which could be taken at a
special meeting is to be taken at such annual meeting) state the purpose or
purposes. The notice of a special meeting shall in all instances state the
purpose or purposes for which the meeting is called. The notice of any meeting
shall also include, or be accompanied by, any additional statements,
information, or documents prescribed by the DGCL. Except as otherwise provided
by the DGCL, a copy of the notice of any meeting shall be given, personally or
by mail, not less than ten days nor more than sixty days before the date of the
meeting, unless the lapse of the prescribed period of time shall have been
waived, and directed to each stockholder at his record address or at such other
address which he may have furnished by request in writing to the Secretary of
the Corporation. Notice by mail shall be deemed to be given when deposited, with
postage thereon prepaid, in the United States Mail or delivered to an express
mail or similar service for delivery or transmitted by facsimile or other
electronic means to the record address for such deliveries. If a meeting is
adjourned to another time, not more than thirty days hence, and/or to another
place, and if an announcement of the adjourned time and/or place is made at the
meeting, it shall not be necessary to give notice of the adjourned meeting
unless the directors, after adjournment, fix a new record date for the adjourned
meeting. Notice need not be given to any stockholder who submits a written
waiver of notice signed by him before or after the time stated therein.
Attendance of a stockholder at a meeting of stockholders shall constitute a
waiver of notice of such meeting, except when the stockholder attends the
meeting for the express purpose of objecting, at the beginning of the meeting,
to the transaction of any business because the meeting is not lawfully called or
convened. Neither the business to be transacted at, nor the
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purpose of, any regular or special meeting of the stockholders need be specified
in any written waiver of notice.
7.6 STOCKHOLDER LIST. The officer who has charge of the
stock ledger of the Corporation shall prepare and make, at least ten days before
every meeting of stockholders, a complete list of the stockholders, arranged in
alphabetical order, and showing the address of each stockholder and the number
of shares registered in the name of each stockholder. Such list shall be open to
the examination of any stockholder, for any purpose germane to the meeting,
during ordinary business hours, for a period of at least ten days prior to the
meeting, either at a place within the city or other municipality or community
where the meeting is to be held, which place shall be specified in the notice of
the meeting, or if not so specified, at the place where the meeting is to be
held. The list shall also be produced and kept at the time and place of the
meeting during the whole time thereof, and may be inspected by any stockholder
who is present. The stock ledger shall be the only evidence as to who are the
stockholders entitled to examine the stock ledger, the list required by this
section or the books of the Corporation, or to vote at any meeting of
stockholders.
7.7 CONDUCT OF MEETING. Meetings of the stockholders shall
be presided over by one of the following officers in the order of seniority and
if present and acting - the Chairman of the Board, if any, the Vice-Chairman of
the Board, if any, the President, a Vice-President, or, if none of the foregoing
is in office and present and acting, by a chairman to be chosen by the
stockholders. The Secretary of the Corporation, or in his absence, an Assistant
Secretary, shall act as secretary of every meeting, but if neither the Secretary
nor an Assistant Secretary is present the Chairman of the meeting shall appoint
a secretary of the meeting.
7.8 PROXY REPRESENTATION. Every stockholder may authorize
another person or persons to act for him by proxy in all matters in which a
stockholder is entitled to participate, whether by waiving notice of any
meeting, voting or participating at a meeting, or expressing consent or dissent
without a meeting. Every proxy must be signed by the stockholder or by his
attorney-in-fact and may be signed in facsimile or other electronic form
reasonably acceptable to the Corporation. No proxy shall be voted or acted upon
after three years from its date unless such proxy provides for a longer period.
A duly executed proxy shall be irrevocable if it states that it is irrevocable
and, if, and only as long as, it is coupled with an interest sufficient in law
to support an irrevocable power. A proxy may be made irrevocable regardless of
whether the interest with which it is coupled is an interest in the stock itself
or an interest in the Corporation generally.
7.9 INSPECTORS. The directors, in advance of any meeting,
may, but need not, appoint one or more inspectors of election to act at the
meeting or any adjournment thereof. If an inspector or inspectors are not
appointed, the person presiding at the meeting may, but need not, appoint one or
more inspectors. In case any person who may be appointed as an inspector fails
to appear or act, the vacancy may be filled by appointment made by the directors
in advance of the meeting or at the meeting by the person presiding thereat.
Each inspector, if any, before entering
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upon the discharge of his duties, shall take and sign an oath faithfully to
execute the duties of inspectors at such meeting with strict impartiality and
according to the best of his ability. The inspectors, if any, shall determine
the number of shares of stock outstanding and the voting power of each, the
shares of stock represented at the meeting, the existence of a quorum, the
validity and effect of proxies, and shall receive votes, ballots, or consents,
hear and determine all challenges and questions arising in connection with the
right to vote, count and tabulate all votes, ballots, or consents, determine the
result, and do such acts as are proper to conduct the election or vote with
fairness to all stockholders. On request of the person presiding at the meeting,
the inspector or inspectors, if any, shall make a report in writing of any
challenge, question, or matter determined by him or them and execute a
certificate of any fact found by him or them. Except as otherwise required by
subsection (e) of Section 231 of the DGCL, the provisions of that Section shall
not apply to the Corporation.
7.10 QUORUM. The holders of a majority of the outstanding
shares of stock shall constitute a quorum at a meeting of stockholders for the
transaction of any business. The stockholders present may adjourn the meeting
despite the absence of a quorum.
7.11 VOTING. Each share of stock shall entitle the holders
thereof to one vote. Directors shall be elected by a plurality of the votes of
the shares present in person or represented by proxy at the meeting and entitled
to vote on the election of directors. Any other action shall be authorized by a
majority of the votes cast except where the DGCL prescribes a different
percentage of votes and/or a different exercise of voting power, and except as
may be otherwise prescribed by the provisions of the Certificate of
Incorporation and these Bylaws. In the election of directors, and for any other
action, voting need not be by ballot.
8. STOCKHOLDER VOTE. Any election or other action by stockholders
of the Corporation may be effected at an annual or special meeting of
stockholders or by the written consent without a meeting of the number of
stockholders needed to approve such an action had a meeting of the stockholders
been held.
ARTICLE II
DIRECTORS
1. FUNCTIONS AND DEFINITION. The business and affairs of the
Corporation shall be managed by or under the direction of the Board of Directors
of the Corporation. The Board of Directors shall have the authority to fix the
compensation of the members thereof. The use of the phrase "whole board" herein
refers to the total number of directors which the Corporation would have if
there were no vacancies.
2. QUALIFICATIONS AND NUMBER. A director need not be a
stockholder, a citizen of the United States, or a resident of the State of
Delaware. The initial Board of Directors
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shall consist of not less than three (3) nor more than ten (10) as may be set
from time to time by the majority vote of the Board of Directors.
3. ELECTION AND TERM. The first Board of Directors, unless the
members thereof shall have been named in the Certificate of Incorporation, shall
be elected by the incorporator or incorporators and shall hold office until the
first annual meeting of stockholders and until their successors are elected and
qualified or until their earlier resignation or removal. The first Board of
Directors shall consist of at least three (3) directors. Any director may resign
at any time upon written notice to the Corporation. Thereafter, directors who
are elected at an annual meeting of stockholders, and directors who are elected
in the interim to fill vacancies and newly created directorships, shall hold
office until the next annual meeting of stockholders and until their successors
are elected and qualified or until their earlier resignation or removal.
4. VACANCIES. Subject to Article VII of the Certificate of
Incorporation, and except as the DGCL may otherwise require, in the interim
between annual meetings of stockholders or of special meetings of stockholders
called for the election of directors and/or for the removal of one or more
directors and for the filling of any vacancy in that connection, newly created
directorships and any vacancies in the Board of Directors, including unfilled
vacancies resulting from the removal of directors with or without cause, may be
filled by the vote of a majority of the remaining directors then in office,
although less than a quorum.
5. MEETINGS.
5.1 TIME. Meetings shall be held at such time as the Board
shall fix, except that the first meeting of a newly elected Board shall be held
as soon after its election as the directors may conveniently assemble.
5.2 PLACE. Meetings shall be held at such place within or
without the State of Delaware as shall be fixed by the Board.
5.3 CALL. No call shall be required for regular meetings for
which the time and place have been fixed. Special meetings may be called by or
at the direction of the Chairman of the Board, if any, the Vice-Chairman of the
Board, if any, of the President, or of a majority of the directors in office.
5.4 MEETINGS BY TELEPHONE. Members of the Board may
participate in a meeting through the use of conference telephone or similar
communications equipment, so long as all directors participating in such meeting
can hear one another. Participation in a meeting pursuant to this paragraph
constitutes presence in person at such meeting.
5.5 NOTICE OR ACTUAL OR CONSTRUCTIVE WAIVER. No notice shall
be required for regular meetings for which the time and place have been fixed.
Written, oral, or any other mode of notice of the time and place shall be given
for special meetings in sufficient time for
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the convenient assembly of the directors thereat. Notice need not be given to
any director or to any member of a committee of directors who submits a written
waiver of notice signed by him before or after the time stated therein.
Attendance of any such person at a meeting shall constitute a waiver of notice
of such meeting, except when he attends a meeting for the express purpose of
objecting, at the beginning of the meeting, to the transaction of any business
because the meeting is not lawfully called or convened. Neither the business to
be transacted at, nor the purpose of, any regular or special meeting of the
directors need be specified in any written waiver of notice.
5.6 QUORUM AND ACTION. A majority of the whole Board shall
constitute a quorum except when a vacancy or vacancies prevents such majority,
whereupon a majority of the directors in office shall constitute a quorum,
provided that such majority shall constitute at least one-third of the whole
Board. A majority of the directors present, whether or not a quorum is present,
may adjourn a meeting to another time and place. Except as herein otherwise
provided, and except as otherwise provided by the DGCL, the vote of the majority
of the directors present at a meeting at which a quorum is present shall be the
act of the Board. The quorum and voting provisions herein stated shall not be
construed as conflicting with any provisions of the DGCL and these Bylaws which
govern a meeting of directors held to fill vacancies and newly created
directorships in the Board or action of disinterested directors.
Any member or members of the Board of Directors or of any
committee designated by the Board, may participate in a meeting of the Board, or
any such committee, as the case may be, by means of conference telephone or
similar communications equipment by means of which all persons participating in
the meeting can hear each other.
5.7 CHAIRMAN OF THE MEETING. The Chairman of the Board, if
any and if present and acting, shall preside at all meetings. Otherwise, the
Vice-Chairman of the Board, if any and if present and acting, or the President,
if present and acting, or any other director chosen by the Board, shall preside.
6. REMOVAL OF DIRECTORS. Subject to Article VII of the
Certificate of Incorporation, except as may otherwise be provided by the DGCL,
any director or the entire Board of Directors may be removed, with or without
cause, by the holders of a majority of the shares then entitled to vote at an
election of directors.
7. COMMITTEES. The Board of Directors may, by resolution passed
by a majority of the whole Board, designate one or more committees, each
committee to consist of one or more of the directors of the Corporation. The
Board may designate one or more directors as alternate members of any committee,
who may replace any absent or disqualified member at any meeting of the
committee. In the absence or disqualification of any member of any such
committee or committees, the member or members thereof present at any meeting
and not disqualified from voting, whether or not he or they constitute a quorum,
may unanimously appoint another member of the Board of Directors to act at the
meeting in the place of any such absent or disqualified member. Any such
committee, to the extent provided in the resolution of the Board, shall have and
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may exercise the powers and authority of the Board of Directors in the
management of the business and affairs of the Corporation with the exception of
any authority the delegation of which is prohibited by Section 141 of the DGCL,
and may authorize the seal of the Corporation to be affixed to all papers which
may require it.
8. WRITTEN ACTION. Any action required or permitted to be taken
at any meeting of the Board of Directors or any committee thereof may be taken
without a meeting if all members of the Board of Directors or committee, as the
case may be, consent thereto in writing, and the writing or writings are filed
with the minutes of proceedings of the Board or committee.
ARTICLE III
OFFICERS
The officers of the Corporation shall consist of a President, a Secretary,
a Chief Financial Officer, and, if deemed necessary, expedient, or desirable by
the Board of Directors, a Chairman of the Board, a Vice-Chairman of the Board,
an Executive Vice-President, one or more other Vice-Presidents, one or more
Assistant Secretaries, one or more Assistant Treasurers, and such other officers
with such titles as the resolution of the Board of Directors choosing them shall
designate. Except as may otherwise be provided in the resolution of the Board of
Directors choosing him, no officer other than the Chairman or Vice-Chairman of
the Board, if any, need be a director. Any number of offices may be held by the
same person, as the directors may determine.
Unless otherwise provided in the resolution choosing him, each
officer shall be chosen for a term which shall continue until the meeting of the
Board of Directors following the next annual meeting of stockholders and until
his successor shall have been chosen and qualified.
All officers of the Corporation shall have such authority and
perform such duties in the management and operation of the Corporation as shall
be prescribed in the resolutions of the Board of Directors designating and
choosing such officers and prescribing their authority and duties, and shall
have such additional authority and duties as are incident to their office except
to the extent that such resolutions may be inconsistent therewith. The Secretary
or an Assistant Secretary of the Corporation shall record all of the proceedings
of all meetings and actions in writing of stockholders, directors, and
committees of directors, and shall exercise such additional authority and
perform such additional duties as the Board shall assign to him. Any officer may
be removed, with or without cause, by the Board of Directors. Any vacancy in any
office may be filled by the Board of Directors.
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ARTICLE IV
CONTRACTS, CHECKS, DRAFTS, BANKING
1. EXECUTION OF CONTRACTS. The Board, except as these Bylaws otherwise
provide, may authorize any officer or officers, agent or agents, to enter into
any contract or execute any instrument in the name of and on behalf of the
Corporation, and such authority may be general or confined to specific
instances; and unless so authorized by the Board or by these Bylaws, no officer,
agent or employee shall have any power or authority to bind the Corporation by
any contract or engagement or to pledge its credit or to render it liable for
any purpose or in any amount.
2. CHECKS, DRAFTS, ETC. All checks, drafts or other orders for payment
of money, notes or other evidence of indebtedness, issued in the name of or
payable to the Corporation, shall be signed or endorsed by such person or
persons and in such manner as, from time to time, shall be determined by
resolution of the Board. Each such officer, assistant, agent or attorney shall
give such bond, if any, as the Board may require.
3. DEPOSITS. All funds of the Corporation not otherwise employed shall
be deposited from time to time to the credit of the Corporation in such banks,
trust companies or other depositories as the Board may select, or as may be
selected by any officer or officers, assistant or assistants, agent or agents,
or attorney or attorneys of the Corporation to whom such power shall have been
delegated by the Board. For the purpose of deposit and for the purpose of
collection for the account of the Corporation, the President, any Vice President
or the Chief Financial Officer (or any other officer or officers, assistant or
assistants, agent or agents, or attorney or attorneys of the Corporation who
shall from time to time be determined by the Board) may endorse, assign and
deliver checks, drafts and other orders for the payment of money which are
payable to the order of the Corporation.
4. GENERAL AND SPECIAL BANK ACCOUNTS. The Board may from time to time
authorize the opening and keeping of general and special bank accounts with such
banks, trust companies or other depositories as the Board may select or as may
be selected by any officer or officers, assistant or assistants, agent or
agents, or attorney or attorneys of the Corporation to whom such power shall
have been delegated by the Board. The Board may make such special rules and
regulations with respect to such bank accounts, not inconsistent with the
provisions of these Bylaws, as it may deem expedient.
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ARTICLE V
INDEMNIFICATION
1. INDEMNIFICATION OF DIRECTORS AND OFFICERS. The Corporation shall
indemnify, in the manner and to the fullest extent permitted by the DGCL, as the
same exists or may hereafter be amended (the "Delaware Law") (but in the case of
any such amendment, only to the extent that such amendment permits the
Corporation to provide broader indemnification rights than permitted prior
thereto), any person (or the estate of any person) who is or was a party to, or
is threatened to be made a party to, any threatened, pending or completed
action, suit or proceeding, whether or not by or in the right of the
Corporation, and whether civil, criminal, administrative, investigative or
otherwise, by reason of the fact that such person is or was a director or
officer of the Corporation, or is or was serving at the request of the
Corporation as a director or officer of another corporation, partnership, joint
venture, trust or other enterprise. The Corporation may, to the fullest extent
permitted by the Delaware Law, purchase and maintain insurance on behalf of any
such person against any liability which may be asserted against such person. The
Corporation may create a trust fund, grant a security interest or use other
means (including without limitation a letter of credit) to ensure the payment of
such sums as may become necessary to effect the indemnification as provided
herein. To the fullest extent permitted by the Delaware Law, the indemnification
provided herein shall include expenses (including attorneys' fees), judgments,
fines and amounts paid in settlement and any such expenses shall be paid by the
Corporation in advance of the final disposition of such action, suit or
proceeding upon receipt of an undertaking by or on behalf of the indemnitee to
repay such amounts if it is ultimately determined that he or she is not entitled
to be indemnified. The indemnification provided herein shall not be deemed to
limit the right of the Corporation to indemnify any other person for any such
expenses to the fullest extent permitted by the Delaware Law, nor shall it be
deemed exclusive of any other rights to which any person seeking indemnification
from the Corporation may be entitled under any agreement, the Corporation's
Certificate of Incorporation, vote of stockholders or disinterested directors,
or otherwise, both as to action in such person's official capacity and as to
action in another capacity while holding such office.
2. INDEMNIFICATION OF EMPLOYEES AND AGENTS. The Corporation may, but
only to the extent that the Board of Directors may (but shall not be obligated
to) authorize from time to time, grant rights to indemnification and to the
advancement of expenses to any employee or agent of the Corporation to the
fullest extent of the provisions of this Article V as they apply to the
indemnification and advancement of expenses of directors and officers of the
Corporation.
3. ENFORCEMENT OF INDEMNIFICATION. The rights to indemnification and
the advancement of expenses conferred above shall be contract rights. If a claim
under this Article V is not paid in full by the Corporation within 60 days after
written claim has been received by the Corporation, except in the case of a
claim for an advancement of expenses, in which case the applicable period shall
be 20 days, the indemnitee may at any time thereafter bring suit against the
Corporation to recover the unpaid amount of the claim. If successful in whole or
in part in any such
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suit, or in a suit brought by the Corporation to recover an advancement of
expenses pursuant to the terms of an undertaking, the indemnitee shall be
entitled to be paid also the expenses of prosecuting or defending such suit. In
(i) any suit brought by the indemnitee to enforce a right to indemnification
hereunder (but not in a suit brought by the indemnitee to enforce a right to an
advancement of expenses) it shall be a defense that, and (ii) any suit by the
Corporation to recover an advancement of expenses pursuant to the terms of an
undertaking the Corporation shall be entitled to recover such expenses upon a
final adjudication that the indemnitee has not met any applicable standard for
indemnification set forth in the Delaware Law. Neither the failure of the
Corporation (including its Board of Directors, independent legal counsel or
stockholders) to have made a determination prior to the commencement of such
suit that indemnification of the indemnitee is proper in the circumstances
because the indemnitee has met the applicable standard of conduct set forth in
the Delaware Law, nor an actual determination by the Corporation (including its
Board of Directors, independent legal counsel or stockholders) that the
indemnitee has not met such applicable standard of conduct, shall create a
presumption that the indemnitee has not met the applicable standard of conduct
or, in the case of such a suit brought by the indemnitee, be a defense to such
suit. In any suit brought by the indemnitee to enforce a right to
indemnification or to an advancement of expenses hereunder, or by the
Corporation to recover an advancement or expenses pursuant to the terms of an
undertaking, the burden of proving that the indemnitee is not entitled to be
indemnified, or to such advancement of expenses, under this Article V or
otherwise shall be on the Corporation.
ARTICLE VI
CORPORATE SEAL
The corporate seal shall be in such form as the Board of Directors
shall prescribe.
ARTICLE VII
FISCAL YEAR
The fiscal year of the Corporation shall be fixed, and shall be
subject to change, by the Board of Directors.
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ARTICLE VIII
CONTROL OVER BYLAWS
Subject to Article VII of the Certificate of Incorporation and the
provisions of the DGCL, the power to amend, alter, or repeal these Bylaws and to
adopt new Bylaws may be exercised by the Board of Directors.
I HEREBY CERTIFY that the foregoing is a full, true, and correct
copy of the Bylaws of ZuluGroup.com, Ltd., a Delaware corporation, as in effect
on the date hereof.
Dated:
----------------------------------
Incorporator
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APPENDIX C
ARTICLES OF AMENDMENT
of
ARTICLES OF INCORPORATION OF
ENHANCED SERVICES COMPANY, INC.
CREATING
SERIES 1998 RESTRICTED CONVERTIBLE PREFERRED STOCK
(Pursuant to Section 7-106-102 of the
Colorado Business Corporation Law)
Pursuant to Section 7-106-102 of the Colorado Business Corporation Act of
the State of Colorado (the "CBCA") and Section 2 of Article IV of the Articles
of Incorporation of Enhanced Services Company, Inc., a corporation organized and
existing under the CBCA (this "Corporation"), this Corporation hereby adopts the
following Articles of Amendment to its Articles of Incorporation:
FIRST: The name of this Corporation is ENHANCED SERVICES COMPANY, INC.
SECOND: The following amendment to the Articles of Incorporation was
adopted on March 2, 1998, as prescribed by Section 7-106-102 of the CBCA, by the
Board of Directors of this Corporation, no action of the shareholders being
required pursuant to Article IV of the Articles of Incorporation of this
Corporation:
Article IV of the Articles of Incorporation shall be amended
by adding a new Section 3 to Article VI, to designate a class of
authorized Preferred Stock, par value $.001 per share, of this
Corporation, and the designation and amount thereof and the voting
powers, preferences and relative participating, optional and other
special rights of the shares of such series, and the qualifications,
limitations or restrictions thereof are as follows:
Section 3. Series 1998 Restricted Convertible Preferred Stock.
3.1 Designation and Amount; Definitions. The shares of such
series shall be designated as the "Series 1998 Restricted Convertible
Preferred Stock" (the "Series 1998 Restricted Preferred Stock") and the
number of shares initially constituting such series shall be 1,000,000,
which number may be decreased by the Board of Directors without a vote of
stockholders; provided, however, that such number may not be decreased
below the number of then currently outstanding shares of Series 1998
Restricted Preferred Stock. Capitalized terms used herein and not
otherwise defined have the meanings ascribed to them in Section 3.8.
3.2 Dividends and Distributions.
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(a) The right of the holders of shares of Series 1998
Restricted Preferred Stock shall be inferior and subordinate in all
respects to the dividend rights granted to the holders of the
Corporation's 8.6% Cumulative Convertible Preferred Stock.
Otherwise, the holders of the shares of Series 1998 Restricted
Preferred Stock are entitled to the same dividend rights as the
holders of any other securities of the Company.
(b) The holders of shares of Series 1998 Restricted
Preferred Stock shall not be entitled to receive any dividends or
other distributions in respect of such shares of Series 1998
Restricted Preferred Stock, except as provided in these Articles of
Amendment of the Articles of Incorporation.
3.3 Voting Rights. Except as otherwise provided in the
Bylaws of the Corporation, or by law, the holders of Series 1998
Restricted Preferred Stock shall have no voting rights and their consent
shall not be required for taking any corporate action.
3.4 Certain Restrictions. Except as imposed in these
Articles of Amendment of the Articles of Incorporation, there are no other
restrictions imposed upon the Corporation which are associated solely with
the Series 1998 Restricted Preferred Stock.
3.5 Conversion.
(a) Right of Conversion at the Corporation's Option.
On the terms and conditions contained herein, the Corporation is
hereby granted the exclusive right and option, without any
obligation, to convert each share of Series 1998 Restricted
Preferred Stock into 2.771806 fully paid and non-assessable shares
of Common Stock.
(b) Required Resolution. The right of the Corporation
to convert the shares of Series 1998 Restricted Preferred Stock
arises as of the date of adoption of a resolution (the "Authorizing
Resolution") by the holders of a majority of the issued and
outstanding shares of Common Stock at a special or annual meeting of
shareholders duly called for such purpose. Upon adoption of the
Authorizing Resolution, each share of Series 1998 Restricted
Preferred Stock shall automatically be converted into the number of
shares of Common Stock stated in Section 3.5 (a).
(c) Record Date. The Board of Directors shall fix a
record date for the determination of the holders of the Series 1998
Restricted Preferred Stock to be converted, not more than 60 days
nor less than 30 days before the date fixed for conversion. Notice
of conversion having been mailed as aforesaid, from and after the
conversion date (unless the Corporation fails to issue the shares of
Common stock upon such conversion) shall no longer be deemed to be
outstanding. All rights of the holders thereof as stock holders of
the Corporation (except the right to receive from the Corporation
she shares of Common Stock issuable upon conversion) shall cease and
terminate, and upon surrender according to said notice of the
certificates for any such shares (properly endorsed or assigned for
transfer), the Corporation shall convert such shares.
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(d) Merger, Consolidation. If, while any shares of the
Series 1998 Restricted Preferred Stock remain outstanding, this
Corporation shall enter into a consolidation with or merger into any
other corporation wherein this Corporation is not the surviving
corporation, or sell or convey its property as an entirety or
substantially as an entirety, and in connection with such
consolidation, merger, sale, or conveyance, shares of stock or other
securities shall be issuable or deliverable in exchange for the
Common Stock, appropriate provisions shall be made that, on the
terms and in the manner provided in this Section 3.5, the holder of
any Series 1998 Restricted Preferred Stock may thereafter convert
the same into the same kind and amount of securities as may be
issuable by the terms of such consolidation, merger, sale or
conveyance with respect to the number of shares of Common Stock into
which such shares of Preferred Stock is convertible at the time of
such consolidation, merger, sale or conveyance. After any such
consolidation, merger, sale or conveyance, the right of conversion
shall be to convert the Series 1998 Restricted Preferred Stock into
such securities as the same may form time to time be constituted.
3.6. Reacquired Shares. Any shares of Series 1998 Restricted
Preferred Stock converted, purchased or otherwise acquired by this
Corporation or any subsidiary of this Corporation in any manner whatsoever
shall be retired promptly after the acquisition thereof, and, if necessary
to provide for the lawful conversion or purchase of such shares, the
capital represented by such shares shall be reduced in accordance with the
CBCA. This Corporation shall take all actions which are necessary so that
all such shares become authorized but unissued shares of Series 1998
Restricted Preferred Stock, $.001 par value per share, of this
Corporation.
3.7. Liquidation, Dissolution or Winding-Up. Upon any
liquidation, dissolution or winding-up of the affairs of this Corporation,
no distributions shall be made (a) to the holder of shares of Junior Stock
unless, prior thereto, the holder of shares of Series 1998 Restricted
Preferred Stock shall have received (a) $3.00 per share, plus (b) an
amount equal to accrued unpaid dividends, if any.
3.8 Definitions. (a) As used herein, the following terms
shall have the meanings indicated.
"Business Day" means any day other than a Saturday, Sunday or
a day on which banking institutions in the State of Colorado are
authorized or obligated by law or executive order to close.
"Effective Date" means the date of filing of this Articles of
Amendment with the Secretary of the State of Colorado.
"Holders" means any of the holders of the shares of Series
1998 Restricted Preferred Stock.
"Person" means any person or entity of any nature whatsoever,
specifically including an individual, a firm, a company, a
corporation, a partnership, a trust or other entity.
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<PAGE> 126
(b) "Construction of Certain Terms and Phrases".
Unless the context otherwise requires, (I) words of any gender
include each other gender; (ii) words using the singular or plural
number also include the plural or singular number, respectively;
(iii) the terms "hereof," "herein," "hereby," and derivative or
similar words refer to these entire Articles of Amendment of Article
of Incorporation (this "Amendment"); and (iv) the term "Section" or
"clause" refers to the specified section or clause of this
Amendment. Whenever this Amendment refers to a number of days, such
number shall refer to calendar days unless Business Days are
specified. All accounting terms used herein and not expressly
defined herein shall have the meanings given to them under generally
accepted accounting principles.
3.9 Rank. The Series 1998 Restricted Preferred Stock shall
rank, with respect to the payment of dividends and the distribution of
assets upon liquidation, dissolution or winding-up of the affairs of this
Corporation, prior to all shares of Common Stock of this Corporation, but
junior and inferior to the 8.6% Preferred Stock.
3.10 Fractional Shares. Each fractional share of Series 1998
Restricted Preferred Stock outstanding shall be entitled to a ratably
proportionate amount of all dividends and distributions payable with
respect to each outstanding shares of Series 1998 Restricted Preferred
Stock according to the terms hereof whether as a dividend or upon
liquidation dissolution or winding up of the affairs of this Corporation,
and all such dividends and distributions shall be payable in the same
manner and at the same time as provided herein for each outstanding share
of Series 1998 Restricted Preferred Stock.
ARTICLE V
REGISTRATION RIGHTS
5.01 Pendent Registration Rights. If at any time during the first
thirty-six months after the Effective Date ("Covered Period"), ENHANCED, or any
successor by merger, acquisition, consolidation or a similar change of control
event, proposes to file under the 1933 Act, on its behalf and/or on behalf of
any of its securities holders, a new registration statement relating to any
securities of ENHANCED or of any successor by merger, acquisition, consolidation
or a similar change of control event (a "Registration Statement") other than in
connection with a dividend reinvestment, employee stock purchase, option or a
similar plan, ENHANCED shall give written notice to each of the other parties
hereto and any successors to their ownership of Enhanced Stock, as contemplated
here, (collectively the "Holders") at least thirty (30) days before the filing
with the SEC of such Registration Statement. Such notice shall offer to include
in such filing that number of shares of Enhanced Stock then held by the Holders
(including shares convertible into the class of equity being registered) as such
Holders may request pursuant to written notice to ENHANCED within twenty (20)
days after the date of mailing of such offer. ENHANCED shall thereupon include
in such filing that amount of Enhanced Stock so requested by the Holders, and,
subject to ENHANCED's right to withdraw such filing, shall use its best efforts
to effect registration under the 1933 Act of such shares of Enhanced Stock. The
right of the Holders to have their shares of Enhanced Stock included in any
Registration Statement in accordance with the provisions of this Article V shall
be provided for in each such Registration Statement.
5.02 Underwriter Limitations. If any of the Holders's shares of Enhanced
Stock are to be sold in an underwritten public offering pursuant to this
Agreement, ENHANCED shall promptly notify the Holders as to its selection of
investment bankers for the offering. If the managing
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underwriters shall advise ENHANCED in writing that in their good faith opinion
the number of shares of Enhanced Stock requested to be included in such
Registration Statement exceeds the number of shares which can be sold in an
orderly manner in such offering, then the Holders shall have the right, in
addition to the rights in Section 5.04, exercisable not more than three times
during the Covered Period, to require ENHANCED to file a registration statement
on From S-1, Form SB-1, Form S-3 or otherwise to allow for the resale of the
Enhanced Stock.
5.03 ENHANCED's Election to File. Notwithstanding the foregoing, the
Board of Directors of ENHANCED, in its sole discretion, may determine not to
file the Registration Statement or proceed with the offering as to which the
notice specified herein is given without any liability to ENHANCED.
5.04 Demand Registration. In addition, on or after March 1, 1999, the
Holders, by a majority vote, based on the Enhanced Stock held by them, acting
jointly, may request, in writing, that ENHANCED file a registration statement on
Form S-1, Form SB-1 or Form S-3 under the 1933 Act covering the registration of
the Enhanced Stock issued to them. Upon receipt of such written request,
ENHANCED, shall immediately (and, in any event, within 60 days) undertake to
file a Registration Statement ninety (90) days of the receipt of such written
request effect the registration of such Enhanced Stock. The Holders shall be
entitled to only two "demand registrations" and any such "demand registrations"
may be made with respect to all or any portion (but not less than $5,000,000 in
market capitalization) of the Enhanced Stock they hold on the date of such
request. ENHANCED shall not be required to effect a registration pursuant to
this Section 5.04: if it has effected two (2) registrations under Section 5.02
under which the Holders could have sold all of their shares pursuant thereto and
has provided the appropriate notices to Holders under Section 5.01.
5.05 Reporting Requirements Under The Securities Exchange Act of 1934. To
the extent required, ENHANCED shall timely file such information, documents, and
reports as the SEC may require or prescribe under either Section 13 or 15(d)
(whichever is applicable) of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"). ENHANCED shall whenever requested by the Holders notify
them in writing whether ENHANCED has, as of the date specified by the Holders,
complied with the Exchange Act reporting requirements to which ENHANCED is
subject for a period prior to such date as shall be specified by ENHANCED.
ENHANCED acknowledges and agrees that the purposes of the requirements contained
in this Section 5.05, are to enable the Holders, as the case may be, to comply
with the current public information requirements of Rule 144 under the 1933 Act
should the Holders ever wish to dispose of any of the shares of Enhanced Stock
acquired by them without registration under the 1933 Act in reliance upon Rule
144 (or any equivalent successor provision or similar rule hereafter adopted).
ENHANCED shall take such other measures and file such other information,
documents, and reports as shall hereafter be required by the SEC as a condition
to the availability of Rule 144 under the 1933 Act (or any equivalent successor
provision or similar rule hereafter adopted), including, without limitation,
using its best efforts to assure that there shall be available at all times
adequate public information with respect to ENHANCED and Enhanced Stock. The
obligation to make available adequate public information and otherwise take such
measures necessary to maintain the availability of Rule 144 shall remain in
effect for so long as ENHANCED or its successor is subject to the filing
requirements of Section 13 or Section 15(d) of the Exchange Act. In such event
and for so long as the Holders own any Enhanced Stock, ENHANCED shall furnish
forthwith upon request a written statement as to its compliance with the
reporting requirements of said Rule 144 of the 1933 Act, and of the Exchange Act
(at any time
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<PAGE> 128
after it has become subject to such reporting requirements); a copy of the most
recent annual or quarterly report of ENHANCED and such other reports and
documents as the Holders may reasonably request in availing itself of any rule
or regulation of the SEC allowing it to sell any such securities without
registration.
