<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------------
FORM 1O-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 SEPTEMBER 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)
-----------------------
<TABLE>
<S> <C>
North Carolina 56-1817510
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
</TABLE>
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 preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
As of September 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
-----
<S> <C>
Part I--Financial Information .................................................................. 1
Item 1. Financial Statements.................................................................... 1
Consolidated Balance Sheets--September 30, 1999 (unaudited) and December 31, 1998.. 1
Consolidated Statements of Operations for the three-month and
nine-month periods ended September 30, 1999 and 1998 (unaudited)................ 2
Consolidated Statements of Cash Flows for the nine-month periods
ended September 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...................................................................... 13
Item 1. Legal Proceedings...................................................................... 13
Item 2. Changes in Securities and Use of Proceeds.............................................. 13
Item 6. Exhibits and Reports on Form 8-K 14.................................................... 14
Signatures...................................................................................... 15
</TABLE>
<PAGE>
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements
INTER*ACT ELECTRONIC MARKETING. INC.
(Formerly, Inter*Act Systems, Incorporated)
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
---- ----
(Unaudited)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 11,510 $ 14,166
Receivables, net 2,127 3,667
Other current assets 3,789 2,964
----------- -----------
Total current assets 17,426 20,797
Property, plant and equipment, net 31,130 28,102
Bond issuance costs, net 2,293 2,776
Patents, licenses and trademarks, net 8,052 8,771
Other noncurrent assets 100 45
----------- -----------
Total assets $ 59,001 $ 60,491
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 2,657 $ 3,075
Accrued expenses 5,805 3,016
Current portion of long-term debt 5,656 5,554
Deferred revenue 676 2,146
----------- -----------
Total current liabilities 14,794 13,791
Long-term debt, net of discount and current portion 124,104 111,819
----------- -----------
Total liabilities 138,898 125,610
----------- -----------
Common stock purchase warrants 27,436 27,436
----------- -----------
Commitments and contingencies (note 7)
Stockholders' equity (deficit):
10% Series A Mandatorily Convertible Preferred stock, no par value,
authorized 5,000,000 shares; 488,868 and 177,878 shares issued and
outstanding at September 30, 1999 and December 31, 1998, respectively 50,960 18,142
Common stock, no par value, authorized 50,000,000 shares; 7,728,555 shares issued
and outstanding at September 30, 1999 and December 31, 1998 28,251 28,251
Additional paid-in capital 768 768
Deferred compensation (301) (416)
Accumulated other comprehensive income (loss) (79) (19)
Accumulated deficit (186,932) (139,281)
----------- -----------
Total stockholders' equity (deficit) (107,333) (92,555)
----------- -----------
Total liabilities and stockholders' equity (deficit) $ 59,001 $ 60,491
=========== ===========
The accompanying notes are an integral part of these consolidated balance sheets.
</TABLE>
1
<PAGE>
INTER*ACT ELECTRONIC MARKETING. INC.
(Formerly, Inter*Act Systems, Incorporated)
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
--------------------------------------- ------------------------------------
September 30, September 30, September 30, September 30,
1999 1998 1999 1998
(Unaudited)
<S> <C> <C> <C> <C>
Gross sales $ 974 $ 2,660 $ 6,153 $ 4,656
Less: Retailer reimbursements (577) (840) (1,877) (1,790)
------------- ------------- ------------- -------------
Net sales 397 1,820 4,276 2,866
------------- ------------- ------------- -------------
Operating expenses:
Direct costs 2,222 2,396 7,110 6,771
Selling, general and administrative expenses 6,495 6,475 20,319 23,345
Depreciation and amortization of intangible assets 2,392 2,202 6,791 5,473
------------- ------------- ------------- -------------
Total operating expenses 11,109 11,073 34,220 35,589
------------- ------------- ------------- -------------
Operating loss (10,712) (9,253) (29,944) (32,723)
------------- ------------- ------------- -------------
Other income (expense):
Interest income 128 302 246 1,135
Interest expense (5,803) (5,472) (17,266) (15,499)
------------- ------------- ------------- -------------
Total other expense (5,675) (5,170) (17,020) (14,364)
------------- -------------- -------------- --------------
Loss before extraordinary item and income taxes (16,387) (14,423) (46,964) (47,087)
Income taxes -- -- -- --
------------- ------------- ------------- -------------
Net loss before extraordinary item (16,387) (14,423) (46,964) (47,087)
Extraordinary item - gain on extinguishment of debt -- -- 1,728 --
------------- ------------- ------------- -------------
Net loss (16,387) (14,423) (45,236) (47,087)
Preferred stock dividends accrued (1,215) -- (2,416) --
------------- ------------- ------------- -------------
Net loss attributable to common stock $ (17,602) $ (14,423) $ (47,652) $ (47,087)
============= ============= ============= =============
Per share information:
Net loss per common share before extraordinary item:
Basic and Diluted $ (2.28) $ (1.87) $ (6.39) $ (6.09)
Extraordinary item - gain on extinguishment of debt -- -- .22 --
------------- ------------- ------------ -------------
Net loss per common share:
Basic and Diluted $ (2.28) $ (1.87) $ (6.17) $ (6.09)
============ ============ ============ =============
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, Incorporated)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Nine Months Ended
September 30, September 30,
1999 1998
---- ----
(Unaudited) (Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (45,236) $ (47,087)
Items not affecting cash and cash equivalents:
Depreciation and amortization of fixed and intangible assets 6,791 5,473
Loss on disposal of assets -- 29
Non-cash interest on discounted bonds 13,987 15,376
Extraordinary gain on extinguishment of debt (1,728) --
Other items, net (55) 114
Changes in working capital:
Receivables, net 1,540 (1,345)
Accounts payable and accrued expenses 2,224 (4,287)
Other current assets (825) (311)
Deferred revenues (1,470) 285
--------- ----------
Net cash used in operating activities (24,772) (31,753)
---------- ---------
Cash flows from investing activities:
Expenditures for property, plant and equipment (8,011) (7,319)
Proceeds from disposal of assets 2 --
Patent acquisition costs -- (2,090)
--------- ----------
Net cash used in investing activities (8,009) (9,409)
--------- ----------
Cash flows from financing activities:
Long-term debt repayments (23) --
Long-term debt retirements (194) --
Proceeds from preferred stock issuance 30,402 --
--------- ----------
Net cash provided by financing activities 30,185 --
--------- ----------
Foreign exchange effects on cash and cash equivalents (60) (37)
--------- ----------
Net decrease in cash and cash equivalents (2,656) (41,199)
Cash and cash equivalents at beginning of period 14,166 45,211
--------- ----------
Cash and cash equivalents at end of period $ 11,510 $ 4,012
========= ==========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 498 $ 26
========= ==========
Supplemental disclosures of non-cash investing and financing activities:
Issuance of note payable for patent acquisition $ -- $ 5,679
========= ==========
Dividends payable in preferred stock $ 2,416 $ --
========= ==========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
3
<PAGE>
INTER*ACT ELECTRONIC MARKETING, INC.
(Formerly, Inter*Act Systems, Incorporated)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Nine Months Ended September 30, 1999 and September 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 4,300 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, 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 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) risks
inherent in the necessity for the Company to raise additional equity or debt
financing to fund continuing losses, (vii) the intensely competitive nature of
the consumer product and promotional industry, (viii) risks that the Company's
rights related to patents, proprietary information and trademarks may not
adequately protect its business, (ix) the Company's ability to attract and
retain competent management employees and (x) 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.
