<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 8, 1996
REGISTRATION NO. 333-12795
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------
PRE EFFECTIVE AMENDMENT #1 TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------
THINK NEW IDEAS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
--------------
DELAWARE 7389 95-4578104
(STATE OR OTHER (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
JURISDICTION CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
OF INCORPORATION OR
ORGANIZATION)
45 WEST 36TH STREET
NEW YORK, NEW YORK 10018
(212) 629-6800
(ADDRESS, INCLUDING ZIP CODE AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
--------------
SCOTT A. MEDNICK
CHIEF EXECUTIVE OFFICER
THINK NEW IDEAS, INC.
8522 NATIONAL BOULEVARD, SUITE 101
CULVER CITY, CALIFORNIA 90232-2481
(310) 842-8444
(NAME, ADDRESS, INCLUDING ZIP CODE AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
COPIES TO:
RALPH V. DE MARTINO, ESQ. SHELDON E. MISHER, ESQ.
DE MARTINO FINKELSTEIN ROSEN & VIRGA BACHNER, TALLY, POLEVOY & MISHER, LLP
1818 N STREET, NW, SUITE 400 380 MADISON AVENUE
WASHINGTON, DC 20036-2492 NEW YORK, NY 10017
(202) 659-0494 (212) 687-7000
--------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
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 (the "Securities Act"), other than securities offered only in connection
with dividend or interest reinvestment plans, check the following box. [_]
If this Form is filed to register additional securities for an Offering
pursuant to Rule 462(b) under the Securities Act, please 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 delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
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, as amended, or until the
Registration Statement shall become effective on such date as the Commission,
acting pursuant to said Section 8(a), may determine.
CALCULATION OF REGISTRATION FEE
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- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS AMOUNT TO BE OFFERING PRICE PER AGGREGATE OFFERING AMOUNT OF
OF SECURITIES TO BE REGISTERED REGISTERED(2) SHARE(1) PRICE(1) REGISTRATION FEE
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, par value
$.0001(2)............... 2,300,000 $ 7.50 $17,250,000 $5,948
- ----------------------------------------------------------------------------------------------------
Underwriter
Warrants(3)............. 200,000 .001 $ 200 --
- ----------------------------------------------------------------------------------------------------
Common Stock, par value
$.0001(4)............... 200,000 $10.50 $ 2,100,000 $ 725
- ----------------------------------------------------------------------------------------------------
Total.................... $19,350,000 $6,673
- ----------------------------------------------------------------------------------------------------
Less amounts previously
paid.................... $6,569
- ----------------------------------------------------------------------------------------------------
Total.................... $ 104
</TABLE>
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(1) Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457(a).
(2) Includes 300,000 shares of Common Stock subject to the over-allotment
option granted to the Underwriter.
(3) To be issued to the Underwriter in the Offering.
(4) Issuable upon exercise of the warrants to be issued to the Underwriter.
*Note: Pursuant to Rule 416 under the Securities Act of 1933, as amended, this
Registration Statement covers such additional indeterminate number of
shares of Common Stock as may be issued by reason of adjustments in the
number of shares of Common Stock issuable pursuant to anti-dilution
provisions applicable to the securities subject hereto. Because such
additional shares of Common Stock will, if issued, be issued for no
additional consideration, no registration fee is required.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+THE INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THE SECURITIES DESCRIBED HEREIN HAS BEEN +
+FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THE SECURITIES MAY NOT BE +
+SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION +
+STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO +
+SELL OR THE SOLICITATION OF AN OFFER TO BUY, NOR SHALL THERE BE ANY SALE OF +
+THESE SECURITIES DESCRIBED HEREIN IN ANY STATE IN WHICH SUCH OFFER, +
+SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION +
+UNDER THE SECURITIES LAWS OF ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Subject to completion, dated November 8, 1996
PROSPECTUS
[LOGO OF THINK NEW IDEAS, INC. APPEARS HERE]
2,000,000 Shares of Common Stock
-----------
All of the shares of common stock, par value $.0001 (the "Common Stock"),
offered hereby are being sold by THINK New Ideas, Inc. (the "Company"), except
for certain shares that may be sold in connection with the exercise of the
over-allotment option granted to the Underwriter. Prior to this Offering (the
"Offering"), there has been no public market for the Common Stock of the
Company. It is currently estimated that the initial public offering price will
be between $7.00 and $8.00 per share. See "Underwriting" for a discussion of
the factors to be considered in determining the initial public offering price.
The Company has applied for listing of the Common Stock for quotation on The
Nasdaq National Market ("Nasdaq") under the symbol "THNK."
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK AND IMMEDIATE
SUBSTANTIAL DILUTION. SEE "RISK FACTORS" BEGINNING ON PAGE 8 AND "DILUTION."
THE SECURITIES OFFERED HEREBY HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
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<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) COMPANY(2)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share $ $ $
- --------------------------------------------------------------------------------
Total(3) $ $ $
</TABLE>
- --------------------------------------------------------------------------------
(1) Does not include additional underwriting compensation in the form of: (a) a
warrant to purchase up to 200,000 shares of Common Stock exercisable for a
period of four years commencing one year from the date of this Prospectus
at a price equal to 140% of the initial public offering price (the
"Underwriter's Warrant"); (b) a non-accountable expense allowance equal to
1.0% of the initial public offering price; and (c) an advisory fee (the
"Advisory Fee") equal to 3.0% of the initial public offering price. The
Company and Benchmark Equity Group, Inc. ("Benchmark" or the "Selling
Stockholder") have agreed to indemnify the Underwriter against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(2) Before deducting estimated expenses of the Offering payable by the Company,
including the non-accountable expense allowance and the Advisory Fee,
estimated at $ ($ if the Underwriter's over-allotment option is
exercised in full). See "Underwriting."
(3) The Company and the Selling Stockholder have granted to Commonwealth
Associates (the "Underwriter") a 30-day option to purchase up to 300,000
additional shares of Common Stock on the same terms and conditions as set
forth above, solely to cover over-allotments, if any. Pursuant to the terms
of such option, upon exercise thereof by the Underwriter, the first 200,000
shares of Common Stock will be offered and sold by the Selling Stockholder
and the remaining 100,000 shares of Common Stock will be offered and sold
by the Company. The Company will not receive any of the proceeds from the
sale of shares of Common Stock by the Selling Stockholder. If such option
is exercised in full, the total Price to Public, Underwriting Discounts and
Commissions and Proceeds to the Company will be $ , $ and $ ,
respectively. See "Principal and Selling Stockholders" and "Underwriting."
The shares of Common Stock are being offered by the Underwriter subject to
prior sale, when, as and if delivered to and accepted by the Underwriter, and
subject to certain other conditions. The Underwriter reserves the right to
withdraw, cancel or modify the Offering and to reject any order in whole or in
part. It is expected that delivery of certificates representing the Common
Stock will be made against payment therefor at the offices of Commonwealth
Associates, 733 Third Avenue, New York, New York 10017, on or about , 1996.
See "Underwriting."
COMMONWEALTH ASSOCIATES
The date of this Prospectus is , 1996
<PAGE>
[ART]
Think New Ideas, On Ramp, Metaverse, Internet One, CubePublisher, Market
Advantage, CubeBuilder, CubeEditor, CubeEngine, CubeFactory, CubeTech,
UpperClass, Office of the Future, Inc., OFI, NetCube, and VINNI are trademarks
of the Company or its subsidiaries. The Company or its subsidiaries has filed
servicemark applications with the U.S. Patent and Trademark Office for "Think
New Ideas" and the "Thinking Head" logo. The Company or its subsidiaries has
filed various product trademarks with the U.S. Patent and Trademark Office.
This Prospectus also includes product names, trade names and trademarks of
other companies.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
TRANSACTIONS MAY BE EFFECTED IN THE OVER-THE-COUNTER MARKET, ON NASDAQ OR
OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
2
<PAGE>
PROSPECTUS SUMMARY
The following summary information is qualified in its entirety and should be
read in conjunction with the more detailed information and consolidated
financial statements (including the notes thereto) appearing elsewhere in this
prospectus (the "Prospectus"). The information provided throughout this
Prospectus assumes that the over-allotment option granted to the Underwriter is
not exercised and gives retroactive effect to a one to .496225157 reverse stock
split effected by the Company in September 1996 and a 2 for 3 reverse split to
be effected by the Company in November 1996. References hereinafter to the
Company shall include its subsidiaries as the context may require. Prospective
investors are urged to consider the factors discussed in "Risk Factors" in
evaluating an investment in the Common Stock offered hereby.
THE COMPANY
The Company provides integrated marketing and communications solutions to
Fortune 500 clients. Through the creative use of traditional marketing skills
combined with advanced technological expertise, the Company is positioned as
one of the leading integrated marketing and communications firms in the
emerging new media and digital communications arena. The Company's integrated
solutions include the development of several proprietary Internet, intranet
tools and applications. These tools and applications include WebMechanic,
Ecorp, Netcube, ASAP and Comparabase, each providing specific solutions to
problems commonly faced by corporate clientele, for example, improving internal
corporate communications, reducing costs of operations, integrating multiple
databases and data base analysis, timely evaluation of consumer marketing. The
Company has designed its solutions to be customized to the specification of
each client, remaining flexible enough to allow for marketing and licensing to
a broad base of corporate clients and industries.
The Company will continue to offer its services and products to corporate
clients by drawing upon its core strengths which include: desk top accessible
database management and software designs, sophisticated Internet and Intranet
systems development and corporate brand name marketing and positioning. These
strengths and capabilities allow the Company to assist its corporate clients as
follows:
Communicate and Operate More Efficiently Internally. The Company's user-
friendly interfaces and Internet/intranet tools, combined with training
software and methodology, enable it to develop and deploy sophisticated
intranet solutions for its clients. For example, the Company developed a
proprietary intranet solution called "Distributor Net" to allow Anheuser
Busch to exchange proprietary data with its distributors over the Internet.
Access Data More Efficiently. The Company's proprietary technologies
allow users of both the World Wide Web and corporate intranets to: (i)
craft on-line marketing solutions that are responsive to user needs,
allowing markets and analysts to more easily access, analyze and utilize
data; and (ii) provide necessary tools to allow the Website sponsor to
assess the effectiveness of its marketing solutions in a timely manner.
Position and Brand Products and Services. The Company utilizes its
experience in traditional marketing services, as well as its understanding
of interactive and Internet/intranet technologies and other emerging media
to position clients and market their products. The Company provides a range
of services, including brand positioning, developing corporate identity and
print, television and packaging design, as well as the ability to target
individual consumers with tailored marketing messages and programs.
Market Products and Services Using Internet Technology. The Company
develops corporate Websites that incorporate the latest in multi-layered
Internet technology to employ creative marketing strategies. For example,
the Company's "Comparabase" comparative software engine, licensed to NEC,
allows visitors to perform comparative product searches and quickly
generate customized product presentations from the NEC product database
based on the visitors' product preferences, interests and desired
specifications.
The Company's current clients include: Anheuser Busch Companies, Inc., Avon,
Bankers Trust, Berlitz International, Inc., Bloomingdale's, Busch Entertainment
Corporation, Chrysler Corporation, The Coca-Cola
3
<PAGE>
Company, Continental Airlines, Inc., Janus Funds, Microsoft, MITA, Moet, NEC
USA, Inc., Pioneer Electronics (USA) Inc., Reebok International, Ltd., Samsung
Electronics of America, Inc., Sea World, Sega of America, Inc., Sony, Sprint,
Tambrands, Time Warner, The Toro Company, Turner Entertainment Group and United
Distillers.
The Company's growth strategy includes the following elements: (i) the
continued marketing and branding of its proprietary internet, intranet and
database management solutions to its existing and future clients; (ii)
expansion of its licensing service and hosting contract services to enhance its
recurring revenue base; (iii) develop solutions which incorporate the latest
on-line technologies; and (v) continue to develop traditional marketing
solutions to serve existing clients and attract new clients.
In August 1996, the Company entered into a strategic relationship with
Omnicom Group Inc. ("Omnicom"), a publicly held company. Omnicom is the third
largest marketing and advertising company in the world. Pursuant to the
Company's agreement with Omnicom (the "Omnicom Agreement"), Omnicom purchased
938,667 shares of Common Stock from the Company in exchange for the payment to
the Company of $4,998,000; and in November 1996 four principal stockholders of
the Company transferred an aggregate of 124,667 shares of Common Stock to
Omnicom for no cash consideration. Omnicom consented to the November 1996 stock
split and related amendments to the Omnicom Agreement and the Company agreed to
decrease the number of shares available under the 1996 Stock Option Plan (the
"Omnicom Transaction"). Since June 1996, the Company and Omnicom have engaged
in joint marketing of their services to several Omnicom clients and the Company
believes that the relationship could provide access to a substantial additional
client base. See "Recent Developments--Omnicom Transaction."
The Company's executive offices are located at 45 West 36th Street, New York,
New York 10018. Its telephone number at that location is (212) 629-6800. The
addresses of the Company and the Subsidiaries on the Internet include the
following: http:\\www.thinkinc.com. None of the information contained in any of
the Websites mentioned in this Prospectus is deemed to be incorporated herein.
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Company... 2,000,000 Shares
Common Stock outstanding after the 6,266,667 Shares(1)(2)
Offering.............................
Use of Proceeds....................... The Company intends to use the net
proceeds from the Offering for general
corporate purposes, including working
capital. See "Use of Proceeds."
Proposed Nasdaq National Market THNK
Symbol...............................
Risk Factors.......................... The Offering involves a high degree of
risk and immediate substantial
dilution. See "Risk Factors" and
"Dilution."
</TABLE>
- --------
(1) Excludes: (a) 200,000 shares of Common Stock issuable upon exercise of the
Underwriter's Warrants; and (b) 966,667 shares of Common Stock reserved for
issuance pursuant to the Company's 1996 Stock Option Plan, pursuant to
which options to purchase 963,333 shares of Common Stock are issued and
outstanding. See "Management--Stock Option Plan," "Description of
Securities" and "Underwriting."
(2) Includes 825,000 shares of Common Stock (the "Escrow Shares") which have
been deposited into escrow by the holders thereof. The Escrow Shares are
subject to cancellation and will be contributed to the capital of the
Company if the Company does not attain certain earnings levels or the
market price of the Common Stock does not achieve certain levels. If such
earnings or market price levels are met, the Company will record a
substantial non-cash charge to earnings, for financial reporting purposes,
as compensation expense relating to the value of the Escrow Shares released
to Company officers and employees. See "Risk Factors--Potential Charges to
Earnings," "Capitalization" and "Principal and Selling Stockholders."
4
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
The table below contains certain summary historical and pro forma financial
information of the Company for the three-year period ended June 30, 1996. The
information has been derived from the consolidated financial statements
included elsewhere in this Prospectus (the "Financial Statements") and, with
respect to the pro forma balance sheet information, gives effect to the sale of
certain shares of Common Stock and the conversion and repayment of certain debt
and other obligations subsequent to June 30, 1996. See Notes 2, 5, 10 and 12 of
Notes to Financial Statements. This information should be read in conjunction
with the Financial Statements and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JUNE 30,
---------------------------------
1994 1995 1996
-------------------- ------------
(IN THOUSANDS, EXCEPT PER SHARE
AND SHARE AMOUNTS)
<S> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA
Revenues.................................... $ 8,486 $ 10,332 $ 12,146
Operating expenses:
Direct salaries and related expenses...... 3,321 3,557 4,587
Other direct expenses..................... 3,776 3,935 4,815
Selling, general and administrative
expenses................................. 1,963 2,622 3,286
Merger expenses............................. -- -- 981
-------- --------- ------------
Operating income (loss)..................... (574) 218 (1,523)
Interest expense............................ (82) (132) (418)
Other, net.................................. 8 77 146
-------- --------- ------------
Income (loss) before taxes on income........ (648) 163 (1,795)
Taxes on income............................. 103 (234) (149)
-------- --------- ------------
Net loss.................................... $ (545) $ (71) $ (1,944)
======== ========= ============
Pro forma data(1)
Net loss.................................. $ (1,195)
Loss per common share..................... (.38)
Shares used in computing loss per common
share.................................... 3,070,831
Supplemental loss per share............... (.30)
Shares used in computing supplemental loss
per share................................ 3,174,615
</TABLE>
<TABLE>
<CAPTION>
AT JUNE 30, 1996
------------------------------------
PRO FORMA
ACTUAL PRO FORMA(2) AS ADJUSTED(3)
------- ------------ --------------
<S> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA
Cash and cash equivalents................. $ 430 $2,709 $15,752
Working capital........................... 342 3,121 16,164
Total assets.............................. 4,778 7,003 19,828
Convertible promissory notes.............. 2,070 -- --
Note payable to related party............. 788 500 500
Total shareholders' equity (deficit)...... (1,080) 4,003 16,828
</TABLE>
(Footnotes appear on next page)
5
<PAGE>
- --------
(1) Excludes the costs incurred by the Company in connection with its
acquisitions of the Subsidiaries, includes the impact of employment
agreements between the Company and certain key employees as if such
agreements had been in effect throughout fiscal 1996 and adjusts income
taxes to zero since none would have been recognized had the acquisitions
occurred previously. Supplemental pro forma net loss further excludes the
effect of interest expense on debt repaid with proceeds received from the
Omnicom Transaction. Shares used in computing supplemental pro forma loss
per share are increased to give effect to the assumed use of the net
proceeds of the Omnicom Transaction to repay debt rather than the assumed
repurchase of treasury stock.
(2) Gives effect to the following transactions effected by the Company
subsequent to June 30, 1996: (a) the receipt of proceeds of $4,998,000
(excluding related expenses) pursuant to the Omnicom Transaction; (b) the
conversion of $27,000 in principal amount of certain Non-Negotiable 10%
Convertible Promissory Notes (the "10% Notes") pursuant to the terms of
such notes into 216,667 shares of Common Stock; (c) the conversion of
$162,495 in principal amount of certain Series I Non-Negotiable 12%
Promissory Notes (the "12% Notes") pursuant to the terms of such notes into
216,660 shares of Common Stock; (d) repayment of the remaining $243,000 and
$1,637,505 in principal amount respectively outstanding under the 10% Notes
and the 12% Notes; (e) repayment of $288,000 of amounts due under a
promissory note issued to a related party; and (f) payment of $500,000
pursuant to the terms of a certain finder's agreement upon termination
thereof. See Notes 2, 5, 10 and 12 of Notes to Financial Statements. See
"Certain Transactions."
(3) Gives effect to the sale of the 2,000,000 shares of Common Stock offered
hereby at an assumed initial public offering price of $7.50 per share and
receipt of the net proceeds therefrom. Reflects the accrual at June 30,
1996, of $218,000 of expenses related to the Offering.
6
<PAGE>
RECENT DEVELOPMENTS
THE REORGANIZATION
The Company was incorporated pursuant to the laws of the State of Delaware
in January 1996. In June 1996, in exchange for the issuance of an aggregate of
723,167 shares of Common Stock, the Company acquired all of the issued and
outstanding capital stock of seven companies: Scott Mednick & Associates, Inc.
("Mednick Group"); On Ramp, Inc. ("On Ramp"); Internet One, Inc. ("Internet
One"); Creative Resources Agency, Inc. ("Creative Resources"); The S.D.
Goodman Group, Inc. ("Goodman Group"), and NetCube Corporation of Delaware and
NetCube Corporation of New Jersey (collectively, "NetCube"). The foregoing
companies have been defined and are collectively referred to hereinafter as
the "Subsidiaries" and the combination of the Subsidiaries with the Company is
referred to hereafter as the "Reorganization." See "Certain Transactions."
OMNICOM TRANSACTION
Pursuant to the terms of the Omnicom Agreement, Omnicom purchased 938,667
shares of Common Stock from the Company in exchange for $4,998,000. Pursuant
to the terms of the Omnicom Agreement: (a) the Company has appointed Barry
Wagner to represent Omnicom on the Company's board of directors (the "Board of
Directors"); (b) Omnicom has agreed not to increase its ownership interest in
the Company absent the approval of the Board of Directors; and (c) Omnicom has
granted the Company a right of first refusal to purchase the shares of Common
Stock owned by Omnicom.
In November 1996 four principal stockholders of the Company transferred an
aggregate of 124,667 shares of Common Stock to Omnicom. Omnicom consented to
the November 1996 stock split and related amendments to the Omnicom Agreement
and the Company agreed to decrease the number of shares available under the
1996 Stock Option Plan.
The Company entered into the Omnicom Transaction to establish a strategic
relationship which management of the Company believes could provide access to
a substantial additional client base, although there can be no assurance that
such result will occur. Since June 30, 1996, Omnicom and the Company have
engaged in the joint marketing of their services to several Omnicom clients.
There can be no assurance that such joint marketing will continue, nor can
there be any assurance with respect to the effect of such marketing on the
Company's operations.
7
<PAGE>
RISK FACTORS
The securities offered hereby are speculative in nature and an investment in
the Common Stock offered hereby involves a high degree of risk. In addition to
the other information contained in this Prospectus, prospective investors
should carefully consider the following risk factors in evaluating whether to
purchase the Common Stock offered hereby. Moreover, prospective investors are
cautioned that the statements in this Prospectus that are not descriptions of
historical facts may be forward looking statements that are subject to risks
and uncertainties. Actual results could differ materially from those currently
anticipated due to a number of factors.
OPERATING LOSS
During the fiscal year ended June 30, 1996 the Company realized an operating
loss of $1,523,000 and a net loss of $1,944,000. Those losses resulted
primarily from non-recurring merger expenses in the amount of $981,000
incurred in combining the Subsidiaries and losses from operations realized by
one of the Subsidiaries, NetCube, in the amount of $1,033,000. During the
fiscal year ended June 30, 1996, NetCube modified its business so as to
emphasize the development of its proprietary NetCube data applications and de-
emphasize hourly consulting services, resulting in a significant decrease in
revenues. Although the Company believes that the losses at NetCube may be
reduced as NetCube changes its focus from product development to the marketing
of its proprietary data applications, there can be no assurance that the
Company will be able to achieve or sustain profitable operations at NetCube.
Moreover, there can be no assurance that any other Subsidiary or that the
Company as a whole will be profitable. The Company also intends to increase
marketing and other operating expenses and increase the level of capital
expenditures, including costs related to Internet infrastructure. Such
increases in operating expense levels and capital expenditures may adversely
affect operating results. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business."
FLUCTUATIONS IN OPERATING RESULTS
The Company's quarterly operating results have varied significantly in the
past and the Company expects operating results to continue to fluctuate in
future quarters. Factors which may affect the Company's operating results in
the future include timing of the completion or cancellation of projects, the
loss of a client, receipt of new business and variations in business mix, and
other factors outside the control of the Company. The Company may be unable to
adjust spending in a timely manner to compensate for any unexpected revenue
shortfall, and a shortfall in actual revenues as compared to estimated
revenues would have an immediate, material adverse effect on the Company's
business, financial condition and operating results. The Company's operating
results could also be materially adversely affected by increased competition
in the Company's markets. The Company believes that period to period
comparisons of its revenues and operating results are not necessarily
meaningful and that such comparisons should not be relied upon as indicators
of future performance. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business."
LACK OF COMBINED OPERATING HISTORY; RISK OF INTEGRATION
While certain of the Subsidiaries have been in existence for several years,
the Reorganization occurred in June 1996. See "Recent Developments." The
Company's success will depend in part on its ability to manage the combined
operations of those companies, and to integrate the operations of those
companies in a single organizational structure. The Company currently operates
at five principal locations and has only recently commenced centralizing
administrative functions at its New York office. There can be no assurance
that the Company will be able to effectively integrate the operations of its
Subsidiaries in a single organizational structure. Integration of these
operations could also place additional strain on the management and key
technical resources of the Company. The failure to successfully manage this
integration could have a material adverse effect on the Company. Finally,
while a key motivation for the Reorganization is the belief that the
Subsidiaries can market their services to existing clients of other
Subsidiaries, there can be no assurance that this cross-marketing will be
achieved or sustained. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business--Business Strategy."
8
<PAGE>
MANAGEMENT OF GROWTH; FUTURE CAPITAL REQUIREMENTS
The Company and the Subsidiaries have experienced significant growth since
their inception, which places demands on the management, employees, operations
and physical resources of the organization. Although the Company's strategy
contemplates continued future growth, there can be no assurance that such
growth will be achieved. In order to manage any future growth, the Company
will be required to continue to improve its operating systems, attract and
retain superior management, marketing and new media talent and expand the
Company's facilities. If the Company is unable to effectively manage its
growth, the Company's business, operating results and financial condition
could be adversely affected. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
Future growth, if achieved, may also strain the Company's capital resources.
Although the Company anticipates that cash flow from operations and the
proceeds of the Offering contemplated hereby will be sufficient to fund its
operations during the next 12 months, the Company may require additional
financing in order to expand its business. There can be no assurance that the
Company will be able to successfully negotiate or obtain additional financing,
or that such financing will be on terms favorable or acceptable to the
Company. The failure to secure necessary financing could have a material
adverse impact on the Company. See "Use of Proceeds," "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources" and "Business."
DEPENDENCE ON THE INTERNET; DEVELOPING MARKET
The Company's ability to derive revenues by providing marketing solutions
will depend in part upon a robust industry and the infrastructure for
providing Internet access and carrying Internet traffic. There can be no
assurance that the necessary infrastructure, such as a reliable network
backbone, or complementary products, such as high speed modems, will be
developed or that the Internet will become a viable commercial marketplace.
Critical issues concerning the commercial use of the Internet, including
security, reliability, cost, ease of use and access, and quality of service,
remain unresolved and may impact the growth of Internet use. In the event that
the necessary infrastructure or complementary products are not developed, or
the Internet does not become a viable commercial marketplace, the business,
operating results and financial condition of the Company could be adversely
affected.
DEPENDENCE ON PROPRIETARY TECHNOLOGIES
The Company regards certain of its products and technologies, including its
software applications, as proprietary and relies upon a combination of
trademark, copyright and trade secret law, together with non-disclosure
licensing and invention assignment agreements, to establish and protect its
proprietary rights. Much of the Company's proprietary information may not be
patentable, and the Company does not currently possess any patents. There can
be no assurance that the Company's current intellectual property rights will
afford meaningful protection or that the Company's competitors will not
independently develop technologies that are substantially equivalent or
superior to the Company's technologies. There can be no assurance that others
will not infringe the Company's proprietary rights or assert claims that the
Company's technologies infringe their proprietary rights. Litigation
concerning the alleged violation of intellectual property rights is inherently
uncertain and could result in significant costs to the Company, whether or not
any such claims are valid.
RAPID TECHNOLOGICAL CHANGE
The market for interactive marketing services is characterized by rapid
changes in technology. The rapid pace of technological change presents
substantial challenges to a provider of marketing services to maintain its
technical competence and competitive position. In addition to competing with
other integrated marketing service providers and traditional advertising
agencies, the Company competes with specialized service providers that are
highly skilled in their particular discipline. The Company believes that, in
order for it to compete successfully, each of the disciplines that is utilized
in developing a solution for a client must demonstrate competence equal
9
<PAGE>
or superior to that demonstrated by competitive specialty firms that limit the
scope of their services to that particular discipline. There can be no
assurance that the Company will be successful in attracting and maintaining a
high level of technical and artistic competence or that it will be successful
in providing competitive solutions to clients. Failure to do so could result
in the loss of existing customers or the inability to attract and retain new
customers, which developments could have a material adverse effect on the
business, financial condition and operating results of the Company. See
"Business."
RELIANCE ON KEY MANAGEMENT PERSONNEL
The Company's operations are dependent upon the continued efforts of its
senior management, including Scott A. Mednick, the Chief Executive Officer of
the Company; Ronald Bloom, the President and Chief Operating Officer of the
Company; and Adam Curry, the Chief Technology Officer of the Company, each of
whom performs significant marketing, sales and product development functions.
The loss of the services of any of the foregoing officers could be detrimental
to the Company. Messrs. Mednick, Bloom and Curry, along with certain other
members of senior management, have entered into employment agreements with the
Company. These agreements contain noncompete provisions that may not be
enforceable in certain states. The Company has obtained key man life insurance
in the principal amount of $2,000,000 on each of the lives of Messrs. Mednick
and Bloom. The Company intends to obtain key man life insurance on the life of
Mr. Curry. See "Management."
Qualified employees are in great demand and are likely to remain a limited
resource for the foreseeable future. Competition for skilled creative and
technical talent is intense. There can be no assurance that the Company will
be successful in attracting and retaining such personnel. In addition, the
Company's ability to generate revenues relates directly to the number and
expertise of the personnel that are available to work on its projects. Any
failure by the Company to retain existing employees or to hire new employees
when necessary could have a material adverse effect upon the Company's
business, financial condition and results of operations. See "Business--
Employees."
BROAD DISCRETIONARY USE OF PROCEEDS
The Company has broad discretion with respect to the specific application of
the net proceeds of this Offering. Such amounts are intended to be used for
working capital, including salaries, equipment and development of technology.
Thus, purchasers of the shares offered hereby will be entrusting their funds
to the Company's management, upon whose judgment the investors must depend,
with only limited information concerning management's specific intentions.
DEPENDENCE ON SIGNIFICANT PROJECTS; LIMITED CONTRACTUAL RELATIONSHIPS
The Company's five largest clients accounted for approximately 38% of the
Company's revenues for the fiscal year ended June 30, 1996, with significant
quarterly fluctuations in the amount of revenue contribution from each such
client. Pioneer Electronics (USA), Inc., SEGA of America, Inc., Toshiba of
America, Inc., Reebok International, Ltd., and Source Informatics, the
Company's five largest clients during the period, accounted for approximately
14.6%, 7.1%, 5.4%, 5.3% and 5.2% of the Company's revenues, respectively,
during the period. The Company's clients generally retain the Company on a
project by project basis. Consequently, a client from whom the Company
generates substantial revenue in one period may not be a substantial source of
revenue in a subsequent period. There can be no assurance that a client will
engage the Company for further services once a project is completed. Moreover,
the Company typically does not enter into long-term contractual relationships
with its clients, and therefore such clients may unilaterally reduce their use
of the Company's services or terminate existing projects at their discretion.
The termination of a business relationship with any of the Company's
significant clients or a material reduction in a significant client's use of
the services provided by the Company could have a material adverse effect on
the business, financial condition and operating results of the Company. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
10
<PAGE>
PROJECT PROFIT EXPOSURES; NEED TO DEVELOP RECURRING REVENUE
The Company generates the substantial majority of its revenues through
project fees on a fixed fee for service basis. The Company assumes greater
financial risk on fixed-price type contracts than on either time-and-material
or cost-reimbursable contracts. Failure to anticipate technical problems,
estimate costs accurately or control costs during performance of a fixed-price
contract may reduce the Company's profit or cause a loss. Although the
majority of the Company's projects typically last four to eight weeks and
therefore each individual short-term project creates less exposure than a
long-term fixed-price contract, in the event the Company does not accurately
anticipate the progress of a number of significant revenue-generating projects
it could have a material adverse effect on the Company's business, operating
results and financial condition. The Company's future success will depend in
part on its ability to convert its project by project relationships to
continuing relationships characterized by recurring revenue. There can be no
assurance that the Company's efforts will be successful. See "Business" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
COMPETITION
The market for the Company's services is highly competitive and is
characterized by pressures to incorporate new capabilities and accelerate job
completion schedules. The Company faces competition from a number of sources,
including national and regional new media marketing companies and national and
local advertising agencies, many of which have started to develop or acquire
interactive media capabilities. New boutiques that either provide integrated
or specialized services (e.g., corporate identity and packaging, advertising
services or Website design) and are technologically proficient, have emerged
and are competing with the Company. Many of the Company's competitors or
potential competitors have longer operating histories, longer client
relationships and significantly greater financial, management, technology,
development, sales, marketing and other resources than the Company. The
Company's ability to maintain its existing clients and generate new clients
depends to a significant degree on the quality of its services and its
reputation among its clients and potential clients, as compared with the
quality of services provided by and the reputations of the Company's
competitors. In the event that the Company loses clients to competitors
because of dissatisfaction with the services performed or provided by the
Company, or the reputation of the Company is otherwise adversely impacted, the
business, financial condition and operating results of the Company could be
materially adversely affected.
There are relatively low barriers to entry into the Company's business. The
Company expects that it will face additional competition in the future from
new entrants into the market. There can be no assurance that existing or
future competitors will not develop or offer marketing communication services
and products that provide significant performance, price, creative or other
advantages over those offered by the Company, which could have a material
adverse effect on the business, financial condition and operating results of
the Company.
SYSTEM SECURITY
The Company currently operates servers and maintains Internet connectivity
from its offices in New York and Colorado. Despite the implementation of
network security measures by the Company, such as limiting physical and
network access to its routers, the Company's Internet infrastructure is
vulnerable to computer viruses, break-ins and similar disruptive problems
caused by its customers or other Internet users. Computer viruses, break-ins
or other security problems could lead to interruption, delays or cessation in
service to the Company's Internet customers. Further, such inappropriate use
of the Internet could also potentially jeopardize the security of confidential
information stored in the computer systems of the Company's customers and
other parties connected to the Internet, which may deter potential customers
and give rise to uncertain liability to users whose security or privacy has
been infringed. The security and privacy concerns of existing and potential
customers may inhibit the growth of the Internet service industry in general
and the Company's customer base and revenues in particular. A significant
security breach could result in loss of customers, damage to the Company's
reputation, direct damages, costs of repair and detection, and other expenses.
The occurrence of any of the foregoing events could have a material adverse
effect on the Company's business, results of operations and financial
condition.
11
<PAGE>
RISK OF SYSTEM FAILURE
The success of the Company is dependent upon its ability to deliver high
quality, uninterrupted Internet hosting, which requires that the Company
protect its computer equipment and the information stored in its servers
against damage by fire, natural disaster, power loss, telecommunications
failures, unauthorized intrusion and other catastrophic events. Any damage or
failure that causes interruptions in the Company's operations could have a
material adverse effect on its business, results of operations and financial
condition. In particular, a failure at its New York offices, if prolonged,
could result in reduced revenues, loss of customers and damage to the
Company's reputation, any of which could in turn have a material adverse
effect on the Company's business, results of operations and financial
condition. While the Company carries property and business interruption
insurance to cover its operations, the coverage may not be adequate to
compensate the losses that may occur.
REGULATORY UNCERTAINTY; LEGAL UNCERTAINTIES
The Company is not currently subject to government regulation, except to the
extent that it is subject to regulations of general applicability to business.
However, due to the increasing media attention on the Internet, it is possible
that laws and regulations applicable to the Internet may be adopted that will
address user privacy, or the pricing, taxation, characteristics or quality of
products or services offered over the Internet. The adoption of any such laws
or regulations could restrict the growth of the Internet, which in turn could
adversely affect the demand for the Company's services, affect the Company's
cost structure or cause the Company to modify its operations. Moreover, the
applicability of existing laws governing property ownership, libel and privacy
to the Internet is unsettled. It is possible, therefore, that businesses that
develop Websites could be subject to liability for certain actions of their
clients, including liability for infringement of intellectual property rights,
defamation and libel. The Company is unable to predict the impact that any
future change in applicable law may have on its business. Any imposition of
liability on the Company could have a material adverse effect on the Company's
financial condition and operations.
POTENTIAL CHARGES TO EARNINGS
The Securities and Exchange Commission (the "Commission") has taken the
position with respect to escrow arrangements such as that entered into by the
Company and certain of its stockholders that in the event any shares are
released from escrow to the holders who are officers, directors, employees or
consultants of the Company, a compensation expense will be recorded for
financial reporting purposes. Accordingly, in the event of the release of the
Escrow Shares, the Company will recognize during the period in which the
earnings thresholds are probable of being met or such stock levels achieved, a
substantial noncash charge to earnings equal to the fair market value of such
shares on the date of their release, which would have the effect of
significantly increasing the Company's loss or reducing or eliminating
earnings, if any, at such time. The recognition of such compensation expense
may have a depressive effect on the market price of the Company's securities.
Notwithstanding the foregoing discussion, there can be no assurance that the
Company will attain the targets which would enable the Escrow Shares to be
released from escrow. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Principal and Selling Stockholders--
Escrow Shares."
ABSENCE OF PRIOR TRADING MARKET; POSSIBLE VOLATILITY OF STOCK PRICE
Prior to the Offering, there has been no public trading market for the
Common Stock, and there can be no assurance that an active trading market will
develop or be sustained upon completion of the Offering. The initial public
offering price of the shares of Common Stock will be determined by negotiation
among the Company and the Underwriter and does not necessarily bear any
relationship to the Company's assets, book value, net worth or any other
established criteria of value. See "Underwriting" for a discussion of the
factors that will be considered in determining the initial public offering
price. The market price of the shares of Common Stock, like that of the common
stock of many other companies engaged in technology-related fields, is likely
to be highly volatile. Factors such as fluctuations in the Company's operating
results, the operating results of the Company's competitors and other
technology companies, and general market conditions may have a significant
impact on the market price of the Common Stock.
12
<PAGE>
FUTURE SALES OF COMMON STOCK; REGISTRATION RIGHTS
Future sales of shares of Common Stock by existing stockholders pursuant to
Rule 144 under the Securities Act of 1933 (the "Securities Act"), through the
exercise of outstanding registration rights or through the issuance of shares
of Common Stock upon exercise of options, warrants or otherwise, could have an
adverse effect on the price of the Company's Common Stock. In addition to the
2,000,000 shares of Common Stock offered hereby, subject to compliance with
Rule 144 under the Securities Act, 4,266,667 shares of Common Stock will be
eligible for sale in the public market beginning February 1998. An additional
216,667 shares of Common Stock issuable upon the exercise of vested options
will also become eligible for sale in the public market pursuant to Rule 701
and Rule 144 under the Securities Act beginning approximately one year from
the date of this Prospectus. The Commission has recently proposed an amendment
to the holding period requirements of Rule 144 to permit resales of restricted
securities after a one year holding period rather than a two year holding
period, and to permit unrestricted resales by non-affiliates after a two year
holding period rather than a three year holding period. Additionally, the
holders of 1,187,590 shares of Common Stock have certain demand and/or
piggyback registration rights with respect to shares owned by them. Holders of
3,833,340 shares of outstanding Common Stock and 433,327 shares of Common
Stock have agreed not to sell or transfer any of their shares for periods of
12 months and 6 months, respectively, following the Offering without the prior
written consent of the Underwriter. The Underwriter may, at its sole
discretion and at any time without notice, release all or any portion of the
shares subject to such lock-up agreements. See "Description of Capital Stock--
Registration Rights" and "Shares Eligible for Future Sale."
POTENTIAL ANTI-TAKEOVER PROVISIONS
The Certificate of Incorporation of the Company, as amended (the
"Certificate of Incorporation") authorizes the issuance of up to 5,000,000
shares of Preferred Stock with such rights and preferences as may be
determined from time to time by the Board of Directors. Accordingly, the Board
of Directors may, without stockholder approval, issue shares of Preferred
Stock with dividend, liquidation, conversion, voting or other rights which
could adversely affect the voting power or other rights of the holders of
Common Stock. However, the Company's ability to issue such securities is, with
certain exceptions, subject to the prior approval of the Underwriter for a
period of twelve months from the date of this Prospectus. See "Underwriting."
Although the Company does not currently intend to issue any shares of
Preferred Stock, there can be no assurance that the Company will not do so in
the future. In addition to the foregoing, the Certificate of Incorporation and
the Bylaws of the Company (the "Bylaws") contain provisions which may
discourage certain transactions involving an actual or threatened change in
control of the Company. The Bylaws prescribe the manner in which shareholder
proposals may be presented for consideration at meetings of stockholders. The
Company is also subject to a Delaware statute regarding business combinations.
Any of the foregoing may have the effect of rendering more difficult, or
discouraging, an acquisition of the Company or changes in control of the
Company. See "Management" and "Description of Securities."
CONTROL BY EXISTING STOCKHOLDERS
As of the date hereof, the officers and directors of the Company (and their
affiliates) own an aggregate of 4,030,007 shares of Common Stock (including
825,000 Escrow Shares with respect to which the owners thereof have voting
rights). Immediately upon completion of the Offering, the officers and
directors of the Company will own or control the voting of 64.3% of the
Company's issued and outstanding voting Common Stock. Moreover, pursuant to
the Bylaws, holders of 33% of all outstanding shares of Common Stock entitled
to vote shall constitute a quorum and the holders of a majority of such quorum
may control the vote. The officers and directors of the Company, as holders of
the Company's securities, will therefore have the ability to significantly
influence the election of the Board of Directors, to potentially control the
outcome of any corporate action requiring less than a majority of the
outstanding voting securities entitled to vote, and consequently, to
significantly influence the business and affairs of the Company. See "Recent
Transactions," "Management," "Certain Transactions" and "Principal and Selling
Stockholders."
13
<PAGE>
IMMEDIATE AND SUBSTANTIAL DILUTION
Purchasers of the Common Stock in the Offering will suffer immediate
substantial dilution in the net tangible book value of shares of Common Stock
purchased in the amount of $4.41 per share or 58.8%. In January 1996, the
founders of the Company paid $.0001 (par value) per share for their shares of
Common Stock. In March 1996 and April 1996, respectively, the holders of the
10% Notes agreed to pay (and subsequently paid) $.125 per share for their
shares of Common Stock and the holders of the 12% Notes agreed to pay (and
subsequently paid) $.75 per share for their shares of Common Stock. Upon
completion of the Offering, the Company's current stockholders will have paid
$7,154,788 for 3,441,667 shares of Common Stock (excluding the Escrow Shares)
or 63% of the Company's then outstanding shares of Common Stock, and
purchasers of shares of Common Stock in the Offering will have paid
$15,000,000 for 2,000,000 shares of Common Stock, or 37% of the Company's then
outstanding shares of Common Stock. Therefore, investors' shares of Common
Stock will bear a substantially greater financial risk than the Company's
current stockholders. See "Dilution," "Management--Stock Option Plan,"
"Certain Transactions" and "Description of Securities."
POSSIBLE DELISTING; RISKS OF LOW-PRICED STOCK
Under the rules of the National Association of Securities Dealers, Inc.
("NASD"), in order to maintain listing on Nasdaq, a company must have, among
other things, between $1,000,000 and $4,000,000 in net tangible assets
(depending upon whether or not such company has sustained operating losses)
and, alternatively, either: (i) $3,000,000 in market value of public float and
$4,000,000 in net tangible assets; or (ii) a minimum bid price of $1.00 per
share. In the event that the Company is unable to satisfy the requirements for
continued quotation on the Nasdaq National Market or on the Nasdaq SmallCap
Market, quotation, if any, of the Common Stock would be in the over-the-
counter market in what are commonly referred to as the "pink sheets" of the
National Quotation Bureau, Inc. or on the NASD OTC Electronic Bulletin Board.
As a result, an investor may find it more difficult to dispose of or to obtain
accurate quotations as to the price of such securities. If the Company's
securities were delisted from Nasdaq they could become subject to Rule 15g-9
under the Exchange Act, which imposes additional sales practice requirements
on broker-dealers which sell such securities to persons other than established
customers and "accredited investors" (generally, individuals with net worths
in excess of $1,000,000 or annual incomes exceeding $200,000 or $300,000
together with their spouses).
In addition, Commission regulations define a "penny stock" to be any non-
Nasdaq equity security that has a market price (as therein defined) of less
than $5.00 per share or with an exercise price of less than $5.00 per share,
subject to certain exceptions. The Commission's rules impose additional
requirements on broker-dealers for any transactions involving penny stocks.
In the event that the Company's securities are delisted or become subject to
Rule 15g-9 or the penny stock rules, the liquidity of the Company's securities
will be adversely affected and investors may find it more difficult to dispose
of or obtain accurate quotations to the prices thereof.
ABSENCE OF DIVIDENDS
The Company has not paid any dividends on its Common Stock since its
incorporation and anticipates that, for the foreseeable future, working
capital and earnings, if any, will be retained for use in the Company's
business operations and in the expansion of its business. See "Dividend
Policy" and "Description of Securities."
14
<PAGE>
USE OF PROCEEDS
The net proceeds to be received by the Company from the sale of the Common
Stock offered hereby at an assumed initial public offering price of $7.50 per
share and after deducting underwriting discounts and commissions and estimated
expenses payable by the Company, will be approximately $12,825,000 (or
approximately $13,492,500 if the over-allotment option granted to the
Underwriter is exercised in full). The Company will receive the proceeds of
the sale of the shares of Common Stock offered by the Company, but will not
receive any of the proceeds from the sale of any shares of Common Stock
offered by the Selling Stockholder pursuant to exercise of the Underwriter's
over-allotment option. The Company intends to use the net proceeds of the
Offering approximately as follows: $2,500,000 for sales and marketing;
$1,500,000 for the purchase of computer equipment; $1,500,000 for research and
development and the remaining balance for working capital.
The Company may also use a portion of such net proceeds and investment
securities balances to acquire or invest in businesses, products and
technologies that are complementary to those of the Company, although no such
acquisitions are planned or being negotiated as of the date of this Prospectus
and no portion of the net proceeds has been allocated for any specific
acquisitions.
The Company's intended allocation of net proceeds of the Offering is based
upon the Company's current plans and prevailing economic and industry
conditions. Although the Company does not currently contemplate material
changes with respect to allocation of the net proceeds, to the extent that
management of the Company finds that adjustment thereto is required, the
amounts shown may be adjusted among the uses indicated above. Pending their
ultimate use, the net proceeds will be invested in short-term, investment
grade, interest-bearing securities, certificates of deposit or direct or
guaranteed obligations of the United States.
DIVIDEND POLICY
The Company has not paid, and does not anticipate paying, any dividends on
its Common Stock in the foreseeable future. The Company currently intends to
retain its future earnings for use in operations and expansion of its
business. Declaration and payment of future dividends, if any, will be at the
sole discretion of the Board of Directors. Certain of the Subsidiaries have
declared dividends in connection with such Subsidiaries' former elections to
be treated as Subchapter S corporations under the Internal Revenue Code of
1986, as amended (to enable the former owners of such Subsidiaries to pay
applicable Federal income taxes).
15
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company: (i) as of
June 30, 1996; (ii) on a pro forma basis after giving effect to the issuance
of 938,667 shares of Common Stock to Omnicom and an aggregate of 433,327
shares of Common Stock to the holders of the 10% Notes and the 12% Notes upon
the conversion thereof and the repayment of certain debt and other obligations
subsequent to June 30, 1996; and (iii) as adjusted to give effect to the sale
of the Common Stock offered hereby at an assumed initial public offering price
of $7.50 per share and the receipt of the estimated net proceeds therefrom.
<TABLE>
<CAPTION>
JUNE 30, 1996
-------------------------------------------
PRO FORMA AS
ACTUAL(1) PRO FORMA(1)(2) ADJUSTED(1)(2)(3)
--------- --------------- -----------------
(IN THOUSANDS)
<S> <C> <C> <C>
Note payable to related party...... $ 788 $ 500 $ 500
Convertible promissory notes....... 2,070 -- --
Stockholders' Equity:
Preferred Stock, $.0001 par
value; 5,000,000 shares
authorized; no shares
outstanding..................... -- -- --
Common Stock, $.0001 par value;
50,000,000 shares authorized;
2,894,673 shares issued
(actual)(1); 4,266,667 shares
issued (pro forma) (1)(2) ; and
6,266,667 shares issued (as
adjusted)(1)(2)(3).............. -- 1 1
Additional paid-in capital....... -- 5,136 17,961
Accumulated deficit.............. (1,080) (1,134) (1,134)
------- ------- -------
Total shareholders' equity
(deficit)..................... (1,080) 4,003 16,828
------- ------- -------
Total capitalization......... $ 1,778 $ 4,503 $17,328
======= ======= =======
</TABLE>
- --------
(1) Includes 825,000 shares of Common Stock held in escrow. See "Principal and
Selling Securityholders."
(2) Gives effect to the following transactions effected by the Company
subsequent to June 30, 1996: (a) the issuance of 938,667 shares of Common
Stock to Omnicom and the receipt of proceeds of $4,998,000 pursuant to the
Omnicom Transaction; (b) the issuance of 216,667 shares of Common Stock
upon conversion of $27,000 in principal amount under the 10% Notes; (c)
the issuance of 216,660 shares of Common Stock upon conversion of $162,495
in principal amount under the 12% Notes; (d) repayment of principal (and
accrued interest) on the remaining $1,880,505 principal amount of the 10%
Notes and the 12% Notes; (e) repayment of $288,000 of amounts due under a
promissory note issued to a related party; and (f) payment of $500,000
pursuant to the terms of a certain finder's agreement upon termination
thereof. See "Certain Transactions."
(3) Gives effect to the sale of all of the Common Stock offered hereby at an
assumed initial public offering price of $7.50 per share and receipt of
the net proceeds thereof.
16
<PAGE>
DILUTION
The pro forma net tangible book value of the Company as of June 30, 1996 was
$3,746,000 or approximately $1.09 per share of Common Stock, after giving
effect to the following transactions effected by the Company subsequent to
June 30, 1996: (i) the issuance of 938,667 shares of Common Stock to Omnicom
and the receipt of $4,998,000 in proceeds therefrom (excluding related
expenses); (ii) the issuance of 216,667 shares of Common Stock upon conversion
of $27,000 in principal amount under the 10% Notes; (iii) the issuance of
216,660 shares upon conversion of $162,495 in principal amount under the 12%
Notes; (iv) repayment of the remaining $243,000 in principal amount under the
10% Notes and the remaining $1,637,505 in principal amount under the 12%
Notes; (v) repayment of $288,000 of amounts due under a promissory note issued
to a related party; and (vi) payment of $500,000 pursuant to the terms of a
certain finder's agreement upon termination thereof. Pro forma net tangible
book value per share represents the amount of the Company's pro forma
stockholders' equity, less intangible assets, divided by the number of shares
of Common Stock outstanding (excluding the Escrow Shares) after giving effect
to the issuance of shares of Common Stock as set forth above.
Dilution to new investors represents the difference between the amount per
share paid by purchasers of shares of Common Stock in the Offering made hereby
and the pro forma net tangible book value per share of Common Stock
immediately after completion of the Offering. After giving effect to the sale
of 2,000,000 shares of Common Stock by the Company at an assumed initial
public offering price of $7.50 per share and receipt of the estimated pro
forma net proceeds therefrom, the pro forma net tangible book value of the
Company as of June 30, 1996 would have been $16,788,000 or $3.09 per share.
This represents an immediate increase in net tangible book value of $2.00 per
share to existing stockholders and an immediate dilution in net tangible book
value of $4.41 per share to new investors. The following table illustrates
this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share................. $7.50
Pro forma net tangible book value per share as of June 30,
1996......................................................... 1.09
Increase per share attributable to new investors.............. 2.00
----
Pro forma net tangible book value per share after the Offering.. 3.09
-----
Dilution per share to new investors............................. $4.41
=====
</TABLE>
In the event that the Underwriter's over-allotment option is exercised in
full, the pro forma net tangible book value of the Company at June 30, 1996
would be approximately $3.15 per share (excluding the Escrow Shares), which
would result in dilution per share to the new investors in the Offering of
approximately $4.35 per share.
The following table summarizes on a pro forma basis at June 30, 1996 the
difference between the number of shares of Common Stock purchased from the
Company, the total consideration paid and the average price per share paid by
existing stockholders since inception and by new investors in this Offering
(at an assumed initial public offering price of $7.50 per share):
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
-------------------- ---------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing Stockholders... 4,266,667(1) 68% $ 7,154,788(2) 32% $1.68
New Investors........... 2,000,000 32% 15,000,000 68% $7.50
--------- --- ----------- ---
Totals................ 6,266,667 100% $22,154,788 100%
========= === =========== ===
</TABLE>
- --------
(1) Includes 825,000 shares of Common Stock held in escrow.
(2) Includes $4,998,000 paid by Omnicom in the Omnicom Transaction.
The foregoing tables do not give effect to the exercise of any outstanding
options or the release of the Escrow Shares. See "Management--Stock Option
Plan" and "Principal and Selling Stockholders."
17
<PAGE>
SELECTED FINANCIAL DATA
The following selected consolidated financial information of the Company for
the three-year period ended June 30, 1996 has been derived from the Financial
Statements included elsewhere in this Prospectus and, with respect to the pro
forma balance sheet information, gives effect to the sale and issuance of
certain shares of Common Stock and the conversion and repayment of certain
debt and other obligations subsequent to June 30, 1996. See Notes 2, 5, 10 and
12 of Notes to Financial Statements. This information should be read in
conjunction with the Financial Statements and "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JUNE 30,
---------------------------------
1994 1995 1996
-------------------- ------------
(IN THOUSANDS, EXCEPT PER SHARE
AND SHARE AMOUNTS)
<S> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA
Revenues.................................... $ 8,486 $ 10,332 $ 12,146
Operating expenses:
Direct salaries and related expenses...... 3,321 3,557 4,587
Other direct expenses..................... 3,776 3,935 4,815
Selling, general and administrative
expenses................................. 1,963 2,622 3,286
Merger expenses............................. -- -- 981
-------- --------- ------------
Operating income (loss)..................... (574) 218 (1,523)
Interest expense............................ (82) (132) (418)
Other net................................... 8 77 146
-------- --------- ------------
Income (loss) before taxes on income........ (648) 163 (1,795)
Taxes on income............................. 103 (234) (149)
-------- --------- ------------
Net loss.................................... $ (545) $ (71) $ (1,944)
======== ========= ============
Pro forma data (1)
Net loss.................................. $ (1,195)
Loss per common share..................... (.38)
Shares used in computing loss per common
share.................................... 3,070,831
Supplemental loss per share............... (.30)
Shares used in computing supplemental loss
per share................................ 3,174,615
</TABLE>
<TABLE>
<CAPTION>
AT JUNE 30, 1996
------------------------------------
PRO FORMA
ACTUAL PRO FORMA(2) AS ADJUSTED(3)
------- ------------ --------------
<S> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA
Cash and cash equivalents................. $ 430 $2,709 $15,752
Working capital........................... 342 3,121 16,164
Total assets.............................. 4,778 7,003 19,828
Convertible promissory notes.............. 2,070 -- --
Note payable to related party............. 788 500 500
Total shareholders' equity (deficit)...... (1,080) 4,003 16,828
</TABLE>
- --------
(1) Excludes the costs incurred by the Company in connection with its
acquisitions of the Subsidiaries, includes the impact of employment
agreements between the Company and certain key employees as if such
agreements had been in effect throughout fiscal 1996 and adjusts income
taxes to zero since none would have been recognized had the acquisitions
occurred previously. Supplemental pro forma net loss further excludes the
effect of interest expense on debt repaid with proceeds received from the
Omnicom Transaction. Shares used in computing supplemental pro forma loss
per share are increased to give effect to the assumed use of the net
proceeds of the Omnicom Transaction to repay debt rather than the assumed
repurchase of treasury stock.