5.06 Expenses. All expenses incident to ENHANCED's performance of or
compliance with its undertaking in this Article V, including, without
limitation, all registration and filing fees, printing expenses, messenger and
delivery expenses, and fees and disbursements of counsel for ENHANCED and all
independent certified public accountants, underwriters (excluding discounts and
commissions) and other persons retained by ENHANCED (all such expenses being
herein called "Registration Expenses"), will be borne by ENHANCED, whether or
not such Registration Statement becomes effective.
5.07 Indemnification; Contribution.
(a) In the event of any registration of any Enhanced Stock under
the 1933 Act pursuant to this agreement, ENHANCED shall
indemnify, defend and hold harmless, to the full extent
permitted by law and without limitation as to time, the
Holders (collectively, the "Indemnified Persons"), against any
losses, claims, damages or liabilities, joint or several, to
which any Indemnified Person may become subject, under the
1933 Act or otherwise, insofar as such losses, claims, damages
or liabilities (or actions in respect thereof) arise out of or
are based upon any untrue statement or alleged untrue
statement of any material fact contained in or incorporated by
reference into such Registration Statement or preliminary
prospectus (if used prior to the effective date of such
Registration Statement) or final or summary prospectus
contained therein (if used during the period ENHANCED is
required to keep the Registration Statement effective), or any
amendment or supplement thereto, or arise out of or are based
upon the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to
make the statements made therein (in the case of a prospectus
or form of prospectus or supplement thereto, in light of the
circumstances under which they are made) not misleading, and
any violation or alleged violation of the 1933 Act, the
Exchange Act or any state securities laws, or any rule or
regulation thereunder, and will reimburse each indemnified
Person on a current basis for any legal or any other expenses
reasonably incurred by it in connection with investigating or
defending any such action or claim (excluding any amounts paid
in settlement of any litigation, commenced or threatened, if
such settlement is effected without the prior written consent
of ENHANCED, which consent shall not be unreasonably
withheld); provided, however, that ENHANCED will not be liable
to a particular indemnified Person in -------- ------- any
such case to the extent that any such loss, claim, damage,
liability or expense arises out of or is based upon an untrue
statement or omission or alleged omission made in said
Registration Statement, said preliminary prospectus or said
final or summary prospectus or any amendment or supplement
thereto, in reliance upon written information furnished to
ENHANCED by or on behalf the Holders for use in the
preparation thereof; and provided further that the indemnity
agreement contained in this Section 5.07 with respect to any
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<PAGE> 129
preliminary prospectus shall not inure to the benefit of any
Indemnified Person in respect of any loss, claim, damage,
liability or action asserted by someone who purchased Enhanced
Stock from such person if (i) a copy of the final prospectus
(as the same may be amended or supplemented) in connection
with such Registration Statement was not sent or given to such
person with or prior to written confirmation of the sale, (ii)
such final prospectus shall correct the untrue statement or
alleged untrue statement, or omission or alleged omission,
which is the basis of such loss, claim, liability or action,
and (iii) there would have been no such liability but for the
failure to deliver such final prospectus by the Holders, as
the case may be.
(b) Promptly after receipt by a party entitled to indemnification
under Article V hereof of notice of the commencement of any
action, such indemnified party will, if a claim in respect
thereof is to be made against the indemnifying party under
either of such Sections, notify the indemnifying party in
writing of the commencement thereof. In case any such action
is brought against the indemnified party and it shall so
notify the indemnifying party of the commencement thereof, the
indemnifying party shall assume the defense thereof with
counsel reasonably satisfactory to such indemnified party;
provided, however, that if the indemnifying party fails to
take reasonable steps necessary to diligently defend such
claim within 20 days after receiving notice from the
indemnified party that the indemnified party believes the
indemnifying party has failed to take such steps, the
indemnified party may assume its own defense and the
indemnifying party shall be liable for any expenses therefor.
The indemnity agreements in this Section 5.07 shall be in
addition to any liabilities which the indemnifying parties may
have pursuant to law.
(c) In the event that any provision of an indemnification clause
in an underwriting agreement executed by or on behalf of
ENHANCED differs from a provision in this Section 5.07 such
provision in the underwriting agreement shall determine
ENHANCED' and the Holders' rights in respect thereof.
5.08 After Acquired Shares. All of the provisions of this Article V shall
apply to all of the shares of Enhanced Stock owned by the Holders, acquired by
the Holders pursuant to this Agreement or otherwise, including any shares of the
capital stock of ENHANCED or any successor acquired by the Holders hereafter
which are "restricted securities" within the meaning of Rule 144 under the 1933
Act, or to any other securities issued in exchange for the foregoing securities.
5.09 Obligations of ENHANCED. Whenever required to effect the
registration of any Enhanced Stock covered hereby, ENHANCED shall, as
expeditiously, as reasonably possible:
(a) Filing. Prepare and file with the SEC a registration statement
with respect to such Enhanced Stock and use all reasonable
efforts to cause such registration statement to become
effective, and keep such registration statement effective for
up to ninety (90) days or, if earlier, until the Holders have
completed the distribution related thereto.
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<PAGE> 130
(b) Amendments. Prepare and file with the SEC such amendments and
supplements to such registration statement and prospectus used
in connection with such registration statement as may be
necessary to comply with the provisions of the 1933 Act with
respect to the disposition of all securities covered by such
registration statement.
(c) Prospective Delivery. Furnish to the Holders such number of
copies of the prospectus, including a preliminary prospectus,
in conformity with the requirements of the 1933 Act, and such
other documents as they reasonably request in order to
facilitate the disposition of the Enhanced Stock covered
hereby owned by them and notify the Holders covered by a
registration statement for which a prospectus relating thereto
is required to be delivered under the 1933 Act of any event
which would cause the prospectus included in such registration
statement, as then in effect, to include an untrue statement
of a material fact or to omit to state a material fact
required to be stated therein or necessary to make the
statements therein not misleading in the light of the
circumstances than existing.
(d) Blue Sky. Use all reasonable efforts to register and qualify
the securities covered by such registration under such other
securities laws and Blue Sky laws of such jurisdictions as
shall be reasonably requested by the Holders, provided that
ENHANCED shall not be required in connection therewith or as a
condition thereto to qualify to do business or to file a
general consent to service of process in any such states or
jurisdictions.
(e) Underwriting Matters. In the event of any underwritten public
offering, enter into and perform its obligations under an
underwriting agreement, in usual and customary form, with the
managing underwriter(s) of such offering. The Holders shall
also be required to enter into and perform their obligations
under such an agreement.
(f) Opinion. Furnish, at the request of the Holders on the date
that such Enhanced Stock is delivered to the underwriters for
sale, if such securities are being sold through underwriters,
or, if such securities are not being sold through
underwriters, on the date that the registration statement with
respect to such securities becomes effective, (i) an opinion,
dated as of such date, from the counsel representing the
Company for the purposes of such registration, in the form and
substance as is customarily given to underwriters in an
underwritten public offering and reasonably satisfactory to a
majority of the holders of Enhanced Stock requesting
registration, addressed to the
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underwriters, if any, and to the holders requesting the
registration of their Enhanced Stock and (ii) a letter dated
as of such date, from the independent certified public
accountants of the Company, in form and substance as is
customarily given by independent certified public accountants
to underwriters in an underwritten public offering and
reasonably satisfactory to a majority of the holders
requesting registration, addressed to the underwriters, if
any, and if permitted by applicable accounting standards, to
the holders requesting the registration of the Enhanced Stock
covered hereby.
5.10 Assignment of Registration Rights. The rights to cause ENHANCED to
register Enhanced Stock pursuant to this Article V may be assigned by the
Holders, as the case may be, to a transferee or assignee, provided such
transferee or assignee (i) is a corporation or partnership controlled by the
Holders' subsidiary, parent, general partner, limited partner or retired partner
of such an entity, (ii) is a family member of a Holder or trust for the benefit
of a Holder, or (iii) acquires at least five percent (5%) of the shares of
Enhanced Stock issued to the Holders as of the date hereof (as adjusted for
stock splits and combinations) and is not a competitor of ENHANCED (as
determined by the Board of Directors); provided, however, (A) the transferor
shall, within ten (10) days after such transfer, furnish to ENHANCED written
notice of the name and address of such transferee or assignee and the securities
with respect to which such registration rights are being assigned and (B) such
transferee shall agree to be subject to all restrictions set forth in this
Agreement.
ARTICLE VI
IN WITNESS WHEREOF, the undersigned President and Treasurer of this
Corporation do certify that the Board of Directors adopted the amendments set
forth above.
ENHANCED SERVICES COMPANY, INC.
By:______________________________________
Kenneth M. Duckman, President
By:______________________________________
Robert C. Smith, Treasurer
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APPENDIX D
ARTICLES OF AMENDMENT
OF
ARTICLES OF INCORPORATION
OF
ENHANCED SERVICES COMPANY, INC.
CREATING
INVESTOR PREFERRED STOCK
Pursuant to Section 7-106-102 of the Colorado Business Corporation Act of
the State of Colorado (the "CBCA") and Section 2 of Article IV of the Articles
of Incorporation of Enhanced Services Company, Inc., a Colorado corporation
organized and existing under the CBCA (this "Corporation"), this Corporation
hereby adopts the following Articles of Amendment to its Articles of
Incorporation:
FIRST: The name of this Corporation is Enhanced Services Company,
Inc.
SECOND: The following amendment to the Articles of Incorporation of
Enhanced Services Company, Inc. (the "Corporation") was duly
adopted by the Board of Directors of the Corporation, on
August 18, 1998, in the manner prescribed by the CBCA and
Section 2 of Article IV of the Articles of Incorporation of
the Corporation:
RESOLVED, that pursuant to the Corporation's Articles of Incorporation and
the CBCA, there be and hereby is authorized and created a series of convertible
preferred shares, hereby designated as the Investor Preferred Stock, consisting
of five thousand (5,000) authorized shares with a stated value of one thousand
dollars ($1000) per share and a par value of $.001 per share, to be issued from
time to time upon receipt of subscription, provided however, that if the
Investor Preferred is not issued prior to December 30, 1998, it shall no longer
be available for issuance. The Investor Preferred Stock shall be convertible
immediately upon issue, to the extent that there are available sufficient
authorized shares of common stock, of par value $.001 of the Corporation or upon
receipt of stockholder approval at an annual meeting of stockholders of the
Corporation if the same is required under the NASDAQ Rules, on the basis of one
(1) share of Investor Preferred Stock for one thousand (1000) shares of common
stock of the Corporation, subject to adjustment in
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the event of any stock splits, stock dividends, reclassifications or capital
transactions, as applicable, and which, on an unconverted basis, shall have the
voting powers, designations, preferences and relative participating, optional or
other rights, if any, or the qualifications, limitations, or restrictions, set
forth in such certificate of incorporation, and in addition thereto, those
following.
In furtherance of this Resolution, Article IV of the Articles of
Incorporation of the Corporation and amended to include a new Section 7, as
follows:
ARTICLE IV
CAPITAL STOCK
"Section 7. Investor Preferred Stock.
7.1 DESIGNATION. The shares of such series shall be designated as the
"Investor Preferred Stock" and the number of shares initially
constituting such series shall be five thousand (5,000), which
number may be decreased by the Board of Directors without a vote of
stockholders; provided, however, that such number may not be
decreased below the number of then currently outstanding shares of
Investor Preferred Stock and that no Investor Preferred Stock will
be available for issuance after December 31, 1998. Capitalized terms
used herein and not otherwise defined have the meanings ascribed to
them in Section 7.8.
7.2 DIVIDENDS.
(a) The right of the holders of shares of Investor Preferred Stock
shall be inferior and subordinate in all respects to the
dividend rights granted to the holders of the Corporation's
8.6% Cumulative Convertible Preferred Stock (the "8.6%
Preferred Stock"). Otherwise, the holders of the shares of
Investor Preferred Stock are entitled to the same dividend
rights as the holders of any other securities of the Company.
(b) The holders of shares of Investor Preferred Stock shall not be
entitled to receive any dividends or other distributions in
respect of such shares of Investor Preferred Stock, except as
provided in these Articles of Amendment of the Articles of
Incorporation.
7.3 VOTING RIGHTS. Except as otherwise provided in the Bylaws of the
Corporation, or by law, the holders of Investor Preferred Stock
shall have no voting rights and their consent shall not be required
for taking any corporate action.
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<PAGE> 134
7.4 CERTAIN RESTRICTIONS. Except as imposed in these Articles of
Amendment of the Articles of Incorporation, there are no other
restrictions imposed upon the Corporation which are associated
solely with the Investor Preferred Stock.
7.5 CONVERSION.
(a) Right of Conversion Upon Registration. On the terms and
conditions contained herein, the Corporation is hereby
obligated upon request of the stockholder to convert shares of
Investor Preferred to a maximum amount of not more than twenty
percent (20%) of the then outstanding shares of common stock
of the Corporation, and to convert any additional shares, as
required only after the approval of the stockholders of the
Corporation at a meeting of the stockholders called for such a
purpose, and in accordance with the rules promulgated by
NASDAQ ("NASDAQ Rules"). Any such conversion shall be on the
basis of one share of Investor Preferred Stock for one
thousand shares (1000) of the Corporation's fully paid and
non-assessable common stock, subject to adjustment in the
event of any stock splits, stock dividends, reclassifications
or capital transactions, as applicable. In the event there is
an insufficient amount of authorized but unissued common stock
available to cover the conversion of any shares of the
Investor Preferred Stock, the conversion of such shares shall
await the approval of the stockholders of the Corporation of
an increase in the authorized but unissued shares of the
Corporation's common stock.
(b) Merger, Consolidation. If, while any shares of the Investor
Preferred Stock remain outstanding, this Corporation shall
enter into a consolidation with or merger into any other
corporation wherein this Corporation is not the surviving
corporation, or sell or convey its property as an entirety or
substantially as an entirety, and in connection with such
consolidation, merger, sale, or conveyance, shares of stock or
other securities shall be issuable or deliverable in exchange
for the common stock into which any issued and outstanding
Investor Preferred Stock may be convertible, appropriate
provisions shall be made that, on the terms and in the manner
provided in this Section 7.5, the holder of any Investor
Preferred Stock may thereafter convert the same into the same
kind and amount of securities as may be issuable by the terms
of such consolidation, merger, sale or conveyance with respect
to the number of shares of common stock into which such shares
of Investor Preferred Stock are convertible at the time of
such consolidation, merger, sale or conveyance. After any such
consolidation, merger, sale or conveyance, the right of
conversion shall be to convert the Investor Preferred Stock
into such securities as the same may form time to time be
constituted.
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<PAGE> 135
7.6 REACQUIRED SHARES. Any shares of Investor Preferred Stock converted,
purchased or otherwise acquired by this Corporation or any
subsidiary of this Corporation in any manner whatsoever shall be
retired promptly after the acquisition thereof, and, if necessary to
provide for the lawful conversion or purchase of such shares, the
capital represented by such shares shall be reduced in accordance
with the CBCA. This Corporation shall take all actions which are
necessary so that all such shares become authorized but unissued
shares of Investor Preferred Stock of this Corporation.
7.7 LIQUIDATION DISSOLUTION OR WINDING UP.
(a) Upon any liquidation, dissolution or winding-up of the affairs
of this Corporation, no distributions shall be made to the
holder of shares of common stock unless, prior thereto, the
holder of shares of Investor Preferred Stock shall have
received: (a) cash or non-cash assets valued at $1000 per
share, plus (b) an amount equal to accrued and unpaid
dividends, if any.
(b) Notwithstanding anything set forth above, holders of Investor
Preferred Stock shall not be entitled to receive more than the
Redemption Amount, as adjusted to reflect any stock dividends,
stock splits or recapitalizations, upon any liquidation,
dissolution or winding up of the Corporation. A consolidation
or merger of the Corporation with or into any other
corporation or corporations (including with a wholly owned
corporation), any other corporate reorganization or any other
transaction (or series of related transactions) that results
in the transfer of more than fifty percent (50%) of the
outstanding voting power of the Corporation or a sale,
conveyance, or other disposition of all or substantially all
of the Corporation's assets, shall not be deemed to be a
liquidation, dissolution or winding up within the meaning of
this paragraph so long as the successor in interest assumes
the obligations of the Corporation. The purchase or redemption
by the Corporation of stock of any class, in any number
permitted by law, shall not for the purpose of this paragraph
be regarded as a liquidation, dissolution or winding up of the
Corporation.
7.8 DEFINITIONS.
(a) As used herein, the following terms shall have the meanings
indicated.
"Business Day" means any day other than a Saturday, Sunday or
a day on which banking institutions in the State of Colorado
are authorized or obligated by law or executive order to
close.
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<PAGE> 136
"Effective Date" means the date of filing of this Articles of
Amendment with the Secretary of the State of Colorado,
provided, however, that the Corporation may treat the Investor
Preferred Stock as outstanding as of September 9, 1998.
"Holders" means any of the holders of the shares of Investor
Preferred Stock.
"Person" means any person or entity of any nature whatsoever,
specifically including an individual, a firm, a company, a
corporation, a partnership, a trust or other entity.
(b) Construction of Certain Terms and Phrases. Unless the context
otherwise requires, (I) words of any gender include each other
gender; (ii) words using the singular or plural number also
include the plural or singular number, respectively; (iii) the
terms "hereof," "herein," "hereby," and derivative or similar
words refer to these entire Articles of Amendment of Article
of Incorporation (this "Amendment"); and (iv) the term
"Section" or "clause" refers to the specified section or
clause of this Amendment. Whenever this Amendment refers to a
number of days, such number shall refer to calendar days
unless Business Days are specified. All accounting terms used
herein and not expressly defined herein shall have the
meanings given to them under generally accepted accounting
principles.
7.9 RANK. The Investor Preferred Stock shall rank, with respect to the
payment of dividends and the distribution of assets upon
liquidation, dissolution or winding-up of the affairs of this
Corporation, prior to all shares of common stock of this
Corporation, but junior and inferior to the 8.6% Preferred Stock."
FURTHER RESOLVED, that the statements contained in the foregoing
resolution creating and designating the said Investor Preferred Stock and fixing
the number, powers, preferences and relative, optional, participating, and other
special rights and the qualifications, limitations, restrictions, and other
distinguishing characteristics thereof shall, upon the date of adoption of said
series, be deemed to be included in and be a part of the Articles of
Incorporation. The date of adoption of the aforesaid amendments was August 18,
1998. This amendment was duly adopted by the Board of Directors of the
Corporation without shareholder action and that shareholder action was not
required.
IN WITNESS THEREOF, the undersigned having been duly authorized has
executed the foregoing ARTICLES OF AMENDMENT OF THE ARTICLES OF INCORPORATION OF
ENHANCED SERVICES COMPANY, INC. CREATING INVESTOR PREFERRED STOCK on this 16th
day of September, 1998.
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<PAGE> 137
ENHANCED SERVICES COMPANY, INC.
By: ____________________________
Robert Smith
Chief Financial Officer
Attest:
State of California:
County of Los Angeles:
Subscribed and sworn to before me this ____ th day of September, 1998
--------------------------------
Notary Public
Name: __________________________
My commission expires: _________
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<PAGE> 138
APPENDIX E
ARTICLES OF AMENDMENT
OF
ARTICLES OF INCORPORATION
OF
ENHANCED SERVICES COMPANY, INC.
CREATING
1998(B) PREFERRED STOCK
Pursuant to Section 7-106-102 of the Colorado Business Corporation Act of
the State of Colorado (the "CBCA") and Section 2 of Article IV of the Articles
of Incorporation of Enhanced Services Company, Inc., a Colorado corporation
organized and existing under the CBCA (this "Corporation"), this Corporation
hereby adopts the following Articles of Amendment to its Articles of
Incorporation:
FIRST: The name of this Corporation is Enhanced Services Company,
Inc.
SECOND: The Articles of Amendment of Articles of Incorporation of
Enhanced Services Company, Inc. creating the 8.6% Cumulative
Convertible Preferred Stock filed on January 8, 1997 and
creating the Series 1998 Restricted Convertible Preferred
Stock filed on March 6, 1998 are hereby amended respectively
to be numbered as "Section 4" and "Section 5" of "Article IV"
of the Articles of Incorporation of the Corporation, thereby
correcting errors in the numbering of those Articles of
Amendment and the Sections.
THIRD: The following Articles of Amendment to the Articles of
Incorporation of Enhanced Services Company, Inc. (the
"Corporation") were duly adopted by the Board of Directors of
the Corporation, on September 9, 1998, in the manner
prescribed by the CBCA and Section 2 of Article IV of the
Articles of Incorporation of the Corporation by adopting the
following restrictions:
RESOLVED, that pursuant to the Corporation's Articles of Incorporation and
the CBCA, there be and hereby is authorized and created a series of convertible
preferred shares, hereby designated as the 1998(B) Preferred Stock, consisting
of five-hundred and twenty thousand (520,000) authorized shares, to be issued on
the Effective Date (as defined for reference in Section 6.9 below). The 1998(B)
Preferred Stock shall be convertible on the basis of ten (10) shares of the
common stock $.001 par value of the Corporation for each share of 1998(B)
Preferred Stock, into
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<PAGE> 139
five million two hundred thousand (5,200,000) shares common stock after the
later of the time of the (i) approval by the stockholders of the Corporation of
a resolution allowing for the conversion of the 1998(B) Preferred Stock into
common stock of the Corporation and, (ii) the approval of the shareholders of
Zulu-tek, Inc., a Utah corporation, of a resolution allowing for the liquidation
of Zulu-tek, Inc. (collectively referred to as the Authorizing Actions). All
shares of 1998(B) Preferred Stock, upon conversion shall be placed in
safekeeping by Zulu-tek and shall not be in any way sold, pledged, hypothecated
or transferred, in any manner, until such shares of common stock are covered by
an effective registration statement filed with the Securities and Exchange
Commission (the "SEC") or such issuance as undertaken in reliance on an
exemption from such registration. In the event either of the Authorizing Actions
have not been completed by December 30, 1998, this 1998(B) Preferred Stock shall
be returned to the status of authorized and unissued stock, unless the Board of
Directors of the Corporation extends the time for the Authorizing Actions to be
completed on a date no later than June 30, 1999. All shares of 1998(B) Preferred
Stock upon conversion shall be subject to adjustment in the event of any stock
splits, stock dividends, reclassifications or capital transactions, as
applicable. Prior to any conversion, the 1998(B) Preferred Stock shall have the
voting powers, designations, preferences and relative participating, optional or
other rights, if any, or the qualifications, limitations, or restrictions, set
forth in the Articles of Incorporation, as amended.
In furtherance of this Resolution, Article IV of the Articles of
Incorporation is amended to include a new Section 6 as follows:
"Section 6. 1998(B) Preferred Stock.
6.1 DESIGNATION. The shares of such series shall be designated as the
1998(B) Preferred Stock and the number of shares initially
constituting such series shall be five hundred and twenty thousand
(520,000), which number may be decreased by the Board of Directors
without a vote of stockholders; provided, however, that such number
may not be decreased below the number of then currently outstanding
shares of 1998(B) Preferred Stock. Capitalized terms used herein and
not otherwise defined have the meanings ascribed to them in Section
6.8.
6.2 DIVIDENDS.
(a) The right of the holders of shares of 1998(B) Preferred Stock
shall be inferior and subordinate in all respects to the
dividend rights granted to the holders of the Corporation's
8.6% Cumulative Convertible Preferred Stock. Otherwise, the
holders of the shares of 1998(B) Preferred Stock are entitled
to the same dividend rights as the holders of any other
securities of the Corporation.
(b) The holders of shares of 1998(B) Preferred Stock shall not be
entitled to receive any dividends or other distributions in
respect of such shares of 1998(B) Preferred Stock, except as
provided in these Articles of Amendment of the Articles of
Incorporation.
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<PAGE> 140
6.3 VOTING RIGHTS. Except as otherwise provided in the Bylaws of the
Corporation, or by law, the holders of 1998(B) Preferred Stock shall
have no voting rights and their consent shall not be required for
taking any corporate action.
6.4 CERTAIN RESTRICTIONS. Except as imposed in these Articles of
Amendment of the Articles of Incorporation, there are no other
restrictions imposed upon the Corporation which are associated
solely with the 1998(B) Preferred Stock.
6.5 CONVERSION.
(a) Conversion. The Corporation is hereby obligated to convert the
outstanding shares of 1998(B) Preferred Stock into common
stock within ten business days of the completion of the
Authorizing Actions on the basis of ten (10) shares of common
stock for each share of 1998(B) Preferred Stock subject to
adjustment in the event of any stock splits, stock dividends,
reclassifications or capital transactions, as applicable. All
common stock issued upon the conversion of the 1998 (B)
Preferred Stock shall be placed in safekeeping by Zulu-tek,
Inc., the Utah corporation ("Zulu-tek") to which the 1998(B)
Preferred Stock is to be issued and shall not be in any way
sold, pledged, hypothecated or transferred, in any manner,
until such shares of common stock are covered by an effective
registration statement filed with the Securities and Exchange
Commission or are eligible for distribution to the
shareholders of Zulu-tek in reliance on an exemption from such
registration. In the event there is an insufficient amount of
authorized but unissued common stock available to cover the
conversion of any shares of the 1998(B) Preferred Stock, the
conversion of such shares shall be deferred until the
stockholders of the Corporation have approved an increase in
the authorized but unissued shares of the Corporation's common
stock at a special meeting to be called for such a purpose.
(b) Unissued Stock. Any shares of the 1998(B) Preferred Stock
which remain unissued as of December 30, 1998, shall be
retired and will become authorized and unissued stock of the
Corporation, unless the Board of Directors of the Corporation
extends the time for issuance of the 1998(B) Preferred Stock
to a date not later than June 30, 1999.
(c) Record Date. The Board of Directors shall fix the day on which
the last of the Authorizing Actions have been approved as the
record date for the determination of the holders of the stock
of Zulu-tek to whom the common stock underlying the 1998(B)
Preferred Stock is issued. No notice of conversion shall be
issued and upon the adoption of the Authorizing Actions, all
shares of the 1998(B) Preferred Stock shall no longer be
deemed to be outstanding and shall be deemed converted into
shares of the Corporation's common stock. All rights of the
holders of the 1998(B) Preferred Stock,
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<PAGE> 141
except the right to receive from the Corporation the shares of
common stock issuable upon conversion, shall cease and
terminate, and upon surrender of the 1998(B) Preferred Stock,
the Corporation shall convert such shares within ten Business
Days of the completion of the Authorizing Actions.
(d) Merger, Consolidation. If, while any shares of the 1998(B)
Preferred Stock remain outstanding, this Corporation shall
enter into a consolidation with or merger into any other
corporation wherein this Corporation is not the surviving
corporation, or sell or convey its property as an entirety or
substantially as an entirety, and in connection with such
consolidation, merger, sale, or conveyance, shares of stock or
other securities shall be issuable or deliverable in exchange
for the common stock of the Corporation, including any common
stock into which issued and outstanding shares of 1998(B)
Preferred Stock may be converted, appropriate provisions shall
be made that, on the terms and in the manner provided in this
Section 6.5, the holder of any 1998(B) Preferred Stock may
thereafter convert the same into the same kind and amount of
securities as may be issuable by the terms of such
consolidation, merger, sale or conveyance with respect to the
number of shares of common stock into which such shares of
1998(B) Preferred Stock are convertible at the time of such
consolidation, merger, sale or conveyance. After any such
consolidation, merger, sale or conveyance, the right of
conversion shall be to convert the 1998(B) Preferred Stock
into such securities as the same may from time to time be
constituted.
6.6 REACQUIRED SHARES. Any shares of 1998(B) Preferred Stock converted,
purchased or otherwise acquired by this Corporation or any
subsidiary of this Corporation in any manner whatsoever shall be
retired promptly after the acquisition thereof, and, if necessary to
provide for the lawful conversion or purchase of such shares, the
capital represented by such shares shall be reduced in accordance
with the CBCA. This Corporation shall take all actions which are
necessary so that all such shares become authorized but unissued
shares of 1998(B) Preferred Stock, $.001 par value per share, of
this Corporation.
6.7 LIQUIDATION DISSOLUTION OR WINDING UP.
(a) Upon any liquidation, dissolution or winding-up of the affairs
of this Corporation, no distributions shall be made to the
holders of shares of common stock unless, prior thereto, the
holder of shares of 1998(B) Preferred Stock shall receive a
"Redemption Amount" equal to (a) cash or non-cash assets equal
to value of this 1998(B) Preferred Stock, on an as converted
basis, plus (b) an amount equal to accrued unpaid dividends,
if any.
(b) Notwithstanding anything set forth above, holders of 1998(B)
Preferred Stock shall not be entitled to receive more than the
Redemption Amount, as adjusted to reflect
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<PAGE> 142
any stock dividends, stock splits or recapitalizations, upon any
liquidation, dissolution or winding up of the Corporation. A
consolidation or merger of the Corporation with or into any other
corporation or corporations (including a wholly owned corporation),
any other corporate reorganization or any other transaction (or
series of related transactions) that results in the transfer of more
than fifty percent (50%) of the outstanding voting power of the
Corporation or a sale, conveyance, or other disposition of all or
substantially all of the Corporation's assets, shall not be deemed
to be a liquidation, dissolution or winding up within the meaning of
this paragraph so long as the successor in interest assumes the
obligations of the Corporation. The purchase or redemption by the
Corporation of stock of any class, in any number permitted by law,
shall not for the purpose of this paragraph be regarded as a
liquidation, dissolution or winding up of the Corporation.
6.8 DEFINITIONS.
(a) As used herein, the following terms shall have the meanings
indicated.
"Authorizing Action" means collectively the approval by the
stockholders of the Corporation of a resolution allowing for
the conversion of the 1998(B) Preferred Stock into common
stock of the Corporation and, (ii) the approval of the
shareholders of Zulu-tek, Inc., a Utah corporation, of a
resolution allowing for the liquidation of Zulu-tek, Inc.
"Business Day" means any day other than a Saturday, Sunday or
a day on which banking institutions in the State of Colorado
are authorized or obligated by law or executive order to
close.
"Effective Date" means the date of filing of this Articles of
Amendment with the Secretary of the State of Colorado,
provided, however, that the Corporation may treat the 1998(B)
Preferred Stock as outstanding as of September 9, 1998.
"Holders" means any of the holders of the shares of 1998(B)
Preferred Stock.
"Person" means any person or entity of any nature whatsoever,
specifically including an individual, a firm, a company, a
corporation, a partnership, a trust or other entity.
(b) Construction of Certain Terms and Phrases. Unless the context
otherwise requires, (i) words of any gender include each other
gender; (ii) words using the singular or plural number also
include the plural or singular number, respectively; (iii) the
terms "hereof," "herein," "hereby," and derivative or similar
words refer to these entire Articles of Amendment of Article
of Incorporation (this "Amendment"); and (iv) the term
"Section" or "clause" refers to the specified section or
clause of this Amendment. Whenever this
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<PAGE> 143
Amendment refers to a number of days, such number shall refer
to calendar days unless Business Days are specified. All
accounting terms used herein and not expressly defined herein
shall have the meanings given to them under generally accepted
accounting principles.
6.9 RANK. The 1998(B) Preferred Stock shall rank, with respect to
the payment of dividends and the distribution of assets upon
liquidation, dissolution or winding-up of the affairs of this
Corporation, prior to all shares of common stock of this
Corporation, but junior and inferior to the 8.6% Preferred
Stock."
FURTHER RESOLVED, that the statements contained in the foregoing
resolution creating and designating the said 1998(B) Preferred Stock and fixing
the number, powers, preferences and relative, optional, participating, and other
special rights and the qualifications, limitations, restrictions, and other
distinguishing characteristics thereof shall, upon the date of adoption of said
series, be deemed to be included in and be a part of the Articles of
Incorporation. The date of adoption of the aforesaid amendments was September 9,
1998. This amendment was duly adopted by the Board of Directors of the
Corporation without shareholder action and shareholder action was not required.
IN WITNESS THEREOF, the undersigned having been duly authorized has
executed the foregoing ARTICLES OF AMENDMENT OF THE ARTICLES OF INCORPORATION OF
ENHANCED SERVICES COMPANY, INC. CREATING 1998(B) PREFERRED STOCK on this 16th
day of September, 1998.
ENHANCED SERVICES COMPANY, INC.
By: _____________________________
Robert Smith
Chief Financial Officer
Attest:
State of California:
County of Los Angeles:
Subscribed and sworn to before me this ____th day of September, 1998
--------------------------------
Notary Public
Name: __________________________
My commission expires: ___________
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<PAGE> 144
APPENDIX F
[FILED ON A PRELIMINARY BASIS SUBJECT TO NEGOTIATION WITH HOLDERS.]
ARTICLES OF AMENDMENT
OF THE
ARTICLES OF INCORPORATION OF
ENHANCED SERVICES COMPANY, INC.
CREATING
1998(C) NON-CONVERTIBLE PREFERRED STOCK
Pursuant to Section 7-106-102 of the Colorado Business Corporation
Act of the state of Colorado (the "CBCA") and Section 2 of Article IV of the
Articles of Incorporation of Enhanced Services Company, Inc., a corporation
organized and existing under the provisions of the CBCA (the "Corporation"), the
Corporation hereby adopts the following Articles of Amendment, to its Articles
of Incorporation:
FIRST: The name of the Corporation is Enhanced Services
Company, Inc.
SECOND: The following amendment to the Articles of
Incorporation of enhanced Services Company, Inc.,
was duly adopted by the Board of Directors of the
Corporation, at a meeting held __________, 1998, in
the manner prescribed by the CBCA, to wit:
RESOLVED, that pursuant to the Corporation's Articles of
Incorporation and the CBCA, there be and hereby is authorized and created a
series of preferred shares, hereby designated as the 1998(C) Non-Convertible
Preferred Stock, consisting of fifteen thousand (15,000) authorized shares, of a
stated value of One Thousand dollars ($1,000) per share, which shall have the
voting powers, designations, preferences and relative participating, optional or
other rights, if any, or the qualifications, limitations, or restrictions, set
forth in such certificate of incorporation, and in addition thereto, those
following:
Section 7. 1998(C) Non-Convertible Preferred Stock.
