<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended June 30, 1999
Commission File No. 0-21935
----------------
Modem Media . Poppe Tyson, Inc.
(Exact name of registrant as specified in its charter)
DELAWARE 06-1464807
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
230 East Avenue
Norwalk, CT 06855
(203) 299-7000
(Address of principal executive offices and zip code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the past 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
There were 5,482,025 shares of the Registrant's Class A Common Stock, $.001
par value, and 5,617,670 shares of the Registrant's Class B Common Stock, $.001
par value, outstanding as of July 23, 1999.
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<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Description Page
----------- ----
PART I. FINANCIAL INFORMATION
<S> <C>
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of June 30, 1999 and December
31, 1998............................................................... 1
Condensed Consolidated Statements of Operations for the three and six
months ended
June 30, 1999 and 1998................................................. 2
Condensed Consolidated Statements of Cash Flows for the six months ended
June 30, 1999 and 1998................................................. 3
Notes to Condensed Consolidated Financial Statements.................... 4
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.................................................... 9
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................. 16
Item 2. Changes in Securities and Use of Proceeds......................... 16
Item 3. Defaults Upon Senior Securities................................... 16
Item 4. Submission of Matters to a Vote of Security Holders............... 16
Item 5. Other Information................................................. 16
Item 6. Exhibits and Reports on Form 8-K.................................. 16
Signatures................................................................ 17
</TABLE>
i
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MODEM MEDIA . POPPE TYSON, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
------------ ------------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................ $ 43,698,000 $ 7,824,000
Accounts receivable, net......................... 14,996,000 13,619,000
Unbilled revenues................................ 2,775,000 1,261,000
True North note receivable....................... -- 4,500,000
Other current assets............................. 2,839,000 2,263,000
------------ ------------
Total current assets........................... 64,308,000 29,467,000
Noncurrent assets:
Property and equipment, net...................... 9,225,000 6,826,000
Goodwill, net.................................... 51,769,000 33,139,000
Other assets..................................... 1,182,000 1,854,000
------------ ------------
Total noncurrent assets........................ 62,176,000 41,819,000
------------ ------------
Total assets................................... $126,484,000 $ 71,286,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................. $ 4,250,000 $ 4,522,000
Pre-billed media................................. 6,405,000 6,914,000
Advance billings................................. 2,543,000 2,164,000
Deferred revenues................................ 5,403,000 5,484,000
Due to True North................................ -- 1,797,000
Note payable to True North....................... -- 6,000,000
Accrued expenses and other current liabilities... 10,384,000 8,503,000
------------ ------------
Total current liabilities...................... 28,985,000 35,384,000
Other liabilities.................................. 452,000 342,000
Stockholders' equity:
Preferred stock, $.001 par value, 5,000,000
shares authorized, none issued and outstanding.. -- --
Common stock, Class A, $.001 par value,
39,351,376 shares authorized, 5,512,469 and
2,424,135 shares issued......................... 5,000 2,000
Common stock, Class B, $.001 par value, 5,648,624
shares authorized, 5,618,249 and 5,648,624
shares issued and outstanding................... 6,000 6,000
Paid-in capital.................................. 109,015,000 47,211,000
Accumulated deficit.............................. (11,505,000) (11,613,000)
Treasury stock, 32,330 shares of Class A common
stock, at cost.................................. (428,000) --
Accumulated other comprehensive income........... (46,000) (46,000)
------------ ------------
Total stockholders' equity..................... 97,047,000 35,560,000
------------ ------------
Total liabilities and stockholders' equity..... $126,484,000 $ 71,286,000
============ ============
</TABLE>
The accompanying notes to condensed consolidated financial statements are an
integral part of these balance sheets.
1
<PAGE>
MODEM MEDIA . POPPE TYSON, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
----------------------- -----------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Revenues..................... $16,042,000 $10,451,000 $28,425,000 $19,467,000
Costs and expenses:
Salaries and benefits...... 8,996,000 7,400,000 17,480,000 13,320,000
Office and general......... 5,018,000 3,516,000 8,941,000 5,990,000
Amortization of goodwill... 719,000 430,000 1,309,000 847,000
Operating (income) losses
of True North Units Held
for Transfer.............. -- (78,000) -- 3,000
----------- ----------- ----------- -----------
Total costs and
expenses................ 14,733,000 11,268,000 27,730,000 20,160,000
----------- ----------- ----------- -----------
Operating income (loss)...... 1,309,000 (817,000) 695,000 (693,000)
Interest income (expense),
net......................... 504,000 (3,000) 841,000 (4,000)
----------- ----------- ----------- -----------
Income (loss) before income
taxes....................... 1,813,000 (820,000) 1,536,000 (697,000)
Provision (benefit) for
income taxes................ 1,232,000 (52,000) 1,428,000 265,000
----------- ----------- ----------- -----------
Net income (loss)............ $ 581,000 $ (768,000) $ 108,000 $ (962,000)
=========== =========== =========== ===========
Net income (loss) per share:
Basic...................... $ 0.05 $ (0.11) $ 0.01 $ (0.13)
=========== =========== =========== ===========
Diluted.................... $ 0.05 $ (0.11) $ 0.01 $ (0.13)
=========== =========== =========== ===========
Weighted-average number of
common shares outstanding:
Basic...................... 11,092,000 7,263,000 10,269,000 7,263,000
=========== =========== =========== ===========
Diluted.................... 11,685,000 7,263,000 10,840,000 7,263,000
=========== =========== =========== ===========
</TABLE>
The accompanying notes to condensed consolidated financial statements are an
integral part of these statements.
2
<PAGE>
MODEM MEDIA . POPPE TYSON, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended
June 30,
-----------------------
1999 1998
----------- ----------
(unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)................................... $ 108,000 $ (962,000)
Adjustments to reconcile net income (loss) to net
cash provided by
(used in) operating activities:
Depreciation....................................... 1,691,000 682,000
Amortization of goodwill........................... 1,309,000 847,000
Provision for doubtful accounts.................... 167,000 142,000
Loss on disposal of equipment...................... 170,000 --
Changes in assets and liabilities:
Accounts receivable............................... (1,544,000) (3,541,000)
Unbilled revenues................................. (1,514,000) 177,000
Other current assets.............................. (576,000) (392,000)
Accounts payable, accrued expenses and other
current liabilities.............................. 2,173,000 1,856,000
Pre-billed media.................................. (509,000) (640,000)
Advance billings.................................. 379,000 (356,000)
Deferred revenues................................. (81,000) 977,000
Other, net........................................ (725,000) (32,000)
Net assets of True North Units Held for Transfer.. -- 76,000
----------- ----------
Net cash provided by (used in) operating
activities..................................... 1,048,000 (1,166,000)
Cash flows from investing activities:
Purchase of property and equipment.................. (4,001,000) (1,038,000)
Acquisition, net of cash acquired................... (1,419,000) --
----------- ----------
Net cash used in investing activities........... (5,420,000) (1,038,000)
Cash flows from financing activities:
Proceeds from initial public offering............... 43,459,000 --
Funding to True North............................... (3,297,000) (563,000)
Purchase of treasury stock.......................... (428,000) --
Principal payments made under capital lease
obligations........................................ (195,000) (181,000)
Exercise of stock options........................... 707,000 --
----------- ----------
Net cash provided by (used in) financing
activities..................................... 40,246,000 (744,000)
----------- ----------
Net increase (decrease) in cash....................... 35,874,000 (2,948,000)
Cash and cash equivalents, beginning of the period.... 7,824,000 7,056,000
----------- ----------
Cash and cash equivalents, end of the period.......... $43,698,000 $4,108,000
=========== ==========
</TABLE>
The accompanying notes to condensed consolidated financial statements are an
integral part of these statements.
3
<PAGE>
MODEM MEDIA . POPPE TYSON, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation and Summary of Significant Accounting Policies
Nature of Operations--Modem Media . Poppe Tyson, Inc. ("Modem Media" or the
"Company") is a subsidiary of True North Communications Inc. ("True North") and
a leading builder and marketer of customer-focused e-businesses for world-class
brands. The Company develops customer-driven insights to identify and
capitalize on e-business opportunities, and utilizes its conceptual,
technological and marketing expertise to build, distribute and manage
differentiated e-business solutions for its clients around the globe. The
Company has offices in Norwalk, CT, New York City, San Francisco, Toronto,
London, Tokyo, and Hong Kong, with an affiliate office in Sao Paolo.