18
<PAGE>
(2) Gives effect to the following transactions effected by the Company
subsequent to June 30, 1996: (a) the receipt of proceeds of $4,998,000
(excluding related expenses) pursuant to the Omnicom Transaction; (b) the
conversion of $27,000 in principal amount of the 10% Notes pursuant to the
terms of such notes into 216,667 shares of Common Stock; (c) the
conversion of $162,495 in principal amount of the 12% Notes pursuant to
the terms of such notes into 216,660 shares of Common Stock; (d) repayment
of the remaining $243,000 and $1,637,505 in principal amount respectively
outstanding under the 10% Notes and the 12% Notes; (e) repayment of
$288,000 of amounts due under a promissory note issued to a related party;
and (f) payment of $500,000 pursuant to the terms of a certain finder's
agreement upon termination thereof. See Notes 2, 5, 10 and 12 of Notes to
Financial Statements. See "Certain Transactions."
(3) Gives effect to the sale of the 2,000,000 shares of Common Stock offered
hereby at an assumed initial public offering price of $7.50 per share and
receipt of the net proceeds therefrom. Reflects the accrual at June 30,
1996 of $218,000 of expenses related to the Offering.
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
OVERVIEW
The Company was incorporated in the State of Delaware in January 1996 for
the purpose of creating a corporate structure to facilitate the combination
and integration of specialized businesses operating in the areas of
advertising, marketing, Internet and intranet services and data management.
See "Recent Developments--The Reorganization." On June 30, 1996, the Company
completed the acquisition of all of the outstanding shares of common stock of
the Subsidiaries in exchange an aggregate of 723,167 shares of Common Stock.
Each of the acquisitions was accounted for using the pooling of interests
method. Accordingly, the results of operations for each of the Subsidiaries
has been included in the Company's Financial Statements since the earlier of
July 1, 1993 or each Subsidiary's inception.
The Subsidiaries generate revenue from Internet and interactive media
services including Website development and hosting, corporate internal
communications solutions, database marketing, corporate identity and product
branding and packaging, on-line and off-line training systems, advertising and
media placement services, and interface solutions that provide high-speed
access via the Internet to off-line databases. Historically, revenues from
these services by the Subsidiaries have been derived on a project-by-project
basis, which tends to cause fluctuations in revenues between reporting
periods. A substantial portion of those revenues have been fixed fees for
services to be delivered. While the Company has recently entered into a number
of contracts for ongoing maintenance, content updates, server hosting and
software licensing, which will create recurring revenue streams for the life
of their respective contracts (typically 12 months), it is anticipated that
project revenue will continue to be a significant component of total revenues
and therefore revenue may continue to fluctuate significantly from quarter to
quarter.
The Company generally provides Website design and development and
traditional marketing services under contracts that vary in duration from two
to four weeks in the case of smaller projects and up to five months in the
case of larger projects. In connection with Website design and development,
the Company typically enters into twelve-month arrangements providing for
maintenance, content updates of Websites and software licensing and hosting of
a client Website on the Company's servers. Revenues from contracted services
are generally recognized using the percentage of completion method based upon
the ratio of costs incurred to total estimated costs of the project. Revenues
from hosting, maintenance and updates are recognized as the services are
provided.
Part of the Company's strategy to increase revenues is to attempt to
increase the percentage of revenue which is recurring and to increase the
number of services provided to a particular client. The Company intends to
implement this strategy by increasing its over-all marketing and cross-
marketing efforts. See "Business--Business Strategy."
RESULTS OF OPERATIONS
The following discussion of the results of operations and financial
condition of the Company should be read in conjunction with the Financial
Statements and notes thereto included elsewhere in this Prospectus.
20
<PAGE>
Revenues. The following table presents the Company's consolidated revenues,
by reference to the Subsidiaries, for the fiscal years ended June 30, 1994,
1995 and 1996. The individual and combined historical revenues of the
Subsidiaries are not necessarily indicative of the future revenues that may be
expected.
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
------------------------------------
1994 1995 1996
---------- ----------- -----------
$ % $ % $ %
------ --- ------- --- ------- ---
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Mednick Group, Creative Resources,
Goodman Group.......................... $5,317 63% $ 5,881 57% $ 7,084 58%
On Ramp................................. 7 -- 776 8 2,323 19
Internet One............................ 76 1 674 6 1,338 11
NetCube................................. 3,086 36 3,001 29 1,401 12
------ --- ------- --- ------- ---
$8,486 100% $10,332 100% $12,146 100%
====== === ======= === ======= ===
</TABLE>
Revenues for Mednick Group, Creative Resources and Goodman Group, consisting
primarily of strategic marketing and corporate and brand positioning,
increased to $7,084,000 in fiscal 1996 from $5,881,000 in fiscal 1995 (20%)
and from $5,317,000 in fiscal 1994 (11%). The increase in revenues in fiscal
1996 resulted from sales to new clients of Mednick Group and Creative
Resources completing its first full year of operations. The increase in
revenues in fiscal 1995 resulted primarily from the completion of the first
full year of operations at Goodman Group and the start-up of operations at
Creative Resources.
Revenues for On Ramp and Internet One, consisting primarily of Internet and
intranet systems and services, on-line systems and implementation of tools and
training, increased to $3,661,000 in fiscal 1996 from $1,450,000 in fiscal
1995 (152%) and from $83,000 in fiscal 1994 (1,647%). The increase in revenues
in fiscal 1996 is primarily the result of increased corporate awareness and
demand for Internet access, infrastructure, security, and training, while the
increase in revenues in 1995 is primarily attributed to On Ramp and Internet
One completing their first full year of operations.
Revenues for NetCube, consisting primarily of data access consulting and
services, decreased to $1,401,000 in fiscal 1996 from $3,001,000 in fiscal
1995 (53%) and from $3,086,000 in fiscal 1994 (3%). The decrease in revenues
in fiscal 1996 was primarily the result of the strategic decision by the
management of NetCube to more fully develop its data base interface
application and to de-emphasize NetCube's historical focus of providing hourly
consulting services. This shift in business focus resulted in a significant
reduction in revenues and higher development costs without offsetting
revenues.
Direct salaries and related expenses. Direct salaries and related expenses
consist of wages, payroll taxes and employee benefits. Direct salaries and
related expenses increased to $4,587,000 in fiscal 1996 from $3,557,000 in
fiscal 1995 (29%) and from $3,321,000 in fiscal 1994 (7%). The increase in
fiscal 1996 is primarily due to the hiring of additional personnel
necessitated by growth at Mednick Group, On Ramp and Internet One. The
increase in fiscal 1995 is primarily attributed to an increase of $640,000 in
salary expenses at Internet One, On Ramp and Goodman Group which were all
completing their first full year of operation, offset in part by a decrease of
$450,000 at NetCube due to a reduction in performance bonuses.
Other direct expenses. Other direct expenses consist of contract labor,
materials and facility expenses associated with providing services to the
Subsidiaries' clients. Other direct expenses increased to $4,815,000 in fiscal
1996 from $3,935,000 in fiscal 1995 (22%) and from $3,776,000 in fiscal 1994
(4%). The increase in fiscal 1996 is primarily due to incremental costs
incurred by the Subsidiaries as a result of higher levels of operations. The
increase in 1995 is comprised of increased direct expenses of approximately
$660,000 at Internet One, On Ramp, Creative Resources and Goodman Group
associated with those companies completing their first full year of
operations, offset in part by an approximate $500,000 reduction in production
material and contract labor expenses at Mednick Group and NetCube.
21
<PAGE>
General and administrative expenses. General and administrative expenses
consist primarily of salaries and related payroll costs for financial and
administrative personnel, occupancy costs, consulting and professional fees,
general office expenses and bad debt expense. General and administrative
expenses increased to $3,286,000 in fiscal 1996 from $2,622,000 in fiscal 1995
(25%) and from $1,962,000 in fiscal 1994 (34%). The increase in fiscal 1996 is
due to increased occupancy expenses and administrative salaries as most of the
Subsidiaries expanded upon their corporate infrastructure to accommodate
operational growth and the increase in 1995 is primarily the reflection of
several of the Subsidiaries completing their first full year of operations.
Economies of scale, elimination of duplicate overhead and administrative
costs, and reduction in professional fees paid by the Subsidiaries for
services which will be performed in-house are expected to reduce future
operating costs. Offsetting these anticipated benefits are anticipated
increases in personnel costs due to increased administrative personnel and
expenses to be incurred in developing the Company's corporate infrastructure.
Merger Expenses. Merger expenses consist of the nonrecurring costs incurred
by the Company in completing the acquisitions of the Subsidiaries on June 30,
1996, including a $500,000 finder's fee paid to an affiliate of the Company.
See "Certain Transactions--Consulting and Finders' Agreements."
Interest Expense. Interest expense increased to $418,000 in fiscal 1996 from
$132,000 in fiscal 1995 (216%) and from $83,000 in fiscal 1994 (59%). The
increase in fiscal 1996 was primarily due to expense associated with the
Company's convertible promissory note borrowings. The increase in 1995 was
primarily the result of increased related party borrowings made by NetCube to
finance its operations.
Income taxes. The Company had income tax expenses of $149,000 in fiscal 1996
and $234,000 in fiscal 1995 and the Company had an income tax benefit of
$103,000 in fiscal 1994. Given that certain of the Subsidiaries were not
subject to taxation (as such Subsidiaries had elected S corporation status
under applicable provisions of the Internal Revenue Code of 1986, as amended,
and certain state statutes) and the remaining Subsidiaries were subject to
income taxes based on their respective discreet operations, the effective
income tax rate on a consolidated historical basis is not meaningful. The
Company will file consolidated tax returns in the future.
LIQUIDITY AND CAPITAL RESOURCES
Since their respective formations, the Subsidiaries have financed their
operations primarily through cash generated from operations, bank borrowings
and shareholder contributions and financings.
During 1996, the Company entered into a series of transactions in order to
fund the operations of the Subsidiaries and to prepare itself for the
Offering. The Company raised $270,000 through the issuance of three 10% Notes.
Proceeds obtained from the issuance have been used to cover costs related to
the Company's acquisitions of the Subsidiaries and the Offering. The Company
raised an additional $1,800,000 through a private placement of 12% Notes.
Proceeds received by the Company, after deducting placement agent fees and
other expenses, totaled $1,582,500. Of the funds received from the private
placement, $1,000,000 was loaned to On Ramp in order to complete a transaction
in which On Ramp redeemed outstanding shares of its common stock. The
remaining funds received from the private placement have been used to provide
working capital for On Ramp and Internet One. See "Certain Transactions--
Recent Financings."
In August 1996, the Company received proceeds of $4,998,000 through the
issuance of shares of Common Stock to Omnicom. See "Recent Developments--
Omnicom Transaction." Proceeds raised from the Omnicom Transaction were used
by the Company to retire the nonconvertible portion of the outstanding
principal and accrued interest under the 10% Notes and 12% Notes (aggregating
$1,880,505), to retire certain other debt and outstanding obligations, to fund
the operations of the Subsidiaries and to cover expenses and costs incurred in
connection with the acquisitions of the Subsidiaries and the Offering.
At June 30, 1996, the Company had cash and cash equivalents of approximately
$430,000 and working capital of approximately $342,000. Subsequent to June 30,
1996, the Company effected the following
22
<PAGE>
transactions: (i) the sale of 938,667 shares of Common Stock to Omnicom and
the receipt of proceeds therefrom of $4,998,000 and the transfer by four
principal stockholders of the Company of an aggregate of 124,667 shares of
Common Stock to Omnicom for no cash consideration; (ii) the conversion of
$27,000 in principal amount under the 10% Notes and $162,000 in principal
amount under the 12% Notes, respectively, into 216,667 and 216,660 shares of
Common Stock; (iii) the repayment of the non-convertible portion of the 10%
Notes and the 12% Notes, aggregating $1,881,000 from the proceeds of the
Omnicom Transaction; (iv) the payment of a finder's fee in consideration for
the termination of a certain finder's agreement using proceeds from the
Omnicom transaction; and (v) the renegotiation of the terms of a note payable
to a related party, providing for liquidation of $288,000 of such debt using
proceeds from the Omnicom Transaction and extending the maturity of the
remaining balance of $500,000 until March 1998. Upon completion of the
foregoing transactions, the Company's cash and cash equivalents and working
capital positions on a pro forma basis at June 30, 1996 were $2,709,000 and
$3,121,000, respectively.
The Company has entered into employment agreements ranging in term from one
year to three years (exclusive of extensions) with several of its executive
officers pursuant to which the Company is obligated to pay such individuals up
to an aggregate of $1,225,000 per year. See "Management--Executive
Compensation."
The Company anticipates significant changes in its operating cost structure
once the Subsidiaries have been completely integrated, and administration and
control of the Company's future operations have been centralized. The Company
expects that the cash generated from future operations and from the Offering
will be sufficient to fund the anticipated expenditures required for product
development, organizational infrastructure (including additional personnel and
upgraded telecommunications and computer systems) and general corporate needs
for the next 12 months. See "Use of Proceeds."
There can be no assurance that the Company will not be required to seek
additional sources of financing within the foreseeable future. The failure to
raise the funds necessary to finance the Company's future cash requirements
would adversely affect the Company's ability to pursue its operational
strategies.
In the event of the release of the Escrow Shares, the Company will recognize
during the period in which the earnings thresholds are probable of being met
or such stock levels achieved, a substantial noncash charge to earnings equal
to the fair market value of such shares on the date of their release, which
would have the effect of significantly increasing the Company's loss or
reducing or eliminating earnings, if any, at such time. The recognition of
such compensation expense may have a depressive effect on the market price of
the Company's securities. Notwithstanding the foregoing discussion, there can
be no assurance that the Company will attain the targets which would enable
the Escrow Shares to be released from escrow.
Impact of New Accounting Pronouncements. Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-based Compensation" ("SFAS No. 123")
issued by the Financial Accounting Standards Board ("FASB") is effective for
specific transactions entered into after December 15, 1995, while the
disclosure requirements are effective for financial statements for fiscal
years beginning after December 15, 1995. The new standards establish a fair
value method of accounting for stock-based compensation plans and for
transactions in which an entity acquires goods or services from nonemployees
in exchange for equity instruments. However, it also allows an entity to
continue to measure compensation cost for those plans using the intrinsic
value based method of accounting prescribed by APB Opinion No. 25, "Accounting
for Stock Issued to Employees." Entities electing to remain with the
accounting in APB Opinion No. 25 must make pro forma disclosures of net income
and earnings per share, as of the fair value based method of accounting
defined in the Statement had been applied. Management believes that the
Company will elect to make pro forma disclosures as allowed by SFAS No. 123.
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of" (SFAS No. 121), issued by the FASB is
effective for financial statements for fiscal years beginning after December
15, 1995. The new standard establishes new guidelines regarding when
impairment losses on long-lived assets, which include plant and equipment and
certain identifiable intangible assets and goodwill, should be recognized and
how impairment losses should be measured. The Company does not expect adoption
to have a material effect on its financial position or results of operations.
23
<PAGE>
BUSINESS
OVERVIEW
The Company develops and provides a broad range of marketing and
communications solutions to corporate clients by combining traditional
marketing expertise with advanced Internet intranet capabilities. In addition,
the Company has developed proprietary software applications that allow users
to easily access, analyze and utilize server and mainframe databases over the
Internet.
The Company's mission is to become the leader of integrated marketing
solutions by drawing upon its core strengths, which include: corporate brand
name marketing and positioning, sophisticated Internet and intranet content
development, and desk-top driven database management and software design.
The Company is a collection of seven diverse and experienced companies. The
following table summarizes the types of services provided by each Subsidiary:
<TABLE>
<CAPTION>
COMMENCEMENT
SUBSIDIARY OF OPERATIONS PREDOMINANT TYPE OF SERVICE PROVIDED
---------- ------------- ------------------------------------
<S> <C> <C>
Mednick Group........... October 1982 Strategic Marketing and Corporate and Brand
Positioning
On Ramp................. February 1994 Internet and Intranet Systems and Services
NetCube................. February 1978 Database and Information Management and
Utilization
Goodman Group........... July 1993 Strategic Marketing and Corporate and Brand
Positioning
Creative Resources...... November 1994 Strategic Marketing and Corporate and Brand
Positioning
Internet One............ November 1993 Secure On-Line Systems Implementation and
Internet Tools Training
</TABLE>
The Company's current clients include Anheuser Busch Companies, Inc., Avon,
Bankers Trust, Berlitz International, Inc., Bloomingdale's, Busch
Entertainment Corporation, Chrysler Corporation, The Coca-Cola Company,
Continental Airlines, Inc., General Motors Corporation, Janus Funds, Liz
Claiborne, Inc., Microsoft, MITA, Moet, NEC USA, Inc., Pioneer Electronics
(USA) Inc., Random House, Reebok International, Ltd., Samsung Electronics of
America, Inc., Sea World, Sega of America, Inc., Sony, Sprint, Tambrands, Time
Warner, The Toro Company, Turner Entertainment Group and United Distillers.
In August 1996, the Company entered into a strategic relationship with
Omnicom. Omnicom is the third largest advertising company in the world.
Pursuant to the Omnicom Agreement, Omnicom purchased 938,667 shares of Common
Stock for the Company in exchange for payment to the Company of $4,998,000.
Since June 1996, the Company and Omnicom have engaged in joint marketing of
their services to several Omnicom clients and the Company believes that the
relationship could provide access to a substantial additional client base and
to additional advertising agent support systems.
In November 1996 four principal stockholders of the Company transferred an
aggregate of 124,667 shares of Common Stock to Omnicom for no cash
consideration. Omnicom consented to the November 1996 stock split and related
amendments to the Omnicom Agreement and the Company agreed to decrease the
number of shares available under the 1996 Stock Option Plan.
THE INDUSTRY
The recent proliferation of new technologies, particularly the Internet, has
changed the way companies market and distribute their products and services
and communicate with their vendors, suppliers, customers and employees. These
developments are creating the following trends:
Substantial Opportunities for Internet Marketing and Advertising. As the
Internet emerges as a global information network, corporations are struggling
to discover and develop the marketing, advertising and
24
<PAGE>
communication strategies that will enable them to utilize this interactive
network to their advantage. The World Wide Web offers corporations the ability
to market their products and services, enhance their corporate identity and
brand image to a worldwide audience, distribute products or information
targeted to groups or individuals, and operate more efficiently and cost-
effectively. These capabilities offer the opportunity to enhance the
relationship between marketer and consumer and challenge the marketers to take
full advantage of the capabilities offered by the Internet.
Demand for More Marketing Information. In order to design effective and
targeted marketing campaigns, corporations desire information regarding
customers' characteristics, interests and behavior. The Internet provides a
new technical means to efficiently obtain this information from individual
users and react to it in real time. Further, Internet usage itself creates
additional marketing information about users. However, most companies lack the
skill, experience or technology to exploit the information gathering potential
of the Internet.
Businesses Are Searching For Ways To Maximize Their Interactive
Investment. Businesses are experiencing competitive pressure to draw more
value from their Internet presence. Internet presences are becoming more
elaborate and expensive, increasing the need for companies to be able to
quantify the return on investment and make rapid changes based on measured
reaction. As the novelty of simply having a Website diminishes, the
competitive, solutions-driven capabilities of the Internet become more
critical.
Evolution of the Communications Infrastructure. Internet technology and the
World Wide Web have revolutionized on-line communications and data sharing.
Many companies have begun to adopt Internet technology for their corporate
intranets. An intranet is a private data communications network that utilizes
Internet technology to provide improved communications, reduced deployment and
maintenance costs, and increased ability to access corporate data, within a
secure environment. Key elements in successful corporate intranet
implementations include the creation of a user friendly interface and the
integration of this interface into the existing information infrastructure.
Effective user interfaces encompass Internet-style point-and click graphics,
audio and video, page scrolling and bookmarking.
THE COMPANY'S SERVICES AND PRODUCTS
The Company combines technological expertise in Internet and interactive
communications with extensive traditional marketing experience to provide
integrated solutions to leading corporate accounts. The Company's solutions
incorporate brand and corporate strategy and positioning, Website development,
maintenance, updating and hosting, corporate intranet solutions, sophisticated
content development capabilities, data access and profile-driven response
technologies, on-line and off-line training systems, and advertising and media
placement services. The Company has developed several proprietary software
applications (including NetCube, ASAP, Comparabase, VINNI and PenPals) that it
utilizes in delivering marketing solutions to its clients. The Company focuses
on assisting its clients in the following areas:
Position and Brand Products and Services. The Company utilizes its
experience in traditional advertising and marketing, as well as its
understanding of the capabilities of different and emerging media, to position
clients and market their products. The Company provides a range of services,
including brand positioning, developing corporate identity and print,
television and packaging design.
Market Client Products and Services Using Internet Technology. The Company
combines traditional and interactive media approaches advertising and
marketing to position its clients and market their products and services on
the Internet. This includes the development of Websites that incorporate the
latest in Internet technology. For example, at the NEC Website a visitor can
request a database-driven catalogue to compare a number of NEC products and
generate customized Webpages displaying a comparative presentation of those
NEC products in which that visitor has an interest (http://www.nec.com). The
Company's "smart Websites" track and analyze a visitor's travels through a
Website and make suggestions regarding additional links or Websites that may
be of interest to the user in real time (http://www.hitsathome.com/idsst). The
Company's intelligent interfaces allow users to customize a personalized
interface with links to the user's favorite Websites. The Company's user-
directed interactive technology results in Internet experiences which are
unique for each
25
<PAGE>
user, based on the user's indicated preferences, characteristics or past
behavior (http: www.4adventure.com). The skillful application of these
technologies enable a business to market directly with the consumer, improving
the effectiveness of the marketing message.
Identify and Develop New Lines Of Distribution. The Company is working with
its clients to develop new channels of distribution utilizing the Internet.
For example, Avon sought to utilize a marketing channel not currently
addressed by its traditional distribution system. The Company is assisting
Avon in establishing a Website from which it will market directly to customers
over the Internet and allow Avon representatives to receive product
information and communicate internally. The Website (http: www.avon.com) is
expected to be introduced in September 1996. The Company is also creating a
Website that will enable Bloomingdale's to sell a variety of merchandise on-
line, allowing it to extend its distribution beyond its current retail store
and catalog presence (http: www.bloomingdales.com).
Communicate and Operate More Effectively Internally. The Company's user-
friendly interfaces and Internet tools, combined with training software and
methodology, enable it to develop and deploy sophisticated intranet solutions
for its clients. For example, the Company developed a password-protected
intranet to allow Anheuser Busch to deliver proprietary marketing information
to its distributors. This intranet allows Anheuser Busch, among other things,
to distribute information and engage in communication with its distributors
quickly and provides a means for distributors to order marketing materials
easily through a secure medium.
Access Data More Efficiently. The Company's proprietary technologies allow
users of both the World Wide Web and corporate intranets to easily access,
analyze and utilize data on-line. The Company's software components include
NetCube, ASAP and Comparabase. NetCube is a database interface application
that enables highly flexible viewing, analysis and reporting of information
generated from multiple databases. ASAP, the Advanced Statistical Analysis
Program, is a software application that provides proprietary statistical
analysis to the sponsor of a Website regarding the number and nature of the
visits to that Website. Comparabase is a searchable comparative on-line
database that enables consumers to select products from a sizeable on-line
catalogue and compare them to similar products by feature. These proprietary
tools allow the Company to: (i) craft on-line marketing solutions that are
responsive to user needs, allowing the user to more easily access, compile and
analyze data; and (ii) provide necessary tools to allow the Website sponsor to
assess the effectiveness of its marketing solutions.
BUSINESS STRATEGY
The Company continues to leverage its core strengths in order to further
enhance its ability to provide high-quality, innovative marketing and
communications solutions, both in traditional media and interactive media,
with a special focus on the Internet and intranet applications. The Company's
strategies include the following key elements:
Market and Cross-Market Services. In fiscal 1996, the Company provided
services to over 100 companies. See "Business--Customers" below. Many of these
companies are leaders in their respective industries. The entry level of the
Company into a business is typically at a senior management level, enabling
the Company to position itself for future assignments as its client's needs
expand. The Company leverages these client relationships in a number of ways.
First, the Company often sells expanded or updated solutions or new services
to its existing clients. Second, clients of one of the Subsidiaries are often
offered solutions or services by another Subsidiary. For example, the Rockport
Company, historically a client of Mednick Group for traditional marketing
services, was introduced to the Internet capabilities of On Ramp, resulting in
the creation of both Internet (http: www.rockport.com) and intranet solutions
for Rockport. Third, the Company uses experience gained working for existing
clients, or leads or endorsements furnished by an existing client, to secure
new client engagements.
Apply the Company's Experience in Internet and Data Management Technologies
to Provide Clients Interactive Functionality. The Company differentiates its
solutions by providing technological expertise in Website creation and
Internet tools and database access and analytical technologies. In addition,
the Company draws upon its proprietary software components to enhance the
effectiveness of its integrated solutions. The
26
<PAGE>
Company applies this technology in order to create an Internet presence for
clients who previously did not have a Website, to create enhanced Websites for
clients with first-generation Websites, and to add, extend and enhance
functionality to client Websites by incorporating technologies such as data
management, intuitive interface, intelligent agents or transaction security.
Recently, the Company has been applying its on-line communications skills and
Internet technology expertise to build communications solutions for corporate
intranets.
Create Recurring Revenue Sources. The Company is attempting to increase the
percentage of revenue that is recurring, thereby reducing its dependence on
project by project fees. The Company derives recurring revenue in a number of
ways: (i) updating client Websites to add new content or functionality,
maintaining client Websites to optimize performance, hosting client Websites
on the Company's servers and providing clients with periodic analytical
reports on use of their Websites; (ii) licensing its proprietary software
applications to its clients; and (iii) selling advertising space, sponsorships
and "hot links" on its proprietary content Websites (http: www.metaverse.com,
http: www.alterworld.com) and infotainment events (such as the 37th Annual
Grammy Awards).
Develop Solutions which Incorporate the Latest Technologies. The Company
maintains its technological leadership by continuously evaluating and adopting
the latest Internet tools, data management and profile-based customization
technologies, in order to create more effective solutions. For example, the
Company works with leading technology providers to evaluate pre-release
versions of new Internet tools (such as Microsoft's Active X, Real Audio's
Streaming Audio and MacroMedia's Shockwave, Sun Microsystem's Java). Such
opportunities allow the Company to comment on "beta" or pre-release versions
of software allowing it the opportunity to potentially influence the ultimate
product, and to develop an early expertise in the use of such software.
Moreover, the acquisition of NetCube provides the Company with database access
and analysis expertise and proprietary tools not available to traditional
marketing and communications firms.
Continue to Develop Compelling Content. The Company creates content for use
in: (i) client Websites; (ii) Company sponsored Websites; and (iii) Company
sponsored promotions and events. The Company's Websites provide
"Infotainment," a combination of information and entertainment on the Internet
(http: www.metaverse.com, http: www.alterworld.com, http: melroseplace.com).
For example, Metaverse.com features, among other things, film, music,
politics, World Wide Web-related information, photography exhibits and
receives millions of "hits" each month. The Company has hosted a number of
cybercasts (live broadcasts of media events over the Internet) of an
entertainment or marketing events (http: www.metaverse.com cyber).
Entertainment cybercasts have included the 37th Annual Grammy Awards, the Mike
Tyson Comeback Fight and the NFL Draft. Corporate Cybercasts have included the
Reebok Supershow and Anheuser Busch Distributor Convention. Think's Websites
and Cybercasts attract measurable traffic, serve as a testing grounds for new
content and presentation techniques, attract and build visitor bases and help
direct those visitors to clients' Websites and enhance the Company's
visibility. Client Websites, such as Continental Airlines, Reebok, NEC and
Anheuser Busch, feature content created and maintained each month by Company.
See "Case Studies."
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CUSTOMERS
The following is a list of customers of the Company that represented $50,000
or more in revenues to the Company during the fiscal year ended June 30, 1996.
CONSUMER GOODS ENTERTAINMENT TECHNOLOGY
Anheuser Busch Berkeley Systems Hewlett Packard
Avon Broadcast Music, Inc. (BMI) I-Link
Berlitz Crystal Dynamics AT&T
Bloomingdale's Disney Art Classics Sprint
Book of the Month Club Interplay Microsoft
Busch Entertainment Knowledge Adventure Mita
Coca-Cola Company MSNBC Motorola
Liz Claiborne NBA Properties NEC
Reebok Request Television Pioneer
Rockport Sega Samsung
Tambrands Sony Toshiba
TBS Superstation Western Digital
TRAVEL & TRANSPORTATION Turner New Media
Continental Airlines BUSINESS TO BUSINESS
Chrysler Motors FINANCIAL Hearst
Fodors ING Barings RL Polk
Ford Motors Janus Funds Turner Network Sales
Bankers Trust W. R. Grace
Walsh America
Wentworth
In the fiscal year ended June 30, 1996, Pioneer Electronics of America, Inc.
accounted for 15% of the Company's revenue. No other customer accounted for
more than 10% of the Company's revenue.
CASE STUDIES
Reebok. The Company provides a broad range of marketing, branding and
corporate positioning services to Reebok International, Ltd. This relationship
began in March 1991 when the Company was retained to launch the Step Reebok
program, the first branded bench aerobic system. The client sought a complete,
integrated marketing program targeting retailers, health clubs and consumers,
for which the Company developed a multi-staged marketing solution, which
included: brand identity, advertising and a fitness home video. For his
efforts on behalf of Reebok Classics Shoes in 1992, the Company's Chief
Executive Officer, Scott A. Mednick, was named "Print Art Director of the Year
for the Western Region" by Adweek Magazine.
Upon the advent of the World Wide Web, the Company was retained to help
Reebok brand and position its new corporate campaign, "Planet Reebok", on-
line. The Company responded by designing and implementing PlanetReebok.com,
one of the first commercial Websites on the Internet.
In order to help maintain a high level of traffic and recognition for
PlanetReebok.com, the Company has provided live cybercasts for Reebok, has
hosted live "chats" with various Reebok-sponsored athletes and has developed
other content and marketing solutions. When the Company's ASAP Statistical
Analysis Program indicated that traffic to the Website was decreasing, the
Company redesigned and relaunched the site, resulting in increased traffic and
new interest. The Company has gone on to expand the marketing of Reebok's
message and products on the Internet, including daily live updates from the
1996 Summer Olympics. The client relationship has resulted in Reebok's
presence on the Company's Metaverse.com Website and the hosting of the
PlanetReebok Website on the Company's Internet servers.
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Anheuser Busch. When Anheuser Busch Companies, Inc. ("Anheuser Busch") chose
the Company to develop a complete Internet entertainment presence, the result
was the Budweiser.com Website, (http: www.budweiser.com) a full featured
interactive entertainment Website introduced in November 1995. Budweiser.com
has been voted the number one corporate Website on the Internet by Interactive
Week Magazine. The Company's mission was to make the site more than just a
"billboard" on the Internet. The Website marked the introduction of the
Company's proprietary 3-D Browser interface, VINNI, which has been licensed
exclusively to Anheuser Busch on a month-to-month basis as part of its debut
on-line marketing campaign. The Company has supported the Budweiser.com
Website with custom-developed promotional efforts, including: a "Bud Bowl
'96," sweepstakes conceived and managed by the Company; a live Cybercast from
Budweiser's national convention in New Orleans, Louisiana in 1996; and the
"Net the Gold" promotion, supporting Budweiser's sponsorship of the 1996
Olympics. The client relationship has resulted in Budweiser's presence on the
Company's Metaverse.com Website, the hosting of the Anheuser Busch Website on
the Company's Internet servers and a contract to update the Anheuser Busch
Website, each of which represents a continuing source of recurring revenue.
The Company has recently developed a password-protected intranet solution
enabling distributors, resellers and corporate employees to access information
regarding a new corporate positioning campaign.
Based upon its work for Budweiser, the Company was also selected to develop,
maintain and host the http: www.4adventure.com Website for Sea World, Busch
Gardens and other theme parks owned by the Busch Entertainment Corporation.
This Website prompts a user to input words describing the users' dream
vacation, and responds by generating a Webpage that is constructed on the
basis of such input. In addition, the Website allows the user to create a
customized vacation based on the user's references and allows the user to book
vacation reservations on-line.
Continental Airlines. In order to provide a foundation to attract traffic
and eventually offer on-line ticket sales, the Company recently created a
Website and on-line campaign for Continental Airlines, Inc. ("Continental").
The Continental Airlines Website (http: www.flycontinental.com) includes a
custom navigation interface created by the Company in conjunction with
Continental, Electronic Data Systems, Inc. and Official Airline Guides, which
enables visitors to review schedules on-line. The Company is currently engaged
in the design of a custom interface to permit booking and receipt of airline
ticketing.
NEC. NEC USA, Inc. ("NEC") requested that the Company design and implement
an interactive Internet intranet solution that incorporated three separate
divisions (each with a distinct look, feel and product category) into a single
on-line environment. The Company responded by creating http: www.nec.com,
featuring two on-line interactive databases, NEC Search and Comparabase. Each
of NEC Search and Comparabase were created by the Company and are licensed to
NEC USA, Inc, along with a complete toolset that enables NEC administrative
staff to update the databases without any specific Internet expertise. The
Website includes an on-line customer support section developed by the Company.
The client relationship has resulted in NEC's presence on the Company's
Metaverse.com Website, software licensing and a contract to update and provide
content for the NEC Website, as well as designing and cybercasting the
interactive portion of NEC's recent appearance at the Networld Interop
conference in Las Vegas.
Sega. The Company began working with Sega of America, Inc. ("Sega") in April
1991 to provide traditional marketing solutions for its hardware and software
products. The Company's initial assignments were to develop packaging for the
Game Gear portable game machine and the Menacer bazooka accessory to Sega's
primary game console, the Genesis. In the course of its relationship with
Sega, the Company has designed packaging for more than fifty individual game
titles, as well as themes, graphics and trade advertising promotion for Sega's
participation in the Consumer Electronics Show. In addition, the Company
developed the logo, hardware and peripheral packaging, point-of-sale, print
advertising and miscellaneous collateral materials utilized in the launch of
Sega Saturn, a new 32-bit gaming platform, in May 1995.
Janus. Janus Funds is one of the largest mutual fund companies in the United
States, managing over $32 billion in assets for its clients. Janus selected
the Company to develop and deploy a dynamically driven Web
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presence which enables Janus customers to enter password protected areas,
check out their funds and portfolio information and monitor the net asset
value of their portfolios. The Website features database interface and full
session based tracking. In addition, the Company created two custom
applications: a Java navigational aid and JAB (the Janus Asset Builder), a
Java-based calculation applet.
RELATIONSHIP WITH OMNICOM
In August 1996, the Company entered into a strategic relationship with
Omnicom, the third largest advertising company in the world. Pursuant to the
terms of the Omnicom Agreement: (i) Omnicom purchased 938,667 shares of Common
Stock from the Company in exchange for $4,998,000; (ii) the Company appointed
Barry Wagner to represent Omnicom on the Company's Board of Directors; (iii)
Omnicom agreed not to increase its ownership interest in the Company absent
the approval of the Board of Directors; and (iv) Omnicom granted the Company a
right of first refusal to purchase the shares of Common Stock owned by
Omnicom.
In November 1996 four principal stockholders of the Company transferred an
aggregate of 124,667 shares of Common Stock to Omnicom for no cash
consideration. Omnicom consented to the November 1996 stock split and related
amendments to the Omnicom Agreement and the Company agreed to decrease the
number of shares available under the 1996 Stock Option Plan.
The Company entered into the Omnicom Transaction to establish a strategic
relationship that could provide access to a substantial additional client base
and to additional advertising agent support systems, although there can be no
assurance that these results will occur. Since June 30, 1996, Omnicom and the
Company have engaged in the joint marketing of their services to several
Omnicom clients. There can be no assurance that such joint marketing will
continue, nor can there be any assurance with respect to the effect of such
marketing on the Company's operations.
COMPETITION
The market for the Company's services is highly competitive and is
characterized by pressures to incorporate new capabilities and accelerate job
completion schedules. The Company faces competition from a number of sources.
These sources include national and regional new media marketing companies and
national and local advertising agencies, many of which have started to develop
or acquire interactive media capabilities. New boutiques that either provide
integrated or specialized services (e.g., corporate identity and packaging,
advertising services or Website design) and are technologically proficient,
have emerged and are competing with the Company. Many of the Company's
competitors or potential competitors have longer operating histories, longer
client relationships and significantly greater financial, management,
technology, development, sales, marketing and other resources than the
Company. The Company's ability to maintain its existing clients and generate
new clients depends to a significant degree on the quality of its services and
its reputation among its clients and potential clients, as compared with the
quality of services provided by and the reputations of the Company's
competitors. In the event that the Company loses clients to competitors
because of dissatisfaction with the services performed or provided by the
Company, or the reputation of the Company is otherwise adversely impacted, the
business, financial condition and operating results of the Company could be
materially adversely affected.
There are relatively low barriers to entry into the Company's business. The
Company expects that it will face additional competition from new entrants
into the market in the future. There can be no assurance that existing or
future competitors will not develop or offer marketing communication services
and products that provide significant performance, price, creative,
technological or other advantages over those offered by the Company, which
could have a material adverse effect on the business, financial condition and
operating results of the Company.
The Company believes that the principal competitive factors in the market
for new media marketing services are creative content, quality of service,
breadth of services offered, technological and new media sophistication,
perceived value, responsiveness to clients' needs and timeliness in delivering
solutions. The Company believes that it generally competes favorably with
respect to each of these factors.
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SERVER HOSTING AND INTERNET CONNECTIVITY
The Company currently operates servers and maintains Internet connectivity
from its offices in New York and Colorado. In New York, the Company's
connectivity is via redundant DS-3 100 MB/sec lines with connectivity to the
MAE East, MAE West and SWIPE, with all associated peering. Backup is available
via multiple redundant T-1 lines. The Company's serving in New York is
accomplished via symmetrical multiprocessing, multi-threaded Windows NT
servers and Sun Ultra 170E servers with uninterrupted power supply backup
distributed primarily through Cisco routers. In Colorado, the Company's
connectivity is via T-1 lines. Servers in the Colorado facility consist of
multiple Sun Ultra 170E with uninterrupted power supply backup distributed
primarily through Cisco routers. Both facilities feature level 0 backup with
off-site storage.
The Company intends to expand its server and connectivity infrastructure in
the future by adding servers and dedicated high bandwidth connectivity at each
of its other major offices. The Company believes that updating and expanding
its technically advanced network is important to maintaining its leadership
position. The Company intends to continue to invest in maintaining and
expanding its server and connectivity infrastructure.
PROPERTIES
The Company's executive and administrative offices are located in New York,
New York. The Company also maintains offices in Culver City, California;
Boulder, Colorado; Atlanta, Georgia; and Edgewater, New Jersey.
The New York facilities consist of approximately 10,000 square feet on two
floors in midtown Manhattan (the "Manhattan Space"). The Manhattan Space is
currently leased on a month-to-month basis for $145,000 per annum from October
1, 1996 to September 30, 2001 and then for $155,000 per annum from October 1,
2001 to September 30, 2006.
The California facility consists of approximately 11,000 square feet of
space located in a converted warehouse. Such space is currently leased by the
Company on a month-to-month basis for approximately $15,000 per month.
The Company's offices in Colorado, Georgia and New Jersey range in space
from 2500 square feet to 9,000 square feet. Each of these facilities is leased
with monthly rents ranging from $750 to $10,000.
The Company believes that its existing facilities are adequate to meet its
current operating needs and that suitable additional space will be available
to the Company on favorable terms should the Company require additional space
to accommodate future operations or expansion. Further, in the event that any
one of the foregoing leases was not renewed, the Company believes that it
would be able to obtain suitable alternative space on terms comparable to
those currently afforded to the Company.
EMPLOYEES
At November 1, 1996, the Company employed 98 full-time employees, including
12 persons in management, 17 creative directors, 35 production personnel, 15
administrative persons, 10 marketing representatives and 9 technical
professionals. The Company is not a party to any collective bargaining
agreement and the Company's employees are not represented by any labor union.
The Company considers its relationship with its employees to be good. The
Company's success depends in large part upon its ability to attract, develop,
motivate and retain highly skilled creative and technical employees, of which
there can be no assurance.
LEGAL PROCEEDINGS
The Company is not a party to any litigation that is expected to have a
material adverse effect on the Company's financial condition or results of
operations.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information with respect to the
directors and executive officers of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE COMPANY
---- --- -------------------------
<S> <C> <C>
Scott Mednick.................. 40 Chief Executive Officer and Chairman of the
Board
Ronald Bloom................... 44 President, Chief Operating Officer and
Director
Melvin Epstein................. 50 Chief Financial Officer and Secretary
Adam Curry..................... 31 Chief Technology Officer and Director
David Hieb..................... 31 Vice President
James Grannan.................. 33 Vice President
Susan Goodman.................. 41 Vice President
James Carlisle................. 49 Vice President
Frank DeLape................... 42 Director
Angel Martinez................. 40 Director
Michael Ribero................. 40 Director
Barry Wagner................... 56 Director
</TABLE>
Scott Mednick has been Chairman of the Board of Directors and Chief
Executive Officer of the Company since its inception in January 1996. Mr.
Mednick founded Scott A. Mednick & Associates, Inc. (known as "The Mednick
Group"), one of the Subsidiaries, primarily engaged in the provision of
strategic marketing and corporate and brand positioning, in 1985. Mr. Mednick
is the President and Creative Director of The Mednick Group. Prior to starting
The Mednick Group, Mr. Mednick was employed by Boyd Communications in Los
Angeles, California, most recently as Creative Director from 1982 to 1985. Mr.
Mednick holds a B.A. Degree from the Rhode Island School of Design.
Ronald Bloom has been a Director and the President and Chief Operating
Officer of the Company since June 1996. Previously, Mr. Bloom was Chief
Operating Officer and General Manager of On Ramp, one of the Subsidiaries,
primarily engaged in the provision of Internet and intranet systems and
services, from 1995 to 1996, and presently serves as its Vice President and
Secretary. Prior to joining On Ramp, Mr. Bloom founded and served as President
of MediaTime Advertising and Communications, Chicago, Illinois from 1979 to
1981; President of Prototype Computer Aided Design from 1980 to 1983; Vice
President and Creative Director of Jeffrey Nemetz and Associates Advertising,
Chicago, Illinois from 1983 to 1985; President of TMF Communications, Los
Angeles, California from 1986 to 1989; President of Ron Bloom Productions, a
production company and consulting firm founded by Mr. Bloom from 1989 to 1994.
Melvin Epstein has been the Chief Financial Officer of the Company since
August 1996. From 1994 to August 1996, Mr. Epstein was Managing Director of TN
Services, a unit of True North Communications, an advertising agency. Prior to
joining TN Services, Mr. Epstein was the Chief Financial Officer of Backer
Spielvogel Bates, a subsidiary of Saatchi & Saatchi, P.L.C., from 1987 to
1994. Mr. Epstein holds a B.S. in Accounting from Queen's College.
Adam Curry has been a Director and the Chief Technical Officer of the
Company since June 1996. Mr. Curry founded and has been Chairman of the Board
of Directors of On Ramp since 1994 and its President since March 1996. Mr.
Curry hosted and produced the nationally broadcast radio program "CountDown"
from 1983 to 1987. From 1987 to 1992, Mr. Curry served as an On-Air
Personality for MTV Networks in New York.
David Hieb has been Vice President of the Company since June 1996. Mr. Hieb
founded Internet One, one of the Subsidiaries, primarily engaged in the
provision of secure on-line systems and Internet tools training, in October of
1993. From July 1991 through September 1993, Mr. Hieb was Senior Engineer for
the Root Group,
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Inc. a UNIX and TCP IP networking firm. From January 1990 through July 1991,
Mr. Hieb was a Systems Engineer for the Computer Science Department at the
University of Colorado at Boulder. Mr. Hieb holds a B.S. in Electrical and
Computer Engineering from the University of Colorado at Boulder.
James Grannan has been Vice President of the Company since June 1996. Mr.
Grannan founded Creative Resources, one of the Subsidiaries, primarily engaged
in the provision of strategic marketing and corporate and brand positioning
services, in 1994. Mr. Grannan was Creative Manager for the Coca-Cola Company
from 1992 to 1994 and Promotional Packaging and Design Manager for the Coca-
Cola Company from 1988 to 1992. Prior to joining Coca-Cola, Mr. Grannan worked
with Adair-Greene, an advertising agency in Atlanta, Georgia from 1987 to
1988. Mr. Grannan holds a B.A. Degree in Advertising Design from the Atlanta
College of Art.
Susan Goodman has been Vice President of the Company since June 1996. Ms.
Goodman founded the Goodman Group, one of the Subsidiaries, primarily engaged
in the provision of strategic marketing and corporate and brand positioning
services, in 1993 as a strategic marketing consultancy, specializing in direct
marketing and new media. Previously she was Director of Client Services at
Chiat Day Direct Marketing from February 1992 through July 1992. She spent 10
years in merchandising in the apparel industry with companies such as IZOD and
Merona Sport (division of Oxford Industries). Ms. Goodman serves on the
Operating Committee of the Direct Marketing Association's Business to Business
Council. Ms. Goodman has a B.A. in history from Tufts University and received
her M.B.A. in Marketing, Finance and Strategic Planning from Northwestern
University's Kellogg School of Management.
James Carlisle has been Vice President of the Company since June 1996. Dr.
Carlisle founded NetCube Corporation, one of the Subsidiaries, primarily
engaged in the provision of database and information management and
utilization services, in 1978. Prior to that, Dr. Carlisle was co-founder,
Vice President and Chief Technical Officer of Office Systems Planning
Corporation from 1975 to 1977. He was a Research Scientist at the Information
Sciences Institute, the first software development center funded by the
Defense Advanced Research Project Agency (DARPA), supporting the Advanced
Research Project Agency (ARPA)-Net from 1974 to 1977. Dr. Carlisle served
simultaneously as an Associate Professor on the faculty of the University of
Southern California, Annenberg School of Communications, where he co-founded
the first doctoral program to focus on Human Interaction with Computers,
Teleconferencing, and Internet-related technologies. Dr. Carlisle has been a
research scientist at the Wharton School from 1976 to 1977, a consultant at
the RAND Corporation in 1970, and a consultant for Lexis Corp. from 1969 to
1970. He received his Ph.D. and M.Phil. from Yale University's School of
Organization and Management and a B.S. in Engineering with Honors from
Princeton University.
Frank DeLape became a Director of the Company when it was formed in January
1996. Mr. DeLape has served as President, Secretary, Treasurer and a director
of Oak Tree Capital, Inc., financial consulting firm, since its formation in
January 1996 and of Benchmark Equity Group, Inc., a financial consulting firm,
since its formation in April 1994. Oak Tree Capital, Inc. is the manager and a
member of Trident II, L.L.C., a stockholder of the Company. Mr. DeLape served
as President, Chief Executive Officer and Director of AquaNatural Company, a
provider of water purification, dispensing and marketing program, from its
inception in February 1992 until March 1994. Mr. DeLape served as President,
Chief Executive Officer and a director of Critical Industries, Inc. from 1990
to 1992.
Angel Martinez has been a Director of the Company since September 1996.
Since July 1994, Mr. Martinez has served as President and Chief Executive
Officer of the Rockport Company, Inc. a shoe manufacturer. Prior to joining
Rockport Company, Inc., Mr. Martinez served as Executive Vice President for
Global Marketing at Reebok International, Ltd. from February 1994 until July
1994. Mr. Martinez was President of the Fitness Division of Reebok
International, Ltd. from September 1992 to January 1994, prior to which, he
served as Vice President for Business Development. Mr. Martinez is also a
member of the Board of Advisors for the Reebok Human Rights Awards. Mr.
Martinez holds a B.A. from the University of California at Davis.
Michael Ribero has been a Director of the Company since September 1996.
Since September 1995, Mr. Ribero has served as Executive Vice President and
General Manager of Sega of America. Prior to joining Sega
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of America, Mr. Ribero was Executive Vice President, Marketing and Strategic
Planning of Hilton Hotels Corporation from October 1994 to February 1995, the
Senior Vice President, Marketing and Strategic Planning from January to
September 1994, and the Senior Vice President, Marketing from June 1988 to
December 1993. Mr. Ribero holds a B.S. in Operations Research and Industrial
Engineering from the University of Florida.
Barry Wagner has been a Director of the Company since September 1996. Mr.
Wagner has been an employee of Omnicom since 1974, and currently serves as
Secretary and General Counsel of Omnicom. Mr. Wagner also serves as Secretary
and Chief Legal Officer of BBDO Worldwide Inc. and is Senior Vice President
and Chief Legal Officer of BBDO New York, both of which are part of Omnicom.
Prior to joining Omnicom, Mr. Wagner was an attorney with the National
Broadcasting Company and the Federal Reserve Board of New York. Mr. Wagner is
a graduate of Hamilton College and Harvard Law School.
All officers of the Company are elected to serve in such capacities until
the next annual meeting of the Board of Directors of the Company and until
their successors are duly elected and qualified.
BOARD COMMITTEES
Audit Committee. The Company's audit committee (the "Audit Committee") is
responsible for making recommendations to the Board of Directors concerning
the selection and engagement of the Company's independent certified public
accountants and for reviewing the scope of the annual audit, audit fees, and
results of the audit. The Audit Committee also reviews and discusses with
management and the Board of Directors such matters as accounting policies and
internal accounting controls, and procedures for preparation of financial
statements. Michael Ribero and Barry Wagner are members of the Audit
Committee.
Compensation Committee. The Company's compensation committee (the
"Compensation Committee") approves the compensation for executive employees of
the Company. The Compensation Committee reviews and recommends to the Board of
Directors the compensation and benefits of all officers of the Company,
reviews general policy matters relating to compensation and benefits of
employees of the Company and administers the Company's 1996 Stock Option Plan.
Michael Ribero and Angel Martinez are members of the Compensation Committee.
EXECUTIVE COMPENSATION
The following table sets forth the compensation received by the Company's
Chief Executive Officer and four most highly compensated executive officers
whose total annual salary and bonus exceeded $100,000 during the year ended
June 30, 1996 ("Named Officers").
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
--------------------------------
NAME AND OTHER ANNUAL ALL OTHER
PRINCIPAL POSITION SALARY BONUS COMPENSATION($) COMPENSATION($)
------------------ -------- ------- --------------- ---------------
<S> <C> <C> <C> <C>
Scott Mednick................. $225,000 $11,376 $20,000 --
Chief Executive Officer
Ronald Bloom.................. $106,250 $58,234 -- --
President
Adam Curry.................... $125,000 $ 2,684 -- --
Chief Technology Officer
Susan Goodman................. $138,000 -- -- $130,000(1)
Vice President
James Carlisle................ $159,500 -- -- $ 7,200
Vice President
</TABLE>
- --------
(1) Represents distributions to the noted executive as the former sole
stockholder of Goodman Group, previously a Subchapter S corporation.
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<PAGE>
EMPLOYMENT AGREEMENTS
The Company has entered into an employment agreement with each of Scott
Mednick, Ronald Bloom, Adam Curry and James Carlisle, each of which provides
for an initial term of three years, subject to automatic extension for a
period of two years in the absence of notice to the contrary at the option of
the Company. Pursuant to the terms of such agreement, Mr. Mednick is entitled
to receive an annual salary of $195,000. Pursuant to the respective terms of
such agreements, as amended by individual letter agreements each dated October
28, 1996, each of Messrs. Bloom, Curry and Carlisle is entitled to receive an
annual salary of $125,000. Each of Messrs. Mednick, Bloom, Curry and Carlisle
is entitled to receive a bonus as determined by the Board of Directors.
The Company has also entered into an employment agreement with James Grannan
which provides for an initial term of one year subject to renewal for a period
of one year at the discretion of the Company. Pursuant to the terms of such
agreement, Mr. Grannan is entitled to receive an annual salary of $125,000 and
bonuses as determined by the Board of Directors.
The Company has also entered into an employment agreement with David Hieb
which provides for an initial term of three years subject to renewal for a
period of one year at the discretion of the Company. Pursuant to the terms of
such agreement, Mr. Hieb is entitled to receive an annual salary of $125,000
and bonuses as determined by the Board of Directors.
The Company has also entered into an employment agreement with Susan Goodman
which provides for an initial term of three years. Pursuant to the terms of
the employment agreement, Ms. Goodman is entitled to receive an annual salary
of $195,000, a bonus of $30,000 within six months of execution of such
agreement and bonuses thereafter as determined by the Board of Directors.
The Company has also entered into an employment letter with Mel Epstein.
Pursuant to the terms of the letter, Mr. Epstein is entitled to receive an
annual salary of $180,000.
All of the foregoing employment agreements provide for termination by the
Company upon death or disability of the individual and may be terminated with
or without cause (as defined therein). Such agreements also provide for
severance payments upon termination without cause based upon a multiple of the
monthly salaries provided for therein (for up to 12 months following the
number of months otherwise remaining under such agreements). In addition, all
of the foregoing employment agreements contain non-competition and
confidentiality provisions that extend beyond the respective terms of such
agreements for periods of up to one year.
DIRECTOR COMPENSATION
Employee directors receive no compensation for acting as directors or
attending meetings of directors. Non-employee directors receive $1,000 per
year for each year such director serves on the Board of Directors, $2,500 per
meeting attended. In addition, all directors are eligible to receive options
under the Company's Stock Option Plan. See "Management--Stock Option Plan."
All directors are entitled to reimbursement of reasonable expenses related to
attending meetings of the directors. Frank DeLape, a director of the Company,
is a principal and director of Benchmark, which received a $500,000 finder's
fee and receives consulting fees of $7,000 per month from the Company. See
"Certain Transactions--Consulting and Finder's Agreements."
STOCK OPTION PLAN
In July 1996, the Board of Directors adopted and the Company's stockholders
approved the 1996 Stock Option Plan (the "Stock Option Plan"). The Stock
Option Plan provides for the grant of options which qualify as incentive stock
options ("Incentive Options") under Section 422 of the Internal Revenue Code
of 1986, as amended, to officers and employees of the Company and options
which do not so qualify ("Non-Qualified Options") to officers, directors,
employees and consultants of the Company (including the Subsidiaries). A total
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of 966,667 shares of Common Stock is reserved for issuance under the Stock
Option Plan (which number is subject to adjustment in the event of the
Company's declaration of stock dividends, stock splits, reclassifications and
the occurrence of other similar events). Options to purchase 933,333 shares of
Common Stock at an exercise price per share of $7.50 were granted by the
Company in November 1996. No options were granted prior to June 30, 1996. The
Options granted will vest in increments of one-fourth at the end of each year
over a four year period from the date of grant. No options have been exercised
to date.
