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________________________________________________________________________________
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO .
COMMISSION FILE NUMBER: 333-12091
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INTER*ACT SYSTEMS, INCORPORATED
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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NORTH CAROLINA 56-1817510
(STATE OR OTHER JURISDICTION OF INCORPORATION OR (I.R.S. EMPLOYER IDENTIFICATION NO.)
ORGANIZATION)
14 WESTPORT AVENUE 06851
NORWALK, CONNECTICUT (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
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REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (203) 750-0300
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
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TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
None None
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
None
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
form 10-K. [x]
As of March 25, 1998, the number of shares outstanding of the registrant's
Common Stock, no par value, was 7,728,555 shares. There is no trading market for
the Common Stock. Accordingly, the aggregate market value of the common Stock
held by non-affiliates of the registrant is not determinable. See Part II, Item
5. of this Report.
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CROSS REFERENCE SHEET
AND
TABLE OF CONTENTS
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PAGE NUMBER
OR REFERENCE
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PART 1
ITEM 1. Business............................................................................... 3
ITEM 2. Properties............................................................................. 16
ITEM 3. Legal Proceedings...................................................................... 16
ITEM 4. Submission of Matters to a Vote of Security Holders.................................... 17
PART II
ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters.................. 17
ITEM 6. Selected Consolidated Financial Data................................................... 18
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations........................................................................... 19
ITEM 8. Financial Statements and Supplementary Data............................................ 29
ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure... 29
PART III
ITEM 10. Directors and Executive Officers of the Company........................................ 30
ITEM 11. Executive Compensation................................................................. 33
ITEM 12. Security Ownership of Certain Beneficial Owners and Management......................... 36
ITEM 13. Certain Relationships and Related Transactions......................................... 39
PART IV
ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 10-K....................... 42
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CAUTIONARY STATEMENT FOR PURPOSE OF THE 'SAFE HARBOR' PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995
The statements contained in this Annual Report on Form 10-K that are not
historical facts are forward-looking statements (as such term is defined in the
Private Securities Litigation Reform Act of 1995), which can be identified by
the use of forward-looking terminology such as believes, expects, may, will,
should, or anticipates or the negative thereof or other variations thereon or
comparable terminology, or by discussions of strategy that involve risks and
uncertainties. In addition, from time to time, the Company or its
representatives have made or may make forward-looking statements, orally or in
writing. Such forwarding-looking statements may be included in, but are not
limited to, various filings made by the Company with the Securities and Exchange
Commission, or press releases or oral statements made by or with the approval of
an authorized executive officer of the Company. Forward-looking statements are
based on management's current views and assumptions and involve risks and
uncertainties that could significantly affect expected results. The Company
wishes to caution the reader that factors, such as those listed below, in some
cases have affected and could affect the Company's actual results, causing
actual results to differ materially from those in any forward-looking statement.
These factors include: (i) the Company's limited operating history, significant
losses, accumulated deficit, negative cash flow from operations and expected
future losses, (ii) the dependence of the Company on its ability to establish,
maintain and expand relationships with Manufacturers to promote brands on the
ILN (as defined herein) and the uncertainty of market acceptance for the ILN,
(iii) the uncertainty as to whether the Company will be able to manage its
growth effectively, (iv) the early stage of the Company's products and services
and technical and other problems that the Company has experienced and may
experience, (v) risks related to the Company's substantial leverage and debt
service obligations, (vi) the Company's dependence on third parties such as
those who manufacture ILN terminals, (vii) the intensely competitive nature of
the consumer product and promotional industry, (viii) risks that the Company's
rights related to patents, proprietary information and trademarks may not
adequately protect its business, (ix) the possible inability of new management
to perform their respective roles and the possible conflicts of interest of the
Company's directors, officers and principal shareholders in certain transactions
with the Company. See Part II, Item 7. 'Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Risk Factors.'
PART I
ITEM 1. BUSINESS
Inter*Act Systems, Incorporated ('Inter*Act' or the 'Company') is one of
the nation's largest in-store operators of customer-interactive electronic
marketing systems. The Company's patented technologies enable consumer products
manufacturers ('Manufacturers') and supermarket retailers ('Retailers') to offer
shopper-specific purchase incentives and messages to customers moments before
shopping begins. The Company's proprietary system, called the Inter*Act Loyalty
Network'tm' ('ILN'), utilizes patented, multimedia touch-screen terminals, or
Smart Kiosks'tm', located in the entrance area of retail grocery stores. These
terminals are connected to each store's point-of-sale scanning system which
allows the electronic promotions to be immediately redeemed at the check-out.
This fully automated process virtually eliminates the misredemption and fraud
associated with paper coupons, estimated by industry sources to cost
Manufacturers hundreds of millions of dollars per year.
Through the ILN, Retailers and Manufacturers can track and analyze
individual consumer purchasing behavior over time and issue individually
targeted purchase discounts, free product sampling, and other promotional
incentives in order to increase sales while building store and brand loyalty.
The Company owns a series of patents and exclusive patent licenses that it
believes are a significant barrier to other potential kiosk-based in-store
competitors.
The Company's primary objective is to become the nation's largest in-store
marketing services company by uniquely integrating the economic interests of
Manufacturers, Retailers, and consumers at a lower cost than any other in-store
marketing vehicle. The Company believes that the ILN capitalizes on the
convergence of major trends in the Manufacturer and Retailer industries to
better target and serve consumers. Manufacturers are striving to increase the
efficiency of their brand promotion through
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individually targeted incentives and are seeking to offer promotions nearer to
the shopper purchase decision. Retailers are developing customer databases that
identify individual households and their product purchasing histories over time,
thereby allowing Retailers first to segment their customers by sales and
profitability and then reward them accordingly. Retailers are also seeking to
offer rewards to and communicate with their customers in-store as opposed to at
home. In addition to these industry trends, consumers are seeking greater
convenience in shopping without sacrificing savings.
In the U.S., the Company has installed systems in 1,317 stores, and has
contracted to install in approximately an additional 2,100 stores as of March
25, 1998. Additionally, the Company, through a subsidiary, has entered into a
contract with Sainsbury's, one of the largest Retailers in the United Kingdom,
to commercially deploy the ILN in pilot stores in 1998.
The Company is compensated by Manufacturers who commit to a specific set of
targeted promotions and pay the Company fees when a consumer selects and redeems
promotional incentives. This predominantly 'pay on redemption' method of payment
is unique in an industry that traditionally charges for promotions distributed
rather than promotions redeemed. In addition, Manufacturers are given category
exclusivity for the duration of their contract.
INDUSTRY OVERVIEW
Manufacturers have traditionally used promotional vehicles such as mass
media advertising (newspapers, printed circulars, television, radio, and
billboards), Free Standing Inserts ('FSIs') and direct marketing techniques to
reach consumers. In 1996, Manufacturers of consumer products and household items
spent over $51 billion on promotional strategies designed to support their
brands, up from $49 billion in 1995. A growing diversity of lifestyles and a
profound expansion in the amount of information delivered to increasingly
fragmented consumer segments have contributed to brand proliferation and a
perceived decline in brand loyalty. At the same time, the changes in the
workforce and demographic shifts have made it increasingly difficult for
Manufacturers to use traditionally mass distributed and untargeted promotional
methods to reach purchasing decision makers. Consequently, conventional
advertising and promotional strategies that are untargeted have become less
efficient because they are reaching fewer people who are potential purchasers.
Manufacturers have recognized the limitations of traditional promotional
vehicles. Despite the ineffectiveness of coupons and other mass distributed
promotional vehicles at reaching consumers efficiently, they continue to be
prevalent promotional tools. According to Veronis, Shuler & Associates, over 306
billion coupons were distributed in the United States in 1996 as compared with
237 billion in 1986. A decrease in the redemption rates of coupons by consumers
illustrates the limitations of this promotional tool. While consumers continued
to recognize the value of coupons by redeeming them for an estimated $3.7
billion of savings in 1996, overall redemption rates of all distributed coupons
dropped to average of 1.8% in 1996 versus 2.8% in 1986. In response to the
declining redemption rates of coupons, spending by Manufacturers on FSIs
declined year over year for the first time from $7 billion in 1995 to $6 billion
in 1996. In spite of the decreasing effectiveness of the more traditional
promotional methods such as coupons and mass media, and the corresponding
decline in Manufacturers' spending on promotional incentives such as FSIs,
Manufacturers are maintaining a similar level of overall investment in brand
promotions by shifting their promotional dollars to more targeted vehicles.
Promotional spending through direct marketing (targeted free sample give aways
and other direct to consumer programs) increased by 6% from 1990 to 1996.
Not only have Manufacturers recognized the value of targeted promotions,
they have also recognized the effectiveness of promotions delivered in close
proximity to the purchase decision. It is estimated that 70% of all brand
purchase decisions are made by consumers while they are in the store, according
to Progressive Grocer Magazine and the Point-of-Purchase Advertising Institute
(POPAI). In-store promotion has enjoyed rapid growth as Manufacturers have begun
to shift promotion spending to emerging in-store platforms. As reported in the
Annual Survey of Promotional Practices, 72% of Manufacturers utilized in-store
electronic promotion techniques in 1996 as compared with only 48% in 1994, while
spending $850 million on these promotions, an increase of 33% over 1994,
according to Promo Magazine.
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Retailers have also begun to institute changes in their approach to
reaching their customers. Retailers have invested in technology to improve
efficiency and inventory management. Advances in point of sale technology, in
addition to providing efficiency at check-out and a means of price and inventory
control, also provide a platform for Retailers to identify and target their
customer base. This new technology has enabled Retailers to develop programs
that permit them to capture information about and communicate with targeted
segments of their customer base.
Today Retailers have begun to concentrate on retaining and growing the 20%
to 25% of their customer base that accounts for an estimated 70% to 80% of total
store sales. Retailers are using loyalty-building frequent shopper card programs
('loyalty cards') in order to establish a direct means of communication with
these most important customers. The card programs are also designed to
counteract competition from other supermarkets, mass merchandisers, warehouse
clubs and specialty Retailers. These loyalty cards enable participating
customers to take advantage of product discounts offered by that store or by
regional chains without presenting a paper coupon. In a survey conducted by
Supermarket News (April 1, 1996), it was reported that 35% of households
contacted had a least one loyalty card, and 67% of these households always used
the card when shopping. It was estimated that by year 2000, 75% of all U.S.
households will have one or more loyalty cards.
RATIONALE FOR THE ILN NETWORK
The ILN is positioned to provide a competitive advantage to Manufacturers
and Retailers by offering sophisticated targeting in close proximity to the
point of purchase decision at the beginning of the shopping process, by
populating the ILN with promotional offers that are based on past purchase
history, by charging for service based on products sold rather than offers
distributed, and by delivering the product in a paperless electronic system to
improve efficiency.
BENEFITS FOR MANUFACTURERS
The Company believes that it provides Manufacturers with a more efficient
promotion channel than those channels to which they have traditionally allocated
promotional and advertising spending.
Ability to Target Incentives Based on Prior Purchase History. The Company
believes that Manufacturers want to tailor promotional incentives by individual
households according to their degree of loyalty to the promoted brand. In order
for Manufacturers to offer targeted promotions they must have access to
household purchase history data and a targeting algorithm that can match the
desired promotions with the desired households. The ILN provides access to such
household data through its connection to the retailer point-of-sale system,
which permits the Company's Target Engine Software ('TES') to deliver different
promotional strategies for the same product depending on the buying habits of
each customer. See ' -- Technology and Software -- ILN Software.' The ILN can
also remind a consumer to buy particular products when sufficient time has
lapsed since the last purchase and can stimulate increased purchase volume
through promotions such as 'buy two and get a third item free.'
Ability to Deliver Promotions in Close Proximity to Brand Purchase
Decisions. It is estimated that 70% of all brand purchase decisions are made by
consumers while they are in the store according to Progressive Grocer Magazine
and POPAI. The Company believes that the ILN's store entrance location, which
provides a shopping list of promotions prior to purchase, affords Manufacturers
the most opportune time to reach shoppers with a targeted incentive.
The Company believes that the offering of personally customized discounts
to consumers in the store immediately prior to shopping results in the current
average of an approximately 35% redemption rate of ILN's electronically offered
coupons (which the Company believes is two to five times higher than that of
other in-store vehicles and approximately 18 times higher than that of FSIs).
Delivers Accountable Consumer Promotion Alternative. The Company believes
that the ILN offers Manufacturers the lowest cost alternative among coupon
promotional strategies because:
The Company's core product is based upon a 'pay on redemption' format;
Manufacturers pay the Company a fee predominantly upon actual redemption
and not merely upon a distribution of a specific coupon or promotion.
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The ILN's electronic scanning of the frequent shopping card at
checkout verifies that items for which promotions were selected were
actually purchased, virtually eliminating the problem of mistaken and
fraudulent redemption of paper coupons. Industry sources estimate that this
costs Manufacturers hundreds of millions of dollars per year through other
coupon promotion vehicles.
Stimulates Incremental Product Sales. As a result of its front-end location
and targeted touch-screen promotional display, management believes that the ILN
can directly cause an increase in the sales volume of promoted products. Sales
increases are generally attributable to a promotion motivating consumers to
trade up in volume (e.g., buy two and get a third item free), to try a new brand
due to the value of the offered incentive or to remind consumers to buy a
specified brand due to the on-screen prompt. Substantial sales increases at the
product and category level were attributed to the Company's ILN in Information
Resources Inc. matched store studies ('IRI Studies') performed for several
Manufacturers. These studies showed that Manufacturers who promoted products on
the ILN enjoyed significant product sales increases versus the same Manufacturer
products not promoted on the ILN in comparable stores.
Develops Manufacturers/Retailer Partnership. The Company believes that its
ILN provides a new and unique platform for Manufacturers to maximize the impact
of account-specific (i.e., retail chain-specific) promotion dollars. For
example, a Manufacturer-sponsored sweepstakes promotion may be conducted
electronically via the ILN and advertised jointly by the Manufacturer and
Retailer in a specific market area. In this way, the ILN serves as a bridge
between the Manufacturer and the Retailer's frequent shopper card program.
Provides Unique Promotion Flexibility. The ILN allows Manufacturers to
adjust any attribute of a promotion virtually on a daily basis. Modifications to
Manufacturer promotions can be introduced to the ILN remotely from the Company's
headquarters.
BENEFITS FOR RETAILERS
The Company believes that the ILN provides competitive advantages for
Retailers.
Provides Inexpensive, In-Store Platform To Reward The Most Valued Shoppers.
As in many industries, a small number of loyal customers account for a major
portion of revenue and profits per store. Many major supermarket chains have
developed loyalty card marketing programs to help them identify and reward these
valuable customers. The Company believes that the ILN, working in conjunction
with a store's loyalty marketing card, offers Retailers a unique and
cost-efficient way to deliver in-store targeted messages, promotional incentives
and rewards to this important shopper segment. In a study conducted by the
Company, utilizing data procured from three ILN stores, the average transaction
size for a loyalty card holder who visited an ILN terminal was approximately
twice as large as the average transaction size of a loyalty card holder and
approximately three times as large as the average for all customers.
Promotes Consumer/Retailer Communication. In addition to rewarding its best
customers, a store can use the ILN more generally to capture information from,
and to communicate with, cardholders through questionnaires, interactive games,
electronic sweepstakes, tie-in promotions with local media, charities, special
events and other merchandising theme promotions. Access to the ILN also enhances
the efforts by Retailers to promote acceptance and usage of their loyalty cards.
Stimulates Incremental Product Sales. The Company believes that the ILN
stimulates incremental product sales for Retailers as a result of several
factors. The ILN's location at the store entrance enables it to remind a shopper
of an item they may otherwise would have forgotten or stimulate them to purchase
items in addition to those they intended to purchase. The ILN also provides the
Retailer a channel to promote perishable foods and private label products.
Finally, the ILN program is able to track the time lapse since the last purchase
of a particular product and remind a consumer to buy the needed item in the
store that day rather than in another class of trade.
Distributes, Redeems and Clears Promotions Electronically. Traditional
promotion of food and related products relies upon paper-based systems such as
FSIs and other paper coupon vehicles. Paper-based promotions require Retailers
to handle paper at checkout and bundle paper records that must be sent to third
party clearing businesses. With the ILN, there is no paper for cashiers to
handle and no
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need for expensive third party clearing. See ' -- Products and
Services -- Inter*Act Loyalty Network ('ILN').'
Generates Incremental Fee Revenue. Retailers receive revenue based upon
promotion redemptions, currently $0.08 per transaction. The Company believes
that this fee produces high-margin revenue for Retailers relative to the amount
of floor space that the ILN occupies.
BENEFITS FOR CONSUMERS
The Company believes that consumers who are introduced to the ILN continue
their usage as they discover the following benefits:
Provides Increased Purchasing Power and Convenience. Consumers want to
maximize the value of their shopping dollars through discounts and
promotions, but at the same time wish to limit the amount of time they
invest preparing for shopping. The ILN eliminates the time-consuming
exercise of locating, clipping and organizing individual coupons, and the
consumer does not have to remember to bring any paper coupons to the store
or track expiration dates. The ILN is conveniently located inside the store
entrance where it can easily be accessed at the beginning of shopping. In
less than 60 seconds, the ILN terminal will display approximately 35 to 40
customer-specific product promotions and will dispense a shopping list for
the product discounts selected by the customer, which if redeemed could
result in substantial savings to the consumer.
Provides Personalized Discounts and Incentives. The ILN is designed to
deliver customer-selected incentives that are customized to an individual
consumer's purchasing preferences. The Company believes that consumers
prefer to select and redeem promotions on the ILN that are targeted to
their past purchasing history as evidenced by redemption rates of targeted
promotions that are approximately twice the redemption rates of promotions
that are randomly presented.
In June 1997, the Company contracted Yankelovich Partners to conduct a
telephone 'Habits and Usage' study among 302 loyalty card holders selected at
random. The results of the study indicate that the ILN system is an attractive
source of value to the customer with few barriers to trial and high satisfaction
rates promoting repeat usage. The study was conducted in the Philadelphia
market, where participating ILN chains include the market leader ACME (a
division of American Stores), SuperFresh (a division of A&P) and Laneco. As
shown on the graph below, the conversion from trial to repeat usage (trial to
acceptor) was 86%.
CONSUMER AWARENESS & ACCEPTANCE
[CHART]
Source: Yankelovich Partners Habits and Usage Study June/July 1997
Accordingly, the Company believes that consumer marketing support that
raises awareness of the ILN will increase kiosk usage among existing and new
loyalty card holders.
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BUSINESS STRATEGY
The Company's primary objective is to become the preeminent in-store
distributor of promotional incentives by integrating the interests of
Manufacturers, Retailers and consumers. The Company is pursuing the following
principal business strategies to achieve its objectives:
INCREASE MANUFACTURER ENROLLMENT ON THE ILN
During the twelve months ended December 31, 1997, 52 Manufacturers promoted
116 products through the ILN. The Company is continually working to increase
both the number of brands per Manufacturer and dollars committed per brand since
certain of the Manufacturers currently under contract promote only one product
offering. Manufacturers who have tested or contracted with the ILN in 1997
include Beatrice Cheese, Ben & Jerry's, Benckiser, Borden Foods, Bri-Al, Brown &
Williamson, Carvel Corporation, Church & Dwight, Citrus World, ConAgra Frozen
Foods, CPC International, Dean Foods, Dial, Disney Magazines, Dow Brands,
Drypers, Friendship Dairy, General Mills, Georgia Pacific, Gillette, Gruner+
Jahr, Heinz Pet Products, Hunt Wesson, Hygrade, Irving Tissue, James River,
Jones Dairy Farm, JR Simplot, Keebler, Kikkoman, Kimberly-Clark, Krino Foods,
Lea & Perrin's, Lever Brothers, Marathon Enterprises, Nestle Beverage, Northland
Cranberries, Ore-Ida Foods, Pepsi Cola, Pine Mountain, Procter & Gamble,
Reynolds Metals, SmithKline Beecham, SP Healthcare, Stroehmann Bread, Tenneco,
Tetley, Tropicana, Turkey Hill, Universal Foods, Van Den Bergh, and Warner
Wellcome.
Manufacturers typically trial the ILN for contract amounts that are
typically less than $100,000. Upon successful completion of trial, Manufacturers
have been willing to commit substantially greater amounts of promotional dollars
to the ILN. Successful trials have recently led to multi-cycle/multi-brand
category contracts or letters of intent with Manufacturers including Keebler,
General Mills, Procter & Gamble and Pillsbury. The Company is pursuing increased
contractual commitments from certain other multi-brand Manufacturers. The
Company believes that securing these multi-brand Manufacturers will induce other
Manufacturers to seek space on the ILN during the ILN's ongoing roll-out.
NATIONWIDE INSTALLATION OF THE ILN
The Company is actively pursuing multi-year contracts with additional major
Retailers in key geographic regions across the country. The Company believes
that Manufacturers seek access to a promotion platform that incorporates a
nationwide network of top Retailers. The Company also believes that these top
Retailers comprise approximately 10,000 to 12,000 stores and are among the
approximately 18,500 stores in the United States that are part of chain
supermarkets and have annual sales of greater than $2 million. As of December
31, 1997, the Company had over 3,000 stores in the United States under contract
and had installed terminals in 1,148 stores, only the second electronic in-store
company offering promotional incentives to achieve a 1,000+ installed store
base, the first such company being Catalina Marketing Corporation ('Catalina').
See ' -- Customers and Competition.' The Company's contracts with Retailers
typically provide for a 90 day trial period followed by an initial term of up to
36 months. The Company has installed its ILN in A&P (consisting of A&P, Farmer
Jack, Food Emporium, Kohl's, Super Fresh and Waldbaum's stores), American Stores
(ACME and Lucky North divisions), Food Lion, Gerland's, Grand Union, and Laneco.
The Company expects to be deployed in the Jewel and Lucky South divisions of
American Stores in the first half of 1998 and the Charlotte division of Food
Lion in the second half of 1998. Upon completion of these installations, the
Company will have installed ILN terminals in stores in 22 states and will be
represented in nine of the top 15 food markets in the United States. The Company
also has contracts for future installation in Giant (Washington/Baltimore),
Marsh, Randalls and Weis supermarket chains.
ENLISTMENT OF ILN RETAILERS TO ASSIST IN THE MANUFACTURER SALES EFFORT
Substantially all of the Retailers who have installed the ILN are aiding
the Company in its efforts to expand Manufacturer participation on the ILN.
Retailer efforts include the inclusion of ILN promotional materials in Retailer
sales meetings with Manufacturers; the distribution of letters to Manufacturers
indicating Retailer support of the ILN; the placement of ILN terminals in the
lobbies or
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waiting rooms of retailer headquarters; and the ability to locate an Inter*Act
salesperson at Retailer headquarters to immediately follow-up with Manufacturers
who indicate interest to the Retailers' own sales forces.
CONTINUED EXPANSION OF ILN FUNCTIONALITY THROUGH INNOVATIVE PROPRIETARY SOFTWARE
DEVELOPMENT
The Company's video touch-screen platform offers virtually unlimited
opportunity for the creation of innovative in-store promotions that appeal to
consumers and make the ILN more personalized to each of them. The Company
intends to maximize this opportunity through aggressive proprietary software
development that anticipates and addresses the loyalty marketing goals of
Manufacturers and Retailers while simultaneously enhancing consumers' enjoyment
of an ILN visit. In addition to the ILN's numerous screens of brand icons that
lead to electronic discounts, the ILN also offers Manufacturers the ability to
pursue other promotion strategies, including targeted free samples of products
and the ability to purchase access to customized 'full screen' presentations
(that, for example, may visually and audibly portray the promoted products'
tie-in with a just-released Hollywood movie), among others. Retailers are able
to conduct sweepstakes promotions electronically, promote private label
products, and offer ILN incentives to tie-in with their weekly circular
promotions. The Company is planning a mid-1998 software release that will add
significantly to the ILN's Retailer functionality. Added features will include,
among others, the ability to offer rewards through the ILN to specific customers
based upon their spending in the store or other loyalty criteria, and the
ability to offer prizes tied to games of chance.
LEVERAGE THE COMPANY'S GROWING DATABASE ON CONSUMER SHOPPING PATTERNS
Manufacturers will benefit from access to the extensive consumer behavior
research that is expected to be accessible through the Inter*Act Cardholder
Panel ('ICP'). Each day the Company collects data on all card-identified
shoppers, whether or not they stopped at the kiosks. For certain stores, these
data are aggregated centrally at Inter*Act's headquarters. As Inter*Act expands
this database, the Company intends to develop a system that will provide
information to Manufacturers on the efficiency of promotion and incentives which
are brand-specific, location-specific, value-specific and date-specific. It may
also be possible for the Company to assist the Manufacturers in creating the
optimal promotional strategy given the historical impact of the ILN and other
promotions initiated by Manufacturers.
ACQUISITION OF INTELLECTUAL PROPERTY RIGHTS
The Company has successfully acquired exclusive and non-exclusive licenses
to a number of patents covering various aspects of in-store promotion in general
and its business in particular. The Company believes that several of its
licensed patents are seminal in the incentive distribution industry and afford
the Company the ability to aggressively protect its growing business franchise.
PURSUE EUROPEAN EXPANSION
The Company, through a subsidiary, recently entered into a four-year
exclusive contract to commercially deploy the ILN with Sainsbury's, one of the
largest retailers in the United Kingdom, following a pilot program in the Spring
of 1998. The Company believes that the U.K. consumer promotion and retail
markets represent a substantial opportunity for the Company's products and
services.
PRODUCTS AND SERVICES
INTER*ACT LOYALTY NETWORK ('ILN')
A customer can access the ILN by inserting his or her frequent shopper
card, as issued under the store's existing loyalty card program, into the
Company's ATM-like terminal(s) located near the entrance to the store. The
system identifies the customer and, based upon data gathered by the ILN on that
customer's cumulative purchasing history, displays full color images of
promotions and discounts
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specifically selected for that customer. The ILN may also present several
'universal' promotions (offered by either the Retailer or Manufacturers) to all
ILN visitors. The customer selects desired promotions, usually price discounts,
multiple purchase bonuses or free product samples, by simply touching the
desired product icon displayed on the screen. When the selection process is
complete (in less than 60 seconds for most shoppers), the ILN terminal can
deliver a 'shopping list' of all selected promotions, which serves to remind the
customer of the selected promotions while shopping. After shopping, the
customer's purchases and frequent shopper card are electronically scanned at
checkout, and the ILN (i) verifies that the promoted items were purchased, (ii)
immediately notifies the store register system to give the customer the selected
discounts and promotions and (iii) records all the customer's purchases for use
in more accurately targeting promotions during future visits. Due to
technological constraints unique to certain Retailers in approximately 238
stores, the ILN delivers individual coupons rather than a shopping list.
The Company's contracts with Manufacturers provide them with the
opportunity to offer promotions on an exclusive basis within 13 four-week cycles
during a year. These product categories are generally based on standard industry
classifications of household and consumer products available in supermarkets.
The purchaser of a particular category is given the exclusive right to promote
products in that category for each cycle purchased. Categories are generally
purchased nationally, although programs can be developed with regional
differences in mind.
The Company's primary source of revenue is the sale of product category
cycles to Manufacturers. The Company's revenue is generated from a fee charged
for each redeemed electronic incentive and in certain cases an ILN access fee.
MANUFACTURER PRODUCTS
ILN Targeting Products. The Company's core product offered to Manufacturers
is the ability to tailor promotions and incentives to individual shoppers based
upon their degree of loyalty to the promoted product as demonstrated by prior
purchase history. On a daily basis, the ILN chooses a unique set of promotions
for each shopper according to Manufacturer specifications.
ILN Universal Products. The Company also offers Manufacturers the ability
to show a product offer or other incentive to all ILN visitors, regardless of
purchase history. For example, the Company's Check-In-Ad'tm' product is
typically offered to account-specific Manufacturer sales representatives who
wish to show a universal offer to ILN visitors and increase the visibility of
their promotion by potentially receiving an ad placement in a Retailer's weekly
flyer. The universal aspect of Check-In-Ad'tm' promotions allows such offers to
be advertised by Retailers because all ILN visitors are assured of seeing these
promotions. Retailers join Inter*Act in selling this product and receive a
portion of the Company's Check-In-Ad'tm' fees for doing so.
The Company also markets a product that combines Check-In-Ad'tm' with its
ILN targeting products in its new '3+1=More'tm' offering to Manufacturers.
3+1=More'tm' takes a typical four-week cycle and offers three weeks of targeted
promotions plus one week of universal promotion to maximize volume and
efficiencies. The ILN can also deliver free recipes prominently featuring the
sponsoring brands as the key ingredients. Brand focused recipes offer two
distinct benefits for Manufacturers. First, participating Manufacturers may use
the recipe feature as an opportunity to continue reaching shoppers with a
seasonal alternative to discounting. Second, Manufacturers that do not generally
offer discounts may consider using recipes as an integral part of their
marketing strategy by implementing an ongoing program of different recipes. The
Company intends to target this program to Manufacturers that do not generally
offer discounts but may elect to test discounting in conjunction with the
recipes to measure the incremental sales gained by adding discounts as a
purchase incentive.
PRICING
Pay on Redemption. Manufacturers pay a transaction fee to the Company
predominantly based upon an electronically cleared redemption of ILN's
electronic incentives. The transaction fee is composed of (i) a redemption fee,
(ii) a processing fee and (iii) an incentive fee (the face value of the discount
for the consumer). Inter*Act retains the redemption fee, passes through the
incentive fee to the Retailer and pays the Retailer the processing fee. In the
case of the Company's targeting products, the amount of the redemption fee
earned by the Company depends on whether the consumer who
10
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redeems the promotion is a 'targeted' consumer (one for whom the Manufacturer is
specifically directing the promotion in order to reward loyalty or to encourage
switching brands) or an 'entry-level' consumer (a shopper for whom the ILN has
insufficient data on prior purchasing activity to determine appropriate targeted
promotions). The Company earns a higher fee when it provides a Manufacturer with
a targeted redemption. The Company can also receive revenue on a fixed charge
per day basis from Manufacturers who contract for recipes and event promotion
screens. Event promotion screens are full screens shown on the ILN that are
dedicated to a specific market campaign.
Brand Contract Terms. The principal elements of the Company's brand
contracts with Manufacturers are brand identity, product category exclusivity,
dollar commitment and the start and end dates of the promotion period. The
typical contract duration is for four-to-twelve week periods or until the total
dollar commitment is exhausted. In some cases, contract duration may be for one
year. The Company offers category exclusivity to Manufacturers on the ILN (i.e.,
two brands of soups will not simultaneously have promotions on the ILN). If the
dollar commitment is exhausted prior to the contract term, the Manufacturer can
choose to terminate the promotions for the duration of the period or to increase
the dollar commitment. If the contract term expires before the dollar commitment
is exhausted, the contract will terminate unless the Manufacturer elects to
continue the promotion until the original dollar commitment is exhausted,
providing the category has not been contracted by a competing brand. National
contracts of three cycles or more receive renewal rights for the following year.
RETAILER PRODUCTS
The Company offers its Retailer partners the ability to promote to, and
communicate with, their shoppers on a cardholder-specific basis. Retailers can
promote private label products and perimeter departments through the ILN,
conduct sweepstakes and games electronically, and communicate with customers
through customized screens. In the first half of 1998, the Company is launching
a series of Retailer products designed to allow Retailers to communicate with
and reward their best customers, just as they enter a store. These products give
the Retailer the ability to target promotions to specific cardholders that the
Retailer has selected. The Retailer can use these products to support 'Top
Shopper' programs, continuity programs, and buyers clubs (e.g., a 'Baby'
products club). The Company currently charges Retailers nominal fees for use of
the ILN. Retailer use of the ILN substantially increases consumer usage of the
ILN. The Company expects that substantially all of its revenue will be earned
from Manufacturers.
11
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<PAGE>
RETAILER PARTNERS
Set forth below are the Retailers who have entered into contracts as of
March 25, 1998 to use the ILN and the resulting installations the Company has
achieved to date.
<TABLE>
<CAPTION>
REGIONAL STORES
STATISTICAL CONTRACTED TO STORES
AREA RETAILER RECEIVE ILN INSTALLED
- ------------ --------------------------------------------------------- ------------- ---------
<S> <C> <C> <C>
New England A&P New England.......................................... 50 50
Grand Union.............................................. 57 57
------ ---------
Total New England........................................ 107 107
------ ---------
Mid Atlantic A&P Metro................................................ 122 122
A&P (Baltimore/Washington)............................... 86 86
Acme..................................................... 178 178
Food Emporium............................................ 16 16
Food Lion................................................ 1,077 49
Giant Maryland........................................... 160 --
Grand Union.............................................. 116 116
Laneco................................................... 16 16
Price Chopper............................................ 91 --
SuperFresh............................................... 68 68
Waldbaum's............................................... 81 81
Weis Markets............................................. 125 --
------ ---------
Total Mid Atlantic....................................... 2,136 732
------ ---------
South East A&P New Orleans.......................................... 36 --
A&P Atlanta.............................................. 48 48
------ ---------
Total South East......................................... 84 48
------ ---------
East Central Farmer Jack.............................................. 95 6
Food Town................................................ 10 --
Marsh.................................................... 74 --
Riser.................................................... 57 --
------ ---------
Total East Central....................................... 236 6
------ ---------
West Central Jewel Food Stores........................................ 186 17
Kohl's................................................... 46 46
------ ---------
Total West Central....................................... 232 63
------ ---------
South West Gerlands................................................. 16 16
Randalls/Tom Thumb....................................... 150 --
------ ---------
Total South West......................................... 166 16
------ ---------
Pacific Lucky North.............................................. 177 177
Lucky South.............................................. 245 168
------ ---------
Total Pacific............................................ 422 345
------ ---------
Total.................................................... 3,383 1,317
------ ---------
------ ---------
</TABLE>
TECHNOLOGY AND SOFTWARE
ILN SOFTWARE
The Company maintains a staff of software developers and engineers. This
team continually refines and enhances ILN functionality for both Manufacturers
and Retailers. It also has primary responsibility for developing the unique
interfaces required to connect the ILN to each Retailer's point-of-sale system
controller. The Company's core targeting products are driven by its proprietary
Target Engine Software ('TES') which collects and analyzes each shopper's
cumulative market basket of purchases stored over a rolling time period of
between three and 12 months depending on the size of the store. On a daily
basis, TES selects for each shopper up to 40 product promotions from the larger
universe of promotions available on the ILN (between 100 and 200 on a fully
loaded system) based on each consumer's purchasing history. Presently the
Company is developing software and hardware enhancements to enable Inter*Act to
collect and analyze consumer data over longer periods in all stores.
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<PAGE>
For each product category available on the ILN, the TES classifies each
consumer as follows:
<TABLE>
<CAPTION>
CLASSIFICATION CONSUMER DESCRIPTION
---------------------------- --------------------------------------------------------
<S> <C> <C>
'Targeted' Brand loyal................. Tends to purchase consistently the Manufacturer's brand
within the product category
'Targeted' Brand switcher.............. Tends to demonstrate little brand loyalty, buying
several different brands over time within a category
'Targeted' Brand competitive........... Tends to purchase consistently a competitor's brand
'Untargeted' Entry level................. A consumer who has no record of purchasing products
within the product category
</TABLE>
Customers are offered promotions with specific incentives on specific
products depending on their individual purchasing profiles. For example, a
customer classified as 'brand competitive' can be offered a higher discount than
would a consumer classified as a 'brand switcher,' who in turn would receive a
higher discount than would a consumer classified as 'brand loyal.' In this way,
the TES offers Manufacturers the ability to execute different promotional
strategies for the same product simultaneously. Manufacturers pay a higher fee
to the Company for targeted promotion redemptions than for entry level promotion
redemptions and have the flexibility to change the relative face values of
redemptions for each targeted category. Until a customer has a purchase history
in every product category on the ILN, he or she may also see a number of entry
level promotions, which are randomly selected by the TES.
ILN software also enables event promotions (full screen(s) dedicated to the
promotion of a specific marketing campaign), sweepstakes and games, full-motion
videos and printed vouchers that shoppers can mail in for rebates or other
special promotions. The Company's current system release gives Retailers the
ability to target offers directly to a predetermined set of customers, such as
preferred shoppers.
ILN HARDWARE
INTERACT LOYALTY NETWORK
IN-STORE CONFIGURATION & INTERACTION
[FLOW CHART]
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<PAGE>
A customer can access the ILN by inserting his or her frequent shopper
card, as issued under the store's existing loyalty card program, into the
Company's ATM-like terminal(s) located near the entrance to the store. The
system identifies the customer and, based upon data gathered by the ILN on that
customer's cumulative purchasing history, displays full color images of
promotions and discounts specifically selected for that customer. The ILN may
also present several 'universal' promotions (offered by either the Retailer or
Manufacturers) to all ILN visitors. The customer selects desired promotions,
usually price discounts, multiple purchase bonuses or free product samples, by
simply touching the desired product icon displayed on the screen. When the
selection process is complete (in less than 60 seconds for most shoppers), the
ILN terminal can deliver a 'shopping list' of all selected promotions, which
serves to remind the customer of the selected promotions while shopping. After
shopping, the customer's purchases and frequent shopper card are electronically
scanned at checkout, and the ILN (i) verifies that the promoted items were
purchased, (ii) immediately notifies the store register system to give the
customer the selected discounts and promotions and (iii) records all the
customer's purchases for use in more accurately targeting promotions during
future visits. Due to technological constraints unique to certain Retailers in
approximately 238 stores, the ILN delivers individual coupons rather than a
shopping list.
A shopping list offers several advantages over paper coupons. The customer
does not need to present this list at checkout to receive the discounts for
promoted products. Rather, the shopping list serves as a reminder to the shopper
to purchase the promoted products.
SALES AND MARKETING
The primary focus of the Company's sales effort is to attract national
Manufacturers to contract for ILN category cycles. The sales effort is conducted
primarily through the Company's direct sales force, all of whom are experienced
in packaged goods and marketing services sales. These people are organized into
geographical teams, with operations in San Francisco, Los Angeles, Chicago,
Cincinnati, Atlanta, New Jersey, Philadelphia, and Norwalk. The teams are headed
by group sales directors who report to the Vice President, National Sales. The
Company augments its direct sales efforts through the development of strategic
relationships with prominent promotion agencies and food brokers. Through
development of custom events and packages, the Company can provide a unique
offering to both of these constituents, giving a competitive point of difference
in the marketplace. This, in turn, generates trial and bona fide success stories
among their principals which can be cultivated into larger headquarter
commitments.
The Company plans to continue to aggressively hire experienced, well
trained industry sales professionals into key positions across the nation and to
invest in continuous training of the team. The Company's sales team is directed
towards (a) securing tactical programs from Manufacturers, and pursuing account
growth through analysis, repeat sales and further brand penetration through
successful trials and (b) strategic sales, in which the Company pursues
long-term multi-brand commitments from prominent Manufacturers in return for
longer-term contractual commitments to the ILN.
Retailer sales efforts are conducted through direct mail campaigns, trade
shows and two Company-employed sales representatives, supported by senior
management. Ongoing Retailer service, support, and product sales are provided by
the Company's Client Services group. Client Service account executives typically
have substantial industry experience selling packaged goods to Retailers and are
responsible for maximizing each Retailer's use of ILN functionality.
SUPPLY OF ILN TERMINALS
As of March 25, 1998, the Company is negotiating with a number of major
equipment integrators to supply ILN terminals and servers to the Company, and
expects to conclude a non-exclusive terminal supply agreement during the second
quarter of 1998. The Company recently terminated a three-year exclusive supply
agreement with Thermo Information Solutions, Inc. ('Thermo'). See Part II, Item
7. 'Management Discussion and Analysis of Financial Condition and Results of
Operations -- Year Ended December 31, 1997 Compared with Year Ended December 31,
1996.'
14
<PAGE>
<PAGE>
INTELLECTUAL PROPERTY MATTERS
The Company currently uses U.S. Patent No. 4,554,446 (the '446 Patent') in
its in-store consumer product promotion and couponing business. The Company is
licensee of the '446 Patent, which expires in November 2003, through separate
agreements with the holders of rights in this patent. With respect to one
license agreement under which the Company is assignee, the Company is required
to pay a royalty of 2% of the gross collected revenues of the Company, to the
extent derived from the Company's exploitation of the patent, with such royalty
decreasing to 1% of such revenues after $10 million in aggregate royalties have
been paid to the licensors. This license agreement requires that certain minimum
monthly payments be made to the licensors, and be exceeded within approximately
two years, in order to avoid triggering a termination right on the part of the
licensors. With respect to another license agreement, the Company is required to
pay the licensor a royalty of .8% of the gross collected revenues of the Company
to the extent derived from the Company's exploitation of the patent, until such
time as the licensor has received the aggregate sum of $600,000 after which no
additional royalty payments are required. This license agreement requires
certain minimum monthly payments to the licensor. Additionally, the Company is
required to pay royalties to a former director of the Company who was an earlier
licensee of this patent and assigned his rights therein to the Company, in
exchange for certain ongoing payments and other consideration, to the Company's
subsidiary, which in turn has assigned such rights to the Company. See Part III,
Item 13. 'Certain Relationships and Related Transactions.' See ' -- Products and
Services -- Inter*Act Loyalty Network.' In addition, the foregoing license
agreements include two patents that are not presently used in the Company's
business.
During the third quarter of 1997, the Company acquired pursuant to a patent
license agreement, certain exclusive and nonexclusive rights for U.S. Patent No.
Re.34,915 for a 'Paperless System for Distributing, Redeeming and Clearing
Merchandise Coupons.' Consideration for such license included cash, shares of
Common Stock and royalties based on the Company's future revenue stream from
such patent. The term of such agreement is for as long as the patent remains
valid and enforceable, subject to certain termination rights as set forth in
such agreement. Management believes that by obtaining the rights to this patent,
the Company will experience a significant competitive edge in the electronic
coupon redemption industry in the future.
The Company has acquired the registered trademark Coupon Xpress'r'.
Inter*Act Loyalty Network is a service mark of the Company and an application
for federal registration of the mark is pending. Applications for Inter*Act
Promotion Network'tm' and Coupon Central'tm' are also pending.
