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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________
FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): September 12, 2001
__________________
MINDARROW SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
Delaware 0-28403 77-0511097
(State or other jurisdiction of (Commission File Number) (I.R.S. Employer
incorporation) Identification No.)
101 Enterprise, Suite 340, Aliso Viejo, California 92656
(Address of principal executive offices) (Zip Code)
____________________
Registrant's telephone number, including area code: (949) 916-8705
N/A
(Former name or former address, if changed since last report)
_________________
MindArrow Systems, Inc., a Delaware corporation ("Registrant"), filed
with the Commission on September 24, 2001, a Current Report on Form 8-K (the
"Current Report") describing Registrant's acquisition of substantially all of
the assets of Radical Communication, Inc., a privately-held Delaware corporation
("Radical"), on September 12, 2001. In accordance with the instructions to
paragraphs (a)(4) and (b)(2) of Item 7 of Form 8-K, the Current Report omitted
the financial statements of the business acquired and the pro forma financial
information required by such paragraphs.
Accordingly, Registrant hereby amends the Current Report by deleting
Item 7 thereof and replacing it in its entirety with the following:
Item 7. Financial Statements, Pro Forma Financial Information, and Exhibits
(a) Financial Statements of Business Acquired
Page
----
Report of Independent Certified Public Accountants................................. 2
Consolidated Balance Sheets - June 30, 2001 (unaudited) and December 31, 2000 ..... 3
Consolidated Statements of Operations - For the Six Months Ended June 30, 2001
and 2000 (unaudited), and for the Year Ended December 31, 2000..................... 4
Consolidated Statement of Changes in Stockholders' Equity - For the Year Ended
December 31, 2000 and for the Six Months Ended June 30, 2001 (unaudited)........... 5
Consolidated Statements of Changes in Cash Flows - For the Six Months Ended
June 30, 2001 and 2000 (unaudited), and for the Year Ended December 31, 2000 ...... 6
Notes to Consolidated Financial Statements......................................... 7
(b) Pro Forma Financial Information
Unaudited Pro Forma Combined Financial Statements Basis of Presentation............ 14
Unaudited Pro Forma Combined Balance Sheet......................................... 15
Unaudited Pro Forma Combined Statements of Operations.............................. 16
Notes to Unaudited Pro Forma Combined Financial Statements......................... 18
Page 1
Report of Independent Certified Public Accountants
Board of Directors
MindArrow Systems, Inc.
We have audited the accompanying consolidated balance sheet of Radical
Communication, Inc. and subsidiary as of December 31, 2000 and the related
statements of operations, stockholders' equity, and cash flows for the year then
ended. 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 financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our 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 Radical
Communication, Inc. and subsidiary as of December 31, 2000, and the results of
their operations and their cash flows for the year then ended in conformity with
accounting principles generally accepted in the United States of America.
As discussed in Notes A and H, the Company significantly curtailed operations in
May 2001 and on September 12, 2001 consummated a transaction in which
substantially all of its assets were sold to and certain liabilities were
assumed by MindArrow Systems, Inc.
/s/ Grant Thornton LLP
Reno, Nevada
September 12, 2001
Page 2
Radical Communication, Inc. and Subsidiary
Consolidated Balance Sheets
June 30, December 31,
2001 2000
------------ ------------
(unaudited)
ASSETS
Current Assets:
Cash $ 419,132 $ 670,904
Investment securities held to maturity - 3,984,505
Accounts receivable, net of allowance for doubtful accounts of $164,872
at June 30, 2001 and $24,669 at December 31, 2000 223,832 572,712
Prepaid expenses 55,421 69,326
------------ ------------
Total current assets 698,385 5,297,447
Fixed Assets, net 2,516,155 2,835,035
Deposits 51,716 -
------------ ------------
Total assets $ 3,266,256 $ 8,132,482
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued liabilities $ 676,422 $ 1,178,583
Deferred revenue 62,581 -
Current portion of capital lease obligations 739,370 690,104
Notes payable 200,000 -
------------ ------------
Total current liabilities 1,678,373 1,868,687
Capital lease obligations, net of current portion 287,158 583,564
------------ ------------
Total liabilities 1,965,531 2,452,251
------------ ------------
Stockholders' Equity:
Series A Convertible Preferred Stock,
$0.001 par value; 9,926,666 shares authorized, issued and outstanding;
$14,889,999 aggregate liquidation preference 9,927 9,927
Common Stock,
$0.001 par value; 29,926,666 shares authorized; 12,000,000 shares issued
and outstanding 12,000 12,000
Additional paid-in capital 18,414,518 18,414,518
Accumulated deficit (17,135,720) (12,756,214)
------------ ------------
Total stockholders' equity 1,300,725 5,680,231
------------ ------------
Total liabilities and stockholders' equity $ 3,266,256 $ 8,132,482
============ ============
The accompanying notes are an integral part of these statements.