Pursuant to its terms, the Stock Option Plan is to be administered by the
Board of Directors or a committee established by the Board of Directors (the
"Stock Option Committee"). The Board of Directors or such committee determines
the persons to whom options are granted, the number of shares of stock subject
to an option, the period during which options may be exercised and the
exercise price thereof.
The price at which each share of Common Stock covered by an option may be
purchased shall be determined by the Board of Directors or the Stock Option
Committee, provided that the option price for any Incentive Option shall not
be less than the "fair market value" of the shares of Common Stock at the time
of grant, and provided, however, if an Incentive Option to purchase shares of
Common Stock is granted to an optionee who owns more than ten percent (10%) of
the voting power of the capital stock of the Company, the minimum exercise
price of such option shall be not less than one hundred ten percent (110%) of
the "fair market value" of the shares of Common Stock on the date of grant
determined in accordance with the Stock Option Plan.
LIMITATION ON LIABILITY; INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Certificate of Incorporation limits the personal liability of directors
to the fullest extent permitted by Section 102(b)(7) of the Delaware General
Corporation Law. Section 145 of the Delaware General Corporation Law provides
that a corporation's certificate of incorporation may limit the personal
liability of its directors for monetary damages for breach of their fiduciary
duties as directors except for liability: (i) for any breach of the director's
duty of loyalty to the corporation or its stockholders; (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a
knowing violation of law; (iii) arising under Section 174 of the Delaware
General Corporation Law; or (iv) for any transaction from which the director
derived an improper personal benefit.
The effect of the foregoing is to require the Company to indemnify the
officers and directors of the Company for any claim arising against such
persons in their official capacities if such person acted in good faith and in
a manner that he reasonably believed to be in or not opposed to the best
interests of the corporation, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was unlawful.
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CERTAIN TRANSACTIONS
ISSUANCE OF FOUNDERS' STOCK
In January 1996, Scott A. Mednick, Ronald Bloom, Benchmark and Christopher
Efird, as the founding stockholders of the Company, acquired an aggregate of
2,171,508 shares of Common Stock in exchange for payment of an aggregate of
$657 therefor.
THE REORGANIZATION
In connection with the Company's acquisition of Mednick Group pursuant to
the Reorganization in June 1996, the Company issued to Scott Mednick, as the
sole stockholder of Mednick Group, an aggregate of 208,084 shares of Common
Stock. Mr. Mednick is a founding stockholder, an officer and a director of the
Company. For information relating to the Reorganization, see "Recent
Developments--The Reorganization."
RECENT FINANCINGS
In March 1996, the Company obtained a loan in the aggregate principal amount
of $270,000 from three separate lenders, including Trident II, L.L.C., Frank
M. DeLape and J.B. Manning. In exchange for extension of the loan, the Company
issued three 10% Notes, including one in the principal amount of $225,000 to
Trident II, L.L.C. and one in the principal amount of $20,000 to Mr. DeLape.
Mr. DeLape, a director and founder of the Company, is an officer, director and
principal of Benchmark and of Oak Tree Capital, Inc., which is the manager and
a member of Trident II, L.L.C. In August 1996, an aggregate of $27,000 in
principal amount of the foregoing 10% Notes was converted by the holders
thereof into an aggregate of 216,667 shares of Common Stock. In July 1996,
Trident II, L.L.C. loaned the Company an additional $75,000 evidenced by a
separate non-convertible promissory note. Principal and interest outstanding
under the 10% Note and the $75,000 non-convertible promissory note were repaid
out of the proceeds of the Omnicom Transaction in August 1996, as more fully
described elsewhere herein. See "Principal Stockholders."
In April 1996, upon release of an escrow account established to facilitate
the following loan transaction, the Company loaned an aggregate of $1,000,000
to On Ramp in connection with the redemption by On Ramp of 100 shares of its
common stock (which shares of common stock represented 66% of the issued and
outstanding capital stock of On Ramp). Such redemption was the result of an
agreement previously reached among the former stockholders of On Ramp arising
out of fundamental differences among such individuals relating to the
operation and business strategy of On Ramp. In addition, pursuant to the terms
of a certain loan agreement between the Company and On Ramp, the Company
agreed to make available to On Ramp an additional $600,000, of which $583,000
has been borrowed by On Ramp as of the date hereof. Such loans are evidenced
by promissory notes executed on behalf of On Ramp in favor of the Company in
the principal amounts of $1,000,000 and $600,000, respectively (the "On Ramp
Notes"). Amounts outstanding under the On Ramp Notes accrue interest at the
rate of 12% per annum. Payment of principal and interest on the On Ramp Notes
was due on August 16, 1996, subject to a six-month cure period. Repayment of
amounts outstanding under the On Ramp Notes were secured by the pledge in
favor of the Company of 26 shares of common stock of On Ramp by Adam Curry
(who, as a result of the foregoing redemption, became the sole stockholder of
On Ramp). Subsequently, in connection with the Company's acquisition of On
Ramp, the Company acquired all of the issued and outstanding capital stock of
On Ramp, including the shares of common stock subject to the On Ramp Pledge
Agreement. In addition, amounts owed by On Ramp to its former shareholders in
the amount of $234,000 were forgiven by On Ramp in fiscal 1996.
In May 1996, pursuant to the terms of a certain loan agreement between the
Company and Internet One, the Company agreed to make available to Internet One
up to $70,000, of which $50,000 has been borrowed by Internet One as of the
date hereof. Such loan is evidenced by a promissory note executed by Internet
One in favor of the Company in the principal amount of $70,000 (the "Internet
One Note"). Amounts outstanding under the Internet One Note accrue interest at
the rate of 12% per annum. Payment of principal and interest on the Internet
One Note is due on September 30, 1996. Repayment of amounts outstanding under
the Internet One Note was secured by the pledge in favor of the Company (the
"Internet One Pledge Agreement") of 132,000
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<PAGE>
shares of common stock of Internet One (which shares of common stock represent
33% of the issued and outstanding capital stock of Internet One) by David R.
Hieb. Subsequently, in connection with the Company's acquisition of Internet
One, the Company acquired all of the outstanding shares of capital stock of
Internet One, including the shares of common stock subject to the Internet One
Pledge Agreement.
Historically, Dr. Carlisle and his father, Dan Carlisle, have extended
credit to NetCube. In connection with the Company's acquisition of NetCube in
June 1996, Dr. Carlisle agreed to forgive an aggregate of approximately
$1,220,000 in debt owed to him by NetCube. In addition, the Company agreed to
issue three promissory notes providing for repayment of amounts owed to each
of Dr. Carlisle and Dan Carlisle. Each of such promissory notes accrues
interest at the rate of 8% per annum and is convertible into shares of Common
Stock prior to expiration thereof at the rate of $7.50 per share. The
principal amount of the promissory note issued to Dr. Carlisle is $132,000 and
the principal amounts of the two promissory notes issued to Dan Carlisle are
$288,000 and $515,760, respectively. The $132,000 promissory note issued to
Dr. Carlisle and the $288,000 promissory note issued to Dan Carlisle are
payable prior to the Offering; the $515,760 promissory note issued to Dan
Carlisle is payable on March 31, 1998 (or earlier, upon the Company's receipt
of $3,000,000 from a private offering of securities, the sale of 50% of the
assets of the Company or another public offering.)
CONSULTING AND FINDER'S AGREEMENTS
In March 1996, the Company entered into a consulting agreement with
Benchmark (the "Consulting Agreement"), pursuant to which Benchmark agreed to
render to the Company for a period of two years certain management consulting
services, including among other things, rendering advice in the areas of
strategic planning, business strategy, acquisition planning and business
administration. In exchange therefor, the Company agreed to pay Benchmark a
lump sum payment of $35,000 plus a monthly fee of $7,000. In March 1996, the
Company also entered into a finder's agreement with Benchmark (the "Finder's
Agreement"), pursuant to which Benchmark agreed to introduce acquisition
candidates to the Company, on a non-exclusive basis, for a period of two
years. In August 1996, in consideration of the payment by the Company to
Benchmark of $500,000, representing payment of amounts earned in connection
with the introduction of certain of the Subsidiaries, the Finder's Agreement
was terminated. The Company used a portion of the proceeds of the Omnicom
Transaction to pay amounts owed by the Company to Benchmark under the Finder's
Agreement. Benchmark is a founding stockholder of the Company and Frank M.
DeLape, a director of Benchmark, is a director of the Company and an officer
and director of Oak Tree Capital, Inc., which is the manager and a member of
Trident II, L.L.C., a stockholder of the Company. See "Management" and
"Principal Stockholders."
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PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information as of November 1, 1996
with respect to the beneficial ownership of the Company's Common Stock by: (i)
each of the Company's directors; (ii) each of the Named Officers; (iii) each
person or entity who is known to the Company to beneficially own 5% or more of
the outstanding Common Stock; and (iv) all directors and executive officers of
the Company as a group.
<TABLE>
<CAPTION>
PERCENT BENEFICIALLY OWNED
NUMBER OF SHARES -----------------------------
NAME AND ADDRESS BENEFICIALLY BEFORE AFTER
OF BENEFICIAL OWNER(1) OWNED OFFERING OFFERING
---------------------- ---------------- ------------- -------------
<S> <C> <C> <C>
Frank M. DeLape.............. 976,358 22.9 15.6
16406 Brook Forest Drive
Houston, Texas 77059
Benchmark Equity Group....... 779,691 18.3 12.4
16815 Royal Crest Drive
Suite 160
Houston, Texas 77058
Ronald Bloom................. 875,932 20.5 14.0
45 West 36th Street
New York, New York 10036
Scott A. Mednick............. 630,467 14.8 10.1
8522 National Boulevard,
Suite 101
Culver City, California
90232-2481
Adam Curry................... 200,405 4.7 3.2
30 Glen Road
Verona, New Jersey 07044
James Carlisle............... 195,182 4.6 3.1
45 Allison Road
Alpine, New Jersey 07620
Susan Goodman................ 49,623 1.2 0.8
45 West 36th Street
New York, New York 10036
Omnicom Group, Inc........... 1,063,335 24.9 17.0
437 Madison Avenue
New York, New York 10022
Angel Martinez............... -- -- --
Michael Ribero............... -- -- --
Barry Wagner................. -- -- --
All Directors and Executive
Officers as a Group (12
persons).................... 3,091,340 72.5 49.3
</TABLE>
- --------
* Less than one percent.
(1) Unless otherwise noted, all of such shares of Common Stock listed above
are owned of record by each individual named as beneficial owner and such
individual has sole voting and dispositive power with respect to the
shares of Common Stock owned by each of them. Each person's percentage of
ownership is determined by assuming that any options or convertible
securities held by such person which are exercisable within 60 days from
the date hereof have been exercised or converted, as the case may be.
(2) Includes 709,501 shares and 180,000 shares of Common Stock beneficially
owned by Benchmark and Trident II, L.L.C., respectively. Mr. DeLape, a
director of the Company, is an officer, director and principal of
Benchmark and of Oak Tree Capital, Inc., which is the manager and a member
of Trident II, L.L.C, and may be deemed to be beneficial owner of such
shares. An aggregate of 200,000 shares of Common Stock owned by Benchmark
are subject to sale by Benchmark, as the Selling Stockholder, upon the
exercise of the over-allotment option granted to the Underwriter. If the
over-allotment option is exercised in full,
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Mr. DeLape would beneficially own approximately 12.7% of the outstanding
Common Stock after the Offering. Excludes 101,357 shares held by
Christopher Efird, a principal of Benchmark, and a former director of the
Company. Benchmark is owned and controlled by Frank DeLape.
(3) Excludes 180,000 shares of Common Stock owned by Trident II, L.L.C. and
16,667 shares of Common Stock owned by Frank DeLape.
(4) Represents shares of Common Stock issued in connection with the Company's
acquisition of On Ramp, which shares were issued in the name of Sachnoff &
Weaver, Ltd., as escrow agent, to be distributed to Mr. Curry and certain
former stockholders of On Ramp upon release of escrow.
(5) Excludes 66,667 shares of Common Stock issuable upon exercise of options
granted to the named stockholder under the 1996 Stock Option Plan.
(6) Excludes 36,667 shares of Common Stock issuable upon exercise of options
granted to the named stockholder under the 1996 Stock Option Plan.
(7) Omnicom is a multinational, publicly held corporation.
(8) Excludes shares of Common Stock subject to options granted under the 1996
Stock Option Plan.
ESCROW SHARES
In connection with the Offering, certain holders of Common Stock have agreed
to place, on a pro rata basis, 825,000 shares into escrow pursuant to an
escrow agreement (the "Escrow Agreement") between such holders and Continental
Stock Transfer & Trust Company, as escrow agent. The Escrow Shares are not
transferable or assignable; however, the Escrow Shares may be voted by the
beneficial holders thereof.
The Escrow Shares will be released from escrow if, and only if, the
following conditions are met:
(a) the Company's net income before provision for income taxes and
exclusive of any extraordinary earnings (all as audited by the Company's
independent public accountants) (the "Minimum Pretax Income") amounts to at
least $1.15 per share for any of the fiscal years ending June 30, 1997,
1998 or 1999;
(b) the Closing Price (as defined in the Escrow Agreement) of the Common
Stock averages in excess of $30.00 per share for 40 consecutive business
days during the 36-month period commencing on the date of this Prospectus;
(c) during the periods specified in (b) above, the Company is acquired by
or merged into another entity in a transaction in which the value of the
per share consideration received by the stockholders of the Company on the
date of such transaction or at any time during the period set forth in (b)
equals or exceeds the level set forth in (b) above.
Holders of the Escrow Shares and their respective escrowed amounts are as
follows: Benchmark, 232,218 shares; Mr. Mednick, 187,774 shares; Mr. Bloom,
260,883 shares; Mr. Curry, 59,687 shares; Mr. Grannan, 1,182 shares; Ms.
Goodman, 14,779 shares; Mr. Hieb, 10,345 shares; and Dr. Carlisle, 58,132
shares.
The Minimum Pretax Income amounts set forth above shall: (i) be calculated
exclusively of any extraordinary earnings, including any charge to income
relating to the release of the Escrow Shares; and (ii) be increased
proportionately, with certain limitations, in the event additional shares of
Common Stock or securities convertible into, exchangeable for or exercisable
into Common Stock are issued after completion of the Offering. The Closing
Price amounts set forth above are subject to adjustment in the event of any
stock splits, reverse stock splits or other similar events.
Any money, securities, rights or property distributed in respect of the
Escrow Share and including any property distributed as dividends or pursuant
to any stock split, merger, recapitalization, dissolution, or total or partial
liquidation of the Company, shall be held in escrow until release of the
Escrow Shares. If the applicable Minimum Pretax Income or Closing Price levels
set forth above have not been met by September 30, 1999, the Escrow Shares, as
well as any dividends or other distributions made with respect thereto, will
be cancelled and contributed to the capital of the Company. The Company
expects that the release of the Escrow Shares to officers,
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directors, employees and consultants of the Company will be deemed
compensatory and, accordingly, will result in a substantial charge to
reportable earnings, which would equal the fair market value of such shares on
the date of release. Such charge could substantially increase the loss or
reduce or eliminate the Company's net income, if any, for financial reporting
purposes for the period during which such shares and options are, or become
probable of being, released from escrow. Although the amount of compensation
expense recognized by the Company will not affect the Company's total
stockholders' equity, it may have a negative effect on the market price of the
Company's securities. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and Note 9 of Notes to Financial
Statements.
The Minimum Pretax Income and Closing Price levels set forth above were
determined by negotiation between the Company and the Underwriter and should
not be construed to imply or predict any future earnings by the Company or any
increase in the market price of its securities.
DESCRIPTION OF SECURITIES
The following description of the Company's securities does not purport to be
complete and is subject in all respects to applicable Delaware law and the
provisions of the Company's Certificate of Incorporation and Bylaws and the
Underwriting Agreement between the Company and the Underwriter, copies of all
of which have been filed with the Commission as exhibits to the Registration
Statement of which this Prospectus forms a part.
COMMON STOCK
The Certificate of Incorporation of the Company authorizes the issuance of
up to 50,000,000 shares of Common Stock, $.0001 par value per share. As of
November 1, 1996, there were 4,266,667 shares of Common Stock outstanding held
by 20 holders of record. Each share of Common Stock entitles the holder
thereof to one vote on each matter submitted to the stockholders of the
Company. The holders of Common Stock are entitled to receive ratable
dividends, if any, as may be declared by the Board of Directors out of funds
legally available therefor. In the event of a liquidation, dissolution or
winding up of Company, the holders of Common Stock are entitled to share
ratable in all of the assets of the Company available for distribution. The
Common Stock has no preemptive, subscription or conversion rights, or
redemption or sinking fund provisions applicable thereto. All outstanding
shares of Common Stock are fully paid and non-assessable. The Company has not
paid any dividends on its Common Stock to date.
PREFERRED STOCK
The Certificate of Incorporation of the Company authorizes the issuance of
up to 5,000,000 shares of Preferred Stock, $.0001 par value per share. None of
such Preferred Stock has been designated or issued. The Board of Directors is
authorized to issue shares of Preferred Stock from time to time in one or more
series and, subject to the limitations contained in the Certificate of
Incorporation and any limitations prescribed by law, to establish and
designate any such series and to fix the number of shares and the relative
conversion rights, voting rights and terms of redemption (including sinking
fund provisions) and liquidation preferences. If shares of Preferred Stock
with voting rights are issued, such issuance could affect the voting rights of
the holders of the Common Stock by increasing the number of outstanding shares
having voting rights, and by the creation of class or series voting rights.
Issuance of shares of Preferred Stock could, under certain circumstances, have
the effect of delaying or preventing a change in control of the Company and
may adversely affect the rights of holders of Common Stock. Also, the
Preferred Stock could have preferences over the Common Stock (and other series
of Preferred Stock) with respect to dividends and liquidation rights.
ANTI-TAKEOVER EFFECTS OF PROVISIONS OF THE CERTIFICATE OF INCORPORATION
The Certificate of Incorporation and Bylaws contain provisions that could
discourage potential takeover attempts and prevent stockholders from changing
the Company's management. The Bylaws provide that no
41
<PAGE>
proposal by a stockholder shall be presented for vote at an annual meeting of
stockholders unless such stockholder shall, not later than the close of
business of the last business day of January and, with respect to a special
meeting, not later than the close of business on the fifth calendar day
following the date on which notice of the meeting is first given to
stockholders, provide the Board of Directors or the Secretary of the Company
with written notice of intention to present a proposal for action at the
forthcoming meeting of stockholders, which notice shall include the name and
address of such stockholder, the number of voting securities he or she holds
of record and which he or she holds beneficially, the text of the proposal to
be presented at the meeting and a statement in support of the proposal. Any
stockholder may make any other proposal at an annual meeting or special
meeting of stockholders and the same may be discussed and considered, but
unless stated in writing and filed with the Board of Directors or the
Secretary prior to the date set forth above, such proposal shall be laid over
for action at an adjourned, special, or annual meeting of the stockholders
taking place 60 days or more thereafter.
REGISTRATION RIGHTS
The Company has granted to the holders of the 10% Notes demand and piggyback
registration rights with respect to 216,667 shares of Common Stock issued upon
conversion of such notes and has granted to the holders of the 12% Notes
piggyback registration rights with respect to 216,660 shares of Common Stock
issued upon conversion of such notes. The former owners of Internet One, Inc.
have also been granted piggyback registration rights with respect to 25% of to
the shares of Common Stock issued to such owners in connection with the
Company's acquisition of Internet One. Pursuant to the terms of a certain
Employment Agreement between the Company and Scott A. Mednick, the Company has
agreed to file a registration statement relating to all of the Common Stock
owned by Mr. Mednick in the event that Mr. Mednick's employment is terminated
without cause. Additionally, pursuant to the terms of the Reorganization
Agreements relating to the Company's acquisition of Mednick Group and On Ramp,
the Company has agreed to file a registration statement under the Securities
Act relating to 25% percent of the shares of the Common Stock owned by each of
Mr. Mednick and Adam Curry. Each of the foregoing stockholders has entered
into a lock up agreement with the Underwriter, pursuant to which each such
stockholder has agreed not to exercise such registration rights and not to
sell or transfer any of their shares of Common Stock for periods of six and
twelve months. The holders of the Underwriter's Warrants will also have
certain demand and piggyback registration rights with respect to such warrants
and the 200,000 shares of Common Stock underlying such warrants. Any exercise
of the above registration rights may hinder efforts by the Company to arrange
future financings of the Company and or have an adverse effect on the market
price of the Company's shares. See "Underwriting."
TRANSFER AGENT & REGISTRAR
Continental Stock Transfer & Trust Company, New York, New York, is the
Transfer Agent and Registrar for the Company's securities. Its telephone
number is (212) 509-4000.
BUSINESS COMBINATION PROVISIONS
The Company has expressly elected to be subject to Section 203 of the
Delaware General Corporation Law regulating "business combinations" (defined
to include a broad range of transactions) between Delaware corporations and
"interested stockholders" (defined as persons who have acquired at least 15%
of a corporation's stock). Under the law, a corporation subject to Section 203
may not engage in any business combination with any interested stockholder for
a period of three years from the date such person became an interested
stockholder unless certain conditions are satisfied. Section 203 contains
provisions enabling a corporation to avoid the statute's restrictions.
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<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, the Company will have outstanding 6,266,667
shares of Common Stock. Of these shares, the 2,000,000 shares of Common Stock
offered hereby will be freely transferable. without restriction or further
registration under the Securities Act, unless purchased by affiliates of the
Company as that term is defined in Rule 144 under the Securities Act ("Rule
144") described below. The 4,266,667 shares of Common Stock currently
outstanding are "restricted securities" or owned by affiliates within the
meaning of Rule 144 and may not be sold publicly unless they are registered
under the Securities Act or are sold pursuant to Rule 144 or another exemption
from registration. Such shares will become eligible for sale in the public
market pursuant to Rule 144 commencing February 1998.
In general, under Rule 144, a person (or persons whose shares are
aggregated), including persons who may be deemed to be "affiliates" of the
Company as that term is defined under the Securities Act, is entitled to sell
within any three-month period a number of restricted shares beneficially owned
for at least two years that does not exceed the greater of (i) 1% of the then
outstanding shares of Common Stock or (ii) an amount equal to the average
weekly trading volume in the Common Stock during the four calendar weeks
preceding such sale. Sales under Rule 144 are also subject to certain
requirements as to the manner of sale, notice and the availability of current
public information about the Company. However, a person who is not deemed an
affiliate and has beneficially owned such shares for at least three years is
entitled to sell such shares under Rule 144(k) without regard to the volume or
other resale requirements. The Commission has recently proposed an amendment
to the holding period requirements of Rule 144 to permit resales of restricted
securities after a one-year holding period rather than a two-year holding
period, and to permit unrestricted resales by non-affiliates pursuant to Rule
144(k) after a two-year holding period rather than a three-year holding
period. In the event such proposal is adopted, the dates upon which the
outstanding restricted securities will become eligible for sale under Rule 144
will be accelerated.
Under Rule 701 of the Securities Act, persons who purchase shares upon
exercise of options granted prior to the date of this Prospectus are entitled
to sell such shares after the 90th day following the date of this Prospectus
in reliance on Rule 144, without having to comply with the holding period
requirements of Rule 144 and, in the case of non-affiliates, without having to
comply with the public information, volume limitation or notice provisions of
Rule 144. Affiliates are subject to all Rule 144 restrictions after this 90-
day period, but without a holding period. If all the requirements of Rule 701
are met, an aggregate of 216,667 shares subject to outstanding vested stock
options may be sold pursuant to such rule at the end of this 90-day period,
subject to an agreement by all option holders not to sell or otherwise dispose
of any shares of Common Stock for a period of 12 months after the date of this
Prospectus without the Underwriter's prior written consent.
The Company has granted certain demand and piggyback registration rights
with respect to an aggregate of 1,187,590 shares of Common Stock. The
Underwriter also has demand and piggyback registration rights with respect to
the Common Stock underlying the Underwriter's Warrants. See "Description of
Securities--Registration Rights" and "Underwriting."
Notwithstanding the above, the holders of all of the outstanding shares of
Common Stock (including shares issuable upon exercise of options) have agreed
not to sell or otherwise dispose of any shares of Common Stock without the
Underwriter's prior written consent for a period of 12 months after the date
of this Prospectus. In addition, 825,000 of such shares are Escrow Shares and
are subject to the restrictions on transfer set forth in the Escrow Agreement.
See "Principal and Selling Stockholders--Escrow Shares" and "Underwriting."
Prior to the Offering, there has been no market for any securities of the
Company, and no predictions can be made of the effect, if any, that sales of
Common Stock or the availability of Common Stock for sale will have on the
market price of such securities prevailing from time to time. Nevertheless,
sales of substantial amounts of Common Stock in the public market could
adversely affect prevailing market prices and the ability of the Company to
raise equity capital in the future.
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UNDERWRITING
Commonwealth Associates, the Underwriter, has agreed, subject to the terms
and conditions of the Underwriting Agreement, to purchase from the Company the
2,000,000 shares of Common Stock offered hereby on a "firm commitment" basis,
if any are purchased. The shares are being offered by the Underwriter subject
to prior sale, when, as and if delivered to and accepted by the Underwriter
and subject to approval of certain legal matters by counsel and to certain
other conditions.
The Underwriter has advised the Company that it proposes to offer the shares
of Common Stock to the initial public at the public offering price set forth
on the cover page of this Prospectus and to certain dealers who are members of
the NASD, at such prices less concessions of not in excess of $ per share,
of which a sum not in excess of $ per share may in turn be reallowed to
other dealers who are members of the NASD. After the commencement of the
Offering, the initial public offering price, the concession and the
reallowance may be changed by the Underwriter.
The Company and the Selling Stockholder have granted to the Underwriter an
option, exercisable during the 30-day period commencing on the date of this
Prospectus, to purchase from the Company at the initial public offering price,
less underwriting discounts, up to 300,000 additional shares for the purpose
of covering over-allotments, if any. If the over-allotment option is
exercised, the Selling Stockholder will sell the first 200,000 shares to be
sold upon exercise of the over-allotment option and the Company will sell up
to the remaining 100,000 shares.
The Company has agreed to sell to the Underwriter and its designees, for
nominal consideration, the Underwriter's Warrants to purchase up to 200,000
shares of Common Stock. The Underwriter's Warrants will be exercisable during
the four-year period commencing one year after the date of this Prospectus at
an exercise price of $ per share, subject to adjustment in certain events
to protect against dilution, and are not transferable for a period of one year
after the date of this Prospectus except to officers of the Underwriter or to
members of the selling group. The Company has agreed to register during the
four-year period commencing one year after the date of this Prospectus, on two
separate occasions, the securities issuable upon exercise thereof under the
Securities Act, the initial such registration to be at the Company's expense
and the second at the expense of the holders. The Underwriter's Warrants
include a provision permitting the holders to elect a "cashless exercise"
whereby the holders may exchange, in lieu of cash, such number of shares
issuable upon exercise of the Underwriter's Warrants equal in value to the
aggregate exercise price. The Company has also granted certain piggyback
registration rights to holders of the Underwriter's Warrants.
The Company has agreed to pay to the Underwriter a non-accountable expense
allowance equal to 1% of the gross proceeds derived from the sale of shares
offered hereby, including any shares purchased pursuant to the Underwriter's
over-allotment option, $35,000 of which has been paid to date. The Company has
also agreed to enter into a financial consulting agreement with the
Underwriter providing for an advisory fee of 3% of the gross proceeds derived
from the sale of shares offered hereby, including any shares purchased
pursuant to the Underwriter's over-allotment option.
The Company and the Selling Stockholder have agreed to indemnify the
Underwriter against certain liabilities, including liabilities under the
Securities Act.
All of the Company's current stockholders, optionholders, officers and
directors have agreed not to sell, assign, transfer or otherwise dispose
publicly of any of their shares of Common Stock or exercise any registration
rights for periods of 6 or 12 months after the date of this Prospectus without
the prior written consent of the Underwriter.
Prior to the Offering, there has been no public market for any of the
securities offered hereby. Accordingly, the initial public offering price of
the shares offered hereby has been determined by negotiation between the
Company and the Underwriter and are not necessarily related to the Company's
asset value, net worth or other established criteria of value. Among the
factors considered in determining such prices and terms, in addition to
44
<PAGE>
prevailing market conditions, include the history of and the prospects for the
industry in which the Company competes, the present state of the Company's
development and its future prospects, an assessment of the Company's
management, the Company's capital structure and demand for similar securities
of comparable companies.
The Underwriter has informed the Company that it does not expect sales to
discretionary accounts to exceed 5% of the total number of the shares offered
hereby.
The Underwriter acted as Placement Agent for a private placement in April
1996 for which it received a placement agent fee of $180,000 and a non-
accountable expense allowance of $37,500.
LEGAL MATTERS
Certain legal matters in connection with the issuance of the securities
being offered hereby will be passed upon for the Company by De Martino
Finkelstein Rosen & Virga, Washington, D.C. Certain matters in connection with
this Offering will be passed upon for the Underwriter by Bachner, Tally,
Polevoy & Misher, LLP, New York, New York.
EXPERTS
The Financial Statements of the Company and the Subsidiaries at June 30,
1996 and for each of the three years in the three-year period ended June 30,
1996 appearing in this Prospectus have been audited by BDO Seidman, LLP,
independent certified public accountants, as indicated in their report
appearing elsewhere herein, and have been included herein in reliance upon
such report, given upon the authority of said firm as experts in accounting
and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Commission the Registration Statement
relating to the shares of Common Stock offered hereby. This Prospectus does
not contain all of the information set forth in the Registration Statement and
the exhibits and schedules thereto. For further information with respect to
the Company and such Common Stock, reference is made to the Registration
Statement and the exhibits and schedules filed as a part thereof. Statements
contained in this Prospectus as to the contents of any agreement or any other
document referred to are not necessarily complete, and in each instance, if
such agreement or document is filed as an exhibit, reference is made to the
copy of such document filed as an exhibit to the Registration Statement. The
Registration Statement, including exhibits and schedules thereto, may be
inspected without charge at the public reference facilities maintained by the
Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549 and at the regional offices of the Commission located at Room 1228,
Seven World Trade Center, 13th Floor, New York, New York 10048 and
Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661. Copies of such materials may be obtained from the Public
Reference Section of the Commission, Room 1024, Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549, and its public reference facilities in
New York, New York and Chicago, Illinois, at prescribed rates. In addition,
the Commission maintains a Website on the Internet that contains reports,
proxy and information statements and other information regarding registrants
that file electronically with the Commission. The address of the Commission's
Website is http: www.sec.gov.
Following the Offering, the Company will be subject to the reporting and
other requirements of the Exchange Act and intends to furnish to its
Stockholders annual reports containing audited financial statements and may
furnish interim reports as it deems appropriate.
45
<PAGE>
THINK NEW IDEAS, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
FINANCIAL STATEMENTS
Independent Certified Public Accountants' Report............. F-2
Consolidated Balance Sheets.................................. F-3
Consolidated Statements of Operations........................ F-4
Consolidated Statements of Shareholders' Equity (Deficit).... F-5
Consolidated Statements of Cash Flows........................ F-6
Notes to the Consolidated Financial Statements............... F-7 through F-15
</TABLE>
F-1
<PAGE>
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS' REPORT
[The following is the form of the opinion that BDO Seidman, LLP will be in a
position to issue upon completion of the grant of options, a two for three
reverse stock split, and contribution of shares into an escrow account
described in Note 8 and the private placement transaction described in Note
12.]
To the Shareholders of Think New Ideas, Inc.
New York, New York
We have audited the accompanying consolidated balance sheets of Think New
Ideas, Inc. and subsidiaries as of June 30, 1995 and 1996 and the related
consolidated statements of operations, shareholders' equity (deficit) and cash
flows for each of the three years in the period ended June 30, 1996. 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 generally accepted auditing
standards. 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 audits provide 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 Think New
Ideas, Inc. and subsidiaries as of June 30, 1995 and 1996, and the results of
their operations and their cash flows for each of the three years in the
period ended June 30, 1996, in conformity with generally accepted accounting
principles.
BDO Seidman, LLP
New York, New York
July 23, 1996, except for Notes 5, 8, 10
and 12, which are as of November , 1996
F-2
<PAGE>
THINK NEW IDEAS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30,
----------------------
1995 1996
---------- -----------
<S> <C> <C>
ASSETS (Notes 2 and 4)
Current Assets:
Cash and cash equivalents............................ $ 381,511 $ 429,596
Accounts receivable, net of allowance for doubtful
accounts of $45,000 and $186,000.................... 1,528,393 2,394,732
Unbilled receivables................................. 795,575 296,903
Due from shareholders................................ 89,400 --
Prepaid expenses and other assets.................... 15,622 60,914
Refundable income taxes (Note 6)..................... 152,613 --
Deferred income taxes (Note 6)....................... -- 160,000
---------- -----------
Total current assets................................... 2,963,114 3,342,145
---------- -----------
Property and equipment, net (Note 3)................... 608,401 699,031
Software development costs............................. -- 167,436
Deferred income taxes (Note 6)......................... 115,000 79,000
Other assets........................................... 55,605 490,394
---------- -----------
$3,742,120 $ 4,778,006
========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY (Note 2)
Current Liabilities:
Note payable to bank (Note 4)........................ $ -- $ 70,000
Note payable to related party (Note 10).............. 430,000 --
Accounts payable..................................... 1,010,347 1,244,057
Accrued salaries and wages........................... 36,053 349,158
Accrued expenses..................................... 190,873 306,949
Deferred revenue..................................... 425,984 452,959
Income taxes payable (Note 6)........................ -- 76,779
Deferred income taxes (Note 6)....................... 240,000 --
Due to shareholders (Notes 2 and 10)................. 1,202,816 500,000
---------- -----------
Total current liabilities.............................. 3,536,073 2,999,902
---------- -----------
Convertible promissory notes (Notes 5 and 12).......... -- 2,070,000
Note payable to related party (Note 10)................ -- 788,000
---------- -----------
Total liabilities...................................... 3,536,073 5,857,902
---------- -----------
Commitments and Contingencies (Note 7)
Redeemable Common Stock (Note 8)....................... -- --
Shareholders' Equity (Deficit) (Notes 8 and 12):
Preferred stock, $.0001 par value; shares authorized
1,000,000; none issued and outstanding.............. -- --
Common stock, $.0001 par value; shares authorized
30,000,000; 1,186,311 and 2,894,673 shares issued... 118 289
Additional paid-in capital........................... 161,767 --
Retained earnings (accumulated deficit).............. 44,162 (1,080,185)
---------- -----------
Total shareholders' equity (deficit)................... 206,047 (1,079,896)
---------- -----------
$3,742,120 $ 4,778,006
========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
THINK NEW IDEAS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
------------------------------------
1994 1995 1996
---------- ----------- -----------
<S> <C> <C> <C>
Revenues (Note 11)....................... $8,485,505 $10,331,991 $12,146,348
Operating Expenses:
Direct salaries and related expenses... 3,321,477 3,556,758 4,587,027
Other direct expenses.................. 3,775,562 3,935,172 4,814,771
Selling, general and administrative
expenses.............................. 1,962,471 2,622,490 3,286,090
Merger expenses (Note 2)............... -- -- 981,341
---------- ----------- -----------
Operating income (loss).................. (574,005) 217,571 (1,522,881)
Interest expense......................... (82,778) (131,877) (417,589)
Other, net............................... 8,119 77,340 145,817
---------- ----------- -----------
Income (loss) before taxes on income..... (648,664) 163,034 (1,794,653)
Taxes on income (Note 6)................. 103,240 (233,821) (149,187)
---------- ----------- -----------
Net loss................................. $ (545,424) $ (70,787) $(1,943,840)
========== =========== ===========
Pro forma amounts (unaudited):
Historical loss before taxes on
income................................ $(1,794,653)
Compensation adjustment................ (382,000)
Merger expense adjustment.............. 981,341
-----------
Net loss............................... $(1,195,312)
===========
Loss per common share.................. $ (.38)
===========
Supplemental loss per common share..... $ (.30)
===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
THINK NEW IDEAS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED JUNE 30, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
RETAINED
COMMON STOCK ADDITIONAL EARNINGS
----------------- PAID-IN (ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT)
--------- ------ ----------- ------------
<S> <C> <C> <C> <C>
Balance, July 1, 1993.............. 403,266 $ 40 $ 1,960 $ 929,059
Issuance of common stock......... 779,075 78 12,801 --
Capital contributions............ -- -- 15,000 --
Distributions to shareholders.... -- -- -- (72,753)
Net loss for the year............ -- -- -- (545,424)
--------- ---- ----------- -----------
Balance, June 30, 1994............. 1,182,341 118 29,761 310,882
Issuance of common stock......... 3,970 -- 9,336 --
Capital contributions............ -- -- 122,670 --
Distributions to shareholders.... -- -- -- (195,933)
Net loss for the year............ -- -- -- (70,787)
--------- ---- ----------- -----------
Balance, June 30, 1995............. 1,186,311 118 161,767 44,162
Issuance of common stock......... 2,171,507 217 440 --
Capital contributions............ -- -- 150,000 --
Conversion of shareholder loans
and interest (Note 10).......... -- -- 1,685,075 --
Acquisition of common stock (Note
8).............................. (463,145) (46) (5,954) (994,000)
Distributions to shareholders.... -- -- (24,325) (153,510)
Capitalization of accumulated
deficit of subsidiaries upon
termination of S-corporation
elections....................... -- -- (1,967,003) 1,967,003
Net loss for the year............ -- -- -- (1,943,840)
--------- ---- ----------- -----------
Balance, June 30, 1996............. 2,894,673 $289 $ -- $(1,080,185)
========= ==== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
THINK NEW IDEAS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
---------------------------------
1994 1995 1996
--------- --------- -----------
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net loss.................................. $(545,424) $ (70,787) $(1,943,840)
Adjustments to reconcile net loss to net
cash provided by (used in) operating
activities:
Depreciation............................ 419,230 275,555 262,181
Amortization............................ -- -- 163,000
Deferred income taxes................... (309,000) (55,000) (364,000)
Bad debt expense........................ 78,547 246,683 166,655
Changes in assets and liabilities:
Accounts receivable................... 45,118 (814,401) (1,032,994)
Unbilled receivables.................. (37,444) (293,330) 498,672
Due from shareholders................. 7,681 (82,081) 89,400
Accounts payable...................... 98,933 393,322 233,710
Accrued expenses...................... 60,240 (4,355) 429,181
Deferred revenue...................... -- 425,984 26,975
Due to shareholders................... -- -- 500,000
Other assets and liabilities.......... 28,410 25,980 21,339
--------- --------- -----------
Net cash provided by (used in) operating
activities................................. (153,709) 47,570 (949,721)
--------- --------- -----------
Cash Flows from Investing Activities:
Additions to software development costs... -- -- (167,436)
Purchases of property and equipment....... (105,716) (382,192) (352,811)
--------- --------- -----------
Net cash used in investing activities....... (105,716) (382,192) (520,247)
--------- --------- -----------
Cash Flows from Financing Activities:
Proceeds from issuance of promissory
notes.................................... -- -- 2,070,000
Deferred financing costs.................. -- -- (217,500)
Increase in notes payable to related
parties.................................. 464,310 516,864 840,259
Acquisition of common stock............... -- -- (1,000,000)
Deferred offering costs................... -- -- (217,528)
Borrowings on operating lines of credit... -- -- 70,000
Principal repayments on long-term debt.... (49,365) (69,567) --
Issuance of common stock.................. 12,879 9,336 657
Capital contributions..................... 15,000 122,670 150,000
Distributions to shareholders............. (72,753) (195,933) (177,835)
--------- --------- -----------
Net cash provided by financing activities... 370,071 383,370 1,518,053
--------- --------- -----------
Net increase in cash and cash equivalents... 110,646 48,748 48,085
Cash and cash equivalents, beginning of
year....................................... 222,117 332,763 381,511
--------- --------- -----------
Cash and cash equivalents, end of year...... $ 332,763 $ 381,511 $ 429,596
--------- --------- -----------
Supplemental Cash Flow Information:
Cash paid during the year for:
Income taxes............................ $ 74,000 $ 235,133 $ 139,967
Interest................................ 7,647 7,823 8,091
--------- --------- -----------
Noncash financing activities:
Loans and accrued interest payable to
shareholders converted to additional
paid in capital........................ $ -- $ -- $ 1,685,075
--------- --------- -----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
THINK NEW IDEAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business and Principles of Consolidation
The consolidated financial statements include the accounts of Think New
Ideas, Inc. ("Think" or the "Company") and its subsidiaries. All significant
intercompany accounts and transactions have been eliminated in consolidation.
The Company was incorporated in January 1996. In June 1996, the Company
acquired the companies discussed in Note 2 in business combinations accounted
for using the pooling of interests method. Accordingly, the consolidated
financial statements give retroactive effect to the acquisitions.
The Company provides marketing and communications services to clients
seeking to market their products and services and convey messages and images
to the public. The Company provides traditional services, such as advertising
copy, graphic design and art work, and "new media" services. New media
services include developing Internet web sites and related analytical tools
and Internet training.
Cash and Cash Equivalents
For purposes of the consolidated balance sheets and statements of cash
flows, the Company considers all highly liquid investments having original
maturities of three months or less to be cash equivalents.
Property and Equipment
Property and equipment are stated at cost. Depreciation is provided using
the straight-line method over the following estimated useful lives:
<TABLE>
<CAPTION>
YEARS
------
<S> <C>
Equipment.......................................................... 3 to 5
Furniture and fixtures............................................. 5 to 7
Leasehold improvements............................................. 5
</TABLE>
Software Development Costs
In accordance with the provisions of Statement of Financial Accounting
Standards (SFAS) No. 86, "Accounting for the Costs of Computer Software to be
Sold, Leased, or Otherwise Marketed," software development costs incurred by
the Company subsequent to establishing technological feasibility of the
resulting product or enhancement and until the product is available for
general release to customers are capitalized and carried at the lower of
unamortized cost or net realizable value. Net realizable value is determined
based on estimates of future revenues to be derived from the sale of the
software product reduced by costs of completing and disposing of that product.
Amortization of the costs capitalized is expected to begin in 1997 and will be
based on current and anticipated future revenues for each product or
enhancement with an annual minimum equal to straight-line amortization over
the remaining estimated economic life of the product or enhancement.
Revenue Recognition
Revenues from the design and development of Internet web sites and
traditional marketing services are recognized using the percentage of
completion method based on the ratio of costs incurred to total estimated
costs. Unbilled receivables represent costs incurred and anticipated profits
earned on projects in progress in excess of amounts billed, and are recorded
as assets. Deferred revenue includes amounts billed in excess of costs
F-7
<PAGE>
THINK NEW IDEAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
incurred and estimated profits earned, and are recorded as liabilities. To the
extent costs incurred and anticipated costs to complete projects in progress
exceed anticipated billings, a loss is recognized for the excess.
Payments received for subsequent maintenance of internet web sites are
deferred and recognized over the period during which the maintenance is
supplied.
Taxes on Income
Three of the Company's subsidiaries had elected S corporation status under
applicable provisions of the Internal Revenue Code and certain state statues
and, accordingly, were not subject to income taxes. The S corporation status
of these subsidiaries terminated on June 30, 1996 as a result of their
acquisition by the Company.
The Company and its other subsidiaries account for income taxes in
accordance with the provisions of SFAS No. 109, "Accounting for Income Taxes."
SFAS No. 109 requires the recognition of deferred tax assets and liabilities
for the expected future income tax consequences of events that have been
recognized in a company's financial statements or tax return. Deferred income
taxes reflect the net tax effects of temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes
and the amounts for income tax purposes using enacted tax rates in effect in
the years in which the temporary differences are expected to reverse.
Pro Forma Data (Unaudited)
Concurrent with the business combinations consummated on June 30, 1996, the
Company entered into employment agreements with certain of its officers (as
discussed further in Note 7). Pro forma adjustments for the year ended June
30, 1996 have been presented to exclude the costs of effecting the business
combination transactions and reflect these employment agreements as if they
had been in effect throughout 1996.
The pro forma data does not reflect a benefit for income taxes because none
would have been recognized if the business combinations had occurred and the
Company and all of its subsidiaries had been taxed as C corporations since
July 1, 1993.
Pro forma loss per common share is computed based on pro forma net loss and
the weighted average number of shares of common stock and common stock
equivalents outstanding (which excludes 825,000 shares held in escrow (see
Note 8)), as adjusted for the effects of applying Securities and Exchange
Commission Staff Accounting Bulletin (SAB) No. 83, using the treasury stock
method. Pursuant to SAB No. 83, common stock issued by the Company at prices
less than the initial public offering price during the twelve months preceding
the initial filing of the registration statement of which these financial
statements form a part, together with the number of shares of common stock
subject to options and convertible debt issued during such period having
exercise or conversion prices below the initial public offering price have
been treated as outstanding for all periods presented. As a result, 3,070,831
shares were used in the calculation. Similarly, pro forma net loss used in the
calculation was adjusted by approximately $19,000, the related amount of
interest expense on convertible debt issued (see Note 5).
Supplemental pro forma loss per common share is computed by dividing
supplemental pro forma net loss (pro forma net loss adjusted as described in
the preceding paragraph, further adjusted by approximately $224,000, the
amount of interest expense on debt repaid with the proceeds of the August 1996
private placement (see Note 12) by the weighted average number of shares that
would have been treated as outstanding (3,174,615) had the portion of the
proceeds from the shares sold in August 1996 to fund debt repayments been used
to repay debt on the dates it was issued, rather than for the assumed purchase
of treasury stock.
F-8
<PAGE>
THINK NEW IDEAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Historical loss per common share data are not considered meaningful and,
therefore, are not presented.
Fair Values of Financial Instruments
The carrying amounts reported in the balance sheet as of June 30, 1996 for
cash equivalents, accounts receivable, and accounts and notes payable
approximate fair value because of the immediate or short-term maturity of
these financial instruments. The carrying amounts reported for the
nonconvertible portions of the convertible promissory notes approximate fair
value. The fair values of the convertible portions of the convertible
promissory notes have been estimated based on the estimated fair value of the
common stock into which the notes are convertible. Based on the price per
share for which the Company's common stock was recently sold in a private
placement (Note 12), the estimated aggregate fair value of the convertible
portions of the convertible promissory notes approximated $2,037,000 at June
30, 1996.
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 and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Concentrations of Credit Risk
Financial instruments which potentially subject the Company to a
concentration of credit risk consist of cash and cash equivalents and accounts
and unbilled receivables. Cash and cash equivalents consist of deposits and
money market funds placed with various high credit quality financial
institutions. Concentrations of credit risk with respect to receivables are
limited due to the geographically diverse customer base. The Company controls
credit risk through credit approvals, credit limits and monitoring procedures.
New Accounting Pronouncements
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of" (SFAS No. 121), issued by the Financial
Accounting Standards Board (FASB) is effective for financial statements for
fiscal years beginning after December 15, 1995. The new standard establishes
new guidelines regarding when impairment losses on long-lived assets, which
include plant and equipment and certain identifiable intangible assets and
goodwill, should be recognized and how impairment losses should be measured.
The adoption of SFAS 121 during the first quarter of fiscal 1997 did not have
a material effect on the Company's financial position or results of
operations.
SFAS No. 123, "Accounting for Stock-Based Compensation" (SFAS No. 123),
issued by the FASB is effective for specific transactions entered into after
December 15, 1995, while the disclosure requirements are effective for
financial statements for fiscal years beginning after December 15, 1995. The
new standard establishes a fair value method of accounting for stock-based
compensation plans and for transactions in which an entity acquires goods or
services from nonemployees in exchange for equity instruments. The adoption of
SFAS 123 during the first quarter of fiscal 1997 did not have a material
effect on the Company's financial position or results of operations.
F-9
<PAGE>
THINK NEW IDEAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 2--BUSINESS ACQUISITIONS
In June 1996, the Company acquired all of the issued and outstanding shares
of common stock of the following entities in exchange for 723,167 shares of
the Company's common stock:
<TABLE>
<CAPTION>
NUMBER OF SHARES
ENTITY/DATE OPERATIONS COMMENCED ISSUED TO EFFECT ACQUISITION
-------------------------------- ----------------------------
<S> <C>
The Mednick Group ("Mednick")/October 1982.... 208,084
On Ramp, Inc. ("On Ramp")/February 1994....... 231,572
Creative Resources Agency, Inc. ("Creative
Resources")/November 1994.................... 3,970
The S.D. Goodman Group ("Goodman")/July 1993.. 49,623
Internet One, Inc. ("Internet One")/November
1993......................................... 34,736
NetCube, Inc. ("NetCube")/February 1978....... 195,182
</TABLE>
Mednick, Creative Resources and Goodman provide a wide variety of marketing-
related services. On Ramp, NetCube and Internet One are principally providers
of new media services. The acquisition of each of these companies has been
accounted for using the pooling of interests method of accounting, and
accordingly, the accompanying consolidated financial statements give
retroactive effect to the acquisitions, as if the companies had always
operated as a single entity. In connection with the acquisitions,
approximately $981,000 of acquisition costs and expenses were incurred,
including $500,000 in finder's fees owed to Benchmark Equity Group
("Benchmark"), a shareholder of the Company, and have been charged to expense
during 1996.
Separate results of operations for the combining entities for the three
years in the period ended June 30, 1996 are as follows:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
------------------------------------
1994 1995 1996
---------- ----------- -----------
<S> <C> <C> <C>
Revenues:
Mednick................................. $5,203,185 $ 5,046,035 $ 6,150,950
On Ramp................................. 6,543 775,803 2,323,365
Creative Resources...................... -- 160,058 371,298
Goodman................................. 113,160 674,967 561,203
Internet One............................ 76,519 674,214 1,338,246
NetCube................................. 3,086,098 3,000,914 1,401,286
Think................................... -- -- --
---------- ----------- -----------
Combined................................ $8,485,505 $10,331,991 $12,146,348
========== =========== ===========
Net Income (Loss):
Mednick................................. $ 72,781 $ (62,860) $ 263,428
On Ramp................................. (26,465) (128,474) (279,104)
Creative Resources...................... -- 63,511 74,000
Goodman................................. 61,312 179,159 133,010
Internet One............................ 22,283 92,652 2,974
NetCube................................. (675,335) (214,775) (1,032,583)
Think................................... -- -- (1,105,565)
---------- ----------- -----------
Combined................................ $ (545,424) $ (70,787) $(1,943,840)
========== =========== ===========
</TABLE>
F-10
<PAGE>
THINK NEW IDEAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 3--PROPERTY AND EQUIPMENT
Property and equipment at June 30, consisted of the following:
<TABLE>
<CAPTION>
1995 1996
----------- -----------
<S> <C> <C>
Equipment......................................... $ 1,955,931 $ 2,047,966
Furniture and fixtures............................ 568,925 604,610
Leasehold improvements............................ 360,025 365,551
----------- -----------
2,884,881 3,018,127
Less accumulated depreciation and amortization.... (2,276,480) (2,319,096)
----------- -----------
Property and equipment, net....................... $ 608,401 $ 699,031
=========== ===========
</TABLE>
NOTE 4--LINES OF CREDIT
Certain of the Company's subsidiaries have lines of credit with banks having
an aggregate borrowing availability of $290,000. Interest rates at June 30,
1996 range from 1% over prime to 10.75%. At June 30, 1996, borrowings of
$70,000 were outstanding at an interest rate of 9.5%. At June 30, 1995, there
were no outstanding borrowings. Borrowings under the lines of credit are
secured by substantially all of the assets and guaranteed by the former
stockholders of the respective subsidiaries. One of the lines requires all
outstanding borrowings to be repaid for a thirty day period during each six
months and contains certain other restrictive covenants.
NOTE 5--CONVERTIBLE PROMISSORY NOTES
In March 1996, the Company borrowed $270,000 pursuant to the terms of three
separate convertible promissory notes. Two of the notes, having original
principal balances of $225,000 and $20,000, are payable to an entity
controlled by a shareholder of the Company and to a shareholder, respectively.
Each of the notes bear interest at 10% and mature upon the earlier of
September 30, 1996 or the Company raising $2,000,000 through a debt or equity
financing. At the option of the note holders, up to an aggregate of $27,000 in
principal may be converted into 216,667 shares of the Company's common stock.
In April 1996, the Company raised $1,582,500, net of placement fees of
$217,500, through a private placement of 12% convertible promissory notes. The
principal balance, together with accrued interest, is due upon the earlier of
April 30, 1997 or the Company raising $3,000,000 through a debt or equity
financing. The notes are secured by the pledge of all of the outstanding
shares of common stock of On Ramp. At the option of the note holders, up to an
aggregate of $162,495 in principal may be converted into 216,660 shares of the
Company's common stock.
As discussed more fully in Note 12, subsequent to June 30, 1996 the
convertible promissory notes were converted into common stock or repaid with
proceeds obtained from the sale of the Company's common stock. Accordingly,
the convertible promissory notes have been classified as noncurrent
liabilities at June 30, 1996.