CUSTOMERS AND COMPETITION
The Company competes against a wide range of promotional media for
Manufacturers' advertising and promotional dollars, including television, radio,
print and direct mail. The Company also competes against providers of in-store
and point-of-sale marketing platforms, such as ActMedia, Inc. ('ActMedia'),
which provides automatic coupon dispensers in the aisles of supermarkets, and
Catalina, which provides an electronic marketing network that delivers coupons
to consumers at checkout lanes based on that day's purchases. The Company
competes for promotional dollars based on several factors, including the ability
to more accurately and effectively target consumers, the ability to demonstrate
Retailer support of the system, the ability to influence buying behavior,
promotion flexibility, and price. Most of the Company's competitors are larger
and have substantially greater resources than the Company. In many of the
grocery stores in which the Company has installed its ILN, ActMedia and Catalina
also provide their in-store promotion services.
EMPLOYEES
As of December 31, 1997, the Company had approximately 200 employees
primarily full-time. None of the Company's employees is represented by a labor
union. The Company considers its relations with its employees to be good. The
Company's future success will depend in significant part on the continued
service of its key technical, sales and senior management personnel. Competition
for such personnel is intense and there can be no assurance that the Company can
retain its key managerial, sales and technical employees. The Company
anticipates that the nationwide commercialization of the
15
<PAGE>
<PAGE>
ILN will require the hiring of a substantial number of new employees in
connection with the planned expansion of its business.
RELATIONSHIP WITH VANGUARD
The Company receives business development and other support from Vanguard
Cellular Systems, Inc. (together with its subsidiaries, 'Vanguard') the
Company's largest shareholder. Stephen R. Leeolou, Chief Executive Officer and
Chairman of the Company, is also Co-Chief Executive Officer of Vanguard. Six of
the Company's eleven directors are also directors of Vanguard. See Part II, Item
7. 'Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Risk Factors' and Part III, Item 12. 'Security Ownership of
Certain Beneficial Owners and Management,' and Part III, Item 13. 'Certain
Relationships and Related Transactions'.
ITEM 2. PROPERTIES
The Company is headquartered in Norwalk, Connecticut, where it leases
33,452 square feet of office space. The lease runs through January 31, 2000. The
Company also leases 2,080 square feet of warehouse storage space in Central
Islip, New York. The lease runs through June 1999. The Company intends to lease
other warehouse storage space as necessary and believes that suitable space will
be readily available to meet its anticipated needs for the foreseeable future.
Warehouse space is leased in South Carolina to meet the Company's needs of
storing finished kiosks and kiosk supplies. The Company believes this space is
adequate to accommodate the Company's variable storage requirements. Additional
warehouse space is leased in Columbus, Ohio which is used to store finished
kiosks, servers, and kiosk supplies.
ITEM 3. LEGAL PROCEEDINGS
In February 1996, the Company filed suit against Catalina alleging that
Catalina has infringed United States Letters Patent No. 4,554,446 (the '446
Patent') under which the Company is licensee. The Company alleges that Catalina
is infringing the patent by making, using and offering for sale devices and
systems that incorporate and employ inventions covered by the '446 Patent. The
Company is seeking an injunction against Catalina to stop further infringement
of the patent, treble damages and the costs and expenses incurred in connection
with the suit. The complaint has been amended to add additional detail, and
Catalina has answered denying the allegations, raising certain affirmative
defenses, and seeking declaratory judgment of non-infringement, invalidity or
unenforceability of the '446 Patent. In May 1997, Catalina asserted a second
counterclaim alleging that the Company is infringing a newly issued Catalina
patent, U.S. Patent No. 5,612,868. The Company has answered denying the
allegations, raising affirmative defenses and seeking declaratory judgment of
non-infringement, invalidity and unenforceability of U.S. Patent No. 5,612,868.
Discovery on the claims and counterclaims is proceeding and various motions are
pending before the United States District Court in the District of Connecticut.
As with any litigation, the ultimate outcome of these actions cannot be
predicted. However, the Company intends to assert its claims vigorously.
In January 1998, Catalina Marketing International, Inc. ('Catalina
International,' a subsidiary of Catalina) filed suit against the Company
alleging that the Company has infringed United States Patent No. 4,674,041 (the
'041 Patent') which Catalina International acquired by assignment in December
1997. Catalina International alleges that the Company is infringing the '041
Patent by making, using and offering for sale devices and systems that
incorporate and employ inventions covered by the '041 Patent. Also in February
1998, Catalina International amended its complaint to join as additional parties
defendant Thermo and Coleman Research Corporation ('Coleman'), who have
manufactured kiosks pursuant to an agreement with the Company. Catalina
International seeks injunctive and declaratory relief as well as unspecified
money damages against all defendants, and has filed a motion for preliminary
injunction against the Company seeking to stop further alleged infringement of
the '041 Patent pending trial. Various other motions are pending in the United
States District Court in the District of Connecticut, including the Company's
motion for a more definite statement. The Company
16
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<PAGE>
intends to defend against Catalina International's claims vigorously, and to
pursue available remedies against Catalina International, which may include the
filing of appropriate counterclaims.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of 1997.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
There is currently no established trading market for the Common Stock.
Inter*Act has no current intention to list the Common Stock for trading on any
securities exchange or on any automated dealer quotation system. As of March 25,
1998, the company had 7,728,555 shares of Common Stock issued and outstanding,
which shares were held by 224 shareholders of record.
The Company has not paid any cash dividends since its inception and does
not intend to pay cash dividends on its Common Stock in the foreseeable future.
The Company intends to retain future earnings to finance its operations and fund
the growth of its business. Any payment of dividends in the future will be at
the discretion of the Board of Directors of the Company and will depend upon,
among other things, the Company's earnings, financial condition, capital
requirements, level of indebtedness, contractual and other restrictions in
respect of the payment of dividends, and other factors the Company's Board of
Directors deems relevant. The Company's ability to pay dividends or make
distributions to shareholders is also restricted by the terms of the Indenture.
17
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ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data of the Company are
qualified by reference to, and should be read in conjunction with, Part II, Item
8. 'Financial Statements and Supplementary Data -- Consolidated Financial
Statements', including notes thereto, and, Part II, Item 7. 'Management's
Discussion and Analysis of and Results of Operations'. In February 1997, the
Company elected to change its fiscal year end from the last Saturday in
September to December 31, effective December 31, 1996. For comparability
purposes, the following summary consolidated financial data of the Company for
the year ended 1996 has been restated into a comparable twelve month period
ended December 31, 1996. The consolidated financial data for the years 1994
through 1997 have been derived from audited consolidated financial statements.
<TABLE>
<CAPTION>
THREE MONTH PERIOD
YEAR ENDED ENDED FISCAL YEARS ENDED
-------------------- ------------------ -----------------------------------
DECEMBER 31, DECEMBER 31, SEPTEMBER 28, SEPTEMBER 30,
-------------------- ------------------ ------------- ------------------
1997 1996 1996 1995 1996 1995 1994
-------- -------- ------- ------- ------------- ------- -------
(UNAUDITED) (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED INCOME STATEMENT DATA:
Gross sales............................... $ 1,672 $ 823 $ 408 $ 78 $ 492 $ 255 $ 6
Less: Retailer reimbursements......... (964) (482) (240) (45) (287) (144) (4)
-------- -------- ------- ------- ------------- ------- -------
Net sales............................ 708 341 168 33 205 111 2
-------- -------- ------- ------- ------------- ------- -------
Operating Expenses:
Direct costs.......................... 5,784 3,030 939 275 2,298 903 262
Selling, general and administrative
expenses............................ 26,352 8,468 3,077 1,453 6,911 3,391 1,973
Depreciation and amortization of
intangibles......................... 3,934 1,201 468 88 821 191 32
-------- -------- ------- ------- ------------- ------- -------
Total operating expenses.............. 36,070 12,699 4,484 1,816 10,030 4,485 2,267
-------- -------- ------- ------- ------------- ------- -------
Operating loss............................ (35,362) (12,358) (4,316) (1,783) (9,825) (4,374) (2,265)
-------- -------- ------- ------- ------------- ------- -------
Other income (expense)
Interest income....................... 3,892 2,251 1,249 7 1,009 35 9
Interest expense...................... (18,033) (6,948) (4,263) (58) (2,743) (187) (88)
Other expense......................... (301) -- -- -- -- -- --
-------- -------- ------- ------- ------------- ------- -------
Total other expense................... (14,442) (4,697) (3,014) (51) (1,734) (152) (79)
-------- -------- ------- ------- ------------- ------- -------
Loss from operations before income
taxes................................... (49,804) (17,055) (7,330) (1,834) (11,559) (4,526) (2,344)
Income taxes.............................. (10) -- -- -- -- -- --
-------- -------- ------- ------- ------------- ------- -------
Net loss.................................. $(49,814) $(17,055) $(7,330) $(1,834) $ (11,559) $(4,526) $(2,344)
-------- -------- ------- ------- ------------- ------- -------
-------- -------- ------- ------- ------------- ------- -------
Loss Per Common Share:
Basic................................. $ (6.48) $ (2.46) $ (0.96) $ (0.44) $ (1.91) $ (1.27) $ (0.83)
-------- -------- ------- ------- ------------- ------- -------
-------- -------- ------- ------- ------------- ------- -------
Diluted............................... $ (6.48) $ (2.46) $ (0.96) $ (0.44) $ (1.91) $ (1.27) $ (0.83)
-------- -------- ------- ------- ------------- ------- -------
-------- -------- ------- ------- ------------- ------- -------
Weighted average number of common shares:
Basic................................. 7,692 6,939 7,669 4,126 6,038 3,556 2,830
Diluted............................... 7,692 6,939 7,669 4,126 6,038 3,556 2,830
OTHER DATA: (in whole numbers)
Installed terminals at end of
period.............................. 1,840 623 623 96 614 62 7
Installed stores at end of period..... 1,148 335 335 51 328 25 3
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 28, SEPTEMBER 30,
-------------------- ------------- -----------------
1997 1996 1996 1995 1994
-------- -------- ------------- ------ -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Working capital (deficit)................................. $ 38,478 $ 86,230 $ 91,835 $ (753) $ 63
Total assets.............................................. 81,023 105,765 107,757 2,178 644
Total debt................................................ 91,406 76,866 72,923 2,042 1,893
Common stock purchase warrants(1)......................... 27,436 24,464 24,464 -- --
Stockholder's equity (deficit)............................ (48,432) 643 7,934 (910) (1,417)
</TABLE>
- ------------
(1) Reflects the effect of the valuation of the warrants issued in the Private
Placement, which are exercisable for 9.429 shares of Common Stock per
warrant. The exercise price of $.01 per share was
(footnotes continued on next page)
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(footnotes continued from previous page)
deemed to have been paid at the time of issuance. See Notes 6 and 8 to the
Notes to Consolidated Financial Statements.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following should be read in conjunction with the Consolidated Financial
Statements of the Company and the Notes thereto, and other financial information
included elsewhere in this report. This report contains certain statements
regarding future operating results and anticipated growth, the accuracy of which
is subject to many risks and uncertainties. Such trends, and their anticipated
impact on the Company, could differ materially from those discussed in this
report. Factors that could cause or contribute to such differences include, but
are not limited to, those discussed in ' -- Risk Factors' and elsewhere in this
report.
The Company is one of the nation's largest in-store operators of
customer-interactive electronic marketing systems. The Company's patented
technologies enable consumer products Manufacturers and Retailers to offer
shopper-specific purchase incentives and messages to customers moments before
shopping begins. The Company's proprietary system, called the Inter*Act Loyalty
Network'tm' ('ILN'), utilizes patented, multimedia touch-screen terminals, or
Smart Kiosks'tm', located in the entrance area of retail grocery stores. These
terminals are connected to each store's point-of-sale scanning system which
allows the electronic promotions to be immediately redeemed at the check-out.
This fully automated process virtually eliminates the misredemption and fraud
associated with paper coupons, estimated by industry sources to cost
Manufacturers hundreds of millions of dollars per year.
In the second quarter of 1997, the Company changed the reference to its
proprietary interactive multimedia system from Inter*Act Promotion Network
('IPN') to Inter*Act Loyalty Network ('ILN') in order to more closely align the
marketing of Inter*Act's products and services to the supermarket industry,
whose participants are increasingly pursuing frequent shopper or loyalty card
programs, as well as to Manufacturers, who typically seek to win new customer
loyalty.
The Company recognizes revenue as electronic discounts are redeemed at
store cash registers. Manufacturers pay a fee to the Company for each
redemption. The fee is composed of (1) a retailer processing fee, (2) a
redemption fee and (3) the face value of the coupon. The Company, in turn,
passes through both the retailer processing fee, which is included in direct
operating expenses, and the face value of the coupon to the Retailer, while
retaining the redemption fee. The Company records as net sales the redemption
fee and the retailer processing fee paid by the Manufacturers. Certain
Manufacturers pay the Company in advance for a portion of anticipated
redemptions, and these amounts are recorded as deferred revenue until earned
through redemptions. The Company's net sales and results of operations during
the periods presented have not been significantly affected by inflation.
Direct costs of the Company consist of such expenditures for direct store
support, paper used in the kiosks to print shopping lists and recipes, direct
marketing costs, telecommunications between the stores and the Company and
retailer processing fees. Selling, general and administration expenses include
items relating to sales and marketing, administration, non-paid promotional
expenses and royalties payable under certain patent agreements.
Non-paid promotional expenses represent consumer discounts and retailer
processing fees paid to the Retailer by the Company on promotions offered on the
ILN that are not funded by a Manufacturer contract. Manufacturer participation
in the ILN to date has been characterized by a substantial number of trial
commitments leading to increasing dollar commitments to the ILN from those
Manufacturers as the network approaches a more national footprint. In the fourth
quarter of 1997, the Company completed the installation of the Lucky North
division of American Stores in Northern California. As of March 25, 1998, the
Company has begun installation of Retailers in Los Angeles and Chicago. As the
network grows and is more widely accepted by Manufacturers, the Company believes
that the need for non-paid promotions will diminish and that revenues from
Manufacturers will increase.
To date, the Company has generated minimal operating revenue, has incurred
significant losses and has experienced substantial negative cash flow from
operations. The Company's prospects must be
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considered in light of the risks, expenses and difficulties frequently
encountered by companies in their early stage of development. The Company had an
accumulated stockholders deficit of $48.4 million as of December 31, 1997 and
has incurred losses of $49.8 million, $7.3 million and $11.6 million for the
year ended December 31, 1997, the three month period ended December 31, 1996 and
the fiscal year ended September 28, 1996, respectively. The Company expects to
incur substantial additional costs to install additional ILN terminals in retail
supermarket stores and to sponsor selected promotions to demonstrate the utility
of the ILN to consumers, Retailers and Manufacturers. The Company expects to
incur net losses in 1998 and may operate at a loss for the foreseeable future,
and there can be no assurance that the Company will ever be able to achieve
profitability or, if achieved, sustain such profitability.
YEAR ENDED DECEMBER 31, 1997 COMPARED WITH YEAR ENDED DECEMBER 31, 1996
The Company had installed 1,840 terminals in 1,148 stores as of December
31, 1997 as compared to 623 terminals in 335 stores as of December 31, 1996.
Total redemptions for the year ended December 31, 1997 increased by
approximately 11.3 million redemptions to 16.2 million redemptions from 4.9
million redemptions in the comparable period in 1996. Average
redemptions/day/store decreased to 56 from 65 for the year ended December 31,
1997 versus the comparable period in 1996. The decrease in average
redemptions/day/stores was primarily attributed to a 1996 fourth quarter
sweepstakes promotion sponsored by a Retailer, which at that time represented
over 50% of the Company's limited store base. This promotion was primarily
responsible for the strong average redemptions/day/store reported in the fourth
quarter 1996 of 93. Average redemptions/day/store were 75 during the fourth
quarter 1997. Fourth quarter 1997 redemptions were 7.7 million as compared to
2.8 million redemptions in the same period of 1996.
Manufacturers promoting on the ILN system for at least one week during the
1997 and 1996 periods increased to 52 from 26, respectively, while total
products promoted increased to 86 from 84. Net sales during the year ended
December 31, 1997, increased to $708,000 from $341,000 in the 1996 period,
primarily as a result of the larger installed base of ILN terminals. During the
three month period ended December 31, 1997, net sales increased to $188,000 from
$168,000 in the same period in 1996.
Operating loss for the year ended December 31, 1997 was $35.4 million
versus an operating loss of $12.4 million in calendar 1996. The increased loss
was primarily due to higher employee costs, non-paid promotions, settlement
costs incurred to terminate an exclusive supplier contract, fixed asset
write-offs, legal fees and depreciation expense. Higher employee costs of
approximately $5.5 million represent an increase of 96 employees, from 99
employees at December 31, 1996 to 195 employees at December 31, 1997. Most of
the increase in headcount represents additional technology and field service
personnel to support the increase in number of terminals and stores installed.
Non-paid promotion expense increased by $4.3 million in the 1997 twelve-month
period, to $6.3 million from $2.0 million in the comparable 1996 period.
Non-paid promotions represent consumer incentives and retailer processing fees
paid for by the Company instead of by contracted Manufacturers and are placed on
the ILN in order to stimulate consumer usage. As the network grows and is more
widely accepted by Manufacturers the Company believes that the need for non-paid
promotions will diminish substantially. During the third quarter of 1997, the
Company entered into preliminary negotiations with Coleman, a parent of Thermo,
to terminate an exclusive supply agreement whereby Coleman was to fulfill the
Company's anticipated terminal requirements for a three-year period. Such
negotiations led to execution of a mutual termination agreement during the first
quarter of 1998. As part of this mutual termination agreement, the Company
agreed to pay $4.5 million, in installments, to pay balances on previously
purchased ILN equipment, to acquire certain inventory and to obtain early
release from the exclusivity provision of the original contract to allow the
Company to pursue relationships with new vendors. Of this amount, $4.1 million
was charged to operating income during 1997 and approximately $400,000 related
to supplies and terminal parts acquired by the Company in the Agreement and is
reflected in other current assets as of December 31, 1997. The Company recorded
approximately $1.1 million of fixed asset write-offs during the year ended
December 31, 1997, primarily representing the disposal of obsolete assets. Legal
expense, primarily costs associated with patent litigation, increased by $1.1
million over the
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comparable 1996 period (see Note 11 to Notes to Consolidated Financial
Statements). Depreciation expense increased by $2.7 million reflecting the
addition of approximately 1,200 terminals installed in 800 stores from December
31, 1996 to December 31, 1997. Fourth quarter 1997 operating loss of $13.2
million was $8.9 million higher than in the fourth quarter of 1996, primarily
reflecting additional headcount and expenses associated with increased
installations of terminals, the Coleman settlement of approximately $2.8 million
(approximately $1.3 million was recorded in the third quarter of 1997),
increased non-paid promotion expense of $2.0 million and higher depreciation
expense of $831,000.
Net loss for the year ended December 31, 1997 increased by approximately
$32.7 million from $17.1 million in the comparable 1996 period to $49.8 million
primarily due to higher operating losses of $23.0 million, increased non-cash
interest expense of $11.1 million and higher other expenses of $300,000, offset
by an increase in interest income of $1.6 million. Non-cash interest expense of
$18.0 million during the year ended December 31, 1997 reflects the interest
expense on the issuance of $142 million of 14% Senior Discount Notes on August
2, 1996 for which the Company received net proceeds of $90.8 million
(See' -- Liquidity and Capital Resources'). Interest income of $3.9 million for
1997 reflects an increased average cash balance during 1997 versus the
comparable period in 1996. Net loss for the three month period ended December
31, 1997, was $17.3 million, an increase of $10.0 million compared to the same
three month period in 1996 due to increased operating losses and interest
expense of $8.9 million and $400,000, respectively, and lower interest income of
$500,000.
THREE MONTH PERIOD ENDED DECEMBER 31, 1996 COMPARED WITH THREE MONTH PERIOD
ENDED DECEMBER 31, 1995
Net sales were $168,000 and $33,000 in the 1996 and 1995 three month
periods, respectively. The increase was primarily attributable to the addition
of ILN terminals installed in stores in the 1996 period. As of December 31, 1996
and December 31, 1995, 335 and 51 stores contained ILN terminals, respectively.
Net sales did not increase proportionately with the increase in installed
stores. The number of Manufacturers promoting on the ILN for at least one week
during the 1996 and 1995 periods increased to 25 from 22, respectively, while
total product offerings promoted decreased to 75 from 82. Average paid
redemptions/day/store decreased to 17 from 30. This was principally a result of
ILN terminals in the 1996 period being supported through a higher number of
non-paid incentives than were promoted in the 1995 period.
Operating loss increased to approximately $4.3 million from $1.7 million in
the three month period ended December 31, 1996, versus the comparable 1995
period. The increase was primarily due to increased employee headcount,
increased supplies and other expenses related to increased ILN usage, increased
non-paid promotion expense of approximately $1.0 million and higher depreciation
expense of approximately $380,000. The increase in employee costs resulted from
increased headcount required to support additional store roll-outs and increased
emphasis on sales and marketing.
Net loss increased by approximately $5.5 million to $7.3 million for the
three month period ended December 31, 1996, reflecting the increased operating
loss of $2.5 million, and higher interest expense of $4.2 million attributable
to the issuance of the $142 million of 14% Senior Discount Notes on August 2,
1996 (See' -- Liquidity and Capital Resources'), offset by higher interest
income of $1.2 million resulting from increased cash balances from the proceeds
of such issuance.
FISCAL YEAR ENDED SEPTEMBER 28, 1996 COMPARED WITH FISCAL YEAR ENDED SEPTEMBER
30, 1995
Net sales were $205,000 and $111,000 during the fiscal years ended
September 28, 1996 and September 30, 1995, respectively. As of September 28,
1996 and September 30, 1995, the Company had installed terminals in 328 and 25
stores, respectively. The Company generated minimal operating revenue from its
inception in 1993 through December 31, 1996 having devoted most of its resources
to the development, testing and initial deployment, capital formation and
recruitment of management and other key employees.
Operating loss was $9.8 million in the fiscal year ended September 28,
1996, reflecting an increase of $5.5 million or 125% in operating loss over the
comparable period in 1995. The increase was primarily due to higher employee
costs, increased non-paid promotions of $696,000, increased supply
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expenses of $1.4 million and higher depreciation expense of $630,000. The
increase in employee expense represents an increase of employees to support the
roll-out of terminals in stores. Higher supply costs and depreciation relate to
the additional 500 terminals installed in 300 stores during the fiscal year
ended September 28, 1996.
Net loss for the fiscal years ended September 28, 1996 and September 30,
1995 was $11.6 million and $4.5 million, respectively. The increase in net loss
for the year ended September 28, 1996 over the comparable prior year was
primarily attributable to higher operating losses of $5.5 million and increased
interest expense of $2.6 million, offset by increased interest income of $1.0
million. Interest expense of $2.7 million in 1996 reflects interest expense on
the issuance of $142 million of 14% Senior Discount Notes on August 2, 1996 (See
' -- Liquidity and Capital Resources'). The increase in interest income during
the fiscal year ended September 30, 1996 reflects an increased average cash
balance in 1996 versus the comparable 1995 period.
LIQUIDITY AND CAPITAL RESOURCES
For the year ended December 31, 1997, the three month period ended December
31, 1996, and the fiscal years ended September 28, 1996 and September 30, 1995,
cash used in operating activities was $22.2 million, $2.6 million, $6.7 million
and $3.8 million, respectively. From inception to December 31, 1997, the Company
generated minimal revenue yet incurred expenses related to the development of
its ILN technology, test marketing the product and recruiting additional
personnel. The Company has funded its operations through private sales of debt
and equity securities. From its inception through December 31, 1997, the
Company's stockholders had contributed $27.7 million of equity to the Company of
which $2.0 million was originally issued as debt and subsequently converted to
equity. The Company consummated a private offering of debt securities (the
'Private Placement') on August 2, 1996 for which it received net proceeds of
approximately $90.8 million. The Private Placement consisted of 142,000 units
representing $142 million in aggregate principal amount of 14% Senior Discount
Notes Due 2003 (the 'Notes') and warrants (the 'Warrants') to purchase initially
an aggregate of 1,041,428 shares of common stock of the Company at $.01 per
share. As of September 30, 1997, a Qualifying Initial Public Offering (as
defined in the Notes) had not been completed and as a result thereof, the
Warrants were then adjusted to entitle respective holders to purchase an
aggregate of 1,338,918 shares of common stock at $.01 per share. Therefore, the
Company recorded additional Common Stock Purchase Warrants of $3.0 million
reflecting the valuation of the additional 297,492 shares, or 2.095 shares
issuable per warrant. For a further description of the Notes and Warrants, See
Notes 6 and 8 to the Notes to Consolidated Financial Statements included
elsewhere herein.
In January 1997, the Company consummated an exchange offer (the 'Exchange
Offer'), whereby the holders of the Notes issued in the Private Placement
exchanged such Notes for new Notes (the 'Exchange Notes') that were registered
under the Securities Act of 1933, as amended. The Exchange Notes do not bear
legends restricting the transfer thereof.
At December 31, 1997, the Company had working capital of $38.5 million,
compared to working capital of $86.2 million at December 31, 1996. Total cash
and cash equivalents at December 31, 1997 and December 31, 1996 was $45.2
million and $88.3 million, respectively. The Company's current level of
indebtedness, amounting to approximately $91.4 million, represents long-term
debt resulting from the Private Placement.
In the year ended December 31, 1997, cash used in investing activities was
$20.9 million, primarily reflecting disbursements for net capital expenditures
of $20.1 million. During the year ended December 31, 1997, the Company installed
approximately 1,200 terminals in over 800 stores. Of the $20.1 million net
capital expenditures, approximately $6.9 million relates to ILN equipment for
planned 1998 installations, the majority of which the Company expects to be
installed during the first half of 1998. The Company estimates its 1998 capital
expenditures will be approximately $15 million, to be used primarily for ILN
equipment.
In the three month period ended December 31, 1996 and the fiscal years
ended September 28, 1996 and September 30, 1995, cash used in investing
activities was $2.6 million, $8.7 million and $1.7 million, respectively.
Expenditures for ILN equipment was the primary use of funds in each of these
years.
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In the fiscal year ended September 28, 1996, cash provided by financing
activities was $108.8 million, reflecting net proceeds received of $90.8 million
from the Private Placement and $18.3 million received from the issuance of
common stock. In the fiscal year ended September 30, 1995, cash provided by
financing activities was $5.4 million of which $5.0 million represent net
proceeds from the issuance of common stock. Financing activities during the year
ended December 31, 1997 and the three month period ended December 31, 1996 did
not provide any cash to the Company.
As of March 24, 1998, the Company terminated its three-year exclusive
terminal supply relationship with Coleman and its subsidiary, Thermo
(collectively, the 'Vendors'). As part of this mutual termination agreement, the
Company agreed to pay $4.5 million, in installments, to pay balances on
previously purchased ILN equipment, to acquire certain inventory and to obtain
early release from the exclusivity provision of the original contract to allow
the Company to pursue relationships with new vendors. See ' -- Year Ended
December 31, 1997 Compared with Year Ended December 31, 1996.' Further, the
Vendors will supply the Company with 350 additional kiosks.
The Company continues to use the net proceeds from the Private Placement to
fund capital expenditures, working capital requirements and operating losses
incurred in connection with the increased commercialization of its ILN. The
Company intends to raise additional equity or debt capital to fund its ongoing
1998 and 1999 expansion plans. In addition, the Company has received several
multi-year equipment leasing proposals from equipment manufacturers for future
purchases of ILN equipment. There is no assurance that such additional capital
or equipment financing can be obtained. In the event that such additional
capital or equipment financing is not obtained, the Company believes that
existing cash and cash equivalents, together with reduced or delayed operating
and capital expenditures, will be sufficient to meet the Company's operating
requirements into the first quarter of 1999. Because of the Company's early
stage of development and the risks inherent in its business, there are a number
of material uncertainties that could result in shortfalls in revenue. For
example, shortfalls could occur if the Company experiences delays in
installations of the ILN such that any growth in paid redemption volume is
delayed.
If additional funds are raised through the issuance of equity securities,
the percentage ownership of the stockholders may experience additional dilution,
or such equity securities may have rights, preferences or privileges senior to
the Common Stock. If additional funds are raised through debt financing, such
financing will increase the financial leverage of the Company and earnings would
be reduced by the associated interest expense. The Indenture related to the
Exchange Notes permits the Company to incur additional indebtedness, subject to
certain limitations. There can be no assurance that additional financing will be
available when needed on terms favorable to the Company or at all. If adequate
funds are not available on acceptable terms, the Company may be unable to
continue its planned ILN installations, expand both the number and dollar amount
of Manufacturer commitments, or respond to competitive pressures, any of which
could have a material adverse effect on the Company's results of operations and
financial condition.
The Company is currently in the process of updating its systems to ensure
all programs are year 2000 compliant. The Company will utilize internal and
external resources to reprogram, replace and test systems for year 2000
compliance. The estimated cost of such project is estimated to be approximately
$300,000. Year 2000 compliance testing is expected to be completed no later than
December 31, 1998. The Company is also reliant on Year 2000 compliance by
Retailers with respect to the Company's TES ability to process and collect data
from the TES interface to each of the Retailer's point-of-sale systems. The
Company is currently working with Retailers to test such interfaces for year
2000 compliance. There can be no assurance that a failure by a Retailer to
become Year 2000 compliant will not negatively affect the Company with respect
to that Retailer.
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RISK FACTORS
The information contained in this report should be read in conjunction with
the following factors.
LIMITED OPERATING HISTORY; SIGNIFICANT LOSSES; ACCUMULATED DEFICIT; FUTURE
LOSSES
The Company was incorporated in February 1993 and has concentrated its
efforts on the development, testing and initial deployment of the ILN, on
capital formation and on the recruitment of management and other key employees.
Accordingly, the Company has a limited operating history upon which an
evaluation of the Company and its prospects can be based. To date, the Company
has generated minimal operating revenue, has incurred significant losses and has
experienced substantial negative cash flow from operations. The Company had an
accumulated stockholders deficit of $48.4 million as of December 31, 1997 and
has incurred losses of $49.8 million, $7.3 million and $11.6 million for the
year ended December 31, 1997, the three month period ended December 31, 1996 and
the fiscal year ended September 28, 1996, respectively. The Company expects to
incur substantial additional costs to install additional ILN terminals and to
sponsor selected promotions to demonstrate the utility of the ILN to consumers,
Retailers and Manufacturers. The Company expended $6.3 million and $2.0 million
for the year ended December 31, 1997 and December 31, 1996, respectively, to
sponsor promotions. The Company will incur net losses in fiscal 1998 and may
operate at a loss for the foreseeable future. There can be no assurance that the
Company will ever be able to achieve profitability or, if achieved, sustain such
profitability.
The Company's prospects must be considered in light of the risks, expenses
and difficulties frequently encountered by companies in the early stages of
their development. To address these risks, the Company must, among other things,
effectively manage any growth that may occur, successfully commercialize its
product by securing new and renewal commitments from Manufacturers, respond to
competitive developments and attract and retain management and other key
personnel.
ABILITY TO OBTAIN BRAND CONTRACTS; LENGTHY SALES CYCLE
All or substantially all the Company's revenue is expected to be derived
for the foreseeable future from fees paid by Manufacturers that promote products
on the ILN. However, many Manufacturers currently participating in the ILN are
doing so at relatively low promotional dollar commitments to test the ILN's
effectiveness. Accordingly, the Company's future success will depend
substantially on its ability to establish, maintain and expand relationships
with Manufacturers to promote their products using the ILN. Moreover, it is
critical that the Company obtain additional commitments from Manufacturers of
major brands in the most popular consumer product categories, as it has recently
done with Keebler, Procter & Gamble, General Mills and Pillsbury, and to develop
long-term relationships with these Manufacturers in order to ensure that an
appropriate mix of products is displayed on the ILN.
In addition, the Company has experienced a lengthy sales cycle in marketing
the ILN to Manufacturers. In most cases, the time between initial contact with
the Manufacturer and the execution of the final contract, if any, exceeds five
months. The Company could fail to obtain such commitments or could experience
substantial delays in obtaining such commitments, and, once such commitments are
received, the Company could fail to maintain relationships through renewal
contracts. There can be no assurance that the Company will obtain additional
commitments on a timely basis from any Manufacturers and maintain long-term
relationships with these Manufacturers to participate in the ILN. Even if the
Company obtains initial commitments from additional major and other
Manufacturers, these contracts typically have had short-term durations, and
there can be no assurance that such Manufacturers will make the ILN a component
of their long-term promotional strategies. In addition, if a contract expires
and the dollar value of the total redemptions during the contract term is less
than the contract value, the Company may not be able to realize the remaining
contract value. Any of the foregoing events could result in the Company
incurring substantially greater losses for a longer period than expected and
could have a material adverse effect on the Company's business, results of
operations and financial condition. In addition, as a new market participant,
the Company may only receive one opportunity to convince any single Manufacturer
to become and remain a customer of the Company. As
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a result, even short-term difficulties in implementing its strategies could have
a material adverse effect on its results of operations and financial condition.
In order to enhance its prospects of enrolling Manufacturers in the ILN,
the Company has elected in the past, and expects to elect in the future, to
sponsor from time to time, at its own cost, selected product promotions in
certain stores to continue to demonstrate the effectiveness of the ILN in
prompting product sales and targeting promotions to individual consumers.
Currently the Company sponsors a majority of its promotions. Since these
promotional expenditures are classified as selling, general and administrative
expenses and are incurred to attract Manufacturers and enhance future revenue,
the Company's current losses will be increased in the period of the expenditures
and, if the expected future revenue does not materialize, liquidity difficulties
currently experienced by the Company could become more significant. See
' -- Limited Operating History; Significant Losses; Accumulated Deficit; Future
Losses'.
UNCERTAINTY OF MARKET ACCEPTANCE
Because the utility and the ultimate attractiveness of the ILN to
Manufacturers is substantially dependent on the number of shoppers using the
system, the number of stores in which the Company has installed its ILN
significantly affects its revenue generation potential. The Company's
profitability and the success of its growth plans will be significantly affected
by its ability to contract with additional Retailers for the installation of the
ILN and to install the system in such stores in a rapid and orderly manner.
While the Company has contractual commitments from 13 supermarket chains as of
March 25, 1998, there can be no assurance that Retailers who currently, or in
the future, have ILN terminals installed will retain the ILN in their stores or
that the Company will be able to continue to increase the number of stores in
which the ILN is installed.
The Company also is dependent on the level of general acceptance and usage
by consumers. Consumer acceptance and usage are dependent on many factors, such
as actual and perceived ease of use, access to terminals during peak shopping
periods, reliability of the Company's ILN and perceived attractiveness of the
product offerings of the ILN. There can be no assurance that an adequate number
of consumers will use the ILN at a level sufficient to support the ILN on an
ongoing basis or at a level that will attract additional Manufacturers.
Inasmuch as demand by Manufacturers, Retailers and consumers is
substantially interrelated, any significant continuous lack or lessening of
demand by any one of these constituencies could have an adverse effect on
overall market acceptance. See Part I, Item 1. 'Business -- Business Strategy'.
MANAGEMENT OF GROWTH
The Company's rapid growth has placed, and is expected to continue to
place, significant pressure on the Company's managerial, operational and
financial resources. To manage its growth, the Company must continue to
strengthen its management, implement and improve its operational and financial
systems and expand, train and manage its employee base. The Company also will be
required to develop and manage multiple relationships with various customers,
business partners and other third parties. The Company's systems, procedures or
controls may not be adequate to support the Company's operations and Company
management may not be able to achieve the rapid expansion necessary to exploit
potential market opportunities for the Company's products and services. Any
significant problems in the Company's commercialization of the ILN could create
a negative image in the consumer product promotion and discounting business that
may be impossible to overcome. The Company's future operating results will also
depend on its ability to expand its sales and marketing and research and
development organizations, to implement and manage new distribution channels to
penetrate markets and to expand its support organization. The Company's failure
to manage growth effectively will have a material adverse effect on the
Company's business, operating results and financial condition.
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RISKS RELATING TO SUBSTANTIAL LEVERAGE AND DEBT SERVICE OBLIGATIONS
The Company is highly leveraged with indebtedness that is substantial in
relation to its stockholders' equity. As of December 1997, the Company had an
aggregate of $91.4 million of indebtedness and stockholders' deficit of $48.4
million. See Part II, Item 6. 'Selected Consolidated Financial Data.'
The Company's high degree of leverage could have important consequences
including but not limited to the following: (i) the Company's ability to obtain
additional financing for capital expenditures, working capital, general
corporate purposes or other purposes (including potential acquisitions) may be
impaired in the future; and (ii) the Company's flexibility to adjust to changing
market conditions and ability to withstand competitive pressures could be
limited, and the Company may be more vulnerable to a downturn in general
economic conditions of its business, or be unable to carry out capital spending
that is important to its growth strategy.
Pursuant to an Indenture dated as of August 1, 1996 (the 'Indenture'), the
Company issued $142,000,000 principal amount at maturity of 14% Senior Discount
Notes Due 2003 (the 'Notes'). The Company's ability to make scheduled payments
or to refinance its obligations with respect to the Notes and its other
indebtedness will ultimately depend on its financial and operating performance,
which in turn is subject to prevailing economic and competitive conditions and
to certain financial, business and other factors that may be beyond its control,
including operating difficulties, increased operating costs, product prices, the
response of competitors, regulatory developments and delays in implementing its
strategy. The Company's ability to meet its debt service and other obligations
will depend on the extent to which the Company can implement successfully its
business strategy of achieving large-scale commercialization of the ILN. There
can be no assurance that the Company will be able to implement fully its
strategy or that the anticipated results of its strategy will be realized. See
Part I, Item 1. 'Business -- Business Strategy.'
If the Company's cash flow and capital resources are insufficient to fund
its debt service obligations, the Company may be forced to reduce or delay
capital expenditures, sell assets, seek to obtain additional equity capital, or
restructure its debt. There can be no assurance that the Company's cash flow and
capital resources will be sufficient for payment of interest on and principal of
its indebtedness in the future, or that any such alternative measures would be
available at reasonable costs or would permit the Company to meet its scheduled
debt service obligations. In the absence of adequate operating results and/or
capital resources, the Company could face substantial liquidity problems and
might be required to dispose of material assets or operations to meet its debt
service and other obligations, and there can be no assurance as to the timing of
such sales or the proceeds which the Company could realize therefrom.
NEED FOR ADDITIONAL FINANCING
The Company will need to procure additional financing, the amount and
timing of which will depend on a number of factors including the pace of
expansion of the Company's markets and customer base, services offered, and
development efforts and the cash flow generated by its operations. In the event
that such additional financing is not obtained, the Company believes that
existing cash and cash equivalents, along with reduced or delayed operating and
capital expenditures, will be sufficient to meet the Company's operating
requirements into the first quarter of 1999. See ' -- Liquidity and Capital
Resources.' The Indenture limits the ability of the Company to incur additional
indebtedness in certain circumstances. If additional funds are raised through
debt financing, such financing will increase the financial leverage of the
Company and earnings would be reduced by the associated interest expense. There
can be no assurance that additional financing will be available when needed on
terms favorable to the Company. Any future debt financing or issuance of
preferred stock by the Company would be senior to the rights of the holders of
Common Stock, and any future issuance of Common Stock would result in the
dilution of the then existing stockholders' proportionate equity interests in
the Company. If adequate funds are not available on acceptable terms, the
Company may be unable to continue its planned ILN installations, expand both the
number and dollar amount of Manufacturer commitments, or respond to competitive
pressures, any of which could have a material adverse effect on the Company's
business, results of operations and financial condition.
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DEPENDENCE ON THIRD PARTIES
The Company's success is dependent upon its ability to obtain and maintain
favorable contracts with Retailers and Manufacturers. The Company has derived
and will continue to derive substantially all its revenue from the participation
of Manufacturers on the ILN and from the operation of the ILN in supermarkets.
Any decrease in Manufacturers' promotional expenditures in general or the
decision of Manufacturers to promote their products through marketing strategies
that do not include the ILN could result in a smaller overall market for the
Company's services. In addition, the Company is dependent upon the condition and
performance of its Retailer partners. Consequently, factors affecting the
advertising and promotional strategy of Manufacturers or the condition of its
Retail partners, such as labor disputes or supply problems, could have a
material adverse effect on the Company's business, results of operations or
financial condition.
In addition, the Company's terminals have been manufactured by a single
supplier, Thermo, under an exclusive contract. As of March 24, 1998, the Company
terminated its contract with Thermo. See 'Management Discussion and Analysis of
Financial Condition and Results of Operations -- Year Ended December 31, 1997
Compared with Year Ended December 31, 1996.' As of March 25, 1998, the Company
is negotiating with a number of major equipment integrators to supply ILN
terminals and servers to the Company, and expects to conclude a non-exclusive
terminal supply agreement during the second quarter 1998. With any new supplier
with which the Company may contract in the future, the Company may experience
problems related to the transition of suppliers and their transition from
prototype to commercial deployment.
COMPETITION
The consumer product advertising and promotional business is intensely
competitive. Many media outlets compete for the advertising and promotional
dollars Manufacturers spend to promote their products. The Company's services
compete against these media outlets, such as television, radio, newspapers and,
most directly, coupons. A number of new, electronic marketing products and
services also have been introduced, including electronic shelf markers,
computer-screen equipped shopping carts, battery-powered coupon dispensers,
electronic marketing networks and frequent shopper programs. A number of
potential competitors have failed because of a lack of acceptance, lack of
capital, technical problems or a combination of these factors. While the Company
believes it provides a cost-effective targeted marketing service, there are many
factors a Manufacturer will take into account in allocating advertising or
promotional expenditures, and there can be no assurance that the Company's
services will compete effectively against alternative marketing outlets. Most of
the Company's competitors in the consumer product promotional and advertising
business are larger, possess significantly greater financial resources and have
longer operating histories than the Company. See Part I, Item 1.
'Business -- Customers and Competition.'
PATENTS, PROPRIETARY INFORMATION AND TRADEMARKS
The Company's success and ability to compete are dependent upon its
proprietary systems and technology. The Company holds licenses to United States
patents which cover various aspects of its systems and methods of distributing
promotions, and the Company also has an additional patent application pending.
Inter*Act Loyalty Network is a service mark of the Company and an application
for federal registration of the mark is pending. Applications for Inter*Act
Promotion Network'tm' and Coupon Central'tm' are also pending. However, it is
possible that patent rights held by the Company may be held invalid or that
disputes with third parties over the scope of licensed patents and other
proprietary rights may occur, including the Company's trademarks. Certain
aspects of the Company's services may not be adequately protected from
infringement or copying and there can be no assurance that the Company's
licensed patents or its trademarks would be upheld if challenged or that
competitors might not develop similar or superior processes or services outside
the protection of any patents licensed to the Company. In addition, litigation
may be necessary to enforce or protect the Company's intellectual property
rights or to defend against claims of infringement or invalidity. In February
1996, the Company filed suit against Catalina alleging that Catalina has
infringed United States Letters Patent No. 4,554,446 under which the Company is
a licensee. In May 1997, Catalina asserted a counter claim
27
<PAGE>
<PAGE>
alleging that the Company is infringing a newly issued Catalina patent, U.S.
