<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999
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
-------------------
INTER*ACT ELECTRONIC MARKETING, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
-------------------
NORTH CAROLINA 56-1817510
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER IDENTIFICATION NO.)
OF INCORPORATION OR ORGANIZATION)
14 WESTPORT AVENUE
NORWALK, CONNECTICUT 06851
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)
(203) 750-0300
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
-------------------
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 preceeding 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.
[x] Yes [ ] No
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date. As of June 30, 1999,
the number of shares outstanding of the registrant's Common Stock, 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.
<PAGE>
INDEX
<TABLE>
<CAPTION>
PAGE
--------
PART I -- FINANCIAL INFORMATION
<S> <C>
Item 1. Financial Statements
Consolidated Balance Sheets -- June 30, 1999 (unaudited) and
December 31, 1998............................................................ 1
Consolidated Statements of Operations for the three-month and six-month periods ended
June 30, 1999 and 1998 (unaudited)......................................... 2
Consolidated Statements of Cash Flows for the six-month periods ended
June 30, 1999 and 1998 (unaudited)......................................... 3
Notes to Consolidated Financial Statements................................... 4
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations................................................................... 7
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings............................................................ 12
Item 2. Changes in Securities and Use of Proceeds.................................... 12
Item 4. Submission of Matters to a Vote of Security Holders.......................... 13
Item 6. Exhibits and Reports on Form 8-K............................................. 14
Signatures............................................................................ 15
</TABLE>
<PAGE>
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INTER*ACT ELECTRONIC MARKETING, INC.
(Formerly, Inter*Act Systems Inc.)
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
---- ----
(UNAUDITED)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 23,971 $ 14,166
Receivables, net 2,239 3,667
Other current assets 3,386 2,964
----------- -----------
Total current assets 29,596 20,797
Property, plant and equipment, net 26,982 28,102
Bond issuance costs, net 2,442 2,776
Patents, licenses and trademarks, net 8,291 8,771
Other noncurrent assets 135 45
----------- -----------
Total assets $ 67,446 $ 60,491
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 1,157 $ 3,075
Accrued expenses 4,826 3,016
Current portion of long-term debt 5,656 5,554
Deferred revenue 848 2,146
----------- -----------
Total current liabilities 12,487 13,791
Long-term debt, net of discount and current portion 121,648 111,819
----------- -----------
Total liabilities 134,135 125,610
----------- -----------
Common stock purchase warrants 27,436 27,436
----------- -----------
Commitments and contingencies (note 8)
Stockholders' equity (deficit):
10% Series A Mandatorily Convertible Preferred stock, no par value,
authorized 5,000,000 shares; 456,839 and 177,878 shares issued and
outstanding at June 30, 1999 and December 31, 1998, respectively 46,539 18,142
Common stock, no par value, authorized 50,000,000 shares; 7,728,555 shares issued
and outstanding at June 30, 1999 and December 31, 1998 28,251 28,251
Additional paid-in capital 768 768
Deferred compensation (339) (416)
Accumulated other comprehensive income (loss) (13) (19)
Accumulated deficit (169,331) (139,281)
----------- -----------
Total stockholders' equity (deficit) (94,125) (92,555)
----------- -----------
Total liabilities and stockholders' equity (deficit) $ 67,446 $ 60,491
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
1
<PAGE>
INTER*ACT ELECTRONIC MARKETING, INC.
(Formerly, Inter*Act Systems Inc.)
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
--------------------------------------- ------------------------------------
June 30, June 30, June 30, June 30,
1999 1998 1999 1998
(UNAUDITED)
<S> <C> <C> <C> <C>
Gross sales $ 1,126 $ 1,301 $ 5,179 $ 1,996
Less: Retailer reimbursements (452) (538) (1,300) (950)
---------- ---------- ---------- ----------
Net sales 674 763 3,879 1,046
---------- ---------- ---------- ----------
Operating expenses:
Direct costs 2,501 2,093 4,888 4,375
Selling, general and administrative expenses 7,269 7,302 13,824 16,870
Depreciation and amortization of intangible assets 2,239 1,796 4,399 3,271
---------- ---------- ---------- ----------
Total operating expenses 12,009 11,191 23,111 24,516
---------- ---------- ---------- ----------
Operating loss (11,335) (10,428) (19,232) (23,470)
---------- ---------- ---------- ----------
Other income (expense):
Interest income 43 323 118 833
Interest expense (5,910) (5,194) (11,463) (10,027)
---------- ---------- ---------- ----------
Total other expense (5,867) (4,871) (11,345) (9,194)
---------- ---------- ---------- ----------
Loss before extraordinary item and income taxes (17,202) (15,299) (30,577) (32,664)
Income taxes -- -- -- --
---------- ---------- ---------- ----------
Net loss before extraordinary item (17,202) (15,299) (30,577) (32,664)
Extraordinary item - gain on extinguishment of debt -- -- 1,728 --
---------- ---------- ---------- ----------
Net loss (17,202) (15,299) (28,849) (32,664)
Preferred stock dividends accrued (742) -- (1,201) --
---------- ---------- ---------- ----------
Net loss attributable to common stockholders $ (17,944) $ (15,299) $ (30,050) $ (32,664)
========= ========= ========== ==========
Per share information:
Net loss per common share before extraordinary item:
Basic and Diluted $ (2.32) $ (1.98) $ (4.11) $ (4.23)
Extraordinary item - gain on extinguishment of debt -- -- .22 --
---------- ---------- ---------- ----------
Net loss per common share:
Basic and Diluted $ (2.32) $ (1.98) $ (3.89) $ (4.23)
========= ========== ========== ==========
Common shares used in computing per share
amounts:
Basic and Diluted 7,729 7,729 7,729 7,729
========= ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
2
<PAGE>
INTER*ACT ELECTRONIC MARKETING, INC.
(Formerly, Inter*Act Systems Inc.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, JUNE 30,
1999 1998
---- ----
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (28,849) $ (32,664)
Items not affecting cash and cash equivalents:
Depreciation and amortization of fixed and intangible assets 4,399 3,477
Loss on disposal of assets -- 23
Non-cash interest on discounted bonds 11,264 9,989
Extraordinary gain on extinguishment of debt (1,728) --
Other items, net -- 75
Changes in working capital:
Receivables, net 1,428 (1,184)
Accounts payable and accrued expenses 134 (1,655)
Other current assets (381) (196)
Deferred revenues (1,300) 877
--------- ----------
Net cash used in operating activities. (15,033) (21,258)
--------- ----------
Cash flows from investing activities:
Expenditures for property, plant and equipment (2,149) (6,543)
Proceeds from disposal of assets 2 --
Patent acquisition costs -- (2,090)
--------- ----------
Net cash used in investing activities. (2,147) (8,633)
--------- ----------
Cash flows from financing activities:
Long-term debt repayments (23) --
Long-term debt retirements (194) --
Proceeds from preferred stock issuance 27,196 --
--------- ----------
Net cash provided by financing activities 26,979 --
--------- ----------
Foreign exchange effects on cash and cash equivalents 6 (9)
--------- ----------
Net increase (decrease) in cash and cash equivalents 9,805 (29,900)
Cash and cash equivalents at beginning of period 14,166 45,211
--------- ----------
Cash and cash equivalents at end of period $ 23,971 $ 15,311
========= ==========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 188 $ 20
========= =========
Supplemental disclosures of non-cash investing and financing activities:
Issuance of note payable for patent acquisition $ -- $ 5,679
========= ==========
Dividends payable in preferred stock $ 1,201 $ --
========= ==========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
3
<PAGE>
INTER*ACT ELECTRONIC MARKETING, INC.
(Formerly, Inter*Act Systems Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND JUNE 30, 1998
1. BUSINESS DESCRIPTION
Inter*Act Electronic Marketing, Inc. ("Inter*Act" or the "Company"),
which changed its name from Inter*Act Systems, Incorporated effective July 1,
1999, operates one of the nation's largest electronic marketing networks linked
to supermarket retailers' loyalty card databases that can reach shoppers both
in-store and on the Internet. The Company's patented technologies enable
consumer products manufacturers ("Manufacturers") and supermarket retailers
("Retailers") to use historical purchase behavior data to deliver
shopper-specific purchase incentives and messages to customers moments before
shopping begins. The Company's proprietary system, called the Inter*Act Loyalty
Network'sm' ("ILN"), comprises over 2,700 server-based Smart Terminals'TM'
located inside the front entrance of more than 20 retail chains in the U.S. and
Europe, as well as a recently launched Company-owned Internet web site called
"Shopper Perks'sm'". The Smart Terminals'TM' are linked directly to each store's
point-of-sale scanning system via Company-owned in-store servers. This in-store
network allows Shopper Perks'sm' to offer consumers, in selected markets at this
time, the only commercial scale in-home/in-store electronic platform for shopper
incentives available the same day and directly at the cash register. No paper is
required at any time. 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.
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 ability to attract and retain competent management employees (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.
From inception to June 30, 1999, the Company has not had significant
revenues relative to its expenses, has incurred recurring losses and has
experienced negative operating cash flow, and there is no assurance that the
product the Company has developed will achieve widespread success in the
marketplace. In addition to increasing its revenues, the Company must raise
additional equity or debt capital to fund its ongoing expansion plans. There is
no assurance that such additional financing can be obtained. In the event that
such additional 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 2000.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PREPARATION
The accompanying interim financial statements as of June 30, 1999 and
for the three- and six-month periods ended June 30, 1999 and June 30, 1998 are
unaudited; however, in the opinion of management, all adjustments, which consist
of normal recurring accruals, necessary for a fair presentation of the financial
position and results of operations from such interim periods, are included. The
results of operations for the interim periods presented are not necessarily
indicative of results to be expected for an entire year. For further
information, refer to the consolidated financial statements and notes thereto
included in the Company's Annual Report on Form 10-K for the year ended December
31, 1998.