From inception to September 30, 1999, the Company has generated revenues
significantly lower than 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 negative cash flow and ongoing
expansion plans. There is no assurance that such additional financing can be
obtained.
2. Summary of Significant Accounting Policies
Basis of Preparation
The accompanying interim financial statements as of September 30, 1999 and
for the three- and nine-month periods ended September 30, 1999 and September 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 Statement of
Financial Accounting Standards ("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
4
<PAGE>
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.
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.
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 observes the provisions of 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>
Nine Months Ended
September 30,
1999 1998
(Unaudited)
(In thousands)
<S> <C> <C>
Net Loss $(45,236) $(47.087)
--------- --------
Other comprehensive income (loss)
Translation adjustments (60) (37)
----
Other comprehensive income (loss) (60) (37)
--------- --------
Comprehensive loss $(45,296) $(47,124)
--------- --------
</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 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 ctock 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 September 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. The United States District Court in the District of Connecticut has
denied Catalina Marketing's motions for summary judgment, and a scheduling order
is pending. As with any litigation, the ultimate outcome of the suit cannot be
predicted. However, the Company intends to pursue its claim and defend against
Catalina Marketing's counterclaim 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 has been 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
6
<PAGE>
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.
9. Subsequent Events
Repurchase of Notes
In October 1999, the Company repurchased 15,000 of its 14% Senior
Discount Notes due 2003, each with a face value of $1,000 per note, for an
aggregate of $3.0 million in cash. In connection therewith, the Company also
repurchased Warrants to purchase an aggregate of 141,435 shares of the Company's
common stock which were originally issued as part of the offering of the Notes.
This repurchase of Notes will result in a gain on extinguishment of debt in the
fourth quarter of 1999.
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 nine months ended
September 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
commercial scale 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
7
<PAGE>
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 generated operating revenue significantly lower
than 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 $107.3 million as of September 30, 1999 and
has incurred cumulative losses of $186.9 million through September 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 to operate
at a loss for the foreseeable future. There can be no assurance that the Company
will achieve profitability or, if achieved, will be able to sustain such
profitability.
Nine Months Ended September 30, 1999 Compared With Nine Months Ended September
30, 1998
The Company had an installed base in the U.S. of 2,496 terminals in 1,677
stores as of September 30, 1999, as compared to 2,648 terminals in 1,749 stores
as of September 30, 1998. The number of terminals and number of stores with
terminals declined as of September 30,1999 as compared to 1998 largely as a
result of a large retailer closing stores on the East Coast. During the first
nine months 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). The ILN has already
been installed in Cub Foods, and is expected to be installed in SuperValu (New
England) by the end of the fourth quarter and in Eagle Food Centers in the first
quarter of 2000.
During the first nine months of 1999, the Company entered into contracts
to install the ILN in Sainsbury's supermarkets and in Boots the Chemist stores
in the United Kingdom. Starting in the third quarter and continuing into the
fourth quarter, the Company installed 1,819 terminals in 454 stores. The Company
will continue equipping stores with the ILN through the first quarter of 2000.
Net sales during the nine-month period ended September 30, 1999 increased
to $4.3 million from $2.9 million in the 1998 period, primarily as a result of
the larger installed base of ILN terminals in the U.S. during the entire 1999
period versus the comparable period in 1998 and the Company's expanding presence
in the United Kingdom.
Operating loss for the nine-month period ended September 30, 1999 was
$29.9 million versus $32.7 million in the 1998 period. The improvement in
operating results for the 1999 nine months was due to the increase in revenue of
$1.4 million and lower selling, general and administrative ("S,G&A") costs
partially offset by a $1.3 million increase in depreciation and amortization and
a $1.3 million provision for severance and related costs due 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. Major factors in
the decrease in S,G&A expense for the year were a $3.1 million reduction in
non-paid company-sponsored promotions and lower litigation costs. Depreciation
charges and field service fleet expenses increased by $1.3 million and $278,000
respectively, reflecting the cost of the additional terminals in service in 1999
versus the comparable period in 1998.
Net loss for the nine-month period ended September 30, 1999 decreased by
approximately $1.9 million from $47.1 million to $45.2 million. Contributing to
the improvement was a $2.8 million reduction in operating losses, 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 $1.8 million and
lower interest income of $889,000. Substantially all of the interest expense of
$17.3 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 $246,000 for the first nine months of
1999 reflects a decreased average cash balance in 1999 compared to the 1998
period. Cash and cash equivalents at September 30, 1999 were $11.5 million as
compared to $4.0 million at September 30, 1998.
Three Months Ended September 30, 1999 Compared With Three Months Ended September
30, 1998
Net sales during the three-month period ended September 30, 1999 decreased
to $397,000 from $1.8 million in the 1998 period, principally due to 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 promotions. The Sainsbury's rollout resumed in
the third quarter of 1999. The decrease in revenue was also a result of the
Company's transition in U.S. sales management
8
<PAGE>
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 September 30, 1999 was
$10.7 million versus $9.3 million in the 1998 comparable period. The increase in
operating loss for the quarter was a direct result of the reduced revenue due to
the above-mentioned European delays and domestic sales management changes.
Net loss for the three-month period ended September 30, 1999 increased by
approximately $2.0 million from $14.4 million to $16.4 million primarily due to
the higher operating loss of $1.4 million and increased interest expense of
$331,000 coupled with a decrease in interest income of $174,000.
Liquidity and Capital Resources
For the nine months ended September 30, 1999 and 1998, cash used in
operating activities was $24.8 million and $31.8 million, respectively. From
inception to September 30, 1999, the Company has generated minimal revenue
relative to its expenses, primarily consisting of 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 September 30, 1999, the Company's shareholders have
contributed approximately $77.9 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").
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 of Preferred Stock to be issued in
the private offering. As of September 30, 1999, an aggregate of 488,868 shares
of Preferred Stock had been issued, representing net proceeds of $48.2 million.
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 September 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 $8.7 million on the Notes is due and payable in February
2000. The Company is currently negotiating with the holders of the Notes to
exchange the Notes for a combination of new notes, a new series of preferred
stock and warrants. Cash payments of interest on the new notes would be
deferred. There is no assurance that these negotiations will result in a
successful transaction.
9
<PAGE>
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. None of the
Warrants originally issued as part of the offering of the Notes were purchased
in connection with this repurchase of the Notes. This repurchase of Notes
resulted in an extraordinary gain on extinguishment of debt of $1.7 million.
At September 30, 1999. the Company had working capital of $2.6 million,
compared to working capital of $7.0 million at December 31, 1998. Total cash and
cash equivalents at September 30, 1999 and December 31, 1998 was $11.5 million
and $14.2 million, respectively. The Company's current level of indebtedness,
amounting to approximately $129.8 million, represents long-term debt resulting
from the Private Placement and from the purchase of certain intellectual
property.
In the period ended September 30, 1999, cash used in investing activities
was $8.0 million, primarily reflecting disbursements for net capital
expenditures. 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 September
30, 1999 was $30.2 million resulting primarily from the Preferred Stock
issuance. No cash was provided by financing activities during the period ended
September 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. In addition, the Company
is negotiating with private investors for additonal equity and debt capital.
There is no assurance that such additional equipment financing or additional
capital can be obtained.
If additional funds are raised through the issuance of equity securities,
shareholders may experience 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.
If the Company is unsuccessful in negotiating an exchange of the Notes for
new notes with a deferred interest payment or is unsuccessful in raising
additional equity capital or debt financing 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 as security systems and other services for its central
and satellite offices. 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
10
<PAGE>
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 noncompliance problems, one patch for the Company's interactive
terminal systems and one for its server systems. The Company has tested and
deployed both patches required for the Company's interactive terminal systems.