7.1 DESIGNATION. The designation of the series of Preferred
Stock created hereby shall be1998(C) Non-Convertible
Preferred Stock ("1998(C) Non-Convertible Preferred").
The shares of 1998(C) Non-Convertible Preferred shall be
fully paid and nonassessable.
7.2 DIVIDENDS. The holders of the shares of 1998(C)
Non-Convertible Preferred shall be entitled to receive,
subordinate to the holders of the 8.6% Cumulative
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<PAGE> 145
Preferred Stock, cumulative dividends, out of assets
legally available therefor and prior in preference to
any declaration or payment of any dividend on the Common
Stock, par value $0.001 of the Corporation ("Common
Stock"), at a rate of 5% of the stated value per annum
("Dividends") payable on the last Redemption Date (as
defined below) by delivery to the holders of cash equal
to the amount of the Dividends or, at the option of the
Corporation, Common Stock of the Corporation with a Fair
Market Value on the date of payment equal to the amount
of Dividends. For purposes hereof, if the Common Stock
is quoted on the NASDAQ Stock Market, or the successor
thereto, Fair Market Value shall mean the average of the
bid and ask price for the Common Stock on the thirty
(30) trading days prior to date of payment, or, if the
Common Stock are listed on the New York Stock Exchange
or the American Stock Exchange, as applicable, Fair
Market Value shall be equal to the closing price, in
each case as determined as the average of the closing
prices on the thirty (30) trading days prior to date of
payment. If the Common Stock are not publicly traded,
Fair Market Value shall be equal to the greater of the
book value of the Common Stock on the most recent
audited financial statements of the Corporation or the
price per share received by the Corporation in the most
recent sale of Common Stock to a person or entity which
was not an affiliate of or otherwise related to the
Corporation.
7.3 SINKING FUND. No provision shall be made for any sinking
fund.
7.4 LIQUIDATION RIGHTS IN THE EVENT OF ANY VOLUNTARY OR
INVOLUNTARY LIQUIDATION.
(a) In the event of any liquidation, dissolution or
winding up of the Corporation, either voluntary or
involuntary, holders of 1998(C) Non-Convertible
Preferred shall be entitled to receive, subordinate
to the holders of the 8.6% Cumulative Preferred
Stock, but prior and in preference to any
distribution of any of the assets of the Corporation
to the holders of Common Stock or any other classes
of Preferred Stock by reason of their ownership
thereof an amount ("Redemption Amount") equal to the
sum of (i) $1,000 for each outstanding share of
1998(C) Non-Convertible Preferred (the "Original
1998(C) Issue Price"), as adjusted to reflect any
stock splits, stock dividends or other
recapitalizations, and (ii) an amount equal to all
declared but unpaid Dividends on each such share,
provided, however, that the holders of the 1998(C)
Non-Convertible Preferred shall not be entitled to
receive any amount as a result of a liquidation,
dissolution, or winding up of the corporation prior
to the holders of the 8.6% Cumulative Preferred
Stock of the Corporation until said holders have
agreed to be subordinate to the holders hereof,
which subordination agreement shall be provided to
the holders of the 1998(C) Non-Convertible
Preferred. If upon the occurrence of such event, the
assets and funds thus distributed or available for
distributions among the
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holders of the 1998(C) Non-Convertible Preferred
shall be insufficient to permit the payment to such
holders of the full aforesaid preferential amounts,
then the assets and funds of the Corporation legally
available for distribution shall be distributed
ratably among the holders of the 1998(C)
Non-Convertible Preferred in proportion to the
product of the liquidation preference of each such
share and the number of shares owned by each such
holder.
(b) Notwithstanding anything set forth above,
holders of 1998(C) Non-Convertible Preferred shall
not be entitled to receive more than the Redemption
Amount, as adjusted to reflect any stock dividends,
stock splits or recapitalizations, upon any
liquidation, dissolution or winding up of the
Corporation. A consolidation or merger of the
Corporation with or into any other corporation or
corporations (other than a wholly owned
corporation), any other corporate reorganization or
any other transaction (or series of related
transactions) that results in the transfer of more
than fifty percent (50%) of the outstanding voting
power of the Corporation or a sale, conveyance, or
other disposition of all or substantially all of the
Corporation's assets, shall not be deemed to be a
liquidation, dissolution or winding up within the
meaning of this paragraph so long as the successor
in interest assumes the obligations of the
Corporation to pay the Redemption Amount on the
Redemption Dates. The purchase or redemption by the
Corporation of stock of any class, in any number
permitted by law, shall not for the purpose of this
paragraph be regarded as a liquidation, dissolution
or winding up of the Corporation.
7.5 REDEMPTION. The 1998(C) Non-Convertible Preferred shall
be redeemed by the Corporation on the following dates
("Redemption Dates"):
(a) On or before December 31, 1999, the higher
amount of one-third (1/3) of the issued shares or
3,403 shares of the 1998(C) Non-Convertible
Preferred, at $1,000 per share;
(b) On or before December 31, 2001, the higher the
amount of one-third (1/3) of the issued shares or
3,403 shares of the 1998(C) Non-Convertible
Preferred at $1,000 per share; and
(c) On or before December 31, 2002, the higher the
amount of one-third (1/3) of the issued shares or
3,403 shares of the 1998(C) Non-Convertible
Preferred at $1,000 per share.
7.6 VOTING. The 1998(C) Non-Convertible Preferred shall be
non-voting except to the extent that the holders thereof
shall be entitled to vote or consent to certain matters
under the CBCA or section 7.10 below.
7.7 PAR VALUE/STATED VALUE. The shares of the 1998(C)
Non-Convertible Preferred shall have a par value of
$1.00 per share, and a stated value of $1,000 per share.
7.8 NO IMPAIRMENT. The Corporation shall not amend its
Articles of Incorporation or participate in any
reorganization, transfer of assets, consolidation,
merger,
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<PAGE> 147
dissolution, issue or sale of securities or any
other voluntary action, for the purpose of avoiding
or seeking to avoid the observance or performance of
any of the terms to be observed or performed
hereunder by the Corporation, but will, at all times
in good faith, assist in carrying out all such
action as may be reasonably necessary or appropriate
in order to protect the Redemption Rights of holders
of 1998(C) Non-Convertible Preferred against
impairment.
7.9 OTHER PREFERENCES. The shares of the 1998(C)
Non-Convertible Preferred shall have no other
preferences, rights, restrictions, or qualifications,
except as set forth above, or as otherwise provided by
law or by the certificate of incorporation of the
Corporation.
7.10 PROTECTIVE PROVISIONS. So long as shares of 1998(C)
Non-Convertible Preferred are outstanding, the
Corporation shall not, without first obtaining the
approval (by vote or written consent, as provided by
law) of the holders of at least a majority of the then
outstanding shares of 1998(C) Non-Convertible Preferred,
voting as one class:
(a) Create any new class or series of stock having a
preference over, or being on a parity with, the
1998(C) Non-Convertible Preferred with respect to
voting, dividends, redemption or liquidation rights;
or
(b) Declare, make or pay any distributions of any
kind on any Common Stock, except for the declaration
and payment of stock dividends payable in the form
of Common Stock;
(c) Redeem, purchase, acquire or retire any Common
Stock or any warrants, option or other rights to
acquire any Common Stock, except for repurchases of
Common Stock (or options to acquire such shares)
held by employees, officers, directors, consultants
and advisors to the Corporation upon termination of
their employment or services pursuant to agreements
providing for such repurchase; or
(d) Increase the authorized number of shares of the
8.6% Cumulative Preferred Stock; or alter or change
the rights, preferences or privileges of the shares
of the 8.6% Cumulative Preferred Stock or the
1998(C) Non-Convertible Preferred.
FURTHER RESOLVED, that the statements contained in the foregoing
resolution creating and designating the said 1998(C) Non-Convertible Preferred
and fixing the number, powers, preferences and relative, optional,
participating, and other special rights and the qualifications, limitations,
restrictions, and other distinguishing characteristics thereof shall, upon the
date of adoption of said series, be deemed to be included in and be a part of
the Articles of Incorporation. The date of adoption of the aforesaid amendments
was __________, 1998. This amendment was duly adopted by the Board of Directors
of the Corporation without shareholder action and that shareholder action was
not required.
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<PAGE> 148
IN WITNESS THEREOF, the undersigned having been duly authorized has
executed the foregoing ARTICLES OF AMENDMENT OF THE ARTICLES OF INCORPORATION OF
ENHANCED SERVICES COMPANY, INC. CREATING 1998(C) NON-CONVERTIBLE PREFERRED STOCK
this ____ day of __________, 1998.
ENHANCED SERVICES COMPANY, INC.
By:
--------------------------------
Robert Smith
Chief Financial Officer
Attest:
State of California:
County of Los Angeles:
Subscribed and sworn to before me this 30th day of December, 1997
--------------------------------
Notary Public
Name:
---------------------------
My commission expires:
----------
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APPENDIX G EXECUTION COPY
SECURITIES ACQUISITION AND REORGANIZATION AGREEMENT
BY AND BETWEEN
ENHANCED SERVICES COMPANY, INC., a Colorado Corporation
AND
ZULU-tek, INC., a Utah Corporation
<PAGE> 150
September 9,1998
SECURITIES ACQUISITION AGREEMENT
TABLE OF CONTENTS
<TABLE>
<S> <C>
ARTICLE I EXCHANGE OF REORGANIZATION STOCK FOR ZULU-TEK ASSETS.............................................2
1.01 Exchange.............................................................................2
1.02 Fully Paid and Nonassessable Status..................................................2
ARTICLE II REPRESENTATIONS AND WARRANTIES OF ENHANCED.......................................................2
2.01 Organization.........................................................................2
2.02 Corporate Power and Authority of ENHANCED............................................2
2.03 No Conflict..........................................................................3
2.04 Issuance of Shares...................................................................3
2.05 Receipt of Information...............................................................3
2.06 Sophisticated Investor...............................................................4
2.07 Capital Structure....................................................................4
(a) Common Stock.............................................................4
(b) 8.6% Preferred...........................................................4
(c) 1998 Preferred...........................................................4
(d) 1998(B) Preferred........................................................4
(e) 1998(C) Preferred........................................................4
(f) Investor Preferred.......................................................5
2.08 Directors and Officers...............................................................5
2.09 Certain Financial Information........................................................5
2.10 Litigation...........................................................................6
2.11 NASDAQ Matters.......................................................................6
2.12 Compliance With Law..................................................................6
2.13 Corporate Records....................................................................6
2.14 Material Contracts...................................................................6
2.15 Taxes................................................................................6
2.16 ERISA................................................................................7
2.17 Patents, Copyrights, Etc.............................................................7
2.18 No Materially Adverse Matters, Etc...................................................7
2.19 No Further Representations and Warranties............................................7
ARTICLE III REPRESENTATIONS AND WARRANTIES OF ZULU-TEK......................................................8
3.01 Organization of ZULU-tek.............................................................8
3.02 Corporate Power and Authority........................................................8
3.03 No Conflict..........................................................................9
</TABLE>
2
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<TABLE>
<S> <C>
3.04 Capital Structure of ZULU-tek........................................................9
(a) ZULU-tek Common Stock....................................................9
(b) Series A Preferred Stock.................................................9
(c) Series B Preferred Stock.................................................9
(d) Series C Preferred Stock.................................................9
(e) Series D Preferred Stock.................................................9
3.05 Directors and Officers..............................................................10
3.06 Compliance With Law.................................................................10
3.07 Corporate Records...................................................................10
3.08 Status of Subsidiaries.............................................................10
3.09 Restricted Securities...............................................................10
3.10 Receipt of Information..............................................................11
3.11 Sophisticated Investor..............................................................11
3.12 Legends.............................................................................11
3.13 Material Contracts..................................................................11
3.14 Taxes...............................................................................11
3.15 ERISA...............................................................................12
3.16 Patents, Copyrights, Etc............................................................12
3.17 Litigation..........................................................................12
3.18 No Materially Adverse Contracts, Etc................................................12
3.19 No Further Representations and Warranties...........................................13
ARTICLE IV REGISTRATION RIGHTS.............................................................................13
4.01 Registration Rights.................................................................13
4.02 Reporting Requirements Under The Securities Exchange Act of 1934....................13
4.03 Expenses............................................................................13
4.04 Indemnification; Contribution.......................................................13
4.05 Obligations of ENHANCED.............................................................15
(a) Filing..................................................................15
(b) Amendments..............................................................15
(c) Prospective Delivery....................................................15
(d) Blue Sky................................................................16
ARTICLE V CLOSING AND POST-CLOSING MATTERS.................................................................16
5.01 Closing.............................................................................16
5.02 Closing Documents...................................................................16
(a) ENHANCED Deliveries.....................................................16
(b) ZULU-tek Deliveries.....................................................16
5.03 Post-Closing Matters................................................................17
5.04 Satisfaction of Conditions..........................................................19
ARTICLE VI TERMINATION.....................................................................................19
6.01 Termination.........................................................................19
</TABLE>
3
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<TABLE>
<S> <C>
ARTICLE VII BROKERAGE AND SIMILAR FEES.....................................................................19
7.01 No Other Fee Agreements.............................................................19
ARTICLE VIII CONFIDENTIALITY...............................................................................20
8.01 Maintenance of Confidential Information.............................................20
8.02 Remedies on Breach..................................................................20
ARTICLE IX MISCELLANEOUS PROVISIONS........................................................................20
9.01 Representation of Multiple Parties..................................................20
9.02 Amendment and Waiver................................................................21
9.03 Severability........................................................................21
9.04 Expenses............................................................................21
9.05 Press Releases......................................................................21
9.06 Notices.............................................................................21
9.07 Entire Agreement....................................................................22
9.08 Assignment..........................................................................22
9.09 Third Parties.......................................................................23
9.10 Section and Other Headings..........................................................23
9.11 Counterparts; Facsimile Signatures..................................................23
9.12 Governing Law; Venue; Jurisdiction..................................................23
9.13 Further Assurances..................................................................23
9.14 Survival of Representations and Warranties..........................................23
9.15 Pronouns............................................................................23
</TABLE>
4
<PAGE> 153
EXHIBIT LIST
EXHIBIT 1.01(a) ZULU-tek LIABILITIES
EXHIBIT 1.01(b) ZULU-TEK ASSETS
EXHIBIT 2.01 SUBSIDIARIES OF ENHANCED
EXHIBIT 2.07 OUTSTANDING OPTIONS AND WARRANTS
EXHIBIT 2.08 CURRENT DIRECTORS AND OFFICERS OF ENHANCED
EXHIBIT 2.09 FINANCIAL INFORMATION OF ENHANCED INCLUDING ENHANCED
OBLIGATIONS
EXHIBIT 2.10 PENDING LITIGATION OR PROCEEDINGS OF ENHANCED
EXHIBIT 2.14 ENHANCED MATERIAL CONTRACTS
EXHIBIT 2.16 ERISA MATTERS OF ENHANCED
EXHIBIT 2.17 PATENTS, COPYRIGHTS, ETC. OF ENHANCED
EXHIBIT 3.01 SUBSIDIARIES OF ZULU-TEK
EXHIBIT 3.04 CAPITAL STRUCTURE OF ZULU-TEK
EXHIBIT 3.05 CURRENT OFFICERS AND DIRECTORS OF ZULU-TEK
EXHIBIT 3.13 ZULU-TEK MATERIAL CONTRACTS
EXHIBIT 3.14 ZULU-TEK TAX MATTERS
EXHIBIT 3.15 ERISA MATTERS OF ZULU-TEK
EXHIBIT 3.16 PATENTS, COPYRIGHTS, ETC. OF ZULU-TEK
EXHIBIT 3.17 ZULU-TEK LITIGATION
5
<PAGE> 154
SECURITIES ACQUISITION AND REORGANIZATION AGREEMENT
This SECURITIES ACQUISITION AND REORGANIZATION AGREEMENT
("Agreement") dated as of September 9, 1998 is made by and between ENHANCED
Services Company, Inc., a Colorado corporation ("ENHANCED") and ZULU-tek, Inc.,
a Utah corporation ("ZULU-tek"), both with offices at 3415 Sepulveda Blvd.,
Suite 500, Los Angeles, California 90034.
WHEREAS, ENHANCED desires to exchange (the "Exchange") 520,000 of
its newly authorized 1998(B) Preferred Stock $.001 par value ("1998(B)
Preferred") and up to 10,209 shares of its newly authorized 1998(C) Preferred
Stock ("1998(C) Preferred," and collectively the "Reorganization Stock") and up
to $374,800 for substantially all of the assets and the assumption by ENHANCED
of all of the Zulu-tek liabilities, and Zulu-tek desires to acquire the
Reorganization Stock from ENHANCED upon the terms and subject to the conditions
hereinafter set forth; and
WHEREAS, ZULU-tek and ENHANCED intend to cooperate in obtaining the
consent of the holders of the ZULU-tek Series C Preferred Stock to exchange
those shares for the 1998(C) Preferred; and
WHEREAS, ENHANCED will submit to its Annual Meeting of Stockholders,
which is expected to be scheduled in mid-November, 1998, a proposal to convert
the 1998(B) Preferred into 5,200,000 shares of ENHANCED Common Stock (as defined
below); and
WHEREAS, ZULU-tek intends to convene a shareholders meeting to seek
approval to liquidate the corporation and to distribute the ENHANCED Common
Stock underlying the 1998(B) Preferred to its stockholders in liquidation; and
WHEREAS, ZULU-tek and ENHANCED intend that the transaction as set
out in this Agreement constitute a tax free reorganization to ZULU-tek, to the
ZULU-tek stockholders and to ENHANCED under Sections 354 and 368 (a)(1)(D) of
the Internal Revenue Code of 1986, as amended (the "Code").
NOW, THEREFORE, in consideration of the foregoing premises and the
representations, warranties and agreements herein, and for other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:
1
<PAGE> 155
ARTICLE I
EXCHANGE OF REORGANIZATION STOCK FOR ZULU-TEK ASSETS
1.01 Exchange. In reliance on the representations and warranties set
forth herein, at the Closing (as hereinafter defined), ENHANCED shall issue and
deliver the Reorganization Stock, and shall assume the liabilities of ZULU-tek
set out on Exhibit 1.01(a). ZULU-tek shall transfer the assets set out on
Exhibit 1.01(b) to ENHANCED (the assets listed in 1.01(b) 1-3 shall be referred
to as "Acquired Stock").
1.02 Fully Paid and Nonassessable Status. All of the shares of
Reorganization Stock to be issued and delivered by ENHANCED pursuant to this
Agreement, when issued in accordance with the terms of the Agreement, shall be
duly authorized, validly issued, fully paid and nonassessable and shall be
restricted securities as set forth in this Agreement.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF ENHANCED
ENHANCED hereby represents and warrants to ZULU-tek as follows:
2.01 Organization. As of the date of this Agreement ENHANCED is a
corporation duly organized, validly existing and in good standing under the laws
of Colorado and has the requisite corporate power and authority to own, lease
and operate its properties and to carry on its business in the manner now being
conducted and is duly qualified or licensed to do business as a foreign
corporation in good standing in any jurisdictions in which the ownership of its
property or the conduct of its business requires such qualification, except such
jurisdictions in which its failure to be so qualified or licensed will have no
material adverse effect on its business or properties. In connection with the
Annual Meeting of Stockholders, ENHANCED will seek the approval of its
stockholders to change its state of incorporation from Colorado to Delaware
through a merger with a newly organized Delaware corporation.
2.02 Corporate Power and Authority of ENHANCED. ENHANCED has the
full corporate power and authority to execute and deliver this Agreement, to
issue and deliver the ENHANCED Stock and to perform its other obligations under
this Agreement. The execution, delivery and performance of this Agreement by
ENHANCED has been authorized by all necessary corporate actions required by law,
by ENHANCED's Articles of Incorporation, as amended to date ("ENHANCED Articles
of Incorporation"), its Bylaws, as in effect on the date hereof ("ENHANCED
Bylaws"), any voting trusts, voting agreements, stockholders or similar
agreements ("ENHANCED Stockholder Understandings") or otherwise required to be
taken to authorize the execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby. Assuming due execution and
delivery of the Agreement by the other parties hereto, this Agreement is a valid
and binding agreement of ENHANCED, enforceable in accordance with its terms,
except to the extent such enforceability may be subject to limitations
2
<PAGE> 156
of public policy under federal and state securities laws and under applicable
bankruptcy, insolvency or similar laws affecting creditor's rights generally or
the availability of equitable remedies.
2.03 No Conflict. Neither the execution and delivery of this
Agreement nor the consummation by ENHANCED of the transactions contemplated
hereby will (a) conflict with or result in a breach of any provision of the
ENHANCED Articles of Incorporation or the ENHANCED Bylaws, (b) result in a
default (or with the passing of time give rise to any right of termination,
cancellation or acceleration) under any of the terms, conditions or provisions
of the ENHANCED Stockholder Understandings or any other material note, bond,
mortgage, indenture, franchise, license, permit or agreement or other instrument
or obligation to which ENHANCED is a party or by which ENHANCED is bound or to
which any of the assets of ENHANCED is subject and will not have a material
adverse effect on the financial condition of ENHANCED, (c) violate any statute
or law or any judgment, decree, order, writ, injunction, regulation or rule
applicable to ENHANCED, the violation of which would have a material adverse
effect on the financial conditions of ENHANCED, or (d) result in or require the
creation of any material lien with respect to any assets of ENHANCED.
2.04 Issuance of Shares. The Reorganization Stock to be delivered
pursuant to this Agreement is authorized but unissued capital stock and the
articles of amendment to effect such issuance have not yet been filed by
ENHANCED but will be filed prior to Closing. Subsequent to the filing of the
applicable Certificates of Designation for the Reorganization Stock, and the
increase in its authorized capital stock needed to effect the conversion of such
Reorganization Stock, ENHANCED has full power and authority to issue and deliver
the Reorganization Stock, and has obtained and provided all notices and consents
required under the ENHANCED Articles of Incorporation, the ENHANCED Bylaws and
the applicable rules of the National Association of Securities Dealers ("NASD")
or as a corporation listed on the NASDAQ SmallCap ("NASDAQ") Stock Market
(collectively, the "NASDAQ Rules").
2.05 Receipt of Information. ENHANCED and its representatives have
received and reviewed this Agreement, all Exhibits hereto, and all other
documents and materials that ZULU-tek has provided to them in connection with
the transactions contemplated by this Agreement. ENHANCED and its
representatives have had an opportunity to review those documents and all other
documents and materials requested of ZULU-tek and have been given an opportunity
to ask such questions of ZULU-tek concerning the terms and conditions of the
Agreement, their respective organization and structure, and the business,
operations, business prospects, shareholders, advisers, representatives, market
position, financial condition, assets and liabilities (including contingent
liabilities) of ZULU-tek as well as such other relevant matters as they have
deemed necessary or desirable and have been given all such information as they
have requested, in order to make an informed and independent evaluation of the
merits and risks of the transactions contemplated herein.
3
<PAGE> 157
2.06 Sophisticated Investor. ENHANCED has, by reason of its
corporate status and financial experience, the capacity to make the independent
evaluation contemplated hereby and to protect its own interests in connection
with this Agreement and this transactions contemplated hereby.
2.07 Capital Structure. The authorized capital stock of ENHANCED
currently consists of 20,000,000 shares of capital stock of which 15,000,000 are
shares of Common Stock, par value $.001 per share ("ENHANCED Common Stock") and
5,000,000 are preferred shares to be on such terms and in such series as may be
designated by the Board of Directors of ENHANCED. The currently outstanding
capital of ENHANCED is:
(a) Common Stock. 3,245,118 shares are issued and outstanding as of
August 11, 1998 and as of August 31, 1998, 1,161,250 shares were
reserved for issuance on exercise of outstanding options and
warrants;
(b) 8.6% Preferred. 8.6% Cumulative Preferred Stock ("8.6%
Preferred") of which 15,000 shares are authorized and 8,000 shares
are outstanding on the date hereof; and
(c) 1998 Preferred. The 1998 Preferred Stock consisting of 1,000,000
shares, par value $3.00, issued to Netvest Capital Partners LP, a
Delaware limited partnership, in transactions implemented on March
6, 1998, which shares are convertible into 5,543,600 shares of
ENHANCED Common Stock solely at the option of ENHANCED after receipt
of stockholder approval at the ENHANCED Annual Meeting of
Stockholders convened in accordance with the NASDAQ Rules and the
requirements of the Securities & Exchange Commission (the "SEC");
(d) 1998(B) Preferred. The 1998(B) Preferred Stock consisting of
520,000 shares to be issued to ZULU-tek in connection with the
transactions contemplated hereby and which shares shall be
convertible into 5,200,000 shares of ENHANCED Common Stock, subject
to adjustment in the event of any stock splits, stock dividend,
reclassifications or other capital transactions, as applicable,
after receipt of stockholder approval at the ENHANCED Annual Meeting
of Stockholders and there is an effective SEC registration statement
allowing for the distribution of the Common Stock to the
stockholders of ZULU-tek;
(e) 1998(C) Preferred. The 1998(C) Preferred Stock consisting of
15,000 shares, stated value $1,000 per share, which shall be
exchanged on a share for share basis for the outstanding ZULU-tek
Series C Preferred Stock held by Softbank Holdings, Inc., Ozemail,
Inc. and certain individuals in connection with the liquidation of
ZULU-tek, subject to adjustment in the event of any stock splits,
stock dividend, reclassifications or other capital transactions, as
applicable, and subject to such terms and conditions as shall be
negotiated with the holders and reflected in the proxy materials for
the ENHANCED Annual Meeting of Stockholders; and
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<PAGE> 158
(f) Investor Preferred. The Investor Preferred Stock ("Investor
Preferred") consisting of up to 500,000 shares, stated value $10 per share, to
be issued by ENHANCED to certain investors at a purchase price of $10.00 per
share, to be issued on or prior to December 31, 1998 and to be convertible into
ENHANCED Common Stock on the basis of 10 shares of ENHANCED Common Stock for
each share of Investor Preferred, subject to adjustment in the event of any
stock splits, stock dividend, reclassifications or other capital transactions,
as applicable. To the extent required by the NASDAQ Rules, the Investor
Preferred will be convertible only after receipt of stockholder approval at the
ENHANCED Annual Meeting of Stockholders (including approval of an increase in
the number of authorized shares). If requested by the holders, ENHANCED will
file a registration statement with the SEC covering the resale of the ENHANCED
Common Stock to be issued upon the conversion of the Investor Preferred.
The ENHANCED Common Stock entitles each holder to one vote for each
share held. Except as set forth on Exhibit 2.07, as of the date of this
Agreement and at Closing, there are or will be no other outstanding options,
warrants or other rights, subscriptions, options, calls, rights, warrants,
convertible securities, unsatisfied preemptive rights or other agreements or
commitments of any character obligating ENHANCED to issue (or reserve for
issuance) or to transfer or sell any shares of its capital stock of any class.
No other classes of preferred shares have been designated or issued and, except
as set forth herein with respect to the Reorganization Stock to be issued to
ZULU-tek and upon any exercise of outstanding options and warrants, no
additional shares of the capital stock of ENHANCED will be issued or reserved
for issuance at or prior to the Closing. The Certificates of Designation to be
filed in the State of Colorado will correctly set forth the terms of the
ENHANCED 1998(B) and the Investor Preferred and the 1998(C) Preferred Stock.
2.08 Directors and Officers. The current directors and officers of
ENHANCED are set forth on Exhibit 2.08 and each of them currently validly holds
their respective offices in accordance with the provisions of the ENHANCED
Articles of Incorporation and ENHANCED By-laws.
2.09 Certain Financial Information. The audited and unaudited
financial statements of ENHANCED, filed with the SEC for all periods through May
31, 1998, fairly present the financial position of ENHANCED as of the date filed
and fairly represent the results of financial operations for the periods covered
thereby, in accordance with generally accepted accounting principles applied on
a consistent basis. Except as disclosed in such financial statements
(collectively the "Financial Statements") or on Exhibit 2.09 (the "ENHANCED
Obligations"), there are no material contingencies and no loans to or from any
officers, directors or affiliates of ENHANCED which exist or are committed as of
the date hereof. As set forth in Exhibit 2.09, FCA Investment Company, a
Delaware corporation ("FCAIC"), has advanced $500,000.00 to ENHANCED as working
capital.
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2.10 Litigation. Except as set forth on Exhibit 2.10, as of the date
of this Agreement, there is no litigation or proceedings pending or, to the best
of the knowledge of ENHANCED's stockholders and ENHANCED's directors and
officers, threatened against ENHANCED or any of its assets or properties. To the
extent that after the date hereof ENHANCED shall become aware that such claims
or litigation shall be initiated or threatened with respect to this transaction
or any actions of ENHANCED, it shall promptly advise ZULU-tek thereof.
2.11 NASDAQ Matters. ENHANCED will submit an application to NASDAQ
to list the ENHANCED Common Stock underlying the Reorganization Stock and the
Investor Preferred on NASDAQ to allow for listing extemporaneously with the
conversion of such stock. ENHANCED makes no representation or warranty
associated with the continued listing of the shares of ENHANCED for trading as a
"small cap" company on NASDAQ and ZULU-tek acknowledges receipt of
correspondence between NASDAQ and ENHANCED pertaining to ENHANCED's NASDAQ
listing. ZULU-tek agrees to accept the Reorganization Stock without any
liability or obligation concerning such listing, provided that ENHANCED
covenants and agrees to use its best efforts to maintain such NASDAQ listing.
ZULU-tek agrees to cooperate, at the request of ENHANCED, in ENHANCED's efforts
to maintain such listing, but makes no representation with respect to its
capacity to effect the continued listing of the ENHANCED Common Stock.
2.12 Compliance With Law. ENHANCED is conducting its business and
operations in compliance with all governmental rules and regulations applicable
thereto and is not in violation or default in any material respect under any
statute, law, ordinance, rule, regulation, judgment, order, decree, concession,
grant, franchise, license or other governmental authorization or approval
applicable to it or any of its business and affairs.
2.13 Corporate Records. True and correct copies of the Articles of
Incorporation, Bylaws and minutes of the Board of Directors and stockholders of
ENHANCED and all amendments thereto of ENHANCED have been delivered to ZULU-tek.
The minute books of ENHANCED for which minutes were prepared, contain accurate
minutes of the meetings of and consents to actions taken without meetings of the
Board of Directors and stockholders of ENHANCED since inception.
2.14 Material Contracts. Exhibit 2.14 sets forth all employment
agreements, stock option plans and agreements, insurance plans, employee benefit
plans and all contracts of ENHANCED, in effect on the date hereof, which require
annual payments of more than $50,000, and the status of the same at the date
hereof.
2.15 Taxes. ENHANCED has filed all federal, state and other tax
returns required to be filed, and all taxes, assessments and other governmental
charges due from ENHANCED have been fully paid. ENHANCED has established on its
books reserves adequate for the payment of all federal, state and other tax
liabilities.
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2.16 ERISA. Except as set forth on Exhibit 2.16, ENHANCED is in
compliance in all material respects with the applicable provisions of ERISA and
has not incurred any liability to the Pension Benefit Guaranty Corporation or a
plan under Title IV of ERISA; and no "prohibited transaction" or "reportable
event" (as such terms are defined in ERISA) has occurred with respect to any
plan.
2.17 Patents, Copyrights, Etc. Exhibit 2.17 sets forth an accurate
and complete list of all patents, copyrights, trademarks, trade names, trademark
registrations, service names, service marks, domain names, licenses, formulas
and applications therefor owned by ENHANCED or its subsidiaries or used or
required by ENHANCED in the operation of its business, title to each of which
is, except as set forth in Exhibit 2.17, held by ENHANCED free and clear of all
adverse claims, liens, security agreements, restrictions or other encumbrances.
Except as set forth in Exhibit 2.17, ENHANCED owns or possesses adequate
licenses or other rights to use all patents, trademarks, trade names, service
marks, domain names, trade secrets or other intangible property rights and
know-how necessary to entitle ENHANCED to conduct its business as presently
being conducted. There is no infringement action, lawsuit, claim, or complaint
or any written notice to ENHANCED which asserts that ENHANCED's operations
violate or infringe the rights or the trade names, trademarks, trademark
registrations, service names, service marks, domain names or copyrights, and
ENHANCED is not in any way making use of any confidential information or trade
secrets of any person, except with the consent of such person. Except as set
forth in Exhibit 2.17, ENHANCED has taken reasonable steps to protect its
proprietary information (except disclosure of source codes pursuant to licensing
agreements) and is the lawful owner of the proprietary information free and
clear of any claim of any third party. ENHANCED's proprietary rights are
adequate of the conduct of its business substantially as now conducted without
known conflict with any rights of others. ENHANCED will provide to ZULU-tek upon
ZULU-tek's request a copy of all filings, registrations and other documents
relating to any of the foregoing franchises, patents, copyrights, trademarks,
trade names, trademark registrations, service names, service marks, domain
names, licenses, formulas and applications.
2.18 No Materially Adverse Matters, Etc. ENHANCED is not subject to
any charge, corporate or other legal restriction, or any judgment, decree,
order, rule or regulation that has or is expected in the future to have a
materially adverse effect on the business, assets or financial condition of
ENHANCED. ENHANCED is not a party to any contract or agreement that has or is
expected, in the judgment of ENHANCED's officers, to have any materially adverse
effect on the business of ENHANCED.
2.19 No Further Representations and Warranties. ZULU-tek
acknowledges that no other representations or warranties have been made by
ENHANCED or relied upon by ZULU-tek except as set out in this Agreement.