Page 3
Radical Communication, Inc. and Subsidiary
Consolidated Statements of Operations
Six Months Ended Year Ended
June 30, June 30, December 31,
2001 2000 2000
-------------- -------------- --------------
(unaudited)
Revenues $ 547,707 $ 339,979 $ 1,182,063
-------------- -------------- --------------
Operating expenses:
Development 1,341,476 568,087 1,998,356
Production 621,607 643,890 1,741,566
Sales and marketing 813,870 940,282 3,191,745
General and administration 1,497,664 1,872,939 4,722,002
Depreciation and amortization 628,304 121,684 629,798
-------------- -------------- --------------
4,902,921 4,146,882 12,283,467
-------------- -------------- --------------
Operating loss (4,355,214) (3,806,903) (11,101,404)
Interest income (expense) (24,292) 16,660 171,912
-------------- -------------- --------------
Net loss $ (4,379,506) $ (3,790,243) $ (10,929,492)
============== ============== ==============
The accompanying notes are an integral part of these statements.
Page 4
Radical Communication, Inc. and Subsidiary
Consolidated Statement of Changes in Stockholders' Equity
Series A Preferred Stock Common Stock Additional Paid-In Accumulated
--------------------------- --------------------------
Shares Amount Shares Amount Capital Deficits
------------ ------------- ------------ ------------ ------------------ -------------
Balance, December 31, 1999 - $ - - $ - $ - $ (1,826,722)
Contributions by members - - - - - -
Recapitalization - - 12,000,000 12,000 3,524,446 -
Issuance of preferred stock 9,926,666 9,927 - - 14,890,072 -
Net loss - - - - - (10,929,492)
------------ ------------- ------------ ------------ ------------------ -------------
Balance, December 31, 2000 9,926,666 9,927 12,000,000 12,000 18,414,518 (12,756,214)
Net loss - - - - - (4,379,506)
------------ ------------- ------------ ------------ ------------------ -------------
Balance, June 30, 2001 (unaudited) 9,926,666 $ 9,927 12,000,000 $ 12,000 $ 18,414,518 $ (17,135,720)
============ ============= ============ ============ ================== =============
Membership Units Total
---------------- -------------
Balance, December 31, 1999 $ 2,211,446 $ 384,724
Contributions by members 1,325,000 1,325,000
Recapitalization (3,536,446) -
Issuance of preferred stock - 14,899,999
Net loss - (10,929,492)
---------------- -------------
Balance, December 31, 2000 - 5,680,231
Net loss - (4,379,506)
---------------- -------------
Balance, June 30, 2001 (unaudited) $ - $ 1,300,725
================ =============
The accompanying notes are an integral part of these statements.
Page 5
Radical Communication, Inc.
Consolidated Statements of Cash Flows
Six Months Ended Year Ended
June 30, June 30, December 31,
2001 2000 2000
------------ ------------ ------------
(unaudited)
Cash flows from operating activities:
Net loss $ (4,379,506) $ (3,790,243) $(10,929,492)
Adjustments to reconcile net loss to net cash used in operations:
Depreciation and amortization 628,304 121,684 629,798
(Increase) decrease in accounts receivable 348,880 (224,711) (561,870)
(Increase) decrease in prepaid expenses 13,905 (33,584) (66,231)
Increase in deposits (51,716) (130,629) -
Increase (decrease) in accounts payable and accrued liabilities (502,161) 502,706 949,340
Increase in deferred revenue 62,581 - -
------------ ------------ ------------
Net cash used in operations (3,879,713) (3,554,777) (9,978,455)
------------ ------------ ------------
Cash flows from investing activities:
Purchases of fixed assets (309,424) (84,157) (1,461,569)
(Purchase) maturity of investment securities held to maturity 3,984,505 - (3,984,505)
------------ ------------ ------------
Net cash (used in) provided by investing activities 3,675,081 (84,157) (5,446,074)
------------ ------------ ------------
Cash flows from financing activities:
Repayment of capital lease obligations (247,140) (409,707) (643,963)
Proceeds from notes payable 200,000 - -
Proceeds from issuance of preferred stock - 8,059,999 14,899,999
Proceeds from issuance of membership units - 1,325,000 1,325,000
------------ ------------ ------------
Net cash (used in) provided by financing activities (47,140) 8,975,292 15,581,036
------------ ------------ ------------
Net increase (decrease) in cash (251,772) 5,336,358 156,507
Cash, beginning of period 670,904 514,397 514,397
------------ ------------ ------------
Cash, end of period $ 419,132 $ 5,850,755 $ 670,904
============ ============ ============
Cash paid for income taxes $ - $ - $ -
============ ============ ============
Cash paid for interest $ 72,817 $ 4,479 $ 83,158
============ ============ ============
The accompanying notes are an integral part of these statements.
Page 6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000 and June 30, 2001 (unaudited)
Note A--The Company and Summary of Significant Accounting Policies
Radical Communication, Inc. ("RCI" or the "Company") is a software and services
company that creates, delivers, and tracks targeted multimedia communications
over the Internet. The Company's technology is designed to help its clients
build stronger relationships with their customers through more efficient and
cost-effective communications.
