<PAGE>
As filed with the Securities and Exchange Commission on March 3, 2000
Registration No. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------
FORM S-1
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
-----------
LOGICAL DESIGN SOLUTIONS, INC.
(Exact name of registrant as specified in its charter)
Delaware 7371 22-3710893
(State or other (Primary Standard (I.R.S. Employer
jurisdiction of Industrial Classification Identification No.)
incorporation or Code Number)
organization)
465 South Street, Suite 103
Morristown, New Jersey 07960
(973) 971-0100
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
Marilynne White, Esq.
General Counsel
Logical Design Solutions, Inc.
465 South Street, Suite 103
Morristown, New Jersey 07960
(973) 971-0100
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
Copies to:
Joseph W. Armbrust, Jr., Esq. Philip J. Boeckman, Esq.
Michael T. Kohler, Esq. Cravath, Swaine & Moore
Brown & Wood LLP Worldwide Plaza
One World Trade Center 825 Eighth Avenue
New York, New York 10048 New York, New York 10019
(212) 839-5300 (212) 474-1000
-----------
Approximate date of commencement of proposed sale to the public: As soon as
practicable after this Registration Statement becomes effective.
-----------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act of 1933, please check the
following box and list the Securities Act of 1933 registration statement number
of the earlier effective registration statement for the same offering. [_]
--------------
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act of 1933, check the following box and list the
Securities Act of 1933 registration statement number of the earlier effective
registration statement for the same offering. [_]
-------------------
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act of 1933, check the following box and list the
Securities Act of 1933 registration statement number of the earlier effective
registration statement for the same offering. [_]
-------------------
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
CALCULATION OF REGISTRATION FEE
<TABLE>
- ----------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------
<CAPTION>
Proposed Maximum
Title of each Class of Aggregate Amount of
Securities to be Registered Offering Price (1) Registration Fee
- ----------------------------------------------------------------------------------------
<S> <C> <C>
Common Stock...................................... $56,350,000 $14,877
- ----------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------
</TABLE>
(1) Estimated solely for purposes of calculating the registration fee pursuant
to Rule 457(o) under the Securities Act of 1933.
The registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933, or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this preliminary prospectus is not complete and may be +
+changed. We may not sell these securities until the registration statement +
+filed with the Securities and Exchange Commission is effective. This +
+preliminary prospectus is not an offer to sell these securities and it is not +
+soliciting an offer to buy these securities in any state where the offer or +
+sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, MARCH 3, 2000
PROSPECTUS
Shares
[LOGO of Logical Design Solutions]
Common Stock
$ per share
--------
We are selling shares of our common stock. The underwriters named in this
prospectus may purchase up to additional shares of our common stock from
the selling stockholders that we identify in this prospectus to cover over-
allotments. We will not receive any proceeds from the sale of shares by the
selling stockholders.
This is an initial public offering of our common stock. We currently expect
the initial public offering price to be between $ and $ per share. We
have applied to have our common stock included for quotation on the Nasdaq
National Market under the symbol "LDSI".
--------
Investing in our common stock involves risks. See "Risk Factors" beginning on
page 8.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
--------
<TABLE>
<CAPTION>
Per
Share Total
----- -----
<S> <C> <C>
Public Offering Price $ $
Underwriting Discount $ $
Proceeds, before expenses, to Logical Design Solutions $ $
==== ====
</TABLE>
If the underwriters exercise in full their option to purchase additional
shares of our common stock to cover over-allotments, the proceeds to the
selling stockholders will be $ . The underwriters are offering the shares
subject to various conditions. The underwriters expect to deliver the shares to
purchasers on or about , 2000.
--------
Salomon Smith Barney Lehman Brothers
SG Cowen
, 2000
<PAGE>
[INSIDE COVER PAGE]
GRAPHIC:
[Graphic to come]
<PAGE>
You should rely only on the information contained in this prospectus.
Neither we nor any of the underwriters or the selling stockholders have
authorized anyone to provide you with different information. We are not making
an offer of these securities in any state where the offer is not permitted.
You should not assume that the information provided by this prospectus is
accurate as of any date other than the date on the front of this prospectus.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary......................................................... 4
Risk Factors............................................................... 8
Use of Proceeds............................................................ 16
Dividend Policy............................................................ 16
Capitalization............................................................. 17
Dilution................................................................... 18
Selected Financial Data.................................................... 19
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................................. 20
Business................................................................... 28
Management................................................................. 39
Certain Transactions....................................................... 46
Principal and Selling Stockholders......................................... 51
Description of Capital Stock............................................... 53
Shares Eligible for Future Sale............................................ 56
Underwriting............................................................... 58
Legal Matters.............................................................. 60
Experts.................................................................... 60
Where You Can Find More Information........................................ 60
Index to Financial Statements.............................................. F-1
</TABLE>
------------------
Until , 2000 (25 days after the commencement of this offering), all
dealers that buy, sell or trade the common stock, whether or not participating
in this offering, may be required to deliver a prospectus. This is in addition
to the dealers' obligation to deliver a prospectus when acting as underwriters
and with respect to their unsold allotments or subscriptions.
3
<PAGE>
PROSPECTUS SUMMARY
This summary is not complete and does not contain all of the information
that you should consider before investing in our common stock. You should read
the entire prospectus carefully, including the more detailed information
regarding Logical Design Solutions, the risks of purchasing our common stock
discussed under "Risk Factors," and our financial statements and the
accompanying notes. Unless the context otherwise requires, references to "we,"
"us" or "our company" are to Logical Design Solutions, Inc.
Logical Design Solutions
Logical Design Solutions is a professional services provider of e-business
solutions primarily to Fortune 500 companies. We work with our clients to
anticipate and evolve their e-business initiatives across industry and
technology trends. We leverage emerging technologies to enable our clients to
conduct business with their employees, customers and partners.
Since 1995, we have focused on providing solutions based on Internet
technologies. We have evolved our business from business-to-employee high-
volume, secure corporate intranet sites to complex business-to-business
extranets that link companies with their outside partners. Over the last two
years, we have extended our reach to service the diverse range of constituents
of our clients' businesses, including business-to-business-to-consumer. We
believe our competitive differentiator has been our ability to extend our
clients' e-business models to an increasingly diverse universe of users while
managing complex content and creating an interactive, targeted user experience.
We offer our services to market leaders in the following targeted industries
in which we have knowledge and experience: communications, financial services,
healthcare, manufacturing and publishing. We focus on building long-term
relationships with our clients. For example, AT&T was our first client in 1990
and we continue to provide e-business solutions for them today. We have
developed a blue-chip client list with significant repeat business. Our clients
include Aetna/US Healthcare, AT&T, The Chase Manhattan Bank, International
Paper, Johnson & Johnson, Lehman Brothers, Lucent Technologies, The MONY Group,
Philip Morris Companies, SBC Communications, The Thomson Corporation and
Winstar Communications.
Our Market Opportunity
The Internet and related corporate extranet and intranet technologies enable
companies, consumers, business partners, suppliers and employees to interact
and transact business on a one-to-one and one-to-many basis. In order to
achieve this manner of connectivity, a growing number of organizations are
demanding more advanced, customized Internet solutions. The availability of
high quality professionals experienced in designing, developing and
implementing advanced Internet solutions is limited, making the market for
recruiting and retaining these individuals extremely competitive. As a result,
an increasing number of businesses, from start-ups to established companies,
engage professional services firms to help them design and implement these
solutions. A May 1999 study by International Data Corporation estimates that
the worldwide market for Internet services will grow from $7.8 billion in 1998
to $78.6 billion in 2003, representing a compound annual growth rate of nearly
60%.
Logical Design Solutions believes organizations are increasingly searching
for a single-source professional services firm that integrates the strategy,
design and technology skills specifically required for offering comprehensive
e-business solutions. Furthermore, we believe that organizations will
increasingly look to e-business solutions providers that can leverage industry
knowledge and provide effective program management to formulate a focused,
strategic and integrated approach to e-business and to efficiently design and
implement large-scale, complex e-business solutions.
4
<PAGE>
Our Approach to Market
Our approach to market includes the following elements:
Industry Expertise. Led by industry managers with long-term industry and
consulting experience, our vertical market focus and industry practice model
form the foundation for our business development efforts. We sell our services
primarily to executive level management using our reputation of experience in
their industry, a client list of major corporations and case studies that
support our ability to deliver end-to-end solutions in similar situations.
Integrated Solutions. We offer our clients a suite of comprehensive services
that covers strategy, design and technology. Our methodology, the Logical
Approach, enables us to provide these services in an integrated manner to
bridge between business and information technology units.
User Experience. We seek to leverage our experience and credentials in
usability engineering as a competitive differentiator. Our commitment to
advancing the user experience is reflected in our Usability Center, which we
use to analyze user requirements, navigate content presentation and test Web
sites.
Long-Term Client Relationships. We focus on building long-term relationships
with our clients. We strive to become our clients' e-business partner of choice
and assist our clients in managing the evolution of their e-business.
Our Growth Strategy
Our goal is to expand upon our position as a provider of e-business
solutions to Fortune 500 companies in the markets we target. To achieve this
goal, we pursue the following strategies:
. Deepen Client Relationships;
. Further Penetrate our Vertical Markets;
. Continue to Develop Leading-Edge Technology Capabilities;
. Retain and Hire Outstanding Professionals; and
. Expand Geographically.
Our Approach to Engagements: The Logical Approach
In each of our engagements, we employ our proprietary methodology, the
Logical Approach, to advise our clients on e-business strategies and to design
and implement customized, complex e-business solutions. Using our Logical
Approach, we service our engagements with a multidisciplinary team led by a
dedicated project manager who coordinates business strategy, design and
technology services. We integrate industry-specific strategy with enterprise
level design and technological capabilities to provide customized e-business
solutions.
The Logical Approach is a comprehensive methodology which integrates
multidisciplinary tasks across four phases: strategy, blueprint, construction
and post-implementation evaluation. The Logical Approach is a scalable process
and we can customize the specific phases necessary to suit the parameters of
each client engagement. The inclusion of any phase or phases depends on the
type of solution required and the scope of the work.
Our Incorporation and Offices
We started our business in 1990 as a New Jersey corporation. We recently
reorganized as a Delaware corporation. Our principal offices are located at 465
South Street, Suite 103 in Morristown, New Jersey 07960. Our telephone number
is 973-971-0100.
Risk Factors
Investing in our common stock involves risks. For a discussion of certain of
these risks, see the discussion under the caption "Risk Factors" in this
prospectus.
5
<PAGE>
THE OFFERING
Common stock offered................ shares
Common stock outstanding after this
offering(1)......................... shares
Use of proceeds..................... For repayment of indebtedness and general
corporate purposes, including working
capital, expansion of operations and
sales and marketing capabilities and
possible acquisitions. We will not
receive any proceeds from the sale of
shares by the selling stockholders.
Proposed Nasdaq National Market
symbol.............................. "LDSI"
- --------
(1) Includes 2,150,000 shares of common stock issuable upon the exercise of
warrants outstanding with an exercise price of $0.01 per share. Excludes
the following shares of common stock that may be issued in the future:
. 2,275,430 shares issuable under our 1997 Stock Plan and our 1999 Stock
Plan upon the exercise of outstanding employee options at a weighted
average exercise price of $3.10 per share, including 1,000,000 shares
issuable pursuant to options granted to our Chief Executive Officer in
March 2000 as contemplated in the purchase agreement relating to our
1997 issuance of warrants and debentures;
. 28,000 shares issuable upon the exercise of outstanding director options
at an exercise price of $5.00 per share; and
. 1,929,670 unissued shares authorized for future awards under our 1999
Stock Plan and our 2000 Non-Employee Director Plan.
------------
Except as otherwise indicated, all information in this prospectus:
. reflects the amendment and restatement of our certificate of
incorporation which will occur prior to the closing of this offering;
and
. assumes no exercise of the underwriters' option to purchase additional
shares of common stock from the selling stockholders to cover over-
allotments.
------------
"Logical Design Solutions" is a registered trademark of Logical Design
Solutions, Inc. and "The Logical Approach" is a service mark of Logical Design
Solutions, Inc. This prospectus also includes trademarks and trade names of
other parties.
6
<PAGE>
SUMMARY FINANCIAL DATA
You should read the following summary financial data together with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our financial statements and the related notes, all of which
appear elsewhere in this prospectus. Statement of operations data for the years
ended December 31, 1995, 1996 and 1997 reflect our combined results with an
affiliated company, Logical Design Solutions International, Inc. Effective
December 31, 1997, Logical Design Solutions International, Inc. merged with and
into us and ceased to exist. Statement of operations data for the year ended
December 31, 1999 include the results of operations of Jump! Information
Technologies, Inc. from the date of its acquisition on November 10, 1999
through December 31, 1999. Pro forma statement of operations data for the year
ended December 31, 1999 reflect the acquisition of Jump! as if such transaction
had occurred on January 1, 1999. The as adjusted balance sheet data give effect
to our sale of the shares of common stock offered by this prospectus, the
application of the proceeds received thereby and the exercise of the warrants
upon consummation of this offering.
<TABLE>
<CAPTION>
Actual Pro Forma
--------------------------------------- ------------
Year Ended December 31, Year Ended
--------------------------------------- December 31,
1995 1996 1997 1998 1999 1999
------ ------ ------- ------- ------- ------------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Revenue................. $4,502 $7,325 $11,052 $11,330 $15,839 $17,940
Gross profit............ 2,214 3,986 6,675 5,768 8,298 9,293
Operating expenses:
Selling, general and
administrative........ 1,203 2,082 3,491 4,768 6,978 7,779
Depreciation and
amortization.......... 91 139 336 653 942 1,160
Stock-based
compensation.......... -- -- -- -- 1,077 1,077
------ ------ ------- ------- ------- -------
Total................ 1,294 2,221 3,827 5,421 8,997 10,016
------ ------ ------- ------- ------- -------
Income (loss) from
operations............. 920 1,765 2,848 347 (699) (723)
Increase in market value
of redeemable
warrants............... -- -- (288) (366) (7,505) (7,505)
Net income (loss)....... 884 1,716 1,597 (614) (8,944) (9,011)
====== ====== ======= ======= ======= =======
Basic net income (loss)
per common share....... $ 0.23 $ 0.22 $ 0.20 $ (0.08) $ (1.14) $ (1.13)
====== ====== ======= ======= ======= =======
Diluted net income
(loss) per common
share.................. $ 0.23 $ 0.22 $ 0.17 $ (0.08) $ (1.14) $ (1.13)
====== ====== ======= ======= ======= =======
Weighted average common
shares outstanding..... 3,927 7,850 7,850 7,850 7,868 7,962
====== ====== ======= ======= ======= =======
Weighted average common
shares and common share
equivalents............ 3,927 7,850 9,532 7,850 7,868 7,962
====== ====== ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
December 31, 1999
--------------------
Actual As Adjusted
------- -----------
(in thousands)
<S> <C> <C>
Balance Sheet Data:
Cash and cash equivalents.................................. $ 1,432 $
Working capital............................................ 5,378
Total assets............................................... 12,051
Senior subordinated debentures............................. 5,424
Junior subordinated debentures............................. 1,418
Redeemable warrants........................................ 10,431
Stockholders' equity (deficiency).......................... (7,960)
</TABLE>
7
<PAGE>
RISK FACTORS
An investment in our common stock involves risks. You should carefully
consider the risks described below and the other information in this prospectus
including our financial statements and the related notes before you decide to
buy our common stock. The trading price of our common stock could decline due
to any of these risks, and you could lose all or part of your investment.
We have a limited number of significant clients. If we lose a major client or
significant project, our revenues could be adversely affected.
We generate substantially all of our revenue from a limited number of major
clients. In 1999, for example, our three largest clients, Lucent, AT&T and
Aetna/US Healthcare, accounted for approximately 28%, 24% and 12%,
respectively, of our revenue (24%, 22% and 10%, respectively, on a pro forma
basis including our acquisition of Jump! Information Technologies, Inc.). In
addition, Research Institute of America, a subsidiary of The Thomson
Corporation, contributed approximately 13% of our revenue on a pro forma basis
in 1999. Our five largest clients contributed approximately 74% of our revenue
in 1999, on both an actual and a pro forma basis. In 1998, our two largest
clients, AT&T and Lucent, accounted for approximately 47% and 27%,
respectively, of our revenue. Our five largest clients contributed
approximately 83% of our revenue in 1998. If we lose any major clients or any
of our clients cancel or significantly reduce a large project's scope, our
business, financial condition and results of operations could be materially and
adversely affected. This risk is particularly relevant in the context of the
recent trend toward consolidation in our targeted industries. If one of our
clients were to be acquired, there can be no assurance that the acquiring
company will continue to use our services and our business could be materially
and adversely affected. There is also the risk that one or more of our major
customers will replace us with their in-house information technology
department.
We have a recent history of losses and expect to incur losses in the future.
We incurred net losses of $8.9 million and $614,000 during the years ended
December 31, 1999 and December 31, 1998, respectively. In addition, after
giving pro forma effect to our acquisition of Jump! our net loss for 1999 would
have been $9.0 million. As of December 31, 1999, we had an accumulated deficit
of $9.3 million. We expect to continue to incur losses for the foreseeable
future. We also expect to continue to incur increasing selling, general and
administrative expenses. As a result, we will need to generate significant
revenues to achieve profitability. If we do achieve profitability, we may not
be able to sustain or increase profitability on a quarterly or annual basis in
the future.
We may not be able to hire and retain highly skilled employees, which could
affect our ability to compete effectively.
Our business is people intensive and if we cannot recruit and retain highly
qualified employees, our business would suffer substantially. To succeed, we
must hire, train, motivate, retain and manage employees who are highly skilled
in the rapidly changing extranet, intranet and Internet technologies.
Individuals who have such skills and can perform the services we offer are
scarce. Competition for these individuals, therefore, is intense. We might not
be able to hire enough of them or to effectively train, motivate, retain and
manage the employees we do hire. This could hinder our ability to complete
existing projects and bid for new projects. In addition, because the
competition for qualified employees in our industry is intense, hiring,
training, motivating, retaining and managing employees with the strategic,
technical and creative skills we need is both time-consuming and expensive. The
competition for employees has increased our cash and non-cash compensation
costs. These costs may increase after the offering because prospective
employees may perceive that the stock option component of our compensation may
not be as valuable as it was prior to the offering.
In addition, we use subcontractors to supplement our staffing requirements
and satisfy particular skills required on individual client engagements.
Subcontractors generally cost us more than our own personnel and, consequently,
we usually generate lower gross margins when using subcontractors. In 1999,
subcontractors accounted for approximately 13% of our cost of revenue. To the
extent we continue to use subcontractors, our gross margins may be lower.
8
<PAGE>
We are growing quickly. Future growth of our business could make it difficult
to manage our resources.
Our business has grown substantially, both organically and through our
acquisition of Jump! in late 1999, and we intend to continue to expand our
operations in the foreseeable future. Our sales have increased from $4.5
million in 1995 to $15.8 million in 1999 ($17.9 million in 1999 on a pro forma
basis including our acquisition of Jump!). Our rapid growth has stretched, and
could continue to stretch, our management, personnel, systems and resources. As
we grow quickly and add employees, managing employee utilization will be more
difficult and may lead to more volatility in our margins. To grow our company,
we must not only replace the employees who leave, but also hire significant
numbers of new employees. Our number of employees increased from 101 to 135
during 1999, and we have hired 24 additional employees from January 1, 2000
through February 29, 2000. We expect that we will need to continue to hire and
retain management personnel and other employees and continue to invest in our
systems and facilities. Our management has limited experience managing a
business of our size and no experience managing a public company. We are a
small company and our ability to absorb mistakes is more limited than many of
our competitors. If we do not manage the growth of our business effectively,
our results of operations and financial condition could be materially affected.
We have many client contracts that can be cancelled without penalty. If clients
terminate contracts with us on little or no notice, our results of operations
could suffer.
Most of our clients can reduce or cancel their contracts for our services
without penalty and with little or no notice. If a significant client or a
number of small clients terminate, significantly reduce or modify business
relationships with us, our business, financial condition and results of
operations could be materially and adversely affected. Consequently, you should
not predict or anticipate our future revenue based on the number of clients we
have, the length of time we have had them or the number and size of our
existing engagements. When a client postpones, modifies or cancels an
engagement, we must seek to shift our employees to other engagements to
minimize the resulting adverse impact on our operating results. In addition,
our operating expenses are relatively fixed and cannot be reduced on short
notice.
Lack of detailed written contracts could impair our ability to collect fees,
protect our intellectual property and protect ourselves from liability.
In some client engagements, consistent with what we believe to be industry
practice, work is performed for clients on the basis of a limited statement of
work or verbal agreements before a detailed written contract can be finalized.
To the extent that we fail to have detailed written contracts in place, our
ability to collect fees, protect our intellectual property and protect
ourselves from liability may be impaired.
We depend on fixed-price and retainer contracts, and our business may be
negatively impacted if we fail to accurately estimate the time and resources
necessary for our services.
As part of our strategy, we generally enter into fixed-price and retainer
fee contracts, rather than contracts based on payment for time and materials.
In 1999, approximately 40% of our revenues were derived from fixed-price
contracts and approximately 38% from retainer-based contracts. In order to
manage our growth effectively, we must set fixed-price and retainer fees
accurately, maintain high employee utilization rates and maintain the quality
of our services. If we miscalculate the resources or time we need for these
contracts, our business, financial condition and results of operations could be
materially and adversely affected. Often, we fix the price before we finalize
the design specifications, which increases the risk that we will misprice these
contracts. The increasing complexity of our engagements, as described below,
makes accurately estimating our time and resources more difficult.
The increased size and complexity of our engagements may make it more difficult
to meet client expectations and a failure to do so could damage our reputation
and business.
The complexity and average dollar size of our engagements has grown
significantly while the timeframe for completing engagements has generally
decreased. As our client engagements become larger and more complex and must be
completed in shorter timeframes, it becomes more difficult to manage the
development
9
<PAGE>
process and the likelihood and consequences of any mistakes increase. Any
inability by us to complete client solutions in a timely manner, any defects
contained in the solutions we deliver and any other failure by us to achieve
client expectations, could have a material adverse effect on our reputation
with the affected client and generally within our industry.
The e-business professional services market is highly competitive and has low
barriers to entry. If we cannot effectively compete, our revenues may decline.
Our market is new, intensely competitive, highly fragmented and subject to
rapid technological change. We expect competition to intensify and increase
over time because:
. there are few barriers to entering the e-business professional services
market;
. our industry is consolidating; and
. many of our competitors are forming strategic relationships.
We compete against other e-business professional services firms, as well as
a number of different types of companies that are not exclusively in the e-
business professional services business. These competitors, which generally
offer some of the professional services we offer, include:
. traditional strategic consulting firms;
. interactive advertising agencies;
. professional services groups of computer equipment companies;
. traditional systems integrators; and
. internal information technology departments of current or potential
clients.
Many of our competitors have longer operating histories, greater name
recognition, larger established client bases, longer client relationships and
significantly greater financial, technical, personnel and marketing resources
than we do. These competitors may be in a stronger position to respond quickly
to new or emerging technologies and changes in client requirements. These
competitors may also be able to undertake more extensive marketing campaigns,
adopt more aggressive pricing policies and make more attractive offers to
potential clients, employees and strategic partners. Further, our competitors
may perform e-business services that are equal or superior to our services or
that achieve greater market acceptance than our services. We have no patented
or other proprietary technology that would preclude or inhibit competitors from
duplicating our services. We must rely on the skills of our personnel and the
quality of our client service. We cannot assure you that we will be able to
compete successfully against existing or future competitors.
Our quarterly revenues and operating results are likely to fluctuate
significantly, which may cause our stock price to decline.
Our quarterly revenues and operating results have varied in the past and are
likely to vary significantly from quarter to quarter. This fluctuation may
cause our operating results to be below the expectations of securities analysts
and investors, and the price of our stock may fall. Factors that could cause
quarterly fluctuations include:
. the loss of a significant customer or engagement;
. our employee utilization rate, including our ability to transition
employees quickly from completed or terminated engagements to new
engagements;
. the introduction of new services or changes in pricing policies by us or
our competitors;
. our ability to manage costs, including employee costs and our selling,
general and administrative expenses; and
. our clients' information technology budgeting.
10
<PAGE>
In any given quarter, most of our revenues have been attributable to a
limited number of customers and we expect this to continue. As a result, the
cancellation or deferral of any of these contracts in a particular quarter
could significantly reduce our revenues, which would hurt our quarterly
financial performance. In addition, most of our operating expenses,
particularly personnel and rent, are relatively fixed and based upon
anticipated revenues. Consequently, unanticipated variations in the number, or
progress toward completion, of our projects may cause significant variations in
operating results in any particular quarter and could result in losses for that
quarter. An unanticipated termination of a major project, a client's decision
not to proceed with a project we anticipated or the completion during a quarter
of several major client projects, could result in underutilized employees and
have a material adverse effect on us. Further, a failure to book an expected
order in a given quarter or the need to provide training to our employees on
new technologies would not be offset by a corresponding reduction in costs and
could adversely affect our operating results. As a result of these factors, we
believe that period-to-period comparisons of our revenues and operating results
are not necessarily meaningful.
The sales cycle for our services is variable and several months may elapse
from the time we contact a potential client to the time we sign a client
contract. To market our services successfully, we typically must educate our
potential clients on the types and benefits of our services, which can require
significant time and resources. In addition, our clients often must complete
thorough internal and external pricing analyses and operating comparisons,
competitive evaluations and internal approval processes before purchasing our
services. Once a client contracts to purchase our services, the time required
to begin rendering our services may take longer than we plan. Delays in
executing client contracts or implementing services for our clients may
adversely effect our revenues and reputation and cause our operating results to
fluctuate.
In addition, we generally experience more activity in the second half of the
year, as clients attempt to complete projects by year end, than in the
beginning of the year, when many projects are just being contemplated and not
yet underway. Also, our work associated with developing and updating employee
self-service extranets for benefit plans has generally resulted in increased
activity in the second and third quarters as clients prepare for employee open
enrollment periods. If we do not have a sufficient number of employees
available to handle this increased activity, we generally hire subcontractors
to staff these projects. In the past, increased activity in the third quarter
has caused us to increase our use of subcontractors in that quarter, which has
had a negative affect on our gross margins in that quarter.
Lack of growth or decline in Internet usage will cause our business to suffer.
We have derived a substantial portion of our revenue from projects involving
the Internet. The Internet is new and rapidly evolving. Our business will be
adversely affected if Internet usage does not continue to grow. A number of
factors may inhibit Internet usage. These factors include inadequate network
infrastructure, security concerns, inconsistent service quality and lack of
cost-effective, high-speed service. For example, recent attacks by computer
hackers on major e-commerce Web sites have heightened concerns regarding the
security and reliability of the Internet. On the other hand, if Internet usage
grows, the Internet infrastructure may not support the demands this growth will
place on it. The Internet's performance and reliability may decline. In
addition, outages and delays have occurred throughout the Internet network
infrastructure and have interrupted Internet service. If these outages or
delays occur frequently in the future, Internet usage could grow more slowly or
decline.
We have also derived a majority of our revenue from extranet and intranet
projects, and the usage of extranets and intranets may be affected by many of
the same factors affecting Internet usage.
We may also incur substantial costs to keep up with changes surrounding the
Internet. Unresolved critical issues concerning the commercial use and
government regulation of the Internet include the following:
. security;
. cost and ease of Internet access;
11
<PAGE>
. intellectual property ownership;
. privacy;
. taxation; and
. liability issues.
Any costs we incur because of these factors could materially and adversely
affect our business, financial condition and results of operations.
If we fail to keep pace with changing technologies, we may lose clients.
Our market is characterized by rapidly changing technologies, frequent new
product and service introductions and evolving industry standards. If we cannot
keep pace with these changes in a timely and cost-effective manner, our
business could suffer. To achieve our goals, we need to develop strategic e-
business solutions that keep pace with continuing changes in industry
standards, information technology and client preferences. We will have to
improve the performance features and reliability of our services to adapt to
rapidly changing technologies. Our failure to keep pace with the latest
technological developments would have a material adverse effect on our
business, financial condition and results of operations. We could also incur
substantial costs to keep pace with changing technologies.
Our efforts to increase recognition of the Logical Design Solutions brand
nationally may not be successful, which may limit our ability to expand our
client base and attract acquisition candidates and employees.
We believe that building the Logical Design Solutions brand is critical for
expanding our client base, hiring and retaining employees and attracting
acquisition candidates. Historically, our branding efforts have been on a
regional basis and otherwise narrowly focused. Many of our competitors are
already nationally recognized and have active national advertising campaigns.
If we do not build the Logical Design Solutions brand on a national basis, we
may not be able to effect our growth strategy. We also believe that reputation
and name recognition will grow in importance as the number of companies
competing in the market for e-business professional services increases. The
branding of our name will also depend largely on our success in providing high
quality, reliable and cost-effective services. If clients do not perceive our
services as meeting their needs, or if we fail to market our services
effectively, we may be unsuccessful in maintaining and strengthening our brand.
If we fail to promote and maintain our brand, or incur excessive expenses to do
so, our business, results of operations and financial condition may materially
suffer.
We depend on our Chief Executive Officer and our Chief Technology Officer, and
the loss of either of them may adversely affect our ability to attract and
retain customers and to compete effectively.
We believe that our success depends on the continued employment of our
founder, President and Chief Executive Officer, Mimi Brooks, and our Chief
Technology Officer, David W. Stoltzfus. If Ms. Brooks or Mr. Stoltzfus were
unable or unwilling to continue in their present positions, it would be very
difficult to replace them and our business could be adversely affected. Ms.
Brooks is particularly important to our business in providing strategic
direction and managing our customer relationships. Mr. Stoltzfus is
particularly important to our business in setting the strategic direction for
our use of technology and building our technological capabilities.
Future acquisitions or expansion could disrupt our ongoing business, distract
our management and employees, increase our expenses and adversely affect our
results of operations and your investment.
A component of our growth strategy is to expand geographically and by
acquisition. Establishing new office locations will likely require substantial
financial and management resources. We cannot assure you that we will select
appropriate markets to enter, open new offices efficiently or manage new
offices profitably. Our
12
<PAGE>
failure to accurately assess these issues could negatively impact our business.
To date, we have made one acquisition. We may not be able to make additional
acquisitions on commercially acceptable terms, or at all. Any acquisitions we
may make in the future will also involve risks. If we do acquire a company, we
could have difficulty retaining and assimilating that company's personnel. We
may also incur substantial goodwill in connection with any acquisitions which
will cause our annual amortization charge to increase. In addition, we could
have difficulty integrating acquired products, services or technologies into
our operations. These difficulties could disrupt our ongoing business, distract
our management and employees, increase our expenses and materially and
adversely affect our results of operations. Furthermore, we may incur debt or
issue equity securities to pay for any future acquisitions. If we issue equity
securities, your ownership share of our company will be reduced.
If we are unable to protect our intellectual property or if others claim we are
infringing on their intellectual property, we could incur significant expenses
or be prevented from providing our services.
Our success depends, in part, upon our intellectual property rights which
consist of a combination of copyright, trademark and trade secret laws and
contractual restrictions. We do not have any patents or patent applications
pending. Existing trade secret and copyright laws afford us only limited
protection. Third parties may attempt to disclose, obtain or use our processes
and methodologies. This is particularly true in foreign countries where laws or
law enforcement practices may not protect our proprietary rights as fully as in
the United States. Litigation to enforce our rights could be expensive, divert
management resources and may not adequately protect our business. Others may
independently develop and obtain patents or copyrights for technologies that
are similar or superior to our processes and methodologies.
Certain intellectual property rights developed during client engagements are
retained by the clients as our customer contracts are work-for-hire
arrangements. Although we believe that our services do not infringe upon the
intellectual property rights of third parties or our clients, we cannot assure
you that claims will not be asserted against us in the future by third parties
or our clients that our solutions or technologies are infringing upon their
intellectual property rights. We expect that the risk of infringement claims
against us and our clients will increase if more of our competitors obtain
patents for software products and processes.
We typically indemnify our clients against claims that we have violated a
third party's intellectual property rights. Assertion of claims against us or
our clients could result in litigation, and we may not be able to prevail in
the litigation or be able to obtain a license for the use of any infringed
intellectual property from a third party on commercially reasonable terms, or
at all. Any of these claims, regardless of their outcome, could harm our
reputation, damage our relationships with clients, result in substantial costs
to us, divert management's attention from our operations and could adversely
affect our business, results of operation and financial condition.
While we provide customized technology solutions for specific client
engagements, part of our marketing and design strategy includes the reuse of
components of these solutions. Issues relating to the ownership of and rights
to use solutions can be complicated and there can be no assurance that disputes
will not arise that affect our ability to resell or reuse these solutions. Some
of our contracts may limit our ability to resell or reuse a solution and could
require us to incur additional expenses to develop new solutions for future
projects.
We are, and will continue to be, controlled by our founder and Chief Executive
Officer, Mimi Brooks, which could result in her taking actions that other
stockholders do not approve.
After this offering, our founder, President and Chief Executive Officer,
Mimi Brooks, will beneficially own approximately % of our outstanding common
stock, % if the underwriters' over-allotment option is exercised in full. As
a result, she will continue to be able to control most matters requiring
stockholder approval. Among other things, she will be able to elect a majority
of the directors and approve significant corporate matters such as decisions
about acquisitions, sales of assets, mergers or similar transactions and
amendments to our certificate of incorporation and bylaws.
13
<PAGE>
Anti-takeover provisions of our amended and restated certificate of
incorporation and by-laws and provisions of Delaware law could delay or prevent
a change of control that you may favor.
Provisions of our amended and restated certificate of incorporation and
bylaws that will become effective upon the closing of this offering and
provisions of applicable Delaware law may discourage, delay or prevent a merger
or other change of control that stockholders may consider favorable. The
provisions of our amended and restated certificate of incorporation and bylaws,
among other things, will:
. divide our board of directors into three classes, with members of each
class to be elected in staggered three-year terms;
. limit the right of stockholders to remove directors;
. regulate how stockholders may present proposals or nominate directors
for election at annual meetings of stockholders; and
. authorize our board of directors to issue preferred stock in one or more
series, without stockholder approval.
The provisions of our amended and restated certificate of incorporation and
bylaws and certain provisions of Delaware law could:
. have the effect of delaying, deferring or preventing a change of control
of our company;
. discourage bids for our common stock at a premium over the market price;
or
. impede the ability of the holders of our common stock to change our
management.
See "Description of Capital Stock--Anti-Takeover Effects of Our Amended and
Restated Certificate of Incorporation and Bylaws and Provisions of Delaware
Law."
This offering's net proceeds may be allocated in ways with which you and other
stockholders may not agree.
We have not determined how the proceeds of this offering will be spent. Our
management may spend this offering's net proceeds in ways with which you and
our other stockholders may not agree. See "Use of Proceeds."
The total price investors will pay for our common stock in this offering will
substantially exceed the value of our assets after subtracting our liabilities.
The price you will pay for our common stock will be substantially higher
than the book value per share of our outstanding stock after this offering. You
will suffer immediate and substantial dilution. The dilution will be $ per
share in the net tangible book value of the common stock issued in this
offering. In addition, investors in this offering will contribute % of the
total amount paid by all investors in our company but will own only % of
the shares outstanding.
Our stock has not traded publicly, and after this offering its market price may
fluctuate widely.
Prior to this offering, there has been no public market for our common
stock. The market price of our common stock could fluctuate substantially due
to:
. future announcements concerning us or our competitors;
. quarterly fluctuations in operating results;
. technological innovations;
. changes in earnings estimates or recommendations by analysts; or
. general economic conditions.
14
<PAGE>
In addition, the stock prices of many technology companies fluctuate widely
for reasons which may be unrelated to operating results. Fluctuations in our
common stock's market price may affect our visibility and credibility in the e-
business solutions market.
Future sales of our common stock in the public market could lower our stock
price and impair our ability to raise funds in new stock offerings.
After this offering, we will have shares of common stock outstanding.
Sales of a large number of shares, or the availability of a large number of
shares for sale, could adversely affect the market price of our common stock
and could impair our ability to raise funds in additional stock offerings.
Following the expiration of a 180-day "lock up" period to which substantially
all of the shares held by our current stockholders will be subject, the holders
whose shares are subject to that lock-up period will in general be entitled to
dispose of their shares. Moreover, Salomon Smith Barney Inc. may in its sole
discretion and at any time without notice, release all or any portion of the
securities subject to the lock-up agreements.
The shares of common stock sold in this offering will be freely tradable
without restriction or further registration under the Securities Act, unless
the shares are purchased by an affiliate of ours, the sales of which will be
limited by Rule 144 under the Securities Act. Holders of restricted shares
generally will be entitled to sell these shares in the public market without
registration either under Rule 144 or any other applicable exemption under the
Securities Act.
As soon as practicable after this offering, we intend to register up to
shares of common stock subject to outstanding stock options or reserved for
issuance under our stock plans. As of December 31, 1999, options to purchase
1,205,918 shares of common stock were outstanding.
After this offering, the holders of approximately 2,150,000 shares of our
common stock will have rights, subject to some conditions, to require us to
file registration statements covering their shares or to include their shares
in registration statements that we may file for ourselves or other
stockholders. By exercising their registration rights and selling a large
number of shares, these holders could cause the price of our common stock to
decline. Furthermore, if we were to include in a company-initiated registration
statement shares held by those holders pursuant to the exercise of their
registration rights, those sales could impair our ability to raise needed
capital by depressing the price at which we could sell our common stock.
You should be aware that there are benefits of this offering to existing
stockholders.
The underwriters named in this prospectus may purchase up to additional
shares of common stock from several of our existing stockholders to cover over-
allotments. The average price per share paid by these existing stockholders is
$ . Assuming the underwriters exercise the over-allotment option in full, the
net price per share that will be paid to the selling stockholders is $ .
Therefore, the average realized gain per share to the selling stockholders
would be $ . See "Dilution."
Further, our senior subordinated debentures and junior subordinated
debentures are held by some of our existing stockholders. We intend utilize a
portion of the proceeds of this offering to pay off these debentures.
This prospectus contains forward-looking statements and market data which may
not prove to be accurate.
Many statements made in this prospectus under captions "Prospectus Summary,"
"Risk Factors," "Management's Discussion and Analysis of Financial Condition
and Results of Operations," "Business" and elsewhere are forward-looking
statements that are not based on historical facts. The words "expects,"
"anticipates," "estimates," "intends," "believes" and similar expressions are
intended to identify forward-looking statements. Forward-looking statements
involve risks and uncertainties, and there are important factors that could
cause actual results to differ materially from those expressed or implied by
forward-looking statements. The forward-looking statements made in this
prospectus are based on events through the date on which the statements are
made.
15
<PAGE>
This prospectus contains estimates of market size and growth and other
information related to the Internet. These estimates have been included in a
study published by International Data Corporation, a market research firm.
These estimates are based on various assumptions about certain events, trends
and activities. We have not independently verified the information and
assumptions on which these market estimates are based. If any of the
assumptions are wrong, then the market estimates may also be wrong.
USE OF PROCEEDS
We will receive estimated proceeds of approximately $ million from
this offering, net of underwriting discounts and estimated expenses, and based
on an assumed initial public offering price of $ per share, the midpoint
of the expected price range. We will not receive any proceeds from the sale of
shares by the selling stockholders.
The primary purposes of this offering are to obtain additional capital,
create a public market for our common stock and facilitate future access to
public markets. We intend to use the majority of the offering's net proceeds
for general corporate purposes, including working capital, expansion of
operations and sales and marketing activities and increases in personnel. We
will use a portion of the proceeds to pay off all our outstanding senior
subordinated debentures and junior subordinated debentures. The $5.54 million
aggregate principal amount of outstanding senior subordinated debentures accrue
interest at a rate of 9.0% per annum and mature on March 19, 2002. The $1.11
million aggregate principal amount of outstanding junior subordinated
debentures accrue interest at 9.0% per annum and mature on March 19, 2003. As
of December 31, 1999, the total amount of outstanding principal and accrued
interest on the senior subordinated debentures and junior subordinated
debentures was $8.5 million. The senior subordinated debentures and the junior
subordinated debentures are held by certain of our executive officers,
directors and significant shareholders. See "Certain Transactions."
We may use a portion of the proceeds for strategic acquisitions. From time
to time, in the ordinary course of business, we evaluate potential
acquisitions. We have no present understandings or agreements with respect to
any acquisition.
Pending use of the net proceeds for the above purposes, we intend to invest
the funds in short-term, interest-bearing, investment-grade securities.
DIVIDEND POLICY
We intend to retain future earnings, if any, to finance the expansion of its
business and do not expect to pay any cash dividends in the foreseeable future.
See "Management's Discussion and Analysis of Financial Conditions and Results
of Operations--Liquidity and Capital Resources."
16
<PAGE>
CAPITALIZATION
The following table presents our capitalization as of December 31, 1999 on
an actual basis and an as adjusted basis. The as adjusted basis presentation
reflects:
. the issuance of 2,150,000 shares of common stock upon the exercise of
outstanding warrants at an exercise price of $0.01 per share upon
consummation of this offering;
. amendment and restatement of our certificate of incorporation which will
occur prior to the closing of this offering; and
. our sale of shares of common stock in this offering at an assumed
initial public offering price of $ per share, the midpoint of the
expected price range.
The as adjusted basis presentation assumes no exercise of the underwriters'
option to purchase additional shares to cover over-allotments and also does not
include 1,205,918 shares of common stock issuable upon exercise of stock
options outstanding as of December 31, 1999 or 1,106,550 shares of common stock
issuable upon exercise of stock options issued subsequent to December 31, 1999.
You should read this information together with the financial statements and
notes to those financial statements appearing elsewhere in this prospectus.
<TABLE>
<CAPTION>
December 31, 1999
--------------------
Actual As Adjusted
------- -----------
(in thousands)
<S> <C> <C>
Cash and cash equivalents.................................. $ 1,432 $
======= =======
Capital lease obligations--current......................... $ 76 $ 76
======= =======
Senior subordinated debentures............................. $ 5,424 --
Junior subordinated debentures............................. 1,418 --
Capital lease obligations, less current portion............ 199 $ 199
Redeemable warrants........................................ 10,431 --
Stockholders' equity (deficiency)
Common stock, no par value; 15,000,000 shares
authorized, 7,969,801 shares issued and
outstanding (actual); shares authorized,
shares issued and outstanding (as adjusted)......... 6,713
Deferred stock compensation.............................. (5,404) (4,107)
Accumulated deficit...................................... (9,269)
------- -------
Total stockholders' equity (deficiency).................. (7,960)
------- -------
Total capitalization................................... $ 9,512 $
======= =======
</TABLE>
17
<PAGE>
DILUTION
Our pro forma net tangible book value as of December 31, 1999, was
approximately $1.6 million, or $0.16 per share of common stock. We have
determined pro forma net tangible book value per share by subtracting
intangible assets from pro forma stockholders' equity and dividing that number
by 10,119,801 pro forma shares of common stock outstanding as of December 31,
1999. The preceding pro forma information gives effect to the exercise of
warrants to purchase 2,150,000 shares of common stock at $0.01 per share prior
to completion of this offering.
If we sell shares of common stock in this offering at an assumed initial
public offering price of $ per share and assuming our receipt of the
estimated net proceeds therefrom, our pro forma adjusted net tangible book
value as of December 31, 1999, would have been approximately $ million, or
$ per share. This represents an immediate increase in such net tangible book
value of $ per share to existing stockholders and an immediate dilution of
$ per share to new investors. The following table illustrates this per share
dilution.
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share.................. $
Pro forma net tangible book value as of December 31, 1999........ $0.16
Increase per share of common stock attributable to the
offering(1).....................................................
-----
Pro forma net tangible book value after the offering(1)..........
-----
Net tangible book value dilution to new investors(1)............. $
=====
</TABLE>
The following table summarizes on a pro forma basis as of December 31, 1999,
the total number of shares of common stock purchased from us, the total
consideration paid to us and the average price per share paid by existing
stockholders and by new investors (at an assumed initial offering price of $
per share and without giving effect to the underwriting discount and estimated
offering expenses).
<TABLE>
<CAPTION>
Total
Shares Purchased Consideration Average
------------------ --------------- Price Paid
Number Percent Amount Percent Per Share
---------- ------- ------- ------- ----------
<S> <C> <C> <C> <C> <C>
Existing stockholders............. 10,119,801 % $85,237 % $.0084
New investors.....................
---------- ----- ------- ----- ------
Total........................... % $ %
========== ===== ======= ===== ======
========== ===== ======= ===== ======
</TABLE>
The table above does not include (1) options outstanding as of December 31,
1999 to purchase a total of 1,205,918 shares of common stock with a weighted
average per share exercise price of $2.15 or (2) options to purchase 1,106,550
shares of common stock issued subsequent to December 31, 1999 with a weighted
average exercise price of $4.17. If the options were to be exercised in full
for cash, pro forma net tangible book value per share after the offering would
be $ , the increase per share attributable to new investors would be $ ,
and the dilution per share to new investors would be $ .
18
<PAGE>
SELECTED FINANCIAL DATA
The following tables contain selected financial data as of December 31 in
each of the years 1995 through 1999 and for each of the years in the five-year
period ended December 31, 1999. The selected financial data for each of the
years in the five-year period ended December 31, 1999 have been derived from
our financial statements, which have been audited by Ernst & Young LLP,
independent auditors. Statement of operations data for the years ended 1995,
1996 and 1997 reflect our combined results with an affiliated company, Logical
Design Solutions International, Inc. Effective December 31, 1997, Logical
Design Solutions International merged with and into us and ceased to exist. The
selected financial data are qualified by reference to, and should be read in
conjunction with, our financial statements and the notes to those financial
statements, included elsewhere in this prospectus.
Statement of operations data for the year ended December 31, 1999 include
the results of operations of Jump! Information Technologies, Inc. from the
effective date of its acquisition on November 10, 1999. The pro forma statement
of operations data assume that the acquisition of Jump! occurred on January 1,
1999. The pro forma data may not, however, be indicative of the results of
operations that actually would have occurred had the Jump! acquisition occurred
at the beginning of the period presented or of the results of operations that
we may achieve in the future. The pro forma statement of operations data should
be read in conjunction with our unaudited pro forma financial information and
our financial statements and Jump!'s financial statements, which have been
audited by Ernst & Young LLP, included elsewhere in this prospectus. The as
adjusted balance sheet data give effect to our sale of the shares of common
stock offered in this prospectus, the application of the proceeds received
thereby and the exercise of the warrants upon consummation of this offering.
<TABLE>
<CAPTION>
Actual ProForma
----------------------------------------- ------------
Year Ended
Year Ended December 31, December 31,
----------------------------------------- ------------
1995 1996 1997 1998 1999 1999
------ ------ ------- ------- ------- ------------
(in thousands, except per share data)
Statement of Operations
Data:
<S> <C> <C> <C> <C> <C> <C>
Revenue................. $4,502 $7,325 $11,052 $11,330 $15,839 $17,940
Cost of revenue......... 2,288 3,339 4,377 5,562 7,541 8,647
------ ------ ------- ------- ------- -------
Gross profit............ 2,214 3,986 6,675 5,768 8,298 9,293
------ ------ ------- ------- ------- -------
Operating expenses:
Selling, general and
administrative........ 1,203 2,082 3,491 4,768 6,978 7,779
Depreciation and
amortization.......... 91 139 336 653 942 1,160
Stock-based
compensation.......... -- -- -- -- 1,077 1,077
------ ------ ------- ------- ------- -------
Total................ 1,294 2,221 3,827 5,421 8,997 10,016
------ ------ ------- ------- ------- -------
Income (loss) from
operations............. 920 1,765 2,848 347 (699) (723)
Increase in market value
of redeemable
warrants............... -- -- (288) (366) (7,505) (7,505)
Interest expense, net... (25) (1) (510) (724) (962) (959)
Other income............ 9 8 12 14 20 25
------ ------ ------- ------- ------- -------
Income (loss) before
income taxes........... 904 1772 2,062 (729) (9,146) (9,162)
Income tax provision
(benefit).............. 20 56 465 (115) (202) (151)
------ ------ ------- ------- ------- -------
Net income (loss)....... $ 884 $1,716 $ 1,597 $ (614) $(8,944) $(9,011)
====== ====== ======= ======= ======= =======
Basic net income (loss)
per common share....... $ 0.23 $ 0.22 $ 0.20 $ (0.08) $ (1.14) $ (1.13)
====== ====== ======= ======= ======= =======
Diluted net income
(loss) per common
share.................. $ 0.23 $ 0.22 $ 0.17 $ (0.08) $ (1.14) $ (1.13)
====== ====== ======= ======= ======= =======
Weighted average common
shares outstanding..... 3,927 7,850 7,850 7,850 7,868 7,962
====== ====== ======= ======= ======= =======
Weighted average common
shares and common share
equivalents............ 3,927 7,850 9,532 7,850 7,868 7,962
====== ====== ======= ======= ======= =======
<CAPTION>
December 31, December 31,
----------------------------------------- 1999
1995 1996 1997 1998 1999 As Adjusted
------ ------ ------- ------- ------- ------------
(in thousands)
Balance Sheet Data:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Cash and cash
equivalents............ $ 306 $1,355 $ 5,104 $ 3,510 $ 1,432
Working capital......... 827 1,740 6,051 5,327 5,378
Total assets............ 1,828 3,594 9,429 10,352 12,051
Capital lease
obligations, less
current portion........ 10 2 -- 275 199
Senior subordinated
debentures............. -- -- 3,558 4,400 5,424
Junior subordinated
debentures............. -- -- 1,194 1,301 1,418
Redeemable warrants..... -- -- 2,560 2,926 10,431
Stockholders' equity
(deficiency)........... 1,031 2,257 29 (284) (7,960)
</TABLE>
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion together with "Selected Financial
Data," our financial statements and the notes to those financial statements
elsewhere in this prospectus. In addition to historical information, this
discussion contains forward-looking information that involves risks and
uncertainties. Our actual results could differ materially from those
anticipated by us due to competitive factors, risks associated with our
expansion plans and other factors discussed under "Risk Factors" and elsewhere
in this prospectus.
Overview
Our revenue is generally comprised of fees generated for professional
services. We provide our services on a fixed-price, retainer, and time and
materials basis. In 1999, approximately 40% of our revenue was derived from
fixed-price contracts, 38% from retainer contracts and 22% from time and
materials contracts. On a pro forma basis, after giving effect to our
acquisition in November 1999 of Jump! Information Technologies, Inc., time and
material contracts would have generated approximately 31% of our 1999 revenues,
as all of Jump!'s contracts were time and material contracts. For fixed-price
and retainer-based engagements, we evaluate the technical complexity, work
effort required and the project's timetable to estimate and propose fixed
prices for such projects. A senior management team member must approve all of
our fixed-price proposals. For these contracts, we recognize revenue using a
percentage-of-completion method primarily based on costs incurred. We make
provisions for estimated losses on uncompleted contracts on a contract-by-
contract basis and recognize these provisions in the period in which the losses
are determined. To date, such losses have not been significant. Several of our
larger clients have entered into retainer-based billing arrangements. Under
these arrangements, clients are invoiced an equal amount on a monthly basis
over the term of the contract for the core engagement team. The retainer
agreements also provide for additional staff to be added to the engagement on
an as-needed basis. Fees associated with the additional staff are recorded on a
time and materials basis and are invoiced to the client on a monthly basis.
Most retainer agreements are for a term of one year, and include a renewal
clause. Consistent with our focus of establishing long-term client
relationships, our goal is to increase the number of retainer-based
relationships. This provides us with greater predictability of revenues and to
date have usually resulted in higher utilization for the core engagement team.
For time and materials contracts we recognize revenue as we perform services
and incur costs. We are generally reimbursed for reasonable expenses under all
of our contracts.
Revenue from a limited number of clients has comprised a substantial portion
of our revenues and is expected to represent a substantial portion of our
revenues in the foreseeable future. In 1997 and 1998, our five largest clients
accounted for approximately 82% and 83% of our revenue, respectively. In 1999,
our five largest clients accounted for approximately 74% of our revenue on both
an actual and a pro forma basis including our acquisition of Jump!, and Lucent
and AT&T accounted for approximately 28% and 24%, respectively (24% and 22%,
respectively, on a pro forma basis). AT&T and Lucent accounted for
approximately 55% and 26% of our retainer-based revenue in 1999, respectively.
Any cancellation, deferral or significant reduction in work performed for these
principal clients or a significant number of smaller clients could have a
material adverse effect on our business, financial condition and results of
operations.
Cost of revenue represents our most significant expense and consists
primarily of salaries, bonuses and associated employee benefits for personnel
directly assigned to client projects and non-reimbursed direct expenses
incurred to complete projects. We plan to increase the number of our project
personnel in order to support our planned growth. We have hired 24 additional
employees from January 1, 2000 through February 29, 2000. There is increased
competition for qualified personnel that has increased our cash and non-cash
compensation costs. Our gross margins are impacted by our employee utilization.
Employee utilization can be affected by multiple factors, including rapid
growth and reductions in the number or size of projects in any period.
Reduction in employee utilization rates could cause further decline in gross
profit as a percentage of revenue. Cost of revenue also includes fees paid to
subcontractors for work performed on our projects.
20
<PAGE>
Subcontractors generally cost us more than our own personnel and, consequently,
we usually generate lower gross margins when using subcontractors. In 1999,
subcontractors accounted for approximately 13% of our cost of revenue. In 1998
and 1997, subcontractors accounted for approximately 3% and 12% of our cost of
revenue, respectively. Subcontractors are called upon to supplement our
staffing requirements and satisfy particular skills required on individual
client engagements.
Selling, general and administrative costs consist of salaries and bonuses
for executive and selected senior management, finance, recruiting, selling and
marketing and administrative personnel and associated employee benefits,
facilities costs, computer and office equipment, operating leases, training,
promotional expenses, travel expenses and all other corporate costs. Our sales
and marketing expenses are expected to increase as a percentage of revenue in
the future as we enhance our selling efforts. We expect selling, general and
administrative expenses to increase in absolute dollars as we expand our direct
sales force, open new offices, increase our recruiting efforts and incur
additional costs related to the growth of our business and operation as a
public company.
Depreciation and amortization consists of depreciation of property and
equipment using the straight-line method, generally over three to seven years,
based on the estimated useful lives of the respective assets. Goodwill from the
Jump! acquisition described below is being amortized over three years. We
expect to expand some of our current offices and expand geographically by
opening new offices in 2000 and 2001. This will require us to purchase
additional furniture, office equipment and computer and networking equipment,
all of which will increase our depreciation expense. If we make more
acquisitions, we may also have more goodwill to amortize.
Stock-based compensation expense in 1999 consists of grants to employees of
options to purchase approximately 400,000 shares of our common stock at an
exercise price below the deemed fair market value for financial reporting
purposes of the common stock on the dates of grant. In addition, in connection
with the acquisition of Jump!, we issued 109,500 shares of our common stock to
the former stockholders of Jump! which are subject to certain vesting
provisions. These 1999 option grants and stock issuances resulted in a non-cash
compensation charge of $6.5 million, of which $1.1 million has been recorded
through December 31, 1999. In addition, since January 1, 2000, we have granted
to our employees and our Chief Executive Officer options to purchase 1,106,550
shares of our common stock at exercise prices below the deemed fair market
value for financial reporting purposes of the common stock on the dates of
grant. The remaining balance of $5,405,000 from the 1999 option grants and
stock issuances and the non-cash compensation charge of $12.9 million resulting
from the 2000 grants, based on deemed fair market value at December 31, 1999,
will be amortized over the remaining vesting schedule as follows:
<TABLE>
<CAPTION>
Amount of Deferred Stock
Compensation
------------------------
<S> <C>
Year Ended December 31,
2000........................ $15,612,000
2001........................ 1,349,000
2002........................ 742,000
2003........................ 599,000
2004........................ 12,000
</TABLE>
Increase in market value of redeemable warrants consists primarily of the
impact of accreting to fair market value our redeemable warrants, the value of
which increased substantially in 1999 based on a substantial increase in the
valuation of our company.
During fiscal 2000, we will record significant charges to operations in
connection with: (1) the accretion to fair market value of the redeemable
warrants immediately prior to their exercise in connection with this offering;
(2) the vesting of the 109,500 shares issued to the selling shareholders in
connection with our acquisition of Jump! and (3) the accretion to redemption
value of the senior subordinated debentures. Based upon the midpoint of the
expected price range of this offering, the fiscal 2000 charge related to the
redeemable
21
<PAGE>
warrants is estimated to be approximately $ million and the charge
related to the vesting of the Jump! shares is estimated to be $
million. Based upon an assumed redemption date of May 1, 2000, the charge for
the year ended December 31, 2000 relating to the accretion to redemption value
of the senior subordinated debentures will be approximately $1.8 million.
Interest expense represents the accrual of interest on our senior and junior
debentures which is added to the principal over the term of the debentures. As
described in this prospectus under the caption "Certain Transactions," the
debentures were issued in 1997 to Summit Ventures IV, L.P. and other investors,
including certain of our officers and directors. Interest income consists of
interest earned on funds held in a money market account.
In addition to the impact of the aforementioned non-cash charges, our
financial results may fluctuate from quarter to quarter based on such factors
as the type of project, number, complexity, size, scope and lead time of
projects in which we are engaged. More specifically, these fluctuations can
result from the contractual terms and degree of completion of such projects,
any delays incurred in connection with projects, employee utilization rates,
the adequacy of provisions for losses, the accuracy of estimates of resources
required to complete ongoing projects and general economic conditions. In
addition, revenue from a large client may constitute a significant portion of
our total revenue in a particular quarter.
In addition, we generally experience more activity in the second half of the
year, as clients attempt to complete projects by year end, than in the
beginning of the year, when many projects are just being contemplated and not
yet underway. Also, our work associated with developing and updating employee
self-service extranets for benefit plans has generally resulted in increased
activity in the second and third quarters as clients prepare for employee open
enrollment periods. If we do not have a sufficient number of employees
available to handle this increased activity, we generally hire subcontractors
to staff these projects. In the past, increased activity in the third quarter
has caused us to increase our use of subcontractors in that quarter, which has
had a negative affect on our gross margins in that quarter.
Recent Acquisition
In November 1999, we completed a merger with Jump! Information Technologies,
Inc. by exchanging 109,500 shares of our common stock, subject to certain
vesting provisions, and $525,000 in cash for all of the common stock of Jump!.
In addition, Jump!'s employee options were converted into options to purchase
25,339 shares of our common stock, of which 12,668 were unvested. We incurred
acquisition costs of $149,000 and issued 12,671 vested stock options valued at
$168,000 associated with the Jump! acquisition, which are included in goodwill.
The 109,500 shares of common stock we issued are subject to vesting provisions
and, including the unvested stock options granted, resulted in stock-based
compensation of $432,000 and deferred compensation charges of $1.3 million,
based upon the estimated fair market value of the shares at December 31, 1999,
which will be charged to operations over the vesting periods. Since these
charges are based upon the fair market value of the stock over the vesting
schedule, the amounts could be higher than those estimated at December 31,
1999. These shares will become fully vested upon the completion of this
offering. We accounted for this transaction as a purchase. The historical
information presented in this section includes the results of operations of
Jump! since the date of its acquisition.
22
<PAGE>
Results of Operations
The following table presents, for the periods indicated, the relative
composition of revenue and selected statements of operations data as a
percentage of revenue:
<TABLE>
<CAPTION>
Year Ended
December 31,
--------------------
1997 1998 1999
----- ----- -----
<S> <C> <C> <C>
Revenue.................................................. 100.0% 100.0 % 100.0 %
Cost of revenue.......................................... 39.6 49.1 47.6
----- ----- -----
Gross profit............................................. 60.4 50.9 52.4
----- ----- -----
Operating expenses:
Selling, general and administrative.................... 31.6 42.1 44.1
Depreciation and amortization.......................... 3.0 5.8 5.9
Stock-based compensation............................... -- -- 6.8
----- ----- -----
Total................................................ 34.6 47.9 56.8
----- ----- -----
Income (loss) from operations............................ 25.8 3.0 (4.4)
Increase in market value of redeemable warrants.......... (2.6) (3.2) (47.3)
Interest income (expense), net........................... (4.5) (6.2) (6.0)
----- ----- -----
Income (loss) before income taxes........................ 18.7 (6.4) (57.7)
Income tax provision (benefit)........................... 4.2 (1.0) (1.3)
----- ----- -----
Net income (loss)........................................ 14.5% (5.4)% (56.4)%
===== ===== =====
</TABLE>
1999 Compared to 1998
Revenue. Revenue increased $4.5 million, or 39.8%, to $15.8 million in 1999
from $11.3 million in 1998. This increase in revenue reflects increases in the
number of billed employee hours, the number of clients and the complexity of
engagements undertaken. The number of clients increased from 32 in 1998 to 44
in 1999. Jump! accounted for $266,000, or 5.9%, of the increase in our 1999
revenues.
Cost of Revenue. Cost of revenue increased $2.0 million, or 35.6%, to $7.5
million in 1999 from $5.6 million in 1998. The increase during 1999 was due
primarily to increases in the number of personnel needed to service the
increasing number and complexity of our engagements. Salary costs also
increased in 1999. Our professional staff increased to 95 at December 31, 1999
from 77 at December 31, 1998. As a percentage of revenue, cost of revenue
decreased to 47.6% during 1999 as compared to 49.1% during 1998.
Gross Profit. Gross profit increased $2.5 million, or 43.9%, to $8.3 million
in 1999 from $5.8 million in 1998. The gross profit dollar increase reflects
the increase in revenue during 1999. As a percentage of revenue, gross profit
increased to 52.4% during 1999 as compared to 50.9% during 1998. The percentage
increase reflects an increase in our employee utilization, which was partially
offset by increased salary costs.
Selling, General and Administrative. Selling, general and administrative
costs increased $2.2 million, or 46.4%, to $7.0 million in 1999 from $4.8
million in 1998. This increase was due primarily to increased salaries for
sales, marketing and administrative personnel and increased facility costs.
Selling and marketing costs increased $1.3 million, or approximately 136%, to
$2.2 million in 1999 from $924,000 in 1998. The increase was due to increased
personnel-related costs and sales promotion efforts. Facility and related costs
increased approximately $434,000, or approximately 53%, to $1.25 million in
1999 from $816,000 in 1998. The increase in facility and related costs was due
to the addition of the New York City office in July 1998. As a percentage of
revenue, selling, general and administrative expenses increased to 44.1% in
1999 as compared to 42.1% in 1998.
Depreciation and Amortization. Depreciation and amortization costs increased
$289,000, or 44.2%, to $942,000 in 1999 from $653,000 in 1998. This increase
was due primarily to a full year of depreciation on the
23
<PAGE>
fixed assets in our New York City office, which opened in July 1998, and
goodwill associated with the acquisition of Jump!. Goodwill charged to
operations in 1999 totaled $33,000.
Stock-based Compensation. We incurred charges of $1.1 million in 1999 for
costs associated with our employee stock option plan. We had no stock-based
compensation in 1998.
Increase in Market Value of Redeemable Warrants. The increase in market
value for redeemable warrants amounted to $7.5 million in 1999 compared to
$366,000 in 1998. This increase in value is based on the substantial increase
in the valuation of our company at December 31, 1999 compared to the prior
year.
Interest Income (Expense), Net. Interest expense increased $239,000, or
32.9%, to interest expense of $963,000 in 1999 from interest expense of
$724,000 in 1998. The increased interest expense is due to the accrual of
interest on our senior and junior debentures which is added to the principal
over the term of the debentures. Interest expense of $1.2 million was offset by
interest income of $201,000 earned during 1999.
Income Tax Provision (Benefit). Operating losses generated in 1999 were
carried back for tax purposes creating a tax benefit. The $202,000 income tax
benefit in 1999 represents a benefit from combined federal and state income
taxes at an effective rate of 2.3%. The income tax benefit of $115,000 in 1998
represented a benefit from combined federal and state income taxes at an
effective rate of 15.8%. These effective tax rates are lower than the statutory
rate primarily due to the impact of the accretion to market value of the
redeemable warrants.
1998 Compared to 1997
1998 was a building year for us. We opened our New York City office in July
1998, reorganized our professional staff into areas of expertise and rearranged
our sales organization using a vertical market approach.
Revenue. Revenue increased $277,000, or 2.5%, to $11.3 million in 1998 from
$11.1 million in 1997. Our ability to increase our revenues in 1998 was
negatively impacted by the factors set forth above.
Cost of Revenue. Cost of revenue increased $1.2 million, or 27.1%, to $5.6
million in 1998 from $4.4 million in 1997. This increase was due primarily to
the cost of additional professional staff and increased salary costs. We had 77
professional staff at December 31, 1998 and 63 at December 31, 1997. As a
percentage of revenue, cost of revenue increased to 49.1% during 1998 as
compared to 39.6% during 1997.
Gross Profit. Gross profit decreased $907,000, or 13.6%, to $5.8 million in
1998 from $6.7 million in 1997. The gross profit decrease reflects the increase
in cost of revenue during 1998. As a percentage of revenue, gross profit
decreased to 50.9% during 1998 as compared to 60.4% during 1997. The percentage
decrease reflects the increase in the number of employees, increased salary
costs and a reduction in utilization.
Selling, General and Administrative. Selling, general and administrative
costs increased $1.3 million, or 36.6%, to $4.8 million in 1998 from $3.5
million in 1997. This increase was due primarily to increases in personnel, the
leasing of our New York City office and related facility costs to support
growth of our operations. Selling and marketing cost increased $110,000, or
approximately 14%, to $924,000 in 1998 from $814,000 in 1997. The increase was
due to increased personnel related costs and sales promotion efforts. Facility
and related costs increased approximately $334,000, or approximately 69%, to
$816,000 in 1998 from $482,000 in 1997. The increase in facility and related
costs was due to the addition of our New York City office in July 1998. As a
percentage of revenue, selling, general and administrative expenses increased
to 42.1% in 1998 compared to 31.6% in 1997.
Depreciation and Amortization. Depreciation and amortization costs increased
$317,000, or 94.5%, to $653,000 in 1998 from $336,000 in 1997. This increase
was due primarily to depreciation on our New York City office fixed assets
purchased in 1998.
24
<PAGE>
Increase in Market Value of Redeemable Warrants. The increase in market
value of redeemable warrants amounted to $366,000 in 1998 compared to $288,000
in 1997. The increase in this charge is due to the redeemable warrants being
outstanding for a full year in 1998 compared to approximately nine months in
1997.
Interest Income (Expense), Net. Interest expense increased $214,000, or 42%,
to $724,000 in 1998 from $510,000 in 1997. This increase was due primarily to
interest expense we incurred from our senior and junior debentures. Interest
expense of $985,000 was offset by interest income of $261,000 earned in 1998.
Income Tax Provision (Benefit). Operating losses generated in 1998 were
carried back for tax purposes creating a tax benefit. The $115,000 tax benefit
in 1998 represents a benefit from combined federal and state income taxes at an
effective rate of 15.8%. The income tax expense of $465,000 in 1997 represented
an expense from combined federal and state income taxes at an effective rate of
22.6%.
Quarterly Results of Operations
The following tables set forth unaudited quarterly financial data for the
periods indicated. We derived this data from unaudited financial statements,
and, in the opinion of our management, they include all adjustments, which
consist only of normal recurring adjustments, necessary to present fairly the
financial results for the periods. Results of operations for any previous
fiscal quarter do not necessarily indicate what results may be for any future
period.
<TABLE>
<CAPTION>
Quarter Ended
--------------------------------------------------------------------------------
Mar. 31, Jun. 30, Sep. 30, Dec. 31, Mar. 31, Jun. 30, Sep. 30, Dec. 31,
1998 1998 1998 1998 1999 1999 1999 1999
-------- -------- -------- -------- -------- -------- -------- --------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue................. $2,965 $2,636 $2,774 $2,955 $ 3,234 $ 3,365 $ 4,212 $ 5,028
Cost of revenue......... 1,237 1,346 1,456 1,523 1,582 1,584 2,216 2,159
------ ------ ------ ------ ------- ------- ------- -------
Gross profit............ 1,728 1,290 1,318 1,432 1,652 1,781 1,996 2,869
------ ------ ------ ------ ------- ------- ------- -------
Operating expenses:
Selling, general and
administrative........ 1,038 1,021 1,289 1,417 1,425 1,608 1,492 2,453
Depreciation and
amortization.......... 115 138 194 209 223 234 225 260
Stock-based
compensation.......... -- -- -- -- 12 70 175 820
------ ------ ------ ------ ------- ------- ------- -------
Total.................. 1,153 1,159 1,483 1,626 1,660 1,912 1,892 3,533
------ ------ ------ ------ ------- ------- ------- -------
Income (loss) from
operations............. 575 131 (165) (194) (8) (131) 104 (664)
Increase in market value
of redeemable
warrants............... (91) (91) (92) (92) (1,876) (1,876) (1,876) (1,877)
Other income (expense).. (186) (187) (195) (142) (234) (232) (249) (227)
------ ------ ------ ------ ------- ------- ------- -------
Income (loss) before
income taxes........... 298 (147) (452) (428) (2,118) (2,239) (2,021) (2,768)
Income tax provision
(benefit).............. 47 (23) (71) (68) (49) (52) (46) (55)
------ ------ ------ ------ ------- ------- ------- -------
Net income (loss)....... $ 251 $ (124) $ (381) $ (360) $(2,069) $(2,187) $(1,975) $(2,713)
====== ====== ====== ====== ======= ======= ======= =======
As a Percentage of
Revenue:
Revenue................. 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenue......... 41.7 51.1 52.5 51.5 48.9 47.1 52.6 43.0
------ ------ ------ ------ ------- ------- ------- -------
Gross profit............ 58.3 48.9 47.5 48.5 51.1 52.9 47.4 57.0
------ ------ ------ ------ ------- ------- ------- -------
Operating expenses:
Selling, general and
administrative........ 35.0 38.7 46.5 48.0 44.1 47.8 35.4 48.8
Depreciation and
amortization.......... 3.9 5.2 7.0 7.1 6.9 7.0 5.3 5.2
Stock-based
compensation.......... -- -- -- -- 0.4 2.0 4.2 16.3
------ ------ ------ ------ ------- ------- ------- -------
Total.................. 38.9 43.9 53.5 55.1 51.4 56.8 44.9 70.3
------ ------ ------ ------ ------- ------- ------- -------
Income (loss) from
operations............. 19.4 5.0 (6.0) (6.6) (0.3) (3.9) 2.5 (13.3)
Increase in market value
of redeemable
warrants............... (3.1) (3.5) (3.3) (3.1) (58.0) (55.8) (44.5) (37.3)
Other income (expense).. (6.2) (7.1) (7.0) (4.8) (7.2) (6.8) (6.0) (4.5)
------ ------ ------ ------ ------- ------- ------- -------
Income (loss) before
income taxes........... 10.1 (5.6) (16.3) (14.5) (65.5) (66.5) (48.0) (55.1)
Income tax provision
(benefit).............. 1.6 (0.9) (2.6) (2.3) (1.5) (1.5) (1.1) (1.1)
------ ------ ------ ------ ------- ------- ------- -------
Net income (loss)....... 8.5% (4.7)% (13.7)% (12.2)% (64.0)% (65.0)% (46.9)% (54.0)%
====== ====== ====== ====== ======= ======= ======= =======
</TABLE>
25
<PAGE>
We believe that period to period comparisons of our operating results are
not necessarily meaningful and that you should not rely on these comparisons as
indicators of future performance. See "Risk Factors--Our quarterly revenues and
operating results are likely to fluctuate significantly, which may cause our
stock price to decline."
Liquidity and Capital Resources
In June 1997, we entered into a $1.5 million line of credit with First Union
National Bank to be used for working capital purposes. The interest rate on
amounts borrowed are at First Union's Prime Rate. The credit facility expires
in June 2000, and will renew automatically for one additional year at the sole
discretion of First Union. The credit facility contains restrictions on us,
including a prohibition on the payment of cash dividends by us, and requires us
to comply with financial tests and to maintain specified financial ratios. As
of the date of this prospectus, we had no outstanding borrowings under the
credit facility.
On March 4, 1998, First Union extended to us an irrevocable standby letter
of credit in the amount of $549,000, as security for our New York office lease,
to expire on June 1, 1999. The letter of credit has been automatically extended
and will continue to automatically extend for annual periods through June 1,
2005. The amount of funds available decreases to $320,500 for the third year of
the letter, to $274,500 for the fourth year of the letter and to $137,250 after
the fourth year until the letter's expiration. The funds will only be made
available if and when we are in default on the terms of our office lease.
On February 9, 2000, First Union extended to us a standby letter of credit
in the amount of $970,667, as security for our new Morristown, New Jersey
office lease, to expire on June 15, 2010. The amount of funds available
decreases to $767,000 for the fourth, fifth and sixth years of the letter and
to $546,000 after the sixth year until the letter's expiration. The funds will
only be made available if and when we are in default on the terms of our office
lease.
Cash and cash equivalents decreased to $1.4 million at December 31, 1999,
from $3.5 million at December 31, 1998. In 1999, our net cash used in operating
activities was approximately $850,000, compared to net cash provided by
operating activities of approximately $514,000 in 1998. We experienced an
increased use of cash in 1999, primarily attributable to an expansion of our
business and an increase in our accounts receivable. In 1999, we also spent
approximately $493,000, net of cash acquired, in connection with our
acquisition of Jump!.
Unbilled engagement revenues increased approximately $270,000 from
approximately $17,000 at December 31, 1998 to approximately $287,000 at
December 31, 1999. This increase was primarily due to growth in the size and
number of our projects. All unbilled engagement revenues receivables as of
December 31, 1999 are expected to be invoiced during 2000. Unbilled engagement
revenues represent engagement revenues recognized in excess of amounts billed.
Capital expenditures of approximately $680,000, $1.8 million and $750,000
for 1999, 1998 and 1997, respectively, were used primarily for computer
equipment, office equipment and leasehold improvements related our growth.
Capital expenditures for 2000 are expected to be approximately $2.5 million and
will be made principally for computer equipment, internally used software
purchases, office furniture and leasehold improvements to support our growth.
Our capital expenditure budget for 2000 includes our move from our current
Morristown facility to a larger facility, also in Morristown. Our capital
expenditure budget for 2000 does not include any other amounts we may spend on
expanding existing offices or building or acquiring new offices.
We anticipate that the net proceeds of this offering, together with existing
sources of liquidity and funds generated from operations, should provide
adequate cash to fund our currently anticipated cash needs through at least the
next 18 months. To the extent we are unable to fund our operations from cash
flows, we may need to obtain financing from external sources in the form of
either additional equity or indebtedness. There can be no assurance that
additional financing will be available to us at all, or that, if available, the
financing will be obtainable on terms favorable to us.
26
<PAGE>
Recently Issued Accounting Standards
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivatives and
Hedging Activities," which establishes accounting and reporting standards of
derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities. In July 1999, the FASB approved
SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities--
Deferral of the Effective Date of FASB Statement No. 133," which amends SFAS
No. 133 to be effective for all fiscal quarters of all fiscal years beginning
after June 15, 2000. We do not currently engage in derivative activity and do
not expect the adoption of this standard to have a material effect on our
results of consolidated operations, financial position or cash flows.
Quantitative and Qualitative Disclosures About Market Risk
We do not currently hold any derivative instruments and we do not engage in
hedging activities. Also, we do not have any outstanding variable interest rate
debt and currently do not enter into any transaction denominated in a foreign
currency. Thus, our direct exposure to interest rate and foreign exchange
fluctuations is minimal.
27
<PAGE>
BUSINESS
Overview
Logical Design Solutions is a professional services provider of e-business
solutions primarily to Fortune 500 companies. We work with our clients to
anticipate and evolve their e-business initiatives across industry and
technology trends. We leverage emerging technologies to enable our clients to
conduct business with their employees, customers and partners.