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
In June 1998 the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities." The
Statement establishes accounting and reporting standards requiring that every
derivative instrument (including certain derivative instruments embedded in
other contracts) be recorded in the balance sheet as either an asset or
liability measured at its fair value. The statement requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. Special accounting for qualifying hedges
allows a derivative's gains and losses to offset related results on the hedged
item in the income statement, and requires that a company must formally
document, designate, and assess the effectiveness of transactions that receive
hedge accounting.
4
<PAGE>
Pursuant to SFAS No. 137, which was issued in June 1999, "Accounting
for Derivative Instruments and Hedging Activities -- Deferral of the Effective
Date of FASB Statement No. 133 - An Amendment of FASB Statement No. 133", SFAS
No. 133 will be effective for fiscal years beginning after June 15, 2000. A
company may also implement the Statement as of the beginning of any fiscal
quarter after issuance (that is, fiscal quarters beginning June 16, 1999 and
thereafter). SFAS No. 133 cannot be applied retroactively. SFAS No. 133 must be
applied to (a) derivative instruments and (b) certain derivative instruments
imbedded in hybrid contracts that were issued, acquired, or substantively
modified after either December 31, 1997 or 1998, at the company's election.
While the Company operates in international markets, it does so
presently without the use of derivative instruments and therefore SFAS No. 133
is not currently applicable.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the
current year presentation.
3. NET INCOME (LOSS) PER SHARE
The Company accounts for earnings per share pursuant to SFAS No. 128,
"Earnings Per Share." 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. In all periods presented, the impact of
convertible preferred stock, stock options and warrants was anti-dilutive, and
basic and diluted EPS are the same.
4. COMPREHENSIVE INCOME
The Company has adopted SFAS No. 130, "Reporting Comprehensive Income,"
which requires companies to report all changes in equity, except those resulting
from investments by owners and distributions to owners, for the period in which
they are recognized. Comprehensive income is the total of net income and all
other nonowner changes in equity (or other comprehensive income) such as
unrealized gains/losses on securities classified as available-for-sale, foreign
currency translation adjustments and minimum pension liability adjustments.
Comprehensive and other comprehensive income must be reported on the face of
annual financial statements. The Company has chosen to disclose comprehensive
income (loss), which for the 1999 and 1998 periods includes its net loss and
foreign currency translation adjustments, in its consolidated statements of
stockholders' equity.
Comprehensive income and its components are as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
1999 1998
--------- ---------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
Net Loss................................................ $ (28,849) $ (32,664)
---------- ----------
Other comprehensive income (loss)
Translation adjustments........................ 6 (9)
---------- ----------
Other comprehensive income (loss).............. 6 (9)
---------- ----------
Comprehensive loss...................................... $ (28,843) $ (32,673)
========== ==========
</TABLE>
The components of accumulated other comprehensive income included in
the accompanying consolidated balance sheets consist of cumulative translation
adjustments as of the end of the periods.
5
<PAGE>
5. SEGMENT REPORTING
Effective December 31, 1998, the Company adopted SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information." Pursuant
to this pronouncement, reportable operating segments are determined based on the
Company's management approach. The management approach, as defined by SFAS No.
131, is based on the way that the chief operating decision-maker organizes the
segments within an enterprise for making operating decisions and assessing
performance. The Company's results of operations are reviewed by the chief
operating decision-maker on a consolidated basis and the Company operates in
only one segment.
6. REPURCHASE OF NOTES
During March 1999, the Company repurchased an aggregate of $2.4 million
(face value) of its outstanding 14% Senior Discount Notes due 2003 (the "Notes")
with a net value (of unamortized discounts and related debt issuance costs) of
$1.9 million at a cost of $194,000. The Company realized a net extraordinary
gain on the repurchase of $1.7 million.
7. AMENDMENT OF NOTE
In May 1998 the Company issued, in connection with the acquisition of
certain intellectual property, a note payable. This note, which was amended in
June 1999, bears interest currently at 10.0% per year on the $5.7 million
principal balance and is payable on June 1, 2000. If, prior to the maturity of
this note, the Company completes a qualifying initial public offering of Common
Stock or consummates a change of control, the then-outstanding principal balance
and accrued interest would be convertible into shares of the Company's Common
Stock at a conversion price of $8.50 per share, which management believes
represents the Fair Value of the Company's Common Stock at the time of the June
1999 Amendment. This note is reflected as a current liability in the Company's
consolidated balance sheet as of June 30, 1999.
8. LEGAL PROCEEDINGS
In February 1996, the Company filed suit against Catalina Marketing
Corporation ("Catalina Marketing") alleging that Catalina Marketing has
infringed United States Patent No. 4,554,446 (the "'446 Patent") under which the
Company is licensee. The Company alleges that Catalina Marketing is infringing
this 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 Marketing to stop further infringement of
the patent, treble damages and the costs and expenses incurred in connection
with the suit. The complaint was amended to add additional detail, and Catalina
Marketing 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 Marketing asserted a
counterclaim alleging that the Company is infringing a newly issued Catalina
Marketing Patent U.S. Patent No. 5,612,868 (the "'868 Patent"). The Company
answered denying the allegations, raising affirmative defenses and seeking
declaratory judgment of non-infringement, invalidity and unenforceability of the
'868 Patent. Discovery on the claims and counterclaims will proceed and various
motions are pending before the United States District Court in the District of
Connecticut. As with any litigation, the ultimate outcome of the suit cannot be
predicted. However, the Company intends to pursue the action vigorously.
In January 1998, Catalina Marketing International, Inc. ("Catalina
International", a subsidiary of Catalina Marketing) 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.
Catalina International seeks injunctive and declaratory relief as well as
unspecified money damages against all defendants. The United States District
Court in the District of Connecticut granted the Company's motion for a more
definite statement and denied Catalina International's motion for a preliminary
injunction as moot. The Company intends to defend against Catalina
International's claims vigorously, and to pursue available remedies against
Catalina International. This action was recently consolidated with the
litigation involving the '446 Patent and the '868 Patent for purposes of
discovery and trial.
On May 27, 1998, the Company filed a new suit against Catalina
Marketing alleging that Catalina Marketing has infringed United States Patents
Nos. 5,201,010; 5,338,165; 5,430,644; 5,448,471; 5,592,560; 5,621,812;
5,659,469; and 5,638,457 (collectively, the "Deaton Patents"), which the Company
acquired in 1998. The Company alleges that Catalina Marketing is infringing the
Deaton Patents by making, using, selling and offering for sale devices and
systems that incorporate and employ inventions covered by the Deaton Patents.
The Company is seeking an injunction against Catalina Marketing to stop further
infringement of these patents, treble damages and the costs and expenses
incurred in connection with the suit. Catalina Marketing answered denying the
allegations, raising certain affirmative defenses, and seeking declaratory
judgment of non-infringement, invalidity or unenforceability of the Deaton
Patents. This action has been brought in the United States District Court in the
District of Connecticut. Catalina Marketing has also challenged some of the
claims of six of the Deaton Patents by provoking interference proceedings in the
U.S. Patent and Trademark Office. The Company intends to vigorously protect its
rights under the Deaton Patents both in the interference proceedings and in the
new lawsuit.
6
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis is qualified by reference to and
should be read in conjunction with the unaudited Consolidated Financial
Statements of the Company and the Notes thereto and other financial information
included elsewhere in this report. Operating results for the six months ended
June 30, 1999 are not necessarily indicative of the results that may be expected
for the year ending December 31, 1999 or any other period.
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 product manufacturers ("Manufacturers") and
supermarket retailers ("Retailers") to offer shopper-specific purchase
incentives and messages to customers moments before shopping begins. The Company
has also started offering consumers, in selected markets at this time, the only
in-home/in-store electronic platform for shopper incentives available the same
day and directly at the cash register. The Company's proprietary system, called
the Inter*Act Loyalty Network'sm' ("ILN"), utilizes patented, multimedia
touch-screen terminals, or Smart Terminals'TM' , located in the entrance area of
retail grocery stores, in addition to a Company-owned Internet web site called
"Shopper Perks'sm'." The in-store 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 in-store technology, networked to
the Company's headquarters, also enables the same day in-store electronic
fulfillment of Internet selected promotions. 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.
During 1996, 1997 and most of 1998, the Company recognized revenue as
electronic discounts were redeemed at store cash registers. Manufacturers paid a
fee to the Company for each redemption. The fee was composed of (i) a retailer
processing fee, (ii) a redemption fee and (iii) the face value of the coupon.
The Company, in turn, passed through both the retailer processing fee, which was
included in direct operating expenses, and the face value of the coupon to the
Retailer, while retaining the redemption fee. The Company recorded as net sales
the redemption fee and the retailer processing fee paid by the Manufacturers.
Beginning in 1998, the Company also had arrangements with Manufacturers
whereby the Company received a fixed payment over a fixed period. In these
cases, the Company recognizes revenue on a ratable basis over the fixed period
during which it is providing service or exclusivity to such Manufacturers, as
well as the retailer processing fee paid by the Manufacturers. The Company is
principally operating under this revenue model in 1999 and expects to do so in
future periods.
Certain Manufacturers pay the Company in advance for a portion of
anticipated redemptions or a portion of the fixed contract amount, as applicable
and these amounts are recorded as deferred revenue until earned through
redemption activity or, for fixed fee arrangements, through the passage of time,
during the contract period.
Direct costs of the Company consist of expenditures for direct store
support, paper used in the terminals 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. 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 not generated significant operating revenue
relative to its expenses, has incurred significant losses and has experienced
substantial negative cash flow from operations. The Company's prospects must be
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 $94.1 million as of June 30, 1999 and has
incurred cumulative losses of $169.3 million through June 30, 1999. 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 the remainder of 1999 and may operate
at a loss for the foreseeable future. There can be no assurance that the Company
will achieve profitability or, if achieved, sustain such profitability.