Patent No. 5,612,868. The Company has answered denying the allegations, raising
affirmative defenses and seeking declaratory judgment of non-infringement,
invalidity and unenforceability. In January 1998, Catalina Marketing
International, Inc. filed suit against the Company alleging that the Company had
infringed U.S. Patent No. 4,674,041, acquired by Catalina International in
December 1997. In February 1998, Catalina International amended its complaint to
join as additional parties defendant Thermo and Coleman. The Company intends to
defend against Catalina International claims vigorously, and to pursue available
remedies, which may include filing appropriate counter claims. See Part I, Item
3. 'Legal Proceedings'. Misappropriation of the Company's intellectual property
or any potential litigation on the Company's rights to its intellectual property
could have a material adverse effect on the Company's business, results of
operations and financial condition. See Part I, Item 1.
'Business -- Intellectual Property Matters'.
NEW MANAGEMENT; DEPENDENCE ON KEY EMPLOYEES
The Company's business operating results and financial condition depend in
significant part upon the continued contributions of its management and other
key technical personnel and sales people. Most of the Company's management and
sales force has been hired by the Company in the last eighteen months. The
Company's Senior Vice President, Chief Operating Officer and Chief Financial
Officer has served in such capacity since April 1997. From September 1996
through April 1997, he served as Chief Financial Officer. The Company's Senior
Vice President and Chief Marketing Officer has served since September 1997 and
its Vice President of National Sales since April 1997. The Company's Chief
Executive Officer, Mr. Stephen Leeolou, was elected to such position on June 12,
1996. Mr. Leeolou is also a co-founder, Co-Chief Executive Officer and a
director of Vanguard.
An inability of new management and other recently hired employees of the
Company to adjust quickly to, and to perform as expected in, their respective
roles within the Company or an inability of the Company to attract and retain
employees with such skills could have a material adverse effect on the Company's
business, results of operations and financial condition. See Part III, Item 10.
'Directors and Executive Officers of the Company'.
The Company is also highly dependent on certain key technical employees and
on its ability to recruit, retain and motivate high quality technical personnel.
All employment agreements entered into by the Company are terminable at will by
either party. See Part III, Item 10. 'Directors and Executive Officers of the
Company'. The Company's future success will depend on its ability to retain key
managers and employ additional qualified senior managers. Competition for such
personnel is intense and the inability to attract and retain additional
qualified employees or the loss of current key employees and managers could
materially and adversely affect the Company's business, results of operations
and financial condition.
FLUCTUATIONS IN QUARTERLY OPERATING RESULTS
The Company has experienced fluctuations in its quarterly operating results
and may continue to do so in the future. Some of the factors that may affect the
quarterly operating results of the Company include (i) the timing and nature of
expansion efforts in both new and existing markets, (ii) the introduction of new
products or services and the market response to those introductions, (iii)
relationships with Retailers, (iv) relationships with Manufacturers, (v)
seasonal trends, particularly in the retail grocery industry, (vi) changes in
pricing policies or service offerings, (vii) changes in the level of marketing
and other operating expenses to support future growth, (viii) the mix of product
and promotional offerings on the ILN, (ix) competitive factors and (x) general
economic conditions. Consequently, quarterly revenues and operating results may
fluctuate significantly, and the Company believes that period-to-period
comparisons of results will not necessarily be meaningful and should not be
relied upon as an indication of future performance.
28
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<PAGE>
RELATIONSHIP WITH DIRECTORS, OFFICERS AND PRINCIPAL SHAREHOLDERS; POTENTIAL
CONFLICTS OF INTEREST; CONTROL BY SIGNIFICANT SHAREHOLDER
The directors, officers and principal shareholders of the Company have
potential conflicts of interest in certain transactions with the Company and
between the Company and certain parties controlled by or otherwise related to
directors, officers or principal shareholders. These transactions include asset
purchases, private purchases of stock, loans to the Company, licensing of
proprietary rights, option grants, consulting agreements and other transactions.
See Part III, Item 13. 'Certain Relationships and Related Transactions'. In
addition, directors and officers of Vanguard who are also directors or officers
of the Company, including Stephen R. Leeolou, the Company's Chairman and Chief
Executive Officer, have certain fiduciary obligations to each organization.
Vanguard and directors and officers of Vanguard who are also directors and
officers of the Company are in positions involving the possibility of conflicts
of interest with respect to certain transactions concerning the Company.
Although the terms of certain of these arrangements were established in
consultation with the Company, they were not the result of arm's-length
negotiations. Accordingly, although the Company believes that the terms of these
arrangements were reasonable under the circumstances, there can be no assurance
that these agreements are as favorable to the Company as those that could be
obtained from unaffiliated third parties. With respect to future transactions,
the Company currently has not adopted or formulated any procedures to resolve
conflicts of interest other than customary board practices such as relying on
the judgment of disinterested directors, when appropriate.
As of December 31, 1997, Vanguard and certain of its officers and directors
who are also officers and directors of the Company owned beneficially
approximately 41% of the outstanding Common Stock. As a result of the
relationship between Vanguard and the Company and this share ownership, Vanguard
has significant control over the Company and the conduct of its business. These
factors may have the effect of delaying, deferring or preventing a change in
control of the Company. See Part III, Item 10. 'Directors and Executive Officers
of the Company' and Part III, Item 12. 'Security Ownership of Certain Beneficial
Owners and Management'.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary financial information that are
required to be included pursuant to this Item 8. are listed in and follow the
Index to Financial Statements following Item 14 of this Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
29
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<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The following table sets forth certain information about each of the
Company's executive officers and directors.
<TABLE>
<CAPTION>
NAME AGE POSITION
- -------------------------------------------- --- --------------------------------------------------------------
<S> <C> <C>
Stephen R. Leeolou.......................... 42 Chairman of the Board of Directors, Chief Executive Officer;
Treasurer and Director
Richard A. Vinchesi, Jr. ................... 31 Senior Vice President; Chief Operating Officer and Chief
Financial Officer
William F. Penwell.......................... 65 Vice Chairman of the Board of Directors; Secretary; Director
Paul A. Nash................................ 41 Senior Vice President; Director
James F. Brandhorst, Jr. ................... 56 Senior Vice President and Chief Marketing Officer
Thomas A. Manna............................. 40 Vice President, National Sales
Michael T. Leeolou.......................... 40 Vice President, Retail Services
Robert M. DeMichele......................... 53 Director
William P. Emerson, Jr. .................... 45 Director
Haynes G. Griffin........................... 51 Director
Richard P. Ludington........................ 51 Director
L. Richardson Preyer, Jr. .................. 50 Director
Brian A. Rich............................... 37 Director
Stuart S. Richardson........................ 51 Director
Robert A. Silverberg........................ 62 Director
</TABLE>
Executive officers of the Company are elected annually by the Board of
Directors and serve until their successors are duly elected and qualified. The
Board of Directors is classified. Mr. Penwell, Mr. Preyer and Mr. Silverberg
will hold office until the next annual meeting of shareholders in 1998. Mr.
Nash, Mr. DeMichele, Mr. Griffin and Mr. Rich will hold office until the annual
meeting of shareholders in 1999. Mr. Leeolou, Mr. Emerson, Mr. Ludington and Mr.
Richardson will hold office until the annual meeting of shareholders in 2000.
Directors elected at the 1998 annual meeting of shareholders will hold office
for three years.
Stephen R. Leeolou has been a director of the Company since its inception
in 1993 and Chairman of the Board of Directors and Treasurer of the Company
since 1995. In June 1996, Mr. Leeolou became Chief Executive Officer of the
Company. Mr. Leeolou is a co-founder and Co-Chief Executive Officer of Vanguard,
and has served as an executive officer and director of Vanguard since its
inception in 1984. See Part III, Item 13. 'Certain Relationships and Related
Transactions'. Since 1994, Mr. Leeolou has been a charter director of the North
Carolina Electronics and Information Technology Association. Mr. Leeolou also
serves as a director of International Wireless Communications Inc., a
California-based company involved in wireless telecommunications, licensing,
construction and operations primarily in Asia and Lation America. Stephen R.
Leeolou is the brother of Michael T. Leeolou.
Richard A. Vinchesi, Jr. has been Senior Vice President, Chief Operating
Officer and Chief Financial Officer of the Company since April 1997. He served
as Vice President and Chief Financial Officer from September 1996 to April 1997.
Prior thereto, he served in various capacities in the Corporate Finance
department of Salomon Brothers Inc., most recently as a Vice President in the
Media Group.
William F. Penwell has been Vice Chairman of the Board of Directors of the
Company since 1995 and Secretary since June 1996. Mr. Penwell served as
President and Chief Executive Officer of the Company from 1993 to 1996 and has
served as a director of the Company since 1994. Prior to joining the Company in
1993, Mr. Penwell was Chairman of TSS Ltd., a publicly traded company engaged in
the manufacture and deployment of terminals used to dispense coupons. Prior
thereto, Mr. Penwell was Chairman and Chief Executive Officer of the Sperry &
Hutchinson Co., Inc. (issuers of S&H green stamps) and President and Chief
Executive Officer of its Counter Intelligence Division which operated a frequent
shopper and database marketing business.
30
<PAGE>
<PAGE>
Paul A. Nash has been a director of the Company since its inception and has
been a Senior Vice President of the Company since 1993. From 1994 to January
1996, Mr. Nash also served as the Company's Chief Operating Officer. Prior
thereto, he was Chairman and Chief Executive Officer for Advanced Technical
Services, Inc., a nationwide ATM manufacturing, maintenance and support company.
James F. Brandhorst, Jr. has been Senior Vice President and Chief Marketing
Officer since September 1997. From April 1992 through March 1997, Mr. Brandhorst
served in a number of positions with R.J. Reynolds including as Managing
Director and Regional Vice President of R.J. Reynolds International in Malaysia
and Senior Vice President, Marketing and Business Planning of RJR Tobacco
International. Prior thereto, he served in various executive positions in
advertising including positions with The Coca-Cola Company.
Thomas A. Manna has been Vice President, National Sales since April 1997.
Prior to joining the Company, he held various positions with Catalina Marketing
Corporation including Senior Vice President/General Manager, SaveNOW! from
January 1996 through March 1997, Senior Vice President, National Sales and
Client Services from March 1994 through December 1995 and Vice President Sales
and Retail East from June 1991 through February 1994.
Michael T. Leeolou has been Vice President, Retail Services since September
1996. From September 1995 through August 1996, Mr. Leeolou was a Regional Sales
Manager for Geotek Communications. From January 1990 through August 1995 he was
a Senior Account Executive with AT&T. Michael T. Leeolou is the brother of
Stephen R. Leeolou.
Robert M. DeMichele has been a director of the Company since 1995 and has
served as President, Chief Executive Officer and a director of Lexington Global
Asset Managers, Inc., a diversified financial services holding company, since
1995. Prior thereto, Mr. DeMichele was President, Chief Executive Officer and a
director of Piedmont Management Company, Inc., formerly the parent corporation
of Lexington Global Asset Managers, Inc. Mr. DeMichele also serves as a director
of Vanguard, Chartwell Reinsurance Co. and the Navigators Group, Inc.
William P. Emerson, Jr. has been a director of the Company since its
inception and has served as the President and Chief Executive Officer of all
divisions of Wilmington Shipping Company since 1991. During 1995, Mr. Emerson
served as Chairman of the Company's Board of Directors. Wilmington Shipping
Company services the international trade community through divisions that
include steamship line agents, customs brokers and freight forwarders, a
warehouse and a container maintenance and repair station.
Haynes G. Griffin has been a director of the Company since its inception
and from 1993 to 1995 Mr. Griffin served as Chairman of the Board of Directors
of the Company. Mr. Griffin is a co-founder of Vanguard and has served as an
executive officer and a member of its Board of Directors since its inception in
1983. Mr. Griffin is presently Chairman and Co-Chief Executive Officer of
Vanguard. Mr. Griffin also serves as Chairman of the Board of Directors of
International Wireless Communications, Inc. Mr. Griffin also is a member of the
Boards of Directors of Lexington Global Asset Managers, Inc. and Geotek
Communication, Inc. and recently served on the United States Advisory Council on
the National Information Infrastructure. He is a past Chairman of the Cellular
Telecommunications Industry Association.
Richard P. Ludington has been a director of the Company since 1993. Mr.
Ludington is presently in the private practice of law. From 1996 to 1997, Mr.
Ludington was Vice President-Real Estate of Forest Land Group, L.L.C., a
timberland investment corporation. Prior thereto, Mr. Ludington has served as
Southeast Regional Director for The Conservation Fund, a nonprofit organization
that creates partnerships with private and public sector corporations and
organizations to help protect America's outdoor environment.
L. Richardson Preyer, Jr. has been a director of the Company since its
inception. Mr. Preyer is a co-founder of Vanguard and has served as its Vice
Chairman of the Board, Executive Vice President and Treasurer since its
inception in 1983. Prior to the formation of Vanguard, Mr. Preyer was Vice
President of Caro-Cell which was engaged in the formation of partnerships to
fund and apply for cellular telephone authorizations. Mr. Preyer is a cousin of
Stuart S. Richardson.
31
<PAGE>
<PAGE>
Brian A. Rich has been a director of the Company since June 1996. Mr. Rich
has served as Managing Director and Group Head of Toronto Dominion Capital, the
U.S. merchant bank affiliate of Toronto Dominion Bank, since July 1995. Prior
thereto, Mr. Rich was a managing director of the Communications Finance Group of
Toronto Dominion Bank in New York where he focused on transactions in the
wireless communications, cable and broadcast industries. Mr. Rich also serves as
a director of Teletrac, Inc. and International Wireless Communications, Inc.
Stuart S. Richardson has been a director of the Company since 1995 and has
served as Chairman of Lexington Global Asset Managers, Inc., a diversified
financial services holding company, since 1995. Prior thereto, was an executive
of Piedmont Management Company, Inc., formerly the parent corporation of
Lexington Global Asset Managers, Inc., and served as its Vice Chairman from 1986
to 1995. Mr. Richardson also is the former Chairman of the Board of
Richardson-Vicks, Inc. and serves as Chairman of the Board of Vanguard and a
director of Chartwell Reinsurance Co. Mr. Richardson is a cousin of Mr. Preyer.
Robert A. Silverberg has been a director of the Company since June 1996.
Mr. Silverberg has been Executive Vice President and Director of Vectra Bank
since 1995. Prior thereto, Mr. Silverberg was Chairman of the Board and
President of First Denver Corporation and Chairman of the Board of its
subsidiary, First National Bank of Denver. Mr. Silverberg has also been
President and Chairman of the Board of 181 Realty Company, a commercial real
estate holding company, and has been a director of Vanguard since 1984.
In addition to the officers of the Company mentioned above, Blair Jenkins
has been President and Chief Executive Officer of Inter*Act International
Holdings, Inc., the Company's subsidiary presently developing the Company's
United Kingdom business, since April 1997. From 1993 until joining the Company
in April 1997, he was a Chief Executive with Catalina Marketing U.K. Prior
thereto he served as Senior Vice President Restaurant Operations with
Pepsico-Pizza Hut U.K. and Chief Executive of Allied Bakeries operating division
of Associated British Foods.
The Company's bylaws provide that the number of directors shall be not less
than 7 nor more than 12, such number within the foregoing range to be fixed from
time to time by the Board of Directors or shareholders. The number is presently
fixed at 12, although there are presently only 11 directors of the Company. The
holders of a majority of the Company's Common Stock have entered into an
agreement whereby Vanguard is entitled to designate six of the 12 directors
until such time as the Company has completed an initial public offering of its
Common Stock. See Part III, Item 13. 'Certain Relationships and Related
Transactions'.
COMMITTEES
The Compensation and Stock Option Committee of the Board of Directors
consists of Messrs. Griffin (Chairman), Richardson, Preyer and Emerson. This
Committee recommends employee salaries and incentive compensation to the Board
of Directors and administers the Company's stock option plans.
The Audit Committee of the Board of Directors consists of Messrs.
Silverberg (Chairman), Emerson, Ludington and Penwell. The Audit Committee makes
recommendations to the Board of Directors concerning its review of the Company's
internal controls and accounting system and its review of the annual audit, and
regarding the selection of independent auditors.
DIRECTOR COMPENSATION
Directors of the Company have received options to purchase Common Stock in
lieu of cash compensation for serving on the Board of Directors or its
committees. The number of options granted in lieu of cash are determined each
year by the Compensation and Stock Option Committee. In granting options, such
Committee considers the individual directors' service on committees and other
time devoted to Company business as a director and whether the director has also
been compensated as an employee. During 1997, the members of the Board of
Directors received options for their service as directors as follows: Mr.
Emerson (3,000 shares); Mr. DeMichele (7,500 shares); Mr. Griffin (3,000
shares); Mr. Ludington (3,000 shares); Mr. Preyer (10,000 shares); Mr. Rich
(3,000 shares); Mr.
32
<PAGE>
<PAGE>
Richardson (7,500 shares); and Mr. Silverberg (3,000 shares). Such options are
exercisable at a price of $10.00 per share, fully vested and expire 10 years
from the date of grant.
ITEM 11. EXECUTIVE COMPENSATION
COMPENSATION OF EXECUTIVE OFFICERS
The following table sets forth all compensation paid by the Company to (i)
its Chairman of the Board and Chief Executive Officer and (ii) each of the four
most highly compensated individuals serving as executive officers of the Company
at the end of 1997 (collectively, the 'Named Officers'), for services rendered
in all capacities to the Company during the periods indicated.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
---------------
ANNUAL COMPENSATION SECURITIES
----------------------------- UNDERLYING
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) OPTIONS/SARS(#)
- ------------------------------------------------------------------ ---- --------- -------- ---------------
<S> <C> <C> <C> <C>
Stephen R. Leeolou ............................................... 1997 50,000 -- --
Chairman of the Board, Chief Executive Officer and and Treasurer 1996 11,538 -- 192,600
1995 -- -- 8,400
Richard A. Vinchesi, Jr. ........................................ 1997 142,538 -- 52,000
Senior Vice President, Chief Operating Officer and Chief 1996 33,157 15,000 48,000
Financial Officer 1995 -- -- --
William F. Penwell ............................................... 1997 120,923 12,500 --
Vice Chairman of the Board and Secretary 1996 71,821 6,500 24,000
1995 109,256 12,000 --
Paul A. Nash ..................................................... 1997 138,600 -- --
Senior Vice President 1996 132,996 4,000 14,000
1995 136,855 4,000 --
Thomas A. Manna .................................................. 1997 105,962 155,000(1) 70,000
Vice President National Sales 1996 -- -- --
1995 -- -- --
</TABLE>
- ------------
(1) Of such amount, $100,000 represents a signing bonus payable to Mr. Manna
upon execution of an employment agreement. See ' -- Employment and other
Agreements'.
------------------------
Option Grants, Exercises and Holdings and Fiscal Year-end Option Values.
The following table summarizes all option grants during the year ended December
31, 1997 to the Named Officers.
<TABLE>
<CAPTION>
OPTION GRANTS DURING 1997 POTENTIAL REALIZABLE
------------------------------------------------------- VALUE AT ASSUMED
PERCENT ANNUAL RATES OF
NUMBER OF OF TOTAL STOCK PRICE
SHARES OPTIONS APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OR OPTION TERM(2)
OPTIONS EMPLOYEES BASE PRICE EXPIRATION --------------------
NAME GRANTED(#) IN 1997(%) PER SHARE DATE 5%($) 10%($)
- ------------------------------------- ----------- ----------- ----------- ---------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
Stephen R. Leeolou................... -- -- -- -- -- --
Richard A. Vinchesi, Jr.(1).......... 52,000 $10 $ 10.00 4/29/07 327,025 828,746
William F. Penwell................... -- -- -- -- -- --
Paul A. Nash......................... -- -- -- -- -- --
Thomas A. Manna(1)................... 70,000 13 10.00 3/30/07 440,226 1,115,620
</TABLE>
(footnotes on next page)
33
<PAGE>
<PAGE>
(footnotes from previous page)
(1) Mr. Vinchesi's options were granted under the 1997 Long-term Incentive Plan.
Of Mr. Manna's options, 35,000 were granted under the 1996 Nonqualified
Stock Option Plan and 35,000 were granted under the 1994 Stock Compensation
Plan. For a summary of the terms of such options, see 'Stock Compensation
Plans' below.
(2) Amounts represent hypothetical gains that could be achieved for the
respective options if exercised at the end of the option term. These gains
are based on assumed rates of stock price appreciation, mandated by rules
promulgated by the Securities and Exchange Commission, of 5% and 10%
compounded annually from the date the respective options were granted to
their expiration date, and are not intended to forecast possible future
appreciation, if any, in the price of the Company's Common Stock. The gains
shown are net of the option exercise price, but do not include deductions
for federal or state income taxes or other expenses associated with the
exercise of the options or the sale of the underlying shares. The actual
gains, if any, on the exercise of the stock options will depend on the
future performance of the Common Stock, the option holder's continued
employment through the option period and the date on which the options are
exercised.
------------------------
No Named Officers exercised any stock options during 1997. The following
table sets forth information concerning all option holdings for the year ended
December 31, 1997, with respect to the Named Officers.
<TABLE>
<CAPTION>
AGGREGATED OPTIONS/SAR EXERCISES IN 1997
AND YEAR-END 1997 OPTION VALUES
-------------------------------------------------------------------
NUMBER OF
SECURITIES
UNDERLYING VALUE OF
UNEXERCISED IN-THE-MONEY
OPTIONS/SARS AT OPTIONS/SARS
FISCAL AT FISCAL
SHARES YEAR-END(#) YEAR-END($)(1)
ACQUIRED ON VALUE EXERCISABLE/ EXERCISABLE/
NAME EXERCISE(#) REALIZED($) UNERERCISABLE UNEXERCISABLE
- --------------------------------------------- -------------- ----------- --------------- ---------------
<S> <C> <C> <C> <C>
Stephen R. Leeolou........................... 202,000 913,700 102,000/100,000 463,700/450,000
Richard A. Vinchesi, Jr. .................... 100,000 120,000 9,600/90,400 24,000/96,000
Thomas A. Manna.............................. 70,000 0 0/70,000 0/0
William F. Penwell........................... 66,000 396,500 37,350/28,650 241,625/154,875
Paul A. Nash................................. 29,000 138,000 15,400/13,600 74,000/64,000
</TABLE>
- ------------
(1) There is no trading market for the Common Stock. Management estimated the
fair market value of the Common Stock to be $10.00 per share at December 31,
1997.
------------------------
Stock Compensation Plans. The Company has a 1994 Stock Compensation Plan
that provides for the issuance of shares of Common Stock to key employees,
consultants and directors pursuant to stock options that meet the requirements
of Section 422 of the Internal Revenue Code of 1986, as amended (incentive stock
options), options that do not meet such requirements (nonqualified stock
options) and stock bonuses. All options under the plan must be granted at an
exercise price not less than fair market value. Stock bonuses may be in the form
of grants of restricted stock. The aggregate number of shares of Common Stock
that may be issued pursuant to the plan may not exceed 330,000 shares, subject
to adjustment upon occurrence of certain events affecting the Company's
capitalization. As of December 31, 1997, 17,900 shares remain available for
future grants under the 1994 Stock Compensation Plan.
The Company also has a 1996 Nonqualified Stock Option Plan that provides
for the issuance of shares of Common Stock to key employees, consultants and
directors pursuant to nonqualified stock options. All options must be granted at
an exercise price not less than $5.50 per share. The aggregate number of shares
of Common Stock that may be issued pursuant to the plan may not exceed 600,000
shares of Common Stock, subject to adjustment upon occurrence of certain events
affecting the
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<PAGE>
Company's capitalization. This plan is subject to shareholder approval. As of
December 31, 1997, 17,000 shares remain available for future grants under the
1996 Nonqualified Stock Option Plan.
The Company also has established the 1997 Long-Term Incentive Plan that
provides for the issuance of shares of Common Stock to officers, supervisory
employees, directors or consultants pursuant to incentive and nonqualified stock
options and restricted and unrestricted stock awards. All options under the plan
must be granted at an exercise price not less than the fair market value of the
Common Stock at the time of the grant. No stock awards or stock appreciation
rights have been granted under the plan. The aggregate number of shares that may
be issued pursuant to this plan may not exceed 500,000 shares, subject to
certain adjustments affecting the Company's capitalization. As of December 31,
1997, 135,200 shares remain available for future grants under this plan.
The foregoing plans are administered by the Compensation and Stock Option
Committee of the Board of Directors, which is authorized, subject to the
provisions of the Plan, to determine to whom and at what time options and
bonuses may be granted and the other terms and conditions of the grant.
EMPLOYMENT AND OTHER AGREEMENTS
All of the Company's employees, including the Named Officers, are employees
at will. Each of the Named Officers and each employee of the Company is required
to sign non-compete and non-disclosure agreements covering such items as
ownership and authorship of all work and materials, trade secrets, confidential
information, unfair business practices and covenants not to compete.
In connection with Mr. Manna's offer of employment in March 1997, the
Company and Mr. Manna entered into a letter agreement in which the Company
agreed to pay Mr. Manna a base salary of $145,000, a guaranteed $55,000
incentive pay amount in the first year of employment and a $100,000 incentive
pay amount in the second year of employment, contingent on reaching mutually
agreeable quarterly sales objectives. In addition, Mr. Manna was paid a one-time
signing bonus in the amount of $100,000 and was granted options to purchase an
aggregate of 70,000 shares of Common Stock at an exercise price of $10.00 per
share vesting over five years. Should Mr. Manna be terminated for any reason
other than cause, the Company also agreed to immediately vest 50% of all
unvested outstanding options that were granted to him or 40,000 shares,
whichever is greater, and to pay one year of severance pay. In addition, during
the first five years of employment, should a change in control occur for the
Company, Mr. Manna's unvested options will automatically vest.
In connection with Mr. Brandhorst's offer of employment in September 1997
the Company and Mr. Brandhorst entered into a letter agreement pursuant to which
the Company agreed to pay Mr. Brandhorst a base salary of $130,000 per annum, a
guaranteed first year bonus of $25,000 with bonus opportunities available in
subsequent years based on pre-determined objectives and reimbursement of
temporary living allowance for the first year of employment. In addition, Mr.
Brandhorst was granted options to purchase 50,000 shares of Common Stock at an
exercise price of $10.00 per share vesting over five years. If the Company is
sold at any time during Mr. Brandhorst's employment, his options will
immediately vest in full.
The Company has entered into other various employment agreements with
certain other of its employees, all of which are terminable at will by either
party and none of which is considered material.
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
Decisions on compensation on the Company's Chief Executive Officer and of
its other executive officers are made by the Company's Board of Directors upon
recommendations of the Compensation Committee (the 'Committee'). Four
nonemployee directors currently serve as members of the Committee: Haynes G.
Griffin, Chairman, Stuart S. Richardson, L. Richardson Preyer, Jr., and William
P. Emerson, Jr.
The Committee's philosophy is to provide the Company's executive officers
with reasonable cash compensation, augmented by incentive compensation
represented by stock options. The Company has found that, in many instances, it
can attract highly qualified persons at salaries that are below what they could
obtain elsewhere in exchange for stock options which, if the Company is
successful, provide
35
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<PAGE>
considerable upside potential. The Committee believes that stock options that
vest over a substantial length of time (generally over three to five years) are
a particularly effective incentive for executives of an entrepreneurial company
such as the Company in its start-up phase because they enable the Company to
attract persons who have a willingness to work very hard to make the Company
successful. Since it believes stock options are particularly effective, it has
sought to emphasize stock options and to de-emphasize cash compensation for the
Company's executive officers.
The Committee believes that it is important for the Company's Chief
Executive Officer to receive cash compensation from the Company to reflect the
substantial time commitment and the effort involved in leading an
entrepreneurial company. However, since Stephen R. Leeolou, the Company's
Chairman and Chief Executive Officer, is a full-time employee of Vanguard, the
Company's largest shareholder, and since Mr. Leeolou's time commitment to the
Company is less than full-time, the Committee has not sought to pay Mr. Leeolou
a competitive salary. Mr. Leeolou presently receives a salary of $50,000 per
year. However, because the Committee feels that Mr. Leeolou's efforts are
important to the long-term success of the Company, in June 1996 it recommended
awarding Mr. Leeolou an option to purchase 192,600 shares of the Company's
common stock at a price of $5.50 per share. That option was approved by the
Board.
Haynes G. Griffin L. Richardson Preyer, Jr. Stuart S.
Richardson William P. Emerson, Jr.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Haynes G. Griffin, L. Richardson Preyer, Jr. and Stuart S. Richardson,
members of the Company's Compensation and Stock Option Committee, are each
directors and executive officers of Vanguard. Stephen R. Leeolou, Chief
Executive Officer of the Company, also is a director and executive officer of
Vanguard. Each of the foregoing persons and Vanguard, as well as William P.
Emerson, Jr., who is also a member of the Compensation and Stock Option
Committee, have provided capital to the Company and engaged in related
transactions. In addition, Vanguard has provided and continues to provide
certain services to the Company pursuant to consulting and management services
agreements entered into in 1995 and 1996. See Part III, Item 13. 'Certain
Relationships and Related Transactions'.
INDEMNIFICATION MATTERS
The North Carolina Business Corporation Act (the 'Business Corporation
Act') provides for mandatory indemnification against reasonable expenses for a
director or officer who is wholly successful in the defense of any proceeding to
which he is a party because he is or was a director or officer of a corporation.
Additionally, as permitted by the Business Corporation Act, the Company's Bylaws
provide for indemnification of the Company's directors and Indemnified Officers
(executive officers who are also directors and any other officer who is
designated by the Board as an Indemnified Officer) against any and all liability
and expenses in any proceeding, including reasonable attorneys' fees, arising
out of their status or activities as directors and officers, except for
liability or litigation expense incurred on account of activities that at the
time taken were not in good faith or were known or reasonably should have been
known by such director or officer or employee to be clearly in conflict with the
best interests to the Company or that such director or officer had reason to
believe were unlawful.
At present, there is no pending litigation or proceeding involving any
director or officer, employee or agent of the Company where indemnification will
be required. The Company is not aware of any threatened litigation or proceeding
which may result in a claim for such indemnification.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
PRINCIPAL SHAREHOLDERS
The following table sets forth the ownership of the Company's Common Stock
by each person known by the Company to be the owner of 5% or more of the Common
Stock, by each person who is a
36
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<PAGE>
director or named officer of the Company and by all directors and executive
officers of the Company as a group.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY
OWNED(1)
-----------------------
SHAREHOLDER NUMBER PERCENT(1)
- ------------------------------------------------------------------------------- --------- ----------
<S> <C> <C>
Vanguard Cellular Operating Corp.(2)........................................... 2,944,381 27.79%
Piedmont Acorn Investors Limited Partnership(3)(4)............................. 786,286 7.42
Clearing Systems, Inc(5)....................................................... 816,902 7.71
Stephen R. Leeolou(6).......................................................... 444,162 4.19
William F. Penwell(7).......................................................... 52,852 *
Paul A. Nash(8)................................................................ 832,302 7.85
Richard P. Ludington(9)........................................................ 113,567 1.07
William P. Emerson, Jr.(10).................................................... 317,837 3.00
Haynes G. Griffin(11).......................................................... 460,464 4.35
L. Richardson Preyer, Jr.(4)(12)............................................... 381,762 3.60
Richard A. Vinchesi, Jr.(13)................................................... 30,000 *
Stuart S. Richardson(4)(14).................................................... 113,500 1.07
Robert A. Silverberg(15)....................................................... 26,000 *
Robert M. DeMichele(4)(16)..................................................... 73,500 *
Thomas A. Manna(17)............................................................ 14,000 *
Brian A. Rich(18).............................................................. 6,000 *
All Directors and Officers as a group (15 persons)(19)......................... 2,823,946 26.65
</TABLE>
- ------------
* Owns less than 1% of the total outstanding Common Stock.
(1) Applicable percentage of ownership is based on 10,596,186 shares of Common
Stock outstanding as of March 1, 1998. Beneficial ownership is determined
in accordance with the rules of the Commission and includes voting and
investment power with respect to securities. Shares issuable under options
or warrants currently excisable or exercisable within 60 days of March 1,
1998 are deemed outstanding for purposes of computing the percentage
ownership of the person holding such options or warrants, but are not
deemed outstanding for purposes of computing the percentage of any other
person. Except for shares held jointly with a person's spouse or subject to
applicable community property laws, or as indicated in the footnotes to
this table, each stockholder identified in the table possesses sole voting
and investment power with respect to all shares of Common Stock shown as
beneficially owned by such stockholder.
(2) Includes 900,113 shares that Vanguard has the right to acquire under a
warrant at $23.50 per share under an amended and restated warrant. Also
includes 169,722 shares that Vanguard has the right to acquire at $.01 per
share under a warrant issued in the Private Placement. See Part III, Item
13. 'Certain Relationships and Related Transactions'. These shares may also
be deemed beneficially owned by Messrs. Stephen Leeolou, Griffin, Preyer
and Richardson, each of whom is a director and executive officer of
Vanguard.
(3) These shares are owned of record by Piedmont Acorn Investors Limited
Partnership. Lunsford Richardson, Jr. is the general partner of Piedmont
Acorn Investors Limited Partnership and may also be deemed to beneficially
own such shares.
(4) The descendants of Lunsford Richardson, Sr., their spouses, trusts, and
corporations in which they have interests and charitable organizations
established by such descendants (collectively referred to as the
'Richardson Family') beneficially own approximately 1,268,048 shares or
11.97% of the Company's Common Stock as of March 1, 1998. Such number of
shares includes 786,286 shares owned by Piedmont Acorn Investors Limited
Partnership, 50,000 shares held by the Smith Richardson Foundation, Inc.,
50,000 shares held by Piedmont Harbor-Piedmont Associates Limited
Partnership, 342,162 shares held directly by L. Richardson Preyer, Jr., and
39,600 shares which Mr. Preyer has the right to acquire under presently
exercisable options granted to him under the
(footnotes continued on next page)
37
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<PAGE>
(footnotes continued from previous page)
Company's stock option plans. The individuals and institutions constituting
the Richardson Family have differing interests and may not necessarily vote
their shares in the same manner. Furthermore, trustees and directors have
fiduciary obligations (either individually or jointly with other
fiduciaries) under which they must act on the basis of fiduciary
requirements which may dictate positions that differ from their personal
interests.
(5) These shares are owned of record by Clearing Systems, Inc. ('CSI'). Paul A.
Nash, a director and executive officer of the Company, and Michael R.
Jones, a former director of the Company, are principal shareholders of CSI
and may also be deemed to beneficially own such shares.
(6) Includes 102,000 shares that Mr. Leeolou has the right to acquire under
presently exercisable stock options granted to him under the Company's
stock option plans. Does not include shares owned by Vanguard, for which
Mr. Stephen Leeolou serves as a director and executive officer. Mr. Stephen
Leeolou disclaims beneficial ownership of such shares.
(7) Includes 41,350 shares that Mr. Penwell has the right to acquire under
presently exercisable stock options granted to him under the Company's
stock option plans.
(8) Includes 15,400 shares that Mr. Nash has the right to acquire under
presently exercisable stock options granted to him under the Company's
stock option plans. Also includes 816,902 shares owned of record by CSI
that may be deemed beneficially owned by Mr. Nash.
(9) Includes 18,000 shares that Mr. Ludington has the right to acquire under
presently exercisable stock options granted to him under the Company's
stock option plans, and 17,113 shares held by a trust for the benefit of
his children.
(10) Includes 42,200 shares shares that Mr. Emerson has the right to acquire
under presently exercisable options granted to him under the Company's
stock option plans. Includes 30,000 shares held by a trust for the benefit
of his sons, 5,000 shares held by an entity controlled by Mr. Emerson, and
4,600 shares held by members of his immediate family.
(11) Includes 32,600 shares that Mr. Griffin has the right to acquire under
presently exercisable options granted to him under the Company's stock
option plans, and 85,702 shares owned by a partnership of which his brother
is general partner. Does not include shares owned by Vanguard, for which
Mr. Griffin serves as a director and executive officer. Mr. Griffin
disclaims beneficial ownership of such shares.
(12) Includes 39,600 shares that Mr. Preyer has the right to acquire under
presently exercisable options granted to him under the Company's stock
option plans. Does not include shares owned by Vanguard, for which Mr.
Preyer serves as a director and executive officer. Mr. Preyer disclaims
beneficial ownership of such shares.
(13) Includes 20,000 shares that Mr. Vinchesi has the right to acquire under
presently exercisable options granted to him under the Company's stock
option plans.
(14) Represents 50,000 shares held by the Smith Richardson Foundation, of which
Mr. Richardson serves as one of eight trustees and 50,000 shares held by
Piedmont Harbor-Piedmont Associates Limited Partnership, of which Mr.
Richardson is a general partner. The shares held by the Smith Richardson
Foundation are also reported as beneficially owned by Robert M. DeMichele.
Mr. Richardson disclaims beneficial ownership of the shares held by such
foundation and partnership. Does not include shares owned by Vanguard, for
which Mr. Richardson serves as a director and executive officer. Mr.
Richardson disclaims beneficial ownership of such shares. Includes 13,500
shares that Mr. Richardson has the right to acquire under the presently
exercisable options granted to him under Company's stock option plans.
(15) Includes 6,000 shares shares that Mr. Silverberg has the right to acquire
under presently exercisable options granted to him under the Company's
stock option plans.
(16) Includes 50,000 shares held by the Smith Richardson Foundation, of which
Mr. DeMichele serves as one of eight trustees. The shares held by the Smith
Richardson Foundation are also reported as
(footnotes continued on next page)
38
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<PAGE>
(footnotes continued from previous page)
beneficially owned by Stuart S. Richardson. Mr. DeMichele disclaims
beneficial ownership of the shares held by such foundation. Includes 13,500
shares that Mr. DeMichele has the right to acquire under presently
exercisable options granted to him under the Company's stock option plans.
(17) Includes 14,000 shares that Mr. Manna has the right to acquire under
presently exercisable options granted to him under the Company's stock
option plans.
(18) Does not include the 363,636 shares owned by Toronto Dominion Investments,
Inc., an affiliate of Mr. Rich's employer, Toronto Dominion Bank. Includes
6,000 shares that Mr. Rich has the right to acquire under presently
exercisable options granted to him under the Company's stock option plans.
(19) Includes 372,150 shares, shares that may be purchased under presently
exercisable options granted to directors and officers under the Company's
stock option plans.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company was incorporated in 1993 and in April of that year purchased
certain technology and other assets, including software and trademarks and
service marks under which the ILN was developed, and assumed certain
liabilities, of Clearing Systems, Inc. ('CSI') in exchange for 816,902 shares of
the Company's authorized Common Stock. CSI is a Delaware corporation founded in
1992 whose principal shareholders are Paul A. Nash, a director of the Company,
and Michael R. Jones, a former director of the Company. CSI was the shell
corporation under which certain of the Company's technology was first developed
and has had no business operation. On June 15, 1993, Mr. Jones assigned to the
Company his rights as licensee of certain patent rights, including the patent
presently used in the Company's business. See Part I, Item 1.
'Business -- Intellectual Property Matters'.
From time to time after such purchase, the Company has obtained capital for
its business by issuing shares of its Common Stock in private transaction and
directors, officers, and principal shareholders of the Company and members of
their immediate families and certain related entities have purchased shares. The
first of these transactions was consummated April 1993, whereby the Company
issued 1,999,998 shares of its Common Stock at a purchase price of approximately
$1.02 per share to certain individual investors including Messrs. Preyer,
Griffin, Leeolou, Emerson, and Ludington.
In connection with their April 1993 purchases of Common Stock, the initial
investors agreed to lend the Company and aggregate of $1.6 million. These loans
were made to the Company in 1994 and included loans made by the following
investors in the amounts indicated: Mr. Preyer, $196,722; Mr. Griffin, $196,722;
Mr. Leeolou, $196,722; Mr. Emerson, $177, 050; and Mr. Ludington, $65,574. Also
included were loans made by Alonzo Family Partners, Ltd., a limited partnership
owned by the brother of Haynes G. Griffin and certain members of the brother's
immediate family, and Mr. Penwell, who each purchased part of an initial
investor's interest and agreed to fulfill a portion his loan commitment. The
promissory notes issued for such loans, bearing interest with rates from prime
plus 2% to 15%, were exchanged for 8.5% convertible notes in 1995 in the same
principal amount and with a conversion price of $5.00 per share.
In May 1995, Vanguard, purchased 400,000 shares of Common Stock of the
Company at a purchase price of $5.00 per share. In connection with such
purchase, Vanguard received a warrant to purchase up to an additional 10.27% of
the Common Stock of the Company (the 'Vanguard Warrant'). The Vanguard Warrant
was restructured immediately prior to consummation of the Private Placement to
provide Vanguard with the right to buy 900,113 shares at any time before May 5,
2005 at $23.50 per share.
On October 13, 1995, the Board of Directors approved a private offering of
Common Stock at a purchase price of $5.50 per share, pursuant to which $18.1
million of Common Stock was sold. The Purchasers included Mr. Preyer (45,454
shares), Mr. Griffin (45,454 shares), Mr. Leeolou (45,454 shares) Mr. DeMichele
(10,000 shares), Alonzo Family Partners, Ltd. (36,363 shares), Shipyard
Associates, a general partnership of which certain of Mr. Emerson's family
members and an entity affiliated with Mr. Emerson were general partners,
Vanguard (1,454,546 shares), Toronto Dominion Investments, Inc.
39
<PAGE>
<PAGE>
('TDI') (363,636 shares), and Piedmont Acorn Investors Limited Partnership
(786,286 shares). In connection with this offering, purchasers of $250,000 or
more of Common Stock received warrants to purchase a number of shares of Common
Stock equal to 5% of the shares purchased in the offering and purchasers of
$1,000,000 or more of Common Stock received warrants to purchase a number of
shares of Common Stock equal to 10% of the shares purchased in the offering.
Purchasers of Common Stock in this offering who were also purchasers of Common
Stock in 1994 and earlier 1995 offerings (excluding Vanguard) were also offered
warrants (at a purchase price of $.01 per warrant share) to purchase Common
Stock. The exercise price of the warrants in this offering will equal the
average sales price of the next $2 million of Common Stock issued and sold by
the Company. Purchasers and recipients of warrants in this offering included Mr.