Since 1995, we have focused on providing solutions based on Internet
technologies. We have evolved our business from business-to-employee high-
volume, secure corporate intranet sites to complex business-to-business
extranets that link companies with their outside partners. Over the last two
years, we have extended our reach to service the diverse range of constituents
of our clients' businesses, including business-to-business-to-consumer. We
believe our competitive differentiator has been our ability to extend our
clients' e-business models to an increasingly diverse universe of users while
managing complex content and creating an interactive, targeted user experience.
In each of our engagements we employ our proprietary methodology, the
Logical Approach, to advise our clients on e-business strategies and to design
and implement customized, complex e-business solutions. We focus on providing
our services to market leaders in the following targeted industries in which we
have knowledge and experience: communications, financial services, healthcare,
manufacturing and publishing.
We focus on building long-term relationships with our clients. For example,
AT&T was our first client in 1990 and we continue to provide e-business
solutions for them today. We have developed a blue-chip client list with
significant repeat business. Our clients include Aetna/US Healthcare, AT&T, The
Chase Manhattan Bank, International Paper, Johnson & Johnson, Lehman Brothers,
Lucent Technologies, The MONY Group, Philip Morris Companies, SBC
Communications, The Thomson Corporation and Winstar Communications.
Industry Background
Increasing acceptance of the Internet and related corporate extranet and
intranet technologies has created numerous opportunities for companies seeking
growth and increased efficiencies in highly competitive and rapidly changing
markets. The Internet enables companies, consumers, business partners,
suppliers and employees to interact and transact business on a one-to-one and
one-to-many basis. In order to achieve this manner of connectivity, a growing
number of organizations are demanding more advanced, customized Internet
solutions. In addition, organizations are seeking to differentiate themselves
from their competitors by providing enhanced experiences for their end-users
with features that are easy to use and offer personalized service.
Although companies are eager to capture the opportunities presented by the
Internet, the strategy, design and implementation of an effective e-business
solution requires special skills and expertise. These special skills include:
. assessing the strategic implications of the Internet for a business;
. integrating new and existing business processes;
. developing creative initiatives for brand, content, and user experience;
and
. implementing the advanced technology required to support these
solutions.
The availability of high quality professionals experienced in designing,
developing and implementing advanced Internet solutions is limited, making the
market for recruiting and retaining these individuals extremely competitive. As
a result, an increasing number of businesses, from start-ups to established
companies, engage professional services firms to help them design and implement
these solutions. A May 1999 study by International Data Corporation estimates
that the worldwide market for Internet services will grow from $7.8 billion in
1998 to $78.6 billion in 2003, representing a compound annual growth rate of
nearly 60%.
28
<PAGE>
Logical Design Solutions believes organizations are increasingly searching
for a single-source professional services firm that integrates the strategy,
design and technology skills specifically required for offering comprehensive
e-business solutions. Furthermore, we believe that organizations will
increasingly look to e-business solutions providers that can leverage industry
knowledge and provide effective program management to formulate a focused,
strategic and integrated approach to e-business and to efficiently design and
implement large-scale, complex e-business solutions.
Our Approach to Market
Our approach to market includes the following elements:
Industry Expertise
Led by industry managers with long-term industry and consulting experience,
our vertical market focus and industry practice model form the foundation for
our business development efforts. We target the following industries:
communications, financial services, healthcare, manufacturing and publishing.
We sell our services primarily to executive level management using our
reputation of experience in their industry, a client list of major corporations
and case studies that support our ability to deliver end-to-end solutions in
similar situations. During our sales process, we seek to demonstrate our
ability to work within complex technical situations, while bringing a business
focus to the potential engagement.
Integrated Solutions
We offer our clients a suite of comprehensive services that covers strategy,
design and technology. Our methodology, the Logical Approach, enables us to
provide these services in an integrated manner to bridge between business and
information technology units. By using our multidisciplinary teams of
strategists, designers and technologists we provide the diverse skills required
to deliver comprehensive solutions. This ability to provide comprehensive
services offers our clients a single source in building an e-business solution.
User Experience
We seek to leverage our experience and credentials in usability engineering
as a competitive differentiator. We believe our usability capabilities help our
clients assess the needs of their increasingly demanding and diverse customer
base and engineer a user experience that is personalized, measurable and a
competitive market advantage. Our commitment to advancing the user experience
is reflected in our Usability Center, which we use to analyze user
requirements, navigate content presentation and test Web sites. Our focus on
the end user's experience is designed to provide our clients' employees,
customers and partners with a positive user experience, which leads to higher
levels of customer satisfaction and loyalty.
Long-Term Client Relationships
We focus on building long-term relationships with our clients. We strive to
become our clients' e-business partner of choice and assist our clients in
managing the evolution of their e-business. As we work with our clients, we
gain knowledge about their business, technical environment and internal
decision-making processes. We become familiar with a client's business and work
closely with the client to understand, predict and address its evolving
business needs. Our focus on long-term relationships has resulted in
significant repeat business from our clients.
Our Growth Strategy
Our goal is to expand upon our position as a provider of e-business
solutions to Fortune 500 companies in the markets we target. To achieve this
goal, we pursue the following strategies:
Deepen Client Relationships
We focus on growing our business with existing clients and leveraging these
relationships into new, expanded engagements. By offering our clients
integrated strategy, design and technology e-business solutions,
29
<PAGE>
we strive to be the primary e-business services provider for our clients. We
also believe that our record of client satisfaction has led to long-term
relationships with our clients and to an increase in the amount, scope and
complexity of services requested by many of our clients. For instance, we began
our work for AT&T in 1990 and we continue to provide a range of e-business
solutions for them today. In addition, our relationship with AT&T allowed us to
obtain Lucent as a client immediately following its spin-off from AT&T. Lucent
remains a major client today.
Further Penetrate our Vertical Markets
We have assembled industry practice groups of professionals experienced in
the business practices and processes of our targeted industries. We believe
that our industry focus enables us to provide effective solutions tailored to
the special needs of our clients. In each of our vertical industry groups, we
develop industry-specific offerings and capitalize on referrals from existing
clients. In addition, our industry experience reduces the knowledge asset
transfer on new engagements, improves efficiency of implementation and reduces
project delivery times by, among other things, allowing us to leverage those
elements of our e-business solutions for which there is repeat customer demand.
We intend to continue to utilize our knowledge and industry experience to
further penetrate and broaden our vertical market presence.
Continue to Develop Leading-Edge Technology Capabilities
We believe being able to deliver integrated, quality technical capabilities
is an important competitive advantage in our industry. Our technical
specialists in systems engineering and application development allow us to
offer customized, complex e-business solutions. We intend to continue to hire
additional software engineers and develop new technology skill-sets to deliver
quality solutions and meet the evolving needs of clients. We work with emerging
technologies and stay current with industry developments through our dedicated
team of technical specialists who evaluate new technologies and work on
innovative solutions.
Retain and Hire Outstanding Professionals
Retaining and attracting outstanding professionals is essential to our
growth. We focus on maintaining a culture that fosters innovation and
emphasizes professional development and plan to continue to do so. We support
each professional's development in their primary discipline through training
that is focused on their specific areas of expertise. We have developed a
consistent and cohesive corporate culture by primarily growing organically. Our
company culture encourages our professionals to work closely in
multidisciplinary groups to facilitate the development of integrated solutions
for our clients. We intend to continue to offer competitive compensation
packages, including equity participation through stock options for all of our
professionals.
Expand Geographically
We believe that significant opportunities exist for our services beyond our
current locations, including serving existing and new clients in other markets.
We have expanded, and intend to continue to expand, our geographic presence,
both nationally and internationally, based on our clients' needs, our vertical
market focus and market opportunities. We intend to continue to expand
primarily through organic growth, which may be supplemented by strategic
acquisitions. Our strategic acquisition of Jump! in November 1999 added a
geographical presence for us in the Washington, D.C. metropolitan area,
expanded upon our technological capabilities and added a client relationship
with Research Institute of America, part of The Thomson Corporation, a
publishing conglomerate.
Our Approach to Engagements: The Logical Approach
In each of our client engagements, we apply the Logical Approach. Using our
Logical Approach, we service our engagements with a multidisciplinary team led
by a dedicated project manager who coordinates business strategy, design and
technology services. We integrate industry-specific strategy with enterprise
30
<PAGE>
level design and technological capabilities to provide customized e-business
solutions. Our Logical Approach also provides for an ongoing process for
evaluating and tailoring a company's e-business solution. Ongoing assessments
of business and market trends, technology trends, competition, user
requirements, and application requirements provide continual feedback on the
company's e-business strategy.
The Logical Approach is a comprehensive methodology which integrates
multidisciplinary tasks across four phases: strategy, blueprint, construction
and post-implementation evaluation. The Logical Approach is a scalable process
and we can customize the specific phases necessary to suit the parameters of
each client engagement. The inclusion of any phase or phases depends on the
type of solution required and the scope of the work.
Strategy
We believe that a client's e-business strategy should be integrated with its
overall business strategy. We enable our clients to develop a viable,
successful e-business strategy that balances enterprise objectives with user
needs and competitive market challenges. Our Usability Center helps tailor the
e-business strategy to specific user requirements. We work with senior business
managers to define the e-business strategy and the supporting strategic
technology plan. In developing an e-business strategy, we focus on designing
solutions that will meet our client's business objectives, such as reducing
costs, generating revenue through new channels or developing targeted, one-to-
one marketing initiatives. Our strategic consultants focus on understanding and
applying the appropriate e-business models to our clients' business. We assess
and define business requirements to solidify the e-business strategy, taking
into account numerous factors that may affect the strategy, such as industry
trends, shifts in a client's business direction and escalating competitive
forces.
Blueprint
During the blueprint phase we develop an integrated schematic of how to
bridge the gap between e-business strategy and construction. To establish a
blueprint, we examine the aspects of the client's technology and business that
are critical to a successful e-business initiative. We also refine the
functional and creative requirements that support the business strategy. The e-
business blueprint comprises the following elements:
. Infrastructure Migration Plan. Our technologists review and analyze the
client's current infrastructure to ensure that its network and
architecture will be stable, reliable and scalable. We identify gaps in
our client's infrastructure and outline a migration plan that will
support the e-business strategy, while attempting to leverage the
client's installed technology and infrastructure and mitigate risks.
. Business Assimilation Plan. Our business analysts review and analyze the
client's current workflows, policies and procedures to identify areas
that will be significantly impacted by the e-business strategy. We
identify individual project releases to address these areas and plan
these releases to coincide with the delivery of specific e-business
functions and features.
. Marketing and Communications Plan. Our marketing consultants collaborate
with the client's corporate communications organization to establish or
enhance its online brand. Our consultants also collaborate with the
client to define strategies for communicating and introducing the e-
business capabilities to its employees, customers and partners.
. Internal Staff Skills and Capability. Our business analysts collaborate
with the client's internal information technology team to determine what
new capabilities will be required to implement and maintain its e-
business initiative.
. Release Plan. Our project managers develop a release plan which provides
an integrated, phased approach to delivering e-business capabilities for
the client. The release plan offers a functional view of what
capabilities will be delivered, over what time period and to which
constituents. It takes into account the schedules and resources outlined
in each of the plans listed above to ensure that there is a
comprehensive approach to rolling out the e-business solution.
31
<PAGE>
Construction
During the construction phase, we integrate project management, software
engineering, software quality management and creative disciplines. We seek to
build e-business sites that deliver quality functionality and enhanced user
experiences on reliable and scalable infrastructures. We leverage systems and
processes already in place as well as pre-built, customizable modules of code
and design. We develop e-business solutions that use the latest proven
technologies to transform business processes. We offer technology
implementation services, including applications architecture design, technical
infrastructure design, custom application development, legacy and third party
software integration, as well as technology advisory services. Before we
deliver the application to our clients, as part of this phase, we conduct a
comprehensive series of test cases on the different applications.
As part of the construction process, we utilize our creative abilities to
address navigation, layout, information architecture, personalization and
branding. We seek to create e-business solutions that have direct, immediate
and relevant appeal and utility. As e-business solutions have become an
important point of contact with employees, customers and partners, the user
interface of these applications has become an increasingly visible component.
Recognizing this importance, among other things, we test the user interface of
our proposed solutions through representative users at our Usability Center. We
aim to provide intuitive, visually appealing and highly usable solutions
designed with the end user in mind.
Post-Implementation Evaluation
After the client's site is constructed and delivered, we provide a wide
range of services aimed at ensuring that the site is achieving and continues to
achieve the client's e-business strategic objectives. A key technique that we
deploy is testing and focus group sessions in our Usability Center. These tests
and sessions help to ensure that the user is able to easily achieve the
benefits for which the e-business solution was designed. We also conduct
analysis of other sites to ensure that the client's site remains competitive
within the marketplace. Finally, we monitor industry trends and explore ways to
enhance and tailor the site. The results of our testing and analysis are then
fed back into the strategy phase of the Logical Approach, helping to make the
Logical Approach an ongoing process.
Clients
We focus on providing our services to market leaders in the following
targeted industries: communications services, financial services,
manufacturing, healthcare and publishing. We utilize our industry experience in
serving our clients in each industry. The following is a representative sample
of our current clients.
Communications Services Manufacturing
AT&T International Paper
Bell Atlantic Johnson & Johnson
SBC Communications Lucent Technologies
Winstar Communications NCR
Philip Morris Companies
Financial Services
The Chase Manhattan Bank Publishing
Lehman Brothers The McGraw Hill Companies
Met Life The Thomson Corporation
The MONY Group
Healthcare
Aetna/US Healthcare
Pfizer
32
<PAGE>
We seek to develop long-term relationships with our clients. We become
familiar with a client's business and work closely with the client to
understand, project and address the client's evolving strategic business needs.
In 1999, our five largest clients accounted for approximately 74% of our
revenue on both an actual and a pro forma basis including our acquisition of
Jump!. Our three largest clients in 1999, Lucent, AT&T and Aetna/US Healthcare,
contributed approximately 28%, 24% and 12%, respectively, of our revenue
(approximately 24%, 22% and 10%, respectively, on a pro forma basis). In
addition, Research Institute of America, a subsidiary of The Thomson
Corporation, contributed approximately 13% of our revenue on a pro forma basis
in 1999. In 1998, our five largest clients accounted for approximately 83% of
our revenue. Our two largest clients in 1998, AT&T and Lucent, contributed
approximately 47% and 27%, respectively, of our revenue. In 1997, our five
largest clients accounted for approximately 82% of our revenue. Our two largest
clients in 1997, AT&T and Lucent, contributed approximately 42% and 24%,
respectively of our revenue. No other clients contributed over 10% of our
revenue in 1999, 1998 or 1997.
Client Case Studies
We manage a significant range of e-business engagements including:
. customer self-service solutions for billing, customer care, and the
personalized delivery of information;
. enterprise self-service solutions for human resources, content
management, corporate communications and financial applications, such as
pension plans and profit sharing arrangements; and
. corporate e-business presence solutions, .com sites, corporate extranets
and new channel development sites.
Set forth below are several representative client engagements:
AT&T
We began our relationship with AT&T in 1990, developing corporate
information systems, and AT&T remains a major client today. Over our ten year
history with AT&T, we have utilized emerging technologies--moving from CD-Rom
delivery to intranet, extranet and Internet-based solutions. Examples of
specific initiatives performed for AT&T include:
. Health and Insurance Information Center. In 1995, we created a
customized health and insurance intranet that allows employees to access
their benefits data, search provider directories, model the impact of
lifestyle changes on their benefits, enroll for benefits and compare
carrier options online. With this intranet, employees can now self-
manage many aspects of their human resources benefits and programs.
. Pension Update Information Center. In 1997, we created an extranet-
based self-service pension planning center, allowing employees to
personalize benefit amounts, receive detailed pension plan information
and model various retirement scenarios to project their pension benefits
under different retirement scenarios. This center has engaged and
assisted AT&T employees in learning about their pension benefits.
. Benefit Decisions 2000. In 1999, we created an Internet site providing
information on health and welfare plans for employees joining AT&T
through mergers and acquisitions. Through this Internet site, employees
from merged or acquired entities can, before joining AT&T, learn about
the enrollment process, model various benefit options and enroll in
specific benefit plans. This Internet
33
<PAGE>
site enhances communication of benefit information and options to newly
acquired employees and has improved the transition of these employees
into AT&T's core human resources systems.
Our initiatives for AT&T support over 100 classes of users. Each user class
has its own profile and associated business rules that control the type of
pension and benefits modeling and content available to the user. The solutions
interface to existing enterprise resource planning systems and to multiple
external healthcare provider sites.
Lucent Technologies
Lucent became our client upon its spin-off from AT&T in September 1996 and
remains a major client today. We developed e-business strategies for Lucent,
as well as designed and implemented solutions that allow Lucent to better
interact with its employees and customers. Examples of e-business solutions
developed for Lucent include:
. Benefits Central. In 1997, we designed and implemented Benefits Central,
a personalized and secure intranet site, providing approximately 100,000
Lucent employees worldwide direct access to information about their
health and welfare benefits. This site provides online enrollment in
benefit plans, access to health provider listings, compensation and
financial information, as well as allows Web-enabled access to Lucent
stock quotes. The Benefits Central site utilizes XML and application
server technology to exchange information between the Web application
and existing data sources. This architectural approach allows the
application to be independent of the back-end data source. Benefit
Central provides a self-service functionality to Lucent employees.
. NetCare Professional Services. In 1998, we designed, developed and
launched an e-commerce Internet site for Lucent products and Lucent's
NetCare management services division. This Internet site presents a
personalized site to each of NetCare's customers, incorporates a single
consistent interface for Lucent's extensive product line and provides
Lucent with a channel to efficiently communicate new information to its
customers. The Internet site also provides customer service, logging
customer requests, registrations, feedback and content updates. The
NetCare site uses scalable technologies such as application servers,
relational databases and LDAP directories. This Internet site became a
major customer service delivery channel for the NetCare management
services division.
. The Solution Advisor. In 1999, we developed the marketing/customer
service application called Find Your Solution for Lucent's enterprise
division, which services its small-medium business market. This site
operates as a component of Lucent's company Web site. Lucent's
enterprise customers can access this application to assist them in
making voice and data networking communication decisions. Through an
online questionnaire, prospective customers provides information about
their industry, company and communications goals. Based on that input,
Find Your Solution provides them suggested solutions and Lucent product
information.
. Zingo. In 1999, we helped Lucent's wireless division develop a custom
mobile portal for small devices such as wireless phones and hand-held
computers. In addition to designing the portal's interface and branding
approach, we provided overall project management and coordination of the
multiple vendors who were engaged for this effort. This experimental
platform was targeted at telecommunications service providers and
enabled access to multiple third party applications.
34
<PAGE>
The MONY Group
The MONY Group entered into a retainer contract with us in mid-1999 to
advise and assist them on their e-business initiatives. We provide advice,
design and enhancement development in an ongoing fashion for many areas of
MONY's public Web site. This support includes assistance with application
development, look and feel enhancements, navigation, design and content
analysis and creation. Among the projects are:
. Strategic Planning. We conducted a strategic infrastructure planning
effort, the purpose of which was to define the foundational
infrastructure for developing and deploying internally and externally
focussed e-business applications. We assembled and worked with a
steering committee made up of architects representing various areas
within MONY. The results of this joint effort was an infrastructure
recommendation and migration strategy to evolve to an e-business
environment.
. Weekly Activity Report. We redesigned and implemented a process to allow
MONY's independent international finance representatives to acquire
templates and file required reports via the Internet. MONY experienced
increased efficiencies by migrating from a telephone-based to an
Internet-based system. The new system has been designed by
representatives with hierarchical security within which to access
information.
. Trusted Advisor-Rep World. At the end of 1999, we built the Trusted
Advisor Internet site to provide financial planners, who represent
MONY's products, access to content information such as tax rules and
changes, research on investment products, forms and estate planning
tools.
. Broker Insight. We created an Internet application to support MONY's
global network of brokers. This system linked MONY's brokers with the
compliance documents, rules and sales tools they needed to provide
enhanced customer service to their and MONY's customer base.
Aetna/US Healthcare
In July 1999, Aetna/US Healthcare hired us to provide strategic e-business
consulting. In October 1999, Aetna/US Healthcare converted this engagement to a
retainer-based arrangement, naming us as an e-business partner for the
remainder of 1999 and through 2000. Our initial work for Aetna/US Healthcare
has included:
. Strategic e-Business Consulting and Business Requirements. We worked
with senior executives, general managers and the Chief Information
Officer and his staff to develop an approach for analyzing business,
operational, user and technical requirements to support key e-business
initiatives. We developed e-business models and detailed use cases that
we translated into a multiphase, multiyear implementation plan and a go-
to-market strategy.
. Online Brand and User Experience Design. During the first phase, we
partnered with Aetna/US Healthcare to develop two prototypes. One
prototype represented Aetna/US Healthcare's e-commerce functionality
depicted in the use cases. This protype was used to gain executive and
stakeholder acceptance of the "future state" for e-commerce at Aetna/US
Healthcare. The second prototype represented the e-commerce
functionality plus the online branding design and user interface
conventions.
. Technical Consulting. We provide ongoing technical architecture
consulting and design to the Chief Technology Officer and his staff. We
have a seat on Aetna/US Healthcare's internal technical advisory
council, which is responsible for Aetna/US Healthcare's strategic
technology direction. In this capacity, we provide expertise on e-
commerce products, platforms and technology.
Sales and Marketing
We primarily market our services to Fortune 500 companies. Our sales and
marketing organization is built around five industry practices and staffed with
professionals with industry and e-business experience. Each industry practice
team is led by a practice manager who has long-term industry and consulting
experience. Account executives and account managers report to the industry
practice managers. Account executives are responsible for generating leads,
qualifying opportunities and driving new revenue.
35
<PAGE>
Account managers are responsible for strategic account management, proposal
development and revenue growth with key current clients. Our account management
model is focused around growing existing engagements and leveraging them into
new engagements through cross and up sell business development. This focus
allows us to build a more solid understanding of the business issues facing
each client.
We have recently added channel managers to our industry teams. Channel
managers are responsible for establishing and leveraging partner relationships
into additional revenue streams. We seek additional business and technical
partnerships to drive new revenue, enhance our technology strength and provide
us with a first glance view of technology trends.
Currently the sales teams for our five industry practices are composed of a
total of 13 individuals. Our marketing team of four individuals provides both
corporate-wide and industry specific marketing support to drive our business
development. Marketing programs include corporate branding, public relations
programs, client success stories, advertising and promoting our executives for
speaking opportunities and sponsored event management.
Technological Capabilities
Our current technical organization is organized into separate areas of
expertise. Our senior level technology professionals average at least 10 years
of experience in large-scale application development and reports to our Chief
Technology Officer. This senior group provides overall leadership to our staff
on technology direction and engineering best practices as well as researching
emerging technologies. Our technical specialists in systems engineering and
application development design and deliver our e-business solutions. Our system
engineers have extensive experience across a broad range of Internet-based
technologies. We identify specific areas of concentration, which we view as
essential to deliver business-critical e-business solutions. These areas
include:
. server-side Java technologies such as Servlets and JSP;
. application service technologies which enable session management and
reliable, scalable processing such as NetDynamics, Netscape Application
Server, Microsoft IIS/ASP and BEA WebLogic;
. markup languages including HTML, XML and SGML;
. Internet security technologies such as PKI, SSL and Digital
Certificates;
. directory technologies including LDAP;
. database management systems such as Oracle, Sybase and SQL Server;
. personalization and publishing software such as Vignette;
. Web-centric customer relationship management technologies such as
Silknet; and
. portal technologies such as Netscape's Customer Net Center.
In addition to specific products and technologies, our specialists and
architects understand distributed computing architectures, which are essential
for delivering e-business solutions.
Strategic Affiliation with the Sun Microsystems / Netscape Alliance
We have established a strategic affiliation with the Sun Microsystems /
Netscape Alliance. This affiliation provides us with early access to training,
product support and technology. In addition, this relationship with the
Alliance has led to several engagements, including with Winstar Communications.
The primary goals of our affiliation with the Alliance are:
. to deepen our technical capability and understanding of industry leading
products and technologies that are commonly deployed in e-business
applications;
36
<PAGE>
. to create or identify new revenue opportunities through referrals and
joint marketing; and
. to enhance our position as an industry leader in bill presentment and
payment solutions.
We intend to seek out additional strategic alliances and affiliations with
other technology service providers to increase our business opportunities.
Competition
We compete with other providers of e-business professional services. The
market for these services has grown dramatically in recent years as a result of
the increasing use of Internet technologies by businesses to interact and
transact with their employees, customers and partners. Our market is intensely
competitive, highly fragmented and subject to rapid technological change. We
expect competition to persist and intensify in the future. Our current and
potential competitors include:
. e-business professional services firms, such as Agency.com, Diamond
Technology Partners, iXL, Organic, Proxicom, Razorfish, Sapient, Scient,
USWeb/CKS and Viant;
. traditional strategic consulting firms, such as Booz-Allen & Hamilton,
Boston Consulting Group and McKinsey;
. interactive advertising agencies, such as Modem Media.Poppe Tyson and
OgilvyOne;
. professional services groups of computer equipment companies, such as
Hewlett-Packard and IBM;
. traditional systems integrators, such as Andersen Consulting, Cambridge
Technology Partners and EDS; and
. internal information technology departments of current or potential
clients.
We believe the principal competitive factors in our market are:
. vertical industry business knowledge and experience;
. breadth and integration of service offerings;
. cost and quality of service;
. client relationships;
. strategic expertise, technical knowledge and creative skills;
. ability to attract and retain quality professionals; and
. brand recognition and reputation.
Competition is intense in our industry. Our ability to compete favorably
across these competitive factors may be beyond our control.
Many of our competitors have longer operating histories, greater name
recognition, larger established client bases, longer client relationships and
significantly greater financial, technical, personnel and marketing resources
than we do. These competitors may be in a stronger position to respond quickly
to new or emerging technologies and changes in client requirements. These
competitors may also be able to undertake more extensive marketing campaigns,
adopt more aggressive pricing policies and make more attractive offers to
potential clients, employees and strategic partners. Further, our competitors
may perform e-business services that are equal or superior to our services or
that achieve greater market acceptance than our services. There are relatively
low barriers to entry into the e-business professional services industry. We
have no patented or other proprietary technology that would preclude or inhibit
competitors from entering the e-business professional services market.
Therefore, we must rely on the skill of our personnel and the quality of our
client service. The
37
<PAGE>
costs to develop and provide e-business services are low. Therefore, we expect
to continually face additional competition from new entrants into the market in
the future. See "Risk Factor--The e-business professional services market is
highly competitive and has low barriers to entry. If we cannot effectively
compete, our revenues may decline."
Personnel
As of February 29, 2000, we had 159 employees. Of these, 122 were consulting
and service delivery professionals and 37 were management and administrative
personnel performing sales, marketing, human resources, finance, accounting,
legal and administrative functions.
None of our employees are represented by a labor union nor have we ever
experienced a work stoppage. We believe our employee relations are good.
Intellectual Property
We rely on a combination of trade secret, nondisclosure and other
contractual agreements, and copyright and trademark laws to protect our
intellectual property. We enter into confidentiality agreements with our
employees, generally require that our consultants and clients enter into such
agreements and limit access to and distribution of our information. There can
be no assurance that the steps we have taken in this regard will be adequate to
deter misappropriation of our proprietary information or that we will be able
to detect unauthorized use and take appropriate steps to enforce our rights. We
do not have any patents or patent applications pending.
Generally, our client contracts provide a work-for-hire intellectual
property right for each client in the custom work developed specifically for
that client. The intellectual property rights in work done prior to the client
contract or independent of the services provided that client remain with us.
See "Risk Factors--If we are unable to protect our intellectual property or if
others claim we are infringing on their intellectual property, we could incur
significant expenses or be prevented from providing our services."
Facilities
Our headquarters and principal administrative, finance, legal, sales and
marketing operations are located in approximately 17,400 square feet of leased
office space in Morristown, New Jersey. Our lease expires in July 2001. We plan
to move from our current Morristown facility to an approximately 52,000 square-
foot facility in June 2000. The new office space, also in Morristown, will be
solely occupied by us under a lease, the term of which extends to February
2010. We also lease office space in New York City and Chantilly, Virginia. Our
office in New York City, which contains our Usability Center, is in an
approximately 18,000 square-foot facility under a lease that expires in July
2005. The lease for our 9,946 square-foot Chantilly, Virginia facility expires
in February 2006.
Legal Proceedings
We are from time to time involved in litigation incidental to the conduct of
our business. We are not a party to any lawsuit or proceeding that, in the
opinion of our management, is likely to have a material adverse effect on us.
38
<PAGE>
MANAGEMENT
Directors, Executive Officers and Key Employees
The following table sets forth, as of February 29, 2000, the name, age and
position within Logical Design Solutions of each of our directors, executive
officers and key employees.
<TABLE>
<CAPTION>
Name Age Position(s) With Company
---- --- ------------------------
<S> <C> <C>
Mimi Brooks............... 39 President, Chief Executive Officer and Chairwoman
David W. Stoltzfus........ 42 Chief Technology Officer and Director
John P. Fee............... 39 Chief Operating Officer
E. Bruce Lovenberg........ 42 Chief Financial Officer
Marilynne N. White........ 42 Vice President and General Counsel
Thomas Shea............... 39 Vice President--Sales
Paul F. Lozier............ 53 Director
Kevin Mohan............... 36 Director
</TABLE>
Mimi Brooks is our founder and has served as President, Chief Executive Officer
and Chairwoman of our board of directors since its inception in 1990. Prior to
founding our company, Ms. Brooks served as a human resources information
systems executive for AT&T.
David W. Stoltzfus has been Chief Technology Officer since joining us in 1997
and a director since 1999. Prior to joining us, Mr. Stoltzfus was employed with
The Vanguard Group since 1988 where his most recent position was Principal in
Charge of Enterprise Architecture and was an officer of The Vanguard Group
since 1994.
John P. Fee has been Chief Operating Officer since joining us in 1999. Prior to
joining us, Mr. Fee served as Vice President of Thomson Consulting, a division
of The Thomson Corporation, a publishing conglomerate, since April 1997. Mr.
Fee served as Chief Information Officer of Gemini Consulting, a division of The
Cap Gemini Group, from October 1995 to March 1997, where he also served as a
member of the Cap Gemini IT Strategy Board. Mr. Fee served as an account
executive at Computer Systems Advisor, a provider of business modeling
solutions, from September 1989 to October 1995.
E. Bruce Lovenberg has been Chief Financial Officer since joining us in 1996.
Prior to joining us, Mr. Lovenberg was a Senior Manager at Ernst & Young since
1985, where he served as Practice Leader for the New Jersey--Entrepreneurial
Services Group consulting practice. Mr. Lovenberg is a Certified Public
Accountant.
Marilynne N. White has been Vice President and General Counsel since joining us
in 1999. Prior to joining us, Ms. White was a vertical markets executive at
Thomson Consulting from 1998 to 1999. Ms. White served as Vice President of
Marketing and Sales at United Press International from 1997 to 1998 and as
senior advisor at the Office of Agreements' Compliance within the U.S.
Department of Commerce from 1996 to 1997. Ms. White earned a J.D. degree from
Georgetown University Law School in 1995.
Thomas J. Shea has been Vice President of Sales since June 1995. Prior to
that, Mr. Shea held various executive and managerial positions at Dun &
Bradstreet Information Services from 1985 to 1995.
Paul F. Lozier has served as a member of our board of directors since March
1997. Mr. Lozier has been President of Samedan, Inc., a corporate finance
consulting firm, since 1996. Prior to that, from 1977 to 1996, Mr. Lozier held
various positions at Merrill Lynch, Pierce, Fenner & Smith Incorporated,
including serving as a Managing Director of Merrill Lynch Investment Banking
from 1987 to 1996. Mr. Lozier is also a director of The Bank of Somerset Hills.
Kevin Mohan has served as a member of our board of directors since March 1997.
Mr. Mohan has been a General Partner of Summit Partners, a venture capital
firm, since December 1997. Prior to that, from September
39
<PAGE>
1994 to December 1997, Mr. Mohan was a Vice President of Summit Partners. Mr.
Mohan is also a director of several privately held companies.
Several of our directors were elected to the board pursuant to a
shareholders agreement that terminates as of the closing of this offering. The
shareholders agreement provides that Ms. Brooks is to be a director. Pursuant
to the shareholders agreement, Mr. Stoltzfus and Mr. Lozier were designated as
directors by Ms. Brooks and Mr. Mohan was designated by Summit Ventures IV,
L.P.
We intend to elect two additional independent directors to our board within
90 days following this offering. We will be required to have three independent
directors, as defined by the Nasdaq National Market, to maintain the listing of
our common stock on the Nasdaq National Market.
Classes of Directors
We plan to adopt a provision in our certificate of incorporation which will
divide our board of directors into three classes, denominated as Class I, Class
II and Class III. Members of each class hold office for staggered three-year
terms. At each annual meeting of our stockholders commencing in 2001, the
successors to the directors whose term expires at that meeting will be elected
to serve until the third annual meeting after their election or until their
successor has been elected and qualified. Mr. Mohan will serve as the Class I
director whose term expires at the 2001 annual meeting of stockholders. Mr.
Lozier will serve as the Class II director whose term expires at the 2002
annual meeting of stockholders. Ms. Brooks and Mr. Stoltzfus will serve as
Class III directors whose terms expire at the 2003 annual meeting of
stockholders. With respect to each class, a director's term will be subject to
the election and qualification of their successors, or their earlier death,
resignation or removal. These provisions, when taken in conjunction with other
provisions of our amended and restated certificate of incorporation authorizing
the board of directors to fill vacant directorships, may delay a stockholder
from removing incumbent directors and simultaneously gaining control of the
board of directors by filling the vacancies with its own nominees.
Board Committees
The audit committee reviews, acts on and reports to the board of directors
with respect to various auditing and accounting matters. These matters include
the selection of our auditors, the scope of the annual audits, fees to be paid
to the auditors, the performance of our independent auditors and our accounting
practices. The audit committee currently consists of Ms. Brooks, Mr. Lozier and
Mr. Mohan. It is anticipated that following the consummation of this offering,
Ms. Brooks and Mr. Mohan will resign from the audit committee and that the two
additional independent directors who will be appointed to our board will join
Mr. Lozier as members of the audit committee.
The compensation committee determines the salaries and incentive
compensation of our officers and provides recommendations for the salaries and
incentive compensation of other employees and consultants. The compensation
committee also administers our various incentive compensation, stock and
benefit plans. The compensation committee currently consists of Ms. Brooks, Mr.
Lozier and Mr. Mohan. It is anticipated that following the consummation of this
offering, the current members of the compensation committee will be replaced by
the two additional independent directors who will be appointed to our board
within 90 days of this offering.
Director Compensation
We do not currently compensate our directors who are also our employees.
Each non-employee director currently receives $1,000 of cash compensation per
meeting attended and is reimbursed for reasonable travel expenses for each
board meeting attended. Our directors will also be eligible for equity awards
under our 1999 Stock Plan and our 2000 Stock Plan for Non-Employee Directors,
see "-- Stock Plans" below for a description of such plans.
40
<PAGE>
Executive Compensation
The following table summarizes the compensation paid to or earned by our
Chief Executive Officer and all other executive officers whose salary and bonus
for services rendered in all capacities to us for the fiscal year ended
December 31, 1999 exceeded $100,000. We will use the term "named executive
officers" to refer to these people later in this prospectus.
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Compensation
Annual Compensation Awards
------------------------------ ------------
Securities
Underlying
Name and Principal Position(s) Year Salary Bonus Other(1) Options/SARS
- ------------------------------ ---- -------- ------- -------- ------------
<S> <C> <C> <C> <C> <C>
Mimi Brooks
President, Chief Executive
Officer and Chairwoman.......... 1999 $174,583 $75,000 $6,690(2) --
David W. Stoltzfus
Chief Technology Officer........ 1999 166,875 100,000 6,164(2) 15,000
E. Bruce Lovenberg
Chief Financial Officer......... 1999 124,750 30,000 4,643 15,000
Thomas Shea
Vice President--Sales........... 1999 134,167 20,000 4,625 15,000
</TABLE>
- --------
(1) Contributions by the company to its 401(k) plan were made during 1999 in
the amounts of $4,800, $4,800, $4,643 and $4,625 for Ms. Brooks, Mr.
Stoltzfus, Mr. Lovenberg and Mr. Shea, respectively.
(2) Includes $1,890 and $1,360 for Ms. Brooks and Mr. Stoltzfus, respectively,
representing the value of leased automobiles provided by the company.
41
<PAGE>
Option Grants in Last Fiscal Year
The following table summarizes the options granted to each of the named
executive officers during the fiscal year ended December 31, 1999.
<TABLE>
<CAPTION>
Potential Realizable
Individual Grants Value at Assumed
--------------------------------------------- Annual Rates
Percent of of Stock Price
Number of Total Options Appreciation for
Securities Granted to Option
Underlying Employees in Term(1)
Options Fiscal Exercise Expiration ---------------------
Name Granted(2) Year Price Date 5% 10%
---- ---------- ------------- -------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Mimi Brooks............. -- -- -- -- -- --
David W. Stoltzfus...... 15,000 2.8% $2.20 1/1/09 $ 20,754 $ 52,954
E. Bruce Lovenberg...... 10,000 1.9 2.20 1/1/09 13,836 35,062
5,000 0.9 2.20 12/31/09 6,918 17,531
Thomas Shea............. 10,000 1.9 2.20 1/1/09 13,836 35,062
5,000 0.9 2.20 12/31/09 6,918 17,531
</TABLE>
- --------
(1) The dollar amounts under these columns represent the potential realizable
value of each grant assuming that the market value of our stock appreciates
from the date of grant to the expiration of the option at annualized rates
of 5% and 10%. These assumed rates of appreciation have been specified by
the SEC for illustrative purposes only and are not intended to forecast
future financial performance or possible future appreciation of our stock.
The actual amount the executive officer may realize will depend on the
extent to which the stock price exceeds the exercise price of the options
on the date the option is exercised.
(2) Represent incentive stock options granted under our 1999 Stock Plan. The
options vest over a four-year period with 25% vesting on each anniversary
of the date of grant.
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option
Values
The following table presents information with respect to stock options owned
by the named executive officers at December 31, 1999. No stock options were
exercised by the named executive officers during the fiscal year ended December
31, 1999.
<TABLE>
<CAPTION>
Number of Securities
Underlying Unexercised Value Of Unexercised
Options at In-The-Money Options at
December 31, 1999 December 31, 1999(1)
------------------------- -------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Mimi Brooks(2).............. -- -- -- --
David W. Stoltzfus.......... 100,000 115,000 $ $
E. Bruce Lovenberg.......... 50,000 65,000
Thomas Shea................. 75,000 90,000
</TABLE>
- --------
(1) There was no public trading market for the common stock as of December 31,
1999. Accordingly, these values have been calculated on the basis of the
assumed initial public offering price of $ per share, less the
applicable exercise price per share, multiplied by the number of shares
underlying such options.
(2) The table does not include options granted to Ms. Brooks subsequent to
December 31, 1999. For a description of such options, see "Stock Options
Granted in March 2000" below.
42
<PAGE>
Stock Plans
1997 Stock Plan. The 1997 Stock Plan was designed to attract, incent and
retain the best available personnel and to promote the success of our business,
through grants of incentive stock options, nonqualified stock options and stock
purchase rights. We adopted the 1997 Stock Plan effective as of
September 10, 1997 following approval by the stockholders on September 10,
1997. As of February 29, 2000, there were options to purchase 983,100 shares of
common stock outstanding under this plan, at a weighted average exercise price
of $2.13 per share. As of this date, there are no further shares available for
issuance under the 1997 Stock Plan.
1999 Stock Plan. The 1999 Stock Plan is designed to attract, incent and
retain the best available personnel and to promote the success of our business,
through grants of incentive stock options, nonqualified stock options and stock
purchase rights. The administrator administers the 1999 Stock Plan and
determines to whom options and purchase rights are to be granted and the terms
and conditions, including the number of shares and the period of
exercisability, thereof. We adopted the 1999 Stock Plan effective as of
November 9, 1999 following approval by the stockholders on October 28, 1999.
The 1999 Stock Plan was amended and restated by our board of directors on March
1, 2000, and our stockholders approved it as so amended on , 2000.
Subject to adjustment as provided in the 1999 Stock Plan, the number of
shares of common stock that may be issued under the 1999 Stock Plan may not in
the aggregate exceed 2,750,000 shares, which may be shares of original issuance
or shares of restricted stock repurchased by us at their original purchase
price or a combination thereof. Our service providers, including officers,
directors and consultants, may be selected by the administrator to receive
benefits under the 1999 Stock Plan.
The administrator, which may be our full board of directors or the
compensation committee of the board, may grant incentive stock options to
employees that entitle the optionee to purchase shares of common stock. If the
optionee owns stock representing more than 10% of the voting power of all
classes of stock, the exercise price will be not less than 110% of the fair
market value on the date of grant. Any other employee will have an exercise
price of not less than the fair market value on the date of grant. To the
extent that the fair market value of the incentive stock options exercisable
for the first time by the optionee during a calendar year exceeds $100,000,
such options will be treated as nonqualified stock options. The term of each
option will be stated in the applicable option agreement. In the case of an
incentive stock option, the term will be no longer than ten years from the date
of grant (five years in the case of an incentive stock option granted to an
optionee who, at the time of the grant, owned stock representing more than 10%
of the voting power of our capital stock).
The administrator may grant nonqualified stock options and stock purchase
rights to employees, directors or consultants that entitle the optionee to
purchase shares of common stock. The exercise price of a nonqualified option
will be determined by the administrator, except that a nonqualified option that
is intended to qualify as "performance-based compensation" for federal tax
purposes will have an exercise price of no less than 100% of the fair market
value on the date of grant.
Subject to adjustment as provided in the 1999 Stock Plan, no employee,
director or consultant will be granted, in any two fiscal years after the
offering, options to purchase more than 500,000 shares. In connection with his
or her initial service, an employee, director or consultant may be granted
options to purchase up to an additional 500,000 shares, which will not count
against the two fiscal year limit. A cancelled option will be counted against
the two fiscal year and the initial service limits.
The administrator may provide that the option price generally is payable at
the time of exercise in cash, by check, by promissory note, by surrender of
shares and by certain other forms of cashless exercise.
Stock purchase rights may be issued by the administrator alone or in
addition to other grants under this plan or cash awards outside this plan. The
administrator will determine the terms, conditions and restrictions to the
offer, including the number of shares that the offeree is entitled to purchase,
the price to be paid, the period to accept the offer and the form of the
restricted stock purchase agreement. Execution of the restricted stock purchase
agreement will be an acceptance of the offer. Unless the administrator
determines otherwise, the
43
<PAGE>
agreement will give us an option to repurchase the shares at the price paid by
the purchaser upon the voluntary or involuntary termination of the purchaser's
services to us. Upon exercise of the stock purchase option, the purchaser will
have rights equivalent to those of a shareholder.
Options or purchase rights are not transferable by a participant except if
the administrator makes the right transferable or if transferred by will or the
laws of descent and distribution. If the administrator makes an option or a
purchase right transferable, the option or purchase right will contain
additional terms and conditions that the administrator deems appropriate. An
option or a purchase right may be exercised within 12 months following the
death of the optionee, by the optionee's estate or by the person who acquires
the right by bequest or inheritance, if the optionee would have been entitled
to exercise the right on the date of death.
In the event of a merger by us into another corporation or the sale of
substantially all the assets, each option or purchase right will be assumed or
substituted by the successor corporation or by a parent or subsidiary of the
successor corporation. All options or purchase rights will fully vest if the
successor refuses to assume or substitute those outstanding options or purchase
rights.
To the extent the administrator determines it to be desirable to qualify the
options as "performance-based compensation", the plan shall be administered by
a compensation committee of not less than two nonemployee directors who are
"non-employee directors" within the meaning of Rule 16b-3 and "outside
directors" within the meaning of Section 162(m) of the Code. In connection with
its administration of the stock plans, the compensation committee is authorized
to interpret the stock plans and related agreements and other documents. The
1999 Stock Plan may be amended from time to time by the board of directors,
with shareholder approval to the extent necessary and desirable to comply with
applicable law.
As of February 29, 2000 there were options to purchase 1,292,330 shares of
common stock outstanding under this plan, at a weighted average exercise price
of $3.83 per share. The total number of stock options or other awards that will
be granted under the 1999 Stock Plan in the future is not determinable at this
time. The 1999 Stock Plan is not the exclusive means by which we may grant
equity-based incentive awards and in no way limits our ability to grant equity-
based awards outside the 1999 Stock Plan.
2000 Stock Plan for Non-Employee Directors. The 2000 Stock Plan for Non-
Employee Directors is designed to attract, incent and retain the best available
members of the board of directors and to promote the success of our business,
through grants of nonqualified stock options. The administrator administers the
plan and determines to whom options are to be granted and the terms and
conditions, including the number of shares and the period of exercisability,
thereof. We adopted the 2000 Stock Plan for Non-Employee Directors effective as
of March 1, 2000, and the stockholders approved the plan on , 2000.
Subject to adjustment as provided in the 2000 Stock Plan for Non-Employee
Directors, the number of shares of common stock that may be issued under the
plan may not in the aggregate exceed shares, which may be shares of
original issuance or shares of restricted stock repurchased by us at their
original purchase price or a combination thereof. Our non-employee directors
may be selected by the administrator to receive benefits under the 2000 Stock
Plan for Non-Employee Directors.
The administrator, which will be our full board of directors, may grant
nonqualified stock options to our non-employee directors that entitle the
optionee to purchase shares of common stock. The term of each option will be
stated in the applicable option agreement. The administrator will determine the
exercise price of a nonqualified option, which may be equal to, less than or
greater than the fair market value per share on the date of grant. Each option
shall become cumulatively exercisable upon the completion of such periods of
service or the occurrence of such events as the administrator will determine.
The administrator may provide that the option price generally is payable at
the time of exercise in cash, by check, promissory note, by surrender of shares
and certain other forms of cashless exercise.
Options are not transferable by a participant except if the administrator
makes the right transferable or if transferred by will or the laws of descent
and distribution. If the administrator makes an option or a purchase
44
<PAGE>
right transferable, the option or purchase right will contain additional terms
and conditions that the administrator deems appropriate. An option may be
exercised within 12 months following the death of the optionee, by the
optionee's estate or by the person who acquires the right by bequest or
inheritance, if the optionee would have been entitled to exercise the right on
the date of death.
In the event of a merger by us into another corporation or the sale of
substantially all the assets, each option or purchase right will be assumed or
substituted by the successor corporation or by a parent or subsidiary of the
successor corporation. All options or purchase rights will fully vest if the
successor refuses to assume or substitute those outstanding options or purchase
rights.
The 2000 Stock Plan for Non-Employee Directors may be amended from time to
time by the board of directors, with shareholder approval to the extent
necessary and desirable to comply with applicable law.
As of March 1, 2000, there were option rights to purchase 28,000 shares of
common stock outstanding under this plan, at an exercise price of $5.00 per
share. The total number of stock options or other awards that will be granted
under the 2000 Stock Plan for Non-Employee Directors in the future is not
determinable at this time. The 2000 Stock Plan for Non-Employee Directors is
not the exclusive means by which we may grant equity-based incentive awards and
in no way limits our ability to grant equity-based awards outside the 2000
Stock Plan for Non-Employee Directors.
Stock Options Granted in March 2000
In March 2000, as contemplated by the 1997 purchase agreement relating to
the sale of debentures and warrants, we granted options to purchase 1,000,000
shares of our common stock to Ms. Mimi Brooks, our President and Chief
Executive Officer. These options have an exercise price of $3.35 per share with
respect to 500,000 shares and an exercise price of $4.82 per share with respect
to the other 500,000. All of these options have a 10-year term and were vested
immediately upon grant. The options are non-qualified stock options under the
Internal Revenue Code and will result in compensation income to Ms. Brooks at
the time of exercise equal to the difference between the exercise price and the
fair market value at such date. We will be entitled to a compensation deduction
for tax purposes that generally will correspond in time and amount to the
income recognized by Ms. Brooks. As described in "Management's Discussion and
Analysis of Financial Condition and Results of Operations," these options will
also result in compensation expense for financial accounting purposes in the
first quarter of fiscal 2000.
401(k) Profit Sharing Plan
Our 401(k) Profit Sharing plan covers all of our employees. The 401(k) plan
is intended to qualify under Section 401(k) of the Code. Consequently,
contributions to the 401(k) plan by employees or by us, and the investment
earnings thereon, are not taxable to employees until withdrawn from the 401(k)
plan. Further, contributions by us, if any, will be deductible by us when made.
Employees may elect to contribute up to 15% of their current compensation to
the 401(k) plan, up to the statutorily prescribed annual limit, which was
$10,500 in 1999. The 401(k) plan permits, but does not require, additional
matching contributions to the 401(k) plan by us on behalf of all participants
in the 401(k) plan. In 1999, we contributed $230,400 to the 401(k) plan.
Compensation Committee Interlocks and Insider Participation
The members of the compensation committee are Ms. Brooks and Messrs. Lozier
and Mohan. No executive officer of our company serves on the board of directors
or compensation committee of any entity which has one or more executive
officers serving as a member of our board of directors or compensation
committee. For more information about transactions and relationships between us
and Ms. Brooks and Messrs. Lozier and Mohan, you should see the "--Directors,
Executive Officers and Key Employees" and "Certain Transactions" sections of
this prospectus. It is anticipated that following the consummation of this
offering, the current members of the compensation committee will be replaced by
the two additional independent directors who will be appointed to our board
within 90 days of this offering.
45
<PAGE>
CERTAIN TRANSACTIONS
Investment by Summit, Paul F. Lozier and Samedan, Inc.
Subordinated Debenture and Warrant Purchase Agreement
In March 1997, Summit Ventures IV, Summit Investors III, Samedan, Inc., and
Mr. Paul F. Lozier (the investors), and Ms. Mimi Brooks and Mr. Darren Bryden
(the principal shareholders) entered into a 9% senior subordinated debenture
and warrant purchase agreement and related agreements with us. Ms. Brooks is
our President and Chief Executive Officer and Chairwoman of our board of
directors and held these positions in March 1997. In March 1997, Mr. Bryden
served as our Executive Vice President. Mr. Mohan, who is a General Partner of
Summit Partners, and Mr. Lozier are currently directors of our company.
Under the purchase agreement, we agreed to issue and the investors agreed to
buy a total of approximately $5.5 million principal amount of 9% senior
subordinated debentures due March 2002 and warrants to purchase 2,150,000
shares of our common stock (giving effect to the anti-dilution provisions of
the warrant agreement discussed below), for a total consideration of
approximately $5.1 million in cash. The proceeds from the sale of the senior
subordinated debentures and the warrants were used to provide working capital
and to fund business expansion. The purchase agreement contains various
financial and negative covenants that restrict our ability to take specified
actions. The covenants will no longer apply to us upon consummation of this
offering.
Sale of Senior Subordinated Debentures
Pursuant to the purchase agreement, on March 19, 1997, we issued
approximately $5.5 million aggregate principal amount at maturity of 9% senior
subordinated debentures due March 2002. The senior subordinated debentures are
junior in right of payment to all senior debt. The senior subordinated
debentures bear interest from the date of issuance until the date of payment of
principal in full at the rate of 9.0%. Interest is computed on the basis of a
360-day year and the actual number of days elapsed on the unpaid principal
amount of senior subordinated debentures. Interest accrues and is compounded
annually on the senior subordinated debentures and will be paid upon payment of
principal. The net proceeds from the offering of the senior subordinated
debentures and warrants accompanying the senior subordinated debentures were
approximately $5.1 million after deducting the discount payable to the
purchasers and the offering expenses.
The principal amount of the senior debentures is payable in full on March
19, 2002, but we may prepay the senior subordinated debentures at any time in
whole or in installments of $100,000, without premium or penalty. The senior
subordinated debentures will be repaid in full with a portion of the proceeds
of this offering.
Warrant Agreement
Pursuant to the purchase agreement described above, we also entered into a
warrant agreement in connection with the issuance to the investors of the
warrants to purchase 2,150,000 shares of common stock. The warrant agreement
sets forth the provisions of the warrants and the terms and conditions on which
the warrants may be issued, exchanged, exercised and replaced. Under the
warrant agreement, each warrant certificate entitles the holder to purchase the
number of shares of common stock specified on the warrant certificate at a
purchase price of $0.01 per share at any time on or after March 20, 1997 and on
or before the expiration date, which is April 19, 2004.
The shares of common stock issuable upon exercise of the warrants are
subject to anti-dilution adjustments upon extraordinary distribution of our
assets, declaration or payment of a share dividend, combination of its
outstanding common stock into a smaller number of shares of common stock, or
issuance of any shares of its
46
<PAGE>
capital stock in a reclassification of its common stock (including any
reclassification in connection with a consolidation or merger in which our
company survives). In addition, in the event of a consolidation or merger in
which our company does not survive, a liquidating dividend with respect to the
common stock or a tender offer or exchange offer with respect to the common
stock (other than a tender offer opposed by our board of directors), the
warrant holder will have the right to receive the consideration with respect to
the shares for which the warrant is exercisable, reduced by the exercise price.
The holders of the warrants have agreed to exercise all of the warrants upon
the completion of this offering. Any warrants not exercised will terminate the
first business day following the completion of this offering.
Shareholders Agreement
On March 19, 1997, as a condition to the purchase agreement entered into on
the same date, we entered into a shareholder agreement with the principal
shareholders and investors. The agreement entitles the shareholders to a right
of first refusal and a right of participation on transfers by a principal
shareholder and preemptive rights to acquire a pro rata share of new securities
issued by us. The preemptive rights do not apply to this offering. The parties
also agreed to vote all shares owned by them for the election of directors
pursuant to the terms of the shareholders agreement.
Pursuant to its terms, the shareholders agreement will terminate immediately
prior to the consummation of this offering.
Samedan Engagement Letter
On March 8, 1997, we entered into an engagement letter with Samedan, Inc.
pursuant to which Samedan agreed to act as our financial advisor to assist us
in raising capital for a one-year term. Samedan, Inc., which is wholly-owned by
Mr. Lozier, was paid a fee of $200,000 in connection with the issuance of the
debentures and warrants, $80,000 of which was paid in cash. In consideration of
the remaining $120,000 of the fee and a cash payment of $123,402, Samedan
received $243,402 principal amount of senior subordinated debentures and
Mr. Lozier received warrants to acquire 100,000 shares.
Registration Rights Agreement
In connection with the purchase agreement, on March 19, 1997, we entered
into a registration rights agreement with Summit Ventures IV, L.P., Summit
Investors III, L.P., and Paul F. Lozier to provide these investors with certain
demand and "piggyback" registration rights with respect to shares of common
stock issuable upon exercise of the warrants acquired under the purchase
agreement or otherwise.
Registration demand rights granted under the agreement require us, at any
time, to register our common stock held by investors in connection with a firm
commitment underwriting upon written request by investors that hold in the
aggregate at least 25% of our outstanding common stock held by or issuable to
all investors party to the agreement, or any lesser percentage if the
anticipated aggregate price to the public of the offering would exceed $10
million. Investors meeting these requirements may collectively initiate up to
two demand right registrations. After any demand registration request, we are
obligated to promptly give written notice of the proposed registration to other
investors and use all commercially reasonable efforts to effect the
registration of the common stock issuable upon exercise of the warrants.
Additional investors may join in the demand registration upon a written request
given within 30 days after receipt of the notice from us. The number of
securities registered may be limited by the managing underwriter for marketing
purposes and, under those circumstances, the number of securities registered
will be divided pro rata among all investors that request registration. We are
only permitted to include shares held by us or the joining investors in the
demand registration if we have the consent of the investors initially
requesting registration or if inclusion of the
47
<PAGE>
additional shares of common stock will not reduce the number or the offering
price of shares to be registered by those investors.
The investors party to the agreement also have "piggyback" registration
rights. If we determine to register any securities on our own account, for
security holders or for holders exercising registration rights other than the
rights described above, we are obligated to give notice to investors including
the number of shares to be registered and the name of the proposed underwriter.
Investors will have 20 days from the date of delivery of the written notice to
request registration of the common stock issuable upon the exercise of their
warrants. We are obligated to use our best efforts to register all securities
specified in timely written requests submitted by investors in response to our
notice. Any limitation by the underwriter on the number of securities to be
registered will first exclude securities not held by investors party to the
agreement and their assignees and then exclude securities pro rata based upon
the total number of securities held by the holders requesting registration. We
are obligated to pay all expenses associated with the registration, except for
underwriting discounts and selling commissions, and to keep the holders advised
as to initiation and completion of each registration. Expenses payable by the
holders will be borne by the holders pro rata on the basis of the number of
shares registered by each. The investors have agreed to waive their piggyback
registration rights in connection with this offering.
We are not obligated to effect a registration of securities under the
agreement if:
. we receive a written opinion that registration is not required under the
securities laws;
. we have obtained a no-action letter from the Securities and Exchange
Commission stating that registration is not required; or
. we determine in good faith that use of a prospectus would require
disclosure of material information for which we have a bona fide
business purpose for preserving as confidential and the securities laws
do not otherwise require disclosure of the information.
The investors party to the agreement are obligated to refrain from selling
registrable securities during any period when, and to the same extent that, our
officers are restricted in connection with an offering of securities by us.
Issuance of Junior Subordinated Debentures
In connection with the sale of the senior subordinated debentures and
warrants, we and Logical Design Solutions International, Inc., which was an
affiliated company, agreed to convert from a subchapter "S" corporation to a
subchapter "C" corporation. Prior to the closing of the sale in connection with
the conversion, we issued $1,114,289 aggregate principal amount of 9% junior
subordinated debentures due March 2003 to the principal shareholders, an amount
representing their retained earnings in the companies. Ms. Brooks received and
currently holds $1,073,900 principal amount of the debentures. The terms of the
junior subordinated debentures are identical to those of the senior
subordinated debentures in all material respects, except that the junior
subordinated debentures are payable one year after the senior subordinated
debentures and are junior in right of payment to all senior debt, including the
senior subordinated debentures. Upon certain events of default under the
purchase agreement, and in some cases only with the consent of the holder or
holders of greater than 50% of the principal amount of the senior subordinated
debentures, the unpaid principal amount and accrued and unpaid interest in the
senior and junior subordinated debentures will automatically become due and
payable.
In addition, prior to the closing of the sale, we and Logical Design
Solutions International, Inc. distributed to the principal shareholders cash
equal to the amount of estimated federal and state income taxes payable by such
shareholders for periods prior to the closing date of the sale. In the purchase
agreement, the parties agreed that appropriate adjustments would be made in the
case of an overdistribution. During 1998, final subchapter "S" tax calculations
and income tax returns were prepared and returns filed for us and Logical
Design
48
<PAGE>
Solutions International, Inc., which resulted in the finalization of taxes
payable and earnings available for distribution to the principal shareholders.
This resulted in a reclassification of certain of the distributions to the
principal shareholders as loans by us to them in amounts equal to the
overdistribution, which included accrued interest from the closing date of the
sale, as agreed to by us, the principal shareholders and the investors. As a
result of the reclassification, Ms. Brooks executed a promissory note to us in
the amount of $401,932. The note accrues interest at a 9.0% rate compounded
annually. The principal amount of the loan plus accrued interest is due and
payable on March 19, 2003. $444,136 of principal and accrued interest was
outstanding as of February 29, 2000 on the note from Ms. Brooks.
The junior subordinated debentures will be repaid in full with a portion of
the proceeds of this offering.
Jump! Transaction
In November 1999, we completed a merger with Jump! Information
Technologies, Inc., by exchanging 109,500 shares of our common stock and
$525,000 in cash for all of the common stock of Jump!. In addition, Jump!'s
options were converted into options to purchase 25,339 shares of our common
stock. We incurred acquisition costs of $149,000 and issued 12,671 vested
stock options valued at $168,000 associated with the Jump! acquisition, which
are included in goodwill. We accounted for this transaction as a purchase.
Mr. Allan Von Dette and Mr. William Engel, the Jump! shareholders, entered
into a shareholders agreement at the time of the acquisition governing their
rights and obligations with respect to the shares of common stock held by them
and in the escrow account described below. The agreement prohibits either
shareholder from selling or transferring any common stock without first giving
us and the non-selling shareholders a right of first refusal.
Under the shareholders agreement, we have agreed to repurchase any shares
of a Jump! shareholder whose employment with the firm is terminated. If the
termination is a voluntary resignation or an involuntary termination by us
with just cause, the repurchase price will be zero based on a termination date
prior to January 1, 2000, 25% of the fair market value based on a date of
termination from and including January 1, 2000 and prior to March 31, 2000,
50% from and including March 31, 2000 and prior to June 30, 2000, 75% from and
including June 30, 2000 and prior to September 30, 2000 and 100% of the fair
market value from September 30, 2000. If the employment is terminated for any
other reason, we will repurchase the shares for 100% of the fair market value.
This agreement will terminate upon the consummation of this offering.
Of the 109,500 shares issued in the acquisition of Jump!, 68,182 were
deposited into an escrow account as security for any general or tax
indemnification obligations by the sellers resulting from the acquisition. The
general indemnification covers any loss, liability, claim or damage from
failure of a representation or warranty or breach of any covenant in the Jump!
stock purchase agreement. The tax indemnification will indemnify against
liability for the taxes of Jump! for any pre-closing period, including real,
personal and intangible property taxes, and any liability of the sellers or
persons affiliated with Jump!. The sellers maintain the rights to dividends
and voting rights on the shares that are held in the escrow account.
The escrowed property will not to be distributed until the release of all
the escrow property on November 10, 2000. In the event of a merger, however,
if we are not the survivor of the merger, then one half of the escrow property
will be distributed to the Jump! shareholders, provided the Jump! shareholders
are still employed by us.
In the event of an initial public offering by us prior to termination of
the escrow account, the Jump! shareholders are permitted to substitute $75,000
for the escrow shares. Also, if the Jump! shareholders' employment is
terminated, we are obligated to repurchase the shares in accordance with the
Jump! shareholder agreement, and the Jump! shareholders must deposit up to
$75,000 of the proceeds from our repurchase into the escrow account.
49
<PAGE>
Other Transactions
During 1998, Mr. Bryden, who served as our Executive Vice President until
January 1999 and is beneficial owner of approximately 6.3% of our outstanding
common stock prior to this offering, borrowed a total of $247,100 from us. Mr.
Bryden executed a promissory note, dated November 17, 1998, and a mortgage note
and second mortgage, each dated June 11, 1998 and each in favor of us. The
promissory note is in the amount of $66,100 with interest compounded annually
at a rate of 8.5%. Under the mortgage note and second mortgage, Mr. Bryden
borrowed $181,000, interest compounded annually at a rate of 8.5%. As security
for the payment of the promissory note and second mortgage, Mr. Bryden has
executed a stock pledge agreement in favor of us, dated as of June 11, 1998,
under which he has pledged all shares of our capital stock owned by him up to a
maximum of $250,000 in market value. Currently, $276,802 of principal and
accrued interest is outstanding on the loan to Mr. Bryden.
50
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table presents information regarding the beneficial ownership
of common stock as of February 29, 2000 and as adjusted to reflect the sale of
common stock in this offering by:
. each person (or group of affiliated persons) who is the beneficial
owner of more than 5% of the outstanding common stock;
. each of the named executive officers;
. each of our directors;
. all of the executive officers and directors as a group; and
. each selling stockholder.
The persons named in this table have sole voting power for all shares of
common stock shown as beneficially owned by them, subject to community property
laws where applicable and except as indicated in the footnotes to this table.
Beneficial ownership is determined in accordance with the rules of the SEC. In
computing the number of shares beneficially owned by a person and the
percentage ownership of that person, shares of common stock subject to options
held by that person that are currently exercisable or exercisable within 60
days after February 29, 2000, are deemed outstanding. Such shares, however, are
not deemed outstanding for the purpose of computing the percentage ownership of
any other person. Unless otherwise indicated, the address of each person named
below is c/o Logical Design Solutions, Inc., 465 South Street, Suite 103,
Morristown, New Jersey 07960.
Certain of the stockholders named in this table have granted the
underwriters an option to purchase additional shares solely to cover
over-allotments. The respective number of shares subject to the option by each
selling stockholder is set forth opposite their name and assumes that the
option is exercised in full. If the underwriters exercise only a portion of the
option, the number of shares to be sold by the selling stockholders will be
proportionately reduced on a pro rata basis.
The "Beneficial Ownership After the Offering" share numbers and percentages
assume that the option granted to the underwriters to purchase additional
shares is not exercised.
<TABLE>
<CAPTION>
Shares
to be Sold
in the
Beneficial Ownership Over-Allotment Beneficial Ownership
Prior to the Offering Option After the Offering
--------------------- -------------- ------------------------
Name Number Percentage Number Percentage
---- ---------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Mimi Brooks(1).......... 8,065,001 89.8% %
Summit Partners(2)...... 2,050,000 20.4
Darren Bryden(3)........ 785,000 9.8
E. Bruce Lovenberg(4)... 52,500 *
David W. Stoltzfus(4)... 103,750 1.3
Thomas Shea(4).......... 77,500 1.0
Paul F. Lozier(5)....... 128,000 1.6
Kevin Mohan(6).......... 2,050,000 20.4
All executive officers
and directors as a
group (8 persons)...... 10,476,751 92.0
</TABLE>
- --------
* Less than 1% of the outstanding shares.
(1) Includes 1,000,000 shares of common stock issuable upon the exercise of
stock options granted in March 2000.
51
<PAGE>
(2) Represents 1,947,705 shares of common stock held by Summit Ventures IV,
L.P. and 102,295 shares held by Summit Investors III, L.P., issuable upon
the exercise of warrants, which are exercisable at any time at the option
of the holders. Summit has agreed to exercise these warrants prior to the
completion of this offering. The address of Summit Ventures IV, L.P. is 600
Atlantic Avenue, Suite 2800, Boston, MA 02210.
(3) Mr. Bryden's address is 156 Smoke Rise Road, Basking Ridge, NJ 07920.
(4) Represents shares of common stock issuable upon the exercise of stock
options.
(5) Includes (a) 100,000 shares of common stock issuable upon the exercise of
warrants, which are exercisable at any time at the option of the holder and
(b) 28,000 shares of common stock issuable upon the exercise of stock
options granted in March 2000. Mr. Lozier has agreed to exercise his
warrants prior to the completion of this offering. Mr. Lozier's address is
40 Dellwood Drive, Madison, NJ 07940.
(6) Represents 1,947,705 shares of common stock held by Summit Ventures IV,
L.P. and 102,295 shares held by Summit Investors III, L.P., issuable upon
the exercise of warrants, which are exercisable at any time at the option
of the holders. Mr. Mohan is (i) a general partner of Stamps, Woodsum & Co.
IV, which is the general partner of Summit Ventures IV, L.P. and (ii) a
general partner of Summit Investors III, L.P. Mr. Mohan expressly disclaims
beneficial ownership of such shares, except as to his proportionate
interest in Summit Ventures IV, L.P. and Summit Investors III, L.P. The
address of Summit Ventures IV, L.P. is 600 Atlantic Avenue, Suite 2800,
Boston, MA 02210.
52
<PAGE>
DESCRIPTION OF CAPITAL STOCK
General
Upon the closing of the offering, our authorized capital stock will consist
of shares of common stock, par value $.01 per share, and shares of
preferred stock, par value $.01 per share. The following information relates
only to our amended and restated certificate of incorporation, which will be
adopted prior to the closing of this offering.
Common Stock
As of the date of this prospectus, there were 7,976,401 shares of common
stock outstanding and held of record by 14 stockholders. Based upon the number
of shares outstanding as of the date of this prospectus and giving effect to
the issuance of shares of common stock by us in this offering, there will
be shares of common stock outstanding upon completion of this offering.
Holders of common stock are entitled to one vote for each share held on all
matters submitted to a vote of stockholders. They do not have cumulative voting
rights. As a result, holders of a majority of the shares of common stock
entitled to vote in any election of directors may elect all of the directors
standing for election. Holders of common stock are entitled to receive ratably,
dividends, if any, as the board of directors may declare out of funds legally
available, subject to any preferential dividend rights of any then-outstanding
preferred stock. Upon our liquidation, dissolution or winding up, the holders
of common stock are entitled to receive ratably our net assets available after
the payment of all debts and other liabilities and subject to the prior rights
of any then-outstanding preferred stock. Holders of the common stock have no
preemptive, subscription, redemption or conversion rights. The outstanding
shares of common stock are, and the shares offered by us in the offering will
be, when issued in consideration for payment, fully paid and nonassessable. The
rights, preferences and privileges of holders of common stock are subject to,
and may be adversely affected by, the rights of the holders of shares of any
series of preferred stock which we may designate and issue in the future. See
"--Preferred Stock."
Preferred Stock
As of the date of this prospectus, we had no outstanding shares of preferred
stock.
Following the closing of this offering, the board of directors will be
authorized, without further stockholder approval, to issue from time to time up
to an aggregate of shares of preferred stock in one or more series. The
board of directors may fix or alter the designations, preferences, rights and
any qualification, limitations or restrictions of the shares of any series,
including the dividend rights, dividend rates, conversion rights, voting
rights, redemption terms and prices, liquidation preferences and the numbers of
shares constituting any series. As of the closing of this offering, no shares
of preferred stock will be outstanding. Although the ability of the board of
directors to designate and issue preferred stock could provide flexibility in
possible acquisitions or other corporate purposes, issuance of preferred stock
may have adverse effects on the holders of common stock. The effects include:
. restrictions on dividends on the common stock if dividends on the
preferred stock have not been paid;
. dilution of voting power of the common stock to the extent the preferred
stock has voting rights; or
. deferral of participation in our assets upon liquidation until
satisfaction of any liquidation preference granted to holders of the
preferred stock.
In addition, issuance of preferred stock could make it more difficult for a
third party to acquire a majority of the outstanding voting stock and
accordingly may be used as an "anti-takeover" device. The board of directors,
however, currently does not contemplate the issuance of any preferred stock and
is not aware of any pending transactions that would be affected by such
issuance.
53
<PAGE>
Anti-Takeover Effects of Our Amended and Restated Certificate of Incorporation
and Bylaws and Provisions of Delaware Law
Our amended and restated certificate of incorporation and bylaws, which will
become effective prior to the closing of this offering, and provisions of
Delaware corporate law may hinder or delay a third party's attempt to acquire
us. They may also make it difficult for the stockholders to remove incumbent
management.
Classified Board of Directors; Removal; Vacancies. Our amended and restated
certificate of incorporation divides the board of directors into three classes.
The directors in each class serve three-year terms. The directors' terms are
staggered by class. Our classified board of directors is intended to provide
continuity and stability in the board of director's membership and policies.
However, a classified board of directors makes it more difficult for
stockholders to change the board of directors' composition quickly. Also, under
the amended and restated certificate of incorporation, directors may be removed
only for cause by a two-thirds stockholder vote. In addition, a majority of the
directors then in office can fill board vacancies and newly created
directorships resulting from any increase in the size of the board of
directors. This is true even if those directors do not constitute a quorum or
if only one director is left in office. These provisions could prevent
stockholders, including parties who want to take over or acquire us, from
removing incumbent directors without cause and filling the resulting vacancies
with their own nominees.
Advance Notice Provisions for Stockholder Proposals and Stockholder
Nominations of Directors. Our amended and restated bylaws will establish an
advance notice procedure regarding nominations of directors by stockholders and
other stockholder proposals. The advance notice procedure will not apply to
nominations of directors by the board of directors. For matters a stockholder
wishes to bring before an annual meeting of stockholders, the stockholder must
deliver us notice not less than 60 days nor more than 90 days before the first
anniversary of the preceding year's annual meeting of nominations and other
business to be brought before a an annual meeting of our stockholders. The
stockholder must put information in the notice regarding
. the stockholder and its holdings;
. the background of any nominee for director;
. the written consent to being named as a nominee and to serving as a
director if elected;
. any business desired to be brought before the meeting;
. the reasons for conducting the business at the meeting; and
. any material interest of the stockholder in the business proposed.
At a special meeting of stockholders called to elect directors, stockholders
can make a nomination only if they deliver to us a notice that complies with
the above requirements no later than the tenth day following the day on which
public announcement of the special meeting is made. The bylaws could preclude a
nomination for the election of directors or the conduct of certain business at
a particular meeting if the proper procedures are not followed. This may
discourage or deter a third party from conducting a solicitation of proxies to
elect its own slate of directors or otherwise attempting to obtain control of
us.
Special Stockholders' Meetings. Our amended and restated certificate of
incorporation and bylaws will permit special meetings of the stockholders to be
called only by the board of directors, the Chairperson of the board, the Chief
Executive Officer or the President or holders of at least 75% of our securities
that are outstanding and entitled to vote in an election of directors.
Limitations on Stockholder Action by Written Consent. Our amended and
restated certificate of incorporation will place limits on the stockholders'
ability to act by written consent. Specifically, any action to be taken at a
stockholders' meeting may be taken without a meeting only if consented to
generally by stockholders having voting power of at least 75% of the voting
power of all shares of each class or series entitled to vote on the action.
54
<PAGE>
Authorized But Unissued Shares. Without stockholder approval, we can issue
shares of common stock and preferred stock up to the number of shares
authorized for issuance in our amended and restated certificate of
incorporation, except as limited by Nasdaq rules. We could use these additional
shares for a variety of corporate purposes. These purposes include future
securities offerings to raise additional capital, corporate acquisitions and
employee benefit plans. Our ability to issue these shares of common stock and
preferred stock could make it more difficult or discourage an attempt to obtain
control of us by means of a proxy contest, tender offer, merger or otherwise.
Section 203 of Delaware Law. After this offering is completed, Section 203
of the Delaware General Corporation Law will apply to us. This section will
prohibit us from engaging in a "business combination" with an "interested
stockholder." This restriction will apply for three years after the date of the
transaction in which the person became an interested stockholder, unless the
business combination is approved in a prescribed manner. A "business
combination" includes (1) mergers, (2) asset sales and (3) other transactions
resulting in a financial benefit to an interested stockholder. Generally, an
"interested stockholder" is a person who, together with affiliates and
associates, owns, or within three years did own, 15% or more of our voting
stock. Section 203 could delay, defer or prevent a change in our control. It
might also reduce the price that investors might be willing to pay in the
future for shares of common stock.
Limitation of Liability and Indemnification Matters
Our amended and restated certificate of incorporation will provide that our
directors shall not be personally liable to us or our stockholders for monetary
damages for breach of fiduciary duty as a director, except for liability (1)
for any breach of the director's duty of loyalty to us or our stockholders, (2)
for acts or omissions not in good faith or which involve intentional misconduct
or a knowing violation of law, (3) under a provision of Delaware law relating
to unlawful payment of dividends or unlawful stock purchase or redemption of
stock or (4) for any transaction from which the director derives an improper
personal benefit. As a result of this provision, we and our stockholders may be
unable to obtain monetary damages from a director for breach of his or her duty
of care.
Our amended and restated bylaws will provide for the indemnification of
directors and officers and any person who is or was serving at our request as a
director, officer, employee, partner or agent of another corporation or of a
partnership, joint venture, limited liability company, trust or other
enterprise to the fullest extent authorized by, and subject to the conditions
set forth in, the Delaware General Corporation Law against all expenses,
liabilities and losses. The indemnification provided under the bylaws will
include the right to be paid by us the expenses in advance of any proceeding
for which indemnification may be had in advance of its final disposition.
Transfer Agent and Registrar
The transfer agent and registrar for the common stock is First Union
National Bank.
Listing
We have applied to have our common stock listed on the Nasdaq National
Market under the trading symbol "LDSI."
