<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
FORM 10 Q/A
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2000
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO .
Commission File Number: 333-12091
----------------
INTER.ACT ELECTRONIC MARKETING, INC.
(Exact name of registrant as specified in its charter)
North Carolina 56-1817510
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
6836 Morrison Boulevard, Suite #200
Charlotte, North Carolina
(Address of principal executive offices)
28211
(Zip Code)
Registrant's telephone number, including area code: (704) 770-2100
----------------
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 August 14, 2000, the number of shares outstanding of the registrant's
Common Stock was 7,743,739. 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.
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<PAGE>
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
Part I--Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets--June 30, 2000 (unaudited) and
December 31, 1999................................................ 3
Consolidated Statements of Operations for the three-month and
six-month periods ended June 30, 2000 and 1999 (unaudited)....... 4
Consolidated Statements of Cash Flows for the six-month periods
ended June 30, 2000 and 1999 (unaudited)......................... 5
Notes to Consolidated Financial Statements....................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................ 9
Part II--Other Information
Item 1. Legal Proceedings................................................ 17
Item 2. Changes in Securities and Use of Proceeds........................ 17
Item 3. Exhibits and Reports on Form 8-K
Signatures................................................................ 20
</TABLE>
2
<PAGE>
PART I--FINANCIAL INFORMATION
Item 1. Financial Statements
INTER.ACT ELECTRONIC MARKETING, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
----------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................... $ 1,664 $ 9,939
Receivables, net.................................... 1,725 1,715
Other current assets................................ 3,899 4,206
--------- ---------
Total current assets.............................. 7,288 15,860
Property, plant and equipment, net.................... 31,097 31,222
Bond issuance costs, net.............................. 80 96
Patents, licenses and trademarks, net................. 7,333 7,812
Other noncurrent assets............................... 107 123
--------- ---------
Total assets...................................... $ 45,905 $ 55,113
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable.................................... $ 4,885 $ 5,351
Accrued expenses.................................... 3,693 3,415
Current portion of debt............................. 10,775 6,135
Deferred revenue.................................... 629 332
--------- ---------
Total current liabilities......................... 19,982 15,233
Long-term debt, net of discount and current portion... 70,924 63,949
Accrued dividends..................................... 8,956 4,071
--------- ---------
Total liabilities................................. 99,862 83,253
--------- ---------
Common stock purchase warrants........................ 11,367 11,367
--------- ---------
14% Series B Senior Mandatorily Redeemable Convertible
Preferred Stock, no par value, authorized 140,000
shares; 139,575 shares issued and outstanding at June
30, 2000 and December 31, 1999....................... 60,800 59,146
--------- ---------
10% Series C Mandatorily Redeemable Convertible
Preferred Stock, no par value, authorized 250,000
shares; 148,860 and 70,120 shares issued and
outstanding at June 30, 2000 and December 31, 1999,
respectively......................................... 15,529 7,039
--------- ---------
Commitments and contingencies
Stockholders' equity (deficit):
10% Series A Mandatorily Convertible Preferred
Stock, no par value, authorized 700,000 shares;
498,868 shares issued and outstanding at June 30,
2000 and December 31, 1999......................... 55,686 53,199
Common stock, no par value, authorized 50,000,000
shares; 7,743,739 shares issued and outstanding at
June 30, 2000 and December 31, 1999................ 28,380 28,380
Additional paid-in capital.......................... 22,468 22,468
Accumulated other comprehensive income.............. 516 26
Accumulated deficit................................. (248,703) (209,765)
--------- ---------
Total stockholders' equity (deficit).............. (141,653) (105,692)
--------- ---------
Total liabilities and stockholders' equity
(deficit)........................................ $ 45,905 $ 55,113
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
3
<PAGE>
INTER.ACT ELECTRONIC MARKETING, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three Months
Ended Six Months Ended
------------------ ------------------
June 30, June 30, June 30, June 30
2000 1999 2000 1999
-------- -------- -------- --------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Gross sales............................ $ 2,414 $ 1,126 $ 4,002 $ 5,179
Less: Retailer reimbursements........ (482) (452) (1,035) (1,300)
-------- -------- -------- --------
Net sales.......................... 1,932 674 2,967 3,879
-------- -------- -------- --------
Operating expenses:
Direct costs......................... 1,683 2,501 3,756 4,888
Selling, general and administrative
expenses............................ 6,610 7,269 14,846 13,824
Depreciation and amortization of
intangible assets................... 3,385 2,239 6,464 4,399
-------- -------- -------- --------
Total operating expenses........... 11,678 12,009 25,066 23,111
-------- -------- -------- --------
Operating loss......................... (9,746) (11,335) (22,099) (19,232)
-------- -------- -------- --------
Other income (expense):
Interest income...................... 24 43 45 118
Interest expense..................... (3,788) (5,910) (7,242) (11,463)
-------- -------- -------- --------
Total other expense................ (3,764) (5,867) (7,197) (11,345)
-------- -------- -------- --------
Loss before extraordinary item and
income taxes.......................... (13,510) (17,202) (29,296) (30,577)
Income taxes........................... -- -- -- --
-------- -------- -------- --------
Net loss before extraordinary
item.............................. (13,510) (17,202) (29,296) (30,577)
Extraordinary item--gain on
extinguishment of debt................ -- -- -- 1,728
-------- -------- -------- --------
Net loss........................... (13,510) (17,202) (29,296) (28,849)
Preferred stock dividends accrued...... (4,885) (742) (9,641) (1,201)
-------- -------- -------- --------
Net loss attributable to common stock.. $(18,395) $(17,944) $(38,937) $(30,050)
======== ======== ======== ========
Per share information:
Net loss per common share before
extraordinary item:
Basic and diluted.................... $ (2.38) $ (2.32) $ (5.03) $ (4.11)
Extraordinary item--gain on
extinguishment of debt.............. -- -- -- .22
-------- -------- -------- --------
Net loss per common share:
Basic and diluted.................... $ (2.38) $ (2.32) $ (5.03) $ (3.89)
======== ======== ======== ========
Common shares used in computing per
share amounts:
Basic and Diluted.................... 7,744 7,729 7,744 7,729
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
4
<PAGE>
INTER.ACT ELECTRONIC MARKETING, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Six Months Ended
------------------
June 30, June 30,
2000 1999
-------- --------
(Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net loss................................................ $(29,296) $(28,849)
Items not affecting cash and cash equivalents:
Depreciation and amortization of fixed and intangible
assets............................................... 6,464 4,399
Non-cash interest on discounted bonds................. 6,823 11,264
Extraordinary gain on extinguishment of debt.......... -- (1,728)
Other items, net...................................... 28 --
Changes in working capital:
Receivables, net...................................... (10) 1,428
Accounts payable and accrued expenses................. (188) 134
Other current assets.................................. 824 (381)
Deferred revenues..................................... 297 (1,300)
-------- --------
Net cash used in operating activities............... (15,058) (15,033)
-------- --------
Cash flows from investing activities:
Expenditures for property, plant and equipment.......... (6,345) (2,149)
Proceeds from disposal of assets........................ -- 2
-------- --------
Net cash used in investing activities............... (6,345) (2,147)
Cash flows from financing activities:
Debt repayments......................................... (196) (23)
Long-term debt retirements.............................. -- (194)
Proceeds from preferred stock issuance.................. 7,846 27,196
Proceeds from lease financing........................... 488 --
Proceeds from loan issuance............................. 4,500 --
-------- --------
Net cash provided by financing activities........... 12,638 26,979
-------- --------
Foreign exchange effects on cash and cash equivalents..... 490 6
-------- --------
Net (decrease) increase in cash and cash equivalents...... (8,275) 9,805
Cash and cash equivalents at beginning of period.......... 9,939 14,166
-------- --------
Cash and cash equivalents at end of period................ $ 1,664 $ 23,971
-------- --------
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest.............................................. $ 367 $ 188
======== ========
Supplemental disclosures of non-cash investing and
financing activities:
Dividends payable in preferred stock.................... $ 4,756 $ 1,201
======== ========
Accrued dividends payable in cash....................... $ 4,885 $ --
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
5
<PAGE>
INTER.ACT ELECTRONIC MARKETING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Six Months Ended June 30, 2000 and June 30, 1999
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,
believes it operates the world's largest fully electronic marketing network
linked to supermarket and pharmacy retailers' point-of-sale ("POS") databases
that serves on-line promotions and advertisements to shoppers seamlessly in-
store, at home and in the office. The Company's patented technologies enable
consumer products manufacturers ("Manufacturers") and supermarket retailers
("Retailers") to use historical purchase behavior data to develop targeted
purchase incentives and messages which the Company delivers to customers
before shopping begins. The Company's proprietary system, called the Inter.Act
e-Marketing NetworkSM ("IEMN"), currently comprises over 5,000 server-based
terminals 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 ShopperPerks.com. The Company's web site and its in-store
ShopperPerks(TM) portals, are linked directly to each store's point-of-sale
scanning system via Company-owned in-store servers. This on-line network gives
Inter.Act's business partners exclusive access to offer all shoppers (whether
Internet users or not) same-day, personalized savings that are electronically
downloaded to participating Retailers' cash register systems. Delivering
highly targeted, pre-shopping promotions on the IEMN historically has
generated average consumer response, or redemption, rates above 25%, which the
Company believes is superior to the response rate of any other marketing or
advertising medium in the industry.
