As filed with the Securities and Exchange Commission on March 20, 2006
Registration No. 333-
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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RELATIONSERVE MEDIA, INC.
(Name of Small Business Issuer in Its Charter)
DELAWARE 4899 43-2053462
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification No.)
6700 NORTH ANDREWS AVENUE
FORT LAUDERDALE, FLORIDA 33390
(954) 202-6000
(Address and Telephone Number of Registrant's Principal Executive Offices)
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SHAWN MCNAMARA
SENIOR VICE PRESIDENT
RELATIONSERVE MEDIA, INC.
6700 NORTH ANDREWS AVENUE
FORT LAUDERDALE, FLORIDA 33390
(954) 202-6000
(Name, Address and Telephone Number of Agent for Service)
Copy to:
HARVEY J. KESNER, ESQ.
OLSHAN GRUNDMAN FROME ROSENZWEIG & WOLOSKY LLP
65 EAST 55TH STREET
NEW YORK, NEW YORK 10022
(212) 451-2300
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AS SOON AS PRACTICABLE AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT
(Approximate Date of Proposed Sale to the Public)
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 ("Securities Act"), check the following box.[X]
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434, check
the following box. [_]
CALCULATION OF REGISTRATION FEE
Proposed
Maximum
Offering Proposed Maximum Amount of
Title of Each Class of Amount To Be Price Per Aggregate Offering Registration
Securities To Be Registered Registered(1) Share Price Fee
- ---------------------------- ------------- --------- ------------------ ------------
Common Stock, par value
$0.001 per share outstanding 38,215,139 $1.945(2) $ 74,328,445 $ 7,953.16
Common Stock underlying
$2.00 per share Warrants 812,500 $1.945(3) $ 1,580,312.50 $ 169.09
Common Stock underlying
$3.50 per share Warrants 524,257 $ 3.50(4) $ 1,834,899.50 $ 196.33
Common Stock underlying
$0.25 per share Warrants 5,200,000 $1.945(3) $ 10,114,000 $ 1,082.20
Common Stock underlying
$1.50 Debentures 37,862,500 $1.945(3) $ 73,646,562.50 $ 7,879.76
Common Stock underlying
$0.01 Warrants 9,629,957 $1.945(3) $ 18,730,266.26 $ 2,004.14
---------- ------ --------------- ----------
TOTAL 92,244,353 -- $180,234,425.76 $19,284.69
========== ====== =============== ==========
(1) Pursuant to Rule 416 of the Securities Act, the shares of common stock
offered hereby also include an indeterminate number of additional shares of
common stock as may from time to time become issuable by reason of stock splits,
stock dividends, recapitalizations or other similar transactions. A portion of
the securities to be registered are subject to provisions which require the
Registrant to register the resale of 130% of the Common Stock issuable upon the
exercise of certain warrants and convertible debentures.
(2) Estimated at $1.945 per share, the average of the bid and ask price of
common stock as reported on the OTC Bulletin Board regulated quotation service
on March 14, 2006, for the purpose of calculating the registration fee in
accordance with Rule 457(c) under the Securities Act.
(3) Estimated at $1.945 per share, the average of the bid and ask price of
common stock as reported on the OTC Bulletin Board regulated quotation service
on March 14, 2006, for the purpose of calculating the registration fee in
accordance with Rule 457(g)(3) under the Securities Act.
(4) Based on the exercise price of the warrants, for the purpose of calculating
the registration fee in accordance with Rule 457(g)(3) under the Securities Act.
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to Section 8(a), may
determine.
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Subject to completion, dated March 20, 2006
PROSPECTUS
RELATIONSERVE MEDIA, INC.
6700 North Andrews Avenue
Fort Lauderdale, Florida 33390
(954) 202-6000
84,671,853 Shares of Common Stock
This prospectus relates to the sale by certain selling stockholders identified
in this prospectus (the "Selling Stockholders") of up to an aggregate of
84,671,853 shares of common stock, par value $0.001 per share ("Common Stock").
All of such shares of Common Stock are being offered for resale by the Selling
Stockholders.
The prices at which the Selling Stockholders may sell shares will be determined
by the prevailing market price for the shares or in negotiated transactions. We
will not receive any of the proceeds from the sale of these shares by the
Selling Stockholders. However, we will receive proceeds from the exercise of
warrants if exercised by the Selling Stockholder.
We will bear all costs relating to the registration of the Common Stock, other
than any Selling Stockholder's legal or accounting costs or commissions.
Our Common Stock is quoted on the regulated quotation service of the OTC
Bulletin Board under the symbol "RSVM.OB." The last sales price of our Common
Stock on March 17, 2006 as reported by the OTC Bulletin Board was $1.88 per
share.
The information in this prospectus is not complete and may be changed. These
securities may not be sold (except pursuant to a transaction exempt from the
registration requirements of the Securities Act of 1933, as amended (the
"Securities Act")) until the Registration Statement filed with the Securities
and Exchange Commission ("SEC") is declared effective. This prospectus is not an
offer to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
INVESTING IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. YOU SHOULD READ
THIS ENTIRE PROSPECTUS CAREFULLY, INCLUDING THE SECTION ENTITLED "RISK FACTORS"
BEGINNING ON PAGE 3 WHICH DESCRIBES CERTAIN MATERIAL RISK FACTORS YOU SHOULD
CONSIDER BEFORE INVESTING.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this prospectus is March __, 2006
TABLE OF CONTENTS
Page
----
PROSPECTUS SUMMARY....................................................... 2
RISK FACTORS............................................................. 3
FORWARD-LOOKING STATEMENTS............................................... 21
USE OF PROCEEDS.......................................................... 22
MARKET FOR OUR COMMON STOCK AND RELATED STOCKHOLDER MATTERS.............. 22
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RELATIONSERVE'S FINANCIAL
CONDITION AND RESULTS OF OPERATION.................................... 24
DESCRIPTION OF BUSINESS.................................................. 35
UNAUDITED CONDENSED COMBINED PRO FORMA FINANCIAL STATEMENTS.............. 42
MANAGEMENT............................................................... 49
PRINCIPAL STOCKHOLDERS................................................... 55
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS........................... 56
SELLING STOCKHOLDERS..................................................... 57
DESCRIPTION OF SECURITIES................................................ 69
PLAN OF DISTRIBUTION..................................................... 72
WHERE YOU CAN FIND MORE INFORMATION...................................... 73
LEGAL MATTERS............................................................ 73
EXPERTS.................................................................. 73
DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION FOR SECURITIES
ACT LIABILITIES....................................................... 74
CHANGES IN ACCOUNTANT.................................................... 74
SIGNATURES............................................................... 11
You should rely only on the information contained in this prospectus and in any
prospectus supplement we may file after the date of this prospectus. We have not
authorized anyone to provide you with different information. If anyone provides
you with different or inconsistent information, you should not rely on it. The
Selling Stockholders will not make an offer to sell these securities in any
jurisdiction where an offer or sale is not permitted. You should assume that the
information appearing in this prospectus or any supplement is accurate as of the
date on the front cover of this prospectus or any supplement only, regardless of
the time of delivery of this prospectus or any supplement or of any sale of
Common Stock. Our business, financial condition, results of operations and
prospects may have changed since that date.
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PROSPECTUS SUMMARY
The following summary highlights aspects of the offering. This prospectus does
not contain all of the information that may be important to you. You should read
this entire prospectus carefully, including the "Risk Factors" section and the
financial statements, related notes and the other more detailed information
appearing elsewhere in this prospectus before making an investment decision.
Unless otherwise indicated, all references to "we", "us", "our" and similar
terms and any references to the "Registrant" refer to RelationServe Media, Inc.
and its subsidiaries, and not to the Selling Stockholders.
OVERVIEW
RelationServe Media, Inc. (the "Company", "we or "our") is a holding company
organized for the purpose of acquiring, owning, and managing various marketing
and advertising businesses, primarily involving the Internet. We operate two
primary businesses and since February 2006 our SendTec ("SendTec") marketing
services business has become our dominant operation. On March 17, 2006, our
board of directors authorized that our name be changed to SendTec, Inc., subject
to stockholder approval.
SendTec is a marketing company, primarily involved in direct response marketing.
In addition to SendTec, we also own and operate two smaller businesses,
RelationServe Access, and Friendsand.com. For the twelve months ended December
31, 2005, we reported revenues of $11,302,780 derived solely from our
RelationServe and Friendsand.com businesses. On a pro-forma basis, our
consolidated revenues for 2005, including SendTec's revenues as if it had been
owned during the entire 2005 fiscal year, was $49,072,522.
BACKGROUND OF THE SENDTEC ACQUISITION
On August 9, 2005, we entered into an asset purchase agreement (as subsequently
amended, the "Agreement") with theglobe.com, inc. ("Globe") for the purchase of
the business and substantially all of the assets of SendTec. The purchase price
for SendTec under the Agreement was $37,500,000, subject to adjustment, and the
assumption of certain liabilities. On October 31, 2005 we assigned our rights
under the Agreement to an affiliated company, SendTec Acquisition Corp. ("STAC")
and entered into certain agreements providing for financing of the transactions.
As a result of requirements under the acquisition financing arrangements
described herein, from October 31, 2005 (the "Acquisition Date") through
February 3, 2006 (the "Consolidation Date") STAC operated independently and as a
minority-owned affiliate of ours prior to the Consolidation Date. Following the
Consolidation Date, STAC became a wholly-owned subsidiary of ours in connection
with a series of transactions that took place on the Consolidation Date (the
"Consolidation").
We maintain our principal executive offices at 877 Executive Center Drive West,
Suite 300, St. Petersburg, Florida 33702 and 6700 North Andrews Avenue, Fort
Lauderdale, Florida, 33309. SendTec also maintains an office in New York City.
We presently have 131 employees.
RATIONALIZATION PLAN
On and following the Consolidation, SendTec management and RelationServe
management commenced a joint review of the collective operations, synergies,
and, opportunities, which is ongoing. During the three month period following
the Acquisition Date and prior to the Consolidation Date, we operated
RelationServe and Friendsand.com wholly-independently from SendTec due to legal
and structural limitations imposed under the Debentures. During the first
quarter of 2006, initial steps were taken to reduce staff at RelationServe and
Friendsand.com, eliminate redundant positions and activities, replace certain
members of management, and evaluate additional opportunities for cost savings
through
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consolidation, reduction, disposition of assets or businesses, and other means
in an emphasis to streamline the businesses and implement a workable plan to
consolidate the management and operations of two synergistic but highly
divergent companies operating in two locations, with potential inefficiencies
and redundant administration. As a result of this review, we may take additional
steps which can not be determined at this time, which may include further
reducing our staff, combining administrative functions, relocating all or a
portion of its operations, terminating certain activities or operations, or
selling or disposing of assets of operations. Certain actions may require the
consent of our Debenture holders and require us to recognize accounting charges
for discontinued or disposed operations.
During the initial phase of management's review, we recognized that certain
financial covenants required under the Debentures would likely not be met during
the fourth quarter of 2005, and possibly thereafter, based upon, among other
things, non-cash accounting charges, unexpected costs and inefficiencies of
operating as two separate entities required by the terms of the STAC Debentures,
the impact of Hurricane Katrina and Wilma on the national economy and on Florida
in particular where both RelationServe and SendTec were forced to close or
operate at reduced staffing levels for several weeks, significant senior
management and extensive junior personnel changes at RelationServe and
Friendsand, poor morale, cultural differences, and uncertainty during the
transition period, and increased costs at Friendsand. In addition, the business
of RelationServe experienced a downturn and the industry in which Friendsand
operates became the focus of regulatory and public scrutiny. These factors
continue to impact us as a whole and we are continuing to study options for
combining the various businesses, which could include elimination or sale of
certain assets or businesses.
THE OFFERING
Common Stock Offered by
Selling Stockholders 84,671,853 shares of Common Stock.
Use of Proceeds We will not receive any proceeds from the sale
of shares in this offering by the Selling
Stockholders. However, we will receive proceeds
from the exercise of the warrants if they are
exercised by the Selling Stockholders. We
intend to use any proceeds for working capital
and general corporate purposes.
OTC Bulletin Board Symbol RSVM.OB
Common Stock Outstanding As of March 13, 2006 we had 40,741,920 shares
of Common Stock issued and outstanding, which
includes shares offered by this prospectus, but
which excludes shares that, as of the date of
this prospectus, are issuable upon the exercise
of warrants and our debentures.
RISK FACTORS
RISKS RELATING TO THE CONSOLIDATED COMPANY
Our acquisition of SendTec occurred on February 3, 2006. All references to
SendTec's risks herein are intended to refer prospectively to periods on and
following the acquisition.
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WE MAY BE UNABLE TO EFFECTIVELY INTEGRATE SENDTEC OR ADDITIONAL TARGETED ASSETS
OR MAY INCORRECTLY ASCERTAIN THE MERITS OR RISKS OF OUR OR SUCH TARGETED ASSETS
OPERATIONS.
The success of the SendTec acquisition will depend, in part, on our ability to
realize the benefits of enhanced resources, growth opportunities and other
synergies of combining with SendTec and to effectively leverage the SendTec
marketing and technical resources. We are exposed to risks related to the
integration, management, and retention of acquired client relationships,
operations and personnel. Integration of the businesses will be complex,
time-consuming and may disrupt the combined company's businesses if not
completed in a timely and efficient manner. Some of the difficulties that the
combined company may encounter include:
o diversion of management's attention from other business concerns;
o inability to use the acquired resources effectively; and
o demonstrating to the combined company's customers, vendors and
partners that the acquisition will not result in adverse changes to
their relationships.
We may also be affected by numerous risks inherent in our operations and the
operations of additional targeted assets. Although our management will endeavor
to evaluate the risks inherent in our business, other targeted businesses, and
the industry generally, we cannot assure that we will properly ascertain or
assess all of the significant risk factors.
ON A COMBINED PRO FORMA BASIS WE EXPERIENCED A SIGNIFICANT LOSS FOR THE YEAR
ENDED DECEMBER 31, 2005.
While we had $1,095,993 of operating income on a combined pro forma basis for
the year ended December 31, 2005, we experienced a net loss of $15,068,650 on a
combined pro forma basis. We are unable to predict if we will achieve
profitability on a combined pro forma basis. In order to achieve and maintain
profitability, we will need to generate significant revenues. If we do not
continue to increase our revenues, our business, results of operations, and
financial condition could be materially and adversely affected.
WE MAY REQUIRE ADDITIONAL FUNDING TO SUPPORT OUR OPERATIONS AND CAPITAL
EXPENDITURES, WHICH MAY NOT BE AVAILABLE AND WHICH LACK OF AVAILABILITY COULD
ADVERSELY AFFECT OUR BUSINESS.
We may need additional funds to support our growth, fund future acquisitions,
pursue business opportunities, react to unforeseen difficulties and to respond
to competitive pressures. There can be no assurance that any financing
arrangements will be available in amounts or on terms acceptable, if at all.
Furthermore, the sale of additional equity or convertible debt securities may
result in further dilution to existing stockholders. If we raise additional
funds through the issuance of debt, we will be required to service that debt and
we are likely to become subject to restrictive covenants and other restrictions
contained in the instruments governing that debt, which may limit our
operational flexibility. If adequate additional funds are not available, we may
be required to delay, reduce the scope of, or eliminate material parts of the
implementation of our business strategy, including the possibility of additional
acquisitions or internally developed businesses.
WE MAY MAKE ADDITIONAL ACQUISITIONS, WHICH COULD DIVERT MANAGEMENT'S ATTENTION,
CAUSE OWNERSHIP DILUTION, AND BE DIFFICULT TO INTEGRATE.
Our business strategy depends in part upon our ability to identify, structure,
and integrate acquisitions, in addition to SendTec, that are complementary with
our business model. Acquisitions, strategic relationships, and investments in
the technology and Internet sectors involve a high degree of risk. We may also
be unable to find a sufficient number of attractive opportunities, if any, to
meet our objectives. Although many technology and Internet companies have grown
in terms of revenue, few companies are profitable or have competitive market
share. Our potential acquisitions, relationships, investment targets, and
partners may have histories of net losses and may expect net losses for the
foreseeable future.
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Acquisition transactions are accompanied by a number of risks that could harm us
and our business, operating results, and financial condition. These risks apply
to our completed acquisitions and acquisitions we may undertake in the future,
including:
o We could experience a substantial strain on our resources, including
time and money, and may not be successful;
o Our management's attention may be diverted from our ongoing business
concerns;
o While integrating new companies, we may lose key executives or other
employees of these companies;
o We could experience customer dissatisfaction or performance problems
with an acquired company or technology;
o We may become subject to unknown or underestimated liabilities of an
acquired entity or incur unexpected expenses or losses from such
acquisitions; and
o We may incur possible impairment charges related to goodwill or other
intangible assets or other unanticipated events or circumstances, any
of which could harm our business.
Consequently, we might not be successful in integrating any acquired businesses,
products or technologies, and might not achieve anticipated revenue and cost
benefits.
IF AN EVENT OF DEFAULT OCCURS UNDER THE DEBENTURES, IT COULD RESULT IN A
MATERIAL ADVERSE EFFECT ON OUR BUSINESS, OPERATING RESULTS, OR FINANCIAL
CONDITION AS THE DEBENTURE HOLDERS MAINTAIN A FIRST PRIORITY SECURITY INTEREST
ON ALL OF OUR ASSETS AND ON THE ASSETS OF OUR SUBSIDIARIES.
On October 31, 2005, effective upon the Consolidation, STAC issued $34.95
million of Senior Secured Convertible Debentures due October 30, 2009 that are
now convertible into shares of our Common Stock and are guaranteed by us and
each of our subsidiaries. The Debenture holders have a first priority security
interest on all of our assets and on the assets of our subsidiaries. Events of
default include, but are not limited to, the following:
o failure to pay interest, principal payments or liquidated damages if
and when due;
o a breach of any material covenant or term or condition of the
Debenture or any of the transaction documents;
o a default or event of default (subject to any grace or cure period
provided for in the applicable agreement, document or instrument)
under any of the transaction documents, or any other material
agreement, lease, document or instrument;
o a breach of any representation or warranty made in the Debenture or
the other transaction documents;
o certain bankruptcy and bankruptcy related matters;
o a default by us or any of our subsidiaries in any of its material
obligations under any mortgage, credit agreement or other facility,
indenture agreement, factoring agreement or
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other instrument under which there may be issued, or by which there
may be secured or evidenced, any indebtedness for borrowed money or
money due under any long term leasing or factoring arrangement of any
of them in an amount exceeding $75,000 ($150,000 in the case of the
Company); and
o a Registration Statement for the shares issuable upon conversion of
the Debentures and exercise of certain warrants shall not have been
declared effective by the SEC on or prior to the 120th calendar day
after the Consolidation Date; or shall lapse after effectiveness.
If we default on our obligations under our Debentures or related agreements, the
cash required to pay such amounts will most likely come out of our working
capital. Since we rely on our working capital for our day-to-day operations,
such a default would have a material adverse effect on our business, operating
results, or financial condition. In such event, we may be forced to restructure,
file for bankruptcy, sell assets, or cease operations, any of which would put
the Company, its investors and the value of our Common Stock, at significant
risk. Further, our obligations under the Debentures are secured by substantially
all of our assets. Failure to fulfill our obligations under the Debentures and
related agreements could lead to loss of these assets, which would be
detrimental to our operations.
THE RESTRICTIONS ON OUR ACTIVITIES CONTAINED IN THE DEBENTURES COULD NEGATIVELY
IMPACT OUR ABILITY TO OBTAIN FINANCING FROM OTHER SOURCES.
So long as any portion of the Debentures remain outstanding, we are restricted
from incurring additional indebtedness other than certain permitted
indebtedness. To the extent that additional debt financing is required for us to
conduct our operations, these restrictions could materially adversely impact our
ability to achieve our operational objective.
WE MAY BE UNABLE TO EFFECT AN ADDITIONAL ACQUISITION OR INCORRECTLY ASCERTAIN
THE MERITS OR RISKS OF AN ADDITIONAL ACQUIRED COMPANY.
To the extent we complete an acquisition, we may be affected by numerous risks
inherent in its business operations. Although our management will endeavor to
evaluate the risks inherent in a business or industry, we cannot assure an
investor that we will properly ascertain or assess all of the significant risk
factors.
WE MAY BE UNABLE TO ATTRACT AND RETAIN KEY EMPLOYEES.
Failure to attract and retain necessary technical personnel and skilled
management could adversely affect our business. Our success depends to a
significant degree upon our ability to attract, retain and motivate highly
skilled and qualified personnel. If we fail to attract, train and retain
sufficient numbers of these highly qualified people, our prospects, business,
financial condition, and results of operations will be materially and adversely
affected. Our success also depends on the skills, experience, and performance of
key members of our management team. The loss of any key employee, could have an
adverse effect on our prospects, business, financial condition, and results of
operations.
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The lack of experience of our management team puts us at a competitive
disadvantage. Our management team lacks public company experience, which could
impair our ability to comply with legal and regulatory requirements such as
those imposed by Sarbanes-Oxley Act of 2002. The individuals who now constitute
management have never had responsibility for managing a publicly traded company.
Such responsibilities include complying with federal securities laws and making
required disclosures on a timely basis. There can be no assurance that our
management will be able to implement and affect programs and policies in an
effective and timely manner that adequately respond to such increased legal,
regulatory compliance, and reporting requirements. Our failure to do so could
lead to penalties, loss of trading liquidity, and regulatory actions and further
result in the deterioration of our business.
WE MAY NOT BE ABLE TO EFFECTIVELY MANAGE OUR GROWTH.
Our strategy envisions continuing to grow our business. If we fail to
effectively manage growth, our financial results could be adversely affected.
Additional growth may place a strain on management systems and resources. We
must continue to refine and expand our business development capabilities,
systems, and processes as well as our access to financing sources. As we grow,
we must continue to hire, train, supervise, and manage new employees. We may not
be able to:
o meet our capital needs;
o expand our systems effectively or efficiently or in a timely manner;
o allocate our human resources optimally;
o identify and hire qualified employees or retain valued employees; or
o incorporate effectively the components of additional business that we
may acquire in our effort to achieve growth.
IF WE ARE UNABLE TO OBTAIN ADEQUATE INSURANCE, OUR FINANCIAL CONDITION COULD BE
ADVERSELY AFFECTED IN THE EVENT OF UNINSURED OR INADEQUATELY INSURED LOSS OR
DAMAGE. OUR ABILITY TO EFFECTIVELY RECRUIT AND RETAIN QUALIFIED OFFICERS AND
DIRECTORS COULD ALSO BE ADVERSELY AFFECTED IF WE EXPERIENCE DIFFICULTY IN
OBTAINING ADEQUATE DIRECTORS' AND OFFICERS' LIABILITY INSURANCE.
We may not be able to obtain insurance policies on terms affordable to us that
would adequately insure our business and property against damage, loss, or
claims by third parties. To the extent our business or property suffers any
damages, losses, or claims by third parties that are not covered or adequately
covered by insurance, our financial condition may be materially adversely
affected.
We may be unable to secure or maintain insurance as a public company to cover
liability claims made against our officers and directors. If we are unable to
adequately insure our officers and directors, we may not be able to retain or
recruit qualified officers and directors. Our Debentures require $8 million of
directors and officers insurance and key man insurance on the life of Paul
Soltoff, without which the Debentures may be in default.
IF WE ARE UNABLE TO COMPETE IN THE HIGHLY COMPETITIVE PERFORMANCE-BASED
ADVERTISING AND SEARCH MARKETING INDUSTRIES, WE MAY EXPERIENCE REDUCED DEMAND
FOR OUR PRODUCTS AND SERVICES.
We expect to operate in a highly competitive environment. We principally compete
with other companies in the following main areas:
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o sales to merchant advertisers of performance-based advertising; and
o services that allow merchants to manage their advertising campaigns
across multiple networks and track the success of these campaigns.
Although we expect to pursue a strategy that allows us to potentially partner
with all relevant companies in the industry, there are certain companies in the
industry that may not wish to partner with us.
We expect competition to intensify in the future because current and new
competitors can enter our market with little difficulty. The barriers to
entering such markets are relatively low. In fact, many current Internet and
media companies presently have the technical capabilities and advertiser bases
to enter the search marketing service industry. Further, if the consolidation
trend continues among the larger media and search engine companies with greater
brand recognition, the share of the market remaining for us and other smaller
search marketing services providers could decrease, even though the number of
smaller providers could continue to increase. These factors could adversely
affect our competitive position in the search marketing services industry.
Some of our competitors, as well as potential entrants into our market, may be
better positioned to succeed in this market. They may have:
o longer operating histories;
o more management experience;
o an employee base with more extensive experience;
o a better ability to service customers in multiple cities in the United
States and internationally by virtue of the location of sales offices;
o larger customer bases;
o greater brand recognition; and
o significantly greater financial, marketing and other resources.
In addition, many current and potential competitors can devote substantially
greater resources than we can to promotion, web site development, and systems
development. Furthermore, there are numerous larger, more well-established and
well-financed entities with which we will compete and that could acquire or
create competing companies and/or invest in or form joint ventures in categories
or countries of interest to us, all of which could adversely impact our
business. Any of these trends could increase competition and reduce the demand
for any of our services.
WE ARE SUSCEPTIBLE TO GENERAL ECONOMIC CONDITIONS, AND A DOWNTURN IN ADVERTISING
AND MARKETING SPENDING BY MERCHANTS COULD ADVERSELY AFFECT OUR OPERATING
RESULTS.
Our operating results will be subject to fluctuations based on general economic
conditions, in particular those conditions that impact merchant-consumer
transactions. If there were to be a general economic downturn that affected
consumer activity in particular, however slight, then we would expect that
business entities, including our merchant advertisers and potential merchant
advertisers, could substantially and immediately reduce their advertising and
marketing budgets. We believe that during periods of lower consumer activity,
merchant spending on advertising and marketing is more likely to be
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reduced, and more quickly, than many other types of business expenses. These
factors could cause a material adverse effect on our operating results.
RISKS RELATED TO SENDTEC'S BUSINESS
ANY DECREASE IN DEMAND FOR SENDTEC'S ONLINE MARKETING SERVICES COULD
SUBSTANTIALLY REDUCE SENDTEC'S REVENUES.
To date, a substantial portion of SendTec's revenues have been derived from
Internet advertising. SendTec expects that online advertising will continue to
account for a substantial portion of revenues for the foreseeable future.
However, SendTec's revenues from Internet advertising may decrease in the future
for a number of reasons, including the following:
o the rate at which Internet users click on advertisements or take
action in response to an advertisement has always been low and could
decline as the volume of Internet advertising increases;
o Internet users can install software programs that allow them to
prevent advertisements from appearing on their screens or block the
receipt of emails;
o advertisers may prefer an alternative Internet advertising format,
product or service which SendTec might not offer at that time; and
o SendTec may be unable to make the transition to new Internet
advertising formats preferred by advertisers.
IF SENDTEC'S PRICING MODELS ARE NOT ACCEPTED BY ITS ADVERTISER CLIENTS, SENDTEC
COULD LOSE CLIENTS AND ITS REVENUES COULD DECLINE.
Most of SendTec's services are offered to advertisers based on cost-per-action
or cost-per-click pricing models, under which advertisers only pay SendTec if
SendTec provides the results they specify. These results-based pricing models
differ from the fixed-rate pricing model used by many Internet advertising
companies, under which the fee is based on the number of times the advertisement
is shown without regard to effectiveness. SendTec's ability to generate
significant revenues from advertisers will depend, in part, on SendTec's ability
to demonstrate the effectiveness of these primary pricing models to advertisers,
who may be more accustomed to a fixed-rate pricing model.
Furthermore, intense competition among websites and other Internet advertising
providers has led to the development of a number of alternative pricing models
for Internet advertising. The proliferation of multiple pricing alternatives may
confuse advertisers and make it more difficult for them to differentiate among
alternatives. In addition, it is possible that new pricing models may be
developed and gain widespread acceptance that are not compatible with SendTec's
business model or SendTec's technology. These alternatives, and the likelihood
that additional pricing models will be introduced, make it difficult for SendTec
to project the levels of advertising revenues or the margins that SendTec, or
the Internet advertising industry in general, will realize in the future. If
advertisers do not understand the benefits of SendTec's pricing models, then the
market for SendTec's services may decline or develop more slowly than SendTec
expects, which may limit SendTec's ability to grow their revenues or cause their
revenues to decline.
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SENDTEC DEPENDS ON A LIMITED NUMBER OF CLIENTS FOR A SIGNIFICANT PERCENTAGE OF
THEIR REVENUES, AND THE LOSS OF ONE OR MORE OF THESE ADVERTISERS COULD CAUSE
SENDTEC'S REVENUES TO DECLINE.
For year ended December 31, 2005, revenues from SendTec's two largest clients
accounted for 43.8% and of its total revenues. SendTec believes that a limited
number of clients will continue to be the source of a substantial portion of
their revenues for the foreseeable future. Key factors in maintaining SendTec's
relationships with these clients include SendTec's performance on individual
campaigns, the strength of SendTec's professional reputation, and the
relationships of SendTec's key executives with client personnel. To the extent
that SendTec's performance does not meet client expectations, or its reputation
or relationships with one or more major clients are impaired, SendTec's revenues
could decline and its operating results could be adversely affected.
ANY LIMITATION ON SENDTEC'S USE OF DATA DERIVED FROM CLIENTS' ADVERTISING
CAMPAIGNS COULD SIGNIFICANTLY DIMINISH THE VALUE OF SENDTEC'S SERVICES AND CAUSE
SENDTEC TO LOSE CLIENTS AND REVENUES.
When an individual visits SendTec's clients' websites, SendTec uses
technologies, including cookies and web beacons, to collect information such as
the user's IP address, advertisements delivered by SendTec that have been viewed
by the user, and responses by the user to such advertisements. SendTec
aggregates and analyzes this information to determine the placement of
advertisements across SendTec's affiliate network of advertising space. Although
the data SendTec collects from campaigns of different clients, once aggregated,
are not identifiable, SendTec's clients might decide not to allow SendTec to
collect some or all of this data or might limit SendTec's use of this data. Any
limitation on SendTec's ability to use such data could make it more difficult
for SendTec to deliver online marketing programs that meet client demands.
In addition, although SendTec's contracts generally permit SendTec to aggregate
data from advertising campaigns, SendTec's clients might nonetheless request
that SendTec discontinue using data obtained from their campaigns that have
already been aggregated with other clients' campaign data. It would be
difficult, if not impossible, to comply with these requests, and such requests
could result in significant expenditures of resources, interruptions, failures
or defects or use in SendTec's data collection, mining, and storage systems.
Privacy concerns regarding the collection or use of user data, could also limit
SendTec's ability to aggregate and analyze data from SendTec's clients. Under
such circumstances, SendTec may lose clients and their revenues may decline.
IF THE MARKET FOR INTERNET ADVERTISING FAILS TO CONTINUE TO DEVELOP, SENDTEC'S
REVENUES AND SENDTEC'S OPERATING RESULTS COULD BE HARMED.
SendTec's future success is highly dependent on the continued use and growth of
the Internet as an advertising medium. The Internet advertising market is
relatively new and rapidly evolving, and it uses different measurements than
traditional media to gauge effectiveness. As a result, demand for and market
acceptance of Internet advertising services is uncertain and subject to change.
Many of SendTec's current or potential advertiser clients have little or no
experience using the Internet for advertising purposes and have allocated only
limited portions of their advertising budgets to the Internet. The adoption of
Internet advertising, particularly by those entities that have historically
relied upon traditional media for advertising, requires the acceptance of a new
way of conducting business, exchanging information, measuring success, and
evaluating new advertising products and services. Such clients find Internet
advertising to be less effective for promoting their products and services than
traditional advertising media. SendTec cannot assure that the market for
Internet advertising will continue to grow or become
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sustainable. If the market for Internet advertising fails to continue to develop
or develops more slowly than SendTec expects, SendTec's revenues and business
could be harmed.
RISKS RELATED TO THE SUPPLY OF ADVERTISING SPACE
SENDTEC DEPENDS ON ONLINE PUBLISHERS FOR ADVERTISING SPACE TO DELIVER ITS
CLIENTS' ADVERTISING CAMPAIGNS, AND ANY DECLINE IN THE SUPPLY OF ADVERTISING
SPACE AVAILABLE THROUGH SENDTEC'S NETWORK COULD CAUSE SENDTEC'S REVENUES TO
DECLINE.
The websites, search engines, and email publishers that sell or venture their
advertising space to or with SendTec are not bound by long-term contracts that
ensure SendTec a consistent supply of advertising space, which SendTec refers to
as their inventory. SendTec generates a significant portion of revenues from the
advertising inventory provided by a limited number of publishers. In most
instances, publishers can change the amount of inventory they make available to
SendTec at any time, as well as the price at which they make it available. In
addition, publishers may place significant restrictions on SendTec's use of
their advertising inventory. These restrictions may prohibit advertisements from
specific advertisers or specific industries, or restrict the use of certain
creative content or format. If a publisher decides not to make inventory
available to SendTec, or decides to increase the price, or places significant
restrictions on the use of such inventory, SendTec may not be able to replace
this with inventory from other publishers that satisfy SendTec's requirements in
a timely and cost-effective manner. If this happens, SendTec's revenues could
decline or SendTec's cost of acquiring inventory may increase.
SENDTEC'S GROWTH MAY BE LIMITED IF IT IS UNABLE TO OBTAIN SUFFICIENT ADVERTISING
INVENTORY THAT MEETS SENDTEC'S PRICING AND QUALITY REQUIREMENTS.
SendTec's growth depends on its ability to effectively manage and expand the
volume of its inventory of advertising space. To attract new advertisers,
SendTec must increase its supply of inventory that meets its performance and
pricing requirements. SendTec's ability to purchase or venture sufficient
quantities of suitable advertising inventory will depend on various factors,
some of which are beyond its control. These factors include:
o SendTec's ability to offer publishers a competitive price for their
inventory;
o SendTec's ability to estimate the quality of the available inventory;
and
o SendTec's ability to efficiently manage its existing advertising
inventory.
In addition, the number of competing Internet advertising networks that purchase
advertising inventory from websites, search engine and email publishers
continues to increase. SendTec cannot assure that SendTec will be able to
purchase or venture advertising inventory that meets its performance, price, and
quality requirements, and if it cannot do so, SendTec's ability to generate
revenues could be limited.
ANY LIMITATION ON SENDTEC'S ABILITY TO POST ADVERTISEMENTS THROUGHOUT ITS
NETWORK OF ADVERTISING SPACE COULD HARM SENDTEC'S BUSINESS.
SendTec executes advertising programs for clients primarily by posting
advertisements, which it refers to as ad delivery, on SendTec's affiliate
network of advertising space. SendTec's business could suffer from a variety of
factors that could limit or reduce its ability to post advertisements across
SendTec's affiliate network, including:
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o technological changes that render the delivery of SendTec's
advertisements obsolete or incompatible with the operating systems of
consumers and/or the systems of online publishers;
o lawsuits or injunctions based on claims that SendTec's ad delivery
methodologies violate the proprietary rights of other parties and
regulatory or legal restrictions; and
o interruptions, failures or defects in SendTec's ad delivery and
tracking systems.
CONSOLIDATION OF ONLINE PUBLISHERS MAY IMPAIR SENDTEC'S ABILITY TO PROVIDE
MARKETING SERVICES, ACQUIRE ADVERTISING INVENTORY AT FAVORABLE RATES AND COLLECT
CAMPAIGN DATA.
The consolidation of Internet advertising networks, web portals, search engines
and other online publishers could eventually lead to a concentration of
desirable advertising inventory on a very small number of networks and large
websites. Such concentration could:
o increase SendTec's costs if these publishers use their greater
bargaining power to increase rates for advertising inventory;
o impair SendTec's ability to provide marketing services if these
publishers prevent SendTec from distributing SendTec's clients'
advertising campaigns on their websites or if they adopt ad delivery
systems that are not compatible with SendTec's ad delivery
methodologies; and
SENDTEC'S BUSINESS COULD BE HARMED IF THE USE OF TRACKING TECHNOLOGY IS
RESTRICTED OR BECOMES SUBJECT TO NEW REGULATION.
In conjunction with the delivery of advertisements to websites, SendTec
typically places small files of information, commonly known as cookies, on an
Internet user's hard drive, generally without the user's knowledge or consent.
Cookie information is passed to SendTec through an Internet user's browser
software. SendTec uses cookies to collect information regarding the
advertisements SendTec delivers to Internet users and their interaction with
these advertisements. SendTec uses this information to identify Internet users
who have received SendTec's advertisements in the past and to monitor and
prevent potentially fraudulent activity. In addition, SendTec's technology uses
this information to monitor the performance of ongoing advertising campaigns and
plan future campaigns.
Some Internet commentators and privacy advocates have proposed limiting or
eliminating the use of cookies and other Internet tracking technologies, and
legislation has been introduced in some jurisdictions to regulate Internet
tracking technologies. The European Union has already adopted a directive
requiring that when cookies are used, the user must be informed and offered an
opportunity to opt-out of the cookies' use. If there is a further reduction or
limitation in the use of Internet tracking technologies such as cookies:
o SendTec may have to replace or re-engineer SendTec's tracking
technology, which could require significant amounts of SendTec's time
and resources, may not be completed in time to avoid losing clients or
advertising inventory, and may not be commercially or technically
feasible;
o SendTec may have to develop or acquire other technology to prevent
fraud; and
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o SendTec may become subject to costly and time-consuming litigation or
investigations due to SendTec's use of cookie technology or other
technologies designed to collect Internet usage information.
Any one or more of these occurrences could result in increased costs, require
SendTec to change its business practices or divert management's attention.
IF SENDTEC OR ITS ADVERTISER OR PUBLISHER CLIENTS FAIL TO COMPLY WITH
REGULATIONS GOVERNING CONSUMER PRIVACY, SENDTEC COULD FACE SUBSTANTIAL COSTS AND
SENDTEC'S BUSINESS COULD BE HARMED.
SendTec's collection, maintenance and sharing of information regarding Internet
users could result in lawsuits or government inquiries. These actions may
include those related to U.S. federal and state legislation or European Union
directives limiting the ability of companies like SendTec to collect, receive
and use information regarding Internet users. Litigation and regulatory
inquiries are often expensive and time-consuming and the outcome is uncertain.
Any involvement by SendTec in any of these matters could require SendTec to:
o spend significant amounts on SendTec's legal defense;
o divert the attention of senior management from other aspects of
SendTec's business;
o defer or cancel new product launches as a result of these claims or
proceedings; and
o make changes to SendTec's present and planned products or services.
Further, SendTec cannot assure that its advertiser and publisher clients are
currently in compliance, or will remain in compliance, with their own privacy
policies, regulations governing consumer privacy or other applicable legal
requirements. SendTec may be held liable if its clients use SendTec's technology
or its data or SendTec collects on their behalf in a manner that is not in
compliance with applicable laws or regulations or its or their own stated
privacy standards.
SENDTEC MAY BE LIABLE FOR CONTENT IN THE ADVERTISEMENTS IT DELIVERS FOR
SENDTEC'S CLIENTS.
SendTec may be liable to third parties for content in the advertisements they
deliver if the artwork, text or other content involved violates copyrights,
trademarks, or other intellectual property rights of third parties or if the
content is defamatory. Although SendTec generally receives warranties from its
advertisers that they have the right to use any copyrights, trademarks or other
intellectual property included in an advertisement and are normally indemnified
by the advertisers, a third party may still file a claim against SendTec. Any
claims by third parties against SendTec could be time-consuming, could result in
costly litigation and adverse judgments, and could require SendTec to change its
business or practices.
MISAPPROPRIATION OF CONFIDENTIAL INFORMATION HELD BY SENDTEC COULD CAUSE SENDTEC
TO LOSE CLIENTS OR INCUR LIABILITY.
SendTec retains highly confidential information on behalf of its clients in
SendTec's systems and databases. Although SendTec maintains security features in
its systems, SendTec's operations may be susceptible to hacker interception,
break-ins and other disruptions. These disruptions may jeopardize the security
of information stored in and transmitted through SendTec's systems. If
confidential information is compromised, SendTec could be subject to lawsuits by
the affected clients or Internet users, which
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could damage SendTec's reputation among its current and future potential
clients, require significant expenditures of capital and other resources, and
cause SendTec to lose business and revenues.
ADDITIONAL BUSINESS RISKS RELATING TO SENDTEC'S BUSINESS
SENDTEC GENERALLY DOES NOT HAVE LONG-TERM CONTRACTS WITH ITS CLIENTS.
SendTec's clients typically hire SendTec on a project-by-project basis or on an
annual contractual relationship. Moreover, SendTec's clients generally have the
right to terminate their relationships with SendTec without penalty and with
relatively short or no notice. Once a project is completed SendTec cannot assure
that a client will engage SendTec for further services. From time to time,
highly successful engagements have ended because SendTec's client was acquired
and the new owners decided not to retain SendTec. A client that generates
substantial revenue for SendTec in one period may not be a substantial source of
revenue in a subsequent period. SendTec expects a relatively high level of
client concentration to continue, but not necessarily involve the same clients
from period to period. The termination of SendTec's business relationships with
any of its significant clients, or a material reduction in the use of SendTec's
services by any of their significant clients, could adversely affect SendTec's
future financial performance.
IF SENDTEC FAILS TO MANAGE ITS GROWTH EFFECTIVELY, SENDTEC'S EXPENSES COULD
INCREASE AND SENDTEC'S MANAGEMENT'S TIME AND ATTENTION COULD BE DIVERTED.
As SendTec continues to increase the scope of its operations, SendTec will need
an effective planning and management process to implement their business plan
successfully in the rapidly evolving Internet it is unable to manage its
expanding operations effectively. SendTec plans to continue to expand its sales
and marketing, customer support and research and development organizations. Past
growth has placed, and any future growth will continue to place, a significant
strain on SendTec's management systems and resources. SendTec will likely need
to continue to improve its financial and managerial controls and SendTec's
reporting systems and procedures. In addition, SendTec will need to expand,
train and manage its work force. SendTec's failure to manage its growth
effectively could increase SendTec's expenses and divert management's time and
attention.
If we are unable to manage our growth or our operations, our financial results
could be adversely affected.
IF SENDTEC FAILS TO ESTABLISH, MAINTAIN AND EXPAND ITS TECHNOLOGY BUSINESS, AND
MARKETING ALLIANCES AND PARTNERSHIPS, SENDTEC'S ABILITY TO GROW COULD BE
LIMITED.
In order to grow SendTec's technology business, we must generate, retain and
strengthen successful business and marketing alliances with advertising
agencies.
SendTec depends, and expects to continue to depend, on SendTec's business and
marketing alliances, which are companies which they have written or oral
agreements to work to provide services to work with SendTec's clients and to
refer business from their clients and customers to SendTec. If companies with
which SendTec has business and marketing alliances do not refer their clients
and customers to SendTec to perform their online campaign and message
management, SendTec's revenue and results of operations would be severely
harmed.
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RISKS RELATING TO OUR BUSINESS
IF WE ARE NOT ABLE TO RESPOND TO THE RAPID TECHNOLOGICAL CHANGE CHARACTERISTIC
OF OUR INDUSTRY, OUR PRODUCTS AND SERVICES MAY NOT BE COMPETITIVE.