Basis of Presentation--The condensed consolidated balance sheet as of June
30, 1999, the condensed consolidated statements of operations for the three and
six months ended June 30, 1999 and 1998 and the condensed consolidated
statements of cash flows for the six months ended June 30, 1999 and 1998, are
unaudited. The unaudited condensed consolidated financial statements reflect
all adjustments (consisting only of normal recurring adjustments), that are, in
the opinion of management, necessary for a fair presentation of the Company's
financial position and results of operations. The operating results for the
three and six months ended June 30, 1999 and 1998 are not necessarily
indicative of the results to be expected for any other interim period or any
future fiscal year.
Reclassifications--Certain reclassifications have been made in the prior
period condensed consolidated financial statements to conform to the current
period presentation.
Income Taxes--The Company accounts for income taxes under the liability
method in accordance with Statement of Financial Accounting Standards ("SFAS")
No. 109, Accounting for Income Taxes. The Company's effective tax rates differ
from the federal statutory rate primarily due to the effect of non-deductible
goodwill amortization, the losses of certain foreign subsidiaries on which the
Company did not recognize a tax benefit and the tax effects of the non-
strategic digital interactive marketing operations that the Company sold back
to True North effective October 1, 1998 (see Note 2).
Cash and Cash Equivalents--The Company considers all highly liquid
investments with a maturity of three months or less at the time of purchase to
be cash equivalents.
Net Income (Loss) Per Share--In accordance with SFAS No. 128, Earnings Per
Share, basic net income (loss) per share is computed using the weighted-average
number of common shares outstanding during each period. Diluted net income
(loss) per share gives effect to all potential dilutive securities that were
outstanding during each period. The Company had net losses for the three and
six months ended June 30, 1998; as a result, none of the options outstanding
during those periods were included in the computations of diluted net loss per
share since they were antidilutive. The following table sets forth the
computation of the weighted-average number of common shares outstanding on a
diluted basis:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- --------------------
1999 1998 1999 1998
---------- --------- ---------- ---------
<S> <C> <C> <C> <C>
Basic weighted-average number of
common shares outstanding.......... 11,092,000 7,263,000 10,269,000 7,263,000
Potential dilutive effect of stock
options............................ 593,000 -- 571,000 --
---------- --------- ---------- ---------
Diluted weighted-average number of
common shares outstanding.......... 11,685,000 7,263,000 10,840,000 7,263,000
========== ========= ========== =========
</TABLE>
4
<PAGE>
MODEM MEDIA . POPPE TYSON, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
All historical weighted-average share and per-share amounts have been
restated to reflect a 0.95-for-1 reverse stock split, which occurred on
February 3, 1999 (see Note 3).
2. Acquisitions
On December 31, 1996, True North, through the Company, acquired a 64%
interest in Modem Media Advertising Limited Partnership (the "Modem
Partnership"). In addition to the consideration initially paid, True North was
obligated to make cash payments of up to $19,000,000 and issue $4,000,000 in
shares of True North common stock to the former owners of the Modem Partnership
upon completion of an initial public offering of the Company's common stock.
The acquisition agreement also required additional payments to be made
contingent on the Company meeting certain targeted operating levels prior to
such offering, which payments would thereby reduce the aforementioned
$19,000,000 obligation. Pursuant to the agreement, payments aggregating
$4,413,000 were made to the former owners through December 31, 1998. On
February 10, 1999, the Company completed an initial public offering of its
common stock (see Note 3). As a result, True North paid $14,587,000 in cash and
issued $3,931,000 in True North common stock to the former owners of the Modem
Partnership, thereby resulting in corresponding increases in goodwill recorded
on the books of the Company. Such amounts are being amortized over the
remainder of the original 20-year amortization period.
On February 3, 1999, the Company signed a definitive agreement with True
North to purchase the strategic interactive marketing operations of Poppe
Tyson, Inc. effective October 1, 1998 in exchange for (i) the net assets of the
non-strategic digital interactive marketing businesses originally contributed
by True North to the Company in 1996 and (ii) 809,514 shares of Class B common
stock of the Company. In conjunction with this transaction, True North forgave
$5,763,000 of intercompany borrowings and transferred $1,624,000 of fixed
assets to the Company.
In June 1999, the Company acquired 100% of the outstanding capital stock of
a builder and marketer of e-businesses in Tokyo, Japan for approximately
$1,400,000 in cash. Pursuant to the acquisition agreement, the Company is
obligated to make additional payments of up to approximately $2,700,000 if the
acquired entity's results of operations exceed certain targeted levels annually
through 2002. At the Company's discretion, such payments may be comprised of
cash and/or common stock of the Company. The acquisition has been accounted for
under the purchase method of accounting and, accordingly, the operating results
of the acquired entity have been included in the Company's consolidated
financial statements from the date of its acquisition. The net assets of the
acquired entity were not significant. The excess of purchase price over the net
assets acquired of approximately $1,400,000 is reflected in the accompanying
condensed consolidated balance sheet as of June 30, 1999 and is being amortized
over a ten-year period.
3. Equity
Change in Authorized Shares/Reverse Stock Split--On January 11, 1999, the
Company's Board of Directors approved an amendment to the Company's Certificate
of Incorporation to provide for the authorization of an aggregate of 39,351,376
shares of Class A common stock and 5,648,624 shares of Class B common stock. On
that date, the Board of Directors also approved a 0.95-for-1 reverse split of
both classes of the Company's outstanding common stock effective upon
completion of the acquisition of the strategic interactive marketing operations
of Poppe Tyson, Inc., which occurred on February 3, 1999 (see Note 2).
Accordingly, all historical share and per-share amounts have been restated to
reflect the changes in authorized shares and the reverse stock split.
Initial Public Offering--On February 10, 1999, the Company completed an
initial public offering of 2,990,000 shares of its Class A common stock at an
initial public offering price of $16.00 per share. Total net
5
<PAGE>
MODEM MEDIA . POPPE TYSON, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
proceeds from the offering were approximately $42,051,000. The Company used
$6,000,000 of these proceeds to settle an intercompany note payable to True
North and approximately $2,800,000 to acquire and fund the operations of a
builder and marketer of e-businesses in Tokyo, Japan (see Note 2). The Company
expects to use the remaining net proceeds for general corporate purposes,
strategic initiatives and additional international expansion. Pending the use
of the net proceeds for the above purposes, the Company has invested such funds
in short-term, interest-bearing, investment grade obligations that are
reflected as cash equivalents in the accompanying condensed consolidated
balance sheet as of June 30, 1999.
Stockholders Agreement--In May 1999, the Company and True North entered into
a stockholders' agreement ("Stockholders Agreement") which stipulates, among
other things, that upon the earlier of (i) the date True North and its
affiliates no longer own at least 35% of the outstanding capital stock of the
Company and (ii) June 30, 2000, True North agrees that it and its affiliates
will convert all of their shares of Class B common stock of the Company into
shares of Class A common stock of the Company.
Registration Rights Agreement--As part of the Stockholders Agreement, the
Company and True North agreed to enter into a registration rights agreement
that would contain provisions granting the holders of Class B common stock, and
certain holders of Class A common stock, the right to participate in certain
registrations of the Company's common stock, subject to limitations to be
outlined therein. In addition, the agreement would also provide the holders of
Class B common stock of the Company the right to initiate the registration of
their securities, subject to certain timing and other limitations.