7
<PAGE>
SIX MONTHS ENDED JUNE 30, 1999 COMPARED WITH SIX MONTHS ENDED JUNE 30, 1998
The Company had an installed base in the U.S. of 2,545 terminals in
1,721 stores as of June 30, 1999 as compared to 2,539 terminals in 1,680 stores
as of June 30, 1998. During the first half of 1999, the Company entered into
contracts to install the ILN in Eagle Food Centers, a chain located principally
in Illinois, Cub Foods, a chain located principally in Georgia, and SuperValu
(New England).
Net sales during the six-month period ended June 30, 1999 increased to
$3.9 million from $1.0 million in the 1998 period, primarily as a result of the
larger installed base of ILN terminals in the U.S. in place during the entire
1999 period and the Company's operations in the United Kingdom.
Operating loss for the six-month period ended June 30, 1999 was $19.2
million versus $23.5 million in the 1998 comparable period. The improvement in
operating results for the 1999 six months was due to the increase in revenue of
$3.2 million and lower selling, general and administrative ("S,G&A") costs
partially offset by increased depreciation and a $1.5 million provision for
severance and related costs related to the planned relocation of the corporate
offices to North Carolina in the first half of 2000, which was communicated
formally in the second quarter of 1999. Contributing to the favorable impact on
S,G&A expense was a $3.3 million reduction in non-paid company-sponsored
promotions decreased. Depreciation and telecommunication charges increased by
$1.1 million and $210,000 respectively, reflecting the greater number of
terminals in service for the full six-month period in 1999 versus the comparable
period in 1998.
Net loss for the six-month period ended June 30, 1999 decreased by
approximately $3.9 million from $32.7 million to $28.8 million primarily due to
a reduction of $4.3 million in operating loss, and an extraordinary gain in the
first quarter of 1999 on the repurchase of debt of $1.7 million partially offset
by higher interest expense of $1.4 million and lower interest income of
$715,000. Substantially all of the interest expense of $11.5 million represents
non-cash interest expense on the issuance of $142 million of 14% Senior Discount
Notes on August 2, 1996 (See "-- Liquidity and Capital Resources"). Interest
income of $118,000 for the first half of 1999 reflects a decreased average cash
balance during the first half of 1999 as compared with $833,000 in the
comparable 1998 period versus the comparable period in 1998. Cash and cash
equivalents at June 30, 1999 were $24.0 million as compared to $15.3 million at
June 30, 1998.
THREE MONTHS ENDED JUNE 30, 1999 COMPARED WITH THREE MONTHS ENDED JUNE 30, 1998
Net sales during the three-month period ended June 30, 1999 decreased
to $674,000 from $763,000 in the 1998 period, primarily as a result of the
delay in the commercial rollout of the ILN in Sainsbury's, a major European
retailer. During the delay, the Company elected to defer further invoicing on
its revenue backlog for Sainsbury's-related promotion. The Sainsbury's rollout
has recently resumed. The decrease in revenue was also a result of the Company's
transition in U.S. sales management that took place during the end of 1998 and
early 1999, which resulted in lower sales build during the period.
Operating loss for the three-month period ended June 30, 1999 was $11.3
million versus $10.4 million in the 1998 comparable period. The increase in
operating loss for the quarter was primarily due to a $1.5 million provision for
severance and related costs related to the above-mentioned planned headquarter
relocation partially reduced by savings of $1.0 million in non-paid and special
promotions for the period.
Net loss for the three-month period ended June 30, 1999 increased by
approximately $1.9 million from $15.3 million to $17.2 million primarily due to
the higher operating loss of $.9 million and increased interest expense of
$716,000 coupled with a decrease in interest income of $280,000.
LIQUIDITY AND CAPITAL RESOURCES
For the six months ended June 30, 1999 and the six-month period ended
June 30, 1998, respectively, cash used in operating activities was $15.0 million
and $21.3 million, respectively. From inception to June 30, 1999, the Company
has generated minimal revenue relative to its expenses 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 equity and debt securities.
From its inception to June 30, 1999, the Company's shareholders have
contributed approximately $76.3 million of equity to the Company through
private offerings of common stock (the "Common Stock"), the conversion of
approximately $2.0 million in stockholder debt to Common Stock and a
private offering of the Company's 10% Series A Mandatorily Convertible Preferred
Stock (the "Preferred Stock").
8
<PAGE>
The private offering of Preferred Stock began in July 1998 when the
Board of Directors authorized the sale of up to $40 million of Preferred Stock,
first to the Company's shareholders and then to other investors. The Preferred
Stock originally offered was convertible into Common Stock at a conversion rate
of $10.00 per share of Common Stock. As of December 31, 1998, the Company had
issued and sold 177,878 shares of Preferred Stock for gross proceeds of
approximately $17.8 million. In March 1999, the Board of Directors and
shareholders of the Company approved certain changes to the Preferred Stock and
the Board increased the aggregate offering of Preferred Stock to $70 million.
Such changes consisted of (i) a reduction in the conversion price from $10.00 to
$8.50 per share of Common Stock into which each share of Preferred Stock is
convertible, (ii) an increase in the number of votes per share of Preferred
Stock from 10 to the number of shares of Common Stock into which it is
convertible (initially 11.7647), (iii) accrual of dividends on the Preferred
Stock semi-annually, as opposed to quarterly, to be paid only in shares of
Preferred Stock and (iv) the addition of anti-dilution provisions. Such changes
are applicable to all shares of Preferred Stock issued prior to the effective
date of the changes and all additional shares Preferred Stock to be issued in
the private offering. The private offering was concluded on August 10, 1999 with
an aggregate of 488,868 shares of Preferred Stock issued, representing net
proceeds of $48.2 million. The Company owes commission on these sales, which is
not to exceed $700,000.
In May 1998 the Company issued, in connection with the acquisition of
certain intellectual property, a note payable. This note, which was amended in
June 1999, bears interest currently at 10.0% per year on the $5.7 million
principal balance and is payable on June 1, 2000. If, prior to the maturity of
this note, the Company completes a qualifying initial public offering of Common
Stock or consummates a change of control, the then-outstanding principal balance
and accrued interest would be convertible into shares of the Company's Common
Stock at a conversion price of $8.50 per share, which management believes
represents the Fair Value of the Company's Common Stock at the time of the June
1999 Amendment. This note is reflected as a current liability in the Company's
consolidated balance sheet as of June 30, 1999.
In 1996, the Company consummated a private offering of debt securities
(the "Private Placement") 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
Warrant Purchase Agreement) had not been completed and, as a result, 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. In January 1997, the Company consummated an exchange offer
whereby the holders of the Notes issued in the Private Placement exchanged such
Notes for identical new Notes that were registered under the Securities Act of
1933, as amended, and that do not bear legends restricting the transfer thereof.
An interest payment of $9.7 million on the Notes is due and payable in February
2000.
In March 1999, the Company repurchased Notes with an aggregate face
value of approximately $2.4 million, for an aggregate of $194,000 in cash. The
Warrants originally issued as part of the offering of the Notes continue to be
outstanding after the repurchase of the Notes. This repurchase of Notes resulted
in an extraordinary gain on extinguishment of debt of $1.7 million.
At June 30, 1999, the Company had working capital of $17.1 million,
compared to working capital of $7.0 million at December 31, 1998. Total cash and
cash equivalents at June 30, 1999 and December 31, 1998 was $24.0 million and
$14.2 million, respectively. The Company's current level of indebtedness,
amounting to approximately $127.3 million, represents long-term debt resulting
from the Private Placement and from the purchase of certain intellectual
property.
In the period ended June 30, 1999, cash used in investing activities
was $2.1 million, primarily reflecting disbursements for net capital
expenditures of $2.1 million. Such net capital expenditures included ILN
equipment and components, fixtures, furniture and equipment for office expansion
in Europe, and other equipment. The Company estimates its 1999 capital
expenditures will be approximately $16.0 million, to be used primarily for ILN
equipment.
Cash provided by financing activities during the period ended June 30,
1999 was $27 million resulting primarily from the Preferred Stock issuance. No
cash was provided by financing activities during the period ended June 30, 1998.
The Company will require additional equity or debt financing to fund
capital expenditures, working capital requirements and operating losses to be
incurred in connection with the increased commercialization of its ILN. The
Company has entered into an agreement with a leasing company to lease up to
$3.0 million of terminals and related equipment in the U.S., with a right of
first refusal on up to $10.0 million in additional lease financing. The Company
is working with its leasing source and other third parties to secure lease
financing for the purchase of ILN equipment in Europe. 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 at least into January 2000.
9
<PAGE>
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 growth in
the network and Manufacturer promotions 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 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 either 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.
YEAR 2000 COMPLIANCE
Many currently installed computer systems and software programs may be
coded to accept only two-digit entries in their respective date code fields and
cannot distinguish 21st century dates from 20th century dates. As a result, many
software and computer systems may need to be upgraded or replaced to distinguish
such dates and properly perform date manipulations in accordance with such
systems' intended uses (i.e., "Year 2000 compliant"). Since December 1997, the
Company has been surveying and assessing its known business-critical,
date-sensitive systems for Year 2000 compliance. The Company has also begun
investigating the Year 2000 compliance of all its business-critical service
vendors. In assessing its Year 2000 compliance, the Company is examining its
information technology infrastructure. The Company's Year 2000 compliance
project has included an examination, assessment and remediation of its
interactive terminal network, which the Company considers integral to its
information technology infrastructure. In addition, the Company is assessing the
Year 2000 compliance of certain of its business-critical, non-information
technology systems, such security systems and other services for its central and
satellite. The survey and assessment phase of the Company's Year 2000 compliance
project is substantially complete with respect to the Company's internal
systems.
In July 1998, the Company completed its source code review of all
internally developed software. The Company has corrected all problems found and
has incorporated the necessary changes into the most recent software release,
deployed in the first quarter of 1999. The Company also began testing all of its
production systems developed in-house in July 1998. The tests conducted by the
Company exercised all components of such production systems, including in-house
software, third-party software, and client software. The Company's tests of its
production systems, completed in the first quarter of 1999, identified
relatively few problems that had not already been identified by the source code
review. All problems found during testing were corrected through software
maintenance procedures. With the Company's Year 2000 compliance testing
complete, the Company has initiated an on-going compliance testing program so
that any system changes in internally developed software that the Company may
implement in the future do not introduce any new non-compliance issues.