Preyer (2,773 shares), Mr. Griffin (2,773 shares), Mr. Leeolou (2,773 shares),
Mr. DeMichele (1,000 shares), Vanguard (145,455 shares), Piedmont Acorn
Investors Limited Partnership (78,629 shares), TDI (36,364 shares), Shipyard
Associates (13,750 shares), Smith Richardson Foundation, Inc. (2,500 shares) and
Piedmont Harbor-Piedmont Associates Limited Partnership (2,500 shares). These
warrants expire on December 31, 2000.
On December 28, 1995, the Company issued to CSI a $375,000 note,
convertible into shares of Common Stock at the rate of $5.50 per share and
bearing interest at the rate of 8.5% per annum, in satisfaction of certain
obligations of the Company to CSI for consulting services rendered. In January
1996, at CSI's request the convertible note was partitioned and distributed to
certain creditors of CSI, including Mr. Nash ($90,000) and Mr. Jones ($216,000).
In connection with Mr. Nash's agreement to assign his interest in a terminal
design to the Company, Mr. Nash's note was prepaid by the Company in January
1996.
Effective February 1, 1996, the holders of the 8.5% convertible notes
issued in 1995 converted the principal thereof into shares of common stock at
the conversion price of $5.00 per share and accepted Common Stock in lieu of
one-half of the accrued interest thereon at the rate of $5.50 per share. Shares
issued to converting noteholders pursuant to this conversion and interest
payment included the following: Mr. Preyer, 40,864 shares; Mr. Griffin, 40,864
shares; Mr. Leeolou, 40,864 shares; Mr. Emerson, 36,778 shares; Mr. Ludington,
13,620 shares; Mr. Penwell, 3,500 shares; and Alonzo Family Partners, Ltd.,
7,350 shares.
Effective May 31, 1996, other promissory notes issued in 1994 to Mr.
Emerson, Mr. Griffin, Mr. Leeolou, Mr. Preyer and Mr. Ludington, including
accrued interest, were exchanged for shares of the Common Stock at the rate of
$5.50 per share. Shares issued to exchanging noteholders pursuant to such
exchange included the following: Mr. Emerson, 11,169 shares; Mr. Griffin, 12,410
shares; Mr. Leeolou, 12,410 shares; Mr. Preyer, 12,410 shares; and Mr.
Ludington, 4,136 shares.
In June 1996, the Company entered into a management services agreement with
Vanguard for a two year term (the 'Management Services Agreement'). Pursuant to
the terms of the Management Services Agreement, Vanguard provides services to
the Company from time to time to assist the Company in developing accounting,
human resources, information management, legal compliance, sales training,
research and development, business development and operation procedures, and
systems and programs. In June 1996 and again in June 1997 the Company issued
10,000 shares of Common Stock to Vanguard as compensation for its services under
the Management Services Agreement. For the fiscal years December 31, 1997 and
September 28, 1996, the Company also reimbursed Vanguard $218,000 and $71,000,
respectively, for its out-of-pocket expenses incurred in rendering such
services.
In connection with their respective investments, Vanguard and TDI each
entered into agreements providing certain rights to have their shares of the
Company's Common Stock registered under the Securities Act. If the Company
proposes to make a registered public offering of any of its securities under the
Securities Act, other than certain specified types of offerings, the Company
will be obligated to give written notice of the proposed registration to
Vanguard and TDI. Upon receipt of such written notice of the proposed
registration, Vanguard and TDI will be entitled to request that all or a portion
of their Common Stock be included in such registration offering (a 'Piggyback
Registration') except in certain specified circumstances. The agreements also
provide that, at any time after six months from the date the first registration
statement filed under the Securities Act by the Company becomes effective, the
shareholder is entitled to request registration for sale under the Securities
Act of all or a portion of its Common Stock (a 'Demand Registration'), provided
that the shareholder shall not be entitled to
40
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<PAGE>
request any Demand Registration within the 12-month period immediately following
the date of any previous request for a Demand Registration. These rights to
Piggyback and Demand Registrations expire at such time as the recipient's shares
subject to such registration rights may be sold pursuant to Rule 144(k) of the
Securities Act.
In August 1996, Vanguard purchased 18,000 of the Units sold in the Private
Placement.
Inter*Act has received, and expects to continue receiving, substantial
business development support from its three largest shareholders: Vanguard, one
of the largest independent operators of cellular telephone systems in the United
States; the Richardson Family, founders and former operators of the consumer
products company Richardson-Vicks, Inc.; and Toronto Dominion Investments, Inc.,
a wholly owned indirect subsidiary of Toronto Dominion Bank, which is one of the
largest media finance institutions in the world.
Stephen R. Leeolou, Chief Executive Officer and Chairman of the Company, is
a co-founder of Vanguard and currently serves as its President and a member of
its Board of Directors. The Board of Directors of Vanguard recently announced
its intention to elect him to the position of Chief Executive Officer of
Vanguard in May 1998. Other directors of Vanguard are also directors of
Inter*Act and, through a voting agreement with a majority of the Company's
stockholders, Vanguard is entitled to have six of its designees on the Company's
Board of Directors. See Part III, Item 10. 'Directors and Executive Officers of
the Company'.
Stock options have been granted under the Company's stock option plans from
time to time the Company directors and officers. See Part III, Item 10,
'Directors and Executive Officers of the Registrant' and Part III, Item 11,
'Executive Compensation'.
41
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 10-K
(a) List of documents filed as part of this report:
1. The financial statements listed on page F-1.
2. All schedules are omitted because they are not applicable, not
required or the requested information is included in the Consolidated
Financial Statements or notes thereto.
3. Exhibits to this report are listed below and in the accompanying
Index to Exhibits.
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ------------ -----------------------------------------------------------------------------------------------------
<C> <S> <C>
*3 (a)(1) Articles of Incorporation of the Company, with amendments, through June 12, 1996.
****3 (a)(2) Articles of Amendment of the Company, dated May 21, 1997 and effective June 3, 1997.
****3 (b) Amended and Restated Bylaws of the Company.
*4 (a) Specimen Certificate of the Company's Common Stock.
*4 (b) Indenture dated August 1, 1996, between the Company and Fleet National Bank, as trustee, relating to
$142,000,000 in principal amount of 14% Senior Discount Notes due 2003.
*10 (a) Management Services Agreement dated June 17, 1996, between the Company and Vanguard Cellular Systems,
Inc.
*10 (b) Consulting Agreement dated January, 1996, between the Company and Vanguard Cellular Systems, Inc.
*10 (c) Registration Rights Agreement dated May 5, 1995, between the Company and Vanguard Cellular Systems,
Inc.
*10 (d) Amendment No. 1 to Registration Rights Agreement dated October, 1995, between the Company and
Vanguard Cellular Systems, Inc.
*10 (e) Registration Rights Agreement dated March, 1996 between the Company and Toronto Dominion Investments,
Inc.
*10 (f) Subscription Agreement dated October, 1995, between the Company and Vanguard Cellular Systems, Inc.
*10 (g) Company's 1996 Nonqualified Stock Option Plan.
*10 (h) Form of Nonqualified Stock Option Agreement.
*10 (i) Company's 1994 Stock Compensation Plan.
*10 (j) Form of Incentive Stock Option Agreement.
*10 (k) Amended and Restated Common Stock Purchase Warrant granted to Vanguard Cellular Operating Corp.
*10 (l) Warrant Agreement dated August 1, 1996, between the Company and Fleet National Bank, as Warrant
Agent.
*10 (m) Shareholders' Agreement dated April 16, 1993, between the Company and its shareholders.
*10 (n) Amendment No. 1 to Shareholders' Agreement dated June 17, 1994, between the Company and its
shareholders.
*10 (o) Exchange and Registration Rights Agreement dated July 30, 1996, between the Company and the Initial
Purchasers.
*10 (p) Kiosk Agreement dated September 3, 1996, between the Company and Coleman Research Corporation.
*10 (q) Assignment of License Agreement dated June 15, 1993 among Gerald Singer and Arthur Murphy as
Licensors, Michael R. Jones as Licensee and Network Licensing, Inc. as Assignee.
*10 (r) Security Agreement dated June 16, 1993 between Michael R. Jones and Network Licensing, Inc.
*10 (s) Sublicense dated June 16, 1993 between Network Licensing, Inc. and the Company.
*10 (t) Settlement Agreement and Mutual General Release dated as of September 6, 1994 among Gerald R. Singer,
Arthur J. Murphy, Lenora Singer, Joan Murphy, Network Licensing, Inc. and the Company.
*10 (u) Amended and Restated Patent Rights Assignment/Consulting Agreement dated as of March 29, 1995 between
Joseph F. Stratton and the Company.
*10 (v) Agreement Regarding Licensing matters dated as of January 22, 1996 among Michael R. Jones, Network
Licensing, Inc. and the Company.
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ------------ -----------------------------------------------------------------------------------------------------
<C> <S> <C>
*10 (w) Letter Agreement dated July 22, 1996 between Gerald Singer, Arthur J. Murphy and the Company.
*10 (x) Assignment dated as of July 23, 1996 from Network Licensing, Inc. to the Company.
**10 (y) Purchase Agreement dated July 30, 1996, between the Company and the Initial Purchasers.
***10 (z) Company's 1997 Long-Term Incentive Plan.
10 (aa) Form of Incentive Stock Option Agreement.
10 (bb) Form of Nonqualified Stock Option Agreement.
10 (cc) Patent License Agreement dated August 20, 1997, between the Company and Coupco, Inc. (Portions
of this exhibit have been omitted pursuant to a request for confidential treatment.)
10 (dd) Termination Agreement dated March 24, 1998 between the Company, Coleman Research Corporation and
Thermo Information Solutions, Inc.
10 (ee) Letter Agreement dated March 17, 1997 between the Company and Thomas A. Manna.
10 (ff) Letter Agreement dated September 3, 1997 between the Company and James. F. Brandhort, Jr.
10 (gg) Form of Employment, Noncompetition and Nondisclosure Agreement.
21 List of Subsidiaries of the Company.
27 Financial Data Schedule.
</TABLE>
- ------------
* Incorporated by reference to the corresponding exhibit number filed with
the Company's Registration Statement on Form S-4 (Registration No.
333-12091)
** Incorporated by reference to exhibit 1 filed with the Company's
Registration Statement on Form S-4 (Registration No. 333-12091)
*** Incorporated by reference to the corresponding exhibit number filed with
the Company's Quarterly Report on Fom 10-Q for the period ended March 31,
1997.
**** Incorporated by reference to the corresponding exhibit number filed with
the Company's Quarterly Report on Form 10-Q for the period ended June 30,
1997.
(b) Reports on Form 8-K:
The Company did not file any reports on Form 8-K with the Securities and
Exchange Commission during the fourth quarter of 1997.
(c) Exhibits:
See (a) 3. above for a listing of Exhibits filed as a part of this Report.
(d) Additional Financial Statement Schedules:
None. Additional financial statement schedules are not filed herewith, as
the information required therein is either not applicable, or can be found in
the Consolidated Financial Statements or the Notes thereto.
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO SECTION
15(D) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES PURSUANT TO
SECTION 12 OF THE ACT
Neither an annual report covering the Company's last fiscal year nor proxy
materials with respect to any annual or other meeting of security holders have
been sent to security holders.
The Company currently anticipates that it will send to security holders an
annual report covering the year ended December 31, 1997 at a future date.
43
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<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities and
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
INTER*ACT SYSTEMS, INCORPORATED
By: /s/ RICHARD A. VINCHESI, JR.
...................................
RICHARD A. VINCHESI, JR., SENIOR
VICE PRESIDENT,
CHIEF OPERATING OFFICER AND CHIEF
FINANCIAL OFFICER
March 30, 1998
Pursuant to the requirements of the Securities and Exchange Act of 1934,
this report has been signed by the following persons on behalf of the Company in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------ -------------------------------------------- -------------------
<C> <S> <C>
/S/ STEPHEN R. LEEOLOU Chairman of the Board of Directors and Chief March 30, 1998
......................................... Executive Officer and Treasurer
(STEPHEN R. LEEOLOU)
/S/ RICHARD A. VINCHESI, JR. Senior Vice President, Chief Operating March 30, 1998
......................................... Officer and Chief Financial Officer
(RICHARD A. VINCHESI, JR.) (principal accounting and principal
financial officer)
/S/ WILLIAM F. PENWELL Vice Chairman of the Board of Directors March 31, 1998
.........................................
(WILLIAM F. PENWELL)
/S/ PAUL A. NASH Senior Vice President, Director March 30, 1998
.........................................
(PAUL A. NASH)
/S/ ROBERT M. DEMICHELE Director March 30, 1998
.........................................
(ROBERT M. DEMICHELE)
/S/ WILLIAM P. EMERSON, JR. Director March 30, 1998
.........................................
(WILLIAM P. EMERSON, JR.)
/S/ HAYNES G. GRIFFIN Director March 30, 1998
.........................................
(HAYNES G. GRIFFIN)
/S/ RICHARD P. LUDINGTON Director March 30, 1998
.........................................
(RICHARD P. LUDINGTON)
/S/ L. RICHARDSON PREYER, JR. Director March 30, 1998
.........................................
(L. RICHARDSON PREYER, JR.)
/S/ BRIAN A. RICH Director March 30, 1998
.........................................
(BRIAN A. RICH)
Director March , 1998
.........................................
(STUART S. RICHARDSON)
Director March , 1998
.........................................
(ROBERT A. SILVERBERG)
</TABLE>
44
<PAGE>
<PAGE>
INTER*ACT SYSTEMS, INCORPORATED
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Report of Independent Public Accountants................................................................... F-2
Consolidated Balance Sheets as of December 31, 1997 and December 31, 1996.................................. F-3
Consolidated Statements of Operations for the year ended December 31, 1997, the three month period ended
December 31, 1996 and the fiscal years ended September 28, 1996 and September 30, 1995................... F-4
Consolidated Statements of Cash Flows for the year ended December 31, 1997, the three month period ended
December 31, 1996 and the fiscal years ended September 28, 1996 and September 30, 1995................... F-5
Consolidated Statements of Stockholders' Equity (Deficit) for the year ended December 31, 1997, the three
month period ended December 31, 1996 and the fiscal years ended September 28, 1996 and September 30,
1995..................................................................................................... F-6
Notes to Consolidated Financial Statements................................................................. F-7
</TABLE>
F-1
<PAGE>
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To INTER*ACT SYSTEMS, INCORPORATED:
We have audited the accompanying consolidated balance sheets of Inter*Act
Systems, Incorporated (a North Carolina corporation) and Subsidiaries as of
December 31, 1997 and December 31, 1996, and the related consolidated statements
of operations, stockholders' equity (deficit) and cash flows for the year ended
December 31, 1997, the three month period ended December 31, 1996 and the fiscal
years ended September 28, 1996 and September 30, 1995. 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 audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Inter*Act Systems,
Incorporated and Subsidiaries as of December 31, 1997 and December 31, 1996, and
the results of their operations and their cash flows for the year ended December
31, 1997, the three month period ended December 31, 1996 and the fiscal years
ended September 28, 1996 and September 30, 1995, in conformity with generally
accepted accounting principles.
ARTHUR ANDERSEN LLP
New York, New York
March 17, 1998
F-2
<PAGE>
<PAGE>
INTER*ACT SYSTEMS, INCORPORATED
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1997 1996
------------ ------------
(IN THOUSANDS, EXCEPT SHARE
DATA)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................................... $ 45,211 $ 88,306
Receivables, net............................................................ 813 617
Other current assets........................................................ 3,067 807
------------ ------------
Total current assets................................................... 49,091 89,730
Property, plant and equipment, net............................................... 26,900 11,690
Bond issuance costs, net......................................................... 3,302 3,720
Patents, licenses and trademarks, net............................................ 1,687 227
Other noncurrent assets.......................................................... 43 398
------------ ------------
Total assets........................................................... $ 81,023 $105,765
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable............................................................ $ 3,204 $ 1,243
Accrued expenses............................................................ 6,870 1,778
Deferred revenue............................................................ 539 479
------------ ------------
Total current liabilities.............................................. 10,613 3,500
Long-term debt, net of discount.................................................. 91,406 76,866
Other noncurrent liabilities..................................................... -- 292
------------ ------------
Total liabilities...................................................... 102,019 80,658
------------ ------------
Common stock purchase warrants................................................... 27,436 24,464
------------ ------------
Stockholders' equity (deficit):
Preferred stock, no par value, authorized 5,000,000 shares; none
outstanding............................................................... -- --
Common stock, no par value, authorized 20,000,000 shares; 7,728,555, and
7,668,555 shares issued and outstanding at December 31, 1997 and December
31, 1996, respectively.................................................... 28,251 27,651
Additional paid-in capital................................................ 768 768
Deferred compensation....................................................... (570) (723)
Cumulative translation adjustments.......................................... (14) --
Accumulated deficit......................................................... (76,867) (27,053)
------------ ------------
Total stockholders' equity (deficit)................................... (48,432) 643
------------ ------------
Total liabilities and stockholders' equity (deficit)................... $ 81,023 $105,765
------------ ------------
------------ ------------
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-3
<PAGE>
<PAGE>
INTER*ACT SYSTEMS, INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTH
PERIOD FISCAL YEAR ENDED
YEAR ENDED ENDED ------------------------------
DECEMBER 31, DECEMBER 31, SEPTEMBER 28, SEPTEMBER 30,
1997 1996 1996 1995
------------ ------------ ------------- -------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Gross sales......................................... $ 1,672 $ 408 $ 492 $ 255
Less: Retailer reimbursements.................. (964) (240) (287) (144)
------------ ------------ ------------- -------------
Net sales................................. 708 168 205 111
------------ ------------ ------------- -------------
Operating expenses:
Direct costs................................... 5,784 939 2,298 903
Selling, general and administrative expenses... 26,352 3,077 6,911 3,391
Depreciation and amortization of intangibles... 3,934 468 821 191
------------ ------------ ------------- -------------
Total operating expenses.................. 36,070 4,484 10,030 4,485
------------ ------------ ------------- -------------
Operating loss...................................... (35,362) (4,316) (9,825) (4,374)
------------ ------------ ------------- -------------
Other income (expense)
Interest income................................ 3,892 1,249 1,009 35
Interest expense............................... (18,033) (4,263) (2,743) (187)
Other expense.................................. (301) -- -- --
------------ ------------ ------------- -------------
Total other expense....................... (14,442) (3,014) (1,734) (152)
------------ ------------ ------------- -------------
Income (loss) before income taxes................... (49,804) (7,330) (11,559) (4,526)
Income taxes........................................ (10) -- -- --
------------ ------------ ------------- -------------
Net loss....................................... $(49,814) $ (7,330) $ (11,559) $(4,526)
------------ ------------ ------------- -------------
------------ ------------ ------------- -------------
Per share information:
Net loss per common share:
Basic.......................................... $ (6.48) $ (0.96) $ (1.91) $ (1.27)
------------ ------------ ------------- -------------
------------ ------------ ------------- -------------
Diluted........................................ $ (6.48) $ (0.96) $ (1.91) $ (1.27)
------------ ------------ ------------- -------------
------------ ------------ ------------- -------------
Common shares used in computing per share amounts:
Basic.......................................... 7,692 7,669 6,038 3,556
------------ ------------ ------------- -------------
------------ ------------ ------------- -------------
Diluted........................................ 7,692 7,669 6,038 3,556
------------ ------------ ------------- -------------
------------ ------------ ------------- -------------
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-4
<PAGE>
<PAGE>
INTER*ACT SYSTEMS, INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTH
PERIOD FISCAL YEAR ENDED
YEAR ENDED ENDED ------------------------------
DECEMBER 31, DECEMBER 31, SEPTEMBER 28, SEPTEMBER 30,
1997 1996 1996 1995
------------ ------------ ------------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss........................................ $(49,814) $ (7,330) $ (11,559) $(4,526)
Items not affecting cash and cash equivalents:
Depreciation and amortization of intangible
assets.................................... 3,934 468 821 191
Loss on disposal of assets.................. 1,097 -- 74 10
Non-cash interest on discounted bonds....... 17,972 4,217 2,626 --
Equity in earnings of affiliate, net........ 301 -- -- --
Other items, net............................ 319 38 381 --
Changes in working capital:
Receivables, net............................ (196) (373) (169) (59)
Accounts payable and accrued expenses....... 6,416 1,038 1,208 588
Other current assets........................ (2,260) (866) (255) (45)
Deferred revenues........................... 60 250 207 22
------------ ------------ ------------- -------------
Net cash used in operating activities... (22,171) (2,558) (6,666) (3,819)
------------ ------------ ------------- -------------
Cash flows from investing activities:
Expenditures for property, plant and
equipment................................. (20,110) (2,584) (8,739) (1,702)
Proceeds from disposal of assets............ -- -- 57 --
Patent acquisition costs.................... (800) -- -- --
------------ ------------ ------------- -------------
Net cash used in investing activities... (20,910) (2,584) (8,682) (1,702)
------------ ------------ ------------- -------------
Cash flows from financing activities:
Net proceeds from issuance of 14% Senior
Notes..................................... -- -- 90,865 --
Long-term debt repayments................... -- (32) (20) --
Proceeds from common stock issuance, net.... -- -- 18,256 5,033
Net amount due to stockholders.............. -- -- -- 148
Net amount due (from) to related parties.... -- -- (339) 200
------------ ------------ ------------- -------------
Net cash (used in) provided by financing
activities............................ -- (32) 108,762 5,381
------------ ------------ ------------- -------------
Foreign exchange effects on cash and cash
equivalents....................................... (14) -- -- --
------------ ------------ ------------- -------------
Net (decrease) increase in cash and cash
equivalents....................................... (43,095) (5,174) 93,414 (140)
Cash and cash equivalents at beginning of period.... 88,306 93,480 66 206
------------ ------------ ------------- -------------
Cash and cash equivalents at end of period.......... $ 45,211 $ 88,306 $ 93,480 $ 66
------------ ------------ ------------- -------------
------------ ------------ ------------- -------------
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest........................................ $ 39 $ 10 $ 94 $ 79
------------ ------------ ------------- -------------
------------ ------------ ------------- -------------
Supplemental disclosures of non-cash investing and
financing activities:
Deferred compensation related to stock options
granted....................................... $ -- $ -- $ 768 $--
------------ ------------ ------------- -------------
------------ ------------ ------------- -------------
Issuance of common stock in consideration of
certain obligations........................... $ 600 $ -- $ 2,141 $--
------------ ------------ ------------- -------------
------------ ------------ ------------- -------------
Issuance of common stock purchase warrants in
connection with the issuance of 14% Senior
Notes......................................... $ 2,972 $ -- $ 24,464 $ --
------------ ------------ ------------- -------------
------------ ------------ ------------- -------------
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-5
<PAGE>
<PAGE>
INTER*ACT SYSTEMS, INCORPORATED
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
TOTAL
COMMON STOCK ADDITIONAL CUMULATIVE STOCKHOLDERS'
----------------- PAID-IN DEFERRED ACCUMULATED TRANSLATION EQUITY
SHARES AMOUNT CAPITAL COMPENSATION DEFICIT ADJUSTMENTS (DEFICIT)
------ ------- ---------- ------------ ----------- ----------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at September 30,
1994.................... 2,917 $2,222 -$- $-- $ (3,638) $-- $ (1,416)
Issuance of common
stock............... 1,032 5,172 -- -- -- 5,172
Forfeiture of common
stock............... (18) (140) -- -- -- (140)
Net loss.............. -- -- -- -- (4,526) (4,526)
------ ------- ----- ----- ----------- --- -------------
Balance at September 30,
1995.................... 3,931 7,254 -- -- (8,164) -- (910)
Issuance of common
stock............... 3,329 18,311 -- -- -- -- 18,311
Conversion of certain
obligations to
common stock........ 409 2,086 -- -- -- -- 2,086
Deferred Compensation
related to stock
options granted..... -- -- 768 (768) -- -- --
Amortization of
deferred
compensation........ -- -- -- 6 -- -- 6
Net loss.............. -- -- -- -- (11,559) -- (11,559)
------ ------- ----- ----- ----------- --- -------------
Balance at September 28,
1996.................... 7,669 27,651 768 (762) (19,723) -- 7,934
Amortization of
deferred
compensation........ -- -- -- 39 -- -- 39
Net loss.............. -- -- -- -- (7,330) -- (7,330)
------ ------- ----- ----- ----------- --- -------------
Balance at December 31,
1996.................... 7,669 27,651 768 (723) (27,053) -- 643
Issuance of common
stock............... 60 600 -- -- -- -- 600
Amortization of
deferred
compensation........ -- -- -- 153 -- -- 153
Translation
Adjustment.......... -- -- -- -- (14) (14)
Net loss.............. -- -- -- -- (49,814) -- (49,814)
------ ------- ----- ----- ----------- --- -------------
Balance at December 31,
1997.................... 7,729 $28,251 $768 $ (570) $ (76,867) $ (14) $ (48,432)
------ ------- ----- ------ ----------- ----- -------------
------ ------- ----- ------ ----------- ----- -------------
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-6
<PAGE>
<PAGE>
INTER*ACT SYSTEMS, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1997, THE THREE MONTH PERIOD ENDED DECEMBER 31,
1996 AND FOR THE FISCAL YEARS ENDED SEPTEMBER 28, 1996 AND SEPTEMBER 30, 1995
1. BUSINESS DESCRIPTION
Inter*Act Systems, Incorporated (the 'Company') is one of the nation's
largest in-store operators of customer-interactive electronic marketing systems.
The Company's patented technologies enable consumer products manufacturers
('Manufacturers') and supermarket retailers ('Retailers') to offer
shopper-specific purchase incentives and messages to customers moments before
shopping begins. The Company's proprietary system, called the Inter*Act Loyalty
Network'tm' ('ILN'), utilizes patented, multimedia touch-screen terminals, or
Smart Kiosks'tm', located in the entrance area of retail grocery stores. These
terminals are connected to each store's point-of-sale scanning system which
allows the electronic promotions to be immediately redeemed at the check-out.
This fully automated process virtually eliminates misredemption and fraud
associated with paper coupons, estimated by industry sources to cost
manufacturers hundreds of millions of dollars per year.
Certain factors could affect Inter*Act's actual future financial results.
These factors include: (i) the Company's limited operating history, significant
losses, accumulated deficit and expected future losses, (ii) the dependence of
the Company on its ability to establish, maintain and expand relationships with
manufacturers to promote brands on the ILN and the uncertainty of market
acceptance for the ILN, (iii) the uncertainty as to whether the Company will be
able to manage its growth effectively, (iv) the early stage of the Company's
products and services and technical and other problems that the Company has
experienced and may experience, (v) risks related to the Company's substantial
leverage and debt service obligations, (vi) the Company's dependence on third
parties such as those who manufacture ILN terminals, (vii) the intensely
competitive nature of the consumer product and promotional industry and (viii)
risks that the Company's rights related to patents, proprietary information and
trademarks may not adequately protect its business, and (ix) the possible
inability of new management to perform their respective roles and the possible
conflicts of interest of the Company's directors, officers and principal
shareholders in certain transactions with the Company.
From inception to December 31, 1997, the Company has had minimal revenues,
incurred recurring losses and experienced negative operating cash flow and there
is no assurance that the product the Company has developed will achieve success
in the marketplace. The Company intends to raise additional equity or debt
capital to fund its ongoing 1998 and 1999 expansion plans. In addition, the
Company has received several multi-year equipment leasing proposals from
equipment manufacturers for future purchases of ILN equipment. There is no
assurance that such additional capital or equipment financing can be obtained.
In the event that such additional financing is not obtained, the Company
believes that existing cash and cash equivalents, along with reduced or delayed
operating and capital expenditures, will be sufficient to meet the Company's
operating requirements into the first quarter of 1999.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The financial statements include the consolidated accounts of the Company
and its wholly and majority-owned subsidiaries: Network Licensing, Inc. ('NLI'),
Inter*Act International Holdings, Inc. ('Inter*Act International'), Inter*Act
Holdings, Ltd., ('Inter*Act Holdings') and Inter*Act U.K. Ltd. ('Inter*Act
U.K.'). Inter*Act International, Inter*Act Holdings and Inter*Act U.K. were
incorporated during 1997. All intercompany accounts and transactions have been
eliminated in consolidation.
FISCAL YEAR
On February 13, 1997, the Company elected to change its fiscal year end
from the last Saturday in September to December 31, effective December 31, 1996.
The Company's 1996 and 1995 fiscal years
F-7
<PAGE>
<PAGE>
INTER*ACT SYSTEMS, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1997, THE THREE MONTH PERIOD ENDED DECEMBER 31,
1996 AND FOR THE FISCAL YEARS ENDED SEPTEMBER 28, 1996 AND SEPTEMBER 30, 1995
ended on the Saturday closest to September 30. The financial statements for
fiscal 1996 and 1995 each contain activity for fifty-two weeks.
REVENUE RECOGNITION
The Company recognizes revenue as electronic discounts are redeemed at
store cash registers. Manufacturers pay a fee to the Company for each
redemption. The fee is composed of 1) a retailer processing fee, 2) a redemption
fee and 3) the face value of the coupon. The Company, in turn, passes through
both the retailer processing fee, which is included in direct operating
expenses, and the face value of the coupon to the Retailer, while retaining the
redemption fee. The Company records as net sales the redemption fee and the
retailer processing fee paid by the Manufacturers. Certain Manufacturers pay the
Company in advance for a portion of anticipated redemptions, and these amounts
are recorded as deferred revenue until earned through redemptions.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents, which at December 31, 1997 and December 31, 1996
were primarily comprised of money market funds and overnight repurchase
agreements, are stated at cost, which approximates market value. Highly liquid
investments with original maturities of three months or less are considered cash
equivalents.
RECEIVABLES, NET
Accounts receivable included in current assets are stated net of allowances
for doubtful accounts of approximately $30,000 and $10,000 at December 31, 1997
and at December 31, 1996, respectively. The Company recorded approximately
$30,000 and $10,000 for bad debt expense for the year ended December 31, 1997
and the three month period ended December 31, 1996, respectively. The Company
did not record an allowance for doubtful accounts or bad debt expense for the
fiscal years ended September 28, 1996 or September 30, 1995.
PROPERTY, PLANT AND EQUIPMENT
Depreciation is generally provided on the straight-line method for
financial reporting purposes over the estimated useful lives of the underlying
assets. Machinery and equipment are depreciated over a period ranging from 3 to
5 years and leasehold improvements are amortized using the straight-line method
over the term of the lease or the estimated useful life of the improvements,
whichever is shorter. In-store machinery and equipment are depreciated over five
years. Repairs and maintenance are charged to expense as incurred.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs incurred by the Company are included in
selling, general and administrative expenses. Such costs for the year ended
December 31, 1997, the three month period ended December 31, 1996 and the fiscal
years ended September 28, 1996 and September 30, 1995 were $646,000, $121,000,
$800,000 and $623,000, respectively.
BOND ISSUANCE COSTS
Bond issuance costs incurred by the Company are costs associated with a
private placement offering of 14% Senior Discount Notes during fiscal 1996 (the
'Private Placement') (See Note 6) and are being amortized over seven years using
the effective interest rate method. Accumulated
F-8
<PAGE>
<PAGE>
INTER*ACT SYSTEMS, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1997, THE THREE MONTH PERIOD ENDED DECEMBER 31,
1996 AND FOR THE FISCAL YEARS ENDED SEPTEMBER 28, 1996 AND SEPTEMBER 30, 1995
amortization was $633,000 and $169,000 at December 31, 1997 and at December 31,
1996, respectively. The Company recorded amortization expense on the bond
issuance costs of $464,000, $102,000 and $67,000 for the year ended December 31,
1997, the three month period ended December 31, 1996 and the fiscal year ended
September 28, 1996, respectively.
PATENTS, LICENSES AND TRADEMARKS
Acquisition costs for patents, licenses and trademarks and legal fees
incurred for the improvement and protection of the Company's patents, licenses
and trademarks have been deferred and are being amortized over fifteen years or
the remaining life of the patent, license or trademark, whichever is less, using
the straight-line method. Accumulated amortization was $95,000 and $34,000 at
December 31, 1997 and December 31, 1996, respectively. The Company recorded
amortization expense of $131,000, $10,000, $22,000 and $2,000 for the year ended
December 31, 1997, the three month period ended December 31, 1996 and the fiscal
years ended September 28, 1996 and September 30, 1995, respectively.
FOREIGN CURRENCY TRANSLATION
Assets and liabilities of foreign entities have been translated using the
exchange rates in effect at the balance sheet dates. Results of operations of
foreign entities are translated using the average exchange rates prevailing
throughout the period. Local currencies are considered functional currencies of
the Company's foreign operating entities. Translation effects are accumulated as
part of the cumulative foreign translation adjustment in equity. Gains and
losses from foreign currency transactions are included in net loss for the
period. The Company did not incur material foreign exchange gains or losses
during any period presented. The Company has not entered into any derivative
transactions to hedge foreign currency exposure.
LONG-LIVED ASSETS
Statement of Financial Accounting Standards ('SFAS') No. 121, 'Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of,' requires that long-lived assets be reviewed for impairment whenever events
or changes in circumstances indicate that the carrying amount of the asset in
question may not be recoverable. The adoption of SFAS No. 121 in the three-month
period ended December 31, 1996 did not have a material effect on the Company's
results of operations, cash flows or financial position.
INCOME TAXES
The Company accounts for income taxes in accordance with SFAS No. 109,
'Accounting for Income Taxes.' SFAS No. 109 requires an asset and liability
approach for financial reporting for income taxes. It also requires the company
to adjust its deferred tax balances in the period of enactment for the effect of
enacted changes in tax rates and to provide a valuation allowance against such
deferred tax assets that are not, more likely than not, to be realized.
STOCK-BASED COMPENSATION
During the three month period ended December 31, 1996, the Company adopted
the provisions of SFAS No. 123, 'Accounting for Stock-Based Compensation,' by
continuing to apply the provisions of Accounting Principles Board ('APB')
Opinion No. 25, 'Accounting for Stock Issued to Employees,' while providing the
required pro forma disclosures as if the fair value method had been applied.
(See Note 13)
F-9
<PAGE>
<PAGE>
INTER*ACT SYSTEMS, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1997, THE THREE MONTH PERIOD ENDED DECEMBER 31,
1996 AND FOR THE FISCAL YEARS ENDED SEPTEMBER 28, 1996 AND SEPTEMBER 30, 1995
NET LOSS PER SHARE
Effective December 31, 1997, the Company adopted SFAS No. 128, 'Earnings
Per Share.' (See Note 9.) In accordance with SFAS No. 128, net loss per common
share amounts ('basic EPS') were computed by dividing net loss by the weighted
average number of common shares outstanding and contingently issuable shares
(which satisfy certain conditions) and excluded any potential dilution. Net loss
per common share amounts -- assuming dilution ('diluted EPS') were computed by
reflecting potential dilution from the exercise of stock options and warrants.
SFAS No. 128 requires the presentation of both basic EPS and diluted EPS on the
face of the income statement. Net loss per share amounts for the same prior-year
periods have been restated to conform with the provisions of SFAS No. 128;
however, the result of that restatement was not material. In all periods
presented, the impact of stock options and warrants was anti-dilutive.
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 (specifically with
respect to the lives of in-store machinery and equipment) and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
RECLASSIFICATIONS
Certain prior year financial statement amounts have been reclassified to
conform with the current year presentation.
3. PROPERTY, PLANT AND EQUIPMENT, NET
Property, plant and equipment consisted of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1997 1996
------------ ------------
<S> <C> <C>
Land and buildings........................................... $ 77 $ 16
------------ ------------
Machinery and equipment
In-Store................................................ 28,383 11,286
Other................................................... 3,067 1,784
------------ ------------
Total machinery and equipment........................... 31,450 13,070
------------ ------------
31,527 13,086
Less: accumulated depreciation............................... (4,627) (1,396)
------------ ------------
Property, plant and equipment, net........................... $ 26,900 $ 11,690
------------ ------------
------------ ------------
</TABLE>
Depreciation expense was approximately $3.8 million, $456,000, $786,000 and
$180,000 for the year ended December 31, 1997, the three month period ended
December 31, 1996 and the fiscal years ended September 28, 1996 and September
30, 1995, respectively.
4. LEASES
The Company leases office facilities and equipment under various operating
lease agreements expiring through year 2002. Future minimum lease payments under
noncancelable operating leases at December 31, 1997 were as follows:
F-10
<PAGE>
<PAGE>
INTER*ACT SYSTEMS, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1997, THE THREE MONTH PERIOD ENDED DECEMBER 31,
1996 AND FOR THE FISCAL YEARS ENDED SEPTEMBER 28, 1996 AND SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
OPERATING
LEASES
--------------
(IN THOUSANDS)
<S> <C>
1998............................. $ 911
1999............................. 932
2000............................. 330
2001............................. 99
2002............................. 11
-------
$2,283
-------
-------
</TABLE>
Rent expense of $383,000, $57,000, $222,000 and $219,000 was recognized for the
year ended December 31, 1997, the three month period ended December 31, 1996 and
the fiscal years ended September 28, 1996 and September 30, 1995, respectively,
and is included in selling, general and administrative expenses.
5. RELATED PARTY TRANSACTIONS
On April 14, 1993, the Company entered into an agreement with Clearing
Systems, Inc. ('CSI'), a Delaware corporation, whereby approximately 817,000
shares of the Company's common stock were exchanged for certain assets,
consisting primarily of acquired technology and research and development, at the
then estimated fair market value of $612,000, and assumption of certain
liabilities of CSI. The agreement provided that CSI would consult on matters
pertaining to the Company's technology, vendor relations, customer contacts and
strategic planning and be paid a fee when, and if, the Company installed 50 ILN
terminals or achieved $1,000,000 in revenues. During December 1995, in
anticipation of the Company's limited cash resources, the parties amended the
consulting agreement to provide that CSI would receive a $375,000 note,
convertible into shares of the Company's common stock at a rate of $5.50 per
share and bearing interest at the rate of 8.5% per annum, in satisfaction of the
amounts due under the consulting agreement. The Company has paid $138,500 of the
note and the remaining portion of $236,500 is due December 28, 1998. The entire
consulting fee of $375,000 was recorded as an expense during the fiscal year
ended September 28, 1996.
The Company is party to various agreements with Vanguard Cellular Financial
Corp. (together with its subsidiaries, 'Vanguard'). As of December 31, 1997,
Vanguard has beneficial ownership of approximately 3.1 million shares of
common stock of the Company and holds 18,000 units issued in the Private
Placement (See Note 6). Stephen R. Leeolou, Chairman and Chief Executive Officer
of the Company, is also co-founder and Co-Chief Executive Officer of Vanguard.
On June 17, 1996, the Company entered into a management consulting
agreement with Vanguard for a period of two years. Under the agreement, Vanguard
will assist the Company in developing accounting, human resources, information
management, legal compliance, sales training, research and development, business
development and operations procedures, systems and programs. For services
rendered under the agreement, the Company issued 10,000 shares of its common
stock upon execution of the agreement and issued 10,000 shares in June 1997. In
addition, the Company will reimburse Vanguard for any expenses incurred in the
course of providing consulting services. This agreement terminated the previous
consulting agreements dated January 30, 1996, the Company had with Vanguard.
Under the January 30, 1996 agreement, Vanguard was to provide one of its
executive employees to serve in the role of Chief Operating Officer (the 'COO')
of the Company and to provide other consulting services as necessary. All
expenses, including related compensation expenses of such individuals based on
time rendered on the Company's activities, would be paid by the Company. This
agreement was terminated upon execution of the management consulting agreement
with Vanguard on June 17, 1996. The Company has paid Vanguard under such
consulting agreements, approximately
F-11
<PAGE>
<PAGE>
INTER*ACT SYSTEMS, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1997, THE THREE MONTH PERIOD ENDED DECEMBER 31,
1996 AND FOR THE FISCAL YEARS ENDED SEPTEMBER 28, 1996 AND SEPTEMBER 30, 1995
$218,000, $42,000 and $29,000 during the year ended December 31, 1997, the three
month period ended December 31, 1996 and the fiscal year ended September 28,
1996, respectively.
In May 1995, the Company issued 400,000 shares of common stock to Vanguard
at a Purchase price of $5.00 per share. In connection with this issuance,
Vanguard also received a warrant (the 'Vanguard Warrant') to purchase up to an
additional 400,000 shares of the Company's common stock at the agreed-upon fair
market value of such stock at the time of exercise. This warrant agreement
contains an anti-dilution clause which provides for adjustments to the number of
shares eligible to be purchased to maintain the number of shares at
approximately 10.3% of the Company's outstanding common stock. The warrant
expires on the earlier of (i) May 5, 2005 or (ii) the consummation of an initial
public offering by the Company. The terms of the Vanguard Warrant were
restructured immediately prior to the consummation of the private placement
transaction (see Note 7) to provide that Vanguard has the right to buy 900,113
shares at any time before May 5, 2005 at $23.50 per share, which was, in the
opinion of management, the fair market value of the related common stock at the
date of restructuring. The restructured Vanguard Warrant also provides that
Vanguard may pay the exercise price either in cash or, if the fair market value
of the common stock at the time of exercise is greater than the exercise price,
by surrendering any unexercised portion of the Vanguard Warrant and receiving
the number of shares equal to (i) the excess of fair market value per share at
the time of exercise over the exercise price per share multiplied by (ii) the
number of shares surrendered.
On May 5, 1995, the Company entered into a Registration Rights Agreement
with Vanguard relating to certain warrants and shares of common stock of the
Company owned by Vanguard. The agreement provides that Vanguard may at any time
after six months from the date the first registration statement filed by the
Company under the Securities Act of 1933 becomes effective, request the Company
to effect the registration of certain securities held by Vanguard as
expeditiously as may be practicable. However, the Company is entitled to decline
such request, if, in the Company's judgment, such demand registration would not
be in the Company's best interest. The Company may only decline such request
once and will only be effective for a three-month period. In addition, the
agreement allows Vanguard certain piggyback registration rights on any security
offerings the Company may undertake, provided, however, the Company's
underwriter determines, in their sole discretion, such shares will not
jeopardize the success of the proposed offering by the Company. The agreement
terminates the earlier of five years from date of the Company's first
registration statement becomes effective or such time as Vanguard may sell its
securities pursuant to Rule 144 under the Securities Act.
