Registration No. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
FORM S-1
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
---------------
24/7 MEDIA, INC.
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 7319 13-3995672
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
1250 Broadway, New York, NY 10001
(212) 231-7100
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
---------------
DAVID J. MOORE
Chief Executive Officer
24/7 Media, Inc.
1250 Broadway, New York, New York 10001
(212) 231-7100
Fax (212) 760-1774
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
---------------
Copies of Communications to:
<TABLE>
<S> <C>
Ronald R. Papa, Esq. Larry W. Sonsini, Esq.
Proskauer Rose LLP David Drummond, Esq.
1585 Broadway Wilson Sonsini Goodrich & Rosati
New York, New York 10036-8299 Professional Corporation
(212) 969-3000 650 Page Mill Road
Fax (212) 969-2900 Palo Alto, California 94304
(650) 493-9300
Fax (650) 493-6811
</TABLE>
---------------
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, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. -
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration 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>
Title of each class of Securities Proposed Maximum Aggregate Amount of Registration
To Be Registered Offering Price (1)(2) Fee
- ---------------------------------------- ---------------------------- -----------------------
<S> <C> <C>
Common Stock, par value $.01 per share $46,000,000 $13,570
</TABLE>
(1) Includes $6,000,000 of Common Stock, par value $.01 per share (the "Common
Stock") which the Underwriters have an option to purchase to cover over-
allotments, if any.
(2) Estimated pursuant to Rule 457(o) under the Securities Act of 1933, as
amended, solely for the purpose of calculating the registration fee.
---------------
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>
SUBJECT TO COMPLETION PRELIMINARY PROSPECTUS DATED JUNE 4, 1998
PROSPECTUS
Shares
24/7 Media, Inc.
Common Stock
----------------
All of the shares of Common Stock, par value $.01 per share, (the "Common
Stock") offered hereby (the "Offering") are being sold by 24/7 Media, Inc.
("24/7 Media" or the "Company"). Prior to the Offering, there has been no
public market for the Common Stock. It is currently estimated that the initial
public offering price for the Common Stock will be between $ and
$ per share. See "Underwriting" for information relating to the factors
considered in determining the initial public offering price of the Common
Stock.
Shares of Common Stock may be reserved for sale at the public offering price to
the Company's employees, directors and other persons with relationships with
the Company. Such employees, directors and other persons may purchase, in the
aggregate, not more than 10% of the Common Stock offered hereby. See
"Underwriting."
The Company intends to apply for listing of the Common Stock on the Nasdaq
National Market under the symbol "TFSM."
See "Risk Factors" beginning on page 5 for a discussion of certain factors
which should be considered by prospective purchasers of Common Stock offered
hereby.
----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
================================================================================
<TABLE>
<CAPTION>
Price to Underwriting Proceeds to
Public Discount (1) Company (2)
---------- -------------- ------------
<S> <C> <C> <C>
Per Share......... $ $ $
- ------------------- ---------- -------------- ------------
Total (3) ......... $ $ $
</TABLE>
================================================================================
(1) The Company has agreed to indemnify the several Underwriters against
certain liabilities under the Securities Act of 1933, as amended. See
"Underwriting."
(2) Before deducting expenses payable by the Company estimated at $ .
(3) The Company has granted the Underwriters an option to purchase up to an
additional shares of Common Stock to cover over-allotments. If such
option is exercised in full, the total Price to Public, Underwriting
Discount and Proceeds to Company will be $ , $ , and $ ,
respectively. See "Underwriting."
----------------
The shares of Common Stock are offered by the several Underwriters,
subject to prior sale, when, as and if accepted by them, subject to approval of
certain legal matters by counsel for the Underwriters. The Underwriters reserve
the right to withdraw, cancel or modify such offer and to reject orders in
whole or in part. It is expected that delivery of the shares of Common Stock
will be made in New York, New York, on or about , 1998.
----------------
Merrill Lynch & Co.
Allen & Company Incorporated
J.P. Morgan & Co.
----------------
The date of this Prospectus is , 1998.
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
<PAGE>
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING OVER-ALLOTMENT, STABILIZING AND SHORT-COVERING TRANSACTIONS IN SUCH
SECURITIES AND THE IMPOSITION OF A PENALTY BID IN CONNECTION WITH THE OFFERING.
FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information, including "Risk Factors" and the Consolidated Financial Statements
(including the Notes thereto), appearing elsewhere in this Prospectus. The
discussion in this prospectus contains forward looking statements that involve
risks and uncertainties including, but not limited to, those specifically
discussed in this Prospectus. 24/7 Media's actual results could differ
materially from those discussed herein. The terms "24/7 Media" and "the
Company" mean 24/7 Media, Inc. and its subsidiary and each of its predecessor
entities. In addition, unless otherwise indicated, all information herein (i)
assumes no exercise of the Underwriters' over-allotment option, (ii) reflects
the automatic conversion of shares of the Company's Series A Preferred
Stock into an aggregate of shares of Common Stock (the "Preferred Stock
Conversion") to be effected simultaneously with the closing of the Offering,
(iii) has not been adjusted to give effect to a 1-for- reverse split of the
Company's Common Stock (the "Stock Split") to be effected prior to the closing
of the Offering, and (iv) does not reflect the acquisition of CliqNow! as
described under "Recent Developments" in this Prospectus Summary.
The Company
Overview
24/7 Media operates networks of Websites that enable both advertisers and
Web publishers to capitalize on the many opportunities presented by Internet
advertising, direct marketing and commerce. The Company generates revenues by
delivering advertisements and promotions to Websites affiliated with the
Company ("Affiliated Websites"). In particular, 24/7 Media: (i) operates the
24/7 Network (the "24/7 Network"), a network of over 80 high profile Websites
to which the Company delivered an aggregate of over 325 million advertisements
in April 1998; (ii) operates the ContentZone (the "ContentZone"), a network of
over 2,000 small to medium-sized Websites to which the Company delivered an
aggregate of over 40 million advertisements in April 1998; (iii) licenses its
Adfinity[TM] advertising management system ("Adfinity[TM]") to independent
Websites to manage and serve high-volume advertising and direct marketing
campaigns; and (iv) markets its dbCommerce[TM] software ("db Commerce[TM]") to
Web commerce companies ("e-commerce merchants") to enable the delivery of
targeted promotions.
The Company operates in the rapidly growing Internet advertising industry.
International Data Corp. ("IDC") estimates that at the end of 1997 there were
over 38 million users on the World Wide Web (the "Web") in the United States
and over 68 million Web users worldwide, and that by the end of 2002 the number
of Web users will increase to over 135 million in the United States and to over
319 million worldwide. Jupiter Communications projects that the dollar value of
Internet advertising in the United States will increase from $940 million in
1997 to $7.7 billion in 2002.
The Company believes that advertisers seek to place Internet ads in ways
to maximize unduplicated "reach" (the breadth of user contacts on the
Internet). During April 1998, the 365 million impressions generated by the
Company's networks reached more than one third of all Internet users, according
to a study prepared for the Company by Media Metrix. The Company believes that
this reach figure is among the highest in the Internet advertising industry.
The Company plans to aggressively recruit Websites of all sizes for its
networks in order to further extend the Company's reach as well as to provide
advertisers with a broad base of online content and Web pages viewed by
Internet users ("page views"), and to improve the Company's brand awareness and
visibility with media buyers.
In addition, as online advertisers and direct marketers increase their use
of the Internet, they seek solutions and technologies that allow them to
efficiently deliver highly targeted messages. 24/7 Media's customized solutions
allow advertisers and direct marketers to tailor their ad campaigns in order to
reach desired audiences, while reducing costs, easing time pressures and
alleviating the need to purchase a series of ad campaigns from numerous Web
publishers. Advertisers and direct marketers can achieve their objectives by
buying ad space on a specific Website, within a particular content channel or
across an entire network.
As Internet traffic grows, Web publishers increasingly seek to maximize
the value of their online inventory. The Company's extensive sales and
marketing experience enables Web publishers to access media buyers at large ad
agencies and to sell advertisement space without incurring the costs and
challenges associated with building and maintaining an ad sales force.
Additionally, the ad serving and targeting capabilities of Adfinity[TM]
effectively deliver advertisements to the Company's Affiliated Websites.
1
<PAGE>
The recent addition of the Company's Adfinity[TM] and dbCommerce[TM]
technologies allows 24/7 Media to provide comprehensive advertising solutions
for advertisers, direct marketers and Web publishers. Adfinity[TM] is designed
to target, deliver, and track advertisements and direct marketing promotions
across the Company's networks. Adfinity[TM] can create a profile of an Internet
user by integrating such user's online behavior with third party demographic
and lifestyle data. These profiles can allow Adfinity[TM] to deliver targeted
advertisements to the right person at the right time. dbCommerce[TM] software
is designed to enable e-commerce merchants to deliver promotions and messages
to targeted customer audiences by integrating database marketing techniques
with customer transaction information and third party databases.
The Company's senior management team includes several individuals with
over fifteen years of experience in advertising sales in the television and
proprietary online network industries. Other members of senior management
contribute extensive knowledge of ad serving technology and database targeting.
The Company leverages its media sales and technology expertise to maximize the
value of ad campaigns for both advertisers and Affiliated Websites.
Formation of the Company
The Company was incorporated in Delaware on January 23, 1998 to
consolidate three Internet advertising companies: (i) Petry Interactive, Inc.
("Petry"), a Delaware corporation which sold advertising for Websites organized
in a network, (ii) Advercomm, Inc. ("Advercomm"), a newly-formed Delaware
corporation which brought a number of high profile Websites to the 24/7
Network, and (iii) Interactive Imaginations, Inc. ("Interactive Imaginations"),
a New York corporation which operated the ContentZone and Riddler.com.
Subsequently, the Company acquired both Intelligent Interactions Corporation
("Intelligent Interactions"), a Delaware corporation that develops and licenses
ad serving technology and e-commerce software, and the CliqNow! division
("CliqNow!") of K2 Design, Inc.
The Company was formed as a wholly owned subsidiary of Interactive
Imaginations. On February 24, 1998, the Company simultaneously consummated the
merger of each of Petry and Advercomm with and into the Company (together with
the concurrent investment of approximately $10 million by certain investors,
the "Initial Merger"). On April 9, 1998, Interactive Imaginations was merged
with and into the Company (together with the Initial Merger, the "Merger") . On
April 13, 1998, the Company acquired Intelligent Interactions as a wholly-owned
subsidiary of the Company (the "Acquisition"), and as of June 1, 1998, the
Company acquired CliqNow!.
The Company's principal executive offices are located at 1250 Broadway,
New York, New York, 10001, and its telephone number at that location is (212)
231-7100. The Company's main Website address is www.247media.com.
Recent Developments
As of June 1, 1998, the Company acquired CliqNow! for $4,000,000, with
$1,000,000 payable in cash and $3,000,000 payable in Series B Convertible
Preferred Stock. The preferred stock converts to Common Stock automatically
upon consummation of the Offering at a conversion price per share of Common
Stock equal to the per share proceeds to the Company as set forth on the cover
of this prospectus. CliqNow! is an Internet advertising network that generated
revenues of $500,559 for the three months ended March 31, 1998 and $896,427 for
the period from inception in April 1997 to December 31, 1997. CliqNow!'s
network is comprised of approximately 80 medium to large Websites organized
into eight topical channels: Financial, Golf, Tech, College, Travel, Sports,
Home and Kids. The Company has also hired ten employees of CliqNow!, six of
whom are principally engaged in sales. The Company intends to furnish
CliqNow!'s audited financial statements within 60 days of the effective date of
the acquisition pursuant to the requirements of Rule 3-05 of Regulation S-X of
the Securities Act of 1933, as amended.
2
<PAGE>
The Offering
<TABLE>
<S> <C>
Common stock offered ........................... shares
Common stock to be outstanding after the
Offering ...................................... shares(1)
Use of proceeds ................................ For general corporate purposes, including working capital,
expansion of sales and marketing capabilities, and
possible acquisitions. See "Use of Proceeds."
Proposed Nasdaq National Market symbol ......... The Company intends to apply for a listing of the
Common Stock on the Nasdaq National Market under the
symbol "TFSM."
</TABLE>
- ----------------
(1) Excludes approximately 3,733,951 shares of Common Stock issuable upon
exercise of stock options outstanding at June 1, 1998 granted under the
Company's 1998 Stock Incentive Plan (of which 675,931 are vested and
exerciseable at June 1, 1998) and approximately 2,016,043 shares of Common
Stock reserved for issuance pursuant to future grants under the 1998 Stock
Incentive Plan. The outstanding stock options have a weighted average
exercise price of $0.89 per share. Also excludes approximately 15,952,077
shares of Common Stock issuable upon exercise of outstanding warrants at
June 1, 1998. Such warrants have a weighted average exercise price of
$2.09 per share. Also excludes 3,000 shares of Series B Convertible
Preferred Stock issued in connection with the acquisition of CliqNow!. See
"Shares Eligible for Future Sale."
3
<PAGE>
Summary Consolidated Financial Data
<TABLE>
<CAPTION>
Three Months Ended
Year Ended -----------------------------------------------------------------------------
December 31, March 31, June 30, Sept. 30, Dec. 31, March 31,
1997 1997 1997 1997 1997 1998
--------------- --------------- --------------- --------------- --------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Pro Forma (1)
- ------------------------------------
Consolidated Statement of Operations Data:
Advertising revenue ............... $ 2,736,365 $ 399,688 $ 526,192 $ 649,036 $ 1,161,449 $ 1,846,748
Consulting and license fees ....... 1,746,896 805,245 639,588 244,890 57,173 88,362
Total revenue ................... 4,483,261 1,204,933 1,165,780 893,926 1,218,622 1,935,110
Gross profit ...................... 1,653,323 730,584 583,320 95,421 243,998 326,831
Operating loss (2) ................ (19,802,635) (8,034,181) (3,796,930) (5,144,072) (2,827,452) (3,849,659)
Net loss .......................... (19,898,240) (8,020,039) (3,798,230) (5,174,674) (2,905,297) (4,028,351)
Pro forma:
Basic net loss
per share (3) ....................
Shares outstanding (3) ...........
Historical
- -------------------------------------
Consolidated Statement of Operations Data:
Advertising revenue ............... $ 1,467,105 $ 388,892 $ 355,346 $ 315,697 $ 407,170 $ 1,076,250
Consulting and license fees ....... 1,681,464 805,245 630,588 233,130 12,501 --
Total revenue ................... 3,148,569 1,194,137 985,934 548,827 419,671 1,076,250
Gross profit ...................... 1,493,229 734,550 551,294 37,361 170,024 146,247
Operating loss .................... (5,209,362) (798,059) (1,423,535) (2,400,167) (587,601) (2,128,080)
Net loss .......................... (5,305,828) (784,377) (1,427,594) (2,433,302) (660,555) (2,295,338)
Cumulative dividends on
mandatorily redeemable
convertible preferred stock ...... -- -- -- -- -- (33,500)
Net loss attributable to common
stockholders ..................... $ (5,305,828) $ (784,377) $ (1,427,594) $ (2,433,302) $ (666,555) $ (2,328,838)
Basic net loss
per share (3) ....................
Shares outstanding (3) ............
<CAPTION>
As of March 31, 1998
--------------------------------------------------
Pro Forma
Actual Pro Forma (4) As Adjusted (5)
------------- --------------- ----------------
<S> <C> <C> <C>
Consolidated Balance Sheet Data:
Cash and cash equivalents .................................. $ 7,764,695 $ 7,768,370
Working capital ............................................ 6,317,136 6,033,480
Goodwill, net .............................................. 7,870,174 10,217,580
Total assets ............................................... 18,201,993 20,783,592
Long-term debt ............................................. 479,408 479,408
Mandatorily redeemable convertible preferred stock ......... 10,093,502 --
Total stockholders' equity ................................. $ 4,264,180 $16,550,883
</TABLE>
- ----------------
(1) Pro forma consolidated statement of operations data reflects the
consolidation of the results of operations of Petry, Advercomm and
Intelligent Interactions as if each company had been acquired on January
1, 1997 (or inception, if later) and the conversion of all outstanding
shares of mandatorily redeemable convertible preferred stock into shares
of Common Stock, which will be converted immediately prior to the Offering
as if it had occurred on January 1, 1997.
(2) Includes acquisition related non-cash charges for amortization of goodwill
and write-off of acquired in-process technology. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
and the Pro Forma Consolidated Financial Information and the related Notes
thereto.
(3) See Note 1 to the Company's Consolidated Financial Statements for the
determination of shares used in computing pro forma basic net loss per
share.
(4) Pro forma consolidated balance sheet data gives effect to (i) the
acquisition of Intelligent Interactions which occurred after March 31,
1998, as if such acquisition occurred on March 31, 1988 and (ii) the
conversion of all outstanding shares of mandatorily redeemable convertible
preferred stock into 14,308,306 shares of Common Stock immediately prior
to the closing of this Offering.
(5) Adjusted to reflect the sale of shares of Common Stock by the Company
at the assumed initial public offering price of $ per share and the
application of the estimated net proceeds therefrom. See "Use of
Proceeds."
4
<PAGE>
RISK FACTORS
In addition to the other information in this Prospectus, prospective
investors should consider carefully the following risk factors in evaluating
the Company and its business before purchasing the Common Stock offered hereby.
This Prospectus contains forward-looking statements that are based largely on
the Company's current expectations and that are subject to a number of risks
and uncertainties, including those set forth below. The Company's actual
results could differ materially from the results discussed in "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and elsewhere in this Prospectus.
Extremely Limited Operating History; History of Losses; Integration of Acquired
Entities
Because none of the predecessor companies that were combined to form 24/7
Media had an operating history of more than four years, the Company has an
extremely limited operating history upon which an evaluation of the Company can
be based. The Company and its prospects must be considered in light of the
risks, expenses and difficulties encountered by companies with limited
operating histories, particularly companies in the new and rapidly evolving
Internet market. To address these risks, the Company must, among other things,
effectively develop new relationships and maintain existing relationships with
customers, business and technology partners and other third parties; further
develop and upgrade its technology; improve its technical support and service;
respond to competitive developments; implement and improve operational,
financial and managerial information systems; and attract, retain and motivate
qualified personnel. There can be no assurance that the Company will succeed in
addressing such risks and the failure to do so could have a material adverse
effect on the Company's business, results of operations and financial
condition.
Although the Company has experienced revenue growth in recent periods,
such growth may not be sustained and is not necessarily indicative of future
operating results. The Company incurred pro forma net losses of $19.9 million
for the year ended December 31, 1997 and $4.0 million for the three months
ended March 31, 1998. Each of the predecessors of the Company had net losses in
each year since its inception. The Company anticipates that it will incur
operating losses for the foreseeable future due to a high level of planned
operating and capital expenditures. There can be no assurance that operating
losses will not increase in the future or that the Company will ever achieve or
sustain profitability. The Company's business, results of operations and
financial condition may be materially and adversely affected if revenues do not
grow at anticipated rates or if the Company is unable to adjust operating
expenses to appropriate levels for revenue levels achieved.
24/7 Media did not conduct any substantial operations until February 1998.
In February 1998, the Company closed a transaction pursuant to which Petry and
Advercomm were merged into the Company. In April 1998, the Company completed
two transactions pursuant to which Interactive Imaginations was merged into the
Company and Intelligent Interactions became a wholly-owned subsidiary of the
Company. In June 1998, the Company acquired the CliqNow! network of Websites.
See "Prospectus Summary--Formation of the Company" and "--Recent Developments."
In order to effectively integrate the previously independent operations, the
Company must continue to integrate and improve its financial and management
controls, ad serving technology, reporting systems and procedures, and expand,
train and manage its work force. Completion of such integration may take a
significant period of time and will require the dedication of management and
other resources, which may distract management's attention from other
operations of the Company. See "--Management of Growth; Risks Associated with
Acquisitions; Risks of International Expansion."
Potential Fluctuations in Quarterly Operating Results; Seasonality
The Company's results of operations may fluctuate significantly in the
future as a result of a variety of factors, many of which are beyond the
Company's control. These factors include the addition of new or loss of current
advertisers or Affiliated Websites, changes in fees paid by advertisers,
changes in the level of user traffic and number of available impressions on the
Websites in the Company's networks, changes in service fees payable by the
Company to Web publishers, the introduction of new Internet advertising
services by the Company or its competitors, variations in the levels of capital
expenditures and other costs relating to the expansion of the Company's
operations, and general economic conditions. Future revenues and results of
operations of the Company may be difficult to forecast due to such factors.
Management believes that its revenues are also subject to seasonal
fluctuations because advertisers generally place fewer advertisements during
the first and third calendar quarters of each year. Additional seasonal
patterns in Internet advertising spending may emerge as the industry matures.
Expenditures by advertisers tend to vary in cycles that reflect overall
economic conditions as well as budgeting and buying patterns. The Company's
business
5
<PAGE>
could be materially adversely affected by a decline in the economic prospects
of advertisers or the economy generally, which could alter current or
prospective advertisers' spending priorities or budget cycles or extend the
Company's sales cycle with respect to certain of its advertisers.
The Company's current and future expense levels are based in large part on
its investment plans and estimates of future revenues. In particular, the
Company expects to significantly increase its operating expenses in order to
expand its sales and marketing organization and to enhance its Adfinity[TM]
technology. To the extent that such expenses precede or are not subsequently
followed by increased revenues, the Company's business, results of operations
and financial condition would be materially and adversely affected. The Company
may be unable to, or may elect not to, adjust spending in a timely manner to
compensate for any unexpected revenue shortfall. Therefore, any significant
shortfall in revenues in relation to the Company's expectations would have a
material adverse effect on the Company's business, results of operations and
financial condition.
Due to the foregoing factors, 24/7 Media believes that period-to-period
comparisons of its results of operations may not be meaningful and should not
be relied upon as indicators of future performance. Furthermore it is possible
that in some future periods the Company's results of operations may fall below
the expectations of securities analysts and investors. In such event, the
trading price of the Common Stock would likely be materially and adversely
affected. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
Developing Market; Unproven Effectiveness of Web Advertising and Online Direct
Marketing
In the new and rapidly evolving Internet advertising market, demand and
market acceptance for products and services are subject to high levels of
uncertainty, and a significant number of entrants continually seek to penetrate
the market. Since 24/7 Media expects to derive substantially all of its
revenues in the foreseeable future from Internet advertising, the future
success of the Company is highly dependent on the increased use of the Internet
as an advertising medium.
The Internet as an advertising medium has not been in existence for a
sufficient period of time in order to demonstrate its effectiveness as compared
with traditional advertising media. Most of the Company's current or potential
advertising customers have limited or no experience using the Internet as an
advertising medium, have not devoted a significant portion of their advertising
expenditures to Internet advertising and may not find Internet advertising to
be effective for promoting their products and services relative to advertising
across traditional media. Companies adopting Internet advertising, particularly
those that use traditional media for advertising, must accept new ways of
conducting business and exchanging information. In addition, most Web
publishers have limited or no experience in generating revenues from the sale
of advertising space on their Websites. There can be no assurance that the
market for Internet advertising will continue to emerge or be sustainable.
Online advertising must demonstrate a level of effectiveness necessary to
justify a reallocation of resources from traditional forms of advertising to
this developing medium. There are currently no widely accepted standards to
measure the effectiveness of Internet advertising and there can be no assurance
that such standards will develop to sufficiently support Internet advertising
as a significant advertising medium. Advertisers may not accept the Company's
or third-party measurements of impressions on Websites utilizing the Company's
services or that such measurements will not contain errors. In addition, the
effectiveness of Internet advertising is dependent upon the accuracy of
information contained in the databases used to target advertisements. There can
be no assurance that the information in the Company's database will be accurate
or that advertisers will be willing to have advertisements targeted by any
database containing such potential inaccuracies. Actual or perceived
ineffectiveness of online advertising generally, or accuracy of measurements or
database information in particular, could limit the long-term growth of online
advertising which would have a material adverse effect on the Company's
business, results of operations and financial condition.
Banner advertising, from which the Company currently derives most of its
revenues, may not be an effective advertising method in the future. There can
be no assurance that any other forms of Internet advertising will be developed
or accepted by the market and if so developed, that the Company would
effectively transition to the marketing and sale of such other forms of online
advertising. Moreover, "filter" software programs that limit advertising from
being delivered to a Website are currently available. Failure to successfully
develop alternative forms of online advertising or widespread adoption of
filter software could have a material adverse effect upon the Internet
advertising market and 24/7 Media's business, results of operations and
financial condition.
6
<PAGE>
Adoption of online direct marketing, particularly by those entities that
have historically relied upon traditional means of direct marketing (such as
telemarketing and direct mail), requires the broad acceptance of a new and
substantially different approach to direct marketing. As with online
advertising and other new markets, intensive marketing and sales efforts may be
necessary to educate prospective advertisers regarding the uses and benefits of
the Company's products and services in order to generate demand for the
Company's services. Enterprises that have already invested substantial
resources in other methods of conducting business may be reluctant or slow to
adopt a new approach that may replace, limit, or compete with their existing
systems. In addition, since online direct marketing is emerging as a new and
distinct market apart from online advertising, potential adoptees of online
direct marketing services will increasingly demand functionality tailored to
their specific requirements.
Reliance on a Limited Number of Web Publishers; Dependence on the 24/7 Network
The Company expects to generate most of its revenues for the foreseeable
future from advertisements delivered to Websites of a limited number of Web
publishers on the 24/7 Network. For the year ended December 31, 1997 and for
the three months ended March 31, 1998, approximately 70% and 66%, respectively,
of the 24/7 Network's pro forma advertising revenues were derived from
advertisements on the top ten Affiliated Websites on the 24/7 Network. The 24/7
Network consists of a limited number of Affiliated Websites that have
contracted for the Company's services under agreements cancellable upon a
specified notice period. Affiliated Websites generally measure satisfaction by
acceptable revenue levels, adequate "click-thru rates" (the percentage of times
users click on an advertisement), high levels of customer service and timely
and accurate reporting. There can be no assurance that such Affiliated Websites
will remain associated with the 24/7 Network, that the Affiliated Websites will
maintain consistent or increasing levels of traffic over time, or that the
Company would be able to replace any Affiliated Website with another Web
publisher with comparable traffic patterns and user demographics. The loss or
reduction in traffic of such Websites may cause advertisers or Web publishers
to withdraw from the 24/7 Network, which, in turn, could materially adversely
affect the Company's business, results of operations and financial condition.
The failure of the Company to successfully market the 24/7 Network or the
failure of Affiliated Websites to maintain consistent or increasing levels of
traffic would have a material adverse effect on the Company's business, results
of operations and financial condition.
Reliance on a Limited Number of Advertisers and Ad Agencies
The Company's revenues have been derived from a limited number of
advertisers and ad agencies that purchase space on Affiliated Websites and the
Company expects that a limited number of these entities may continue to account
for a significant percentage of the Company's revenues for the foreseeable
future. In particular, for the year ended December 31, 1997 and the three
months ended March 31, 1998, the Company's top ten advertisers and ad agencies
accounted for an aggregate of approximately 48% and 51%, respectively, of the
24/7 Network's pro forma advertising revenues. Advertisers and ad agencies
typically purchase advertising pursuant to purchase order agreements that run
for a limited time. There can be no assurance that current advertisers and ad
agencies will continue to purchase advertising from the Company or that the
Company will be able to successfully attract additional advertisers and ad
agencies. The loss of one or more of the advertisers or ad agencies that
represent a material portion of the revenues generated on the 24/7 Network or
the ContentZone could have a material adverse effect on the Company's business,
results of operations and financial condition. In addition, the non-payment or
late payment of amounts to the Company due from a significant advertiser or ad
agency could have a material adverse effect on the Company's business, results
of operations and financial condition.
Integration of Adfinity[TM] Technology; Dependence on Third Party Technology
The Company currently utilizes the AdForce advertisement management
service from IMGIS, Inc. to deliver its advertisements to the 24/7 Network. The
Company intends to replace the AdForce service with the Company's Adfinity[TM]
system, which is expected to become the technology platform for the Company's
networks. The Company anticipates that Adfinity[TM] will enable it to deliver
targeted advertisements based on demographic profiles and consumer behavior.
There can be no assurance that the information required to develop user
profiles will be available and, if available, that the utilization of such
information will not be cost prohibitive. The Company's ability to deliver
increased value to advertisers and Web publishers in the future is therefore
based, in large part, on the successful integration of Adfinity[TM] as the
technology platform for the Company's networks. In order to complete the
transition to Adfinity[TM], the Company must, among other things, ensure
scaleability of the Adfinity[TM] system, assimilate the Company's current sales
and reporting functions into the Adfinity[TM] model, work with existing
Affiliated Websites to re-tag such Websites, and install new computer hardware
and software. Although the Company expects that the transition to Adfinity[TM]
will be completed by the third quarter of 1998, there can be no
7
<PAGE>
assurance that the Company will be able to integrate Adfinity[TM] on a timely
basis. The failure of the Company to effect a successful transition to
Adfinity[TM] could result in a loss of Affiliated Websites, a disruption in the
Company's ability to effectively deliver advertisements and a negative impact
on its business in general until Adfinity[TM] or an alternative advertisement
management technology is integrated. If the Company is unable to successfully
integrate the Adfinity[TM] technology on a timely basis, or if the Adfinity[TM]
technology does not enable the Company to successfully target advertisements
based on demographic profiles and consumer behavior, or if the information to
develop user profiles is not available, the Company's business, results of
operations and financial condition would be materially adversely affected.
Until the integration of Adfinity[TM] is completed, the Company will be
dependent upon AdForce to deliver its ads to the 24/7 Network. If the AdForce
service becomes unavailable or if AdForce fails to effectively serve the
Company's advertisements, the Company's business, results of operations and
financial condition would be materially adversely affected. In addition to the
delivery of advertisements, AdForce also produces frequent operational reports
for use by the Company, advertisers and the Affiliated Websites. However, the
AdForce system requires the Company to employ a significant amount of effort to
prepare information for financial reporting. This causes difficulties in
preparing financial statements and reporting information on a timely basis. The
Company is in the process of upgrading its systems in order to integrate newly
developed and/or purchased modules with its existing systems and with
Adfinity[TM] in order to improve its accounting, control and reporting methods.
The Company's inability to add additional software and hardware or to further
develop and upgrade its existing technologies, systems or network
infrastructure may cause unanticipated delays in delivering its customers'
advertisements and providing timely reporting of accurate financial
information.
Competition
The markets for Internet advertising and related products and services are
intensely competitive and such competition is expected to increase. The Company
believes that its ability to compete depends upon many factors both within and
beyond its control, including the timing and market acceptance of new products
and enhancements of existing services developed by the Company and its
competitors; changing demands regarding customer service and support; shifts in
sales and marketing efforts by the Company and its competitors; and the ease of
use, performance, price and reliability of the Company's services and products.
The Company competes for Internet advertising revenues with large Web
publishers and Web search engine companies, such as America Online, Excite,
Infoseek, Lycos and Yahoo. Further, the 24/7 Network competes with a variety of
Internet advertising networks, including DoubleClick and Rainbow Interactive, a
joint venture of Cablevision Systems Corp. and NBC. In marketing the Company's
networks and its Adfinity[TM] service to Web publishers, the Company also
competes with providers of advertisement software and related services,
including NetGravity and Accipiter, a division of CMG Information Services,
Inc. In marketing dbCommerce[TM], the Company competes with a variety of
entities, including BroadVision. The Company also encounters competition from a
number of other sources, including content aggregators, companies engaged in
advertising sales networks, advertising agencies and other entities which
facilitate Internet advertising. Many of the Company's existing competitors, as
well as a number of potential new competitors, have longer operating histories,
greater name recognition, larger customer bases and significantly greater
financial, technical and marketing resources than the Company. There can be no
assurance that the Company will be able to compete successfully against current
or future competitors or that competitive pressures will not have a material
adverse effect on the Company's business, results of operations and financial
condition. In addition, the Internet, in general, and the Company,
specifically, also must compete for a share of advertisers' total budgets with
traditional advertising media, such as television, radio, cable and print. To
the extent that the Internet is perceived to be a limited or ineffective
advertising medium, advertisers may be reluctant to devote a significant
portion of their advertising budgets to Internet advertising, which could limit
the growth of Internet advertising and would have a material adverse effect on
the Company's business, results of operations and financial condition.
Technological Change
The Internet market is characterized by rapidly changing technology,
evolving industry standards, frequent new product announcements, introductions
and enhancements, and changing customer demands. The introduction of new
products and services embodying new technologies and the emergence of new
industry standards and practices can render existing products and services
obsolete and unmarketable or require unanticipated investments in research and
development. These market characteristics are heightened by the emerging nature
of the Internet industry. The Company's future success depends on its ability
to adapt to rapidly changing technologies and to
8
<PAGE>
improve the performance, features and reliability of its services and products
in response to changing customer and industry demands. The failure of the
Company to successfully adapt to such technological change could adversely
affect its business, results of operations and financial condition.
Furthermore, there can be no assurance that the Company will not
experience difficulties that could delay or prevent the successful design,
development, testing, introduction or marketing of services, or that any new
services or enhancements to existing services will adequately meet the
requirements of its current and prospective advertisers and Affiliated Websites
and achieve any degree of significant market acceptance. If the Company is
unable, for technological or other reasons, to develop and introduce new
services or enhancements to existing services in a timely manner or in response
to changing market conditions or customer requirements, or if its services or
enhancements contain errors or do not achieve a significant degree of market
acceptance, the Company's business, results of operations and financial
condition would be materially and adversely affected.
Dependence on the Web Infrastructure
24/7 Media's success depends upon, among other things, the continued
expansion of, and reliance on, the Internet and the development and maintenance
of a viable Web network infrastructure. The maintenance and improvement of this
infrastructure will require timely development of products, such as high speed
modems and communications equipment, in order to continue to provide reliable
Web access and improved content. The current Web infrastructure may not be able
to support an increased number of users or the increased bandwidth requirements
of users, and, as such, the performance or reliability of the Web may be
adversely affected. Furthermore, the Web has experienced certain outages and
delays as a result of damage to portions of its infrastructure. Such outages
and delays, including those resulting from Year 2000 problems, could adversely
affect Websites and the level of traffic on the Company's networks. The
effectiveness of the Web may decline due to delays in the development or
adoption of new standards and protocols (for example, the next-generation
Internet protocol) designed to support increased levels of activity. There can
be no assurance that the infrastructure or products or services necessary to
maintain the Web will be developed, or that the Web will be a viable commercial
medium for advertisers. If the necessary infrastructure, standards, protocols,
products, services or facilities are not developed , or if the Web does not
become a viable commercial medium, 24/7 Media's business, results of operations
and financial condition could be materially and adversely affected. Even if
such infrastructure, standards or protocols or complementary products, services
or facilities are developed, there can be no assurance that the Company will
not be required to incur substantial expenditures in order to adapt its
services to changing or emerging technologies, which could have a material
adverse effect on the Company's business, results of operations and financial
condition. Moreover, critical issues concerning the commercial use and
government regulation of the Internet (including security, cost, ease of use
and access, intellectual property ownership and other legal liability issues)
remain unresolved and could materially and adversely impact both the growth of
the Internet and the Company's business, results of operations and financial
condition.
Dependence on Third Party Systems; Risk of System Failure; Capacity Constraints
A key to the Company's strategy is to generate a high volume of traffic
for its products and services. In particular, the future success of the Company
depends on the performance of Adfinity[TM] and third party service providers.
Adfinity's computer hardware and software is housed at GlobalCenter, Inc.
("GlobalCenter"), a third party provider of Internet communication services.
Any Adfinity[TM] or third party ad server system failure, including failures
that delay the delivery of advertisements to Websites, could reduce customer
satisfaction and result in a material adverse effect on the Company's business,
results of operations and financial condition.
In general, the Company's operations are dependent upon the proper
operation of its own and third party computer systems. Any damage from fire,
power loss, telecommunications failures, vandalism and other malicious acts,
and similar unexpected events could adversely affect 24/7 Media's business,
results of operations and financial condition. In addition, failure of the
Company's telecommunications providers to provide the data communications
capacity in the time frame required by the Company for any reason could cause
interruptions in the services provided by the Company. Despite precautions
taken by the Company, unanticipated problems affecting the Company's computer
and telecommunications systems in the future could cause interruptions in the
delivery of the Company's services. Any damage or failure that interrupts or
delays the Company's operations could have a material adverse effect on the
Company's business, results of operations and financial condition.
Furthermore, large increases in the volume of advertising delivered
through the Company's ad servers could strain the capacity of the software or
hardware deployed by the Company, which could lead to slower response
9
<PAGE>
time or system failures and could have a material adverse effect on the
Company's business, results of operations and financial condition.
Unproven Business Model
Since the markets for online advertising and direct marketing are in the
early stages of development, there can be no assurance that the Company's model
for pricing its products and services will remain an acceptable model. The
Company's business model is to generate revenues primarily by providing
Internet advertising services to advertisers and Web publishers. The profit
potential of the Company's business model is unproven. To be successful, the
Company must develop and market services that are broadly accepted by
advertisers and Web publishers. There can be no assurance that Internet
advertising, in general, or that the Company's services, in particular, will
achieve broad market acceptance. The Company's ability to generate significant
revenues from advertisers will depend, in part, on the continued development of
a large base of Web publishers that utilize the Company's services and have
Websites with adequate available ad space inventory, and whose Websites
generate sufficient user traffic with demographic characteristics that are
attractive to such advertisers. A variety of related pricing models have
developed in the Company's marketplace, making it difficult to project future
levels of advertising revenues and applicable gross margins that can be
sustained by the Company. A key component of the Company's strategy is to
enhance the value of the ad inventory on its networks by seeking to sell 100%
of its inventory of available page views and by increasing the breadth and
depth of its content channels. The Company has limited experience in
implementing and following such a strategy and there can be no assurance that
such strategy will succeed or that the Company will be able to maintain
sufficient gross margins.
Management of Growth; Risks Associated with Acquisitions; Risks of
International Expansion
24/7 Media has experienced rapid growth and expansion in operations that
have placed a significant strain on the Company's managerial, operational and
financial resources. The Company has grown from approximately 60 employees on a
pro forma basis as of September 30, 1997 to approximately 100 employees as of
May 31, 1998 and expects the number of employees to increase in the future. In
order to successfully compete in the evolving Internet industry, 24/7 Media
must continue to improve its financial and management controls, enhance its
reporting systems and procedures, and expand, train and manage its work force.
There can be no assurance that the Company's systems, procedures or controls
will be adequate to support 24/7 Media's expanding operations, or that
management will be able to respond effectively to such growth. The Company's
future results of operations also depend on the expansion of its sales,
marketing and customer support organizations. 24/7 Media's business, results of
operations and financial condition could be materially adversely affected if
growth is not managed effectively.
24/7 Media intends to pursue selective acquisitions of businesses,
technologies and product lines as a key component of its growth strategy. 24/7
Media regularly seeks to identify and acquire companies or assets that will
enhance 24/7 Media's revenue growth, operations and profitability. Any future
acquisition may result in the use of significant amounts of cash, potentially
dilutive issuances of equity securities, incurrence of debt and amortization
expenses related to goodwill and other intangible assets, each of which could
materially adversely affect the Company's business, results of operations or
financial condition. In addition, acquisitions involve numerous risks,
including the difficulties in the integration and assimilation of the
operations technologies, products and personnel of any acquired business; the
diversion of management's attention from other business concerns; the
availability of favorable acquisition financing for future acquisitions; and
the potential loss of key employees of any acquired business. In the event that
an acquisition does occur, there can be no assurance that 24/7 Media will be
able to successfully integrate the acquired business, and the failure to do so
could have a material adverse effect on the Company's results of operations and
financial position. See "--Integration of Adfinity[TM] Technology; Dependence
on Third Party Technology."
The Company may, in the future, operate in international markets and such
an expansion would involve certain inherent risks, such as unexpected changes
in regulatory requirements, potentially adverse tax consequences, general
export restrictions and export controls relating to encryption technology,
tariffs and other trade barriers, political instability and fluctuations in
currency exchange rates, and seasonal reductions in business activity. Any of
the above could have a material adverse effect on the success of the Company's
future international initiatives.
Dependence on Key Personnel
The Company's success depends upon its senior management and its key sales
and technical personnel, particularly David J. Moore, Chief Executive Officer,
Jacob I. Friesel, Executive Vice President, and Yale R. Brown,
10
<PAGE>
Executive Vice President. The loss of the services of one or more of these
persons could materially adversely affect 24/7 Media's business, results of
operations and financial condition. 24/7 Media's success also depends on its
ability to attract and retain qualified technical, sales and marketing,
customer support, financial and accounting, and managerial personnel.
Competition for such personnel in the Internet industry is intense, and there
can be no assurance that the Company will be able to retain its key personnel
or that it can attract, assimilate or retain other highly qualified personnel
in the future. The Company has experienced in the past, and may continue to
experience in the future, difficulty in hiring and retaining candidates with
appropriate qualifications, especially in sales and marketing positions. The
failure by the Company to successfully hire and retain candidates with
appropriate qualifications could have a material adverse effect on the
Company's business, results of operations and financial condition.
Trademarks, Patents and Proprietary Rights; Risk of Infringement; Privacy
Concerns
24/7 Media relies upon patent, trademark, copyright and trade secret laws
to protect its intellectual property. The Company seeks to protect its
trademarks by registering them in the United States and internationally (where
necessary) and has applied for registrations for trademarks in the United
States. There can be no assurance that all of the Company's trademark
registrations or patent applications will be approved or granted or that they
will not be successfully challenged by others. Such patent, trademark,
copyright and trade secret protection may not be available in every country in
which the Company's services are distributed. In addition, 24/7 Media protects
its proprietary rights through the use of confidentiality agreements with
employees and affiliates. 24/7 Media also licenses certain proprietary rights
to third parties. There can be no assurance that such agreements and licenses
will provide adequate protection of 24/7 Media's proprietary rights; that the
Company's employees and affiliates may not keep such information confidential;
and such proprietary information may otherwise become known, or be
independently developed by competitors.
Legal standards relating to the validity, enforceability and scope of
protection of certain proprietary rights in Internet-related industries are
uncertain and still evolving, and no assurance can be given as to the future
viability or value of any proprietary rights of the Company or other companies
within the industry. There can be no assurance that the steps taken by the
Company to protect its proprietary rights will be adequate or that third
parties will not infringe or misappropriate the Company's proprietary rights.
Any such infringement or misappropriation, should it occur, could have a
material adverse effect on the Company's business, results of operations and
financial condition. Furthermore, there can be no assurance that the Company's
business activities will not infringe upon the proprietary rights of others, or
that other parties will not assert infringement claims against the Company. The
Company anticipates that it may be subject to claims in the ordinary course of
its business, including claims of alleged infringement of the trademarks and
other intellectual property rights of third parties by the Company and its
business partners. Such claims and any resultant litigation, should it occur,
could subject the Company to significant liability for damages and could result
in invalidation of the Company's proprietary rights and, even if not
meritorious, could be time-consuming and expensive to defend, and could result
in the diversion of management time and attention, any of which could have a
material adverse effect on the Company's business, results of operations and
financial condition.
The Company's Adfinity[TM] technology collects and utilizes data derived
from user activity on the 24/7 Network and the Websites of independent Web
publishers using the Company's services. There can be no assurance that any
trade secret, copyright or other protection will be available for such data or
that others will not claim rights to such data. 24/7 Media must also keep
certain information regarding Web publishers confidential pursuant to its
contracts with Web publishers. Adfinity[TM] enables the use of "cookies," in
addition to other mechanisms, to deliver targeted advertising, to help compile
demographic information, and to limit the frequency with which an advertisement
is shown to the user. Cookies are bits of information keyed to a specific
server, file pathway or directory location that are stored on a user's hard
drive and passed to a Website's server through the user's browser software.
Cookies are placed on the user's hard drive without the user's knowledge or
consent, but can be removed by the user at any time through the modification of
the user's browser settings. Due to privacy concerns, some Internet
commentators, advocates and governmental bodies have suggested that the use of
cookies be limited or eliminated. In addition, certain currently available
Internet browsers allow a user to delete cookies or prevent cookies from being
stored on the user's hard drive.
Government Regulation
Due to the increasing popularity and use of the Web, a number of laws and
regulations may be adopted regarding user privacy, pricing, acceptable content,
taxation and quality of products and services. Although there are currently few
11
<PAGE>
laws or regulations directly governing access to or commerce on the Internet,
any new legislation could inhibit the growth in use of the Web and decrease the
acceptance of the Web as a communications and commercial medium which could
have a material adverse effect on the Company's business, results of operations
and financial condition. In addition, the growing use of the Web has burdened
existing telecommunications infrastructure and has caused interruptions in
phone service. Certain telephone carriers have petitioned the government to
regulate and impose fees on Internet service providers and online service
providers in a manner similar to long distance telephone carriers. Any such
regulations could affect the costs of communicating on the Web and adversely
affect the growth in use of the Web, which could in turn decrease the demand
for the Company's products or otherwise have a material adverse effect on the
Company's business, results of operations and financial condition. Further, due
to the global nature of the Web, governments of states or foreign countries may
attempt to regulate Internet transmissions or levy sales or other taxes
relating to the Company's activities. There can be no assurance that violations
of local laws will not be alleged by applicable governments, 24/7 Media may not
violate such laws or new laws will not be enacted in the future. Moreover, the
applicability to the Internet of existing laws governing issues such as
property ownership, libel and personal privacy is uncertain. Any of the
foregoing developments could have a material adverse effect on the Company's
business, results of operations and financial condition.
Year 2000 Compliance
Beginning in the year 2000, the date fields coded in certain software
products and computer systems will need to accept four digit entries in order
to distinguish 21st century dates from 20th century dates. Significant
uncertainty exists in the software industry concerning the potential effects
associated with such compliance issues. The Company is currently taking steps
to make its products Year 2000 compliant. However, there can be no assurance
that the Company will be successful in making its products Year 2000 compliant.
In addition, the Company's ad servers and certain of its customers may also be
impacted by Year 2000 complications. Any failure by the Company or its ad
servers or its customers to make their products Year 2000 compliant could
result in a decrease in sales of the Company's products, an increase in the
allocation of resources to address Year 2000 problems of the Company's
customers without additional revenue commensurate with such dedication of
resources, or an increase in litigation costs relating to losses suffered by
the Company's customers due to such Year 2000 problems. The occurrence of any
such event could have a material adverse effect on the Company's business,
results of operations and financial condition.
Control by Principal Stockholders, Officers and Directors
After the Offering, the directors and executive officers and their
affiliates will beneficially own approximately % of the outstanding Common
Stock. As a result, these stockholders will be able to exercise control over
all matters requiring stockholder approval, including the election of directors
and approval of significant corporate transactions. This concentration of
ownership may have the effect of delaying or preventing a change in control of
the Company. See "Management" and "Security Ownership of Certain Beneficial
Owners and Management."
Broad Discretion in Use of Proceeds
The net proceeds of the offering will be added to the Company's working
capital and will be available for general corporate purposes, including capital
expenditures and potential future acquisitions. As of the date of this
Prospectus, the Company cannot specify with certainty the particular uses for
the net proceeds to be received upon completion of the offering. Accordingly,
the Company's management will have broad discretion in the application of the
net proceeds. See "Use of Proceeds."
Shares Eligible for Future Sale
Sales of significant amounts of Common Stock in the public market after
the offering, or the perception that such sales will occur, could materially
affect the market price of the Common Stock or the future ability of the
Company to raise capital through an offering of its equity securities. The
Company will have shares of Common Stock outstanding after the offering.
The shares offered hereby will be eligible for immediate sale in the
public market without restriction, except shares purchased by "affiliates" of
the Company within the meaning of Rule 144 promulgated under the Securities
Act. The remaining shares of Common Stock held by existing stockholders
will be "restricted securities" within the meaning of 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 Rules
144, 144(k) or 701 promulgated under the Securities Act. The Company's
directors and officers and certain of its stockholders have agreed that they
will not sell, directly or indirectly, any Common Stock
12
<PAGE>
without the prior consent of the representatives of the Underwriters for a
period of 180 days from the date of this Prospectus. See "Underwriting."
Subject to these lock-up agreements and the provisions of Rules 144, 144(k) and
701, additional shares will be available for sale in the public market (subject
in the case of shares held by affiliates to compliance with certain volume
restrictions) as follows: (i) shares will be eligible for sale 90 to 180
days after the date of this Prospectus, (ii) shares will be eligible for
sale upon the expiration of lock-up agreements 180 days after the date of this
Prospectus and (iii) shares will be eligible for sale immediately upon
the date of this Prospectus. In addition, there are outstanding options to
purchase shares of Common Stock and outstanding warrants to purchase
shares of Common Stock which will be eligible for sale in the public
market from time to time subject, in the case of options, to vesting and, in
the case of certain options and warrants, the expiration of lock-up agreements.
In addition, certain stockholders, representing approximately shares of
Common Stock, and certain optionholders, with respect to an aggregate
shares of Common Stock issuable upon the exercise of stock options, have the
right, subject to certain conditions, to include their shares in future
registration statements relating to the Company's securities and/or to cause
the Company to register certain shares of Common Stock owned by them. See
"Shares Eligible For Future Sale."
Lack of Public Market for Common Stock; Possible Volatility of Stock Price
Prior to the Offering, there has been no public market for the Common
Stock. Accordingly, there can be no assurance that an active trading market for
the Common Stock will develop or be sustained after the Offering or that the
market price of the Common Stock will not decline below the initial public
offering price. The initial public offering price will be determined by
negotiations between the Company and the representatives of the Underwriters.
See "Underwriting." The trading price of the Common Stock could be subject to
wide fluctuations caused by, among other things, variations in quarterly
results of operations, the gain or loss of significant advertisers or
Affiliated Websites, changes in earning estimates of 24/7 Media by industry
analysts, announcements of technological innovations or new services by 24/7
Media or its competitors, or general conditions in the economy in general or in
Internet-related industries.
In addition, the stock market in general has experienced extreme price and
volume fluctuations which have affected the market price for many companies in
industries similar or related to that of the Company and which have been
unrelated to the operating performance of these companies. These market
fluctuations may have a material adverse effect on the market price of the
Company's Common Stock.
Anti-takeover Effects of Certain Charter, Bylaws And Delaware Law Provisions;
Possible Issuance of Preferred Stock
After the Offering and upon receipt of the requisite stockholder approval,
the Company's board of directors may issue up to 10,000,000 shares of preferred
stock without any further vote or action by the stockholders, and determine the
price, rights, preferences, privileges and restrictions, including voting
rights of such shares. The preferred stock may be issued with voting,
liquidation, dividend and other rights superior to those of the Common Stock.
The issuance of preferred stock could make it difficult for a third party to
acquire a majority of the outstanding voting stock of the Company. Further,
certain provisions of the Company's certificate of incorporation, the Company's
bylaws and Delaware law could have the effect of delaying or preventing a
change in control of the Company. See "Description of Capital Stock--Delaware
Anti-Takeover Law and Certain Charter Provisions."