The market for our services is characterized by rapid change in business models
and technological infrastructure, and we need to constantly adapt to changing
markets and technologies to provide competitive services. Our future success
will depend, in part, upon our ability to develop our services for both our
target market and for applications in new markets. We may not, however, be able
to successfully do so, and our competitors may develop innovations that render
our products and services obsolete or uncompetitive.
OUR TECHNICAL SYSTEMS WILL BE VULNERABLE TO INTERRUPTION AND DAMAGE THAT MAY BE
COSTLY AND TIME-CONSUMING TO RESOLVE AND MAY HARM OUR BUSINESS AND REPUTATION.
A natural or man-made disaster or other cause could interrupt our services for
an indeterminate length of time and severely damage our business, prospects,
financial condition, and results of operations. Our systems and operations are
vulnerable to damage or interruption from fire, floods, network failure,
hardware failure, software failure, power loss, telecommunications failures,
break-ins, terrorism, war or sabotage, computer viruses, denial of service
attacks, penetration of our network by unauthorized computer users and
"hackers," and other similar events, and other unanticipated problems.
We presently may not posses and may not have developed or implemented adequate
protections or safeguards to overcome any of these events. We also may not have
anticipated or addressed many of the potential events that could threaten or
undermine our technology network. Any of these occurrences could cause material
interruptions or delays in our business, result in the loss of data, render us
unable to provide services to our customers, expose us to material risk of loss
or litigation and liability, materially damage our reputation and our visitor
traffic may decrease as a result. In addition, if a person is able to circumvent
our security measures, he or she could destroy or misappropriate valuable
information or disrupt our operations, which could cause irreparable damage to
our reputation or business. Similar industry-wide concerns or events could also
damage our reputation or business. Our insurance, if obtained, may not be
adequate to compensate us for all losses that may occur as a result of a
catastrophic system failure or other loss, and our insurers may not be able or
may decline to do so for a variety of reasons.
If we fail to address these issues in a timely manner, we may lose the
confidence of our merchant advertisers, our revenue may decline, and our
business could suffer.
WE MAY RELY ON THIRD PARTY CO-LOCATION PROVIDERS, AND A FAILURE OF SERVICE BY
THESE PROVIDERS COULD ADVERSELY AFFECT OUR BUSINESS AND REPUTATION.
We may rely upon third party co-location providers to host our main servers. In
the event that these providers experience any interruption in operations or
cease operations for any reason or if we are unable to agree on satisfactory
terms for continued hosting relationships, we would be forced to enter into a
relationship with other service providers or assume hosting responsibilities
ourselves. If we are forced to switch hosting facilities, we may not be
successful in finding an alternative service provider on acceptable terms or in
hosting the computer servers ourselves. We may also be limited in our remedies
against these providers in the event of a failure of service. In the past,
short-term outages have occurred in the service maintained by co-location
providers that could recur. We also may rely on third party providers for
components of our technology platform, such as hardware and software providers,
credit card processors,
15
and domain name registrars. A failure or limitation of service or available
capacity by any of these third party providers could adversely affect our
business and reputation.
OUR RESULTS OF OPERATIONS MIGHT FLUCTUATE DUE TO CHANGES IN THE SEARCH ENGINE
BASED ALGORITHMS, WHICH COULD ADVERSELY AFFECT OUR REVENUE AND IN TURN THE
MARKET PRICE OF OUR COMMON STOCK.
Our revenue will be heavily dependent on how search engines treat our content in
their indexes. In the event search engines determine that our content is not
high quality, such search engines may not rank our content as highly in their
indexes resulting in a reduction in our traffic, which may cause lower than
expected revenues. We are greatly dependent on a small number of major search
engines, namely Google, Yahoo!, MSN, and AOL. Search engines tend to adjust
their algorithms periodically and each adjustment tends to have an impact on how
our content ranks in their indexes. These constant fluctuations could make it
difficult for us to predict future revenues.
WE DEPEND ON THE GROWTH OF THE INTERNET AND INTERNET INFRASTRUCTURE FOR OUR
FUTURE GROWTH AND ANY DECREASE OR LESS THAN ANTICIPATED GROWTH IN INTERNET USAGE
COULD ADVERSELY AFFECT OUR BUSINESS PROSPECTS.
Our future revenue and profits, if any, depend upon the continued widespread use
of the Internet as an effective commercial and business medium. Factors that
could reduce the widespread use of the Internet include:
o possible disruptions or other damage to the Internet or
telecommunications infrastructure;
o failure of the individual networking infrastructures of our merchant
advertisers and distribution partners to alleviate potential,
overloading and delayed response times;
o a decision by merchant advertisers to spend more of their marketing
dollars in offline areas;
o increased governmental regulation and taxation; and
o actual or perceived lack of security or privacy protection.
In particular, concerns over the security of transactions conducted on the
Internet and the privacy of users may inhibit the growth of the Internet and
other online services, especially online commerce. In order for the online
commerce market to develop successfully, we, and other market participants, must
be able to transmit confidential information, including credit card information,
securely over public networks. Any decrease or less than anticipated growth in
Internet usage could have a material adverse effect on our business prospects.
WE ARE EXPOSED TO RISKS ASSOCIATED WITH CREDIT CARD FRAUD AND CREDIT PAYMENT,
AND WE MAY SUFFER LOSSES AS A RESULT OF FRAUDULENT DATA OR PAYMENT FAILURE BY
MERCHANT ADVERTISERS.
We may suffer losses as a result of payments made with fraudulent credit card
data. Our failure to adequately control fraudulent credit card transactions
could reduce any gross profit margin. In addition, under limited circumstances,
we extend significant amounts of credit to clients and merchant advertisers who
may default on their accounts payable to us.
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GOVERNMENT REGULATION OF THE INTERNET MAY ADVERSELY AFFECT OUR BUSINESS AND
OPERATING RESULTS.
We may be subject to additional operating restrictions and regulations in the
future. Companies engaging in online search, commerce, and related businesses
face uncertainty related to future government regulation of the Internet. Due to
the rapid growth and widespread use of the Internet, legislatures at the federal
and state levels are enacting and considering various laws and regulations
relating to the Internet. Furthermore, the application of existing laws and
regulations to Internet companies remains somewhat unclear. Our business and
operating results may be negatively affected by new laws, and such existing or
new regulations may expose us to substantial compliance costs and liabilities
and may impede the growth in use of the Internet.
The application of these statutes and others to the Internet search industry is
not entirely settled. Further, several existing and proposed federal laws could
have an impact on our business:
o The Digital Millennium Copyright Act and its related safe harbors, are
intended to reduce the liability of online service providers for
listing or linking to third-party web sites that include materials
that infringe copyrights or other rights of others.
o The CAN-SPAM Act of 2003 and certain state laws are intended to
regulate interstate commerce by imposing limitations and penalties on
the transmission of unsolicited commercial electronic mail via the
Internet.
With respect to the subject matter of each of these laws, courts may apply these
laws in unintended and unexpected ways. As a company that provides services over
the Internet, we may be subject to an action brought under any of these or
future laws governing online services. Many of the services of the Internet are
automated and companies, such as ours, may be unknowing conduits for illegal or
prohibited materials. It is not known how courts will rule in many
circumstances. For example, it is possible that courts could find strict
liability or impose "know your customer" standards of conduct in certain
circumstances in which case we could be liable for actions by others.
We may also be subject to costs and liabilities with respect to privacy issues.
Several Internet companies have incurred costs and paid penalties for violating
their privacy policies. Further, it is anticipated that new legislation will be
adopted by federal and state governments with respect to user privacy.
Additionally, foreign governments may pass laws that could negatively impact our
business or may prosecute us for our products and services based upon existing
laws. The restrictions imposed by, and costs of complying with, current and
possible future laws and regulations related to our business could harm our
business and operating results.
FUTURE REGULATION OF SEARCH ENGINES MAY ADVERSELY AFFECT THE COMMERCIAL UTILITY
OF OUR SEARCH MARKETING SERVICES.
The Federal Trade Commission ("FTC") has recently reviewed the way in which
search engines disclose paid placements or paid inclusion practices to Internet
users. In 2002, the FTC issued guidance recommending that all search engine
companies ensure that all paid search results are clearly distinguished from
non-paid results, that the use of paid inclusion is clearly and conspicuously
explained and disclosed and that other disclosures are made to avoid misleading
users about the possible effects of paid placement or paid inclusion listings on
search results. Such disclosures, if ultimately mandated by the FTC or
voluntarily made by us, may reduce the desirability of any paid placement and
paid inclusion services that we offer. We believe that some users may conclude
that paid search results are not subject to the same relevancy requirements as
non-paid search results, and will view paid search results less
17
favorably. If such FTC disclosure reduces the desirability of our paid placement
and paid inclusion services, and "click-throughs" of our paid search results
decrease, the commercial utility of our search marketing services could be
adversely affected.
GOVERNMENT REGULATIONS AND LEGAL UNCERTAINTIES RELATING TO THE INTERNET AND
ONLINE COMMERCE COULD NEGATIVELY IMPACT OUR INTERNET BUSINESS.
Online commerce is relatively new and rapidly changing, and federal and state
regulations relating to the Internet and online commerce are evolving.
Currently, there are few laws or regulations directly applicable to the Internet
or online commerce on the Internet, and the laws governing the Internet that
exist remain largely unsettled. New Internet laws and regulations could dampen
growth in use and acceptance of the Internet for commerce. In addition,
applicability to the Internet of existing laws governing issues such as property
ownership, copyrights and other intellectual property issues, libel, obscenity,
and personal privacy is uncertain. The vast majority of those laws were adopted
prior to the advent of the Internet and related technologies and, as a result,
do not expressly contemplate or address the unique issues presented by the
Internet and related technologies. Further, growth and development of online
commerce have prompted calls for more stringent consumer protection laws, both
in the U.S. and abroad. The adoption or modification of laws or regulations
applicable to the Internet could have a material adverse effect on our Internet
business operations. We also will be subject to regulation not specifically
related to the Internet, including laws affecting direct marketers and
advertisers.
In addition, in 1998, the Internet Tax Freedom Act was enacted, which generally
placed a three-year moratorium on state and local taxes on Internet access and
on multiple or discriminatory state and local taxes on electronic commerce. This
moratorium was recently extended until November 1, 2007. We cannot predict
whether this moratorium will be extended in the future or whether future
legislation will alter the nature of the moratorium. If this moratorium is not
extended in its current form, state and local governments could impose
additional taxes on Internet-based transactions, and these taxes could decrease
our ability to compete with traditional retailers and could have a material
adverse effect on our business, financial condition, results of operations, and
cash flow.
In addition, several telecommunications carriers have requested that the Federal
Communications Commission ("FCC") regulate telecommunications over the Internet.
Due to the increasing use of the Internet and the burden it has placed on the
current telecommunications infrastructure, telephone carriers have requested the
FCC to regulate Internet service providers and impose access fees on those
providers. If the FCC imposes access fees, the costs of using the Internet could
increase dramatically. This could result in the reduced use of the Internet as a
medium for commerce, which could have a material adverse effect on our Internet
business operations.
WE MAY INCUR LIABILITIES FOR THE ACTIVITIES OF USERS OF OUR SERVICE, WHICH COULD
ADVERSELY AFFECT OUR SERVICE OFFERINGS.
The law relating to the liability of providers of online services for activities
of their users and for the content of their merchant advertiser listings and
other postings or usage (such as our social networking community Friendsand.com)
is currently unsettled and could damage our business, financial condition, and
operating results. Our insurance policies may not provide coverage for liability
arising out of activities of our users or merchant advertisers for the content
of our listings or other services (such as our social networking community
Friendsand.com). Furthermore, we may not be able to obtain or maintain adequate
insurance coverage to reduce or limit the liabilities associated with our
businesses. We may not successfully avoid civil or criminal liability for
unlawful activities carried out by consumers or other users of our services or
for the content of our or their listings or posting therein. Our potential
liability for unlawful activities of users of our services or for the content of
our or their listings or postings therein
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could require us to implement measures to reduce our exposure to such liability,
which may require us, among other things, to spend substantial resources or to
discontinue certain service offerings.
IF WE DO NOT MAINTAIN AND GROW A CRITICAL MASS OF MERCHANT ADVERTISERS, OUR
OPERATING RESULTS COULD BE ADVERSELY AFFECTED.
Our success depends, in part, on our and any additional acquired business's
maintenance and growth of a critical mass of merchant advertisers and a
continued interest in our and any additional acquired business's
performance-based advertising and search marketing services. If, through our or
any additional acquired business, we are unable to achieve a growing base of
merchant advertisers, we may not successfully develop or market technologies,
products or services that are competitive or accepted by merchant advertisers.
Any decline in the number of merchant advertisers could adversely affect our
operating results generally.
WE ARE DEPENDENT UPON SEVERAL OF THE MAJOR SEARCH ENGINES TO CONTINUE TO PROVIDE
US TRAFFIC THAT MERCHANT ADVERTISERS DEEM TO BE OF VALUE, AND IF THEY DO NOT, IT
COULD HAVE A MATERIAL ADVERSE EFFECT ON THE VALUE OF OUR SERVICES.
We are dependent upon several of the major Internet search engines namely
Google, Yahoo!, MSN and AOL to provide traffic that merchant advertisers deem to
be of value. We monitor the traffic delivered to our merchant advertisers in an
attempt to optimize the quality of traffic we deliver. We review factors such as
non-human processes, including robots, spiders, scripts (or other software),
mechanical automation of clicking and other sources and causes of low-quality
traffic, including, but not limited to, other non-human clicking agents. Even
with such monitoring in place, there is a risk that a certain amount of
low-quality traffic will be provided to our merchant advertisers, which, if not
contained, may be detrimental to those relationships. Low-quality traffic (or
traffic that is deemed to be less valuable by our merchant advertisers) may
prevent us from growing our base of merchant advertisers and cause us to lose
relationships with existing merchant advertisers or any additional acquired
business.
WE MAY BE SUBJECT TO LITIGATION FOR INFRINGING THE INTELLECTUAL PROPERTY RIGHTS
OF OTHERS.
Our success will depend, in part, on our ability to protect our intellectual
property and to operate without infringing on the intellectual property rights
of others. There can be no guarantee that any of our intellectual property will
be adequately safeguarded, or that it will not be challenged by third parties.
We may be subject to patent infringement claims or other intellectual property
infringement claims that would be costly to defend and could limit our ability
to use certain critical technologies.
Any additional patent litigation could negatively impact our business by
diverting resources and management attention from other aspects of the business
and adding uncertainty as to the ownership of technology and services that we
view as proprietary and essential to our business. In addition, a successful
claim of patent infringement against us and our failure or inability to license
the infringed or similar technology on reasonable terms, or at all, could have a
material adverse effect on our business.
WE MAY BE INVOLVED IN LAWSUITS TO PROTECT OR ENFORCE ANY PATENTS THAT WE
CURRENTLY HOLD OR MAY BE GRANTED, WHICH COULD BE EXPENSIVE AND TIME CONSUMING.
We may initiate patent litigation against third parties to protect or enforce
our patent rights, although we presently do not own any patents, and we may be
similarly sued by others. We may also become subject to interference proceedings
conducted in the patent and trademark offices of various countries to determine
the priority of inventions. The defense and prosecution, if necessary, of
intellectual property suits, interference proceedings and related legal and
administrative proceedings is costly and may divert
19
our technical and management personnel from their normal responsibilities. We
may not prevail in any of these suits. An adverse determination of any
litigation or defense proceedings could put our patents at risk of being
invalidated or interpreted narrowly and could put our patent applications at
risk of not being issued.
Furthermore, because of the substantial amount of discovery required in
connection with intellectual property litigation, there is a risk that some of
our confidential information could be compromised by disclosure during this type
of litigation. In addition, during the course of this kind of litigation, there
could be public announcements of the results of hearings, motions or other
interim proceedings or developments in the litigation. If securities analysts or
investors perceive these results to be negative, they could have an adverse
effect on the trading price of our Common Stock.
RISKS RELATING TO OUR COMMON STOCK
EFFECT OF OUTSTANDING WARRANTS, OPTIONS AND CONVERTIBLE DEBENTURES
Currently, we have outstanding warrants and options exercisable into an
aggregate of 20,115,214 shares of Common Stock and outstanding Debentures
convertible into 23,300,000 shares of Common Stock and an additional 5,852,000
shares if the Debenture holders exercise their right to purchase additional
Debentures. The exercise or conversion of all of such outstanding warrants,
options or Debentures would dilute the then-existing stockholders' percentage
ownership of our Common Stock, and any sales in the public market of the Common
Stock underlying such securities could adversely affect prevailing market prices
for the Common Stock. Moreover, the terms upon which we would be able to obtain
additional equity capital could be adversely affected since the holders of such
securities can be expected to exercise or convert them at a time when we would,
in all likelihood, be able to obtain any needed capital on terms more favorable
to us than those provided by such securities.
WE NEED TO AUTHORIZE ADDITIONAL SHARES SO THAT WE CAN REGISTER ALL OF THE SHARES
THAT WE ARE REQUIRED TO REGISTER PURSUANT TO THIS REGISTRATION STATEMENT.
We currently have 90,000,000 shares of authorized common stock. Such amount is
sufficient to cover our outstanding shares and we have a sufficient amount of
shares reserved for issuance for the exercise or conversion of our outstanding
options, warrants and Debentures and any additional options or Debentures that
we may issue pursuant to the terms of our stock option plans or our Debentures.
However, the terms of our Securities Purchase Agreement with the Debenture
holders requires us to register 130% of the shares of common stock that they are
entitled to if they exercised all of the Warrants and Debentures that they are
entitled. Currently, we do not have sufficient authorized common stock to cover
such registration. While we are in the process of trying to increase our
authorized common stock to cover such registration, failure to increase our
authorized common stock could result in a breach of the Debentures, and the
Securities Purchase Agreement relating to the Debentures.
APPLICABLE SEC RULES GOVERNING THE TRADING OF "PENNY STOCKS" LIMITS THE TRADING
AND LIQUIDITY OF OUR COMMON STOCK.
Our Common Stock is quoted on the OTC Bulletin Board, and currently trades, and
may continue to trade below $5.00 per share. Therefore, the Common Stock is
considered a "penny stock" and subject to SEC rules and regulations that impose
limitations upon the manner in which such shares may be publicly traded. These
regulations require the delivery, prior to any transaction involving a penny
stock, of a disclosure schedule explaining the penny stock market and the
associated risks. Under these regulations, certain brokers who recommend such
securities to persons other than established customers or certain accredited
investors must make a special written suitability determination regarding such a
purchaser and receive such purchaser's written agreement to a transaction prior
to sale. These regulations have the effect of limiting the trading activity of
our Common Stock and reducing the liquidity of an investment in our Common
Stock.
THE MARKET PRICE OF OUR COMMON STOCK IS LIKELY TO BE HIGHLY VOLATILE AND SUBJECT
TO WIDE FLUCTUATIONS.
The market price of our Common Stock is likely to be highly volatile and could
be subject to wide fluctuations in response to a number of factors, including:
o announcements of new products or services by our competitors;
o fluctuations in revenue attributable to changes in the search engine
based algorithms that rank the relevance of our content;
20
o quarterly variations in our revenues and operating expenses;
o announcements of technological innovations or new products or services
by us; and
o sales of our Common Stock by our founders or other selling
stockholders.
OUR OPERATING RESULTS MAY FLUCTUATE SIGNIFICANTLY, AND THESE FLUCTUATIONS MAY
CAUSE OUR COMMON STOCK PRICE TO FALL.
Our operating results will likely vary in the future primarily as the result of
fluctuations in our revenues and operating expenses. If our results of
operations do not meet the expectations of current or potential stockholders,
the price of our Common Stock may decline.
THERE MAY BE A LIMITED PUBLIC MARKET FOR SHARES OF OUR COMMON STOCK, WHICH MAY
MAKE IT DIFFICULT FOR STOCKHOLDER TO SELL THEIR SHARES.
An active public market for shares of our Common Stock may not develop, or if
one should develop, it may not be sustained. Therefore, stockholders may not be
able to find purchasers for their shares of Common Stock.
OUR COMMON STOCK IS CONTROLLED BY INSIDERS.
Paul Soltoff, Eric Obeck and Donald Gould, who are officers of our Company,
collectively own in excess of 20% of the outstanding shares of our Common Stock.
Such concentrated control may adversely affect the price of our Common Stock.
These principal stockholders may be able to control matters requiring approval
by our stockholders, including the election of directors. Such concentrated
control may also make it difficult for our stockholders to receive a premium for
their shares of Common Stock in the event we were to have an opportunity to
merge with a third party or enter into different transactions which require
stockholder approval. In addition, certain provisions of Delaware law could have
the effect of making it more difficult or more expensive for a third party to
acquire, or of discouraging a third party from attempting to acquire control.
WE DO NOT EXPECT TO PAY DIVIDENDS FOR THE FORESEEABLE FUTURE.
We currently intend to retain any future earnings to support the development and
expansion of our business and do not anticipate paying cash dividends in the
foreseeable future. In addition, the terms of the Debentures prohibit the
payment of dividend. Our payment of any future dividends will be at the
discretion of our board of directors after taking into account various factors,
including but not limited to our financial condition, operating results, cash
needs, growth plans, and the terms of any credit agreements that we may be a
party to at the time. Accordingly, stockholders must rely on sales of their
Common Stock after price appreciation, which may never occur, as the only way to
realize a return on their investment. The Debentures restrict our ability to pay
dividends to our stockholders.
FORWARD-LOOKING STATEMENTS
This Registration Statement on Form SB-2 contains forward-looking statements (as
defined in Section 27A of the Securities Act and Section 21E of the Securities
Exchange Act of 1934 (the "Exchange Act"). To the extent that any statements
made in this Registration Statement contain information that is not historical,
these statements are essentially forward-looking. Forward-looking statements can
be identified by the use of words such as "expects," "plans" "will," "may,"
"anticipates," believes," "should," "intends," "estimates," and other words of
similar meaning. These statements are subject to risks and
21
uncertainties that cannot be predicted or quantified and consequently, actual
results may differ materially from those expressed or implied by such
forward-looking statements. Such risks and uncertainties include, without
limitation, risks associated with the uncertainty of future financial results,
additional financing requirements, development of new products, the
effectiveness, profitability, and marketability of such products, the ability to
protect proprietary information, the impact of current, pending, or future
legislation and regulation on the electronic marketing industry, the impact of
competitive products or pricing, technological changes, the effect of general
economic and business conditions and other risks and uncertainties detailed from
time to time in our filings with the Securities and Exchange Commission. We do
not undertake any obligation to publicly update any forward-looking statements.
As a result, you should not place undue reliance on these forward-looking
statements.
We also use market data and industry forecasts and projections throughout this
Registration Statement, which we have obtained from market research, publicly
available information and industry publications. These sources generally state
that the information they provide has been obtained from sources believed to be
reliable, but that the accuracy and completeness of the information are not
guaranteed. The forecasts and projections are based on industry surveys and the
preparers' experience in the industry, and the projected amounts may not be
achieved. Similarly, although we believe that the surveys and market research
others have performed are reliable, we have not independently verified this
information. Forecasts and other forward-looking information obtained from these
sources are subject to the same qualifications and the additional uncertainties
accompanying any estimates of future market size, revenue and market acceptance
of products and services.
USE OF PROCEEDS
The Selling Stockholders will receive all of the proceeds from the sale of the
shares offered for sale by them under this prospectus. We will not receive any
proceeds from the resale of shares by the Selling Stockholders covered by this
prospectus. We will, however, receive proceeds from the exercise of warrants
outstanding. Such proceeds will be used for working capital and general
corporate purposes.
MARKET FOR OUR COMMON STOCK AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
Our Common Stock has been quoted on the OTC Bulletin Board since June 30, 2005
under the symbol RSVM.OB. Prior to that date, there was no active market for our
Common Stock. Based upon information furnished by our transfer agent, as of
March 13, 2006, we had approximately 225 holders of record of our Common Stock.
The following table sets forth the high and low bid prices for our Common Stock
for the periods indicated, as reported by the OTC Bulletin Board. The prices
state inter-dealer quotations, which do not include retail mark-ups, mark-downs
or commissions. Such prices do not necessarily represent actual transactions.
Fiscal Year 2004 High Low
- ---------------- ----- -----
First Quarter $ NA $ NA
Second Quarter NA NA
Third Quarter NA NA
Fourth Quarter NA NA
22
Fiscal Year 2005
- ----------------
First Quarter $ NA $ NA
Second Quarter 4.35 3.50
Third Quarter 9.00 4.11
Fourth Quarter 6.48 2.52
Fiscal Year 2006
- ----------------
First Quarter (through March 15, 2006) $3.75 $1.71
DIVIDENDS
We have not declared or paid dividends on our Common Stock and do not anticipate
declaring or paying any cash dividends on our Common Stock in the foreseeable
future. We currently expect to retain future earnings, if any, for the
development of our business. Dividends may be paid on our Common Stock only if
and when declared by our Board of Directors. The Debentures restrict our ability
to pay dividends to our stockholders.
EQUITY COMPENSATION PLAN INFORMATION
We maintain a 2005 Non-Employee Directors Stock Option Plan (the "Directors
Plan"), 2005 Incentive Stock Plan (the "2005 Plan") and 2006 Incentive Stock
Plan (the "2006 Plan"). Both the Directors Plan and the 2005 Plan (collectively,
the "Plans") have been approved by our Board of Directors and stockholders. The
2006 Plan has been approved by our Board of Directors and is subject to
stockholder approval. As of March 10, 2006 we had issued (i) 282,100 shares of
Common Stock under the Plans and had outstanding stock options to purchase a
total of 3,948,500 shares of Common Stock, with exercise prices at or in excess
of the fair market value on the date of grant. (See "Item 10 - Executive
Compensation" for a detailed description of our equity compensation plans.)
The following table provides information as of December 31, 2005 with respect to
the shares of Common Stock that may be issued under our existing equity
compensation plans:
Number of securities to Weighted-average
be issued upon exercise price of Number of securities
exercise of outstanding outstanding options, remaining available
Plan Category options, warrants and rights warrants and rights for future issuance
- --------------------- ---------------------------- -------------------- --------------------
Equity compensation
plans approved by
security holders 3,288,000 $2.98 1,729,900
Equity compensation
plans not approved by
security holders 0 $ 0 0
23
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RELATIONSERVE'S FINANCIAL
CONDITION AND RESULTS OF OPERATION
RESULTS OF OPERATIONS
TWELVE MONTHS ENDED DECEMBER 31, 2005 COMPARED TO TWELVE MONTHS ENDED DECEMBER
31, 2004
REVENUES, COST OF REVENUES AND GROSS PROFIT
Net revenues for twelve months ended December 31, 2005 were $11,302,780 as
compared to net revenues of $9,564,993 for twelve months ended December 31,
2004, an increase of $1,737,787 or approximately 18.2%. This increase reflects
our increased marketing efforts and broadening of our customer base. We
currently employ 30 sales representatives who market and sell our products. This
increase reflects the growth in our online lead generation product revenues from
approximately $3,051,300 for the twelve months ended December 31, 2004 to
approximately $4,034,000 for the twelve months ended December 31, 2005, growth
in our append and data services products from approximately $2,979,600 for the
twelve months ended December 31, 2004 to $3,343,600 for the twelve months ended
December 31, 2005, and growth in our email marketing product revenues from
approximately $3,534,000 for the twelve months ended December 31, 2004 to
approximately $3,923,200 for the twelve months ended December 31, 2005. We
continue to build customer relations and expect revenues to increase in
connection with our subsequent consolidation with SendTec.
Costs of revenues for the twelve months ended December 31, 2005 were $2,542,614
as compared to cost of revenues of $2,146,596 for the twelve months ended
December 31, 2004, an increase of $396,018 or approximately 18.4%. Costs of
revenues include salaries and contract labor costs for our technology
department, costs associated with our internet broadcast bandwidth,
non-capitalized costs associated with maintaining our databases and outsourcing
data information from outside vendors, and amortization expense associated with
our email database. For the twelve months ended December 31, 2005, technology
salaries and contract labor amounted to $643,893 as compared to $878,117 for the
twelve months ended December 31, 2004, a decrease of $234,224 or 26.7%. This
decrease reflects a decrease in the number of technology employees from 12
employees to 9. For the twelve months ended December 31, 2005, broadcast
bandwidth expenses amounted to $159,866 as compared to $547,331 for the twelve
months ended December 31, 2004, a decrease of $389,465 or 71.2%. This decrease
was attributable to the outsourcing of email broadcasting to third party vendor,
which reduced the Company's internal bandwidth requirements. For the twelve
months ended December 31, 2005, we incurred costs associated with the
acquisition of data for our database and outsourced data functions of $1,054,032
as compared to $395,673 for the twelve months ended December 31, 2004, an
increase of $684,824 or 166.4%. The increase is primarily attributable to the
outsourcing to third party vendors of our email broadcast function. For the
twelve months ended December 31, 2005, we incurred amortization expense related
to the amortization of our email database of $628,539 as compared to $325,475
for the twelve months ended December 31, 2004, an increase of $303,064 or 93%.
The increase in amortization expense was attributable to an increase in
capitalized costs associated with our email database.
Our gross profit margins approximately 77.5% of net revenues for the twelve
months ended December 31, 2005 as compared to approximately 77.6% for the twelve
months ended December 31, 2004.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
For the twelve months ended December 31, 2005, salaries expense amounted to
$2,441,026 as compared to $1,699,167 for the twelve months ended December 31,
2004, an increase of $741,859 or approximately
24
43.7%. The increase was attributable to the hiring of our chief executive
officer and chief operating officer in June 2005 as well as the hiring of
additional administrative staff to facilitate our growth and the recording of
stock-based compensation of $495,054 from the issuance of common shares and
granting of stock options to employees and a consultant. We expect our salaries
expense to increase in subsequent quarters due to these new officers and other
new employees.
For the twelve months ended December 31, 2005, bad debt expense amounted to
$2,393,203 as compared to $1,650,242 for the twelve months ended December 31,
2004, an increase of $742,961 or approximately 45%. We have established an
allowance for doubtful accounts based upon factors pertaining to the credit risk
of specific customers, historical trends, and other information. Delinquent
accounts are written-off when it is determined that the amounts are
uncollectible. At December 31, 2005, the allowance for doubtful accounts was
$1,014,338.
For the twelve months ended December 31, 2005, commission expense amounted to
$1,462,728 as compared to $1,884,447 for the twelve months ended December 31,
2004, a decrease of $421,719, or approximately 22.4%. The decrease is primarily
due to the reduction in sales personnel from 40 employees to 30.
For the twelve months ended December 31, 2005, professional fees amounted to
$975,132 as compared to $420,007 for the twelve months ended December 31, 2004,
an increase of $555,125 or approximately 132.2%. The increase was primarily
attributable to an increase in legal and accounting fees associated with our
acquisitions and SEC filings as well as the audit of our financial statements.
For the twelve months ended December 31, 2005, advertising and trade show
expense amounted to $653,484 as compared to $493,713 for the twelve months ended
December 31, 2004, an increase of $159,771, or approximately 32.4%. We continued
to increase our marketing efforts to increase our revenues.
For the twelve months ended December 31, 2005, depreciation and amortization
expense amounted to $215,307 as compared to $187,031 for the twelve months ended
December 31, 2004, an increase of $28,276 or approximately 15%. This increase
was attributable to the acquisition of property and equipment of $202,000 in
2005.
Total other general and administrative expenses for the twelve months ended
December 31, 2005 were $2,287,349, an increase of $1,374,400, or approximately
151%, from total general and administrative expenses for the twelve months ended
December 31, 2004 of $912,949. This increase is summarized as follows:
2005 2004
---------- --------
Rent $ 359,885 $239,129
Consulting fees 448,188 --
Payroll taxes 243,089 --
Insurance 178,009 136,404
Telephone 124,168 185,430
Other 934,010 351,986
---------- --------
Total $2,287,349 $912,949
========== ========
The increase in rent expense was attributable to payments during the twelve
months ended December 31, 2005 for common area maintenance and utilities that
were not reflected as rent expense in the prior period. Additionally, during a
portion of 2005, we rented an office in New York on a month-to-month basis. As
of December 31, 2005, we no longer rent the New York facility.
25
In 2005, we incurred payroll taxes related to our salaries. In 2004, we leased
our employees from a third party. The increase in insurance is primarily related
to an increase in health insurance costs due the increase in the number of
employees.
The increase in other general and administrative expense was attributable to an
overall increase in operations as well as an increase in expenses in 2005 of
approximately $211,000 related to the termination of employment agreements with
our former officers and settlement fees paid to certain former employees,
We reported a loss from operations of $(1,668,063) for the twelve months ended
December 31, 2005 as compared to income from operations of $170,841 for the
twelve months ended December 31, 2004.
OTHER INCOME (EXPENSES)
For the twelve months ended December 31, 2004, we recognized a gain on
extinguishment of debt of $162,955 compared to $0 for the twelve months ended
December 31, 2005.
In 2004, we recorded a loss of $100,000 from the termination of an aborted
acquisition. On October 21, 2004, we entered into an Asset Purchase Agreement
("the Agreement") which was subsequently terminated due to a breach by the
Company. In accordance with the terms of the Agreement, and an Amended Mutual
Release and Agreement, we paid a termination fee of $100,000.
In 2004, we recorded an asset impairment charge of $198,240. The asset
impairment charge consisted of an asset impairment charge of $135,000 due to the
disposal of property and equipment and $63,371 for email addresses which were
removed from the email database.
For the twelve months ended December 31, 2005, we recorded an estimated
registration rights penalty of $75,000 compared to $0 for the twelve months
ended December 31, 2004.
For the twelve months ended December 31, 2005, we recorded a loss on
equity-method investment of $1,034,102 related to our equity investment in STAC,
as discussed elsewhere herein.
Interest income for the twelve months ended December 31, 2005 was $3,144 as
compared to $0 for the twelve months ended December 31, 2004, an increase of
$3,144 or 100%. This was primarily attributable to the investment of excess cash
in money market accounts.
Interest expense for the twelve months ended December 31, 2005 was $14,268 as
compared to $5,276 for the twelve months ended December 31, 2004, an increase of
$8,992 or 170%. This was primarily attributable to the assumption of debt of
$700,000 in connection with our acquisitions, which has been repaid prior to
December 31, 2005.
For the twelve months ended December 31, 2005, we did not record a provision for
income taxes due to our net loss. In 2004, the Company had made an election to
have its income or loss taxed directly to its members as a partnership for
income tax purposes. Accordingly, the pro rata income or loss will be included
in the tax return of the members. As a result, no income taxes have been
recognized in the accompanying financial statements for the 2004 period.
26
NET (LOSS) INCOME
For the twelve months ended December 31, 2005, we recorded a net loss of
$2,788,289 compared to net income of $30,280 for the twelve months ended
December 31, 2004.
Liquidity and Capital Resources
On April 20, 2005, we commenced a private offering of up to $1,000,000 of Units,
each Unit consisted of 50,000 shares of our common stock with warrants to
purchase 25,000 shares of our common stock exercisable at $2.00 per share. The
private placement was originally to be for a maximum amount of $1,000,000, but
was subsequently increased to a maximum of $1,625,000. In May and June 2005, we
sold 1,625,000 shares of and granted 812,500 warrants to purchase 812,500 shares
of common stock at an exercise price of $2.00 per share for net proceeds of
$1,495,026.
Pursuant to a Confidential Memorandum dated June 22, 2005, (the "PPM"), we
offered in a private placement to accredited investors up to $4,000,000 of Units
for a purchase price of $100,000 per Unit. Each Unit consists of 50,000 shares
of the Company's common stock, par value $0.001 per share (the "Common Stock")
and a three-year warrant to purchase 25,000 shares of Common Stock at $3.50 per
share. As of December 31, 2005, we sold Units to accredited investors for net
proceeds of $1,955,527 issuing 1,048,515 shares of common stock and granting
524,257 warrants to purchase 524,257 shares of common stock at $3.50 per share.
The Company's purchase of SendTec was financed by issuance of $34.95 million of
Senior Secured Convertible Debentures due October 30, 2009 of STAC as well as
issuance by the Company of $10,289,690 of Series A Convertible Preferred Stock,
par value $0.001 per share. We used $10,000,000 of the proceeds we received in
this transaction to purchase a 23% interest in STAC. As a result of the
Consolidation discussed above, the Debentures, initially convertible at $1.00
per share into STAC Common Stock, are now convertible into Company common stock
at a conversion price of $1.50 per share. The Debenture Holders maintain a first
priority security interest in all of our assets and in the assets of our
subsidiaries. So long as the Debentures remain outstanding, we are restricted
from incurring additional indebtedness other than certain permitted
indebtedness.
Subsequent to December 31, 2005, the Company sold to Sunrise Equity Partners, LP
500,000 shares of Company Common Stock for $750,000, of which the Company
received net proceeds of $675,000 after deducting fees and expenses of $75,000.
In addition, the Company has received proceeds of $62,500 from the exercise of
Warrants.
During the twelve months ended December 31, 2005, we repaid loans payable of
$700,000 and paid $150,000 in cash in connection with the acquisition of certain
assets and liabilities of Omni Point Marketing, LLC, a Florida limited liability
company ("Omni Point"), and all of the outstanding membership interests of
Friendsand, LLC, a Delaware limited liability company related to Omni Point by
common ownership.
Net cash flows provided by operating activities for the twelve months ended
December 31, 2005 were $156,722 as compared to net cash provided by operating
activities of $359,271 for the twelve months ended December 31, 2004, a decrease
of $202,549. For the twelve months ended December 31, 2005, net cash provided by
operating activities was attributable to cash provided from our net loss of
$(2,788,289) (adjusted for add-back non-cash items such as depreciation and
amortization of $900,130, stock-based compensation and consulting of $705,179,
an increase in provision for bad debt of $2,393,203, and a loss on
equity-method investment of $1,034,102), and an increase in accounts receivable
of $3,394,719, an increase in prepaid expenses and other assets of $91,862, and
a decrease in deferred rent of $26,330,
27
offset by cash received from the repayment of amounts due from former principals
of $140,312, an increase in accounts payable of $870,896, an increase in other
accrued expenses of $201,149, an increase in accrued commissions of $125,174 and
an increase in customer deposits of $87,677. For the twelve months ended
December 31, 2004, net cash provided by operating activities was attributable to
net cash provided from our net income of $30,280 (adjusted for add-back non-cash
items such as depreciation and amortization of $512,506, an increase in
provision for bad debt of $1,650,242, an asset impairment charge of $198,240,
and a gain on extinguishment of notes payable of $162,705, and an increase in
accounts payable of $718,597, offset by a decrease in accrued expenses of
$55,952, an increase in amounts due from former principals of $102,241, and an
increase in prepaid expenses and other assets of $133,237.
We reported net cash flows used in investing activities of $13,125,548 for the
twelve months ended December 31, 2005 as compared to net cash used in investing
activities of $881,233 for the twelve months ended December 31, 2004, an
increase of $12,244,315. This increase is attributable to the use of cash of
$10,309,083 in connection with our investment in a prospective acquiree, an
increase in acquisitions of capitalized data costs of $2,464,850, an increase in
the acquisition of property and equipment of $201,615, and cash paid in the
acquisition of the net assets of Friendsand, LLC of $150,000.
Net cash flows provided by financing activities was $12,971,019 for the twelve
months ended December 31, 2005 as compared to net cash provided by financing
activities of $432,118 for the twelve months ended December 31, 2004. For the
twelve months ended December 31, 2005, we received net proceeds from the sale of
common stock of $2,455,527, proceeds from the sale of preferred stock of
$10,289,690, cash received in acquisition of $995,426, and net proceeds from the
exercise of warrants of $137,500 offset by net draws by members
(pre-acquisition) of $207,124 and the repayment of loans payable of $700,000. In
addition to the proceeds from the sale of preferred stock, our purchase of
SendTec was financed through the issuance of $34.95 million of Debentures of
STAC. For the twelve months ended December 31, 2004, we received proceeds from
contributions by members of $1,195,000 offset by the repayment of notes payable
of $532,882 and the distribution of $230,000 to former principals.
We reported a net increase in cash for the twelve months ended December 31, 2005
of $2,093 as compared to a net decrease in cash of $59,564 for the twelve months
ended December 31, 2004. At December 31, 2005, we had cash on hand of $156,472.
CRITICAL ACCOUNTING POLICIES
Our financial statements and accompanying notes are prepared in accordance with
generally accepted accounting principles in the United States. Preparing
financial statements requires management to make estimates and assumptions that
affect the reported amounts of assets, liabilities, revenue and expenses. These
estimates and assumptions are affected by management's applications of
accounting policies. Our critical accounting policies include revenue
recognition, the useful life of our intangible assets, and accounting for stock
based compensation.
Revenue Recognition - We follow the guidance of the Securities and Exchange
Commission's Staff Accounting Bulletin 104 for revenue recognition. In general,
we record revenue when persuasive evidence of an arrangement exists, services
have been rendered or product delivery has occurred, the sales price to the
customer is fixed or determinable, and collectibility is reasonably assured. The
following policies reflect specific criteria for the various revenues streams of
the Company:
Email append Services: The Company's email append solution allows marketers
to augment their existing customer database with the Company's
permission-based email data. When a match is confirmed, the customer's
email address is added to the client's file. Revenue is recognized upon
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completion of the email append service and the delivery of the updated
customer database is delivered to the client.
Electronic change of address: The Company's electronic change of address
service enables clients to update their email databases. Revenue is
recognized upon delivery of the updated customer database is delivered to
the client.
Lead generation: The Company offers lead generation programs to assist a
variety of businesses with customer acquisition. The Company pre-screens
the leads through its online surveys to meet its clients' exact criteria.
Revenue is recognized upon delivery of a lead database to the client.
Direct Mail and postal list advertisement: The Company compiles an
exclusive Internet responders' postal mailing list. This list is sourced
from online registration and individuals who have responded to the
Company's online campaigns. These consumers are responsive to offers and
purchase products and services through online and offline channels. Revenue
is recognized upon delivery of the respective list to the client.
Online market research: The Company has developed a consumer survey. The
Company offers a variety of targeted leads generated from its ongoing
survey responses. The Company also offers marketers the opportunity to add
specific questions to the survey. The Company then sells the response
information to the marketer on a cost per response basis. If a marketer or
a market research company needs a full survey completed, the Company will
broadcast its client's survey to a designated responder list on a cost per
thousand basis. Revenue is recognized upon delivery of the respective
survey is delivered to the designated responder.
Intangible assets consist of a database of email addresses acquired during
normal operations and costs associated with the development of our various
websites. Costs to develop new email databases, which primarily represent direct
external costs, are capitalized and are amortized straight-line over the
expected lives of the databases. We review the carrying value of intangibles and
other long-lived assets for impairment at least annually or whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. Recoverability of long-lived assets is measured by comparison of
its carrying amount to the undiscounted cash flows that the asset or asset group
is expected to generate. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the property, if any, exceeds its fair market value.
Accounting for Stock Based Compensation - We account for stock based
compensation utilizing Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("SFAS 123"), which encourages, but
does not require, companies to record compensation cost for stock-based employee
compensation plans at fair value. We have chosen to account for stock-based
compensation using the intrinsic value method prescribed in Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees", and
related interpretations. Accordingly, compensation cost for stock options is
measured as the excess, if any, of the estimated fair market value of our stock
at the date of the grant over the amount an employee must pay to acquire the
stock. We have adopted the "disclosure only" alternative described in SFAS 123
and SFAS 148 (See Recent Accounting Pronouncements), which require pro forma
disclosures of net income and earnings per share as if the fair value method of
accounting had been applied. Because of this election, we continue to account
for our employee stock-based compensation plans under Accounting Principles
Board (APB) Opinion No. 25 and the related interpretations. We are required to
comply with SFAS No. 123 (revised 2004) starting on the first day of our fiscal
year 2006. We are currently evaluating the effect that the adoption of SFAS No.