55
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Sales, or the availability for sale, of substantial amounts of our common
stock in the public market could adversely affect our common stock's prevailing
market price. Upon completion of this offering, we will have outstanding an
aggregate of shares of our common stock, assuming no exercise of
outstanding options. Of these shares, all of the shares sold in this offering
will be freely tradeable without restriction or further registration under the
Securities Act, unless the shares are purchased by our "affiliates" as that
term is defined in Rule 405 under the Securities Act. See "Risk Factors--Future
sales of our common stock in the public market could lower our stock price and
impair our ability to raise funds in new stock offerings."
shares of common stock held by existing stockholders are "restricted
securities" as that term is defined in Rule 144 under the Securities Act.
Restricted securities may be sold in the public market only if registered or if
they qualify for an exemption from registration under Rule 144 or Rule 701.
These two rules are summarized below. Further, as described below, holders of
some of our common stock have rights to have their shares registered and we
plan to file a registration statement to cover the shares issued under our
option plans.
Lock-Up Agreements
All of our officers and directors, and holders of substantially all of our
stock, who will own an aggregate of shares (of which shares are
issuable upon the exercise of outstanding options) of common stock after this
offering, have signed lock-up agreements. Under these agreements, they agreed,
among other things, not to transfer or dispose of any shares of common stock,
or any securities convertible into shares of common stock, for a period of 180
days after the date of this prospectus. Transfers or dispositions can be made
sooner with the prior written consent of Salomon Smith Barney Inc. This consent
may be given at any time without public notice.
Rule 144
Under Rule 144, as currently in effect, shares of common stock will be
freely tradeable 90 days after this offering closes. Of these shares of common
stock, shares are subject to lock-up agreements. In general, under Rule
144, beginning 90 days after the closing of this offering, a person who has
owned shares of our common stock for at least one year would be entitled to
sell within any three-month period a number of shares that does not exceed the
greater of:
. 1% of the number of shares of common stock then outstanding, which will
equal approximately shares immediately after this offering; or
. the average weekly trading volume of the common stock on the Nasdaq
National Market during the four calendar weeks preceding the filing of a
notice on Form 144 with respect to such sale.
Sales under Rule 144 are also subject to manner of sale provisions and notice
requirements and to the availability of current public information about us.
Under Rule 144(k), shares of common stock will be freely tradeable after
this offering closes. of these shares of common stock are subject to lock-
up agreements. Under Rule 144(k), a person who is not one of our affiliates at
any time during the 90 days preceding a sale, and who has owned the shares
proposed to be sold for at least two years, is entitled to sell the shares
without complying with the manner of sale, public information, volume
limitation or notice provisions of Rule 144. Therefore, except to the extent
restricted by the lock-up agreements, "Rule 144(k) shares" may be sold
immediately upon the completion of this offering.
56
<PAGE>
Rule 701
As of the date of this prospectus, a total of 2,320,330 shares of common
stock had been issued or were issuable upon the exercise of options. All of
these shares, subject to option vesting, will be eligible for sale in reliance
on Rule 701 beginning 90 days after the closing of this offering. Of these
shares of common stock, shares are subject to lock-up agreements. In
general, under Rule 701, as currently in effect, any of our employees,
consultants or advisors who has purchased shares from us in connection with a
compensatory plan or other agreement is eligible to resell such shares 90 days
after the effective date of this offering in reliance on Rule 144, but without
compliance with restrictions, including the holding period, contained in Rule
144.
Registration Rights
Upon completion of this offering, stockholders owning an aggregate of
2,150,000 shares of common stock will have registration rights as to their
shares. All of these shares of common stock are subject to lock-up agreements.
These stockholders, or their transferees, will be entitled to demand that we
register their shares and are entitled to piggyback registration rights. See
"Certain Transactions--Registration Rights Agreement." After registration,
these shares will be freely tradeable without restriction under the Securities
Act, unless the shares are purchased by affiliates.
Stock Plans
As soon as practicable after this offering, we intend to file a registration
statement under the Securities Act covering shares of common stock reserved
for issuance under our stock option plans. As of March 1, 2000, options to
purchase 2,303,430 shares of common stock were outstanding. The registration
statement is expected to be filed and become effective as soon as practicable
after the effective date of this offering. Accordingly, shares registered under
such registration statement will, subject to vesting provisions and Rule 144
volume limitations applicable to our affiliates, be available for sale in the
open market shortly after this offering closes, and in the case of our
officers, directors and stockholders who have entered into lock-up agreements,
after the 180-day lock-up agreements expire.
57
<PAGE>
UNDERWRITING
Subject to the terms and conditions stated in the underwriting agreement
dated the date hereof, each underwriter named below has severally agreed to
purchase, and we have agreed to sell to such underwriter, the number of shares
set forth opposite the name of that underwriter.
<TABLE>
<CAPTION>
Number
Name of shares
---- ---------
<S> <C>
Salomon Smith Barney Inc........................................
Lehman Brothers Inc.............................................
SG Cowen Securities Corporation.................................
Total.........................................................
===
</TABLE>
The underwriting agreement provides that the obligations of the several
underwriters to purchase the shares included in this offering are subject to
approval of legal matters by counsel and to other conditions. The underwriters
are obligated to purchase all the shares, other than those covered by the over-
allotment option described below, if they purchase any of the shares.
The underwriters, for whom Salomon Smith Barney Inc., Lehman Brothers Inc.
and SG Cowen Securities Corporation are acting as representatives, propose to
offer some of the shares directly to the public at the public offering price
set forth on the cover page of this prospectus and some of the shares to
certain dealers at the public offering price less a concession not in excess of
$ per share. The underwriters may allow, and such dealers may reallow, a
discount not in excess of $ per share on sales to certain other dealers. If
all the shares are not sold at the initial offering price, the representatives
may change the public offering price and other selling terms. The
representatives have advised us that the underwriters do not intend to confirm
any sales to any accounts over which they exercise discretionary authority.
The selling stockholders have granted to the underwriters an option,
exercisable for 30 days from the date of this prospectus, to purchase up to
additional shares of our common stock at the public offering price less the
underwriting discount. The underwriters may exercise this option solely for the
purpose of covering over-allotments, if any, in connection with this offering.
To the extent this option is exercised, each underwriter will be obligated,
subject to some conditions, to purchase a number of additional shares
approximately proportionate to such underwriter's initial purchase commitment.
At our request, the underwriters will reserve up to 5% of the shares of our
common stock to be sold in this offering, at the initial public offering price,
to our directors, officers and employees, as well as to some of our customers
and suppliers. This directed share program will be administered by Salomon
Smith Barney Inc. The number of shares of common stock available for sale to
the general public will be reduced to the extent these individuals purchase
reserved shares. Any reserved shares which are not so purchased will be offered
by the underwriters to the general public on the same basis as the other shares
offered by this prospectus. We have agreed to indemnify the underwriters
against certain liabilities and expenses, including liabilities under the
Securities Act of 1933, in connection with sales of the directed shares.
We, our executive officers and directors and holders of substantially all of
our existing outstanding shares have agreed that, for a period of 180 days from
the date of this prospectus, we will not, without prior written consent of
Salomon Smith Barney Inc., dispose of or hedge, any shares of our common stock
or any securities convertible into, or exercisable or exchangeable for, our
common stock. Salomon Smith Barney Inc., in its sole discretion, may release
any of the securities subject to these lock-up agreements at any time without
notice.
Prior to this offering, there has been no public market for our common
stock. Consequently, the initial public offering price for our common stock
will be negotiated among us, the selling stockholders and the representatives.
Among the factors to be considered in determining the public offering price
will be:
. our record of operation;
. our current financial condition;
58
<PAGE>
. our future prospects;
. our markets;
. the economic conditions in and future prospects for the industry in
which we compete;
. our management; and
. currently prevailing general conditions in the equity securities
markets, including current market valuations of publicly traded
companies considered comparable to us.
The prices at which the shares will sell in the public market after this
offering may, however, be lower than the price at which they are sold by the
underwriters. Additionally, an active trading market in our common stock may
not develop and continue after this offering.
We have applied to have our common stock included for quotation on the
Nasdaq National Market under the symbol "LDSI."
The following table shows the underwriting discount that we and the selling
stockholders will pay to the underwriters in connection with this offering.
These amounts are shown assuming both no exercise and full exercise of the
underwriters' option to purchase additional shares of common stock.
<TABLE>
<CAPTION>
No Exercise Full Exercise
----------- -------------
<S> <C> <C>
Per share....................................... $ $
Total......................................... $ $
</TABLE>
In connection with this offering, Salomon Smith Barney Inc., on behalf of
the underwriters, may purchase and sell shares of our common stock in the open
market. These transactions may include over-allotment, syndicate covering
transactions and stabilizing transactions. Over-allotment involves syndicate
sales of shares in excess of the number of shares to be purchased by the
underwriters in the offering, which creates a syndicate short position.
Syndicate covering transactions involve purchases of the shares in the open
market after the distribution has been completed in order to cover syndicate
short positions. Stabilizing transactions consist of certain bids or purchases
of shares made to prevent or retard a decline in the market price of the shares
while this offering is in progress.
The underwriters also may impose a penalty bid. Penalty bids permit the
underwriters to reclaim a selling concession from a syndicate member when
Salomon Smith Barney Inc., in covering syndicate short positions or making
stabilizing purchases, repurchase shares originally sold by that syndicate
member.
Any of these activities may cause the price of the shares to be higher than
it would otherwise be in the open market in the absence of such transactions.
Salomon Smith Barney Inc. may effect these transactions on the Nasdaq National
Market or in the over-the-counter market, or otherwise and may discontinue them
at any time.
We estimate that our total expenses for this offering, excluding the
underwriting discount, will be $ million.
The representatives or their respective affiliates may in the future perform
various investment banking and advisory services for us from time to time, for
which they will receive customary fees. The representatives may, from time to
time, engage in transactions with and perform services for us in the ordinary
course of business.
We and the selling stockholders have agreed to indemnify the underwriters
against certain liabilities, including liabilities under the Securities Act of
1933, or to contribute to payments the underwriters may be required to make in
respect of any of those liabilities.
59
<PAGE>
LEGAL MATTERS
The validity of the shares of common stock being offered hereby and other
legal matters will be passed upon for us by Brown & Wood LLP, New York, New
York. Legal matters in connection with the offering will be passed upon for the
underwriters by Cravath, Swaine & Moore, New York, New York.
EXPERTS
Ernst & Young LLP, independent auditors, have audited our financial
statements as of December 31, 1999 and 1998 and for each of the three years in
the period ended December 31, 1999 as set forth in their report. We have
included our financial statements in this prospectus and elsewhere in the
registration statement in reliance on Ernst & Young LLP's report, given on
their authority as experts in accounting and auditing.
Ernst & Young LLP, independent auditors, have audited the financial
statements of Jump! Information Technologies, Inc. as of December 31, 1998 and
for the periods from January 1, 1999 to November 9, 1999 and March 6, 1998
(inception) to December 31, 1998 as set forth in their report. We have included
these financial statements in this prospectus and elsewhere in the registration
statement in reliance on Ernst & Young LLP's report, given on their authority
as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC a registration statement on Form S-1. It includes
exhibits and schedules. This prospectus is part of the registration statement.
It does not contain all of the information that is in the registration
statement. The registration statement contains more information about us and
the common stock. Statements contained in this prospectus concerning the
provisions of documents filed as exhibits to the registration statement are
necessarily summaries which disclose the material terms of such documents. Each
of these statements is qualified in its entirety by reference to the copy of
the applicable document filed with the SEC. You may read and copy all or any
portion of the registration statement at the SEC's public reference room at 450
Fifth Street, N.W., Washington, D.C. 20549. You can request copies of these
documents, upon payment of a duplicating fee, by writing to the SEC. Please
call the SEC at 1-800-SEC-0330 for further information on the public reference
room's operations. The registration statement is also available to you on the
SEC's Internet site (http://www.sec.gov). We intend to furnish our stockholders
with annual reports containing financial statements audited by our independent
accountants and quarterly reports containing unaudited financial statements for
the first three quarters of each fiscal year.
60
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Unaudited Pro Forma Financial Information
<TABLE>
<S> <C>
Overview.................................................................. F-2
Unaudited Pro Forma Statement of Operations for the year ended December
31, 1999................................................................. F-3
Notes to Unaudited Pro Forma Statement of Operations for the year ended
December 31, 1999........................................................ F-3
Logical Design Solutions, Inc.
Report of Independent Auditors............................................ F-4
Balance Sheet at December 31, 1998 and 1999............................... F-5
Statements of Operations for each of the three years in the period ended
December 31, 1999........................................................ F-6
Statements of Changes in Stockholders' Equity (Deficiency) for each of the
three years in the period ended December 31, 1999........................ F-7
Statements of Cash Flows for each of the three years in the period ended
December 31, 1999........................................................ F-8
Notes to Financial Statements............................................. F-10
Jump! Information Technologies, Inc.
Report of Independent Auditors............................................ F-23
Balance Sheet at December 31, 1998........................................ F-24
Statements of Income for the period from March 6, 1998 (inception) to
December 31, 1998 and
January 1, 1999 to November 9, 1999...................................... F-25
Statements of Cash Flows for the period from March 6, 1998 (inception) to
December 31, 1998 and January 1, 1999 to November 9, 1999................ F-26
Notes to Financial Statements............................................. F-27
</TABLE>
F-1
<PAGE>
UNAUDITED PRO FORMA FINANCIAL INFORMATION
Overview
The following unaudited pro forma statement of operations for the year ended
December 31, 1999 set forth below presents our results of operations for 1999
as if the acquisition of Jump! Information Technologies, Inc. on November 10,
1999 had occurred at January 1, 1999. The unaudited pro forma statement of
operations for the fiscal year ended December 31, 1999 combines, with
appropriate adjustments, our audited results of operations for our year ended
December 31, 1999 and the audited results of operations of Jump! for the period
ended November 10, 1999.
The unaudited pro forma statement of operations has been prepared on the
basis of preliminary assumptions and estimates. The unaudited pro forma
statement of operations may not be indicative of the results of operations that
would have been achieved if the acquisition of Jump! Information Technologies,
Inc. had been effected on the date indicated or which may be achieved in the
future. The unaudited pro forma statement of operations and notes thereto
should be read in conjunction with "Selected Financial Data," "Management's
Discussion and Analysis of Financial Condition and Results of Operations," and
the financial statements of Logical Design Solutions and Jump! Information
Technologies, Inc., all included elsewhere in this prospectus.
F-2
<PAGE>
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
Jump! Actual
(January 1,
1999-
LDS November 9, Pro Forma LDS
Actual 1999)(1) Adjustments Pro Forma
------- ------------ ----------- ---------
(in thousands, except per share amounts)
<S> <C> <C> <C> <C>
Statement of Operations Data:
Revenue.......................... $15,839 $2,101 $ -- $17,940
Cost of revenue.................. 7,541 1,106 -- 8,647
------- ------ ----- -------
Gross profit................... 8,298 995 -- 9,293
------- ------ ----- -------
Operating expenses:
Selling, general and
administrative................ 6,978 801 -- 7,779
Depreciation and amortization.. 942 13 205(2) 1,160
Stock-based compensation....... 1,077 -- -- 1,077
------- ------ ----- -------
Total........................ 8,997 814 205 10,016
------- ------ ----- -------
Income (loss) from operations.... (699) 181 (205) (723)
Increase in market value of
redeemable warrants............. (7,505) -- -- (7,505)
Interest expense, net............ (1,163) -- -- (1,163)
Interest income.................. 201 3 -- 204
Other income..................... 20 5 -- 25
------- ------ ----- -------
Income (loss) before income
taxes........................... (9,146) 189 (205) (9,162)
Income tax provision (benefit)... (202) 72 (21)(3) (151)
------- ------ ----- -------
Net income (loss)................ $(8,944) $ 117 $(184) $(9,011)
======= ====== ===== =======
Basic net income (loss) per
common share.................... $ (1.14) -- -- $ (1.13)
======= ====== ===== =======
Diluted net income (loss) per
common share.................... $ (1.14) -- -- $ (1.13)
======= ====== ===== =======
Weighted average common shares
outstanding..................... 7,868 -- 94(4) 7,962
======= ====== ===== =======
Weighted average common shares
and common share equivalents.... 7,868 -- 94(4) 7,962
======= ====== ===== =======
</TABLE>
- --------
Notes to Unaudited Pro Forma Statement of Operations
(1) In November 1999, Logical Design Solutions, Inc. ("LDS" or the "Company")
acquired 100% of the outstanding stock of Jump! Information Technologies,
Inc. ("Jump!"), a publishing and information services e-business solutions
provider located in Chantilly, Virginia, for a purchase price of
approximately $842,000 that consisted of (i) $525,000 of cash, (ii)
$167,000 relating to 12,671 vested stock options and (iii) $149,000 in
closing costs. The fair value of the total assets and total liabilities
related to this acquisition was $578,000 and $452,000, respectively, and
goodwill amounted to $715,000. Goodwill is being amortized over an
estimated useful life of three years.
The Company accounted for the above acquisition as a purchase. Accordingly,
the acquired assets and liabilities assumed have been recorded at their
estimated fair values at the date of acquisition. The results of operations
of the acquired business is included in the Company's results of operations
from the acquisition date.
(2) To record amortization expense related to goodwill for January 1, 1999
through November 9, 1999.
(3) To adjust the benefit for income taxes as if Jump! was acquired on January
1, 1999.
(4) To adjust the weighted average common shares outstanding as if the stock
issued in connection with the acquisition had been issued on January 1,
1999.
F-3
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Logical Design Solutions, Inc.
We have audited the accompanying balance sheets of Logical Design Solutions,
Inc. (the "Company") as of December 31, 1998 and 1999, and the related
statements of operations, stockholders' equity (deficiency) and cash flows for
each of the three years in the period ended December 31, 1999. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe our audits provide a reasonable
basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Logical Design Solutions,
Inc. as of December 31, 1998 and 1999, and the results of its operations and
its cash flows for each of the three years in the period ended December 31,
1999, in conformity with accounting principles generally accepted in the United
States.
Hackensack, New Jersey /s/ Ernst & Young LLP
February 17, 2000, except for Note 16
as to which the date is March 1, 2000
F-4
<PAGE>
LOGICAL DESIGN SOLUTIONS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31
------------------------
1998 1999
----------- -----------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents.......................... $ 3,509,742 $ 1,432,005
Accounts receivable, less allowance for doubtful
accounts of $215,566 and $50,000 in 1998 and 1999,
respectively...................................... 2,758,373 5,529,901
Unbilled engagement revenues....................... 17,365 287,174
Prepaid expenses and other......................... 101,041 125,487
Refundable income taxes............................ 375,000 309,137
Deferred income taxes.............................. 107,200 40,608
----------- -----------
Total current assets............................. 6,868,721 7,724,312
Property and equipment, net.......................... 2,527,933 2,554,171
Deferred financing costs, net of accumulated
amortization of $134,726 and $212,509 in 1998 and
1999, respectively.................................. 245,888 168,105
Loans to stockholders................................ 653,801 711,346
Deferred income taxes................................ 43,348
Goodwill, net of accumulated amortization of $ -0-
and $33,342 in 1998 and 1999, respectively.......... 682,572
Other assets......................................... 55,550 167,420
----------- -----------
$10,351,893 $12,051,274
=========== ===========
Liabilities and stockholders' deficiency
Current liabilities:
Capital lease obligations--current................. $ 70,473 $ 75,703
Accounts payable................................... 149,124 448,465
Accrued expenses................................... 720,443 1,467,361
Unearned engagement revenues....................... 487,075 305,995
Deferred income taxes--current..................... 114,700 48,863
----------- -----------
Total current liabilities........................ 1,541,815 2,346,387
Senior Subordinated Debentures (redemption value of
$7,048,803 at December 31, 1999).................... 4,399,599 5,424,063
Junior Subordinated Debentures--Related Parties...... 1,301,114 1,417,902
Capital lease obligations............................ 274,921 199,219
Deferred income taxes................................ 36,386
Other liabilities.................................... 192,000 156,217
Redeemable warrants.................................. 2,926,381 10,431,337
Stockholders' deficiency:
Common stock, no par value, 15,000,000 shares
authorized, 7,850,001 and 7,969,801 shares issued
and outstanding at December 31, 1998 and 1999,
respectively...................................... 40,543 6,713,082
Deferred stock compensation........................ (5,404,671)
Accumulated deficit................................ (324,480) (9,268,648)
----------- -----------
Total stockholders' deficiency................... (283,937) (7,960,237)
----------- -----------
$10,351,893 $12,051,274
=========== ===========
</TABLE>
See accompanying notes.
F-5
<PAGE>
LOGICAL DESIGN SOLUTIONS, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year ended December 31
-------------------------------------
1997 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
Revenue................................ $11,052,478 $11,329,920 $15,839,348
Cost of revenue........................ 4,377,578 5,562,159 7,541,531
----------- ----------- -----------
Gross profit........................... 6,674,900 5,767,761 8,297,817
Operating expenses:
Selling, general and administrative.. 3,490,688 4,767,329 6,977,744
Depreciation and amortization........ 335,886 653,275 942,131
Stock-based compensation............. 1,077,037
----------- ----------- -----------
3,826,574 5,420,604 8,996,912
----------- ----------- -----------
Income (loss) from operations.......... 2,848,326 347,157 (699,095)
Other income (expense):
Increase in market value of
redeemable warrants................. (288,048) (366,333) (7,504,956)
Interest expense..................... (667,527) (984,880) (1,163,918)
Interest income...................... 157,308 260,890 201,374
Other................................ 11,481 14,131 20,071
----------- ----------- -----------
(786,786) (1,076,192) (8,447,429)
----------- ----------- -----------
Income (loss) before income taxes...... 2,061,540 (729,035) (9,146,524)
Provision (benefit) for income taxes... 465,000 (115,097) (202,356)
----------- ----------- -----------
Net income (loss)...................... $ 1,596,540 $ (613,938) $(8,944,168)
=========== =========== ===========
Basic net income (loss) per common
share................................. $.20 $(.08) $(1.14)
=========== =========== ===========
Diluted net income (loss) per common
share................................. $.17 $(.08) $(1.14)
=========== =========== ===========
Weighted-average common shares
outstanding........................... 7,850,001 7,850,023 7,867,786
=========== =========== ===========
Weighted-average common shares and
common share equivalents.............. 9,532,262 7,850,023 7,867,786
=========== =========== ===========
</TABLE>
See accompanying notes.
F-6
<PAGE>
LOGICAL DESIGN SOLUTIONS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
<TABLE>
<CAPTION>
Retained Total
Common Stock Deferred Earnings Stockholders'
-------------------- Stock (Accumulated Equity
Shares Amount Compensation Deficit) (Deficiency)
--------- ---------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C>
Balance, January 1,
1997................... 7,850,001 $ 39,348 $ -- $ 2,217,539 $ 2,256,887
Distributions to
stockholders......... (3,824,237) (3,824,237)
Net income............ 1,596,540 1,596,540
--------- ---------- ----------- ----------- -----------
Balance, December 31,
1997................... 7,850,001 39,348 -- (10,158) 29,190
Distributions to
stockholders......... (44,348) (44,348)
Reclassification of
distributions........ 343,964 343,964
Stock options
exercised............ 500 1,195 1,195
Net loss.............. (613,938) (613,938)
--------- ---------- ----------- ----------- -----------
Balance, December 31,
1998................... 7,850,501 40,543 -- (324,480) (283,937)
Issuance of common
stock and vested
stock options in
connection with
acquisition.......... 109,500 1,897,737 (1,297,600) 600,137
Stock options
exercised............ 9,800 23,194 23,194
Compensatory stock
option grants........ 4,751,608 (4,107,071) 644,537
Net loss.............. (8,944,168) (8,944,168)
--------- ---------- ----------- ----------- -----------
Balance, December 31,
1999................... 7,969,801 $6,713,082 $(5,404,671) $(9,268,648) $(7,960,237)
========= ========== =========== =========== ===========
</TABLE>
See accompanying notes.
F-7
<PAGE>
LOGICAL DESIGN SOLUTIONS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended December 31
-------------------------------------
1997 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)...................... $ 1,596,540 $ (613,938) $(8,944,168)
Adjustments to reconcile net income
(loss) to net cash provided by (used
in) operating activities:
Depreciation.......................... 268,855 474,067 647,728
Amortization.......................... 67,031 179,208 294,403
Deferred income taxes................. 150,000 (147,200) (50,356)
Accretion to redemption value--Senior
Debentures........................... 147,278 265,209 384,863
Accrued interest--Senior Debentures... 392,101 533,954 582,011
Accrued interest--Junior Debentures... 79,394 107,431 116,788
Accrued interest--loans to
stockholders......................... (62,737) (57,545)
Amortization of original issuance
discount--Senior Debentures.......... 47,000 42,155 57,590
Stock-based compensation.............. 1,077,037
Accretion of redeemable warrants...... 288,048 366,333 7,504,956
Other................................. (2,449) (6,050)
Changes in operating assets and
liabilities, net of effects of
business acquisition:
Accounts receivable, net............. (1,249,285) 164,323 (2,509,417)
Unbilled project revenues............ 8,952 (8,559) (269,809)
Prepaid expenses and other........... (31,268) (41,255) (24,446)
Refundable income taxes.............. (375,000) 65,863
Other assets......................... 1,683 (12,968) 5,220
Accounts payable..................... 399,017 (341,994) 228,185
Accrued expenses..................... 32,296 273,931 157,325
Unearned project revenues............ 209,262 (396,490) (358,157)
Accrued payroll and related
expenses............................ 173,422 123,492 283,407
Income taxes payable................. (36,385) (13,615) --
Other liabilities.................... (39,971)
----------- ----------- -----------
Net cash provided by (used in) operating
activities............................. 2,543,941 513,898 (854,543)
Cash flows from investing activities:
Proceeds from sale of fixed assets..... 17,156
Purchases of property and equipment.... (746,886) (1,785,501) (682,532)
Business acquisition, net of cash
acquired.............................. (493,384)
----------- ----------- -----------
Net cash used in investing activities... (746,886) (1,768,345) (1,175,916)
Cash flows from financing activities:
Issuance of Senior Debentures and
redeemable warrants................... 5,123,902
Deferred financing costs............... (257,339) (3,275)
Payments on notes payable.............. (8,321) (2,080)
Payments on capital lease obligations.. (10,327) (44,256) (70,472)
Distributions to stockholders.......... (2,895,948) (44,348)
Proceeds from exercise of stock
options............................... 1,195 23,194
Loans to stockholders.................. (247,100)
----------- ----------- -----------
Net cash provided by (used in) financing
activities............................. 1,951,967 (339,864) (47,278)
----------- ----------- -----------
Net (decrease) increase in cash and cash
equivalents............................ 3,749,022 (1,594,311) (2,077,737)
Cash and cash equivalents, beginning of
year................................... 1,355,031 5,104,053 3,509,742
----------- ----------- -----------
Cash and cash equivalents, end of year.. $ 5,104,053 $ 3,509,742 $ 1,432,005
=========== =========== ===========
</TABLE>
F-8
<PAGE>
LOGICAL DESIGN SOLUTIONS, INC.
STATEMENTS OF CASH FLOWS--(Continued)
<TABLE>
<CAPTION>
Year ended December 31
----------------------------
1997 1998 1999
-------- -------- ----------
<S> <C> <C> <C>
Supplemental cash flow disclosures:
Income taxes paid................................ $351,000 $420,717 $ 7,306
======== ======== ==========
Interest paid.................................... $ 1,306 $ 29,585 $ 22,667
======== ======== ==========
Non-cash financing activities:
Issuance of Senior Subordinated Debentures and
redeemable warrants in lieu of financial
advisory fees................................... $120,000 $ -- $ --
======== ======== ==========
Capital lease obligations........................ $ -- $389,650 $ --
======== ======== ==========
Reclassification of distributions to stockholders
to loans to stockholders........................ $ -- $343,964 $ --
======== ======== ==========
Issuance of common stock and vested stock options
in connection with business acquisition......... $ -- $ -- $1,897,737
======== ======== ==========
</TABLE>
See accompanying notes.
F-9
<PAGE>
LOGICAL DESIGN SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1999
1. Basis of Presentation and Summary of Significant Accounting Policies
Description of Business and Organization
Logical Design Solutions, Inc. ("LDS" or the "Company") is a professional
services provider of e-business solutions primarily to Fortune 500 companies.
The Company advises its clients on e-business strategies and designs and
implements customized, complex e-business solutions. LDS focuses on providing
its services in the following targeted industries: communications, financial
services, healthcare, manufacturing and publishing.
Prior to the investment and restructuring discussed in Note 2 and through
December 31, 1997, LDS and an affiliated company known as Logical Design
Solutions International, Inc. ("LDSI") provided the above services. Both LDS
and LDSI were controlled by a common majority stockholder. Effective December
31, 1997 and as contemplated in the March 1997 investment (see Note 2), LDSI
merged with and into LDS and LDSI ceased to exist. Pursuant to such merger, the
100 shares of LDSI common stock issued and outstanding, which were held by the
majority stockholder of LDS, were converted into one share of common stock of
the Company. The accompanying 1997 statements of operations and cash flows of
the Company include the 12 month results of operations of LDS and LDSI on a
combined basis.
In November 1999, the Company acquired 100% of the outstanding capital stock
of Jump! Information Technologies, Inc. ("Jump!") (see Note 3). In December
1999, Jump! was merged into the Company, with the Company being the surviving
corporation.
Management Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Cash Equivalents
The Company considers all highly liquid short-term investments with original
maturities of 90 days or less to be cash equivalents. Cash and equivalents
include funds held in a money manager investment account. The amounts invested
in this manner, the cost of which approximates market, were approximately
$3,100,000 and $1,137,000 at December 31, 1998 and 1999, respectively.
Property and Equipment
Property and equipment are recorded at cost. Depreciation is recorded using
the straight- line method based on the estimated useful lives of the assets.
Deferred Financing Costs
Costs incurred in connection with the issuance of the Senior Debentures (as
defined below) have been deferred and are being amortized over the life of the
related debt.
F-10
<PAGE>
LOGICAL DESIGN SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1999
Revenue Recognition
The Company uses the percentage-of-completion method of reporting revenues
for fixed-fee engagements in progress measured by the percentage of costs
incurred to date to estimated total costs for each project. Under this method,
engagement revenues are recorded based upon the estimated stage of completion
of each engagement. Under retainer-based engagements, clients are invoiced an
equal amount on a monthly basis over the term of the contract for the core
engagement team. The retainer agreements also provide for additional staff to
be added to the engagement on an as-needed basis. Fees associated with the
additional staff are recorded on a time and materials basis. Under time and
materials basis contracts, revenue is recognized as services are provided.
Reimbursable engagement costs are excluded from revenue as the Company incurs
these costs on behalf of its customers. Revenue from maintenance agreements are
recognized ratably over the terms of the agreements. Maintenance revenue
totaling approximately $225,000, $246,000 and $220,000 in 1997, 1998 and 1999,
respectively, is included in revenues.
Projected or realized losses under contracts are provided for in the period
when the losses are first determined.
Unbilled engagement revenues represent engagement revenues recognized in
excess of amounts billed. Billings in excess of revenue recognized are
classified as unearned engagement revenues.
Income Taxes
Deferred income taxes are provided for differences between the financial
statement and income tax bases of assets and liabilities using enacted tax
rates in effect in the years in which the differences are expected to reverse.
Prior to March 19, 1997, LDS elected to be taxed under the provisions of
Subchapter "S" of the Internal Revenue Code (Subchapter "S"). Under those
provisions, LDS did not pay federal corporate income taxes on its taxable
income. Instead, the Company's stockholders were liable for individual federal
income tax on the Company's taxable income. Effective March 19, 1997, LDS
became taxable under the provisions of Subchapter "C" of the Internal Revenue
Code (Subchapter "C") (see Note 2). Effective December 31, 1997, LDSI, which
previous to that date was taxed under the provisions of Subchapter "S", became
taxable under the provisions of Subchapter "C".
Concentrations of Credit Risk
The Company is engaged in providing e-business solutions primarily to
Fortune 500 companies. The Company performs ongoing, informal credit
evaluations of its customers' financial condition and requires no collateral
from its customers. The Company maintains an allowance for potential credit
losses, when necessary. Historically, such losses have been within management's
expectations. During the years ended December 31, 1997, 1998 and 1999, the
Company wrote off $16,460, $0, and $215,566, respectively, of accounts
receivable and increased the allowance for doubtful accounts by $36,460,
$215,566 and $50,000, respectively.
In 1997 and 1998, the Company's two largest clients accounted for
approximately 66% and 73% of total revenue and 55% and 66% of total accounts
receivable, respectively. In 1999, the Company's three largest clients
accounted for approximately 64% and 61% of total revenue and total accounts
receivable, respectively. These clients are in the communications, financial
services and manufacturing industries.
F-11
<PAGE>
LOGICAL DESIGN SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1999
The Company periodically has cash balances in excess of Federal Deposit
Insurance Corporation limits.
Research and Development Costs
Research and development expenditures are charged to operations as
incurred. To date, substantially all research and development activities of
the Company have been pursuant to customer engagements and, accordingly, have
been expensed as a cost of the engagements.
Goodwill
Goodwill represents the excess of cost over the fair value of the net
assets acquired and is being amortized on a straight-line basis over an
estimated useful life of three years. Management periodically evaluates the
recoverability of goodwill by comparing anticipated undiscounted future cash
flows from operations to the carrying value of the goodwill. Should the
evaluation indicate that the goodwill is not recoverable, an adjustment would
be recorded.
Impairment of Long-Lived Assets
The Company applies Statement of Financial Accounting Standards (SFAS) No.
121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of. Management periodically evaluates whether events or
circumstances have occurred that indicate that the remaining estimated useful
lives of property and equipment, other identifiable intangible assets and
goodwill may warrant revision or that remaining balances may not be
recoverable.
Stock-Based Compensation
As permitted by Financial Accounting Standards Board Statement No. 123,
Accounting for Stock-Based Compensation ("FAS 123"), which establishes a fair
value based method of accounting for stock-based compensation plans, the
Company has elected to follow Accounting Principal Board Opinion No. 25
Accounting for Stock Issued to Employees ("APB 25"), for recognizing stock-
based compensation expense for financial statement purposes. Under APB 25,
compensation expense is based on the difference, if any, on the date of the
grant, between the fair value of the Company's stock and the exercise price.
Fair Value of Financial Instruments
The fair value of a financial instrument is the amount at which the
instrument could be exchanged in a current transaction between willing
parties.
The fair value of each of the following instruments approximates their
carrying value because of the short maturity of these instruments: cash and
cash equivalents, accounts receivable, accounts payable, accrued expenses and
other liabilities. The carrying values of capital lease obligations and junior
subordinated debentures approximate fair value since the related interest
rates approximate rates currently available to the Company. The carrying value
of senior subordinated debentures is based upon relative fair values of the
debentures and the warrants at date of issuance with accretion to face value
through the scheduled redemption date. (See Note 6 regarding redemption values
which approximates fair value.) The fair value of the redeemable warrants is
based upon an independent valuation. (See Note 13.)
F-12
<PAGE>
LOGICAL DESIGN SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1999
Earnings Per Share
Basic and diluted earnings per share are calculated in accordance with
Financial Accounting Standards Board Statement No. 128, Earnings Per Share
("FAS 128"). All earnings per share amounts for all periods have been presented
to conform to the requirements of FAS 128.
Comprehensive Income
No statement of comprehensive income has been included in the accompanying
financial statements since there are no differences to be reported from the
accompanying statements of operations or stockholders' equity.
2. Investment and Restructuring
In March 1997, LDS effected a restructuring (the "Restructuring") in
connection with the issuance of Senior Subordinated Debentures (see Note 6) and
Warrants to purchase common stock to certain investment funds of a venture
capital group and other investors (collectively, the "Investors") (see Notes 1,
10 and 13). In connection with the Restructuring, effective March 19, 1997, LDS
converted from a Subchapter "S" Corporation to a Subchapter "C" Corporation for
income tax purposes.
3. Business Combination
In November 1999, the Company acquired 100% of the outstanding stock of
Jump! Information Technologies, Inc., a publishing and information services e-
business solutions provider located in Chantilly, Virginia, for a purchase
price of approximately $842,000 that consisted of (i) $525,000 of cash, (ii)
$168,000 of vested stock options (12,671 vested stock options were issued) and
(iii) $149,000 in closing costs. The Company also issued 109,500 shares of
common stock in connection with this acquisition. The fair value of the total
assets and total liabilities related to this acquisition was $578,000 and
$452,000, respectively, and goodwill amounted to approximately $715,000.
The Company accounted for the above acquisition as a purchase. Accordingly,
the acquired assets and liabilities assumed have been recorded at their
estimated fair values at the date of acquisition. The results of operations of
the acquired business are included in the Company's results of operations from
the acquisition date.
In connection with the Jump! acquisition, the Company issued 109,500 shares
of its common stock to the former Jump! shareholders and entered into a
shareholders' agreement with them governing their rights and obligations with
respect to the 109,500 shares held by them. Under the shareholders' agreement,
the Company will repurchase any shares of a Jump! shareholder whose employment
with the Company is terminated. If the termination is a voluntary resignation
or an involuntary termination by the Company with just cause, the repurchase
price will be zero if the termination occurs prior to January 1, 2000, 25% of
the fair market value based on a date of termination from and including January
1, 2000 but prior to March 31, 2000, 50% from and including March 31, 2000 and
prior to June 30, 2000, 75% from and including June 30, 2000 and prior to
September 30, 2000 and 100% of the fair market value from September 30, 2000.
If the employment is terminated for any other reason, the Company will
repurchase the shares for 100% of the fair market value. This agreement shall
terminate upon a firmly underwritten public offering with gross proceeds to the
Company of at least $10 million.
Based upon the estimated fair market value of these shares at December 31,
1999, the Company recorded $432,500 of stock-based compensation and $1,297,600
of deferred compensation which will be amortized over the vesting period.
Deferred compensation and the related compensation expense will be adjusted on
a prospective basis over the vesting schedule based on changes in fair market
value of the common stock during the period.
F-13
<PAGE>
LOGICAL DESIGN SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1999
The following table represents the unaudited pro forma results of operations
for the years ended December 31, 1998 and 1999 as if the above acquisition had
occurred on January 1 of the respective year:
<TABLE>
<CAPTION>
1998 1999
----------- -----------
<S> <C> <C>
Revenue....................................... $12,545,000 $17,940,000
Net loss...................................... $ (764,000) $(9,011,000)
Basic net loss per common share............... $ (.10) $ (1.13)
Diluted net loss per share.................... $ (.10) $ (1.13)
</TABLE>
The pro forma amounts reflect the amortization of the excess of purchase
price over the net assets acquired. The pro forma results are not necessarily
indicative of the results of operations that would have occurred had the
acquisition taken place at the beginning of the period presented nor are they
intended to be indicative of results that may occur in the future.
4. Property and Equipment
Major classes of property and equipment and their related estimated useful
lives as of December 31, 1998 and 1999 are as follows:
<TABLE>
<CAPTION>
Estimated
Useful Life
(Years) 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
Computer equipment................. 3 $ 1,590,602 $ 2,219,004
Office equipment................... 5 354,628 393,438
Furniture and fixtures............. 7 722,836 907,049
Equipment under capital lease...... 3 440,186 440,186
Leasehold improvements............. * 657,234 657,234
----------- -----------
3,765,486 4,616,911
Less accumulated depreciation and
amortization...................... (1,237,553) (2,062,740)
----------- -----------
$ 2,527,933 $ 2,554,171
=========== ===========
</TABLE>
- --------
* Lesser of term of lease or estimated useful life.
5. Accrued Expenses
Accrued expenses consists of the following:
<TABLE>
<CAPTION>
1998 1999
-------- ----------
<S> <C> <C>
Accrued payroll and related expenses................ $511,034 $ 918,683
Accrued professional fees........................... 76,411 269,245
Other accrued expenses.............................. 132,998 279,433
-------- ----------
$720,443 $1,467,361
======== ==========
</TABLE>
F-14
<PAGE>
LOGICAL DESIGN SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1999
6. Subordinated Debt
Senior Subordinated Debentures
On March 19, 1997, LDS issued Senior Subordinated Debentures ("Senior
Debentures") in the aggregate principal amount of $5,540,736 for an aggregate
cash purchase price of $5,123,902. In connection with the issuance of the
Senior Debentures, LDS also issued a warrant to acquire 2,150,000 shares,
subject to adjustment, of common stock ("Warrants"). Upon issuance, the
Warrants were recorded at their relative fair market value in relation to the
Senior Debentures, resulting in an allocation of $2,272,000 of proceeds from
the Senior Debentures to the Warrants and an effective interest rate of 21.0%
on the Senior Debentures (see Note 13). The accretion to redemption value of
the Senior Debentures, based on deemed fair market value on date of issuance,
is being recorded as interest expense as an adjustment to yield over the five
year life of the Senior Debentures.
The Senior Debentures are payable in full on March 19, 2002 and accrue
interest from the date of issuance until the date of payment of principal at
the rate of 9.0% per year compounded annually. Interest is payable upon payment
of principal which is due March 19, 2002. The redemption value of the Senior
Subordinated Debentures, including accrued interest of approximately $1.5
million, was approximately $7.0 million at December 31, 1999.
Junior Subordinated Debentures
In connection with the above transaction, LDS made distributions to its
management stockholders in the form of Junior Subordinated Debentures ("Junior
Debentures"). The Junior Debentures are payable in full on March 19, 2003 and
accrue interest from the date of issuance until the date of payment of
principal at the rate of 9.0% per year compounded annually. Interest is payable
upon payment of principal which is due March 19, 2003.
7. Lines of Credit
The Company has a line of credit arrangement with a bank which allows for
borrowings up to $1,500,000. Borrowings under this line accrue interest at the
prime rate. This line expires on June 30, 2000 and is subject to annual
renewal.
The Company also has a $150,000 equipment line of credit. Under this line,
80% of the cost of the equipment purchased is eligible for borrowing.
Borrowings under this line accrue interest at the prime rate plus .25%.
Borrowings under the equipment line are repaid in 36 monthly installments, plus
interest.
There were no outstanding borrowings under these lines of credit at December
31, 1999.
The lines of credit contain various financial covenants which require the
Company to, among other requirements, maintain a minimum current ratio and a
maximum debt to equity ratio.
F-15
<PAGE>
LOGICAL DESIGN SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1999
8. Capital Lease Obligations
The Company leases certain office equipment under leases classified as
capital leases for financial reporting purposes. The following is a schedule of
future minimum lease payments under these agreements and the present value of
the payments as of December 31, 1999:
<TABLE>
<S> <C>
Year ended December 31:
2000......................................................... $ 92,983
2001......................................................... 92,983
2002......................................................... 92,983
2003......................................................... 130,995
--------
309,944
Less amount representing interest............................ (35,022)
--------
Present value of minimum lease payments...................... $274,922
========
</TABLE>
9. Commitments
Leases
The Company leases office space, automobiles and office equipment under
noncancelable operating lease agreements which expire through February 2010.
Aggregate annual future minimum lease payments under these noncancelable leases
are, including the new Morristown facility, as follows:
<TABLE>
<S> <C>
Year ended December 31:
2000....................................................... $ 2,480,000
2001....................................................... 2,431,000
2002....................................................... 2,229,000
2003....................................................... 2,306,000
2004....................................................... 2,320,000
2005 and thereafter........................................ 8,857,000
-----------
$20,623,000
===========
</TABLE>
Rent expense for the years ended December 31, 1997, 1998 and 1999 was
$347,500, $617,700 and $934,500, respectively.
Letters of Credit
The Company has outstanding letters of credit of $549,000 and $80,000 at
December 31, 1999.
Employment Agreements
The Company has employment contracts with several key employees. The
agreements provide for minimum salary amounts and discretionary performance
bonus arrangements as determined and approved by the Board of Directors.
F-16
<PAGE>
LOGICAL DESIGN SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1999
10. Related Party Transactions
The principal stockholders periodically obtain advances from the Company.
Such amounts are recorded in the balance sheet as loans to stockholders. During
1997, and as contemplated and agreed upon by the parties involved in the
issuance of the Senior Debentures and Junior Debentures (see Note 6), the
principal stockholders also received cash distributions based on estimated
available LDS and LDSI Subchapter "S" earnings and estimated required personal
income tax payments. During 1998, final LDS and LDSI Subchapter "S" income tax
returns were prepared and filed which resulted in the finalization of taxes
payable and earnings available for distribution to stockholders. This resulted
in a reclassification during 1998 of $343,964 between distributions to
stockholders and loans to stockholders as agreed upon by the Company, the
stockholders and the Investors. This excess cash distribution represents
amounts agreed upon by the parties to be retained in the business at the time
of the transaction. The parties agreed to record such amounts as loans to
stockholders. Interest has been accrued on such amounts at 9.0% and is included
in the loans to stockholders' balance. In addition, during 1998 the Company
advanced $247,100 to a principal stockholder in order to purchase a personal
residence. Such amount is secured by a note and a second mortgage on the
property. These notes accrue interest payable monthly at 8.5%. The notes,
including all principal and interest, are due between June and August 2003.
Under certain conditions the Company can accelerate the repayment of the notes.
In connection with these advances, the stockholder and the Company executed an
agreement under which the stockholder pledged 785,000 shares of common stock as
collateral for the obligation to the Company.
11. Income Taxes
The provision (benefit) for income taxes for the years ended December 31,
1997, 1998 and 1999 consisted of the following:
<TABLE>
<CAPTION>
1997 1998 1999
------------------------------ --------- ---------
Subchapter Subchapter
"S" Corp. "C" Corp. Total Total Total
---------- ---------- -------- --------- ---------
<S> <C> <C> <C> <C> <C>
Current:
Federal.................. $205,000 $205,000 $ 25,000 $(152,000)
State.................... $47,000 63,000 110,000 7,103
------- -------- -------- --------- ---------
47,000 268,000 315,000 32,103 (152,000)
Deferred:
Federal.................. 120,000 120,000 (125,000) (6,207)
State.................... 30,000 30,000 (22,200) (44,149)
-------- -------- --------- ---------
150,000 150,000 (147,200) (50,356)
------- -------- -------- --------- ---------
Income taxes............... $47,000 $418,000 $465,000 $(115,097) $(202,356)
======= ======== ======== ========= =========
</TABLE>
F-17
<PAGE>
LOGICAL DESIGN SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1999
The provision (benefit) for income taxes reconciled to the amount computed
by applying the statutory federal rate of 34% to the income (loss) before
income taxes is as follows:
<TABLE>
<CAPTION>
1997 1998 1999
----- ----- -----
<S> <C> <C> <C>
Statutory federal income tax............................ 34.0% (34.0)% (34.0)%
Increases (decreases):
Increase in market value of redeemable warrants....... 4.8 17.1 29.0
Stock-based compensation.............................. -- -- 2.5
Income attributable to "S" Corporation periods........ (26.8) -- --
Establishment of initial deferred tax liabilities upon
conversion from
"S" to "C" Corporation............................... 8.1 -- --
Other................................................. 2.5 1.1 .2
----- ----- -----
Income taxes............................................ 22.6% (15.8)% (2.3)%
===== ===== =====
</TABLE>
The significant components of the Company's deferred tax assets and
liabilities at December 31, 1998 and 1999 are as follows:
<TABLE>
<CAPTION>
1998 1999
-------- --------
<S> <C> <C>
Deferred tax assets:
Current:
Allowance for doubtful accounts................... $ 86,200 $ 20,000
Deferred income................................... -- 12,500
Accrued vacation.................................. 21,000 8,108
-------- --------
107,200 40,608
Noncurrent:
Net operating loss carryforward................... -- 43,348
-------- --------
Total deferred tax assets............................. 107,200 83,956
Deferred tax liabilities:
Current:
Cash to accrual conversion--Jump!................. -- (48,863)
Cash to accrual conversion--LDSI.................. (114,700) --
-------- --------
(114,700) (48,863)
Noncurrent:
Depreciation...................................... -- (29,500)
Amortization...................................... -- (6,886)
-------- --------
-- (36,386)
-------- --------
Total deferred tax liabilities........................ (114,700) (85,249)
-------- --------
Net deferred tax liabilities.......................... $ (7,500) $ (1,293)
======== ========
</TABLE>
As of December 31, 1999, the Company has net operating loss carryforwards of
approximately $720,000 for state tax reporting purposes, which expire between
2006 and 2019.
F-18
<PAGE>
LOGICAL DESIGN SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1999
12. Employee Benefit Plan
The Company has a 401(k) plan (the "Plan") which covers substantially all
employees, subject to minimum age and service requirements. The Company may
make contributions to the Plan. Any such contributions are determined on an
annual basis and are at the discretion of the Board of Directors. Contributions
for the years ended December 31, 1997, 1998 and 1999 were $142,700, $153,700
and $230,400, respectively.
13. Stockholders' Equity
Effective March 17, 1997, LDS amended its certificate of incorporation to
increase the number of shares authorized to 1,500,000 shares and the Board of
Directors authorized and approved a 3,925-for-one stock split increasing the
number of outstanding shares from 200 shares to 785,000 shares.
Effective September 10, 1997, LDS amended its certificate of incorporation
to increase the number of shares authorized to 15,000,000 shares and the Board
of Directors further authorized and approved a ten-for-one stock split
increasing the number of shares outstanding to 7,850,000.
All per share amounts have been adjusted for the above stock splits, except
as otherwise indicated.
In connection with the issuance of Senior Debentures (see Note 6), LDS also
issued Warrants to certain Investors to acquire 2,150,000 common shares. The
Warrants may be exchanged for an equal number of shares of common stock of LDS.
The Warrants are exercisable on March 19, 2004 at a price of $.01 per share and
expire on March 19, 2004 or earlier as defined in the warrant agreement. The
shares of common stock issuable upon exercise of the Warrants are subject to
demand registration rights on the part of the Investors and piggyback
registration rights. LDS has reserved 2,150,000 shares of common stock for
issuance upon the exercise of the Warrants.
The Warrants are subject to a Redemption Agreement which permits the
Investors to put the Warrants to LDS for redemption at the fair market value
(as agreed upon in good faith between the Company and the Investors) of the
shares of common stock issuable upon the exercise of the Warrants at the
earlier of the occurrence of a liquidity event (as defined) or March 19, 2003.
In the event a redemption request is made on March 19, 2003, the Warrants will
be redeemed 50% on March 19, 2003 and 50% on March 19, 2004. Under the terms of
the Warrant Agreement, each holder of Warrants must immediately exercise all
Warrants held upon the completion of an initial public offering of LDS common
shares.
In accordance with Emerging Issues Task Force No. 96-13, Accounting for
Derivative Financial Instruments Indexed to, and Potentially Settled in, a
Company's Own Stock, the Company estimated the fair value of the Warrants at
date of issuance. The Company has continued to estimate the fair value of the
Warrants with changes in fair value amortized and reported in the statements of
operations based upon an anticipated date of redemption of the Warrants of
March 19, 2003. At each balance sheet date the fair value was determined by an
independent valuation and, based on these valuations, the Company increased the
carrying value of the Warrants and recorded a charge of $288,048, $366,333 and
$7,504,956 in the statements of operations for the years ended December 31,
1997, 1998 and 1999, respectively. The estimated fair value of the warrants as
of December 31, 1999 was approximately $34 million.
F-19
<PAGE>
LOGICAL DESIGN SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1999
14. Earnings Per Share
The reconciliation of shares used to calculate basic and diluted earnings
per share consists of the following:
<TABLE>
<CAPTION>
1997 1998 1999
--------- --------- ---------
<S> <C> <C> <C>
Weighted-average common shares outstanding used
to
calculate basic earnings per share.............. 7,850,001 7,850,023 7,867,786
Net effect of dilutive warrants based on treasury
stock
method using average market price............... 1,682,261 * *
--------- --------- ---------
Weighted-average common shares and common share
equivalents used to calculate diluted earnings
per share....................................... 9,532,262 7,850,023 7,867,786
========= ========= =========
</TABLE>
- --------
* The dilutive stock options and warrants are not included as their effect is
anti-dilutive.
15. Stock Option Plans
Effective September 10, 1997, the stockholders of the Company approved the
1997 Stock Option Plan ("1997 Plan"). On October 28, 1999, the Board of
Directors adopted the Company's 1999 Stock Option Plan ("1999 Plan"). Under the
Plans (the 1997 Plan and 1999 Plan, collectively), the Company issues options
at exercise prices equal to fair value at the date of grant and no compensation
expense is recorded. Options granted under the Plans are designated as either
nonqualified stock options or incentive stock options. Under the terms of the
1997 Plan, the Company has reserved 1,000,000 shares of common stock for
issuance upon exercise of options. Under the terms of the 1999 Plan, the
Company has reserved 330,000 shares of common stock for issuance upon exercise
of options. No option will have a term in excess of ten years under the Plans.
The administrator, which may be the Board of Directors or a committee thereof,
is responsible for determining the individuals to be granted options, the
number of options each individual will receive, the option price per share and
the exercise period of each option. Options granted pursuant to the Plans
generally vest over a one to four year period from date of grant.
Of the 527,118 stock options issued during the year ended December 31, 1999,
non-qualified options to purchase 130,000 shares and incentive stock options to
purchase 268,818 shares at exercise prices of $2.20 were considered to be below
the deemed fair market value at date of grant for financial reporting purposes.
In accordance with APB 25, compensation expense will be recognized as the
difference between the exercise prices of these options at their respective
grant dates and the deemed fair value for financial reporting purposes of the
common stock. The Company recorded $644,537 of compensation expense during 1999
based on the vesting schedules of these options. In addition, the Company
recorded deferred stock compensation of $4,107,071 as of December 31, 1999;
such amounts are included as a reduction of stockholders' equity and are being
amortized to compensation expense over the vesting period of the options
granted, which range from one to four years from the date of grant.
F-20
<PAGE>
LOGICAL DESIGN SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1999
The following table summarizes information about stock options outstanding
at December 31, 1997, 1998 and 1999:
<TABLE>
<CAPTION>
1997 1998 1999
----------------- ----------------- -------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Stock Exercise Stock Exercise Stock
Price Options Price Options Price Options
--------- ------- --------- ------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding,
beginning of year...... $ -- -- $2.04 565,000 $2.12 758,500
Granted............... 2.04 565,000 2.39 204,100 2.20 527,118
Exercised............. -- -- 2.39 (500) 2.37 (9,800)
Canceled.............. -- -- 2.39 (10,100) 2.30 (69,900)
----- ------- ----- ------- ----- ---------
Options outstanding, end
of year................ $2.04 565,000 $2.12 758,500 2.15 1,205,918
===== ======= ===== ======= ===== =========
Options exercisable, end
of year................ $ -- -- $2.11 178,250 $2.13 424,484
===== ======= ===== ======= ===== =========
</TABLE>
The weighted-average fair value of options granted was $.66 per share or
$135,000 and $10.16 per share or $5,400,000 for the years ended December 31,
1998 and 1999, respectively.
<TABLE>
<CAPTION>
Weighted-Average
Option Exercise Outstanding Remaining
Class Price Options Contractual Life
------ -------- ----------- ----------------
<S> <C> <C> <C>
1997................................ $2.04 550,000 7.7 years
1998................................ $2.39 136,600 8.3 years
1999................................ $2.20 519,318 9.5 years
========= =========
1,205,918 8.5 years
========= =========
</TABLE>
Pro forma information regarding net income (loss) is required by FAS 123 and
has been determined as if the Company had been accounting for its employee
stock options under the fair value method of that statement. The fair value of
these options was estimated at the date of grant using the Black-Scholes
option-pricing fair value model with the following weighted-average
assumptions: volatility of near-zero; risk-free interest rate of 6.8% in 1999
and 5.35% in 1998 and 1997; no dividends; and an expected life of the options
of five years for options granted in 1999 and six years for options granted in
1998 and 1997. Had compensation cost been recognized based on the fair value of
the employee stock options on the date of grant under the methodology
prescribed by FAS 123, the Company's pro forma net income (loss) would have
been approximately $1.6 million, ($760,000) and ($9.5 million) in 1997, 1998
and 1999, respectively, and pro forma basic and diluted net (loss) income per
common share would have been ($1.21) and ($.10) in 1999 and 1998, respectively.
Pro forma basic and diluted net income per common share would have been $.20
and $.16 in 1997, respectively.
Option valuation models require the input of highly subjective assumptions
including the expected life of the option and the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in
the subjective input assumptions can materially affect the fair value estimate,
in management's opinion, the existing models do not necessarily provide a
reliable single measure of the fair value of its employee stock options.
F-21
<PAGE>
LOGICAL DESIGN SOLUTIONS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1999
16. Subsequent Events
Leases
The Company will be moving its headquarters and principal operations from
its current Morristown, New Jersey location to a new location, also in
Morristown, in June 2000. In February 2000, the Company entered into a ten year
lease for this new office space. Minimum annual lease payments amount to
$1,456,000 for the first three years of the lease, $1,534,000 for years four
through six, and $1,638,000 for years seven through ten. In connection with the
lease agreement, the Company obtained a letter of credit for $970,667 to be
used as security. The letter of credit requirement is reduced to $767,000 on
February 10, 2004, $546,000 on February 10, 2006, and will be released after
lease termination.
Stock Options
Effective March 1, 2000, the Board of Directors amended the Company's 1999
Stock Plan to increase the number of common shares reserved for issuance from
330,000 to 2,750,000. In addition, on this same date, the Board of Directors
approved the 2000 Stock Plan for Non-Employee Directors ("2000 Plan"). Under
the terms of the 2000 Plan, the Company has reserved 500,000 shares of common
stock for issuance upon exercise of options.
From January 1, 2000 to March 1, 2000, the Company issued non qualified
options to purchase 1,070,250 shares and incentive stock options to purchase
36,300 shares of common stock at exercise prices between $3.35 and $5.00 (which
were considered to be below the deemed fair market value for financial
reporting purposes). In accordance with APB 25, stock-based compensation
expense will be recorded based on the vesting schedules of these options, which
range from immediate vesting at date of grant (1,000,000 options) to four
years, and will amount to approximately $12.9 million.
F-22
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Jump! Information Technologies, Inc.
We have audited the accompanying balance sheet of Jump! Information
Technologies, Inc. (the "Company") as of December 31, 1998, and the related
statements of income and cash flows for the periods from March 6, 1998
(inception) to December 31, 1998 and January 1, 1999 to November 9, 1999. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe our audits provide a reasonable
basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Jump! Information
Technologies, Inc. as of December 31, 1998, and the results of its operations
and its cash flows for the periods from March 6, 1998 (inception) to December
31, 1998 and January 1, 1999 to November 9, 1999, in conformity with accounting
principles generally accepted in the United States.
Hackensack, New Jersey /s/ Ernst & Young LLP
February 4, 2000
F-23
<PAGE>
JUMP! INFORMATION TECHNOLOGIES, INC.
BALANCE SHEET
December 31, 1998
<TABLE>
<S> <C>
Assets
Current assets:
Cash............................................................... $ 24
Accounts receivable................................................ 279,933
Deferred income taxes.............................................. 50,079
--------
Total current assets............................................. 330,036
Computer equipment, net of accumulated depreciation of $7,975........ 36,235
Deferred income taxes................................................ 12,520
Other assets......................................................... 14,270
--------
$393,061
========
Liabilities and stockholders' equity
Current liabilities:
Accounts payable and accrued expenses.............................. $ 2,575
Deferred revenue................................................... 124,996
Loan from stockholder.............................................. 23,162
Income taxes payable............................................... 10,209
Deferred income taxes.............................................. 111,973
--------
Total current liabilities........................................ 272,915
Deferred revenue..................................................... 31,251
Stockholders' equity: 1,500
Class A, Voting Common Stock, no par value, 2,100,000 shares
authorized, 2,100,000 shares issued and outstanding...............
Class B, Non-Voting Common Stock, no par value, 500,000 shares
authorized, none issued or outstanding............................ (1,500)
Loan to stockholders............................................... 88,895
--------
Retained earnings.................................................. 88,895
--------
Total stockholders' equity....................................... $393,061
========
</TABLE>
See accompanying notes.
F-24
<PAGE>
JUMP! INFORMATION TECHNOLOGIES, INC.
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
March
6, 1998 January
(inception) 1, 1999
to to
December 31, November
1998 9, 1999
------------ ----------
<S> <C> <C>
Revenue................................................ $1,215,364 $2,100,571
Cost of revenue........................................ 457,614 1,105,822
---------- ----------
Gross profit........................................... 757,750 994,749
Selling, general and administrative.................... 613,878 801,030
Depreciation and amortization.......................... 7,975 12,795
---------- ----------
Income from operations................................. 135,897 180,924
Other income:
Interest income...................................... 2,237 2,773
Other................................................ 10,344 5,443
---------- ----------
Income before provision for income taxes............... 148,478 189,140
Provision for income taxes............................. 59,583 72,208
---------- ----------
Net income............................................. $ 88,895 $ 116,932
========== ==========
</TABLE>
See accompanying notes.
F-25
<PAGE>
JUMP! INFORMATION TECHNOLOGIES, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
March
6, 1998 January
(inception) 1, 1999
to to
December November
31, 1998 9, 1999
----------- ---------
<S> <C> <C> <C>
Cash flows from operating activities
Net income......................................... $ 88,895 $ 116,932
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization.................... 7,975 12,795
Deferred income taxes............................ 49,374 (5,062)
Changes in operating assets and liabilities:
Accounts receivable............................ (279,933) 17,822
Other assets................................... (14,270) (102,820)
Accounts payable and accrued expenses.......... 2,575 96,679
Deferred revenues.............................. 156,247 20,830
Income taxes payable........................... 10,209 77,270
Other liabilities.............................. 4,187
--------- ---------
Net cash provided by operating activities.......... 21,072 238,633
Cash flows from investing activities
Capital expenditures............................... (44,210) (170,169)
--------- ---------
Net cash used in investing activities.............. (44,210) (170,169)
Cash flows from financing activities
Purchase of treasury stock......................... (15,210)
Loan to stockholders............................... (1,500) 1,500
Proceeds from the sale of common stock............. 1,500
Loan from stockholder.............................. 23,162 (23,162)
--------- ---------
Net cash provided by (used in) financing
activities........................................ 23,162 (36,872)
--------- ---------
Net increase in cash............................... 24 31,592
Cash, beginning of period.......................... -- 24
--------- ---------
Cash, end of period................................ $ 24 $ 31,616
========= =========
Supplemental cash flow disclosures
Income taxes paid.................................. $ -- $ 5,700
========= =========
</TABLE>
See accompanying notes.
F-26
<PAGE>
JUMP! INFORMATION TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
1. Basis of Presentation and Summary of Significant Accounting Policies
Description of Business and Organization
Jump! Information Technologies, Inc. ("Jump!" or the "Company") is a
publishing and information services e-business solutions provider located in
Chantilly, Virginia.
Jump! was incorporated on March 6, 1998 as Net3 Technologies, Inc. The
Company's name was changed to Jump! Information Technologies, Inc. on November
10, 1998.
Management Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Computer Equipment
Computer equipment is recorded at cost. Depreciation is recorded using the
straight line method over the estimated useful life of the assets of three
years.
Revenue Recognition
The Company's revenue is generated from contracts that are billed on a time
and materials basis. Under these contracts, revenue is recognized as services
are provided.
Income Taxes
Deferred income taxes are provided for differences between the financial
statement and income tax bases of assets and liabilities using enacted tax
rates in effect in the years in which the differences are expected to reverse.
Concentrations of Credit Risk
The Company is engaged in providing e-business solutions to its customers.
The Company performs ongoing, informal credit evaluations of its customers'
financial condition and requires no collateral from its customers.
One customer accounted for 100% of total revenue in 1998 and 100% of
accounts receivable at December 31, 1998. This same customer accounted for 96%
of total revenue in 1999. The loss of this customer would have a material
impact on the financial condition of the Company.
Stock-Based Compensation
As permitted by Financial Accounting Standards Board Statement No. 123,
Accounting for Stock-Based Compensation ("FAS 123"), which establishes a fair
value based method of accounting for stock-based compensation plans, the
Company has elected to follow Accounting Principal Board Opinion No. 25
Accounting for Stock Issued to Employees ("APB 25"), for recognizing stock-
based compensation expense for financial statement purposes. Under APB 25,
compensation expense is based on the difference, if any, on the date of grant,
between the fair value of the Company's stock and the exercise price.
F-27
<PAGE>
JUMP! INFORMATION TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1998
2. Commitments
Leases
The Company leases office space under a noncancelable operating lease
agreement which will expire in June 2005. Aggregate annual future minimum lease
payments under this noncancelable lease is as follows:
<TABLE>
<S> <C>
Year ended December 31:
1999........................................................ $ 159,000
2000........................................................ 206,000
2002........................................................ 217,000
2002........................................................ 224,000
2003........................................................ 230,000
2004 and thereafter......................................... 605,000
----------
$1,641,000
==========
</TABLE>
Rent expense for the periods ended December 31, 1998 and November 9, 1999
was approximately $111,000 and $136,000, respectively.
Employment Agreements
The Company has employment contracts with certain key employees. The
agreements provide for minimum salary amounts and discretionary performance
bonus arrangements as determined and approved by the Board of Directors.
3. Related Party Transactions
The initial capital contribution by the founding stockholders was funded
through a $1,500 loan from the Company. Such amount is recorded as "loan to
stockholders" and reflected as a reduction to stockholders' equity in the
December 31, 1998 balance sheet.
In December 1998, a Company officer and stockholder loaned the Company
approximately $23,000 for working capital purposes. Such amount is classified
as "loan from stockholder" in the December 31, 1998 balance sheet. The loan was
repaid in full in March 1999.
4. Income Taxes
The provision for income taxes consisted of the following:
<TABLE>
<CAPTION>
December 31, November 9,
1998 1999
------------ -----------
<S> <C> <C>
Current:
Federal....................................... $ 8,861 $64,954
State......................................... 1,348 12,316
------- -------
10,209 77,270
Deferred:
Federal....................................... 41,968 (4,303)
State......................................... 7,406 (759)
------- -------
49,374 (5,062)
------- -------
Income taxes.................................... $59,583 $72,208
======= =======
</TABLE>
F-28
<PAGE>
JUMP! INFORMATION TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1998
The provision for income taxes for the 1998 and 1999 periods differed from
the amount computed by applying the statutory federal rate of 34% to pre-tax
income principally due to the effect of state taxes.
The significant components of the Company's deferred tax assets and
liabilities at December 31, 1998 was as follows:
<TABLE>
<S> <C>
Deferred tax assets:
Deferred revenue........................................... $ 62,599
Deferred tax liabilities:
Cash to accrual conversion................................. (111,973)
---------
Net deferred tax liabilities................................. $ (49,374)
=========
</TABLE>
5. Stockholders' Equity
Effective November 10, 1998, the Company amended its certificate of
incorporation to create two classes of common stock ("Class A, Voting Common
Stock" and "Class B, Non-Voting Common Stock") and increase the number of
shares authorized to 2,100,000 shares of Class A, Voting Common Stock and
500,000 shares of Class B, Non-Voting Common Stock. In addition, the Board of
Directors authorized and approved a 700-for-one stock split of Class A, Voting
Common Stock increasing the number of shares issued and outstanding from 300
shares to 2,100,000 shares. The stock split has been given retroactive effect
in these financial statements.
6. Stock Options
Effective November 10, 1998, the Board of Directors and stockholders
approved the Jump! Information Technologies, Inc. Non-Qualified Stock Option
Plan (the "Plan"). Under the terms of the Plan, the Company has reserved all
500,000 shares of Class B, Non-Voting Common Stock for issuance upon exercise
of options. The Plan is administered by a committee comprised of one or more
individuals appointed by the Board of Directors. This committee is responsible
for determining the individuals to be granted options, the number of options
each individual will receive, the option price per share and the exercise
period of each option. All options expire in ten years from date of grant.
Options granted pursuant to the Plan generally vest over a two year period from
date of grant.
The following table summarizes information about stock options outstanding
at December 31, 1998 and November 9, 1999:
<TABLE>
<CAPTION>
1998 1999
----------------- ------------------
Weighted- Weighted-
Average Average
Exercise Stock Exercise Stock
Price Options Price Options
--------- ------- --------- --------
<S> <C> <C> <C> <C>
Options outstanding, beginning of
period........................... $-- -- $.25 234,000
Granted......................... .25 234,000 .25 192,000
Exercised....................... .25 (39,000)
Canceled........................ -- -- .25 (156,000)
---- ------- ---- --------
Options outstanding, end of
period........................... $.25 234,000 $.25 231,000
==== ======= ==== ========
Options exercisable, end of
period........................... $-- -- $.25 39,000
==== ======= ==== ========
</TABLE>
F-29
<PAGE>
JUMP! INFORMATION TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1998
The weighted-average fair value of options granted was $.07 per share or
$16,000 for the period ended December 31, 1998 and $.07 per share or $13,000
for the period ended November 9, 1999.
Pro forma information regarding net income is required by FAS 123 and has
been determined as if the Company had been accounting for its employee stock
options under the fair value method of that statement. The fair value of these
options was estimated at the date of grant using the minimum value method for
non-public companies permitted by FAS 123 with the following assumptions:
weighted average risk-free interest rate of 6.71%; no dividends; and weighted
average expected life of the options of five years. Had compensation cost been
recognized based on the fair value of the employee stock options on the date
of grant under the methodology prescribed by FAS 123, the Company's net income
would have decreased by approximately $1,000 in 1998 and $8,000 in 1999.
Option valuation models require the input of highly subjective assumptions
including the expected life of the option. Because the Company's employee
stock options have characteristics significantly different from those of
traded options, and because changes in the subjective input assumptions can
materially affect the fair value estimate, in management's opinion, the
existing models do not necessarily provide a reliable single measure of the
fair value of its employee stock options.
7. Subsequent Events
Pursuant to a stock purchase agreement dated November 10, 1999, the
stockholders of the Company sold 100% of the Company's outstanding capital
stock to Logical Design Solutions, Inc. ("LDS"), a third party.
In December 1999, Jump! was merged into its acquirer, LDS, with LDS being
the surviving corporation.
F-30
<PAGE>
[INSIDE BACKCOVER PAGE]
GRAPHIC:
[Graphic to come]
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Shares
Logical Design Solutions, Inc.
Common Stock
[LOGO of Logical Design Solutions]
--------
PROSPECTUS
, 2000
--------
Salomon Smith Barney
Lehman Brothers
SG Cowen
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
Information Not Required In Prospectus
Item 13. Other Expenses of Issuance and Distribution.
The following table sets forth the expenses expected to be incurred in
connection with the issuance and distribution of common stock registered
hereby, all of which expenses, except for the Securities and Exchange
Commission registration fee, the National Association of Securities Dealers,
Inc. filing fee, and the Nasdaq National Market listing application fee, are
estimated.
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee................ $14,877
National Association of Securities Dealers, Inc. filing fee........ 6,135
Nasdaq National Market listing application fee..................... *
Printing and engraving fees and expenses........................... *
Legal fees and expenses............................................ *
Accountants' fees and expenses..................................... *
Blue Sky fees and expenses......................................... *
Transfer Agent and Register fees and expenses...................... *
Miscellaneous expenses............................................. *
-------
Total............................................................ $
=======
</TABLE>
- --------
* To be provided by amendment
Item 14. Indemnification of Directors and Officers.
Section 145 of the Delaware General Corporation Law ("DGCL") provides that a
corporation may indemnify any person who was or is a party or is threatened to
be made a party to any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative, or investigative (other
than an action by or in the right of the corporation) by reason of the fact
that the person is or was a director, officer, employee or agent of the
corporation, or is or was servicing at the request of the corporation as
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by the person in connection with the action, suit or proceeding if the
person acted in good faith in a manner the person 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 the
person's conduct was unlawful. Section 145 further provides that a corporation
similarly may indemnify the person serving in that capacity who was or is a
party or is threatened to be made a party to any threatened, pending or
completed action or suit by or in the right of the corporation to procure a
judgment in its favor, against expenses actually and reasonably incurred by the
person in connection with the defense or settlement of the action or suit if
the person acted in good faith and in a manner the person reasonably believed
to be in or not opposed to the best interests of the corporation and except
that no indemnification shall be made in respect of any claim, issue or matter
as to which the person shall have been adjudged to be liable to the corporation
unless and only to the extent that the Delaware Court of Chancery or the court
in which the action or suit was brought shall determine upon application that,
despite the adjudication of liability but in view of all the circumstances of
the case, the person is fairly and reasonably entitled to indemnity for the
expenses which the Court of Chancery or other court shall deem proper. The
provisions regarding indemnification and advancement of expenses under Section
145 of the DGCL shall not be deemed exclusive of any other rights to which
those seeking indemnification or advancement of expenses may be entitled under
any bylaw, agreement, stockholders' or disinterested directors' vote or
otherwise.
Section 102(b)(7) of the DGCL permits a corporation to include in its
certificate of incorporation a provision eliminating or limiting the personal
liability of a director to the corporation or its stockholders for monetary
damages for breach of fiduciary duty as a director, provided that the provision
shall not eliminate or
II-1
<PAGE>
limit the liability of a director: (i) for any breach of the director's duty of
loyalty to the corporation or its stockholders; (ii) for acts or omissions not
in good faith or which involve intentional misconduct or a knowing violation of
law; (iii) under Section 174 of the DGCL (relating to unlawful payment of
dividends and unlawful stock purchase and redemption); or (iv) for any
transaction from which the director derived an improper personal benefit.
As permitted by Section 145(e) of the DGCL, Logical Design Solutions'
amended and restated certificate of incorporation and amended and restated
bylaws will provide that the company shall indemnify its directors, officers
and any person serving at the request of the company as a director, officer,
employee, partner (limited or general) or agent of another corporation or of a
partnership, joint venture, limited liability company, trust or other
enterprise, including service with respect to an employee benefit plan. The
company will also be permitted to purchase and maintain insurance on behalf of
any person who is or was a director, officer, employee or agent of the
Registrant, or is or was serving at the request of the Registrant as a
director, officer, employee, partner (limited or general) or agent of another
corporation or of a partnership, joint venture, limited liability company,
trust or other enterprise, against any liability asserted against such person
or incurred by such person in any such capacity, or arising out of such
person's status as such, and related expenses, whether or not the Registrant
would have the power to indemnify such person against such liability under the
provisions of the DGCL.
Item 15. Recent Sales of Unregistered Securities.
(a) On March 18, 1997, the company issued approximately $1.1 million
aggregate principal amount at maturity of 9% junior subordinated debentures to
Mary K. Brooks and Darren A. Bryden in consideration of certain retained
earnings. These debentures were issued without registration under the
Securities Act in reliance upon an exemption from registration under Section
4(2).
(b) On March 19, 1997, the company issued approximately $5.5 million
aggregate principal amount at maturity of 9% senior subordinated debentures to
Summit Ventures IV, L.P., Summit Investors III, L.P. and Samedan, Inc. and
warrants to acquire 2,150,000 shares of common stock to Summit Ventures IV,
L.P., Summit Investors III, L.P. and Mr. Paul F. Lozier for total consideration
of approximately $5.1 million. These debentures and warrants were issued
without registration under the Securities Act in reliance upon an exemption
from registration under Section 4(2).
(c) Between August 29, 1997 and December 31, 1999 the company granted
options to purchase a total of 1,296,218 shares of common stock under the
company's 1997 Stock Plan and the company's 1999 Stock Plan. During that
period, the company issued 10,300 shares of common stock to its employees for a
total of $24,390 upon the exercise of the options. These securities were issued
without registration under the Securities Act in reliance upon an exemption
from registration under Rule 701 and Section 4(2).
(d) On November 10, 1999, the company issued 109,500 shares of its common
stock, along with $525,000, in exchange for all of the outstanding securities
of Jump! Information Technologies, Inc. These shares were issued without
registration under the Securities Act in reliance upon an exemption from
registration under Section 4(2).
(e) On March 2, 2000, the Registrant issued an aggregate of 7,976,401
shares of common stock to the stockholders of Logical Design Solutions, Inc., a
New Jersey corporation ("LDSNJ"), pursuant to a merger in which LDSNJ merged
with and into the Registrant, which prior to the merger had been a wholly-owned
subsidiary of LDSNJ. These securities were issued without registration under
the Securities Act in reliance upon an exemption from registration under
Section 4(2).
