SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT UNDER SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 1998
[ ] TRANSITION REPORT UNDER SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File No. 000-21775
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THINK NEW IDEAS, INC.
(Name of small business issuer in its charter)
DELAWARE 95-4578104
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
45 WEST 36TH STREET, 12TH FLOOR, NEW YORK, NEW YORK 10018 (212) 629-6800
(Address and telephone number of principal executive offices)
-------------------------------
Securities registered pursuant to Section 12(b) of the Exchange Act: None.
Securities registered pursuant to Section 12(g) of the Exchange Act: Common
Stock, $0.0001 par value.
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past twelve (12) months (or for such
period that the Registrant was required to file such reports); and (2) has been
subject to such filing requirements for the past ninety (90) days.
Yes /x/ No / /
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. / /
The Registrant's revenues for the fiscal year ended June 30, 1998 totaled
$42,644,405.
As of September 16, 1998, the aggregate market value of the voting stock held by
non-affiliates of the Registrant (assuming for this purpose that only directors
and officers of the Registrant are affiliates of the Registrant), based on the
last sale price on that date, was approximately $44,133,475.
As of September 16, 1998, there were 8,440,698 shares of Common Stock
outstanding.
Documents incorporated by reference: Certain exhibits hereto have been
specifically incorporated by reference herein in Item 13 under Part III hereof.
Transitional Small Business Disclosure Format: Yes / / No /x/
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6
INDEX TO FORM 10-KSB
OF
THINK NEW IDEAS, INC.
PAGE
PART I
ITEM 1. Description of Business..........................................2
ITEM 2. Description of Property.........................................14
ITEM 3. Legal Proceedings...............................................15
ITEM 4. Submission of Matters to a Vote of Securityholders..............15
PART II
ITEM 5. Market for Common Equity and Related Stockholder Matters........15
ITEM 6. Management's Discussion and Analysis of Financial Condition and
Results of Operations...........................................16
ITEM 7. Consolidated Financial Statements..............................F-1
ITEM 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures...........................................26
PART III
ITEM 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act...............26
ITEM 10. Executive Compensation..........................................30
ITEM 11. Security Ownership of Certain Beneficial Owners and Management.38
ITEM 12. Certain Relationships and Related Transactions..................38
ITEM 13. Exhibits and Reports On Form 8-K................................41
NOTE: Certain sections of this document contain forward-looking statements
that involve risks and uncertainties. The Company's actual results may differ
significantly from the results discussed in the forward-looking statements.
Factors that might cause such a difference include, but are not limited to,
those discussed in the sections entitled "Business-Factors Affecting Operating
Results and Market Price of Stock" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
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PART I
ITEM 1 DESCRIPTION OF BUSINESS
BACKGROUND
THINK New Ideas, Inc. (the "Company") was incorporated in the State of
Delaware in January 1996. On June 30, 1996, the Company commenced its operations
upon completion of the acquisition of all of the capital stock of the following
entities: Internet One, Inc., a Colorado corporation ("Internet One"), Creative
Resources Agency, Inc., a Georgia corporation ("Creative Resources"); Scott A.
Mednick & Associates, Inc., a California corporation ("Mednick Group"); The S.D.
Goodman Group, Inc., a New York corporation ("Goodman Group"); On Ramp, Inc., a
New York corporation ("On Ramp"); NetCube Corporation, a Delaware corporation
and NetCube Corporation, a New Jersey corporation (collectively, "NetCube"), in
exchange for issuance of an aggregate of 723,167 shares of the Company's common
stock (the "Common Stock"). All of the foregoing companies may be referred to
hereinafter as the "Founding Companies."
In August 1996, the Company entered into a strategic relationship with
Omnicom Group Inc., a publicly held company ("Omnicom"). Omnicom is the largest
marketing and advertising company in the world. Pursuant to the Company's
agreement with Omnicom (the "Omnicom Agreement"), the Company received net
proceeds of $4,948,000 from the issuance of 938,667 shares of Common Stock to
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 (the "Omnicom Transaction").
In November 1996, the Company completed its initial public offering (the
"Initial Public Offering") pursuant to which the Company issued 2,150,000 shares
of Common Stock. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources." In
connection with the Initial Public Offering, the Company effected two reverse
stock splits; accordingly, all share and per share data reflects the effects of
such splits. See Note 9 to the Company's Consolidated Financial Statements.
Effective as of May 31, 1997, the Company acquired certain assets and
operations of Fathom Advertising, a full service advertising agency ("Fathom"),
from Ketchum Communications, Inc., a wholly-owned subsidiary of Omnicom
("Ketchum") in exchange for the issuance of an aggregate of 120,000 shares of
Common Stock (the "Fathom Acquisition").
In November 1997, the Company acquired all of the outstanding capital
stock of BBG New Media, Inc., a Massachusetts corporation, which provides
interactive marketing services ("BBG") in exchange for the issuance of 303,334
shares of Common Stock and payment of $175,000 in cash pursuant to an Agreement
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and Plan of Merger dated November 3, 1997 (the "BBG Agreement"). In addition,
under the terms of the BBG Agreement, the Company will issue additional shares
of Common Stock to the former stockholders of BBG if the Company achieves
certain sales growth during the period from November 1, 1998 through October 31,
1999. See Note 2 to the Consolidated Financial Statements of the Company.
In April 1998, the Company acquired all of the outstanding capital stock
of Herring/Newman, Inc., a Washington corporation, which provides advertising
services ("Herring/Newman") in exchange for the issuance of 127,799 shares of
Common Stock and payment of $400,000 in cash pursuant to an Agreement and Plan
of Merger dated April 2, 1998 (the "HN Acquisition"). In addition, the Company
issued 77,220 shares of Common Stock which are being held in escrow (the "HN
Escrow Shares"). The HN Escrow Shares will be released to the former
stockholders of Herring/Newman on the first anniversary of the HN Acquisition
upon fulfillment of certain conditions, including retention of certain key
clients. See Note 2 to the Consolidated Financial Statements of the Company.
In June 1998, the Company acquired all of the outstanding capital stock of
Interweb, Inc., a Georgia corporation, which provides Web-based solutions to
Fortune 500 companies ("Interweb") and UbiCube Group, Inc., a Delaware
interactive marketing corporation ("UbiCube"). The Company acquired Interweb
pursuant to an Agreement and Plan of Merger dated June 2, 1998 in exchange for
the issuance of 600,000 shares of Common Stock and $200,000 in cash (the
"Interweb Acquisition"). The Company acquired UbiCube pursuant to an Agreement
and Plan of Merger dated June 27, 1998 (the "UbiCube Agreement") through a
wholly-owned subsidiary, UbiCube Acquisition Corp., in exchange for the issuance
of 154,257 shares of Common Stock and the promise to pay $2,250,000 through
January 15, 2000 (the "UbiCube Acquisition"). Pursuant to the UbiCube Agreement,
an additional 154,257 shares of Common Stock were placed in escrow and will be
released to the former stockholders of UbiCube based on the attainment of
certain milestones on January 15, 1999, January 15, 2000, and January 15, 2001.
In addition, in connection with the UbiCube Acquisition, the Company may issue
additional shares of Common Stock to the former stockholders of UbiCube subject
to the attainment of certain revenue and profit targets during the three years
ending June 2001. See Note 2 to the Consolidated Financial Statements of the
Company.
The Founding Companies, BBG, Herring/Newman, Interweb and UbiCube may
be collectively referred to hereinafter as the "Subsidiaries."
BUSINESS OVERVIEW
The Company provides integrated marketing, communications and technology
solutions enabling clients to utilize the Internet and other interactive
technologies to enhance their competitive position. The Company focuses on
identifying opportunities for companies to restructure their marketing and
distribution strategies around interactive technologies and implementing
creative solutions to deliver their messages with the greatest impact. The
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Company's solutions incorporate various technologies including customized
interactive applications, e-commerce and e-catalog technology, consumer modeling
and response technology and database development. The Company integrates its
core expertise through a standardized process that begins with strategic
planning and consulting and continues through implementation and
post-implementation review and maintenance. The Company's solutions are intended
to help clients determine and implement their business strategies, build brand
awareness, and effectively communicate information to their internal and
external constituents.
The Company approaches each client engagement utilizing its standard
proprietary methodology, the THINK Vision Process (described more fully below).
Utilizing this process, the Company thoroughly researches a client's business to
determine the effectiveness of existing communications programs and how such
programs may be improved and integrated into an interactive strategy that is
intended to help clients gain a competitive advantage in a changing business
landscape.
The Company currently operates an international network of offices with
headquarters in New York City, New York and regional offices in Los Angeles; San
Francisco, California; Seattle, Washington; Stoneham, Massachusetts; Atlanta,
Georgia; London, England and Sophia, Bulgaria. The Company provides integrated
solutions through multi-disciplinary teams with creative, consulting and
technological expertise from across the Company's network of offices.
METHODOLOGY
THE THINK VISION PROCESS. The Company approaches each client engagement
utilizing its standard proprietary methodology, the THINK Vision Process.
Through this process, the Company's consultants thoroughly research a client's
entire business - including internal audiences, such as employees, and external
audiences, such as customers and suppliers - to determine the effectiveness of
existing communications programs and how such programs may be improved and
integrated into an Interactive Communications strategy that helps the client
gain a competitive advantage in a changing business landscape. The THINK Vision
Process places significant emphasis on strategic planning and implementation.
The THINK Vision Process is composed of six phases: (1) assessment; (2) strategy
development and specification; (3) concept development; (4) implementation; (5)
review and adjustment; and (6) maintenance and long-term planning.
MARKETING EXPERTISE
The Company's marketing expertise helps its clients identify their
customers and other target audiences, define the processes of communicating to
those audiences and analyze the results of those communications. The Company
applies its marketing expertise to each integrated solution to enable clients to
deliver the right message at the right time to the right audience. The Company's
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solutions range from extending, enhancing and developing brands, designing
corporate and product brand networks, integrating and developing media
programming and relationship-building to acquiring and maintaining customers.
BUSINESS EXPERTISE
The Company's expertise in business processes helps its clients improve
the entire value chain of their businesses, from sales, accounting, order
management, supply chain management and inventory procurement, to planning and
scheduling, manufacturing and finished goods delivery. The Company applies its
expertise in business processes to ensure that each Integrated Solution is
designed to consider, analyze and improve all components of each client's value
chain.
TECHNOLOGY EXPERTISE
The Company's technology expertise provides the Company with the ability
to design, develop and implement integrated marketing and communications
technology solutions. The Company is "technology agnostic" and seeks to develop
secure, flexible and innovative solutions across a wide range of networking and
telecommunications environments using third-party and proprietary technologies.
The Company's technology expertise encompasses multiple system architectures,
programming languages, broadband technologies, digital media applications, and
communication networks utilizing Internet, intranet and extranet technologies.
The Company's core technical competencies include:
APPLICATIONS DESIGN AND DEVELOPMENT. The Company utilizes a variety of
programming languages and tools including C/C++, CORBA, Java, SQL, Visual Basic,
and other object-oriented technologies. The Company also develops programming
tools and environments when appropriate in order to implement the most
cost-effective and functional Interactive Solution.
INNOVATIVE GUI DESIGN AND DEVELOPMENT. In order to maximize the
effectiveness of the Company's solutions, the Company integrates creative
marketing and communications expertise with software applications development to
create engaging, innovative and easy-to-use GUIs for Web Sites and other
front-end applications.
NETWORK INTEGRATION AND SYSTEMS MANAGEMENT. In order to implement
effectively the Company's solutions, the Company utilizes a wide range of
database management and information technology integration and implementation
services. The Company integrates its solutions into existing information
technology environments and infrastructures, including front and back-end
objected oriented and relational databases, enterprise-wide local and wide area
networks, client/server architectures and other distributed computing
environments.
INTERNET APPLICATIONS AND SERVICES. The Company's Internet applications
and services expertise includes the development of secure electronic-commerce
and electronic-catalog environments, Web-tracking software and other
Internet-related applications and services. This expertise has allowed the
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Company to develop certain applications that are integrated into its Interactive
Solutions. For instance, the Company has developed the following applications
and tools that can be integrated into its Interactive Solutions:
Multi-user ,Object- Client authoring tool that enables executives with-
oriented Authoring out technical experience to add animated graphics
Tool ("MOAT") and text to any part of a Web site, intranet or
extranet.
WebMechanic Automated Website and intranet building and
management tool that enables real-time generation
of customized Web sites. WebMechanic also provides
the ability to edit, create and refresh content
from any location in a user-friendly process.
Electronic Consumer relations program that automates
Consumer communications aspect of relationship management
Relations systems, automatically generating personalized
Program responses based on information provided or
("E-CORP") queried. E-CORP simultaneously logs and forwards
messages to appropriate internal departments.
E-CORP collects responses in a relational database
allowing information to be segmented and analyzed,
facilitating outward communications with interest
groups based on various criteria.
Advanced Statistical Tracks and analyzes Web site usage and
Analysis Program functionality. ASAP works with existing log file
("ASAP") analysis technology to present information in a
format and language that can be easily understood.
X-Tracker Tracks and analyzes Web site traffic generation.
Allows generation of reports that show
effectiveness of individual campaigns and events
from any medium in driving traffic to Web sites.
X-Tracker reports graphically and quantitatively
show correlation between individual and integrated
campaigns in directing traffic.
Lightweight Directory service protocol that allows end users
Directory Access to query directory entries for any attribute or
Protocol ("LDAP") combination of attributes. LDAP provides answers
to problems historically associated with online
directory systems by standardizing data storage
structure and optimizing use of system resources.
SALES AND MARKETING
The Company has 30 employees dedicated to sales and marketing divided
between regional and national development teams in all of its U.S. offices and
in its U.K. office and a national Corporate Business Development Group (the
"Development Group"). The sales and marketing department manages the many
opportunities developed from (1) the leverage and expansion of existing client
opportunities, (2) pursuit of referrals from existing clients, partners and
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third party organizations and (3) leads developed through the Company extensive
conference and sponsored corporate speaking engagements.
The Development Group, staffed with strategic marketers and account
planners, lead and assist in developing and writing sophisticated responses to
the requests for proposals as developed and aggregated by the Company's
marketing efforts. The Development Group is also responsible for coordinating
and tracking all new business opportunities, resource allocation and revenue
goal planning and tracking. The Company tracks extensively all business
development activity and maintains an active business development database to
statistically track and measure the success of its sales and marketing efforts
on a quarterly basis.
The Company markets itself through traditional brand promotion strategies
such as consolidated marketing and collateral material, public relations
campaigns, client and partner referrals, and speaking engagements. The Company
also depends on establishing and maintaining close relationships with industry
analysts, industry publications and speaking circuit registries.
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 specialized and integrated marketing and communication firms,
information technology consulting firms, and national and regional advertising
agencies. In addition, many national advertising agencies have internally
developed or acquired new media capabilities. New competitors have also emerged
that either provide integrated or specialized services (e.g., corporate identity
and packaging, advertising services or Web site design) or are technologically
proficient, especially in the new media arena. 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 business has moderately low barriers to entry. The Company
has no significant proprietary technology that would preclude or inhibit
competitors from entering the Company's market. The Company expects that it will
face additional competition from new market entrants. Existing or future
competitors may 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
Company's business, financial condition and results of operations.
EMPLOYEES
As of June 30, 1998, the Company had 418 full-time employees and 56
part-time employees. Of these employees, 5 were officers, 27 were other
management personnel, 71 were in operations, 124 were in technical and
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production, 81 were in creative/design and media, and 110 were sales and service
representatives. None of the Company's employees are represented by a labor
union or are subject to a collective bargaining agreement. The Company has never
experienced a work stoppage and believes its employee relations are good.
GOVERNMENT REGULATION
The Company has no knowledge of any governmental regulations which
materially adversely affect its operations.
FACTORS AFFECTING OPERATING RESULTS AND MARKET PRICE OF STOCK
The Company operates in a rapidly changing environment that involves a
number of uncertainties, some of which are beyond the Company's control. In
addition to the uncertainties described elsewhere in this report, these
uncertainties include:
DEPENDENCE ON KEY ACCOUNTS. The Company's four largest clients accounted
for thirty-nine percent (39%) of the Company's revenues for the fiscal year
ended June 30, 1998, with fluctuations in the amount of revenue contribution
from each such client from quarter to quarter. Oracle and Pioneer, the Company's
two largest clients during the fiscal year ended June 30, 1998, accounted for
approximately thirteen percent (13%) each of the Company's revenues, during the
period. Since the Company's clients generally retain the Company on a project by
project basis, a client from whom the Company generates substantial revenue in
one period may not be a substantial source of revenue in a subsequent period. To
the extent that the Company's major clients do not remain a significant source
of revenues, and the Company is unable to replace these clients, there could be
a direct and immediate material adverse effect on the Company's business,
financial condition and operating results. The Company's typical project lasts
from two to four weeks in the case of smaller projects and up to five months in
the case of larger projects. Once a project is completed there can be no
assurance that a client will engage the Company for further services. In
addition, the Company's clients may unilaterally reduce their use of the
Company's services or terminate existing projects without penalty. The
termination of the Company's business relationship with any of its significant
clients or a material reduction in the use of the Company's services by a
significant client would have a material adverse effect on the Company's
business, financial condition and operating results.
FLUCTUATIONS IN QUARTERLY OPERATING RESULTS AND MARGINS; SEASONALITY OF
BUSINESS. The Company's operating results have fluctuated in the past and may
fluctuate in the future as a result of a variety of factors, including timing of
the completion, material reduction or cancellation of major projects or the loss
of a major client, timing of the receipt of new business, timing of the hiring
or loss of personnel, timing of the opening or closing of an office, the
relative mix of high margin creative projects as compared to lower margin
production projects, changes in the pricing strategies and business model of the
Company or its competitors, capital expenditures and other costs relating to the
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expansion of operations, and other factors that are outside of the Company's
control. Operating results could also be materially adversely affected by
increased competition in the Company's markets. The Company's operating margins
may fluctuate from quarter to quarter depending on the relative mix of lower
cost full time employees versus higher cost independent contractors. The Company
experiences some seasonality in its business which results from timing of
product introductions and business cycles of the Company's clients. The
Company's revenues may be somewhat higher during certain quarters of the
Company's fiscal year reflecting the trends of its clients preparing marketing
campaigns for products launched in anticipation of fall trade shows and the
holiday season. The Company's revenues for the first calendar quarter tend to be
somewhat lower because many clients have expended most of their marketing
budgets prior to the end of the calendar year and do not release funds from the
next calendar year's marketing budget until mid to late January. The Company
expects this seasonality to continue in the future. As a result of the foregoing
and other factors, the Company anticipates that it may experience material and
adverse fluctuations in future operating results on a quarterly or annual basis.
Therefore, the Company believes that period to period comparisons of its
revenues and operating results are not necessarily meaningful and that such
comparisons cannot be relied upon as indicators of future performance.
MANAGEMENT OF GROWTH; RISKS ASSOCIATED WITH EXPANSION. The Company's
business has grown rapidly in recent periods and its customer base has expanded
significantly. In the last year, the Company has opened new offices in Boston,
San Francisco, Seattle, the United Kingdom and Bulgaria; continued the
integration of several companies into one corporate organization; and has
increased the size of each of its offices in Los Angeles, New York and Atlanta.
The Company expects that the number of its employees will continue to grow and
that both existing and new management personnel will increase their
responsibilities. The Company's success depends on the ability of its executive
officers and other members of senior management to operate effectively, both
independently and as a group. This continued growth is expected to continue to
strain the Company's existing operational, financial and management information
systems.
The Company also intends to expand its operations into international
markets. However, the Company has only two offices outside of the United States
and has little experience in managing an international network of consulting
offices and marketing services to international clients. The Company expects to
incur significant costs in pursuit of these activities. If revenues from
international consulting offices are not adequate to offset the expenses of
establishing and maintaining them, or if the Company is unable to market its
services to international clients, the Company's business, results of operations
and financial condition could be materially adversely affected. The Company may
not be able to establish and maintain international offices or market its
services to international clients.
There are also certain risks inherent in doing business on an
international level. These risks include:
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o unexpected changes in regulatory requirements,
o export and import restrictions,
o tariffs and other trade barriers,
o difficulties in staffing and managing foreign operations,
o potentially adverse differences in business customs, practices, and
norms,
o longer payment cycles,
o problems in collecting accounts receivable,
o political instability,
o fluctuations in currency exchange rates,
o software piracy,
o seasonal reductions in business activity,
o potentially adverse tax consequences.
One or more of these factors may materially adversely affect the Company's
future international operations and, consequently, the Company's business,
results of operations and financial condition. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
In addition, the Company plans to expand its offerings of integrated
marketing communication services and products. There can be no assurance that
the Company will be successful in identifying new services or products that will
be attractive to clients or that such services or products will ultimately
generate revenues in excess of the costs of introducing them. Difficulties in
recruiting and assimilating new personnel, enhancing the Company's financial and
operational controls and expanding the Company's marketing and customer support
capabilities may impede the Company's ability to pursue its growth strategy. The
Company may be unable to manage its recent or any future expansions effectively,
and any inability to do so would have a material adverse effect on the Company's
business, financial condition and operating results. In addition, the Company
may be unable to sustain the rates of growth that it has experienced in the
past. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
DEVELOPING MARKET FOR INTEGRATED SOLUTIONS; UNCERTAIN ADOPTION OF THE
COMPANY'S INTEGRATED SOLUTIONS. The Company's future growth depends on its
ability to increase the amount of revenue it derives from providing integrated
marketing and communication solutions to its customers. The Company's marketing
and communication solutions use a variety of marketing and communication
channels, including the Internet, intranets, extranets and other new media, as
well as other traditional forms of marketing, such as print and broadcast media.
The market for integrating marketing and communication through new media is new
and rapidly evolving. It is characterized by an increasing number of new market
entrants. Demand and market acceptance for the Company's recently introduced
services, and the broader market for marketing and communication through new
media, are both uncertain.
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Organizations that have historically relied upon traditional means of
marketing and communication generally may need to accept new ways of conducting
business and exchanging information if they choose to adopt an integrated
solution to facilitate such marketing and communication. In particular,
companies that have already invested substantial resources in other means of
conducting commerce and exchanging information may be particularly reluctant or
slow to adopt a new strategy that may make their existing resources and
infrastructure less useful.
RISKS ASSOCIATED WITH ACQUISITIONS. As part of its business strategy, the
Company expects to acquire companies that are complementary to the Company. Any
such future acquisitions would be accompanied by the risks commonly encountered
in acquisitions of businesses including: the difficulty of assimilating the
operations and personnel of the acquired businesses, the potential disruption of
the Company's ongoing business, the inability of management to maximize the
financial and strategic position of the Company through the successful
incorporation of acquired personnel and clients, the maintenance of uniform
standards, controls, procedures and policies and the impairment of relationships
with employees and clients as a result of any integration of new management
personnel. In fiscal 1998, the Company acquired four new companies. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." In addition to the integration challenges presented by these and
earlier acquisitions, the Company expects that it will continue to pursue a
growth strategy predicated in part on additional acquisitions, some of which may
be dilutive to existing Company stockholders if the acquisitions are paid for in
whole or in part with shares of Common Stock. The Company closed the operations
of two of its subsidiaries at the end of fiscal 1997. In addition, the Company
has eliminated and is continuing to eliminate portions of the businesses that it
has acquired that no longer fit its business model. Consequently, the Company's
prior acquisitions or any potential acquisitions may have a material adverse
effect on the Company's business, financial condition and operating results. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
PROJECT PROFIT EXPOSURES. 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 six
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.
CONFLICTS OF INTEREST. Conflicts of interest are inherent in certain
segments of the marketing communications industry, particularly in advertising.
The Company has in the past and will in the future be unable to pursue potential
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advertising and other opportunities because such opportunities will require the
Company to provide services to direct competitors of existing clients of the
Company. In addition, the Company risks alienating or straining relationships
with existing clients each time the Company agrees to provide services to even
indirect competitors of existing Company clients. Conflicts of interest may
jeopardize the stability of revenues generated from existing clients and
preclude access to business prospects, either of which developments could have a
material adverse effect on the Company's business, financial condition and
operating results.
SUSCEPTIBILITY TO GENERAL ECONOMIC CONDITIONS. The Company's revenues and
results of operations will be subject to fluctuations based upon the general
economic conditions. If there were to be a general economic downturn or a
recession in the United States, then the Company expects that business
enterprises, including its clients and potential clients, will substantially and
immediately reduce their advertising and marketing budgets. In the event of such
an economic downturn, there can be no assurance that the Company's business,
operating results and financial condition would not be materially and adversely
affected.
DEPENDENCE ON PROPRIETARY TECHNOLOGIES. The Company regards certain of its
products and technologies, including its software applications, as proprietary.
The Company relies upon a combination of trademark, copyright and trade secret
law, together with non-disclosure 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. The Company's current intellectual property rights may not afford
meaningful protection and the Company's competitors may independently develop
technologies that are substantially equivalent or superior to the Company's
technologies. Others may 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, even
if any such claims are not valid.
PROBLEMS WITH SYSTEM SECURITY. The Company currently operates servers and
maintains Internet connectivity from all of its offices. Although the Company
has implemented network security measures, such as limiting physical and network
access to its routers, the Company's Internet infrastructure could be vulnerable
to computer viruses, break-ins and similar disruptive problems. Computer
viruses, break-ins or other security problems could lead to interruption, delays
or cessation in service to the Company's Internet customers. Further,
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 entities connected to the Internet. This may deter customers
and give rise to potential liability to users whose security or privacy has been
infringed.
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RISK OF SYSTEM FAILURE. The Company's success depends on its ability to
deliver high quality, uninterrupted Internet hosting. Therefore, THINK must
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. The
Company has an aggressive and stable back-up plan that encompasses daily full
backups of all server platforms - both inter-company and hosting devices. The
Company has contracted an off-site storage vendor to store the backup off-site
in an elements-proof storage facility outside the New York City area. This
rotation occurs on a weekly basis, thus at any time we have the ability to
retrieve the data back onsite if there is ever a need to do so. This facility
also provides multiple network environments if ever the need arose to duplicate
a server at their location due to the inability to do so at THINK (fire, flood,
etc.). The automated backup process is only accessable by the Systems Operations
Manager, the Senior NT Administrator and the Manager of Hosting Operations all
senior members of THINK's Corporate Technology Services Department. Any of these
events could have a material adverse effect on the Company's business, results
of operations and financial condition. Although 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.
RISK OF LOSS DUE TO FIXED FEE-FOR-SERVICE PRICING. The Company generates
most of its project revenues 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 document the
project properly, 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. However, if the Company does not accurately
anticipate the progress of a number of significant revenue-generating projects,
the Company's business, results of operations and financial condition could be
materially adversely affected.
POTENTIAL LIABILITY TO CLIENTS. Many of the Company's consulting
engagements involve the development, implementation and maintenance of
applications that are critical to the operations of its clients' businesses. The
Company's failure or inability to meet a client's expectations could injure the
Company's business reputation or result in a claim for substantial damages
against the Company, whether or not the Company is responsible for such failure.
The Company attempts to limit contractually its damages arising from negligent
acts, errors, mistakes or omissions in rendering its services. However, these
contractual protections may not be enforceable in all instances and may not
otherwise fully protect the Company from liability for damages. The Company
maintains general liability insurance coverage, including coverage for errors
and omissions. Nevertheless, this coverage may not continue to be available on
reasonable terms and may not be available in amounts sufficient to cover one or
more large claims. In addition, the insurer may disclaim coverage as to any
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future claim. The Company's business, results of operations and financial
condition may be materially adversely affected if one or more large claims are
asserted against the Company that are uninsured, exceed available insurance
coverage or result in changes to the Company's insurance policies, including
premium increases.
YEAR 2000 COMPLIANCE. Many currently installed computer systems and
software products are coded to accept only two-digit entries in the date code
field. Beginning in the year 2000, these date code fields must accept four-digit
entries to distinguish 21st century dates from 20th century dates. As a result,
in less than two years, computer systems and/or software used by many companies
may need to be upgraded to comply with such "Year 2000" requirements.
Significant uncertainty exists concerning the potential effects associated with
this compliance. Although the Company believes that its systems are Year 2000
compliant, there can be no assurance that coding errors or other defects will
not be discovered in the future. Any Year 2000 compliance problem of the
Company, its customers or the Internet infrastructure could result in a material
adverse effect on the Company's business, financial condition and results of
operations.
ITEM 2. DESCRIPTION OF PROPERTY
The Company's executive and administrative offices are located in New
York, New York. The Company also maintains offices in Los Angeles and San
Francisco, California; Atlanta, Georgia; Boston, Massachusetts; Seattle,
Washington; London, United Kingdom and Sophia, Bulgaria.
The New York facilities consist of approximately 20,000 square feet on two
floors in midtown Manhattan. The office space is currently leased for $290,000
per annum from October 1, 1996 to September 2001. The rent on the New York
facilities will increase to $310,000 per annum from October 1, 2001 to September
30, 2006.
The Los Angeles, California facility consists of approximately 15,500
square feet of space. The lease is for a term of ten years ending May 31, 2007.
The rent for the first three years of the lease is approximately $330,000 per
annum. The rent for the remainder of the lease approximately $370,000 per annum.
The Georgia facility consists of approximately 14,000 square feet of space
located in Atlanta. The Company leased this space for a term of five years
ending May 15, 2002. The rent for the five years of the lease is approximately
$108,000 per annum.
The Massachusetts facility consists of approximately 16,000 square feet of
space located in Stoneham. The current lease expires January 15, 1999. The rent
payments for the remaining six and a half months of the lease is approximately
$158,000. The Company has negotiated a new lease for 17,500 square feet for new
office space in Boston. The new lease is for a term of five years and is
effective October 1, 1998. The rent for the lease term is approximately $625,000
per annum.
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The Washington facility consists of approximately 18,542 square feet of
space located in Seattle. The lease expires on May 1, 1999. The rent for the
remaining eleven months is approximately $300,000.
The San Francisco, California facility consists of approximately 3,600
square feet of space which is leased through June 30, 2001 at the rate of $5,409
per month, which rate will increase to $5,666 in 1999 and to $5,924 in 2000 and
2001.
The London facility consists of approximately 2,500 square feet of space
which is leased through March 31, 2000 at the rate of $40,000 per annum.
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.
The Company owns no real estate and does not intend to invest in real
estate or interests in real estate, real estate mortgages, or securities of or
interest in persons primarily engaged in real estate activities for the
foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any legal proceedings required to be
disclosed pursuant hereto.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to the stockholders of the Company for
consideration during the fourth quarter of the fiscal year ended June 30, 1998.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
MARKET PRICE OF COMMON STOCK
The Common Stock commenced quotation on Nasdaq under the symbol "THNK" on
November 26, 1996 upon consummation of the Initial Public Offering. Prior to
that date, there was no public market for the Common Stock. The following table
sets forth, for the periods indicated, the high and low transaction prices of
the Common Stock as quoted by Nasdaq.
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HIGH LOW
----------- ---------------
Second Quarter 1997 (from November 27, 1996) $ 7.2500 $ 5.8750
Third Quarter 1997........................ 6.2500 3.8750
Fourth Quarter 1997....................... 4.8750 2.5000
First Quarter 1998........................ 10.8750 4.0625
Second Quarter 1998....................... 13.0000 7.2500
Third Quarter 1998........................ 17.9375 7.6250
Fourth Quarter 1998....................... 39.2500 17.0000
First Quarter 1999 (through September 16,
1998)................................... 33.2500 6.0630
As of September 11, 1998, there were 166 holders of record of Common Stock
based upon information furnished by Continental Stock Transfer and Trust
Company, New York, New York, the transfer agent for the Company's securities.
The Company believes, based upon security positions listings, that there are
more than 400 beneficial owners of the Common Stock. The sales price of the
Common Stock as reported by Nasdaq on September 16, 1998 was $6.47. As of
September 11, 1998, there were 8,440,698 shares of Common Stock outstanding.
The Company has never paid and does not anticipate paying any cash
dividends on its Common Stock in the foreseeable future. The Company intends to
retain all earnings for use in the Company's business operations and in the
expansion of its business.
During the fiscal year ended June 30, 1998, in connection with the BBG
Acquisition, the H/N Acquisition, the Interweb Acquisition and the UbiCube
Acquisition, the Company issued an aggregate of 1,185,390 shares of Common Stock
pursuant to Section 4 and Regulation D of the Securities Act of 1933. More
specific descriptions of each of these transactions is provided under the
sections hereof entitled "Business," "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Certain Relationships and
Related Transactions."
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of the Company's consolidated
financial condition and results of operations should be read in conjunction with
the Company's Consolidated Financial Statements and Notes thereto in Item 7
hereof. This section and other parts hereof contain forward-looking statements
that involve risks and uncertainties. The Company's actual results may differ
significantly from the results discussed in the forward looking statements.
Factors that might cause such a difference include, but are not limited to,
those discussed in the section entitled "Business--Factors Affecting Operating
Results and Market Price of Stock" commencing on page 8.
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OVERVIEW
The Company was incorporated in January 1996 and commenced operations in
June 1996 upon completion of its acquisitions of Internet One, Creative
Resources, Mednick Group, Goodman Group, On Ramp and NetCube (previously defined
as the "Founding Companies"). In fiscal 1997, the Company acquired Fathom, and
in fiscal 1998, the Company acquired BBG, Herring/Newman, Interweb and UbiCube.
See Note 2 to the Company's Consolidated Financial Statements.
The combination of the Mednick Group, the Goodman Group, Internet One,
Creative Resources and NetCube was accounted for using the pooling of interests
method of accounting. Accordingly, the Consolidated Financial Statements of the
Company have been prepared as if each of the foregoing entities had been a part
of the Company since the respective dates of each such entity's inception. The
Company's acquisitions of On Ramp, Fathom, BBG, Herring/Newman, Interweb and
UbiCube were accounted for using the purchase method of accounting. Accordingly,
the results of operations of each of the foregoing have been included in the
Consolidated Financial Statements of the Company since the respective date of
each such acquisition. As a result of these purchase method acquisitions, the
Company's financial statements may lack comparability from period to period.
The Company provides integrated marketing, communications and technology
solutions enabling clients to utilize the Internet and other interactive
technologies to enhance their competitive position. The Company focuses on
identifying opportunities for companies to restructure their marketing and
distribution strategies around interactive technologies and implementing
creative solutions to deliver their messages with the greatest impact. The
Company's solutions incorporate various technologies including customized
interactive applications, e-commerce and e-catalog technology, consumer modeling
and response technology and database development. The Company integrates its
core expertise through a standardized process that begins with strategic
planning and consulting and continues through implementation and
post-implementation review and maintenance. The Company's solutions are intended
to help clients determine and implement their business strategies, build brand
awareness, and effectively communicate information to their internal and
external constituents.
The Company approaches each client engagement utilizing its standard
proprietary methodology, the THINK Vision Process (described more fully below).
Utilizing this process, the Company thoroughly researches a client's business to
determine the effectiveness of existing communications programs and how such
programs may be improved and integrated into an interactive strategy that is
intended to help clients gain a competitive advantage in a changing business
landscape. See "Business."
The Company has historically generated revenue from both traditional
marketing and interactive media services including Website development and
hosting, corporate internal communications solutions, database marketing,
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corporate identity and product branding and packaging, advertising and media
placement services, and interface solutions that provide high-speed access via
the Internet to off-line databases. Although the Company derives revenues from
both traditional marketing and interactive media services, management of the
Company assesses the performance of the internal organization and makes
operational decisions on the Company as one integrated client service business.
Revenues from these services have been derived on a project-by-project basis,
which tends to cause fluctuations in revenues between reporting periods.
Substantial portions of those revenues have been from fixed fee contracts for
services to be delivered. 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 period to period.
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 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.
The Company's strategy is to concentrate its future on the expansion of
its interactive marketing services and, as a result, revenues from traditional
advertising services are anticipated to decrease in importance in 1999 and
future years. As a part of this strategy the Company decided in April 1998, to
dispose of its traditional graphic design departments, and in the fourth quarter
of 1998 recorded a restructuring charge of $921,000 for the costs associated
with that disposal. Revenues and operating losses generated from the graphic
design and digital output businesses located in Atlanta, Los Angeles and Boston
are included in the results of operations for fiscal 1998 and, to the extent
that they are unlikely to reoccur in fiscal 1999, may make the fiscal 1998
results of operations not indicative of future periods.
Part of the Company's overall business strategy is to continue to increase
the percentage of revenue that is recurring and to continue to increase the
number of services provided to a particular client. The Company is implementing
this strategy by increasing its over-all marketing and cross-marketing efforts.
Another part of the Company's business strategy is to grow through the
acquisition and integration of synergistically compatible businesses. The
Company believes that there will be a consolidation among technology-based
marketing solution providers and that this consolidation will continue to create
opportunities for the Company to expand through acquisitions and joint ventures.
In addition to its recent acquisitions, the Company continues to pursue
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acquisition opportunities and has undertaken discussions with several companies
engaged in businesses that are complementary or supplementary to those of the
Company. The Company's acquisition strategies continue to focus on acquiring
companies that will be integrated into Company's existing infrastructure,
enabling the Company to acquire access to additional product or service
offerings, experienced management that can contribute to building the business
in a profitable manner, and provide international expansion, such as that
achieved in Europe through the UbiCube Acquisitions. Throughout the coming years
the Company expects to continue its focus on growth opportunities through new
clients, expanded representation of existing clients and business acquisition.
The Company will look to continue to maximize the use if its resources by the
divestiture of non-strategic businesses and investment in those portions of the
business offering the highest returns.
RESULTS OF OPERATIONS - YEARS ENDED JUNE 30, 1998 AND 1997
REVENUES
Consolidated revenues were $42,644,000 in fiscal 1998, an increase of
$25,208,000 or 145% from revenues of $17,437,000 in fiscal 1997.
Of the overall increase in revenues, $6,700,000 is the result of the
inclusion of the operations of BBG, Interweb, Herring/Newman and Ubicube (the
"1998 Acquisitions"). In addition, the Company's acquisition of Fathom in the
last month of fiscal 1997 accounted for $11,600,000 of the increase in revenues
and the closures of NetCube and Internet One in fiscal 1997 caused a reduction
of $1,250,000. The balance of revenue increase of $8,158,000 was attributable to
increased business generated by the Company's interactive marketing and
communications services.
OPERATING RESULTS
Operating loss for fiscal 1998 increased $20,000,000 to $27,400,000 from
$7,400,000 in fiscal 1997, primarily as a result of an increase of $27,300,000
from restructuring and non-cash charges (stock compensation and purchased
research and development) recorded in fiscal 1998 as compared to fiscal 1997.
Excluding the consideration of such charges from both 1998 and 1997, operating
income improved by approximately $8,300,000 principally as the result of the
increase in revenues and a decline in direct salaries and related expenses as a
percentage of revenues.
DIRECT SALARIES AND RELATED EXPENSES
Direct salaries and related expenses consist primarily of wages and
associated payroll costs and benefits for permanent and temporary employees.
Direct salaries and related expenses increased $4,557,000 or 73.4% to
$10,764,000 or 25.2% of revenue in fiscal 1998 from $6,207,000 or 35% of revenue
in fiscal 1997. The 1998 Acquisitions accounted for $2,809,000 of the increase,
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while the closures in fiscal 1997 of the NetCube and Internet One operations
provided a $1,138,000 reduction. The remainder of the increase was due to
expansion of the Company's marketing, technology, client service and creative
functions to meet the requirements of the growth in assignments that produced
the increase in revenues. Direct salaries and related expenses declined as a
percentage of revenues due to better utilization of multi-skilled employees and
higher margin projects in fiscal 1998, specifically in strategic marketing and
consulting. Certain specific or types of assignments may carry higher or lower
margins, as a result of which future periods may not reflect as favorable a
relationship between revenues and direct costs.