123 (revised 2004) will have on our consolidated operating results and financial
condition. No stock-based compensation cost is currently reflected in net income
for employee and director option grants as
29
all options granted under the 2005 Incentive Stock Plan and the Non-Employee
Directors Stock Plan had an exercise price equal to the market value of the
underlying common stock on the date of grant.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 2004, the FASB issued FASB Statement No. 123R, "Share-Based Payment,
an Amendment of FASB Statement No. 123" ("FAS No. 123R"). FAS No. 123R requires
companies to recognize in the statement of operations the grant date fair value
of stock options and other equity-based compensation issued to employees. FAS
No. 123R is effective beginning in the Company's first of fiscal 2006. We are in
process of evaluating the impact this pronouncement may have on our financial
statements.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF SENDTEC'S FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
BASIS OF PRESENTATION OF FINANCIAL STATEMENTS;
SendTec's financial statements have been prepared as "carve out" financial
statements in accordance with SEC interpretations under Staff Accounting
Bulletin (SAB) Topic 1-B. The term carve out as used herein applies to general
purpose financial statements of an operating unit, sometimes not itself a
separate legal entity, which are derived or "carved-out" of those of a larger
corporate entity. For example, a division or a portion thereof representing a
particular business can be carved out of an entity's financial statements. As
such, SendTec's financial statements have been presented reflecting SendTec as a
stand alone entity, not as a part of the consolidated financial statements of
its parent company.
As required by the SAB, the financial statements include allocations from its
parent companies necessary to reflect all of the costs of doing business.
Management believes that the assumptions underlying the financial statements,
including such allocations are reasonable.
Additionally, as required by SAB Topic 5-J, these financial statements reflect
"push-down" accounting for the September 1, 2004 transaction with theglobe.com
("theglobe") establishing a new basis of accounting. Push-down accounting for
the sale of SendTec to RelationServe Media, Inc. ("RelationServe") was not
applied as management believes the conditions requiring push-down accounting
were not met.
Income taxes have been calculated as if all of the Company's operations had been
conducted as a separate tax paying legal entity, filing its own separate tax
return and as if the transaction described in Note J had not occurred.
YEAR ENDED DECEMBER 31, 2005 COMPARED TO THE YEAR ENDED DECEMBER 31, 2004
NET REVENUE: Net Revenue totaled $37.8 million for the year ended December 31,
2005 as compared to $32.7 million for the year ended December 31, 2004.
SendTec's net revenue was primarily generated from three areas: online
performance advertising, offline direct response television media buying and
online and offline strategic marketing services. The increase of $5.1 million in
total net revenue as compared to 2004 was primarily attributable to increased
online performance advertising revenue and direct response television media
revenue. Online performance advertising revenue totaled $31.6 million for 2005
as compared to $28.4 for 2004. The 11% increase in online performance
advertising resulted from the addition of several new online advertising clients
and the continued growth of SendTec's online search engine marketing revenues.
Online performance advertising revenue comprised approximately 83.6% and 86.9%
of SendTec's total net revenue in 2005 and 2004, respectively. Direct response
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television media buying revenue totaled $2.0 million in 2005 as compared to $0.4
million in 2004. The 426% increase in direct response television media revenue
resulted primarily from the addition of two new television media Clients in the
last two quarters of 2005. Direct response television media buying revenue
comprised approximately 5.2% and 1.2% of SendTec's total net revenue in 2005 and
2004, respectively.
COST OF REVENUE: Cost of revenue consists of third party vendor costs for
research, production and post production services plus all third party vendor
fees incurred to acquire advertising media, including the actual cost of the
media. Cost of revenue totaled $25.5 million for the year ended December 31,
2005 as compared to $22.6 million for the year ended December 31, 2004.
Approximately 93.1% of the increase in cost of revenue in 2005 as compared to
2004 resulted from an increase in cost of revenue related to online performance
advertising. This increase was directly attributable to the increase in online
performance advertising revenue in 2005, as compared to the same period in 2004.
Cost of revenue related to online performance advertising represented
approximately 94.1% and 95.1% of SendTec's total cost of revenue in 2005 and
2004, respectively. Additionally, cost of revenue resulting from online
performance advertising was approximately 76.4% and 75.6% of online performance
advertising revenue in 2005 and 2004, respectively.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES: Selling, general and
administrative expenses consist primarily of salaries and related personnel
costs for sales, operations and general and administrative employees. This
expense category also includes costs for facilities rent, legal and professional
services, server hosting and bandwidth services, marketing services and other
general corporate overhead expenses. Selling, general and administrative
expenses totaled $8.3 million for the year ended December 31, 2005 as compared
to $7.0 million for the year ended December 31, 2004. Employee salaries,
commissions and benefits represented approximately 78.4% and 77.6% of total
selling, general and administrative expenses in 2005 and 2004, respectively.
Approximately $1.1 million of the total increase in selling, general and
administrative expenses in 2005 as compared to 2004 resulted from increased
salaries, commissions and benefits paid to employees. The increase in employee
costs was primarily a result of an increase in the number of employees in 2005
as compared to 2004. SendTec employed 71 and 51 at the end of 2005 and 2004,
respectively.
DEPRECIATION AND AMORTIZATION: Depreciation and amortization expense totaled
$0.7 million for the year ended December 31, 2005. The $0.3 million increase
over 2004 resulted principally from the amortization of non-compete intangibles
recorded as a result of the acquisition of SendTec by theglobe.
STOCK BONUS COMPENSATION: Stock bonus compensation expense totaled $4.8 million
in 2005. This amount reflects common stock in SendTec Acquisition Corporation
(STAC) granted to SendTec management upon the acquisition of the assets and
liabilities of SendTec by STAC from the globe.com on October 31, 2005.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOW ITEMS
YEAR ENDED DECEMBER 31, 2005 COMPARED TO YEAR ENDED DECEMBER 31, 2004
As of December 31, 2005, SendTec had approximately $3.4 million in cash and cash
equivalents as compared to $3.1 million at December 31, 2004. Net cash provided
by operating activities was $4.3 million and $2.4 million for the years ended
December 31, 2005 and 2004, respectively. The period-to-period increase in net
cash provided by operating activities was primarily due to an increase in net
income earned in 2005 after adjusting net income for non-cash stock compensation
of $4.8 million. SendTec
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made cash advances totaling $3.5 million and $1.8 million to theglobe, its
parent company, in 2005 and 2004, respectively and made advances related to the
providing of advertising and marketing services totaling $0.3 million and $1.0
million to an affiliated wholly-owned subsidiary of theglobe in 2005 and 2004,
respectively.
FUTURE AND CRITICAL NEED FOR CAPITAL
SendTec's parent company, theglobe, continues to incur substantial consolidated
net losses and its management believes that theglobe will continue to be
unprofitable and use cash in its operations for the foreseeable future.
theglobe's consolidated net losses and cash usage during its recent past and
projected future periods relate primarily to the operation of its VoIP telephony
services business and to a lesser extent to corporate overhead expenses and the
operations of its computer games business. SendTec has contributed net income
and cash flow since being acquired on September 1, 2004, and management expects
that SendTec will continue to be profitable and provide positive cash flow in
future periods.
MANAGEMENT'S DISCUSSION OF CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of our financial statements in conformity with accounting
principles generally accepted in the United States of America requires us to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenue and expenses during
the reporting period. Our estimates, judgments and assumptions are continually
evaluated based on available information and experience. Because of the use of
estimates inherent in the financial reporting process, actual results could
differ from those estimates.
Certain of our accounting policies require higher degrees of judgment than
others in their application. These include revenue recognition, valuation of
customer receivables, valuation of goodwill, intangible assets and other
long-lived assets and capitalization of computer software costs. Our accounting
policies and procedures related to these areas are summarized below.
REVENUE RECOGNITION
Revenue from the distribution of Internet advertising is recognized when
Internet users visit and complete actions at an advertiser's website. Revenue
consists of the gross value of billings to clients, including the recovery of
costs incurred to acquire online media required to execute client campaigns.
Recorded revenue is based upon reports generated by the SendTec's tracking
software.
Revenue derived from search engine marketing services, such as search engine
keyword buying, is recognized on a net basis when the associated keyword search
media is clicked on by a consumer. SendTec typically earns a media commission
equal to a percentage of the keyword search media purchased for its clients. In
many cases, the amount the SendTec bills to clients significantly exceeds the
amount of revenue that is earned due to the existence of various "pass-through"
charges such as the cost of the search engine keyword media. Amounts received in
advance of search engine keyword media purchases are deferred and included in
deferred revenue in the accompanying balance sheet.
Revenue derived from the purchase and tracking of direct response media, such as
television and radio commercials, is recognized on a net basis when the
associated media is aired. In many cases, the amount the SendTec bills to
clients significantly exceeds the amount of revenue that is earned due to the
existence of various "pass-through" charges such as the cost of the television
and radio media. Amounts received in advance of media airings are deferred and
included in deferred revenue in the accompanying balance sheet.
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Revenue generated from the production of direct response advertising programs,
such as infomercials, is recognized on the completed contract method when such
programs are complete and available for airing. Production activities generally
take eight to twelve weeks and SendTec usually collects amounts in advance and
at various points throughout the production process. Amounts received from
customers prior to completion of commercials are included in deferred revenue
and direct costs associated with the production of commercials in process are
deferred and included within other current assets in the accompanying balance
sheet.
VALUATION OF CUSTOMER RECEIVABLES
Provisions for the allowance for doubtful accounts are made based on historical
loss experience adjusted for specific credit risks. Measurement of such losses
requires consideration of SendTec's historical loss experience, judgments about
customer credit risk, and the need to adjust for current economic conditions.
GOODWILL AND INTANGIBLE ASSETS
In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations" and
SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires that
certain acquired intangible assets in a business combination be recognized as
assets separate from goodwill. SFAS No. 142 requires that goodwill and other
intangibles with indefinite lives should no longer be amortized, but rather
tested for impairment annually or on an interim basis if events or circumstances
indicate that the fair value of the asset has decreased below its carrying
value.
Our policy calls for the assessment of the potential impairment of goodwill and
other identifiable intangibles with indefinite lives whenever events or changes
in circumstances indicate that the carrying value may not be recoverable or at
least on an annual basis. Some factors we consider important which could trigger
an impairment review include the following:
o significant under-performance relative to historical, expected or projected
future operating results;
o significant changes in the manner of our use of the acquired assets or the
strategy for our overall business; and
o significant negative industry or economic trends.
When we determine that the carrying value of goodwill or other identified
intangibles with indefinite lives may not be recoverable, we measure any
impairment based on a projected discounted cash flow method.
LONG-LIVED ASSETS
Historically, SendTec's long-lived assets, other than goodwill, have primarily
consisted of property and equipment, capitalized costs of internal-use software
and values attributable to covenants not to compete.
Long-lived assets held and used by SendTec and intangible assets with
determinable lives are reviewed for impairment whenever events or circumstances
indicate that the carrying amount of assets may not be recoverable in accordance
with SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets." We evaluate recoverability of assets to be held and used by comparing
the carrying amount of the assets, or the appropriate grouping of assets, to an
estimate of undiscounted future cash flows to be generated by the assets, or
asset group. If such assets are considered to be impaired, the
33
impairment to be recognized is measured as the amount by which the carrying
amount of the assets exceeds the fair value of the assets. Fair values are based
on quoted market values, if available. If quoted market prices are not
available, the estimate of fair value may be based on the discounted value of
the estimated future cash flows attributable to the assets, or other valuation
techniques deemed reasonable in the circumstances.
CAPITALIZATION OF COMPUTER SOFTWARE COSTS
SendTec capitalizes the cost of internal-use software which has a useful life in
excess of one year in accordance with Statement of Position No. 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use." Subsequent additions, modifications, or upgrades to internal-use
software are capitalized only to the extent that they allow the software to
perform a task it previously did not perform. Software maintenance and training
costs are expensed in the period in which they are incurred. Capitalized
computer software costs are amortized using the straight-line method over the
expected useful life, or three years.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In May 2005, the FASB issued SFAS No. 154, "Accounting for Changes and Error
Corrections, a Replacement of APB Opinion No. 20 and FASB Statement No. 3." SFAS
154 applies to all voluntary changes in accounting principles and requires
retrospective application to prior periods' financial statements of changes in
accounting principles. This statement also requires that a change in
depreciation, amortization or depletion method for long-lived, non-financial
assets be accounted for as a change in accounting estimate effected by a change
in accounting principle. SFAS 154 carries forward without change the guidance
contained in APB Opinion No. 20 for reporting the correction of an error in
previously issued financial statements and a change in accounting estimate. This
statement is effective for accounting changes and corrections of errors made in
fiscal years beginning after December 15, 2005. The Company does not expect the
adoption of this standard to have a material impact on its financial condition,
results of operations or liquidity.
In March 2005, the FASB issued Interpretation ("FIN") No. 47, "Accounting for
Conditional Asset Retirement Obligations," an interpretation of FASB Statement
No. 143, "Accounting for Asset Retirement Obligations." The interpretation
clarifies that the term conditional asset retirement obligation refers to a
legal obligation to perform an asset retirement activity in which the timing
and/or method of settlement are conditional on a future event that may or may
not be within the control of the entity. An entity is required to recognize a
liability for the fair value of a conditional asset retirement obligation if the
fair value of the liability can be reasonably estimated. FIN 47 also clarifies
when an entity would have sufficient information to reasonably estimate the fair
value of an asset retirement obligation. The effective date of this
interpretation is no later than the end of fiscal years ending after December
15, 2005. SendTec is currently investigating the effect, if any, that FIN 47
would have on the SendTec's financial position, cash flows and results of
operations.
In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary
Assets, an amendment of APB Opinion No. 29." SFAS No. 153 requires exchanges of
productive assets to be accounted for at fair value, rather than at carryover
basis, unless (1) neither the asset received nor the asset surrendered has a
fair value that is determinable within reasonable limits or (2) the transactions
lack commercial substance. This statement is effective for nonmonetary asset
exchanges occurring in fiscal periods beginning after June 15, 2005. SendTec
does not expect the adoption of this standard to have a material impact on its
financial condition, results of operations, or liquidity.
34
In December 2004, the FASB issued SFAS No. 123R, "Share-Based Payment." This
standard replaces SFAS No. 123, "Accounting for Stock-Based Compensation" and
supersedes Accounting Principles Board ("APB") Opinion No. 25, "Accounting for
Stock Issued to Employees." The standard requires companies to expense the fair
value of stock options on the grant date and is effective for annual periods
beginning after June 15, 2005. In accordance with the revised statement, the
expense attributable to stock options granted or vested subsequent to January 1,
2006 will be required to be recognized. The precise impact of the adoption of
SFAS No. 123R cannot be predicted at this time because it will depend on the
levels of share-based payments that are granted in the future and whether the
related compensation expense is allocated to SendTec by theglobe for SendTec
employees participating in the Parent Company's stock option plans. However,
SendTec believes that the adoption of this standard may have a significant
effect on SendTec's results of operations or financial position.
In December 2003, the FASB issued FIN No. 46-R "Consolidation of Variable
Interest Entities." FIN 46-R, which modifies certain provisions and effective
dates of FIN 46, sets forth the criteria to be used in determining whether an
investment in a variable interest entity should be consolidated. These
provisions are based on the general premise that if a company controls another
entity through interests other than voting interests, that company should
consolidate the controlled entity. SendTec believes that currently, it does not
have any material arrangements that meet the definition of a variable interest
entity which would require consolidation.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity." SFAS No. 150
affects the issuer's accounting for three types of freestanding financial
instruments. One type is mandatorily redeemable shares, which the issuing
company is obligated to buy back in exchange for cash or other assets. A second
type, which includes put options and forward purchase contracts, involves
instruments that do or may require the issuer to buy back some of its shares in
exchange for cash or other assets. The third type of instrument consists of
obligations that can be settled with shares, the monetary value of which is
fixed, tied solely or predominantly to a variable such as a market index, or
varies inversely with the value of the issuers' shares. SFAS No. 150 does not
apply to features embedded in a financial instrument that is not a derivative in
its entirety. SFAS No. 150 also requires disclosures about alternative ways of
settling the instruments and the capital structure of entities, whose shares are
mandatorily redeemable. Most of the guidance in SFAS No. 150 is effective for
all financial instruments entered into or modified after May 31, 2003, and
otherwise is effective from the start of the first interim period beginning
after June 15, 2003. The adoption of this standard did not have a material
impact on SendTec's results of operations or financial position.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments Hedging Activities." This statement amends and clarifies
accounting for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities under SFAS No. 133. SFAS
No. 149 became effective during the third quarter of 2003 and did not have a
material impact on the SendTec's results of operations or financial position.
DESCRIPTION OF BUSINESS
OVERVIEW
RelationServe Media, Inc. (the "Company", "we or "our") is a holding company
organized for the purpose of acquiring, owning, and managing various marketing
and advertising businesses, primarily involving the Internet. The Company
operates two primary businesses and since February 2006 the Company's SendTec
("SendTec") marketing services business has become its dominant operation. On
35
March 17, 2006, the Company authorized its name be changed to SendTec, Inc.,
subject to stockholder approval.
SendTec is a marketing company, primarily involved in direct response marketing.
In addition to SendTec, the Company also owns and operates two smaller
businesses, RelationServe Access, and Friendsand.com. For the twelve months
ended December 31, 2005, the Company reported revenues of $11,302,780 derived
solely from its RelationServe and Friendsand.com businesses. On a pro-forma
basis, the Company's consolidated revenues for 2005, including SendTec's
revenues as if it had been owned during the entire 2005 fiscal year, was
$49,072,522.
MERGER TRANSACTIONS COMPLETED IN 2005
The Company was originally formed as Chubasco Resources Corp. in the State
of Nevada as an exploration stage company engaged in the business of mineral
exploration. On October 21, 2004, the Company entered into an Asset Purchase
Agreement that was subsequently terminated due to a breach by the Company. In
2004, in accordance with the terms of the Asset Purchase Agreement, and an
Amended Mutual Release and Agreement, the Company accrued a termination fee of
$100,000, which was paid in 2005.
Pursuant to the terms of a Merger Agreement, the Company acquired all of
the issued and outstanding capital stock of RelationServe on a one-for-one basis
in exchange for 13,326,000 shares of its $0.001 par value common stock. In
addition, certain of Chubasco's stockholders simultaneously cancelled an
aggregate of 6,800,000 shares of their common stock upon completing the Merger.
Each share of RelationServe common stock (13,326,000) and each RelationServe
warrant (6,562,500) outstanding prior to the Merger was automatically converted
into an equivalent number of shares of the Company's common stock and an
equivalent number of warrants to purchase shares of the Company's common stock
upon completion of the Merger. As a result, RelationServe's former stockholders
became the Company's majority stockholders and RelationServe became the
Company's wholly-owned subsidiary. Chubasco's stockholders retained 3,216,500
shares of the Company's common stock. In addition, the Company assumed a
$700,000 promissory note due in May 2007 that RelationServe issued as partial
consideration in a previous purchase of net assets described below.
Prior to the Merger, RelationServe, through its wholly-owned subsidiary,
RelationServe Access, Inc. ("Access"), purchased certain assets and assumed
certain liabilities of Omni Point Marketing, LLC, a Florida limited liability
company ("Omni Point"), and through its wholly-owned subsidiary, Friendsand,
Inc. ("Friendsand"), acquired all of the outstanding membership interests of
Friendsand, LLC, a Delaware limited liability company related to Omni Point by
common ownership (the "Affiliated Company" or "Friends LLC"). RelationServe
completed these transactions simultaneously on May 16, 2005. RelationServe
acquired the net assets and business of Omni Point and membership interests of
Affiliated Company for a combination of cash in the amount of $150,000, a
two-year promissory note in the principal amount of $700,000, and 8,000,000
shares of its common stock. RelationServe, which had no business operations
prior to these transactions, accounted for its acquisition of Omni Point's net
assets and merger with Affiliated Company as a recapitalization because Omni
Point and the former member of Affiliated Company gained control of a majority
of RelationServe's common stock upon completing these transactions. Accordingly,
Omni Point and Affiliated Company are deemed to be the acquirer for accounting
purposes. The Company became a Delaware corporation through a reincorporation
merger completed in 2005.
BACKGROUND OF THE SENDTEC ACQUISITION
On August 9, 2005, the Company entered into an asset purchase agreement, (as
subsequently amended, the "Agreement") with theglobe.com, inc. ("Globe") for the
purchase of the business and substantially all
36
of the assets of SendTec. The purchase price for SendTec under the Agreement was
$37,500,000, subject to adjustment, and the assumption of certain liabilities.
On October 31, 2005 the Company assigned its rights under the Agreement to an
affiliated company, SendTec Acquisition Corp. ("STAC") and entered into certain
agreements providing for financing of the transactions. As a result of
requirements under the acquisition financing arrangements described herein, from
October 31, 2005 (the "Acquisition Date") through February 3, 2006 (the
"Consolidation Date") STAC operated independently and as a minority-owned
affiliate of the Company prior to the Consolidation Date. Following the
Consolidation Date, STAC became a wholly-owned subsidiary of the Company in
connection with a series of transactions that took place on the Consolidation
Date (the "Consolidation").
The SendTec purchase was financed by the issuance of $34.95 million of Senior
Secured Convertible Debentures due October 30, 2009 of STAC, as amended (the
"Debentures"), collateralized and guaranteed by the Company and each of its
subsidiaries and the issuance by the Company of $10,289,690 of Series A
Convertible Preferred Stock, par value $0.001 per share (the "Series A
Preferred"). Both the Debentures and the Series A Preferred were convertible,
upon the Consolidation, into the Common Stock of the Company. In order to
provide funds to STAC to complete the Asset Purchase, $10,000,000 of STAC common
stock, par value $0.001 per share (the "STAC Common Stock"), was issued to the
Company from the proceeds of the sale of the Series A Preferred by the Company
upon the Consolidation.
On February 3, 2006, provisions of the Debentures, as well as the terms of
certain agreements with the management of STAC, resulted in the automatic
conversion of STAC into a wholly-owned subsidiary of the Company. All Series A
Preferred was automatically converted to Common Stock, and thereafter, the
Company, through STAC, acquired and continued to operate the business of
SendTec, in addition to the RelationServe Access and Friendsand.com business.
We currently plan to continue our efforts to acquire businesses engaged in, or
related to, Internet marketing and advertising. We may issue additional shares
of Common Stock, preferred stock, warrants to acquire shares of our Common
Stock, debt, or make cash payments, or a combination thereof, in connection with
such acquisitions.
The Company maintains its principal executive offices at 877 Executive Center
Drive West, Suite 300, St. Petersburg, Florida 33702 and 6700 North Andrews
Avenue, Fort Lauderdale, Florida, 33309. SendTec also maintains an office in New
York City. The Company presently has 50 employees.
Any references to SendTec include the current business which is held by STAC as
well as the business and substantially all of the assets of SendTec which were
acquired by STAC.
SENDTEC BUSINESS
SendTec is a direct response marketing services and technology company that
provides customers a wide range of direct marketing products and services to
help market their products and services on the Internet ("online") and through
traditional media channels such as television, radio, and print advertising
("offline"). Utilizing SendTec's marketing products and services, SendTec's
clients seek to increase the effectiveness and the return on investment on
advertising campaigns. SendTec's online and offline direct marketing products
and services include strategic campaign development, creative development,
creative production and post-production, media buying and tracking, campaign
management, campaign analysis and optimization, technology systems
implementation and integration for campaign tracking, and many other agency type
services. In addition, SendTec has a suite of technology solutions, ROY,
SearchFactz(TM), SOAR (an acronym for "SendTec Optimization and Reporting") and
iFactz(TM), which enable it to deliver, track, and optimize direct marketing
campaigns across multiple distribution channels, including television, radio,
direct mail, print, and the Internet. The combination of SendTec's direct
37
marketing capabilities, technology, and experience in both online and offline
marketing, enable its clients to optimize their advertising campaigns across a
broad spectrum of advertising mediums.
ON-LINE MARKETING SERVICES- SEARCHFACTZ(TM)
SendTec offers a variety of products and services that enable on-line
advertisers and publishers to generate performance-based results through online
marketing channels such as search marketing, web advertising, e-commerce
up-sells, affiliate marketing, and email marketing. SendTec's broad range of
products and services include creative strategy and execution, strategic offer
development, production planning, media planning, media buying, and search
optimization. Through these products and services, SendTec's clients can address
all aspects of the marketing continuum, from strategic planning through
execution, including results management and campaign refinements. SendTec's
proprietary technologies allow advertisers and publishers to track, report, and
optimize online campaign activity all the way to the "conversion level" (which
means a consumer's actual response to the offer, as for example, by making a
purchase). SendTec's knowledge of digital advertising strategies, targeting
methods, media placements, and creative executions combined with its technology
help SendTec's clients improve their advertising performance and return on
investment.
As part of its on-line marketing services, SendTec manages and optimizes paid
search programs for direct marketers, providing them with bid/rank management,
and creative and strategic consulting in order to optimize paid search.
SearchFactz(TM) is a search engine marketing pay-per-click bid management
technology that coordinates performance and cost data from search engines,
conversion activities from websites, and generates actionable campaign alerts
that can be analyzed and acted upon by marketing analysts to optimize return on
investment from marketing budgets. SendTec, through SearchFactz(TM) and the
collective experience of its search engine marketing team, develops the mix of
search engine marketing strategies and services to meet a client's customer
acquisition goals. SendTec's search engine marketing services include goals
assessment, keyword research and development, creative development, landing page
optimization, centralized search listing management, bid management, conversion
analysis, fraud detection, campaign optimization, and ROI and profit
maximization. From pay-per-click to paid-inclusion and comparison shopping
engines, the Company believes SendTec utilizes the most cost-effective channels
to create customized search marketing campaign to meet its client's objectives.
COMPETITION
SendTec's business and industry is highly competitive. The competition for
advertising dollars has also put pressure on pricing points, in particular, for
online advertisers. Our competitors include search engines, inventory resellers,
referral companies, online networks, and destination websites. SendTec also
competes with a variety of large and small advertising agencies but its primary
competitors are interactive marketing companies such as ValueClick, aQuantive,
Advertising.com, and Performics.
OFF-LINE MARKETING SERVICES- IFACTZ(TM)
SendTec also offers a full array of off-line marketing services utilizing
traditional distribution channels such as television, radio, print, and direct
mail. SendTec's offline marketing services include creative strategy,
production, and media buying. SendTec has developed, produced, and distributed
numerous direct response television campaigns for customers and has received
national awards for its creative and production work. SendTec utilizes its two
in-house state-of-the-art non-linear digital video editing suites. SendTec's
staff includes experienced production department directors, producers, and
editors on staff. SendTec's media buying department provides a full range of
services including strategic media planning, media trafficking, media buying,
media tracking, and post-buy media and financial analysis and has executed media
buying assignments for all types of television (broadcast and cable), radio, and
print
38
formats. SendTec's long time relationships with media partners have enabled
SendTec to provide clients competitive media prices.
SendTec has developed a proprietary software application, iFactz(TM), which
provides a competitive advantage in marketing offline advertising services.
iFactz(TM) is SendTec's Application Service Provider or "ASP" technology that
tracks and reports the online responses that are generated from offline direct
response advertising. Historically, advertisers have lacked the ability to
accurately track which offline advertising yields results online and thus
advertisers have been unable to properly optimize their media buys. iFactz(TM)
intelligently tracks and reports web activity from all offline advertising - TV
(even national cable), radio, print, and direct mail - in real time.
iFactz(TM)'s Intelligent Sourcing(TM) is a media technology that informs the
user where online customers come from, and what corresponding activity they
produced on the user's website. iFactz(TM)'s ASP design enables advertisers to
implement and access the technology in a timely and cost efficient manner as
there are no cumbersome, time-consuming, and costly implementation expenses and
lead times. iFactz(TM) is licensed to clients both as a stand alone technology
solution and as part of an overall campaign offering. The Company believes that
iFactz(TM) has provided SendTec with a significant competitive advantage, and
that there are currently no similar technologies available in the market.
RELATIONSERVE ACCESS BUSINESS
INTERNET MARKETING
RelationServe offers advertisers and merchants integrated online marketing
programs including permission-based email advertising, email database append
services, online surveys, and Internet compiled direct mail lists. RelationServe
services advertising agencies, large consumer marketers and direct marketers and
has acquired various proprietary software technologies that enable RelationServe
to deliver email broadcast and email data append products.
DATA APPEND
RelationServe's data append allows marketers to augment their existing customer
database with permission-based email and demographic data. When a match is
confirmed, the customer's email address and other demographic variables are
added to the client's file. We believe this increases the value of client
databases and allows the client to save money through email marketing, and to
access a market more efficiently through multi-channel campaigns.
ONLINE REGISTRATION (CO-REG)
Our co-registration service is a product that can build an in-house database of
new prospective clients. Through key strategic alliances, we are the front end
registration solution for a variety of products and services. These include
product registration sites, online newsletter registration, and trial-software
download sites. Custom co-registrations can also be created for lead generation.
LEAD GENERATION
Lead generation programs assist a variety of businesses with customer
acquisition. We pre-screen leads through online surveys to meet client's
specified criteria. For example, we are able to generate leads for the following
industries: mortgage; debt reduction/debt consolidation; not-for-profit
organizations; auto sales; telecommunications; insurance, and investment agents.
39
TARGETED OPT-IN EMAIL
RelationServe's targeted opt-in email provides targeted lists and a network of
permission-based websites, with access to additional websites via various list
broker relationships.
DIRECT MAIL AND POSTAL LIST
We maintain a compiled postal mailing list from Internet responders to online
registration and online campaigns. These consumers are responders to offers and
may have purchased products and services through online and offline channels. We
offer a wide variety of demographic and psycho-graphic criteria for customers
list selection.
MARKETS
The following is an overview of our three primary channels through which
RelationServe markets its products and services:
DIRECT SALES
Through our direct sales team and business development executives, we pursue
major consumer marketers and direct marketers through telesales efforts, direct
marketing, trade shows, and on-site client presentations.
ADVERTISING AGENCIES
We offer our products and services at a discounted rate to traditional
advertising agencies and online marketing agencies. These resellers offer our
products and services to their clients as a stand-alone marketing effort or as
part of a larger multi-channel marketing campaign.
LIST BROKERS
We offer our products and services at a discounted rate to a network of list
brokers. These organizations often have years of experience marketing postal
lists and can expand their revenue potential by offering our email marketing
lists.
COMPETITION
RelationServe's business and industry is highly competitive. The competition for
advertising dollars has also put pressure on pricing points, in particular, for
online advertisers. Our competitors include advertising agencies, inventory
resellers, search engines, referral companies, and destination websites. We also
compete with traditional media such as television, radio, and print, and with
direct marketing companies.
We are also impacted by competition among destination websites that reach users
or customers of search services. Several large media and search engine companies
dominate this end of the transaction channel, and thousands of smaller outlets
are available to customers as well. User traffic among the media and search
engine companies is concentrated among such larger participants as AOL, Google,
Microsoft through MSN Search, and Yahoo! through FAST, Inktomi, Overture and
Yahoo! Search. The online search industry continues to experience consolidation
of major websites and search engines, which has the effect of increasing the
negotiating power of these parties in relation to smaller providers such as
RelationServe.
40
FRIENDSAND.COM
The business of Friendsand.com, a social networking community, represents a
small portion of the overall activities of the Company. Friendsand.com competes
with such larger and more established social networking websites as Myspace.com.
To date, Friendsand.com has incurred losses.
RATIONALIZATION PLAN
On and following the Consolidation, SendTec management and RelationServe
management commenced a joint review of the collective operations, synergies,
and, opportunities, which is ongoing. During the three month period following
the Acquisition Date and prior to the Consolidation Date, the Company operated
RelationServe and Friendsand.com wholly-independently from SendTec due to legal
and structural limitations imposed under the Debentures. During the first
quarter of 2006, initial steps were taken to reduce staff at RelationServe and
Friendsand.com, eliminate redundant positions and activities, replace certain
members of management, and evaluate additional opportunities for cost savings
through consolidation, reduction, disposition of assets or businesses, and other
means in an emphasis to streamline the businesses and implement a workable plan
to consolidate the management and operations of two synergistic but highly
divergent companies operating in two locations, with potential inefficiencies
and redundant administration. As a result of this review, the Company may take
additional steps which can not be determined at this time, which may include
further reducing its staff, combining administrative functions, relocating all
or a portion of its operations, terminating certain activities or operations, or
selling or disposing of assets of operations. Certain actions may require the
consent of the Company's Debenture holders and require the Company to recognize
accounting charges for discontinued or disposed operations.
During the initial phase of management's review, the Company recognized that
certain financial covenants required under the Debentures would likely not be
met during the fourth quarter of 2005, and possibly thereafter, based upon,
among other things, non-cash accounting charges, unexpected costs and
inefficiencies of operating as two separate entities required by the terms of
the STAC Debentures, the impact of Hurricane Katrina and Wilma on the national
economy and on Florida in particular where both RelationServe and SendTec were
forced to close or operate at reduced staffing levels for several weeks,
significant senior management and extensive junior personnel changes at
RelationServe and Friendsand, poor morale, cultural differences, and uncertainty
during the transition period, and increased costs at Friendsand. In addition,
the business of RelationServe experienced a downturn and the industry in which
Friendsand operates became the focus of regulatory and public scrutiny. These
factors continue to impact the Company as a whole and the Company is continuing
to study options for combining the various businesses, which could include
elimination or sale of certain assets or businesses.
As a result of discussions with representatives of the Debenture holders during
early 2006, the Company, STAC, and the Debenture holders agreed, on February 3,
2006, to the following amendments to the Debentures and related agreements:
o STAC will have minimum EBITDA for the fourth quarter of 2005 of
$650,000 (from $1,725,000) and for fiscal year 2005 of $4,350,000
(from $5,200,000). Further, following the Consolidation, the financial
covenants for RelationServe are eliminated; and
o the Company financial covenants set forth in the Schedules 4.22(a)
(capital expenditures), (b) (minimum consolidated Company EBITDA), and
(c) (Company cash balances) were restated and are incorporated by
reference to Schedules 4.22(a), (b), and (c), respectively, to Exhibit
10.21 to the Company's Annual Report on Form 10-KSB for the year ended
December 31, 2005.
DESCRIPTION OF PROPERTY.
SendTec's operations are located in St. Petersburg, Florida, where we lease
approximately 19,800 square feet of office space for approximately $27,600 per
month. The lease expires in February 2010. In addition, we maintain an office
for SendTec under a lease for approximately 2,500 square feet of office space in
New York City for approximately $5,400 per month, which expires in December of
2009. The Company's RelationServe operations are located in approximately 15,615
square feet in Ft. Lauderdale, Florida under a lease originally entered into by
Omni Point for rental payments of approximately $35,650 per month.
LEGAL PROCEEDINGS.
Certain Legal Proceedings
Through December 31, 2005, the Company and/or Omni Point have been named as
defendants in two separate claims made by customers arising in the ordinary
course of its business and one employment related claim. The Company believes it
has substantial defenses and intends to vigorously defend itself against any all
actions taken by the plaintiffs in these matters. The Company does not believe
that any potential damages that could arise from these claims will have a
material adverse effect on its financial condition or the results of its
operations.
Omni Point has been named as a defendant in a certain employment related claim
which to date has not been asserted against the Company. Although the Company is
not a defendant in this matter at this time, there can be no assurance that the
plaintiffs will not attempt to assert this claim against the Company in the
future or that such claim, if asserted, will not result in a material loss to
the Company. The range of loss with respect to this matter, if any, cannot be
quantified.
41
On February 3, 2006, InfoLink Communications, Services, Inc, (InfoLink) filed a
complaint against the Company and Omnipoint for allegedly violating the federal
CAN SPAM ACT of 2003, 15 U.S.C. ss. 7701, and breach of an alleged licensing
agreement between Omni Point and InfoLink. Info Link seeks actual damages in an
amount of approximately $100,000 and approximately $1,500,000 in statutory
damages, which are considered to be highly speculative by the Company and legal
counsel. This case is initial stages. The Company intends to vigorously defend
itself with respect to this matter, however; its outcome or range of possible
loss, if any, cannot be predicted at this time. The Company cannot provide any
assurance that the outcome of this matter will not have a material adverse
effect on its financial position or results of operations.
On February 17, 2006, the Law Offices of Robert H. Weiss PLLC ("Weiss") filed a
complaint against the Company and Omni Point for fraud, breach of contract,
unjust enrichment, and violation of the Uniform Deceptive Practices Act. Weiss
seeks compensatory damages in an amount no less than approximately $80,000 in
addition to punitive and exemplary damages with no specified amount. The Company
also has accounts receivable due from Weiss of approximately $387,000 which are
fully reserved. This case is in its initial stages. The Company intends to
vigorously defend itself with respect to this matter, however; its outcome or
range of possible loss, if any, cannot be predicted at this time. The Company
cannot provide any assurance that the outcome of this matter will not have a
material adverse effect on its financial position or results of operations,
On March 6, 2006 Boston Meridian LLC ("Boston Meridian") filed a complaint in
the United States District Court District of Massachusetts alleging it is due
certain fees and expense reimbursements in connection with the acquisition of
the business of SendTec from theglobe.com inc. Boston Meridian seeks an
aggregate of $917,302 in fees and expenses and 100,000 shares of common stock.
The Company believes the litigation is without merit and intends to vigorously
defend against the complaint. The Company cannot provide any assurance that the
outcome of this matter will not have a material adverse effect on its financial
position or the results of operations.
On December 15, 2004, the Federal Bureau of Investigation served Omni Point with
a search warrant regarding the alleged use of unlicensed software and seized
certain e-mail servers with a net book value of approximately $135,000.
Management believes the investigation resulted from a former independent
contractor of the Company using the alleged unlicensed software on the Company's
behalf and without the Company's knowledge. Management and legal counsel are
currently unaware of any additional developments in the investigation. The
Unites States Attorney's Office had then indicated that it would contact the
Company's legal counsel as the investigation continues. The Company has not
received any further communications with respect to this matter; however, there
can be no assurance that this matter, if further investigated, will not have a
material adverse effect on the Company.
In consideration of the Debenture holders' agreements the Company issued 525,000
shares of Common Stock, pro rata to the Debenture holders in accordance with
their respective ownership at the closing of the Consolidation.
RELATIONSERVE MEDIA, INC.
UNAUDITED CONDENSED COMBINED PRO FORMA FINANCIAL STATEMENTS
The following unaudited pro forma combined condensed financial information is
based on and should be read in conjunction with the historical financial
statements and notes thereto of Relationserve Media, Inc. and SendTec included
elsewhere this registration statement on from SB-2. The unaudited pro forma
information is presented for illustration purposes only in accordance with the
assumptions set forth below and in the notes to the pro forma combined condensed
financial statements.
The unaudited pro forma combined condensed balance sheet combines the balance
sheet of RelationServe Media, Inc. ("RelationServe" or "Company"), with the
balance sheet of SendTec ("SendTec") and gives pro forma effect to the
Relationserve's sale of Series A Preferred Stock, the issuance (through an
acquisition subsidiary) of $34,950,000 of senior secured convertible debentures,
the sale of common stock to members of SendTec's management and the Company's
completion of its acquisition of SendTec in as if these transaction were
consummated on December 31, 2005. The unaudited pro forma combined condensed
statement of operations combines the statement of operations of RelationServe
Media, Inc. ("RelationServe" or "Company"), with the statement of operations of
SendTec and gives pro forma effect to the Relationserve's sale of Series A
Preferred Stock, the issuance (through an acquisition subsidiary) of $34,950,000
of senior secured convertible debentures, the sale of common stock to members of
SendTec's management, and the Company's completion of its acquisition of SendTec
as if these transaction were completed on January 1, 2005.
The pro forma adjustments reflected in these unaudited condensed combined pro
forma financial statements are described in the notes hereto and are based on
the Company's estimates, available information and assumptions that management
believes are reasonable. The following unaudited pro forma combined condensed
financial statements also do not include any adjustments to conform accounting
practices of the combining companies or to reflect any cost savings or synergies
anticipated as a result of having completed these transactions. This information
is not necessarily indicative of the operating results of operations or the
financial position that would have occurred if the financing transactions and
acquisition had taken place as of the dates or for the periods indicated.
42
RELATIONSERVE MEDIA, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
AT DECEMBER 31, 2005
Relation Serve Pro Forma Combined
Media, Inc. (a) SendTec (b) Adjustments Pro Forma
--------------- ----------- ------------ -----------
ASSETS
Current Assets
Cash $ 156,472 $ 3,350,545 $ 45,481,700 (d) $ 6,494,545
(2,064,172) (e)
(40,430,000) (f)
Accounts receivable 1,624,577 9,910,804 11,535,381
Prepaid expenses and other current assets 154,673 251,918 406,591
----------- ----------- ------------ -----------
Total Current Assets 1,935,722 13,513,267 2,987,528 18,436,517
Property And Equipment, net of accumulated
depreciation 782,386 828,446 1,610,832
Goodwill -- 12,605,874 (12,605,874) (f) 34,958,673
34,958,673 (f)
Deferred financing costs 2,064,172 (e) 2,064,172
Investment In SendTec Acquisition Corporation 9,274,981 -- (9,274,981) (c) --
Intangible Assets, net of accumulated
amortization 2,561,298 1,320,000 (1,320,000) (f) 2,561,298
Non Compete 1,866,000 (f) 1,866,000
Other Assets 32,690 15,330 48,020
----------- ----------- ------------ -----------
TOTAL ASSETS $14,587,077 $28,282,917 $ 18,675,518 $61,545,512
=========== =========== ============ ===========
43
Relation Serve Pro Forma Combined
LIABILITIES AND STOCKHOLDERS' EQUITY Media, Inc. (a) SendTec (b) Adjustments Pro Forma
--------------- ----------- ------------ -----------
Current Liabilities
Accounts payable $ 1,208,693 $ 9,993,415 $11,202,108
Accrued expenses 789,225 566,705 1,355,930
Other Current Liabilities 391,890 191,596 583,486
------------- ----------- ------------ -----------
Total Current Liabilities 2,389,808 10,751,716 -- 13,141,524
Other Liabilities 166,535 145,125 (145,125) (f) 166,535
------------- ----------- ------------ -----------
Total Liabilities 2,556,343 10,896,841 (145,125) 13,308,059
Stockholders' Equity
Preferred 10,289,690 (10,289,690) (c) --
Common 1,741,044 17,386,076 1,014,709 (c) 48,237,453
45,481,700 (d)
(17,386,076) (f)
------------- ----------- ------------ -----------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $ 14,587,077 $28,282,917 $ 18,675,518 $61,545,512
============= =========== ============ ===========
44
NOTES TO UNAUDITED CONDENSED COMBINED PRO FORMA
BALANCE SHEET
(a) Derived from the audited balance sheet of RelationServe Media, Inc. as
of December 31, 2005.
(b) Derived from the audited balance sheet of SendTec as of December 31,
2005.
(c) Reflects RelationServe's elimination of its investment in SendTec
Acquisition Corp. ("STAC"), a subsidiary formed solely to acquire the
assets of SendTec, and the proportionate share of STAC's losses for
the period of October 31, 2005 through December 31, 2005.