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.
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 has finalized 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 and telephone 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 forward-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-
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<PAGE>
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 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) risks inherent in the necessity for the Company to
raise additional equity or debt financing to fund continuing losses, (vii) the
intensely competitive nature of the consumer product and promotional industry,
(viii) risks that the Company's rights related to patents, proprietary
information and trademarks may not adequately protect its business, (ix) the
Company's ability to attract and retain competent management employees and (x)
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.
12
<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. As of September 30, 1999, the Company had issued and sold an aggregate
of 488,868 shares of Preferred Stock at a price of $100.00 per share resulting
in net cash proceeds to the Company of approximately $48.2 million. Of such
shares, 32,029 were issued and sold during the third quarter of 1999.
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.
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<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C>
3(a) Restated Articles of Incorporation of the Company effective September 10, 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-in 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(1) to the Company's Annual Report on Form 10-K for the year ended
September 28, 1996.
10(b)(8) Key Employee Severance Plan
10(b)(9) Form of Severance Agreement for Key Employees
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 third quarter ended
September 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.
<TABLE>
<S> <C>
Date
----
By /s/ Stephen R. Leeolou November 15, 1999
---------------------------
Stephen R. Leeolou
Chairman, Chief Executive Officer and Treasurer
(Principal Financial Officer)
By /s/ Lee D. Armbuster
--------------------------- November 15, 1999
Lee D. Armbuster
President and Chief Operating Officer
</TABLE>
STATEMENT OF DIFFERENCES
------------------------
The trademark symbol shall be expressed as............................. 'TM'
The service mark symbol shall be expressed as.......................... 'sm'
15
<PAGE>
EX-3
EXHIBIT 3(a)
RESTATED ARTICLES OF INCORPORATION
OF
INTER*ACT ELECTRONIC MARKETING, INC.
1. The name of the corporation is Inter*Act Electronic
Marketing, Inc.
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. The shares of common stock
shall have unlimited voting rights and, after satisfaction of
claims, if any, of the holders of shares of preferred stock,
shall be entitled to receive the net assets of the corporation
upon distribution. The Board of Directors of the corporation
shall have full power and authority to establish one or more
series within the class of preferred stock, to define the
designations, preferences, limitations and relative rights
(including conversion rights) of shares within such class and
to determine all variations between series. (The rights and
preferences of the series established by the Board of
Directors and designated as the 10% Series A Mandatorily
Convertible Preferred Stock are described on the "Amended and
Restated Statement of Rights and Preferences of the 10% Series
A Mandatorily Convertible Preferred Stock of Inter*Act
Electronic Marketing, Inc." attached hereto).
3. The street address and county of the current registered agent
of the corporation are Suite 1500, Renaissance Plaza, 230
North Elm Street, Greensboro, North Carolina, 27401, Guilford
County, and the name of the registered agent at that address
is Doris R. Bray.
The mailing address of the current registered office of the
corporation is P.O. Box 21847, Greensboro, North Carolina
27420.
4. Any director or the entire Board of Directors of the
corporation may be removed at any time, but only for cause and
only by the affirmative vote of the holders of at least
two-thirds (66%) of the outstanding shares of capital stock
of the corporation entitled to vote generally in elections of
directors (considered for this purpose as a single class).
5. To the fullest extent permitted by the North Carolina Business
Corporation Act as it exists or may hereafter be amended, no
person who is serving or who has served as a director of the
corporation shall be personally liable to the corporation or
any
<PAGE>
of its shareholders for monetary damages for breach of duty as
a director. No amendment or repeal of this article, nor the
addition of any provision to these Articles of Incorporation
inconsistent with this article, shall eliminate or reduce the
protection granted herein with respect to any matter that
occurred prior to such amendment, repeal, or addition.
6. (a) As used in this Article 6, the term "Person"
includes any person, firm or corporation; any person, firm or
corporation controlling that Person, controlled by that
Person, or under common control with that Person; and any
group of which that Person or any of the foregoing persons,
firms or corporations or members, or any other group
controlling that Person, controlled by that Person, or under
common control with that Person. As used herein the term
"group" includes persons, firms and corporations acting in
concert, whether or not as a formal group. The term "equity
security" means any shares of stock or similar security, any
security convertible, with or without consideration, into such
a security, or carrying any warrant or right to subscribe to
or to purchase such a security; or any such warrant or right.
(b) Except as authorized by section (d) of this
Article 6, if, as of the record date for the determination of
the identity of the shareholders of the corporation entitled
to notice and to vote on such transaction, any Person is the
record or beneficial owner, directly or indirectly, of more
than ten percent (10%) of any class of equity security of the
corporation, the affirmative vote of the holders of two-thirds
(66%) of the shares of capital stock of the corporation then
entitled to vote in elections of directors shall be required
for (1) the merger or consolidation of the corporation with
that Person; or (2) the sale, lease, or exchange of
substantially all of the assets of the corporation or of that
Person to the other; or (3) any dissolution of the
corporation. This affirmative vote is in addition to any vote
otherwise required by North Carolina law or by any agreement
between the corporation and any national securities exchange.
(c) The Board of Directors of the corporation shall
have the power and duty to determine for purposes of this
Article 6, on the basis of information known to the
corporation, whether (1) the purported holder of record or
beneficial owner of any class of equity security of the
corporation is a "Person" within the meaning of section (A);
(2) whether such Person in fact holds of record or owns
beneficially more than ten percent (10%) of any class of
equity security of the corporation; and (3) whether the
approval of the Board of Directors referred to in section (d)
has been obtained. Any such determination by the Board of
Directors shall be conclusive and binding for all purposes of
this Article 6.
(d) The provisions of this Article 6 shall not apply
to (1) any one of the transactions specified in section (b) if
the Board of Directors of the corporation shall by resolution,
by a vote of a majority of its members than in office other
than
2
<PAGE>
such Person, have approved such transaction and recommended
its approval by the shareholders; or (2) any merger or
consolidation of the corporation with, or any sale, lease or
exchange to the corporation or any of its subsidiaries of any
of the assets of, any corporation of which a majority of the
outstanding shares of stock entitled to vote in elections of
directors of such other corporation is owned of record or
beneficially by the corporation and its subsidiaries.
(e) No amendment of the Articles of Incorporation of
the corporation shall amend, alter, repeal or change any of
the provisions of this Article 6, unless the amendment
effecting such amendment, alteration, change or repeal shall
receive the affirmative vote of the holders of two-thirds
(66%) of the shares of capital stock of the corporation then
entitled to vote in elections of directors.
7. (a) Notwithstanding any other provision of the
Articles of Incorporation or the bylaws of the corporation,
the Board of Directors of the corporation shall have the power
to adopt, amend or repeal the bylaws of the corporation except
to the extent limited by law. The shareholders of the
corporation may exercise their power to adopt, amend or repeal
the bylaws of the corporation only by the affirmative vote of
the holders of at least two-thirds (66%) of the outstanding
shares of capital stock of the corporation entitled to vote
generally in the election of directors (considered for this
purpose as one class and notwithstanding that some lesser
percentage may be permitted by law, or permitted or required
by the Articles of Incorporation or the bylaws of the
corporation).
(b) No amendment of the Articles of Incorporation of
the corporation shall amend, alter, repeal or change any of
the provisions of this Article 7 unless the amendment
effecting such amendment, alteration, change or repeal shall
receive the affirmative vote of the holders of two-thirds
(66%) of the shares of capital stock of the corporation then
entitled to vote in elections of directors.