6. LONG-TERM DEBT
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1997 1996
------------ ------------
<S> <C> <C>
14% Senior Discount Notes(1).................................... $ 91,406 $ 76,866
Less: Current portion of long-term debt......................... -- --
------------ ------------
Total long-term debt.................................. $ 91,406 $ 76,866
------------ ------------
------------ ------------
</TABLE>
- ------------
(1) In August 1996, the Company, through the Private Placement, issued 142,000
units, each consisting of a 14% senior discount note due 2003 (collectively,
the 'Notes') with a principal amount at maturity of $1,000 and a warrant to
purchase 7.334 shares (adjusting to 9.429 shares at September 30, 1997 if
the Company did not complete a qualified initial public offering of common
stock by that date) of common stock of the Company at $.01 per share. The
gross proceeds of $94.8
(footnotes continued on next page)
F-12
<PAGE>
<PAGE>
INTER*ACT SYSTEMS, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1997, THE THREE MONTH PERIOD ENDED DECEMBER 31,
1996 AND FOR THE FISCAL YEARS ENDED SEPTEMBER 28, 1996 AND SEPTEMBER 30, 1995
(footnotes continued from previous page)
million were allocated by the Company to the value of the warrants of
approximately $24.5 million and to the discounted notes of approximately
$70.2 million. Expenses of the offering of approximately $3.8 million were
capitalized as bond issuance costs and are being amortized over the
remaining term of the Notes. The Company did not complete a qualified
initial public offering of common stock by September 30, 1997; therefore,
the Company recorded additional common stock purchase warrants of $3.0
million reflecting the valuation of an additional 297,490 shares, or 2.095
shares issuable per warrant.
No cash interest will be payable on the Notes prior to February 1, 2000.
The Notes will accrue cash interest at a rate of 14% per annum, commencing on
August 1, 1999, payable semi-annually on February 1 and August 1 of each year
commencing on February 1, 2000. The debt discount related to the difference
between the face value of the notes ($142 million) and the proceeds of the
Private Placement ($94.8 million) is being accreted over the period to August 1,
1999. The debt discount related to the portion of the Private Placement
allocated to the value of the warrants ($27.4 million, $24.5 million and $24.5
million at December 31, 1997, December 31, 1996 and September 30, 1996,
respectively) is being accreted over the full term of the Notes to August 1,
2003. Interest expense on the notes, including the accretion of debt discount
and amortization of issuance costs, is being recognized at a constant rate of
interest over the life of the Notes. Discount accretion of $17.5 million, $4.1
million and $2.6 million and amortization of bond issuance costs of
approximately $464,000, $102,000 and $67,000 have been recognized as interest
expense during the year ended December 31, 1997, the three month period ended
December 31, 1996 and the fiscal year ended September 28, 1996, respectively. If
additional funds are raised through debt financing, such financing will increase
the financial leverage of the Company and earnings would be reduced by the
associated interest expense. There is no assurance that the Company will be able
to meet its financial obligations under the Notes or other commitments.
7. COMMON STOCK
During the year ended December 31, 1997, the Company issued 60,000 shares
of Common Stock, 50,000 shares for partial consideration in the acquisition of a
patent and 10,000 shares issued pursuant to the management service agreement the
Company has with Vanguard. (See Note 5) The issuance of such shares was recorded
at $10.00 per share, which management believes approximates the fair market
value of the shares on date of issuance.
During the fiscal year ended September 28, 1996, the Company issued
approximately 3,738,000 shares of Common Stock of which approximately 3,418,000
shares were issued at a purchase price of $5.50 per share and approximately
320,000 were issued at a purchase price of $5.00 per share. Approximately
3,319,000 shares were issued as part of a private offering of common stock at a
purchase price of $5.50 per share. In connection with this offering, purchasers
of $250,000 or more of common stock received warrants to purchase a number of
shares of common stock equal to 5% of the shares purchased in the offering and
purchasers of $1,000,000 or more of common stock received warrants to purchase a
number of shares of common stock equal to 10% of the shares purchased in the
offering. The exercise price of all warrants issued or sold in connection with
this offering will equal the sales price of the next $2 million of common stock
issued and sold by the Company. Purchasers of common stock in this offering who
were also purchasers of common stock in certain earlier offerings were also
offered warrants (at a purchase price of $.01 per warrant share) to purchase
common stock. Approximately 323,216 warrants were issued under this offering and
expire on December 31, 2000. Also during the year ended September 30, 1996,
10,000 shares of common stock were issued pursuant to the management service
agreement the Company has with Vanguard at the then estimated fair market value
of $5.50 per share. In addition, the Company converted approximately $2.1
million in debt, notes payable and related accrued interest due to stockholders
into 409,000 shares of common stock. Notes
F-13
<PAGE>
<PAGE>
INTER*ACT SYSTEMS, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1997, THE THREE MONTH PERIOD ENDED DECEMBER 31,
1996 AND FOR THE FISCAL YEARS ENDED SEPTEMBER 28, 1996 AND SEPTEMBER 30, 1995
payable to stockholders of $1.6 million bearing interest at 8.5%, maturing on
February 1, 1998 were converted into approximately 320,000 shares of common
stock at a conversion price of $5.00 per share. Fifty percent of accrued
interest on such notes payable were converted into approximately 13,000 shares
at a conversion price of $5.50 per share, the remaining fifty percent of accrued
interest was paid in cash. Other notes payable to stockholders with a principal
amount of approximately $371,000 and related accrued interest of approximately
$47,000 were converted into approximately 76,000 shares of common stock at $5.50
per share.
During the fiscal year ended September 30, 1995, the Company issued
1,032,000 shares of common stock. Vanguard, through a subsidiary, purchased
400,000 shares of common stock of the Company at a purchase price of $5.00 per
share. In connection with such investment, Vanguard received a warrant to
purchase up to an additional 10.27% of the common stock of the Company at an
exercise price equal to the fair market value of the common stock at the time of
the exercise (the 'Vanguard Warrant'). The Vanguard Warrant was exercisable at
any time prior to the earlier of an underwritten initial public offering or May
5, 2005. The Vanguard Warrant was restructured immediately prior to consummation
of the Private Placement to provide that Vanguard has the right to buy 900,113
shares at any time before May 5, 2005 at $23.50 per share. The restructured
Vanguard Warrant also provides that Vanguard may pay the exercise price either
in cash or, if the fair market value of the common stock at the time of exercise
is greater than the exercise price, by surrendering any unexercised portion of
the Vanguard Warrant and receiving the number of shares equal to (i) the excess
of fair market value per share at the time of exercise over the exercise price
per share multiplied by (ii) the number of shares surrendered.
Of the remaining 632,000 shares issued during the fiscal year ended
September 30, 1995, approximately 607,000 shares were issued at $5.00 per share
and approximately 25,000 shares were issued at $5.50 per share.
On September 30, 1994, a stockholder agreed to forfeit 10,000 shares of the
Company's common stock for failure to fulfill an obligation to invest additional
capital in the Company. The forfeiture did not reduce the amount of the
stockholder's financial investment in the Company at that time, but did reduce
the number of shares issued to this individual. These shares were subsequently
reissued to two other individuals at $5.00 per share. In December 1994, the same
stockholder agreed to forfeit an additional 18,000 shares of the Company's
common stock for failure to fulfill an obligation to invest additional capital
in the Company. Upon this forfeiture, the investor's equity in the Company was
reduced in the total amount of $140,000, representing the value of 28,000 shares
of common stock at $5.00 per share. The original forfeiture of 10,000 shares and
subsequent reissuance of the same 10,000 shares at $5.00 per share was recorded
during the fiscal year ended September 30, 1994. The additional forfeiture of
18,000 shares and the entire value of the September 1994 and December 1994
forfeitures of $140,000 was recorded during the fiscal year ended September 30,
1995.
8. COMMON STOCK PURCHASE WARRANTS
In addition to the Vanguard Warrant to purchase 900,113 shares and the
warrants to purchase an aggregate of 323,216 shares issued in the private
offering described in Note 7, the Company has issued and outstanding other
warrants described below. In August 1996, the Company, through the Private
Placement, issued 142,000 units, each consisting of a 14% senior discount note
due 2003 (collectively, the 'Notes') with a principal amount at maturity of
$1,000 and a warrant to purchase 7.334 shares (adjusting to 9.429 shares at
September 30, 1997 if the Company did not complete a qualified initial public
offering of common stock by that date) of common stock of the Company at $.01
per share. The Company did not complete a qualified public offering of common
stock by September 30, 1997, therefore, the Company recorded additional common
stock purchase warrants of $3.0 million reflecting the valuation of an
additional 297,490 shares, or 2.095 shares issuable per warrant. These warrants
shall be exercisable on or after the earliest to occur of (i) August 1, 2000,
(ii) a change of control, (iii) (a) 90
F-14
<PAGE>
<PAGE>
INTER*ACT SYSTEMS, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1997, THE THREE MONTH PERIOD ENDED DECEMBER 31,
1996 AND FOR THE FISCAL YEARS ENDED SEPTEMBER 28, 1996 AND SEPTEMBER 30, 1995
days after the closing of an initial public offering or (b) upon the closing of
the initial public offering but only in respect of warrants required to be
exercised to permit the holders thereof to sell shares in the initial public
offering, (iv) a consolidation, merger or purchase of assets involving the
Company or any of its subsidiaries that results in the common stock of the
Company becoming subject to registration, (v) an extraordinary cash dividend or
(vi) the voluntary or involuntary dissolution, liquidation or winding up of the
affairs of the Company. The number of shares of the common stock for which a
warrant is exercisable is subject to adjustment upon the occurrence of certain
events.
Holders of warrants (or common stock issued in respect thereof) will be
entitled to include the common stock issued or issuable upon the exercise of the
warrants (the 'Underlying Common Stock') in a registration statement whenever
the Company or any shareholder proposes to effect a public equity offering with
respect to common stock of the Company (other than redeemable stock), except to
the extent the managing underwriter for such offering determines that such
registration and sale would materially adversely affect the price, timing or
distribution of the shares to be sold in such public equity offering. Following
the occurrence of an initial public offering, holders of warrants and Underlying
Common Stock representing not less than 25% of all the outstanding warrants and
Underlying Common Stock, taken together, will have the right, on one occasion,
to require the Company to register these securities pursuant to an effective
registration statement.
After August 1, 2001, the Company may be required, under certain
circumstances, to purchase, at fair market value, the outstanding warrants and
underlying common stock issued. Depending on the fair market value at that time,
there may be a charge to earnings in connection with the repurchase of warrants
and underlying common stock.
Management of the Company believes, based on independent third party
valuations, that the value of the Company's common stock at the date of the
initial issuance of these warrants was $23.50 per share and, accordingly,
allocated $24.5 million of the proceeds of the Private Placement to the value of
these warrants based on 142,000 units consisting of warrants to purchase 7.334
shares of common stock per unit with an exercise price of $.01 per share.
Effective September 30, 1997, the Company recorded additional Common Stock
Purchase Warrants of approximately $3.0 million reflecting the valuation of an
additional 297,490 shares, or 2.095 shares issuable per warrant. This aggregate
amount is classified between liabilities and stockholders' equity (deficit) in
the accompanying consolidated balance sheet as of December 31, 1997. The value
of the original warrants and the incremental value of the 2.095 (9.429 less
7.334) warrants issued per unit of the Notes effective September 30, 1997 have,
since their issuance, been accounted for as an additional debt discount subject
to accretion as described in Note 6.
F-15
<PAGE>
<PAGE>
INTER*ACT SYSTEMS, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1997, THE THREE MONTH PERIOD ENDED DECEMBER 31,
1996 AND FOR THE FISCAL YEARS ENDED SEPTEMBER 28, 1996 AND SEPTEMBER 30, 1995
9. NET LOSS PER SHARE
A reconciliation between the net loss and common shares of the basic and
diluted EPS computations is as follows:
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTH PERIOD FISCAL YEAR ENDED
DECEMBER 31, 1997 ENDED DECEMBER 31, 1996 SEPTEMBER 28, 1996
-------------------------- -------------------------- --------------------------
PER PER PER
SHARE SHARE SHARE
NET LOSS SHARES AMOUNT NET LOSS SHARES AMOUNT NET LOSS SHARES AMOUNT
-------- ------ ------ -------- ------ ------ -------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Basic EPS
Net loss attributable to common
stock........................... $(49,814) 7,692 $(6.48) $(7,330) 7,669 $(0.96) $(11,559) 6,038 $(1.91)
Effect on Dilutive Securities:
Warrants........................ -- -- --
Stock Options................... -- -- --
-------- ------ ------ -------- ------ ------ -------- ------ ------
Diluted EPS
Net loss attributable to common
stock and assumed option
exercise........................ $(49,814) 7,692 $(6.48) $(7,330) 7,669 $(0.96) $(11,559) 6,038 $(1.91)
-------- ------ ------ -------- ------ ------ -------- ------ ------
-------- ------ ------ -------- ------ ------ -------- ------ ------
<CAPTION>
FISCAL YEAR ENDED
SEPTEMBER 30, 1995
--------------------------
PER
SHARE
NET LOSS SHARES AMOUNT
-------- ------ ------
<S> <C> <C> <C>
Basic EPS
Net loss attributable to common
stock........................... $(4,526) 3,556 $(1.27)
Effect on Dilutive Securities:
Warrants........................ --
Stock Options................... --
-------- ------ ------
Diluted EPS
Net loss attributable to common
stock and assumed option
exercise........................ $(4,526) 3,556 $(1.27)
-------- ------ ------
-------- ------ ------
</TABLE>
There were no reconciling items to be reported by the Company in the
calculation for basic EPS and diluted EPS for the year ended December 31, 1997,
three month period ended December 31, 1996 and the fiscal years ended September
28, 1996 and September 30, 1995. Inclusion of the Company's outstanding common
stock purchase warrants and stock options (See Note 13) would have an
antidilutive effect on earnings per share and, therefore, they are not included
in the calculation of diluted EPS per SFAS No. 128.
10. DEFERRED COMPENSATION
In September 1996, the Company issued options to purchase 48,000 shares of
common stock at an exercise price of $7.50 per share under the 1996 Nonqualified
Stock Option Plan (See Note 13), which was an exercise price below the
then-estimated fair market value of the Company's common stock on the date of
grant. Accordingly, the Company has recorded a deferred compensation charge of
$768,000, which will be amortized ratably over the five year vesting period of
the related options. Accumulated amortization was $198,000, $45,000 and $6,000
at December 31, 1997, December 31, 1996 and September 28, 1996, respectively.
Amortization expense of deferred compensation was $153,000, $39,000 and $6,000
for the year ended December 31, 1997, the three month period ended December 31,
1996 and for the fiscal year ended September 28, 1996, respectively.
11. LITIGATION
During the year ended September 28, 1996, a lawsuit was filed and settled
against the Company alleging certain patent infringement. The Company expressly
denied any wrongdoing and entered into such agreement to avoid lengthy
litigation costs. Under the settlement agreement, the Company was required to
pay $400,000, and in return, received, among other things, the worldwide,
perpetual right to use such patent, dismissal with prejudice and release of all
related claims. The cost of the settlement of $400,000 was expensed during the
fiscal year ended September 28, 1996.
In February 1996, the Company filed suit against Catalina Marketing
Corporation alleging that Catalina has infringed United States Letters Patent
No. 4,554,446 (the '446 Patent') under which the Company is licensee. The
Company alleges that Catalina is infringing the patent by making, using and
offering for sale devices and systems that incorporate and employ inventions
covered by the '446 Patent. The Company is seeking an injunction against
Catalina to stop further infringement of the patent, treble damages and the
costs and expenses incurred in connection with the suit. The complaint has been
amended to add additional detail, and Catalina has answered denying the
allegations, raising certain
F-16
<PAGE>
<PAGE>
INTER*ACT SYSTEMS, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1997, THE THREE MONTH PERIOD ENDED DECEMBER 31,
1996 AND FOR THE FISCAL YEARS ENDED SEPTEMBER 28, 1996 AND SEPTEMBER 30, 1995
affirmative defenses, and seeking declaratory judgment of non-infringement,
invalidity or unenforceability of the '446 Patent. In May 1997, Catalina
asserted a second counterclaim alleging that the Company is infringing a newly
issued Catalina Patent U.S. Patent No. 5,612,868. The Company has answered
denying the allegations, raising affirmative defenses and seeking declaratory
judgment of non-infringement, invalidity and unenforceability of U.S. Patent No.
5,612,868. Discovery on the claims and counterclaims is proceeding and various
motions are pending before the United States District Court in the District of
Connecticut. As with any litigation, the ultimate outcome of these actions
cannot be predicted. However, the Company intends to assert its claims
vigorously.
In January 1998, Catalina Marketing International, Inc. ('Catalina
International,' a subsidiary of Catalina) filed suit against the Company
alleging that the Company has infringed United States Patent No. 4,674,041 (the
'041 Patent') which Catalina International Inc. acquired by assignment in
December 1997. Catalina International alleges that the Company is infringing the
'041 Patent by making, using and offering for sale devices and systems that
incorporate and employ inventions covered by the '041 Patent. Also in February
1998, Catalina International amended its complaint to join as additional parties
defendant Thermo Information Solutions, Inc. and Coleman Research Corporation
who have manufactured kiosk pursuant to an agreement with the Company. Catalina
International seeks injunctive and declaratory relief as well as unspecified
money damages against all defendants, and has filed a motion for preliminary
injunction against the Company seeking to stop further alleged infringement of
the '041 Patent pending trial. Various other motions are pending in the United
States District Court in the District of Connecticut, including the Company's
motion for a more definite statement. The Company intends to defend against
Catalina International's claims vigorously, and to pursue available remedies
against Catalina International, which may include the filing of appropriate
counterclaims.
12. INCOME TAXES
The components of cumulative deferred tax assets and liabilities were as
follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1997 1996
----------------- -----------------
<S> <C> <C>
Cumulative Amounts:
Deferred Tax Assets:
Accrued Bonus/Deferred
Compensation/other............................. $ 174 $ 26
Amortization of Warrant Expense.................. 1,545 384
Interest Accretion............................... 4,464 1,242
Other............................................ 13 5
Bond Issuance Cost Amortization.................. 222 59
Net Operating Loss Carryforward.................. 24,294 8,720
----------------- -----------------
Total Deferred Tax Assets................... 30,712 10,436
----------------- -----------------
Deferred Tax Liabilities:
Depreciation..................................... (1157) (527)
----------------- -----------------
Total Deferred Tax Liabilities.............. (1157) (527)
----------------- -----------------
Net Deferred Tax Asset before Valuation
Allowance...................................... 29,555 9,909
----------------- -----------------
Valuation Allowance.............................. (29,555) (9,909)
----------------- -----------------
Net Deferred Tax Asset...................... $-- $--
----------------- -----------------
----------------- -----------------
</TABLE>
In accordance with the provisions of Internal Revenue Code Section 382,
utilization of the Company's net operating loss carryforwards could be limited
in years following a change in the Company's ownership. In general, a change in
ownership occurs if a shareholder's (or the combined
F-17
<PAGE>
<PAGE>
INTER*ACT SYSTEMS, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1997, THE THREE MONTH PERIOD ENDED DECEMBER 31,
1996 AND FOR THE FISCAL YEARS ENDED SEPTEMBER 28, 1996 AND SEPTEMBER 30, 1995
group of the shareholders each owning less than 5%) ownership increases 50
percentage points over a three year period. This change could occur at the time
of an Initial Public Offering. The net operating loss limitation is computed by
applying a percentage (approximately 5%, as determined by the Internal Revenue
Code) to the value of the Company on the date of the change. The Section 382
limitation limits the use of the net operating loss carryforward as computed on
the date of the change in ownership. Net operating losses incurred after the
date of the change of ownership are not limited unless another change in
ownership occurs. At December 31, 1997 the amount of net operating loss
carryforward is approximately $54.4 million. These losses begin to expire in the
2008 tax year.
Creditable foreign taxes paid by the Company or its subsidiaries will be
subject to Internal Revenue Code Section 904, Limitation on Foreign Tax Credit,
because the Company does not have a Federal Income Tax liability. The Foreign
Tax Credit limitation may be carried back two years and forward five years. The
Company has the option of deducting these foreign taxes in lieu of the credit.
In general, since the Company does not have a federal tax liability, the
deduction method will increase the amount of net operating losses which are
available to be carried forward fifteen years. As of December 31, 1997 the
Company has not paid or accrued foreign taxes.
SFAS No. 109 requires a valuation allowance to be recorded when it is more
likely than not that some or all of the deferred tax assets may not be realized.
At each of the balance sheet dates, a valuation allowance for the full amount of
the net deferred tax asset was recorded. This valuation allowance is recorded
due to both the uncertainty of future income and the possible application of
Internal Revenue Code Section 382 limitations on the use of the net operating
loss carryforwards.
13. STOCK OPTION PLANS
The Company has in place the 1994 Stock Compensation Plan which provides
for the issuance of shares of Common Stock to key employees, consultants and
directors pursuant to stock options that meet the requirements of Section 422 of
the Internal Revenue Code of 1986, as amended (incentive stock options), options
that do not meet such requirements (nonqualified stock options) and stock
bonuses. All options under the plan must be granted at an exercise price not
less than fair market value. Stock bonuses may be in the form of grants of
restricted stock. The aggregate number of shares of Common Stock that may be
issued pursuant to the plan may not exceed 330,000 shares, subject to adjustment
upon occurrence of certain events affecting the Company's capitalization. As of
December 31, 1997 an aggregate of 17,900 shares remain available for future
grants under the 1994 Stock Compensation Plan.
The Company also has in place the 1996 Nonqualified Stock Option Plan which
provides for the issuance of shares of Common Stock to key employees,
consultants and directors pursuant to nonqualified stock options. All options
must be granted at an exercise price not less than $5.50 per share. The
aggregate number of shares of Common Stock that may be issued pursuant to the
plan may not exceed 600,000 shares of Common Stock, subject to adjustment upon
occurrence of certain events affecting the Company's capitalization. This plan
is subject to shareholder approval. As of December 31, 1997 an aggregate of
17,000 shares remain available for future grants under the 1996 Nonqualified
Stock Option Plan.
On May 20, 1997, the Company established the 1997 Long-term Incentive Plan
('Long-term Incentive Plan') for the purpose of promoting the long-term
financial performance of the Company by providing incentive compensation
opportunities to officers, supervisory employees, directors or consultants of
the Company or any subsidiary. The plan allows for the Company to grant Stock
Options for the purchase of shares of Stock to Grantees under the Plan in such
amounts as the Compensation Committee of the Board of Directors, in its sole
discretion, determines. The Stock Options granted under the Plan will be
designated as either: (i) Incentive Stock Options or (ii) Nonqualified Stock
Options. The purchase price for shares acquired pursuant to the exercise, will
be determined at the time
F-18
<PAGE>
<PAGE>
INTER*ACT SYSTEMS, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1997, THE THREE MONTH PERIOD ENDED DECEMBER 31,
1996 AND FOR THE FISCAL YEARS ENDED SEPTEMBER 28, 1996 AND SEPTEMBER 30, 1995
of grant; however, it will not be less than the fair market value of the shares
at the time of the grant. The Long-term Incentive Plan also allows the Company
to grant Stock Appreciation Rights in any amount, at its sole discretion, either
alone or in combination with other Awards granted under the Plan. As of December
31, 1997, 367,900 of 500,000 total available options have been issued under the
Long-term Incentive Plan at an exercise price of $10.00 per share. Management
believes that these options were granted at fair market value of common stock at
the date of grant. No Stock Appreciation Rights were awarded as of December 31,
1997. The awards vest annually over five years from the date of grant with the
exception of 63,500 options, which became immediately exercisable.
The Company accounts for these plans under APB Opinion No. 25, under which
no compensation cost has been recognized. Had compensation cost for these plans
been determined consistent with SFAS No. 123 (See Note 2), the Company's net
loss and net loss per share would have been changed to the following pro forma
amounts:
<TABLE>
<CAPTION>
THREE MONTH
YEAR ENDED PERIOD ENDED FISCAL YEAR ENDED
DECEMBER 31, 1997 DECEMBER 31, 1996 SEPTEMBER 28, 1996
----------------- ----------------- ------------------
<S> <C> <C> <C> <C>
Net Loss: As Reported $ (49,814) $(7,330) $(11,559)
Pro Forma (50,353) (7,355) (11,832)
Net Loss Per Share: Basic As Reported (6.48) (.96) (1.91)
Diluted As Reported (6.48) (.96) (1.91)
Basic Pro Forma (6.55) (.96) (1.96)
Diluted Pro Forma (6.55) (.96) (1.96)
</TABLE>
Because the SFAS No. 123 method of accounting has not been applied to
options granted prior to January 1, 1995, the resulting pro forma compensation
cost may not be representative of that to be expected in future years. A summary
of the status of the Company's stock option plans for the year ended December
31, 1997, the three month period ended December 31, 1996 and the fiscal year
ended September 28, 1996 is presented in the table and narrative below:
<TABLE>
<CAPTION>
THREE MONTH
YEAR ENDED PERIOD ENDED FISCAL YEAR ENDED
DECEMBER 31, 1997 DECEMBER 31, 1996 SEPTEMBER 28, 1996
-------------------- ------------------ ------------------
WTD AVG WTD AVG WTD AVG
EX EX EX
SHARES PRICE SHARES PRICE SHARES PRICE
--------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year.............. 821,100 $ 5.40 844,100 $5.40 266,600 $4.77
Granted....................................... 543,400 10.00 -- -- 617,500 5.65
Exercised..................................... -- -- -- -- -- --
Forfeited..................................... 2,200 5.23 (3,000) 5.50 (7,000) 5.00
Expired....................................... 102,400 5.91 (20,000) 5.50 (33,000) 5.08
Outstanding at end of year.................... 1,259,900 7.34 821,100 5.40 844,100 5.40
Exercisable at end of year.................... 571,250 6.16 332,400 5.15 320,200 5.16
Weighted average fair value of options
granted..................................... N/A 7.34 N/A 5.40 N/A 5.40
</TABLE>
821,100 of the options outstanding at December 31, 1996 have exercise
prices between $1.86 and $7.50, with a weighted average exercise price of $5.40
and a weighted average remaining contractual life of 8.2 years. 332,400 of these
options are exercisable. The remaining options have exercise prices between
$1.86 and $7.50, with a weighted average exercise price of $5.56 and a weighted
average remaining contractual life of 6 years. 332,400 of these options are
exercisable; their weighted average exercise price is $5.15.
1,259,900 of the options outstanding at December 31, 1997, have exercise
prices between $1.86 and 10.00, with a weighted average exercise price of $7.34
and a weighted average remaining contractual life
F-19
<PAGE>
<PAGE>
INTER*ACT SYSTEMS, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1997, THE THREE MONTH PERIOD ENDED DECEMBER 31,
1996 AND FOR THE FISCAL YEARS ENDED SEPTEMBER 28, 1996 AND SEPTEMBER 30, 1995
of 8.7 years. 571,250 of these options are exercisable. The remaining options
have exercise prices between $1.86 and 10.00 with a weighted average price of
$8.48 and a weighted average remaining contractual life of 9.1 years. 571,250 of
these options are exercisable; their weighted average exercise price is $6.16.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes Option Pricing Model with the following weighted-average
assumptions used for grants in the year ended December 31, 1997, the three month
period ended December 31, 1996, and the fiscal year ended September 28, 1996
respectively: risk free interest rates of 6.49%, 6.45%, and 6.60%; and expected
dividend yields of 0%, expected lives of 5 years, and expected stock volatility
of 0 for each respective period.
The foregoing plans are administered by the Compensation and Stock Option
Committee of the Board of Directors, which is authorized, subject to the
provisions of the plans, to determine to whom and at what time options and
bonuses may be granted and the other terms and conditions of the grant.
14. COMMITMENTS AND CONTINGENCIES
COMMITMENTS FOR TECHNOLOGY
The Company is party to several patent licensing agreements relating to its
in-store consumer product promotion and couponing business. With respect to one
license agreement under which the Company is assignee, the Company is required
to pay a royalty of 2% of the gross collected revenues of the Company, to the
extent derived from the Company's exploitation of the patent, with such royalty
decreasing to 1% of such revenues after $10 million in aggregate royalties have
been paid to the licensors. This license agreement requires that certain minimum
monthly payments be made to the licensors, and be exceeded within approximately
two years, in order to avoid triggering a termination right on the part of the
licensors. With respect to another license agreement, the Company is required to
pay the licensor a royalty of .8% of the gross collected revenues of the Company
to the extent derived from the Company's exploitation of the patent, until such
time as the licensor has received the aggregate sum of $600,000 after which no
additional royalty payments are required. Under a third agreement, the Company
is required to pay the licensor a royalty of 1% of the gross revenues related to
the Company's exploitation of the patent subject to certain minimum annual
payments, should the Company wish to maintain exclusive rights under such
patent. Under these agreements, the Company recorded royalty payments of
$398,000, $99,000, $333,000 and $274,000 for the year ended December 31, 1997,
the three month period ended December 31, 1996, and for the fiscal years ended
September 28, 1996 and September 30, 1995, respectively.
COMMITMENTS FOR FIXED ASSET PURCHASES
On September 9, 1996, the Company sold its manufacturing operations to
Coleman Research Corporation ('Coleman') for approximately $2.6 million and
entered into an exclusive supply agreement whereby Coleman is to fulfill the
Company's anticipated requirements for terminals for the next three years with
fixed pricing for the first 5,000 terminals. No material gain or loss was
realized in this transaction. As of March 24, 1998, the Company terminated its
three-year exclusive terminal supply relationship with Coleman and its
subsidiary, Thermo Information Solutions, Inc. ('Thermo') (collectively, the
'Vendors'). As part of this mutual termination agreement, the Company agreed to
pay $4.5 million in installments to pay balances on previously purchased ILN
equipment, to acquire certain inventory and to obtain early release from the
exclusivity provision of the original contract to allow the Company to pursue
relationships with new vendors. Of this amount, $4.1 million was charged to
operating expense during 1997. The Vendors have agreed to return supplies and
terminal parts to the Company, for which approximately $400,000 was reflected in
other current assets of the Company as of December 31, 1997. Further, the
Vendors will supply the Company with 350 additional kiosks.
F-20
<PAGE>
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
SEQUENTIAL
EXHIBIT NO. DESCRIPTION PAGE NO.
- ------------ ----------------------------------------------------------------------------------------- ----------
<C> <S> <C> <C>
*3 (a)(1) Articles of Incorporation of the Company, with amendments, through June 12, 1996.........
****3 (a)(2) Articles of Amendment of the Company, dated May 21, 1997 and effective June 3, 1997......
****3 (b) Amended and Restated Bylaws of the Company...............................................
*4 (a) Specimen Certificate of the Company's Common Stock.......................................
*4 (b) Indenture dated August 1, 1996, between the Company and Fleet National Bank, as trustee,
relating to $142,000,000 in principal amount of 14% Senior Discount Notes due 2003.......
*10 (a) Management Services Agreement dated June 17, 1996, between the Company and Vanguard
Cellular Systems, Inc....................................................................
*10 (b) Consulting Agreement dated January, 1996, between the Company and Vanguard Cellular
Systems, Inc.............................................................................
*10 (c) Registration Rights Agreement dated May 5, 1995, between the Company and Vanguard
Cellular Systems, Inc....................................................................
*10 (d) Amendment No. 1 to Registration Rights Agreement dated October, 1995, between the Company
and Vanguard Cellular Systems, Inc.......................................................
*10 (e) Registration Rights Agreement dated March, 1996 between the Company and Toronto Dominion
Investments, Inc.........................................................................
*10 (f) Subscription Agreement dated October, 1995, between the Company and Vanguard Cellular
Systems, Inc.............................................................................
*10 (g) Company's 1996 Nonqualified Stock Option Plan............................................
*10 (h) Form of Nonqualified Stock Option Agreement..............................................
*10 (i) Company's 1994 Stock Compensation Plan...................................................
*10 (j) Form of Incentive Stock Option Agreement.................................................
*10 (k) Amended and Restated Common Stock Purchase Warrant granted to Vanguard Cellular Operating
Corp.....................................................................................
*10 (l) Warrant Agreement dated August 1, 1996, between the Company and Fleet National Bank, as
Warrant Agent............................................................................
*10 (m) Shareholders' Agreement dated April 16, 1993, between the Company and its
shareholders.............................................................................
*10 (n) Amendment No. 1 to Shareholders' Agreement dated June 17, 1994, between the Company and
its shareholders.........................................................................
*10 (o) Exchange and Registration Rights Agreement dated July 30, 1996, between the Company and
the Initial Purchasers...................................................................
*10 (p) Kiosk Agreement dated September 3, 1996, between the Company and Coleman Research
Corporation..............................................................................
*10 (q) Assignment of License Agreement dated June 15, 1993 among Gerald Singer and Arthur Murphy
as Licensors, Michael R. Jones as Licensee and Network Licensing, Inc. as Assignee.......
*10 (r) Security Agreement dated June 16, 1993 between Michael R. Jones and Network Licensing,
Inc......................................................................................
*10 (s) Sublicense dated June 16, 1993 between Network Licensing, Inc. and the Company...........
*10 (t) Settlement Agreement and Mutual General Release dated as of September 6, 1994 among
Gerald R. Singer, Arthur J. Murphy, Lenora Singer, Joan Murphy, Network Licensing, Inc.
and the Company..........................................................................
*10 (u) Amended and Restated Patent Rights Assignment/Consulting Agreement dated as of March 29,
1995 between Joseph F. Stratton and the Company..........................................
*10 (v) Agreement Regarding Licensing matters dated as of January 22, 1996 among Michael R.
Jones, Network Licensing, Inc. and the Company...........................................
*10 (w) Letter Agreement dated July 22, 1996 between Gerald Singer, Arthur J. Murphy and the
Company..................................................................................
*10 (x) Assignment dated as of July 23, 1996 from Network Licensing, Inc. to the Company.........
</TABLE>
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
SEQUENTIAL
EXHIBIT NO. DESCRIPTION PAGE NO.
- ------------ ----------------------------------------------------------------------------------------- ----------
<C> <S> <C> <C>
**10 (y) Purchase Agreement dated July 30, 1996, between the Company and the Initial
Purchasers...............................................................................
***10 (z) Company's 1997 Long-Term Incentive Plan..................................................
10 (aa) Form of Incentive Stock Option Agreement.................................................
10 (bb) Form of Nonqualified Stock Option Agreement..............................................
10 (cc) Patent License Agreement dated August 20, 1997, between the Company and Coupco, Inc.
(Portions of this exhibit have been omitted pursuant to a request for confidentiality.)..
10 (dd) Termination Agreement dated March 24, 1998 between the Company, Coleman Research
Corporation and Thermo Information Solutions, Inc........................................
10 (ee) Letter Agreement dated March 17, 1997 between the Company and Thomas A. Manna............
10 (ff) Letter Agreement dated September 3, 1997 between the Company and James. F. Brandhort,
Jr.......................................................................................
10 (gg) Form of Employment, Noncompetition and Nondisclosure Agreement...........................
21 List of Subsidiaries of the Company......................................................
27 Financial Data Schedule..................................................................
</TABLE>
- ------------
* Incorporated by reference to the corresponding exhibit number filed with
the Company's Registration Statement on Form S-4 (Registration No.
333-12091)
** Incorporated by reference to exhibit 1 filed with the Company's
Registration Statement on Form S-4 (Registration No. 333-12091)
*** Incorporated by reference to the corresponding exhibit number filed with
the Company's Quarterly Report on Fom 10-Q for the period ended March 31,
1997.
**** Incorporated by reference to the corresponding exhibit number filed with
the Company's Quarterly Report on Form 10-Q for the period ended June 30,
1997.
STATEMENT OF DIFFERENCES
The trademark symbol shall be expressed as......................'tm'
<PAGE>
<PAGE>
INTERACT SYSTEMS, INCORPORATED
1997 LONG-TERM INCENTIVE PLAN
INCENTIVE STOCK OPTION AGREEMENT
THIS INCENTIVE STOCK OPTION AGREEMENT (the 'Option Agreement') dated the
___ day of __________, 199__ by and between Inter Act Systems, Incorporated, a
North Carolina corporation (the 'Company'), and ___________________, a key
employee of the Company (the 'Optionee'):
W I T N E S S E T H:
WHEREAS, the Company desires to provide the Optionee with an incentive to
accept employment with the Company and an opportunity to acquire common stock of
the Company so that the Optionee may have a proprietary interest in the success
of the Company; and
WHEREAS, the Company desires to grant the Optionee an incentive stock
option under the Inter Act Systems, Incorporated 1997 Long-Term Incentive Plan
(the 'Plan'), a copy of which is attached hereto and incorporated by reference,
and the Optionee desires to accept such option in accordance with the terms and
conditions set forth herein;
NOW, THEREFORE, in consideration of the premises and the mutual covenants
contained herein, and intending to be legally bound hereby, the parties agree as
follows:
1. Grant of Option. Subject to the terms and conditions of this Agreement,
the Company hereby grants to the Optionee an option (the 'Option') to purchase
all or any portion of _________________ (______) shares of the Company's Common
Stock (the 'Common Stock') at an exercise price of ________________ Dollars
($______) per share (the 'Exercise Price'). This Option is intended to be an
incentive stock option as defined in Section 422 of the Internal Revenue Code of
1986, as amended (the 'Code').
2. Term of Option. Subject to the further limitations and restrictions as
provided in the Plan and this Agreement, the Option shall become exercisable in
installments, with the Optionee having the right to purchase from the Company
the following number of shares of Common Stock of the Company subject to this
Option, on and after the following dates, in cumulative fashion:
(a) At any time after one year from the date hereof, and prior to
termination of this Option, up to twenty percent (20%) of the total number
of shares subject to this Option;
<PAGE>
<PAGE>
(b) At any time after two years from the date hereof, and prior to
termination of this Option, up to forty percent (40%) of the total number
of shares subject to this Option (less any shares previously purchased
pursuant to this Option);
(c) At any time after three years from the date hereof, and prior to
termination of this Option, up to sixty percent (60%) of the total number
of shares subject to this Option (less
<PAGE>
<PAGE>
any shares previously purchased pursuant to this Option);
(d) At any time after four years from the date hereof, and prior to
termination of this Option, up to eighty percent (80%) of the total number
of shares subject to this Option (less any shares previously purchased
pursuant to this Option); and
(e) At any time after five years from the date hereof, and prior to
the termination of this Option, this Option shall be exercisable in full.
Not less than 100 shares may be purchased at any one time pursuant to any
exercise of this Option unless the number of shares purchased is the total
number that may be purchased under this Option at that time or unless the
Company shall otherwise consent. No fractional shares of Common Stock shall be
issued upon any exercise of this Option.
3. Transferability of Option. The Option is not transferable by the
Optionee during the Optionee's lifetime but may be transferred only upon the
death of the Optionee by will or by the laws of descent and distribution.
4. Adjustments. The aggregate number of shares of Common Stock subject to
the Option and the Option exercise price shall be appropriately and equitably
adjusted to reflect any stock dividend, stock split, share combination or
recapitalization occurring subsequent to the date hereof, as further described
in Article 15 of Article I of the Plan.
5. Termination of Option. The Option shall terminate and be no longer
exercisable after the date which is ten years from the date hereof; provided,
however, that the Option shall sooner terminate as follows:
(a) If the Optionee's employment with the Company, its parent, or any
of its subsidiaries, or a corporation of a parent or subsidiary of such
corporation issuing or assuming the Option in a transaction to which
Section 424(a) of the Code applies (for purposes of this Section 5, the
Company, its parent, subsidiary or such other corporation collectively
referred to as the 'Company') is terminated for any reason other than
disability or death, then the Option or unexercised portion thereof shall
terminate on the date which is three months from the effective date of the
Optionee's termination of employment.
(b) If the Optionee's employment with the Company is terminated
because of his disability (within the meaning of Section 22(e)(3) of the
Code), then the Option or unexercised portion thereof shall terminate on
the date which is three months from the effective date of the Optionee's
termination of employment due to disability.
(c) If the Optionee's employment with the Company is terminated by
reason of death, then the Option or unexercised portion thereof shall
terminate
<PAGE>
<PAGE>
which is one year after the date of the Optionee's death. During this
period, the Option may be exercised by the person or persons to whom the
Optionee's rights under this Agreement shall pass by will or by the laws of
descent and distribution.
Any Option that may be exercised for a period following termination of the
Optionee's employment may be exercised only to the extent it was exercisable
immediately before such termination and in no event after the Option would
expire by its terms without regard to such termination.
6. Method of Exercise. The Option shall be exercised by the tender of
payment and delivery to the Company at its principal place of business of a
written notice, at least five (5) days prior to the proposed date of exercise,
which notice shall:
(a) state the election to exercise the Option, the number of shares of
Common Stock with respect to which the Option is being exercised, and the
name, address, and social security number of the person in whose name the
stock certificate or certificates for such shares of Common Stock is to be
registered.
(b) contain any such representations and agreements as to Optionee's
investment interest with respect to such shares of Common Stock as shall be
satisfactory to the Board or Committee.
(c) be signed by the person entitled to exercise the Option, and if
the Option is being exercised by any person or persons other than the
Optionee, be accompanied by proof, satisfactory to the Committee, of the
right of such person or persons to exercise the Option.
Payment of the exercise price may be made in cash or by certified, cashiers
or official check or, at the option of the Company, by personal check. Payment
may also be made by surrendering shares of Common Stock (including any shares of
Common Stock received upon a prior or simultaneous exercise of the Option) at
the then fair market value of such shares, as determined in accordance with
Section 7(b) of Article I of the Plan. Payment may also be made by combining
cash or check and shares of Common Stock.
After receipt of such notice in a form satisfactory to the Committee and
the acceptance of payment, the Company shall deliver to the Optionee a
certificate or certificates representing the shares purchased hereunder,
provided, that if any law or regulation requires the Company to take any action
with respect to the shares specified in such notice before the issuance thereof,
the date of delivery of such shares shall be extended for the period necessary
to take such action.
7. Tax Matters. The Optionee acknowledges that, upon exercise of the
Option, the Optionee will recognize taxable income generally in an amount equal
to the difference between the fair market value of the shares purchased upon
exercise and the
<PAGE>
<PAGE>
Exercise Price paid therefor, and the Company may have certain withholding
obligations for income and other taxes. It shall be a condition to the
Optionee's exercise of the Option and receipt of a stock certificate covering
Shares purchased pursuant to the Option that the Optionee pay to the Company
such amounts as it is required to withhold or, with the consent of the Company,
that the Optionee otherwise provide for the satisfaction of the Company's
withholding obligation. If any such payment is not made by the Optionee, the
Company may deduct the amounts required to be withheld from payments of any kind
to which the Optionee would otherwise be entitled from the Company.