Dilution
Investors purchasing shares of Common Stock in the offering will incur
immediate and substantial dilution in net tangible book value per share. To the
extent outstanding options or warrants to purchase Common Stock are exercised,
there will be further dilution. See "Dilution."
Litigation
24/7 Media has been subject to legal claims in the ordinary course of its
business. Such claims have not had a material adverse effect on the Company's
business, results of operations or financial condition. Nonetheless, these
claims and future claims, if successful, could subject the Company to liability
for damages, invalidate 24/7 Media's proprietary rights and/or divert
management's time and attention, any of which could have a material adverse
effect on the Company's business, results of operations and financial
condition.
13
<PAGE>
USE OF PROCEEDS
The net proceeds to 24/7 Media from the sale of the shares of
Common Stock offered pursuant to the Offering are estimated to be approximately
$ million ($ million if the Underwriter's over-allotment option is
exercised in full), assuming an initial offering price of $ per share and
after deducting underwriting discounts and estimated offering expenses payable
by 24/7 Media. The primary purposes of the Offering are to create a public
market for the Common Stock, to facilitate the Company's future access to the
public equity markets and to obtain additional working capital.
The Company intends to use the net proceeds of the Offering for general
corporate purposes, including working capital, and for the expansion of its
operations and sales and marketing capabilities. In addition, the Company may
use a portion of the net proceeds of the Offering to acquire or invest in
complementary businesses, technologies, services or products, although there
are no current agreements with respect to any such acquisitions, investments or
other transactions. As of the date of this Prospectus, the Company cannot
specify with certainty the particular uses for the net proceeds to be received
upon completion of the Offering. Accordingly, the Company's management will
have broad discretion in the application of the net proceeds. Pending such
uses, the net proceeds will be primarily invested in short-term, investment
grade instruments, certificates of deposit or direct or guaranteed obligations
of the United States.
DIVIDEND POLICY
24/7 Media has not declared or paid any dividends on its capital stock
since inception and does not anticipate paying dividends in the foreseeable
future. It is the present policy of the board of directors to retain earnings,
if any, to finance the expansion of the Company's business. The future payment
of dividends will depend on the results of operations, financial condition,
capital expenditure plans and other factors deemed relevant by 24/7 Media and
will be at the sole discretion of the board of directors.
14
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of 24/7 Media as of
March 31, 1998 (i) on an actual basis, (ii) on a pro forma basis, giving effect
to the Acquisition and the Preferred Stock Conversion and (iii) on a pro forma
as adjusted basis to give effect to the sale by the Company of shares of
Common Stock offered hereby at an assumed offering price of $ per share and
the application by the Company of the estimated net proceeds therefrom, after
deducting estimated underwriting discounts and offering expenses. See "Use of
Proceeds." The capitalization information set forth in the table below is
qualified by and should be read in conjunction with the more detailed
Consolidated Financial Statements and Pro Forma Consolidated Financial
Information and Notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
March 31, 1998
----------------------------------------------------
Pro Pro Forma
Actual Forma As Adjusted
---------------- ---------------- --------------
<S> <C> <C> <C>
Long-term debt .......................................... $ 479,408 $ 479,408 $
Mandatorily redeemable convertible preferred stock Series
A; $.01 par value; 30,000,000 shares authorized;
10,060,002 shares outstanding .......................... 10,093,502 --
Stockholders' equity (1):
Common stock, $.01 par value; 100,000,000 shares
authorized; 27,481,201 shares issued and outstanding
actual; 45,586,476 shares issued and outstanding on a
pro forma basis and shares issued and
outstanding on a pro forma as adjusted basis ......... 274,812 455,865
Additional paid-in-capital .............................. 19,623,624 37,206,555
Accumulated deficit ..................................... (15,634,256) (21,111,537)
------------- -------------
Total stockholders' equity ............................ 4,264,180 16,550,883
------------- -------------
Total capitalization ................................. $ 14,837,090 $ 17,030,291
============= =============
</TABLE>
- ----------------
(1) Excludes approximately 3,733,951 shares of Common Stock issuable upon the
exercise of stock options outstanding at June 1, 1998 granted under the
Company's 1998 Stock Incentive Plan (of which 675,931 are vested and
exerciseable at June 1, 1998) and approximately 2,016,043 shares of Common
Stock reserved for issuance pursuant to future grants under the 1998 Stock
Incentive Plan. The outstanding stock options have a weighted average
exercise price of $0.89 per share. Also excludes approximately 15,952,077
shares of Common Stock issuable upon exercise of outstanding warrants at
June 1, 1998. Such warrants have a weighted average exercise price of
$2.09 per share. Also, excludes 3,000 shares of Series B Convertible
Preferred Stock issued in connection with the acquisition of CliqNow!. See
"Shares Eligible for Future Sale."
15
<PAGE>
DILUTION
As of March 31, 1998, the pro forma net tangible book value (deficit) of
24/7 Media was $ in the aggregate, or $ per share. Pro forma net
tangible book value (deficit) per share represents 24/7 Media's total tangible
assets less total liabilities, divided by the number of outstanding shares of
Common Stock giving effect to the acquisition of Intelligent Interactions, the
Preferred Stock Conversion and the Stock Split. Dilution per share represents
the difference between the amount per share paid by investors in this offering
of Common Stock and the net tangible book value (deficit) per share after the
Offering. After giving effect to the sale of shares of Common Stock (at an
assumed initial public offering price of $ per share) and after
application by the Company of the estimated net proceeds from the Offering, the
Company's pro forma net tangible book value as of March 31, 1998 would have
been $ in the aggregate, or $ per share. This represents an immediate
increase in pro forma net tangible book value of $ per share to existing
shareholders and an immediate dilution in pro forma net tangible book value of
$ per share to new investors purchasing shares of Common Stock in the
Offering. If the initial public offering price is higher or lower, the dilution
to the new investors will increase or decrease accordingly. The following table
illustrates this per share dilution:
<TABLE>
<S> <C>
Assumed initial public offering price per share .......................................
Pro forma net tangible book value (deficit) per share before the Offering ............
Pro forma increase in net tangible book value (deficit) per share attributable to new
investors
Pro forma net tangible book value (deficit) per share after the Offering ..............
Pro forma dilution in net tangible book value per share to new investors ..............
</TABLE>
The following table summarizes, on a pro forma basis as of March 31, 1998,
after giving effect to the acquisition of Intelligent Interactions, the
Preferred Stock Conversion and the Stock Split, the total number of shares of
Common Stock purchased from the Company, the total consideration paid to the
Company and the average price per share paid by existing shareholders and by
new investors:
<TABLE>
<CAPTION>
Shares Purchased Total Consideration Average
-------------------- ----------------------- price per
Number Percent Amount Percent share
-------- --------- ----------- --------- ----------
<S> <C> <C> <C> <C> <C>
Existing shareholders ......... % $ % $
New investors .................
Total ......................... % $ % $
</TABLE>
The calculations in the above tables assume no exercise of the
Underwriters' over-allotment option or exercise of any outstanding stock
options or warrants. If such outstanding options or warrants are exercised,
there will be further dilution to new investors. See "Management--1998 Stock
Incentive Plan."
16
<PAGE>
SELECTED PRO FORMA CONSOLIDATED FINANCIAL DATA
The following pro forma consolidated statement of operations data reflect
the Merger, the Acquisition and the Preferred Stock Conversion as if each had
occurred on January 1, 1997 (or inception, if later). The pro forma
consolidated balance sheet data reflect the Acquisition as if it occurred on
March 31, 1998 and the Preferred Stock Conversion, which will take place
immediately prior to the closing of this Offering. The pro forma financial data
is presented for informational purposes only and may not be indicative of the
results of operations had the mergers and acquisitions occurred on March 31,
1998 for balance sheet purposes and on January 1, 1997 for Statement of
Operations Data purposes, nor do they purport to indicate the future results of
operations of the Company. The following pro forma financial data should be
read in conjunction with the Consolidated Financial Statements and Notes
thereto and the Pro Forma Consolidated Financial Information and related Notes
appearing elsewhere in this Prospectus. Management believes that all
adjustments necessary to present fairly such pro forma financial data have been
made.
<TABLE>
<CAPTION>
Pro Forma Pro Forma
Year Three Months Ended
Ended -------------------------------------------------------------------------------
Dec. 31, March 31, June 30, Sept. 30, Dec. 31, March 31,
1997 1997 1997 1997 1997 1998
---------------- --------------- --------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Consolidated Statement of
Operations Data:
Revenues:
Advertising ..................... $ 2,736,365 $ 399,688 $ 526,192 $ 649,036 $ 1,161,449 $ 1,846,748
Consulting and license fees ..... 1,746,896 805,245 639,588 244,890 57,173 88,362
-------------- ------------- ------------- ------------- ------------- -------------
Total revenues ................. 4,483,261 1,204,933 1,165,780 893,926 1,218,622 1,935,110
Cost of revenues ................. 2,829,938 474,349 582,460 798,505 974,624 1,608,279
-------------- ------------- ------------- ------------- ------------- -------------
Gross profit 1,653,323 730,584 583,320 95,421 243,998 326,831
Operating expenses:
Sales and marketing ............. 4,653,418 923,062 1,397,203 1,443,764 889,389 1,178,438
General and administrative ...... 4,978,381 1,158,354 1,358,096 1,450,340 1,011,591 1,745,511
Product development ............. 1,745,745 469,309 542,683 521,708 212,045 66,738
Other expenses (1) .............. 989,099 -- 123,843 865,256 -- --
Amortization of
goodwill (2) ................... 3,612,034 736,759 958,425 958,425 958,425 1,185,803
Write-off of acquired in-process
technology (2) ................. 5,477,281 5,477,281 -- -- -- --
-------------- ------------- ------------- ------------- ------------- -------------
Total operating expenses ....... 21,455,958 8,764,765 4,380,250 5,239,493 3,071,450 4,176,490
-------------- ------------- ------------- ------------- ------------- -------------
Operating loss .................. (19,802,635) (8,034,181) (3,796,930) (5,144,072) (2,827,452) (3,849,659)
Interest (expense) income, net .. (95,605) 14,142 (1,300) (30,602) (77,845) (178,692)
-------------- ------------- ------------- ------------- ------------- -------------
Net loss ........................ (19,898,240) (8,020,039) (3,798,230) (5,174,674) (2,905,297) (4,028,351)
============== ============= ============= ============= ============= =============
Pro forma:
Basic net loss per share (3) ...
Shares outstanding (3) .........
<CAPTION>
As of
March 31, 1998
---------------
<S> <C>
Consolidated Balance Sheet Data:
Cash and cash equivalents ....................... $ 7,768,370
Working capital ................................. 6,033,480
Goodwill, net ................................... 10,217,580
Total assets .................................... 20,783,592
Long-term debt .................................. 479,408
Mandatorily redeemable convertible preferred stock --
Total stockholders' equity ...................... $16,550,883
</TABLE>
- ----------------
(1) Includes an aggregate of $232,304 in legal costs incurred in defending a
class-action lawsuit filed by certain Affiliated Websites on the
ContentZone, which defense resulted in grant of summary judgment in favor
of the Company, and a net write-off of $756,795 of property and equipment
that was deemed to have no future economic benefit. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
and the Consolidated Financial Statements and the related Notes thereto.
(2) Includes acquisition related non-cash charges for amortization of goodwill
and write-off of acquired in-process technology. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
and the Pro Forma Consolidated Financial Information and the related Notes
thereto.
(3) See Note 1 to the Company's Consolidated Financial Statements for the
determination of shares used in computing pro forma basic net loss per
share.
17
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data as of and for each of the years
in the three-year period ended December 31, 1997 have been derived from the
audited consolidated financial statements of the Company, which are included
elsewhere in this Prospectus. The selected financial data for the period from
September 1994 through December 31, 1994 have been derived from financial
statements of Interactive Imaginations not included herein and the Company's
accounting records. The selected consolidated financial data as of March 31,
1998 and for the three months ended March 31, 1997 and 1998 are derived from
unaudited consolidated financial statements appearing herein. In the opinion of
the Company, such unaudited data reflect all adjustments (consisting only of
normal recurring adjustments) necessary for a fair statement of the financial
data for such period. The results of operations for the three months ended
March 31, 1998 are not necessarily indicative of results that may be expected
for the full year. The selected consolidated financial data set forth below is
qualified in its entirety by, and should be read in conjunction with,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements and the related Notes
thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
September
1994 (inception) Year Ended December 31,
through December 31, -----------------------------------------------
1994 (1) 1995 1996 1997
---------------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Consolidated Statement of Operations Data:
Revenues:
Advertising .................................... $ -- $ 151,750 $ 1,106,329 $ 1,467,105
Consulting and license fees .................... -- -- 435,834 1,681,464
--------- ------------ ------------ ------------
Total revenues ................................ -- 151,750 1,542,163 3,148,569
Cost of revenues ................................ -- 198,291 1,592,771 1,655,340
--------- ------------ ------------ ------------
Gross profit (loss) ............................ -- (46,541) (50,608) 1,493,229
Operating expenses:
Sales and marketing ............................ -- 114,348 2,240,399 1,672,999
General and administrative ..................... (35,771) 581,069 3,010,009 2,622,743
Product development ............................ -- 426,187 1,460,928 1,417,750
Other expenses (2) ............................. -- -- -- 989,099
Amortization of goodwill (3) ................... -- -- -- --
--------- ------------ ------------ ------------
Total operating expenses ...................... (35,771) 1,121,604 6,711,336 6,702,591
--------- ------------ ------------ ------------
Operating loss .................................. (35,771) (1,168,145) (6,761,944) (5,209,362)
Interest (expense) income, net .................. -- -- (33,731) (96,466)
--------- ------------ ------------ ------------
Net loss ........................................ (35,771) (1,168,145) (6,795,675) (5,305,828)
Cumulative dividends on mandatorily
convertible preferred stock .................... -- -- -- --
Net loss attributable to common stockholders .... $ (35,771) $ (1,168,145) $ (6,795,675) $ (5,305,828)
========= ============ ============ ============
Basic net loss per share (4) ....................
Shares outstanding (4) ..........................
<CAPTION>
Three Months Ended
------------------------------
March 31, March 31,
1997 1998
------------- ---------------
<S> <C> <C>
Consolidated Statement of Operations Data:
Revenues:
Advertising .................................... $ 388,892 $ 1,076,250
Consulting and license fees .................... 805,245 --
---------- ------------
Total revenues ................................ 1,194,137 1,076,250
Cost of revenues ................................ 459,587 930,003
---------- ------------
Gross profit (loss) ............................ 734,550 146,247
Operating expenses:
Sales and marketing ............................ 450,505 653,460
General and administrative ..................... 682,581 1,285,512
Product development ............................ 399,523 --
Other expenses (2) ............................. -- --
Amortization of goodwill (3) ................... -- 335,355
---------- ------------
Total operating expenses ...................... 1,532,609 2,274,327
---------- ------------
Operating loss .................................. (798,059) (2,128,080)
Interest (expense) income, net .................. 13,682 (167,258)
---------- ------------
Net loss ........................................ (784,377) (2,295,338)
Cumulative dividends on mandatorily
convertible preferred stock .................... -- (33,500)
Net loss attributable to common stockholders .... $ (784,377) $ (2,328,838)
========== ============
Basic net loss per share (4) ....................
Shares outstanding (4) ..........................
</TABLE>
<TABLE>
<CAPTION>
As of December 31,
------------------------------------------------------
1994 1995 1996 1997
---------- ------------- ------------- ---------------
<S> <C> <C> <C> <C>
Consolidated Balance Sheet Data:
Cash and cash equivalents ........................ $ 10,722 $ -- $1,689,395 $ 93,945
Working capital (deficit) ........................ (9,278) (235,342) (6,493) (1,165,482)
Goodwill, net .................................... -- -- -- --
Total assets ..................................... 29,229 497,165 3,950,790 1,038,941
Long-term debt ................................... -- -- -- 2,316,511
Mandatorily redeemable convertible preferred stock -- -- -- --
Total stockholders' equity (deficit) ............. $ 9,229 $ 202,573 $1,750,202 $ (2,727,967)
<CAPTION>
As of March 31, 1998
----------------------------------------------
Pro Forma
Actual Pro Forma (5) As Adjusted (6)
------------- --------------- ----------------
<S> <C> <C> <C>
Consolidated Balance Sheet Data:
Cash and cash equivalents ........................ $ 7,764,695 $ 7,768,370
Working capital (deficit) ........................ 6,317,136 6,033,480
Goodwill, net .................................... 7,870,174 10,217,580
-----------
Total assets ..................................... 18,201,993 20,783,592
Long-term debt ................................... 479,408 479,408
Mandatorily redeemable convertible preferred stock 10,093,502 --
Total stockholders' equity (deficit) ............. $ 4,264,180 $16,550,883
</TABLE>
- ----------------
(1) Interactive Imaginations was incorporated in September 1994 and had
insignificant activities from inception through December 31, 1994.
(2) Includes an aggregate of $232,304 in legal costs incurred in defending a
class-action lawsuit filed by certain Affiliated Websites on the
ContentZone, which defense resulted in grant of summary judgment in favor
of the Company and a net write-off of approximately $756,795 of property
and equipment that was deemed to have no future economic benefit. See
"Management's Discussion and Analysis of Financial Condition and Results
of Operations" and the Consolidated Financial Statements and the related
Notes thereto.
(3) Includes acquisition related non-cash charges for amortization of goodwill
in connection with the Petry and Advercomm acquisitions. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
and the Consolidated Financial Statements and the related Notes thereto.
(4) See Note 1 to the Company's Consolidated Financial Statements for the
determination of shares used in computing basic net loss per share.
(5) Pro forma consolidated balance sheet data give effect to (i) the
acquisition of Intelligent Interactions which occurred after March 31,
1998, as if such acquisition occurred on March 31, 1998 and (ii) the
conversion of all outstanding shares of mandatorily redeemable convertible
preferred stock into 14,308,306 shares of Common Stock immediately prior
to the closing of this Offering.
(6) Adjusted to reflect the sale of shares of Common Stock by the Company
at the assumed initial public offering price of $ per share and the
application of the estimated net proceeds therefrom. See "Use of
Proceeds."
18
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the Consolidated Financial Statements and the related Notes thereto and the Pro
Forma Consolidated Financial Information and related Notes thereto included
elsewhere in this Prospectus. The following discussion contains forward-looking
statements within the meaning of federal securities law. Such statements can be
identified by the use of forward-looking terminology such as "may," "will,"
"expect," "anticipate," "estimate," "continue" or other similar words. These
statements discuss future expectations, contain projections of results of
operations or of financial condition or state other "forward-looking"
information. Although management believes that the expectations reflected in
such forward-looking statements are based on reasonable assumptions, certain
factors such as rapid changes in the markets in which the Company competes or
general economic conditions might cause a difference between actual results and
such forward-looking statements. When considering such forward-looking
statements, prospective investors should consider the "Risk Factors" and other
cautionary statements in this Prospectus.
General
The Company operates networks of Websites that enable both advertisers and
Web publishers to capitalize on the many opportunities presented by Internet
advertising, direct marketing and commerce. In particular, 24/7 Media: (i)
operates the 24/7 Network, a network of over 80 high profile Websites to which
the Company delivered an aggregate of over 325 million advertisements in April
1998; (ii) operates the ContentZone, a network of over 2,000 small to
medium-sized Websites to which the Company delivered an aggregate of over 40
million advertisements in April 1998; (iii) licenses its Adfinity[TM]
advertising management system to independent Websites to manage and serve
high-volume advertising and direct marketing campaigns; and (iv) markets its
dbCommerce[TM] software to e-commerce merchants to enable the delivery of
targeted promotions.
The Company is the result of several recent mergers, and the combination
of these predecessor entities has resulted in an integrated Internet
advertising company with both media sales and technology expertise. See
"Prospectus Summary--Formation of the Company." Petry established the network
business model and contributed its network of Websites which became the
foundation for the 24/7 Network. Advercomm folded several high profile Websites
into the 24/7 Network, which increased the breadth of content available on the
24/7 Network and accelerated the Company's ability to organize its Affiliated
Websites into channels. Interactive Imaginations' ContentZone provided the
Company with the ability to offer advertising solutions for small to
medium-sized Websites. Intelligent Interactions provided the Company with ad
serving and targeting technology, which is expected to become the technology
platform for the Company's networks. Management believes that the combination
of these predecessor entities has enabled the Company to offer advertisers and
Web publishers comprehensive advertising solutions and to pursue its objective
of becoming the leading Internet advertising and direct marketing firm.
The Company generates substantially all of its revenues by delivering
advertisements and promotions to Affiliated Websites on the 24/7 Network and
the ContentZone. The Company sells its products and services through its sales
and marketing staff located in New York, Chicago, Dallas, Los Angeles, San
Francisco, Seattle and the Washington, D.C. area. The pricing of ads is based
on a variety of factors, including the gross dollar amount spent on the
advertising campaign and whether the campaign is delivered on a specific
Website basis, a channel basis or a run of network basis. The Company strives
to sell 100% of its inventory through the combination of advertisements sold on
a "CPM" basis (the cost to the advertiser to run 1,000 ads) and a
"cost-per-action" basis (whereby revenues are generated if the user responds to
the ad with an action, such as an inquiry or a purchase of the product
advertised).
Advertisements delivered by the Company are typically sold pursuant to
purchase order agreements which are short-term in nature or subject to
cancellation. The Company has recently started to sell sponsorship advertising,
which involves a greater degree of coordination among the Company, the
advertiser and Affiliated Websites. These sponsorships are generally priced
based on the length of time that the sponsorship runs, rather than on a CPM
basis.
Advertising revenues are recognized in the period that the advertisement
is delivered, provided that no significant obligations remain. In nearly all
cases, the Company recognizes revenues generated from advertising sales, net of
any commissions paid to advertising agencies on behalf of their clients. The
Company pays its Affiliated Websites a service fee calculated as a percentage
of revenues generated by advertisements run on the Website, which amount is
included in cost of revenues. In addition, the Company is generally responsible
for billing and collecting for advertisements
19
<PAGE>
delivered to its networks. Revenues relating to sponsorship advertising are
recognized ratably over the sponsorship period. In addition, the Company
generates revenue from licensing its Adfinity[TM] technology to third party Web
publishers. To date, revenue from licensing Adfinity[TM] to third parties has
not comprised a significant percentage of the Company's total revenues.
The Company expects to generate most of its revenues for the foreseeable
future from advertisements delivered to Affiliated Websites on the 24/7
Network. The Company's strategy is to aggressively recruit Websites of all
sizes for its networks in order to extend the Company's reach and to provide
advertisers with a broad base of page views and online content. For the three
months ended March 31, 1998 and for the year ended December 31, 1997, no
Affiliated Website accounted for over 10% of the Company's total advertising
revenue. For the three months ended March 31, 1998 and for the year ended
December 31, 1997, the top ten Websites on the 24/7 Network accounted for
approximately 66% and 70%, respectively, of the 24/7 Network's pro forma
advertising revenue. If the Company were to lose one or more significant
Affiliated Websites or if such Websites experienced a significant reduction in
traffic, the Company's results of operations and financial condition could be
materially and adversely affected. See "Risk Factors--Reliance on a Limited
Number of Web Publishers; Dependence on the 24/7 Network."
The Company believes that, due to the Merger and the Acquisition, the
period-to-period comparisons of its historical operating results are not
meaningful and should not be relied upon as indicative of future performance.
The Company's prospects should be considered in light of the risks, expenses
and difficulties encountered by companies in the early stages of development,
particularly companies in the rapidly evolving Internet market. Although the
Company has experienced revenue growth in recent periods, it anticipates that
it will incur operating losses for the foreseeable future due to a high level
of planned operating and capital expenditures. In particular, the Company
expects to increase its operating expenses in order to expand its sales and
marketing organization and to enhance its Adfinity[TM] technology. See "Risk
Factors--Extremely Limited Operating History; History of Losses; Integration of
Acquired Entities" and "--Potential Fluctuations in Quarterly Operating
Results; Seasonality."
Pro Forma Results of Operations
The following tables present the Company's unaudited results of operations
on a pro forma basis, both in dollar amounts and expressed as a percentage of
the Company's total revenues for the periods indicated, as if the Merger,
Acquisition and the Preferred Stock Conversion had been consummated as of
January 1, 1997 (or inception, if later). As a result, amortization of goodwill
has been recognized beginning in the first quarter of pro forma 1997 and a
charge for acquired in-process technology has been recorded in the first
quarter of pro forma 1997. For reporting purposes (i) amortization of goodwill
will be recognized over a two year period from the respective dates of the
Merger and the Acquisition, and (ii) write-off of in-process technology related
to the Acquisition will be recognized in the second quarter of 1998, date of
acquisition. The Company believes that all necessary adjustments, consisting of
normal recurring adjustments, have been included in the amounts stated below.
The operating results for any period are not necessarily indicative of results
for any subsequent period. Because the Company has a limited operating history,
the Company has included its results of operations on a pro forma basis in
order to better understand the Company's business as a result of the
combination of the businesses of Petry, Advercomm, Interactive Imaginations and
Intelligent Interactions. See Pro Forma Consolidated Financial Information and
the related Notes thereto and "Risk Factors--Potential Fluctuations in
Quarterly Operating Results; Seasonality."
20
<PAGE>
<TABLE>
<CAPTION>
Pro Forma Pro Forma
Year Three Months Ended
Ended ------------------------------------------------------------------------------
Dec. 31, March 31, June 30, Sept. 30, Dec. 31, March 31,
1997 1997 1997 1997 1997 1998
---------------- --------------- --------------- --------------- --------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Consolidated Statement
of Operations Data:
Revenues:
Advertising .................. $ 2,736,365 $ 399,688 $ 526,192 $ 649,036 $ 1,161,449 $ 1,846,748
Consulting and license fees 1,746,896 805,245 639,588 244,890 57,173 88,362
------------ ----------- ----------- ----------- ----------- -----------
Total revenues .............. 4,483,261 1,204,933 1,165,780 893,926 1,218,622 1,935,110
Cost of revenues .............. 2,829,938 474,349 582,460 798,505 974,624 1,608,279
------------ ----------- ----------- ----------- ----------- -----------
Gross profit 1,653,323 730,584 583,320 95,421 243,998 326,831
Operating expenses:
Sales and marketing .......... 4,653,418 923,062 1,397,203 1,443,764 889,389 1,178,438
General and administrative 4,978,381 1,158,354 1,358,096 1,450,340 1,011,591 1,745,511
Product development .......... 1,745,745 469,309 542,683 521,708 212,045 66,738
Other expenses ............... 989,099 -- 123,843 865,256 -- --
Amortization of goodwill ..... 3,612,034 736,759 958,425 958,425 958,425 1,185,803
Write-off of acquired
in-process technology ...... 5,477,281 5,477,281 -- -- -- --
------------ ----------- ----------- ----------- ----------- -----------
Total operating
expenses .................. 21,455,958 8,764,765 4,380,250 5,239,493 3,071,450 4,176,490
------------ ----------- ----------- ----------- ----------- -----------
Operating loss ................ (19,802,635) (8,034,181) (3,796,930) (5,144,072) (2,827,452) (3,849,659)
Interest (expense) income, net (95,605) 14,142 (1,300) (30,602) (77,845) (178,692)
------------ ----------- ----------- ----------- ----------- -----------
Net loss ...................... ($ 19,898,240) ($ 8,020,039) ($ 3,798,230) ($ 5,174,674) ($ 2,905,297) ($ 4,028,351)
============ =========== =========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
Pro Forma
Pro Forma Three Months Ended
Year ---------------------------------------------------------------------
Ended
Dec. 31, March 31, June 30, Sept. 30, Dec. 31, March 31,
1997 1997 1997 1997 1997 1998
------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Consolidated Statement
of Operations Data:
Revenues:
Advertising ...................... 61.0% 33.2% 45.1% 72.6% 95.3% 95.4%
Consulting and license fees 39.0 66.8 54.9 27.4 4.7 4.6
------ ------ ------ ------ ------ ------
Total revenues .................. 100.0 100.0 100.0 100.0 100.0 100.0
Cost of revenues .................. 63.1 39.4 50.0 89.3 80.0 83.1
------ ------ ------ ------ ------ ------
Gross profit .................... 36.9 60.6 50.0 10.7 20.0 16.9
Operating expenses:
Sales and marketing .............. 103.8 76.6 119.9 161.5 73.0 60.9
General and administrative........ 111.0 96.1 116.5 162.2 83.0 90.2
Product development .............. 38.9 38.9 46.6 58.4 17.4 3.4
Other expenses ................... 22.1 -- 10.6 96.8 -- --
Amortization of goodwill ......... 80.6 61.1 82.2 107.2 78.6 61.3
Write-off of acquired
in-process technology .......... 122.2 454.6 -- -- -- --
------ ------ ------ ------ ------ ------
Total operating expenses 478.6 727.4 375.7 586.1 252.2 215.8
------ ------ ------ ------ ------ ------
Operating loss .................... (441.7) (666.8) (325.7) (575.4) (232.0) (198.9)
Interest (expense) income, net ( 2.1) 1.2 ( 0.1) ( 3.4) ( 6.4) ( 9.2)
------ ------ ------ ------ ------ ------
Net loss .......................... (443.8)% (665.6)% (325.8)% (578.9)% (238.4)% (208.1)%
====== ====== ====== ====== ====== ======
</TABLE>
21
<PAGE>
Revenues
Advertising Revenue. Advertising revenue primarily consists of cash
advertising revenue and also includes barter and prize revenue. The Company's
pro forma cash advertising revenue increased each quarter primarily due to an
increase in the number of Websites on the 24/7 Network, the number of
advertisers utilizing the Company's advertising solutions and the number of
advertisements delivered to the 24/7 Network. Such increase was partially
offset by a decline in cash advertising revenue generated by the ContentZone
through the first three quarters of pro forma 1997. The Company expects the
24/7 Network to continue to account for a significant portion of the Company's
total advertising revenue. Historically, the Company utilized barter
transactions and prizes to drive traffic to its Affiliated Websites on the
ContentZone and Riddler.com. Barter and prize revenue decreased sequentially
from approximately 6.6% of total pro forma advertising revenue for the first
quarter of pro forma 1997 to 0.0% in the first quarter of pro forma 1998. The
Company believes that barter and prize revenue will continue to comprise an
insignificant portion of the Company's total revenues in the future.
Consulting and License Fees. Through the first three quarters of pro forma
1997, the Company derived consulting and license fees primarily from an
agreement with SegaSoft, whereby SegaSoft licensed certain software from
Interactive Imaginations. The Company does not expect to realize meaningful
revenues from the SegaSoft license agreement in the future. Pro forma
consulting and license fees in the fourth quarter of 1997 and the first quarter
of 1998 consisted primarily of fees generated from licensing the Adfinity[TM]
system to third parties. The Company expects to derive consulting and licensing
fees in the future from the licensing of Adfinity[TM] and dbCommerce[TM] to
third parties, but does not expect such revenues to comprise a significant
portion of the Company's total revenues.
Cost of Revenues and Gross Profit (Loss).
Cost of revenues consists primarily of fees paid to Affiliated Websites,
which are calculated as a percentage of revenues resulting from ads delivered on
the Company's networks. Cost of revenues also includes third party ad serving
costs, depreciation of the Company's ad serving system and Internet access
costs. The general decline in gross profit over the five quarter period was
caused by (i) the significant quarter-to-quarter decline in high margin
consulting and license fees generated by the SegaSoft agreement; (ii) the
significant growth in advertising revenue generated by the 24/7 Network, which
typically pays higher fees to Affiliated Websites, at the same time that
advertising revenue generated by the ContentZone declined; (iii) an increase in
third party ad serving costs related to the growth of the 24/7 Network, as well
as increased costs relating to ad serving capacity for the ContentZone for the
first three quarters of pro forma 1997; and (iv) the temporary increase, which
began late in the first quarter of pro forma 1998, in third party ad serving
costs incurred by the Company in connection with the transition to Adfinity[TM].
Until the Company completes the transition to Adfinity[TM], it expects to incur
ad serving costs that are significantly higher than historical levels.
Thereafter, the Company expects gross margins to increase because third party ad
serving fees will no longer be paid.
Operating Expenses
Each of sales and marketing expenses, general and administrative expenses
and product development expenses increased over the first three quarters of pro
forma 1997 as both Petry and Interactive Imaginations incurred expenses in
connection with the growth of their respective businesses. All of such expense
categories decreased in the fourth quarter of 1997 because (i) Petry's pro
forma fourth quarter results no longer included expenses of its then-parent and
(ii) Interactive Imaginations reduced its expense levels as it consolidated its
operations in the third quarter of pro forma 1997. Beginning in the first
quarter of pro forma 1998, all of such expense categories increased in
anticipation of the Merger and the Acquisition and expected future growth.
Sales and Marketing Expenses. Sales and marketing expenses consist
primarily of sales force salaries and commissions, advertising expenditures and
costs of trade shows, conventions and marketing materials. The Company expects
sales and marketing expenses to increase as it continues to invest in sales and
marketing personnel, expand into new markets and broaden the visibility of the
Company.
General and Administrative Expenses. General and administrative expenses
consist primarily of compensation, facilities expenses and other overhead
expenses incurred to support the growth of the business. Beginning in the
second quarter of pro forma 1998, the Company expects general and
administrative expenses to increase due to the additional ad serving personnel
required to support Adfinity[TM]. In addition, the Company expects general and
administrative expenses to increase as it incurs increased levels of expenses
to support future growth.
Product Development Expenses. Product development expenses consist
primarily of compensation and related costs incurred to further develop the
Company's ad serving capabilities. Product development expenses
22
<PAGE>
declined in the fourth quarter of pro forma 1997 due to the consolidation of
the operations of Interactive Imaginations, and such expenses were suspended in
the first quarter of pro forma 1998 as the Company sought a more dynamic ad
serving platform. The Company believes that continued investment in product
development, particularly for its Adfinity[TM] system, is critical to its
strategy of providing excellent service, and it expects to increase the future
amounts spent on product development.
Other Expenses. Other expenses in pro forma 1997 included an aggregate of
$232,304 in legal costs incurred during the second and third quarters in
defending a class-action lawsuit filed by certain Affiliated Websites on the
ContentZone, which defense resulted in a grant of summary judgment in favor of
the Company. During the third quarter of pro forma 1997, in connection with the
consolidation of Interactive Imaginations, the Company recorded a net write-off
of $756,795 of property and equipment that was deemed to have no future
economic benefit. In connection with the development of its Adfinity[TM] and
dbCommerce[TM] technologies, the pro forma impact of the cost of acquired
in-process technology is shown in the first quarter of pro forma 1997. The
Company recorded goodwill amortization expense beginning in the first quarter
of pro forma 1997, which represents the excess purchase price over the fair
value of net liabilities of the acquired businesses of Petry, Advercomm and
Intelligent Interactions.
Historical Results of Operations
Years Ended December 31, 1997, 1996 and 1995
24/7 Media's historical results of operations for the fiscal years ended
December 31, 1997, 1996 and 1995 include the results of Interactive
Imaginations and do not reflect any of the operating results of Petry,
Advercomm or Intelligent Interactions, or the pro forma adjusting entries
resulting from the merger of these entities with and into the Company. The
Company does not believe that the historical revenues or expenses as presented
below are reliable or accurate indicators of the future performance of the
combined Company. See "Selected Consolidated Financial Data" and the Company's
Consolidated Financial Statements and related Notes thereto.
Revenues. Total revenues were $3,148,569, $1,542,163 and $151,750 for the
years ended December 31, 1997, 1996 and 1995, respectively. Year-to-year growth
resulted from increases in (i) advertising revenue generated by the ContentZone
and Riddler.com and (ii) consulting and license fees derived from the SegaSoft
agreement, whereby SegaSoft licensed certain software from Interactive
Imaginations. The Company does not expect to realize meaningful revenues from
the SegaSoft agreement in the future. One customer (SegaSoft) accounted for 55%
of Interactive Imaginations' total revenues during 1997, two customers
(SegaSoft and Microsoft Corporation) accounted for 25% and 12% of total cash
advertising revenues, respectively, during both 1997 and 1996, and four
customers (Marion Foundation, AT&T, Coors and 20th Century) accounted for 33%,
21%, 20% and 13% of total cash advertising revenues, respectively, during 1995.
Cost of Revenues and Gross Profit (Loss). Cost of revenues was $1,655,340,
$1,592,771 and $198,291 for the years ended December 31, 1997, 1996 and 1995,
respectively. The increase in cost of revenues in all years was due to the
related growth in advertising revenue, and the smaller percentage increase from
1996 to 1997 was due to a significant increase in the percentage of total
advertising revenue generated by Riddler.com, which does not entail payment of
fees to Affiliated Websites. Gross profit increased from 1996 to 1997 primarily
due to a significant increase in high margin revenues generated by the SegaSoft
agreement.
Operating Expenses. Total operating expenses were $6,702,591, $6,711,336
and $1,121,604 for the years ended December 31, 1997, 1996 and 1995,
respectively. The increase from 1995 to 1996 was caused by increased
expenditures incurred in anticipation of continued growth of the Company. The
decrease from 1996 to 1997 was primarily due to the consolidation of the
Interactive Imaginations business, offset by $989,099 in other expenses
recorded in 1997. Other expenses included $232,304 of legal costs associated
with the successful defense of a class-action lawsuit filed by certain
Affiliated Websites on the ContentZone, as well as a net write-off of $756,795
of property and equipment that was deemed to have no future economic value.
Three Months Ended March 31, 1998 and 1997
For the three months ended March 31, 1998, 24/7 Media's historical results
of operations reflect the Merger as of February 24, 1998. For the three months
ended March 31, 1997, 24/7 Media's historical results of operations only
include the results of Interactive Imaginations. The Company does not believe
that the historical revenues or expenses as presented below are reliable or
accurate indicators of the future performance of the combined Company. See the
Company's Consolidated Financial Statements and related Notes thereto.
23
<PAGE>
Revenues. Total revenues were $1,076,250 for the three months ended March
31, 1998, as compared to $1,194,137 for the three months ended March 31, 1997.
Such decrease was caused primarily by a decline in revenues generated by the
SegaSoft Agreement, offset by a significant increase in advertising revenue.
Cost of Revenues. Cost of revenues was $930,003 for the three months ended
March 31, 1998 as compared to $459,587 for the three months ended March 31,
1997. Such increase primarily related to increases in third party ad serving
costs which were caused by growth in advertising revenue and the temporary
increase in costs in connection with the transition to Adfinity[TM]. Such
increase was offset by reduced ContentZone ad serving costs.
Operating Expenses. Total operating expenses were $2,274,327 for the three
months ended March 31, 1998 as compared to $1,532,609 for the three months
ended March 31, 1997. This increase was caused by higher sales and marketing
and general and administrative expenses in anticipation of the Merger and
future growth, as well as amortization of goodwill resulting from the
acquisition of Petry and Advercomm. Such increase was offset by the significant
reduction of product development expense prior to the acquisition of
Intelligent Interactions.
Liquidity and Capital Resources
Historically, the Company financed its operations primarily from private
placements of equity and convertible debt securities. Concurrently with the
merger of Petry and Advercomm with and into 24/7 Media, the Company completed a
private placement of preferred stock and warrants which resulted in net
proceeds of $9,830,897. As of March 31, 1998, the Company had cash and cash
equivalents of $7,764,695.
In addition to funding on-going operations, the Company's principal
commitments consist of various obligations under operating and capital leases.
On June 1, 1996, the Company entered into an operating lease for the use of
computer equipment with a fair market value of approximately $835,000. Rent
expense for the operating lease was $42,421, $162,862, $559,748 and $381,313
for the three months ended March 31, 1998 and 1997 and the years ended 1997 and
1996, respectively. On May 14, 1998, the Company entered into an operating
lease for computer equipment related to its Adfinity[TM] system, with a fair
market value of approximately $717,000. Total rent expense for currently
outstanding leases is expected to be approximately $115,000 per quarter.
Net cash used in operating activities was $2,309,598, $1,384,894,
$4,465,640, $4,933,106, and $995,194 for the three months ended March 31, 1998
and 1997 and for the years ended December 31, 1997, 1996 and 1995,
respectively. Net cash used in operating activities resulted from the Company's
net operating losses, adjusted for certain non-cash items, including: (i) a
significant advance by SegaSoft in late 1996 for revenues that were primarily
recognized during 1997; (ii) the write-off of property and equipment in 1997;
and (iii) the amortization of goodwill in the first quarter of 1998 related to
the Merger. Net cash used in operating activities also resulted from a high
level of accounts receivables and related accrued liabilities due to the time
lag between revenue recognition and receipt of payments from advertisers. To
the extent the Company is able to improve the timeliness of its billing and
collections processes as it completes the transition to Adfinity[TM], the
Company expects its net working capital as a percentage of total revenues to
improve.
Net cash provided by (used in) investing activities was $71,175, $0,
($19,219), ($1,578,276), and ($464,016) for the three months ended March 31,
1998 and 1997 and the years ended December 31, 1997, 1996 and 1995,
respectively. Net cash used in investing activities resulted primarily from
capital expenditures relating to computer equipment. To the extent that the
Company acquires significant ad serving hardware in the future, net cash used
in investing activities will increase.
Net cash provided by financing activities was $9,909,173, $500,011,
$2,889,409, $8,200,777, and $1,448,488 for the three months ended March 31,
1998 and 1997 and the years ended December 31, 1997, 1996 and 1995,
respectively. Net cash provided by financing activities for the three years
ended December 31, 1997 included issuances of convertible notes, convertible
preferred stock, common stock and warrants. Prior to March 31, 1998, all of the
previously issued convertible notes, convertible preferred stock and warrants
were converted or exercised into common stock, except for approximately
$500,000 principal amount of convertible debt and warrants to purchase
approximately 142,000 shares of Common Stock with an average exercise price of
$0.70 per share. On February 24, 1998, the Company issued Series A Preferred
Stock with detachable warrants at an average exercise price of $2.38.
No provision for federal or state income taxes has been recorded as the
Company incurred net operating losses for all periods presented. At December
31, 1997, the Company had approximately $13,394,000 of federal net
24
<PAGE>
operating loss carryforwards available to offset future taxable income; such
carryforwards expire in various years through 2012. As a result of various
equity transactions during 1996, 1997 and 1998, management believes the Company
has undergone an "ownership change" as defined by section 382 of the Internal
Revenue Code. See Note 3 to the Company's Consolidated Financial Statements.
Accordingly, the utilization of a portion of the net operating loss
carryforward may be limited. Due to this limitation, and the uncertainty
regarding the ultimate utilization of the net operating loss carryforward, no
tax benefit for losses has been recorded by the Company and a valuation
allowance has been recorded for the entire amount of the net deferred tax
asset. In addition, certain events, including any sales by the Company of
shares of its stock, including sales pursuant to this Offering, and/or
transfers of a substantial number of shares of Common Stock by the current
stockholders, may partially restrict the ability of the Company to utilize its
net operating loss carryforwards.
The Company believes that the net proceeds from this offering, combined
with current cash and cash equivalent balances will be sufficient to fund its
requirements for working capital and capital expenditures for at least the next
12 months. To the extent that the company encounters unanticipated
opportunities. The Company may need to raise additional funds sooner in order
to take advantage of unanticipated opportunities, in which case, the Company
may sell additional equity or debt securities or borrow funds from banks. Sales
of additional equity or convertible debt securities would result in additional
dilution of the Company's stockholders.
The Company recognizes the need to ensure that its operations will not be
adversely impacted by Year 2000 software failures. The Company has established
procedures for evaluating and managing the risks and costs associated with this
problem and is currently taking steps to make its products and systems Year
2000 compliant. In addition, the Company's ad servers and certain of its
customers may also be impacted by Year 2000 complications. Any failure by the
Company, its ad servers or its customers to achieve Year 2000 compliance could
have a material adverse effect on the Company's business, results of operations
and financial condition.
Recently Issued Accounting Principles
The Company adopted the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 130, "Reporting Comprehensive Income" in the quarter
ended March 31, 1998. SFAS No. 130 requires the Company to report in their
financial statements, in addition to its net income (loss), comprehensive
income (loss), which includes all changes in equity during a period from
non-owner sources including, as applicable, foreign currency items, minimum
pension liability adjustments and unrealized gains and losses on certain
investments in debt and equity securities. There were no differences between
the Company's comprehensive loss and its net loss as reported.
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use" ("SOP 98-1"). SOP 98-1
provides guidance for determining whether computer software is internal-use
software and on accounting for the proceeds of computer software originally
developed or obtained for internal use and then subsequently sold to the
public. It also provides guidance on capitalization of the costs incurred for
computer software developed or obtained for internal use. The Company has not
yet determined the impact, if any, of adopting SOP 98-1, which will be
effective for the Company's year ending December 31, 1999.
In June 1997, the FASB issued SFAS No. 131, Disclosure About Segments of
an Enterprise and Related Information. SFAS No. 131 establishes standards for
the way that public business enterprises report information about operating
segments. It also establishes standards for related disclosures about products
and services, geographic areas and major customers. SFAS No. 131 is effective
for fiscal years beginning after December 15, 1997. The Company has determined
that it does not have any separately reportable business segments.
25
<PAGE>
BUSINESS
Overview
24/7 Media operates networks of Websites that enable both advertisers and
Web publishers to capitalize on the many opportunities presented by Internet
advertising, direct marketing and commerce. The Company generates revenues by
delivering advertisements and promotions to its Affiliated Websites. In
particular, 24/7 Media: (i) operates the 24/7 Network, a network of over 80
high profile Websites to which the Company delivered an aggregate of over 325
million advertisements in April 1998; (ii) operates the ContentZone, a network
of over 2,000 small to medium-sized Websites to which the Company delivered an
aggregate of over 40 million advertisements in April 1998; (iii) licenses its
Adfinity[TM] advertising management system to independent Websites to manage
and serve high-volume advertising and direct marketing campaigns; and (iv)
markets its dbCommerce[TM] software to e-commerce merchants to enable the
delivery of targeted promotions.
The Company operates in the rapidly growing Internet advertising industry.
IDC estimates that at the end of 1997 there were over 38 million Web users in
the United States and over 68 million Web users worldwide and that by the end
of 2002 the number of Web users will increase to over 135 million in the United
States and to over 319 million worldwide. Jupiter Communications projects that
the dollar value of Internet advertising in the United States will increase
from $940 million in 1997 to $7.7 billion in 2002.
The Company believes that advertisers seek to place Internet ads in ways
to maximize unduplicated reach. During April 1998, the 365 million impressions
generated by the Company's networks reached more than one third of all Internet
users, according to a study prepared for the Company by Media Metrix. The
Company believes that this reach figure is among the highest in the Internet
advertising industry. The Company plans to aggressively recruit Websites of all
sizes for its networks in order to further extend the Company's reach as well
as to provide advertisers with a broad base of online content and page views,
and to improve the Company's brand awareness and visibility with media buyers.
In addition, as online advertisers and direct marketers increase their use
of the Internet, they seek solutions and technologies that allow them to
efficiently deliver highly targeted messages. 24/7 Media's customized solutions
allow advertisers and direct marketers to tailor their ad campaigns to reach
desired audiences, while reducing costs, easing time pressures and alleviating
the need to purchase a series of ad campaigns from numerous Web publishers.
Advertisers and direct marketers can achieve their objectives by buying ad
space on a specific Website, within a particular content channel or across an
entire network.
As Internet traffic grows, Web publishers increasingly seek to maximize
the value of their online inventory. The Company's extensive sales and
marketing experience enables Web publishers to access media buyers at large ad
agencies and to sell advertisement space without incurring the costs and
challenges associated with building and maintaining an ad sales force.
Additionally, the ad serving and targeting capabilities of Adfinity[TM]
effectively deliver advertisements to the Company's Affiliated Websites.
The recent addition of the Company's Adfinity[TM] and dbCommerce[TM]
technologies allows 24/7 Media to provide comprehensive advertising solutions
for advertisers, direct marketers and Web publishers. Adfinity is designed to
target, deliver, and track advertisements and direct marketing messages across
the Company's networks. Adfinity can create a profile of an individual Internet
user by integrating such user's online behavior with third party demographic
and lifestyle data. These profiles can allow Adfinity to deliver targeted
advertisements to the right person at the right time. dbCommerce[TM] software
is designed to enable e-commerce merchants to deliver promotions and messages
to targeted customer audiences by integrating database marketing techniques
with customer transaction information and third party databases.
The Company's senior management team includes several individuals with
over fifteen years of experience in advertising sales in the television and
proprietary online network industries. Other members of senior management
contribute extensive knowledge of ad serving technology and database targeting.
The Company leverages its media sales and technology expertise to maximize the
value of ad campaigns for both advertisers and Affiliated Websites.
26
<PAGE>
Industry Background
Growth of the Internet and the Web
The Internet and the Web are experiencing dramatic growth both in terms of
the number of Web users and the number of Websites. IDC estimates that at the
end of 1997 there were over 38 million Web users in the United States and over
68 million Web users worldwide, and that by the end of 2002 the number of Web
users will increase to over 135 million in the United States and to over 319
million worldwide. In addition, Web users are spending an increasing amount of
time on the Web, and a 1997 report by the U.S. Department of Commerce estimates
that overall traffic on the Internet is doubling every 100 days. According to
Network Solutions, the number of Internet domains (.com, .net and .org) had
grown to over 2 million in May 1998. The growth in the number of Web users, the
amount of time users spend on the Web and the increase in the number of
Websites is being driven by the increasing importance of the Internet as a
sales and distribution channel, a communications medium and an information
resource.
Growth of Online Commerce
The Internet is dramatically affecting the methods by which consumers and
businesses are buying and selling goods and services. The Web provides online
merchants with the ability to reach a global audience and to operate with
minimal infrastructure, reduced overhead and greater economies of scale, while
providing consumers with a broad selection, increased pricing power and
unparalleled convenience. As a result, a growing number of consumers are
transacting business on the Web, including trading securities, buying consumer
goods, paying bills and purchasing airline tickets. Jupiter Communications
estimates that over 25% of adult Web users purchased goods or services over the
Web in 1997 and that 50% of adult Web users will make online purchases in 2000.
Jupiter Communications also estimates that retail consumer purchases of goods
and services over the Internet will increase from $2.6 billion in 1997 to $37.5
billion in 2002. The Company believes that as electronic commerce expands,
advertisers and direct marketers will increasingly use the Web to advertise
products, drive traffic to their Websites, attract customers and facilitate
transactions.
Growth of Internet Advertising
The Web is evolving into an important medium for advertisers due to its
interactive nature, global reach, rapidly growing audience and the expected
increase in online commerce. Unlike more traditional advertising methods, the
Web gives advertisers the potential to target advertisements to broad audiences
or to selected groups of users with specific interests and characteristics. The
Web also allows advertisers and direct marketers to measure the effectiveness
and response rates of advertisements and to track the demographic
characteristics of Web users. The interactive nature of Web advertising enables
advertisers to better understand potential customers, and to change messages
rapidly and cost effectively in response to customer behavior and product
availability. Additionally, the Web allows advertisers and direct marketers to
reach users with attractive demographic profiles. A 1997 U.S. Department of
Commerce study estimated that 48% of Web users have a college degree, 34% have
a household income greater than $60,000, and their average age is approximately
35 years.