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AMENDED AND RESTATED
STATEMENT OF RIGHTS AND PREFERENCES OF THE
10% SERIES A MANDATORILY CONVERTIBLE PREFERRED STOCK
OF INTER*ACT ELECTRONIC MARKETING, INC.
Section 1. Number and Designation. A series consisting initially of
700,000 shares of the authorized preferred stock of the corporation, no par
value, is designated "10% Series A Mandatorily Convertible Preferred Stock" (the
"Series A Preferred Stock"). The number of shares of Series A Preferred Stock
shall not be increased but may be decreased from time to time by resolution of
the Board of Directors; provided, that the number of authorized shares of Series
A Preferred Stock shall be increased by the number of shares of Series A
Preferred Stock issued in respect of dividends pursuant to Section 3(b) hereof.
Section 2. Ranking. For purposes of this Statement of Rights and
Preferences, any stock of any class or classes of the corporation shall be
deemed to rank:
(a) prior to the Series A Preferred Stock, either as to dividends or
upon liquidation, if the holders of such class or classes shall be entitled to
the receipt of dividends or of amounts distributable upon dissolution,
liquidation or winding up of the corporation, as the case may be, in preference
or priority to the holders of Series A Preferred Stock;
(b) on a parity with Series A Preferred Stock (the "Parity Stock"),
either as to dividends or upon liquidation, whether or not the dividend rates,
dividend payment dates or redemption or liquidation prices per share or sinking
fund provisions, if any, shall be different from those of Series A Preferred
Stock, if the holders of such stock shall be entitled to the receipt of
dividends or of amounts distributable upon dissolution, liquidation or winding
up of the corporation, as the case may be, without preference or priority, one
over the other, as between the holders of such stock and the holders of Series A
Preferred Stock; or
(c) junior to Series A Preferred Stock, either as to dividends or upon
liquidation, if such class shall be the common stock, no par value, of the
corporation (the "Common Stock") or if the holders of Series A Preferred Stock
shall be entitled to receipt of dividends or of amounts distributable upon
dissolution, liquidation or winding up of the corporation, as the case may be,
in preference or priority to the holders of shares of such class or classes.
Section 3. Dividends and Distributions.
(a) For each semi-annual dividend period (a "Dividend Period")
dividends payable on each share of Series A Preferred Stock shall be payable at
a rate of 10% per annum of the initial liquidation preference of $100 per share
divided by two. Each Dividend Period shall commence on the April 1 and October 1
following the last day of the preceding Dividend Period and shall end on and
include the day next preceding the first day of the next Dividend Period.
Dividends shall be cumulative from the date of original issue and shall be
payable, when, as and if declared by the Board of Directors or by a duly
authorized committee thereof, on March 31 and September
<PAGE>
30 of each year, commencing on March 31, 1999. Each such dividend shall be paid
to the holders of record of shares of Series A Preferred Stock as they appear on
the stock register of the corporation on such record date, not exceeding 45 days
preceding the payment date thereof, as shall be fixed by the Board of Directors
of the corporation or by a duly authorized committee thereof. Dividends on
account of arrears for any past Dividend Periods may be declared and paid at any
time, without reference to any regular dividend payment date, to holders of
record on such date, not exceeding 45 days preceding the payment date thereof,
as may be fixed by the Board of Directors of the corporation or by a duly
authorized committee thereof.
(b) Dividends payable on shares of Series A Preferred Stock for any
period greater or less than a full Dividend Period, shall be computed on the
basis of a 360-day year consisting of twelve 30-day months and the actual number
of days elapsed in the period. Notwithstanding paragraph (a) of this Section 3,
any dividends payable on the shares of Series A Preferred Stock prior to a
Qualified Public Offering (defined below), including without limitation any or
all dividends in arrears, shall be paid in additional shares of Series A
Preferred Stock. The corporation shall pay such dividend by issuing to such
holder of Series A Preferred Stock additional shares of Series A Preferred Stock
having an aggregate initial liquidation preference equal to the amount of cash
dividends otherwise payable to such holder.
(c) No full dividends shall be declared or paid or set apart for
payment on the Preferred Stock of any series ranking, as to dividends, on a
parity with or junior to the Series A Preferred Stock for any period unless full
cumulative dividends have been or contemporaneously are declared and paid or
declared and a sum sufficient for the payment thereof set apart for such payment
on the Series A Preferred Stock for all Dividend Periods terminating on or prior
to the date of payment of such full cumulative dividends. When dividends are not
paid in full, as aforesaid, upon the shares of Series A Preferred Stock and any
other series of Parity Stock, all dividends declared upon shares of this Series
and such other series of Parity Stock shall be declared pro rata so that the
amount of dividends declared per share on the Series A Preferred Stock and such
other Parity Stock shall in all cases bear to each other the same ratio that
accrued and unpaid dividends per share on the shares of Series A Preferred Stock
and such other Parity Stock bear to each other. Holders of shares of Series A
Preferred Stock shall not be entitled to any dividend, whether payable in cash,
property or stock, in excess of full cumulative dividends, as herein provided,
on the Series A Preferred Stock. No interest, or sum of money in lieu of
interest, shall be payable in respect of any dividend payment or payments on the
Series A Preferred Stock which may be in arrears.
(d) So long as any shares of Series A Preferred Stock are outstanding,
no dividend (other than a dividend in Common Stock or in any other stock ranking
junior to this series as to dividends and upon liquidation and other than as
provided in paragraph (c) of this Section 3) shall be declared or paid or set
aside for payment or other distribution declared or made upon the Common Stock
or upon any other stock ranking junior to or on a parity with this Series as to
dividends or upon liquidation, nor shall any Common Stock or any other stock of
the corporation ranking junior to or on a parity with this Series as to
dividends or upon liquidation be redeemed, purchased or otherwise acquired for
any consideration (or any moneys be paid to or made available for a sinking fund
for the redemption of any shares of any such stock) by the corporation (except
by conversion into or exchange for stock of the corporation ranking junior to
the Series A Preferred Stock as to dividends and upon liquidation) unless, in
each case, the full cumulative
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<PAGE>
dividends on all outstanding shares of Series A Preferred Stock shall have been
paid or declared and set aside for payment for all past Dividend Periods.
Section 4. Voting Rights.
(a) Except as otherwise expressly provided herein or as required by
law, the holders of each share of Series A Preferred Stock shall be entitled to
vote on all matters submitted to shareholders for voting, voting together with
the holders of Common Stock as a single group, and shall be entitled to notice
of any shareholders' meeting in accordance with applicable law and the Bylaws of
the corporation. Each share of Series A Preferred Stock shall entitle the holder
thereof to such number of votes per share on each such matter as shall equal the
number of shares of Common Stock (including fractions of a share) into which
each share of Series A Preferred Stock is convertible pursuant to Section 5(a)
on the record date with respect to such matter. Except as provided in the next
succeeding sentence, the approval of holders of 75% of the outstanding shares of
Series A Preferred Stock shall be required prior to the corporation's issuing
any shares of a class of preferred stock that ranks on a parity with or senior
to the Series A Preferred Stock. Notwithstanding the foregoing sentence, the
corporation may issue up to $90 million of Series A Preferred Stock and Parity
Stock without the approval of any holders of Series A Preferred Stock. The
corporation may not amend or alter any of this Statement of Rights and
Preferences without the approval of the holders of 75% of the outstanding Series
A Preferred Stock.