8. Rights of a Shareholder. The Optionee shall not be deemed for any
purpose to be a shareholder of the Company with respect to any shares covered by
this Option unless this Option shall have been exercised and the Exercise Price
paid in the manner provided herein. No adjustment will be made for dividends or
other rights where the record date is prior to the date of exercise and payment.
Upon the exercise of the Option and the issuance of the certificate or
certificates evidencing the shares of Common Stock received, except as otherwise
provided herein, the Optionee shall have all the rights of a stockholder of the
Company including the rights to receive all dividends or other distributions
paid or made with respect to such shares.
9. Compliance with Securities Laws. The Optionee recognizes that any
registration of the shares of Common Stock issuable pursuant to this Option
under applicable federal and state securities laws, or actions to qualify for
applicable exemptions from such registrations, shall be at the option of the
Company. The Optionee acknowledges that, in the event that no such registrations
are undertaken and the Company relies on exemptions from such registrations, the
shares shall be issued only if the Optionee qualifies to receive such shares in
accordance with the exemptions from registration on which the Company relies and
that, in connection with any issuance of certificates evidencing such shares,
the Board of Directors may require appropriate representations from the Optionee
and take such other action as the Board of Directors may deem necessary,
including but not limited to placing restrictive legends on such certificates
and placing stop transfer instructions in the Company's stock transfer records,
or delivering such instructions to the Company's transfer agent, in order to
assure compliance with any such exemptions. Notwithstanding any other provision
of the Plan or this Agreement (i) no shares will be issued upon any exercise of
the Option unless and until such shares have been registered under all
applicable federal and state securities laws or unless, in the opinion of
counsel satisfactory to the Company, all actions necessary to qualify for
exemptions from such registrations shall have been taken and (ii) the Company
shall have no obligation to undertake such registrations or such actions
necessary to qualify for exemptions from registrations and shall have no
liability whatsoever for not doing so except to refund any option price tendered
to the Company.
10. Shareholders' Agreement. The Optionee understands and agrees that the
shares of Common Stock issuable upon exercise of this Option shall also be
subject to the restrictions on transfer and other provisions of the
shareholders' agreement, if any, that may be in effect among the Company and all
its shareholders as of the date of any
<PAGE>
<PAGE>
exercise of this Option. As a condition to the exercise of this Option, the
Optionee agrees that he will become a party to any such shareholders' agreement
by executing a joinder agreement or other appropriate document. In the event
that the Shareholders' Agreement dated as of April 16, 1993, as amended by
Amendment No. 1 thereto dated as of June 17, 1994, has terminated as a result of
a public offering of capital stock of the Company prior to the exercise of this
Option, the Optionee nevertheless agrees to be bound by the lock-up agreement
contained in Section 23 thereof or any similar lock-up agreement then in effect
with respect to the Company's shareholders.
11. Legends. The certificate or certificates evidencing all or any of the
shares of Common Stock issued upon exercise of this Option shall bear
substantially the following legend:
'The shares evidenced by this certificate have not
been registered under the Securities Act of 1933,
as amended, or under the securities laws of any
state. The shares may not be sold, transferred,
pledged or hypothecated in the absence of any
effective registration statement under the
Securities Act of 1933, as amended, and such
registration or qualification as may be necessary
under the securities laws of any state, or an
opinion of counsel satisfactory to the Company
that such registration or qualification is not
required.'
and shall also bear any legend required by the Shareholders' Agreement.
12. Specific Performance. The Optionee agrees that in the event of any
violation of this Agreement, an action may be commenced by the Company for any
such preliminary and permanent injunction relief and other equitable relief in
any court of competent jurisdiction in the State of North Carolina or in any
other court of competent jurisdiction. The Optionee hereby waives any objections
on the grounds of improper jurisdiction or venue to the commencement of an
action in the State of North Carolina and agrees that effective service of
process may be made upon him by mail under the notice provisions contained in
Section 16 hereof.
13. Construction. Whenever the word 'Optionee' is used in any provision of
this Agreement under circumstances where the provision should logically be
construed to apply to (i) the estate, personal representative, or beneficiary to
whom this Option may be transferred by will or by the laws of descent and
distribution or (ii) the guardian or legal representative of the Optionee acting
pursuant to a valid power of attorney or the decree of a court of competent
jurisdiction, then the term 'Optionee' shall be construed to include such
estate, personal representative, beneficiary, guardian or legal representative.
14. Severability. The provisions of this Agreement shall be severable and
the invalidity or unenforceability of any provision shall not affect the
validity or enforceability of the other provisions hereto.
<PAGE>
<PAGE>
15. Successor and Assigns. The terms of this Agreement shall be binding
upon and shall enure to the benefit of any successors or assigns of the Company
and of the Optionee and of the Common Stock issued or issuable upon the exercise
hereof.
16. Notices. Notices under this Agreement shall be in writing and shall be
deemed to have been duly given (i) when personally delivered, (ii) when
forwarded by Federal Express, Airborne, or another private carrier which
maintains records showing delivery information, (iii) when sent via facsimile
but only if a written facsimile acknowledgment of receipt is received by the
sending party, or (iv) when placed in the United States Mail and forwarded by
registered or certified mail, return receipt requested, postage prepaid,
addressed to the party to whom such notice is being given.
17. Modification. This Agreement is the entire agreement and understanding
of the parties hereto with respect to the Option granted herein and supersedes
any and all prior and contemporaneous negotiations, understandings and
agreements with regard to the Option and the matters set forth herein, whether
oral or written. No representation, inducement, agreement, promise or
understanding altering, modifying, taking from or adding to the terms and
conditions hereof shall have any force or effect unless the same is in writing
and validity executed by the parties hereto.
18. Governing Law. This Agreement shall be governed in accordance with the
laws of the State of North Carolina.
19. Multiple Counterparts. This Agreement may be signed in one or more
counterparts, each of which shall be deemed to be an original.
IN WITNESS WHEREOF, the Optionee has executed this Agreement and the
Company has caused this Agreement to be executed on its behalf by its duly
authorized officer effective as of the day and year first above written.
INTERACT SYSTEMS, INCORPORATED
ATTEST:
By:
Title:
----------------------------------
Secretary
(Corporate Seal)
WITNESS: OPTIONEE:
- -----------------------------------
(SEAL)
Name: -----------------------------------
<PAGE>
<PAGE>
INTER*ACT SYSTEMS, INCORPORATED
1997 LONG-TERM INCENTIVE PLAN
NONQUALIFIED STOCK OPTION AGREEMENT
THIS NONQUALIFIED STOCK OPTION AGREEMENT (the "Option Agreement") dated as
of the___________day of______, 199_, by and between Inter Act Systems,
Incorporated, a North Carolina corporation (the 'Company'), and_____________,
a____________the Company (the 'Optionee'):
- --------------
WITNESSETH:
WHEREAS, the Company desires to compensate the Optionee for services
endered and to be rendered to the Company by granting to the Optionee a
nonqualified stock option under the Inter Act Systems, Incorporated 1997
Long-Term Incentive Plan (the 'Plan'), a copy of which is attached hereto and
incorporated by reference, and the Optionee desires to accept such option in
accordance with the terms and conditions set forth herein;
NOW, THEREFORE, in consideration of the premises and the mutual covenants
contained herein, and intending to be legally bound hereby, the parties agree as
follows:
1. Grant of Option. Subject to the terms and conditions of this Agreement,
the Company hereby grants to the Optionee an option (the 'Option') to purchase
all or any portion of_______________( ) shares of the Company's Common Stock
(the 'Common Stock') at an exercise price of ____________Dollars and___________
Cents ($ ) per share (the 'Exercise Price'). This Option is not intended
to be an incentive stock option as defined in Section 422 of the Internal
Revenue Code of 1986, as amended (the 'Code').
2. Exercise of Option. Subject to the further limitations and restrictions
as provided in the Plan and this Agreement, the Option shall be immediately
exercisable and may be exercised from time to time in whole or in part at any
time after approval of the Plan and prior to termination of the Option;
provided, however, that not less than 100 shares may be purchased at any one
time pursuant to any exercise of this Option unless the number of shares
purchased is the total number that may be purchased under this Option at
that time or unless the Company shall otherwise consent. No fractional shares
of Common Stock shall be issued upon any exercise of this Option.
3. Transferability of Option. The Option may not be sold, pledged,
assigned or transferred in any manner other than upon the death of the Optionee
by will or by the laws of descent and distribution except for immediate family
transfers. For purposes of this Section 3, 'immediate family transfers' shall
mean transfers, without consideration, to (i) a member of the Optionee's
immediate family, (ii) a trust the beneficiaries of which
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consist solely of the Optionee and/or members of his immediate family, or (iii)
a partnership, limited liability company or similar entity all of the members,
partners and beneficiaries of which consist solely of the Optionee and/or
members of his immediate family. For purposes of this Section 3, members of the
Optionee's immediate family include his or her spouse, children, parents and
siblings, and the spouses and lineal descendants of such persons.
4. Adjustments. If the shares of Common Stock of the Company are increased,
decreased, changed into or exchanged for a different number or kind of shares
or securities through merger, consolidation, combination, exhange of shares,
other reorganization, recapitalization, reclassification, stock dividend, stock
split or reverse stock split in which the Company is the surviving entity, an
appropriate and proportionate adjustment shall be made, as provided in Article
15 of the Plan, in the number or kind of shares allocated to the unexercised
portion of the Option and in the Exercise Price thereof.
5. Termination of Option. The Option shall terminate and be no longer
exercisable on___________,___________.
6. Method of Exercise. The Option shall be exercised by the tender of
payment and delivery to the Company at its principal place of business of a
written notice, at least five days prior to the proposed date of exercise,
which notice shall:
(a) state the election to exercise the Option, the number of shares
of Common Stock with respect to which the Option is being exercised, and
the name, address, and social security number of the person in whose
name the stock certificate or certificates for such shares of Common
Stock is to be registered;
(b) contain any such representations and agreements as to
Optionee's investment interest with respect to such shares of Common
Stock as shall be reasonably required by the Board of Directors or the
Committee; and
(c) be signed by the person entitled to exercise the
Option, and if the Option is being exercised by any person or persons
other than the Optionee, be accompanied by proof, satisfactory to the
Committee, of the right of such person or persons to exercise the
Option.
Payment of the Exercise Price may be made in cash or by certified or
cashiers check. Payment may also be made by surrendering shares of Common Stock
(including any shares of Common Stock received upon a prior or simultaneous
exercise of the Option) at the then fair market value of such shares, as
determined in accordance with Section 5(d) of the Plan. Payment may also be made
by combining cash, check and shares of Common Stock.
After receipt of such notice in a form satisfactory to the Committee and
the acceptance of payment, the Company shall deliver to the Optionee a
certficate or certificates representing the shares purchased hereunder;
provided, however, that if any
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law or regulation requires the Company to take any action with respect to the
shares specified in such notice before the issuance thereof, the date of
delivery of such shares shall be extended for the period necessary to take such
action.
7. Tax Matters. The Optionee acknowledges that, upon exercise of the
Option, the Optionee will recognize taxable income generally in an amount equal
to the difference between the fair market value of the shares
purchased upon exercise and the Exercise Price paid therefor, and the
Company may have certain withholding obligations for income and other
taxes. It shall be a condition to the Optionee's exercise of the Option and
receipt of a stock certificate covering Shares purchased pursuant to the
Option that the Optionee pay to the Company such amounts as it is required
to withhold or, with the consent of the Company, that the Optionee
otherwise provide for the satisfaction of the Company's withholding
obligation. If any such payment is not made by the Optionee, the Company
may deduct the amounts required to be withheld from payments of any kind to
which the Optionee would otherwise be entitled from the Company.
8. Rights of a Shareholder. The Optionee shall not be deemed for any
purpose to be a shareholder of the Company with respect to any shares covered by
this Option unless this Option shall have been exercised and the Exercise Price
paid in the manner provided herein. No adjustment will be made for dividends or
other rights where the record date is prior to the date of exercise and payment.
Upon the exercise of the Option and the issuance of the certificate or
certificates evidencing the shares of Common Stock received, except as otherwise
provided herein, the Optionee shall have all the rights of a stockholder of the
Company including the rights to receive all dividends or other distributions
paid or made with respect to such shares.
9. Compliance with Securities Laws. The Optionee recognizes that any
registration of the shares of Common Stock issuable pursuant to this Option
under applicable federal and state securities laws, or actions to qualify for
applicable exemptions from such registrations, shall be at the option of the
Company. The Optionee acknowledges that, in the event that no such registrations
are undertaken and the Company relies on exemptions from such registrations, the
shares shall be issued only if the Optionee qualifies to receive such shares in
accordance with the exemptions from registration on which the Company relies and
that, in connection with any issuance of certificates evidencing such shares,
the Board of Directors may require appropriate representations from the Optionee
and take such other action as the Board of Directors may deem necessary,
including but not limited to placing restrictive legends on such certificates
and placing stop transfer instructions in the Company's stock transfer records,
or delivering such instructions to the Company's transfer agent, in order to
assure compliance with any such exemptions. Notwithstanding any other provision
of the Plan or this Agreement (i) no shares will be issued upon any exercise of
the Option unless and until such shares have been registered under all
applicable federal and state securities laws or unless, in the opinion of
counsel satisfactory to the Company, all actions necessary to qualify for
exemptions from such registrations shall have been taken and (ii) the Company
shall have no obligation to undertake such registrations or such actions
necessary to qualify for exemptions from registrations and shall have no
liability whatsoever for not doing so except to refund any option price tendered
to the Company.
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10. Shareholders' Agreement. The Optionee understands and agrees that the
shares of Common Stock issuable upon exercise of this Option shall also be
subject to the restrictions on transfer and other provisions of the
shareholders' agreement, if any, that may be in effect among the Company and all
its shareholders as of the date of any exercise of this Option (the
'Shareholders' Agreement'). As a condition to the exercise of this Option, the
Optionee agrees that he will become a party to the Shareholders' Agreement by
executing a joinder agreement or other appropriate document. In the event that
the Shareholders' Agreement dated as of April 16, 1993, as amended by Amendment
No. 1 thereto dated as of June 17, 1994, has terminated as a result of a public
offering of capital stock of the Company prior to the exercise of this Option,
the Optionee nevertheless agrees to be bound by the lock-up agreement contained
in Section 23 thereof or any similar lock-up agreement then in effect with
respect to the Company's shareholders.
11. Legends. The certificate or certificates evidencing all or any of the
shares of Common Stock issued upon exercise of this Option shall bear
substantially the following legend:
The shares evidenced by this certificate have not been registered under the
Securities Act of 1933, as amended, or under the securities laws of any state.
The shares may not be sold, transferred, pledged or hypothecated in the absence
of an effective registration statement under the Securities Act of 1933, as
amended, and such registration or qualification as may be necessary under the
securities laws of any state, or an opinion of counsel satisfactory to the
Company that such registration or qualification is not required.
and shall also bear any legend required by the Shareholders' Agreement.
12. Specific Performance. The Optionee agrees that in the event of any
violation of this Agreement, an action may be commenced by the Company for any
such preliminary and permanent injunctive relief and other equitable relief in
any court of competent jurisdiction in the State of North Carolina or in any
other court of competent jurisdiction. The Optionee hereby waives any objections
on the grounds of improper jurisdiction or venue to the commencement of an
action in the State of North Carolina and agrees that effective service of
process may be made upon him by mail under the notice provisions contained in
Section 16 hereof.
13. Construction. Whenever the word 'Optionee' is used in any provision of
this Agreement under circumstances where the provision should logically be
construed to apply to (i) the estate, personal representative, or beneficiary
to whom this Option may be transferred by will or by the laws of descent and
distribution or (ii) the guardian or legal representative of the Optionee acting
pursuant to a valid power of attorney or the decree of a court of competent
jurisdiction, the the term 'Optionee, shall be construed to include such estate,
personal representative, beneficiary, guardian or legal representative.
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14. Severability. The provisions of this Agreement shall be severable and
the invalidity or unenforceability of any provision shall not affect the
validity or enforceability of the other provisions hereto.
15. Successor and Assigns. The terms of this Agreement shall be binding
upon and shall enure to the benefit of any sucessors or assigns of the Company
and of the Optionee and of the Common Stock issued or issuable upon the exercise
hereof.
16. Notices. Notices under this Agreement shall be in writing and shall be
deemed to have been duly given (i) when personally delivered, (ii) when
forwarded by Federal Express, Airborne, or another private carrier which
maintains records showing delivery information, or (iii) when placed in the
United States Mail and forwarded by registered or certified mail, return receipt
requested, postage prepaid, addressed to the party to whom such notice is being
given.
17. Modification. This Agreement is the entire agreement and understanding
of the parties hereto with respect to the Option granted herein and supersedes
any and all prior and contemporaneous negotiations, understandings and
agreements with regard to the Option and the matters set forth herein, whether
oral or written. No representation, inducement, agreement, promise or
understanding altering, modifying, taking from or adding to the terms and
conditions hereof shall have any force or effect unless the same is in writing
and validity executed by the parties hereto.
18. Governing Law. This Agreement shall be governed in accordance with the
laws of the State of North Carolina.
19. Multiple Counterparts. This Agreement may be signed in one or more
counterparts, each of which shall be deemed to be an original.
IN WITNESS WHEREOF, the parties hereto have excuted this Agreement
effective as of the day and year first above written.
INTER*ACT SYSTEMS INCORPORATED
ATTEST:
By:
President
Secretary
[Corporate Seal]
WITNESS: OPTIONEE:
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[SEAL]
NAME:
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CERTAIN MATERIAL DEEMED CONFIDENTIAL BY THE COMPANY HAS BEEN OMITTED FROM THIS
DOCUMENT AND FILED SEPARATELY WITH THE COMMISSION.
PATENT LICENSE AGREEMENT
Agreement made and entered into this 20th day of August, 1997, by and between
COUPCO, INC., a corporation of the State of Delaware, having offices at 60
Amherst Drive, New Rochelle, New York 10804 (hereinafter 'LICENSOR') and
INTER*ACT SYSTEMS, INC., a corporation of the State of North Carolina, having
offices at 14 Westport Avenue, Norwalk, Connecticut 06851 (hereinafter
'LICENSEE').
WITNESSETH:
WHEREAS, LICENSOR warrants and represents that it is the sole owner of all
rights, title and interest in and to U.S. Patent No. 4,882,675 issued on
November 21, 1989 and reissued as U.S. Reissue Patent No. Re. 34,915 on April
25, 1995 for a 'Paperless System for Distributing, Redeeming and Clearing
Merchandise Coupons,' and Canadian Patent No. 1,276,724 issued on November 20,
1990, and the inventions described therein (hereinafter the 'PATENTS');
WHEREAS, LICENSEE is currently in the business of developing, owning and
operating proprietary electronic marketing systems which include interactive
'touch screen' terminals that issue individually targeted coupons and other
promotional incentives (the 'Promotional System')'
WHEREAS, LICENSOR is desirous of granting certain exclusive and nonexclusive
rights to LICENSEE under the PATENTS and any and all inventions, patents, patent
rights, know-how and trade secrets relating to or based on said PATENTS
throughout the world in exchange for valuable consideration;
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WHEREAS, LICENSEE is desirous of acquiring certain exclusive and nonexclusive
rights under the PATENTS and any and all inventions, patents, patent rights,
know-how and trade secrets relating to or based on said PATENTS throughout the
world; and
WHEREAS, LICENSOR warrants and represents that the PATENTS are in full force and
effect, that it knows of no reason why the PATENTS would be invalid or
unenforceable and that there are no other counterpart patents or pending patent
applications to the PATENTS in any country.
NOW, THEREFORE, for and in consideration of the promises and covenants herein
contained and other good and valuable consideration as set forth herein, the
receipt of which is hereby acknowledged, it is hereby agreed as follows:
1. LICENSOR hereby grants to LICENSEE a worldwide, unrestricted right and
license under the PATENTS, and any and all inventions, patents, patent rights,
know-how and trade secrets relating to or based on said PATENTS, to manufacture,
have manufactured, use, offer for sale, sell and import electronic systems
and/or methods *
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2. The worldwide, unrestricted right and license granted in paragraph 1 above
shall be exclusive, with the exclusive right to grant sublicenses subject to
paragraph 8 hereof, with respect to * . LICENSOR warrants and represents that it
has not granted, and agrees that it will not grant, any rights to any other
party which would conflict or otherwise interfere with the Exclusive License
granted herein.
3. The worldwide, unrestricted right and license granted in paragraph 1 above
shall be nonexclusive (with the right to grant sublicenses subject to paragraph
8 hereof to parent companies, sister companies or other entities in which
LICENSEE has (i) a greater than 50% ownership interest as a shareholder,
affiliate, subsidiary, partner, joint venturer or other such
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participant, or (ii) in which LICENSEE has a 50% or less ownership interest
subject to the prior written approval of LICENSOR, which approval shall not be
unreasonably withheld or delayed in cases where LICENSEE has an active role in
the management of said sublicensee's business) * . LICENSOR warrants and
represents that it has not granted any rights to any other party which would
conflict or otherwise interfere with the Nonexclusive License granted herein.
4. As * consideration for the licenses granted herein, LICENSEE hereby agrees
to pay to LICENSOR *
5. *
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. * LICENSOR shall provide at Closing such investment representations and other
documentation executed by LICENSOR and its designated recipients of the Shares,
if any, as may be necessary to assure LICENSEE that the Shares may be issued
pursuant to Rule 506 of Regulation D promulgated by the Securities and Exchange
Commission under the Securities Act of 1933, as amended (the 'Act') or other
exemptions acceptable to LICENSEE from the registration and qualification
requirements of the Act and applicable state securities laws.
6. As further consideration for the license granted herein during the term of
this Agreement as set forth below, LICENSEE agrees to pay to LICENSOR the
following *
The term 'Gross Revenue' shall mean revenue received by LICENSEE directly from
activities covered by the PATENTS in the United States and Canada under the
Exclusive and Nonexclusive Licenses granted herein (except sublicense fees
pursuant to paragraph 8 hereof) *
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7. Notwithstanding the * formulas set forth in paragraph 6 above, if the
actual amount paid by LICENSEE to LICENSOR does not total * for calendar year
1998 (without regard to the payments provided by Paragraph 4 hereof), * for
calendar year 1999 and * for each calendar year thereafter, then and only in
that event shall LICENSOR have the right to notify LICENSEE at any time within
two months after receipt of the written report for the last quarter of each
year, on twenty (20) days written notice to LICENSEE, that unless the noted
deficiency in the minimum amount for that calendar year as specified in this
paragraph 7 is paid by LICENSEE, the Exclusive License granted in paragraph 2
above will be converted into a nonexclusive license, with all other terms and
conditions herein remaining the same. Within twenty (20) days after receipt of
such written notice by
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LICENSEE, LICENSEE shall have the right to pay an additional amount to LICENSOR
to meet the noted deficiency in the minimum payument for the calendar year as
specified in this paragraph 7, in which event the Exclusive License shall remain
exclusive to LICENSEE.
8. The rights granted to LICENSEE in this Agreement to sublicense rights to
third parties under the Exclusive License and/or the Nonexclusive License may be
exercised under the following respective arrangements:
(i) In connection with any sublicense granted by LICENSEE under the
Exclusive License pursuant to paragraph 2 hereof, LICENSOR shall receive * of
income received by LICENSEE directly as a result of the granting of a sublicense
to a sublicensee which is not a parent company, sister company or other entity
in which LICENSEE has a greater than 50% ownership interest as a shareholder,
affiliate, subsidiary, partner, joint venturer or other such participant, and
(b) * the terms of a sublicense agreement by each sublicensee not covered by
subpart (a) of this paragraph 8(i) above. In the event that a sublicense is
granted by LICENSEE under '(b)' of the immediately preceding sentence, then such
sublicense agreement shall contain language naming LICENSOR as a third-party
beneficiary and using the term Net Revenue as defined herein to define the net
revenue of such sublicense, and LICENSOR shall look solely to such sublicensee,
and not to LICENSEE, for payment of the aforementioned * . In no event shall
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LICENSOR be entitled to twice collect a royalty on or percentage of any
income or revenue generated as a result of any sublicense granted by LICENSEE.
(ii) In connection with any sublicense granted by LICENSEE under the
Nonexclusive License pursuant to paragraphs 3 or 7 hereof, LICENSOR shall
receive from such sublicensee * except that 'LICENSEE' is replaced by the
respective sublicensee). In such event, such sublicense agreement shall contain
language naming LICENSOR as a third-party beneficiary and using the term Net
Revenue as defined herein, and LICENSOR shall look solely to such sublicensee,
and not to LICENSEE, for payment of the aforementioned * . Any such sublicense
agreement shall contain substantially the same recordkeeping, termination,
reporting and inspection requirements as set forth herein. In no event shall
LICENSOR be entitled to twice collect a royalty on or percentage of any income
or revenue generated or received as a result of any sublicense granted by
LICENSEE.
(iii) LICENSEE hereby agrees that it shall not attempt to sublicense rights
granted herein to wholly owned subsidiaries or affiliates for the purpose of
avoiding the payment of royalties required hereunder.
(iv) LICENSEE agrees to provide a copy of each such sublicense agreement to
LICENSOR under the terms and conditions set forth herein.
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9. LICENSEE agrees to keep complete and accurate books reflecting Gross
Revenue and Net Revenue received for activities by LICENSEE for which royalties
are due under this Agreement. Said books shall be open to inspection once each
year by an independent auditor selected by LICENSOR at all reasonable times
during business hours upon fifteen (15) days prior written notice for the
purpose of verifying the accuracy of the reports rendered to LICENSOR as
hereinafter required. Such inspection shall be conducted at LICENSOR'S expense
on a confidential basis, and confidential business information reviewed by the
independent auditor shall not be disclosed to LICENSOR.
10. No later than thirty (30) days after the end of each calendar quarter,
LICENSEE shall transmit to LICENSOR a written report covering the immediately
preceding calendar quarter. [Example: Report for third calendar quarter of 1997
(July through September) is due no later than October 30, 1997.] The report
shall set forth the information required to allow a royalty calculation to be
made in acordance with paragraph 6. The report shall be accompanied by a payment
to LICENSOR of the payment due for the calendar quarter just ended calculated
in accordance with paragraphs 6 and 8. The report shall include information
reasonably calculated to inform LICENSOR of the approximate number of
installations of the Promotional System which involve the use of rights granted
to LICENSEE hereunder during the applicable quarter. LICENSOR shall have the
right to inspect the quarterly financial statements of LICENSEE, in addition to
any audited financial statements of LICENSEE.
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11. LICENSEE shall have the first right but not the obligation, in the
event of suspected infringement of any of the PATENTS by a third party
involving the rights granted by the Exclusive License herein, to institute
an infringement suit against such infringer and in connection therewith.
LICENSOR agrees that it will join in such suit and shall have
the right to participate as a party in such suit, and
agrees to otherwise cooperate in the enforcement of the PATENTS.
When commenced by LICENSEE, such litigation shall be under the control of
LICENSEE (including selection of counsel). LICENSOR will have the right to
select its own counsel in such litigation provided that LICENSOR shall be
solely responsible for all legal fees and expenses of its own counsel.
All recoveries of any nature whatsover resulting therefrom will first be
used to cover and reimburse LICENSOR and LICENSEE, on a pro rata basis,
for all expenses, costs and attorney fees incurred by them in connection
with such suit. Any remaining recovery amount shall be deemed part of
the Net Revenue against which royalties are calculated herein.
12. (a) LICENSOR will upon the execution of this Agreement and from
time-to-time thereafter when requested by LICENSEE, during the term of this
Agreement, transmit or otherwise disclose to LICENSEE data, designs, drawings,
specifications, plans and prototypes relating to the inventions covered by the
PATENTS, to the extent such materials are available and accessible.
(b) LICENSOR agrees to act as a consultant to LICENSEE for the first two
(2) years of this Agreement for all technical,
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legal and business issues involving the PATENTS. There shall be no additional
payment for such consulting services except that LICENSOR will be reimbursed
for any actual disbursements incurred in connection with the rendering of
consulting services pursuant to the foregoing.
13. LICENSOR and LICENSEE may terminate this Agreement only as set forth in
this paragraph 13. In the event of a material breach of this Agreement, the
non-breaching party may notify the allegedly breaching party of such breach in
writing, specifying the nature of the alleged breach, in which event the
allegedly breaching party shall have sixty (60) days from receipt of such
written notice to cure such alleged material breach. In the event that the
alleged material breach is not cured within said sixty (60) day period, then,
subject to the limitations of this paragraph 13, the non-breaching party may
terminate this Agreement by providing a written notice of termination to the
allegedly breaching party. In the case of LICENSOR, notice of termination may
issue following said sixty (60) day cure period only in the event that LICENSEE
has materially failed to issue royalty statements, or has materially failed to
pay royalties, if any, specified in such statements as due and owing pursuant to
paragraphs 4, 6, 8, and 10 hereof. In the event LICENSOR alleges any material
breach on the part of LICENSEE other than as set forth in the immediately
preceding sentence, then LICENSOR may not terminate this Agreement except by
demanding binding arbitration before a three-member panel of the American
Arbitration Association ('AAA'), pursuant to AAA rules, on the
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issue of the alleged material breach, and LICENSOR may terminate this Agreement
in such event only if said arbitration panel determines that LICENSEE has
materially breached the Agreement. LICENSOR may terminate this Agreement upon
written notice to LICENSEE at least sixty (60) days after LICENSEE permanently
ceases all operations in the business of promotional marketing. LICENSEE may
terminate this Agreement at any time upon a finding that the PATENTS or any
claims therein are invalid or unenforceable.
14. In the event that LICENSOR or its officers or employees shall make any
improvements, in, concerning or relating to the inventions disclosed in the
PATENTS, such improvements shall be and are hereby made a part hereof upon the
same terms and conditions as the license granted herein, and LICENSEE shall not
be obligated to pay LICENSOR any additional royalty or other consideration for
the use of any such improvement, whether or not a patent or patents issue
thereon.
15. The term of this Agreement shall be from the date first written above
for so long as the PATENTS or any patent covering any improvements as referenced
in paragraph 14 remains valid and enforceable, subject to the right to terminate
as set forth in paragraph 13 above.
16. LICENSOR warrants and represents that it is the sole owner of all
right, title and interest in and to U.S. Patent No. 4,882,675 issued on November
21, 1989 and reissued as U.S. Reissue Patent No. Re. 34,915 on April 25, 1995
for a Paperless System for Distributing, Reedeeming and Clearing Merchandise
Coupons, and
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<PAGE>
Canadian Patent No. 1,276,724 issued on November 20, 1990, and the inventions
described therein. LICENSOR warrants and represents that the PATENTS are in full
force and effect, that it knows of no reason why the PATENTS would be invalid or
unenforceable,that there are no actions, threatened actions or third party
assertions (other than the Home Shopping Network litigation) challenging the
validity or enforceability of the PATENTS, that LICENSOR has the requisite power
and authority to enter into and abide by this Agreement, and that there are no
other counterpart patents or pending patent applications to the PATENTS in any
country.
17. In the event that an action is brought against LICENSEE, related
entities in which LICENSEE is a joint venturer, sublicensor or other such
participant, or any of its suppliers or customers, which, if successful, would
prevent any of such parties from performing in any way licensed activities
covered by the PATENTS, then and in that event, LICENSEE may withhold and use
future payments due to LICENSOR hereunder sufficient to reimburse LICENSEE for
costs, expenses, attorney fees, damages, judgments or other such payments
incurred in connection with such action. LICENSOR agrees to participate in the
defense of any such action.
18. All confidential information relating to or obtained from a party to
this Agreement shall be held in confidence by the other party to the same extent
and in at least the same manner as such party protects its own confidential
information, but in any event in a manner which requires the party receiving
such information to use no less than reasonable care. Neither party
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shall disclose, publish, release, transfer or otherwise make available
confidential information of, or obtained from, the other party in any form to,
or for the use or benefit of, any person or entity without the other party's
written consent. Each party shall, however, be permitted to disclose relevant
aspects of the other party's confidential information to its officers, agents,
professional advisors, contractors, subcontractors and employees on a
need-to-know basis in connection with the performance of its duties and
obligations and the exercise and preservation of its rights under this
Agreement; provided, however, that such party shall take all reasonable measures
so that confidential information of the other party is not disclosed or
duplicated in contravention of the provisions of this Agreement by such
officers, agents, professional advisors, contractors, subcontractors and
employees.
19. In the event that LICENSOR grants another non-exclusive license * with
more favorable payment, * or indemnity terms (considered as a whole) than those
set forth herein, then within ten (10) days of the execution of such license,
LICENSOR shall provide LICENSEE with a copy of such license, and LICENSEE shall
then have thirty (30) days after receipt of such copy in which to determine
whether LICENSEE desires to adopt all of such terms in lieu of the corresponding
terms herein, in which event such more favorable terms shall be automatically
incorporated herein. In no event shall this or any other paragraph authorize
LICENSOR to
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grant any rights in conflict with the exclusive right and license set forth in
paragraph 2 hereof.
20. LICENSOR hereby releases LICENSEE and its officers, agents, employees,
suppliers and customers from any and all claims which LICENSOR may have
involving the PATENTS prior to the date of this Agreement, as such claims relate
to activities involving or relating to LICENSEE. 21.
This Agreement sets forth the entire agreement and understanding
of the parties relating to the subject matter contained herein
and merges all prior discussions between them, and neither
party shall be bound by any definition, condition, warranty or
representation other than as expressly stated in this Agreement or subsequently
set forth in writing and signed by the parties to be bound thereby.
22. This Agreement and the rights, licenses, duties and obligations
hereunder may be transferred or assigned by LICENSEE to any
successor-in-interest of the business of LICENSEE.
23. Any notice to be given under this Agreement shall be in writing and
shall for all purposes be deemed to be fully given by a party (i) if sent by
facsimile communication and by certified U.S. Mail, postage prepaid, or (ii) by
Federal Express courier, to the other party at the addresses set forth below.
The date of facsimile transmission or delivery by Federal Express courier shall
be deemed to be the date on which such notice was given. Either party may change
its address for the purposes of this Agreement by giving the other party written
notice of its new address.
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IF TO LICENSOR:
Dr. Steven Nichtberger
Coupco, Inc.
1415 Colton Road
Gladwyne, PA 19035
[FAX #: 610-527-6997]
WITH COPIES TO:
Michael Seedler, Esq.
Darby & Darby
805 Third Avenue
New York, NY 10022
[FAX #: 212-753-6237
&
Arthur Salzfass
98 Paulding Drive
Chappaqua, NY 10514
[FAX #: 914-238-9607]
IF TO LICENSEE:
Richard Vinchesi
Inter*Act Systems, Inc.
14 Westport Avenue
Norwalk, CT 06854
[FAX #: 203-750-0202]
WITH COPIES TO:
Randy Lipsitz, Esq.
Brown Raysman Millstein Felder & Steiner LLP
120 West 45th Street
New York, NY 10036
[FAX # 212-840-2429]
&
Stephen R. Leeolou
Vanguard Cellular Systems, Inc.
2002 Pisgah Church Road, Suite 300
Greensboro, NC 27455
[FAX # 910-545-4806]
-16-
<PAGE>
<PAGE>
24. This Agreement shall be governed under and by the laws of the State of
Connecticut.
<TABLE>
<S> <C>
COUPCO, INC.
August 20th, 1997 By: STEVEN NICHTBERGER
--------------------------------------------------
Name: STEVEN NICHTBERGER
-------------------------------------------------
Title: President
------------------------------------------------
INTER*ACT SYSTEMS, INC.
August 20th, 1997 By: STEVEN R. LEEOLOU
--------------------------------------------------
Name: Steven R. Leeolou
-------------------------------------------------
Title: Chairman, CEO
------------------------------------------------
</TABLE>
-17-
<PAGE>
<PAGE>
TERMINATION AGREEMENT
This TERMINATION AGREEMENT (hereinafter referred to as the 'Termination
Agreement') dated this 24th day of March, 1998 by and between COLEMAN RESEARCH
CORPORATION, a corporation organized and existing under the laws of the state of
Florida, with its corporate headquarters located at 201 South Orange Avenue,
Suite 1300, Orlando, Florida 32801 (hereinafter referred to a 'CRC', and
INTER*ACT SYSTEMS, INCORPORATED, a corporation organized and existing under the
laws of the State of North Carolina, with its principal place of business at 14
Westport Avenue, Norwalk, Connecticut 06891 (hereinafter referred to as
'Inter*Act'); THERMO INFORMATION SOLUTIONS INC., a corporation organized and
existing under the laws of the state of Delaware and a subsidiary of CRC, with
its corporate headquarters located at 6820 Moquin Drive, Huntsville, Alabama
35806 (hereinafter referred to as 'TIS').
WHEREAS, CRC and Inter*Act entered into that certain Business Assets
Purchase Agreement dated as of September 9, 1996 (hereinafter referred to as the
'Purchase Agreement'), pursuant to which CRC purchased certain assets and rights
from Inter*Act and agreed to assume certain liabilities and obligations of
Inter*Act related to the design, development, manufacture and fabrication of
'Kiosks' (as defined therein);
WHEREAS, pursuant to the terms of the Purchase Agreement CRC and Inter*Act
entered into that certain Kiosk Agreement dated September 9, 1996 ('Kiosk
Agreement') regarding the purchase and sale of Kiosks:
WHEREAS, Schedule 1 to the Kiosk Agreement contained an initial order for
5,000 Kiosks (the 'Original Kiosk Order') and the parties now desire to
terminate the remaining obligations under the Original Kiosk Order and to enter
into two (2) Kiosk orders, as more particularly described below;
WHEREAS, certain disputes have arisen between Inter*Act and CRC under the
Kiosk Agreement, and the parties further desire to terminate the Kiosk Agreement
and the Purchase Agreement and settle and release all disputes, claims and
potential claims under the Kiosk Agreement in accordance with the terms and
conditions of this Termination Agreement; and
WHEREAS, CRC has requested the consent of Inter*Act to assign all of CRC's
interest, rights, duties and obligations in, to and under each of the Purchase
Agreement and the Kiosk Agreement to TIS and Inter*Act has agreed to consent to
this assignment to TIS, subject to the terms and conditions of this Termination
Agreement.
<PAGE>
<PAGE>
NOW, THEREFORE, in consideration of the foregoing and other good and
valuable consideration, the receipt, adequacy and sufficiency of which are
hereby acknowledged, CRC, Inter*Act and TIS agree as follows:
1. Assignment to TIS. CRC hereby assigns all of its interest, rights, duties
and obligations in, to and under each of the Kiosk Agreement to TIS and TIS
agrees to assume, perform and discharge all of CRC's duties and obligations
under the Kiosk Agreement, and Inter*Act hereby consents to the foregoing.
Notwithstanding the foregoing, CRC shall not be released from any of its
duties or obligations under the Kiosk Agreement (as amended and terminated
hereby).
2. Termination Payment. Inter*Act shall pay to TIS Four Million Five Hundred
Thousand Dollars ($4,500,000) (hereinafter referred to as the 'Termination
Payment'). The Termination Payment shall be payable as follows:
2.1 Two Million Dollars ($2,000,000) simultaneously with the execution of
this Agreement; and
2.2 Two Million Five Hundred Thousand Dollars ($2,500,000) by the delivery
of Inter*Act's promissory note in the form of Exhibit 'A' attached
hereto and incorporated herein (the 'Promissory Note').
3. Transfer of Inventory. In consideration of the Termination Payment and the
other agreements provided in this Termination Agreement, as of the date of
this Termination Agreement, CRC and TIS hereby sell, transfer and assign to
Inter*Act all right, title and interest in and to the inventory described
on Exhibit 'B' hereto (the 'Excess Inventory'). the Excess Inventory shall
not be subject to the terms and conditions of the Kiosk Agreement, but
shall be subject to the terms of this Section 3. The Excess Inventory shall
be delivered to Inter*Act at TIS's manufacturing site at a date and time
specified by Inter*Act within two (2) weeks form the date hereof. TIS and
CRC agree to assemble the Excess Inventory in a segregated area of TIS's
manufacturing site, to make the Excess Inventory available to Inter*Act so
that Inter*Act may inspect and count the Excess Inventory and prepare the
Excess Inventory for shipment, and to otherwise cooperate with Inter*Act
(and Inter*Act's designated employees or agents) with respect to the
assembly and shipment of the Excess Inventory. Shipment of the Excess
Inventory shall be Inter*Act's responsibility, at Inter*Act's expense. In
the event the Excess Inventory made available to Inter*Act for shipment
under this Termination Agreement fails to contain any of the items
described in Exhibit 'B' or any items in Exhibit 'B' constitute Damaged
Excess Inventory, Inter*Act shall have
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<PAGE>
the right to set off, against any outstanding payments due under the
Promissory Note, the dollar value of such missing Excess inventory and the
Damaged Excess Intentory (collectively the 'Nonconforming Excess
Inventory') if such dollar value exceeds $5,000. For purposes of this
Termination Agreement, 'Damaged Excess Inventory' means Excess Inventory
that appears, in the best judgment of the managerial representative of each
of Inter*Act and TIS, Roy Quiroga and Rick Kelly, to have been damaged
while under the control of TIS or CRC, as the Case may be, and which damage
is not covered by a warranty in effect at the same time of inspection. Both
of such representatives shall be authorized by their employers to exercise
such judgment in good faith. The dollar value of the Nonconforming Excess
Inventory shall be calculated based on the book value of such Nonconforming
Excess Inventory shown of TIS's or CRC's books and financial records, which
TIS or CRC, as the case may be, shall make available to Inter*Act for
purposes of determining the value of the Nonconforming Excess Inventory.
4. Initial Kiosk Order. Inter*Act hereby orders from TIS One Hundred Twenty
Five (125) Kiosks in accordance with the Kiosk Order attached hereto as
Exhibit 'C' and incorporated herein (the 'Initial Kiosk Order').
Notwithstanding the termination of the Kiosk Agreement as set forth in this
Termination Agreement, all terms and conditions contained in Sections 1.,
3.2, 3.3, 3.6, 3.7, 3.8, 3.9, 3.10, 5., 6.2, 8.1, 8.2, 9.1 and 9.2 shall
apply to and are incorporated herein for purposes of the Initial Kiosk
Order; provided, however, the Acceptance Procedures are deleted and
replaced with the 'Acceptance Procedures' attached hereto as Schedule 1 and
incorporated herein. Payment for the Initial Kiosk Order will be made on
the date of shipment of the Kiosks making up the Initial Kiosk Order by
Inter*Act's delivery of the promissory note in the form of Exhibit 'D'
attached hereto and incorporated herein (the 'Initial Kiosk Order Note').