The Company's electronic multimedia messages, called RadicalMail messages,
combine streaming video, audio, and graphics that are delivered via email or
downloaded from a Web site. The recipient's responses to the message and
transactional activities are provided to the client as part of the services
offered through activity reports. RadicalMail messages can be viewed without
installing any special software and provide consistent, high-quality video
regardless of the recipient's Internet connection speed.
The Company's RadicalBuilder system is an application that allows users to
easily create RadicalMail messages to be deployed through the RCI distributed
network from an easy-to-use Web browser interface, while real-time tracking
provides immediate feedback on who viewed the messages and the actions they
took.
The Company was founded as StreaMedia.com, LLC on February 3, 1999 and
incorporated as Radical Communication, Inc., a Delaware corporation, on March
10, 2000. In May 2001, the Company significantly cut back operations, and in
September 2001, sold its assets to MindArrow Systems, Inc. (see Note H).
1. Principles of Consolidation
The accompanying consolidated financial statements include the accounts of RCI
and its wholly-owned subsidiary, StreaMedia.com, LLC.
2. Interim Financial Statements
The financial statements and related footnote disclosures as of and for the six
months ended June 30, 2001 and 2000 are unaudited; however, in the opinion of
management, all adjustments, consisting of normal recurring adjustments
necessary for a fair presentation of the Company's financial position and
results of operations for such period have been included. The results for the
six months ended June 30, 2001 are not necessarily indicative of the results
that may be expected for the year ending December 31, 2001.
3. Revenue Recognition
Revenues are recognized when the consulting or production services are rendered
and RadicalMail messages are delivered. Software license fees are recognized
when pervasive evidence of an agreement exists, the product has been delivered,
no significant obligations regarding implementation remain, the license fee is
fixed or determinable and collection of the fee is probable.
Revenue from consulting services is recognized as the services are rendered. In
December 1999, the U.S. Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin 101, "Revenue Recognition" ("SAB 101"), which provides
guidance on the recognition, presentation, and disclosure of revenue in
financial statements filed with the SEC. SAB 101 outlines the basic criteria
that must be met to recognize revenue and provides guidance for disclosure
related to revenue recognition policies. The Company believes its revenue
recognition practices are in conformity with the guidelines prescribed in SAB
101.
Page 7
4. Product Development
In accordance with Statement of Position ("SOP") 98-1, "Accounting for the Costs
of Computer Software Developed or Obtained for Internal Use," the Company
expenses costs associated with software developed or obtained for internal use
in the preliminary project stage and, thereafter, capitalizes costs incurred in
the developing or obtaining of internal use software. Capitalized costs are
amortized over their useful life. Whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable, management
evaluates the estimated useful life of intangible assets based upon projected
future undiscounted cash flows. Other costs incurred in research and development
are charged to expense as incurred.
5. Depreciation and Amortization
Property and equipment are stated at cost and depreciated using the
straight-line method over the estimated useful lives of the assets, generally
two to five years. The Company periodically evaluates the recoverability of its
long-lived assets based on expected undiscounted cash flows and recognizes
impairments, if any, based on expected discounted future cash flows.
6. Income Taxes
Income taxes are computed using the asset and liability method. Under the asset
and liability method, deferred income tax assets and liabilities are determined
based on the differences between the financial reporting and tax bases of assets
and liabilities and are measured using the currently enacted tax rates and laws.
A valuation allowance is provided for the amount of deferred tax assets that,
based on available evidence, are not expected to be realized.
At December 31, 2000 and June 30, 2001, the Company had a deferred tax asset of
approximately $1,913,000 and $2,570,000, respectively, resulting from cumulative
net operating losses for the period February 3, 1999 through December 31, 2000
and February 3, 1999 through June 30, 2001. The Company has provided for a
valuation allowance of $1,913,000 and $2,570,000 at December 31, 2000 and June
30, 2001, respectively.
7. Stock-Based Compensation
The Company accounts for stock-based employee compensation arrangements in
accordance with the provisions of Accounting Principles Board Opinion ("APB")
No. 25, "Accounting for Stock Issued to Employees," and complies with the
disclosure provisions of Statement of Financial Accounting Standards ("SFAS")
No. 123, "Accounting for Stock-Based Compensation." Under APB No. 25,
compensation expense is recognized over the vesting period based on the
difference, if any, on the date of grant between the fair value of the Company's
stock and the amount an employee must pay to acquire the stock.
The Company accounts for non-employee stock-based awards in which goods or
services are the consideration received for the equity instruments issued in
accordance with provisions of SFAS No. 123 and Emerging Issues Task Force No.
96-18, "Accounting for Equity Instruments that are Issued to other than
Employees for Acquiring, or in Conjunction with Selling, Goods or Services." In
March 2000, the Financial Accounting Standards Board issued Interpretation No.