F-11
<PAGE>
THINK NEW IDEAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 6--INCOME TAXES
Income tax expense (benefit) consists of the following:
<TABLE>
<CAPTION>
1994 1995 1996
--------- -------- ---------
<S> <C> <C> <C>
Current:
Federal.................................... $ 174,250 $222,021 $ 382,735
State...................................... 31,510 66,800 130,452
--------- -------- ---------
205,760 288,821 513,187
--------- -------- ---------
Deferred:
Federal.................................... (263,000) (47,000) (311,000)
State...................................... (46,000) (8,000) (53,000)
--------- -------- ---------
(309,000) (55,000) (364,000)
--------- -------- ---------
Taxes on income.............................. $(103,240) $233,821 $ 149,187
========= ======== =========
</TABLE>
The difference between the federal statutory tax rate and the effective tax
rate resulted from the following:
<TABLE>
<CAPTION>
1994 1995 1996
----- ----- -----
<S> <C> <C> <C>
Federal statutory tax rate............................ (34.0)% 34.0% (34.0)%
Subsidiaries not subject to income taxes.............. 17.5 50.8 9.3
Merger expenses and other permanent differences....... 3.7 17.5 20.1
State income taxes, net of federal tax benefit........ 3.2 27.0 7.3
Change in valuation allowance......................... -- -- 5.0
Other items, net...................................... (6.3) 14.1 0.6
----- ----- -----
Effective tax rate.................................... (15.9)% 143.4% 8.3%
===== ===== =====
</TABLE>
Temporary differences which gave rise to the deferred tax assets
(liabilities) consisted of the following at June 30, 1995 and 1996:
<TABLE>
<CAPTION>
1995 1996
--------- ---------
<S> <C> <C>
Current:
Accounts receivable................................. $(132,000) $(127,000)
Allowance for doubtful accounts..................... 18,000 52,000
Accounts payable.................................... 38,000 235,000
Tax method conversion deferral...................... (164,000) --
--------- ---------
Total current......................................... (240,000) 160,000
--------- ---------
Noncurrent:
Property and equipment.............................. 115,000 79,000
Net operating loss carryforwards.................... 80,000 170,000
--------- ---------
Total noncurrent...................................... 195,000 249,000
--------- ---------
Deferred tax asset valuation allowance................ (80,000) (170,000)
--------- ---------
Net deferred tax asset (liability).................... $(125,000) $ 239,000
========= =========
</TABLE>
F-12
<PAGE>
THINK NEW IDEAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
For tax purposes, the Company had available, at June 30, 1996, net operating
loss carryforwards of approximately $425,000 which expire through the year
2011.
NOTE 7--COMMITMENTS AND CONTINGENCIES
The Company leases office space and certain equipment under operating leases
which expire on various dates over the next fifteen years. Future minimum
rental commitments under existing leases as of June 30, 1996 are as follows:
<TABLE>
<CAPTION>
AMOUNT
----------
<S> <C>
Year ended June 30,
1997............................................................ $ 217,000
1998............................................................ 323,000
1999............................................................ 315,000
2000............................................................ 321,000
2001............................................................ 326,000
Thereafter...................................................... 1,964,000
----------
$3,466,000
==========
</TABLE>
Total rent expense under operating leases amounted to $407,914, $411,266 and
$662,340 for the years ended June 30, 1994, 1995 and 1996.
In March 1996, the Company entered into a two year consulting agreement with
Benchmark. Under the agreement, the Company is required to pay Benchmark
$35,000 at signing and a monthly fee of $7,000. During 1996, the Company paid
$56,000 to Benchmark in connection with the agreement.
The Company has entered into employment agreements with certain of its
officers. The agreements have terms of up to three years and include, among
other things, noncomplete agreements and salary and benefits continuation.
NOTE 8--SHAREHOLDERS' EQUITY
The Company has a stock option and appreciation rights plan (the "Plan")
which provides for the grant of options to purchase up to 966,667 shares of
the Company's common stock at exercise prices to be determined by the Board of
Directors. Subsequent to June 30, 1996, the Company granted options to certain
employees to acquire 933,333 shares at a per share option price of $7.50 (the
estimated fair value of the shares on the date of grant). The options become
exercisable in annual one-third increments beginning on the first anniversary
of the date of grant and expire after ten years.
In February 1995, On Ramp entered into an agreement with its three
shareholders which set forth certain rights and obligations of the
shareholders with respect to each other and with On Ramp regarding the
purchase and disposition of the outstanding shares of On Ramp. The agreement
included, among other things, provisions that required On Ramp to purchase
shares of a decedent or terminated shareholder. The estimated value of the
redeemable On Ramp shares as of that date was not significant; accordingly, no
amount was assigned to them. In April 1996, two of the three shareholders
terminated their employment and On Ramp purchased their shares for $1,000,000.
F-13
<PAGE>
THINK NEW IDEAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In June 1996, the Company effected a 6.855-for-one stock split. In September
1996, the Company effected a .496-for-one reverse stock split. In November
1996, the Company effected a two-for-three reverse stock split. All applicable
share and per share data have been retroactively restated to reflect the stock
splits.
In July 1996, the Board of Directors increased the authorized shares of the
Company's preferred and common stock to 5,000,000 and 50,000,000,
respectively.
Subsequent to June 30, 1996, the Company signed a letter of intent with an
underwriter to conduct a public offering of the Company's common stock. In
connection with the proposed offering, the Company's founding shareholders,
together with the shareholders who acquired shares in connection with the
business acquisitions discussed in Note 2, contributed, on a pro rata basis,
825,000 shares of the Company's common stock held by them into an escrow
account. The shares are to be released to the shareholders from the escrow
account upon the Company achieving certain net income or per share market
price targets. The value of the shares released, as determined by the market
price of the shares on the date of the release, will be recognized as
compensation expense in future periods.
NOTE 9--EMPLOYEE RETIREMENT PLANS
Certain of Think's subsidiaries sponsor defined contribution retirement
plans (the "Plans") which cover all employees meeting minimum service
requirements. The Plans qualify as deferred salary arrangements under Section
401(k) of the Internal Revenue Code. The subsidiaries' contributions to the
plans are based on percentages of the employees' contributions. Employer
contributions to the Plans during the years ended June 30, 1994, 1995 and 1996
were approximately $0, $7,000, and $37,000.
NOTE 10--RELATED PARTY TRANSACTIONS
At June 30, 1995 and 1996, NetCube owed $430,000 and $788,000 to the father
of its former sole shareholder. Pursuant to terms of the promissory note under
which the borrowings were made, advances (including accrued interest) are due
on demand, are unsecured, and bear interest at 10%. Interest expense incurred
by NetCube related to these advances totalled $31,000, $40,000 and $58,000
during the years ended June 30, 1994, 1995 and 1996. Subsequent to June 30,
1996, the Company repaid $288,000 of the note with proceeds obtained from the
sale of the Company's common stock (see Note 12) and amended the terms of the
promissory note whereby the maturity of the remaining unpaid note balance was
extended until March, 1998. Accordingly, the amount due under the note has
been classified as a noncurrent liability at June 30, 1996.
At June 30, 1995, Internet One owed approximately $5,000 to its former
shareholder, which amount was repaid during the year ended June 30, 1996.
At June 30, 1995, NetCube owed approximately $976,000 to its former
shareholder. During 1996, the shareholder converted this balance and
additional loans made during 1996, including interest thereon, aggregating
approximately $1,450,000 to capital. Interest expense of $9,000, $9,000, and
$16,000 was recorded in connection with this loan in 1994, 1995 and 1996.
At June 30, 1995, On Ramp owed approximately $234,000 to its former
shareholders pursuant to terms of promissory notes. The amount outstanding,
including interest thereon, was converted to capital in 1996.
During fiscal 1994 and 1995, Mednick had sales to companies affiliated
through common ownership of $46,000 and $92,000. In fiscal 1995, a receivable
of $104,000 arising from these sales was charged off to expense.
F-14
<PAGE>
THINK NEW IDEAS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
On Ramp leases office space from an affiliate of its former shareholders.
The lease provides for monthly payments of approximately $16,000 through
September 1996. Total expenses paid to this affiliate during the years ended
June 30, 1995 and 1996 were $71,000 and $374,000.
NOTE 11--MAJOR CUSTOMER
During 1995 and 1996, the Company had sales to one customer which accounted
for approximately 16% and 15% of consolidated revenues.
NOTE 12--SUBSEQUENT EVENTS
Private Placement
In August 1996, the Company sold equity securities in a private placement.
In November 1996, the agreement pursuant to which the securities were sold was
amended. As a result, the Company issued an aggregate of 938,667 shares of its
common stock in exchange for net proceeds (after transaction costs of
approximately $50,000) of $4,948,000. Additionally, certain of the Company's
shareholders gave the purchaser an additional 124,667 shares of the Company's
Common Stock held by them for no consideration. The number of shares of common
stock sold is required to be increased if the Company has not successfully
completed a public offering of its common stock by January 31, 1997. Further
increases will be required if a public offering has not been completed by July
31, 1997.
Debt Conversions and Extinguishments
In September 1996, the holders of the convertible promissory notes discussed
in Note 5 converted such notes, aggregating $189,495, into 433,327 shares of
common stock. In addition, a portion of the proceeds of the private placement
discussed above was used to extinguish the remaining $1,880,505 of such notes
and $288,000 of a note payable to a related party, as discussed in Note 10.
F-15
<PAGE>
- -------------------------------------------------------------------------------
NO DEALER, SALES REPRESENTATIVE, OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED
IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY OF THE
UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OF ANY SECURITIES
OTHER THAN THOSE TO WHICH IT RELATES OR AN OFFER TO SELL, OR A SOLICITATION OF
ANY OFFER TO BUY, TO ANY PERSON IN ANY JURISDICTION WHERE SUCH AN OFFER OR SO-
LICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY
SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT
THE INFORMATION SET FORTH HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE
DATE HEREOF.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary....................................................... 3
Recent Developments...................................................... 7
Risk Factors............................................................. 8
Use of Proceeds.......................................................... 15
Dividend Policy.......................................................... 15
Capitalization........................................................... 16
Dilution................................................................. 17
Selected Financial Data.................................................. 18
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 20
Business................................................................. 24
Management............................................................... 32
Certain Transactions..................................................... 37
Principal and Selling Stockholders....................................... 39
Description of Securities................................................ 41
Shares Eligible for Future Sale.......................................... 42
Underwriting............................................................. 44
Legal Matters............................................................ 45
Experts.................................................................. 45
Additional Information................................................... 45
Index to Financial Statements............................................ F-1
</TABLE>
UNTIL , 1996 (25 DAYS AFTER THE DATE OF THE PROSPECTUS), ALL DEALERS AF-
FECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT PARTICIPAT-
ING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN
ADDITION TO THE OBLIGATIONS OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS
UNDERWRITER AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
THINK NEW IDEAS, INC.
[LOGO OF THINK NEW IDEAS, INC. APPEARS HERE]
2,000,000 SHARES OF
COMMON STOCK
PROSPECTUS
, 1996
COMMONWEALTH ASSOCIATES
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The estimated expenses to be incurred by the Company in connection with the
issuance and distribution of the securities being registered pursuant to this
Registration Statement, other than underwriting discounts and commissions, are
estimated as follows:
<TABLE>
<S> <C>
SEC Registration Fee............................................. $ 6,600
NASD Filing Fee.................................................. 2,405
Blue Sky Fees and Expenses....................................... 30,000
Printing Expenses................................................ 100,000
Legal Fees and Expenses.......................................... 200,000
Accountant's Fees and Expenses................................... 100,000
Transfer Agent and Registrar's Fee and Expenses.................. 20,000
Miscellaneous Expenses........................................... 65,995
--------
Total.......................................................... $525,000
========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Underwriter has agreed to indemnify the Company, its directors and each
person who controls it within the meaning of Section 15 of the Securities Act
of 1933 with respect to any statement in or omission from the Registration
Statement or the Prospectus or any amendment or supplement thereto if such
statement or omission was made in reliance upon information furnished in
writing to the Company by the Underwriter specifically for or in connection
with the preparation of the Registration Statement, the Prospectus, or any
such amendment or supplement thereto.
Section 145 of the Delaware General Corporation Law empowers a corporation
to indemnify its directors and officers and to purchase insurance with respect
to liability arising out of their capacity or status as directors and officers
provided that this provision shall not eliminate or limit the liability of a
director: (i) for any breach of the director's duty of loyalty to the
corporation or its stockholders; (ii) for acts or omissions not in good faith
or which involve intentional misconduct or a knowing violation of law; (iii)
arising under Section 174 of the Delaware General Corporation Law; or (iv) for
any transaction from which the director derived an improper personal benefit.
The Delaware General Corporation Law provides further that the
indemnification permitted thereunder shall not be deemed exclusive of any
other rights to which the directors and officers may be entitled under the
corporation's bylaws, any agreement, vote of shareholders or otherwise.
Article Seven of the Company's Certificate of Incorporation eliminates the
personal liability of directors to the fullest extent permitted by Section
102(b)(7) of the Delaware General Corporation Law.
The effect of the foregoing is to require the Company to indemnify the
officers and directors of the Company for any claim arising against any such
person in their official capacities if such person acted in good faith and in
a manner that he reasonably believed to be in or not opposed to the best
interests of the corporation, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was unlawful.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
The Company was incorporated pursuant to the laws of the State of Delaware
on January 30, 1996 at which time 2,171,507 shares of Common Stock were issued
to the Company's founders in exchange for par value as
II-1
<PAGE>
follows: Benchmark: 709,501 shares of Common Stock; Ronald Bloom: 875,932
shares of Common Stock; Scott A. Mednick: 630,467 shares of Common Stock; and
Christopher Efird: 101,357 shares of Common Stock. The issuances were effected
pursuant to a claim exemption under Section 4(2) of the Act.
In March 1996, in exchange for the extension of a loan in the aggregate
principal amount of $270,000, the Company issued the 10% Notes to three
lenders. In August 1996, an aggregate of $27,000 in principal amount of the
10% Notes was converted into 216,667 shares of Common Stock by the holders
thereof and the remaining principal (plus accrued interest) was repaid.
In April 1996, the Company commenced the private Offering of the 12% Notes.
Pursuant to such Offering, the Company issued an aggregate of $1,800,000 in
principal amount of 12% Notes to nine investors. The Company relied upon the
services of the Placement Agent with respect to the offer of 12% Notes in the
aggregate principal amount of $1,250,000, for which the Placement Agent
received a fee equal to 10% of the aggregate proceeds of the private Offering
and a non-accountable expense allowance equal to 3% of the aggregate proceeds
received by the Company from investors introduced by the Placement Agent. In
August 1996, an aggregate of $162,495 in principal amount of the 12% Notes was
converted by the holders of thereof into 216,660 shares of Common Stock and
the remaining principal (plus accrued interest) was repaid.
Pursuant to the terms of the Omnicom Agreement, in August 1996, the Company
offered and sold to Omnicom 938,667 shares of Common Stock in exchange for
proceeds of $4,998,000.
The Company believes that the transactions set forth above were exempt from
registration with the Commission pursuant to Section 4(2) of the Securities
Act as transactions by an issuer not involving any public Offering. Except as
disclosed above, no broker-dealer or underwriter was involved in the foregoing
transactions. All certificates representing such securities have been
appropriately legended. The March and April 1996 placements were made in
reliance upon a claim of exemption pursuant to Rule 506 of Regulation D.
Additionally, the participants in the March and April 1996 private placements
were accredited investors. All requisite regulatory filings were made in
accordance with Rule 506 of Regulation D.
ITEM 16. EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<C> <S>
1.1 Form of Underwriting Agreement by and among the Company and the
Underwriter.
1.2 Form of Underwriter's Warrant.
1.3 Form of Advisory Agreement with Commonwealth Associates.
1.4* Form of Letter of Transmittal and Custody Agreement.
1.5* Form of Selling Stockholders Irrevocable Power of Attorney.
3.1(a)* Certificate of Incorporation of the Company.
3.1(b)* Certificate of Amendment to Certificate of Incorporation of the
Company.
3.1(c)* Certificate of Amendment to Certificate of Incorporation of the
Company.
3.2* Amended and Restated Bylaws of the Company.
4.1* Specimen Common Stock Certificate of the Company.
4.2* Form of Non-Negotiable 10% Convertible Promissory Note.
4.3* Form of Series I Non-Negotiable 12% Convertible Promissory Note.
5.1** Opinion of De Martino Finkelstein Rosen & Virga, counsel for the
Company.
10.1* Form of Agreement and Plan of Reorganization by and among the Company
and each of the Subsidiaries.
10.2* Employment Agreement by and between the Company and Scott A. Mednick.
10.3* Employment Agreement by and between the Company and Adam Curry.
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<C> <S>
10.3(a) Amendment to Adam Curry Employment Agreement dated October 28, 1996.
10.4* Employment Agreement by and between the Company and Ronald Bloom.
10.4(a) Amendment to Ronald Bloom Employment Agreement dated October 28,
1996.
10.5* Employment Agreement by and between the Company and David R. Hieb.
10.6* Employment Agreement by and between the Company and James Grannan.
10.7* Employment Agreement by and between the Company and Susan Goodman.
10.8* Employment Agreement by and between the Company and Dr. James
Carlisle.
10.8(a) Amendment to Dr. James Carlisle Employment Agreement dated October
28, 1996.
10.9* Promissory Note, dated March 31, 1996, executed by On Ramp, Inc. in
favor of the Company in the principal amount of $1,000,000.
10.10* Loan Agreement, dated March 31, 1996, by and between On Ramp, Inc.
and the Company.
10.11* Promissory Note, dated March 31, 1996, executed by On Ramp, Inc. in
favor of the Company in the principal amount of $600,000.
10.12* Pledge Agreement, dated March 31, 1996, by and among On Ramp, Inc.
Adam Curry and the Company.
10.13* Loan Agreement, dated May 13, 1996, by and between the Company and
Internet One, Inc.
10.14* Promissory Note, dated May 13, 1996, executed by Internet One, Inc.
in favor of the Company in the principal amount of $70,000.
10.15* Pledge Agreement, dated May 13, 1996, by and among Internet One,
Inc., David R. Hieb and the Company.
10.16 Form of Amended and Restated 1996 Stock Option Plan.
10.16(a)* Amended and Restated 1996 Stock Option Plan.
10.17(a)* Consulting Agreement by and between the Company and Benchmark Equity
Group, Inc.
10.17(b)* Amendment to Consulting Agreement dated August 9, 1996.
10.18(a)* Stock Purchase Agreement between Omnicom Group Inc. and the Company.
10.18(b)* Form of Letter of Amendment to Omnicom Agreement.
10.19 Form of Escrow Agreement between the Company, Continental Stock
Transfer and Trust Company and certain stockholders of the Company.
10.20(a) Letter Agreement by and among the Company, Dan Carlisle and James H.
Carlisle dated September 20, 1996.
10.20(b) Promissory Note, dated October 1, 1996, executed by the Company in
favor of James J. Carlisle in the principal amount of $132,000.
10.20(c) Promissory Note, dated October 1, 1996, executed by the Company in
favor of Dan Carlisle in the principal amount of $288,000.
10.20(d) Promissory Note, dated October 1, 1996, executed by the Company in
favor of Dan Carlisle in the principal amount of $515,760.
10.21** Employment letter by and between the Company and Mel Epstein.
11 Loss per share calculations.
21.1 Subsidiaries of the Company.
23.1** Consent of De Martino Finkelstein Rosen & Virga (included in Exhibit
5.1).
23.2 Consent of BDO Seidman, LLP, independent certified public
accountants.
24.1 Power of Attorney (included on signature page in Registration
Statement).
27.1 Financial Data Schedule.
</TABLE>
- --------
*Previously filed.
**To be filed by amendment.
II-3
<PAGE>
ITEM 17. UNDERTAKINGS
(a) Undertakings Relating to Indemnification and Acceleration of Effective
Date. Insofar as indemnification for liabilities arising under the Securities
Act of 1933, as amended, may be permitted to directors, officers and
controlling persons of the Company pursuant to the foregoing provisions of
this Registration Statement, or otherwise, the Company has been advised that
in the opinion of the Securities and Exchange Commission such indemnification
is against public policy as expressed in the Securities Act of 1933 and is,
therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the Company of expenses incurred or paid by a
director, officer or controlling person of the Company 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 Company 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 of whether such indemnification by it is against
public policy as expressed in the Securities Act of 1933 and will be governed
by the final adjudication of such issue.
(b) Undertakings Relating to Rule 430A Under the Securities Act of 1933. The
Company hereby understands that it will:
(1) For the purpose of determining any liability under the Securities Act
of 1933, treat the information omitted from the form of prospectus filed as
part of this Registration Statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the Company under Rule 424(b)(1)
or (4) or 497(h) under the Securities Act of 1933 as part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act
of 1933, treat each post-effective amendment that contains a form of
prospectus as a new registration statement for the securities offered in
the Registration Statement, and that Offering of such securities at that
time shall be deemed to be as the initial bona fide Offering thereof.
II-4
<PAGE>
SIGNATURES
IN ACCORDANCE WITH THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS
AMENDED, THE COMPANY HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED
ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF
LOS ANGELES, STATE OF CALIFORNIA, ON NOVEMBER , 1996.
THINK New Ideas, Inc.
By: /s/ Scott A. Mednick
---------------------------------
SCOTT A. MEDNICK
CHIEF EXECUTIVE OFFICER
POWER OF ATTORNEY
Each person whose signature appears below constitutes and appoints Scott A.
Mednick, Ronald E. Bloom and Adam S. Curry as his true and lawful attorney-in-
fact and agent, each acting alone, with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign any or all amendments (including post-effective
amendments) to this Registration Statement and to sign any registration
statement filed under Rule 462 and to file the same, with all exhibits
thereto, and all documents in connection therewith, with the Commission,
granting unto said attorney-in-fact and agent, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
and about the premises, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that said attorney-in-
fact and agent, or his substitute or substitutes, may lawfully do or cause to
be done by virtue hereof.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Scott A. Mednick Chief Executive November , 1996
- ------------------------------------- Officer and
SCOTT A. MEDNICK Chairman of the
Board of Directors
/s/ Ronald E. Bloom President, Chief November , 1996
- ------------------------------------- Operating Officer
RONALD E. BLOOM and Director
/s/ Adam S. Curry Chief Technology November , 1996
- ------------------------------------- Officer and
ADAM S. CURRY Director
/s/ Melvin Epstein Chief Financial November , 1996
- ------------------------------------- Officer
MELVIN EPSTEIN
/s/ Frank DeLape Director November , 1996
- -------------------------------------
FRANK DELAPE
Director , 1996
- -------------------------------------
ANGEL MARTINEZ
Director , 1996
- -------------------------------------
MICHAEL RIBERO
Director , 1996
- -------------------------------------
BARRY J. WAGNER
</TABLE>
II-5
<PAGE>
SIGNATURES
IN ACCORDANCE WITH THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS
AMENDED, THE COMPANY HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED
ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF
LOS ANGELES, STATE OF CALIFORNIA, ON SEPTEMBER , 1996.
THINK New Ideas, Inc.
By:
---------------------------------
SCOTT A. MEDNICK
CHIEF EXECUTIVE OFFICER
POWER OF ATTORNEY
Each person whose signature appears below constitutes and appoints Scott A.
Mednick, Ronald S. Bloom and Adam S. Curry as his true and lawful attorney-in-
fact and agent, each acting alone, with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign any or all amendments (including post-effective
amendments) to this Registration Statement, and to sign any registration
statement filed under Rule 462 and to file the same, with all exhibits
thereto, and all documents in connection therewith, with the Commission,
granting unto said attorney-in-fact and agent, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
and about the premises, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that said attorney-in-
fact and agent, or his substitute or substitutes, may lawfully do or cause to
be done by virtue hereof.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED.
SIGNATURE TITLE DATE
--------- ----- ----
Chief Executive , 1996
- ------------------------------------- Officer and
SCOTT A. MEDNICK Chairman of the
Board of Directors
President, Chief , 1996
- ------------------------------------- Operating Officer
RONALD S. BLOOM and Director
Chief Technology , 1996
- ------------------------------------- Officer and
ADAM S. CURRY Director
Chief Financial , 1996
- ------------------------------------- Officer
MELVIN EPSTEIN
Director , 1996
- -------------------------------------
FRANK DELAPE
Director , 1996
- -------------------------------------
ANGEL MARTINEZ
Director , 1996
- -------------------------------------
MICHAEL RIBERO
Director , 1996
- -------------------------------------
BARRY J. WAGNER
II-6
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT PAGE NO.
------- ----------------------- --------
<C> <S> <C>
1.1 Form of Underwriting Agreement by and among the Company
and the Underwriter.
1.2 Form of Underwriter's Warrant.
1.3 Form of Advisory Agreement with Commonwealth Associates.
1.4* Form of Letter of Transmittal and Custody Agreement.
1.5* Form of Selling Stockholders Irrevocable Power of
Attorney.
3.1(a)* Certificate of Incorporation of the Company.
3.1(b)* Certificate of Amendment to Certificate of Incorporation
of the Company.
3.1(c)* Certificate of Amendment to Certificate of Incorporation
of the Company.
3.2* Amended and Restated Bylaws of the Company.
4.1* Specimen Common Stock Certificate of the Company.
4.2* Form of Non-Negotiable 10% Convertible Promissory Note.
4.3* Form of Series I Non-Negotiable 12% Convertible Promissory
Note.
5.1** Opinion of De Martino Finkelstein Rosen & Virga, counsel
for the Company.
10.1* Form of Agreement and Plan of Reorganization by and among
the Company and each of the Subsidiaries.
10.2* Employment Agreement by and between the Company and Scott
A. Mednick.
10.3* Employment Agreement by and between the Company and Adam
Curry.
10.3(a) Amendment to Adam Curry Employment Agreement dated October
28, 1996.
10.4* Employment Agreement by and between the Company and Ronald
Bloom.
10.4(a) Amendment to Ronald Bloom Employment Agreement dated
October 28, 1996.
10.5* Employment Agreement by and between the Company and David
R. Hieb.
10.6* Employment Agreement by and between the Company and James
Grannan.
10.7* Employment Agreement by and between the Company and Susan
Goodman.
10.8* Employment Agreement by and between the Company and Dr.
James Carlisle.
10.8(a) Amendment to Dr. James Carlisle Employment Agreement dated
October 28, 1996.
10.9* Promissory Note, dated March 31, 1996, executed by On
Ramp, Inc. in favor of the Company in the principal amount
of $1,000,000.
10.10* Loan Agreement, dated March 31, 1996, by and between On
Ramp, Inc. and the Company.
10.11* Promissory Note, dated March 31, 1996, executed by On
Ramp, Inc. in favor of the Company in the principal amount
of $600,000.
10.12* Pledge Agreement, dated March 31, 1996, by and among On
Ramp, Inc. Adam Curry and the Company.
10.13* Loan Agreement, dated May 13, 1996, by and between the
Company and Internet One, Inc.
10.14* Promissory Note, dated May 13, 1996, executed by Internet
One, Inc. in favor of the Company in the principal amount
of $70,000.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT PAGE NO.
------- ----------------------- --------
<C> <S> <C>
10.15* Pledge Agreement, dated May 13, 1996, by and among
Internet One, Inc., David R. Hieb and the Company.
10.16 Form of Amended and Restated 1996 Stock Option Plan.
10.16(a)* Amended and Restated 1996 Stock Option Plan.
10.17(a)* Consulting Agreement by and between the Company and
Benchmark Equity Group, Inc.
10.17(b)* Amendment to Consulting Agreement dated August 9, 1996.
10.18(a)* Stock Purchase Agreement between Omnicom Group Inc. and
the Company.
10.18(b)* Form of Letter of Amendment to Omnicom Agreement.
10.19 Form of Escrow Agreement between the Company, Continental
Stock Transfer and Trust Company and certain stockholders
of the Company.
10.20(a) Letter Agreement by and among the Company, Dan Carlisle
and James H. Carlisle dated September 20, 1996.
10.20(b) Promissory Note, dated October 1, 1996, executed by the
Company in favor of James J. Carlisle in the principal
amount of $132,000.
10.20(c) Promissory Note, dated October 1, 1996, executed by the
Company in favor of Dan Carlisle in the principal amount
of $288,000.
10.20(d) Promissory Note, dated October 1, 1996, executed by the
Company in favor of Dan Carlisle in the principal amount
of $515,760.
10.21** Employment letter by and between the Company and Mel
Epstein.
11 Loss per share calculations.
21.1 Subsidiaries of the Company.
23.1** Consent of De Martino Finkelstein Rosen & Virga (included
in Exhibit 5.1).
23.2 Consent of BDO Seidman, LLP, independent certified public
accountants.
24.1 Power of Attorney (included on signature page in
Registration Statement).
27.1 Financial Data Schedule.
</TABLE>
- --------
*Previously filed.
**To be filed by amendment.
<PAGE>
COMMONWEALTH ASSOCIATES
2,000,000 Shares
THINK NEW IDEAS, INC.
Common Stock
UNDERWRITING AGREEMENT
----------------------
Commonwealth Associates
733 Third Avenue
New York, New York 10017
THINK New Ideas, Inc., a Delaware corporation (the "Company"), proposes to
issue and sell to Commonwealth Associates (the "Underwriter"), pursuant to this
Underwriting Agreement (the "Agreement"), an aggregate of 2,000,000 shares (the
"Stock") of Common Stock, $.0001 par value (such class of stock being herein
called the "Common Stock"), of the Company. In addition, the Company and a
certain stockholder of the Company named in Schedule A hereto (the "Selling
Stockholder") severally proposed to grant to the Underwriter the option referred
to in Section 3(b) hereof to purchase all or any part of an aggregate of
300,000 additional shares of Common Stock, the Selling Stockholder selling not
more than the number of shares set forth opposite the Selling Stockholder's name
in Schedule B hereto, if and to the extent that you shall have determined to
exercise the right to purchase such shares of Common Stock. Unless the context
otherwise indicates, the term "Stock" shall include the 300,000 additional
shares referred to above.
You have advised the Company that you desire to purchase the Stock. The
Company confirms the agreement made by it with respect to the purchase of the
Stock by you as follows:
1. Representations and Warranties of the Company. The Company represents
---------------------------------------------
and warrants to, and agrees with, the Underwriter that:
(a) A registration statement (File No. 333-12795) on Form SB-2 relating
to the public offering of the Stock, including a form of prospectus subject to
completion, copies of which have heretofore been delivered to you, has been
prepared by the Company in conformity with the requirements of the Securities
Act of 1933, as amended (the "Act"), and the rules and regulations (the "Rules
and Regulations") of the Securities and Exchange Commission (the "Commission")
thereunder, and has been filed with the Commission under the Act and one or more
amendments to such registration statement may have been so filed. After the
execution of this Agreement, the Company will file with the Commission either
(i) if such registration
<PAGE>
statement, as it may have been amended, has been declared by the Commission to
be effective under the Act, a prospectus in the form most recently included in
an amendment to such registration statement (or, if no such amendment shall have
been filed, in such registration statement), with such changes or insertions as
are required by Rule 430A under the Act or permitted by Rule 424(b) under the
Act and as have been provided to and approved by the Representative prior to the
execution of this Agreement, or (ii) if such registration statement, as it may
have been amended, has not been declared by the Commission to be effective under
the Act, an amendment to such registration statement, including a form of
prospectus, a copy of which amendment has been furnished to and approved by the
Representative prior to the execution of this Agreement. As used in this
Agreement, the term "Registration Statement" means such registration statement,
as amended at the time when it was or is declared effective, including all
financial schedules and exhibits thereto and including any information omitted
therefrom pursuant to Rule 430A under the Act and included in the Prospectus (as
hereinafter defined); the term "Preliminary Prospectus" means each prospectus
subject to completion filed with such registration statement or any amendment
thereto (including the prospectus subject to completion, if any, included in the
Registration Statement or any amendment thereto at the time it was or is
declared effective); and the term "Prospectus" means the prospectus first filed
with the Commission pursuant to Rule 424(b) under the Act, or, if no prospectus
is required to be filed pursuant to said Rule 424(b), such term means the
prospectus included in the Registration Statement; except that if such
registration statement or prospectus is amended or such prospectus is
supplemented, after the effective date of such registration statement and prior
to the Option Closing Date (as hereinafter defined), the terms "Registration
Statement" and "Prospectus" shall include such registration statement and
prospectus as so amended, and the term "Prospectus" shall include the prospectus
as so supplemented, or both, as the case may be.
(b) The Commission has not issued any order preventing or suspending the
use of any Preliminary Prospectus. When the Registration Statement becomes
effective and at all times subsequent thereto up to and on the Closing Date (as
hereinafter defined) or the Option Closing Date, as the case may be, (i) the
Registration Statement and Prospectus will in all respects conform to the
requirements of the Act and the Rules and Regulations; and (ii) neither the
Registration Statement nor the Prospectus will include any untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary to make statements therein not misleading; provided, however, that
the Company makes no representations, warranties or agreements as to information
contained in or omitted from the Registration Statement or Prospectus in
reliance upon, and in conformity with, written information furnished to the
Company by or on behalf of the Underwriter specifically for use in the
preparation thereof. It is understood that the statements set forth in the
Prospectus on page 2 with respect to stabilization, under the heading
"Underwriting" and the identity of counsel to the Underwriter under the heading
"Legal Matters" constitute the only information furnished in writing by or on
behalf of the Underwriter for inclusion in the Registration Statement and
Prospectus, as the case may be.
(c) The Company has been duly incorporated and is validly existing as a
corporation in good standing under the laws of the jurisdiction of its
incorporation, with full
-2-
<PAGE>
power and authority (corporate and other) to own its properties and conduct its
business as described in the Prospectus and is duly qualified to do business as
a foreign corporation and is in good standing in all other jurisdictions in
which the nature of its business or the character or location of its properties
requires such qualification, except where failure to so qualify will not
materially affect the Company's business, properties or financial condition. The
Company has no subsidiaries other than those listed on Schedule B attached
hereto (the "Subsidiaries"). The Company does not own any equity interest in any
other corporation, joint venture, partnership or other business entity, other
than the Subsidiaries. The Company owns all of the capital stock of each
Subsidiary free and clear of all liens, securities interest and encumbrances.
Each Subsidiary is a corporation, duly organized, validly existing and in good
standing under the laws of the state of its respective incorporation, with full
power and authority, corporate and other, to own or lease and operate its
respective properties and to conduct its respective business as described in the
Registration Statement. Each Subsidiary is duly qualified to do business as a
foreign corporation and is in good standing in all jurisdictions wherein such
qualification is necessary and failure so to qualify could result in a material
adverse effect on the financial condition, results of operations, business or
properties of such Subsidiary.
(d) The authorized, issued and outstanding capital stock of the Company
as of September 30, 1996 is as set forth in the Prospectus under
"Capitalization"; the shares of issued and outstanding capital stock of the
Company set forth thereunder have been duly authorized, validly issued and are
fully paid and non-assessable and have been issued in compliance with all
federal and state securities laws; except as set forth in the Prospectus, no
options, warrants or other rights to purchase, agreements or other obligations
to issue, or agreements or other rights to convert any obligation into, any
shares of capital stock of the Company have been granted or entered into by the
Company; and the capital stock conforms to all statements relating thereto
contained in the Registration Statement and Prospectus.
(e) The Stock and the Common Stock to be issued upon exercise of the
common stock purchase warrants to be issued to the Underwriter (the "Warrants")
are duly authorized, and when issued and delivered pursuant to this Agreement,
will be duly authorized, validly issued, fully paid and non-assessable and free
of preemptive rights of any security holder of the Company. Neither the filing
of the Registration Statement nor the offering or sale of the Stock as
contemplated in this Agreement gives rise to any rights, other than those which
have been waived or satisfied, for or relating to the registration of any shares
of Common Stock, except as described in the Registration Statement.
(f) This Agreement, the Warrants and the Advisory Agreement (to be
delivered to you in accordance with Section 4(o) and 4(r), respectively, hereof)
have been duly and validly authorized, executed and delivered by the Company.
The Company has full power and lawful authority to authorize, issue and sell the
Stock to be sold by it hereunder on the terms and conditions set forth herein,
and no consent, approval, authorization or other order of any governmental
authority is required in connection with such authorization, execution and
delivery or with the authorization, issue and sale of the Stock or the Warrants,
except such as may be required under the Act or state securities laws.
-3-
<PAGE>
(g) Except as described in the Prospectus, neither the Company nor any
of its Subsidiaries is in violation, breach or default of or under, and
consummation of the transactions herein contemplated and the fulfillment of the
terms of this Agreement will not conflict with, or result in a breach or
violation of, any of the terms or provisions of, or constitute a default under,
or result in the creation or imposition of any lien, charge or encumbrance upon
any of the respective properties or assets of the Company or any of its
Subsidiaries pursuant to the terms of any indenture, mortgage, deed of trust,
loan agreement or other agreement or instrument to which the Company or any of
its Subsidiaries is a party or by which the Company or any of its Subsidiaries
may be bound or to which any of the respective properties or assets of the
Company or any of its Subsidiaries is subject, nor will such action result in
any violation of the provisions of the respective articles of incorporation or
the by-laws of the Company or any of its Subsidiaries, as amended, or any
statute or any order, rule or regulation applicable to the Company or any of its
Subsidiaries of any court or of any regulatory authority or other governmental
body having jurisdiction over the Company or any of its Subsidiaries.
(h) Subject to the qualifications stated in the Prospectus, the Company
and each of its Subsidiaries has good and marketable title to all respective
properties and assets described in the Prospectus as owned by the Company and
each of its Subsidiaries, free and clear of all liens, charges, encumbrances or
restrictions, except such as are not materially significant or important in
relation to its respective business; all of the material leases and subleases
under which the Company or any of its Subsidiaries is the lessor or sublessor of
properties or assets or under which the Company or any of its Subsidiaries holds
properties or assets as lessee or sublessee as described in the Prospectus are
in full force and effect, and, except as described in the Prospectus, the
Company and each of its Subsidiaries is not in default in any material respect
with respect to any of the terms or provisions of any of such leases or
subleases, and no claim has been asserted by anyone adverse to rights of the
Company or any of its Subsidiaries as lessor, sublessor, lessee or sublessee
under any of the leases or subleases mentioned above, or affecting or
questioning the right of the Company or any of its Subsidiaries to continued
possession of the leased or subleased premises or assets under any such lease or
sublease except as described or referred to in the Prospectus; and the Company
and each of its Subsidiaries owns or leases all such properties described in the
Prospectus as are necessary to its respective operations as now conducted and,
except as otherwise stated in the Prospectus, as proposed to be conducted as set
forth in the Prospectus.
(i) BDO Seidman, LLP, who have given their reports on certain financial
statements filed and to be filed with the Commission as a part of the
Registration Statement, which are incorporated in the Prospectus, are with
respect to the Company, independent public accountants as required by the Act
and the Rules and Regulations.
(j) The financial statements, together with related notes, set forth in
the Prospectus or the Registration Statement present fairly the financial
position and results of operations and changes in cash flow of the Company and
each of its Subsidiaries on the basis stated in the Registration Statement, at
the respective dates and for the respective periods to which they apply. Said
statements and related notes have been prepared in accordance with
-4-
<PAGE>
generally accepted accounting principles applied on a basis which is consistent
during the periods involved and the Rules and Regulations. The information set
forth under the captions "Dilution," "Capitalization" and "Selected Financial
Data" in the Prospectus fairly present, on the basis stated in the Prospectus,
the information included therein.
(k) Subsequent to the respective dates as of which information is given
in the Registration Statement and Prospectus, neither the Company nor any of its
Subsidiaries has incurred any liabilities or obligations, direct or contingent,
not in the ordinary course of business, or entered into any transaction not in
the ordinary course of business, which is material to the respective businesses
of the Company or any of its Subsidiaries, and there has not been any change in
the capital stock of, or any incurrence of short-term or long-term debt by, the
Company or any of its Subsidiaries or any issuance of options, warrants or other
rights to purchase the capital stock of the Company or any of its Subsidiaries
or any adverse change or any development involving, so far as the Company can
now reasonably foresee a prospective adverse change in the respective conditions
(financial or other), net worths, results of operations, businesses, key
personnel or properties of the Company or any of its Subsidiaries which would be
material to the respective businesses or financial conditions of the Company or
any of its Subsidiaries and neither the Company nor any of its Subsidiaries has
become a party to, and neither the respective businesses nor the properties of
the Company or any of its Subsidiaries has become the subject of, any material
litigation whether or not in the ordinary course of business.
(l) Except as set forth in the Prospectus, there is not now pending or,
to the knowledge of the Company, threatened, any action, suit or proceeding to
which the Company or any of its Subsidiaries is a party before or by any court
or governmental agency or body, which might result in any material adverse
change in the respective conditions (financial or other), business prospects,
net worths, or properties of the Company or any of its Subsidiaries, nor are
there any actions, suits or proceedings related to environmental matters or
related to discrimination on the basis of age, sex, religion or race; and no
labor disputes involving the employees of the Company or any of its Subsidiaries
exist or are imminent which might be expected to adversely affect the conduct of
the respective businesses, properties or operations or the financial conditions
or results of operations of the Company or any of its Subsidiaries.
(m) Except as disclosed in the Prospectus, the Company and each of its
Subsidiaries has filed all necessary federal, state and foreign income and
franchise tax returns and has paid all taxes shown as due thereon; and there is
no tax deficiency which has been or to the knowledge of the Company might be
asserted against the Company or any of its Subsidiaries.
(n) The Company and each of its Subsidiaries has sufficient licenses,
permits and other governmental authorizations as are required for the conduct of
its respective business or the ownership of its properties as described in the
Prospectus and is in all material respects complying therewith and owns or
possesses adequate rights to use all material trademarks, service marks, trade-
names, trademark registrations, service mark registrations, copyrights and
licenses necessary for the conduct of such business and none of the foregoing
are in dispute or are in conflict with the right of any other person or entity.
To the best knowledge of
-5-
<PAGE>
the Company, none of the activities or business of the Company or any of its
Subsidiaries are in violation of, or cause the Company or any of its
Subsidiaries to violate, any law, rule, regulation or order of the United
States, any state, county or locality, or of any agency or body of the United
States or of any state, county or locality, the violation of which would have a
material adverse impact upon the respective conditions (financial or otherwise),
businesses, properties, prospective results of operations, or net worth of the
Company or any of its Subsidiaries.
(o) Neither the Company nor any of its Subsidiaries has directly or
indirectly, at any time (i) made any contributions to any candidate for
political office, or failed to disclose fully any such contribution in violation
of law or (ii) made any payment to any state, federal or foreign governmental
officer or official, or other person charged with similar public or quasi-public
duties, other than payments or contributions required or allowed by applicable
law. The Company's internal accounting controls and procedures are sufficient to
cause the Company to comply in all material respects with the Foreign Corrupt
Practices Act of 1977, as amended.
(p) On the Closing Dates (hereinafter defined) all transfer or other
taxes, (including franchise, capital stock or other tax, other than income
taxes, imposed by any jurisdiction) if any, which are required to be paid in
connection with the sale and transfer of the Stock to the Underwriter hereunder
will have been fully paid or provided for by the Company and all laws imposing
such taxes will have been fully complied with.
(q) All contracts and other documents of the Company and each of its
Subsidiaries which are, under the Rules and Regulations, required to be filed as
exhibits to the Registration Statement have been so filed.
(r) Neither the Company nor any of its Subsidiaries has taken and will
not take, directly or indirectly, any action designed to cause or result in, or
which has constituted or which might reasonably be expected to constitute, the
stabilization or manipulation of the price of the shares of Common Stock.
(s) Neither the Company nor any of its Subsidiaries has entered into any
agreement pursuant to which any person is entitled, either directly or
indirectly, to compensation from the Company for services as a finder in
connection with the public offering referred to herein.
(t) Except as previously disclosed in writing by the Company to the
Representative, no officer, director or stockholder of the Company or any of its
Subsidiaries has any National Association of Securities Dealers Inc. (the
"NASD") affiliation.
(u) Neither the Company nor any of the Subsidiaries is and upon receipt
of the proceeds from the sale of the Stock will be, an "investment company"
within the meaning of the Investment Company Act of 1940, as amended, and the
rules and regulations thereunder.
-6-
<PAGE>
(v) Neither the Company nor any of its Subsidiaries has distributed nor
will distribute prior to the First Closing Date any offering material in
connection with the offering and sale of the Stock other than the Prospectus,
the Registration Statement and the other materials permitted by the Act.
(w) The conditions for use of Form SB-2, as set forth in the General
Instructions thereto, have been satisfied.
(x) The Company has complied with all provisions of Section 517.075
Florida Statutes relating to doing business with the government of Cuba or with
any person or affiliate located in Cuba.
2. Representations and Warrant's of the Selling Stockholder. The Selling
--------------------------------------------------------
Stockholder represents and warrants to and agrees with, the Underwriter that:
(a) This Agreement has been duly executed and delivered by or on behalf
of the Selling Stockholder.
(b) The execution and delivery by the Selling Stockholder of, and the
performance by the Selling Stockholder of its obligations under, this Agreement,
the Custody Agreement signed by the Selling Stockholder and Continental Stock
Transfer and Trust Company, as Custodian, relating to the deposit of the Stock
to be sold by the Selling Stockholder (the "Custody Agreement") and the Power of
Attorney appointing certain individuals as the Selling Stockholder's attorneys-
in-fact to the extent set forth therein, relating to the transactions
contemplated hereby and by the Registration Statement (the "Power of Attorney")
will not contravene any provision of applicable law, or any agreement or other
instrument binding upon the Selling Stockholder or any judgment, order or decree
of any governmental body, agency or court having jurisdiction over the Selling
Stockholder, and no consent, approval, authorization or order of, or
qualification with, any governmental body or agency is required for the
performance by the Selling Stockholder of its obligations under the Agreement or
the Custody Agreement or Power of Attorney of the Selling Stockholder, except
such as may be required by the securities or "blue sky" laws of the various
states in connection with the offer and sale of the Stock.
(c) The Selling Stockholder has, and on the Closing Date and Option
Closing Date, if any, will have, valid title to the Stock to be sold by the
Selling Stockholder and the legal right and power, and all approval required by
law, to enter into this Agreement, the Custody Agreement and the Power of
Attorney and to sell, transfer and deliver the Stock to be sold by the Selling
Stockholder.
(d) The Stock to be sold by the Selling Stockholder pursuant to this
Agreement, has been duly authorized and is validly issued, fully paid and non-
assessable.
-7-
<PAGE>
(e) The Custody Agreement and the Power of Attorney have been duly
executed and delivered by the Selling Stockholder and are valid and binding
agreements of the Selling Stockholder.
(f) Assuming the Underwriter acquires its interest in the Stock to be
sold by the Selling Stockholder in good faith and without notice of any adverse
claims, delivery of the Stock to be sold by the Selling Stockholder pursuant to
this Agreement will pass title to such Stock free and clear of any security
interests, claims, liens, equities and other encumbrances.
(g) All information furnished by or on behalf of the Selling Stockholder
for use in the Registration Statement and Prospectus is, and on the Closing Date
and Option Closing Date, if any, will be, true, correct, and complete, and does
not, and on the Closing Date and Option Closing Date, if any, will not, contain
any untrue statement of a material fact or omit to state any material fact
necessary to make such information not misleading.
3. Purchase, Delivery and Sale of the Stock.
----------------------------------------
(a) Subject to the terms and conditions of this Agreement, and upon the
basis of the representations, warranties, and agreements herein contained, the
Company agrees to issue and sell to the Underwriter, and the Underwriter agrees
to buy from the Company at $ per share of Stock, at the place and time
hereinafter specified, 2,000,000 shares of Stock (the "First Stock").
Delivery of the First Stock against payment therefor shall take place at
the offices of Commonwealth Associates, 733 Third Avenue, New York, New York
10017 (or at such other place as may be designated by agreement between you and
the Company) at 10:00 a.m., New York time, on , 199_, or at such
later time and date as you may designate, such time and date of payment and
delivery for the First Stock being herein called the "First Closing Date."
(b) In addition, subject to the terms and conditions of this Agreement,
and upon the basis of the representations, warranties and agreements herein
contained, the Company and the Selling Stockholder hereby grant, severally and
not jointly, an option to the Underwriter to purchase all or any part of an
aggregate of an additional 300,000 shares of Stock (the Selling Stockholder to
sell to the Underwriter up to the number of additional shares of Stock set forth
in Schedule B opposite the name of the Selling Stockholder), at the same price
per share of Stock, as the Underwriter shall pay for the First Stock being sold
pursuant to the provisions of subsection (a) of this Section 3 (such additional
Stock being referred to herein as the "Option Stock"). This option may be
exercised within 45 days after the effective date of the Registration Statement
upon notice by the Underwriter to the Company and the Custodian advising as to
the amount of Option Stock as to which the option is being exercised, the names
and denominations in which the certificates for such Option Stock are to be
registered and the time and date when
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<PAGE>
such certificates are to be delivered. Such time and date shall be determined by
the Underwriter but shall not be earlier than four nor later than ten full
business days after the exercise of said option, nor in any event prior to the
First Closing Date, and such time and date is referred to herein as the "Option
Closing Date." Delivery of the Option Stock against payment therefor shall take
place at the offices of Commonwealth Associates, 733 Third Avenue, New York, New
York 10017. In the event that this option is exercised in part, the Underwriter
shall first purchase all of the shares of Option Stock offered by the Selling
Stockholder before purchasing any Option Stock from the Company. The option
granted hereunder may be exercised only to cover overallotments in the sale by
the Underwriter of First Stock referred to in subsection (a) above. In the event
the Company declares or pays a dividend or distribution on its Common Stock,
whether in the form of cash, shares of Common Stock or any other consideration,
prior to the Option Closing Date, such dividend or distribution shall also be
paid on the Option Stock at the Option Closing Date.
(c) The Company will make the certificates for the Stock to be purchased
by the Underwriter hereunder available to the Underwriter for checking at least
two full business days prior to the First Closing Date or the Option Closing
Date (which are collectively referred to herein as the "Closing Dates"). The
certificates shall be in such names and denominations as you may request, at
least two full business days prior to the Closing Dates. Time shall be of the
essence and delivery at the time and place specified in this Agreement is a
further condition to the obligations of the Underwriter.
Definitive certificates in negotiable form for the Stock to be purchased
by the Underwriter hereunder will be delivered by the Company the Underwriter
for the accounts of the Underwriter against payment of the purchase price
therefor by the Underwriter, by certified or bank cashier's checks in New York
Clearing House funds, payable to the order of the Company.
In addition, in the event the Underwriter exercise the option to
purchase from the Company and the Selling Stockholder all or any portion of the
Option Stock pursuant to the provisions of subsection (b) above, payment for
such stock shall be made to or upon the order of the Company and the Custodian,
on behalf of the Selling Stockholder, respectively, by certified or bank
cashier's checks payable in New York Clearing House funds at the offices of
Commonwealth Associates, at the time and date of delivery of such Stock as
required by the provisions of subsection (b) above, against receipt of the
certificates for such Stock by the Underwriter registered in such names and in
such denominations as the Underwriter may request.
It is understood that the Underwriter proposes to offer the Stock to be
purchased hereunder to the public upon the terms and conditions set forth in the
Registration Statement, after the Registration Statement becomes effective.
4. Covenants of the Company. The Company covenants and agrees with the
------------------------
Underwriter that:
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<PAGE>
(a) The Company will use its best efforts to cause the Registration
Statement to become effective. If required, the Company will file the
Prospectus and any amendment or supplement thereto with the Commission in the
manner and within the time period required by Rule 424(b) under the Act. Upon
notification from the Commission that the Registration Statement has become
effective, the Company will so advise you and will not at any time, whether
before or after the effective date, file any amendment to the Registration
Statement or supplement to the Prospectus of which you shall not previously have
been advised and furnished with a copy or to which you or your counsel shall
have objected in writing or which is not in compliance with the Act and the
Rules and Regulations. At any time prior to the later of (A) the completion by
the Underwriter of the distribution of the Stock contemplated hereby (but in no
event more than nine months after the date on which the Registration Statement
shall have become or been declared effective) and (B) 25 days after the date on
which the Registration Statement shall have become or been declared effective
(the "Minimum Period"), the Company will prepare and file with the Commission,
promptly upon your request, any amendments or supplements to the Registration
Statement or Prospectus which, in your opinion, may be necessary or advisable in
connection with the distribution of the Stock.
As soon as the Company is advised thereof, the Company will advise you,
and confirm the advice in writing, of the receipt of any comments of the
Commission, of the effectiveness of any post-effective amendment to the
Registration Statement, of the filing of any supplement to the Prospectus or any
amended Prospectus, of any request made by the Commission for amendment of the
Registration Statement or for supplementing of the Prospectus or for additional
information with respect thereto, of the issuance by the Commission or any state
or regulatory body of any stop order or other order or threat thereof suspending
the effectiveness of the Registration Statement or any order preventing or
suspending the use of any preliminary prospectus, or of the suspension of the
qualification of the Stock for offering in any jurisdiction, or of the
institution of any proceedings for any of such purposes, and will use its best
efforts to prevent the issuance of any such order, and, if issued, to obtain as
soon as possible the lifting thereof.
The Company has caused to be delivered to you copies of each Preliminary
Prospectus, and the Company has consented and hereby consents to the use of such
copies for the purposes permitted by the Act. The Company authorizes the
Underwriter and dealers to use the Prospectus in connection with the sale of the
Stock for such period as in the opinion of counsel to the Underwriter the use
thereof is required to comply with the applicable provisions of the Act and the
Rules and Regulations. In case of the happening, at any time within such period
as a Prospectus is required under this Act to be delivered in connection with
sales by the Underwriter of any event of which the Company has knowledge and
which materially affects the Company or the securities of the Company, or which
in the opinion of counsel for the Company or counsel for the Underwriter should
be set forth in an amendment of the Registration Statement or a supplement to
the Prospectus in order to make the statements therein not then misleading, in
light of the circumstances existing at the time the Prospectus is required to be
delivered to a purchaser of the Stock or in case it shall be necessary to amend
or supplement the Prospectus to comply with law or with the Rules and
Regulations, the Company
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<PAGE>
will notify you promptly and forthwith prepare and furnish to you copies of such
amended Prospectus or of such supplement to be attached to the Prospectus, in
such quantities as you may reasonably request, in order that the Prospectus, as
so amended or supplemented, will not contain any untrue statement of a material
fact or omit to state any material fact necessary in order to make the
statements in the Prospectus, in the light of the circumstances under which they
are made, not misleading. The preparation and furnishing of any such amendment
or supplement to the Registration Statement or amended Prospectus or supplement
to be attached to the Prospectus shall be without expense to the Underwriter,
except that in case the Underwriter is required, in connection with the sale of
the Stock, to deliver a Prospectus nine months or more after the effective date
of the Registration Statement, the Company will upon request of and at the
expense of the Underwriter, amend or supplement the Registration Statement and
Prospectus and furnish the Underwriter with reasonable quantities of
prospectuses complying with Section 10(a)(3) of the Act.
The Company will comply with the Act, the Rules and Regulations and the
Securities Exchange Act of 1934, as amended (the "Exchange Act") and the rules
and regulations thereunder in connection with the offering and issuance of the
Stock.
(b) The Company will use its best efforts to qualify to register the
Stock for sale under the securities or "blue sky" laws of such jurisdictions as
the Representative may designate and will make such applications and furnish
such information as may be required for that purpose and to comply with such
laws, provided the Company shall not be required to qualify as a foreign
corporation or a dealer in securities or to execute a general consent to service
of process in any jurisdiction in any action other than one arising out of the
offering or sale of the Stock. The Company will, from time to time, prepare and
file such statements and reports as are or may be required to continue such
qualification in effect for so long a period as the Underwriters may reasonably
request.