From inception to June 30, 2000, the Company has incurred recurring losses
and has experienced negative operating cash flow. Revenues from the Company's
United States operations have not met projections and, although the Company
raised $7.8 million through the sale and issuance of 78,460 shares of 10%
Series C Mandatorily Convertible Preferred Stock during the first six months
of 2000, the Company has been recently unsuccessful in securing sufficient
additional debt or equity financing at appropriate costs necessary to maintain
its operations in both the U.S. and Europe. Following strategic discussions
with a number of third parties, the Company has recently announced its
intentions to sell all or substantially all of the assets in its U.S.
operating business, including the sale or licensing of certain patents and
other intellectual property, and in anticipation of such divestiture, has
reduced its work force in the United States. The divestiture is not intended
to include the Company's assets and operations in the United Kingdom and
continental Europe, where it plans to continue to expand its operations. See
further discussion in "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
The expected one-time cash infusion from the sale of the assets and/or
revenue from the licensing of its intellectual property is expected to be used
to reduce trade liabilities, to pay off certain short-term debt, to pay for
operating expenses in the U.S. and/or to expand its European operations,
depending on the level of cash proceeds received. The Company must, however,
raise additional equity and/or debt capital in the third quarter of 2000
pending the closing of any such sale or licensing in order to continue its
operations through the end of the year. The Company has received standby
senior debt commitments from certain existing shareholders, which it believes
will be sufficient to finance ongoing operations until consummation of the
U.S. asset sale or licensing. The closing of these commitments is subject to
certain conditions being met. There is no assurance that the Company will be
successful in closing all the standby loan commitments or that the asset sale
or licensing will raise sufficient capital to meet the Company's cash
requirements through the end of the year.
Even if the cash proceeds from the sale and/or licensing of the Company's
United States assets are sufficient and the Company is successful in closing
the standby loan commitments, 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 consumer
product manufacturers to promote brands on the IEMN and the uncertainty of
market acceptance for the IEMN, (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 may experience, (v) risks related to the Company's leverage and debt
service obligations, (vi) risks inherent in the necessity for the
6
<PAGE>
Company to raise additional equity or debt financing to fund continuing
losses, (vii) the Company's dependence on third parties, (viii) the intensely
competitive nature of the consumer product and promotional industry, (ix)
risks that the Company's rights related to patents, proprietary information
and trademarks may not adequately protect its business, (x) risks related to
managing the overseas operations from the United States and (xi) the possible
inability of new management to perform their respective roles.
2. Summary of Significant Accounting Policies
Basis of Preparation
The accompanying interim financial statements as of June 30, 2000 and for
the six-month periods ended June 30, 2000 and 1999 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/A for the year ended December 31, 1999.
Derivative Instruments and Hedging Activities
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." This statement
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. SFAS No. 133, as amended by SFAS Nos. 137 and 138, is
effective for all fiscal years beginning after June 15, 2000 and will not
require retroactive restatement of prior period financial statements. This
statement requires the recognition of all derivative instruments as either
assets or liabilities in the balance sheet measured at fair value. Derivative
instruments will be recognized as gains or losses in the period of change. If
certain conditions are met where the derivative instrument has been designated
as a fair value hedge, the hedge items may also be marked to market through
earnings, thus creating an offset. If the derivative is designed and qualifies
as a cash flow hedge, the changes in fair value of the derivative instrument
may be recorded in comprehensive income. The Company does not presently make
use of derivative instruments.
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
Comprehensive income and its components are as follows:
<TABLE>
<CAPTION>
Six Months Ended
------------------
June 30, June 30,
2000 1999
-------- --------
(Unaudited)
(In thousands)
<S> <C> <C>
Net Loss................................................ $(29,296) $(28,849)
Other comprehensive income (loss)
Translation adjustments............................... 490 6
-------- --------
Other comprehensive income (loss)..................... 490 6
-------- --------
Comprehensive loss...................................... $(28,806) $(28,843)
======== ========
</TABLE>
The components of accumulated other comprehensive income included in the
accompanying consolidated balance sheets consist of cumulative foreign
currency translation adjustments as of the end of the periods.
7
<PAGE>
5. Segment Reporting
The Company observes the provisions of SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." While the Company's
results of operations are primarily reviewed on a consolidated basis, the
chief operating decision maker also manages the enterprise in two geographic
segments: (i) North American and (ii) Europe. The following represents
selected consolidated financial information for the Company's segments for the
period ended June 30, 2000.
<TABLE>
<CAPTION>
For the Period Ended June 30, 2000
------------------------------------------------
Operating Data North America Europe Eliminations Consolidated
-------------- ------------- ------- ------------ ------------
<S> <C> <C> <C> <C>
Net sales................. $ 947 $ 2,020 $ -- $ 2,967
Income (Loss) from
operations............... (18,765) (3,334) -- (22,099)
Depreciation.............. 3,912 2,072 -- 5,984
Capital Expenditures...... 1,348 4,997 -- 6,345
Identifiable Assets....... 25,335 14,902 (1,665) 38,572
<CAPTION>
For the Period Ended June 30, 1999
------------------------------------------------
Operating Data North America Europe Eliminations Consolidated
-------------- ------------- ------- ------------ ------------
<S> <C> <C> <C> <C>
Net sales................. $ 1,307 $ 2,572 $ -- $ 3,879
Income (Loss) from
operations............... (18,937) (295) -- (19,232)
Depreciation.............. 3,633 286 -- 3,919
Capital Expenditures...... 1,266 883 -- 2,149
Identifiable Assets....... 55,899 4,762 (1,506) 59,155
</TABLE>
6. 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 under which the Company is
licensee. The Company is seeking money damages (including costs and expenses)
and a permanent injunction against Catalina Marketing to stop further
infringement of the 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 Company answered denying the
allegations and seeking declaratory judgment of non-infringement, invalidity
and unenforceability of the 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. Although the ultimate outcome of
the suit cannot be predicted, the Company intends to pursue and defend the
action vigorously.
In January 1998, Catalina Marketing International, Inc. ("Catalina
International," a subsidiary of Catalina Marketing) filed suit against the
Company alleging that the Company has infringed United States Patent No.
4,674,041. Catalina International seeks money damages as well as injunctive
relief. The Company intends to defend against Catalina International's claims
vigorously. This action has been consolidated with the litigation involving
Catalina Marketing for purposes of discovery and trial.