4. Comprehensive Income
The Company reflects its comprehensive income, such as unrealized gains and
losses on the Company's foreign currency translation adjustments, as a separate
component of stockholders' equity as required by SFAS No. 130, Reporting
Comprehensive Income. Total comprehensive income (loss) for the three and six
months ended June 30, 1999 and 1998 was as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------- ------------------
1999 1998 1999 1998
-------- --------- -------- ---------
<S> <C> <C> <C> <C>
Net income (loss).................... $581,000 $(768,000) $108,000 $(962,000)
Foreign currency translation
adjustment.......................... (9,000) (3,000) -- 16,000
-------- --------- -------- ---------
Total comprehensive income (loss).. $572,000 $(771,000) $108,000 $(946,000)
======== ========= ======== =========
</TABLE>
5. Stock Purchase Plan
In February 1999, the Company established an Employee Stock Purchase Plan
(the "Purchase Plan") under which a total of 950,000 shares of Class A common
stock have been made available for sale. The Purchase Plan permits eligible
employees to purchase Class A common stock through payroll deductions, which
may not exceed 15% of an employee's compensation, as defined, subject to
certain limitations. Each offering period under the Purchase Plan lasts twenty-
four months, the first of which began on February 15, 1999 and terminates on
February 14, 2001. During each offering period, there are a series of
consecutive, overlapping purchase periods, each approximately six months in
duration. For employees other than those who elected participation in the
initial purchase period, the purchase price of each share of Class A common
stock under this plan will be equal to 85% of the fair market value per share
of Class A common stock on the first or last day of the purchase period,
whichever is lower. However, for employees who elected participation in the
initial purchase period, the purchase price of each share of Class A common
stock during the first offering period will be equal to 85% of the initial
public offering price or the fair market value on the last day of each
6
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MODEM MEDIA . POPPE TYSON, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
purchase period, whichever is lower, provided that the employees do not
withdraw from the Purchase Plan during the offering period. Employees may
modify or end their participation in the Purchase Plan at any time during an
offering period, subject to certain limitations. Participation ends
automatically upon termination of employment with the Company. The Purchase
Plan will terminate in 2009 unless sooner terminated by the Company's Board of
Directors.
6. Related Party Transactions
True North Note Receivable--The Company's $4,500,000 note receivable from
True North, reflected as "True North note receivable" in the accompanying
condensed consolidated balance sheet as of December 31, 1998, was repaid by
True North in February 1999.
Due to True North--The Company's outstanding balance under its credit
facility with True North, reflected as "Due to True North" in the accompanying
condensed consolidated balance sheet as of December 31, 1998, was repaid by the
Company in April 1999.
Note Payable to True North--The Company's $6,000,000 note payable to True
North was repaid in February 1999 with a portion of the Company's net proceeds
from its initial public offering (see Note 3).
7. Geographic Information
Information about the Company's operations in different geographic regions
is as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------- ------------------------
1999 1998 1999 1998
------------ ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues:
Domestic................ $ 13,978,000 $ 9,400,000 $24,757,000 $17,285,000
International........... 2,064,000 1,051,000 3,668,000 2,182,000
------------ ----------- ----------- -----------
$ 16,042,000 $10,451,000 $28,425,000 $19,467,000
============ =========== =========== ===========
Income (loss) before
income taxes:
Domestic................ $ 2,075,000 $ (775,000) $ 2,196,000 $ (521,000)
International........... (262,000) (123,000) (660,000) (173,000)
True North Units Held
for Transfer........... -- 78,000 -- (3,000)
------------ ----------- ----------- -----------
$ 1,813,000 $ (820,000) $ 1,536,000 $ (697,000)
============ =========== =========== ===========
Net income (loss):
Domestic................ $ 889,000 $ (635,000) $ 697,000 $ (672,000)
International........... (308,000) (146,000) (589,000) (214,000)
True North Units Held
for Transfer........... -- 13,000 -- (76,000)
------------ ----------- ----------- -----------
$ 581,000 $ (768,000) $ 108,000 $ (962,000)
============ =========== =========== ===========
</TABLE>
7
<PAGE>
MODEM MEDIA . POPPE TYSON, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
8. Supplemental Cash Flow Data
<TABLE>
<CAPTION>
Three Months
Ended Six Months Ended
June 30, June 30,
---------------- -----------------
1999 1998 1999 1998
-------- ------- -------- --------
<S> <C> <C> <C> <C>
Interest paid................................ $ 29,000 $22,000 $ 77,000 $ 57,000
Taxes paid................................... $536,000 $87,000 $536,000 $198,000
</TABLE>
9. Subsequent Event
Effective August 9, 1999, the Company entered into an agreement to provide
$12,000,000 of services to General Electric Company ("GE") through September
30, 2000. If GE fails to meet its obligation to purchase such services prior to
September 30, 2000, GE will make a cash payment to the Company equal to the
difference between the $12,000,000 commitment and the actual amount of services
purchased during such period. In conjunction with GE's commitment to purchase
the aforementioned services, the Company granted General Electric Capital
Corporation warrants to purchase 95,000 shares of the Company's Class A common
stock at $24.32 per share, the average of the high and low trading prices
during the five trading days prior to the grant date. The warrants vested
immediately and expire on August 8, 2004. The fair value of these warrants, as
determined by an independent appraisal expert, will result in a non-cash charge
of $587,100 which will be reflected as a reduction of revenues as services are
provided over the next 14 months or a reduction of the cash payment previously
discussed, if applicable.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Certain statements herein constitute "forward-looking statements" within the
meaning of Section 21E(i)(1) of the Securities and Exchange Act of 1934, as
amended. Such forward-looking statements involve known and unknown risks,
uncertainties and other factors that may cause the actual results of Modem
Media to be materially different from any future results expressed or implied
by these statements. Such factors include, among other things, the following: a
history of operating losses, dependence on a limited number of clients,
variability of operating results, the ability to integrate acquired companies,
the cost and timing of international expansion, the ability to estimate costs
in fixed-fee assignments, the cost and timing of the implementation of the
Modem Media Year 2000 project, the timely response to and correction by third
parties and clients of their Year 2000 issues, the extent to which the
interests of Modem Media's controlling stockholder, True North, conflict with
Modem Media's interests, the ability to manage future growth, dependence on key
management personnel, exclusivity arrangements with clients that may limit the
ability to provide services to others, dependence on technology, dependence on
the continued growth of the Internet, and changes in government regulation. In
light of these and other uncertainties, the forward-looking statements included
in this document should not be regarded as a representation by Modem Media that
its plans and objectives will be achieved.
Overview
Modem Media is a leading builder and marketer of customer-focused e-
businesses for world-class brands. Modem Media enables global marketers to
attract, acquire and retain customers on the Internet by providing superior
marketing strategy, consulting, technology, creative and media services. Modem
Media derives substantially all of its revenues from fees for building,
distributing and managing differentiated e-business solutions for its clients
around the globe. Modem Media's global office network provides the following
services to its clients:
. Internet business consulting and long-term strategic plans
. website, e-commerce, and e-care platform design and development
. Internet marketing and distribution strategy and execution
. customer relationship optimization strategy and execution
A majority of Modem Media's revenues are derived from fixed-fee assignments.
Modem Media recognizes revenues as services are rendered. Modem Media
reassesses its estimated costs on each project periodically and losses are
accrued, on a project-by-project basis, to the extent costs incurred and
anticipated costs to complete projects exceed anticipated billings. Provisions
for losses on uncompleted contracts are recognized in the period in which such
losses are determined.
Clients generally hire Modem Media on an engagement basis rather than a
retainer basis. Once a project is completed, there can be no assurance that a
client will engage Modem Media for future services. As a result, a client that
generates substantial revenue for Modem Media in one period may not be a
substantial source of revenue in a subsequent period. In addition, Modem
Media's clients generally have the right to terminate their relationships with
Modem Media without penalty and with relatively short or no notice. The
termination of Modem Media's business relationships with any of its significant
clients, or a material reduction in the use of Modem Media's services by any
such clients, could adversely affect Modem Media's business, financial
condition and results of operations.
Salaries and benefits represent the majority of Modem Media's operating
expenses. These expenses include salaries, employee benefits, incentive
compensation and other payroll-related costs. Office and general is comprised
of office rent, utilities, depreciation, amortization of software, professional
and consulting fees, travel, telephone and other related expenses.
Modem Media has experienced operating losses as well as net losses in nine
of the fourteen quarters from January 1, 1996 through June 30, 1999. Although
Modem Media has experienced revenue growth in recent
9
<PAGE>
periods, these growth rates may not be sustainable or indicative of future
operating results. In addition, Modem Media has incurred substantial costs to
expand and integrate its operations and intends to continue to invest heavily
in ongoing expansion and integration efforts as well as infrastructure
development. As a result, there can be no assurance that Modem Media will
sustain profitability.
Seasonality and Other Factors Affecting Operating Results
Modem Media's revenues have historically been higher during the second half
of each year as its clients prepare marketing campaigns for products and
services launched in anticipation of fall trade shows and the holiday season.
In the past, Modem Media has experienced revenue declines during the first
quarter of the year from the fourth quarter of the preceding year as clients
reestablish their annual marketing and advertising budgets. Although Modem
Media did not experience this variation in the first quarter of 1999, there can
be no assurance that the variation will not return in future fiscal years.