The unique capabilities of online advertising, the growth in traffic on
the Web and the favorable characteristics of Web users have led to a
significant increase in online advertising. According to Jupiter
Communications, the dollar value of online advertising in the United States is
expected to increase from $940 million in 1997 to $7.7 billion in 2002,
representing a 52% compounded annual growth rate. By comparison, in 1997 IDC
estimated that $173 billion was spent on traditional media advertising
(television, radio, cable and print) in the United States. Until recently, the
leading Internet advertisers have been technology companies, search engines and
Web publishers. However, many of the largest advertisers utilizing traditional
media, including consumer products companies and automobile manufacturers, are
expanding their use of online advertising. The Company believes that online
advertising will continue to capture an increasing share of available
advertising dollars and that this trend will drive demand for online ad
inventory and for sophisticated Internet advertising solutions.
Opportunities for Direct Marketing
The Web also represents an attractive medium for direct marketing, which
has traditionally been conducted through direct mail, telemarketing and
televison infomercials. The interactive nature of the Web enables direct
marketers to deliver targeted promotions to consumers at the point-of-sale. The
success of a direct marketing campaign is measured by the response rate of
consumers (e.g., number of leads, number of sales or transactions
27
<PAGE>
as a percentage of promotions viewed). The Internet has the potential to enable
direct marketers to increase consumer response rates and decrease
costs-per-transaction by targeting and delivering direct marketing campaigns to
particular consumers based on their demographic profile, self-selected
interests and online behavioral characteristics. By providing a more
cost-effective method to reach target customers, online advertising is expected
to improve the direct marketer's return on investment. The Direct Marketing
Association estimates that $153 billion was spent in 1997 on all forms of
direct marketing in the United States, and Jupiter Communications estimates
that expenditures on direct marketing over the Internet will exceed $1.3
billion in 2002.
Challenges Facing Advertisers, Direct Marketers and Web Publishers
While the Web offers numerous opportunities, most online advertisers,
direct marketers and Web publishers face a number of significant challenges to
realizing the potential of Internet advertising. As online advertisers, direct
marketers and Web publishers increase their use of the Internet, they seek
solutions and technologies which will allow them to deliver highly targeted
messages, receive real-time feedback, benefit from business efficiencies and
capitalize on other potential advantages of online advertising and direct
marketing.
Advertisers and Direct Marketers. For advertisers and direct marketers,
large advertising campaigns can be time-consuming, expensive and difficult to
manage and can require the use of media purchasers at advertising agencies to
place advertisements. Given the breadth of content available on the Web, it is
difficult for advertisers and direct marketers to justify the costs of
transacting individually with a number of smaller, but desirable, sites in
order to reach a large online audience. In addition, many advertisers and
direct marketers lack the analytical tools to evaluate and optimize the
effectiveness of advertising campaigns, target appropriate users, efficiently
place advertisements and deliver content. Advertisers and direct marketers also
find that individual Websites typically lack the technology to serve a variety
of advertisements to a broad reach of Internet users.
Web Publishers. Web publishers who seek to sell ad space on their Websites
face an array of challenges. Most Web publishers have difficulty attracting and
maintaining experienced personnel to sell ad space on their Websites and
justifying the costs of establishing such a sales force. In addition, most Web
publishers cannot afford, or lack the ability, to operate and maintain
sophisticated ad servers and databases to provide effective ad serving,
targeting and reporting to advertisers. Furthermore, for sales personnel at all
but the largest Websites, it can be difficult to gain access to media buyers at
large advertising agencies. As a result, online advertising spending is highly
concentrated on large Websites. In its most recent report, Jupiter
Communications estimated that, during August 1997, the top ten Websites on the
Internet accounted for approximately 52% of all dollars spent on Internet
advertising. The Company believes all but the largest Websites will continue to
face challenges in capturing a share of the total advertising dollars spent on
the Internet.
The 24/7 Media Solution
The Company operates the 24/7 Network and the ContentZone, which are
networks of Websites that enable both advertisers and Web publishers to
capitalize on the many opportunities presented by Internet advertising, direct
marketing and commerce. The 24/7 Network is comprised of over 80 high profile
Websites and the ContentZone is comprised of over 2,000 small to medium-sized
Websites. The Company offers comprehensive advertising sales solutions for both
emerging and mature Web publishers and provides advertisers and direct
marketers with targeted ad delivery across the Company's networks. During April
1998, the 365 million impressions generated by the Company's networks reached
more than one third of all Internet users, according to a study prepared for
the Company by Media Metrix. The Company believes that this reach figure is
among the highest in the Internet advertising industry. The Company's ability
to deliver targeted advertisements has recently been enhanced by the addition
of the Adfinity[TM] ad serving technology.
Benefits to Advertisers and Direct Marketers
24/7 Media reduces costs and eases time pressures for advertisers and
direct marketers by alleviating the need to purchase a series of ad campaigns
from numerous Web publishers. The Company's networks provide advertisers and
direct marketers with access to a wide variety of online content and a broad
reach of Internet users. Advertisers and direct marketers can enhance the
effectiveness of advertising and direct marketing campaigns by customizing
their ad delivery on the Company's networks and buying ad space either on
selected Affiliated Websites, within a particular content channel or across an
entire network. The Company believes that its Adfinity[TM] technology will
enable advertisers to optimize ad performance by reaching highly targeted
audiences based on demographic profiles
28
<PAGE>
and user behavior. In addition, the Company provides advertisers and direct
marketers with comprehensive reporting services in order to monitor the
effectiveness of ad delivery.
Benefits to Web Publishers
Membership on the Company's networks enables Web publishers to immediately
generate advertising revenues by gaining access to advertisers and direct
marketers without the costs and challenges associated with building and
maintaining their own ad sales force and ad serving technology. Websites
included on the Company's networks benefit from 24/7 Media's experienced
management team, its extensive sales and marketing organization and its direct
access to advertisers and agencies. The organization of the Company's networks
into channels of Web publishers' content enhances the value of inventory on
small to medium-sized Websites and enables such Websites to generate revenues
by selling ad space within a channel that is attractive to advertisers.
Furthermore, the Company believes that the targeting capabilities of the
Company's Adfinity[TM] ad management system will increase the value of Web
publishers' inventory. The Company also provides sophisticated tracking and
reporting functions for its Affiliated Websites. For Web publishers with their
own in-house ad sales forces, the Company licenses its Adfinity[TM] ad
management system to serve advertisements and provide enhanced targeting and
reporting capabilities.
Strategy
24/7 Media's objective is to become the leading Internet advertising and
direct marketing firm by providing superior turnkey advertising solutions for
Web publishers and maximizing the effectiveness of advertisers' Internet
advertising campaigns. The Company intends to reach its objective by
implementing the following strategies:
Expand the 24/7 Network and the ContentZone. The Company plans to
aggressively recruit Websites for the 24/7 Network and the ContentZone in order
to extend the Company's reach and to provide a broad base of page views and
online content to advertisers. The Company believes that its approach to
expansion is unique in that it recruits Websites of all sizes, including
high-profile or larger to medium-sized Websites on the 24/7 Network and medium
to smaller-sized Websites on the ContentZone. Such a collection of Websites of
diverse sizes and content allows advertisers to target Internet users by
interest and enhances the value of each Affiliated Website's inventory. An
increased number of Affiliated Websites and an expanded breadth of available
content will further enable advertisers to consolidate their ad purchases and
will improve the Company's brand awareness and visibility with media buyers.
Maximize Sales and Marketing Effectiveness. The Company believes that its
sales and marketing organization is among the largest in the Internet
advertising industry, providing the Company with a competitive advantage. The
Company intends to leverage the substantial media sales experience of its
management team in order to maximize the value of ad campaigns to benefit both
advertisers and Affiliated Websites. 24/7 Media believes that advertiser
awareness of the Company is critical to its success. Accordingly, the Company
continually expands its services for advertisers and advertising agencies in
order to establish and expand the recognition of its corporate identity. The
Company also promotes its service offerings through its Website, trade
publication advertisements, direct mail and promotional activities, trade shows
and other media events.
Enhance Capabilities of Ad Targeting Technology. The Company believes that
its Adfinity[TM] ad management technology creates significant value for
advertisers, direct marketers and Web publishers. Adfinity[TM] can create a
profile of an individual Internet user by integrating such user's online
behavior with third party demographic and lifestyle data. These profiles can
enable Adfinity[TM] to deliver targeted advertisements to the right person at
the right time. The Company intends to continue to enhance its targeting
capabilities and technology through investment in research and development
activities.
Increase Value of Ad Inventory. The Company believes that click-thru rates
will increase as its Adfinity[TM] technology delivers advertisements to a more
highly targeted audience, resulting in more effective advertising campaigns and
enabling the Company to charge higher CPM rates. Furthermore, the Company
believes that as it increases the breadth and depth of its content channels,
the sale of ads targeted to specific channels will increase, displacing lower
CPM run of network campaigns, in which ads are delivered across the Websites in
a network, and cost-per-action campaigns that generate revenues only if the
user responds to the ad with an action, such as an inquiry or a purchase of the
product advertised. The Company intends to further increase the value of its ad
inventory by seeking to sell 100% of inventory through the sale of a
combination of advertisements sold on a CPM
29
<PAGE>
basis and a cost-per-action basis, by selling sponsorships on Affiliated
Websites and by refining its management of ad space inventory.
Provide Highest Level of Customer Service. The Company emphasizes high
quality service for Web publishers and advertisers. For example, the Company
employs techniques of benchmarking, statistical analysis and continuous process
improvement to provide Web publishers and advertisers with "best of class"
service. The Company continually surveys its Affiliated Websites and
advertisers to monitor service levels and identify and resolve problems. In
addition, the Company expects that Adfinity[TM] will offer enhanced reporting
capabilities that allow Web publishers and advertisers to better assess the
efficiency and performance of ad campaigns.
24/7 Media Products and Services
24/7 Media offers Internet advertisers, direct marketers and Web
publishers comprehensive Internet advertising solutions. The Company also
licenses its Adfinity[TM] ad serving technology and markets its dbCommerce[TM]
software to third parties.
Internet Advertising Networks
The Company operates both the 24/7 Network and the ContentZone, which are
collections of Websites with diverse online content organized into topical
channels.
The 24/7 Network. Through the 24/7 Network, the Company provides
advertisement sales and delivery services and related functions to over 80
Affiliated Websites. The 24/7 Network aggregates large and medium-sized
Websites that are attractive to advertisers, generate a high number of ad
impressions and contribute a variety of online content to the network. No
single Website on the 24/7 Network produced more than ten percent of the 24/7
Network's pro forma advertising revenues in the year ended December 31, 1997 or
in the three months ended March 31, 1998, and the ten largest sites in the 24/7
Network produced approximately 70% and 66% of the 24/7 Network's pro forma
advertising revenue in such periods, respectively. During the month of April
1998, the Company delivered over 325 million advertisements to the 24/7
Network.
ContentZone. The ContentZone is a network of over 2,000 small to
medium-sized Websites to which the Company can deliver targeted advertisements.
Such Websites encompass a broad and diverse range of content that reflects the
eclectic, grass-roots nature of the Web. The ContentZone provides one of the
few advertising revenue opportunities for such small and emerging Websites.
During the month of April 1998, the Company delivered over 40 million
advertisements to the Affiliated Websites on the ContentZone. The Company
created and operates the ContentZone Website (www.contentzone.com) to promote
and generate traffic on its Affiliated Websites on the ContentZone.
Channels on the Networks. The 24/7 Network's and the ContentZone's
Affiliated Websites are currently organized into the following topical
channels:
<TABLE>
<S> <C>
[bullet] Automotive [bullet] Real Estate
[bullet] Business/Financial [bullet] Search Directory/ISP
[bullet] Entertainment [bullet] Sports
[bullet] Games [bullet] Technology/Computers
[bullet] International [bullet] Travel
[bullet] News/Information [bullet] Women/Family
</TABLE>
The Company is presently developing several new channels prompted by user
and advertiser interests. The Company expects to expand into additional
channels to respond to advertisers' needs.
The Games channel of the 24/7 Network includes the Company's Riddler.com
Website (www.riddler.com), a Website that offers a diverse number of
single-player and multi-player games to over 700,000 registered subscribers, as
well as to a number of unregistered users. Riddler.com offers free games and
prizes as an incentive to consumers to supply the Riddler.com database with
personal demographic and psychographic data. The Company delivers
advertisements and sponsorship messages on Riddler.com that do not interrupt
the game being played, but require the user to scroll through the advertisement
in order to begin playing the game.
Service Levels on the Networks. The Company offers different levels of
service to the Affiliated Websites on its networks.
30
<PAGE>
The Company offers full service to Affiliated Websites on the 24/7
Network. For such Websites, the Company appoints an account manager to oversee
the relationship with the Website, sells the Website ad inventory directly to
advertisers, solicits sponsorships specifically for such Website and integrates
sales efforts with the Website. The Company recognizes revenues generated from
advertising sales net of any ad agency commissions.
For all other Websites on the 24/7 Network, the Company bundles
advertisements as part of a channel or run of network package, pursuant to
which the advertisement is delivered across Websites in one of the channels
listed above or across the entire 24/7 Network. For example, an advertiser who
buys an advertisement on the Automotive channel is guaranteed that such
advertisement will run only on the Websites in the Automotive channel. The
Company typically receives a minimum available inventory on such Websites,
receives commissions only on the advertisements the Company sells and believes
that it is generally the only third party that sells ads on such Websites.
All Websites on the ContentZone receive service similar to the channel or
run of network service on the 24/7 Network except that advertisement delivery
is highly automated and ads are delivered across Websites included in specific
channels on the ContentZone or across the entire ContentZone.
Advertisers on the Networks. The Company maintains relationships with, and
focuses its sales and marketing efforts on, the leading Internet and
traditional advertisers and advertising agencies, many of which have utilized
the Company's solutions. Advertisers and advertising agencies employ the
Company in various ways. Based on its breadth of online content and its
extensive reach, the Company has the ability to package personalized
advertising solutions for advertisers and ad agencies. The Company's sales
force works closely with advertisers to enhance the effectiveness of
advertising campaigns by customizing ad delivery either on a specific Website,
within a particular content channel, or across an entire network. Set forth
below is a representative list of advertising agencies and advertisers that
have delivered advertisements on the Company's networks during the four months
ended April 30, 1998:
Advertising Agencies
<TABLE>
<S> <C>
[bullet] Agency.com [bullet] i-traffic
[bullet] Ammirati Puris Lintas [bullet] J. Walter Thompson
[bullet] Anderson & Lembke [bullet] Kirshenbaum Bond & Partners
[bullet] Avalanche [bullet] LeftField
[bullet] BBDO Interactive [bullet] The Lampshire Group
[bullet] Boss Media [bullet] Media.com
[bullet] CKS/Sitespecific [bullet] Mercury 7
[bullet] Dahlin Smith White [bullet] Modem Media
[bullet] DMB&B [bullet] Ogilvy & Mather
[bullet] Fallon McElligott [bullet] Planet U
[bullet] Freeman [bullet] Strategic Interactive Group
[bullet] Giant Step [bullet] Thunderhouse
[bullet] GM Cyberworks [bullet] TBWA-Chiat Day
[bullet] Grey [bullet] US Interactive
[bullet] Hal Riney [bullet] Wolverine
[bullet] iballs [bullet] Y&R Wunderman
[bullet] ifrontier
</TABLE>
31
<PAGE>
Advertisers
<TABLE>
<S> <C>
[bullet] Ace Hardware [bullet] General Motors
[bullet] Amazon.com [bullet] Hewlett Packard
[bullet] American Express [bullet] IBM
[bullet] AT&T [bullet] Infoseek
[bullet] Bell Atlantic [bullet] Intel
[bullet] BellSouth [bullet] Investors Business Daily
[bullet] Bloomberg [bullet] Mastercard
[bullet] Broderbund [bullet] Metromail
[bullet] Cardsecure [bullet] Microsoft
[bullet] CDNow [bullet] The Mining Company
[bullet] Charles Schwab [bullet] News Corp
[bullet] Cendant [bullet] N2K
[bullet] Cisco Systems [bullet] Pointcast
[bullet] Citibank [bullet] Proctor & Gamble
[bullet] Citizens Bank [bullet] Sony
[bullet] Columbia House [bullet] Sprint
[bullet] Compaq [bullet] Standard & Poor's
[bullet] Discover Card [bullet] Time Life
[bullet] Disney [bullet] Tripod
[bullet] eBay [bullet] US West
[bullet] Encyclopedia Britannica [bullet] Visa
[bullet] Entrepreneur [bullet] Web Genesis
[bullet] Ford [bullet] Ziff Davis
[bullet] FTD
</TABLE>
Admission to the Networks. Web publishers seeking to join the 24/7 Network
must meet specified standards, such as quality content and brand name
recognition, specified levels of existing and projected page views, attractive
user demographics, and sponsorship opportunities. Any Web publisher possessing
non-objectionable content on its Website can qualify for admission to the
ContentZone. The Company expects to "graduate" ContentZone members to the 24/7
Network if they generate a sufficient number of ad impressions per month and
satisfy the requisite standards.
Adfinity[TM] Ad Serving Technology
Adfinity[TM] ad serving technology is designed to allow Websites to
target, deliver, and track a high volume of advertisements to Internet viewers
without causing a slow down in the performance of the Website or a delay in ad
delivery. 24/7 Media acquired Adfinity[TM] as part of its acquisition of
Intelligent Interactions, and is currently integrating the Adfinity[TM] ad
serving technology into the 24/7 Network. The Company expects Adfinity[TM] to
serve as the Company's technology platform, delivering all of the
advertisements to the 24/7 Network and the ContentZone. In addition, the
Company currently licenses Adfinity[TM] to eight Websites, including The Motley
Fool, MecklerMedia and RealNetworks.
Adfinity[TM]'s targeting engine is designed to enable advertisers and
direct marketers to target advertisements and Internet content to individuals
or audience segments using flexible, advertiser-defined demographic profiles.
Advertisers can control the advertisement delivered, the user targeted, and the
frequency of ad delivery. Adfinity[TM] integrates information, such as a user's
online response rate to advertisements, name, address, age, or e-mail address,
with third-party databases to generate a comprehensive demographic profile of
the Internet user. Using such user profile, the Company can serve
advertisements and promotions specifically targeted to such user. Adfinity[TM]
also utilizes database overlays from marketing firms or other third parties in
order to create a comprehensive direct marketing model for the Company.
Through Adfinity[TM], the Company provides Internet advertisers, direct
marketers and Web publishers with comprehensive timely reports regarding the
demographics of users receiving and responding to advertisements. If a selected
audience does not respond well to an advertising message, then Adfinity[TM]
allows Internet advertisers,
32
<PAGE>
direct marketers and Web publishers to promptly change advertising messages or
images, refine the targeted demographics and rebroadcast messages.
dbCommerce[TM] Software
24/7 Media acquired dbCommerce[TM] software in connection with the
acquisition of Intelligent Interactions. dbCommerce[TM] software is designed to
enable e-commerce merchants to deliver targeted promotions and messages to
distinct customer segments or specific customers by integrating database
marketing techniques with customer transaction information and third party
databases. dbCommerce[TM] is designed to track the effectiveness of promotional
efforts by source code, page view, products shown and Internet response rates
and to provide reports of this information to e-commerce merchants to improve
the targeting of future promotions and messages.
The Company's Intelligent Interactions subsidiary recently entered into an
agreement pursuant to which IBM bundles the dbCommerce[TM] software with IBM's
I-commerce server for database and Web marketing purposes. Furthermore,
Intelligent Interactions and Open Market Inc. recently entered into an
agreement to jointly market products that result from the integration of the
dbCommerce[TM] software with Open Market's Transact commerce server,
LiveCommerce's industrial cataloging software and SecureLink's development
environment. To date, the Company has not realized any revenues from its
dbCommerce[TM] software.
Privacy Protection
In utilizing its targeting technology and software, the Company adheres to
the principles of the Direct Marketing Association regarding privacy concerns.
To address privacy concerns, users are permitted, at their request, to
"opt-out" of demographic profile targeting. When a subscriber objects to
profile targeting, Adfinity[TM] and dbCommerce[TM] automatically deliver ads
based only on site-defined page, location, or context. The Company generally
does not depend on the use of "cookies", which are bits of information keyed to
a specific server, file or directory location that are stored on a user's hard
drive and passed to a Website's server through the user's browser software. The
use of cookies on the Web has met with some resistance by Internet users. Ad
serving systems can manage targeted advertising and control the frequency of
ads delivered to users without using cookies through the use of a user login at
each session, or with the user's permission, such systems can use a cookie to
identify the user for future visits.
Sales and Marketing
The Company believes it maintains one of the largest Internet advertising
sales organizations. The Company sells its services in the United States
through a sales and marketing organization which included 37 salespeople as of
May 31, 1998. These employees are located at the Company's headquarters in New
York, and in the Company's offices in Chicago, Dallas, Los Angeles, San
Francisco, Seattle and the Washington D.C. area.
The Company believes that it has a competitive advantage due to the
geographic breadth of its sales force and its ability to continually improve
its sales and marketing capabilities. The Company continuously leverages the
substantial media experience of its management team to maximize the value of ad
campaigns for both advertisers and Affiliated Websites. The Company also
employs a Website relationship department that surveys Affiliated Websites and
monitors qualitative indicators of service levels in order to continuously
improve its customer service.
24/7 Media believes that advertiser awareness of the Company and its
services is critical to its success. As a result, the Company seeks to
continually communicate with its advertisers and advertising agencies through
its Website, trade publication advertisements, public relations, direct mail,
ongoing customer communications programs, promotional activities, trade shows
and online advertisements over the Company's networks and on third party
Websites.
Intellectual Property
The Company regards its intellectual property as critical to its success,
and relies upon patent, trademark, copyright and trade secret laws in the
United States and other jurisdictions to protect its proprietary rights. The
Company has filed applications with the United States Patent and Trademark
Office to protect certain aspects of its Adfinity[TM] and dbCommerce[TM]
technologies. The Company pursues the protection of its trademarks by applying
to register the trademarks in the United States and (based upon anticipated
use) internationally, and is the owner of a registration for the 24/7 Media
trademark in the United States. There can be no assurance that any of the
Company's trademark registrations or patent applications will be approved or
granted and, if they are granted, that
33
<PAGE>
they will not be successfully challenged by others or invalidated through
administrative process or litigation. Further, if the Company's trademark
registrations are not approved or granted due to the prior issuance of
trademarks to third parties or for other reasons, there can be no assurance
that the Company would be able to enter into arrangements with such third
parties on commercially reasonable terms to allow the Company to continue to
use such trademarks. Patent, trademark, copyright and trade secret protection
may not be available in every country in which the Company's services are
distributed or made available. In addition, the Company seeks to protect its
proprietary rights through the use of confidentiality agreements with
employees, consultants, advisors and others. There can be no assurance that
such agreements will provide adequate protection for the Company's proprietary
rights in the event of any unauthorized use or disclosure, that employees of
the Company, consultants, advisors or others will maintain the confidentiality
of such proprietary information, or that such proprietary information will not
otherwise become known, or be independently developed, by competitors.
The Company's Adfinity[TM] technology collects and utilizes data derived
from user activity on the Company's networks and of the Websites of Web
publishers using the Company's services. This data is used for advertisement
targeting and for predicting advertisement performance. Although the Company
believes that it has the right to use such data, there can be no assurance that
any trade secret, copyright or other protection will be available for such
information or that others will not claim rights to such information. Further,
pursuant to its contracts with Web publishers using the Company's services, the
Company is obligated to keep certain information regarding the Web publisher
confidential.
Legal standards relating to the validity, enforceability and scope of
protection of certain proprietary rights in Internet-related industries are
uncertain and currently evolving. The future viability or value of any
proprietary rights of 24/7 Media is unknown. Steps taken by 24/7 Media to
protect its proprietary rights may not be adequate and third parties may
infringe or misappropriate the Company's proprietary rights. Any such
infringement or misappropriation, should it occur, could have a material
adverse effect on the Company's business, results of operations and financial
condition. Furthermore, there can be no assurance that the Company's business
activities will not infringe upon the proprietary rights of others, or that
other parties will not assert infringement claims against the Company.
Competition
The markets for Internet advertising and related products and services are
intensely competitive and such competition is expected to continue to increase.
The Company believes that its ability to compete depends upon many factors
within and beyond its control, including the timing and market acceptance of
new services and enhancements to existing services developed by the Company and
its competitors, customer service and support, sales and marketing efforts, and
the ease of use, performance, price and reliability of the Company's products
and services. The Company believes it has a competitive advantage due to the
geographic breadth of its sales force and its ability to continually improve
its sales and marketing capabilities.
The Company competes for Internet advertising revenues with large Web
publishers and Web search engine companies, such as America Online, Excite,
Infoseek, Lycos and Yahoo. Further, the 24/7 Network competes with a variety of
Internet advertising networks, including DoubleClick and Rainbow Interactive, a
joint venture of Cablevision Systems Corp. and NBC. In marketing the Company's
networks and its Adfinity[TM] system to Web publishers, the Company also
competes with providers of advertisement servers and related services,
including NetGravity and Accipiter, a division of CMG Information Services,
Inc. In marketing dbCommerce[TM], the Company competes with BroadVision. The
Company also encounters competition from a number of other sources, including
content aggregators, companies engaged in advertising sales networks,
advertising agencies, and other entities which facilitate Internet advertising.
Many of the Company's existing competitors, as well as a number of potential
new competitors, have longer operating histories, greater name recognition,
larger customer bases and significantly greater financial, technical and
marketing resources than the Company. See "Risk Factors--Competition."
Employees
As of May 31, 1998, the Company employed 100 persons, including 61 in
sales, marketing and customer support, 24 in product development, and 15 in
accounting, human resources and administration. The Company is not subject to
any collective bargaining agreements and believes that it enjoys a good
relationship with its employees.
34
<PAGE>
Facilities and Systems
The Company's principal executive offices are located at 1250 Broadway,
New York, New York and consist of approximately 13,000 square feet under a
lease that expires in October 2003; the Company has and expects to exercise in
the next three months an option to lease an additional 13,000 square feet on an
adjacent floor. The Company also leases office space at 915 Broadway, New York,
New York.
In addition, the Company leases office space for its sales, marketing and
product development staff in Chicago, Dallas, Los Angeles, San Francisco and
the Washington D.C. area. The Company believes that its existing facilities,
including the additional space in the executive offices, will be sufficient for
its purposes for the next 12 months.
The Company's Adfinity[TM] ad serving software and hardware are housed at
GlobalCenter in Herndon, Virginia. In the future, the Company may opt to
utilize other GlobalCenter locations in New York and California. GlobalCenter
provides the Company with a secure area to store and operate its computer
systems, capacity communications links and Internet connectivity systems, and
contractual protection against service interruptions.
Legal Proceedings
The Company is not a party to any material legal proceedings.
35
<PAGE>
MANAGEMENT
Executive Officers and Directors
The following table sets forth certain information concerning the
executive officers and directors of the Company:
<TABLE>
<CAPTION>
Name Age Position and Offices
- ---- --- --------------------
<S> <C> <C>
David J. Moore 45 President and Chief Executive Officer and a Director
R. Theodore Ammon 48 Chairman of the Board
Yale R. Brown 43 Executive Vice President--Technology and Operations
and a Director
Jacob I. Friesel 48 Executive Vice President--Sales and Marketing and a
Director
C. Andrew Johns 38 Executive Vice President, Treasurer & Chief Financial
Officer
David Chaney 27 Director
Michael P. Paolucci 27 Director
Jack L. Rivkin 57 Director
Charles W. Stryker, Ph.D. 50 Director
</TABLE>
David J. Moore has been President and Chief Executive Officer and a
Director of the Company since February 1998. Mr. Moore was Chief Executive
Officer of Petry Interactive from December 1995 to February 1998. From 1993 to
1994, Mr. Moore was President of Geomedica, an online service for physicians,
which he sold to Reuters. From 1982 to 1992, Mr. Moore was a Group Vice
President at Hearst/ABC-Viacom Entertainment Services, where he participated in
the launch of Cable Health Network, Lifetime Television, Lifetime Medical
Television, a service targeted to physicians, and HealthLink Television, a
physician waiting room television service. From 1979 to 1982, Mr. Moore had a
television advertising sales position with Turner Broadcasting. Mr. Moore
received a B.A. degree in Communications from Northern Illinois University.
R. Theodore Ammon, Chairman of the Board of the Company, has been Chairman
of the Board of Big Flower Holdings, Inc. and its predecessor company, Big
Flower Press Holdings, Inc. since 1993. From 1990 to 1992, Mr. Ammon was a
General Partner of Kohlberg Kravis Roberts & Co., a New York and San
Francisco-based investment firm, and an executive of such firm prior to 1990.
Mr. Ammon also serves on the board of directors of each of Host Marriott
Corporation, Culligan Water Technologies, Inc. and Samsonite Corporation. Mr.
Ammon received a B.A. degree in Economics from Bucknell University.
Yale R. Brown has been Executive Vice President--Technology and Operations
and a Director since April 1998. Mr. Brown was Chief Executive Officer of
Intelligent Interactions Corporation since February 1995. Mr. Brown held
various positions with Oracle Corporation from 1990 through 1995, including
Vice President of Emerging Technologies, Vice President of the Advanced
Technologies Group of Oracle Consulting, and Vice President of Strategic
Consulting Services for Oracle Complex Systems Corporation, Oracle's systems
integration subsidiary. Mr. Brown was the Director of the Information Resources
Management Practice of Coopers & Lybrand from 1987 to 1990. From 1981 to 1987,
Mr. Brown was a consultant with Booz, Allen & Hamilton Inc. From 1978 to 1980,
Mr. Brown was a Federal Reserve Examiner for the Board of Governors of the
Federal Reserve System. Mr. Brown received a M.B.A. degree in Applied Economics
and a B.A. degree in Political Science from The George Washington University.
Jacob I. Friesel has been Executive Vice President--Sales and Marketing
and a Director of the Company since February 1998. From 1997 to 1998, Mr.
Friesel was President of Katz Millennium Marketing, the Internet media sales
division of Katz Media Group, Inc. He was Vice President, Strategic Planning
for the Katz Television Group from 1994 to 1997. From 1993 to 1994, he was a
Vice President and General Sales Manager of Katz American Television, a leading
advertising representative of major market television stations. He was Vice
President, General Sales Manager of Katz Continental Television from 1991
through 1993, and was employed in various media advertising sales and
management positions with the Katz Agency from 1976 to 1991. Mr. Friesel
received a B.A. degree in Mass Communications from the City University of New
York.
36
<PAGE>
C. Andrew Johns has been Executive Vice President, Treasurer and Chief
Financial Officer since April 1998. From 1996 to 1998, he was co-founder and
Managing Director of Manufacturers Renaissance Network, Inc., which provides
strategic consulting and investment banking services to small and medium-sized
businesses. From 1990 to 1996, Mr. Johns was President and owner of Strathmore
Hill Associates, Inc., an investment banking and strategic consulting firm. Mr.
Johns received a M.B.A. degree from Stanford University Graduate School of
Business and a B.S. degree in Commerce from The University of Virginia. Mr.
Johns is a Chartered Financial Analyst.
David Chaney, Director of the Company, has been an associate at Prospect
Street NYC Discovery Fund, L.P. since July 1996, where he manages a portfolio
of $125 million in funds related to venture capital projects. From June 1995 to
July 1996, Mr. Chaney was an associate at UBS Securities involved in investment
banking, and from June 1993 to June 1995, he was an analyst in the investment
banking division of J.P. Morgan Securities Inc. Mr. Chaney received a B.A.
degree in Psychology from Harvard University.
Michael P. Paolucci, Director of the Company, has been a consultant to the
Company in connection with mergers, acquisitions and other strategic
initiatives since February 1998. Mr. Paolucci is a co-founder of Interactive
Imaginations and was Chief Executive Officer of Interactive Imaginations from
its incorporation in 1994 to February 1998. From 1992 to 1994, Mr. Paolucci was
involved in communications, marketing and public relations for Jupiter
Communications. Mr. Paolucci received a B.A. degree in Economics from Cornell
University.
Jack L. Rivkin, Director of the Company, has been Senior Vice President of
the Investment Group of Travelers Group Inc. since October 1995, where he is
responsible for the management of venture capital and public equity
partnerships for various Travelers Insurance Companies. He is also a director
and member of the investment committee of Greenwich Street Capital, a $625
million merchant banking fund affiliated with Travelers, and an adjunct
professor at Columbia University Business School. From March 1993 to October
1995, Mr. Rivkin was vice chairman and director of Global Research at Smith
Barney. From 1987 to 1992, Mr. Rivkin was director of the Equities Division and
Director of Research of Lehman Brothers. From 1984 to 1987, Mr. Rivkin was
President of PaineWebber Capital, Inc., the merchant banking arm of PaineWebber
Group, and Chairman of Mitchell Hutchins Asset Management. Mr. Rivkin is also a
director of HumaScan Inc., a medical device company, and PRT Group, Inc., an
information technology company. Mr. Rivkin received a M.B.A. degree from
Harvard Business School and a B.A. degree in Metallurgical Engineering from the
Colorado School of Mines.
Charles W. Stryker, Ph.D., Director of the Company, has been President of
IntelliQuest Marketing Information Solutions, Inc. and President of
Zona/Research since 1998. Dr. Stryker served as a Director of IntelliQuest
Information Group Inc. from October 1997 to March 1998. From 1991 to 1997, he
was President of each of MkIS User Forum and Information Technology Forum,
companies providing marketing information, consulting and service products to
executives and technology companies. Dr. Stryker received a B.S. degree and a
M.S. degree in Electrical Engineering and a Ph.D. in Computer Science from New
York University.
Key Employees
Mark A. Burchill has been Senior Vice President of Business Development
and Marketing since February 1998 and was Senior Vice President and co-founder
of Petry Interactive, Inc. from December 1995 to February 1998. In 1994, Mr.
Burchill was Director of International Sales & Development for Petry Media
Corp, a television rep firm. From 1992 to 1994, Mr. Burchill was a market
consultant for the Los Angeles Rams and MTV Networks while also pursuing a
graduate degree. From 1989 to 1992, Mr. Burchill was a Senior Media Planner in
the media department of Young & Rubicam Advertising. Mr. Burchill received a
M.B.A. degree from Anderson School of Management at the University of
California at Los Angeles and a B.A. degree from Hobart College.
Garrett P. Cecchini has been Senior Vice President of National Sales since
February 1998. From February 1997 to February 1998, he was Vice President,
General Manager of Katz Millennium Marketing. From December 1994 to February
1997, Mr. Cecchini was co-founder of Goodman Cecchini Media Design, a Website
development concern, and US Cybersites, a commercial bandwidth reseller. From
1992 to 1994, Mr. Cecchini was Vice President, Director of Sales for Sony
Pictures Entertainment's Columbia TriStar Television Division, a syndicator of
television programming. From January 1991 to December 1992, Mr Cecchini was
Senior Vice President, Director of Sales for Telemundo Group, Inc., a Spanish
language television network. From 1989 to 1991, Mr. Cecchini was Vice President
of Sales for WHDH-TV, then a CBS Network affiliate in the Boston television
market. From 1982 to 1989, Mr Cecchini was Vice President and General Sales
Manager for TeleRep Inc., a division of Cox
37
<PAGE>
Communications. Prior to 1982, Mr. Cecchini was a Senior Account Executive with
Petry Television Inc., a TV advertisement company. Mr. Cecchini received a B.S.
degree in Accounting and Marketing from Manhattan College.
Scott E. Cohen has been Senior Vice President--Sponsorships & Syndication,
and General Manager of the ContentZone and Riddler.com since February 1998. Mr.
Cohen was Senior Vice President of Sales for Petry Interactive from August 1997
to February 1998, and Vice President of Business Development at Petry
Interactive from November 1996 to August 1997. From 1994 to 1996, Mr. Cohen was
Manager, Business Development and Account Executive, Syndicated Television
Sales for New World Communications and from 1992 to 1994, Mr. Cohen was
Director of Real Estate at Revlon. From 1983 to 1992, Mr. Cohen was Chief
Executive Officer and owner of SEC Enterprises, Inc., a real estate brokerage
and investment company. From 1989 to 1990, Mr. Cohen was Manager of the Real
Estate Consulting Services Group at Coopers & Lybrand. Mr. Cohen received a
M.B.A. degree from the William E. Simon School of Business Administration at
the University of Rochester.
Geoff Judge has been Senior Vice President Technology & Operations since
February 1998. Mr. Judge was President of Interactive Imaginations from
September 1997 to February 1998 and was Executive Vice President, Marketing and
Sales from May 1997 to September 1997. From 1995 to 1997, Mr. Judge was Vice
President, Marketing for iMarket Inc., a software company. From 1994 to 1995,
Mr. Judge was Vice President--Marketing at Doubleday Direct, where he managed
the membership base of the company's nine book clubs. From 1985 to 1994, Mr.
Judge was at American Express in numerous roles including Vice President and
General Manager, Travel & Corporate Insurance Group, where he managed an
operating group of over 70 people, and a $90 million portfolio of products that
were direct marketed to cardmembers. Mr. Judge received a M.B.A. degree from
the Columbia University Graduate School of Business and a B.A. degree in
Economics from Northwestern University.
Mark E. Moran has been Senior Vice President and General Counsel since
April 1998. From June 1993 to April 1998, Mr. Moran was an associate attorney
at Proskauer Rose LLP. From April 1986 to May 1993, Mr. Moran was a financial
analyst in the Securities Processing Division of The Bank of New York. Mr.
Moran received a J.D. degree from Fordham Law School, a M.B.A. degree in
Finance from Fordham Graduate School of Business, and a B.A. degree in
Economics from The University of Virginia.
Stuart D. Shaw has been Senior Vice President of Finance & Administration
since February 1998. He was Vice President and Chief Financial Officer of Petry
Interactive, Inc. from October 1997 to February 1998. From 1991 to 1997, Mr.
Shaw was Director of Financial Reporting, then Vice President of Customer
Resources for Penguin Books, a trade publisher. From 1989 to 1991, Mr. Shaw was
Controller for Warren, Gorham & Lamont, a publisher of professional resource
literature. From 1983 to 1989, Mr. Shaw was an auditor with Arthur Andersen. Mr
Shaw received a B.B.A. degree in Public Accounting from Pace University. Mr.
Shaw is a Certified Public Accountant.
Matthew B. Walker has been Senior Vice President and Chief Technology
Officer since April 1998. Mr. Walker was co-founder and Senior Vice President
of Intelligent Interactions Corporation from February 1995 to April 1998. From
August 1990 to February 1995, Mr. Walker worked in a series of positions at
Oracle Corporation including director of the Emerging Technologies Group,
Manager of Design and Development of the interactive television trial system
for Bell Atlantic Video Services, Inc., and director of Advanced Technologies.
Mr. Walker received a M.B.A. degree from George Mason University and a B.S.
degree in Systems Engineering and Economics from The University of Virginia.
Committees of the Board of Directors
Audit Committee. The Audit Committee, composed of Messrs. Ammon, Rivkin
and Chaney, who are each independent directors who are not employees of the
Company ("Independent Directors"), makes recommendations concerning the
engagement of independent public accountants, reviews with the independent
public accountants the plans and results of the audit engagement, approves
professional services provided by the independent public accountants, reviews
the independence of the independent public accountants, considers the range of
audit and non-audit fees and reviews the adequacy of the Company's internal
accounting controls.
Compensation Committee. The Compensation Committee, composed of Messrs.
Moore, Rivkin and Stryker, approves the salaries and other benefits of the
executive officers of the Company and administers any non-stock based bonus or
incentive compensation plans of the Company (excluding any cash awards intended
to qualify for the exception for performance-based compensation under Section
162(m) of the Internal Revenue Code of 1986,
38
<PAGE>
as amended (the "Code")). In addition, the Compensation Committee consults with
the Company's management regarding pension and other benefit plans, and
compensation policies and practices of the Company.
Stock Option Committee. The Stock Option Committee, composed of Messrs.
Ammon, Rivkin and Chaney, directors who qualify as outside directors under
Section 162(m) of the Code and as non-employee directors under Rule 16b-3(c) of
the Securities Exchange Act of 1934, as amended, (the "Exchange Act")
administers any stock-based incentive plans of the Company, including the 1998
Stock Incentive Plan. In addition, the Stock Option Committee is responsible
for granting any cash awards intended to qualify for the exception for
performance-based compensation under Section 162(m) of the Code.
Election of Directors
Prior to the first annual meeting of the stockholders of the Company, the
Company's Board of Directors will be divided into three classes. Directors of
each class will be elected at the annual meeting of stockholders held in the
year in which the term for such class expires and will serve thereafter for
three years. No determination has been made as to which directors will be
members of each class. See "Description of Capital Stock--Delaware Anti-Takeover
Law and Certain Charter Provisions."
Executive Compensation and Employment Agreements
The Company has entered into employment agreements with its executive
officers and several of its key employees providing for annual compensation in
excess of $100,000. The material terms of such employment agreements generally
are as follows: (i) the employment term runs through December 31, 1998 (except
as set forth below) and is automatically renewable for successive one-year
terms unless either party gives written notice to the other at least six months
prior to the expiration of the then employment term; (ii) during the employment
term and thereafter, the Company will indemnify the executive to the fullest
extent permitted by law, in connection with any claim against such executive as
a result of such executive serving as an officer or director of the Company or
in any capacity at the request of the Company in or with regard to any other
entity, employee benefit plan or enterprise; (iii) any dispute or controversy
arising under or in connection with the employment agreement (other than
injunctive relief) shall be settled exclusively by arbitration; (iv) the
agreement may be terminated at any time by the Company with or without cause
(as defined in the agreement) and, if an executive is terminated without cause
(including the Company giving notice of non-renewal), he will receive severance
pay in an amount generally equal to six months' base salary and bonus, plus
continued medical benefits for a period equal to the severance period; and (v)
if termination is the result of the executive's death or disability, the
Company will pay to the executive or his estate an amount equal to six months'
base salary at his then current rate of pay (reduced in the case of disability
by his long-term disability policy payments).
The agreement of David J. Moore extends through January 1, 2001. Mr.
Moore's agreement provides for an annual base salary of $225,000 and a target
bonus of $275,000, $300,000 and $325,000 for 1998, 1999, and 2000,
respectively. Mr. Moore was also awarded 225,000 shares of restricted stock
that vest over three years. Upon termination by the Company without cause, Mr.
Moore shall be entitled to receive severance pay in an amount equal to two
times base salary, plus the maximum bonus for which he is eligible during the
fiscal year of termination.
The agreements of the other executive officers of the Company provide for
base salaries between $140,000 and $160,000 and incentives, based on attainment
of corporate goals, between $45,000 and $121,000. The agreement of Yale R.
Brown extends through December 31, 1999 and permits the executive to terminate
the agreement and receive six months' salary and bonus if the executive is
asked to increase his one way commute more than 25 miles. The agreement of C.
Andrew Johns extends through December 31, 1999.
1998 Stock Incentive Plan
Background; Purpose; Eligibility. On February 13, 1998, the Board of
Directors and the stockholders of the Company approved the 1998 Stock Incentive
Plan (the "Incentive Plan"). The Incentive Plan was subsequently amended and
restated, effective as of February 13, 1998, to reflect certain changes. The
following description of the Incentive Plan is intended only as a summary and
is qualified in its entirety by reference to the Incentive Plan. The purpose of
the Incentive Plan is to enhance the profitability and value of the Company and
its affiliates for the benefit of their stockholders by enabling the Company
(i) to offer employees of the Company stock based incentives and other equity
interests in the Company, thereby creating a means to raise the level of stock
ownership by employees in order to attract, retain and reward such employees
and strengthen the mutuality of interests between
39
<PAGE>
employees and the Company's stockholders, and (ii) to make equity based awards
to non-employee directors thereby attracting, retaining and rewarding such
non-employee directors and strengthening the mutuality of interests between
non-employee directors and the stockholders. All employees of the Company and
its subsidiaries that satisfy certain requirements are eligible to be granted
awards under the Incentive Plan. In addition, non-employee directors of the
Company will receive awards of non-qualified stock options under the Incentive
Plan, but are not eligible for other awards thereunder.
Administration. The Incentive Plan will be administered by the Stock
Option Committee of the Board of Directors of the Company which, to the extent
legally required, will be comprised solely of two or more directors qualifying
as outside directors under Section 162(m) of the Code and satisfying any
requirements of Rule 16b-3 of the Exchange Act. The Stock Option Committee will
have full authority and discretion, subject to the terms of the Incentive Plan,
to determine those individuals eligible to receive awards and the amount and
type of awards. Terms and conditions of awards will be set forth in written
grant agreements, the terms of which will be consistent with the terms of the
Incentive Plan. Awards under the Incentive Plan may not be made on or after the
tenth anniversary of the date of its adoption, but awards granted prior to such
date may extend beyond that date.
Available Shares and Other Units. A maximum of shares of Common Stock
may be issued or used for reference purposes pursuant to the Incentive Plan.
The maximum number of shares of Common Stock subject to each issue of stock
options or stock appreciation rights that may be granted to any individual
under the Incentive Plan is for each fiscal year of the Company during the
term of the Incentive Plan. If a stock appreciation right is granted in tandem
with a stock option, it shall apply against the individual limits for both
stock options and stock appreciation rights, but only once against the maximum
number of shares available under the Incentive Plan.
In general, upon the cancellation or expiration of an award, the unissued
shares of Common Stock subject to such awards will again be available for
awards under the Incentive Plan, but will still count against the individual
specified limits.
The Stock Option Committee may make appropriate adjustments to the number
of shares available for awards and the terms of outstanding awards under the
Incentive Plan to reflect any change in the Company's capital stock, split-up,
stock dividend, special distribution to stockholders, combination or
reclassification with respect to any outstanding series or class of stock or
consolidation, merger or sale of all or substantially all of the assets of the
Company.
Amendments. The Incentive Plan provides that it may be amended by the
Board of Directors, except that no such amendment, without stockholder approval
(to the extent such approval is required by Rule 16b-3 of the Exchange Act, the
exception for performance-based compensation under Section 162(m) of the Code
or, to the extent applicable to incentive stock options, under Section 422 of
the Code), may increase the aggregate number of shares of Common Stock reserved
for awards or the maximum individual limits for any fiscal year, change the
classification of employees and non-employee directors eligible to receive
awards, decrease the minimum option price of any option, extend the maximum
option period under the Incentive Plan, change any rights with respect to
non-employee directors or make any other change that requires stockholder
approval under, to the extent applicable, Rule 16b-3 of the Exchange Act, the
exception for performance-based compensation under Section 162(m) of the Code
or, to the extent applicable to incentive stock options, Section 422 of the
Code. The Incentive Plan may not be amended without the approval of the
stockholders of the Company in accordance with the applicable laws or other
requirements to (i) increase the aggregate number of shares of Common Stock
that may be issued under the Incentive Plan, (ii) decrease the minimum option
price of any option, or (iii) make any other amendment that would require
stockholder approval under the rules of any exchange or system on which the
Company's securities are listed or traded at the request of the Company.
Types of Awards. The Incentive Plan provides for the grant of any or all
of the following types of awards to eligible employees: (i) stock options,
including incentive stock options and non-qualified stock options; (ii) stock
appreciation rights, in tandem with stock options or freestanding; and (iii)
restricted stock. In addition, the Incentive Plan provides for the one-time
non-discretionary award of stock options to non-employee directors of the
Company. Each of these types of awards is discussed in more detail below.
Awards may be granted singly, in combination, or in tandem, as determined by
the Stock Option Committee.
40
<PAGE>
Stock Options. Under the Incentive Plan, the Stock Option Committee may
grant awards in the form of options to purchase shares of Common Stock. Options
may be in the form of incentive stock options or non-qualified stock options.
The Stock Option Committee will, with regard to each stock option, determine
the number of shares subject to the option, the term of the option (which shall
not exceed ten years, provided, however, that the term of an incentive stock
option granted to a ten percent stockholder of the Company shall not exceed
five years), the exercise price per share of stock subject to the option, the
vesting schedule (if any), and the other material terms of the option. No
option may have an exercise price less than the fair market value of the Common
Stock at the time of grant (or, in the case of an incentive stock option
granted to a ten percent stockholder of the Company, 110% of fair market
value), except that, in the case of certain modifications of the stock options
that are deemed to be new issuances under the Code, the exercise price may
continue to be the original exercise price.
The option price upon exercise may, to the extent determined by the Stock
Option Committee at or after the time of grant, be paid by a participant in
cash, in shares of Common Stock owned by the participant (free and clear of any
liens and encumbrances), in shares of restricted stock valued at fair market
value on the payment date as determined by the Stock Option Committee (without
regard to any forfeiture restrictions applicable to restricted stock), by a
reduction in the number of shares of Common Stock issuable upon exercise of the
option or by such other method as is approved by the Stock Option Committee. If
an option is exercised by delivery of shares of restricted stock, the shares of
Common Stock acquired pursuant to the exercise of the option will generally be
subject to the same restrictions as were applicable to such restricted stock.
All options may be made exerciseable in installments, and the exerciseability
of options may be accelerated by the Stock Option Committee. The Stock Option
Committee may at any time offer to buy an option previously granted on such
terms and conditions as the Stock Option Committee shall establish. The Stock
Option Committee may in its discretion reprice options or substitute options
with lower exercise prices in exchange for outstanding options that are not
incentive stock options, provided that the exercise price of substitute options
or repriced options shall not be less than the fair market value at the time of
such repricing or substitution. Options may also, at the discretion of the
Stock Option Committee, provide for "reloads," whereby a new option is granted
for the same number of shares as the number of shares of Common Stock or
restricted stock used by the participant to pay the option price upon exercise.
Restricted Stock. The Incentive Plan authorizes the Stock Option Committee
to award shares of restricted stock. Upon the award of restricted stock, the
recipient has all rights of a stockholder with respect to the shares, unless so
specified by the Stock Option Committee at the time of grant, subject to the
conditions and restrictions generally applicable to restricted stock or
specifically set forth in the recipient's restricted stock award agreement.
Unless otherwise determined by the Committee at grant, payment of dividends, if
any, shall be deferred until the date that the relevant share of restricted
stock vests.
Recipients of restricted stock are required to enter into a restricted
stock award agreement with the Company which states the restrictions to which
the shares are subject and the date or dates or criteria on which such
restrictions will lapse. Within the limits of the Incentive Plan, the Stock
Option Committee may provide for the lapse of such restrictions in installments
in whole or in part or may accelerate or waive such restrictions at any time.