The Company has completed its assessment of all central office and
in-store computer equipment. In doing so, the Company has identified the systems
that will require upgrades to become Year 2000 compliant. Approximately 600 out
of the Company's approximately 4500 in-store computer systems were not Year 2000
compliant. All non-compliant systems originated from a single computer vendor.
That vendor has identified two software patches that it claims will effectively
circumvent the non-compliance problems, one patch for the Company's interactive
terminal systems and one for its server systems. The Company has tested and
deployed the patch required for the Company's interactive terminal systems. The
vendor has indicated that the patch needed for the store server systems will be
available in the third quarter of 1999. After the Company has successfully
completed testing of the server patch, the Company intends to implement the
patch at all its affected locations as soon as practicable thereafter.
The Company has identified 107 of its service vendors as critical to
the Company's business. The Company has contacted all of these business-critical
vendors to determine their status with respect to Year 2000 compliance. To date,
the Company has received responses from approximately 30 of these vendors. All
vendors who responded indicated that they were not yet fully Year 2000 compliant
but were executing a plan to become so. Failure of third-party equipment,
software or content to operate properly with respect to the Year 2000 issue
could require the Company to incur unanticipated expenses to remedy problems,
which could have a material adverse effect on the Company's business, operating
results and financial condition. The Company cannot guarantee that the systems
of its service vendors or other companies on which it relies will be Year 2000
compliant.
10
<PAGE>
The Company estimates that the cost of becoming Year 2000 compliant
will be approximately $200,000. The Company expects to expense any costs
relating to remedying Year 2000 problems as such costs are incurred. To date,
the Company has spent approximately $155,000 on such problems. Of these
expenses, approximately $95,000 were related to reprogramming or replacing
software; approximately $45,000 were related to replacing or upgrading of
hardware; and approximately $60,000 were project management and administrative
expenses. All of those costs have been funded through the Company's operating
cash flows.
Although the assessment is still underway, management currently
believes that all business-critical internally developed systems will be
compliant by the year 2000 and that the hardware and software that make up the
Company's information technology infrastructure is substantially Year 2000
compliant, However, there can be no assurance that the systems of other
companies on which the Company relies also will be converted on time or that any
such failure to convert by another company would not have an adverse effect on
the Company's operations. Breakdowns in the service infrastructure that supports
the Company's network could have an impact on the Company's operations,
including the loss of communication links with certain stores, loss of electric
power to the Company's central office or to isolated store systems, inability to
process transactions because of failure in the Company's retail clients' point
of sales systems, and an inability to execute purchases for new equipment, or
engage in similar business activities.
The Company is in the process of finalizing a contingency plan for
possible Year 2000 issues. Where it has identified a need the Company is
establishing contingency plans based on its actual testing experience with its
vendor base and its on-going assessment of the risks posed by the non-compliance
of third party vendors and others. The Company has contingency plans in place
for most critical vendors, the exception being power companies.
Because resolving Year 2000 issues is a worldwide phenomenon that will
likely absorb a substantial portion of information technology budgets and
attention in the near term, the impact of the year 2000 on the Company's future
revenue is difficult to discern but is a risk to be considered in evaluating
future growth of the Company.
CAUTIONARY STATEMENT FOR PURPOSE OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995
The statements contained in this Quarterly Report on Form 10-Q 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 intensely competitive nature of the consumer
product and promotional industry, (vii) risks that the Company's rights related
to patents, proprietary information and trademarks may not adequately protect
its business, (viii) the Company's ability to attract and retain competent
management employees and (ix) the risks associated with unforeseen technological
issues connected with the Company's own Year 2000 compliance project and the
compliance efforts of third parties on whom the Company relies. . See Part II,
Item 7, "Management's Discussion and Analysis of Financial Condition and Results
of Operations -- Risk Factors" of the Company's Annual Report on Form 10-K for
the year ended December 31, 1998 for a more specific description of these risks.
The Company's discussion of its Year 2000 compliance project under the heading
"Year 2000 Compliance" also contains forward-looking statements that are subject
to risks and uncertainties that could cause the actual results to differ from
those projected. These include the risks associated with unforeseen
technological issues connected with the Company's own Year 2000 compliance
project and the compliance efforts of third parties on whom the Company relies.
11
<PAGE>
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is involved in litigation with Catalina Marketing
Corporation and its subsidiary, Catalina Marketing International, Inc.,
involving alleged patent infringement. See Note 3 "Legal Proceedings" of Notes
to Consolidated Financial Statements in Item I of Part I of this Quarterly
Report on Form 10-Q, which is incorporated herein by reference.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
In 1998, the Board of Directors of Company established a series of
preferred stock of the Company -- the 10% Series A Mandatorily Convertible
Preferred Stock (the "Preferred Stock") -- and approved the sale of up to $40
million of Preferred Stock in a private offering in reliance on exemptions from
registration of such shares contained in Regulation D of the Securities and
Exchange Commission promulgated under the Securities Act of 1933, as amended
(the "1933 Act"), because the offers and sales of such shares were limited to
the Company's existing shareholders and others who are "Accredited Investors"
(as defined in Regulation D) and up to 35 of the Company's existing shareholders
who are "qualified investors" (as defined in Regulation D). As of December 31,
1998, the Company had sold and issued 177,878 shares of Preferred Stock at a
purchase price of $100.00 per share resulting in approximately $17.8 million in
gross proceeds, $100,000 of which was received in the form of satisfaction of
accounts payable and the balance of which was received in cash. The proceeds of
the offering were and continue to be used to fund capital expenditures, working
capital requirements and operating losses incurred in connection with the
ongoing roll-out of the Company's ILN during 1999 and for general corporate
purposes.
In March 1999, the Board of Directors and shareholders of the Company
approved certain changes to the terms of the Preferred Stock and the Board of
Directors increased the aggregate number of shares of the Preferred Stock
offered to 700,000 at a price of $100.00 per share for an aggregate offering
price of $70 million. See Item 2, "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources" in Part I of this Quarterly Report on Form 10-Q. The changes apply to
all shares of Preferred Stock previously issued and to be issued pursuant to the
private offering. During the second quarter of 1999, the Company issued and sold
an additional 183,311 shares of Preferred Stock at a price of $100 per share
which, will result in gross cash proceeds to the Company of approximately $18.3
million.
Each share of Preferred Stock is automatically convertible into a
number of shares of the Company's common stock (the "Common Stock") equal to the
"Liquidation Preference" ($100.00 plus accrued and unpaid dividends) on the date
of conversion divided by the Conversion Price ($8.50, subject to adjustment in
certain events) upon (i) the closing of a Qualified Public Offering (defined
below), (ii) the closing of any Transaction (defined below) in which each holder
of shares of Preferred Stock is entitled to receive an amount of cash or
marketable securities having a current market value at least equal to the
Liquidation Preference of such shares of Preferred Stock (a "Qualified
Transaction") or (iii) the vote of not less than 75% of the outstanding shares
of Preferred Stock. "Qualified Public Offering" means a firm commitment public
offering of the Common Stock pursuant to a registration statement declared
effective under the 1933 Act, underwritten by a securities firm of nationally
recognized standing with an aggregate offering price to the public of not less
than $30 million and a price per share not less than the Conversion Price.
"Transaction" means any transaction (including, without limitation, a merger,
consolidation, share exchange, sale, lease or other disposition of all or
substantially all of the corporation's assets) in connection with which the
previously outstanding Common Stock shall be changed into or exchanged for
different securities of the corporation or capital stock or other securities of
another corporation or interests in a noncorporate entity or other property
(including cash) or any combination of the foregoing. At the option of the
holder, each share of Preferred Stock is also convertible at any time into a
number of shares of Common Stock equal to the Liquidation Preference on the date
of conversion divided by the Conversion Price.
12
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The annual meeting of the shareholders of the Company was held on June 29,
1999.
(b) The name of each director elected at the annual meeting is set forth in
subparagraph (c) below. The name of each other director whose term of office as
a director continued after the annual meeting is as follows: William P. Emerson;
Stephen R. Leeolou; Richard P. Ludington; L. Richardson Preyer, Jr.; Stuart S.
Richardson; and Robert A. Silverberg.
(c) At the annual meeting of shareholders, the shareholders voted (1) on the
election of three Class II Directors to hold office until the 2002 Annual
Meeting of Shareholders and one Class I Director to hold office until the 2001
Annual Meeting of Shareholders; (2) to amend the Articles of Incorporation to
change the name of the Company to "Inter*Act Electronic Marketing, Inc.," (3)
to amend the Articles of Incorporation to increase the authorized common stock
of the Company from 20,000,000 shares to 50,000,000 shares, and (4) to amend the
Company's 1997 Long-Term Incentive Plan to increase to 1,470,000 shares the
number of shares reserved for issuance thereunder.