OTHER DIRECT EXPENSES
Other direct expenses consist of contract labor, travel and production
expenses associated with providing services to clients. Other direct expenses
increased $8,164,000 to $12,856,000 in fiscal 1998 from $4,692,000 in fiscal
1997. The increase in fiscal 1998 is due to the inclusion of the operations of
the 1998 Acquisitions as well as production related costs associated with the
Company's higher level of revenues.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses consist of marketing
expenses, technology costs (hardware and software purchases and leasing) and
telecommunications costs for Internet access. Selling, general and
administrative expenses also includes corporate expenses such as insurance,
personnel costs for finance and administration, accounting and legal fees,
management information systems, and employee benefits. Selling, general and
administrative expenses increased by $3,781,000 to $14,445,000 in fiscal 1998
from $10,664,000 in fiscal 1997. The 1998 Acquisitions accounted for $1,499,000
of such increase, while the closures of NetCube and Internet One in fiscal 1997
reduced these expenses by $1,714,000. The net remaining increase of $4,086,000
reflects increases in occupancy expenses, corporate executive and administrative
salaries required to support the Company's growth. As a percentage of revenues,
selling, general and administrative expenses declined to 33.9% in 1998 from
61.2% in 1997 as the growth in the Company's revenues created efficiencies and
economies of scale.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization increased $1,208,000 to $2,827,000 in fiscal
1998 from $1,619,000 in fiscal 1997. The increase in fiscal 1998 is primarily
due to the amortization of goodwill related to the 1998 Acquisitions which in
the aggregate amounted to $1,400,000. The increase in fiscal 1998 also includes
the amortization of additions to capitalized software of $92,400. The 1998
amortization includes $1,200,000 of goodwill amortization resulting from the
purchase of On Ramp which has been fully amortized.
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STOCK COMPENSATION EXPENSE
ESCROW SHARES. In fiscal 1998, the Company recorded a one-time charge of
$21,700,000 as the result of the release to certain stockholders of the Company
of the shares of Common Stock owned by such stockholders which were placed in
escrow at the time of the Initial Public Offering (the "IPO Escrow"). These
shares were subject to release upon the attainment of any one of certain
performance targets by the Company, including a market price target of $20 per
share for forty consecutive business days, which was achieved in the fourth
quarter of fiscal 1998. See "Certain Relationships and Related Transactions."
STOCK ACCELERATION. In the fourth quarter of fiscal 1998, the Company
reached a settlement agreement, as amended, with Scott A. Mednick, the former
Chief Executive Officer and Chairman of the Board of Directors of the Company,
in connection with his resignation from such positions. Pursuant to the terms of
the amended agreement, the Company accelerated the exercise dates of options to
purchase up to 60,000 shares of Common Stock granted to Mr. Mednick. As a
result, the Company recorded a $1,400,000 non-cash charge for the difference
between the exercise price for such options and the market price of the
underlying Common Stock as of the settlement.
RESTRUCTURING COSTS
In April 1998, the Company formalized a decision to dispose of its
traditional graphic design departments and in connection therewith recorded a
restructuring charge of $921,000 for costs associated with that closure. As part
of the restructuring plan, approximately 25 employees were terminated in the
fourth quarter of fiscal 1998 and the charge includes $500,000 for severance and
other related personnel costs and approximately $421,000 for lease liabilities
and other occupancy and facilities related costs. The Company also recorded
restructuring costs in fiscal 1997 of $1,732,000 in connection with its decision
to cease operations of Internet One in Colorado and NetCube in New Jersey.
PURCHASED RESEARCH AND DEVELOPMENT EXPENSE
In its fiscal 1998 acquisitions of Interweb and UbiCube the Company
acquired, among other things, the research and development being conducted by
those companies on the development of certain software products. Since these
research and development projects were in process for products that had not yet
reached technological feasibility and since the efforts, except for those
products, would have no other alternative future use, the Company was required
by generally accepted accounting principles to charge a portion of the purchase
price, representing the fair value of the research to date, to expense. On such
basis, the Company charged $4,700,000 and $500,000 of the purchase prices of
Interweb and UbiCube, respectively, to research and development expense.
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NET INTEREST INCOME
Net interest income was $199,000 in fiscal 1998 and $152,000 in fiscal
1997. Interest expense decreased in fiscal 1998 to $89,000 from $134,000 in
fiscal 1997. The decrease in fiscal 1998 was primarily due to savings resulting
from the elimination of debt through the conversion of an amount outstanding
under a certain convertible promissory note. See "Certain Relationships and
Related Transactions."
TAXES ON INCOME
The Company recorded income tax provisions of $339,000 in fiscal 1998 and
$246,000 in fiscal 1997. The 1998 income tax provision represents certain state
income taxes, while the 1997 provision results from both state income taxes and
a change in the valuation allowance. Valuation allowances of 100% have been
established for the Company's net federal and state deferred tax assets, which
result principally for net operating loss carryforwards which have not yet been
reflected in the results of operations. The net operating loss carryforwards
differ from the Company's financial reporting losses due to the
non-deductibility of the 1998 charges for stock compensation and purchased
research and development.
LIQUIDITY AND CAPITAL RESOURCES
Through fiscal 1997, the Company financed its operations with the proceeds
of bank borrowings, the private placement of debt and equity securities, and the
proceeds of the Initial Public Offering. In fiscal 1998, the Company financed
its operations, the cash requirements of its acquisitions and an overall
reduction in its interest-bearing debt, principally through the cash generated
by operations.
During fiscal 1996, the Company entered into a series of transactions in
order to fund the operations of the Founding Companies and to prepare itself for
the Initial Public Offering. The Company raised $270,000 in a private offering,
pursuant to which the Company issued three convertible 10% promissory notes (the
"10% Notes"). Proceeds of the private placement were used to cover costs related
to the Company's acquisitions of the Founding Companies and the Initial Public
Offering. The Company raised an additional $1,800,000 in another private
offering, pursuant to which the Company issued several 12% convertible
promissory notes (the "12% Notes"). Proceeds received by the Company, after
deducting placement fees and other expenses, totaled $1,582,500. Approximately,
$1,000,000 of the funds received from this private placement 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 this private
placement were used to provide working capital for On Ramp and Internet One.
In August 1996, the Company received net proceeds of $4,948,000 through
the issuance of 938,667 shares of Common Stock to Omnicom. 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
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and 12% Notes (aggregating $1,880,505), to repay certain other corporate debt
and outstanding obligations, to fund the operations of the Founding Companies
and to cover expenses and costs incurred in connection with the acquisitions of
the Founding Companies and the Initial Public Offering.
In November 1996, the Company completed the Initial Public Offering, which
has provided significant working capital to the Company and the Subsidiaries.
The Company issued 2,150,000 shares of Common Stock and received net proceeds
from the Initial Public Offering of $11,973,000.
In fiscal 1998, the Company received $1,066,000 from the exercise of
stock options granted under the Company's 1997 Plan (as hereinafter defined).
The Company's operations generated cash flows of $10,049,000 in fiscal
1998 due principally to the inclusion in net loss of the non-cash charges of
$23,043,000 for stock compensation and $5,200,000 for purchased research and
development, together with increase in accounts payable and accrued expenses of
$6,094,000. Accounts payable and accrued expenses increased at June 30, 1998 due
to the timing of media and vendor payments, which is the result of increased
business. The Company expects that its level of accounts payable will decrease,
using cash from operations.
Net cash used in operating activities for fiscal 1997 of $7,849,000
resulted primarily from a net loss of $7,571,000 combined with an increase in
accounts and unbilled receivables of $4,336,000 and $2,200,000, respectively,
offset in part by noncash charges for (i) depreciation and amortization of
$1,619,000 (including amortization of intangibles of $1,297,000), (ii)
restructuring costs of $1,732,000, and (iii) a combined increase in accounts
payable and accrued expenses of $1,843,000. The increase in unbilled receivables
is principally due to two Website development projects undertaken by On Ramp for
which significant work has been performed in advance of the dates billings are
permitted under the contracts. Accounts receivable increased primarily due to
the increased volume of work performed by On Ramp and an increase in the aging
of accounts receivable.
At June 30, 1998, the Company had cash and cash equivalents of $7,650,000
and net working capital of $6,869,000 compared to net working capital of
$8,079,000 at June 30, 1997. The $1,210,000 decrease in net working capital
reflects an increase in the cash used in fiscal 1998 for investing activities,
including acquisitions.
The Company's investing activities utilized cash of $4,938,000 in fiscal
1998, including $3,441,000 used to finance portions of the BBG Acquisition and
the HN Acquisition and $2,828,000 expended on equipment and software
development. The cash used in investing activities increased from $3,327,000 in
fiscal 1997 principally due to the cash acquisition expenditures, and the
increase in capital expenditures caused by the overall increase in the scope of
the Company's operations. These increases in investing cash outflows were
partially offset by cash provided by the Company's operations. These increases
in investing cash outflows were partially offset by cash provided by the
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Company's sale of the marketable securities held at the end of fiscal 1997 as
the result of the temporary investment of the proceeds of the Initial Public
Offering.
Financing activities in 1998 utilized cash of $908,000 principally to
reduce bank and related party debt by an aggregate of $1,518,000 and pay capital
lease installments of $455,000, partially funded by $1,065,000 received upon the
exercise of stock options granted by the Company. The cash generated from
financing activities of $14,198,000 in fiscal 1997 reflects receipt of the
proceeds of the Company's private and public offerings of securities during such
year.
The Company believes that cash generated by its operations in 1999 will be
sufficient to fund its operations, pay required debt and capital lease
obligations, and continue the Company's strategy growth through acquisitions.
However, there can be no assurance that such cash requirements can be funded
totally from operations, and in particular, the cash required for acquisitions
that cannot be structured solely with common stock or deferred payments. The
Company may be required to seek additional sources of capital to facilitate
transactions that require significant cash payments. There can be no assurance
that such additional capital would be available when needed, and the inability
to obtain such financing could adversely affect the Company's pursuit of its
strategies.
INFLATION
While inflation has not had a material effect on the Company's operations
in the past, there can be no assurance that the Company will be able to continue
to offset the effects of inflation on the costs of its products or services
through price increases to its customers without experiencing a reduction in the
demand for its products; or that inflation will not have an overall effect on
the advertising, marketing, Internet and intranet and data management market
that would have a material affect on the Company.
IMPACT OF YEAR 2000
The Year 2000 issue is a result of computer programs being written using
two digits, rather than four, to define the applicable year. Accordingly, any of
the Company's computer programs that have date sensitive software may cause
system failures or miscalculations if data entry of "00" is recognized as the
year 1900 rather than 2000. The Company is addressing this risk to the
availability and integrity of its financial systems. The Company has established
processes for evaluating and managing the risks and costs associated with this
problem. The Company's assessment of its systems will be completed during fiscal
1999. Additionally, the Company has provided its clients and vendors with the
tools needed to perform their Year 2000 compliance initiatives. Due to the
Company having state of the art computer systems, no hardware upgrade will be
required. The Company's primary focus is the state of readiness of the Internet
infrastructure and is working with the Internet Engineering Task force ("IETF"),
of which the Company is a member, Cisco Systems and Worldcom to ensure
mitigation of risk with redundant and Year 2000 compliant infrastructure.
Additionally, the Company is working with and seeking Year 2000 compliance
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statements from its software vendors, such as Microsoft, Sun Microsystems and
Apple. The Company estimates the total direct amount to remediate the Year 2000
issue to be immaterial to the Company's results of operations or financial
condition. All costs will be expensed as incurred, unless new software is
purchased which will be capitalized.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 131, "Disclosure About Segments of
an Enterprise and Related Information," which is effective for years beginning
after December 15, 1997. SFAS 131 establishes standards for the way that public
enterprises report information about operating segments in annual financial
statements and requires that those enterprises report selected information about
operating segments in interim financial reports. It also establishes standards
for related disclosures about products and services, geographic areas, and major
customers. SFAS 131 is effective for financial statements for fiscal years
beginning after December 15, 1997, and therefore the Company will adopt the new
requirements retroactively in fiscal 1999. Management has not completed its
review of SFAS 131, but does not anticipate that the adoption of this statement
will have a significant effect on the Company.
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No.
133 must first be applied in the first quarter of fiscal years that begin after
June 15, 1999, and in general, requires that entities recognize all derivative
financial instruments as assets or liabilities, measured at fair value, and
include in earnings the changes in the fair value of such assets and
liabilities. SFAS No. 133 also provides that changes in the fair value of assets
or liabilities being hedged with recognized derivative instruments be recognized
and included in earnings. The Company does not utilize derivative instruments,
either for hedging or other purposes, and therefore anticipates that the
adoption of the requirements of SFAS No. 133 will not have a material affect on
its consolidated financial statements.
25
<PAGE>
ITEM 7. CONSOLIDATED FINANCIAL STATEMENTS
THINK New Ideas, Inc. and Subsidiaries
Index to Consolidated Financial Statements
PAGE
Report of Independent Auditors, Ernst & Young, LLP...................F-2
Report of Independent Certified Public Accountants, BDO Seidman, LLP.F-3
Consolidated Financial Statements:
Consolidated Balance Sheets........................................F-4
Consolidated Statements of Operations..............................F-5
Consolidated Statements of Shareholders' Equity....................F-6
Consolidated Statements of Cash Flows..............................F-7
Notes to Consolidated Financial Statements.........................F-8
F-1
<PAGE>
Report of Independent Auditors
Board of Directors
THINK New Ideas, Inc.
We have audited the accompanying consolidated balance sheet of THINK New Ideas,
Inc. and subsidiaries (the "Company") as of June 30, 1998 and the related
consolidated statements of operations, shareholders' equity and cash flows for
the year then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the consolidated financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the consolidated financial statements.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall consolidated
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of THINK New Ideas,
Inc. and subsidiaries as of June 30, 1998 and the consolidated results of their
operations and their cash flows for the year in the period then ended, in
conformity with generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
----------------------
ERNST & YOUNG LLP
New York, New York
August 5, 1998
F-2
<PAGE>
Report of Independent Certified Public Accountants
Board of Directors
THINK New Ideas, Inc.
We have audited the accompanying consolidated balance sheet of THINK New Ideas,
Inc. and subsidiaries (the "Company") as of June 30, 1997 and the related
consolidated statements of operations, shareholders' equity and cash flows for
the year then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the consolidated financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the consolidated financial statements.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall consolidated
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of THINK New Ideas,
Inc. and subsidiaries as of June 30, 1997 and the consolidated results of their
operations and their cash flows for the year in the period then ended, in
conformity with generally accepted accounting principles.
/s/ BDO Seidman, LLP
--------------------
BDO Seidman, LLP
New York, New York
September 19, 1997
F-3
<PAGE>
THINK New Ideas, Inc. and Subsidiaries
Consolidated Balance Sheets
<TABLE>
<CAPTION>
June 30
----------------------------------------
1998 1997
------------------- -----------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 7,653,576 $ 3,451,347
Marketable securities - 1,321,722
Accounts receivable, net of allowance for doubtful accounts
of $ 1,019,475 in 1998 and $614,137 in 1997 14,431,288 9,314,851
Unbilled receivables 3,455,181 2,497,389
Prepaid expenses and other current assets 715,574 535,307
------------------- -----------------
Total current assets 26,255,619 17,120,616
Property and equipment, net 5,682,059 2,285,620
Capitalized software, net 1,858,370 131,253
Goodwill, net of accumulated amortization of $2,534,207 in 1998
and $1,098,938 in 1997 17,344,798 1,502,562
Other assets 1,112,225 362,119
------------------- -----------------
Total assets $ 52,253,071 $ 21,402,170
=================== =================
Liabilities and shareholders' equity
Current liabilities:
Accounts payable $ 9,912,683 $ 2,647,833
Accrued expenses 3,414,977 2,201,099
Accrued restructuring costs 307,482 1,135,000
Media payable 3,407,266 953,556
Income taxes payable 566,578 40,571
Bank payable 491,915 -
Due to related party 591,946 1,906,512
Current portion of obligations under capital leases 693,619 156,867
------------------- -----------------
Total current liabilities 19,386,466 9,041,438
Obligations under capital leases 260,645 264,372
Convertible promissory note payable to related party - 515,760
Other long-term liabilities 102,548 206,250
------------------- -----------------
Total liabilities 19,749,659 10,027,820
Commitments and contingencies
Shareholders' equity:
Preferred stock, $.0001 par value; 5,000,000 shares authorized;
none issued and outstanding - -
Common stock, $.0001 par value; 50,000,000 shares authorized;
8,433,656 and 6,536,667 shares issued in 1998 and 1997, 843 654
respectively
Additional paid-in capital 67,731,946 19,050,174
Accumulated deficit (35,229,377) (7,676,478)
------------------- -----------------
Total shareholders' equity 32,503,412 11,374,350
=================== =================
Total liabilities and shareholders' equity $ 52,253,071 $ 21,402,170
=================== =================
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-4
<PAGE>
THINK New Ideas, Inc. and Subsidiaries
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Year ended June 30
----------------------------------------
1998 1997
------------------- -------------------
<S> <C> <C>
Revenues $ 42,644,405 $ 17,436,847
Operating expenses:
Direct salaries and related expenses 10,764,109 6,207,371
Other direct expenses 12,856,128 4,691,563
Selling, general and administrative expenses 14,445,056 10,663,941
Depreciation and amortization 2,827,391 1,619,104
Stock compensation expense 23,043,450 -
Restructuring costs 920,610 1,732,000
Purchased research and development expense 5,200,000 -
------------------- -------------------
Operating loss (27,412,339) (7,477,132)
Interest income, net 199,274 151,869
------------------- -------------------
Loss before taxes on income (27,213,065) (7,325,263)
Provision for income taxes 339,834 245,900
------------------- -------------------
Net loss $ (27,552,899) $ (7,571,163)
=================== ===================
Net loss per share-basic and diluted $(4.36) $(1.63)
=================== ===================
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-5
<PAGE>
THINK New Ideas, Inc. and Subsidiaries
Consolidated Statements of Shareholders' Equity
<TABLE>
<CAPTION>
Retained
Common Stock Additional Earnings
------------------------- Paid In Accumulated
Shares Amount Capital Deficit) Total
---------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at June 30, 1996 2,894,673 289 1,334,630 (105,315) 1,229,604
Issuance of common stock in connection with
private placement 938,667 94 4,947,968 - 4,948,062
Conversion of convertible debt 433,327 44 189,452 - 189,496
Issuance of common stock pursuant to initial
public offering 2,150,000 215 11,972,636 - 11,972,851
Issuance of common stock in connection with
acquisition -Fathom 120,000 12 442,488 - 442,500
Issuance of stock options to nonemployee - - 163,000 - 163,000
directors
Net loss for the year - - - (7,571,163) (7,571,163)
---------------------------------------------------------------------
Balance at June 30, 1997 6,536,667 654 19,050,174 (7,676,478) 11,374,350
Issuance of common stock for services rendered 75,000 8 359,368 - 359,376
Issuance of stock options for consulting - - 86,500 - 86,500
services
Issuance of common stock in connection with
acquisitions 1,416,867 141 23,538,845 - 23,538,986
Issuance of common stock on exercise
of stock options 181,713 18 1,065,665 - 1,065,683
Conversion of convertible promissory note 79,697 8 587,958 - 587,966
Issuance of common stock on exercise
of warrants 143,712 14 (14) - -
Acceleration of stock option vesting - - 1,387,200 - 1,387,200
Common stock released from escrow to founders - - 21,656,250 - 21,656,250
Net loss for the year - - - (27,552,899) (27,552,899)
=====================================================================
Balance at June 30, 1998 8,433,656 $843 $67,731,946 $(35,229,377) $ 32,503,412
=====================================================================
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-6
<PAGE>
THINK New Ideas, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Year Ended June 30
1998 1997
----------------- ----------------
<S> <C> <C>
Cash flows from operating activities
Net loss $(27,552,899) $ (7,571,163)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation and amortization 1,341,470 322,085
Amortization of intangibles and deferred financing costs 1,485,921 1,297,019
Deferred income taxes - 140,000
Bad debt expense 317,588 428,137
Restructuring charges 920,610 1,732,000
Consulting fees - 369,250
Stock compensation expense 23,043,450 -
Purchased research and development 5,200,000 -
Changes in assets and liabilities, excluding effects of acquisitions:
Accounts receivable 945,404 (4,335,664)
Unbilled receivables (878,611) (2,200,486)
Accounts payable and accrued expenses 6,094,396 1,842,772
Accrued restructuring (1,706,867) -
Media payable 984,182 500,597
Income tax payable (161,627) -
Other assets and liabilities 15,897 (373,492)
--------------- --------------
Net cash provided by (used in) operating activities 10,048,914 (7,848,945)
--------------- --------------
Cash flows from investing activities
Additions to software development costs (577,770) (518,315)
Purchases of property and equipment (2,240,529) (1,487,435)
Sales and (purchases) of marketable securities 1,321,722 (1,321,722)
Acquisitions, net of cash acquired (3,441,744) -
--------------- --------------
Net cash (used in) investing activities (4,938,321) (3,327,472)
--------------- --------------
Cash flows from financing activities
Proceeds from issuance (repayment) of promissory notes - (1,880,505)
Deferred offering costs - (272,240)
Net Repayments on operating lines of credit and short-term debt (203,861) (70,000)
Proceeds from private placement - 4,948,062
Issuance of common stock 1,065,683 -
Proceeds from initial public offering - 11,972,851
Payments on capital leases (455,620) -
Payments on amounts due to related party (1,314,566) (500,000)
--------------- --------------
Net cash (used in) provided by financing activities (908,364) 14,198,168
Net increase in cash and cash equivalents 4,202,229 3,021,751
Cash and cash equivalents, beginning of year 3,451,347 429,596
=============== ==============
Cash and cash equivalents, end of year $ 7,653,576 $ 3,451,347
=============== ==============
Supplemental cash flow information Cash paid during the year for:
Income taxes $ 264,232 $ 153,010
Interest 74,958 180,949
Noncash investing and financing activities:
Issuance of common stock for acquisitions 23,538,986 442,500
Conversion of convertible promissory notes into common stock 587,966 189,496
Purchase of equipment by capital leases 988,645 421,439
Issuance of common stock and options as finders fee to
consultant for acquisitions 445,868 -
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-7
<PAGE>
THINK NEW IDEAS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1998
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The Company was incorporated in January 1996, and commenced operations on June
30, 1996 upon combination of the Company with the Mednick Group, Creative
Resources, the Goodman Group, Internet One, and NetCube, each of which had been
previously engaged in providing various marketing and communications services.
The combination of these five companies into the Company was accounted for as a
pooling of interests, and, accordingly, the consolidated financial statements of
the Company are prepared as if each of these companies had been a part of the
Company from inception of such companies. As hereinafter used, the term
"Company" shall include the Company's subsidiaries, as the context may require.
The Company provides marketing and communication services that include
traditional services, such as advertising, graphic design (discontinued April
1998; see Note 12) and "new media" advertising services including the design and
development of internet web sites and related tools. The company considers its
operation to comprise a single business segment under Statement of Financial
Accounting Standards ("SFAS") No. 14.
The consolidated financial statements include the accounts of the Company and
all of its subsidiaries, which are wholly owned, (See Note 2 below). All
intercompany accounts and transactions are eliminated in consolidation.
The Company reports on a June 30 fiscal year.
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.
F-8
<PAGE>
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with remaining maturities of
three months or less when purchased to be cash equivalents.
PROPERTY AND EQUIPMENT
The Company uses the straight-line method of depreciation. Property and
equipment includes certain assets utilized pursuant to capital leases, which are
recorded at the present value of the minimum noncancellable lease payments at
the inception of the lease. The estimated useful lives of property and equipment
are as follows:
YEARS
-------------
Equipment 3 to 5
Furniture and fixtures 5 to 7
Leasehold improvements are amortized on a straight-line basis over the term of
the lease or the estimated useful life of the improvement, whichever is shorter.
CAPITALIZED SOFTWARE
In accordance with Statement of Financial Accounting Standards No. 86,
"Accounting for Costs of Computer Software to be Sold, Leased or Otherwise
Marketed," the Company capitalizes costs incurred to develop new software
products after determination that technological feasibility has been established
for the product. Costs incurred prior to the establishment of technological
feasibility are charged to expense. Amortization of the costs capitalized begins
when the related product is available for general release and is based on
current and anticipated future revenues for each product or enhancement, with an
annual minimum charge equal to straight-line amortization over the remaining
estimated economic life of the product or enhancement. The Company utilizes an
estimated life of three years for capitalized software.
F-9
<PAGE>
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
GOODWILL AND OTHER INTANGIBLES
Goodwill and other intangibles are amortized on a straight-line basis ranging
from 2 to 15 years. The Company periodically assesses the recoverability of the
cost of its goodwill based upon estimated future profitability of the related
operating entities. The agreements pursuant to which the Company acquired
certain companies (see Note 2) include provisions that would require the Company
to issue additional shares (or release additional shares from escrow established
at the time of the acquisition) if the acquired company meets certain goals. The
value of any such shares issued or released, as of the date issued or released,
will be added to the goodwill related to such acquisition and amortized over the
remainder of that goodwill's useful life.
REVENUE RECOGNITION
Revenues from the design and development of Internet web sites, interactive and
traditional marketing services are recognized using the percentage-of-completion
method. Unbilled receivables represent time and costs incurred on projects in
progress in excess of amounts billed, and are recorded as assets. Amounts billed
in excess of costs incurred are recorded as liabilities. To the extent costs
incurred and anticipated costs to complete projects in progress exceed
anticipated billings, a loss is recognized in the period such determination is
made for the excess.
Payments received for subsequent maintenance of Internet web sites are deferred
and recognized over the period during which the maintenance is provided.
Revenue from advertising and related services is comprised of commissions and
fees derived from billings to clients for media and production activities.
Commission revenue is recognized primarily when media placements appear on
television, radio, or in print. Fee revenue is recognized when services are
rendered.
STOCK COMPENSATION
The Company measures compensation expense related to the grant of stock options
and stock-based awards to employees in accordance with the provisions of
Accounting Principles Board ("APB") Opinion No. 25, under which compensation
expense, if any, is generally based on the difference between the exercise price
of an option, or the amount paid for an award, and the market price or fair
value of the underlying common stock at the date of the award or at the
measurement date for variable awards. Stock-based compensation arrangements
F-10
<PAGE>
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
STOCK COMPENSATiON (CONTINUED)
involving nonemployees are accounted for under SFAS No. 123, under which such
arrangements are accounted for based on the fair value of the option or award.
As required by SFAS No. 123 the Company discloses pro forma net income and net
income per share information reflecting the effect of applying SFAS No. 123 fair
value measurement to employee arrangements.
INCOME TAXES
The Company determines its deferred tax provision under the liability method,
whereby deferred tax assets and liabilities are recognized for the expected tax
consequences of temporary differences between the tax bases of assets and
liabilities and their reported amounts using presently enacted tax rates. The
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
EARNING PER SHARE
The Company adopted the provisions of SFAS No. 128, "Earnings Per Share,"
effective July 1, 1997. In accordance with the requirements of SFAS No. 123,
earnings per share amounts for prior periods have been restated; such
restatement had no affect on the previously reported amounts. All share and per
share amounts in the consolidated financial statements reflect the effect of the
Company's June 1996 stock split and September 1996 and November 1996 reverse
stock splits.
Under SFAS No. 128 basic earnings per share excludes any dilution for common
stock equivalents and is computed on the basis of net income divided by the
weighted average number of common shares outstanding during the relevant period.
Diluted earnings per share reflects the potential dilution that could occur if
options or other securities or contracts entitling the holder to acquire shares
of common stock were exercised or converted, resulting in the issuance of
additional shares of common stock that would then share in earnings. However,
diluted earnings per share does not consider such dilution if its affect would
be to reduce the loss per share ("anti-dilutive").
FAIR VALUES OF FINANCIAL INSTRUMENTS
The fair value of cash and cash equivalents, marketable securities, accounts
receivables, accounts and notes payable, and short-term debt approximate book
value.
F-11
<PAGE>
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CONCENTRATION OF CREDIT RISK, MAJOR CUSTOMERS AND GEOGRAPHIC INFORMATION
Financial instruments which potentially subject the Company to a concentration
of credit risk consist of cash and cash equivalents, marketable securities and
accounts receivables. Cash and cash equivalents and marketable securities
consist of deposits and money market funds placed with various high credit
quality financial institutions.
The Company generates revenue principally from customers located in North
America, many of which are large multi-national organizations. Two customers
each separately accounted for 13% of consolidated revenues in 1998. During 1997,
two customers accounted for 10% and 13%, respectively, of total revenues.
Concentrations of credit risk with respect to receivables is limited due to the
geographically diverse customer base. The Company routinely assesses the
financial strength of its customers and does not require collateral or other
security to support customer receivables. Credit losses are provided for in the
consolidated financial statements in the form of an allowance for doubtful
accounts.
RECLASSIFICATIONS
Certain balances in prior fiscal years have been reclassified to conform with
the presentation adopted in the current fiscal year.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 131, "Disclosure About Segments of
an Enterprise and Related Information," which is effective for years beginning
after December 15, 1997. SFAS 131 establishes standards for the way that public
enterprises report information about operating segments in annual financial
statements and requires that those enterprises report selected information about
operating segments in interim financial reports. It also establishes standards
for related disclosures about products and services, geographic areas, and major
customers. SFAS 131 is effective for financial statements for fiscal years
beginning after December 15, 1997, and therefore the Company will adopt the new
requirements retroactively in fiscal 1999. Management has not completed its
review of SFAS 131, but does not anticipate that the adoption of this statement
will have a significant effect on the Company.
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No.
133 must first be applied in the first quarter of fiscal years that begin after
June 15, 1999, and in general, requires that entities recognize all derivative
financial instruments as assets or liabilities, measured at fair value, and
F-12
<PAGE>
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NEW ACCOUNTING PRONOUNCEMENTS (CONTINUED)
include in earnings the changes in the fair value of such assets and
liabilities. SFAS No. 133 also provides that changes in the fair value of assets
or liabilities being hedged with recognized derivative instruments be recognized
and included in earnings. The Company does not utilize derivative instruments,
either for hedging or other purposes, and therefore anticipates that the
adoption of the requirements of SFAS No. 133 will not have a material affect on
its consolidated financial statements.
2. BUSINESS ACQUISITIONS
On June 30, 1996, the Company acquired all of the issued and outstanding shares
of capital stock of the following entities in exchange for 491,595 shares of the
Company's common stock:
NUMBER OF
SHARES ISSUED
ENTITY/DATE OPERATIONS COMMENCED TO EFFECT
ACQUISITION
- --------------------------------------------------------------------
Scott A. Mednick & Associates, Inc./October 1982 208,084
Creative Resources Agency, Inc./November 1994 3,970
The S.D. Goodman Group/July 1993 49,623
Internet One, Inc./November 1993 34,736
NetCube, Inc./February 1978 195,182
Mednick Group, Creative Resources and Goodman Group provide a wide variety of
marketing-related services. 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 these acquisitions, as if the companies had always operated as a
single entity. In connection with these acquisitions, approximately $676,000 of
transaction costs and expenses were incurred and have been charged to expense
during 1996.
On June 30, 1996, the Company acquired all of the outstanding shares of capital
stock of On Ramp, a provider of new media services, in exchange for 231,572
shares of Common Stock. The purchase price of $1,338,000 (includes transaction
costs of approximately $750,000, including a $500,000 finder's fee paid to
Benchmark Equity Group, Inc., formerly a principal stockholder of the Company)
has been allocated to the assets purchased and the liabilities assumed based
upon their estimated fair values at the date of acquisition. The carrying
amounts of the tangible assets and liabilities acquired and assumed approximated
their fair values, and the excess $2,310,000 of the purchase price over the
carrying amounts of net assets acquired as follows:
F-13
<PAGE>
2. BUSINESS ACQUISiTIONS (CONTINUED)
Goodwill $2,159,000
Purchased software and other intangible 251,000
assets
Deferred income taxes (100,000)
=============
$2,310,000
=============
Goodwill related to this acquisition was amortized over a two year period and is
fully amortized at June 30, 1998.
FISCAL 1997 ACQUISITIONS
On May 31, 1997, the Company acquired certain assets and operations of Fathom
Advertising Agency, Inc. ("Fathom"), a provider of traditional full service
advertising services, from Ketchum Communications, Inc., a wholly-owned
subsidiary of Omnicom Group Inc. ("Omnicom"), a principal stockholder of the
Company, in exchange for 120,000 shares of the Company's common stock. The
purchase price of $442,500, was classified as goodwill and is being amortized
over two years.
In November 1997, the Company purchased all of the issued and outstanding
capital stock of BBG New Media, Inc., a Massachusetts corporation ("BBG") which
provides interactive marketing services. As consideration, the Company paid
$175,000 in cash and issued 303,334 shares of Common Stock to the former
stockholders of BBG, valued at $3,602,000. In addition, the Company is required
to issue additional shares of Common Stock if BBG achieves certain sales growth
rates during the period from November 1, 1998 through October 31, 1999. If such
shares of Common Stock are issued, such issuance will increase goodwill. The
aggregate purchase price of approximately $4,800,000, including acquisition
costs, exceeded the fair value of the net tangible assets acquired by
approximately $4,233,000 and was recorded as goodwill and is being amortized
using the straight line method over 15 years.
In April 1998, the Company acquired all of the issued and outstanding shares of
capital stock of Herring/Newman, Inc., a Washington corporation
("Herring/Newman") engaged in the business of full service advertising. As
consideration, the Company issued an aggregate of 127,799 shares of Common
Stock, valued at $1,655,000, and paid $400,000 in cash. The Company issued an
additional 77,220 shares of common stock, which is being held in escrow. Such
escrowed shares shall be released to the former stockholders of Herring/Newman
on the first anniversary of the closing date upon the occurrence of certain
conditions, including retention of Herring/Newman's largest clients. The amount
of such escrow shares will increase goodwill if released. The aggregate purchase
price of $3,006,000, which excludes consideration of the escrow shares and
includes acquisition costs, exceeded the fair value of the net tangible assets
acquired by $2,102,000 and was recorded as goodwill and is being amortized using
the straight line method over 15 years.
F-14
<PAGE>
2. BUSINESS ACQUISITIONS (CONTINUED)
On June 3, 1998, the Company acquired all of the issued and outstanding shares
of capital stock of Interweb, Inc., an Atlanta corporation ("Interweb") which
provides web-based solutions to clients. As consideration for the purchase of
Interweb, the Company issued 600,000 shares of Common Stock, valued at
$11,625,000 and paid $200,000 in cash. The aggregate purchase price, including
acquisition costs, exceeded Interweb's net assets (approximately $669,000) by
$11,304,000. Of such amount, $4,700,000 was immediately charged to expense as
the fair value for software related research and development efforts in process
at Interweb for products that had not yet reached technological feasibility and
which efforts, except for such products, would have no other alternative future
use. The remaining $6,604,000 was allocated as follows:
Software (developed) $1,149,000
Goodwill 5,165,000
Other 290,000
=============
$6,604,000
=============
Goodwill is being amortized using the straight line method over 15 years.
On June 29, 1998, UbiCube Acquisition Corp., ("UAC"), a wholly owned subsidiary
of the Company, acquired all of the issued and outstanding capital stock of
UbiCube Group, Inc., a Delaware interactive marketing company ("UbiCube") which
has offices in London and San Francisco. As a result of the acquisition, UbiCube
was merged with and into UAC in exchange for the issuance of 154,257 shares of
Common Stock having an aggregate value of approximately $4,000,000, and
guaranteed future payments of $2,250,000 through January 15, 2000. In addition,
154,257 shares of Common Stock were placed in escrow and will be released based
on the attainment of certain milestones at January 15, 1999, January 15, 2000
and March 1, 2001. In addition, the Company may issue additional shares to the
former stockholders of UbiCube of approximately $9,000,000, subject to the
attainment of certain revenue and profit targets during the three years ending
June 2001. The aggregate purchase price, which excludes shares held in escrow,
but includes acquisition costs, exceeded UbiCube's net assets (approximately
$600,000) by approximately $6,100,000. Of such amount, $500,000 was immediately
charged to expense as the fair value of software related research and
development efforts in process for products that had not yet reached
technological feasibility and which efforts, except for such products, would
have no other alternative future use. The remaining $5,600,000 exceeded the fair
value of the net tangible assets acquired and was recorded as goodwill which is
being amortized using the straight line method over 15 years.
F-15
<PAGE>
2. BUSINESS ACQUISITIONS (CONTINUED)
Each of the acquisitions of Fathom, On Ramp, BBG, Herring/Newman, Interweb and
UbiCube has been accounted for using the purchase method of accounting.
Accordingly, the results of operations of these companies are included in the
consolidated financial statements from their respective dates of acquisition.
The following unaudited pro forma information is presented as if the Company had
completed the acquisitions as of the beginning of the preceding and current
fiscal years. Such pro forma results exclude, due to their nonrecurring nature,
the $4,700,000 and $500,000 charges for in process research and development
recorded in connection with the acquisitions of Interweb and UbiCube. The pro
forma information is not necessarily indicative of what the results of
operations would have been had the acquisitions taken place at July 1, 1996 or
1997, or of the future results of operations.
1998 1997
------------- -------------
Revenue $ 53,797,480 $33,024,339
============= =============
Net loss $(28,958,059) $(9,333,204)
============= =============
Net loss per common shares
basic and diluted $ (4.59) $ (2.01)
============= =============
Weighted-average common
shares outstanding 6,315,087 4,638,337
============= =============
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following at June 30:
1998 1997
--------------------------
Equipment $6,176,440 $3,065,576
Furniture and fixtures 1,307,047 660,137
Leasehold improvements 1,963,924 1,127,519
--------------------------
9,447,411 4,853,232
Less accumulated depreciation and
amortization 3,765,352 2,567,612
==========================
Property and equipment, net $5,682,059 $2,285,620
==========================
Included in capital leases is equipment of $1,353,145 and $465,855 with
accumulated depreciation of $503,174 and $16,796 under capital leases for fiscal
years ended June 30, 1998 and June 30, 1997, respectively.
F-16
<PAGE>
4. CAPITALIZED SOFTWARE
Capitalized software costs consist of $1,200,000 relating to software acquired
on June 3, 1998 in connection with the Interweb acquisition. The remaining
$658,370 were for various software products developed during the year.
The estimated useful life for capitalized software costs is three years.
Amortization expense for software is approximately $92,400 for fiscal year ended
June 30, 1998. Amortization related to Interweb's capitalized software of
$1,200,000 will be amortized starting July 1, 1998.
5. CONVERTIBLE PROMISSORY NOTES
During fiscal 1996, Dan Carlisle, the father of the former stockholder of
NetCube, extended credit to NetCube. In connection with the Company's
combination with NetCube in June 1996, the Company issued a convertible
promissory note for the repayment of the principal amount of $515,760 with
accrued interest at 8% per annum. The principle and interest on the note was
convertible into shares of Common Stock at a conversion price of $7.00 per share
with respect to principal and $12.00 per share with respect to accrued interest
on the note. Principal and interest on the note, which was due on March 31,
1998, was converted into 73,680 shares of Common Stock (for principal) and 6,017
shares of Common Stock (for interest).
6. BANK PAYABLE
On April 24, 1998, the Company established a line of credit with the Bank
of New York ("BONY"), pursuant to which BONY agreed to permit the Company to
borrow $5,000,000 through March 31, 1999. Amounts outstanding from time to time
under the line of credit accrue interest at a floating rate based on the prime
lending rate of the bank are due and payable (together with interest) on demand.
The line of credit is evidenced by a promissory note and is secured by
substantially all of the assets of the Company. In addition, amounts outstanding
under the line of credit have been guaranteed by each of the Mednick Group and
On Ramp. As of June 30, 1998, there was $400,000 outstanding under the agreement
with BONY.