RelationServe completed a $10,000,000 private placement of its Series
A Preferred Stock on October 31, 2005 and used the proceeds from this
transaction to acquire 23% of the voting interests in STAC.
Accordingly, RelationServe accounted for its investment in STAC from
the date of its formation to the date in which it completed the
acquisition of SendTec (February 3, 2006) under the equity method of
accounting. STAC used the funds invested by RelationServe to acquire
the net assets of SendTec as described in Notes (d), (e) and (f).
(d) Reflects the receipt of funds obtained upon the closing of two
separate financing transactions and the sale of 506,380 shares of STAC
common stock to members of SendTec management, who became members of
STAC management ("STAC Management") as reflected in the following
table
STAC Debentures $34,950,000
RelationServe Series A Convertible Preferred 10,000,000
STAC common stock 531,700
-----------
Total $45,481,700
===========
The senior secured convertible debentures, due October 30, 2009, were
assumed by RelationServe upon its consolidation with STAC on February
6, 2006. At such time, these debentures became convertible into
RelationServe common stock at the option of the debenture holders at a
conversion price of $1.50 per share. These debentures provide
quarterly payments of principal plus contractual interest at 6% per
annum, RelationServe also issued 10,081,607 common stock purchase
warrants to the debenture holders exercisable at $0.01 per share. In
accordance with APB 14, $34,500,000 of the proceeds from the senior
secured convertible debentures was allocated, on a pro-forma basis, to
warrants based on the relative fair value of the debentures and the
warrants.
The Series A Preferred stock was mandatorily convertible into shares
of the Company's common stock at such time that the Company completed
its consolidation with STAC. The conversion price in effect at the
date of consolidation resulted in a 10 to 1 conversion ratio or
conversion price or $1.35 per share. Accordingly, the adjustment for
the financing transactions presents the issuance of the preferred as
an increase in common equity.
STAC management purchased 506,380 shares of STAC common stock at $1.05
per share. These shares, in addition to other STAC common stock shares
granted to SendTec management as stock compensation were converted
into approximately 9,506,380 shares of Company common stock at the
time of the consolidation with STAC.
45
(e) Reflects the deferral of transaction expenses incurred in connection
with issuing the Debentures described in Note (d).
(f) Reflects the Company's (i) issuance of purchase consideration to the
sellers of SendTec, (ii) elimination of SendTec's historical equity,
previously recognized intangible assets (including goodwill), and
deferred taxes and (iii) allocation of its purchase price to the fair
value of assets acquired and liabilities assumed.
The following table provides an analysis of the purchase price of the
SendTec acquisition and the preliminary allocation of the purchase
price to the assets acquired and liabilities assumed:
Consideration Paid $39,850,000
Transaction expenses 580,000
Total purchase cost $40,430,000
Assets acquired:
Cash $ 3,350,545
Accounts receivable 9,910,804
Prepaid expenses & other assets 267,248
Property and equipment 828,446
14,357,043
Liabilities assumed:
Accounts payable and accrued liabilities 10,560,120
Other Liabilities 191,596
10,751,716
Net assets acquired 3,605,327
Purchase price in excess of net assets acquired $36,824,673
Allocated to
Covenant not to compete 1,866,000
Goodwill $34,958,673
The Company's allocation of its purchase price is preliminary and is based on
significantly limited information. The actual allocation of the purchase price
will be based on valuation studies that have not yet been performed.
46
RELATIONSERVE MEDIA, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR YEAR ENDED DECEMBER 31, 2005
RelationServe Pro Forma Combined
Media, Inc. (a) SendTec (b) Adjustments Pro Forma
--------------- ----------- ----------- ------------
Revenue $11,302,780 $37,769,742 $ 49,072,522
Cost of Revenue $ 2,542,614 25,530,243 28,072,857
----------- ----------- ----------- ------------
Gross Profit 8,760,166 12,239,499 -- 20,999,665
Operating Expenses
Selling, general, and administrative 10,212,922 8,303,304 1,400,833 (d) 18,857,892
(1,059,167) (d)
Depreciation and amortization 215,307 718,477 471,996 (d) 1,045,780
(360,000) (d)
----------- ----------- ----------- ------------
10,428,229 9,021,781 453,662 19,903,672
----------- ----------- ----------- ------------
(Loss)/Income From Operation (1,668,063) 3,217,718 (453,662) 1,095,993
Other Income (Expense)
Interest expense (14,268) -- (8,737,500) (e) (11,364,811)
(2,097,000) (f)
Stock Bonus Compensation (4,774,323) (516,043) (d) (4,774,323)
Loss on Equity Method Investment (1,034,102) 1,034,102 (g) --
Other Income (Expense) (71,856) 46,347 (25,509)
----------- ----------- ----------- ------------
(1,120,226) (4,727,976) (10,316,441) (16,164,643)
Net (Loss)/Income Before Income Taxes (2,788,289) (1,510,258) (10,770,103) (15,068,650)
Income Tax Benefit/(Expense) -- 523,898 (523,898) (h --
----------- ----------- ----------- ------------
NET (LOSS)/INCOME (2,788,289) (986,360) (11,294,001) (15,068,650)
=========== =========== =========== ============
NET (LOSS)/INCOME PER COMMON SHARE:
BASIC AND DILUTED $ (0.19) $ (0.36)
=========== ============
Weighted Average Number of Common
Shares Outstanding:
Basic and diluted 14,500,271 27,208,978 (j) 41,709,249
=========== =========== ============
47
NOTES TO UNAUDITED CONDENSED COMBINED PRO FORMA
STATEMENT OF OPERATIONS
(a) Derived from the audited statement of operations of Relationserve
Media, Inc. as of December 31, 2005.
(b) Derived from the audited statement of operations of SendTec as of
December 31, 2005.
(c) Reflects the elimination of SendTec management compensation under the
previous employment agreements and the recording of SendTec management
compensation under the new employment agreements.
(d) Reflects (a) the elimination of historical amortization expense
related to non-compete agreements; (b) recording of amortization
expense of $471,996 of the non-compete agreements recorded in the
purchase accounting. These costs are being amortized over the term of
the underlying agreements (four years); and (c) recording of the
amortization of the deferred financing costs over the term of the
underlying debt (four years).
(e) Reflects the accretion of the discount of the senior secured
convertible debentures described in Balance Sheet Note (2) over the
four year term of the underlying debentures.
(f) Reflects the interest expense on the senior secured convertible
debentures at an interest rate of 6% per annum, payable quarterly.
(g) Reflects the elimination of RelationServe's proportionate share of
STAC's losses for the period of October 31, 2005 through December 31,
2005 as recorded under the equity method of accounting.
(h) Reflects the elimination of SendTec's historical tax benefit, due to
our current assessment of the realizability of this tax benefit and
the potential limitation of this tax benefit under Section 382 of the
Internal Revenue Code.
(i) Reflects the issuance, by the Company at the date of the consolidation
with STAC of (i) 10,081,607 common stock purchase warrants to the
Debenture investors, (ii) 9,506,380 shares of common stock to the STAC
management in exchange for their shares in STAC, (iii) 7,621,991
shares of common stock issued in connection with the mandatory
conversion of the Series A Preferred at the date of consolidation.
(j) The warrants issued to the Debenture holders were included in the
determination of pro forma loss per share due the fact they are
exercisable at $.01 per share. Accordingly, they are deemed to be
equivalent to outstanding common stock for purposes of the pro forma
illustration. In addition, the historical financial statements include
a stock based compensation charge of approximately $5,000,000 for
shares of STAC common stock issued to STAC Management concurrent with
the purchase of SendTec's net assets from the globe.
48
MANAGEMENT
Our directors and executive officers are as follows:
YEAR
BECAME A PRINCIPAL OCCUPATION FOR THE PAST FIVE
NAME AGE DIRECTOR YEARS AND CURRENT PUBLIC DIRECTORSHIPS
- ----------------- --- -------- -------------------------------------------
Paul Soltoff 51 2005 CHIEF EXECUTIVE OFFICER AND DIRECTOR OF THE
COMPANY SINCE FEBRUARY 2006. Chief
Executive Officer of STAC since February
2006 and Chairman of the Board and Chief
Executive Officer of SendTec since its
inception in February 2000. Mr. Soltoff is
a director of Health Benefits Direct
Corporation, an online insurance
marketplace that enables consumers to shop
online for individual health and life
insurance and obtain insurance
company-sponsored quotes for such coverage.
Eric Obeck 41 -- PRESIDENT OF THE COMPANY SINCE FEBRUARY
2006. President of STAC since February 2006
and President of SendTec since July 2003.
Chief Operating Officer of SendTec from
August 2000 through June 2003.
Donald Gould 42 -- CHIEF FINANCIAL OFFICER OF THE COMPANY
SINCE FEBRUARY 2006. Chief Financial
Officer of STAC since February 2006 and of
SendTec since 2000.
Michael Brauser 50 2005 CHAIRMAN OF THE BOARD OF DIRECTORS OF THE
COMPANY SINCE OCTOBER 2005. Founder,
President and CEO of Marlin Capital
Partners, a private investment company,
since 2003. President and Chief Executive
Officer of Naviant, Inc. (eDirect, Inc), an
internet marketing company, from 1999
through 2002. Director and Founder of
Seisint Inc. (eData.com, Inc), from 1999
through 2003.
Shawn McNamara 40 -- PRINCIPAL EXECUTIVE OFFICER AND SENIOR VICE
PRESIDENT OF THE COMPANY SINCE NOVEMBER
2005. Interim Chief Executive Officer from
November 2005 through the present. From
2004 to October 2005, Mr. McNamara was
President of Marketlink, Inc., an internet
marketing company. From 2001 to 2003, Mr.
McNamara was President of Optinic.com, an
internet marketing company. From 1998
through 2001, Mr. McNamara was President
and COO for worldwideweb.com, a
publicly-traded company and an internet
marketing company.
Adam C. Wasserman 41 -- PRINCIPAL FINANCIAL OFFICER OF THE COMPANY
SINCE AUGUST 2005. INTERIM CHIEF FINANCIAL
OFFICER SINCE AUGUST 2005. Chief Executive
Officer of CFO Oncall, Inc., a provider of
consultant accounting services specializing
in SEC financial reporting, outsourced
chief financial officer services, audit
preparation service, accounting, automated
systems, and internal controls, since
November 1999.
49
Each director holds office until the next annual meeting of stockholders or
until his or her successor has been duly elected and qualified. Executive
officers are elected annually and serve at the discretion of our Board.
The Company's purchase of SendTec's assets was financed by the issuance of
Debentures to several holders including LB I Group Inc., which is an affiliated
entity of Lehman Brothers Holdings Inc. and Lehman Brothers Inc. In conjunction
with this issuance, on October 31, 2005, effective upon the Consolidation, the
Company, Lehman Brothers Inc. and LB I Group Inc. entered into a letter
agreement (the "Director Agreement"), pursuant to which the parties agreed to
certain matters relating to the composition of the Company's Board of Directors
and its independent registered public accounting firm. For a further description
of the Director Agreement, see "Item 12- Certain Relationships and Related
Transactions".
There are no family relationships between any of our directors or executive
officers.
AUDIT COMMITTEE
Our Board of Directors has determined that Michael Brauser is the financial
expert serving on our Audit Committee and as of December 31, 2005 was
independent as such term is used in Item 7(d)(3)(iv) of Schedule 14A under the
Exchange Act.
CODE OF ETHICS
We adopted a Code of Ethics that applies to our officers, directors and
employees, including our chief executive officer and chief financial officer. A
copy of such Code of Ethics is attached as Exhibit 14 to the Company's Current
Report on Form 8-K dated July 13, 2005.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
On December 30, 2005 the Company became subject to Section 16(a) of the Exchange
Act, which requires executive officers and directors, and persons who
beneficially own more than ten percent of the common stock of a company with a
class of securities registered under the Exchange Act, to file initial reports
of ownership and reports of changes in ownership with the Securities and
Exchange Commission. MHB Trust, a Cook Island Trust, which the Company believes
is a more than ten percent owner of the Company's Common Stock, has not
currently filed a Form 3 stating such ownership percentage. The MHB Trust was
established during 2005 by our chairman of the Board, Michael Brauser, as
settler.
Summary Compensation Table
The following table sets forth information for the three most recently completed
fiscal years concerning the compensation of (i) the Chief Executive Officer and
(ii) all other executive officers who earned in excess of $100,000 in salary and
bonus in the fiscal year ended December 31, 2005 (the "Named Executive
Officers"). Such information excludes for the periods stated all compensation
and awards to STAC officers and directors inasmuch as the date of the
consolidation was in February 2006.
50
Long Term Compensation
Annual --------------------------------------
Compensation Restricted Securities
------------- Stock Underlying All Other
Salary Award(s) Options Compensation
Name and Principal Position Year ($) ($) (#) ($)(3)
- ---------------------------------- ---- ------ ---------- ---------- ------------
Shawn McNamara 2005 40,502 10,000 100,000 0
(Principal Executive Officer from 2004 0 0 0 0
November 16, 2005 through present) 2003 0 0 0 0
Adam Wasserman 2005 40,610 0 0 0
(Principal Financial Officer from 2004 0 0 0 0
August 9, 2005 through present) 2003 0 0 0 0
Danielle Karp(1)(2) 2005 68,270 0 100,000 0
(President from June 13, 2005 2004 64,214 0 0 0
through February 3, 2006) 2003 0 0 0 0
Ohad Jehassi(2) 2005 82,958 80,000 100,000 0
(COO from July 13, 2005) 2004 0 0 0 0
2003 0 0 0 0
Mandee Heller Adler(2) 2005 73,077 100,000 100,000 0
(CEO from June 21, 2005 through 2004 0 0 0 0
November 11, 2005) 2003 0 0 0 0
Scott Young(2) 2005 0 0 0 0
(President and CFO from inception 2004 0 0 0 0
through June 13, 2005) 2003 0 0 0 0
- ----------
(1) The Company was formed in May 2005. Amounts for periods prior to 2005
reflect compensation received from an entity that sold its assets to the
Company.
(2) Former officer and/or director of the Company.
(3) As to Named Executive Officers, perquisites and other personal benefits,
securities, or property received by each Named Executive Officer did not
exceed the lesser of $50,000 or 10% of such Named Executive Officer's
annual salary and bonus.
OPTION GRANTS TABLE FOR FISCAL 2005
The following table contains information concerning the grant of stock options
to our executive officers during the fiscal year. No stock appreciation rights
were granted during the year.
51
Number of
Securities Percent of Total
Underlying Options/SARs Granted Exercise Or
Options/SARs to Employees in Fiscal Base Price
Name Granted (#) Year(%)(1) ($/Sh) Expiration Date
- ------------------- ------------ ---------------------- ----------- -----------------
Shawn McNamara 100,000 5.9 3.85 November 30, 2010
Adam Wasserman 0 0 0 None
Danielle Karp 100,000 5.9 3.85 July 13, 2015
Ohad Jehassi 100,000 5.9 3.85 July 13, 2015
Mandee Heller Adler 100,000 5.9 3.85 July 13, 2015
Scott Young 0 0 0 None
- ----------
(1) Based on number of options granted and not forfeited as of December 31,
2005. Does not include options granted to the Company's non-employee
Chairman of the Board of Directors.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
The following table sets forth information regarding the exercise of stock
options during the last fiscal year by the named officers in the Summary
Compensation Table above and the fiscal year-end value of unexercised options.
Number of Securities
Underlying Unexercised Value Of Unexercised
Options/SARs At FY-End In-The-Money Options/SARs
(#) Exercisable/ At FY-End ($) (1)
Name Unexercisable Exercisable/Unexercisable
- ------------------- ---------------------- -------------------------
Shawn McNamara 0/100,000 0/0
Adam Wasserman 0/0 0/0
Danielle Karp 0/100,000 0/0
Ohad Jehassi 0/100,000 0/0
Mandee Heller Adler 0/100,000 0/0
Scott Young 0/0 0/0
52
EQUITY COMPENSATION PLAN INFORMATION
2005 INCENTIVE STOCK PLAN
An aggregate of 3,300,000 shares of Common Stock have been reserved for issuance
under the 2005 Incentive Plan. The purpose of the 2005 Incentive Plan is to
provide an incentive to retain in the employ and as directors, officers,
consultants, advisors and employees of the Company, persons of training,
experience, and ability, to attract new directors, officers, consultants,
advisors and employees whose services are considered valuable, to encourage the
sense of proprietorship, and to stimulate the active interest of such persons in
our development and financial success. Under the 2005 Incentive Plan, we are
authorized to issue incentive stock options intended to qualify under Section
422 of the Code, non-qualified stock options, and restricted stock. The 2005
Incentive Plan is administered by the Board or a compensation committee
designated be the Board of at least two directors (the "Compensation
Committee").
Options and restricted Common Stock granted under the 2005 Incentive Plan have a
maximum term of ten years. Unless otherwise determined by the Board or
Compensation Committee at the time of grant, options will be subject to a
vesting period of three years. Upon a change in control, the vesting and
exercisability of outstanding options and vesting of outstanding restricted
common stock may accelerate. The 2005 Incentive Plan permits "cashless exercise"
of outstanding options. As of the date of this Annual Report on Form 10-KSB,
options to purchase 2,948,500 shares of Common Stock (intended to qualify as
incentive stock options) and 282,100 shares of restricted Common Stock have been
granted under the 2005 Incentive Plan.
DIRECTORS' PLAN
The Directors Plan provides for the grant of non-qualified stock options to
non-employee directors of the Company and its subsidiaries. 2,000,000 shares of
common stock have been reserved for issuance under the Directors Plan, provided
that awards to the Chairman of the Board are limited to 1,000,000 shares. The
Directors Plan provides that each non-employee director who is newly-elected or
appointed Chairman of the Board shall receive an option to purchase 1,000,000
shares of common stock exercisable on the six-month anniversary of the approval
of the Directors Plan by the stockholders, each newly elected or appointed
non-employee director (other than the Chairman) shall be granted an option to
purchase 50,000 shares of common stock, exercisable as to 50% of such shares on
the date which is one year from the date of grant and 50% on the date which is
two years from the date of grant. The Directors Plan permits "cashless exercise"
of outstanding options. In addition, each non-employee director shall be granted
an option to purchase 50,000 shares of common stock on the second anniversary of
such director's initial election or appointment, exercisable as to 50% on the
date which is one year from the date of grant and 50% on the date which is two
years from the date of grant. All such options shall be exercisable at the fair
market value on the date of grant. As of the date of this Annual Report on Form
10-KSB, 1,000,000 options to purchase Common Stock were granted to the Company's
former Chairman of the Board.
2006 INCENTIVE STOCK PLAN
The 2006 Incentive Plan was adopted by the Board of Directors on March 3, 2006
and is still subject to approval by stockholders. An aggregate of 2,700,000
shares of Common Stock have been reserved for issuance under the 2006 Incentive
Plan. The purpose of the 2006 Incentive Plan is to provide an incentive to
retain in the employ of and as directors, officers, consultants, advisors, and
employees of the Company, persons of training, experience, and ability, to
attract new directors, officers, consultants, advisors, and employees whose
services are considered valuable, to encourage the sense of proprietorship and
to
53
stimulate the active interest of such persons into our development and financial
success. Under the 2006 Incentive Plan, we are authorized to issue incentive
stock options intended to qualify under Section 422 of the Code, non-qualified
stock options, and restricted stock. The 2006 Incentive Plan permits "cashless
exercise" of outstanding options. The maximum number of shares of Common Stock
that may be subject to options granted under the 2006 Incentive Plan to any
individual in any calendar year shall not exceed 1,000,000 shares in order to
qualify as performance-based compensation under Section 162(m) of the Internal
Revenue Code. The 2006 Incentive Plan is currently administered by the Board of
Directors or a Committee of the Board of Directors. As of March 13, 2005, no
shares of Common Stock have been issued under the 2006 Incentive Plan and no
options to purchase shares of Common Stock were outstanding.
EMPLOYMENT AGREEMENTS
Paul Soltoff became Chief Executive Officer of STAC pursuant to an Employment
Agreement dated October 31, 2005 and of the Company on February 3, 2006. The
Agreement provides that Mr. Soltoff will serve as Chief Executive Officer for an
initial five year term, which will be renewed for additional one year terms
thereafter, unless written notice is provided by either party. The agreement
provides for an annual base salary of no less than $400,000, as well as such
incentive compensation and bonuses as the Board of Directors may determine and
to which he may become entitled pursuant to an incentive compensation or bonus
program.
Donald Gould became Chief Financial Officer of STAC pursuant to an Employment
Agreement dated October 31, 2005 and of the Company on February 3, 2006. The
Agreement provides that Mr. Gould will serve as Chief Financial Officer for an
initial five year term, which will be renewed for additional one year terms
thereafter, unless written notice is provided by either party. The agreement
provides for an annual base salary of no less than $225,000, as well as such
incentive compensation and bonuses as the board of directors may determine and
to which he may become entitled to pursuant to an incentive compensation or
bonus program.
Eric Obeck became President of STAC pursuant to an Employment Agreement dated
October 31, 2005 and of the Company on February 3, 2006. The Agreement provides
that Mr. Obeck will serve as President for an initial five year term, which will
be renewed for additional one year terms thereafter, unless written notice is
provided by either party. The agreement provides for an annual base salary of no
less than $325,000, as well as such incentive compensation and bonuses as the
Board of Directors may determine and to which he may become entitled to pursuant
to an incentive compensation or bonus program.
Shawn McNamara became Vice President of the Company pursuant to an Employment
Agreement dated November 30, 2005. The Agreement provides that Mr. McNamara will
serve as the Vice President for an initial one-year term, which will be renewed
for additional one-year terms thereafter, unless written notice is provided by
either party. The agreement provides for a signing bonus of $30,000 and an
annual base salary of $180,000. In addition, pursuant to the agreement, Mr.
McNamara received five-year options to purchase 100,000 shares of the Company's
Common Stock, exercisable at $3.85 per share, subject to exercise upon his
continued employment as to one third (1/3) of such shares on each of the six
month, first, and second year anniversaries of the date of grant. Mr. McNamara
also received 10,000 shares of unregistered Common Stock.
COMPENSATION OF DIRECTORS
Each non-employee director who is newly elected or appointed Chairman of the
Board is granted an option to purchase up to 1,000,000 shares of Common Stock.
Each person (other than the Chairman) who
54
is newly elected or appointed as a non-employee director is granted an option to
purchase fifty thousand shares of Common Stock. Each person who remains a
non-employee director for a period of two consecutive years following the date
of initial election or appointment is granted an option to purchase fifty
thousand shares of Common Stock.
In addition, the current Chairman of the Board of Directors received a $200,000
payment in connection with his services and a $100,000 expense reimbursement in
connection with the closing of the SendTec Acquisition.
PRINCIPAL STOCKHOLDERS
The information regarding beneficial ownership of our Common Stock has been
presented in accordance with the rules of the SEC. Under these rules, a person
or entity may be deemed to beneficially own any shares as to which such person
or entity, directly or indirectly, has or shares voting power or investment
power, or has the right to acquire voting or investment power within 60 days
through the exercise of any stock option or other right. The percentage of
beneficial ownership as to any person as of a particular date is calculated by
dividing (a) (i) the number of shares beneficially owned by such person, plus
(ii) the number of shares as to which such person has the right to acquire
voting or investment power within 60 days, by (b) the total number of shares
outstanding as of such date, plus any shares that such person has the right to
acquire from us within 60 days. Including those shares in the tables does not,
however, constitute an admission that the named stockholder is a direct or
indirect beneficial owner of those shares.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Based solely upon information available to us, the following table sets forth
certain information regarding beneficial ownership of our Common Stock as of
March 13, 2006 by (i) each person or entity known by us to own beneficially more
than 5% of our outstanding Common Stock, (ii) each of our directors and Named
Executive Officers, and (iii) all directors and executive officers as a group.
Except as otherwise indicated, each of the stockholders named below has sole
voting and investment power with respect to such shares of Common Stock:
Percentage
Name and Address of Number of Shares Beneficially
Beneficial Owner(1) Beneficially Owned Owned
- ----------------------------------- ------------------ ------------
Paul Soltoff 3,341,276(2) 8.2%
Donald Gould 2,248,013(3) 5.5%
Eric Obeck 2,788,487(4) 6.8%
Michael Brauser 100,000(5) *
LB I Group Inc. 3,034,795(6) 7.3%
MHB Trust 5,392,500(7) 12.4%
Leslie T. Altavilla Revocable Trust 3,200,000(8) 7.9%
Shawn McNamara 43,334(9) *
Adam Wasserman 0 0
Danielle Karp 100,000(10) *
Ohad Jehassi 125,000(11) *
Mandee Heller Adler 200,000(12) *
Scott Young 0 0
- ----------
* Represents less than 1%.
(1) Unless otherwise indicated, the address of each stockholder listed above is
c/o the executive offices of RelationServe.
55
(2) Based on a Schedule 13D filed on March 1, 2006. Mr. Soltoff's business
address is c/o SendTec Acquisition Corp., 877 Executive Center Drive West,
Suite 300, St. Petersburg, Florida 33702.
(3) Based on a Schedule 13D filed on March 1, 2006. Mr. Gould's business
address is c/o SendTec Acquisition Corp., 877 Executive Center Drive West,
Suite 300, St. Petersburg, Florida 33702.
(4) Based on a Schedule 13D filed on March 1, 2006. Mr. Obeck's business
address is c/o SendTec Acquisition Corp., 877 Executive Center Drive West,
Suite 300, St. Petersburg, Florida 33702.
(5) Consists of presently exercisable warrants to purchase 100,000 shares of
Common Stock held by DIG Investment Trust, an entity in which the wife of
Mr. Brauser is the trustee of a trust for the benefit of their children.
Mr. Brauser disclaims beneficial ownership of the warrants and the shares
of Common Stock underlying the warrants.
(6) Based on a Schedule 13G filed on February 15, 2006, LB I Group Inc.
beneficially owns 3,034,795 shares of Common Stock. Such shares include a
warrant to purchase 1,037,985 shares of Common Stock exercisable within 60
days. Lehman Brothers Inc. is the parent company of LB I Group. Lehman
Brothers Holdings Inc., a public reporting company, is the parent company
of Lehman Brothers Inc. The address for LB I Group is c/o Lehman Brothers
Inc., 399 Park Avenue, New York, New York 10022, Attn: Eric Salzman and
Will Yelsits. Lehman Brothers Inc. is a registered broker-dealer.
(7) Includes immediately exercisable warrant to purchase 2,792,500 share of
Common Stock. MHB Trust's address is c/o Southpac Trust Limited, ANZ House,
Main Road, Avara Raratongo, Cook Islands. Mr. Brauser disclaims beneficial
ownership of any shares of Common Stock or Warrants owned by MHB Trust.
(8) The business address for the trust is 14300 Clay Terrace Blvd., Ste. 269,
Carmel, IN 46032.
(9) Consists of an option to purchase 33,334 shares of Common Stock exercisable
within 60 days and 10,000 shares of Restricted Common Stock granted under
the 2005 Plan. Such restrictions lapse as to 1/3 of such shares on the six
month, one year and two year anniversaries of the date of grant.
(10) Consists of immediately exercisable option to purchase 100,000 shares of
Common Stock.
(11) Consists of an immediately exercisable option to purchase 25,000 shares of
Common Stock and 80,000 shares of restricted Common Stock granted under the
2005 Plan.
(12) Includes immediately exercisable option to purchase 100,000 shares of
Common Stock granted under the 2005 Incentive Plan.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company's purchase of SendTec's assets was financed by the issuance of
$34.95 million of Senior Secured Convertible Debentures due October 30, 2009 of
STAC. The Debentures are convertible into shares of Company Common Stock. Among
the purchasers of the Debentures was LB I Group Inc., which is currently a 5%
stockholder of the Company. LB I Group Inc. may be deemed an affiliate of Lehman
Brothers Holdings Inc. and Lehman Brothers Inc. In conjunction with the initial
issuance of the Debentures on October 31, 2005, effective upon the
Consolidation, the Company, Lehman Brothers, Inc. and LB I Group Inc. entered
into a letter agreement pursuant to which the parties agreed to certain matters
relating to the Company's Board of Directors and its independent registered
public accounting firm including: (i) the Company's Board of Directors may not
exceed six members, (ii) at Lehman's request, the Company must use its best
efforts to cause all then members of the Board of Directors to resign other than
Mandee Heller Adler and cause the election of Michael Brauser and Paul Soltoff
as members of the Board of Directors, (iii) at the request of Lehman, the
Company must use its best efforts to prevent the election of any member of the
Board of Directors to which Lehman reasonably and timely objects, (iv) Lehman
has the right to designate a member of the Board of Directors and the Company
must use its best efforts to cause
56
such person's election to the Board of Directors, (v) Lehman has the right to
designate a representative to attend all meetings of the Board of Directors in a
nonvoting observer capacity and, in this respect, the Company must give such
representative copies of all notices, minutes, consents and all other materials
that it provides to the directors and (vi) the Company's independent registered
public accounting firm must be reasonably acceptable to Lehman. On February 3,
2006, Lehman advised the Company that it did not currently intend to exercise
its right to designate a member of the Board of Directors.
On October 31, 2005, the Company and STAC entered into certain agreements with
members of STAC management including Paul Soltoff, Donald Gould, and Eric Obeck.
On February 2, 2006, members of STAC management received 9,506,380 shares of
Company Common Stock (9.5% of the outstanding shares of STAC Common Stock giving
effect to the conversion as of October 31, 2005 of all Debentures) in a
transaction intended to be a tax-free reorganization for all ownership interests
held in STAC by such persons.
The current Chairman of the Board of Directors received a $200,000 payment in
connection with his services and a $100,000 expense reimbursement in connection
with the closing of the SendTec transaction.
The Company has an arrangement with CFO OnCall, Inc. pursuant to which Adam C.
Wasserman serves as the principal financial officer of the Company.
SELLING STOCKHOLDERS
The following table sets forth the shares beneficially owned, as of the date of
this prospectus, by the Selling Stockholders prior to the offering contemplated
by this prospectus, the number of shares each Selling Stockholder is offering by
this prospectus and the number of shares which each Selling Stockholder would
own beneficially if all such offered shares are sold. Except as expressly set
forth below, none of the Selling Stockholders is known to us to be a registered
broker-dealer or an affiliate of a registered broker-deal, except for Phillip F.
Frink, Jr., David N. Baker, Portside Growth and Opportunity Fund, and Andrew S.
Reckles. Each of the Selling Stockholders has acquired his, her or its shares
solely for investment and not with a view to or for resale or distribution of
such securities. Beneficial ownership is determined in accordance with SEC rules
and includes voting or investment power with respect to the securities.
SHARES OF PERCENTAGE OF
SHARES OF COMMON SHARES OF COMMON STOCK COMMON STOCK
STOCK OWNED PRIOR COMMON STOCK TO OWNED AFTER THE OWNED AFTER THE
NAME TO THE OFFERING BE SOLD OFFERING OFFERING
- -------------------------------------------------- ----------------- --------------- --------------- ---------------
LB I Group Inc. 9,694,866.68(1) 9,694,866.68 -0- -0-
MHB Trust 5,392,500(2) 5,392,500 -0- -0-
Palisades Master Fund, L.P. 5,027,629.83(3) 5,027,629.83 -0- -0-
SDS Capital Group SPC, Ltd. 4,991,695.67(4) 4,991,695.67 -0- -0-
57
SHARES OF PERCENTAGE OF
SHARES OF COMMON SHARES OF COMMON STOCK COMMON STOCK
STOCK OWNED PRIOR COMMON STOCK TO OWNED AFTER THE OWNED AFTER THE
NAME TO THE OFFERING BE SOLD OFFERING OFFERING
- -------------------------------------------------- ----------------- --------------- --------------- ---------------
Alexandra Global Master Fund, Ltd. 4,850,730.34(5) 4,850,730.34 -0- -0-
Mellon HBV Master Global Event 4,365,658(6) 4,365,658 -0- -0-
Driven Fund L.P.
Paul Soltoff 3,341,276 3,341,276 -0- -0-
Leslie T. Altavilla 3,200,000 3,200,000 -0- -0-
Rev. TR DTD 3/28/03
Eric Obeck 2,788,487 2,788,487 -0- -0-
Donald Gould, Jr. 2,248,013 2,248,013 -0- -0-
CAMOFI Master LDC 1,940,292.34(7) 1,940,292.34 -0- -0-
Portside Growth and Opportunity Fund 1,940,292.34(7) 1,940,292.34 -0- -0-
Mellon HBV Master U.S. Event Driven 1,455,219(8) 1,455,219 -0- -0-
Fund, L.P.
Cobalt Holdings, LLC 1,430,000 1,430,000 -0- -0-
GRQ Consultants, Inc. 1,020,000(9) 1,020,000 -0- -0-
RHP Master Fund, Ltd. 970,145.67(10) 970,145.67 -0- -0-
The Musser Foundation 750,000(11) 750,000 -0- -0-
JGB Capital L.P. 727,610(12) 727,610 -0- -0-
Superior Securities Group Inc. 500,000 500,000 -0- -0-
Profit Sharing Plan
Sunrise Equity Partners 500,000 500,000 -0- -0-
C. James Jensen 500,000 500,000 -0- -0-
Joseph Abrams 500,000 500,000 -0- -0-
Broadlawn Master Fund, LTD. 490,740 490,740 -0- -0-
58
SHARES OF PERCENTAGE OF
SHARES OF COMMON SHARES OF COMMON STOCK COMMON STOCK
STOCK OWNED PRIOR COMMON STOCK TO OWNED AFTER THE OWNED AFTER THE
NAME TO THE OFFERING BE SOLD OFFERING OFFERING
- -------------------------------------------------- ----------------- --------------- --------------- ---------------
Gerald Brauser 450,000 450,000 -0- -0-
Core Fund, L.P. 441,670 441,670 -0- -0-
Path Investment Group, LLC 416,667(13) 416,667 -0- -0-
James O. Patterson IRA 400,000 400,000 -0- -0-
Whalehaven Capital Fund Limited 400,000 400,000 -0- -0-
Gilder Funding Corp. 400,000(14) 400,000 -0- -0-
Innovative Investors, Inc. 400,000(13) 400,000 -0- -0-
Harry Greene 394,960 394,960 -0- -0-
Martin Goldfarb, M.D. 391,900(15) 391,900 -0- -0-
Alan C. Shoaf 375,000 375,000 -0- -0-
Walter Bilofsky, Trustee of the Eight Family 314,070 314,070 -0- -0-
Trust u/t/a 11/8/99
Jacob Honig Irrevocable Trust 300,000 300,000 -0- -0-
2030 Investors LLC 300,000 300,000 -0- -0-
Steven Morvay 293,684 293,684 -0- -0-
Tom Alison 293,684 293,684 -0- -0-
Robert Herskowitz 250,000 250,000 -0- -0-
Brad Greenspan 245,370 245,370 -0- -0-
Terrace Capital 240,000 240,000 -0- -0-
Reuben Taub 235,190 235,190 -0- -0-
Leon Brauser 225,000(16) 225,000 -0- -0-
Nite Capital LP 225,000(17) 225,000 -0- -0-
59
SHARES OF PERCENTAGE OF
SHARES OF COMMON SHARES OF COMMON STOCK COMMON STOCK
STOCK OWNED PRIOR COMMON STOCK TO OWNED AFTER THE OWNED AFTER THE
NAME TO THE OFFERING BE SOLD OFFERING OFFERING
- -------------------------------------------------- ----------------- --------------- --------------- ---------------
John M. Rivers, Jr. 200,000 200,000 -0- -0-
Tom Estes 200,000 200,000 -0- -0-
Green Streak Group Inc. 200,000(18) 200,000 -0- -0-
Robert Swayman 200,000(18) 200,000 -0- -0-
S.B. Joseph Clark 196,300 196,300 -0- -0-
James O. Patterson 196,290 196,290 -0- -0-
J.O. Patterson & Co. 196,290 196,290 -0- -0-
Mark Salter 194,029.34(19) 194,029.34 -0- -0-
Chocolate Chip Investments, L.P. 186,110(20) 186,110 -0- -0-
Andrew Reckles 175,000 175,000 -0- -0-
Paul Mannion, Jr. 175,000 175,000 -0- -0-
Chase Financing Inc. 164,023 164,023 -0- -0-
Chase Mortgage 154,000 154,000 -0- -0-
American High Growth Equities Retirement Trust 150,000(21) 150,000 -0- -0-
Peddle Partners 149,070(20) 149,070 -0- -0-
Nite Capital 148,150 148,150 -0- -0-
Jack W. Kuhn, Jr. Revocable TR UAD 12/11/2000 148,150 148,150 -0- -0-
Irv Brechner 146,276 146,276 -0- -0-
David N. Baker 137,410 137,410 -0- -0-
Pioneer Venture Partners LLC 133,333 133,333 -0- -0-
Hunter Capital 125,000 125,000 -0- -0-
60
SHARES OF PERCENTAGE OF
SHARES OF COMMON SHARES OF COMMON STOCK COMMON STOCK
STOCK OWNED PRIOR COMMON STOCK TO OWNED AFTER THE OWNED AFTER THE
NAME TO THE OFFERING BE SOLD OFFERING OFFERING
- -------------------------------------------------- ----------------- --------------- --------------- ---------------
Samuel A. Tancredi 124,070(20) 124,070 -0- -0-
Barbara and Clive Kabatznik 117,780 117,780 -0- -0-
Andrew W. Schonzeit 115,000 115,000 -0- -0-
Edward Feighan 112,500(22) 112,500 -0- -0-
Herb and Nora Lynn Hersey 112,500(22) 112,500 -0- -0-
Elinor Ganz TR Elinor Ganz TTEE 4/13/94 112,500(23) 112,500 -0- -0-
Charles Schwab Inc. Cust. for Elinor 111,570(24) 111,570 -0- -0-
Ganz IRA Rollover
Marvin Sternberg 100,000 100,000 -0- -0-
Deborah Silver 100,000 100,000 -0- -0-
George Gitschel 100,000 100,000 -0- -0-
Stephanie Group LLC 100,000 100,000 -0- -0-
Guerilla Partners, L.P. 100,000 100,000 -0- -0-
DBGJ Irrevocable Trust 100,000(18) 100,000 -0- -0-
Stanley Trilling and Linda M. Trilling, TTEE of 98,150 98,150 -0- -0-
S/L Trilling Trust DTD 4/15/96
New Wellington Group LLC 98,150 98,150 -0- -0-
Sarah B. Jennings 98,140 98,140 -0- -0-
John P. Morbeck 98,140 98,140 -0- -0-
Phyllis Ulreich 93,520(20) 93,520 -0- -0-
Charles Schwab & Co. Custodian FBO 80,000 80,000 -0- -0-
Margie H. Ginn
61
SHARES OF PERCENTAGE OF
SHARES OF COMMON SHARES OF COMMON STOCK COMMON STOCK
STOCK OWNED PRIOR COMMON STOCK TO OWNED AFTER THE OWNED AFTER THE
NAME TO THE OFFERING BE SOLD OFFERING OFFERING
- -------------------------------------------------- ----------------- --------------- --------------- ---------------
Dani Mofshin 80,000(18) 80,000 -0- -0-
Andrew Morgenstern 75,000(25) 75,000 -0- -0-
Bridge Ventures, Inc. 75,000(25) 75,000 -0- -0-
Charles Lowlicht 75,000(25) 75,000 -0- -0-
DeJohn Relationserve Partnership 75,000(25) 75,000 -0- -0-
Don Axelrod 75,000(25) 75,000 -0- -0-
Jeffrey and Robin Feinberg 75,000(25) 75,000 -0- -0-
Lawrence Franken 75,000(25) 75,000 -0- -0-
Monarch Capital Fund Ltd. 75,000(25) 75,000 -0- -0-
Serpentine Group Inc. Defined Benefit Pension Plan 75,000(25) 75,000 -0- -0-
Stephen and Debra Shapiro 75,000(26) 75,000 -0- -0-
Steven and Sandra Mofshin 75,000(25) 75,000 -0- -0-
Parabolic Investment Fund Ltd. 75,000(20) 75,000 -0- -0-
Richard F. Thompson 75,000(20) 75,000 -0- -0-
Stephens Inc., Custodian for Stuart E. Feick IRA 75,000(20) 75,000 -0- -0-
TCMP3 Partners 74,074 74,074 -0- -0-
New Britain Radiological Assoc 401K 74,070 74,070 -0- -0-
FBO Sidney Ulreich
62
SHARES OF PERCENTAGE OF
SHARES OF COMMON SHARES OF COMMON STOCK COMMON STOCK
STOCK OWNED PRIOR COMMON STOCK TO OWNED AFTER THE OWNED AFTER THE
NAME TO THE OFFERING BE SOLD OFFERING OFFERING
- -------------------------------------------------- ----------------- --------------- --------------- ---------------
Olshan Grundman Frome Rosenzweig & Wolosky LLP 72,772(26) 72,772 -0- -0-
Baruch Z. Halberstam 70,374 70,374 -0- -0-
NE Capital Partners 62,500 62,500 -0- -0-
Sheldon Perlick Marital TR J. Perlick & E. 56,250(27) 56,250 -0- -0-
Perlick TTEE
Jensen Children's Trust 50,000 50,000 -0- -0-
Dalton B. Thomas 50,000 50,000 -0- -0-
Stuart E. Feick 50,000 50,000 -0- -0-
DJV Air Inc. 50,000(18) 50,000 -0- -0-
Greg Sturgis 50,000(18) 50,000 -0- -0-
Kagan Family Trust 49,070 49,070 -0- -0-
Charles Kagan 49,070 49,070 -0- -0-
Aharon Ungar & Jennifer B. Ungar JT TEN 44,440 44,440 -0- -0-
Joseph L. Berkman Living TR UAD 4/9/90 44,440 44,440 -0- -0-
Arnold L. Liber 44,440 44,440 -0- -0-
Philip F. Frink Jr., Trustee First Washington 39,250 39,250 -0- -0-
Corp. Profit Sharing Plan FBO Phillip F. Frink Jr.