Stock Appreciation Rights ("SARs"). The Incentive Plan authorizes the
Stock Option Committee to grant SARs either with a stock option ("Tandem SARs")
or independent of a stock option ("Non-Tandem SARs"). A SAR is a right to
receive a payment either in cash or Common Stock as the Stock Option Committee
may determine, equal in value to the excess of the fair market value of a share
of Common Stock on the date of exercise over the reference price per share of
Common Stock established in connection with the grant of the SAR. The reference
price per share covered by an SAR will be the per share exercise price of the
related option in the case of a Tandem SAR and will be not less than the per
share fair market value of the Common Stock on the date of grant (or any other
date chosen by the Stock Option Committee) in the case of a Non-Tandem SAR
subject to the same exception that applies to stock options.
A Tandem SAR may be granted at the time of the grant of the related stock
option or, if the related stock option is a non-qualified stock option, at any
time thereafter during the term of the stock option. A Tandem SAR generally may
be exercised only at the times and to the extent the related stock option is
exercisable. A Tandem SAR is exercised by surrendering the same portion of the
related option. A Tandem SAR expires upon the termination of the related stock
option.
41
<PAGE>
A Non-Tandem SAR will be exerciseable as provided by the Stock Option
Committee and will have such other terms and conditions as the Stock Option
Committee may determine. A Non-Tandem SAR may have a term no longer than ten
years from its date of grant. A Non-Tandem SAR is subject to acceleration of
vesting or immediate termination upon termination of employment in certain
circumstances.
The Stock Option Committee is also authorized to grant "limited SARs,"
either as Tandem SARs or Non-Tandem SARs. Limited SARs would become exercisable
only upon the occurrence of a Change in Control (as defined in the Incentive
Plan) or such other event as the Stock Option Committee may designate at the
time of grant or thereafter.
Change of Control. In the event of a merger of the Company, the sale of
substantially all of its assets or securities representing 40% or more of the
total combined voting power of the Company's then outstanding securities or
upon certain changes in membership of the Board of Directors during any
two-year period, then (i) each option and related SARs will be fully vested and
immediately exerciseable, or each option may be repurchased by the Company for
an amount of cash equal to the excess of the Change of Control Price (as
defined in the Incentive Plan) over the exercise price, and (ii) the
restrictions on shares of restricted stock shall lapse as if the applicable
restriction period had ended.
Awards to Non-employee Directors
Directors of the Company do not receive cash compensation for their
service as directors or committee members, but are reimbursed for their
reasonable expenses in attending meetings of the Board of Directors or
committees of the Board of Directors. The Incentive Plan provides for the
grant, at the discretion of the Stock Option Committee, of non-qualified
options to non-employee directors pursuant to the terms of the Incentive Plan.
In February 1998, Charles W. Stryker was granted options to purchase
shares of Common Stock in connection with his service on the Board of
Directors. No other non-employee director has received any non-cash
compensation for serving on the Board of Directors.
42
<PAGE>
CERTAIN TRANSACTIONS
Formation of the Company
The Company was incorporated in Delaware on January 23, 1998. On February
24, 1998, the Company simultaneously consummated the merger of each of
Advercomm and Petry with and into the Company, and on April 9, 1998,
Interactive Imaginations was merged with and into the Company. On April 13,
1998, the Company acquired Intelligent Interactions as a wholly-owned
subsidiary of the Company and as of June 1, 1998, the Company acquired
CliqNow!. See "Prospectus Summary--The Company--Formation of the Company" and
"--Recent Developments."
For clarity of presentation, share numbers and per share prices for the
transactions described below do not reflect the Preferred Stock Conversion to
be effected at the closing of the Offering and have not been adjusted to give
effect to the Stock Split to be effected prior to the closing of the Offering.
In addition, the Company intends to file a restated certificate of
incorporation immediately prior to the consummation of the Offering to decrease
the number of authorized shares of common stock and preferred stock.
Investments of the The Travelers Insurance Company prior to the Merger
In January 1997, the Company entered into a Securities Purchase Agreement
with certain investors, including The Travelers Insurance Company, for the sale
and issuance of convertible perferred shares, subject to anti-dilution
adjustment, for an aggregate purchase price of approximately $500,000. In
addition, in 1997 and January 1998, the Company issued to The Travelers
Insurance Company senior convertible notes in an aggregate principal amount of
$1,400,000 and also issued warrants in connection therewith. Jack L. Rivkin, a
director of the Company, is the Senior Vice President of the Investment Group
of Travelers Group Inc.
Merger of Petry, Advercomm and Interactive Imaginations into the Company
Pursuant to an Agreement and Plan of Merger, dated February 2, 1998, among
Interactive Imaginations, 24/7 Acquisitions Corp. (a wholly-owned subsidiary of
Interactive Imaginations), Petry and Advercomm, each of Petry and Advercomm
were merged with and into 24/7 Acquisitions Corp., and 24/7 Acquisitions Corp.
changed its name to 24/7 Media, Inc. Upon consummation of the Initial Merger,
each share of common stock of Petry was converted into 83,954.95 shares of
Common Stock of the Company, and each share of common stock of Advercomm was
converted into 1,049.44 shares of Common Stock of the Company.
In connection with the Initial Merger, Interactive Imaginations entered
into a Securities Purchase Agreement, dated February 25, 1998, with certain
investors (including David J. Moore, the President and Chief Executive Officer
of the Company), (the "Securities Purchase Agreement") for the sale and
issuance of preferred shares and warrants in a private placement for total
proceeds of $10,060,002. Also in connection with the Initial Merger,
Interactive Imaginations entered into a Shareholders' Agreement, dated February
25, 1998, among The Travelers Insurance Company, Prospect Street NYC Discovery
Fund, L.P., Big Flower Digital Services, Inc. and certain individual investors
(the "Shareholders' Agreement"), which provided, among other things, the
shareholders with a right to elect three members of the seven member board of
directors of the Company and a right of first refusal with respect to transfers
of Company securities. The Shareholders' Agreement will be terminated upon the
consummation of this Offering. In connection with the Initial Merger, certain
shareholders of the Company were granted registration rights with respect to
their shares of Common Stock. See "Description of Capital Stock--Registration
Rights."
Petry Interactive entered into an oral consulting agreement with
Manufacturers Renaissance Network, Inc. ("MRN"), a corporation of which C.
Andrew Johns, the Executive Vice President, Treasurer and Chief Financial
Officer of the Company, was an officer and a 50% stockholder, pursuant to which
MRN was paid $75,000 and Class C Warrants to purchase 75,000 shares of Common
Stock at an exercise price of $0.952 per share for consulting services rendered
in connection with the Merger. 24/7 Media also paid MRN a consulting fee of
approximately $33,000 for services rendered in connection with the acquisition
of Intelligent Interactions.
On February 24, 1998, Interactive Imaginations and Michael P. Paolucci, a
director of the Company, entered into a Confidential Separation Agreement and
General Release ("Separation Agreement") pursuant to which Mr. Paolucci's
employment as an executive, but not as a Director, of Interactive Imaginations
was terminated as of February 24, 1998. The terms of the Separation Agreement
generally provide that Mr. Paolucci and Interactive Imaginations agreed to
release and discharge the other party (and its successors and assigns) from all
causes of
43
<PAGE>
action, claims, judgments, obligations, damages or liabilities. Interactive
Imaginations agreed to issue to Mr. Paolucci Class C Warrants to purchase up to
2,500,000 shares of Common Stock at an exercise price of $0.952 per share. In
addition, Interactive Imaginations agreed to extend the term from January 31,
2000 to January 31, 2005 in respect of a fully vested option held by Mr.
Paolucci to purchase 52,000 shares of Interactive Imaginations common stock at
$0.43 per share.
Interactive Imaginations also entered into a Consulting Agreement, dated
as of January 1, 1998 with Neterprises, Inc. ("Consulting Agreement"), pursuant
to which Mr. Paolucci, President and sole stockholder of Neterprises, Inc.,
agreed to provide management and consulting services to Interactive
Imaginations for a term of up to one year in connection with the identification
and evaluation of potential strategic relationships and potential acquisition
targets. In return for such services, Mr. Paolucci received a lump sum payment
of $180,000 and currently receives a monthly fee of $12,500.
Intelligent Interactions Acquisition
Pursuant to an Agreement and Plan of Merger, dated as of April 9, 1998,
among 24/7 Media, Inc., Interactions Acquisition Corp. and Intelligent
Interactions Corporation, Interactions Acquisition Corp., a wholly-owned
subsidiary of the Company, was merged with and into Intelligent Interactions.
Shareholders of Intelligent Interactions, including Yale R. Brown, Executive
Vice President-Technology and Operations of the Company, and Trinity Ventures,
received shares of capital stock of the Company. In connection with the
acquisition of Intelligent Interactions, certain shareholders (i) entered into
an amended and restated version of the Shareholders' Agreement and (ii) were
granted registration rights with respect to their shares of Common Stock. See
"Description of Capital Stock--Registration Rights."
During 1995 and 1996, Intelligent Interactions borrowed $56,000 and
$55,000, respectively, from Yale R. Brown, who was the founder and principal
stockholder of Intelligent Interactions. All amounts outstanding at September
6, 1996, under these notes, plus accrued interest on those amounts were
converted into one instrument in the amount of $113,856. During 1997, the full
outstanding balance was paid on this obligation.
Future Transactions
The Board of Directors of the Company has adopted a policy that future
transactions between the Company and its officers, directors, principal
stockholders and their affiliates will be subject to approval of a majority of
the Independent Directors, and will be on terms no less favorable to the
Company than could be obtained from unaffiliated third parties.
Other
For information regarding the grant of stock options to executive officers
and directors, see "Management--
Awards to Non-employee Directors", "--Executive Compensation and Employment
Agreements", "--1998 Stock Incentive Plan" and "Security Ownership of Certain
Beneficial Owners and Management."
44
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information regarding beneficial ownership
of the Common Stock as of May 31, 1998, by: (i) each person who the Company
knows to own beneficially more than 5% of the Common Stock; (ii) each of 24/7
Media's directors and executive officers; and (iii) 24/7 Media's current
directors and executive officers as a group.
<TABLE>
<CAPTION>
Ownership After Offering
Ownership Prior to Ownership After and Over-Allotment
Offering Offering (2) Shares Option (3)
------------------------ ------------------------ Subject to -----------------------
Over-
Number Number Allotment Number
Beneficial Owner(1) of Shares Percentage of Shares Percentage Option of Shares Percentage
- -------------------------- ----------- ------------ ----------- ------------ ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
David J. Moore (4) (5) 8.5%
R. Theodore Ammon (6) 14.3
Yale R. Brown (4) (7) 7.2
Jacob I. Friesel (4) 6.9
C. Andrew Johns (4) (8) *
Garrett P. Cecchini (4) 6.9
Scott E. Cohen (4) 5.5
David Chaney (9) 14.3
Michael P. Paolucci (10) 7.3
Jack L. Rivkin (11) 21.0
Charles W. Stryker --
Trinity Ventures (12) 6.2
All directors and
executive officers as
a group (9 persons) 64.2%
</TABLE>
- ----------------
* Represents less than 1% of the outstanding Common Stock.
(1) Applicable percentage ownership is based on shares of Common
Stock outstanding as of May 31, 1998 (which assumes full conversion of the
Series A Preferred Stock). Beneficial ownership is determined in
accordance with the rules of the Securities and Exchange Commission and
generally includes voting or investment power with respect to securities,
subject to community property laws, where applicable. Shares of Common
Stock subject to options or warrants that are presently exercisable within
60 days of May 31, 1998 and beneficially owned by the person holding such
options and warrants are treated as outstanding for the purpose of
computing the percentage ownership for such person are treated as
outstanding, but are not treated as outstanding for the purpose of
computing the percentage ownership of any other person.
(2) Assumes that the Underwriters' over-allotment option to purchase up to
shares is not exercised.
(3) Assumes that the Underwriters' over-allotment option to purchase
shares is exercised in full.
(4) The address of Messrs. Moore, Brown, Friesel, Johns, Cecchini and Cohen is
c/o 24/7 Media, Inc., 1250 Broadway, New York, New York 10001.
(5) Represents shares, Class A warrants to purchase shares and
Class B warrants to purchase shares. Includes shares of
Common Stock owned by Mr. Moore's wife, as to which Mr. Moore expressly
disclaims beneficial ownership.
(6) Represents shares, Class A warrants to purchase shares and Class B
warrants to purchase shares held by Big Flower Digital Services, Inc., an
indirect subsidiary of Big Flower Holdings, Inc. Mr. Ammon is the Chairman
of the Board of Directors of the Company and of Big Flower Holdings, Inc.
Mr. Ammon does not own any shares of Common Stock of the Company in his
individual capacity and expressly disclaims beneficial ownership of the
shares held by Big Flower Digital Services, Inc. The address of each of
these entities is c/o Big Flower Holdings, Inc., 3 East 54th Street, New
York, New York 10022.
(7) Represents shares, Class A warrants to purchase shares, Class B warrants
to purchase shares and Class C warrants to purchase shares.
(8) Represents Class C warrants to purchase shares.
(9) Represents shares, Class A warrants to purchase shares and Class B
warrants to purchase shares held by Prospect Street NYC Discovery Fund,
L.P. and shares, Class A warrants to purchase shares and Class B warrants
to purchase shares held by Prospect Street NYC Co-Investment Fund, L.P.
Mr. Chaney is a director of the Company and is an associate of Prospect
Street NYC Discovery Fund, L.P. Mr. Chaney does not own any shares of
Common Stock of the Company in his individual
45
<PAGE>
capacity and expressly disclaims beneficial ownership of the shares held
by Prospect Street NYC Discovery Fund, L.P. and Prospect Street NYC
Co-Investment Fund, L.P. The address of each of these entities is c/o
Prospect Street NYC Discovery Fund, L.P., 250 Park Avenue, 17th floor, New
York, New York 10177.
(10) Represents shares and Class C warrants to purchase shares.
Mr. Paolucci is a director of the Company and his address is c/o 24/7
Media, Inc., 1250 Broadway, New York, New York 10001.
(11) Represents shares, Class A warrants to purchase shares and
Class B warrants to purchase shares held by The Travelers
Insurance Company, and shares held by Travelers Indemnity. Mr. Rivkin
is a director of the Company and is Senior Vice President of the
Investment Group of Travelers Group Inc., an affiliate of The Travelers
Insurance Company and Travelers Indemnity. Mr. Rivkin does not own any
shares of Common Stock of the Company in his individual capacity and
expressly disclaims beneficial ownership of the shares held by The
Travelers Insurance Company and Travelers Indemnity. The address of each
of these entities is c/o Travelers Group Inc., 388 Greenwich Street, 36th
floor, New York, New York 10013.
(12) Represents shares, Class A warrants to purchase shares, Class B
warrants to purchase shares and Class C warrants to purchase
shares held by Trinity Ventures V, L.P., and shares, Class A warrants
to purchase , Class B warrants to purchase shares and Class C
warrants to purchase shares held by Trinity V Side-by-Side Fund, L.P.
Trinity Ventures, L.P. is the general partner of each of these funds. The
address of these entities is c/o Trinity Ventures, 3000 Sand Hill Road,
Building 1, Suite 240, Menlo Park, California 94025.
46
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The following description of 24/7 Media's capital stock is not complete
and should be read in conjunction with (i) applicable provisions of Delaware
law and (ii) the provisions of the Company's certificate of incorporation and
by-laws, copies of which have been filed as exhibits to the registration
statement of which this prospectus is a part. The Company intends to file an
amended and restated certificate of incorporation ("Certificate of
Incorporation") immediately prior to the consummation of the Offering. The
following description of the Company's capital stock is based upon the amended
and restated Certificate of Incorporation.
The authorized capital stock of 24/7 Media consists of shares of
Common Stock, par value $.01 per share, and shares of Preferred Stock, par
value $.01 per share, which may be issued in one or more classes and series.
Upon consummation of this offering, there will be shares of Common
Stock and no shares of Preferred Stock issued and outstanding.
Common Stock
Each holder of Common Stock is entitled to one vote per share of record on
all matters to be voted upon by the stockholders. Holders do not have
cumulative voting rights. Stockholders casting a plurality of the votes of
stockholders entitled to vote in an election of directors may elect all of the
directors. Subject to the preferential rights of any Preferred Stock that may
at the time be outstanding, each share of Common Stock will have an equal and
ratable right to receive dividends when, if, and as declared from time to time
by the board of directors. 24/7 Media may be subject to certain future
agreements which restrict the payment of dividends. 24/7 Media does not
anticipate paying cash dividends in the foreseeable future. See "Dividend
Policy."
If 24/7 Media is liquidated, dissolved or subject to winding up, then
holders of Common Stock are entitled to an equal share of all assets remaining
after payments to creditors and after satisfaction of any liquidation
preference of shares of Preferred Stock that may at the time be outstanding.
Holders of Common Stock have no preemptive, subscription, conversion or
redemption rights and are not subject to further calls or assessments by 24/7
Media. The outstanding shares of Common Stock are validly issued, fully paid
and nonassessable. The shares of Common Stock offered by 24/7 Media in this
offering will also be, when issued and paid for, validly issued, fully paid and
nonassessable.
Preferred Stock
The Company's Certificate of Incorporation authorizes the board of
directors, without any vote or action by the stockholders (subject to
applicable law, regulations and stock exchange rules) to issue up to
shares of Preferred Stock in one or more classes and series and to fix the
designations, preferences, rights, qualifications, limitations and restrictions
thereof, including the voting rights, dividend rights, dividend rate,
conversion rights, terms of redemption (including sinking fund provisions),
redemption price or prices, liquidation preferences and number of shares
constituting any series. Although it presently has no intention to do so, the
Board of Directors could issue Preferred Stock with voting and conversion
rights that could adversely affect the voting powers of the holders of the
Common Stock and the market price of the Common Stock. The issuance of
Preferred Stock may also have the effect of delaying, deferring or preventing a
change of control of 24/7 Media without further action by the stockholders.
Such issuance may also discourage bids for the Common Stock at a premium over
the market price.
Registration Rights
Pursuant to the terms of the Registration Rights Agreement, dated as of
April 9, 1998, among the Company and the investors named therein, after the
closing of the Offering, the holders of shares of Common Stock will be
entitled to certain registration rights with respect to the registration of
such shares under the Securities Act. In addition, pursuant to certain stock
purchase agreements, certain former shareholders of Interactive Imaginations
holding approximately shares of Common Stock have registration rights with
respect to the registration of such shares under the Securities Act. Pursuant
to such Registration Rights Agreements, the holders of such shares are entitled
to demand that the Company register their shares under the Securities Act,
subject to certain limitations. Subject to limited exceptions, the Company is
not required to effect more than two such registrations for certain investors
and three such registrations for certain other investors pursuant to such
demand registration rights. In addition, the holders of such shares of Common
Stock will be entitled to certain piggyback registration rights with respect to
the registration of such shares of Common Stock under the Securities Act. In
the event that the Company proposes to register any shares of Common Stock
under the Securities Act, either for its account or for the account
47
<PAGE>
of other security holders, the holders of shares having piggyback registration
rights are entitled to receive notice of such registration and are entitled to
include their shares therein, subject to certain limitations. Further, at any
time after the Company becomes eligible to file a registration statement on
Form S-3, such holders may require the Company to file registration statements
under the Securities Act on Form S-3 with respect to their shares of Common
Stock. These registration rights are subject to certain conditions and
limitations, among them the right of the underwriters of an offering to limit
the number of shares of Common Stock held by security holders with registration
rights to be included in such registration. The Company is generally required
to bear all of the expenses of all such registrations, except underwriting
discounts and commissions. Registration of any of the shares of Common Stock
held by security holders with registration rights would result in such shares
becoming freely tradeable without restriction under the Securities Act
immediately upon effectiveness of such registration.
Delaware Anti-Takeover Law and Certain Charter Provisions
24/7 Media is subject to Section 203 of the Delaware General Corporation
Law ("Section 203") which generally prohibits a Delaware corporation from
engaging in any business combination with any interested stockholder for a
period of three years following the date that such stockholder became an
interested stockholder. Section 203 applies unless: (i) prior to the date such
stockholder became an interested stockholder, the board of directors of the
corporation approved either the business combination or the transaction which
resulted in the stockholder becoming an interested stockholder; (ii) upon
consummation of the transaction which resulted in the stockholder becoming an
interested stockholder, the interested stockholder owned at least 85% of the
voting stock of the corporation outstanding at the time the transaction
commenced (the number of shares outstanding excludes those shares owned (A) by
persons who are both directors and officers, and (B) by employee stock plans in
which participants do not have the right to determine confidentially whether
shares held subject to the plan will be tendered in a tender or exchange
offer); or (iii) on or after such date the stockholder became an interested
stockholder, the business combination is approved by the board of directors and
authorized at an annual or special meeting of stockholders (not by written
consent) by the affirmative vote of at least 662/3% of the outstanding voting
stock which is not owned by the interested stockholder.
Section 203 defines a business combination to include: (i) any merger or
consolidation involving the corporation and the interested stockholder; (ii)
any sale, transfer, pledge or other disposition of 10% or more of the assets of
the corporation involving the interested stockholder; (iii) certain
transactions which result in the issuance or transfer by the corporation of any
stock of the corporation to the interested stockholder; (iv) any transaction
involving the corporation which increases the proportionate share of the stock
of any class or series of the corporation beneficially owned by the interested
stockholder; or (v) the receipt by the interested stockholder of any loans,
advances, guarantees, pledges or other financial benefits provided through the
corporation. In general, Section 203 defines an interested stockholder as any
entity or person beneficially owning 15% or more of the outstanding voting
stock of the corporation and any entity or person affiliated with or
controlling or controlled by such entity or person.
Certain provisions of the Company's Certificate of Incorporation and
Delaware law may delay, defer or prevent a change in control of the Company and
may adversely affect the voting and other rights of holders of common stock. In
particular, the ability of the board of directors to issue Preferred Stock
without stockholder approval may delay, defer or prevent a change in control of
the Company and may adversely affect the voting and other rights of other
holders of Common Stock. In addition, the Company's Certificate of
Incorporation provides for a classified board of directors and the inability of
stockholders to vote cumulatively for directors.
Limitation on Directors' Liability and Indemnification Matters
The Company's Certificate of Incorporation provides that, except to the
extent prohibited by Delaware law, the Company's directors shall not be
personally liable to the Company or its stockholders for monetary damages for
any breach of fiduciary duty as directors of the Company. Under Delaware law,
the directors have a fiduciary duty to the Company which is not eliminated by
this provision of the certificate of incorporation and, in appropriate
circumstances, equitable remedies such as injunctive or other forms of
nonmonetary relief will remain available. In addition, each director will
continue to be subject to liability under Delaware law for breach of the
director's duty of loyalty to the Company, for acts or omissions which are
found by a court of competent jurisdiction to be not in good faith or which
involves intentional misconduct, or knowing violations of law, for actions
leading to improper personal benefit to the director, and for payment of
dividends or approval of stock repurchases or
48
<PAGE>
redemptions that are prohibited by Delaware law. This provision also does not
affect the directors' responsibilities under any other laws, such as the
Federal securities laws or state or Federal environmental laws.
The Company has obtained liability insurance for its senior officers and
directors and has entered into indemnity agreements to indemnify its executive
officers and directors in addition to the indemnification provided for in the
Company's Certificate of Incorporation and bylaws. These agreements, among
other things, indemnify the Company's directors and executive officers for
certain expenses (including attorneys' fees and associated legal expenses),
judgments and fines and amounts paid in settlement, actually and reasonably
incurred by any such person in any action, suit or proceeding arising out of
such person's services as a director or executive officer on behalf of the
Company. The Company believes that these provisions and agreements are
necessary to attract and retain qualified directors and officers.
Certain Effects of Authorized but Unissued Stock
Upon consummation of this Offering, there will be shares of Common
Stock and shares of Preferred Stock available for issuance without
stockholder approval, except as may be required by the Company's Certificate of
Incorporation, by applicable law or regulatory agencies or by the rules of the
Nasdaq National Market or any stock exchange on which the Common Stock may then
be listed. The Company does not currently have plans to issue additional shares
of capital stock. See "Shares Eligible for Future Sale."
Stock Transfer Agent and Registrar
The Stock Transfer Agent and Registrar for the Common Stock is The Bank of
New York, located at 101 Barclay Street, 11E, New York, New York and its
telephone number at such location is (800) 524-4458.
49
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no market for the Common Stock.
Future sales of substantial amounts of Common Stock in the public market could
adversely affect market prices prevailing from time to time. Furthermore, since
only a limited number of shares will be available for sale shortly after this
offering because of certain contractual and legal restrictions on resale (as
described below), sales of substantial amounts of Common Stock of the Company
in the public market after the restrictions lapse could adversely affect the
prevailing market price and the ability of the Company to raise equity capital
in the future.
Upon completion of this Offering, the Company will have outstanding an
aggregate of shares of Common Stock, assuming no exercise of the
Underwriters' over-allotment option and no exercise of outstanding options. Of
these shares, the shares sold in this offering will be freely tradeable
without restriction or further registration under the Securities Act of 1933,
as amended (the "Securities Act"), unless such shares are purchased by
"affiliates" of the Company as that term is defined in Rule 144 under the
Securities Act (the "Affiliates"). The remaining shares of Common Stock
held by existing stockholders are "restricted securities" as that term is
defined in Rule 144 under the Securities Act ("Restricted Shares"). Restricted
Shares may be sold in the public market only if registered or if they qualify
for an exemption from registration under Rules 144, 144(k) or 701 promulgated
under the Securities Act, which rules are summarized below. As a result of the
contractual restrictions described below and the provisions of Rules 144,
144(k) and 701, additional shares will be available for sale in the public
market as follows: (i) shares will be eligible for immediate sale on the
date of this Prospectus, (ii) shares will be eligible for sale upon
expiration of the lock-up agreements 180 days after the date of this Prospectus
and (iii) shares will be eligible for sale upon expiration of their
respective one-year holding periods.
Upon completion of this offering, the holdings of shares of Common Stock,
or their transferees, will be entitled to certain rights with respect to the
registration of such shares under the Securities Act. See "Description of
Capital Stock--Registration Rights." Registration of such shares under the
Securities Act would result in such shares becoming freely tradeable without
restriction under the Securities Act (except for shares purchased by
Affiliates) immediately upon the effectiveness of such registration.
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this Prospectus, a person (or persons whose shares are aggregated)
who has beneficially owned Restricted Shares for at least one year (including
the holding period of any prior owner except an Affiliate) would be entitled to
sell within any three-month period a number of shares that does not exceed the
greater of: (i) one percent of the number of shares of Common Stock then
outstanding (which will equal approximately shares immediately after this
offering); or (ii) 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 certain manner of sale provisions and notice requirements and to the
availability of current public information about the Company. Under Rule
144(k), a person who is not deemed to have been an Affiliate of the Company at
any time during the 90 days preceding a sale, and who has beneficially owned
the Restricted Shares for at least two years (including the holding period of
any prior owner except an Affiliate), is entitled to sell such shares without
complying with the manner of sale, public information, volume limitation or
notice provisions of Rule 144; therefore, unless otherwise restricted, "144(k)
shares" may be sold immediately upon the completion of this offering. In
general, under Rule 701 of the Securities Act as currently in effect, any
employee, consultant or advisor of the Company who purchased shares from the
Company in connection with a compensatory stock or option plan or other written
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 certain
restrictions, including the holding period, contained in Rule 144.
The Company intends to file a registration statement on Form S-8 under the
Securities Act covering shares of Common Stock reserved for issuance under the
Company's 1998 Stock Incentive Plan. Such 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 Rule 144 volume limitations applicable to
Affiliates, be available for sale in the open market, unless such shares are
subject to vesting restrictions with the Company or the lock-up agreements
described herein.
50
<PAGE>
UNDERWRITING
Subject to the terms and conditions set forth in the Purchase Agreement
(the "Purchase Agreement") among the Company and each of the underwriters named
below, the Company has agreed to sell to each of the Underwriters, and each of
the Underwriters, for whom Merrill Lynch, Pierce, Fenner & Smith Incorporated,
J.P. Morgan Securities Inc. and Allen & Company Incorporated are acting as the
representatives (the "Representatives"), has agreed to purchase the number of
shares of Common Stock set forth opposite its name below. In the Purchase
Agreement, the several underwriters have agreed, subject to the terms and
conditions set forth therein, to purchase all of the shares of Common Stock
offered hereby, if any are purchased. In the event of default by an
Underwriter, the Purchase Agreement provides that, in certain circumstances,
purchase commitments of the non-defaulting Underwriters may be increased or the
Purchase Agreement may be terminated.
<TABLE>
<CAPTION>
Number
Underwriter of Shares
- ----------- ---------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith
Incorporated .................
Allen & Company Incorporated .........
J.P. Morgan Securities Inc. .......... ----------
Total .........................
==========
</TABLE>
The Underwriters have advised the Company that they propose initially to
offer the shares of Common Stock to the public at the initial public offering
price set forth on the cover page of this Prospectus, and to certain dealers at
such price less a concession not in excess of $ per share of Common Stock.
The Underwriters may allow, and such dealers may reallow, a discount not in
excess of $ per share of Common Stock on sales to certain other dealers.
After the initial public offering, the public offering price, concession and
discount may be changed.
At the request of the Company, the Underwriters have reserved up to
shares of Common Stock for sale at the initial public offering price to
directors, officers, employees, associates and related persons of the Company
and its affiliates. The number of shares of Common Stock available for sale to
the general public will be reduced to the extent such persons purchase such
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 hereby.
The Company has granted to the Underwriters an option exercisable for 30
days after the date of this Prospectus, to purchase up to an additional
shares of Common Stock to cover over-allotments, if any, at the initial public
offering price set forth on the cover page hereof, less the underwriting
discount. If the Underwriters exercise this option, each Underwriter will have
a firm commitment, subject to certain conditions, to purchase approximately the
same percentage thereof that the number of shares of Common Stock to be
purchased by it shown in the foregoing table is of the shares of Common
Stock initially offered hereby.
The Company has agreed, subject to certain exceptions, not to, directly or
indirectly, (i) sell, grant any option to purchase or otherwise transfer or
dispose of any shares of Common Stock or securities convertible into or
exchangeable or exercisable for Common Stock or file a registration statement
under the Securities Act with respect to the foregoing or (ii) enter into any
swap or other agreement or transaction that transfers, in whole or in part, the
economic consequence of ownership of the Common Stock, without the prior
written consent of Merrill Lynch, for a period of 180 days after the date of
this Prospectus. The foregoing does not prohibit the Company from issuing
shares pursuant to the 1998 Stock Incentive Plan or upon exercise of
outstanding warrants.
The Company has agreed to indemnify the several Underwriters against
certain liabilities under the Securities Act, or to contribute to payments the
Underwriters may be required to make in respect thereof.
The Underwriters have advised the Company that they do not intend to
confirm sales of the Common Stock offered hereby to any accounts over which
they exercise discretionary authority.
Prior to this Offering, there has been no market for the Common Stock of
the Company. The initial public offering price was determined through
negotiations among the Company and the Underwriters. Among the factors
51
<PAGE>
considered in determining the initial public offering price, in addition to
prevailing market conditions, were the trading multiples of publicly traded
companies that the Underwriters believe to be comparable to the Company,
certain financial information of the Company, the history of, and the prospects
for, the Company and the industry in which it competes, an assessment of the
Company's management, its past and present operation, the prospects for, and
timing of, future revenues of the Company, the present state of the Company's
development, and the above factors in relation to market values and various
valuation measures of other companies engaged in activities similar to the
Company. There can be no assurance that an active trading market will develop
for the Common Stock or that the Common Stock will trade in the public market
subsequent to the Offering at or above the initial public offering price.
The Company intends to apply for a listing of the Common Stock on the
Nasdaq National Market under the symbol "TFSM."
52
<PAGE>
LEGAL MATTERS
The validity of the Common Stock offered hereby is being passed upon by
Proskauer Rose LLP, New York, New York. Certain legal matters in connection
with the Offering will be passed upon for the Underwriters by Wilson Sonsini
Goodrich & Rosati, Professional Corporation, Palo Alto, California.
EXPERTS
The financial statements of 24/7 Media, Inc. as of December 31, 1996 and
1997 and for each of the years in the three-year period ended December 31, 1997
and the financial statements of Interactive Holdings, LLC as of December 31,
1997 and for the period from February 1, 1997 (inception) to September 28, 1997
(Predecessor) and the period from September 29, 1997 to December 31, 1997
(Successor), have been included in this Prospectus and elsewhere in the
Registration Statement in reliance on the reports of KPMG Peat Marwick LLP,
independent certified public accountants, appearing elsewhere herein and upon
the authority of said firm as experts in auditing and accounting.
The financial statements of Intelligent Interactions Corporation as of
December 31, 1997 and 1996 and for the years ended December 31, 1997 and 1996
and the period from inception (February 28, 1995) to December 31, 1995 included
in this Prospectus and elsewhere in the Registration Statement have been
audited by Arthur Andersen LLP, independent public accountants, as indicated in
their reports with respect thereto, and are included herein in reliance upon
the authority of said firm as experts in giving said reports.
AVAILABLE INFORMATION
The Company has filed a registration statement on Form S-1 ("Registration
Statement") relating to the Common Stock offered hereby with the Commission
through the Electronic Data Gathering, Analysis and Retrieval System ("EDGAR").
This Prospectus is part of the Registration Statement and does not contain all
of the information in the Registration Statement and its exhibits and
schedules. For further information about the Company and the Common Stock, a
copy of the Registration Statement and its exhibits and schedules may be
inspected without charge and copied at the offices of the Commission at Room
1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and at
the Commission's regional offices located at 7 World Trade Center, 13th Floor,
New York, New York 10048; and Citicorp Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661. You may also access Registration Statements
filed through EDGAR at the Commission's Website at http://www.sec.gov. The
Company's Common Stock is expected to be listed on the Nasdaq National Market.
Reports and other information concerning the Company are available for
inspection at the Nasdaq National Market at 1735 K Street, Washington D.C.
20006.
After this Offering, the Company will have to file reports, proxy
statements and other information with the Commission via EDGAR as required by
the Exchange Act. The Company will furnish common stockholders with annual
reports containing audited financial statements and quarterly reports
containing unaudited financial statements. The Company will also furnish other
reports as it determines or are required by law. Copies of such material may be
inspected and copied at the Commission's offices and viewed electronically at
the Commission's Website.
----------------
24/7 Media, Intelligent Interactions, ContentZone, Riddler.com, CliqNow!,
Adfinity and dbCommerce are trademarks of the Company or its subsidiary,
Intelligent Interactions Corporation. This Prospectus contains other product
names, tradenames and trademarks of the Company and of other entities, all of
which are the property of their respective owners.
53
<PAGE>
24/7 MEDIA, INC.
(Successor Company to Interactive Imaginations, Inc.)
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Page
----
24/7 MEDIA, INC. (Successor Company to Interactive Imaginations, Inc.)
Independent Auditors' Report ........................................... F-2
Consolidated Balance Sheet ............................................. F-3
Consolidated Statements of Operations .................................. F-4
Consolidated Statements of Stockholders' Equity (Deficit) .............. F-5
Consolidated Statements of Cash Flows .................................. F-6
Notes to Financial Statements .......................................... F-7
PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
Overview ............................................................... F-24
Pro Forma Consolidated Statements of Operations ........................ F-26
Pro Forma Consolidated Balance Sheet ................................... F-27
Notes to Pro Forma Consolidated Financial Information .................. F-28
INTERACTIVE HOLDINGS, LLC (Successor Company to Petry Interactive, Inc.)
Independent Auditors' Report ........................................... F-29
Balance Sheet .......................................................... F-30
Statements of Operations ............................................... F-31
Statements of Shareholder's/Members' Equity (Deficit) .................. F-32
Statements of Cash Flows ............................................... F-33
Notes to Financial Statements .......................................... F-34
INTELLIGENT INTERACTIONS CORPORATION
Report of Independent Public Accountants ............................... F-38
Balance Sheets ......................................................... F-39
Statements of Operations ............................................... F-40
Statements of Stockholders' Equity ..................................... F-41
Statements of Cash Flows ............................................... F-42
Notes to Financial Statements .......................................... F-43
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
24/7 Media, Inc.
We have audited the accompanying balance sheets of 24/7 Media, Inc.
(successor company to Interactive Imaginations, Inc.) as of December 31, 1996
and 1997, and the related statements of operations, stockholders' equity
(deficit) and cash flows for each of the years in the three-year period ended
December 31, 1997. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of 24/7 Media, Inc. as of
December 31, 1996 and 1997, and the results of its operations and its cash
flows for each of the years in the three-years period ended December 31, 1997
in conformity with generally accepted accounting principles.
KPMG PEAT MARWICK LLP
New York, New York
June 2, 1998
F-2
<PAGE>
24/7 MEDIA, INC.
(Successor Company to Interactive Imaginations, Inc.)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
---------------------------------- March 31,
1996 1997 1998
--------------- ---------------- ----------------
(unaudited)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents .................................... $ 1,689,395 $ 93,945 $ 7,764,695
Accounts receivable, net of allowance for doubtful
accounts of $66,000, $63,723 and $269,968,
respectively ................................................ 267,173 176,034 1,818,899
Prepaid expenses and other current assets .................... 237,527 14,936 52,296
------------ ------------- -------------
Total current assets ..................................... 2,194,095 284,915 9,635,890
------------ ------------- -------------
Property and equipment, net ..................................... 1,677,936 591,337 630,652
Goodwill, net ................................................... -- -- 7,870,174
Deferred offering costs ......................................... -- 110,602 13,148
Intangible assets, net .......................................... 17,287 2,711 2,503
Deposits ........................................................ 61,472 49,376 49,626
------------ ------------- -------------
Total assets ............................................. $ 3,950,790 $ 1,038,941 $ 18,201,993
============ ============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable ............................................. 136,523 882,696 813,518
Accrued liabilities .......................................... 514,355 471,205 2,180,969
Loans payable--related party ................................. -- -- 283,267
Deferred revenue ............................................. 1,549,710 96,496 41,000
------------ ------------- -------------
Total current liabilities ................................ 2,200,588 1,450,397 3,318,754
------------ ------------- -------------
Senior convertible notes payable--related parties, net of debt
discount of $158,348 and $20,592, respectively.................. -- 2,316,511 479,408
Other liabilities ............................................... -- -- 46,149
Mandatorily redeemable convertible preferred stock,
10,060,002 shares authorized; 10,060,002 issued and outstanding
entitled to a liquidation preference of $1 per share plus unpaid
dividends; 4% per annum ($10,093,502 in the aggregate at March
31, 1998) ...................................................... -- -- 10,093,502
Stockholders' equity (deficit):
Convertible preferred stock, $.01 par value; 500,000 shares
authorized; 140,722, 158,144 and no shares issued and
outstanding, respectively; with aggregate liquidation
preference of $4,538,733 at December 31, 1997................ 1,407 1,581 --
Common stock, $.01 par value; 100,000,000 shares
authorized; 4,316,463, 4,595,047 and 27,481,201 shares
issued and outstanding, respectively ........................ 43,165 45,950 274,812
Additional paid-in capital ................................... 9,705,220 10,529,920 19,623,624
Accumulated deficit .......................................... (7,999,590) (13,305,418) (15,634,256)
------------ ------------- -------------
Total stockholders' equity (deficit) ..................... 1,750,202 (2,727,967) 4,264,180
------------ ------------- -------------
Commitments and contingencies
Total liabilities and stockholders' equity
(deficit) ............................................... $ 3,950,790 1,038,941 18,201,993
============ ============= =============
</TABLE>
F-3
<PAGE>
24/7 MEDIA, INC.
(Successor Company to Interactive Imaginations, Inc.)
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three months
ended
Years ended December 31, March 31,
----------------------------------------------- ----------------------------
1995 1996 1997 1997 1998
--------------- --------------- --------------- ------------ ---------------
<S> <C> <C> <C> <C> <C>
Revenues: (unaudited)
Advertising ..................................... $ 151,750 1,106,329 1,467,105 388,892 1,076,250
Consulting and license fees ..................... -- 435,834 1,681,464 805,245 --
------------ --------- --------- ---------- ---------
Total revenues .............................. 151,750 1,542,163 3,148,569 1,194,137 1,076,250
Cost of revenues ................................ 198,291 1,592,771 1,655,340 459,587 930,003
------------ --------- --------- ---------- ---------
Gross profit (loss) ......................... (46,541) (50,608) 1,493,229 734,550 146,247
------------ --------- --------- ---------- ---------
Operating expenses:
Sales and marketing .......................... 114,348 2,240,399 1,672,999 450,505 653,460
General and administrative ................... 581,069 3,010,009 2,622,743 682,581 1,285,512
Product development .......................... 426,187 1,460,928 1,417,750 399,523 --
Write-off of property and equipment .......... -- -- 756,795 -- --
Legal costs in connection with claim ......... -- -- 232,304 -- --
Amortization of goodwill ..................... -- -- -- -- 335,355
------------ --------- --------- ---------- ---------
Total operating expenses ................. 1,121,604 6,711,336 6,702,591 1,532,609 2,274,327
------------ --------- --------- ---------- ---------
Loss from operations ..................... (1,168,145) (6,761,944) (5,209,362) (798,059) (2,128,080)
Interest income ................................. -- 11,704 17,597 13,682 25,504
Interest expense, including amortization of
debt discount of $17,900, $42,652 and
$149,903 in 1996, 1997 and 1998,
respectively ................................... -- (45,435) (114,063) -- (192,762)
------------ ---------- ---------- ---------- ----------
Net loss ................................. (1,168,145) (6,795,675) (5,305,828) (784,377) (2,295,338)
Cumulative dividends on mandatorily
convertible preferred stock .................... -- -- -- -- (33,500)
------------ ---------- ---------- ---------- ----------
Net loss attributable to common
stockholders ................................... $ (1,168,145) (6,795,675) (5,305,828) (784,377) (2,328,838)
Net loss per share--basic ....................... $
============ ========== ========== ======== ==========
Weighted average shares outstanding .............
============ ========== ========== ======== ==========
Pro forma basic net loss per share .............. $
============ ========== ========== ======== ==========
Weighted average shares used in pro forma
basic net loss per share calculation ...........
============ ========== ========== ======== ==========
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
24/7 MEDIA, INC.
(Successor Company to Interactive Imaginations, Inc.)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
Years Ended December 31, 1995, 1996 and 1997
and the Three Months Ended March 31, 1998 (unaudited)
<TABLE>
<CAPTION>
Stockholders' (Equity) Deficit
-------------------------------------------------
Convertible Common stock
preferred stock voting
------------------------- -----------------------
Shares Amount Shares Amount
------------- ----------- ------------ ----------
<S> <C> <C> <C> <C>
Balance as of December 31, 1994 ....................... -- $ -- -- $ --
Issuance of Class B common stock subsequently
converted to Class A ................................. -- -- -- --
Issuance of Class A common stock, net of $20,512
issuance costs ....................................... -- -- -- --
Net loss .............................................. -- -- -- --
------- --------- --------- --------
Balance as of December 31, 1995 ....................... -- -- -- --
Issuance of Class A common stock, net of $39,125
issuance costs ....................................... -- -- -- --
Common stock Class A converted ........................ -- -- 4,308,130 43,081
Issuance of common stock to officer ................... -- -- 8,333 84
Issuance of warrants in connection
with mandatory conversion subordinated notes.......... -- -- -- --
Notes converted to preferred stock .................... 52,262 523 -- --
Issuance of preferred stock, net of $236,820
issuance costs ....................................... 88,460 884 -- --
Net loss .............................................. -- -- -- --
------ --------- --------- --------
Balance as of December 31, 1996 ....................... 140,722 1,407 4,316,463 43,165
Issuance of preferred stock ........................... 17,422 174 -- --
Issuance of common stock to officer ................... -- -- 41,847 418
Issuance of warrants in connection
with senior convertible notes--related parties ....... -- -- -- --
Senior convertible notes payable--related parties
converted into common stock .......................... -- -- 236,737 2,367
Net loss .............................................. -- -- -- --
------- --------- --------- --------
Balance as of December 31, 1997 ....................... 158,144 1,581 4,595,047 45,950
Issuance of warrants in connection with senior
convertible notes--related parties ................... -- -- -- --
Issuance of warrants to former officer ................ -- -- -- --
Issuance of warrants to consultant .................... -- -- -- --
Issuance of common stock for acquired businesses....... -- -- 17,315,701 173,157
Offering costs in connection with mandatorily
redeemable convertible preferred stock ............... -- -- -- --
Senior convertible notes payable--related parties
converted into common stock .......................... -- -- 3,002,344 30,023
Convertible preferred stock converted into
common stock ......................................... (158,144) (1,581) 2,171,633 21,716
Conversion of warrants into common stock .............. -- -- 396,476 3,966
Imputed interest on loans payable--related parties -- -- -- --
Accrual of cumulative dividends on mandatorily
redeemable convertible preferred stock ............... -- -- -- --
Net loss for the period ............................... -- -- -- --
-------- --------- ---------- --------
Balance as of March 31, 1998 (unaudited) .............. -- $ -- 27,481,201 $274,812
======== ========= ========== ========
<CAPTION>
Stockholders' (Equity) Deficit
--------------------------------------------------------------------------
Common stock
Class A Additional Total
------------------------- paid-in Accumulated stockholders'
Shares Amount capital deficit equity (deficit)
------------- ----------- -------------- --------------- -----------------
<S> <C> <C> <C> <C> <C>
Balance as of December 31, 1994 ....................... 100,000 $ 1,000 44,000 (35,771) 9,229
Issuance of Class B common stock subsequently
converted to Class A ................................. 62,707 627 92,373 -- 93,000
Issuance of Class A common stock, net of $20,512
issuance costs ....................................... 130,623 1,306 1,267,182 -- 1,268,488
Net loss .............................................. -- -- -- (1,168,144) (1,168,144)
------- --------- --------- ---------- ----------
Balance as of December 31, 1995 ....................... 293,330 2,933 1,403,555 (1,203,915) 202,573
Issuance of Class A common stock, net of $39,125
issuance costs ....................................... 137,483 1,375 4,484,500 -- 4,485,875
Common stock Class A converted ........................ (430,813) (4,308) (38,773) -- --
Issuance of common stock to officer ................... -- -- 37,543 -- 37,627
Issuance of warrants in connection
with mandatory conversion subordinated notes.......... -- -- 17,900 -- 17,900
Notes converted to preferred stock .................... -- -- 1,499,477 -- 1,500,000
Issuance of preferred stock, net of $236,820
issuance costs ....................................... -- -- 2,301,018 -- 2,301,902
Net loss .............................................. -- -- -- (6,795,675) (6,795,675)
-------- --------- --------- ---------- ----------
Balance as of December 31, 1996 ....................... -- -- 9,705,220 (7,999,590) 1,750,202
Issuance of preferred stock ........................... -- -- 499,837 -- 500,011
Issuance of common stock to officer ................... -- -- 31,473 -- 31,891
Issuance of warrants in connection
with senior convertible notes--related parties ....... -- -- 201,000 -- 201,000
Senior convertible notes payable--related parties
converted into common stock .......................... -- -- 92,390 -- 94,757
Net loss .............................................. -- -- -- (5,305,828) (5,305,828)
-------- --------- --------- ---------- ----------
Balance as of December 31, 1997 ....................... -- -- 10,529,920 (13,305,418) (2,727,967)
Issuance of warrants in connection with senior
convertible notes--related parties ................... -- -- 12,156 -- 12,156
Issuance of warrants to former officer ................ -- -- 450,000 -- 450,000
Issuance of warrants to consultant .................... -- -- 20,240 -- 20,240
Issuance of common stock for acquired businesses....... -- -- 6,753,123 -- 6,926,280
Offering costs in connection with mandatorily
redeemable convertible preferred stock ............... -- -- (229,105) -- (229,105)
Senior convertible notes payable--related parties
converted into common stock .......................... -- -- 2,102,391 -- 2,132,414
Convertible preferred stock converted into
common stock ......................................... -- -- (20,135) -- --
Conversion of warrants into common stock .............. -- -- (3,966) -- --
Imputed interest on loans payable--related parties -- -- 9,000 -- 9,000
Accrual of cumulative dividends on mandatorily
redeemable convertible preferred stock ............... -- -- -- (33,500) (33,500)
Net loss for the period ............................... -- -- -- (2,295,338) (2,295,338)
-------- --------- ---------- ----------- ----------
Balance as of March 31, 1998 (unaudited) .............. -- $ -- 19,623,624 (15,634,256) 4,264,180
======== ========= ========== =========== ==========
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE>
24/7 MEDIA, INC.
(Successor Company to Interactive Imaginations, Inc.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years ended December 31,
------------------------------------------------
1995 1996 1997
---------------- --------------- ---------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss ................................................. $ (1,168,144) (6,795,675) (5,305,828)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization ........................... 59,196 305,050 364,607
Amortization of debt discount ........................... -- 17,900 42,652
Write-off of property and equipment ..................... -- -- 756,795
Accrued interest on senior convertible notes--related
parties ................................................ -- -- 68,609
Imputed interest on note payable--related party ......... -- -- --
Provision for doubtful accounts ......................... 10,000 66,000 --
Amortization of intangible assets ....................... -- -- --
Non-cash compensation ................................... -- 37,627 31,891
Changes in operating assets and liabilities:
Accounts receivable .................................... (69,250) (273,923) 91,139
Prepaid assets and other current assets ................ -- (237,527) 222,591
Deposits ............................................... (14,588) (45,554) 12,096
Accounts payable ....................................... 136,231 292 746,172
Accrued liabilities .................................... 51,361 442,994 (43,150)
Deferred revenue ....................................... -- 1,549,710 (1,453,214)
------------ ---------- ----------
Net cash used in operating activities ................ (995,194) (4,933,106) (4,465,640)
------------ ---------- ----------
Cash flows from investing activities:
Increase in intangible assets ............................ -- (41,205) --
Cash received from acquisitions .......................... -- -- --
Proceeds from sale of property and equipment ............. -- -- 22,850
Purchase of property and equipment ....................... (464,016) (1,537,071) (42,069)
------------ ---------- ----------
Net cash used in investing activities ................ (464,016) (1,578,276) (19,219)
------------ ---------- ----------
Cash flows from financing activities:
Net proceeds from issuance of Mandatorily
Redeemable Series A Preferred Stock ..................... -- -- --
Deferred offering costs .................................. -- -- (110,602)
Proceeds from senior convertible notes payable--
related parties ......................................... -- -- 2,500,000
Proceeds from notes payable--related parties ............. 122,000 -- --
Repayment of notes payable--related parties .............. (35,000) (87,000) --
Proceeds from mandatory conversion subordinated
notes payable ........................................... -- 1,500,000 --
Proceeds from issuance of common stock, net .............. 1,361,488 4,485,875 --
Proceeds from issuance of convertible preferred stock,
net ..................................................... -- 2,301,902 500,011
------------ ---------- ----------
Net cash provided by financing activities ............ 1,448,488 8,200,777 2,889,409
------------ ---------- ----------
Net change in cash and cash equivalents .............. (10,722) 1,689,395 (1,595,450)
Cash and cash equivalents at beginning of period ............ 10,722 -- 1,689,395
------------ ---------- ----------
Cash and cash equivalents at end of period .................. $ -- 1,689,395 93,945
============ ========== ==========
<CAPTION>
Three Months
Ended
March 31,
-------------------------------
1997 1998
--------------- ---------------
<S> <C> <C>
Cash flows from operating activities:
Net loss ................................................. (784,377) (2,295,338)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization ........................... 104,220 58,349
Amortization of debt discount ........................... -- 149,903
Write-off of property and equipment ..................... -- --
Accrued interest on senior convertible notes--related
parties ................................................ -- 7,555
Imputed interest on note payable--related party ......... -- 9,000
Provision for doubtful accounts ......................... 15,000 27,430
Amortization of intangible assets ....................... -- 335,355
Non-cash compensation ................................... 8,041 470,240
Changes in operating assets and liabilities:
Accounts receivable .................................... 147,695 (579,518)
Prepaid assets and other current assets ................ 131,463 (31,885)
Deposits ............................................... -- (250)
Accounts payable ....................................... 148,227 (82,075)
Accrued liabilities .................................... (193,174) (322,868)
Deferred revenue ....................................... (961,989) (55,496)
-------- ----------
Net cash used in operating activities ................ (1,384,894) (2,309,598)
---------- ----------
Cash flows from investing activities:
Increase in intangible assets ............................ -- --
Cash received from acquisitions .......................... -- 168,839
Proceeds from sale of property and equipment ............. -- --
Purchase of property and equipment ....................... -- (97,664)
---------- ----------
Net cash used in investing activities ................ -- 71,175
---------- ----------
Cash flows from financing activities:
Net proceeds from issuance of Mandatorily
Redeemable Series A Preferred Stock ..................... -- 10,060,002
Deferred offering costs .................................. (288,651)
Proceeds from senior convertible notes payable--
related parties ......................................... --
Proceeds from notes payable--related parties ............. 150,000
Repayment of notes payable--related parties .............. (12,178)
Proceeds from mandatory conversion subordinated
notes payable ........................................... --
Proceeds from issuance of common stock, net .............. --
Proceeds from issuance of convertible preferred stock,
net ..................................................... 500,011 --
---------- ----------
Net cash provided by financing activities ............ 500,011 9,909,173
---------- ----------
Net change in cash and cash equivalents .............. (884,884) 7,670,750
Cash and cash equivalents at beginning of period ............ 1,689,395 93,945
---------- ----------
Cash and cash equivalents at end of period .................. 804,511 7,764,695
========== ==========
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE>
24/7 MEDIA, INC.