The proposals voted on and the results of the voting were as follows:
1. Election of Class II Directors for a three-year term
<TABLE>
<CAPTION>
Votes Abstentions and
Votes For Withheld Broker Nonvotes
<S> <C> <C> <C>
Haynes G. Griffin 9,055,442 10,000 0
Robert M. DeMichele 9,055,442 10,000 0
Brian A. Rich 9,055,442 10,000 0
</TABLE>
Election of Class I Director for a two-year term
<TABLE>
<CAPTION>
Votes Abstentions and
Votes For Withheld Broker Nonvotes
<S> <C> <C> <C>
Richard A. Horvitz 9,055,442 10,000 0
</TABLE>
2. Amendment to the Articles of Incorporation to change the Company's name
<TABLE>
<S> <C>
Votes for: 9,065,442
Votes against: 0
Abstentions and Broker Nonvotes: 0
</TABLE>
3. Amendment to the Articles of Incorporation to increase the authorized Common
Stock of the Company to 50,000,000
<TABLE>
<S> <C>
Votes for: 6,234,720
Votes against: 2,830,722
Abstentions and Broker Nonvotes: 0
</TABLE>
13
<PAGE>
Under the North Carolina Business Corporation Act, shares of common stock are
entitled to vote as a separate class on this matter. Of the shares of common
stock voting, the results were as follows:
<TABLE>
<S> <C>
Votes for: 4,255,910
Votes against: 1,889,546
Abstentions and Broker Nonvotes: 0
</TABLE>
4. Amendment to the 1997 Long-Term Incentive Plan to increase to 1,470,000
shares the number of shares of Common Stock reserved for issuance thereunder
<TABLE>
<S> <C>
Votes for: 5,959,828
Votes against: 3,105,614
Abstentions and Broker Nonvotes: 0
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<S> <C>
*3(a)(1) -- Articles of Incorporation of the Company, with amendments through
June 12, 1996, filed as Exhibit 3(a) to the Company's Registration
Statement on Form S-4 (Registration 333-12091).
*3(a)(2) -- Articles of Amendment of the Company, dated May 21, 1997 and
effective June 3, 1997, filed as Exhibit 3(a)(2) to the Company's
Quarterly Report on Form 10-Q for the period ended June 30, 1997.
*3(a)(3) -- Articles of Amendment of the Company, dated and effective March 29,
1999, filed as Exhibit 3(a)(3) to the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1998.
3(a)(4) -- Articles of Amendment of the Company, dated June 29, 1999 and
effective July 1, 1999.
*3(b) -- Amended and Restated Bylaws of the Company filed as Exhibit 3(b) to
the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1998.
*4(a)(1) -- Specimen Certificate of the Company's Common Stock, filed as Exhibit
4(a) to the Company's Registration Statement of Form S-4 (Registration
333-12091).
*4(a)(2) -- Specimen Certificate of the Company's 10% Series A Mandatorily
Convertible Preferred Stock, filed as Exhibit 4(a)(2) to the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 1998.
*4(b)(1) -- Shareholders' Agreement dated April 16, 1993, between the Company
and its shareholders, filed as Exhibit 10-m to the Company's
Registration Statement on Form S-4 (No. 333-12091).
*4(b)(2) -- Amendment No. 1 to Shareholders' Agreement dated June 17, 1994,
between the Company and its shareholders, filed as Exhibit 10(n) to the
Company's Registration Statement on Form S-4 (No. 333-12091).
*4(c) -- 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, filed as Exhibit 4(b) to the
Company's Registration Statement on Form S-4 (Registration 333-12091).
*4(d) -- Warrant Agreement dated August 1, 1996, between the Company and
Fleet National Bank, as Warrant Agent, filed as Exhibit 10(l) to the
Company's Annual Report on Form 10-K for the year ended September 28,
1996.
10(b)(5) -- Company's 1997 Long-Term Incentive Plan, as amended.
27. -- Financial Data Schedule.
</TABLE>
---------
*Incorporated by reference to the statement or report indicated.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the six months ended June 30, 1999.
14
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
INTER*ACT ELECTRONIC MARKETING, INC.
DATE
-----------
By /s/ STEPHEN R. LEEOLOU August 16, 1999
...........................................
STEPHEN R. LEEOLOU
CHAIRMAN & CHIEF EXECUTIVE OFFICER
By /s/ RICHARD A. VINCHESI August 16, 1999
...........................................
RICHARD A. VINCHESI
SENIOR VICE PRESIDENT,
CHIEF OPERATING OFFICER &
CHIEF FINANCIAL OFFICER
15
STATEMENT OF DIFFERENCES
------------------------
The trademark symbol shall be expressed as............................... 'TM'
The service mark symbol shall be expressed as............................ 'sm'
<PAGE>
EX-3
EXHIBIT 3(a)(4)
ARTICLES OF AMENDMENT
OF
INTER*ACT SYSTEMS, INCORPORATED
The undersigned corporation hereby submits these Articles of Amendment
for the purpose of amending its Articles of Incorporation:
1. The name of the corporation is Inter*Act Systems, Incorporated.
2. The Articles of Incorporation of the corporation are hereby amended
as follows:
A. Article 1 of the Articles of Incorporation is hereby amended in
its entirety to read as follows:
1. The name of the corporation is Inter*Act Electronic
Marketing, Inc.
B. The first sentence of Article 2 of the Articles of Incorporation
is hereby amended in its entirety to read as follows:
2. The aggregate number of shares of capital stock which the
corporation shall have the authority to issue is 55,000,000,
50,000,000 of which shall be common stock and 5,000,000 of which
shall be preferred stock.
3. The foregoing amendments to the Articles of Incorporation of the
corporation were adopted by its shareholders on the 29th day of June, 1999.
This the 29th day of June, 1999.
INTER*ACT SYSTEMS, INCORPORATED
By: /s/ Stephen R. Leeolou
-------------------------------------------
Stephen R. Leeolou, Chief Executive Officer
<PAGE>
EX-10
EXHIBIT 10(b)(5)
INTER*ACT SYSTEMS, INCORPORATED
1997 LONG-TERM INCENTIVE PLAN
ARTICLE 1
PURPOSE
1.1 Purpose. This Inter*Act Systems, Incorporated 1997 Long-Term
Incentive Plan (the "Plan") is intended to induce those persons who are in a
position to contribute materially to the success of Inter*Act Systems,
Incorporated (the "Company") to remain with the Company, to offer them rewards
in recognition of their contributions to the Company's progress and to offer
them incentives to continue to promote the best interests of the Company.
1.2 Grant of Awards. In order to maintain flexibility in the grant of
incentive benefits, the Plan allows for the grant of Stock Options (both
Incentive Stock Options and Nonqualified Stock Options), Stock Appreciation
Rights, Unrestricted Stock, Restricted Stock and Performance Shares.
ARTICLE 2
DEFINITIONS
2.1 "Award" means any grant of Stock Options, Stock Appreciation
Rights, Unrestricted Stock, Restricted Stock or Performance Shares authorized by
the Committee under this Plan.
2.2 "Board" means the Board of Directors of the Company.
2.3 "Code" means the Internal Revenue Code of 1986, as amended.
2.4 "Committee" means the committee appointed by the Board pursuant to
Article 3 of the Plan for the purpose of administering the Plan.
2.5 "Disinterested Person" means a person who is both a "Non-Employee
Director" within the meaning of Rule 16b-3 as promulgated by the Securities and
Exchange Commission under the Securities Exchange Act of 1934 and an "outside
director" within the meaning of Section 162(m) of the Code and the regulations
promulgated thereunder.
2.6 "Fair Market Value" means, as of a given date, the closing sales
price per share of the Company's Stock, as reported on the national securities
exchange on which the Stock is principally traded on the day preceding the day
(or the most recent trading day preceding the day) on which the stock is to be
valued. For purposes of this section, the term "national securities
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exchange" shall include the National Association of Securities Dealers Automated
Quotation System. If at the time the determination of Fair Market Value is made
the Stock is not admitted to trading on a national securities exchange for which
sales prices are regularly reported, Fair Market Value shall be determined by
the Committee on the basis of such factors as it deems appropriate; provided,
however, that Fair Market Value shall be determined without regard to any
restriction other than a restriction which, by its terms, shall never lapse.
2.7 "Grantee" means a person who receives an Award pursuant to the
Plan.
2.8 "Incentive Stock Option" means any Stock Option designated as an
Incentive Stock Option within the meaning of Section 422 of Code. Any Stock
Option so designated shall be construed to comply in every respect with Section
422 of the Code.
2.9 "Nontandem Stock Appreciation Right" means any Stock Appreciation
Right granted pursuant to Article 7 of the Plan in a manner not related to a
grant of a Stock Option.
2.10 "Nonqualified Stock Option" means any Stock Option granted
pursuant to the Plan that is not designated as being an Incentive Stock Option
under Section 422 of the Code. Any Stock Option so designated shall not be
subject to Section 422 of the Code.
2.11 "Performance-based Compensation Award" means an Award described in
Article 11 of the Plan.
2.12 "Performance Shares" means shares of Stock that are subject to an
Award pursuant to Article 10 of the Plan.
2.13 "Restricted Stock" means shares of Stock that are issued to a
Grantee subject to restrictions under Article 9 of the Plan.
2.14 "Stock" means the Common Stock, no par value, of the Company or
any successor class of stock.
2.15 "Stock Appreciation Right" means the right to receive, pursuant to
an Award granted pursuant to Article 7 of the Plan, shares of Stock equal in
value to the excess, at the time the right is exercised, of the Fair Market
Value of the number of shares subject to the Award over the Fair Market Value of
such shares at the time the Award was granted. A Stock Appreciation Right may be
a Tandem Stock Appreciation Right or a Nontandem Stock Appreciation Right.
2.16 "Stock Option" means any Incentive Stock Option or Nonqualified
Stock Option to purchase shares of Stock granted to any Grantee pursuant to
Article 6 of the Plan.
2.17 "Subsidiary" means any person, firm, partnership, limited
liability company or corporation at least 50% of the total combined voting power
of which is owned directly or indirectly by the Company.
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2.18 "Tandem Stock Appreciation Right" means any Stock Appreciation
Right granted pursuant to Article 7 of the Plan in conjunction with all or part
of any Stock Option granted under the Plan pursuant to a Stock Option agreement
which states that the Grantee may, in lieu of exercising the Stock Option,
surrender the Stock Option and receive shares of Stock equal in value to the
Stock Appreciation Right.
2.19 "Unrestricted Stock" means an Award of shares of Stock pursuant to
Article 8 of the Plan.
ARTICLE 3
ADMINISTRATION
3.1 Committee. The Plan shall be administered by a Committee appointed
by the Board consisting of not less than two members, all of whom must be
Disinterested Persons. Any action of the Committee shall be taken by majority
vote at a meeting called in accordance with procedures adopted by the Committee
or by the unanimous written consent of the Committee.