Alfred Gladstone 37,500(24) 37,500 -0- -0-
Richard McDonald 37,500(24) 37,500 -0- -0-
Andrew Kutno 37,500(28) 37,500 -0- -0-
63
SHARES OF PERCENTAGE OF
SHARES OF COMMON SHARES OF COMMON STOCK COMMON STOCK
STOCK OWNED PRIOR COMMON STOCK TO OWNED AFTER THE OWNED AFTER THE
NAME TO THE OFFERING BE SOLD OFFERING OFFERING
- -------------------------------------------------- ----------------- --------------- --------------- ---------------
Brad Feinberg 37,500(28) 37,500 -0- -0-
Bradley P. Brooks 37,500(28) 37,500 -0- -0-
Charles and Carol McCormick 37,500(28) 37,500 -0- -0-
David Khaghan 37,500(28) 37,500 -0- -0-
Jonathan Alpert 37,500(28) 37,500 -0- -0-
Solomon Yakoby 37,500(28) 37,500 -0- -0-
Charles Schwab Cust. for Joseph Berkman Roth IRA 37,270(29) 37,270 -0- -0-
New Britain Radiological Assoc 401K FBO Alfred 37,040 37,040 -0- -0-
Gladstone
Charles Schwab as custodian for Elinor C. Ganz IRA 37,040 37,040 -0- -0-
Beverly Pinnas 37,040 37,040 -0- -0-
Gladstone Family Trust A. Gladstone 37,040 37,040 -0- -0-
& P. Bourdeau TTEE UAD 8/19/98
Elinor C. Ganz TTEE Trust Agreement 37,040 37,040 -0- -0-
of Susan J. Ganz UAD 9/28/1984
Elinor C. Ganz TTEE Trust Agreement 37,040 37,040 -0- -0-
of Amy H. Ganz UAD 9/28/1984
Harold & Patricia Gelber TTEE 37,040 37,040 -0- -0-
Barbara Landies Living Trust Dated 8/27/96 37,030 37,030 -0- -0-
64
SHARES OF PERCENTAGE OF
SHARES OF COMMON SHARES OF COMMON STOCK COMMON STOCK
STOCK OWNED PRIOR COMMON STOCK TO OWNED AFTER THE OWNED AFTER THE
NAME TO THE OFFERING BE SOLD OFFERING OFFERING
- -------------------------------------------------- ----------------- --------------- --------------- ---------------
Neil Herskowitz 35,000 35,000 -0- -0-
Riverside Contractors 35,000 35,000 -0- -0-
Kobi Chukran 35,000 35,000 -0- -0-
Jacob L. Halberstam and Sarah H. Halberstam JTWROS 33,334 33,334 -0- -0-
James Davidson 33,000 33,000 -0- -0-
Daniel Brauser 30,000(18) 30,000 -0- -0-
DiMarino - Kroop - Prieto Gastrointestinal Assoc. 29,630 29,630 -0- -0-
PA UAD 11/1/75
Sheldon Perlick Marital TR UAD 6/14/91 29,630 29,630 -0- -0-
Matthew R. Abrams 25,000 25,000 -0- -0-
Sarah E. Abrams 25,000 25,000 -0- -0-
John Logan 25,000 25,000 -0- -0-
Alex Ehrenthal 25,000 25,000 -0- -0-
Kevin Fleming 25,000(18) 25,000 -0- -0-
Stephen Sonnabend 22,220 22,220 -0- -0-
Ganz Family Foundation 22,220 22,220 -0- -0-
Sali Ulreich Irrevocable TR UAD 12/31/1995 22,220 22,220 -0- -0-
Christopher T. and Susan L. Harkins, Tenants by 19,630 19,630 -0- -0-
the Entirety
Jacob J. Strikowski 19,630 19,630 -0- -0-
65
SHARES OF PERCENTAGE OF
SHARES OF COMMON SHARES OF COMMON STOCK COMMON STOCK
STOCK OWNED PRIOR COMMON STOCK TO OWNED AFTER THE OWNED AFTER THE
NAME TO THE OFFERING BE SOLD OFFERING OFFERING
- -------------------------------------------------- ----------------- --------------- --------------- ---------------
Charles Schwab as custodian for David N. 18,520 18,520 -0- -0-
Sternlicht IRA ROLLOVER
Madge W. Gladstone TR FBO Alfred Gladstone 18,520 18,520 -0- -0-
UAD 2/10/97
Laura J. Berlin 18,520 18,520 -0- -0-
Madge W. Gladstone TR FBO Michael Gladstone 18,520 18,520 -0- -0-
UAD 2/10/97
Sandra Shore-Goldfarb 18,520 18,520 -0- -0-
Charles Schwab & Co. Custodian FBO Timothy A. Ginn 15,000 15,000 -0- -0-
Brian J. Jensen, Trust B 15,000 15,000 -0- -0-
Daniel L. Moyer 15,000(30) 15,000 -0- -0-
Gregory R. Thompson 15,000(30) 15,000 -0- -0-
Barry Honig 15,000 15,000 -0- -0-
Harry Kesner 15,000 15,000 -0- -0-
Alfred E. Gladstone 14,810 14,810 -0- -0-
Harry Edward Turner and Patty Lee Turner 10,000 10,000 -0- -0-
David Simcox 10,000 10,000 -0- -0-
Joyce Lewis 10,000 10,000 -0- -0-
Michael Richmond 10,000 10,000 -0- -0-
Steven Alembik 10,000 10,000 -0- -0-
Walter Klugewicz 10,000 10,000 -0- -0-
Scott Frohman 10,000(18) 10,000 -0- -0-
Charles Eissa 10,000(18) 10,000 -0- -0-
66
SHARES OF PERCENTAGE OF
SHARES OF COMMON SHARES OF COMMON STOCK COMMON STOCK
STOCK OWNED PRIOR COMMON STOCK TO OWNED AFTER THE OWNED AFTER THE
NAME TO THE OFFERING BE SOLD OFFERING OFFERING
- -------------------------------------------------- ----------------- --------------- --------------- ---------------
Congregation Dir Hochaim 10,000(18) 10,000 -0- -0-
Gary Harrison 9,810 9,810 -0- -0-
GRQ Consultants, Inc. 401(k) Plan 7,500(31) 7,500 -0- -0-
GRQ Consultants, Inc. Deferred Benefit Plan 7,500(31) 7,500 -0- -0-
Steven Wolosky 7,500(31) 7,500 -0- -0-
Jorge Martinez 5,000 5,000 -0- -0-
John Rayson 5,000(18) 5,000 -0- -0-
Doug Apfelberg 5,000(18) 5,000 -0- -0-
Tim Popfinger 5,000(18) 5,000 -0- -0-
Paradox Trading Company, L.L.C. 3,750(32) 3,750 -0- -0-
Peter Anderson 3,000 3,000 -0- -0-
Erin Meehan 3,000(18) 3,000 -0- -0-
Bob Bloomfield 2,500(18) 2,500 -0- -0-
Carol Hamilton 2,000 2,000 -0- -0-
Lisa Mottern 2,000 2,000 -0- -0-
Alfredo Rizzo 2,000(18) 2,000 -0- -0-
JH Associates, Inc. 1,000 1,000 -0- -0-
- ----------
(1) Includes 6,666,666.67 shares of Common Stock underlying a four-year
convertible debenture and a seven-year warrant to purchase 1,037,985.02
shares of Common Stock with an exercise price of $0.01, which is subject to
adjustment. Lehman Brothers Inc. is the parent company of LB I Group and a
registered broker-dealer. LB I Group has represented that it is not acting
as an underwriter in this offering, it purchased the shares it is offering
under this prospectus in the ordinary course of business, and at the time
of such purchase, it had no agreements or understandings, directly or
indirectly, with any person to distribute the shares.
(2) Includes a ten-year warrant to purchase 2,792,500 shares of Common Stock
with an exercise price of $0.25 received as consideration for bridge loans.
67
(3) Includes 2,666,666.67 shares of Common Stock underlying a four-year
convertible debenture and a seven-year warrant to purchase 326,479.17
shares of Common Stock with an exercise price of $0.01, which is subject to
adjustment.
(4) Includes 2,666,666.67 shares of Common Stock underlying a four-year
convertible debenture and a seven-year warrant to purchase 1,153,832 shares
of Common Stock with an exercise price of $0.01, which is subject to
adjustment.
(5) Includes 3,333,333.34 shares of Common Stock underlying a four-year
convertible debenture and a seven-year warrant to purchase 1,442,290 shares
of Common Stock with an exercise price of $0.01, which is subject to
adjustment.
(6) Includes 3,000,000 shares of Common Stock underlying a four-year
convertible debenture and a seven-year warrant to purchase 1,298,061 shares
of Common Stock with an exercise price of $0.01, which is subject to
adjustment.
(7) Includes 1,333,333.34 shares of Common Stock underlying a four-year
convertible debenture and a seven-year warrant to purchase 576,916 shares
of Common Stock with an exercise price of $0.01, which is subject to
adjustment.
(8) Includes 1,000,000 shares of Common Stock underlying a four-year
convertible debenture and a seven-year warrant to purchase 432,687 shares
of Common Stock with an exercise price of $0.01, which is subject to
adjustment.
(9) Represents a ten-year warrant to purchase Common Stock with an exercise
price of $0.25 received as consideration for bridge loans.
(10) Includes 666,666.67 shares of Common Stock underlying a four-year
convertible debenture and a seven-year warrant to purchase 288,458 shares
of Common Stock with an exercise price of $0.01, which is subject to
adjustment.
(11) Includes a three-year warrant to purchase 250,000 shares of Common Stock
with an exercise price of $2.00.
(12) Includes 500,000 shares of Common Stock underlying a four-year convertible
debenture and a seven-year warrant to purchase 216,344 shares of Common
Stock with an exercise price of $0.01, which is subject to adjustment.
(13) Includes a ten-year warrant to purchase 300,000 shares of Common Stock with
an exercise price of $0.25.
(14) Includes a three-year warrant to purchase 50,000 shares of Common Stock
with an exercise price of $2.00.
(15) Includes a three-year warrant to purchase 81,250 shares of Common Stock
with an exercise price of $3.50.
(16) Includes a three-year warrant to purchase 75,000 shares of Common Stock
with an exercise price of $2.00
(17) Includes a three-year warrant to purchase 75,000 shares of Common Stock
with an exercise price of $3.50.
(18) Represents a ten-year warrant to purchase Common Stock with an exercise
price of $0.25.
(19) Includes 133,333.34 shares of Common Stock underlying a four-year
convertible debenture and a seven-year warrant to purchase 57,692 shares of
Common Stock with an exercise price of $0.01, which is subject to
adjustment.
(20) Includes a three-year warrant to purchase 25,000 shares of Common Stock
with an exercise price of $3.50.
68
(21) Includes a three-year warrant to purchase 50,000 shares of Common Stock
with an exercise price of $3.50.
(22) Includes a three-year warrant to purchase 37,500 shares of Common Stock
with an exercise price of $2.00.
(23) Includes a three-year warrant to purchase 37,500 shares of Common Stock
with an exercise price of $3.50.
(24) Includes a three-year warrant to purchase 12,500 shares of Common Stock
with an exercise price of $3.50.
(25) Includes a three-year warrant to purchase 25,000 shares of Common Stock
purchase with an exercise price of $2.00.
(26) Represents 48,515 shares of Common Stock and a three-year warrant to
purchase 24,257 shares of Common Stock with an exercise price of $3.50 as
payment for legal services.
(27) Includes a three-year warrant to purchase 18,750 shares of Common Stock
with an exercise price of $3.50.
(28) Includes a three-year warrant to purchase 12,500 shares of Common Stock
with an exercise price of $2.00.
(29) Includes a three-year warrant to purchase 6,250 shares of Common Stock with
an exercise price of $3.50.
(30) Includes a three-year warrant to purchase 5,000 shares of Common Stock with
an exercise price of $3.50.
(31) Includes a three-year warrant to purchase 2,500 shares of Common Stock with
an exercise price of $3.50.
(32) Includes a three-year warrant to purchase 1,250 shares of Common Stock with
an exercise price of $3.50.
DESCRIPTION OF SECURITIES
We are authorized to issue 90,000,000 shares of Common Stock, par value $0.001
per share, and 10,000,000 shares of Preferred Stock, par value $0.001 per share.
As of March 13, 2006, there were 40,791,920 shares of Common Stock issued and
outstanding and no shares of Preferred Stock issued and outstanding.
COMMON STOCK
The holders of Common Stock are entitled to one vote per share. Our Certificate
of Incorporation does not provide for cumulative voting. The holders of Common
Stock are entitled to receive ratably such dividends, if any, as may be declared
by the Board out of legally available funds. However, the current policy of the
Board is to retain earnings, if any, for operations and growth. Upon
liquidation, dissolution or winding-up, the holders of Common Stock are entitled
to share ratably in all assets which are legally available for distribution. The
holders of Common Stock have no preemptive, subscription, redemption or
conversion rights.
PREFERRED STOCK
Our board of directors are authorized, subject to any limitations prescribed by
law, without further vote or action by the stockholders, to issue from time to
time shares of preferred stock in one or more series. Each such series of
preferred stock shall have such number of shares, designations, preferences,
voting powers, qualifications, and special or relative rights or privileges as
shall be determined by our board of directors, which may include, among others,
dividend rights, voting rights, liquidation preferences, conversion rights and
preemptive rights.
69
THE SENIOR SECURED CONVERTIBLE DEBENTURES
Under the terms of the STAC Debentures, STAC is obligated to pay interest of 6%
per annum on the outstanding principal amount of the STAC Debentures, payable
quarterly beginning on February 1, 2006. Commencing on October 15 2007, STAC is
required to make a quarterly redemption payment equal to 6.25% of the original
principal amount of the STAC Debentures, in cash. After the first anniversary of
the closing, STAC has the option to redeem the outstanding principal amount, in
whole and not in part, plus accrued but unpaid interest and interest not yet
accrued. Any remaining principal and accrued but unpaid interest is due on
October 30, 2009 (the "Maturity Date").
The STAC Debentures are convertible into shares of common stock of the Company
at $1.50 per share.
The entire principal amount of the STAC Debentures may become due before the
Maturity Date upon the occurrence of certain events. Upon the occurrence of a
change in control of STAC, the lenders may require STAC to repurchase the
debentures in whole or in part, plus accrued but unpaid interest. Furthermore,
upon the occurrence of an event of default, as defined in the Debentures, at the
lenders' election, the full principal amount of the STAC Debentures, plus
interest, becomes immediately due and payable in cash.
So long as any portion of the STAC Debentures is outstanding, STAC will not and
from and after the Consolidation, the Company will not permit any of its
subsidiaries to, directly or indirectly:
enter into, create, incur, assume, guarantee or suffer to exist any indebtedness
for borrowed money of any kind, including but not limited to, a guarantee, but
excluding Permitted Indebtedness (as defined in the STAC Debenture);
(a) enter into, create, incur, assume or suffer to exist any liens of any
kind, on or with respect to any of its property or assets now owned or
hereafter acquired or any interest therein or any income or profits
therefrom except in connection with Permitted Indebtedness;
(b) amend its certificate of incorporation, bylaws or other charter
documents so as to materially and adversely affect any rights of the
holder;
(c) repay, repurchase or offer to repay, repurchase or otherwise acquire
more than a de minimis number of shares of common stock or common
stock equivalents other than to the extent permitted or required under
the STAC Debenture or the Transaction Documents (as defined in the
STAC Debenture);
(d) enter into any agreement with respect to any of the foregoing; or
(e) pay cash dividends or distributions on any equity securities.
The STAC Debentures are secured by the STAC Security Agreement (the "STAC
Security Agreement") dated as of October 31, 2005, creating a lien in all of the
assets of STAC. The Company also entered into a security agreement whereby there
is a lien on all of its assets.
WARRANTS
The Company currently has outstanding 5,200,000 warrants to purchase 5,200,000
shares of common stock at $0.25 per shares. The warrants expire on April 1,
2015.
70
The Company currently has outstanding 562,500 warrants to purchase 562,500
shares of common stock at $2.00 per share. The warrants expire on May 16, 2008.
The Company currently has outstanding 250,000 warrants to purchase 250,000
shares of common stock at $2.00 per share. The warrants expire on June 13, 2008.
The Company currently has outstanding 524,257 warrants to purchase 524,257
shares of common stock at $3.50 per share. The warrants expire on June 30, 2008.
The Company currently has outstanding 9,629,957 warrants to purchase 9,629,957
shares of common stock at $0.01 per share. The warrants expire on October 30,
2112.
Prior to exercise, the warrants do not confer upon holders any voting or any
other rights as a stockholder.
REGISTRATION RIGHTS
On February 3, 2006, the Company entered into a Registration Rights Agreement
with each of the holders of the Debentures and Warrants to register the
underlying Common Stock thereunder. The Registration Rights Agreement provides
that the Company will file a registration statement with the Securities Exchange
Commission ("SEC") within 45 days following the Consolidation. If the Company
does not comply with certain requirements relating to the filing the
registration statement or maintaining its effectiveness, the Company will pay
each holder monthly in cash as partial liquidated damages 1% of the aggregate
purchase price paid by such holder for the Company Common Stock. If the Company
fails to pay any partial liquidated damages in full within seven days after the
date payable, the Company will pay interest thereon at a rate of 18% per annum
to the holder, accruing daily from the date such partial liquidated damages are
due until such amounts, plus all such interest thereon, are paid in full.
The Company entered into a Registration Rights Agreement with each of the
purchasers of the RelationServe Series A Preferred Stock (such Series A
Preferred Stock was subsequently converted into 7,162,991 shares of Common
Stock). The Registration Rights Agreement provides that the Company will file a
registration statement with the Securities Exchange Commission ("SEC") within 45
days following either the closing of the Consolidation or a public announcement
of the abandonment of the Consolidation. If the registration statement filed
with the SEC is not declared effective within 120 days of filing or does not
remain effective while the shares of RelationServe Common Stock underlying the
RelationServe Series A Preferred Stock remain outstanding the Company will pay
such holder monthly in cash as partial liquidated damages 1% of the aggregate
purchase price paid by such holder for the RelationServe Preferred Stock.
INDEMNIFICATION
Our Certificate of Incorporation contains provisions to (i) eliminate the
personal liability of our directors for monetary damages resulting from breaches
of their fiduciary duty (other than breaches of the duty of loyalty, acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, violations under Section 174 of the Delaware General
Corporation Law (the "DGCL") or for any transaction from which the director
derived an improper personal benefit) and (ii) indemnify our directors and
officers to the fullest extent permitted by Section 145 of the DGCL, including
circumstances in which indemnification is otherwise discretionary. We believe
that these provisions are necessary to attract and retain qualified persons as
directors and officers. As a result of this provision, our or our stockholders'
ability to successfully prosecute an action against a director for a breach of
his duty of care has been limited. However, the provision does not affect the
availability of equitable remedies such as an injunction or rescission based
upon a director's breach of his duty of care. The Securities and Exchange
71
Commission has taken the position that the provision will have no effect on
claims arising under the federal securities laws.
In addition, the Certificate of Incorporation and By-Laws provide mandatory
indemnification rights, subject to limited exceptions, to any person who was or
is party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding by reason of the fact that such person is
or was our director or officer, or is or was serving at our request as a
director or officer of another corporation, partnership, joint venture, trust,
employee benefit plan or other enterprise. Such indemnification rights include
reimbursement for expenses incurred by such person in advance of the final
disposition of such proceeding in accordance with the applicable provisions of
the DGCL.
PLAN OF DISTRIBUTION
We are registering an aggregate of 84,671,853 shares of common stock covered by
this prospectus on behalf of the Selling Stockholders. The Selling Stockholders
and, as permitted by applicable law, any of their donees, pledgees, assignees
and successors-in-interest may, from time to time, offer and sell any and all of
their shares of Common Stock on any stock exchange, market, or trading facility
on which such shares are traded. The Selling Stockholders will act independently
of us and each other in making decisions with respect to the timing, manner and
size of each such sale. Sales may be made at fixed or negotiated or market
prices. The shares may be sold by way of any legally available means, including
in one or more of the following transactions:
o a block trade in which a broker-dealer engaged by a Selling
Stockholder attempts to sell the shares as agent but may position and
resell a portion of the block as principal to facilitate the
transaction;
o purchases by a broker-dealer as principal and resale by the
broker-dealer for its account pursuant to this prospectus;
o through the writing of options or shares, whether the options are
listed on an options exchange or otherwise;
o ordinary brokerage transactions and transactions in which a
broker-dealer solicits purchasers; and
o privately negotiated transactions.
Transactions under this prospectus may or may not involve brokers or dealers.
The Selling Stockholders may sell shares directly to purchasers or to or through
broker-dealers, who may act as agents or principals. Broker-dealers engaged by
the Selling Stockholders may arrange for other broker-dealers to participate in
selling shares. Broker-dealers or agents may receive compensation in the form of
commissions, discounts or concessions from the Selling Stockholders in amounts
to be negotiated in connection with the sale. Broker-dealers or agents also may
receive compensation in the form of discounts, concessions, or commissions from
the purchasers of shares for whom the broker-dealers may act as agents or to
whom they sell as principal, or both. The compensation of any prticular
broker-dealer may be in excess of customary commission. Selling Stockholders and
any broker-dealers and any other participating broker-dealers who execute sales
for the Selling Stockholders may be deemed to be "underwriters" within the
meaning of the Securities Act in connection with such sales. In such event, any
commissions received by such broker-dealers or agents and any profit on the
resale of the shares purchased by them may be deemed to be underwriting
discounts and commissions under the Securities Act. If the Selling Stockholders
are deemed to be underwriters, they may be subject to certain statutory and
regulatory liabilities, including liabilities imposed pursuant to Sections 11,
12 and 17 of the Securities Act of 1933, as amended (the "Securities Act"), and
Rule 10b-5 under the Securities Exchange Act of 1934, as amended (the "Exchange
Act"). There is no underwriter or coordinating broker acting in connection with
the proposed sale of shares by the selling security holder.
72
To the extent required, the number of shares to be sold, the name of the Selling
Stockholder, the purchase price, the name of any agent or broker and any
applicable commissions, discounts or other compensation to such agents or
brokers and other material facts with respect to a particular offering will be
set forth in a prospectus supplement as required by the Rules and Regulations
under the Securities Act.
The Selling Stockholders may also sell shares under Rule 144 under the
Securities Act if available, rather than pursuant to this prospectus.
In order to comply with the securities laws of certain states, if applicable,
the shares will be sold in such jurisdictions, if required, only through
registered or licensed brokers or dealers. In addition, in certain states the
shares may not be sold unless the shares have been registered or qualified for
sale in such state or an exemption from registration or qualification is
available and complied with. The anti-manipulative provisions of Regulation M
promulgated under the Exchange Act may apply to sales of the shares offered by
the Selling Stockholders.
We are required to pay all fees and expenses incident to the registration of the
shares. Otherwise, all discounts, commissions or fees incurred in connection
with the sale of Common Stock offered hereby will be paid by the Selling
Stockholders.
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and current reports, and other information with the
SEC. Our filings are available to the public at the SEC's web site at
http://www.sec.gov. You may also read and copy any document we file at the SEC's
Public Reference Room, 450 Fifth Street, N.W., Washington, D.C. 20549. Further
information on the Public Reference Room may be obtained by calling the SEC at
1-800-SEC-0330.
We have filed a registration statement on Form SB-2 with the SEC under the
Securities Act for the Common Stock offered by this prospectus. This prospectus
does not contain all of the information set forth in the registration statement,
certain parts of which have been omitted in accordance with the rules and
regulations of the SEC. For further information, reference is made to the
registration statement and its exhibits. Whenever we make references in this
prospectus to any of our contracts, agreements or other documents, the
references are not necessarily complete and you should refer to the exhibits
attached to the registration statement for the copies of the actual contract,
agreement or other document.
LEGAL MATTERS
The validity of the securities being offered by this prospectus have been passed
upon for us by Olshan Grundman Frome Rosenzweig & Wolosky LLP, New York, New
York. On June 30, 2005 we issued to Olshan Grundman Frome Rosenzweig & Wolosky
LLP 48,515 shares of Common Stock and a three-year warrant to purchase an
aggregate of 24,257 shares of Common Stock with an exercise price of $3.50 in
exchange for legal services all of which shares are being registered for resale
pursuant to this Registration Statement.
EXPERTS
The financial statements of the Company as of December 31, 2004 included in this
prospectus have been so included in reliance on the report (which contains an
explanatory paragraph relating to our ability to continue as a going concern) of
McKean, Paul, Chrycy, Fletcher & Co., independent public accounting firm, given
on the authority of said firm as experts in accounting and auditing.
73
The financial statements of the Company as of December 31, 2005 included in this
prospectus have been so included in the reliance on the report of Marcum &
Kliegman LLP, independent public accounting firm, given on the authority of said
firm as experts in accounting and auditing.
The financial statements of SendTec Acquisition Corp. and its predecessor entity
as of December 31, 2005 and December 31, 2004 included in this Prospectus have
been so included in reliance on the report of Gregory, Sharer and Stuart, PA,
independent public accounting firm, given on the authority of said firm as
experts in accounting and auditing.
DISCLOSURE OF COMMISSION POSITION ON
INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
Insofar as indemnification for liabilities arising under the Securities Act may
be permitted to our directors, officers or persons controlling us, we have been
advised that it is the SEC's opinion that such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable.
CHANGES IN ACCOUNTANT
On July 13, 2005, our Board of Directors appointed Sherb & Co., LLP as our
Independent Registered Public Accounting Firm to audit the Company's financial
statements for the fiscal year ending December 31, 2005.
The reports of Morgan & Company on our financial statements from our inception
in April 2004 contained no adverse opinion or disclaimer of opinion, and were
not qualified or modified as to uncertainty, audit scope or accounting
principles, except such reports were modified as to an explanatory paragraph
relating to its ability to continue as a "going concern" as a result of its lack
of existing commitments from lenders to provide necessary financing, lack of
sufficient working capital, and recurring losses from operations.
From our inception in April 2004 there were no disagreements with Morgan &
Company on any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure which, if not resolved to the
satisfaction of Morgan & Company, would have caused it to make reference to the
matter in connection with its reports. There were no "reportable events" as that
term is described in Item 304(a)(1)(v) of Regulation S-B.
From our inception in April 2004, we did not consult Sherb & Co., LLP regarding
either: (i) the application of accounting principles to a specified transaction,
completed or proposed, or the type of audit opinion that might be rendered our
financial statements, or (ii) any matter that was either the subject of a
disagreement as defined in Item 304(a)(1)(iv) of Regulation S-B or a reportable
event as described in Item 304(a)(1)(v) of Regulation S-B.
Effective as of November 30, 2005, Marcum & Kliegman LLP replaced Sherb & Co.,
LLP as our independent accountants. Sherb & Co., LLP had previously been engaged
as the principal accountant to audit our financial statements.
In connection with the recent investment of the Company in SendTec Acquisition
Corp. ("STAC"), the Company is required to undertake an audit of the Company's
financial statements and reports for the period ending September 30, 2005, and
to utilize a firm that is selected by the Company and acceptable to certain
co-investors in the STAC transaction. We believe that it is in the Company's
best interest to have Marcum & Kliegman LLP perform the required audit and
therefore we retained Marcum & Kliegman
74
LLP as the Company's new Independent Registered Public Accounting Firm to audit
the Company's financial statements for the fiscal year ending December 31, 2005
effective as of November 30, 2005. Marcum & Kliegman LLP is located at 655 Third
Avenue, 16th Floor, New York, New York 10017.
Appointment of Marcum & Kliegman LLP was recommended and approved by our board
of directors. During our most recent fiscal year, and the subsequent interim
period, prior to November 30, 2005, we did not consult Marcum & Kliegman LLP
regarding either: (i) the application of accounting principles to a specified
transaction, completed or proposed, or the type of audit opinion that might be
rendered on the Company's financial statements, or (ii) any matter that was
either the subject of a disagreement as defined in Item 304(a)(1)(iv) of
Regulation S-B or a reportable event as described in Item 304(a)(1)(v) of
Regulation S-B.
During our most recent fiscal year and the subsequent interim periods, there
were no disagreements with Sherb & Co., LLP on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedure which, if not resolved to the satisfaction of Sherb & Co., LLP, would
have caused it to make reference to the matter in connection with its reports.
There were no "reportable events" as that term is described in Item 304(a)(1)(v)
of Regulation S-B.
75
CONTENTS
- --------------------------------------------------------------------------------
RELATIONSERVE MEDIA, INC. AND SUBSIDIARIES
Page
---------
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMS F1 - F2
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheet F3 - F4
Consolidated Statements of Operations F5 - F6
Consolidated Statements of Stockholders' Equity F7 - F8
Consolidated Statements of Cash Flows F9 - F10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F10 - F31
SENDTEC, INC.
Page
---------
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTS F34 - F35
FINANCIAL STATEMENTS
Consolidated Balance Sheet F-36
Consolidated Statements of Operations F-37
Consolidated Statements of Stockholders' Equity F-38
Consolidated Statements of Cash Flows F-39
NOTES TO FINANCIAL STATEMENTS F40 - F50
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors
RelationServe Media, Inc. and Subsidiaries
Fort Lauderdale, Florida
We have audited the accompanying consolidated balance sheet of RelationServe
Media, Inc. and Subsidiaries as of December 31, 2005 and the related
consolidated statements of operations, stockholders' equity and cash flows for
the year then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit includes examining
on a test basis, evidence supporting the amounts and disclosures in the
consolidated financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of RelationServe Media,
Inc. and Subsidiaries as of December 31, 2005, and the results of its operations
and its cash flows for the year then ended, in conformity with accounting
principles generally accepted in the United States of America.
New York, New York
March 10, 2006
/S/ MARCUM & KLIEGMAN LLP
F-1
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Members of
Omnipoint Marketing, LLC:
We have audited the accompanying statements of operations, members' equity and
cash flows of Omnipoint Marketing, LLC (a Florida limited liability company)
("the Company") for the year ended December 31, 2004. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company's internal control
over financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Omnipoint Marketing, LLC for
the year then ended December 31, 2004, in conformity with accounting principles
generally accepted in the United States of America.
As discussed in Note 9 to the Financial Statement on December 15, 2004, the
Federal Bureau of Investigation served the Company with a search warrant
regarding alleged use of unlicensed software and seized certain e-mail servers
with a net book value of approximately $135,000. Management and legal counsel
have indicated that an investigation by the United States Attorney's Office is
currently being conducted and have no information regarding its status or
effect, if any, on the financial statements. The financial statements do not
include any adjustments, other than the write-off of the e-mail servers, which
might result from the outcome of the investigation.
As discussed in Note 2 to the financial statements on May 16, 2005, the Company
sold substantially all its net assets. The Company received 3,500,000 shares of
common stock or 26% of the outstanding common shares of the acquirer.
/s/ McKEAN, PAUL, CHRYCY, FLETCHER & CO.
Miami, Florida,
May 24, 2005
F-2
RELATIONSERVE MEDIA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
December 31, 2005
- --------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS
Cash $ 156,472
Accounts receivable, less allowance for doubtful
accounts of $1,014,338 1,624,577
Prepaid expenses and other current assets 154,673
-----------
Total Current Assets $ 1,935,722
PROPERTY AND EQUIPMENT, Net 782,386
INTANGIBLE ASSETS, Net 2,561,298
INVESTMENT IN SENDTEC ACQUISITION CORP. 9,274,981
OTHER ASSETS 32,690
-----------
TOTAL ASSETS $14,587,077
===========
The accompanying notes are an integral part of these financial statements.
F-3
RELATIONSERVE MEDIA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET, Continued
December 31, 2005
- --------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 1,208,693
Accrued expenses 156,815
Accrued compensation 175,966
Accrued commissions 381,444
Accrued penalty - registration rights 75,000
Customer deposits 391,890
------------
Total Current Liabilities $ 2,389,808
DEFERRED RENT 166,535
-----------
TOTAL LIABILITIES 2,556,343
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Series A Convertible Preferred stock - $.001 par value; 1,500,000
authorized; 762,199 shares issued and outstanding 10,289,690
Common stock - $.001 par value; 90,000,000 shares authorized;
19,671,015 shares issued and outstanding 19,671
Deferred compensation (1,851,973)
Additional paid in capital 16,651,325
Accumulated deficit (13,077,979)
------------
TOTAL STOCKHOLDERS' EQUITY 12,030,734
-----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $14,587,077
===========
The accompanying notes are an integral part of these financial statements.
F-4
RELATIONSERVE MEDIA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Year Ended
December 31,
-------------------------
2005 2004
------------ ----------
REVENUES, Net $ 11,302,780 $9,564,993
COST OF REVENUES 2,542,614 2,146,596
------------ ----------
GROSS PROFIT 8,760,166 7,418,397
------------ ----------
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Salaries 2,441,026 1,699,167
Bad debt 2,393,203 1,650,242
Commissions 1,462,728 1,884,447
Professional fees 975,132 420,007
Advertising and trade shows 653,484 493,713
Depreciation and amortization 215,307 187,031
Other general and administrative 2,287,349 912,949
TOTAL SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 10,428,229 7,247,556
------------ ----------
(LOSS) INCOME FROM OPERATIONS (1,668,063) 170,841
OTHER INCOME (EXPENSE)
Gain on forgiveness of debt -- 162,955
Termination fee in connection with aborted acquisition -- (100,000)
Asset impairment charge -- (198,240)
Registration rights penalty (75,000) --
Loss on equity-method investment (1,034,102) --
Interest income 3,144 --
Interest expense (14,268) (5,276)
------------ ----------
TOTAL OTHER EXPENSE (1,120,226) (140,561)
------------ ----------
(LOSS) INCOME BEFORE INCOME TAX PROVISION (2,788,289) 30,280
INCOME TAX PROVISION -- --
NET (LOSS) INCOME (2,788,289) 30,280
BENEFICIAL CONVERSION FEATURE - PREFERRED STOCK (10,289,690) --
------------ ----------
NET (LOSS) INCOME ATTRIBUTABLE TO COMMON SHAREHOLDERS $(13,077,979) $ 30,280
============ ==========
Net (Loss) Income Per Common Share:
Basic and Diluted $ (0.19) $ (0.00)
============ ==========
Weighted Average Number of Common Shares Outstanding:
Basic and Diluted 14,500,271 8,000,000
============ ==========
The accompanying notes are an integral part of these financial statements.
F-5
RELATIONSERVE MEDIA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Years Ended December 31, 2005 and 2004
- --------------------------------------------------------------------------------
Series A Preferred
Convertible
Preferred Stock Common Stock $.001
$.001 Par Value Par Value
------------------ -------------------
Number of Number of
Shares Amount Shares Amount
--------- ------ ---------- -------
BALANCE - January 1, 2004 -- $-- 8,000,000 $ 8,000
Contributions from former members of Omni Point
Marketing, LLC -- -- -- --
Distributions to former members of Omni Point
Marketing, LLC -- -- -- --
Net income -- -- -- --
--------- ------ ---------- -------
BALANCE - January 1, 2005 -- -- 8,000,000 8,000
Distributions to former members of Omni Point
Marketing, LLC -- -- -- --
Effects of reverse merger at June 13, 2005
Capitalization of LLC's accumulated
deficit at time of recapitalization -- -- -- --
Equity of RelationServe, Inc. at time of
recapitalization -- -- 5,326,000 5,326
Common stock issued in private placement
commenced in April 2005 -- -- 500,000 500
Cash paid to former member of Friendsand, LLC
in exchange for membership interest -- -- -- --
Note issued to former member of Friendsand, LLC
in exchange for membership interest -- -- -- --
Common stock issued to employees as an
accommodation by stockholders -- -- -- --
--------- ------ ---------- -------
Balance carried forward -- $-- 13,826,000 $13,826
========= ====== ========== =======
Advanced Total
Deferred Paid-In Accumulated Stockholders'
Compensation Capital Deficit Equity
------------ ----------- ----------- -------------
BALANCE - January 1, 2004 $ -- $1,207,220 $(686,631) $ 528,589
Contributions from former members of Omni Point
Marketing, LLC -- 1,195,000 -- 1,195,000
Distributions to former members of Omni Point
Marketing, LLC -- (230,000) -- (230,000)
Net income -- -- 30,280 30,280
----------- ---------- --------- ----------
BALANCE - January 1, 2005 -- 2,172,220 (656,351) 1,523,869
Distributions to former members of Omni Point
Marketing, LLC -- (438,169) -- (438,169)
Effects of reverse merger at June 13, 2005
Capitalization of LLC's accumulated
deficit at time of recapitalization -- (656,351) 656,351 --
Equity of RelationServe, Inc. at time of
recapitalization (1,050,000) 2,040,100 -- 995,426
Common stock issued in private placement
commenced in April 2005 -- 499,500 -- 500,000
Cash paid to former member of Friendsand, LLC
in exchange for membership interest -- (150,000) -- (150,000)
Note issued to former member of Friendsand, LLC
in exchange for membership interest -- (700,000) -- (700,000)
Common stock issued to employees as an
accommodation by stockholders -- 210,000 -- 210,000
----------- ---------- --------- ----------
Balance carried forward $(1,050,000) $2,977,300 $ -- $1,941,126
=========== ========== ========= ==========
The accompanying notes are an integral part of these financial statements.
F-6
RELATIONSERVE MEDIA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY, Continued
For the Years Ended December 31, 2005 and 2004
- --------------------------------------------------------------------------------
Preferred Stock $.001 Common Stock $.001
Par Value Par Value
---------------------- -------------------
Number of Number of Deferred
Shares Amount Shares Amount Compensation
--------- ----------- ---------- ------- ------------
Balance brought forward -- $ -- 13,826,000 $13,826 $(1,050,000)
Equity of Chubasco Resources Corp. at time of
recapitalization -- -- 3,216,500 3,216 --
Common stock issued under consulting agreements -- -- 840,000 840 (871,500)
Common stock issued under employment agreements -- -- 390,000 390 (393,500)
Common stock issued in private placement
commenced in June 2005 -- -- 1,048,515 1,049 --
Common stock issued upon exercise of warrants -- -- 550,000 550 --
Series A preferred stock issued in private
placement commenced in October 2005 762,199 10,289,690 -- -- --
Common Shares returned upon cancellation of
employment agreements -- -- (200,000) (200) 200,000
Cancellation of consulting agreement -- -- -- -- 850,000
Grant of common stock options -- -- -- -- (1,067,152)
Beneficial conversion feature - Series A
preferred -- -- -- -- --
Amortization of deferred compensation -- -- -- -- 480,179
Net loss -- -- -- -- --
------- ----------- ---------- ------- -----------
BALANCE - DECEMBER 31, 2005 762,199 $10,289,690 19,671,015 $19,671 $(1,851,973)
======= =========== ========== ======= ===========
Additional Total
Paid-In Accumulated Stockholders'
Capital Deficit Equity
----------- ------------ -------------
Balance brought forward $ 2,977,300 $ -- $ 1,941,126
Equity of Chubasco Resources Corp. at time of
recapitalization (3,215) -- 1
Common stock issued under consulting agreements 870,660 -- --
Common stock issued under employment agreements 393,110 -- --
Common stock issued in private placement
commenced in June 2005 1,954,478 -- 1,955,527
Common stock issued upon exercise of warrants 136,950 -- 137,500
Series A preferred stock issued in private
placement commenced in October 2005 -- -- 10,289,690
Common Shares returned upon cancellation of
employment agreements (199,800) -- --
Cancellation of consulting agreement (850,000) -- --
Grant of common stock options 1,082,152 -- 15,000
Beneficial conversion feature - Series A
preferred 10,289,690 (10,289,690) --
Amortization of deferred compensation -- -- 480,179
Net loss -- (2,788,289) (2,788,289)
----------- ------------ -----------
BALANCE - DECEMBER 31, 2005 $16,651,325 $(13,077,979) $12,030,734
=========== ============ ===========
The accompanying notes are an integral part of these financial statements.
F-7
RELATIONSERVE MEDIA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Year Ended
December 31,
--------------------------
2005 2004
------------ -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) income $ (2,788,289) $ 30,280
------------ -----------
Adjustments to reconcile net (loss) income to net cash
used in operating activities:
Depreciation and amortization 900,130 512,506
Stock-based compensation 705,179 --
Provision for bad debt 2,393,203 1,650,242
Loss on equity-method investment 1,034,102 --
Asset impairment charge -- 198,240
Gain on extinguishment of notes payable -- (162,705)
Changes in assets and liabilities:
Accounts receivable (3,394,719) (2,266,179)
Due from former members of LLC 140,312 (102,241)
Prepaid expenses and other current assets (88,138) (133,237)
Other assets (3,724) --
Accounts payable 870,896 718,597
Accrued expenses 201,149 (55,952)
Accrued commissions 125,174 --
Deferred rent (26,330) --
Customer deposits 87,677 --
------------ -----------
TOTAL ADJUSTMENTS 2,944,911 359,271
------------ -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 156,622 389,551
------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Cash paid in purchase of net assets of
Friendsand, LLC (150,000) --
Purchase of property and equipment (201,615) (64,805)
Investment in prospective acquiree (10,309,083) --
Purchase of intangible assets (2,464,850) (816,428)
------------ -----------
NET CASH USED IN INVESTING ACTIVITIES $(13,125,548) $ (881,233)
The accompanying notes are an integral part of these financial statements.
F-8
RELATIONSERVE MEDIA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, Continued
For the Year Ended
December 31,
------------------------
2005 2004
----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from sales of common stock $ 2,455,527 $ --
Net proceeds from sales of preferred stock 10,289,690 --
Cash received in acquisition 995,426 --
Proceeds received upon exercise of warrants 137,500 --
Contributions from former members of Omni Point Marketing LLC -- 1,195,000
Distributions to former members of Omni Point Marketing LLC (207,124) (230,000)
Payments on notes payable -- (532,882)
Principal payments payable to former member of Friendsand, LLC (700,000) --
----------- ----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 12,971,019 432,118
----------- ----------
NET INCREASE (DECREASE) IN CASH 2,093 (59,564)
CASH - Beginning of Year 154,379 213,943
----------- ----------
CASH - End of Year $ 156,472 $ 154,379
=========== ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest $ 810 $ 5,276
=========== ==========
Taxes $ -- $ --
=========== ==========
Non-cash investing and financing activities:
Note payable assumed in connection with acquisition of
net assets from Omni Point Marketing, LLC $ 700,000 $ --
=========== ==========
Common stock issued under deferred compensation arrangements $ 1,263,770 $ --
=========== ==========
Distribution of asset to former member of Friendsand, LLC $ 231,003 $ --
=========== ==========
The accompanying notes are an integral part of these financial statements.
F-9
NOTE 1 - ORGANIZATION AND DESCRIPTION OF BUSINESS
RelationServe Media, Inc. was originally formed as Chubasco Resources Corp.
("Chubasco") in the state of Nevada on April 27, 2004 as an exploration
stage company engaged in the business of mineral exploration. On June 10,
2005, Chubasco's Board of Directors authorized the merger (the "Merger") of
its newly formed wholly-owned subsidiary, Reland Acquisition, Inc.
("Reland"), a Delaware corporation, with RelationServe, Inc., a Delaware
corporation ("RelationServe"), pursuant to an Agreement of Merger and Plan
of Reorganization (the "Merger Agreement") described in Note 2. At the time
of the merger, Chubasco was an inactive public shell company. The Merger
was completed on June 13, 2005. Chubasco changed its name to RelationServe
Media, Inc. (the "Company") on June 15, 2005.
The Company specializes in marketing third party offers for products and
services via email. The Company also offers integrated online and offline
marketing programs, including permission-based email advertising, email
database append services, online surveys, ad serving networks and internet
compiled direct mail lists. Through its wholly-owned subsidiary,
Friendsand, Inc., the Company hosts an internet social networking
community.
NOTE 2 - MERGER TRANSACTIONS
Pursuant to the terms of the Merger Agreement, the Company acquired all of
the issued and outstanding capital stock of RelationServe on a one-for-one
basis in exchange for 13,326,000 shares of its $0.001 par value common
stock. In addition, certain of Chubasco's stockholders simultaneously
cancelled an aggregate of 6,800,000 shares of their common stock upon
completing the Merger. Each share of RelationServe common stock
(13,326,000) and each RelationServe warrant (6,562,500) outstanding prior
to the Merger were automatically converted into an equivalent number of
shares of the Company's common stock and an equivalent number of warrants
to purchase shares of the Company's common stock upon completing the
Merger. As a result, RelationServe's former stockholders became the
Company's majority stockholders and RelationServe became the Company's
wholly-owned subsidiary. Chubasco's stockholders retained 3,216,500 shares
of the Company's common stock. In addition, the Company assumed a $700,000
promissory note due in May 2007 that RelationServe issued as partial
consideration in a previous purchase of net assets described below.