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ARTICLE III
REPRESENTATIONS AND WARRANTIES OF ZULU-TEK
ZULU-tek represents and warrants to ENHANCED, on its own behalf and
with respect to material transactions by its material subsidiaries (all of which
are collectively referred to as "ZULU-tek" solely for purposes of Sections 3.03,
3.06, 3.07 and 3.13 to 3.18), as follows:
3.01 Organization of ZULU-tek. ZULU-tek is a corporation duly
organized, validly existing and in good standing under the laws of Utah and has
the requisite corporate power and authority to own, lease and operate its
properties and to carry on its business in the manner now being conducted and is
licensed to do business as a foreign corporation in any jurisdictions in which
the ownership of its property or the conduct of its business requires such
qualification, except such jurisdictions in which its failure to be so qualified
or licensed will have no material adverse effect on its business or properties.
Attached as Exhibit 3.01 is a list of all of the entities in which ZULU-tek
directly or indirectly holds any shares, options or other rights (the "ZULU
Subsidiaries").
3.02 Corporate Power and Authority. ZULU-tek has the full corporate
power and authority to execute and deliver this Agreement and to perform its
obligations under this Agreement. The execution, delivery and performance of
this Agreement by ZULU-tek has been authorized by all necessary corporate
actions required by law, by ZULU-tek's Articles of Incorporation, and other
Bylaws or constituent documents or otherwise required to be taken to authorize
the execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby. Notwithstanding the same, the parties
acknowledge that it is unclear whether Star Medical, Inc. (the predecessor to
ZULU-tek), which was organized in 1985 has, since 1992, adopted the resolution,
required by Sections 16-10a-704 and 16-10a-1704 of the Business Corporations Act
of Utah (as newly adopted in 1992) to allow for written consent by stockholders,
even though it would appear that such a resolution had been adopted since Star
Medical, Inc., took action by written consent of its stockholders subsequent to
such date and, consistent with such practice, a written consent of a majority of
the holders of the Common Stock of ZULU-tek has been sought and received with
respect to the transactions contemplated hereby. However, to assure compliance
and resolve any possible ambiguities, ZULU-tek intends to seek ratification of
certain transactions, including the ones covered by this Agreement, at a Special
Meeting of Stockholders (as described in Article V). In addition, consent to the
transaction from a holder of the ZULU-tek Series A Preferred is pending. Subject
to the proceeding and assuming due execution and delivery of the Agreement by
the other parties hereto, this Agreement is a valid and binding agreement of
ZULU-tek, enforceable in accordance with its terms, except to the extent such
enforceability may be subject to limitations of public policy under federal and
state securities laws and under applicable bankruptcy, insolvency or similar
laws affecting creditor's rights generally or the availability of equitable
remedies.
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3.03 No Conflict. Neither the execution and delivery of this
Agreement nor the consummation by ZULU-tek of the transactions contemplated
hereby will (a) conflict with or result in a breach of any provision of its
constituent documents, (b) result in a default (or give rise to any right of
termination, cancellation or acceleration) under any of the terms, conditions or
provisions of any material note, bond, mortgage, indenture, franchise, license,
permit or agreement or other instrument or obligation to which ZULU-tek is a
party or by which ZULU-tek is bound or to which any of its assets are subject,
(c) violate any statute or law or any judgment, decree, order, writ, injunction,
regulation or rule applicable to ZULU-tek, the violation of which would have a
material adverse effect on the financial conditions of ZULU-tek, or (d) result
in or require the creation of any material lien with respect to any assets of
ZULU-tek.
3.04 Capital Structure of ZULU-tek. ZULU-tek represents and warrants
to ENHANCED that as of the date of this Agreement, the authorized capital stock
of ZULU-tek consists of 150,000,000 shares of capital stock, including:
(a) ZULU-tek Common Stock. 100,000,000 shares of Common
Stock, $0.001 par value per share, of which 51,917,263
were issued and outstanding at August 10, 1998;
(b) Series A Preferred Stock. 2,000,000 shares of Series A
Preferred Stock, of which 374,800 shares are issued and
outstanding as of the date hereof, which shares of
Series A Preferred Stock entitle the holders to a per
share preferential payment of $1.00 plus accrued and
unpaid dividends;
(c) Series B Preferred Stock. 3,000,000 shares of Series B
Preferred Stock, $1.00 stated value per share, which
shares were convertible at the option of the holder into
an aggregate of 7,333,334 shares of ZULU-tek Common
Stock on February 6, 1998 (4,000,000 shares), May 6,
1998 (2,000,000 shares), and August 6, 1998 (1,333,384
shares) but which are no longer convertible on the date
hereof;
(d) Series C Preferred Stock. 15,000 shares of Series C
Preferred Stock of which 10,209 shares are currently
outstanding and 1,891 shares are currently reserved for
issuance to former stockholders of Softbank Interactive
Media, Inc. ("SIM") as listed on Exhibit 3.04; and
(e) Series D Preferred Stock. 1,000,000 shares of ZULU-tek
Preferred Stock par value $.01 per share issued to and
held by ENHANCED in connection with the March
Transaction.
The ZULU-tek Common Stock and the Series A Preferred Stock are
voting shares, each entitling the holders to one vote for each share held.
Except as required by law or the terms of such series, the Series B, Series C
and Series D Preferred Stock are non-voting stock. The
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Certificates of Designation filed in the state of Utah correctly set forth the
terms of the ZULU-tek Class A, B, C and D Preferred Stock which is outstanding.
Except as set forth on Exhibit 3.04 as of the date of this Agreement, there are
no outstanding options, warrants or other rights, subscriptions, options, calls,
rights, warrants, convertible securities, unsatisfied preemptive rights or other
agreements or commitments of any character obligating ZULU-tek to issue (or
reserve for issuance) or to transfer or sell any shares of its capital stock of
any class.
3.05 Directors and Officers. The current directors and officers of
ZULU-tek are set forth on Exhibit 3.05 and each of them is currently holding
their respective offices in accordance with the provisions of the ZULU-tek
Articles of Incorporation and ZULU-tek By-laws.
3.06 Compliance With Law. ZULU-tek is conducting its business and
operations in compliance with all governmental rules and regulations applicable
thereto and is not in violation or default in any material respect under any
statute, law, ordinance, rule, regulation, judgment, order, decree, concession,
grant, franchise, license or other governmental authorization or approval
applicable to it or any of its business and affairs, the violation or default of
which would have a material adverse effect on its business.
3.07 Corporate Records. True and correct copies of the Articles of
Incorporation, Bylaws and minutes of the Board of Directors and stockholders of
ZULU-tek and all amendments thereto have been delivered to ENHANCED. The minute
books of ZULU-tek contain all accurate minutes of the meetings for which minutes
were prepared and consents to actions taken without meetings of the Board of
Directors and stockholders of ZULU-tek since August 1, 1997.
3.08 Status of Subsidiaries. Exhibit 3.01 sets forth the names,
state of organization, corporate status and ownership of each of the ZULU-tek
Subsidiaries, which information ZULU-tek represents to be accurate as of the
date shown. To the extent that any of the ZULU-tek Subsidiaries are not
currently in good standing, ZULU-tek shall use its best efforts, at its expense,
to cure any deficiencies and to insure the good standing of such subsidiaries on
or prior to September 30, 1998.
3.09 Restricted Securities. ZULU-tek acknowledges that the shares of
the Reorganization Stock have not been registered under the 1933 Act or
registered or qualified under any state securities laws on the grounds that such
shares of Reorganization Stock are being issued in a transaction exempt from the
registration requirements of the 1933 Act. ZULU-tek acknowledges that the shares
of Reorganization Stock must be held indefinitely unless such shares of
Reorganization Stock are subsequently registered under the 1933 Act and
qualified or registered under applicable state securities laws or an exemption
from registration and qualification is available, and that, except as otherwise
provided in this Agreement, the Reorganization Stock cannot be transferred.
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3.10 Receipt of Information. ZULU-tek has received and reviewed this
Agreement, all Exhibits hereto, and all other documents and materials that
ENHANCED has provided to it in connection with the transactions contemplated by
this Agreement. ZULU-tek and its representatives have had an opportunity to
review all documents and other materials requested of ENHANCED and have been
given an opportunity to ask such questions of ENHANCED concerning the
Reorganization Stock to be acquired hereunder, their respective organization and
structure, and the business, operations, business prospects, shareholders,
advisers, representatives, market position, financial condition, assets and
liabilities (including contingent liabilities) of ENHANCED as well as such other
relevant matters as they have deemed necessary or desirable and have been given
all such information as they have requested, in order to make an independent and
informed evaluation of the merits and risks of the investment in the ENHANCED
Stock contemplated herein.
3.11 Sophisticated Investor. ZULU-tek has, by reason of its
financial experience, the capacity to make the independent evaluation
contemplated hereby and to protect its interests in connection with this
Agreement and the transactions contemplated hereby.
3.12 Legends. ZULU-tek acknowledges that each certificate or other
document evidencing the Reorganization Stock shall be endorsed with the legends
set forth below:
(a) "THE SHARES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED
UNDER THE UNITED STATES SECURITIES ACT OF 1933, AND MAY
NOT BE SOLD, TRANSFERRED, ASSIGNED, PLEDGED OR
HYPOTHECATED ABSENT AN EFFECTIVE REGISTRATION THEREOF
UNDER SUCH ACT OR COMPLIANCE WITH AN AVAILABLE EXEMPTION
FROM REGISTRATION. THE COMPANY MAY REFUSE TO AUTHORIZE
ANY TRANSFER OF THE SHARES IN RELIANCE ON AN EXEMPTION
FROM REGISTRATION UNTIL IT HAS RECEIVED AN OPINION OF
COUNSEL, REASONABLY SATISFACTORY TO THE COMPANY AND ITS
COUNSEL, THAT SUCH REGISTRATION IS NOT REQUIRED."
(b) If required by the authorities of any state in
connection with the issuance or sale of the ENHANCED
Common Stock, the legend required by such state
authority.
3.13 Material Contracts. Exhibit 3.13 sets forth all employment
agreements, stock option plans and agreements, insurance plans, employee benefit
plans and all contracts of ZULU-tek, in effect on the date hereof, which require
annual payments of more than $50,000, and the status of the same at the date
hereof.
3.14 Taxes. Except as set forth on Exhibit 3.14, ZULU-tek has filed
all federal, state and other tax returns required to be filed, and all taxes,
assessments and other governmental charges due from ZULU-tek have been fully
paid. ZULU-tek has established on its books reserves adequate for the payment of
all federal, state and other tax liabilities.
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3.15 ERISA. ZULU-tek does not maintain any plans subject to the
provisions of ERISA. Except as set forth on Exhibit 3.15, ZULU-tek has not
incurred any liability to the Pension Benefit Guaranty Corporation or a plan
under Title IV of ERISA; and no "prohibited transaction" or "reportable event"
(as such terms are defined in ERISA) has occurred with respect to any plan.
3.16 Patents, Copyrights, Etc. Exhibit 3.16 sets forth an accurate
and complete list of all patents, copyrights, trademarks, trade names, trademark
registrations, service names, service marks, domain names, licenses, formulas
and applications therefor owned by ZULU-tek or its subsidiaries or used or
required by ZULU-tek in the operation of its business, title to each of which
is, except as set forth in Exhibit 3.16, held by ZULU-tek free and clear of all
adverse claims, liens, security agreements, restrictions or other encumbrances.
Except as set forth in Exhibit 3.16, ZULU-tek owns or possesses adequate
licenses or other rights to use all patents, trademarks, trade names, service
marks, domain names, trade secrets or other intangible property rights and
know-how necessary to entitle ZULU-tek to conduct its business as presently
being conducted. There is no infringement action, lawsuit, claim, or complaint
or any written notice to ZULU-tek which asserts that ZULU-tek's operations
violate or infringe the rights or the trade names, trademarks, trademark
registrations, service names, service marks, domain names or copyrights, and
ZULU-tek is not in any way making use of any confidential information or trade
secrets of any person, except with the consent of such person. Except as set
forth in Exhibit 3.16, ZULU-tek has taken reasonable steps to protect its
proprietary information (except disclosure of source codes pursuant to licensing
agreements) and is the lawful owner of the proprietary information free and
clear of any claim of any third party. ZULU-tek's proprietary rights are
adequate of the conduct of its business substantially as now conducted without
known conflict with any rights of others. ZULU-tek will provide to ENHANCED upon
ENHANCED's request a copy of all filings, registrations and other documents
relating to any of the foregoing franchises, patents, copyrights, trademarks,
trade names, trademark registrations, service names, service marks, domain
names, licenses, formulas and applications.
3.17 Litigation. Except as set forth on Exhibit 2.10, as of the date
of this Agreement, there is no litigation or proceedings pending or, to the best
of the knowledge of ZULU-tek's stockholders and ZULU-tek's directors and
officers, threatened against ZULU-tek or any of its assets or properties. To the
extent that after the date hereof ZULU-tek shall become aware that such claims
or litigation shall be initiated or threatened with respect to this transaction
or any actions of ZULU-tek, it shall promptly advise ENHANCED thereof.
3.18 No Materially Adverse Contracts, Etc. ZULU-tek is not subject
to any charge, corporate or other legal restriction, or any judgment, decree,
order, rule or regulation that has or is expected in the future to have a
materially adverse effect on the business, assets or financial condition of
ZULU-tek. ZULU-tek is not a party to any contract or agreement that has or is
expected, in the judgment of ZULU-tek's officers, to have any materially adverse
effect on the business of ZULU-tek.
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3.19 No Further Representations and Warranties. ENHANCED
acknowledges that no other representations or warranties have been made or
relied upon by ENHANCED except as set out in this Agreement.
ARTICLE IV
REGISTRATION RIGHTS
4.01 Registration Rights. ENHANCED shall file a registration
statement on Form S-3, S-4 or at its option, on Form S-1, Form SB-1 or any other
appropriate registration statement form available under the 1933 Act covering
the registration of the ENHANCED Common Stock to be issued upon a conversion of
the Reorganization Stock.
4.02 Reporting Requirements Under The Securities Exchange Act of
1934. To the extent required, ENHANCED shall timely file such information,
documents, and reports as the SEC may require or prescribe under either Section
13 or 15(d) (whichever is applicable) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), and ENHANCED shall take such other measures and
file such other information, documents, and reports as shall hereafter be
required by the SEC as a condition to the availability of Rule 144 under the
1933 Act (or any equivalent successor provision or similar rule hereafter
adopted), including, without limitation, using its best efforts to assure that
there shall be available at all times adequate public information with respect
to ENHANCED and the ENHANCED Common Stock. The obligation to make available
adequate public information and otherwise take such measures necessary to
maintain the availability of Rule 144 shall remain in effect for so long as
ENHANCED or its successor is subject to the filing requirements of Section 13 or
Section 15(d) of the Exchange Act. ENHANCED shall furnish forthwith upon request
a written statement as to its compliance with the reporting requirements of said
Rule 144 of the 1933 Act, and of the Exchange Act; a copy of the most recent
annual or quarterly report of ENHANCED and such other reports and documents as a
holder of its Common Stock may reasonably request in availing itself of any rule
or regulation of the SEC allowing the sale of any such securities without
registration.
4.03 Expenses. All expenses incident to ENHANCED's performance of or
compliance with its undertaking in this Article IV, including, without
limitation, all registration and filing fees, printing expenses, messenger and
delivery expenses, and fees and disbursements of counsel for ENHANCED,
independent certified public accountants, underwriters (excluding underwriting
discounts and commissions) and other persons retained by ENHANCED (all such
expenses being herein called "Registration Expenses"), will be borne by
ENHANCED, whether or not such Registration Statement becomes effective.
4.04 Indemnification; Contribution.
(a) In the event of any registration of any ENHANCED Common
Stock under the 1933 Act pursuant to this agreement,
ENHANCED shall indemnify and hold harmless ZULU-tek, the
holders and recipients of the ENHANCED Common
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Stock, and the directors, officers, employees, agents
and consultants of ENHANCED, ZULU-tek and of the holders
of the ENHANCED Common Stock (collectively, the
"Indemnified Persons"), to the full extent permitted by
law and without limitation as to time, against any
losses, claims, damages or liabilities, joint or
several, to which any Indemnified Person may become
subject, under the 1933 Act or otherwise, insofar as
such losses, claims, damages or liabilities (or actions
in respect thereof) arise out of or are based upon any
untrue statement or alleged untrue statement of any
material fact contained in or incorporated by reference
into such Registration Statement or preliminary
prospectus (if used prior to the effective date of such
Registration Statement) or final or summary prospectus
contained therein (if used during the period ENHANCED is
required to keep the Registration Statement effective),
or any amendment or supplement thereto, or arise out of
or are based upon the omission or alleged omission to
state therein a material fact required to be stated
therein or necessary to make the statements made therein
(in the case of a prospectus or form of prospectus or
supplement thereto, in light of the circumstances under
which they are made) not misleading, and any violation
or alleged violation of the 1933 Act, the Exchange Act
or any state securities laws, or any rule or regulation
thereunder, and will reimburse each Indemnified Person
on a current basis for any legal or any other expenses
reasonably incurred by it in connection with
investigating or defending any such action or claim
(excluding any amounts paid in settlement of any
litigation, commenced or threatened, if such settlement
is effected without the prior written consent of
ENHANCED, which consent shall not be unreasonably
withheld); provided, however, that ENHANCED will not be
liable to a particular Indemnified Person in any such
case to the extent that any such loss, claim, damage,
liability or expense arises out of or is based upon an
untrue statement or omission or alleged omission made in
said Registration Statement, said preliminary prospectus
or said final or summary prospectus or any amendment or
supplement thereto, in reliance upon written information
furnished to ENHANCED by or on behalf of an Indemnified
Person for use in the preparation thereof; and provided
further that the indemnity agreement contained in this
Section 4.03 with respect to any preliminary prospectus
shall not inure to the benefit of any Indemnified Person
in respect of any loss, claim, damage, liability or
action asserted by someone who purchased ENHANCED Common
Stock from such person if (i) a copy of the final
prospectus (as the same may be amended or supplemented)
in connection with such Registration Statement was not
sent or given to such person with or prior to written
confirmation of the sale, (ii) such final prospectus
shall correct the untrue statement or alleged untrue
statement, or omission or alleged omission, which is the
basis of such loss, claim, liability or action, and
(iii) there would have been no such liability but for
the failure to deliver such final prospectus by the
holders, as the case may be.
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(b) Promptly after receipt, by a party entitled to
indemnification under this Article IV, of notice of the
commencement of any action, such Indemnified Person
will, if a claim in respect thereof is to be made
against the indemnifying party under either of such
Sections, notify the Indemnifying Person in writing of
the commencement thereof. In case any such action is
brought against an Indemnified Person and it shall so
notify the Indemnifying Person of the commencement
thereof, the indemnifying party shall assume the defense
thereof with counsel reasonably satisfactory to such
Indemnified Person; provided, however, that if the
Indemnifying Person fails to take reasonable steps
necessary to diligently defend such claim within 20 days
after receiving notice from the Indemnified Person that
the Indemnified Person believes the Indemnifying Person
has failed to take such steps, the Indemnified Person
may assume its own defense and the Indemnifying Person
shall be liable for any expenses therefor. The indemnity
agreements in this Section 4.04 shall be in addition to
any liabilities which the indemnifying parties may have
pursuant to law.
(c) In the event that any provision of an indemnification
clause in an underwriting agreement executed by or on
behalf of ENHANCED differs from a provision in this
Section 4.04 such provision in the underwriting
agreement shall determine ENHANCED's and the Indemnified
Persons' rights in respect thereof.
4.05 Obligations of ENHANCED. Whenever required to effect the
registration of any ENHANCED Common Stock covered hereby, ENHANCED shall, as
expeditiously, as reasonably possible:
(a) Filing. Prepare and file with the SEC a registration
statement with respect to such ENHANCED Common Stock and
use all reasonable efforts to cause such registration
statement to become effective, and keep such
registration statement effective for up to ninety (90)
days.
(b) Amendments. Prepare and file with the SEC such
amendments and supplements to such registration
statement and prospectus used in connection with such
registration statement as may be necessary to comply
with the provisions of the 1933 Act with respect to the
disposition of all securities covered by such
registration statement.
(c) Prospective Delivery. Furnish such number of copies of
the prospectus, including a preliminary prospectus, in
conformity with the requirements of the 1933 Act, and
such other documents as may be reasonably requested in
order to facilitate the disposition of the ENHANCED
Common Stock covered hereby owned by them and notify the
holders covered by a registration statement for which a
prospectus relating thereto is required to be delivered
under the 1933 Act of any event which would cause the
prospectus included in such registration statement, as
then in
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effect, to include an untrue statement of a material
fact or to omit to state a material fact required to be
stated therein or necessary to make the statements
therein not misleading in the light of the circumstances
than existing.
(d) Blue Sky. Use all reasonable efforts to register and
qualify the securities covered by such registration
under such other securities laws and Blue Sky laws of
such jurisdictions as shall be appropriate, provided
that ENHANCED shall not be required in connection
therewith or as a condition thereto to qualify to do
business or to file a general consent to service of
process in any such states or jurisdictions.
ARTICLE V
CLOSING AND POST-CLOSING MATTERS
5.01 Closing. The closing of the transactions contemplated hereby
(the "Closing") shall take place at the offices of Brand Farrar & Buxbaum LLP
located at 515 S. Flower Street, Suite 3500, Los Angeles, California 90071-2201
at 2:00 p.m. PST on the date hereof or on such other date as the parties
determine, but no later than September 15, 1998.
5.02 Closing Documents. At the Closing the parties shall deliver or
exchange the following:
(a) ENHANCED Deliveries. At the Closing, ENHANCED shall
deliver to ZULU-tek:
(i) An executed copy of this Agreement
(ii) Certified Resolutions of the Board of Directors
of ENHANCED approving the transactions
contemplated hereby;
(iii) Officer's and director's certificates in form
reasonably satisfactory to ZULU-tek;
(iv) Certificate of Status and good standing
certificate from Colorado; and
(v) Such other documents, consents, instruments,
opinions and certificates as ZULU-tek may
reasonably request; and
(b) ZULU-tek Deliveries. At the Closing, ZULU-tek shall
deliver to ENHANCED:
(i) An executed copy of this Agreement
(ii) Certified Resolutions of the Board of Directors
of ZULU-tek, approving the transactions
contemplated hereby and written consent to the
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transaction approved by a majority of the
outstanding Common Stock of ZULU-tek;
(iii) Officer's and director's certificates in form
reasonably acceptable to ENHANCED;
(iv) Certificate of Status and good standing
certificate from Utah; and
(v) Stock certificates representing the Acquired
Stock owned by ZULU-tek to be exchanged
hereunder, duly endorsed in blank or
accompanied by appropriate instruments of
assignment duly executed in blank, free and
clear of all claims, liens and encumbrances
whatsoever; and
(vi) Such other documents, consents, instruments,
opinion and certificates as ENHANCED may
reasonably request.
5.03 Post-Closing Matters. Immediately following the Closing, the
parties undertake to complete the following post-Closing documentation and
delivery matters and shall exchange the same, as received, from time to time
after the Closing date; provided however that in the event all such post-Closing
matters, other than items 5.03(b)(v) and (c)(v), shall not have been completed
on or October 15, 1998, the party that has not yet received the items due from
the other, may upon 20 days written notice, at its option, terminate the
transactions contemplated hereby in which event the parties will take what other
actions may be required to return, on or before December 30, 1998, the
Reorganization Stock and the Acquired Stock and the assets and liabilities to
the parties holding them prior to Closing and to take all other reasonable
actions to return the parties to the status of such party prior to a Closing.
(a) Promptly after the date hereof, the parties will review
their respective incentive compensation, stock option,
benefit and other plans with a view to coordinating the
terms thereof and to integrating the participants and
equities available thereunder, including the submission
of any such plans to the stockholders of ZULU-tek or
ENHANCED for approval, as applicable.
(b) ENHANCED shall:
(i) File the Certificates of Designations for
1998(B) and 1998(C) Preferred and provide
ZULU-tek with copies of such Certificates and
evidence of filing and effectiveness in
Colorado;
(ii) Immediately after filing of the Certificates of
Designation, issue certificates for the
Reorganization Stock which shall be issued as
fully paid and non-assessable and free of all
claims, liens and encumbrances whatsoever;
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(iii) Execute and deliver Assumption Agreements and
similar documents assuming the obligations of
ZULU-tek set out on Exhibit 1.01(a), to the
extent such assumption agreements or similar
documents are necessary to effect the same;
(iv) To the extent required, deliver the cash
necessary to acquire the shares of the ZULU-tek
Series A Preferred Stock which ZULU-tek must
redeem at the request of the holder; and
(v) Take appropriate action to call and convene the
Annual Meeting of its Stockholders to consider
and vote upon the transactions contemplated
hereby and requiring stockholder action, with
any such matters to be submitted supported by a
recommendation for approval by its Board of
Directors. ENHANCED shall solicit the approval
thereof by its stockholders by mailing or
delivering to each such stockholder a proxy
statement and proxy. In connection therewith,
promptly after the Closing the parties will
cooperate in finalizing and filing the
appropriate proxy material and registration
statements with the SEC.
(c) ZULU-tek shall or shall cause its subsidiaries to:
(i) Take such actions as may reasonably be required
to assure that each of the ZULU-tek
Subsidiaries is in good standing in the
jurisdiction in which it is incorporated as
soon as practicable, but in no event later than
September 30, 1998;
(ii) Deliver the Certificates representing all of
the Acquired Stock, properly endorsed for
transfer free and clear of all claims, liens
and encumbrances, whatsoever;
(iii) Deliver or transfer any other assets as
contemplated by Exhibit 1.01 (b), along with
such Bills of Sale and other documents of
transfer as may be required to transfer title
to ENHANCED, free of all claims, liens and
encumbrances whatsoever, except those set forth
on Exhibit 1.01(a) or which ENHANCED shall
agree to assume;
(iv) Execute and deliver Assignment Agreements and
similar documents transferring the obligations
and liabilities of ZULU-tek set out on Exhibit
1.01(a), to the extent such Assignment
Agreements or similar documents are necessary
to effect the same;
(v) Take appropriate action to call and convene a
special meeting of its Stockholders to ratify
the transactions contemplated hereby and to
18
<PAGE> 172
consider and vote upon the liquidation of
ZULU-tek with any such matters to be submitted
supported by a recommendation for approval by
its Board of Directors. ZULU-tek shall solicit
the approval thereof by its stockholders by
mailing or delivering to each such stockholder
a proxy statement and proxy; and
(vi) Cause to be prepared and delivered, for
inclusion in the Proxy solicitation materials
of ZULU-tek and ENHANCED, a tax opinion of
counsel with respect to the Reorganization.
5.04 Satisfaction of Conditions. Each party hereto agrees that
subsequent to Closing, it will take all actions reasonably within its power and
authority to duly and promptly carry out all of its obligations under this
Agreement and to comply with all of the representations and warranties hereunder
applicable to it and to use its reasonable best efforts to cause all of the
conditions to the obligation of the other hereunder, to be satisfied as promptly
as possible.
ARTICLE VI
TERMINATION
6.01 Termination. Unless otherwise agreed to by the parties, either
party hereto may terminate this Agreement upon ten (10) days written notice if:
(i) approval of the stockholders of ENHANCED for the conversion of the 1998
Preferred and 1998(B) Preferred is not obtained by ENHANCED on or prior to
December 30, 1998; (ii) a lawsuit is filed seeking to enjoin the parties from
completing the Exchange; or (iii) a registration statement does not become
effective with the SEC on or prior to January 31, 1999.
ARTICLE VII
BROKERAGE AND SIMILAR FEES
7.01 No Other Fee Agreements. ENHANCED, and ZULU-tek each hereby
represents and warrants to the other that it has not entered into any other
agreements, or retained or otherwise authorized any investment banker,
individual, broker, finder, consultant or other intermediary to act for or on
its or their behalf in a manner which would entitle such person to any payment
of any broker's or finder's fees or other payments or commissions in connection
with the transactions Purchase or any other transactions contemplated hereby.
ENHANCED and ZULU-tek each agree to be responsible for any costs they may incur
and will jointly and severally indemnify and hold the other and their respective
officers, directors, employees and agents harmless against any such commissions,
fees or other compensation found to be due on account of any such agreements.
19
<PAGE> 173
ARTICLE VIII
CONFIDENTIALITY
8.01 Maintenance of Confidential Information. From the date hereof
and continuing until December 30, 1999 each party will hold in confidence all
information obtained or delivered by a party hereto and their representatives
and designated in writing by the person providing the same as "Confidential
Information", subject to the disclosure or use of such information as may be
required in order for the parties to perform their respective due diligence and
other obligations hereunder. This obligation of confidentiality shall not extend
to any information which is shown to have previously been (i) known to the party
receiving it, (ii) is generally known to others engaged in the trade or business
of the party receiving it, (iii) is part of public knowledge or literature, or
(iv) was lawfully received from a third party or shall be required to be
disclosed pursuant to applicable law or the rules of a stock exchange (including
NASDAQ) on which such party's securities may be listed. Without limiting the
generality of the foregoing, it is understood and agreed that certain
information disclosed by either ZULU-tek or ENHANCED to the other or their
respective representatives may constitute "material inside information" that has
not previously been disclosed to the public generally. The parties acknowledge
their understanding of the restrictions on the use of such information imposed
by Federal and State securities laws, and agree to comply and cause their
representatives to comply with such restrictions. In no event shall the
Confidential Information received by either party be used for its own commercial
or financial advantage. Each party shall take all steps necessary to insure
compliance with the requirements of this Section by all persons having access to
the Confidential Information, including any person retained to provide advice
relating to the transactions contemplated hereby. Should the transactions not be
consummated, all copies of Confidential Information, in whatever form, shall be
returned to the originator by each party and its representatives.
8.02 Remedies on Breach. The parties hereto acknowledge and agree
that the breach of this Article VIII will result in serious and irreparable
damage and that it would be extremely burdensome and difficult, if not
impossible, to determine the scope and extent of damages suffered by reason of a
breach of this Section. Accordingly, the parties hereto agree that all remedies
at law or in equity shall be available to enforce the terms of this Article VIII
and to recover damages of whatever kind and amount permitted by law for breach
hereof. Notwithstanding anything to the contrary contained herein, no party
hereto shall be deemed to have violated or breached this Article VIII if such
party provides a copy of, or discloses information contained in, this Agreement
in connection with obtaining any waiver, consent, or approval, or undertaking
registration or filing required or contemplated by this Agreement.
ARTICLE IX
MISCELLANEOUS PROVISIONS
9.01 Representation of Multiple Parties. ENHANCED and ZULU-tek each
acknowledge that the transactions contemplated hereby have been negotiated and
structured by their management of the parties and by their respective advisors
and that, at their election, they
20
<PAGE> 174
have agreed not to retain independent counsel for each of the parties with
respect to the negotiation, documentation and implementation of the transactions
set forth herein. ENHANCED and ZULU-tek each acknowledge that they have
requested that Brand Farrar & Buxbaum LLP document the transaction jointly for
both parties with the knowledge that, as a result, they each are hereby giving
their informed, written consent pursuant to California Rule of Professional
Conduct 30310(C) to the representation by Brand Farrar & Buxbaum LLP of more
than one party in transactions in which the interests of the parties potentially
conflict. In addition, by execution hereof, they confirm that their election to
forego independent counsel constitutes a waiver of any conflict that might arise
under any other applicable professional rules, code and other provisions,
including provisions of attorney/client privilege, as the same are applicable to
Brand Farrar & Buxbaum LLP, in its capacity of documenting the transactions
contemplated hereby and of providing Federal income tax advice with respect to
the tax effects of the Reorganization. In the event that an actual conflict
arises between the interests of the parties, each of the parties agree and
hereby give their informed written consent that Brand Farrar & Buxbaum LLP shall
be entitled to elect which, if either, of the parties it shall continue to
represent.
9.02 Amendment and Waiver. This Agreement shall not be altered or
amended except by a written instrument executed by ENHANCED, and ZULU-tek. Any
waiver of any term, covenant, agreement or condition contained in this Agreement
shall not be deemed a waiver of any other term, covenant, agreement or
condition, and any waiver of any default in such term, covenant, agreement or
condition shall not be deemed a waiver of any later default thereof or of any
default of any other term, covenant, agreement or condition.
9.03 Severability. In the event that any one or more of the
provisions of this Agreement shall be invalid, illegal or unenforceable, all
other provisions hereof shall be given effect separately therefrom and shall not
be affected thereby.
9.04 Expenses. Except as otherwise provided herein, the parties
hereto shall be responsible for their own fees and expenses incurred in
connection with this Agreement.
9.05 Press Releases. All press releases or other public
communications relating to this Agreement or the transactions contemplated
hereby will require the prior approval of ZULU-tek and ENHANCED, unless counsel
has advised either party that such release or other public communication must
immediately be issued and the issuing party has not been able, despite its good
faith efforts, to secure the prior approval of the other party. Except as
required by law or the applicable securities regulations, the parties will use
their best efforts to maintain as confidential the purchase price and other
economic terms of the transaction and to seek confidential treatment with
respect to filings of this Agreement and any Exhibits hereto.
9.06 Notices. All notices, requests, demands and other
communications which are required or may be given under this Agreement shall be
in writing and shall be delivered by
21
<PAGE> 175
personal delivery, by overnight courier or by registered or certified mail,
postage prepaid, or by confirmed facsimile to the parties as follows:
If to ENHANCED: ENHANCED Services Company, Inc.
3415 Sepulveda Boulevard, Suite 500
Los Angeles, CA 90034
Telecopy: (310) 563-0555
with a copy to: Robert Smith
3415 Sepulveda Boulevard, Suite 500
Los Angeles, CA 90034
Telecopy: (310) 563-0555
If to ZULU-tek: ZULU-TEK, Inc.
c/o ZULU Media, Inc.
3415 Sepulveda Boulevard, Suite 500
Los Angeles, CA 90034
Telecopy: (310) 563-0555
with a copy to: Paul Messina
935 West San Marcos Boulevard, #101
San Marcos, California 92069
In all cases, copies Brand Farrar & Buxbaum LLP
to ENHANCED or to 515 South Flower Street, Suite 3500
ZULU-tek shall also Los Angeles, California 90071
be directed to: Attention: Margaret G. Graf, Esq.