44 ("FIN 44"), "Accounting for Certain Transactions involving Stock
Compensation," an interpretation of APB No. 25. FIN 44 clarifies (a) the
definition of "employee" for purposes of applying APB No. 25, (b) the criteria
for determining whether a plan qualifies as a noncompensatory plan, (c) the
accounting consequence of various modifications to the terms of a previously
fixed stock option or award, and (d) the accounting for an exchange of stock
compensation awards in a business combination.
FIN 44 was effective July 1, 2000, except requirements regarding certain events
that occur after December 15, 1998 or January 12, 2000 but before the effective
date should be applied prospectively. FIN 44 did not have a material impact on
the Company's financial position, results of operations or cash flows.
Page 8
8. Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, disclosure of contingent
assets and liabilities at the date of the financial statements, and the reported
amounts of revenues and expenses during the reported period. Actual results
could differ from those estimates.
9. Cash and Cash Equivalents
All highly liquid instruments with an original maturity of three months or less
are considered cash equivalents.
10. Concentration of Credit Risk
Financial instruments that potentially subject the Company to significant
concentration of credit risk consist primarily of cash, cash equivalents, and
accounts receivable. Substantially all of the Company's cash and cash
equivalents are held in one financial institution. As of December 31, 2000 and
June 30, 2001, the carrying amounts of cash were $670,904 and $419,132,
respectively, and the bank balances were $910,370 and $454,496, respectively, of
which $100,000 was FDIC insured. Accounts receivable are typically unsecured and
derived primarily from customers located in the United States. The Company
performs ongoing credit evaluations of its customers and will maintain reserves
for potential credit losses as the need arises.
11. Comprehensive Income
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS No.
130, "Reporting Comprehensive Income," which has been adopted by the Company.
SFAS No. 130 establishes standards for reporting comprehensive income and its
components in a financial statement. Comprehensive income as defined includes
all changes in equity (net assets) during a period from non-owner sources.
Examples of items to be included in comprehensive income, which are excluded
from net income, include foreign currency translation adjustments and unrealized
gains and losses on available-for-sale securities. As none of these components
have impacted the Company, adjustments for comprehensive income have not been
made to the accompanying consolidated financial statements.
12. Segments
The Company has adopted SFAS No. 131 "Disclosures about Segments of an
Enterprise and Related Information". SFAS No. 131 establishes standards for
reporting information regarding operating segments in annual financial
statements and requires selected financial information for those segments to be
presented in interim financial reports. SFAS No. 131 also establishes standards
for related disclosures about products and services, and geographic areas. To
date the Company has viewed its operations as principally one segment.
13. Investments
The Company determines the appropriate classification of its investments in debt
and equity securities at the time of purchase and reevaluates such
determinations at each balance sheet date. Debt securities are classified as
held-to-maturity when the Company has the positive intent and ability to hold
the securities to maturity. Debt securities for which the Company does not have
the intent or ability to hold to maturity are classified as available for sale.
Held-to-maturity securities are recorded as either short-term or long-term on
the balance sheet based on contractual maturity date and are stated at amortized
cost. Marketable securities that are bought and held principally for the purpose
of selling them in the near term are classified as trading securities and are
reported at fair value, with unrealized gains and losses recognized in earnings.
Debt and marketable equity securities not classified as held-to-maturity or as
trading, are classified as available-for-sale and are carried at fair market
value, with the unrealized gains and losses, net of tax, included in the
determination of comprehensive income and reported in shareholders' equity. At
December 31, 2000, the Company only had investments in held-to-maturity debt
securities.
Page 9
14. Recent Accounting Pronouncements
On July 20, 2001, the FASB issued SFAS No. 141, "Business Combinations", and
SFAS 142, "Goodwill and Intangible Assets". SFAS No. 141 is effective for all
business combinations completed after June 30, 2001. SFAS No. 142 is effective
for fiscal years beginning after December 15, 2001; however, certain provisions
of this Statement apply to goodwill and other intangible assets acquired between
July 1, 2001 and the effective date of SFAS No. 142. Major provisions of these
Statements and their effective dates for the Company are as follows:
. All business combinations initiated after June 30, 2001 must use the
purchase method of accounting. The pooling of interest method of accounting
is prohibited except for transactions initiated before July 1, 2001.
. Intangible assets acquired in a business combination must be recorded
separately from goodwill if they arise from contractual or other legal
rights or are separable from the acquired entity and can be sold,
transferred, licensed, rented or exchanged, either individually or as part
of a related contract, asset or liability.
. Goodwill, as well as intangible assets with indefinite lives, acquired
after June 30, 2001, will not be amortized. Effective January 1, 2002, all
previously recognized goodwill and intangible assets with indefinite lives
will no longer be subject to amortization.
. All acquired goodwill must be assigned to reporting units for purposes of
impairment testing and segment reporting.
The Company does not anticipate that the adoption of SFAS Nos. 141 and 142 will
have any material impact on the Company's financial position or results of
operations.