Prior to the Merger, RelationServe, through its wholly-owned subsidiary,
RelationServe Access, Inc. ("Access"), purchased certain assets and assumed
certain liabilities of Omni Point Marketing, LLC, a Florida limited
liability company ("Omni Point"), and through its wholly-owned subsidiary,
Friendsand, Inc. ("Friendsand"), acquired all of the outstanding membership
interests of Friendsand, LLC, a Delaware limited liability company related
to Omni Point by common ownership (the "Affiliated Company" or "Friends
LLC"). RelationServe completed these transactions simultaneously on May 16,
2005. RelationServe acquired the net assets and business of Omni Point and
membership interests of Affiliated Company for a combination of cash in the
amount of $150,000, a two-year promissory note in the principal amount of
$700,000, and 8,000,000 shares of its common stock. RelationServe, which
had no business operations prior to these transactions had 5,326,000 of
common stock outstanding at the time of the merger including 1,050,000 it
issued under a deferred compensation arrangement described in Note 9.
Accordingly, the Company accounted for its acquisition of Omni Point's net
assets and merger with the Affiliated Company as a recapitalization because
Omni Point and the former member of the Affiliated Company gained control
of a majority of RelationServe's common stock upon completing these
transactions. Accordingly, Omni Point and the Affiliated Company are deemed
to be the acquirer for accounting purposes.
The consolidated financial statements have been retroactively restated to
give effect to these transactions for all periods presented.
On October 21, 2004, the Company entered into an Asset Purchase Agreement
that was subsequently terminated due to a breach by the Company. In 2004,
in accordance with the terms of the Asset
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Purchase Agreement, and an Amended Mutual Release and Agreement, the
Company accrued a termination fee of $100,000 that was paid in 2005.
NOTE 3 - LIQUIDITY AND FINANCIAL CONDITION
The Company's incurred a $2,788,289 loss for the year ended December 31,
2005, which includes an aggregate of $2,639,411 in non-cash charges
relating to stock based compensation of $705,179, depreciation and
amortization of $900,130 and its proportionate share of losses in an
investee accounted for under the equity method of accounting in the amount
of $1,034,102. The Company's cash flow from operations amounted to
$156,622.
In October 31, 2005, the Company raised aggregate proceeds of $10,309,083
in a sale of its Series A Preferred stock which it used to purchase a 23%
interest in SendTec Acquisition Corp. (Note 5). In addition, the Company
raised $2,455,527 in net proceeds from sales of its common stock and used
such funds, among other purposes, to invest an additional $2,464,850 to
improve its e-mail database and acquire a customer.
The Company raised additional net proceeds of approximately $500,000 in a
financing transactions it completed subsequent to December 31, 2005.
The Company is in the process of integrating an acquired business (Notes 5
and 14) with and into its existing operations and believes that its current
capital resources and resources available from its acquired business will
enable it to sustain operations through December 31, 2005. The Company
intends to raise additional capital to fund the expansion of its business
and believes it has access to capital resources, however; the Company has
not secured any commitments for new financing at this time nor can the
Company provide any assurance that it will be successful in its efforts to
raise additional capital if considered necessary, in the future.
NOTE 4 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The consolidated financial statements are prepared in accordance with
generally accepted accounting principles in the United States of America.
The consolidated financial statements include the Company and its
wholly-owned subsidiaries, RelationServe Access, Inc., RelationServe, Inc.
and Friendsand, Inc. All material intercompany balances and transactions
have been eliminated in the consolidated financial statements.
ACCOUNTS RECEIVABLE
The Company has a policy of reserving for uncollectible accounts based on
its best estimate of the amount of probable credit losses in its existing
accounts receivable. The Company periodically reviews its accounts
receivable to determine whether an allowance is necessary based on an
analysis of past due accounts and other factors that may indicate that the
realization of an account may be in doubt. Account balances deemed to be
uncollectible are charged to the allowance after all means of collection
have been exhausted and the potential for recovery is considered remote. At
December 31, 2005, the Company has established, based on a review of its
outstanding balances, an allowance for doubtful accounts in the amount of
$1,014,338.
REVENUE RECOGNITION
The Company follows the guidance of Securities and Exchange Commission
("SEC") Staff Accounting Bulletin ("SAB") 104 with respect to its
recognition for revenue. Accordingly, the Company records revenue at the
time in which persuasive evidence of an arrangement exists, services have
been rendered or product delivery has occurred, the sales price to the
customer is fixed or determinable, and collectability is reasonably
assured. The Company's accounting policies with respect to its specific
revenues streams are as follows:
F-11
EMAIL APPEND SERVICES: The Company's email append solution allows a
marketer to augment their existing customer database with the Company's
permission-based email data. When a match is confirmed, the customer's
email address is added to the client's file. Revenue is recognized at the
time in which the email append service is completed and the updated
customer database is delivered to the customer.
ELECTRONIC CHANGE OF ADDRESS: The Company's electronic change of address
service updates customers their email databases. Revenue is recognized at
the time in which an updated customer database is delivered to the
customer.
LEAD GENERATION: The Company offers lead generation programs to assist a
variety of businesses with customer acquisition. The Company pre-screens
the leads through its online surveys to meet its clients' exact criteria.
Revenue is recognized at the time in which the updated lead database is
delivered to the customer.
DIRECT MAIL AND POSTAL LIST ADVERTISEMENT: The Company compiles an
exclusive Internet responders' postal mailing list. This list is sourced
from online registration and individuals who have responded to the
Company's online campaigns. These consumers are responsive to offers and
purchase products and services through online and offline channels. Revenue
is recognized at the time in which such lists are delivered to a customer.
ONLINE MARKET RESEARCH: The Company has developed a consumer survey that is
used to identify targeted leads based on survey responses. The Company then
sells the response data to the customer on a cost per response basis.
Revenue is recognized at the time in which the respective survey data is
delivered to the customer.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. The cost of repairs and
maintenance is expensed as incurred; major replacements and improvements
are capitalized. When assets are retired or disposed of, the cost and
accumulated depreciation are removed from the accounts, and any resulting
gains or losses are included in income in the year of disposition.
Depreciation and amortization are being computed over the estimated useful
lives of the assets, generally three to seven years, using the
straight-line method. Repairs and maintenance costs are expensed as
incurred.
INTANGIBLE ASSETS
Intangible assets consist of costs incurred in connection with establishing
business and consumer information databases that the Company sells to third
parties for use in various types of marketing campaigns. These costs, which
principally consist of direct external costs, are capitalized and amortized
using the straight-line method over expected useful lives of three years.
Website development costs that the Company has incurred in connection with
developing the Friendsand internet social networking and other specific
purpose websites include direct external costs, which are capitalized and
amortized using the straight-line method over expected useful lives of
three to five years. In addition, the Company purchased a customer list
that it characterized as an intangible asset (Notes 7 and 9) that is being
amortized using the straight-line method over expected useful life of three
years.
IMPAIRMENT OF LONG-LIVED ASSETS
In accordance with Statement of Financial Accounting Standards (SFAS) No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets," The
Company periodically reviews its long-lived assets for impairment whenever
events or changes in circumstances indicate that the carrying amount of the
assets may not be fully recoverable. The Company recognizes an impairment
loss when the sum of expected undiscounted future cash flows is less than
the carrying amount of the asset. The amount of impairment is measured as
the difference between the asset's estimated fair value and its book value.
The Company did not consider it necessary to record any impairment charges
during the year ended December 31, 2005.
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EARNINGS PER SHARE
In accordance with SFAS No. 128 "Earnings Per Share," Basic earnings per
share is computed by dividing net income by the weighted average number of
shares of common stock outstanding during the period. Diluted earnings per
share is computed by dividing net income by the weighted average number of
shares of common stock, common stock equivalents and potentially dilutive
securities outstanding during each period. Diluted loss per common share is
not presented because it is anti-dilutive. The Company's common stock
equivalents at December 31, 2005 include the following:
Options 3,288,000
Warrants 6,786,757
Convertible Preferred Stock 7,621,991
----------
17,696,748
----------
As described in Note 14, the Company issued, upon its completion of an
acquisition subsequent to December 31, 2005, 10,081,607 common stock
purchase warrants to debenture investors who financed the acquisition,
9,506,380 shares of common stock to members of the acquired company's
management, and converted (pursuant to a mandatory conversion feature) its
Series A Preferred into 7,621,991 shares of its common stock. In addition,
the debentures that were used used to finance the acquisition are
convertible into 23,300,000 shares of the Company's common stock at $1.50
per share. Certain of the debenture investors subsequently elected to
exercise 2,664,398 of their common stock purchase warrants. Subsequent to
December 31, 2005, the Company also issued 500,000 shares of its common
stock to debenture holders in connection with an amendment and waiver of
certain provisions in the debenture agreement, 520,000 shares in private
placement transactions, granted options to purchase 1,700,000 shares of
stock and issued, upon the exercise of other warrants, an additional
250,000 shares of stock (Note 14).
In accordance with the provisions of Issue No. 5 of EITF 03-6
"Participating Securities and the Two-Class Method under FASB Statement No.
128," the Company has not included the Series A Preferred in its
determination of basic EPS for the year ended December 31, 2005 because the
holders of these securities are not contractually obligated to fund the
Company's losses nor do these securities include any provisions for the
reduction of their contractual principal amount as a result of any losses
incurred by the Company.
INCOME TAXES
Income taxes are accounted for under the asset and liability method of SFAS
No. 109, "Accounting for Income Taxes ("SFAS 109"). Under SFAS 109 deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax bases.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. Under SFAS 109, the
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
Omni Point and Friendsand, LLC as the predecessors to the Company, were
organized as limited liability companies for federal income tax purposes.
Accordingly, any amounts earned during the period of January 1, 2005
through May 15, 2005 and for the year ended December 31, 2004 are being
reported by the members of these entities on their individual tax returns.
Accordingly, the Company has not recognized any income tax expense in the
accompanying financial statements for the period of January 1, 2005 through
May 15, 2005 and for the year ended December 31, 2004. Due to net losses
for the periods presented, there is no income tax expense recognized using
an effective tax rate of 38% under the method prescribed by SFAS 109 for
the years ended December 31, 2005 and 2004, respectively.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles in the United States ("US GAAP") requires
management to make estimates and assumptions that
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affect certain reported amounts and disclosures. Accordingly, actual
results could differ from those estimates. Significant estimates in 2005
and 2004 include the allowance for doubtful accounts, stock-based
compensation, and the useful lives of property and equipment and intangible
assets.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts reported in the balance sheet for cash, accounts
receivable, prepaid expenses, other assets, accounts payable, accrued
expenses, and customer deposits approximate fair value based on the
short-term maturity of these instruments.
COMMON STOCK PURCHASE WARRANTS
The Company accounts for common stock purchase warrants in accordance with
the provisions of Emerging Issues Tack Force Issue ("EITF") issue No. 00-19
"Accounting for Derivative Financial Instruments Indexed to, and
Potentially Settled in, a Company's Own Stock" ("EITF 00-19"). Based on the
provisions of EITF 00-19, the Company classifies as equity any contracts
that (i) require physical settlement or net-share settlement, or (ii) gives
the company a choice of net-cash settlement or settlement in its own shares
(physical settlement or net-share settlement). The Company classifies as
assets or liabilities any contracts that (i) require net-cash settlement
(including a requirement to net cash settle the contract if an event occurs
and if that event is outside the control of the company), or (ii) give the
counterparty a choice of net-cash settlement or settlement in shares
(physical settlement or net-share settlement).
REGISTRATION RIGHTS AGREEMENTS
The Company has adopted View C of EITF 05-4 "Effect of a Liquidated Damages
Clause on a Freestanding Financial Instrument Subject to EITF 00-19" ("EITF
05-4"). Accordingly, the Company classifies as liability instruments, the
fair value of registration rights agreements when such agreements (i)
require it to file, and cause to be declared effective under the Securities
Act, a registration statement with the SEC within contractually fixed time
periods, and (ii) provide for the payment of liquidating damages in the
event of its failure to comply with such agreements. Under View C of EITF
05-4, (i) registration rights with these characteristics are accounted for
as derivative financial instruments at fair value and (ii) contracts that
are (a) indexed to and potentially settled in an issuer's own stock and (b)
permit gross physical or net share settlement with no net cash settlement
alternative are classified as equity instruments. At December 31, 2005, the
Company recorded a registration rights penalty expense of $75,000, which
has been included on the accompanying consolidated balance sheet.
STOCK-BASED COMPENSATION
The Company accounts for stock options issued to employees in accordance
with the provisions of Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations. As
such, compensation cost is measured on the date of grant as the excess of
the current market price of the underlying stock over the exercise price.
Such compensation amounts are amortized over the shorter of the respective
vesting or service periods of the option grant. The Company adopted the
disclosure provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation" and SFAS 148, "Accounting for Stock-Based Compensation -
Transition and Disclosure", which permits entities to provide pro forma net
income (loss) and pro forma earnings (loss) per share disclosures for
employee stock option grants as if the fair-valued based method defined in
SFAS No. 123 had been applied.
The exercise prices of all options granted by the Company equal the market
price at the dates of grant. Accordingly, no compensation expense has been
recognized. Had compensation cost for the stock option plan been determined
based on the fair value of the options at the grant dates consistent with
the method of SFAS 123, "Accounting for Stock Based Compensation", the
Company's net loss and loss per share for the years ended December 31, 2005
and 2004 would have been changed to the following pro-forma amounts:
F-14
2005 2004
----------- -------
Net (loss) income, as reported $(2,788,289) 30,280
Less: stock-based employee compensation expense
determined under fair value based method, net of related
tax effect (239,586) --
----------- -------
Pro forma net (loss) income $(3,027,875) $30,280
=========== =======
Basic and diluted net (loss) income per common share:
As reported $ (0.19) $ (0.00)
=========== =======
Pro forma $ (0.20) $ (0.00)
=========== =======
The option grants were estimated as of the date of grant using the
Black-Scholes option-pricing model with the following assumptions: expected
volatility of 50%-83%; risk free interest rate of 3.53%; expected life of
four to five years and annual dividend rate of 0%. The above pro forma
disclosures may not be representative of the effects on reported net
earnings for future years as options vest over several years and the
Company may continue to grant options to employees.
NON-EMPLOYEE STOCK BASED COMPENSATION
The cost of stock based compensation awards issued to non-employees for
services are recorded at either the fair value of the services rendered or
the instruments issued in exchange for such services, whichever is more
readily determinable, using the measurement date guidelines enumerated in
Emerging Issues Task Force Issue ("EITF") 96-18, "Accounting for Equity
Instruments That Are Issued to Other Than Employees for Acquiring, or in
Conjunction with Selling, Goods or Services" ("EITF 96-18").
ADVERTISING COSTS
Advertising costs are expensed as incurred. The Company's advertising
expense amounted to $653,484 and $493,713 for the years ended December 31,
2005 and 2004, respectively.
CONCENTRATION OF CREDIT RISK
CASH
The Company maintains cash accounts in financial institutions insured
by the Federal Deposit Insurance Corporation ("FDIC"). Management
monitors the soundness of these institutions and considers the
Company's risk to be minimal.
ACCOUNTS RECEIVABLE
The Company has three customers whose accounts receivable balances
amount to an aggregate of approximately $1,370,000 or 58% of the
outstanding balances at December 31, 2005.
RECLASSIFICATIONS
Certain amounts in the 2004 financial statements have been reclassified to
conform to the 2005 consolidated financial statement presentation. These
reclassifications had no impact on previously reported net results of
operations.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 2004, the FASB issued FASB Statement No. 123R, "Share-Based
Payment, an Amendment of FASB Statement No. 123" ("FAS No. 123R"). FAS No.
123R requires companies to recognize in the statement of operations the
grant-date fair value of stock options and other equity-based compensation
issued to employees. FAS No. 123R is effective for the first fiscal year
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beginning after December 15, 2005. The Company is in process of evaluating
the impact of this pronouncement on its financial statements.
In April 2005, the Securities and Exchange Commission's Office of the Chief
Accountant and its Division of Corporation Finance has released Staff
Accounting Bulletin (SAB) No.107 to provide guidance regarding the
application of FASB Statement No. 123 (revised 2004), Share-Based Payment.
Statement No. 123(R) covers a wide range of share-based compensation
arrangements including share options, restricted share plans,
performance-based awards, share appreciation rights, and employee share
purchase plans. SAB 107 provides interpretative guidance related to the
interaction between Statement No. 123R and certain SEC rules and
regulations, as well as the staff's views regarding the valuation of
share-based payment arrangements for public companies.
In May 2005, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 154, "Accounting Changes
and Error Corrections-a replacement of APB Opinion No. 20 and FASB
Statement No. 3" ("SFAS 154"). This Statement replaces APB Opinion No. 20,
Accounting Changes, and FASB Statement No. 3, Reporting Accounting Changes
in Interim Financial Statements, and changes the requirements for the
accounting for and reporting of a change in accounting principle. This
Statement applies to all voluntary changes in accounting principle. It also
applies to changes required by an accounting pronouncement in the unusual
instance that the pronouncement does not include specific transition
provisions. When a pronouncement includes specific transition provisions,
those provisions should be followed.
APB Opinion No. 20 previously required that most voluntary changes in
accounting principle be recognized by including in net income of the period
of the change the cumulative effect of changing to the new accounting
principle. This Statement requires retrospective application to prior
periods' financial statements of changes in accounting principle, unless it
is impracticable to determine either the period-specific effects or the
cumulative effect of the change. When it is impracticable to determine the
period-specific effects of an accounting change on one or more individual
prior periods presented, this Statement requires that the new accounting
principle be applied to the balances of assets and liabilities as of the
beginning of the earliest period for which retrospective application is
practicable and that a corresponding adjustment be made to the opening
balance of retained earnings (or other appropriate components of equity or
net assets in the statement of financial position) for that period rather
than being reported in an income statement. When it is impracticable to
determine the cumulative effect of applying a change in accounting
principle to all prior periods, this Statement requires that the new
accounting principle be applied as if it were adopted prospectively from
the earliest date practicable. This Statement shall be effective for
accounting changes and corrections of errors made in fiscal years beginning
after December 15, 2005. The Company does not believe that the adoption of
SFAS 154 will have a significant effect on its financial statements.
On June 29, 2005, the EITF ratified Issue No. 05-2, "The Meaning of
'Conventional Convertible Debt Instrument' in EITF Issue No. 00-19,
'Accounting for Derivative Financial Instruments Indexed to, and
Potentially Settled in, a Company's Own Stock.'" EITF Issue 05-2 provides
guidance on determining whether a convertible debt instrument is
"conventional" for the purpose of determining when an issuer is required to
bifurcate a conversion option that is embedded in convertible debt in
accordance with SFAS 133. Issue No. 05-2 is effective for new instruments
entered into and instruments modified in reporting periods beginning after
June 29, 2005. The adoption of this pronouncement did not have a material
effect on the Company's financial statements.
In September 2005, Issue No. 05-4, "The Effect of a Liquidated Damages
Clause on a Freestanding Financial Instrument Subject to EITF Issue No.
00-19, 'Accounting for Derivative Financial Instruments Indexed to, and
Potentially Settled in, a Company's Own Stock.'" EITF 05-4 provides
guidance to issuers as to how to account for registration rights agreements
that require an issuer to use its "best efforts" to file a registration
statement for the resale of equity instruments and have it
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declared effective by the end of a specified grace period and, if
applicable, maintain the effectiveness of the registration statement for a
period of time or pay a liquidated damage penalty to the investor. The
Company has adopted view C of this pronouncement. Accordingly, the Company
has bifurcated registration rights from their related free standing
financial instruments and recorded them at fair value. The fair value of
the common stock purchase warrants subject to registration rights are
accounted for in accordance classified as equity.
In September 2005, the FASB ratified the Emerging Issues Task Force's
("EITF") Issue No. 05-7, "Accounting for Modifications to Conversion
Options Embedded in Debt Instruments and Related Issues," which addresses
whether a modification to a conversion option that changes its fair value
affects the recognition of interest expense for the associated debt
instrument after the modification and whether a borrower should recognize a
beneficial conversion feature, not a debt extinguishment if a debt
modification increases the intrinsic value of the debt (for example, the
modification reduces the conversion price of the debt). This issue is
effective for future modifications of debt instruments beginning in the
first interim or annual reporting period beginning after December 15, 2005.
The Company is currently in the process of evaluating the effect that the
adoption of this pronouncement may have on its financial statements.
In September 2005, the FASB also ratified the EITF's Issue No. 05-8,
"Income Tax Consequences of Issuing Convertible Debt with a Beneficial
Conversion Feature," which discusses whether the issuance of convertible
debt with a beneficial conversion feature results in a basis difference
arising from the intrinsic value of the beneficial conversion feature on
the commitment date (which is recorded in the shareholder's equity for book
purposes, but as a liability for income tax purposes), and, if so, whether
that basis difference is a temporary difference under FASB Statement No.
109, "Accounting for Income Taxes." This Issue should be applied by
retrospective application pursuant to Statement 154 to all instruments with
a beneficial conversion feature accounted for under Issue 00-27 included in
financial statements for reporting periods beginning after December 15,
2005. The Company is currently in the process of evaluating the effect that
the adoption of this pronouncement may have on its financial statements.
Other accounting standards that have been issued or proposed by the FASB or
other standards-setting bodies that do not require adoption until a future
date are not expected to have a material impact on the consolidated
financial statements upon adoption.
NOTE 5 - INVESTMENT IN SENDTEC ACQUISITION CORP.
On August 9, 2005, the Company entered into an asset purchase agreement
(the "Asset Purchase Agreement"), as amended on August 23, 2005, with
theglobe.com, Inc. and its wholly-owned subsidiary, SendTec, Inc.
("SendTec"). The Asset Purchase Agreement provided for the Company to
purchase, through SendTec Acquisition Corp. ("STAC"), the business and
assets of SendTec (the "Asset Purchase").
Investment in STAC includes a $10,000,000 investment that the Company made
in STAC, plus $309,083 of transaction expenses that the Company incurred in
connection with completing its planned acquisition of Send Tec, less the
Company's proportionate share of its losses in STAC for the period October
31, 2005 through December 31, 2005. The Company formed STAC solely to
purchase the business and assets of SendTec.
The Asset Purchase Agreement, as originally contemplated by the parties,
provided for the closing of this transaction to occur through STAC, as a
wholly-owned or majority-owned subsidiary of the Company, on or prior to
October 31, 2005.
As a result of the financing arrangement described herein, the Asset
Purchase was restructured to include certain additional conditions for the
Company to satisfy prior to completing its acquisition of SendTec. In
connection therewith, the Company, on October 31, 2005 assigned its rights
under the
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Agreement to STAC with the consent of the sellers in the transaction and
entered into certain other agreements providing for the financing of the
transaction. As a result of such financing arrangements, STAC temporarily
ceased to be a wholly-owned subsidiary of the Company upon closing the
Asset Purchase and upon STAC's concurrent issuance, in a private placement,
of preferred stock representing 64% of the aggregate voting interests in
STAC. STAC completed the Asset Purchase on October 31, 2005. The aggregate
purchase consideration (paid by STAC to the sellers) amounted to
approximately $40,430,000 including cash of approximately $39,850,000 plus
transaction expenses of approximately $580,000 incurred in connection with
closing this transaction.
STAC financed its purchase of SendTec by issuing (a) 10,000,000 shares of
its par value $0.001 common stock ("STAC Common Stock") to the Company for
$10,000,000 in cash and (b) pursuant to a Securities Purchase Agreement
(the "STAC Debenture Agreement"), $34,950,000 of its 6% Senior Secured
Convertible Debentures due October 30, 2009 (the "STAC Debentures") to
institutional investors (the "Investors"). In addition, certain Investors
of the STAC Debentures also purchased 280,351 shares of STAC's Series A
Redeemable Preferred Stock (the "STAC Preferred Stock") at a price of $1.00
per share for net proceeds of approximately $280,000 and STAC Management
purchased 531,700 shares of STAC common stock for $531,700. STAC also
issued, for no consideration, an additional 4,774,323 shares of its common
stock to STAC management concurrent with its purchase of Send Tec on
October 31, 2005. Each share of STAC Preferred Stock possesses 100 votes
per share, representing approximately 64% of the total voting interests of
STAC. The Company retained approximately 23% of the total voting interests
in STAC. The remaining voting interests in STAC include 5,306,023 shares of
STAC common stock held by STAC management, including an aggregate of
531,700 shares purchased by individual STAC managers for cash and an
aggregate of 4,774,323 shares granted by STAC to the individual managers as
compensation.
The Asset Purchase, STAC Debenture Agreement, STAC Preferred Stock,
RelationServe Preferred and certain other contemporaneous agreements
entered into with the management of STAC provide for the mandatory
consolidation of STAC, as defined in the Securities Purchase Agreement (the
"Consolidation") with the Company upon the attainment of certain
contractual milestones (the "Consolidation Milestones").
Such Consolidation Milestones, as defined in the Securities Purchase and
related agreements, principally included the delivery, by the Company to
the Investors and their agent in the transaction, of its audited financial
statements for the nine months ended September 30, 2005 (the "Audited
Financial Statements"), (b) satisfactory evidence that it had achieved
certain minimum levels of revenue, earnings and cash flow as specified
aforementioned agreements (the "Financial Covenants") (c) a letter from its
legal counsel providing negative assurance that reports the Company has
filed with SEC since June 10, 2005 through the date of the letter contain
no material misstatements or omissions of fact and (d) satisfactory
evidence that certain former members of Omni Point and Affiliate Company
relinquished their equity or other interest in the Company (as of the time
of the Consolidation) and have given the Company a general release of all
claims and entered into non-competition and non-solicitation agreements
reasonably satisfactory to the purchasers of the STAC Debentures.
The Company, STAC and the purchasers of the debenture also entered into an
Investor Rights Agreement (the "Investor Rights Agreement") providing,
among other things, for the formation a five member board, including one
member to jointly represent the Company and a debenture investor, and
mandatory effectuation of a liquidity event, as defined, in the event that
the Consolidation Milestones and related Consolidation were not completed.
The Company accounted for its investment in STAC in accordance with the
provision of APB 18, "The Equity Method of Accounting for Investments in
Common Stock," which provides for
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companies to record, in results of operations, their proportionate share of
earnings or losses of investees when they are deemed to influence but not
control the affairs of the investee enterprise. Accordingly, the Company
recorded a $1,034,102 charge for its proportionate share of STAC's losses
for the period of October 31, 2005 through December 31, 2005.
As described in Note 14, the Company delivered satisfactory evidence of its
completion of the Consolidation Milestones on or about February 3, 2006 and
completed its consolidation with STAC on February 3, 2006.
The Company accounts for its investment under the equity method if the
investment gives the Company the ability to exercise significant influence,
but not control, over the investee. Significant influence is generally
deemed to exist if the Company has an ownership interest in the voting
stock of the investee of between 20% and 50%, although other factors, such
as representation on the investee's Board of Directors and the impact of
commercial arrangements, are considered in determining whether the equity
method of accounting is appropriate. The Company has the ability to
exercise significant influence, but not control these investees.
Accordingly, under the equity method of accounting, the Company's share of
the investee's earnings or loss is included in the consolidated statements
of operations. The Company records its investments in equity-method
investees on the consolidated balance sheet as "Investment in prospective
acquiree" and its share of the investee's earnings or losses in "Loss on
equity-method investment." In the statement of operations for the year
ended December 31, 2005, the Company recorded a loss on equity-method
investment of $1,034,102.
NOTE 6 - PROPERTY AND EQUIPMENT
At December 31, 2005, property and equipment consist of the following:
Computer equipment $ 600,185
Office equipment 167,267
Furniture and fixtures 225,040
Leasehold improvements 127,011
Software 75,930
1,195,433
Less: accumulated depreciation (413,047)
----------
$ 782,386
==========
Depreciation expense amounted to $198,235 and $187,031 for the years ended
December 31, 2005 and 2004, respectively. In addition, the Company recorded
an asset impairment charge of approximately $135,000 for the year ended
December 31, 2004.
NOTE 7 - INTANGIBLE ASSETS
At December 31, 2005, intangible assets consist of the following:
Email database $ 3,478,162
Customer list 320,000
Web properties 155,274
3,633,436
Less: accumulated amortization (1,072,138)
-----------
$ 2,561,298
===========
F-19
Amortization expense amounted to $701,895 and $325,475 for the years ended
December 31, 2005 and 2004, respectively, including $619,650 and $325,475
relating to the amortization of the email database that is included in cost
of sales.
The Company recorded asset impairment charge of $63,371 for the year ended
December 31, 2004 for email addresses that were removed from the email
database.
Amortization expense subsequent to the year ended December 31, 2005 is as
follows:
Years ending December 31:
2006 $1,163,856
2007 864,967
2008 519,601
2009 12,874
----------
$2,561,298
==========
NOTE 8 - NOTES PAYABLE - FORMER MEMBER OF FRIENDSAND LLC
In accordance with a Termination and Quit Claim Agreement for an Operating
Agreement previously entered into with a related party, the Company issued
notes payable in the face amounts of $700,000 and $150,000 in August 2003.
The $700,000 note was non-interest bearing with monthly payments of $38,889
through January 2005. The notes were secured by the assets of the Company.
Within the note agreements, the Company had the option to make any payment
through the delivery of valid email addresses to the third party.
On March 26, 2004, the Company entered into a Settlement Agreement and
agreed to pay $500,000 in satisfaction of its remaining obligations of
$662,705 under the Termination and Quit Claim Agreement. Accordingly,
$162,955 of notes forgiven has been treated as gain on the extinguishment
of debt in the financial statements for the year ended December 31, 2004,
and has been included in "Other income (expense)" in the accompanying
financial statements for the year ended December 31, 2004.
As described in Note 2, on May 13, 2005 the Company assumed a $700,000
promissory note to the former member of Friendsand LLC as partial
consideration in the merger of Friendsand LLC and RelationServe. The note,
which bears interest at the rate of 6% per annum, was due with all
principal, plus all accrued interest, on May 13, 2007, subject to
acceleration (i) in the principal amount of $350,000, plus accrued
interest, on such amount to the date on which the Company closes on a
private placement or public offering of its securities with aggregate gross
proceeds of not less than $5,000,000; and (ii) in the principal amount of
$350,000, plus accrued interest on such amount to the date on which the
Company closes on a private placement or public offering of its securities
with aggregate gross proceeds of not less than $10,000,000. As of December
31, 2005, the Company repaid the entire principal balance of $700,000 of
this note.
NOTE 9 - COMMITMENTS AND CONTINGENCIES
EMPLOYMENT AGREEMENTS
Effective June 17, 2005, the Company entered into a three-year employment
agreement with its Chief Executive Officer ending on June 16, 2008, which
automatically renews for successive 24-month terms unless earlier
terminated by the Company or the employee. In addition to an annual salary
of $200,000, the agreement entitled the officer to receive an option to
purchase 100,000 shares of common stock of the Company at fair market
value. The Board of Directors approved the grant of this option on June 21,
2005 at an exercise price of $3.85 per share. The fair value of the
Company's common stock was deemed to be $1.00 per share at the date of
grant based on the selling price of
F-20
shares issued in a recently completed private placement transaction.
Subject to the terms of the 2005 Incentive Stock Plan (Note 11), this
option vests as to 25% six months following the date of grant and 25% on
each of the first, second and third anniversaries of the date of grant. The
option expires on the earlier of June 21, 2015 or upon the executive's
termination of employment. The agreement also provides for an annual bonus
at the discretion of the Board of Directors. On July 13, 2005, the Board of
Directors also approved a grant of 300,000 shares of common stock to the
executive, of which one-third vested at the date of grant, one-third vests
upon the first anniversary of the date of grant and the remaining one-third
vests upon the second anniversary of the date of grant (Note 11).
Effective November 10, 2005, the Company's chief executive officer resigned
as an employee, officer, and director of the Company. Under the terms of a
separation agreement, the Company made a $25,000 cash payment during 2005,
committed to make an additional $25,000 cash payment on or before April 6,
2006 (which is included in accrued expenses in the accompanying balance
sheet), and permitted the executive to retain options to purchase 100,000
shares of its common stock, and 100,000 shares of restricted common stock
granted and issued under the Plan in June 2005. The Company also agreed to
register for resale, the shares of common stock and common stock underlying
the stock option on its next registration statement filed with the SEC.
Effective June 17, 2005, the Company entered into a three-year employment
agreement with its President ending on June 16, 2008, which automatically
renews for successive 24-month terms unless earlier terminated by the
Company or the employee. The Agreement provides for an initial base salary
of $100,000 per year, which shall be increased by at least $25,000, as the
Board of Directors may determine, on each anniversary of the effective
date. In addition, the agreement entitled the officer to receive an option
to purchase 100,000 shares of common stock of the Company at fair market
value. The Board of Directors approved the grant of this option at an
exercise price of $3.85 per share. The fair value of the Company's common
stock was deemed to be $1.00 per share on the date of grant based on the
price of shares issued in a recently competed private placement
transaction. Subject to the terms of the 2005 Incentive Stock Plan (see
Note 11), this option vests 25% six months following the date of grant and
25% on each of the first, second and third anniversaries of the date of
grant. This option expires on the earlier of June 21, 2015 or upon the
termination of the executive. The agreement also provides for the payment
of an annual bonus at the discretion of the Board of Directors.
As described in Note 14, the President resigned from her position and
entered into a termination agreement with the Company effective February 3,
2006.
Effective June 27, 2005, the Company entered into a three-year employment
agreement with its Chief Operating Officer expiring on June 27, 2008, which
automatically renews for successive 24-month terms unless earlier
terminated by the Company or the employee. The agreement provides for the
payment of an annual salary in the amount of $180,000, plus options to
purchase 100,000 shares of the Company's common stock at fair market value
on the date of grant. This option vests as to 25% six months following the
date of grant and 25% on each of the first, second and third anniversaries
of the date of grant and expire on June 21, 2015, or earlier due to
employment termination. The Board of Directors approved the grant of this
option at an exercise price of $3.85 per share. The fair value of the
Company's common stock was deemed to be $1.00 per share on the date of
grant based on the price of shares issued in a recently completed private
placement transaction. The agreement also provides for the payment of an
annual bonus at the discretion of the Board of Directors and a grant of
300,000 shares of common of which one-third of such shares would vest at
the date of grant, one-third would vest upon the first anniversary of the
date of grant and the remaining one-third would vest upon the second
anniversary of the date of grant. The Board of Directors approved such
grant effective July 13, 2005 (Note 11).
F-21
Effective November 16, 2005, the Company's Board of Directors appointed a
new senior vice president of sales and marketing who is also serving as the
Company's interim chief executive officer. Under the terms of the
employment agreement, the executive will serve for an initial term one
year, renewable automatically for successive terms of an additional year
unless cancelled by either the executive or the Company on not less that 60
days notice prior to the expiration of the then effective term. The
agreement provides for the payment of a $30,000 signing bonus paid upon
entering into the agreement and base salary in the amount of $180,000 per
annum. The Board of Directors also approved the grant of a five-year option
to purchase 100,000 shares and 10,000 shares of the Company's common stock.
The stock options vest as to one third of such shares on each of the six
month, first, and second year anniversaries of the date of grant, provided,
however, that all of such options shall be immediately exercisable upon any
change in control as defined in the Plan.
CONSULTING AGREEMENTS
In May 2005, the Company entered into a one year consulting agreement with
Summit Financial Partners, LLC ("Summit") in which Summit agreed to provide
the Company with certain corporate finance and strategic advisory services.
Compensation under this arrangement consists of (a) 1,050,000 fully vested
and non-forfeitable shares of the company's restricted common stock (Note
10), and (b) success fees ranging from 3% to 7% of the gross amount of
certain types of investing and financing transactions in which the
consultant has acted in the capacity of an intermediary or transaction
advisor. In August 2005, the Company paid a $28,500 success fee to Summit
for services rendered in connection with a private placement of its common
stock. The fair value of the Company's common stock was deemed to be $1.00
per share on the date of grant based on the price of shares issued in a
recently completed private placement transaction. The Company cancelled its
consulting agreement with Summit effective October 6, 2005. Summit retained
200,000 shares of the Company's common stock in connection with the
termination of this agreement.
F-22
On June 13, 2005, the Company entered into a twenty-one-month consulting
agreement with Stronghurst LLC ("Stronghurst"), in which Stronghurst agreed
to provide the Company with certain types of corporate finance services in
exchange for 750,000 shares of Common Stock (Note 9).
The Company issued 375,000 of these shares to Stronghurst upon entering
into the agreement. The remaining shares were placed in as escrow account
from which the Company would release 187,500 shares in March 2006 and
187,500 shares in September 2006. All shares issued under this arrangement
were subject to rescission by the Company in the event that the Company did
not complete its acquisition of SendTec. In January 2006, the Company
completed its acquisition of SendTec.
On August 17, 2005, the Company entered into an investment banking
agreement (the "Investment Banking Agreement") with Janney Montgomery Scott
LLC ("Janney") in which Janney agreed to provide the Company with financial
advisory and investment 'banking services in connection with its investment
in and proposed acquisition of SendTec (Notes 2 and 13). In exchange, the
Company agreed to pay Janney a cash fee equal to 5% of the gross proceeds
received upon the completion of a private placement transaction, subject to
a reduction of 1% based on the participation of certain prospective
investors previously identified by the Company, plus up to $25,000 in
expense reimbursements whether or not a private placement transaction is
consummated. The Company made a $25,000 retainer payment to Janney upon
executing the Investment Banking Agreement, which is included in deferred
financing costs in the accompanying balance sheet.
The Company terminated its agreement with Janney upon the completion of its
private placement of preferred stock (Note 10).
On November 30, 2005, the Company purchased a customer list from, and
entered into a one-year consulting agreement with Elite Card Services, Inc.
("Elite"). The purchase price for the customer list amounted to $320,000 of
which the Company paid $220,000 upon signing and accrued an additional
$100,000 payable in two installment of $50,000 thirty and sixty days
following the execution agreement. The Company has agreed to pay
compensation to the consultant for service to be rendered during the
one-year term of the agreement of $300,000 in cash payable in equal
semi-monthly or bi-weekly installments during the term agreement plus
90,000 shares of common stock and 600,000 five-year options exercisable at
$3.85 per share. This option becomes exercisable as to one-third of such
shares on each of the six month, first, and second year anniversaries of
the date of grant.
The Company recorded aggregate stock based compensation of $99,054 based on
the fair value of the common stock and common stock purchase options it
issued under the arrangement. This amount is included as a component of
other general and administrative expenses in the accompanying statement of
operations for the year ended December 31, 2005.
OPERATING LEASE
The Company leases office space under an operating lease, originally
entered into by Omni Point, which expires in September 2009. Rent expense
under this arrangement is recorded using the straight-line method over the
term of the lease. The difference between rent expense recognized on the
straight-line method and actual rental payments is presented as a deferred
rent liability in the accompanying consolidated balance sheet.
F-23
Future minimum lease payments subsequent to December 31, 2005 are as
follows:
Years ending December 31:
2006 $ 261,000
2007 268,000
2008 276,000
2009 212,000
----------
$1,017,000
==========
Rent expense amounted to $396,157 and $239,129 for the years ended December
31, 2005 and 2004, respectively.
LEGAL CONTINGENCIES
Through December 31, 2005, the Company and/or Omni Point have been named as
defendants in two separate claims made by customers arising in the ordinary
course of its business and one employment related claim. The Company
believes it has substantial defenses and intends to vigorously defend
itself against any all actions taken by the plaintiffs in these matters.
The Company does not believe that any potential damages that could arise
from these claims will have a material adverse effect on its financial
condition or the results of its operations. Omnipoint has been named as a
defendant in a certain employment related claim which to date has not been
asserted against the Company. Although the Company is not a defendant in
this matter at this time, there can be no assurance that the plaintiffs
will not attempt to assert this claim against the Company in the future or
that such claim, if asserted, will not result in a material loss to the
Company. The range of loss with respect to this matter, if any, cannot be
quantified.
Subsequent to December 31, 2005, the Company received notices of complaint
from plaintiffs in three additional matters arising in the course of
business, which are more fully described in Note 14.
On December 15, 2004, the Federal Bureau of Investigation served Omni Point
with a search warrant regarding the alleged use of unlicensed software and
seized certain e-mail servers with a net book value of approximately
$135,000. Management believes the investigation resulted from a former
independent contractor of the Company using the alleged unlicensed software
on the Company's behalf and without the Company's knowledge. Management and
legal counsel are currently unaware of any additional developments in the
investigation. The Unites States Attorney's Office had indicated that it
would be in contact with Company's legal counsel as the investigation
continues. The Company has not received any further communications with
respect to this matter; however, there can be no assurance that this
matter, if further investigated, will not have a material adverse effect on
the Company.
NOTE 10 - STOCKHOLDERS' EQUITY
COMMON STOCK
As described in Note 9, the Company entered into a consulting agreement
with Summit providing for 1,050,000 shares of stock based compensation
including 200,000 shares issued directly to Summit by the Company and
850,000 shares transferred to Summit by certain stockholders of the
Company. The Company cancelled its consulting agreement with Summit
effective October 6, 2005. Summit retained 200,000 shares of the Company's
common stock in connection with the termination of this agreement.
Accordingly, the Company recorded $200,000 of consulting expense under this
arrangement for the year ended December 31, 2005. The Company recorded
stock based compensation under these arrangements using the measurement
date guidelines prescribed in EITF
F-24
96-18. All shares issued under this arrangement were fully vested and
non-forfeitable at their date of issuance.
As described in Note 9, the Company entered into a consulting agreement
with Stronghurst providing for 750,000 shares of stock based compensation,
subject to rescission by the Company in the event that the Company does not
complete the SendTec transaction. Accordingly, the Company recorded
$750,000 of deferred compensation at the inception of the agreement.
The Company recorded compensation expense under these arrangements using a
fair value for its common stock of $1.00, which is equal to the selling
price of the Company's common stock in a recently completed private
placement transaction.
In June 2005, the Company under a private placement memorandum of April
2005 (the "April Offering") issued $500,000 in units, each unit consisting
of 50,000 shares of common stock with ten-year warrants to purchase 25,000
shares of the Company's common stock exercisable at $2.00 per share.
On June 22, 2005, the Company commenced a private placement (the "June
Offering") of up to $4,000,000 in units for a purchase price of $100,000
per unit, each unit consisting of 50,000 shares of the Company's common
stock, par value $0.001 per share and a three-year warrant to purchase
25,000 shares of Common Stock at $3.50 per share. On June 30, 2005, the
Company sold 20.97 units under the June offering to accredited investors
for net proceeds of $1,955,527 and issued an aggregate of 1,000,000 shares
of common stock, plus warrants to purchase 500,000 shares of the Company's
common stock at $3.50 per share. The Company also issued 48,515 shares of
its common stock and 24,257 common stock purchase warrants to its legal
counsel for services rendered in connection with completing this
transaction.
The units in the June Offering were concurrently issued with a registration
rights agreement requiring the Company to register, within 45 days of the
closing of the final sale under the June Offering, a registration with the
SEC and to use its best efforts to cause such registration statement to be
declared effective upon the earlier of (i) 120 days from the filing date,
(ii) 10 days within following the receipt of a "No Review Letter" from the
SEC or (iii) the first business day following the day the SEC determined
such registration statement to eligible to become effective. The agreement
further provides that in the event that the Company is not successful in
its efforts to cause such registration statement to be declared effective
within certain contractually defined periods of time, the Company would be
obligated to pay liquidated damages of 1% of the purchase price per month,
payable in stock, up to a maximum of 12%.