In November 1997, in connection with its acquisition of BBG, the Company
entered into an agreement with Medford Bank, which agreement provides for
repayment of a loan of $117,000. Amounts outstanding on the loan accrue interest
at a rate of 10% per annum and are due and payable on May 13, 1999. The loan was
personally guaranteed by the former officers of BBG who are employees of the
Company. The outstanding balance under the loan as of June 30, 1998 was $91,915.
F-17
<PAGE>
7. INCOME TAXES
Taxes on income consist of the following:
1998 1997
------------------------
Current:
Federal $ - $ -
State 339,834 105,900
------------------------
339,834 105,900
------------------------
Deferred:
Federal - 120,000
State - 20,000
------------------------
- 140,000
========================
Taxes on income $339,834 $245,900
========================
The difference between the Federal statutory tax rate and the effective tax rate
resulted from the following:
1998 1997
------------------------
Federal statutory tax rate (34.0)% (34.0)%
Nondeductible compensation
and research and
development expense 32.2 -
State income taxes, net of
Federal tax benefit .8 1.4
Change in valuation allowance (4.3) 39.4
Other items, net .5 (3.4)
========================
Effective tax rate 1.2% 3.4%
========================
F-18
<PAGE>
7. INCOME TAXES (CONTINUED)
Temporary differences which gave rise to the deferred tax assets (liabilities)
consisted of the following at June 30:
1998 1997
-------------------------------
Current:
Accounts receivable $ - $ (95,250)
Allowance for doubtful accounts 235,000 253,655
Accounts payable - 176,250
Nondeductible reserves 178,000 -
Accrued compensation 572,000 -
Other - 21,600
-------------------------------
Total current 985,000 356,255
-------------------------------
Noncurrent:
Depreciation 168,000 98,830
Software development costs and other
intangibles (697,000) (17,000)
Net operating loss carryforwards 1,745,000 3,223,600
-------------------------------
Total noncurrent 1,216,000 3,305,430
-------------------------------
Net deferred tax assets before valuation
allowance 2,201,000 3,361,685
Deferred tax asset valuation allowance (2,201,000) (3,361,685)
-------------------------------
Net deferred tax asset $ - $ -
===============================
F-19
<PAGE>
7. INCOME TAXES (CONTINUED)
Management believes that, based on a number of factors, the available objective
evidence creates sufficient uncertainty regarding the realizability of the
deferred tax assets such that a full valuation allowance has been recorded.
These factors include the lack of significant history of profits and the fact
that the market in which the Company competes is intensely competitive and
characterized by rapidly changing technology, and the lack of carryback capacity
to realize these assets.
At June 30, 1998, the Company had federal net operating loss carryforwards of
approximately $4,229,000. The net operating loss carryforwards will expire at
various dates beginning 2011, if not utilized. Utilization of the net operating
losses may be subject to a substantial annual limitation due to the ownership
change limitations provided by the Internal Revenue Code of 1986 and similar
state provisions. The annual limitation may result in the expiration of net
operating losses before utilization.
8. COMMITMENTS AND CONTINGENCIES
(a) LEASES
Future minimum payments, by year and in the aggregate, under operating and
capital leases with initial or remaining terms of one year or more consisted of
the following at June 30, 1998:
OPERATING CAPITAL
LEASES LEASES TOTAL
------------------------------------
1999 $1,666,478 $728,187 $ 2,394,665
2000 1,392,456 244,603 1,637,059
2001 1,429,396 16,800 1,446,196
2002 1,455,404 9,800 1,465,204
2003 1,373,649 - 1,373,649
Thereafter 2,624,561 - 2,624,561
=============----------=============
Total minimum lease payments $9,941,944 999,390 $10,941,334
============= =============
Amount representing interest 45,126
----------
Present value of net minimum
lease payments 954,264
Less current portion 693,619
==========
Long term portion $260,645
==========
Total rent expense under operating leases amounted to $990,019 and $654,268 for
fiscal 1998 and 1997, respectively.
F-20
<PAGE>
8. COMMITMENTS AND CONTINGENCIES (CONTINUED)
(b) CONSULTING AGREEMENTS
On June 30, 1997, the Company entered into a one year consulting agreement (the
"Consulting Agreement") pursuant to which the Company was obligated to issue up
to 200,000 shares of Common Stock, and options to acquire up to 150,000 shares
of Common Stock to the consultant in exchange for rendering certain consulting
services to the Company, including acquisitions, investor relations and market
analysis.
In fiscal 1998, the Consulting Agreement was terminated, thereby eliminating the
issuance of any remaining shares of Common Stock or stock options due under the
original Consulting Agreement. In connection therewith, the Company agreed to
pay the consultant finders fees for successful acquisitions introduced to the
Company by the consultant. Fees of $1,520,000 paid to the consultant in fiscal
1998 have been recorded as acquisition costs.
(c) EMPLOYMENT AGREEMENTS
The Company is a party to employment agreements with certain of its officers.
The agreements have terms for one to three years and include, among other
things, noncompete agreements and salary and benefits continuation. Some
employment agreements provide for bonuses based on division profitability and
other milestones. Minimum salary commitments under the agreements equal in the
aggregate $1,486,000 as of June 30, 1998.
(d) LITiGATION
The Company is not a party to any pending litigation. However, in the normal
course of business, the Company may be subject to certain claims and litigation,
including unasserted claims. The Company is of the opinion that, based on
information presently available, any such legal matters will not have a material
adverse effect on the financial position or results of operations of the
Company.
9. SHAREHOLDERS' EQUITY
(a) EARNINGS PER SHARE
Shares of Common Stock held in escrow related to acquisitions are not included
in the calculation of weighted average shares outstanding for the periods
presented, as the conditions required to release escrow shares for these
acquisitions were not fulfilled at the end of the applicable periods presented.
F-21
<PAGE>
9. SHAREHOLDERS' EQUITY (CONTINUED)
(a) EARNINGS PER SHARE (CONTINUED)
JUNE 30
1998 1997
------------------------
Weighted average shares outstanding used
in computation of basic and diluted
earnings per share 6,315,087 4,638,337
Securities for issuance of common shares excluded from diluted earnings per
share due to antidilutive effect are as follows:
1998 1997
------------------------
Stock options 2,204,907 1,137,796
Convertible debt - 79,697
Common stock purchase warrants 71,288 215,000
(b) COMMON STOCK ISSUANCE
In August 1996, the Company issued Common Stock to Omnicom 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 Common Stock in exchange for net proceeds (after transaction costs of
approximately $50,000) of $4,948,000. Additionally, certain stockholders of the
Company transferred to Omnicom an additional 124,667 shares of Common Stock
owned by them for no additional consideration.
On November 26, 1996, the Company completed its initial public offering of
2,150,000 shares of Common Stock at a price of $7.00 per share (the "Initial
Public Offering") which resulted in the Company receiving net proceeds of
approximately $11,973,000.
In connection with the Initial Public Offering, the Company issued to the
underwriters of the Initial Public Offering warrants to purchase 215,000 shares
of Common Stock. Such warrants, which became exercisable in November 1997 at an
exercise price of $9.80 per share, contain "cashless exercise" provisions,
whereby the holders thereof, in lieu of paying the exercise price in cash, may
exercise the warrants with shares issuable thereunder as consideration for part
or all of the remaining shares issuable under the warrants. During fiscal 1998,
warrants to purchase approximately 144,000 shares of common Stock were
exercised.
F-22
<PAGE>
9. SHAREHOLDERS' EQUITY (CONTINUED)
(c) ESCROW SHARES
In connection with the Initial Public offering, certain stockholders placed an
aggregate of 825,000 shares into escrow (the "Escrow Shares") to be released
upon the Company's attainment of any one of certain performance targets (the
"Targets") pursuant to an escrow agreement (the "Escrow Agreement") between such
holders and Continental Stock Transfer & Trust Company, as escrow agent.
Pursuant to the Escrow Agreement, the Escrow Shares were not transferable or
assignable, but could be voted by the holders thereof. During the fourth quarter
of fiscal 1998, one of the Targets (a closing price of at least $20 per share of
Common Stock for forty consecutive business day from November 1996 to November
1999 as quoted by Nasdaq) was fulfilled and the Escrow Shares were released. The
Company therefore, recorded a non-cash charge to earnings of approximately
$21,700,000, equal to the fair market value of the Escrow Shares on April
24,1998, the date of release.
(d) ACCELERATED STOCK OPTIONS
In the fourth quarter of fiscal 1998, the Company reached a settlement
agreement, as amended, with Scott A. Mednick, the Company's former Chief
Executive Officer and Chairman of the Board of Directors, who left the Company.
Pursuant to the terms of the amended agreement, the Company agreed to accelerate
the exercise dates of Mr. Mednick's options to acquire 60,000 shares of Common
Stock. The acceleration of Mr. Mednick's options resulted in the recognition of
a charge of $1,400,000 for the difference between the exercise price of the
options and the market value of the underlying Common Stock on the date of the
settlement.
10. EMPLOYEE COMPENSATION PLANS
(a) 401(K) PLAN
The Company sponsors a defined contribution retirement plan which cover all
employees meeting minimum service requirements. Employees of the companies
acquired by the Company become eligible to join the plan over a period not
exceeding one year from the date of acquisition. The Plan qualifies as a
deferred salary arrangement under Section 401(k) of the Internal Revenue Code.
The Company's contributions to the plan is based on percentages of the
F-23
<PAGE>
10. EMPLOYEE COMPENSATION PLANS (CONTINUED)
(b) STOCK COMPENSATION PLAN
employees' contributions. Employer contributions to the Plan during the years
ended June 30, 1998 and 1997 were approximately $86,000 and $52,000,
respectively.
In June 1996, the stockholders of the Company authorized adoption of stock
option plans. In July 1996, the Board of Directors adopted the 1996 Stock Option
Plan (the "1996 Plan"), which was subsequently amended and restated in November
1996. The 1996 Plan provided for the grant of options to officers, directors,
employees and consultants of the Company. A total of 966,667 shares of common
stock were reserved for issuance under the 1996 Plan. Options to purchase
966,667 shares of common stock at an exercise price per share of $7.50 (the
estimated fair value of the shares on the date of grant) were granted to certain
employees in November 1996. The options granted generally were to vest in
increments of one-fourth at the end of each year over a four year period from
the date of grant and expire after ten years.
Pursuant to a resolution of the Board of Directors, the Company terminated the
1996 Plan and established the THINK New Ideas, Inc. 1997 Stock Option Plan (the
"1997 Plan") which provides for the granting of options to officers, directors,
employees and consultants of the Company. All of the persons entitled to
participate in the 1996 Plan were given the opportunity to participate in the
1997 Plan and, in exchange for the cancellation of the outstanding 1996 Plan
options, received options to purchase the same number of shares, with the same
terms as the 1996 Plan options, of the common stock they were entitled to
purchase under the 1996 Plan at a price per share equal to $4.05 (the market
price on the date of grant). Under the 1997 Plan, the Company may grant options
to purchase up to 2,000,000 shares of common stock.
In June 1998, the Board of Directors adopted the 1998 Stock Option Plan (the
"1998 Plan") which provides for the grant of options to new employees of the
Company to acquire up to 1,500,000 shares of Common Stock.
The stock options granted under the 1997 Plan and the 1998 Plan are generally
intended to be "incentive" stock options under the Internal Revenue Code. Such
options are granted with an exercise price equal to the market price of the
underlying common stock on the date of grant and vest ratably over four years.
F-24
<PAGE>
10. EMPLOYEE COMPENSATION PLANS (CONTINUED)
(b) STOCK COMPENSATION PLAN (CONTINUED)
During the fiscal year ended June 30, 1997, the Board of Directors granted
options to purchase 20,000 shares of common stock at an exercise price ranging
from $3.69 to $4.46 (based on the closing transaction price of the Common Stock)
to each of the seven directors, of which four were non-employee directors and,
accordingly, the Company recognized $163,000 of expense in fiscal 1997, which
equals the fair value of the options granted based on a Black-Scholes model,
upon granting the options. Such options become exercisable one year from the
date of grant for a period of five years.
As of June 30, 1998, there were outstanding options exercisable to purchase up
to 2,204,907 shares of common stock under both the 1997 and 1998 Plan.
A summary of the activity in the Company's stock option plans for fiscal 1998
and 1997 is as follows:
<TABLE>
<CAPTION>
1998 1997
Weighted Weighted Average
Number of Shares Average Number of Shares Exercise Price
Exercise Price
-----------------------------------------------------------------------
<S> <C> <C> <C> <C>
Options outstanding at beginning of year 1,137,796 $3.97 - $ -
Granted 1,576,216 12.68 2,104,463 5.59
Exercised 181,713 4.07 - -
Forfeited/canceled 327,392 5.09 966,667 7.50
------------------
------------------
Options outstanding at end of year 2,204,907 9.99 1,137,796 3.97
==================
==================
Options exercisable at end of year 411,600 5.39 - -
==================
</TABLE>
Pro forma information regarding net income and earnings per share required by
SFAS No. 123, has been determined as if the Company had accounted for its
employee stock options under the fair value method of SFAS No. 123. The fair
value for these options was estimated at the date of grant using a Black-Scholes
option pricing model with the following assumptions for vested and non vested
options:
F-25
<PAGE>
10. EMPLOYEE COMPENSATION PLANS (CONTINUED)
(b) STOCK COMPENSATION PLAN (CONTINUED)
PERIOD ENDED JUNE 30
1998 1997
---------------------------
ASSUMPTIONS
Risk-free interest rate 5.93%-6.12% 5.53% -6.51%
Volatility .55 .35
Average life 2 YEARS 10 years
For purpose of pro forma disclosures, the estimated fair value of the options
are amortized to expense over the vesting period of the options. The pro forma
net loss and loss per share is as follows:
1998 1997
---------------------------------------
Pro forma net loss $28,298,355 $8,129,163
Pro forma net loss per common share:
Basic $4.48 $1.75
The following table summarizes information about stock options outstanding at
June 30, 1998.
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
---------------------------- ----------------------------
Weighted
Average Weighted
Remaining Average
Exercise Price Number Contractual Number Exercise Price
Outstanding Life Exercisable
- -------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
3.69 250,000 8.9 125,000 3.69
4.05 497,016 8.6 166,600 4.05
6.00 1,000 9.2 100,000 8.88
6.19 84,250 9.2 20,000 9.77
8.25 122,875 9.5
8.88 220,000 9.3
9.77 80,000 9.3
11.88 477,250 9.5
18.69 394,216 10.0
20.00 23,800 10.0
23.67 51,500 9.8
24.13 3,000 9.9
----------------- -------------------
2,204,907 411,600 5.39
================= ===================
</TABLE>
F-26
<PAGE>
11. RELATED PARTY TRANSACTIONS
In March 1996, the Company entered into a two year consulting agreement with
Benchmark Equity Group, Inc., a founding and former significant stockholder of
the Company. Under the agreement, the Company was required to pay Benchmark
$35,000 upon execution and a monthly fee of $7,000. The Company paid $56,000 for
the fiscal year ended June 30, 1997 to Benchmark in connection with the
agreement. During fiscal 1998, Benchmark ceased performing services under the
agreement and, as a result thereof, the Company discontinued payment thereunder.
On March 17, 1998, the Company entered into a loan agreement with Omnicom, a
shareholder of the Company, whereby the Company borrowed $500,000 at 8 %. The
loan is payable on January 31, 1999.
During fiscal 1998, the Company recorded revenues of $600,000 from Omnicom for
certain consulting services. Such amounts were included in accounts receivable
at June 30,1998, which were collected in August 1998.
12. RESTRUCTURING COSTS
1997 COSTS
In June 1997, the Company implemented a plan for NetCube and Internet One which
was designed to close the operations of these subsidiaries and dispose of
related assets due to continued decline in the entities' performance. In
accordance with the guidance set forth in Emerging Issues Task Force Issue 94-3
"Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity (Including Certain Costs Incurred in a Restructuring)"
("EITF 94-3") the Company in fiscal 1997 recorded a restructuring charge of
$1,732,000 comprised of the following:
Write-down of capitalized software costs $ 597,000
Severance benefits and employee
termination costs 681,000
Disposal of fixed assets and other assets 454,000
-------------
$1,732,000
=============
The accrued liability for severance, disposal and other costs of $1,135,000 at
June 30, 1997 was eliminated in fiscal 1998 through charges for the costs as
incurred. The aggregate revenues and operating losses for NetCube and Internet
One for fiscal 1997 were $1,253,000 and $1,746,000, respectively.
There is no remaining reserve balance as of June 30, 1998 related to the prior
year reserve to close the operations of NetCube and Internet One.
F-27
<PAGE>
12. RESTRUCTURING COSTS (CONTINUED)
1998 COSTS
As part of the Company's strategic focus on providing interactive marketing and
business solutions, the Company in April, 1998 formalized a decision to dispose
of its traditional graphic design departments. The Company recorded a charge of
$921,000 in order to reflect the anticipated costs to dispose of the graphic
design departments.
The charge, recorded pursuant to EITF 94-3, includes severance and other
personnel related costs of $500,000 and lease and other occupancy and facilities
related costs of $421,000.
The remaining reserve balance of approximately $307,000 at June 30, 1998 is
available for costs relating to facility and machinery leases.
F-28
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
During the fiscal year ended June 30, 1998, the Company changed its
independent auditors from BDO Seidman, LLP to Ernst & Young, LLP as previously
reported on Form 8-K/A filed with the Securities and Exchange Commission on May
27, 1998 (File No. 000-21775). There were no disagreements with any of the
Company's independent accountants during the fiscal year ended June 30, 1998.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
The following table sets forth, as of June 30, 1998, certain information
with respect to the directors and executive officers of the Company:
<TABLE>
<CAPTION>
Name Age Position with the Company
----- --- -------------------------
<S> <C> <C>
Ronald Bloom........................ 45 Chairman and Chief Executive Officer
Melvin Epstein...................... 53 Chief Financial Officer and Secretary
Adam Curry.......................... 34 Chief Technology Officer and Director
Larry Kopald........................ 44 Chief Creative Officer and Director
Susan Goodman....................... 43 Executive Vice President
James Grannan....................... 35 Executive Vice President
James Carlisle...................... 51 Executive Vice President
Richard Char........................ 39 Director
Marc Canter......................... 41 Director
Barry Wagner........................ 58 Director
</TABLE>
RONALD BLOOM has been a Director since June 1996. He served as President
and Chief Operating Officer of the Company from June 1996 until May, 1998 when
he was appointed Chairman of the Board and Chief Executive Officer. 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. 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
26
<PAGE>
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 Queens College and is a Certified
Public Accountant.
ADAM CURRY has been a Director and the Chief Technology 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.
LARRY KOPALD has been a Director and the Chief Creative Officer of the
Company since September 1997. Prior to joining the Company, Mr. Kopald was the
Executive Creative Officer of Fathom, a division of Ketchum Communications, Inc.
from 1995 to 1997. Prior to joining Fathom, Mr. Kopald was the Executive
Creative Director/Executive Vice President of Foote, Coyne & Belding from 1987
to 1994. In 1994, Mr. Kopald founded the Kopald Group, a consulting firm
specializing in strategic and creative issues. Mr. Kopald holds a B.S. in
Pre-Med. from Drake and a Masters degree in Journalism from Northwestern
University.
SUSAN GOODMAN has been Executive 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.
Prior to that time, 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 GRANNAN has been Executive Vice President of the Company since June
1996. Mr. Grannan founded Creative Resources, a Subsidiary 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. Mr. Grannan holds a B.A. Degree in Advertising Design
from the Atlanta College of Art.
27
<PAGE>
JAMES CARLISLE has been Executive Vice President of the Company since
1996. Dr. Carlisle founded NetCube Corporation, a Company which was primarily
engaged in the provision of database and information management and utilization
services, in 1978. Dr. Carlisle 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.
RICHARD CHAR has been a Director of the Company since August 1997. Mr.
Char joined Cowen & Company in May 1997 and is a Managing Director and the Head
of Technology Investment Banking at Cowen & Company. In July 1998, Cowen &
Company merged with Societe Generale and became SG Cowen Securities Corporation
("SG Cowen"). Prior to joining SG Cowen, Mr. Char was an attorney with Wilson
Sonsini Goodrich & Rosati for thirteen years. Mr. Char holds an A.B. from
Harvard University and J.D. from Stanford University.
MARC CANTER has been a Director of the Company since August 1997. Mr.
Canter has been the Chairman of Canter Technology since founding the company in
1992. Prior to forming Canter Technology, Mr. Canter was the founder and
chairman of MacroMind, which merged into MacroMedia, until he retired in 1991.
Mr. Canter holds a B.F.A. from Oberlin Conservatory of Music.
BARRY WAGNER has been a Director of the Company since September 1996. Mr.
Wagner has been an employee of Omnicom and its predecessor companies 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 Bank of New York. Mr.
Wagner is a graduate of Hamilton College and Harvard Law School.
SCOTT MEDNICK, formerly Chairman of the Board of Directors and Chief
Executive Officer of the Company, resigned from all of his positions effective
May 15, 1998 pursuant to the terms of a Settlement Agreement. See "Management -
Employment and Related Agreements."
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
28
<PAGE>
statements. Currently Messrs. Char and Wagner serve as members of the Audit
Committee. The Audit Committee held two meetings during the fiscal year ended
June 30, 1998.
EXECUTIVE COMMITTEE. The Company's executive committee (the "Executive
Committee") has the rights, privileges, duties and responsibilities to exercise
the full power and authority of the Board of Directors in the management of the
business of the Company, to the extent not assigned to other committees of the
Board of Directors and to the extent permitted by Delaware law, the Certificate
of Incorporation and the Bylaws of the Company. Currently, Messrs. Bloom, Wagner
and Curry serve as members of the Executive Committee. The Company has no
nominating committee, but the Executive Committee currently serves the function
that a nominating committee would be created to serve. The Executive Committee
held ten meetings during the fiscal year ended June 30, 1998.
COMPENSATION COMMITTEE. The Company's compensation committee (the
"Compensation Committee") approves the compensation for executive officers 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 Stock Option Plans. Currently, Messrs.
Char and Canter serve as members of the Compensation Committee. The Compensation
Committee held ten meetings during the fiscal year ended June 30, 1998.
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Exchange Act requires the Company's officers and
directors, and persons who own more than ten percent of a registered class of
the Company's equity securities, to file reports of ownership and changes in
ownership of equity securities of the Company with the Commission. Officers,
directors and greater than ten percent stockholders are required by regulation
to furnish the Company with copies of all Section 16(a) forms that they file.
Based solely upon a review of Forms 3, Forms 4 and Forms 5 furnished to
the Company pursuant to Rule 16a-3 under the Exchange Act, it is the Company's
belief that, other than as set forth below, any such forms required to be filed
pursuant to Section 16(a) of the Exchange Act were filed, as necessary, by the
officers, directors and securityholders required to file the same.
One Form 4 covering the sale of 9,166 shares of Common Stock in April 1998
was not timely filed by Susan Goodman, an executive officer of the Company. The
transaction was reported on a Form 5 filed on behalf of Ms.
Goodman in August 1998.
29
<PAGE>
ITEM 10. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth the aggregate cash compensation awarded to,
earned by or paid for services rendered to the Company during the last three
fiscal years by each person who served as the Company's chief executive officer
during the Company's fiscal year ended June 30, 1998 and the four other most
highly compensated executive officers of the Company whose salary and bonus for
fiscal 1998 was in excess of $100,000 (the "Named Executive Officers").
<TABLE>
<CAPTION>
Long-Term Compensation
-----------------------------------------
Annual Compensation Awards Payouts
----------------------------------------------- --------------------------- ----------
Securities
Restricted Underlying
Name and Other Annual Stock Options/ LTIP All Other
Principal Position Year Salary($) Bonus($) Compensation($) Awards($) SARs(#) Payouts($) Compensation($)
------------------ ---- --------- -------- --------------- --------- ---------- ---------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Ronald E. Bloom(1) 1998 192,375 67,125 -- -- 80,000(2) -- 764(10)
Chairman of 1997 125,000 69,696 -- -- 20,000(3) -- 237(10)
Board and Chief 1996 106,250 58,234 -- -- -- -- 1,250(10)
Executive Officer
Adam C. Curry(4) 1998 192,375 67,125 -- -- 80,000(2) -- 3,676(10)
Chief Technology 1997 125,000 81,480 -- -- 20,000(3) -- --
Officer 1996 125,000 2,500 -- -- -- -- --
Melvin Epstein(5) 1998 180,000 -- -- -- 25,000(2) -- 2,521(10)
Chief Financial 1997 156,923 -- -- -- 133,333(3) --
Officer 1996 -- -- -- -- --
Susan Goodman(6) 1998 203,330 -- -- -- 25,000(2) -- 5,160(10)
Executive Vice 1997 195,000 46,825 -- -- 26,667(3) -- --
President 1996 138,000 130,000(7) -- -- -- -- --
Larry Kopald(8) 1998 304,166 150,000(11) -- -- -- -- --
Chief Creative 1997 25,000 -- -- -- 250,000(3) -- --
Officer and 1996 -- -- -- -- -- -- --
President, The
Mednick Group
Scott Mednick(9) 1998 268,508 20,000 -- -- 80,000(2) -- 2,192(10)
Former Chairman of 1997 225,000 28,782 -- -- 20,000(3) -- 4,750(10)
the Board and Chief 1996 225,000 11,376 -- -- -- -- 4,598(10)
Executive Officer
</TABLE>
- --------------------------
(1) Mr. Bloom commenced his employment with the Company in June 1996, was
appointed President in July 1996 and Chairman and Chief Executive
Officer on May 24, 1998 upon the resignation of Scott A. Mednick.
(2) Represents shares of Common Stock issuable upon exercise of options
granted to the noted officers pursuant to the 1997 Stock Option Plan at
an exercise price of $8.88 per share for each individual, other than
Mr. Bloom, who owned in excess of 10% of the outstanding Common Stock
on the date of grant and whose options, therefore, have an exercise
price of $9.77 per share.
(3) Represents shares of Common Stock issuable upon exercise of options
granted to the noted officer pursuant to the 1997 Stock Option Plan at
an exercise price of $4.05 per share for each individual, other than
Mr. Bloom, who owned in excess of 10% of the outstanding Common Stock
on the date of grant and whose options have an exercise price of $4.46
per share and Mr. Kopald, whose options, therefore, have an exercise
price of $3.69 per share (representing the fair market value of the
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<PAGE>
Common Stock at the time of grant as determined in accordance with the
provisions of such plan).
(4) Mr. Curry commenced his employment with the Company and was appointed
Chief Technology Officer in June 1996.
(5) Mr. Epstein commenced his employment with the Company in August 1996.
(6) Ms. Goodman commenced her employment with the Company in June 1996.
(7) Represents distributions to the noted executive as the former sole
stockholder of the Goodman Group.
(8) Mr. Kopald commenced his employment with the Company effective as of
May 31, 1997. Consequently, prior to the end of fiscal 1997, Mr. Kopald
received approximately $25,000 of the salary noted above.
(9) Mr. Mednick commenced his employment with the Company and was appointed
Chairman and Chief Executive Officer in March 1996. Mr. Mednick
resigned as Chairman and Chief Executive Officer in May 1998 pursuant
to the terms of a settlement, as amended. See "Certain Relationships
and Related Transactions."
(10) Represents contributions to the Company's 401(k) plan on behalf of the
named individual.
(11) Represents a bonus earned pursuant to Mr. Kopald's employment
agreement. See - "Employment and Related Agreements."
OPTIONS/SAR GRANTS IN LAST FISCAL YEAR (1998)
The following table sets forth certain information with respect to the
options granted during the fiscal year ended June 30, 1998 to the Named
Executive Officers. No stock appreciation rights ("SARs") have been granted by
the Company.
<TABLE>
<CAPTION>
Individual Grants
-----------------------------------------------------------------------------------------------
Percent of Total
Number of Securities Options/SARs Granted to
Underlying Options/SARs Employees in Exercise or Base Expiration
Name Granted (#) Fiscal Year Price ($/Sh) Date
---- ----------- ----------- ------------ --------
<S> <C> <C> <C> <C>
Ronald Bloom 80,000 5.1% 9.770 1/28/2008
Adam Curry 80,000 5.1% 8.880 1/28/2008
Melvin Epstein 25,000 1.6% 8.880 1/28/2008
Susan Goodman 25,000 1.6% 8.880 1/28/2008
Scott Mednick 80,000 5.1% 8.880 1/28/2008
</TABLE>
AGGREGATE OPTION/SAR EXERCISES IN LAST FISCAL YEAR; FISCAL YEAR-END
OPTION/SAR VALUES
Set forth below is the number of options exercised by the Named
Executive Officers during the fiscal year ended June 30, 1998 and the number
and value of exercisable and unexercisable options as of June 30, 1998. No
SARs have been granted by the Company.
<TABLE>
<CAPTION>
Number of Securities Underlying
Unexercised Options/SARs at FY- Value of Unexercised In-the-Money
Shares End (#) Options/SARs at FY-End ($)(1)
Acquired on Value ----------------------------------- ------------------------------------
Name Exercise (#) Realized ($) Exercisable Unexercisable Exercisable Unexercisable
- ---- ------------ ------------ -------------- ---------------- --------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
Ronald Bloom 0 0 40,000 60,000 $760,400 $981,300
Adam Curry 0 0 40,000 60,000 786,400 1,034,700
Melvin Epstein 0 0 133,333 25,000 2,943,326 431,125
Susan Goodman 9,166 $224,659 0 27,501 1,038,210
Larry Kopald 0 0 125,000 125,000 2,804,375 2,804,375
Scott Mednick 0 0 100,000 0 1,821,100 0
</TABLE>
31
<PAGE>
- --------------------------
(1) The calculations of the value of unexercised options are based on the
difference between the closing sales price of $26.125, as quoted by
Nasdaq, of the Common Stock on June 30, 1998 and the exercise price of
each option multiplied by the number of shares of Common Stock covered by
such option.
EMPLOYMENT AND RELATED AGREEMENTS
On June 30, 1996, the Company entered into an employment agreement with
each of Scott Mednick, Ronald Bloom, Adam Curry, Susan Goodman, James Grannan
and James Carlisle. Each of the Company's agreements with Messrs. Mednick, Curry
and Bloom 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.
In connection with Mr. Mednick's resignation as Chairman and Chief
Executive Officer of the Company, in May 1998, the Company entered into a
settlement agreement with Mr. Mednick in May 1998, as amended in July 1998,
thereby terminating Mr. Mednick's employment agreement. Under the terms of the
settlement agreement, as amended, the Company agreed to accelerate the exercise
dates of the options to acquire up to 60,000 shares of Common Stock granted to
owned by Mr. Mednick in exchange for Mr. Mednick's agreement to be bound by the
non-compete and confidentiality provisions of such agreement. Although the
original terms of the settlement agreement provided for payment to Mr. Mednick
of $936,130 over a 24 month period, payment of such amount was eliminated by
amendment to the agreement. Acceleration of Mr. Mednick's options resulted in
recognition of a charge of $1,400,000 for the difference between the exercise
price of the options and the market value of the underlying shares of Common
Stock on the date of settlement. See Note 9 to the Consolidated Financial
Statements of the Company and "Certain Relationships and Related Transactions."
Pursuant to the terms of their respective employment agreements, as
amended, each of Messrs. Bloom and Curry is entitled to receive an annual salary
of $260,000 and bonuses as determined by the Board of Directors.
The employment agreement with Ms. Goodman provides for an initial term of
three years and entitles Ms. Goodman to receive an annual salary of $215,000 and
bonuses as determined by the Board of Directors.
The employment agreement with Mr. Grannan provides for an initial term of
one year, with the option to renew for successive one year periods. Mr.
Grannan's employment agreement was renewed on June 30, 1997 and June 30, 1998.
Under the terms of the agreement, as amended, Mr. Grannan is entitled to receive
an annual salary of $125,000 and bonuses as determined by the Board of
Directors.
The employment agreement with Dr. Carlisle provides for an initial term of
three years, with the option to renew for a two year period. Under the terms of
the agreement, as amended, Dr. Carlisle is entitled to receive an annual salary
of $195,000 and bonuses as determined by the Board of Directors.
32
<PAGE>
In August 1996, the Company entered into an employment letter with Melvin
Epstein. Pursuant to the terms of such letter, Mr. Epstein is entitled to
receive an annual salary of $180,000, subject to annual review and evaluation.
The contract may be terminated by either party upon prior notice.
In May 1997, in connection with the Fathom Acquisition, the Company
reached an agreement with Larry Kopald, pursuant to which Mr. Kopald is entitled
to receive an annual salary of $300,000 the first year of his employment and
$350,000 the second year of his employment. In addition, Mr. Kopald: (i) earned
a bonus of $150,000 in the first year of his employment based upon a significant
client's agreement to enter into an advertising services agreement with the
Company; and (ii) received options exercisable to purchase up to 250,000 shares
of Common Stock in equal increments over a period of four years at an exercise
price of $3.69 per share, the market price of the Common Stock on the date of
grant. In addition, in the second year of his employment Mr. Kopald is entitled
to receive bonuses of up to 10% of profits on billings on the account of a
significant client in excess of $20 million dollars.
The Company's 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 twelve months following the number of months
otherwise remaining under such agreements). In addition, all of the foregoing
employment agreements, other than Mr. Epstein's, contain non-competition and
confidentiality provisions that extend beyond the respective terms of such
agreements for periods of up to one year.
CONSULTING AND OTHER ARRANGEMENTS
In March 1996, the Company entered into a consulting agreement with
Benchmark Equity Group, Inc. ("Benchmark") pursuant to which the Company paid
Benchmark $35,000 upon execution and agreed to pay Benchmark $7,000 per month in
consulting fees. Frank DeLape, formerly a principal stockholder and director of
the Company, is a principal and director of Benchmark. The consulting agreement
expired by its terms on March 28, 1998. Benchmark ceased providing services to
the Company prior thereto, at which time the Company discontinued payment to
Benchmark.
In June 1997, the Company entered into a consulting agreement, pursuant to
which the consultant agreed to render to the Company for a period of one year
certain consulting services, including, among other things, providing merger and
acquisition and investor and public relations services. In exchange therefore,
the Company agreed to issue an aggregate of up to 150,000 shares of Common Stock
and options to acquire up to 150,000 shares of Common Stock, at an exercise
price per share ranging from $8.64 to $11.56, based upon the closing transaction
price of the Common Stock at the end of each month that the corresponding
options were issued.
33
<PAGE>
Pursuant to an agreement to terminate the consulting agreement, the
Company agreed to pay the consultant finders fees upon consummation of
transactions with companies introduced to the Company by the consultant. Such
fees are to be negotiated on a case-by-case basis. To date, the Company has paid
$1,520,000 in fees pursuant to this agreement.
LOANS
During the fiscal year ended June 30, 1998, Mr. Bloom received advances
for expenses of $68,340, for which approximately $18,000 had been offset by
expense reports as of June 30, 1998. As of the date hereof approximately $15,000
remains outstanding. To the extent the same remains outstanding, Mr. Bloom is
responsible to reimburse the Company.
DIRECTOR COMPENSATION
Employee directors of the Company receive no cash compensation for acting
as directors or attending meetings of the Board of Directors. Non-employee
directors receive $1,000 per year for each year such director serves on the
Board of Directors and $2,500 per meeting attended. All directors are entitled
to reimbursement of reasonable expenses related to attending meetings of the
directors.
In addition, on June 30 of each year each director is entitled to receive
an option to purchase an aggregate of up to 20,000 shares of Common Stock. The
exercise price of each such option is the last transaction price of the Common
Stock as quoted on Nasdaq on the date of grant or on the day immediately
preceding the date of grant. The options are generally exercisable one year
after the date of grant, and are exercisable over a four-year period and expire
five years from the date of grant. Notwithstanding the Company's general
practice of annually granting options to directors, based on agreements between
the Company and each director, there are no options for directors for fiscal
1998. In addition, all directors are eligible to receive options under the 1997
Plan (as defined below).
STOCK OPTION PLANS
In June 1996, the stockholders of the Company authorized the Company's
implementation of stock option plans to compensate management and other
employees. In July 1996, the Board of Directors adopted and the stockholders of
the Company ratified the THINK New Ideas, Inc. 1996 Stock Option Plan (the "1996
Plan"). Subsequently, in February 1997, by resolution of the Board of Directors,
the 1996 Plan was terminated and the participants therein were granted options
(identical to those held in the 1996 Plan) in the THINK New Ideas, Inc. Amended
and Restated 1997 Stock Option Plan (the "1997 Plan"), which was adopted by
resolution of the Board of Directors in September 1997 and ratified by the
stockholders of the Company in December 1997.
34
<PAGE>
The 1997 Plan provides for the grant of options that qualify as incentive
stock options ("Incentive Options") under Section 422 of the Internal Revenue
Code of 1986, as amended ("Code"), to officers and employees of the Company (and
its subsidiaries) and options that do not so qualify ("Non-Qualified Options")
to officers, directors, employees and consultants of the Company (and its
subsidiaries). Pursuant to the terms of the 1997 Plan, the Company may grant
options exercisable to purchase up to 2,000,000 shares of Common Stock. As of
June 30, 1998, the Company had granted options exercisable to purchase up to
1,932,086 shares of Common Stock, which options had an aggregate market value,
based on the closing sales price of the Common Stock underlying such options as
quoted by the Nasdaq National Market on such date, of $50,475,747. Such options
become exercisable one year after the date of grant and are exercisable over a
four-year period in equal annual increments. Options to purchase an aggregate of
343,737 shares of Common Stock are currently exercisable. The exercise price of
the options granted to date range from $3.69 to $28.44.
Pursuant to its terms, the 1997 Plan is administered by the Compensation
Committee. The Compensation 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. Under the 1997
Plan, the exercise price for any Incentive Option may not be less than the "fair
market value" of the shares of Common Stock at the time of grant. In addition,
if an Incentive Option to purchase shares of Common Stock is granted to an
optionee who owns more than 10% of the voting power of the capital stock of the
Company, the minimum exercise price of such option may be not less than 110% of
the "fair market value" of the shares of Common Stock on the date of grant.
In May 1998, the Board of Directors adopted the THINK New Ideas, Inc. 1998
New Employee Stock Option Plan (the "1998 Plan"). The 1998 Plan provides for the
grant of options that qualify as incentive stock options ("Incentive Options")
under the Code and options that do not so qualify ("Non-Qualified Options") to
induce individuals to become employees of the Company (and its subsidiaries).
Pursuant to the terms of the 1998 Plan, the Company may grant options
exercisable to purchase up to 1,500,000 shares of Common Stock. As of June 30,
1998, the Company had granted options exercisable to purchase up to 394,250
shares of Common Stock, which options had an aggregate market value, based on
the closing sales price of the Common Stock underlying such options as quoted by
the Nasdaq National Market on such date, of $10,299,781. Such options become
exercisable one year after the date of grant and are exercisable over a
four-year period in equal annual increments. None of the options are currently
exercisable. The exercise price of the options granted to date is $18.69.
Pursuant to its terms, the 1998 Plan is administered by the Compensation
Committee. The Compensation 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. Pursuant to the
1998 Plan, the exercise price for any Incentive Option may not be less than the
"fair market value" of the shares of Common Stock at the time of grant. In
35
<PAGE>
addition, if an Incentive Option to purchase shares of Common Stock is granted
to an optionee who owns more than 10% of the voting power of the capital stock
of the Company, the minimum exercise price of such option may be not less than
110% of the "fair market value" of the shares of Common Stock on the date of
grant.
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.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers or persons controlling the
registrant pursuant to the foregoing provisions, the registrant has been
informed that in the opinion of the Commission such indemnification is against
public policy as expressed in the Securities Act and is therefore unenforceable.