Notwithstanding the foregoing, the parties acknowledge and agree, with
respect to the Initial Kiosk Order Note: (i) Inter*Act shall be under no
obligation to execute and deliver the Initial Kiosk Order Note unless and
until the Initial Kiosk Order has satisfied the 'Acceptance Procedures'
(attached hereto as Schedule 1), TIS has shipped the subject Kiosks to
Inter*Act, and TIS has issued and presented its invoice covering the
Initial Kiosk Order to Inter*Act, in that order; (ii) in the event
Inter*Act fails to execute and deliver the Initial Kiosk Order Note as
required hereunder, the terms of payment contained in Section 4 of the
Kiosk Agreement shall govern the terms of payment for the Initial Kiosk
Order (except that Inter*Act shall pay the Initial Kiosk Order within
forty-five (45) days of the Invoice Date); and (iii) in the event Inter*Act
(by the sale of capital stock or otherwise) raises the sum
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<PAGE>
of not less than $40,000,000 Inter*Act shall not be required to execute and
deliver the Initial Kiosk Order Note in payment of the Initial Kiosk Order,
gut the terms of payment contained in Section 4 of the Kiosk Order (except
that Inter*Act shall pay the Initial Kiosk Order invoice within forty-five
(45) days of the Invoice Date).
5. Additional Kiosk Order. Inter*Act hereby orders from TIS and additional two
hundred twenty five (225) Kiosks in accordance with the Kiosk Order
attached hereto as Exhibit E and incorporated herein (the 'Additional
Kiosk Order'). Notwithstanding the termination of the Kiosk Agreement as
set forth in this Termination Agreement, all terms and conditions contained
in Sections 1, 3.2, 3.3, 3.6, 3.7, 3.8, 3.9, 3.10, 5., 6.2, 8.1, 8.2, 9.1
and 9.2 of the Kiosk Agreement shall apply to and are incorporated herein
for purposes of the Additional Kiosk Order; provided, however, 'Acceptance
Procedures' defined above. Payment for each shipment made under the
Additional Kiosk Order will be made on the date of shipment of the subject
Kiosks by Inter*Act's delivery of a promissory note in the form of Exhibit
'F' attached hereto and incorporated herein (the 'Additional Kiosk Order
Note'), in the principal amount of the dollar value of the Kiosks shipped
on the particular shipping date. Notwithstanding the foregoing, the parties
acknowledge and agree, with respect to any Additional Kiosk Order Note: (i)
Inter*Act shall be under no obligation to execute and deliver an Additional
Kiosk Order Note unless and until the particular shipment satisfies the
terms of the Additional Kiosk Order and (x) the Kiosks designated for such
shipment have satisfied the 'Acceptance Procedures' (as defined above), (y)
TIS has shipped the subject Kiosks to Inter*Act, and (z) TIS has issued and
presented its invoice covering said Kiosks to Inter*Act, in that order;
(ii) in the event Inter*Act fails to execute and deliver any Additional
Kiosk Order Note as required hereinabove, there terms of payment contained
in Section 4 of the Kiosk Agreement shall govern the terms of payment for
the Kiosks covered by the applicable portion of the Additional Kiosk Order;
and (iii) in the event Inter*Act (by the sale of capital stock or
otherwise) raises the sum of not less than $40,000,000 in equity, Inter*Act
shall not be required to execute and deliver any Additional Kiosk Order
Notes in payment of any part of the Additional Kiosk Order, but the terms
of payment contained in Section 4 of the Kiosk Agreement shall govern the
terms of payment for the Additional Kiosk Order.
6. Termination of Orders for Non-Delivery. Inter*Act shall have the rights to
terminate, upon written notice to TIS, the Additional Kiosk Order in the
event TIS fails to deliver
4
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<PAGE>
in accordance with the Shipping Schedule at least eighty five percent (85%)
of the Kiosks specified by the Additional Kiosk Order or at least fifteen
percent (15%) of such Kiosks in any shipment fail to satisfy the Acceptance
Procedures.
7. Termination of Kiosk Agreement. Except with respect to the first two
sentences of Section 8.1 of the Kiosk Agreement and Section 9.1 of the
Kiosk Agreement, the parties agree and acknowledge that the Kiosk Agreement
is hereby terminated in its entirety effective as of the date of this
Termination Agreement and shall be null and void. The incorporation of
certain terms and conditions of the Kiosk Agreement as reflected in
Sections 4 and 5 above shall not affect the termination of the Kiosk
Agreement as provided in this Termination Agreement.
8. Termination of Original Order. The parties agree and acknowledge that the
unfilled portion of the Original Kiosk Order is hereby terminated in its
entirety as of the date of this Termination Agreement and shall be null and
void.
9. Return of Inter*Act Property Under Kiosk Agreement. Notwithstanding the
termination of the Kiosk Agreement as set forth in this termination
agreement, CRC, TIS and Inter*Act acknowledge and agree that the
incorporation of Section 8.1 and Section 8.2 of the Kiosk Agreement into
Sections 4 and 5 of this Termination Agreement is designed to allow
performance of TIS's obligations under Sections 4 and 5 of this Termination
Agreement. TIS and CRC shall return all 'Proprietary Property'
(as defined in the Purchase Agreement) and all Proprietary Property (as
defined in the Kiosk Agreement) and other such materials (including,
without limitation, licensed materials and source codes) and any
derivatives, modifications, improvements, alterations, combinations or
developments thereof (referred to herein collectively as the 'Return
Materials') to Inter*Act upon the fulfillment by TIS of its obligations to
Inter*Act under the Sections 4 and 5 above or the termination of such
obligations for any reason, whereupon, neither CRC nor TIS shall have any
right, title and interest in or to the Return Materials.
10. Termination of Purchase Agreement; Further Indemnity. The parties
acknowledge and agree that the Purchase Agreement is hereby terminated,
including, without limitation, any liability of any party under Section 9
(Breach of Covenants, Warranties or Indemnification) of the Purchase
Agreement; provided, however, Inter*Act hereby agrees to defend, indemnify
and hold harmless CRC and TIS (including, but not limited to, its division,
Kiosk Solutions, collectively hereafter referred to as 'TIS') (CRC and TIS
referred to herein as the 'Indemnified Parties') from and against any
5
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and all claims, counterclaims or judgments arising in either (i) Inter*Act
Systems, Inc. v. Catalina Marketing Corp., Case No. 3-96-CV-00274-AWT,
pending in the United States District Court for the District of Connecticut
or (ii) Catalina Marketing International, Inc. v. Inter*Act Systems, Inc.,
Case No. CV-98-39-A, pending in the United States District Court for the
Eastern District of Virginia, or (iii) Catalina Marketing International,
Inc. v. Inter*Act Systems, Inc., Case No. 3-98-CV422 (PCD), pending in the
United States District Court for the District of Connecticut, or (iv) any
other action in which Catalina Marketing Corp. is a claimant that involves
Inter*Act's covenants, representations or warranties under the Purchase
Agreement (these (iv) actions referred to as 'Catalina Actions'), provided,
however, that such duty to defend, indemnify and hold harmless CRS and TIS
shall only apply, as to Catalina Actions, to Catalina Actions brought or
filed on or before September 8, 1998. The obligations of Inter*Act to
indemnify, defend, and hold harmless the Indemnified Parties pursuant to
this Section 10 shall be expressly conditioned upon the following: (w) each
of the Indemnified Parties shall be represented by legal counsel selected
by Inter*Act; (x) none of the Indemnified Parties perceives or knows of any
conflicts or interest or potential conflicts of interest which may arise
due to Inter*Act's selected legal counsel representing both Inter*Act and
the Indemnified Parties; (y) each of the Indemnified Parties shall
cooperate fully with Inter*Act, including, without limitation, by making
available for discovery and for trial personnel and documents reasonably
required by Inter*Act (for which Inter*Act shall pay or reimburse the
Indemnified Parties pre-approved, reasonable out-of-pocket expenses), and
by arranging for a waiver of conflicts should they arise; and (z) Inter*Act
shall control the defense and/or settlement of any such claims or actions.
11. [INTENTIONALLY DELETED]
12. Continuation of Confidentiality. Notwithstanding the termination of the
Kiosk Agreement and the Purchase Agreement as provided in this Termination
Agreement, any and all obligations of confidentiality or non-disclosure
imposed upon CRC and/or TIS (whether pursuant to Sections 9.1 of the Kiosk
Agreement or otherwise) or upon any current or former officers or employees
of CRC and/or TIS or of any affiliate of CRC and/or TIS (whether pursuant
to Section 2.1.3 of the Kiosk Agreement or otherwise) shall be and remain
in full force and effect.
13. Release. Inter*Act on the one hand, and TIS and CRC, on the other hand, in
consideration of the agreements made by the other parties under this
Termination Agreement, do
6
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hereby release and forever discharge the other party, its parents,
affiliates, subsidiaries, assigns, successors, employees, officers,
directors, trustees, shareholders, agents, representatives and attorneys
from any and all claims, losses, demands, actions, causes of action or
damages known, unknown or subsequently discovered, arising out of any matter
or thing whatsoever, and they do hereby mutually agree and declare that none
owes to any of the other any obligation or amount whatsoever, on account of
any transaction, occurrence, contract, express or implied, or other dealings
or relations of any kind heretofore existing between them in any way
relating to the Purchase Agreement, the Kiosk Agreement or any documents or
instruments executed in connection therewith or any action taken or omitted
to be taken in connection therewith; provided, however, nothing in this
Termination Agreement shall affect or release the rights, obligations or
liabilities of the parties contained in this Termination Agreement.
14. Covenant Not to Sue. Except for enforcement of this Agreement,
Inter*Act, on the one hand, and TIS and CRC, on the other hand, hereby
covenant that they will not at any time after the Effective Date commence
any action, lawsuit or other legal proceeding, in law or in equity, or
otherwise, based upon or arising out of any fact or matter preceding the
Effective Date, against the other party to this Termination Agreement nor
against the other party's officers, agents, employees, representatives and
affiliates.
15. Representations and Warranties of CRC and TIS. Each of CRC and TIS
represents, warrants and covenants to Inter*Act as follows:
a. The Recitals stated hereinabove are true;
b. It is a corporation duly organized and in good standing under
the laws of the State of Florida (as to CRC), the laws of the State of
Delaware (as to TIS);
c. It is legally authorized to execute and perform its obligations
under this Termination Agreement, and the execution of this Termination
Agreement and the performance of its obligations hereunder have been
duly authorized by its Board of Directors, and no further authorization
is necessary; and there are no provisions of law, federal, state, or
local, or of its articles of incorporation or by-laws, nor is it a party
to any existing contracts or agreements whatsoever, which could in any
way bar or impede it from executing this Termination Agreement and
performing its
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obligations hereunder, and this Termination Agreement constitutes
its valid, legal and binding obligation;
d. Except for as relates to the matters referred to in Section 10
above, it has or possesses no claim, action, cause of action, right of
offset, demand or damage, known or unknown, asserted or unasserted, at
law or in equity as of the date of this Termination Agreement against
Inter*Act, its affiliates, officers, directors, agents, employees,
shareholders, representatives or attorneys, arising out of or related in
any way to the Purchase Agreement or the Kiosk Agreement or any document
or instrument executed in connection therewith or any action taken or
omitted to be taken in connection therewith;
e. The transactions evidenced by this Termination Agreement
(whether taken separately or in any particular combination) are not
subject to any bulk sales act or similar law and no party shall have any
claim in any of the assets or properties being sold or transferred
pursuant to this Termination Agreement as a result of non-compliance
with any bulk sales act or similar law;
f. To its knowledge, there exists no claim, assertion, assessment,
action, proceeding or cause of action (whether pending or threatened)
which could give rise to (i) its obligation to indemnify Inter*Act
pursuant to Section 9.2 of the Purchase Agreement, or (ii) Inter*Act's
obligation to indemnify CRC or TIS pursuant to Section 9.1 of the
Purchase Agreement (excepting, however, as provided in Section 10
above); and
g. Kiosk Solutions is a division of TIS and has no separate legal
existence apart from TIS.
16. Representations and Warranties of Inter*Act. Inter*Act represents,
warrants and covenants to TIS as follows:
a. The Recitals stated hereinabove are true;
b. It is a corporation duly organized and in good standing under
the laws of the State of North Carolina;
c. It is legally authorized to execute and perform its obligations
under this Termination Agreement, and the execution of this Termination
Agreement
8
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and the performance of its oblitations hereunder have been duly
authorized by its Board of Directors, and no further authorization
is necessary; and there are no provisions of any law, federal, state,
or local, or of its articles of incorporation or by-laws, nor is it a
party to any existing contracts or agreements whatsoever, which could
in any way bar or impede it from executing this Termination Agreement
and performing its obligations hereunder, and this Termination
Agreement constitutes its valid, legal and binding obligation;
d. It has or possesses no claim, action, cause of action, right of
offset, demand or damage, known or unknown, asserted or unasserted, at
law or in equity, as of the date of this Termination Agreement against
CRC or TIS, their respective affiliates, officers, directors, agents,
employees, shareholders, representatives or attorneys, arising out of or
related in any way to the Purchase Agreement, the Kiosk Agreement or any
document or instrument executed in connection therewith or any action
taken or omitted to be taken in connection therewith; and
e. To its knowledge, there exists no claim, assertion, assessment,
action, proceeding or cause of action (whether pending or threatened)
which could give rise to (i) its obligation to indemnify CRC and/or TIS
pursuant to Section 9.1 of the Purchase Agreement (excepting, however,
as provided in Section 10 above) or (ii) to CRC's or TIS's obligation to
indemnify Inter*Act pursuant to Section 9.2 of the Purchase Agreement.
17. Binding Nature and Assignment. This Termination Agreement shall be
binding on the parties hereto and their respective successors and permitted
assigns, but no party may assign this Termination Agreement without the
prior written consent of the other parties.
18. Headings. The headings used herein are for reference and
convenience only and do not constitute part of this Termination Agreement.
19. Severability. If any provision of this Termination Agreement
should be held invalid, illegal or unenforceable, the validity, legality
and enforceability of the remaining provisions shall not in any way be
affected or impaired thereby, and any such provision shall be deemed
restated to
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reflect the original intention of the parties as nearly as possible in
accordance with applicable law.
20. No Waiver. No delay or omission by a party hereto to exercise any right or
power hereunder shall impair such right or power or be construed to be a
waiver thereof. A waiver by any of the parties hereto of any of the
covenants to be performed by the other or any breach thereof shall not be
construed to be a waiver of any succeeding breach thereof or of any other
covenant herein contained.
21. Indemnity. Each party hereby agrees to indemnify and hold harmless each
other party from and against any lability or loss, cost, damage, claim,
expense or judgment (including but not limited to, the amount of any
judgment or settlement and attorneys' fees) arising out of or occasioned by
the breach of any of the terms, conditions, obligations, liabilities,
representations or warranties contained in this Termination Agreement.
22. Additional Documents. Each of the parties each agrees to execute and
deliver to the other party any and all additional documents or instruments
deemed reasonably necessary or appropriate by the other party to effectuate
the terms and conditions of this Termination Agreement.
23. Attorney's Fees. If any legal action or proceeding is brought for the
enforcement of any obligation under this Termination Agreement, or because
of an alleged dispute, breach, default or misrepresentation in connection
with any of the provisions of this Termination Agreement, the prevailing
party shall be entitled to recover reasonable attorneys' fees and other
costs incurred in addition to any other relief to which it may be entitled.
24. Amendments. No amendment, change, waiver, or discharge hereof shall be
valid unless in writing and signed by an authorized representative of the
party against which such amendment, change, waiver, or discharge is sought
to be enforced.
25. Entire Agreement. This Termination Agreement, including any exhibit or
schedule referred to herein, which exhibit or schedule shall be
incorporated herein for all purposes, constitutes the entire agreement
between the parties hereto with respect to the subject matter hereof and
supersedes any representations, understandings or agreements relative
hereto which are not fully expressed herein.
26. Governing Law. This Agreement shall be governed by and construed in all
respects in accordance with the laws of South Carolina without regard to
its conflicts of law rules.
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27. Notices. All notices, consents or other communications required or
permitted to be given by any party hereunder shall be in writing (including
telecopy or similar writing) and shall be given by delivery or by certified
or registered mail, postage prepaid, as follows:
27.1 If to Inter*Act:
14 Westport Avenue
Norwalk, Connecticut 06851
Attention: Chief Operating Officer
Telecopy: (203) 750-0203
27.2 If to CRC:
201 South Orange Avenue
Suite 1300
Orlando, Florida 32801
Attention: President
Telecopy: (407) 244-5753
27.3 If to TIS:
6820 Moquin Drive
Huntsville, Alabama 35806
Attention: President
Telecopy: (205) 922-6027
or such other address or telecopy number (or other similar number) as any
party may from time to time specify to the other parties hereto. Any
notice, consent or other communication required or permitted to be given
hereunder shall be deemed to have been given on the date of mailing,
personal delivery or telecopy (provided that appropriate answer back is
received) thereof and shall be conclusively presumed to have been received
on the second business day following the date of mailing or, in the case of
personal delivery, the actual day of personal delivery thereof, or, in the
case of telecopy delivery, when such telecopy is transmitted, except that a
change of address shall not be effective until actually received.
28. Defined Terms. Capitalized terms used but not defined herein shall have the
meanings ascribed to such terms in the Kiosk Agreement.
29. Counterparts. This Termination Agreement may be executed in several
counterparts, each of which, when so executed, shall be deemed to be an
original, and such counterparts shall, together, constitute and be one and
the same instrument.
IN WITNESS WHEREOF, the Parties, each intending to be legally bound, have
each caused this Agreement to be executed on the date first set forth above.
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IN WITNESS WHEREOF, the Parties, each intending to be legally bound, have
each caused this Agreement to be executed on the date first set forth above.
INTER*ACT SYSTEMS, INCORPORATED COLEMAN RESEARCH CORPORATION
By: RICHARD VINCHESI By:
------------------------- ---------------------------
Richard Vinchesi
Its: Chief Operating Officer Its:
Date: 3-24-98 Date:
------------------------- -------------------------
THERMO INFORMATION SOLUTIONS INC.
By: ROBERT V. WELLS
-------------------------
Robert V. Wells
Its: President
Date: 3-24-98
-------------------------
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IN WITNESS WHEREOF, the Parties, each intending to be legally bound, have
each caused this Agreement to be executed on the date first set forth above.
INTER*ACT SYSTEMS, INCORPORATED COLEMAN RESEARCH CORPORATION
By: By: ANNE POE
------------------------- ---------------------------
Richard Vinchesi
Its: Chief Operating Officer Its: Chairman
Date: Date: 3-24-98
------------------------- -------------------------
THERMO INFORMATION SOLUTIONS INC.
By:
-------------------------
Robert V. Wells
Its: President
Date:
-------------------------
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Exhibit A
PROMISSORY NOTE
$2,500,000.00
March , 1998
FOR VALUE RECEIVED, the undersigned, INTER*ACT SYSTEMS, INCORPORATED, a
North Carolina corporation (hereinafter and together with any subsequent obligor
hereunder collectively called 'Borrower') hereby promises to pay to the order of
THERMO INFORMATION SOLUTIONS INC., a Delaware corporation (hereinafter and
together with any subsequent holder hereof called 'Lender') the principal sum of
TWO MILLION FIVE HUNDRED THOUSAND AND NO/100 DOLLARS ($2,500,000.00).
The unpaid principal of this Promissory Note ('Note') outstanding from time
to time shall not bear interest; provided that any principal of this Note not
paid when within three (3) business days of its due date (whether at stated
maturity, by acceleration or otherwise) shall, from and after such date until
the date such principal is paid, bear interest at the rate per annum (computed
on the basis of a year of 360 days) of fourteen percent (14%).
The Principal of this Note shall be due and payable in installments as
follows:
a. One Million Dollars ($1,000,000) on May 31, 1998; and
b. One Million Five Hundred Thousand Dollars ($1,500,000) on July 15, 1998.
All payments shall be applied first to accrued interest, and then to
principal; provided that if any other costs or amounts are due, then any monies
received, at the option of Lender, may first be applied to repay such cost or
amount, and the balance, if any, shall be then applied to accrued interest and
then to principal. All payments hereunder shall be paid in lawful money of the
United States of America and shall be made at the office of Lender at its
address at 6820 Moquin Drive, Huntsville, Alabama 35806 Attn: President, or such
other place and to such other persons(s) as Lender may from time to time
designate in writing.
This Note may be prepaid at any time, in whole or in part, without premium
or penalty.
An 'Event of Default' shall exist under this Note (a) in the event the
Borrower shall fail to make any payment within three
1
<PAGE>
<PAGE>
(3) business days of its due date under this Note, or (b) if there shall
exist an Event of Default as such term is defined in (i) the Initial Kiosk Order
Note issued pursuant to the Termination Agreement (as defined below), or (ii)
any of the Additional Kiosk Order Notes (if any) issued pursuant to the
Termination Agreement (as defined below) (collectively the promissory notes
referred to in (a) and (b) shall be referred to as the 'Ancillary Notes'). Upon
the occurrence of an Event of Default:
(a) any and all of the debts and liabilities of the Borrower to the
Lender, whether contained herein or otherwise, may, at the option of the
Lender, and without demand or notice of any kind, be declared and
immediately become due and payable in full, and the Lender may exercise any
rights available to it at law or in equity, or available under any
agreement relating to any liability of the Borrower to the Lender, and
(b) Interest accruing under this Note shall accrue at the rate per
annum (computed on the basis of a year of 360 days) of fourteen percent
(14%).
If this Note is collected by legal action or through an attorney at law,
any and all costs of collection, including reasonable attorneys' fees, incurred
by the Lender shall be paid by the Borrower. For purposes of this Note,
'reasonable attorneys' fees' shall mean legal fees and expenses charged to
Lender by Lender's outside counsel at ordinary hourly rates and shall not be
calculated based on any of the outstanding balance of this Note.
The failure or forbearance of the Lender to exercise any right hereunder or
under any of the Ancillary Notes, or otherwise granted to it by law, shall not
affect or release the liability of the Borrower, and shall not constitute a
waiver of such right unless so stated by the Lender in writing. Any provision
of this Note which may be unenforceable or invalid under applicable law shall be
ineffective to the extent of the unenforceability or invalidity, but shall not
affect the enforceability or validity of any other provision of this Note.
This Note is issued pursuant to the Termination Agreement by and between
Borrower, Coleman Research Corporation and Lender dated , 1998
(the 'Termination Agreement'). Capitalized terms used but not otherwise defined
herein shall have the meanings ascribed to such terms in the Termination
Agreement. Time is of the essence in the payment and performance of this Note.
BORROWER HEREBY WAIVES ALL RIGHTS TO PRESENTMENT, PROTEST AND NOTICE OF
DISHONOR.
2
<PAGE>
<PAGE>
This Note is executed under the hand and seal of the Borrower on the date
first above written.
'BORROWER:'
WITNESSES: INTER*ACT SYSTEMS, INCORPORATED
- ------------------------- --------------------------------(SEAL)
its: Chief Operating Officer
- ------------------------- Borrower's
Federal Identification
Number is:----------------------------
Borrower's
------------------------------
Address:------------------------------
------------------------------
3
<PAGE>
<PAGE>
EXHIBIT B
<TABLE>
<CAPTION>
ID PART NUMBER DESCRIPTION QUANTITY COST EXTENDED $
<C> <S> <C> <C> <C> <C>
151 C-HB-001-03-1-0A GRN 1/4 X 1 CARRIAGE BO 4728 $0.04 $189.12
153 C-HB-001-04-1-0A 1/4 X 1-1/2 GREEN CARRI 3848 $0.06 $230.88
154 C-HB-001-04-2-0A 1/4 X 1-1/2 GRAY CARR BOL 755 $0.84 $633.37
155 C-HB-002-01-1-0A JACKING PLATE SCREW 522 $1.18 $615.96
158 C-HB-006-01-1-0A 1/4-20X1 HEX HEAD BOLT 926 $0.00 $0.00
188 C-HG-003-04-3-0A 1/8 X .650 GRY POP RIVI 5560 $0.41 $2,260.70
190 C-HG-009-04-1-0A 1/16' X 1 COTTER PIN 3692 $0.01 $42.46
193 C-HG-012-01-1-0A #6-32 X 3/4 PIM STUD 1997 $0.03 $59.91
194 C-HG-013-01-1-0A #6-32 X 1/2' PEM STUD 2012 $0.03 $60.36
195 C-HG-014-01-1-0A 1/2 PEM STUD 2046 $0.03 $61.38
196 C-HG-015-01-1-0A 1/4 STAND-OFF 8571 $0.00 $0.00
224 C-HN-002-04-1-0A #6-32 HEX NUTS 26857 $0.01 $282.00
226 C-HN-002-05-1-0A #8-32 HEX NUT 14975 $0.02 $363.89
231 C-HN-003-01-1-0A #6-32 WING NUT, STEEL, 9908 $0.02 $198.16
233 C-HN-004-01-1-0A 1/4-20 X 7/8 COUPLING N 488 $0.12 $58.56
237 C-HS-002-02-1-0A 4-40 X 3/8 PHIL PAN MS 19595 $0.01 $195.95
238 C-HS-002-03-1-0A 4-40 X 3/16 PHL PAN HD 136 $0.69 $94.08
239 C-HS-003-01-1-0A 6-32 X 1/4 PHIL PAN MS 20924 $0.01 $209.24
244 C-HS-003-05-1-0A 6-32 X 3/4 PHIL PAN MS 27047 $0.01 $270.47
245 C-HS-003-06-1-0A 1/4'-20 X 1/2 PHIL PAN M 1511 $0.00 $0.00
246 C-HS-003-07-1-0A #8-32 X 1' PHIL PAN MS 16828 $0.00 $0.00
255 C-HS-004-04-1-0A 8-32 X 5/8 PHIL PAN MS 15479 $0.02 $309.58
256 C-HS-004-07-1-0A 8-32 X 1 PHIL PHD MS 4376 $0.01 $54.70
258 C-HS-005-07-2-0A 10-32 X 1 PHIL PANHD MS 931 $0.02 $14.90
271 C-HS-009-06-4-0A #8 X 3/4 PHIL PAN SMS 9148 $0.02 $182.96
273 C-HS-009-12-4-0A $8 X 1-1/2 PHIL PAN SMS 14328 $0.04 $573.12
274 C-HS-017-02-1-0A GRN 6 X 1/4 FLT HD SMS 6759 $0.01 $67.59
278 C-HS-020-03-2-0A #6 X 3/8 GRY PHIL FLT SMS 33629 $0.01 $460.72
44 C-OM-003-03-1-0B CITOH LOWER PTRDECK 2 19 $6.75 $128.25
46 C-OM-003-03-2-0B CITOH UPPER PTRDECK 2 16 $7.35 $117.60
291 C-KT-001-01-1-0A CUTTER ASSEMBLY CITOHK1 1467 $211.00 $309,537.00
362 C-PR-001-04-1-0A CITOH EZ-4 THERMAL PRI 2823 $506.52 $1,429,898.90
5 C-OA-019-01-1-0A MICRON CPU 120MHZ W/WES 15 $1,759.00 $26,385.00
13 C-OF-002-02-1-0A FAN, CPU 11 $5.00 $55.00
20 C-OL-003-02-1-0A CLEAR FACEPLATE GRAPHIC 443 $5.15 $2,281.45
21 C-OL-003-02-1-0B RED LENS FACEPLATE PANE 17 $0.00 $0.00
22 C-OL-003-02-1-0C RED/CLEAR CENTER FP PAN 15 $0.00 $0.00
23 C-OL-003-02-2-0A STORE ID LABEL 510 $0.33 $170.14
24 C-OL-003-02-3-0A SML GRAPHICS PLATE(MODB 148 $1.65 $244.20
34 C-OM-001-03-1-0A LASER BASE PLATE 137 $3.14 $429.81
35 C-OM-001-03-2-0A LASER AXIAL PLATE 184 $3.15 $579.16
63 C-OM-012-01-1-0A ALUM ACTUATOR ROD FORCT 253 $2.10 $531.30
92 C-CA-004-01-1-0A SERIAL PTR CBL DB9F/26P 1647 $8.08 $13,307.76
93 C-CA-005-01-1-0A MAGSTRIPE CBL 90DGR 20P 1557 $9.27 $14,433.39
94 C-CA-005-02-2-0A MAGTEK SWIPE READER CAB 2 $10.00 $20.00
</TABLE>
<PAGE>
<PAGE>
EXHIBIT B
<TABLE>
<CAPTION>
ID PART NUMBER DESCRIPTION QUANTITY COST EXTENDED $
- ---- ------------------ -------------------------- -------- --------- ----------
<C> <S> <C> <C> <C> <C>
98 C-CA-008-01-1-0A PARR PTR CBL 26PIN/DB25 1453 $9.67 $14,050.51
105 C-CA-015-01-1-0A TOUCH SCN EXT CBL 9PF/9 771 $4.27 $3,289,39
109 C-CA-020-01-1-0A KEYBD EXT CBL 6 PIN M/M 39 $2.00 $78.00
110 C-CA-021-01-1-0A MONITOR EXT CBL 6' 15 P 18 $2.00 $36.00
111 C-CA-022-01-1-0A 6'3 COND POWER CABLE 168 $1.20 $201.60
112 C-CA-023-01-1-0A PSC LASER READER CABLE 1637 $4.82 $7,890.34
117 C-CA-027-01-1-0A 15' BNC THINNET 171 $3.43 $586.53
119 C-CB-001-01-1-0A KTX CONTROLLER BOARD 173 $272.00 $47,056.00
124 C-CN-001-01-1-0A 1/4 MALE SPADE CONNECTO 4739 $0.20 $947.80
129 C-CN-005-01-1-0A 50 OHM BNC TERMINATORS 162 $0.40 $64.88
130 C-CN-005-01-2-0A 50 OHM BNC TERM W/GRDLO 1051 $1.91 $2,006.88
131 C-CN-005-02-1-0A 50 OHM T BNC CONNECTORS 229 $1.79 $408.77
132 C-CN-006-01-1-0A # 6 STUD FORK TER/CRMP C 802 $0.20 $160.40
134 C-CR-001-01-1-0A ARLAN AIRONET CLIENT CA 1 $433.69 $433.69
135 C-CR-001-01-2-0A SOLECTEK AIR LAN CARD 21 $408.49 $8,578.27
149 C-GL-001-01-1-0A GLS TMP/CTD GRAPHIC PNL 23 $16.85 $387.55
323 C-PL-001-01-1-0A CABINET SHELL OLD GREEN 3 $700.00 $2,100.00
324 C-PL-001-01-2-0A CABINET SHELL WOOD GREE 3 $1,165.00 $3,495.00
340 C-PL-009-03-1-0A ANGLED PLASTIC COVER 56 $1.50 $84.00
342 C-PL-012-01-1-0A KTX LOW PAPER SWITCH 359 $5.00 $1,795.00
343 C-PL-013-01-1-0A LOW PAPER SWITCH BLOCK 1791 $1.39 $2,490.92
359 C-PR-001-03-1-0A KTX PA THERMAL PRINTER 3 $758.00 $2,274.00
375 C-PS-004-01-1-0A KTX POWER SUPPLY 188 $264.50 $49,725.51
377 C-SC-001-01-1-0A MAGSTRIPE CARD READER A 1281 $75.00 $96,075.00
380 C-SC-002-01-2-0A PSC LASER SCANNER OMNID 10 $558.00 $5,580.00
74 C-OS-002-01-1-0A OVERHEAD LIGHT BOX 9 $211.00 $1,899.00
288 C-HW-013-01-1-0A 1/4" LOCK WASHER 1135 $0.02 $19.07
298 C-PK-004-01-1-0A LARGE PALLOT 31X48 206 $15.78 $3,249.65
321 C-PK-020-01-1-0A CRATE 4X4 RUN 3/4" BOTM 4 $400.00 $1,600.00
327 C-PL-003-06-1-0A FACE PLATE FLAPPER 130 $3.69 $480.00
8 C-OD-001-01-1-0A 3.5" FLOPPY DRIVE 3 $59.00 $177.00
10 C-OD-002-02-1-0A 1.6 GIG HD WESTERN DIG 156 $263.32 $41,078.20
73 C-OP-033-01-1-0A A/B SWITCHBOX 8 $19.99 $159.92
136 C-CS-001-01-1-0A AUDIO CARD/SOUND BLASTE 42 $69.00 $2,898.00
137 C-CV-001-02-1-0A VIDEO CARD/PCI W/2MB VR 73 $474.11 $34,609.73
290 C-KB-001-01-1-0A KEYBOARD, DIN CONNECTOR 50 $49.00 $2,450.00
293 C-LT-001-01-1-0A 12" LIGHT BULB, ROUND 1856 $9.00 $16,704.00
294 C-LT-001-01-2-0A 8" LIGHT BULB, ROUND 1856 $7.00 $12,992.00
295 C-PB-100-01-1-0A SWECOIN 5200 CTRL BOARD 9 $240.00 $2,160.00
373 C-PS-002-01-1-0A MODEM/FAX PROTECTOR 1500 $38.95 $58,425.00
374 C-PS-003-01-1-0A PC POWER SUPPLY 200WATT 23 $32.00 $736.00
134 C-HS-005-07-3-0A 10-32 X 1/2 PHIL PAN MS 45 $0.02 $0.90
14 C-OW-004-01-1-0A 4'2 CONDUCTOR POWER CO 78 $0.86 $66.80
33 C-HG-006-01-2-0A NEW LAZY SUSAN 98 $18.50 $1,813.00
7 C-OM-001-01-3-0A LT MONITOR SUPPORT BRKT 108 $8.36 $902.36
</TABLE>
Page 2
<PAGE>
<PAGE>
EXHIBIT B
<TABLE>
<CAPTION>
ID PART NUMBER DESCRIPTION QUANTITY COST EXTENDED $
<C> <S> <C> <C> <C> <C>
73 C-PL-014-01-1-0A PLASTIC SPACER 120 $1.52 $182.64
109 C-HK-002-01-1-0A SML PL KNOB 1/4 X 20 X 1/2 165 $1.73 $284.84
67 C-PK-005-03-1-0A 1/2" WIRE BUCKLES 216 $0.02 $4.84
38 C-HH-001-01-2-0A LOWER DOOR HINGE 3" 261 $8.26 $2,155.86
81 C-SP-001-01-1-0A 3" AUDIO SPEAKER 282 $2.44 $688.59
132 C-HG-002-02-2-0A 6-32 X 1/4 AL STDOFF FM/F 346 $0.02 $5.36
133 C-HS-004-01-2-0A 8-32 X 1/8 PHIL PAN MS 429 $0.10 $40.76
50 C-HN-002-09-1-0A 5/16" 18 NYLOX NUT 436 $0.04 $17.44
60 C-HS-019-13-2-0A GRY 6 X 5/16 PHIL FLT S 520 $0.50 $259.38
49 C-HN-002-08-1-0A 1/4 X 20 HEX NUT 586 $0.01 $4.92
52 C-HR-001-01-1-0A RETAINING RING 1/4" INSDM 606 $0.26 $160.17
46 C-HN-002-04-2-0A #6-32 NYLOX HEX NUT 674 $0.04 $11.39
68 C-PK-006-01-1-0A KIOSK BAGS FOR FOAMING 654 $0.42 $274.68
106 C-OM-014-01-1-0A TOP LOCK CATCH PLATE 773 $0.97 $749.81
77 C-PS-001-01-1-0A FIVE OUTLET PSUPPLY 794 $19.05 $15,128.64
26 C-HB-004-01-1-0A SNAKE EYE SECURITY BOLT 869 $0.29 $252.01
131 C-HS-009-03-1-0A #8 X 3/8 GRY PHIL PSMS 1128 $0.38 $429.32
62 C-HW-010-01-1-0A #12 FLAT WASHERS 1237 $0.01 $12.37
56 C-HS-007-01-1-0A 10-32 X 1/2" KEYHOLE SC 1286 $1.23 $1,581.78
129 C-HS-003-02-1-0A 3/8" BINDING POST SET 1308 $0.07 $91.56
47 C-HN-001-07-1-0A 1/2-13 HEX NUT (FOR KIO 1742 $0.32 $557.44
28 C-HG-001-01-1-0A LOWER VENT STRAIN RELIE 1776 $0.06 $110.11
61 C-HW-009-01-1-0A #10 FLAT WASHERS 2673 $0.01 $21.38
97 C-HG-008-02-1-0A 8" THICK PLSTC TIE WRAP 2731 $0.04 $109.24
70 C-PK-016-03-1-0A SERIAL# TAPE 1/2" SILVER 2734 $0.02 $63.43
136 C-HS-008-06-4-0A #6 X 3/4 PHIL PAN SMS 3378 $0.01 $33.78
25 C-HB-001-03-2-0A 1/4 X 1 GRAY CARRIAGE BOL 3821 $0.17 $640.78
92 C-HG-008-03-2-0A 4" PLASTIC TIE WRAPS 4353 $0.02 $87.06
58 C-HS-008-05-2-0A GRY 6-32 X 3/4 PHIL FLT M 4432 $0.10 $449.40
23 C-CN-003-01-1-0A 4 POSITION TERMINAL BLK 5119 $0.79 $4,044.01
89 C-HW-012-01-1-0A 1/4" USS FLAT WASHERS 5146 $0.02 $102.92
98 C-HG-008-03-1-0A 8" THIN PLSTC TIE WRAPS 6937 $0.02 $118.62
137 C-HS-009-05-4-0A #8 X 5/8 PHIL PAN SMS 7926 $0.02 $158.52
127 C-AD-001-02-2-0A SCOTCHMATE FASTENER FEM 8448 $0.07 $558.41
34 C-HG-008-02-2-0A 24" PLASTIC TIE WRAPS 8526 $0.28 $2,387.28
93 C-HW-004-01-1-0A #4 FLAT WASHERS 8658 $0.01 $86.58
94 C-HW-008-01-1-0A #8 FLAT WASHERS 11260 $0.01 $140.75
55 C-HS-004-03-1-0A 8-32 X 1/2 PHIL PAN MS 11670 $0.02 $233.40
126 C-AD-001-02-1-0A SCOTCHMATE FASTENER MAL 12048 $0.07 $796.37
51 C-HN-003-05-1-0A #8-32 NYLOX HEX NUTS 13608 $0.01 $171.46
99 C-HS-003-03-1-0A 6-32 X 1/2 PHIL PAN MS 14452 $0.01 $144.52
90 C-HN-002-07-1-0A 1/4-20 NYLOX HEX NUT 18372 $0.02 $369.28
31 C-HG-003-04-2-0A 1/8 X 1/2 GRY POP RIVET 62498 $0.04 $2,499.92
$2,296,618.16
</TABLE>
Page 3
<PAGE>
<PAGE>
Exhibit C
Inter*Act Systems, Incorporated
14 Westport Avenue [LOGO]
Norwalk, Connecticut 06851
Tel 203.750.0300, Fax 203.750.0202
PURCHASE ORDER
PO NUMBER: 01-9830
-------
<TABLE>
<S> <C>
To: Thermo Information Solutions, Inc. Ship To: Inter*Act Systems, Incorporated
75 Old Barnwell Road 14 Westport Avenue
West Columbia, SC 29170 Norwalk, Connecticut 06851
(803) 739-0003 (203) 750-0300
</TABLE>
<TABLE>
<S> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------
P.O. DATE REQUISITIONER SHIP VIA F.O.B. TERMS
- ----------------------------------------------------------------------------------------------------------
1/16/98 Rogelio Quiroga TBD NET 45
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
QTY UNIT DESCRIPTION UNIT PRICE TOTAL
- ----------------------------------------------------------------------------------------------------------
89 MOD B-2 Kiosk w/ Generic Software, Hardwired $7,018.00 $624,602.00
with a NE2000 compatible card.
89 Retrofit charge (all metal replaced) $500.00 $44,500.00
36 MOD B-2 Kiosk w/ Generic Software, Hardwired $7,018.00 $252,648.00
with a NE2000 compatible card.
Terms: Net 45 for shipment.
Shipment of all 125 units shall
be on April 3, 1998
</TABLE>
<TABLE>
<S> <C>
- ----------------------------------------------------------------------------------------------------------
Bill To: Inter*Act Systems, Incorporated SUBTOTAL $921,750.00
Accounts Payable SHIPPING & HANDLING
14 Westport Avenue SALES TAX
Norwalk, Connecticut 06851 OTHER ------------
Tel 203.750.0300, Fax 203.750.0202 TOTAL ------------
Richard Vinchesi 1-16-98
- ------------------------------------------------ --------------------------------------------------
Ordered By: Date Authorized By: Date
Please note that this Purchase Order expires one year from P.O. Date as noted above. Inter*Act will not assume
liability for any unshipped product after expiration date.
</TABLE>
<PAGE>
<PAGE>
SCHEDULE 1
Final Inspection and Internal Packing (C-FP-003-01-1-0A thru C-FP-003-01-6-0C)
1) Clean any dirty spots on Kiosk. The glued edges on the hood should be clean
and not discolored. Remove any obvious markings from the inside of the
cabinet.
2) Insure that the speakers are secure and the proper mounting hardware has
been used.
3) Insure that the hood and doors are properly aligned. Verify that the upper
hood lock is keyed "C346A" and operates correctly. Verify the bottom door
cam lock is keyed "C415A".
4) Verify holes are drilled and screws/washers installed on back top of hood
and holes are drilled on upper signage panel.
5) Inspect lower signage panel for alignment, cleanliness, sharp edges, and
visual damage.
6) Inspect the cam brace and make sure all cam brace screws are securely
mounted to the hood and that the cam brace is properly aligned and secure.
7) Inspect the lower grill, hubble sub assembly and signage bolts on the back
of the cabinet.
8) Inspect the touch screen, monitor, scanner and scanner glass for loose
hardware, damage and cleanliness.
9) Insure that all tie plates are secure and cables are routed such that
adequate service loops exist and cables are not subject to damage.
10) Inspect the printer assembly, printer power supply installation, and main
power supply installation.
11) Inspect the computer installation on the lazy Susan and verify that the
keyboard is centered and secured with Velcro on the keyboard shelf.
12) Verify all cables are connected and secure.
13) Verify printer self test, coupons, and recipes are located on the touch
screen.
14) Secure the printer assembly rail to the right hand monitor support bracket
lower centerpiece using a 24" cable tie.
15) Insert the pink foam wrapped Delrin paper spool (C-PL-007-01-1-0A) between
the printer and the right hand monitor support bracket.
16) Insure Swecoin printer paper release lever is in down position prior to
shipping.