Section 5. Conversion of Series A Preferred Stock. The holders of
Series A Preferred Stock shall have conversion rights as follows (the
"Conversion Rights"):
(a) Right to Convert. Each share of Series A Preferred Stock shall be
convertible, at the option of the holder thereof, at any time after the date of
issuance of such share at the office of the corporation or any transfer agent
for such stock, into such number of fully paid and nonassessable shares of
Common Stock as is equal to the Liquidation Preference on the date of conversion
divided by $8.50, as adjusted pursuant to Section 5(g) below (the "Conversion
Price").
(b) Mandatory Conversion. Each share of Series A Preferred Stock shall
automatically be converted into such number of fully paid and nonassessable
shares of Common Stock as is equal to the Liquidation Preference on the date of
conversion divided by the Conversion Price, upon (i) the closing of the sale of
the Common Stock in a Qualified Public Offering (defined below), (ii) the
closing of any Transaction (as defined in Section 5(h) below) in which each
holder of shares of Series A 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 Series A Preferred Stock (a
"Qualified Transaction") or (iii) the vote or written consent of holders of not
less than 75% of the outstanding shares of Series A Preferred Stock. Notice of
any Qualified Public Offering or Qualified Transaction shall be given to each
holder of Series A Preferred Stock at least thirty days prior to anticipated
date of closing and conversion. "Qualified Public Offering" means a firm
commitment, public offering of the
3
<PAGE>
Common Stock pursuant to a registration statement declared effective under the
Securities Act of 1933, as amended, 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.
(c) Mechanics of Conversion.
(i) To convert shares of Series A Preferred Stock into shares of
Common Stock, the holder of such shares of Series A Preferred Stock
shall (A) surrender the certificate or certificates therefor, duly
endorsed, at the office of the corporation or of any transfer agent for
such stock, (B) give written notice to the corporation at such office
that it elects to convert the same, (C) state therein the name or names
in which it wishes the certificate or certificates for shares of Common
Stock to be issued and (D) deliver to the corporation an executed
joinder agreement pursuant to which such holder agrees to become a
party to and be bound by the Shareholders' Agreement dated as of April
16, 1993 among the corporation and the holders of Common Stock, as
amended (the "Shareholders' Agreement"). The corporation shall, as soon
as practicable thereafter and at its expense, issue and deliver to such
holder a certificate or certificates for the number of shares of Common
Stock to which such holder is entitled. Such conversion shall be deemed
to have been made immediately prior to the close of business on the
date of surrender of the shares of Series A Preferred Stock to be
converted, and the person or persons entitled to receive the shares of
Common Stock issuable upon such conversion shall be treated for all
purposes as the record holder or holders of such shares of Common Stock
on such date.
(ii) If the conversion is mandatory pursuant to Section 5(b) of
this Statement of Rights and Preferences, the conversion shall be
conditioned upon the closing with the underwriters of the sale of
securities pursuant to such Qualified Public Offering, the closing of
such Qualified Transaction or the vote or written consent of holders of
not less than 75% of the outstanding shares of Series A Preferred
Stock, as the case may be, and the Series A Preferred Stock shall be
deemed to have been converted immediately prior to the occurrence of
such event.
(d) Reservation of Stock Issuable Upon Conversion. The corporation
shall at all times reserve and keep available out of its authorized but unissued
shares of Common Stock, free of preemptive rights, solely for the purpose of
effecting the conversion of the shares of Series A Preferred Stock, such number
of its shares of Common Stock as shall from time to time be sufficient to effect
the conversion of all outstanding shares of Series A Preferred Stock; and if at
any time the number of authorized but unissued shares of Common Stock shall not
be sufficient to effect the conversion of all then outstanding shares of Series
A Preferred Stock, the corporation will take such corporate action as may, in
the opinion of its counsel, be necessary to increase its authorized but unissued
shares of Common Stock to such number of shares as shall be sufficient for such
purpose, including, without limitation, engaging in best efforts to obtain the
requisite shareholder approval of any necessary amendment to these Articles of
Incorporation.
4
<PAGE>
(e) Fractional Shares. No fractional share shall be issued upon the
conversion of any share or shares of Series A Preferred Stock. All shares of
Common Stock (including fractions thereof) issuable upon conversion of more than
one share of Series A Preferred Stock by a holder thereof shall be aggregated
for purposes of determining whether the conversion would result in the issuance
of any fractional share. If, after the aforementioned aggregation, the
conversion would result in the issuance of a fraction of a share of Common
Stock, the corporation shall, in lieu of issuing any fractional share, pay the
holder otherwise entitled to such fraction a sum in cash equal to the same
fraction of the fair market value per share as of the date of conversion.
(f) No Impairment. The corporation will not, by amendment of its
Articles of Incorporation or through any reorganization, transfer of assets,
consolidation, merger, share exchange, dissolution, issue or sale of securities
or any other voluntary action, avoid or seek to avoid the observance or
performance of any of the terms to be observed or performed hereunder by the
corporation, including without limitation the adjustments required under this
Section 5, and will at all times in good faith assist in the carrying out of all
the provisions of this Section 5 and in the taking of all such action as may be
necessary or appropriate in order to protect the Conversion Rights of the
holders of Series A Preferred Stock against impairment.
(g) Adjustment to Conversion Price. The Conversion Price shall be
adjusted as follows:
(i) If, at any time during the period when the Series A Preferred
Stock remains outstanding, the corporation shall declare and pay on
shares of Common Stock a dividend payable in shares of Common Stock or
shall split the then outstanding shares of Common Stock into a greater
number of shares, then the number of shares of Common Stock which the
holders of the Series A Preferred Stock would receive upon conversion
thereof, as in effect at the time of taking of a record for such
dividend or at the time of such stock split, shall be proportionately
increased and the Conversion Price shall be proportionately decreased,
and conversely, if at any time the corporation shall contract or reduce
the number of outstanding shares of Common Stock by combining such
shares into a smaller number of shares, then the number of shares which
may be purchased upon the conversion of the Series A Preferred Stock at
the time of such action shall be proportionately decreased as of such
time, and the Conversion Price shall be proportionately increased.
(ii) If the corporation shall issue or sell shares of its Common
Stock (including without limitation shares issued upon exercise of
options, rights or warrants) at a price per share (taking into account,
to the extent applicable, any price paid for the option, right or
warrant) less than the Conversion Price, then, forthwith upon such
issue or sale, the Conversion Price shall be reduced to an amount equal
to (i) the cash consideration per share received by the corporation as
consideration for such sale or issue, plus (ii) the per share amount of
any other consideration received by the corporation as consideration
for such sale or issue, as such amount shall be determined in good
faith by the Board of
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<PAGE>
Directors of the corporation, whose determination shall be conclusive
and described in a resolution of the Board of Directors.
(iii) If the corporation shall issue or sell securities convertible
into Common Stock entitling the holders thereof to convert such
securities into shares of Common Stock at a conversion price per share
(i.e., the amount payable upon involuntary liquidation, in the case of
preferred stock, or the principal amount, in the case of debt, divided
by the number of shares of Common Stock issuable upon conversion
thereof) which is less than the Conversion Price, then, forthwith upon
such issue or sale, the Conversion Price shall be reduced to an amount
equal to such lower conversion price, as such amount shall be
determined in good faith by the Board of Directors of the corporation,
whose determination shall be conclusive, and described in a resolution
of the Board of Directors.