Modem Media's operating results have fluctuated in the past, and may
continue to fluctuate in the future, as a result of a variety of factors,
including the timing of new projects, material reductions, cancellations or
completions of major projects, the loss of significant clients, the opening or
closing of offices, Modem Media's relative mix of business, changes in Modem
Media's pricing strategies or those of its competitors, employee utilization
rates, changes in personnel and other factors that are outside of Modem Media's
control. In addition, Modem Media has experienced some variation in operating
results throughout the year resulting in part from marketing communications
spending patterns and business cycles of its clients. As a result, period-to-
period comparisons of Modem Media's operating results cannot be relied upon as
indicators of future performance.
During the second quarter, Modem Media resigned its relationship with AT&T.
Management does not expect the resignation to have a material adverse impact on
the operating results of Modem Media through the end of 1999 or beyond.
Results of Operations
The following table sets forth certain statements of operations data of
Modem Media for the three and six months ended June 30, 1999 and 1998 included
elsewhere in this Quarterly Report on Form 10-Q:
<TABLE>
<CAPTION>
Three Months Six Months
Ended Ended
June 30, June 30,
--------------- ---------------
1999 1998 1999 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
(unaudited, in thousands)
Revenues.................................... $16,042 $10,451 $28,425 $19,467
Salaries and benefits....................... 8,996 7,400 17,480 13,320
Office and general.......................... 5,018 3,516 8,941 5,990
Amortization of goodwill.................... 719 430 1,309 847
Operating (income) losses of True North
Units Held for Transfer.................... -- (78) -- 3
------- ------- ------- -------
Operating income (loss)..................... 1,309 (817) 695 (693)
Interest income (expense), net.............. 504 (3) 841 (4)
Provision (benefit) for income taxes........ 1,232 (52) 1,428 265
------- ------- ------- -------
Net income (loss)........................... $ 581 $ (768) $ 108 $ (962)
======= ======= ======= =======
</TABLE>
10
<PAGE>
The following table sets forth certain items from Modem Media's statements
of operations data as a percentage of total revenues for the periods indicated:
<TABLE>
<CAPTION>
Three Months Six Months
Ended Ended
June 30, June 30,
-------------- ------------
1999 1998 1999 1998
------ ------ ----- -----
<S> <C> <C> <C> <C>
(unaudited)
Revenues...................................... 100.0% 100.0% 100.0% 100.0%
Salaries and benefits......................... 56.0 70.8 61.5 68.4
Office and general............................ 31.3 33.6 31.5 30.8
Amortization of goodwill...................... 4.5 4.1 4.6 4.3
Operating (income) losses of True North Units
Held for Transfer............................. -- (0.7) -- --
------ ------ ----- -----
Operating income (loss)....................... 8.2 (7.8) 2.4 (3.5)
Interest income (expense), net................ 3.1 -- 3.0 --
Provision (benefit) for income taxes.......... 7.7 (0.5) 5.0 1.4
------ ------ ----- -----
Net income (loss)............................. 3.6% (7.3)% 0.4% (4.9)%
====== ====== ===== =====
</TABLE>
Results of Operations--Three Months Ended June 30, 1999 Compared to Three
Months Ended June 30, 1998
Revenues. Revenues increased $5.6 million, or 53.5%, to $16.0 million for
the three months ended June 30, 1999 from $10.5 million for the three months
ended June 30, 1998. Revenues increased primarily as a result of increased
services provided to existing clients, as well as the addition of new clients.
Salaries and Benefits. Salaries and benefits increased $1.6 million, or
21.6%, to $9.0 million for the three months ended June 30, 1999 from $7.4
million for the three months ended June 30, 1998. Salaries and benefits
represented 56.0% and 70.8% of revenues for the three months ended June 30,
1999 and 1998, respectively. The dollar increase in salaries and benefits is
attributable to a company-wide increase in headcount to better manage the
growth of its business, service clients and actively pursue new client
business. The decrease of salaries and benefits as a percentage of revenue is
due primarily to higher percentage growth rates in revenue.
Office and General. Office and general increased $1.5 million, or 42.7%, to
$5.0 million for the three months ended June 30, 1999 from $3.5 million for the
three months ended June 30, 1998. Office and general represented 31.3% and
33.6% of revenues for the three months ended June 30, 1999 and 1998,
respectively. The dollar increase in office and general is primarily due to
increased occupancy and office support expenses incurred in connection with
increases in headcount. The decrease of office and general as a percentage of
revenue is due primarily to higher percentage growth rates in revenue.
Amortization of Goodwill. Amortization of goodwill increased by $0.3
million, or 67.2%, to $0.7 million for the three months ended June 30, 1999
from $0.4 million for the three months ended June 30, 1998. The increase is
primarily a result of payments of additional purchase price for Modem Media
Advertising Limited Partnership ("the Modem Partnership") by True North to the
former owners of the Modem Partnership of $3.3 million and $18.5 million in May
1998 and February 1999, respectively (see Note 2 of Notes to Condensed
Consolidated Financial Statements of Modem Media . Poppe Tyson, Inc. and
Subsidiaries).
Operating (Income) Losses of True North Units Held for Transfer. The non-
strategic digital interactive marketing operations were sold to True North
effective October 1, 1998. Accordingly, the operating results of such entities
are not a part of the Company's operating results for the three months ended
June 30, 1999.
11
<PAGE>
Interest. Interest income, net increased to $0.5 million during the three
months ended June 30, 1999. The increase is principally attributable to
interest income earned on investments purchased with the proceeds from Modem
Media's initial public offering.
Income Taxes. Modem Media had a provision for income taxes of $1.2 million
on pre-tax income of $1.8 million for the three months ended June 30, 1999, as
compared to a benefit for income taxes of $0.1 million on a pre-tax loss of
$0.8 million for the three months ended June 30, 1998. The effective income tax
rate was 68.0% for the three months ended June 30, 1999 as compared to an
effective income tax benefit rate of 6.3% for the three months ended June 30,
1998. The effective tax rates differ from the federal statutory rate primarily
due to the effect of non-deductible goodwill amortization and losses of certain
foreign subsidiaries on which Modem Media did not recognize tax benefits.
Results of Operations--Six Months Ended June 30, 1999 Compared to Six Months
Ended June 30, 1998
Revenues. Revenues increased $9.0 million, or 46.0%, to $28.4 million for
the six months ended June 30, 1999 from $19.5 million for the six months ended
June 30, 1998. Revenues increased primarily as a result of increased services
provided to existing clients, as well as the addition of new clients.
Salaries and Benefits. Salaries and benefits increased $4.2 million, or
31.2%, to $17.5 million for the six months ended June 30, 1999 from $13.3
million for the six months ended June 30, 1998. Salaries and benefits
represented 61.5% and 68.4% of revenues for the six months ended June 30, 1999
and 1998, respectively. The dollar increase in salaries and benefits is
attributable to a company-wide increase in headcount to better manage the
growth of its business, service clients and actively pursue new client
business. The decrease of salaries and benefits as a percentage of revenue is
due primarily to higher percentage growth rates in revenue.
Office and General. Office and general increased $3.0 million, or 49.3%, to
$8.9 million for the six months ended June 30, 1999 from $6.0 million for the
six months ended June 30, 1998. Office and general represented 31.5% and 30.8%
of revenues for the six months ended June 30, 1999 and 1998, respectively. Both
the dollar and percentage increases in office and general were primarily due to
increased occupancy and office support expenses incurred in connection with
increases in headcount.
Amortization of Goodwill. Amortization of goodwill increased by $0.5
million, or 54.5%, to $1.3 million for the six months ended June 30, 1999 from
$0.8 million for the six months ended June 30, 1998. The increase is a result
of payments of additional purchase price for Modem Partnership by True North to
the former owners of the Modem Partnership of $3.3 million and $18.5 million in
May 1998 and February 1999, respectively (see Note 2 of Notes to Condensed
Consolidated Financial Statements of Modem Media . Poppe Tyson, Inc. and
Subsidiaries).
Operating (Income) Losses of True North Units Held for Transfer. The non-
strategic digital interactive marketing operations were sold to True North
effective October 1, 1998. Accordingly, the operating results of such entities
are not a part of the Company's operating results for the six months ended June
30, 1999.