II-2
<PAGE>
Item 16. Exhibits and Financial Statement Schedules.
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Description
------- -------------------
<C> <S>
1.1 Form of Underwriting Agreement.*
3.1 Certificate of Incorporation of Logical Design Solutions, Inc.
3.2 Form of Amended and Restated Certificate of Incorporation of Logical
Design Solutions, Inc. to be effective upon closing of this offering.*
3.3 Bylaws of Logical Design Solutions, Inc.
3.4 Form of Amended and Restated Bylaws of Logical Design Solutions, Inc.
to be effective upon closing of this offering.*
4.1 Form of Common Stock Certificate of Logical Design Solutions, Inc.*
5.1 Opinion of Brown & Wood LLP.*
10.1 9% Senior Subordinated Debenture and Warrant Purchase Agreement,
dated as of March 19, 1997, among Logical Design Solutions, Inc.,
principal stockholders of Logical Design Solutions, Inc., Summit
Ventures IV, L.P., Summit Investors III, L.P., Paul F. Lozier and
Samedan, Inc.
10.2 Warrant Agreement, dated as of March 19, 1997, among Logical Design
Solutions, Inc., principal stockholders of Logical Design Solutions,
Inc., Summit Ventures IV, L.P., Summit Investors III, L.P., and Paul
F. Lozier.
10.3 Shareholders Agreement, dated as of March 19, 1997, among Logical
Design Solutions, Inc., principal stockholders of Logical Design
Solutions, Inc., Summit Ventures IV, L.P., Summit Investors III, L.P.,
and Paul F. Lozier.
10.4 Registration Rights Agreement, dated as of March 19, 1997, among
Logical Design Solutions, Inc., Summit Ventures IV, L.P., Summit
Investors III, L.P., and Paul F. Lozier.
10.5 Redemption Agreement, dated as of March 19, 1997, among Logical Design
Solutions, Inc., Summit Ventures IV, L.P., Summit Investors III, L.P.,
and Paul F. Lozier.
10.6 Stock Purchase Agreement, dated November 10, 1999, by and among
William Engel, Allan Von Dette and Logical Design Solutions, Inc.
10.7 Logical Design Solutions, Inc. 1997 Stock Plan.
10.8 Logical Design Solutions, Inc. 1999 Stock Plan.
10.9 Logical Design Solutions, Inc. 2000 Stock Plan for Non-Employee
Directors.
10.10 Lease Agreement.*
23.1 Consent of Brown & Wood LLP (included in Exhibit 5.1).*
23.2 Consent of Ernst & Young LLP.
24.1 Power of Attorney (included on signature page).
27.1 Financial Data Schedule.
</TABLE>
- --------
* To be filed by amendment.
Item 17. Undertakings
(a) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant under the foregoing provisions, or otherwise, the Registrant has
been advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of
II-3
<PAGE>
expenses incurred or paid by director, office or controlling persons of the
Registrant in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in connection with the
securities being registered, the Registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether the indemnification by it is
against public policy as expressed in the Securities Act of 1933 and will be
governed by the final adjudication of such issue.
(b) The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Morristown, State of New
Jersey, on March 3, 2000.
LOGICAL DESIGN SOLUTIONS, INC.
/s/ Mimi Brooks
By: _________________________________
Mimi Brooks
President, Chief Executive
Officer
and Chairwoman
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below hereby constitutes and appoints Marilynne N. White and E. Bruce Lovenberg
his or her true and lawful attorneys-in-fact and agents with full power of
substitution and resubstitution, for him or her and in his or her name, place
and stead, any and all capacities, to sign any and all amendments (including
post-effective amendments) of and supplements to this Registration Statement,
or any related registration statement filed pursuant to Rule 462(b) under the
Securities Act of 1933, and to file the same with all exhibits thereto and
other documents in connection therewith, with the Securities and Exchange
Commission, granting unto such attorneys-in-fact and agents full power and
authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises, to all intents and purposes and
as fully as they might or could do in person, hereby ratifying and confirming
all that such attorneys-in-fact and agents, or his or her substitute, may
lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the date indicated.
<TABLE>
<CAPTION>
Name Title Date
---- ----- ----
<S> <C> <C>
/s/ Mimi Brooks President, Chief Executive March 3, 2000
___________________________________________ Officer and Chairwoman
Mimi Brooks (Principal Executive
Officer)
/s/ E. Bruce Lovenberg Chief Financial Officer March 3, 2000
___________________________________________ (Principal Financial and
E. Bruce Lovenberg Accounting Officer)
/s/ David W. Stoltzfus Chief Technology Officer March 3, 2000
___________________________________________ and Director
David W. Stoltzfus
/s/ Paul Lozier Director March 3, 2000
___________________________________________
Paul Lozier
/s/ Kevin Mohan Director March 3, 2000
___________________________________________
Kevin Mohan
</TABLE>
II-5
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
<C> <S>
1.1 Form of Underwriting Agreement.*
3.1 Certificate of Incorporation of Logical Design Solutions, Inc.
3.2 Form of Amended and Restated Certificate of Incorporation of Logical
Design Solutions, Inc. to be effective upon closing of this offering.*
3.3 Bylaws of Logical Design Solutions, Inc.
3.4 Form of Amended and Restated Bylaws of Logical Design Solutions, Inc. to
be effective upon closing of this offering.*
4.1 Form of Common Stock Certificate of Logical Design Solutions, Inc.*
5.1 Opinion of Brown & Wood LLP.*
10.1 9% Senior Subordinated Debenture and Warrant Purchase Agreement, dated
as of March 19, 1997, among Logical Design Solutions, Inc., principal
stockholders of Logical Design Solutions, Inc., Summit Ventures IV,
L.P., Summit Investors III, L.P., Paul F. Lozier and Samedan, Inc.
10.2 Warrant Agreement, dated as of March 19, 1997, among Logical Design
Solutions, Inc., principal stockholders of Logical Design Solutions,
Inc., Summit Ventures IV, L.P., Summit Investors III, L.P., and Paul F.
Lozier.
10.3 Shareholders Agreement, dated as of March 19, 1997, among Logical Design
Solutions, Inc., principal stockholders of Logical Design Solutions,
Inc., Summit Ventures IV, L.P., Summit Investors III, L.P., and Paul F.
Lozier.
10.4 Registration Rights Agreement, dated as of March 19, 1997, among Logical
Design Solutions, Inc., Summit Ventures IV, L.P., Summit Investors III,
L.P., and Paul F. Lozier.
10.5 Redemption Agreement, dated as of March 19, 1997, among Logical Design
Solutions, Inc., Summit Ventures IV, L.P., Summit Investors III, L.P.,
and Paul F. Lozier.
10.6 Stock Purchase Agreement, dated November 10, 1999, by and among William
Engel, Allan Von Dette and Logical Design Solutions, Inc.
10.7 Logical Design Solutions, Inc. 1997 Stock Plan.
10.8 Logical Design Solutions, Inc. 1999 Stock Plan.
10.9 Logical Design Solutions, Inc. 2000 Stock Plan for Non-Employee
Directors.
10.10 Lease Agreement.*
23.1 Consent of Brown & Wood LLP (included in Exhibit 5.1).*
23.3 Consent of Ernst & Young LLP.
24.1 Power of Attorney (included on signature page).
27.1 Financial Data Schedule.
</TABLE>
- --------
* To be filed by amendment.
<PAGE>
EXHIBIT 3.1
CERTIFICATE OF INCORPORATION
OF
LOGICAL DESIGN SOLUTIONS, INC.
* * * * *
THE UNDERSIGNED, in order to form a corporation for the purposes
hereinafter stated, under and pursuant to the provisions of the General
Corporation Law of the State of Delaware, does hereby certify as follows:
ARTICLE I.
The name of the corporation (which is hereinafter referred to as the
"Corporation") is:
Logical Design Solutions, Inc.
ARTICLE II.
The registered office of the Corporation is to be located at Corporation
Trust Center, 1209 Orange Street in the City of Wilmington, in the County of New
Castle, in the State of Delaware. The name of its registered agent at that
address is The Corporation Trust Company.
ARTICLE III.
The purpose of the Corporation is to engage in any lawful act or activity
for which a corporation may be organized under the General Corporation Law of
the State of Delaware.
ARTICLE IV.
The total number of shares of stock which the Corporation is authorized to
issue is 15,000,000 shares of Common Stock, par value $0.01 per share
(hereinafter referred to as "Common Stock").
ARTICLE V.
The Corporation is to have perpetual existence.
<PAGE>
ARTICLE VI.
No director of the Corporation shall be personally liable to the
Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director; provided, however, that this limitation shall not eliminate
-------- -------
or limit the liability of a director (i) for any beach 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) under Section 174 of the General Corporation Law of the State of
Delaware, or (iv) for any transaction from which the director derived an
improper personal benefit. If the General Corporation Law of the State of
Delaware is hereafter amended to authorize corporate action further limiting or
eliminating the personal liability of directors, then the liability of each
director of the Corporation shall be limited or eliminated to the fullest extent
permitted by the General Corporation Law of the State of Delaware as so amended
from time to time.
Neither the amendment nor repeal of this Article, nor the adoption of any
provision of the Certificate of Incorporation inconsistent with this Article,
shall eliminate or reduce the effect of this Article in respect of any matter
occurring, or any cause of action, suit or claim that, but for this Article,
would accrue or arise, prior to such amendment, repeal or adoption of an
inconsistent provision.
ARTICLE VII.
Section 7.1. Indemnification by Corporation. The Corporation shall
------------------------------
indemnify any person who is or was a director or officer of the Corporation with
respect to actions taken or omitted by such person in any capacity in which such
person serves the Corporation, to the full extent authorized or permitted by
law, as now or hereafter in effect, and such right to indemnification shall
continue as to a person who has ceased to be a director or officer, as the case
may be, and shall inure to the benefit of such person's heirs, executors, and
personal and legal representatives; provided, however, that, except for
-------- -------
proceedings to enforce rights to indemnification, the Corporation shall not be
obligated to indemnify any person in connection with a proceeding (or part
thereof) initiated by such person unless such proceeding (or part thereof) was
authorized in advance, or unanimously consented to, by the Board of Directors of
the Corporation.
Directors and officers of the Corporation shall have the right to be paid
by the Corporation expenses incurred in defending or otherwise participating in
any proceeding in advance of its final disposition.
The Corporation may, to the extent authorized from time to time by the
Board of Directors, provide rights to indemnification and to the advancement of
expenses to employees and agents of the Corporation.
The rights to indemnification and to the advancement of expenses conferred
in this Section shall not be exclusive of any other right that any person may
have or hereafter acquire under this Certificate of Incorporation, the by-laws,
any statute, agreement, vote of stockholders or disinterested director or
otherwise.
2
<PAGE>
Any repeal or modification of this Section by the stockholders of the
Corporation shall not adversely affect any rights to indemnification and to the
advancement of expenses of a director or officer of the Corporation, existing at
the time of such repeal or modification with respect to any acts or omissions
occurring prior to such repeal or modification.
Section 7.2. Insurance. By action of the Board of Directors,
---------
notwithstanding any interest of the directors in the action, the Corporation may
purchase and maintain insurance, in such amounts as the Board of Directors deems
appropriate, on behalf of any person who is or was a director, officer, employee
or agent of the Corporation, or is or was serving at the request of the
Corporation as a director, officer, employee or agent (including trustee) of
another corporation, partnership, joint venture, trust or other enterprise
against any liability asserted against him and incurred by him in any such
capacity, or arising out of his status as such, whether or not the Corporation
shall have the power to indemnify him against such liability under the
provisions of this Article.
ARTICLE VIII.
The Corporation reserves the right to amend, alter, change or repeal any
provisions contained in this Certificate of Incorporation in the manner now or
hereafter prescribed by law, and all the provisions of this Certificate of
Incorporation and all rights and powers conferred in this Certificate of
Incorporation on stockholders, directors and officers are subject to this
reserved power.
ARTICLE IX.
The name and address of the incorporator is as follows:
Name Mailing Address
---- ---------------
Michael D. Golden Brown & Wood llp
One World Trade Center
New York, New York 10048
3
<PAGE>
The undersigned, being the sole incorporator hereinbefore named, for the
purpose of forming a corporation pursuant to the General Corporation Law of the
State of Delaware, does make this Certificate of Incorporation, hereby declaring
and certifying that the facts herein stated are true; and accordingly has
hereunto set his hand this 18th day of February, 2000.
/s/ Michael D. Golden
________________________________
Michael D. Golden
Incorporator
4
<PAGE>
EXHIBIT 3.3
B Y - L A W S
of
LOGICAL DESIGN SOLUTIONS, INC.
(A Delaware Corporation)
ARTICLE I.
Offices
Offices. Logical Design Solutions, Inc. (the "Corporation") shall have such
-------
offices in such places either within or without the State of Delaware as the
Board of Directors may from time to time determine. The Corporation may keep
the books and records of the Corporation at such place or places within or
without the State of Delaware as the Board of Directors may from time to time by
resolution determine.
ARTICLE II.
Meeting of Stockholders
Section 2.01. Annual Meetings. The annual meeting of the stockholders for
---------------
the election of directors and for the transaction of such other business as may
properly be brought before such meeting shall be held on such date and at such
time and place, either within or without the State of Delaware, as the Board of
Directors shall designate by resolution, within thirteen months subsequent to
the later of the date of incorporation or the last annual meeting of
stockholders, for the purpose of electing directors and for the transaction of
such other business as may come before the meeting. If any annual meeting shall
not be held on the day designated herein or if the directors to be elected at
such annual meeting shall not have been elected thereat or at any adjournment
thereof, the Board of Directors of the Corporation shall cause a special meeting
of the stockholders to be held as soon thereafter as conveniently may be for the
election of such directors. At such special meeting the stockholders may elect
directors and transact other business with the same force and effect as at an
annual meeting duly called and held.
Section 2.02. Special Meetings. A special meeting of the stockholders for
----------------
any purpose or purposes may be called at any time by the Chairman of the Board
of Directors or President or by a majority of the directors and shall be called
by the President upon the written request of stockholders holding of record in
the aggregate at least one-third of the shares of stock of the Corporation
entitled to vote at such meeting.
Section 2.03. Notice of Meetings. Written notice stating the place, day and
------------------
time of the meeting and, in the case of a special meeting, the purpose or
purposes for which the meeting is called, shall be given not less than ten (10)
nor more than sixty (60) days before the date of the
<PAGE>
meeting by or at the direction of the President, or the officer or persons
calling the meeting, to each stockholder of record entitled to vote at such
meeting. If mailed, such notice is deemed to be given when deposited in the
United States mail, addressed to the stockholder at his address as it appears on
the stock transfer books of the Corporation, with postage thereon prepaid.
Waiver by a stockholder in writing of notice of a stockholders' meeting, signed
by him or her, whether before or after the time of such meeting, shall be
equivalent to the giving of such notice. Attendance by a stockholder, whether in
person or by proxy, at a stockholders' meeting shall constitute a waiver of
notice of such meeting of which he has had no notice, except when the person
attends a meeting for the express purpose of objecting at the beginning of the
meeting to the transaction of any business because the meeting is not lawfully
called or convened.
Section 2.04. Quorum. At each meeting of the stockholders, except as
------
otherwise expressly required by statute, the Certificate of Incorporation or
these By- Laws, the holders of record of a majority of the issued and
outstanding shares of stock of the Corporation entitled to vote at such meeting
shall constitute a quorum for the transaction of business when present at such
meeting either in person or by proxy. In the absence of a quorum at any such
meeting or any adjournment or adjournments thereof, the stockholders present in
person or by proxy and entitled to vote may, by a vote of a majority of the
shares represented at the meeting, or, in the absence of any stockholders, any
officer entitled to preside at such meeting may adjourn the meeting from time to
time and, if adjourned to another time or place, without notice, provided that
the time and place of such adjourned meeting are announced at the meeting at
which the adjournment is taken; however, if after the adjournment a new record
date is fixed for the adjourned meeting, notice shall be given as provided in
Section 3 of this Article 2. At any adjourned meeting at which a quorum is
present, any business may be transacted which might have been transacted at the
meeting as originally called; but only those stockholders entitled to vote at
the meeting as originally noticed shall be entitled to vote at any adjournment
or adjournments thereof, unless a new record date shall be fixed for the
adjourned meeting. The absence from any meeting in person or by proxy of
stockholders holding the number of shares of stock of the Corporation entitled
to vote thereat required by statute, the Certificate of Incorporation or these
By-Laws for action upon any given matter shall not prevent action at such
meeting upon any other matter which might properly come before the meeting, if
there shall be present thereat in person or by proxy stockholders holding the
number of shares of stock of the Corporation entitled to vote thereat required
in respect of such other matter.
Section 2.05. Voting. Except as otherwise expressly required by statute,
------
the Certificate of Incorporation or these By-Laws, each stockholder shall at
each meeting of the stockholders be entitled to one vote in person or by proxy
for each share of stock of the Corporation entitled to be voted thereat held by
him or her and registered in his name on the books of the Corporation:
(a) on such date as may be fixed by the Board of Directors as the record
date for the determination of stockholders entitled to notice of and to vote at
such meeting; or
(b) in the event that no record date shall have been so fixed, at the close
of business on the day next preceding the day on which notice of the meeting is
given, or, if notice is waived, at the close of business on the day next
preceding the day on which the meeting is held.
2
<PAGE>
Section 2.06. Proxies. At all meetings of stockholders, a stockholder may
-------
vote by proxy executed in writing by the stockholder, or his authorized officer,
director, employee or agent may sign or cause to be signed an instrument in
writing authorizing another person or persons to act for him or her as proxy.
Any copy, facsimile or other reliable reproduction of such writing may be used
for any and all purposes for which the original writing could be used, provided
such reproduction is a complete reproduction of the entire original writing.
Facsimile transmissions or other electronic transmissions of such proxy will be
valid, provided that the Chief Financial Officer of the Corporation determines
that such proxy is authorized by the stockholder.
Such proxy shall be filed with the Chief Financial Officer of the
Corporation before or at the time of the meeting. No proxy shall be voted on
after three years from its date, unless said proxy provides for a longer period.
Upon the demand of any stockholder, the vote for directors and the vote upon any
question before the meeting shall be by ballot.
Section 2.07. Closing of Transfer Books and Fixing of Record Date. For the
---------------------------------------------- ----
purpose of determining stockholders entitled to notice of or to vote at a
meeting of stockholders or any adjournment thereof, the Board of Directors may
fix, in advance, a record date, which shall not be more than sixty (60) nor less
than ten (10) days before the date of such meeting. If no record date is fixed,
the record date for determining stockholders entitled to notice of or to vote at
a meeting of stockholders shall be at the close of business on the date next
preceding the day on which notice is given, or, if notice is waived, at the
close of business on the next day preceding the day on which the meeting is
held. A determination of stockholders of record entitled to notice of or to vote
at a meeting of stockholders shall apply to any adjournment of the meeting;
provided, however, that the Board of Directors may fix a new record date for the
adjourned meeting.
For the purpose of determining stockholders entitled to consent to
corporate action in writing without a meeting, the Board of Directors may fix,
in advance, a record date, which shall not precede the date upon which the
resolution fixing the record date is adopted by the Board of Directors, and
which date shall not be more than ten (10) days after the date upon which the
resolution fixing the record date is adopted by the Board of Directors. If no
record date is fixed, the record date for determining stockholders entitled to
consent to corporate action without a meeting, where no prior action by the
Board of Directors is required by statute, the Certificate of Incorporation or
these By-Laws, shall be the first date on which a signed written consent setting
forth the action taken or proposed to be taken is delivered to the Company's
registered office in Delaware, its principal place of business or to an officer
or agent of the corporation having custody of the book in which proceedings of
stockholder meetings are recorded. If, however, prior action by the Board of
Directors is required and no record date is fixed by it, the record date for
determining stockholders entitled to consent to corporate action in writing
without a meeting shall be at the close of business on the day on which the
Board of Directors adopts the resolution taking such prior action.
For the purpose of determining the stockholders entitled to receive payment
of any dividend or other distribution or allotment of any rights or the
stockholders entitled to exercise any rights in respect of any change,
conversion or exchange of stock, or for the purpose of any other lawful action,
the Board of Directors may fix a record date, which record date shall not
precede the date upon which the resolution fixing the record date is adopted,
and which record
3
<PAGE>
date shall be not more than sixty days prior to such action. If no record date
is fixed, the record date for determining stockholders for any such purpose
shall be at the close of business on the day on which the Board of Directors
adopts the resolution relating thereto.
Section 2.08. List of Stockholders. It shall be the duty of the Chief
--------------------
Financial Officer or other officer who shall have charge of the stock ledger of
the Corporation, either directly or through another officer designated by him or
her or through a transfer agent or transfer clerk appointed by the Board of
Directors, to prepare and make, at least ten (10) days before every meeting of
stockholders, a complete list of the stockholders entitled to vote at the
meeting, arranged in alphabetical order, and showing the address of each
stockholder and the number of shares registered in the name of each stockholder.
Such list shall be open to the examination of any stockholder, for any purpose
germane to the meeting, during ordinary business hours, for a period of at least
ten days prior to the meeting, either at a place within the city where the
meeting is to be held, which place shall be specified in the notice of the
meeting, or, if not so specified, at the place where the meeting is to be held.
The list shall also be produced and kept at the time and place of the meeting
during the whole time thereof, and may be inspected by any stockholder present.
Section 2.09. Action Without a Meeting. Whenever the vote of stockholders
------------------------
at a meeting thereof is required or permitted to be taken for or in connection
with any corporate action, by any provision of the statute or of the Certificate
of Incorporation or of these By-Laws, the meeting and vote of stockholders may
be dispensed with: (1) if all of the stockholders who would have been entitled
to vote upon the action if such meeting were held shall consent in writing to
such corporate action being taken; or (2) if the holders of a majority of the
stock (or such greater percentage as shall be required by statute for the
proposed action) who would have been entitled to vote upon the action if a
meeting had been held shall consent in writing to such corporate action being
taken; provided that prompt notice of the taking of the corporate action without
a meeting by less than unanimous written consent shall be given to those
stockholders who have not consented in writing and who, if the action had been
taken at a meeting, would have been entitled to notice of the meeting.
ARTICLE III.
Board of Directors
Section 3.01. General Powers. The property, business and affairs of the
--------------
Corporation shall be managed by the Board of Directors.
Section 3.02. Number and Term of Office. The number of Directors shall
-------------------------
consist of not less than one (1) nor more than fifteen (15) members, the exact
number of which shall initially be fixed by the Incorporator and thereafter from
time to time by resolution adopted by affirmative vote of a majority of the
entire Board of Directors. Directors need not be stockholders. Each director
shall hold office until the annual meeting of the stockholders next following
his election or until his successor shall have been elected and shall have
qualified, or until his death, or until he shall resign or shall have been
removed.
4
<PAGE>
Section 3.03. Vacancies. Any vacancy in the Board of Directors, whether
---------
caused by death, resignation, increase in the number of directors (whether by
amendment of these By-Laws or otherwise), removal or any other cause, may be
filled either by the stockholders of the Corporation entitled to vote for the
election of directors, at a special meeting of the stockholders called for the
purpose, or vote of the Board of Directors. If the number of directors then in
office is less than a quorum, such newly created directorships and vacancies may
be filled by vote of a majority of the directors then in office. Each director
so chosen shall hold office until the next annual meeting of stockholders and
until his successor shall have been elected and shall have qualified, or until
death, or until he shall resign or shall have been removed.
Section 3.04. Resignation and Removal of Directors. Any director may resign
------------------------------------
at any time upon giving written notice to the President or to the Board of
Directors. Any such resignation shall take effect at the time specified therein
or, if no time is so specified, upon its receipt by the President or by the
Board of Directors; and unless otherwise specified therein the acceptance of
such resignation shall not be necessary to make it effective. Any director or
directors of the Corporation may be removed either with or without cause at any
time by the vote of the holders of a majority of the stock entitled to vote at
an election of directors and thereupon the term of office of such director or
directors who shall have been so removed shall forthwith terminate, and there
shall be a vacancy or vacancies in the Board of Directors.
Section 3.05. Regular Meetings. Regular meetings of the Board of Directors
----------------
shall be held at such time and places as the Board of Directors shall determine,
within or without the State of Delaware. Notice of regular meetings need not be
given.
Section 3.06. Special Meetings; Notice. Special meetings of the Board of
------------------------
Directors shall be held whenever called by the Chairman of the Board, President
or by a Vice President, or by the Chief Financial Officer or by any two of the
directors. Except as otherwise expressly required by statute, the Certificate of
Incorporation or these By-Laws, notice of each such meeting shall be mailed to
each director, addressed to him or her at his residence or usual place of
business, at least four days before the day on which the meeting is to be held,
or shall be sent to him or her at such place by telegraph, telecopy, cable or
wireless or other similar means of communication, or shall be delivered
personally or by telephone, at least one day before the meeting is to be held.
Section 3.07. Place of Meetings. The Board of Directors may hold its
-----------------
meetings at such place or places within or without the State of Delaware as it
may from time to time determine, or as shall be specified in the respective
notice of meetings.
Section 3.08. Compensation. Directors, as such, shall receive such
------------
compensation for their services as may be fixed by the Board of Directors;
provided, that nothing herein contained shall be construed to preclude any
director from serving the Corporation in any capacity and receiving compensation
therefor. Members of special or standing committees may be allowed like
compensation for attending committee meetings.
Section 3.09. Quorum and Manner of Acting. A majority of the total number
---------------------------
of directors (except when a Board of Directors of one director is authorized
pursuant to Section 2 of Article III hereof, in which case one director) then in
office shall constitute a quorum for the
5
<PAGE>
transaction of business at any meeting and the act of a majority of the
directors present at any meeting at which a quorum is present shall be the act
of the Board of Directors. In the absence of a quorum, a majority of the
directors present or the director present may adjourn any meeting from time to
time until a quorum shall be present. At any adjourned meeting at which a quorum
is present, any business may be transacted which might have been transacted at
the meeting as originally called. Notice of any adjourned meeting need not be
given.
Section 3.10. Action Without a Meeting. Any action required or permitted to
------------------------
be taken at any meeting of the Board of Directors, or of any committee thereof,
may be taken without a meeting if all members of the Board of Directors or
committee, as the case may be, consent thereto in writing, and the writing or
writings are filed with the minutes of proceedings of the Board of Directors or
the committee. No other provision of these By-Laws, whether or not requiring a
vote, resolution or other action of the Board of Directors or any committee
thereof, shall restrict the power of the Board of Directors or any committee to
act without a meeting as above provided.
Section 3.11. Use of Conference Telephone. Any one or more members of the
---------------------------
Board of Directors or of any committee thereof may participate in any meeting of
such Board of Directors or committee by means of a conference telephone or
similar communications method allowing all persons participating in the meeting
to hear each other. Participation in a meeting pursuant to this Section 11 shall
constitute presence in person at such meeting.
Section 3.12. Interest of Directors in Contracts. Any contract or other
----------------------------------
transaction between the Corporation and one (1) or more of its directors or
officers, or between the Corporation and any other corporation, partnership or
association of which one or more of its directors are directors, officers,
employees, stockholders or in which one or more of its directors has a financial
interest, shall be valid for all purposes, notwithstanding the presence of such
director or directors at the meeting of the Board of Directors of the
Corporation, which acts upon, or in reference to, such contract or transaction,
and notwithstanding his or her or their participation in such action, if the
fact of such interest shall be disclosed or known to the Board of Directors or a
committee and the Board of Directors or such committee shall nevertheless in
good faith authorize such contract or other transaction by an affirmative vote
of a majority of the disinterested directors present. The interested director or
directors shall be counted in determining the presence of a quorum at a meeting
of the Board of Directors or such committee, but shall not be counted in
calculating the majority of such quorum necessary to authorize the contract of
other transaction. This section shall not be construed to invalidate any
contract or other transaction which would otherwise be valid under the common
and statutory law applicable thereto.
Section 3.13. Dividends. Subject to the provisions of the Certificate of
---------
Incorporation, the Board of Directors may at any regular or special meeting
declare and pay dividends, out of funds legally available therefor, upon the
capital stock of the Corporation as and when the Board of Directors deems
expedient. Before declaring any dividends there may be set apart out of any
funds of the Corporation available for dividends, such sum or sums as the
directors from time to time in their discretion deem proper working capital or
as a reserve fund to meet contingencies or for equalizing dividends or for such
other purposes as the directors shall deem conducive to the interests of the
Corporation and may abolish such reserves.
6
<PAGE>
Section 3.14. Fiscal Year. The fiscal year of the Corporation shall be
-----------
determined by resolution of the Board of Directors.
Section 3.15. Committees. The Board of Directors may, by resolution adopted
----------
by a majority of the whole Board of Directors, designate one or more committees,
each committee to consist of three or more of the directors of the Corporation.
The Board of Directors may designate one or more directors as alternate members
of any committee, who may replace any absent or disqualified member at any
meeting of the committee, the member or members thereof present at any meeting
and not disqualified from voting, whether or not such member or members
constitute a quorum, may unanimously appoint another member of the Board of
Directors to act at the meeting place of any such absent or disqualified member.
Any such committee, to the extent provided in the resolution of the Board of
Directors, shall have and may exercise all the powers and authority of the Board
of Directors in the management of the business and affairs of the Corporation,
and may authorize the seal of the Corporation to be affixed to all papers which
may require it; but no such committee shall have power or authority to amend the
Certificate of Incorporation of the Corporation, adopt the agreement of merger
or consolidation, recommend to the stockholders the sale, lease or exchange of
all or substantially all of the Corporation's property and assets, recommend to
the stockholders a dissolution of the Corporation or a revocation of
dissolution, or amend these By-Laws and, unless the resolution expressly so
provides, no such committee shall have the power or authority to declare a
dividend or to authorize the issuance of stock.
Unless the Board of Directors otherwise provides, each committee designated
by the Board of Directors may make, alter and repeal rules for the conduct of
its business. In the absence of such rules each committee shall conduct its
business in the same manner as the Board of Directors conducts its business
pursuant to Sections 3.01 through 3.14 of Article III of these By-Laws.
ARTICLE IV.
Officers
Section 4.01. Officers. The Board of Directors may elect or appoint from
--------
among their number a Chairman of the Board. The Board of Directors may elect or
appoint a President, one or more Vice Presidents, a Secretary, a Treasurer and
such other officers as the Board of Directors may determine to be necessary.
Subject to other direction by the Board of Directors, the duties and authority
of the officers shall be those usually pertaining to their respective offices
and those specifically delegated to them by the Board of Directors. Except as
may otherwise be provided in these By-Laws, Assistant Secretaries, if there be
any, shall perform such duties and have such powers as from time to time may be
assigned to them by the Board of Directors, the President, any Vice President,
if there be one, or the Secretary, if there be one, and in the absence of a
Secretary or in the event of his or her disability or refusal to act, shall
perform the duties of the Secretary, and when so acting, shall have all the
powers of and be subject to all the restrictions upon the Secretary.
Section 4.02. Resignations and Removal. Any officer may resign at any time
------------------------
upon giving written notice to the Chairman, the President or to the Board of
Directors. Any such
7
<PAGE>
resignation shall take effect at the time specified therein or, if no time is so
specified, upon its receipt by the Chairman, by the President or by the Board of
Directors; and, unless otherwise specified therein, the acceptance of such
resignation shall not be necessary to make it effective. Any officer may be
removed, either with or without cause, at any time, by the Board of Directors.
Section 4.03. Vacancies. A vacancy in any office because of death,
---------
resignation, removal or any other cause may be filled for the unexpired portion
of the term by the Board of Directors.
Section 4.04. Compensation. The Board of Directors may determine and pay to
------------
officers of the Corporation, including officers who may also be directors, such
compensation for services as shall in the opinion of the Board of Directors be
reasonable.
ARTICLE V.
Contracts, Checks, Drafts and Proxies
Section 5.01. Contracts. The Board of Directors may take action authorizing
---------
any officer or officers, or agent or agents, to enter into any contract or
engagement and to execute and deliver any instrument in the name of and on
behalf of the Corporation, and such authority may be general or confined to
specific instances. Subject to the control and direction of the Board of
Directors, the President, any Vice President, the Chief Financial Officer and
the Treasurer may enter into, execute, deliver and amend bonds, promissory
notes, contracts, agreements, deeds, leases, guarantees, loans, commitments,
obligations, liabilities and other instruments to be made or executed for or on
behalf of the Corporation. Subject to any restrictions imposed by the Board of
Directors, such officers of the Corporation may delegate such powers to others
under his or her jurisdiction, it being understood, however, that any such
delegation of power shall not relieve such officer of responsibility with
respect to the exercise of such delegated power.
Section 5.02. Checks and Drafts. All checks, drafts or other orders for the
-----------------
payment of money, issued in the name of the Corporation, shall be signed by the
President, Treasurer, an Assistant Treasurer or such other officer empowered by
the Board of Directors.
Section 5.03. Proxies. All proxies or instruments authorizing any person to
-------
attend, vote, consent or otherwise act at any and all meetings of stockholders
of any corporation in which the Corporation shall own shares or in which it
shall otherwise be interested shall be executed by the Chairman, the President,
any Vice President or such other officers as the Chairman of the Board, the
President, any Vice President or the Board of Directors may from time to time
determine.
ARTICLE VI.
Capital Stock
Section 6.01. Certificates for Stock. Every holder of shares of stock of
----------------------
the Corporation shall be entitled to have a certificate, in such form as the
Board of Directors shall prescribe,
8
<PAGE>
certifying the number of shares of stock of the Corporation owned by him or her.
Each such certificate shall be signed in the name of the Corporation by the
Chairman of the Board, or by the President or a Vice President and the Treasurer
or an Assistant Treasurer, certifying the number of shares owned by him or her.
In case any officer who shall have signed any such certificate or certificates
shall cease to be such officer before such certificate or certificates shall
have been issued by the Corporation, such certificate or certificates may be
issued by the Corporation with the same effect as though he were such officer at
the date of issue.
Section 6.02. Registered Holders. The Corporation shall be entitled to
------------------
treat the registered holder of any certificate for stock of the Corporation as
the absolute and exclusive owner thereof and of the shares represented thereby
for all purposes, including without limitation the right to receive dividends
and to vote and as to any liability for calls and assessments, and, accordingly,
the Corporation shall not be bound to recognize any equitable or other claim to
or interest in such share or shares on the part of any other person, whether or
not the Corporation shall have express or other notice thereof, save as
expressly provided by statute.
Section 6.03. Regulations. The Board of Directors may make such rules and
-----------
regulations as it may deem expedient, not inconsistent with statute, the
Certificate of Incorporation or these By-Laws, concerning the issue, transfer
and registration of certificates for shares of stock of the Corporation. It may
appoint or authorize any principal officer or officers to appoint one or more
transfer clerks or one or more transfer agents and one or more registrars, and
may require all certificates for shares of stock of the Corporation to bear the
signature or signatures of any of them.
Section 6.04. Lost, Stolen or Destroyed Certificates. The Corporation shall
--------------------------------------
issue a new certificate in place of any certificate for shares previously issued
if the registered owner of the certificate:
(a) Makes proof in affidavit form that it has been lost, destroyed or
wrongfully taken; and
(b) Requests the issuance of a new certificate before the Corporation has
notice that the certificate has been acquired by a purchaser for value in good
faith and without notice of an adverse claim; and
(c) Gives a bond in such form, and with such surety or sureties, with fixed
or open penalty, as the Corporation may direct, to indemnify the Corporation
(and its transfer agent and registrar, if any) against any claim that may be
made on account of the alleged loss, destruction or theft of the certificate;
and
(d) Satisfies any other reasonable requirements imposed by the Corporation.
When a certificate has been lost, apparently destroyed or wrongfully taken, and
the holder of record fails to notify the Corporation within a reasonable time
after he has notice of it, and the Corporation registers a transfer of the
shares represented by the certificate before receiving such notification, the
holder of record is precluded from making any claim against the Corporation for
the transfer or for a new certificate.
9
<PAGE>
ARTICLE VII.
Miscellaneous Provisions
Section 7.01. Waiver of Notice. Whenever notice is required to be given by
----------------
statute, the Certificate of Incorporation or these By-Laws, a written waiver
thereof, signed by the person entitled to notice, whether before or after the
time stated therein, shall be deemed equivalent to notice. Attendance of a
person at a meeting shall constitute a waiver of notice of such meeting, except
when the person attends a meeting for the express purpose of objecting, at the
beginning of the meeting, to the transaction of any business because the meeting
is not lawfully called or convened. Neither the business to be transacted at,
nor the purpose of, any regular or special meeting of the stockholders,
directors, or members of a committee of directors need be specified in any
written waiver of notice.
Section 7.02. Corporate Seal. The corporate seal shall be circular in form,
--------------
and shall contain the name of the Corporation, the year of its creation and the
words "Corporate Seal". Said seal may be used by causing it or a facsimile
thereof to be impressed or affixed or reproduced.
Section 7.03. Procedure. Meetings of stockholders and of the Board of
---------
Directors shall be conducted in an orderly procedure as shall be determined by
the presiding officer at such meetings. The presiding officer shall make all
rulings and decisions on any motion or question to come before such meetings and
his ruling shall be final and decisive.
ARTICLE VIII.
Amendments
Section 8.01. Amendments. These By-Laws may be altered, amended or repealed
----------
or new By-Laws may be adopted by the stockholders or by the Board of Directors
at any regular meeting of the stockholders or of the Board of Directors or at
any special meeting of the stockholders or of the Board of Directors. The power
to alter, adopt, amend or repeal By-Laws so conferred on the Board of Directors
by this Section 1 shall not divest or limit the power of the stockholders to
alter, adopt, amend or repeal By-Laws.
10
<PAGE>
EXHIBIT 10.1
LOGICAL DESIGN SOLUTIONS, INC.
9% SENIOR SUBORDINATED DEBENTURE
AND WARRANT PURCHASE AGREEMENT
Dated as of March 19, 1997
<PAGE>
LOGICAL DESIGN SOLUTIONS, INC.
9% SENIOR SUBORDINATED DEBENTURE
AND WARRANT PURCHASE AGREEMENT
Dated as of March 19, 1997
TABLE OF CONTENTS
ARTICLE I
PURCHASE AND SALE OF SENIOR DEBENTURES AND WARRANTS
1.1 Purchase and Sale of Subordinated Debentures...................... 1
1.2 Issuance of Warrants.............................................. 1
1.3 Investment Units.................................................. 1
1.4 Warrant Shares.................................................... 2
1.5 Closing........................................................... 2
1.6 Use of Proceeds................................................... 2
1.7 Distributions to Certain Shareholders............................. 2
1.8 Termination of S Corporation Status............................... 3
1.9 Merger of LDS and LDSI............................................ 3
1.10 Issuance of Junior Subordinated Debentures........................ 3
1.11 Option Pools...................................................... 4
1.12 Description of Senior Debentures.................................. 4
1.13 Description of Junior Debentures.................................. 5
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF
THE COMPANY AND THE PRINCIPAL SHAREHOLDERS
2.1 Organization and Corporate Power................................... 5
2.2 Authorization...................................................... 6
2.3 Government Approvals............................................... 6
2.4 Authorized and Outstanding Stock................................... 7
2.5 Subsidiaries....................................................... 7
2.6 Financial Information.............................................. 7
2.7 Events Subsequent to the Date of the Financial Statements.......... 8
2.8 Litigation......................................................... 8
2.9 Compliance with Laws and Other Instruments......................... 8
2.10 Taxes.............................................................. 8
2.11 Real Property; Environmental Matters............................... 9
2.12 Personal Property................................................. 10
2.13 Patents, Trademarks, etc.......................................... 10
2.14 Agreements of Directors, Officers and Employees................... 10
2.15 Governmental and Industrial Approvals............................. 11
2.16 Contracts and Commitments......................................... 11
2.17 Registration Rights............................................... 11
2.18 Insurance Coverage................................................ 11
2.19 Employee Matters.................................................. 11
2.20 No Brokers or Finders............................................. 12
i
<PAGE>
2.21 Transactions with Affiliates...................................... 12
2.22 Assumptions; Guarantees, etc. of Indebtedness of Other Persons.... 12
ARTICLE III
AFFIRMATIVE COVENANTS OF THE COMPANY
3.1 Accounts and Reports.............................................. 12
3.2 Payment of Taxes.................................................. 14
3.3 Maintenance of Key Man Insurance.................................. 14
3.4 Compliance with Laws, etc......................................... 14
3.5 Inspection........................................................ 14
3.6 Corporate Existence; Ownership of Subsidiaries.................... 15
3.7 Compliance with ERISA............................................. 15
3.8 Board Approval.................................................... 15
3.9 Financings........................................................ 15
3.10 Meetings of the Board of Directors................................ 15
3.11 Rule 144A Information............................................. 15
ARTICLE IV
NEGATIVE COVENANTS OF THE COMPANY
4.1 Investments in Other Persons...................................... 16
4.2 Distributions..................................................... 16
4.3 Dealings with Affiliates.......................................... 17
4.4 Merger............................................................ 17
4.5 Limitation on Options............................................. 18
4.6 Limitation on Subsidiary Dividends and Other Distributions........ 18
4.7 No Conflicting Agreements......................................... 18
4.8 Change in Business................................................ 18
4.9 Indebtedness...................................................... 18
4.10 Minimum Net Income................................................ 18
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF THE PURCHASERS
5.1 Representations and Warranties.................................... 19
5.2 Permitted Transfers; Legends...................................... 21
ARTICLE VI
SUBORDINATION OF DEBENTURES
6.1 Agreement to Subordinate.......................................... 22
6.2 Acceleration of Senior Debt....................................... 22
6.3 Insolvency, Etc................................................... 23
6.4 Payments Held in Trust............................................ 23
6.5 The Company's Obligations Unconditional........................... 23
6.6 Subrogation Upon Payment of Senior Debt........................... 23
6.7 Notice............................................................ 24
6.8 Knowledge......................................................... 24
ii
<PAGE>
ARTICLE VII
CONDITIONS OF PURCHASERS' OBLIGATION
7.1 Effect of Conditions.............................................. 24
7.2 Representations and Warranties.................................... 24
7.3 Performance....................................................... 24
7.4 No Material Adverse Change........................................ 24
7.5 Opinion of Counsel................................................ 25
7.6 Board Election.................................................... 25
7.7 Redemption Agreement.............................................. 25
7.8 Shareholders Agreement............................................ 25
7.9 Registration Rights Agreement..................................... 25
ARTICLE VIII
CONDITIONS OF THE COMPANY'S OBLIGATIONS
8.1 Effect of Conditions.............................................. 25
8.2 Representations and Warranties.................................... 25
8.3 Performance....................................................... 25
8.4 Payment........................................................... 25
ARTICLE IX
DEFAULTS AND REMEDIES
9.1 Events of Default; Acceleration................................... 26
9.2 Rescission of Acceleration........................................ 28
ARTICLE X
CERTAIN DEFINITIONS
ARTICLE XI
MISCELLANEOUS
11.1 Senior Debenture Payments......................................... 30
11.2 Form, Registration, Transfer and Exchange of Senior Debentures.... 31
11.3 Survival of Representations....................................... 31
11.4 Parties in Interest............................................... 31
11.5 Debentures Owned by Affiliates.................................... 32
11.6 Amendments and Waivers............................................ 32
11.7 Notices........................................................... 32
11.8 Expenses.......................................................... 33
11.9 Counterparts...................................................... 33
11.10 Effect of Headings................................................ 33
11.11 Transferability as Unit........................................... 33
11.12 Governing Law..................................................... 34
iii
<PAGE>
EXHIBITS
A Form of 9 % Senior Subordinated Debenture
B Warrant Agreement
C Merger Agreement
D Form of 9% Junior Subordinated Debenture
E Opinion of Brown & Wood LLP
F Redemption Agreement
G Shareholders Agreement
H Registration Rights Agreement
iv
<PAGE>
March 19, 1997
To: The Persons listed on
Schedule 1.1 attached hereto:
------------
Re: Senior Subordinated Debentures and Warrants
Ladies and Gentlemen:
Logical Design Solutions, Inc., a New Jersey corporation ("LDS"), and Mary
Kay Brooks and Darren Bryden (each a "Principal Shareholder" and collectively
the "Principal Shareholders"), hereby agree with each of you as follows:
ARTICLE I
PURCHASE AND SALE OF SENIOR DEBENTURES AND WARRANTS
1.1 Purchase and Sale of Subordinated Debentures. At the Closing (as herein
defined), LDS will sell to you (the "Purchasers") for the aggregate purchase
price of Five Million Two Hundred Forty - Three Thousand Nine Hundred and Two
($5,243,902) Dollars 9% Senior Subordinated Debentures of the Company (as
defined herein) (the "Senior Debentures") in the aggregate principal amount of
$5,540,735.71. Each of the Purchasers agrees to purchase, separately and
severally, the aggregate amount of Senior Debentures and Warrants (as defined
below) set forth opposite its name on Schedule 1.1 hereto. The Company shall not
be obligated to sell any of the Senior Debentures or the Warrants unless all
conditions set forth in Article VIII hereof shall have been satisfied or waived.
The Senior Debentures shall be in the form of Exhibit A attached hereto.
1.2 Issuance of Warrants. At the Closing, LDS will issue to the Purchasers
warrants (the "Warrants") to acquire an aggregate of 215,000 shares of common
stock, no par value per share (the "Common Stock"), of LDS. The Warrants will be
issued pursuant to a Warrant Agreement in the form of Exhibit B attached hereto
(the "Warrant Agreement").
1.3 Investment Units. The Senior Debentures and the Warrants constitute
investment units ("Investment Units") for the purposes of Section 1273(c)(2)(A)
of the Internal Revenue Code of 1986 as amended (the "Code"). In accordance with
such section and Section 1273(b)(2) of the Code, the issue price of investment
units of a Purchaser is the amount such Purchaser pays for its Senior Debenture.
LDS and the Purchasers agree that within thirty (30) days after the Closing they
will in good faith agree in writing as to the allocation of the issue price
between the Senior Debentures and the Warrants in proportion to their respective
fair market values. None of the parties will take any position in its tax
returns that is inconsistent with such agreed upon allocation. LDS will provide
the Purchasers with any information necessary for them to report their income
from this transaction properly.
<PAGE>
1.4 Warrant Shares. LDS shall at all times reserve from its authorized but
unissued capital a sufficient number of shares of Common Stock (the "Warrant
Shares") for issuance upon exercise of the Warrants granted pursuant to the
Warrant Agreement.
1.5 Closing. Subject to the satisfaction or waiver of the conditions set
forth in Articles VII and VIII hereof, the sale and purchase of the Senior
Debentures and Warrants shall be made at a closing (the "Closing") to be held at
the offices of Hutchins, Wheeler & Dittmar, A Professional Corporation, 101
Federal Street, Boston, Massachusetts, at 10:00 A.M. on March 19, 1997 or such
later date as may be agreed upon by the Company and the Purchasers. The date on
which the Closing occurs is referred to herein as the "Closing Date". Payment at
the Closing for the Senior Debentures and Warrants shall be by wire transfer
payable in immediately available federal funds. Each Purchaser shall pay that
amount for the Senior Debentures and Warrants being acquired by it at the
Closing as is set forth on Schedule 1.1 hereof. At the Closing, the Company will
deliver to each Purchaser one or more notes representing the Senior Debentures
purchased by such Purchaser and one or more warrant certificates evidencing the
Warrants being acquired by such Purchaser in such denominations and issued in
such names as may be requested by such Purchaser.
1.6 Use of Proceeds. The proceeds from the sale of the Senior Debentures
and Warrants will be used to provide working capital and to fund business
expansion and expenses associated with the transaction contemplated in this
Agreement.
1.7 Distributions to Certain Shareholders. The parties agree that the
following distributions shall be made to shareholders of LDS and Logical Design
Solutions International, Inc. ("LDSI") at or prior to the Closing:
(a) Prior to the Closing, each of LDS and LDSI shall have distributed to
their respective shareholders an aggregate amount of $1,014,6004 representing
their aggregate retained earnings as of December 31, 1995.
(b) It is expected that within 120 days following the Closing, Bell
Atlantic will commit to make to LDSI a payment or payments in the aggregate
amount of $1.7 million relating to the licensing of LDSI's Teletrac product
(such payment referred to herein as the "Prospective Exclusivity Payment"). The
parties agree that if within such 120 day period Bell Atlantic does commit to
make such payment, LDSI will distribute to its sole shareholder the account
receivable consisting of such commitment to make such payment. Neither LDS nor
LDSI shall have any obligation to make any such distributions to the extent that
Bell Atlantic does not commit to make such Prospective Exclusivity Payment.
(c) At or prior to the Closing, LDS and LDSI shall have distributed to
their respective shareholders amounts equal to the federal and state income
taxes payable by such shareholders (at an assumed rate of 37%), as shareholders
of S corporations, an aggregate amount of $634,798.27 with respect to the income
earned by LDS and LDSI during the period January 1, 1996 through December 31,
1996, and $215,596.41 with respect to income earned by LDS and LDSI during the
period January 1, 1997 through February 28, 1997; provided, however, that no
such distributions shall be made with respect to any income tax incurred by such
shareholders with respect to the other distributions set forth in this Section
1.7, nor with respect to the receipt
2
<PAGE>
by such shareholders of the Junior Subordinated Debentures described below.
Following the Closing, if it is determined that the Company has either
overdistributed or underdistributed amounts otherwise payable to the Principal
Shareholders, appropriate adjustments will be made.
1.8 Termination of S Corporation Status. LDS shall take such steps as the
Purchasers may request to terminate its status as an S corporation, effective as
of the Closing Date.
1.9 Merger of LDS and LDSI. (a) Immediately following the distribution
described in Section 1.7(b), and in all events within 120 days following the
Closing, LDS and LDSI shall be merged (such transaction referred to herein as
the "Merger"), with LDS surviving such Merger. As used hereafter in this
Agreement, the term "Company" shall mean LDS prior to the Merger, and shall mean
LDS as the surviving corporation following the Merger; provided that for
purposes of Article 11, except as otherwise noted, the term "Company" shall mean
LDS and LDSI on a combined basis as if the Merger had occurred prior to the date
hereof. Such merger shall be effected on the terms set forth in the merger
agreement in the form of Exhibit C attached hereto (the "Merger Agreement")
which shall be approved by the shareholders of each of LDS and LDSI and executed
on behalf of each such corporation prior to the Closing Date. The Principal
Shareholders agree that they shall take such action as may be required to effect
such merger in accordance with the terms of the Merger Agreement.
(b) Unless expressly called for or permitted by this Agreement or otherwise
consented to by the Purchasers in writing, from the Closing Date through the
date of the Merger, LDSI shall:
(i) perform in all material respects all obligations of LDSI under
agreements, contracts and instruments relating to or affecting its
properties, assets and business;
(ii) comply in all material respects with all statutes, laws,
ordinances, rules and regulations applicable to the Company;
(iii) not merge or consolidate with, or agree to merge or consolidate
with, or purchase substantially all the assets of, or otherwise acquire a
business or any corporation;
(iv) not make any dividends, distribution or other payments with
respect to its capital stock;
(v) not incur any indebtedness for borrowed money;
(vi) not incur any capital expenditure, or commit to an), such capital
expenditure, in excess of $5,000; and
(vii) not create or enlarge or enhance any employee benefit plan or
enter into any employment contract or increase compensation paid to any
officer paid to LDSI.
1.10 Issuance of Junior Subordinated Debentures. Effective as of March 18,
1997, LDS and LDSI distributed to the Principal Shareholders as set forth on
Schedule 1.10 of 9% Junior Subordinated Debentures in the forms of Exhibit D and
D-1, respectively, attached hereto
3
<PAGE>
(collectively, the "Junior Debentures" and, together with the Senior Debentures,
the "Debentures") in the aggregate principal amount of $1,114,289.50. The Junior
Debentures will be subordinate to the Senior Debentures as hereinafter set
forth.
1.11 Option Pools. Within thirty (30) days after the Closing, Date, there
shall be established three option plans (collectively, the "Option Plans"), each
of which shall be reasonably acceptable in form and substance to the Purchasers
and shall provide for the issuance of options, as follows:
(a) An option pool ("Option Pool A") will be established for current and
future senior management members and directors of the Company, and there shall
be reserved for issuance thereunder 100,000 shares of common stock.
(b) An option pool ("Option Pool B") shall be established for the Principal
Shareholders, with the exercise price of options granted pursuant thereto based
upon an equity evaluation of the Company of $40 million and there shall be
50,000 shares of Common Stock reserved for issuance under such plan.
(c) A third option pool ("Option Pool C") will be established for Mimi
Brooks and Darren Bryden, with the exercise price of options granted pursuant
thereto based upon an equity valuation of the Company of $60 million. There
shall be 50,000 shares of Common Stock reserved for issuance under such plan.
1.12 Description of Senior Debentures. The Senior Debentures shall have the
following terms, and shall be entitled to the following rights and benefits:
(a) The principal amount of the Senior Debentures shall be paid March 19,
2002. The Senior Debentures may, at each Purchaser's option, be pre consummation
of a Liquidity Event (as herein defined). The Company may prepay the Senior
Debentures at any time and from time to time in whole or in installments of $
100,000, without premium or penalty. Each such prepayment shall be preceded by
two Business Days' notice. Any partial prepayment of the Senior Debentures shall
be allocated among all holders of Senior Debentures pro rata in proportion to
the principal amount of the Senior Debentures held by each.
(b) The Senior Debentures shall bear interest from the date of issuance
until the date of payment of principal in full at the rate of 9% per year.
Interest shall be computed on the basis of a 360-day year and the actual number
of days elapsed, on the unpaid principal amount of the Senior Debentures.
Interest shall accrue and compound annually and shall be paid upon payment of
principal.
(c) Any interest not paid when due and payable shall thereafter be paid on
demand by the Purchasers, together with a late charge of two percent (2%) of the
amount of interest payment due.
(d) All payments of principal and interest on the Senior Debentures shall
be made by the Company in lawful money of the United States of America in
immediately available federal funds (or at the request of the holder of a Senior
Debenture, by certified or bank check or wire transfer) on the date such payment
is due.
4
<PAGE>
(e) The indebtedness evidenced by the Senior Debentures shall be junior and
subordinate in right of payment to all Senior Debt, as that term is defined in
Article VI hereof but shall be senior in right of payment to all indebtedness
evidenced by the Junior Debentures.
1.13 Description of Junior Debentures.
(a) The principal amount of the Junior Debentures shall be payable in full
on March 19, 2003. The Junior Debentures may, at the holders' option, be prepaid
in full upon consummation of a Liquidity Event. The Company may prepay the
Junior Debentures from time to time in whole or installments of $100,000,
without premium or penalty. Each such prepayment shall be preceded by two
Business Days' notice. Any partial prepayment of the Junior Debentures shall be
allocated among all holders of Junior Debentures pro rata in proportion to the
principal amount of the Junior Debentures held by each.
(b) The Junior Debentures shall bear interest on the date of issuance until
the date of payment of principal in full at the rate of 9% per year. Interest
shall be computed on the basis of a 360-day year and the actual number of days
elapsed, on the unpaid principal amount of the Junior Debentures. Interest shall
accrue and compound annually and shall be paid upon payment of principal.
(c) Any interest not paid when due and payable shall thereafter be paid on
demand by the holders of the Junior Debentures, together with a late charge of
2% of the amount of interest payment due.
(d) All payments of principal and interest on the Junior Debentures shall
be made by the Company in lawful money of the United States of America in
immediately available federal funds (or at the request of a holder of a Junior
Debenture, by certified or bank check or wire transfer) on the date such payment
is due.
(e) The indebtedness evidenced by the Junior Debentures shall be junior and
subordinate in right of payments to all Senior Debt, as that term is defined in
Article VI hereof, including, with respect to the Senior Debentures,
indebtedness evidenced thereby.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF THE
COMPANY AND THE PRINCIPAL SHAREHOLDERS
In order to induce the Purchasers to purchase the Senior Debentures and
Warrants, the Company and the Principal Shareholders, acting jointly and
severally, make the following representations and warranties which shall be
true, correct and complete in all respects on the date hereof and shall be true,
correct and complete in all material respects as of the Closing except for those
representations and warranties that address matters only as of a particular date
or only with respect to a specific period of time:
2.1 Organization and Corporate Power. The Company is a corporation duly
organized, validly existing and in good standing under the laws of the
jurisdiction of its incorporation and has all requisite corporate power and
authority to own its properties and to carry on its business
5
<PAGE>
as presently conducted. The Company is qualified as a foreign corporation in
good standing in each jurisdiction in which it owns or leases real property or
maintains employees.
2.2 Authorization. (a) The Company has all necessary corporate power and
has taken all necessary corporate action required for the due authorization,
execution, delivery and performance by the Company of this Agreement, the
Warrant Agreement, the Debentures, the Shareholders Agreement, the Redemption
Agreement and the Registration Rights Agreement (such agreements other than this
Agreement hereinafter referred to collectively as the "Related Agreements") and
any other agreements or instruments executed by the Company in connection
herewith or therewith and the consummation of the transactions contemplated
herein or therein, and for the due authorization, issuance and delivery of the
Debentures, the Warrants, and upon exercise of the Warrants pursuant to the
terms of the Warrant Agreement and upon payment of the exercise price therefor,
the Warrant Shares. The issuance of the Debentures, the Warrants and the Warrant
Shares does not require any further corporate action and is not and, except as
set forth in the Related Agreements, will not be subject to any preemptive
right, right of first refusal or the like. This Agreement and the Related
Agreements and the other agreements and instruments executed by the Company in
connection herewith or therewith will each be a valid and binding obligation of
the Company enforceable in accordance with its respective terms, except as
enforcement thereof may be limited by bankruptcy, insolvency, reorganization,
fraudulent conveyance, moratorium or other similar laws relating to or affecting
enforcement of creditors' rights generally and except as enforcement thereof is
subject to general principles of equity (regardless of whether enforcement is
considered' in a proceeding in equity or at law).
(b) Each Principal Shareholder has full legal capacity and unrestricted
power to execute and deliver this Agreement and the Related Agreements to which
he or she is a party, and any other agreements or instruments executed by him or
her in connection herewith or therewith and to consummate the transactions
contemplated herein or therein. This Agreement, the Related Agreements and the
other agreements and instruments executed by the Principal Shareholders in
connection herewith or therewith each will be a valid and binding obligation of
the Principal Shareholders enforceable in accordance with its respective terms,
except as enforcement thereof may be limited by bankruptcy, insolvency,
reorganization, fraudulent conveyance, moratorium or other similar laws relating
to or affecting enforcement of creditors' rights generally and except as
enforcement thereof is subject to general principles of equity (regardless of
whether enforcement is considered in a proceeding in equity or at law).
(c) Each Principal Shareholder owns, of record and beneficially, the number
of shares of Common Stock set forth opposite his or her name on Schedule 2.4
hereto, free and clear of any pledges, security interests, liens, charges or
other encumbrances.
2.3 Government Approvals. No consent, approval, license or authorization
of, or designation, declaration or filing with, any court or governmental
authority is or will be required on the part of the Company or the Principal
Shareholders in connection with the execution, delivery and performance by the
Company or the Principal Shareholders of this Agreement, any of the Related
Agreements and any other agreements or instruments executed by the Company or
the Principal Shareholders in connection herewith or therewith, or in connection
with the issuance of the Debentures, the Warrants and the Warrant Shares, except
for (i) those which have already been made or granted, (ii) those which may be
required under state securities or "blue
6
<PAGE>
sky" laws, and (iii) the filing of registration statements with the Securities
and Exchange Commission (the "Commission") and any applicable state securities
commission as specifically provided for in the Registration Rights Agreement.
2.4 Authorized and Outstanding Stock. The authorized capital stock of LDS
consists of 1,500,000 shares of Common Stock, of which 785,000 shares are
validly issued and outstanding and held of record and owned beneficially by the
Persons set forth on Schedule 2.4 attached hereto, free and clear of all liens,
security interests, restrictions on transfer, and other encumbrances, and the
authorized capital stock of LDSI consists of 2,500 shares of Common Stock, of
which 100 shares are validly issued and outstanding and held of record and owned
beneficially by the Persons set forth on Schedule 2.4 attached hereto, free and
clear of all liens, security interests, restrictions on transfer, and other
encumbrances. All issued and outstanding shares of capital stock of LDS and LDSI
are, and upon exercise of the Warrants pursuant to the terms of the Warrant
Agreement and upon payment of the exercise price therefor, all Warrant Shares
will be, duly and validly authorized, validly issued and fully paid and
non-assessable and free from any restrictions on transfer, except for
restrictions imposed by federal or state securities or "blue-sky" laws and
except for those imposed pursuant to this Agreement and any Related Agreement.
Except as set forth on Schedule 2.4, there are no outstanding warrants, options,
commitments, preemptive rights, rights to acquire or purchase, conversion rights
or demands of any character relating to the capital stock or other securities of
LDS or LDSI. All issued and outstanding shares of capital stock of LDS and LDSI
were issued (i) in transactions exempt from the registration provisions of the
Act, and (ii) in compliance with or in transactions exempt from the registration
provisions of applicable state securities or "blue-sky" laws.
2.5 Subsidiaries. The Company does not have any Subsidiaries or other
equity investment in any other Person.
2.6 Financial Information. The Company has previously delivered to the
Purchasers the financial statements of the Company for the year ended December
31, 1996, accompanied by the audit report of Ernst & Young LP (the "Audited
Financial Statements"), and the financial statements of the Company for the year
ended December 31, 1995 and for the two months ended February 28, 1997 (the
"Unaudited Financial Statements" and, together with the Audited Financial
Statements, the "Financial Statements"). The Financial Statements are in
accordance with the books and records of the Company and present fairly in
accordance with generally accepted accounting principles applied on a basis
consistent with prior periods the financial condition and results of operations
of the Company as of the dates and for the periods shown; provided, however,
that the Unaudited Financial Statements do not have all footnotes recorded in
accordance with generally accepted accounting principles, and are subject to
year-end adjustments. Except in connection with the transactions contemplated
herein, the Company has no liability or obligation, contingent or otherwise,
which is not adequately reserved against or reflected in the Audited Financial
Statements, except for liabilities and obligations incurred in the ordinary
course of business since December 31, 1996. Since December 31, 1996, except in
connection with the transactions contemplated herein, (i) there has been no
change in the business, assets, liabilities, condition (financial or otherwise)
or operations of the Company except for changes in the ordinary course of
business which would not have a Material Adverse Effect, and (ii) none of the
business, prospects, condition (financial or otherwise), operations,
7
<PAGE>
property or affairs of the Company has been materially adversely affected by any
occurrence or development, individually or in the aggregate, whether or not
insured against.
2.7 Events Subsequent to the Date of the Financial Statements. Except in
connection with the transactions contemplated herein, and except as set forth on
Schedule 2.7, since December 31, 1996, the Company has not, except in the
ordinary course of business, (i) issued any stock, stock options, warrants or
other securities convertible into or exchangeable for capital stock, or any bond
or other corporate security, (ii) borrowed any money (except under revolving
lines of credit which existed as of December 31, 1996) or mortgaged, pledged or
subjected to any lien any of its assets, tangible or intangible, (iii) sold,
assigned or transferred any of its tangible assets, or canceled any debt or
claim, or (iv) suffered any material loss of property or waived any right of
substantial value. Except as set forth on Schedule 2.7, since December 31, 1996,
the Company has not declared or made any payment or distribution to stockholders
or purchased or redeemed any shares of its capital stock or other securities.
2.8 Litigation. Except as otherwise set forth on Schedule 2.8 hereto, there
is no litigation or governmental proceeding or investigation pending or, to the
knowledge of the Company or the Principal Shareholders threatened, against the
Company or affecting any of its properties or assets, or against any officer,
key employee or shareholder of the Company in his or her capacity as such, and,
to the knowledge of the Company and the Principal Stockholders, no event has
occurred nor does there exist any condition on the basis of which any
litigation, proceeding or investigation is reasonably likely to be instituted
with any substantial likelihood of recovery where such recovery would have a
Material Adverse Effect. Neither the Company nor any officer, key employee or
shareholder of the Company in his or her capacity as such is, to the knowledge
of the Company and the Principal Shareholders, in material default with respect
to any order, writ, injunction, decree, ruling or decision of any court,
commission, board or other government agency.
2.9 Compliance with Laws and Other Instruments. The Company is in
compliance with all of the provisions of this Agreement and of its charter and
by-laws, and, in all material respects with the provisions of each mortgage,
indenture, lease, license, other agreement or instrument, judgment, decree,
judicial order, statute, and regulation by which it is bound or to which it or
its properties are subject. Neither the execution, delivery or performance of
this Agreement and the Related Agreements nor the consummation of the
transactions contemplated hereby and thereby, nor the offer, issuance, sale or
delivery of the Debentures, the Warrants and Warrant Shares, with or without the
giving of notice or passage of time, or both, will violate, or result in any
breach of, or constitute a default under, or result in the imposition of any
encumbrance upon any asset of the Company pursuant to any provision of its
charter or by-laws, subject to the Charter Amendments, or any statute, rule or
regulation, contract, lease, judgment, decree or other document or instrument by
which the Company is bound or to which it or any of its properties are subject,
or will cause the Company to lose the benefit of any right or privilege it
presently enjoys or cause any Person who is expected to normally do business
with the Company to discontinue to do so on the same basis, except for
violations, breaches, defaults, encumbrances or losses which would not have a
Material Adverse Effect.
2.10 Taxes. Each of LDS and LDSI is a S corporation within the meaning of
the Internal Revenue Code of 1986, as amended (the "Code") for federal income
tax purposes and
8
<PAGE>
has been a S corporation continually since the date of its formation. The
Company has filed all tax returns, reports and forms (including statements of
estimated taxes owed) required to be filed within the applicable periods for
such filings and has paid all taxes required to be paid, and has established
adequate reserves (net of estimated tax payments already made) for the payment
of all taxes payable in respect to the period subsequent to the last periods
covered by such returns. All such tax returns, reports and forms are true,
correct and complete. Each of LDS and LDSI has properly classified for tax
purposes all employees, consultants and independent contractors, and has made
all filings and has withheld and paid all taxes, required to have been filed,
withheld or paid in connection with services provided by such persons. Adequate
amounts have been withheld by LDS and LDSI from its respective employees for all
periods in compliance with the tax, social security and unemployment withholding
provisions of all federal, state, local and foreign laws. No deficiencies for
any tax are currently assessed against LDS or LDSI, and no tax returns of LDS or
LDSI have ever been audited, and, to the knowledge of LDS or LDSI and the
Principal Shareholders, there is no such audit pending and the Company has not
received any notice for any taxing authority that it is contemplating such an
audit. There is no tax lien, whether imposed by any federal, state or local
taxing authority, outstanding against the assets, properties or business of LDS
or LDSI, other than any lien for taxes not yet due and payable. For the purposes
of this Agreement, the term "tax" shall include all federal, state, local and
foreign taxes, including income, franchise, property, sales, use, gross
receipts, excise, withholding, payroll and employment taxes or other similar
assessments of any kind whatsoever, including all interest, penalties and
additions imposed with respect to such amounts.
2.11 Real Property; Environmental Matters.
(a) Schedule 2.11 sets forth the addresses and uses of all real property
that the Company owns or leases or subleases, and any lien (exclusive of any
statutory landlord's lien) or encumbrance for which the Company is liable and
which the Company has secured with any such owned real property or leasehold
interest, specifying in the case of each such lease or sublease, the name of the
lessor or sublessor, as the case may be, the lease term and the obligations of
the lessee thereunder (or in lieu thereof, attaching a copy of such lease or
sublease). There are no defaults by the Company, or to the actual knowledge of
the Company and the Principal Shareholders (without investigation by the Company
or the Principal Shareholders), by any other party thereto, which might curtail
in any material respect the present use by the Company of the property listed on
Schedule 2.11. The performance by the Company of this Agreement and the Related
Agreements will not result in the termination of, or in any increase of any
amounts payable under, any lease listed on Schedule 2.11.
(b) All real property, owned or leased by the Company comply with all
applicable laws, rules, regulations, order, ordinances, judgments and decrees of
any governmental authorities with respect to all environmental statutes, rules
and regulations. The Company has not received notice of, nor does the Company or
any Principal Shareholder have knowledge of, any past or present events,
conditions, circumstances, activities, practices, incidents, actions or plans of
the Company which may cause noncompliance with, or which may give rise to any
liability for any claim, action, suit, proceeding, hearing, or investigation,
based on or related to the disposal, storage, handling, manufacture, processing,
distribution, use, treatment or transport, or the emission, discharge, release
or threatened release into the environment, of any Substance (as defined
herein). As used in this Section 2.11, the term "Substance" or "Substances"
shall mean
9
<PAGE>
any pollutant, hazardous substance, hazardous material, hazardous waste or toxic
waste, as defined in any presently enacted federal, state or local statute or
any regulation that has been promulgated pursuant thereto. No part of any of the
real property owned or leased by the Company has been listed or proposed for
listing on the National Priorities List established by the United States
Environmental Protection Agency, or any other such list by any federal, state or
local authorities.
(c) The Company has all registrations, permits, licenses, and approvals
issued by or on behalf of any federal, state or local governmental body or
agency if any ("Environmental Permits") that are required in connection with the
operation by the Company of its business, the discharge or emission of
Substances by the Company from real property owned or leased by the Company or
the generation, treatment, storage, transportation, or disposal of any such
Substances by the Company.
2.12 Personal Property. Except as set forth on Schedule 2.12 and except for
property sold or otherwise disposed of in the ordinary course of business since
December 31, 1996, the Company owns free and clear of any liens or encumbrances,
all of the personal property reflected as owned by the Company in the most
recent balance sheet contained in the Financial Statements, and all other
material items of personal property acquired by the Company through the date
hereof. All material items of such personal property are in normal operating
condition, wear and tear excepted.
2.13 Patents, Trademarks, etc. Set forth on Schedule 2.13 is a list and
brief description of all material patents, patent rights, patent applications,
trademarks, trademark applications, service marks, service mark applications
trade names and copyrights and all applications for such that are in the process
of being prepared, owned by or registered in the name of the Company, or of
which the Company is a licensor or licensee or in which the Company has any
right, and in each case a brief description of the nature of such right. The
Company owns or possesses adequate licenses or other rights to use all patents,
patent applications, trademarks, trademark applications, service marks, service
mark applications, trade names, copyrights, manufacturing processes, formulae,
trade secrets and know how (collectively, "Intellectual Property") necessary or
desirable to the conduct of its business as conducted and as proposed to be
conducted, and to conduct and market any educational course or program now
marketed or conducted by the Company and no claim is pending or, to the
knowledge of the Company and the Principal Shareholders, threatened to the
effect that the operations of the Company infringe upon or conflict with the
asserted rights of any other person under any Intellectual Property, or that the
Company does not have the right to market any educational course or program, and
there is no known basis for any such claim (whether or not pending or
threatened). No claim is pending or, to the knowledge of the Company and the
Principal Shareholders, threatened to the effect that any such Intellectual
Property owned or licensed by the Company, or which the Company otherwise has
the right to use, is invalid or unenforceable by the Company, and there is no
known basis for any such claim (whether or not pending or threatened).
2.14 Agreements of Directors, Officers and Employees. To the knowledge of
the Company, no director, officer or employee of or consultant to the Company is
in violation of any terms of any employment contract, non-competition agreement,
non-disclosure agreement, patent disclosure or assignment agreement or other
contract or agreement containing restrictive
10
<PAGE>
covenants relating to the right of any such director, officer, employee or
consultant to be employed or engaged by the Company because of the nature of the
business conducted or proposed to be conducted by the Company, or relating to
the use of trade secrets or proprietary information of others.
2.15 Governmental and Industrial Approvals. The Company has all the
material permits, licenses, orders, franchises and other rights and privileges
of all federal, state, local or foreign governmental or regulatory bodies
necessary for the conduct of its business as presently conducted. All such
permits, licenses, orders, franchises and other rights and privileges are in
full force and effect and, to the knowledge of the Company and the Principal
Shareholders, no suspension or cancellation of any of them is threatened, and
none of such permits, licenses, orders, franchises or other rights and
privileges will be affected by the consummation of the transactions contemplated
in this Agreement and the Related Agreements.
2.16 Contracts and Commitments. Except in connection with the transactions
set forth herein, and except as set forth on Schedule 2.16 attached hereto, the
Company has no contract, obligation or commitment which is material or which
involves a potential material commitment or any stock redemption or stock
purchase agreement, stock option plan, shareholders' agreement, financing
agreement, license or real property lease. For purposes of this Section 2.16, a
contract, obligation or commitment shall be deemed material if it requires
expenditures to be made by the Company within one year from the date hereof in
excess of $100,000 or requires payment to the Company within one year from the
date hereof in excess of $100,000 and is not cancelable by the Company without
penalty within 30 days.
2.17 Registration Rights. The Company has not granted any rights relating
to registration of its capital stock under the Act or state securities laws
other than those contained in the Registration Rights Agreement.
2.18 Insurance Coverage. Schedule 2.18 hereto contains an accurate list of
the insurance policies currently maintained by the Company. Except as described
on Schedule 2.18, there are currently no claims pending against the Company
under any insurance policies currently in effect and covering the property,
business or employees of the Company, and all premiums due and payable with
respect to the policies maintained by the Company have been paid to date. All
such policies are in full force and effect and provide insurance, including
without limitation, liability insurance, in such amounts and against such risks
as is customary for companies engaged in similar businesses to the Company to
protect employees, properties, assets, businesses and operations of the Company.
2.19 Employee Matters. Except as set forth on Schedule 2.19, and except as
set forth herein, the Company does not have in effect any employment agreements,
consulting agreements, deferred compensation, severance, pension or retirement
agreements or arrangements, bonus, incentive or profit-sharing plans or
arrangements, or labor or collective bargaining agreements, written or oral. The
Company and the Principal Shareholders have no knowledge that any of the
officers or other key employees of the Company presently intends to terminate
his employment. The Company is in compliance in all material respects with all
applicable laws and regulations relating to labor, employment, fair employment
practices, terms and conditions of employment, and wages and hours. The Company
is in material compliance
11
<PAGE>
with the terms of all plans, programs and agreements listed on Schedule 2.19,
and each such plan, program or agreement is in material compliance with all of
the requirements and provisions of the Employee Retirement Income Security Act
of 1974, as amended ("ERISA"). No such plan or program has engaged in any
"prohibited transaction" as defined in Section 4975 of the Code, or has incurred
any "accumulated funding deficiency" as defined in Section 302 of ERISA, nor has
any reportable event as defined in Section 4043(b) of ERISA occurred with
respect to any such plan or program. With respect to each plan listed on
Schedule 2.19, any required filings, including all filings required to be made
with the United States Department of Labor and Internal Revenue Service, have
been timely filed, except where the failure to make such filings will not have a
Material Adverse Effect. The consummation of the transactions contemplated
hereby will not entitle any employee of the Company to receive any bonus,
severance or other payment.
2.20 No Brokers or Finders. Except for a fee in the amount of $200,000
payable to Samedan, Inc., of which fee $80,000 shall be paid by the Company in
cash at the Closing, and $120,000 of which shall be paid through the issuance of
Senior Debentures and Warrants as provided in Article 1, the parties hereto
agree that no person has or will have, as a result of the transactions
contemplated by this Agreement, any right, interest or claim against or upon the
Company or any Purchaser for any commission, fee or other compensation as a
finder or broker because of any act or omission by the Company or any Purchaser.
2.21 Transactions with Affiliates. Except as set forth on Schedule 2.21,
and except as set forth herein, there are no loans, leases or other continuing
transactions between the Company on the one hand, and any officer or director of
the Company or any person owning five percent (5%) or more of the Common Stock
of the Company or any respective family member or affiliate of such officer,
director or shareholder on the other hand.