On May 27, 1998, the Company filed a 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 is seeking monetary damages (including costs and
expenses). 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 seven of the Deaton Patents by provoking interference
proceedings in the U.S. Patent and Trademark Office ("Patent Office").
However, two of the Deaton Patents have been removed from the interference
proceedings as a result of a Patent Office decision. In addition, a pending
Deaton patent application owned by the Company has been brought into the
interference proceedings at the request of the Company as a result of another
Patent Office decision. The Company intends to vigorously protect its rights
under the Deaton Patents both in the interference proceedings and in the new
lawsuit.
8
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion and analysis is qualified by reference to and
should be read in conjunction with the unaudited Consolidated Financial
Statements of the Company and the Notes thereto, and other financial
information included elsewhere in this report. Operating results for the six
months ended June 30, 2000 are not necessarily indicative of the results that
may be expected for the year ending December 31, 2000 or any other period.
The Company believes that it operates the world's largest fully electronic
marketing network linked to supermarket and pharmacy retailers' point-of-sale
("POS") databases that serves on-line promotions and advertisements to
shoppers seamlessly in-store, at home and in the office. The Company's
patented technologies enable consumer products manufacturers ("Manufacturers")
and supermarket retailers ("Retailers") to use historical purchase behavior
data to develop targeted purchase incentives and messages which the Company
delivers to customers before shopping begins. The Company's proprietary
system, called the Inter.Act e-Marketing NetworkSM ("IEMN"), presently
consists of over 4,900 server-based terminals located inside the front
entrance of stores in more than 20 retail chains in the U.S. and Europe, as
well as a recently launched Company-owned Internet web site called
ShopperPerks.comSM. The Company's web site and its in-store ShopperPerksTM
portals, are linked directly to each store's point-of-sale scanning system via
Company-owned in-store servers. This on-line network gives Inter-Act's
business partners exclusive access to offer all shoppers (whether Internet
users or not) same-day, personalized savings that are electronically
downloaded to participating Retailers' cash register systems. Delivering
highly targeted, pre-shopping promotions on the IEMN historically has
generated average consumer response, or redemption, rates above 25%, which the
Company believes is superior to the response rate of any other marketing or
advertising medium in the industry.
Strategic Redirection
From inception to June 30, 2000, the Company has not generated significant
operating revenue relative to its expenses, has incurred significant losses
and has experienced substantial negative cash flow from operations. The vast
majority of losses has been generated by its operations in the United States.
The Company's business in Europe is less capital intensive and, management
believes the Company's European operations will generate positive operating
income much sooner than would its United States operations. Following
strategic discussions with a number of third parties, the Company has recently
announced its intentions to sell all or substantial all of the assets in its
United States operating business, including the sale or licensing of certain
patents and other intellectual property and, in anticipation of such a
divestiture, has reduced its workforce in the United States. The divestiture
is not intended to include the Company's assets and operations in the United
Kingdom and continental Europe, where it plans to continue to expand its
operations.
Revenues
During 1998 and to a limited extent in 1999, 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 and through 1999, the Company also had arrangements with
Manufacturers whereby the Company received a fixed payment over a fixed
period, generally one year. In these cases, the Company recognized 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.
In 2000, the Company began receiving variable fees from Manufacturers for
each product redeemed and fixed fees for project management of each promotion.
The Company recognizes revenue as electronic discounts are redeemed at the
store cash register and, for the project management fee, on a ratable basis
over the fixed period over which it is providing services or exclusivity to
such Manufacturers. The Company believes that more
9
<PAGE>
Manufacturers will agree to promote more products on the IEMN with this new
pricing format, since the cost per product sold is expected to be lower, but
there is no assurance that this will be the case.
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.
Promotions by manufacturers, and thus revenues, have not met projections
thus far. Net revenues during the six-month period ended June 30, 2000
decreased to $3.0 million from $3.9 million in the 1999 period, primarily as a
result of lower deposits from trial activity. Of the six-month revenues in
2000, $947,000 are attributable from operations in United States and $2.0
million are attributable to operations in Europe.
Expenses
Direct costs of the Company consist of expenditures for direct store
support, paper used in the terminals to print shopping lists and recipes,
direct marketing costs, telecommunications between the stores and the Company
and retailer processing fees. Selling, general and administration expenses
include items relating to sales and marketing, administration, non-paid
promotional expenses and royalties payable under certain patent agreements.
Non-paid promotional expenses represent consumer discounts and retailer
processing fees paid to the Retailer by the Company on promotions offered on
the IEMN that are not funded by a Manufacturer contract. Manufacturer
participation in the IEMN to date has been characterized by a substantial
number of trial commitments leading to increasing dollar commitments to the
IEMN 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.
Consolidated Cash Flow for Six Months Ended June 30, 2000
At June 30, 2000, the Company had net working capital of $(12.7) million,
compared to working capital of $627,000 at December 31, 1999. Total cash and
cash equivalents at June 30, 2000 and December 31, 1999 was $1.7 million and
$9.9 million, respectively. At June 30, 2000, long-term debt was $80.0 million
compared to $68.0 million at December 31, 1999. The long-term debt consists of
PIK Notes (see "Liquidity and Capital Resources"), accrued interest, accrued
dividends, and capital leases. The increase in long-term debt was primarily
attributable to accrued interest on the PIK Notes.
Cash used in operating activities during the period ended June 30, 2000 was
$15.1 million, as compared to $15.0 million at June 30, 1999. Cash has been
used primarily for the development of the Company's IEMN technology, test
marketing and deploying the product and compensation of personnel. Cash used
in operating activities during the period ended June 30, 2000 for the U.S. and
European operations were $14.1 million and $984,000, respectively.
Cash used in investing activities during the period ended June 30, 2000, was
$6.3 million, reflecting disbursements for net capital expenditures. Such net
capital expenditures were primarily for IEMN equipment and components,
fixtures, furniture and equipment for expansion in Europe, and other
equipment. Cash used in investing activities during the 2000 period for the
U.S. and European operations were $1.3 and $5.0 million, respectively. For the
period ended June 30, 1999, cash used in investing activities was $2.1
million, primarily reflecting disbursements for net capital expenditures.
Net cash provided by financing activities during the period ended June 30,
2000 and 1999 was $12.6 million and $27.0 million, respectively, resulting
primarily from the net proceeds from private offerings of preferred stock.
Six Months Ended June 30, 2000 Compared With Six Months Ended June 30, 1999
The Company had an installed base of over 4,900 terminals in 2,226 stores as
of June 30, 2000 as compared to 2,545 terminals in 1,721 stores as of June 30,
1999. The Company continued the fulfillment of its contract with Sainsbury's
by installing the IEMN in additional stores in the United Kingdom.
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Net sales during the six-month period ended June 30, 2000 decreased to $3.0
million from $3.9 million in the 1999 period, primarily as a result of lower
deposits from trial activity in the first three months of 2000 compared to the
first three months of 1999 offset by increased number of stores in the UK in
Sainsbury's from 86 to 300.
Delays in the installations of the IEMN in 1999 contributed to the decrease
in sales during the first six months of 2000.
Operating loss for the six-month period ended June 30, 2000 was $22.1
million versus $19.2 million in the 1999 comparable period. The decrease in
operating results for the six-month period resulted from decreased revenue of
$912,000 and higher selling, general and administrative costs of 1.0 million
and higher depreciation and amortization expenses of $2.1 million partially
offset by decreased direct costs of $1.1 million. Selling, general, and
administrative expenses increased primarily due to higher advertising
expenditures, telecommunication costs, paper and kiosk supplies, rents and
foreign currency translation loss. This increase was partially offset by lower
severance and relocation in 2000 compared to 1999 that was booked in
conjunction with the headquarters move from Connecticut to Charlotte, as well
as lower legal fees and instore maintenance expenses. The decrease in direct
costs resulted from decreased salaries and wages and spare parts.