Interest. Interest income, net increased to $0.8 million during the six
months ended June 30, 1999. The increase is principally attributable to
interest income earned on investments purchased with the proceeds from Modem
Media's initial public offering.
Income Taxes. Modem Media had a provision for income taxes of $1.4 million
on pre-tax income of $1.5 million for the six months ended June 30, 1999, as
compared to a provision for income taxes of $0.3 million on a pre-tax loss of
$0.7 million for the six months ended June 30, 1998. The effective income tax
rates for the six months ended June 30, 1999 and 1998 were 93.0% and 38.0%,
respectively. The effective tax rates
12
<PAGE>
differ from the federal statutory rate primarily due to the effect of non-
deductible goodwill amortization and losses of certain foreign subsidiaries on
which Modem Media did not recognize tax benefits.
Liquidity and Capital Resources
Modem Media historically has financed its operations primarily from funds
generated from operations and borrowings from True North. At December 31, 1998,
Modem Media had a non-interest bearing intercompany note payable to True North
of $6.0 million, which was repaid in February 1999 from the net proceeds of
Modem Media's initial public offering. Pursuant to agreements between True
North and its lenders, Modem Media is subject to limitations on indebtedness
that could adversely affect Modem Media's ability to secure debt financing in
the future.
Net cash provided by (used in) operating activities was $1.0 million and
$(1.2) million for the six months ended June 30, 1999 and 1998, respectively.
The investment in working capital was offset by depreciation expense and
goodwill amortization, which totaled $3.0 million and $1.5 million for the six
months ended June 30, 1999 and 1998, respectively.
Net cash used in investing activities was $5.4 million and $1.0 million for
the six months ended June 30, 1999 and 1998, respectively. Investing activities
reflect the June 1999 acquisition by the Company of a builder and marketer of
e-businesses in Japan, capital expenditures to purchase and install enterprise
software in 1999, and purchases of other computer software, computer hardware,
furniture and office equipment in both periods.
Net cash provided by (used in) financing activities was $40.2 million and
$(0.7) million for the six months ended June 30, 1999 and 1998, respectively.
The primary source of cash flows from financing activities was Modem Media's
initial public offering in February 1999.
Modem Media's short-term capital commitments include lease payments over the
next 12 months aggregating approximately $4.8 million and the funding of
certain international operations which are not expected to be self-sufficient
in the near-term. The long-term capital needs of Modem Media will depend on
numerous factors, including the rates at which Modem Media is able to obtain
new business from clients and expand its personnel and infrastructure to
accommodate growth, as well as the rate at which it chooses to invest in new
technologies and additional global expansion. Modem Media has ongoing needs for
capital, including working capital for operations, project development costs
and capital expenditures to maintain and expand its operations.
In August 1998, True North extended a credit facility to Modem Media
allowing for revolving borrowings in the amount of up to $3.0 million to be
outstanding at any given time. The credit facility with True North expires in
February 2001, or upon 60 days advance notice if True North's voting control in
Modem Media falls below 50% of total voting power. There are no borrowings
outstanding under this facility as of June 30, 1999.
Modem Media believes that the net proceeds from its initial public offering,
together with funds available from operations, if any, will be sufficient to
meet its capital needs for at least the next twelve months. A portion of the
net proceeds from the offering may also be used to acquire or invest in
complementary companies, services, products or technologies, or to invest in
strategic initiatives or geographic expansion. Modem Media has no agreements or
commitments with respect to any such transactions other than those disclosed in
the notes to the accompanying condensed consolidated financial statements.
Year 2000 Compliance
The following Year 2000 statement is a Year 2000 Readiness Disclosure made
pursuant to Section 7(b) of the Year 2000 Information and Readiness Disclosure
Act.
Modem Media continues to evaluate and address date-sensitive system issues
associated with the Year 2000. The Company's approach to addressing the Year
2000 issue is team-based, involving employees from
13
<PAGE>
multiple disciplines and an outside consultant. Modem Media is approaching this
issue in the following five phases: awareness, assessment (including an
inventory and review of information technology systems, hardware, software,
non-information technology systems and equipment), repair/replacement, testing
and implementation.
Regarding both the IT and non-IT systems, Modem Media has completed the
awareness phase, is approximately 60% complete with respect to the assessment
phase, is approximately 77% complete with respect to the repair/replacement
phase and is approximately 50% complete with respect to each of the testing and
implementation phases. Completion of the assessment phase is expected during
the third quarter of 1999, with completion of the repair/replacement, testing
and implementation phases to be completed during the fourth quarter of 1999.
Thus far, the assessment phase has revealed that Modem Media's non-
information technology systems do not contain any elements that are susceptible
to Year 2000 problems. Modem Media has limited exposure in its IT systems and
very little custom software. Remediation of commercial off-the-shelf software
has been scheduled and involves upgrades, replacement, or retirement of
packages determined to pose risk to normal operations. The few custom
applications are being assessed and plans have been made to address identified
date issues. All client system hardware has been upgraded or slated for
retirement prior to the end of this year. The assessment of servers is underway
with remediation taking place in parallel. As a result, Modem Media believes
that its internal computer systems will properly utilize dates beyond December
31, 1999. If, in the worst case scenario, such replacement is not made or is
not completed on a timely basis, the Year 2000 issue could have a material
impact on the operations of Modem Media.
Furthermore, there can be no assurance that Modem Media's suppliers will not
experience material business disruptions as a result of the Year 2000 issue
that could affect Modem Media. In this regard, Modem Media has asked each of
its third-party suppliers to confirm that they are Year 2000 compliant.
Substantially all of Modem Media's third-party suppliers have indicated that
they expect to be Year 2000 compliant by the Year 2000 based on their progress
to date, and a majority have indicated that their Year 2000 compliance programs
have already been completed. However, in the worst case scenario, a substantial
number of third parties could be unable to complete their Year 2000 resolution
process, causing significant disruptions in Modem Media's ability to provide
services to its clients.
Modem Media regularly conducts transactions and performs services that
interface directly with the systems of its clients. The inability of Modem
Media's clients to complete their Year 2000 compliance could cause them to
substantially reduce their spending on interactive marketing programs.
In addition, True North has agreed to provide legal, tax preparation,
insurance, treasury, financing and debt and lease guaranty services to Modem
Media. Modem Media does not believe that any Year 2000 problems experienced by
True North would have a material effect on True North's ability to provide
these services to Modem Media, for the following reasons:
. True North's ability to provide these services is based for the most
part on the availability of its personnel, rather than the integrity of
its systems,
. the use of these systems by True North personnel is generally incidental
to the services provided, and
. the systems used generally consist of off-the-shelf software that is
readily replaceable.
Modem Media is in the process of developing contingency plans to be used in
the event of a failure of its information technology systems, even though it
expects to have its material systems in place during the third quarter of 1999.
In connection with Modem Media's assessment of third party readiness during
1999, Modem Media is evaluating the extent to which contingency plans are
needed based on the level of uncertainty regarding such readiness. In the event
Modem Media's intermediaries or vendors do not expect to be Year 2000
compliant, Modem Media's contingency plans may include replacing such
intermediaries or vendors or conducting the particular operation itself. Modem
Media expects to complete its contingency plans by the fourth quarter of 1999.
14
<PAGE>
Modem Media estimates the total cost of its Year 2000 program to be
approximately $500,000, of which $200,000 has been incurred as of June 30, 1999
and none of which has been capitalized. There is no guarantee, however, that
the actual costs incurred will not differ materially from this estimate.
In order to keep pace with the growth and expansion of its business, Modem
Media decided in 1997 to replace its existing financial accounting system and
is currently in the process of doing so. Under the purchase agreement, the
system provider has given Modem Media a two-year limited warranty that the
replacement financial accounting system will be Year 2000 compliant.