2.22 Assumptions; Guarantees, etc. of Indebtedness of Other Persons. Except
as set forth on Schedule 2.22, the Company has not assumed, guaranteed, endorsed
or otherwise become directly or contingently liable on or for any indebtedness
for borrowed money of any other Person, except guarantees by endorsement of
negotiable instruments for deposit or collection or similar transactions in the
ordinary course of business.
ARTICLE III
AFFIRMATIVE COVENANTS OF THE COMPANY
Without limiting any other covenants and provisions hereof, the Company
covenants and agrees that except as is otherwise provided in Sections 3.12, 3.13
and Section 11.4, it will observe the following covenants on and after the
Closing Date and until the first to occur of (i) consummation of a Qualified
Public Offering, and (ii) repayment in full of all obligations under the
Debentures and redemption of all Warrant Shares.
3.1 Accounts and Reports. The Company will, and will cause each of its
Subsidiaries to, maintain a system of accounts in accordance with generally
accepted accounting principles consistently applied and the Company will, and
will cause each of its Subsidiaries to, keep full
12
<PAGE>
and complete financial records. The Company will furnish to each Purchaser the
information set forth in this Section 3.1.
(a) Within ninety (90) days after the end of each fiscal year, a copy of
the consolidated and consolidating balance sheet of the Company and its
Subsidiaries as at the end of such year, together with consolidated and
consolidating statements of income, shareholders' equity and cash flow of the
Company and its Subsidiaries for such year, setting forth in each case in
comparative form the corresponding figures for the preceding fiscal year, all in
reasonable detail and accompanied by the unqualified report of Ernst & Young LP
or such other of the six largest public accountant firms (measured by total
revenues) as may be selected from time to time by the Board of Directors;
provided that such consolidating statements need not be audited.
(b) Within thirty (30) days after each month, a preliminary consolidated
and consolidating balance sheet of the Company and its Subsidiaries as of the
end of such month and preliminary consolidated and consolidating statements of
income, shareholders' equity and cash flow for such month and for the period
commencing at the end of the previous fiscal year and ending with the end of
such month, setting forth in each case in comparative form the corresponding
figures for the corresponding period of the preceding fiscal year, all in
reasonable detail.
(c) At the time of delivery of each monthly and annual statement, a
certificate, executed by either the president or chief financial officer of the
Company stating that such officer has reviewed the provisions of Articles III,
IV and IX of this Agreement and has no knowledge of any default by the Company
or any Subsidiary in the performance or observance of any of the provisions
thereof or, if such officer has such knowledge, specifying such default.
(d) Not later than thirty (30) days prior to the end of each fiscal year, a
copy of the operating plan and budget for the next fiscal year required under
Section 3.8.
(e) Promptly upon receipt thereof, any written report, any so called
"management letter", and any other reports submitted to the Company or any
Subsidiary by its independent public accountants relating to the business,
prospects or financial condition of the Company and its Subsidiaries.
(f) Promptly after the commencement thereof, notice of (i) all actions,
suits and proceedings before any court or governmental department, commission,
board, bureau, agency or instrumentality, domestic or foreign, affecting the
Company (or any Subsidiary) which, if successful, would have a Material Adverse
Effect; and (ii) all material defaults by the Company or any Subsidiary (whether
or not declared) under any agreement for money borrowed (unless waived or cured
within applicable grace periods);
(g) Promptly upon sending, making available, or filing the same, all
reports and financial statements as the Company (or any Subsidiary) shall send
or make available generally to the shareholders of the Company as such or to the
Commission; and
(h) Such other information with regard to the business, properties or the
condition or operations, financial or otherwise, of the Company or its
Subsidiaries as the Purchasers may from time to time reasonably request.
13
<PAGE>
3.2 Payment of Taxes. The Company will pay and discharge (and cause any
Subsidiary to pay and discharge) all taxes, assessments and governmental charges
or levies imposed upon it or upon its income or profits, or upon any properties
belonging to it, prior to the date on which penalties attach thereto, and all
lawful claims which, if unpaid, might become a lien or charge upon any
properties of the Company (or any Subsidiary), provided that neither the Company
nor any Subsidiary shall be required to pay any such tax, assessment, charge,
levy or claim which (i) has not been asserted or is not owed, or (ii) is being
contested in good faith and by proper proceedings if the Company or such
Subsidiary shall have set aside on its books adequate reserves in the opinion of
management and the Company's independent accountants with respect thereto.
3.3 Maintenance of Key Man Insurance. The Company will, at its expense, use
its best effort to maintain a life insurance policy with a death benefit of at
least $ 1,000,000 with a responsible and reputable insurance company payable to
the Company on the life of each of Mary Kay Brooks and Darren Bryden. The
Company will maintain such policies and will not cause or permit any assignment
of the proceeds of such policies and will not borrow against such policies. The
Company will add one designee of the Purchasers as a notice party to such
policy, and will request that the issuer of each policy provide such designee
with ten (10) days' notice before either such policy is terminated (for failure
to pay premium or otherwise) or assigned, or before any change is made in the
designation of the beneficiary thereof. Each of the Principal Shareholders
hereby represents and warrants that he or she has not in the past been denied
insurance on usual and customary rates available for an insured without a
pre-existing condition, and that he or she has no knowledge of any fact or
circumstance which would prevent the Company from obtaining life insurance on
his or her life at such usual and customary rates.
3.4 Compliance with Laws, etc. The Company will comply (and cause each of
its Subsidiaries to comply) with all applicable laws, rules, regulations and
orders of any governmental authority, the noncompliance with which would have a
material adverse effect on the business, condition or results of operations of
the Company and its Subsidiaries, taken as a whole.
3.5 Inspection. At any reasonable time during normal business hours and
from time to time, but not more frequently than once per calendar quarter,
respectively, for all Purchasers and not more than once every twelve months for
all unaffiliated transferees of the Purchasers, as a group, the Company (and
each of its Subsidiaries) will permit (i) any one or more of the Purchasers who
then own, of record or beneficially, any Debentures, Warrants or Warrant Shares
who owns, of record or beneficially, at least ten percent (10%) of the then
outstanding principal amount of the Debentures, Warrants or Warrant Shares, and
(ii) any of the agents or representatives of the foregoing Persons, to examine
and make copies of and extracts from the records and books of account of and
visit the properties of the Company (and any of its Subsidiaries) and to discuss
the Company's affairs, finances and accounts with any of its officers or
directors; provided that any Person or Persons exercising rights under this
Section 3.5 shall (i) use all reasonable efforts to ensure that any such
examination or visit results in a minimum of disruption to the operations of the
Company and (ii) shall agree in writing to keep any proprietary information of
the Company disclosed to him in the course of such inspection confidential in a
manner consistent with prudent business practices and treatment of such Person's
or Persons' own confidential information and not use such proprietary
information for
14
<PAGE>
any purpose in competition with the Company's business. The rights granted under
this Section 3.5 shall be in addition to any rights which any Purchaser may have
under applicable law.
3.6 Corporate Existence; Ownership of Subsidiaries. The Company will, and
will cause its Subsidiaries to, at all times preserve and keep in full force and
effect their corporate existence, and rights and franchises material to the
business of the Company and its Subsidiaries, taken as a whole, and will
qualify, and will cause each of its Subsidiaries to qualify, to do business as a
foreign corporation in any jurisdiction where the failure to do so would have a
Material Adverse Effect. The Company shall at all times own of record and
beneficially, free and clear of all liens, charges, restrictions, claims and
encumbrances of any nature, a majority of the issued and outstanding capital
stock of each of its Subsidiaries.
3.7 Compliance with ERISA. The Company will comply (and cause each of its
Subsidiaries to comply) in all material respects with all minimum funding
requirements applicable to any pension or other employee benefit plans which are
subject to ERISA or to the Code, and comply in all other material respects with
the provisions of ERISA and the Code, and the rules and regulations thereunder,
which are applicable to any such plan. Neither the Company nor any of its
Subsidiaries will permit any event or condition to exist which could permit any
such plan to be terminated under circumstances which cause the lien provided for
in Section 4068 of ERISA to attach to the assets of the Company or any of its
Subsidiaries.
3.8 Board Approval. Not later than thirty (30) days prior to the end of
each fiscal year, the Company will prepare and submit to its Board of Directors
for its approval prior to such year end an operating plan and budget, cash flow
projections and profit and loss projections, all itemized in reasonable detail
for the immediately following year.
3.9 Financings. The Company will promptly provide to the Board of Directors
the details and terms of, and any brochures or investment memoranda prepared by
the Company related to, any possible financing of any nature for the Company (or
any of its Subsidiaries), whether initiated by the Company or any other Person.
3.10 Meetings of the Board of Directors. The Directors shall schedule
regular meetings not less frequently than once every fiscal quarter. The Company
shall reimburse all members of the Board of Directors of the Company for all
direct out-of-pocket expenses incurred by them in attending such meetings.
3.11 Rule 144A Information. The Company shall, upon the written request of
any Purchaser, provide to such Purchaser and to any prospective institutional
transferee of the Debentures designated by such Purchaser, such financial and
other information as is reasonably available to the Company or can be obtained
by the Company without material expense and as such Purchaser may reasonably
determine is required to permit such transfer to comply with the requirements of
Rule 144A promulgated under the Act.
15
<PAGE>
ARTICLE IV
NEGATIVE COVENANTS OF THE COMPANY
Without limiting any other covenants and provisions hereof, the Company
covenants and agrees that except as is otherwise provided in Section 11.4, it
will comply (and will cause each Subsidiary to comply) for the benefit of the
Purchasers with each of the provisions of this Article IV on and after the
Closing Date and until the first to occur of (i) consummation of a Qualified
Public Offering and (ii) repayment of all obligations under the Debentures and
redemption of all Warrants or Warrant Shares.
4.1 Investments in Other Persons. The Company will not make or permit any
Subsidiary to make any loan or advance to any Person, or purchase, otherwise
acquire, or permit any Subsidiary to purchase or otherwise acquire, the capital
stock or assets of any Person without the prior approval of the Purchasers,
except:
(i) investments by the Company or a Subsidiary in evidences of
indebtedness issued or fully guaranteed by the United States of America and
having a maturity of not more than one year from the date of acquisition;
(ii) investments by the Company or a Subsidiary in certificates of
deposit, notes, acceptances and repurchase agreements having a maturity of
not more than one year from the date of acquisition issued by a bank
organized in the United States having a combined capital and surplus of at
least $50,000,000;
(iii) loans, advances or investments from the Company to any
Subsidiary, a Subsidiary to the Company or from a Subsidiary to another
Subsidiary;
(iv) investments by the Company or a Subsidiary in A-rated or better
commercial paper having a maturity of not more than one year from the date
of acquisition; and
(v) investments by the Company or a Subsidiary in "money market" fund
shares, or in "money market" accounts fully insured by the Federal Deposit
Insurance Corporation and sponsored by banks and other financial
institutions, provided that such "money market" fund or "money market"
accounts invest principally in investments of the types described in
clauses (i), (ii) or (iv) of this subsection 4. 1.
4.2 Distributions. Except as otherwise expressly set forth in this
Agreement and the Related Agreements, the Company will not declare or pay any
dividends, purchase, redeem, retire, or otherwise acquire for value any of its
capital stock (or rights, options or warrants to purchase such shares) now or
hereafter outstanding, return any capital to its shareholders as such, or make
any distribution of assets to its shareholders as such, or permit any Subsidiary
to do any of the foregoing, except that the Subsidiaries may declare and make
payment of cash and stock dividends, return capital and make distributions of
assets to the Company and except that nothing herein contained shall prevent the
Company from:
16
<PAGE>
(i) effecting a stock split or declaring or paying any dividend
consisting of shares of any class of capital stock to the holders of shares
of such class of capital stock; or
(ii) complying with the terms of the Redemption Agreement.
4.3 Dealings with Affiliates. Except as set forth herein and in the Related
Agreements, and except for those transactions listed in Schedule 4.3 attached
hereto, the Company will not enter into any transaction with any officer or
director of the Company or any Subsidiary or holder of any class of capital
stock of the Company, or any member of their respective immediate families or
any corporation or other entity directly or indirectly controlling, controlled
by or under common control with one or more of such officers, directors or
shareholders or members of their immediate families, unless the interest of such
person is disclosed in advance to the Board of Directors, such transaction is on
arm's-length terms which are no less favorable to the Company or any Subsidiary
than those which could have been obtained from an unaffiliated third party, and
such transaction is approved by a disinterested majority of the Board of
Directors of the Company or such Subsidiary.
4.4 Merger. Except as set forth herein, the Company shall not, and shall
not permit any Subsidiary to merge or consolidate with any other corporation, or
sell, assign, lease or otherwise dispose of or voluntarily part with the control
of (whether in one transaction or in a series of transactions) all, or
substantially all, of its assets (whether now owned or hereinafter acquired) or
sell, assign or otherwise dispose of (whether in one transaction or in a series
of transactions) any of its accounts receivable (whether now in existence or
hereinafter created) at a discount or with recourse, to any Person, or permit
any Subsidiary to do any of the foregoing, (i) except for sales or other
dispositions of assets in the ordinary course of business, and (ii) except that
(a) any wholly owned Subsidiary may merge into or consolidate with or transfer
assets to any other wholly owned Subsidiary, and (b) any wholly owned Subsidiary
may merge into or transfer assets to the Company. Notwithstanding the provisions
of this Section 4.4, if in connection with the sale, merger or consolidation of
the Company, (i) all of the Debentures are paid in full, and the Purchasers
receive with respect to their Warrants or Warrant Shares cash or "Liquid
Securities" (as herein defined), and (ii) if such transaction is consummated
prior to the fourth anniversary of the Closing Date, the amount to be received
by the Purchasers for their Warrants or Warrant Shares is at least equal to the
amount paid by the Purchasers for the Senior Debentures, less all interest paid
or accrued by the Company on the Senior Debentures, then the Company may
consummate such transaction without the approval of the Purchasers. The term
"Liquid Securities" means securities which are tradeable without regard to
volume limitations (except for (i) such restrictions on transfer that may be
imposed in order for a transaction to be accounted for as a pooling of
interests, and (ii) for restrictions under an issuer's internal guidelines
pertaining to transfers by affiliates), and which have been issued by an entity
with market capitalization of at least $750 million, and for which the average
daily trading volume of such securities during the 30 day period immediately
preceding such transaction exceeds 100,000 shares; provided that if securities
are received pursuant to an agreement which provides for the filing of a
registration statement to cover or permit resales of such securities, such
securities shall be deemed "Liquid Securities".
17
<PAGE>
4.5 Limitation on Options. Except as otherwise expressly set forth in this
Agreement and the Related Agreements, the Company shall not grant any options,
warrants or other rights to acquire shares of Common Stock or other equity
securities of the Company, other than pursuant to the Option Plans.
4.6 Limitation on Subsidiary Dividends and Other Distributions. The Company
shall not permit any of its Subsidiaries, directly or indirectly, to create or
suffer to exist or become effective any encumbrances or restrictions on the
ability of any of its Subsidiaries to (i) pay dividends or make any other
distributions on its capital stock or any other interest or participation in its
profit owned by any of the Company or any of its Subsidiaries, or pay any
indebtedness owed by any of the Subsidiaries, (ii) make loans or advances to the
Company, or (iii) transfer any of its properties or assets to the Company.
4.7 No Conflicting Agreements. The Company agrees that neither it nor any
Subsidiary will, without the consent of the Purchasers, enter into or amend any
agreement, contract, commitment or understanding which would restrict or
prohibit the exercise by the Purchasers of any of their rights under this
Agreement or any of the Related Agreements.
4.8 Change in Business. The Company will continue to remain principally
engaged in the line of business in which it is engaged on the date hereof, and
will not, without the consent of the Purchasers, enter into any unrelated
business.
4.9 Indebtedness. Except as otherwise expressly set forth in this Agreement
and the Related Agreements, the Company will not, and will not permit any
Subsidiary to, incur or suffer to remain any Indebtedness for borrowed money
other than (i) Indebtedness evidenced by the Senior Debentures, (ii)
Indebtedness evidenced by the Junior Debentures, (iii) Indebtedness consisting
of Senior Debt, (iv) Indebtedness under a bank line of credit, (v) Indebtedness
incurred or assumed in connection with the acquisition of a Person to the extent
permitted under Sections 4.1 and 4.4 and (vi) as expressly set forth in this
Agreement and the Related Agreements. In addition, the Company will not incur
any Indebtedness ranking senior to or pari passu with the Senior Debentures
(other than trade payables in the normal course of business) if for any
consecutive twelve month period ending at the close of any fiscal quarter
occurring after the Closing Date, Consolidated Net Income before interest and
taxes for such twelve month period is less than 1.5 times the interest payments
on the Senior Debentures and any debt ranking senior or pari passu with the
Senior Debentures (including non-cash interest on the Senior Debentures) for
such twelve month period.
4.10 Minimum Net Income. The Company and its Subsidiaries shall have
Consolidated Net Income for the twelve consecutive months ending on the last day
of each of its fiscal quarters (treated as a single accounting period),
commencing with the quarter ending March 31, 1997, of at least $ 1.00.
Notwithstanding the provision of Section 4.10, if the Board of Directors of the
Company (including all designees of Summit Ventures IV, L.P.) unanimously
approves a business plan or budget that forecasts Consolidated Net Income of
less than $1.00, then this Section 4.10 shall be deemed to have been waived with
respect to the period of time covered by such business plan or budget, and the
Purchasers shall not have any right of acceleration under Article IX, or any
right to designate additional directors under the Shareholder
18
<PAGE>
Agreement if Consolidated Net Income is less than $1.00 during the period
covered by such business plan or budget.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF THE PURCHASERS
5.1 Representations and Warranties. Each Purchaser hereby represents and
warrants to the Company as follows:
(a) With respect to such of the Purchasers as are individuals, such
Purchaser has full legal capacity and unrestricted power to execute and deliver
this agreement and the Related Agreements to which he or she is a party, and any
other agreements or instruments executed by him or her in connection herewith or
therewith and to consummate the transactions contemplated herein or therein.
With respect to such of the Purchasers as are partnerships, such Purchaser is a
limited partnership duly organized, validly existing and in good standing under
the laws of the State of Delaware and has all requisite partnership power and
authority and has taken all necessary partnership action required for the due
authorization, execution, delivery and performance by the Purchaser of this
Agreement and the Related Agreements, and any other agreements or instruments
executed by the Purchaser in connection herewith or therewith and the
consummation of the transactions contemplated herein or therein;
(b) This Agreement, the Related Agreements and the other agreements and
instruments executed by such Purchaser in connection herewith or therewith will
each be a legal, valid and binding obligations of such Purchaser, enforceable
against such Purchaser in accordance with their respective terms;
(c) No consent, approval, license or authorization of, or designation,
declaration or filing with, any court or governmental authority is or will be
required on the part of the Purchasers in connection with the execution,
delivery and performance by the Purchasers of this Agreement, any Related
Agreements and any other agreements or instruments executed by the Purchasers in
connection herewith or therewith.
(d) The Purchasers are in compliance with all the provisions of this
Agreement and their organizational and partnership documents, if any, and in all
material respects with the material provisions of each other agreement or
instrument, judgment, decree, judicial order, statute and regulation by which
they are bound or to which they are subject. Neither the execution, delivery or
performance of this Agreement and the Related Agreements nor the consummation of
the transactions contemplated hereby and thereby, will materially violate, or
result in any material breach of, or constitute a default under any provision of
the Purchasers organization or partnership documents, if any, or any statute,
rule or regulation, contract, lease, judgment, decree or other document or
instrument by which the Purchasers is bound.
(e) Each Purchaser is acquiring the Senior Debentures, Warrants and Warrant
Shares solely for its own account as an investment and not with a view to any
distribution or resale thereof in violation of the Securities Act. Each
Purchaser has been advised that the Senior Debentures, Warrants and Warrant
Shares have not been registered under the Securities Act or
19
<PAGE>
under the provisions of any state securities or "blue sky" law. Each Purchaser,
by accepting the Senior Debentures, Warrants and Warrant Shares, agrees and
acknowledges that it will not directly or indirectly, offer, transfer, sell,
assign, pledge, encumber, hypothecate or dispose of any of such Senior
Debentures, Warrants or Warrant Shares (or to solicit any offers to purchase or
otherwise acquire or take a pledge of any of the Senior Debentures, Warrants or
Warrant Shares) unless such offer, transfer, sale, assignment, pledge,
encumbrance, hypothecation or other disposition is made (i) pursuant to an
effective registration statement under the Securities Act and in compliance with
all applicable state securities or "blue sky" laws or (ii) pursuant to an
available exemption from registration under, or otherwise in compliance with,
the Securities Act and all applicable state securities or "blue sky" laws. Such
Purchaser understands and agrees that in the case of a transfer or other
disposition made pursuant to clause (ii) above, each Purchaser of Senior
Debentures, Warrants or Warrant Shares shall be required to provide to the
Company an opinion of counsel reasonably satisfactory to the Company to the
effect that registration under the Securities Act is not required and a written
certification (or in the Company's discretion, an opinion of counsel reasonably
acceptable to the Company (who may be counsel employed by the Purchaser)) that
qualification or registration under any such state securities laws and
regulations is not required (or that any applicable state qualification or
registration requirements have been satisfied in full).
(f) Each Purchaser is an "Accredited Investor" (as such term is defined in
Rule 501 of Regulation D of the Securities Act). The financial situation of the
Purchaser is such that it can afford to bear the economic risk of holding the
unregistered Senior Debentures, Warrants or Warrant for an indefinite period of
time. Each Purchaser can afford to suffer the complete loss of its investment in
the Senior Debentures, Warrants or Warrant Shares. The knowledge and experience
of the Purchaser in financial and business matters is such that it is capable of
evaluating the risk of the investment in the Securities. Each Purchaser
acknowledges that it has had access to such financial and other information, and
has been afforded the opportunity to ask such questions of representatives of
the Company and receive answers thereto, as the each Purchaser has deemed
necessary in connection with its decision to purchase the Senior Debentures,
Warrants or Warrant Shares, and that no representation or warranties, express or
implied, are being made by the Company with respect to the Company, the Senior
Debentures, Warrants or Warrant Shares, other than those expressly set forth
herein.
(g) Such Purchaser has been advised and understands that the Senior
Debentures, Warrants and Warrant Shares have not been registered under the Act,
on the grounds that no distribution or public offering of the Senior Debentures,
Warrants or Warrant Shares is to be effected, and that in this connection, the
Company is relying in part on the representations of such Purchaser set forth in
this Article V;
(h) Such Purchaser has been further advised and understands that no public
market now exists for any of the securities issued by the Company and that a
public market may never exist for the Senior Debentures, Warrants or Warrant
Shares; and
(i) Except as set forth on Schedule 5.1, no person has or will have, as a
result of the transaction contemplated by this Agreement, any right, interest or
claim against or upon the Purchasers or the Company or any of its Subsidiaries
for any commission, fee or other compensation as a finder or broker because of
any act or omission by such Purchaser.
20
<PAGE>
(j) Such Purchaser is not subscribing for the Senior Debentures, Warrants
and Warrant Shares as a result of or subsequent to any advertisement, article,
notice or other communication published in any newspaper, magazine or similar
media or broadcast over television or radio or presented at any seminar or
meeting;
(k) Each of the Purchasers represents, warrants and covenants that it shall
maintain in confidence, and shall not use or disclose without the prior written
consent of the Company, any information identified as confidential that is
furnished to it by the Company ("Confidential Information") in connection with
the herein contemplated offering (the "Offering"). This obligation of
confidentiality shall not apply, however, to any information (a) in the public
domain through no unauthorized act or failure to act by any Purchaser, (b)
lawfully disclosed to such Purchaser by a third party who possessed such
information without any obligation of confidentiality, (c) known previously by
such Purchaser or lawfully developed by such Purchaser independent of any
disclosure by the Company, or (d) disclosed to legal or financial advisors in
the ordinary course of evaluating this investment; provided, however, that such
advisors agree to be bound by the provisions of this Section 5.1(k). Each
Purchaser further covenants that such Purchaser shall return to the Company all
tangible materials containing such information upon request by the Company.
Notwithstanding the foregoing, in the event that a Purchaser is required by
subpoena, civil investigative demand or similar legal process to disclose any
Confidential Information, such Purchaser agrees that it will promptly notify the
Company of such request or requirement prior to any such disclosure so that the
Company may seek to oppose such disclosure or to obtain an appropriate
protective order or other appropriate remedy. Such Purchaser shall not be liable
for the disclosure of Confidential Information pursuant to the preceding
sentence unless such disclosure was caused by or resulted from a previous
disclosure not permitted by this Agreement. Such Purchaser agrees that it will
exercise its best efforts, without cost to such Purchaser, to assist the Company
in obtaining a protective order or other reliable assurance that confidential
treatment will be accorded the Confidential Information. The foregoing
provisions of this Section 5.1 (k) notwithstanding, any Purchaser may disclose
and use any Confidential Information in connection with the enforcement of its
rights hereunder and in any action, suit or is preceding relating thereto.
5.2 Permitted Transfers; Legends. The Company agrees that it will permit a
transfer of Senior Debentures, Warrants and Warrant Shares by a Purchaser which
is a partnership or limited liability company to an affiliated partnership or
limited liability company of such Purchaser, and that following consummation of
the first sale of equity securities by the Company pursuant to a registration
statement filed under the Act, it will permit, upon prior written request, (i) a
transfer of the Senior Debentures, Warrants and Warrant Shares by a partnership
to one or more of its partners, where no consideration is exchanged therefor by
such partners, or to a retired or withdrawn partner who retires or withdraws
after the date hereof in full or partial distribution of his interest in such
partnership, or to the estate of any such partner or the transfer by gift will
or intestate succession of any partner to his spouse or to his siblings, lineal
descendants or ancestors of such partner of his spouse, or to a trust created
for the benefit of one or more of the foregoing and (if such Person agrees to be
subject to this Agreement and Related Agreements and) (ii) a sale or other
transfer of any of the Senior Debentures, Warrants or Warrant Shares, if the
transferee agrees in writing to be subject to the terms hereof and the Related
Agreements to the same extent as if it were an original Purchaser hereunder and
upon obtaining assurance satisfactory to the Company that such transaction is
exempt from the
21
<PAGE>
registration requirements of, or is covered by an effective registration
statement under the Act and applicable state securities or "blue-sky" laws,
including without limitation, receipt of an unqualified opinion of counsel
reasonably satisfactory to the Company. The certificates representing the Senior
Debentures, Warrants or Warrant Shares shall bear a legend evidencing such
restriction on transfer substantially in the following form:
"This security has been acquired for investment and has not been
registered under the Securities Act of 1933 (the "Act") or the
securities laws of any state. This security may not be transferred by
sale, assignment, pledge or otherwise unless (i) a registration
statement therefor under the Act is in effect or (ii) the corporation
has received an opinion of counsel, which opinion is reasonably
satisfactory to the corporation to the effect that such registration
is not required under the Act or the securities laws of any state.
ARTICLE VI
SUBORDINATION OF DEBENTURES
6.1 Agreement to Subordinate. The Company agrees, and each holder of the
Debentures by its acceptance thereof agrees, that notwithstanding any other
provision of this Agreement or the Debentures, the payment of the principal of
and interest on each and all of the Debentures shall be subordinate and junior
in right of payment, to the extent and in the manner hereinafter set forth, to
the prior payment in full of all Indebtedness of the Company at any time
outstanding for money borrowed from commercial banks, including any extensions,
renewals, modifications or refinancings thereof, whether outstanding on the date
hereof or hereafter created or incurred, which is not by its terms subordinate
and junior to or on parity with the Debentures and which is permitted hereby at
the time it is created or incurred, and that such subordination is for the
benefit of and may be enforced by the holder(s) of Senior Debt against the
Company and any holder of the Debentures. Furthermore, each holder of a Junior
Debenture, by his or her acceptance thereof agrees, that notwithstanding any
other provision of this Agreement or the Junior Debentures, the payment of the
principal of and interest on each and all of the Junior Debentures shall be
subordinate and junior in right of payment, to the extent and in the manner
hereinafter set forth, to the prior payment in full of all Indebtedness of the
Company under the Senior Debentures, and that such subordination is for the
benefit of and may be enforced by the holders of Senior Debt against the Company
and any holder of the Junior Debentures. Such Indebtedness of the Company to
which the Debentures are subordinate and junior is referred to herein as "Senior
Debt", and in the case of the Junior Debentures, the term Senior Debt shall also
include any obligations of the Company under the Senior Debentures. Each holder
of Debentures by its acceptance thereof agrees to execute, acknowledge and
deliver such instruments, subordination agreements, inter-creditor agreements
and other agreements as any holder of Senior Debt may from time to time request
which are not on terms inconsistent with the terms hereunder in order to
confirm, reflect and implement such subordination.
6.2 Acceleration of Senior Debt. Upon maturity of any Senior Debt, whether
by acceleration (unless waived or rescinded in writing), lapse of time or
otherwise, no payment shall be made on account of principal of or interest on
the Debentures until all principal of and
22
<PAGE>
accrued and unpaid interest on all such matured Senior Debt shall have been paid
in full or such payment shall have been duly provided for.
6.3 Insolvency, Etc. In the event of any insolvency or bankruptcy
proceeding, or any receivership, liquidation, reorganization or similar
proceedings in connection therewith (or upon the distribution of the assets of
the Company in connection therewith) relative to the Company or to its property,
or in the event of any proceedings for voluntary liquidation, dissolution or
other winding-up of the Company, whether or not involving insolvency or
bankruptcy, upon any assignment for the benefit of creditors, or any other
marshaling of the assets and liabilities of the Company, then and in such event
the holders of Senior Debt shall be entitled to receive payment in full of all
obligations of principal and accrued and unpaid interest with respect to Senior
Debt before the holders of Debentures shall be entitled to receive any payment
of principal or interest upon the Debentures, provided, however, that if a
payment or distribution in respect of the Debentures (i) is authorized by a
final, non-appealable order or decree giving explicit effect to the
subordination of the Debentures to Senior Debt and made by a court of competent
jurisdiction in a reorganization or bankruptcy proceeding or (ii) is in the form
of securities or obligations which by their terms are subordinate and junior (at
least to the extent provided in this Article VI) to the payment of all Senior
Debt then outstanding, then such payment or distribution may be made to the
holders of Debentures notwithstanding the occurrence of the events described in
this Section 6.3.
6.4 Payments Held in Trust. If the holder of any Debenture receives any
payment or distribution of any character, whether in cash, securities or other
property, or whether in the form of a payment from the Company or any guarantor
or any other party, with respect to such Debentures which such holder is not
entitled to receive on account of the provisions of this Article VI and has
knowledge or has received notice that it is not so entitled, such holder will
hold any amounts so received in trust for the benefit of the holders of Senior
Debt and will forthwith turn over such payment or distribution to the holders of
Senior Debt and upon receipt such payment or distribution shall be applied to
Senior Debt until the same shall have been paid in full.
6.5 The Company's Obligations Unconditional. The provisions of this Article
VI are for the purpose of defining the relative rights of holders of Senior Debt
on the one hand, and the holders of Debentures on the other hand, against the
Company and its property. Nothing herein shall impair, as between the Company,
its creditors other than the holders of Senior Debt, and the holders of
Debentures, the obligation of the Company, which is unconditional and absolute,
to pay to the holders thereof the full amount of the principal and accrued and
unpaid interest on the Debentures, in accordance with the terms thereof and the
provisions hereof, and to comply with all of its covenants and agreements
contained herein; nor shall anything herein prevent the holder of any Debentures
from exercising all remedies otherwise permitted by applicable law or hereunder
upon default hereunder or under any Debenture, subject to the rights, if any,
under this Article VI of holders of Senior Debt to receive payments and
distributions otherwise payable to the holders of Debentures.
6.6 Subrogation Upon Payment of Senior Debt. Subject to such conditions as
the holder(s) of Senior Debt may require, upon payment in full of all Senior
Debt, the holders of the Debentures shall be subrogated to the rights of the
holders of Senior Debt to receive payments or
23
<PAGE>
distributions of assets of the Company applicable to Senior Debt, to the extent
that distributions otherwise payable to the holders of Debentures have been
applied to the payment of Senior Debt, until the principal of and accrued and
unpaid interest on the Debentures shall have been paid in full. For the purposes
of such subrogation, no payments or distributions to the holders of Senior Debt
of any cash, property or securities which the holders of Debentures would be
entitled to receive except for the provisions of this Article VI shall, as
between the Company and its creditors (other than the holders of Senior Debt)
and the holders of Debentures, be deemed to be a payment by the Company to or on
account of Senior Debt.
6.7 Notice. The Company shall promptly notify the holders of Debentures of
any facts known to the Company that would cause a payment of any obligations
with respect to the Debentures to violate this Article VI, but failure to give
such notice shall not affect the subordination of the Debentures to Senior Debt
provided herein.
6.8 Knowledge. No holder of any Debenture shall at any time be charged with
knowledge of any of the events described in Sections 6.2 or 6.3 hereof or the
existence of any other facts which would prohibit the making of any payment of
monies to such holder or the taking of any acceleration or other action by such
holder by virtue of the provisions of this Article VI unless and until such
holder shall have received written notice of such events or facts signed, as the
case may be, by an officer of the Company or by the holder of Senior Debt.
ARTICLE VII
CONDITIONS OF PURCHASERS' OBLIGATION
7.1 Effect of Conditions. The obligation of the Purchaser to purchase and
pay for the Debentures and Warrants at the Closing shall be subject at its
election to the satisfaction or waiver of each of the conditions stated in the
following Sections of this Article.
7.2 Representations and Warranties. The representations and warranties of
the Company and the Principal Shareholders contained in this Agreement shall be
true and correct in all material respects on the Closing Date with the same
effect as though made on and as of that date, and the Purchasers shall have
received a certificate dated as of such Closing Date and signed on behalf of the
Company and the Principal Shareholders to that effect.
7.3 Performance. The Company and the Principal Shareholders shall have
performed and complied in all material respects with all of the agreements,
covenants and conditions contained in this Agreement required to be performed or
complied with by it and them at or prior to such Closing Date, and the
Purchasers shall have received a certificate dated as of such Closing Date and
signed on behalf of the Company and the Principal Shareholders to that effect.
7.4 No Material Adverse Change. The business, properties, assets or
condition (financial or otherwise) of the Company shall not have been materially
adversely affected since the date of this Agreement, whether by fire, casualty,
act of God or otherwise, and there shall have been no other changes in the
business, properties, assets, condition (financial or otherwise), management or
prospects of the Company that would have a Material Adverse Effect.
24
<PAGE>
7.5 Opinion of Counsel. The Purchasers shall have received an opinion,
dated the Closing Date, from Brown & Wood LLP, counsel to the Company, in the
form attached as Exhibit E.
7.6 Board Election. Concurrently with the Closing, the Board of Directors
of the Company shall have been expanded to seven members, two of whom shall be
designees of the Purchasers as provided in the Shareholders' Agreement.
7.7 Redemption Agreement. The Company shall have executed and delivered to
the Purchasers the Redemption Agreement in the form of Exhibit F attached
hereto.
7.8 Shareholders Agreement. The Company and the Principal Shareholders
shall have executed and delivered to the Purchasers the Shareholders Agreement
in the form of Exhibit G attached hereto, and the existing shareholder agreement
among the Company and the Principal Shareholders shall have been terminated.
7.9 Registration Rights Agreement. The Company shall have executed and
delivered to the Purchasers the Registration Rights Agreement in the form of
Exhibit H attached hereto.
ARTICLE VIII
CONDITIONS OF THE COMPANY'S OBLIGATIONS
8.1 Effect of Conditions. The obligation of the Company to sell the
Debentures and Warrants at the Closing shall be subject at its election to the
satisfaction or waiver of each of the conditions stated in the following
Sections of this Article.
8.2 Representations and Warranties. The representations and warranties of
the Purchasers contained in this Agreement shall be true and correct in all
material respects on the Closing Date with the same effect as though made on and
as of that date and the Company shall have received a certificate on the Closing
Date and signed on behalf of each Purchaser to that effect.
8.3 Performance. The Purchasers shall have performed and complied in all
material respects with all of the agreements, covenants and conditions contained
in the Agreement required to be performed or complied with by them at or prior
to such Closing, and the Company shall have received a certificate dated as of
such Closing and signed on behalf of the Purchasers to that effect.
8.4 Payment. Each of the Purchasers shall have delivered payment to the
Company in respect of their purchases of the Senior Debentures and Warrants.
25
<PAGE>
ARTICLE IX
DEFAULTS AND REMEDIES
9.1 Events of Default; Acceleration
An "Event of Default" occurs if:
(1) The Company defaults in the payment of any principal or interest of any
Debenture when the same shall become due, either by the terms thereof or
otherwise as herein provided; or
(2) In the case of the Senior Debentures, the Company or any Subsidiary
shall fail to perform or observe any covenant contained in Article IV of this
Agreement, other than Section 4.10, and such default shall not have been
remedied within twenty calendar days after such default shall first have become
known to any officer of the Company or written notice thereof shall have been
received by the Company (regardless of the source of such notice); or
(3) In the case of the Senior Debentures, the Company shall fail to perform
or observe the covenant contained in Section 4.10, and such failure shall
continue for at least twenty-four (24) months, commencing with any month
following the month in which the Closing Date occurs.
(4) In the case of the Senior Debentures, the Company or any of its
Subsidiaries defaults in the performance or observance of any other agreement,
term or condition contained in the Senior Debentures, this Agreement or the
Related Agreements and such default shall not have been remedied within twenty
calendar days after such default shall first have become known to any officer of
the Company or written notice thereof shall have been received by the Company
(regardless of the source of such notice); or
(5) The Company or any Subsidiary shall default (subject to any applicable
grace period) in the payment of any principal of or premium, if any, or interest
on any other Indebtedness or obligation with respect to borrowed money the
outstanding principal of which is, at the time of such default, in an aggregate
amount greater than $100,000 or shall default in the performance of any material
term of any instrument evidencing such Indebtedness or of any mortgage,
indenture or agreement relating thereto, and the effect of such default is to
cause, or to permit the holder or holders of such obligation to cause, such
Indebtedness or obligation to become due and payable prior to its stated
maturity, unless such failure to pay or perform shall have been waived in
writing by the requisite holders of such Indebtedness or other obligation; or
(6) The Company or any Subsidiary pursuant to or within the meaning of any
Bankruptcy Law:
(A) commences a voluntary case,
(B) consents to the entry of an order for relief against it in an
involuntary case,
26
<PAGE>
(C) consents to the appointment of a Custodian of it or for all or
substantially all of its property,
(D) makes a general assignment for the benefit of its creditors, or
(E) is the debtor in an involuntary case which is not dismissed within
60 days of the commencement thereof; or
(7) A court of competent jurisdiction enters an order or decree under any
Bankruptcy Law that:
(A) provides for relief against the Company or any Subsidiary in an
involuntary case,
(B) appoints a Custodian of the Company or any Subsidiary for all or
substantially all of its property, or
(C) orders the liquidation of the Company or any Subsidiary; or
(8) A final, non-appealable judgment for the payment of money in an amount
in excess of $200,000 shall be rendered against the Company or any of its
Subsidiaries (other than any judgment as to which a reputable insurance company
shall have accepted full liability in writing) and shall remain undischarged for
a period (during which execution shall not be effectively stayed) of 30 days
after the date on which the right to appeal has expired; or
(9) Any representation or warranty made by the Company in this Agreement or
in the Related Agreements shall prove to be materially false or incorrect on the
date as of which made; then and in any such case (a) upon the occurrence of any
Event of Default described in clause (6) or (7) above, the unpaid principal
amount of and accrued and unpaid interest on the Debentures shall automatically
become due and payable, without presentment, demand, protest or notice of any
kind, all of which are hereby waived by the Company, and (b) upon the occurrence
of any other Event of Default, in addition to any other rights, powers and
remedies permitted by law or in equity, the holder or holders of greater than
50% in principal amount of the Senior Debentures then outstanding may, at its or
their option, by notice in writing to the Company, declare all of the Debentures
to be, and all of the Debentures shall thereupon be and become, immediately due
and payable together with interest accrued and unpaid thereon and all other sums
due hereunder, without presentment, demand, protest or other notice of any kind,
all of which are waived by the Company.
Upon the occurrence of any such Event of Default, the holders of Debentures
may proceed to protect and enforce their rights by an action at law, suit in
equity or other appropriate proceeding, whether for the specific performance of
any agreement contained herein or in the Debentures held by them, for an
injunction against a violation of any of the terms hereof or thereof, or for the
pursuit of any other remedy which it may have by virtue of this Agreement or
pursuant to applicable law. The Company shall pay to the holders of Debentures
upon demand the reasonable costs and expenses of collection and of any other
actions referred to in this Article IX, including without limitation reasonable
attorney's fees, expenses and disbursements.
27
<PAGE>
No course of dealing and no delay on the part of the holders of Debentures
in exercising any of their rights shall operate as a waiver thereof or otherwise
prejudice the rights of any holder of the Debentures, nor shall any single or
partial exercise of any right, power or remedy preclude any other or further
exercise thereof or the exercise of any other right, power or remedy hereunder.
No right, power or remedy conferred hereby or by the Debentures on the holders
thereof shall be exclusive of any other right, power or remedy referred to
herein or therein or now or hereafter available at law, in equity, by statute or
otherwise.
9.2 Rescission of Acceleration. At any time after any declaration of
acceleration of all the Debentures shall have been made pursuant to Section 9.1
by any holder or holders of the Senior Debentures and before a judgment or
decree for the payment of money due has been obtained by such holder or holders,
the holder or holders of at least a majority in aggregate principal amount of
the Senior Debentures at the time outstanding may, by written notice to the
Company and to the other holders of the Debentures rescind and annul such
declaration and its consequences, provided that (i) the principal of and accrued
and unpaid interest on the Debentures which shall have become due otherwise than
by such declaration of acceleration shall have been duly paid, and (ii) all
Events of Default other than the nonpayment of principal of and accrued and
unpaid interest on the Debentures which have become due solely by such
declaration of acceleration shall have been cured or waived by the holders of a
majority in aggregate principal amount of the Debentures at the time
outstanding. No rescission or annulment referred to above shall affect any
subsequent Default or any right, power or remedy arising out of such subsequent
Default.
ARTICLE X
CERTAIN DEFINITIONS
As used in this Agreement, the following terms shall have the following
meanings (such meanings to be equally applicable to both the singular and plural
forms of the terms defined):
"Act" means the Securities Act of 1933, as amended.
"Agreement" means this 9% Senior Subordinated Debenture and Warrant
Purchase Agreement as from time to time amended and in effect between the
parties.
"Bankruptcy Law" means Title 11, U.S. Code or any similar federal or state
law for the relief of debtors.
"Business Day" shall mean day which is not a legal holiday in the
Commonwealth of Massachusetts or the City of Boston or New York City.
"Cash and Cash Equivalents" means cash and investments in certificates of
deposit, money market funds and obligations issues or guaranteed by the United
States Government or any instrumentality thereof, in each case only if due and
payable on demand or within thirty (30) days after the date of purchase.
"Closing" shall have the meaning set forth in Section 1.5.
28
<PAGE>
"Closing Date" shall have the meaning set forth in Section 1.5.
"Commission" shall have the meaning set forth in Section 2.3.
"Company" shall have the meaning set forth in Section 1.9.
"Consolidated Net Income" means, for any period, the Company's and its
Subsidiaries' consolidated net income after any income and franchise tax, as
determined in conformity with generally accepted accounting principles
consistently applied, but excluding: (a) the income of any Person (other than
Subsidiaries of the Company) in which the Company or any of its Subsidiaries has
an ownership interest, unless received by the Company or its Subsidiary under
cash distributions; (b) any after-tax gains or losses attributable to asset
dispositions; and (c) to the extent not included in clauses (a) and (b) above,
any after-tax extraordinary non-cash gains or extraordinary non-cash losses.
"Custodian" means any receiver, trustee, assignee, liquidator or similar
official under any Bankruptcy Law.
"Default" shall mean an Event of Default or any event which with notice or
lapse of time or both would become an Event of Default.
"Event of Default" shall have the meaning set forth in Section 9.1.
"Indebtedness" means all obligations, contingent or otherwise, whether
current or long-term, which in accordance with generally accepted accounting
principles would be classified upon the obligor's balance sheet as indebtedness
(other than deferred taxes) and shall also include capitalized leases,
guarantees, endorsements (other than for collection in the ordinary course of
business) or other arrangements whereby responsibility is assumed for the
obligations of others, including any agreement to purchase or otherwise acquire
the obligations of others or any agreement, contingent or otherwise, to furnish
funds for the purchase of goods, supplies or services for the purpose of payment
of the obligations of others, excluding accounts payable incurred in the
ordinary course of business.
"Lien" shall mean any mortgage, deed of trust, pledge, security interest,
encumbrance, lien or charge of any kind (including any agreement to give any of
the foregoing, any conditional sale or other title retention agreement, and the
filing of or agreement to give any financing statement under the Uniform
Commercial Code of any jurisdiction).
"Liquidity Event" shall mean any one or more of the following: (i) a
liquidation, dissolution or winding-up of the Company, whether voluntary or
involuntary; (ii) a sale, merger or similar transaction involving the Company,
as the result of which those persons who held 100% of the voting stock of the
Company immediately prior to such transaction do not hold more than 50% of the
voting stock of the Company (or the surviving or resulting entity) after giving
effect to such transaction; (iii) the sale of all or substantially all of the
assets of the Company; or (iv) consummation of the first Qualified Public
Offering.
29
<PAGE>
"Material Adverse Effect" means a material and adverse effect on the
assets, liabilities, properties, business, results of operation, prospects or
condition (financial or otherwise) of the Company and its Subsidiaries, taken as
a whole.
"Person" means an individual, corporation, partnership, joint venture,
trust or unincorporated organization or a government or agency or political
subdivision thereof.
"Purchasers" shall have the meaning set forth in Section 1.1.
"Qualified Public Offering" means the first public offering of securities
of the Company pursuant to a registration statement filed under the Act in which
the gross proceeds received by the Company are at least $30 million and in
connection with which the Senior Debentures are paid in full.
"Related Agreements" shall have the meaning set forth in Section 2.2.
"Senior Debt" shall have the meaning set forth in Section 6.1.
"Subsidiary" or "Subsidiaries" means any corporation, association or other
business entity of which the Company and/or any of its other Subsidiaries
directly or indirectly owns at the time more than fifty percent (50%) of the
outstanding voting shares of every class of such corporation or trust other than
directors' qualifying shares.
"Tangible Net Worth" means the value of the Company's tangible assets less
its liabilities, as determined in accordance with generally accepted accounting
principles, consistently applied.
ARTICLE XI
MISCELLANEOUS
11.1 Senior Debenture Payments. The Company agrees that, so long as any
Purchaser shall hold any Senior Debentures, it will make payments of principal
and interest on any Senior Debenture held by such Purchaser not later than 2:00
p.m., Boston, Massachusetts time, on the date such payment is due, in
immediately available federal funds, by credit to the Purchaser's account, as
specified in Schedule 1.1 hereto, or such other account or accounts as the
Purchaser may designate in writing, notwithstanding any contrary provision
contained herein or any Senior Debenture with respect to the place of payment.
Each Purchaser agrees that, before disposing of any Senior Debenture, it or its
nominee will make a notation thereon of all principal payments previously paid
thereon and of the date to which interest thereon has been paid, and will notify
the Company of the name and address of the transferee of such Senior Debenture
and will follow the procedures set forth in Section 5.2 hereof and in the
Related Agreements. At the election of any subsequent holder of any Senior
Debenture which has made the same agreements relating to such Senior Debenture
as the Purchaser has made in this Section 11.1, the Company will make payments
of principal and interest to the account of such successor holder in the same
manner as set forth above.
30
<PAGE>
11.2 Form, Registration, Transfer and Exchange of Senior Debentures. The
Senior Debentures are issuable as registered notes and in denominations of not
less than $ 10,000 or any integral multiple thereof. The Company shall keep at
its principal office the register in which the Company shall provide for the
registration of the Senior Debentures and for transfers of the Senior
Debentures. Upon surrender for registration of transfer of any Senior Debenture
at such office, the Company shall execute and deliver, at its expense, one or
more new such Senior Debenture or Senior Debentures of like tenor and of like
aggregate principal amount, which new Senior Debenture or Senior Debentures
shall each be a registered Senior Debenture. At the option of the holder of any
Senior Debenture, such Senior Debenture may be exchanged for other Senior
Debentures, of any authorized denominations, of a like aggregate principal
amount, upon surrender of the Senior Debenture to be exchanged at the office of
the Company. Whenever any Senior Debenture is so surrendered for exchange, the
Company shall execute and deliver, at its expense, the Senior Debentures which
the holder thereof making the exchange is entitled to receive. Every Senior
Debenture presented or surrendered for registration of transfer shall be duly
endorsed, or be accompanied by a written instrument of transfer duly executed by
the holder of such Senior Debenture or such holder's attorney-in-fact duly
authorized in writing and the holder thereof shall agree in writing to follow
the procedures set forth in Section 5.2 hereof and in the Related Agreements
relating to transfers. Any Senior Debenture issued in exchange for any Senior
Debenture or upon transfer thereof shall carry the rights to unpaid interest and
interest to accrue which were carried by the Senior Debenture so exchanged or
transferred, and neither gain nor loss of interest shall result from any such
transfer or exchange. Upon receipt by the Company of an affidavit of the
treasurer, assistant treasurer, or other responsible official of any Purchaser
(or, in the case of holders of Senior Debentures other than a Purchaser,
evidence reasonably satisfactory to the Company) of the ownership of and the
loss, theft, destruction or mutilation of a Senior Debenture and (i) in case of
loss, theft or destruction of a Senior Debenture, of indemnity reasonably
satisfactory to it or (ii) in the case of the mutilation of any Senior
Debenture, upon surrender and cancellation thereof, the Company, at its expense,
shall execute and deliver in lieu thereof a new Senior Debenture of like tenor
and of a like principal amount and dated and bearing interest from the date to
which interest has been paid on such lost, stolen, destroyed or mutilated Senior
Debenture.
11.3 Survival of Representations. The representations, warranties,
covenants and agreements made herein or in any certificates or documents
executed in connection herewith shall survive the execution and delivery hereof
and the closing of the transactions contemplated hereby.
11.4 Parties in Interest. Except as otherwise set forth herein, all
covenants, agreements, representations, warranties and undertakings contained in
this Agreement shall be binding on and shall inure to the benefit of the parties
hereto and their respective successors and assigns of the parties hereto
(including transferees of any of the Debentures, Warrants and Warrant Shares).
Notwithstanding the foregoing, (i) no transferee of Debentures, Warrants or
Warrant Shares, other than an affiliate of the Purchasers, shall have the right
to enforce the covenants contained in Section 4.4, and (ii) if a Debenture and
Warrant have been transferred to a Person other than an affiliate of a Purchaser
and all Debentures have been paid in full, then such unaffiliated transferee
shall not have the benefit of, and shall have no rights under, any of the
provisions of Articles III and IV hereof other than the provisions of Sections
3.1 and 3.5, each of which shall continue in full force and effect for the
benefit of such transferee.
31
<PAGE>
11.5 Debentures Owned by Affiliates. For the purposes of applying all
provisions of this Agreement the Debentures or shares owned of record by any
affiliate of a Purchaser shall be deemed to be owned by such Purchaser. For the
purpose of this Agreement, the term "affiliate" shall mean any Person
controlling, controlled by or under common control with, a Purchaser and any
general or limited partner of any Purchaser. Without limiting the foregoing,
each Purchaser shall be considered an affiliate of each other Purchaser.
11.6 Amendments and Waivers. This Agreement may be amended and the Company
may take any action herein prohibited, or omit to perform any act herein
required to be performed by it, only if the Company shall have obtained the
written consent to such amendment, action or omission to act, of the holder or
holders of not less than a majority in aggregate principal amount of the Senior
Debentures at the time outstanding; and each holder of any Debenture at the time
or thereafter outstanding shall be bound by any consent authorized by this
Section 11.6, whether or not such Debenture shall have been marked to indicate
such consent, but any Debenture issued thereafter shall contain a reference or
bear a notation referring to any such consent; provided that notwithstanding
anything in this Section 11.6 to the contrary, without the written consent of
(a) the holder or holders of all Senior Debentures at the time outstanding, no
consent, amendment or waiver to or under this Agreement shall extend or reduce
the maturity of any Senior Debenture, or reduce the rate or affect the time of
payment of interest with respect to any Senior Debenture, or affect the time,
amount or allocation of any required prepayments, or reduce the proportion of
the principal amount of the Senior Debentures required with respect to any
consent, amendment or waiver, (b) the holder or holders of all Junior Debentures
at the time outstanding, no consent, or waiver to or under this Agreement shall
extend or reduce the maturity of any Junior Debenture, or reduce the rate or
effect at the time of payment of interest with respect to any Junior Debenture,
or effect the time, amount or allocation of any required prepayments, or reduce
the portion of the principal amount of the Junior Debentures required with
respect to any consent, amendment or waiver, and (c) the holder or holders of
all Debentures at the time outstanding, no amendment to this Agreement shall
affect the provisions of Article VI. The Company shall promptly send copies of
any amendment, consent or waiver (and any requests for any such amendment,
consent or waiver) relating to this Agreement or the Debentures to each holder
of the Debentures and, to the extent practicable, shall consult with holder of
the Debentures, in connection with each such amendment, consent and waiver. No
course of dealing between the Company and the holder of any of the Debentures
nor any delay in exercise any rights hereunder or any of the Debentures shall
operate as a waiver of any rights of any holder of such Debentures. The Company
will reimburse the Purchasers for the reasonable fees and expenses of counsel
incurred in connection with any amendment or modification of this Agreement or
any of the Related Agreements or any waiver hereof or thereof.
11.7 Notices. All notices, requests, consents, reports and demands shall be
in writing and shall be hand delivered, sent by facsimile or other electronic
medium, or mailed, postage prepaid, to the Company or to the Purchasers at the
address set forth below or to such other address as may be furnished in writing
to the other parties hereto:
32
<PAGE>
The Company: Logical Design Solutions, Inc.
465 South Street
Morristown, New Jersey 07960
Attention: President
Fax: (201) 971-0103
with copy to: Brown & Wood LLP
One World Trade Center
New York, New York
Attention: Joseph W. Armbrust, Esquire
Fax: (212) 839-5593
The Purchasers: The address set forth opposite the Purchaser's name on
Schedule 1.1 attached hereto.
with copy to: Hutchins, Wheeler & Dittmar,
A Professional Corporation
101 Federal Street
Boston, Massachusetts 02110
Attention: James Westra, Esquire
Fax: (617) 951-1295
11.8 Expenses. Immediately upon consummation of the Closing, the Company
shall pay all reasonable costs and expenses of the Purchasers in connection with
the investigation, preparation, execution and delivery of this Agreement (and
due diligence related thereto) and the other instruments and documents to be
delivered hereunder and the transactions contemplated hereby and thereby,
including the reasonable fees and disbursements of Hutchins, Wheeler & Dittmar,
A Professional Corporation, special counsel to the Purchasers, provided that
such aggregate payment shall not exceed $45,000. If the purchase of the
Debentures is not consummated in accordance with the terms of this Agreement,
the Company shall not be required under this Agreement to pay any of the
Purchasers' costs or expenses.
11.9 Counterparts. This Agreement and any exhibit hereto may be executed in
multiple counterparts, each of which shall constitute an original but all of
which shall constitute but one and the same instrument. One or more counterparts
of this Agreement or any exhibit hereto may be delivered via telecopier, with
the intention that they shall have the same effect as an original counterpart
hereof.
11.10 Effect of Headings. The article and section headings herein are for
convenience only and shall not affect the construction hereof.
11.11 Transferability as Unit. Prior to payment of a Senior Debenture
included in an Investment Unit or exercise of a Warrant included in an
Investment Unit, no holder may separately transfer a Senior Debenture or Warrant
without transferring to the same transferee the other security comprising the
Investment Unit.
33
<PAGE>
11.12 Governing Law. This Agreement shall be deemed a contract made under
the laws of The Commonwealth of Massachusetts and together with the rights and
obligations of the parties hereunder, shall be construed under and governed by
the laws of such Commonwealth.
* * * * *
34
<PAGE>
LOGICAL DESIGN SOLUTIONS, INC.
9% SENIOR SUBORDINATED DEBENTURE
AND WARRANT PURCHASE AGREEMENT
Counterpart Signature Page
If you are in agreement with the foregoing, please sign the form of
acceptance on the enclosed counterpart of this letter and return the same to the
Company, whereupon, this letter shall become a binding agreement among us.
Very truly yours,
LOGICAL DESIGN SOLUTIONS, INC.
/s/ Mary Kay Brooks
By: -------------------------------------
Name: Mary Kay Brooks
Title: President
PRINCIPAL SHAREHOLDERS:
----------------------
/s/ Mary Kay Brooks
-----------------------------------------
Mary Kay Brooks
/s/ Darren Bryden
-----------------------------------------
Darren Bryden
<PAGE>
LOGICAL DESIGN SOLUTIONS, INC.
9% SENIOR SUBORDINATED DEBENTURE
AND WARRANT PURCHASE AGREEMENT
Counterpart Signature Page
PURCHASERS:
----------
SUMMIT VENTURES IV, L.P.
By: Summit Partners IV, L.P.,
Its General Partner
By: Stamps, Woodsum & Co. IV,
Its General Partner
/s/ Kevin Mohan
By: -------------------------------------
General Partner
SUMMIT INVESTORS III, L.P.
/s/ Kevin Mohan
By: -------------------------------------
Authorized Signatory
/s/ Paul F. Lozier
-----------------------------------------
Paul F. Lozier
SAMEDAN, INC.
/s/ Paul F. Lozier
By: -------------------------------------
<PAGE>
LOGICAL DESIGN SOLUTIONS, INC.
Schedule 1.1
Senior Debentures
<TABLE>
<CAPTION>
Principal Amount of Total Purchase
Debentures to be Number of Shares Price of
Name and Address Purchased Covered by Warrants Investment Units
- ---------------- ------------------- ------------------- ----------------
<S> <C> <C> <C>
Summit Ventures IV, L.P. $5,032,521 194,770.50 $4,750,000
600 Atlantic Avenue
Boston, MA 022 10
Attention: Kevin P. Mohan
Summit Investors 111, L.P. $ 246,312.71 10,229.50 249,500
600 Atlantic Avenue
Boston, MA 02210
Attention: Kevin P. Mohan
Samedan, Inc. $ 243,902 10,000 243,902
40 Dellwood Drive
Madison, NJ 07940
------------------- ------------------- ----------------
Totals $5,540,735.71 215,000 $5,243,902
=================== =================== ================
</TABLE>
<PAGE>
Logical Design Solution, Inc.
Schedule 1.10
Junior Debentures
<TABLE>
<CAPTION>
Principal Amount of Junior Principal Amount of Junior
Subordinated Debentures for Subordinated Debentures for
Investment Logical Design Solutions, Logical Design Solutions
Name and Address Inc. International, Inc.
- ---------------------- ------------------------------ ------------------------------
<S> <C> <C>
Mary Kay Brooks $695,122.45 $378,777.33
222 Woodland Avenue
Madison, NJ 07940
Darren A. Bryden
18-24 Franklin Place
Suite 213
Morristown, NJ 07960 40,389.74
-------------- --------------
Total: $735.512.19 $378.777
============== ==============
</TABLE>
<PAGE>
Logical Design Solutions, Inc.
Schedule 2.4
Authorized and Outstanding Stock
<TABLE>
<CAPTION>
Logical Design Solutions, Inc. # Shares Authorized # Shares Outstanding
------------------------------ ------------------- --------------------
<S> <C>
at 12/31/1996 1,500,000 <C>
Mark Kay Brooks 706,500
Darren A. Bryden _________ 78,500
------
Total 1,500,000 785,000
Logical Design Solutions, Inc. 2,500
at 12/31/96
Mary Kay Brooks ______ 100
-----
Total 2,500 100
</TABLE>
* Employment Agreements for E. Bruce Lovenberg and Thomas J. Shea provide for
the issuance of Stock Options. Such Options are at the sole discretion of
the corporation. As of December 31, 1996, no such Options have been issued.
* A new Stock Option plan is being developed.
<PAGE>
Logical Design Solutions
Schedule 2.7
Subsequent Events
(i) None
(ii) None
(iii) None
(iv) None
Stockholders distributions representing accumulated Retained Earnings are as
follows:
LDS
Mary Kay Brooks $1,023,997
Darren A. Bryden $ 142,989
LDSI
Mary Kay Brooks $ 823,200
<PAGE>
Logical Design Solutions
Schedule 2.8
Divorce proceedings between Mr. and Mrs. Brooks. As of the date hereof, there
has been no claim relating to Logical Design Solutions, Inc. ("LDS") or to any
shares of LDS held by any shareholder of LDS.
<PAGE>
Logical Design Solutions, Inc.
Schedule 2.11
Real Property Environmental Matters
<TABLE>
<CAPTION>
Rental Address Lessor Term of the Lease Use of Property
- -------------- ------ ----------------- ---------------
<S> <C> <C> <C>
465 South Street Gale & Wentworth April 15, 1996 to July 15, 2001 Office
Suite 103 465 South Street $20,913.42 Monthly +
Morristown, NJ 07960 Morristown, NJ 07960 $111.60 for share of Cafe
465 South Street Gale & Wentworth March 1, 1997 to July 15, 2001 Office
Suite 105 465 South Street $9,100 Monthly + amortized
Morristown, NJ 07960 Morristown, NJ 07960 portion of build out costs
(estimated at $800 per month)
</TABLE>
No Environmental Issues Exist
<PAGE>
Logical Design Solutions, Inc.
Schedule 2.12
Personal Property
- ------------------------------------------------------------------------------
Computer Equipment Financed through Sanwa Leasing Corporation
See Exhibit I Attached Hereto
Computer Equipment Financed through GE Capital
(Previously Tilden Financial Corp.)
See Exhibit 2 Attached Hereto
Computer Equipment Financed through Summit Bank (Previously United Jersey Bank)
See Exhibit 3 Attached Hereto
<PAGE>
Logical Design Solutions, Inc.
Schedule 2.13
Patents. Trademarks, Etc.
LoQical Design Solutions, Inc.
Pending Trademark Application Mark: LDS WEBTRAC
<TABLE>
<S> <C> <C>
Class: International Class 9
Description: Computer software programs, and instruction
manuals and demo disks sold together, for
monitoring and reporting usage of various sites on
the Internet computer network, in International Class 9.
Date of first use: On or before October 30, 1995
Application Number: 75027878
Filing Date: December 5, 1995
Logical Design Solutions International, Inc.
Copyright Registration Title Of This Work: Tele-Trac
Registration Number: TX 3 704 768
Effective Date Of Registration: Jan 10, 1994
Nature Of Authorship: Computer Program
</TABLE>
<PAGE>
Logical Design Solutions, Inc.
Schedule 2.16
Contracts and Commitments
The following Project Commitments are expected to generate in excess of $100,000
during the coming year:
<TABLE>
<CAPTION>
Client Project ID Proiect Name Project Tvpe
- ------ ---------- ------------ ------------
<S> <C> <C> <C>
Advanta ADV2 Advanta Booster Project Time & Materials
Advanta ADV5 Avdanta Corporate Site Time & Materials
AT&T DPPG AT&T Personnel Guide - Print Time & Materials
AT&T CLSS AT&T BMD Local Service Site Time & Materials
AT&T DMHC AT&T Health Care Time & Materials
Lucent LHRW Lucent HR Website Time & Materials
NCR NCR2 NCR Phase 11 - Case Mgmt Time & Materials
AT&T DMEV AT&T HR Self Service Vision Time & Materials
J&J JJSS J&J Employee Self Service Fixed Fee ($505,000)
Vanguard VRRC Vanguard Retirement Center Fixed Fee ($230,000)
AT&T CICM AT&T Commercial Markets Time & Materials
Bell Atlantic BAV2 Bell Atlantic View @ Once 2.0 Fixed Fee ($620,000)
Time Telecom TMI I Time Telecom Malaysia Fixed Fee ($350,000)
New Zealand NIVS New Zealand Telecom Fixed Fee ($800,000)
Project Commitments are cancelable by LDS, or the Client Company with written
notice.
In addition to project commitments, LDS is obligated for $100,000 or more to the
following commitments:
Gale & Wentworth Lease for Offices - Suite 103 $1,145,864
Suite 105 $ 477,750 + Amortized Cost of Build Out
Employment Agreements over $ 100,000 for the following employees:
Mary K. Brooks
Darren A. Bryden
Thomas J. Shea
E. Bruce Lovenberg
Martin Bums
Agreement dated March 8, 1997 with Paul Lozier.
</TABLE>
<PAGE>
Logical Design Solutions, Inc.
Schedule 2.18
Insurance Coverage
Business Owners Policy
Agent: Traber & Vreeland Insurance
Insurance Co: LMI Insurance Company
4011 WestChase Blvd
Raleigh, NC 27607
Policy #: CB29-13004
Workers Compensation Ploicy
Agent: Traber & Vreeland Insurance
Insurance Co: LMI Insurance Company
4011 WestChase
Blvd Raleigh, NC 27607
Policy IM: WC2914429
Life Insurance - Mary K. Brooks
Insurance Co: The Midland Life Insurance Company
250 East Broad Street
Columbus, OH 43215
Policy #: 57313
Disability Insurance - Mary K. Brooks
Agent: Virginia R. Hendee
Insurance Co: Northwestern Mutual Life
720 E. Wisconsin Ave.
Milwaukee, WI 53202
Policy # D-790-864
DI-161-646
Company Health Insurance
Insurance Co: Aetna Life & Casualty
66 Sigourney Street
Hartford, CT 06160-0126
Policy#'s: 127335-010-00700
127335-010-00000
127335-010-00702
Company Dental Plan
Insurance Co: New England Insurance
Healthplan Services, Inc.
3501 Frontaae Road
Tampa, FL 33607
Policy TN792884-2
Group Life Insurance / Group Long Tenn Disability
Insurance Co: Unum Life Insurance of America
PO Box 7777-W3335
Philadelphia, PA 19175-3335
ID/ Policy#: 513104
There are no outstanding claims
<PAGE>
Logical Design Solutions, Inc.
Schedule 2.19
Employee Matters
All employees have signed the EMPLOYEE CONFIDENTIALITY, NONDISCLOSURE AND
RESTRICTIVE COVENANT AGREEMENT. See attached schedule for listing of current LDS
employees.
Darren Bryden, E. Bruce Lovenberg, and Tom Shea have all signed individual
Employment Agreements.
All Independent Contractors have signed the INDEPENDANT CONTRACTORS AGREEMENT.
See attached schedule for listing of current LDS independent contractors.
All full-time employees are eligible to participate in the companies 401k
defined benefits program after six months of employment.
<PAGE>
Logical Design Solutions, Inc.
Schedule 2.21
Transactions with Affiliates
None.
<PAGE>
Logical Design Solutions, Inc.
Schedule 2.22
Assumptions. Guarantees. etc. of Indebtedness of Other Persons
None
<PAGE>
Logical Design Solutions, Inc.
Schedule 5.1
Representation and Warranties
Agreement dated March 8, 1997 with Paul Lozier.
<PAGE>
LOGICAL DESIGN SOLUTIONS
EMPLOYEE LISTING BY DEPARTMENT
EXECUTIVE:
Brooks, Mary K.
Bryden, Darren A.
Lovenberg, E. Bruce
Shea, Thomas J.
HUMAN RESOURCES:
- ----------------
Batista, Shirley
Gallic, Kerri
Links, Donald
Maurer, Debra
Sklareski, Leanne
ACCOUNTING/FINANCE:
Rankin, Maria E.
PRODUCTS & SERVICES:
Alvi, Hanif Knopf, Glenn
Bennett, Mark Koenig, John R.
Bissett, Lawrence Kushler, Jeanine
Boyer, Barbara Lanza, Lois
Bretherick, Steven Lee, Kelly
Burns, Martin Leno,Joseph
Cameron, Michelle Liao, Stephanie
Chidella, Aparna MacAvoy, Robert
Crowley, Jack Mauro, Edward
Cuorno, John Menk, James
Daidone, John Modell, Geri
Duane, Eileen Pinto, Jacqueline
Erdley, William Saint-Andre, Peter
Flesch, Joseph Salimbene, Michelle
Frassinelli, Michael Salvas, Thomas
Goebel, Daniel Shannon, Michael
Goldberg, Diane Sikorski, Gary
Harlos, Richard Smith, Samantha
Harris, Susan Snyder, Barbara
Jurista, James Thomas,Tammy
Kalas, Raymond Thomas, Jacqueline
Kermen, David TitQie, Charles
Khan, Arif Treiling, Steven
Kirchuk, Steven Tsai, Tony
Klingenburg, Anne Tunkel, Bruce
Zhana, Yan
<PAGE>
LOGICAL DESIGN SOLUTIONS
INDEPENDANT CONTRACTORS
Bergger, Joan
Eesley, Richard
Goldschmidt, Dee
Renda, Cathy
Tran, Polly
Tran, Tuyen
<PAGE>
EXHIBIT 10.2
WARRANT AGREEMENT
LOGICAL DESIGN SOLUTIONS, INC.
DATED AS OF March 19, 1997
<PAGE>
WARRANT AGREEMENT
Table of Contents
Page
----
1. Issue of Warrant to Purchasers, Form of Warrants................. 3
2. Registration..................................................... 3
3. Transfer of Warrants............................................. 4
4. Term; Exercise................................................... 4
5. Surrender of Warrant Certificates................................ 5
6. Mutilated or Missing Warrant Certificate......................... 5
7. Reservation of Common Stock, etc................................. 5
8. Anti-dilution Adjustments........................................ 6
8.1 Extraordinary Distributions............................... 6
8.2 Equitable Adjustments..................................... 6
8.3 Notice of Adjustment...................................... 6
8.4 Reflection of Adjustments on Certificates................. 7
9. [Intentionally Omitted].......................................... 7
10. Certain Events................................................... 7
11. Absence of Registration.......................................... 8
12. Information Covenants............................................ 8
12.1 Notice of Stockholder Meetings............................ 8
12.2 Notice of Distributions................................... 9
12.3 Financial Statements, etc................................. 9
12.4 Proper Books and Records.................................. 9
13. Notices.......................................................... 9
14. Warrant Obligations Independent of Debt Obligations.............. 9
15. Fractional Interests............................................. 10
16. Binding Effect; Survival......................................... 10
17. Counterparts..................................................... 10
18. Governing Law.................................................... 10
<PAGE>
WARRANT AGREEMENT dated as of March 19, 1997, between Logical Design
Solutions, Inc., a New Jersey corporation (the "Company"), and the purchasers
set forth on Schedule I attached hereto (each individually a "Purchaser" and
----------
collectively the "Purchasers"). The Purchasers, so long as they are holders of
any warrants hereunder, together with any permitted transferees or assignees who
are registered holders of any warrant issued hereunder or a like warrant or
warrants issued upon the transfer of such warrant (each individually a "Warrant"
and collectively the "Warrants") are referred to collectively as the "Holders"
and individually as a "Holder."
WHEREAS, pursuant to the terms of a 9% Senior Subordinated Debenture and
Warrant Purchase Agreement dated as of March 19, 1997, among the Company,
certain shareholders of the Company and the Purchasers (the "Purchase
Agreement"), the Company has agreed to issue to each Purchaser a Warrant as
hereinafter described to purchase shares of the Company's Common Stock, no par
value per share (together with any other or additional classes of the Company's
capital stock for which the Warrants may become exercisable in accordance with
Section 8.4 of this Agreement, the "Common Stock"), upon the terms and subject
to the conditions set forth in the Purchase Agreement; and
WHEREAS, the Company wishes to set forth, among other things, the
provisions of such Warrants and the terms and conditions on which such Warrants
may be issued, exchanged, exercised and replaced;
NOW, THEREFORE, in consideration of the premises and the mutual agreements
herein set forth, the parties hereto agree as follows:
1. Issue of Warrant to Purchasers, Form of Warrants. The Company shall on
------------------------------------------------
the date hereof issue and deliver to the Purchasers Warrants to purchase an
aggregate of 215,000 shares of Common Stock, subject to adjustment pursuant to
Section 8 hereof, for the purchase price set forth in the Purchase Agreement.
Each Purchaser shall receive a Warrant to purchase the number of shares of such
Common Stock set forth opposite such Purchaser's name on Schedule I attached
----------
hereto. Each Warrant, and any additional Warrants which may be issued upon
partial exercise, replacement or transfer of such Warrant or Warrants, shall be
evidenced by, and subject to the terms of, a Warrant Certificate (including the
Forms of Election to Purchase and Assignment attached thereto, a "Warrant
Certificate") in the form of Exhibit A attached hereto, in each case executed on
---------
behalf of the Company by the manual or facsimile signature of the President or
Vice President of the Company, under its corporate seal affixed or in facsimile,
and attested to by the Secretary or an Assistant Secretary of the Company. A
Warrant Certificate evidencing the original Warrant issued to each Purchaser
shall be executed and delivered to such Purchaser simultaneously with the
execution of this Agreement. The Company will pay any documentary stamp taxes
attributable to the initial issuance of Warrants and the issuance of Common
Stock upon the exercise of Warrants.
2. Registration. All Warrant Certificates shall be numbered and shall be
------------
registered in a warrant register (the "Warrant Register") as they are issued.
Subject to its compliance with the foregoing, the Company shall be entitled to
treat the registered Holder of any Warrant on the Warrant Register as the owner
in fact of such Warrant for all purposes and shall not be bound to recognize any
equitable or other claim to or interest in such Warrant on the part of any other
<PAGE>
person or entity, and shall not be liable for any registration of transfer of
Warrants which are registered or to be registered in the name of a fiduciary or
the nominee of a fiduciary unless made with the actual knowledge that a
fiduciary or nominee is committing a breach of trust in requesting such
registration or transfer, or with the knowledge of such facts that its
participation therein amounts to bad faith.
3. Transfer of Warrants. Any Warrant may be transferred or endorsed to
--------------------
another party in whole or in part by (i) surrendering to the Company, or its
duly authorized agent, for cancellation the existing Warrant Certificate
evidencing the Warrant to be transferred, endorsed or accompanied by a written
instrument of transfer, in form satisfactory to the Company, duly executed by
the Holder thereof in person or by a duly authorized representative, agent or
attorney-in-fact appointed in writing, (ii) by supplying the Company with an
opinion of counsel, which opinion shall be reasonably satisfactory to the
Company, to the effect that registration under the Securities Act of 1933 has
been accomplished or is not necessary in connection with such transfer of
Warrants, and (iii) by having the transferee agree in writing to be bound by the
provisions of the Purchase Agreement, this Agreement, the Shareholders
Agreement, dated March 19, 1997, by and among the Company, certain of its
shareholders, and the Purchasers (the "Shareholders Agreement"), and the
Redemption Agreement, dated March 19, 1997, by and among the Company and the
Purchasers (the "Redemption Agreement"). Upon receipt thereof, the Company
shall issue and deliver, in the name of the transferee, a new Warrant
Certificate containing the same terms as the surrendered Warrant Certificate.
In the case of the transfer of fewer than all of the rights evidenced by the
surrendered Warrant Certificate, the Company shall issue a new Warrant
Certificate to the Holder thereof for the remaining number of shares specified
in the Warrant Certificate so surrendered.