(Successor Company to Interactive Imaginations, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and 1997
(All information subsequent to December 31, 1997 is Unaudited)
(1) Summary of Operations and Significant Accounting Policies
(a) Summary of Operations
24/7 Media, Inc. (successor company to Interactive Imaginations, Inc.
("Interactive Imaginations")) operates networks of Websites that enable both
advertisers and Web publishers to capitalize on the many opportunities
presented by Internet advertising, direct marketing and commerce. The Company
generates revenues by delivering advertisements and promotions to Websites
affiliated with the Company. Interactive Imaginations's properties include the
ContentZone, which is a network of small to medium-sized Websites to which
advertisements and promotions are served; and Riddler.com, an advertising
supported Website that enables users to play intellectually challenging games
for prizes and cash. Effective February 24, 1998, 24/7 Media commenced
operations of the 24/7 Network, a network of high profile Websites to which
advertisements are served.
Inherent in the Company's business are various risks and uncertainties,
including its limited operating history, unproven business model and the
limited history of commerce on the Internet. The Company's success may depend
in part upon the emergence of the Internet as a communications medium,
prospective project development efforts, and the acceptance of the Company's
solutions by the marketplace.
Interactive Imaginations, Inc. was incorporated in the State of New York
in September 1994 and first recognized revenue in June 1995. 24/7 Media, Inc.
(the "Company") was incorporated in Delaware on January 23, 1998 to consolidate
three Internet advertising companies: (i) Petry Interactive, Inc. ("Petry"),
which sold advertising for Websites organized in a network (ii) Advercomm, Inc.
("Advercomm"), a newly formed corporation which brought a number of high
profile Websites to the 24/7 Network, and (iii) Interactive Imaginations, Inc.
Subsequently, the Company acquired both Intelligent Interactions Corporation
("Intelligent Interactions"), a corporation that develops and licenses ad
serving technology and e-commerce software, and the CliqNow! network of
Websites ("CliqNow!").
The Company was formed on January 23, 1998 as a wholly owned subsidiary of
Interactive Imaginations. On February 24, 1998, the Company simultaneously
consummated the merger of each of Petry and Advercomm with and into the Company
(the mergers, together with the concurrent investment of approximately $10
million by certain investors, the "Initial Merger"). On April 9, 1998,
Interactive Imaginations was merged with and into the Company. In addition, on
April 13, 1998, the Company acquired Intelligent Interactions as a wholly-owned
subsidiary of the Company and as of June 1, 1998, the Company acquired CliqNow!
(see note 11).
(b) Principles of Consolidation
The Company's audited financial statements as of December 31, 1996 and
1997 and for each of the years in the three-year period ended December 31, 1997
include the historical results of Interactive Imaginations and do not reflect
any of the operating results of Petry, Advercomm, Intelligent Interactions or
CliqNow!.
The Company's unaudited consolidated financial statements as of March 31,
1998 and the three months ended March 31, 1998, include the consolidated
accounts of the Company, and Petry and Advercomm from February 24, 1998 (date
of acquisition) through March 31, 1998, giving effect to the Initial Merger as
of February 24, 1998. For the three months ended March 31, 1997, the Company's
historical results of operations only include the results of Interactive
Imaginations. All significant intercompany transactions and balances have been
eliminated in consolidation.
On February 24, 1998, the Company acquired all of the outstanding stock of
Petry and Advercomm in separate transactions in exchange for 10,494,366 and
6,821,335 shares of the Company's Common Stock, respectively, for a total
purchase price of $4,197,800 and $2,728,500, respectively, plus acquisition
costs of $157,000.
The acquisitions have been accounted for using the purchase method of
accounting, and accordingly, the purchase price has been allocated to the
tangible and identifiable intangible assets acquired and liabilities assumed
F-7
<PAGE>
24/7 MEDIA, INC.
(Successor Company to Interactive Imaginations, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996 and 1997
(All information subsequent to December 31, 1997 is Unaudited)
(1) Summary of Operations and Significant Accounting Policies --Continued
on the basis of their fair values on the acquisition dates. Approximately
($1,122,200) of the aggregate purchase price was allocated to net tangible
liabilities consisting primarily of cash, accounts receivable, property and
equipment, accounts payable and accrued liabilities. The historical carrying
amounts of such net liabilities approximated their fair values. The purchase
price in excess of the fair value of identified tangible and intangible assets
and liabilities assumed in the amount of $8,205,500 was allocated to goodwill
and is being amortized over its estimated useful life of two years.
The Petry and Advercomm acquisitions have been primarily structured as tax
free exchanges of stock, therefore, the differences between the recognized fair
value of the acquired assets, including intangible assets, and their historical
tax bases is not deductible for income tax purposes.
The fair value of the Company's Common Stock issued as consideration for
the acquisitions was estimated to be $0.40 per share, determined primarily by
reference to the Common Stock conversion price of $0.40 per share in connection
with the Company's issuance of approximately $1,000,000 of senior convertible
notes payable and detachable warrants during the period from September through
November 1997.
(c) Use of Estimates
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(d) Cash and Cash Equivalents
The Company considers all highly liquid securities, with original
maturities of three months or less, to be cash equivalents. Cash equivalents at
December 31, 1996 and 1997 and March 31, 1998 were $1,252,802, $0 and
$6,018,521, respectively, which consisted of certificates of deposit.
(e) Property and Equipment
Property and equipment are stated at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the related assets,
generally three to five years. Leasehold improvements are amortized using the
straight-line method over the estimated useful lives of the assets or the term
of the leases, whichever is shorter.
(f) Intangible Assets
Intangible assets including trademarks and licenses are being amortized
using the straight-line method over one to five years.
Goodwill resulting from the acquisition of Internet advertising businesses
is estimated by management to be primarily associated with the acquired
workforce, contracts and technological know how. As a result of the rapid
technological changes occurring in the Internet industry and the intense
competition for qualified Internet professionals and customers, recorded
goodwill is amortized on the straight-line basis over the estimated periods of
benefit, which is two years.
At each balance sheet date, the Company assesses the value of recorded
goodwill for possible impairment based upon a number of factors, including
turnover of the acquired workforce and the undiscounted value of expected
future operating cash flows in relation to its net investment in each
subsidiary. To date, the Company has not recorded any provisions for possible
impairment of intangible assets.
(g) Income Taxes
The Company accounts for income taxes using the asset and liability
method. Under this method, deferred tax assets and liabilities are recognized
for the future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases and operating
F-8
<PAGE>
24/7 MEDIA, INC.
(Successor Company to Interactive Imaginations, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996 and 1997
(All information subsequent to December 31, 1997 is Unaudited)
(1) Summary of Operations and Significant Accounting Policies --Continued
loss and tax credit carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in results of operation in the period that the tax change
occurs.
(h) Deferred Revenue
Deferred revenue consists of a prepaid software license fee for use of the
Company's proprietary technology and prepaid advertising fees, although the
majority of the Company's advertising customers generally pay after the
services have been provided. As of December 31, 1996 and 1997 and March 31,
1998, the Company had deferred revenue related to the software license
$1,071,059, $0 and $0 and advertising agreements of $454,064, $96,496 and
$41,000, respectively.
(i) Revenue Recognition
The Company's advertising revenues are derived principally from short-term
advertising agreements in which the Company delivers advertising impressions or
full-page advertisements for a fixed fee to third-party Websites comprising the
24/7 Network, the ContentZone and to a lesser extent its Riddler.com Website.
Revenues from advertising are recognized in the period the advertising
impressions are delivered, provided collection of the resulting receivables is
probable. For the years ended December 31, 1996 and 1997 and the three months
ended March 31, 1998, the Company recognized $436,476, $682,853, and $250,164,
respectively, of cash advertising revenue related solely to the ContentZone.
Websites affiliated with the Company ("Affiliated Websites") register web
page(s) with the Company's networks and display advertising banners on those
pages. The Company pays its Affiliated Websites a service fee for providing
advertising space to the Company's networks. The Company becomes obligated to
make payments to such Affiliated Websites, which have contracted with the
Company to be part of the Company's networks, in the period the advertising
impressions are delivered. Such expenses are classified as cost of revenues in
the consolidated statements of operations.
The Company's licensing revenues are derived principally from a software
licensing fee and fees from maintenance, consulting and support of its
software. Licensing fees are recognized as performance occurs under the terms
of the applicable agreement.
At December 31, 1997 and March 31, 1998, accounts receivable include
approximately $56,000 and $1,242,700, respectively, of unbilled receivables.
(j) Barter Transactions
The Company trades advertisements on its Web properties in exchange for
advertisements on the Internet sites of other companies. Barter revenues and
expenses are recorded at the fair market value of services provided or
received, whichever is more determinable in the circumstances. Revenue from
barter transactions is recognized as income when advertisements are delivered
on the Company's Web properties. Barter expense is recognized when the
Company's advertisements are run on other companies' Web sites, which is
typically, in the same period when the barter revenue is recognized.
Advertising barter revenues and expenses were approximately $0, $55,000,
$83,000 and $0 for the years ended 1995, 1996, 1997 and the three months ended
March 31, 1998, respectively.
The Company also receives payment for its advertising services in the form
of goods that are used as prizes for the Riddler game site. Prize revenue and
the corresponding prize expense is recorded at a discount from its estimated
fair market value. Advertising prize revenues were approximately $0, $196,000,
$86,000 and $0 for the years ended 1995, 1996 and 1997 and for the three months
ended March 31, 1998, respectively.
F-9
<PAGE>
24/7 MEDIA, INC.
(Successor Company to Interactive Imaginations, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996 and 1997
(All information subsequent to December 31, 1997 is Unaudited)
(1) Summary of Operations and Significant Accounting Policies --Continued
The Company expects that barter revenue will represent a significantly
smaller percentage of total revenues in the future.
(k) Product Development Costs
Product development costs and enhancements to existing products are
charged to operations as incurred. Software development costs are required to
be capitalized when a product's technological feasibility has been established
by completion of a working model of the product and ending when a product is
available for general release to customers. To date, completion of a working
model of the Company's products and general release have substantially
coincided. As a result, the Company has not capitalized any software
development costs since such costs have not been significant.
(l) Deferred Offering Costs
At December 31, 1997 and March 31, 1998 specific incremental costs
directly attributable to the issuance of mandatorily redeemable convertible
preferred stock and initial public offering ("IPO") transactions, respectively
have been deferred. The December 31, 1997 costs have been charged against
additional paid-in capital as a result of the Company's issuance of mandatorily
redeemable convertible preferred stock during the three months ended March 31,
1998. The March 31, 1998 incremental costs incurred in connection with the
Company's IPO will be charged against additional paid-in-capital in connection
with this Offering.
(m) Stock-Based Compensation
The Company accounts for stock-based employee compensation arrangements in
accordance with provisions of APB No. 25, "Accounting for Stock Issued to
Employees," and complies with the disclosure provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation." Under APB No. 25, compensation cost
is recognized based on the difference, if any, on the date of grant between the
fair value of the Company's stock and the amount an employee must pay to
acquire the stock.
(n) Impairment of Long-Lived Assets
The Company reviews its long-lived assets for impairment whenever events
or changes in circumstances indicate that the carrying amount of an asset may
not be recoverable. Recoverability of assets to be held and used is measured by
a comparison of the carrying amount of an asset to future net cash flows
expected to be generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount by which
the carrying amount of the assets exceed the fair value of the assets.
(o) Advertising Expenses
The Company expenses the cost of advertising and promoting its services as
incurred. Such costs are included in sales and marketing on the statements of
operations and totaled $54,123, $514,637, $181,280 and $208,369 for the years
ended December 31, 1995, 1996 and 1997 and the three months ended March 31,
1998, respectively.
(p) Financial Instruments and Concentration of Risk
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist primarily of cash and cash equivalents,
accounts receivable, accounts payable and accrued liabilities. At December 31,
1996 and 1997, the fair value of these instruments approximated their financial
statement carrying amount. Substantially all of the Company's cash equivalents
were invested in certificates of deposit. The Company has not experienced any
significant credit losses to date.
F-10
<PAGE>
24/7 MEDIA, INC.
(Successor Company to Interactive Imaginations, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996 and 1997
(All information subsequent to December 31, 1997 is Unaudited)
(1) Summary of Operations and Significant Accounting Policies --Continued
Revenues associated with major customers, as a percentage of total cash
advertising revenues (excluding barter), are as follows:
<TABLE>
<CAPTION>
Three Months
Year Ended December Ended
31, March 31,
-------------------- ------------
1995 1996 1997 1997 1998
------ ------ ------ ------ -----
Customer (unaudited)
<S> <C> <C> <C> <C> <C>
A ............. 33% -- -- 47% --
B ............. 21% -- -- -- --
C ............. 20% -- -- -- --
D ............. 13% -- -- -- --
E ............. -- 25% 25% -- --
F ............. -- 21% 12% -- --
G ............. -- -- -- -- 15%
</TABLE>
Accounts receivable regarding significant advertising customers, as a
percentage of total accounts receivable, are as follows:
<TABLE>
<CAPTION>
December 31,
--------------- March 31,
1996 1997 1998
------ ------ ------------
Customer (unaudited)
<S> <C> <C> <C>
I ............... 28% -- --
II .............. 12% -- --
III ............. -- 13% --
IV .............. -- -- 52%
V ............... -- -- 12%
</TABLE>
To date, accounts receivable have been derived from advertising fees
billed to advertisers located in the United States. The Company generally
requires no collateral. The Company maintains reserves for potential credit
losses; historically, such losses have been minor and within management's
expectations.
(q) Interim Results (Unaudited)
The accompanying interim financial statements as of March 31, 1998 and for
the three months ended March 31, 1997 and 1998 are unaudited. In the opinion of
management, the unaudited interim financial statements have been prepared on
the same basis as the annual financial statements and reflect all adjustments,
which include only normal recurring adjustments, necessary to present fairly
the financial position as of March 31, 1998 and the results of the Company's
operations and its cash flows for the three months ended March 31, 1997 and
1998. The financial data and other information disclosed in these notes to
condensed consolidated financial statements related to these periods are
unaudited. The results for the three months ended March 31, 1998 are not
necessarily indicative of the results to be expected for the year ending
December 31, 1998.
(r) Loss Per Share
Loss per share is presented in accordance with the provisions of Statement
of Financial Accounting Standards No. 128, Earnings Per Share, (SFAS 128). SFAS
128 replaced the presentation of primary and fully diluted earnings (loss) per
share (EPS), with a presentation of basic EPS and diluted EPS. Under SFAS 128,
basic EPS excludes dilution for common stock equivalents and is computed by
dividing income or loss available to common shareholders by the weighted
average number of common shares outstanding for the period. Diluted EPS
reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or
F-11
<PAGE>
24/7 MEDIA, INC.
(Successor Company to Interactive Imaginations, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996 and 1997
(All information subsequent to December 31, 1997 is Unaudited)
(1) Summary of Operations and Significant Accounting Policies --Continued
converted into common stock and resulted in the issuance of common stock. Only
basic EPS is presented as all common stock equivalents are antidilutive.
Pro forma basic net loss per share is computed by dividing the net loss by
the sum of the weighted average number of shares of common stock and the shares
resulting from the assumed conversion of all outstanding shares of Mandatorily
Redeemable Convertible Preferred Stock as though such conversion occurred at
the beginning of the period or the date of issuance, if later. This data is
unaudited.
At December 31, 1997 and March 31, 1998, outstanding options to purchase
shares of common stock, the outstanding Mandatorily Redeemable Convertible
Preferred Stock and outstanding Warrants could potentially dilute basic
earnings per share in the future and have not been included in the computation
of diluted net loss per share because to do so would have been antidilutive for
the periods presented.
(s) Recent Accounting Pronouncements
The Company adopted the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 130, "Reporting Comprehensive Income" in the quarter
ended March 31, 1998. SFAS No. 130 requires the Company to report in their
financial statements, in addition to its net income (loss), comprehensive
income (loss), which includes all changes in equity during a period from
non-owner sources including, as applicable, foreign currency items, minimum
pension liability adjustments and unrealized gains and losses on certain
investments in debt and equity securities. There were no difference between the
Company's comprehensive loss and its net loss as reported.
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use" ("SOP 98-1"). SOP 98-1
provides guidance for determining whether computer software is internal-use
software and on accounting for the proceeds of computer software originally
developed or obtained for internal use and then subsequently sold to the
public. It also provides guidance on capitalization of the costs incurred for
computer software developed or obtained for internal use. The Company has not
yet determined the impact, if any, of adopting SOP 98-1, which will be
effective for the Company's year ending December 31, 1999.
In June 1997, the FASB issued SFAS No. 131, Disclosure About Segments of
an Enterprise and Related Information. SFAS No. 131 establishes standards for
the way that public business enterprises report information about operating
segments. It also establishes standards for related disclosures about products
and services, geographic areas and major customers. SFAS No. 131 is effective
for fiscal years beginning after December 15, 1997. The Company has determined
that it does not have any separately reportable business segments.
F-12
<PAGE>
24/7 MEDIA, INC.
(Successor Company to Interactive Imaginations, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996 and 1997
(All information subsequent to December 31, 1997 is Unaudited)
(2) Balance Sheet Components
Prepaid Expenses and Other Current Assets
<TABLE>
<CAPTION>
December 31,
--------------------- March 31,
1996 1997 1998
----------- --------- ------------
(unaudited)
<S> <C> <C> <C>
Prepaid operating lease ......... $108,946 $ -- $ --
Barter receivable ............... 85,358 -- --
Other prepaid ................... 43,223 14,936 52,296
-------- ------- -------
$237,527 $14,936 52,296
======== ======= =======
</TABLE>
Property and Equipment, Net
<TABLE>
<CAPTION>
December 31,
--------------------------- March 31,
1996 1997 1998
------------- ------------- --------------
(unaudited)
<S> <C> <C> <C>
Computer equipment ..................................... $1,893,217 $972,283 $1,069,950
Furniture and fixtures ................................. 87,922 -- --
Leasehold improvements ................................. 33,517 -- --
---------- -------- ----------
2,014,656 972,283 1,069,950
Less accumulated depreciation and amortization ......... (336,720) (380,946) (439,298)
---------- -------- ----------
$1,677,936 $591,337 630,652
========== ======== ==========
</TABLE>
During 1997, in connection with a reduction in the Company's operations and
personnel, the Company recorded a net write-off of approximately $756,795
of property and equipment that was deemed to have no future economic
benefit.
Intangible Assets
<TABLE>
<CAPTION>
December 31,
------------------------ March 31,
1996 1997 1998
------------ ----------- --------------
(unaudited)
<S> <C> <C> <C>
Licenses .............................. $ 37,040 $ -- $ --
Trademarks ............................ 4,165 4,165 4,165
--------- -------- ----------
41,205 4,165 4,165
Less accumulated amortization ......... (23,918) (1,454) (1,662)
--------- -------- ----------
$ 17,287 $ 2,711 $ 2,503
========= ======== ==========
Goodwill .............................. $ -- $ -- $8,205,529
Less accumulated amortization ......... -- -- (335,355)
--------- -------- ----------
$ -- $ -- $7,870,174
========= ======== ==========
</TABLE>
F-13
<PAGE>
24/7 MEDIA, INC.
(Successor Company to Interactive Imaginations, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996 and 1997
(All information subsequent to December 31, 1997 is Unaudited)
(2) Balance Sheet Components --Continued
Accrued Liabilities
<TABLE>
<CAPTION>
December 31,
----------------------- March 31,
1996 1997 1998
----------- ----------- ------------
(unaudited)
<S> <C> <C> <C>
Professional fees ......................... $102,105 $225,691 $ 205,882
Employee commissions and expenses ......... -- -- 423,409
Ad management fees ........................ -- -- 258,435
Barter payable ............................ 85,358 -- --
Affiliate royalties ....................... 43,955 81,384 941,715
Prizes .................................... 68,474 -- --
Other ..................................... 214,463 164,130 351,528
-------- -------- ----------
$514,355 $471,205 $2,180,969
======== ======== ==========
</TABLE>
(3) Income Taxes
No provision for federal or state income taxes has been recorded as the
Company incurred net operating losses for all periods presented and has no
carryback potential. At December 31, 1997, the Company had approximately
$13,394,000 of federal net operating loss carryforwards available to offset
future taxable income; such carryforwards expire in various years through 2012.
As a result of various equity transactions during 1996 and 1997 as well as
during 1998 (see notes 5 and 11), management believes the Company has undergone
an "ownership change" as defined by section 382 of the Internal Revenue Code.
Accordingly, the utilization of a portion of the net operating loss
carryforward may be limited. Due to this limitation, and the uncertainty
regarding the ultimate utilization of the net operating loss carryforwards, no
tax benefit for losses has been recorded by the Company in 1995, 1996 and 1997,
and a full valuation allowance has been recorded for the entire amount of the
net deferred tax asset.
The tax effects of temporary differences and tax loss carryforwards that
give rise to significant portions of federal deferred tax assets and deferred
tax liabilities at December 31, 1996 and 1997 are presented below.
<TABLE>
<CAPTION>
1996 1997
--------------- ---------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards ................................... $ 2,223,000 $ 4,554,000
Deferred revenues .................................................. 527,000 33,000
Accounts receivable principally due to allowance for doubtful
accounts .......................................................... 22,000 22,000
Other .............................................................. 24,000 22,000
------------ ------------
Gross deferred tax assets ............................................. 2,796,000 4,631,000
Less: valuation allowance ............................................. (2,698,000) (4,501,000)
------------ ------------
Net deferred tax assets ........................................ 98,000 130,000
------------ ------------
Deferred tax liabilities:
Plant and equipment, principally due to differences in depreciation (98,000) (130,000)
------------ ------------
Gross deferred tax liabilities ........................................ (98,000) (130,000)
------------ ------------
$ -- $ --
============ ============
</TABLE>
F-14
<PAGE>
24/7 MEDIA, INC.
(Successor Company to Interactive Imaginations, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996 and 1997
(All information subsequent to December 31, 1997 is Unaudited)
(4) Notes Payable
Notes Payable--Related Parties
An officer and stockholder of the Company loaned the Company $80,000 in
1995 at an interest rate of 5.76%. The entire principal and accrued interest
totaling $85,618 related to those loans were paid in full in 1996. Affiliates
of this same stockholder loaned the Company $10,000 and $25,000 in 1995 at
interest rates of 6.97% and 6.19%, respectively. The entire principal balance
of $35,000 related to those loans was paid in full in 1995. In addition, an
officer and stockholder of the Company loaned the Company $7,000 in 1995 at an
interest rate of 6.60%. This loan was offset against certain personal expenses
paid by the Company on behalf of this officer and stockholder.
Mandatory Conversion Subordinated Notes
In August, September and October 1996, the Company issued Mandatory
Conversion Subordinated Notes ("Notes") in the aggregate principal amount of
$1,500,000 and bearing an interest rate equal to 8% per annum. These Notes were
converted into a total of 52,262 Convertible Preferred Shares ("Preferred
Shares") in connection with the Company's November 1996 private placement, as
required by the terms and conditions of such Notes. All accrued interest on
these Notes, aggregating $21,919, was paid to the holders thereof in connection
with the conversion to Convertible Preferred Shares.
Senior Convertible Notes Payable--Related Parties
During 1997, the Company received $2,500,000 in proceeds from the issuance
of senior convertible notes payable primarily to affiliates of stockholders of
the Company, bearing an interest rate of 8% compounded semi-annually. The
notes, including interest thereon, are due on the earlier of prepayment,
redemption, conversion of the notes into common stock or May 15, 1999, the
maturity date. Each of the notes was issued with detachable warrants allowing
such holders to purchase shares of the Company's common stock at prices ranging
from $0.40 to $2.09 per share. The value attributed to the warrants of $201,000
has been recorded as debt discount and is being amortized to interest expense
using the interest method over the term of the notes.
The notes are convertible into common stock at conversion prices ranging
from $0.40 to $2.09 per share upon occurrence of certain events. On December
22, 1997, $94,757 of the notes, including interest thereon, were converted into
236,737 shares of common stock at $0.40 per share. During 1997, the Company
recorded $42,652 of interest expense in connection with the amortization of the
debt discount and conversion of the aforementioned notes.
During January 1998, the Company received $150,000 in proceeds from the
issuance of senior convertible notes payable with terms similar to the notes
issued during 1997. The notes are convertible into 173,282 shares of common
stock at $0.87 per share. The value attributable to 17,240 warrants, to
purchase shares of the Company's common stock at $0.87 per share, of $12,156
was recorded as debt discount.
In connection with the Securities Purchase Agreement and the Merger,
$2,056,250 of the Senior Convertible Notes Payable--Related Parties, plus
accrued interest thereon, were converted into 3,002,344 shares of common stock,
leaving approximately $500,000 of such notes, plus accrued interest thereon,
outstanding as of June 2, 1998.
Loan Payable--Related Party
In connection with the Petry acquisition, Petry Media Corporation, a
shareholder of the Company, agreed to lend an aggregate of $300,000 during the
period September 29, 1997 to December 31, 1997. The loan is repaid through the
payment of 5% of the gross commissions or other revenues received by the
Company, after deducting advertising agency commissions and web-site royalties.
At March 31, 1998, $283,267 of the loan was outstanding.
In accordance with Staff Accounting Bulletin Topic 5:T, the Company has
imputed an interest cost because these loans have no stated interest rate. The
imputed interest rate used was based on a market rate of interest of 12%.
F-15
<PAGE>
24/7 MEDIA, INC.
(Successor Company to Interactive Imaginations, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996 and 1997
(All information subsequent to December 31, 1997 is Unaudited)
(4) Notes Payable --Continued
Warrants
In connection with the issuance of Mandatory Convertible Subordinated
Notes in August 1996, in the principal amount of $500,000, the Company also
issued to the note holder detachable warrants to purchase 26,132 of the
Company's Common Shares at a price of $2.87. Such warrants expire no later than
three years from the date of issuance. The value attributed to the warrants of
$17,900 was recorded as debt discount and subsequently charged to interest
expense in connection with the conversion of the aforementioned notes.
On April 9, 1997, the Company granted warrants to purchase 17,500 of the
Company's Common shares at an exercise price of $12.43 per share. The fair
value of the warrants was insignificant on the date of grant.
In connection with the issuance of Senior Convertible Notes
Payable--Related Parties, warrants to purchase 677,264 and 17,240 Common shares
at a price of $0.40 and $0.87 were outstanding as of December 31, 1997 and
February 25, 1998, respectively, and such warrants expire no later than three
years from the date of issuance.
In connection with the February 25, 1998 Securities Purchase Agreement and
Merger, 713,715 warrants to purchase common shares were exchanged for 396,476
shares of Common Stock. Accordingly, the Company charged the unamortized
portion of the applicable debt discount to interest expense in connection with
the conversion of the notes and warrants.
On February 24, 1998, Interactive Imaginations and Michael P. Paolucci
entered into a Confidential Separation Agreement and General Release
("Separation Agreement") pursuant to which Mr. Paolucci's employment as an
executive, but not as a Director, of Interactive Imaginations was terminated as
of February 24, 1998. The terms of the Separation Agreement generally provide
that Mr. Paolucci and Interactive Imaginations agreed to release and discharge
the other party (and its successors and assigns) from all causes of action,
claims, judgments, obligations, damages or liabilities. Interactive
Imaginations agreed to issue to Mr. Paolucci Class C Warrants to purchase up to
2,500,000 shares of Common Stock at an exercise price of $0.952 per share. In
addition, Interactive Imaginations agreed to extend the term from January 31,
2000 to January 31, 2005 in respect of a fully vested option held by Mr.
Paolucci to purchase 52,000 shares of Interactive Imaginations common stock at
$0.43 per share. Accordingly, the Company recorded compensation expense of
$450,000 during the three month period ended March 31, 1998.
(5) Common Stock, Convertible Preferred Shares and Mandatorily Redeemable
Convertible Preferred Stock
Common Stock
In connection with its formation in September 1994, the Company authorized
1,000,000 Common shares, par value $.01 per share, and immediately thereafter
issued a total of 100,000 Common shares to its founders in exchange for
approximately $30,000 worth of expenses, as well as $15,000 in cash.
In February 1995, the Company amended its capital structure to eliminate
the existing Common shares and create Common Stock Class A and Common Stock
Class B. Accordingly, the Company amended its Certificate of Incorporation to
provide for: (i) conversion of the 1,000,000 authorized Common shares (900,000
authorized but not issued; 100,000 issued and outstanding) into 1,000,000 Class
A Common shares, par value $.01 per share; and (ii) authorization of 1,000
Class B Common shares, par value $.01 per share.
In March 1995, the Company issued a total of 999 Class B Common shares in
exchange for approximately $93,000 in cash, which were subsequently (in June
1995) converted to 62,707 Class A Common shares. During the remainder of 1995,
the Company issued a total of 130,623 additional Class A Common shares in
exchange for $1,289,000 in cash. As of December 31, 1995, the Company had
authorized: (i) 1,000,000 Class A Common shares, of which 293,330 were issued
and outstanding; and (ii) 1,000 Class B Common shares, of which none were
outstanding.
F-16
<PAGE>
24/7 MEDIA, INC.
(Successor Company to Interactive Imaginations, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996 and 1997
(All information subsequent to December 31, 1997 is Unaudited)
(5) Common Stock, Convertible Preferred Shares and Mandatorily Redeemable
Convertible Preferred Stock--Continued
During 1996, the Company issued an additional 137,483 Class A Common
shares in exchange for $4,525,000 in cash.
In March 1996, the Company's shareholders approved a recapitalization plan
which provided for: (i) conversion of the 1,000,000 authorized Class A Common
Shares into 30,000,000 Common Shares, par value $.01 per share; (ii) conversion
of each of the 430,813 issued and outstanding Class A Common shares into 10 of
the new Common Shares (any remaining fractional shares could be purchased or
sold by each shareholder in the conversion); and (iii) conversion of the 1,000
authorized Class B Common shares into 2,000,000 Preferred Shares, par value
$.01 per share.
Convertible Preferred Shares
In November 1996, the Company designated 500,000 Convertible Preferred
Shares, par value $.01 per share, out of the 2,000,000 Preferred Shares, which
were authorized in March 1996, the rights and preferences of which are
generally more senior to the Company's Common Shares and are more fully
described in the Company's Amended Certificate of Incorporation (the "Amended
Certificate"). Thereafter, the Company completed a private placement of 140,722
Preferred Shares for an aggregate price of $4,038,722. Such consideration
consisted of the cancellation of outstanding Notes (described above) in the
aggregate principal amount of $1,500,000 plus $2,538,722 in cash. Each
Preferred Share is convertible into ten (10) Common Shares (subject to
adjustment as set forth in the Amended Certificate) upon the occurrence of
certain events in respect of the Company or the holders of Preferred Shares. In
January 1997, the Company issued 17,422 shares of Preferred Stock for a payment
of $500,011 in cash.
As of December 31, 1996 and 1997, the 140,722 and 158,144 issued and
outstanding Preferred Shares were convertible into 1,407,220 and 2,171,633
Common Shares, however, no Preferred Shares were converted as of that date (see
note 11). The Company has reserved 5,000,000 authorized but unissued Common
Shares for issuance in connection with the conversion of the Preferred Shares.
These Preferred Shares, in the event of any voluntary or involuntary
liquidation, dissolution or winding up of the Company, as defined, on a pari
passu basis, are entitled to receive an amount equal to $28.70 per share, to be
paid out of the assets of the Company available for distribution before any
such payments shall be made on any shares of the Company's common shares or any
other capital stock of the Company other than the Preferred Shares, plus any
declared and unpaid dividends.
The Preferred Shares are subject to mandatory conversion, and shall be
automatically converted into common shares, as noted above, in the event:
(i) the Company successfully consummates a firm commitment for an
underwritten initial public offering of its equity securities for:
(a) a gross per share price offered to the public of at least 200% of the
then current per share conversion price, as defined; and
(b) a total gross offering amount, as defined, of at least $20,000,000;
or
(ii) the holders of a majority of the Preferred Shares vote in favor of or
consent to such conversion.
For as long as the Preferred Shares are outstanding, the Company shall
not, without the prior written consent or affirmative vote of the holders of at
least 66 2/3 % of all of the outstanding Preferred Shares:
(i) authorize or issue any other equity securities of the Company which
rank superior to the Preferred Shares with respect to conversion,
dividends, redemption, liquidation, antidilution or other preferences,
designations, rights or powers;
F-17
<PAGE>
24/7 MEDIA, INC.
(Successor Company to Interactive Imaginations, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996 and 1997
(All information subsequent to December 31, 1997 is Unaudited)
(5) Common Stock, Convertible Preferred Shares and Mandatorily Redeemable
Convertible Preferred Stock--Continued
(ii) authorize or issue any securities of the Company which have voting
rights superior to the Preferred Shares; or
(iii) otherwise amend, alter or repeal the preferences, designations,
rights or powers of the Preferred Shares or enter into any transaction
that shall result in any such amendment, alterations, or repeal, which
would have an adverse effect upon holders of such shares.
Mandatorily Redeemable Convertible Preferred Stock
On February 25, 1998, the Company entered into a Securities Purchase
Agreement for the Sale and Issuance of 10,060,002 shares of Mandatorily
Redeemable Convertible Preferred Stock--Series A ("Mandatorily Redeemable
Convertible Preferred Stock" or "Series A"), par value $.01 per share,
5,283,616 Class A Warrants and 5,283,616 Class B Warrants in a private
placement for total proceeds of $10,060,002.
After giving effect to the Securities Purchase Agreement, including the
Merger, the capital stock of the Company consists of: (i) 100,000,000 common
shares, of which 27,481,201 shares are issued and outstanding, 10,060,002
shares are reserved for issuance upon conversion of issued and outstanding
Mandatorily Redeemable Convertible Preferred Stock or "Series A," 5,283,616
shares are reserved for issuance upon exercise of issued and outstanding Class
A Warrants, 5,283,616 shares are reserved for issuance upon exercise of issued
and outstanding Class B Warrants, 2,575,000 are reserved for issuance upon
exercise of issued and outstanding Class C Warrants, 142,421 are reserved for
issuance upon exercise of issued and outstanding unclassified warrants, 251,028
(subject to adjustment) are reserved for issuance upon exercise of outstanding
convertible debentures, and 5,750,000 shares are reserved for issuance to key
employees, officers and directors of, and consultants to, the Company under
stock incentives that have been granted or are available for grant by the
Company pursuant to the 1998 Stock Incentive Plan; and (ii) 30,000,000
preferred shares, of which none are outstanding and of which 10,060,002 shares
designated as Mandatorily Redeemable Convertible Preferred Stock or Series A
shares, all of which are in a private placement.
The Series A shares rank (i) prior to the Common Stock of the Company;
(ii) with any Securities (as defined in the Securities Purchase Agreement); and
(iii) junior to any Senior Securities, in each case as to dividends and other
distribution of assets and upon liquidation, dissolution or winding up of the
Company, whether voluntary or involuntary. The Series A shareholders are
entitled to receive, when and as declared by the Board of Directors out of
funds legally available, dividends at a rate of $0.04 per share per annum. Such
dividends shall be cancelled pursuant to the Securities Purchase Agreement if
the Company consummates an initial public offering (as defined) prior to
January 1, 1999.
Each share of Series A shall be convertible, at the option of the holder,
at any time and without the payment of additional consideration into common
stock determined by the sum of (i) the Payment Price of $0.952 per Series A
share divided by the conversion price of $0.952 per common share (as adjusted),
plus (ii) all accrued and unpaid dividends with respect to such share divided
by the dividend conversion price of equal to twice the conversion price of
$0.952.
Each Series A share (and, as applicable, all accrued but unpaid dividends
thereon), shall automatically be converted into common shares at the conversion
price (and dividend conversion price) immediately upon the closing of a
qualified public offering.
In the event the Company has not completed a qualified public offering on
the prior to the fifth anniversary of the original issue date, each shareholder
of record of Series A shares will have the right to cause the Company to redeem
at the option of the shareholder all or part of the shareholder's outstanding
Series A shares by paying cash of $0.952 per share plus any dividends accrued.
Additionally, if the Company fails to maintain at least $10 million of Key-Man
Life Insurance on the President and Chief Executive Officer of the Company,
each shareholder of record of Series A Shares will have the right to cause the
company to redeem at the option of the shareholder
F-18
<PAGE>
24/7 MEDIA, INC.
(Successor Company to Interactive Imaginations, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996 and 1997
(All information subsequent to December 31, 1997 is Unaudited)
(5) Common Stock, Convertible Preferred Shares and Mandatorily Redeemable
Convertible Preferred Stock--Continued
all or part of the shareholder's outstanding Series A Shares by paying cash of
$0.952 per share plus any dividends accrued.
Series A shareholders have one vote for each full common share into which
a Series A share would be convertible.
In conjunction with the Securities Purchase Agreement, the Company issued
both Class A Warrants and Class B Warrants to purchase 5,283,616 shares of the
Company's common stock, par value $.01 per share, at $1.904 and $2.856 per
share, respectively. Such warrants are immediately exerciseable and expire on
February 25, 2003.
(6) Stock Option Plan
1995 Stock Option Plan--amended
During 1995, the Company established the 1995 Stock Option Plan, which was
amended (the "Amended Plan") by the Board of Directors in December 1996. Under
the Amended Plan, the Board of Directors may issue incentive stock options or
non-qualified stock options to purchase up to 870,000 common shares. Incentive
stock options may be granted to officers who are employees of the Company,
Directors of the Company and other employees of the Company who are deemed to
be "key employees." Incentive stock options must be issued at the fair market
value of the Company's common stock at the date the option is issued.
Non-qualified stock options may be granted to officers, directors, other
employees, consultants and advisors of the Company. The option price for
non-qualified stock options shall be at least 85% of the fair market value of
the Company's common stock. The granted options under the amended plan shall be
for periods not to exceed ten years. Options granted to shareholders who own
greater than 10% of the outstanding stock must be issued at 110% of the fair
market value of the stock on the date the options are granted. Subsequent to
December 31, 1997, the Amended Plan was replaced by the 1998 Stock Incentive
Plan (see below).
The per share weighted-average fair value of stock options granted during
1995, 1996 and 1997 was $0.64, $2.32 and, $0.40, respectively, on the date of
grant using the Black-Scholes method with the following weighted-average
assumptions: 1995--risk-free interest rate 6.39%, and an expected life of two
years; 1996--risk-free interest rate 6.18%, and an expected life of three
years; and 1997--risk-free interest rate 5.64%, and an expected life of two
years.
The Company applies APB Opinion No. 25 in accounting for its Plan and,
accordingly, no compensation cost has been recognized for its stock options in
the accompanying financial statements.
Had the Company determined compensation cost based on the fair value at
the grant date for its stock options under SFAS No. 123, the Company's net
income would have been reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1995 1996 1997
---------------- --------------- ---------------
<S> <C> <C> <C>
Net loss:
As reported ......... $ (1,168,144) (6,795,675) (5,305,828)
Pro forma ........... $ (1,179,998) (6,838,920) (5,322,570)
Net loss per share:
As reported ......... $
Pro forma ........... $
</TABLE>
F-19
<PAGE>
24/7 MEDIA, INC.
(Successor Company to Interactive Imaginations, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996 and 1997
(All information subsequent to December 31, 1997 is Unaudited)
(6) Stock Option Plan--Continued
Stock option activity during the periods indicated is as follows:
<TABLE>
<CAPTION>
Weighted
average
Options exercise
granted price
------------ ---------
<S> <C> <C>
Outstanding at December 31, 1994 ............... --
Granted ........................................ 257,700 $ 0.77
Exercised ...................................... --
Canceled ....................................... --
-------
Outstanding at December 31, 1995 ............... 257,700 $ 0.77
Granted ........................................ 227,555 2.82
Exercised ...................................... --
Canceled ....................................... (52,068) 1.28
------- -------
Outstanding at December 31, 1996 ............... 433,187 1.79
Granted (a) .................................... 831,188 0.40
Exercised ...................................... --
Canceled ....................................... (91,133) 1.61
------- -------
Outstanding at December 31, 1997 ............... 1,173,242 0.93
========= =======
Vested at December 31, 1997 .................... 529,493
=========
Options available at December 31, 1997 ......... --
=========
</TABLE>
(a) At December 31, 1997, the total number of options outstanding for
purchase of common shares under the Amended Plan exceeded the options
available for issuance. Subsequent to December 31, 1997, the Company
replaced the Amended Plan with the 1998 Stock Incentive Plan (see below)
and increased the number of shares available under the plan to a
maximum of 5,750,000.
The following table summarizes information about stock options outstanding
at December 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------- -----------------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
RANGE OF NUMBER REMAINING AVERAGE NUMBER AVERAGE
EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
- ----------------- ------------- ------------------ ---------------- ------------- ---------------
<S> <C> <C> <C> <C> <C>
$0.40-0.43 1,059,671 7.1 years $ 0.40 420,922 $ 0.40
1.00-1.29 37,856 2.1 years 1.23 32,856 1.26
2.00-2.98 75,715 3.3 years 2.70 75,715 2.70
--------- -------
1,173,242 529,493
========= =======
</TABLE>
1998 Stock Incentive Plan
On February 13, 1998, the Board of Directors and stockholders of the
Company approved the 1998 Stock Incentive Plan (the Plan). The following is a
summary of the material features of the Plan. This Plan replaces the 1995 Stock
Option Plan--Amended.
All employees of and consultants to the Company are eligible under the
Plan. Eligibility under the Plan shall be determined by the Stock Incentive
Committee. The Plan provides for the grant of any or all of the following types
of awards: (i) stock options, including incentive stock options and
non-qualified stock options; (ii) stock appreciation rights, in tandem with
stock options or free standing; and (iii) restricted stock. In addition, the
Plan provides for the one-time non-discretionary award of stock options to
non-employee directors of the Company.
F-20
<PAGE>
24/7 MEDIA, INC.
(Successor Company to Interactive Imaginations, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996 and 1997
(All information subsequent to December 31, 1997 is Unaudited)
(6) Stock Option Plan--Continued
A maximum of 5,750,000 shares of Common Stock may be issued or used for
reference purposes pursuant to the Plan. The maximum number of shares of Common
Stock subject to each of stock options or stock appreciation rights that may be
granted to any individual under the Plan is 250,000 for each fiscal year during
the term of the Plan. If a stock appreciation right is granted in tandem with a
stock option, it shall be applied against the individual limits for both stock
options and stock appreciation rights, but only once against the maximum number
of shares available under the Plan.
Subsequent to December 31, 1997, the Company granted 2,248,096 and 504,116
options at $1.00 per share during March and April 1998, respectively.
(7) Major Contracts
In November 1996, the Company entered into an agreement with SegaSoft to
license the rights to its registration-driven ad targeting software. The
contract term was for two years from the earlier of the first commercial use of
SegaSoft's Heat Network or August 1, 1997. The Company received a license fee
of $1.8 million, of which $1.2 million was received by December 31, 1996. In
addition, the Company received a $300,000 non-refundable consulting retainer
fee in November 1996. This fee, plus an additional $100,000 credit, was applied
against consulting service fees for design modifications to the software for
the SegaSoft Heat Network, which were recognized as revenues as services were
performed. The Company accounted for the majority of the license fee as
performance occurred over the period during which the licensed software was
transferred to SegaSoft and modified to perform to SegaSoft's specifications,
with the remaining balance applied over the two-year term. For the years ended
December 31, 1996 and 1997 and for the three months ended March 31, 1998, the
Company recorded approximately $429,000, $1,681,000 and $0 in revenue,
respectively.
During 1996, the Company entered into an agreement with SegaSoft for
advertising on the Company's ContentZone Websites and/or Riddler.com. The term
of the contract was for one year from the date of signing. The Company received
a prepayment in full for $540,000 in 1996. Revenue from the agreement was
recognized ratably over the terms of the contracts. For the years ended
December 31, 1996 and 1997, the Company recorded $212,000 and $326,000 in
revenue, respectively.
During 1996, the Company entered into an agreement with Microsoft
Corporation for advertising on the Company's ContentZone Websites. The term of
the contracts was for one year from the date of signing. The Company received a
prepayment in full for $150,000 in 1996. Revenue from the agreement was
recognized ratably over the terms of the contracts. For the years ended
December 31, 1996 and 1997, the Company recorded $75,000 and $75,000 in
revenue, respectively.
(8) Supplemental Cash Flow Information
Supplemental disclosure of cash flow information:
During 1996, 1997 and 1998, the amount of cash paid for interest was
$27,535, $0 and $0, respectively.
Non-cash financing activities:
During 1996, the Company converted $1.5 million of mandatory conversion
subordinated notes into Preferred Shares.
During 1997, the Company converted $94,757 of senior convertible notes
into common stock.
For the three months ended March 31, 1998, the Company converted 158,144
shares of convertible preferred stock into 2,171,633 shares of common stock,
converted $2,056,250 of senior convertible notes payable--related parties, plus
accrued interest, into 3,002,344 shares of Common Stock and outstanding
warrants were converted
F-21
<PAGE>
24/7 MEDIA, INC.
(Successor Company to Interactive Imaginations, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996 and 1997
(All information subsequent to December 31, 1997 is Unaudited)
(8) Supplemental Cash Flow Information--Continued
into 396,476 shares of Common Stock. Additionally, for the three month period
ended March 31, 1998, the Company recorded imputed interest payable on loans
payable--related party of $9,000. The Company issued 10,494,366 and 6,821,335
shares of common stock in connection with the Petry and Advercomm acquisitions
respectively.
In February 1998, the Company issued warrants to a former officer for
$450,000 (see Note 4).
(9) Commitments
The Company leases its facilities and certain equipment under operating
lease agreements. During May 1996, the Company converted its New York office
lease agreements to a month-to-month basis for approximately 11,000 square feet
of office space. Rental expense from operating leases amounted to $31,000,
$175,000, $183,000 and $26,000 for the years ended 1995, 1996 and 1997 and for
the three month period ended March 31, 1998, respectively.
On June 1, 1996, the Company entered into an eighteen-month operating
lease for the use of computer equipment with a fair market value of
approximately $835,000. The lease requires six quarterly payments of $163,420
beginning on June 1, 1996. In October 1997, the lease agreement was modified
and as a result the quarterly payments were adjusted to $45,935 through the
extended term of the lease, November 30, 1998. Rent expense for the operating
lease was $381,313 and $559,748 for the years ended 1996 and 1997,
respectively.
Future minimum payments under noncancelable operating leases at December
31, 1997 are as follows:
<TABLE>
<CAPTION>
Operating
Year ending December 31 leases
- ------------------------------------------------ ----------
<S> <C>
1998 ........................................ $271,000
1999 ........................................ 128,000
2000 ........................................ 23,000
2001 ........................................ 1,000
--------
Total minimum payments required ......... $423,000
========
</TABLE>
Interactive Imaginations also entered into a Consulting Agreement, dated
as of January 1, 1998 with Neterprises, Inc. ("Consulting Agreement"), pursuant
to which Mr. Paolucci, President and sole stockholder of Neterprises, Inc.,
agreed to provide management and consulting services to Interactive
Imaginations for a term of up to one year in connection with the identification
and evaluation of potential strategic relationships and potential acquisition
targets. In return for such services, Mr. Paolucci received a lump sum payment
of $180,000 and currently receives a monthly fee of $12,500.
In connection with the stock purchase agreement to acquire Petry, the
Company is obligated to pay a related party a royalty of 5% of the gross
commissions or other revenues received by the Company, after deducting
advertising agency commissions and web-site royalties. Total royalties to be
paid will not exceed $1,000,000. Payment of the royalty amount commences upon
full repayment of the loan payable--related party (see note 4). As of March 31,
1998, the Company had accrued $46,149 in royalty payments which are included in
other long-term liabilities.
(10) Legal Proceedings
The Company is involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material effect on the Company's
financial position, results of operation or liquidity. During 1997, the Company
successfully defended claims against the Company; however, legal costs incurred
in connection with such claims amounted to $232,304.
F-22
<PAGE>
24/7 MEDIA, INC.
(Successor Company to Interactive Imaginations, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996 and 1997
(All information subsequent to December 31, 1997 is Unaudited)
(11) Subsequent Events--Unaudited
Intelligent Interactions Acquisition
During April 1998, the Company entered into an Agreement and Plan of
Merger (the "Merger") to acquire all of the outstanding stock of Intelligent
Interactions.
Upon consummation of the Merger, each share of common stock of Intelligent
Interactions was converted into approximately 16.3 shares of common stock, 2.3
Class A Warrants, 2.3 Class B Warrants and 1.2 Class C Warrants of the Company.