(c) If the sale of the Stock provided for herein is not consummated for
any reason caused by the Company, the Company shall pay all costs and expenses
incident to the performance of the Company's obligations hereunder, including
but not limited to, all of the expenses itemized in Section 9, including the
accountable expenses of the Underwriter, including legal fees.
(d) The Company will use its best efforts to (i) cause a registration
statement under the Exchange Act to be declared effective concurrently with the
completion of this offering (and will notify the Underwriter in writing
immediately upon the effectiveness of such registration statement), and (ii) if
requested by the Underwriter, to obtain a listing on the Pacific Stock Exchange,
and to obtain and keep current a listing in the Standard & Poors or Moody's
Industrial OTC Manual.
(e) For so long as the Company is a reporting company under either
Section 12(g) or 15(d) of the Exchange Act, the Company, at its expense, will
furnish to its stockholders an annual report (including financial statements
audited by independent public
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<PAGE>
accountants), in reasonable detail, and at its expense, will furnish to you
during the period ending five (5) years from the date hereof, (i) as soon as
practicable after the end of each fiscal year, a balance sheet of the Company
and any of its subsidiaries as at the end of such fiscal year, together with
statements of income, surplus and cash flow of the Company and any subsidiaries
for such fiscal year, all in reasonable detail and accompanied by a copy of the
certificate or report thereon of independent accountants; (ii) as soon as
practicable after the end of each of the first three fiscal quarters of each
fiscal year, consolidated summary financial information of the Company for such
quarter in reasonable detail; (iii) as soon as they are available, a copy of all
reports (financial or other) mailed to security holders; (iv) as soon as they
are available, a copy of all non-confidential reports and financial statements
furnished to or filed with the Commission of any securities exchange or
automated quotation system on which any class of securities of the Company is
listed; and (v) such other information as you may from time to time reasonably
request.
(f) In the event the Company has an active subsidiary or subsidiaries,
such financial statements referred to in subsection (e) above will be on a
consolidated basis to the extent the accounts of the Company and its subsidiary
or subsidiaries are consolidated in reports furnished to its stockholders
generally.
(g) The Company will deliver to you at or before the First Closing Date
two signed copies of the Registration Statement including all financial
statements and exhibits filed therewith, and of all amendments thereto. The
Company will deliver to or upon the order of the Underwriter, from time to time
until the effective date of the Registration Statement, as many copies of any
Preliminary Prospectus filed with the Commission prior to the effective date of
the Registration Statement as the Underwriter may reasonably request. The
Company will deliver to the Underwriter on the effective date of the
Registration Statement and thereafter for so long as a Prospectus is required to
be delivered under the Act, from time to time, as many copies of the Prospectus,
in final form, or as thereafter amended or supplemented, as the Underwriter may
from time to time reasonably request.
(h) The Company will make generally available to its security holders
and deliver to you as soon as it is practicable to do so but in no event later
than 90 days after the end of twelve months after its current fiscal quarter, an
earnings statement (which need not be audited) covering a period of at least
twelve consecutive months beginning after the effective date of the Registration
Statement, which shall satisfy the requirements of Section 11(a) of the Act.
(i) The Company will apply the net proceeds from the sale of the Stock
for the purposes set forth under "Use of Proceeds" in the Prospectus, and will
file such reports with the Commission with respect to the sale of the Stock and
the application of the proceeds therefrom as may be required pursuant to Rule
463 under the Act.
(j) The Company will, promptly upon your request, prepare and file with
the Commission any amendments or supplements to the Registration Statement,
Preliminary
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<PAGE>
Prospectus or Prospectus and take any other action, which in the reasonable
opinion of Bachner, Tally, Polevoy & Misher LLP, counsel to the Underwriter, may
be reasonably necessary or advisable in connection with the distribution of the
Stock, and will use its best efforts to cause the same to become effective as
promptly as possible.
(k) The Company will reserve and keep available that maximum number of
its authorized but unissued shares of Common Stock which are issuable upon
exercise of the Warrants outstanding from time to time.
(l) For a period of twelve months from the First Closing Date, no
officer, director or stockholder of the Company (the "Principal Stockholders")
will offer, sell or dispose of, directly or indirectly, any shares of Common
Stock except for the Note Stock (as defined herein) without the prior written
consent of the Underwriter. For a period of six months from the First Closing
Date, no Principal Stockholder will offer, sell or dispose of directly or
indirectly, any shares of Common Stock which were issued upon conversion of
certain promissory notes, as listed in Schedule C (the "Note Stock") without the
prior written consent of the Underwriter. In order to enforce this covenant, the
Company shall impose stop-transfer instructions with respect to the shares of
Common Stock and shares of Note Stock owned by the Principal Shareholders until
the end of each such period.
(m) Upon completion of this offering, the Company will make all filings
required, including registration under the Exchange Act, to obtain the listing
of its Common Stock on the Nasdaq National Market, and will effect and maintain
such listing for at least five (5) years from the date of this Agreement.
(n) The Company and each of the Principal Stockholders represents that
it or he has not taken and agree that it or he will not take, directly or
indirectly, any action designed to or which has constituted or which might
reasonably be expected to cause or result in the stabilization or manipulation
of the price of the Stock or to facilitate the sale or resale of the Stock.
(o) On the Closing Date, and simultaneously with the delivery of the
Stock, the Company shall execute and deliver to you the Warrants. The Warrants
will be substantially in the form of the Stock Purchase Warrant filed as an
Exhibit to the Registration Statement.
(p) During the 18 month period commencing on the date of this Agreement
the Company will not, without the prior written consent of the Underwriter,
grant options to purchase shares of Common Stock at a price less than the
greater of (i) initial public offering price of the Stock or (ii) the fair
market value of the Common Stock on the date of grant. During the six month
period commencing on the date of this Agreement, the Company will not, without
the prior written consent of the Underwriter, grant options to any current
officer of the Company. During the three year period from the First Closing
Date, the Company will not,
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<PAGE>
without the prior written consent of the Underwriter offer or sell any of its
Securities pursuant to Regulation S.
(q) Scott Mednick will be President of the Company on the Closing Dates.
The Company has obtained key person life insurance on the lives of each of Scott
Mednick and Ronald Bloom in an amount of not less than $2 million and will use
its best efforts to maintain such insurance until the end of the fifth
anniversary of the First Closing Date or, if such individual's employment is
terminated prior to such date, to maintain such insurance on his successor
until the expiration of such period. For a period of thirteen months from the
First Closing Date, the compensation of the executive officers of the Company
shall not be increased from the compensation levels disclosed in the Prospectus.
(r) On the Closing Date and simultaneously with the delivery of the
Stock the Company shall execute and deliver to you a financial advisory and
consulting agreement with you, in the form previously delivered to the Company
by you (the "Advisory Agreement") along with payment of the fee due thereunder,
by certified or bank cashier's checks, in New York Clearing House Funds, payable
to the order of the Underwriter.
(s) For a period of five (5) years from the Effective Date the Company
(i) at its expense, shall cause its regularly engaged independent certified
public accountants to review (but not audit) the Company's financial statements
for each of the first three (3) fiscal quarters prior to the announcement of
quarterly financial information, the filing of the Company's 10-Q quarterly
report and the mailing of quarterly financial information to stockholders and
(ii) shall not change its accounting firm within the prior written consent of
the Chairman or the President of the Underwriter.
(t) As promptly as practicable after the Closing Date, the Company will
prepare, at its own expense, hard cover "bound volumes" relating to the
offering, and will distribute at least four of such volumes to the individuals
designated by the Underwriter or counsel to the Underwriter.
(u) The Company shall, for a period of six years after the date of this
Agreement, submit such reports to the Secretary of the Treasury and to
stockholders, as the Secretary may require, pursuant to Section 1202 of the
Internal Revenue Code, as amended, or regulations promulgated thereunder, in
order for the Company to qualify as a "small business" so that stockholders may
realize special tax treatment with respect to their investment in the Company.
(v) The Company shall not grant registration rights to any person which
are exercisable prior to 13 months after the First Closing Date.
(w) For a period of three years after the Closing Date, the Company
shall cause the transfer agent for the Company's Common Stock, at its own
expense, to provide the Underwriter, if so requested, with copies of the
Company's daily transfer sheets.
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(x) For a period of three years after the Closing Date, the Company
shall maintain BDO Seidman, LLP as the regularly engaged independent certified
public accounts to the Company, and shall not effect a change therefrom without
the prior written consent of the Underwriter; provided that no such consent
shall be necessary if the new independent certified public accountant to the
Company is a firm which is a member of the so-called "Big Six."
5. Conditions of Underwriter's Obligation. The obligations of the
---------------------------------------
Underwriter to purchase and pay for the Stock which it has agreed to purchase
hereunder, are subject to the accuracy (as of the date hereof, and as of the
Closing Dates) of and compliance with the representations and warranties of the
Company and the Selling Stockholder herein, to the performance by the Company
and the Selling Stockholder of their respective obligations hereunder, and to
the following conditions:
(a) The Registration Statement shall have become effective and you
shall have received notice thereof not later than 10:00 A.M., New York
time, on the day following the date of this Agreement, or at such later
time or on such later date as to which you may agree in writing; on or
prior to the Closing Dates no stop order suspending the effectiveness of
the Registration Statement shall have been issued and no proceedings for
that or a similar purpose shall have been instituted or shall be pending
or, to your knowledge or to the knowledge of the Company, shall be
contemplated by the Commission; any request on the part of the Commission
for additional information shall have been complied with to the reasonable
satisfaction of Bachner, Tally, Polevoy & Misher LLP, counsel to the
Underwriter; and no stop order shall be in effect denying or suspending
effectiveness of such qualification nor shall any stop order proceedings
with respect thereto be instituted or pending or threatened. If required,
the Prospectus shall have been filed with the Commission in the manner and
within the time period required by Rule 424(b) under the Act.
(b) At the First Closing Date, you shall have received the opinion,
addressed to the Underwriter, dated as of the First Closing Date, of
DeMartino, Finkelstein, Rosen & Virga, counsel for the Company, in form and
substance satisfactory to counsel for the Underwriter, to the effect that:
(i) the Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the State
of Delaware, with full corporate power and authority to own its
properties and conduct its business as described in the Registration
Statement and Prospectus and is duly qualified or licensed to do
business as a foreign corporation in New York and is in good standing in
each other jurisdiction in which the ownership or leasing of its
properties or conduct of its business requires such qualification;
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(ii) each of the Subsidiaries have been duly incorporated
and are validly existing as a corporation in good standing under the
laws of their respective states of incorporation, as set forth on
Schedule B, with full corporate power and authority to own their
properties and conduct their businesses as described in the
Registration Statement and Prospectus and are duly qualified or
licensed to do business as foreign corporations and are in good
standing in each other jurisdiction in which the ownership or leasing
of their properties or conduct of their businesses requires such
qualification;
(iii) to the best knowledge of such counsel, (a) the
Company and each of its Subsidiaries has obtained, or is in the
process of obtaining, all licenses, permits and other governmental
authorizations necessary to the conduct of its respective business as
described in the Prospectus, (b) such licenses, permits and other
governmental authorizations obtained are in full force and effect,
and (c) the Company and each of its Subsidiaries are in all material
respects complying therewith;
(iv) the authorized capitalization of the Company as of
September 30, 1996 is as set forth under "Capitalization" in the
Prospectus; all shares of the Company's outstanding stock requiring
authorization for issuance by the Company's board of directors have
been duly authorized, validly issued, are fully paid and non-
assessable and conform to the description thereof contained in the
Prospectus; the outstanding shares of Common Stock of the Company
have not been issued in violation of the preemptive rights of any
stockholder and the stockholders of the Company do not have any
preemptive rights or other rights to subscribe for or to purchase,
nor are there any restrictions upon the voting or transfer of any of
the Stock; the Stock conforms to the description thereof contained in
the Prospectus; the Stock have been duly authorized and, when issued
and delivered pursuant to this Agreement, will be duly and validly
issued, fully paid, non-assessable, free of preemptive rights and no
personal liability will attach to the ownership thereof; all prior
sales by the Company of the Company's securities have been made in
compliance with or under an exemption from registration under the Act
and applicable state securities laws and the stockholders of the
Company have no recession rights with respect to any outstanding
securities of the Company; and to the best of such counsel's
knowledge, neither the filing of the Registration Statement nor the
offering or sale of the Stock as contemplated by this Agreement gives
rise to any registration rights or other rights, other than those
which have been waived or satisfied for or relating to the
registration of any shares of Common Stock;
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<PAGE>
(v) each of this Agreement, the Warrants and the Advisory
Agreement have been duly and validly authorized, executed and
delivered by the Company and assuming due execution by each other
party hereto, constitutes a legal, valid and binding obligation of
the Company enforceable against the Company in accordance with its
respective terms (except as such enforceability may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium or
other laws of general application relating to or affecting
enforcement of creditors' rights and the application of equitable
principles in any action, legal or equitable, and except as rights to
indemnity or contribution may be limited by applicable law);
(vi) the certificates evidencing the Stock are in due and
proper form; the Warrants will be exercisable for shares of Common
Stock of the Company in accordance with the terms of the Warrants and
at the prices therein provided for; at all times during the term of
the Warrants the shares of Common Stock of the Company issuable upon
exercise of the Warrants have been duly authorized and reserved for
issuance upon such exercise and such shares, when issued upon such
exercise in accordance with the terms of the Warrants and at the
price provided for, will be duly and validly issued, fully paid and
non-assessable;
(vii) such counsel knows of no pending or threatened legal
or governmental proceedings to which the Company or any of its
Subsidiaries is a party which could materially adversely affect the
respective businesses, properties, financial conditions or operations
of the Company or any of its Subsidiaries; or which question the
validity of the Common Stock of the Company, the Stock, this
Agreement, the Warrants or the Advisory Agreement, or of any action
taken or to be taken by the Company pursuant to this Agreement, the
Warrants or the Advisory Agreement, and no such proceedings are known
to such counsel to be contemplated against the Company or any of its
Subsidiaries; there are no governmental proceedings or regulations
required to be described or referred to in the Registration Statement
which are not so described or referred to;
(viii) neither the Company nor any of its Subsidiaries is in
violation of or default under, nor will the execution and delivery of
this Agreement, the Warrants or the Advisory Agreement, and the
incurrence of the obligations herein or therein set forth and the
consummation of the transactions herein or therein contemplated,
result in a breach or violation of, or constitute a default under the
respective certificate or articles of incorporation or by-laws, in
the performance or observance of any material obligations, agreement,
covenant or condition contained in any bond,
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<PAGE>
debenture, note or other evidence of indebtedness or in any contract,
indenture, mortgage, loan agreement, lease, joint venture or other
agreement or instrument to which the Company or any of its
Subsidiaries is a party or by which the Company or any of its
Subsidiaries or any of their respective properties may be bound or in
violation of any material order, rule, regulation, writ, injunction,
or decree of any government, governmental instrumentality or court,
domestic or foreign;
(ix) the Registration Statement has become effective under
the Act, and to the best of such counsel's knowledge, no stop order
suspending the effectiveness of the Registration Statement is in
effect, and no proceedings for that purpose have been instituted or
are pending before, or threatened by, the Commission; the
Registration Statement and the Prospectus (except for the financial
statements and other financial data contained therein, or omitted
therefrom, as to which such counsel need express no opinion) comply
as to form in all material respects with the applicable requirements
of the Act and the Rules and Regulations;
(x) such counsel has participated in the preparation of
the Registration Statement and the Prospectus and nothing has come to
the attention of such counsel to cause such counsel to have reason to
believe that the Registration Statement or any amendment thereto at
the time it became effective or as of the Closing Dates contained any
untrue statement of a material fact required to be stated therein or
omitted to state any material fact required to be stated therein or
necessary to make the statements therein not misleading or that the
Prospectus or any supplement thereto contains any untrue statement of
a material fact or omits to state a material fact necessary in order
to make statements therein, in light of the circumstances under which
they were made, not misleading (except, in the case of both the
Registration Statement and any amendment thereto and the Prospectus
and any supplement thereto, for the financial statements, notes
thereto and other financial information and schedules contained
therein, as to which such counsel need express no opinion);
(xi) all descriptions in the Registration Statement and
the Prospectus, and any amendment or supplement thereto, of contracts
and other documents are accurate and fairly present the information
required to be shown, and such counsel is familiar with all contracts
and other documents referred to in the Registration Statement and the
Prospectus and any such amendment or supplement or filed as exhibits
to the Registration Statement, and such counsel does not know of any
contracts or documents of a character required to be summarized or
described therein or to be filed as exhibits thereto which are not so
summarized, described or filed;
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<PAGE>
(xii) no authorization, approval, consent, or license of
any governmental or regulatory authority or agency is necessary in
connection with the authorization, issuance, transfer, sale or
delivery of the Stock by the Company, in connection with the
execution, delivery and performance of this Agreement by the Company
or in connection with the taking of any action contemplated herein,
or the issuance of the Warrants or the Common Stock underlying the
Warrants, other than registrations or qualifications of the Stock
under applicable state or foreign securities or Blue Sky laws and
registration under the Act;
(xiii) the statements in the Registration Statement under
the captions "Business", "Use of Proceeds", "Management", and
"Description of Common Stock" have been reviewed by such counsel and
insofar as they refer to descriptions of agreements, statements of
law, descriptions of statutes, licenses, rules or regulations or
legal conclusions, are correct in all material respects; and
(xiv) the Stock has been duly authorized for quotation on
the Nasdaq National Market.
Such opinion shall also cover such matters incident to the
transactions contemplated hereby as the Underwriter or counsel for the
Underwriter shall reasonably request. In rendering such opinion, such
counsel may rely upon certificates of any officer of the Company or
public officials as to matters of fact; and may rely as to all matters of
law other than the law of the United States or of the State of Delaware
upon opinions of counsel satisfactory to you, in which case the opinion
shall state that they have no reason to believe that you and they are not
entitled to so rely.
(c) All corporate proceedings and other legal matters relating to
this Agreement, the Registration Statement, the Prospectus and other
related matters shall be satisfactory to or approved by Bachner, Tally,
Polevoy & Misher LLP, counsel to the Underwriter, and you shall have
received from such counsel a signed opinion, dated as of the First
Closing Date, with respect to the validity of the issuance of the Stock,
the form of the Registration Statement and Prospectus (other than the
financial statements and other financial data contained therein), the
execution of this Agreement and other related matters as you may
reasonably require. The Company shall have furnished to counsel for the
Underwriter such documents as they may reasonably request for the purpose
of enabling them to render such opinion.
(d) You shall have received a letter prior to the effective date of
the Registration Statement and again on and as of the First Closing Date
from BDO Seidman, LLP, independent public accountants for the Company,
substantially in
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<PAGE>
the form approved by you, and including estimates of the Company's
revenues and results of operations for the period ending at the end of
the month immediately preceding the effective date and results of the
comparable period during the prior fiscal year.
(e) At the Closing Dates, (i) the representations and warranties of
the Company contained in this Agreement shall be true and correct with
the same effect as if made on and as of the Closing Dates and the Company
shall have performed all of its obligations hereunder and satisfied all
the conditions on its part to be satisfied at or prior to such Closing
Date, (ii) the Registration Statement and the Prospectus and any
amendments or supplements thereto shall contain all statements which are
required to be stated therein in accordance with the Act and the Rules
and Regulations, and in all material respects conform to the requirements
thereof, and neither the Registration Statement nor the Prospectus nor
any amendment or supplement thereto shall contain any untrue statement of
a material fact or omit to state any material fact required to be stated
therein or necessary to make the statements therein not misleading,
(iii) there shall have been, since the respective dates as of which
information is given, no material adverse change, or any development
involving a prospective material adverse change in the respective
businesses, properties or conditions (financial or otherwise), results of
operations, capital stock, long-term or short-term debt or general
affairs of the Company or any of its Subsidiaries from that set forth in
the Registration Statement and the Prospectus, except changes which the
Registration Statement and Prospectus indicate might occur after the
effective date of the Registration Statement, and the neither Company nor
any of its Subsidiaries shall have incurred any material liabilities or
agreement not in the ordinary course of business other than as referred
to in the Registration Statement and Prospectus; and (iv) except as set
forth in the Prospectus, no action, suit or proceeding at law or in
equity shall be pending or threatened against the Company or any of its
Subsidiaries which would be required to be set forth in the Registration
Statement, and no proceedings shall be pending or threatened against the
Company or any of its Subsidiaries before or by any commission, board or
administrative agency in the United States or elsewhere, wherein an
unfavorable decision, ruling or finding would materially and adversely
affect the respective businesses, properties, conditions (financial or
otherwise), results of operations or general affairs of the Company or
any of its Subsidiaries, and (v) you shall have received, at the First
Closing Date, a certificate signed by each of the Chairman of the Board
or the President and the principal financial or accounting officer of the
Company, dated as of the First Closing Date, evidencing compliance with
the provisions of this subsection (e).
(f) Upon exercise of the option provided for in Section 3(b) hereof,
the obligations of the Underwriter to purchase and pay for the Option
Stock referred
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to therein will be subject (as of the date hereof and as of the Option
Closing Date) to the following additional conditions:
(i) The Registration Statement shall remain effective at
the Option Closing Date, and no stop order suspending the
effectiveness thereof shall have been issued and no proceedings for
that purpose shall have been instituted or shall be pending, or, to
your knowledge or the knowledge of the Company, shall be contemplated
by the Commission, and any reasonable request on the part of the
Commission for additional information shall have been complied with
to the satisfaction of Bachner, Tally, Polevoy & Misher LLP, counsel
to the Underwriter.
(ii) At the Option Closing Date there shall have been
delivered to you the signed opinion of DeMartino, Finkelstein, Rosen
& Virga, counsel for the Company, dated as of the Option Closing
Date, in form and substance satisfactory to Bachner, Tally, Polevoy &
Misher LLP, counsel to the Underwriter which opinion shall be
substantially the same in scope and substance as the opinion
furnished to you at the First Closing Date pursuant to Section 5(b),
except that such opinion, where appropriate, shall cover the Option
Stock.
(iii) At the Option Closing Date there shall have been
delivered to you a signed opinion of DeMartino, Finkelstein, Rosen &
Virga, counsel for the Selling Stockholder, dated the Option Closing
Date, to the effect that:
(A) this Agreement has been duly executed and
delivered by or on behalf of each of the Selling Stockholder;
(B) to such counsel's knowledge, after due inquiry,
the execution and delivery by the Selling Stockholder of, and
the performance by the Selling Stockholder of its obligations
under this Agreement, the Custody Agreement and the Power of
Attorney of the Selling Stockholder will not contravene any
provision of laws of the United States or of New York, or, to
the best of such counsel's knowledge, any agreement or other
instrument binding upon the Selling Stockholder or, to the
best of such counsel's knowledge, any judgment, order or
decree of any governmental body, agency or court having
jurisdiction over the Selling Stockholder, and no consent,
approval, authorization or order of, or qualification with,
any governmental body or agency is required for the
performance by the Selling Stockholder of its obligations
under this Agreement, the Custody Agreement or the Power of
Attorney of the Selling Stockholder, except such as may be
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<PAGE>
required by the securities or "blue sky" laws of the various
states in connection with offer and sale of the Stock;
(C) each of the Custody Agreement and the Power of
Attorney of the Selling Stockholder has been duly executed
and delivered by the Selling Stockholder and is a valid and
binding agreement of the Selling Stockholder;
(D) assuming the Underwriter acquires its interest
in the Stock to be sold by the Selling Stockholder in good
faith and without notice of any adverse claims, delivery of
the Stock to be sold by the Selling Stockholder pursuant to
this Agreement will pass title to such Stock free and clear
of any security interests, claims, liens, securities interest
and other encumbrances; and
(iii) At the Option Closing Date there shall have been
delivered to you a certificate of the Chairman of the Board or the
President and the principal financial or accounting officer of the
Company, dated the Option Closing Date, in form and substance
satisfactory to Bachner, Tally, Polevoy & Misher LLP, counsel to the
Underwriter, substantially the same in scope and substance as the
certificate furnished to you at the First Closing Date pursuant to
Section 5(e).
(iv) At the Option Closing Date there shall have been
delivered to you a letter in form and substance satisfactory to you
from BDO Seidman, LLP, dated the Option Closing Date and addressed to
the Underwriters confirming the information in their letter referred
to in Section 5(d) hereof and stating that nothing has come to their
attention during the period from the ending date of their review
referred to in said letter to a date not more than five business days
prior to the Option Closing Date, which would require any change in
said letter if it were required to be dated the Option Closing Date.
(v) All proceedings taken at or prior to the Option
Closing Date in connection with the sale and issuance of the Option
Stock shall be satisfactory in form and substance to you, and you and
Bachner, Tally, Polevoy & Misher LLP, counsel to the Underwriter,
shall have been furnished with all such documents, certificates,
affidavits and opinions as you may request in connection with this
transaction in order to evidence the accuracy and completeness of any
of the representations, warranties or statements of the Company and
the Selling Stockholder or their compliance with any of the covenants
or conditions contained herein.
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<PAGE>
(g) No action shall have been taken by the Commission or the NASD the
effect of which would make it improper, at any time prior to the Closing
Date, for members of the NASD to execute transactions (as principal or
agent) in the Common Stock and no proceedings for the taking of such
action shall have been instituted or shall be pending, or, to the
knowledge of the Underwriter or the Company, shall be contemplated by the
Commission or the NASD. The Company represents that at the date hereof it
has no knowledge that any such action is in fact contemplated by the
Commission or the NASD. The Company shall advise the Underwriter of any
NASD affiliation of any of its officers, directors, stockholders or their
affiliates.
If any of the conditions herein provided for in this Section shall not
have been fulfilled as of the date indicated, this Agreement and all obligations
of the Underwriter under this Agreement may be cancelled at, or at any time
prior to, each Closing Date by the Representative. Any such cancellation shall
be without liability of the Underwriter to the Company or the Selling
Stockholder.
6. Conditions of the Obligations of the Company. The obligation of the
---------------------------------------------
Company to sell and deliver the Stock is subject to the following conditions:
(a) The Registration Statement shall have become effective not
later than 10:00 A.M. New York time, on the day following the date of
this Agreement, or on such later date as the Company and the Underwriter
may agree to in writing.
(b) At the Closing Dates, no stop orders suspending the
effectiveness of the Registration Statement shall have been issued under
the Act or any proceedings therefor initiated or threatened by the
Commission.
If the conditions to the obligations of the Company provided for in this
Section have been fulfilled on the First Closing Date but are not fulfilled
after the First Closing Date and prior to the Option Closing Date, then only the
obligation of the Company and the Selling Stockholders to sell and deliver the
Stock on exercise of the option provided for in Section 3(b) hereof shall be
affected.
7. Indemnification.
---------------
(a) The Company agrees to indemnify and hold harmless the
Underwriter and each person, if any, who controls the Underwriter within the
meaning of the Act against any losses, claims, damages or liabilities, joint or
several (which shall, for all purposes of this Agreement, include, but not be
limited to, all reasonable costs of defense and investigation and all attorneys'
fees), to which the Underwriter or such controlling person may become subject,
under the Act or otherwise, and will reimburse, as incurred, the Underwriter and
such controlling persons for any legal or other expenses reasonably incurred in
connection with investigating, defending against or appearing as a third party
witness in connection with any losses, claims,
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damages or liabilities, insofar as such losses, claims, damages or liabilities
(or actions in respect thereof) arise out of or are based upon any untrue
statement or alleged untrue statement of any material fact contained in (A) the
Registration Statement, any Preliminary Prospectus, the Prospectus, or any
amendment or supplement thereto, (B) any blue sky application or other document
executed by the Company specifically for that purpose or based upon written
information furnished by the Company filed in any state or other jurisdiction in
order to qualify any or all of the Stock under the securities laws thereof (any
such application, document or information being hereinafter called a "Blue Sky
Application"), or arise out of or are based upon the omission or alleged
omission to state in the Registration Statement, any Preliminary Prospectus,
Prospectus, or any amendment or supplement thereto, or in any Blue Sky
Application, a material fact required to be stated therein or necessary to make
the statements therein not misleading; provided, however, that the Company will
not be liable in any such case to the extent, but only to the extent, that any
such loss, claim, damage or liability arises out of or is based upon an untrue
statement or alleged untrue statement or omission or alleged omission made in
reliance upon and in conformity with written information furnished to the
Company by or on behalf of the Underwriter specifically for use in the
preparation of the Registration Statement or any such amendment or supplement
thereof or any such Blue Sky Application or any such preliminary Prospectus or
the Prospectus or any such amendment or supplement thereto. This indemnity will
be in addition to any liability which the Company may otherwise have.
(b) To the extent the over-allotment option is exercised and the
Selling Stockholder sells Stock hereunder, the Selling Stockholder agrees to
indemnify and hold harmless (i) the Company, its directors, its officers who
sign the Registration Statement and each person, if any, who controls the
Company with the meaning of either Section 15 of the Securities Act or Section
20 of the Exchange Act and (ii) the Underwriter and each person, if any, who
controls the Underwriter within the meaning of Section 15 of the Securities Act
or Section 20 of the Exchange Act, from and against any and all losses, claims,
damages and liabilities (including, without limitation, any legal or other
expenses reasonably incurred in connection with defending or investigating any
such action or claim) caused by any untrue statement or alleged untrue statement
of a material fact contained in the Registration Statement or any amendment
thereof, any Preliminary Prospectus or the Prospectus (as amended or
supplemented if the Company shall have furnished any amendments or supplements
thereto), or caused by any omission or alleged untrue statement or omission
based upon information relating to the Underwriter furnished to the Company in
writing by or on behalf of the Underwriter expressly for use therein; provided,
--------
however, that with respect to any amount due to an indemnified person under this
- -------
Section 7, the Selling Stockholder shall be liable only the extent of the net
proceeds received by the Selling Stockholder from the sale of the Selling
Stockholder's Stock; provided further, however, that the indemnification
-------- ------- -------
provided by the Selling Stockholder to the Company shall only be with reference
to information relating to the Selling Stockholder furnished in writing by or on
behalf of the Selling Stockholder expressly for use in the Registration
Statement, any Preliminary Prospectus, the Prospectus or any amendments or
supplements thereto. The Underwriter will make no claim hereunder of the Selling
Stockholder until a period of at last six months after the Underwriter
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<PAGE>
have made a claim against the Company hereunder and such claim remains
unsatisfied or has been rejected.
(c) The Underwriter will indemnify and hold harmless the Company, the
Selling Stockholder, each of the Company's directors, each nominee (if any) for
director of the Company named in the Prospectus, each of the Company's officers
who have signed the Registration Statement, and each person, if any, who
controls the Company or the Selling Stockholder within the meaning of the Act,
against any losses, claims, damages or liabilities (which shall, for all
purposes of this Agreement, include, but not be limited to, all costs of defense
and investigation and all attorneys' fees) to which the Company or the Selling
Stockholder or any such director, nominee, officer or controlling person may
become subject under the Act or otherwise, insofar as such losses, claims,
damages or liabilities (or actions in respect thereof) arise out of or are based
upon any untrue statement or alleged untrue statement of any material fact
contained in the Registration Statement, any Preliminary Prospectus, the
Prospectus, or any amendment or supplement thereto, or arise out of or are based
upon the omission or the alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading, in each case to the extent, but only to the extent, that such untrue
statement or alleged untrue statement or omission or alleged omission was made
in the Registration Statement, any Preliminary Prospectus, the Prospectus, or
any amendment or supplement thereto, (i) in reliance upon and in conformity with
written information furnished to the Company or the Selling Stockholder by you
specifically for use in the preparation thereof and (ii) relates to the
transactions effected by the Underwriter in connection with the offer and sale
of the Stock contemplated hereby. This indemnity agreement will be in addition
to any liability which the Underwriter may otherwise have.
(d) Promptly after receipt by an indemnified party under this
Section 7 of notice of the commencement of any action, such indemnified party
will, if a claim in respect thereof is to be made against the indemnifying party
under this Section, notify in writing the indemnifying party of the commencement
thereof; but the omission so to notify the indemnifying party will not relieve
it from any liability which it may have to any indemnified party otherwise than
under this Section. In case any such action is brought against any indemnified
party, and it notifies the indemnifying party of the commencement thereof, the
indemnifying party will be entitled to participate in, and, to the extent that
it may wish, jointly with any other indemnifying party similarly notified, to
assume the defense thereof, subject to the provisions herein stated, with
counsel reasonably satisfactory to such indemnified party, and after notice from
the indemnifying party to such indemnified party of its election so to assume
the defense thereof, the indemnifying party will not be liable to such
indemnified party under this Section for any legal or other expenses
subsequently incurred by such indemnified party in connection with the defense
thereof other than reasonable costs of investigation. The indemnified party
shall have the right to employ separate counsel in any such action and to
participate in the defense thereof, but the fees and expenses of such counsel
shall not be at the expense of the indemnifying party if the indemnifying party
has assumed the defense of the action with counsel reasonably satisfactory to
the indemnified party; provided that if the indemnified party is an Underwriter
or a person who controls such Underwriter within the meaning of the Act, the
fees and expenses of
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<PAGE>
such counsel shall be at the expense of the indemnifying party if (i) the
employment of such counsel has been specifically authorized in writing by the
indemnifying party or (ii) the named parties to any such action (including any
impleaded parties) include both such Underwriter or such controlling person and
the indemnifying party and in the judgment of the Underwriter, it is advisable
for the Underwriter or controlling persons to be represented by separate counsel
(in which case the indemnifying party shall not have the right to assume the
defense of such action on behalf of such Underwriter or such controlling person,
it being understood, however, that the indemnifying party shall not, in
connection with any one such action or separate but substantially similar or
related actions in the same jurisdiction arising out of the same general
allegations or circumstances, be liable for the reasonable fees and expenses of
more than one separate firm of attorneys for all such Underwriters and
controlling persons, which firm shall be designated in writing by you). No
settlement of any action against an indemnified party shall be made without the
consent of the indemnifying party, which shall not be unreasonably withheld in
light of all factors of importance to such indemnifying party.
8. Contribution. In order to provide for just and equitable
------------
contribution under the Act in any case in which (i) the Underwriter makes claim
for indemnification pursuant to Section 7 hereof but it is judicially determined
(by the entry of a final judgment or decree by a court of competent jurisdiction
and the expiration of time to appeal or the denial of the last right of appeal)
that such indemnification may not be enforced in such case, notwithstanding the
fact that the express provisions of Section 7 provide for indemnification in
such case, or (ii) contribution under the Act may be required on the part of the
Underwriter, then the Company and each person who controls the Company and the
Selling Stockholder, in the aggregate, and the Underwriter shall contribute to
the aggregate losses, claims, damages or liabilities to which they may be
subject (which shall, for all purposes of this Agreement, include, but not be
limited to, all reasonable costs of defense and investigation and all reasonable
attorneys' fees) in either such case (after contribution from others) in such
proportions that the Underwriter is responsible, and the Company and the Selling
Stockholder shall be responsible for the remaining portion, provided, however,
that the Selling Stockholder shall not be required to contribute an amount in
excess of the amount of net proceeds from the sale of the Selling Stockholder's
Stock, and further provided that (a) if such allocation is not permitted by
applicable law then the relative fault of the Company, the Selling Stockholder
and the Underwriter and controlling persons, in the aggregate, in connection
with the statements or omissions which resulted in such damages and other
relevant equitable considerations shall also be considered. The relative fault
shall be determined by reference to, among other things, whether in the case of
an untrue statement of a material fact or the omission to state a material fact,
such statement or omission relates to information supplied by the Company or the
Selling Stockholder, or the Underwriter and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
untrue statement or omission. The Company , the Selling Stockholder and the
Underwriter agree that (a) it would not be just and equitable if the respective
obligations of the Company and the Selling Stockholder and the Underwriter to
contribute pursuant to this Section 8 were to be determined by pro rata or per
capita allocation of the aggregate damages (even if the Underwriter and its
controlling persons in the aggregate were treated as one entity for such
purpose) or by any other method of allocation that does not take account of the
equitable considerations referred to in the
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<PAGE>
first sentence of this Section 8, (b) that the contribution of the Underwriter
shall not be in excess of its proportionate share of the portion of such losses,
claims, damages or liabilities for which the Underwriter is responsible and
(c) that the Selling Stockholder shall not be required to contribute an amount
in excess of the amount of net proceeds from the sale of the Selling
Stockholder's Stock. No person guilty of a fraudulent misrepresentation (within
the meaning of Section 11(f) of the Act) shall be entitled to contribution from
any person who is not guilty of such fraudulent misrepresentation. As used in
this paragraph, the term "Underwriter" includes any officer, director, or other
person who controls the Underwriter within the meaning of Section 15 of the Act
and the words "Company" and "Selling Stockholder" include any officer, director,
or person who controls the Company or any Selling Stockholder within the meaning
of Section 15 of the Act. If the full amount of the contribution specified in
this paragraph is not permitted by law, then the Underwriter and each person who
controls the Underwriter shall be entitled to contribution from the Company, its
officers, directors and controlling persons, and the Selling Stockholder and its
controlling persons to the full extent permitted by law. The foregoing
contribution agreement shall in no way affect the contribution liabilities of
any persons having liability under Section 11 of the Act other than the Company,
the Selling Stockholder and the Underwriter. No contribution shall be requested
with regard to the settlement of any matter from any party who did not consent
to the settlement; provided, however, that such consent shall not be
unreasonably withheld in light of all factors of importance to such party.
9. Costs and Expenses.
------------------
(a) The Selling Stockholder agrees to pay or cause to be paid (i) all
taxes, if any, on the transfer and sale of the Stock being sold by the Selling
Stockholder and (ii) the Selling Stockholder's pro rata share (determined by
--- ----
dividing the number of shares of Stock sold by the Selling Stockholder by the
total number of shares of Stock sold by the Company and the Selling Stockholders
in the aggregate) of all costs and expenses incident to the performance of the
obligations of the Selling Stockholder and the Company under this Agreement, and
the fees, disbursements and expenses of counsel for the Selling Stockholder;
provided, however, that the Selling Stockholder shall not be liable for the
aforementioned expenses to the extent such expenses are paid by the Company.
(b) Whether or not this Agreement becomes effective or the sale of
the Stock to the Underwriter is consummated, the Company will pay all costs and
expenses incident to the performance of this Agreement by the Company including,
but not limited to, the fees and expenses of counsel to the Company; provided
however that the Selling Stockholder shall not be liable for the aforementioned
expenses to the extent such expenses are paid by the Company and of the
Company's accountants; the costs of investigative reports regarding the Company,
its principal stockholders and/or its officers and directors and each of its
Subsidiaries; the costs and expenses incident to the preparation, printing,
filing and distribution under the Act of the Registration Statement (including
the financial statements therein and all amendments and exhibits thereto),
Preliminary Prospectus and the Prospectus, as amended or supplemented, the fee
of the NASD in connection with the filing required by the NASD relating to the
offering of the Stock contemplated hereby; all expenses, including reasonable
fees and disbursements of
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counsel to the Underwriter, in connection with the qualification of the Stock
under the state securities or blue sky laws which the Underwriter shall
designate; the cost of printing and furnishing to the Underwriter copies of the
Registration Statement, each Preliminary Prospectus, the Prospectus, this
Agreement, the Selling Agreement, Underwriter's Questionnaire, Underwriter's
Power of Attorney and the Blue Sky Memorandum, any fees relating to the listing
of the Common Stock on the Nasdaq National Market or other securities exchange,
the cost of printing the certificates representing the Stock, the fees of the
transfer agent, the cost of publication of at least three "tombstones" of the
offering (at least one of which shall be in a national business newspaper and
one of which shall be in a major New York newspaper and the cost of preparing at
least four hard cover "bound volumes" relating to the offering for individuals
designated by the Underwriter. The Company shall pay any and all taxes
(including any transfer, franchise, capital stock or other tax imposed by any
jurisdiction) on sales to the Underwriters hereunder. The Company will also pay
all cost and expenses incident to the furnishing of any amended Prospectus or of
any supplement to be attached to the Prospectus as called for in Section 4(a) of
this Agreement except as otherwise set forth in said Section.
(b) In addition to the foregoing expenses the Company shall at the
First Closing Date pay to Commonwealth Associates in its individual rather than
representative capacity, a non-accountable expense allowance of $________ of
which $35,000 has been paid. In the event the overallotment option is exercised,
the Company shall pay to Commonwealth Associates at the Option Closing Date an
additional amount equal to 1% of the gross proceeds from the sale of Stock by
the Company on exercise of the overallotment option. In the event the
transactions contemplated hereby are not consummated by reason of any action by
the Underwriter (except if such prevention is based upon a breach by the Company
of any covenant, representation or warranty contained herein or because any
other condition to the Underwriter's obligations hereunder required to be
fulfilled by the Company is not fulfilled) the Company shall be liable for the
accountable expenses of the Underwriter, including legal fees. In the event the
transactions contemplated hereby are not consummated by reason of any action of
the Company or because of a breach by the Company of any covenant,
representation or warranty herein, the Company shall be liable for the
accountable expenses of the Underwriter, including legal fees.
(c) No person is entitled either directly or indirectly to
compensation from the Company, from the Underwriter or from any other person for
services as a finder in connection with the proposed offering, and the Company
agrees to indemnify and hold harmless the Underwriter, against any losses,
claims, damages or liabilities, joint or several (which shall, for all purposes
of this Agreement, include, but not be limited to, all costs of defense and
investigation and all attorneys' fees), to which the Company, the Underwriter or
such other person may become subject insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon the
claim of any person (other than an employee of the party claiming indemnity) or
entity that he or it is entitled to a finder's fee in connection with the
proposed offering by reason of such person's or entity's influence or prior
contact with the indemnifying party.
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10. Effective Date. The Agreement shall become effective upon its
--------------
execution except that you may, at your option, delay its effectiveness until
11:00 A.M., New York time on the first full business day following the effective
date of the Registration Statement, or at such earlier time after the effective
date of the Registration Statement as you in your discretion shall first
commence the initial public offering by the Underwriter of any of the Stock.
The time of the initial public offering shall mean the time of release by you of
the first newspaper advertisement with respect to the Stock, or the time when
the Stock is first generally offered by you to dealers by letter or telegram,
whichever shall first occur. This Agreement may be terminated by you at any
time before it becomes effective as provided above, except that Sections 4(c),
7, 8, 9, 13, 14, 15 and 16 shall remain in effect notwithstanding such
termination.
12. Termination.
-----------
(a) This Agreement, except for Sections 4(c), 7, 8, 9, 12, 13, 14,
15 and 16 hereof, may be terminated at any time prior to the First Closing Date,
and the option referred to in Section 3(b) hereof, if exercised, may be
cancelled at any time prior to the Option Closing Date, by you if in your
judgment it is impracticable to offer for sale or to enforce contracts made by
the Underwriter for the resale of the Stock agreed to be purchased hereunder by
reason of (i) the Company having sustained a material loss, whether or not
insured, by reason of fire, earthquake, flood, accident or other calamity, or
from any labor dispute or court or government action, order or decree;
(ii) trading in securities on the New York Stock Exchange, the American Stock
Exchange, the Nasdaq SmallCap Market or the Nasdaq National Market having been
suspended or limited; (iii) material governmental restrictions having been
imposed on trading in securities generally (not in force and effect on the date
hereof); (iv) a banking moratorium having been declared by federal or New York
state authorities; (v) an outbreak of international hostilities or other
national or international calamity or crisis or change in economic or political
conditions having occurred; (vi) a pending or threatened legal or governmental
proceeding or action relating generally to either of the Company's or any of its
Subsidiaries businesses, or a notification having been received by the Company
or any of its Subsidiaries of the threat of any such proceeding or action, which
could materially adversely affect the Company or any of its Subsidiaries;
(vii) except as contemplated by the Prospectus, the Company or any of its
Subsidiaries are merged or consolidated into or all or substantially all of the
capital stock or assets of the Company or any of its Subsidiaries are acquired
by another company or group or there exists a binding legal commitment for the
foregoing or any other material change of ownership or control occurs;
(viii) the passage by the Congress of the United States or by any state
legislative body, or federal or state agency or other authority of any act,
measure, rule or regulation, or the adoption of any orders, rules or regulations
by any governmental body or any authoritative accounting institute or board, or
any governmental executive, which is reasonably believed likely by the
Underwriter to have a material impact on the respective businesses, financial
conditions or financial statements of the Company or any of its Subsidiaries or
the market for the securities offered pursuant to the Prospectus; (ix) any
adverse change in the financial or securities markets beyond normal market
fluctuations, having occurred since the date of this Agreement, or (x) any
material adverse change having occurred, since the respective dates of which
information is given in the Registration Statement and Prospectus, in the
respective
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earnings, businesses, prospects or general conditions of the Company or any of
its Subsidiaries, financial or otherwise, whether or not arising in the ordinary
course of business.
(b) If you elect to prevent this Agreement from becoming effective
or to terminate this Agreement as provided in this Section 11 or in Section 10,
the Company shall be promptly notified by you, by telephone or telegram,
confirmed by letter.
12. Warrants. At or before the First Closing Date, the Company will sell
--------
to Commonwealth Associates, or its designees for a consideration of $200, and
upon the terms and conditions set forth in the form of Warrant annexed as an
exhibit to the Registration Statement, Warrants to purchase an aggregate of
200,000 shares of Common Stock of the Company. In the event of conflict in the
terms of this Agreement and the Warrants, the language of the Warrants shall
control.
13. Representations, Warranties and Agreements to Survive Delivery. The
--------------------------------------------------------------
respective indemnities, agreements, representations, warranties and other
statements of the Company or its Principal Stockholder and the Selling
Stockholder where appropriate, and the Underwriter set forth in or made pursuant
to this Agreement will remain in full force and effect, regardless of any
investigation made by or on behalf of the Underwriter, the Company or any of its
officers or directors or any controlling person or the Selling Stockholder and
will survive delivery of and payment of the Stock and the termination of this
Agreement.
14. Notice. Any communications specifically required hereunder to be in
------
writing, if sent to the Underwriter, will be mailed, delivered or telegraphed
and confirmed to it at Commonwealth Associates, 733 Third Avenue, New York, New
York 10017 with a copy sent to Bachner, Tally, Polevoy & Misher LLP,
380 Madison Avenue, New York, New York 10017, or if sent to the Company, will be
mailed, delivered or telegraphed and confirmed to it at 45 West 36th Street, New
York, New York 10018, with a copy sent to DeMartino, Finkelstein, Rosen & Virga,
1818 N Street, N.W., Washington D.C. 20036.
15. Parties in Interest. The Agreement herein set forth is made solely
-------------------
for the benefit of the Underwriter, the Company and, to the extent expressed,
the Principal Stockholders, the Selling Stockholder and any person controlling
the Company or the Underwriter or the Selling Stockholder, and directors of the
Company, nominees for directors (if any) named in the Prospectus, its officers
who have signed the Registration Statement, and their respective executors,
administrators, successors, and assigns and no other person shall acquire or
have any right under or by virtue of this Agreement. The term "successors and
assigns" shall not include any purchaser, as such purchaser, from the
Underwriter of the Stock.
16. Applicable Law. This Agreement will be governed by, and construed in
--------------
accordance with, the laws of the State of New York applicable to agreements made
and to be entirely performed within New York.
-30-
<PAGE>
If the foregoing is in accordance with your understanding of our
agreement, kindly sign and return this agreement, whereupon it will become a
binding agreement between the Company, the Selling Stockholder and the
Underwriter in accordance with its terms.
Very truly yours,
THINK NEW IDEAS, INC.
By:
------------------------------------
Scott Mednick, Chairman and Chief
Executive Officer
The Selling Stockholder named in
Schedule A hereto, acting generally
By:
------------------------------------
Attorney-in-fact
The foregoing Underwriting Agreement is hereby confirmed and accepted
as of the date first above written.
COMMONWEALTH ASSOCIATES
By:
------------------------------------
Robert Beuret, Vice Chairman
By:
------------------------------------
Basil Aschuitto, Chief Operating
Officer
We hereby agree to be bound by the provisions of 3(k),(l), and (n) and 13
hereof.
- ----------------------------------------
- ----------------------------------------
- ----------------------------------------
-31-
<PAGE>
SCHEDULE A
<TABLE>
<CAPTION>
Maximum
Number of shares
of Option Stock
Selling Stockholder To be Sold
------------------- ----------------
<S> <C>
Benchmark Equity Group 200,000
Total: 200,000
-------
===========
</TABLE>
<PAGE>
SCHEDULE B
<TABLE>
<CAPTION>
State of
Subsidiary Incorporation
-------------- -----------------
<S> <C>
Scott Mednick & Associates, Inc.
On Ramp, Inc.
Internet One, Inc.
Creative Resources Agency, Inc.
S.D. Goodman Group, Inc.
NetCube Corporation
</TABLE>
<PAGE>
SCHEDULE C
Number of shares
Principal Stockholders of Note Stock
---------------------- ----------------
<PAGE>
************************************************************************
STOCK PURCHASE WARRANT
To Purchase Common Stock of
THINK NEW IDEAS, INC.
************************************************************************
<PAGE>
COMMONWEALTH ASSOCIATES
2,000,000 Shares
THINK NEW IDEAS, INC.
Common Stock
UNDERWRITING AGREEMENT
----------------------
Commonwealth Associates
733 Third Avenue
New York, New York 10017
THINK New Ideas, Inc., a Delaware corporation (the "Company"), proposes to
issue and sell to Commonwealth Associates (the "Underwriter"), pursuant to this
Underwriting Agreement (the "Agreement"), an aggregate of 2,000,000 shares (the
"Stock") of Common Stock, $.0001 par value (such class of stock being herein
called the "Common Stock"), of the Company. In addition, the Company and a
certain stockholder of the Company named in Schedule A hereto (the "Selling
Stockholder") severally proposed to grant to the Underwriter the option referred
to in Section 3(b) hereof to purchase all or any part of an aggregate of
300,000 additional shares of Common Stock, the Selling Stockholder selling not
more than the number of shares set forth opposite the Selling Stockholder's name
in Schedule B hereto, if and to the extent that you shall have determined to
exercise the right to purchase such shares of Common Stock. Unless the context
otherwise indicates, the term "Stock" shall include the 300,000 additional
shares referred to above.
You have advised the Company that you desire to purchase the Stock. The
Company confirms the agreement made by it with respect to the purchase of the
Stock by you as follows:
1. Representations and Warranties of the Company. The Company represents
---------------------------------------------
and warrants to, and agrees with, the Underwriter that:
(a) A registration statement (File No. 333-12795) on Form SB-2 relating
to the public offering of the Stock, including a form of prospectus subject to
completion, copies of which have heretofore been delivered to you, has been
prepared by the Company in conformity with the requirements of the Securities
Act of 1933, as amended (the "Act"), and the rules and regulations (the "Rules
and Regulations") of the Securities and Exchange Commission (the "Commission")
thereunder, and has been filed with the Commission under the Act and one or more
amendments to such registration statement may have been so filed. After the
execution of this Agreement, the Company will file with the Commission either
(i) if such registration
<PAGE>
statement, as it may have been amended, has been declared by the Commission to
be effective under the Act, a prospectus in the form most recently included in
an amendment to such registration statement (or, if no such amendment shall have
been filed, in such registration statement), with such changes or insertions as
are required by Rule 430A under the Act or permitted by Rule 424(b) under the
Act and as have been provided to and approved by the Representative prior to the
execution of this Agreement, or (ii) if such registration statement, as it may
have been amended, has not been declared by the Commission to be effective under
the Act, an amendment to such registration statement, including a form of
prospectus, a copy of which amendment has been furnished to and approved by the
Representative prior to the execution of this Agreement. As used in this
Agreement, the term "Registration Statement" means such registration statement,
as amended at the time when it was or is declared effective, including all
financial schedules and exhibits thereto and including any information omitted
therefrom pursuant to Rule 430A under the Act and included in the Prospectus (as
hereinafter defined); the term "Preliminary Prospectus" means each prospectus
subject to completion filed with such registration statement or any amendment
thereto (including the prospectus subject to completion, if any, included in the
Registration Statement or any amendment thereto at the time it was or is
declared effective); and the term "Prospectus" means the prospectus first filed
with the Commission pursuant to Rule 424(b) under the Act, or, if no prospectus
is required to be filed pursuant to said Rule 424(b), such term means the
prospectus included in the Registration Statement; except that if such
registration statement or prospectus is amended or such prospectus is
supplemented, after the effective date of such registration statement and prior
to the Option Closing Date (as hereinafter defined), the terms "Registration
Statement" and "Prospectus" shall include such registration statement and
prospectus as so amended, and the term "Prospectus" shall include the prospectus
as so supplemented, or both, as the case may be.
(b) The Commission has not issued any order preventing or suspending the
use of any Preliminary Prospectus. When the Registration Statement becomes
effective and at all times subsequent thereto up to and on the Closing Date (as
hereinafter defined) or the Option Closing Date, as the case may be, (i) the
Registration Statement and Prospectus will in all respects conform to the
requirements of the Act and the Rules and Regulations; and (ii) neither the
Registration Statement nor the Prospectus will include any untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary to make statements therein not misleading; provided, however, that
the Company makes no representations, warranties or agreements as to information
contained in or omitted from the Registration Statement or Prospectus in
reliance upon, and in conformity with, written information furnished to the
Company by or on behalf of the Underwriter specifically for use in the
preparation thereof. It is understood that the statements set forth in the
Prospectus on page 2 with respect to stabilization, under the heading
"Underwriting" and the identity of counsel to the Underwriter under the heading
"Legal Matters" constitute the only information furnished in writing by or on
behalf of the Underwriter for inclusion in the Registration Statement and
Prospectus, as the case may be.
(c) The Company has been duly incorporated and is validly existing as a
corporation in good standing under the laws of the jurisdiction of its
incorporation, with full
-2-
<PAGE>
power and authority (corporate and other) to own its properties and conduct its
business as described in the Prospectus and is duly qualified to do business as
a foreign corporation and is in good standing in all other jurisdictions in
which the nature of its business or the character or location of its properties
requires such qualification, except where failure to so qualify will not
materially affect the Company's business, properties or financial condition. The
Company has no subsidiaries other than those listed on Schedule B attached
hereto (the "Subsidiaries"). The Company does not own any equity interest in any
other corporation, joint venture, partnership or other business entity, other
than the Subsidiaries. The Company owns all of the capital stock of each
Subsidiary free and clear of all liens, securities interest and encumbrances.