In accordance with view C of EITF 05-04, the Company classified the common
stock purchase warrants it issued in the June Offering as equity
instruments. In addition, the liquidated damages, as a separate derivative
financial instrument, were not characterized as liabilities since such
damages, if any would be settled in shares of the Company's common stock.
The Company was in default of its obligation register for resale, the
shares it issued in the June offering within the contractual time period.
On October 31, 2005 the Board of Directors of the Company ratified waivers
obtained from a majority of the purchasers in the June 30, 2005 offering
and entered into new Consent and Waiver Agreements containing amended
registration obligations of the Company. The Company contemplates that the
securities sold in the June 30, 2005 private placement will be registered
for resale contemporaneously with the registration of the securities issued
in connection with the financing of the Asset Purchase.
On June 27, 2005, the Company issued 550,000 shares of common stock in
connection with the exercise of a warrant to purchase 550,000 shares of
common stock for net proceeds of $137,500.
F-25
As described in Note 9, the Company granted 300,000 shares of common stock
to its Chief Executive Officer on July 13, 2005. The Company valued these
shares at $1.00 per share based upon the selling price of shares it issued
in a recently completed private placement transaction. This award was
amended upon the Chief Executive Officer's resignation on November 10,
2005. In connection with such resignation, the Chief Executive Officer
returned and the Company cancelled 200,000 shares of common stock
previously issued under this arrangement. Accordingly, for the year ended
December 31, 2005, the Company recorded salary expense of $100,000.
As described in Note 9, the Company granted 80,000 shares of common stock
to its Chief Operating Officer on July 13, 2005. The Company valued these
shares at $1.00 per share based upon the selling price of shares it issued
in a recently completed private placement transaction. In December 2005,
the Chief Operating Officer resigned. Accordingly, for the year ended
December 31, 2005, the Company recorded salary expense of $80,000.
As described in Note 9, the Company granted 10,000 shares of common stock
to its senior vice president of sales and marketing who temporarily served
as the Company's interim chief executive officer on November 16, 2005. The
Company valued these shares at $1.35 per share based upon the selling price
of shares it issued in a recently completed private placement transaction.
Accordingly, the Company recorded deferred compensation of $13,500, which
is being amortized over the 12-month term of the employment agreement. For
the year ended December 31, 2005, amortization of this deferred
compensation amounted to $1,125 and is included in salaries.
As described in Note 9, the Company entered into a consulting agreement
with Elite providing for 90,000 shares of stock based compensation. The
Company recorded stock based compensation under these arrangements using
the measurement date guidelines prescribed in EITF 96-18. Accordingly, the
Company recorded deferred compensation of $121,500, which is being
amortized over the 12-month term of the consulting agreement. All shares
issued under this arrangement were fully vested and non-forfeitable at
their date of issuance. For the year ended December 31, 2005, amortization
of this deferred compensation amounted to $10,125 and is included in other
general and administrative expense.
In December 2005, the Company issued 50,000 shares of common stock in
connection with the exercise of a warrant to purchase 50,000 shares of
Common Stock for net proceeds of $12,500.
NON-EMPLOYEE OPTION GRANT
As described in Note 9, the Company granted five-year options to purchase a
total of 600,000 shares of its common stock, exercisable at $3.85 per
share. This option becomes exercisable as to one-third of such shares on
each of the six month, first, and second year anniversaries of the date of
grant. The Company has accounted for these in accordance with the
provisions of EITF 96-18. Accordingly, the Company recorded at fair value
the calculated value of the options vested at the end of each period until
the options are fully vested. Accordingly, the Company recorded deferred
compensation of $1,067,152, which is being amortized over the 12-month term
of the consulting agreement. For the year ended December 31, 2005,
amortization of this deferred compensation amounted to $88,929 and is
included in other general and administrative expense.
PREFERRED STOCK
On October 28, 2005, the Company filed a Certificate of Designation
authorizing the issuance of up to 1,500,000 shares of its Series A
Convertible Preferred Stock, par value $0.001 per share (the "RelationServe
Preferred").
On October 31, 2005 the Company sold in a private placement 762,199 shares
of its newly created Series A Preferred Stock for proceeds amounting to
$10,289,690. The Series A Preferred is mandatorily convertible into shares
of the Company's common stock at such time that the Company completes its
consolidation with STAC or, in the event that the Company does satisfy the
Consolidation Milestones to complete the Consolidation, at the option of
the holder, each at the then
F-26
effective conversion price. The conversion price is based upon a formula
that currently results in a 10 to 1 conversion ratio or price or $1.35 per
share. The Company used $10,000,000 the proceeds it received from this
transaction to purchase the Common Stock of STAC (Note 5) and the remainder
for general corporate and working capital purposes.
The Series A Preferred also features (1) a liquidation preference entitling
the holders of the Series A Preferred to be paid an amount equal to their
original purchase price of $13.50 per share (subject to adjustment for
stock splits, stock dividends, recapitalizations and similar events) upon a
liquidation event as defined, and (2) a right to participate in dividends,
on a pro rata basis with the common stockholders, based upon the number of
common shares into which the Series A are convertible, if and when declared
by the Board of Directors.
The holders of the Series A Preferred are also entitled to vote separately
and as a class, on all matters affecting the rights, value or ranking of
the Series A Preferred and on all matters in which the common stockholders
are entitled to vote in the same manner and with the same effect as the
common stockholders, based on the number of common shares into which the
then outstanding Series A Preferred is convertible.
The Company is also obligated to reserve at all times, such number of
shares of its common stock sufficient for issuance upon the conversion of
its redeemable preferred stock.
The Company accounted for the issuance of its Series A Preferred stock in
accordance with the provisions of EITF 98-5 and EITF 00-27, both titled
"Convertible Securities with Beneficial Conversion Features and
Contingently Adjustable Conversion Ratios." Accordingly the Company
recorded a $10,289,690 deemed dividend for the beneficial conversion
feature associated with the difference between fair value of the Company's
Common's Stock of $3.97 per share and the active conversion price of $1.35
per share in effect at the commitment date of this transaction.
The Company concurrently entered into a Registration Rights Agreement with
each of the purchasers of the RelationServe Preferred. Pursuant to such
Registration Rights Agreement, the Company is required to file within 45
days, and cause to be declared effective within 120 days, a registration
statement with the SEC for the resale of the shares of common stock
underlying this arrangement. If the Company fails to cause such
registration statement to be declared effective within 120 days of its
filing and/or fails to maintain the effectiveness of the registration
statement while the shares of common stock underlying the Series A
Preferred remain outstanding, it will be required to pay liquidated damages
to the holders of the Series A Preferred of 1% per month of the aggregate
purchase for such period of time that it is not in compliance.
As described above, the Company accounts for registration rights that
contain liquidating damage provisions as separate derivative financial
instruments in accordance with view C of EITF 05-4. Accordingly, the
Company recorded a registration rights liability in the amount of $75,000.
The Company determined the amount of liability based on the present value
of the penalty that would accrue during the period of time in which the
transfer of the shares would be restricted under Rule 144, adjusted for its
estimate of the probability of its failure to comply with the registration
rights agreement.
NOTE 11 - STOCK OPTION PLANS
2005 NON-EMPLOYEE DIRECTORS' PLAN
On June 16, 2005, the Company granted an option to purchase 1,000,000
shares of common stock to a non-employee director under its 2005
Non-Employee Directors' Plan (the "Directors Plan"). The option was
exercisable six months after the approval of the Directors' Plan by the
Company's stockholders, expires on June 16, 2010 and is exercisable at
$1.00 per share, which was deemed to be the fair market value of the
Company's common stock at the date of grant based upon the selling
F-27
price of shares it issued in the April offering. Accordingly, no
compensation expense has been recognized.
On August 9, 2005, by written consent, a majority of the Company's
stockholders approved the Company's 2005 Non-Employee Directors Stock
Option Plan (the "Plan"). The Plan was ratified by the same majority of
stockholders in existence at the date the grant was approved. Accordingly,
the measurement date was determined to be the date of grant. The Directors
Plan provides for the grant of up to 2,000,000 non-qualified stock options
to non- employee directors of the Company. The plan also provides for (a)
each newly elected or appointed director (other than the Chairman) to be
granted options to purchase 50,000 shares of common stock, of which 50%
would become exercisable on the date which is one year from the date of
grant and the remaining 50% would be come exercisable on the date which is
two years from the date of grant, and (b) for each such director to be
granted an additional option to purchase 50,000 shares of common stock on
the second anniversary of their initial election or appointment of which
50% would become exercisable on the date which is one year from the date of
grant and the remaining 50% would become exercisable on the date which is
two years from the date of grant. All options granted under the Directors
Plan have a maximum term of ten years subject to accelerated vesting in the
event of a change in control of the Company. On October 31, 2005, the
Chairman of the Board of Directors resigned from his position. Upon such
resignation, the Company accelerated the vesting of 1,000,000 stock options
previously awarded to the Chairman under the Directors' Plan.
2005 INCENTIVE STOCK PLAN
On June 21, 2005, the Company adopted the 2005 Incentive Stock Plan (the
"Plan"), which was subsequently approved by stockholders. The Plan provides
for the grant of options and the issuance of restricted shares. An
aggregate of 3,300,000 shares of common stock is reserved for issuance
under the Plan. Both incentive and nonqualified stock options may be
granted under the Plan. The Plan terminates on June 21, 2015. As of
December 31, 2005, 482,100 shares of common stock and options to purchase
2,719,000 shares of common stock have been granted under the Plan.
The exercise price of options granted pursuant to this plan may not be less
than 100% of the fair market value of the Company's common stock on the
date of grant and the term of options granted under this plan may not
exceed 10 years. For holders of 10% or more of the combined voting power of
all classes of the Company's stock, options may not be granted at less than
110% of the fair value of the Company's common stock on the date of grant
and the term of such options may not exceed 5 years.
On June 21, 2005, the Company granted options to purchase an aggregate of
2,019,000 shares of common stock to employees of the Company. The options
are exercisable at $3.85 per share. The fair market value of the common
stock was deemed to be $1.00 per share at the grant date based upon the
selling price of shares issued in a recently completed private placement
transaction. Accordingly, under APB 25, no compensation expense was
recognized. The options vest as to 25% six months following the date of
grant and 25% on each of the first, second and third anniversaries of the
date of grant and expire. These options expire upon the earlier of June 21,
2015, or the employees' separation of employment with the Company.
As described in Note 9, on November 30, 2005, the Company granted options
to purchase an aggregate of 100,000 shares of common stock to an employee
of the Company. The option is exercisable at $3.85 per share. The fair
market value of the common stock was deemed to be $1.35 per share at the
grant date based upon the selling price of shares issued in a recently
completed private placement transaction. Accordingly, under APB 25, no
compensation expense was recognized. The stock options vest as to one third
of such shares on each of the six month, first, and second year
anniversaries of the date of grant, provided, however, that all of such
options shall be immediately exercisable upon any change in control as
defined in the Plan. These options expire
F-28
upon the earlier of November 16, 2010, or the employees' separation of
employment with the Company. The Company also granted 600,000 options to a
non-employee under a consulting agreement described in Notes 9 and 10 that
were accounted for in accordance with EITF 96-18.
A summary of the status of the Company's outstanding stock options granted
to employees and a director as of December 31, 2005 and for the year then
ended is as follows:
Number Weighted
of Average
Options Exercise Price
--------- --------------
Outstanding at December 31, 2004 -- $0.00
Granted 3,119,000 2.98
Forfeited (431,000) 3.85
Outstanding at December 31, 2005 2,688,000 $2.98
Weighted Average fair value of options granted
during the period $2.98
Weighted
Number Average Weighted Number Weighted
Range of Outstanding at Remaining Average Exercisable at Average
Exercise December 31, Contractual Exercise December 31, Exercise
Price 2005 Life Price 2005 Price
- -------- -------------- ----------- -------- -------------- --------
$1.00 1,000,000 4.46 Years $1.00 1,000,000 $1.00
$3.85 1,688,000 9.60 Years 3.85 222,000 3.85
2,688,000 $2.98 1,222,000 $1.51
========= ===== ========= =====
NOTE 12 - INCOME TAXES
For the period of May 16, 2005 through December 31, 2005, the Company
incurred book losses of approximately $2,800,000 and anticipates having a
tax loss for the period of May 16, 2005 through December 31, 2005 of
approximately $2,500,000. The Company currently estimates that it has
deferred tax assets of approximately $1,800,000, which principally relate
to (i) losses it incurred during the initial period in which it has been
operating as a C Corporation, (ii) its allowance for doubtful accounts, and
(iii) approximately $1,000,000 of book to tax basis differences arises in
connection with its equity investment in STAC . The Company fully reserved
for this amount due to the fact that it is still operating within its
initial period as a C Corporation and substantial uncertainty exists as to
the utilization of any of its deferred tax assets in future periods. In
addition, the utilization of any net operating losses that the Company has
generated to date may be subject to substantial limitations due to the
"change of ownership" provisions under Section 382 of the Internal Revenue
Code and similar state provisions.
NOTE 13 - RELATED PARTY TRANSACTIONS
For the year ended December 31, 2005, the Company recognized revenues from
two companies related to a stockholder of the Company in the aggregate
amount of $590,000. At December 31, 2005, these companies did not owe the
Company and funds. The Company also appointed a new Chairman to its Board
of Directors to whom it made a $100,000 payment for expenses incurred
F-29
during the course of performing services for the Company. Effective
November 1, 2005, the Company agreed to pay its Chairman compensation in
the amount of $4,000 per week. The Company accrued compensation expense
under this arrangement of $35,200, which is included as a component of
compensation expense in the accompanying statement for the year ended
December 31, 2005.
For the year ended December 31, 2005, the Company paid to a company 100%
owned by its chief financial officer $40,610 for accounting services
rendered.
NOTE 14 - SUBSEQUENT EVENTS
CONSOLIDATION WITH STAC
The Company delivered satisfactory evidence of its completion of the
Consolidation Milestones on or about February 1, 2006 and as a result
thereof completed its acquisition of the entire Send Tec business through
its consolidation with STAC on February 3, 2006. The Company acquired
SendTec for the purpose of expanding its existing business operations to
include a greater variety of marketing channels. The Company believes that
its acquisition of SendTec will enable it increase its market share in the
on-line and direct marketing business by creating superior value for its
customers in the execution of their marketing campaigns.
Upon Consolidation, (i) the STAC Debentures became convertible at a
conversion price of $1.50 per share into the Company's Common Stock; (ii)
seven-year warrants to purchase 10,081,607 shares of Company's Common Stock
were issued to the STAC Debenture purchasers exercisable at $0.01 per
share; (iii) the STAC Preferred Stock was redeemed by STAC for its initial
purchase price $280,351, (iv) the Company Series A Preferred was
automatically converted into 7,621,991 shares of the Company's Common Stock
and (v) members of STAC Management exchanged their interest in STAC for an
aggregate of 9,506,380 shares of RelationServe common stock. In addition,
upon Consolidation, the Company and each of its subsidiaries executed and
delivered a "Transaction Guaranty" and the "Guarantor Security Agreement"
to guaranty the timely payment of amounts due under the STAC Debentures and
pledging the assets of the Company and its affiliates.
The following table provides a preliminary estimate of the Company's
allocation of its purchase to the fair value of assets acquired and
liabilities assumed in this transaction:
Consideration Paid $ 39,850,000
Transaction expenses 580,000
Total purchase cost $ 40,430,000
Asset acquired 14,300,000
Liabilities assumed (10,700,000)
------------
Net assets acquired 3,600,000
------------
Purchase price in excess of net assets acquired $ 36,830,000
Allocated to
Covenant not to compete 1,866,000
Goodwill $ 34,964,000
The following unaudited pro-forma information reflects the results of
continuing operations of the Company as if the acquisitions had been
consummated as of January 1, 2005:
F-30
2005
-----------
Revenues $49,000,000
Net Loss 14,550,000
Net Loss per share ($.35)
The Company's allocation of its purchase price to the net assets of SendTec
and presentation of the pro forma results is preliminary. This information,
which is based on significantly limited information, is being presented for
illustration purposes only and is not indicative of the results that the
Company would have achieved or could potentially achieve in future periods
had it completed this transaction as of the dates indicated. The actual
allocation of the purchase price will be based on valuation studies that
have not yet been performed.
LEGAL CONTINGENCY
On February 3, 2006, InfoLink Communications, Services, Inc, (InfoLink)
filed a complaint against the Company and Omnipoint for allegedly violating
the federal CAN SPAM ACT of 2003, 15 U.S.C. Section 7701, and breach of an
alleged licensing agreement between Omni Point and InfoLink. Info Link
seeks actual damages in an amount of approximately $100,000 and
approximately $1,500,000 in statutory damages, which are considered to be
highly speculative by the Company and legal counsel. This case is in its
initial stages. The Company intends to vigorously defend itself with
respect to this matter, however; its outcome or range of possible loss, if
any, cannot be predicted at this time. The Company cannot provide any
assurance that the outcome of this matter will not have a material adverse
effect on its financial position or the results of operations.
On February 17, 2006, the Law Offices of Robert H. Weiss PLLC ("Weiss")
filed a complaint against the Company and Omni Point for fraud, breach of
contract, unjust enrichment, and violation of the Uniform Deceptive
Practices Act. Weiss seeks compensatory damages in an amount no less than
approximately $80,000 in addition to punitive and exemplary damages with no
specified amount. The Company also has accounts receivable due from Weiss
of approximately $387,000 which are fully reserved. This case is initial
stages. The Company intends to vigorously defend itself with respect to
this matter, however; its outcome or range of possible loss, if any, cannot
be predicted at this time. The Company cannot provide any assurance that
the outcome of this matter will not have a material adverse effect on its
financial position or the results of operations.
On March 6, 2006 Boston Meridian LLC ("Boston Meridian") filed a complaint
in the United States District Court District of Massachusetts alleging it
is due certain fees and expense reimbursements in connection with the
acquisition of the business of SendTec from theglobe.com inc.
Boston Meridian seeks an aggregate of $917,302 in fees and expenses and
100,000 shares of Company common stock. The Company believes the litigation
is without merit and intends to vigorously defend against the complaint.
The Company cannot provide any assurance that the outcome of this matter
will not have a material adverse effect on its financial position or the
results of operations.
EMPLOYMENT AGREEMENTS
Paul Soltoff became Chief Executive Officer of STAC pursuant to an
Employment Agreement dated October 31, 2005 and of the Company on February
3, 2006. The Agreement provides that Mr. Soltoff will serve as Chief
Executive Officer for an initial five-year term, which will be renewed for
F-31
additional one-year terms thereafter, unless written notice is provided by
either party. The agreement provides for an annual base salary of no less
than $400,000, as well as such incentive compensation and bonuses as the
Board of Directors may determine and to which he may become entitled to
pursuant to an incentive compensation or bonus program.
Donald Gould became Chief Financial Officer of STAC pursuant to an
Employment Agreement dated October 31, 2005 and of the Company on February
3, 2006. The Agreement provides that Mr. Gould will serve as Chief
Financial Officer for an initial five-year term, which will be renewed for
additional one-year terms thereafter, unless written notice is provided by
either party. The agreement provides for an annual base salary of no less
than $225,000, as well as such incentive compensation and bonuses as the
Board of Directors may determine and to which he may become entitled to
pursuant to an incentive compensation or bonus program.
Eric Obeck became President of STAC pursuant to an Employment Agreement
dated October 31, 2005 and of the Company on February 3, 2006. The
Agreement provides that Mr. Obeck will serve as President for an initial
five-year term, which will be renewed for additional one-year terms
thereafter, unless written notice is provided by either party. The
agreement provides for an annual base salary of no less than $325,000, as
well as such incentive compensation and bonuses as the Board of Directors
may determine and to which he may become entitled to pursuant to an
incentive compensation or bonus program.
Securities Purchase Agreement with Sunrise Equity Partners, L.P.
On February 3, 2006, the Company and Sunrise Equity Partners, L.P.
("Sunrise") entered into a Securities Purchase Agreement pursuant to which
the Company sold to Sunrise 500,000 shares of Company Common Stock for
$750,000, of which the Company received net proceeds of $675,000 after
deducting fees and expenses of $75,000. The Company granted Sunrise
unlimited and customary "piggyback" registration rights as well as
registration rights similar to the registration rights granted by the
Company in connection with that certain Registration Rights Agreement dated
October 31, 2005 with its then holders of Series A Preferred Stock. As a
result, the Company is obligated to file a Registration Statement on or
before 45 days after the Consolidation pursuant to the Registration Rights
Agreement described above. The registration rights will survive until such
time as the Company Common Stock may be sold without volume restrictions
pursuant to Rule 144(k) of the Securities Act.
STAC DEBENTURE AND WAIVER
The STAC Debenture provides, among other things, for the Company to assume
liability for the STAC Debentures on the date of Consolidation. The STAC
Debenture also required STAC, and the Company beginning on the date of
Consolidation to comply with certain financial covenants and provide for
the Debenture holders to Participate in subsequent financing transactions.
The Company and STAC were not in compliance with financial covenants
stipulated in the STAC Debenture prior to and as of, respectively the date
of consolidation.
On February 3, 2006, the Company and the Debenture holders entered into a
letter agreement pursuant to which the debenture holders agreed to (a)
forbear to call a covenant default of STAC's breach of the financial
covenants, (b) amend the STAC Debenture to substantially eliminate the
requirement for the Company to comply with the financial covenants at any
time up to the date of consolidation and during the year ended December 31,
2006 and (c) consent to the Company's sale of common stock to Sunrise
described above, in exchange for 525,000 shares of Common Stock with an
aggregate fair value of 1,443,750.
SEVERANCE AGREEMENT WITH FORMER PRESIDENT
Effective February 3, 2006, the Company and its former President entered
into a Release and Employment Severance Agreement pursuant which provided
for (i) the former President to resign
F-32
from her position with the Company, (ii) the Company to make severance
payments in the aggregate amount of $50,000, (iii) the accelerated vesting
of options to purchase 100,000 shares of Company Common Stock, (iv) the
former President's release of all claims, promises, causes of action that
she has or may have against the Company and (v) the former President's
promise not to disclose confidential information relating to the Company.
2006 INCENTIVE STOCK PLAN
The 2006 Incentive Plan was adopted by the Board of Directors on March 3,
2006 but is still subject to approval by our stockholders. An aggregate of
2,700,000 shares of Common Stock have been reserved for issuance under the
2006 Incentive Plan. The purpose of the 2006 Incentive Plan is to provide
an incentive to retain in the employ of and as directors, officers,
consultants, advisors and employees of our company, persons of training,
experience and ability, to attract new directors, officers, consultants,
advisors and employees whose services are considered valuable, to encourage
the sense of proprietorship and to stimulate the active interest of such
persons into our development and financial success. Under the 2006
Incentive Plan, we are authorized to issue incentive stock options intended
to qualify under Section 422 of the Code, non-qualified stock options and
restricted stock. The maximum number of shares of common stock that may be
subject to options granted under the 2006 Incentive Plan to any individual
in any calendar year shall not exceed 1,000,000 shares in order to qualify
as performance-based compensation under Section 162(m) of the Code. The
2006 Incentive Plan is currently administered by the Board or a Committee
of the Board of Directors. As of March 13, 2005, no shares of Common Stock
have been issued under the 2006 Incentive Plan and no options to purchase
shares of Common Stock were outstanding.
EQUITY TRANSACTIONS
In January 2006, the Company issued 50,000 shares of common stock in
connection with the exercise of a warrant for net proceeds of $12,500.
In February 2006, the Company issued 2,664,398 shares of common stock in
connection with the exercise of warrants through a cashless exercise
provision in the warrants equaling 9,549.81 shares of common stock.
The Company also issued 200,000 shares of common stock in February 2006 in
connection with the exercise of a warrant for net proceeds of $50,000.
OPTION GRANTS
In March 2006 the Company granted in the aggregate, options to purchase
1,700,000 shares of common stock to employees of SendTec. The options have
an exercise price of $1.80 and expires in March 2006.
F-33
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
SENDTEC, INC.
Page
---------
REPORTS OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTS F34 - F35
FINANCIAL STATEMENTS
Balance Sheet F-36
Statements of Operations F-37
Statements of Stockholders' Equity F-38
Statements of Cash Flows F-39
NOTES TO FINANCIAL STATEMENTS F40 - F50
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Stockholder
SendTec, Inc.
We have audited the accompanying balance sheet of SendTec, Inc (a Florida
corporation), as of December 31, 2005, and the related statements of operations,
stockholder's equity, and cash flows for the year then ended and for the four
month period from September 1, 2004 to December 31, 2004. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
presentation of the financial statements. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of SendTec, Inc. as of December
31, 2005, and the results of its operations and its cash flows for the year then
ended and for the four month period from September 1, 2004 to December 31, 2004
in conformity with accounting principles generally accepted in the United States
of America.
GREGORY, SHARER & STUART, P.A.
St. Petersburg, Florida
March 10, 2006
F-34
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Stockholders
SendTec, Inc.
We have audited the accompanying statements of operations, stockholders' equity
and cash flows of SendTec, Inc (a Florida corporation) for the eight month
period from January 1, 2004 to August 31, 2004. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the statements of
operations, stockholders' equity and cash flows are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the statements of operations, stockholders'
equity and cash flows. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall presentation of the statements of operations,
stockholders' equity and cash flows. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the statements of operations, stockholders' equity and cash
flows referred to above present fairly, in all material respects, the results of
the operations of SendTec, Inc. for the period from January 1, 2004 to August
31, 2004, in conformity with accounting principles generally accepted in the
United States of America.
GREGORY, SHARER & STUART, P.A.
St. Petersburg, Florida
March 10, 2006
F-35
SENDTEC, INC.
BALANCE SHEET
DECEMBER 31, 2005
- --------------------------------------------------------------------------------
ASSETS
Current Assets
Cash $ 3,350,545
Accounts receivable 9,910,804
Prepaid expenses and other current assets 251,918
-----------
Total Current Assets 13,513,267
Property And Equipment, net of accumulated depreciation of $465,747 828,446
Goodwill 12,605,874
Intangible Assets, net of accumulated amortization of $360,000 1,320,000
Other Assets 15,330
-----------
TOTAL ASSETS $28,282,917
===========
Total Liabilities And Stockholder's Equity
Current Liabilities
Accounts payable $ 9,993,415
Accrued expenses and other current liabilities 566,705
Deferred revenue 191,596
-----------
Total Current Liabilities 10,751,716
Deferred Tax Liability 145,125
-----------
Total Liabilities 10,896,841
Stockholder's Equity
Common stock (Note C) 1
Additional paid-in capital 18,398,019
Net dividends to parent company (618,434)
Accumulated deficit (393,510)
-----------
Total Stockholder's Equity 17,386,076
-----------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $28,282,917
===========
See the accompanying notes
F-36
SENDTEC, INC.
STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------
Successor Predecessor
Company Company
-------------- --------------
Year Ended 4 Months Ended 8 Months Ended
December 31, December 31, August 31,
2005 2004 2004
------------ -------------- --------------
Revenue $37,769,742 $13,408,183 $19,243,689
Cost of Revenue 25,530,243 9,670,229 12,892,819
----------- ----------- -----------
Gross Profit 12,239,499 3,737,954 6,350,870
Operating Expenses
Selling, general, and administrative 8,303,304 2,547,025 4,455,004
Depreciation and amortization 718,477 227,270 176,329
----------- ----------- -----------
9,021,781 2,774,295 4,631,333
----------- ----------- -----------
Income From Operations 3,217,718 963,659 1,719,537
Other Income (Expense)
Stock bonus compensation (4,774,323) -- --
Interest income 46,347 9,715 17,583
Other expense -- -- (19,974)
----------- ----------- -----------
(4,727,976) 9,715 (2,391)
----------- ----------- -----------
Net (Loss)/Income Before Income Taxes (1,510,258) 973,374 1,717,146
Income Tax Benefit/(Expense) 523,898 (380,524) (770,790)
----------- ----------- -----------
NET (LOSS)/INCOME $ (986,360) $ 592,850 $ 946,356
=========== =========== ===========
See the accompanying notes
F-37
SENDTEC, INC.
STATEMENTS OF STOCKHOLDER'S EQUITY
FOR THE YEAR ENDED DECEMBER 31, 2005
THE FOUR MONTHS ENDED DECEMBER 31, 2004
AND THE EIGHT MONTHS ENDED AUGUST 31, 2004
- --------------------------------------------------------------------------------
COMMON STOCK ADDITIONAL
-------------------- PAID-IN TREASURY
Shares Amount CAPITAL STOCK
---------- ------- ----------- --------
BALANCE AT JANUARY 1, 2004 4,377,822 4,377 $ 2,486,489 $(75,580)
Issuance of common stock 1,000 1 2,249 --
Payoff of notes receivable -- -- -- --
Net income for eight months ended August 31, 2004 -- -- -- --
---------- ------- ----------- --------
BALANCE AT AUGUST 31, 2004 4,378,822 4,378 2,488,738 (75,580)
Recapitalization at September 1, 2004 (4,378,722) (4,377) 15,909,281 75,580
---------- ------- ----------- --------
Balance after recapitalization on September 1, 2004 100 1 18,398,019 --
Net Dividends to Parent Company (See Note I) -- -- -- --
Net income for four months ended December 31, 2004 -- -- -- --
---------- ------- ----------- --------
BALANCE AT DECEMBER 31, 2004 100 1 18,398,019 --
Net Dividends to Parent Company (See Note I) -- -- -- --
Net loss for the year -- -- -- --
---------- ------- ----------- --------
BALANCE AT DECEMBER 31, 2005 100 $ 1 $18,398,019 $ --
========== ======= =========== ========
NOTES NET RETAINED
RECEIVABLE - DIVIDENDS EARNINGS TOTAL
COMMON TO PARENT (ACCUMULATED STOCKHOLDER'S
STOCK COMPANY DEFICIT) EQUITY
------------ ----------- ------------ -------------
BALANCE AT JANUARY 1, 2004 $(55,350) $ -- $ 1,130,051 $ 3,489,987
Issuance of common stock -- -- -- 2,250
Payoff of notes receivable 55,350 -- -- 55,350
Net income for eight months ended August 31, 2004 -- -- 946,356 946,356
-------- ----------- ----------- -----------
BALANCE AT AUGUST 31, 2004 -- -- 2,076,407 4,493,943
Recapitalization at September 1, 2004 -- (2,076,407) 13,904,077
-------- ----------- ----------- -----------
Balance after recapitalization on September 1, 2004 -- -- -- 18,398,020
Net Dividends to Parent Company (See Note I) -- (2,042,582) -- (2,042,582)
Net income for four months ended December 31, 2004 -- -- 592,850 592,850
-------- ----------- ----------- -----------
BALANCE AT DECEMBER 31, 2004 -- (2,042,582) 592,850 16,948,288
Net Dividends to Parent Company (See Note I) -- 1,424,148 -- 1,424,148
Net loss for the year -- (986,360) (986,360)
-------- ----------- ----------- -----------
BALANCE AT DECEMBER 31, 2005 $ -- $ (618,434) $ (393,510) $17,386,076
======== =========== =========== ===========
See the accompanying notes
F-38
SENDTEC, INC.
STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
Successor Predecessor
Company Company
-------------- --------------
Year Ended 4 Months Ended 8 Months Ended
December 31, December 31, August 31,
2005 2004 2004
------------ -------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss)/income $ (986,360) $ 592,850 $ 946,356
Adjustments to reconcile net (loss)/income to net
cash provided by operating activities
Depreciation and amortization 718,477 227,270 176,329
Loss on disposal of property and equipment -- -- 19,974
Deferred tax (benefit) expense (523,898) (226,501) 38,165
Stock compensation expense 5,253,403 234,231 --
Changes in operating assets and liabilities
Accounts receivable (3,057,466) (853,062) (2,186,094)
Prepaid expenses and other current assets 198,506 (721,968) (58,064)
Other assets 263 (818) 27,684
Accounts payable 3,609,913 2,062,690 1,437,910
Accrued expense and other current
liabilities (516,815) 436,688 (155,858)
Deferred revenue (384,354) 54,218 377,389
----------- ----------- -----------
Net Cash Provided By Operating
Activities 4,311,669 1,805,598 623,791
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of property and equipment -- -- 10,000
Additions to goodwill (7,635) -- --
Purchase of property and equipment (223,166) (40,324) (344,175)
----------- ----------- -----------
Net Cash Used By Investing Activities (230,801) (40,324) (334,175)
CASH FLOWS FROM FINANCING ACTIVITIES
Net payments to parent company (3,829,255) (2,276,813) --
Sale of common stock -- -- 2,250
Proceeds from payoff of notes receivable - common
stock -- -- 55,350
----------- ----------- -----------
Net Cash (Used)/Provided By Financing
Activities (3,829,255) (2,276,813) 57,600
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH 251,613 (511,539) 347,216
CASH AT BEGINNING OF PERIOD 3,098,932 3,610,471 3,263,255
----------- ----------- -----------
CASH AT END OF PERIOD $ 3,350,545 $ 3,098,932 $ 3,610,471
=========== =========== ===========
See the accompanying notes
F-39
NOTE A - NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
The accompanying financial statements include the accounts of SendTec, Inc.
(SendTec and Company). As more fully disclosed in Note B, on September 1, 2004
the Company was acquired by theglobe.com (theglobe). Additionally, as more fully
disclosed in Note J, on August 9, 2005 theglobe and SendTec entered into an
asset purchase agreement for the sale of substantially all of the net assets of
SendTec to RelationServe Media, Inc. (RelationServe). On February 3, 2006,
RelationServe completed the purchase of the net assets of SendTec from theglobe.
The Company provides advertising and marketing services for its customers
located throughout the United States of America. These services include
distribution of internet advertising, search engine marketing services, purchase
of direct response television media for customers, and production of television
commercials for direct response advertising.
PRESENTATION OF FINANCIAL STATEMENTS
SendTec's financial statements have been prepared as "carve out" financial
statements in accordance with SEC interpretations under Staff Accounting
Bulletin (SAB) Topic 1-B. The term carve out as used herein applies to general
purpose financial statements of an operating unit, sometimes not itself a
separate legal entity, which are derived or "carved-out" of those of a larger
corporate entity. For example, a division or a portion thereof representing a
particular business can be carved out of an entity's financial statements. As
such, SendTec's financial statements have been presented reflecting SendTec as a
stand alone entity, not as a part of the consolidated financial statements of
its parent company.
As required by the SAB, the financial statements include allocations from its
parent companies necessary to reflect all of the costs of doing business.
Management believes that the assumptions underlying the financial statements,
including such allocations are reasonable.
Additionally, as required by SAB Topic 5-J, these financial statements reflect
"push-down" accounting for the September 1, 2004 transaction with theglobe (as
described in Note B) establishing a new basis of accounting. Push-down
accounting for the sale of SendTec to RelationServe (as more fully described in
Note J) was not applied as management believes the conditions requiring
push-down accounting were not met.
Income taxes have been calculated as if all of the Company's operations had been
conducted as a separate tax paying legal entity, filing its own separate tax
return and as if the transaction described in Note J had not occurred.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reporting amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the financial statements and the reporting amounts of revenues and expenses
during the reported period. These estimates and assumptions relate to estimates
of collectibility of accounts receivable, accruals, the impairment of long-lived
assets and other factors. Actual results could differ from these estimates.
F-40
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of certain of the Company's financial instruments, including
cash, accounts receivable, accounts payable, accrued expenses, and deferred
revenue approximate fair value at December 31, 2005 due to their short
maturities. The Company maintains its cash with various financial institutions.
RECEIVABLES AND CREDIT POLICIES
Accounts receivable are uncollateralized customer obligations due under normal
trade terms generally requiring payment within 30 days from the invoice date.
Follow-up correspondence is made if unpaid accounts receivable go beyond 30
days. Payments on accounts receivable are allocated to the specific invoices
identified on the customer's remittance advice.
Trade accounts receivable are stated at the amount management expects to collect
from outstanding balances. The carrying amounts of accounts receivable
approximate management's best estimate of the amounts that will be collected.
Management individually reviews all accounts receivable balances that exceed the
due date and estimates the portion, if any, of the balance that will not be
collected. Balances still outstanding after management has used reasonable
collection efforts are written off through a charge to earnings and a credit to
trade accounts receivable. Bad debt expense is not material to the financial
statements.
UNBILLED REVENUE
Included in accounts receivable at December 31, 2005 is unbilled revenue of
$4,332,644. Unbilled revenues are revenues earned in fiscal year 2005, but not
invoiced until after December 31, 2005. These unbilled revenues were
subsequently invoiced in 2006.
GOODWILL AND INTANGIBLE ASSETS
The Company accounts for goodwill and intangible assets in accordance with
Financial Accounting Standards Board (FASB) Statement of Financial Accounting
Standards (SFAS) No. 142, GOODWILL AND OTHER INTANGIBLE ASSETS. SFAS No. 142
requires that goodwill and other intangibles with indefinite lives should no
longer be amortized, but rather be tested for impairment annually or on an
interim basis if events or circumstances indicate that the fair value of an
asset has decreased below its carrying value.
Goodwill is stated at cost at December 31, 2005; the Company had no other
intangible assets with indefinite lives. Intangible assets subject to
amortization, included in the accompanying consolidated balance sheets as of
December 31, 2005 are being amortized on a straight-line basis over their
estimated useful lives of five years.
LONG-LIVED ASSETS
Long-lived assets, including property and equipment and intangible assets
subject to amortization are reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable, in accordance with SFAS No. 144, ACCOUNTING FOR THE IMPAIRMENT OR
DISPOSAL OF LONG-LIVED ASSETS. If events or changes in circumstances indicate
that the carrying amount of an asset or an appropriate grouping of assets may
not be recoverable, the Company estimates the undiscounted future cash flows to
result from the use of the asset or asset group. If the sum of the undiscounted
cash flows is less than the carrying value, the Company recognizes an impairment
loss measured as the amount by which the carrying value exceeds the fair value
of the assets. Fair values are based on quoted market values, if available. If
quoted market values are not available, the estimate of fair
F-41
value may be based on the discounted value of the estimated future cash flows
attributable to the assets or other valuation techniques deemed reasonable in
the circumstances.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is computed using
straight-line and accelerated methods over the estimated useful lives of the
related assets as follows:
Furniture and equipment 3-7 years
Software 3 years
REVENUE RECOGNITION
Revenue from the distribution of internet advertising is recognized when
internet users visit and complete actions at an advertiser's website. Revenue
consists of the gross value of billings to clients, including the recovery of
costs incurred to acquire online media required to execute client campaigns.
Recorded revenue is based upon reports generated by the Company's tracking
software.
Revenue derived from search engine marketing services, such as search engine
keyword buying, is recognized on a net basis in the period when the associated
keyword search media is clicked on by a consumer. SendTec typically earns a
media commission equal to a percentage of the keyword search media purchased for
its clients. In many cases, the amount SendTec bills to clients significantly
exceeds the amount of revenue that is earned due to the existence of various
pass-through charges such as the cost of the search engine keyword media.
Amounts received in advance of search engine keyword media purchases are
deferred and included in deferred revenue in the accompanying balance sheet.
Revenue derived from the purchase and tracking of direct response media, such as
television and radio commercials, is recognized on a net basis when the
associated media is aired. In many cases, the amount the Company bills to
clients significantly exceeds the amount of revenue that is earned due to the
existence of various pass-through charges such as the cost of the television and
radio media. Amounts received in advance of media airings are deferred and
included in deferred revenue in the accompanying balance sheet.
Revenue generated from the production of direct response advertising programs,
such as infomercials, is recognized on the completed contract method when such
programs are complete and available for airing. Production activities generally
take eight to 12 weeks and the Company usually collects amounts in advance and
at various points throughout the production process. Amounts received from
customers prior to completion of commercials are included in deferred revenue
and direct costs associated with the production of commercials in process are
deferred and included within other current assets in the accompanying balance
sheet.
INCOME TAXES
The Company accounts for income taxes using the asset and liability method (also
refer to Note A PRESENTATION OF FINANCIAL STATEMENTS). Under this method,
deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in the results of
operations in the period that the tax change occurs.
F-42
Stock-Based Compensation
In October 1995, SFAS No. 123, Accounting for Stock-Based Compensation, was
issued and provided companies an alternative to accounting for stock-based
compensation as prescribed under APB Opinion No. 25.
SFAS No. 123 encourages, but does not require, companies to recognize
compensation expense for stock-based awards based on their fair market value at
the date of grant. SFAS No. 123 allows companies to continue to follow existing
accounting rules (intrinsic value method under APB No. 25) provided that
pro-forma disclosures are made of what net income would have been had the new
fair value method been used. The required disclosures were amended in December
2002 with the issuance of SFAS No. 148, Accounting for Stock Based Compensation
- - Transition and Disclosure. The Company adopted the disclosure requirements of
SFAS No.123 as amended by SFAS No. 148, but continues to account for stock-based
compensation under APB No. 25.
Until its acquisition by theglobe on September 1, 2004, the Company had
stock-based compensation plans which are more fully described in Note D. Upon
its acquisition by theglobe, the employees of SendTec became eligible to
participate in the stock option plans of theglobe. theglobe accounts for its
stock option plans in accordance with the measurement provisions of APB No. 25.
Had theglobe determined stock compensation cost based on the fair value at the
grant date for its stock options under SFAS No. 123 and allocated the
compensation expense to the Company for its employees participating in
theglobe's stock option plans, the Company's net (loss)/income would have been
reduced to the pro forma amounts indicated below:
Year Ended 4 Months Ending 8 Months Ending
December 31, 2005 December 31, 2004 August 31, 2004
----------------- ----------------- ---------------
Successor Predecessor
Net (loss)/income, as reported $ (986,360) $ 592,850 $946,356
Add stock-based compensation included in net
(loss)/income as reported, net of tax 293,820 140,539 --
Deduct stock-based compensation determined under
fair value method (326,262) (162,410) --
----------- --------- --------
Pro forma net (loss)/income $(1,018,802) $ 570,979 $946,356
=========== ========= ========
Not included in the chart above are amounts of stock based compensation
associated with an outright stock grant to SendTec management in the form of
common stock of SendTec Acquisition Corporation (refer to Note J). The value of
this stock grant under the measurement provision of both APB 25 and SFAS 123 was
determined to be $4,774,323 and is reflected in the statement of operations as
stock bonus compensation for the year ended December 31, 2005.
Recently Issued Accounting Pronouncements
In May 2005, the FASB issued SFAS No. 154, Accounting for Changes and Error
Corrections, A Replacement of APB Opinion No. 20 and FASB Statement No. 3. SFAS
154 applies to all voluntary changes in accounting principles and requires
retrospective application to prior period financial statements of changes in
accounting principles. This statement also requires that a change in
depreciation, amortization or depletion method for long-lived, non-financial
assets be accounted for as a change in accounting estimate affected by a change
in accounting principle. SFAS 154 carries forward without change the guidance
contained in APB Opinion No. 20 for reporting the correction of an error in
previously issued financial statements and a change in accounting estimate. This
statement is effective for
F-43
accounting changes and corrections of errors made in fiscal years beginning
after December 15, 2005. The Company does not expect the adoption of this
standard to have a material impact on its financial condition, results of
operations or liquidity.