4. Term; Exercise. A Warrant entitles the Holder thereof to purchase the
--------------
number of shares of Common Stock specified in the Warrant Certificate held by
such Holder at a purchase price of $.01 per share (the "Exercise Price") at any
time after 12:01 p.m. on March 20, 1997 and on or before 5:00 p.m. Boston Time
on such date (the "Expiration Date") as is specified in a written note (the
"Termination Notice") given by the Company to each registered holder of a
Warrant Certificate; provided that such Termination Notice may not be given
prior to March 19, 2004, and provided further that the Expiration Date shall be
at least thirty (30) days after the date on which the Termination Notice is
given. The Exercise Price and the number of shares issuable upon exercise of
any Warrant are subject to adjustment upon the occurrence of certain events,
pursuant to the provisions of Section 8 of this Agreement. Subject to the
provisions of this Agreement, the Holder of a Warrant shall have the right,
which may be exercised in whole or in part, to purchase from the Company, and
the Company shall issue and sell to such Holder, the number of fully paid and
non-assessable shares of Common Stock (together with any other shares of the
Company's Common Stock issuable upon exercise of Warrants, the "Shares")
specified in the Warrant Certificate held by such Holder. Such right shall be
exercised by surrender to the Company, or its duly authorized agent, of such
Warrant Certificate, with the Form of Election to Purchase attached thereto duly
completed and signed, and upon payment to the Company of the Exercise Price, as
adjusted in accordance with the provisions of Section 8, for the number of
Shares in respect of which the Warrant is then exercised. Payment of such
Exercise Price may be made in cash, by certified check or bank draft payable to
the order of the Company, by wire transfer of immediately available funds, or by
cancellation of the Warrant with respect to such number of Shares as have a fair
market value (determined in good faith by
2
<PAGE>
the Board of Directors of the Company without regard to minority or illiquidity
discount) equal to the Exercise Price of the Warrants which are being exercised.
Upon such surrender of the Warrant Certificate and payment of the Exercise Price
as aforesaid, the Company shall issue and cause to be delivered with all
reasonable dispatch to or upon the written order of the Holder of such Warrant,
in such name or names as such Holder may designate (assuming such designation is
to a transferee as permitted under Paragraph 3 hereof), a certificate or
certificates for the number of full Shares so purchased, together with cash, as
provided in Section 15 of this Agreement, in respect of any fraction of a Share
otherwise issuable upon such surrender. Such certificate or certificates shall
be deemed to have been issued and any person or entity so designated to be named
therein shall be deemed to have become a holder of record of such Shares as of
the date of the surrender of the Warrant Certificate and payment of the Exercise
Price as aforesaid; provided, however, that if, at the date of surrender of a
Warrant Certificate and payment of such Exercise Price, the transfer books for
the Common Stock (or, upon adjustment, such other class of stock as may be
purchasable upon the exercise of the Warrant) shall be closed, the certificates
for the Shares in respect of which such Warrant is then exercised shall be
issued as of the date on which such books shall next be opened (whether before,
on or after the Expiration Date) and until such date the Company shall be under
no duty to deliver any certificate for such Shares; provided further, however,
----------------
that the transfer books shall not be closed at any time for a period longer than
forty-eight (48) hours unless otherwise required by law. A Warrant shall be
exercisable, at the election of the Holder thereof, either for all or for part
only of the Shares specified in the Warrant Certificate and if any Warrant is
exercised in part prior to the Expiration Date, the Company shall issue a new
Warrant Certificate for the remaining number of Shares specified in the Warrant
Certificate so surrendered.
5. Surrender of Warrant Certificates. Any surrender of a Warrant
---------------------------------
Certificate for transfer pursuant to Section 3 above or upon exercise pursuant
to Section 4 above shall be made (a) to the Company at its principal office or
(b) to the Company at such other place or to such agent of the Company as the
Company shall hereafter notify the Holders.
6. Mutilated or Missing Warrant Certificate. If a Warrant Certificate is
----------------------------------------
mutilated, lost, stolen or destroyed, the Company shall issue and deliver (a) in
exchange and substitution for and upon cancellation of any mutilated Warrant
Certificate or (b) in lieu of and in substitution for any Warrant Certificate
lost, stolen or destroyed, a new Warrant Certificate of like tenor representing
an equivalent right or interest. Upon receipt by the Company of an affidavit of
the treasurer, assistant treasurer, or other responsible official of any
Purchaser (or, in the case of holders of Warrants other than a Purchaser,
evidence reasonably satisfactory to the Company) of the ownership of and the
loss, theft, destruction, or mutilation of a Warrant and (i) in case of loss,
theft, or destruction of a Warrant, of indemnity reasonably satisfactory to it,
or (ii) in the case of the mutilation of any Warrants, upon surrender and
cancellation thereof, the Company, at its expense, shall execute and deliver in
lieu thereof a new Warrant of like tenor. Transfer taxes or the like (if any)
shall be paid by the Purchaser or the transferee.
7. Reservation of Common Stock, etc. The Company shall reserve for so long
---------------------------------
as any Warrant remains outstanding a number of authorized and unissued Shares
sufficient to provide for the exercise of all such Warrants, and the transfer
agent for the Common Stock, which may be the Company (the "Transfer Agent"), is
hereby irrevocably authorized and directed at all times until the Expiration
Date to reserve such number of authorized and unissued Shares
3
<PAGE>
as necessary for such purpose. The Company shall keep copies of this Agreement
on file with the Transfer Agent and shall supply the Transfer Agent with duly
executed stock certificates for such purpose and will itself provide or
otherwise make available any cash payable as provided in Section 15 of this
Agreement. All Warrant Certificates surrendered upon the exercise of Warrants
shall be canceled, and such canceled Warrant Certificates shall constitute
sufficient evidence of the number of Shares which have been issued upon the
exercise of Warrants. The Company shall furnish to the Transfer Agent a copy of
all notices of adjustment, and certificates related thereto, required to be
transmitted to each Holder pursuant to Section 8.6 hereof.
8. Anti-dilution Adjustments. The number and kind of Shares purchasable
-------------------------
upon exercise of the Warrants shall be subject to adjustments from time to time
upon the happening of the events hereinafter specified. No adjustment shall be
made for any cash dividends or any Shares issued or issuable upon exercise of
the Warrants. Notwithstanding any other provision hereof or of any Warrant, the
Exercise Price shall not in any event be less than the par value (if any) of the
Common Stock. The Company hereby covenants that, to the extent permitted by
law, the par value of each share of Common Stock shall not be more than $.01 and
the Company will not increase such par value so long as any Warrant is
outstanding.
8.1 Extraordinary Distributions. If the Company makes any distribution of
---------------------------
its assets upon or with respect to its Common Stock, as a liquidating or partial
liquidating dividend, or other than as a dividend payable out of earnings or any
surplus legally available for dividends under the laws of the jurisdiction of
incorporation of the Company, each Holder of a Warrant shall, upon the exercise
of such Warrant after the record date for such distribution or, in the absence
of a record date, after the date of such distribution, receive, in addition to
the shares subscribed for, the amount of such assets (or, at the option of the
Company, a sum equal to the value thereof at the time of distribution as
reasonably determined in good faith by the board of directors of the Company)
which would have been distributed to such Holder if such Holder had exercised
such Holder's Warrant immediately prior to the record date for such distribution
or, in the absence of a record date, immediately prior to the date of such
distribution.
8.2 Equitable Adjustments. If the Company (i) declares or pays a dividend on
---------------------
its Common Stock in shares of its capital stock or makes a distribution in
shares of Common Stock, (ii) subdivides its outstanding Common Stock, (iii)
combines its outstanding Common Stock into a smaller number of shares of Common
Stock or (iv) issues any shares of its capital stock in a reclassification of
its Common Stock (including any such reclassification in connection with a
consolidation or merger in which the Company is the continuing entity), the
number of Shares of Common Stock for which Warrants are exercisable in effect at
the time of the record date for such dividend or of the effective date of such
subdivision, combination or reclassification shall be proportionately adjusted
so that the Holder of any Warrant exercised after such date shall be entitled to
receive the aggregate number and kind of shares which, if such Warrant had been
exercised immediately prior to such time, it would have owned upon such exercise
and been entitled to receive upon such dividend, subdivision, combination or
reclassification. Such adjustment shall be made successively whenever any event
listed above shall occur, but no duplicative adjustment shall be made hereunder.
8.3 Notice of Adjustment. Whenever an adjustment is made pursuant to this
--------------------
Section 8, the Company shall promptly cause a notice setting forth the adjusted
number of Shares
4
<PAGE>
issuable upon exercise of each Warrant to be mailed to each Holder at such
Holder's last address appearing on the Warrant Register and shall cause a
certified copy thereof to be mailed to the Transfer Agent, if such Transfer
Agent is not the Company. The Company shall, upon the request in writing of the
Holders of a majority of the Warrants, retain a nationally recognized firm of
independent public accountants of recognized standing selected by the board of
directors of the Company to make any computation required by this Section 8, and
a certificate signed by such firm shall be conclusive evidence of the
correctness of such adjustment, which shall be binding on the Holders and the
Company.
8.4 Reflection of Adjustments on Certificates. Notwithstanding any
-----------------------------------------
adjustments in the number or kind of Shares purchasable upon exercise of
Warrants, any Warrant Certificate theretofore or thereafter issued may continue
to express the same price and number and kind of Shares as are stated in the
Warrant Certificate initially issuable pursuant to this Agreement.
9. [Intentionally Omitted].
---------------------
10. Certain Events. If any of the following occurs on or before the
--------------
Expiration Date:
(a) a consolidation or merger of the Company with or into another entity
(other than any merger as to which the Company is the surviving corporation
and there is no change in the Common Stock in connection therewith),
(b) a liquidating dividend with respect to the Common Stock, or
(c) a tender offer or exchange offer with respect to the Common Stock
(other than a tender offer opposed by the Company's board of directors),
(each, an "Event"), then, in connection with any such Event, each Holder of a
Warrant shall have the right, in lieu of exercising such Warrant in advance of
such Event and receiving the consideration which a Holder of the Shares issuable
upon exercise of such Warrant would receive in connection with such
consolidation or merger, liquidating dividend or tender offer (the "Event
Consideration"), upon surrender of the Warrant Certificate evidencing such
Warrant to the Company or its duly authorized agent or to the depositary or
exchange agent, as the case may be, to receive the Event Consideration with
respect to the Shares for which such Warrant is exercisable reduced by the
Exercise Price. Such reduction in the Event Consideration shall first be applied
to any cash included in the Event Consideration and, to the extent that such
cash is less than the Exercise Price, the amount of the securities or other
property to be received by such Holder shall be reduced by an amount that,
together with any such cash, is (in the reasonable judgment of the Company's
board of directors) equal to the Exercise Price. The Company hereby covenants
(A) to give notice of any Event specified in (a) or (b) above to each
Holder of Warrants at least fifteen (15) business days in advance of the
record date for determining stockholders' rights with respect to such
Event, and
5
<PAGE>
(B) that any agreements, resolutions, offers or other documents with
respect to any Event shall contain terms consistent with the provisions of
this Section 10 and, in the case of any Event specified in (c) above, shall
be forwarded to each Holder of Warrants.
The provisions of this Section 10 shall also apply to successive Events.
11. Absence of Registration. By acceptance of a Warrant Certificate
-----------------------
evidencing the Warrant, each Holder represents and agrees that such Holder is
acquiring the Warrant, and that upon exercise thereof it will acquire the
Shares, with its own funds for its own account for investment, and not with a
view to any sale, distribution or transfer thereof in violation of the
Securities Act of 1933 (the "Securities Act").
Each Holder acknowledges that such Holder has been informed by the Company
or by the previous Holder of the Warrant that the Warrant may not, under the
Securities Act and applicable regulations thereunder, be re-sold, transferred or
otherwise disposed of without registration under the Securities Act or an
applicable exemption from the registration requirements of the Securities Act.
Warrant Certificates and shares of Common Stock issuable upon exercise of
Warrants shall bear
the following legend:
THIS SECURITY HAS BEEN ACQUIRED FOR INVESTMENT AND HAS NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1993 (THE "ACT") OR THE SECURITIES LAWS OF ANY
STATE. THIS SECURITY MAY NOT BE TRANSFERRED BY SALE, ASSIGNMENT, PLEDGE OR
OTHERWISE UNLESS (i) A REGISTRATION STATEMENT FOR THIS SECURITY UNDER THE
ACT IS IN EFFECT OR (ii) THE CORPORATION HAS RECEIVED AN OPINION OF
COUNSEL, WHICH OPINION IS REASONABLY SATISFACTORY TO THE CORPORATION TO THE
EFFECT THAT SUCH REGISTRATION IS NOT REQUIRED UNDER THE ACT OR THE
SECURITIES LAWS OF ANY STATE.
12. Information Covenants.
---------------------
12.1 Notice of Stockholder Meetings. Except as otherwise expressly
------------------------------
stated herein, nothing contained in this Agreement shall be construed as
conferring upon any Holder the right to receive dividends, to vote or to consent
to or receive notice as a stockholder in respect of the meetings of stockholders
or the election of directors of the Company or any other matter, or any rights
whatsoever as a stockholder of the Company; provided, however, that if a meeting
-------- -------
of the stockholders of the Company is called or if consents of the Company's
stockholders are solicited to consider and take action on a proposal for (i) the
declaration of a dividend with respect to Shares, other than in cash and payable
out of its earned surplus, (ii) the redemption or repurchase of any Shares,
other than pursuant to the Purchase Agreement, the Shareholders Agreement, or
the Redemption Agreement or pursuant to repurchase agreements with employees,
(iii) the voluntary dissolution of the Company or (iv) any consolidation, merger
or sale of all or substantially all of its property, assets, business and good
will as an entirety, then the Company shall cause a notice thereof to be sent by
first class mail, postage prepaid, at least
6
<PAGE>
twenty (20) business days prior to the record date for determining stockholders
entitled to vote at such meeting or to take action with respect to such consent,
to each Holder of Warrants at such Holder's address appearing on the Warrant
Register; but failure to mail or to receive such notice or any defect therein or
in the mailing thereof shall not affect the validity of any action taken at such
meeting or by such consent.
12.2 Notice of Distributions. If the Company determines to make any
-----------------------
distribution on its Common Stock, then the Company shall deliver a notice of its
intention to make such distribution by first class mail, postage prepaid, at
least twenty (20) business days prior to the record date for such distribution
to each registered Holder of Warrants at such Holder's address appearing on the
Warrant Register, but failure to mail or to receive such notice or any defect
therein or in the mailing thereof shall not affect the validity of any action
taken in connection with such distribution.
12.3 Financial Statements, etc. Notwithstanding Section 12.1 above, the
--------------------------
Company shall promptly deliver to each Holder copies of all regular and periodic
financial information, proxy materials and other information and reports, if
any, which the Company or any of its subsidiaries shall file with the Securities
and Exchange Commission. In addition, the Company shall deliver to each Holder
all financial statements and other reports required to be delivered to holders
of Debentures pursuant to paragraph 3.1 of the Purchase Agreement.
12.4 Proper Books and Records. The Company covenants that it will keep
------------------------
proper books and records in which full, true and correct entries in conformity
with generally accepted accounting principles shall be made of all dealings and
transactions in relation to its business and activities.
13. Notices. Any notice pursuant to this Agreement to be given or made by
-------
any Holder to or on the Company shall be made by hand delivery, prepaid first-
class mail (registered or certified, return receipt requested), telegraph,
facsimile transmission (receipt confirmed), or overnight air courier
guaranteeing next day delivery, addressed to the parties at their addresses set
forth in the Purchase Agreement.
Any notice or demand authorized by this Agreement to be given or made by the
Company to any Holder shall be sufficiently given or made (except as otherwise
provided in this Agreement) if sent as provided above, addressed to such
Holder's address appearing on the Warrant Register, with a copy, in the case of
a Purchaser, to James Westra, Hutchins, Wheeler & Dittmar, 101 Federal Street,
Boston, Massachusetts 02110 (facsimile transmission number: (617) 951-1295).
14. Warrant Obligations Independent of Debt Obligations. Pursuant to the
---------------------------------------------------
Purchase Agreement, the Company has issued 9% Senior Subordinated Debentures Due
March 18, 2002, and 9% Junior Debentures Due March 19, 2003 (collectively, the
"Subordinated Notes") to the Purchasers. The obligations of the Company or its
affiliates with respect to the Warrants, including, without limitation, the
obligations set forth in this Agreement, are independent of any obligations of
the Company under the Subordinated Notes, and such obligations with respect to
the Warrants shall remain valid and binding notwithstanding the performance of,
or any breach by the Company or its affiliates with respect to, their
obligations under the Subordinated Notes.
7
<PAGE>
15. Fractional Interests. The Company shall not be required to issue
--------------------
fractions of Shares on the exercise of Warrants. If the Company elects not to
issue fractions of Shares, then with respect to any fraction of a Share that
would otherwise have been issuable on the exercise of a Warrant, the Company
shall purchase such fraction for an amount in cash equal to the fraction of the
then current Exercise Price attributable to such fractional share.
16. Binding Effect; Survival. This Agreement shall survive the exercise of
------------------------
the Warrants and shall be binding upon the Company and its successors and
assigns and shall be binding upon and inure to the benefit of the Holders of the
Warrants and each holder of Shares issued upon exercise of the Warrants.
17. Counterparts. This Agreement may be executed in any number of
------------
counterparts, each of which so executed shall be deemed to be an original; but
such counterparts together shall constitute but one and the same instrument.
18. Governing Law. This Agreement shall be governed by and construed in
-------------
accordance with the internal laws of the Commonwealth of Massachusetts.
[The rest of this page intentionally left blank]
8
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed as an instrument under SEAL as of the date for first above written.
LOGICAL DESIGN SOLUTIONS, INC.:
LOGICAL DESIGN SOLUTIONS, INC.
By: /s/ Mary Kay Brooks
---------------------------
Name: Mary Kay Brooks
Title: President
SUMMIT VENTURES IV, L.P.:
By: Summit Partners IV, L.P.,
its General Partner
By: Stamps, Woodsum & Co. IV,
its General Partner
By: /s/ Kevin Mohan
--------------------------
General Partner
SUMMIT INVESTORS III, L.P.
By: /s/ Kevin Mohan
--------------------------
Authorized Signatory
/s/ Paul F. Lozier
-----------------------------
Paul F. Lozier
<PAGE>
EXHIBIT 10.3
SHAREHOLDERS AGREEMENT
AGREEMENT, made as of the 19th day of March, 1997, by and among Logical
Design Solutions, Inc., a New Jersey corporation (the "Company"), Mary Kay
Brooks, Darren Bryden (individually, a "Management Shareholder" and
collectively, the "Management Shareholders"), and Summit Ventures IV, L.P.
"Summit Investors III, L.P. and Paul F. Lozier (individually an "Investor" and
collectively, the "Investors" and, together with the Management Shareholders,
the "Shareholders").
WHEREAS, the Investors are acquiring 9% Senior Subordinated Debentures and
Warrants (the "Warrants") to purchase an aggregate of 215,000 shares of common
stock, no par value per share, of the Company (the "Common Stock"), pursuant to
the terms of a 9% Senior Subordinated Debenture and Warrant Purchase Agreement
dated as of the date hereof among the Company, the Investors and certain
shareholders of the Company (the "Purchase Agreement");
WHEREAS, it is a condition to the obligations of the parties under the
Purchase Agreement that this Agreement be executed by the parties hereto, and
the parties are willing to execute this Agreement and to be bound by the
provisions hereof.
NOW, THEREFORE, in consideration of the foregoing, the agreements set forth
below, and the parties' desire to provide for continuity of ownership of the
Company to further the interests of the Company and its present and future
shareholders, the parties hereby agree with each other as follows:
1. Definition of Shares. As used in this Agreement, "Shares" shall mean and
--------------------
include all shares of the Common Stock and other equity securities of the
Company now owned or hereafter acquired by a Shareholder, including, without
limitation, the shares of Common Stock issuable upon exercise of the Warrants.
Other terms used as defined terms herein and not otherwise defined shall have
the meanings set forth in the Purchase Agreement.
2. Prohibited Transfers. No Management Shareholder shall sell, assign,
--------------------
transfer, pledge, hypothecate, mortgage, encumber or dispose of all or any of
his or her Shares except in compliance with the terms of this Agreement.
Notwithstanding anything to the contrary contained in this Agreement, (a) a
Management Shareholder may transfer without the necessity of prior approval all
or any of his or her Shares by way of gift to his or her spouse, to any of his
or her lineal descendants or ancestors, or to any trust for the benefit of any
one or more of the Shareholder, his or her spouse, or his or her lineal
descendants or ancestors, and (b) a Shareholder may transfer all or any of his
or her Shares by will or the laws of descent and distribution; provided that any
such transferee under clause (a) or (b) of this Section 2 (referred to herein as
"Permitted Transferees") shall agree in writing with the Company and the other
Shareholders, as a condition to such transfer, to be bound by all of the
provisions of this Agreement to the same extent as if such transferee were the
Management Shareholder transferring such Shares.
<PAGE>
3. Right of First Refusal on Dispositions.
--------------------------------------
(a) If at any time a Management Shareholder (a "Selling Management
Shareholder") desires to sell or otherwise transfer all or any part of his or
her Shares pursuant to a bona fide offer from a third party (the "Proposed
Transferee"), the Selling Management Shareholder shall submit a written offer
(the "Offer") by delivering the Offer to the Company and the non-selling
Shareholders (the "Other Shareholders") to sell such Shares (the "Offered
Shares") to the Company and the Other Shareholders on terms and conditions,
including price, not less favorable than those on which the Selling Management
Shareholder proposes to sell such Offered Shares to the Proposed Transferee. The
Offer shall disclose the identity of the Proposed Transferee, the number of
Offered Shares proposed to be sold, the total number of Shares owned by the
Selling Management Shareholder, the terms and conditions, including price, of
the proposed sale, and any other material facts relating to the proposed sale.
The Offer shall further state (i) that the Company and the Other Shareholders
may acquire, in accordance with the provisions of this Agreement, any of the
Offered Shares for the price and upon the other terms and conditions set forth
therein and (ii), if all such Offered Shares are not purchased by the Company
and the Other Shareholders, the Other Shareholders who have not purchased any
such Offered Shares pursuant to this Section 3 may exercise their rights
provided pursuant to Section 4 hereof.
(b) The Company shall have the first right to purchase the Offered
Shares. If the Company desires to purchase all or any part of the Offered
Shares, it shall communicate in writing its election to purchase any of the
Offered Shares to the Selling Management Shareholder and the Other Shareholders,
which communication shall state the number of Offered Shares that the Company
desires to purchase and the number of Offered Shares, if any, remaining for
purchase by the Other Shareholders pursuant to Section (c) below, and shall be
given within 20 days of the date the Offer was made.
(c) If the Company does not elect to purchase all of the Offered
Shares within the time period specified above, each Other Shareholder shall have
the right to purchase that number of remaining Offered Shares as shall be equal
to the number of such remaining Offered Shares multiplied by a percentage equal
to two times the percentage of Shares (calculated on a fully diluted basis)
owned by such Other Shareholder (or issuable to such Other Shareholder upon
exercise of Warrants owned by such Other Shareholder). The percentage of Shares
owned on a fully diluted basis by any Other Shareholder shall be calculated as
if all options and Warrants which are then exercisable have been exercised in
full. The amount of such Offered Shares that each Other Shareholder is entitled
to purchase under this Section 3(c) shall be referred to as its "Pro Rata
Fraction."
(d) Those Other Shareholders who desire to purchase all or any part of
the remaining Offered Shares shall communicate in writing their election to
purchase to the Selling Management Shareholder, which communication shall state
the number of remaining Offered Shares said Other Shareholders desire to
purchase and shall be provided to the Selling Management Shareholder within 30
days of the date the Offer was made. Such communication, together with the
communication of the Company specified above, shall, when taken in conjunction
with the Offer, be deemed to constitute a valid, legally binding and enforceable
agreement for the sale and purchase of such Offered Shares. Sales of such
Offered Shares to be
-2-
<PAGE>
sold to the Company, the Other Shareholders pursuant to this Section 3 shall be
made at the offices of the Company within 60 days following the date the Offer
was made.
(e) To the extent the Company and the Other Shareholders do not
purchase all the Offered Shares, then all, but not fewer than all, of the
remaining Offered Shares may be sold by the Selling Management Shareholder at
any time within 120 days after the date the Offer was made, subject to the
provisions of Section 4. Any such sale shall be to the Proposed Transferee, at
not less than the price and upon other terms and conditions, if any, not more
favorable to the Proposed Transferee than those specified in the Offer. If the
Offered Shares are not sold within such 120-day period, they shall continue to
be subject to the requirements of a prior offer pursuant to this Section 3, and
may not be transferred except in compliance with the provisions of this Section
3. If Offered Shares are sold pursuant to this Section 3 to any purchaser who is
not a party to this Agreement, the purchaser of such Offered Shares shall
execute a counterpart of this Agreement as a precondition of the purchase of
such Offered Shares and any Offered Shares sold to such purchaser shall continue
to be subject to the provisions of this Agreement.
(f) In the event a Management Shareholder is required to transfer
Shares pursuant to a court order, decree or judgment, or pursuant to a
settlement of a court proceeding such transfer shall be deemed to be a sale for
purposes of this Section 3, and shall entitle the Company and the Other
Shareholders to exercise their right of first refusal with respect to such
transfer. In any event, the Management Shareholder who is required to make such
transfer shall provide an Offer as herein provided. The price at which the
Shares may be purchased pursuant to such Offer shall be the price as set by the
court which issued such order, decree or judgment, or the price as set by the
parties to such settlement. If a price is not determined by such court, or by
the parties to such settlement, then the price shall be determined pursuant to
an appraisal conducted in accordance with the provisions of Section 2 of the
Redemption Agreement, with one appraiser chosen by the Management Shareholder
who is making such transfer, and the other appraiser chosen by the Company.
4. Right of Participation in Sales.
-------------------------------
(a) If at any time following compliance with the provisions of Section
3 (if applicable), any Selling Management Shareholder desires to transfer all or
any part of the Shares owned by him or it to any third party (not including the
Company), then each Other Shareholder (other than those who have elected to
purchase Shares pursuant to Section 3) shall have the right to sell to the third
party, as a condition to such sale by the Selling Management Shareholder, at the
same price per share and on the same terms and conditions as involved in such
sale by the Selling Management Shareholder, a pro rata portion of the amount of
--- ----
Shares proposed to be sold to the third party; provided, however, that such
-------- -------
right shall not apply to any sale or transfer by a Management Shareholder to the
Company. The "pro rata portion" of Shares which the Other Shareholder shall be
--- ----
entitled to sell to the third party shall be that number of Shares as shall
equal the number of Shares proposed to be sold to the third party multiplied by
a fraction, the numerator of which is the aggregate of all shares of Common
Stock which are then held by the Other Shareholder wishing to participate in the
sale or issuable upon exercise of Warrants held by such Other Shareholder, and
the denominator of which is the aggregate of all shares of Common Stock which
are then held by all Other Shareholders wishing to participate in any sale
-3-
<PAGE>
under this Section 4 or issuable upon exercise of Warrants held by such Other
Shareholders, including the Selling Management Shareholder.
(b) If the Selling Management Shareholder wishes to make a sale to a
third party which is subject to this Section 4, the Selling Management
Shareholder shall, after complying with the provisions of Section 3, give to
each Other Shareholder notice of such proposed sale, and stating that all Shares
were not purchased pursuant to the Offer as discussed in Section 3. Such notice
shall be given at least 20 days prior to the date of the proposed sale to the
third party. Each Other Shareholder wishing to so participate in any sale under
this Section 4 shall notify the selling Management Shareholder in writing of
such intention within 15 days after such Other Shareholder's receipt of the
notice described in the preceding sentence.
(c) The Selling Management Shareholder and each participating Other
Shareholder shall sell to the third party all, or at the option of the third
party, any part of the Shares proposed to be sold by them at not less than the
price and upon other terms and conditions, if any, not more favorable to the
third party than those in the notice provided by the Selling Management
Shareholder under subparagraph (b) above; provided, however, that any purchase
-------- -------
of less than all of such Shares by the third party shall be made from the
Selling Management Shareholder and each participating Other Shareholder pro rata
--- ----
based upon the relative number of the Shares that the Selling Management
Shareholder and each participating Other Shareholder is otherwise entitled to
sell pursuant to Section 4(a).
(d) If any Shares are sold pursuant to this Section 4 to any purchaser
who is not a party to this Agreement, the purchaser of such Shares shall execute
a counterpart of this Agreement as a precondition to the purchase of such Shares
and such Shares shall continue to be subject to the provisions of this Agreement
.
5. Election of Directors.
---------------------
(a) During the term of this Agreement, at each annual meeting of the
shareholders of the Company, and at each special meeting of the shareholders of
the Company called for the purpose of electing directors of the Company, and at
any time at which shareholders of the Company shall have the right to, or shall,
vote for directors of the Company, then, and in each event, the Shareholders
shall vote all Shares owned by them for the election of a Board of Directors
consisting of not more than seven directors, designated in the manner designated
below (subject to adjustment in accordance with the provisions of subparagraph
(b) of this Section 5):
(i) two directors shall be designated by Summit Ventures IV,
L.P. (so long as it and its affiliates shall own or have the right to acquire at
least 33 1/3% of the Shares which it owns or has the right to acquire on the
date hereof), one of which designees shall initially be Kevin P. Mohan, with the
second such designee to be named by Summit Ventures IV, L.P. at such time as it
deems appropriate;
(ii) one director shall be Mary Kay Brooks, (so long as she and
her permitted transferees described in Section 2 shall continue to hold at least
33 1/3% of the shares of Common Stock owned by her on the date hereof), who
shall serve as chair; and
-4-
<PAGE>
(iii) four directors shall be designated by holders of a
majority of the shares of Common Stock outstanding on a fully diluted basis.
(b) Notwithstanding the provisions of subparagraph (a) of this Section
5, if there shall occur an Event of Default under the Purchase Agreement, then
upon the date of occurrence of such Event of Default, and upon the first day of
each successive two fiscal quarter period following the occurrence of such Event
of Default (commencing with the first day of the second full fiscal quarter
after such Event of Default), the number of Directors designated by Summit
Ventures IV, L.P., designated pursuant to Section 5(a)(i) shall be increased by
one additional Director, and the total number of Directors set forth in Section
5(a) shall be increased accordingly. Once the number of Directors designated
pursuant to Section 5(a)(i) and the size of the Board of Directors have been
increased pursuant to this Section 5(b), they shall not thereafter be reduced
upon waiver of such Event of Default; provided, however, that with respect to
any Event of Default resulting from a breach of Section 4.10 of the Purchase
Agreement, if subsequent to such Event of Default the Company achieves
Consolidated Net Income Before Taxes of at least $ 1.00 during any twelve (12
month) period commencing with the last day of the second fiscal quarter ending
subsequent to the occurrence of such Event of Default, then on one occasion such
Event of Default shall be considered cured and the number of Directors which can
be designated by Summit Ventures IV, L.P. shall be reduced (and such additional
designated Director or Directors shall resign) to the original number set forth
in Section 5(a) hereof.
6. Insurance. The Company shall at all times maintain for the benefit of its
---------
officers and directors liability insurance in scope and amount, and from an
insurer, reasonably acceptable to the Investors; provided, however, that the
Company shall not be obligated to maintain such insurance if in the good faith
judgment of its Board of Directors such insurance is not available at a
reasonable cost.
7. Compensation Committee. There shall be established at all times during the
----------------------
term of this Agreement a Compensation Committee of the Board of Directors (the
"Compensation Committee"), one member of which shall be such one of the
directors designated pursuant to Section 5(a)(i) as shall be specified by Summit
Ventures IV, L.P. The Compensation Committee will determine the compensation of
all senior employees and consultants of the Company (including salary, bonus,
equity participation and benefits) consistent with compensation of companies
similar to the Company; provided that no member of the Compensation Committee
may vote on his or her own compensation. The compensation of senior employees
and consultants shall be reviewed by the Compensation Committee on an annual
basis, and the decision by a majority of the members of the Compensation
Committee will control the Committee's actions. Within thirty (30) days after
the date hereof the Compensation Committee shall adopt a statement of policy
concerning compensation of senior employees, which statement shall be reasonably
acceptable to a majority of the committee members, including the director
designated pursuant to Section 5(a)(i). Any decision of the Committee involving
the grant of options (including the pricing and other terms thereof, and prior
to the adoption of the statement of policy referenced in the preceding sentence,
any increase in compensation paid to a member of senior management, such
majority must include a director designated pursuant to Section 5(a)(i);
-5-
<PAGE>
8. Term. This Agreement shall terminate on the earlier to occur of (a)
----
immediately prior to consummation of the first Qualified Public Offering, (b)
the tenth anniversary of the date of this Agreement or (c) all Warrants have
been redeemed by the Company pursuant to Paragraph 1 of the Redemption
Agreement.
9. Preemptive Rights. (a) The Company hereby grants to each Investor so long
-----------------
as it shall own, of record or beneficially, or have the right to acquire from
the Company, any shares of Common Stock, the right to purchase all or part of
its pro rata share of New Securities (as defined in subparagraph (b)) which the
Company, from time to time, proposes to sell and issue. A Shareholder's pro
rata share, for purposes of this preemptive right, is the ratio of the number of
shares of Common Stock which such Shareholder owns or has the right to acquire
from the Company to the total number of shares of Common Stock then outstanding
(giving effect to the exercise of all Warrants then outstanding). The
Shareholders shall have a right of over-allotment pursuant to this Section 9
such that to the extent a Shareholder does not exercise its preemptive right in
full hereunder, such additional shares of New Securities which such Shareholder
did not purchase may be purchased by the other Shareholders in proportion to the
total number of shares of Common Stock which each such other Shareholder owns or
has the right to acquire from the Company compared to the total number of shares
of Common Stock which all such other Investors own or have the right to acquire
from the Company.
(b) "New Securities" shall mean any capital stock of the Company,
whether now authorized or not, and rights, options or warrants to purchase
capital stock, and securities of any type whatsoever that are, or may become,
convertible into or exchangeable for capital stock, issued on or after the date
hereof; provided that the term "New Securities" does not include (i) Common
--------
Stock issued as a stock dividend to holders of Common Stock or upon any stock
split, subdivision or combination of shares of Common Stock, (ii) the aggregate
number of shares of Common Stock issuable upon exercise of options permitted
under the Purchase Agreement, (iii) the Warrant Shares, (iv) Common Stock issued
in connection with a Qualified Public Offering, and (v) Common Stock issued in
connection with an acquisition, merger or other transaction which has been
approved by vote of the Board of Directors, including the affirmative vote of
any director designated pursuant to Section 5(a)(i) and (vi) capital stock and
rights, options or warrants to purchase and securities of any type whatsoever
which are convertible into or exchangeable for capital stock which are
outstanding on the date hereof.
(c) In the event the Company proposes to undertake an issuance of New
Securities, it shall give each Shareholder written notice of its intention,
describing the type of New Securities and the price and the terms upon which the
Company proposes to issue the same. Each Shareholder shall have 10 business days
from the date of receipt of any such notice to agree to purchase up to the
Shareholder's pro rata share of such New Securities (any over-allotment amount
pursuant to the operation of subparagraph (a) hereof) for the price and upon the
terms specified in the notice by giving written notice to the Company and
stating therein the quantity of New Securities to be purchased.
(d) In the event any Shareholder fails to exercise in full its
preemptive right (after giving effect to the over-allotment provision of
subparagraph (a) hereof), the Company shall have 90 days thereafter to sell the
New Securities with respect to which the Shareholder's option was not exercised,
at a price and upon terms no more favorable to the purchasers thereof
-6-
<PAGE>
than specified in the Company's notice. To the extent the Company does not sell
all the New Securities without first again offering such securities to the
Shareholders in the manner provided above.
(e) The rights granted to the Shareholders under this Section 9 shall
expire immediately prior to, and shall not apply in connection with, the
consummation of the first Qualified Public Offering.
10. Specific Enforcement. Each Shareholder expressly agrees that the Other
--------------------
Shareholders and the Company may be irreparably damaged if this Agreement is not
specifically enforced. Upon a breach or threatened breach of the terms,
covenants and/or conditions of this Agreement by any Shareholder, the Other
Shareholders and the Company shall, in addition to all other remedies, each be
entitled to apply for a temporary or permanent injunction, and/or a decree for
specific performance, in accordance with the provisions hereof.
11. Legend. Each certificate evidencing any of the Shares now owned or
------
hereafter acquired by the Shareholders shall bear in addition to any other
legends required by other agreements or by law a legend substantially as
follows:
"Any sale, assignment, transfer or other disposition of the shares
represented by this certificate is restricted by, and subject to, the terms
and provisions of a certain Shareholders' Agreement dated as of March 19,
1997. A copy of said Agreement is on file with the Secretary of the
Corporation."
12. Notices. Notices given hereunder shall be deemed to have been duly given
-------
on the date of personal delivery or on the date of postmark if mailed by
certified or registered mail, return receipt requested, to the party being
notified at his or its address specified on Schedule I hereto or such other
address as the addressee may subsequently notify the other parties of in
writing.
13. Entire Agreement and Amendments. This Agreement constitutes the entire
-------------------------------
agreement of the parties with respect to the subject matter hereof and neither
this Agreement nor any provision hereof may be waived, modified, amended or
terminated except by a written agreement signed by the parties hereto; provided,
--------
however, that Investors owning at least a majority of the Shares owned by all
- -------
Investors may effect any such waiver, modification, amendment or termination on
behalf of all of the Investors and Management Shareholders owning at least a
majority of the Shares owned by all Management Shareholders may effect any such
waiver, modification, amendment or termination on behalf of all of the
Management Shareholders. Each of the Shareholders represents that he or it is
not a party to any other agreement which would prevent him or it from performing
his or its obligations hereunder. No waiver of any breach or default hereunder
shall be considered valid unless in writing, and no such waiver shall be deemed
a waiver of any subsequent breach or default of the same or similar nature.
14. Governing Law; Successors and Assigns. This Agreement shall be governed
-------------------------------------
by the internal laws of the State of New Jersey without giving effect to the
conflicts of laws principles
-7-
<PAGE>
thereof and, except as otherwise provided herein, shall be binding upon the
heirs, personal representatives, executors, administrators, successors and
assigns of the parties. Notwithstanding the foregoing, in the event an Investor
transfers Shares to an unaffiliated Person, such transferee shall have no rights
under this Agreement, other than those granted under Section 9 of this
Agreement, and shall not be bound by any of the provisions of this Agreement.
15. Severability. If any provision of this Agreement shall be held to be
------------
illegal, invalid or unenforceable, such illegality, invalidity or
unenforceability shall attach only to such provision and shall not in any manner
affect or render illegal, invalid or unenforceable any other provision of this
Agreement, and this Agreement shall be carried out as if any such illegal,
invalid or unenforceable provision were not contained herein.
16. Captions. Captions are for convenience only and are not deemed to be part
--------
of this Agreement.
17. Counterparts. This Agreement may be executed in two or more counterparts,
------------
each of which shall be deemed an original, but all of which together shall
constitute one and the same instrument.
-8-
<PAGE>
IN WITNESS WHEREOF, this Agreement has been executed as an instrument under
SEAL as of the date and year first above written.
MANAGEMENT SHAREHOLDERS: COMPANY:
/s/ Mary Kay Brooks LOGICAL DESIGN SOLUTIONS, INC.
- ---------------------------
Mary Kay Brooks By: /s/ Mary kay Brooks
-----------------------
Name: Mary Kay Brooks
Title: President
/s/ Darren Bryden
- ---------------------------
Darren Bryden INVESTORS:
SUMMIT VENTURES IV, L.P.
By: Summit Partners IV, L.P.,
its General Partner
By: Stamps Woodsum & Co. IV,
its General Partner
By: /s/ Kevin Mohan
-----------------------
General Partner
SUMMIT INVESTORS III, L.P.
By: /s/ Paul Lozier
-----------------------
Authorized Signatory
/s/ Paul F. Lozier
-----------------------
Paul F. Lozier
-9-
<PAGE>
SCHEDULE 1
----------
Company
- -------
Logical Design Solutions, Inc.
465 South Street
Morristown, New Jersey 07960
Attn: President
Management Shareholders
- -----------------------
Mary Kay Brooks
c/o Logical Design Solutions, Inc.
465 South Street
Morristown, New Jersey 07960
Darren Bryden
c/o Logical Design Solutions, Inc.
465 South Street
Morristown, New Jersey 07960
Investors
- ---------
Summit Investors III, L.P.
600 Atlantic Avenue, Suite 2800
Boston, MA 02210-2227
Attn: Kevin P. Mohan
Summit Ventures IV, L.P.
600 Atlantic Avenue, Suite 2800
Boston, MA 02210-2227
Attn: Kevin P. Mohan
Paul F. Lozier
40 Dellwood Drive
Madison, NJ 07940
<PAGE>
EXHIBIT 10.4
REGISTRATION RIGHTS AGREEMENT
AGREEMENT, made as of the 19th day of March, 1997, by and among LOGICAL
DESIGN SOLUTIONS, INC., a New Jersey corporation (the "Company"), and those
persons set forth on Schedule I as Investors (each an "Investor" and
----------
collectively the "Investors").
WHEREAS, the Investors are acquiring warrants ("Warrants") to acquire an
aggregate of 215,000 Shares of Common Stock, no par value per share, of the
Company (the "Common Stock"), pursuant to the terms of a 9% Senior Subordinated
Debenture and Warrant Purchase Agreement dated as of the date hereof among the
Company, the Investors and certain shareholders of the Company (the "Purchase
Agreement"); and
WHEREAS, it is a condition to the obligations of the Investors under the
Purchase Agreement that this Agreement be executed by the parties hereto in
order to provide the Investors with certain registration rights with respect to
the shares of Common Stock issuable upon exercise of the Warrants being acquired
by the Investors under the Purchase Agreement or otherwise acquired by the
Investors, and the parties are willing to execute this Agreement and to be bound
by the provisions hereof,
NOW, THEREFORE, in consideration of the premises and mutual covenants
contained herein, the parties hereto agree as follows:
1. Certain Definitions. As used in this Agreement, the following terms
-------------------
shall have the following respective meanings:
"Act" means the Securities Act of 1933, as amended, or any successor
federal statute, and the rules and regulations of the Commission thereunder, all
as the same shall be in effect at the time.
"Commission" means the Securities and Exchange Commission, or any other
Federal agency at the time administering the Act.
"Exchange Act" means the Securities Exchange Act of 1934, as amended, or
any successor federal statute, and the rules and regulations of the Commission
thereunder, all as the same shall be in effect at the time.
"Holder" means the person who is then the record owner of Registrable
Securities which have not been sold to the public.
"Initiating Holders" means any Investors and their assignees who in the
aggregate are holders of at least twenty-five percent (25%) of the outstanding
Registrable Securities held by the Investors and their assignees.
"Registrable Securities" means all shares of Common Stock now owned or
hereafter acquired by any Investor.
<PAGE>
The term "register" means to register under the Act and applicable state
securities laws for the purpose of effecting a public sale of securities.
"Registration Expenses" means all expenses incurred by the Company in
compliance with Sections 2, 3 or 5 hereof, including, without limitation, all
registration and filing fees, printing expenses, transfer taxes, fees and
disbursements of counsel for the Company, blue-sky fees and expenses, fees of
transfer agents and registrars, reasonable fees and disbursements of one counsel
for all the selling Holders, and the expense of any special audits incident to
or required by any such registration.
"Selling Expenses" means all underwriting discounts and selling commissions
applicable to the sale of Registrable Securities.
2. Requested Registrations
-----------------------
(a) If at any time after December 31, 1997 the Company shall receive
from one or more Initiating Holders a written request that the Company effect
the registration of Registrable Securities representing at least twenty-five
percent (25%) of the Registrable Securities held by or issuable to all the
Investors (or any lesser percentage if the reasonably anticipated aggregate
price to the public of the Registrable Securities to be included in such
registration would exceed $ 10,000,000), in connection with a firm commitment
underwriting, the Company will:
(i) promptly give written notice of the proposed registration to all
other Holders; and
(ii) as soon as practicable, use all commercially reasonable efforts
to effect such registration as may be so requested and as would permit or
facilitate the sale and distribution of such portion of such Registrable
Securities as are specified in such request, together with such portion of
the Registrable Securities of any Holder or Holders joining in such request
as are specified in a written request given within thirty days after receipt
of such written notice from the Company. If the underwriter managing the
offering advises the Holders who have requested inclusion of their
Registrable Securities in such registration that marketing considerations
require a limitation on the number of shares offered, such limitation shall
be imposed, subject to the immediately following sentence, pro rata among
such Holders who requested inclusion of Registrable Securities in such
registration according to the number of Registrable Securities then held by
such Holders. Neither the Company nor any other shareholder may include
shares in a registration effected under this Section 2(a) without the consent
of the Initiating Holders holding a majority of the Registrable Securities
sought to be included in such registration by the Initiating Holders if the
inclusion of shares by the Company or the other shareholders would limit the
number of Registrable Securities sought to be included by the Initiating
Holders or reduce the offering price thereof. The Investors may initiate two
registrations pursuant to this Section 2(a). No registration initiated by the
Initiating Holders hereunder shall count as a registration under this Section
2(a) unless and until it shall have been
2
<PAGE>
declared effective (an "Effective Registration") and the Initiating Holders
shall have sold all of the Registrable Securities included in such
registration.
(b) The underwriter of any underwriting requested under this Section 2
shall be selected by the Company; provided that such underwriter must be
reasonably acceptable to the Holders of a majority of the Registrable Securities
included therein.
3. "Piggy Back" Registrations.
-------------------------
(a) If the Company shall determine to register any of its securities,
either for its own account or the account of a security holder or holders
exercising their registration rights (subject to the provisions of Section 2),
other than a registration relating solely to employee benefit plans or a
registration on any registration form which does not permit secondary sales or
does not include substantially the same information as would be required to be
included in a registration statement covering the sale of Registrable Securities
or pursuant to Form S-4, the Company will:
(i) Promptly give to each Holder of Registrable Securities written
notice thereof (which shall include the number of shares the Company or other
security holder proposes to register and, if known, the name of the proposed
underwriter); and
(ii) Use its best efforts to include in such registration all the
Registrable Securities specified in a written request or requests, made by
any Holder within twenty (20) days after the date of delivery of the written
notice from the Company described in clause (i) above. If the underwriter
advises the Company that marketing considerations require a limitation on the
number of shares offered pursuant to any registration statement, then the
Company may offer all of the securities it proposes to register for its own
account and such limitation on any remaining securities that may, in the
opinion of the underwriter, be sold will be imposed: (a) first, so as to
exclude all Registrable Securities of Holders other than the Investors and
their assignees; and (b) thereafter, pro rata among the Holders who requested
--- ----
inclusion of Registrable Securities in such registration according to the
number of Registrable Securities then held by such Holders.
(b) The Company shall select the underwriter for an offering made
pursuant to this Section 3, but shall not be required to register under the
Exchange Act prior to such date.
4. Expenses of Registration. All Registration Expenses incurred in
------------------------
connection with any registration, qualification or compliance pursuant to
Section 2, 3 or 5 shall be paid by the Company. All Selling Expenses incurred in
connection with any such registration, qualification or compliance shall be
borne by the holders of the securities registered, pro rata on the basis of the
number of their shares so registered.
5. Registration on Form S-3. The Company shall use its best efforts to
------------------------
qualify for registration on Form S-3 or any comparable or successor form; and to
that end the Company shall register (whether or not required by law to do so)
the Common Stock under the Exchange
3
<PAGE>
Act in accordance with the provisions of the Exchange Act following the
effective date of the first registration of any securities of the Company on
Form S- I or any comparable or successor form, but shall not be required to
register under the Exchange Act prior to such date. After the Company has
qualified for the use of Form S-3, in addition to the rights contained in the
foregoing provisions of this Agreement, the Holders of Registrable Securities
shall have the right to request registrations on Form S-3 (such requests shall
be in writing and shall state the number of shares of Registrable Securities to
be disposed of and the intended methods of disposition of such shares by such
Holder or Holders); provided that the Company shall not be obligated to effect
any such registration pursuant to this Section 5 more than once in any twelve
month period, and in no event shall the Company be required to register shares
with an aggregate market value of less than $5,000,000.
6. Registration Procedures. In the case of each registration effected by the
-----------------------
Company pursuant to this Agreement, the Company will keep each Holder of
Registrable Securities included in such registration advised in writing as to
the initiation of each registration and as to the completion thereof. At its
expense, the Company will do the following for the benefit of such Holders:
(a) Keep such registration effective for a period of 120 days or until the
Holder or Holders have completed the distribution described in the registration
statement relating thereto, whichever first occurs, and amend or supplement such
registration statement and the prospectus contained therein from time to time to
the extent necessary to comply with the Act and applicable state securities
laws;
(b) Use its best efforts to register or qualify the Registrable Securities
covered by such registration under the applicable securities or "blue sky" laws
of such jurisdictions as the selling shareholders may reasonably request;
provided, that the Company shall not be obligated to qualify to do business in
any jurisdiction where it is not then so qualified or otherwise required to be
so qualified or to take any action which would subject it to the service of
process in suits other than those arising out of such registration;
(c) Furnish such number of prospectuses and other documents incident
thereto as a Holder from time to time may reasonably request;
(d) In connection with any underwritten offering pursuant to a
registration statement filed pursuant to Section 2 hereof, the Company will
enter into any underwriting agreement reasonably necessary to effect the offer
and sale of Common Stock, provided such underwriting agreement contains
customary underwriting provisions and is entered into by the Holder and provided
further that, if the underwriter so requests, the underwriting agreement will
contain customary contribution provisions on the part of the Company;
(e) To the extent then permitted under applicable professional guidelines
and standards, use its best efforts to obtain a comfort letter from the
Company's independent public accountants in customary form and covering
4
<PAGE>
such matters of the type customarily covered by comfort letters and an opinion
from the Company's counsel in customary form and covering such matters of the
type customarily covered in a public issuance of securities, in each case
addressed to the Holders, and provide copies thereof to the Holders; and
(f) Permit the counsel to the selling shareholders whose expenses are being
paid pursuant to Section 4 hereof to inspect and copy such corporate documents
as he may reasonably request.
7. Indemnification.
---------------
(a) The Company will, and hereby does, indemnify each Holder, each of its
officers, directors and partners, and each person controlling such Holder within
the meaning of the Act, with respect to which registration, qualification or
compliance has been effected pursuant to this Agreement, and each underwriter,
if any, and each person who controls such underwriter within the meaning of the
Act, against all claims, losses, damages and liabilities (or actions in respect
thereof) arising out of or based on any untrue statement (or alleged untrue
statement) of a material fact contained in any final prospectus, offering
circular or other document (including any related registration statement,
notification or the like) incident to any such registration, qualification or
compliance, or based on any omission (or alleged omission) to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, or any material violation by the Company of the Act or
the Exchange Act or securities act of any state or any rule or regulation
thereunder applicable to the Company and relating to action or inaction required
of the Company in connection with any such registration, qualification or
compliance, and will reimburse each such Holder, each of its officers, directors
and partners, and each person controlling such Holder, each such underwriter and
each person who controls any such underwriter, for any legal and any other
expenses reasonably incurred in connection with investigating and defending any
such claim, loss, damage, liability or action, whether or not resulting in any
liability, provided that the Company will not be liable in any such case to the
extent that any such claim, loss, damage, liability or expense arises out of or
is based on any untrue statement (or alleged untrue statement) or omission (or
alleged omission) based upon written information furnished to the Company by
such Holder or underwriter and stated to be specifically for use therein.
(b) Each Holder will, if Registrable Securities held by him are included in
the securities as to which such registration, qualification or compliance is
being effected, indemnify the Company, each of its directors and officers and
each underwriter, if any, of the Company's securities covered by such a
registration statement, each person who controls the Company or such underwriter
within the meaning of the Act and the rules and regulations thereunder, each
other such Holder and each of their officers, directors and partners, and each
person controlling such Holder, against all claims, losses, damages and
liabilities (or actions in respect thereof) arising out of or based on any
untrue statement (or alleged untrue statement) of a material fact contained in
any such registration statement, prospectus, offering circular or other
document, or any omission (or alleged omission) to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading, and will reimburse the Company, each person controlling the Company,
each underwriter and each person who controls any such
5
<PAGE>
underwriter, each Holder and each person controlling such Holder, and their
respective directors, officers, partners, persons, underwriters and control
persons for any legal or any other expenses reasonably incurred in connection
with investigating or defending any such claim, loss, damage, liability or
action, whether or not resulting in liability, in each case to the extent, but
only to the extent, that such untrue statement (or alleged untrue statement) or
omission (or alleged omission) is made in such registration statement,
prospectus, offering circular or other document in reliance upon and in
conformity with written information furnished to the Company by such Holder and
stated to be specifically for use therein; provided, however, that the
obligations of each Holder hereunder shall be limited to an amount equal to the
net proceeds received by such Holder upon sale of his securities.
(c) Each party entitled to indemnification under this Section 7 (the
"Indemnified Party") shall give notice to the party required to provide
indemnification (the "Indemnifying Party") promptly after such Indemnified Party
has actual knowledge of any claim as to which indemnity may be sought, but the
failure of any Indemnified Party to give such notice shall not relieve the
Indemnifying Party of its obligations under this Section 7 (except and to the
extent the Indemnifying Party has been prejudiced as a consequence thereof). The
Indemnifying Party will be entitled to participate in, and to the extent that it
may elect by written notice delivered to the Indemnified Party promptly after
receiving the aforesaid notice from such Indemnified Party, at its expense to
assume, the defense of any such claim or any litigation resulting therefrom,
with counsel reasonably satisfactory to such Indemnified Party, provided that
the Indemnified Party may participate in such defense at its expense,
notwithstanding the assumption of such defense by the Indemnifying Party, and
provided, further, that if the defendants in any such action shall include both
the Indemnified Party and the Indemnifying Party and the Indemnified Party shall
have reasonably concluded that there may be legal defenses available to it
and/or other Indemnified Parties which are different from or additional to those
available to the Indemnifying Party, the Indemnified Party or Parties shall have
the right to select separate counsel to assert such legal defenses and to
otherwise participate in the defense of such action on behalf of such
Indemnified Party or Parties and the fees and expenses of such counsel shall be
paid by the Indemnifying Party. No Indemnifying Party, in the defense of any
such claim or litigation, shall, except with the consent of each Indemnified
Party, consent to entry of any judgment or enter into any settlement which does
not include as an unconditional term thereof the giving by the claimant or
plaintiff to such Indemnified Party of a release from all liability in respect
to such claim or litigation. Each Indemnified Party shall (i) furnish such
information regarding itself or the claim in question as an Indemnifying Party
may reasonably request in writing and as shall be reasonably required in
connection with defense of such claim and litigation resulting therefrom and
(ii) shall reasonably assist the Indemnifying Party in any such defense,
provided that the Indemnified Party shall not be required to expend its funds in
connection with such assistance.
(d) No Holder shall be required to participate in a registration pursuant
to which it would be required to execute an underwriting agreement in connection
with a registration effected under Section 2 or 3 which imposes indemnification
or contribution obligations on such Holder more onerous than those imposed
hereunder; provided, however, that
6
<PAGE>
the Company shall not be deemed to breach the provisions of Section 2 or 3 if a
Holder is not permitted to participate in a registration on account of his
refusal to execute an underwriting agreement on the basis of this subsection
(d).
8. Information by Holder Each Holder of Registrable Securities included
---------------------
in any registration shall furnish to the Company such information regarding such
Holder and the distribution proposed by such Holder as the Company may
reasonably request in writing and as shall be reasonably required in connection
with any registration, qualification or compliance referred to in this Agreement
or otherwise required by applicable state or federal securities laws.
9. Limitations on Registration Rights. From and after the date of this
----------------------------------
Agreement, the Company shall not, without the prior written consent of the
Investors, enter into any agreement with any holder or prospective holder of any
securities of the Company which would give any such holder or prospective holder
the right to require the Company, upon any registration of any of its
securities, to include, among the securities which the Company is then
registering, securities owned by such holder, unless under the terms of such
agreement, such holder or prospective holder may include such securities in any
such registration only to the extent that the inclusion of its securities will
not limit the number of Registrable Securities sought to be included by the
Holders of Registrable Securities.
10. Exception to Registration. The Company shall not be required to
-------------------------
effect a registration under this Agreement if (i) in the written opinion of
counsel for the Company, which counsel and the opinion so rendered shall be
reasonably acceptable to the Holders of Registrable Securities, such Holders may
sell without registration under the Act all Registrable Securities for which
they requested registration under the provisions of the Act and in the manner
and in the quantity in which the Registrable Securities were proposed to be
sold, or (ii) the Company shall have obtained from the Commission a "no-action"
letter to that effect; provided that this Section 10 shall not apply to sales
made under Rule 144(k) or any successor rule promulgated by the Commission until
after the effective date of the Company's initial registration of shares under
the Act or (iii) if the Company determines in its good faith judgment that the
use of any prospectus would require the disclosure of material information that
the Company has a bona fide business purpose for preserving as confidential or
the disclosure of which would impede the Company's ability to consummate a
transaction, and that the Company is not otherwise required by applicable
securities laws or regulations to disclose, upon written notice of such
determination by the Company, the rights of the Holders to offer, sell or
distribute any Registrable Securities or to require the Company to take action
with respect to the registration or sale of any Registrable Securities pursuant
to this Agreement shall be suspended until the date upon which the Company
notifies the Holders in writing (the "Suspension Termination Notice") that
suspension of such rights for the grounds set forth in this paragraph is no
longer necessary, and the Company agrees to give such notice as promptly as
practicable following the date that such suspension of rights is no longer
necessary (but in any event any such suspension shall be effective for a period
not in excess of 60 consecutive days and for no more than 180 days in any
calendar year). If the Company shall give any such notice, the time periods set
forth in Section 2 above shall be extended by the number of days during which
the period from and including the date of the
7
<PAGE>
giving of such notice of suspension to and including the date the Company
delivers the Suspension Termination Notice. Notwithstanding the foregoing, in no
event shall the provisions of this Section 10 be construed to preclude a Holder
of Registrable Securities from exercising rights under Section 3 for a period of
three years after the effective date of the Company's initial registration of
shares under the Act.
The Initiating Investors each agree not to offer, sell, contract to sell or
otherwise dispose of any Registrable Securities, or any securities convertible
into or exchangeable or excisable for such securities during any period when,
and to the same extent that, any officers of the Company are restricted in
connection with an offering of securities by the Company. The Company shall give
reasonable advance notice to each such Initiating Investor of such offering.
11. Rule 144 Reporting. With a view to making available the benefits of
------------------
certain rules and regulations of the Commission which may permit the sale of
restricted securities (as that term is used in Rule 144 under the Act) to the
public without registration, the Company agrees to:
(a) make and keep public information available as those terms are
understood and defined in Rule 144 under the Act, at all times from and after
ninety days following the effective date of the first registration under the Act
filed by the Company for an offering of its securities to the general public;
(b) use its best efforts to file with the Commission in a timely
manner all reports and other documents required of the Company under the Act and
the Exchange Act at any time after it has become subject to such reporting
requirements; and
(c) so long as an Investor owns any restricted securities, furnish
to the Investor forthwith upon request a written statement by the Company as to
its compliance with the reporting requirements of Rule 144 (at any time from and
after ninety days following the effective date of the first registration
statement filed by the Company for an offering of its securities to the general
public), and of the Act and Exchange Act (at any time after it has become
subject to such reporting requirements), a copy of the most recent annual or
quarterly report of the Company, and such other reports and documents so filed
by the Company as an Investor may reasonably request in availing itself of any
rule or regulation of the Commission allowing an Investor to sell any such
securities without registration.
12. Listing Application. If shares of any class of stock of the Company
-------------------
shall be listed on a national securities exchange, the Company shall, at its
expense, include in its listing application all of the shares of the listed
class then owned by any Investor.
13. Damages. The Company recognizes and agrees that the Holder of
-------
Registrable Securities shall not have an adequate remedy if the Company fails to
comply with the provisions of this Agreement, and that damages will not be
readily ascertainable, and the Company expressly agrees that in the event of
such failure any Holder of Registrable Securities shall be
8
<PAGE>
entitled to seek specific performance of the Company's obligations hereunder and
that the Company will not oppose an application seeking such specific
performance.
14. Representations and Warranties of the Company. The Company represents
---------------------------------------------
and warrants to the Investors as follows:
(a) The execution, delivery and performance of this Agreement by the
Company have been duly authorized by all requisite corporate action and will not
violate any provision of law, any order of any court or other agency of
government by which the Company or any of its properties or assets is bound, the
Articles of Incorporation or By-laws of the Company or any provision of any
indenture, agreement or other instrument to which the Company or any or its
properties or assets is bound, conflict with, result in a breach of or
constitute (with due notice or lapse of time or both) a default under any such
indenture, agreement or other instrument or result in the creation or imposition
of any lien, charge or encumbrance of any nature whatsoever upon any of the
properties or assets of the Company.
(b) This Agreement has been duly executed and delivered by the
Company and constitutes the legal, valid and binding obligation of the Company,
enforceable against the Company in accordance with its terms.
15. Miscellaneous.
-------------
(a) All covenants and agreements contained in this Agreement by or
on behalf of any of the parties hereto shall bind and inure to the benefit of
the respective successors and assigns of the parties hereto (including without
limitation transferees of any Registrable Securities), whether so expressed or
not.
(b) All notices, requests, consents and other communications
hereunder shall be in writing and shall be mailed by certified or registered
mail, return receipt requested, postage prepaid, or telecopied or sent by other
facsimile method addressed as follows:
If to the Company or any Investor, at the address of such party set
forth on Schedule I hereto or the most recent address as is shown on the
stock records of the Company; and
If to any subsequent Holder of Registrable Securities, to it at such
address as may have been furnished to the Company in writing by such
Holder; or, in any case, at such other address or addresses as shall have
been furnished in writing to the Company (in the case of a Holder of
Registrable Securities) or to the Holders of Registrable Securities (in the
case of the Company) in accordance with the provisions of this paragraph.
(c) This Agreement shall be governed by and construed in accordance
with the laws of the Commonwealth of Massachusetts.
9
<PAGE>
(d) This Agreement may not be amended or modified, and no provision
hereof may be waived, without the written consent of the Company, the Investors
and the holders of at least a majority of the then outstanding Registrable
Securities.
(e) This Agreement may be executed in two or more counterparts, each
of which shall be deemed an original, but all of which together shall constitute
one and the same instrument.
(f) If any provision of this Agreement shall be held to be illegal,
invalid or unenforceable, such illegality, invalidity or unenforceability shall
attach only to such provision and shall not in any manner affect or render
illegal, invalid or unenforceable any other provision of this Agreement, and
this Agreement shall be carried out as if any such illegal, invalid or
unenforceable provision were not contained herein.
* * * * * * * * *
10
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
excited as an instrument under SEAL as of the date for first above written.
LOGICAL DESIGN SOLUTIONS, INC.
/s/ Mary Kay Brooks
By:________________________________
Name: Mary Kay Brooks
Title: President
SUMMIT VENTURES IV, L.P.,
By: Summit Partners IV, L.P.,
its General Partner
By: Stamps, Woodsum & Co. IV,
Its General Partner
/s/ Kevin Mohan
By: _______________________
General Partner
SUMMIT INVESTORS, III, L.P.
/s/ Kevin Mohan
By:_________________________
Authorized Signatory
/s/ Paul F. Lozier
____________________________
Paul F. Lozier
<PAGE>
SCHEDULE I
----------
Company
- -------
Logical Design Solutions, Inc.
465 South Street
Morristown, NJ 07960
Attn: President
Investors
- ---------
Name and Address
- ----------------
Summit Ventures IV, L.P.
600 Atlantic Avenue, Suite 2800
Boston, MA 02210-2227
Attn: Kevin P. Mohan
Summit Investors III, L.P.
600 Atlantic Avenue, Suite 2800
Boston, MA 02210-2227
Attn: Kevin P. Mohan
Paul F. Lozier
40 Dellwood Drive
Madison, NJ 07940
<PAGE>
EXHIBIT 10.5
REDEMPTION AGREEMENT
--------------------
This Redemption Agreement (this "Agreement") is dated as of the 19th day of
March, 1997 by and among Logical Design Solutions, Inc., a New Jersey
corporation (the "Company"), and the persons set forth on Schedule 1.1 (each an
------------
"Investor" and collectively the "Investors").
Pursuant to the terms of a 9% Senior Subordinated Debenture and Warrant
Purchase Agreement of even date (the "Purchase Agreement"), the Investors have
acquired warrants (the "Warrants") to purchase an aggregate of 215,000 shares of
the common stock, no par value per share, of the Company. Capitalized terms used
herein and not otherwise defined in this Agreement shall have the meanings
assigned to them in the Purchase Agreement.
In consideration of the execution and deliver, of the Purchase Agreement
and the agreements set forth below, the parties agree with each other as
follows:
1. Option to Sell Warrants to Company.
----------------------------------
Upon the first to occur of: (i) the liquidation, dissolution or
winding up of the Company; (ii) the sale of all or substantially all of the
Company's assets; (iii) the merger or consolidation of the Company with any
Person, or the transfer of ownership of any voting shares of the Company to any
Person as a consequence of which transaction described in this clause (iii)
those Persons who held all of the voting shares of the Company immediately prior
to such transfer do not hold a majority of the voting shares of the Company
after the consummation of such transfer (a "Control Sale") (the items described
in clauses (i) - (iii) referred to herein collectively as a "Liquidity Event"),
or (iv) March 19, 2003, the Investors may require the Company to redeem the
Warrants then held by them on the terms set forth herein; provided, however,
-------- -------
that if such request is made pursuant to clause (iv), then the Warrants as to
which redemption has been requested shall be redeemed one-half on March 19,
2003, and one-half on March 19, 2004. The Company shall use its best efforts to
give the Investors not less than 30 day's advance written notice of any proposed
Liquidity Event, and, in the event that a Liquidity Event shall not occur on or
before January 15, 2003, the Company shall give Investors notice on such date
that the Investors may elect to request redemption of Warrants on March 19,
2003. Following receipt of such notice, any Investor or Investors holding an
aggregate of not less than twenty percent (20%) of the total Shares held by the
Investors may notify the Company that it or they intend to offer to the Company
any or all of the Warrants then held by them for purchase by the Company. The
Company shall promptly give notice of such intention to all other Investors who
own Shares, and any Investor may, within ten (10) days of such notice, give the
Company notice that it intends to offer to the Company any or all of the
Warrants then held by it. The Company shall repurchase all Warrants so offered
under this Agreement as set forth below. The option to sell Warrants pursuant to
this Section 1 shall be referred to as the "Option."
2. Price.
-----
(a) The price to be paid by the Company for the Warrants to be sold
under the Option shall be the fair market value of the Warrant Shares issuable
upon exercise thereof, as of
<PAGE>
the date of such proposed repurchase. In the case of redemption requested in
connection with a Liquidity Event, fair market value of Warrant Shares shall be
the price payable to holders of shares of Common Stock in connection with such
Liquidity Event. In the case of a redemption requested pursuant to clause (iv)
of Section 1, fair market value shall be as agreed upon in good faith by the
Company and the Representative (who shall be a Person selected by the Investors
owning a majority of the Warrants to be redeemed hereunder and who shall be
hereinafter referred to as the "Representative"), taking into account, in
valuing such Warrants, all relevant facts and circumstances; provided, however,
-------- -------
that there shall be no discount to reflect the fact that the Warrants are
illiquid or represent a minority interest in the Company. If no such agreement
is reached within thirty (30) days after notice is given to the Company of the
Investors' exercise of the Option under clause (iv), the fair market value shall
be determined by appraisal as set forth below.
(b) All appraisals shall be undertaken by two appraisers, one selected by
the Board of Directors of the Company and one selected by the Representative. No
Director who is affiliated with an Investor shall vote on the selection of the
appraiser chosen by the Company. The fair market value shall be the fair market
value arrived at by those appraisers within thirty (30) days following the
appointment of the last appraiser to be appointed. In the event that the two
appraisers agree in good faith on such fair market value within such a period of
time, such agreed value shall be used for these purposes. If the appraisers
cannot agree but their valuations are within 10% of each other, the fair market
value shall be the mean of the two valuations. If the appraisers cannot agree
and the differences in the valuations are greater than 10%, the appraisers shall
select a third appraiser who will calculate fair market value independently,
and, except as provided in the next sentence, the fair market value of the
Warrants shall be the average of the two fair market values arrived at by the
appraisers who are closest in amount. If one appraiser's valuation is the mean
of the other two valuations, such mean valuation shall be the fair market value.
In the event that the two original appraisers cannot agree upon a third
appraiser within ten (10) days following the end of the thirty (30) day period
referred to above, then the third appraiser shall be appointed by the American
Arbitration Association in Boston, Massachusetts. The expenses of the appraiser
chosen by the Company will be borne by it, the expenses of the appraiser chosen
by the Investors will be borne by them, pro rata based on the number of Warrants
--- ----
being redeemed, and the expenses of the third appraiser will be borne 50% by the
Company and 50% by the Investors, pro rata based on the number of Warrants being
--- ----
redeemed; provided, however that in the event any Investor previously offering
-------- -------
his Warrants for repurchase shall notify the Company of its election not to sell
any or all of its Warrants, such Investor will be obligated to pay a portion of
the expenses of the third appraiser otherwise payable by the Company equal to a
fraction, the numerator of which is the number of Warrants such Investor
originally elected to be redeemed and the denominator of which is the total
number of Warrants the Investors requested to be redeemed.
3. Payment.
-------
(a) Within fifteen (15) days following the determination of fair market
value, as provided above, the Company shall purchase the Warrants tendered to it
at the price
2
<PAGE>
established by this Agreement (the "Redemption Price"), and the
Investors shall deliver to the Company, upon receipt of payment therefor, the
certificates for the Warrants duly endorsed by them for transfer.
(b) Payment shall be made by check or wire transfer of funds to such bank
account as each Investor shall direct.
4. Termination of Option. The obligations of the Company to purchase the
---------------------
Warrants as provided in this Agreement shall terminate immediately prior to the
consummation of a Liquidity Event.
5. Notices. All notices or other communications required or permitted to be
-------
delivered hereunder shall be in writing signed by the party giving the notice
and sent by telecopier, express delivery service, or regular or certified mail
to the address specified in the Purchase Agreement.
6. Entire Agreement. This Agreement and the agreements referred to herein
----------------
constitute the entire agreement of the parties with respect to the matters
contemplated herein. This Agreement and such other agreements supersede any and
all prior understandings as to the subject matter of this Agreement.
7. Amendments, Waivers and Consents. Any provision in this Agreement to the
--------------------------------
contrary notwithstanding, changes in or additions to this Agreement may be made,
and compliance with any covenant or provision herein set forth may be omitted or
waived, if the Company shall obtain consent thereto in writing from Persons
holding an aggregate of at least a majority of the Warrants owned by the
Investors.
8. Binding Effect; Assignment. This Agreement shall be binding upon and
--------------------------
inure to the benefit of the successors and assigns of the respective parties
hereto.
9. General. 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. In this Agreement the singular includes the plural, the plural
the singular, the masculine gender includes the neuter, masculine and feminine
genders. This Agreement shall be governed by and construed under the laws of The
Commonwealth of Massachusetts.
10. Severability. If any provision of this Agreement shall be found by any
------------
court of competent jurisdiction to be invalid or unenforceable, the parties
hereby waive such provision to the extent that it is found to be invalid or
unenforceable. Such provision shall, to the maximum extent allowable by law, be
modified by such court so that it becomes enforceable, and, as modified, shall
be enforced as any other provision hereof, with all the other provisions hereof
continuing in full force and effect.
3
<PAGE>
11. Counterparts. This Agreement may be executed in counterparts, all of
------------
which together shall constitute one and the same instrument.
******
4
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed as an instrument under SEAL as of the date for first above written.
LOGICAL DESIGN SOLUTIONS, INC.
/s/ Mary Kay Brooks
By:__________________________________
Name: Mary Kay Brooks
Title: President
SUMMIT VENTURES IV, L.P.
By: Summit Partners IV, L.P.,
its General Partner
By: Stamps, Woodsum & Co. IV,
its General Partner
/s/ Kevin Mohan
By:__________________________________
General Partner
SUMMIT INVESTORS, L.P.
/s/ Kevin Mohan
By:__________________________________
Authorized Signatory
/s/ Paul F. Lozier
_____________________________________
Paul F. Lozier
5
<PAGE>
SCHEDULE 1.1
------------
Investors
- ---------
Name and Address
- ----------------
Summit Ventures IV, L.P.
600 Atlantic Avenue, Suite 2800
Boston, MA 02210-2227
Attn: Kevin P. Mohan
Summit Investors III, L.P.
600 Atlantic Avenue, Suite 2800
Boston, MA 02210-2227
Attn: Kevin P. Mohan
Paul F. Lozier
40 Dellwood Drive
Madison, NJ 07940
6
<PAGE>
EXHIBIT 10.6
_________________________________
STOCK PURCHASE AGREEMENT
among
Allan Von Dette
and
William Engel,
on the one hand,
and
Logical Design Solutions, Inc.,
on the other hand.