Each Subsidiary is a corporation, duly organized, validly existing and in good
standing under the laws of the state of its respective incorporation, with full
power and authority, corporate and other, to own or lease and operate its
respective properties and to conduct its respective business as described in the
Registration Statement. Each Subsidiary is duly qualified to do business as a
foreign corporation and is in good standing in all jurisdictions wherein such
qualification is necessary and failure so to qualify could result in a material
adverse effect on the financial condition, results of operations, business or
properties of such Subsidiary.
(d) The authorized, issued and outstanding capital stock of the Company
as of September 30, 1996 is as set forth in the Prospectus under
"Capitalization"; the shares of issued and outstanding capital stock of the
Company set forth thereunder have been duly authorized, validly issued and are
fully paid and non-assessable and have been issued in compliance with all
federal and state securities laws; except as set forth in the Prospectus, no
options, warrants or other rights to purchase, agreements or other obligations
to issue, or agreements or other rights to convert any obligation into, any
shares of capital stock of the Company have been granted or entered into by the
Company; and the capital stock conforms to all statements relating thereto
contained in the Registration Statement and Prospectus.
(e) The Stock and the Common Stock to be issued upon exercise of the
common stock purchase warrants to be issued to the Underwriter (the "Warrants")
are duly authorized, and when issued and delivered pursuant to this Agreement,
will be duly authorized, validly issued, fully paid and non-assessable and free
of preemptive rights of any security holder of the Company. Neither the filing
of the Registration Statement nor the offering or sale of the Stock as
contemplated in this Agreement gives rise to any rights, other than those which
have been waived or satisfied, for or relating to the registration of any shares
of Common Stock, except as described in the Registration Statement.
(f) This Agreement, the Warrants and the Advisory Agreement (to be
delivered to you in accordance with Section 4(o) and 4(r), respectively, hereof)
have been duly and validly authorized, executed and delivered by the Company.
The Company has full power and lawful authority to authorize, issue and sell the
Stock to be sold by it hereunder on the terms and conditions set forth herein,
and no consent, approval, authorization or other order of any governmental
authority is required in connection with such authorization, execution and
delivery or with the authorization, issue and sale of the Stock or the Warrants,
except such as may be required under the Act or state securities laws.
-3-
<PAGE>
(g) Except as described in the Prospectus, neither the Company nor any
of its Subsidiaries is in violation, breach or default of or under, and
consummation of the transactions herein contemplated and the fulfillment of the
terms of this Agreement will not conflict with, or result in a breach or
violation of, any of the terms or provisions of, or constitute a default under,
or result in the creation or imposition of any lien, charge or encumbrance upon
any of the respective properties or assets of the Company or any of its
Subsidiaries pursuant to the terms of any indenture, mortgage, deed of trust,
loan agreement or other agreement or instrument to which the Company or any of
its Subsidiaries is a party or by which the Company or any of its Subsidiaries
may be bound or to which any of the respective properties or assets of the
Company or any of its Subsidiaries is subject, nor will such action result in
any violation of the provisions of the respective articles of incorporation or
the by-laws of the Company or any of its Subsidiaries, as amended, or any
statute or any order, rule or regulation applicable to the Company or any of its
Subsidiaries of any court or of any regulatory authority or other governmental
body having jurisdiction over the Company or any of its Subsidiaries.
(h) Subject to the qualifications stated in the Prospectus, the Company
and each of its Subsidiaries has good and marketable title to all respective
properties and assets described in the Prospectus as owned by the Company and
each of its Subsidiaries, free and clear of all liens, charges, encumbrances or
restrictions, except such as are not materially significant or important in
relation to its respective business; all of the material leases and subleases
under which the Company or any of its Subsidiaries is the lessor or sublessor of
properties or assets or under which the Company or any of its Subsidiaries holds
properties or assets as lessee or sublessee as described in the Prospectus are
in full force and effect, and, except as described in the Prospectus, the
Company and each of its Subsidiaries is not in default in any material respect
with respect to any of the terms or provisions of any of such leases or
subleases, and no claim has been asserted by anyone adverse to rights of the
Company or any of its Subsidiaries as lessor, sublessor, lessee or sublessee
under any of the leases or subleases mentioned above, or affecting or
questioning the right of the Company or any of its Subsidiaries to continued
possession of the leased or subleased premises or assets under any such lease or
sublease except as described or referred to in the Prospectus; and the Company
and each of its Subsidiaries owns or leases all such properties described in the
Prospectus as are necessary to its respective operations as now conducted and,
except as otherwise stated in the Prospectus, as proposed to be conducted as set
forth in the Prospectus.
(i) BDO Seidman, LLP, who have given their reports on certain financial
statements filed and to be filed with the Commission as a part of the
Registration Statement, which are incorporated in the Prospectus, are with
respect to the Company, independent public accountants as required by the Act
and the Rules and Regulations.
(j) The financial statements, together with related notes, set forth in
the Prospectus or the Registration Statement present fairly the financial
position and results of operations and changes in cash flow of the Company and
each of its Subsidiaries on the basis stated in the Registration Statement, at
the respective dates and for the respective periods to which they apply. Said
statements and related notes have been prepared in accordance with
-4-
<PAGE>
generally accepted accounting principles applied on a basis which is consistent
during the periods involved and the Rules and Regulations. The information set
forth under the captions "Dilution," "Capitalization" and "Selected Financial
Data" in the Prospectus fairly present, on the basis stated in the Prospectus,
the information included therein.
(k) Subsequent to the respective dates as of which information is given
in the Registration Statement and Prospectus, neither the Company nor any of its
Subsidiaries has incurred any liabilities or obligations, direct or contingent,
not in the ordinary course of business, or entered into any transaction not in
the ordinary course of business, which is material to the respective businesses
of the Company or any of its Subsidiaries, and there has not been any change in
the capital stock of, or any incurrence of short-term or long-term debt by, the
Company or any of its Subsidiaries or any issuance of options, warrants or other
rights to purchase the capital stock of the Company or any of its Subsidiaries
or any adverse change or any development involving, so far as the Company can
now reasonably foresee a prospective adverse change in the respective conditions
(financial or other), net worths, results of operations, businesses, key
personnel or properties of the Company or any of its Subsidiaries which would be
material to the respective businesses or financial conditions of the Company or
any of its Subsidiaries and neither the Company nor any of its Subsidiaries has
become a party to, and neither the respective businesses nor the properties of
the Company or any of its Subsidiaries has become the subject of, any material
litigation whether or not in the ordinary course of business.
(l) Except as set forth in the Prospectus, there is not now pending or,
to the knowledge of the Company, threatened, any action, suit or proceeding to
which the Company or any of its Subsidiaries is a party before or by any court
or governmental agency or body, which might result in any material adverse
change in the respective conditions (financial or other), business prospects,
net worths, or properties of the Company or any of its Subsidiaries, nor are
there any actions, suits or proceedings related to environmental matters or
related to discrimination on the basis of age, sex, religion or race; and no
labor disputes involving the employees of the Company or any of its Subsidiaries
exist or are imminent which might be expected to adversely affect the conduct of
the respective businesses, properties or operations or the financial conditions
or results of operations of the Company or any of its Subsidiaries.
(m) Except as disclosed in the Prospectus, the Company and each of its
Subsidiaries has filed all necessary federal, state and foreign income and
franchise tax returns and has paid all taxes shown as due thereon; and there is
no tax deficiency which has been or to the knowledge of the Company might be
asserted against the Company or any of its Subsidiaries.
(n) The Company and each of its Subsidiaries has sufficient licenses,
permits and other governmental authorizations as are required for the conduct of
its respective business or the ownership of its properties as described in the
Prospectus and is in all material respects complying therewith and owns or
possesses adequate rights to use all material trademarks, service marks, trade-
names, trademark registrations, service mark registrations, copyrights and
licenses necessary for the conduct of such business and none of the foregoing
are in dispute or are in conflict with the right of any other person or entity.
To the best knowledge of
-5-
<PAGE>
the Company, none of the activities or business of the Company or any of its
Subsidiaries are in violation of, or cause the Company or any of its
Subsidiaries to violate, any law, rule, regulation or order of the United
States, any state, county or locality, or of any agency or body of the United
States or of any state, county or locality, the violation of which would have a
material adverse impact upon the respective conditions (financial or otherwise),
businesses, properties, prospective results of operations, or net worth of the
Company or any of its Subsidiaries.
(o) Neither the Company nor any of its Subsidiaries has directly or
indirectly, at any time (i) made any contributions to any candidate for
political office, or failed to disclose fully any such contribution in violation
of law or (ii) made any payment to any state, federal or foreign governmental
officer or official, or other person charged with similar public or quasi-public
duties, other than payments or contributions required or allowed by applicable
law. The Company's internal accounting controls and procedures are sufficient to
cause the Company to comply in all material respects with the Foreign Corrupt
Practices Act of 1977, as amended.
(p) On the Closing Dates (hereinafter defined) all transfer or other
taxes, (including franchise, capital stock or other tax, other than income
taxes, imposed by any jurisdiction) if any, which are required to be paid in
connection with the sale and transfer of the Stock to the Underwriter hereunder
will have been fully paid or provided for by the Company and all laws imposing
such taxes will have been fully complied with.
(q) All contracts and other documents of the Company and each of its
Subsidiaries which are, under the Rules and Regulations, required to be filed as
exhibits to the Registration Statement have been so filed.
(r) Neither the Company nor any of its Subsidiaries has taken and will
not take, directly or indirectly, any action designed to cause or result in, or
which has constituted or which might reasonably be expected to constitute, the
stabilization or manipulation of the price of the shares of Common Stock.
(s) Neither the Company nor any of its Subsidiaries has entered into any
agreement pursuant to which any person is entitled, either directly or
indirectly, to compensation from the Company for services as a finder in
connection with the public offering referred to herein.
(t) Except as previously disclosed in writing by the Company to the
Representative, no officer, director or stockholder of the Company or any of its
Subsidiaries has any National Association of Securities Dealers Inc. (the
"NASD") affiliation.
(u) Neither the Company nor any of the Subsidiaries is and upon receipt
of the proceeds from the sale of the Stock will be, an "investment company"
within the meaning of the Investment Company Act of 1940, as amended, and the
rules and regulations thereunder.
-6-
<PAGE>
(v) Neither the Company nor any of its Subsidiaries has distributed nor
will distribute prior to the First Closing Date any offering material in
connection with the offering and sale of the Stock other than the Prospectus,
the Registration Statement and the other materials permitted by the Act.
(w) The conditions for use of Form SB-2, as set forth in the General
Instructions thereto, have been satisfied.
(x) The Company has complied with all provisions of Section 517.075
Florida Statutes relating to doing business with the government of Cuba or with
any person or affiliate located in Cuba.
2. Representations and Warrant's of the Selling Stockholder. The Selling
--------------------------------------------------------
Stockholder represents and warrants to and agrees with, the Underwriter that:
(a) This Agreement has been duly executed and delivered by or on behalf
of the Selling Stockholder.
(b) The execution and delivery by the Selling Stockholder of, and the
performance by the Selling Stockholder of its obligations under, this Agreement,
the Custody Agreement signed by the Selling Stockholder and Continental Stock
Transfer and Trust Company, as Custodian, relating to the deposit of the Stock
to be sold by the Selling Stockholder (the "Custody Agreement") and the Power of
Attorney appointing certain individuals as the Selling Stockholder's attorneys-
in-fact to the extent set forth therein, relating to the transactions
contemplated hereby and by the Registration Statement (the "Power of Attorney")
will not contravene any provision of applicable law, or any agreement or other
instrument binding upon the Selling Stockholder or any judgment, order or decree
of any governmental body, agency or court having jurisdiction over the Selling
Stockholder, and no consent, approval, authorization or order of, or
qualification with, any governmental body or agency is required for the
performance by the Selling Stockholder of its obligations under the Agreement or
the Custody Agreement or Power of Attorney of the Selling Stockholder, except
such as may be required by the securities or "blue sky" laws of the various
states in connection with the offer and sale of the Stock.
(c) The Selling Stockholder has, and on the Closing Date and Option
Closing Date, if any, will have, valid title to the Stock to be sold by the
Selling Stockholder and the legal right and power, and all approval required by
law, to enter into this Agreement, the Custody Agreement and the Power of
Attorney and to sell, transfer and deliver the Stock to be sold by the Selling
Stockholder.
(d) The Stock to be sold by the Selling Stockholder pursuant to this
Agreement, has been duly authorized and is validly issued, fully paid and non-
assessable.
-7-
<PAGE>
(e) The Custody Agreement and the Power of Attorney have been duly
executed and delivered by the Selling Stockholder and are valid and binding
agreements of the Selling Stockholder.
(f) Assuming the Underwriter acquires its interest in the Stock to be
sold by the Selling Stockholder in good faith and without notice of any adverse
claims, delivery of the Stock to be sold by the Selling Stockholder pursuant to
this Agreement will pass title to such Stock free and clear of any security
interests, claims, liens, equities and other encumbrances.
(g) All information furnished by or on behalf of the Selling Stockholder
for use in the Registration Statement and Prospectus is, and on the Closing Date
and Option Closing Date, if any, will be, true, correct, and complete, and does
not, and on the Closing Date and Option Closing Date, if any, will not, contain
any untrue statement of a material fact or omit to state any material fact
necessary to make such information not misleading.
3. Purchase, Delivery and Sale of the Stock.
----------------------------------------
(a) Subject to the terms and conditions of this Agreement, and upon the
basis of the representations, warranties, and agreements herein contained, the
Company agrees to issue and sell to the Underwriter, and the Underwriter agrees
to buy from the Company at $ per share of Stock, at the place and time
hereinafter specified, 2,000,000 shares of Stock (the "First Stock").
Delivery of the First Stock against payment therefor shall take place at
the offices of Commonwealth Associates, 733 Third Avenue, New York, New York
10017 (or at such other place as may be designated by agreement between you and
the Company) at 10:00 a.m., New York time, on , 199_, or at such
later time and date as you may designate, such time and date of payment and
delivery for the First Stock being herein called the "First Closing Date."
(b) In addition, subject to the terms and conditions of this Agreement,
and upon the basis of the representations, warranties and agreements herein
contained, the Company and the Selling Stockholder hereby grant, severally and
not jointly, an option to the Underwriter to purchase all or any part of an
aggregate of an additional 300,000 shares of Stock (the Selling Stockholder to
sell to the Underwriter up to the number of additional shares of Stock set forth
in Schedule B opposite the name of the Selling Stockholder), at the same price
per share of Stock, as the Underwriter shall pay for the First Stock being sold
pursuant to the provisions of subsection (a) of this Section 3 (such additional
Stock being referred to herein as the "Option Stock"). This option may be
exercised within 45 days after the effective date of the Registration Statement
upon notice by the Underwriter to the Company and the Custodian advising as to
the amount of Option Stock as to which the option is being exercised, the names
and denominations in which the certificates for such Option Stock are to be
registered and the time and date when
-8-
<PAGE>
such certificates are to be delivered. Such time and date shall be determined by
the Underwriter but shall not be earlier than four nor later than ten full
business days after the exercise of said option, nor in any event prior to the
First Closing Date, and such time and date is referred to herein as the "Option
Closing Date." Delivery of the Option Stock against payment therefor shall take
place at the offices of Commonwealth Associates, 733 Third Avenue, New York, New
York 10017. In the event that this option is exercised in part, the Underwriter
shall first purchase all of the shares of Option Stock offered by the Selling
Stockholder before purchasing any Option Stock from the Company. The option
granted hereunder may be exercised only to cover overallotments in the sale by
the Underwriter of First Stock referred to in subsection (a) above. In the event
the Company declares or pays a dividend or distribution on its Common Stock,
whether in the form of cash, shares of Common Stock or any other consideration,
prior to the Option Closing Date, such dividend or distribution shall also be
paid on the Option Stock at the Option Closing Date.
(c) The Company will make the certificates for the Stock to be purchased
by the Underwriter hereunder available to the Underwriter for checking at least
two full business days prior to the First Closing Date or the Option Closing
Date (which are collectively referred to herein as the "Closing Dates"). The
certificates shall be in such names and denominations as you may request, at
least two full business days prior to the Closing Dates. Time shall be of the
essence and delivery at the time and place specified in this Agreement is a
further condition to the obligations of the Underwriter.
Definitive certificates in negotiable form for the Stock to be purchased
by the Underwriter hereunder will be delivered by the Company the Underwriter
for the accounts of the Underwriter against payment of the purchase price
therefor by the Underwriter, by certified or bank cashier's checks in New York
Clearing House funds, payable to the order of the Company.
In addition, in the event the Underwriter exercise the option to
purchase from the Company and the Selling Stockholder all or any portion of the
Option Stock pursuant to the provisions of subsection (b) above, payment for
such stock shall be made to or upon the order of the Company and the Custodian,
on behalf of the Selling Stockholder, respectively, by certified or bank
cashier's checks payable in New York Clearing House funds at the offices of
Commonwealth Associates, at the time and date of delivery of such Stock as
required by the provisions of subsection (b) above, against receipt of the
certificates for such Stock by the Underwriter registered in such names and in
such denominations as the Underwriter may request.
It is understood that the Underwriter proposes to offer the Stock to be
purchased hereunder to the public upon the terms and conditions set forth in the
Registration Statement, after the Registration Statement becomes effective.
4. Covenants of the Company. The Company covenants and agrees with the
------------------------
Underwriter that:
-9-
<PAGE>
(a) The Company will use its best efforts to cause the Registration
Statement to become effective. If required, the Company will file the
Prospectus and any amendment or supplement thereto with the Commission in the
manner and within the time period required by Rule 424(b) under the Act. Upon
notification from the Commission that the Registration Statement has become
effective, the Company will so advise you and will not at any time, whether
before or after the effective date, file any amendment to the Registration
Statement or supplement to the Prospectus of which you shall not previously have
been advised and furnished with a copy or to which you or your counsel shall
have objected in writing or which is not in compliance with the Act and the
Rules and Regulations. At any time prior to the later of (A) the completion by
the Underwriter of the distribution of the Stock contemplated hereby (but in no
event more than nine months after the date on which the Registration Statement
shall have become or been declared effective) and (B) 25 days after the date on
which the Registration Statement shall have become or been declared effective
(the "Minimum Period"), the Company will prepare and file with the Commission,
promptly upon your request, any amendments or supplements to the Registration
Statement or Prospectus which, in your opinion, may be necessary or advisable in
connection with the distribution of the Stock.
As soon as the Company is advised thereof, the Company will advise you,
and confirm the advice in writing, of the receipt of any comments of the
Commission, of the effectiveness of any post-effective amendment to the
Registration Statement, of the filing of any supplement to the Prospectus or any
amended Prospectus, of any request made by the Commission for amendment of the
Registration Statement or for supplementing of the Prospectus or for additional
information with respect thereto, of the issuance by the Commission or any state
or regulatory body of any stop order or other order or threat thereof suspending
the effectiveness of the Registration Statement or any order preventing or
suspending the use of any preliminary prospectus, or of the suspension of the
qualification of the Stock for offering in any jurisdiction, or of the
institution of any proceedings for any of such purposes, and will use its best
efforts to prevent the issuance of any such order, and, if issued, to obtain as
soon as possible the lifting thereof.
The Company has caused to be delivered to you copies of each Preliminary
Prospectus, and the Company has consented and hereby consents to the use of such
copies for the purposes permitted by the Act. The Company authorizes the
Underwriter and dealers to use the Prospectus in connection with the sale of the
Stock for such period as in the opinion of counsel to the Underwriter the use
thereof is required to comply with the applicable provisions of the Act and the
Rules and Regulations. In case of the happening, at any time within such period
as a Prospectus is required under this Act to be delivered in connection with
sales by the Underwriter of any event of which the Company has knowledge and
which materially affects the Company or the securities of the Company, or which
in the opinion of counsel for the Company or counsel for the Underwriter should
be set forth in an amendment of the Registration Statement or a supplement to
the Prospectus in order to make the statements therein not then misleading, in
light of the circumstances existing at the time the Prospectus is required to be
delivered to a purchaser of the Stock or in case it shall be necessary to amend
or supplement the Prospectus to comply with law or with the Rules and
Regulations, the Company
-10-
<PAGE>
will notify you promptly and forthwith prepare and furnish to you copies of such
amended Prospectus or of such supplement to be attached to the Prospectus, in
such quantities as you may reasonably request, in order that the Prospectus, as
so amended or supplemented, will not contain any untrue statement of a material
fact or omit to state any material fact necessary in order to make the
statements in the Prospectus, in the light of the circumstances under which they
are made, not misleading. The preparation and furnishing of any such amendment
or supplement to the Registration Statement or amended Prospectus or supplement
to be attached to the Prospectus shall be without expense to the Underwriter,
except that in case the Underwriter is required, in connection with the sale of
the Stock, to deliver a Prospectus nine months or more after the effective date
of the Registration Statement, the Company will upon request of and at the
expense of the Underwriter, amend or supplement the Registration Statement and
Prospectus and furnish the Underwriter with reasonable quantities of
prospectuses complying with Section 10(a)(3) of the Act.
The Company will comply with the Act, the Rules and Regulations and the
Securities Exchange Act of 1934, as amended (the "Exchange Act") and the rules
and regulations thereunder in connection with the offering and issuance of the
Stock.
(b) The Company will use its best efforts to qualify to register the
Stock for sale under the securities or "blue sky" laws of such jurisdictions as
the Representative may designate and will make such applications and furnish
such information as may be required for that purpose and to comply with such
laws, provided the Company shall not be required to qualify as a foreign
corporation or a dealer in securities or to execute a general consent to service
of process in any jurisdiction in any action other than one arising out of the
offering or sale of the Stock. The Company will, from time to time, prepare and
file such statements and reports as are or may be required to continue such
qualification in effect for so long a period as the Underwriters may reasonably
request.
(c) If the sale of the Stock provided for herein is not consummated for
any reason caused by the Company, the Company shall pay all costs and expenses
incident to the performance of the Company's obligations hereunder, including
but not limited to, all of the expenses itemized in Section 9, including the
accountable expenses of the Underwriter, including legal fees.
(d) The Company will use its best efforts to (i) cause a registration
statement under the Exchange Act to be declared effective concurrently with the
completion of this offering (and will notify the Underwriter in writing
immediately upon the effectiveness of such registration statement), and (ii) if
requested by the Underwriter, to obtain a listing on the Pacific Stock Exchange,
and to obtain and keep current a listing in the Standard & Poors or Moody's
Industrial OTC Manual.
(e) For so long as the Company is a reporting company under either
Section 12(g) or 15(d) of the Exchange Act, the Company, at its expense, will
furnish to its stockholders an annual report (including financial statements
audited by independent public
-11-
<PAGE>
accountants), in reasonable detail, and at its expense, will furnish to you
during the period ending five (5) years from the date hereof, (i) as soon as
practicable after the end of each fiscal year, a balance sheet of the Company
and any of its subsidiaries as at the end of such fiscal year, together with
statements of income, surplus and cash flow of the Company and any subsidiaries
for such fiscal year, all in reasonable detail and accompanied by a copy of the
certificate or report thereon of independent accountants; (ii) as soon as
practicable after the end of each of the first three fiscal quarters of each
fiscal year, consolidated summary financial information of the Company for such
quarter in reasonable detail; (iii) as soon as they are available, a copy of all
reports (financial or other) mailed to security holders; (iv) as soon as they
are available, a copy of all non-confidential reports and financial statements
furnished to or filed with the Commission of any securities exchange or
automated quotation system on which any class of securities of the Company is
listed; and (v) such other information as you may from time to time reasonably
request.
(f) In the event the Company has an active subsidiary or subsidiaries,
such financial statements referred to in subsection (e) above will be on a
consolidated basis to the extent the accounts of the Company and its subsidiary
or subsidiaries are consolidated in reports furnished to its stockholders
generally.
(g) The Company will deliver to you at or before the First Closing Date
two signed copies of the Registration Statement including all financial
statements and exhibits filed therewith, and of all amendments thereto. The
Company will deliver to or upon the order of the Underwriter, from time to time
until the effective date of the Registration Statement, as many copies of any
Preliminary Prospectus filed with the Commission prior to the effective date of
the Registration Statement as the Underwriter may reasonably request. The
Company will deliver to the Underwriter on the effective date of the
Registration Statement and thereafter for so long as a Prospectus is required to
be delivered under the Act, from time to time, as many copies of the Prospectus,
in final form, or as thereafter amended or supplemented, as the Underwriter may
from time to time reasonably request.
(h) The Company will make generally available to its security holders
and deliver to you as soon as it is practicable to do so but in no event later
than 90 days after the end of twelve months after its current fiscal quarter, an
earnings statement (which need not be audited) covering a period of at least
twelve consecutive months beginning after the effective date of the Registration
Statement, which shall satisfy the requirements of Section 11(a) of the Act.
(i) The Company will apply the net proceeds from the sale of the Stock
for the purposes set forth under "Use of Proceeds" in the Prospectus, and will
file such reports with the Commission with respect to the sale of the Stock and
the application of the proceeds therefrom as may be required pursuant to Rule
463 under the Act.
(j) The Company will, promptly upon your request, prepare and file with
the Commission any amendments or supplements to the Registration Statement,
Preliminary
-12-
<PAGE>
November __, 1996
THINK New Ideas, Inc.
45 West 36th Street
New York, NY 10018
Attn: Scott Mednick
Chairman and Chief Executive Officer
Dear Mr. Mednick:
This will confirm the arrangements, terms and conditions pursuant to which
Commonwealth Associates (the "Consultant"), has been retained to serve as a
financial consultant and advisor to THINK New Ideas, Inc., a Delaware
corporation (the "Company"), on a non-exclusive basis for services rendered in
association with the Company's initial public offering and terminating on the
closing (the "Closing") of the Company's initial public offering (the
"Offering"). The undersigned hereby agrees to the following terms and
conditions:
1. Duties of Consultant: Consultant shall, at the request of the
--------------------
Company, upon reasonable notice, provide such financial consulting services and
advise pertaining to the Company's business affairs as the Company may from time
to time reasonably request.
The services described in this Section 1 shall be rendered by
Consultant without any direct supervision by the Company at such time and place
and in such manner (whether by conference, telephone, letter or otherwise) as
Consultant may determine.
2. Compensation: As compensation for consultant's services hereunder,
------------
the Company shall pay Consultant, at the Closing, an amount equal to three
percent (3%) of the gross proceeds from the Offering, including any proceeds
from the exercise of the Underwriter's over-allotment option.
3. Additional Compensation in Certain Circumstances: In additional to
------------------------------------------------
the financial consulting services described in Section 1 above, Consultant may
bring the Company in contact with persons, whether individuals or entities that
may be suitable candidates for providing the Company with, or may lead the
Company to other individuals or entities that may provide the Company with, debt
or equity financing or that may be suitable candidates, or may lead the Company
to such suitable candidates, to purchase substantially all of the stock or
assets of the Company, sell all or substantially all of such candidate's stock
or otherwise transfer control of, or a material interest in, such candidate to
the Company, merge with the Company, or enter into a joint venture, strategic
alliance or other transaction with the Company (a "Transaction"). If the
Company enters into an agreement with any persons or their affiliates, or with
any persons introduced to the Company by any such persons or their affiliates
during the term of this Agreement or within six months of the expiration of the
term of this Agreement, pursuant to
<PAGE>
which the Company enters into a Transaction, the Company will pay to Consultant,
upon the closing of the Transaction, an amount mutually agreeable to both the
Company and Consultant which should be such amount as is generally customary for
the type of Transaction.
4. Available Time: Consultant shall make available such time as it, in
--------------
its sole discretion, shall deem appropriate for the performance of its
obligations under this Agreement and may in certain circumstances be entitled to
additional compensation in connection therewith.
5. Relationship: Nothing herein shall constitute Consultant as an
------------
employee or agent of the Company, except to such extent as might hereinafter be
agreed upon for a particular purpose. Except as might hereinafter be expressly
agreed, Consultant shall not have the authority to obligate or commit the
Company in any manner whatsoever.
6. Indemnification: Since Consultant will be acting on behalf of the
---------------
Company, the Company agrees to the indemnification provisions attached to this
Agreement as Annex A and incorporated herein in their entirety.
7. Confidentiality: Except in the course of the performance of its
---------------
duties hereunder, Consultant agrees that it shall not disclose any trade
secrets, know-how, or other proprietary information not in the public domain
leaned as a result of this Agreement unless and until such information becomes
generally known.
8. Assignment and Termination: This Agreement shall not be assignable by
--------------------------
any party except to successors to all or substantially all of the business of
either party for any reason whatsoever without the prior written consent of the
other party, which consent may not be arbitrarily withheld by the party whose
consent is required.
9. Governing Law: This Agreement shall be deemed to be a contract made
-------------
under the laws of the State of New York and for all purposes shall be construed
in accordance with the laws of said State.
Very truly yours,
By:____________________________
Robert Beuret, Vice Chairman
Confirmed and Agreed to this
__ day of November, 1996
THINK NEW IDEAS, INC.
-2-
<PAGE>
By: _______________________________
Scott Mednick, Chairman and
Chief Executive Officer
-3-
<PAGE>
ANNEX A
Indemnification Provisions
--------------------------
In connection with the engagement of Commonwealth Associates ("Consultant")
by THINK New Ideas, Inc. (the"Company") pursuant to that certain Agreement dated
as of November __, 1996, the Company hereby agrees as follows:
1. In connection with or arising out of or relating to the engagement of
Consultant under the Agreement, or any actions taken or omitted, services
performed or matters contemplated by or in connection with the Agreement, the
Company agrees to reimburse Consultant, its affiliates and their respective
directors, officers, employees, agents and controlling persons (each an
"Indemnified Party") promptly upon demand for expenses (including fees and
expenses of legal counsel) as they are incurred in connection with the
investigation of, preparation for or defense of any pending or threatened claim,
or any litigation, proceeding or other action in respect thereof. The Company
also agrees (in connection with the foregoing) to indemnify and hold harmless
each Indemnified Party from and against any and all losses, claims, damages and
liabilities, joint or several, to which any Indemnified Party may become
subject, including any amount paid in settlement of any litigation or other
action (commenced or threatened), to which the Company shall have consented in
writing (such consent not to be unreasonably withheld), whether or not any
Indemnified Party is a party and whether or not liability resulted; provided,
however, that the Company shall not be liable pursuant to this sentence in
respect of any loss, claim, damage or liability to the extent that a court
having competent jurisdiction shall have determined by final judgment (not
subject to further appeal) that such loss, claim, damage or liability resulted
primarily and directly from the willful misfeasance or gross negligence of such
Indemnified Party.
2. An Indemnified Party shall have the right to retain separate legal
counsel of its own choice to conduct the defense and all related matters in
connection with any such litigation, proceeding or other action. The Company
shall pay the fees and expenses of such legal counsel, and such legal counsel
shall to the fullest extent consistent with its professional responsibilities
cooperate with the Company and any legal counsel designated by the Company. The
Company agrees to consult in advance with Consultant with respect to the terms
of any proposed waiver, release or settlement of any claim, liability,
proceeding or other action against the Company to which an Indemnified Party may
also be subject, and to use its best efforts to afford Consultant and/or any
such Indemnified Party the opportunity to join in such waiver, release or
settlement.
3. In the event that the indemnity provided for in paragraphs 1 and 2
hereof is unavailable or insufficient to hold any Indemnified Party harmless,
then the Company shall contribute to amounts paid or payable by an Indemnified
Party in respect of such Indemnified Party's losses, claims, damages and
liabilities as to which the indemnity provided for in
<PAGE>
paragraphs 1 and 2 hereof is unavailable or insufficient (i) in such proportion
as appropriately reflects the relative benefits received by the Company, on the
one hand, and Consultant, on the other hand, in connection with the matters as
to which such losses, claims, damages or liabilities relate, or (ii) if the
allocation provided by clause (i) above is not permitted by applicable law, in
such proportion as appropriately reflects not only the relative benefits
referred to in clause (i) but also the relative fault of the Company, on the one
hand, and Consultant, on the other hand, as well as any other equitable
consideration. The amounts paid or payable by a party in respect of losses,
claims, damages and liabilities referred to above shall be deemed to include any
legal or other fees and expenses incurred in defending any litigation,
proceeding or other action or claim. Notwithstanding the provisions hereof,
Consultant's share of the liability hereunder shall not be in excess of the
amount of fees actually received by Consultant under the Agreement (excluding
any amounts received as reimbursement of expenses incurred by Consultant).
4. It is understood and agreed that, in connection with Consultant's
engagement by the Company, Consultant may also be engaged to act for the Company
in one or more additional capacities, and that the terms of any such additional
engagement may be embodied in one or more separate written agreements. These
Indemnification Provisions shall apply to the engagement under the Agreement and
to any such additional engagement and any modification of such additional
engagement; provided, however, that in the event that the Company engages
Consultant to provide additional services (other than as indicated in the
Agreement), such further engagement may be subject to separate indemnification
and contribution provisions as may be mutually agreed upon.
5. These Indemnification Provisions shall remain in full force and effect
whether or not any of the transactions contemplated by the Agreement are
consummated and shall survive the expiration to the period of the Agreement, and
shall in addition to any liability that the Company might otherwise have to any
Indemnified Party under the Agreement or otherwise.
Very truly yours,
THINK NEW IDEAS, INC.
By:______________________________
Scott Mednick, Chairman and
Chief Executive Officer
-2-
<PAGE>
EXHIBIT 10.3a
-------------
THINK NEW IDEAS, INC.
8522 National Boulevard, Suite 101
Culver City, California 90232-2481
October 28, 1996
Mr. Adam Curry
Chief Technology Officer
THINK New Ideas, Inc.
45 West 36th Street, Fifth Floor
New York, New York 10018
Re: Amendment to Employment Agreement dated June 30, 1996
-----------------------------------------------------
Dear Adam:
Reference is hereby made to that certain employment agreement dated as of
June 30, 1996 (the "Employment Agreement") between THINK New Ideas, Inc. (the
"Corporation") and Adam Curry (the "Employee"). This letter is intended to
confirm that, notwithstanding anything else to the contrary set forth in the
Employment Agreement, the Corporation and the Employee hereby agree that Section
4(a) of the Employment Agreement be hereby amended by striking Section 4(a) of
the Employment Agreement thereof and by substituting in lieu thereof the
following new Section 4(a) to read as follows:
"4(a) Compensation. The Company shall pay the Employee compensation equal
------------
to at least One Hundred Twenty-Five Thousand Dollars ($125,000) per annum at a
rate of Ten Thousand Four Hundred Sixteen Dollars and Sixty-seven Cents
$10,416.67 per month (such monthly amount as the same may be increased from time
to time by virtue of the adjustments set forth hereinbelow shall be defined as
the "Monthly Compensation"). Such salary shall be payable in accordance with
the customary payroll practices of the Company."
Except as otherwise expressly modified hereby or required to effectuate the
modification set forth herein, the Employment Agreement shall remain unchanged
and shall continue in full force an effect pursuant to the terms thereof.
This letter agreement contains the entire agreement between the Corporation
and the Employee with respect to the modification which is the subject hereof.
This letter agreement may not be amended, changed, modified or discharged, nor
may any provision hereof be waived, except by an instrument in writing executed
by or on behalf of the party against whom enforcement of any amendment, waiver,
change, modification or discharge is sought. No course of conduct or dealing
shall be construed to modify, amend or otherwise affect any of the provisions
hereof. Please confirm that the Employee is in agreement with the foregoing,
and that the foregoing is in accordance with your understanding by signing and
returning this letter, which shall thereupon constitute a binding agreement.
Agreed to and accepted as of this
30th day of October, 1996: Very truly yours,
THINK NEW IDEAS, INC.
By: /s/ Adam Curry By: /s/ Scott A. Mednick
-------------- ------------------------
Adam Curry Scott A. Mednick
Chief Executive Officer
<PAGE>
EXHIBIT 10.4a
THINK NEW IDEAS, INC.
8522 National Boulevard, Suite 101
Culver City, California 90232-2481
October 28, 1996
Mr. Ronald Bloom
President
THINK New Ideas, Inc.
45 West 36th Street
New York, NY 10036
Re: Amendment to Employment Agreement dated June 30, 1996
-----------------------------------------------------
Dear Jim:
Reference is hereby made to that certain employment agreement dated as of
June 30, 1996 (the "Employment Agreement") between THINK New Ideas, Inc. (the
"Corporation") and Ronald Bloom (the "Employee"). This letter is intended to
confirm that, notwithstanding anything else to the contrary set forth in the
Employment Agreement, the Corporation and the Employee hereby agree that Section
4(a) of the Employment Agreement be hereby amended by striking Section 4(a) of
the Employment Agreement thereof and by substituting in lieu thereof the
following new Section 4(a) to read as follows:
"4(a) Compensation. The Company shall pay the Employee compensation equal
------------
to at least One Hundred Twenty-Five Thousand Dollars ($125,000) per annum at a
rate of Ten Thousand Four Hundred Sixteen Dollars and Sixty-seven Cents
$10,416.67 per month (such monthly amount as the same may be increased from time
to time by virtue of the adjustments set forth hereinbelow shall be defined as
the "Monthly Compensation"). Such salary shall be payable in accordance with
the customary payroll practices of the Company."
Except as otherwise expressly modified hereby or required to effectuate the
modification set forth herein, the Employment Agreement shall remain unchanged
and shall continue in full force an effect pursuant to the terms thereof.
This letter agreement contains the entire agreement between the Corporation
and the Employee with respect to the modification which is the subject hereof.
This letter agreement may not be amended, changed, modified or discharged, nor
may any provision hereof be waived, except by an instrument in writing executed
by or on behalf of the party against whom enforcement of any amendment, waiver,
change, modification or discharge is sought. No course of conduct or dealing
shall be construed to modify, amend or otherwise affect any of the provisions
hereof. Please confirm that the Employee is in agreement with the foregoing,
and that the foregoing is in accordance with your understanding by signing and
returning this letter, which shall thereupon constitute a binding agreement.
Agreed to and accepted as of this
30th day of October, 1996: Very truly yours,
THINK NEW IDEAS, INC.
By: /s/ Ronald Bloom By: /s/ Scott A. Mednick
---------------- --------------------
Ronald Bloom Scott A. Mednick
Chief Executive Officer
<PAGE>
THINK NEW IDEAS, INC. EXHIBIT 10.8a
8522 National Boulevard, Suite 101
Culver City, California 90232-2481
October 28, 1996
Dr. James Carlisle
Vice President
NetCube, Inc.
115 River Road
Edgewater, New Jersey 07020
Re: Amendment to Employment Agreement dated June 30, 1996
-----------------------------------------------------
Dear Jim:
Reference is hereby made to that certain employment agreement dated as of
June 30, 1996 (the "Employment Agreement") between THINK New Ideas, Inc. (the
"Corporation") and James Carlisle (the "Employee"). This letter is intended to
confirm that, notwithstanding anything else to the contrary set forth in the
Employment Agreement, the Corporation and the Employee hereby agree that Section
4(a) of the Employment Agreement be hereby amended by striking Section 4(a) of
the Employment Agreement thereof and by substituting in lieu thereof the
following new Section 4(a) to read as follows:
4(a) Compensation. The Company shall pay the Employee compensation equal
------------
to at least One Hundred Twenty-Five Thousand Dollars ($125,000) per annum at a
rate of Ten Thousand Four Hundred Sixteen Dollars and Sixty-seven Cents
$10,416.67 per month (such monthly amount as the same may be increased from time
to time by virtue of the adjustments set forth hereinbelow shall be defined as
the "Monthly Compensation"). Such salary shall be payable in accordance with the
customary payroll practices of the Company."
Except as otherwise expressly modified hereby or required to effectuate the
modification set forth herein, the Employment Agreement shall remain unchanged
and shall continue in full force an effect pursuant to the terms thereof.
This letter agreement contains the entire agreement between the Corporation
and the Employee with respect to the modification which is the subject hereof.
This letter agreement may not be amended, changed, modified or discharged, nor
may any provision hereof be waived, except by an instrument in writing executed
by or on behalf of the party against whom enforcement of any amendment, waiver,
change, modification or discharge is sought. No course of conduct or dealing
shall be construed to modify, amend or otherwise affect any of the provisions
hereof. Please confirm that the Employee is in agreement with the foregoing, and
that the foregoing is in accordance with your understanding by signing and
returning this letter, which shall thereupon constitute a binding agreement.
Agreed to and accepted as of this
30th day of October, 1996: Very truly yours,
THINK NEW IDEAS, INC.
By: /s/ James Carlisle By: /s/ Scott A. Mednick
-------------------------------- ----------------------------
James Carlisle Scott A. Mednick
Chief Executive Officer
<PAGE>
Exhibit 10.16
<PAGE>
Exhibit 10.16
- --------------------------------------------------------------------------------
Think New Ideas, Inc.
Amended and Restated
1996 Stock Option Plan
(AS AMENDED ON NOVEMBER ___, 1996)
- --------------------------------------------------------------------------------
<PAGE>
THINK NEW IDEAS, INC.
1996 STOCK OPTION
ARTICLE I
---------
ESTABLISHMENT AND PURPOSE
-------------------------
Section 1.1. Think New Ideas, Inc., a Delaware corporation (the "Company"),
hereby establishes a stock option to be named Think New Ideas, Inc. 1996 Stock
Option (the "Plan").
Section 1.2. The purpose of this Plan is to induce persons who are
officers, directors, employees and consultants of the Company (or any of its
subsidiaries) who are in a position to contribute materially to the Company's
prosperity to remain with the Company, to offer said persons incentives and
rewards in recognition of their contributions to the Company's progress, and to
encourage said persons to continue to promote the best interests of the Company.
This Plan provides for the grant of options to purchase shares of common stock
of the Company, par value $.001 per share (the "Common Stock") which qualify as
incentive stock options ("Incentive Options") under Section 422 of the Internal
Revenue Code of 1986, as amended (the "Code"), to persons who are employees, as
well as options which do not so qualify ("Non-Qualified Options") to be issued
to persons, including those who are not employees. Incentive Options and Non-
Qualified Options may be collectively referred to hereinafter as the "Options"
as the context may require. Persons granted Options hereunder may be referred
to hereinafter as the "Optionees."
Section 1.3. All Options granted on or after the date that this Plan has
been approved and adopted by the Company's board of directors (the "Board of
Directors") shall be governed by the terms and conditions of this Plan unless
the terms of any such Option specifically indicate that it is not to be so
governed.
Section 1.4. Any Option granted hereunder which is intended to qualify as
an Incentive Option which, for any reason whatsoever, fails to so qualify, shall
be deemed to be a Non-Qualified Option granted hereunder.
ARTICLE II
----------
ADMINISTRATION
--------------
Section 2.1. All determinations hereunder concerning the selection of
persons eligible to receive awards under this Plan and determinations with
respect to the timing, pricing and amount of an award hereunder (other than
pursuant to a non-discretionary formula hereinafter set forth, shall be made by
an administrator (the "Administrator"). The Administrator shall be either: (a)
the Board of Directors, or (b) in the discretion of the Board of Directors, a
committee of not less than two members of the Board of Directors (the
"Committee"), each of whom is a "Non-Employee" Director as such term is defined
in Rule 16b-3 (as such rule may be amended from time to time, "Rule 16b-3")
under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). In
the event this Plan is administered by the Committee, the Committee shall select
one of its members to serve as the chairman thereof and shall hold its meetings
at such times and places as it may
<PAGE>
determine. In such case, a majority of the total number of members of the
Committee shall be necessary to constitute a quorum; and (i) the affirmative act
of a majority of the members present at any meeting at which a quorum is
present, or (ii) the approval in writing by a majority of the members of the
Committee, shall be necessary to constitute action by the Committee.
Section 2.2. The provisions hereof relating to Incentive Options are
intended to comply in every respect with Section 422 of the Code ("Section 422")
and the regulations promulgated thereunder. In the event that any future
statute or regulation shall modify Section 422, this Plan shall be deemed to
incorporate by reference such modification. Any agreement relating to the grant
of any Incentive Option hereunder, which Option is outstanding and unexercised
at the time that any modifying statute or regulation becomes effective, shall
also be deemed to incorporate by reference such modification and no notice of
such modification need be given to the Optionee. Any agreement relating to an
Incentive Option granted hereunder shall provide that the Optionee hold the
stock received upon exercise of such Incentive Option for a minimum of two years
from the date of grant of the Incentive Option and one year from the date of
exercise of such Incentive Option, absent the written approval, consent or
waiver of the Administrator.
Section 2.3. If any provision of this Plan is determined to disqualify the
shares of Common Stock purchasable upon exercise of an Incentive Option granted
hereunder from the special tax treatment provided by Section 422, such provision
shall be deemed to incorporate by reference the modification required to qualify
such shares of Common Stock for said tax treatment.
Section 2.4. The Company shall grant Options hereunder in accordance with
determinations made by the Administrator pursuant to the provisions hereof. All
Options granted pursuant hereto shall be clearly identified as Incentive Options
or Non-Qualified Options. The Administrator may from time to time adopt (and
thereafter amend or rescind) such rules and regulations for carrying out this
Plan and take such action in the administration of this Plan, not inconsistent
with the provisions hereof, as it shall deem proper. The Board of Directors or,
subject to the supervision of the Board of Directors, the Committee, as the
Administrator, shall have plenary discretion, subject to the express provisions
of this Plan, to determine which officers, directors, employees and consultants
shall be granted Options, the number of shares subject to each Option, the time
or times when an Option may be exercised (whether in whole or in installments),
the terms and provisions of the respective agreements relating to the grant of
Options (which need not be identical), including such terms and provisions which
may be amended from time to time as shall be required, in the judgment of the
Administrator, to conform to any change in any law or regulation applicable
hereto, and to make all other determinations deemed necessary or advisable for
the administration of this Plan. The interpretation and construction of any
provision of this Plan by the Administrator (unless otherwise determined by the
Board of Directors) shall be final, conclusive and binding upon all persons.
2
<PAGE>
Section 2.5. No member of the Administrator shall be liable for any action
or determination made in good faith with respect to administration of this Plan
or the Options granted hereunder. Members of the Board of Directors and/or the
Committee, as the Administrator, shall be indemnified by the Company, pursuant
to the Company's bylaws, for any expenses, judgments or other costs incurred as
a result of a lawsuit filed against such member claiming any rights or remedies
arising out of such member's participation in the administration of this Plan.
ARTICLE III
-----------
TOTAL NUMBER OF SHARES TO BE OPTIONED
-------------------------------------
Section 3.1. There shall be reserved for issuance or transfer upon
exercise of the Options granted from time to time hereunder an aggregate of
966,667 shares of Common Stock (subject to adjustment as provided in Article
VIII hereof). The shares of Common Stock issued upon exercise of any Option
granted hereunder may be shares of Common Stock previously issued and reacquired
by the Company at any time or authorized but unissued shares of Common Stock, as
the Board of Directors from time to time may determine.
Section 3.2. In the event that any Options outstanding under this Plan for
any reason expire or are terminated without having been exercised in full, the
unpurchased shares of Common Stock subject to such Option and any such
surrendered shares of Common Stock will no longer be available for transfer
hereunder.
Section 3.3. No Options shall be granted pursuant hereto to any Optionee
after the tenth anniversary of the earlier of: (a) the date that this Plan is
adopted by the Board of Directors, or (b) the date that this Plan is approved by
the stockholders of the Company.
3
<PAGE>
ARTICLE IV
----------
ELIGIBILITY
-----------
Section 4.1. Non-Qualified Options may be granted hereunder to officers,
directors, employees and consultants of the Company (or any of its subsidiaries)
selected by the Administrator, and Incentive Options may be granted hereunder
only to employees (including officers and directors who are employees) of the
Company (or any of its subsidiaries) selected by the Administrator. For
purposes of determining who is an employee with respect to eligibility for
Incentive Options, the provisions of Section 422 of the Code shall govern. The
Administrator may determine (in its sole discretion) that any person who would
otherwise be eligible to be granted Options shall, nonetheless, be ineligible to
receive any award under this Plan.
Section 4.2. Except as set forth in Section 2.5, the Administrator shall
(in its discretion) determine the persons to be granted Options, the time or
times at which Options shall be granted, the number of shares of Common Stock
subject to each Option, the terms of a vesting or forfeiture schedule, if any,
the type of Option issued, the period during which such Options may be
exercised, the manner in which Options may be exercised and all other terms and
conditions of the Options; provided, however, no Option shall be granted which
-------- -------
has terms or conditions inconsistent with those stated in Articles V and VI
hereof. Relevant factors in making such determinations may include the value of
the services rendered by the respective Optionee, his or her present and
potential contributions to the Company, and such other factors which are deemed
relevant by the Administrator in accomplishing the purpose of this Plan.
ARTICLE V
---------
TERMS AND CONDITIONS OF OPTIONS
-------------------------------
Section 5.1. Each Option granted under this Plan shall be evidenced by a
stock option certificate and agreement (the "Option Agreement") in a form
consistent with this Plan, provided that the following terms and conditions
shall apply:
(a) The price at which each share of Common Stock covered by an Option may
be purchased shall be set forth in the Option Agreement and shall be determined
by the Administrator, provided that the option price for any Incentive Option
shall not be less than the "fair market value" of the shares of Common Stock at
the time of grant determined. Notwithstanding the foregoing, if an Incentive
Option to purchase shares of Common Stock is granted hereunder to an Optionee
who, on the date of the grant, directly or indirectly owns more than ten percent
(10%) of the voting power of all classes of capital stock of the Company (or its
parent or subsidiary), not including the shares of Common Stock obtainable upon
exercise of the Option, the minimum exercise price of such Option shall be not
less than one hundred ten percent (110%) of the "fair market value" of the
shares of Common Stock on the date of grant determined in accordance with
Section 5.1(b) below.
4
<PAGE>
(b) The "fair market value" shall be determined by the Administrator, which
determination shall be binding upon the Company and its officers, directors,
employees and consultants. The determination of the "fair market value" shall
be based upon the following: (i) if the Common Stock is not listed and traded
upon a recognized securities exchange and there is no report of stock prices
with respect to the Common Stock published by a recognized stock quotation
service, on the basis of the recent purchases and sales of the Common Stock in
arms-length transactions; (ii) if the Common Stock is not then listed and traded
upon a recognized securities exchange or quoted on the NASDAQ National Market
System, and there are reports of stock prices by a recognized quotation service,
upon the basis of the last reported sale or transaction price of the Common
Stock on the date of grant as reported by a recognized quotation service, or, if
there is no last reported sale or transaction price on that day, then upon the
basis of the mean of the last reported closing bid and closing asked prices for
the Common Stock on that day or on the date nearest preceding that day; or (iii)
if the Common Stock shall then be listed and traded upon a recognized securities
exchange or quoted on the NASDAQ National Market System, upon the basis of the
last reported sale or transaction price at which shares of Common Stock were
traded on such recognized securities exchange on the date of grant or, if the
Common Stock was not traded on such date, upon the basis of the last reported
sale or transaction price on the date nearest preceding that date. The
Administrator shall also consider such other factors relating to the "fair
market value" of the Common Stock as it shall deem appropriate.
(c) For the purpose of determining whether an Optionee owns more than ten
percent (10%) of the voting power of all classes of stock of the Company, an
Optionee shall be considered to own those shares of stock which are owned
directly or indirectly through brothers and sisters (including half-blooded
siblings), spouse, ancestors and lineal descendants; and proportionately as a
shareholder of a corporation, a partner of a partnership, and/or a beneficiary
of a trust or an estate that owns shares of capital stock of the Company.
(d) Notwithstanding any other provision hereof, in accordance with the
provisions of Section 422(d) of the Code, to the extent that the aggregate "fair
market value" (determined at the time the Option is granted) of the shares of
Common Stock with respect to which Incentive Options (without reference to this
provision) are exercisable for the first time by any individual in any calendar
year under any and all stock option plans of the Company (and its subsidiary
corporations and its parent, if any) exceeds $100,000, such Options shall be
treated as Non-Qualified Options.
(e) An Optionee may, in the Administrator's discretion, be granted more
than one Incentive Option or Non-Qualified Option during the duration of this
Plan, and may be issued a combination of Non-Qualified Options and Incentive
Options; provided, however, that non-employees are not eligible to receive
-------- -------
Incentive Options.
(f) The duration of any Option shall be within the sole discretion of the
Administrator; provided, however, that any Incentive Option granted to a ten
-------- -------
percent (10%) or less stockholder or any Non-Qualified Option shall, by its
terms, be exercised within ten years
5
<PAGE>
after the date the Option is granted and any Incentive Option granted to a
greater than ten percent (10%) stockholder shall, by its terms, be exercised
within five years after the date the Option is granted.
(g) An Option shall not be transferable by the Optionee other than by will,
or by the laws of descent and distribution. An Option may be exercised during
the Optionee's lifetime only by the Optionee.
(h) At least six months shall elapse from the date on which an Option is
granted to an officer, director, or beneficial owner of more than ten percent
(10%) of the outstanding shares of Common Stock of the Company under this Plan
by the Administrator to the date on which any share of Common Stock underlying
such Option is sold, unless the Administrator otherwise consents in writing.
ARTICLE VI
----------
EMPLOYMENT OR SERVICE OF OPTIONEE
---------------------------------
Section 6.1. If the employment or service of an Optionee is terminated for
cause, the option rights of such Optionee, both accrued and future, under any
then outstanding Non-Qualified or Incentive Option shall terminate immediately,
subject to the provisions of any employment agreement between the Company (or
any subsidiary) and an Optionee which, by its terms, provides otherwise. In the
event that an employee who is an Optionee hereunder has entered into an
employment agreement with the Company (or a subsidiary), "cause" shall have the
meaning attributed thereto in such employment agreement; otherwise, "cause"
shall mean incompetence in the performance of duties, disloyalty, dishonesty,
theft, embezzlement, unauthorized disclosure of patents, processes or trade
secrets of the Company, individually or as an employee, partner, associate,
officer or director of any organization. The determination of the existence and
the proof of "cause" shall be made by the Administrator and, subject to the
review of any determination made by the Administrator, such determination shall
be binding on the Optionee and the Company.
Section 6.2. Subject to the provisions of any employment agreement between
the Company (or a subsidiary) and an Optionee, if the employment or service of
an Optionee is terminated by either the Optionee or the Company for any reason
other than cause, death, or for disability (as defined in Section 22(e)(3) of
the Code or pursuant to the terms of such an employment agreement), the option
rights of such Optionee under any then outstanding Non-Qualified or Incentive
Option shall, subject to the provisions of Section 5.1(h) hereof, be exercisable
by such Optionee at any time prior to the expiration of the Option or within
three months after the date of such termination, whichever period of time is
shorter, but only to the extent of the accrued right to exercise an Option at
the date of such termination.