15
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Modem Media is not a party to any material legal proceedings.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On February 4, 1999, the Securities and Exchange Commission declared Modem
Media's Registration Statement on Form S-1 (No. 333-68057) effective. On
February 10, 1999, Modem Media completed an initial public offering of an
aggregate of 2,990,000 shares of Modem Media's Class A common stock at an
offering price of $16.00 per share. The managing underwriters for the offering
were BancBoston Robertson Stephens, NationsBanc Montgomery Securities LLC and
Bear, Stearns & Co. Inc. Net proceeds to Modem Media, after deducting
underwriting discounts and commissions of $3,349,000 and offering expenses of
$2,440,000 were $42,051,000. None of the expenses incurred in the offering were
direct or indirect payments to directors, officers, or general partners of the
issuer or their associates, to persons owning ten percent or more of any class
of equity securities of the issuer or to affiliates of the issuer. Modem Media
used $6,000,000 of these proceeds to settle an intercompany note payable to its
parent, True North, and approximately $2,800,000 to acquire and fund the
operations of a builder and marketer of e-businesses in Tokyo, Japan. Modem
Media has invested the remainder of the net proceeds in short-term, interest-
bearing, investment grade obligations pending their use.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<C> <S>
4.2 Stockholders Agreement dated as of May 4, 1999 by and between the
Company, True North Communications Inc., Gerald M. O'Connell and Robert
C. Allen, II.
10.12 Modem Media Advertising Limited Partnership 1996 Option Plan and its
amendment
27.1 Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K
The Company filed a Form 8-K, dated June 29, 1999, reporting in Item 5 the
Company's resignation from its relationship with AT&T.
16
<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 thereunto duly authorized.
MODEM MEDIA . POPPE TYSON, INC.
Date: August 16, 1999 /s/ Gerald M. O'Connell
By: _________________________________
Gerald M. O'Connell
Chief Executive Officer
(Principal Executive Officer)
/s/ Steven C. Roberts
___________________________________
Steven C. Roberts
Chief Financial Officer
(Principal Financial and
Accounting Officer)
17
<PAGE>
Exhibit 4.2
STOCKHOLDERS AGREEMENT
THIS AGREEMENT is made as of May 4, 1999 by and among True North
Communications Inc., a Delaware corporation ("True North"), Modem Media . Poppe
----------
Tyson, Inc., a Delaware corporation ("Modem Media"), and Gerald M. O'Connell and
-----------
Robert C. Allen, II (together, the "Modem Stockholders" and together with True
------------------
North, collectively referred to as the "Stockholders).
------------
WHEREAS, True North, Modem Media, the Modem Stockholders and certain other
parties are party to an Amendment and Competition Agreement dated as of February
3, 1999 (the "Amendment") which amends the Amended and Restated Acquisition
---------
Agreement, dated as of December 31, 1996 among such parties (the "Acquisition
-----------
Agreement"), and an Agreement and Plan of Merger, dated as of February 3, 1999
- ---------
(the "Merger Agreement").
WHEREAS, True North and the Modem Stockholders are parties to a Letter of
Intent dated May 20, 1998 (the "Letter of Intent").
----------------
WHEREAS, Modem Media and the Stockholders desire to enter into this
Agreement for the purposes, among others, of establishing the composition of the
Board and making changes to the Acquisition Agreement, the Amendment and the
Letter of Intent.
NOW, THEREFORE, in consideration of the mutual covenants contained
herein and other good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, the parties to this Agreement hereby agree as
follows:
1. The parties hereto agree to the nomination and election to the Board
of Robert H. Beeby, Don Peppers and Joseph Zimmel.
2. Until the earlier of (i) the date on which True North and its
affiliates no longer own in the aggregate shares of capital stock of Modem Media
representing at least 35% of the outstanding capital stock of Modem Media and
(ii) December 31, 1999 (the earlier of such date being referred to herein as the
"Expiration Date"), Modem Media shall not, and the Modem Stockholders shall
cause Modem Media to not, without the prior written consent of a majority of the
members of the Board designated by True North, directly or indirectly:
(a) make any dividends or distributions on, or redemptions or
purchases of, any equity securities of Modem Media;
(b) issue equity securities in excess of 22.5% of the then-outstanding
equity securities of Modem Media;
(c) enter into any business other than the business conducted by Modem
Media, or fundamentally change the business of Modem Media, as of the date
hereof;
(d) establish any subsidiary, partnership, corporation or any other
business enterprise or enter into any joint venture that would be material to
the business or operations of Modem Media;
(e) sell all or substantially all of the assets of Modem Media;
<PAGE>
(f) make any acquisitions of or investments in the stock, assets or
business of any other entity in any form of transaction
aggregating in excess of $25 million in any one transaction or $50
million in any 12-month period;
(g) (i) undertake a liquidation, dissolution, recapitalization or
reorganization of Modem Media or (ii) make any amendment to Modem
Media's Bylaws;
(h) increase or decrease the number of Board members;
(i) create any new committees of the Board or make any appointments to
committees of the Board;
(j) appoint or remove the Chief Executive Officer, Chief Financial
Officer or President of Modem Media; or
(k) agree to do any of the foregoing.
3. Until the Expiration Date, Modem Media shall not, and the Modem
Stockholders shall cause Modem Media to not, without the prior written consent
of a majority of the independent members of the Board, enter into any contract
or arrangement with any Modem Stockholder or any affiliate thereof.
4. Following the Expiration Date until such time as True North and its
affiliates no longer own in the aggregate shares of capital stock of Modem Media
representing at least 10% of the outstanding capital stock of Modem Media, each
Stockholder and Modem Media shall take all actions necessary in order to cause
the election to the Board of at least one director designated by True North.
5. Upon the earlier of (i) the date True North and its affiliates no
longer own in the aggregate shares of capital stock of Modem Media representing
at least 35% of the outstanding capital stock of Modem Media and (ii) June 30,
2000, True North agrees that it will, and will cause its affiliates to, convert
the shares of Class B Common Stock of Modem Media then owned by it and its
affiliates into shares of Class A Common Stock of Modem Media.
6. The parties hereto agree to enter into a Registration Rights Agreement
substantially in the form attached hereto as Exhibit A.
---------
7. (a) The parties hereto agree that, on the Expiration Date:
(i) the Acquisition Agreement will be amended to delete
Section 9.9 in its entirety;
(ii) the Amendment will be terminated in its entirety; and
(iii) the Letter of Intent will be amended to delete Section V
thereof in its entirety.
<PAGE>
(b) After the Expiration Date, to the extent that it is in the mutual
interest of both parties, Modem Media, FCB Worldwide and Bozell
Worldwide will cooperate on any projects under such terms and
conditions as both parties mutually agree.
8. Until the date on which True North and its affiliates no longer own in
the aggregate shares of capital stock of Modem Media representing at least 15%
of the then-outstanding capital stock of Modem Media and for the remaining
quarters and final year end results for the year in which True North's ownership
falls below 15%, Modem Media will continue to timely provide True North with all
financial or tax information which True North requests in order to comply with
its public reporting requirements, its tax and other legal requirements.
9. This document embodies the complete agreement and understanding among
the parties hereto with respect to the subject matter hereof and supersedes and
preempts any prior understanding, agreements or representations by or among the
parties, written or oral, with respect to such matters.
10. Paragraphs 2, 5 and 6 are subject to the ratification by True North's
Board of Directors at its next regularly scheduled meeting. True North's
management agrees to recommend this document for ratification.
* * * * *
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the
date and year first above written.
True North Communications Inc.
/s/ Donald S. Seeley
By: ____________________________
Vice Chairman and CFO
Its: ____________________________
Modem Media . Poppe Tyson, Inc.
/s/ Gerald M. O'Connell
By: ____________________________
CEO
Its: ____________________________
/s/ Gerald M. O'Connell
__________________________________
Gerald M. O'Connell
/s/ Robert C. Allen, II
__________________________________
Robert C. Allen, II
<PAGE>
Exhibit 10.12
MODEM MEDIA ADVERTISING
LIMITED PARTNERSHIP
1996 OPTION PLAN
The purpose of this 1996 Option Plan (the "Plan") of Modem Media
Advertising Limited Partnership, a Connecticut limited partnership (the
"Company"), is to provide officers, directors, key employees and consultants of
the Company with an opportunity to own units of limited partnership interest in
the Company issueable pursuant to the Company's Limited-Partnership Agreement
("Units"). Upon exercise of an Option granted under the Plan and execution of
the Company's Limited Partnership Agreement by the Optionholder, such
Optionholder will become a Limited Partner in the Company, subject to and in
accordance with the terms of the Company's Limited Partnership Agreement.