Net loss for the six-month period ended June 30, 2000 increased by
approximately $447,000 from $28.8 million to $29.3 million primarily due to
higher operating losses in the 2000 period, partially offset by lower interest
expense of $4.2 million due to the Exchange Offer (See "Liquidity and Capital
Resources") and augmented by an extraordinary gain on the repurchase of debt
of $1.7 million in the 1999 period. Interest expense of $7.2 million
represents primarily non-cash interest expense on the issuance of $69.7
million of 14% Senior Discount Notes on August 2, 1996 (See "Liquidity and
Capital Resources"). Interest income of $45,000 for the first six months of
2000 reflects a decreased average cash balance during the first six months of
2000 versus the comparable period in 1999.
Three Months Ended June 30, 2000 Compared With Three Months Ended June 30,
1999
Net sales during the three-month period ended June 30, 2000 increased to
$1.9 million from $674,000 in the 1999 period, primarily as a result of
increased store count in the UK.
Operating loss for the three-month period ended June 30, 2000 was $9.7
million versus $11.3 million in the 1999 comparable period. The improvement in
operating results for the three-month period resulted from increased revenue
of $1.3 million, decreased direct costs of $818,000, and decreased selling,
general and administrative costs of $659,000. This improvement was offset by
higher depreciation of $1.1 million.
Net loss for the three-month period ended June 30, 2000 decreased by
approximately $3.7 million from $17.2 million to $13.5 million. This
improvement in net loss resulted from improved operating results of $1.6
million and lower interest expense of $2.1 million due to the Exchange Offer
(See "Liquidity and Capital Resources".) Interest expense of $3.8 million
represents primarily non-cash interest expense on the issuance of $69.7
million of 14% Senior Discount Notes on August 2, 1996 (See "Liquidity and
Capital Resources"). Interest income of $24,000 for the three months of 2000
reflects a decreased average cash balance during 2000 versus the comparable
period in 1999.
Liquidity and Capital Resources
To date, the Company has not generated significant operating revenue
relative to its expenses, has incurred significant losses and has experienced
substantial negative cash flow from operations. The Company has funded its
operations through private sales of equity and debt securities and recently
through short-term loans intended to bridge equipment leasing and other
financing. At June 30, 2000, the Company had cash and cash equivalents of $1.7
million and net working capital of $(12.7) million. The Company will require
additional equity or debt financing in order to continue its operations
through the end of the year.
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Historical Equity Financings
From inception through June 30, 2000, the Company's shareholders have
contributed approximately $174.0 million of equity to the Company through
private offerings of common stock, the conversion of approximately $2.0
million in stockholder debt to common stock and private offerings of preferred
stock.
The private offerings of common stock and conversion of stockholder
indebtedness occurred primarily from inception through 1996. During the year
ended December 31, 1997, the Company issued an aggregate of 60,000 shares of
common stock in exchange for intellectual property and services. No common
stock was issued during the year ended December 31, 1998. The Company issued
approximately 15,000 shares of common stock in exchange for services during
the year ended December 31, 1999.
The Company's first private offering of preferred stock began in July 1998
when the Board of Directors authorized the sale of up to $40 million of 10%
Series A Mandatorily Convertible Preferred Stock (the "Series A Preferred
Stock"), first to the Company's shareholders and then to other investors at a
price of $100 per share. The Series A Preferred Stock originally offered was
convertible into common stock at a conversion rate of $10.00 per share of
common stock. In March 1999, the Board of Directors and shareholders of the
Company approved certain changes to the Series A Preferred Stock and the Board
increased the aggregate offering of Series A 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 Series A Preferred
Stock is convertible, (ii) an increase in the number of votes per share of
Series A 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
Series A Preferred Stock semi-annually, as opposed to quarterly, to be paid
only in shares of Series A Preferred Stock and (iv) the addition of anti-
dilution provisions. Such changes are applicable to all shares of Series A
Preferred Stock issued prior to the effective date of the changes and all
additional shares of Series A Preferred Stock issued in the private offering.
The offering of Series A Preferred Stock was closed in 1999. As of December
31, 1999, the Company had issued and sold 498,868 shares of Series A Preferred
Stock at a price of $100 per share for total proceeds of approximately $49.9
million, all of which were received in cash with the exception of $100,000.
All such shares continue to be outstanding as of June 30, 2000. Accrued
dividends, payable in Series A Preferred Stock, were $6.5 million as of June
30, 2000.
In December 1999, the Company issued to tendering holders of the Company's
Discount Notes in the Exchange Offer described below 139,575 shares of 14%
Series B Senior Mandatorily Redeemable Convertible Preferred Stock (the
"Series B Preferred Stock"), all of which were issued and outstanding as of
June 30, 2000. The shares of Series B Preferred Stock have a liquidation
preference of $500.00 per share and rank senior, as to dividends and
liquidation preference, to all other classes of the Company's capital stock.
Dividends on the Series B Preferred Stock accrue from August 1, 1999, at the
rate of 14% per annum of the liquidation preference (determined as of the
respective dividend payment date) per share, payable semi-annually on the
first day of February and August of each year, commencing on February 1, 2000,
and are cumulative to the extent unpaid. Accrued dividends on the Series B
Preferred Stock were $9.0 million as of June 30, 2000.
In December 1999, the Company's Board of Directors designated an additional
series of preferred stock, the 10% Series C Mandatorily Redeemable Convertible
Preferred Stock (the "Series C Preferred Stock") and authorized the issuance
and sale in a private offering up to 250,000 units consisting of one share of
Series C Preferred Stock and one warrant to purchase approximately 7.14 shares
of the Company's common stock at a price of $14.00 per share. The shares of
Series C Preferred Stock have a liquidation preference of $100.00 per share
and rank, as to dividends and liquidation preference, equal to the Series A
Preferred Stock, junior to the Series B Preferred Stock and senior to the
Company's common stock. Dividends on the Series C Preferred Stock are payable
only in shares of Series C Preferred Stock and accrue from the date of
issuance, at the rate of 10% per annum of the liquidation preference, payable
semi-annually on the first day of March and September of each year, commencing
on the last day of March and September of each year, and are cumulative to the
extent unpaid. During the first six months of 2000, the Company issued and
sold 78,740 units for total proceeds of approximately $7.9 million, of which
all were received in cash except $28,000 that were received in the form of
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services. The Company has recently been unsuccessful in selling additional
units. As of June 30, 2000, the Company had 148,860 shares of Series C
Preferred Stock outstanding. Accrued dividends, payable in Series C Preferred
Stock, were $643,000 as of June 30, 2000.
Historical Debt Financings
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 "Discount Notes") and warrants (the "Discount Note Warrants") to purchase
initially an aggregate of 1,041,428 shares of common stock of the Company at
$.01 per share. As required by the Warrant Purchase Agreement, the Discount
Note Warrants were adjusted effective September 30, 1997 to entitle the
respective holders to purchase an aggregate of 1,338,918 shares of common stock
at $.01 per share because the Company had not completed a qualifying initial
public offering. Accordingly, 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 exchanged for the outstanding Discount Notes issued in the Private
Placement new and identical Discount Notes that were registered under the
Securities Act of 1933, as amended. As discussed below, the first interest
payment on the Discount Notes in the amount of $8.7 million was scheduled to be
paid in February 2000.
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 was payable on July 31, 2000. The Company and the payee
have agreed to an extension of the maturity of the note for an additional 90
ninety days. This note is reflected as a current liability in the Company's
consolidated balance sheet as of June 30, 2000.