17) Inspect wire routing for loose ties, service loops, damage and loose
hardware.
18) For the MOD-B2 and MOD-B3 hardwire configurations, place (2ea)25' 10BaseT
ethernet cables on top of the computer. Insert (5 ea.) foam blocks, 1
between the computer and 5-outlet power strip, 1 on each side of the
computer and 2 between the keyboard and monitor.
19) Install the Kiosk part number/serial number warning label to the lower
right hand portion of the lower vent located on the back of the Kiosk
cabinet. Initial step 0060 on route sheet.
20) Install pink foam over the monitor for protection during shipping. Verify
and update serial numbers on route sheet.
21) Disconnect power and verify that the main power cord is attached to the
upper left-hand keyhole screw.
22) Finals inspect the exterior of the Kiosk. Using a file or a sanding
block, smooth out any rough joints (glued edges) on the upper hood and
bottom door of the Kiosk. There is no sanding on the shell portion of the
Kiosk. Inspect for rough corners (i.e. where upper hood meets the bottom
door) and debur any sharp edges.
23) Inspect internal packing and initial the "Final Inspection/Internal
Packing" step 0070 on the route sheet.
24) I/A rep initial route sheet step 0080 prior to shipping.
<PAGE>
<PAGE>
Exhibit D
PROMISSORY NOTE
(Initial Kiosk Order Note)
$921,750.00
---------------, 1998
FOR VALUE RECEIVED, the undersigned INTER*ACT SYSTEMS, INCORPORATED, a
North Carolina corporation (hereinafter and together with any subsequent obligor
hereunder collectively called "Borrower") hereby promises to pay to the order of
THERMO INFORMATION SOLUTIONS INC., a Delaware corporation (hereinafter and
together with any subsequent holder hereof called "Lender") the principal sum of
NINE HUNDRED TWENTY-ONE THOUSAND SEVEN HUNDRED FIFTY AND N0/100 DOLLARS
($921,750.00).
The unpaid principal of this Promissory Note ("Note") outstanding from
time to time shall not bear interest; provided that any principal of this Note
not paid when due (whether at stated maturity, by acceleration or otherwise)
shall, from and after the date when due until the date such principal is paid,
bear interest at the rate per annum (computed on the basis of a year of 360
days) of fourteen percent (14%).
The Principal of this Note shall be due and payable on May 19, 1998.
All payments shall be applied first to accrued interest, and then to
principal, provided that if any other costs or amounts are due, than any monies
received, at the option of Lender, may first be applied to repay such cost or
amount, and the balance, if any, shall be then applied to accrued interest and
then to principal. All payments hereunder shall be paid in lawful money to the
United States of America and shall be made at the office of Lender at its
address at 6820 Moquin Drive, Huntsville, Alabama 35806 Attn: President, or such
other place and to such other person(s) as Lender may from time to time
designate in writing.
This Note may be repaid at any time, in whole or in part, without
premium or penalty.
An "Event of Default" shall exist under this Note (a) in the event the
Borrower shall fail to make any payment due under this Note, or (b) if there
shall exist an Event of Default as such term is defined in (i) the Promissory
Note in the principal amount of Two Million Five Hundred Thousand Dollars
($2,500,000) dated March , 1998 executed by Borrower in favor of Lender or (ii)
any other promissory note executed and delivered by Borrower to Lender
(collectively the promissory notes referred to in (b) shall be referred to as
the "Ancillary Notes"). Upon the occurrence of an Event of Default:
<PAGE>
<PAGE>
(a) any and all of the debts and liabilities of the Borrower to the
Lender, whether contained herein or otherwise, may, at the option of the
Lender, and without demand or notice of any kind, be declared and
immediately become due and payable in full, and the Lender may exercise any
rights available to it at law or in equity, or available under any
agreement relating to any liability of the Borrower to the Lender; and
(b) interest accruing under this Note shall accrue at the rate per
annum (computed on the basis of a year of 360 days) of fourteen percent
(14%).
If this Note is collected by legal action or through an attorney at law,
any and all costs of collection, including reasonable attorneys fees, incurred
by the Lender shall be paid by the Borrower.
The failure or forbearance of the Lender to exercise any right hereunder
or under either of the Ancillary Notes, or otherwise granted to it by law, shall
not affect or release the liability of the Borrower, and shall not constitute a
waiver of such right unless so stated by the Lender in writing. Any provision of
this Note which may be unenforceable or invalid under applicable law shall be
ineffective to the extent of the unenforceability or invalidity, but shall not
affect the enforceability or validity of any other provision of this Note.
This Note is issued pursuant to the Termination Agreement dated March ,
1998 by and between Lender, Coleman Research Corporation and Borrower, and is
subject to the terms and conditions of said Termination Agreement.
Time is of the essence in the payment and performance of this Note.
BORROWER HEREBY WAIVES ALL RIGHTS TO PRESENTMENT, PROTEST AND NOTICE OF
DISHONOR.
This Note is executed under the hand and seal of the Borrower on the
date first above written.
"BORROWER"
WITNESSES: INTER*ACT SYSTEMS, INCORPORATED
- ------------------------ ------------------------------(SEAL)
Its: Chief Operating Officer
- ------------------------
Borrower's
Federal Identification Number is:
Borrower's
Address:-------------------------
2
<PAGE>
<PAGE>
Exhibit E
[LOGO] Inter*Act Systems, Inc.
14 Westport Avenue PURCHASE
Norwalk, CT 06851 ORDER
203.750.0300 * Fax 203.840.7979
The following number must appear on all related correspondence,
shipping papers, and invoices: PO NUMBER: 02-9827
<TABLE>
<S> <C>
To: Ship To: Rob Winer/Southern Warehouse
Thermo Information Solutions, Inc. Inter*Act Systems, Inc.
75 Old Barnwell Road 14 Westport Ave.
West Columbia, SC 29170 Norwalk, CT. 06851
(803) 739-0003 (203) 750-0300
</TABLE>
<TABLE>
- ----------------------------------------------------------------------------------------------------------
P.O. DATE REQUISITIONER SHIP VIA F.O.B. POINT TERMS
<S> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------
2/18/98 Rogelio Quiroga TBD 30 days
- ----------------------------------------------------------------------------------------------------------
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
QTY UNIT DESCRIPTION UNIT PRICE TOTAL
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
225 MOD B-2 Kiosk w/ Generic Software, Hardwired $7,000.00 $1,575,000.00
with a NE2000 compatible card.
Shipment shall be as follows:
35 Units on or before May 1,1998
40 Units on or before May 8,1998
50 Units on or before May 15,1998
50 Units on or before May 22,1998
50 Units on or before May 29,1998
Copy of Computer configuration also attached.
- ----------------------------------------------------------------------------------------------------------
SUBTOTAL $1,575,000.00
SALES TAX
SHIPPING & HANDLING
OTHER --------------
$1,575,000.00
TOTAL --------------
INTER*ACT SYSTEMS, INC.
14 Westport Avenue * Norwalk, CT 06851
Tel 203.760.0300 * Fax 203.840.7979
Authorized by Richard Vinchesi Date 2-25-98
--------------------------------------------------
</TABLE>
<PAGE>
<PAGE>
Exhibit F
PROMISSORY NOTE
(Additional Kiosk Order Note)
$_____________ ______________1998
FOR VALUE RECEIVED, the undersigned, INTER*ACT SYSTEMS, INCORPORATED, a
North Carolina Corporation (hereinafter and together with any subsequent obligor
hereunder collectively called 'Borrower') hereby promises to pay to the order of
THERMO INFORMATION SOLUTIONS, INC., a Delaware corporation (hereinafter and
together with any subsequent holder hereof called 'Lender') the principal sum of
____________________________________________________________________________
AND NO/100 DOLLARS ($________.00).
The unpaid principal of this Promissory Note ('Note') outstanding from time
to time shall not bear interest; provided that any principal of this Note not
paid within three (3) business days of its due date (whether at stated maturity,
by acceleration or otherwise) shall, from and after the date when due until the
date such principal is paid, bear interest at the rate per annum (computed on
the basis of a year of 360 days) of fourteen percent (14%).
The Principal of this Note shall be due and payable thirty (30) days from
the date set forth above.
All payments shall be applied first to accrued interest, and then to
principal, provided that if any other costs or amounts are due, then any monies
received, at the option of Lender, may first be applied to repay such cost or
amount, and the balance, if any, shall be then applied to accrued interest and
then to principal. All payments hereunder shall be paid in lawful money of the
United States of America and shall be made at the office of Lender at its
address at 6820 Moquin Drive, Huntsville, Alabama 35806 Attn: President, or such
other place and to such other person(s) as Lender may from time to time
designate in writing.
This Note may be repaid at any time, in whole or in part, without premium
or penalty.
An 'Event of Default' shall exist under this Note (a) in the event the
Borrower shall fail to make any payment within three (3) business days of its
due date under this Note, or (b) if there shall exist an Event of Default as
such term is defined in (i) any other Additional Kiosk Order Note executed and
delivered by Borrower in favor of Lender pursuant to the Termination Agreement
referred to below, or (ii) the Promissory Note in the principal amount of Nine
Hundred Twenty-One Thousand Seven Hundred Fifty Dollars ($921,750) (iii) the
Promissory Note in the principal amount of Two Million Five Hundred Thousand
($2,500,000) dated _____________, 1998 executed by Borrower in favor of Lender
(collectively the promissory notes referred to in (b) shall be referred to as
the 'Ancillary Notes'). Upon the occurrence of an Event of Default:
(a) any and all of the debts and liabilities of the Borrower to the
Lender, whether contained herein or otherwise, may, at the option of the
Lender, and without
<PAGE>
<PAGE>
demand or notice of any kind, be declared and immediately become due and
payable in full, and the Lender may exercise any rights available to it at
law in equity, or available under any agreement relating to any liability
of the Borrower to the Lender, and
(b) interest accruing under this Note shall accrue at the rate per
annum (computed on the basis of a year of 360 days) of fourteen percent
(14%).
If this Note is collected by legal action or through an attorney at law,
any and all costs of collection, including reasonable attorneys fees, incurred
by the Lender shall be paid by the Borrower.
The failure or forbearance of the Lender to exercise any right hereunder or
under any of the Ancillary Notes, or otherwise granted to it by law, shall not
affect or release the liability of the Borrower, and shall not constitute a
waiver of such right unless so stated by the Lender in writing. Any provision of
this Note which may be unenforceable or invalid under applicable law shall be
ineffective to the extent of the unenforceability or invalidity, but shall not
affect the enforceability or validity of any other provision of this Note.
This Note is issued pursuant to the Termination Agreement by and between
Borrower, Coleman Research Corporation and Lender dated March ____, 1998 (the
'Termination Agreement'), and is subject to the terms and conditions of the
Termination Agreement.
Time is of the essence in the payment and performance of this Note.
BORROWER HEREBY WAIVES ALL RIGHTS TO PRESENTMENT, PROTEST AND NOTICE OF
DISHONOR.
This Note is executed under the hand and seal of the Borrower on the date
first above written.
'BORROWER:'
WITNESSES: INTER*ACT SYSTEMS, INCORPORATED
_____________________________ ________________________________(SEAL)
Its:___________________________________
_____________________________ Borrower's
Federal Identification Number is:______
Borrower's
Address:_______________________________
_______________________________________
2
<PAGE>
<PAGE>
PROMISSORY NOTE
$2,500,000.00
March 24, 1998
FOR VALUE RECEIVED, the undersigned, INTER*ACT SYSTEMS, INCORPORATED, a
North Carolina corporation (hereinafter and together with any subsequent obligor
hereunder collectively called 'Borrower') hereby promises to pay to the order of
THERMO INFORMATION SOLUTIONS INC., a Delaware corporation (hereinafter and
together with any subsequent holder hereof called 'Lender') the principal sum of
TWO MILLION FIVE HUNDRED THOUSAND AND NO/100 DOLLARS ($2,500,000.00).
The unpaid principal of this Promissory Note ('Note') outstanding from time
to time shall not bear interest; provided that any principal of this Note not
paid when within three (3) business days of its due date (whether at stated
maturity, by acceleration or otherwise) shall, from and after such date until
the date such principal is paid, bear interest at the rate per annum (computed
on the basis of a year of 360 days) of fourteen percent (14%).
The Principal of this Note shall be due and payable in installments as
follows:
a. One Million Dollars ($1,000,000) on May 31, 1998; and
b. One Million Five Hundred Thousand Dollar ($1,500,000) on July 15,
1998.
All payments shall be applied first to accrued interest, and then to
principal; provided that if any other costs or amounts are due, then any monies
received, at the option of Lender, may first be applied to repay such cost or
amount, and the balance, if any, shall be then applied to accrued interest and
then to principal. All payments hereunder shall be paid in lawful money of the
United States of America and shall be made at the office of Lender at its
address at 6820 Moquin Drive, Huntsville, Alabama 35806 Attn: President, or
such other place and to such other person(s) as Lender may from time to time
designate in writing.
This Note may be prepaid at any time, in whole or in part, without premium
or penalty.
An 'Event of Default' shall exist under this Note (a) in the event the
Borrower shall fail to make any payment within three (3) business days of its
due date under this Note, or (b) if there shall exist an Event of Default as
such term is defined in (i) the Initial Kiosk Order Note issued pursuant to the
<PAGE>
<PAGE>
Termination Agreement (as defined below), or (ii) any of the Additional Kiosk
Order Notes (if any) issued pursuant to the Termination Agreement (as defined
below) (collectively the promissory notes referred to in (a) and (b) shall be
referred to as the 'Ancillary Notes'). Upon the occurrence of an Event of
Default:
(a) any and all of the debts and liabilities of the Borrower to the
Lender, whether contained herein or otherwise, may, at the option of the
Lender, and without demand or notice of any kind, be declared and
immediately become due and payable in full, and the Lender may exercise any
rights available to it at law or in equity, or available under any
agreement relating to any liability of the Borrower to Lender, and
(b) Interest accruing under this Note shall accrue at the rate per
annum (computed on the basis of a year of 360 days) or fourteen percent
(14%).
If this Note is collected by legal action or through an attorney at law,
any and all costs of collection, including reasonable attorneys' fees, incurred
by the Lender shall be paid by the Borrower. For purposes of this Note,
'reasonable attorneys's fees' shall mean legal fees and expenses charged to
Lender by Lender's outside counsel at ordinary hourly rates and shall not be
calculated based on any of the outstanding balance of this Note.
The failure or forbearance of the Lender to exercise any right hereunder or
under any of the Ancillary Notes, or otherwise granted to it by law, shall not
affect or release the liability of the Borrower, and shall not constitute a
waiver of such right unless so stated by the Lender in writing. Any provision of
this Note which may be unenforceable or invalid under applicable law shall be
ineffective to the extent of the unenforceability or invalidity, but shall not
affect the enforceability or validity of any other provision of this Note.
This Note is issued pursuant to the Termination Agreement by and between
Borrower, Coleman Research Corporation and Lender dated March 24, 1998 (the
'Termination Agreement'). Capitalized terms used but not otherwise defined
herein shall have the meanings ascribed to such terms in the Termination
Agreement. Time is of the essence in the payment and performance of this Note.
BORROWER HEREBY WAIVES ALL RIGHTS TO PRESENTMENT, PROTEST AND NOTICE OF
DISHONOR.
This Note is executed under the hand and seal of the Borrower on the date
first above written.
2
<PAGE>
<PAGE>
This Note is executed under the hand and seal of the Borrower on the date
first above written.
'BORROWER:'
WITNESSES: INTER*ACT SYSTEMS, INCORPORATED
Mary Braunsdorf RICHARD VINCHESI
_____________________________ _________________________________(SEAL)
its: Chief Operating Officer
Melissa Zegray
_____________________________ Borrower's
Federal Identification
Number is: 56-1817510
Address: 14 Westport Avenue
Norwalk, CT 06851
3
<PAGE>
<PAGE>
Inter*Act Systems, Incorporated [LOGO]
14 Westport Ave., Norwalk, CT 06851
Tel 203-750-0300, Fax 203-750-0202
March 14, 1997
Mr. Thomas A. Manna
751 Forest Avenue
Rye, NY 10580
Dear Tom:
Following my meeting with our Board's Compensation Committee this afternoon, I
am happy to extend to you a final revised offer of employment:
Terms and Conditions
Position: Vice President, National Sales
Position Summary: Plans, organizes and directs all aspects of the
Company's sales efforts to packaged goods
manufacturers to sponsor electronic promotions of
various types on the Company's Inter*Act Promotion
Network ("IPN"). May also include direction of the
Company's sales efforts to retail supermarket
chains. Also participates in executive level
corporate strategic planning and development.
Work Location: Inter*Act Headquarters
Reporting to: Chairman & Chief Executive Officer
Signing Bonus: per attached
Base Salary: Biweekly rate of $5,576.92 which, if annualized,
would be $145,000, to be reviewed annually.
Incentive Pay Opportunities: o per attached
o The Company's CEO and CFO will work with you to
develop a sales commission plan that will be
designed to be competitive relative to established
industry comparables. If this new plan is more
desirable to you than your then current incentive
compensation plan, then the CEO and CFO will work
with you in good faith to tailor a plan of similar
characteristics that will be offered to you to
replace your then existing incentive compensation
plan.
<PAGE>
<PAGE>
Inter*Act Systems, Incorporated
T. Manna Offer Letter
Page 2
Pay Dates: Every other Friday. Direct deposit of your
paycheck into the account(s) of your choice is
available.
Vacation: You will receive at least three (3) weeks paid
vacation annually.
Inter*Act
Stock Options: Subject to the approval of our Board of Directors,
you will be granted an option to purchase 70,000
shares of Inter*Act Stock at a strike price of $10
per share, in accordance with the provisions of
the 1996 Nonqualified Stock Option Plan. These
options will vest over a five (5) year period on
your employment anniversary date (20% per year).
You will be eligible to receive additional option
grants each year during your annual Performance
Review.
Performance Review: You will receive an annual performance review.
Benefits: Eligibility for Corporate Medical/Dental coverage
will commence the first of the month following 60
days of employment. The Company pays 90% of the
cost coverage of the employee and 55% of the cost
of coverage of dependents. Details are attached.
The Company may change the ratio of Company to
employee contribution at its sole discretion. You
will be eligible for Inter*Act's 401(k) Savings
and Investment Plan on the first quarterly
enrollment date after 6 months of employment.
Severance: per attached
Representations
and Indemnification: You agree that in accepting this offer of
employment you will not violate any ongoing legal
obligations to your current employer and will not
disclose to Inter*Act, or any of its employees,
any proprietary information related to your
current employer. Inter*Act will agree to
indemnify you against any potential claims by your
current employer related to your accepting this
officer of employment so long as you have not
violated the foregoing representations to
Inter*Act.
Confidentiality and
Non-Compete: per attached
Effective Date of Employment: Two weeks from the date on which you countersign
this agreement, or sooner if possible.
<PAGE>
<PAGE>
Inter*Act Systems, Incorporated
T. Manna Offer Letter
Page 3
This is a letter of offer; there is no employment contract either expressed or
implied. As with all Inter*Act employees , this is employment at will. If you
have any questions, please feel free to contact me or Mary Davis, Manager of
Human Resources at 800-888-8946. ext. 208.
Tom, I have gone to great lengths to come as close as possible to the terms you
requested Thursday morning; we have stretched to the limit. We believe you are
more than worth the effort. I truly hope you will find this offer acceptable so
we can get down to the business of cresting the new paradigm!.
Best Regards,
/s/ Stephen R. Leeolou
Stephen R. Leeolou
Chairman & Chief Executive Officer
Please sign and return this by fax to me at (910) 545-2265 and return the
original by Federal Express.
I have read the foregoing terms and conditions and hereby agree to accept them
as stated.
*Accepted: /s/ Thomas A. Manna 3/15/97
----------------------------------------------------------------------
Thomas A. Manna Date
* With accepted changes as outlined in the attached letter now recognized as the
"Adendum" to this agreement.
<PAGE>
<PAGE>
Thomas A. Manna
751 Forest Ave.
Rye, New York 10580
March 15, 1997
Mr. Stephen R. Leeolou
Inter-Act Systems, Inc.
14 Westport Ave.
Norwalk, CT 06851
Dear Steve:
I am in receipt of InterAct's revised offer letter. Let me express my
appreciation for your personal conviction to make this "deal" happen! I fully
comprehend the lengths to which you went as reflected by the stated terms.
In the spirit of wrapping this up over the weekend, I'd like to propose the
following language changes:
Signing Bonus: You will receive a one-time signing bonus of
$100,000 to partially offset the proceeds from the
stock options you will forfeit (vesting dates:
April 29 and May 1, 1997) by joining InterAct
before May 2, 1997. Fifty percent (50%) of this
Bonus will paid in May 1997, with the remaining
50% paid the first week of January 1998. This
signing bonus is guaranteed when you commence
employment with InterAct.
Additionally, InterAct will reimburse the cost of
COBRA interim health care coverage incurred by
accepting this position.
Incentive Pay
Opportunities: $55,000 guaranteed in the first calendar year
(1997) of the employment. This amount will be paid
in two (2) equal installments: 50% in June 1997,
and the remaining 50% paid January 1998.
This portion of your annual incentive pay
opportunity will automatically escalate to
$100,000 in the second calendar year of employment
(1998) based on reaching mutually agreeable
quarterly IPN brand sales objectives.
<PAGE>
<PAGE>
Thomas A. Manna
Page 2
Severance: If, at any time during your first five years of
employment InterAct is sold (and you are not able
to, or do not wish to work for the new owner),
InterAct will immediately vest all unvested
options. If at any time during your first five
years of employment, your employment is terminated
for any reason other than cause (gross negligence,
dereliction of duty, fraud), then InterAct will
immediately vest 50% of all unvested outstanding
options that have been granted to you or 40,000
options shares, whichever is greater.
Additionally, under either circumstance, InterAct
will continue paying you your base salary for an
additional 12 months.
Confidentiality All employees are required to sign the Corporate
Employee Proprietary Information Agreement. It is
also agreed that the Non-Compete elements of the
attached offer letter do not apply to this
agreement. However, it is agreed that we will
mutually agree to some Non-Compete language which
will include narrow parameters relative to time
and companies within the industry affected.
Steve, assuming these changes are agreeable to you I would be extremely pleased
to join InterAct and look forward to building a truly premier organization with
you, Rich and Ray!
Please note your acceptance of these changes by countersigning this letter
below. This will officially amend InterAct's revised offer letter dated 3/14/97,
which is attached and signed by me. These two (2) documents in combination now
become the offer agreement.
Sincerely,
/s/ Thomas A. Manna
Thomas A. Manna
Accepted: /s/ Stephen R. Leeolou 3/16/97
----------------------------------------------------------------------
Stephen R. Leeolou Date
<PAGE>
<PAGE>
Inter*Act Systems, Incorporated
14 Westport Ave., Norwalk, CT 06851
Tel. 203-750-0300, Fax 203-750-0202
September 3, 1997 [LOGO]
Inter*Act
Mr. James F. Brandhorst, Jr.
1709 Pope CT.
Wilmington, NC 28405
Dear Jim:
Based on our recent discussions I am delighted to extend the following offer of
employment:
Terms and Conditions
--------------------
Position: Senior Vice President & Chief Marketing Officer
Position Summary: Plans, organizes and directs all
aspects of the Company's marketing strategy in
support of the Company's sales and revenue
objectives. Also participates in senior executive
level corporate strategic planning and
development.
Work Location: Inter*Act Headquarters - Norwalk, Connecticut
Reporting to: Chairman & Chief Executive Officer
Salary: Biweekly rate of $5,000, which if annualized would
be $130,000.
Annual Bonus Opportunity: $25,000: guaranteed and paid
quarterly in year one; year two and beyond to be
based on mutually agreeable objectives.
Pay Dates: Every other Friday. Direct deposit of your
paycheck into the account(s) of your choice is
available.
Moving Allowance: You will receive a maximum of $1,500 per month to
be used to cover any documented temporary
living/commuting expenses associated with your
full-time position with this Company but only for
a period of one year.
Vacation: You will receive 3 weeks of paid vacation,
annually.
Benefits: Eligibility for Corporate Medical/Dental coverage
will commence the first of the month following 60
days of employment. The Company pays 90% of the
cost of coverage of the employee and 55% of the
cost of coverage of dependents. Details are
attached. The Company may change the ratio of
Company to employee contribution at its sole
discretion. You will be eligible for Inter*Act's
401(k) Savings and Investment Plan on the first
quarterly enrollment date after 6 months of
employment.
<PAGE>
<PAGE>
Inter*Act Systems, Incorporated
Brandhorst - Page 2
Inter*Act Stock Options: You will be granted an option to purchase 50,000
shares of Inter*Act Stock at a strike price of
$10 per share, in accordance with the provisions
of the 1996 Nonqualified Stock Option Plan. These
options will vest over a 5 year period on your
employment anniversary date (20% per year).
Accelerating Vesting: If, at any time during your employment with the
Company, Inter*Act is sold, and you are not able
to, or do not wish to , work for the new owner,
then the Company will immediately vest all
outstanding options that have been granted to you.
Performance Review: You will receive an annual performance review.
Confidentiality: All employees are required to sign the Corporate
Employee Propriety Information Agreement.
Effective Date of Employment: Thursday, September 4, 1997
As with all Inter*Act employees, this is employment at-will. If you have any
questions, please feel free to contact me or Pete Rickler, Director of Human
Resources.
Jim, on behalf of the entire Company, I am extremely enthusiastic about you
joining the Inter*Act team. I, personally, look forward to great times together
as we pursue the Inter*Act vision!
Sincerely,
/s/ Stephen R. Leeolou
Stephen R. Leeolou
Chairman & Chief Executive Officer
Please sign and return to Pete Rickler in Human Resources.
I have read the foregoing terms and conditions and hereby agree to accept them
as stated.
/s/ James F Brandhorst, Jr. 9/4/97
- --------------------------------------------------------------------------------
James F. Brandhorst, Jr. Date
<PAGE>
<PAGE>
INTER*ACT SYSTEMS, INCORPORATED
EMPLOYMENT, NONCOMPETITION AND NONDISCLOSURE AGREEMENT
This Employment, Noncompetition and Nondisclosure Agreement (the
"Agreement") is entered as of March 31, 1997 between INTER*ACT SYSTEMS,
INCORPORATED ("InterAct"), as employer, and ("Employee"), and
sets forth the full understanding of both parties as to certain terms and
conditions of InterAct's employment of Employee. EMPLOYEE UNDERSTANDS AND
ACKNOWLEDGES THAT THIS AGREEMENT CONTAINS SIGNIFICANT RESTRICTIONS ON HIS OR HER
FREEDOM DURING EMPLOYMENT BY INTERACT, AND AFTER LEAVING THE EMPLOY OF INTERACT,
TO DIVULGE INFORMATION LEARNED WHILE AT INTERACT.
BACKGROUND
----------
InterAct continues to develop the InterAct Promotion Network (including
certain documentation), which delivers targeted, immediately useable, electronic
discounts to consumers via interactive "touch-screen" terminals located inside
the entrance of retail supermarkets. InterAct's business is highly competitive
and includes extensive use of trade secrets and other competitively sensitive
information. InterAct's research and development and other projects may also
include work with trade secrets and other proprietary or competitively sensitive
information of its manufacturers, retailers and customers. InterAct therefore
requires that each of its employees enter a nondisclosure Agreement in order to
safeguard its legitimate business and other interests.
In consideration of the employment of the Employee by InterAct, and other
good and valuable consideration (including the covenants and Agreements
contained herein), the receipt and sufficiency of which are hereby acknowledged,
InterAct and Employee hereby agree to the following terms and conditions.
TERMS AND CONDITIONS
1. Terms of employment. InterAct hereby employs Employee, and Employee
hereby accepts employment with InterAct on an "at-will" basis. Employee
acknowledges that InterAct neither guarantees nor promises Employee continued
employment for any particular length of time. Nothing contained herein is
intended to provide Employee with any expectation of or right to continued
employment for a particular period of time. The terms of Sections 2, 3, 4 and 5
shall survive the termination of employment under this Agreement regardless of
who causes termination and under what circumstances.
2. InterAct's ownership and authorship of all work and materials. Employee
and InterAct intend that InterAct shall be the owner of all work, and all
tangible and intangible materials and products, in any way produced, developed
or created by Employee as set forth below.
<PAGE>
<PAGE>
A. All "work for hire", as the term is defined in the copyright laws
of the United States, prepared by Employee in the course of his or her
employment with InterAct are expressly intended to be wholly owned, and all
copyrights to be held, by InterAct. To the extent that any such copyrightable
works may not, by operation of law, be works for hire, Employee hereby assigns
to InterAct ownership of all copyright rights in those works. InterAct shall
have the right to obtain and hold in its own name copyrights, registrations and
similar protection which may be available for those works. Employee agrees to
give InterAct or its designees all assistance reasonably required to perfect
those rights.
B. All discoveries, developments, ideas, improvements, innovations,
inventions, processes, programs, systems, techniques or other things, whether or
not patentable, that are made, conceived or reduced to practice by Employee,
while employed by InterAct and for six (6) months thereafter, solely or with
others, whether or not during working hours or on InterAct's premises, and that
(a) relate to InterAct's business or actual or demonstrably anticipated research
or development or a reasonable or contemplated expansion thereof, or (b) result
from any work performed by Employee for InterAct, or (c) are developed on
InterAct's time or using InterAct's equipment, supplies, facilities or trade
secret information or (d) are based up on or related to "trade secrets and other
confidential information of InterAct" (as defined in paragraph 3 below) which
Employee has had or may have access to through his or her employment with
InterAct, shall be the property of, and shall promptly be disclosed by Employee
to, InterAct. Further, Employee agrees that, at any time during or after his or
her employment with InterAct, he or she will, without further compensation but
at InterAct's sole expense, sign all papers and cooperate in all other acts
reasonably required to protect InterAct's rights in all such property, including
without limitation applying for, obtaining and enforcing patents thereon in any
and all countries. In the event that Employee is unable or unavailable or shall
refuse to sign any lawful or necessary document required in order for InterAct
to apply for and obtain a patent or patents with respect to any work performed
by Employee (including applications or renewals, extensions, divisions, or
continuations), Employee hereby irrevocably designates and appoints InterAct and
its duly authorized officers and agents as Employee's agents and
attorneys-in-fact to act for and in Employee's behalf, and in his or her place
and stead, to execute and file any such applications and to do all other
lawfully permitted acts to further the prosecution and issuance of patents with
respect to such new developments with the same legal force and effect as if
executed by Employee.
C. Employee hereby irrevocably relinquishes for the benefit of
InterAct and it assigns any moral rights in any work recognized by applicable
law.
3. Trade secrets and other confidential information of InterAct. At all
times during his or her employment with InterAct and thereafter, Employee
specifically agrees that he or she will not, without InterAct's prior written
permission, in any way disclose, reveal or transfer any trade secrets or
proprietary or confidential information of InterAct or its manufacturers,
retailers and/or any party with whom InterAct contracts to any third party (that
is, to any person or entity outside InterAct). Employee further specifically
agrees that he or she will not in any way use any such trade secrets or
confidential
2
<PAGE>
<PAGE>
information for any purpose except in the course of Employee's work for InterAct
(including for any party with whom InterAct contracts).
For purposes of this Agreement "trade secrets and other confidential
information of InterAct includes information, whether or not recorded in any
medium, and whether or not copyrighted, disclosed to or known by Employee
(including information conceived, developed, discovered or originated in whole
or in part by Employee) by virtue of his or her employment under this Agreement,
not generally known in the Business (as defined in Section 5) (or in other
businesses or industries in which InterAct may become engaged), that gives
InterAct a competitive advantage over others who do not know or have access to
such information. It includes, without limitation, concepts, data, designs,
diagrams, discoveries, documentation, graphics, ideas, inventions, know-how,
negative know-how, models, photographs, procedures, processes, research and
development, specifications, strategies and techniques; manufacturer, retailer
or customer names, lists and other information (including financial information)
related to existing and potential manufacturers, retailers and customers; flow
charts, source and object code; marketing plans, techniques and materials; price
lists and pricing policies; and financial information of InterAct or those
working for InterAct, or of InterAct's manufacturers and retailers.
"Trade secrets and other confidential information of InterAct" does not
include information: already in the public domain through no breach of this
Agreement; in Employee's possession prior to receipt from InterAct, as proven by
written records; rightfully obtained by Employee from a third party in rightful
possession of such information; or, subject to the time limitations contained in
paragraph 2.B., after termination of Employee's employment under this Agreement,
subsequently developed independently by Employee (without any reliance upon
trade secrets or other confidential information of InterAct), as proven by
written records.
Despite the foregoing restrictions, Employee may use and disclose any
information to the extent required by an order of any court or other
governmental authority, but only after InterAct or its manufacturers, retailers
or contractors, as the case may be, have been so notified and have had the
opportunity, if possible, to obtain reasonable protection for this information
in connection with its disclosure.
4. Prohibition Against Unfair Business Practices. Professional research
and development activity may be susceptible to unfair or questionable business
practices. For example, trade secrets and other confidential information can be
misappropriated and valuable documents can be copied and taken for improper
purposes. Industrial espionage is a serious concern for InterAct which depends
on sensitive technology for commercial success.
Employees engaged in research and development can be targets of, or
participants in, unfair business practices because of the special attractiveness
of the advanced technology, computer programs, product development strategies,
and business opportunities they come to know by virtue of their employment.
Employee understands
3
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that it would be unfair for a former employee of InterAct to recruit personnel
directly from the ranks of InterAct's own employees by using connections and
inside information previously acquired from InterAct. InterAct puts great
emphasis on selecting, training, and promoting talented individuals for
positions of significant responsibility. Employee understands that the time,
effort, and capital invested by InterAct in its work force should not be
diverted by someone operating on an inside track. In addition, Employee
understands that it would be unfair for individuals still employed by InterAct
to form and pursue a competitive business while receiving wages and other
benefits from Interact.
During employee's employment with Interact, Employee is required to
refrain from engaging in any action that might be harmful to InterAct and its
business. Employee's responsibility to promote and support InterActs business by
its very nature requires Employee to prevent InterAct from suffering injury or
hardship. The obligation is intentionally broad and general because it is
difficult to anticipate all possible circumstances, and Employee agrees to
resolve all doubts by consulting InterAct on how best to proceed. By way of
example, during Employee's employment with Interact, Employee may not solicit or
recruit any other InterAct employee to form or join another business. Except as
otherwise provided in Section 5 below, Interact cannot prohibit Employee from
terminating Employee's employment and pursuing other kinds of work, but if
Employee should decide to form or join another business Employee is required to
advise InterAct promptly, so that projects in progress and under consideration
are not needlessly disrupted and so that even the possibility that trade secrets
or other confidential information may be compromised can be avoided.
During employee's employment with Interact, if Employee learns or even
suspects that any unfair or questionable business practice may be occurring,
Employee is required to advise InterAct promptly. The obligation is
intentionally broad and general because it is difficult to anticipate all
possible circumstances, and Employee agrees to resolve all doubts by reporting
to InterAct the information that has come to Employee's attention. By way of
example, Employee should report the incident immediately if anyone who is an
employee or contractor of InterAct contacts Employee or any other InterAct
employee with an offer to form or join a new business.
5. Covenant Not to Compete. (a) Employee promises and agrees that, during
the period of his/her employment by InterAct, and for a period of one (1) year
following the termination of his/her employment with InterAct for any reason,
he/she will not (except on behalf or InterAct), directly or indirectly, (i) be
employed by, (ii) represent or render consulting or advisory services to, or
(iii) participate or be connected in the management or control of any business
that is engaged in the business of displaying and/or dispensing through
inter-active terminals (often known as "kiosks") electronic discounts, coupons,
recipes or other promotions (the "Business").
(b) It is the desire and intent of the parties that the provisions of this
Covenant Not to Compete shall be enforced to the fullest extent permitted under
law. Accordingly, if any particular portion of this Covenant Not to Compete
shall be adjudicated to be invalid or
4
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<PAGE>
unenforceable, such adjudication shall apply only with respect to the operation
of that portion in the particular jurisdiction in which such adjudication is
made, and all other portions shall continue in full force and effect. In
addition, if any period of time or any geographic area set forth in this
Covenant Not to Compete is adjudicated to be unreasonably long or unreasonably
broad, then this Agreement shall be enforceable for such period of time or with
respect to such geographic area as the court in question shall find to be
reasonable.
6. Noninterference with personal relations. During Employee's employment
with InterAct and for a period of one (1) year following the termination of
Employee's employment with InterAct for any reason, Employee will not solicit,
entice or persuade any other employees of InterAct to leave the services of
InterAct.
7. Surrender of property upon termination. All property of InterAct,
including without limitation all "trade secrets and other confidential
Information of InterAct" (as defined in Section 3), computer tapes, computer
programs, data, diskettes, graphics of all description, information, materials,
notes, records, reference materials, and other documents or media shall belong
exclusively to Interact, and Employee agrees to turn over all such property in
his or her control to InterAct upon request or upon termination, for whatever
reason, of his or her employment with InterAct.
8. Employment by InterAct as sole occupation. Subject only to specific
exceptions (if any) in this Agreement, Employee agrees to devote his or her full
business time, attention, skill and effort, exclusively to the performance of
the duties that InterAct may assign. Employee may not engage in any business
activities or render any services of a business, commercial or professional
nature, whether or not for compensation, for the benefit of anyone other than
InterAct, unless InterAct has given its advance written consent. Employee
understands that it is the policy of InterAct never to allow its personnel to
work for any competitive enterprise during their employment, including after
hours, on weekends or during vacation time, even if only organizational
assistance or limited consultation is involved.
9. Employees acknowledgement of equitable remedies in event of breach.
Employee specifically acknowledges the unique nature an the value of the trade
secrets and other confidential information of InterAct to which he or she will
have access by virtue of his or her employment with InterAct, and further
acknowledges that InterAct has informed Employee that, because of that unique
nature and value, InterAct may, in the event of the Employee's breach of this
Agreement, in addition to any other remedies and damages available, seek
injunctive and other equitable relief against Employee.
10. Employee warranty of no conflict. Employee warrants that his or her
work for InterAct does and will not in any way conflict with any remaining
obligations he or she may have with any prior employer or contractor. Employee
shall not during the course of his or her employment with InterAct use for the
benefit of Interact any trade secrets or other confidential information relating
to and obtained from any prior employer. Employee
5
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<PAGE>
also agrees to perform all work for InterAct in a manner that avoids even the
appearance of infringement rights of any third party.
11. Related parties. This Agreement shall inure to the benefit of, and be
binding upon, InterAct and its subsidiaries and its affiliates, together with
their successors and assigns, and Employee, together with Employee's heirs,
executors, administrators, personal representatives, successors and assigns.
12. Severability. In the event that any of the provisions of this
Agreement are held invalid or otherwise unenforceable in any respect, it is the
parties' express intent that such invalidity or unenforceability to the maximum
practicable extent shall not affect any other provision, and that this Agreement
shall be construed and enforced as an integrated whole without the invalid or
unenforceable provision. The covenants in this Agreement shall be construed as
covenants independent of one another and as obligations distinct from any other
contract between Employee and InterAct. Any claim that Employee may have against
InterAct shall not constitute a defense of InterAct's enforcement of this
Agreement.
13. Assignment, delegation and subcontracting. This Agreement is for
unique personal services and may not be assigned, delegated or subcontracted by
Employee. InterAct reserves the right to assign or otherwise dispose of its
rights under this Agreement in its sole discretion.
14. Amendment and waiver. This Agreement may not be amended except in a
writing signed by both parties. No waiver of any provision or breach of this
Agreement shall be deemed a waiver of any other provision or any later breach,
and no waiver shall in any event be valid unless contained in a writing signed
by the waiving party.
[REMAINDER OF PAGE INTENTIONALLY BLANK]
6
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<PAGE>
15. Interpretation; Governing Law. This Agreement contains the entire
understanding of the parties with respect to this subject matter and supersedes
all prior agreements between them with respect thereto except for that certain
Offer Letter dated March 14, 1997 and signed by Employee on 3/15/97 and
Employee's letter to Company dated March 15, 1997 and signed by Stephen R.
Leeolou on 3/16/97. The headings in this Agreement are for convenience only and
shall not under any circumstances be used in any way to construe the Agreement.
Wherever possible, the word "or" shall be given both its conjunctive and
disjunctive meanings. This Agreement shall be governed by the laws of the
State of Connecticut.
IN WITNESS WHEREOF, the parties have signed this Agreement effective as of
the date first written above.
INTER*ACT SYSTEMS, EMPLOYEE
INCORPORATED
- ------------------------- -------------------------
Signature Signature
- ------------------------- -------------------------
Typed Name Typed Name
- -------------------------
Title
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<PAGE>
Form 10-K Filing
Inter*Act Systems, Incorporated
Exhibit 21
List of Subsidiaries
Corporate Name State or Country of
-------------- Incorporation
----------------------
Inter*Act Systems, Incorporated North Carolina
Inter*Act International Holdings, Inc. North Carolina
Inter*Act Holding Limited United Kingdom
Inter*Act Systems UK Limited United Kingdom
Network Licensing, Inc. North Carolina
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> YEAR 3-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1997
<PERIOD-START> JAN-01-1997 OCT-01-1997
<PERIOD-END> DEC-31-1997 DEC-31-1997
<CASH> 45,211,000 45,211,000
<SECURITIES> 0 0
<RECEIVABLES> 813,000 813,000
<ALLOWANCES> 30,000 30,000
<INVENTORY> 0 0
<CURRENT-ASSETS> 49,091,000 49,091,000
<PP&E> 0 0
<DEPRECIATION> 0 0
<TOTAL-ASSETS> 81,023,000 81,023,000
<CURRENT-LIABILITIES> 10,613,000 10,613,000
<BONDS> 91,406,000 91,406,000
0 0
0 0
<COMMON> 28,251,000 28,251,000
<OTHER-SE> (76,683,000) (76,683,000)
<TOTAL-LIABILITY-AND-EQUITY> 81,023,000 81,023,000
<SALES> 0 0
<TOTAL-REVENUES> 708,000 218,000
<CGS> 0 0
<TOTAL-COSTS> 36,070,000 13,413,000
<OTHER-EXPENSES> 301,000 199,000
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 18,033,000 4,659,000
<INCOME-PRETAX> (49,804,000) (17,296,000)
<INCOME-TAX> 10,000 10,000
<INCOME-CONTINUING> (49,814,000) (17,306,000)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (49,814,000) (17,306,000)
<EPS-PRIMARY> (6.48) (2.24)
<EPS-DILUTED> (6.48) (2.24)
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