Note B--Fixed Assets
Fixed assets, at cost, consist of the following:
June 30, December 31,
2001 2000
------------ -------------
(unaudited)
Equipment $ 2,199,547 $ 2,187,443
Computers 412,219 412,219
Furniture and fixtures 41,224 41,224
Software 1,116,816 819,496
------------ -------------
3,769,806 3,460,382
Less accumulated depreciation (1,253,651) (625,347)
------------ -------------
$ 2,516,155 $ 2,835,035
============ =============
Fixed assets included $1,871,669 of fixed assets under capital lease at June 30,
2001 and December 31, 2000. Accumulated depreciation of assets under capital
lease totaled $706,236 and $393,840 at June 30, 2001 and December 31, 2000,
respectively. With the exception of equipment subject to one capital lease,
these assets were included in the transaction on September 12, 2001, whereby
MindArrow Systems purchased substantially all of the assets of the Company (See
Notes D and H).
Note C--Investment in Securities held to Maturity
The Company's investments in debt securities, which mature within one year, are
held to maturity and are valued at amortized cost, which approximates fair
value. The investments consist of discount agency notes. The aggregate fair
value at December 31, 2000 was $3,984,505.
Page 10
Note D--Commitments and Contingencies
1. Capital Leases
Future minimum lease payments under capital lease obligations at June 30, 2001
and December 31, 2000 are as follows:
June 30, December 31,
2001 2000
----------- ------------
(unaudited)
2001 $ 540,891 $ 818,304
2002 498,175 498,175
2003 142,759 142,759
----------- ------------
Total minimum lease payments 1,181,825 1,459,238
Less amount representing interest (155,297) (185,570)
----------- ------------
Present value of minimum lease payments 1,026,528 1,273,668
Less current portion of capital lease obligations (739,370) (690,104)
----------- ------------
Capital lease obligations, net of current portion $ 287,158 $ 583,564
=========== ============
Upon the sale of assets of the Company to MindArrow Systems (See Note H), all
but one of these leases were assigned to MindArrow. The lease that was not
assigned, with a balance of $428,858 at June 30, 2001, remained an obligation of
the Company. The lease obligation secured assets that also remained with the
Company and were not included in the transaction.
2. Operating Leases
In January 2000, the Company entered into a non-cancelable three-year operating
lease for its facilities in Huntington Beach, California, commencing on May 1,
2000. The lease provides for rent payments of $4,671 through April 30, 2001,
$4,886 through April 30, 2002, and $5,102 through the remaining term of the
lease, which expires on April 30, 2003. The minimum lease payments for operating
leases for the years ending December 31 are as follows:
2001 $ 29,319
2002 60,362
2003 20,408
-------------
$ 110,089
=============
Rent expense for the year ended December 31, 2000 amounted to $37,368. Rent
expense for the six months ended June 30, 2001 amounted to $28,456. This lease
obligation was assumed by MindArrow Systems upon the sale of assets of the
Company (See Note H).
3. Notes Payable
On June 6, 2001, the Company entered into five convertible secured promissory
notes totaling $200,000, payable on the earlier of July 6, 2001, the
consolidation or merger of the Company, or the sale of all, or substantially
all, of the assets of the Company. The notes bear interest at 9.5%, increasing
to 12% if the notes are not paid on the maturity date. The holders of the notes
have the option to convert their note balances to preferred stock of the Company
prior to the Company entering into any change of control transaction.
Upon the sale of assets of the Company to MindArrow Systems (See Note H), these
liabilities were not assumed by MindArrow and remained an obligation of the
Company.
Page 11
4. Legal Proceedings
From time to time the Company is subject to legal proceedings and claims in the
ordinary course of business, including claims of alleged infringement of
trademarks, copyrights and other intellectual property rights. The Company is
not currently aware of any legal proceedings or claims that it believes will
have, individually or in the aggregate, a material adverse effect on the
Company's consolidated financial position or results of operations.
Note E--Recapitalization
On March 10, 2000, the Company acquired all of the outstanding membership units
of StreaMedia LLC. For accounting purposes, the acquisition was treated as a
recapitalization of the Company. The stockholders of StreaMedia LLC exchanged
their membership units for 12,000,000 shares of common stock of the Company.
Note F--Stockholders' Equity
1. Series A Convertible Preferred Stock
As of December 31, 2000, the Company had issued 9,926,666 shares of Series A
preferred stock for $1.50 per share in a private placement which closed in
August 2000. Net proceeds were approximately $14.9 million. Dividends are
payable to holders of Series A preferred stock when and if declared by the
Company and will be non-cumulative. No dividends (other than those payable
solely in common stock) will be declared or paid with respect to shares of
common stock until dividends in the aggregate amount of at least $0.12 per share
have been paid or declared on the Series A preferred.
Holders of shares of Series A preferred are entitled to vote on all matters
submitted to a vote of the stockholders. Each share of Series A preferred
entitles the holder to the number of votes equal to the number of shares of
common stock into which the Series A preferred is convertible as of the record
date established for the vote of stockholders. In addition, holders of Series A
preferred, voting as a separate class, are entitled to elect two members of the
Board of Directors.