36
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table sets forth certain information as of June 30, 1998
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 Executive 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>
Number of Shares Percentage of
Outstanding Shares
Beneficially Beneficially
of Beneficial Owner Owned Owned
- --------------------------------------------- ------------------ --------------------------
<S> <C> <C>
Ronald Bloom................................ 832,933(1) 9.82%
45 West 36th Street
New York, New York 10018
Adam Curry ................................. 190,075(2) 2.24%
45 West 36th Street
New York, New York 10018
James Carlisle.............................. 213,849(3) 2.53%
45 West 36th Street
New York, New York 10018
Susan Goodman............................... 49,623(4) *
45 West 36th Street
New York, New York 10018
Melvin Epstein.............................. 135,333(5) 1.58%
45 West 36th Street
New York, New York 10018
James Grannan............................... 12,637(6) *
45 West 36th Street
New York, New York 10018
Larry S. Kopald............................. 125,000(7) 1.46%
45 West 36th Street
New York, New York 10018
Omnicom Group Inc........................... 1,183,333 14.02%
437 Madison Avenue
New York, New York 10022
Barry Wagner................................ 20,000(8) *
437 Madison Avenue
New York, New York 10022
Marc Canter................................. 20,000(8) *
45 West 36th Street
New York, New York 10018
Richard Char................................ 20,000(8) *
45 West 36th Street
New York, New York 10018
All Directors and Executive Officers 1,619,450
as a Group (10 persons)....................
- -------------------
* denotes less than one percent.
</TABLE>
37
<PAGE>
(1) Includes 40,000 shares of Common Stock issuable upon exercise of options
that are presently exercisable or that become exercisable within 60 days
of June 30, 1998 ("Presently Exercisable"). Does not include 80,000 shares
of Common Stock issuable upon exercise of options that are not Presently
Exercisable.
(2) Includes 40,000 shares of Common Stock, issuable upon exercise of options
that are Presently Exercisable. Does not include 80,000 shares of Common
Stock, issuable upon exercise of options that are not Presently
Exercisable.
(3) Includes 2,000 shares owned by the members of the individual's immediate
family.
(4) Does not include 52,501 shares of Common Stock, issuable upon exercise of
options that are not Presently Exercisable.
(5) Includes 133,333 shares of Common Stock, issuable upon exercise of options
that are Presently Exercisable. Does not include 25,000 shares of Common
Stock, issuable upon exercise of options that are not Presently
Exercisable.
(6) Includes 8,667 shares of Common Stock, issuable upon exercise of options
that are Presently Exercisable. Does not include 27,333 shares of Common
Stock that are not Presently Exercisable.
(7) Includes 125,000 shares of Common Stock, issuable upon exercise of options
that are Presently Exercisable. Does not include 125,000 of Common Stock,
issuable upon exercise of options shares that are not Presently
Exercisable.
(8) Includes 20,000 shares of Common Stock, issuable upon exercise of options
that are Presently Exercisable.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In January 1996, Scott Mednick, Ronald Bloom, Benchmark and Christopher
Efird, as the founding stockholders of the Company, acquired an aggregate of
2,171,506 shares of Common Stock in exchange for payment of an aggregate of $656
therefore.
In connection with the Company's acquisition of the Mednick Group in June
1996, the Company issued to Scott Mednick, as the sole stockholder of the
Mednick Group, an aggregate of 208,084 shares of Common Stock. Mr. Mednick was a
founding stockholder, officer and director of the Company.
In connection with the Company's acquisition On Ramp in June 1996, the
Company issued to Adam Curry, as the sole stockholder of On Ramp, an aggregate
of 231,572 shares of Common Stock. Mr. Curry is a founding stockholder, officer
and director of the Company.
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. and
Frank M. DeLape. In exchange for extension of the loan, the Company issued the
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,
formerly a principal stockholder and 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. 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 nonconvertible promissory note. Principal and interest outstanding
under the 10% Notes and the $75,000 nonconvertible promissory note were repaid
out of the proceeds of the Omnicom Transaction in August 1996, as more fully
described elsewhere herein.
In March 1996, the Company entered into a consulting agreement with
Benchmark (the "Benchmark 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
38
<PAGE>
strategic planning, business strategy, acquisition planning and business
administration. In exchange therefore, the Company agreed to pay Benchmark
$35,000 upon execution and a monthly fee of $7,000. Prior to expiration of the
Benchmark Agreement on March 28, 1998, Benchmark ceased providing services to
the Company, at which time the Company discontinued payment to Benchmark.
Benchmark was a founding stockholder of the Company and Frank M. DeLape, a
director of Benchmark, was 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., which was a principal stockholder of the Company. See Note 11 to the
Consolidated Financial Statements of the Company and "Management" and "Principal
Stockholders."
In April 1996, 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). The 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 made available to On
Ramp an additional $600,000. Such loans were 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 accrued 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. Such loan was eliminated
upon consolidation. See Note 1 to the Consolidated Financial Statements.
In May 1996, pursuant to the terms of a certain loan agreement between the
Company and Internet One, the Company loaned $50,000 to Internet One. The loan
was 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 accrued interest at the rate of 12% per
annum. Payment of principal and interest on the Internet One Note was 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 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. Such loan was eliminated upon
consolidation. See Note 1 to the Consolidated Financial Statements.
39
<PAGE>
Historically, Dr. Carlisle and his father, Dan Carlisle, 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 accrued interest at the rate of
8% per annum and was convertible into shares of Common Stock at the rate of
$7.50 per share. The principal amount of the promissory note issued to Dr.
Carlisle was $132,000 and the principal amounts of the two promissory notes
issued to Dan Carlisle were $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 were paid in full as of March 17, 1997; the $515,760 promissory
note issued to Dan Carlisle was converted into 73,680 shares of Common Stock in
March 1998 and the interest was converted into 6,017 shares of Common Stock.
During the fiscal year ended June 30, 1998, Mr. Bloom received advances
for expenses of $68,340, for which approximately $18,000 had been offset by
expense reports as of June 30, 1998. As of the date hereof approximately $15,000
remains outstanding. To the extent the same remains outstanding, Mr. Bloom is
responsible to reimburse the Company.
In November 1996, in connection with the Initial Public Offering, certain
stockholders placed an aggregate of 825,000 shares into the IPO Escrow pursuant
to an escrow agreement (the "Escrow Agreement") between such holders and
Continental Stock Transfer & Trust Company, as escrow agent. Pursuant to the
Escrow Agreement, the Escrow Shares were not transferable or assignable, but
could be voted by the holder thereof. During the fourth quarter of fiscal 1998,
one of the Targets (a closing price of $20 per share of Common Stock for forty
consecutive business day from November 1996 to November 1999 as quoted by
Nasdaq) was achieved and the Escrow Shares were released. Upon release of the
IPO Escrow, the stockholders received their Escrow Shares as follows: Benchmark
- - 204,645; Christopher Efird - 27,906 shares; Scott Mednick - 188,043 shares;
Ronald Bloom - 261,256 shares; Adam Curry - 59,774 shares; Susan Goodman -
14,801 shares; David Hieb - 10,360 shares; and James Carlisle - 58,215 shares.
See Note 9 to the Consolidated Financial Statements of the Company and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
On March 17, 1998, the Company entered into a loan agreement with Omnicom
pursuant to which Omnicom agreed to lend $500,000 to the Company. Amounts
outstanding from time to time under the loan accrue interest at 8% per annum and
are due and payable (together with interest) on January 31, 1999. As of
September 3, 1998 there was outstanding $500,000 under the loan agreement with
Omnicom. See Note 11 to the Consolidated Financial Statements of the Company and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
On April 24, 1998, the Company established a line of credit with the BONY,
pursuant to which BONY agreed to make available to the Company $5,000,000
through April 28, 1999. Amounts outstanding from time to time under the line of
credit accrue interest at a floating rate based on the prime lending rate of the
40
<PAGE>
bank are due and payable (together with interest) on demand. The line of credit
is evidenced by a promissory note and is secured by the assets of the Mednick
Group and On Ramp. In addition, amounts outstanding under the line of credit
have been guaranteed by each of the Mednick Group and On Ramp. As of September
3, 1998, there was approximately outstanding $400,000 under the line of credit
with BONY. See Note 6 to the Consolidated Financial Statements of the Company
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations."
In connection with Mr. Mednick's resignation as Chairman and Chief
Executive Officer of the Company in May 1998, the Company entered into a
settlement agreement with Mr. Mednick in May 1998, as amended in July 1998,
thereby terminating Mr. Mednick's employment agreement. Under the terms of the
settlement agreement, as amended, the Company agreed to accelerate the exercise
dates of the options to acquire up to 60,000 shares of Common Stock granted to
Mr. Mednick in exchange for Mr. Mednick's agreement to be bound by the
non-compete and confidentiality provisions of such agreement. Although the
original terms of the settlement agreement provided for payment to Mr. Mednick
of $936,130 over a 24 month period, payment of such amount was eliminated by
amendment to the agreement. See Note 9 to the Consolidated Financial Statements
of the Company and "Executive Compensation."
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
a) EXHIBITS.
EXHIBIT
NUMBER TITLE OF EXHIBIT
------ ----------------
2.1 Asset Purchase and Forbearance Agreement, dated May 31, 1997,
by and between THINK New Ideas, Inc. and Ketchum
Communications, Inc.
2.2 Agreement and Plan of Merger dated June 27, 1998 between THINK
New Ideas, Inc., UbiCube Group, Inc., Ubicube Acquisition
Corp. and the Stockholders of UbiCube Group. Inc., filed with
the Securities and Exchange Commission on September 11, 1998
as an exhibit to the Company's Form 8-K/A (File No. 000-21775)
and incorporated herein by reference.
2.3 Agreement and Plan of Merger dated June 2, 1998 between THINK
New Ideas, Inc., Interweb, Inc. and the Stockholders of
Interweb, Inc., filed with the Securities and Exchange
Commission on August 14, 1998 as an exhibit to the Company's
Form 8-K/A (File No. 000-21775) and incorporated
herein by reference.
41
<PAGE>
2.4* Agreement and Plan of Merger dated April 1, 1998 between THINK
New Ideas, Inc., Herring/Newman, Inc., Phil Herring, and
Daniel Gross.
2.5 Agreement and Plan of Merger dated November 11, 1997 between
THINK New Ideas, Inc., BBG New Media, Inc., Daniel McCartney,
and Joseph Nicholson, filed with the Securities and Exchange
Commission on January 16, 1998 as an exhibit to the Company's
Form 8-K/A (File No. 000-21775) and incorporated herein by
reference.
2.6 Agreement and Plan of Merger by and among THINK New Ideas,
Inc., On Ramp, Inc. and Adam Curry filed with the Securities
and Exchange Commission on September 26, 1996 as an exhibit to
the Company's Registration Statement on Form SB-2 (File No.
333-12795) and incorporated herein by reference.
2.7 Agreement and Plan of Merger by and among THINK New Ideas,
Inc., NetCube Corporation and James Carlisle, Ph.D. filed with
the Securities and Exchange Commission on September 26, 1996
as an exhibit to the Company's Registration Statement on Form
SB-2 (File No. 333-12795) and
incorporated herein by reference.
2.8 Agreement and Plan of Merger by and among THINK New Ideas,
Inc., Creative Resources, Inc. and James Grannan filed with
the Securities and Exchange Commission on September 26, 1996
as an exhibit to the Company's Registration Statement on Form
SB-2 (File No. 333-12795) and incorporated herein by
reference.
2.9 Agreement and Plan of Merger by and among THINK New Ideas,
Inc., The S.D. Goodman Group, Inc. and Susan Goodman filed
with the Securities and Exchange Commission on September 26,
1996 as an exhibit to the Company's Registration Statement on
Form SB-2 (File No. 333-12795) and incorporated herein by
reference.
2.10 Agreement and Plan of Merger by and among THINK New Ideas,
Inc., Internet One, Inc. and David and Dana Hieb filed with
the Securities and Exchange Commission on September 26, 1996
as an exhibit to the Company's Registration Statement on Form
SB-2 (File No. 333-12795) and incorporated herein by
reference.
2.11 Agreement and Plan of Merger by and among THINK New Ideas,
Inc., Scott Mednick & Associates, Inc. and Scott Mednick filed
with the Securities and Exchange Commission on September 26,
1996 as an exhibit to the Company's Registration Statement on
42
<PAGE>
Form SB-2 (File No. 333-12795) and incorporated herein by
reference.
3.1 Articles of Incorporation of THINK New Ideas, Inc., (Delaware)
(Registrant) filed with the Securities and Exchange Commission
on September 26, 1996 as an exhibit to the Company's
Registration Statement on Form SB-2 (File No. 333-12795) and
incorporated herein by reference.
3.2 Bylaws of THINK New Ideas, Inc. filed with the Securities and
Exchange Commission on September 26, 1996 as an exhibit to the
Company's Registration Statement on Form SB-2 (File No.
333-12795) and incorporated herein by reference.
4.1 Specimen Common Stock Certificate filed with the Securities
and Exchange Commission on September 26, 1996 as an exhibit to
the Company's Registration Statement on Form SB-2 (File No.
333-12795) and incorporated herein by reference.
4.2 Form of Warrant Agreement among the Company, Commonwealth
Associates and Continental Stock Transfer and Trust Company
filed with the Securities and Exchange Commission on September
26, 1996 as an exhibit to the Company's Registration Statement
on Form SB-2 (File No. 333-12795) and incorporated herein by
reference.
4.3 THINK New Ideas, Inc. 1996 Stock Option Plan, filed with the
Securities and Exchange Commission on September 26, 1996 as an
exhibit to the Company's Registration Statement on Form SB-2
(File No. 333-12795) and incorporated herein by reference.
4.4 Amended and Restated THINK New Ideas, Inc. 1997 Stock Option
Plan.
4.5* THINK New Ideas, Inc. 1998 New Employee Stock Option Plan.
10.1 Employment Agreement between THINK New Ideas, Inc. and Scott
Mednick, filed with the Securities and Exchange Commission as
an exhibit to the Company's Registration Statement on Form
SB-2, dated September 26, 1996 (File No. 333-12795), and
incorporated herein by reference.
10.2 Employment Agreement between THINK New Ideas, Inc. and Ron
Bloom, filed with the Securities and Exchange Commission as an
43
<PAGE>
exhibit to the Company's Registration Statement on Form SB-2,
dated September 26, 1996 (File No. 333-12795), and
incorporated herein by reference.
10.2(a) Amendment to Ron Bloom Employment Agreement dated October 28,
1996, filed with the Securities and Exchange Commission as an
exhibit to the Company's Registration Statement on Form SB-2,
dated September 26, 1996 (File No. 333-12795), and
incorporated herein by reference..
10.2(b) Amendment to Ron Bloom Employment Agreement dated October 23,
1997, filed with the Securities and Exchange Commission as an
exhibit to the Company's Quarterly Report on Form 10-QSB for
the quarter ended March 31, 1998 (File No.
000-21775).
10.3 Employment Agreement between THINK New Ideas, Inc. and Adam
Curry, filed with the Securities and Exchange Commission as an
exhibit to the Company's Registration Statement on Form SB-2,
dated September 26, 1996 (File No. 333-12795), and
incorporated herein by reference.
10.3(a) Amendment to Adam Curry Employment Agreement dated October 28,
1996, filed with the Securities and Exchange Commission as an
exhibit to the Company's Registration Statement on Form SB-2,
dated September 26, 1996 (File No. 333-12795), and
incorporated herein by reference.
10.3(b) Amendment to Adam Curry Employment Agreement dated October 23,
1997, filed with the Securities and Exchange Commission as an
exhibit to the Company's Quarterly Report on Form 10-QSB for
the quarter ended March 31, 1998 (File No.
000-21775).
10.4 Employment Agreement between THINK New Ideas, Inc. and Susan
Goodman, filed with the Securities and Exchange Commission as
an exhibit to the Company's Registration Statement on Form
SB-2, dated September 26, 1996 (File No. 333-12795), and
incorporated herein by reference.
10.4(a) Amendment to Susan Goodman Employment Agreement dated October
23, 1997, filed with the Securities and Exchange Commission as
an exhibit to the Company's Quarterly Report on Form 10-QSB
for the quarter ended March 31, 1998 (File No. 000-21775).
44
<PAGE>
10.5 Employment Agreement between THINK New Ideas, Inc. and James
Carlisle, filed with the Securities and Exchange Commission as
an exhibit to the Company's Registration Statement on Form
SB-2, dated September 26, 1996 (File No. 333-12795), and
incorporated herein by reference.
10.5(a) Amendment to James Carlisle Employment Agreement dated October
28, 1996, filed with the Securities and Exchange Commission as
an exhibit to the Company's Registration Statement on Form
SB-2, dated September 26, 1996 (File No. 333-12795), and
incorporated herein by reference.
10.5(b)* Amendment to James Carlisle Employment Agreement dated March
18, 1998.
10.6 Employment Agreement between THINK New Ideas, Inc. and James
Grannan, filed with the Securities and Exchange Commission as
an exhibit to the Company's Registration Statement on Form
SB-2, dated September 26, 1996 (File No. 333-12795), and
incorporated herein by reference.
10.6(a) Letter Amendment to Employment Agreement of James Grannan
dated July 30, 1997, filed with the Securities and Exchange
Commission as an exhibit to the Company's Annual Report on
Form 10-KSB for the fiscal year ended June 30, 1997 (File No.
000-21775) and incorporated herein by reference.
10.7 Employment Agreement between THINK New Ideas, Inc. and Mel
Epstein, filed with the Securities and Exchange Commission as
an exhibit to the Company's Registration Statement on Form
SB-2, dated September 26, 1996 (File No. 333-12795), and
incorporated herein by reference.
10.8(a) Employment Letter between THINK New Ideas, Inc. and Larry
Kopald, filed with the Securities and Exchange Commission as
an exhibit to the Company's Annual Report on Form 10-KSB for
the fiscal year ended June 30, 1997 (File No. 000-21775) and
incorporated herein by reference.
10.8(b) Employment Agreement between THINK New Ideas, Inc. and Larry
Kopald, filed with the Securities and Exchange Commission as
an exhibit to the Company's Annual Report on Form 10-KSB/A for
the fiscal year ended June 30, 1997 (File No. 000-21775) and
incorporated herein by reference.
45
<PAGE>
10.9 Consulting Agreement, dated June 30, 1997, between THINK New
Ideas, Inc. and Jason H. Pollak, filed with the Securities and
Exchange Commission as an exhibit to the Company's
Registration Statement on Form S-8 filed with the Commission
on July 17, 1997 (File No.333-31511) and incorporated herein
by reference.
10.10 Termination Agreement between THINK New Ideas, Inc. and David
Hieb, dated May 20, 1997, filed with the Securities and
Exchange Commission as an exhibit to the Company's Annual
Report on Form 10-KSB for the fiscal year ended June 30, 1997
and incorporated herein by reference.
10.11* Settlement Agreement, dated as of May 15, 1998, by and between
the Company and Scott Mednick.
10.12* Settlement Agreement, dated as of July 28, 1998, by and
between the Company and Scott Mednick.
10.13 Letter Agreement between the Company and Scott Mednick dated
May 15, 1998, filed with the Securities and Exchange
Commission as an exhibit to the Company's Quarterly Report on
Form 10-QSB for the quarter ended March 31, 1998 (File No.
000-21775).
10.14(a)* Loan Agreement by and between Omnicom Finance Inc. and THINK
New Ideas, Inc. dated March 17, 1998.
10.14(b)* Promissory Note in favor of Omnicom Finance Inc.
10.15(a)* Letter Agreement by and between The Bank of New York and THINK
New Ideas, Inc., dated April 24, 1998.
10.15(b)* Promissory Note in favor of The Bank of New York.
10.16* Form of General Guarantee to Bank of New York Loan Agreement
provided by On Ramp, Inc. and Scott A. Mednick & Associates,
Inc.
10.17* Form of Security Agreement to Bank of New York Loan Agreement
provided by On Ramp, Inc., Scott A. Mednick & Associates, Inc.
and THINK New Ideas, Inc.
13.1 Quarterly Report on Form 10-QSB for quarter ended March 31,
1998 filed with the Securities and Exchange Commission on May
21, 1998 and incorporated herein by reference.
46
<PAGE>
16.1 Letter Certifying Change of Accountants, filed with the
Securities and Exchange Commission on the Company's Current
Report on Form 8-K filed on February 27, 1998 (File No.
000-21775).
27* Financial Data Schedule.
- -------------
* Denotes documents filed herewith. Other documents are incorporated herein by
reference as noted above.
(b) REPORTS ON FORM 8-K.
On April 16, 1998, the Company filed a Current Report on Form 8-K to
report the acquisition of Herring/Newman, Inc.
On May 27, 1998, the Company filed an Amended and Restated Current Report
on Form 8-K/A to report the change in auditors.
On June 16, 1998, the Company filed a Current Report on Form 8-K to report
the acquisition of Interweb, Inc.
47
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this report to be signed on its behalf
by the undersigned, hereunto duly authorized.
THINK NEW IDEAS, INC.
Dated: September 17, 1998 By: /s/ Ronald E. Bloom
----------------------
Ronald E. Bloom, Chairman and Chief
Executive Officer
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the registrant and in the capacities and
on the dates indicated.
<TABLE>
<CAPTION>
<S> <C> <C>
/s/ Ronald E. Bloom Chief Executive Officer, Chairman September 17, 1998
- ----------------------------- of the Board and Director
Ronald E. Bloom
/s/ Adam Curry Chief Technology Officer and September 17, 1998
- ----------------------------- Director
Adam Curry
/s/ Melvin Epstein Chief Financial Officer September 17, 1998
- -----------------------------
Melvin Epstein
/s/ Barry Wagner Director September 17, 1998
- -----------------------------
Barry Wagner
/s/ Richard Char Director September 17, 1998
- -----------------------------
Richard Char
/s/ Marc Canter Director September 17, 1998
- -----------------------------
Marc Canter
/s/ Larry Kopald Chief Creative Officer and Director September 17, 1998
- -----------------------------
Larry Kopald
</TABLE>
Exhibit 2.4
==============================================================================
AGREEMENT AND PLAN OF MERGER
BY AND AMONG
THINK NEW IDEAS, INC.,
AND
HERRING/NEWMAN, INC.
PHIL HERRING
AND
DAN GROSS
APRIL 1, 1998
==============================================================================
<PAGE>
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT (the "Agreement") is entered into as of this 1st day of
April, 1998, by and among THINK New Ideas, Inc., a Delaware corporation
("THINK"), Herring/Newman, Inc., a Washington corporation (the "Company"),
Philip Herring and Daniel Gross (each individually referred to hereinafter as a
"Stockholder" and collectively referred to hereinafter as the "Stockholders").
WITNESSETH:
WHEREAS, the authorized capital stock of the Company consists of 50,000
shares of common stock, par value $1.00 per share (the "Company Stock"), of
which 445 shares are issued and outstanding as of the date hereof;
WHEREAS, Phil Herring owns 425 shares of Company Stock, representing
ninety-five and one half percent (95.5%) of the issued and outstanding shares of
capital stock of the Company;
WHEREAS, Dan Gross owns 20 shares of Company Stock, representing four and
one half percent (4.5%) of the issued and outstanding shares of capital stock of
the Company;
WHEREAS, Phil Herring and Dan Gross, are the sole Stockholders of the
Company, and as such, each Stockholder desires to sell, assign, transfer and
convey to THINK all of each Stockholder's right, title and interest in and to
the issued and outstanding shares of Company Stock pursuant to the terms and
subject to the conditions set forth in this Agreement;
WHEREAS, it is the desire of THINK to purchase, obtain and acquire from
the Stockholders all of each of such individual's right, title and interest in
and to all of the issued and outstanding shares Company Stock pursuant to the
terms and subject to the conditions set forth in this Agreement;
WHEREAS, the authorized capital stock of THINK consists of 50,000,000
shares of common stock, par value $.0001 per share (the "THINK Stock"), and
5,000,000 shares of preferred stock, par value $.0001 per share (the "Preferred
Stock"), of which 6,963,470 shares of THINK Stock were issued and outstanding as
of March 5, 1998 and no shares of Preferred Stock are issued and outstanding as
of the date hereof;
WHEREAS, the respective Boards of Directors of THINK and the Company deem
it advisable and in the best interests of each such entity and its respective
stockholders that the Company merge with and into THINK (the "Merger") pursuant
to the terms of the Agreement and the applicable provisions of the laws of the
State of Delaware and the State of Washington;
WHEREAS, the Stockholders are currently the only stockholders of the
Company entitled to vote on the Merger and have unanimously voted in favor of
the Merger; and
2
<PAGE>
WHEREAS, the Merger is intended to be treated as a tax-free reorganization
pursuant to the provisions of Section 368(a)(1)(A) of the Internal Revenue Code
of 1986, as amended (the "Code").
NOW, THEREFORE, in consideration of the premises and mutual covenants,
conditions and agreements contained herein and for such other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties hereto, each intending to be legally bound hereby, agree as follows:
ARTICLE I
TERMS OF MERGER
1.1 MERGER. Upon the terms and subject to the conditions set forth in this
Agreement, the Company shall be merged with and into THINK and the Stockholders
shall transfer and convey to THINK all of the Stockholders' right, title and
interest in and to all of the issued and outstanding shares of Company Stock.
The Stockholders hereby agree, upon the terms and subject to the conditions set
forth herein, to transfer and deliver to THINK for conversion into shares of
THINK Stock certificates, properly endorsed in blank or accompanied by a
properly executed stock power, representing all of the issued and outstanding
shares of Company Stock or an affidavit of loss, as the case may be.
1.2 MERGER CONSIDERATION. In consideration of and pursuant to conversion
of all of the issued and outstanding shares of Company Stock as set forth in
Section 1.1 above, THINK shall issue to the Stockholders an aggregate of up to
$3,055,000 as set forth below (the "Purchase Price").
(a) INITIAL PAYMENT OF PURCHASE PRICE. Upon surrender of the
certificates representing the shares of Company Stock or delivery of the
affidavit of loss, as applicable, THINK shall: (i) pay to the Stockholders an
aggregate of $400,000 in cash and issue to the Stockholders in proportion to
their ownership of Company Stock as set forth on Schedule 1.2(a) hereto shares
of THINK Stock having an aggregate value of $1,655,000; and (ii) issue to the
Stockholders, to be held in escrow at Continental Stock Transfer and Trust
Company or such other agent as may be mutually agreed upon by the parties hereto
on such terms and conditions as may be mutually agreed to by the parties hereto
(the "Escrow Agent"), shares of THINK Stock having an aggregate value of
$1,000,000 calculated pursuant to Subsection 1.2(b) below (the "Escrowed
Stock"). The number of shares of THINK Stock issuable hereunder shall be
calculated in accordance with Subsection 1.2(c) below.
(b) PURCHASE PRICE. The Escrowed Stock issuable as set forth in
Subsection 1.2(a)(ii) above shall be issued to the Stockholders on the Closing
Date in proportion to their ownership of the Company Stock as set forth on
Schedule 1.2(a) hereto and shall be placed in escrow pending release to the
Stockholders on the first anniversary of the Closing Date (the "Anniversary
3
<PAGE>
Date"); PROVIDED THAT, in the event that either Westin Premier, Inc. ("Westin")
and Hewlett Packard ("HP"), is not a client of THINK on the Anniversary Date,
THINK shall have the right to force the Stockholders to sell back to THINK, for
nominal consideration, all of the Escrowed Shares subject to the following:
(i) if Westin is a client of THINK on the Anniversary Date
and the actual revenue derived by THINK from Westin (the "Westin Revenue")
during the twelve (12) months prior to the Anniversary Date (the "Measurement
Period") is at least 80% of the actual revenue derived by the Company from
Westin during the twelve (12) months prior to the Closing Date (the "Base
Period"), one half of the Escrowed Stock (the "Westin Stock") shall be retained
by the Stockholders; if the Westin Revenue during the Measurement Period is less
than 60% of the Westin Revenue during the Base Period, all shares of the Westin
Stock shall be sold back to THINK. If the Westin Revenue during the Measurement
Period is at least 60% but less than 80% of the Westin Revenue during the Base
Period, then the Stockholders shall be entitled to keep the number of shares of
Westin Stock that is produced by dividing the Measurement Period by the Base
Period, subtracting .6 therefrom, multiplying the resulting number by 5 and by
multiplying the Westin Stock by the product of the foregoing.
(ii) if HP is a client of THINK on the Anniversary Date and
the actual revenue derived by THINK from HP (the "HP Revenue") during the
Measurement Period is at least 80% of the actual revenue derived by the Company
from HP during the Base Period, one half of the Escrowed Stock (the "HP Stock")
shall be retained by the Stockholders; if the HP Revenue during the Measurement
Period is less than 60% of the HP Revenue during the Base Period, all shares of
the HP Stock shall be sold back to THINK. If the HP Revenue during the
Measurement Period is at least 60% but less than 80% of the HP Revenue during
the Base Period, then the Stockholders shall be entitled to keep the number of
shares of HP Stock that is produced by dividing the Measurement Period by the
Base Period, subtracting .6 therefrom, multiplying the resulting number by 5 and
by multiplying the HP Stock by the product of the foregoing.
On the Anniversary Date, THINK shall notify the Escrow Agent
in writing of: (i) fulfillment of the conditions herein set forth relating to
release of the Escrowed Stock, whereupon the Escrowed Stock shall be delivered
to the Stockholders; or (ii) that such conditions have not been fulfilled,
whereupon the Escrowed Stock shall be delivered back to THINK.
Notwithstanding the foregoing, in the event that THINK
experiences a Change in Control (as hereinafter defined), the Stockholders shall
be entitled to retain all of the Westin Stock and HP Stock and such stock shall
be immediately released to the Stockholders upon consummation of such Change in
Control. A "Change in Control" as used herein shall mean: (i) the sale of all or
substantially all of the assets of THINK; (ii) the acquisition of the capital
stock of THINK by any person or group the result of which is the ownership by
such person or group of more than forty percent (40%) of the issued and
outstanding capital stock of THINK; and (iii) any merger, reorganization or
consolidation of THINK pursuant to which THINK is not the surviving company.
4
<PAGE>
It is intended that the needs of Westin and HP subsequent to
the Closing will continue to be serviced primarily by Messrs. Toliver, Gross and
Brown and THINK shall make available the resources and personnel needed to
support servicing Westin and HP subsequent to Closing that is comparable, by
reasonable industry standards, to that which the Company has provided to such
clients prior to Closing; PROVIDED THAT, the foregoing individuals continue to
service the needs of Westin and HP in a manner comparable, by reasonable
industry standards, to the manner in which they have serviced such clients prior
to Closing and, FURTHER PROVIDED that such individuals have entered into
employment agreements between THINK and such individuals as contemplated by
Section 7.14 hereof.
(c) CALCULATION OF PURCHASE PRICE. The number of shares of THINK
Stock issuable hereunder shall be determined by dividing the amount of the
Purchase Price by the average of the closing transaction price per share of
THINK Stock for the twenty (20) trading days immediately prior to the Closing
Date as quoted by the Nasdaq National Market Systemsm or such other exchange or
quotation bureau on which THINK's securities are then traded or listed for
quotation.
1.3 EFFECTIVE TIME OF MERGER. Subject to the terms and conditions of this
Agreement, the articles of merger, in substantially the form of Exhibit 1.4 (a)
(the "Articles of Merger"), required by Section 23B.11.030 of the Washington
Business Corporation Act of the Revised Code of Washington ("RCW") and the
certificate of merger, in substantially the form of Exhibit 1.4(b) (the
"Certificate of Merger"), required by Section 252 of the Delaware General
Corporation Law (the "DGCL") shall be duly executed and acknowledged by the
Constituent Corporations (as hereinafter defined) and thereafter delivered to
the Secretaries of the State of Washington and the State of Delaware for filing
pursuant to the RCW and the DGCL, respectively, on the Closing Date (as
hereinafter defined). The Merger shall become effective (the "Effective Time")
upon the filing of the Articles of Merger with the Secretaries of the State of
Washington and the State of Delaware and the filing of the Certificate of Merger
with the Secretary of the State of Delaware (collectively referred to as the
"Merger Documents").
1.4 EFFECTS OF THE MERGER.
(a) At the Effective Time: (i) the separate existence of the Company
shall cease and the Company shall be merged with and into THINK (the Company and
THINK are sometimes referred to hereinafter as the "Constituent Corporations"
and THINK is sometimes referred to hereinafter as the "Surviving Corporation");
(ii) the Certificate of Incorporation of THINK as in effect immediately prior to
the Effective Time shall continue to be the Certificate of Incorporation of the
Surviving Corporation; and (iii) the Bylaws of THINK as in effect immediately
prior to the Effective Time shall continue to be the Bylaws of the Surviving
Corporation.
(b) At and after the Effective Time, the Merger shall have the effects
set forth in Section 23B.11.030 of the RCW and in Section 259 of the DGCL.
Without limiting the foregoing, at the Effective Time, THINK as the Surviving
Corporation shall possess all the rights, privileges, powers and franchises of a
public as well as a private nature, and be subject to all the restrictions,
disabilities and duties of each of the Constituent Corporations, and all
singular rights, privileges, powers and franchises of each of the Constituent
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Corporations, and all property, real, personal and mixed, and all debts due to
either of the Constituent Corporations on whatever account, as well as for stock
subscriptions and all other things in action or belonging to each of the
Constituent Corporations, shall be vested in THINK as the Surviving Corporation
and all property, rights, privileges, powers and franchises, and all and every
other interest shall be thereafter as effectually the property of the Surviving
Corporation as they were of the Constituent Corporations, and the title to any
real estate vested by deed or otherwise, in either of the Constituent
Corporations, shall not revert or be in any way impaired; but all rights of
creditors and all liens upon any property of either of the Constituent
Corporations shall thenceforth attach to THINK as the Surviving Corporation and
may be enforced against it to the same extent as if said debts and liabilities
had been incurred by it.
1.5 DIRECTORS AND OFFICERS OF THE SURVIVING CORPORATION. The directors and
officers of THINK immediately prior to the Effective Time shall continue to be
the directors and officers of THINK as the Surviving Corporation until their
successors shall have been duly elected, appointed and/or qualified or until
their earlier death, resignation or removal in accordance with the Certificate
of Incorporation and Bylaws of THINK.
1.6 CONVERSION OF CAPITAL STOCK. As of the Effective Time, by virtue of
the Merger and without any action on the part of any holder of shares of Company
Stock or shares of THINK Stock:
(a) THINK STOCK. Each issued and outstanding share of THINK Stock
shall continue to be issued and outstanding and shall not be effected by the
Merger.
(b) CONVERSION OF COMPANY STOCK. Each share of Company Stock issued
and outstanding as of the Effective Time shall be converted into shares of THINK
Stock as set forth on Schedule 1.2(a) hereto. All such shares of Company Stock,
when so converted, shall no longer be outstanding and shall automatically be
canceled and retired and shall cease to exist, and each holder of a certificate
representing any such shares shall cease to have any rights with respect
thereto, except the right to receive the shares of THINK Stock to be issued or
paid in consideration therefor upon the surrender of such certificate for
exchange to THINK at the Closing (as hereinafter defined).
1.7 RESTRICTIONS ON RESALE OF THINK STOCK. The shares of THINK Stock
received by the Stockholders pursuant to this Agreement may not be sold,
assigned, pledged, hypothecated or transferred, or any interest therein conveyed
to any other person, except in accordance with the registration provisions of
the federal and state securities laws or in accordance with applicable exemption
therefrom, and the certificates representing such shares shall contain
appropriate legends to that effect.
1.8 TAX-FREE REORGANIZATION. The parties intend that the Merger qualify as
a tax-free reorganization under Section 368(a)(1)(A) of the Code. Unless
required by a final determination of the Internal Revenue Service (or other
governing body having jurisdiction over these matters) or a court of competent
jurisdiction, the parties shall not take any position on any subsequently filed
tax return inconsistent with this section. Each party hereto represents to each
other that there exists no indebtedness between THINK and the Company and that
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such party is not an investment company as defined in Subsections
368(a)(2)(F)(iii) and (iv) of the Code. The parties hereby agree to comply with
the reporting requirements of Treasury Regulation Section 1.368-3.
In furtherance of the foregoing, THINK hereby represents, warrants and
covenants that:
(a) it has no plan or intention to reacquire any THINK Stock issued
to the Stockholders;
(b) it has no plan or intention to sell or otherwise dispose of any
of the assets of the Company, except for dispositions made in the ordinary
course of business or transfers described in Section 368(a)(2)(C) of the Code;
and
(c) following the Merger, THINK will continue the historic business
of the Company or use a significant portion of the Company's historic business
assets its business in accordance with Section 1.368-1 of the Treasury
Regulations.
In addition, each of the Company and the Stockholders hereby represents,
warrants and covenants that:
(d) prior to the Merger, the liabilities of the Company were
incurred by the Company in the ordinary course of its business;
(e) the Company is not under the jurisdiction of a court in a Title
11 or similar case within the meaning of Section 368(a)(3)(A) of the Code; and
(f) as of the Effective Date, the fair market value of the assets
of the Company equal or exceed the sum of the liabilities of the Company.
ARTICLE II
CLOSING
2.1 DATE AND TIME OF CLOSING. Subject to satisfaction of the
conditions set forth in this Agreement and compliance with the other provisions
hereof, the closing of the transactions contemplated by this Agreement (the
"Closing") shall take place on April 1, 1998 at 10:00 a.m. (eastern standard
time) at the law offices of Kirkpatrick & Lockhart LLP, 1800 Massachusetts
Avenue, N.W., Washington, D.C. 20036, or at such other place and time thereafter
as shall be mutually agreeable to the parties hereto (the "Closing Date").
2.2 CLOSING DOCUMENTS. Upon fulfillment of the conditions set forth
herein, on the Closing Date, the parties hereto shall cause the Merger Documents
to be filed as contemplated in Section 1.3 hereof and each party hereto will
execute and deliver to the other parties here to such other documents and
instruments as are contemplated herein.
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ARTICLE III
REPRESENTATIONS AND WARRANTIES
3.1 REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND THE Stockholders.
The Company and the Stockholders, severally, except as specifically provided
herein, represent and warrant to THINK as follows:
(a) AUTHORIZATION. The execution, delivery and performance of this
Agreement and consummation of the transactions contemplated hereby have been
duly authorized, adopted and approved by the board of directors of the Company
and by each of the Stockholders. The Company has taken all necessary corporate
action and has all of the necessary corporate power to enter into this Agreement
and to consummate the transactions contemplated hereby. This Agreement has been
duly and validly executed and delivered by an officer of the Company on its
behalf and, assuming that this Agreement is the valid and binding obligation of
THINK, is the valid and binding obligation of the Company, enforceable against
the Company in accordance with its terms, except as such enforcement may be
limited by applicable bankruptcy, insolvency, reorganization, moratorium or
other similar laws now or hereafter in effect, or by legal or equitable
principles, relating to or limiting creditors' rights generally and except that
the remedy of specific performance and injunctive and other forms of equitable
relief are subject to certain equitable defenses and to the discretion of the
court before which any proceeding therefor may be brought. Each Stockholder
severally represents and warrants that he has the ability to consummate the
transactions contemplated hereby, that this Agreement has been duly and validly
executed and delivered by him and that this Agreement is the valid and binding
obligation of such Stockholder, enforceable against each such Stockholder in
accordance with its terms, except as such enforcement may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium or other similar
laws now or hereafter in effect, or by legal or equitable principles, relating
to or limiting creditors' rights generally and except that the remedy of
specific performance and injunctive and other forms of equitable relief are
subject to certain equitable defenses and to the discretion of the court before
which any proceeding therefor may be brought.