(iv) Notwithstanding anything to the contrary contained herein, the
provisions of paragraphs (i), (ii) and (iii) of this Section 5(g) shall
not apply with respect to the issuance of any Excluded Securities (as
defined below). For the purposes hereof, "Excluded Securities" means
(A) shares of Common Stock issued in connection with the exercise or
grant of options or rights granted to employees, directors or
consultants of the corporation pursuant to the terms of any stock
compensation plan of the corporation in effect on March 1, 1999 or
adopted by the shareholders of the corporation after March 1, 1999, (B)
shares of Common Stock to be issued in connection with the exercise of
options or warrants issued by the corporation and outstanding on March
1, 1999 and (C) warrants issued to any person as a condition to such
person providing debt financing to the corporation (provided that the
Board of Directors of the corporation unanimously approves the issuance
of debt to such person) and any shares of Common Stock issued in
connection with the exercise of such warrants.
(v) Whenever the Conversion Price shall be adjusted as provided in
this Section 5(g), the corporation shall as soon as practicable
thereafter file at its principal office, a statement signed by its
Chief Financial Officer, showing in reasonable detail the basis for
such adjustment and the actual Conversion Price that shall be in effect
after such adjustment and shall cause a copy of such statement to be
sent to the holders of the Series A Preferred Stock at their addresses
on the books and records of the corporation.
(h) Changes in Common Stock. In case at any time the corporation shall
initiate any transaction or be a party to 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, charter
amendment, recapitalization or reclassification of the Common Stock or a "Stock
Sale," as defined below) 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 non-corporate entity or other property (including cash) or any
combination of the foregoing (each such transaction being herein called a
"Transaction"), then, as a condition of the consummation of the Transaction,
lawful, enforceable and adequate provision shall be made so that the holders of
Series A
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<PAGE>
Preferred Stock shall be entitled to receive upon conversion of their shares of
Series A Preferred Stock at any time on or after the consummation of the
Transaction, in lieu of the shares of Common Stock issuable upon such conversion
prior to such consummation, the securities or other property (including cash) to
which such holders of Series A Preferred Stock would have been entitled upon
consummation of the Transaction if such holders had converted their shares of
Series A Preferred Stock immediately prior thereto (subject to adjustments from
and after the consummation date as nearly equivalent as possible to the
adjustments provided for in this Section 5). If a purchase, tender or exchange
offer is made to and accepted by the holders of more than 50% of the outstanding
Common Stock (a "Stock Sale"), and if the holders of Series A Preferred Stock so
designate in a written notice given to the corporation, such holders of Series A
Preferred Stock shall be entitled to receive upon the conversion of their shares
of Series A Preferred Stock at any time on or after the consummation of the
Stock Sale in lieu of the shares of Common Stock issuable upon conversion prior
to the consummation of the Stock Sale, the securities or other property to which
such holders of Series A Preferred Stock would have been entitled if such
holders had converted their shares of Series A Preferred Stock prior to the
expiration of such purchase, tender or exchange offer and had accepted such
offer (subject to adjustments from and after the consummation of such purchase,
tender or exchange offer as nearly equivalent as possible to the adjustments
provided for in this Section 5). The corporation will not effect any Transaction
unless prior to the consummation thereof each corporation or entity (other than
the corporation) which may be required to deliver any securities or other
property upon the conversion of Series A Preferred Stock as provided herein
shall assume, by written instrument delivered to the holders of Series A
Preferred Stock, the obligation to deliver to such holders such securities or
other property as in accordance with the foregoing provisions such holders may
be entitled to receive. The foregoing provisions of this Section 5(h) shall
similarly apply to successive Transactions.
(i) Other Action Affecting Common Stock. In case at any time or from
time to time the corporation shall take any action affecting the Common Stock,
other than an action described in Section 5(h) hereof, then, unless in the
opinion of the Board of Directors of the corporation such action will not have a
material adverse effect upon the rights of the holders of Series A Preferred
Stock (taking into consideration, if necessary, any prior actions which the
Board of Directors deemed not to materially adversely affect the rights of the
holders), the conversion formula set forth in Section 5(a) shall be adjusted in
such manner and at such time as the Board of Directors of the corporation may in
good faith determine to be equitable in the circumstances.
(j) Issue Taxes. The corporation shall pay any and all issue and other
taxes that may be payable in respect of any issue or delivery of shares of
Common Stock on conversion of shares of Series A Preferred Stock pursuant
hereto; provided, that the corporation shall not be obligated to pay any
transfer taxes resulting from any transfer requested by any holder in connection
with any such conversion.
(k) Any shares of Series A Preferred Stock which shall at any time have
been converted pursuant to this Section 6 shall, after such conversion, have the
status of authorized but unissued
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<PAGE>
shares of preferred stock, without designation as to series until such shares
are once more designated as part of a particular series by the Board.
Section 6. Liquidation Preference.
(a) Series A Preferred Stock. In the event of any liquidation,
dissolution or winding up of the corporation, either voluntary or involuntary,
the holders of the Series A Preferred Stock shall be entitled to receive, prior
and in preference to any distribution of any of the assets or surplus funds of
the corporation to the holders of any stock ranking junior to the Series A
Preferred Stock, an amount equal to $100.00 per share plus the amount of accrued
and unpaid dividends thereon (the "Liquidation Preference") (such Liquidation
Preference to be adjusted for any combinations, consolidations, stock
distributions or stock dividends with respect to shares of the Series A
Preferred Stock). If upon the occurrence of any such liquidation, dissolution or
winding up of the corporation the assets and funds to be distributed among the
holders of the Series A Preferred Stock shall be insufficient to permit the
payment to such holders of the full Liquidation Preference, then the entire
assets and funds of the corporation legally available for distribution after
payment of any amounts due and owing to holders of any stock ranking senior to
the Series A Preferred Stock shall be distributed ratably among the holders of
Series A Preferred Stock based upon the number of shares of Series A Preferred
Stock then held by them.
(b) Consolidation, Merger, etc. Not a Liquidation. The consolidation or
merger of the corporation with or into any other entity, the acquisition of the
capital stock of the corporation in a share exchange or the sale, lease or other
disposition of all or substantially all of the assets, property or business of
the corporation shall not be deemed to be a liquidation, dissolution or winding
up of the corporation within the meaning of this Section 6.
(c) Valuation of Securities. Any securities to be distributed pursuant
to this Section 6 in a liquidation, dissolution or winding up of the corporation
shall be the fair market value thereof, as determined in good faith by the Board
of Directors of the corporation or, if so required by a holder of Series A
Preferred Stock, as determined by a national or regional investment bank or a
national accounting firm mutually selected by such holder and the corporation,
the fees and expenses of which shall be paid by the corporation.
(d) Notice. Written notice (the "Notice") of any such liquidation,
dissolution or winding up of the corporation within the meaning of this Section
6, which states the payment date, the place where said payments shall be made
and the date on which Conversion Rights (as defined in Section 5) terminate as
to such shares (which shall be not less than 20 days after the date such notice
is given), shall be given by first class mail, postage prepaid, or by telecopy,
facsimile or recognized overnight courier, not less than 30 nor more than 60
days prior to the payment date stated therein, to the then holders of record of
Series A Preferred Stock and Common Stock, such Notice to be addressed to each
such holder at its address as shown on the records of the corporation.
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<PAGE>
Section 7. Redemption Rights.
(a) The corporation shall have the right at any time after November 1,
2005 to redeem, out of funds legally available therefor, any outstanding shares
of Series A Preferred Stock, in whole or in part, for a redemption price equal
to the Liquidation Price per share of the Series A Preferred Stock (calculated
as if the corporation liquidated on the date of redemption). On November 1,
2008, the corporation shall redeem, out of funds legally available therefor, any
outstanding shares of Series A Preferred Stock, in whole or in part, for a
redemption price equal to the Liquidation Price per share of the Series A
Preferred Stock (calculated as if the corporation liquidated on the date of
redemption).