3.2 Authority of Committee. Subject to the other provisions of this
Plan, and with a view to effecting its purpose, the Committee shall have sole
authority in its absolute discretion: (i) to grant Awards under the Plan; (ii)
to determine the officers, employees and directors to whom Awards shall be
granted under the Plan; (iii) to determine the number of shares of Stock subject
to any Award under the Plan; (iv) to establish the price, duration, performance
measures and any other term, restriction or condition of an Award under the
Plan; (v) to accelerate the time at which any outstanding Stock Option or Stock
Appreciation Right may be exercised or the time when restrictions or conditions
on any other Awards will lapse; (vi) to construe and interpret the Plan; (vii)
to prescribe, amend, and rescind rules and regulations relating to the Plan; and
(viii) to make any other determinations necessary or advisable for the
administration of the Plan and to do everything necessary or appropriate to
administer the Plan. Notwithstanding the foregoing, the Board may grant Awards
from time to time to consultants and directors who are not employees of the
Company or any of its Subsidiaries.
3.3 Liability; Indemnification. No member of the Committee or the Board
shall be liable for any action or determination made in good faith with respect
to the Plan or to any Award granted thereunder. In addition, directors and
members of the Committee shall be eligible for indemnification from the Company,
pursuant to the Company's Bylaws, with respect to any matter arising under the
Plan.
ARTICLE 4
STOCK SUBJECT TO PLAN
4.1 Maximum Number of Shares Subject to the Plan. The maximum aggregate
number of shares of Stock available pursuant to the Plan, subject to adjustment
as provided in Article 14 hereof, shall be 1,470,000 shares of the Stock. If any
Stock Option granted pursuant to the Plan expires or terminates for any reason
before it shall have been exercised in full, the unpurchased
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shares subject to such expired or terminated Stock Option shall again be
available for the purposes of the Plan, except that any unpurchased shares that
have been subject to a Stock Option in connection with which a Tandem Stock
Appreciation Right has also been granted shall be reduced by the number of
shares issued in connection with the Tandem Stock Appreciation Right. If any
Nontandem Stock Appreciation Right granted pursuant to the Plan expires or
terminates for any reason before all shares subject thereto have been issued,
the unissued shares associated with such Nontandem Stock Appreciation Rights
shall again be available for the purposes of the Plan. If any shares issued
pursuant to a Restricted Stock Award shall be forfeited, such shares shall again
be available for the purposes of the Plan. If a Performance Share Award
terminates for any reason before all of the shares associated with such
Performance Shares Award shall have been issued pursuant thereto, such unissued
shares shall again be available for the purposes of the Plan. If any Stock
Appreciation Right or Performance Shares are paid in cash rather than in shares,
in whole or in part, the number of shares of Stock available under the Plan will
be reduced by the number of shares to which the cash payment relates.
4.2 Maximum Number of Shares For Any Individual. Notwithstanding any
other term or provision of the Plan, the aggregate number of shares of Stock
with respect to which Awards under the Plan may be granted to any individual
(including Awards that are subsequently canceled) shall not exceed 250,000
shares of Stock of the Company. If a Stock Option is canceled, terminated or
repriced, the canceled, terminated or repriced Stock Option shall be counted
against the maximum number of shares for which Awards may be granted to such
Grantee. If cash is paid to a Grantee in settlement of any Stock Appreciation
Right or Performance Shares Award, the number of shares to which the cash
payment relates shall be counted against the maximum number of shares for which
Awards may be granted to such Grantee.
4.3 Reservation of Shares of Common Stock. The Company, during the term
of this Plan, will at all times reserve and keep available such number of shares
of the Stock as shall be sufficient to satisfy the requirements of the Plan. In
addition, the Company will from time to time, as is necessary to accomplish the
purposes of this Plan, seek to obtain from any regulatory agency having
jurisdiction any requisite authority in order to issue and sell shares of Stock
hereunder. The inability of the Company to obtain from any regulatory agency
having jurisdiction the authority deemed by the Company's counsel to be
necessary to the lawful issuance and sale of any shares of the Stock hereunder
shall relieve the Company of any liability in respect of the nonissuance or sale
of the Stock as to which the requisite authority shall not have been obtained.
ARTICLE 5
ELIGIBILITY
Awards under the Plan may be granted to persons identified by the
Committee who are executive or supervisory employees, officers, directors, or
consultants of the Company or any Subsidiary. Notwithstanding the foregoing,
Incentive Stock Options to purchase shares of Stock may be granted pursuant to
the Plan only to executive or supervisory employees of the Company or a
Subsidiary that is a corporation, including directors and officers who are also
employees of the Company or a Subsidiary that is a corporation.
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ARTICLE 6
STOCK OPTIONS
6.1 Grant of Stock Options. The Committee may cause the Company to
grant Stock Options for the purchase of shares of Stock to Grantees under the
Plan in such amounts as the Committee, in its sole discretion, shall determine.
Such Stock Options may be granted either alone or in addition to other Awards
granted under the Plan. The Stock Options granted under the Plan shall be
designated as either: (i) Incentive Stock Options or (ii) Nonqualified Stock
Options.
6.2 Stock Option Terms and Conditions. Stock Options granted under the
Plan shall be evidenced by written agreements in such form as the Committee may
from time to time approve. The terms and conditions of Stock Options granted
under the Plan, including the satisfaction of corporate or individual
performance objectives and other vesting standards, may differ one from another
as the Committee shall, in its discretion, determine, as long as all Stock
Options granted under the Plan satisfy the requirements of the Plan.
6.3 Purchase Price. The purchase price for shares acquired pursuant to
the exercise, in whole or in part, of any Stock Option shall be determined by
the Committee at the time of grant, subject to the limitations set forth in this
Section 6.3. In no event shall the purchase price of any Stock Option be less
than the Fair Market Value of the shares at the time of the grant of the Stock
Option; except that for any Grantee who owns more than 10% of the combined
voting power of all classes of stock of the Company, the purchase price of any
Incentive Stock Option shall not be less than 110% of Fair Market Value. The
applicable Stock Option agreement may provide for adjustments to the purchase
price, as the Committee shall determine, provided that the purchase price shall
never be less than the initial purchase (except to the extent such adjustments
are pursuant to Article 15). The purchase price so determined shall also be
applicable in connection with the exercise of any Tandem Stock Appreciation
Right granted with respect to such Stock Option.
6.4 Duration of Stock Options. Each Stock Option and all rights
thereunder granted pursuant to the terms of the Plan shall expire on the date
specified in the applicable Stock Option agreement, but in no event shall any
Stock Option granted under the Plan expire later than 15 years from the date on
which the Stock Option is granted; provided, however, that no Incentive Stock
Option may be exercisable more than ten years from the date of the Award and no
Incentive Stock Option granted to an employee who owns more than 10% of the
combined voting power of all classes of stock of the Company, may be exercisable
after the date five years from the date of the Award.
6.5 Exercise of Stock Options. Each Stock Option shall be exercisable
in one or more installments during its term, and the right to exercise may be
cumulative. No Stock Option may
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be exercised for a fraction of a share of Stock. Unless otherwise provided by
the applicable Stock Option agreement, the purchase price of any shares
purchased shall be paid in full in cash or by certified or cashier's check
payable to the order of the Company, by surrender of shares of Stock held by the
Grantee for more than six months and having a value at the exercise date equal
to the exercise price, or through a cashless exercise through a broker-dealer
registered with the Securities and Exchange Commission, or by a combination of
any of the foregoing. If any portion of the purchase price is paid in shares of
Stock, those shares shall be valued at their Fair Market Value as of the day of
delivery. No Grantee, or Grantee's executor, administrator, legatee, or
distributes, shall be deemed to be a holder of any shares subject to a Stock
Option unless and until a stock certificate or certificates for such are issued
to such Grantee under the terms of the Plan. No adjustment shall be made for
dividends (ordinary or extraordinary, whether in cash, securities or other
property) or distributions or other rights for which the record date is prior to
the date such stock certificate is issued, except as provided in Article 15. The
exercise of Stock Options under the Plan shall be subject to the withholding
requirements as set forth in Section 16.1.
6.6 Written Notice Required. A Stock Option shall be exercised when
written notice of that exercise, stating the number of shares of Stock with
respect to which the Stock Option is being exercised, has been given to the
Company at its principal office, to the attention of the General Counsel, by the
Grantee and full payment for the shares with respect to which the Stock Option
is exercised has been received by the Company.
6.7 Maximum Amount of Incentive Stock Options in Any Calendar Year. The
aggregate Fair Market Value (determined as of the time the option is granted) of
the Stock with respect to which Incentive Stock Options are first exercisable by
any Grantee during any calendar year under the terms of this Plan and all other
such plans of the Company and any parent and Subsidiary shall not exceed
$100,000. Any Stock Option in excess of the foregoing limitation shall be deemed
a Nonqualified Stock Option to the extent of such excess.
6.8 Cancellation of Stock Appreciation Rights. Upon exercise of all or
a portion of a Stock Option, any related Tandem Stock Appreciation Rights shall
be canceled with respect to an equal number of shares of Stock.
ARTICLE 7
STOCK APPRECIATION RIGHTS
7.1 Grant of Stock Appreciation Rights. The Committee may cause the
Company to grant Stock Appreciation Rights to Grantees under the Plan in such
amounts as the Committee, in its sole discretion, shall determine. Such Stock
Appreciation Rights may be granted either alone or in addition to other Awards
granted under the Plan. The Stock Appreciation Rights granted under the Plan
shall be designated as either: (i) Tandem Stock Appreciation Rights or (ii)
Nontandem Stock Appreciation Rights.
7.2 Stock Appreciation Rights Terms and Conditions. Stock Appreciation
Rights granted under the Plan shall be evidenced by written agreements in such
form as the Committee
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may from time to time approve. The terms and conditions of Stock Appreciation
Rights granted under the Plan, including the satisfaction of corporate or
individual performance objectives and other vesting standards, may differ one
from another as the Committee shall, in its discretion, determine, as long as
all Stock Appreciation Rights granted under the Plan satisfy the requirements of
the Plan.