In March 1999, the Company repurchased a portion of the Discount Notes with
an aggregate face value of approximately $2.4 million, for an aggregate of
$194,000 in cash. The Discount Note Warrants originally issued in connection
with the issuance of these Discount Notes were not repurchased by the Company
and continue to be outstanding. This repurchase of Discount Notes resulted in
an extraordinary gain on extinguishment of debt of $1.7 million. In October
1999, the Company repurchased additional Discount Notes with a face value of
approximately $15.0 million for an aggregate of $3.0 million in cash. Discount
Note Warrants to purchase 141,435 shares of the Company's common stock
originally issued in connection with the issuance of these Discount Notes were
also repurchased by the Company in this transaction at no additional cost. In
December 1999, the $15.0 million of Discount Notes and related Discount Note
Warrants repurchased in October 1999 were resold by the Company for $3.0
million cash.
In April 1999, the Company entered into an agreement with a leasing company
pursuant to which it leased approximately $1.4 million of terminals and related
equipment in the U.S. Payments under the 3-year lease are approximately
$564,000 per year.
In December 1999, the Company completed an exchange offer (the "Exchange
Offer") of new securities for its outstanding Discount Notes. As a result of
the Exchange Offer, the Company's long-term debt was reduced by one half and
cash interest payments were rescheduled to 2003. In the Exchange Offer, the
Company exchanged 14% Senior Pay-in-Kind Notes Due 2003 (the "PIK Notes") of
InterAct Operating Co., Inc., a wholly owned subsidiary of the Company, 14%
Series B Senior Mandatorily Convertible Preferred Stock of the Company (the
"Series B Preferred Stock") and common stock purchase warrants (the "Exchange
Offer Warrants") for its outstanding Discount Notes. Each holder of $1,000
principal amount of Discount Notes received $500 principal amount of PIK Notes,
one share of Series B Preferred Stock having an initial liquidation preference
of $500 and one Exchange Offer Warrant to purchase 17.96 shares of common stock
for an exercise price of $.01. Because 100% of the outstanding Discount Notes
(other than those held by the Company) were tendered in the Exchange Offer, the
issuer of the PIK Notes, InterAct Operating Co., Inc., merged with and into its
parent, the Company, on December 30, 1999. Consequently, the PIK Notes are
direct obligations of the Company.
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The PIK Notes mature on August 1, 2003 and accrue interest at a rate of 14%
per annum from and after August 1, 1999, payable semiannually on February 1
and August 1 of each year, beginning February 1, 2000. The Company may, at its
option, elect not to make interest payments in cash prior to the date that is
18 months following the earlier of an initial public offering of the Company's
common stock or a Change in Control (as defined in the Indenture governing the
PIK Notes). To the extent that the Company does not pay interest in cash,
the interest accrued on the PIK Notes will be paid by the issuance of
additional promissory notes, which will have substantially the same terms,
including date of maturity and interest rate, as the PIK Notes. On February 1,
2000 and August 1, 2000 the Company issued additional PIK Notes in the
aggregate principal amount of $4 million and $5.2 million, respectively, as
payment of the interest accrued on the PIK Notes.
Under an Exchange and Registration Rights Agreement entered into in
connection with the Exchange Offer, if the Company had not commenced an
initial public offering or filed with the Securities and Exchange Commission a
registration statement for identical notes to be exchanged for the PIK Notes
within 180 days of the Exchange Offer, penalty interest in the amount of one
half of one percent would accrue on the outstanding principal amount of the
PIK Notes. The Company has not completed an initial public offering nor has
the Company filed a registration statement. Consequently, $18,000 of penalty
interest was accrued in the financial statements for June 30, 2000.
In May 2000, the Company entered into a equipment lease agreement with a
leasing company for approximately $500,000 of computer equipment. Payments
under the three-year lease are approximately $16,000 per month. In connection
with this lease financing, the Company issued the leasing company a five-year
warrant to purchase 1,946 shares (increasing by 5% each semi-annual period) of
common stock of the Company at an exercise price of $14.00 per share.
Recent Short-Term Debt Financings
The Company has recently received short-term financing under two bridge
loans. Such bridge loans were made based on the assumption that the Company
would receive substantial equipment lease financing under negotiation at the
time the loans were made, and that the proceeds therefrom would be used to
repay the bridge loans. The Company has been unsuccessful in obtaining
sufficient equipment financing to repay the bridge loans.
One of the bridge loans was made by an equipment leasing broker in May 2000
in the amount of $1.5 million. In connection therewith, the Company granted
the lender a security interest in certain of its assets. The note provided
that in the event it was not paid upon its maturity on July 24, 1999, the
unpaid balance would thereafter bear interest until fully paid at the lesser
of 22.5% per annum or the maximum rate allowed by law In addition, the Note
provided that if not paid in full on the maturity date, the lender would
receive a warrant to purchase 5,358 shares of common stock of the Company
(increasing by 5% each semi-annual period) at an exercise price of $14.00 per
share for five years.
The $1.5 million note was not paid when due. The warrant was thus delivered
and the interest rate under the note increased to 22.5%. In order to prevent
the lender from foreclosing on the collateral securing the note and disrupting
the business operations of the Company, certain directors of the Company
recently purchased the note and succeeded to the security interests in the
collateral. The note remains in default and is accruing interest at 22.5% per
annum. The directors have agreed with the Company that any action by them with
respect to the collateral or with respect to the note shall require the vote
of directors owning a majority of the principal amount of the note.
The other bridge loan was from a bank in June 2000 in the amount of $5.0
million. As a condition of making the loan, the bank required that certain
directors and a major shareholder unconditionally personally guarantee the
obligations under the note. As of June 30, 2000, only $3 million had been
drawn down on this loan and only that amount is reflected in current
liabilities. The note is due on September 15, 2000. As of August 14, 2000, the
entire $5 million had been borrowed.
In consideration for the guaranties, the Company agreed to give the
guarantors terms equivalent to those given to equipment leasing broker under
its $1.5 million bridge financing, which had been negotiated on an arm's
length basis. The Company agreed to pay the guarantors a guaranty fee in an
amount per annum equal to the
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difference between the effective rate of interest between the two bridge
notes. In addition, the Company agreed that should any guarantor be required
to make a payment on his or its respective guaranty, the Company would issue
to such guarantor a five year warrant (on terms equivalent to the other) to
purchase at an exercise price of $14.00 per share a number of shares of common
stock of the Company equal to 5% of the amount paid to the bank under the
guaranty divided by 14. The Company further agreed that the interest rate on
any obligation of the Company to the guarantors under their subrogation rights
would be the lesser of 22.5% or the maximum rate allowed by law.
Additional Financing Needs
The Company has recently announced its intentions to sell all or
substantially all of the assets in its U.S. operating business, including the
sale or licensing of certain patents and other intellectual property, and in
anticipation of such divestiture, has reduced its workforce in the United
States. The divestiture is not intended to include the Company's assets and
operations in the United Kingdom and continental Europe, where it plans to
continue to expand its operations. These steps were necessary because, in the
opinion of management, the U.S. operating and financial results were not
improving rapidly enough to justify further investment at the present cost of
the Company's capital. The Company will require additional financing in the
third quarter of 2000 in order to continue its business operations until
proceeds from the divestiture are received.
The Company has received standby senior debt commitments from certain
existing shareholders which it believes will be sufficient to finance ongoing
operations until consummation of the U.S. asset sale or licensing. The closing
of these commitments is subject to certain conditions being met. There is no
assurance that the Company will be successful in closing all the standby loan
commitments or that the asset sale or licensing will raise sufficient capital
to meet the Company's cash requirements through the end of the year.
Even if such financing is received and the sale of United States assets
and/or licensing of the Company's intellectual property is successful, the
Company may require additional capital or equipment or other debt financing in
order to continue its IEMN expansion in Europe. Further, the Company expects
to incur additional net losses in the remainder of 2000 and may operate at a
loss for the foreseeable future. There can be no assurance that the Company
will achieve profitability or, if achieved, sustain such profitability.