(b) In the event that fewer than all the outstanding Series A Preferred
Stock are to be redeemed, except as otherwise provided by law, the number of
shares to be redeemed shall be determined by the Board and the shares to be
redeemed shall be determined by lot or pro rata as may be determined by the
Board or by any other method as may be determined by the Board in its sole
discretion to be equitable.
(c) In the event the corporation shall redeem shares of Series A
Preferred Stock, notice of such redemption shall be given by first class mail,
postage prepaid, mailed not less than 30 nor more than 60 days prior to the
redemption date, to each holder of record of the shares to be redeemed, at such
holder's address as the same appears on the stock register of the Corporation.
Each such notice shall state: (i) the redemption date; (ii) the number of shares
of Series A Preferred Stock to be redeemed and, if fewer than all the shares
held by such holder are to be redeemed, the number of such shares to be redeemed
from such holder; (iii) the redemption price; and (iv) the place or places where
certificates for such shares are to be surrendered for payment of the redemption
price.
(d) Notice having been mailed as aforesaid, from and after the
redemption date (unless default shall be made by the corporation in providing
money for the payment of the redemption price), the redeemed shares of Series A
Preferred Stock shall no longer be deemed to be outstanding, and all rights of
the holders thereof as stockholders of the corporation (except the right to
receive from the corporation the redemption price) shall cease. Upon surrender
in accordance with said notice of the certificates for any shares so redeemed
(properly endorsed or assigned for transfer, if the Board shall so require and
the notice shall so state), such shares shall be redeemed by the corporation at
the redemption price aforesaid. In case fewer than all the shares represented by
any such certificate are redeemed, a new certificate shall be issued
representing the unredeemed shares without cost to the holder thereof.
(e) Any shares of Series A Preferred Stock which shall at any time have
been redeemed shall, after such redemption, have the status of authorized but
unissued shares of preferred stock, without designation as to series until such
shares are once more designated as part of a particular series by the Board.
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EX-10
EXHIBIT 10(b)(8)
INTER*ACT ELECTRONIC MARKETING, INC.
KEY EMPLOYEE SEVERANCE PLAN
WHEREAS, the Board of Directors of INTER*ACT ELECTRONIC MARKETING,
INC. (the "Company") considers certain key employees to be uniquely valuable
assets of the Company and essential to its growth and prosperity; and
WHEREAS, the Board of Directors believes that adoption of a reasonable
severance plan would have the effect of giving to such key employees a sense of
security that would have a positive effect on their performances on behalf of
the Company; and
WHEREAS, this Board believes that a reasonable severance plan would
improve the ability of the Company to attract and maintain qualified key
employees; now, therefore, it is
RESOLVED, that this Board of Directors hereby adopts the following Key
Employee Severance Plan (the "Plan"):
1. PURPOSE. The purpose of the Plan is to attract and retain highly
qualified, high impact key employees for the Company.
2. ELIGIBILITY. Any employee of the Company who is identified by the
Board of Directors or its Compensation Committee as a participant in the Plan
and who enters into a Severance Agreement substantially in the form attached to
this Plan shall be a participant in the Plan (a "Participant").
3. ENTITLEMENT. Any Participant who:
(1) is terminated from his or her employ by the Company "without
cause" (as defined in Section 4) following a "change in control" of the
Company, or
(2) who shall have terminated his or her employment because of a
"change in position or employment conditions" (as defined in Section 5)
following a "change in control".
<PAGE>
shall be entitled to receive a severance payment in an amount equal to his or
her average annual base salary for the immediately preceding two fiscal years of
the Company (or such lesser number of whole fiscal years as he or she shall have
been in the employ of the Company, or, if he or she shall have been in the
employ of the Company less than a whole fiscal year, his or her current base
salary compensation) ("Average Annual Base Compensation"), multiplied by a
number specified in the Participant's Severance Agreement (the "Severance
Payment"). Upon entitlement, the Severance Payment will be payable in cash or by
certified check within thirty (30) days following the date upon which the
Participant became entitled to the Severance Payment.
For purposes of this Agreement, a "change of control" shall be deemed
to have occurred upon the occurrence of any of the following events:
(1) Any "person" (as such term is used in Sections 13(d) and
14(d)(2) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act") but excluding any employee benefit plan of the Company)
is or becomes the "beneficial owner" (as defined in Rule 13d-3 under
the Exchange Act), directly or indirectly, of securities of the Company
representing 50% or more of the combined voting power of the Company's
outstanding securities then entitled ordinarily (and apart from rights
accruing under special circumstances) to vote for the election of
directors; or
(2) Individuals who are "Continuing Directors" (as hereinafter
defined) cease for any reason to constitute at least a majority of the
Board of Directors; or
(3) A sale of more than 90% of the assets (measured in terms of
monetary value) of the Company is consummated; or
(4) Any merger, consolidation, or like business combination or
reorganization of the Company is consummated that resulted in the
occurrence of any event described in clause (i) or (ii) above.
For purposes of the foregoing, "Continuing Directors" shall mean (a)
the directors of the Company in office on the date of the Severance Agreement
between the Company and the Participant and (b) any successor to any such
director (and any additional director) who after the date of the relevant
Severance Agreement (i) was nominated or selected by a majority of the
Continuing Directors in office at the time of his or her nomination or selection
and (ii) who is not an "affiliate" or "associate" (as defined in Regulation 12B
under the Exchange Act) of any person who is the beneficial owner, directly or
indirectly, of securities representing 50% or more of the combined voting power
of the Company's outstanding securities then entitled ordinarily to vote for the
election of directors.
2
<PAGE>
Notwithstanding anything to the contrary contained herein, in the event
that any portion of the Severance Payment received or to be received by a
Participant, together with any other payments received by him or her, whether
paid or payable pursuant to the terms of this Plan or any other plan,
arrangement or agreement with the Company or any other person or entity, would
not be deductible in whole or in part by the Company in the calculation of its
federal income tax by reason of Section 280G of the Internal Revenue Code or
would cause, either directly or indirectly, an "excess parachute payment" to
exist within the meaning of said Section 280G, the Severance Payment payable
shall be reduced until no portion of the Severance Payment would fail to be
deductible by reason of being an "excess parachute payment." In the event that
any dispute arises as to whether an "excess parachute payment" exists, the
appropriate calculations shall be made by the Company's regularly employed
independent public auditors and delivered to the Participant in writing within
30 days following the date for payment of the Severance Payment, and the Company
will warrant to the Participant the accuracy of the calculations and the
information on which they are based.
4. DEFINITION OF "WITHOUT CAUSE." Termination of the Participant's
employ by the Company following a "change in control" for any reason other than
one of the following shall be deemed to be termination "without cause":
(1) continued neglect of duties for which he or she was employed
after receipt of written notice thereof from the Board of Directors or
its Compensation Committee or from the Chief Executive Officer of the
Company;
(2) continued insubordination after receipt of two written warnings
with respect thereto;
(3) misconduct involving moral turpitude in the performance of
duties for which employed, including, without limitation, the
commission of fraud, misappropriation or embezzlement by the
Participant;
(4) the Participant's being accused of committing any felony for
which he or she is indicted; or
(5) disability of the Participant, whether mental or physical, which
renders him or her substantially unable to render the services for
which he or she is employed for more than 90 days (in which event the
Participant shall be entitled to the benefits of any applicable
employee benefit plan).