7.3 Tandem Stock Appreciation Rights.
7.3.1 Award of Tandem Stock Appreciation Rights. Tandem Stock
Appreciation Rights may be granted by the Committee in connection with
any Stock Option granted under the Plan, either at the time the Stock
Option is granted or thereafter at any time prior to the exercise,
termination or expiration of the Stock Option, except that in the case
of an Incentive Stock Option, such rights may be granted only at the
time of the grant of such Incentive Stock Option.
7.3.2 Limitations on Exercise of Tandem Stock Appreciation
Rights. A Tandem Stock Appreciation Right shall be exercisable only to
the extent that the related Stock Option is exercisable and shall be
exercisable only for such period as the Committee may determine (which
period may expire prior to the expiration date of the related Stock
Option). Upon the exercise of all or a portion of Tandem Stock
Appreciation Rights, the related Stock Option shall be canceled with
respect to the shares of Stock to which the exercised portion of the
Tandem Stock Appreciation Rights relates.
7.3.3 Surrender or Exchange of Tandem Stock Appreciation
Rights. A Tandem Stock Appreciation Right shall entitle the Grantee to
surrender to the Company unexercised the related Stock Option, or any
portion thereof, and to receive from the Company in exchange therefor
that number of shares of Stock having an aggregate Fair Market Value
equal to (i) the excess of (A) the Fair Market Value of one (1) share
of Common Stock at the time the Tandem Stock Appreciation Right is
exercised over (B) the purchase price per share specified in such Stock
Option, multiplied by (ii) the number of shares of Stock subject to the
Stock Option, or portion thereof, which is surrendered. Cash shall be
delivered in lieu of any fractional shares.
7.4 Nontandem Stock Appreciation Rights.
7.4.1 Award of Nontandem Stock Appreciation Rights. Nontandem
Stock Appreciation Rights may be granted by the Committee in a manner
not related to a grant of a Stock Option. At the time of grant of a
Nontandem Stock Appreciation Right, the Committee shall specify the
number of shares of Stock covered by such right and the base price of
shares of Stock to be used in connection with the calculation described
in Section 7.4.2 below. The base price of a Nontandem Stock
Appreciation Right shall be not less than 100% of the Fair Market Value
of a share of Common Stock on the date of grant. A Nontandem Stock
Appreciation Right shall be exercisable during such period as the
Committee shall determine.
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7.4.2 Exercise of Nontandem Stock Appreciation Rights. The
exercise of a Nontandem Stock Appreciation Right shall entitle the
Grantee to receive from the Company that number of shares of Stock
having an aggregate Fair Market Value equal to (i) the excess of (A)
the Fair Market Value of one (1) share of Stock at the time at which
the Nontandem Stock Appreciation Right is exercised over (B) the base
price of the shares covered by the Nontandem Stock Appreciation Right,
multiplied by (ii) the number of shares of Stock covered by the
Nontandem Stock Appreciation Right, or the portion thereof being
exercised. Cash shall be delivered in lieu of any fractional shares.
7.5 Settlement of Stock Appreciation Rights. As soon as is reasonably
practicable after the exercise of a Stock Appreciation Right, the Company shall
(i) issue, in the name of the Grantee, stock certificates representing the total
number of full shares of Stock to which the Grantee is entitled pursuant to
Section 7.3.3 or Section 7.4.2 hereof and cash in an amount equal to the Fair
Market Value, as of the date of exercise, of any resulting fractional shares,
and (ii) if the Committee causes the Company to elect to settle all or part of
its obligations arising out of the exercise of the Stock Appreciation Right in
cash pursuant to Section 7.6, deliver to the Grantee an amount in cash equal to
the Fair Market Value, as of the date of exercise, of the shares of Stock it
would otherwise be obligated to deliver. The settlement of any Stock
Appreciation Right under the Plan shall be subject to the withholding
requirements as set forth in Section 16.1.
7.6 Cash Settlement. The Committee, in its discretion, may cause the
Company to settle all or any part of its obligation arising out of the exercise
of a Stock Appreciation Right by the payment of cash in lieu of all or part of
the shares of Stock it would otherwise be obligated to deliver in an amount
equal to the Fair Market Value of such shares on the date of exercise.
7.7 Written Notice Required. A Stock Appreciation Right shall be
exercised when written notice of that exercise, stating the number of shares of
Stock with respect to which the Stock Appreciation Right is being exercised, has
been given to the Company at its principal office, to the attention of the
General Counsel, by the Grantee.
ARTICLE 8
UNRESTRICTED STOCK
8.1 Grant of Unrestricted Stock. The Committee may cause the Company to
award Unrestricted Stock to persons eligible under the Plan in such amounts as
the Committee, in its sole discretion, shall determine. Such shares of Stock may
be issued either alone or in addition to other Awards granted under the Plan.
8.2 Delivery of Unrestricted Stock. The Company shall issue, in the
name of each Grantee to whom Unrestricted Stock has been granted, stock
certificates representing the total number shares of Unrestricted Stock granted
to the Grantee and shall deliver such certificates to the Grantee as soon as
reasonably practicable after the date of the Award. The delivery of Unrestricted
Stock under the Plan shall be subject to the withholding requirements as set
forth in Section 16.1.
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ARTICLE 9
RESTRICTED STOCK
9.1 Grant of Restricted Stock. The Committee may cause the Company to
grant Restricted Stock to Grantees under the Plan in such amounts as the
Committee, in its sole discretion, shall determine. Such shares of Restricted
Stock may be issued either alone or in addition to other Awards granted under
the Plan.
9.2 Restrictions and Conditions. Restricted Stock granted under the
Plan shall be evidenced by written agreements in such form as the Committee may
from time to time approve. The restrictions and conditions imposed on Restricted
Stock granted under the Plan, including the satisfaction of corporate or
individual performance objectives, may differ from one Award to another as the
Committee shall, in its discretion, determine as long as all Awards satisfy the
requirements of the Plan; provided, however, that no grant shall require any
payment of cash consideration by the recipient. Each Award of Restricted Stock
shall be effective as of the date so stated in the resolution of the Committee
making the Award.
9.3 Duration of Awards. The restrictions and conditions imposed upon
any Restricted Stock shall lapse, in whole or in part, as provided in the
agreement pursuant to which the Award is made, but in no event later than 10
years from the date of the Award.
9.4 Restricted Stock Certificates. Each certificate issued for shares
of Restricted Stock shall be registered in the name of the Grantee and shall be
deposited by him or her with the Company, to the attention of the Chief
Executive Officer, together with a stock power endorsed in blank. The shares
shall be subject to restrictions as to transferability as provided in Article 13
and to such other restrictions and conditions as may be imposed by the Committee
at the time of making the Award (the "restrictions and conditions"), which shall
be referenced by a conspicuous legend on the reverse side of the stock
certificate representing the shares.
9.5 Rights of Holders of Restricted Stock. Subject to the restrictions
and conditions herein and the written agreement evidencing the Restricted Stock,
the Grantee shall be the owner of the Restricted Stock and shall have all of the
rights of a shareholder, including, but not limited to, the right to receive all
dividends paid on the Restricted Stock and the right to vote the shares. In the
event there is a change in the Stock as described in Article 15, any shares or
other securities issued with respect to shares subject to restrictions and
conditions under the Plan shall be subject to the same restrictions and
conditions, and the certificates therefor, together with a stock power endorsed
in blank, shall be delivered to the Company, to the attention of the Chief
Executive Officer.
9.6 Delivery of Restricted Stock. Following the lapse of the
restrictions and conditions imposed on any Restricted Stock, the certificate or
certificates evidencing such shares shall be reissued by the Company in the name
of the Grantee without legend (except to the extent that a legend may be
necessary for compliance with applicable securities laws) and shall be delivered
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to the Grantee. The delivery of Restricted Stock under the Plan shall be subject
to the withholding requirements as set forth in Section 16.1.
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ARTICLE 10
PERFORMANCE SHARES
10.1 Grant of Performance Shares. The Committee may cause the Company
to grant Performance Shares to Grantees under the Plan in such amounts as the
Committee, in its sole discretion, shall determine. Such Performance Shares may
be issued either alone or in addition to other Awards under the Plan. Each
Performance Share grant shall confer upon the Grantee the right to receive a
specified number of shares of Stock contingent upon the achievement of specified
corporate or individual performance objectives within a specified period.
10.2 Terms and Conditions. Performance Shares granted under the Plan
shall be evidenced by written agreements in such form as the Committee may from
time to time approve. The Committee shall specify the performance objectives and
the period of duration of the Performance Shares Award at the time that such
Award is granted. Any Performance Share Award granted under this Plan shall
constitute an unfunded promise to issue shares of Stock to the Grantee in the
future upon the completion of specified conditions. No Grantee shall be deemed
to be a holder of any shares subject to a Performance Shares Award unless and
until a stock certificate or certificates for such are issued to such Grantee
under the terms of the Plan. No adjustment shall be made for dividends (ordinary
or extraordinary, whether in cash, securities or other property) or
distributions or other rights for which the record date is prior to the date
stock certificates are issued pursuant to any Performance Shares Award, except
as provided in Article 15. The settlement of any Performance Shares Award shall
be subject to the withholding requirements as set forth in Section 16.1.
10.3 Cash in Lieu of Stock. In lieu of some or all of the shares earned
by achievement of the specified performance objectives within the specified
period, the Committee may distribute cash in an amount equal to the Fair Market
Value of the Stock at the time that the performance objective is achieved within
the specified period multiplied by the number of Performance Shares.
10.4 Performance Objective Period. The duration of the period within
which to achieve the performance objectives is to be determined by the
Committee, but in no event shall the duration be later than 15 years from the
date of the Award.