Each share of Preferred Stock, Series A Preferred Stock, Series AA
Preferred Stock or Series AAA Preferred Stock of Intelligent Interactions was
converted to approximately 18 shares of Mandatorily Redeemable Convertible
Preferred Stock--Series A, par value $.01 per share, 2.7 Class A Warrants, 2.7
Class B Warrants and 1.4 Class C Warrants of the Company. The convertible note
payable was also converted into Mandatorily Redeemable Convertible Preferred
Stock--Series A and detachable warrants were terminated as a result of the
merger.
In addition, each option to purchase shares of common stock of Intelligent
Interactions was converted into an option to purchase approximately 16 shares
of common stock of the Company under the terms and pursuant to the conditions
of the Company's 1998 Stock Incentive Plan.
The acquisition will be accounted for using the purchase method of
accounting, and accordingly, the total purchase price of $7,670,500 will be
allocated to the tangible and identifiable intangible assets acquired and
liabilities assumed on the basis of their fair values on the acquisition date.
Approximately $(154,200) of the aggregate purchase price is expected to be
allocated to net tangible liabilities consisting primarily of cash, accounts
receivable, property and equipment, accounts payable and accrued liabilities.
The historical carrying amounts of such net liabilities approximate their fair
values. Approximately $5,477,300 is expected to be allocated to in-process
technology and will be immediately charged to operations because such
in-process technology have not reached the stage of technological feasibility
at the acquisition dates and have no alternative future use. The purchase price
in excess of identified tangible and intangible assets and liabilities assumed
in the amount of $2,347,400 is expected to be allocated to goodwill and will be
amortized over its estimated useful life of two years.
CliqNow! Acquisitions
As of June 1, 1998, the Company acquired the CliqNow! division of K2
Design, Inc., an Internet advertising network comprised of medium to large
Websites organized into eight topical channels, for $4,000,000, with $1,000,000
payable in cash and $3,000,000 payable in Series B Convertible Redeemable
Preferred Stock. The preferred stock converts to Common Stock automatically
upon consummation of the Offering at a conversion price per share of Common
Stock equal to the per share proceeds to the Company. The Company intends to
furnish CliqNow!'s audited financial statements within 60 days of the effective
date of the acquisition pursuant to the requirements of Rule 3-05 of Regulation
S-X of the Securities Act of 1933, as amended.
(12) Initial Public Offering and Related Transactions (Unaudited)
The Company is offering shares of its common stock, par value
$.01 per share in an initial public offering (the "Offering"). All pro forma
amounts have been reflected to give effect of the Offering.
F-23
<PAGE>
24/7 MEDIA, INC.
(Successor Company to Interactive Imaginations, Inc.)
PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
OVERVIEW
During the period from January 1, 1998 through April 13, 1998, the Company
acquired three entities (the "Acquired Entities") in separate transactions in
exchange for securities of the Company. The Acquired Entities are as follows:
<TABLE>
<CAPTION>
EFFECTIVE EQUITY
ACQUIRED ENTITY DATE CONSIDERATION(1)
- ---------------------------------- ------------------- -----------------
<S> <C> <C>
Petry ............................ February 24, 1998 $ 4,292,800
Advercomm ........................ February 24, 1998 2,790,500
Intelligent Interactions ......... April 13, 1998 7,670,500
-----------
$14,753,800
===========
</TABLE>
- --------
(1) Includes acquisition costs of $157,000
The acquisitions have been accounted for using the purchase method of
accounting, and accordingly, each purchase price has been or will be allocated
to the tangible and identifiable intangible assets acquired and liabilities
assumed on the basis of their fair values on the acquisition dates.
Approximately $(1,276,400) of the aggregate recognized purchase price is
expected to be allocated to identified net tangible liabilities consisting
primarily of cash, accounts receivable, property and equipment, accounts
payable and accrued liabilities. The historical carrying amounts of such assets
and liabilities approximated their fair values. Approximately $5,477,300 of the
aggregate purchase price is expected to be allocated to in-process technology.
Because such in-process technology had not reached the stage of technological
feasibility at the acquisition dates and had no alternative future use, these
amounts were immediately charged to operations. The purchase price in excess of
identified tangible and intangible assets in the amount of $10,552,900 is
expected to be allocated to goodwill and is being amortized on an entity by
entity basis over its estimated useful life of two years.
The fair value of the Company's equity securities issued as consideration
for the acquisitions was determined based upon a number of considerations. The
fair value of the 17,315,701 aggregate shares of Common Stock issued in
connection with the acquisition of Petry and Advercomm was estimated to be
$0.40 per share, determined primarily by reference to the common stock
conversion price of $0.40 per share in connection with the Company's issuance
of approximately $1,000,000 senior convertible notes payable and detachable
warrants during September and November 1997. The fair value of the Company's
equity securities issued as consideration for the Intelligent Interactions
acquisition was determined based upon a number of factors, including the sale
of 10,060,002 shares of Mandatorily Convertible Redeemable Preferred
Stock-Series A on February 25, 1998 (excluding detachable warrants) for
$10,060,002 in cash. The fair value of the Company's Mandatorily Convertible
Redeemable Preferred Stock was estimated to be $1.06 per share and its Common
Stock $1.00 per share. The fair value of purchased existing and in-process
technologies were determined by management using a risk-adjusted income
valuation approach.
The following unaudited pro forma consolidated statements of operations
give effect to these acquisitions as if they had occurred on January 1, 1997
(or date of inception, if later) by consolidating the results of operations of
the Acquired Entities with the results of operations of 24/7 Media for the year
ended December 31, 1997 and the three months ended March 31, 1998. The pro
forma adjustments include the elimination of all intercompany transactions.
Advercomm was incorporated in November 1997 and had no operations in 1997;
however, the operation of Advercomm's network based advertising services
commenced on February 1, 1998; accordingly, Advercomm's pro forma results of
operations are only included in the pro forma statement of operations for the
two months of operations in the first quarter of 1998. The unaudited pro forma
consolidated statements of operations also gives effect to the conversion of
the Mandatorily Redeemable Preferred Stock into Common Stock which will be
converted immediately prior to the Offering as if it had occurred on January 1,
1997.
F-24
<PAGE>
24/7 MEDIA, INC.
(Successor Company to Interactive Imaginations, Inc.)
PRO FORMA CONSOLIDATED FINANCIAL INFORMATION--Continued
OVERVIEW--Continued
The unaudited pro forma consolidated statements of operations are not
necessarily indicative of the operating results that would have been achieved
had the transactions been in effect as of the beginning of the periods
presented and should not be construed as being representative of future
operating results.
The unaudited pro forma consolidated balance sheet gives effect to the
acquisition of Intelligent Interactions as if the acquisition had occurred on
March 31, 1998. The Company's historical consolidated balance sheet as of March
31, 1998 includes the February 24, 1998 acquisition of Petry and Advercomm. See
Notes 1 and 12 to the Consolidated Financial Statements.
The historical financial statements of the Company, Petry, and Intelligent
Interactions are included elsewhere in this Prospectus and the unaudited pro
forma consolidated financial information presented herein should be read in
conjunction with those financial statements and related notes.
F-25
<PAGE>
24/7 MEDIA, INC.
(Successor Company to Interactive Imaginations, Inc.)
PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
OVERVIEW--Continued
<TABLE>
<CAPTION>
Year Ended December 31, 1997
---------------------------------------------------------------------------
24/7 Media, Inc.
(successor company Pro forma
to Interactive Acquired Pro forma consolidated
Imaginations, Inc.) Companies adjustments 24/7 Media, Inc.
--------------------- --------------- ------------------ ------------------
<S> <C> <C> <C> <C>
Revenues:
Advertising ........................... $ 1,467,105 $ 1,269,260 -- $ 2,736,365
Consulting and license fees ........... 1,681,464 65,432 -- 1,746,896
------------ ------------ -- -------------
Total revenues ....................... 3,148,569 1,334,692 -- 4,483,261
Cost of revenues ....................... 1,655,340 1,174,598 -- 2,829,938
------------ ------------ -- -------------
Gross profit 1,493,229 160,094 -- 1,653,323
------------ ------------ -- -------------
Operating expenses:
Sales and marketing ................... 1,672,999 2,980,419 -- 4,653,418
General and administrative ............ 2,622,743 2,355,638 -- 4,978,381
Product development ................... 1,417,750 327,995 -- 1,745,745
Other expenses ........................ 989,099 -- -- 989,099
Amortization of
goodwill ............................. -- -- 3,612,034(B) 3,612,034
Write-off of acquired in-process
technology ........................... -- -- 5,477,281(A) 5,477,281
------------ ------------ --------- -------------
Total operating expenses ............. 6,702,591 5,664,052 9,089,315 21,455,958
------------ ------------ --------- -------------
Operating loss ......................... (5,209,362) (5,503,958) (9,089,315) (19,802,635)
Interest (expense) income, net ......... (96,466) 861 -- (95,605)
Net loss .............................. $ (5,305,828) $ (5,503,097) $ (9,089,315) $ (19,898,240)
============ ============ ============ =============
Pro forma:
Basic net loss per share (F) .........
Shares outstanding (F) ...............
<CAPTION>
Three Months Ended March 31, 1998
----------------------------------------------------------------------
24/7 Media, Inc.
(successor company Pro forma
to Interactive Acquired Pro forma consolidated
Imaginations, Inc.) Companies adjustments 24/7 Media, Inc.
--------------------- ------------- ---------------- -----------------
<S> <C> <C> <C> <C>
Revenues:
Advertising ........................... $ 1,076,250 $ 770,498 -- $ 1,846,748
Consulting and license fees ........... -- 88,362 -- 88,362
------------ ---------- -- ------------
Total revenues ....................... 1,076,250 858,860 -- 1,935,110
Cost of revenues ....................... 930,003 678,276 -- 1,608,279
------------ ---------- -- ------------
Gross profit 146,247 180,584 -- 326,831
------------ ---------- -- ------------
Operating expenses:
Sales and marketing ................... 653,460 524,978 -- 1,178,438
General and administrative ............ 1,285,512 459,999 -- 1,745,511
Product development ................... -- 66,738 -- 66,738
Other expenses ........................ -- -- -- --
Amortization of
goodwill ............................. 335,355 -- 850,448(B) 1,185,803
Write-off of acquired in-process
technology ........................... -- -- -- --
------------ ---------- ------- ------------
Total operating expenses ............. 2,274,327 1,051,715 850,448 4,176,490
------------ ---------- ------- ------------
Operating loss ......................... (2,128,080) (871,131) (850,448) (3,849,659
Interest (expense) income, net ......... (167,258) (11,434) -- (178,692)
Net loss .............................. $ (2,295,338) $ (882,565) $ (850,448) $ (4,028,351)
============ ========== ========== ============
Pro forma:
Basic net loss per share (F) .........
Shares outstanding (F) ...............
</TABLE>
See accompanying notes to Pro Forma Consolidated Financial Information.
F-26
<PAGE>
24/7 MEDIA, INC.
(Successor Company to Interactive Imaginations, Inc.)
PRO FORMA CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
March 31, 1998 March 31, 1998
---------------------------------------------------------------------------
24/7 Media, Inc.
(successor company Intelligent Pro Pro forma
to Interactive Interactions Forma consolidated
Imaginations, Inc.) Corp. Adjustments 24/7 Media, Inc.
--------------------- ------------------------------------ ----------------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ............................... $ 7,764,695 3,675 -- 7,768,370
Accounts receivable, net ................................ 1,818,899 87,499 -- 1,906,398
Prepaid expenses and other current assets ............... 52,296 13,568 65,864
-------------- ---------- ----------- -----------
Total current assets ................................ 9,635,890 104,742 -- 9,740,632
Property and equipment, net ............................. 630,652 129,451 -- 760,103
Goodwill, net ........................................... 7,870,174 -- 2,347,406(C) 10,217,580
Deferred offering costs ................................. 13,148 -- -- 13,148
Intangible assets, net .................................. 2,503 -- -- 2,503
Deposits ................................................ 49,626 49,626
-------------- ---------- ----------- -----------
Total assets ........................................ $ 18,201,993 234,193 2,347,406 20,783,592
============== ========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Line of credit .......................................... -- 17,195 -- 17,195
Accounts payable ........................................ 813,518 121,801 66,300(C) 1,001,619
Accrued liabilities ..................................... 2,180,969 183,102 -- 2,364,071
Loans payable--related party ............................ 283,267 -- -- 283,267
Convertible note payable ................................ -- 450,000 (450,000)(E) --
Deferred revenue ........................................ 41,000 -- 41,000
-------------- ---------- ----------- -----------
Total current liabilities ........................... 3,318,754 772,098 (383,700) 3,707,152
Senior convertible notes payable--related parties, net of
debt discount .......................................... 479,408 -- -- 479,408
Other liabilities ....................................... 46,149 -- -- 46,149
450,000(E)
Mandatorily redeemable convertible preferred stock, ..... 10,093,502 3,454,481 (13,999,783)(D) --
Stockholders' equity (deficit):
Convertible preferred stock ............................. -- -- -- --
Common stock ............................................ 274,812 2,412 178,641(D) 455,865
Additional paid-in capital .............................. 19,623,624 135,690 17,447,241(D) 37,206,555
Accumulated deficit ..................................... (15,634,256) (4,130,488) (1,346,793)(C) (21,111,537)
-------------- ---------- ----------- -----------
Total stockholders' equity (deficit) ................ 4,264,180 (3,992,386) 16,279,089 16,550,883
-------------- ---------- ----------- -----------
Commitments and contingencies
Total liabilities and stockholders' equity .......... 18,201,993 234,193 2,347,406 20,783,592
============== ========== =========== ===========
</TABLE>
See accompanying notes to Pro Forma Consolidated Financial Information.
F-27
<PAGE>
The following adjustments were applied to the Company's historical
consolidated financial statements and the Acquired Entities to arrive at the
pro forma consolidated financial information.
(A) To record acquired in-process technology associated with the
Intelligent Interactions acquisition in the amount of $5,477,300 which has been
recognized on January 1, 1997.
(B) To record amortization expense related to goodwill in the amount of
$10,552,900, which is amortized on an entity by entity basis, as if each
acquisition had occurred on January 1, 1997 (or inception, if later), over its
estimated useful life of two years.
(C) To record goodwill associated with the acquisition of Intelligent
Interactions and record a reduction to accumulated deficit in connection with
the related acquired in-process technology and to eliminate the historical
stockholders' deficit as of the acquisition date using the purchase method of
accounting.
(D) To give effect to the conversion of all outstanding shares of 24/7
Media's mandatorily redeemable convertible preferred stock (included shares
issued in connection with the Intelligent Interactions acquisition) into
14,308,306 shares of Common Stock immediately prior to the closing of this
offering.
(E) To give effect to conversion of Intelligent Interactions' $450,000
convertible note payable and $3,454,500 of manditorily redeemable convertible
preferred stock into shares of 24/7 Media's mandatorily redeemable convertible
preferred stock.
(F) The Company computes net loss per share in accordance with the
provisions of SFAS No. 128, "Earnings Per Share" and SEC Staff Accounting
Bulletin No. 98. Under SFAS No. 128 and SAB No. 98, basic net loss per share is
computed by dividing the net loss for the period by the weighted average number
of common shares outstanding during the period. The weighted average shares
used to compute basic net loss per share include outstanding shares of Common
Stock from the date of issuance. The computation excludes (i) for the year
ended December 31, 1997, _________ equivalent shares of Mandatorily Redeemable
Convertible Preferred Stock Series A. In addition, the calculation of diluted
net loss per share excludes Common Stock issuable upon exercise of employee
stock options and upon exercise of outstanding warrants, as their effect in all
periods presented is antidilutive.
Pro forma net loss per share is computed on the basis described above and
giving effect to the common shares issued to the acquired companies as if
acquired on January 1, 1997.
In future periods, the weighted average shares used to compute diluted
earnings per share will include the incremental shares of Common Stock relating
to outstanding options and warrants to the extent such incremental shares are
dilutive.
F-28
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Members of Interactive Holdings, LLC
(formerly Petry Interactive, Inc.)
We have audited the accompanying balance sheet of Interactive Holdings,
LLC (formerly Petry Interactive, Inc.) as of December 31, 1997 (Successor), and
the related statement of operations and shareholder's/members' deficit and cash
flows for the period from February 1, 1997 (inception) to September 28, 1997
(Predecessor) and the period from September 29, 1997 to December 31, 1997
(Successor). These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides 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 Interactive Holdings, LLC
as of December 31, 1997 (Successor), and the results of its operations and its
cash flows for the period February 1, 1997 (inception) to September 28, 1997
(Predecessor) and the period from September 29, 1997 to December 31, 1997
(Successor) in conformity with generally accepted accounting principles.
As discussed in note 1 to the financial statements, on September 29, 1997,
Interactive Holdings, LLC acquired Petry Interactive, Inc. As a result of the
change in control, the financial information for the period after the change in
control is presented on a different cost basis than that for the period before
the change in control and, therefore, is not comparable.
KPMG PEAT MARWICK LLP
New York, New York
June 2, 1998
F-29
<PAGE>
INTERACTIVE HOLDINGS, LLC
(FORMERLY PETRY INTERACTIVE, INC.)
BALANCE SHEET
<TABLE>
<CAPTION>
December 31,
1997
-------------
Successor
<S> <C>
ASSETS
Current Assets:
Cash ...................................................................... $ 117,849
Accounts receivable, net of allowance for doubtful accounts of $158,777 ... 803,089
Prepaid expenses and other current assets ................................. 6,449
----------
Total current assets .................................................. 927,387
----------
Other assets ................................................................. 5,000
----------
Total assets .......................................................... $ 932,387
----------
LIABILITIES AND MEMBERS' DEFICIT
Current Liabilities:
Loan payable--related party ............................................... 300,000
Accounts payable .......................................................... 8,875
Accrued liabilities ....................................................... 1,297,024
----------
Total current liabilities ............................................. 1,605,899
----------
Other long-term liabilities .................................................. 16,733
----------
Total liabilities ............................................................ 1,622,632
----------
Members' deficit:
Common Stock; $0.01 par value, 200,000 shares authorized, 100 shares issued
and outstanding .......................................................... 1
Paid in capital ........................................................... 6,000
Members' deficit .......................................................... (696,246)
----------
Total members' equity (deficit) ....................................... (690,245)
----------
Commitments and contingencies
Total liabilities and members' deficit ................................ $ 932,387
==========
</TABLE>
See accompanying notes to financial statements.
F-30
<PAGE>
INTERACTIVE HOLDINGS, LLC
(FORMERLY PETRY INTERACTIVE, INC.)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Period from
February 1, 1997 Period from
(inception) September 29, 1997
to to
September 28, 1997 December 31, 1997
-------------------- -------------------
(Predecessor) (Successor)
<S> <C> <C>
Advertising revenue ..................... $ 514,982 $ 754,279
Cost of revenues ........................ 449,621 724,973
------------ ----------
Gross profit ..................... 65,361 29,306
------------ ----------
Operating expenses:
Sales and marketing .................. 1,306,125 424,386
General and administrative ........... 950,210 295,163
------------ ----------
Total operating expenses ......... 2,256,335 719,549
Interest expense ..................... -- 6,000
----------
Net loss ......................... $ (2,190,974) $ (696,243)
============ ==========
</TABLE>
See accompanying notes to financial statements.
F-31
<PAGE>
INTERACTIVE HOLDINGS, LLC
(FORMERLY PETRY INTERACTIVE, INC.)
STATEMENTS OF SHAREHOLDER'S/MEMBERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
Total
Common Paid-In Shareholder's Shareholder's
Stock Capital Deficit Deficit
-------- --------- --------------- --------------
<S> <C> <C> <C> <C>
Balance as of February 1, 1997 (inception) ......... $ 1 -- $ (1) --
Net loss for the period ............................ -- -- (2,190,974) (2,190,974)
--- -- ------------ ----------
Balance as of September 28, 1997 ................... $ 1 -- (2,190,975) (2,190,974)
=== == ============ ==========
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Tota l
Common Paid-In Members' Members'
Stock Capital Deficit Deficit
----- ------- ------- -------
<S> <C> <C> <C> <C>
Members' deficit subsequent to the change in control as of
September 28, 1997 ...................................... $ 1 -- -- 1
------ ------ --------- ---------
Imputed interest on loan payable--related party .......... -- 6,000 -- 6,000
Net loss for the period .................................. -- -- (696,246) (696,246)
------ ------ --------- ---------
Members' deficit as of December 31, 1997 ................. $ 1 6,000 (696,246) (690,245)
====== ====== ========= =========
</TABLE>
See accompanying notes to financial statements.
F-32
<PAGE>
INTERACTIVE HOLDINGS, LLC
(FORMERLY PETRY INTERACTIVE, INC.)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Period from
February 1, 1997 Period from
(inception) September 29, 1997
to to
September 28, 1997 December 31, 1997
-------------------- -------------------
(Predecessor) (Successor)
<S> <C> <C>
Cash flows from operating activities:
Net loss ........................................................ $ (2,190,974) (696,243)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation ................................................... 10,358 --
Provision for doubtful accounts ................................ 12,992 145,786
Imputed interest on loan payable--related party ................ 6,000
Changes in operating assets and liabilities, net of acquisition:
Accounts receivable ........................................... (424,800) (410,861)
Prepaid assets and other current assets ....................... (5,490) (960)
Other assets .................................................. -- (5,000)
Accounts payable .............................................. 15,000 (6,125)
Accrued liabilities ........................................... 528,501 785,252
------------ --------
Net cash used by operating activities ....................... (2,054,413) (182,151)
------------ --------
Cash flows from financing activities:
Proceeds from loan payable--related party ....................... -- 300,000
Net cash transferred from--related party ........................ 2,180,617 --
------------ --------
Net cash provided by financing activities ................... 2,180,617 300,000
------------ --------
Net change in cash .......................................... 126,205 117,849
Cash at the beginning of period .................................... -- --
------------ --------
Cash at end of period .............................................. $ 126,205 117,849
============ ========
</TABLE>
See accompanying notes to financial statements.
F-33
<PAGE>
INTERACTIVE HOLDINGS, LLC
(FORMERLY PETRY INTERACTIVE, INC.)
NOTES TO FINANCIAL STATEMENTS
December 31, 1997
(All information subsequent to December 31, 1997 is Unaudited)
(1) Summary of Operations and Significant Accounting Policies
(a) Summary of Operations
Interactive Holdings, LLC. (formerly Petry Interactive, Inc.) (the
"Company") operates a network of Websites that enables both advertisers and Web
publishers to capitalize on the many opportunities presented by Internet
advertising, direct marketing and commerce. The Company generates revenues by
delivering advertisements and promotions to Websites affiliated with the
Company ("Affiliated Websites").
Inherent in the Company's business are various risks and uncertainties,
including its limited operating history, unproven business model and the
limited history of commerce on the Internet. The Company's success may depend
in part upon the emergence of the Internet as a communications medium,
prospective project development efforts, and the acceptance of the Company's
solutions by the marketplace.
On February 25, 1998, the Company simultaneously merged with Advercomm,
Inc. and with and into 24/7 Media, Inc. (successor company to Interactive
Imaginations, Inc.).
(b) Basis of Presentation
For the period February 1, 1997 (inception) to September 28, 1997, Petry
Interactive, Inc. was a wholly owned subsidiary of Petry Media Corporation
("PMC") (Predecessor). On February 1, 1997, Petry Interactive commenced
operations as a provider of Internet advertising solutions to a network of
Websites. On September 29, 1997, the Company entered into a Stock Purchase
Agreement whereby all of the outstanding shares of Petry Interactive, Inc. were
purchased by the Company in exchange for $100 in cash plus a warrant to
purchase 20% of the Company for $0.25. Accordingly, the statements of
operations and cash flows for the period February 1, 1997 (inception) to
September 28, 1997 reflect the operations of the Company as part of PMC
(Predecessor), and the balance sheet as of December 31, 1997 and the statements
of operations, members' deficit and cash flows for the period September 29,
1997 to December 31, 1997 reflect the operations and financial position under
the ownership of the Company (Successor).
As a result of the change in control, the financial information for the
period after the change in control is presented on a different cost basis than
that for the period before the change in control and, therefore, is not
comparable.
The accompanying financial statements include certain corporate general
and administrative expenses incurred on a consolidated basis by PMC for the
period February 1, 1997 (inception) to September 28, 1997 that have been
allocated to the Company. Such allocations include corporate salaries, rent,
professional services and depreciation and are included in general and
administrative expenses in the Company's statement of operations. In
management's opinion, the basis for the allocation of such costs is reasonable.
However, the expenses allocated to the Company are not necessarily
representative of what the Company would have incurred on a stand alone basis.
Allocated costs are as follows:
<TABLE>
<CAPTION>
Period from
February 1, 1997
(inception)
to
September 28, 1997
-------------------
(Predecessor)
<S> <C>
Corporate salaries ............ $534,686
Rent .......................... 63,896
Professional services ......... 23,594
Depreciation .................. 10,358
--------
$632,534
========
</TABLE>
F-34
<PAGE>
INTERACTIVE HOLDINGS, LLC
(FORMERLY PETRY INTERACTIVE, INC.)
NOTES TO FINANCIAL STATEMENTS--Continued
December 31, 1997
(All information subsequent to December 31, 1997 is Unaudited)
(1) Summary of Operations and Significant Accounting Policies --Continued
The purchase of the Company by Interactive Holdings LLC was accounted for
using the purchase method of accounting. The estimated fair value of the net
assets acquired is as follows:
<TABLE>
<S> <C>
Accounts receivable, net ...................... $538,013
Prepaid and other current assets .............. 5,490
Accounts payable and accrued expenses ......... 543,502
</TABLE>
The estimated fair value of the net assets acquired was determined by
management by reference to the fair value of these instruments at the date of
purchase which approximated their financial statement carrying amount.
(c) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(d) Income Taxes
For the period February 1, 1997 (inception) to September 28, 1997, federal
and state income taxes are provided as if the Company filed a separate tax
return. On a stand alone basis, the Company owes no current taxes and has not
been allocated any income tax expense (benefit) by PMC.
For the period September 29, 1997 to December 31, 1997, for federal and
state income tax purpose, the Company is treated as a partnership. The Company
incurred a net operating loss of $696,243 for the period, accordingly, no
provision has been made for income taxes, as income or loss is included in the
tax returns of the members.
(e) Revenue Recognition
The Company's advertising revenues are derived principally from short-term
advertising agreements in which the Company delivers advertising impressions or
full-page deliveries for a fixed fee to third-party Websites comprising the
Petry Network. For the period February 1, 1997 (inception) to September 28,
1997, revenues from advertising were recognized ratably over the term of the
agreement as services were performed. For the period from September 29, 1997,
to December 31, 1997, revenues from advertising are recognized in the period
the advertising impressions are delivered provided collection of the resulting
receivable is probable.
Websites affiliated with the Company ("Affiliated Websites") register web
page(s) with the Company's network and display advertising banners on those
pages. The Company pays its Affiliated Websites a service fee for providing
advertising space to the Petry Network. The Company becomes obligated to make
payments to such Affiliated Websites, which have contracted with the Company to
be part of the Petry Network, in the period the advertising impressions are
delivered. Such expenses are classified as cost of revenues in the statements
of operations.
At December 31, 1997, accounts receivable include approximately $500,700
of unbilled receivables for which revenue was recognized in 1997.
(f) Advertising Expenses
The Company expenses the cost of advertising and promoting its services as
incurred. Such costs are included in sales and marketing in the statement of
operations and totaled $18,000 and $19,765 for the period February 1, 1997
(inception) to September 28, 1997 and for the period September 29, 1997 to
December 31 1997, respectively.
F-35
<PAGE>
INTERACTIVE HOLDINGS, LLC
(FORMERLY PETRY INTERACTIVE, INC.)
NOTES TO FINANCIAL STATEMENTS--Continued
December 31, 1997
(All information subsequent to December 31, 1997 is Unaudited)
(1) Summary of Operations and Significant Accounting Policies --Continued
(g) Financial Instruments and Concentration of Risk
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist primarily of cash, accounts receivable,
accounts payable and accrued liabilities. At December 31, 1997 the fair value
of these instruments approximated their financial statement carrying amount.
Accounts receivable have been derived from advertising fees billed to
advertisers located in the United States. The Company generally requires no
collateral. The Company maintains reserves for potential credit losses. At
December 31, 1997, one customer accounted for over 10% of the Company's
accounts receivable, accounting for 12% of total receivables.
(2) Balance Sheet Components
Accrued Liabilities
A summary of accrued liabilities follows:
<TABLE>
<CAPTION>
December 31,
1997
-------------
<S> <C>
Affiliate royalties .......... $ 684,532
Ad management fees ........... 219,120
Employee commissions ......... 203,729
Other ........................ 189,643
----------
$1,297,024
==========
</TABLE>
(3) Loan Payable--Related Party
In connection with the Stock Purchase Agreement with PMC, dated September
29, 1997, PMC agreed to lend an aggregate of $300,000 during the period
September 29, 1997 to December 31, 1997. The loan is repaid at a rate of 5% of
the gross commissions or other revenues received by the Company, after
deducting advertising agency commissions and web-site royalties. The loan has
no stated interest and is expected to be paid within the next year.
In accordance with Staff Accounting Bulletin Topic 5:T, the Company has
imputed an interest cost because these loans have no stated interest rate. The
imputed interest rate used was based on a market rate of interest of 12%. For
the three month period ended December 31, 1997, interest expense was $6,000.
(4) Commitments
In connection with the Stock Purchase Agreement dated September 29, 1997,
the Company is obligated to pay PMC a royalty of 5% of the gross commissions or
other revenues received by the Company, after deducting advertising agency
commissions and web-site royalties. Total royalties to be paid will not exceed
$1,000,000. Any payments of the royalty amount commences upon full repayment of
the loan payable--related party (See note 3). As of December 31, 1997, the
Company had accrued $16,733 in royalty payments to PMC which are included in
other long-term liabilities.
(5) Legal Proceedings
The Company is involved in various other claims and legal actions arising
in the ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material effect on the Company's
financial position, results of operation or liquidity.
F-36
<PAGE>
INTERACTIVE HOLDINGS, LLC
(FORMERLY PETRY INTERACTIVE, INC.)
NOTES TO FINANCIAL STATEMENTS--Continued
December 31, 1997
(All information subsequent to December 31, 1997 is Unaudited)
(6) Warrants
In connection with the Stock Purchase Agreement dated September 29, 1997,
the Company issued to PMC a warrant for 25 shares of common stock, $.01 par
value for $0.25. The warrant was exercised in connection with the February 1998
Plan of Merger and Securities Purchase Agreement (see Note 7).
(7) Subsequent Event--Unaudited
On February 24, 1998, the Company sold all of its issued and outstanding
shares to 24/7 Media, Inc. in exchange for 10,494,366 shares of 24/7 Media
Inc.'s common stock.
F-37
<PAGE>
Report of Independent Public Accountants
To Intelligent Interactions Corporation:
We have audited the accompanying balance sheets of Intelligent
Interactions Corporation (a Delaware corporation in the development stage) as
of December 31, 1996 and 1997, and the related statements of operations,
stockholders' deficit and cash flows for the period from inception (February
28, 1995) to December 31, 1995 and the years ended December 31, 1996 and 1997.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the 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 that 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 Intelligent Interactions
Corporation as of December 31, 1996 and 1997, and the results of its operations
and its cash flows for the period from inception to December 31, 1995 and the
years ended December 31, 1996 and 1997, in conformity with generally accepted
accounting principles.
/s/ ARTHUR ANDERSEN LLP
Washington, D.C.
May 13, 1998
F-38
<PAGE>
INTELLIGENT INTERACTIONS CORPORATION
(A Development Stage Company)
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, March 31,
----------------------------- ---------------
1996 1997 1998
------------- --------------- ---------------
ASSETS (unaudited)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents ......................................................... $ 531,100 $ 423,548 $ 3,675
Accounts receivable ............................................................... -- 23,768 87,499
Other current assets .............................................................. 100 7,169 13,568
---------- ------------- -------------
Total current assets ............................................................ 531,200 454,485 104,742
---------- ------------- -------------
Property and equipment, at cost:
Computer equipment ................................................................ 93,243 151,163 151,163
Furniture and fixtures ............................................................ 2,329 16,648 16,648
Software .......................................................................... 2,656 22,714 22,714
---------- ------------- -------------
98,228 190,525 190,525
Less--Accumulated depreciation .................................................... (11,537) (46,073) (61,074)
---------- ------------- -------------
86,691 144,452 129,451
---------- ------------- -------------
Total assets .................................................................... $ 617,891 $ 598,937 $ 234,193
========== ============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable .................................................................. 27,298 100,542 121,801
---------- ------------- -------------
Accrued expenses .................................................................. 36,184 121,991 183,102
Line of credit .................................................................... $ -- $ 19,583 $ 17,195
Note payable to officer ........................................................... 86,446 -- --
Convertible notes payable ......................................................... -- 450,000 450,000
Total current liabilities ....................................................... 149,928 692,116 772,098
Commitments (Note 5) ................................................................
Convertible, redeemable preferred stock; $0.01 par value
Series A; 71,870 shares authorized; 71,870 issued and outstanding in 1996, 1997
and 1998, respectively; entitled to liquidation preference of $16.42 per share
plus unpaid dividends; 8% per annum ($1,209,075, $1,303,483 and $1,327,085
in the aggregate in 1996, 1997 and 1998, respectively) ........................... 1,209,075 1,303,483 1,327,085
Series A-1; 71,870 shares authorized; none issued or outstanding .................. -- -- --
Series AA; 54,150 shares authorized; 0 and 54,142 issued and outstanding in 1996
and in 1997 and 1998, respectively; entitled to liquidation preference of $18.47
per share plus unpaid dividends; 8% per annum ($1,056,447 and $1,076,447 in
the aggregate in 1997 and 1998, respectively) .................................... -- 1,056,447 1,076,447
Series AA-1; 54,150 shares authorized; none issued or outstanding ................. -- -- --
Series AAA; 78,304 shares authorized; 0 and 48,712 issued and outstanding in
1996 and in 1997 and 1998, respectively; entitled to liquidation preference of
$20.53 per share plus unpaid dividends; 8% per annum ($1,030,948 and
$1,050,949 in 1997 and 1998, respectively in the aggregate)....................... -- 1,030,948 1,050,949
Series AAA-1; 78,304 shares authorized; none issued or outstanding ................ -- -- --
---------- ------------- -------------
Total convertible, redeemable preferred stock value 1,209,075 3,390,878 3,454,481
---------- ------------- -------------
Stockholders' deficit:
Common stock; $0.01 par value; 930,000 shares authorized; 230,170 shares issued
and outstanding in 1996, 1997, and 1998, respectively ............................ 2,412 2,412 2,412
Additional paid-in capital ........................................................ 142,290 142,290 142,290
Treasury stock .................................................................... (6,600) (6,600) (6,600)
Deficit accumulated during the development stage .................................. (879,214) (3,622,159) (4,130,488)
---------- ------------- -------------
Total stockholders' deficit ..................................................... (741,112) (3,484,057) (3,992,386)
---------- ------------- -------------
Total liabilities and stockholders' deficit ..................................... $ 617,891 $ 598,937 $ 234,193
========== ============= =============
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-39
<PAGE>
INTELLIGENT INTERACTIONS CORPORATION
(A Development Stage Company)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Period From
Inception
(February 28,
1995) To Year Ended Year Ended
December 31, December 31, December 31,
1995 1996 1997
--------------- -------------- ----------------
<S> <C> <C> <C>
Revenues:
Consulting and license
fees and support ............... $ -- $ -- $ 65,432
Cost of revenues ................ -- -- --
---------- ---------- ------------
Gross profit ................. -- -- 65,432
Operating expenses:
Sales and marketing ............. -- 254,515 1,249,910
Product development ............. 21,964 92,280 327,995
General and
administrative ................. 133,238 350,368 1,055,589
---------- ---------- ------------
Total operating expenses ......... 155,202 697,163 2,633,494
---------- ---------- ------------
Loss from operations ............. (155,202) (697,163) (2,568,062)
Interest income (expense),
net ............................. 473 (1,438) 6,861
Other income ..................... -- 3,085 --
---------- ---------- ------------
Net loss ......................... (154,729) (695,516) (2,561,201)
Less dividends on
preferred stock ................. -- (28,969) (181,744)
---------- ---------- ------------
Net loss applicable to
common stock .................... $ (154,729) $ (724,485) $ (2,742,945)
========== ========== ============
<CAPTION>
Period From
Inception
(February 28,
Quarter Ended Quarter Ended 1995) To
March 31, March 31, March 31,
1997 1998 1998
--------------- --------------- ----------------
(unaudited) (unaudited) (unaudited)
<S> <C> <C> <C>
Revenues:
Consulting and license
fees and support ............... $ -- $ 88,362 $ 153,794
Cost of revenues ................ -- 13,200 13,200
---------- ---------- ------------
Gross profit ................. -- 75,162 140,594
Operating expenses:
Sales and marketing ............. 182,043 226,548 1,730,973
Product development ............. 91,386 66,738 508,977
General and
administrative ................. 250,165 221,168 1,760,363
---------- ---------- ------------
Total operating expenses ......... 523,594 514,454 4,000,313
---------- ---------- ------------
Loss from operations ............. (523,594) (439,292) (3,859,719)
Interest income (expense),
net ............................. 460 (5,434) 462
Other income ..................... -- -- 3,085
---------- ---------- ------------
Net loss ......................... (523,134) (444,726) (3,856,172)
Less dividends on
preferred stock ................. (23,602) (63,603) (274,316)
---------- ---------- ------------
Net loss applicable to
common stock .................... $ (546,736) $ (508,329) $ (4,130,488)
========== ========== ============
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-40
<PAGE>
INTELLIGENT INTERACTIONS CORPORATION
(A Development Stage Company)
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Stockholders'
Deficit
-------------------
Preferred Stock Common Stock
----------------------- -------------------
Shares Amount Shares Amount
---------- ------------ ---------- --------
<S> <C> <C> <C> <C>
Inception, February 28, 1995 ....................... -- $ -- -- $ --
Sale of Common Stock to Founders at $0.60 per
share, July, September, and December 1995 ........ -- -- 206,670 2,067
Stock issued to employees for services rendered
valued at $0.60 per share, December 1995.......... -- -- 14,500 145
Net loss .......................................... -- -- -- --
------ ---------- ------- ------
Balance, December 31, 1995 ......................... -- -- 221,170 2,212
Stock issued to employee for services rendered
valued at $0.60 per share, February 1996.......... -- -- 20,000 200
Sale of Series A Preferred Stock to investors
valued at $16.42 per share, September 1996........ 71,870 1,180,106 -- --
Repurchase of 11,000 of terminated employee's
shares by the Company at $0.60 per share,
November 1996 ..................................... -- -- -- --
Accrued dividends on Preferred Stock .............. -- 28,969 -- --
Net loss .......................................... -- -- -- --
------ ---------- ------- ------
Balance, December 31, 1996 ......................... 71,870 1,209,075 241,170 2,412
Sale of Series AA Preferred Stock to investors
valued at $18.47 per share, April 1997............ 54,142 1,000,002 -- --
Sale of Series AAA Preferred Stock to investors
valued at $20.53 per share, August 1997........... 48,712 1,000,057 -- --
Accrued Dividends on Preferred Stock .............. -- 181,744 -- --
Net loss .......................................... -- -- -- --
------ ---------- ------- ------
Balance, December 31, 1997 ......................... 174,724 3,390,878 241,170 2,412
Accrued dividends on Preferred Stock
(unaudited) ...................................... -- 63,603 -- --
Net loss (unaudited) .............................. -- -- -- --
------- ---------- ------- ------
Balance, March 31, 1998 (unaudited) ................ 174,724 $3,454,481 241,170 $2,412
======= ========== ======= ======
<CAPTION>
Stockholders' Deficit
------------------------------------------
Deficit
Accumulated
Additional During the
Paid-In Treasury Development
Capital Stock Stage
------------ ------------- ---------------
<S> <C> <C> <C>
Inception, February 28, 1995 ....................... $ -- $ -- $ --
Sale of Common Stock to Founders at $0.60 per
share, July, September, and December 1995 ........ 121,935 -- --
Stock issued to employees for services rendered
valued at $0.60 per share, December 1995.......... 8,555 -- --
Net loss .......................................... -- -- (154,729)
-------- --------- ------------
Balance, December 31, 1995 ......................... 130,490 -- (154,729)
Stock issued to employee for services rendered
valued at $0.60 per share, February 1996.......... 11,800 -- --
Sale of Series A Preferred Stock to investors
valued at $16.42 per share, September 1996........ -- -- --
Repurchase of 11,000 of terminated employee's
shares by the Company at $0.60 per share,
November 1996 ..................................... -- (6,600) --
Accrued dividends on Preferred Stock .............. -- -- (28,969)
Net loss .......................................... -- -- (695,516)
-------- --------- ------------
Balance, December 31, 1996 ......................... 142,290 (6,600) (879,214)
Sale of Series AA Preferred Stock to investors
valued at $18.47 per share, April 1997............ -- -- --
Sale of Series AAA Preferred Stock to investors
valued at $20.53 per share, August 1997........... -- -- --
Accrued Dividends on Preferred Stock .............. -- -- (181,744)
Net loss .......................................... -- -- (2,561,201)
-------- --------- ------------
Balance, December 31, 1997 ......................... 142,290 (6,600) (3,622,159)
Accrued dividends on Preferred Stock
(unaudited) ...................................... -- -- (63,603)
Net loss (unaudited) .............................. -- -- (444,726)
-------- --------- ------------
Balance, March 31, 1998 (unaudited) ................ $142,290 $ (6,600) $ (4,130,488)
======== ========= ============
</TABLE>
The accompanying notes are an integral part of these statements.
F-41
<PAGE>
INTELLIGENT INTERACTIONS CORPORATION
(A Development Stage Company)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Period From
Inception
(February 28,
1995) To Year Ended Year Ended
December 31, December 31, December 31,
1995 1996 1997
--------------- -------------- ----------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss ............................................. $ (154,729) $ (695,516) $ (2,561,201)
Adjustments to reconcile net loss to net cash used
in operating activities-- ...........................
Depreciation ........................................ 2,185 9,352 34,536
Compensation expense on stock grants ................ 8,700 12,000 --
Changes in operating assets and liabilities:
Accounts receivable ................................ -- -- (23,768)
Other current assets ............................... (1,000) 900 (7,069)
Accounts payable and accrued expenses .............. 5,497 57,985 159,051
---------- ----------- ------------
Net cash used in operating activities ............. (139,347) (615,279) (2,398,451)
Cash flows from investing activities:
Purchases of property and equipment .................. (13,109) (85,119) (92,297)
---------- ----------- ------------
Net cash used in investing activities ............. (13,109) (85,119) (92,297)
Cash flows from financing activities:
Proceeds from sale of common stock ................... 124,002 -- --
Proceeds from sale of preferred stock ................ -- 1,180,106 2,000,059
Purchase of treasury shares .......................... -- (6,600) --
Proceeds from note payable ........................... -- -- 450,000
Net proceeds from (payments on) line of credit ....... 10,000 (10,000) 19,583
Net proceeds from (payments on) note payable to
officer ............................................. 56,000 30,446 (86,446)
---------- ----------- ------------
Net cash provided by financing activities ......... 190,002 1,193,952 2,383,196
---------- ----------- ------------
Net increase (decrease) in cash ....................... 37,546 493,554 (107,552)
Cash and cash equivalents, beginning of period ........ -- 37,546 531,100
---------- ----------- ------------
Cash and cash equivalents, end of period .............. $ 37,546 $ 531,100 $ 423,548
========== =========== ============
Supplemental cash flow information:
Cash paid for interest ............................... $ -- $ 10,331 $ 15,284
========== =========== ============
<CAPTION>
Period From
Inception
(February 28,
Quarter Ended Quarter Ended 1995) To
March 31, March 31, March 31,
1997 1998 1998
--------------- --------------- ----------------
(unaudited) (unaudited) (unaudited)
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss ............................................. $ (523,134) $ (444,726) $ (3,856,172)
Adjustments to reconcile net loss to net cash used
in operating activities-- ...........................
Depreciation ........................................ 3,815 15,001 61,074
Compensation expense on stock grants ................ -- -- 20,700
Changes in operating assets and liabilities:
Accounts receivable ................................ (100) (63,731) (87,499)
Other current assets ............................... (19,192) (6,399) (13,568)
Accounts payable and accrued expenses .............. 101,677 82,370 304,903
---------- ---------- ------------
Net cash used in operating activities ............. (436,934) (417,485) (3,570,562)
Cash flows from investing activities:
Purchases of property and equipment .................. (50,749) -- (190,525)
---------- ---------- ------------
Net cash used in investing activities ............. (50,749) -- (190,525)
Cash flows from financing activities:
Proceeds from sale of common stock ................... -- -- 124,002
Proceeds from sale of preferred stock ................ -- -- 3,180,165
Purchase of treasury shares .......................... -- -- (6,600)
Proceeds from note payable ........................... -- -- 450,000
Net proceeds from (payments on) line of credit ....... -- (2,388) 17,195
Net proceeds from (payments on) note payable to
officer ............................................. (28,101) -- --
---------- ---------- ------------
Net cash provided by financing activities ......... (28,101) (2,388) 3,764,762
---------- ---------- ------------
Net increase (decrease) in cash ....................... (515,784) (419,873) 3,675
Cash and cash equivalents, beginning of period ........ 531,100 423,548 --
---------- ---------- ------------
Cash and cash equivalents, end of period .............. $ 15,316 $ 3,675 $ 3,675
========== ========== ============
Supplemental cash flow information:
Cash paid for interest ............................... $ 1,928 $ 6,626 $ 32,241
========== ========== ============
</TABLE>
The accompanying notes are an integral part of these statements.
F-42
<PAGE>
INTELLIGENT INTERACTIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS
As of December 31, 1997 and 1996 and
As of March 31, 1998 (unaudited)
(All information subsequent to December 31, 1997 is Unaudited)
(1) Business Description and Risk Factors
Intelligent Interactions Corporation (the "Company"), was incorporated on
February 28, 1995, in the state of Delaware. The Company is developing the
Intelligent Programming Engine (IPE[TM]), an enabling technology necessary to
ensure the economic viability of the information super highway. The IPE[TM]
provides targeted content delivery through interactive on-line networks. The
Company is in the development stage and has a limited operating history, has
incurred operating losses since its inception, and expects losses to continue
and increase. Since its inception, the Company has been engaged in development
and organizational efforts, including development of its IPE[TM] software
technology; creation of development and deployment plans; and recruitment of
administrative, technical, and business development staff. Many of the
Company's current and potential competitors have substantially greater
financial and technological resources, sales and marketing capabilities, and
experience than the Company. The Company's success will depend on the continued
service of its management team and technical personnel. There can be no
assurance that the Company will be successful in the development or
commercialization of its services.
In April 1998, the Company was acquired by 24/7 Media, Inc. ("24/7 Media"
See Note 8). 24/7 Media has committed to fund the future operations of
Intelligent Interactions.
Common Stock Split
Pursuant to the amendment of its certificate of incorporation in 1996, the
Company exchanged existing outstanding common stock for 241,170 shares of $0.01
par value common stock completing a 10 to 1 stock split. All amounts have been
restated to reflect the 10 to 1 stock split and change in par value.
(2) Summary of Significant Accounting Policies
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents. Included in cash and
cash equivalents are investments in a money market account.
Property and Equipment
Property and equipment are stated at cost. Depreciation is calculated
using the straight-line method over a three-year period. Depreciation expense
for 1996 and 1997 was $9,352 and $34,536, respectively.
Income Taxes
The Company accounts for income taxes under Statement of Financial
Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes," which
requires recognition of deferred tax liabilities and assets for the expected
future tax consequences of events that have been included in the financial
statements or income tax returns. Under this method, deferred tax liabilities
and assets are determined based on the difference between the financial
statement and tax bases of assets and liabilities using enacted tax rates in
effect for the year in which the differences are expected to reverse.
Management has established a valuation reserve against the net deferred tax
asset related primarily to the Company's net operating loss carryforward.
The Company, with the consent of its stockholders, had previously elected
under the Internal Revenue Code to be an "S" corporation, effective February
28, 1995. In lieu of corporate income taxes, the stockholders of an
F-43
<PAGE>
INTELLIGENT INTERACTIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
As of December 31, 1997 and 1996 and
As of March 31, 1998 (unaudited)
(All information subsequent to December 31, 1997 is Unaudited)
(2) Summary of Significant Accounting Policies --Continued
"S" corporation are taxed on their proportionate shares of the Company's
taxable income. No provision or liability for income taxes has been included in
the financial statements for the period of time that the Company was a
Subchapter "S" corporation.
The Company terminated the Subchapter "S" election, by the admittance of a
nonqualified stockholder, on September 10, 1996.
Revenue Recognition
Revenue from software licenses and software support agreements is
recognized ratably over the term of the agreement. Revenue from consulting
services is recognized as the services are provided.
The American Institute of Certified Public Accountants (the "AICPA") has
issued a Statement of Position (the "SOP") SOP-97-2, "Software Revenue
Recognition," and is effective for fiscal years beginning after December 15,
1997. The Company adopted SOP-97-2 effective January 1, 1998 and the adoption
did not have a material impact on the Company.
Product Development Costs
Product development costs and enhancements to existing products are
charged to operations as incurred. Software development costs are required to
be capitalized when a product's technological feasibility has been established
by completion of a working model of the product and ending when a product is
available for general release to customers. To date, completion of a working
model of the Company's products and general release have substantially
coincided. As a result, the Company has not capitalized any software
development costs since such costs have not been significant.
Unaudited Interim Financial Statements
The accompanying balance sheet as of March 31, 1998 and the accompanying
statements of operations stockholders' deficit and cash flows for the three
months ended March 31, 1997 and 1998 included herein have been prepared by the
Company and are unaudited. The information furnished in the unaudited financial
statements referred to above includes all adjustments which are, in the opinion
of management, necessary for a fair presentation of such financial statements.
The results of operations for the three months ended March 31, 1998 are not
necessarily indicative of the results to be expected for the entire fiscal
year.
Increase in Authorized Shares
In March 1998, the Board of Directors increased the authorized stock of
the company to consist of 930,000 shares of common stock, $0.01 par value, and
78,304 shares of Series AAA Preferred Stock, no par value. All share amounts in
the accompanying financial statements reflect the increase in authorized
shares.
Reclassifications
Certain reclassifications of prior year amounts have been made to conform
to the December 31, 1997 presentation.
(3) Line of Credit and Note Payable
The Company maintains a line of credit with a bank in the amount of
$50,000. The agreement with the bank provides for a floating interest rate of
prime plus 2 percent, which was 10.25 and 10.50 percent as of December 31, 1996
and 1997, respectively. Borrowings are secured by government securities
belonging to a founder of the Company. The line of credit expires in September
1998. There were no borrowings outstanding at December 31, 1996 and 1997.
F-44
<PAGE>
INTELLIGENT INTERACTIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
As of December 31, 1997 and 1996 and
As of March 31, 1998 (unaudited)
(All information subsequent to December 31, 1997 is Unaudited)
(3) Line of Credit and Note Payable --Continued
In January 1997, the Company obtained an additional line of credit with a
bank in the amount of $400,000. The agreement with the bank provides for a
floating interest rate of prime plus one and a half percent which was 10
percent at December 31, 1997. Borrowings are secured by all assets of the
Company. The line of credit expires on July 31, 1998. As of December 31, 1997,
borrowings of $19,583 were outstanding. The line was repaid and cancelled in
April 1998.