Cautionary Statement for Purpose of the Safe Harbor Provisions of the Private
Securities Litigation Reform Act of 1995
The statements contained in this Quarterly Report on Form 10-Q that are not
historical facts are forward-looking statements (as such term is defined in
the Private Securities Litigation Reform Act of 1995), which can be identified
by the use of forward-looking terminology such as believes, expects, may,
will, should, or anticipates or the negative thereof or other variations
thereon or comparable terminology, or by discussions of strategy that involve
risks and uncertainties. In addition, from time to time, the Company or its
representatives have made or may make forward-looking statements, orally or in
writing. Such forwarding-looking statements may be included in, but are not
limited to, various filings made by the Company with the Securities and
Exchange Commission, or press releases or oral statements made by or with the
approval of an authorized executive officer of the Company. Forward-looking
statements are based on management's current views and assumptions and involve
risks and uncertainties that could significantly affect expected results. The
Company wishes to caution the reader that factors, such as those listed below,
in some cases have affected and could affect the Company's actual results,
causing actual results to differ materially from those in any forward-looking
statement. These factors include: (i) the Company's limited operating history,
significant losses, accumulated deficit, negative cash flow from operations
and expected future losses, (ii) the dependence of the Company on its ability
to establish, maintain and expand relationships with consumer product
manufacturers to promote brands on the IEMN (as defined herein) and the
uncertainty of market acceptance for the IEMN, (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
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services and technical and other problems that the Company may experience, (v)
risks related to the Company's 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 Company's dependence on
third parties, (viii) the intensely competitive nature of the consumer product
and promotional industry, (ix) risks that the Company's rights related to
patents, proprietary information and trademarks may not adequately protect its
business, (x) risks relating to the relocation of the Company's corporate
offices, including potential costs involved in the relocation as well as the
need for new employees to develop the skills necessary to develop the
Company's business and (xi) the possible inability of new management to
perform their respective roles. 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 10K/A for the year ended December 31,
1999 for a more specific description of these risks.
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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 6, 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
Series C Preferred Stock and Warrants
During the quarter ended June 30, 2000, the Company issued and sold 1,530
shares of Series C Preferred Stock for gross proceeds of $153,000, $125,000 of
which was received in cash and $28,000 of which was in exchange for services.
In connection therewith, the Company issued warrants to purchase 10,928 shares
of Company's common stock at a purchase price of $14.00 per share. The issue
and sale of such securities was part of a private offering of up to 250,000
units at $100 per unit, consisting of one share of Series C Preferred Stock
and one warrant to purchase approximately 7.14 shares of the Company's common
stock a price of $14.00 per share, approved by the Board of Directors of the
Company in December 1999. The units were offered and sold in reliance on
exemptions from registration of such shares contained in Regulation D of the
Securities and Exchange Commission promulgated under the Securities Act
because the offers and sales of such shares were limited to the Company's
existing shareholders and others who were "Accredited Investors" and up to 35
of the Company's existing shareholders who were "qualified investors". As of
June 30, 2000, 148,860 units had been issued and sold for total proceeds of
$14.9 million, representing 148,860 shares of Series C Preferred Stock and
warrants to purchase 1,063,259 shares of common stock, all of which are
presently outstanding.
The shares of Series C Preferred Stock have a liquidation preference of
$100.00 per share and rank, as to dividends and liquidation preference, equal
to the Series A Preferred Stock, junior to the Series B Preferred Stock and
senior to the Company's common stock. Dividends on the Series C Preferred
Stock are payable only in shares of Series C Preferred Stock and accrue from
the date of issuance, at the rate of 10% per annum of the liquidation
preference, payable semi-annually on the first day of March and September of
each year, commencing on the last day of March and September of each year, and
are cumulative to the extent unpaid. Accrued dividends, payable in Series C
Preferred Stock, were approximately $643,000 as of June 30, 2000.
Each share of Series C Preferred Stock will automatically be converted into
a number of shares of Common Stock equal to the Liquidation Preference on the
date of conversion divided by the Conversion Price (initially $14.00) upon (i)
the closing of 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, (ii) the
closing of 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 or (iii) the vote of not
less than 75% of the outstanding Series C Preferred Stock. Holders of Series C
Preferred Stock will be entitled at any time to convert each share Series C
Preferred Stock held by them into a number of shares of Common Stock equal to
the Liquidation Preference on the date of conversion divided by the Conversion
Price. The Conversion Price (initially $14.00) is subject to adjustment upon
the occurrence of certain events, including if the Company declares and pays
on shares of its Common Stock a dividend payable in shares of Common Stock or
splits the then outstanding shares of common stock into a greater number of
shares or if, except in certain circumstances, the Company issues additional
common stock for a consideration less than $14.00 per share or issues options
or other securities that are convertible into or exercisable for shares of
Common Stock at a conversion or exercise price that is less than $14.00 per
share.
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The holders of Series C Preferred Shares will generally vote together with
the holders of the Common Stock as a single class on all matters submitted to
the shareholders of the Company for voting. Each share of Series C Preferred
Stock entitles the holder to such number of votes on each such matter as shall
equal the number of shares of Common Stock into which such Series C Preferred
Stock is convertible on the record date with respect to such matter. In
addition, approval of holders of a majority of the outstanding Series C
Preferred Stock will be required prior to the Company's issuing any shares of
a class of preferred stock that rank pari passu with or senior to the Series C
Preferred Stock, except that the Company may issue up to an aggregate of $90
million of Series C Preferred Stock, Series C Preferred Stock and preferred
stock ranking pari passu with the Series C Preferred Stock without the
approval of any holders of Series C Preferred Stock. The Company may not amend
or alter any of the preferences of the Series C Preferred Stock without the
approval of the holders of a majority of the outstanding Series C Preferred
Stock.
At any time after November 1, 2005, the Series C Preferred Stock may be
redeemed at the option of the Company from time to time, in whole or in part,
upon not less than 30 days' notice to each registered holder of the Series C
Preferred Stock at a redemption price equal to the Liquidation Preference on
the date of redemption. Holders of Series C Preferred Stock will have the
option to convert such Series C Preferred Stock into shares of Common Stock
prior to the redemption. The Company does not intend to establish a sinking
fund or otherwise set aside any amounts for the redemption of the Series C
Preferred Stock.
On November 1, 2008, the Company will redeem each outstanding share of
Series C Preferred Stock, out of funds legally available for such redemption,
at a redemption price equal to its Liquidation Preference on the date of
redemption. Holders of shares of Series C Preferred Stock will have the option
to convert such Series C Preferred Stock into shares of Common Stock prior to
the redemption.
At no time will the Company purchase or redeem any Series C Preferred Shares
unless the assets of the Company remaining after such redemption and any
corresponding reduction in capital, if any, are sufficient to pay any debts of
the Company for which payment has not been otherwise provided, or as may
otherwise be limited by applicable North Carolina law. However, the Company
will redeem all Series C Preferred Stock duly tendered for redemption as soon
thereafter as such redemption may be permitted by applicable North Carolina
law. To the extent that redemption of less than all of the Series C Preferred
Stock duly tendered for redemption is permitted, the Company will redeem such
shares (together with the Series A Preferred Stock) on a pro rata basis.
The warrants issued in connection with this private offering are presently
exercisable for common stock at a purchase price of $14.00 per share and
expire ten years from the date of issuance. The number of shares of the Common
Stock for which the warrants issued in the private offering are exercisable
and the exercise price are subject to adjustment upon the occurrence of
certain events, including if the Company declares and pays on shares of its
Common Stock a dividend payable in shares of Common Stock or splits the then
outstanding shares of common stock into a greater number of shares or if,
except in certain circumstances, the Company issues additional common stock
for a consideration less than $14.00 per share or issues options or other
securities that are convertible into or exercisable for shares of Common Stock
at a conversion or exercise price that is less than $14.00 per share.