5. CHANGE IN POSITION OR EMPLOYMENT CONDITIONS. The Participant shall
be deemed to have had a "change in position or employment conditions" upon
3
<PAGE>
the occurrence, following a "change in control" of the Company, of any one of
the following events:
(1) his or her authority and/or responsibilities are substantially
reduced, without his or her consent, from that in existence immediately
prior to the "change in control";
(2) his or her base compensation is reduced or his or her bonus
opportunities and other employee benefits are substantially reduced;
(3) the Participant is required to change his or her residence or
principal place of business from Charlotte, North Carolina, or such
other principal office to which he or she shall be specifically
assigned by the Company; or
(4) the travel obligations of the Participant on behalf of the
Company are, without his or her consent, increased materially above
those in effect immediately prior to the "change in control."
6. COVENANTS NOT TO COMPETE. Participation in the Plan is conditioned
upon the Participant's agreement, which agreement shall be confirmed by his or
her entering into the Severance Agreement that during the term of his or her
employment with the Company and for a period of one year following the
termination of such employment:
(1) He or she will not, directly or indirectly, own any interest in,
manage, operate, control, be employed by, render consulting or advisory
services to, or participate in or be connected with the management or
control of any business that is then (A) a competitor of Inter*Act,
including but not limited to Catalina Marketing Corporation, Planet U,
CoolSavings and Actmedia, Inc. or any affiliate thereof, or (B) engaged
in the business of displaying and/or dispensing electronic discounts,
coupons, recipes or other promotions through inter-active terminals or
other customer interface systems in grocery or other retail stores or
through the Internet, and any other business activity that the Company
may engage in during the course of the Participant's employment (an
"electronic marketing system") in competition with the Company in the
Territory;
(2) He or she will not, directly or indirectly, influence or attempt
to influence any retail store customer or any product manufacturer
customer of the Company to discontinue its use of the Company's
services or to divert such business to any other person, firm or
corporation;
4
<PAGE>
(3) He or she will not, directly or indirectly, interfere with,
disrupt or attempt to disrupt the relationship, contractual or
otherwise, between the Company and any of its respective suppliers,
principals, distributors, lessors or licensors; and
(4) He or she will not, directly or indirectly, solicit any employee
of the Company, whose base annual salary at the time of the
Participant's termination was $30,000 or more, to work for any person,
firm or corporation.
The purposes of this Section 6, the "Territory" shall mean the United States,
the United Kingdom, continental Europe and any other geographic area in which
the Company is operating an electronic marketing system immediately prior to a
"change in control".
7. DEFINITION OF "COMPANY." For purposes of this Plan, the term
"Company" shall be deemed to include Inter*Act Electronic Marketing, Inc. and
all of its direct and indirect wholly owned subsidiaries and their respective
successors and assigns.
8. EMPLOYMENT RIGHTS. Neither the adoption of this Plan nor the
execution by the Company of a Severance Agreement shall be deemed to confer upon
any Participant the right to continued employment with the Company or to
interfere in any way with the right of the Company to terminate the employment
of any employee at any time.
9. BINDING EFFECT. This Plan shall be binding upon and enure to the
benefit of the Company and its successors and assigns, including any company
with which the Company shall merge or to which the Company shall transfer all or
substantially all of its assets.
10. AMENDMENT OR TERMINATION. This Plan may be amended or terminated at
any time by the Board of Directors of the Company, provided, however, that no
amendment or termination shall adversely affect the rights of any Participant
who shall have entered into a Severance Agreement prior to the time of such
amendment or termination without his or her written consent.
Approved and adopted by the Board of Directors of Inter*Act Electronic
Marketing, Inc. as of August 19, 1999.
5
<PAGE>
EX-10
EXHIBIT 10(b)(9)
INTER*ACT ELECTRONIC MARKETING, INC.
SEVERANCE AGREEMENT FOR KEY EMPLOYEES
THIS AGREEMENT, dated as of ______________ by and between INTER*ACT
ELECTRONIC MARKETING, INC., a North Carolina corporation (the "Company"), and
_____________________ , a key employee of the Company (the "Participant").
WHEREAS, the Company maintains a Key Employee Severance Plan (the
"Plan"); and
WHEREAS, the Company has offered to the Participant the opportunity of
participating in the Plan on the terms and conditions of the Plan and of this
Agreement and the Participant desires to participate on such terms and
conditions;
NOW, THEREFORE, in consideration of the premises and other good and
valuable consideration receipt of which is hereby acknowledged, it is agreed:
1. PLAN PARTICIPATION. The Company hereby designates the Participant a
Participant under the Plan (a copy of which is attached to and made a part of
this Agreement) and shall be entitled to all rights and subject to all the terms
of the Plan. The number by which the Participant's Average Annual Base
Compensation (as defined in the Plan) will be multiplied to determine his or her
Severance Payment under Section 3(c) of the Plan shall be --------------------.
2. COVENANTS NOT TO COMPETE; OTHER PROVISIONS. The Participant hereby
acknowledges and agrees that, by entering into this Agreement, he is subject to
and bound by all provisions of the Plan, including without limitation the
provisions of Section 6 thereof, entitled "Covenants Not To Compete" to which he
specifically agrees.
3. INJUNCTIVE RELIEF. The Participant acknowledges and agrees that the
Company would suffer irreparable injury in the event of a breach by him of any
of the provisions of Section 6 of the Plan and that the Company shall be
entitled to an injunction restraining him from any breach or threatened breach
thereof. Nothing herein shall be construed, however, as prohibiting the Company
from pursuing any other remedies at law or in equity that it may have for any
such breach or threatened breach of any provision of said Section 6 or
otherwise, including the recovery of damages from the Participant.
4. EMPLOYMENT RIGHTS. The Participant acknowledges that this Agreement
<PAGE>
FINAL
does not confer upon him any right to continued employment with the Company or
any of its subsidiaries.
5. SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and
shall inure to the benefit of the Participant and his personal representatives,
estate and heirs and to the Company and its successors and assigns, including
without limitation any corporation or other entity with which the Company may
merge or to which it may transfer all or substantially all of its assets and
business (by operation of law or otherwise). The Participant may not assign this
Agreement or any part hereof without the prior written consent of the Company,
which consent may be withheld by the Company for any reason it deems
appropriate.
6. AMENDMENT; WAIVER. No provision of this Agreement or the Plan may be
amended or modified in any manner that adversely affects the rights of the
Participant hereunder except in writing signed by the Participant. No waiver by
either party of any breach by the other party of any provision of this Agreement
shall be deemed a waiver of any other breach.
7. NOTICES. All notices or other communications given pursuant to this
Agreement shall be in writing and either delivered personally, by confirmed
facsimile, by confirmed overnight delivery or by prepaid registered or certified
mail, return receipt requested. Notices and other communications mailed to the
Participant shall be addressed to his last address as shown on the personnel
records of the Company, and notices and other communications to the Company
shall be addressed to Inter*Act Electronic Marketing, Inc.,
_______________________________________________, Attn: Chairman. Either party
may change the address to which notices are to be mailed pursuant to this
Section 7, by written notice given in accordance herewith.
8. SEVERABILITY. If any one or more of the provisions contained in this
Agreement shall be invalid, illegal, or unenforceable in any respect under any
applicable law, the validity, legality and enforceability of the remaining
provisions shall not in any way be affected or impaired thereby.
9. GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws and judicial decisions of the State of North Carolina.
IN WITNESS WHEREOF, the parties have executed this Agreement on the day
and year first above written.
INTER*ACT ELECTRONIC MARKETING, INC.
By:_________________________________
2
<PAGE>
(SEAL)
Participant
Approved and adopted by the Board of Directors of Inter*Act Electronic
Marketing, Inc. as of August 19, 1999.
3
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