___________________________________________________
Dated as of November 10, 1999
___________________________________________________
<PAGE>
Table of Contents
Page
----
1. Purchase and Sale of the Shares...................................... 1
2. Closing.............................................................. 1
(a) Closing....................................................... 1
(b) Consideration................................................. 1
(c) Escrow........................................................ 1
3. Representations and Warranties of the Sellers........................ 1
(a) Organization and Standing; Books and Records.................. 2
(b) Authority..................................................... 2
(c) Ownership of Capital Stock of the Company; the Shares......... 2
(d) No Conflicts; Consents........................................ 3
(e) Capital Stock of the Company.................................. 3
(f) Equity Interests.............................................. 4
(g) Financial Statements; Undisclosed Liabilities................. 4
(h) Absence of Changes or Events.................................. 4
(i) Taxes......................................................... 5
(j) Assets Other than Real Property Interests..................... 6
(k) Title to Real Property........................................ 7
(l) Contracts..................................................... 7
(m) Litigation.................................................... 7
(n) Insurance..................................................... 8
(o) Benefit Plans................................................. 8
(p) Compliance with Applicable Laws............................... 9
(q) Employee and Labor Matters.................................... 9
(r) Transactions with Affiliates.................................. 10
(s) Corporate Name................................................ 10
(t) Customers..................................................... 10
(u) Private Offering.............................................. 10
(v) Intellectual Property......................................... 11
(w) Technology.................................................... 11
(x) Brokers....................................................... 12
4. Representations and Warranties of the Buyer.......................... 12
(a) Authority..................................................... 12
(b) No Conflicts; Consents........................................ 12
(c) LDS Shares.................................................... 12
(d) Brokers....................................................... 12
5. Covenants of the Sellers............................................. 13
(a) Confidentiality............................................... 13
(b) Supplemental Disclosure....................................... 13
(c) Corporate Name................................................ 13
(d) Records....................................................... 13
i
<PAGE>
6. Covenants of the Buyer............................................... 14
(a) Confidentiality............................................... 14
(b) Supplemental Disclosure....................................... 14
(c) Employees and Employee Benefit Plans.......................... 14
(d) Establishment of Retention Bonus Pool......................... 14
7. Mutual Covenants..................................................... 15
(a) Further Assurances............................................ 15
(b) Publicity..................................................... 15
8. Conditions to Closing................................................ 15
(a) Each Party's Obligation....................................... 15
(b) The Sellers' Obligation....................................... 16
(c) The Buyer's Obligation........................................ 16
9. Indemnification...................................................... 17
(a) Tax Indemnification........................................... 17
(b) General Indemnification by the Sellers........................ 18
(c) General Indemnification by the Buyer.......................... 18
(d) Losses Net of Insurance, etc.................................. 18
(e) Termination of Indemnification under Sections
9(b) and 9(c)................................................. 19
(f) Procedures Relating to Indemnification
(Other than under Section 9(a))............................... 19
(g) Other Claims.................................................. 21
(h) Procedures Relating to Indemnification of Tax Claims.......... 21
(i) Satisfaction of Claims........................................ 22
10. Tax Matters.......................................................... 22
11. Assignment........................................................... 24
12. No Third-Party Beneficiaries......................................... 25
13. Survival............................................................. 25
14. Expenses............................................................. 25
15. Amendments........................................................... 25
16. Notices.............................................................. 25
17. Interpretation; Exhibits and Schedules............................... 26
18. Counterparts......................................................... 26
19. Entire Agreement..................................................... 26
20. Severability......................................................... 27
ii
<PAGE>
21. Consent to Jurisdiction.............................................. 27
22. Governing Law........................................................ 27
Exhibit A Form of Escrow Agreement
Exhibit B Form of Employment Agreement
Exhibit C Confidentiality Agreement, as Amended
Exhibit D Form of Stockholders Agreement
Schedule 2(b) Selling Stockholders/Consideration
Schedule 3(e) Capital Stock of the Company
Schedule 3(g) Financial Statements; Undisclosed Liabilities
Schedule 3(h) Absence of Changes or Events
Schedule 3(i) Taxes
Schedule 3(k) Title to Real Property
Schedule 3(l) Contracts
Schedule 3(n) Insurance
Schedule 3(o) Benefit Plans
Schedule 3(p) Compliance with Applicable Laws
Schedule 3(r) Transactions with Affiliates
Schedule 3(t) Customers
Schedule 3(v) Intellectual Property
iii
<PAGE>
Table of Definitions
Applicable Laws ......................................................3(p)
Auditor ..........................................................2(d)(iv)
Beardsley Purchase ...............................................3(c)(iv)
Benefit Plans .....................................................3(o)(i)
Buyer ...........................................................Preamble
Closing ..............................................................2(a)
Closing Date .........................................................2(a)
Code ...........................................................3(i)(i)(D)
Confidentiality Agreement ............................................5(c)
Consideration ....................................................Preamble
Contracts ............................................................3(l)
ERISA .............................................................3(o)(i)
Employment Agreements .............................................8(c)(v)
Escrow Agent .........................................................2(c)
Escrow Agreement .....................................................2(c)
Escrow Amount ........................................................2(c)
Financial Statements .................................................3(g)
Governmental Entity ..................................................3(d)
Intellectual Property ................................................3(v)
Interest Rate .....................................................2(d)(v)
IRS ............................................................3(i)(i)(C)
LDS Shares ...........................................................2(b)
Leased Property ......................................................3(k)
Loss .................................................................9(d)
Material Adverse Effect...............................................3(a)
New Jersey Act .......................................................3(d)
Non-Voting Stock .................................................3(c)(iv)
October Balance Sheet ................................................3(g)
Pension Plans ...................................................3(o)(iii)
Permitted Liens....................................................3(j)(i)
Plan .............................................................3(e)(ii)
Pre-Closing Tax Period .........................................3(i)(i)(E)
Property Taxes ....................................................9(a)(i)
Records ..............................................................5(f)
RIA ..............................................................3(l)(ii)
Schupp Buy-Back ..................................................3(c)(iv)
Securities Act .......................................................3(u)
Sellers .........................................................Preamble
Service Agreement ....................................................5(b)
Shareholders Agreement ..........................................8(c)(iii)
Shares ..........................................................Preamble
Straddle Period ......................................................9(a)
Subsidiary ...........................................................3(a)
System Software ......................................................3(w)
iv
<PAGE>
Tax Claim ............................................................9(h)
Tax or Taxes ...................................................3(i)(i)(A)
Tax Return .....................................................3(i)(i)(B)
Third Party Claim ....................................................9(f)
Virginia Act .........................................................3(d)
Voting Stock .........................................................3(e)
Year 2000 Compliant ..................................................3(w)
v
<PAGE>
STOCK PURCHASE AGREEMENT
STOCK PURCHASE AGREEMENT, dated as of November 10, 1999, by and among Allan
Von Dette and William Engel (the "Sellers"), on the one hand, and Logical Design
Solutions, Inc., a corporation organized under the laws of the State of New
Jersey (the "Buyer"), on the other hand.
The Sellers desire to sell to the Buyer, and the Buyer desires to purchase
from the Sellers, all of the issued and outstanding shares of the Class A,
Voting Common Stock, no par value per share (the "Shares"), of Jump! Information
Technologies, Inc., a corporation organized under the laws of the Commonwealth
of Virginia that is wholly-owned of record by the Sellers (the "Company"), in
exchange for the consideration set forth in Section 2 (the "Consideration").
Accordingly, the Sellers and the Buyer hereby agree as follows:
1. Purchase and Sale of the Shares. On the terms and subject to the
-------------------------------
conditions of this Agreement, the Sellers shall sell, transfer and deliver or
cause to be sold, transferred and delivered to the Buyer, and the Buyer shall
purchase from the Sellers, in each case free and clear of all liens, charges and
encumbrances of any kind, the Shares for the Consideration, payable as set forth
below in Section 2.
2. Closing. (a) Closing. The closing (the "Closing") of the purchase and
------- -------
sale of the Shares shall be held at the offices of Brown & Wood llp, One World
Trade Center, New York, New York 10048, at 10:00 a.m. New York City time on
November 10, 1999 (the "Closing Date").
(b) Consideration. At the Closing, (i) subject to Section 2(c) below, the
Buyer shall deliver to each Seller, (x) the cash component of the Consideration
as set forth on Schedule 2(b) hereto payable by the Buyer to each Seller in
immediately available funds by wire transfer to a bank account designated in
writing by such Seller and (y) the number of shares of common stock of the
Buyer, no par value per share (the "LDS Shares"), as set forth on Schedule 2(b)
hereto issuable by the Buyer to each such Seller and (ii) each Seller shall
deliver or cause to be delivered to the Buyer certificates representing all
Shares owned of record by such Seller, duly endorsed in blank or accompanied by
stock powers duly endorsed in blank in proper form for transfer, with
appropriate transfer stamps, if any, affixed.
(c) Escrow. In connection with Section 9 hereof, the number of LDS Shares
set forth under the column heading "Escrow Amounts LDS Shares" on Schedule 2(b)
hereto (the "Escrow Amount") of the Consideration shall be delivered by the
Buyer on the Closing Date to First Union National Bank, as escrow agent (the
"Escrow Agent"), under an escrow agreement to be entered into on or immediately
prior to the Closing Date by the Sellers, the Buyer and the Escrow Agent
substantially in the form of Exhibit A hereto (the "Escrow Agreement").
3. Representations and Warranties of the Sellers. The Sellers hereby
---------------------------------------------
jointly and severally represent and warrant to the Buyer as follows:
<PAGE>
(a) Organization and Standing; Books and Records. (i) The Company is a
corporation duly organized, validly existing and in good standing under the laws
of the Commonwealth of Virginia. The Company has no Subsidiaries (as defined
below). The Company has all requisite corporate power and authority necessary to
carry on its business as presently conducted and to enable it to own, lease or
otherwise hold its properties and assets. The Company is duly qualified to do
business and in good standing as a foreign corporation in each jurisdiction in
which the conduct or nature of its business or the ownership, leasing or holding
of its properties or assets makes such qualification necessary, except such
jurisdictions where the failure to be so qualified or in good standing,
individually or in the aggregate, would not have a material adverse effect on
the business, condition (financial or otherwise), results of operations or
prospects of the Company (a "Material Adverse Effect"). The term "Subsidiary"
means each person of which a majority of the voting power of the voting equity
securities or equity interest is owned, directly or indirectly, by the Company.
(ii) The Sellers have delivered to the Buyer true and complete
copies of the Articles of Incorporation and By-laws, each as amended to date, of
the Company. The stock certificates and transfer books and the minute books of
the Company (which have been made available for inspection by the Buyer prior to
the execution and delivery of this Agreement) are true and complete.
(b) Authority. Each Seller has all requisite power and authority to
enter into this Agreement and the Escrow Agreement, to perform his obligations
hereunder and thereunder and to consummate the transactions contemplated hereby
and thereby. All acts and other proceedings required to be taken by each Seller
to authorize the execution, delivery and performance of this Agreement and the
Escrow Agreement and the consummation of the transactions contemplated hereby
and thereby have been duly and properly taken. This Agreement and the Escrow
Agreement have been duly executed and delivered by each Seller and constitute
legal, valid and binding obligations of each Seller, enforceable against each
Seller in accordance with their terms. Any action required to be taken by the
shareholders of the Company or Board of Directors of the Company in connection
with approving this Agreement and authorizing the consummation of the
transactions contemplated herein has been taken.
(c) Ownership of Capital Stock of the Company; the Shares. (i) The
Sellers are the record owners of the Shares listed beside their respective names
on Schedule 2(b) hereto. Each Seller has good and valid title to such Shares
held of record, in each case free and clear of any liens, charges or
encumbrances of any kind.
(ii) Upon delivery to the Buyer at the Closing of certificates
representing the Shares, duly endorsed by the Sellers for transfer to the Buyer,
and upon the Sellers' receipt of the Consideration (net of the Escrow Amount),
good and valid title to the Shares will pass to the Buyer, free and clear of any
liens, charges or encumbrances of any kind, other than those arising from acts
of the Buyer or its affiliates. Other than this Agreement, the Shares are not
subject to any agreement, contract, commitment, understanding or arrangement,
2
<PAGE>
including any such agreement, contract, commitment, understanding or arrangement
restricting or otherwise relating to the voting, dividend rights or disposition
of the Shares.
(iii) Each of the shareholders agreement, dated October 30, 1998,
among the Sellers, Jeffrey Beardsley, John Schupp and the Company and the voting
agreement, dated October 30, 1998, among the Sellers and Jeff Beardsley has been
validly terminated.
(iv) Immediately prior to the Closing, the Company purchased all
of the shares of Series A, Class B, Non-Voting Common Stock, no par value per
share, of the Company (the "Non-Voting Stock") owned by Jon Schupp (the "Schupp
Buy-Back"). Immediately prior to the Closing, each of the Sellers purchased
350,000 Voting Shares from Jeffrey Beardsley (the "Beardsley Purchase"). The
consummation of the Schupp Buy-Back and the Beardsley Purchase were each in
compliance with all applicable Federal and state laws and regulations relating
to the offer, sale and purchase of securities.
(d) No Conflicts; Consents. The execution and delivery of this
Agreement by each Seller and the Escrow Agreement by each Seller do not, and the
consummation of the transactions contemplated hereby and thereby and compliance
with the terms hereof and thereof will not, conflict with, or result in any
violation of or default (with or without notice or lapse of time, or both)
under, or give rise to a right of termination, cancellation or acceleration of
any obligation or to loss of a material benefit under, or result in the creation
of any lien, charge or encumbrance of any kind upon any of the properties or
assets of the Company under, any provision of (i) the Articles of Incorporation
or By-laws of the Company, (ii) any note, bond, mortgage, indenture, deed of
trust, license, lease, contract, commitment, agreement or arrangement to which
the Company is a party or by which it or its properties or assets are bound or
(iii) any judgment, order or decree, or statute, law, ordinance, rule or
regulation, applicable to the Company or its properties or assets. No consent,
approval, license, permit, order or authorization of, or registration,
declaration or filing with, any Federal, state, local or foreign government or
any court of competent jurisdiction, administrative agency or commission or
other governmental authority or instrumentality, domestic or foreign, or any
national securities or commodities exchange or other regulatory or self-
regulatory body or association (a "Governmental Entity") is required to be
obtained or made by or with respect to any Seller or the Company or any of their
respective affiliates in connection with (A) the execution, delivery and
performance of this Agreement or the Escrow Agreement or the consummation of the
transactions contemplated hereby or thereby or (B) the conduct by the Company of
its business following the Closing as conducted on the date hereof, except for
filings (if any) to be made pursuant to the Virginia Stock Corporation Act (the
"Virginia Act") or the New Jersey Business Corporation Act (the "New Jersey
Act").
(e) Capital Stock of the Company. (i) The authorized capital stock of
the Company consists of 2,100,000 shares of Class A Voting Common Stock, no par
value per share (the "Voting Stock"), and 500,000 shares of Non-Voting Stock, of
which no shares of Non-Voting Stock are issued and outstanding and 2,100,000
shares of Voting Stock, constituting the Shares, are duly authorized and validly
issued and outstanding, fully paid and nonassessable, and
3
<PAGE>
all the certificates representing the Shares are in the physical possession of
the Sellers. Except for the Shares, there are no shares of capital stock of the
Company outstanding. None of the Shares have been issued in violation of, or are
subject to, any purchase option, call, right of first refusal, preemptive,
subscription or similar right under any provision of applicable law, the
Articles of Incorporation or By-laws of the Company or any agreement, contract
or instrument to which any Seller or the Company is a party or by which any of
them or any of their respective properties or assets is bound. There are no
outstanding warrants, options, rights, "phantom" stock rights, agreements,
convertible or exchangeable securities or other commitments. There are no equity
securities of the Company reserved for issuance for any purpose. There are no
outstanding bonds, debentures, notes or other indebtedness having the right to
vote on any matters on which stockholders of the Company may vote.
(ii) The Company's Non-Qualified Stock Option Plan (the "Plan") has
been validly terminated and is no longer in force or effect and all options
previously issued under the Plan have been validly terminated and are no longer
in force or effect. Attached hereto as Schedule 3(e), are the written agreements
entered into by each holder of previously issued options regarding termination
of his or her options.
(f) Equity Interests. The Company does not directly or indirectly own
any capital stock of or other equity interests in any corporation, partnership
or other person, and the Company is not a member of or participant in any
partnership, joint venture or similar person.
(g) Financial Statements; Undisclosed Liabilities. (i) Schedule 3(g)
sets forth (A) the unaudited balance sheet, dated as of October 31, 1999, of the
Company (the "October Balance Sheet"), (B) the unaudited balance sheet of the
Company as of December 31, 1998, and the unaudited statements of operations of
the Company for the period from inception (March 1, 1998) to December 31, 1998
(the financial statements described in clauses (A) and (B) above, are
collectively referred to herein as the "Financial Statements") and (C) other
known liabilities of the Company. The Financial Statements are complete and
correct, are in accordance with the books and records of the Company and fairly
present the financial condition and results of operations of the Company as of
the respective dates thereof and for the respective periods indicated.
(ii) The Company does not have any liabilities or obligations of
any nature (whether accrued, absolute, contingent, threatened or otherwise),
except (A) as disclosed, reflected or reserved against in the October Balance
Sheet, (B) for liabilities and obligations incurred in the ordinary course of
business since the date of the October Balance Sheet, incurred not in violation
of this Agreement and that would not, individually or in the aggregate, result
in a Material Adverse Effect, (C) for Taxes (as defined in Section 3(i)) and (D)
as disclosed on Schedule 3(g).
(h) Absence of Changes or Events. Except as set forth in Schedule
3(h), since the date of the October Balance Sheet, there has not been any
material adverse change (or any development that is reasonably likely to result
in any material adverse change) in the business, assets, condition (financial or
otherwise), results of operations or prospects of the Company.
4
<PAGE>
Except as set forth in Schedule 3(h), since the date of the October Balance
Sheet, the business of the Company has been conducted in the ordinary course and
in substantially the same manner as previously conducted, and the Company has
not (i) declared or paid any dividend or made any other distribution to its
stockholders whether or not upon or in respect of any shares of its capital
stock, (ii) redeemed or otherwise acquired any shares of its capital stock or
issued any capital stock or any option, warrant or right relating thereto or any
securities convertible into or exchangeable for any shares of capital stock,
(iii) adopted or amended any Benefit Plan (as defined in Section 3(o)), except
as required by law, or entered into or amended any employment, severance or
consulting agreement, contract or similar arrangement, (iv) granted to any
director, officer or employee any increase in compensation or benefits, except
for increases for any such director, officer or employee in the ordinary course
of business consistent with past practice or as may be required under existing
agreements, (v) incurred or assumed any liability, obligation or indebtedness
for borrowed money or guaranteed any such liability, obligation or indebtedness,
(vi) extended any credit to any person, except in the ordinary course of
business, (vii) permitted, allowed or suffered any of its assets to become
subject to any mortgage, security interest, lien, charge, encumbrance, easement,
covenant, right-of-way or other similar restriction of any nature whatsoever,
(viii) cancelled any indebtedness or waived any claims or rights of substantial
value, except for customer trade adjustments in the ordinary course of business
that do not exceed $1,000 individually or $5,000 in the aggregate, (ix) entered
into any agreement, contract or other arrangement with any Seller or any of
their affiliates, (x) made any change in any method of accounting or accounting
practice or policy, (xi) made, changed or revoked any election relating to the
Company or the Shares under any Tax law, except as required by law or (xii)
entered into, or modified, amended, terminated, or permitted the lapse of, any
lease of real property or other material agreement relating to real property.
(i) Taxes. (i) For purposes of this Agreement, (A) "Tax" or "Taxes"
shall mean all taxes, charges, fees, levies or other assessments, including,
without limitation, income, gross receipts, excise, property, sales,
withholding, social security, occupation, use, service, license, payroll,
franchise, transfer and recording taxes, fees and charges, including estimated
taxes, imposed by the United States or any taxing authority (domestic or
foreign), whether computed on a separate, consolidated, unitary, combined or any
other basis; and such term shall include any interest, fines, penalties or
additional amounts attributable to, or imposed upon, or with respect to any such
taxes, charges, fees, levies or other assessments; (B) "Tax Return" shall mean
any return, report or other document or information required to be supplied to a
taxing authority in connection with Taxes; (C) "IRS" shall mean the Internal
Revenue Service; (D) "Code" shall mean the Internal Revenue Code of 1986, as
amended; and (E) "Pre-Closing Tax Period" shall mean all taxable periods ending
on or beforeDecember 31, 1998.
(ii) The Company is a "C" corporation as defined in the Code and has
been a "C" corporation since inception.
(iii) Since inception, the only jurisdictions where the Company has
filed any income tax returns are with the Federal government of the United
States of America
5
<PAGE>
and with the Commonwealth of Virginia. The Sellers have delivered to the Buyer
true and correct copies of all Tax Returns.
(iv) Except as set forth in Schedule 3(i), (A) the Company has (x)
duly filed with the appropriate Governmental Entities all Tax Returns required
to be filed by it on or prior to the date hereof, and such Tax Returns are true,
correct and complete in all material respects and (y) duly paid in full all
Taxes for the Pre-Closing Tax Period, (B) there are no liens for Taxes upon the
Shares or the assets of the Company except for statutory liens for current Taxes
not yet due, (C) the Company has complied in all respects with all applicable
laws, rules and regulations relating to the payment and withholding of Taxes
(including, without limitation, withholding of Taxes pursuant to Sections 1441,
1442, 3121 and 3402 of the Code or similar provisions under any foreign laws)
and has, within the time and the manner prescribed by law, withheld from and
paid over to the proper Governmental Entities all amounts required to be so
withheld and paid over under applicable laws, (D) no Federal, state, local or
foreign audits or other administrative proceedings or court proceedings are
presently pending with regard to any Taxes or Tax Returns of the Company, and
the Company has not received notice of any pending audits or proceedings, (E)
there are no outstanding written requests, agreements, consents or waivers to
extend the statutory period of limitations applicable to the assessment of any
Taxes or deficiencies against the Company, (F) the Company is not a party to any
agreement providing for the allocation or sharing of Taxes, (G) the Company is
not a party to any agreement, contract or other arrangement that could result,
separately or in the aggregate, in the payment of any "excess parachute
payments" within the meaning of Section 280G of the Code and (H) no power of
attorney has been executed by the Company with respect to any matter relating to
Taxes which is currently in force.
(j) Assets Other than Real Property Interests. (i) The Company has good
and valid title to all assets (other than real property interests) reflected on
the October Balance Sheet or acquired after the date thereof, except those sold
or otherwise disposed of for fair value since the date of the October Balance
Sheet in the ordinary course of business consistent with past practice and not
in violation of this Agreement, in each case free and clear of all liens,
charges or encumbrances of any kind except (A) mechanics', carriers', workmen's,
repairmen's or other like liens arising or incurred in the ordinary course of
business, liens arising under original purchase price conditional sales
contracts and equipment leases with third parties entered into in the ordinary
course of business and liens for Taxes that are not due and payable or that may
thereafter be paid without penalty and (B) other imperfections of title or
encumbrances, if any, that do not, individually or in the aggregate, materially
impair the continued use and operation of the assets to which they relate in the
business of the Company as presently conducted (the liens and imperfections of
title described in clauses (A) and (B) above are hereinafter referred to
collectively as "Permitted Liens").
(ii) All leased personal property of the Company is in all material
respects in the condition required of such property by the terms of the lease
applicable thereto during the term of the lease and upon the expiration thereof,
and the Company has made all payments required by all such leases.
6
<PAGE>
(k) Title to Real Property. The Company does not own in fee any real
property. Schedule 3(k) sets forth a complete list of all real property and
interests in real property leased by the Company (individually, a "Leased
Property"). The Company has good and valid title to the leasehold estates in all
Leased Property free and clear of all liens, charges and encumbrances
(including, without limitation, leases, subleases, assignments, easements,
covenants, rights-of-way and other similar restrictions of any nature
whatsoever), except (A) such as are set forth in Schedule 3(k), (B) Permitted
Liens, (C) easements, covenants, rights-of-way and other similar restrictions of
record, (D) any conditions that may be shown by a current, accurate survey or
physical inspection of any Leased Property made prior to Closing and (E) (I)
zoning, building and other similar restrictions, (II) mortgages, security
interests, liens, charges, encumbrances, easements, covenants, rights-of-way and
other similar restrictions that have been placed by any developer, landlord or
other third party on property over which the Company has easement rights or on
any Leased Property, and subordination or similar agreements relating thereto,
and (III) unrecorded easements, covenants, rights-of-way and other similar
restrictions, none of which items set forth in clauses (I), (II) and (III),
individually or in the aggregate, materially impair the continued use and
operation of the property to which they relate in the business of the Company as
presently conducted. The current use by the Company of the offices located on
Leased Property does not violate any local zoning or similar land use or
government regulations in any material respect.
(l) Contracts. (i) Schedule 3(l) sets forth a true and complete list of
all agreements, contracts, leases, subleases, licenses, options, instruments or
arrangements (oral or written) (collectively, the "Contracts") which the Company
is a party to. Except as set forth in Schedule 3(l), all Contracts are valid,
binding and in full force and effect and are enforceable by the Company in
accordance with its terms. Except as set forth in Schedule 3(l), the Company has
performed all material obligations required to be performed by it to date under
the Contracts and it is not (with or without the lapse of time or the giving of
notice, or both) in breach or default in any material respect thereunder and, to
the knowledge of the Sellers, no other party to any of the Contracts is (with or
without the lapse of time or the giving of notice, or both) in breach or default
in any material respect thereunder. All Contracts have been made available for
inspection by the Buyer prior to the execution and delivery of this Agreement.
All third party consents necessary to consummate the transactions set forth
herein (if any) have been received by the Company.
(ii) The special agreement, dated April 1, 1998, by and between the
Company and Research Institute of America Group ("RIA") relating to a $250,000
"conditional investment" has been validly amended such that paragraphs 4, 5 and
6 of such agreement are no longer in force or effect. Such amendment is attached
hereto on Schedule 3(l).
(m) Litigation. There is no claim, action, suit, proceeding,
arbitration, investigation or inquiry before any Governmental Entity or any
private arbitration tribunal now pending, or, to the best knowledge of the
Sellers, threatened, against, relating to or affecting the Company or the
properties, assets or business of the Company or the transactions contemplated
by this Agreement and the Escrow Agreement. To the knowledge of the Sellers,
there is no basis
7
<PAGE>
for any such claim, action, suit, proceeding, arbitration, investigation or
inquiry which, individually or in the aggregate, may have a Material Adverse
Effect. Neither the Company nor any of the directors, officers or employees of
the Company has been permanently or temporarily enjoined or prohibited by
judgment, order or decree of any Governmental Entity from engaging in or
continuing any conduct or practice in connection with the businesses engaged in
by the Company. There is not in existence any judgment, order or decree of any
Governmental Entity enjoining or prohibiting the Company from taking, or
requiring the Company to take, any action of any kind or to which the Company or
any of its properties or assets is subject or bound. The Company is not in
violation in any material respect of any judgment, order or decree of any
Governmental Entity.
(n) Insurance. The Company maintains policies of fire and casualty,
liability and other forms of insurance in such amounts, with such deductibles
and against such risks and losses as are reasonable for the business and assets
of the Company. The insurance policies maintained with respect to the Company
and its assets and properties are listed in Schedule 3(n). All such policies are
in full force and effect, all premiums due and payable thereon have been paid
(other than retroactive or retrospective premium adjustments that are not yet,
but may be, required to be paid with respect to any period ending prior to the
Closing Date), and no notice of cancellation or termination has been received
with respect to any such policy which has not been replaced on substantially
similar terms prior to the date of such cancellation. The activities and
operations of the Company have been conducted in a manner so as to conform in
all material respects to all applicable provisions of such insurance policies.
(o) Benefit Plans. (i) Schedule 3(o) sets forth a list and brief
description of all "employee benefit plans" (as defined in Section 3(3) of the
Employee Retirement Income Security Act of 1974, as amended ("ERISA")) and all
other retirement, deferred compensation, health, fringe benefit, severance or
similar employee benefit or compensation arrangements (all the foregoing being
herein called "Benefit Plans") maintained by the Company for the benefit of any
director, officer or employee of the Company. The Sellers have delivered or made
available to the Buyer true, complete and correct copies of (A) each Benefit
Plan (or, in the case of any unwritten Benefit Plans, descriptions thereof), (B)
the most recent annual report on Form 5500 (together with all schedules and
exhibits filed therewith) filed with the IRS with respect to each Benefit Plan
(if any such report was required) and the most recent summary annual report
distributed to participants with respect to each Benefit Plan for which a
summary annual report is required and (C) the most recent summary plan
description for each Benefit Plan for which such a summary plan description is
required. None of the Benefit Plans is (A) a "multiple employer plan" (within
the meaning of Section 413(c) of the Code), (B) a "multiemployer plan" (within
the meaning of Section 3(37) of ERISA), or (C) a "welfare benefit fund" (within
the meaning of Section 419(e) of the Code). None of the Benefit Plans is subject
to Section 412 of the Code or Title IV of ERISA, and the Company has not
previously maintained or contributed to (or been required to maintain or
contribute to) any plan which was subject to Section 412 of the Code or Title IV
of ERISA with respect to which the Company could have any liability therefor.
The Company is not a member of a controlled group, under common control, or
required to be treated
8
<PAGE>
as a single employer with any other entity (within the meaning of Section
414(b), (c) or (m) of the Code or Section 4001(a)(14) or (b)(1) of ERISA).
(ii) Each Benefit Plan has been administered in all material
respects in accordance with its terms. The Company and all the Benefit Plans are
in compliance in all material respects with the applicable provisions of ERISA
and the Code and all other applicable law. There are no lawsuits, actions,
termination proceedings or other proceedings pending or, to the knowledge of the
Sellers, threatened against or involving any Benefit Plan and, to the knowledge
of the Sellers, there are no investigations by any Governmental Entity or other
claims (except claims for benefits payable in the normal operation of the
Benefit Plans) pending or threatened against or involving any Benefit Plan or
asserting any rights to benefits under any Benefit Plan.
(iii) All Benefit Plans which are "employee pension benefits plans"
(as defined in Section 3(2) of ERISA) (the "Pension Plans") have been the
subject of determination letters from the IRS to the effect that such Pension
Plans are qualified and exempt from Federal income taxes under Sections 401(a)
and 501(a), respectively, of the Code, and no such determination letter has been
revoked nor, to the knowledge of the Sellers, has revocation been threatened,
nor has any such Pension Plan been amended or administered since the date of its
most recent determination letter or application therefor in any respect that
would adversely affect its qualification.
(iv) None of the Benefit Plans which is a "employee welfare benefit
plans" (as defined in Section 3(1) of ERISA) provides for post-retirement
medical, dental or life insurance benefits, the cost of which is not entirely
borne by the retirees eligible therefor.
(v) Except as set forth in Schedule 3(o), no director, officer or
employee or former director, officer or employee of the Company will become
entitled to payment or accelerated vesting of any stock option bonus,
retirement, severance, job security or similar benefit or any enhanced benefit
solely as a result of the transactions contemplated hereby.
(p) Compliance with Applicable Laws. The Company is in compliance in all
material respects with all applicable statutes, laws, ordinances, rules, orders
and regulations of any Governmental Entity ("Applicable Laws"), including,
without limitation, (i) the Foreign Corrupt Practices Act, (ii) the Federal
Election Campaign Act, (iii) any provision of any Applicable Law relating to
campaign financing and/or contributions to political candidates, political
parties, political action committees and the like and (iv) any provision of any
Applicable Law relating to government procurement practices and procedures.
Except as set forth in Schedule 3(p), none of the Sellers or the Company has
received any written communication since inception of the Company from a
Governmental Entity that alleges that the Company is not in compliance in any
material respect with any Applicable Laws.
(q) Employee and Labor Matters. (i) No action, suit, complaint, charge,
arbitration, inquiry, proceeding or investigation by or before any Governmental
Entity (including without limitation the Equal Employment Opportunity
Commission), brought by or on behalf of
9
<PAGE>
any employee, prospective employee, former employee, retiree, labor organization
or other representative of the Company's employees is pending or, to the best
knowledge of the Sellers, threatened against the Company or any employee of the
Company (including, without limitation, with respect to alleged sexual
harassment); (ii) no grievance is pending or, to the best knowledge of the
Sellers, threatened against the Company; (iii) the Company is not a party to, or
otherwise bound by, any consent decree with, or citation by, any Governmental
Entity relating to employees or employment practices; and (iv) the Company is in
compliance with all applicable laws, agreements, contracts, and policies
relating to employment, employment practices, wages, hours, and terms and
conditions of employment (including, without limitation, with respect to
workmen's compensation laws and disability insurance coverage laws). The Company
is not a party to any collective bargaining agreements.
(r) Transactions with Affiliates. (i) Except as set forth in Schedule 3(r),
none of the Contracts between the Company, on the one hand, and any Seller or
any of his affiliates (other than the Company), on the other hand, will continue
in effect subsequent to the Closing. Except as set forth in Schedule 3(r), after
the Closing neither any Seller nor any of his affiliates will have any interest
in any property (real or personal, tangible or intangible) or contract used in
or pertaining to the business of the Company. Neither any Seller nor any of his
affiliates has any direct or indirect ownership interest in any person in which
the Company has any direct or indirect ownership interest or with which the
Company competes or has a business relationship.
(ii) The Sellers and the employees of the Company have repaid all
outstanding amounts due to the Company.
(s) Corporate Name. The Company (i) has the exclusive right to use the name
"Jump! Information Technologies, Inc." as the name of a corporation in the
Commonwealth of Virginia and (ii) has not received any notice of conflict since
inception with respect to the rights of others regarding such name.
(t) Customers. Except as set forth in Schedule 3(t), the Company does not
have any customer from which it received more than 1% of its revenues during its
most recent full fiscal year. Except as set forth in Schedule 3(t), since the
date of the October Balance Sheet, there has not been any material adverse
change in the business relationship of the Company with any customer set forth
in Schedule 3(t).
(u) Private Offering. Each of the Sellers (i) is acquiring all of the LDS
Shares to be acquired by him hereunder with no view or intention to offer for
sale any of the LDS Shares in a manner which would violate the Securities Act of
1933, as amended (the "Securities Act") or state securities laws; (ii) has
carefully reviewed and understands the risks of, and other considerations
relating to, acquiring the LDS Shares and an investment in the Buyer, and fully
understands the limitations on transfer of the LDS Shares under the Securities
Act and state securities laws and acknowledges and agrees that the certificates
representing the LDS Shares shall contain a legend regarding restrictions on
transfer under the Securities Act and the Shareholders Agreement (as defined
herein); (iii) has consulted his own financial, legal and tax advisors with
respect to the economic, legal and tax consequences of an investment in the LDS
10
<PAGE>
Shares and has not relied on the Buyer, its officers, directors, affiliates or
professional advisors for advice as to such consequences; (iv) is knowledgeable
and experienced with regard to the business of the Buyer; (v) has received all
information he has requested in connection with his entry into this Agreement
and his acquisition of the LDS Shares, and has been given the opportunity and
right to meet the representatives of the Buyer and to investigate and inquire
into all aspects of the Buyer and the terms and conditions of the acquisition of
the LDS Shares.
(v) Intellectual Property. Schedule 3(v) sets forth a true and complete
list of all copyrights, patents, trademarks (registered or unregistered), trade
names and service marks and applications therefor and other material
intellectual property and proprietary rights, whether or not subject to
statutory registration or protection (collectively, "Intellectual Property"),
owned, used, filed by or licensed to the Company. With respect to registered
trademarks, Schedule 3(v) sets forth a list of all jurisdictions in which such
trademarks are registered or applied for and all registration and application
numbers. Except as set forth in Schedule 3(v), the Company owns, and the Company
has the right to use, execute, reproduce, display, perform, modify, enhance,
distribute, prepare derivative works of and sublicense, without payment to any
other person, all Intellectual Property listed in Schedule 3(v) and the
consummation of the transactions contemplated hereby will not conflict with,
alter or impair any such rights.
The Company has not granted any options, licenses or agreements of any kind
relating to Intellectual Property listed in Schedule 3(v) or the marketing or
distribution thereof. The Company is not bound by or a party to any options,
licenses or agreements of any kind relating to the Intellectual Property of any
other person, except as set forth in Schedule 3(v) and except for agreements
relating to computer software licensed to the Company in the ordinary course of
business. Subject to the rights of third parties set forth in Schedule 3(v),
all Intellectual Property listed in Schedule 3(v) is free and clear of the
claims of others and of all liens, security interests and encumbrances
whatsoever. The conduct of the business of the Company as presently conducted
does not violate, conflict with or infringe the Intellectual Property of any
other person. Except as set forth in Schedule 3(v), (i) no claims are pending,
or to the knowledge of the Sellers, threatened, against the Company by any
person with respect to the ownership, validity, enforceability, effectiveness or
use of any Intellectual Property and (ii) since inception, the Sellers and the
Company have not received any communications alleging that the Company has
violated any rights relating to Intellectual Property of any person or entity.
(w) Technology. The Sellers have taken all commercially reasonable measures
in order to insure that the computer software, computer firmware, computer
hardware (whether general or special purpose), and other similar or related
items of automated, computerized, and/or software system(s) that are material to
the Company's financial and informational systems (collectively, the "System
Software") are Year 2000 Compliant (as defined below). "Year 2000 Compliant"
means, with respect to any System Software, that such System Software will (i)
operate prior to, during and after the calendar year 2000 without error relating
to the date related data, and (ii) properly recognize and indicate dates in the
calendar year 2000 and beyond as both input and output.
11
<PAGE>
(x) Brokers. No Seller nor the Company is subject to any valid claim of any
broker, investment banker, finder or other intermediary in connection with the
transactions contemplated by this Agreement.
4. Representations and Warranties of the Buyer. The Buyer hereby
-------------------------------------------
represents and warrants to the Sellers as follows:
(a) Authority. The Buyer is a corporation duly organized, validly existing
and in good standing under the laws of the State of New Jersey. The Buyer has
all requisite corporate power and authority to enter into this Agreement and the
Escrow Agreement, to perform its obligations hereunder and thereunder and to
consummate the transactions contemplated hereby and thereby. All corporate acts
and other proceedings required to be taken by the Buyer to authorize the
execution, delivery and performance of this Agreement and the Escrow Agreement
and the consummation of the transactions contemplated hereby and thereby have
been duly and properly taken. This Agreement and the Escrow Agreement have been
duly executed and delivered by the Buyer and constitute legal, valid and binding
obligations of the Buyer, enforceable against the Buyer in accordance with their
respective terms.
(b) No Conflicts; Consents. The execution and delivery of this Agreement
and the Escrow Agreement by the Buyer do not, and the consummation of the
transactions contemplated hereby and thereby and compliance with the terms
hereof and thereof will not, conflict with, or result in any violation of or
default (with or without notice or lapse of time, or both) under, or give rise
to a right of termination, cancellation or acceleration of any obligation or to
loss of a material benefit under, or result in the creation of any lien, charge
or encumbrance of any kind upon any of the properties or assets of the Buyer
under, any provision of (i) the Certificate of Incorporation or By-laws of the
Buyer, (ii) any material note, bond, mortgage, indenture, deed of trust,
license, lease, contract, commitment, agreement or arrangement to which the
Buyer is a party or by which any of its properties or assets is bound or (iii)
any judgment, order or decree, or statute, law, ordinance, rule or regulation,
applicable to the Buyer or any of its properties or assets. No consent,
approval, license, permit, order or authorization of, or registration,
declaration or filing with, any Governmental Entity is required to be obtained
or made by or with respect to the Buyer or any of its affiliates in connection
with the execution, delivery and performance of this Agreement or the Escrow
Agreement or the consummation of the transactions contemplated hereby and
thereby.
(c) LDS Shares. Assuming that the representations set forth in Sections
3(b) and 3(u) are true and further assuming that the Sellers have the requisite
power and authority to be the lawful owners of the LDS Shares, upon delivery to
each of the Sellers at the Closing of certificates representing the LDS Shares
and upon the Buyer's receipt of the Shares, good and valid title to the LDS
Shares will pass to the Sellers, free and clear of any liens, charges or
encumbrances of any kind, other than those arising from acts of the Sellers.
(d) Brokers. The Buyer is not subject to any valid claim of any broker,
investment banker, finder or other intermediary in connection with the
transactions contemplated by this Agreement.
12
<PAGE>
5. Covenants of the Sellers. The Sellers jointly and severally covenant and
------------------------
agree as follows:
(a) Confidentiality. The Sellers acknowledge that in connection with the
purchase and sale of the Shares and the consummation of the other transactions
contemplated hereby, they and the Company are subject to the terms of a
confidentiality agreement, dated August 4, 1999, as amended by a letter
agreement dated August 12, 1999, both attached hereto as Exhibit C, between the
Buyer and the Company (the "Confidentiality Agreement"), the terms of which are
incorporated herein by reference. Each Seller hereby affirms that all terms and
conditions set forth in the Confidentiality Agreement remain in full force and
effect and apply to, among other things, this Agreement and the transactions
contemplated hereunder.
(b) Supplemental Disclosure. The Sellers shall give prompt notice to the
Buyer of (i) any representation or warranty made by any Seller contained in this
Agreement that is qualified as to materiality becoming untrue or inaccurate or
any such representation or warranty that is not so qualified becoming untrue or
inaccurate in any material respect or (ii) the failure by any Seller to comply
with or satisfy in any material respect any covenant or agreement to be complied
with or satisfied by it under this Agreement; provided, however, that no such
-------- -------
notification shall affect the representations, warranties, covenants or
agreements of the parties.
(c) Corporate Name. The Sellers shall not use, or permit any other person
(other than the Company or the Buyer and any person authorized by the Company or
the Buyer) to use, the name "Jump! Information Technologies, Inc." or any
variation thereof using the words "Jump! Information Technologies, Inc." for any
purpose whatsoever.
(d) Records. On the Closing Date, the Sellers shall deliver or cause to be
delivered to the Buyer all agreements, documents, books, records and files,
including records and files stored on computer disks or tapes or any other
storage medium (collectively, "Records"), if any, in the possession of the
Sellers relating to the business and operations of the Company, subject to the
following exceptions:
(i) The Buyer recognizes that certain Records may contain
incidental information relating to the Sellers, and that the Sellers may retain
such Records and shall provide copies of the relevant portions thereof to the
Buyer;
(ii) The Sellers may retain copies of all Records prepared in
connection with the sale of the Shares, including bids received from other
parties, if any, and analyses relating to the Company; and
(iii) The Sellers may retain any Tax Returns and supporting work
papers, and the Buyer shall be provided with copies of such Tax Returns only to
the extent that they relate to the Company's separate returns or separate Tax
liability. The Sellers may have reasonable access to the records of the Company
for tax purposes.
13
<PAGE>
6. Covenants of the Buyer. The Buyer covenants and agrees as follows:
----------------------
(a) Confidentiality. The Buyer acknowledges that the information being
provided to it in connection with the purchase and sale of the Shares and the
consummation of the other transactions contemplated hereby is subject to the
terms of the Confidentiality Agreement, the terms of which are incorporated
herein by reference. The Buyer hereby affirms that all terms and conditions set
forth in the Confidentiality Agreement remain in full force and effect and apply
to, among other things, this Agreement and the transactions contemplated
hereunder.
(b) Supplemental Disclosure. The Buyer shall give prompt notice to the
Sellers of (i) any representation or warranty made by it contained in this
Agreement that is qualified as to materiality becoming untrue or inaccurate or
any such representation or warranty that is not so qualified becoming untrue or
inaccurate in any material respect or (ii) the failure by it to comply with or
satisfy in any material respect any covenant or agreement to be complied with or
satisfied by it under this Agreement; provided, however, that no such
-------- -------
notification shall affect the representations, warranties, covenants or
agreements of the parties.
(c) Employees and Employee Benefit Plans. (i) The Buyer shall, or shall
cause the Company to, offer employment, on an at will basis and at substantially
the same rates of compensation as in effect immediately prior to the Closing, to
all employees of the Company employed at the Closing Date. Notwithstanding
anything to the contrary, no contracts of employment shall be deemed to have
been created pursuant to this Section.
(ii) The Buyer shall cause service by employees of the Company to
be recognized under each benefit plan or arrangement established, maintained or
contributed to by the Buyer after the Closing for the benefit of any such
employees for purposes of (A) eligibility to participate and (B) vesting, but in
no event shall such service be taken into account in determining the accrual of
benefits under any such benefit plan or arrangement, including, but not limited
to, a defined benefit plan.
(iii) At and after the Closing Date, the Buyer shall make adequate
provisions to carry out the agreements set forth in this Section 6(c).
(d) Establishment of Retention Bonus Pool. The Buyer shall establish, or
cause the Company to establish, a retention bonus pool in the aggregate amount
of $50,000 that shall be funded as of the Closing Date for the benefit of
certain employees of the Company (not including the Sellers or Jeffrey
Beardsley), which bonus pool shall have such terms and conditions as are
determined by the Sellers (in their sole discretion) after consulting with the
Buyer, including provisions with respect to who shall receive a bonus,
allocation of individual amounts, timing of payments, vesting schedules and
performance criteria.
14
<PAGE>
7. Mutual Covenants.
----------------
(a) Further Assurances. The Sellers shall cooperate with the Buyer, and
the Buyer shall cooperate with the Sellers, in filing any necessary
applications, reports or other documents with, giving any notices to, and
seeking any consents from, all Governmental Entities and all third parties as
may be required in connection with the consummation of the transactions
contemplated by this Agreement and the Escrow Agreement and the performance by
the Company of its business after such consummation, and in seeking necessary
consultation with and prompt favorable action by any such Governmental Entity or
third party. From time to time, as and when requested by another party hereto, a
party hereto shall execute and deliver, or cause to be executed and delivered,
all such documents and instruments and shall take, or cause to be taken, all
such further or other actions as such other party may reasonably deem necessary
or desirable to consummate the transactions and the agreements set forth herein.
(b) Publicity. The Sellers and the Buyer agree that no public release or
announcement concerning the transactions contemplated hereby shall be issued by
any party hereto or the Company without the prior consent of (i) the Buyer in
the case of a release or an announcement by a Seller or the Company or (ii) the
Sellers in the case of a release or an announcement by the Buyer (in each case
which consent shall not be unreasonably withheld), except as such release or
announcement may be required by law or the rules or regulations of any United
States or foreign securities exchange, in which case the party required to make
the release or announcement shall, if practicable, allow the Buyer or the
Sellers, as the case may be, reasonable time to comment on such release or
announcement in advance of such issuance. The Sellers shall not make any
comments or statements with respect to the transactions contemplated hereby to
any third party (including without limitation members of the news media,
securities analysts and employees of the Company) without the prior consent of
the Buyer.
8. Conditions to Closing.
---------------------
(a) Each Party's Obligation. The respective obligation of each party
hereto to effect the transactions contemplated hereby is subject to the
satisfaction or waiver as of the Closing of the following conditions:
(i) No statute, rule, regulation, executive order, decree,
temporary restraining order, preliminary or permanent injunction or other order
shall have been enacted, entered, promulgated, enforced or issued by any
Governmental Entity and no other legal restraint or prohibition preventing the
purchase and sale of the Shares or any of the other transactions contemplated by
this Agreement or the Escrow Agreement shall be in effect.
(ii) All third party consents (including those set forth on
Schedule 3(l)) and all consents of or filings with Governmental Entities
necessary (including pursuant to the New Jersey Act or the Virginia Act, if any)
for the consummation of the transactions contemplated hereby shall have been
received or made and proof thereof shall be delivered at the Closing.
15
<PAGE>
(b) The Sellers' Obligation. The obligation of the Sellers to sell and
deliver the Shares to the Buyer is subject to the satisfaction or waiver as of
the Closing of the following conditions:
(i) The representations and warranties of the Buyer made in this
Agreement qualified as to materiality shall be true and correct, and those not
so qualified shall be true and correct in all material respects, as of the
Closing, except to the extent such representations and warranties expressly
relate to an earlier date (in which case such representations and warranties
qualified as to materiality shall be true and correct, and those not so
qualified shall be true and correct in all material respects, on and as of such
earlier date). The Buyer shall have duly performed, complied with and satisfied
in all material respects all covenants, agreements and conditions required by
this Agreement to be performed, complied with or satisfied by the Buyer by the
time of the Closing. The Buyer shall have delivered to the Sellers a certificate
dated the Closing Date and signed by an officer of the Buyer confirming the
foregoing.
(ii) There shall not be pending or threatened against the Company
or any Seller any suit, action or proceeding by any Governmental Entity (or any
suit, action or proceeding by any other person that has a reasonable likelihood
of success), challenging or seeking to restrain or prohibit the purchase and
sale of the Shares or any of the other transactions contemplated by this
Agreement or the Escrow Agreement.
(c) The Buyer's Obligation. The obligation of the Buyer to purchase the
Shares from the Sellers is subject to the satisfaction (or waiver by the Buyer)
as of the Closing of the following conditions:
(i) The representations and warranties of the Sellers made in this
Agreement qualified as to materiality shall be true and correct, and those not
so qualified shall be true and correct in all material respects, as of the
Closing, except to the extent such representations and warranties expressly
relate to an earlier date (in which case such representations and warranties
qualified as to materiality shall be true and correct, and those not so
qualified shall be true and correct in all material respects, on and as of such
earlier date). The Sellers shall have duly performed, complied with and
satisfied in all material respects all covenants, agreements and conditions
required by this Agreement to be performed, complied with or satisfied by the
Sellers by the time of the Closing. Each Seller shall have delivered to the
Buyer a certificate dated the Closing Date and signed by such Seller confirming
the foregoing.
(ii) There shall not be pending or threatened against the Buyer,
the Company or any of their directors or officers any suit, action or proceeding
by any Governmental Entity (or any suit, action or proceeding by any other
person that has a reasonable likelihood of success), (A) challenging or seeking
to restrain or prohibit the purchase and sale of the Shares or any of the other
transactions contemplated by this Agreement or the Escrow Agreement or seeking
to obtain from the Buyer or any of its subsidiaries in connection with the
purchase and sale of the Shares any damages in excess of $1,000,000, (B) seeking
to prohibit or limit the ownership or operation by the Buyer or the Company of
any material portion of the business or
16
<PAGE>
assets of the Buyer, its subsidiaries or the Company, or to compel the Buyer,
its subsidiaries or the Company to dispose of or hold separate any material
portion of the business or assets of the Buyer, its subsidiaries or the Company,
in each case as a result of the purchase and sale of the Shares or any of the
other transactions contemplated by this Agreement or the Escrow Agreement, (C)
seeking to impose limitations on the ability of the Buyer to acquire or hold, or
exercise full rights of ownership of, the Shares, including the right to vote
the Shares on all matters properly presented to the stockholders of the Company
or (D) seeking to prohibit the Buyer or any of its subsidiaries from effectively
controlling in any material respect the business or operations of the Company.
(iii) The Buyer and each of the Sellers shall have executed and
delivered at Closing a shareholder agreement, substantially in the form of
Exhibit D hereto (the "Shareholders Agreement").
(iv) Each Seller, the Buyer and the Escrow Agent shall have
executed and delivered at Closing the Escrow Agreement.
(v) The Company and each of the Sellers shall have executed and
delivered at Closing employment agreements substantially in the form of Exhibit
B hereto (the "Employment Agreements").
9. Indemnification.
---------------
(a) Tax Indemnification. The Sellers, jointly and severally, shall
indemnify the Buyer and its affiliates (including the Company) and each of their
respective directors, officers, employees, stockholders, agents and other
representatives against and hold them harmless from (x) any liability for Taxes
of the Company for any Pre-Closing Tax Period, (y) any liability for Taxes of
the Sellers or any other person (other than the Company) which is or has ever
been affiliated with the Company and (z) any liability for reasonable legal,
accounting, appraisal, consulting or similar fees and expenses for any item
attributable to any item in clause (x) or (y) above. The Buyer shall, and after
the Closing shall also cause the Company to, indemnify each Seller and its
affiliates and each of their respective employees, agents and representatives
against and hold them harmless from any liability for Taxes of the Company or
any affiliate for any taxable period ending after December 31, 1998 (except to
the extent such taxable period began before December 31, 1998, in which case the
Buyer's indemnity will cover only that portion of any such Taxes that are not
for the Pre- Closing Tax Period). In the case of any taxable period that
includes (but does not end on) December 31, 1998 (a "Straddle Period"):
(i) real, personal and intangible property Taxes ("property Taxes")
of the Company for any Pre-Closing Tax Period (other than Taxes imposed in
connection with the sale of the Shares or otherwise in connection with this
Agreement or the transactions contemplated hereby) shall be equal to the amount
of such property Taxes for the entire Straddle Period multiplied by a fraction,
the numerator of which is the number of days during the Straddle Period that are
in the Pre-Closing Tax Period and the denominator of which is the number of days
in the Straddle Period; and
17
<PAGE>
(ii) the Taxes of the Company (other than property Taxes) for the
Pre-Closing Tax Period (other than Taxes imposed in connection with the sale of
the Shares or otherwise in connection with this Agreement or the transactions
contemplated hereby) shall be computed as if such taxable period ended as of the
close of business on December 31, 1998. The indemnity obligations of the Sellers
in respect of Taxes for a Straddle Period shall equal the excess of (x) such
Taxes for the Pre-Closing Tax Period over (y) the sum of (i) the amount of such
Taxes for the Pre-Closing Tax Period paid by the Sellers or any of its
affiliates (other than the Company) at any time and (ii) the amount of such
Taxes paid by the Company on or prior to December 31, 1998. The Sellers, jointly
and severally, shall initially pay such excess to the Buyer five days prior to
the date on which the Tax Return (including any Tax Return with respect to
estimated Taxes) with respect to the liability for such Taxes is required to be
filed (and if no such Tax Return is required to be filed, five days prior to the
date satisfaction of the Tax liability is required by the relevant taxing
authority). The payments to be made pursuant to this paragraph by the Sellers
with respect to a Straddle Period shall be appropriately adjusted to reflect any
final determination (which shall include the execution of Form 870-AD or any
successor form) with respect to Taxes for the Straddle Period.
(b) General Indemnification by the Sellers. The Sellers, jointly and
severally, shall indemnify the Buyer and its affiliates (including the Company)
and each of their respective directors, officers, employees, stockholders,
agents and representatives against and hold them harmless from any loss,
liability, claim, damage or expense (including reasonable legal fees and
expenses) suffered or incurred by any such indemnified party (other than any
relating to Taxes, for which indemnification provisions are set forth in Section
9(a) hereof) arising from, relating to or otherwise in respect of (i) any
failure of any representation or warranty of any of the Sellers contained in
this Agreement which survives the Closing or in any certificate delivered
pursuant hereto to be true and correct and (ii) any breach of any agreement or
covenant of any Seller contained in this Agreement.
(c) General Indemnification by the Buyer. The Buyer shall, and shall
cause the Company to, indemnify each Seller, its affiliates and each of their
respective employees, agents and representatives against and hold them harmless
from any loss, liability, claim, damage or expense (including reasonable legal
fees and expenses) suffered or incurred by any such indemnified party (other
than any relating to Taxes, for which indemnification provisions are set forth
in Section 9(a)) arising from, relating to or otherwise in respect of (i) any
failure of any representation or warranty of the Buyer contained in this
Agreement which survives the Closing or in any certificate delivered pursuant
hereto to be true and correct and (ii) any breach of any agreement or covenant
of the Buyer contained in this Agreement.
(d) Losses Net of Insurance, etc. The amount of any loss, liability,
claim, damage, expense or Tax for which indemnification is provided under this
Section 9 shall be net of any amounts actually recovered by the indemnified
party under insurance policies with respect to such loss, liability, claim,
damage, expense or Tax (collectively, a "Loss") and shall be (i) increased to
take account of any net Tax cost incurred by the indemnified party arising from
the receipt of indemnity payments hereunder (grossed up for such increase) and
(ii) reduced to take
18
<PAGE>
account of any net Tax benefit realized by the indemnified party arising from
the incurrence or payment of any such Loss. In computing the amount of any such
Tax cost or Tax benefit, the indemnified party shall be deemed to recognize all
other items of income, gain, loss, deduction or credit before recognizing any
item arising from the receipt of any indemnity payment hereunder or the
incurrence or payment of any indemnified Loss. Any indemnity payment under this
Agreement shall be treated as an adjustment to the Consideration for Tax
purposes, unless a final determination (which shall include the execution of a
Form 870-AD or successor form) with respect to the indemnified party or any of
its affiliates causes any such payment not to be treated as an adjustment to the
Consideration for United States Federal income Tax purposes.
(e) Termination of Indemnification under Sections 9(b) and 9(c). The
obligations to indemnify and hold harmless a party hereto pursuant to Sections
9(b) and 9(c), shall terminate at the close of business on the date which is one
(1) year after the Closing Date, except as follows:
(i) in the case of Sections 3(i) and 3(o), such representations and
warranties shall terminate when the applicable statute of limitations has
expired; and
(ii) in the case of Sections 3(b), 3(c)(i), 3(c)(ii), 3(e)(i), 3(u)
and Sections 4(a) and 4(c), such representations and warranties shall not
expire;
provided, however, that such obligations to indemnify and hold harmless shall
- -------- -------
not terminate with respect to any item as to which the person to be indemnified
or the related party thereto shall have, before the expiration of the applicable
period, previously made a claim by delivering a notice of such claim (stating in
reasonable detail the basis of such claim) to the indemnifying party.
(f) Procedures Relating to Indemnification (Other than under Section
9(a)). In order for a party (the "indemnified party") to be entitled to any
indemnification provided for under this Agreement (other than under Section
9(a)) in respect of, arising out of or involving a claim or demand made by any
person against the indemnified party (a "Third Party Claim"), such indemnified
party must notify the indemnifying party in writing, and in reasonable detail,
of the Third Party Claim within 10 business days after receipt by such
indemnified party of written notice of the Third Party Claim; provided, however,
-------- -------
that failure to give such notification shall not affect the indemnification
provided hereunder except to the extent the indemnifying party shall have been
actually prejudiced as a result of such failure (except that the indemnifying
party shall not be liable for any expenses incurred during the period in which
the indemnified party failed to give such notice). Thereafter, the indemnified
party shall deliver to the indemnifying party, within five business days after
the indemnified party's receipt thereof, copies of all notices and documents
(including court papers) received by the indemnified party relating to the Third
Party Claim.
If a Third Party Claim is made against an indemnified party, the
indemnifying party shall be entitled to participate in the defense thereof and,
if it so chooses and acknowledges its obligation to indemnify the indemnified
party therefor, to assume the defense thereof with counsel selected by the
indemnifying party; provided that such counsel is not reasonably
--------
19
<PAGE>
objected to by the indemnified party. Should the indemnifying party so elect to
assume the defense of a Third Party Claim, the indemnifying party shall not be
liable to the indemnified party for legal expenses subsequently incurred by the
indemnified party in connection with the defense thereof. If the indemnifying
party assumes such defense, the indemnified party shall have the right to
participate in the defense thereof and to employ counsel, at its own expense,
separate from the counsel employed by the indemnifying party, it being
understood that the indemnifying party shall control such defense. The
indemnifying party shall be liable for the fees and expenses of counsel employed
by the indemnified party for any period during which the indemnifying party has
failed to assume the defense thereof (other than during the period prior to the
time the indemnified party shall have given notice of the Third Party Claim as
provided above).
If the indemnifying party so elects to assume the defense of any Third
Party Claim, all of the indemnified parties shall cooperate with the
indemnifying party in the defense or prosecution thereof. Such cooperation
shall include the retention and (upon the indemnifying party's request) the
provision to the indemnifying party of records and information which are
reasonably relevant to such Third Party Claim, and making employees available on
a mutually convenient basis to provide additional information and explanation of
any material provided hereunder. Whether or not the indemnifying party shall
have assumed the defense of a Third Party Claim, the indemnified party shall not
admit any liability with respect to, or settle, compromise or discharge, such
Third Party Claim without the indemnifying party's prior written consent (which
consent shall not be unreasonably withheld). If the indemnifying party shall
have assumed the defense of a Third Party Claim, the indemnified party shall
agree to any settlement, compromise or discharge of a Third Party Claim which
the indemnifying party may recommend and which by its terms obligates the
indemnifying party to pay the full amount of the liability in connection with
such Third Party Claim, which releases the indemnifying party completely in
connection with such Third Party Claim and which would not otherwise adversely
affect the indemnified party.
Notwithstanding the foregoing, the indemnifying party shall not be entitled
to assume the defense of any Third Party Claim (and shall be liable for the
reasonable fees and expenses of counsel incurred by the indemnified party in
defending such Third Party Claim) if the Third Party Claim seeks an order,
injunction or other equitable relief or relief for other than money damages
against the indemnified party which the indemnified party reasonably determines,
after conferring with its outside counsel, cannot be separated from any related
claim for money damages. If such equitable relief or other relief portion of
the Third Party Claim can be so separated from that for money damages, the
indemnifying party shall be entitled to assume the defense of the portion
relating to money damages. The indemnification required by Section 9(b) and
9(c) shall be made by periodic payments of the amount thereof during the course
of the investigation or defense, as and when bills are received or loss,
liability, claim, damage or expense is incurred. All claims under Section 9(b)
or 9(c) other than Third Party Claims shall be governed by Section 9(g). All
Tax Claims (as defined in Section 9(h)) shall be governed by Section 9(h).
20
<PAGE>
(g) Other Claims. In the event any indemnified party should have a claim
against any indemnifying party under Section 9(b) or 9(c) that does not involve
a Third Party Claim being asserted against or sought to be collected from such
indemnified party, the indemnified party shall deliver notice of such claim with
reasonable promptness to the indemnifying party. The failure by any indemnified
party so to notify the indemnifying party shall not relieve the indemnifying
party from any liability which it may have to such indemnified party under
Section 9(b) or 9(c), except to the extent that the indemnifying party
demonstrates that it has been materially prejudiced by such failure. If the
indemnifying party does not notify the indemnified party within 45 calendar days
following its receipt of such notice that the indemnifying party disputes its
liability to the indemnified party under Section 9(b) or 9(c), such claim
specified by the indemnified party in such notice shall be conclusively deemed a
liability of the indemnifying party under Section 9(b) or 9(c) and the
indemnifying party shall pay the amount of such liability to the indemnified
party on demand or, in the case of any notice in which the amount of the claim
(or any portion thereof) is estimated, on such later date when the amount of
such claim (or such portion thereof) becomes finally determined. If the
indemnifying party has timely disputed its liability with respect to such claim,
as provided above, the indemnifying party and the indemnified party shall
proceed in good faith to negotiate a resolution of such dispute and, if not
resolved through negotiations, such dispute shall be resolved by litigation in
an appropriate court of competent jurisdiction.
(h) Procedures Relating to Indemnification of Tax Claims. If a claim
shall be made by any taxing authority, which, if successful, might result in an
indemnity payment to the Buyer, one of its affiliates or any of their respective
directors, officers, employees, stockholders, agents or representatives pursuant
to Section 9(a), then the Buyer shall give notice to the Sellers in writing of
such claim and of any counterclaim the Buyer proposes to assert (a "Tax Claim");
provided, however, that the failure to give such notice shall not affect the
- -------- -------
indemnification provided hereunder except to the extent the Sellers have been
actually and materially prejudiced as a result of such failure. If a Tax Claim
shall be made by any taxing authority, which, if successful, might result in an
indemnity payment to either of the Sellers or one of their affiliates pursuant
to Section 9(a), then the Sellers shall give notice to the Buyer in writing of
such Tax Claim; provide, however, that the failure to give such notice shall not
------- -------
affect the indemnification provided hereunder except to the extent the Buyer has
been actually and materially prejudiced as a result of such failure.
With respect to any Tax Claim relating to a taxable period ending on or
prior to December 31, 1998, the Sellers shall control all proceedings and may
make all decisions taken in connection with such Tax Claim (including selection
of counsel) and, without limiting the foregoing, may in their sole discretion
pursue or forego any and all administrative appeals, proceedings, hearings and
conferences with any taxing authority with respect thereto, and may, in their
sole discretion, either pay the Tax claimed and sue for a refund where
applicable law permits such refund suits or contest the Tax Claim in any
permissible manner; provided, however, that the Sellers must first consult in
-------- -------
good faith with the Buyer before taking any action with respect to the conduct
of a Tax Claim. Notwithstanding the foregoing, (i) the Sellers shall not settle
any Tax Claim without the prior written consent of the Buyer, which consent
shall not
21
<PAGE>
be unreasonably withheld, (ii) the Buyer, and counsel of its own choosing, shall
have the right to participate fully in all aspects of the defense of such Tax
Claim, (iii) the Sellers shall inform the Buyer, reasonably promptly in advance,
of the date, time and place of all administrative and judicial meetings,
conferences, hearings and other proceedings relating to such Tax Claim, (iv) the
Buyer shall be entitled to have its representatives (including counsel,
accountants and consultants) attend and participate in any such administrative
and judicial meetings, conferences, hearings and other proceedings relating to
such Tax Claim and (v) the Sellers shall provide to the Buyer all information,
document requests and responses, proposed notices of deficiency, notices of
deficiency, revenue agent's reports, protests, petitions and any other documents
relating to such Tax Claim promptly upon receipt from, or in advance of
submission to (as the case may be), the relevant taxing authority.
The Sellers and the Buyer shall jointly control and participate in all
proceedings taken in connection with any Tax Claim relating to Taxes of the
Company for a Straddle Period. Neither the Sellers nor the Buyer shall settle
any such Tax Claim without the prior written consent of the other.
The Buyer shall control all proceedings with respect to any Tax Claim
relating to a taxable period beginning after December 31, 1998. None of the
Sellers shall have any right to participate in the conduct of any such
proceeding.
The Buyer shall, and shall cause the Company and each of its affiliates, on
the one hand, to, and each Seller and its affiliates, on the other hand, shall,
reasonably cooperate in contesting any Tax Claim, which cooperation shall
include the retention and, upon request, the provision to the requesting person
of records and information which are reasonably relevant to such Tax Claim, and
making employees available on a mutually convenient basis to provide additional
information or explanation of any material provided hereunder or to testify at
proceedings relating to such Tax Claim.
(i) Satisfaction of Claims. In the event the Buyer shall be entitled to
recover any amount pursuant to the indemnification provisions set forth in this
Section 9, the Buyer shall look to the Escrow Amount only, and shall not seek to
recover any amount directly from any Seller, except for indemnification claims
that survive pursuant to Sections 9(e)(i) and 9(e)(ii), in which case the Buyer
shall first look to the Escrow Amount and shall not seek to recover any amount
directly from any Seller until the Escrow Amount shall be exhausted and/or the
Escrow Agreement has terminated. Except for claims made pursuant to Sections
9(e)(i) and 9(e)(ii) hereof, no claim for indemnification under this Section 9
may be made, and the Sellers shall not have any liability for any and all claims
which, when aggregated with all previous claims for which payment has been made
under this Section 9, exceeds $150,000.
10. Tax Matters.
-----------
(a) For any taxable period of the Company that includes (but does not
end on) the Closing Date, the Buyer shall timely prepare and file with the
appropriate taxing authorities all Tax Returns required to be filed and shall
pay all Taxes due with respect to such Returns;
22
<PAGE>
provided that the Sellers shall reimburse the Buyer (in accordance with the
- --------
procedures set forth in Section 9(a)) for any amount owed by the Sellers
pursuant to Section 9(a) with respect to the taxable periods covered by such Tax
Returns. For any taxable period of the Company that ends on or before December
31, 1998, the Sellers shall timely prepare and file with the appropriate taxing
authorities all Tax Returns required to be filed, and shall pay all Taxes due
with respect to such Tax Returns (or, if the Buyer or the Company pays such
Taxes after the Closing Date, shall reimburse the Buyer in accordance with the
procedures set forth in Section 9(a) hereof); provided, however, that no such
-------- -------
Tax Return shall be filed without the prior written consent of the Buyer. The
Buyer and the Sellers agree to cause the Company to file all Tax Returns for the
taxable period including the Closing Date on the basis that the relevant taxable
period ended as of the close of business on the Closing Date, unless the
relevant taxing authority will not accept a Tax Return filed on that basis.
(b) The Sellers shall, and shall cause the Company to, and the Buyer
shall, reasonably cooperate, and shall cause their respective affiliates,
officers, employees, agents, auditors and other representatives reasonably to
cooperate, in preparing and filing all Tax Returns and in resolving all disputes
and audits with respect to all taxable periods relating to Taxes, including by
maintaining and making available to each other all records necessary in
connection with Taxes, provided, however, in no event shall the Buyer be
-------- -------
required to provide any Tax Return to the Sellers. The Buyer and the Sellers
recognize that the Sellers and their affiliates will need access, from time to
time, after the Closing Date, to certain accounting and Tax records and
information held by the Company to the extent such records and information
pertain to events occurring prior to the Closing Date; therefore, the Buyer
agrees, and agrees after the Closing to cause the Company, to allow the Sellers
and their agents and other representatives, at times and dates mutually
acceptable to the parties, reasonable access to such records from time to time,
during normal business hours and at the Sellers' expense.
(c) The amount or economic benefit of any refunds, credits or offsets
of Taxes of the Company for any taxable period ending on or before the Closing
Date shall be for the account of the Sellers. Notwithstanding the foregoing,
(i) any such refunds, credits or offsets of Taxes shall be for the account of
the Buyer to the extent such refunds, credits or offsets of Taxes are
attributable (determined on a marginal basis) to the carryback from a taxable
period beginning after the Closing Date (or the portion of a Straddle Period
that begins on the day after the Closing Date) of items of loss, deduction or
credit, or other tax items, of the Company (or any of its affiliates, including
the Buyer) and (ii) to the extent the Buyer or the Company pays after the
Closing Date any amount with respect to Taxes for any such taxable period,
refunds of such Taxes (determined on a first-in, first-out basis) shall be for
the account of the Buyer. The amount or economic benefit of any refunds,
credits or offsets of Taxes of the Company for any taxable period beginning
after the Closing Date shall be for the account of the Buyer. The amount or
economic benefit of any refunds, credits or offsets of Taxes of the Company for
any Straddle Period shall be equitably apportioned between the Sellers, on the
one hand, and the Buyer, on the other hand. Each party shall forward, and shall
cause its affiliates to forward, to the party entitled pursuant to this Section
10(c) to receive the amount or economic benefit of a refund, credit or offset to
Tax the amount of such refund, or the economic benefit of such credit
23
<PAGE>
or offset to Tax, within 30 days after such refund is received or after such
credit or offset is allowed or applied against other Tax liability, as the case
may be; provided, however, that any such amounts payable pursuant to this
-------- -------
Section 10(c) shall be net of any Tax cost or Tax benefit to the party making
payment pursuant to this Section 10(c) and its affiliates attributable to the
receipt of such refund, credit or offset to Tax and/or the payment of such
amounts pursuant to this Section 10(c). The Buyer and the Sellers shall treat
any amounts payable pursuant to this Section 10(c) as an adjustment to the
Consideration unless a final determination (which shall include the execution of
a Form 870-AD or successor form) causes any such payment not to be treated as an
adjustment to the Consideration for United States Federal income Tax purposes.
(d) The Sellers shall file any amended consolidated, combined or
unitary Tax Returns for taxable years ending on or prior to the Closing Date
which are required as a result of examination adjustments made by the IRS or by
the applicable state, municipal, provincial, local or foreign taxing authorities
for such taxable years as finally determined; provided, however, that no such
-------- -------
Return shall be filed without the prior written consent of the Buyer, which
consent shall not be unreasonably withheld.
For those jurisdictions in which separate Tax Returns are filed by the
Company, any required amended returns resulting from such examination
adjustments, as finally determined, shall be prepared by the Sellers and
furnished to the Company for approval, signature and filing at least 30 days
prior to the due date for filing such Tax Returns.
(e) All transfer, documentary, sales, use, registration and other such
Taxes (including all applicable real estate transfer or gains Taxes and stock
transfer Taxes) and related fees (including any penalties, interest and
additions to Tax) incurred in connection with the sale of the Shares or
otherwise in connection with this Agreement, the Escrow Agreement and the
transactions contemplated hereby and thereby shall be paid by the Sellers, and
the Sellers and the Buyer shall cooperate in timely preparing and filing all Tax
Returns as may be required to comply with the provisions of such Tax laws. The
Sellers shall bear and pay any stock transfer Taxes due as a result of the sale
of the Shares to the Buyer.
(f) The Sellers shall deliver to the Buyer at the Closing a duly
executed and acknowledged certificate, in form and substance acceptable to the
Buyer and in compliance with the Code and Treasury Regulations, certifying such
facts as to establish that the sale of the Shares and any other transactions
contemplated hereby are exempt from withholding under Section 1445 of the Code.
11. Assignment. This Agreement and the rights and obligations hereunder shall
----------
not be assignable or transferable by any Seller or the Buyer (including by
operation of law in connection with a merger, or sale of substantially all the
assets, or any dissolution, of the Buyer or any Seller) without the prior
written consent of the Buyer or the Sellers, as the case may be; provided,
--------
however, that the Buyer may assign its right to purchase the Shares hereunder to
- -------
an affiliate of the Buyer with the prior written consent of the Sellers (which
consent will not be unreasonably withheld); provided further, that no assignment
-------- -------
shall limit or affect the assignor's obligations hereunder. Any attempted
assignment in violation of this Section 11 shall be void.
24
<PAGE>
12. No Third-Party Beneficiaries. Except as provided in Sections 6(c), 6(d)
----------------------------
and Section 9 hereof, this Agreement is for the sole benefit of the parties
hereto and their permitted assigns, and nothing herein expressed or implied
shall give or be construed to give to any person, other than the parties hereto
and such assigns, any legal or equitable rights hereunder.
13. Survival. The agreements and covenants set forth herein shall survive
--------
the Closing. The representations and warranties in this Agreement and in any
certificate delivered pursuant hereto shall survive the Closing solely for
purposes of Sections 9(b) and (c) and shall terminate at the close of business
on the date which is one (1) year after the Closing Date, except as follows:
(i) in the case of Sections 3(i) and 3(o), such representations and
warranties shall terminate when the applicable statute of limitations has
expired; and
(ii) in the case of Sections 3(b), 3(c)(i), 3(c)(ii), 3(e)(i), 3(u) and
Sections 4(a) and 4(c), such representations and warranties shall not expire.
14. Expenses. Whether or not the transactions contemplated hereby are
--------
consummated, and except as otherwise specifically provided in this Agreement or
the Escrow Agreement, all costs and expenses incurred in connection with this
Agreement and the transactions contemplated hereby shall be paid by the party
incurring such costs or expenses.
15. Amendments. No amendment, modification or waiver in respect of this
----------
Agreement shall be effective unless it shall be in writing and signed by the
Buyer and the Sellers.
16. Notices. All notices or other communications required or permitted to
-------
be given hereunder shall be in writing and shall be delivered by hand or sent by
telecopy or sent, postage prepaid, by registered, certified or express mail or
reputable overnight courier service and shall be deemed given when so delivered
by hand, or telecopied, or if mailed, three days after mailing (one business day
in the case of express mail or overnight courier service), as follows:
(i) if to the Sellers,
Allan Von Dette
6858 Compton Heights Circle
Clifton, VA 21024
and
William Engel
14150 Newbrook Drive
Suite 210
Chantilly, VA 20151
25
<PAGE>
with a copy to:
Foust & Clark, P.C.
8345-A Greensboro Drive
McLean, VA 22102
Telecopy No.: (703) 893-7907
Attention: Gorham S. (Rory) Clark, Esq.
and
(ii) if to the Buyer,
Logical Design Solutions, Inc.
465 South Street
Suite 103
Morristown, NJ 07960
Telecopy No.: (973) 734-1695
Attention: E. Bruce Lovenberg
with copies to:
Brown & Wood LLP
One World Trade Center
New York, NY 10048
Telecopy No.: (212) 839-5599
Attention: J. Armbrust, Esq.
or such other address as any party may from time to time specify by written
notice to the other parties hereto.
17. Interpretation; Exhibits and Schedules. The headings contained in this
--------------------------------------
Agreement, in any Exhibit or Schedule hereto and in the table of contents to
this Agreement are for reference purposes only and shall not affect in any way
the meaning or interpretation of this Agreement. All Exhibits and Schedules
annexed hereto or referred to herein are hereby incorporated in and made a part
of this Agreement as if set forth in full herein. Any capitalized terms used in
any Schedule or Exhibit but not otherwise defined therein, shall have the
meaning as defined in this Agreement.
18. Counterparts. This Agreement may be executed in one or more
------------
counterparts, all of which shall be considered one and the same agreement, and
shall become effective when one or more such counterparts have been signed by
each of the parties and delivered to the other parties.
19. Entire Agreement. This Agreement, the Employment Agreements, the
----------------
Shareholders Agreement, the Confidentiality Agreement and the Escrow Agreement
contain the
26
<PAGE>
entire agreement and understanding between the parties hereto with respect to
the subject matter hereof and supersede all prior agreements and understandings
relating to such subject matter. The parties hereto shall not be liable or bound
to any other party in any manner by any representations, warranties or covenants
relating to such subject matter except as specifically set forth herein, in the
Confidentiality Agreement or in the Escrow Agreement.
20. Severability. If any provision of this Agreement (or any portion
------------
thereof) or the application of any such provision (or any portion thereof) to
any person or circumstance shall be held invalid, illegal or unenforceable in
any respect by a court of competent jurisdiction, such invalidity, illegality or
unenforceability shall not affect any other provision hereof (or the remaining
portion thereof) or the application of such provision to any other persons or
circumstances.
21. Consent to Jurisdiction. The Buyer and the Sellers irrevocably submit
-----------------------
to the exclusive jurisdiction of (a) the Superior Court of the State of New
Jersey, Chancery Division of Morris County and (b) the United States District
Court for the District of New Jersey, for the purposes of any suit, action or
other proceeding arising out of this Agreement, the Escrow Agreement or any
transaction contemplated hereby or thereby. The Buyer and the Sellers agree to
commence any action, suit or proceeding relating hereto or to the Escrow
Agreement either in the United States District Court for the District of New
Jersey or if such suit, action or other proceeding may not be brought in such
court for jurisdictional reasons, in the Superior Court of the State of New
Jersey, Chancery Division of Morris County. The Buyer and the Sellers further
agree that service of any process, summons, notice or document by U.S.
registered mail to such party's respective address set forth in Section 16 above
shall be effective service of process for any action, suit or proceeding in New
Jersey with respect to any matters to which it has submitted to jurisdiction in
this Section 21. The Buyer and the Sellers irrevocably and unconditionally waive
any objection to the laying of venue of any action, suit or proceeding arising
out of this Agreement, the Escrow Agreement or the transactions contemplated
hereby in (i) the Superior Court of the State of New Jersey, Chancery Division
of Morris County or (ii) the United States District Court for the District of
New Jersey, and hereby further irrevocably and unconditionally waives and agrees
not to plead or claim in any such court that any such action, suit or proceeding
brought in any such court has been brought in an inconvenient forum.
22. Governing Law. This Agreement and the rights and obligations of the
-------------
parties hereto shall be governed by and construed in accordance with the
internal laws of the State of New Jersey applicable to agreements made and to be
performed entirely within such State, without regard to the conflicts of law
principles of such State.