(b) ORGANIZATION: SUBSIDIARIES. The Company is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Washington. The Company has the requisite corporate power and authority to own
and lease its properties and assets and to carry on its business as it is now
being conducted and is duly qualified to do business as a foreign corporation in
each jurisdiction where it owns or leases real property or conducts business,
except where the failure to be so qualified would not have a material adverse
effect on the business, operations, earnings, prospects, assets or condition
(financial or otherwise) of the Company ("Material Adverse Effect"). Set forth
on Schedule 3.1(b) hereto is a true and correct list of each jurisdiction in
which the Company is qualified to do business. The Company does not own any
shares of capital stock or other interest in any corporation, partnership,
association or other entity.
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(c) CAPITALIZATION. The number of authorized, issued and outstanding
shares of capital stock of the Company as of the date hereof is as set forth
above in the recitals to this Agreement. The outstanding shares of Company Stock
have been duly authorized, validly issued and are fully paid and non-assessable.
Each Stockholder hereby severally represents and warrants that he is the sole
legal and beneficial owner of the number of shares of Company Stock as set forth
in the recitals and schedules to this Agreement, which shares, in the aggregate,
represent all of the issued and outstanding shares of capital stock of the
Company. Each Stockholder hereby severally represents and warrants that the
issued and outstanding shares of Company Stock owned by such Stockholder are
owned free of preemptive rights and free and clear of any and all adverse
claims, liens, mortgages, charges, security interests, encumbrances and other
restrictions or limitations of any kind whatsoever. The Company has not issued
any shares of capital stock which could give rise to claims for violation of any
federal or state securities laws (including any rules or regulations promulgated
thereunder) or the securities laws of any other jurisdiction (including any
rules or regulations promulgated thereunder). There are no options, warrants,
calls, convertible securities or commitments of any kind whatsoever relating to
the shares of the Company Stock subject hereto or any of the unissued shares of
capital stock of the Company, and there are no voting trusts, voting agreements,
stockholder agreements or other agreements or understandings of any kind
whatsoever which relate to the voting of the capital stock of the Company.
(d) FINANCIAL STATEMENTS. The Company has heretofore delivered to
THINK: (i) financial statements of the Company reviewed as at March 31, 1997
(the "Reviewed Statements"); and (ii) interim unaudited financial statements of
the Company for the ten (10) months ended January 31, 1998 (the "Interim
Statements") (all of the foregoing, including the notes thereto, may
collectively be referred to hereinafter as the "Financial Statements")
accompanied by the corresponding relevant opinions and reports of the Company's
independent accountants as of the same dates and for the same periods. The
Financial Statements present fairly, in all material respects, the financial
position of the Company as of the respective dates indicated and the results of
operations and cash flows of the Company for the respective periods indicated.
The Reviewed Statements have been prepared in conformity with generally accepted
accounting principles applied on a consistent basis.
(e) OWNED REAL PROPERTY. The Company does not own nor does it have
any interest in, any real property other than the leased real property set forth
below.
(f) LEASED REAL PROPERTY; TENANCIES. Set forth on Schedule 3.1(f)
hereto is a true, correct and complete list of all of the leases and subleases
(the "Real Property Leases") with respect to real property leased by the Company
as lessee (the "Leased Real Property"). Also set forth on Schedule 3.1(f) is a
true, correct and complete list of the monthly or annual, as the case may be,
rental payments due under the Real Property Leases and the expiration dates
thereof that is true, correct and complete in all material respects. The Company
has delivered to THINK true, correct and complete copies of each of the Real
Property Leases. Except as set forth on Schedule 3.1(f), the Company is not
required pursuant to the provisions of any of the Real Property Leases (or
otherwise) to obtain the consent of any lessor with respect to the Leased Real
Property prior to or in connection with consummation of the transactions
contemplated hereby. Neither the Company nor, to the knowledge of the Company
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and the Stockholders, any third party is in material default under any of the
Real Property Leases. There are no subleases or subtenancies for any part of the
Leased Real Property that shall remain in effect after the Closing Date and, to
the knowledge of the Company and the Stockholders, there is no third party which
has any right to purchase, use or otherwise possess all or any part of the
Leased Real Property.
(g) TITLE. The Company: (i) holds a valid and enforceable leasehold
interest in the Leased Real Property; and (ii) owns good and marketable title to
all of the assets and properties reflected on the balance sheets of the
Financial Statements or purchased by the Company after the date of the most
recent thereof, except for supplies consumed or assets or properties sold in the
ordinary course of business subsequent to the date thereof. The Company's
leasehold interest in the Leased Real Property is free of all adverse claims,
liens, mortgages, charges, security interests, encumbrances and other
restrictions or limitations of any kind whatsoever, except: (A) as stated in the
Financial Statements; (B) for liens for taxes or assessments not yet due and
payable or which are being contested by the Company in good faith; (C) for minor
liens imposed by law for sums not yet due or which are being contested by the
Company in good faith; and (D) for imperfections of title, adverse claims,
charges, restrictions, limitations, encumbrances, liens or security interests
that are minor and which do not detract from the value of the Leased Real
Property subject thereto or which do not impair the operations of the Company or
affect the present use of the Leased Real Property. To the Company's or the
Stockholders' knowledge, there is no condemnation or eminent domain proceeding
pending or threatened against the Leased Real Property (or any part thereof).
The Company has not made any commitments or received any notice, oral or
written, from any public authority or other entity with respect to the taking or
use of the Leased Real Property (or any part thereof), whether temporarily or
permanently, for easements, rights-of-way or other public or quasi-public
purposes or for any other purpose whatsoever nor, to the Company's or the
Stockholders' knowledge, is there any proceeding pending or threatened which
could adversely affect the zoning classification relating to such property or
its use by the Company as of the date hereof. The assets reflected on the
balance sheets of the Financial Statements and those purchased by the Company
after the date of the most recent thereof, are owned free and clear of all
adverse claims, liens, mortgages, charges, security interests, encumbrances and
other restrictions or limitations of any kind whatsoever, except: (A) as stated
in the Financial Statements including, without limitation, liens or security
interests granted by the Company in favor of Seafirst Bank; (B) for liens for
taxes or assessments not yet due and payable or which are being contested by the
Company in good faith; (C) for minor liens imposed by law for sums not yet due
or which are being contested by the Company in good faith; and (D) for
imperfections of title, adverse claims, charges, restrictions, limitations,
encumbrances, liens or security interests that are minor and which do not
detract in any material respect from the value of any of the assets subject
thereto or which do not impair the operations of the Company in any material
respect or affect the present use of the assets in any material respect. The
Company has not made any commitments or received any notice, oral or written,
from any public authority or other entity with respect to the taking or use of
any of the Company's assets, whether temporarily or permanently, for any purpose
whatsoever, nor is there any proceeding pending or, to the Company's or the
Stockholders' knowledge, threatened which could adversely affect any asset owned
or used by the Company as of the date hereof.
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(h) CONDITION OF ASSETS. The Real Property Leases and all other
documents and agreements pursuant to which the Company has obtained the right to
use or occupy any real property, personal property or assets, are valid and
enforceable in all material respects in accordance with their respective terms,
except as such enforcement may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other similar laws now or hereafter in effect, or
by legal or equitable principles, relating to or limiting creditors' rights
generally and except that the remedy of specific performance and injunctive and
other forms of equitable relief are subject to certain equitable defenses and to
the discretion of the court before which any proceeding therefor may be brought.
All material licenses, permits and authorizations related to the location or
operation of the business of the Company are in good standing and are valid and
enforceable in all material respects in accordance with their respective terms.
There is not, under any of the foregoing instruments, documents or agreements,
any existing default, nor is there any event which, with notice or lapse of time
or both, would constitute a default arising through the Company or any third
party which could: (i) have a Material Adverse Effect; or (ii) materially
adversely affect its use of the Leased Real Property or the title to its assets.
To the Company's or the Stockholders' knowledge, the Company is not in violation
of and has complied with all applicable zoning, building or other codes,
statutes, regulations, ordinances, notices and orders of any governmental
authority with respect to the occupancy, use, maintenance, condition, operation
and improvement of the Leased Real Property or assets, except where the failure
to comply would not have a Material Adverse Effect or where compliance is the
obligation of a landlord under a Real Property Lease. To the knowledge of the
Company and the Stockholders, the Company's use of any improvements for the
purposes for which any of the Leased Real Property or assets are being used as
of the date hereof does not violate any such code, statute, regulation,
ordinance, notice or order. The Company possesses all licenses, certificates of
occupancy, permits and authorizations material to the Company's operation and
maintenance of the Leased Real Property or assets for all uses for which such
property is or assets are operated or used by the Company as of the date hereof,
except where the failure to do so would not have a Material Adverse Effect. All
of the Leased Real Property or assets (whether owned or leased by the Company)
are in good operating condition and repair, subject to normal wear and use and
each such item is usable in a manner consistent with current use by the Company.
(i) INTELLECTUAL PROPERTY.
(i) the Company's right, title or interest in the registered
and unregistered trademarks, service marks and trade names (including any
applications for the same), trade secrets, registered and unregistered
copyrights, and computer programs and software (whether or not protected by
patent, copyright or otherwise) which are owned by, licensed by, used in or are
material to the business of the Company (the "Intellectual Property") is free
and clear of adverse claims, liens, mortgages, charges, security interests and
encumbrances or other restrictions or limitations of any kind whatsoever;
(ii) the Company has not committed any acts of unfair
competition or directly, indirectly, contributorily or by inducement, infringed
upon any patent, trademark, service mark, trade name, copyright, computer
program or software, or any other intellectual property, nor has the Company
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misappropriated any of the foregoing from any other person or entity or received
from any other person or entity any notice, charge, claim or other assertion
with respect thereto; and
(iii) the Company has not sent or otherwise communicated to
any other person or entity any notice, charge, claim or other assertion of, nor
has the Company any knowledge of, any present, impending or threatened
infringement upon any of the Intellectual Property by any other person or
entity, or misappropriation of any of the foregoing by any other person or
entity, or any commission of acts of unfair competition by any other person or
entity.
(j) ABSENCE OF UNDISCLOSED LIABILITIES. Other than as set forth in
the Financial Statements, the Company has not had nor does it have any
indebtedness, loss or liability of any nature whatsoever (other than as incurred
in the ordinary course of business), whether accrued, absolute, contingent or
otherwise and whether due or become due, which is material to the Company's
business or assets, or the operations, prospects, earnings or condition
(financial or otherwise) of the Company.
(k) ABSENCE OF CERTAIN CHANGES OR EVENTS. The Company has not, since
December 31, 1997, suffered an event that has had or will have a Material
Adverse Effect.
(l) AGREEMENTS. Set forth on Schedule 3.1(l) hereto is a true,
correct and complete list of all contracts, agreements and other instruments
material to the business or operation of the Company, including without
limitation, those to which the Company is a party and those by which any of its
property or assets are bound ("Material Agreements"). Copies of all such
contracts, agreements and other instruments have heretofore been delivered by
the Company to THINK. Other than as set forth on Schedule 3.1(l) and 3.1(f),
there is no contract, agreement or other instrument to which the Company or
either Stockholder is a party or which affects the assets, liabilities or
outstanding securities of the Company, which is material to the business, assets
or operations of the Company. None of the foregoing agreements limits the
freedom of the Company to compete in any line of business or with any person or
other entity in any geographic region within or outside of the United States of
America.
Neither the Company, the Stockholders nor any third party is in
default and no event has occurred which, with notice or lapse of time or both,
could cause or become a default by the Company, the Stockholders or any third
party, under any Material Agreement, except as would not have a Material Adverse
Effect. To the knowledge of the Company and the Stockholders, each Material
Agreement is enforceable in accordance with its terms against all other parties
thereto, except as such enforcement may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium or other similar laws now or hereafter in
effect, or by legal or equitable principles, relating to or limiting creditors'
rights generally and except that the remedy of specific performance and
injunctive and other forms of equitable relief are subject to certain equitable
defenses and to the discretion of the court before which any proceeding therefor
may be brought.
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(m) NON-CONTRAVENTION; CONSENTS. Neither the execution and delivery
of this Agreement by the Company and each of the Stockholders, nor consummation
of the transactions contemplated hereby, does or will: (i) violate or conflict
with any provision of the articles of incorporation or bylaws of the Company;
(ii) violate or, with the passage of time, result in the violation of any
provision of, or result in the acceleration of or entitle any party to
accelerate any obligation under, or result in the creation an imposition of any
lien, charge, pledge, security interest or other encumbrance upon any of the
property or assets, which are material to the business or operation of the
Company, pursuant to any provision of any mortgage, lien, lease, agreement,
permit, indenture, license, instrument, law, order, arbitration award, judgment
or decree to which the Company is a party or by which it or any of such property
or assets are bound, the effect of which violation, acceleration, creation or
imposition could have a Material Adverse Effect; (iii) violate or conflict with
any other restriction of any kind whatsoever to which the Company or either
Stockholder is subject or by which any of their properties or assets may be
bound, the effect of any of which violation or conflict could have a Material
Adverse Effect; or (iv) constitute an event permitting termination by a third
party of any Material Agreement which termination could have a Material Adverse
Effect. No consent, authorization, order or approval of, or filing or
registration with, any governmental commission, board or other regulatory body
is required in connection with the execution, delivery and performance of the
terms of this Agreement and consummation of the transactions contemplated
hereby.
(n) EMPLOYEE BENEFIT PLANS. Schedule 3.1(n) hereto sets forth a
true, correct and complete list of all "employee benefit plans" as such term is
defined in Section 3(3) of the Employee Retirement Income Security Act of 1974,
as amended ("ERISA") (the "Benefit Plans") covering the employees of the Company
(the "Employees"). Each Benefit Plan of the Company is in compliance in all
material respects with all applicable provisions of law, including ERISA and the
Code. There are no pending or, to the Company's or the Stockholders' knowledge,
threatened claims against any Benefit Plan of the Company (except for claims for
benefits payable in the normal operation of such Benefit Plans) that could give
rise to any material liability to the Company. All reports, notices and returns
required to be filed with any governmental agency or provided to any person or
entity with respect to the Benefit Plans of the Company have been timely filed.
Except as set forth in Schedule 3.1(p), the Company has never maintained,
contributed to or been obligated to contribute to any Benefit Plan that is an
employee pension plan (within the meaning of Section 3(2) of ERISA) or any
multiemployer plan (within the meaning of Section 3(37) of ERISA).
(o) LABOR RELATIONS. There are no agreements with or pending
petitions for recognition of any labor union or association as the exclusive
bargaining agent for any or all of the employees of the Company and no such
petition has been pending at any time during the five (5) years prior to the
date hereof. To the Company's or the Stockholders' knowledge, there has not been
any organizing effort by any union or other group seeking to represent any
employees of the Company as its exclusive bargaining agent at any time during
the two years prior to the date hereof. There are no labor strikes, work
stoppages or other labor disputes now pending or threatened against the Company,
nor has there been any such labor strike, work stoppage or other labor dispute
or grievance at any time during the two years prior to the date hereof. Neither
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the Company nor any Stockholder has any knowledge that any executive, key
employee or any group of employees of the Company has any plans to terminate
his/her employment with the Company.
(p) INSURANCE. Schedule 3.1(p) hereto sets forth a true, correct and
complete list of all insurance policies or binders of insurance or programs of
self-insurance which relate to the business of the Company as of the date
hereof. The coverage under each such policy and binder is in full force and
effect. Neither the Company nor any Stockholder has knowledge of nor has the
Company or any Stockholder received any notice of cancellation, termination,
nonrenewal or disallowance of any claim thereunder or with respect thereto.
Neither the Company nor any Stockholder has knowledge of any claim against the
Company relating to its business, assets, properties or operations which would
materially increase the insurance premiums payable by the Company under such
policy or binder in excess of normal increases consistent with industry
practices.
(q) TAX MATTERS. The Company is not a member of an affiliated group,
within the meaning of Section 1504 of the Code (an "Affiliated Group"). The
Company has filed when due and will file if and when due prior to the Closing
Date (after giving effect to any extensions granted by the requisite legal or
regulatory authority) all returns, reports, elections, estimates, declarations,
schedules, forms and other documents ("Tax Returns") relating to taxes required
to be filed by the Code or by any applicable federal, state, county, municipal,
local, foreign or other laws, including, without limitation, consolidated,
combined or unitary returns, for any taxable period ending prior to or on the
Closing Date (the "Pre-Closing Tax Period"). The taxable year of the Company for
federal and state income and business tax purposes currently ends on March 31 of
each year. All taxes shown on any Tax Return due and required to be filed prior
to Closing for any Pre-Closing Tax Period have been, or will have been, paid or
accrued prior to the Closing. The Company has heretofore delivered to THINK all
Tax Returns filed on its behalf for the fiscal years ended March 31, 1993, 1994,
1995, 1996 and 1997. The Company has fully accrued on its books, based on the
cash method of accounting, all taxes for any Pre-Closing Tax Period. No tax
liens have been filed, and no material claims have been or are being asserted
or, to the Company's or the Stockholders' knowledge, threatened against the
Company with respect to any taxes. No Tax Returns of the Company have been
audited in the past five (5) years by any taxing authority, no deficiencies or
claims have been proposed, assessed or claimed (including interest and
penalties) against the Company which have not been paid or accrued and the
Company has not waived or extended any statute of limitations with respect to
the assessment of any taxes, which waiver or extension has not yet expired by
its terms. To the knowledge of the Company and Stockholders, there are no suits,
actions, proceedings, claims or investigations now pending against the Company
with respect to any taxes, except as set forth on Schedule 3.1(q) hereto. The
Company has withheld or collected from each payment made to each of its
employees, consultants, contractors and other payees the amount of all taxes
(including, but not limited to, federal income taxes, state and local income and
wage taxes, payroll taxes, workers' compensation and unemployment taxes)
required to be withheld or collected therefrom for all Pre-Closing Tax Periods
and the Company has timely paid or accrued and reported the same in respect of
its employees, consultants, contractors and other payees to the proper tax
receiving offices. The Company does not have any liability for any taxes of any
nature whatsoever for any Pre-Closing Tax Period and neither the Stockholders
nor the Company is aware of any basis for any additional liabilities for taxes
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for any Pre-Closing Tax Period. The reserve for accrued but unpaid taxes for the
period ending March 31, 1997 includes adequate provision for all taxes which
have been assessed or which will be due and payable by the Company for all
Pre-Closing Tax Periods. The Company does not file any state or local tax
returns on a unitary or combined basis with any other member of an Affiliated
Group.
The term "taxes" or "tax" as used in this section or referred to
elsewhere in this Agreement shall mean all taxes, charges, fees, levies,
penalties, or other assessments, including without limitation, income, capital
gain, profit, gross receipts, ad valorem, excise, property, payroll,
withholding, employment, severance, social security, workers' compensation,
occupation, premium, customs duties, windfall profits, sales, use, and franchise
taxes, imposed by the United States, or any state, county, local or foreign
government or any subdivision or agency thereof, and including any interest,
penalties. or additions attributable thereto.
(r) COMPLIANCE WITH APPLICABLE LAW. The Company has been and is in
compliance with all foreign, federal, state and local laws, statutes,
ordinances, rules and regulations applicable to the business, except where the
failure to comply with which would not materially adversely affect the business,
assets, operations, earnings, prospects or condition (financial or otherwise) of
the Company or which would subject any officer or director of the Company to
civil or criminal penalties or imprisonment. The Company has complied with the
rules and regulations of all governmental agencies having authority over its
business and its operations, including without limitation, agencies concerned
with intra-state and interstate commerce, occupational safety and employment
practices, except where the failure to comply would not have a material adverse
effect on the business, operations, earnings, prospects, assets or condition
(financial or otherwise) of the Company. Neither the Company nor the
Stockholders has any knowledge of or received any notice of violation of any
such rule or regulation during the five (5) years prior to the date hereof which
could result in any liability of the Company for penalties or damages or which
could subject the Company to any injunction or government writ, order or decree.
To the Company's or the Stockholders' knowledge, there are no facts, events or
conditions that could interfere with, prevent continued compliance with or give
rise to any liability under any foreign, federal, state or local governmental
laws, statutes, ordinances or regulations applicable to the business, assets,
operations, earnings, prospects or condition (financial or otherwise) of the
Company, except where the failure to do so would not have a material adverse
effect on the business, operations, earnings, prospects, assets or condition
(financial or otherwise) of the Company.
(s) LITIGATION. Except as otherwise provided on Schedule 3.1(s),
there is no action, suit, proceeding or investigation pending or, to the
Company's or the Stockholders' knowledge, threatened, which could restrict the
Company or the Stockholders' ability to perform his respective obligations
hereunder or could have a material adverse effect on the business, assets,
operations, earnings, prospects or condition (financial or otherwise) of the
Company. Neither the Company nor any Stockholder is in default in respect of any
judgment, order, writ, injunction or decree of any court or any federal, state,
local or other governmental agency, authority, body, board, bureau, commission,
department or instrumentality which could have a material adverse effect on the
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business, assets, operations, earnings, prospects or condition (financial or
otherwise) of the Company.
(t) PERMITS. The Company holds all permits, licenses, orders and
approvals of all federal, state or local governmental or regulatory authorities,
agencies or bodies required for the conduct and operation of the Company's
business as currently conducted, except where the failure to do so would not
have a material adverse effect on the business, operations, earnings, prospects,
assets or condition (financial or otherwise) of the Company. All such permits,
licenses, orders, and approvals are in full force and effect and no suspension,
termination or revocation of any of the foregoing is threatened. None of such
permits, licenses, orders or approvals will be materially adversely effected by
consummation of the transactions contemplated by this Agreement. The Company has
no knowledge of nor has it received any notice of violation of any of such rules
or regulations during the five (5) years prior to the date hereof which would
result in any liability of the Company for penalties or damages or which would
subject the Company to any injunction or governmental writ, order or decree.
(u) UNLAWFUL PAYMENTS. Neither the Company, the Stockholders, nor
any officer, director, employee, agent or representative of the Company has
made, directly or indirectly, any bribe or kickback, illegal political
contribution, payment from corporate funds which was incorrectly recorded on the
books and records of the Company, unlawful payment from corporate funds to
governmental or municipal officials in their individual capacities for the
purpose of affecting their action or the actions of the jurisdiction which they
represent to obtain favorable treatment in securing business or licenses or to
obtain special concessions of any kind whatsoever, or illegal payment from
corporate funds to obtain or retain any business.
(v) OFFICERS, DIRECTORS AND EMPLOYEES. Schedule 3.1(v) hereto sets
forth a true, correct and complete list of all of the officers, directors and
employees of the Company as of the date hereof, including their respective
names, titles and salaries. The Company has also provided to THINK true, correct
and complete copies of any employment agreements between the Company and any of
the foregoing officers, directors and employees of the Company in effect as of
the date hereof.
(w) LOANS TO OR FROM AFFILIATES. Except as set forth on Schedule
3.1(w) hereto, there exist no outstanding loans by the Company to any current or
former officer, director, employee, consultant or stockholder of the Company or
any affiliate of any of the foregoing. There are no outstanding loans to the
Company by any current or former officer, director, employee, consultant or
stockholder of the Company.
(x) BOOKS AND RECORDS.
(i) The books of account and other financial records of the
Company are complete and correct in all material respects and have been
maintained in accordance with good business practices.
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(ii) All material corporate action of the Company's board of
directors (including any committees) and stockholders of the Company since the
date of the Company's incorporation has been authorized, approved and/or
ratified in the minute books of the Company.
(y) BANK ACCOUNTS. Set forth on Schedule 3.1(y) is a true, correct
and complete list of the names of each bank, savings and loan, or other
financial institution, at which the Company maintains any account (including any
cash contribution or similar accounts) and the names of all persons authorized
to draw thereon or who have access thereto. Schedule 3.1 (y) includes a true,
correct and complete list of each credit or loan facility or guaranty
established and/or maintained by or on behalf of the Company, including the
amounts available to the Company under each such facility, the outstanding
principal balance thereunder as of the date hereof, the interest rate applicable
thereto and the maturity date thereof.
(z) INVESTMENT PURPOSE. Each Stockholder represents that each such
Stockholder is acquiring and will acquire, as the case may be, the shares of
THINK Stock issuable to it pursuant hereto solely for its own account for
investment purposes only and not with a view toward resale or distribution
thereof other than pursuant to an effective registration statement or applicable
exemption from the registration requirements of the Securities Act of 1933, as
amended (the "Securities Act"). Each Stockholder understands that such shares of
THINK Stock will be issued in reliance upon an exemption from the registration
requirements of the Securities Act and that subsequent sale or transfer of such
securities is prohibited absent registration or exemption from the provisions of
the Securities Act. Each Stockholder hereby agrees, severally and not jointly,
that he will not sell, assign, transfer, pledge or otherwise convey any of the
shares of the THINK Stock issuable to it pursuant hereto, except in compliance
with the provisions of the Securities Act and in accordance with any transfer
restrictions or similar terms set forth on the certificates representing such
securities or otherwise set forth herein.
(aa) AGREEMENTS WITH AFFILIATES. Except as set forth on Schedule
3.1(aa) hereto, the Company is not a party to any instrument, license, lease or
other agreement, written or oral, with any officer, director or stockholder of
the Company.
(bb) ACCURACY OF INFORMATION FURNISHED. The Company and the
Stockholders (severally and not jointly with respect to those statements,
representations and warranties made severally and not jointly by such
Stockholders) represent that no statement by the Company or the Stockholders set
forth herein or in the exhibits or the schedules hereto contained, contains or
will contain any untrue statement of a material fact, or omits, omitted or will
omit to state any material fact which is necessary to make the statements
contained herein or therein, in light of the circumstances under which they were
made, not misleading.
3.2 REPRESENTATIONS AND WARRANTIES OF THINK. THINK represents and warrants
to the Company and the Stockholders as follows:
(a) AUTHORIZATION. The execution, delivery and performance of this
Agreement and consummation of the transactions contemplated hereby have been
duly authorized, adopted and approved by the board of directors of THINK. THINK
has taken all necessary corporate action and has all of the necessary corporate
17
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power to enter into this Agreement and to consummate the transactions
contemplated hereby. This Agreement has been duly and validly executed and
delivered by the officers of THINK on behalf of THINK and, assuming that this
Agreement is the valid and binding obligation of each of the Company and the
Stockholders, is the valid and binding obligation of THINK, enforceable against
it in accordance with its terms, except as such enforcement may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium or other similar
laws now or hereafter in effect, or by legal or equitable principles, relating
to or limiting creditors' rights generally and except that the remedy of
specific performance and injunctive and other forms of equitable relief are
subject to certain equitable defenses and to the discretion of the court before
which any proceeding therefor may be brought.
(b) ORGANIZATION. THINK is a corporation duly organized, validly
existing and in good standing under the laws of the State of Delaware. THINK has
the corporate requisite power and authority to own and lease its properties and
assets, and to carry on its business as it is now being conducted. THINK is duly
qualified to do business as a foreign corporation in each jurisdiction where it
owns or leases real property or conducts business, except where the failure to
be so qualified would not have a material adverse effect on the business,
operations, earnings, prospects, assets or condition (financial or otherwise) of
THINK.
(c) CAPITALIZATION. The number of authorized, issued and outstanding
shares of capital stock of THINK as of the date hereof is as set forth above in
the recitals to this Agreement. The outstanding shares of THINK Stock have been
duly authorized and validly issued and are fully paid and nonassessable. As of
the date hereof, the number of shares of capital stock that THINK is currently
authorized to issue is adequate to permit THINK to fulfill its obligations
hereunder with respect to issuance of the shares of THINK Stock to the
Stockholders pursuant hereto. On the Closing Date, the shares of THINK Stock
issuable to the Stockholders pursuant to Section 1.2 will be duly authorized,
validly issued, fully paid and nonassessable and the stock options issued to the
Stockholders and certain key employees pursuant to Section 5.1(k) below, and as
set forth on Schedule 3.1(c) above, will be authorized and validly issued. THINK
has not issued any shares of capital stock which could give rise to claims for
violation of any federal or state securities laws (including any rules or
regulations promulgated thereunder) or the securities laws of any other
jurisdiction (including any rules or regulations promulgated thereunder). As of
the date hereof, except as set forth herein, there are no options, warrants,
calls, convertible securities or commitments of any kind whatsoever relating to
the shares of THINK Stock subject hereto.
(d) NON-CONTRAVENTION; CONSENTS. Neither the execution and delivery
of this Agreement, nor consummation of the transactions contemplated hereby,
does or will: (i) violate or conflict with any provision of the certificate of
incorporation or bylaws of THINK; (ii) violate or conflict with any material
provision of any mortgage, lien, lease, agreement, permit, indenture, license,
instrument, law, order, arbitration award, judgment or decree to which THINK is
a party or by which it or the property or assets which are material to its
business or operation are bound, the effect of any of which violation would have
a material adverse effect on the business, assets, operations, earnings,
prospects (financial or otherwise) of the Company; (iii) violate or conflict
with any other restriction to which THINK is subject or by which any of the
property or assets which are material to the business or operation of THINK may
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be bound, the effect of any of which violation or conflict would have a material
adverse effect on the business, assets, operations, earnings, prospects
(financial or otherwise) of the Company; or (iv) constitute an event permitting
termination of any agreement to which THINK is subject by any other party
thereto, if in any such circumstance such termination could have a materially
adverse effect on the ability of THINK to fulfill its respective obligations
hereunder. Other than as provided herein, no consent, authorization, order or
approval of, or filing or registration with, any governmental commission, board
or other regulatory body is required in connection with the execution, delivery
and performance of the terms of this Agreement by THINK and consummation by
THINK of any of the transactions contemplated hereby.
(e) LITIGATION. There is no action, suit, proceeding or
investigation pending against or related to THINK, nor, to the best knowledge of
THINK, has THINK been threatened with any such action, suit, proceeding or
investigation, which would restrict the ability of either to perform its
respective obligations hereunder or which would have a material adverse effect
on the business, assets, operations, earnings, prospects or condition (financial
or otherwise) of THINK. THINK is not in default in respect of any judgment,
order, writ, injunction or decree of any court or any federal, state, local or
other governmental agency, authority, body, board, bureau, commission,
department or instrumentality which could have a material adverse effect on the
business, assets, operations, earnings, prospects or condition (financial or
otherwise) of THINK.
(f) ACCURACY OF INFORMATION FURNISHED. No statement by THINK set
forth herein or in the exhibits or the schedules hereto, and no statement set
forth in any certificate or other instrument or document required to be
delivered by or on behalf of THINK pursuant hereto or in connection with
consummation of the transactions contemplated hereby, contained, contains or
will contain any untrue statement of a material fact, or omitted, omits or will
omit to state any material fact which is necessary to make the statements
contained herein or therein, in light of the circumstances under which they were
made, not misleading.
(g) COMPLIANCE WITH APPLICABLE LAW. THINK has been and is in
compliance with all foreign, federal, state and local laws, statutes,
ordinances, rules and regulations (including without limitation the Securities
Act and the Securities Exchange Act of 1934, as amended) as of the date hereof,
the failure to comply with which could materially adversely affect the business,
assets, operations, earnings, prospects or condition (financial or otherwise) of
THINK or which would subject any officer or director of THINK to civil or
criminal penalties or imprisonment. THINK has complied with the rules and
regulations of all governmental agencies having authority over its business and
its operations, including without limitation, agencies concerned with
intra-state and interstate commerce, occupational safety, environmental
protection and employment practices, except where the failure to comply with
which would not have a material adverse effect on the business, operations,
earnings, prospects, assets or condition (financial or otherwise) of THINK.
THINK has no knowledge of and has not received any notice of violation of any
such rule or regulation during the two years prior to the date hereof which
could result in any liability of THINK for penalties or damages or which could
subject it to any injunction or government writ, order or decree. To the best
knowledge of THINK, there are no facts, events or conditions that could
interfere with, prevent continued compliance with or give rise to any liability
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under any foreign, federal, state or local governmental laws, statutes,
ordinances or regulations applicable to the business, assets, operations,
earnings, prospects or condition (financial or otherwise) of THINK, except where
the failure to do so would not have a material adverse effect on the business,
operations, earnings, prospects, assets or condition (financial or otherwise) of
THINK.
(h) NO MATERIAL ADVERSE CHANGE. No material adverse change in the
business, operations, affairs, prospects, properties, assets, existing and
potential liabilities, obligations, profits or condition (financial or
otherwise) of THINK has occurred since March 31, 1997.
(i) EMPLOYEE BENEFIT PLANS. Schedule 3.2(i) hereto sets forth a
true, correct and complete list of all Benefit Plans (the "THINK Benefit Plans")
covering the employees of the THINK (the "THINK Employees"). Each THINK Benefit
Plan is in compliance in all material respects with all applicable provisions of
law, including ERISA and the Code. There are no pending or, to THINK's
knowledge, threatened claims against any THINK Benefit Plan (except for claims
for benefits payable in the normal operation of the THINK Benefit Plans) that
could give rise to any material liability to the THINK. All material reports,
notices and returns required to be filed with any governmental agency or
provided to any person or entity with respect to the THINK Benefit Plans have
been timely filed. THINK has never maintained, contributed to or been obligated
to contribute to any Benefit Plan that is an employee pension plan (within the
meaning of Section 3(2) of ERISA) or any multiemployer pension or multiemployer
welfare benefit plan (within the meaning of Section 3(37) of ERISA).
3.3 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. The representations and
warranties set forth in Sections 3.1 and 3.2 hereof shall survive until the
close of business on the Anniversary Date, PROVIDED THAT, notice or demand with
respect to any alleged breach thereof is given as required pursuant to Article
VI hereof; and FURTHER PROVIDED THAT, with respect to claims for damages arising
out of any misrepresentation or breach of warranty made by the Company and the
Stockholders relating to taxes, notice shall have been given on or before the
close of business on the sixtieth (60th) day following the later to occur of:
(i) the expiration date of the statute of limitations applicable to any
indemnified federal, state or local tax liability; and (ii) the final
determination of any such tax liability, including the final administrative
and/or judicial determination thereof.
ARTICLE IV
ITEMS DELIVERABLE AT CLOSING
4.1 ITEMS DELIVERED BY THE COMPANY. Upon Closing, the following documents
shall have been furnished and events shall have occurred:
(a) COPIES OF RESOLUTIONS. The Company shall have furnished THINK
with certified copies of resolutions duly adopted by the board of directors of
the Company and the Stockholders authorizing the execution, delivery and
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performance of the terms of this Agreement and all other necessary or proper
corporate action to enable the Company to comply with the terms of this
Agreement.
(b) CERTIFICATES OF GOOD STANDING. The Company shall have furnished
THINK with certified copies of certificates of good standing of the Company
dated not more than five (5) business days prior to the Closing Date from the
State of Washington and each other jurisdiction in which the Company does
business.
(c) DELIVERY OF OFFICERS' CERTIFICATES. The Company and each of the
Stockholders shall have delivered to THINK certificates, dated the Closing Date,
and signed by an executive officer of the Company (with respect to the Company),
and by each of the Stockholders individually, representing and affirming that
the representations and warranties made by each of the Company and the
Stockholders jointly and/or severally as set forth in this Agreement were and
are true, correct and complete and the conditions set forth in this Agreement
have been satisfied. The Company shall also have delivered a certificate signed
by the Secretary of the Company with respect to the authority and incumbency of
the officers of the Company executing this Agreement and any documents required
to be executed or delivered in connection therewith.
(d) DELIVERY OF STOCK CERTIFICATES. The Stockholders shall have
delivered to THINK certificates representing all of the issued and outstanding
capital stock of the Company, which certificates shall be properly endorsed in
blank or shall be accompanied by a properly executed stock power or,
alternatively and as the case may be, shall have delivered appropriately
executed affidavits of loss relating to such stock.
(e) CONSENTS AND WAIVERS. Any and all necessary consents,
authorizations, orders or approvals shall have been obtained, except as the same
shall have been waived by THINK.
(f) DELIVERY OF DOCUMENTS AND OTHER INFORMATION. The Company shall
have delivered to THINK all of the agreements, contracts, documents and other
instruments required to be delivered pursuant to the provisions of this
Agreement.
4.2 ITEMS DELIVERED BY THINK. Upon Closing, the following documents shall
have been furnished and events shall have occurred:
(a) COPIES OF RESOLUTIONS. THINK shall have furnished the Company
with certified copies of resolutions duly adopted by the board of directors of
THINK authorizing the execution, delivery and performance of the terms of this
Agreement and all other necessary or proper corporate action to enable THINK to
comply with the terms of this Agreement.
(b) CERTIFICATES OF GOOD STANDING. THINK shall have furnished the
Company with certified copies of certificates of good standing of THINK dated
not more than five (5) business days prior to the Closing Date from the State of
Delaware and each other jurisdiction in which THINK is qualified to do business.
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(c) DELIVERY OF OFFICERS' CERTIFICATES. THINK shall have delivered
to the Company and the Stockholders certificates, dated the Closing Date and
signed by an executive officer of THINK, affirming that the representations and
warranties of THINK as set forth in this Agreement were and are true, correct
and complete and the conditions set forth in this Agreement have been satisfied.
THINK shall also have delivered a certificate signed by the Secretary of THINK
with respect to the authority and incumbency of the officers of THINK executing
this Agreement and any documents required to be executed or delivered in
connection therewith.
(d) STOCK CERTIFICATES. THINK shall have issued and delivered to
the Stockholders certificates representing the shares of THINK Stock issuable
pursuant hereto, which certificates shall be in the respective names of the
Stockholders and in the respective amounts set forth on Schedule 1.2(a) hereto.
(e) CONSENTS AND WAIVERS. Any and all necessary consents,
authorizations, orders or approvals shall have been obtained, except as the same
shall have been waived by the Company and the Stockholders.
ARTICLE V
INDEMNIFICATION AND CLAIMS
5.1 INDEMNIFICATION BY THE COMPANY AND THE STOCKHOLDERS.
(a) Subject to Sections 5.1(b) and 5.1(c) hereof, the Stockholders
hereby agree, severally to indemnify and hold harmless THINK against and in
respect of all damages, claims, losses and expenses (including, without
limitation, reasonable attorneys' fees and disbursements) reasonably incurred by
THINK (all such amounts may hereinafter be referred to as the "Damages") arising
out of: (i) any misrepresentation or breach of any representation or warranty
made by the Company or the Stockholders pursuant to the provisions of this
Agreement or in any statement, certificate or other document furnished by the
Company or the Stockholders pursuant to this Agreement; and (ii) the
nonperformance or breach of any covenant, agreement or obligation of the Company
or the Stockholders contained in this Agreement which has not been waived by
THINK in writing. The Stockholders shall have no right to seek contribution from
the Company in the event that they are required to make any payments hereunder.
(b) Until the close of business on the Anniversary Date and subject
to Section 3.3 hereof, the Stockholders shall be obligated to indemnify THINK
pursuant to this Section 5.1 with respect to claims for Damages as to which
THINK shall have given written notice to the Company and the Stockholders on or
before: (i) the close of business on the sixtieth (60th) day following discovery
by THINK of the facts upon which a claim for indemnification is being made; or
(ii) if the claim for indemnification relates to assertions made by a third
party, the close of business on the thirtieth (30th) day following receipt of
notice by a third party of a claim for indemnification by such party (a "Third
Party Claim"). Any such notice shall describe the nature of the claim for
Damages, the provisions of this Agreement upon which such claim is based and the
amount of the Damages, if then ascertainable or if not then ascertainable, an
estimate thereof. The Stockholders shall be obligated to indemnify THINK with
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respect to claims for Damages arising out of any misrepresentation or breach of
warranty made by the Company or the Stockholders relating to Subsection 3.1(q)
as to which THINK shall have given notice on or before the close of business on
the sixtieth (60th) day following the later of: (i) the expiration date of the
statute of limitations applicable to any indemnified federal, state, foreign or
local tax liability; or (ii) the final determination of any such tax liability,
including the final administrative and/or judicial determination thereof.