In December 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary Assets,
An Amendment of APB Opinion No. 29. SFAS No. 153 requires exchanges of
productive assets to be accounted for at fair value, rather than at carryover
basis, unless (1) neither the asset received nor the asset surrendered has a
fair value that is determinable within reasonable limits or (2) the transactions
lack commercial substance. This statement is effective for nonmonetary asset
exchanges occurring in fiscal periods beginning after June 15, 2005. The Company
does not expect the adoption of this standard to have a material impact on its
financial position, results of operations, or liquidity.
In December 2004, the FASB issued SFAS No. 123R, Share-Based Payment. This
standard replaces SFAS No. 123 and supersedes Accounting Principles Board (APB)
Opinion No. 25, Accounting for Stock Issued to Employees. The standard requires
companies to expense the fair value of stock options on the grant date and is
effective for annual periods beginning after June 15, 2005. In accordance with
the revised statement, the expense attributable to stock options granted or
vested subsequent to January 1, 2006 will be required to be recognized. The
precise impact of the adoption of SFAS No. 123R cannot be predicted at this time
because it will depend on the levels of share-based payments that are granted in
the future.
In December 2003, the FASB issued FIN No. 46-R, Consolidation of Variable
Interest Entities. FIN 46-R, which modifies certain provisions and effective
dates of FIN 46, sets forth the criteria to be used in determining whether an
investment in a variable interest entity should be consolidated. These
provisions are based on the general premise that if a company controls another
entity through interests other than voting interests that company should
consolidate the controlled entity. The Company believes that, currently, it does
not have any material arrangements that meet the definition of a variable
interest entity which would require consolidation.
In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments Hedging Activities. This statement amends and clarifies
accounting for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities under SFAS No. 133. SFAS
No. 149 became effective during the third quarter of 2003 and did not have a
material impact on the Company's results of operations or financial position.
Reclassifications
Certain amounts in the 2004 financial statements were reclassified to conform to
the 2005 presentation. These reclassifications had no effect on previously
reported net income.
NOTE B - RECAPITALIZATION UPON SENDTEC'S ACQUISITION BY THE GLOBE
On September 1, 2004, theglobe acquired SendTec. In exchange for all of the
issued and outstanding shares of capital stock of SendTec, theglobe paid
consideration consisting of: (1) $6,000,000 in cash, excluding transaction
costs; (2) the issuance of an aggregate of 17,500,024 shares of theglobe's
common stock; (3) the issuance of an aggregate of 175,000 shares of theglobe's
Series H Automatically Converting Preferred Stock (which was subsequently
converted into approximately 17,500,500 shares of theglobe's common stock
effective December 1, 2004); and (4) the issuance of a subordinated promissory
note in the amount of $1,000,009 by theglobe. An aggregate of 3,974,165
replacement options to acquire theglobe common stock were also issued by
theglobe for all of the issued and outstanding options to acquire SendTec shares
held by the employees of SendTec as of the acquisition date.
F-44
For financial reporting purposes, theglobe's purchase price was pushed down into
the accounts of SendTec, resulting effectively in a recapitalization of SendTec
as of September 1, 2004.
In addition, warrants to acquire shares of theglobe common stock would be issued
to SendTec stockholders when and if SendTec exceeds forecasted operating income,
as defined, of $10.125 million for the year ending December 31, 2005. The number
of earn-out warrants may range from an aggregate of 250,000 to 2.5 million if
actual operating income exceeds the forecast by at least 10%. At the end of
2005, no warrants were issued related to this earn-out provision, therefore, no
consideration related to this contingency was included in the determination of
the SendTec purchase price.
As part of the SendTec acquisition transaction, certain executives of SendTec
entered into new employment agreements with SendTec. The employment agreements
each have a term of five years and automatically renew for an additional year at
expiration unless either party provides the requisite notice of non-renewal. The
agreements also contain certain non-compete provisions for periods as specified
by the agreements. The $1.8 million value assigned to the non-compete agreements
is being amortized on a straight-line basis over five years. Annual amortization
expense of the non-compete agreements is estimated to be $360,000 in 2005
through 2008 and $240,000 in 2009. The related accumulated amortization as of
December 31, 2005 was $360,000.
SendTec issued 100 shares of $.01 par value common stock to theglobe to
capitalize the new entity.
The SendTec purchase price allocation was as follows:
Cash $ 3,610,000
Accounts receivable 5,534,000
Other current assets 194,000
Fixed assets 1,031,000
Non-compete agreements 1,800,000
Goodwill 12,598,000
Other assets 124,000
Deferred taxes (896,000)
Assumed liabilities (5,597,000)
-----------
$18,398,000
===========
NOTE C - STOCKHOLDERS' EQUITY
Preferred Stock
Prior to its acquisition by theglobe, SendTec had authorized a total of 10
million shares of $.001 par value preferred stock. No shares had been issued.
Common Stock
After SendTec's acquisition by theglobe, SendTec had authorized a total of 1,000
shares of common stock, with 100 issued as of December 31, 2005, par value of
$.01 per share.
F-45
NOTE D - STOCK OPTION PLANS
SendTec Stock Option Plan
During 2000, the Company established the SendTec Stock Option Plan (SendTec
Plan) which authorized the issuance of a maximum of 750,000 shares of the
Company's common stock. Officers, key employees, directors and consultants were
eligible for grants under the terms of the SendTec Plan. The maximum term of the
stock options granted under the SendTec Plan was 10 years and most optionees
vested in the options over a 24-month period.
Options under the SendTec Plan may be options which qualify under Section 422 of
the Internal Revenue Code (incentive stock options) or options which do not
qualify under Section 422 (nonqualified options).
The following table summarizes SendTec Plan option activity for the period from
January 1, 2004 to August 31, 2004:
Weighted Average
Shares Exercise Price
------- ----------------
January 1, 2004 through August 31, 2004
Stock option activity outstanding at beginning of year 318,200 $2.25
Granted 288,100 $5.40
Expired or surrendered (56,000) $2.25
------- -----
Outstanding at end of period 550,300 $3.90
======= =====
Exercisable at end of period 85,550 $2.25
======= =====
The weighted average life of the options is five years. The estimated fair value
of stock options at the time of the grant using the Black-Scholes option pricing
model was as follows:
August 31,
2004
----------
Fair value per option $--
Assumptions
Annualized dividend yield 0%
Expected volatility 0%
Risk free interest rate 5%
Expected option terms (in years) 5
theglobe Stock Option Plan
Pursuant to the agreement and plan of merger in connection with the acquisition
of the Company on September 1, 2004, theglobe issued an aggregate of 3,974,165
replacement options to acquire shares of theglobe's common stock for each of the
issued and outstanding options to acquire shares of SendTec common stock held by
employees of SendTec. Of these replacement options, 3,273,668 have exercise
prices of $.06 and 700,497 have exercise prices of $.27 per share. theglobe also
agreed to grant an aggregate of 225,000 options to employees of SendTec and
25,000 options to a consultant of SendTec at an exercise price of $.34 per share
under similar terms as other stock option grants of theglobe. theglobe also
granted 1 million stock options at an exercise price of $.27 per share in
connection with the establishment of a bonus option pool pursuant to which
various employees of SendTec could vest in such options if SendTec exceeds
forecasted operating income, as defined, of $10.125 million for the year
F-46
ending December 31, 2005. At the end of 2005, no options were issued related to
this bonus option pool provision.
theglobe is accounting for the replacement options issued in accordance with FIN
No. 44, Accounting for Certain Transactions Involving Stock Compensation, which
requires the value of the unvested portion of the stock options issued to be
treated as deferred compensation to be recognized in the results of operations
over the remaining vesting period. The compensation expense related to the
replacement options to the Company was recognized by SendTec as additional
expense of $479,080 for the year ended December 31, 2005 and $234,231 for the
four month period ended December 31, 2004.
NOTE E - COMMITMENTS
As discussed in Note B, as part of the SendTec acquisition transaction on
September 1, 2004, certain executives of SendTec entered into new employment
agreements with SendTec. The employment agreements each have a term of five
years and automatically renew for an additional year at expiration unless either
party provides the requisite notice of non-renewal. The agreements provide for
total base salaries of $900,000 per annum and contain certain non-compete
provisions for periods as specified by the agreements.
The Company has noncancelable operating lease agreements for buildings and
equipment expiring through 2010. Future minimum lease payments required under
the operating leases are as follows as of December 31, 2005:
Year ending December 31,
2006 $ 292,858
2007 300,180
2008 307,684
2009 315,376
2010 62,151
----------
$1,278,249
==========
Rent expense for all operating leases was approximately $295,000 for the year
ended December 31, 2005; $84,000 for the four months ended December 31, 2004;
and $124,000 for the eight months ended August 31, 2004.
NOTE F - INCOME TAXES
Subsequent to its acquisition by theglobe, the Company has been included in
theglobe's consolidated income tax return. Income tax expense in the
accompanying statements of operations has been determined on a separate company
basis for all periods presented.
The provision for income taxes consists of the following:
Year Ended 4 Months Ended 8 Months Ended
December 31, December 31, August 31,
2005 2004 2004
------------ -------------- --------------
Successor Predecessor
Current
Federal $ -- $ 518,302 $625,545
State 88,723 107,080
--------- --------- --------
-- 607,025 732,625
Deferred
Federal (447,325) (193,395) 32,586
State (76,573) (33,106) 5,579
--------- --------- --------
(523,898) (226,501) 38,165
--------- --------- --------
$(523,898) $ 380,524 $770,790
========= ========= ========
F-47
The income tax (benefit)/expense differs from the amount computed using the
statutory federal income tax rate as follows:
Year Ended 4 Months Ended 8 Months Ended
December 31, December 31, August 31,
2005 2004 2004
------------ -------------- --------------
Income tax( benefit)/expense at federal
statutory rate $(513,488) $330,945 $583,831
State tax expense, net of federal benefit (50,538) 36,708 74,355
Transaction expenses -- -- 82,620
Other 40,128 12,871 29,984
--------- -------- --------
$(523,898) $380,524 $770,790
========= ======== ========
Tax effects of temporary differences that give rise to the deferred tax
liability relate to approximately the following at December 31, 2005:
Deferred tax assets
Stock based compensation $ 268,400
Net operating loss carryforward 198,000
Other 44,800
Deferred tax liabilities
Depreciation and amortization (159,600)
Non-compete (496,700)
---------
$(145,100)
=========
During the eight months ended August 31, 2004, the Company used federal and
state net operating loss carryforwards to offset taxable income of approximately
$4,894. At December 31, 2005 (on a stand alone basis and ignoring the effects of
the transaction described in Note J), the Company had a net loss carryforward of
$527,000.
Income taxes paid were $25,450 during the year ended December 31, 2005 and
$1,832,000 during the eight month period ended August 31, 2004. Current income
tax expense since August 31, 2004 (theglobe acquisition date) have been included
in net dividends to parent company.
NOTE G - SIGNIFICANT CUSTOMERS
A significant portion of the Company's revenue is attributable to a small number
of customers. During the year ended December 31, 2005, two customers accounted
for approximately 44% of the Company's net revenue. During both the eight month
period ended August 31, 2004 and the four month period ended December 31, 2004,
two customers accounted for approximately 59% of the Company's net revenue.
Three customers represented approximately 47% of the Company's total accounts
receivable as of December 31, 2005.
F-48
NOTE H - RETIREMENT PLAN
Effective January 1, 2003, the Company established a SIMPLE IRA savings plan
(Plan) which is maintained for the benefit of all eligible employees who have
completed six months of service. The Plan allows employees to make certain tax
deferred voluntary contributions. The Company contributed to the plan such
amounts as deemed appropriate. Contributions made by the Company totaled
approximately $44,000 for the eight month period ended August 31, 2004 and
$33,000 for the four month period ended December 31, 2004. The Plan was
terminated on December 31, 2004.
NOTE I - RELATED PARTY TRANSACTIONS
In connection with the acquisition of SendTec, certain of the SendTec executives
who collectively received approximately 82% of the shares of theglobe.com common
stock and preferred stock issued in the merger, theglobe, and theglobe's
chairman and chief executive officer and president (individually and on behalf
of certain affiliated entities) entered into a stockholders' agreement. Pursuant
to the terms of the stockholders' agreement, the SendTec executives granted an
irrevocable proxy to vote their shares to E&C Capital Partners LLP, an affiliate
of theglobe's chairman and chief executive officer, on all matters (including
the election of directors) other than with respect to certain potential
affiliated transactions involving theglobe's chairman and chief executive
officer or president.
SendTec advanced cash to its parent company, theglobe.com, in 2005 and 2004.
SendTec has recorded these cash advances as an inter-company receivable, due
from parent company, in the period in which the cash advance was made. Cash
advances to theglobe.com were $3.5 million for the year ended December 31, 2005
and $1.8 million for the four months ended December 31, 2004. These amounts were
deemed to be dividends to theglobe and reclassified as dividends to parent
company for 2005 and 2004.
SendTec provided various marketing services to an affiliated company of
theglobe.com in fiscal years 2004 and 2005. This affiliated company was invoiced
for all marketing services at SendTec's standard third-party rates. SendTec
recognized revenue for these marketing services in the period they were earned
and recorded an intercompany receivable, due from affiliated company, in the
same period. Revenues recognized from marketing services provided to the
affiliated company were $222,741 for the year ended December 31, 2005 and
$875,584 for the four month period ended December 31, 2004. These amounts were
deemed to be dividends to theglobe and reclassified as dividends to parent
company for 2005 and 2004.
SendTec management received $4,938,591 of compensation in the form of common
stock in SendTec Acquisition Corporation ("STAC")(refer to Note J) in the year
ended December 31, 2005. This stock based compensation includes taxes paid by
SendTec related to the compensation in the amount of $164,268. The stock based
compensation was included in net dividends to parent company in SendTec's
December 31, 2005 balance sheet.
SendTec recorded current income tax expense of $0 and $607,025 for the year
ended December 31, 2005 and for the four months ended December 31, 2004,
respectively. For 2005 and for the four months ended December 31, 2004, these
amounts were reclassified as dividends to parent company.
F-49
Year Ended 4 Months Ended 8 Months Ended
December 31, 2005 December 31, 2004 August 31, 2004
----------------- ----------------- ---------------
Successor Predecessor
Cash advances to parent company $ 3,500,000 $1,800,000 $--
Marketing services provided to parent company 222,741 875,584 --
Stock option compensation expense (479,080) (234,231) --
Stock bonus compensation expense (4,774,323) -- --
Net other expenses 106,514 208,254 --
Current income tax expense -- (607,025) --
----------- ---------- ---
$(1,424,148) $2,042,582 $--
=========== ========== ===
NOTE J - SENDTEC ASSET PURCHASE AGREEMENT
On August 9, 2005, RelationServe entered into an asset purchase agreement, as
amended (the Agreement) with theglobe for the purchase of all of the business
and substantially all of the assets of SendTec. The purchase price for SendTec
under the Agreement was $37.5 million, subject to adjustment, and the assumption
of certain liabilities. On October 31, 2005, RelationServe assigned its rights
under the Agreement to STAC and entered into certain agreements providing for
financing of the transactions. RelationServe organized STAC to serve as the
purchaser of the business and, as a result of the financing arrangements
described herein, from October 31, 2005 through February 3, 2006 (the
Consolidation Date), STAC operated independently and as a minority-owned
affiliate of RelationServe prior to the Consolidation Date. Following the
Consolidation Date, STAC once again became a wholly-owned subsidiary of
RelationServe in connection with a series of transactions that took place on the
Consolidation Date between RelationServe, STAC, and certain investors (the
Consolidation).
The SendTec purchase was financed by issuance of $34.95 million of STAC Senior
Secured Convertible Debentures due on October 30, 2009 (the Debentures) as well
as issuance by RelationServe of $10,289,690 of Series A Convertible Preferred
Stock, par value $0.001 per share (the Series A Preferred). In order to provide
funds to STAC to complete the Asset Purchase, $10 million of STAC common stock,
par value $0.001 per share (the STAC Common Stock) was issued to RelationServe
from the proceeds of the sale of the Series A Preferred by RelationServe.
On February 3, 2006, certain provisions of the Debentures, as well as the terms
of certain agreements with the management of STAC, resulted in the automatic
conversion of STAC into a wholly-owned subsidiary of RelationServe. Upon the
Consolidation on February 3, 2005, STAC became a wholly-owned subsidiary of
RelationServe and thereafter, RelationServe, through STAC, acquired and
continued to operate the business of SendTec.
F-50
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers.
Our Certificate of Incorporation contains provisions to (i) eliminate the
personal liability of our directors for monetary damages resulting from breaches
of their fiduciary duty (other than breaches of the duty of loyalty, acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, violations under Section 174 of the Delaware General
Corporation Law (the "DGCL") or for any transaction from which the director
derived an improper personal benefit) and (ii) indemnify our directors and
officers to the fullest extent permitted by Section 145 of the DGCL, including
circumstances in which indemnification is otherwise discretionary. We believe
that these provisions are necessary to attract and retain qualified persons as
directors and officers. As a result of this provision, our or our stockholders'
ability to successfully prosecute an action against a director for a breach of
his duty of care has been limited. However, the provision does not affect the
availability of equitable remedies such as an injunction or rescission based
upon a director's breach of his duty of care. The Securities and Exchange
Commission has taken the position that the provision will have no effect on
claims arising under the federal securities laws.
In addition, the Certificate of Incorporation and By-Laws provide mandatory
indemnification rights, subject to limited exceptions, to any person who was or
is party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding by reason of the fact that such person is
or was our director or officer, or is or was serving at our request as a
director or officer of another corporation, partnership, joint venture, trust,
employee benefit plan or other enterprise. Such indemnification rights include
reimbursement for expenses incurred by such person in advance of the final
disposition of such proceeding in accordance with the applicable provisions of
the DGCL.
Item 25. Other Expenses of Issuance and Distribution
The expenses payable by us in connection with this Registration Statement are
estimated as follows:
SEC Registration Fee $19,284.69
Accounting Fees and Expenses *
----------
Legal Fees and Expenses $ 50,000
Transfer Agent Fees and Expenses $ 10,000
Printing Fees and Expenses *
----------
Miscellaneous Expenses *
----------
Total $ *
----------
- ----------
* Represents less than 1%.
Item 26. Recent Sales of Unregistered Securities
RECENT SALES OF UNREGISTERED SECURITIES
During the last three years, we have issued the following unregistered
securities. None of these transactions involved any underwriters, underwriting
discounts or commissions, except as specified below, or any public offering, and
we believe that each transaction was exempt from the registration requirements
of the Securities Act by virtue of Section 4(2) thereof and/or Regulation D
promulgated
II-1
thereunder. The Company believes that the various issuances described below were
to "accredited investors".
On May 14, 2004, Chubasco issued 6,800,000 shares of Common Stock to Mr. Scott
Young, the Company's former President, Chief Financial Officer and sole
director. Mr. Young acquired these shares at a price of $0.01 per share. We
received $68,000 from this offering. These shares were issued pursuant to
Section 4(2) of the Securities Act and are restricted shares as defined in the
Securities Act.
Chubasco completed an offering of 3,210,000 shares of Common Stock at a price of
$0.01 per share to a total of seven purchasers on June 8, 2004. The total amount
we received from this offering was $32,100. The Company completed the offering
pursuant to Regulation S of the Securities Act.
Chubasco completed an offering of 6,500 shares of our common stock at a price of
$0.25 per share to a total of forty-three purchasers on July 30, 2004. The total
amount we received from this offering was $1,625. We completed the offering
pursuant to Regulation S of the Securities Act.
Relationserve (Delaware's) founders (three persons) received 4,001,000 shares of
common stock and 6,000,000 warrants in connection with their formation efforts,
for providing the bridge loan advances and negotiating our initial acquisitions
which were exchanged for 4,001,000 shares of Common Stock and warrants
exercisable for 6,000,000 shares of Common Stock upon the Effective Time of the
Merger of RelationServe and Relationserve Access, Inc. These shares were issued
in reliance upon and exemption from registration provided pursuant to Section
4(2) of the Securities Act and are restricted shares as defined by the
Securities Act.
On April 20, 2005 Relationserve (Delaware) commenced a private offering of
Units, each Unit consisting of 50,000 shares of Relationserve common stock with
three-year warrants to purchase 25,000 shares of Relationserve (Delaware) common
stock exercisable at $2.00 per share (the "Offering"). Relationserve received
and accepted $1,125,000 of subscriptions from various investors. On June 24,
2005, an additional investor purchased $500,000 of our Units for cash and was
issued 500,000 shares of restricted stock and 250,000 warrants to purchase
Company Common Stock. The Units were issued in reliance on an exemption from
registration provided under Regulation D of the Securities Act and are
restricted shares as defined by the Securities Act.
The acquisition of Omni Point and Friendsand resulted in issuance of 8,000,000
shares of Relationserve (Delaware) Common Stock, a two-year promissory note in
the principal amount of $700,000, and an agreement for the payment of $550,000
of cash ($150,000 of which was paid at closing and $400,000 of which is required
to be used to satisfy certain outstanding obligations) (issued to two persons).
These shares were issued pursuant to Section 4(2) of the Securities Act and are
restricted shares as defined in the Securities Act.
Pursuant to the Merger, on June 13, 2005 we acquired all of the outstanding
capital stock of Relationserve (Delaware) in exchange for 13,326,000 shares of
our Common Stock. We also assumed warrants to purchase 6,550,000 shares of our
Common Stock issued by Relationserve (Delaware). These shares and warrants were
issued pursuant to and exception from registration pursuant to Section 4(2) of
the Securities Act and are restricted securities as defined in the Securities
Act.
On May 24, 2005, we entered into an independent consulting agreement with Summit
Financial Partners, LLC. Under the terms of the Agreement, Summit Financial
Partners, LLC. is to provide investor relations and similar services in exchange
for issuance of 1,050,000 shares of Common Stock. These shares were issued
pursuant to Section 4(2) of the Securities Act and are restricted shares as
defined in the Securities Act.
II-2
On June 22, 2005 we commenced a private offering of up to $4,000,000 of Units,
each Unit consisting of 50,000 shares of Common Stock with three-year warrants
to purchase 25,000 shares of Common Stock exercisable at $3.50 per share. On
June 30, 2005 we conducted and initial closing of the private offering of Units
to "accredited investors" as that term is defined in Regulation D of the
Securities Act, and we received and accepted $2,000,000 of subscriptions in the
Offering and issued 1,000,000 shares and 500,000 warrants sold to various
investors. The Units were issued in reliance on an exemption from registration
provided under Regulation D of the Securities Act and are restricted securities
as defined by the Securities Act.
On June 27, 2005, we issued 550,000 shares of common stock in connection with
the exercise of 550,000 common stock warrants for net proceeds of $137,500.
On June 30, 2005, we issued 48,515 shares of Common Stock and a three-year
warrant to purchase 24,257 shares of Common Stock with an exercise price of
$3.50 to Olshan Grundman Frome Rosenzweig & Wolosky LLP for legal services
provided to us. These warrants and shares of Common Stock were issued pursuant
to Section 4(2) of the Securities Act and are restricted securities as defined
in the Securities Act.
On July 13, 2005 our Board of Directors ratified a consulting agreement with
Stronghurst, LLC, pursuant to which we issued 750,000 shares of Common Stock to
certain principals of Stronghurst, LLC. 375,000 shares were issued on July 13,
2005, and the remaining 375,000 shares are currently being held in escrow with
187,500 to be released 270 days after the execution of the agreement and the
remaining 187,500 to be released on September 13, 2006. These shares of Common
Stock were issued pursuant to Section 4(2) of the Securities Act and are
restricted securities as defined in the Securities Act.
On July 13, 2005 we issued 300,000 shares of restricted Common Stock to our
former Chief Executive Officer Mandee Heller Adler and 80,000 shares of
restricted Common Stock to our former Chief Operating Officer Ohad Jehassi.
On October 28, 2005 the Company filed with the Secretary of State of the State
of Delaware a Certificate of Designations, Preferences and Other Rights and
Qualifications of Series A Preferred Stock (the "Certificate of Designations")
designating 1,500,000 of the Company's previously authorized preferred stock. On
October 31, 2005 the Company issued $10,289,690 of RelationServe Preferred at a
purchase price of $13.50 per share (762,199 shares). Each share of RelationServe
Preferred was convertible into shares of RelationServe Common Stock, at an
initial conversion price of $1.35 per share. On February 3, 2006, all of the
outstanding shares of the Series A Preferred automatically converted into
7,621,991 shares of Company Common Stock pursuant to the terms of the Series A
Preferred at a conversion price of $1.35 per share.
On November 30, 2005 the Company entered into a Consulting Agreement with Elite
Card Services, Inc. ("Consultant"), pursuant to which we issued 90,000 shares of
restricted Common Stock.
On November 30, 2005 we issued 10,000 shares of restricted Common Stock to Shawn
McNamara, our Senior Vice-President and interim Chief Executive Officer.
During January 2005, warrants to purchase 50,000 shares of Company Common Stock
were exercised at an exercise price of $0.25
On February 3, 2005, and as a result of the Consolidation, Debentures
($34,950,000) issued by SendTec Acquisition Corp. ("STAC") on October 31, 2005
and initially convertible into STAC common stock, became convertible into the
Company's Common Stock at a conversion price of $1.50 per share. On such
II-3
date the Company also issued seven-year warrants to the holders of the
Debentures to purchase 10,081,607 shares of the Company's Common Stock in
amounts proportional to the face amount of the Debentures exercisable at $0.01
per share. The warrants will be exercisable from February 3, 2006 through
October 30, 2012.
On February 3, 2006, pursuant to the Securities Exchange Agreement, shares of
STAC Common Stock owned by STAC management were exchanged for an aggregate of
9,506,380 shares of Company Common Stock.
On February 3, 2006, pursuant to a letter agreement between the Company and the
Debenture holders, the Company issued 525,000 shares of Company Common Stock to
the holders pro rata in accordance with their respective ownership of the
Debentures.
On February 3, 2006, pursuant to a Securities Purchase Agreement the Company
sold to an "accredited investor," 500,000 shares of Company Common Stock for
$750,000. In connection with this transaction, we paid a finder's fee of
$25,000.
On February 7, 2006, holders of the seven-year warrants to purchase shares of
Company Common Stock, exercised warrants to purchase an aggregate of 2,664,398
shares of the Company Common Stock. Such exercise was effectuated through the
cashless exercise provision of the warrants equaling 9,549.81 shares in the
aggregate of Company Common Stock underlying the warrants.
On February 10, 2005 warrants to purchase 200,000 shares of Company Common Stock
were exercised at an exercise price of $0.25.
Item 27. Exhibits.
Exhibit
Number Description
- ------- -----------
2.1 Agreement and Plan of Merger of RelationServe Media, Inc. (Nevada)
with and into RelationServe Media, Inc. (Delaware) dated August 29,
2005 (incorporated herein by reference to Exhibit 2.1 to the Company's
Current Report on Form 8-K filed with the Commission on September 2,
2005)
2.2 Agreement of Merger and Plan of Reorganization among Chubasco
Resources Corp., Reland Acquisition, Inc. and RelationServe, Inc.
dated June 10, 2005 (incorporated herein by reference to Exhibit 2.1
to the Company's Current Report on Form 8-K filed with the Commission
on June 16, 2005)
3.1 Amended and Restated Certificate of Incorporation of RelationServe,
Inc. dated August 29, 2005 (incorporated herein by reference to
Exhibit 3.1 to the Company's Current Report on Form 8-K filed with the
Commission on September 2, 2005)
3.2 Amended and Restated By-Laws of RelationServe Media, Inc.
(incorporated herein by reference to Exhibit 3.2 to the Company's
Current Report on Form 8-K filed with the Commission on September 2,
2005)
II-4
Exhibit
Number Description
- ------- -----------
3.3 Amendment to Amended and Restated By-Laws of RelationServe Media, Inc.
(incorporated herein by reference to Exhibit 2.1 to the Company's
Current Report on Form 8-K filed with the Commission on December 5,
2005)
4.1 Form of Warrant to purchase Common Stock of RelationServe Media, Inc.
at an exercise price of $0.01 per share (incorporated herein by
reference to Exhibit 10.7 to the Company's Current Report on Form 8-K
filed with the Commission on February 9, 2006)
4.2 Form of Warrant to purchase Common Stock of RelationServe Media, Inc.
at an exercise price of $3.50 per share (incorporated herein by
reference to Exhibit 4.2 to the Company's Current Report on Form 8-K
filed with the Commission on June 30, 2005)
4.3 Form of Warrant to purchase Common Stock of RelationServe Media, Inc.
at an exercise price of $2.00 per share (incorporated by reference to
exhibit 4.3 to the Company's Annual Report on Form 10-KSB for the year
ended December 31, 2005)
4.4 Form of Warrant to purchase Common Stock of RelationServe Media, Inc.
at an exercise price of $0.25 (incorporated herein by reference to
Exhibit 2.8 to the Company's Current Report on Form 8-K filed with the
Commission on June 16, 2005)
4.5 Form of Restricted Stock Agreement (incorporated herein by reference
to Exhibit 10.15 to the Company's Quarterly Report on Form 10-QSB
filed with the Commission on August 15, 2005)
4.6 Form of Option Certificate (incorporated herein by reference to
Exhibit 10.14 to the Company's Quarterly Report on Form 10-QSB filed
with the Commission on August 15, 2005)
5.1 Opinion of Olshan Grundman Frome Rosenzweig & Wolosky (to be filed by
amendment)
10.01 Asset Purchase Agreement by and among RelationServe Access, Inc., Omni
Point Marketing, LLC, Cobalt Holdings, LLC and McCall and Estes
Advertising, Inc. dated May 12, 2005 (incorporated herein by reference
to Exhibit 2.1 to the Company's Current Report on Form 8-K filed with
the Commission on June 16, 2005)
10.02 Agreement and Plan of Merger between Friends Acquisition, Inc. and
Friendsand LLC dated May 13, 2005 (incorporated herein by reference to
Exhibit 2.2 to the Company's Current Report on Form 8-K filed with the
Commission on June 16, 2005)
10.03 Asset Purchase Agreement by and between RelationServe Media Inc.,
theglobe.com, inc., and SendTec, Inc. (incorporated herein by
reference to Exhibit 10.1 to the Company's Current Report on Form
8-K/A filed with the Commission on August 18, 2005)
10.04 Amendment No. 1 to Asset Purchase Agreement by and between
RelationServe Media Inc., theglobe.com, inc., and SendTec, Inc.
(incorporated herein by reference to Exhibit 10.1 to the Company's
Current Report on Form 8-K filed with the Commission on August 24,
2005)
II-5
Exhibit
Number Description
- ------- -----------
10.05 Holdback Escrow Agreement by and among RelationServe Media, Inc.,
theglobe.com., SendTec, Inc. and Olshan Grundman Frome Rosenzweig &
Wolosky LLP, dated August 9, 2005 (incorporated herein by reference to
Exhibit 10.8 to the Company's Current Report on Form 8-K/A filed with
the Commission on November 7, 2005)
10.06 Securities Purchase Agreement dated as of October 31, 2005, among
SendTec Acquisition Corp., RelationServe Media, Inc., each purchaser
identified on the signature pages hereto and Christiana Corporate
Services, Inc., in its capacity as administrative agent for the
Purchasers (incorporated herein by reference to Exhibit 10.1 to the
Company's Current Report on Form 8-K/A filed with the Commission on
November 7, 2005)
10.07 Form of Senior Secured Convertible Debenture dated as of October 31,
2005, among SendTec Acquisition Corp., RelationServe Media, Inc.,
purchaser, and Christiana Corporate Services, Inc., in its capacity as
administrative agent for the Purchasers (incorporated herein by
reference to Exhibit 10.2 to the Company's Current Report on Form
8-K/A filed with the Commission on November 7, 2005)
10.08 SendTec Acquisition Corp. Security Agreement (incorporated herein by
reference to Exhibit 10.3 to the Company's Current Report on Form
8-K/A filed with the Commission on November 7, 2005)
10.09 Guarantor Security Agreement among the Grantors and Christiana
Corporate Services, Inc., in its capacity as administrative agent for
the Holders, dated February 3, 2006 (incorporated herein by reference
to Exhibit 10.2 to the Company's Current Report on Form 8-K filed with
the Commission on February 9, 2006)
10.10 Copyright Security Agreement among the Grantors and Christiana
Corporate Services, Inc., in its capacity as administrative agent for
the Holders, dated February 3, 2006 (incorporated herein by reference
to Exhibit 10.3 to the Company's Current Report on Form 8-K filed with
the Commission on February 9, 2006)
10.11 Patent Security Agreement, dated February 3, 2006 among the Grantors
and Christiana Corporate Services, Inc., in its capacity as
administrative agent for the Holders, dated February 3, 2006
(incorporated herein by reference to Exhibit 10.4 to the Company's
Current Report on Form 8-K filed with the Commission on February 9,
2006)
10.12 Trademark Security Agreement among the Grantors and Christiana
Corporate Services, Inc., in its capacity as administrative agent for
the Holders, dated February 3, 2006 (incorporated herein by reference
to Exhibit 10.5 to the Company's Current Report on Form 8-K filed with
the Commission on February 9, 2006)
10.13 General Continuing Guaranty among the Guarantors in favor of the
Holders and Christiana Corporate Services, Inc., in its capacity as
administrative agent for the Holders, dated February 3, 2006
(incorporated herein by reference to Exhibit 10.6 to the Company's
Current Report on Form 8-K filed with the Commission on February 9,
2006)
II-6
Exhibit
Number Description
- ------- -----------
10.14 Securities Exchange Agreement by and among the Company and STAC
Management, dated February 3, 2006 (incorporated herein by reference
to Exhibit 10.8 to the Company's Current Report on Form 8-K filed with
the Commission on February 9, 2006)
10.15 Employment Agreement for Paul Soltoff, effective October 31, 2005
(incorporated herein by reference to Exhibit 10.15 to the Company's
Current Report on Form 8-K filed with the Commission on February 9,
2006)
10.16 Employment Agreement for Eric Obeck, effective October 31, 2005
(incorporated herein by reference to Exhibit 10.16 to the Company's
Current Report on Form 8-K filed with the Commission on February 9,
2006)
10.17 Employment Agreement for Donald Gould, effective October 31, 2005
(incorporated herein by reference to Exhibit 10.17 to the Company's
Current Report on Form 8-K filed with the Commission on February 9,
2006)
10.18 Employment Agreement between RelationServe Media, Inc. and Ohad
Jehassi, dated July 13, 2005 (incorporated herein by reference to
Exhibit 10.4 to the Company's Current Report on Form 8-K filed with
the Commission on July 18, 2005)
10.19 Employment Agreement between RelationServe Media, Inc. and Shawn
McNamara, dated November 30, 2005 (incorporated herein by reference to
Exhibit 10.2 to the Company's Current Report on Form 8-K filed with
the Commission on December 5, 2006)
10.20 Letter Agreement by and between the Company and LB I Group Inc., dated
October 31, 2005 (incorporated herein by reference to Exhibit 10.14 to
the Company's Current Report on Form 8-K filed with the Commission on
February 9, 2006)
10.21 Covenant Agreement among SendTec Acquisition Corp., the Company and
the Purchasers, dated February 3, 2006 (incorporated herein by
reference to Exhibit 10.21 to the Company's Annual Report on Form
10-KSB for the year ended December 31, 2005)
10.22 Release and Employment Severance Agreement between RelationServe
Media, Inc. and Mandee Heller Adler dated November 11, 2005
(incorporated herein by reference to Exhibit 10.1 to the Company's
Current Report on Form 8-K filed with the Commission on November 17,
2005)
10.23 Severance Agreement by and between the Company and Danielle Karp,
effective February 3, 2006 (incorporated herein by reference to
Exhibit 10.11 to the Company's Current Report on Form 8-K filed with
the Commission on February 9, 2006)
10.24 Non-Competition and Non-Solicitation Agreement by and between the
Company and the Hirsch Affiliates, dated February 3, 2006
(incorporated herein by reference to Exhibit 10.10 to the Company's
Current Report on Form 8-K filed with the Commission on February 9,
2006)
II-7
Exhibit
Number Description
- ------- -----------
10.25 Mutual General Release by and between the Company and the Hirsch
Affiliates, dated February 3, 2006 (incorporated herein by reference
to Exhibit 10.13 to the Company's Current Report on Form 8-K filed
with the Commission on February 9, 2006)
10.26 Stock Purchase Agreement by and between the Company and Sunrise Equity
Partners, L.P., dated February 3, 2006 (incorporated herein by
reference to Exhibit 10.12 to the Company's Current Report on Form 8-K
filed with the Commission on February 9, 2006)
10.27 Registration Rights Agreement among the Company and the Purchasers,
dated February 3, 2006 (incorporated herein by reference to Exhibit
10.9 to the Company's Current Report on Form 8-K filed with the
Commission on February 9, 2006)
10.28 Waiver and Amended and Restated Registration Rights Agreement between
RelationServe Media, Inc. and certain subscribers to RelationServe
Media Inc.'s common stock and warrants Subscribers to the
RelationServe Media Inc.'s common stock and warrants (incorporated
herein by reference to Exhibit 10.7 to the Company's Current Report on
Form 8-K/A filed with the Commission on November 7, 2005)
10.29 Consulting Agreement between Elite Card Services, Inc. and the
Company, dated November 30, 2005 (incorporated herein by reference to
Exhibit 10.1 to the Company's Current Report on Form 8-K filed with
the Commission on December 5, 2005)
10.30 Form of Registration Rights Agreement between RelationServe Media,
Inc. and Subscribers to the RelationServe Media Inc.'s Series A
Convertible Preferred Stock (incorporated herein by reference to
Exhibit 10.6 to the Company's Current Report on Form 8-K/A filed with
the Commission on November 7, 2005)
10.31 Form of Subscription Agreement between RelationServe Media, Inc. and
Subscribers to the RelationServe Media Inc.'s Series A Convertible
Preferred Stock (incorporated herein by reference to Exhibit 10.5 to
the Company's Current Report on Form 8-K/A filed with the Commission
on November 7, 2005)
10.32 Form of Subscription Agreement of RelationServe Media, Inc. (Nevada)
in connection with the private placement offering which closed on June
30, 2005 (incorporated herein by reference to Exhibit 4.1 to the
Company's Current Report on Form 8-K filed with the Commission on June
30, 2005)
10.33 RelationServe Media, Inc. 2006 Incentive Stock Plan (incorporated here
by reference to Exhibit 10.33 to the Company's Annual Report on Form
10-KSB for the year ended December 31, 2005)
10.34 RelationServe Media Inc. 2005 Non-Employee Directors Stock Option Plan
(incorporated herein by reference to Exhibit 10.1 to the Company's
Current Report on Form 8-K filed with the Commission on August 12,
2005)
II-8
Exhibit
Number Description
- ------- -----------
10.35 RelationServe Media, Inc. 2005 Incentive Stock Plan (incorporated
herein by reference to Exhibit 10.1 to the Company's Current Report on
Form 8-K filed with the Commission on July 18, 2005)
10.36 Note Purchase Agreement by and between RelationServe, Inc., JH
Associates, Inc. and GRQ Consultants, Inc. dated April 1, 2005
(incorporated herein by reference to Exhibit 2.3 to the Company's
Current Report on Form 8-K filed with the Commission on June 16, 2005)
10.37 Lease Agreement dated January 30, 2004 by and between Koger Equity,
Inc. and SendTec, Inc. (incorporated by reference to Exhibit 10.37 to
the Company's Annual Report on Form 10-KSB for the year ended December
31, 2005)
10.38 Lease Amendment Number 1 dated September 27, 2005 by and between CBT
Properties, Inc. and SendTec, Inc. (incorporated by reference to
Exhibit 10.38 to the Company's Annual Report on Form 10-KSB for the
year ended December 31, 2005)
10.39 Agreement of Lease dated May 23, 2005 by and between 386 PAS Partners,
L.L.C., and SendTec, Inc. (incorporated by reference to Exhibit 10.39
to the Company's Annual Report on Form 10-KSB for the year ended
December 31, 2005)
14.1 Code of Ethics of the Company (incorporated herein by reference to
Exhibit 14 to the Company's Current Report on Form 8-K filed with the
Commission on July 18, 2005)
16.1 Letter from Sherb & Co., LLP to the Company, dated December 5, 2005
(incorporated herein by reference to Exhibit 16 to the Company's
Current Report on Form 8-K filed with the Commission on December 5,
2005)
16.2 Letter from Morgan & Company to the Securities and Exchange Commission
dated July 15, 2005 (incorporated herein by reference to Exhibit 16.1
to the Company's Current Report on Form 8-K filed with the Commission
on July 18, 2005)
23.1 Consent of Marcum & Kliegman LLP*
23.2 Consent of McKean Paul Chrycy Fletcher & Co.*
23.3 Consent of Gregory, Sharer and Stuart, P.A.*
23.4 Consent of Olshan Grundman Frome Rosenzweig & Wolosky LLP (contained
in Exhibit 5.1)
- ----------
*filed herewith.
II-9
Item 28. Undertakings.
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which it offers or sells securities, a
post-effective amendment to this Registration Statement to:
(i) Include any prospectus required by Section 10(a) (3) of the Securities Act
of 1933;
(ii) Reflect in the prospectus any facts or events arising after the effective
date of the Registration Statement (or the most recent post-effective amendment
thereof) which, individually or in the aggregate, represent a fundamental change
in the information set forth in the Registration Statement. Notwithstanding the
foregoing, any increase or decrease in volume of securities offered (if the
total dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated maximum
offering range may be reflected in the form of prospectus filed with the
Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume
and price represent no more than a 20 percent change in the maximum aggregate
offering price set forth in the "Calculation of Registration Fee" table in the
effective Registration Statement;
(iii) Include any additional or changed information on the plan of distribution.
(2) For determining liability under the Securities Act, the Registrant will
treat each such post-effective amendment as a new registration statement of the
securities offered, and the offering of such securities at that time to be the
initial bona fide offering.
(3) To remove from registration by means of a post-effective amendment any of
the securities being registered which remain unsold at the termination of the
offering.
Insofar as indemnification for liabilities arising under the Securities Act may
be permitted to directors, officers and controlling persons of the Registrant
pursuant to the provisions described under Item 24 above, or otherwise, the
Registrant has been advised that in the opinion of the SEC such indemnification
is against public policy as expressed in the Securities Act and is, therefore,
unenforceable.
In the event that a claim for indemnification against such liabilities, other
than the payment by the Registrant of expenses incurred or paid by a director,
officer or controlling person of the Registrant in the successful defense of any
action, suit or proceeding, is asserted by such director, officer or controlling
person in connection with the securities being registered, the Registrant will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
II-10
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
RELATIONSERVE MEDIA, INC.
By: /s/ Shawn McNamara
------------------------------------
Name: Shawn McNamara
Title: Senior Vice President
Date: March 20, 2006
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
this report has been signed by the following persons on behalf of the registrant
and in the capacities and on the date indicated.
By: /s/ Paul Soltoff March 20, 2006
------------------------------------
Paul Soltoff, Director
By: /s/ Adam Wasserman March 20, 2006
------------------------------------
Adam Wasserman, (Principal Financial
Officer and Principal Accounting
Officer)
By: /s/ Shawn McNamara March 20, 2006
------------------------------------
Shawn McNamara, Senior Vice
President (Principal Executive
Officer)
By: /s/ Michael Brauser March 20, 2006
------------------------------------
Michael Brauser, Chairman of the
Board of Directors
II-11