Each share of Series A preferred is convertible into one share of common stock
at any time upon the stockholder's election. The shares of Series A preferred
will be automatically converted into shares of common stock upon (i) the
effective date of a firm commitment, underwritten public offering of common
stock pursuant to an effective registration statement under the Securities Act,
other than a registration relating solely to a transaction under Rule 145 of the
Securities Act or to any employee benefit plan of the Company, generating
aggregate proceeds to the Company of not less than $15 million (after deducting
underwriters' discounts and expenses) of not less than $4.50 per share, as such
per share price may be adjusted to reflect stock subdivisions, combinations or
dividends with respect to such shares, or (ii) the date specified by affirmative
vote or written consent or agreement of holders of not less than two-thirds
(2/3) of the then outstanding shares of Series A preferred.
In the event of liquidation, the holders of the Series A preferred shall be
entitled to receive, prior to and in preference to any distributions to the
holders of common stock, $1.50 per share of Series A plus any accrued but unpaid
dividends if and when declared by the Board of Directors.
2. Options
Under the 2000 Option Plan (the "Plan"), incentive stock options may be granted
to employees, directors, and officers of the Company and non-qualified stock
options and stock purchase rights may be granted to consultants, employees,
directors, and officers of the Company. Options granted under the Plan are for
periods not to exceed ten years and must be issued at prices not less than 100%
and 85%, for incentive and nonqualified stock options, respectively, of the fair
market value of the stock on the date of grant, as determined by the Board of
Directors. Options granted to shareholders who own greater than 10% of the
outstanding stock are for periods not to exceed five years and must be issued at
prices not less than 110% of the fair market value of the stock on the date of
grant, as determined by the Board of Directors. Options granted under the Stock
Plan generally vest 25% after the first year of service and ratably each month
over
Page 12
the remaining thirty-six month period. The Company has adopted the
disclosure-only provisions of SFAS No. 123, Accounting for Stock-Based
Compensation, but applies APB No. 25 and related interpretations in accounting
for its plans.
The fair value of the Company's stock options was estimated as of the grant date
using the Black-Scholes option pricing model with the following weighted average
assumptions for the year ended December 31, 2000 and for the six months ended
June 30, 2001: dividend yield of 0.0%, expected volatility of 0%, risk free
interest rate of 6.5%, and an expected holding period from 1 to 3 years. All
options granted under the Plan carried an exercise price of $0.60 per share. The
following table summarizes activity under the Plan:
Six Months Ended Year ended
June 30, 2001 December 31, 2000
---------------- -----------------
(unaudited)
Outstanding at beginning of period 7,214,500 -
Granted 179,000 7,516,500
Exercised - -
Forfeited/expired (675,853) (302,000)
------------- -------------
Outstanding at end of period 6,717,647 7,214,500
============= =============
Exercisable 3,004,411 152,750
============= =============
Weighted average contractual life (years) 9.4 9.8
Upon the sale of assets of the Company to MindArrow Systems (See Note H), all
employees were terminated.
Note G--Employment Contracts
The Company had employment agreements with eight employees. The agreements
provided for severance payments under certain circumstances. As of December 31,
2000 and June 30, 2001, if all of the individuals under these contracts were to
be terminated by the Company, the Company's liability would be approximately
$1.2 million. Concurrently with the sale of assets of the Company to MindArrow
Systems (See Note H), all of these contracts were terminated and the liabilities
were settled for approximately $120,000, of which MindArrow assumed
approximately $60,000.
Note H--Subsequent Event
On September 12, 2001, the Company sold substantially all of its assets to
MindArrow Systems, a publicly-traded software and services company which had
previously been a competitor. Under the terms of the transaction, MindArrow
acquired substantially all of the assets of the Company in exchange for
1,980,000 shares of its common stock, 135,000 shares of its Series C preferred
stock and an unsecured subordinated promissory note in the aggregate principal
amount of $1,000,000. The promissory note bears interest at 5% per annum and is
payable in two annual installments of $500,000, with the first installment due
October 1, 2002. MindArrow also assumed certain liabilities, including up to
$900,000 of unsecured payables and certain capital lease obligations. Upon the
close of the proposed transaction, the Company designated a representative to
join MindArrow's Board of Directors. The Company also formed a liquidating trust
and appointed a trustee to manage the settlement of remaining liabilities and
the liquidation of the Company.
Page 13
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
BASIS OF PRESENTATION
On September 12, 2001, MindArrow Systems, Inc. completed the acquisition of
substantially all of the assets and the assumption of certain liabilities of
Radical Communication, Inc., in exchange for 1,980,000 shares of common stock,
135,000 shares of Series C preferred stock, and a note payable for $1,000,000.
Each share of common stock was valued at $1.02, and each share of Series C
preferred at $2.04, resulting in total consideration of $3,295,000.