(c) Notwithstanding the indemnification provided pursuant to
Subsection 5.1 (a) and 5.1(b) above, no amount shall be payable by the
Stockholders in indemnification hereunder or under any other provision of this
Agreement unless the aggregate amount of such Damages in respect of which the
Company or the Stockholders would be liable, but for operation and application
of the provisions of this Section 5.1(c), exceeds on a cumulative basis Fifty
Thousand Dollars ($50,000) and then only to the extent of such excess; PROVIDED,
HOWEVER, that the Stockholders shall not be liable for claims made in excess of
the value of the THINK Stock included in the Purchase Price (the "Cap") and each
such Stockholder shall be liable for his pro rata portion thereof based upon
that portion of the total Purchase Price he is entitled to receive pursuant to
Sections 1.2 hereof. The value of the THINK Stock for purposes of application of
this section shall be determined by multiplying the number of shares of THINK
Stock included in the Purchase Price by the average of the closing transaction
price per share of THINK Stock for the twenty (20) trading days immediately
prior to the date of the notice of claim.
(d) Notwithstanding the foregoing, there shall be no Cap and the
Company shall be entitled to full indemnification by the Stockholders with
respect to claims involving employment matters, environmental matters, tax
matters and intellectual property matters.
(e) In any case where the Stockholders have indemnified THINK for
any Damages and THINK recovers from a third party all or any part of the amount
so indemnified by the Stockholders, THINK shall promptly reimburse to the
Stockholders the amount so recovered.
5.2 CLAIMS AGAINST THINK. With respect to claims or demands by third
parties, whenever THINK shall have received notice that such a claim or demand
has been asserted or threatened which, if valid, would be subject to
indemnification under Section 5.1 hereof, THINK shall as soon as reasonably
possible and in any event within thirty (30) days of receipt of such notice,
notify the Stockholders of such claim or demand and of all relevant facts within
its knowledge which relate thereto. The Stockholders shall then have the right
at their own expense to undertake the defense of any such claims or demands
utilizing counsel selected by the Stockholders, as the case may be, and approved
by THINK, which approval shall not be unreasonably withheld. In the event that
the Stockholders should fail to give notice of the intention to undertake the
defense of any such claim or demand within sixty (60) days after receiving
notice that it has been asserted or threatened, THINK shall have the right to
defend, satisfy and discharge the same by payment, compromise or otherwise and
shall give written notice of any such payment, compromise or settlement to the
Stockholders.
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5.3 INDEMNIFICATION BY THINK.
(a) Subject to Section 5.3(b) hereof, THINK hereby agrees to
indemnify and hold harmless the Company and the Stockholders against and in
respect of all damages, claims, losses and expenses (including without
limitation, reasonable attorneys' fees and disbursements) reasonably incurred by
the Stockholders with respect thereto (all such amounts may hereinafter be
referred to as "Stockholder Damages") arising out of: (i) any misrepresentation
or breach of any representation or warranty made by THINK pursuant to the
provisions of this Agreement or in any statement, certificate or other document
furnished by THINK pursuant to this Agreement; and (ii) the nonperformance or
breach of any covenant, agreement or obligation of THINK which has not been
waived by the Stockholders collectively in writing.
(b) Until the close of business on the Anniversary Date and subject
to Section 3.3 hereof, THINK shall be obligated to indemnify the Stockholders
pursuant to this Section 5.3 only with respect to claims for Stockholder Damages
as to which the Stockholders shall have given written notice to THINK on or
before: (i) the close of business on the sixtieth (60th) day following discovery
by the Stockholders of the facts upon which a claim for indemnification is being
made; or (ii) if the claim is a Third Party Claim, the close of business on the
thirtieth (30th) day following receipt of notice by the third party of assertion
of a Third Party Claim. Any such notice shall describe the nature of the claim
for Damages, the provisions of this Agreement upon which such claim is based and
the amount of the Damages, if then ascertainable, or if not the ascertainable an
estimate thereof.
(c) Notwithstanding the indemnification provided pursuant to
Subsection 5.3(a) above, no amount shall be payable by THINK in indemnification
hereunder or under any other provision of this Agreement unless the aggregate
amount of Stockholder Damages in respect of which THINK would be liable, but for
operation and application of the provisions of this subsection, exceeds on a
cumulative basis Fifty Thousand Dollars ($50,000) and then only to the extent of
such excess.
(d) In any case where THINK has indemnified the Stockholders for any
Stockholder Damages and the Stockholders recover from a third party all or any
part of the amount so indemnified by THINK, the Stockholders shall promptly
reimburse to THINK the amount so recovered.
5.4 CLAIMS AGAINST THE STOCKHOLDERS. With respect to claims or demands by
third parties, whenever the Stockholders shall have received notice that such a
claim or demand has been asserted or threatened, which, if valid, would be
subject to indemnification under Section 5.3 hereof, the Stockholders shall as
soon as reasonably possible and in any event within thirty (30) days of receipt
of such notice, notify THINK of such claim or demand and of all relevant facts
within its knowledge which relate thereto. THINK shall have the right at its own
expense to undertake the defense of any such claim or demand utilizing counsel
selected by THINK and approved by the Stockholders. In the event that THINK
should fail to give notice of its intention to undertake the defense of any such
claim or demand within sixty (60) days after receiving notice that it has been
asserted or threatened, the Stockholders shall have the right to defend, satisfy
and discharge the same by payment, compromise or otherwise and shall give
written notice of any such payment, compromise or settlement to THINK.
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5.5 OFFSETS. The amount of Damages otherwise eligible for indemnification
under this Section shall be reduced by: (i) the amount of any insurance proceeds
(minus all reasonably allocable costs, charges and expenses incurred by an
indemnified party ("Indemnified Party") in obtaining such recovery) actually
recovered in respect thereof; and (ii) any tax-related benefits if and when
actually realized or received (but only after taking into account the tax
benefits to which the Indemnified Party would be entitled without regard to such
item). Any insurance recovery or tax-related benefits referred to in the
previous sentence shall be promptly repaid by the Indemnified Party to the
Stockholders pro rata in accordance with their respective interests following
the time at which such amounts are actually recovered or realized or received;
PROVIDED, HOWEVER, that in the event that any such insurance recovery or
tax-related benefit is set aside or disallowed and the Indemnified Party had
paid any amounts to the Stockholders in respect thereof (or the amount by which
the Indemnified Party was indemnified was reduced in respect thereof), then the
obligations of the Stockholders to indemnify with respect to such amounts shall
be reinstated immediately and such amounts shall be paid promptly to the
Indemnified Party in accordance with the provisions of this Agreement.
ARTICLE VI
TERMINATION AND REMEDIES FOR BREACH OF THIS AGREEMENT
6.1 TERMINATION BY MUTUAL AGREEMENT. This Agreement may be terminated at
any time prior to the Closing by unanimous consent of the parties hereto,
provided that such consent is in writing and is signed by each of the parties
hereto.
6.2 TERMINATION BY OPERATION OF LAW. This Agreement may be terminated by
any party if, in the reasonable opinion of counsel to such party, there shall be
any statute, rule or regulation that renders consummation of the transactions
contemplated hereby illegal or otherwise prohibited, or a court of competent
jurisdiction or any government (or governmental authority) shall have issued an
order, decree or ruling, or has taken any other action restraining, enjoining or
otherwise prohibiting the consummation of such transactions and such order,
decree, ruling or other action shall have become final and nonappealable.
ARTICLE VII
MISCELLANEOUS
7.1 FEES AND EXPENSES. Each party hereto shall pay its own expenses
incident to negotiation, execution, delivery and performance of the terms of
this Agreement and the consummation of the transactions contemplated hereby.
7.2 MODIFICATION, AMENDMENTS AND WAIVER. The parties hereto may amend,
modify or otherwise waive any provision of this Agreement by unanimous consent,
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provided that such consent and any amendment, modification or waiver is in
writing and is signed by each of the parties hereto.
7.3 ASSIGNMENT. None of the parties hereto shall have the authority to
assign its respective rights or obligations under this Agreement without the
prior written consent of the other parties hereto, except that THINK may assign
all or any portion of its respective rights hereunder to an affiliate of THINK
without the prior written consent of the Company or the Stockholders and the
Company and the Stockholders shall execute such documents as are necessary in
order to effectuate such assignments.
7.4 BURDEN AND BENEFIT. This Agreement shall be binding upon and, to the
extent permitted in this Agreement, shall inure to the benefit of the parties
and their respective successors and assigns. In the event of a default by the
Company or the Stockholders of any of their respective obligations hereunder,
the sole and exclusive recourse and remedy of THINK shall be against the Company
and the Stockholders, as the case may be, and any of the Company's or the
Stockholder's assets; under no circumstances shall any officer or director of
the Company be liable in law or equity for any obligations of the Company or the
Stockholders hereunder. In the event of a default by THINK of any of its
obligations hereunder, the sole and exclusive recourse and remedy of the
Stockholders and the Company shall be against THINK and its assets; under no
circumstances shall any officer, director, stockholder or affiliate of THINK be
liable in law or equity for any obligations of THINK hereunder.
7.5 BROKERS. The Company and the Stockholders represent and warrant that
there are no brokers or finders entitled to any brokerage or finder's fee or
other commission or fee based upon arrangements made by or on behalf of the
Company or the Stockholders or any other person in connection with this
Agreement or any of the transactions contemplated hereby. THINK represents and
warrants that no other broker or finder is entitled to any brokerage or finder's
fee or other commission or fee based upon arrangements made by or on behalf of
THINK in connection with this Agreement or any of the transactions contemplated
hereby, other than fees or commissions for which THINK shall be solely
responsible.
7.6 ENTIRE AGREEMENT. This Agreement and the schedules, exhibits, lists
and other documents referred to herein contain the entire agreement among the
parties hereto with respect to the transactions contemplated hereby and
supersede all prior agreements with respect thereto, whether written or oral.
7.7 GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of Delaware, without regard to the
principles of conflicts of laws thereof.
7.8 NOTICES. Any notice, request, instruction or other document to be
given hereunder by any party hereto shall be in writing and delivered
personally, by facsimile transmission or telex, or sent by commercial expedited
delivery service or registered or certified mail (return receipt requested),
postage prepaid, addressed as follows:
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If to the Company
or the Stockholders: Herring/Newman, Inc.
414 Olive Way
Seattle, Washington 98101
Attn: Phil Herring
Facsimile: (206) 343-9000
E-Mail: www.herringn.com
with a copy to: Perkins Coie
1201 Third Avenue, 40th Floor
Seattle, Washington 98101
Attn: Stewart Landefield, Esq.
Alesia Pinney-Hawkins, Esq.
Facsimile: (206) 583-8500
E-Mail: [email protected]
[email protected]
If to the THINK: THINK New Ideas, Inc.
45 West 36th Street
12th Floor
New York, New York 10018
Attn: Ronald E. Bloom
Facsimile: (212) 629-6850
E-Mail: [email protected]
with a copy to: Kirkpatrick & Lockhart LLP
1800 Massachusetts Avenue, 4th Floor
Washington, D.C. 20036
Attn: Victoria A. Baylin, Esq.
Facsimile: (202) 778-9100
E-Mail: [email protected]
or to such other persons or addresses as may be designated in writing by the
party to receive such notice. If sent as aforesaid, the date any such notice
shall be deemed to have been delivered on the date of transmission of a
facsimile or telex, the day after delivery to a commercial overnight delivery
service, or five days after delivery into a United States Postal facility.
7.9 COUNTERPARTS. This Agreement may be executed in two (2) or more
counterparts, each of which shall be an original, but all of which shall
constitute but one agreement.
7.10 RIGHTS CUMULATIVE. All rights, powers and privileges conferred
hereunder upon the parties, unless otherwise provided, shall be cumulative and
shall not be restricted to those given by law. Failure to exercise any power
given any party hereunder or to insist upon strict compliance by any other party
shall not constitute a waiver of any party's right to demand exact compliance
with any of the terms or provisions hereof.
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7.11 SEVERABILITY OF PROVISIONS. The provisions of this Agreement shall be
considered severable in the event that any of such provisions are held by a
court of competent jurisdiction to be invalid, void or otherwise unenforceable.
Such invalid, void or otherwise unenforceable provisions shall be automatically
replaced by other provisions which are valid and enforceable and which are as
similar as possible in term and intent to those provisions deemed to be invalid,
void or otherwise unenforceable. Notwithstanding the foregoing, the remaining
provisions hereof shall remain enforceable to the fullest extent permitted by
law.
7.12 HEADINGS. The headings set forth in the articles and sections of this
Agreement and in the exhibits and the schedules to this Agreement are inserted
for convenience of reference only and shall not be deemed to constitute a part
hereof.
7.13 KNOWLEDGE STANDARD. When used in this Agreement, the phrase "to the
best knowledge of, " "knowledge of, " "known to" or similar phrases shall mean
the actual knowledge of: (i) with respect to THINK, the officers and directors
of THINK; (ii) with respect to the Company, the officers and directors of the
Company; and (iii) with respect to the Stockholders, Philip Herring and Daniel
Gross.
7.14 CERTAIN COVENANTS. Each of THINK and the Stockholders shall use their
best efforts to cause to be executed and delivered an employment agreement
between THINK and each of William Toliver, Daniel Gross and Alan Brown on terms
mutually acceptable in each instance to THINK and such individual. Until such
time as new employment agreements shall be executed, the existing agreements
between the Company and the foregoing individuals shall remain in effect.
In addition to the foregoing, Mr. Herring shall for a period of eighteen
(18) months following the Closing Date upon the request of THINK, give community
marketing presentations at such events and in such locations as THINK shall
identify.
* * * * *
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed and delivered as of the date and year first above written.
ATTEST: THINK NEW IDEAS, INC.
By: /s/ Ronald E. Bloom
- ---------------------------- --------------------------------------
Ronald E. Bloom, President
ATTEST: HERRING/NEWMAN, INC.
By: /s/ Philip Herring
- ---------------------------- --------------------------------------
Title: President
WITNESS: THE STOCKHOLDERS
By: /s/ Philip W. Herring
- ---------------------------- --------------------------------------
Philip W. Herring
WITNESS:
By: /s/ Daniel D. Gross
- ---------------------------- --------------------------------------
Daniel D. Gross
29
EXHIBIT 4.5
==============================================================================
THINK NEW IDEAS, INC.
1998 NEW EMPLOYEE STOCK OPTION PLAN
==============================================================================
<PAGE>
THINK NEW IDEAS, INC.
1998 NEW EMPLOYEE STOCK OPTION PLAN
ARTICLE I
ESTABLISHMENT AND PURPOSE
Section 1.1. THINK New Ideas, Inc., a Delaware corporation (the
"Company"), hereby establishes a stock option plan to be named the THINK New
Ideas, Inc. 1998 New Employee Stock Option Plan (the "Plan").
Section 1.2. The purpose of this Plan is to induce persons to whom the
Company determines to extend offers of employment to agree to become employees
of the Company (or any of its subsidiaries), to offer said persons incentives to
contribute to the Company's progress, and to encourage said persons to promote
the best interests of the Company. This Plan provides for the grant to persons
who become employees of options to purchase shares of common stock of the
Company, par value $.0001 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"), as well as options which may not
be so qualified ("Non-Qualified Options"). 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
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one of its members to serve as the chairman thereof and shall hold its meetings
at such times and places as it may 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.
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
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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
1,500,000 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 may again 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.
ARTICLE IV
ELIGIBILITY
Section 4.1. Options may be granted hereunder to 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 hereunder, 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. 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
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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.
(b) The "fair market value" shall be determined by the
Administrator, which determination shall be binding upon the Optionee, 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.
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(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 Option during the duration of this Plan and may be issued a
combination of Non-Qualified Options and 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 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 (6) 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 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 a written employment agreement
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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 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 (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 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 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 an 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.
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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 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 employee 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; (ii) the consent or
approval of any governmental regulatory body is necessary as a condition of or
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in connection with the issuance or exercise of the Options; or (iii) any other
consent or approval required by applicable law, rule or regulation 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 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
9
<PAGE>
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 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. Pursuant to ss. 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.
10
<PAGE>
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 pursuant hereto, each
Optionee shall agree to any such restrictions.
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.
11
<PAGE>
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 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 this 3rd day of June, 1998.
THINK NEW IDEAS, INC.
[CORPORATE SEAL]
By: /s/ Ronald E. Bloom
----------------------------------------
Ronald E. Bloom, Chief Executive
Officer
ATTEST:
By: /s/ Melvin Epstein
----------------------------------
Melvin Epstein, Secretary
12
Exhibit 10.5(b)
THINK NEW IDEAS, INC.
8000 Sunset Blvd., Penthouse East
Los Angeles, California 90046
March 18, 1998
Dr. James Carlisle
Executive Vice President
THINK New Ideas, Inc.
45 West 36th Street, 12th Floor
New York, New York 10018
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 One Hundred Ninety-Five Thousand Dollars ($195,000) per annum at a rate of
Sixteen Thousand Two Hundred Fifty Dollars ($16,250) 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."
The modification stated herein shall become effective on July 1, 1998.
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 and 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
discharges, 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 forgoing, and that the foregoing is in accordance with your understanding by
<PAGE>
signing and returning this letter, which shall thereupon constitute a binding
agreement.
Agreed to and accepted as of this
18th day of March, 1998 Very truly yours,
THINK New Ideas, Inc.
By: /s/ James Carlisle By: /s/ Scott Mednick
- ---------------------------- ---------------------
James Carlisle Scott Mednick
Chief Executive Officer
2
EXHIBIT 10.11
SETTLEMENT AGREEMENT
THIS SETTLEMENT AGREEMENT (the "Agreement") is entered into as of this
__ day of May 1998, with the intent that it be effective as of May 15, 1998
("Effective Date"), by and between (i) THINK NEW IDEAS, INC., a Delaware
corporation ("THINK"), and SCOTT A. MEDNICK ("Mednick"), and (ii) MEDNICK and
RONALD BLOOM and ADAM CURRY, as to Section 5 only.
RECITALS:
WHEREAS, THINK and Mednick (collectively, the "Parties") entered into
that certain Employment Agreement, dated June 30, 1996, as amended thereafter
from time to time ("Employment Agreement"); and
WHEREAS, Mednick wishes to terminate his employment with THINK; and
WHEREAS, the Parties have mutually agreed to certain terms and
conditions pursuant to which Mednick will terminate his employment with THINK;
and
WHEREAS, said terms and conditions are reflected in the letter
agreement attached hereto as Exhibit A and are intended to serve as a basis for
the Parties entering into this Agreement and the forms of agreements attached
hereto as Exhibits C, D, and E; and
WHEREAS, upon execution by the appropriate parties, this Agreement
shall supersede and replace the Employment Agreement and Mednick's rights under
that agreement shall terminate; and
WHEREAS, Mednick has carefully read and fully understands all the
provisions and effects of this Agreement and the releases contained herein: and
WHEREAS, the Parties hereto desire to put to rest and settle any and
all claims, controversies and differences between them of any sort, origin or
description in order to avoid the costs and uncertainties inherent in resolving
said matters.
NOW, THEREFORE, the Parties, intending to be legally bound hereby and
in consideration of the promises contained herein, do hereby agree as follows:
1. TERMINATION. Mednick acknowledges that, effective as of May 15,
1998, his employment with THINK terminated, after which time he has performed no
further duties, functions or services for THINK.
2. CASH CONSIDERATION, HEALTH INSURANCE AND LIFE INSURANCE. In
consideration of the settlement and release of all claims between the Parties as
set forth herein, THINK shall provide to Mednick the following:
(a) the sum of $936,130 payable in equal bi-monthly
installments over a period of 24 months commencing June 1, 1998 ("Payment
Period");
(b) the right to participate in THINK's health insurance
program during the Payment Period, the cost for said participation to be paid by
THINK;
<PAGE>
(c) a sum of cash equal to the value of four weeks of unused
"vacation" benefits accrued by Mednick during the period commencing July l, 1997
and ending May 15, l998;
(d) a $1,000,000 term life insurance policy, the ownership of
which shall be transferred to Mednick and the premium payments for which will be
paid by THINK for a period of four months after the Effective Date; and
(e) access to the premises of THINK and a right to remove his
personal property for a period of seven (7) calendar days, commencing May 25,
1998.
3. NO OTHER UNPAID SALARY. Excepts as otherwise provided herein,
Mednick acknowledges that he is not entitled to receive any salary, bonuses or
commissions from and after the date of this Agreement.
4. TERMINATION OF EMPLOYMENT AGREEMENT; RESIGNATION. THINK and Mednick
hereby agree that the Employment Agreement, attached hereto as Exhibit B, shall,
from and after the date hereof, be terminated and have no further force or
effect and that Mednick shall resign as President and Chief Executive Officer of
THINK and resign as a member of the Board of Directors of THINK and any
executive committee of THINK.
5. LOCKUP AGREEMENT AND RIGHTS AGREEMENT. In consideration for Mednick
entering into this Agreement (i) Ronald Bloom, Adam Curry and Mednick will enter
into a Lockup Agreement substantially in the form attached hereto as Exhibit C,
and (ii) THINK and Mednick will enter into a Rights Agreement substantially in
the form attached hereto as Exhibit D.
6. COVENANT NOT TO COMPETE. In consideration for the undertakings of
THINK set forth in this Agreement and for other good and valuable consideration,
receipt of which is hereby acknowledged, Mednick hereby covenants and agrees
that, so long as Mednick is receiving any consideration under Section 2(a) of
the Agreement (the "Non-Competition Period"):
(a) ACTIVITIES. Mednick shall not, anywhere in North America
directly or indirectly, individually or as a member of any partnership or joint
venture, or as an officer, director, stockholder, employee or agent of any other
person, firm, corporation, business organization or other entity (except a
charitable organization or entity that is organized and operated under Section
501(c)(3) of the Internal Revenue Code of 1986, as amended), participate in,
engage in, solicit or have any financial or other interest in any activity or
any business or other enterprise in any field which at the time of termination
is competitive with the business or is in substantially the same business as
THINK or any affiliate, subsidiary or division thereof (unless the Board of
Directors shall have authorized such activity and THINK shall have consented
thereto in writing), as an individual or as a member of any partnership or joint
venture, or as an officer, director, stockholder, investor, employee or agent of
any other person, firm, corporation, business organization or other entity;
provided, however, that nothing contained herein shall be construed to prevent
Mednick from acquiring for investment purposes only the stock of any corporation
that competes with THINK, which is listed on a national securities exchange or
traded in the over-the-counter market if Mednick does not and will not as a
result of such investment own more than five percent (5%) of the stock of such
corporation;
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<PAGE>
(b) NON-SOLICITATION. Mednick shall not: (i) solicit or induce any
employee of THINK to terminate his employment or otherwise leave THINK's employ
or hire any such employee (unless the Board of Directors shall have authorized
such employment and THINK shall have consented thereto in writing); or (ii)
solicit any clients or customers of THINK, either as an individual or as a
member of any partnership or joint venture, or as an officer, director,
stockholder, investor, employee or agent of any other person, firm, corporation,
business organization or other entity.
7. STOCK OPTIONS. THINK hereby acknowledges that (i) Mednick is a party
to the Amended and Restated 1997 Stock Option Plan ("1997 Plan"), (ii) as such,
the options granted to Mednick thereunder vest on an accelerated basis as a
result of his separation from THINK, and in connection therewith, THINK
represents that:
(a) DIRECTOR OPTIONS. Within sixty (60) days of the Effective Date,
it will register with the Securities and Exchange Commission the Twenty Thousand
(20,000) stock options granted to Mednick in his capacity as a member of the
Board of Directors of THINK; and
(b) EMPLOYEE OPTIONS. Within sixty (60) days of the Effective Date,
it will obtain all necessary approvals so that Mednick may exercise the Eighty
Thousand (80,000) options that were granted to him under the 1997 Plan.
8. PRESS RELEASE. The Parties will jointly prepare a press release,
indicating Mednick's departure and his being available to THINK to provide the
consulting services pursuant to a Consulting Agreement substantially in the form
attached hereto as Exhibit E.
9. MUTUAL RELEASE AND WAIVER. Except as provided for in paragraph 11,
the Parties hereby release and waive any and all claims they may have against
each other, including any claims Mednick may have against THINK, its parents,
subsidiaries, affiliates, predecessors and assigns, past or present, and each of
them and its and their officers, directors, agents, servants and employees
(hereinafter collectively referred to as the "THINK Parties"), from and against
any and all rights, claims, demands, controversies, causes of action and
liabilities of every kind and character whatsoever, known or unknown, in law or
in equity, occurring prior to and including the date of the execution of this
Agreement and in particular; but without limitation of the general terms herein,
any claims of discrimination which could have been filed by or on behalf of
Mednick with any agency or court under any federal, state or local statute,
regulation, ordinance, order, rule, tort, implied or express contract or other
common law theory. This release and waiver applies to any and all claims whether
the claims are past or present, whether they arise from common law or statute,
whether they arise from labor laws or discrimination laws including, but not
limited to, Title VII of the Civil Rights Act of 1964, as amended, the Age
Discrimination in Employment Act, as amended, the Employee Retirement Income
Security Act of 1974, as amended, any federal or state civil rights or
employment discrimination legislation which claims are based on events that have
transpired from the beginning of time to the date of execution of this
Agreement. Mednick further agrees and covenants that should any person,
organization or other entity file, charge, claim, sue or cause or permit to be
filed any civil action suit or legal proceeding involving any matter occurring
at any time in the past, Mednick will not seek or accept any personal relief in
such civil action, suit or legal proceeding. Further, the Parties do hereby
-3-
<PAGE>
expressly waive and relinquish, to the fullest extent permitted by law, the
provisions, rights, and benefits of ss. 1542 of the California Civil Code, which
provides --
"A general release does not extend to claims which the
creditor does not know or suspect to exist in his favor
at the time of executing the release, which if known by
him must have materially affected his settlement with
the debtor."
and any and all provisions, rights and benefits of any similar state, federal,
or other law, rule or regulation or the common law.
10. MAINTENANCE OF EMPLOYMENT OF ASSISTANT. THINK hereby covenants and
agrees to maintain the employment of Mednick's assistance for a period of no
less than 3 months beyond the Effective Date.
11. FINAL SETTLEMENT. The Parties hereby agree that this Agreement is
in compromise and final settlement among the Parties of all disputed matters and
constitutes full satisfaction of all claims made or which could be made of
whatsoever kind or character which the Parties have or had against each other
from the beginning of time until the Effective Date.
12. RETENTION OF CERTAIN CLAIMS. The Parties expressly acknowledge that
this Agreement is in the nature of a settlement of claims and counterclaims
which either has or had against the other for legal and equitable relief. The
Parties acknowledge further, however, that each expressly retains, and does not
waive, any and all of its or his rights relative to equitable and/or legal
relief under this Agreement.
13. NON-DISPARAGEMENT. The Parties represent, agree, covenant and
promise that they will refrain from disparaging each other in connection with
Mednick's departure and the execution of this Agreement.
14. CONFIDENTIALITY.
(a) INFORMATION. The Parties hereto recognize that it is
fundamental to the business and operation of THINK, its affiliates, subsidiaries
and divisions thereof to preserve the specialized knowledge, trade secrets, and
confidential information of the foregoing concerning the field of advertising,
marketing and interactive Internet solutions. The strength and good will of
THINK is derived from the specialized knowledge, trade secrets, and confidential
information generated from experience through the activities undertaken by
THINK, its affiliates, subsidiaries and divisions thereof. The disclosure of any
of such information and the knowledge thereof on the part of competitors would
be beneficial to such competitors and detrimental to THINK, its affiliates,
subsidiaries and divisions thereof, as would the disclosure of information about
the marketing practices, pricing practices, costs, profit margins, design
specifications, analytical techniques, concepts, ideas, process developments
(whether or not patentable), customer and client agreements, vendor and supplier
agreements and similar items or technologies. By reason of his being an employee
of THINK, in the course of his employment, Mednick had access to, and obtained
specialized knowledge, trade secrets and confidential information such as that
described herein about the business and operation of THINK, its affiliates,
-4-
<PAGE>
subsidiaries and divisions thereof. Therefore, so long as Mednick receives
compensation pursuant to Section 2 of this Agreement, Mednick hereby agrees as
follows, recognizing and acknowledging that THINK is relying on the following in
entering into this Agreement:
(i) RETAIN SECRETS. Except as otherwise required by or
compelled by law, Mednick shall keep secret and retain in strict confidence, and
shall not use, disclose to others, or publish any information, other than
information which is in the public domain or becomes publicly available through
no wrongful act on the part of Mednick, which information shall be deemed not to
be confidential information, relating to the business, operation or other
affairs of THINK, its affiliates, subsidiaries and divisions thereof, including
but not limited to confidential information concerning the design and marketing
practices, pricing practices, costs, profit margins, products, methods,
guidelines, procedures, engineering designs and standards, design
specifications, analytical techniques, technical information, customer, client,
vendor or supplier information, employee information, and any and all other
confidential information acquired by him in the course of his past or future
services for THINK or any affiliate, subsidiary or division thereof.
(b) TURNOVER OF DOCUMENTS. If Mednick holds as THINK's property,
notes, memoranda, books, records, papers, letters, formulas or other data and
all copies thereof and therefrom in any way relating to the business, operation
or other affairs of THINK, its affiliates, subsidiaries and divisions thereof,
whether made by him or otherwise coming into his possession, he shall
immediately deliver the same to THINK upon a request made to him by THINK.
15. CONSULTING. Mednick acknowledges that he will provide advice and
counsel to THINK on an "as-needed" basis pursuant to the terms of the Consulting
Agreement attached hereto as Exhibit E. If Mednick provides such assistance to
THINK, THINK agrees to pay Mednick's reasonable expenses incurred as a result
thereof as more fully set forth in that Consulting Agreement.
16. JOINT PREPARATION. This Agreement was jointly drafted by THINK and
Mednick and is not to be construed against either party. Should any provision of
this Agreement be found to be illegal or unenforceable by any court of competent
jurisdiction and cannot be modified to be enforceable, such provision shall
immediately become null and void leaving the remainder of this Agreement in
effect.
17. GOVERNING LAW. This Agreement and any disputes or questions of
interpretation arising hereunder shall be resolved by applying the laws of the
State of California, excluding its conflict of laws principles.
18. REPRESENTATIONS OF PARTIES. In executing this Agreement, the
Parties hereby represent that:
(a) THEY HAVE COMPLETELY AND CAREFULLY READ THIS AGREEMENT;
-5-
<PAGE>
(b) THEY HAVE CONSULTED ATTORNEYS CONCERNING THIS AGREEMENT;
(c) THEY KNOW AND UNDERSTAND THE CONTENTS OF THIS AGREEMENT, AND
THAT THE TERMS OF THIS AGREEMENT ARE FULLY UNDERSTOOD AND VOLUNTARILY ACCEPTED
THEREBY;
(d) THEY HAVE SIGNED THIS AGREEMENT IN EXCHANGE FOR THE
CONSIDERATION DESCRIBED HEREIN WHICH THEY ACKNOWLEDGE IS ADEQUATE AND
SATISFACTORY TO HIM;
(e) OTHER THAN THE CONSIDERATION SET FORTH HEREIN, NO PROMISES OR
REPRESENTATIONS OF ANY KIND HAVE BEEN MADE THERETO;
(f) THEY EXECUTE THIS AGREEMENT AS THEIR OWN FREE ACTS AND DEEDS;
AND
(g) THIS AGREEMENT WAS ENTERED INTO WITHOUT FRAUD, DURESS, OR
COERCION.
19. SEVERABILITY. The provisions of this Agreement shall be considered
severable in the event that any of such provisions are held by a court of
competent jurisdiction to be invalid, void or otherwise unenforceable. Such
invalid, void or otherwise unenforceable provisions shall be automatically
replaced by other provisions which are valid and enforceable and which are as
similar as possible in term and intent to those provisions deemed to be invalid,
void or otherwise unenforceable. Notwithstanding the foregoing, the remaining
provisions hereof shall remain enforceable to the fullest extent permitted by
law.
20. COUNTERPARTS. This Agreement may be executed in two or more
counterparts and signature pages may be delivered by facsimile, each of which
shall be deemed an original, but all of which together shall constitute one and
the same instrument.
21. ENTIRE AGREEMENT; AMENDMENT. This Agreement contains the entire
agreement between THINK and Mednick with respect to the subject matter hereof
and thereof. This 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.
22. NOTICES. All notices, request, demands and other communications
hereunder shall be in writing and shall be deemed to have been duly given if
physically delivered, delivered by express mail or other expedited service or
upon receipt if mailed, postage prepaid, via first class mail as follows:
(a) To the Company THINK New Ideas, Inc.
and to Ronald 45 West 36th Street
Bloom and 12th Floor
Adam Curry: New York, NY 10018
Attention: President
-6-
<PAGE>
With an additional copy Kirkpatrick & Lockhart LLP
by like means to: 1800 Massachusetts Ave., N.W.
Washington, D.C. 20036
Attn: John B. Spirtos
(b) To the Employee: Mr. Scott Mednick
7972 Mulholland Drive
Los Angeles, California 90046
With an additional copy
by like means to: Riordan & McKinzie
California Plaza
300 South Grand Ave.
29th Floor
Los Angeles, California 90071
Attn: Jeffrey L. Glassman
and/or to such other persons and addresses as any party hereto shall have
specified in writing to the other.
23. ASSIGNABILITY. This Agreement shall not be assignable by Mednick
but shall be binding upon and shall inure to the benefit of his heirs,
executors, administrators and legal representatives. This Agreement shall be
assignable by THINK to any affiliate, subsidiary or division thereof and to any
successor in interest; provided, however, such assignment shall not relieve
THINK of any of its obligations hereunder.
24. WAIVER AND FURTHER AGREEMENT. Any waiver of any breach of any terms
or conditions of this Agreement shall not operate as a waiver of any other
breach of such terms or conditions as any other term or condition hereof, nor
shall any failure to enforce any provision hereof operate as a waiver of such
provision or of any other provision hereof. Each of the Parties hereto agrees to
execute all such further instruments and documents and to take all such further
action as the other party may reasonably require in order to effectuate the
terms and purposes of this Agreement.
25. HEADINGS OF NO EFFECT. The headings contained in this Agreement are
for reference purposes only and shall not in any way affect the meaning or
interpretation of this Agreement.
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<PAGE>
IN WITNESS WHEREOF, the Parties hereto have executed this
Agreement as of the date first above written with the intent that it be
effective as of the Effective Date.
THINK NEW IDEAS, INC.
By: /s/ RONALD E. BLOOM
----------------------------------
Name: RONALD E. BLOOM
--------------------------------
Its: CHIEF EXECUTIVE OFFICER
--------------------------------
/s/ SCOTT A. MEDNICK
------------------------------------
Scott A. Mednick
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<PAGE>
As to Section 5 only: /s/ RONALD E. BLOOM
---------------------------------
Ronald Bloom
/s/ ADAM CURRY
---------------------------------
Adam Curry
-9-
Exhibit 10.12
SETTLEMENT AGREEMENT
THIS SETTLEMENT AGREEMENT (the "Agreement") is entered into this 24 day of
July, 1998, by and between: (i) THINK NEW IDEAS, INC., a Delaware corporation
("THINK") and SCOTT A. MEDNICK ("Mednick") (each, a "Party" and collectively,
the "Parties") and (ii) X-CEED, INC., a New York corporation ("X-ceed") as to
Section 7(b) and Section 9 only.
RECITALS:
WHEREAS, THINK and Mednick are parties to a certain Settlement Agreement,
effective May 15, 1998 (the "Settlement Agreement");
WHEREAS, each of the Parties has alleged that the other Party has breached
certain provisions of the Settlement Agreement, and THINK also has alleged that
X-ceed may have assisted Mednick in wrongful conduct;
WHEREAS, each Party disputes any and all allegations that such Party has
breached the provisions of the Settlement Agreement, and X-ceed denies that it
has engaged in wrongful conduct;
WHEREAS, each Party hereto desires to resolve the matters in dispute under
the Settlement Agreement upon mutually acceptable terms;
WHEREAS, the Parties have therefore determined to amend the terms of the
Settlement Agreement pursuant to the terms and conditions hereinafter set forth;
and
WHEREAS, THINK and Mednick have agreed not to pursue the legal remedies
otherwise available to them in exchange for Mednick's and THINK's agreement to
enter into, be bound by and to perform in accordance with the provisions hereof.
NOW, THEREFORE, in consideration of the premises and mutual covenants,
conditions and agreements set forth herein and for such other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
<PAGE>
Parties and X-ceed (as to Section 7(b) and Section 9 only), each intending to be
legally bound, hereby agree as follows:
1. PAYMENT UNDER SETTLEMENT AGREEMENT; HEALTH INSURANCE. From and after
the date hereof, Mednick shall not be entitled to receive any further payment
from THINK under Section 2(a) of the Settlement Agreement or otherwise and THINK
shall have no further obligation of any kind whatsoever to make any further
payment to Mednick pursuant thereto. Further, Mednick's right to participate in
THINK's health insurance program under Section 2(b) of the Settlement Agreement
shall terminate on July 24, 1999.
2. PRESS RELEASE. Mednick shall cause X-ceed, within one (1) business day
of the date hereof, to issue the press release attached hereto as Exhibit A.
Such press release shall be distributed to and through the same network of
distribution which that certain press release issued by X-ceed on July 20, 1998
(the "X-ceed Press Release") was distributed. Mednick hereby represents that
attached hereto as Exhibit B is a complete and accurate list of the network
participants to and through which the X-ceed Press Release was distributed.
Mednick shall provide, or cause X-ceed to provide, upon distribution of the new
press release, written confirmation that the new press release has been
distributed as required herein.
3. REGISTRATION OF STOCK OPTIONS; VESTING OF STOCK OPTIONS.
(a) REGISTRATION. Section 7(b) of the Settlement Agreement shall be
hereby amended to provide that THINK shall cause the 20,000 shares of common
stock of THINK (the "THINK Common Stock") underlying the options issued to
Mednick as a director of THINK (the "Director Options") to be included in any
registration statement (a "Registration Statement") filed on its behalf under
the Securities Act of 1933, as amended, relating to the offer and sale by it of
any of its securities solely for cash (other than on Form S-4 or any form which
does not include substantially the same information as would be required to be
included in a registration statement covering the sale by Mednick of the Common
Stock underlying the Director Options). THINK shall use its best efforts to file
the Registration Statement as soon as practicable after the date hereof. In
addition, THINK shall use its best efforts to use Form S-8 to fulfill its
obligations hereunder and shall attempt to do so prior to the filing of a
Registration Statement relating to an underwritten offering. The Parties
acknowledge that in the event that the Registration Statement relates to an
underwritten offering, the underwriter may limit the number of shares of such
THINK Common Stock then owned by Mednick to be included in the Registration
Statement. THINK represents that no shareholder of THINK Common Stock will be
allowed to sell securities in said Registration Statement if Mednick is
precluded from including his securities in said Registration Statement as a
result of such underwriter's decision to limit the number of shares of such
THINK Common Stock then owned by Mednick to be included in such offering.
Further, in the event Mednick is excluded from participating in the foregoing
offering, THINK will file a Registration Statement relating to the THINK Common
Stock underlying the Director Options within six months of the effectiveness of
the Registration Statement from which Mednick's securities were excluded. In the
event that the foregoing offering is terminated, THINK will file a Registration
Statement relating to the THINK Common Stock underlying the Director Options
within sixty days of said termination.
2
<PAGE>
(b) VESTING. THINK hereby acknowledges that Section 7(b) of the
Settlement Agreement remains in full force and Mednick may exercise the Eighty
Thousand (80,000) options that were granted to him under the 1997 Stock Option
Plan.