Article I
Definitions
Capitalized terms not otherwise defined herein shall have the meanings set
forth in the Company's Limited Partnership Agreement. The following defined
terms shall have the following meanings:
"Change in Control" means any Successor Company, other than Modem Media,
-----------------
Inc., a Connecticut corporation, becoming, subsequent to the adoption of this
Plan, directly or indirectly, (a) the sole general partner of the Company, (b)
the beneficial owner of securities of the Company and/or securities of Modem
Media, Inc. entitling such Successor Company to 50% or more of the net income of
the Company, or (c) the purchaser of all or substantially all of the Company's
assets.
"Compensation Committee" means a committee compromised of Gerald M.
----------------------
O'Connell, Douglas C. Ahlers and Robert C. Allen, and/or such other substitute
or additional members as may be appointed by the General Partner of the Company
at any time.
"Limited Partnership Agreement" means the Company's First Amended and
-----------------------------
Restated Agreement of Limited Partnership, as the same may be amended,
supplemented or modified from time to time.
"Optionholder" means the holder of an Option issued under this Plan.
------------
"Option" means an option, issued under this Plan, to purchase Units in the
------
Company.
<PAGE>
"Permitted Transferee" means a person who is (a) a member of an
--------------------
Optionholder's immediate family (i.e., a spouse, parent, child (including an
adopted child) or grandchild of that individual); (b) a partnership of which
each partner is a person referred to in clause (a); (c) a trust of which each
beneficiary is a person referred to in clause (a) or (d) a trust in which each
beneficiary as to the payment of principal is a person referred to in clause
(a); and (d) each beneficiary as to the payment of income is a person referred
to in clause (a).
"Person" shall have the meaning set forth in Section 2 (2) of the
------
Securities Act of 1933, as amended.
"Plan Termination Date" means the earliest to occur of (a) September 30,
---------------------
2006, or (b) the liquidation of the Company.
"Successor Company" means any corporation of other Person or entity that,
-----------------
directly or indirectly, succeeds to the ownership of or effective control over
the business and assets of the Company, whether by merger, consolidation,
exchange, sale of assets, contribution of assets, acquisition of stock or
partnership interests, or otherwise.
"Successor Company Shares" means the shares of common stock or other equity
------------------------
interests of any Successor Company.
"Termination" means termination of an Optionholder's employment with the
-----------
Company or its subsidiaries, whether voluntary or involuntary, including,
without limitation, termination upon death, Permanent Disability or retirement.
"Unit" shall have the meaning assigned in the Company's Limited Partnership
----
Agreement.
ARTICLE II
ADMINISTRATION
The Plan shall be administered by both the board of directors of Modem
Media, Inc. and the Compensation Committee, both of which shall have a full
power and authority to interpret the provisions of the Plan and to resolve any
and all questions arising under the Plan, and to render decisions which shall be
final and binding, absent manifest error, on all participants in the Plan.
ARTICLE III
GRANT OF OPTIONS
3.1. Grant of Options. The board of directors of Modem Media, Inc. and the
----------------
Compensation Committee each may grant to officers, directors, employees and
consultants of the Company (and any subsidiaries of the Company) Options to
purchase Units, and such grant may be based upon past, present or anticipated
service or
<PAGE>
performance of such officer, director, employee or consultant or upon
any other criterion that is relevant. Options shall have such terms and
conditions (including terms and conditions relating to the exercise price (the
"Exercise Price")), as may be specified by the board of directors of Modem
Media, Inc. or the Compensation Committee. Each Option shall be fully vested as
of the date of grant thereof.
3.2 Number of Units Available for Grant. Options to purchase up to 30
-----------------------------------
Units, subject to adjustment in accordance with Section 6.3 of this Plan, may be
granted under this Plan. As of the date of adoption of this Plan, 100 Units in
the Company have been issued and are outstanding.
ARTICLE IV
EXERCISE
4.1 Manner of Exercise. Each Option shall be exercisable upon written
------------------
notice (an "Option Exercise Notice") to the Company, which Option Exercise
Notice shall be effective immediately upon delivery except that no Option shall
be exercisable other than in manner which complies with all applicable
requirements of law. The Option Exercise Notice shall specify the date thereof,
and the number of Units with respect to the Option that is being exercised, and
shall be accompanied by (a) check payable to the Company, or other form of
payment authorized under this Plan or acceptable to the Company, in an amount
equal to the applicable Exercise Price and (b) any and all documents required
under the Limited Partnership Agreement as a condition of the admission of the
Optionholder as a Limited Partner in the Company. Except as otherwise provided
in Section 6.3 or 6.8, no adjustment shall be made to the Exercise Price on
account of distributions or other rights occurring or having effect prior to the
date of the Option Exercise Notice. Upon such Optionholder's payment of the
Exercise Price and (if applicable) admission as a Limited Partner in the
Company, the Optionholder shall be treated as having made a capital contribution
to the Company in an amount equal to such exercise Price and shall not be
required to make any additional capital contribution to the Company with respect
to the Units thereby purchased. Unless otherwise expressly stated in the
Option, each Option must be exercised in its entirety, if exercised at all, and
may not be exercised in part.
4.2 Expiration. An Option that has not been exercised pursuant to Section
----------
4.1 hereof shall automatically and without notice terminate and become null and
void upon the earlier of (a) the Plan Termination Date, or (b) expiration of the
Option pursuant to Section 5.2.
4.3 Withholding. The Company shall be entitled to require, as condition
------------
to the issuance of any Units or Successor Company Shares purchasable pursuant to
an Option, that the Optionholder remit prior to exercise of such Option, or that
in appropriate cases the Optionholder agree to remit when due, an amount
sufficient to satisfy all current or estimated future federal, state and local
withholding tax requirements imposed on the Company as a result of the exercise
of such Option.
<PAGE>
4.4 Certificates. Options granted hereunder shall be evidenced by a
------------
certificate (an "Option Certificate") substantially in the form of Exhibit A
hereto. Each Optionholder who accepts an Option (and agrees to be bound by this
Plan) must signify such acceptance by signing the Option Certificate.
ARTICLE V
TRANSFER RESTRICTIONS; REPURCHASE
5.1 Restrictions on Transfer. Options shall not be transferable in whole
------------------------
or in part, other than (a) in a manner which complies with all applicable
requirements of law and (b) either (i) by wills or by the laws of descent and
---
distribution, (ii) to a Permitted Transferee, or (iii) as specifically permitted
under this Article V. Upon any such transfer, the transferee shall execute such
documents as the Company may reasonably require in connection therewith
(including, in the case of a transfer pursuant to clause (a) or (b) of this
Section 5.1, an acknowledgement that such transferee agrees to be bound by the
terms of the Plan). For a period of two years following the date of issuance of
any Option pursuant to this Plan, Units or Successor Company Shares purchased
pursuant to such Option shall not be transferable in whole or in part without
prior written consent of the Company, other than (a) in the manner which
complies with all applicable requirements of law and (b) either (i) by will or
---
by the laws of descent and distribution, (ii) to a Permitted Transferee. The
Company shall have no obligation whatsoever to provide such consent. Each
Optionholder agrees to enter into lock-up agreements reasonably requested by
underwriters in connection with any public offering of Units or other securities
purchasable pursuant to Options.
5.2 Repurchase on Termination. During the 90-day period following the
-------------------------
Termination of an Optionholder, the Company shall have the right to deliver a
notice of repurchase (a "Repurchase Notice") to such Optionholder (or his estate
or legal representative, as the case may be). Upon any date specified by the
Company in the Repurchase Notice (not later that the 90th day following the
date of such Repurchase Notice), the Company shall purchase, and the
Optionholder shall sell, all Options held by such Optionholder for a purchase
price equal to the full fair market value of all unexpired and unexercised
Options held by such Optionholder (determined, by either the board of directors
of Modem Media, Inc. or the Compensation Committee, as of the date of such
Repurchase Notice), less applicable withholding.
ARTICLE VI
MISCELLANEOUS
6.1 Governing Law. The Plan shall be governed by and construed in
-------------
accordance with the laws of the State of Connecticut.
6.2 Term. This Plan, and all Options issued pursuant to this Plan, will
----
expire on the Plan Termination Date.