ARTICLE 11
PERFORMANCE-BASED COMPENSATION AWARDS
11.1 Awards. All Stock Options and Stock Appreciation Rights granted to
key executive and supervisory employees under the Plan are Performance-based
Compensation Awards because they are required by the terms of the Plan to have
an exercise price that is not less than Fair Market Value at the time of the
Award. Restricted Stock and Performance Shares awarded to key executive and
supervisory employees are also Performance-based Compensation Awards under this
Article if granted subject to a written agreement between the Company and the
Grantee setting forth one or more objective performance goals based on the
criteria set forth in Section 11.2 that are required to be met in order for an
Award to vest in the Grantee. The performance goals must
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be established in writing by the Committee prior to the employee's performance
of the relevant services and while the outcome under the goal or goals is
substantially uncertain.
11.2 Performance Goals. The performance goals established by the
Committee with respect to a specific Performance-based Compensation Award must
be based on one or more of the following criteria: increases in the number of
participating brands; increases in the number of stores installed; achieving
targeted marketing costs; increases in revenue; control of operating expenses;
increases in operating cash flow; increases in operating income; reduction in
net loss; and achieving and increasing net income.
11.3 Limitations of Shares. The maximum number of shares that may be
subject to Awards under the Plan contained in Section 4.1 and the maximum number
of shares for any individual contained in Section 4.2 include Performance-based
Compensation Awards.
ARTICLE 12
RELOAD OPTIONS
The Committee may provide in any option agreement entered into pursuant
to the Plan, or by the separate agreement, that if a Grantee makes payment upon
the exercise of any option granted hereunder in whole or in part through the
surrender of shares of Stock, such Grantee shall automatically receive a new
option for the number of shares so surrendered by him at a price equal to the
fair market value of the shares at the time of surrender, exercisable on the
same basis and having the same terms as the underlying option or on such other
basis as the Committee shall determine and provide in the option agreement.
ARTICLE 13
TERMINATION OF EMPLOYMENT
13.1 Termination of Employment. If a Grantee ceases to be employed by
the Company or a Subsidiary for any reason other than death or disability, any
Award granted to such Grantee that is unexercised or still subject to any
restrictions or conditions shall be terminated or forfeited, unless otherwise
provided in the applicable Award agreement.
13.2 Disability. If a Grantee becomes disabled within the meaning of
Section 22(e)(3) of the Code while employed by the Company, or a Subsidiary, any
Stock Option or Stock Appreciation Right granted to such Grantee shall expire
one year after the date of termination of employment due to disability, unless a
longer or shorter period of exercise is provided in the applicable Award
agreement. Any Restricted Stock or Performance Shares granted to such Grantee
shall be terminated or forfeited, unless otherwise provided in the applicable
Award agreement.
13.3 Death of Grantee. If a Grantee dies while employed by the Company,
or a Subsidiary, any Stock Option or Stock Appreciation Right granted to such
Grantee shall expire one year after the date of death, unless a longer or
shorter period of exercise is provided in the
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applicable Award agreement. During the exercise period after death, the Stock
Option or Stock Appreciation Right may be exercised, to the extent provided in
the applicable Award agreement, by the person or persons to whom the Grantee's
rights under the Award Right shall pass by will or by the laws of descent and
distribution but in no event may the Stock Option or Stock Appreciation Right be
exercisable more than ten years from the date of grant. Any Restricted Stock or
Performance Shares granted to such Grantee shall be terminated or forfeited,
unless otherwise provided in the applicable Award agreement.
13.4 Termination as Nonemployee Director of the Company. If a
nonemployee director ceases to serve the Company in that capacity, the Grantee's
rights upon such termination shall be governed in the manner of an Grantee's
rights upon termination of employment as set forth above.
ARTICLE 14
TRANSFER RESTRICTIONS
Stock Options and Stock Appreciation Rights that have not been
exercised by the Grantee and Restricted Stock and Performance Shares that are
subject to restrictions and conditions shall not be subject in any manner to
alienation, sale, transfer, assignment, pledge, attachment or encumbrance of any
kind. Any attempt to alienate, sell, transfer, assign, pledge or otherwise
encumber any such Awards shall be void, except for a transfer by will or by the
laws of descent and distribution. Notwithstanding the foregoing, the Committee
may grant Nonqualified Stock Options that are transferable, without payment of
consideration, to immediate family members of the Grantee or to trusts or
partnerships of such family members, or, to the extent such transfers may be
made in compliance with Rule 16b-3 and applicable tax laws, limited liability
companies of such family members. for purposes of this Article 14, the phrase
"immediate family member" shall mean spouse, children or grandchildren of the
Grantee.
ARTICLE 15
ADJUSTMENTS
If the shares of 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, exchange 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 in the maximum number and
kind of shares as to which Awards may be granted under this Plan. A
corresponding adjustment changing the number or kind of shares allocated to
unexercised or unvested Awards, or portions thereof, which shall have been
granted prior to any such change, shall likewise be made. Any such adjustment in
outstanding Awards shall be made without change in the aggregate purchase price
applicable to the unexercised portion of any such Award, but with a
corresponding adjustment in the price for each share or other unit of any
security covered by the Award. In making any adjustment pursuant to this Article
15, any fractional shares shall be disregarded.
13
<PAGE>
ARTICLE 16
MISCELLANEOUS PROVISIONS
16.1 Tax Withholding. With respect to any Award under the Plan, the
Company shall have the right to require Grantees or their beneficiaries or legal
representatives to remit to the Company an amount sufficient to satisfy federal,
state and local withholding requirements, or to deduct from all payments under
the Plan amounts sufficient to satisfy all withholding tax requirements. Within
the discretion of the Committee, the Company may withhold the tax required to be
withheld from any other cash compensation then or thereafter payable to the
Grantee, or, if deemed necessary by the Company, the Company may sell or
withhold a portion of shares of Stock to be delivered to the Grantee pursuant to
the Plan to provide sufficient funds for withholding tax and delivery of the
proceeds to the Company.
16.2 Termination, Amendment of Plan. The Board may at any time
terminate, amend or revise the terms of the Plan; provided that no amendment or
revision shall, without the approval of the Company's shareholders, (i) increase
the maximum aggregate number of shares that may be sold or distributed pursuant
to Awards granted under this Plan, except as permitted under Article 14; (ii)
change the minimum purchase price for shares of Stock that may be received by
exercise of Stock Option or Stock Appreciation Right under the Plan; (iii)
increase the maximum duration established under the Plan for any Award; or (iv)
permit the granting of an Award to anyone other than specified in Article 5.
16.3 Prior Rights and Obligations. No amendment, suspension, or
termination of the Plan shall, without the consent of the Grantee or other
person who has received an Award, alter or impair any of that Grantee's rights
or obligations under any Award granted under the Plan prior to such amendment,
suspension, or termination.
16.4 Employment. Nothing in the Plan or in any Award shall confer upon
any eligible employee any right to continued employment by the Company, or a
Subsidiary, or limit in any way the right of the Company or a Subsidiary at any
time to terminate or alter the terms of that employment.
16.5 Securities Laws. Shares of Stock issuable pursuant to this Plan
may, at the option of the Company, be registered under applicable federal and
state securities laws, but the Company shall have no obligation to undertake
such registrations and may, in lieu thereof, issue shares hereunder only
pursuant to applicable exemptions from such registrations. In the event that no
such registrations are undertaken, the shares shall be issued only to persons
who qualify to receive such shares in accordance with the exemption from
registration on which the Company relies. In connection with any Award of shares
or the reissuance of certificates under the Plan, the Committee may require
appropriate representations from the recipient of such shares and take such
other action as the Committee may deem necessary, including but not limited to
placing restrictive legends on certificates evidencing such shares and placing
stop transfer instructions in the Company's stock transfer records, or
delivering such instructions to the Company's transfer
14
<PAGE>
agent, in order to assure compliance with any such exemptions. Notwithstanding
any other provision of the Plan, no shares will be issued pursuant to the Plan
unless such shares have been registered under all applicable federal and state
securities laws or unless, in the opinion of counsel satisfactory to the
Company, exemptions from such registrations are available.
16.6 Compliance with Section 16(b). In the case of Grantees who are or
may be subject to Section 16 of the Securities Exchange Act of 1934, it is the
intent of the Company that this Plan and any Award granted hereunder satisfy and
be interpreted in a manner that satisfies the applicable requirements of Rule
16b-3, so that such Grantees will be entitled to the benefits of Rule 16b-3 or
any other exemptive rule under Section 16 and will not be subjected to liability
thereunder. If any provision of the Plan or any Award would otherwise conflict
with the intent expressed herein, that provision, to the extent possible, shall
be interpreted and deemed amended so as to avoid such conflict. To the extent of
any remaining irreconcilable conflict with such intent, such provision shall be
deemed void as applicable to Grantees who are or may be subject to Section 16.
16.7 Reorganization. Except as otherwise provided in the applicable
Award agreement, in the event of a consolidation or a merger in which the
Company is not the surviving corporation, or any other merger in which the
shareholders of the Company exchange their shares of Stock in the Company for
stock of another corporation, or in the event of complete liquidation of the
Company, or in the case of a tender offer approved, all Awards that are
unexercised or still subject to any restrictions and conditions shall thereupon
be terminated or forfeited, provided that the Committee may, prior to the
effective date of any such transaction, either (i) make all such Award
immediately vested or exercisable or (ii) arrange to have the surviving
corporation grant to the Grantees replacement Award on terms which the Board
shall determine to be fair and reasonable.
16.8 Effective Date and Term of Plan. The effective date of this Plan
is April 30, 1997; provided, however, that no Award granted hereunder may be
exercised or become vested unless and until the Plan is approved by the
shareholders of the Company. The Plan was approved by the shareholders of the
Company on May 20, 1997. This Plan reflects all amendments through June 29,
1999. No Awards may be granted under the Plan after April 30, 2007.
INTER*ACT SYSTEMS, INCORPORATED
By: /s/ Stephen R. Leeolou
___________________________________________
Title: Chairman and Chief Executive Officer
________________________________________
15
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