4. TERMINATION OF RIGHTS AGREEMENT. Mednick hereby acknowledges that,
pursuant the terms of the Settlement Agreement, Mednick was provided with the
opportunity, in accordance with a certain rights agreement, effective as of May
15, 1998 (the "Rights Agreement"), to include the securities of THINK owned by
him in a Registration Statement and declined such inclusion in writing.
Therefore, it is hereby agreed that the Rights Agreement shall be terminated as
of the date hereof, that THINK shall have no further obligation to Mednick
whatsoever thereunder and that all references thereto in the Settlement
Agreement shall be deleted.
5. TERMINATION OF NON-COMPETE PROVISION; DURATION OF SECTION 6(b).
Section 6(a) of the Settlement Agreement containing the non-compete provision
shall be hereby terminated. Section 6(b) of the Settlement Agreement shall
terminate on December 31, 1998.
6. TERMINATION OF CONSULTING AGREEMENT. It is hereby agreed that the
consulting agreement, effective May, 15, 1998, between Mednick and THINK (the
"Consulting Agreement") which was entered into in accordance with the Settlement
Agreement shall be terminated as of the date hereof and Section 15 of the
Settlement Agreement and all references to the Consulting Agreement set forth
therein shall be hereby deleted.
7. MUTUAL RELEASE AND WAIVER.
(a) PARTIES MUTUAL RELEASE AND WAIVER. Except as provided for in
Section 9, the Parties hereby release and waive any and all claims they may have
against each other (including any claims Mednick may have against THINK its
parents, subsidiaries, affiliates, predecessors and assigns, past or present,
and each of them and its and their officers, directors, agents, servants and
employees) from and against any and all rights, claims, demands, controversies,
causes of action and liabilities of every kind and character whatsoever, known
or unknown, in law or in equity, occurring prior to and including the date of
the execution of this Agreement and in particular, but without limitation of the
general terms herein. This release and waiver applies to any and all claims
whether the claims are past or present, whether they arise from common law or
statute. Mednick and THINK further agree and covenants that should any person,
organization or other entity file, charge, claim, sue or cause or permit to be
filed any civil action, suit or legal proceeding involving any matter occurring
at any time in the past, neither Party will seek or accept any personal relief
in such civil action, suit or legal proceeding. Further, the Parties do hereby
expressly waive and relinquish, to the fullest extent permitted by law, the
provisions, rights, and benefits of ss. 1542 of the California Civil Code, which
provides --
"A general release does not extend to claims which the creditor does
not know or suspect to exist in his favor at the time of executing
the release, which if known by him must have materially affected his
settlement with the debtor."
3
<PAGE>
and any and all provisions, rights and benefits of any similar state, federal,
or other law, rule or regulation or the common law.
(b) X-CEED AND THINK MUTUAL RELEASE AND WAIVER. Except as provided for
in Section 9, THINK and X-ceed release and waive any and all claims they may
have against each other, its parents, subsidiaries, affiliates, predecessors and
assigns, past or present, and each of them and its and their officers,
directors, agents, servants and employees, from and against any and all rights,
claims, demands, controversies, causes of action and liabilities of every kind
and character whatsoever, known or unknown, in law or in equity, occurring prior
to and including the date of the execution of this Agreement and in particular,
but without limitation of the general terms herein. This release and waiver
applies to any and all claims whether the claims are past or present, whether
they arise from common law or statute, or whether they arise directly or
indirectly as a result of Mednick's activities. THINK and X-ceed each further
agrees and covenants that should any person, organization or other entity file,
charge, claim, sue or cause or permit to be filed any civil action, suit or
legal proceeding involving any matter occurring at any time in the past with
regard to the matters described herein, neither will seek or accept any personal
relief in such civil action, suit or legal proceeding. Further, THINK and X-ceed
do hereby expressly waive and relinquish, to the fullest extent permitted by
law, the provisions, rights, and benefits of ss. 1542 of the California Civil
Code, which provides --
"A general release does not extend to claims which the creditor does
not know or suspect to exist in his favor at the time of executing
the release, which if known by him must have materially affected his
settlement with the debtor."
and any and all provisions, rights and benefits of any similar state, federal,
or other law, rule or regulation or the common law.
8. FINAL SETTLEMENT. The Parties hereby agree that this Agreement is in
compromise and final settlement between the Parties of all disputed matters and
constitutes full satisfaction of all claims made or which could be made of
whatsoever kind or character which the Parties have or had against each other
from the beginning of time.
9. RETENTION OF CERTAIN CLAIMS. The Parties and X-ceed expressly
acknowledge that this Agreement is in the nature of a settlement of claims and
counterclaims which each either has or had against the other for legal and
equitable relief. The Parties and X-ceed acknowledge further, however, that each
expressly retains, and does not waive, any and all of its or his rights relative
to equitable and/or legal relief under this Agreement and the Settlement
Agreement, as amended hereby.
10. NON-DISPARAGEMENT. The Parties represent, agree, covenant and promise
that they will refrain from disparaging each other in connection with Mednick's
departure, the Settlement Agreement and this Agreement.
4
<PAGE>
11. CONFIDENTIALITY. Section 14(b) of the Settlement Agreement is hereby
renumbered Section 14(d) and Section 14(a) and Section 14(a)(i) of the
Settlement Agreement shall be hereby deleted and the following provisions shall
replace such deleted provisions from the date hereof:
(A) ACKNOWLEDGMENT. The parties recognize that: (i) it is fundamental
to the business and operation of THINK to preserve the confidential information
(defined below) of THINK; and (ii) the disclosure of any of such confidential
information to a competitor of think would be beneficial to such competitors and
detrimental to THINK, by reason of his being an employee of THINK, in the course
of his employment, Mednick had access to, and obtained confidential information.
Therefore, except as provided below, for a period of one (1) year from July 24,
1998, Mednick hereby agrees that he shall keep secret and retain in strict
confidence, and shall not use, disclose to others, or publish any confidential
information.
(b) CONFIDENTIAL INFORMATION DEFINED. For purposes of this Agreement,
this term Confidential Information shall mean:
(i) trade secrets concerning (A) technologies used
in the business of THINK, including such items as product specifications,
know-how, formulae, compositions, processes, designs, sketches, photographs,
graphs, drawings, samples, and inventions, (B) information system technologies
used in the business of THINK, including such items as computer software and
programs (including object code and source code), computer software and database
technologies, systems, structures and architectures (and related processes,
formulae, composition, improvements, devices, know-how, inventions, designs,
methods and information); and
(ii) historical financial statements, financial
projections and budgets, historical and projected sales, capital spending
budgets and plans, price lists, market studies, written business plans, customer
lists and personnel training materials.
(c) NON-CONFIDENTIAL INFORMATION. Confidential Information shall not
include information that:
(i) is or becomes part of the public domain through
no fault or breach on the part of Mednick;
(ii) is subsequently rightfully obtained by
Mednick from a third party who has the legal right to disclose it, without an
obligation to keep such information confidential;
(iii) is approved for public release by THINK; or
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<PAGE>
(iv) is required to be disclosed by judicial action
provided that Mednick has first given THINK reasonable notice of such
requirement and reasonably cooperates with THINK in seeking confidential
treatment for any such disclosure.
12. JOINT PREPARATION. This Agreement was jointly prepared by THINK and
Mednick and is not to be construed against either Party. Should any provision of
this Agreement be found to be illegal or unenforceable by any court of competent
jurisdiction and cannot be modified to be enforceable, such provision shall
immediately become null and void leaving the remainder of this Agreement in
effect.
13. GOVERNING LAW. This agreement and any disputes or questions of
interpretation arising hereunder shall be resolved by applying the laws of the
state of california, excluding its conflict of laws principles.
14. REPRESENTATIONS OF PARTIES. IN EXECUTING THIS AGREEMENT, THE
PARTIES HEREBY REPRESENT THAT:
(a) THEY HAVE COMPLETELY AND CAREFULLY READ THIS AGREEMENT;
(b) THEY HAVE CONSULTED ATTORNEYS CONCERNING THIS AGREEMENT;
(c) THEY KNOW AND UNDERSTAND THE CONTENTS OF THIS AGREEMENT,
AND THAT THE TERMS OF THIS AGREEMENT ARE FULLY UNDERSTOOD AND VOLUNTARILY
ACCEPTED THEREBY;
(d) THEY HAVE SIGNED THIS AGREEMENT IN EXCHANGE FOR THE
CONSIDERATION DESCRIBED HEREIN WHICH THEY ACKNOWLEDGES IS ADEQUATE AND
SATISFACTORY TO EACH PARTY;
(e) OTHER THAN THE CONSIDERATION SET FORTH HEREIN, NO PROMISES
OR REPRESENTATIONS OF ANY KIND HAVE BEEN MADE THERETO;
(f) THEY EXECUTE THIS AGREEMENT AS THEIR OWN FREE ACTS AND
DEEDS; AND
(g) THIS AGREEMENT WAS ENTERED INTO WITHOUT FRAUD, DURESS, OR
COERCION.
15. SEVERABILITY. The provisions of this agreement shall be considered
severable in the event that any of such provisions are held by a court of
competent jurisdiction to be invalid, void or otherwise unenforceable. Such
invalid, void or otherwise unenforceable provisions shall be automatically
replaced by other provisions which are valid and enforceable and which are as
similar as possible in term and intent to those provisions deemed to be invalid,
void or otherwise unenforceable. Notwithstanding the foregoing, the remaining
provisions hereof shall remain enforceable to the fullest extent permitted by
law.
6
<PAGE>
16. COUNTERPARTS. This Agreement may be executed in two or more
counterparts and signature pages may be delivered by facsimile, each of which
shall be deemed an original, but all of which together shall constitute one and
the same instrument.
17. ENTIRE AGREEMENT; AMENDMENT. This Agreement contains the entire
agreement between of the Parties with respect to the subject matter hereof and
thereof. This 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.
18. NOTICES. All notices, request, demands and other communications
hereunder shall be in writing and shall be deemed to have been duly given if
physically delivered, delivered by express mail or other expedited service or
upon receipt if mailed, postage prepaid, via first class mail as follows:
(a) To the Company: THINK New Ideas, Inc.
45 West 36th Street
12th Floor
New York, NY 10018
Attention: President
With an additional copy
by like means to: Kirkpatrick & Lockhart LLP
1800 Massachusetts Ave., N.W.
Washington, D.C. 20036
Attn: Lawrence Coe Lanpher
(b) To the Mednick: Mr. Scott Mednick
7972 Mulholland Drive
Los Angeles, California 90046
With an additional copy
by like means to: Riordan & McKinzie
California Plaza
300 South Grand Ave.
29th Floor
Los Angeles, California 90071
Attn: Jeffrey L. Glassman
(c) To X-ceed: X-ceed, Inc.
488 Madison Avenue
3rd Floor
New York, New York 10022
Attention: President
7
<PAGE>
and/or to such other persons and addresses as any party hereto shall have
specified in writing to the other.
19. ASSIGNABILITY. This agreement shall not be assignable by Mednick but
shall be binding upon and shall inure to the benefit of his heirs, executors,
administrators and legal representatives. This agreement shall be assignable by
think to any affiliate, subsidiary or division thereof and to any successor in
interest; provided, however, such assignment shall not relieve think of any of
its obligations hereunder.
20. WAIVER AND FURTHER AGREEMENT. Any waiver of any breach of any terms or
conditions of this agreement shall not operate as a waiver of any other breach
of such terms or conditions as any other term or condition hereof, nor shall any
failure to enforce any provision hereof operate as a waiver of such provision or
of any other provision hereof. Each of the parties agrees to execute all such
further instruments and documents and to take all such further action as the
other party may reasonably require in order to effectuate the terms and purposes
of this agreement.
21. HEADINGS OF NO EFFECT. The headings contained in this Agreement are
for reference purposes only and shall not in any way affect the meaning or
interpretation of this Agreement.
8
<PAGE>
IN WITNESS WHEREOF, the Parties have executed this Agreement as of
the date first above written.
THINK NEW IDEAS, INC.
By: /s/ Ronald Bloom
----------------------------
Name: RONALD BLOOM
Its: CHIEF EXECUTIVE OFFICER
/s/ Scott Mednick
----------------------------
Scott A. Mednick
9
<PAGE>
As to Section 7(b) and Section 9 only:
X-CEED, INC.
By: /s/ Werner Haase
----------------------------
Name: WERNER HAASE
Its: CHIEF EXECUTIVE OFFICER
10
<PAGE>
EXHIBIT A
PRESS RELEASE
<PAGE>
[X-ceed Letterhead]
Scott Mednick, Chairman of X-ceed, issued the following statement:
"On May 15, 1998, I left THINK New Ideas, Inc., a company that I helped to
found. Leaving was a difficult decision. However, at that time it was my desire
to pursue more fully my many charitable endeavors. My duties at THINK and my
day-to-day involvement in the business precluded me from pursuing that goal."
"Very recently, I was presented with a challenging opportunity to consider
joining X-ceed. This was a new opportunity - one that I had not considered until
well after I left THINK. I decided to accept this wonderful opportunity. Of
course, I will devote time to charitable endeavors."
"I look forward to being a part of X-ceed and its exciting future. I look
forward as well to the future potential to work with THINK, particularly the
possibility of using some of its state of the art technologies such as E corp.,
Moat, and Web Mechanic. I am enthusiastic about the incredible future of
interactive communications and look forward to the tremendous opportunity at
X-ceed as well as exploring a continuation of a relationship with THINK."
<PAGE>
EXHIBIT B
PRESS RELEASE DISTRIBUTION LIST
New York Times, Wall Street Journal, Silicon Alley Reporter, @ New York,
Business 2.0, CNN fn., Dow Jones business wire, Associated Press, Reuters.
EXHIBIT 10.14(a)
NOTE
$500.000 As of March 17, 1998
FOR VALUE RECEIVED, the undersigned Think New Ideas. Inc., with an address
at 45 West 36th Street (the "Borrower") hereby unconditionally promises to pay
on such date as may be required pursuant to Section 2.4 of the Loan Agreement
(as hereinafter defined), to the order of Omnicom Finance Inc., a Delaware
corporation (the "Creditor") with offices at 437 Madison Avenue, New York, NY
10022 at said address or at such other address as the Lender may from time to
time designate, in lawful money of the United States and in immediately
available funds, the principal amount of FIVE HUNDRED THOUSAND DOLLARS
($500,000) DOLLARS.
The undersigned further agrees to pay interest in like money at such
office on the unpaid principal amount hereof from the date hereof at the
applicable rate determined in accordance with Section 2.3 of the Loan Agreement
and on the date specified in Section 2.4 of the Loan Agreement.
Whenever any payment to be made hereunder shall be stated to be due on a
Saturday, Sunday or a public or bank holiday (any other day being a "Business
Day"), such payment may be made on the next succeeding Business Day.
This Note is the Note referred to in the Loan Agreement of even date
herewith between the Borrower and Creditor (as amended from time to time, the
"Loan Agreement") and is entitled to the benefits thereof and is subject to the
mandatory prepayment in whole or in part as provided therein. All capitalized
terms used in this Note shall have the meanings ascribed to them in the Loan
Agreement. The provisions of the Loan Agreement are incorporated herein by
reference.
<PAGE>
Upon the occurrence and continuance of any one or more of the Events of
Default specified in the Loan Agreement, all amounts then remaining unpaid on
this Note may be declared to be, or may automatically become, immediately due
and payable as provided therein.
Presentment, demand, protest and notice of dishonor are hereby waived by
the Borrower.
This Note shall be governed by and construed according to the laws of the
State of New York.
Think New Ideas, Inc.
By: /s/ Melvin Epstein
----------------------------
Title: C.F.O.
EXHIBIT 10.14(b)
LOAN AGREEMENT
LOAN AGREEMENT dated as of March 17, 1998 by and between Think New Ideas.
Inc., with an address at 45 West 36th Street, New York, NY 10018 (the
"Borrower") and Omnicom Finance Inc., a Delaware corporation (the "Creditor")
with offices at 437 Madison Avenue. New York, NY 10022.
WHEREAS, the Borrower has requested the Creditor to make a loan to
Borrower in the amount of Five Hundred Thousand ($500,000) Dollars and the
Creditor is willing to lend the Borrower such amount upon the terms and
conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the mutual covenants and
undertakings herein contained, the Borrower and the Creditor hereby agree as
follows:
1.0 DEFINITIONS. For the purposes of this Loan Agreement, unless the context
indicates otherwise:
1.1 "CLOSING DATE." - shall mean March 17, 1998.
1.2 "EVENTS OF DEFAULT." - shall mean any of the Events of Default set forth
under Section 5.1 hereof.
1.3 "LOAN AGREEMENT." - shall mean this Loan Agreement between the Borrower and
the Creditor, as amended or supplemented from time to time.
1 .4 "LOAN INSTRUMENTS." - shall mean this Loan Agreement, the Note and any
other instruments and documents executed between the Creditor and the Borrower
in connection herewith.
1.5 "LOAN." - shall mean the loan made by the Creditor to the Borrower pursuant
to the Note and Section 2.0 hereof.
1.6 "NOTE." - shall mean the promissory note executed by the Borrower in
substantially the form of Exhibit A attached hereto.
<PAGE>
2.0 THE LOAN.
2.1 LOAN. Subject to the terms and conditions and relying upon the
representations and warranties herein set forth being true and correct when
made, the Creditor agrees to make a Loan to the Borrower in the amount of
$500,000. The Loan shall be evidenced by the Note dated the Closing Date.
2.2 USE OF PROCEEDS. The Borrower may only use the proceeds of the Loan for
business purposes.
2.3 INTEREST. The Loan shall bear interest at a rate equal to eight (8%) percent
per-annum. Interest on the Loan shall be calculated based on the daily
outstanding balance thereof during the interest period and on the basis of a 360
day year.
2.4 PAYMENTS. The Borrower promises to pay interest and the entire principal
amount of this Note upon thirty (30) days notice from Creditor or December 31,
1998, whichever is earlier.
3 .0 REPRESENTATIONS AND WARRANTIES. The Borrower hereby represents and warrants
to the Creditor that the following are true and correct:
3.1 ORGANIZATION, CORPORATE POWER, ETC. The Borrower is a corporation duly
organized, validly existing, and in good standing under the laws of its state of
incorporation.
3.2. VALIDITY OF THE LOAN INSTRUMENTS. The execution, delivery and performance
by the Borrower of the Loan Instruments and the borrowing evidenced by the Note
(i) are within the corporate powers of the Borrower, (ii) have been duly
authorized by all requisite corporate action on the part of the Borrower and
(iii) will not violate any provisions of applicable law now in effect, any order
of any court or other agency of government, the Articles of Organization or
By-Laws of the Borrower, or any indenture, agreement or other instrument to
which the Borrower is a party or by which it or any of its property is bound, or
be in conflict with or result in a breach of, or constitute (with or without the
giving of notice or lapse of time, or both) a default under any such indenture,
agreement or other instrument. The Loan Instruments, when executed by the
<PAGE>
Borrower, will each constitute legal, valid and binding obligations in
accordance with their respective terms.
4.0 CONDITIONS OF LENDING. The Creditor shall not be obligated to make the Loan
to the Borrower hereunder unless the following conditions have been satisfied:
4.1 AGREEMENTS, ETC. On the Closing date, the Borrower shall have delivered to
the Creditor the following, duly authorized, executed, and in form and substance
acceptable to the Creditor:
(a) This Loan Agreement executed by the Borrower; and
(b) The Note executed by the Borrower.
4.2 REPRESENTATIONS AND WARRANTIES. On the Closing Date, the representations and
warranties of the Borrower in this Loan Agreement shall be true and correct.
4.3 NO DEFAULT. On the Closing Date, no Event of Default, or event which with
the giving of notice or lapse of time, or both, would constitute an Event of
Default, shall have occurred and be continuing.
5.0 DEFAULT.
5.1 EVENTS OF DEFAULT. The occurrence of any of the following shall constitute
an Event of Default hereunder:
5.1.1 DEFAULT IN PAYMENT. The Borrower shall fail to pay all or any
portion of the principal or interest on the Note when due and payable.
5.1.2 BANKRUPTCY, ETC. The Borrower shall (i) apply for or consent
to the appointment of a receiver, (ii) admit in writing its inability to
pay its debts as they become due, (iii) make a general assignment for the
benefit of creditors, (iv) have filed against it an involuntary petition
in bankruptcy or (v) file a voluntary petition in bankruptcy, or a
petition or an answer seeking reorganization, or an arrangement with
creditors.
5.1.3 RECEIVER, ETC. An order, judgment or decree
<PAGE>
shall be entered against the Borrower by any court of competent jurisdiction,
approving a petition seeking reorganization of the Borrower or of all or a
substantial part of the properties or assets of the Borrower, or appointing a
receiver, trustee or liquidator for the Borrower.
5.2 REMEDIES. If an Event of Default shall occur and be continuing, the Creditor
may, at its option:
5.2.1 ACCELERATION. Declare the principal amount of the Loan and all
interest accrued thereon, and all other amounts due in connection with the
Loan to be immediately due and payable with no further notice or demand
(each of which hereby is expressly waived by the Borrower), whereupon the
same shall become immediately due and payable.
5.2.2 OTHER. Exercise any other remedy existing in equity, or at
law, by virtue of statute or otherwise.
6.0 MISCELLANEOUS.
6.1 NOTICES. All notices required to be given hereunder shall be deemed to be
received if directed to the address(es) recited on page 1 of this Agreement via
facsimile, personal delivery, Certified or Registered Mail or by an overnight
delivery carrier such as Federal Express, or in such other manner as to either
of the parties hereof, as such party shall designate in a written notice to the
other party hereto.
6.2 SURVIVAL OF LOAN AGREEMENT. All agreements, representations and warranties
made herein shall survive the making by the Creditor of the Loan herein and the
execution and delivery to the Creditor of the Note evidencing such Loan until
the Note and all other amounts due from the Borrower to the Creditor hereunder
are paid in full. This Loan Agreement shall be binding upon the Borrower and its
successors, and shall inure to the benefit of the successor and assigns of the
Creditor, except that the Borrower may not transfer or assign any or all of its
rights or obligations hereunder without the prior written consent of the
Creditor.
6.3 SEVERABILITY. In the event that any provision hereof is deemed to be invalid
by reason of the operation of any law or by
<PAGE>
reason of the interpretation placed thereupon by any court, this Loan Agreement
shall be construed as not containing such provision and the invalidity of such
provision shall not affect the validity of any other provisions hereof, and any
and all other provisions hereof which are otherwise lawful shall remain in full
force and effect.
6.4 WAIVER. No delay on the part of either party in exercising any right, power
or privilege hereunder shall operate as a waiver thereof, nor shall any single
or practical exercise of any right, power or privilege hereunder preclude other
or further exercise thereof, or the exercise of any other right, power or
privilege.
6.5 INDEMNIFICATION. The Borrower agrees to indemnify, defend and hold the
Creditor harmless from and against any and all loss, liability, damage,
judgment, claim, deficiency or expense (including interest, penalties,
attorneys' fees and amounts paid in settlement) to which the Creditor may become
subject insofar as such loss, liability, claim, judgment, deficiency or expense
arises out of or is based upon a suit or proceeding brought or threatened in
connection with this Agreement or the other Loan Instruments.
6.6 EXPENSES. The Borrower agrees to pay or reimburse the Creditor for any costs
and expenses (including reasonable attorney fees) incurred in connection with
the enforcement or preservation of any rights under the Loan Instruments.
6.7 MODIFICATION OF LOAN INSTRUMENTS. No modification or waiver of any provision
of any of the Loan Instruments, nor consent to any departure by the Borrower
therefrom, shall in any event be effective unless the same shall be in writing,
and then such waiver or consent shall be effective only in the specific instance
and for the purpose for which given. No notice to or demand on the Borrower in
any case shall entitle the Borrower to any other or further notice or demand in
the same, similar or other circumstances.
6.8 DESCRIPTIVE HEADINGS. The descriptive headings of the several sections of
this Agreement are inserted for convenience only and shall not be deemed to
affect the meaning or construction of any of the provisions hereof.
6.9 APPLICABLE LAW. The Loan Instruments shall be construed in accordance with
and governed by the laws of the State
<PAGE>
of New York without giving effect to the choice or conflict of law principles
thereof.
6.10 COUNTERPARTS. This Agreement may he executed in several counterparts, each
of which shall be deemed an original, but all of which together shall constitute
one and the Same instrument.
6.11 ASSIGNMENT. This Loan Agreement and the Note may be assigned by the
Creditor without the prior written consent of Borrower.
6.12 BUSINESS DISCLOSURES. Borrower shall deliver to the Creditor throughout the
Term of this Loan Agreement monthly financial statements in the format as
required by other Companies in Omnicom Group Inc.'s Communicade Group.
IN WITNESS WHEREOF, this Agreement has been executed and delivered by the
Borrower and the Creditor, by their duly authorized officers on the date first
set forth above.
Think New Ideas, Inc. Omnicom Finance Inc.
By: /s/ Melvin Epstein By: /s/ Maeve C. Robinson
------------------- -----------------------
Title: C.F.O. Title: ASSISTANT TREASURER
EXHIBIT 10.15(a)
THE BANK OF NEW YORK
NEW YORK'S FIRST BANK - FOUNDED 1784 BY ALEXANDER HAMILTON
April 24, 1998
THINK New Ideas, Inc.
45 West 36th Street
12th Floor
New York, New York 10018
Attention: Melvin L. Epstein
Chief Financial Officer
Gentlemen/Ladies:
The Bank of New York (the "Bank") is pleased to confirm that it holds
available to THINK New Ideas, Inc. (the "Company") a $5,000,000 secured line of
credit for direct borrowings by the Company.
Extensions of credit under this line of credit shall be evidenced by,
shall be payable as provided in, and shall bear interest at the rate specified
in, a master promissory note of the Company in the form included with this
letter.
All obligations of the Company to the Bank with respect to this line of
credit shall be jointly and severally guaranteed by On Ramp, Inc. and Scott
Mednick & Associates, Inc. (the "Guarantors") pursuant to guarantees in the
forms included with this letter. In addition, an obligations of the Company and
the Guarantors to the Bank with respect to this line of credit shall be secured
pursuant to security agreements in the forms included with this letter, executed
by the Company or a Guarantor, which grant the Bank a first and prior security
interest in all personal property of the Company and the Guarantors (other than
any and all copyrights, trademarks, service marks, patents and other similar
rights and interests of the Company or any of the Guarantors).
In connection with this line of credit, the Company shall pay to the Bank,
quarterly in arrears on the first day of each January, April, July and October,
a fee if 1/4% per annum on the average daily unused portion of this line of
credit, which fee shall be calculated on the basis of a 360-day year for the
actual number of days elapsed.
For so long as this line of credit is held available or the Company has
any obligations outstanding under this line of credit, there shall be delivered
to the Bank the following, in each case in form and content satisfactory to the
Bank:
<PAGE>
THE BANK OF NEW YORK
2
A. Within 15 days after the filing thereof, a copy of the Forms
10-K and 10-Q filed by the Company with the Securities and Exchange
Commission;
B. Within 15 days after the end of each calendar month, an aging schedule
of the Company's accounts receivable (including a segregation of the pre-billed
media accounts receivable of the Company) as of the last business day of such
calendar month; and
C. Promptly, such other information as the Bank may reasonably
request from time to time.
As you know lines of credit are cancellable at any time by either party
and, in addition, (i) the initial extension of credit under this line of credit
is subject to the Bank's receipt of a letter from the Company's certified public
accountants which covers such matters as the Bank may require and is
satisfactory in form and substance to the Bank and (ii) any extension of credit
under this line of credit is subject to the Bank's satisfaction, at the time of
such extension of credit, with the condition (financial and otherwise),
business, prospects, properties, assets, ownership, management and operations of
each of the Company and each of the Guarantors, with the collateral in respect
of this line of credit and, if the amount of such extension of credit will
result in aggregate extensions of credit in excess of $1,000,000, with the
intended use of such extension of credit: Unless cancelled earlier as provided
in the first sentence of this paragraph, this line of credit shall be held
available until March 31, 1999. Additionally, all extensions of credit under
this line of credit shall be reduced to zero for a period of 30 consecutive days
during the period this line of credit is held available.
THIS LETTER SUPERSEDES IN ITS ENTIRETY THE LETTER DATED APRIL 6, 1998 FROM
THE BANK TO THE COMPANY, WHICH LETTER DATED APRIL 6, 1998 IS OF NO FURTHER FORCE
OR EFFECT.
Very truly yours,
THE BANK OF NEW YORK
By: /S/ A. Alan Ackbarali
--------------------------
A. Alan Ackbarali
Vice President
EXHIBIT 10.15(b)
MASTER PROMISSORY NOTE
(ALTERNATE BANK RATE/LIBOR)
$5,000,000.00 April 28,1998
FOR VALUE RECEIVED, the undersigned (the "Borrower"), hereby promises
to pay to the order of THE BANK OF NEW YORK (the "Bank") at its 530 Fifth
Avenue, New York, New York office, the principal sum of Five Million and 00/100
Dollars ($5,000,000.00) or the aggregate unpaid principal amount of all advances
made by the Bank to the Borrower (which aggregate unpaid principal amount shall
be equal to the amount duly indorsed and set forth opposite the date last
appearing on the schedule attached to this note), whichever is less.
The Borrower agrees to pay interest on the unpaid principal balance of
each advance evidenced hereby from the date such advance is made at a rate per
annum equal to (i) the Alternate Base Rate or (ii) during any Interest Period,
LIBOR plus 1 3/4%, as the Borrower may elect in accordance with the terms of
this note, but not to exceed the maximum rate permitted by law. At any time that
an advance evidenced by this note shall bear interest based on the Alternate
Base Rate it shall be referred to herein as an "ABR Advance". At any time that
an advance evidenced by this note shall bear interest based on LIBOR, it shall
be referred to herein as a "LIBOR Advance". If any advance evidenced by this
note is not paid when due, the Borrower agrees to pay interest on such advance,
payable on demand, at a rate per annum equal to, if the advance is an ABR
Advance, 2% above the rate specified in clause (i) above and, if the advance is
a LIBOR Advance, 2% above the rate otherwise applicable to such advance until
the end of the then current Interest Period and thereafter, 2% above the rate
specified in clause (i) above, but in any case not to exceed the maximum rate
permitted by law. LIBOR Advances shall be in a minimum amount of $100,000 and
the Borrower shall give the Bank prior irrevocable notice of its desire to
borrow a LIBOR Advance no later than 11:00 a.m. (New York City time) three
Business Days prior to the proposed date of borrowing.
"Alternate Base Rate" shall mean, for any day, a rate per annum equal
to the higher of (i) the Prime Rate in effect on such day and (ii) the Federal
Funds Rate in effect on such day plus 1/2 of 1%.
"Business Day" shall mean any day other than a Saturday, Sunday or
other day on which commercial banks in New York, New York are authorized or
required by law to close and, with respect to a LIBOR Advance, a day which is
also a day on which commercial banks are open for business (including dealings
in U.S. Dollar deposits) in London, England.
"Federal Funds Rate" shall mean, for any day, the weighted average of
the rates on overnight Federal funds transactions with members of the Federal
Reserve System arranged by Federal funds brokers, as published for such day (or
if such day is not a Business Day, for the next preceding Business Day) by the
Federal Reserve Bank of New York, or if such rate is not so published for any
<PAGE>
- 2 -
day which is a Business Day, the average of quotations for such day on such
transactions received by the Bank from three Federal funds brokers of recognized
standing selected by the Bank.
"Interest Period" shall mean a period of 1, 2 or 3 month(s) as mutually
agreed by the Borrower and the Bank no later than 11:00 a.m. (New York City
time) three Business Days prior to the first day of such period; provided that
(i) if any Interest Period would end on a day which is not a Business Day, such
Interest Period shall end on the next succeeding Business Day except, if such
next succeeding Business Day falls in another calendar month, such Interest
Period shall end on the next preceding Business Day and (ii) if any Interest
Period would begin on the last Business Day of a calendar month (or on a day for
which there is no numerically corresponding day in the calendar month at the end
of such Interest Period), such Interest Period shall end on the last day of the
calendar month.
"LIBOR" shall mean for the Interest Period relating to a LIBOR Advance,
the rate per annum (rounded, if necessary, to the next higher 1/16 of 1%) equal
to the arithmetic mean of the offered rates for deposits in U.S. Dollars for a
period comparable to such Interest Period which appear on the LIBO Page of the
Reuters Monitor Money Rates Service (or such other page as may replace such page
on such service for the purpose of displaying LIBOR) as of 11:00 a.m. (London
time) on the day that is two Business Days prior to the first day of such
Interest Period. If fewer than two rates appear on the LIBO Page of the Reuters
Monitor Money Rates Service, LIBOR shall mean for the Interest Period relating
to a LIBOR Advance, the rate per annum (rounded, if necessary, to the next
higher 1/16 of 1%) at which the Bank offers deposits in U.S. Dollars for a
period comparable to such Interest Period and in an amount equal to the
outstanding principal amount of such LIBOR Advance to leading banks in the
London interbank eurodollar market as of 11:00 a.m. (London time) on the day
that is two Business Days prior to the first day of such Interest Period.
"Prime Rate" shall mean, for any day, the prime commercial lending rate
of the Bank as publicly announced to be in effect from time to time, such rate
to be adjusted automatically, without notice, on the effective date of any
change in such rate. The Borrower acknowledges that the Prime Rate is not the
lowest rate at which the Bank may make loans or other extensions of credit.
Each ABR Advance shall be payable ON DEMAND, and may be prepaid at any
time without penalty, but with interest on the amount being prepaid through the
date of prepayment. Each LIBOR Advance shall be payable on the last day of the
Interest Period for such advance, and the Borrower shall not have the right to
prepay any LIBOR Advance.
Interest shall be computed on the basis of a 360 day year for the
actual number of days elapsed. Interest on each ABR Advance shall be payable on
the last day of each month and at the maturity of such advance (whether by
acceleration or otherwise). Interest on each LIBOR Advance shall be payable at
the maturity of such advance (whether by acceleration or otherwise).
<PAGE>
- 3 -
If any payment of principal of or interest on any advance evidenced by
this note becomes due and payable on a day which is not a Business Day, then
such payment shall be extended to the next succeeding Business Day and interest
shall be payable at the rate set forth above during such extension.
If the Bank shall make a new advance on a day on which the Borrower is
to repay an advance hereunder, the Bank shall apply the proceeds of the new
advance to make such repayment and only the amount by which the amount being
advanced exceeds the amount being repaid shall be made available to the Borrower
in accordance with the terms of this note.
If at any time, it becomes illegal for the Bank to make or maintain a
LIBOR Advance, or U.S. Dollar deposits are unavailable in the London interbank
eurodollar market, then each LIBOR Advance outstanding at such time shall
automatically convert to an ABR Advance and no new advance may be made as a
LIBOR Advance until such circumstances no longer exist.
The Borrower agrees to compensate the Bank for any loss (other than
lost profit) or expense (including, without limitation, any loss or expense
arising from re-employment of funds obtained by the Bank in order to make or
maintain a LIBOR Advance or from any payment by the Bank to the lenders of such
funds) which the Bank may sustain or incur in the event that (i) the Borrower
fails to pay when due the principal amount of or interest on any LIBOR Advance,
(ii) the Borrower fails to make a borrowing of a LIBOR Advance after the
Borrower has requested the same in accordance with the provisions of this note,
or (iii) the Borrower makes a payment of the principal amount of a LIBOR
Advance, or a LIBOR Advance is automatically converted to an ABR Advance, prior
to the last day of the Interest Period applicable thereto. Such compensation may
include an amount equal to the excess, if any, of (i) the amount of interest
(excluding any margin included therein) which would have accrued on the amount
so paid or converted, or not so borrowed, for the period from the date of such
payment or conversion or of such failure to borrow to the last day of such
Interest Period (or, in the case of a failure to borrow, the Interest Period
that would have commenced on the date of such failure) in each case at LIBOR
which is applicable or would have been applicable to such LIBOR Advance over
(ii) the amount of interest (as reasonably determined by the Bank) which would
have accrued on such amount by placing such amount on deposit for a comparable
period with leading banks in the London interbank eurodollar market.
In the event that any law, treaty, or government regulation subjects
the Bank to any tax with respect to this note or imposes upon the Bank any
reserve, special deposit, assessment or similar requirement against assets held
by or deposits in or for the account of any office of the Bank, and the result
is to increase the cost to the Bank of making or maintaining a LIBOR Advance, or
to reduce the amount of any payment in respect of a LIBOR Advance, by an amount
deemed material by the Bank, the Borrower shall pay to the Bank on demand an
additional amount as will compensate the Bank for such increased cost or reduced
return.
<PAGE>
- 4 -
The Borrower's obligations under the immediately preceding two
paragraphs shall survive payment of the advances and all other amounts payable
hereunder. A certificate of the Bank setting forth such amount or amounts as
shall be necessary to compensate the Bank as specified in the immediately
preceding two paragraphs shall be conclusive absent manifest error.
The Borrower authorizes the Bank to accept telephonic instructions from
a duly authorized representative of the Borrower to make an advance hereunder or
receive any payment of an advance and to indorse on the schedule attached hereto
the amount of all advances hereunder and all principal payments hereof received
by the Bank.
The Bank is authorized to charge any deposit account of the Borrower
maintained at the Bank for each principal prepayment hereof on the date made,
and for each principal payment and for each interest payment due hereunder on
the due date thereof. The Bank shall credit the Borrower's deposit account
maintained at the Bank in the amount of each advance hereunder on the date of
such advance, which credit will be confirmed to the Borrower by standard advice
of credit or notation in the monthly statement sent to the Borrower in
connection with such account. The Borrower agrees that the actual crediting of
the amount of the advance to the Borrower's deposit account shall constitute
conclusive evidence that the advance was made, and neither the failure of the
Bank to indorse on the schedule attached hereto the amount of the advance nor
the failure of the Bank to forward an advice of credit to the Borrower or to
note such advance in the monthly statement sent to the Borrower shall affect the
Borrower's obligations hereunder.
If any of the following events shall occur with respect to any Obligor
(which term shall include the Borrower, any guarantor hereof or any hypothecator
of any collateral securing this note): (i) failure of any Obligor in the
performance of any of such Obligor's covenants herein or in any instrument,
document or agreement delivered in connection herewith and continuance of such
failure for more than seven (7) days after notice thereof from the Bank to the
Borrower; (ii) default by any Obligor in the payment or performance of any
Obligation (which term shall include any and all present or future obligations
or liabilities of such Obligor to the Bank, whether incurred by such Obligor as
maker, indorser, drawer, acceptor, guarantor, accommodation party, counterparty,
purchaser, seller or otherwise, and whether due or to become due, secured or
unsecured, absolute or contingent, joint and/or several, and howsoever and
whensoever acquired by the Bank); (iii) failure of any Obligor to pay when due
any other indebtedness for borrowed money (unless such failure to pay is waived
by the applicable creditor), acceleration of the maturity of such indebtedness
or the occurrence of any event which with notice or lapse of time, or both,
would permit acceleration of such indebtedness; (iv) if the Obligor is an
individual, the death or incompetence of such Obligor; (v) if the Obligor is not
an individual, the dissolution, merger or consolidation of, or the sale or
disposal of all or substantially all of the assets of, such Obligor without the
prior written consent of the Bank; (vi) the financial condition or credit
standing of any Obligor shall be or become materially impaired in the sole
opinion of the Bank or any of its officers; (vii) commencement of any
proceeding, procedure or other remedy supplemental to the enforcement of a
judgment against any Obligor; (viii) any representation or warranty made by any
Obligor or any financial or other statement of any Obligor delivered to the Bank
by or on behalf of any Obligor proves to be untrue, incorrect or incomplete when
made or delivered; (ix) the death of the insured under any life insurance policy
<PAGE>
- 5 -
held as collateral by the Bank for the Obligations of any Obligor with respect
to this note, or the non-payment of any premiums on any such life insurance
policy; (x) the validity or enforceability of this note, any guarantee hereof or
any other document delivered in connection herewith shall be contested or
declared null and void or any Obligor shall deny it has any liability or
obligation under or with respect to this note, any guarantee hereof or any other
document delivered by it in connection herewith; (xi) any Obligor shall make
payment on account of any indebtedness subordinated to the indebtedness
evidenced by this note in contravention of the terms of such subordination; or
(xii) the line of credit under which the advances evidenced by this note are
made shall be canceled; then the LIBOR Advances evidenced by this note and all
accrued interest thereon shall become due and payable forthwith, upon
declaration to that effect by the Bank, without notice to the Borrower or any
other Obligor, anything contained herein or in any other document, instrument or
agreement to the contrary notwithstanding.