Other Warrants
During the quarter ended June 30, 2000, the Company issued warrants to
purchase an aggregate of 7,294 shares of common stock at $14.00 per share in
connection with certain debt financing. These warrants were offered and sold
in reliance on exemptions from registration of such warrants under Section
4(2) of the Securities Act of 1933, as amended, because the warrants were
issued to institutional lenders who were "Accredited Investors".
These warrants are presently exercisable for Common Stock and expire five
years from the date of issuance. The number of shares of the Common Stock for
which the warrants are exercisable will increase by 5% each
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<PAGE>
semiannual period until the warrants have been exercised or converted or until
the mandatory conversion of the Series C Preferred Stock. The holders of the
warrants may at any time require the Company to convert the warrants into
shares of common stock based on the difference between the fair market value
of the common stock and the exercise price of the warrant.
The number of shares of the Common Stock for which these warrants are
exercisable and the exercise price are subject to adjustment upon the
occurrence of certain events, including if the Company declares and pays on
shares of its Common Stock a dividend payable in shares of Common Stock or
splits the then outstanding shares of common stock into a greater number of
shares or if, except in certain circumstances, the Company issues additional
common stock for a consideration less than $14.00 per share or issues options
or other securities that are convertible into or exercisable for shares of
Common Stock at a conversion or exercise price that is less than $14.00 per
share.
Item 4. Submission of Matters to a Vote of Security Holders
(a) The annual meeting of the shareholders of the Company was held on June
13, 2000.
(b) The name of each director elected at the annual meeting is set forth in
subparagraph (c) below. The name of each other director whose term of office
as a director continued after the annual meeting is as follows: Robert M.
DeMichele, Richard A. Horvitz, Haynes G. Griffin, L. Richardson Preyer, Jr.;
Brian A. Rich, and Robert A. Silverberg.
(c) At the annual meeting, the shareholders voted on the election of four
Class III Directors to hold office until the 2003 Annual Meeting of
Shareholders. The results of the voting were as follows:
<TABLE>
<CAPTION>
Votes Abstentions and
Votes For Withheld Broker Nonvotes
---------- -------- ---------------
<S> <C> <C> <C>
Richard P. Ludington..................... 11,939,656 0 0
William P. Emerson....................... 11,939,656 0 0
Stephen R. Leeolou....................... 11,939,656 0 0
Stuart S. Richardson..................... 11,939,656 0 0
</TABLE>
19
<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.
/s/ Stephen R. Leeolou
August 25, 2000 By: _________________________________
Stephen R. Leeolou
Chairman & Chief Executive
Officer
/s/ Thomas J. McGoldrick
August 25, 2000 By: _________________________________
Thomas J. McGoldrick
Executive Vice President &
Chief Financial Officer
20
<PAGE>
Item 3. Exhibits and Reports on Form 8-K
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<C> <S>
*3(a)(1) Restated Articles of Incorporation of the Company, effective
September 10, 1999, filed as Exhibit 3(a) to the Company's
Quarterly Report on Form 10-Q for the period ended September 30,
1999.
*3(a)(2) Articles of Amendment of the Company, dated December 22, 1999 and
effective December 22, 1999, filed as Exhibit 3(a)(2) on the
Company's Annual Report on Form 10-K/A for the fiscal year ended
December 31, 1999.
*3(a)(3) Articles of Merger of Inter.Act Operating Co., Inc. into the
Company, dated December 29, 1999 and effective December 30, 1999,
filed as Exhibit 3(a)(3) on the Company's Annual Report on Form
10-K/A for the fiscal year ended December 31, 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 on Form S-4
(No. 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(a)(3) Specimen Certificate of the Company's 14% Series B Senior
Mandatorily Convertible Preferred Stock, filed as Exhibit 4(a)(3)
on the Company's Annual Report on Form 10-K/A for the fiscal year
ended December 31, 1999.
*4(a)(4) Specimen Certificate of the Company's 10% Series C Mandatorily
Convertible Preferred Stock, filed as Exhibit 4(a)(4) on the
Company's Annual Report on Form 10-K/A for the fiscal year ended
December 31, 1999.
*4(b) Indenture dated as of December 15, 1999 between the Company and
State Street Bank and Trust Company, as trustee, relating to
$70,000,000 in principal amount of Senior-Paid-In-Kind Notes due
2003, filed as Exhibit 4(b) on the Company's Annual Report on Form
10-K/A for the fiscal year ended December 31, 1999.
*4(b)(1) First Supplemental Indenture dated as of December 30, 1999 to
Indenture dated as of December 15, 1999, between the Company and
State Street Bank and Trust Company, as trustee, relating to
$70,000,000 in principal amount of Senior-Paid-in-Kind Notes due
2003, filed as Exhibit 4(b)(1) on the Company's Annual Report on
Form 10-K/A for the fiscal year ended December 31, 1999.
*10(a)(5) Subscription Agreement dated October 1995, between the Company and
Vanguard Cellular Systems. Inc., filed as Exhibit 10(f) to the
Company's Registration Statement on Form S-4 (No. 333-12091).
*10(a)(6) Registration Rights Agreement dated March 1996 between the Company
and Toronto Dominion Investments, Inc., filed as Exhibit 10(e) to
the Company's Registration Statement on Form S-4 (No. 333-12091).
*10(a)(7) Exchange and Registration Rights Agreement dated July 30, 1996,
between the Company and the Initial Purchasers, filed as Exhibit
10(o) to the Company's Registration Statement on Form S-4
(No. 333-12091).
*10(a)(8) Amended and Restated Common Stock Purchase Warrant granted to
Vanguard Cellular Operating Corp,. filed as Exhibit 10(k) to the
Company's Registration Statement on Form S-4 (No. 333-12091).
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<C> <S>
*10(a)(9) Warrant Agreement dated August 1, 1996, between the Company and
Fleet National Bank, as Warrant Agent, filed as Exhibit 10(l) to
the Company's Registration Statement on Form S-4 (No. 333-12091).
*10(a)(10) Voting Agreement among the Company, Vanguard Cellular Operating
Corp. and certain shareholders dated as of November 1, 1996, filed
as Exhibit 10(ii) to the Company's Quarterly Report on Form 10-Q
for the period ended June 30, 1998.
*10(a)(11) Amendment No. 1 to Voting Agreement among the Company, Vanguard
Cellular Operating, Corp. and certain shareholders, dated September
30, 1998, filed as Exhibit 10(a)(11) to the Company's Annual Report
on Form 10-K for the fiscal year ended December 31, 1998.
*10(a)(12) Form of Rights Offering Subscription Agreement for the Company's
10% Series A Mandatorily Convertible Preferred Stock filed as
Exhibit 10(a)(12) to the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1998.
*10(a)(13) Warrant Agreement, dated as of December 15, 1999, between the
Company and American Stock Transfer & Trust Company, as Warrant
Agent, filed as Exhibit 10(a)(13) to the Company's Annual Report on
Form 10-K/A for the fiscal year ended December 31, 1999.
*10(a)(14) Exchange and Registration Rights Agreement, dated as of December
15, 1999, between Inter.Act Operating Co., Inc, and certain
noteholders filed as Exhibit 10(a)(14) to the Company's Annual
Report on Form 10-K/A for the fiscal year ended December 31, 1999.
*10(a)(15) Registration Rights Agreement, dated as of December 15, 1999,
between the Company and the holders of the Company's 14% Series B
Senior Mandatorily Convertible Preferred Stock filed as Exhibit
10(a)(15) to the Company's Annual Report on Form 10-K/A for the
fiscal year ended December 31, 1999.
*10(a)(16) Stockholders Agreement, dated as of December 15, 1999, between the
Company and certain stockholders filed as Exhibit 10(a)(16) to the
Company's Annual Report on Form 10-K/A for the fiscal year ended
December 31, 1999.