27
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the date first written above.
Logical Design Solutions, Inc.
/s/ E. Bruce Lovenberg /s/ Allan Von Dette
_____________________________________ ______________________________
E. Bruce Lovenberg By: Allan Von Dette
Secretary and Chief Financial Officer
/s/ William Engel
_______________________________
By: William Engel
28
<PAGE>
EXHIBIT 10.7
LOGICAL DESIGN SOLUTIONS, INC.
1997 STOCK PLAN
1. Purposes of the Plan. The purposes of this Stock Plan are: to attract and
retain the best available personnel for positions of substantial responsibility,
to provide additional incentive to Employees, Directors and Consultants, and to
promote the success of the Company's business. Options granted under the Plan
may be Incentive Stock Options or Nonstatutory Stock Options, as determined by
the Administrator at the time of grant. Stock Purchase Rights may 41so be
granted under the Plan.
2. Definitions. As used herein, the following definitions shall apply:
(a) "Administrator" means the Board or any of its Committees as shall be
administering the Plan, in accordance with Section 4 of the Plan.
(b) "Applicable Laws" means the requirements relating to the
administration of stock option plans under U. S. state corporate laws,
U.S. federal and state securities laws, the Code, any stock exchange
or quotation system on which the Common Stock is listed or quoted and
the applicable laws of any foreign country or jurisdiction where
Options or Stock Purchase Rights are, or will be, granted under the
Plan.
(c) "Board" means the Board of Directors of the Company.
(d) "Code" means the Internal Revenue Code of 1986, as amended.
(e) "Committee" means a committee of Directors appointed by the Board in
accordance with Section 4 of the Plan.
(f) "Common Stock" means the Common Stock of the Company.
(g) "Company" means Logical Design Solutions, Inc., a New Jersey
corporation.
(h) "Consultant" means any person, including an advisor, engaged by the
Company or a Parent or Subsidiary to render services and who is
compensated for such services.
(i) "Director" means a member of the Board.
(j) "Disability" means total and permanent disability as defined in
Section 22(e)(3) of the Code.
(k) "Employee" means any person, including Section 16(b) Officers and
Directors, employed by the Company or any Parent or Subsidiary of the
Company. A Service Provider shall not cease to be an Employee in the
case of (i) any leave of
<PAGE>
absence approved by the Company or (ii) transfers between locations of the
Company or between the Company, its Parent, any Subsidiary, or any
successor. For purposes of Incentive Stock Options, no such leave may
exceed ninety days, unless reemployment upon expiration of such leave is
guaranteed by statute or contract. If reemployment upon expiration of a
leave of absence approved by the Company is not so guaranteed, on the 181"
day of such leave any Incentive Stock Option held by the Optionee shall
cease to be treated as an Incentive Stock Option and shall be treated for
tax purposes as a Nonstatutory Stock Option. Neither service as a Director
nor payment of a director's fee by the Company shall be sufficient to
constitute "employment" by the Company.
(l) "Exchange Act" means the Securities Exchange Act of 1934, as amended.
(m) "Fair Market Value" means, as of any date, the value of Common Stock
determined as follows:
(i) if the Common Stock is listed on any established stock exchange or a
national market system, including without limitation the Nasdaq National Market
or The Nasdaq Small Cap Market of The Nasdaq Stock Market, its Fair Market Value
shall be the closing sales price for such stock (or the closing bid, if no sales
were reported) as quoted on such exchange or system for the last market trading
day prior to the time of determination, as reported in The Wall Street Journal
or such other source as the Administrator deems reliable;
(ii) if the Common Stock is regularly quoted by a recognized securities
dealer but selling prices are not reported, the Fair Market Value of a Share of
Common Stock shall be the mean between the high bid and low asked prices for the
Common Stock on the last market trading day prior to the day of determination,
based on such source as the Administrator deems reliable;
(iii) in the absence of an established market for the Common Stock, the
Fair Market Value shall be determined in good faith by the Administrator.
(n) "Incentive Stock Option" means an Option intended to qualify as an
incentive stock option within the meaning of Section 422 of the Code and
the regulations promulgated thereunder.
(o) "Nonstatutory Stock Option" means an Option not intended to qualify as an
Incentive Stock Option.
(p) "Notice of Grant" means a written or electronic notice evidencing certain
terms and conditions of an individual Option or Stock Purchase Right grant.
The Notice of Grant is part of the Option Agreement.
2
<PAGE>
(q) "Section 16(b) Officer" means a person who is an officer of the Company
within the meaning of Section 16(b) of the Exchange Act and the rules and
regulations promulgated thereunder.
(r) "Option" means a stock option granted pursuant to the Plan.
(s) "Option Agreement" means an agreement between the Company and an Optionee
evidencing the terms and conditions of an individual Option grant. The
Option Agreement is subject to the terms and conditions of the Plan.
(t) "Option Exchange Program" means a program whereby outstanding options are
surrendered in exchange for options with a lower exercise price.
(u) "Optioned Stock" means the Common Stock subject to an Option or Stock
Purchase Right.
(v) "Optionee" means the holder of an outstanding Option or Stock Purchase
Right granted under the Plan.
(w) "Parent" means a "parent corporation," whether now or hereafter existing,
as defined in Section 424(e) of the Code.
(x) "Plan" means this 1997 Stock Plan.
(y) "Restricted Stock" means shares of Common Stock acquired pursuant to a
grant of Stock Purchase Rights under Section I I below.
(z) "Restricted Stock Purchase Agreement" means a written agreement between the
Company and the Optionee evidencing the terms and restrictions applying to
stock purchased under a Stock Purchase Right. The Restricted Stock Purchase
Agreement is subject to the terms and conditions of the Plan and the Notice
of Grant.
(aa) "Rule 16b-3" means Rule 16b-3 of the Exchange Act or any successor to Rule
16b-3, as in effect when discretion is being exercised with respect to the
Plan.
(bb) "Section 16(b)" means Section 16(b) of the Securities Exchange Act of 1934,
as amended.
(cc) "Service Provider" means an Employee, Director or Consultant.
(dd) "Share" means a share of the Common Stock, as adjusted in accordance with
Section 13 of the Plan.
(ee) "Stock Purchase Right" means the right to purchase Common Stock pursuant to
Section 11 of the Plan, as evidenced by a Notice of Grant.
3
<PAGE>
(ff) "Subsidiary" means a "subsidiary corporation", whether now or hereafter
existing, as defined in Section 424(f) of the Code.
3. Stock Subject to the Plan. Subject to the provisions of Section 13 of the
Plan, the maximum aggregate number of Shares that may be optioned and sold under
the Plan is 100,000 Shares, plus any adjustments as provided for herein. If an
Option or Stock .Purchase Right expires or becomes unexercisable without having
been exercised in full, or is surrendered pursuant to an Option Exchange
Program, the unpurchased Shares which were subject thereto shall become
available for future grant or sale under the Plan (unless the Plan has
terminated); provided, however, that Shares that have actually been issued under
the Plan, whether upon exercise of an Option or Right, shall not be returned to
the Plan and shall not become available for future distribution under the Plan,
except that if Shares of Restricted Stock are repurchased by the Company at
their original purchase price, such Shares shall become available for future
grant under the Plan.
4. Administration of the Plan.
(a) Procedure.
(i) Multiple Administrative Bodies. The Plan may be
administered by different Committees with respect to
different groups of Service Providers.
(ii) Section 162(m). To the extent that the Administrator
determines it to be desirable to qualify Options granted
hereunder as "performance-based compensation" within the
meaning of Section 162(m) of the Code, the Plan shall be
administered by a Committee of two or more "outside
directors" within the meaning of Section 162(m) of the
Code.
(iii) Rule 16b-3. To the extent desirable to qualify
transactions hereunder as exempt under Rule 16b-3, the
Plan shall be administered by the Board or a Committee of
two or more "non- employee directors" within the meaning
of Rule 16b-3.
(iv) Other Administration. Other than as provided above, the
Plan shall be administered by (A) the Board or (B) a
Committee, which Committee shall be constituted to satisfy
Applicable Laws.
(b) Powers of the Administrator. Subject to the provisions of the Plan,
and in the case of a Committee, subject to the specific duties
delegated by the Board to such Committee, the Administrator shall have
the authority, in its discretion:
(i) to determine the Fair Market Value;
(ii) to select the Service Providers to whom Options and Stock
Purchase Rights may be granted hereunder;
4
<PAGE>
(iii) to determine the number of shares of Common Stock to be covered
by each Option and Stock Purchase Right granted hereunder;
(iv) to approve forms of agreement for use under the Plan;
(v) to determine the terms and conditions, not inconsistent with the
terms of the Plan, of any Option or Stock Purchase Right granted hereunder. Such
terms and conditions include, but are not limited to, the exercise price, the
time or times when Options or Stock Purchase Rights may be exercised (which may
be based, on performance criteria), any vesting acceleration or waiver of
forfeiture restrictions, and any restriction or limitation regarding any Option
or Stock Purchase Right or the shares of Common Stock relating thereto, based in
each case on such factors as the Administrator, in its sole discretion, shall
determine;
(vi) to institute an Option Exchange Program;
(vii) to construe and interpret the terms of the Plan and awards
granted pursuant to the Plan;
(viii) to prescribe, amend and rescind rules and regulations relating
to the Plan, including rules and regulations relating to sub-plans established
for the purpose of qualifying for preferred tax treatment under foreign tax
laws;
(ix) to modify or amend each Option or Stock Purchase Right (subject
to Section 15(c) of the Plan), including the discretionary authority to extend
the post-termination exercisability period of Options longer than is otherwise
provided for in the Plan;
(x) to allow Optionees to satisfy withholding tax obligations by
electing to have the Company withhold from the Shares to be issued upon exercise
of an Option or Stock Purchase Right that number of Shares having a Fair Market
Value equal to the amount required to be withheld. The Fair Market Value of the
Shares to be withheld shall be determined on the date that the amount of tax to
be withheld is to be determined. All elections by an Optionee to have Shares
withheld for this purpose shall be made in such form and under such conditions
as the Administrator may deem necessary or advisable;
(xi) to authorize any person to execute on behalf of the Company any
Instrument required to effect the grant of an Option or Stock Purchase Right
previously granted by the Administrator;
(xii) to make all other determinations deemed necessary or advisable
for administering the Plan.
5
<PAGE>
(c) Effect of Administrator's Decision. The Administrator's decisions,
determinations and interpretations shall be final and binding on all
Optionees and any other holders of Options or Stock Purchase Rights.
5. Eligibility. Nonstatutory Stock Options and Stock Purchase Rights may be
granted to Service Providers. Incentive Stock Options may be granted only to
Employees.
6. Limitations.
(a) Each Option shall be designated in the Option Agreement as either an
Incentive Stock Option or a Nonstatutory Stock Option. However,
notwithstanding such designation, to the extent that the aggregate
Fair Market Value of the Shares with respect to which Incentive Stock
Options are exercisable for the first time by the Optionee during any
calendar year (under all plans of the Company and any Parent or
Subsidiary) exceeds $100,000, such Options shall be treated as
Nonstatutory Stock Options. For purposes of this Section 6(a),
Incentive Stock Options shall be taken into account in the order in
which they were granted. The Fair Market Value of the Shares shall be
determined as of the time the Option with respect to such Shares is
granted.
(b) Neither the Plan nor any Option or Stock Purchase Right shall confer
upon an Optionee any right with respect to continuing the Optionee's
relationship as a Service Provider with the Company, nor shall they
interfere in any way with the Optionee's right or the Company's right
to terminate such relationship at any time, with or without cause.
(c) The following limitations shall apply to grants of Options:
(i) No Service Provider shall be granted, in any fiscal year of the
Company, Options to purchase more than ________Shares.
(ii) In connection with his or her initial service, a Service Provider
may be granted Options to purchase up to an additional _______Shares which shall
not count against the limit set forth in subsection (i) above.
(iii) The foregoing limitations shall be adjusted proportionately in
connection with any change in the Company's capitalization as described in
Section 13.
(iv) If an Option is canceled in the same fiscal year of the Company
in which it was granted (other than in connection with a transaction described
in Section 13), the canceled Option will be counted against the limits set forth
in subsections (i) and (ii) above. For this purpose, if the exercise price of an
Option is reduced, the transaction will be treated as a cancellation of the
Option and the grant of a new Option.
6
<PAGE>
7. Term of Plan. Subject to Section 19 of the Plan, the Plan shall become
effective upon its adoption by the Board. It shall continue in effect for a term
of ten (10) years unless terminated earlier under Section 15 of the Plan.
8. Term of Option. The term of each Option shall be stated in the Option
Agreement. In the case of an Incentive Stock Option, the term shall be ten (10)
years from the date of grant or --such shorter term as may be provided in the
Option Agreement. Moreover, in the case of an Incentive Stock Option granted to
an Optionee who, at the time the Incentive Stock Option is granted, owns stock
representing more than ten percent (10%) of the voting power of all classes of
stock of the Company or any Parent or Subsidiary, the term of the Incentive
Stock Option shall be five (5) years from the date of grant or such shorter term
as may be provided in the Option Agreement.
9. Option Exercise Price and Consideration.
(a) Exercise Price. The per share exercise price for the Shares to be
issued pursuant to exercise of an Option shall be determined by the
Administrator, subject to the following:
(i) In the case of an Incentive Stock Option
(A) granted to an Employee who, at the time the Incentive Stock
Option is granted, owns stock representing more than ten
percent (10%) of the voting power of all classes of stock of
the Company or any Parent or Subsidiary, the per Share
exercise price shall be no less than 110 % of the Fair
Market Value per Share on the date of grant.
(B) granted to any Employee other than an Employee described in
paragraph (A) immediately above, the per Share exercise
price shall be no less than 100% of the Fair Market Value
per Share on the date of grant.
(ii) In the case of a Nonstatutory Stock Option, the per Share
exercise price shall be determined by the Administrator. In the case of a
Nonstatutory Stock Option intended to qualify as "performance-based
compensation" within the meaning of Section 162(m) of the Code, the per Share
exercise price shall be no less than 100% of the Fair Market Value per Share on
the date of grant.
(iii) Notwithstanding the foregoing, Options may be granted with a per
Share exercise price of less than 100% of Fair Market Value on the date of grant
pursuant to a merger or other corporate transaction.
(b) Waiting Period and Exercise Dates. At the time an Option is granted,
the Administrator shall fix the period within which the Option may be
exercised and
7
<PAGE>
shall determine any conditions which must be satisfied before the
Option may be exercised.
(c) Form of Consideration. The Administrator shall determine the
acceptable form of consideration for exercising an Option, including
the method of payment. In the case of an Incentive Stock Option, the
Administrator shall determine the acceptable form of consideration at
the time of grant. Such consideration may consist entirely of:
(i) cash;
(ii) check;
(iii) promissory note;
(iv) other Shares which (A) in the case of Shares acquired upon
exercise of an option, have been owned by the Optionee for more than six months
on the date of surrender, and (B) have a Fair Market Value on the date of
surrender equal to the aggregate exercise price of the Shares as to which said
Option shall be exercised;
(v) consideration received by the Company under a formal cashless
exercise program adopted by the Company in connection with the Plan;
(vi) a reduction in the amount of any Company liability to the
Optionee, including any liability attributable to the Optionee's participation
in any Company-sponsored deferred compensation program or arrangement;
(vii) any combination of the foregoing methods of payment; or
(viii) such other consideration and method of payment for the issuance
of Shares to the extent permitted by Applicable Laws.
10. Exercise of Options.
(a) Procedure for Exercise; Rights as a Shareholder. Any Option granted
hereunder shall be exercisable according to the terms of the Plan and
at such times and under such conditions as determined by the
Administrator and set forth in the Option Agreement. Unless the
Administrator provides otherwise, vesting of Options granted hereunder
shall be tolled during any unpaid leave of absence. An Option may not
be exercised for a fraction of a Share.
An Option shall be deemed exercised when the Company receives: (i)
written or electronic notice of exercise (in accordance with the
Option Agreement) from the person entitled to exercise the Option, and
(ii) full payment for the Shares with respect to which the Option is
exercised. Full payment may consist of any
8
<PAGE>
consideration and method of payment authorized by the Administrator
and permitted by the Option Agreement and the Plan. Shares issued upon
exercise of an Option shall be issued in the name of the Optionee or,
if requested by the Optionee, in the name of the Optionee and his or
her spouse.
Until the Shares are issued (as evidenced by the appropriate entry on
the books of the Company or of a duly authorized transfer agent of the
Company), no right to vote or receive dividends or any other rights as
a shareholder shall exist with respect to the Optioned Stock,
notwithstanding the exercise of the Option.
The Company shall issue (or, cause to be issued) such Shares promptly
after the Option is exercised. No adjustment will be made for a
dividend or other right for which the record date is prior to the date
the Shares are issued, except as provided in Section 13 of the Plan.
Exercising an option in any manner shall decrease the number of Shares
thereafter available, both for purposes of the Plan and for sale under
the Option, by the number of Shares as to which the Option is
exercised.
(b) Termination of Relationship as a Service Provider. If an Optionee
ceases to be a Service Provider, other than upon the Optionee's death
or Disability, the Optionee may exercise his or her Option within such
period of time as is specified in the Option Agreement to the extent
that he or she is entitled to exercise, it on the date of termination
(but in no event later than the expiration of the term of such Option
as set forth in the Option Agreement).
In the absence of a specified time in the Option Agreement, the Option
shall remain exercisable for three (3) months following the Optionee's
termination. If, on the date of termination, the Optionee is not
entitled to exercise his or her entire Option, the Shares covered by
the unexercisable portion of the Option shall revert to the Plan. If,
after termination, the Optionee does not exercise his or her Option
within the time specified by the Administrator, the Option shall
terminate, and the Shares covered by such Option shall revert to the
Plan.
(c) Disability of Optionee. If an Optionee ceases to be a Service Provider
as a result of the Optionee's Disability, the Optionee may exercise
his or her Option at any time within twelve (12) months from the date
of termination, but only to the extent that the Optionee is entitled
to exercise it on the date of termination (and in no event later than
the expiration of the term of the Option as set forth in the Option
Agreement). If, on the date of termination, the Optionee is not
entitled to exercise his or her entire Option, the Shares covered by
the unexercisable portion of the Option shall revert to the Plan. If,
after termination, the Optionee does not exercise his or her Option
within the time specified herein, the Option shall terminate, and the
Shares covered by such Option shall revert to the Plan.
9
<PAGE>
(d) Death of Optionee. If an Optionee dies while a Service Provider, the
Option may be exercised at any time within twelve (12) months
following the date of death (but in no event later than the expiration
of the term of such Option as set forth in the Notice of Grant), by
the Optionee's estate or by a person who acquires the right to
exercise the Option by bequest or inheritance, but only to the extent
that the Optionee would have been entitled to exercise the Option on
the date of death. If, at the time of death, the Optionee is not
entitled to exercise his or her entire Option, the Shares covered by
the unexercisable portion of the Option shall immediately revert to
the Plan. The Option may be exercised by the executor or administrator
of the Optionee's estate or, if none, by the person(s) entitled to
exercise the Option under the Optionee's will or the laws of descent
or distribution. If the Option is not so exercised within the time
specified herein, the Option shall terminate, and the Shares covered
by such Option shall revert to the Plan.
(e) Buyout Provisions. The Administrator may at any time offer to buy out
for a payment in cash or Shares, an Option previously granted based on
such terms and conditions as the Administrator shall establish and
communicate to the Optionee at the time that such offer is made.
11. Stock Purchase Rights.
(a) Rights to Purchase. Stock Purchase Rights may be issued either alone,
in addition to, or in tandem with other awards granted under the Plan
and/or cash awards made outside of the Plan. After the Administrator
determines that it will offer Stock Purchase Rights under the Plan, it
shall advise the offeree in writing or electronically, by means of a
Notice of Grant, of the terms, conditions and restrictions related to
the offer, including the number of Shares that the offeree shall be
entitled to purchase, the price to be paid, and the time within which
the offeree must accept such offer. The offer shall be accepted by
execution of a Restricted Stock Purchase Agreement in the form
determined by the Administrator.
(b) Repurchase Option. Unless the Administrator determines otherwise, the
Restricted Stock Purchase Agreement shall grant the Company a
repurchase option exercisable upon the voluntary or involuntary
termination of the purchaser's service with the Company for any reason
(including death or Disability). The purchase price for Shares
repurchased pursuant to the Restricted Stock Purchase Agreement shall
be the original price paid by the purchaser and may be paid by
cancellation of any indebtedness of the purchaser to the Company. The
repurchase option shall lapse at a rate determined by the
Administrator.
(c) Other Provisions. The Restricted Stock Purchase Agreement shall
contain such other terms, provisions and conditions not inconsistent
with the Plan as may be determined by the Administrator in its sole
discretion.
10
<PAGE>
(d) Rights as a Shareholder. Once the Stock Purchase Right is exercised,
the purchaser shall have the rights equivalent to those of a
shareholder, and shall be a shareholder when his or her purchase is
entered upon the records of the duly authorized transfer agent of the
Company. No adjustment will be made for a dividend or other right for
which the record date is prior to the date the Stock Purchase Right is
exercised, except as provided in Section 13 of the Plan.
12. Non-Transferability of Options and Stock Purchase Rights. Unless
determined otherwise by the Administrator, an Option or Stock Purchase Right may
not be sold, pledged, assigned, hypothecated, transferred, or disposed of in any
manner other than by will or by the laws of descent or distribution and may be
exercised, during the lifetime of the Optionee, only by the Optionee. If the
Administrator makes an Option or Stock Purchase Right transferable, such Option
or Stock Purchase Right shall contain such additional terms and conditions as
the Administrator deems appropriate.
13. Adjustments Upon Changes in Capitalization, Dissolution, Merger or Asset
Sale.
(a) Changes in Capitalization. Subject to any required action by the
shareholders of the Company, the number of shares of Common Stock
covered by each outstanding Option and Stock Purchase Right, and the
number of shares of Common Stock which have been authorized for
issuance under the Plan but as to which no Options or Stock Purchase
Rights have yet been granted or which have been returned to the Plan
upon cancellation or expiration of an Option or Stock Purchase Right,
as well as the price per share of Common Stock covered by each such
outstanding Option or Stock Purchase Right, shall be proportionately.
adjusted for any increase or decrease in the number of issued shares
of Common Stock resulting from a stock split, reverse stock split,
stock dividend, combination or reclassification of the Common Stock,
or any other increase or decrease in the number of issued shares of
Common Stock effected without receipt of consideration by the Company;
provided, however, that conversion of any convertible securities of
the Company shall not be deemed to have been "effected without receipt
of consideration." Such adjustment shall be made by the Board, whose
determination in that respect shall be final, binding and conclusive.
Except as expressly provided herein, no issuance by the Company of
shares of stock of any class, or securities convertible into shares of
stock of any class, shall affect, and no adjustment by reason thereof
shall be made with respect to, the number or price of shares of Common
Stock subject to an Option or Stock Purchase Right.
(b) Dissolution or Liquidation. In the event of the proposed dissolution
or liquidation of the Company, the Administrator shall notify each
Optionee as soon as practicable prior to the effective date of such
proposed transaction. The Administrator in its discretion may provide
for an Optionee to have the right to exercise his or her Option until
ten (10) days prior to such transaction as to all of
11
<PAGE>
the Optioned Stock covered thereby, including Shares as to which the Option
would not otherwise be exercisable. In addition, the Administrator may
provide that any Company repurchase option applicable to any Shares
purchased upon exercise of an Option or Stock Purchase Right shall lapse as
to all such Shares, provided the proposed dissolution or liquidation takes
place at the time and in the manner contemplated. To the extent it has not
been previously exercised, an Option or Stock Purchase Right will terminate
immediately prior to the consummation of such proposed action.
(c) Merger or Asset Sale. In the event of a merger of the Company with or into
another corporation, or the sale of substantially all of the assets of the
Company, each outstanding Option and Stock Purchase Right shall be assumed
or an equivalent option or right substituted by the successor corporation
or a Parent or Subsidiary of the successor corporation. In the event that
the successor corporation refuses to assume or substitute for the Option or
Stock Purchase Right, the Optionee shall fully vest in and have the right
to exercise the Option or Stock Purchase Right as to all of the Optioned
Stock, including Shares as to which it would not otherwise be vested or
exercisable. If an Option or Stock Purchase Right becomes fully vested and
exercisable in lieu of assumption or substitution in the event of a merger
or sale of assets, the Administrator shall notify the Optionee in writing
or electronically that the Option or Stock Purchase Right shall be fully
vested and exercisable for a period of fifteen (15) days from the date of
such notice, and the Option or Stock Purchase Right shall terminate upon
the expiration of such period. For the purposes of this paragraph, the
Option or Stock Purchase Right shall be considered assumed if, following
the merger or sale of assets, the option or right confers the right to
purchase or receive, for each Share of Optioned Stock subject to the Option
or Stock Purchase Right immediately prior to the merger or sale of assets,
the consideration (whether stock, cash, or other securities or property)
received in the merger or sale of assets by holders of Common Stock for
each Share held on the effective date of the transaction (and if holders
were offered a choice of consideration, the type of consideration chosen by
the holders of a majority of the outstanding Shares); provided, however,
that if such consideration received in the merger or sale of assets is not
solely common stock of the successor corporation or its Parent, the
Administrator may, with the consent of the successor corporation, provide
for the consideration to be received upon the exercise of the Option or
Stock Purchase Right, for each Share of Optioned Stock subject to the
Option or Stock Purchase Right, to be solely common stock of the successor
corporation or its Parent equal in fair market value to the per share
consideration received by holders of Common Stock in the merger or sale of
assets.
14. Date of Grant. The date of grant of an Option or Stock Purchase Right
shall be, for all purposes, the date on which the Administrator makes the
determination granting such Option or Stock Purchase Right, or such other later
date as is determined by the Administrator. Notice of
12
<PAGE>
the determination shall be provided to each Optionee within a reasonable time
after the date of such grant.
15. Amendment and Termination of the Plan.
(a) Amendment and Termination. The Board may at any time amend, alter,
suspend or terminate the Plan.
(b) Shareholder Approval. The Company shall obtain shareholder approval of
any Plan amendment to the extent necessary and desirable to comply
with Applicable Laws.
(c) Effect of Amendment or Termination. No amendment, alteration,
suspension or termination of the Plan shall impair the rights of any
Optionee, unless mutually agreed otherwise between the Optionee and
the Administrator, which agreement must be in writing and signed by
the Optionee and the Company.
16. Conditions Upon Issuance of Shares.
(a) Legal Compliance. Shares shall not be issued pursuant to the exercise
of an Option or Stock Purchase Right unless the exercise of such
Option or Stock Purchase Right and the issuance and delivery of such
Shares shall comply with Applicable Laws and shall be further subject
to the approval of counsel for the Company with respect to such
compliance.
(b) Investment Representations. As a condition to the exercise of an
Option or Stock Purchase Right, the Company may require the person
exercising such Option or Stock Purchase Right to represent and
warrant at the time of any such exercise that the Shares are being
purchased only for investment and without any present intention to
sell or distribute such Shares if, in the opinion of counsel for the
Company, such a representation is required.
17. Inability to Obtain Authority. The inability of the Company to obtain
authority from any regulatory body having jurisdiction, which authority is
deemed by the Company's counsel to be necessary to the lawful issuance and sale
of any Shares hereunder, shall relieve the Company of any liability in respect
of the failure to issue or sell such Shares as to which such requisite authority
shall not have been obtained.
18. Reservation of Shares. The Company, during the term of this Plan, will at
all times reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of the Plan.
19. Shareholder Approval. The Plan shall be subject to approval by the
shareholders of the Company within twelve (12) months after the date the Plan is
adopted. Such shareholder approval shall be obtained in the manner and to the
degree required under Applicable Laws.
13
<PAGE>
EXHIBIT 10.8
AMENDED AND RESTATED
LOGICAL DESIGN SOLUTIONS, INC.
1999 STOCK PLAN
1. Purposes of the Plan. The purposes of this Stock Plan are: to attract and
retain the best available personnel for positions of substantial responsibility,
to provide additional incentive to Employees, Directors and Consultants, and to
promote the success of the Company's business. Options granted under the Plan
may be Incentive Stock Options or Nonqualified Stock Options, as determined by
the Administrator at the time of grant. Stock Purchase Rights may also be
granted under the Plan.
2. Definitions. As used herein, the following definitions shall apply:
2.1 "Administrator" means the Board or any of its Committees as shall be
administering the Plan, in accordance with Section 4 of the Plan.
2.2 "Applicable Laws" means the requirements relating to the administration
of stock option plans under U.S. state corporate laws, U.S. federal and
state securities laws, the Code, any stock exchange or quotation system on
which the Common Stock is listed or quoted and the applicable laws of any
foreign country or jurisdiction where Options or Stock Purchase Rights are,
or will be, granted under the Plan.
2.3 "Board" means the Board of Directors of the Company.
2.4 "Code" means the Internal Revenue Code of 1986, as amended.
2.5 "Committee" means a committee of Directors appointed by the Board in
accordance with Section 4 of the Plan.
2.6 "Common Stock" means the Common Stock of the Company.
2.7 "Company" means Logical Design Solutions, Inc., a Delaware corporation.
2.8 "Consultant" means any person, including an advisor, engaged by the
Company or a Parent or Subsidiary to render services and who is compensated
for such services.
2.9 "Director" means a member of the Board.
2.10 "Disability" means total and permanent disability as defined in
Section 22(e)(3) of the Code.
<PAGE>
2.11 "Employee" means any person, including Section 16(b) Officers and
Directors, employed by the Company or any Parent or Subsidiary of the
Company. A Service Provider shall not cease to be an Employee in the case
of (i) any leave of absence approved by the Company or (ii) transfers
between locations of the Company or between the Company, its Parent, any
Subsidiary, or any successor. For purposes of Incentive Stock Options, no
such leave may exceed ninety days, unless reemployment upon expiration of
such leave is guaranteed by statute or contract. If reemployment upon
expiration of a leave of absence approved by the Company is not so
guaranteed, on the 181st day of such leave any Incentive Stock Option held
by the Optionee shall cease to be treated as an Incentive Stock Option and
shall be treated for tax purposes as a Nonqualified Stock Option. Neither
service as a Director nor payment of a director's fee by the Company shall
be sufficient to constitute "employment" by the Company.
2.12 "Exchange Act" means the Securities Exchange Act of 1934, as amended.
2.13 "Fair Market Value" means, as of any date, the value of Common Stock
determined as follows:
(a) if the Common Stock is listed on any established stock exchange
or a national market system, including without limitation the Nasdaq
National Market or The Nasdaq Small Cap Market of The Nasdaq Stock
Market, its Fair Market Value shall be the closing sales price for
such stock (or the closing bid, if no sales were reported) as quoted
on such exchange or system for the last market trading day prior to
the time of determination, as reported in The Wall Street Journal or
such other source as the Administrator deems reliable;
(b) if the Common Stock is regularly quoted by a recognized
securities dealer but selling prices are not reported, the Fair
Market Value of a Share of Common Stock shall be the mean between the
high bid and low asked prices for the Common Stock on the last market
trading day prior to the day of determination, based on such source
as the Administrator deems reliable;
(c) in the absence of an established market for the Common Stock, the
Fair Market Value shall be determined in good faith by the
Administrator.
2.14 "Incentive Stock Option" means an Option intended to qualify as an
incentive stock option within the meaning of Section 422 of the Code and
the regulations promulgated thereunder.
2
<PAGE>
2.15 "Nonqualified Stock Option" means an Option not intended to qualify as
an Incentive Stock Option.
2.16 "Notice of Grant" means a written or electronic notice evidencing
certain terms and conditions of an individual Option or Stock Purchase
Right grant. The Notice of Grant is part of the Option Agreement.
2.17 "Section 16(b) Officer" means a person who is an officer of the
Company within the meaning of Section 16(b) of the Exchange Act and the
rules and regulations promulgated thereunder.
2.18 "Option" means a stock option granted pursuant to the Plan.
2.19 "Option Agreement" means an agreement between the Company and an
Optionee evidencing the terms and conditions of an individual Option grant.
The Option Agreement is subject to the terms and conditions of the Plan.
2.20 "Option Exchange Program" means a program whereby outstanding options
are surrendered in exchange for options with a lower exercise price.
2.21 "Optioned Stock" means the Common Stock subject to an Option or Stock
Purchase Right.
2.22 "Optionee" means the holder of an outstanding Option or Stock Purchase
Right granted under the Plan.
2.23 "Parent" means a "parent corporation," whether now or hereafter
existing, as defined in Section 424(e) of the Code.
2.24 "Plan" means this 1999 Stock Plan.
2.25 "Restricted Stock" means shares of Common Stock acquired pursuant to a
grant of Stock Purchase Rights under Section 11 below.
2.26 "Restricted Stock Purchase Agreement" means a written agreement
between the Company and the Optionee evidencing the terms and restrictions
applying to stock purchased under a Stock Purchase Right. The Restricted
Stock Purchase Agreement is subject to the terms and conditions of the Plan
and the Notice of Grant.
2.27 "Rule 16b-3" means Rule 16b-3 of the Exchange Act or any successor to
Rule 16b-3, as in effect when discretion is being exercised with respect to
the Plan.
3
<PAGE>
2.28 "Section 16(b)" means Section 16(b) of the Securities Exchange Act of
1934, as amended.
2.29 "Service Provider" means an Employee, Director or Consultant.
2.30 "Share" means a share of the Common Stock, as adjusted in accordance
with Section 13 of the Plan.
2.31 "Stock Purchase Right" means the right to purchase Common Stock
pursuant to Section 11 of the Plan, as evidenced by a Notice of Grant.
2.32 "Subsidiary" means a "subsidiary corporation", whether now or
hereafter existing, as defined in Section 424(f) of the Code.
3. Stock Subject to the Plan. Subject to the provisions of Section 13 of the
Plan, the maximum aggregate number of Shares that may be optioned and sold under
the Plan is 2,750,000 Shares, plus any adjustments as provided for herein. If
an Option or Stock Purchase Right expires or becomes unexercisable without
having been exercised in full, or is surrendered pursuant to an Option Exchange
Program, the unpurchased Shares which were subject thereto shall become
available for future grant or sale under the Plan (unless the Plan has
terminated); provided, however, that Shares that have actually been issued under
the Plan, whether upon exercise of an Option or Right, shall not be returned to
the Plan and shall not become available for future distribution under the Plan,
except that if Shares of Restricted Stock are repurchased by the Company at
their original purchase price, such Shares shall become available for future
grant under the Plan.
4. Administration of the Plan.
4.1 Procedure.
(a) Multiple Administrative Bodies. The Plan may be administered by
different Committees with respect to different groups of Service
Providers.
(b) Section 162(m). To the extent that the Administrator determines
it to be desirable to qualify Options granted hereunder as
"performance-based compensation" within the meaning of Section 162(m)
of the Code, the Plan shall be administered by a Committee of two or
more "outside directors" within the meaning of Section 162(m) of the
Code.
(c) Rule 16b-3. To the extent desirable to qualify transactions
hereunder as exempt under Rule 16b-3, the Plan shall be administered
by the Board or a Committee of two or more "non-employee directors"
within the meaning of Rule 16b-3.
4
<PAGE>
(d) Other Administration. Other than as provided above, the Plan
shall be administered by (A) the Board or (B) a Committee, which
Committee shall be constituted to satisfy Applicable Laws.
4.2 Powers of the Administrator. Subject to the provisions of the Plan,
and in the case of a Committee, subject to the specific duties delegated by the
Board to such Committee, the Administrator shall have the authority, in its
discretion:
(a) to determine the Fair Market Value;
(b) to select the Service Providers to whom Options and Stock Purchase
Rights may be granted hereunder;
(c) to determine the number of shares of Common Stock to be covered by
each Option and Stock Purchase Right granted hereunder;
(d) to approve forms of agreement for use under the Plan;
(e) to determine the terms and conditions, not inconsistent with the
terms of the Plan, of any Option or Stock Purchase Right granted
hereunder. Such terms and conditions include, but are not limited to,
the exercise price, the time or times when Options or Stock Purchase
Rights may be exercised (which may be based on performance criteria),
any vesting acceleration or waiver of forfeiture restrictions, and any
restriction or limitation regarding any Option or Stock Purchase Right
or the shares of Common Stock relating thereto, based in each case on
such factors as the Administrator, in its sole discretion, shall
determine;
(f) to institute an Option Exchange Program;
(g) to construe and interpret the terms of the Plan and awards granted
pursuant to the Plan;
(h) to prescribe, amend and rescind rules and regulations relating to
the Plan, including rules and regulations relating to sub-plans
established for the purpose of qualifying for preferred tax treatment
under foreign tax laws;
(i) to modify or amend each Option or Stock Purchase Right (subject to
Section 15(c) of the Plan), including the discretionary authority to
extend the post-termination exercisability period of Options longer
than is otherwise provided for in the Plan;
5
<PAGE>
(j) to allow Optionees to satisfy withholding tax obligations by
electing to have the Company withhold from the Shares to be issued
upon exercise of an Option or Stock Purchase Right that number of
Shares having a Fair Market Value equal to the amount required to be
withheld. The Fair Market Value of the Shares to be withheld shall be
determined on the date that the amount of tax to be withheld is to be
determined. All elections by an Optionee to have Shares withheld for
this purpose shall be made in such form and under such conditions as
the Administrator may deem necessary or advisable;
(k) to authorize any person to execute on behalf of the Company any
Instrument required to effect the grant of an Option or Stock Purchase
Right previously granted by the Administrator;
(l) to make all other determinations deemed necessary or advisable for
administering the Plan.
5. Effect of Administrator's Decision. The Administrator's decisions,
determinations and interpretations shall be final and binding on all Optionees
and any other holders of Options or Stock Purchase Rights.
6. Eligibility. Nonqualified Stock Options and Stock Purchase Rights may be
granted to Service Providers. Incentive Stock Options may be granted only to
Employees.
7. Limitations.
7.1 Each Option shall be designated in the Option Agreement as either an
Incentive Stock Option or a Nonqualified Stock Option. However,
notwithstanding such designation, to the extent that the aggregate Fair
Market Value of the Shares with respect to which Incentive Stock Options
are exercisable for the first time by the Optionee during any calendar year
(under all plans of the Company and any Parent or Subsidiary) exceeds
$100,000, such Options shall be treated as Nonqualified Stock Options. For
purposes of this Section 6(a), Incentive Stock Options shall be taken into
account in the order in which they were granted. The Fair Market Value of
the Shares shall be determined as of the time the Option with respect to
such Shares is granted.
7.2 Neither the Plan nor any Option or Stock Purchase Right shall confer
upon an Optionee any right with respect to continuing the Optionee's
relationship as a Service Provider with the Company, nor shall they
interfere in any way with the Optionee's right or the Company's right to
terminate such relationship at any time, with or without cause.
7.3 The following limitations shall apply to grants of Options:
6
<PAGE>
(a) No Service Provider shall be granted, in any two fiscal years of
the Company after the initial public offering of shares of Common
Stock, Options to purchase more than 500,000 Shares.
(b) In connection with his or her initial service, a Service Provider
may be granted Options to purchase up to an additional 500,000 Shares
which shall not count against the limit set forth in subsection (i)
above.
(c) The foregoing limitations shall be adjusted proportionately in
connection with any change in the Company's capitalization as
described in Section 13.
(d) If an Option is canceled in the same fiscal year of the Company in
which it was granted (other than in connection with a transaction
described in Section 13), the canceled Option will be counted against
the limits set forth in subsections (i) and (ii) above. For this
purpose, if the exercise price of an Option is reduced, the
transaction will be treated as a cancellation of the Option and the
grant of a new Option.
8. Term of Plan. The Plan as set forth herein is an amendment and restatement
of the 1999 Stock Plan as originally adopted by the Company. Subject to Section
20 of the Plan, the Plan as amended and restated shall become effective upon its
adoption by the Board. Unless terminated earlier under Section 15 of the Plan,
the Plan as so amended and restated shall continue in effect until ten (10)
years after the earlier of the date of its adoption by the Board or the date of
its approval by the shareholders of the Company.
9. Term of Option. The term of each Option shall be stated in the Option
Agreement. In the case of an Incentive Stock Option, the term shall be ten (10)
years from the date of grant or such shorter term as may be provided in the
Option Agreement. Moreover, in the case of an Incentive Stock Option granted to
an Optionee who, at the time the Incentive Stock Option is granted, owns stock
representing more than ten percent (10%) of the voting power of all classes of
stock of the Company or any Parent or Subsidiary, the term of the Incentive
Stock Option shall be five (5) years from the date of grant or such shorter term
as may be provided in the Option Agreement.
10. Option Exercise Price and Consideration.
10.1 Exercise Price. The per share exercise price for the Shares to be
issued pursuant to exercise of an Option shall be determined by the
Administrator, subject to the following:
7
<PAGE>
(a) In the case of an Incentive Stock Option
(i) granted to an Employee who, at the time the Incentive Stock
Option is granted, owns stock representing more than ten percent
(10%) of the voting power of all classes of stock of the Company
or any Parent or Subsidiary, the per Share exercise price shall
be no less than 110% of the Fair Market Value per Share on the
date of grant.
(ii) granted to any Employee other than an Employee described in
paragraph (A) immediately above, the per Share exercise price
shall be no less than 100% of the Fair Market Value per Share on
the date of grant.
(b) In the case of a Nonqualified Stock Option, the per Share
exercise price shall be determined by the Administrator. In the case
of a Nonqualified Stock Option intended to qualify as "performance-
based compensation" within the meaning of Section 162(m) of the Code,
the per Share exercise price shall be no less than 100% of the Fair
Market Value per Share on the date of grant.
(c) Subject to the foregoing, Options may be granted with a per Share
exercise price equal to, greater than or less than 100% of Fair Market
Value on the date of grant.
10.2 Waiting Period and Exercise Dates. At the time an Option is granted,
the Administrator shall fix the period within which the Option may be exercised
and shall determine any conditions which must be satisfied before the Option may
be exercised.
10.3 Form of Consideration. The Administrator shall determine the
acceptable form of consideration for exercising an Option, including the method
of payment. In the case of an Incentive Stock Option, the Administrator shall
determine the acceptable form of consideration at the time of grant. Such
consideration may consist entirely of:
(a) cash;
(b) check;
(c) promissory note;
(d) other Shares which (A) in the case of Shares acquired upon
exercise of an option, have been owned by the Optionee for more than
six (6) months on the date of surrender, and (B) have a Fair
8
<PAGE>
Market Value on the date of surrender equal to the aggregate exercise
price of the Shares as to which said Option shall be exercised;
(e) consideration received by the Company under a formal cashless
exercise program adopted by the Company in connection with the Plan;
(f) a reduction in the amount of any Company liability to the
Optionee, including any liability attributable to the Optionee's
participation in any Company-sponsored deferred compensation program
or arrangement;
(g) any combination of the foregoing methods of payment; or
(h) such other consideration and method of payment for the issuance of
Shares to the extent permitted by Applicable Laws.
11. Exercise of Options.
11.1 Procedure for Exercise; Rights as a Shareholder. Any Option granted
hereunder shall be exercisable according to the terms of the Plan and at such
times and under such conditions as determined by the Administrator and set forth
in the Option Agreement. Unless the Administrator provides otherwise, vesting
of Options granted hereunder shall be tolled during any unpaid leave of absence.
An Option may not be exercised for a fraction of a Share.
An Option shall be deemed exercised when the Company receives: (i) written
or electronic notice of exercise (in accordance with the Option Agreement) from
the person entitled to exercise the Option, and (ii) full payment for the Shares
with respect to which the Option is exercised. Full payment may consist of any
consideration and method of payment authorized by the Administrator and
permitted by the Option Agreement and the Plan. Shares issued upon exercise of
an Option shall be issued in the name of the Optionee or, if requested by the
Optionee, in the name of the Optionee and his or her spouse.
Until the Shares are issued (as evidenced by the appropriate entry on the
books of the Company or of a duly authorized transfer agent of the Company), no
right to vote or receive dividends or any other rights as a shareholder shall
exist with respect to the Optioned Stock, notwithstanding the exercise of the
Option.
The Company shall issue (or cause to be issued) such Shares promptly after
the Option is exercised. No adjustment will be made for a dividend or other
right for which the record date is prior to the date the Shares are issued,
except as provided in Section 13 of the Plan.
9
<PAGE>
Exercising an Option in any manner shall decrease the number of Shares
thereafter available, both for purposes of the Plan and for sale under the
Option, by the number of Shares as to which the Option is exercised.
11.2 Termination of Relationship as a Service Provider. If an Optionee
ceases to be a Service Provider, other than upon the Optionee's death or
Disability, the Optionee may exercise his or her Option within such period of
time as is specified in the Option Agreement to the extent that he or she is
entitled to exercise it on the date of termination (but in no event later than
the expiration of the term of such Option as set forth in the Option Agreement).
In the absence of a specified time in the Option Agreement, the Option
shall remain exercisable for three (3) months following the Optionee's
termination. If, on the date of termination, the Optionee is not entitled to
exercise his or her entire Option, the Shares covered by the unexercisable
portion of the Option shall revert to the Plan. If, after termination, the
Optionee does not exercise his or her Option within the time specified by the
Administrator, the Option shall terminate, and the Shares covered by such Option
shall revert to the Plan.
11.3 Disability of Optionee. If an Optionee ceases to be a Service
Provider as a result of the Optionee's Disability, the Optionee may exercise his
or her Option at any time within twelve (12) months from the date of
termination, but only to the extent that the Optionee is entitled to exercise it
on the date of termination (and in no event later than the expiration of the
term of the Option as set forth in the Option Agreement). If, on the date of
termination, the Optionee is not entitled to exercise his or her entire Option,
the Shares covered by the unexercisable portion of the Option shall revert to
the Plan. If, after termination, the Optionee does not exercise his or her
Option within the time specified herein, the Option shall terminate, and the
Shares covered by such Option shall revert to the Plan.
11.4 Death of Optionee. If an Optionee dies while a Service Provider, the
Option may be exercised at any time within twelve (12) months following the date
of death (but in no event later than the expiration of the term of such Option
as set forth in the Notice of Grant), by the Optionee's estate or by a person
who acquires the right to exercise the Option by bequest or inheritance, but
only to the extent that the Optionee would have been entitled to exercise the
Option on the date of death. If, at the time of death, the Optionee is not
entitled to exercise his or her entire Option, the Shares covered by the
unexercisable portion of the Option shall immediately revert to the Plan. The
Option may be exercised by the executor or administrator of the Optionee's
estate or, if none, by the person(s) entitled to exercise the Option under the
Optionee's will or the laws of descent or distribution. If the Option is not so
exercised within the time specified herein, the Option shall terminate, and the
Shares covered by such Option shall revert to the Plan.
10
<PAGE>
11.5 Buyout Provisions. The Administrator may at any time offer to buy
out for a payment in cash or Shares, an Option previously granted based on such
terms and conditions as the Administrator shall establish and communicate to the
Optionee at the time that such offer is made.
12. Stock Purchase Rights.
12.1 Rights to Purchase. Stock Purchase Rights may be issued either
alone, in addition to, or in tandem with other awards granted under the Plan
and/or cash awards made outside of the Plan. After the Administrator determines
that it will offer Stock Purchase Rights under the Plan, it shall advise the
offeree in writing or electronically, by means of a Notice of Grant, of the
terms, conditions and restrictions related to the offer, including the number of
Shares that the offeree shall be entitled to purchase, the price to be paid, and
the time within which the offeree must accept such offer. The offer shall be
accepted by execution of a Restricted Stock Purchase Agreement in the form
determined by the Administrator.
12.2 Repurchase Option. Unless the Administrator determines otherwise,
the Restricted Stock Purchase Agreement shall grant the Company a repurchase
option exercisable upon the voluntary or involuntary termination of the
purchaser's service with the Company for any reason (including death or
Disability). The purchase price for Shares repurchased pursuant to the
Restricted Stock Purchase Agreement shall be the original price paid by the
purchaser and may be paid by cancellation of any indebtedness of the purchaser
to the Company. The repurchase option shall lapse at a rate determined by the
Administrator.
12.3 Other Provisions. The Restricted Stock Purchase Agreement shall
contain such other terms, provisions and conditions not inconsistent with the
Plan as may be determined by the Administrator in its sole discretion.
12.4 Rights as a Shareholder. Once the Stock Purchase Right is exercised,
the purchaser shall have the rights equivalent to those of a shareholder, and
shall be a shareholder when his or her purchase is entered upon the records of
the duly authorized transfer agent of the Company. No adjustment will be made
for a dividend or other right for which the record date is prior to the date the
Stock Purchase Right is exercised, except as provided in Section 13 of the Plan.
13. Non-Transferability of Options and Stock Purchase Rights. Unless the
Administrator determines otherwise, an Option or Stock Purchase Right may not be
sold, pledged, assigned, hypothecated, transferred, or disposed of in any manner
other than by will or by the laws of descent or distribution and may be
exercised, during the lifetime of the Optionee, only by the Optionee. If the
Administrator makes an Option or Stock Purchase Right transferable, such Option
or Stock Purchase Right shall contain such additional terms and conditions as
the Administrator deems appropriate.
11
<PAGE>
14. Adjustments Upon Changes in Capitalization, Dissolution, Merger or Asset
Sale.
14.1 Changes in Capitalization. Subject to any required action by the
shareholders of the Company, the number of shares of Common Stock covered by
each outstanding Option and Stock Purchase Right, and the number of shares of
Common Stock which have been authorized for issuance under the Plan but as to
which no Options or Stock Purchase Rights have yet been granted or which have
been returned to the Plan upon cancellation or expiration of an Option or Stock
Purchase Right, as well as the price per share of Common Stock covered by each
such outstanding Option or Stock Purchase Right, shall be proportionately
adjusted for any increase or decrease in the number of issued shares of Common
Stock resulting from a stock split, reverse stock split, stock dividend,
combination or reclassification of the Common Stock, or any other increase or
decrease in the number of issued shares of Common Stock effected without receipt
of consideration by the Company; provided, however, that conversion of any
convertible securities of the Company shall not be deemed to have been "effected
without receipt of consideration." Such adjustment shall be made by the Board,
whose determination in that respect shall be final, binding and conclusive.
Except as expressly provided herein, no issuance by the Company of shares
of stock of any class, or securities convertible into shares of stock of any
class, shall affect, and no adjustment by reason thereof shall be made with
respect to, the number or price of shares of Common Stock subject to an Option
or Stock Purchase Right.
14.2 Dissolution or Liquidation. In the event of the proposed dissolution
or liquidation of the Company, the Administrator shall notify each Optionee as
soon as practicable prior to the effective date of such proposed transaction.
The Administrator in its discretion may provide for an Optionee to have the
right to exercise his or her Option until ten (10) days prior to such
transaction as to all of the Optioned Stock covered thereby, including Shares as
to which the Option would not otherwise be exercisable. In addition, the
Administrator may provide that any Company repurchase option applicable to any
Shares purchased upon exercise of an Option or Stock Purchase Right shall lapse
as to all such Shares, provided the proposed dissolution or liquidation takes
place at the time and in the manner contemplated. To the extent it has not been
previously exercised, an Option or Stock Purchase Right will terminate
immediately prior to the consummation of such proposed action.
14.3 Merger or Asset Sale. In the event of a merger of the Company with
or into another corporation, or the sale of substantially all of the assets of
the Company, each outstanding Option and Stock Purchase Right shall be assumed
or an equivalent option or right substituted by the successor corporation or a
Parent or Subsidiary of the successor corporation. In the event that the
successor corporation refuses to assume or substitute for the Option or Stock
Purchase Right, the Optionee
12
<PAGE>
shall fully vest in and have the right to exercise the Option or Stock Purchase
Right as to all of the Optioned Stock, including Shares as to which it would not
otherwise be vested or exercisable. If an Option or Stock Purchase Right becomes
fully vested and exercisable in lieu of assumption or substitution in the event
of a merger or sale of assets, the Administrator shall notify the Optionee in
writing or electronically that the Option or Stock Purchase Right shall be fully
vested and exercisable for a period of fifteen (15) days from the date of such
notice, and the Option or Stock Purchase Right shall terminate upon the
expiration of such period. For the purposes of this paragraph, the Option or
Stock Purchase Right shall be considered assumed if, following the merger or
sale of assets, the option or right confers the right to purchase or receive,
for each Share of Optioned Stock subject to the Option or Stock Purchase Right
immediately prior to the merger or sale of assets, the consideration (whether
stock, cash, or other securities or property) received in the merger or sale of
assets by holders of Common Stock for each Share held on the effective date of
the transaction (and if holders were offered a choice of consideration, the type
of consideration chosen by the holders of a majority of the outstanding Shares);
provided, however, that if such consideration received in the merger or sale of
assets is not solely common stock of the successor corporation or its Parent,
the Administrator may, with the consent of the successor corporation, provide
for the consideration to be received upon the exercise of the Option or Stock
Purchase Right, for each Share of Optioned Stock subject to the Option or Stock
Purchase Right, to be solely common stock of the successor corporation or its
Parent equal in fair market value to the per share consideration received by
holders of Common Stock in the merger or sale of assets.
15. Date of Grant. The date of grant of an Option or Stock Purchase Right
shall be, for all purposes, the date on which the Administrator makes the
determination granting such Option or Stock Purchase Right, or such other later
date as is determined by the Administrator. Notice of the determination shall
be provided to each Optionee within a reasonable time after the date of such
grant.
16. Amendment and Termination of the Plan.
16.1 Amendment and Termination. The Board may at any time amend, alter,
suspend or terminate the Plan.
16.2 Shareholder Approval. The Company shall obtain shareholder approval
of any Plan amendment to the extent necessary and desirable to comply with
Applicable Laws.
16.3 Effect of Amendment or Termination. No amendment, alteration,
suspension or termination of the Plan shall impair the rights of any Optionee,
unless mutually agreed otherwise between the Optionee and the Administrator,
which agreement must be in writing and signed by the Optionee and the Company.
17. Conditions Upon Granting of Awards and Issuance of Shares.
13
<PAGE>
17.1 Shareholders Agreement. The Administrator, in its discretion, may
determine that as a condition to the grant of an Option or Stock Purchase Right
hereunder the person receiving such Option or Stock Purchase Right shall be
required to enter into a Shareholders Agreement with the Company (in
substantially the form attached to the applicable Notice of Grant) with respect
to all Shares then held and thereafter acquired by such person, including,
without limitation, Shares acquired upon previous exercises of stock options or
stock purchase rights granted under this Plan or any predecessor plan.
17.2 Legal Compliance. Shares shall not be issued pursuant to the
exercise of an Option or Stock Purchase Right unless the exercise of such Option
or Stock Purchase Right and the issuance and delivery of such Shares shall
comply with Applicable Laws and shall be further subject to the approval of
counsel for the Company with respect to such compliance.
17.3 Investment Representations. As a condition to the exercise of an
Option or Stock Purchase Right, the Company may require the person exercising
such Option or Stock Purchase Right to represent and warrant at the time of any
such exercise that the Shares are being purchased only for investment and
without any present intention to sell or distribute such Shares if, in the
opinion of counsel for the Company, such a representation is required.
18. Inability to Obtain Authority. The inability of the Company to obtain
authority from any regulatory body having jurisdiction, which authority is
deemed by the Company's counsel to be necessary to the lawful issuance and sale
of any Shares hereunder, shall relieve the Company of any liability in respect
of the failure to issue or sell such Shares as to which such requisite authority
shall not have been obtained.
19. Reservation of Shares. The Company, during the term of this Plan, will at
all times reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of the Plan.
20. Shareholder Approval. If required under Applicable Laws, the Plan shall be
subject to approval by the shareholders of the Company within twelve (12) months
after the date the Plan is adopted. Such shareholder approval shall be obtained
in the manner and to the degree required under such Applicable Laws.
14
<PAGE>
EXHIBIT 10.9
LOGICAL DESIGN SOLUTIONS, INC.
2000 STOCK PLAN FOR NON-EMPLOYEE DIRECTORS
1. Purposes of the Plan. The purposes of this Stock Plan for Non-Employee
Directors are: to attract and retain the best available non-employees to serve
as members of the Board, to provide additional incentive to such Directors, and
to promote the success of the Company's business. Options granted under the
Plan will be Nonqualified Stock Options.
2. Definitions. As used herein, the following definitions shall apply:
2.1 "Administrator" means the Board, which shall administer the Plan in
accordance with Section 4 of the Plan.
2.2 "Applicable Laws" means the requirements relating to the administration
of stock option plans under U.S. state corporate laws, U.S. federal and
state securities laws, the Code, any stock exchange or quotation system
on which the Common Stock is listed or quoted and the applicable laws
of any foreign country or jurisdiction where Options are, or will be,
granted under the Plan.
2.3 "Board" means the Board of Directors of the Company.
2.4 "Code" means the Internal Revenue Code of 1986, as amended.
2.5 "Common Stock" means the Common Stock of the Company.
2.6 "Company" means Logical Design Solutions, Inc., a Delaware corporation.
2.7 "Director" means a member of the Board.
2.8 "Disability" means total and permanent disability as defined in Section
22(e)(3) of the Code.
2.9 "Exchange Act" means the Securities Exchange Act of 1934, as amended.
2.10 "Fair Market Value" means, as of any date, the value of Common Stock
determined as follows:
(a) if the Common Stock is listed on any established stock exchange or
a national market system, including without limitation the Nasdaq
National Market or The Nasdaq Small Cap Market of The Nasdaq Stock
Market, its Fair Market Value shall be the closing sales price for such
stock (or the closing bid, if no sales were reported) as quoted on such
exchange or system for the last market trading day
<PAGE>
prior to the time of determination, as reported in The Wall Street
Journal or such other source as the Administrator deems reliable;
(b) if the Common Stock is regularly quoted by a recognized securities
dealer but selling prices are not reported, the Fair Market Value of a
Share of Common Stock shall be the mean between the high bid and low
asked prices for the Common Stock on the last market trading day prior
to the day of determination, based on such source as the Administrator
deems reliable;
(c) in the absence of an established market for the Common Stock, the
Fair Market Value shall be determined in good faith by the
Administrator.
2.11 "Non-Employee Director" means a Director who constitutes an "outside
director" within the meaning of Section 162(m) of the Code and a "non-
employee director" within the meaning of Rule 16b-3.
2.12 "Nonqualified Stock Option" means an Option not intended to qualify as
an incentive stock option within the meaning of Section 422 of the
Code.
2.13 "Notice of Grant" means a written or electronic notice evidencing
certain terms and conditions of an individual Option grant. The Notice
of Grant is part of the Option Agreement.
2.14 "Option" means a stock option granted pursuant to the Plan.
2.15 "Option Agreement" means an agreement between the Company and an
Optionee evidencing the terms and conditions of an individual Option
grant. The Option Agreement is subject to the terms and conditions of
the Plan.
2.16 "Option Exchange Program" means a program whereby outstanding options
are surrendered in exchange for options with a lower exercise price.
2.17 "Optioned Stock" means the Common Stock subject to an Option.
2.18 "Optionee" means the holder of an outstanding Option granted under the
Plan.
2.19 "Plan" means this 2000 Stock Plan for Non-Employee Directors.
2.20 "Rule 16b-3" means Rule 16b-3 of the Exchange Act or any successor to
Rule 16b-3, as in effect when discretion is being exercised with
respect to the Plan.
2
<PAGE>
2.21 "Share" means a share of the Common Stock, as adjusted in accordance
with Section 13 of the Plan.
3. Stock Subject to the Plan. Subject to the provisions of Section 13 of the
Plan, the maximum aggregate number of Shares that may be optioned and sold under
the Plan is 500,000 Shares, plus any adjustments as provided for herein. If an
Option expires or becomes unexercisable without having been exercised in full,
or is surrendered pursuant to an Option Exchange Program, the unpurchased Shares
which were subject thereto shall become available for future grant or sale under
the Plan (unless the Plan has terminated); provided, however, that Shares that
have actually been issued under the Plan, whether upon exercise of an Option,
shall not be returned to the Plan and shall not become available for future
distribution under the Plan, except that if Shares of Restricted Stock are
repurchased by the Company at their original purchase price, such Shares shall
become available for future grant under the Plan.
4. Administration of the Plan.
4.1 Procedure. The Plan shall be administered by the Board.
4.2 Powers of the Administrator. Subject to the provisions of the Plan, the
Administrator shall have the authority, in its discretion:
(a) to determine the Fair Market Value;
(b) to select the Non-Employee Directors to whom Options may be
granted hereunder;
(c) to determine the number of shares of Common Stock to be covered by
each Option granted hereunder;
(d) to approve forms of agreement for use under the Plan;
(e) to determine the terms and conditions, not inconsistent with the
terms of the Plan, of any Option granted hereunder. Such terms and
conditions include, but are not limited to, the exercise price, the
time or times when Options may be exercised, any vesting acceleration
or waiver of forfeiture restrictions, and any restriction or limitation
regarding any Option, based in each case on such factors as the
Administrator, in its sole discretion, shall determine;
(f) to institute an Option Exchange Program;
(g) to construe and interpret the terms of the Plan and awards granted
pursuant to the Plan;
3
<PAGE>
(h) to prescribe, amend and rescind rules and regulations relating to
the Plan, including rules and regulations relating to sub-plans
established for the purpose of qualifying for preferred tax treatment
under foreign tax laws;
(i) to modify or amend each Option (subject to Section 15(c) of the
Plan), including the discretionary authority to extend the post-
termination exercisability period of Options longer than is otherwise
provided for in the Plan;
(j) to allow Optionees to satisfy withholding tax obligations by
electing to have the Company withhold from the Shares to be issued upon
exercise of an Option that number of Shares having a Fair Market Value
equal to the amount required to be withheld. The Fair Market Value of
the Shares to be withheld shall be determined on the date that the
amount of tax to be withheld is to be determined. All elections by an
Optionee to have Shares withheld for this purpose shall be made in such
form and under such conditions as the Administrator may deem necessary
or advisable;
(k) to authorize any person to execute on behalf of the Company any
Instrument required to effect the grant of an Option previously granted
by the Administrator;
(l) to make all other determinations deemed necessary or advisable for
administering the Plan.
5. Effect of Administrator's Decision. The Administrator's decisions,
determinations and interpretations shall be final and binding on all Optionees
and any other holders of Options.
6. Eligibility. Each Director who constitutes a Non-Employee Director shall be
eligible to receive grants of Nonqualified Stock Options hereunder, subject to
the limitations of Section 7.
7. Limitations.
7.1 Neither the Plan nor any Option shall confer upon an Optionee any right
with respect to continuing the Optionee's service as Director, nor shall
they interfere in any way with any rights that the Optionee, the Board or
the stockholders of the Company may have to terminate such relationship at
any time.
7.2 The following limitations shall apply to grants of Options hereunder:
4
<PAGE>
(a) Each Option shall become cumulatively exercisable upon the
completion of such periods of service or the occurrence of such events
as the Administrator shall determine in its sole discretion
(b) The exercise price per share of Optioned Stock under the Option
may be equal to, less than or greater than the Fair Market Value per
Share on the date of grant.
8. Term of Plan. The Plan shall become effective upon its adoption by the
Board. Unless terminated earlier under Section 15 of the Plan, it shall
continue in effect until ten (10) years after the date of its adoption by the
Board.
9. Term of Option. The term of each Option shall be ten (10) years from the
date of grant or such shorter term as may be provided in the Option Agreement.
10. Form of Option Consideration. The Administrator shall determine the
acceptable form of consideration for exercising an Option, including the method
of payment, at the time of grant. Such consideration may consist entirely of:
(a) cash;
(b) check;
(c) promissory note;
(d) other Shares which (A) in the case of Shares acquired upon
exercise of an option, have been owned by the Optionee for more than
six (6) months on the date of surrender, and (B) have a Fair Market
Value on the date of surrender equal to the aggregate exercise price of
the Shares as to which said Option shall be exercised;
(e) consideration received by the Company under a formal cashless
exercise program adopted by the Company in connection with the Plan;
(f) a reduction in the amount of any Company liability to the
Optionee, including any liability attributable to the Optionee's
participation in any Company-sponsored deferred compensation program or
arrangement;
(g) any combination of the foregoing methods of payment; or
(h) such other consideration and method of payment for the issuance of
Shares to the extent permitted by Applicable Laws.
11. Exercise of Options.
5
<PAGE>
11.1 Procedure for Exercise; Rights as a Shareholder. Any Option granted
hereunder shall be exercisable according to the terms of the Plan and
at such times and under such conditions as determined by the
Administrator and set forth in the Option Agreement. Unless the
Administrator provides otherwise, vesting of Options granted hereunder
shall be tolled during any unpaid leave of absence. An Option may not
be exercised for a fraction of a Share.
An Option shall be deemed exercised when the Company receives: (i)
written or electronic notice of exercise (in accordance with the Option
Agreement) from the person entitled to exercise the Option, and (ii)
full payment for the Shares with respect to which the Option is
exercised. Full payment may consist of any consideration and method of
payment authorized by the Administrator and permitted by the Option
Agreement and the Plan. Shares issued upon exercise of an Option shall
be issued in the name of the Optionee or, if requested by the Optionee,
in the name of the Optionee and his or her spouse.
Until the Shares are issued (as evidenced by the appropriate entry on
the books of the Company or of a duly authorized transfer agent of the
Company), no right to vote or receive dividends or any other rights as
a shareholder shall exist with respect to the Optioned Stock,
notwithstanding the exercise of the Option.
The Company shall issue (or cause to be issued) such Shares promptly
after the Option is exercised. No adjustment will be made for a
dividend or other right for which the record date is prior to the date
the Shares are issued, except as provided in Section 13 of the Plan.
Exercising an Option in any manner shall decrease the number of Shares
thereafter available, both for purposes of the Plan and for sale under
the Option, by the number of Shares as to which the Option is
exercised.
11.2 Termination of Relationship as a Director. If an Optionee ceases to be
a Director, other than upon the Optionee's death or Disability, the
Optionee may exercise his or her Option within such period of time as
is specified in the Option Agreement to the extent that he or she is
entitled to exercise it on the date of termination of service as a
Director (but in no event later than the expiration of the term of such
Option as set forth in the Option Agreement).
In the absence of a specified time in the Option Agreement, the Option
shall remain exercisable for three (3) months following the Optionee's
termination of service as a Director. If, on the date of termination,
the Optionee is not entitled to exercise his or her entire Option, the
Shares covered by the unexercisable portion of the Option shall revert
to the
6
<PAGE>
Plan. If, after termination, the Optionee does not exercise his or her
Option within the time specified by the Administrator, the Option shall
terminate, and the Shares covered by such Option shall revert to the
Plan.
11.3 Disability of Optionee. If an Optionee terminates service as a Director
as a result of the Optionee's Disability, the Optionee may exercise his
or her Option at any time within twelve (12) months from the date of
termination, but only to the extent that the Optionee is entitled to
exercise it on the date of termination (and in no event later than the
expiration of the term of the Option as set forth in the Option
Agreement). If, on the date of termination, the Optionee is not
entitled to exercise his or her entire Option, the Shares covered by
the unexercisable portion of the Option shall revert to the Plan. If,
after termination, the Optionee does not exercise his or her Option
within the time specified herein, the Option shall terminate, and the
Shares covered by such Option shall revert to the Plan.
11.4 Death of Optionee. If an Optionee dies while a Director, the Option may
be exercised at any time within twelve (12) months following the date
of death (but in no event later than the expiration of the term of such
Option as set forth in the Notice of Grant), by the Optionee's estate
or by a person who acquires the right to exercise the Option by bequest
or inheritance, but only to the extent that the Optionee would have
been entitled to exercise the Option on the date of death. If, at the
time of death, the Optionee is not entitled to exercise his or her
entire Option, the Shares covered by the unexercisable portion of the
Option shall immediately revert to the Plan. The Option may be
exercised by the executor or administrator of the Optionee's estate or,
if none, by the person(s) entitled to exercise the Option under the
Optionee's will or the laws of descent or distribution. If the Option
is not so exercised within the time specified herein, the Option shall
terminate, and the Shares covered by such Option shall revert to the
Plan.
11.5 Buyout Provisions. The Administrator may at any time offer to buy out
for a payment in cash or Shares, an Option previously granted based on
such terms and conditions as the Administrator shall establish and
communicate to the Optionee at the time that such offer is made.
12. Non-Transferability of Options. Unless the Administrator determines
otherwise, an Option may not be sold, pledged, assigned, hypothecated,
transferred, or disposed of in any manner other than by will or by the laws of
descent or distribution and may be exercised, during the lifetime of the
Optionee, only by the Optionee. If the Administrator makes an Option
transferable, such Option shall contain such additional terms and conditions as
the Administrator deems appropriate.
7
<PAGE>
13. Adjustments Upon Changes in Capitalization, Dissolution, Merger or Asset
Sale.
13.1 Changes in Capitalization. Subject to any required action by the
shareholders of the Company, the number of shares of Common Stock
covered by each outstanding Option, and the number of shares of Common
Stock which have been authorized for issuance under the Plan but as to
which no Options have yet been granted or which have been returned to
the Plan upon cancellation or expiration of an Option, as well as the
price per share of Common Stock covered by each such outstanding
Option, shall be proportionately adjusted for any increase or decrease
in the number of issued shares of Common Stock resulting from a stock
split, reverse stock split, stock dividend, combination or
reclassification of the Common Stock, or any other increase or decrease
in the number of issued shares of Common Stock effected without receipt
of consideration by the Company; provided, however, that conversion of
any convertible securities of the Company shall not be deemed to have
been "effected without receipt of consideration." Such adjustment shall
be made by the Board, whose determination in that respect shall be
final, binding and conclusive.
Except as expressly provided herein, no issuance by the Company of
shares of stock of any class, or securities convertible into shares of
stock of any class, shall affect, and no adjustment by reason thereof
shall be made with respect to, the number or price of shares of Common
Stock subject to an Option.
13.2 Dissolution or Liquidation. In the event of the proposed dissolution or
liquidation of the Company, the Administrator shall notify each
Optionee as soon as practicable prior to the effective date of such
proposed transaction. The Administrator in its discretion may provide
for an Optionee to have the right to exercise his or her Option until
ten (10) days prior to such transaction as to all of the Optioned Stock
covered thereby, including Shares as to which the Option would not
otherwise be exercisable. In addition, the Administrator may provide
that any Company repurchase option applicable to any Shares purchased
upon exercise of an Option shall lapse as to all such Shares, provided
the proposed dissolution or liquidation takes place at the time and in
the manner contemplated. To the extent it has not been previously
exercised, an Option will terminate immediately prior to the
consummation of such proposed action.
13.3 Merger or Asset Sale. In the event of a merger of the Company with or
into another corporation, or the sale of substantially all of the
assets of the Company, each outstanding Option shall be assumed or an
8
<PAGE>
equivalent option or right substituted by the successor corporation or
a parent or subsidiary of the successor corporation. In the event that
the successor corporation refuses to assume or substitute for the
Option, the Optionee shall fully vest in and have the right to exercise
the Option as to all of the Optioned Stock, including Shares as to
which it would not otherwise be vested or exercisable. If an Option
becomes fully vested and exercisable in lieu of assumption or
substitution in the event of a merger or sale of assets, the
Administrator shall notify the Optionee in writing or electronically
that the Option shall be fully vested and exercisable for a period of
fifteen (15) days from the date of such notice, and the Option shall
terminate upon the expiration of such period. For the purposes of this
paragraph, the Option shall be considered assumed if, following the
merger or sale of assets, the option or right confers the right to
purchase or receive, for each Share of Optioned Stock subject to the
Option immediately prior to the merger or sale of assets, the
consideration (whether stock, cash, or other securities or property)
received in the merger or sale of assets by holders of Common Stock for
each Share held on the effective date of the transaction (and if
holders were offered a choice of consideration, the type of
consideration chosen by the holders of a majority of the outstanding
Shares); provided, however, that if such consideration received in the
merger or sale of assets is not solely common stock of the successor
corporation or its parent, the Administrator may, with the consent of
the successor corporation, provide for the consideration to be received
upon the exercise of the Option, for each Share of Optioned Stock
subject to the Option, to be solely common stock of the successor
corporation or its parent equal in fair market value to the per share
consideration received by holders of Common Stock in the merger or sale
of assets.
14. Date of Grant. The date of grant of an Option shall be, for all purposes,
the date on which the Administrator makes the determination granting such
Option, or such other later date as is determined by the Administrator. Notice
of the determination shall be provided to each Optionee within a reasonable time
after the date of such grant.
15. Amendment and Termination of the Plan.
15.1 Amendment and Termination. The Board may at any time amend, alter,
suspend or terminate the Plan.
15.2 Shareholder Approval. The Company shall obtain shareholder approval of
any Plan amendment to the extent necessary and desirable to comply with
Applicable Laws.
9
<PAGE>
15.3 Effect of Amendment or Termination. No amendment, alteration,
suspension or termination of the Plan shall impair the rights of any
Optionee, unless mutually agreed otherwise between the Optionee and the
Administrator, which agreement must be in writing and signed by the
Optionee and the Company.
16. Conditions Upon Granting of Awards and Issuance of Shares.
16.1 Shareholders Agreement. The Administrator, in its discretion, may
determine that as a condition to the grant of an Option hereunder the
person receiving such Option shall be required to enter into a
Shareholders Agreement with the Company (in substantially the form
attached to the applicable Notice of Grant) with respect to all Shares
then held and thereafter acquired by such person, including, without
limitation, Shares acquired upon previous exercises of stock options or
stock purchase rights granted under this Plan or any predecessor plan.
16.2 Legal Compliance. Shares shall not be issued pursuant to the exercise
of an Option unless the exercise of such Option and the issuance and
delivery of such Shares shall comply with Applicable Laws and shall be
further subject to the approval of counsel for the Company with respect
to such compliance.
16.3 Investment Representations. As a condition to the exercise of an
Option, the Company may require the person exercising such Option to
represent and warrant at the time of any such exercise that the Shares
are being purchased only for investment and without any present
intention to sell or distribute such Shares if, in the opinion of
counsel for the Company, such a representation is required.
17. Inability to Obtain Authority. The inability of the Company to obtain
authority from any regulatory body having jurisdiction, which authority is
deemed by the Company's counsel to be necessary to the lawful issuance and sale
of any Shares hereunder, shall relieve the Company of any liability in respect
of the failure to issue or sell such Shares as to which such requisite authority
shall not have been obtained.
18. Reservation of Shares. The Company, during the term of this Plan, will at
all times reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of the Plan.
10
<PAGE>
Exhibit 23.3
Consent of Independent Auditors
We consent to the reference to our firm under the captions "Selected Financial
Data" and "Experts" and to the use of our reports dated February 17, 2000
(except Note 16, as to which the date is March 1, 2000) with respect to the
financial statements of Logical Design Solutions, Inc., and February 4, 2000
with respect to the financial statements of Jump! Information Technologies,
Inc., included in the Registration Statement (Form S-1 No. 333-00000) and
related Prospectus of Logical Design Solutions, Inc. for the registration of
000,000 shares of its common stock.
/s/ Ernst & Young LLP
Hackensack, New Jersey
March 1, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 1,432,005
<SECURITIES> 0
<RECEIVABLES> 5,579,901
<ALLOWANCES> (50,000)
<INVENTORY> 0
<CURRENT-ASSETS> 7,724,312
<PP&E> 4,616,911
<DEPRECIATION> (2,062,740)
<TOTAL-ASSETS> 12,051,274
<CURRENT-LIABILITIES> 2,346,387
<BONDS> 0
0
0
<COMMON> 6,713,082
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 12,051,274
<SALES> 0
<TOTAL-REVENUES> 15,839,348
<CGS> 7,541,531
<TOTAL-COSTS> 7,541,531
<OTHER-EXPENSES> 7,504,956
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,163,918
<INCOME-PRETAX> (9,146,524)
<INCOME-TAX> 202,356
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (8,944,168)
<EPS-BASIC> (1.14)
<EPS-DILUTED> (1.14)
</TABLE>