Telecopy: (213) 426-6222
or to such other address as any party shall have specified by notice in writing
to the others in accordance with the terms of this Section 9.06. All notices
shall be effective upon delivery. Rejection or other refusal to accept delivery
of notice or the inability to deliver because of change of address as to which
no notice was given hereunder shall be deemed to be receipt of the notice sent.
9.07 Entire Agreement. This Agreement, the Exhibits hereto and the
other documents delivered by the parties at Closing pursuant to Article V
hereof, constitute the entire agreement among the parties hereto with respect to
the subject matter hereof.
9.08 Assignment. This Agreement and all of the provisions hereof
shall be binding and inure to the benefit of the parties hereto and their
respective successors and permitted assigns, but neither this Agreement nor any
of the rights, interests or obligations hereunder shall be assigned by either
party without the prior written consent of the other party.
22
<PAGE> 176
9.09 Third Parties. Nothing herein expressed or implied is intended
or shall be construed to confer upon or give to any person other than the
parties hereto and their successors or assigns, any rights or remedies under or
by reason of this Agreement.
9.10 Section and Other Headings. The Section and other headings
contained in this Agreement are for reference purposes only and shall not affect
the meaning or interpretation of this Agreement.
9.11 Counterparts; Facsimile Signatures. This Agreement may be
executed in two or more counterparts, each of which shall be deemed to be an
original and all of which together shall be deemed to be one and the same
instrument. The parties hereto further agree that a facsimile signature may be
relied upon and treated with the same force and effect as an original signature.
This Agreement shall become effective, as of the date first written above, when
each party hereto shall have received a counterpart hereof signed by each other
party hereto.
9.12 Governing Law; Venue; Jurisdiction. This Agreement shall be
governed by, and construed in accordance with, the laws of the State of
California without regard to its conflicts of laws doctrines. In the event of
any litigation among the parties hereto, suit shall be brought in Los Angeles
County, California and the parties hereto hereby submit themselves to the
jurisdiction of the state and federal courts in Los Angeles County, California.
9.13 Further Assurances. Each of the parties hereto agrees that it
will, whenever and as often as it shall be reasonably requested so to do by
another party hereto, execute, acknowledge and deliver, or cause to be executed,
acknowledged and delivered, any and all further instruments as may be necessary
or expedient in order to consummate the transactions provided for in this
Agreement, and do any and all further acts and things as may be necessary or
expedient in order to carry out the purpose and intent of this Agreement.
9.14 Survival of Representations and Warranties. Except as otherwise
specifically provided herein, the respective representations and warranties of
the parties hereto shall survive the Closing for a period expiring on the first
anniversary of the Closing, and shall thereafter terminate and be of no further
force or effect except as they relate to written claims made by any such party
to the others prior to such expiration.
9.15 Pronouns. All pronouns and any variations thereof shall be
deemed to refer to masculine, feminine, neuter, singular or plural, except where
the context of the Agreement clearly indicates otherwise.
[signatures continued on next page]
23
<PAGE> 177
SIGNATURE PAGE FOR ACQUISITION AND REORGANIZATION AGREEMENT
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed as of the date first above written.
ZULU-TEK, INC. ENHANCED SERVICES COMPANY, INC.
By: /s/ Keith C. Montgomery By: /s/ Justin Walker
------------------------------ -----------------------------
24
<PAGE> 178
APPENDIX H
ZULU-TEK, INC., AND CONSOLIDATED SUBSIDIARIES
(Unaudited)
August 31, 1998 and 1997
1
<PAGE> 179
ZULU-TEK, INC., AND CONSOLIDATED SUBSIDIARIES
August 31, 1998 and 1997
(Unaudited)
Table of Contents
<TABLE>
<CAPTION>
Page
----
<S> <C>
Financial Statements:
Consolidated Balance Sheet 3
Consolidated Statements of Operations 4
Consolidated Statement of Changes in
Stockholders' Equity (Deficit) 5
Consolidated Statements of Cash Flows 6
Notes to Consolidated Financial Statements 7 - 16
</TABLE>
2
<PAGE> 180
ZULU-TEK, INC., AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
August 31, 1998
(Unaudited)
ASSETS
<TABLE>
<S> <C>
Current Assets
Cash $ 21,770
Accounts receivable, net of allowance for
doubtful accounts of $167,737 251,726
Accounts receivable from related parties 302,853
Other current assets 35,281
------------
Total Current Assets 611,630
Furniture, leasehold improvements and equipment,
net of accumulated depreciation of $505,717 1,540,248
Goodwill, net of accumulated amortization of $4,103,077 11,364,341
Other assets 150,755
------------
Total Assets $ 13,396,974
============
LIABILITIES AND STOCKHOLDERS' (DEFICIT)
Current Liabilities
Advances from and amounts payable to related parties $ 7,093,573
Accounts payable and accrued expenses 7,385,107
Other current liabilities 550,199
------------
Total Current Liabilities 15,028,879
------------
Commitments and Contingencies (Notes 1, 2, 3, 5, 7, 8, 9, 10 and 11)
Mandatory redeemable preferred stock 10,209,000
------------
Stockholders' (deficit)
Preferred stock -- $. 01 par value 50,000,000 shares authorized:
Series A, 374,800 shares issued and outstanding 374,800
Series B, 3,000,000 shares issued and outstanding 3,000,000
Series D, 1,000,000 shares issued and outstanding 10,000
Common Stock -- $.001 par value,
100,000,000 shares authorized;
51,917,263 shares issued and outstanding 51,917
Additional paid-in capital 3,033,461
Accumulated (deficit) (18,011,083)
------------
Total Stockholders' (Deficit) (11,540,905)
------------
Total Liabilities and Stockholders' (Deficit) $ 13,696.974
============
</TABLE>
The accompanying notes are an integral part of the financial statements.
3
<PAGE> 181
ZULU-TEK, INC., AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Eight Months Ended August 31, 1998
(Unaudited)
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Sales $ 1,748,287 $ 5,259
------------ ------------
Operating Expenses
Amortization of goodwill 4,103,077 --
Depreciation 505,117 13,654
Advertising and marketing 215,470 17,407
Rent 281,904 12,519
Salaries 1,903,174 110,628
Travel and entertainment 470,302 4,991
Stock issued for services 413,900 --
Other operating expenses 3,651,365 117,213
------------ ------------
Total Operating Expenses 11,544,309 276,412
------------ ------------
Net Operating (Loss) (9,796,022) (271,153)
------------ ------------
Other (Expenses)
(Loss) on sale of marketable securities (71,471) --
------------ ------------
Total Other (71,471) --
------------ ------------
Net (Loss) $ (9,867,493) $ (271,153)
============ ============
Net (Loss) per Share $ (.21) $ (.01)
============ ============
Weighted Average Shares Outstanding 46,847,763 18,459,573
============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
4
<PAGE> 182
ZULU-TEK, INC., AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' (DEFICIT)
(Unaudited)
From January 1, 1998 through August 31, 1998
<TABLE>
<CAPTION>
Preferred Stock - A Preferred Stock - B Preferred Stock - D
---------------------------- --------------------------- -------------------------
No./Shares Amount No./Shares Amount No./Shares Amount
---------- ------------ ---------- ------------ ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balance at
December 31, 1997 2,000,000 $ 2,000,000 3,000,000 $ 3,000,000 -- $ --
Preferred stock
converted to common
(1,625,200) (1,625,200) -- -- -- --
Common stock issued
for services -- -- -- -- -- --
Stock issued -- -- -- -- 1,000,000 10,000
Net (loss) for the
eight months ended
August 31, 1998
(Unaudited) -- -- -- -- -- --
------------ ------------ ------------ ------------ ------------ ------------
Balance at
August 31, 1998
(Unaudited) 374,800 $ 374,800 3,000,000 $ 3,000,000 1,000,000 $ 10,000
============ ============ ============ ============ ============ ============
<CAPTION>
Common Stock
--------------------------- Additional
Paid-in Accumulated
No./Shares Amount Capital (Deficit) Total
---------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Balance at
December 31, 1997 41,778,263 $ 41,778 $ 1,004,500 $ (8,143,590) $ (2,097,312)
Preferred stock
converted to common
6,000,000 6,000 1,619,200 -- --
Common stock issued
for services 4,139,000 4,139 409,761 -- 413,900
Stock issued -- -- -- -- 10,000
Net (loss) for the
eight months ended
August 31, 1998
(Unaudited) -- -- -- (9,867,493) (9,867,493)
------------ ------------ ------------ ------------ ------------
Balance at
August 31, 1998
(Unaudited) 51,917,263 $ 51,917 $ 3,033,461 $(18,011,083) $(11,540,905)
============ ============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
5
<PAGE> 183
ZULU-TEK, INC., AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Eight Months Ended August 31
(Unaudited)
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Cash Flows from Operating Activities:
Net (loss) $(9,867,493) $ (271,153)
Adjustments to reconcile net
(loss) to net cash provided by (used
in) operating activities
Depreciation 505,117 13,654
Amortization of goodwill 4,103,077 --
Stock issued for services 413,900 --
Increase (decrease) in accounts payable
and accrued expenses (1,474,475) 115,517
(Increase) decrease in accounts receivable 3,489,298 24
Other 581,852 79,541
----------- -----------
Net Cash Provided by (Used in) Operating
Activities (2,248,724) (62,417)
----------- -----------
Cash Flows from Investing Activities:
(Acquisition of) furniture and equipment (809,935) (22,397)
Disposition of marketable securities 820,820 --
----------- -----------
Net Cash (Used in) Investing
Activities 10,885 (22,397)
----------- -----------
Cash Flows from Financing Activities:
Advances from related parties 1,692,881 85,025
----------- -----------
Net Cash Provided by Financing
Activities 1,692,881 85,025
----------- -----------
Increase (decrease) in cash (544,958) 211
Cash, beginning of year 566,728 3,760
----------- -----------
Cash, end of year $ 21,770 $ 3,971
=========== ===========
Interest paid $ -- $ --
=========== ===========
Income taxes paid $ -- $ --
=========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
6
<PAGE> 184
ZULU-TEK, INC., AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS , CONTINUED
August 31, 1998 and 1997
(Unaudited)
(1) Summary of Significant Accounting Policies
(a) General
The Company, a Utah corporation, was incorporated on
April 23, 1985 as Premium, Inc. On January 15, 1987,
the name was changed to Star Medical Corporation. On
August 12, 1997, the name was changed to Netmaster
Group, Inc. On January 15, 1998, the name was changed
to ZULU-tek, Inc. During 1996 and through August 1,
1997, the Company was seeking a business combination
opportunity and was a development stage company since
planned principal operations had not yet commenced.
On August 6, 1997, echoMedia Technologies, Inc., a
newly formed wholly-owned subsidiary of the Company,
incorporated under the laws of Delaware, acquired or
licensed assets and technology previously owned by
echoMEDIA, Inc., a Rhode Island corporation, in
exchange for an aggregate of 15,000,000 restricted
shares of the Company's common stock. In addition
the Company issued 2,000,000 shares of Series A
preferred stock and 3,000,000 shares of Series B
preferred stock in conjunction with this transaction.
The Company has recorded a $5,000,000 expense in the
1997 statement of operations in connection with the
issuance of Series A and Series B Preferred Stock for
services related to completing this transaction.
Subsequent to September 30, 1998, the holder of the
Series B Preferred Stock has agreed to waive its right
to any amounts that it would otherwise receive upon
the liquidation of ZULU-tek, and the Company has
cancelled the shares; this will result in additional
paid in capital being increased by $3,000,000. The
Company also agreed to pay a related party $1,000,000
as a consulting fee for assistance in finding and
negotiating the echoMedia, Inc. transaction. This
business combination has been accounted for as a
reverse acquisition since the former shareholders of
echoMEDIA, Inc. controlled the Company after the
business combination. Prior to this transaction, the
Company had 128,263 common shares outstanding. The net
monetary book value of ZULU-tek, Inc. was a negative
$459 at the time of the reverse acquisition. The
accounts of echoMEDIA, Inc. have been carried over in
the accompanying financial statements, since for
accounting purposes echoMEDIA, Inc. is considered to be
the acquiring party. The 1997 financial statements of
echoMEDIA, Inc. are shown for comparative purposes. The
issuances of the preferred stock related to this
transaction have been charged first to additional
paid-in capital and then to retained earnings, in a
manner similar to dividend, since additional paid-in
capital was not sufficient to cover the par value of
the preferred stock issued.
7
<PAGE> 185
ZULU-TEK, INC., AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS , CONTINUED
August 31, 1998 and 1997
(Unaudited)
(1) Summary of Significant Accounting Policies
(a) General (Continued)
Effective December 31, 1997 Mediabank, Inc., a Rhode
Island Corporation, incorporated on October 31, 1997,
and a wholly-owned subsidiary of the Company acquired
SOFTBANK Interactive Marketing, Inc., a Delaware
Corporation, incorporated on June 17, 1996. On March
24, 1998, SOFTBANK Interactive Marketing, Inc. changed
its name to Zulu Media, Inc. The Company issued 10,209
shares of its mandatory redeemable preferred stock and
500,000 shares of common stock for approximately 75% of
the stock of Zulu Media, Inc. and agreed to pay a fee
of $1,350,000 for the introduction, negotiation and
assistance in the consummation of this acquisition. The
10,209 shares were recorded at their mandatory
redeemable amount of $10,209,000. The 500,000 shares of
common were recorded at $.05 per share based on the
price paid for common stock by other investors.
Pursuant to the terms of an existing agreement with the
25% minority shareholders of Zulu Media Inc., their
shares were to be returned and cancelled for no
consideration if the book value of the Zulu Media, Inc.
was zero or less. After obtaining audited financial
statements of Zulu Media, Inc. for 1997 in 1998, the
minority shareholders of Zulu Media, Inc. were informed
during November, 1998 that their ownership in Zulu
Media, Inc. was terminated pursuant to the terms of the
agreement.
Zulu Media, Inc. is in the business of selling
interactive multimedia advertising and producing
interactive promotions. echoMEDIA, Inc. was a software
development company that provided internet advertising
tools for commercial Web sites. During the first
quarter of 1998, echoMEDIA, Inc. terminated its
operations and transferred its technology to Zulu
Media, Inc.
The consolidated financial statements of the Company
include echoMEDIA, Inc. and the Zulu Media, Inc. since
December 31, 1997, the date of acquisition.
All intercompany transactions and account balances have
been eliminated in the consolidated financial
statements. The Company has selected December 31 as its
year end.
(b) Revenue and Expense Recognition
Revenues are derived from the performance of services,
the sale and related placement of advertisements on
internet sites, and the production of trade shows.
Revenues are recognized as services are performed, on
the run date of an advertisement or when a trade show
commences.
8
<PAGE> 186
ZULU-TEK, INC., AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS , CONTINUED
August 31, 1998 and 1997
(Unaudited)
(1) Summary of Significant accounting Policies
(b) Revenue and Expense Recognition (Continued)
In accordance with certain agreements, billings are
submitted to advertisers on behalf of client web sites.
The gross sales volume is recorded as accounts
receivable and an accrual is recorded for the amount
due to the client web site in accordance with the terms
of the agreement. A deferred liability has been
established to account for timing differences between
advertising billings and the period in which an
advertisement runs.
(c) Furniture, Leasehold Improvements and Equipment
Property and equipment is carried at cost less
accumulated depreciation. The Company expenses
maintenance costs and capitalizes significant
betterments. Depreciation is provided over the
estimated 3-year useful lives of the assets using the
straight-line method. Leasehold improvements are
amortized over the lesser of the term of the lease or
the useful life of the related improvement.
(d) Per Share Information
The per share information is presented based upon the
weighted average number of shares outstanding.
(e) Use of Estimates in the Preparation of Financial
Statements
The preparation of financial statements in conformity
with generally accepted accounting principles requires
management to make estimates and assumptions that
affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported
amounts of revenue and expenses during the reporting
period. Actual results could differ from those
estimates.
(f) Geographic Area of Operations
The Company's customers are principally in the United
States of America. The potential for severe financial
impact can result from negative effects of economic
conditions within the market or geographic area. Since
the Company's business is principally in one area, this
concentration of operations results in an associated
risk and uncertainty.
9
<PAGE> 187
ZULU-TEK, INC., AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS , CONTINUED
August 31, 1998 and 1997
(Unaudited)
(1) Summary of Significant accounting Policies (Continued)
(g) Income Taxes
At December 31, 1997, the Company and its subsidiaries
had approximately $21,000,000 of net operating loss
carryovers which expire in years through 2013. Recent
changes in ownership have resulted in reducing the
available loss carryovers that may be utilized by the
Company. In addition, future changes in ownership could
further reduce the amounts that may be utilized. As of
August 31, 1998 the Company had deferred tax assets of
approximately $6,000,000 related to net operating loss
carryovers. A valuation allowance has been provided for
the total amount since the amounts, if any, of future
revenues necessary to be able to utilize the carryovers
are uncertain.
(h) Concentration of Credit Risk
Financial instruments which potentially subject the
Company to concentrations of credit risk consist
primarily of accounts receivable. The Company grants
credit to various customers principally in the United
States. The Company does not require collateral for its
accounts receivable. Credit evaluations are performed
on the financial condition of customers and an
allowance has been established for accounts which may
not be collectible.
(i) Goodwill
Goodwill is being amortized on a straight-line over a
three year period which commenced on December 31, 1997,
the date of acquisition of Zulu Media, Inc.
Management's policy is to review long-lived assets,
including goodwill, for impairment on a periodic basis,
at least quarterly. As of August 31, 1998 management
believed that there was no impairment in the carrying
value of goodwill or other long-lived assets.
(j) Advertising Expenses
Advertising expenses are expensed as incurred.
(k) Significant Assumptions
See note 7 for a description of assumptions related to
the Company continuing as a going concern. A
contingency exists with respect to the matter, the
ultimate resolution of which cannot presently be
determined.
10
<PAGE> 188
ZULU-TEK, INC., AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS , CONTINUED
August 31, 1998 and 1997
(Unaudited)
(1) Summary of Significant accounting Policies
(k) Significant Assumptions (Continued)
The financial statements include $11,394,341 recorded
as goodwill related to the acquisition of the Zulu
Media, Inc. The financial statements have been prepared
using the assumption that the carrying value of the
goodwill will be recovered from future operations. A
contingency exists with respect to this matter, the
ultimate resolution of which cannot presently be
determined.
(l) Unaudited Financial Statements
The financial statements have been prepared by
management without audit. In the opinion of management,
all adjustments (which include any normal recurring
adjustments) necessary to present fairly the financial
position results of operations, cash flows and changes
in stockholders' (deficit) have been made.
(2) Delinquent Amounts Payable
As of August 31, 1998 the Company is delinquent on payments of
various amounts to creditors including the Internal Revenue
Service. Failure to pay these liabilities could result in liens
being filed on the Company's assets and may result in assets being
attached by creditors resulting in the Company's inability to
continue operations.
(3) Preferred Stock
The Company has 50,000,000 shares of $.01 par value preferred stock
authorized. As of August 31, 1998 the Company had the following
preferred stock outstanding:
The Company issued 2,000,000 shares of Series A Preferred Stock on
August 2, 1997. The Series A Preferred Stock has limited voting
rights and is entitled to receive cumulative dividends out of
assets legally available for that purpose. With respect to such
voting rights, the holders of Series A Preferred Stock vote as a
single class with the holders of Common Stock and shall have such
votes in respect of each share of Series A Preferred Stock on any
matter submitted to the holders of Common Stock as the number of
shares of Common Stock into which shares of Series A Preferred
Stock may then be converted had conversion taken place. Each Share
of Series A Preferred Stock is convertible, at the option of the
holder, into shares of Common Stock at any time after a Conversion
Event. The number of shares of Common Stock issued is calculated by
dividing $1.00 by the lowest per share bid price for shares of
Common Stock during the preceding ninety (90) day period preceding
the Conversion Event provided, however, that the lowest per share
bid price is $.05. The Conversion Event is the
11
<PAGE> 189
ZULU-TEK, INC., AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS , CONTINUED
August 31, 1998 and 1997
(Unaudited)
(3) Preferred Stock (Continued)
earliest of the following: (a) the first quarter in which the gross
revenues exceed $20,000,000; (b) a qualified offering; (c)
effective registration of the Common Stock into which the Series A
is convertible; (d) one half of such shares of each holder on or
after August 1, 1998 and the balance on or after August 31, 1999;
or (e) August 31, 1998. During the eight month period ended August
31, 1998, 1,625,200 shares of Series A Preferred were converted to
6,000,000 shares of common.
The Series A Preferred Stock carries mandatory contingent
redemption provision upon the earliest of the following to occur;
(a) the sale by the Company of all or a substantial portion of its
assets, sale by or Echo Media Technology, Inc. (EMC) of all or
substantially all of its assets, or EMC shall cease being a
wholly-owned subsidiary of the Company; (b) The merger of the
Company with, or the consolidation of the Company into, any other
corporation as a result of which the stockholders of the Company
immediately prior the such merger or consolidation do not own stock
having more that 50% of the outstanding voting power of the
surviving corporation; (c) the dissolution or liquidation of the
Company; (d) Thomas Burgess ceasing for any reason to be Executive
Vice President of the Company or ceasing for any reason to be the
President and a Director of EMC and actively involved in the
executive management thereof; (e) except as a result of a Qualified
Public Offering and stock passing by death, more than 50% of the
outstanding voting stock of the Company becomes owned by persons
other than (i) holders of Series A Preferred Stock and their
transferees and (ii) stockholders of record on August 22, 1997; (f)
any of certain remedy events.
The Company amended its Articles of Incorporation on August 6, 1997
to authorize and issue three million (3,000,000) shares of Series B
Preferred Stock. The Series B Preferred Stock is non-voting and is
not entitled to receive dividends. The Series B Preferred Stock is
convertible into shares of the Common Stock of the Company; (a) on
February 6, 1998, $1,000,000 of the Series B Preferred Stock, at
$0.25 per common share; (b) on May 6, 1998, $1,000,000 of the
Series B Preferred Stock, at $0.50 per common share; (d) on August
6, 1998, $1,000,000 of the Series B Preferred Stock, at $0.75 per
common share; (e) the Series B Preferred Stock is not redeemable by
the Company. The agent for the holders of the Series B Preferred
Stock agreed on February 24, 1998 not to exercise its right of
conversion of the Series B Preferred Stock until the shareholders
of the Company have authorized the issuance of at least 7,333,334
additional shares of the Company's Common Stock. The holders of the
Series B Preferred Stock did not elect to convert any of the stock
into common stock on any of the conversion dates.
12
<PAGE> 190
ZULU-TEK, INC., AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS , CONTINUED
August 31, 1998 and 1997
(Unaudited)
(3) Preferred Stock (Continued)
The Company amended its Articles of Incorporation to authorize,
create and issue 15,000 shares of Series C Redeemable Preferred
Stock with a par value of $1.00 per share, and a stated and
liquidation value of $1,000 per share on December 30, 1997. The
Series C Redeemable Preferred Stock is non voting, except as to
matters which change the covenants of the Series C Redeemable
Preferred Stock. The Series C Redeemable Preferred Stock is
entitled to receive dividends out of assets legally available
therefore and prior in preference to any declaration or payment of
any dividend on the Common Stock of the Company. The Series C
Redeemable Preferred is redeemed by the Company on the following
dates:(a) on or before December 31, 1999, 3,000 shares of the
Series C Redeemable Preferred Stock, at $1,000 per share; (b) on or
before December 31, 2001, 3,000 shares of the Series C Redeemable
Preferred Stock, at $1,000 per share; (c) on or before December 31,
2002, 3,000 shares of the Series C Redeemable Preferred Stock, at
$1,000 per share.
(4) Common Stock
The Company has 100,000,000 shares of $.001 par value common stock
authorized with 51,917,263 issued and outstanding as of August 31,
1998.
(5) Related Party Transactions
As of August 31, 1998, the Company had various amounts payable to
related parties totaling $7,063,573. Of this amount, $2,435,000
bears interest at 0.5% over prime rate and includes a conversion to
common stock option. The conversion option is to a maximum of
1,500,000 shares of common stock subject to certain conditions. In
addition, another $1,000,000 of related party payables is due on
December 31, 1998, bears no interest, and is uncollateralized. The
balance of the amounts payable had no written repayment terms, did
not bear interest and were due on demand. The related parties are
shareholders of the Company or are affiliates of shareholders of
the Company.
The Company has entered into a license agreement with a related
company. The Company has received a license fee of $450,000 as
consideration for granting the related company the exclusive right
to produce a certain trade show worldwide through December 31,
1998. The license fee is being amortized over the term of the
agreement.
(6) Marketable Securities
At December 31, 1997, Zulu Media, Inc. held 11,853, available for
sale shares of Yahoo Stock with a closing bid price of $69.25 for a
total asset carrying value of $820,820. The stock was sold during
the eight month period ended August 31, 1998 for $749,349,
resulting in a loss of $71,471.
13
<PAGE> 191
ZULU-TEK, INC., AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS , CONTINUED
August 31, 1998 and 1997
(Unaudited)
(7) Basis of Presentation - Going Concern
The accompanying financial statements have been prepared in
conformity with generally accepted accounting principles, which
contemplates the continuation of the Company as a going concern.
However, the Company has sustained recurring operating losses, has
a net capital deficiency, and is delinquent on payment of various
creditor liabilities including payroll taxes.
The Company has been able to continue operations through the
funding from private investors, cash inflows from operations, and
the extension of terms from creditors. Continued operation is
dependant upon the Company continuing to obtain financing for its
activities. Management's plan for the Company includes raising
additional working capital through debt and/or equity financing
until profitable operations and positive cash flow are achieved and
maintained. However, no assurances can be given that the company
will be successful in raising additional capital and there is no
assurance that the Company will achieve profitability or a positive
cash flow. If the Company is unable to obtain adequate additional
financing, management will be required to curtail the operations of
the Company.
In view of these matters, realization of certain of the assets in
the accompanying balance sheet is dependent upon continued
operations of the Company, which in turn is dependent upon the
Company's ability to meet its financing requirements, raise
additional capital, and the success of its future operations.
Management believes that actions planned and presently being taken
to revise the Company's operating and financial requirements and
efforts to raise additional capital provide the opportunity for the
Company to continue as a going concern.
(8) Furniture, Leasehold Improvements and Equipment
Furniture, leasehold improvements and equipment is summarized as
follows:
<TABLE>
<S> <C>
Computer equipment $ 680,017
Network operating centers 815,342
Furniture and equipment 439,857
Leasehold improvements 110,149
Accumulated depreciation (505,117)
-----------
$ 1,540,248
===========
</TABLE>
The furniture, leasehold improvements and equipment are pledged as
security for loans made to the Company.
14
<PAGE> 192
ZULU-TEK, INC., AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS , CONTINUED
August 31, 1998 and 1997
(Unaudited)
(9) Acquisition of Zulu Media, Inc.
Effective December 31, 1997, the Company, as described in Note 1,
acquired the business and assets of Zulu Media, Inc. The
acquisition has been accounted for using the purchase method of
accounting. The consideration paid, acquisition costs and the fair
market value of the net liabilities assumed in excess of the
estimated fair value of assets acquired have been assigned to
goodwill.
The net purchase price has been allocated as follows:
<TABLE>
<S> <C>
Goodwill $ 15,497,418
Current assets 4,659,990
Property and equipment 1,845,066
Other assets 111,130
Current liabilities (11,104,839)
Acquisition costs (1,350,000)
------------
9,658,765
Net cash acquired 575,235
------------
Consideration $ 10,234,000
============
</TABLE>
(10) Commitments and Contingencies
Zulu Media, Inc. leases its operating facilities under
non-cancelable operating leases which expire at various dates
through 2001. Future minimum lease payments under such operating
leases are as follows:
<TABLE>
<S> <C>
Four months ending August 31, 1998 $ 449,750
Year ending December 31, 1999 461,750
Year ending December 31, 2000 407,400
Year ending December 31, 2001 307,500
----------
$1,626,400
==========
</TABLE>
(11) Subsequent Events
During December 1998, certain related parties agreed to convert
$5,000,000 of amounts payable to them to $5,000,000 of a newly
authorized class of Preferred Stock ("Investor Preferred")
convertible into 10,000,000 shares of Common Stock. The conversion
of the Investor Preferred into shares of Common Stock is subject to
approval by the stockholders of the Company.
15
<PAGE> 193
ZULU-TEK, INC., AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS , CONTINUED
August 31, 1998 and 1997
(Unaudited)
(11) Subsequent Events (Continued)
During September, 1998, subject to approval by the shareholders of
Enhanced Services Company, Inc. ("Enhanced"), the Company entered
into a business combination transaction with Enhanced whereby the
Company transferred all of its assets and liabilities to Enhanced
in exchange for convertible preferred stock, preferred stock and
cash. The transaction, if approved by the Enhanced stockholders,
will be accounted for as a reverse acquisition since shareholders
that control ZULU-tek, Inc., would control Enhanced after the
business combination.
16
<PAGE> 194
APPENDIX I
ZULU-TEK, INC. AND CONSOLIDATED SUBSIDIARIES
(Unaudited)
September 30, 1998 and 1997
1
<PAGE> 195
ZULU-TEK, INC., AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
September 30, 1998
(Unaudited)
ASSETS
<TABLE>
<CAPTION>
<S> <C>
Current Assets
Cash $ (15,476)
Accounts receivable, net of allowance
for doubtful accounts of $167,737 357,774
Accounts receivable from related parties 363,551
Other current assets 35,282
-----------
Total Current Assets 681,130
Furniture, leasehold improvements and
equipment, net of accumulated
depreciation of $568,256 1,477,709
Goodwill, net of accumulated amortization
of $4,615,962 10,881,456
Other assets 150,755
-----------
Total Assets $13,191,050
===========
LIABILITIES AND STOCKHOLDERS' (DEFICIT)
Current Liabilities
Advances from and amounts payable
to related parties $ 7,093,574
Accounts payable and accrued expenses 7,440,274
Other current liabilities 670,488
-----------
Total Current Liabilities 15,204,336
-----------
Commitments and Contingencies (Notes 1,
2, 3, 5, 7, 8, 9, 10, and 11)
Mandatory redeemable preferred stock 10,209,000
-----------
Stockholders' (deficit)
Preferred stock -- $.01 par value 50,000,000 shares
authorized:
Series A, 374,800 shares issued and outstanding 374,800
Series B, 3,000,000 shares issued and outstanding 3,000,000
Series D, 1,000,000 shares issued and outstanding 10,000
Common Stock -- $.001 par value,
100,000,000 shares authorized;
51,917,263 shares issued and outstanding 51,917
Additional paid-in capital 3,033,461
Accumulated (deficit) (18,692,463)
-----------
Total Stockholders' (Deficit) (12,222,285)
-----------
Total Liabilities and Stockholders' (Deficit) $13,191,050
===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
2
<PAGE> 196
ZULU-TEK, INC., AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Nine Months Ended September 30, 1998
(Unaudited)
<TABLE>
<CAPTION>
1998 1997
------------ -----------
<S> <C> <C>
Sales $ 2,005,791 $ 14,726
------------ -----------
Operating Expenses
Amortization of goodwill 4,615,962 --
Depreciation 568,256 --
Advertising and marketing 242,403 85,148
Rent 317,142 8,572
Salaries 2,022,122 127,508
Travel and entertainment 499,695 19,684
Stock issued for services 413,960 --
Other operating expenses 3,629,412 522,500
------------ -----------
Total Operating Expenses 12,308,892 763,412
------------ -----------
Net Operating (Loss) (10,303,101) (748,687)
------------ -----------
Other (Expenses)
(Loss) on sale of marketable securities (71,471) (--)
------------ -----------
Total Other (71,471) (--)
------------ -----------
Net (Loss) Continuing Operations $(10,374,572) (--)
============ ===========
Discontinued Operations (174,301) (748,687)
------------ -----------
Net (Loss) $(10,548,873) (748,687)
============ ===========
Net (Loss) per share $ (.23) $ (.04)
=========== ===========
Weighted Average Shares Outstanding 46,847,763 18,459,573
=========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
3
<PAGE> 197
ZULU-TEK, INC., AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' (DEFICIT)
(Unaudited)
From January 1, 1998 through September 30, 1998
<TABLE>
<CAPTION>
Preferred Stock-A Preferred Stock-B Preferred Stock-D Common Stock
------------------------ ---------------------- --------------------- ---------------------
No./Shares Amount No./Shares Amount No./Shares Amount No./Shares Amount
---------- ---------- ---------- ---------- ---------- ------- ---------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at
December 31, 1997 2,000,000 $2,000,000 3,000,000 $3,000,000 -- $ -- 41,778,263 $41,778
Preferred stock
converted to common (1,625,200) (1,625,200) -- -- -- -- 6,000,000 6,000
Common stock issued
for services -- -- -- -- -- -- 4,139,000 4,139
Stock issued -- -- -- -- 1,000,000 10,000 -- --
Net (loss) for the
nine months ended
September 30, 1998
(Unaudited) -- -- -- -- -- -- -- --
---------- ---------- --------- ---------- --------- ------ ---------- -------
Balance at
September 30, 1998
(Unaudited) 374,800 $ 374,800 3,000,000 $3,000,000 1,000,000 10,000 51,917,263 $51,917
========== ========== ========= ========== ========= ====== ========== =======
</TABLE>
<TABLE>
<CAPTION>
Additional
Paid-in Accumulated
Capital (Deficit) Total
---------- ------------- ------------
<S> <C> <C> <C>
Balance at
December 31, 1997 $1,004,500 ($8,143,590) ($2,097,312)
Preferred stock
converted to common 1,619,200 -- --
Common stock issued
for services 409,761 -- 413,900
Stock issued -- -- 10,000
Net (loss) for the
nine months ended
September 30, 1998
(Unaudited) -- (10,548,873) (10,548,873)
---------- ----------- -----------
Balance at
September 30, 1998
(Unaudited) $3,033,461 $(18,692,463) $(12,222,285)
========== ============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
4
<PAGE> 198
ZULU-TEK, INC., AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30, 1998
(Unaudited)
<TABLE>
1998 1997
<S> <C> <C>
Cash Flows from Operating Activities:
Net (loss) $(10,486,334) $(748,687)
Adjustments to reconcile net
(loss) to net cash provided by (used
in) operating activities
Depreciation 568,256 --
Amortization of goodwill 4,615,962 --
Stock issued for services 413,900 --
Increase (decrease) in accounts payable
and accrued expenses (1,419,308) 153,653
(Increase) decrease in accounts receivable 3,383,250 (1,243)
Other 710,442 21,301
------------ ---------
Net Cash Provided by (Used in) Operating
Activities (2,222,832) 511,976
------------ ---------
Cash Flows from Investing Activities:
(Acquisition of) furniture and equipment (873,074) (66,487)
Disposition of marketable securities 820,820 --
------------ ---------
Net Cash (Used in) Investing Activities (52,254) (66,487)
------------ ---------
Cash Flows from Financing Activities:
Advances from related parties 1,692,882 657,990
------------ ---------
Net Cash Provided by Financing Activities 1,692,882 657,990
------------ ---------
Increase (decrease) in cash (582,204) 16,527
Cash, beginning of year 566,728 14,689
------------ ---------
Cash, end of year $ (15,476) $ 31,216
============ =========
Interest paid $ -- $ --
============ =========
Income taxes paid $ -- $ --
============ =========
</TABLE>
The accompanying notes are an integral part of the financial statements.