*10(a)(17) Form of Subscription Agreement for the Company's 10% Series C
Mandatorily Convertible Preferred Stock and Common Stock Warrants
filed as Exhibit 10(a)(17) to the Company's Annual Report on Form
10-K/A for the fiscal year ended December 31, 1999.
*10(a)(18) Form of Common Stock Warrant filed as Exhibit 10(a)(18) to the
Company's Annual Report on Form 10-K/A for the fiscal year ended
December 31, 1999.
*10(b)(1) Company's 1994 Stock Compensation Plan, filed as Exhibit 10(i) to
the Company's Registration Statement on Form S-4 (No. 333-12091).
*10(b)(2) Form of Incentive Stock Option Agreement under the 1994 Stock
Compensation Plan, filed as Exhibit 10(k) to the Company's
Registration Statement on Form 5-4 (No. 333-12091).
*10(b)(3) Company's 1996 Nonqualified Stock Option Plan, filed as Exhibit
10(g) to the Company's Registration Statement on Form S-4 (No. 333-
12091).
*10(b)(4) Form of Nonqualified Stock Option Agreement under the 1996
Nonqualified Stock Option Plan, filed as Exhibit 10(h) to the
Company's Registration Statement on Form S-4 (No. 333-12091).
*10(b)(5) Company's 1997 Long-Term Incentive Plan, as amended, filed as
Exhibit 10(b)(5) to the Company's Quarterly Report on Form 10-Q for
the period ended June 30, 1999.
*10(b)(6) Form of Incentive Stock Option Agreement to the 1997 Long-Term
Incentive Plan, filed as Exhibit 10(aa) to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1997.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<C> <S>
*10(b)(7) Form of Nonqualified Stock Option Agreement to the 1997 Long-Term
Incentive Plan filed as Exhibit 10(bb) to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1997.
*10(b)(8) Key Employee Severance Plan, filed as Exhibit 10(b)(8) to the
Company's Quarterly Report on Form 10-Q for the period ended June
30, 1999.
*10(b)(9) Form of Severance Agreement for Key Employees, filed as Exhibit
10(b)(9) to the Company's Quarterly Report on Form 10-Q for the
period ended June 30, 1999.
*10(c)(1) Assignment of License Agreement dated June 15, 1993 among Gerald
Singer and Arthur Murphy as Licensors, Michael R. Jones as Licensee
and Network Licensing, Inc. as Assignee, filed as Exhibit 10(q) to
the Company's Registration Statement on Form S-4 (No. 333-12091).
*10(c)(2) Security Agreement dated June 16, 1993 between Michael R. Jones and
Network Licensing, Inc., filed as Exhibit 10(r) to the Company's
Registration Statement on Form S-4 (No. 333-12091).
*10(c)(3) Sublicense dated June 16, 1993 between Network Licensing, Inc. and
the Company, filed as Exhibit 10(s) to the Company's Registration
Statement on Form S-4 (No. 333-12091).
*10(c)(4) Settlement Agreement and Mutual General Release dated as of
September 6, 1994 among Gerald R. Singer, Arthur J. Murphy, Lenora
Singer, Joan Murphy, Network Licensing, Inc. and the Company, filed
as Exhibit 10(t) to the Company's Registration Statement on Form S-
4 (No. 333-12091).
*10(c)(5) Amended and Restated Patent Rights Assignment/Consulting Agreement
dated as of March 29, 1995 between Joseph F. Stratton and the
Company, filed as Exhibit 10(u) to the Company's Registration
Statement on Form S-4 (No. 333-12091).
*10(c)(6) Agreement Regarding Licensing matters dated as of January 22, 1996
among Michael R. Jones, Network Licensing, Inc. and the Company,
filed as Exhibit 10(v) to the Company's Registration Statement on
Form S-4 (No. 333-12091).
*10(c)(7) Letter Agreement dated July 22, 1996 between Gerald Singer, Arthur
J. Murphy and the Company, filed as Exhibit 10(w) to the Company's
Registration Statement on Form S-4 (No. 333-12091).
*10(c)(8) Assignment dated as of July 23, 1996 from Network Licensing, Inc,
to the Company, filed as Exhibit 10(x) to the Company's
Registration Statement on Form S-4 (No. 333-12091).
*10(c)(9) Patent License Agreement dated August 20, 1997, between the Company
and Coupco, Inc., filed as Exhibit 10(cc) to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1997
(Portions of this exhibit have been omitted pursuant to a request
for confidential treatment).
*10(c)(10) Patent Purchase Agreement dated May 22, 1998, between the Company,
Credit Verification Corporation and David W. Deaton, filed as
Exhibit 10(hh) to the Company's Quarterly Report on Form 10-Q for
the period ended June 30, 1998 (Portions of this exhibit have been
omitted pursuant to a request for confidential treatment).
*10(c)(11) Letter Agreement dated October 2, 1998 between Leona R. Singer,
Trustee under the Gerald and Leona R. Singer Family Trust, Arthur
J. Murphy and the Company, filed as Exhibit 10(c)(11) to the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1998.
*10(d)(1) Letter Agreement dated March 17, 1997 between the Company and
Thomas A. Manna, filed as Exhibit 10(ee) to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 1997.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<C> <S>
*10(d)(2) Severance and Release Agreement dated January 23, 1999 between the
Company and Thomas A. Manna, filed as Exhibit 10(d)(2) to the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1998.
*10(d)(3) Form of Employment, Noncompetition and Nondisclosure Agreement,
filed as Exhibit 10(aa) to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1997.
*10(d)(4) Nonqualified Stock Option Agreement dated September 15, 1999 between
the Company and Stephen R. Leeolou, filed as Exhibit 10(d)(4) to the
Company's Annual Report on Form 10-K/A for the fiscal year ended
December 31, 1999.
*10(d)(5) Incentive Stock Option Agreement dated September 15, 1999 between
the Company and Stephen R. Leeolou, filed as Exhibit 10(d)(5) to the
Company's Annual Report on Form 10-K/A for the fiscal year ended
December 31, 1999.
*10(d)(6) Nonqualified Stock Option Agreement dated September 15, 1999 between
the Company and Stephen R. Leeolou filed as Exhibit 10(d)(6) to the
Company's Annual Report on Form 10-K/A for the fiscal year ended
December 31, 1999.
*10(d)(7) Employment Agreement dated November 2, 1999 between the Company and
Stephen R. Leeolou filed as Exhibit 10(d)(7) to the Company's Annual
Report on Form 10-K/A for the fiscal year ended December 31, 1999.
*10(d)(8) Nonqualified Stock Option Agreement dated November 2, 1999 between
the Company and Stephen R. Leeolou filed as Exhibit 10(d)(8) to the
Company's Annual Report on Form 10-K/A for the fiscal year ended
December 31, 1999.
*10(e)(1) Global Master Agreement effective January 25, 2000 between the
Company and NCR Corporation filed as Exhibit 10(e)(1) to the
Company's Annual Report on Form 10-K/A for the fiscal year ended
December 31, 1999.
*10(e)(2) Addendum to Master Agreement dated January 26, 2000 between the
Company and NCR Corporation (Portions of this exhibit have been
omitted pursuant to a request for confidential treatment) filed as
Exhibit 10(e)(2) to the Company's Annual Report Form 10-K/A for the
fiscal year ended December 31, 1999.
10(f)(1) $5,000,000 Promissory Note dated June 16, 2000 from the Registrant
to First Union National Bank
10(f)(2) Letter Agreement dated June 16, 2000 between the Registrant and
First Union National Bank relating to security interests
10(f)(3) Letter Agreement dated June 16, 2000 between the Registrant and the
Guarantors of the First Union National Bank Promissory Note
*21 List of Subsidiaries of the Company, filed as Exhibit 21 on the
Company's Annual Report on Form 10-K/A for the fiscal year ended
December 31, 1999.
27 Financial Data Schedule.
</TABLE>
--------
* Incorporated by reference to the statement or report indicated.