All advances evidenced hereby together with all accrued interest
thereon shall become immediately and automatically due and payable, without
demand, presentment, protest or notice of any kind, upon the commencement by or
against any Obligor of a case or proceeding under any bankruptcy, insolvency or
other law relating to the relief of debtors, the readjustment, composition or
extension of indebtedness or reorganization or liquidation.
The Borrower waives presentment, demand, protest and notice of protest,
non-payment or dishonor of this note.
The Borrower acknowledges that the ABR Advances evidenced hereby are
payable on demand and payment thereof may be demanded by the Bank at any time
for any reason in the sole and absolute discretion of the Bank.
The Bank shall have a lien on the balances of the Borrower now or
hereafter on deposit with or held as custodian by the Bank and the Bank shall
have full authority to set off such balances against the indebtedness evidenced
by this note or any other Obligation and may at any time, without notice, to the
extent permitted by law, apply the same to the advances evidenced by this note
or such other Obligations, whether due or not.
All obligations of the Borrower to the Bank under this note are secured
pursuant to the terms of any security agreement executed by the Borrower in
favor of the Bank dated of even date herewith as such agreement may be amended
or modified from time to time and any other security agreement that the Borrower
shall have executed or shall at any time execute in favor of the Bank, and the
Bank is entitled to all the benefits thereof.
The Borrower agrees to pay all costs and expenses incurred by the Bank
incidental to or in any way relating to the Bank's enforcement of the
obligations of the Borrower hereunder or the protection of the Bank's rights, in
connection herewith, including, but not limited to, reasonable attorneys' fees
and expenses, whether or not litigation is commenced.
<PAGE>
- 6 -
Promptly upon the Bank's request, the Borrower agrees to furnish such
information (including, without limitation, financial statements and tax returns
of the Borrower) to the Bank and to permit the Bank to inspect and make copies
of its books and records, as the Bank shall reasonably request from time to
time.
So long as any obligation of the Borrower to the Bank under this note
is or may be outstanding and unpaid, the Borrower agrees that it will not grant,
without the prior written consent of the Bank, a security interest in, a lien
upon or an assignment of, any of its current assets (as so classified in
accordance with generally accepted accounting principles) now owned or hereafter
acquired, to secure any obligation for the payment of borrowed money
indebtedness except indebtedness owed to the Bank, it being understood, for the
avoidance of doubt, that such current assets shall not include any copyrights,
trademarks, service marks, patents or other similar rights and interests of the
Borrower.
The Borrower waives any right to claim or interpose any counterclaim or
set-off of any kind in any litigation relating to this note or the transactions
contemplated hereby.
This note may not be amended, and compliance with its terms may not be
waived, orally or by course of dealing, but only by a writing signed by an
authorized officer of the Bank.
This note may be assigned or indorsed by the Bank and its benefits
shall inure to the successors, indorsees and assigns of the Bank.
The Borrower authorizes the Bank to date this note and to complete any
blank space herein according to the terms upon which said advances were granted.
No failure on the part of the Bank to exercise, and no delay in
exercising, any right, remedy or power hereunder shall operate as a waiver
thereof, nor shall any single or partial exercise by the Bank of any right,
remedy or power hereunder preclude any other or future exercise thereof or the
exercise of any other right, remedy or power.
Each and every right, remedy and power hereby granted to the Bank or
allowed it by law or other agreement shall be cumulative and not exclusive of
any other right, remedy or power, and may be exercised by the Bank at any time
and from time to time.
Every provision of this note is intended to be severable; if any term
or provision of this note shall be invalid, illegal or unenforceable for any
reason, the validity, legality and enforceability of the remaining provisions
hereof shall not in any way be affected or impaired thereby.
The Borrower represents and warrants that the Borrower is a corporation
duly organized, validly existing and in good standing under the laws of the
state of its incorporation and is duly qualified to do business in the State of
New York; that the execution, delivery and performance of this note are within
<PAGE>
- 7 -
the Borrower's corporate powers and have been duly authorized by all necessary
action of its board of directors and shareholders; and that each person
executing this note has the authority to execute and deliver this note on behalf
of the Borrower.
THE PROVISIONS OF THIS NOTE SHALL BE CONSTRUED AND INTERPRETED, AND ALL
RIGHTS AND OBLIGATIONS HEREUNDER DETERMINED, IN ACCORDANCE WITH THE LAWS OF THE
STATE OF NEW YORK WITHOUT REGARD TO THE PRINCIPLES OF CONFLICT OF LAWS. THE
BORROWER SUBMITS TO THE JURISDICTION OF STATE AND FEDERAL COURTS LOCATED IN THE
CITY AND STATE OF NEW YORK IN PERSONAM AND AGREES THAT ALL ACTIONS AND
PROCEEDINGS RELATING DIRECTLY OR INDIRECTLY TO THIS NOTE SHALL BE LITIGATED ONLY
IN SAID COURTS OR COURTS LOCATED ELSEWHERE AS SELECTED BY THE BANK AND THAT SUCH
COURTS ARE CONVENIENT FORUMS. THE BORROWER WAIVES PERSONAL SERVICE UPON IT AND
CONSENTS TO SERVICE OF PROCESS BY MAILING A COPY THEREOF TO IT BY REGISTERED OR
CERTIFIED MAIL.
THE BORROWER AND THE BANK WAIVE THE RIGHT TO TRIAL BY JURY IN ANY
ACTION OR PROCEEDING BASED UPON, ARISING OUT OF OR IN ANY WAY CONNECTED TO THIS
NOTE OR THE TRANSACTIONS CONTEMPLATED HEREBY.
THINK NEW IDEAS, INC. Address:
45 West 36th Street
12th Floor
New York, New York 10018
By: /s/ Melvin Epstein
--------------------------
Name: Melvin Epstein
----------------------
Title: C.F.O.
----------------------
By:
--------------------------
Name:
----------------------
Title:
----------------------
<PAGE>
<TABLE>
<CAPTION>
Schedule
to
Promissory Note
Executed by
THINK New Ideas, Inc.
<S> <C> <C> <C> <C> <C> <C>
Date of Amount of Type of Maturity Date Amount of Aggregate Unpaid
Advance Advance Advance* of Advance** LIBOR ** Payment Principal Amount
- -------------- -------------- ------------ -------------------- ------------ -------------- --------------------
</TABLE>
- -----------------------
* Insert "ABR" or "LIBOR", as applicable.
** Only applicable for LIBOR Advances.
EXHIBIT 10.16
THE BANK OF NEW YORK
FORM OF
GENERAL GUARANTEE
(SECURED)
- --------------------------------- ------------------------------------
(Banking Office)
FOR VALUE RECEIVED, and in consideration of loans made or to be made or
credit otherwise extended or to be extended by THE BANK OF NEW YORK (the "Bank")
to or for the account of _____________________ (the "Borrower") of
_____________________________ from time to time and at any time and for other
good and valuable consideration and to induce the Bank, in its discretion, to
make or commit to make such loans or extensions of credit and to make or grant
such renewals, extensions, releases of collateral or relinquishments of legal
rights as the Bank may deem advisable, the undersigned (jointly and severally,
if more than one guarantor, whether executing the same instrument or separate
instruments) absolutely and unconditionally guarantees to the Bank the prompt
payment when due, whether by acceleration or otherwise, of all present or future
obligations and liabilities of any and all kinds of the Borrower to the Bank and
of all instruments of any nature evidencing or relating to any such obligations
and liabilities upon which the Borrower or one or more parties and the Borrower
is or may become liable to the Bank, whether incurred by the Borrower as maker,
indorser, drawer, acceptor, guarantor, accommodation party, counterparty,
purchaser, seller or otherwise, and whether due or to become due, secured or
unsecured, absolute or contingent, joint and/or several, and howsoever or
whensoever acquired by the Bank (all of which are referred to as the
"Obligations"), and irrespective of the genuineness, validity, regularity,
discharge, release or enforceability of such Obligations, or of any instrument
evidencing any of the Obligations or of any collateral therefor or of the
existence or extent of such collateral or of the obligations of the undersigned
under this guarantee. The Obligations shall include interest accruing thereon
before or after the commencement of any insolvency, bankruptcy or reorganization
proceeding in respect of the Borrower or any other guarantor of the Obligations
whether or not such interest is an allowable claim in any such proceeding and
irrespective of the discharge or release of the Borrower or any other guarantor
in such proceeding.
The undersigned assents that the Bank may at any time and from time to
time, either before or after the maturity thereof, without notice to or further
consent of the undersigned, extend the time of payment of, exchange, release,
substitute or surrender any collateral for, renew or extend any of, or change
the amount of, the Obligations or increase the interest rate thereon, and may
also make any agreement with the Borrower or with any other party to or person
liable on any of the Obligations or any guarantor of or hypothecator of
collateral or other surety for such Obligations or interested therein, for the
extension, renewal, payment, compromise, discharge or release thereof, in whole
or in part, or for any modification of the terms thereof or of any agreement
between the Bank and the Borrower or any such other party or person, without in
any way impairing or affecting this guarantee.
The undersigned agrees that this guarantee shall not be impaired or
otherwise affected by any failure to call for, take, hold, protect or perfect,
continue the perfection of or enforce any security interest in or other lien
upon, any collateral for the Obligations, or by any failure to exercise, delay
in the exercising or waiver of, or forbearance with respect to, any right or
remedy available to the Bank with respect to the Obligations.
The undersigned acknowledges that it has derived or expects to derive a
financial or other benefit from each and every Obligation incurred by the
Borrower to the Bank.
The undersigned waives notice of the acceptance of this guarantee and of
the making of any such loans or extensions of credit or the incurrence of any
Obligation, presentment to or demand of payment from anyone whomsoever liable
upon any of the Obligations, protest, notice of presentment, nonpayment or
protest and notice of any sale or other disposition of collateral security or
any default of any sort.
All liabilities of the undersigned to the Bank under this guarantee are
secured pursuant to the terms of any security agreement executed by the
undersigned in favor of the Bank dated of even date herewith as such agreement
may be amended or modified from time to time and any other security agreement
that the undersigned shall have executed or shall at any time execute in favor
of the Bank, and the Bank is entitled to all of the benefits thereof.
<PAGE>
The undersigned agrees to pay all costs and expenses incurred by the Bank
incidental to or in any way relating to the enforcement or protection of the
rights of the Bank hereunder or with respect to any of the Obligations,
including, but not limited to, reasonable attorneys' fees and expenses, whether
or not litigation is commenced.
This is a continuing guarantee and shall apply to all Obligations
notwithstanding that at any particular time any or all of the Obligations shall
have been paid in full. This guarantee shall remain in full force and effect and
be binding upon the undersigned, and the undersigned's successors and assigns,
until written notice of its revocation shall actually be received by the Bank.
No such revocation shall release the undersigned or affect in any manner the
rights, remedies, powers, security interests and liens of the Bank under this
guarantee with respect to any of the Obligations which shall have been created,
contracted, assumed or incurred prior to actual receipt by the Bank of such
written notice of revocation and any renewals or extensions thereof or any
Obligations which shall have been created, contracted, assumed or incurred after
actual receipt of such written notice pursuant to any agreement entered into by
the Bank prior to actual receipt of such written notice and any renewals or
extensions thereof. Any such revocation by one of the undersigned shall not
affect the continuing liabilities hereunder of such of the undersigned as do not
give notice of revocation. If any of the present or future Obligations are
guaranteed by persons, partnerships, limited liability companies or corporations
in addition to the undersigned, the death, release or discharge in whole or in
part, or the bankruptcy, liquidation or dissolution of one or more of them,
shall not discharge or affect the liabilities of the undersigned under this
guarantee.
This guarantee shall continue to be effective, or shall be reinstated, as
the case may be, if at any time payment of all or any part of any payment of any
of the Obligations is rescinded or must be restored or returned by the Bank
whether under any insolvency, bankruptcy, receivership or reorganization
proceeding or otherwise.
This guarantee may be assigned by the Bank and its benefits shall inure to
the successors, indorsees and assigns of the Bank.
This guarantee is a guarantee of payment and not of collection, and the
Bank shall be under no obligation to take any action against the Borrower or any
other person liable with respect to any of the Obligations or resort to any
collateral security securing any of the Obligations or this guarantee as a
condition precedent to the undersigned being obligated to make payment and to
perform as agreed herein. The undersigned hereby waives any right to
<PAGE>
claim or interpose any defense, counterclaim or offset of any nature and
description which it may have or which may exist between and among the Bank, the
Borrower and/or the undersigned or to seek injunctive relief.
Promptly upon the Bank's request, the undersigned agrees to furnish such
information (including financial statements and tax returns of the undersigned)
to the Bank and to permit the Bank to inspect and make copies of its books and
records, as the Bank shall reasonably request from time to time.
The undersigned authorizes the Bank to date this guarantee and to complete
any blank space herein according to the terms upon which this guarantee was
given.
Any notice to the Bank shall be effective only upon receipt by the Bank
and if directed to the Bank at its banking office set forth above or any other
address hereafter specified by written notice from the Bank to the undersigned.
Until such time as the Bank shall have received payment in full in cash in
satisfaction of all of the Obligations, the undersigned waives any right to be
subrogated to the rights of the Bank with respect to the Obligations, and the
undersigned waives any right to and agrees that it will not institute or take
any action against the Borrower seeking contribution, reimbursement or
indemnification by the Borrower with respect to any payments made by the
undersigned to the Bank hereunder.
Every provision of this guarantee is intended to be severable; if any term
or provision of this guarantee shall be invalid, illegal or unenforceable for
any reason whatsoever, the validity, legality or enforceability of the remaining
provisions hereof shall not in any way be affected or impaired thereby.
No failure on the part of the Bank to exercise, and no delay in
exercising, any right, remedy or power hereunder shall operate as a waiver
thereof, nor shall any single or partial exercise by the Bank of any right,
remedy or power hereunder preclude any other or future exercise thereof or the
exercise of any other right, remedy or power.
Each and every right, remedy and power hereby granted to the Bank or
allowed it by law or other agreement shall be cumulative and not exclusive of
any other right, remedy or power, and may be exercised by the Bank at any time
and from time to time.
This guarantee contains the entire agreement and understanding between the
Bank and the undersigned with respect to the subject matter hereof and
supersedes all prior agreements and understandings relating to the subject
matter hereof. This guarantee may not be amended, and compliance with its terms
may not be waived, orally or by course of dealing, but only by a writing signed
by an authorized officer of the Bank.
Until cash payment in full of the Obligations, the liability of the
undersigned under this guarantee shall not be released.
<PAGE>
IF THE UNDERSIGNED IS A CORPORATION:
The undersigned represents and warrants that the undersigned is a
corporation duly organized, validly existing and in good standing under the laws
of the state of its incorporation; that the execution, delivery and performance
of this guarantee are within the undersigned's corporate powers and have been
duly authorized by all necessary action of its board of directors and
shareholders; and that each person executing this guarantee has the authority to
execute and deliver this guarantee on behalf of the undersigned.
IF THE UNDERSIGNED IS A LIMITED LIABILITY COMPANY:
The undersigned represents and warrants that the undersigned is a limited
liability company duly organized, validly existing and in good standing under
the laws of the state of its organization; that the execution, delivery and
performance of this guarantee are within the undersigned's company powers and
have been duly authorized by all necessary action of its members; and that each
person executing this guarantee has the authority to execute and deliver this
guarantee on behalf of the undersigned.
IF THE UNDERSIGNED IS A PARTNERSHIP:
The undersigned represents and warrants that the undersigned is a
partnership duly formed under the laws of the state of its formation; that the
execution, delivery and performance of this guarantee are within the
undersigned's partnership powers and have been duly authorized by all necessary
action of its partners and do not contravene the provisions of its partnership
agreement; and that each person executing this guarantee has the authority to
execute and deliver this guarantee on behalf of the undersigned.
THIS GUARANTEE SHALL BE CONSTRUED AND INTERPRETED, AND ALL RIGHTS AND
OBLIGATIONS HEREUNDER SHALL BE DETERMINED, IN ACCORDANCE WITH THE LAWS OF THE
STATE OF NEW YORK WITHOUT REGARD TO PRINCIPLES OF CONFLICT OF LAWS. THE
UNDERSIGNED SUBMITS TO THE JURISDICTION OF STATE AND FEDERAL COURTS LOCATED IN
THE CITY AND STATE OF NEW YORK IN PERSONAM AND AGREES THAT ALL ACTIONS AND
PROCEEDINGS RELATING DIRECTLY OR INDIRECTLY TO THIS GUARANTEE SHALL BE LITIGATED
ONLY IN SAID COURTS OR COURTS LOCATED ELSEWHERE AS THE BANK MAY SELECT AND THAT
SUCH COURTS ARE CONVENIENT FORUMS. THE UNDERSIGNED WAIVES PERSONAL SERVICE UPON
IT AND CONSENTS TO SERVICE OF PROCESS OUT OF SAID COURTS BY MAILING A COPY
THEREOF TO IT BY REGISTERED OR CERTIFIED MAIL.
<PAGE>
THE UNDERSIGNED AND THE BANK WAIVE THE RIGHT TO TRIAL BY JURY IN ANY
ACTION OR PROCEEDING BASED UPON, ARISING OUT OF OR IN ANY WAY CONNECTED TO THIS
GUARANTEE OR ANY OF THE TRANSACTIONS CONTEMPLATED HEREBY OR THE OBLIGATIONS.
IN WITNESS WHEREOF, this agreement has been executed by the under-signed
as of the date first written above.
NAME OF GUARANTOR: In ADDRESS OF GUARANTOR
SIGNATURE OF GUARANTOR
OR AUTHORIZED SIGNER:
If Authorized Signer
Name:
Title:
SIGNATURE OF GUARANTOR
OR AUTHORIZED SIGNER:
If Authorized Signer
Name:
Title:
[THE APPROPRIATE ACKNOWLEDGMENT ON FOLLOWING PAGES
MUST BE COMPLETED]
<PAGE>
ACKNOWLEDGMENT FOR CORPORATION
State of )
) ss.:
County of )
On the ____ day of ___________, before me personally came ______________, to me
known, who, being by me duly sworn, did depose and say that (s)he resides at
that (s)he is the of
the corporation described in and which executed the foregoing instrument; and
that (s)he signed (his) (her) name thereto by order of the board of directors of
said corporation.
-------------------------
NOTARY PUBLIC
State of )
) ss.:
County of )
On the day of _____, 199 , before me personally came , to
me known, who, being by me duly sworn, did depose and say that (s)he resides at
that (s)he is the of
the corporation described in and which executed the foregoing instrument; and
that (s)he signed (his) (her) name thereto by order of the board of directors of
said corporation.
-------------------------
NOTARY PUBLIC
ACKNOWLEDGMENT FOR PARTNERSHIP
State of )
) ss.:
County of )
On the day of _____, 199 , before me personally came , to
me known, who, being by me duly sworn, did depose and say that (s)he resides at
that (s)he is the of
the corporation described in and which executed the foregoing instrument; and
that (s)he signed (his) (her) name thereto by order of the board of directors of
said corporation.
-------------------------
NOTARY PUBLIC
State of )
) ss.:
County of )
On the day of _____, 199 , before me personally came , to
me known, who, being by me duly sworn, did depose and say that (s)he resides at
that (s)he is the of
the corporation described in and which executed the foregoing instrument; and
that (s)he signed (his) (her) name thereto by order of the board of directors of
said corporation.
-------------------------
NOTARY PUBLIC
<PAGE>
ACKNOWLEDGMENT FOR INDIVIDUAL
State of )
) ss.:
County of )
On the day of _____, 199 , before me personally came , to
me known, who, being by me duly sworn, did depose and say that (s)he resides at
that (s)he is the of
the corporation described in and which executed the foregoing instrument; and
that (s)he signed (his) (her) name thereto by order of the board of directors of
said corporation.
-------------------------
NOTARY PUBLIC
State of )
) ss.:
County of )
On the day of _____, 199 , before me personally came , to
me known, who, being by me duly sworn, did depose and say that (s)he resides at
that (s)he is the of
the corporation described in and which executed the foregoing instrument; and
that (s)he signed (his) (her) name thereto by order of the board of directors of
said corporation.
-------------------------
NOTARY PUBLIC
ACKNOWLEDGMENT FOR LIMITED LIABILITY COMPANY
State of )
) ss.:
County of )
On the day of _____, 199 , before me personally came , to
me known, who, being by me duly sworn, did depose and say that (s)he resides at
that (s)he is the of
the corporation described in and which executed the foregoing instrument; and
that (s)he signed (his) (her) name thereto by order of the board of directors of
said corporation.
-------------------------
NOTARY PUBLIC
State of )
) ss.:
County of )
On the day of _____, 199 , before me personally came , to
me known, who, being by me duly sworn, did depose and say that (s)he resides at
that (s)he is the of
the corporation described in and which executed the foregoing instrument; and
that (s)he signed (his) (her) name thereto by order of the board of directors of
said corporation.
-------------------------
NOTARY PUBLIC
<PAGE>
LIMITATION OF LIABILITY
(THE FOLLOWING PROVISIONS SHALL BE EFFECTIVE ONLY IF EXECUTED BY A DULY
AUTHORIZED OFFICER OF THE BANK)
Notwithstanding the aggregate amount of the Obligations which may become
due to the Bank from the Borrower at any time and from time to time, the
liability of the guarantor under this guarantee shall be limited to the sum of
(i) $ __________(hereinafter referred to as the "Maximum Amount"), (ii) such
portion of the interest, legal expenses, insurance, taxes and other charges and
expenses as are provided for in the instruments or other documents (if any)
evidencing the Obligations of the Borrower as the Maximum Amount bears to the
aggregate principal amount of all Obligations of the Borrower to the Bank at the
time the Bank demands payment under this guarantee and (iii) all expenses
(including, but not limited to, reasonable attorneys' fees and expenses, whether
or not litigation is commenced) in any way relating to the enforcement or
protection of the rights of the Bank under this guarantee. It is understood,
however, that the Obligations of the Borrower to the Bank may at any time exceed
the Maximum Amount without affecting the liabilities of the guarantor under this
guarantee.
---------------------------
BANK OFFICER
EXHIBIT 10.17
FORM OF
SECURITY AGREEMENT
- ------------------------------- --------------------- , 199_
(Banking Office)
FOR VALUE RECEIVED, and in order to induce THE BANK OF NEW YORK (the
"Bank"), in its discretion, to make loans or otherwise extend credit at any
time, and from time to time to, or at the request of, the undersigned (the
"Debtor"), whether the loans or credit so extended shall be absolute or
contingent, the Debtor (jointly and severally, if more than one and whether
executing the same or separate instruments) grants to the Bank, as security for
all present or future obligations or liabilities of any and all kinds of the
Debtor to it, whether incurred by the Debtor as maker, indorser, drawer,
acceptor, guarantor, accommodation party, counterparty, purchaser, seller or
otherwise, whether due or to become due, secured or unsecured, absolute or
contingent, joint and/or several, and howsoever or whensoever acquired by the
Bank including interest accruing thereon before or after the commencement of any
insolvency, bankruptcy or reorganization proceeding of the Debtor whether or not
such interest is an allowable claim in any proceeding and irrespective of the
discharge or release of the Debtor in such proceeding (all of which are referred
to collectively as the "Obligations"), a security interest in and a lien upon
all personal property and fixtures of the Debtor or in which the Debtor has an
interest wherever located and whether now or hereafter existing or now owned or
hereafter acquired and whether or not subject to the Uniform Commercial Code
(the "Code") specified in Schedule A hereto, and also including all interest,
dividends and other distributions thereon paid and payable in cash or in
property, and all replacements and substitutions for, and all accessions and
additions to, and all products and proceeds of, all of the foregoing (all of
which are referred to as the "Collateral").
The Debtor agrees to deliver to the Bank whenever called for by it such
additional collateral security of a kind and of a market value satisfactory to
the Bank, so that there will, at all times, be with the Bank a margin of
security for the payment of all Obligations which shall be satisfactory to it.
In addition to the Bank's security interest in the Collateral, it shall have,
and the Debtor hereby grants to the Bank, a security interest and a lien for all
the Obligations in and upon any personal property of the Debtor or in which the
Debtor may have an interest which is now or may at any time hereafter come into
the possession or control of the Bank, or of any third party acting on its
behalf, whether for the express purpose of being used by the Bank as collateral
security or held in custody or for any other or different purpose, including
such personal property as may be in transit by mail or carrier for any purpose,
or covered or affected by any documents in the Bank's possession or control, or
in the possession or control of any third party acting on its behalf (said
additional personal property is also referred to as the "Collateral"). The
Debtor hereby authorizes the Bank in its discretion, at any time, whether or not
the Collateral is deemed by it adequate, to appropriate and apply upon any of
the Obligations, whether or not due, any of such property of the Debtor and to
charge any of the Obligations against any balance of any account standing to the
credit of the Debtor on the books of the Bank.
Upon failure of the Debtor to pay any Obligation when becoming or made
due, in accordance with its terms, the Bank shall have, in addition to all other
rights and remedies allowed by law, the rights and remedies of a secured party
under the Code and, without limiting the generality of the foregoing, the Bank
may immediately, without demand of performance and without notice of intention
to sell or otherwise dispose of or of time or place of sale or other disposition
or of redemption or other notice or demand whatsoever to the Debtor, all of
which, to the extent permitted by law, are hereby expressly waived, and without
advertisement, (a) sell at public or private sale, grant options to purchase or
otherwise realize upon, in the State of New York, or elsewhere, the whole or
from time to time any part of the Collateral upon which the Bank shall have a
security interest or lien as aforesaid, or any interest which the Debtor may
have therein, and (b) exercise any and all rights, options, powers, benefits or
privileges given to the Bank upon any life insurance policies held as
Collateral. After deducting from the proceeds of any such sale or other
disposition of the Collateral all expenses (including, but not limited to,
reasonable attorneys' fees and expenses and other expenses as set forth below),
the Bank shall apply the residue of such proceeds toward the payment of any of
the Obligations, in such order as the Bank shall elect, the Debtor remaining
liable for any deficiency, plus interest thereon, remaining unpaid after such
application. If notice of any sale or other disposition is required by law to be
given, the Debtor hereby agrees that a notice sent at least five days before the
time of any intended public sale or of the time after which any private sale or
other disposition of the Collateral is to be made, shall be reasonable notice of
such sale or other disposition. The Debtor also agrees to assemble the
Collateral at such place or places as the Bank designates by written notice.
<PAGE>
At any such sale or other disposition the Bank or any other person
designated by the Bank may itself purchase the whole or any part of the
Collateral sold, free from any right of redemption on the part of the Debtor,
which right, to the extent permitted by law, is hereby waived and released.
The Bank may, without any notice to the Debtor, in its discretion, whether
or not any of the Obligations are due, in its name or in the name of the Debtor,
demand, sue for, collect and receive any money or property at any time due,
payable or receivable on or on account of or in exchange for, and may
compromise, settle or extend the time of payment of, any of the demands or
obligations represented by any of the Collateral, and may also exchange any of
the Collateral for other property upon the reorganization, recapitalization or
other readjustment of the issuer, maker or other person who is obligated on or
otherwise has liabilities with respect to the Collateral, and in connection
therewith may deposit any of the Collateral with any committee or depositary
upon such terms as the Bank may in its discretion deem appropriate, and the
Debtor does hereby constitute and appoint the Bank the Debtor's true and lawful
attorney to compromise, settle or extend payment of said demands or obligations
and exchange such Collateral as the Debtor might or could do personally; all
without liability or responsibility for action herein authorized and taken or
not taken in good faith. The Bank is entitled at any time in its discretion to
notify an account debtor or the obliger on any instrument to make payment to it,
regardless of whether or not the Debtor had been previously making collections
on the Collateral, and the Bank may take control of any proceeds of any of the
Collateral. Upon request of the Bank, the Debtor shall receive and hold all
proceeds of the Collateral in trust for the Bank and not commingle any
collections with any of its own funds and immediately deliver such collections
to the Bank.
The Debtor agrees that the Collateral secures, and further agrees to pay
on demand, all expenses (including, but not limited to, reasonable attorneys'
fees and expenses and costs of any insurance and payment of taxes or other
charges) of, or incidental to, the custody, care, sale or collection of, or
realization upon, any of the Collateral or in any way relating to the
enforcement or protection of the rights of the Bank hereunder, whether or not
litigation is commenced.
The Debtor agrees to mark its books and records as the Bank shall request
in order to reflect the rights of the Bank granted herein, and the Bank may, in
its sole discretion, take possession of the Collateral at any time, either prior
to or subsequent to a default under any of the Obligations. The Debtor agrees to
maintain such insurance on the Collateral as the Bank may require. The Bank may,
without any notice to the Debtor, in its discretion, and for its own benefit,
lend, use, transfer or repledge to any third party all or any part of the
Collateral by itself or commingled with the property of others, in bulk or
otherwise. The Bank may, without any notice to the Debtor, sell, assign or
transfer any of the Obligations and the Bank's rights and duties hereunder, and
may deliver the Collateral, or any part thereof, to the assignee or transferee
of any of the Obligations, who shall become vested with all the rights,
remedies, powers, security interests and liens herein given to the Bank in
respect thereto; and the Bank shall thereafter be relieved and fully discharged
from any liability or responsibility in the premises.
The Bank may, without any notice to the Debtor, in its discretion,
transfer, or cause to be transferred, all or any part of the Collateral to its
name, or to the name of its nominee, vote the Collateral so transferred, and
receive income and make or receive collections, including money, thereon and
hold said income and collections as Collateral or apply said income and
collections to any of the Obligations, the manner and distribution of the
application to be made as the Bank shall elect.
Calls for Collateral, demand for payment or notice to the Debtor may be
given by leaving same at the address given below or any other address hereafter
filed with the Bank, or by mailing same to such address with the same effect as
if delivered personally. Such notice given in the manner herein provided shall
be effective whether or not received by the Debtor. The Debtor agrees not to
change its name, any of its places of business, remove any records of the Debtor
relating to any of the Collateral or move any of the Collateral without giving
the Bank thirty days prior written notice.
<PAGE>
With respect to the Collateral, the Bank shall be under no duty to send
notices, perform services, exercise any rights of collection, enforcement,
conversion or exchange, vote, pay for insurance, taxes or other charges or take
any action of any kind in connection with the management thereof and its only
duty with respect thereto shall be to use reasonable care in its custody and
preservation while in its possession, which shall not include any steps
necessary to preserve, obtain, secure or acquire rights or property against or
from any parties.
The Debtor authorizes the Bank, at the Debtor's expense, to file one or
more financing statements and amendments thereto to perfect the security
interests granted herein, without the Debtor's signature thereon, and to take
all actions necessary to perfect (whether by filing, possession, control or
otherwise) its security interest in the Collateral under any applicable law or
regulation and the Debtor agrees to do, file, record, make, execute and deliver
all such acts, deeds, things, agreements, notices, instruments and financing
statements as the Bank may request in order to perfect and enforce the rights of
the Bank herein.
If at any time it is necessary in the opinion of counsel to the Bank that
any or all of the securities held as Collateral (the "Pledged Securities") be
registered under the Securities Act of 1933, as amended, or that an indenture
with respect thereto be qualified under the Trust Indenture Act of 1939, as
amended, in order to permit the sale or other disposition of the Pledged
Securities, the Debtor shall at the Bank's request and at the expense of the
Debtor use the best efforts of the Debtor promptly to cause the registration of
the Pledged Securities and the qualification of such indenture and to continue
such registration and qualification under such laws and in such jurisdictions
and for as long as deemed appropriate by the Bank.
The Debtor hereby authorizes the Bank to date this agreement as of the
date of the granting of any Obligation secured hereby and to complete any blank
space herein (including any schedule hereto) according to the terms upon which
said Obligation was granted.
This agreement may not be amended, or compliance with its terms waived,
orally or by course of dealing, but only by a writing signed by an authorized
officer of the Bank.
No failure on the part of the Bank to exercise, and no delay in
exercising, any right, remedy or power hereunder shall operate as a waiver
thereof, nor shall any single or partial exercise by the Bank of any right,
remedy or power hereunder preclude any other or future exercise thereof or the
exercise of any other right, remedy or power.
Each and every right, remedy and power hereby granted to the Bank or
allowed it by law or other agreement shall be cumulative and not exclusive of
any other right, remedy or power, and may be exercised by the Bank at any time
and from time to time.
This agreement may be assigned by the Bank and its benefits shall inure to
the successors, indorsees and assigns of the Bank.
This agreement shall be construed and interpreted, and all rights and
obligations hereunder shall be determined, in accordance with the laws of the
State of New York without regard to principles of conflict of laws.
Unless otherwise defined or the text otherwise requires, all terms used
herein shall have the meanings specified in the Code.
Every provision of this agreement is intended to be severable; if any term
or provision of this agreement shall be invalid, illegal or unenforceable for
any reason whatsoever, the validity, legality and enforceability of the
remaining provisions hereof shall not in any way be affected or impaired
thereby.
<PAGE>
Any notice to the Bank shall be effective only upon receipt by the Bank
and if directed to the Bank at its banking office set forth above or any other
address hereafter specified by written notice from the Bank to the Debtor.
The Debtor represents and warrants that at the time the Collateral becomes
subject to the Bank's security interest, the Debtor shall be the sole owner of
and fully authorized and able to sell, transfer, pledge and/or grant a first
priority security interest in the Collateral to the Bank and the Collateral
shall be free and clear of all other claims, liens, charges, security interests
and encumbrances except as permitted in writing by the Bank. The Debtor
represents and warrants to the Bank that any information furnished to the Bank
regarding the Collateral is true and correct on the date hereof and is complete
in all material respects.
IF THE DEBTOR IS A CORPORATION:
The Debtor represents and warrants that the Debtor is a corporation duly
organized, validly existing and in good standing under the laws of the state of
its incorporation; that the execution, delivery and performance of this
agreement are within the Debtor's corporate powers and have been duly authorized
by all necessary action of its board of directors and shareholders; and that
each person executing this agreement has the authority to execute and deliver
this agreement on behalf of the Debtor.
IF THE DEBTOR IS A LIMITED LIABILITY COMPANY:
The Debtor represents and warrants that the Debtor is a limited liability
company duly organized, validly existing and in good standing under the laws of
the state of its organization; that the execution delivery and performance of
this agreement are within the Debtor's company powers and have been duly
authorized by all necessary action of its members; and that each person
executing this agreement has the authority to execute and deliver this agreement
on behalf of the Debtor.
IF THE DEBTOR IS A PARTNERSHIP:
The Debtor represents and warrants that the Debtor is a partnership duly
formed under the laws of the state of its formation, that the execution delivery
and performance of this agreement are within the Debtor's partnership powers and
have been duly authorized by all necessary action of its partners and do not
contravene the provisions of its partnership agreement; and that each person
executing this agreement has the authority to execute and deliver this agreement
on behalf of the Debtor.
THE DEBTOR SUBMITS TO THE JURISDICTION OF STATE AND FEDERAL COURTS LOCATED
IN THE CITY AND STATE OF NEW YORK IN PERSONAM AND AGREES THAT ALL ACTIONS AND
PROCEEDINGS RELATING DIRECTLY OR INDIRECTLY TO THIS AGREEMENT SHALL BE LITIGATED
ONLY IN SAID COURTS OR IN COURTS LOCATED ELSEWHERE AS THE BANK MAY SELECT AND
THAT SUCH COURTS ARE CONVENIENT FORUMS AND WAIVES PERSONAL SERVICE UPON IT AND
CONSENTS TO SERVICE OF PROCESS OUT OF SAID COURTS BY MAILING A COPY THEREOF TO
IT BY REGISTERED OR CERTIFIED MAIL.
<PAGE>
THE DEBTOR AND THE BANK WAIVE THE RIGHT TO TRIAL BY JURY IN ANY ACTION OR
PROCEEDING BASED UPON, ARISING OUT OF OR IN ANY WAY CONNECTED WITH THIS
AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY.
NAME OF GUARANTOR: , In ADDRESS OF GUARANTOR
SIGNATURE OF DEBTOR
OR AUTHORIZED SIGNER:
If Authorized Signer
Name:
Title:
SIGNATURE OF DEBTOR
OR AUTHORIZED SIGNER:
If Authorized Signer
Name:
Title:
[SCHEDULE A ON FOLLOWING PAGE MUST BE COMPLETED]
<PAGE>
SCHEDULE A
TO
SECURITY AGREEMENT
EXECUTED BY
(Name of Debtor)
Property specifically included as "Collateral" for purposes of the within
Security Agreement.
All personal property and fixtures of the Debtor or in which the Debtor
has an interest, in each case whether now or hereafter existing or now owned or
hereafter acquired and whether subject to the Uniform Commercial Code including
all goods, money, instruments, accounts, farm products, inventory, equipment,
documents, chattel paper, securities and general intangibles (other than any and
all copyrights, trademarks, service marks, patents and other similar rights and
interests of the Debtor) and all interest, dividends and other distributions
thereon paid and payable in cash or in property; and all replacements and
substitutions for, and all accessions and additions to, and all products and
Proceeds of, all of the foregoing.
As used herein the term Proceeds shall have the meaning set forth in Article 9
of the Uniform Commercial Code and, to the extent not otherwise included, shall
include, but not be limited to, (i) any and all proceeds of any insurance,
causes and rights of action or settlements thereof, escrowed amounts or
property, judicial and arbitration judgments and awards, payable to the Debtor
from or in respect of any person from time to time; (ii) any and all payments
(in any form whatsoever) made or due and payable to the Debtor from time to time
in connection with any requisition, confiscation, condemnation, seizure or
forfeiture of all or any part of the foregoing collateral by any governmental
authority; (iii) all claims of the Debtor for losses or damages arising out of
or relating to or for any breach of any agreements, covenants, representations
or warranties or any default whether or not with respect to or under any of the
foregoing collateral (without limiting any direct or independent rights of the
Bank with respect to the collateral); and (iv) any and all other amounts from
time to time paid or payable under or in connection with the foregoing
collateral.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED STATEMETNS OF INCOME FOR THE TWELVE MONTHS ENDED JUNE 30, 1998 AND
THE CONSOLIDATED BALANCE SHEET AS OF JUNE 30, 1998 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS 000's
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUN-01-1997
<PERIOD-END> JUN-30-1998
<CASH> 7,654
<SECURITIES> 0
<RECEIVABLES> 15,451
<ALLOWANCES> 1,019
<INVENTORY> 0
<CURRENT-ASSETS> 26,256
<PP&E> 9,447
<DEPRECIATION> 3,765
<TOTAL-ASSETS> 52,253
<CURRENT-LIABILITIES> 19,253
<BONDS> 363
0
0
<COMMON> 1
<OTHER-SE> 32,503
<TOTAL-LIABILITY-AND-EQUITY> 52,253
<SALES> 0
<TOTAL-REVENUES> 42,644
<CGS> 0
<TOTAL-COSTS> 23,620
<OTHER-EXPENSES> 31,991
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (27,213)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
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