Section 6.3. Subject to the provisions of any employment agreement between
the Company (or a subsidiary) and an Optionee, in the case of an Optionee who
becomes disabled
6
<PAGE>
(as defined by Section 22(e)(3) of the Code or pursuant to the terms of such an
employment agreement), the option rights of such Optionee under any then
outstanding Non-Qualified or Incentive Option shall, subject to the provisions
of Section 5.1(h) hereof, be exercisable by such Optionee at any time prior to
the expiration of the Option or within one year after the date of termination of
employment or service due to disability, whichever period of time is shorter,
but only to the extent of the accrued right to exercise an Option at the date of
such termination.
Section 6.4. In the event of the death of an Optionee, the option rights
of such Optionee under any then outstanding Non-Qualified or Incentive Option
shall be exercisable by the person or persons to whom these rights pass by will
or by the laws of descent and distribution, at any time prior to the expiration
of the Option or within three years after the date of death, whichever period of
time is shorter, but only to the extent of the accrued right to exercise an
Option at the date of death. If a person or estate acquires the right to
exercise a Non-Qualified or Incentive Option by bequest or inheritance, the
Administrator may require reasonable evidence as to the ownership of such
Option, and may require such consents and releases of taxing authorities as the
Administrator may deem advisable.
Section 6.5. The Administrator may also provide that an employee must be
continuously employed by the Company for such period of time as the
Administrator, in its discretion, deems advisable before the right to exercise
any portion of an Option granted to such employee will accrue, and may also set
such other targets, restrictions or other terms relating to the employment of
the Optionee which targets, restrictions, or terms must be fulfilled or complied
with, as the case may be, prior to the exercise of any portion of an Option
granted to any employee.
Section 6.6. Options granted hereunder shall not be affected by any change
of duties or position, so long as the Optionee continues in the service of the
Company.
Section 6.7. Nothing contained in this Plan or in any Option granted
pursuant hereto shall confer upon any Optionee any right with respect to
continuance of employment or service by the Company nor interfere in any way
with the right of the Company to terminate the Optionee's employment or service
or change the Optionee's compensation at any time.
ARTICLE VII
-----------
PURCHASE OF SHARES
------------------
Section 7.1. Except as provided in this Article VII, an Option shall be
exercised by tender to the Company of the full exercise price of the shares of
Common Stock with respect to which an Option is exercised and written notice of
the exercise. The right to purchase shares of Common Stock shall be cumulative
so that, once the right to purchase any shares of Common Stock has accrued, such
shares or any part thereof may be purchased at any time thereafter until the
expiration or termination of the Option. A partial exercise of an Option shall
not affect the right of the Optionee to subsequently exercise his or her Option
from time to time, in accordance
7
<PAGE>
with this Plan, as to the remaining number of shares of Common Stock subject to
the Option. The purchase price payable upon exercise of an Option shall be in
United States dollars and shall be payable in cash or by certified bank check.
Notwithstanding the foregoing, in lieu of cash, an Optionee may, with the
approval of the Administrator, exercise his or her Option by tendering to the
Company shares of Common Stock owned by him or her having an aggregate fair
market value at least equal to the aggregate purchase price. The "fair market
value" of any shares of Common Stock so surrendered shall be determined by the
Administrator in accordance with Section 5.1(b) hereof.
Section 7.2. Except as provided in Article VI above, an Option may not be
exercised unless the holder thereof is an officer, director, employee, or
consultant of the Company at the time of exercise.
Section 7.3. No Optionee, or Optionee's executor, administrator, legatee,
or distributee or other permitted transferee, shall be deemed to be a holder of
any shares of Common Stock subject to an Option for any purpose whatsoever
unless and until such Option has been exercised and a stock certificate or
certificates for the shares of Common Stock purchased by the Optionee are issued
to the Optionee in accordance with the terms of this Plan. No adjustment shall
be made for dividends (ordinary or extraordinary, whether in cash, securities or
other property) or distributions or other rights for which the record date is
prior to the date that any such stock certificate is issued, except as provided
in Article VIII hereof.
Section 7.4. If: (i) the listing, registration or qualification of the
Options issued hereunder or of any securities issuable upon exercise of such
Options (the "Subject Securities") upon any securities exchange or quotation
system or under federal or state law is necessary as a condition of or in
connection with the issuance or exercise of the Options; or (ii) the consent or
approval of any governmental regulatory body is necessary as a condition of or
in connection with the issuance or exercise of the Options, the Company shall
not be obligated to deliver the certificates representing the Subject Securities
or to accept or to recognize an Option exercise unless and until such listing,
registration, qualification, consent or approval shall have been effected or
obtained. The Company will take reasonable action to so list, register, or
qualify the Options and the Subject Securities, or effect or obtain such consent
or approval, so as to allow for issuance and/or exercise.
Section 7.5. An Optionee may be required to represent to the Company as a
condition of his or her exercise of Options issued under this Plan that: (i)
the Subject Securities acquired upon exercise of his or her Option are being
acquired by him or her for investment purposes only and not with a view to
distribution or resale, unless counsel for the Company is then of the view that
such a representation is not necessary and is not required under the Securities
Act of 1933, as amended (the "Securities Act"), or any other applicable statute,
law, regulation or rule; and (ii) that the Optionee shall make no exercise or
disposition of an Option or of the Subject Securities in contravention of the
Securities Act, the Exchange Act of 1934, or the rules and regulations
thereunder. Optionees may also be required to provide (as a condition precedent
to exercise of an Option) such documentation as may be
8
<PAGE>
reasonably requested by the Company to assure compliance with applicable law and
the terms and conditions of this Plan and the subject Option.
Section 7.6. An Option may be exercised by tender to the Administrator of
a written notice of exercise together with advice of the delivery of an order to
a broker to sell part or all of the shares of Common Stock subject to such
exercise notice and an irrevocable order to such broker to deliver to the
Company (or its transfer agent) sufficient proceeds from the sale of such shares
to pay the exercise price and any withholding taxes. All documentation and
procedures to be followed in connection with such a "cashless exercise" shall be
approved in advance by the Administrator.
ARTICLE VIII
------------
CHANGE IN NUMBER OF OUTSTANDING SHARES OF
-----------------------------------------
STOCK, ADJUSTMENTS, REORGANIZATIONS, ETC.
-----------------------------------------
Section 8.1. In the event that the outstanding shares of Common Stock of
the Company are hereafter increased or decreased or changed into or exchanged
for a different number of shares or kind of shares or other securities of the
Company or of another corporation by reason of reorganization, merger,
consolidation, recapitalization, reclassification, stock split, combination of
shares, or a dividend payable in capital stock, appropriate adjustment shall be
made by the Administrator in the number and kind of shares for the purchase of
which Options may be granted under this Plan, including the maximum number that
may be granted to any one person. In addition, the Administrator shall make
appropriate adjustments in the number and kind of shares as to which outstanding
Options, or portions thereof then unexercised, shall be exercisable, to the end
that the Optionee's proportionate interest shall be maintained as before the
occurrence to the unexercised portion of the Option and with a corresponding
adjustment in the option price per share. Any such adjustment made by the
Administrator shall be conclusive.
Section 8.2. The grant of an Option hereunder shall not affect in any way
the right or power of the Company to make adjustments, reclassifications,
reorganizations or changes of its capital or business structure or to merge or
to consolidate or to dissolve, liquidate or sell, or transfer all or any part of
its business or assets.
Section 8.3. Upon the dissolution or liquidation of the Company, or upon a
reorganization, merger or consolidation of the Company as a result of which the
outstanding securities of the class then subject to Options hereunder are
changed into or exchanged for cash or property or securities not of the
Company's issue, or upon a sale of substantially all the property of the Company
to an association, person, party, corporation, partnership, or control group as
that term is construed for purposes of the Exchange Act, this Plan shall
terminate, and all Options theretofore granted hereunder shall terminate, unless
provision be made in writing in connection with such transaction for the
continuance of this Plan and/or for the assumption of Options theretofore
granted, or the substitution for such Options of options covering the stock of a
successor employer corporation, or a parent or a subsidiary thereof, with
appropriate
9
<PAGE>
adjustments as to the number and kind of shares and prices, in which event this
Plan and options theretofore granted shall continue in the manner and under the
terms so provided. If this Plan and unexercised Options shall terminate pursuant
to the foregoing sentence, all persons owning any unexercised portions of
Options then outstanding shall have the right, at such time prior to the
consummation of the transaction causing such termination as the Company shall
designate, to exercise the unexercised portions of their Options, including the
portions thereof which would, but for this Section 8.3 not yet be exercisable.
ARTICLE IX
----------
DURATION, AMENDMENT AND TERMINATION
-----------------------------------
Section 9.1. The Board of Directors may at any time terminate this Plan or
make such amendments hereto as it shall deem advisable and in the best interests
of the Company, without action on the part of the stockholders of the Company
unless such approval is required pursuant to Section 422 of the Code or the
regulations thereunder; provided, however, that no such termination or amendment
-------- -------
shall, without the consent of the individual to whom any Option shall
theretofore have been granted, affect or impair the rights of such individual
under such Option; and provided, further, that unless the holders of a majority
-------- -------
of each of the classes of the Company's outstanding capital stock entitled to
vote thereon shall have first approved thereof, no amendment of this Plan shall
be made whereby: (a) the total number of shares of Common Stock which may be
optioned under this Plan to all individuals, or any of them, shall be increased,
except by operation of the adjustment provisions of Article VIII hereof; (b) the
authority to administer this Plan by the Administrator shall be withdrawn; (c)
the maximum term of the Options shall be extended; (d) the minimum purchase
price of Incentive Options shall be decreased; (e) the price to Optionees to
whom Options have been granted shall be changed; or (f) the class of individuals
eligible to participate in this Plan is modified. Pursuant to (S)422(b) of the
Code, no Incentive Option may be granted pursuant to this Plan after ten years
from the date this Plan is adopted or the date this Plan is approved by the
stockholders of the Company, whichever is earlier.
ARTICLE X
---------
RESTRICTIONS
------------
Section 10.1. Any Options and shares of Common Stock issued pursuant hereto
shall be subject to such restrictions on transfer and limitations as shall, in
the opinion of the Administrator, be necessary or advisable to assure compliance
with the laws, rules and regulations of the United States government or any
state or jurisdiction thereof. In addition, the Administrator may in any Option
Agreement impose such other restrictions upon the disposition or exercise of an
Option or upon the sale or other disposition of the shares of Common Stock
deliverable upon exercise thereof as the Administrator may, in its sole
discretion, determine. By accepting the grant of an Option or SAR pursuant
hereto, each Optionee shall agree to any such restrictions.
10
<PAGE>
Section 10.2. Any certificate evidencing shares of Common Stock issued
pursuant to exercise of an Option shall bear such legends and statements as the
Administrator, the Board of Directors or counsel to the Company shall deem
advisable to assure compliance with the laws, rules and regulations of the
United States government or any state or jurisdiction thereof. No certificate
evidencing shares of Common Stock shall be delivered pursuant to exercise of the
Options granted under this Plan until the Company has obtained such consents or
approvals from such regulatory bodies of the United States government or any
state or jurisdiction thereof as the Administrator, the Board of Directors or
counsel to the Company deems necessary or advisable.
ARTICLE XI
----------
FINANCIAL ASSISTANCE
--------------------
Section 11.1. The Company is vested with the authority hereunder to assist
any employee to whom an Option is granted hereunder (including any officer or
director of the Company or any of its subsidiaries who is also an employee) in
the payment of the purchase price payable upon exercise of such Option, by
lending the amount of such purchase price to such employee on such terms and at
such rates of interest and upon such security (or unsecured) as shall have been
authorized by or under authority of the Board of Directors. Any such assistance
shall comply with the requirements of Regulation G promulgated by the Board of
the Federal Reserve System, as amended from time to time, and any other
applicable law, rule or regulation.
ARTICLE XII
-----------
APPLICATION OF FUNDS
--------------------
Section 12.1. The proceeds received by the Company from the issuance and
sale of Common Stock upon exercise of Options granted pursuant to this Plan are
to be added to the general funds of the Company and used for its corporate
purposes as determined by the Board of Directors.
ARTICLE XIII
------------
EFFECTIVENESS OF PLAN
---------------------
Section 13.1. This Plan shall become effective upon adoption by the Board
of Directors, and Options may be issued hereunder from and after that date
subject to the provisions of Section 3.3 above. This Plan must be approved by
the Company's stockholders in accordance with the applicable provisions
(relating to the issuance of stock or options) of the Company's governing
documents and state law or, if no such approval is prescribed therein, by the
affirmative vote of the holders of a majority of the votes cast at a duly held
stockholders meeting at which a quorum representing a majority of all the
Company's outstanding voting stock is present and voting (in person or by proxy)
or, without regard to any required time period for
11
<PAGE>
approval, by any other method permitted by Section 422 of the Code and the
regulations thereunder. If such stockholder approval is not obtained within one
year of the adoption of this Plan by the Board of Directors or within such other
time period required under Section 422 of the Code and the regulations
thereunder, this Plan shall remain in force, provided however, that all Options
issued and issuable hereunder shall automatically be deemed to be Non-Qualified
Options.
IN WITNESS WHEREOF, pursuant to the approval of this Plan by the Board of
Directors, this Plan is executed and adopted the 8th day of July, 1996.
THINK NEW IDEAS, INC.
[CORPORATE SEAL]
By: /s/ Scott A. Mednick
-----------------------------
Scott A. Mednick, Chief Executive Officer
ATTEST:
By: /s/ Melvin Epstein
-----------------------------
Melvin Epstein, Secretary
12
<PAGE>
ESCROW AGREEMENT
----------------
AGREEMENT, dated as of the th day of ________, 1996, by and among
Continental Stock Transfer & Trust Company, a New York corporation (hereinafter
referred to as the "Escrow Agent"), THINK New Ideas, Inc., a Delaware
corporation (the "Company"), and the stockholders of the Company who have
executed this agreement (hereinafter collectively called the "Stockholders").
WHEREAS, the Company contemplates a public offering ("Public
Offering") of shares of its Common Stock, par value $.0001 per share (the
"Common Stock") through Commonwealth Associates as underwriter (the
"Underwriter") pursuant to a Registration Statement on Form SB-2 to be filed
with the Securities and Exchange Commission (the "Registration Statement"); and
WHEREAS, the Stockholders have agreed to deposit in escrow an
aggregate of 825,000 shares of Common Stock, $.0001 par value, upon the terms
and conditions set forth herein.
In consideration of the mutual covenants and promises herein
contained, the parties hereto agree as follows:
1. The Stockholders and the Company hereby appoint Continental Stock
Transfer & Trust Company as Escrow Agent and agree that the Stockholders will,
prior to the filing of the Registration Statement (as hereinafter defined)
relating to the Public Offering deliver to the Escrow Agent to hold in
accordance with the provisions hereof, certificates representing an aggregate of
825,000 shares of Common Stock owned of record by the Stockholders in the
respective amounts set forth on Exhibit A hereto (the "Escrow Shares"), together
with stock powers executed in blank. The Escrow Agent, by its execution and
delivery of this Agreement
<PAGE>
hereby acknowledges receipt of the Escrow Shares and accepts its appointment as
Escrow Agent to hold the Escrow Shares in escrow, upon the terms, provisions and
conditions hereof.
2. This Agreement shall become effective upon the date on which the
Securities and Exchange Commission declares effective the Registration Statement
("Effective Date") and shall continue in effect until the earlier of (i) the
date specified in paragraph 4(e) hereof or (ii) the distribution by the Escrow
Agent of all of the Escrow Shares in accordance with the terms hereof (the
"Termination Date"). The period of time from the Effective Date until the
Termination Date is referred to herein as the "Escrow Period."
3. During the Escrow Period, the Escrow Agent shall receive all of
the money, securities, rights or property distributed in respect of the Escrow
Shares then held in escrow, including any such property distributed as dividends
or pursuant to any stock split, merger, recapitalization, dissolution, or total
or partial liquidation of the Company, such property to be held and distributed
as herein provided and hereinafter referred to collectively as the "Escrow
Property."
4. (a) The Escrow Shares are subject to release to the
Stockholders only in the event the conditions set forth herein are met. The
Escrow Agent, upon notice to such effect from the Company as provided in
paragraph 5 hereof, shall deliver the Escrow Shares, together with stock powers
executed in blank, and the Escrow Property deposited in escrow with respect to
such Escrow Shares, to the respective Stockholders, if, and only if, one of the
following conditions is met:
(i) The Company's net income before provision for income taxes (the
"Minimum Pre-Tax Income") equals or exceeds $1.15 per share of
the Company's Common Stock for any of the fiscal years ending
June 30, 1997, 1998 or 1999; or
-2-
<PAGE>
(ii) The Closing Price (as defined herein) of the Company's Common
Stock shall average in excess of $30 per share for any 40
consecutive business days during the period commencing on the
Effective Date and ending 36 months from the Effective Date; or
(iii) The Company is acquired by or merged into another entity in a
transaction in which stockholders of the Company receive per
share consideration at least equal to the level set forth in
(ii) above.
(b) As used in this Section 4, the term "Closing Price" shall be subject
to adjustments in the event of any stock dividend, stock distribution,
stock split or other similar event and shall mean:
(1) If the principal market for the Common Stock is a national
securities exchange or the Nasdaq National Market, the closing
sales price of the Common Stock as reported by such exchange or
market, or on a consolidated tape reflecting transactions on
such exchange or market; or
(2) if the principal market for the Common Stock is not a national
securities exchange or the Nasdaq National Market and the Common
Stock is quoted on the Nasdaq SmallCap Market, the closing bid
price of the Common Stock as quoted on the Nasdaq SmallCap
Market; or
(3) if the principal market for the Common Stock is not a national
securities exchange or the Nasdaq National Market and the Common
Stock is not quoted on the Nasdaq SmallCap Market, the closing
bid for the Common Stock as reported by the National Quotation
Bureau, Inc. ("NQB") or at least two market makers in the Common
Stock if quotations are not available from NQB but are available
from market makers.
(c) The determination of Minimum Pre-Tax Income shall be (i) calculated
exclusive of any extraordinary earnings or charges (including any charges
incurred by the Company in connection with the release from escrow of the Escrow
Shares and any Escrow Property in respect thereof pursuant to the provisions of
this paragraph 4); and (ii) determined by the Company's independent public
accountants in accordance with U.S. generally accepted accounting principles.
-3-
<PAGE>
(d) The Minimum Pre-Tax Income shall be calculated assuming conversion
and/or exercise of all outstanding equity securities of the Company convertible
into or exchangeable for Common Stock, whether or not convertible or
exchangeable at the time of computation (and after adjustment for any stock
dividends, stock splits or similar events); provided that the 200,000 warrants
to be issued to the Underwriter in connection with the Public Offering shall be
excluded for purposes of the calculation of Minimum Pre-Tax Income.
(e) If the Escrow Agent has not received the notice provided for in
Paragraph 5 hereof and delivered all of the Escrow Shares and related Escrow
Property in accordance with the provisions of this Paragraph 4 on or prior to
September 30, 1999, the Escrow Agent shall deliver the certificates representing
all or the remaining Escrow Shares, together with stock powers executed in
blank, and any related Escrow Property to the Company to be placed in the
Company's treasury for cancellation thereof as a contribution to capital. After
such date, the Stockholders shall have no further rights as a stockholder of the
Company with respect to any of the cancelled Escrow Shares.
5. Upon the occurrence or satisfaction of any of the events or
conditions specified in Paragraph 4 hereof, the Company shall promptly give
appropriate notice to the Escrow Agent, the Underwriter (and if the transfer
agent of the Company's Common Stock is different from the Escrow Agent, such
transfer agent) and present such documentation as is reasonably required by the
Escrow Agent to evidence the satisfaction of such conditions.
6. It is understood and agreed by the parties to this Agreement as
follows:
(a) The Escrow Agent is not and shall not be deemed to be a trustee
for any party for any purpose and is merely acting as a depository and in a
ministerial capacity hereunder with the limited duties herein prescribed.
(b) The Escrow Agent does not have and shall not be deemed to have any
responsibility in respect of any instruction, certificate or notice delivered to
it or of the
-4-
<PAGE>
Escrow Shares or any related Escrow Property other than faithfully to carry out
the obligations undertaken in this Agreement and to follow the directions in
such instruction or notice provided in accordance with the terms hereof.
(c) The Escrow Agent is not and shall not be deemed to be liable for
any action taken or omitted by it in good faith and may rely upon, and act in
accordance with, the advice of its counsel without liability on its part for any
action taken or omitted in accordance with such advice. In any event, its
liability hereunder shall be limited to liability for gross negligence, willful
misconduct or bad faith on its part.
(d) The Escrow Agent may conclusively rely upon and act in accordance
with any certificate, instruction, notice, letter, telegram, cablegram or other
written instrument believed by it to be genuine and to have been signed by the
proper party or parties.
(e) The Company agrees (i) to pay the Escrow Agent's reasonable fees
and to reimburse it for its reasonable expenses including attorney's fees
incurred in connection with duties hereunder and (ii) to save harmless,
indemnify and defend the Escrow Agent for, from and against any loss, damage,
liability, judgment, cost and expense whatsoever, including counsel fees,
suffered or incurred by it by reason of, or on account of, any misrepresentation
made to it or its status or activities as Escrow Agent under this Agreement
except for any loss, damage, liability, judgment, cost or expense resulting from
gross negligence, willful misconduct or bad faith on the part of the Escrow
Agent. The obligation of the Escrow Agent to deliver the Escrow Shares to
either the Stockholders or the Company shall be subject to the prior
satisfaction upon demand from the Escrow Agent, of the Company's obligations to
so save harmless, indemnify and defend the Escrow Agent and to reimburse the
Escrow Agent or otherwise pay its fees and expenses hereunder.
-5-
<PAGE>
(f) The Escrow Agent shall not be required to defend any legal
proceeding which may be instituted against it in respect of the subject matter
of this Agreement unless requested to do so by the Stockholders and indemnified
to the Escrow Agent's satisfaction against the cost and expense of such defense
by the party requesting such defense. If any such legal proceeding is instituted
against it, the Escrow Agent agrees promptly to give notice of such proceeding
to the Stockholders and the Company. The Escrow Agent shall not be required to
institute legal proceedings of any kind.
(g) The Escrow Agent shall not, by act, delay, omission or otherwise,
be deemed to have waived any right or remedy it may have either under this
Agreement or generally, unless such waiver be in writing, and no waiver shall be
valid unless it is in writing, signed by the Escrow Agent, and only to the
extent expressly therein set forth. A waiver by the Escrow Agent under the term
of this Agreement shall not be construed as a bar to, or waiver of, the same or
any other such right or remedy which it would otherwise have on any other
occasion.
(h) The Escrow Agent may resign as such hereunder by giving 30 days
written notice thereof to the Stockholders and the Company. Within 20 days
after receipt of such notice, the Stockholders and the Company shall furnish to
the Escrow Agent written instructions for the release of the Escrow Shares and
any related Escrow Property (if such shares and property, if any, have not yet
been released pursuant to Paragraph 4 hereof) to a substitute Escrow Agent which
(whether designated by written instructions from the Stockholders and the
Company jointly or in the absence thereof by instructions from a court of
competent jurisdiction to the Escrow Agent) shall be a bank or trust company
organized and doing business under the laws of the United States or any state
thereof. Such substitute Escrow Agent shall thereafter hold any Escrow Shares
and any related Escrow Property received by it pursuant to the terms of this
-6-
<PAGE>
Agreement and otherwise act hereunder as if it were the Escrow Agent originally
named herein. The Escrow Agent's duties and responsibilities hereunder shall
terminate upon the release of all shares then held in escrow according to such
written instruction or upon such delivery as herein provided. This Agreement
shall not otherwise be assignable by the Escrow Agent without the prior written
consent of the Company.
7. The Stockholders shall have the sole power to vote the Escrow
Shares and any securities deposited in escrow under this Agreement while they
are being held pursuant to this Agreement.
8. (a) Each of the Stockholders agrees that during the term of this
Agreement he will not sell, transfer, hypothecate, negotiate, pledge, assign,
encumber or otherwise dispose of any or all of the Escrow Shares set forth
opposite his name on Exhibit A hereto, unless and until the Company shall have
given the notice as provided in Paragraph 5. This restriction shall not be
applicable to transfers upon death, by operation of law, to family members of
the Stockholders or to any trust for the benefit of the Stockholders, provided
that such transferees agree to be bound by the provisions of this Agreement.
(b) The Stockholders will take any action necessary or
appropriate, including the execution of any further documents or agreements, in
order to effectuate the transfer of the Escrow Shares to the Company if required
pursuant to the provisions of this Agreement.
9. Each of the certificates representing the Escrow Shares will bear
legends to the following effect, as well as any other legends required by
applicable law:
(a) "The sale, transfer, hypothecation, negotiation, pledge,
assignment, encumbrance or other disposition of the shares
evidenced by this certificate are restricted by and are subject
to all of the terms,
-7-
<PAGE>
conditions and provisions of a certain Escrow Agreement entered
into among Commonwealth Associates, THINK New Ideas, Inc. and its
Stockholders, dated as of _________, 199_, a copy of which may be
obtained from the Secretary of THINK New Ideas, Inc. No transfer,
sale or other disposition of these shares may be made unless
specific conditions of such agreement are satisfied.
(b) "The shares evidenced by this certificate have not been registered
under the Securities Act of 1933, as amended. No transfer, sale or
other disposition of these shares may be made unless a
registration statement with respect to these shares has become
effective under said act, or the Company is furnished with an
opinion of counsel satisfactory in form and substance to it that
such registration is not required."
Upon execution of this Agreement, the Company shall direct the
transfer agent for the Company to place stop transfer orders with respect to the
Escrow Shares and to maintain such orders in effect until the transfer agent and
the Underwriter shall have received written notice from the Company as provided
in Paragraph 5.
10. Each notice, instruction or other certificate required or
permitted by the terms hereof shall be in writing and shall be communicated by
personal delivery, fax or registered or certified mail, return receipt
requested, to the parties hereto at the addresses set forth below, or at such
other address as any of them may designate by notice to each of the others:
(i) If to the Company, to:
THINK New Ideas, Inc.
45 West 36th Street
New York, New York 10018
(ii) If to the Stockholders to their respective addresses as set
forth on Exhibit A hereto.
(iii) If to the Escrow Agent, to:
Continental Stock Transfer & Trust Company
Two Broadway
New York, New York 10004
-8-
<PAGE>
(iv) If to the Underwriter, to:
Commonwealth Associates
733 Third Avenue
New York, New York 10017
All notices, instructions or certificates given hereunder to the Escrow Agent
shall be effective upon receipt by the Escrow Agent. All notices given
hereunder by the Escrow Agent shall be effective and deemed received upon
personal delivery or transmission by fax or, if mailed, five (5) calendar days
after mailing by the Escrow Agent.
A copy of all communications sent to the Company, the Stockholders or
the Escrow Agent shall be sent by ordinary mail to DeMartino, Finkelstein, Rosen
& Virga, 1818 N. Street, N.W. Washington, D.C. 20036, Attention: Ralph
DeMartino. A copy of all communications sent to the Underwriter shall be sent
by ordinary mail to Bachner, Tally, Polevoy & Misher LLP, 380 Madison Avenue,
New York, NY 10017, Attention: Sheldon Misher, Esq.
11. Except as set forth in paragraph 12 hereof, this Agreement may
not be modified, altered or amended in any material respect or cancelled or
terminated except with the prior consent of the holders of all of the
outstanding shares of Common Stock of the Company.
12. In the event that the Public Offering is not consummated within
twenty-five (25) days of the Effective Date of the Registration Statement, this
Agreement shall terminate and be of no further force and effect and the Escrow
Agent, upon written notice from both the Company and the Underwriter in
accordance with paragraph 10 hereof of such termination, will return the Escrow
Shares and any Escrow Property in respect thereof to the Stockholders.
-9-
<PAGE>
13. This Agreement shall be governed by and construed in accordance
with the laws of New York and shall be binding upon and inure to the benefit of
all parties hereto and their respective successors in interest and assigns.
14. This Agreement may be executed in several counterparts, which
taken together shall constitute a single instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed by their duly authorized officers on the day and year first above
written.
THINK New Ideas, Inc.
By: ______________________
CONTINENTAL STOCK TRANSFER
& TRUST COMPANY
By: __________________________
STOCKHOLDERS:
_________________________________
__________________________________
-10-
<PAGE>
EXHIBIT A
---------
STOCKHOLDERS' LIST
Name and Address Stock
of Stockholder (1) Certificate No. Number of Escrow Shares
------------------- --------------- -----------------------
-11-
<PAGE>
EXHIBIT 10.20a
Thursday, September 20, 1996
THINK New Ideas, Inc.
45 West 36th Street
New York, New York 10036
Attention: Mel Epstein
Dear Mr. Epstein:
This letter agreement (the "Agreement") confirms the understanding between
THINK New Ideas, Inc., a Delaware corporation ("Think"), and Mr. Dan Carlisle
and Dr. James H. Carlisle in connection with the restructuring of the debt owed
by Think to Dr. James H. Carlisle and Mr. Dan Carlisle, respectively, on the
terms and subject to the conditions set forth herein.
1. Dr. James H. Carlisle shall forgive, effective as of June 30,
1996, all debt and accrued salary owed by Think to Dr. James H. Carlisle
(including $1,048,000 loaned to NetCube Corporation (previously Anzen
Corporation), a Delaware corporation, and $180,000 that was due from
NetCube Corporation, a New Jersey corporation), except as outlined in
paragraph 3 below.
2. (A) Think shall issue a note in the principal amount of $288,000
to Mr. Dan Carlisle, to accrue interest of 8% per annum from October 1,
1996, payable on the earliest of (1) immediately prior to an initial public
offering of securities of Think, (2) the issuance by Think in a private
offering of securities of Think after September 1, 1996 to investors the
proceeds of which exceed $3,000,000, (3) the sale of 50% or more of the
assets or properties of Think or (4) March 31, 1998. The note will be
convertible in full at the option of Mr. Dan Carlisle at the earlier of (i)
January 31, 1998 or (ii) upon the occurrence of an event described in
clauses (2) or (3) into shares of Common Stock of Think at a per share
price of the price per share in the initial public offering, or, if no
initial public offering has occurred at the time of conversion, at a per
share of $5.00, subject to adjustments in the case of recapitalization,
reorganization, stock splits, stock dividends and similar events. Think
shall register such shares with the Securities and Exchange Commission
("SEC") as soon as reasonably practicable after any of its shares of Common
Stock are registered with the SEC; and (B) Think shall issue a note in the
principal amount of $515,760 to Mr. Dan Carlisle, to accrue interest of 8%
per annum from October 1, 1996, payable on the earliest of (1) the issuance
by Think in a private offering of securities of Think after September 1,
1996 to investors the proceeds of which exceed $3,000,000, (2) a public
offering of securities of Think following an initial public offering of
securities of Think, (3) the sale of 50% or more of the assets or
properties of Think or (4) March 31, 1998. The note will be convertible in
full at the option of Mr. Dan Carlisle at the earlier of (i) January 31,
1998 or (ii) upon the occurrence of an event described in clauses (1), (2)
or (3) into shares of Common Stock of Think at a per share price of the
price per share price in the initial public offering, or, if no initial
public offering has occurred at the time of conversion, at a per share
price of $5.00,
<PAGE>
THINK New Ideas, Inc.
September 20, 1996
Page 2
subject to adjustments in the case of recapitalization, reorganization,
stock splits, stock dividends and similar events. Think shall register such
shares with the SEC promptly as soon as reasonably practicable any of its
shares of Common Stock are registered with the SEC; and
3. Think shall issue a note in the principal amount of $132,000 to
Dr. James H. Carlisle, to accrue interest of 8% per annum from July 1,
1996, payable on the earliest of (1) immediately prior to an initial public
offering of securities of Think, (2) the issuance by Think in a private
offering of securities of Think after September 1, 1996 to investors the
proceeds of which exceed $3,000,000, (3) the sale of 50% or more of the
assets or properties of Think or (4) March 31, 1998. The note will be
convertible in full at the option of Dr. James H. Carlisle at the earlier
of (i) January 31, 1998 or (ii) upon the occurrence of an event described
in clauses (2) or (3) into shares of Common Stock of Think at a per share
price of the price per share in the initial public offering, or, if no
initial public offering has occurred at the time of conversion, at a per
share price of $5.00, subject to adjustments in the case of
recapitalization, reorganization, stock splits, stock dividends and similar
events. Think shall register such shares with the SEC as soon as reasonably
practicable after any of its shares of Common Stock are registered with the
SEC.
4. Think shall pay or reimburse Dr. James H. Carlisle and Mr. Dan
Carlisle for all their expenses, including legal fees and expenses of
counsel, rising in connection the restructuring of the debt owed to them by
Think and the registration of shares of Common Stock of Think to be issued
upon conversion of the notes described in paragraphs 2 and 3 above;
provided that, Think is not required to pay for (1) any such expenses
incurred in connection with the preparation of this letter agreement in
excess of $2,000 and (2) for the legal fees of counsel to Dr. James H.
Carlisle and Mr. Dan Carlisle in connection with the review of the notes
described in paragraphs 2 and 3 above to be prepared by counsel to Think.
5. The notes described in paragraphs 2 and 3 above shall not be
convertible during the pendency of any registration statement filed by
Think under the Securities Act of 1933, as amended (the "1933 Act"), if in
the opinion of counsel for Think such conversion would not qualify for an
exemption under the 1933 Act or would create integration issues that
adversely affect Think, unless the shares into which the notes are
convertible are registered under the 1933 Act.
6. Each of Dr. James H. Carlisle and Mr. Dan Carlisle agrees to
execute a lock-up agreement with the underwriters in the initial public
offering of securities of Think with respect to the sale of the shares into
which the notes are convertible at the
<PAGE>
THINK New Ideas, Inc.
September 20, 1996
Page 3
same terms as all the other stockholders, provided that the initial public
offering of securities of Think occurs prior to December 31, 1996.
If the foregoing terms correctly set forth our agreement, please confirm
this by signing and returning to Dr. James H. Carlisle the duplicate copy of
this letter. Thereupon this letter, as signed in counterpart, shall constitute
our agreement on the subject matter herein.
/s/ Dan Carlisle
-------------------------------
Dan Carlisle
/s/ James H. Carlisle
-------------------------------
Dr. James H. Carlisle
Confirmed and Agreed to:
THINK NEW IDEAS, INC.
By: /s/ Scott Mednick
-----------------------------------
Name: Scott Mednick
Title: Chief Executive Officer
<PAGE>
EXHIBIT 10:20B
NEITHER THIS NOTE NOR THE SECURITIES ISSUABLE UPON CONVERSION HEREOF HAVE BEEN
THE SUBJECT OF REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR
UNDER THE SECURITIES LAWS OF ANY STATE AND THE SAME HAVE BEEN (OR WILL BE, WITH
RESPECT TO THE SECURITIES ISSUABLE UPON CONVERSION HEREOF) ISSUED IN RELIANCE ON
EXEMPTIONS FROM THE REGISTRATION REQUIREMENTS OF SAID ACT AND SUCH LAWS.
NEITHER THIS NOTE NOR THE SECURITIES ISSUABLE UPON CONVERSION HEREOF MAY BE
SOLD, TRANSFERRED, PLEDGED, HYPOTHECATED OR OTHERWISE DISPOSED OF EXCEPT AS
PERMITTED UNDER SUCH SECURITIES LAWS, PURSUANT TO REGISTRATION OR EXEMPTION
THEREFROM.
NON-NEGOTIABLE 8% CONVERTIBLE PROMISSORY NOTE
---------------------------------------------
$132,000 Culver City, California
October 1, 1996
FOR VALUE RECEIVED, the undersigned, THINK New Ideas, Inc., a Delaware
corporation (hereinafter referred to as the "Maker"), hereby promises to pay to
Dr. James Carlisle (the "Payee") at 115 River Road, Edgewater, New Jersey
07020, or at such other place as the holder hereof may from time to time
designate in writing, the principal sum of One Hundred Thirty-two Thousand
Dollars ($132,000) in one installment due upon the date (the "Maturity Date")
that is the earlier of: (i) March 31, 1998 or such later date as extended by
the Payee as set forth below; (ii) the Maker's receipt of proceeds of at least
Three Million Dollars ($3,000,000) from one or more public or private equity or
debt offerings (a "Private Offering") conducted by the Maker; (iii) immediately
prior to an initial public offering of securities of the Maker (the "Public
Offering"); or (iv) the sale of 50% or more of the assets or properties of the
Maker (an "Asset Disposition"), together with interest from and after July 1,
1996 at the rate of eight percent (8%) per annum computed on the unpaid
principal balance. Interest shall be paid by Maker to the Payee on the Maturity
Date. By acceptance of this Note, the Payee represents, warrants, covenants and
agrees that he will abide by and be bound by its terms.
1. Prepayment and Notices. The unpaid principal balance outstanding under
----------------------
this Note may be prepaid in part or in full by the Maker without penalty, upon
five (5) days notice to the Payee stating the repayment amount and repayment
date (the "Repayment Date"). The Maker must provide notice five (5) business
days prior to the Maturity Date to the Payee.
2. Conversion.
----------
(a) The unpaid principal amount of this Note shall be convertible at
the option of the Payee (the "Conversion Right") upon the earlier of: (i)
January 31, 1998; or (ii) upon completion of a Private Offering or an Asset
Disposition as set forth above prior to the close of business on the Maturity
Date in the manner and on the terms hereinafter set forth, into shares of common
stock, par value $.0001 per share (the "Common Stock") of the Maker at a price
per share equal to the initial offering price of shares of Common Stock in the
Public Offering or, in the absence of consummation of the Public Offering, at
$7.50 per share (the "Conversion Price"), subject to adjustment pursuant to
Section 4 hereof.
<PAGE>
(b) The Maker may, at its option and upon notice given no later than
February 28, 1998, elect to extend the Maturity Date to a date after March 31,
1998, provided that this Note has not previously been prepaid or converted.
(c) Notwithstanding any other provision of this Note to the contrary,
upon receipt of notice of the Maker's intent to prepay part or all of the
principal amount hereunder or of a Maturity Date, the Payee may elect to
exercise the Conversion Right and convert pursuant to Section 2(a) hereof a
portion (as set forth in subsection (a) hereof) of the amount of unpaid
principal which the Maker intends to prepay, up to the close of business on the
last business day before the stated Repayment Date.
(d) Notwithstanding any other provision hereof, the Conversion Right
may not be exercised at any time during which a registration statement under the
Securities Act of 1933 is filed but not effective, absent the written consent of
the Company.
3. Conversion Procedure. The Conversion Right may be exercised by the
--------------------
Payee by the surrender of this Note (along with the conversion form attached
hereto, duly executed) to the Maker at the principal office of the Maker. Risk
of loss prior to surrender of this Note shall be borne by the Payee.
Consequently, hand delivery with written acknowledgement of receipt by the Maker
or registered or certified mail, return receipt requested, is the preferred mode
of delivery. Conversion shall be deemed to have been effected on the date when
such delivery of the conversion notice is actually made or, if earlier, at the
expiration of five (5) calendar days after being sent to the Maker by the Payee
by registered or certified mail, return receipt requested, with postage thereon
fully prepaid (the "Conversion Date"). As promptly as practicable thereafter,
the Maker shall issue and deliver to the Payee: (a) a new note representing the
difference between principal amount of this Note and the principal amount hereof
which has been converted pursuant hereto; and (b) certificates representing the
number of shares of Common Stock to which the Payee is entitled. The Maker shall
not be obligated to issue certificates representing shares of Common Stock in
the name of any party other than the Payee. The person or entity in whose name
the certificates representing the shares of Common Stock issuable upon
conversion hereof shall be deemed to have become a holder of record on the next
succeeding day on which the transfer books are open, but the Conversion Price
shall be that in effect on the Conversion Date. The Maker covenants that all
securities which may be issued upon exercise of the Conversion Right will, upon
issuance, be fully paid and nonassessable and free of all taxes, liens and
charges caused or created by the Maker with respect to the issuance thereof.
4. Adjustments. The number and kind of securities which may be received
-----------
upon the exercise of the Conversion Right and the Conversion Price shall be
subject to adjustment from time to time upon the happening of certain events, as
follows:
(a) Stock Splits and Combinations. If the Maker shall at any time or
-----------------------------
from time to time after the date hereof effect a subdivision of its outstanding
shares of Common Stock, the Conversion Price then in effect immediately before
such subdivision shall be proportionately
2
<PAGE>
decreased, and conversely, if the Maker shall at any time or from time to time
after the date hereof combine its outstanding shares of Common Stock, the
Conversion Price then in effect immediately before such combination shall be
proportionately increased. Any adjustment under this section shall become
effective upon the close of business on the date the subdivision or combination
becomes effective.
(b) Certain Dividends and Distributions. In the event that the Maker
-----------------------------------
shall at any time or from time to time after the date hereof make or issue, or
fix a record date for the determination of holders of shares of Common Stock
entitled to receive, a dividend or other distribution payable in additional
shares of Common Stock, then and in each such event, the Conversion Price then
in effect shall be decreased as of the time of such issuance or, in the event
that such a record date shall have been fixed, as of the close of business on
such record date, by multiplying the Conversion Price then in effect by a
fraction:
(i) the numerator of which shall be the total number of shares
of Common Stock issued and outstanding immediately prior to the time of such
issuance or the close of business on such record date; and
(ii) the denominator of which shall be the sum of the total
number of shares of Common Stock issued and outstanding immediately prior to the
time of such issuance or the close of business on such record date and the
number of shares of Common Stock issuable in payment of such dividend or
distribution; provided, however, that if such record date shall have been fixed
-------- -------
and such dividend is not fully paid or if such distribution is not fully made on
the date fixed therefor, the Conversion Price shall be recomputed accordingly as
of the close of business on such record date and thereafter such Conversion
Price shall be adjusted pursuant to this subsection as of the time of actual
payment of such dividends or distributions.
(c) Other Dividends and Distributions. In the event that the Maker at
---------------------------------
any time or from time to time after the date hereof shall make or issue, or fix
a record date for the determination of holders of shares of Common Stock
entitled to receive, a dividend or other distribution payable in securities of
the Maker other than shares of Common Stock, then and in each such event
provisions shall be made so that the holder of this Note shall receive, upon
conversion of this Note, in addition to the number of shares of Common Stock
receivable thereupon, the amount of securities of the Maker which such holder
would have received had its Note been converted into shares of Common Stock on
the date of such event and had thereafter, during the period from the date of
such event to and including the Conversion Date, retained such securities
(together with any distributions payable thereon during such period) receivable
by the holder as aforesaid during such period, giving application to all
adjustments called for during such period under this section with respect to the
rights of the holder of the Note.
(d) Reclassification, Exchange or Substitution. If the shares of
------------------------------------------
Common Stock issuable upon the conversion of this Note shall be changed into the
same or different number of shares of any class or classes of capital stock,
whether by capital reorganization, reclassification
3
<PAGE>
or otherwise (other than a subdivision or combination of shares or stock
dividend provided for above, or a reorganization, merger, consolidation or sale
of assets provided for in subsection (e) below), then and in each such event,
the holder of this Note shall have the right thereafter to convert this Note
into the kind and amount of shares of capital stock and other securities and
property receivable upon such reorganization, reclassification or other change,
as the holder of the number of shares of Common Stock into which this Note might
have been converted immediately prior to such reorganization, reclassification
or change, all subject to further adjustment as provided herein.
(e) Reorganization or Consolidation. If, at any time or from time to
-------------------------------
time, there shall be a capital reorganization of the shares of Common Stock
(other than a subdivision, combination, reclassification or exchange of shares
provided for elsewhere in this section) then as a part of such reorganization or
consolidation, provision shall be made so that the holder of this Note shall
thereafter be entitled to receive upon conversion of this Note, the number of
shares of capital stock or other securities or property of the Maker, or of the
successor corporation resulting from such merger or consolidation or sale, to
which the holder of shares of Common Stock deliverable upon conversion would
have been entitled on such reorganization or consolidation.
(f) Minimum Adjustment. Notwithstanding anything to the contrary set
------------------
forth herein, no adjustment of the Conversion Price shall be made in an amount
equal to less than five cents ($.05), but any such lesser adjustment shall be
carried forward and shall be made at the time and together with the next
subsequent adjustment which together with any adjustments so carried forward
shall amount to five cents ($.05) or more.
(g) Certificate of Adjustment. Upon the occurrence of each adjustment
-------------------------
or readjustment of the applicable Conversion Price pursuant to this section, the
Maker shall promptly compute such adjustment or readjustment in accordance with
the terms hereof and prepare and furnish to the holder of this Note a
certificate, signed by the Chairman of the Board, the President or the Chief
Financial Officer, setting forth such adjustment or readjustment and showing in
detail the facts upon which such adjustment or readjustment is based.
(h) Exceptions. Notwithstanding any other provision in this Section
----------
4, no adjustment shall be made to the number or kind of securities issuable upon
exercise of the Conversion Right, and the Conversion Price shall not be adjusted
in the event of the issuance of securities by the Company for consideration,
such as in the sale of securities or the issuance of securities in a merger,
consolidation or acquisition of operations or assets of another person or
entity.
(i) Notices of Record Date. If and in the event that:
----------------------
(i) the Maker shall set a record date for the purpose of
entitling the holders of shares of Common Stock to receive a dividend, or any
other distribution, payable otherwise than in cash;
4
<PAGE>
(ii) there shall occur any capital reorganization of the Maker,
reclassification of the shares of capital stock of the Maker (other than a
subdivision or combination of its outstanding shares of Common Stock);
then, and in any such case, the Maker shall cause to be mailed to the holder of
record of this Note, at least ten (10) days prior to the dates hereinafter
specified, a notice stating the date: (A) which has been set as the record date
for the purpose of such dividend, distribution; or (B) on which such
reclassification or reorganization is to take place and the record date as of
which the holder of record shall be entitled to exchange this Note for
securities or other property deliverable upon such reclassification or
reorganization.
5. Reservation. The Maker covenants that, during the period within which
-----------
the Conversion Right may be exercised, the Maker will at all times have
authorized and reserved for the purpose of issuance upon exercise of the
Conversion Right, a sufficient number of shares of Common Stock (or other
securities subject to the Conversion Right) to provide for the exercise of
the Conversion Right in full.
6. Fractional Shares. No fractional shares of Common Stock shall be issued
-----------------
upon conversion of this Note. In lieu of any fractional shares of Common Stock
to which the Payee would otherwise be entitled, the Maker shall pay an amount
equal to the product of such fraction multiplied by the fair value of one share
of Common Stock on the Conversion Date, as determined in good faith by the Board
of Directors of the Maker.
7. Registration Rights. The Maker hereby covenants and agrees as follows:
-------------------
(a) Definitions. For purposes of this section:
-----------
(i) The terms "register," "registered" and "registration" refer
to a registration effected by preparing and filing a registration statement or
similar document in compliance with the Securities Act of 1933, as amended (the
"Securities Act"), and the declaration of effectiveness of such registration
statement or other document by the Securities and Exchange Commission (the
"SEC").
(ii) The term "Registrable Securities" means: (A) the shares of
Common Stock issued or issuable upon conversion of this Note; or (B) any other
securities of the Maker issued as (or issuable upon the conversion or exercise
of any warrant, right or other security which is issued as) a dividend or other
distribution with respect to, in exchange for or in replacement of the shares of
Common Stock referenced in subsection (A) immediately above, excluding in all
cases, however, any Registrable Securities sold to the public pursuant to a
registration or an exemption from registration.
(iii) The number of shares of "Registrable Securities then
outstanding" shall be the number of securities outstanding which are Registrable
Securities.
5
<PAGE>
(iv) The term "Holder" as used hereinafter in this section means
any person or entity owning of record Registrable Securities.
(b) Registration Rights. In the event that the Conversion Right is
-------------------
exercised, then as soon thereafter as is reasonably practicable the Maker shall
cause the Registrable Securities to be included in a registration statement
filed by the Maker under the Securities Act of 1933 as amended. To the extent
that a Holder is offered the opportunity to include all of its Registrable
Securities in a registration statement, the Maker shall have satisfied all of
its obligations under this section.
(c) Obligations of the Maker. Whenever required under this section to
------------------------
file a registration statement to effect the registration of any Registrable
Securities, the Maker shall:
(i) Prepare and file with the SEC a registration statement with
respect to such Registrable Securities and use its best efforts to cause such
registration statement to become effective, and, upon the request of the Holders
of at least fifty percent (50%) of the Registrable Securities registered
thereunder, keep such registration statement effective for at least four (4)
months.
(ii) Prepare and file with the SEC such amendments and
supplements to such registration statement and the prospectus included therein
as may be necessary to comply with the provisions of the Securities Act with
respect to the disposition of all securities covered by such registration
statement.
(iii) Furnish to the Holders such numbers of copies of a
prospectus, including a preliminary prospectus, in conformity with the
requirements of the Securities Act, and such other documents as they may
reasonably request in order to facilitate the disposition of Registrable
Securities owned by them.
(iv) Use its best efforts to register and qualify the securities
covered by such registration statement under the securities laws of such
jurisdictions as shall be reasonably requested by the Holders for the
distribution of the securities covered by the registration statement, provided
that the Maker shall not be required in connection therewith or as a condition
thereto to qualify to do business or to file a general consent to service of
process in any such jurisdiction.
(v) In the event of any underwritten public offering, enter into
and perform its obligations under an underwriting agreement with terms generally
satisfactory to the managing underwriter of such offering.
(vi) Notify the Holders promptly after the Maker shall have
received notice thereof, of the time when the registration statement becomes
effective or any supplement to any prospectus forming a part of the registration
statement has been filed.
6
<PAGE>
(vii) Notify the Holders of any stop order suspending the
effectiveness of the registration statement and use its reasonable best efforts
to remove such stop order.
(d) Furnish Information. It shall be a condition precedent to the
-------------------
obligations of the Maker to take any action pursuant hereto that any Holder
seeking to include any of its Registrable Securities in a registration statement
filed by the Maker pursuant hereto shall furnish to the Maker such information
regarding itself, the Registrable Securities held by it, and the intended method
of disposition of such securities as shall be required to effect the
registration of its Registrable Securities. In that connection, each such
Holder shall be required to represent to the Maker that all such information
which is given is both complete and accurate in all material respects. Each of
such Holders shall deliver to the Maker a statement in writing from the
beneficial owners of such securities that such beneficial owners bona fide
intend to sell, transfer or otherwise dispose of such securities.
(e) Definition of Expenses.
----------------------
(i) "Registration Expenses" shall mean all expenses incurred by
---------------------
the Maker in complying with Sections 7(b) and 7(c) hereof, including without
limitation, all registration and filing fees, printing expenses, fees and
disbursements of counsel for the Maker, blue sky fees and expenses, and the
expense of any special audits incident to or required by any such registration
(but excluding the compensation of regular employees of the Maker which shall be
paid in any event by the Maker).
(ii) "Selling Expenses" shall mean all underwriting discounts,
----------------
selling commissions and underwriters' expense allowance applicable to the sale
and all fees and disbursements of any counsel (other than the Maker's regular
counsel) for any Holder.
(f) Expenses of Registration. All Registration Expenses incurred in
------------------------
connection with any registration, qualification or compliance herewith, shall be
borne by the Maker, and all Selling Expenses shall be borne by the Holders of
the securities so registered pro rata on the basis of the number of Registrable
Securities so registered; provided, however, that the Maker shall not be
-------- -------
required to pay any Registration Expenses if, as a result of the withdrawal of a
request for registration by Initiating Holders, the registration statement does
not become effective. In the case of such withdrawal and the failure of the
Holders to agree so to forfeit, the Holders shall bear such Registration
Expenses pro rata on the basis of the number of Registrable Securities so
included in the registration request.
(g) Underwriting Requirements. All Holders proposing to distribute
-------------------------
their securities through an underwriting pursuant hereto shall (together with
the Maker and any other holders distributing their securities through such
underwriting) enter into an underwriting agreement in customary form with the
underwriter or underwriters selected for underwriting by the Maker.
Notwithstanding any other provision of this section, at the request of the
managing underwriter, the Holder shall delay the sale of Registrable Securities
which such Holder has requested be registered under this section for the ninety
(90) day period commencing with the effective date
7
<PAGE>
of the registration statement. Notwithstanding anything to the contrary herein,
no such delay shall be required with respect to securities offered by holders of
securities who have requested the Maker to register such securities pursuant to
a mandatory registration obligation of the Maker if other security holders of
the Maker who have not made requests pursuant to such an obligation are not
subject to a similar delay. If any Holder disapproves of the terms of any such
underwriting, he may elect to withdraw therefrom by written notice to the Maker
and the underwriter. Any Registrable Securities excluded or withdrawn from such
underwriting shall not be withdrawn from such registration except at the
election of the Holder.
(h) Delay of Registration. No Holder shall have any right to obtain
---------------------
or seek an injunction restraining or otherwise delaying any such registration as
the result of any controversy that might arise with respect to the
interpretation or implementation of this section.
(i) Reports Under Securities Exchange Act of 1934. With a view toward
---------------------------------------------
making available to Holders the benefits of Rule 144 promulgated under the
Securities Act and any other rule or regulation of the SEC that may at any time
permit a Holder to sell securities of the Maker to the public without
registration, the Maker agrees to:
(i) use its best efforts to make and keep public information
available, as those terms are understood and defined in Rule 144, at all times;
(ii) use its best efforts to file with the SEC in a timely manner
all reports and other documents required of the Maker under the Securities Act
and the Exchange Act; and
(iii) furnish to any Holder, so long as the Holder owns any
Registrable Securities, forthwith upon request such information as may be
reasonably requested in order to allow any Holder to avail himself of any rule
or regulation of the SEC which permits the selling of any such securities
without registration.
(j) Termination of the Maker's Obligations.
--------------------------------------
(i) The Maker shall have no obligation pursuant to Section 7(c)
with respect to any request made by any Holder after the second (2nd)
anniversary of the Maturity Date.
(ii) Notwithstanding any provision hereof to the contrary, the Maker
shall not be required to effect any registration under the Securities Act or
under any state securities laws on behalf of any Holder or Holders if, in the
opinion of counsel for the Maker, the offering or transfer by such Holder or
Holders in the manner proposed (including, without limitation, the number of
shares proposed to be offered or transferred and the method of offering or
transfer) is exempt from the registration requirements of the Securities Act and
the securities laws of applicable states.