During 1995, the Company borrowed $56,000 from the Company's founder and
principal stockholder. The note was originally due in December 1996 and accrued
interest at an annual rate of 10 percent, which was to be paid quarterly.
During 1996, the Company borrowed an additional $55,500 from the Company's
founder and principal stockholder. All amounts outstanding at September 6,
1996, under these notes as well as the 1995 note, plus accrued interest on
those amounts were converted into one instrument in the amount of $113,856.
Principal and interest at the annual rate of 10 percent is due monthly over a
12 month period that began in October 1996. During 1996, the Company paid
$27,410 and $7,052 in principal and interest, respectively, on this obligation.
During 1997, the balance of $86,446 and $3,642 in principal and interest,
respectively, was paid on this obligation.
During 1997, the Company received an aggregate of $450,000 in proceeds
from the issuance of convertible notes payable, bearing an interest rate of 9.5
percent per annum. The notes, and accrued interest, are due on June 29, 1998.
The notes are convertible into any new series of preferred stock ("New Series")
issued by the Company through June 29, 1998. If the Notes are not so converted
within this period, thereafter, each holder of the notes will have the right to
convert the principal and interest of its note into the Series AAA Preferred
stock with a purchase price of $20.53. The Notes were converted as a result of
the Merger (Note 8).
(4) Stockholders' Equity
Common Stock
In September 1996, the Company amended its certificate of incorporation to
increase the number of authorized shares of common stock from 25,000 to 900,000
shares, as well as to effect a 10 for 1 stock split. Common shares are subject
to repurchase by the Company under certain circumstances. In the event a
stockholder terminates employment with the Company, the Company may elect to
repurchase any or all of the shares at the higher of the employee's original
purchase price per share or fair market value. To the extent the employee's
shares are not fully vested, the Company may elect to repurchase any or all of
the unvested shares at the employee's original purchase price. The Company also
has the right of first refusal to purchase a stockholder's shares for the price
offered to the stockholder in the event a stockholder elects to sell his or her
shares. This right of first refusal and repurchase upon termination expires in
the event of an initial public offering of the Company's stock.
Preferred Stock
In 1996, the Company issued 71,870 shares of Series A Convertible,
Redeemable and Voting Preferred Stock ("Series A Preferred Stock") at $16.42
per share. The Preferred Stock is redeemable at any time after September 10,
2003, upon written request from not less than 67 percent of the outstanding
Preferred stockholders at the time of the request. The redemption price shall
be paid in cash equal to the original issue price per share ($16.42) plus any
accrued but unpaid dividends. Dividends are cumulative and accrue at the rate
of 8 percent per share per annum.
In April 1997, the Company issued 54,l42 shares of Series AA Convertible,
Redeemable and Voting Preferred Stock ("Series AA Preferred Stock") at $18.47
per share. The Series AA Preferred Stock is redeemable at any time after April
16, 2004, upon written request from not less than 67 percent of the outstanding
Preferred stockholders at the time of request. The redemption price shall be
paid in cash equal to the original price per share ($18.47) plus any accrued
but unpaid dividends. Dividends are cumulative and accrue at the rate of 8
percent per share per annum.
F-45
<PAGE>
INTELLIGENT INTERACTIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
As of December 31, 1997 and 1996 and
As of March 31, 1998 (unaudited)
(All information subsequent to December 31, 1997 is Unaudited)
(4) Stockholders' Equity --Continued
In August 1997, the Company issued 48,712 shares of Series AAA
Convertible, Redeemable and Voting Preferred Stock ("Series AAA Preferred
Stock") at $20.53 per share. The Series AAA Preferred Stock is redeemable at
any time after August 11, 2004, upon written request from not less than 67
percent of the outstanding Preferred stockholders at the time of request. The
redemption price shall be paid in cash equal to the original price per share
($20.53) plus any accrued but unpaid dividends. Dividends are cumulative and
accrue at the rate of 8 percent per share per annum.
The Series A, Series AA, and Series AAA (collectively, "Preferred Stock")
automatically converts to common stock at an initial ratio of 1 to 1 upon a
firm commitment of an underwritten public offering, at not less than $65.68 per
share or $10,000,000 in aggregate proceeds. The conversion ratio is adjustable
for certain future dilutive events. Conversion to common stock can also occur
upon written request of 67 percent of the outstanding Preferred stockholders.
In the event of liquidation, dissolution, or winding up of the Company,
the holders of each share of Preferred Stock will be paid out prior to and in
preference of holders of common stock in an amount equal to the original issue
price ($16.42 for Series A, $18.47 for Series AA, and $20.53 for Series AAA)
plus all declared but unpaid dividends.
Warrants
The convertible notes payable contained detachable warrants which can be
exercised after the first to occur of the conversion of the notes into the New
Series or June 29, 1998. If the Notes convert into the New Series, the warrants
will be exercisable for the New Series at the same price as those received by
the New Series. If the Notes do not convert into the New Series by June 29,
1998, the warrants will thereafter be exercisable for the Series AAA Preferred
Stock at a purchase price of $20.53. Such warrants will expire within five
years of the agreement. The aggregate purchase price payable upon full exercise
of the warrants equals $157,500 and the number of shares issuable upon full
exercise equals the aggregate purchase price divided by the purchase price per
share under the warrants. The warrants were deemed to have no value and were
terminated as a result of the Merger (Note 8).
1996 Stock Option Plan
The Company has issued stock options to its employees under the 1996
Equity Incentive Plan. These options were issued at fair market value at the
date of grant. These options are summarized as follows:
<TABLE>
<CAPTION>
Weighted
Average Option
Number Exercise Price
of Shares Price Per Share
----------- ---------- -----------------
<S> <C> <C> <C>
Company inception ............................. -- $ -- $ --
Granted ....................................... 70,700 1.09 0.60 -- 1.65
Exercised ..................................... -- -- --
Forfeited ..................................... (10,000) 1.09 0.60
------- ------ ------
Balance at December 31, 1996 .................. 60,700 1.09 0.60 -- 1.65
Granted ....................................... 22,500 1.77 1.65 -- 2.05
Exercised ..................................... -- -- --
Forfeited ..................................... (24,000) 1.65 1.65
------- ------ ------
Balance at December 31, 1997 .................. 59,200 $ 1.20 $0.60 -- 2.05
Granted ....................................... 2,000 2.05 2.05
Exercised ..................................... -- -- --
Forfeited ..................................... (9,600) 1.65 1.65
------- ------ ------
Balance at March 31, 1998 (unaudited) ......... 51,600 $ 1.15 $0.60 -- 2.05
======= ====== ===============
</TABLE>
F-46
<PAGE>
INTELLIGENT INTERACTIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
As of December 31, 1997 and 1996 and
As of March 31, 1998 (unaudited)
(All information subsequent to December 31, 1997 is Unaudited)
(4) Stockholders' Equity --Continued
No options are exercisable at December 31, 1996 and 1997. The weighted
average remaining life for options outstanding at December 31, 1996 and 1997,
was 7.14 years and 6.47 years, respectively, and at March 31, 1998 was 6.11
years.
In October 1995, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 123, "Accounting for Stock-Based Compensation." SFAS No. 123 defines a
"fair value based method" of accounting for an employee stock option or similar
equity instrument. Under the fair value based method, compensation cost is
measured at the grant date based on the value of the award and is recognized
over the service period.
SFAS No. 123 allows an entity to continue to use the intrinsic value
method as defined by APB Opinion No. 25, "Accounting for Stock Issued to
Employees," and management has elected to do so. Under the intrinsic value
method, compensation cost is the excess, if any, of the quoted market price of
the stock at grant date or other measurement date over the amount an employee
must pay to acquire the stock. However, entities electing to remain with the
accounting in APB Opinion No. 25 must make pro forma disclosures of net income
and earnings per share, as if the fair value based method of accounting had
been applied. Accordingly, net loss would be as follows:
<TABLE>
<CAPTION>
As Reported Pro Forma
Year Ended Net Loss Net Loss
- ----------------- --------------- --------------
<S> <C> <C>
1996 ......... $ (695,516) $ (701,914)
1997 ......... (2,561,201) (2,564,751)
</TABLE>
The fair value of each option is estimated on the date of grant using the
Black-Scholes option pricing model with the following assumptions used for
grants in 1996 and 1997: no dividend yield, zero percent volatility, risk-free
interest rates approximating 6 percent, and the estimated life of the option is
the contractual term of the option. The weighted-average grant date fair value
of the options outstanding at December 31, 1996 and 1997, was approximately
$0.45 and $0.50, respectively.
(5) Commitments
In January 1997, the Company entered into a noncancelable operating lease
for office space that expires April 30, 1998. Minimum lease payments required
under this lease are $23,576 in 1998. Total rent paid in 1996 and 1997 was
$27,086 and $69,000, respectively.
(6) Income Taxes
As of December 31, 1996 and 1997, the Company had net operating loss
carryforwards for Federal income tax purposes of approximately $213,000 and
$3,082,000, respectively, that begin expiring in 2011. Net operating loss
carryforwards are subject to review and possible adjustment by the Internal
Revenue Service and may be limited in the event of significant changes in the
ownership of the Company.
SFAS No. 109 requires that the tax benefit of financial reporting net
operating losses and tax credits be recorded as an asset to the extent that
management assesses the utilization of such net operating losses and tax
credits to be "more likely than not." As of December 31, 1996 and 1997, the
Company's net deferred tax assets were approximately $81,000 and $1,171,000,
respectively, which consists primarily of the net operating loss carryforward
and a valuation reserve was recorded against the entire amount.
F-47
<PAGE>
INTELLIGENT INTERACTIONS CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
As of December 31, 1997 and 1996 and
As of March 31, 1998 (unaudited)
(All information subsequent to December 31, 1997 is Unaudited)
(7) Accrued Expenses
Accrued expenses consists of the following as of:
<TABLE>
<CAPTION>
December 31,
March 31,
1996 1997 1998
---------- ---------- ------------
(unaudited)
<S> <C> <C> <C>
Vacation ..................... $13,808 $ 33,809 $ 23,685
Accrued Compensation ......... -- 20,000 26,000
Professional Fees ............ -- 36,000 73,000
Travel Expenses .............. -- 21,425 36,042
Other ........................ 22,376 10,757 24,375
------- -------- --------
$36,184 $121,991 $183,102
======= ======== ========
</TABLE>
(8) Intelligent Interactions Acquisition
During April 1998, 24/7 Media, Inc. ("24/7 Media") acquired all of the
outstanding stock of Intelligent Interactions (the "Merger").
Upon consummation of the Merger, each share of common stock of Intelligent
Interactions was converted into approximately 16.3 shares of common stock, 2.3
Class A Warrants, 2.3 Class B Warrants and 1.2 Class C Warrants of 24/7 Media.
Each share of Preferred Stock, Series A Preferred Stock, Series AA
Preferred Stock or Series AAA Preferred Stock of Intelligent Interactions was
converted to approximately 18 shares of Mandatorily Redeemable Convertible
Preferred Stock--Series A, par value $.01 per share, 2.7 Class A Warrants, 2.7
Class B Warrants and 1.4 Class C Warrants of 24/7 Media. The convertible note
payable was also converted into Mandatorily Redeemable Convertible Preferred
Stock--Series A and the detachable warrants were terminated as a result of the
merger.
In addition, each option to purchase shares of common stock of Intelligent
Interactions was converted into an option to purchase approximately 16 shares
of common stock of 24/7 Media under the terms and pursuant to the conditions of
the 24/7 Media 1998 Stock Incentive Plan.
F-48
<PAGE>
================================================================================
No dealer, salesperson or other individual has been authorized to give any
information or make any representations not contained in this Prospectus. If
given or made, such information or representations must not be relied upon as
having been authorized by the Company or the Underwriters. This Prospectus does
not constitute an offer to sell, or a solicitation of an offer to buy, the
Common Stock in any jurisdiction where, or to any person to whom, it is
unlawful to make such offer or solicitation. Neither the delivery of this
Prospectus nor any sale made hereunder shall, under any circumstances, create
any implication that there has not been any change in the facts set forth in
this Prospectus or in the affairs of the Company since the date hereof.
----------------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----------
<S> <C>
Prospectus Summary ............................ 1
Risk Factors .................................. 5
Use of Proceeds ............................... 14
Dividend Policy ............................... 14
Capitalization ................................ 15
Dilution ...................................... 16
Selected Pro Forma Consolidated
Financial Data ............................. 17
Selected Consolidated Financial Data .......... 18
Management's Discussion and Analysis of
Financial Condition and Results of
Operations ................................. 19
Business ...................................... 26
Management .................................... 36
Certain Transactions .......................... 43
Security Ownership of Certain Beneficial
Owners and Management ........................ 45
Description of Capital Stock .................. 47
Shares Eligible For Future Sale ............... 50
Underwriting .................................. 51
Legal Matters ................................. 53
Experts ....................................... 53
Available Information ......................... 53
Index to Financial Statements ................. F-1
</TABLE>
Until , 1998 (days after the commencement of this offering), all dealers
that effect transactions in the Common Stock, whether or not participating in
this offering, may be required to deliver a Prospectus. This requirement is in
addition to the obligation of dealers to deliver a Prospectus when acting as
Underwriters or with respect to their unsold allotments or subscriptions.
================================================================================
================================================================================
Shares
[LOGO]
24/7 Media, Inc.
Common Stock
----------------------------------
P R O S P E C T U S
----------------------------------
Merrill Lynch & Co.
Allen & Company Incorporated
J.P. Morgan & Co.
, 1998
================================================================================
<PAGE>
Part II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.
The following table sets forth the estimated expenses and costs (other
than underwriting discounts and commissions) expected to be incurred by the
Company in connection with the issuance and distribution of the securities
being registered, all of which will be paid by the Registrant.
<TABLE>
<S> <C>
SEC registration fee ...................... $ 13,570
NASD fee .................................. 7,000
Nasdaq Listing Fee ........................ 50,000
Legal fees and expenses ................... 300,000
Printing and engraving expenses ........... 175,000
Accounting fees and expenses .............. 300,000
Blue Sky fees and expenses ................ 15,000
Transfer agent and registrar fees ......... 5,000
Miscellaneous ............................. 59,430
----------
Total ................................... $1,000,000
==========
</TABLE>
Item 14. Indemnification of Directors and Officers.
The General Corporation Law of the State of Delaware ("DGCL") permits the
Company and its stockholders to limit directors' exposure to liability for
certain breaches of the directors' fiduciary duty, either in a suit on behalf
of the Company or in an action by stockholders of the Company.
The Certificate of Incorporation of the Company (the "Charter") eliminates
the liability of directors to stockholders or the Company for monetary damages
arising out of the directors' breach of their fiduciary duty of care. The
Charter also authorizes the Company to indemnify its directors, officers,
incorporators, employees, and agents with respect to certain costs, expenses,
and amounts incurred in connection with an action, suit, or proceeding by
reason of the fact that such person was serving as a director, officer,
incorporator, employee, or agent of the Company. In addition, the Charter
permits the Company to provide additional indemnification rights to its
officers and directors and to indemnify them to the greatest extent possible
under the DGCL. The Company has entered into indemnification agreements with
each of its officers and directors and intends to enter into indemnification
agreements with each of its future officers and directors. Pursuant to such
indemnification agreements, the Company has agreed to indemnify its officers
and directors against certain liabilities, including liabilities arising out of
the offering made by this registration statement.
The Company maintains a standard form of officers' and directors'
liability insurance policy which provides coverage to the officers and
directors of the Company for certain liabilities, including certain liabilities
which may arise out of this registration statement.
The Underwriting Agreement filed as Exhibit 1.1 hereto provides for
reciprocal indemnification between the Company and its controlling persons, on
the one hand, and the Underwriters and their controlling persons, on the other
hand, against certain liabilities in connection with this offering, including
liabilities under the Securities Act.
Item 15. Recent Sales of Unregistered Securities
The Registrant has sold and issued the following securities within the
past three years. The below securities were offered and sold by the Registrant
in reliance upon exemptions from registration pursuant to either (i) Section
4(2) of the Securities Act, as transactions not involving any public offering,
or (ii) Rule 701 under the Securities Act. No underwriters were involved in
connection with any sales referred to in this Item 15.
During 1996, the Registrant issued 1,374,830 shares of common stock to
certain investors, including Michael P. Paolucci and The Travelers Insurance
Company for an aggregate purchase price of $4,525,000.
In August 1996, the Registrant issued convertible subordinated notes in
the principal amount of $500,000, convertible into common stock at a price of
$2.87 per share and warrants to purchase 26,132 shares of common stock at a
price of $2.87 per share.
II-1
<PAGE>
In November 1996, the Registrant completed a private placement of 140,722
shares of preferred stock, to a group of investors including The Travelers
Insurance Company, convertible into common stock at a price of $2.87 per share,
subject to anti-dilution adjustment, for an aggregate purchase price of
$4,038,722.
During 1997, the Registrant received $2,500,000 in proceeds from the
issuance of senior convertible notes primarily to affiliates and stockholders
of the Company, including The Travelers Insurance Company, bearing an interest
rate of 8% compounded semiannually. Each of the notes was issued with
detachable warrants allowing the holder to purchase shares of common stock at
price ranges ranging from $.40 to $2.09 per share.
In January 1997, the Registrant issued 17,422 shares of preferred stock,
to a group of investors including The Travelers Insurance Company, convertible
into common stock at a price of $2.87 per share, subject to anti-dilution
adjustment, for an aggregate purchase price of $500,011.
In April 1997, the Registrant granted warrants to purchase 17,500 shares
of common stock at $12.43 per share.
In January 1998, the Registrant issued $150,000 in senior convertible
notes to The Travelers Insurance Company, convertible into 173,282 shares of
common stock at $.87 per share.
In January 1998, the Registrant granted warrants to purchase 115, 000
shares of common stock to a consultant of the Registrant in consideration of
services rendered to the Registrant.
In connection with the February 1998 merger of Petry Interactive, Inc and
Advercomm. Inc. with and into the Registrant, (i) the Registrant issued
10,494,366 shares of common stock to former shareholders of Petry Interactive,
Inc., including David J. Moore, Mark A. Burchill and Scott E. Cohen, and
6,821,335 shares of common stock to former shareholders of Advercomm, Inc.,
including Jacob I. Friesel and Garrett P. Cecchini; (ii) the Registrant granted
a former employee (Michael P. Paolucci) warrants to purchase 2,500,000 shares
of common stock at a purchase price of $.952 per share in connection with the
termination of such employee's employment with the Registrant; (iii) the
registrant issued to certain investors 10,060,002 shares of preferred stock for
aggregate proceeds of $10,000,000; (iv) the Registrant granted certain
investors warrants to purchase 5,283,614 shares of common stock at $1.904 per
share and warrants to purchase 5,383,614 shares of common stock at $2.856 per
share; (v) the Registrant granted to consultants warrants to purchase an
aggregate of 37,500 shares of common stock at $.952 per share.
In connection with the April 1998 acquisition of Intelligent Interactions,
Corp., (i) the Registrant issued 3,796,969 shares of common stock to certain
former shareholders of Intelligent Interactions Corp., including Yale R. Brown
and Matthew B. Walker; (ii) the Registrant issued 3,561,505 shares of preferred
stock to certain former shareholders of Intelligent Interactions Corp; (iii)
the Registrant granted to certain former shareholders of Intelligent
Interactions Corp., including Yale R. Brown and Matthew B. Walker, warrants to
purchase 1,060,608 shares of common stock at a purchase price of $1.904 per
share, warrants to purchase 1,060,608 shares of common stock at a purchase
price of $2.856 per share and warrants to purchase 546,212 shares of common
stock at a purchase price of $.952 per share.
In April 1998, the Registrant issued 23,634 shares of common stock to
consultants in consideration of services rendered to the Registrant.
In June 1998, the Company issued to K2 Design, Inc. 3,000 shares of the
Company's Series B Convertible Preferred Stock in connection with the
acquisition of the CliqNow! division of K2 Design, Inc.
The Registrant from time to time has granted stock options to employees in
reliance upon an exemption under the Securities Act of 1933 pursuant to Rule
701 promulgated thereunder. From March 1995 through May 1998 an aggregate of
4,103,304 shares of common stock were issued pursuant to option exercises at
exercise prices ranging from $0.40 to $2.98 to 139 employees, directors and
consultants.
II-2
<PAGE>
Item 16. Exhibits and Financial Statement Schedule/Index
<TABLE>
<S> <C>
1.1 *Form of Underwriting Agreement.
3.1 *Amended and Restated Certificate of Incorporation of the Company.
3.2 *By-laws of the Company.
5.1 *Opinion of Proskauer Rose LLP.
10.1 1998 Stock Incentive Plan.
10.3 Lease Agreement, dated April 30, 1998, between the Company and 38-32 Associates.
10.4 Agreement and Plan of Merger dated February 2, 1998 by and among Interactive
Imaginations, Inc., 24/7 Acquisition Corp., Petry Interactive, Inc. and Advercomm, Inc.
10.5 Agreement and Plan of Merger dated as of April 9, 1998 by and among 24/7 Media, Inc.,
Interactions Acquisition Corp. and Intelligent Interactions Corporation and the persons set
forth on the signature pages thereto.
10.6 *Asset Purchase Agreement, dated as of June 1, 1998, by and between 24/7 Media, Inc. and
K2 Design, Inc.
10.7 Securities Purchase Agreement, dated February 25, 1998, among Interactive Imaginations and
certain investors named therein.
10.8 Registration Rights Agreement, dated April 9, 1998 by and among 24/7 Media, Inc., The
Travelers Insurance Company, Prospect Street NYC Discovery Fund, L.P., Prospect Street
NYC Co-Investment Fund, L.P. , Big Flower Digital Services, Inc., David Banks, Trinity
Ventures V, L.P., Trinity V Side-By-Side Fund, L.P., Zero Stage Capital V Limited
Partnership, and F&W Investments 1996.
10.9 Employment Agreement between David J. Moore and Interactive Imaginations, Inc., dated
February 24, 1998.
10.10 Employment Agreement between Jacob I. Friesel and Interactive Imaginations, Inc., dated
February 24, 1998.
10.11 Employment Agreement between Yale R. Brown and 24/7 Media, Inc., dated April 9, 1998.
10.12 Employment Agreement between C. Andrew Johns and 24/7 Media, Inc., dated April 20,
1998.
10.13 Consulting Agreement dated as of January 1, 1998 by and between Interactive Imaginations,
Inc. and Neterprises, Inc.
10.14 Confidential Separation Agreement and General Release by and between Michael P. Paolucci
and Interactive Imaginations, Inc., dated February 24, 1998.
10.15 Form of Indemnification Agreement.
11.1 *Statement regarding computation of per share earnings.
21.1 Subsidiaries of the Company.
23.1 Consent of KPMG Peat Marwick LLP.
23.2 Consent of Arthur Andersen LLP.
23.3 *Consent of Proskauer Rose LLP (included in Exhibit 5.1).
24.1 Powers of Attorney (included with signature page).
27.1 Financial Data Schedule.
</TABLE>
- ----------------
* To be filed by amendment.
II-3
<PAGE>
Item 17. Undertakings
The undersigned Registrant hereby undertakes to provide to the
Underwriters at the closing specified in the Underwriting Agreement
certificates in such denominations and registered in such names as required by
the Underwriters to permit prompt delivery to each purchaser.
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.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
a registrant pursuant to the provisions described in Item 14, 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 a
registrant of expenses incurred or paid by a director, officer or controlling
person 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
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
II-4
<PAGE>
SIGNATURES AND POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENT, that each person or entity whose signature
appears below constitutes and appoints David J. Moore, C. Andrew Johns and Mark
E. Moran, and each of them, its true and lawful attorneys-in-fact and agents,
with full power of substitution and resubstitution, for it and in its name,
place and stead, in any and all capacities, to sign any and all amendments,
including post-effective amendments, to this Registration Statement on Form S-1
and to file the same, with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, granting
unto said attorneys-in-fact and agents, and each of them, full power and
authority to do and perform each and every act and thing requisite and
necessary to be done, as fully to all intents and purposes as it might or could
do in person, hereby ratifying and confirming all that said attorneys-in-fact
and agents or any of them, or their or his substitute or substitutes may
lawfully do or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-1 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the city of New York, State of New York on June 2, 1998.
24/7 MEDIA, INC.
By: /s/ David J. Moore
----------------------
David J. Moore
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below on June 2, 1998 by the persons
whose signatures appear below, which persons have signed such Registration
Statement in the capacities indicated:
<TABLE>
<CAPTION>
Signature Title
- --------------------------- --------------------------------------------------
<S> <C>
/s/ David J. Moore Chief Executive Officer and Director
- ------------------------- (Principal Executive Officer)
David J. Moore
/s/ R. Theodore Ammon Chairman of the Board
- -------------------------
R. Theodore Ammon
/s/ Yale R. Brown Executive Vice President--Technology and Director
- -------------------------
Yale R. Brown
/s/ Jacob I. Friesel Executive Vice President and Director
- -------------------------
Jacob I. Friesel
/s/ David Chaney Director
- -------------------------
David Chaney
/s/ Michael P. Paolucci Director
- -------------------------
Michael P. Paolucci
/s/ Jack L. Rivkin Director
- -------------------------
Jack L. Rivkin
/s/ Charles Stryker Director
- -------------------------
Charles Stryker
/s/ C. Andrew Johns Executive Vice President, Treasurer & Chief
- ------------------------- Financial Officer (Principal Financial Officer)
C. Andrew Johns
/s/ Stuart D. Shaw Controller (Principal Accounting Officer)
- -------------------------
Stuart D. Shaw
</TABLE>
II-5
<PAGE>
Exhibits and Financial Statement Schedule/Index
Item 16. Exhibits and Financial Statement Schedule/Index
<TABLE>
<S> <C>
1.1 *Form of Underwriting Agreement.
3.1 *Amended and Restated Certificate of Incorporation of the Company.
3.2 *By-laws of the Company.
5.1 *Opinion of Proskauer Rose LLP.
10.1 1998 Stock Incentive Plan.
10.2 Form of Stock Option Agreement.
10.3 Lease Agreement, dated April 30, 1998, between the Company and 38-32 Associates.
10.4 Agreement and Plan of Merger dated February 2, 1998 by and among Interactive
Imaginations, Inc., 24/7 Acquisition Corp., Petry Interactive, Inc. and Advercomm, Inc.
10.5 Agreement and Plan of Merger dated as of April 9, 1998 by and among 24/7 Media, Inc.,
Interactions Acquisition Corp. and Intelligent Interactions Corporation and the persons set
forth on the signature pages thereto.
10.6 *Asset Purchase Agreement, dated as of June 1, 1998, by and between 24/7 Media, Inc. and
K2 Design, Inc.
10.7 Securities Purchase Agreement, dated February 25, 1998, among Interactive Imaginations and
certain investors named therein.
10.8 Registration Rights Agreement, dated April 9, 1998 by and among 24/7 Media, Inc., The
Travelers Insurance Company, Prospect Street NYC Discovery Fund, L.P., Prospect Street
NYC Co-Investment Fund, L.P. , Big Flower Digital Services, Inc., David Banks, Trinity
Ventures V, L.P., Trinity V Side-By-Side Fund, L.P., Zero Stage Capital V Limited
Partnership, and F&W Investments 1996.
10.9 Employment Agreement between David J. Moore and Interactive Imaginations, Inc., dated
February 24, 1998.
10.10 Employment Agreement between Jacob I. Friesel and Interactive Imaginations, Inc., dated
February 24, 1998.
10.11 Employment Agreement between Yale R. Brown and 24/7 Media, Inc., dated April 9, 1998.
10.12 Employment Agreement between C. Andrew Johns and 24/7 Media, Inc., dated April 20,
1998.
10.13 Consulting Agreement dated as of January 1, 1998 by and between Interactive Imaginations,
Inc. and Neterprises, Inc.
10.14 Confidential Separation Agreement and General Release by and between Michael P. Paolucci
and Interactive Imaginations, Inc., dated February 24, 1998.
10.15 Form of Indemnification Agreement.
11.1 *Statement regarding computation of per share earnings.
21.1 Subsidiaries of the Company.
23.1 Consent of KPMG Peat Marwick LLP.
23.2 Consent of Arthur Andersen LLP.
23.3 *Consent of Proskauer Rose LLP (included in Exhibit 5.1).
24.1 Powers of Attorney (included with signature page).
27.1 Financial Data Schedule.
</TABLE>
- ----------------
* To be filed by amendment.
II-6
24/7 MEDIA, INC.
1998 STOCK INCENTIVE PLAN
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
ARTICLE I. PURPOSE .......................................1
ARTICLE II. DEFINITIONS ...................................1
ARTICLE III. ADMINISTRATION ................................5
ARTICLE IV. SHARE AND OTHER LIMITATIONS ...................8
ARTICLE V. ELIGIBILITY ..................................10
ARTICLE VI. EMPLOYEE STOCK OPTION GRANTS .................10
ARTICLE VII. RESTRICTED STOCK AWARDS ......................15
ARTICLE VIII. STOCK APPRECIATION RIGHTS ....................17
ARTICLE IX. NON-EMPLOYEE DIRECTOR STOCK OPTION GRANTS ....21
ARTICLE X. NON-TRANSFERABILITY ..........................23
ARTICLE XI. CHANGE IN CONTROL PROVISIONS .................23
ARTICLE XII. TERMINATION OR AMENDMENT OF THE PLAN .........25
ARTICLE XIII. UNFUNDED PLAN ................................26
ARTICLE XIV. GENERAL PROVISIONS ...........................26
ARTICLE XV. TERM OF PLAN .................................29
ARTICLE XVI. NAME OF PLAN .................................29
</TABLE>
i
<PAGE>
24/7 MEDIA. INC.
1998 Stock Incentive Plan
ARTICLE I.
PURPOSE
The purpose of this 24/7 Media, Inc. 1998 Stock Incentive Plan, (the
"Plan"), is to enhance the profitability and value of 24/7 Media, Inc. (the
"Company") for the benefit of its stockholders by enabling the Company (i) to
offer employees and consultants of the Company and its Affiliates stock based
incentives and other equity interests in the Company, thereby creating a means
to raise the level of stock ownership by employees and consultants in order to
attract, retain and reward such employees and consultants and strengthen the
mutuality of interests between employees or consultants and the Company's
stockholders and (ii) to offer equity based awards to non-employee directors
thereby attracting, retaining and rewarding such non-employee directors and
strengthening the mutuality of interests between non-employee directors and the
Company's stockholders. This Plan subsumes and replaces in its entirety the
Amended and Restated 1995 Stock Option Plan (the "1995 Plan") adopted by the
Company's Board of Directors, and subsequently adopted by the Company's
shareholders at the Company's Annual Meeting of Shareholders on March 8, 1996,
and all Options granted under the 1995 Plan will continue to be outstanding
Options under the Plan. The Plan was originally effective February 13, 1998. It
has been amended and restated in the form set forth herein effective February
13, 1998, conditioned upon the approval of the Company's Board of Directors and
the Company's stockholders within twelve (12) months of the effective date.
ARTICLE II.
DEFINITIONS
For purposes of this Plan, the following terms shall have the following
meanings:
2.1. "Affiliate" shall mean other than the Company, (i) any
corporation in an unbroken chain of corporations beginning with the
Company, or in the event the Company is a subsidiary within the meaning
of Code Section 424(f), beginning with the Company's parent within the
meaning of Code Section 424(e), which owns stock possessing fifty
percent (50%) or more of the total combined voting power of all classes
of stock in one of the other corporations in such chain; (ii) any
corporation, trade or business (including, without limitation, a
partnership or limited liability company) which is controlled fifty
percent (50%) or more (whether by ownership of stock, assets or an
equivalent ownership interest or voting interest) by the Company or one
of its Affiliates; or (iii) any other entity, approved by the Committee
as an Affiliate under the Plan, in which the Company or any of its
Affiliates has a material equity interest.
<PAGE>
2.2. " "Award" shall mean any award under this Plan of any
Stock Option, Stock Appreciation Right or Restricted Stock. All Awards
shall be confirmed by, and subject to the terms of, a written agreement
executed by the Company and the Participant.
2.3. "Board" shall mean the Board of Directors of the Company.
2.4. "Cause" shall mean, with respect to a Participant's
Termination of Employment or Termination of Consultancy, unless
otherwise determined by the Committee at grant, or, if no rights of the
Participant are reduced, thereafter, termination due to a Participant's
dishonesty, fraud, insubordination, willful misconduct, refusal to
perform services (for any reason other than illness or incapacity) or
materially unsatisfactory performance of his or her duties for the
Company as determined by the Committee in its sole discretion. With
respect to a Participant's Termination of Directorship, Cause shall
mean an act or failure to act that constitutes "cause" for removal of a
director under applicable state corporate law.
2.5. "Change in Control" shall have the meaning set forth in
Article XI.
2.6. "Code" shall mean the Internal Revenue Code of 1986, as
amended. Any reference to any section of the Code shall also be a
reference to any successor provision.
2.7. "Committee" shall mean a committee of the Board that may
be appointed from time to time by the Board. To the extent determined
appropriate by the Board, such committee shall consist of two or more
non-employee directors, each of whom shall be a non-employee director
as defined in Rule 16b-3 and an outside director as defined under
Section 162(m) of the Code. To the extent that no Committee exists
which has the authority to administer the Plan, the functions of the
Committee shall be exercised by the Board. If for any reason the
appointed Committee does not meet the requirements of Rule 16b-3 or
Section 162(m) of the Code, such noncompliance with the requirements of
Rule 16b-3 or Section 162(m) of the Code shall not affect the validity
of the awards, grants, interpretations or other actions of the
Committee.
2.8. "Common Stock" means the Common Shares, $.01 par value per
share, of the Company.
2.9. "Consultant" shall mean any advisor or consultant to the
Company or an Affiliate who is eligible pursuant to Article V to be
granted Awards under this Plan.
2.10. "Disability" shall mean total and permanent disability,
as defined in Section 22(e)(3) of the Code.
2.11. "Effective Date" shall mean February 13, 1998.
2.12. "Eligible Employees" shall mean the employees of the
Company and its Subsidiaries who are eligible pursuant to Article V to
be granted Awards under this Plan. Notwithstanding the foregoing, with
respect to the grant of Incentive Stock Options, Eligible
2
<PAGE>
Employees shall mean the employees of the Company, its Subsidiaries and
its parent (within the meaning of Code Section 424(e)) who are eligible
pursuant to Article V to be granted Stock Options under the Plan.
2.13. "Exchange Act" shall mean the Securities Exchange Act of
1934.
2.14. "Fair Market Value" for purposes of this Plan, unless
otherwise required by any applicable provision of the Code or any
regulations issued thereunder, shall mean, as of any date, the last
sales price reported for the Common Stock on the applicable date (i) as
reported by the principal national securities exchange in the United
States on which it is then traded or the Nasdaq Stock Market, Inc., or
(ii) if not traded on any such national securities exchange or the
Nasdaq Stock Market, Inc., as quoted on an automated quotation system
sponsored by the National Association of Securities Dealers. If the
Common Stock is not readily tradable on a national securities exchange,
the Nasdaq Stock Market, Inc. or any system sponsored by the National
Association of Securities Dealers, its Fair Market Value shall be set
in good faith by the Committee. For purposes of the grant of any Award,
the applicable date shall be the date on which the Award is granted or,
in the case of a Stock Appreciation Right, the date a notice of
exercise is received by the Committee or, if the sale of Common Stock
shall not have been reported or quoted on such date, the first day
prior thereto on which the sale of Common Stock was reported or quoted.
2.15. "Good Reason" shall mean, with respect to a
Participant's Termination of Employment or Termination of Consultancy
unless otherwise determined by the Committee at grant, or, if no rights
of the Participant are reduced, thereafter, a voluntary termination due
to "good reason," as the Committee, in its sole discretion, decides to
treat as a Good Reason termination.
2.16. "Incentive Stock Option" shall mean any Stock Option
awarded under this Plan intended to be and designated as an "Incentive
Stock Option" within the meaning of Section 422 of the Code.
2.17. "Non-Qualified Stock Option" shall mean any Stock Option
awarded under this Plan that is not an Incentive Stock Option.
2.18. "Participant" shall mean the following persons to whom
an Award has been made pursuant to this Plan: Eligible Employees of the
Company and its Subsidiaries non-employee directors of the Company;
provided, however, that non-employee directors shall be Participants
for purposes of the Plan solely with respect to awards of Stock Options
pursuant to Article IX.
2.19. "Restricted Stock" shall mean an award of shares of
Common Stock under the Plan that is subject to restrictions under
Article VII.
2.20. "Restriction Period" shall have the meaning set forth in
Subsection 7.3(a) with respect to Restricted Stock for Eligible
Employees.
3
<PAGE>
2.21. "Retirement" with respect to a Participant's Termination
of Employment or Termination of Consultancy, shall mean a Termination
of Employment or Termination of Consultancy without Cause from the
Company by a Participant who has attained (i) at least age sixty-five
(65); or (ii) such earlier date after age fifty-five (55) as approved
by the Committee with regard to such Participant. With respect to a
Participant's Termination of Directorship, Retirement shall mean the
failure to stand for reelection or the failure to be reelected after a
Participant has attained age sixty-five (65).
2.22. "Rule 16b-3" shall mean Rule 16b-3 under Section 16(b) of
the Exchange Act as then in effect or any successor provisions.
2.23. "Section 162(m) of the Code" shall mean the exception for
performance-based compensation under Section 162(m) of the Code and any
Treasury regulations thereunder.
2.24. "Stock Appreciation Right" shall mean the right pursuant
to an Award granted under Article VIII. A Tandem Stock Appreciation
Right shall mean the right to surrender to the Company all (or a
portion) of a Stock Option in exchange for an amount in cash or stock
equal to the excess of (i) the Fair Market Value, on the date such
Stock Option (or such portion thereof) is surrendered, of the Common
Stock covered by such Stock Option (or such portion thereof), over (ii)
the aggregate exercise price of such Stock Option (or such portion
thereof). A Non-Tandem Stock Appreciation Right shall mean the right to
receive an amount in cash or stock equal to the excess of (x) the Fair
Market Value of a share of Common Stock on of the date such right is
exercised, over (y) the aggregate exercise price of such right,
otherwise than on surrender of a Stock Option.
2.25. "Stock Option" or "Option" shall mean any Option to
purchase shares of Common Stock granted to Eligible Employees pursuant
to Article VI.
2.26. "Subsidiary" shall mean any corporation that is defined
as a subsidiary corporation in Section 424(f) of the Code.
2.27. "Ten Percent Stockholder" shall mean a person owning
Common Stock of the Company possessing more than ten percent (10%) of
the total combined voting power of all classes of stock of the Company
as defined in Section 422 of the Code.
2.28. "Termination of Consultancy" shall mean, with respect to
an individual, that the individual is no longer acting as a Consultant
to the Company or an Affiliate. In the event an entity shall cease to
be an Affiliate, there shall be deemed a Termination of Consultancy of
any individual who is not otherwise a Consultant of the Company or
another Affiliate at the time the entity ceases to be an Affiliate.
2.29. "Termination of Directorship" shall mean, with respect to
a non-employee director, that the non-employee director has ceased to
be a director of the Company.
4
<PAGE>
2.30. "Termination of Employment," except as provided in the
next sentence, shall mean (i) a termination of service (for reasons
other than a military or personal leave of absence granted by the
Company) of a Participant from the Company and its Affiliates; or (ii)
when an entity which is employing a Participant ceases to be an
Affiliate, unless the Participant thereupon becomes employed by the
Company or another Affiliate. The Committee may otherwise define
Termination of Employment in the Option grant or, if no rights of the
Participant are reduced, may otherwise define Termination of Employment
thereafter, including, but not limited to, defining Termination of
Employment with regard to entities controlling, under common control
with or controlled by the Company rather than just the Company and its
Affiliates and/or entities that provide substantial services to the
Company or its Affiliates to which the Participant has transferred
directly from the Company or its Affiliates at the request of the
Company.
2.31. "Transfer" or "Transferred" shall mean anticipate,
alienate, attach, sell, assign, pledge, encumber, charge or otherwise
transfer.
2.32. "Withholding Election" shall have the meaning set forth
in Section 14.4.
ARTICLE III.
ADMINISTRATION
3.1. The Committee. The Plan shall be administered and interpreted by the
Committee.
3.2. Awards. The Committee shall have full authority to grant, pursuant
to the terms of this Plan, (i) Stock Options, (ii) Stock Appreciation Rights,
both Tandem and Non-Tandem and (iii) Restricted Stock to Eligible Employees and
Consultants. Stock Options may be granted to non-employee directors of the
Company pursuant to Article IX. In particular, the Committee shall have the
authority:
(a) to select the Eligible Employees and Consultants to whom Stock
Options, Stock Appreciation Rights and Restricted Stock may from time to
time be granted hereunder;
(b) to determine whether and to what extent Stock Options, Stock
Appreciation Rights and Restricted Stock or any combination thereof, are to
be granted hereunder to one or more Eligible Employees or Consultants;
(c) to determine, in accordance with the terms of this Plan, the
number of shares of Common Stock to be covered by each Award to an Eligible
Employee or Consultant granted hereunder;
(d) to determine the terms and conditions, not inconsistent with the
terms of this Plan, of any Award granted hereunder to an Eligible Employee
or Consultant (including, but not limited to, the share price, any
restriction or limitation, any vesting schedule or
5
<PAGE>
acceleration thereof, or any forfeiture restrictions or waiver thereof,
regarding any Stock Option or other Award, and the shares of Common Stock
relating thereto, based on such factors, if any, as the Committee shall
determine, in its sole discretion);
(e) to determine whether and under what circumstances a Stock Option
may be settled in cash, Common Stock and/or Restricted Stock under
Subsection 6.3(d);
(f) to determine whether, to what extent and under what circumstances
to provide loans (which shall be on a recourse basis and shall bear a
reasonable rate of interest) to Eligible Employees and Consultants in order
to exercise Options under the Plan;
(g) to modify, extend or renew a Stock Option, subject to Article XII
hereof, provided, however, that if a Stock Option is modified, extended or
renewed and thereby deemed to be the issuance of a new Stock Option under
the Code or the applicable accounting rules, the exercise price of such
Stock Option may continue to be the original exercise price even if less
than the Fair Market Value of the Common Stock at the time of such
modification, extension or renewal;
(h) to determine whether a Stock Appreciation Right is Tandem or
Non-Tandem; and
(i) to determine whether to require an Eligible Employee or
Consultant, as a condition of the granting of any Award, to not sell or
otherwise dispose of shares acquired pursuant to the exercise of an Option
or as an Award for a period of time as determined by the Committee, in its
sole discretion, following the date of the acquisition of such Option or
Award.
3.3. Guidelines. Subject to Article XII hereof, the Committee shall have
the authority to adopt, alter and repeal such administrative rules, guidelines
and practices governing this Plan and perform all acts, including the delegation
of its administrative responsibilities, as it shall, from time to time, deem
advisable; to construe and interpret the terms and provisions of this Plan and
any Award issued under this Plan (and any agreements relating thereto); and to
otherwise supervise the administration of this Plan. The Committee may correct
any defect, supply any omission or reconcile any inconsistency in this Plan or
in any agreement relating thereto in the manner and to the extent it shall deem
necessary to carry this Plan into effect, but only to the extent any such action
would be permitted under the applicable provisions of Rule 16b-3 (if any) and
the applicable provisions of Section 162(m) of the Code (if any). The Committee
may adopt special guidelines and provisions for persons who are residing in, or
subject to, the taxes of, countries other than the United States to comply with
applicable tax and securities laws. If and to the extent applicable, this Plan
is intended to comply with Section 162(m) of the Code and the applicable
requirements of Rule 16b-3 and shall be limited, construed and interpreted in a
manner so as to comply therewith.
3.4. Decisions Final. Any decision, interpretation or other action made or
taken in good faith by or at the direction of the Company, the Board, or the
Committee (or any of its members) arising out of or in connection with the Plan
shall be within the absolute discretion of all and each of them,
6
<PAGE>
as the case may be, and shall be final, binding and conclusive on the Company
and all employees and Participants and their respective heirs, executors,
administrators, successors and assigns.
3.5. Reliance on Counsel. The Company, the Board or the Committee may
consult with legal counsel, who may be counsel for the Company or other counsel,
with respect to its obligations or duties hereunder, or with respect to any
action or proceeding or any question of law, and shall not be liable with
respect to any action taken or omitted by it in good faith pursuant to the
advice of such counsel.
3.6. Procedures. If the Committee is appointed, the Board shall designate
one of the members of the Committee as chairman and the Committee shall hold
meetings, subject to the By-Laws of the Company, at such times and places as it
shall deem advisable. A majority of the Committee members shall constitute a
quorum. All determinations of the Committee shall be made by a majority of its
members. Any decision or determination reduced to writing and signed by all
Committee members in accordance with the By-Laws of the Company shall be fully
effective as if it had been made by a vote at a meeting duly called and held.
The Committee shall keep minutes of its meetings and shall make such rules and
regulations for the conduct of its business as it shall deem advisable.
3.7. Designation of Consultants -- Liability.
(a) The Committee may designate employees of the Company and
professional advisors to assist the Committee in the administration of
the Plan and may grant authority to employees to execute agreements or
other documents on behalf of the Committee.
(b) The Committee may employ such legal counsel, consultants and
agents as it may deem desirable for the administration of the Plan and may
rely upon any opinion received from any such counsel or consultant and any
computation received from any such consultant or agent. Expenses incurred
by the Committee or Board in the engagement of any such counsel, consultant
or agent shall be paid by the Company. The Committee, its members and any
person designated pursuant to paragraph (a) above shall not be liable for
any action or determination made in good faith with respect to the Plan. To
the maximum extent permitted by applicable law, no officer of the Company
or member or former member of the Committee or of the Board shall be liable
for any action or determination made in good faith with respect to the Plan
or any Award granted under it. To the maximum extent permitted by
applicable law and the Certificate of Incorporation and By-Laws of the
Company and to the extent not covered by insurance, each officer and member
or former member of the Committee or of the Board shall be indemnified and
held harmless by the Company against any cost or expense (including
reasonable fees of counsel reasonably acceptable to the Company) or
liability (including any sum paid in settlement of a claim with the
approval of the Company), and advanced amounts necessary to pay the
foregoing at the earliest time and to the fullest extent permitted, arising
out of any act or omission to act in connection with the Plan, except to
the extent arising out of such officer's, member's or former member's own
fraud or bad faith. Such indemnification shall be in addition to any rights
of indemnification the officers, directors or members or former officers,
directors or members may have under
7
<PAGE>
applicable law or under the Certificate of Incorporation or By-Laws of the
Company or Affiliate. Notwithstanding anything else herein, this
indemnification will not apply to the actions or determi(b) nations made by
an individual with regard to Awards granted to him or her under this Plan.
ARTICLE IV.
SHARE AND OTHER LIMITATIONS
4.1. Shares.
(a) General Limitation. The aggregate number of shares of Common Stock
which may be issued or used for reference purposes under this Plan or with
respect to which other Awards may be granted shall not exceed 8,250,000
shares (subject to any increase or decrease pursuant to Section 4.2) which
may be either authorized and unissued Common Stock or Common Stock held in
or acquired for the treasury of the Company. If any Option or Stock
Appreciation Right granted under this Plan expires, terminates or is
canceled for any reason without having been exercised in full or, with
respect to Options, the Company repurchases any Option pursuant to Section
6.3(f), the number of shares of Common Stock underlying the repurchased
Option, and/or the number of shares of Common Stock underlying any
unexercised Stock Appreciation Right or Option shall again be available for
the purposes of Awards under the Plan. If a Tandem Stock Appreciation Right
or a limited Stock Appreciation Right is granted in tandem with an Option,
such grant shall only apply once against the maximum number of shares of
Common Stock which may be issued under this Plan.
(b) Individual Participant Limitations. (i) The maximum number of
shares of Common Stock subject to any Option which may be granted under
this Plan to each Participant shall not exceed 750,000 shares (subject to
any increase or decrease pursuant to Section 4.2) during each fiscal year
of the Company.
(ii) There are no annual individual Participant
limitations on Restricted Stock.
(iii) The maximum number of shares of Common Stock subject to any
Stock Appreciation Right which may be granted under this Plan to each
Participant shall not exceed 750,000 shares (subject to any increase or
decrease pursuant to Section 4.2) during each fiscal year of the Company.
If a Tandem Stock Appreciation Right or limited Stock
Appreciation Right is granted in tandem with an Option it shall apply
against the Participant's individual share limitations for both Stock
Appreciation Rights and Options.
4.2. Changes.
8
<PAGE>
(a) The existence of the Plan and the Awards granted hereunder shall
not affect in any way the right or power of the Board or the stockholders
of the Company to make or authorize any adjustment, recapitalization,
reorganization or other change in the Company's capital structure or its
business, any merger or consolidation of the Company or its Affiliates, any
issue of bonds, debentures, preferred or prior preference stock ahead of or
affecting Common Stock, the dissolution or liquidation of the Company or
its Affiliates, any sale or transfer of all or part of its assets or
business or any other corporate act or proceeding.
(b) In the event of any such change in the capital structure or
business of the Company by reason of any stock dividend or distribution,
stock split or reverse stock split, recapitalization, reorganization,
merger, consolidation, split-up, combination or exchange of shares,
distribution with respect to its outstanding Common Stock or capital stock
other than Common Stock, sale or transfer of all or part of its assets or
business, reclassification of its capital stock, or any similar change
affecting the Company's capital structure or business and the Committee
determines an adjustment is appropriate under the Plan, then the aggregate
number and kind of shares which thereafter may be issued under this Plan,
the number and kind of shares or other property (including cash) to be
issued upon exercise of an outstanding Option or other Awards granted under
this Plan and the purchase price thereof shall be appropriately adjusted
consistent with such change in such manner as the Committee may deem
equitable to prevent substantial dilution or enlargement of the rights
granted to, or available for, Participants under this Plan or as otherwise
necessary to reflect the change, and any such adjustment determined by the
Committee shall be binding and conclusive on the Company and all
Participants and employees and their respective heirs, executors,
administrators, successors and assigns.
(c) Fractional shares of Common Stock resulting from any adjustment in
Options or Awards pursuant to Section 4.2(a) or (b) shall be aggregated
until, and eliminated at, the time of exercise by rounding-down for
fractions less than one-half (1/2) and rounding-up for fractions equal to
or greater than one-half (1/2). No cash settlements shall be made with
respect to fractional shares eliminated by rounding. Notice of any
adjustment shall be given by the Committee to each Participant whose Option
or Award has been adjusted and such adjustment (whether or not such notice
is given) shall be effective and binding for all purposes of the Plan.