5
<PAGE> 199
ZULU-TEK, INC., AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
September 30, 1998 and 1997
(Unaudited)
(1) Summary of Significant accounting Policies
(a) General
The Company, a Utah corporation, was incorporated on April 23,
1985 as Premium, Inc. On January 15, 1987, the name was changed
to Star Medical Corporation. On August 12, 1997, the name was
changed to Netmaster Group, Inc. On January 15, 1998, the name
was changed to ZULU-tek, Inc. During 1996 and through August 1,
1997, the Company was seeking a business combination opportunity
and was a development stage company since planned principal
operations had not yet commenced.
On August 6, 1997, echoMedia Technologies, Inc., a newly formed
wholly-owned subsidiary of the Company, incorporated under the
laws of Delaware, acquired or licensed assets and technology
previously owned by echoMEDIA, Inc., a Rhode Island corporation,
in exchange for an aggregate of 15,000,000 restricted shares of
the Company's common stock. In addition the Company issued
2,000,000 shares of Series A preferred stock and 3,000,000 shares
of Series B preferred stock in conjunction with this transaction.
The Company has recorded a $5,000,000 expense in the 1997
statement of operations in connection with the issuance of Series
A and Series B Preferred Stock for services related to completing
this transaction. Subsequent to September 30, 1998, the holder of
the Series B Preferred Stock has agreed to waive its right to any
amounts that it would otherwise receive upon the liquidation of
ZULU-tek, and the Company has cancelled the shares; this will
result in additional paid in capital being increased by
$3,000,000. The Company also agreed to pay a related party
$1,000,000 as a consulting fee for assistance in finding and
negotiating the echoMedia, Inc. transaction. This business
combination has been accounted for as a reverse acquisition since
the former shareholders of echoMEDIA, Inc. controlled the Company
after the business combination. Prior to this transaction, the
Company had 128,263 common shares outstanding. The net monetary
book value of ZULU-tek, Inc. was a negative $459 at the time of
the reverse acquisition. The accounts of echoMEDIA, Inc. have
been carried over in the accompanying financial statements, since
for accounting purposes echoMEDIA, Inc. is considered to be the
acquiring party. The 1997 financial statements of echoMEDIA, Inc.
are shown for comparative purposes. The issuances of the
preferred stock related to this transaction have been charged
first to additional paid-in capital and then to retained
earnings, in a manner similar to dividend, since additional
paid-in capital was not sufficient to cover the par value of the
preferred stock issued.
6
<PAGE> 200
ZULU-TEK, INC., AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
September 30, 1998 and 1997
(Unaudited)
(1) Summary of Significant Accounting Policies
(a) General (Continued)
Effective December 31, 1997 Mediabank, Inc., a Rhode Island
Corporation, incorporated on October 31, 1997, and a wholly-owned
subsidiary of the Company acquired SOFTBANK Interactive
Marketing, Inc., a Delaware Corporation, incorporated on June 17,
1996. On March 24, 1998, SOFTBANK Interactive Marketing, Inc.
changed its name to Zulu Media, Inc. The Company issued 10,209
shares of its mandatory redeemable preferred stock and 500,000
shares of common stock for approximately 75% of the stock of Zulu
Media, Inc. and agreed to pay a fee of $1,350,000 for the
introduction, negotiation and assistance in the consummation of
this acquisition. The 10,209 shares were recorded at their
mandatory redeemable amount of $10,209,000. The 500,000 shares of
common were recorded at $.05 per share based on the price paid
for common stock by other investors. Pursuant to the terms of an
existing agreement with the 25% minority shareholders of Zulu
Media Inc., their shares were to be returned and cancelled for no
consideration if the book value of the Zulu Media, Inc. was zero
or less. After obtaining audited financial statements of Zulu
Media, Inc. for 1997 in 1998, the minority shareholders of Zulu
Media, Inc. were informed during November, 1998 that their
ownership in Zulu Media, Inc. was terminated pursuant to the
terms of the agreement.
Zulu Media, Inc. is in the business of selling interactive
multimedia advertising and producing interactive promotions.
echoMEDIA, Inc. was a software development company that provided
internet advertising tools for commercial Web sites. During the
first quarter of 1998, echoMEDIA, Inc. terminated its operations
and transferred its technology to Zulu Media, Inc.
The consolidated financial statements of the Company include
echoMEDIA, Inc. and the Zulu Media, Inc. since December 31, 1997,
the date of acquisition.
All intercompany transactions and account balances have been
eliminated in the consolidated financial statements. The Company
has selected December 31 as its year end.
(b) Revenue and Expense Recognition
Revenues are derived form the performance of services, the sale
and related placement of advertisements on internet sites, and
the production of trade shows. Revenues are recognized as
services are performed, on the run date of an advertisement or
when a trade show commences.
7
<PAGE> 201
ZULU-TEK, INC., AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
September 30, 1998 and 1997
(Unaudited)
(1) Summary of Significant accounting Policies
(b) Revenue and Expense Recognition (Continued)
In accordance with certain agreements, billings are submitted to
advertisers on behalf of client web sites. The gross sales volume is
recorded as accounts receivable and an accrual is recorded for the
amount due to the client web site in accordance with the terms of the
agreement. A deferred liability has been established to account for
timing differences between advertising billings and the period in
which an advertisement runs.
(c) Furniture, Leasehold Improvements and Equipment
Property and equipment is carried at cost less accumulated
depreciation. The Company expenses maintenance costs and capitalizes
significant betterments. Depreciation is provided over the estimated
3-year useful lives of the assets using the straight-line method.
Leasehold improvements are amortized over the lesser of the term of
the lease or the useful life of the related improvement.
(d) Per Share Information
The per share information is presented based upon the weighted
average number of shares outstanding.
(e) Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenue
and expenses during the reporting period. Actual results could differ
from those estimates.
(f) Geographic Area of Operations
The Company's customers are principally in the United States of
America. The potential for severe financial impact can result from
negative effects of economic conditions within the market or
geographic area. Since the Company's business is principally in one
area, this concentration of operations results in an associated risk
and uncertainty.
8
<PAGE> 202
ZULU-TEK, INC., AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
September 30, 1998 and 1997
(Unaudited)
(1) Summary of Significant Accounting Policies (Continued)
(g) Income Taxes
At December 31,1997, the Company and its subsidiaries had
approximately $21,000,000 of net operating loss carryovers which
expire in years through 2013. Recent changes in ownership have
resulted in reducing the available loss carryovers that may be
utilized by the Company. In addition, future changes in ownership
could further reduce the amounts that may be utilized. As of
September 30, 1998 the Company had deferred tax assets of
approximately $6,000,000 related to net operating loss carryovers. A
valuation allowance has been provided for the total amount since the
amounts, if any, of future revenues necessary to be able to utilize
the carryovers are uncertain.
(h) Concentration of Credit Risk
Financial instruments which potentially subject the Company to
concentrations of credit risk consist primarily of accounts
receivable. The Company grants credit to various customers
principally in the United States. The Company does not require
collateral for its accounts receivable. Credit evaluations are
performed on the financial condition of customers and an allowance
has been established for accounts which may not be collectible.
(i) Goodwill
Goodwill is being amortized on a straight-line over a three year
period which commenced on December 31, 1997, the date of acquisition
of Zulu Media, Inc. Management's policy is to review long-lived
assets, including goodwill, for impairment on a periodic basis, at
least quarterly. As of September 30, 1998 management believed that
there was no impairment in the carrying value of goodwill or other
long-lived assets.
(j) Advertising Expenses
Advertising expenses are expensed as incurred.
(k) Significant Assumptions
See note 7 for a description of assumptions related to the Company
continuing as a going concern. A contingency exists with respect to
the matter, the ultimate resolution of which cannot presently be
determined.
9
<PAGE> 203
ZULU-TEK, INC., AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
September 30, 1998 and 1997
(Unaudited)
(1) Summary of Significant accounting Policies
(k) Significant Assumptions (Continued)
The financial statements include $10,881,456 recorded as
goodwill related to the acquisition of the Zulu Media, Inc. The
financial statements have been prepared using the assumption
that the carrying value of the goodwill will be recovered from
future operations. A contingency exists with respect to this
matter, the ultimate resolution of which cannot presently be
determined.
(l) Unaudited Financial Statements
The financial statements have been prepared by management
without audit. In the opinion of management, all adjustments
(which include any normal recurring adjustments) necessary to
present fairly the financial position results of operations,
cash flows and changes in stockholders' (deficit) have been
made.
(2) Delinquent Amounts Payable
As of September 30, 1998 the Company is delinquent on payments of
various amounts to creditors including the Internal Revenue Service.
Failure to pay these liabilities could result in liens being filed on
the Company's assets and may result in assets being attached by
creditors resulting in the Company's inability to continue operations.
(3) Preferred Stock
The Company has 50,000,000 shares of $.01 par value preferred stock
authorized. As of August 31, 1998 the Company had the following
preferred stock outstanding:
The Company issued 2,000,000 shares of Series A Preferred Stock on
August 2, 1997. The Series A Preferred Stock has limited voting rights
and is entitled to receive cumulative dividends out of assets legally
available for that purpose. With respect to such voting rights, the
holders of Series A Preferred Stock vote as a single class with the
holders of Common Stock and shall have such votes in respect of each
share of Series A Preferred Stock on any matter submitted to the holders
of Common Stock as the number of shares of Common Stock into which
shares of Series A Preferred Stock may then be converted had conversion
taken place. Each Share of Series A Preferred Stock is convertible, at
the option of the holder, into shares of Common Stock at any time after
a Conversion Event. The number of shares of Common Stock issued is
calculated by dividing $1.00 by the lowest per share bid price for
shares of Common Stock during the preceding ninety (90) day period
preceding the Conversion Event provided, however, that the lowest per
share bid price is $.05. The Conversion Event is the
10
<PAGE> 204
ZULU-TEK, INC., AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
September 30, 1998 and 1997
(Unaudited)
(3) Preferred Stock (Continued)
earliest of the following: (a) the first quarter in which the gross
revenues exceed $20,000,000; (b) a qualified offering; (c) effective
registration of the Common Stock into which the Series A is convertible;
(d) one half of such shares of each holder on or after August 1, 1998 and
the balance on or after August 31, 1999; or (e) August 31, 1998. During
the nine month period ended September 30, 1998, 1,625,200 shares of Series
A Preferred were converted to 6,000,000 shares of common.
The Series A Preferred Stock carries mandatory contingent redemption
provision upon the earliest of the following to occur; (a) the sale by the
Company of all or a substantial portion of its assets, sale by or Echo
Media Technology, Inc. (EMC) of all or substantially all of its assets, or
EMC shall cease being a wholly-owned subsidiary of the Company; (b) The
merger of the Company with, or the consolidation of the Company into, any
other corporation as a result of which the stockholders of the Company
immediately prior the such merger or consolidation do not own stock having
more than 50% of the outstanding voting power of the surviving
corporation; (c) the dissolution or liquidation of the Company; (d) Thomas
Burgess ceasing for any reason to be Executive Vice President of the
Company or ceasing for any reason to be the President and a Director of
EMC and actively involved in the executive management thereof; (e) except
as a result of a Qualified Public Offering and stock passing by death,
more than 50% of the outstanding voting stock of the Company becomes owned
by persons other than (i) holders of Series A Preferred Stock and their
transferees and (ii) stockholders of record on August 22, 1997; (f) any of
certain remedy events.
The Company amended its Articles of Incorporation on August 6, 1997 to
authorize and issue three million (3,000,000) shares of Series B Preferred
Stock. The Series B Preferred stock is non-voting and is not entitled to
receive dividends. The Series B Preferred Stock is convertible into shares
of the Common Stock of the Company; (a) on February 6, 1998, $1,000,000 of
the Series B Preferred Stock, at $0.25 per common share; (b) on May 6,
1998, $1,000,000 of the Series B Preferred Stock, at $0.50 per common
share; (d) on August 6, 1998, $1,000,000 of the Series B Preferred Stock,
at $0.75 per common share; (e) the Series B Preferred Stock is not
redeemable by the Company. The agent for the holders of the Series B
Preferred Stock agreed on February 24, 1998 not to exercise its right of
conversion of the Series B Preferred Stock until the shareholders of the
Company have authorized the issuance of at least 7,333,334 additional
shares of the Company's Common Stock. The holders of the Series B
Preferred Stock did not elect to convert any of the stock into common
stock on any of the conversion dates.
11
<PAGE> 205
ZULU-TEK, INC., AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
September 30, 1998 and 1997
(Unaudited)
(3) Preferred Stock (Continued)
The Company amended its Articles of Incorporation to authorize, create and
issue 15,000 shares of Series C Redeemable Preferred Stock with a par value
of $1.00 per share, and a stated and liquidation value of $1,000 per share
on December 30, 1997. The Series C Redeemable Preferred Stock is non
voting, except as to matters which change the covenants of the Series C
Redeemable Preferred Stock. The Series C Redeemable Preferred Stock is
entitled to receive dividends out of assets legally available therefore and
prior in preference to any declaration or payment of any dividend on the
Common Stock of the Company. The Series C Redeemable Preferred is redeemed
by the Company on the following dates: (a) on or before December 31, 1999,
3,000 shares of the Series C Redeemable Preferred Stock, at $1,000 per
share; (b) on or before December 31, 2001, 3,000 shares of the Series C
Redeemable Preferred Stock, at $1,000 per share; (c) on or before December
31, 2002, 3,000 shares of the Series C Redeemable Preferred Stock, at
$1,000 per share.
(4) Common Stock
The Company has 100,000,000 shares of $.001 par value common stock
authorized with 51,917,263 issued and outstanding as of September 30, 1998.
(5) Related Party Transactions
As of September 30, 1998, the Company had various amounts payable to
related parties totaling $6,093,574. Of this amount, $2,435,000 bears
interest at 0.5% over prime rate and includes a conversion to common stock
option. The conversion option is to a maximum of 1,500,000 shares of common
stock subject to certain conditions. In addition, another $1,000,000 of
related party payables is due on December 31, 1998, bears no interest, and
is uncollateralized. The balance of the amounts payable had no written
repayment terms, did not bear interest and were due on demand. The related
parties are shareholders of the Company or are affiliates of shareholders
of the Company.
The Company has entered into a license agreement with a related company.
The Company has received a license fee of $450,000 as consideration for
granting the related company the exclusive right to produce a certain trade
show worldwide through December 31, 1998. The license fee is being
amortized over the term of the agreement.
(6) Marketable Securities
At December 31, 1997, Zulu Media, Inc. held 11,853, available for sale
shares of Yahoo Stock with a closing bid price of $69.25 for a total asset
carrying value of $820,820. The stock was sold during the eight month
period ended August 31, 1998 for $749,349, resulting in a loss of $71,471.
12
<PAGE> 206
ZULU-TEK, INC., AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
September 30, 1998 and 1997
(Unaudited)
(7) Basis of Presentation - Going Concern
The accompanying financial statements have been prepared in conformity
with generally accepted accounting principles, which contemplates the
continuation of the Company as a going concern. However, the Company
has sustained recurring operating losses, has a net capital
deficiency, and is delinquent on payment of various creditor
liabilities including payroll taxes.
The Company has been able to continue operations through the funding
from private investors, cash inflows from operations, and the
extension of terms from creditors. Continued operation is dependant
upon the Company continuing to obtain financing for its activities.
Management's plan for the Company includes raising additional working
capital through debt and/or equity financing until profitable
operations and positive cash flow are achieved and maintained.
However, no assurances can be given that the company will be
successful in raising additional capital and there is no assurance
that the Company will achieve profitability or a positive cash flow.
If the Company is unable to obtain adequate additional financing,
management will be required to curtail the operations of the Company.
In view of these matters, realization of certain of the assets in the
accompanying balance sheet is dependent upon continued operations of
the Company, which in turn is dependent upon the Company's ability to
meet its financing requirements, raise additional capital, and the
success of its future operations. Management believes that actions
planned and presently being taken to revise the Company's operating
and financial requirements and efforts to raise additional capital
provide the opportunity for the Company to continue as a going
concern.
(8) Furniture, Leasehold Improvements and Equipment
Furniture, leasehold improvements and equipment is summarized as
follows:
Computer equipment $680,017
Network operating centers 815,342
Furniture and equipment 439,857
Leasehold improvements 110,149
Accumulated depreciation (568,256)
----------
$1,477,709
==========
The furniture, leasehold improvements and equipment are pledged as
security for loans made to the Company.
13
<PAGE> 207
ZULU-TEK, INC., AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
September 30, 1998 and 1997
(Unaudited)
(9) Acquisition of Zulu Media, Inc.
Effective December 31, 1997, the Company, as described in Note 1,
acquired the business and assets of Zulu Media, Inc. The acquisition has
been accounted for using the purchase method of accounting. The
consideration paid, acquisition costs and the fair market value of the
net liabilities assumed in excess of the estimated fair value of assets
acquired have been assigned to goodwill.
The net purchase price has been allocated as follows:
<TABLE>
<S> <C>
Goodwill $15,497,418
Current assets 4,659,990
Property and equipment 1,845,066
Other assets 111,130
Current liabilities (11,104,839)
Acquisition costs (1,350,000)
-----------
9,658,765
Net cash acquired 575,235
-----------
Consideration $10,234,000
===========
</TABLE>
(10) Commitments and Contingencies
Zulu Media, Inc. leases its operating facilities under non-cancelable
operating leases which expire at various dates through 2001. Future
minimum lease payments under such operating leases are as follows:
<TABLE>
<S> <C>
Nine months ending September 30, 1998 $ 479,700
Year ending December 31, 1999 461,750
Year ending December 31, 2000 407,400
Year ending December 31, 2001 307,500
----------
$1,626,400
==========
</TABLE>
(11) Subsequent Events
During December 1998, certain related parties agreed to convert
$5,000,000 of amounts payable to them to $5,000,000 of a newly
authorized class of Preferred Stock ("Investor Preferred") convertible
into 10,000,000 shares of Common Stock. The conversion of the Investor
Preferred into shares of Common Stock is subject to approval by the
stockholders of the Company.
14
<PAGE> 208
ZULU-TEK, INC., AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
September 30, 1998 and 1997
(Unaudited)
(11) Subsequent Events (Continued)
During September, 1998, subject to approval by the shareholders of
Enhanced Services Company, Inc. ("Enhanced"), the Company entered into a
business combination transaction with Enhanced whereby the Company
transferred all of its assets and liabilities to Enhanced in exchange for
convertible preferred stock, preferred stock and cash. The transaction, if
approved by the Enhanced stockholders, will be accounted for as a reverse
acquisition since shareholders that control ZULU-tek, Inc., would control
Enhanced after the business combination.
15
<PAGE> 209
APPENDIX J
ZULU-TEK, INC., AND CONSOLIDATED SUBSIDIARIES
FINANCIAL STATEMENTS
and
REPORTS OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
December 31, 1997 and 1996
1
<PAGE> 210
ZULU-TEK, INC., AND CONSOLIDATED SUBSIDIARIES
December 31, 1997 and 1996
Table of Contents
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Reports of Independent Certified Public Accountants 3,4
Financial Statements:
Consolidated Balance Sheet 5
Consolidated Statements of Operations 6
Consolidated Statement of Changes in
Stockholders' Equity (Deficit) 7
Consolidated Statements of Cash Flows 8
Notes to Consolidated Financial Statements 9-17
</TABLE>
2
<PAGE> 211
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANT
The Board of Directors
ZULU-tek, Inc.
We have audited the consolidated balance sheet of ZULU-tek, Inc. as of December
31, 1997 and the related consolidated statements of operations, changes in
stockholders' equity (deficit) and cash flows for the year ended December 31,
1997. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform an 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 audit provides 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 ZULU-tek, Inc. as of
December 31, 1997 and the consolidated results of its operations, its changes in
consolidated stockholders' equity (deficit) and its consolidated cash flows for
the year ended December 31, 1997 in conformity with generally accepted
accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 7 to the
consolidated financial statements, the Company has suffered recurring losses
from operations, has a net capital deficiency and is delinquent on payment of
creditor liabilities including payroll taxes. These matters raise substantial
doubt about the Company's ability to continue as a going concern. The
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
Brad B. Haynes
Certified Public Accountant
10877 Wilshire Boulevard Suite 603
Los Angeles, CA 90024
December 7, 1998
3
<PAGE> 212
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANT
The Board of Directors
ZULU-tek, Inc.
I have audited the statements of operations, changes in stockholders' equity
(deficit) and cash flows of ZULU-tek, Inc., for the year ended December 31,
1996. These consolidated financial statements are the responsibility of the
Company's management. My responsibility is to express an opinion on these
consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform an 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 audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the results of its operations, its changes in
stockholders' equity and its cash flow for the year ended December 31, 1996 in
conformity with generally accepted accounting principles.
William J. Flynn
Certified Public Accountant
275 Bellevere Avenue
Newport, RI 02840
September 3, 1997
4
<PAGE> 213
ZULU-TEK, INC., AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
December 31, 1997
ASSETS
<TABLE>
<CAPTION>
<S> <C>
Current Assets
Cash $ 566,728
Accounts receivable, net of allowance for
doubtful accounts of $117,738 3,741,024
Marketable securities 820,820
Other current assets 98,146
------------
Total Current Assets 5,226,718
Furniture, leasehold improvements and equipment 1,845,066
Goodwill 15,497,418
Other assets 114,130
------------
Total Assets $ 22,683,332
============
LIABILITIES AND STOCKHOLDERS' (DEFICIT)
Current Liabilities
Advances from and amounts payable to related parties $ 5,400,692
Accounts payable and accrued expenses 8,859,582
Other current liabilities 311,370
------------
Total Current Liabilities 14,571,644
------------
Commitments and Contingencies (Notes 1, 2, 3, 5, 7, 8, 9, 10 and 11) --
------------
Mandatory redeemable preferred stock 10, 209,000
------------
Stockholders' (deficit)
Preferred stock -- $.01 par value 50,000,000 shares authorized:
Series A, 2,000,000 shares issued and outstanding 2,000,000
Series B, 3,000,000 shares issued and outstanding 3,000,000
Common Stock -- $.001 par value,
100,000,000 shares authorized;
41,278,263 shares issued and outstanding 41,778
Additional paid-in capital 1,004,500
Accumulated (deficit) (8,143,590)
------------
Total Stockholders' (Deficit) (2,097,312)
------------
Total Liabilities and Stockholders' (Deficit) $ 22,683,332
============
</TABLE>
The accompanying notes are an integral part of the financial statements.
5
<PAGE> 214
ZULU-TEK, INC., AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Sales $ 36,815 $ 367,891
------------ ------------
Operating Expenses
Depreciation 24,911 4,482
Advertising and marketing 58,268 40,681
Rent 50,676 10,239
Salaries 333,599 90,793
Travel and entertainment 312,541 21,540
Preferred Stock issued for services 5,000,000 --
Common Stock issued for services 3,150 --
Consulting fees, related party 1,000,000 --
Other operating expenses 1,258,764 211,546
------------ ------------
Total Operating Expenses 8,041,909 379,281
------------ ------------
Net Operating (Loss) (8,005,094) (11,390)
------------ ------------
Other (Expenses)
(Loss) on abandonment of furniture,
leasehold improvements and equipment (141,786) (--)
------------ ------------
Total Other (141,786) (--)
------------ ------------
Net (Loss) $ (8,146,880) $ (11,390)
============ ============
Net (Loss) per Share $ (.15) $nil
============ ============
Weighted Average Shares Outstanding 21,676,088 15,000,000
============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
6
<PAGE> 215
ZULU-TEK, INC., AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
From January 1, 1996 through December 31, 1997
<TABLE>
<CAPTION>
Preferred Stock - A Preferred Stock - B Common Stock
------------------------- -------------------------- ---------------------------
No./Shares Amount No./Shares Amount No./Shares Amount
---------- ---------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance at
January 1, 1996 -- $ -- -- $ -- -- $ --
Common stock issued -- -- -- -- 15,000,000 15,000
Net (loss) for the year ended
December 31, 1996
-- -- -- -- -- --
--------- ----------- --------- ----------- ---------- -----------
Balance at
December 31, 1996 -- -- -- -- 15,000,000 15,000
Preferred stock issued for
services 2,000,000 2,000,000 3,000,000 3,000,000 -- --
Reverse Acquisition -- -- -- -- 128,236 128
Common stock issued for
services -- -- -- -- 3,150,000 3,150
Common stock issued -- -- -- -- 23,000,000 23,000
Common stock issued for Zulu
Media, Inc. -- -- -- -- 500,000 500
Net (loss) for the year ended
December 31, 1997
-- -- -- -- -- --
--------- ----------- --------- ----------- ---------- -----------
Balance at
December 31, 1997 2,000,000 $ 2,000,000 3,000,000 $ 3,000,000 41,778,263 $ 41,778
========= =========== ========= =========== ========== ===========
<CAPTION>
Additional
Paid-in Accumulated
Capital (Deficit) Total
----------- ----------- -----------
<S> <C> <C> <C>
Balance at
January 1, 1996 $ -- $ -- --
Common stock issued 15,267 -- 30,267
Net (loss) for the year ended
December 31, 1996
-- (11,390) (11,390)
----------- ----------- -----------
Balance at
December 31, 1996 15,267 (11,390) 18,877
Preferred stock issued for
services -- -- 5,000,000
Reverse acquisition (15,267) 14,680 (459)
Common stock issued for
services -- -- 3,150
Common stock issued 980,000 -- 1,003,000
Common stock issued for Zulu
Media, Inc. 24,500 -- 25,000
Net (loss) for the year ended
December 31, 1997
-- (8,146,880) (8,146,880)
----------- ----------- -----------
Balance at
December 31, 1997 $ 1,004,500 $(8,143,590) $(2,097,312)
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
7
<PAGE> 216
ZULU-TEK, INC., AND CONSOLIDATED SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Cash Flows from Operating Activities:
Net (loss) $(8,146,880) $ (11,390)
Adjustments to reconcile net
(loss) to net cash provided by (used
in) operating activities
Depreciation 24,911 4,482
Stock issued for services 5,003,150 --
(Loss) on abandonment of furniture,
leasehold improvements and equipment 141,786 --
Increase in accounts payable and accrued expenses 460,691 39,964
Consulting fees, accrued 1,000,000 --
(Increase) decrease in accounts
receivable 1,996 (1,996)
Other 5,007 (5,998)
----------- -----------
Net Cash Provided by (Used in) Operating
Activities (1,509,339) 25,062
----------- -----------
Cash Flows from Investing Activities
(Acquisition of) furniture and
equipment (112,516) --
Cash provided by investment in Zulu-Media, Inc. 575,235 (57,673)
----------- -----------
Net Cash (Used in) Investing
Activities 462,719 (57,673)
----------- -----------
Cash Flows from Financing Activities:
Common stock issued 1,000,000 30,267
Advances from related parties 609,588 6,104
----------- -----------
Net Cash Provided by Financing
Activities 1,609,588 36,371
----------- -----------
Increase in cash 562,968 3,760
Cash, beginning of year 3,760 --
----------- -----------
Cash, end of year $ 566,728 $ 3,760
=========== ===========
Interest paid $ -- $ --
=========== ===========
Income taxes paid $ -- $ --
=========== ===========
</TABLE>
Note: Effective December 31, 1997, the Company issued 10,209 of mandatory
redeemable preferred stock with a redemption value of $10,209,000 and 500,000
shares of its common stock valued at $25,000 for Zulu Media, Inc. The Company
also agreed to pay a fee of $1,350,000 related to this transaction. This
transaction resulted in acquired assets of $7,191,421, acquired liabilities of
$11,104,839 and goodwill of $15,497,418. The Company also issued $2,000,000 of
Series A and $3,000,000 of Series B Preferred Stock in connection with the
reverse acquisition described in Note 1 to the financial statements.
The accompanying notes are an integral part of the financial statements.
8
<PAGE> 217
ZULU-TEK, INC., AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997 and 1996
(1) Summary of Significant Accounting Policies
(a) General
The Company, a Utah corporation, was incorporated on
April 23, 1985 as Premium, Inc. On January 15, 1987,
the name was changed to Star Medical Corporation. On
August 12, 1997, the name was changed to Netmaster
Group, Inc. On January 15, 1998, the name was changed
to ZULU-tek, Inc. During 1996 and through August 1,
1997, the Company was seeking a business combination
opportunity and was a development stage company since
planned principal operations had not yet commenced.
On August 6, 1997, echoMedia Technologies, Inc., a
newly formed wholly-owned subsidiary of the Company,
incorporated under the laws of Delaware, acquired or
licensed assets and technology previously owned by
echoMEDIA, Inc., a Rhode Island corporation, in
exchange for an aggregate of 15,000,000 restricted
shares of the Company's common stock. In addition,
the Company issued 2,000,000 shares of Series A
preferred stock and 3,000,000 shares of Series B
preferred stock in conjunction with this transaction.
The Company has recorded a $5,000,000 expense in the
1997 statement of operations in connection with the
issuance of Series A and Series B Preferred Stock for
services related to completing this transaction.
Subsequent to September 30, 1998, the holder of the
Series B Preferred Stock has agreed to waive its right
to any amounts that it would otherwise receive upon the
liquidation of Zulu-tek, and the Company has cancelled
the shares; this will result in additional paid in
capital being increased by $3,000,000. The Company also
agreed to pay a related party $1,000,000 as a
consulting fee for assistance in finding and
negotiating the echoMedia, Inc. transaction. This
business combination has been accounted for as a
reverse acquisition since the former shareholders of
echoMEDIA, Inc. controlled the Company after the
business combination. Prior to this transaction, the
Company had 128,263 common shares outstanding. The net
monetary book value of ZULU-tek, Inc. was a negative
$459 at the time of the reverse acquisition. The
accounts of echoMEDIA, Inc. have been carried over in
the accompanying financial statements, since for
accounting purposes echoMEDIA, Inc is considered to be
the acquiring party. The 1996 financial statements of
echoMEDIA, Inc. are shown for comparative purposes. The
issuances of the preferred stock related to this
transaction have been charged first to additional
paid-in capital and then to retained earnings, in a
manner similar to dividend, since additional paid-in
capital was not sufficient to cover the par value of
the preferred stock issued.
9
<PAGE> 218
ZULU-TEK, INC., AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
December 31, 1997 and 1996
(1) Summary of Significant Accounting Policies
(a) General (Continued)
Effective December 31, 1997 Mediabank, Inc., a Rhode
Island corporation, incorporated on October 31, 1997,
and a wholly-owned subsidiary of the Company acquired
SOFTBANK Interactive Marketing, Inc., a Delaware
Corporation, incorporated on June 17, 1996. On March
24, 1998, SOFTBANK Interactive Marketing, Inc. changed
its name to Zulu Media, Inc. The Company issued 10,209
shares of its mandatory redeemable preferred stock and
500,000 shares of common stock for approximately 75% of
the stock of Zulu Media, Inc. and agreed to pay a fee
of $1,350,000 for the introduction, negotiation and
assistance in the consummation of this acquisition. The
10,209 preferred shares were recorded at their
mandatory redeemable amount of $10,209,000. The 500,000
shares of common stock were recorded at $.05 per share
based on the price paid for common stock by other
investors. Pursuant to the terms of an existing
agreement with the 25% minority shareholders of Zulu
Media, Inc., their shares were to be returned and
cancelled for no consideration if the book value of the
Zulu Media Inc. was zero or less. After obtaining
audited financial statements of Zulu Media, Inc. for
1997 in 1998, the minority shareholders of Zulu Media,
Inc. were informed during November, 1998 that their
ownership in Zulu Media, Inc. was terminated pursuant
to the terms of the agreement.
Zulu Media, Inc. is in the business of selling
interactive multimedia advertising and producing
interactive promotions. echoMEDIA, Inc. was a software
development company that provided internet advertising
tools for commercial Web sites. During the first
quarter of 1998, echoMEDIA, Inc. terminated its
operations and transferred its technology to Zulu
Media, Inc.
The consolidated financial statements of the Company
include echoMEDIA, Inc. for the two years ended
December 31, 1997 and the balance sheet accounts of
Zulu Media, Inc. as of December 31, 1997, the date of
acquisition.
All intercompany transactions and account balances have
been eliminated in the consolidated financial
statements. The Company has selected December 31 as its
year end.
(b) Revenue and Expense Recognition
Revenues are derived from the performance of services,
the sale and related placement of advertisements on
internet sites, and the production of trade shows.
Revenues are recognized as services are performed, on
the run date of an advertisement or when a trade show
commences.
10
<PAGE> 219
ZULU-TEK, INC., AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
December 31, 1997 and 1996
(1) Summary of Significant accounting Policies
(b) Revenue and Expense Recognition (Continued)
In accordance with certain agreements, billings are
submitted to advertisers on behalf of client web sites.