(k) Lock Ups. The Payee (and any subsequent Holder) by acceptance
--------
hereof, hereby acknowledges that it is the Maker's intention to conduct the
Public Offering, which offering is
8
<PAGE>
contemplated to be underwritten; the Payee (and any subsequent Holder) by
acceptance hereof hereby agrees: (i) that its rights to request registration
pursuant to the provisions hereof shall be subject in all respects to the prior
approval of the underwriter of the Public Offering (the "Underwriter"); and (ii)
the Payee (and any subsequent Holder) shall agree to refrain from exercising
such rights or transferring any of the Registrable Securities for a period of up
to thirteen (13) months, should the Underwriter so request.
8. Miscellaneous.
-------------
(a) Restricted Securities. By acceptance hereof, the Payee
---------------------
understands and agrees that this Note and the shares of Common Stock issuable
upon conversion hereof are "restricted securities" under the federal securities
laws inasmuch as they are being acquired from the Maker in a transaction not
involving a public offering and have not been the subject of registration under
the Securities Act and that under such laws and applicable regulations such
securities may be resold in the absence of registration under the Securities Act
only in certain limited circumstances. The Payee hereby represents that he is
taking the Note for long term investment purposes and not with a view toward
resale or distribution and that he is familiar with Rule 144 promulgated under
the Securities Act, as presently in effect, and understands the resale
limitations imposed thereby and by the Securities Act.
(b) Further Limitations on Disposition. This Note may not be
----------------------------------
negotiated, assigned or transferred by Payee. The Payee further agrees not to
make any disposition of all or any portion of this Note (or of the securities
issuable upon conversion hereof) unless and until:
(i) there is then in effect a registration statement under the
Securities Act covering such proposed disposition and such disposition is made
in accordance with such registration statement;
(ii) such disposition is made in accordance with Rule 144 under
the Securities Act; or
(iii) the Payee shall have notified the Maker of the proposed
disposition and shall have furnished the Maker with a detailed statement of the
circumstances surrounding the proposed disposition, and the Payee shall have
furnished the Maker with an opinion of counsel, which opinion of counsel shall
be reasonably satisfactory to the Maker, that such disposition will not require
registration under the Securities Act and will be in compliance with applicable
state securities laws.
(c) Legends. It is understood that this Note and each certificate
-------
evidencing shares of Common Stock issuable upon conversion hereof (or evidencing
any other securities issued with respect thereto pursuant to any stock split,
stock dividend, reorganization or recapitalization) shall bear the legends (in
addition to any legends which may be required in the opinion of the Maker's
counsel by the securities laws of the state where the Payee is located) set
forth on the first page of this Note.
9
<PAGE>
9. Notices.
-------
(a) Notices to the Payee. Any notice required by the provisions of
--------------------
this Note to be given to the holder hereof shall be in writing and may be
delivered by personal service, facsimile transmission or by registered or
certified mail, return receipt requested, with postage thereon fully prepaid or
overnight delivery courier. All such communications shall be addressed to the
Payee of record at its address appearing on the books of the Maker. Service of
any such communication made only by mail shall be deemed complete on the date of
actual delivery as shown by the addressee's registry or certification receipt or
at the expiration of the third (3rd) business day after the date of mailing,
whichever is earlier in time.
(b) Notices to the Maker. Whenever any provision of this Note
--------------------
requires a notice to be given or a request to be made to the Maker by the Payee
or the holder of any other security of the Maker obtained in connection with a
recapitalization, merger, dividend or other event affecting this Note, then and
in each such case, any such notice or request shall be in writing and shall be
sent by registered or certified mail, return receipt requested with postage
thereon fully prepaid to the Maker at its principal place of business.
No notice given or request made hereunder shall be valid unless signed
by the Payee of this Note or other holder giving such notice or request (or, in
the case of a notice or request by Holders of a specified percent in aggregate
principal amount of outstanding Notes, unless signed by each Holder of a Note
whose Note has been counted in constituting the requisite percentage of Notes
required to give such notice or make such request).
10. Construction; Governing Law. The validity and construction of this Note
---------------------------
and all matters pertaining hereto are to be determined in accordance with the
laws of the State of Delaware without regard to the conflicts of law principles
thereof.
IN WITNESS WHEREOF, Maker, by its appropriate officers thereunto duly
authorized, has executed this Non-Negotiable 8% Convertible Promissory Note and
affixed its corporate seal as of this _____ day of ____________, 1996.
THINK NEW IDEAS, INC.
By:
------------------------------
Scott A. Mednick,
Chief Executive Officer
ATTEST:
By:
----------------------------
Mel Epstein, Secretary
10
<PAGE>
CONVERSION FORM
The undersigned hereby elects to convert the following principal
amount of the attached Non-Negotiable 8% Convertible Promissory Note (the
"Note") (not to exceed $__________) into shares of common stock, par value
$.0001 per share, of THINK New Ideas, Inc.
State such amount: Dollars ($ ).
------------------------------- -----------
Date: Signature:
------------------------
-------------------------------------
(Sign exactly as your name appears
on the Note)
<PAGE>
EXHIBIT 10.20C
NEITHER THIS NOTE NOR THE SECURITIES ISSUABLE UPON CONVERSION HEREOF HAVE BEEN
THE SUBJECT OF REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR
UNDER THE SECURITIES LAWS OF ANY STATE AND THE SAME HAVE BEEN (OR WILL BE, WITH
RESPECT TO THE SECURITIES ISSUABLE UPON CONVERSION HEREOF) ISSUED IN RELIANCE ON
EXEMPTIONS FROM THE REGISTRATION REQUIREMENTS OF SAID ACT AND SUCH LAWS.
NEITHER THIS NOTE NOR THE SECURITIES ISSUABLE UPON CONVERSION HEREOF MAY BE
SOLD, TRANSFERRED, PLEDGED, HYPOTHECATED OR OTHERWISE DISPOSED OF EXCEPT AS
PERMITTED UNDER SUCH SECURITIES LAWS, PURSUANT TO REGISTRATION OR EXEMPTION
THEREFROM.
NON-NEGOTIABLE 8% CONVERTIBLE PROMISSORY NOTE
---------------------------------------------
$288,000 Culver City, California
October 1, 1996
FOR VALUE RECEIVED, the undersigned, THINK New Ideas, Inc., a Delaware
corporation (hereinafter referred to as the "Maker"), hereby promises to pay to
Mr. Dan Carlisle (the "Payee") at 426 St. Andrews Drive, Belleair, Florida
34616, or at such other place as the holder hereof may from time to time
designate in writing, the principal sum of Two Hundred Eighty-eight Thousand
Dollars ($288,000) in one installment due upon the date (the "Maturity Date")
that is the earlier of: (i) March 31, 1998 or such later date as extended by
the Payee as set forth below; (ii) the Maker's receipt of proceeds of at least
Three Million Dollars ($3,000,000) from one or more public or private equity or
debt offerings (a "Private Offering") conducted by the Maker; (iii) immediately
prior to an initial public offering of securities of the Maker (the "Public
Offering"); or (iv) the sale of 50% or more of the assets or properties of the
Maker (an "Asset Disposition"), together with interest from and after July 1,
1996 at the rate of eight percent (8%) per annum computed on the unpaid
principal balance. Interest shall be paid by Maker to the Payee on the Maturity
Date. By acceptance of this Note, the Payee represents, warrants, covenants and
agrees that he will abide by and be bound by its terms.
1. Prepayment and Notices. The unpaid principal balance outstanding under this
----------------------
Note may be prepaid in part or in full by the Maker without penalty, upon five
(5) days notice to the Payee stating the repayment amount and repayment date
(the "Repayment Date"). The Maker must provide notice five (5) business days
prior to the Maturity Date to the Payee.
2. Conversion.
----------
(a) The unpaid principal amount of this Note shall be convertible at the
option of the Payee (the "Conversion Right") upon the earlier of: (i) January
31, 1998; or (ii) upon completion of a Private Offering or an Asset Disposition
as set forth above prior to the close of business on the Maturity Date in the
manner and on the terms hereinafter set forth, into shares of common stock, par
value $.0001 per share (the "Common Stock") of the Maker at a price per share
equal to the initial offering price of shares of Common Stock in the Public
Offering or, in the absence of consummation of the Public Offering, at $7.50 per
share (the "Conversion Price"), subject to adjustment pursuant to Section 4
hereof.
<PAGE>
(b) The Maker may, at its option and upon notice given no later than
February 28, 1998, elect to extend the Maturity Date to a date after March 31,
1998, provided that this Note has not previously been prepaid or converted.
(c) Notwithstanding any other provision of this Note to the contrary, upon
receipt of notice of the Maker's intent to prepay part or all of the principal
amount hereunder or of a Maturity Date, the Payee may elect to exercise the
Conversion Right and convert pursuant to Section 2(a) hereof a portion (as set
forth in subsection (a) hereof) of the amount of unpaid principal which the
Maker intends to prepay, up to the close of business on the last business day
before the stated Repayment Date.
(d) Notwithstanding any other provision hereof, the Conversion Right may not
be exercised at any time during which a registration statement under the
Securities Act of 1933 is filed but not effective, absent the written consent of
the Company.
3. Conversion Procedure. The Conversion Right may be exercised by the Payee by
--------------------
the surrender of this Note (along with the conversion form attached hereto, duly
executed) to the Maker at the principal office of the Maker. Risk of loss prior
to surrender of this Note shall be borne by the Payee. Consequently, hand
delivery with written acknowledgement of receipt by the Maker or registered or
certified mail, return receipt requested, is the preferred mode of delivery.
Conversion shall be deemed to have been effected on the date when such delivery
of the conversion notice is actually made or, if earlier, at the expiration of
five (5) calendar days after being sent to the Maker by the Payee by registered
or certified mail, return receipt requested, with postage thereon fully prepaid
(the "Conversion Date"). As promptly as practicable thereafter, the Maker shall
issue and deliver to the Payee: (a) a new note representing the difference
between principal amount of this Note and the principal amount hereof which has
been converted pursuant hereto; and (b) certificates representing the number of
shares of Common Stock to which the Payee is entitled. The Maker shall not be
obligated to issue certificates representing shares of Common Stock in the name
of any party other than the Payee. The person or entity in whose name the
certificates representing the shares of Common Stock issuable upon conversion
hereof shall be deemed to have become a holder of record on the next succeeding
day on which the transfer books are open, but the Conversion Price shall be that
in effect on the Conversion Date. The Maker covenants that all securities which
may be issued upon exercise of the Conversion Right will, upon issuance, be
fully paid and nonassessable and free of all taxes, liens and charges caused or
created by the Maker with respect to the issuance thereof.
4. Adjustments. The number and kind of securities which may be received upon
-----------
the exercise of the Conversion Right and the Conversion Price shall be subject
to adjustment from time to time upon the happening of certain events, as
follows:
(a) Stock Splits and Combinations. If the Maker shall at any time or from
-----------------------------
time to time after the date hereof effect a subdivision of its outstanding
shares of Common Stock, the Conversion Price then in effect immediately before
such subdivision shall be proportionately
2
<PAGE>
decreased, and conversely, if the Maker shall at any time or from time to time
after the date hereof combine its outstanding shares of Common Stock, the
Conversion Price then in effect immediately before such combination shall be
proportionately increased. Any adjustment under this section shall become
effective upon the close of business on the date the subdivision or combination
becomes effective.
(b) Certain Dividends and Distributions. In the event that the Maker
-----------------------------------
shall at any time or from time to time after the date hereof make or issue, or
fix a record date for the determination of holders of shares of Common Stock
entitled to receive, a dividend or other distribution payable in additional
shares of Common Stock, then and in each such event, the Conversion Price then
in effect shall be decreased as of the time of such issuance or, in the event
that such a record date shall have been fixed, as of the close of business on
such record date, by multiplying the Conversion Price then in effect by a
fraction:
(i) the numerator of which shall be the total number of shares of
Common Stock issued and outstanding immediately prior to the time of such
issuance or the close of business on such record date; and
(ii) the denominator of which shall be the sum of the total number of
shares of Common Stock issued and outstanding immediately prior to the time of
such issuance or the close of business on such record date and the number of
shares of Common Stock issuable in payment of such dividend or distribution;
provided, however, that if such record date shall have been fixed and such
- -------- -------
dividend is not fully paid or if such distribution is not fully made on the date
fixed therefor, the Conversion Price shall be recomputed accordingly as of the
close of business on such record date and thereafter such Conversion Price shall
be adjusted pursuant to this subsection as of the time of actual payment of such
dividends or distributions.
(c) Other Dividends and Distributions. In the event that the Maker at
---------------------------------
any time or from time to time after the date hereof shall make or issue, or fix
a record date for the determination of holders of shares of Common Stock
entitled to receive, a dividend or other distribution payable in securities of
the Maker other than shares of Common Stock, then and in each such event
provisions shall be made so that the holder of this Note shall receive, upon
conversion of this Note, in addition to the number of shares of Common Stock
receivable thereupon, the amount of securities of the Maker which such holder
would have received had its Note been converted into shares of Common Stock on
the date of such event and had thereafter, during the period from the date of
such event to and including the Conversion Date, retained such securities
(together with any distributions payable thereon during such period) receivable
by the holder as aforesaid during such period, giving application to all
adjustments called for during such period under this section with respect to the
rights of the holder of the Note.
(d) Reclassification, Exchange or Substitution. If the shares of Common
------------------------------------------
Stock issuable upon the conversion of this Note shall be changed into the same
or different number of shares of any class or classes of capital stock, whether
by capital reorganization, reclassification
3
<PAGE>
or otherwise (other than a subdivision or combination of shares or stock
dividend provided for above, or a reorganization, merger, consolidation or sale
of assets provided for in subsection (e) below), then and in each such event,
the holder of this Note shall have the right thereafter to convert this Note
into the kind and amount of shares of capital stock and other securities and
property receivable upon such reorganization, reclassification or other change,
as the holder of the number of shares of Common Stock into which this Note might
have been converted immediately prior to such reorganization, reclassification
or change, all subject to further adjustment as provided herein.
(e) Reorganization or Consolidation. If, at any time or from time to
-------------------------------
time, there shall be a capital reorganization of the shares of Common Stock
(other than a subdivision, combination, reclassification or exchange of shares
provided for elsewhere in this section) then as a part of such reorganization or
consolidation, provision shall be made so that the holder of this Note shall
thereafter be entitled to receive upon conversion of this Note, the number of
shares of capital stock or other securities or property of the Maker, or of the
successor corporation resulting from such merger or consolidation or sale, to
which the holder of shares of Common Stock deliverable upon conversion would
have been entitled on such reorganization or consolidation.
(f) Minimum Adjustment. Notwithstanding anything to the contrary set forth
------------------
herein, no adjustment of the Conversion Price shall be made in an amount equal
to less than five cents ($.05), but any such lesser adjustment shall be carried
forward and shall be made at the time and together with the next subsequent
adjustment which together with any adjustments so carried forward shall amount
to five cents ($.05) or more.
(g) Certificate of Adjustment. Upon the occurrence of each adjustment or
-------------------------
readjustment of the applicable Conversion Price pursuant to this section, the
Maker shall promptly compute such adjustment or readjustment in accordance with
the terms hereof and prepare and furnish to the holder of this Note a
certificate, signed by the Chairman of the Board, the President or the Chief
Financial Officer, setting forth such adjustment or readjustment and showing in
detail the facts upon which such adjustment or readjustment is based.
(h) Exceptions. Notwithstanding any other provision in this Section 4, no
----------
adjustment shall be made to the number or kind of securities issuable upon
exercise of the Conversion Right, and the Conversion Price shall not be adjusted
in the event of the issuance of securities by the Company for consideration,
such as in the sale of securities or the issuance of securities in a merger,
consolidation or acquisition of operations or assets of another person or
entity.
(i) Notices of Record Date. If and in the event that:
----------------------
(i) the Maker shall set a record date for the purpose of entitling the
holders of shares of Common Stock to receive a dividend, or any other
distribution, payable otherwise than in cash;
4
<PAGE>
(ii) there shall occur any capital reorganization of the Maker,
reclassification of the shares of capital stock of the Maker (other than a
subdivision or combination of its outstanding shares of Common Stock);
then, and in any such case, the Maker shall cause to be mailed to the holder of
record of this Note, at least ten (10) days prior to the dates hereinafter
specified, a notice stating the date: (A) which has been set as the record date
for the purpose of such dividend, distribution; or (B) on which such
reclassification or reorganization is to take place and the record date as of
which the holder of record shall be entitled to exchange this Note for
securities or other property deliverable upon such reclassification or
reorganization.
5. Reservation. The Maker covenants that, during the period within which the
-----------
Conversion Right may be exercised, the Maker will at all times have authorized
and reserved for the purpose of issuance upon exercise of the Conversion Right,
a sufficient number of shares of Common Stock (or other securities subject to
the Conversion Right) to provide for the exercise of the Conversion Right in
full.
6. Fractional Shares. No fractional shares of Common Stock shall be issued
-----------------
upon conversion of this Note. In lieu of any fractional shares of Common Stock
to which the Payee would otherwise be entitled, the Maker shall pay an amount
equal to the product of such fraction multiplied by the fair value of one share
of Common Stock on the Conversion Date, as determined in good faith by the Board
of Directors of the Maker.
7. Registration Rights. The Maker hereby covenants and agrees as follows:
-------------------
(a) Definitions. For purposes of this section:
-----------
(i) The terms "register," "registered" and "registration" refer to a
registration effected by preparing and filing a registration statement or
similar document in compliance with the Securities Act of 1933, as amended (the
"Securities Act"), and the declaration of effectiveness of such registration
statement or other document by the Securities and Exchange Commission (the
"SEC").
(ii) The term "Registrable Securities" means: (A) the shares of Common
Stock issued or issuable upon conversion of this Note; or (B) any other
securities of the Maker issued as (or issuable upon the conversion or exercise
of any warrant, right or other security which is issued as) a dividend or other
distribution with respect to, in exchange for or in replacement of the shares of
Common Stock referenced in subsection (A) immediately above, excluding in all
cases, however, any Registrable Securities sold to the public pursuant to a
registration or an exemption from registration.
(iii) The number of shares of "Registrable Securities then
outstanding" shall be the number of securities outstanding which are Registrable
Securities.
5
<PAGE>
(iv) The term "Holder" as used hereinafter in this section means any
person or entity owning of record Registrable Securities.
(b) Registration Rights. In the event that the Conversion Right is
-------------------
exercised, then as soon thereafter as is reasonably practicable the Maker shall
cause the Registrable Securities to be included in a registration statement
filed by the Maker under the Securities Act of 1933 as amended. To the extent
that a Holder is offered the opportunity to include all of its Registrable
Securities in a registration statement, the Maker shall have satisfied all of
its obligations under this section.
(c) Obligations of the Maker. Whenever required under this section to
------------------------
file a registration statement to effect the registration of any Registrable
Securities, the Maker shall:
(i) Prepare and file with the SEC a registration statement with
respect to such Registrable Securities and use its best efforts to cause such
registration statement to become effective, and, upon the request of the Holders
of at least fifty percent (50%) of the Registrable Securities registered
thereunder, keep such registration statement effective for at least four (4)
months.
(ii) Prepare and file with the SEC such amendments and supplements to
such registration statement and the prospectus included therein as may be
necessary to comply with the provisions of the Securities Act with respect to
the disposition of all securities covered by such registration statement.
(iii) Furnish to the Holders such numbers of copies of a prospectus,
including a preliminary prospectus, in conformity with the requirements of the
Securities Act, and such other documents as they may reasonably request in order
to facilitate the disposition of Registrable Securities owned by them.
(iv) Use its best efforts to register and qualify the securities
covered by such registration statement under the securities laws of such
jurisdictions as shall be reasonably requested by the Holders for the
distribution of the securities covered by the registration statement, provided
that the Maker shall not be required in connection therewith or as a condition
thereto to qualify to do business or to file a general consent to service of
process in any such jurisdiction.
(v) In the event of any underwritten public offering, enter into and
perform its obligations under an underwriting agreement with terms generally
satisfactory to the managing underwriter of such offering.
(vi) Notify the Holders promptly after the Maker shall have received
notice thereof, of the time when the registration statement becomes effective or
any supplement to any prospectus forming a part of the registration statement
has been filed.
6
<PAGE>
(vii) Notify the Holders of any stop order suspending the effectiveness
of the registration statement and use its reasonable best efforts to remove such
stop order.
(d) Furnish Information. It shall be a condition precedent to the
-------------------
obligations of the Maker to take any action pursuant hereto that any Holder
seeking to include any of its Registrable Securities in a registration statement
filed by the Maker pursuant hereto shall furnish to the Maker such information
regarding itself, the Registrable Securities held by it, and the intended method
of disposition of such securities as shall be required to effect the
registration of its Registrable Securities. In that connection, each such
Holder shall be required to represent to the Maker that all such information
which is given is both complete and accurate in all material respects. Each of
such Holders shall deliver to the Maker a statement in writing from the
beneficial owners of such securities that such beneficial owners bona fide
intend to sell, transfer or otherwise dispose of such securities.
(e) Definition of Expenses.
----------------------
(i) "Registration Expenses" shall mean all expenses incurred by the
---------------------
Maker in complying with Sections 7(b) and 7(c) hereof, including without
limitation, all registration and filing fees, printing expenses, fees and
disbursements of counsel for the Maker, blue sky fees and expenses, and the
expense of any special audits incident to or required by any such registration
(but excluding the compensation of regular employees of the Maker which shall be
paid in any event by the Maker).
(ii) "Selling Expenses" shall mean all underwriting discounts, selling
----------------
commissions and underwriters' expense allowance applicable to the sale and all
fees and disbursements of any counsel (other than the Maker's regular counsel)
for any Holder.
(f) Expenses of Registration. All Registration Expenses incurred in
------------------------
connection with any registration, qualification or compliance herewith, shall be
borne by the Maker, and all Selling Expenses shall be borne by the Holders of
the securities so registered pro rata on the basis of the number of Registrable
Securities so registered; provided, however, that the Maker shall not be
-------- -------
required to pay any Registration Expenses if, as a result of the withdrawal of a
request for registration by Initiating Holders, the registration statement does
not become effective. In the case of such withdrawal and the failure of the
Holders to agree so to forfeit, the Holders shall bear such Registration
Expenses pro rata on the basis of the number of Registrable Securities so
included in the registration request.
(g) Underwriting Requirements. All Holders proposing to distribute
-------------------------
their securities through an underwriting pursuant hereto shall (together with
the Maker and any other holders distributing their securities through such
underwriting) enter into an underwriting agreement in customary form with the
underwriter or underwriters selected for underwriting by the Maker.
Notwithstanding any other provision of this section, at the request of the
managing underwriter, the Holder shall delay the sale of Registrable Securities
which such Holder has requested be registered under this section for the ninety
(90) day period commencing with the effective date
7
<PAGE>
of the registration statement. Notwithstanding anything to the contrary herein,
no such delay shall be required with respect to securities offered by holders of
securities who have requested the Maker to register such securities pursuant to
a mandatory registration obligation of the Maker if other security holders of
the Maker who have not made requests pursuant to such an obligation are not
subject to a similar delay. If any Holder disapproves of the terms of any such
underwriting, he may elect to withdraw therefrom by written notice to the Maker
and the underwriter. Any Registrable Securities excluded or withdrawn from such
underwriting shall not be withdrawn from such registration except at the
election of the Holder.
(h) Delay of Registration. No Holder shall have any right to obtain or
---------------------
seek an injunction restraining or otherwise delaying any such registration as
the result of any controversy that might arise with respect to the
interpretation or implementation of this section.
(i) Reports Under Securities Exchange Act of 1934. With a view toward
---------------------------------------------
making available to Holders the benefits of Rule 144 promulgated under the
Securities Act and any other rule or regulation of the SEC that may at any time
permit a Holder to sell securities of the Maker to the public without
registration, the Maker agrees to:
(i) use its best efforts to make and keep public information
available, as those terms are understood and defined in Rule 144, at all times;
(ii) use its best efforts to file with the SEC in a timely manner
all reports and other documents required of the Maker under the Securities Act
and the Exchange Act; and
(iii) furnish to any Holder, so long as the Holder owns any
Registrable Securities, forthwith upon request such information as may be
reasonably requested in order to allow any Holder to avail himself of any rule
or regulation of the SEC which permits the selling of any such securities
without registration.
(j) Termination of the Maker's Obligations.
--------------------------------------
(i) The Maker shall have no obligation pursuant to Section 7(c) with
respect to any request made by any Holder after the second (2nd) anniversary of
the Maturity Date.
(ii) Notwithstanding any provision hereof to the contrary, the Maker
shall not be required to effect any registration under the Securities Act or
under any state securities laws on behalf of any Holder or Holders if, in the
opinion of counsel for the Maker, the offering or transfer by such Holder or
Holders in the manner proposed (including, without limitation, the number of
shares proposed to be offered or transferred and the method of offering or
transfer) is exempt from the registration requirements of the Securities Act and
the securities laws of applicable states.
(k) Lock Ups. The Payee (and any subsequent Holder) by acceptance hereof,
--------
hereby acknowledges that it is the Maker's intention to conduct the Public
Offering, which offering is
8
<PAGE>
contemplated to be underwritten; the Payee (and any subsequent Holder) by
acceptance hereof hereby agrees: (i) that its rights to request registration
pursuant to the provisions hereof shall be subject in all respects to the prior
approval of the underwriter of the Public Offering (the "Underwriter"); and (ii)
the Payee (and any subsequent Holder) shall agree to refrain from exercising
such rights or transferring any of the Registrable Securities for a period of up
to thirteen (13) months, should the Underwriter so request.
8. Miscellaneous.
-------------
(a) Restricted Securities. By acceptance hereof, the Payee understands and
---------------------
agrees that this Note and the shares of Common Stock issuable upon conversion
hereof are "restricted securities" under the federal securities laws inasmuch as
they are being acquired from the Maker in a transaction not involving a public
offering and have not been the subject of registration under the Securities Act
and that under such laws and applicable regulations such securities may be
resold in the absence of registration under the Securities Act only in certain
limited circumstances. The Payee hereby represents that he is taking the Note
for long term investment purposes and not with a view toward resale or
distribution and that he is familiar with Rule 144 promulgated under the
Securities Act, as presently in effect, and understands the resale limitations
imposed thereby and by the Securities Act.
(b) Further Limitations on Disposition. This Note may not be negotiated,
----------------------------------
assigned or transferred by Payee. The Payee further agrees not to make any
disposition of all or any portion of this Note (or of the securities issuable
upon conversion hereof) unless and until:
(i) there is then in effect a registration statement under the
Securities Act covering such proposed disposition and such disposition is made
in accordance with such registration statement;
(ii) such disposition is made in accordance with Rule 144 under the
Securities Act; or
(iii) the Payee shall have notified the Maker of the proposed
disposition and shall have furnished the Maker with a detailed statement of the
circumstances surrounding the proposed disposition, and the Payee shall have
furnished the Maker with an opinion of counsel, which opinion of counsel shall
be reasonably satisfactory to the Maker, that such disposition will not require
registration under the Securities Act and will be in compliance with applicable
state securities laws.
(c) Legends. It is understood that this Note and each certificate
-------
evidencing shares of Common Stock issuable upon conversion hereof (or evidencing
any other securities issued with respect thereto pursuant to any stock split,
stock dividend, reorganization or recapitalization) shall bear the legends (in
addition to any legends which may be required in the opinion of the Maker's
counsel by the securities laws of the state where the Payee is located) set
forth on the first page of this Note.
9
<PAGE>
9. Notices.
-------
(a) Notices to the Payee. Any notice required by the provisions of this
--------------------
Note to be given to the holder hereof shall be in writing and may be delivered
by personal service, facsimile transmission or by registered or certified mail,
return receipt requested, with postage thereon fully prepaid or overnight
delivery courier. All such communications shall be addressed to the Payee of
record at its address appearing on the books of the Maker. Service of any such
communication made only by mail shall be deemed complete on the date of actual
delivery as shown by the addressee's registry or certification receipt or at the
expiration of the third (3rd) business day after the date of mailing, whichever
is earlier in time.
(b) Notices to the Maker. Whenever any provision of this Note requires a
--------------------
notice to be given or a request to be made to the Maker by the Payee or the
holder of any other security of the Maker obtained in connection with a
recapitalization, merger, dividend or other event affecting this Note, then and
in each such case, any such notice or request shall be in writing and shall be
sent by registered or certified mail, return receipt requested with postage
thereon fully prepaid to the Maker at its principal place of business.
No notice given or request made hereunder shall be valid unless signed by
the Payee of this Note or other holder giving such notice or request (or, in the
case of a notice or request by Holders of a specified percent in aggregate
principal amount of outstanding Notes, unless signed by each Holder of a Note
whose Note has been counted in constituting the requisite percentage of Notes
required to give such notice or make such request).
11. Construction; Governing Law. The validity and construction of this Note
---------------------------
and all matters pertaining hereto are to be determined in accordance with the
laws of the State of Delaware without regard to the conflicts of law principles
thereof.
IN WITNESS WHEREOF, Maker, by its appropriate officers thereunto duly
authorized, has executed this Non-Negotiable 8% Convertible Promissory Note and
affixed its corporate seal as of this _____ day of ___________, 1996.
THINK NEW IDEAS, INC.
By:
-----------------------------------------
Scott A. Mednick, Chief Executive Officer
ATTEST:
By:
---------------------------
Mel Epstein, Secretary
10
<PAGE>
CONVERSION FORM
The undersigned hereby elects to convert the following principal amount of
the attached Non-Negotiable 8% Convertible Promissory Note (the "Note") (not to
exceed $__________) into shares of common stock, par value $.0001 per share, of
THINK New Ideas, Inc.
State such amount: _____________________________ Dollars ($___________).
Date: Signature:
------------------------
-----------------------------------------------
(Sign exactly as your name appears on the Note)
11
<PAGE>
EXHIBIT 1020.d
NEITHER THIS NOTE NOR THE SECURITIES ISSUABLE UPON CONVERSION HEREOF HAVE BEEN
THE SUBJECT OF REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR
UNDER THE SECURITIES LAWS OF ANY STATE AND THE SAME HAVE BEEN (OR WILL BE, WITH
RESPECT TO THE SECURITIES ISSUABLE UPON CONVERSION HEREOF) ISSUED IN RELIANCE ON
EXEMPTIONS FROM THE REGISTRATION REQUIREMENTS OF SAID ACT AND SUCH LAWS.
NEITHER THIS NOTE NOR THE SECURITIES ISSUABLE UPON CONVERSION HEREOF MAY BE
SOLD, TRANSFERRED, PLEDGED, HYPOTHECATED OR OTHERWISE DISPOSED OF EXCEPT AS
PERMITTED UNDER SUCH SECURITIES LAWS, PURSUANT TO REGISTRATION OR EXEMPTION
THEREFROM.
NON-NEGOTIABLE 8% CONVERTIBLE PROMISSORY NOTE
---------------------------------------------
$515,760 Culver City, California
October 1, 1996
FOR VALUE RECEIVED, the undersigned, THINK New Ideas, Inc., a Delaware
corporation (hereinafter referred to as the "Maker"), hereby promises to pay to
Mr. Dan Carlisle (the "Payee") at 426 St. Andrews Drive, Belleair, Florida
34616, or at such other place as the holder hereof may from time to time
designate in writing, the principal sum of Five Hundred Fifteen Thousand, Seven
Hundred Sixty Dollars ($515,760) in one installment due upon the date (the
"Maturity Date") that is the earlier of: (i) March 31, 1998 or such later date
as extended by the Payee as set forth below; (ii) the Maker's receipt of
proceeds of at least Three Million Dollars ($3,000,000) from one or more public
or private equity or debt offerings (a "Private Offering") conducted by the
Maker; (iii) a public offering of securities of the Maker after the initial
public offering of securities of the Maker (the "Public Offering"); or (iv) the
sale of 50% or more of the assets or properties of the Maker (an "Asset
Disposition"), together with interest from and after July 1, 1996 at the rate of
eight percent (8%) per annum computed on the unpaid principal balance. Interest
shall be paid by Maker to the Payee on the Maturity Date. By acceptance of this
Note, the Payee represents, warrants, covenants and agrees that he will abide by
and be bound by its terms.
1. Prepayment and Notices. The unpaid principal balance outstanding under this
----------------------
Note may be prepaid in part or in full by the Maker without penalty, upon five
(5) days notice to the Payee stating the repayment amount and repayment date
(the "Repayment Date"). The Maker must provide notice five (5) business days
prior to the Maturity Date to the Payee.
2. Conversion.
----------
(a) The unpaid principal amount of this Note shall be convertible at
the option of the Payee (the "Conversion Right") upon the earlier of: (i)
January 31, 1998; or (ii) upon completion of a subsequent public offering, a
Private Offering or an Asset Disposition as set forth above prior to the close
of business on the Maturity Date in the manner and on the terms hereinafter set
forth, into shares of common stock, par value $.0001 per share (the "Common
Stock") of the Maker at a price per share equal to the initial offering price of
shares of Common
<PAGE>
Stock in the Public Offering or, in the absence of consummation of the Public
Offering, at $7.50 per share (the "Conversion Price"), subject to adjustment
pursuant to Section 4 hereof.
(b) The Maker may, at its option and upon notice given no later than
February 28, 1998, elect to extend the Maturity Date to a date after March 31,
1998, provided that this Note has not previously been prepaid or converted.
(c) Notwithstanding any other provision of this Note to the contrary,
upon receipt of notice of the Maker's intent to prepay part or all of the
principal amount hereunder or of a Maturity Date, the Payee may elect to
exercise the Conversion Right and convert pursuant to Section 2(a) hereof a
portion (as set forth in subsection (a) hereof) of the amount of unpaid
principal which the Maker intends to prepay, up to the close of business on the
last business day before the stated Repayment Date.
(d) Notwithstanding any other provision hereof, the Conversion Right
may not be exercised at any time during which a registration statement under the
Securities Act of 1933 is filed but not effective, absent the written consent of
the Company.
3. Conversion Procedure. The Conversion Right may be exercised by the Payee by
--------------------
the surrender of this Note (along with the conversion form attached hereto, duly
executed) to the Maker at the principal office of the Maker. Risk of loss prior
to surrender of this Note shall be borne by the Payee. Consequently, hand
delivery with written acknowledgement of receipt by the Maker or registered or
certified mail, return receipt requested, is the preferred mode of delivery.
Conversion shall be deemed to have been effected on the date when such delivery
of the conversion notice is actually made or, if earlier, at the expiration of
five (5) calendar days after being sent to the Maker by the Payee by registered
or certified mail, return receipt requested, with postage thereon fully prepaid
(the "Conversion Date"). As promptly as practicable thereafter, the Maker shall
issue and deliver to the Payee: (a) a new note representing the difference
between principal amount of this Note and the principal amount hereof which has
been converted pursuant hereto; and (b) certificates representing the number of
shares of Common Stock to which the Payee is entitled. The Maker shall not be
obligated to issue certificates representing shares of Common Stock in the name
of any party other than the Payee. The person or entity in whose name the
certificates representing the shares of Common Stock issuable upon conversion
hereof shall be deemed to have become a holder of record on the next succeeding
day on which the transfer books are open, but the Conversion Price shall be that
in effect on the Conversion Date. The Maker covenants that all securities which
may be issued upon exercise of the Conversion Right will, upon issuance, be
fully paid and nonassessable and free of all taxes, liens and charges caused or
created by the Maker with respect to the issuance thereof.
4. Adjustments. The number and kind of securities which may be received upon
-----------
the exercise of the Conversion Right and the Conversion Price shall be subject
to adjustment from time to time upon the happening of certain events, as
follows:
2
<PAGE>
(a) Stock Splits and Combinations. If the Maker shall at any time or
-----------------------------
from time to time after the date hereof effect a subdivision of its outstanding
shares of Common Stock, the Conversion Price then in effect immediately before
such subdivision shall be proportionately decreased, and conversely, if the
Maker shall at any time or from time to time after the date hereof combine its
outstanding shares of Common Stock, the Conversion Price then in effect
immediately before such combination shall be proportionately increased. Any
adjustment under this section shall become effective upon the close of business
on the date the subdivision or combination becomes effective.
(b) Certain Dividends and Distributions. In the event that the Maker
-----------------------------------
shall at any time or from time to time after the date hereof make or issue, or
fix a record date for the determination of holders of shares of Common Stock
entitled to receive, a dividend or other distribution payable in additional
shares of Common Stock, then and in each such event, the Conversion Price then
in effect shall be decreased as of the time of such issuance or, in the event
that such a record date shall have been fixed, as of the close of business on
such record date, by multiplying the Conversion Price then in effect by a
fraction:
(i) the numerator of which shall be the total number of shares of
Common Stock issued and outstanding immediately prior to the time of such
issuance or the close of business on such record date; and
(ii) the denominator of which shall be the sum of the total number
of shares of Common Stock issued and outstanding immediately prior to the time
of such issuance or the close of business on such record date and the number of
shares of Common Stock issuable in payment of such dividend or distribution;
provided, however, that if such record date shall have been fixed and such
- -------- -------
dividend is not fully paid or if such distribution is not fully made on the date
fixed therefor, the Conversion Price shall be recomputed accordingly as of the
close of business on such record date and thereafter such Conversion Price shall
be adjusted pursuant to this subsection as of the time of actual payment of such
dividends or distributions.
(c) Other Dividends and Distributions. In the event that the Maker at
---------------------------------
any time or from time to time after the date hereof shall make or issue, or fix
a record date for the determination of holders of shares of Common Stock
entitled to receive, a dividend or other distribution payable in securities of
the Maker other than shares of Common Stock, then and in each such event
provisions shall be made so that the holder of this Note shall receive, upon
conversion of this Note, in addition to the number of shares of Common Stock
receivable thereupon, the amount of securities of the Maker which such holder
would have received had its Note been converted into shares of Common Stock on
the date of such event and had thereafter, during the period from the date of
such event to and including the Conversion Date, retained such securities
(together with any distributions payable thereon during such period) receivable
by the holder as aforesaid during such period, giving application to all
adjustments called for during such period under this section with respect to the
rights of the holder of the Note.
3
<PAGE>
(d) Reclassification, Exchange or Substitution. If the shares of
------------------------------------------
Common Stock issuable upon the conversion of this Note shall be changed into the
same or different number of shares of any class or classes of capital stock,
whether by capital reorganization, reclassification or otherwise (other than a
subdivision or combination of shares or stock dividend provided for above, or a
reorganization, merger, consolidation or sale of assets provided for in
subsection (e) below), then and in each such event, the holder of this Note
shall have the right thereafter to convert this Note into the kind and amount of
shares of capital stock and other securities and property receivable upon such
reorganization, reclassification or other change, as the holder of the number of
shares of Common Stock into which this Note might have been converted
immediately prior to such reorganization, reclassification or change, all
subject to further adjustment as provided herein.
(e) Reorganization or Consolidation. If, at any time or from time to
-------------------------------
time, there shall be a capital reorganization of the shares of Common Stock
(other than a subdivision, combination, reclassification or exchange of shares
provided for elsewhere in this section) then as a part of such reorganization or
consolidation, provision shall be made so that the holder of this Note shall
thereafter be entitled to receive upon conversion of this Note, the number of
shares of capital stock or other securities or property of the Maker, or of the
successor corporation resulting from such merger or consolidation or sale, to
which the holder of shares of Common Stock deliverable upon conversion would
have been entitled on such reorganization or consolidation.
(f) Minimum Adjustment. Notwithstanding anything to the contrary set
------------------
forth herein, no adjustment of the Conversion Price shall be made in an amount
equal to less than five cents ($.05), but any such lesser adjustment shall be
carried forward and shall be made at the time and together with the next
subsequent adjustment which together with any adjustments so carried forward
shall amount to five cents ($.05) or more.
(g) Certificate of Adjustment. Upon the occurrence of each adjustment
-------------------------
or readjustment of the applicable Conversion Price pursuant to this section, the
Maker shall promptly compute such adjustment or readjustment in accordance with
the terms hereof and prepare and furnish to the holder of this Note a
certificate, signed by the Chairman of the Board, the President or the Chief
Financial Officer, setting forth such adjustment or readjustment and showing in
detail the facts upon which such adjustment or readjustment is based.
(h) Exceptions. Notwithstanding any other provision in this Section
----------
4, no adjustment shall be made to the number or kind of securities issuable upon
exercise of the Conversion Right, and the Conversion Price shall not be adjusted
in the event of the issuance of securities by the Company for consideration,
such as in the sale of securities or the issuance of securities in a merger,
consolidation or acquisition of operations or assets of another person or
entity.
4
<PAGE>
(i) Notices of Record Date. If and in the event that:
----------------------
(i) the Maker shall set a record date for the purpose of
entitling the holders of shares of Common Stock to receive a dividend, or any
other distribution, payable otherwise than in cash;
(ii) there shall occur any capital reorganization of the Maker,
reclassification of the shares of capital stock of the Maker (other than a
subdivision or combination of its outstanding shares of Common Stock);
then, and in any such case, the Maker shall cause to be mailed to the holder of
record of this Note, at least ten (10) days prior to the dates hereinafter
specified, a notice stating the date: (A) which has been set as the record date
for the purpose of such dividend, distribution; or (B) on which such
reclassification or reorganization is to take place and the record date as of
which the holder of record shall be entitled to exchange this Note for
securities or other property deliverable upon such reclassification or
reorganization.
5. Reservation. The Maker covenants that, during the period within which the
-----------
Conversion Right may be exercised, the Maker will at all times have authorized
and reserved for the purpose of issuance upon exercise of the Conversion Right,
a sufficient number of shares of Common Stock (or other securities subject to
the Conversion Right) to provide for the exercise of the Conversion Right in
full.
6. Fractional Shares. No fractional shares of Common Stock shall be issued
-----------------
upon conversion of this Note. In lieu of any fractional shares of Common Stock
to which the Payee would otherwise be entitled, the Maker shall pay an amount
equal to the product of such fraction multiplied by the fair value of one share
of Common Stock on the Conversion Date, as determined in good faith by the Board
of Directors of the Maker.
7. Registration Rights. The Maker hereby covenants and agrees as follows:
-------------------
(a) Definitions. For purposes of this section:
-----------
(i) The terms "register," "registered" and "registration" refer
to a registration effected by preparing and filing a registration statement or
similar document in compliance with the Securities Act of 1933, as amended (the
"Securities Act"), and the declaration of effectiveness of such registration
statement or other document by the Securities and Exchange Commission (the
"SEC").
(ii) The term "Registrable Securities" means: (A) the shares of
Common Stock issued or issuable upon conversion of this Note; or (B) any other
securities of the Maker issued as (or issuable upon the conversion or exercise
of any warrant, right or other security which is issued as) a dividend or other
distribution with respect to, in exchange for or in
5
<PAGE>
replacement of the shares of Common Stock referenced in subsection (A)
immediately above, excluding in all cases, however, any Registrable Securities
sold to the public pursuant to a registration or an exemption from registration.
(iii) The number of shares of "Registrable Securities then outstanding"
shall be the number of securities outstanding which are Registrable Securities.
(iv) The term "Holder" as used hereinafter in this section means any
person or entity owning of record Registrable Securities.
(b) Registration Rights. In the event that the Conversion Right is
-------------------
exercised, then as soon thereafter as is reasonably practicable the Maker shall
cause the Registrable Securities to be included in a registration statement
filed by the Maker under the Securities Act of 1933 as amended. To the extent
that a Holder is offered the opportunity to include all of its Registrable
Securities in a registration statement, the Maker shall have satisfied all of
its obligations under this section.
(c) Obligations of the Maker. Whenever required under this section to file
------------------------
a registration statement to effect the registration of any Registrable
Securities, the Maker shall:
(i) Prepare and file with the SEC a registration statement with
respect to such Registrable Securities and use its best efforts to cause such
registration statement to become effective, and, upon the request of the Holders
of at least fifty percent (50%) of the Registrable Securities registered
thereunder, keep such registration statement effective for at least four (4)
months.
(ii) Prepare and file with the SEC such amendments and supplements to
such registration statement and the prospectus included therein as may be
necessary to comply with the provisions of the Securities Act with respect to
the disposition of all securities covered by such registration statement.
(iii) Furnish to the Holders such numbers of copies of a prospectus,
including a preliminary prospectus, in conformity with the requirements of the
Securities Act, and such other documents as they may reasonably request in order
to facilitate the disposition of Registrable Securities owned by them.
(iv) Use its best efforts to register and qualify the securities
covered by such registration statement under the securities laws of such
jurisdictions as shall be reasonably requested by the Holders for the
distribution of the securities covered by the registration statement, provided
that the Maker shall not be required in connection therewith or as a condition
thereto to qualify to do business or to file a general consent to service of
process in any such jurisdiction.
6
<PAGE>
(v) In the event of any underwritten public offering, enter into and
perform its obligations under an underwriting agreement with terms generally
satisfactory to the managing underwriter of such offering.
(vi) Notify the Holders promptly after the Maker shall have received
notice thereof, of the time when the registration statement becomes effective or
any supplement to any prospectus forming a part of the registration statement
has been filed.
(vii) Notify the Holders of any stop order suspending the
effectiveness of the registration statement and use its reasonable best efforts
to remove such stop order.
(d) Furnish Information. It shall be a condition precedent to the
-------------------
obligations of the Maker to take any action pursuant hereto that any Holder
seeking to include any of its Registrable Securities in a registration statement
filed by the Maker pursuant hereto shall furnish to the Maker such information
regarding itself, the Registrable Securities held by it, and the intended method
of disposition of such securities as shall be required to effect the
registration of its Registrable Securities. In that connection, each such
Holder shall be required to represent to the Maker that all such information
which is given is both complete and accurate in all material respects. Each of
such Holders shall deliver to the Maker a statement in writing from the
beneficial owners of such securities that such beneficial owners bona fide
intend to sell, transfer or otherwise dispose of such securities.
(e) Definition of Expenses.
----------------------
(i) "Registration Expenses" shall mean all expenses incurred by the
---------------------
Maker in complying with Sections 7(b) and 7(c) hereof, including without
limitation, all registration and filing fees, printing expenses, fees and
disbursements of counsel for the Maker, blue sky fees and expenses, and the
expense of any special audits incident to or required by any such registration
(but excluding the compensation of regular employees of the Maker which shall be
paid in any event by the Maker).
(ii) "Selling Expenses" shall mean all underwriting discounts, selling
----------------
commissions and underwriters' expense allowance applicable to the sale and all
fees and disbursements of any counsel (other than the Maker's regular counsel)
for any Holder.
(f) Expenses of Registration. All Registration Expenses incurred in
------------------------
connection with any registration, qualification or compliance herewith, shall be
borne by the Maker, and all Selling Expenses shall be borne by the Holders of
the securities so registered pro rata on the basis of the number of Registrable
Securities so registered; provided, however, that the Maker shall not be
-------- -------
required to pay any Registration Expenses if, as a result of the withdrawal of a
request for registration by Initiating Holders, the registration statement does
not become effective. In the case of such withdrawal and the failure of the
Holders to agree so to forfeit, the Holders shall bear such Registration
Expenses pro rata on the basis of the number of Registrable Securities so
included in the registration request.
7
<PAGE>
(g) Underwriting Requirements. All Holders proposing to distribute their
-------------------------
securities through an underwriting pursuant hereto shall (together with the
Maker and any other holders distributing their securities through such
underwriting) enter into an underwriting agreement in customary form with the
underwriter or underwriters selected for underwriting by the Maker.
Notwithstanding any other provision of this section, at the request of the
managing underwriter, the Holder shall delay the sale of Registrable Securities
which such Holder has requested be registered under this section for the ninety
(90) day period commencing with the effective date of the registration
statement. Notwithstanding anything to the contrary herein, no such delay shall
be required with respect to securities offered by holders of securities who have
requested the Maker to register such securities pursuant to a mandatory
registration obligation of the Maker if other security holders of the Maker who
have not made requests pursuant to such an obligation are not subject to a
similar delay. If any Holder disapproves of the terms of any such underwriting,
he may elect to withdraw therefrom by written notice to the Maker and the
underwriter. Any Registrable Securities excluded or withdrawn from such
underwriting shall not be withdrawn from such registration except at the
election of the Holder.
(h) Delay of Registration. No Holder shall have any right to obtain or seek
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an injunction restraining or otherwise delaying any such registration as the
result of any controversy that might arise with respect to the interpretation or
implementation of this section.
(i) Reports Under Securities Exchange Act of 1934. With a view toward
---------------------------------------------
making available to Holders the benefits of Rule 144 promulgated under the
Securities Act and any other rule or regulation of the SEC that may at any time
permit a Holder to sell securities of the Maker to the public without
registration, the Maker agrees to:
(i) use its best efforts to make and keep public information
available, as those terms are understood and defined in Rule 144, at all times;
(ii) use its best efforts to file with the SEC in a timely manner all
reports and other documents required of the Maker under the Securities Act and
the Exchange Act; and
(iii) furnish to any Holder, so long as the Holder owns any Registrable
Securities, forthwith upon request such information as may be reasonably
requested in order to allow any Holder to avail himself of any rule or
regulation of the SEC which permits the selling of any such securities without
registration.
(j) Termination of the Maker's Obligations.
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(i) The Maker shall have no obligation pursuant to Section 7(c) with
respect to any request made by any Holder after the second (2nd) anniversary of
the Maturity Date.
(ii) Notwithstanding any provision hereof to the contrary, the Maker
shall not be required to effect any registration under the Securities Act or
under any state securities laws on behalf of any Holder or Holders if, in the
opinion of counsel for the Maker, the offering or
8
<PAGE>
transfer by such Holder or Holders in the manner proposed (including, without
limitation, the number of shares proposed to be offered or transferred and the
method of offering or transfer) is exempt from the registration requirements of
the Securities Act and the securities laws of applicable states.
(k) Lock Ups. The Payee (and any subsequent Holder) by acceptance hereof,
--------
hereby acknowledges that it is the Maker's intention to conduct the Public
Offering, which offering is contemplated to be underwritten; the Payee (and any
subsequent Holder) by acceptance hereof hereby agrees: (i) that its rights to
request registration pursuant to the provisions hereof shall be subject in all
respects to the prior approval of the underwriter of the Public Offering (the
"Underwriter"); and (ii) the Payee (and any subsequent Holder) shall agree to
refrain from exercising such rights or transferring any of the Registrable
Securities for a period of up to thirteen (13) months, should the Underwriter so
request.
8. Miscellaneous.
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(a) Restricted Securities. By acceptance hereof, the Payee understands and
---------------------
agrees that this Note and the shares of Common Stock issuable upon conversion
hereof are "restricted securities" under the federal securities laws inasmuch as
they are being acquired from the Maker in a transaction not involving a public
offering and have not been the subject of registration under the Securities Act
and that under such laws and applicable regulations such securities may be
resold in the absence of registration under the Securities Act only in certain
limited circumstances. The Payee hereby represents that he is taking the Note
for long term investment purposes and not with a view toward resale or
distribution and that he is familiar with Rule 144 promulgated under the
Securities Act, as presently in effect, and understands the resale limitations
imposed thereby and by the Securities Act.
(b) Further Limitations on Disposition. This Note may not be negotiated,
----------------------------------
assigned or transferred by Payee. The Payee further agrees not to make any
disposition of all or any portion of this Note (or of the securities issuable
upon conversion hereof) unless and until:
(i) there is then in effect a registration statement under the
Securities Act covering such proposed disposition and such disposition is made
in accordance with such registration statement;
(ii) such disposition is made in accordance with Rule 144 under the
Securities Act; or
(iii) the Payee shall have notified the Maker of the proposed
disposition and shall have furnished the Maker with a detailed statement of the
circumstances surrounding the proposed disposition, and the Payee shall have
furnished the Maker with an opinion of counsel, which opinion of counsel shall
be reasonably satisfactory to the Maker, that such disposition will not require
registration under the Securities Act and will be in compliance with applicable
state securities laws.
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<PAGE>
(c) Legends. It is understood that this Note and each certificate
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evidencing shares of Common Stock issuable upon conversion hereof (or evidencing
any other securities issued with respect thereto pursuant to any stock split,
stock dividend, reorganization or recapitalization) shall bear the legends (in
addition to any legends which may be required in the opinion of the Maker's
counsel by the securities laws of the state where the Payee is located) set
forth on the first page of this Note.
9. Notices.
-------
(a) Notices to the Payee. Any notice required by the provisions of this
--------------------
Note to be given to the holder hereof shall be in writing and may be delivered
by personal service, facsimile transmission or by registered or certified mail,
return receipt requested, with postage thereon fully prepaid or overnight
delivery courier. All such communications shall be addressed to the Payee of
record at its address appearing on the books of the Maker. Service of any such
communication made only by mail shall be deemed complete on the date of actual
delivery as shown by the addressee's registry or certification receipt or at the
expiration of the third (3rd) business day after the date of mailing, whichever
is earlier in time.
(b) Notices to the Maker. Whenever any provision of this Note requires a
--------------------
notice to be given or a request to be made to the Maker by the Payee or the
holder of any other security of the Maker obtained in connection with a
recapitalization, merger, dividend or other event affecting this Note, then and
in each such case, any such notice or request shall be in writing and shall be
sent by registered or certified mail, return receipt requested with postage
thereon fully prepaid to the Maker at its principal place of business.
No notice given or request made hereunder shall be valid unless signed by
the Payee of this Note or other holder giving such notice or request (or, in the
case of a notice or request by Holders of a specified percent in aggregate
principal amount of outstanding Notes, unless signed by each Holder of a Note
whose Note has been counted in constituting the requisite percentage of Notes
required to give such notice or make such request).
11. Construction; Governing Law. The validity and construction of this Note
---------------------------
and all matters pertaining hereto are to be determined in accordance with the
laws of the State of Delaware without regard to the conflicts of law principles
thereof.
IN WITNESS WHEREOF, Maker, by its appropriate officers thereunto duly
authorized, has executed this Non-Negotiable 8% Convertible Promissory Note and
affixed its corporate seal as of this _____ day of ___________, 1996.
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THINK NEW IDEAS, INC.
By:
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Scott A. Mednick, Chief Executive Officer
ATTEST:
By:
-----------------------------------
Mel Epstein, Secretary
93826003.636
11
<PAGE>
CONVERSION FORM
The undersigned hereby elects to convert the following principal amount of
the attached Non-Negotiable 8% Convertible Promissory Note (the "Note") (not to
exceed $__________) into shares of common stock, par value $.0001 per share, of
THINK New Ideas, Inc.
State such amount: _____________________________ Dollars ($___________).
Date: Signature:
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----------------------------------------
(Sign exactly as your name appears on the
Note)
93826003.636