The Unaudited Pro Forma Combined Balance Sheet is presented as if the Company
had completed the acquisition as of June 30, 2001. The Unaudited Pro Forma
Combined Statement of Operations for the most recently completed fiscal year is
presented as if the Company had completed the acquisition as of October 1, 1999
and both companies had the same fiscal year-end. The Unaudited Pro Forma
Combined Statement of Operations for the nine months ended June 30, 2001 is
presented as if the Company had completed the acquisition on October 1, 2000.
The pro forma information is based upon tentative allocations of purchase price
for the acquisition and may not be indicative of the results that would have
been reported had such events actually occurred on the dates specified, nor is
it indicative of the Company's future results. Purchase accounting is based upon
preliminary asset valuations, which are subject to change.
In the opinion of management, all adjustments necessary to fairly present this
pro forma information have been made. The Unaudited Pro Forma Combined Financial
Statements are based upon, and should be read in conjunction with, the
historical consolidated financial statements of MindArrow Systems, Inc. and
Subsidiaries, and the respective notes to such financial statements in the
Company's annual report on Form 10-K for the year ended September 30, 2000 and
its other periodic filings with the Securities and Exchange Commission.
Page 14
MindArrow Systems, Inc. and Subsidiaries
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
As of June 30, 2001
-----------------------------------------------------------------------
MindArrow Radical Pro Forma Pro Forma
Systems Communication Adjustments Combined
------------ ---------------- --------------- -----------
ASSETS
Current Assets:
Cash $ 2,424,635 $ 419,132 (a) $ (419,132) $ 2,424,635
Cash, pledged 115,400 - - 115,400
Accounts receivable, net 747,307 223,832 - 971,139
Prepaid expenses 43,867 55,421 - 99,288
Due from related parties 471,231 - - 471,231
------------ ---------------- --------------- ------------
Total current assets 3,802,440 698,385 (419,132) 4,081,693
Fixed Assets, net 2,378,678 2,516,155 (a) (428,858) 4,245,206
(b) (220,769)
Intangible Assets, net 2,794,760 - (d) 2,434,176 5,228,936
Deposits 124,886 51,716 - 176,602
------------ ---------------- --------------- ------------
Total assets $ 9,100,764 $ 3,266,256 $ 1,365,417 $ 13,732,437
============ ================ =============== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued liabilities $ 1,427,084 $ 676,422 $ - $ 2,103,506
Deferred revenue 1,364,259 62,581 - 1,426,840
Current portion of capital lease obligations - 739,370 (a), (c) (187,657) 551,713
Due to related parties 268,670 - - 268,670
Notes payable - 200,000 (200,000) -
------------ ---------------- --------------- ------------
Total current liabilities 3,060,013 1,678,373 (387,657) 4,350,729
------------ ---------------- --------------- ------------
Note payable - - 1,000,000 1,000,000
Capital lease obligations, net of current portion - 287,158 (a), (c) (241,201) 45,957
------------ ---------------- --------------- ------------
Total liabilities 3,060,013 1,965,531 371,142 5,396,686
------------ ---------------- --------------- ------------
Stockholders' Equity:
Series A Convertible Preferred Stock,
$0.001 par value; 9,926,666 shares authorized,
issued and outstanding; $14,889,999 aggregate
liquidation preferennce - 9,927 (9,927) -
Series B Convertible Preferred Stock,
$0.001 par value; 1,750,000 shares authorized;
1,004,949 shares issued and outstanding;
$8,039,592 aggregate liquidation preference 1,005 - - 1,005
Series C Convertible Preferred Stock,
$0.001 par value; 3,000,000 shares authorized;
779,775 shares issued and outstanding; $19,494,375
aggregate liquidation preference 780 - 135 915
Common Stock,
$0.001 par value; 30,000,000 shares authorized;
11,456,666 shares issued and outstanding as of
June 30, 2001 11,457 - 1,980 13,437
Common Stock,
$0.001 par value; 29,926,666 shares authorized;
12,000,000 shares issued and outstanding - 12,000 (12,000) -
Additional paid-in capital 70,149,571 18,414,518 (16,121,633) 72,442,456
Accumulated deficit (64,012,440) (17,135,720) 17,135,720 (64,012,440)
Unearned stock-based compensation (109,622) - - (109,622)
------------ ---------------- ---------------- ------------
Total stockholders' equity 6,040,751 1,300,725 994,275 8,335,751
------------ ---------------- ---------------- ------------
Total liabilities and stockholders' equity $ 9,100,764 $ 3,266,256 $ 1,365,417 $ 13,732,437
============ ================ ================ ============
The accompanying notes are an integral part of these statements.