<PAGE>
6.3 Adjustments. In the event that the Units shall be changed into or
-----------
exchanged for a different number or kind of equity interests of the Company
(whether by reason of merger, consolidation, exchange, recapitilazation,
reclassification, split, combination of interests or otherwise), or if the
number of such Units shall be increased through the distribution of additional
Units in respect of each outstanding Unit, then there shall be substituted for
or added to each Unit available under the Plan and each Unit subject to an
Option, the number and kind of Units or other Company securities into which each
outstanding Unit shall be so changed or for which each such Unit shall be
entitled, as the case may be. In the event there shall be any other change in
the number or kinds of Units, or any other Company securities into which the
Units shall have been changed or for which the Units shall have been exchanged,
then if either the board of directors of Modem Media, Inc. or the Compensation
Committee shall determine that such change equitably requires an adjustment in
the Units or other Company securities available under the Plan or subject to
Options, such adjustments shall be made in accordance with such determination.
6.4 Confidentiality. The Company may from time to time deliver to the
---------------
Optionholders financial information regarding the Company. Each Optionholder
shall hold all such information confidential and not disclose it to any third
party without the consent of the Company.
6.5. Limited Partnership Agreement. The Optionholders acknowledge and
------------------------------
agree that certain provisions of the Limited Partnership Agreement are for the
benefit of the Optionholders, and that the Limited Partnership Agreement may be
amended in the manner provided therein.
6.6 Amendment of Plan. The board of directors of Modem Media, Inc. may
-----------------
make such amendments to the Plan as it shall deem advisable. Except in the case
of any amendment required under law or to reasonably required to ensure
compliance with applicable law, no amendment shall in any way adversely affect
any Options previously granted by the Company and accepted by the Optionholder
without the consent of the Optionholders thereby adversely affected.
6.7 Notice. Notices hereunder shall be given only by personal delivery,
registered or certified mail, return receipt requested, overnight courier
service, or telex, telegram or other form of electronic mail or by telecopy (and
subsequently confirmed by any other permitted means hereunder) and shall be
deemed transmitted when personally delivered or deposited in the mail or
delivered to a courier service or a carrier for electronic transmittal (as the
case may be), postage or charges prepaid and addressed (i) in the case of the
Company, to 228 Saugatuck Avenue, Westport, CT 06880 and (ii) in the case of an
Optionholder, to such Optionholder's address as set forth on the books and
records of the Company.
6.8 Assumption by Successor Company. In the event of a Change in Control,
-------------------------------
each Option shall automatically entitle the Optionholder to purchase, in lieu of
Units otherwise purchasable pursuant to such Option, for an amount equal to the
Exercise
<PAGE>
Price of such Option, Successor Company Shares having a fair market value
(determined as of the date immediately prior to the date on which such Successor
Company became the Successor Company) not less than the excess of the fair
market value of the Units purchasable pursuant to such Option (determined as of
the date immediately prior to date on which such Successor Company became the
Successor Company) over the Exercise Price of such Option. The preceding
sentence shall not apply, however, if in connection with the Change in Control
the Successor Company offers in exchange for each outstanding Option an option
to purchase Successor Company Shares (a) having a value (as of the date of
issuance of Successor Company option) not less than the fair market value of the
Units purchasable pursuant to the Option (as of such date), and (b) on terms and
conditions substantially similar to the terms and conditions of the Option
exchanged therefor except that the terms of such Successor Company option may
include provisions reasonably designed to prevent application of Section 280G of
the Internal Revenue Code to the Successor Company as a result of any exercise
of such Successor Company option. The difference between the exercise price of
options issued by the Successor Company in exchange for Options granted under
the Plan and the fair market value of the Successor Company Shares on the date
of such issuance shall be not less than the difference between the Exercise
Price of such Options and the fair market value of the Units purchasable
pursuant to such Options immediately prior to the date on which such Successor
Company became the Successor Company. In the event that the Company enters into
an agreement (or series of agreements) which are intended to effectuate a Change
in Control, any Units purchased pursuant to an Optionholder's exercise of an
Option during the time period between the signing and closing of such
agreement(s) shall, to the extent possible, be treated for purposes of such
agreement(s) in the same manner as the Option would have been treated for
purposes of such agreement(s) in the same manner as the Option would have been
treated if such exercise had not occurred.
6.9 Registration of Units, Etc. The Company hereby agrees that if the
Company shall hereafter become subject to the reporting requirements of the
Securities Exchange Act of 1934, as amended, the Company shall undertake the
registration of the Units purchasable pursuant to Options, under the Securities
Act of 1933, as amended, pursuant to Form S-8 or any successor form.
6.10 No Guarantee of Employment. This Plan shall not confer upon any
Optionholder any right with respect to continuing the Optionholder's employment
or other relationship with the Company, nor shall this Plan interfere in any way
with the Company's right to terminate such relationship at any time.
6.11 Tax Treatment. The Options granted under this Plan may be granted at
an Exercise Price substantially less than the fair market value of Units
purchasable pursuant to such Options. Each Optionholder is advised to consult a
tax advisor regarding the federal, state and local tax consequences of the
receipt, exercise and/or transfer of any Option or any Units purchasable
pursuant thereto.
<PAGE>
AMENDMENT NO. 1 TO THE MODEM MEDIA ADVERTISING LIMITED PARTNERSHIP
1996 OPTION PLAN
Effective as of July 16, 1999
In accordance of Section 6.6 of the Modem Media Advertising Limited
Partnership 1996 Option Plan (the "Plan") and by the order of the Compensation
Committee of the Board of Directors of Modem Media . Poppe Tyson, Inc., the
successor in interest to Modem Media Advertising Limited Partnership, Section
4.1 and Section 6.7 of the Plan are hereby amended to read in their entirety as
follows:
4.1 Manner of Exercise. Each Option shall be exercisable upon written notice
------------------
(an "Option Exercise Notice") to the Company, which Option Exercise Notice shall
be effective immediately upon delivery except that no Option shall be
exercisable other than in manner which complies with all applicable requirements
of law. The Option Exercise Notice shall specify the date thereof, and the
number of Units with respect to the Option that is being exercised, and shall be
accompanied by (a) check payable to the Company, or other form of payment
authorized under this Plan or acceptable to the Company, in an amount equal to
the applicable Exercise Price and (b) any and all documents required under the
Limited Partnership Agreement as a condition of the admission of the
Optionholder as a Limited Partner in the Company. Except as otherwise provided
in Section 6.3 or 6.8, no adjustment shall be made to the Exercise Price on
account of distributions or other rights occurring or having effect prior to the
date of the Option Exercise Notice. Upon such Optionholder's payment of the
Exercise Price and (if applicable) admission as a Limited Partner in the
Company, the Optionholder shall be treated as having made a capital contribution
to the Company in an amount equal to such exercise Price and shall not be
required to make any additional capital contribution to the Company with respect
to the Units thereby purchased. Unless otherwise expressly stated in the
Option, each Option must be exercised in its entirety, if exercised at all, and
may not be exercised only in part; provided, however, beginning August 4, 1999,
such Option may be exercised in whole or in part.
6.7 Notice. Notices hereunder shall be given only by personal delivery,
------
registered or certified mail, return receipt requested, overnight courier
service, or telex, telegram or other form of electronic mail or by telecopy (and
subsequently confirmed by any other permitted means hereunder) and shall be
deemed transmitted when personally delivered or deposited in the mail or
delivered to a courier service or a carrier for electronic transmittal (as the
case may be), postage or charges prepaid and addressed (i) in the case of the
Company, to 230 East Avenue, Norwalk, CT 06855 and (ii) in the case of an
Optionholder, to such Optionholder's address as set forth on the books and
records of the Company.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S CONDENSED CONSOLIDATED BALANCE SHEET AS OF JUNE 30, 1999 AND CONDENSED
CONSOLIDATED STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 43,698
<SECURITIES> 0
<RECEIVABLES> 16,049
<ALLOWANCES> (1,053)
<INVENTORY> 0
<CURRENT-ASSETS> 64,308
<PP&E> 13,628
<DEPRECIATION> (4,403)
<TOTAL-ASSETS> 126,484
<CURRENT-LIABILITIES> 28,985
<BONDS> 0
0
0
<COMMON> 11
<OTHER-SE> 97,036
<TOTAL-LIABILITY-AND-EQUITY> 126,484
<SALES> 28,425
<TOTAL-REVENUES> 28,425
<CGS> 0
<TOTAL-COSTS> 27,730
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (841)
<INCOME-PRETAX> 1,536
<INCOME-TAX> 1,428
<INCOME-CONTINUING> 108
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 108
<EPS-BASIC> 0.01
<EPS-DILUTED> 0.01
</TABLE>