The gross sales volume is recorded as accounts
receivable and an accrual is recorded for the amount
due to the client web site in accordance with the terms
of the agreement. A deferred liability has been
established to account for timing differences between
advertising billings and the period in which an
advertisement runs.
(c) Furniture, Leasehold Improvements and Equipment
Property and equipment is carried at cost less
accumulated depreciation. The Company expenses
maintenance costs and capitalizes significant
betterments. Depreciation is provided over the
estimated 3-year useful lives of the assets using the
straight-line method. Leasehold improvements are
amortized over the lesser of the term of the lease or
the useful life of the related improvement.
(d) Per Share Information
The per share information is presented based upon the
weighted average number of shares outstanding.
(e) Use of Estimates in the Preparation of Financial
Statements
The preparation of financial statements in conformity
with generally accepted accounting principles requires
management to make estimates and assumptions that
affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported
amounts of revenue and expenses during the reporting
period. Actual results could differ from those
estimates.
(f) Geographic Area of Operations
The Company's customers are principally in the United
States of America. The potential for severe financial
impact can result from negative effects of economic
conditions within the market or geographic area. Since
the Company's business is principally in one area, this
concentration of operations results in an associated
risk and uncertainty.
11
<PAGE> 220
ZULU-TEK, INC., AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
December 31, 1997 and 1996
(1) Summary of Significant accounting Policies (Continued)
(g) Income Taxes
At December 31, 1997, the Company and its subsidiaries
had approximately $13,000,000 of net operating loss
carryovers which expire in years through 2012. Recent
changes in ownership have resulted in reducing the
available loss carryovers that may be utilized by the
Company in future years. In addition, future changes in
ownership could further reduce the amounts that may be
utilized by the Company in future years. As of December
31, 1997 the Company had deferred tax assets of
approximately $4,000,000 related to net operating loss
carryovers. A valuation allowance has been provided for
the total amount since the amounts, if any, of future
revenues necessary to be able to utilize the carryovers
are uncertain.
(h) Concentration of Credit Risk
Financial instruments which potentially subject the
Company to concentrations of credit risk consist
primarily of accounts receivable. The Company grants
credit to various customers principally in the United
States. The Company does not require collateral for its
accounts receivable. Credit evaluations are performed
on the financial condition of customers and an
allowance has been established for accounts which may
not be collectible.
(i) Goodwill
Goodwill will be amortized on a straight-line over a
three year period which commenced on December 31, 1997,
the date of acquisition of Zulu Media, Inc.
Management's policy is to review long-lived assets,
including goodwill, for impairment on a periodic basis,
at least quarterly. As of December 31, 1997 management
believed that there was no impairment in the carrying
value of goodwill or other long-lived assets.
(j) Advertising Expenses
Advertising expenses are expensed as incurred.
(k) Significant Assumptions
See note 7 for a description of assumptions related to
the Company continuing as a going concern. A
contingency exists with respect to the matter, the
ultimate resolution of which cannot presently be
determined.
12
<PAGE> 221
ZULU-TEK, INC., AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
December 31, 1997 and 1996
(1) Summary of Significant accounting Policies
(k) Significant Assumptions (Continued)
The financial statements include $15,472,418 recorded
as goodwill related to the acquisition of the Zulu
Media, Inc. The financial statements have been prepared
using the assumption that the carrying value of the
goodwill will be recovered from future operations. A
contingency exists with respect to this matter, the
ultimate resolution of which cannot presently be
determined.
(2) Delinquent Amounts Payable
As of December 31, 1997 the Company is delinquent on payments of
various amounts to creditors including the Internal Revenue
Service. Failure to pay these liabilities could result in liens
being filed on the Company's assets and may result in assets being
attached by creditors resulting in the Company's inability to
continue operations.
(3) Preferred Stock
The Company has 50,000,000 shares of $.01 par value preferred stock
authorized. As of December 31, 1997 the Company had the following
preferred stock outstanding:
The Company issued 2,000,000 shares of Series A Preferred Stock on
August 2, 1997. The Series A Preferred Stock has limited voting
rights and is entitled to receive cumulative dividends out of
assets legally available for that purpose. With respect to such
voting rights, the holders of Series A Preferred Stock vote as a
single class with the holders of Common Stock and shall have such
votes in respect of each share of Series A Preferred Stock on any
matter submitted to the holders of Common Stock as the number of
shares of Common Stock into which shares of Series A Preferred
Stock may then be converted had conversion taken place. Each Share
of Series A Preferred Stock is convertible, at the option of the
holder, into shares of Common Stock at any time after a Conversion
Event. The number of shares of Common Stock issued is calculated by
dividing $1.00 by the lowest per share bid price for shares of
Common Stock during the preceding ninety (90) day period preceding
the Conversion Event provided, however, that the lowest per share
bid price is $.05. The Conversion Event is the earliest of the
following: (a) the first quarter in which the gross revenues exceed
$20,000,000; (b) a qualified offering; (c) effective registration
of the Common Stock into which the Series A is convertible; (d) one
half of such shares of each holder on or after August 1, 1998 and
the balance on or after August 31, 1999; or (e) August 31, 1998.
13
<PAGE> 222
ZULU-TEK, INC., AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
December 31, 1997 and 1996
(3) Preferred Stock (Continued)
The Series A Preferred Stock carries mandatory contingent
redemption provisions upon the earliest of the following to occur;
(a) the sale by the Company of all or a substantial portion of its
assets, or sale by Echo Media Technology, Inc. (EMC) of all or
substantially all of its assets, or EMC shall cease being a
wholly-owned subsidiary of the Company; (b) The merger of the
Company with, or the consolidation of the Company into, any other
corporation as a result of which the stockholders of the Company
immediately prior the such merger or consolidation do not own stock
having more that 50% of the outstanding voting power of the
surviving corporation; (c) the dissolution or liquidation of the
Company; (d) Thomas Burgess ceasing for any reason to be Executive
Vice President of the Company or ceasing for any reason to be the
President and a Director of EMC and actively involved in the
executive management thereof; (e) except as a result of a Qualified
Public Offering and stock passing by death, more than 50% of the
outstanding voting stock of the Company becomes owned by persons
other than (i) holders of Series A Preferred Stock and their
transferees and (ii) stockholders of record on August 22, 1997; (f)
any of certain remedy events.
The Company amended its Articles of Incorporation on August 6, 1997
to authorize and issue three million (3,000,000) shares of Series B
Preferred Stock. The Series B Preferred Stock is non-voting and is
not entitled to receive dividends. The Series B Preferred Stock is
convertible into shares of the Common Stock of the Company: (a) on
February 6, 1998, $1,000,000 of the Series B Preferred Stock, at
$0.25 per common share; (b) on May 6, 1998, $1,000,000 of the
Series B Preferred Stock, at $0.50 per common share; (d) on August
6, 1998, $1,000,000 of the Series B Preferred Stock, at $0.75 per
common share; (e) the Series B Preferred Stock is not redeemable by
the Company. The agent for the holders of the Series B Preferred
Stock agreed on February 24, 1998 not to exercise its right of
conversion of the Series B Preferred Stock until the shareholders
of the Company have authorized the issuance of at least 7,333,334
additional shares of the Company's Common Stock. The holders of the
Series B Preferred Stock did not elect to convert any of the stock
into common stock on any of the conversion dates.
The Company amended its Articles of Incorporation on December 30,
1997 to authorize, create and issue 15,000 shares of Series C
Redeemable Preferred Stock with a par value of $1.00 per share, and
a stated and liquidation value of $1,000 per share. The Series C
Redeemable Preferred Stock is non voting, except as to matters
which change the covenants of the Series C Redeemable Preferred
Stock. The Series C Redeemable Preferred Stock is entitled to
receive dividends out of assets legally available therefore and
prior in preference to any declaration or payment of any dividend
on the Common Stock of the Company. The Series C Redeemable
Preferred is to be redeemed by the Company on the following dates:
(a) on or before December 31, 1999, 3,000 shares of the Series C
Redeemable Preferred Stock, at $1,000 per share; (b) on or before
December 31, 2001, 3,000 shares of the Series C Redeemable
Preferred Stock, at $1,000 per share; (c) on or before December 31,
2002, 3,000 shares of the Series C Redeemable Preferred Stock, at
$1,000 per share.
14
<PAGE> 223
ZULU-TEK, INC., AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
December 31, 1997 and 1996
(4) Common Stock
The Company has 100,000,000 shares of $.001 par value common stock
authorized of which 41,278,763 are issued and outstanding as of
December 31, 1997.
(5) Related Party Transactions
As of December 31, 1997, the Company had various amounts payable to
related parties totaling $5,400,692. Of this amount, $2,435,000
bears interest at 0.5% over prime rate and includes a conversion to
common stock option. The conversion option is to 1,500,000 shares
of common stock, subject to certain conditions. In addition,
another $1,000,000 of related party payables is due on December 31,
1998, bears no interest and is uncollateralized. The balance of the
amounts payable had no written repayment terms, did not bear
interest and were due on demand. The related parties are
shareholders of the Company or are affiliates of shareholders of
the Company.
The Company's group medical, dental and related benefits programs
for Zulu Media, Inc., were provided by a related party. The related
costs of $1,169,271 for the year ended December 31, 1997 have been
charged to Zulu Media, Inc., and such amounts are included in the
amounts payable to related parties on December 31, 1997.
The Company has entered into a license agreement with a related
company. The Company has received a license fee of $450,000 as
consideration for granting the related company the exclusive right
to produce a certain trade show worldwide through December 31,
1998. The license fee is being amortized over the term of the
agreement.
(6) Marketable Securities
At December 31, 1997, Zulu Media, Inc. held 11,853, available for
sale shares of Yahoo Stock with a closing bid price of $69.25 for a
total asset carrying value of $820,820. The stock was sold during
1998 for $749,349, resulting in a loss of $71,471.
(7) Basis of Presentation - Going Concern
The accompanying financial statements have been prepared in
conformity with generally accepted accounting principles, which
contemplate the continuation of the Company as a going concern.
However, the Company has sustained recurring operating losses, has
a net capital deficiency, and is delinquent on payment of various
creditor liabilities including payroll taxes.
15
<PAGE> 224
ZULU-TEK, INC., AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
December 31, 1997 and 1996
(7) Basis of Presentation - Going Concern (Continued)
The Company has been able to continue operations through funding
from private investors, cash inflows from operations, and the
extension of terms from creditors. Continued operation is dependant
upon the Company continuing to obtain financing for its activities.
Management's plan for the Company includes raising additional
working capital through debt and/or equity financing until
profitable operations and positive cash flow are achieved and
maintained. However, no assurances can be given that the company
will be successful in raising additional capital and there is no
assurance that the Company will achieve profitability or a positive
cash flow. If the Company is unable to obtain adequate additional
financing, management will be required to curtail the operations of
the Company.
In view of these matters, realization of certain of the assets in
the accompanying balance sheet is dependent upon continued
operations of the Company, which in turn is dependent upon the
Company's ability to meet its financing requirements, raise
additional capital, and the success of its future operations.
Management believes that actions planned and presently being taken
to revise the Company's operating and financial requirements and
efforts to raise additional capital provide the opportunity for the
Company to continue as a going concern.
(8) Furniture, Leasehold Improvements and Equipment
Furniture, leasehold improvements and equipment is summarized as
follows:
<TABLE>
<S> <C>
Computer equipment $ 674,688
Network operating centers 743,999
Furniture and equipment 344,515
Leasehold improvements 81,864
----------
$1,845,066
==========
</TABLE>
Subsequent to December 31, 1997, the furniture, leasehold
improvements and equipment were pledged as security for loans made
to the Company.
(9) Acquisition of Zulu Media, Inc.
Effective December 31, 1997, the Company, as described in Note 1,
acquired the business and assets of Zulu Media, Inc. The
acquisition has been accounted for using the purchase method of
accounting. The consideration paid, acquisition costs and the fair
market value of the net liabilities assumed in excess of the
estimated fair value of assets acquired have been assigned to
goodwill.
16
<PAGE> 225
ZULU-TEK, INC., AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
December 31, 1997 and 1996
(9) Acquisition of Zulu Media, Inc. (Continued)
The net purchase price has been allocated as follows:
<TABLE>
<S> <C>
Goodwill $ 15,497,418
Current assets 4,659,990
Property and equipment 1,845,066
Other assets 111,130
Current liabilities (11,104,839)
Acquisition costs (1,350,000)
------------
9,658,765
Net cash acquired 575,235
------------
Consideration $ 10,234,000
============
</TABLE>
(10) Commitments and Contingencies
Zulu Media, Inc. leases its operating facilities under
non-cancelable operating leases which expire at various dates
through 2001. Future minimum lease payments under such operating
leases are as follows:
<TABLE>
<S> <C>
1998 $ 449,750
1999 461,750
2000 407,400
2001 307,500
----------
$1,626,400
==========
</TABLE>
Zulu Media, Inc.'s rental expense for the year ended December 31,
1997 was approximately $566,000.
(11) Subsequent Events
Subsequent to December 31, 1997, 1,625,200 shares of the Series A
Preferred Stock were converted to 6,000,000 shares of common stock.
During the first quarter of 1998, echoMEDIA, Inc. terminated its
operations and transferred its technology to Zulu Media, Inc.
During September, 1998, subject to approval by the shareholders of
Enhanced Services Company, Inc. ("Enhanced"), the Company entered
into a business combination transaction with Enhanced whereby the
Company transferred all of its assets and liabilities to Enhanced
in exchange for convertible preferred stock, preferred stock and
cash. The transaction, if approved by the Enhanced stockholders,
will be accounted for as a reverse acquisition since
17
<PAGE> 226
ZULU-TEK, INC., AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
December 31, 1997 and 1996
shareholders that control ZULU-tek, Inc., would control Enhanced
after the business combination.
18
<PAGE> 227
APPENDIX K
ZULU MEDIA, INC.
(A Delaware Corporation)
FINANCIAL STATEMENTS
December 31, 1997
<PAGE> 228
ZULU MEDIA, INC.
(A Delaware Corporation)
TABLE OF CONTENTS
For the Year Ended December 31, 1997
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditor's Report 1
Balance Sheet 2
Statement of Operations and Accumulated Deficit 3
Statement of Stockholders' Equity 4
Statement of Cash Flows 5
Notes to Financial Statements 6-12
</TABLE>
<PAGE> 229
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANT
To The Board of Directors and Stockholders of
ZULU MEDIA, INC.
We have audited the balance sheet of ZULU MEDIA, INC. as of December 31, 1997
and the related statement of income and accumulated deficit, shareholders'
equity, and cash flows for the year then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit. Those statements
were audited by other auditors whose report has been furnished to us, and our
opinion, insofar as it relates to the amounts included is based solely on the
report of the other auditors.
We conducted our audit 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 audit and the report of the other auditors provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of ZULU MEDIA, INC. as of December
31, 1997, and the results of its operations, shareholders' equity and its cash
flows for the year then ended in conformity with generally accepted accounting
principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 11 to
the consolidated financial statements, the Company has suffered recurring losses
from operations, has a net capital deficiency and is delinquent on payment of
creditor liabilities including payroll taxes. These matters raise substantial
doubt about the Company's ability to continue as a going concern. The
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
Brad B. Haynes
Certified Public Accountant
10877 Wilshire Boulevard
Suite 603
Los Angeles, CA 90024
July 20, 1998
1
<PAGE> 230
ZULU MEDIA, INC.
(A Delaware corporation)
BALANCE SHEET
DECEMBER 31, 1997
ASSETS
<TABLE>
<S> <C> <C>
CURRENT ASSETS
Cash 575,235
Accounts receivable net of allowance for doubtful
accounts 1997 - 117,738 and 1996 - 307,470 3,741,024
Marketable securities 820,820
Prepaid expenses 98,146
-----------
Total Current Assets 5,235,225
PROPERTY AND EQUIPMENT (Net) 1,845,066
OTHER ASSETS
Deposits 111,130
-----------
TOTAL ASSETS 7,191,421
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable 6,504,466
Payroll and other related liabilities 1,854,003
Payable to related party 2,435,000
Deferred revenues, current portion 311,370
-----------
Total Current Liabilities 11,104,839
-----------
TOTAL LIABILITIES 11,104,839
STOCKHOLDERS' EQUITY
Common Stock, 1 par value
authorized, 1,000,000 shares issued
and outstanding shares 862,529 - 1997
1,000 shares - 1996 862,529
Additional paid in capital 26,977,471
Unrealized gain on marketable securities 820,820
Accumulated deficit (32,574,238)
-----------
Total Accumulated Deficit (3,913,418)
-----------
TOTAL LIABILITIES AND
ACCUMULATED DEFICIT 7,191,421
===========
</TABLE>
See accompanying notes
2
<PAGE> 231
ZULU MEDIA, INC.
(A Delaware Corporation)
STATEMENT OF OPERATIONS AND ACCUMULATED DEFICIT
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
<S> <C> <C>
GROSS SALES VOLUME 38,218,566
===========
REVENUES 6,370,634
COST OF SALES 6,250,711
-----------
GROSS PROFIT 119,923
OPERATING EXPENSES
Marketing 2,851,345
Selling 6,871,984
General and administrative 8,309,957
Amortization and write-off of goodwill 9,516,096
-----------
Total Operating Expenses 27,547,382
-----------
LOSS BEFORE INCOME TAXES (27,427,459)
PROVISION FOR INCOME TAXES 0
NET LOSS (27,427,459)
ACCUMULATED DEFICIT DECEMBER 31, 1996 (5,146,779)
ACCUMULATED DEFICIT - DECEMBER 31, 1997 (32,574,238)
-----------
</TABLE>
See accompanying notes
3
<PAGE> 232
ZULU MEDIA, INC.
(A Delaware Corporation)
STATEMENT OF STOCKHOLDER EQUITY
FOR THE YEAR ENDED DECEMBER 31,1997
<TABLE>
<CAPTION>
SERIES A SERIES B
PREFERRED STOCK PREFERRED STOCK COMMON STOCK
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Balance December 31, 1996 705 705 295 295 1,000 1,000
Additional capital
contribution from parent -- -- -- -- -- --
Unrealized gain on
marketable securities -- -- -- -- -- --
Stock split (705) (705) (295) (295) 861,529 861,529
Acquisition of assets of
Webwide Media PTY, LTD -- -- -- -- -- --
Loss for year ended
December 31, 1997 -- -- -- -- -- --
----------- ----------- ----------- ----------- ----------- -----------
Balance December 31, 1997 -- -- -- -- 862,529 862,529
=========== ===========
<CAPTION>
ADDITIONAL UNREALIZED GAIN
PAID-IN ON MARKETABLE ACCUMULATED
CAPITAL SECURITIES DEFICIT TOTAL
---------- --------------- ----------- ---------
<S> <C> <C> <C> <C>
Balance December 31, 1996 11,603,000 -- (5,146,779) 6,458,221
Additional capital
contribution from parent 14,235,000 -- -- 14,235,000
Unrealized gain on
marketable securities -- 820,820 -- 820,820
Stock split (860,529) -- -- --
Acquisition of assets of
Webwide Media PTY, LTD 2,000,000 -- -- 2,000,000
Loss for year ended
December 31, 1997 -- -- (27,427,459) (27,427,459)
----------- ----------- ----------- -----------
Balance December 31, 1997 26,977,471 820,820 (32,574,238) (3,913,418)
=========== =========== =========== ===========
</TABLE>
See accompanying notes
4
<PAGE> 233
ZULU MEDIA, INC.
(A Delaware Corporation)
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss (27,427,460)
Adjustments to reconcile to net cash:
Depreciation 667,353
Amortization and write-off of goodwill 9,516,096
Provision for bad debts 189,732
Decrease in accounts receivable 2,721,646
Decrease in employee advances and other receivables 200,571
Decrease in prepaid expense 19,346
Increase in deposits (42,282)
Increase in accounts payable 138,597
Increase in payroll and other accrued liabilities 158,618
Increase in payable to related party 1,169,271
Decrease in deferred revenues (230,587)
Total Adjustments 14,508,361
-----------
NET CASH USED IN OPERATING ACTIVITIES (12,919,099)
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of property and equipment (1,092,559)
NET CASH USED IN INVESTING ACTIVITIES (1,092,559)
CASH FLOWS FROM FINANCING ACTIVITIES
Additional capital contribution from parent 14,235,000
NET CASH PROVIDED BY FINANCING ACTIVITIES 14,235,000
-----------
NET CASH PROVIDED BY ALL ACTIVITIES 223,342
CASH - December 31, 1996 351,893
-----------
CASH - December 31, 1997 575,235
-----------
</TABLE>
See accompanying notes
5
<PAGE> 234
ZULU MEDIA. INC.
(A Delaware Corporation)
NOTES TO FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1997
1. ORGANIZATION AND DESCRIPTION OF BUSINESS ACTIVITIES
ZULU MEDIA, INC. (the Company), a Delaware corporation, is a
diversified interactive media sales, marketing and communications
company. Business activities of the Company include the sale of
interactive multimedia advertising and production of interactive
promotions.
The Company was formed on June 19, 1996 by SOFTBANK Holding Inc.
(SOFTBANK) with authorized capital consisting of 1,000 shares of
Preferred Stock (705 Series A voting shares and 295 Series B non-voting
shares) and 1 ,000 shares of Common Stock.
On June 19, 1996, SOFTBANK contributed 5,750,000 in cash and committed
to provide as a capital contribution additional cash, as required, in
exchange for 705 shares of Series A Preferred Stock and 705 shares of
Common Stock of the Company.
SoftBank Interactive Marketing, Inc. had a name change to Zulu Media,
Inc. on March 24, 1998.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. Revenue Recognition
Revenues are derived from the performance of services, sale
and related placement of advertisements on internet sites and
production of trade shows. Revenues are recognized as services
are performed, on the run-date of an advertisement or when a
trade show commences.
In accordance with certain agreements, billings are submitted
to advertisers on behalf of client web sites. The gross sales
volume are recorded as accounts receivable and an accrual is
recorded for the amount due to the client web site in
accordance with the terms of the agreement. A deferred
liability has been established to account for timing
differences between advertising billings and the period in
which an advertisement runs. The liability for the year ended
December 31, 1997 was approximately 87,000. The remainder of
the Deferred Revenue as of December 31, 1997 is attributed to
a license agreement with a related party. (See note 5. Related
Party Transaction).
6
<PAGE> 235
ZULU MEDIA, INC.
(A Delaware Corporation)
NOTES TO FINANCIAL STATEMENTS CONTINUED
FOR THE YEAR ENDED DECEMBER 31, 1997
b. Property and Equipment
Property and equipment acquired from IMI are stated at fair
market value as of the acquisition date. Property and
equipment acquired subsequent to June 19, 1996 are stated at
cost. Depreciation is computed on the straight-line basis over
the estimated useful lives of the related assets which is
estimated to be three years. Leasehold improvements are
amortized over the lesser of the term of the lease or the
useful life of the related improvement.
c. Goodwill
Goodwill is amortized using the straight-line method over 10
years. The carrying value of the goodwill is periodically
reviewed by the Company based on the expected future
undiscounted operating cash flows of the Company. Based upon
its most recent analysis, the Company believes that no future
value of goodwill exists as of December 31, 1997.
d. Income Taxes
The Company accounts for income taxes in accordance with
Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes." Under this method, deferred tax
assets and liabilities are determined based on differences
between the financial reporting and tax bases of assets and
liabilities and are measured using the enacted tax rates and
laws that will be in effect when the differences are expected
to reverse.
e. Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported
amounts of assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from
those estimates.
f. New Accounting Standards
Statement of Financial Accounting Standards No.121,
"Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed of" (SFAS No.121) establishes
guidelines regarding when impairment losses on long-lived
assets, which include plant and equipment, and certain
identifiable intangible assets, should be recognized and how
impairment losses should be measured. The adoption resulted in
an impairment write down of 8,412,765 of goodwill and has been
recorded in the Company's current year operations.
7
<PAGE> 236
ZULU MEDIA, INC.
(A Delaware Corporation)
NOTES TO FINANCIAL STATEMENTS CONTINUED
FOR THE YEAR ENDED DECEMBER 31, 1997
3. ACQUISITION
On June 19, 1996, the Company acquired the business and assets of
Interactive Marketing Inc. (IMI) and Network 1.0 for consideration of
5,750,000 in cash, 295 shares of Series B Preferred Stock and 295
shares of Common Stock of the Company.
The acquisition has been accounted for using the purchase method of
accounting. The consideration paid, acquisition costs and the fair
market value of the net liabilities assumed in excess of the estimated
fair market value of assets ordained have been assigned to goodwill.
In connection with the acquisition of IMI, the Company's Board of
Directors authorized the closure of two IMI divisions. The Company
accrued 500,000 for liabilities relating to severance and other exit
costs, with a corresponding increase in goodwill.
The net purchase price has been allocated as follows:
<TABLE>
<S> <C>
Goodwill 8,000,717
Current assets 2,324,821
Fixed assets 406,662
Other assets 44,149
Current liabilities (5,029,193)
Acquisition costs (250,000)
----------
5,497,156
Net cash acquired 252,844
5,750,000
---------
</TABLE>
4. CONCENTRATION OF CREDIT RISK
A concentration of credit risk may exist with respect to trade
receivables. Sales to date have been primarily to customers located in
the United States. The Company provides unsecured credit to its
customers in the normal course of business. Credit evaluations are
performed on the financial condition of customers and a reserve has
been established for accounts which may not be collectible.
8
<PAGE> 237
ZULU MEDIA, INC.
(A Delaware Corporation)
NOTES TO FINANCIAL STATEMENTS CONTINUED
FOR THE YEAR ENDED DECEMBER 31, 1997
5. RELATED PARTY TRANSACTIONS
The Company sells advertising on behalf of a related party. In
connection with the sales representation agreement, the related party
advanced the Company 1,250,000 to be offset against earned sales
revenues from the sale of advertisements made on their behalf. As of
December 31, 1997, the Company had earned 1,250,000 of such sales
revenue, which have been fully offset against the advances in the
accompanying balance sheet.
The Company's group medical, dental and related benefits programs are
provided by a related party. The related costs of 1,169,271 for the
year ended December 31, 1997 have been charged to the Company and such
amounts are expected to be repaid to the related party during 1998.
The Company has entered into a license agreement with a related
company. The Company has received a license fee of 450,000 as
consideration for granting the related company the exclusive right to
produce a certain trade show worldwide through December 31, 1998. The
license fee will be amortized over the term of the agreement and has
been included in Deferred Revenues in the accompanying balance sheet.
6. INCOME TAXES
As of December 31, 1997, the Company had net operating loss
carryforwards for federal and state income tax purposes of
approximately 32,724,000. No benefit has been recorded in the financial
statements due to the uncertainty of future net income. The federal
operating loss carryforwards begin to expire in 2011 and the state
operating loss carryforwards begin to expire in 2001.
Also, the losses will have a significant diminution because of a change
in ownership as promulgated by Internal Revenue Code Section 382.
9
<PAGE> 238
ZULU MEDIA, INC.
(A Delaware Corporation)
NOTES TO FINANCIAL STATEMENTS CONTINUED
FOR THE YEAR ENDED DECEMBER 31, 1997
7. MARKETABLE SECURITIES
At December 31, 1997, the Company held 11,853 available for sale shares
of Yahoo Stock with a closing bid price of 69.25 for a total asset
value of 820,820.
8. PROPERTY AND EQUIPMENT
<TABLE>
<S> <C>
Computer equipment 941,651
Network operating centers 1,038,389
Furniture and equipment 480,834
Leasehold improvement 114,258
---------
Total cost 2,575,132
Less accumulated depreciation 730,066
---------
PROPERTY AND EQUIPMENT NET 1,845,066
=========
</TABLE>
Assets were pledged as security for loans made to the Company (Uniform
Commercial Code Filing.)
9.
10. GROSS SALES VOLUME
Gross sales volume represents the volume of business generated to
produce the revenues. The gross sales volume of 38,218,566 produced
revenues of 6,220,857 for the year ended December 31, 1997.
10
<PAGE> 239
ZULU MEDIA, INC.
(A Delaware Corporation)
NOTES TO FINANCIAL STATEMENTS continued
FOR THE YEAR ENDED DECEMBER 31, 1997
11. GOING CONCERN
The Company has suffered recurring losses from operations, has a net
loss of 27,577,236 for the year ended December 31, 1997. Also at
December 31, 1997, the Company's working capital position was a deficit
of 6,019,391. These conditions raise substantial doubt about the
Company's ability to continue as a going concern. The accompanying
financial statements do not include any adjustments that might result
from the outcome of this uncertainty.
The Company has been able to continue operations through the funding
from private investors, cash inflows from operations, and the extension
of terms from creditors. Continued operations depend upon the Company
continuing to obtain financing for its activities. Management's plan
for the Company includes raising additional working capital through
debt and/or equity financing until profitable operations and positive
cash flow are achieved and maintained, which management believes are in
the near future. However, no assurances can be given that the Company
will be successful in raising additional capital, there is no assurance
that the Company will achieve profitability or positive cash flow. If
the Company is unable to obtain adequate additional financing,
management will be required to curtail the operations of the Company.
12. SUBSEQUENT EVENTS
In 1998, Yahoo Stock (Marketable Securities) were sold for 749,349
resulting in a loss of approximately 71,000.
In 1998, a settlement was effected with Netscape whereby the accounts
receivable due from Netscape (697,764) would be offset by the payable
due to Netscape (1,456,564). The net effect of the settlement was the
mutual dismissal of financial obligations to each other.
Zulu Media, Inc. was sold by SoftBank Holding, Inc. (the parent
company) to MediaBank, Inc., an intermediary for Netmaster, Inc. for
ten million two hundred and nine thousand dollars (10,209,000) in a
common stock purchase. The purchase price was paid to SoftBank
Holdings, Inc. with 10,209 shares of Series C redeemable preferred
stock of Netmaster, Inc. The Netmaster stock shall be redeemable in
three equal installments of 3,403 shares on or before each of December
31, 1999. December 31, 2001 and December 31, 2002 (each referred to as
redemption dates) by MediaBank delivery to SoftBank of 1, 000 cash for
each share of Netmaster stock or an aggregate of three million four
hundred and three thousand dollars (3,403,000) on or before December
31, 1999, December 31, 2001, and December 31, 2002. MediaBank hereby
irrevocably guarantees jointly and severally Netmaster's obligation to
redeem the Netmaster stock as set forth above.
11
<PAGE> 240
ZULU MEDIA, INC.
(A DELAWARE CORPORATION)
NOTES TO FINANCIAL STATEMENTS CONTINUED
FOR THE YEAR ENDED DECEMBER 31, 1997
13. COMMITMENTS AND CONTINGENCIES
The Company leases its operating facilities under non-cancelable
operating leases which expire at various dates through 2001. Future
minimum lease payments under such operating leases are as follows:
<TABLE>
<S> <C>
1998 449,750
1999 461,750
2000 407,400
2001 307,500
---------
1,626,400
=========
</TABLE>
Rental expense for the year ended December 31, 1997 was approximately
566,000.
In the normal course of business the Company is involved in various
lawsuits. Management is of the opinion that any liability or loss in
excess of insurance coverage resulting from such litigation will not
have a material adverse effect on the financial statements.
12
<PAGE> 241
APPENDIX L
Zulu Media, Inc.
(Formerly SOFTBANK Interactive Marketing Inc.)
REPORT AND FINANCIAL STATEMENTS
DECEMBER 31, 1996
<PAGE> 242
[PRICE WATERHOUSE LLP LETTERHEAD]
REPORT OF INDEPENDENT ACCOUNTANTS
February 21, 1997
To the Board of Directors and Stockholders of
SOFTBANK Interactive Marketing Inc.
In our opinion, the accompanying balance sheet and the related statements of
operations, stockholders' equity and cash flows present fairly, in all material
respects, the financial position of SOFTBANK Interactive Marketing Inc. at
December 31, 1996, and the results of its operations and its cash flows for the
period from June 19, 1996 (inception) through December 31, 1996, in conformity
with generally accepted accounting principles. These financial statements are
the responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements based on our audit. We
conducted our audit of these statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audit provides a reasonable basis for the opinion expressed above.
Price Waterhouse LLP
<PAGE> 243
SOFTBANK INTERACTIVE MARKETING INC.
BALANCE SHEET
DECEMBER 31, 1996
<TABLE>
<S> <C>
ASSETS
CURRENT ASSETS
Cash............................................................. $ 351,893
Accounts receivable, net of allowance for doubtful
accounts of $307,470........................................... 6,672,333
Employee advances and other receivables.......................... 200,571
Prepaid expenses................................................. 117,492
-----------
7,342,289
-----------
PROPERTY AND EQUIPMENT
Furniture and equipment.......................................... 433,033
Computer equipment............................................... 948,547
Leasehold improvements........................................... 124,163
-----------
1,505,743
Less: Accumulated depreciation................................... (190,400)
-----------
1,315,343
-----------
OTHER ASSETS
Goodwill, net.................................................... 7,600,681
Deposits......................................................... 68,848
-----------
7,669,529
-----------
$16,327,161
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable................................................. $ 6,365,869
Payroll and other accrued liabilities............................ 1,695,385
Payable to related parties (Note 5).............................. 1,265,729
Deferred revenues, current portion............................... 317,761
-----------
9,644,744
-----------
DEFERRED REVENUES, NON-CURRENT PORTION 224,196
-----------
COMMITMENTS AND CONTINGENCIES (Note 7)
STOCKHOLDERS' EQUITY
Preferred stock, Series A, $1.00 par value -
Authorized, issued and outstanding - 705 voting shares......... 705
Preferred stock, Series B, $1.00 par value -
Authorized, issued and outstanding - 295 non-voting shares..... 295
Common stock, $1.00 par value -
Authorized, issued and outstanding - 1,000 shares.............. 1,000
Additional paid-in capital....................................... 11,603,000
Accumulated deficit.............................................. (5,146,779)
-----------
6,458,221
-----------
$16,327,161
===========
</TABLE>
The accompanying notes to financial statements
are an integral part of these statements.