Page 15
MindArrow Systems, Inc. and Subsidiaries
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
Nine Months Ended June 30, 2001
---------------------------------------------------------------------------------
MindArrow Radical Pro Forma Pro Forma
Systems Communication Adjustments Combined
---------------- ----------------- --------------- ---------------
Revenues $ 2,739,253 $ 1,022,385 $ - $ 3,761,638
---------------- ----------------- --------------- ---------------
Operating expenses:
Development 2,144,665 2,154,788 - 4,299,453
Production 1,301,044 1,232,654 - 2,533,698
Sales and marketing 4,969,565 2,213,958 - 7,183,523
General and administration 4,644,713 2,856,655 - 7,501,368
Depreciation and amortization 2,031,804 902,013 - 2,933,817
---------------- ----------------- --------------- ---------------
15,091,791 9,360,068 - 24,451,859
---------------- ----------------- --------------- ---------------
Operating loss (12,352,538) (8,337,683) - (20,690,221)
Interest income, net 222,149 68,463 (e) (37,500) 253,112
Other expense (64,157) - - (64,157)
Loss on transfer agent fraud (19,609,090) - - (19,609,090)
---------------- ----------------- --------------- ---------------
Net loss $ (31,803,636) $ (8,269,220) $ (37,500) $ (40,110,356)
================ ================= =============== ===============
Basic and diluted loss per share $ (3.00) $ (3.19)
================ ===============
Shares used in computation of basic
and diluted loss per share 10,604,816 12,584,816
================ ===============
The accompanying notes are an integral part of these statements.
Page 16
MindArrow Systems, Inc. and Subsidiaries
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
September 30, December 31,
2000 2000
------------- --------------
MindArrow Radical Pro Forma Pro Forma
Systems Communication Adjustments Combined
------------- -------------- ----------- --------------
Revenues $ 1,641,895 $ 1,182,063 $ - $ 2,823,958
------------- ------------- ----------- --------------
Operating expenses:
Development 2,220,276 1,998,356 - 4,218,632
Production 1,038,963 1,741,566 - 2,780,529
Sales and marketing 7,666,936 3,191,745 - 10,858,681
General and administration 6,212,800 4,722,002 - 10,934,802
Depreciation and amortization 1,527,413 629,798 - 2,157,211
------------- ------------- ----------- --------------
18,666,388 12,283,467 - 30,949,855
------------- ------------- ----------- --------------
Operating loss (17,024,493) (11,101,404) - (28,125,897)
Interest income, net 537,321 171,912 (e) (50,000) 659,233
Provision for income taxes (1,628) - - (1,628)
Minority interest 20,029 - - 20,029
------------- ------------- --------------
-----------
Net loss (16,468,771) (10,929,492) (50,000) (27,448,263)
Beneficial conversion feature on preferred stock (12,346,440) - - (12,346,440)
------------- ------------- ----------- --------------
Net loss available to common stockholders $(28,815,211) $(10,929,492) $ (50,000) $(39,794,703)
============= ============= =========== ==============
Basic and diluted loss per share $ (2.95) $ (3.39)
============= ==============
Shares used in computation of basic and diluted
loss per share 9,759,222 11,739,222
============= ==============
The accompanying notes are an integral part of these statements.
Page 17
MindArrow Systems, Inc. and Subsidiaries
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
The pro forma adjustments contained in the accompanying unaudited pro forma
combined financial statements give effect to the following:
(a) All assets were purchased except for cash and equipment secured by one
capital lease, the liability for which was not assumed, which had a
balance of $428,858 at June 30, 2001.
(b) Fixed assets were written down to fair market value, resulting in a
reduction in recorded value of $220,769.
(c) The Asset Purchase Agreement and a related letter agreement called for
MindArrow to assume up to $900,000 in unsecured liabilities; operating
expenses arising from August 13, 2001 until the close of the
transaction, and any of the capital lease obligations for which the
lessors consented to the assumption. Accordingly, the short-term notes
payable were not assumed, nor was a capital lease obligation which had
a balance of $428,858 as of June 30, 2001. The accompanying Pro Forma
Combined Balance Sheet was prepared as if the transaction had closed
on June 30, 2001, and no adjustment has been made for changes in asset
or liability amounts from that date until September 12, 2001.
(d) The Company is in the process of valuing the excess of purchase price
over the fair value of net assets acquired. Accordingly, no
amortization expense for intangible assets acquired has been recorded
in the accompanying Pro Forma Combined Statements of Operations.
(e) The $1,000,000 note payable bears interest at 5% per annum.
Page 18
(c) EXHIBITS
The following exhibits are filed as part of this report:
Exhibit No. Description
----------- -----------
2.1 Asset Purchase Agreement, dated as of September 12, 2001, by and
among MindArrow Systems, Inc., Radical Communication, Inc. and
STREAMedia, LLC.*
4.1 Subordinated Promissory Note, dated September 12, 2001, by
MindArrow Systems, Inc. **
23.1 Consent of Grant Thornton LLP, Independent Auditors
* Previously filed as Exhibit 2.1 on Form 8-K filed on September
24, 2001.
** Previously filed as Exhibit 4.1 on Form 8-K filed on September
24, 2001.
Page 19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
MINDARROW SYSTEMS, INC.
By: /s/ Michael R. Friedl
--------------------------------------
Michael R. Friedl
Chief Financial Officer, Secretary and
Treasurer
Date: November 26, 2001
Page 20