<PAGE> 244
SOFTBANK INTERACTIVE MARKETING INC.
STATEMENT OF OPERATIONS
FOR THE PERIOD FROM JUNE 19, 1996 (INCEPTION) - DECEMBER 31, 1996
NET REVENUES.................................................... $ 4,140,127
COST OF SALES................................................... 823,937
-----------
Gross Profit............................................ 3,316,190
-----------
OPERATING EXPENSES
Marketing..................................................... 1,426,894
Selling....................................................... 4,023,342
General and administrative.................................... 2,612,697
Amortization of goodwill...................................... 400,036
-----------
Total Costs and Expenses................................ 8,462,969
-----------
Loss before income taxes................................ (5,146,779)
PROVISION FOR INCOME TAXES
-----------
NET LOSS................................................ $(5,146,779)
===========
The accompanying notes to financial statements are an integral part of these
statements.
<PAGE> 245
SOFTBANK INTERACTIVE MARKETING INC.
STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM JUNE 19, 1996 (INCEPTION) - DECEMBER 31, 1996
<TABLE>
<CAPTION>
Series A Series B
Preferred Stock Preferred Stock Common Stock Additional
--------------- --------------- --------------- Paid-in Accumulated
Shares Amount Shares Amount Shares Amount Capital Deficit Total
------ ------ ------ ------ ------ ------ ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Issuance of stock
in connection with
the formation of the
Company and the
acquisition of
IMI and Network 1.0 705 $705 295 $295 1,000 $1,000 $ 5,748,000 $ -- $ 5,750,000
Additional capital
contribution from
parent -- -- -- -- -- -- 5,855,000 -- 5,855,000
Loss for period from
June 19, 1996
(inception) to
December 31, 1996 -- -- -- -- -- -- -- (5,146,779) (5,146,779)
------ ------ ------ ------ ------ ------ ----------- ----------- -----------
705 $705 295 $295 1,000 $1,000 $11,603,000 $(5,146,779) $ 6,458,221
====== ====== ====== ====== ====== ====== =========== =========== ===========
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
<PAGE> 246
SOFTBANK INTERACTIVE MARKETING INC.
STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM JUNE 19, 1996 (INCEPTION) -- DECEMBER 31, 1996
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(5,146,779)
Adjustments to reconcile net loss to
net cash used in operating activities
Depreciation 190,400
Amortization of goodwill 400,036
Allowance for doubtful accounts 307,470
Changes in assets and liabilities, net of acquisitions
Accounts receivable (4,850,603)
Employee advances and other receivables (108,803)
Prepaid expenses (33,397)
Deposits (24,699)
Accounts payable 4,238,617
Payroll and other accrued liabilities 825,715
Payable to related parties (74,271)
Deferred revenues (380,557)
-----------
Net cash used in operating activities (4,656,871)
-----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of Interactive Marketing Inc. (IMI) and
Network 1.0, net of cash acquired (5,497,156)
Acquisition of property and equipment (1,099,080)
-----------
Net cash used in investing activities (6,596,236)
===========
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of stock 5,750,000
Additional capital contribution from parent 5,855,000
-----------
Net cash provided by financing activities 11,605,000
-----------
NET INCREASE IN CASH 351,893
CASH, BEGINNING OF PERIOD
-----------
CASH, END OF PERIOD $ 351,893
===========
</TABLE>
The accompanying notes to financial statements are an integral part
of these statements.
<PAGE> 247
SOFTBANK INTERACTIVE MARKETING INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
1. ORGANIZATION AND DESCRIPTION OF BUSINESS ACTIVITIES
SOFTBANK Interactive Marketing Inc. (the Company), a Delaware corporation,
is a diversified interactive media sales, marketing and communications
company. Business activities of the Company include the sale of
interactive multimedia advertising and production of interactive
promotions.
The Company was formed on June 19, 1996 by SOFTBANK Holdings Inc.
(SOFTBANK) with authorized capital consisting of 1,000 shares of Preferred
Stock (705 Series A voting shares and 295 Series B non-voting shares) and
1,000 shares of Common Stock.
On June 19, 1996, SOFTBANK contributed $5,750,000 in cash and committed to
provide as a capital contribution additional cash, as required, in
exchange for 705 shares of Series A Preferred Stock and 705 shares of
Common Stock of the Company.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. REVENUE RECOGNITION
Revenues are derived from the performance of services, sale and related
placement of advertisements on internet sites and production of trade
shows. Revenues are recognized as services are performed, on the run-date
of an advertisement or when a trade show commences.
In accordance with certain agreements, billings are submitted to
advertisers on behalf of client web sites. The gross billings are recorded
as accounts receivable and an accrual is recorded for the amount due to
the client web site in accordance with the terms of the agreement. A
deferred liability has been established to account for timing differences
between advertising billings and the period in which an advertisement
runs. Such liability in the amount of approximately $141,000 has been
recorded as Deferred Revenues in the accompanying balance sheet. The
remainder of the Deferred Revenues as of December 31, 1996 is attributed
to a license agreement with a related party (see note 5. Related Party
Transactions).
b. PROPERTY AND EQUIPMENT
Property and equipment acquired from IMI are stated at fair market value
as of the acquisition date. Property and equipment acquired subsequent to
June 19, 1996 are stated at cost. Depreciation is computed on the
straight-line basis over the estimated useful lives of the related assets
which is estimated to be three years. Leasehold improvements are
amortized over the lesser of the term of the lease or the useful life of
the related improvement.
1
<PAGE> 248
c. GOODWILL
Goodwill is amortized using the straight-line method over 10 years. The
carrying value of the goodwill is periodically reviewed by the Company
based on the expected future undiscounted operating cash flows of the
Company. Based upon its most recent analysis, the Company believes that no
material impairment of goodwill exists as of December 31, 1996.
d. INCOME TAXES
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes."
Under this method, deferred tax assets and liabilities are determined
based on differences between the financial reporting and tax bases of
assets and liabilities and are measured using the enacted tax rates and
laws that will be in effect when the differences are expected to reverse.
e. USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ from
those estimates.
3. ACQUISITION
On June 19, 1996, the Company acquired the business and assets of
Interactive Marketing Inc. (IMI) and Network 1.0 for consideration of
$5,750,000 in cash, 295 shares of Series B Preferred Stock and 295 shares
of Common Stock of the Company.
The acquisition has been accounted for using the purchase method of
accounting. The consideration paid, acquisition costs and the fair market
value of the net liabilities assumed have been assigned to goodwill. The
financial statements contained herein reflect the operations of the
Company from June 19, 1996 through December 31, 1996.
In connection with the acquisition of IMI, the Company's Board of
Directors authorized the closure of two IMI divisions. The Company accrued
$500,000 for liabilities relating to severance and other exit costs, with
a corresponding increase in goodwill.
The net purchase price has been allocated as follows:
<TABLE>
<S> <C>
Goodwill.............................................$ 8,000,717
Current assets....................................... 2,324,821
Fixed assets......................................... 406,662
Other assets......................................... 44,149
Current liabilities.................................. (5,029,193)
Acquisition costs.................................... (250,000)
-----------
5,497,156
Net cash acquired.................................... 252,844
-----------
$ 5,750,000
===========
</TABLE>
2
<PAGE> 249
4. CONCENTRATION OF CREDIT RISK
A concentration of credit risk may exist with respect to trade
receivables. Sales to date have been primarily to customers located in
the United States. The Company provides unsecured credit to its
customers in the normal course of business. Credit evaluations are
performed on the financial condition of customers and a reserve has
been established for accounts which may not be collectible.
The Company has a customer whose revenues represent approximately 40
percent of the Company's net revenues for the period from June 19, 1996
(inception) to December 31, 1996. Effective January 1, 1997, the
agreement with this customer has not been renewed. The Company does not
expect this to have an adverse impact on 1997 operations.
5. RELATED PARTY TRANSACTIONS
The Company sells advertising on behalf of a related party. In
connection with the sales representation agreement, the related party
advanced the Company $1,250,000 to be offset against earned sales
commissions from the sale of advertisements made on their behalf. As of
December 31, 1996, the Company had earned $628,459 of such sales
commissions, which have been offset against the advances in the
accompanying balance sheet. It is expected that the remaining advance
of $621,541 will be fully offset against sales commissions earned
during 1997.
The Company's group medical, dental and related benefits programs are
provided by a related party. The related costs of $644,188 for the
period from July 1, 1996 to December 31, 1996 have been charged to the
Company and such amounts are expected to be repaid to the related party
during 1997.
The Company has entered into a license agreement with a related
company. The Company has received a license fee of $450,000 as
consideration for granting the related company the exclusive right to
produce a certain trade show worldwide through December 31, 1998. The
license fee will be amortized over the term of the agreement and has
been included in Deferred Revenues in the accompanying balance sheet.
6. INCOME TAXES
As of December 31, 1996, the Company had net operating loss
carryforwards for federal and state income tax purposes totaling
approximately $5,147,000. No benefit has been recorded in the financial
statements due to the uncertainty of future net income. The federal
operating loss carryforwards begin to expire in 2011 and the state
operating loss carryforwards begin to expire in 2001.
3
<PAGE> 250
7. COMMITMENTS AND CONTINGENCIES
The Company leases its operating facilities under non-cancelable operating
leases which expire at various dates through 2001. Future minimum lease
payments under such operating leases are as follows:
<TABLE>
<CAPTION>
<S> <C>
1997 $ 499,200
1998 449,750
1999 461,750
2000 407,400
2001 307,500
----------
$2,125,600
==========
</TABLE>
Rental expense for the period from June 19, 1996 (inception) to December 31,
1996 related to these leases was approximately $271,500.
4
<PAGE> 251
APPENDIX M
AMENDED AND RESTATED
1992 STOCK PLAN
OF
ENHANCED SERVICES COMPANY, INC.
Section 1. PURPOSE OF PLAN
The purpose of this amended and restated 1992 Stock Plan ("Plan") of
Enhanced Services Company, Inc., a Colorado corporation (the "Company"), is to
enable the Company and its subsidiaries, parent entities or successors to
promote the growth and profitability of the Company by providing, through the
granting of Awards (as defined in this Plan), incentives to attract talented
persons to positions with the Companies, to retain such persons and to motivate
them to use their best efforts on behalf of the Company and to enable the
Company to attract, retain and motivate its nonemployee directors and to further
align their interests with those of the stockholders of the Company by providing
for or increasing the proprietary interest of such directors in the Company. The
Plan is being amended hereby to increase the numbers of shares of Common Stock
available for grant to 6,000,000, to remove limitations on the number of options
that can be granted in any year to an employee, to incorporate changes that
accommodate current tax and other considerations and specify grants to be made
to non-employee directors and to restate other provisions of the Plan.
Section 2. PERSONS ELIGIBLE UNDER PLAN
Any employee, non-employee director, independent contractor or consultant
of the Company or any of its subsidiaries, parent entities or successors (each,
a "Participant") shall be eligible to be considered for the grant of Awards
under this Plan.
Section 3. AWARDS
(a) The Administrator (as hereinafter defined), on behalf of the Company,
is authorized under this Plan to enter into any type of arrangement with a
Participant that is not inconsistent with the provisions of this Plan and that,
by its terms, involves or might involve the issuance of (i) shares of Common
Stock of the Company ("Common Stock"), or (ii) a Derivative Security (as such
term is defined in Rule 16a-1 promulgated under the Securities Exchange Act of
1934, as amended (the "Exchange Act"), as such Rule may be amended from time to
time) with an exercise or conversion privilege at a price related to the Common
Stock or with a value derived from the value of the Common Stock. The entering
into of any such arrangement is referred to herein as the "grant" of an "Award."
(b) Awards are not restricted to any specified form or structure and may
include, without limitation, sales or bonuses of stock, restricted stock, stock
options, reload stock options, stock purchase warrants, other rights to acquire
stock, securities convertible into or redeemable for stock, stock appreciation
rights, limited stock appreciation rights, phantom stock, dividend equivalents,
performance units or performance shares, and an Award may consist of one such
security or benefit, or two or more of them in tandem or in the alternative.
(c) Common Stock and Derivative Securities may be issued pursuant to an
Award for any lawful consideration as determined by the Administrator,
including, without limitation, services rendered by the recipient of such Award.
(d) Subject to the provisions of this Plan, the Administrator, in its sole
and absolute discretion, shall determine all of the terms and conditions of each
Award granted under this Plan, which terms and conditions may include, among
other things:
1
<PAGE> 252
(i) a provision permitting the recipient of such Award, including
any recipient who is a director or officer of the Company, to pay the
purchase price of the Common Stock or Derivative Securities or other
property issuable pursuant to such Award, or such recipient's tax
withholding obligation with respect to such issuance, in whole or in part,
by any one or more of the following:
(A) the delivery of cash;
(B) the delivery of previously owned shares of capital stock
of the Company (including "pyramiding") or other property, provided
that the Company is not then prohibited from purchasing or acquiring
shares of its capital stock or such other property,
(C) a reduction in the amount of Common Stock or Derivative
Securities or other property otherwise issuable pursuant to such
Award, or
(D) the delivery of a promissory note, the terms and
conditions of which shall be determined by the Administrator;
(ii) a provision conditioning or accelerating the receipt of
benefits pursuant to such Award, either automatically or in the discretion
of the Administrator, upon the occurrence of specified events, including,
without limitation, a change of control of the Company, an acquisition of
a specified percentage of the voting power of the Company, the dissolution
or liquidation of the Company, a sale of substantially all of the property
and assets of the Company or an event of the type described in Section 8
hereof; or
(iii) a provision required in order for such Award to qualify as an
incentive stock option (an "Incentive Stock Option") under Section 422 of
the Internal Revenue Code ("Code"), provided that the recipient of such
Award is eligible under the Code to receive an Incentive Stock Option.
Stock options which do not so qualify are referred to as "Nonqualified
Stock Options."
Section 4. NONEMPLOYEE DIRECTOR OPTIONS
(a) Each person who becomes a nonemployee director of the Company
("Nonemployee Director") shall automatically be granted, upon becoming a
Nonemployee Director, an Award to purchase 100,000 shares of Common Stock. Each
year, on the first business day following the date of the annual meeting of
stockholders of the Company, or any adjournment thereof, at which directors of
the Company are elected, each Nonemployee Director shall automatically be
granted an Award to purchase an additional 2,000 shares of Common Stock.
(b) If, on any date upon which an Award is to be automatically granted
pursuant to this Section 4 (a "Date of Grant"), the number of shares of Common
Stock remaining available for option under this Plan is insufficient for the
grant to each Nonemployee Director of an Award to purchase the entire number of
shares of Common Stock specified in this Section 4, then an Award to purchase a
proportionate amount of such available number of shares of Common Stock(rounded
to the nearest whole share) shall be granted to each Nonemployee Director on
such date and the remaining Awards shall be granted when shares of Common Stock
become available.
(c) Each Award granted under this Section 4 shall be exercisable in full
upon the Date of Grant of such Award.
(d) Each Award granted under this Section 4 shall expire upon the first to
occur of the following:
(i) The second anniversary of the date upon which the optionee shall
cease to be a Nonemployee Director; or
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(ii) The tenth anniversary of the Date of Grant of such Award.
(e) Each Award to a Nonemployee Director shall have an exercise price
equal to the greater of (i) the aggregate Fair Market Value on the Date of Grant
of such option of the shares of Common Stock subject thereto or (ii) the
aggregate par value of such shares of Common Stock on such date.
(f) Payment of the exercise price of any Nonemployee Director Award and
the optionee's tax withholding obligation, if any, with respect to such
Nonemployee Stock Award shall be made in full in cash concurrently with the
exercise of such Nonemployee Director Award; provided, however, that the payment
of such exercise price and/or tax withholding may instead be made, in whole or
in part, by any one or more of the following:
(i) the delivery of previously owned shares of capital stock of the
Company, provided that the Company is not then prohibited from purchasing
or acquiring shares of its capital stock or such other property; or
(ii) the delivery, concurrently with such exercise and in accordance
with Section 220.3(e)(4) of Regulation T promulgated under the Securities
Exchange Act, of 1934 of a properly executed exercise notice for such
Nonemployee Director Award and irrevocable instructions to a broker
promptly to deliver to the Company a specified dollar amount of the
proceeds of a sale of or a loan secured by the shares of Common Stock
issuable upon exercise of such Nonemployee Director Award.
(g) Each Nonemployee Director Award shall be nontransferable by the
optionee other than by will or the laws of descent and distribution, and shall
be exercisable during the optionee's lifetime only by the optionee or the
optionee's guardian or legal representative.
(h) Nonemployee Director Options are not intended to qualify as Incentive
Stock Options.
Section 5. STOCK SUBJECT TO PLAN
(a) The aggregate number of shares of Common Stock that may be issued or
issuable pursuant to all Awards (including Incentive Stock Options, Nonqualified
Stock Options and other Awards) granted under this Plan shall not exceed six
million (6,000,000) shares of Common Stock and all of which shall be subject to
adjustment as provided in Section 8 hereof.
(b) For purposes of Section 5(a) hereof, the aggregate number of shares of
Common Stock issued and issuable pursuant to all Awards granted under this Plan
shall at any time be deemed to be equal to the sum of the following:
(i) the number shares of Common Stock that were issued prior to such
time pursuant to Awards granted under this Plan, other than Common Stock
that was subsequently reacquired by the Company pursuant to the terms and
conditions of such Awards and with respect to which the holder thereof
received no benefits of ownership such as dividends; plus
(ii) the number of shares of Common Stock that were otherwise
issuable prior to such time pursuant to Awards granted under this Plan,
but that were withheld by the Company as payment of the purchase price of
the Common Stock issued pursuant to such Awards or as payment of the
recipient's tax withholding obligation with respect to such issuance; plus
(iii) the maximum number of shares of Common Stock issuable at or
after such time pursuant to Awards granted under this Plan prior to such
time.
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(iv) if Awards granted under the Plan shall for any reason
terminate, lapse, be forfeited or canceled, or expire without being
exercised, the Shares subject to such unexercised Awards shall again be
available for the granting of Awards under the Plan and shall be included
in the number of Shares which may be optioned and sold under the Plan.
(c) In the event any Participant is deemed to be a "covered Executive"
pursuant to Section 162(m) of the Code and the exercise all or a portion of the
Awards would preclude the Company from taking full advantage of the compensation
deductions arising from the grant of such Awards, together with all other
taxable compensation payable to Participant by the Company, by virtue of the
limitations imposed by Section 162(m) of the Code, then the number of shares as
to which Awards shall be exercisable during the applicable tax year shall be
reduced to such number as would allow the Company to fully deduct the
compensation payable to Participant.
(d) The Company, during the term of this Plan, will at all times reserve
and keep available such number of Shares as shall equal the number of Shares
subject to then-outstanding options under this Plan.
Section 6. DURATION OF PLAN
No Awards shall be granted under this Plan after March 1, 2006. Common
Stock may be issued after March 1, 2006 (the "Termination Date") pursuant to
Awards granted prior to such date.
Section 7. ADMINISTRATION OF PLAN
(a) This Plan shall be administered by the Board of Directors or by an
Administrator(the "Administrator") consisting of two or more directors. In the
event that the Company is"publicly held" within the meaning of Section 162(m) of
the Code, then, with respect to any Awards granted at such time and intended to
qualify for the "performance-based compensation" exception in Section 162(m) of
the Code, the Administrator shall, to the extent necessary, consist of two or
more directors each of whom is an "outside director" within the meaning of
Section 162(m) of the Code and such Award shall not be subject to Board
approval.
(b) Subject to the provisions of this Plan, the Administrator shall be
authorized and empowered to do all things necessary or desirable in connection
with the administration of this Plan, including, without limitation, the
following:
(i) adopt, amend and rescind rules and regulations relating to this
Plan;
(ii) determine which persons are Participants and to which of such
Participants, if any, Awards shall be granted hereunder;
(iii) specify the restrictions on the issuance of the Common Stock
underlying the Awards, including applicable securities laws, legends and
other restrictions;
(iv) grant Awards to Participants and determine the terms and
conditions thereof, including but not limited to the number of Common
Stock issuable pursuant thereto, the continuance of Awards after
termination, during leaves of absence, disability and after death, the
extension of terms of exercise on the conversion of Incentive Stock
Options to Nonqualified Options or other Awards;
(v) accelerate the exercisability of an Award or extend the period
during which an owner of an Award may exercise his or her rights under
such Award (but not beyond the Termination Date);
(vi) determine whether, and the extent to which, adjustments are
required pursuant to Section 8 hereof;
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(vii) determine whether to substitute, with the Participant's
consent, Nonqualified Options for outstanding Incentive Stock Options or
other Awards and any such substitution shall not constitute a new grant
for the purposes of this Plan and shall not require a revaluation of the
exercise price for the substituted Nonqualified Stock Option or Award;
(viii) interpret and construe this Plan and the terms and conditions
of all Awards granted hereunder.
(c) In the event that the Fair Market Value of the Incentive Stock Options
which are exercisable by a Participant for the first time during any calendar
year exceeds $100,000, Awards in excess of such amount shall be treated as
Nonqualified Stock Options or as another form of Award. A Participant who is
deemed to own more than ten percent (10%) of the Company's Common Stock as
determined pursuant to Section 426(b) of the Code and who is granted an
Incentive Stock Option shall be limited to a five (5) year exercise period and
the exercise price shall be set at not less than 110% of the Fair Market Value
of the Shares underlying the grant.
(d) The interpretation and construction by the Administrator of any term
or provision of the Plan or of any Award granted under it, including without
limitation any determination of adjustments required pursuant to Section 7
hereof, shall be conclusive, unless otherwise determined by the Board of
Directors of the Company (the "Board") in which event such action by the Board
shall be conclusive, and such interpretation and construction shall be binding
upon all those who hold or are eligible to receive options under the Plan, and
all persons claiming under them. The Board or Administrator may from time to
time adopt rules and regulations for carrying out this Plan and, subject to the
provisions of this Plan, may prescribe the form or forms of the instruments
evidencing any Award granted under this Plan.
(e) The Administrator will provide to each holder annual financial
statements of the Company to the extent required by law and shall administer the
Plan to comply with Rule 16b-3 promulgated under the Exchange Act and the
requirements of the Code and the regulations thereunder.
Section 8. ADJUSTMENTS
If the outstanding securities of any class then subject to this Plan are
increased, decreased or exchanged for or converted into cash, property or a
different number or kind of securities, or if cash, property or securities are
distributed in respect of such outstanding securities, in either case as a
result of a reorganization, merger, consolidation, recapitalization,
restructuring, reclassification, dividend (other than a regular, quarterly cash
dividend) or other distribution, stock split, reverse stock split or the like,
or if substantially all of the property and assets of the Company are sold,
then, unless the terms of such transaction shall provide otherwise, the
Administrator shall make appropriate and proportionate adjustments in (a) the
number and type of shares or other securities or cash or other property that may
be acquired pursuant to Incentive Stock Options and other Awards theretofore
granted under this Plan, (b) the maximum number and type of shares or other
securities that may be issued pursuant to Incentive Stock Options, Nonqualified
Stock Options and other Awards thereafter granted under this Plan, and (c) the
maximum number of Common Shares that may be subject to stock options or stock
appreciation rights granted during any twelve-month period to any Participant,
as provided in Section 5(c) hereof; provided, however, that no adjustment shall
be made to the number of shares of Common Stock that may be acquired pursuant to
outstanding Incentive Stock Options or the maximum number of shares of Common
Stock with respect to which Incentive Stock Options may be granted under this
Plan to the extent such adjustment would result in such options being treated as
other than Incentive Stock Options; provided, further, that no such adjustment
shall be made to the extent the Administrator determines that such adjustment
would result in the disallowance of a federal income tax deduction for
compensation attributable to Awards hereunder by causing such compensation to be
other than "performance-based compensation" within the meaning of Section
162(m)(4)(C) of the Code.
Section 9. OTHER PROVISIONS
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Awards granted under this Plan shall contain such other terms and
provisions which are not inconsistent with this Plan as the Board or
Administrator may authorize, including but not limited to (a) vesting schedules
governing the exercisability of such Awards, (b) provisions for acceleration of
such vesting schedules in certain events, (c) arrangements whereby the Company
may fulfill any tax withholding obligations it may have in connection with the
exercise of such Awards, (d) provisions imposing restrictions upon the
transferability of stock acquired on exercise of such Award, whether required by
this Plan or applicable securities laws or imposed for other reasons, and (e)
provisions regarding the termination or survival of any such Award upon the
optionee's death, retirement or other terminations of employment and the extent,
if any, to which any such Award may be exercised after such event. Incentive
Stock Options shall contain the terms and provisions required of them under the
Code.
Section 10. FINANCIAL ASSISTANCE.
The Company is vested with authority under this Plan to assist any
Participant to whom an Award is granted hereunder (including any director or
officer of the Company or any of its subsidiaries who is also a Participant) in
the payment of the purchase price payable on exercise of that Award, by lending
the amount of such purchase price to such Participant on such terms and at such
rates of interest and upon such security (or unsecured) as shall have been
authorized by or under authority of the Board.
Section 11. LIMITATIONS OF RIGHTS OF PARTICIPANTS
(a) A Participant under this Plan shall not have any interest in the
shares or in any dividends paid thereon, and shall not have any of the rights or
privileges of a shareholder with respect to such shares, until the certificates
therefor have been issued and delivered to him or her.
(b) No shares of Common Stock issuable under the Plan shall be issued and
no certificate therefor delivered unless and until, in the opinion of legal
counsel for the Company, such securities may be issued and delivered without
causing the Company to be in violation of or to incur any liability under any
federal, state or other securities law, or any other requirement of law or of
any regulatory body having jurisdiction over the Company.
(c) The receipt of an option does not give the holder any right to
continued employment by the Company or a subsidiary for any period, nor shall
the granting of the option or the issuance of shares on exercise thereof give
the Company or any subsidiary any right to the continued services of the holder
for any period.
(d) Nothing contained in this Plan shall constitute the granting of an
Award hereunder, which shall occur only pursuant to express authorization by the
Board or the Administrator.
Section 12. AMENDMENT AND TERMINATION
(a) The Board may amend, suspend, alter, or terminate the Plan at any
time. To the extent necessary or desirable to comply with Rule 16b-3, the I.R.C.
or any other applicable law or regulation, the Company shall obtain shareholder
approval of any amendment to the Plan only in such a manner and to such a degree
as required.
(b) The Board may amend the terms of any Award previously granted,
prospectively or retroactively, and may amend the Plan in accordance with the
provisions of Section 12.1; provided however, that unless required by applicable
law, rule or regulation, no amendment of the Plan or of any Award Agreement
shall, without the consent of any Participant holding any such affected Award,
be permitted if such amendment would affect in a material and adverse manner
Awards granted prior to the date of any such amendment.
(c) Awards may be granted in reliance on and consistent with any amendment
adopted by the Board and which is necessary to enable such Awards to be granted
under the Plan, even though such amendment requires future shareholder approval;
provided, however, that any such contingent Award by its terms may not be
exercised prior to
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<PAGE> 257
shareholder approval of such amendment, and provided further, that in the event
shareholder approval is not obtained within twelve months of the date of grant
of such continent Award, then such contingent Award shall be deemed canceled and
no longer outstanding.
If an amendment to this Plan would (i) increase the maximum number of
shares of Common Stock that may be issued pursuant to (a) all Awards granted
under this Plan, (b) all Incentive Stock Options granted under this Plan, or (c)
Awards granted under this Plan during any calendar year to any one Participant,
(ii) change the class of persons eligible to receive Awards under this Plan,
(iii) otherwise materially increase the benefits hereunder accruing to
participants who are subject to Section 16 of the Exchange Act in a manner not
specifically contemplated herein or (iv) affect this Plan's compliance with Rule
16b-3 or applicable provisions of the Code, as amended from time to time, the
amendment shall be subject to approval by the Company's shareholders to the
extent required to comply with Rule 16b- 3, Sections 422 and 162(m) of the Code,
and other applicable provisions of or rules under the Code, as amended from time
to time.
Section 13. CERTAIN DEFINITIONS
As used in this Plan, the following terms shall have the following
meanings:
"Fair Market Value" shall mean the fair market value of the Common Stock.
If the Common Stock is not publicly traded, fair market value shall be
determined by the Board of the Administrator any may be computed by any method
which the Board or the Administrator in good faith believes will reflect the
fair market value of the Common Stock on the date of such determination. If the
Common Stock is publicly traded, fair market value shall be the closing sale
price per share of Common Stock, if the Common Stock is listed on a national
securities exchange or on the NASDAQ National Market, or if the Common Stock is
not then so listed, the closing bid price per share of Common Stock, on the day
in question (or, if such day is not a trading day or if no sales of Common Stock
were made on such day, on the nearest preceding trading day on which sales of
Common Stock were made), as reported in The Wall Street Journal, or, if trading
in the Common Stock is not then reported in The Wall Street Journal, at such
closing sale or bid price as may then appear in what the Board or the
Administrator in its judgment then deems to be the most nearly comparable
listing or reporting service.
An individual's "Immediate Family" includes only his or her spouse,
parents or other ancestors, and children and other direct descendants of that
individual or of his or her spouse (including such ancestors and descendants by
adoption).
Common Stock is "Publicly Traded" if stock of that class is listed or
admitted to unlisted trading privileges on a national securities exchange or on
the Nasdaq National Market or if sales or bid and offer quotations are reported
for that class of stock in the automated quotation system ("NASDAQ") operated by
the National Association of Securities Dealers, Inc.
Section 14. EFFECTIVE DATE OF PLAN
This Plan shall be effective as of March 1, 1998, the date upon which the
amendment to the Plan was approved by the Board.
IN WITNESS WHEREOF, pursuant to the due authorization and adoption of this
Amended and Restated Plan by the Board on March 1, 1998, the Company has caused
this Amended and Restated Plan to be duly executed by its duly authorized
officers.
ENHANCED SERVICES COMPANY, INC.
Robert Smith, Chief Financial Officer
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<PAGE> 258
PROXY PROXY
ENHANCED SERVICES COMPANY, INC.
3415 South Sepulveda Boulevard, Suite 500, Los Angeles, CA 90034
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS AND MANAGEMENT OF
ENHANCED SERVICES COMPANY, INC.
The undersigned does hereby appoint Robert Smith and Justin Walker,
Esq. as Proxies, each with the power to appoint his substitute, and
hereby authorizes them to represent and to vote, as designated below,
all the shares of Common Stock of Enhanced Services Company, Inc.
held of record by the undersigned on December 15, 1998, at the
annual meeting of stockholders to be held on ___________, 1999 or
any adjournment thereof.
PLEASE CHECK THIS BOX ONLY IF YOU INTEND TO
attend and vote at the Annual Meeting.
PLEASE MARK, SIGN, DATE AND RETURN THE PROXY CARD PROMPTLY
USING THE ENCLOSED ENVELOPE.
(Continued and to be signed on reverse side.)
_______________________________________________________________________________
[FORM OF PROXY CARD]
ENHANCED SERVICES COMPANY, INC.
<PAGE> 259
ENHANCED SERVICES COMPANY, INC.
PLEASE MARK VOTE IN OVAL IN THE FOLLOWING MANNER USING DARK INK ONLY.
[ ]
1. DELAWARE MERGER AND STOCK AUTHORIZATION - For Against Abstain
Transfer of the Company's state of incorporation [ ] [ ] [ ]
From Colorado to Delaware through a merger
with ZuluGroup.com, Ltd., and authorization of
capital stock of 100 million shares of Common
Stock and 25 million shares of Preferred Stock.
2. ISSUANCE OF COMMON STOCK TO HOLDERS OF 1998
PREFERRED STOCK - [ ] [ ] [ ]
Issuance of Common Stock par value $.001
to the holders of 1 million shares of the
Company's Series 1998 Preferred Stock.
3. ISSUANCE OF COMMON STOCK FOR INVESTOR PREFERRED - [ ] [ ] [ ]
Issuance of 10 million shares of Common Stock par
value $.001 to the holders of the Company's
Investor Preferred Stock.
4. ISSUANCE OF COMMON STOCK FOR 1998(B) PREFERRED - [ ] [ ] [ ]
Issuance of 5,200,000 shares of Common Stock par
Value $.001 to the holders of the Company's 1998(B)
Convertible Preferred Stock.
5. ELECT THE DIRECTORS APPROVED BY THE BOARD
OF DIRECTORS [ ] [ ] [ ]
Election as directors of the Company,
Mr. Paul Messina, Mr. Keith C. Montgomery,
and Mr. Joseph L. Searles, III.
6. INCREASE SHARES UNDER INCENTIVE STOCK
OPTION PLAN [ ] [ ] [ ]
To approve broadened Awards and an increase
to 6,000,000 in the number of shares available
for issue as Options under the Company's 1992
Stock Plan.
7. APPOINTMENT OF SCHUMACHER & ASSOCIATES AS
INDEPENDENT AUDITORS - [ ] [ ] [ ]
Ratification of the appointment of Schumacher &
Associates as the Company's independent auditors.
In their discretion, the Proxies are authorized to vote
upon such other business as may properly come before
the meeting. This Proxy, when properly executed, will
be voted in the manner directed by the undersigned
stockholder.
If no direction is made, this Proxy will be voted for.
Dated: _____________________________________________
____________________________________________________
(Signature)
Please sign exactly as name appears below.
When shares are held jointly, both should
sign. When signing as attorney, as executor
Administrator, trustee or guardian, please
Full title as such. If a corporation, please
in full corporate name by President or other
authorized officer. If a partnership, please
sign in partnership name by authorized
person.
- --------------------------------------------------------------------------------
FOLD AND DETACH HERE
YOUR VOTE IS IMPORTANT!
PLEASE MARK, SIGN, DATE AND RETURN THE PROXY CARD PROMPTLY
USING THE ENCLOSED ENVELOPE.
[FORM OF PROXY CARD]
ENHANCED SERVICES COMPANY, INC.