(d) In the event of a merger or consolidation in which the Company is
not the surviving entity or in the event of any transaction that results in
the acquisition of substantially all of the Company's outstanding Common
Stock by a single person or entity or by a group of persons and/or entities
acting in concert, or in the event of the sale or transfer of all of the
Company's assets (all of the foregoing being referred to as "Acquisition
Events"), then the Committee may, in its sole discretion, terminate all
outstanding Options and Stock Appreciation Rights of Eligible Employees and
Consultants, effective as of the date of the Acquisition Event, by
delivering notice of termination to each such Participant at least twenty
(20) days prior to the date of consummation of the Acquisition Event;
provided, that during the period from the date on which such notice of
termination is delivered to the consummation of the Acquisition Event, each
such Participant shall have the
9
<PAGE>
right to exercise in full all of his or her Options and Stock Appreciation
Rights that are then outstanding (without regard to any limitations on
exercisability otherwise contained in the Option or Award Agreements) but
contingent on occurrence of the Acquisition Event, and, provided that, if
the Acquisition Event does not take place within a specified period after
giving such notice for any reason whatsoever, the notice and exercise shall
be null and void.
If an Acquisition Event occurs, to the extent the Committee does not
terminate the outstanding Options and Stock Appreciation Rights pursuant to
this Section 4.2(d), then the provisions of Section 4.2(b) shall apply.
4.3. Purchase Price. Notwithstanding any provision of this Plan to the
contrary, if authorized but previously unissued shares of Common Stock are
issued under this Plan, such shares shall not be issued for a consideration
which is less than as permitted under applicable law.
ARTICLE V.
ELIGIBILITY
5.1. All employees of and Consultants to the Company and its Affiliates are
eligible to be granted Non-Qualified Stock Options, Stock Appreciation Rights
and Restricted Stock under this Plan. All employees of the Company, its
Subsidiaries and its parent (within the meaning of Code Section 424(e)) are
eligible to be granted Incentive Stock Options under the Plan. Eligibility under
this Plan shall be determined by the Committee.
5.2. Non-employee directors of the Company are only eligible to receive an
Award of Stock Options in accordance with Article IX of the Plan.
ARTICLE VI.
EMPLOYEE STOCK OPTION GRANTS
6.1. Options. Each Stock Option granted hereunder shall be one of two
types: (i) an Incentive Stock Option intended to satisfy the requirements of
Section 422 of the Code or (ii) a Non-Qualified Stock Option.
6.2. Grants. The Committee shall have the authority to grant to any
Eligible Employee one or more Incentive Stock Options, Non-Qualified Stock
Options, or both types of Stock Options (in each case with or without Stock
Appreciation Rights). The Committee shall have the authority to grant to any
Consultant one or more Non-Qualified Stock Options (with or without Stock
Appreciation Rights). To the extent that any Stock Option does not qualify as an
Incentive Stock Option (whether because of its provisions or the time or manner
of its exercise or otherwise), such Stock Option or the portion thereof which
does not qualify, shall constitute a separate Non-Qualified Stock Option.
10
<PAGE>
6.3. Terms of Options. Options granted under this Plan shall be subject to
the following terms and conditions, shall be subject to Section 3.2 hereof and
the other provisions of this Plan, and shall be in such form and contain such
additional terms and conditions, not inconsistent with the terms of this Plan,
as the Committee shall deem desirable:
(a) Option Price. The option price per share of Common Stock
purchasable under an Incentive Stock Option shall be determined by the
Committee at the time of grant but shall not be less than 100% of the Fair
Market Value of the share of Common Stock at the time of grant; provided,
however, if an Incentive Stock Option is granted to a Ten Percent
Stockholder, the purchase price shall be no less than 110% of the Fair
Market Value of the Common Stock. The purchase price of shares of Common
Stock subject to a Non-Qualified Stock Option shall be determined by the
Committee but shall not be less than the 100% of the Fair Market Value of
the Common Stock at the time of grant. Notwithstanding the foregoing, if an
Option is modified, extended or renewed and, thereby, deemed to be the
issuance of a new Option under the Code, the exercise price of an Option
may continue to be the original exercise price even if less than the Fair
Market Value of the Common Stock at the time of such modification,
extension or renewal.
(b) Option Term. The term of each Stock Option shall be fixed by the
Committee, but no Stock Option shall be exercisable more than ten (10)
years after the date the Option is granted, provided, however, the term of
an Incentive Stock Option granted to a Ten Percent Stockholder may not
exceed five (5) years.
(c) Exercisability. Stock Options shall be exercisable at such time or
times and subject to such terms and conditions as shall be determined by
the Committee at grant. If the Committee provides, in its discretion, that
any Stock Option is exercisable subject to certain limitations (including,
without limitation, that it is exercisable only in installments or within
certain time periods), the Committee may waive such limitations on the
exercisability at any time at or after grant in whole or in part
(including, without limitation, that the Committee may waive the
installment exercise provisions or accelerate the time at which Options may
be exercised), based on such factors, if any, as the Committee shall
determine, in its sole discretion.
(d) Method of Exercise. Subject to whatever installment exercise and
waiting period provisions apply under subsection (c) above, Stock Options
may be exercised in whole or in part at any time during the Option term, by
giving written notice of exercise to the Company specifying the number of
shares to be purchased. Such notice shall be accompanied by payment in full
of the purchase price in such form, or such other arrangement for the
satisfaction of the purchase price, as the Committee may accept. If and to
the extent determined by the Committee in its sole discretion at or after
grant, payment in full or in part may also be made in the form of Common
Stock withheld from the shares to be received on the exercise of a Stock
Option hereunder, Common Stock owned by the Participant (and for which the
Participant has good title free and clear of any liens and encumbrances) or
Restricted Stock based, in each case, on the Fair Market Value of the
Common Stock on the payment date as determined by the Committee (without
regard to any forfeiture restrictions
11
<PAGE>
applicable to such Restricted Stock). No shares of Common Stock shall be
issued until payment, as provided herein, therefor has been made or
provided for. If payment in full or in part has been made in the form of
Restricted Stock, an equivalent number of shares of Common Stock issued on
exercise of the Option shall be subject to the same restrictions and
conditions, during the remainder of the Restriction Period, applicable to
the Restricted Stock surrendered therefor.
(e) Incentive Stock Option Limitations. To the extent that the
aggregate Fair Market Value (determined as of the time of grant) of the
Common Stock with respect to which Incentive Stock Options are exercisable
for the first time by an Eligible Employee during any calendar year under
the Plan and/or any other stock option plan of the Company or any
Subsidiary or parent corporation (within the meaning of Section 424(e) of
the Code) exceeds $100,000, such Options shall be treated as Options which
are not Incentive Stock Options. In addition, if an Eligible Employee does
not remain employed by the Company, any Subsidiary or parent corporation
(within the meaning of Section 424(e) of the Code) at all times from the
time the Option is granted until three (3) months prior to the date of
exercise (or such other period as required by applicable law), such Option
shall be treated as an Option which is not an Incentive Stock Option.
Should the foregoing provision not be necessary in order for the Stock
Options to qualify as Incentive Stock Options, or should any additional
provisions be required, the Committee may amend the Plan accordingly,
without the necessity of obtaining the approval of the stockholders of the
Company.
(f) Buy Out and Settlement Provisions. The Committee may at any time
on behalf of the Company offer to buy out an Option previously granted,
based on such terms and conditions as the Committee shall establish and
communicate to the Participant at the time that such offer is made.
(g) Form, Modification, Extension and Renewal of Options. Subject to
the terms and conditions and within the limitations of the Plan, an Option
shall be evidenced by such form of agreement or grant as is approved by the
Committee, and the Committee may modify, extend or renew outstanding
Options granted under the Plan (provided that the rights of a Participant
are not reduced without his consent), or accept the surrender of
outstanding Options (up to the extent not theretofore exercised) and
authorize the granting of new Options in substitution therefor (to the
extent not theretofore exercised).
(h) Other Terms and Conditions. Options may contain such other
provisions, which shall not be inconsistent with any of the foregoing terms
of the Plan, as the Committee shall deem appropriate including, without
limitation, permitting "reloads" such that the same number of Options are
granted as the number of Options exercised, shares used to pay for the
exercise price of Options or shares used to pay withholding taxes
("Reloads"). With respect to Reloads, the exercise price of the new Stock
Option shall be the Fair Market Value on the date of the "reload" and the
term of the Stock Option shall be the same as the
12
<PAGE>
remaining term of the Options that are exercised, if applicable, or such
other exercise price and term as determined by the Committee.
6.4. Termination of Employment. The following rules apply with regard to
Options upon the Termination of Employment or Termination of Consultancy of a
Participant:
(a) Termination by Reason of Death. If a Participant's Termination of
Employment or Termination of Consultancy is by reason of death, any Stock
Option held by such Participant, unless otherwise determined by the
Committee at grant or, if no rights of the Participant's estate are
reduced, thereafter, may be exercised, to the extent exercisable at the
Participant's death, by the legal representative of the estate, at any time
within a period of one (1) year from the date of such death, but in no
event beyond the expiration of the stated term of such Stock Option.
(b) Termination by Reason of Disability. If a Participant's
Termination of Employment or Termination of Consultancy is by reason of
Disability, any Stock Option held by such Participant, unless otherwise
determined by the Committee at grant or, if no rights of the Participant
are reduced, thereafter, may be exercised, to the extent exercisable at the
Participant's termination, by the Participant (or the legal representative
of the Participant's estate if the Participant dies after termination) at
any time within a period of one (1) year from the date of such termination,
but in no event beyond the expiration of the stated term of such Stock
Option.
(c) Termination by Reason of Retirement. If a Participant's
Termination of Employment or Termination of Consultancy is by reason of
Retirement, any Stock Option held by such Participant, unless otherwise
determined by the Committee at grant, or, if no rights of the Participant
are reduced, thereafter, shall be fully vested and may thereafter be
exercised by the Participant at any time within a period of one (1) year
from the date of such termination, but in no event beyond the expiration of
the stated term of such Stock Option; provided, however, that, if the
Participant dies within such exercise period, any unexercised Stock Option
held by such Participant shall thereafter be exercisable, to the extent to
which it was exercisable at the time of death, for a period of one (1) year
(or such other period as the Committee may specify at grant or, if no
rights of the Participant's estate are reduced, thereafter) from the date
of such death, but in no event beyond the expiration of the stated term of
such Stock Option.
(d) Involuntary Termination Without Cause or Termination for Good
Reason. If a Participant's Termination of Employment or Termination of
Consultancy is by involuntary termination without Cause or for Good Reason,
any Stock Option held by such Participant, unless otherwise determined by
the Committee at grant or, if no rights of the Participant are reduced,
thereafter, may be exercised, to the extent exercisable at termination, by
the Participant at any time within a period of ninety (90) days from the
date of such termination, but in no event beyond the expiration of the
stated term of such Stock Option.
13
<PAGE>
(e) Termination Without Good Reason. If a Participant's Termination of
Employment or Termination of Consultancy is voluntary but without Good
Reason and occurs prior to, or more than ninety (90) days after, the
occurrence of an event which would be grounds for Termination of Employment
or Termination of Consultancy by the Company for Cause (without regard to
any notice or cure period requirements), any Stock Option held by such
Participant, unless otherwise determined by the Committee at grant or, if
no rights of the Participant are reduced, thereafter, may be exercised, to
the extent exercisable at termination, by the Participant at any time
within a period of thirty (30) days from the date of such termination, but
in no event beyond the expiration of the stated term of such Stock Option.
(f) Other Termination. Unless otherwise determined by the Committee at
grant or, if no rights of the Participant are reduced, thereafter, if a
Participant's Termination of Employment or Termination of Consultancy is
for any reason other than death, Disability, Retirement, Good Reason,
involuntary termination without Cause or voluntary termination as provided
in subsection (e) above, any Stock Option held by such Participant shall
thereupon terminate and expire as of the date of termination, provided that
(unless the Committee determines a different period upon grant or, if, no
rights of the Participant are reduced, thereafter) in the event the
termination is for Cause or is a voluntary termination without Good Reason
within ninety (90) days after occurrence of an event which would be grounds
for Termination of Employment or Termination of Consultancy by the Company
for Cause (without regard to any notice or cure period requirement), any
Stock Option held by the Participant at the time of occurrence of the event
which would be grounds for Termination of Employment or Termination of
Consultancy by the Company for Cause shall be deemed to have terminated and
expired upon occurrence of the event which would be grounds for Termination
of Employment or Termination of Consultancy by the Company for Cause.
ARTICLE VII.
RESTRICTED STOCK AWARDS
7.1. Awards of Restricted Stock. Shares of Restricted Stock may be
issued to Eligible Employees or Consultants either alone or in addition to other
Awards granted under the Plan. The Committee shall determine the eligible
persons to whom, and the time or times at which, grants of Restricted Stock will
be made, the number of shares to be awarded, the price (if any) to be paid by
the recipient (subject to Section 7.2), the time or times within which such
Awards may be subject to forfeiture, the vesting schedule and rights to
acceleration thereof, and all other terms and conditions of the Awards.
7.2. Awards and Certificates. The prospective Participant selected to
receive a Restricted Stock Award shall not have any rights with respect to such
Award, unless and until such Participant has delivered a fully executed copy of
the Restricted Stock Award agreement evidencing the Award
14
<PAGE>
to the Company and has otherwise complied with the applicable terms and
conditions of such Award. Further, such Award shall be subject to the following
conditions:
(a) Purchase Price. The purchase price of Restricted Stock shall be
fixed by the Committee. Subject to Section 4.3, the purchase price for
shares of Restricted Stock may be zero to the extent permitted by
applicable law, and, to the extent not so permitted, such purchase price
may not be less than par value.
(b) Acceptance. Awards of Restricted Stock must be accepted within a
period of sixty (60) days (or such shorter period as the Committee may
specify at grant) after the Award date, by executing a Restricted Stock
Award agreement and by paying whatever price (if any) the Committee has
designated thereunder.
(c) Legend. Each Participant receiving a Restricted Stock Award shall
be issued a stock certificate in respect of such shares of Restricted
Stock, unless the Committee elects to use another system, such as book
entries by the transfer agent, as evidencing ownership of a Restricted
Stock Award. Such certificate shall be registered in the name of such
Participant, and shall bear an appropriate legend referring to the terms,
conditions, and restrictions applicable to such Award, substantially in the
following form:
"The anticipation, alienation, attachment, sale, transfer, assignment,
pledge, encumbrance or charge of the shares of stock represented hereby are
subject to the terms and conditions (including forfeiture) of the 24/7
Media, Inc. (the "Company") 1998 Stock Incentive Plan and an Agreement
entered into between the registered owner and the Company, dated
_____________, 19__. Copies of such Plan and Agreement are on file at the
principal office of the Company."
(d) Custody. The Committee may require that any stock certificates
evidencing such shares be held in custody by the Company until the
restrictions thereon shall have lapsed, and that, as a condition of any
Restricted Stock Award, the Participant shall have delivered a duly signed
stock power, endorsed in blank, relating to the Common Stock covered by
such Award.
7.3. Restrictions and Conditions on Restricted Stock Awards. The shares
of Restricted Stock awarded pursuant to this Plan shall be subject to Article X
and the following restrictions and conditions:
(a) Restriction Period; Vesting and Acceleration of Vesting. The
Participant shall not be permitted to Transfer shares of Restricted Stock
awarded under this Plan during a period set by the Committee (the
"Restriction Period") commencing with the date of such Award, as set forth
in the Restricted Stock Award agreement and such agreement shall set forth
a vesting schedule and any events which would accelerate vesting of the
shares of Restricted Stock. Within these limits, based on service, or other
criteria determined by the Committee, the Committee may provide for the
lapse of such restrictions in installments in
15
<PAGE>
whole or in part, or may accelerate the vesting of all or any part of any
Restricted Stock Award.
(b) Rights as Stockholder. Except as provided in this subsection (b)
and subsection (a) above and as otherwise determined by the Committee, the
Participant shall have, with respect to the shares of Restricted Stock, all
of the rights of a holder of shares of Common Stock of the Company
including, without limitation, the right to receive any dividends, the
right to vote such shares and, subject to and conditioned upon the full
vesting of shares of Restricted Stock, the right to tender such shares.
Notwithstanding the foregoing, the payment of dividends shall be deferred
until, and conditioned upon, the expiration of the applicable Restriction
Period, unless the Committee, in its sole discretion, specifies otherwise
at the time of the Award.
(c) Lapse of Restrictions. If and when the Restriction Period expires
without a prior forfeiture of the Restricted Stock subject to such
Restriction Period, the certificates for such shares shall be delivered to
the Participant. All legends shall be removed from said certificates at the
time of delivery to the Participant except as otherwise required by
applicable law.
7.4. Termination of Employment or Termination of Consultancy for
Restricted Stock. Subject to the applicable provisions of the Restricted Stock
Award agreement and this Plan, upon a Participant's Termination of Employment or
Termination of Consultancy for any reason during the relevant Restriction
Period, all Restricted Stock still subject to restriction will vest or be
forfeited in accordance with the terms and conditions established by the
Committee at grant or thereafter.
ARTICLE VIII.
STOCK APPRECIATION RIGHTS
8.1. Tandem Stock Appreciation Rights. Stock Appreciation Rights may be
granted in conjunction with all or part of any Stock Option (a "Reference Stock
Option") granted under this Plan ("Tandem Stock Appreciation Rights"). In the
case of a Non-Qualified Stock Option, such rights may be granted either at or
after the time of the grant of such Reference Stock Option. In the case of an
Incentive Stock Option, such rights may be granted only at the time of the grant
of such Reference Stock Option.
8.2. Terms and Conditions of Tandem Stock Appreciation Rights. Tandem
Stock Appreciation Rights shall be subject to such terms and conditions, not
inconsistent with the provisions of this Plan, as shall be determined from time
to time by the Committee, including Article X and the following:
(a) Term. A Tandem Stock Appreciation Right or applicable portion
thereof granted with respect to a Reference Stock Option shall terminate
and no longer be exercisable upon the termination or exercise of the
Reference Stock Option, except that, unless otherwise determined by the
Committee, in its sole discretion, at the time of grant, a Tandem Stock
16
<PAGE>
Appreciation Right granted with respect to less than the full number of
shares covered by the Reference Stock Option shall not be reduced until and
then only to the extent the exercise or termination of the Reference Stock
Option causes the number of shares covered by the Tandem Stock Appreciation
Right to exceed the number of shares remaining available and unexercised
under the Reference Stock Option.
(b) Exercisability. Tandem Stock Appreciation Rights shall be
exercisable only at such time or times and to the extent that the Reference
Stock Options to which they relate shall be exercisable in accordance with
the provisions of Article VI and this Article VIII.
(c) Method of Exercise. A Tandem Stock Appreciation Right may be
exercised by an optionee by surrendering the applicable portion of the
Reference Stock Option. Upon such exercise and surrender, the Participant
shall be entitled to receive an amount determined in the manner prescribed
in this Section 8.2. Stock Options which have been so surrendered, in whole
or in part, shall no longer be exercisable to the extent the related Tandem
Stock Appreciation Rights have been exercised.
(d) Payment. Upon the exercise of a Tandem Stock Appreciation Right a
Participant shall be entitled to receive up to, but no more than, an amount
in cash and/or Common Stock (as chosen by the Committee in its sole
discretion) equal in value to the excess of the Fair Market Value of one
share of Common Stock over the option price per share specified in the
Reference Stock Option multiplied by the number of shares in respect of
which the Tandem Stock Appreciation Right shall have been exercised, with
the Committee having the right to determine the form of payment.
(e) Deemed Exercise of Reference Stock Option. Upon the exercise of a
Tandem Stock Appreciation Right, the Reference Stock Option or part thereof
to which such Stock Appreciation Right is related shall be deemed to have
been exercised for the purpose of the limitation set forth in Article IV of
the Plan on the number of shares of Common Stock to be issued under the
Plan.
8.3. Non-Tandem Stock Appreciation Rights. Non-Tandem Stock
Appreciation Rights may also be granted without reference to any Stock Options
granted under this Plan.
8.4. Terms and Conditions of Non-Tandem Stock Appreciation Rights.
Non-Tandem Stock Appreciation Rights shall be subject to such terms and
conditions, not inconsistent with the provisions of this Plan, as shall be
determined from time to time by the Committee, including Article X and the
following:
(a) Term. The term of each Non-Tandem Stock Appreciation Right shall
be fixed by the Committee, but shall not be greater than ten (10) years
after the date the right is granted.
(b) Exercisability. Non-Tandem Stock Appreciation Rights shall be
exercisable at such time or times and subject to such terms and conditions
as shall be determined by the
17
<PAGE>
Committee at grant. If the Committee provides, in its discretion, that any
such right is exercisable subject to certain limitations (including,
without limitation, that it is exercisable only in installments or within
certain time periods), the Committee may waive such limitation on the
exercisability at any time at or after grant in whole or in part
(including, without limitation, that the Committee may waive the
installment exercise provisions or accelerate the time at which rights may
be exercised), based on such factors, if any, as the Committee shall
determine, in its sole discretion.
(c) Method of Exercise. Subject to whatever installment exercise and
waiting period provisions apply under subsection (b) above, Non-Tandem
Stock Appreciation Rights may be exercised in whole or in part at any time
during the option term, by giving written notice of exercise to the Company
specifying the number of Non-Tandem Stock Appreciation Rights to be
exercised.
(d) Payment. Upon the exercise of a Non-Tandem Stock Appreciation
Right a Participant shall be entitled to receive, for each right exercised,
up to, but no more than, an amount in cash and/or Common Stock (as chosen
by the Committee in its sole discretion) equal in value to the excess of
the Fair Market Value of one share of Common Stock on the date the right is
exercised over the Fair Market Value of one (1) share of Common Stock on
the date the right was awarded to the Participant.
8.5. Limited Stock Appreciation Rights. The Committee may, in its sole
discretion, grant Tandem and Non-Tandem Stock Appreciation Rights either as a
general Stock Appreciation Right or as a limited Stock Appreciation Right.
Limited Stock Appreciation Rights may be exercised upon the occurrence of such
event as the Committee may, in its sole discretion, designate at the time of
grant or thereafter. Upon the exercise of limited Stock Appreciation Rights,
except as otherwise provided in an Award agreement, the Participant shall
receive in cash or Common Stock, as determined by the Committee, an amount equal
to the amount (1) set forth in Section 8.2(d) with respect to Tandem Stock
Appreciation Rights or (2) set forth in Section 8.4(d) with respect to
Non-Tandem Stock Appreciation Rights.
8.6. Termination of Employment or Termination of Consultancy. The
following rules apply with regard to Stock Appreciation Rights upon the
Termination of Employment or Termination of Consultancy of a Participant.
(a) Termination by Death. If a Participant's Termination of Employment
or Termination of Consultancy is by reason of death, any Stock Appreciation
Right held by such Participant, unless otherwise determined by the
Committee at grant or if no rights of the Participant's estate are reduced,
thereafter, may be exercised, to the extent exercisable at the
Participant's death, by the legal representative of the estate, at any time
within a period of one (1) year from the date of such death or until the
expiration of the stated term of such Stock Appreciation Right, whichever
period is the shorter.
(b) Termination by Reason of Disability. If a Participant's
Termination of Employment or Termination of Consultancy is by reason of
Disability, any Stock
18
<PAGE>
Appreciation Right held by such participant, unless otherwise determined by
the Committee at grant or, if no rights of the Participant are reduced,
thereafter, may be exercised, to the extent exercisable at the
Participant's termination, by the Participant (or the legal representative
of the Participant's estate if the Participant dies after termination) at
any time within a period of one (1) year from the date of such termination
or until the expiration of the stated term of such Stock Appreciation
Right, whichever period is the shorter.
(c) Termination by Reason of Retirement. If a Participant's
Termination of Employment or Termination of Consultancy is by reason of
Retirement, any Stock Appreciation Right held by such Participant, unless
otherwise determined by the Committee at grant or, if no rights of the
Participant are reduced, thereafter, shall be fully vested and may
thereafter be exercised by the Participant at any time within a period of
one (1) year from the date of such termination or until the expiration of
the stated term of such right, whichever period is the shorter; provided,
however, that, if the Participant dies within such one (1) year period, any
unexercised Non-Tandem Stock Appreciation Right held by such Participant
shall thereafter be exercisable, to the extent to which it was exercisable
at the time of death, for a period of one (1) year (or such other period as
the Committee may specify at grant or if no rights of the Participant are
reduced, thereafter) from the date of such death or until the expiration of
the stated term of such right, whichever period is the shorter.
(d) Involuntary Termination Without Cause or Termination for Good
Reason. If a Participant's Termination of Employment or Termination of
Consultancy is by involuntary termination without Cause or for Good Reason,
any Stock Appreciation Right held by such participant, unless otherwise
determined by the Committee at grant or if no rights of the participant are
reduced, thereafter, may be exercised, to the extent exercisable at
termination, by the Participant at any time within a period of ninety (90)
days from the date of such termination or until the expiration of the
stated term of such right, whichever period is shorter.
(e) Termination Without Good Reason. If a Participant's Termination of
Employment or Termination of Consultancy is voluntary but without Good
Reason and occurs prior to, or more than ninety (90) days after, the
occurrence of an event which would be grounds for Termination of Employment
or Termination of Consultancy by the Company for Cause (without regard to
any notice or cure period requirements), any Stock Appreciation Right held
by such Participant, unless greater or lesser exercise rights are provided
by the Committee at the time of grant or, if no rights of the participant
are reduced, thereafter, may be exercised, to the extent exercisable at
termination, by the Participant at any time within a period of thirty (30)
days from the date of such termination, but in no event beyond the
expiration of the stated term of such Stock Appreciation Right.
(f) Other Termination. Unless otherwise determined by the Committee at
grant, or, if no rights of the Participant are reduced thereafter, if a
Participant's Termination of Employment or Termination of Consultancy is
for any reason other than death, Disability, Retirement, Good Reason,
involuntary termination without Cause or voluntary termination as provided
in subsection (e) above, any Stock Appreciation Right held by such
Participant
19
<PAGE>
shall thereupon terminate or expire as of the date of termination,
provided, that (unless the Committee determines a different period upon
grant, or, if no rights of the Participant are reduced, thereafter) in the
event the termination is for Cause or is a voluntary termination as
provided in subsection (e) above, within ninety (90) days after occurrence
of an event which would be grounds for Termination of Employment or
Termination of Consultancy by the Company for Cause (without regard to any
notice or cure period requirement), any Stock Appreciation Right held by
the Participant at the time of the occurrence of the event which would be
grounds for Termination of Employment or Termination of Consultancy by the
Company for Cause shall be deemed to have terminated and expired upon
occurrence of the event which would be grounds for Termination of
Employment or Termination of Consultancy by the Company for Cause.
ARTICLE IX.
NON-EMPLOYEE DIRECTOR STOCK OPTION GRANTS
9.1. Options. The terms of this Article IX shall apply only to Options
granted to non-employee directors.
9.2. Grants. A Committee of the Board may in its discretion grant Options
to non-employee directors of the Company, subject to all limitations set forth
in the Plan. No Person who would be eligible to receive Options pursuant to this
Article IX shall be a member of such Committee.
9.3. Non-Qualified Stock Options. Stock Options granted under this Article
IX shall be Non-Qualified Stock Options.
9.4. Terms of Options. Options granted under this Article shall be subject
to the following terms and conditions and shall be in such form and contain such
additional terms and conditions, not inconsistent with terms of this Plan, as
the Committee shall deem desirable:
(a) Option Price. The purchase price per share deliverable upon the
exercise of an Option granted pursuant to Section 9.2(a)(1) shall be the
Price to the Public and the purchase price per share deliverable upon the
exercise of an Option granted pursuant to Section 9.2(a)(2) shall be 100%
of the Fair Market Value of such Common Stock at the time of the grant of
the Option (the "Purchase Price"), or the par value of the Common Stock,
whichever is greater.
(b) Exercisability. Except as otherwise provided herein, twenty-five
percent (25%) of any Option granted under this Article IX shall be
exercisable on or after each of the four anniversaries following the date
of grant.
(c) Method for Exercise. A non-employee director electing to exercise
one or more Options shall give written notice of exercise to the Company
specifying the number of shares to be purchased. Common Stock purchased
pursuant to the exercise of Options shall
20
<PAGE>
be paid for at the time of exercise in cash or by delivery of unencumbered
Common Stock owned by the non-employee director or a combination thereof or
by such other method as approved by the Board.
(d) Option Term. Except as otherwise provided herein, if not
previously exercised each Option shall expire upon the tenth anniversary of
the date of the grant thereof.
9.5. Termination of Directorship. The following rules apply with regard
to Options upon the Termination of Directorship:
(a) Death, Disability or Otherwise Ceasing to be a Director Other than
for Cause. Except as otherwise provided herein, upon the Termination of
Directorship, on account of Disability, death, Retirement, resignation,
failure to stand for reelection or failure to be reelected or otherwise
other than as set forth in (b) below, all outstanding Options then
exercisable and not exercised by the Participant prior to such Termination
of Directorship shall remain exercisable, to the extent exercisable at the
Termination of Directorship, by the Participant or, in the case of death,
by the Participant's estate or by the person given authority to exercise
such Options by his or her will or by operation of law, for the remainder
of the stated term of such Options.
(b) Cause. Upon removal, failure to stand for reelection or failure to
be renominated for Cause, or if the Company obtains or discovers
information after Termination of Directorship that such Participant had
engaged in conduct that would have justified a removal for Cause during
such directorship, all outstanding Options of such Participant shall
immediately terminate and shall be null and void.
(c) Cancellation of Options. No Options that were not exercisable
during the period such person serves as a director shall thereafter become
exercisable upon a Termination of Directorship for any reason or no reason
whatsoever, and such Options shall terminate and become null and void upon
a Termination of Directorship.
9.6 (a) Changes. The Awards to a non-employee director shall be subject to
Sections 4.2(a), (b) and (c) of the Plan and this Section 9.6, but shall
not be subject to Section 4.2(d).
(b) If the Company shall not be the surviving corporation in any
merger or consolidation, or if the Company is to be dissolved or
liquidated, then, unless the surviving corporation assumes the Options or
substitutes new Options which are determined by the Board in its sole
discretion to be substantially similar in nature and equivalent in terms
and value for Options then outstanding, upon the effective date of such
merger, consolidation, liquidation or dissolution, any unexercised Options
shall expire without additional compensation to the holder thereof;
provided, that, the Committee shall deliver notice to each non-employee
director at least twenty (20) days prior to the date of consummation of
such merger, consolidation, dissolution or liquidation which would result
in the expiration of the Options and during the period from the date on
which such notice of termination is delivered to the consummation of the
merger, consolidation, dissolution or liquidation, such Participant
21
<PAGE>
shall have the right to exercise in full effective as of such consummation
all Options that are then outstanding (without regard to limitations on
exercise otherwise contained in the Options) but contingent on occurrence
of the merger, consolidation, dissolution or liquidation, and, provided
that, if the contemplated transaction does not take place within a ninety
(90) day period after giving such notice for any reason whatsoever, the
notice, accelerated vesting and exercise shall be null and void and, if and
when appropriate, new notice shall be given as aforesaid.
ARTICLE X.
NON-TRANSFERABILITY
Except as provided in the last sentence of this Article X, no Stock
Option or Stock Appreciation Right shall be Transferable by the Participant
otherwise than by will or by the laws of descent and distribution. All Stock
Options and all Stock Appreciation Rights shall be exercisable, during the
Participant's lifetime, only by the Participant. Tandem Stock Appreciation
Rights shall be Transferable, to the extent permitted above, only with the
underlying Stock Option. Shares of Restricted Stock under Article VII may not be
Transferred prior to the date on which shares are issued, or, if later, the date
on which any applicable restriction lapses. No Award shall, except as otherwise
specifically provided by law or herein, be Transferable in any manner, and any
attempt to Transfer any such Award shall be void, and no such Award shall in any
manner be liable for or subject to the debts, contracts, liabilities,
engagements or torts of any person who shall be entitled to such Award, nor
shall it be subject to attachment or legal process for or against such person.
Notwithstanding the foregoing, the Committee may determine at the time of grant
or thereafter, that a Stock Option, other than an Incentive Stock Option, that
is otherwise not transferable pursuant to this Article X is transferable in
whole or part and in such circumstances, and under such conditions, as specified
by the Committee.
ARTICLE XI.
11.1. Benefits. In the event of a Change in Control of the Company (as
defined below), except as otherwise provided by the Committee upon the grant of
an Award, each Participant shall have the following benefits:
(a) All outstanding Options and the related Tandem Stock Appreciation
Rights and Non-Tandem Stock Appreciation Rights of such Participant granted
prior to the Change in Control shall be fully vested and immediately
exercisable in their entirety. The Committee, in its sole discretion, may
provide for the purchase of any such Stock Options by the Company for an
amount of cash equal to the excess of the Change in Control price (as
defined below) of the shares of Common Stock covered by such Stock Options,
over the aggregate exercise price of such Stock Options. For purposes of
this Section 11.1, Change
22
<PAGE>
in Control price shall mean the higher of (i) the highest price per share
of Common Stock paid in any transaction related to a Change in Control of
the Company, or (ii) the highest Fair Market Value per share of Common
Stock at any time during the sixty (60) day period preceding a Change in
Control.
(b) The restrictions to which any shares of Restricted Stock of such
Participant granted prior to the Change in Control are subject shall lapse
as if the applicable Restriction Period had ended upon such Change in
Control.
(c) Notwithstanding anything else herein, the Committee may, in its
sole discretion, provide for accelerated vesting of an Award (other than a
grant to a non-employee director pursuant to Article IX hereof), upon a
Termination of Employment during the Pre-Change in Control Period. Unless
otherwise determined by the Committee, the Pre-Change in Control Period
shall be the one hundred eighty (180) day period prior to a Change in
Control.
11.2. Change in Control. A "Change in Control" shall be deemed
to have occurred:
(a) upon any "person" as such term is used in Sections 13(d) and 14(d)
of the Exchange Act (other than the Company, any trustee or other fiduciary
holding securities under any employee benefit plan of the Company, or any
company owned, directly or indirectly, by the stockholders of the Company
in substantially the same proportions as their ownership of Common Stock of
the Company, becoming the owner (as defined in Rule 13d-3 under the
Exchange Act), directly or indirectly, of securities of the Company
representing forty percent (40%) or more of the combined voting power of
the Company's then outstanding securities (including, without limitation,
securities owned at the time of any increase in ownership);
(b) during any period of two consecutive years, individuals who at the
beginning of such period constitute the Board of Directors, and any new
director (other than a director designated by a person who has entered into
an agreement with the Company to effect a transaction described in
paragraph (a), (c), or (d) of this section) or a director whose initial
assumption of office occurs as a result of either an actual or threatened
election contest (as such terms are used in Rule 14a-11 of Regulation 14A
promulgated under the Exchange Act) or other actual or threatened
solicitation of proxies or consents by or on behalf of a person other than
the Board of Directors of the Company whose election by the Board of
Directors or nomination for election by the Company's stockholders was
approved by a vote of at least two-thirds of the directors then still in
office who either were directors at the beginning of the two-year period or
whose election or nomination for election was previously so approved, cease
for any reason to constitute at least a majority of the Board of Directors;
(c) upon the merger or consolidation of the Company with any other
corporation, other than a merger or consolidation which would result in the
voting securities of the Company outstanding immediately prior thereto
continuing to represent (either by remaining outstanding or by being
converted into voting securities of the surviving entity more than
23
<PAGE>
fifty percent (50%) of the combined voting power of the voting securities
of the Company or such surviving entity outstanding immediately after such
merger or consolidation; provided, however, that a merger or consolidation
effected to implement a recapitalization of the Company (or similar
transaction) in which no person (other than those covered by the exceptions
in (a) above) acquires more than forty percent (40%) of the combined voting
power of the Company's then outstanding securities shall not constitute a
Change in Control of the Company; or
(d) upon the stockholder's of the Company approval of a plan of
complete liquidation of the Company or an agreement for the sale or
disposition by the Company of all or substantially all of the Company's
assets other than the sale of all or substantially all of the assets of the
Company to a person or persons who beneficially own, directly or
indirectly, at least fifty percent (50%) or more of the combined voting
power of the outstanding voting securities of the Company at the time of
the sale.
ARTICLE XII.
TERMINATION OR AMENDMENT OF THE PLAN
12.1. Termination or Amendment. Notwithstanding any other provision of
this Plan, the Board may at any time, and from time to time, amend, in whole or
in part, any or all of the provisions of the Plan, or suspend or terminate it
entirely, retroactively or otherwise; provided, however, that, unless otherwise
required by law or specifically provided herein, the rights of a Participant
with respect to Awards granted prior to such amendment, suspension or
termination, may not be impaired without the consent of such Participant and,
provided further, without the approval of the stockholders of the Company, if
and to the extent required by the applicable provisions of Rule 16b-3 or, if and
to the extent required, under the applicable provisions of Section 162(m) of the
Code, or with regard to Incentive Stock Options, Section 422 of the Code, no
amendment may be made which would (i) increase the aggregate number of shares of
Common Stock that may be issued under this Plan; (ii) increase the maximum
individual Participant limitations for a fiscal year under Section 4.1(b); (iii)
change the classification of employees, Consultants, and non-employee directors
eligible to receive Awards under this Plan; (iv) decrease the minimum option
price of any Stock Option; (v) extend the maximum option period under Section
6.3; (vi) change any rights under the Plan with regard to non-employee
directors; or (vii) require stockholder approval in order for the Plan to
continue to comply with the applicable provisions, if any, of Rule 16b-3,
Section 162(m) of the Code, any applicable state law, or, with regard to
Incentive Stock Options, Section 422 of the Code. In no event may the Plan be
amended without the approval of the stockholders of the Company in accordance
with the applicable laws or other requirements to increase the aggregate number
of shares of Common Stock that may be issued under the Plan, decrease the
minimum option price of any Stock Option, or to make any other amendment that
would require stockholder approval under the rules of any exchange or system on
which the Company's securities are listed or traded at the request of the
Company.
24
<PAGE>
The Committee may amend the terms of any Award theretofore granted,
prospectively or retroactively, but, subject to Article IV above or as otherwise
specifically provided herein, no such amendment or other action by the Committee
shall impair the rights of any holder without the holder's consent.
ARTICLE XIII.
UNFUNDED PLAN
13.1. Unfunded Status of Plan. This Plan is intended to constitute an
"unfunded" plan for incentive compensation. With respect to any payments as to
which a Participant has a fixed and vested interest but which are not yet made
to a Participant by the Company, nothing contained herein shall give any such
Participant any rights that are greater than those of a general creditor of the
Company.
ARTICLE XIV.
GENERAL PROVISIONS
14.1. Legend. The Committee may require each person receiving shares
pursuant to an Award under the Plan to represent to and agree with the Company
in writing that the Participant is acquiring the shares without a view to
distribution thereof. In addition to any legend required by this Plan, the
certificates for such shares may include any legend which the Committee deems
appropriate to reflect any restrictions on Transfer.
All certificates for shares of Common Stock delivered under the Plan shall
be subject to such stock transfer orders and other restrictions as the Committee
may deem advisable under the rules, regulations and other requirements of the
Securities and Exchange Commission, any stock exchange upon which the Common
Stock is then listed or any national securities association system upon whose
system the Common Stock is then quoted, any applicable Federal or state
securities law, and any applicable corporate law, and the Committee may cause a
legend or legends to be put on any such certificates to make appropriate
reference to such restrictions.
14.2. Other Plans. Nothing contained in this Plan shall prevent the Board
from adopting other or additional compensation arrangements, subject to
stockholder approval if such approval is required; and such arrangements may be
either generally applicable or applicable only in specific cases.
14.3. No Right to Employment/Directorship. Neither this Plan nor the grant
of any Award hereunder shall give any Participant or other employee any right
with respect to continuance of employment by the Company or any Affiliate, nor
shall they be a limitation in any way on the right of the Company or any
Affiliate by which an employee is employed to terminate his employment at any
time. Neither this Plan nor the grant of any Award hereunder shall impose any
obligations on
25
<PAGE>
the Company to retain any Participant as a director nor shall it impose on the
part of any Participant any obligation to remain as a director of the Company.
14.4. Withholding of Taxes. The Company shall have the right to deduct from
any payment to be made to a Participant, or to otherwise require, prior to the
issuance or delivery of any shares of Common Stock or the payment of any cash
hereunder, payment by the Participant of, any Federal, state or local taxes
required by law to be withheld. Upon the vesting of Restricted Stock, or upon
making an election under Code Section 83(b), a Participant shall pay all
required withholding to the Company.
The Committee may permit any such withholding obligation with regard to any
Participant to be satisfied by reducing the number of shares of Common Stock
otherwise deliverable or by delivering shares of Common Stock already owned. Any
fraction of a share of Common Stock required to satisfy such tax obligations
shall be disregarded and the amount due shall be paid instead in cash by the
Participant.
14.5. Listing and Other Conditions.
(a) As long as the Common Stock is listed on a national securities
exchange or system sponsored by a national securities association, the
issue of any shares of Common Stock pursuant to an Award shall be
conditioned upon such shares being listed on such exchange or system. The
Company shall have no obligation to issue such shares unless and until such
shares are so listed, and the right to exercise any Option with respect to
such shares shall be suspended until such listing has been effected.
(b) If at any time counsel to the Company shall be of the opinion that
any sale or delivery of shares of Common Stock pursuant to an Award is or
may in the circumstances be unlawful or result in the imposition of excise
taxes on the Company under the statutes, rules or regulations of any
applicable jurisdiction, the Company shall have no obligation to make such
sale or delivery, or to make any application or to effect or to maintain
any qualification or registration under the Securities Act of 1933, as
amended, or otherwise with respect to shares of Common Stock or Awards, and
the right to exercise any Option shall be suspended until, in the opinion
of said counsel, such sale or delivery shall be lawful or will not result
in the imposition of excise taxes on the Company.
(c) Upon termination of any period of suspension under this Section
14.5, any Award affected by such suspension which shall not then have
expired or terminated shall be reinstated as to all shares available before
such suspension and as to shares which would otherwise have become
available during the period of such suspension, but no such suspension
shall extend the term of any Option.
14.6. Governing Law. This Plan shall be governed and construed in
accordance with the laws of the state of incorporation of the Company
(regardless of the law that might otherwise govern under applicable principles
of conflict of laws).
26
<PAGE>
14.7. Construction. Wherever any words are used in this Plan in the
masculine gender they shall be construed as though they were also used in the
feminine gender in all cases where they would so apply, and wherever any words
are used herein in the singular form they shall be construed as though they were
also used in the plural form in all cases where they would so apply. To the
extent applicable, the Plan shall be limited, construed and interpreted in a
manner so as to comply with the applicable requirements of Rule 16b-3 and
Section 162(m) of the Code; however, noncompliance with Rule 16b-3 or Section
162(m) of the Code shall have no impact on the effectiveness of a Stock Option
granted under the Plan.
14.8. Other Benefits. No Award payment under this Plan shall be deemed
compensation for purposes of computing benefits under any retirement plan of the
Company or its subsidiaries nor affect any benefits under any other benefit plan
now or subsequently in effect under which the availability or amount of benefits
is related to the level of compensation.
14.9. Costs. The Company shall bear all expenses included in administering
this Plan, including expenses of issuing Common Stock pursuant to any Awards
hereunder.
14.10. No Right to Same Benefits. The provisions of Awards need not be
the same with respect to each Participant, and such Awards to individual
Participants need not be the same in subsequent years.
14.11. Death/Disability. The Committee may in its discretion require the
transferee of a Participant to supply it with written notice of the
Participant's death or Disability and to supply it with a copy of the will (in
the case of the Participant's death) or such other evidence as the Committee
deems necessary to establish the validity of the transfer of an Award. The
Committee may also require that the agreement of the transferee to be bound by
all of the terms and conditions of the Plan.
14.12. Section 16(b) of the Exchange Act. All elections and transactions
under the Plan by persons subject to Section 16 of the Exchange Act involving
shares of Common Stock are intended to comply with any applicable condition
under Rule 16b-3. The Committee may establish and adopt written administrative
guidelines, designed to facilitate compliance with Section 16(b) of the Exchange
Act, as it may deem necessary or proper for the administration and operation of
the Plan and the transaction of business thereunder.
14.13. Severability of Provisions. If any provision of the Plan shall be
held invalid or unenforceable, such invalidity or unenforceability shall not
affect any other provisions hereof, and the Plan shall be construed and enforced
as if such provisions had not been included.
14.14. Headings and Captions. The headings and captions herein are provided
for reference and convenience only, shall not be considered part of the Plan,
and shall not be employed in the construction of the Plan.
ARTICLE XV.
27
<PAGE>
TERM OF PLAN
No Award shall be granted pursuant to the Plan on or after the tenth
anniversary of the earlier of the date the Plan is adopted or the date of
stockholder approval, but Awards granted prior to such tenth anniversary may
extend beyond that date.
ARTICLE XVI.
NAME OF PLAN
This Plan shall be known as the 24/7 Media, Inc. 1998 Stock Incentive Plan.
28
24/7 MEDIA, INC.
OPTION AGREEMENT
PURSUANT TO THE
24/7 MEDIA, INC.
1998 STOCK INCENTIVE PLAN
-------------------------
AGREEMENT, dated as of March 25, 1998 by and between 24/7 Media, Inc. (the
"Company") and (the "Participant").
Preliminary Statement
---------------------
The Stock Option Committee of the Board of Directors of the Company (the
"Committee"), pursuant to the Company's 1998 Stock Incentive Plan, annexed
hereto as Exhibit A (the "Plan"), has authorized the granting to the
Participant, as an Eligible Employee, of an incentive stock option (the
"Option") to purchase the number of shares ("Shares") of the Company's common
stock, par value $.01 per share (the "Common Stock"), set forth below. The
parties hereto desire to enter into this Agreement in order to set forth the
terms of the Option.
Accordingly, the parties hereto agree as follows:
1. Tax Matters. The Option granted hereby is intended to qualify as an
"incentive stock option" under Section 422 of the Internal Revenue Code of 1986,
as amended (the "Code").
2. Grant of Option. Subject in all respects to the Plan and the terms and
conditions set forth herein and therein, the Participant is hereby granted the
Option to purchase from the Company up to Shares, at a price per Share of $1.00,
subject to adjustment in accordance with the Plan (the "Option Price").
3. Vesting. The Option is exercisable in installments as provided below,
which shall be cumulative. To the extent that the Option has become exercisable
with respect to a percentage of the Shares as provided below, the Option may
thereafter be exercised by the Participant, in whole or in part, at any time or
from time to time prior to the expiration of the Option as provided herein. The
following table indicates each date upon which the Participant shall be entitled
to exercise the Option with respect to the percentage of Shares indicated beside
that date:
<TABLE>
<CAPTION>
Vesting Date Percentage of Shares
------------ --------------------
<S> <C>
March 25, 1999 25%
March 25, 2000 50%
March 25, 2001 75%
March 25, 2002 100%
</TABLE>
<PAGE>
4. Termination. Unless terminated as provided in Section 5 below or
otherwise pursuant to the Plan, the Option shall expire on the tenth anniversary
of this Agreement, or earlier as provided in the Plan upon a Termination of
Employment of the Participant.
5. Restriction on Transfer of Option. The Option granted hereby is not
transferable otherwise than by will or under the applicable laws of descent and
distribution and during the lifetime of the Participant may be exercised only by
the Participant or the Participant's guardian or legal representative. In
addition, the Option shall not be assigned, negotiated, pledged or hypothecated
in any way (whether by operation of law or otherwise), and the Option shall not
be subject to execution, attachment or similar process. Upon any attempt to
transfer, assign, negotiate, pledge or hypothecate the Option, or in the event
of any levy upon the Option by reason of any execution, attachment or similar
process contrary to the provisions hereof, the Option shall immediately become
null and void.
6. Rights as a Stockholder. The Participant shall not have any rights as a
stockholder with respect to any Shares covered by the Option until the
Participant shall have become the holder of record of the Shares, and, no
adjustments shall be made for dividends in cash or other property, distributions
or other rights in respect of any such Shares, except as otherwise specifically
provided for in the Plan.
7. Provisions of Plan Control. This Agreement is subject to all the terms,
conditions and provisions of the Plan, including, without limitation, the
amendment provisions thereof, and to such rules, regulations and interpretations
relating to the Plan as may be adopted by the Committee and as may be in effect
from time to time. Any capitalized term used but not defined herein shall have
the meaning ascribed to such term in the Plan. The annexed copy of the Plan is
incorporated herein by reference. If and to the extent that this Agreement
conflicts or is inconsistent with the terms, conditions and provisions of the
Plan, the Plan shall control, and this Agreement shall be deemed to be modified
accordingly.
8. Notices. Any notice or communication given hereunder shall be in writing
and shall be deemed to have been duly given when delivered in person, when
dispatched by telegram or one business day after having been dispatched by a
nationally recognized courier service or three business days after or by United
States mail, to the appropriate party at the address set forth below (or such
other address as the party shall from time to time specify by sending notice to
the appropriate address set forth below).
If to the Company, to:
24/7 Media, Inc.
1290 Avenue of the Americas
New York, New York 10104
Attention: Secretary
If to the Participant, to the most recent address furnished by the
Participant to the Company.
2
<PAGE>
9. No Obligation to Continue Employment. This Agreement does not guarantee
that the Company or any Subsidiary will employ the Participant for any specific
time period, nor does it modify in any respect the Company's or any Subsidiary's
right to terminate or modify the Participant's employment or compensation.
IN WITNESS WHEREOF, the parties have executed this Agreement on the date
and year first above written.
24/7 MEDIA, INC.
By:
-----------------------------------
--------------------------------------
******************************************************************************
AGREEMENT OF LEASE
between
38-32 ASSOCIATES,
Landlord,
and
24/7 MEDIA INC.
Tenant,
Dated: April 30, 1998
PREMISES:
1250 Broadway
Twenty-Seventh (27th) Floor
New York, New York
******************************************************************************
<PAGE>
TABLE OF CONTENTS
Page
----
ARTICLE 1 RENT ............................................................ 1
ARTICLE 2 PREPARATION OF THE DEMISED PREMISES.............................. 3
ARTICLE 3 ADJUSTMENTS OF RENT.............................................. 3
ARTICLE 4 ELECTRICITY...................................................... 9
ARTICLE 5 USE ............................................................. 12
ARTICLE 6 ALTERATIONS AND INSTALLATIONS.................................... 12
ARTICLE 7 REPAIRS ......................................................... 15
ARTICLE 8 REQUIREMENTS OF LAW.............................................. 17
ARTICLE 9 INSURANCE, LOSS, REIMBURSEMENT, LIABILITY........................ 18
ARTICLE 10 DAMAGE BY FIRE OR OTHER CAUSE.................................... 21
ARTICLE 11 ASSIGNMENT, MORTGAGING, SUBLETTING, ETC.......................... 23
ARTICLE 12 CERTIFICATE OF OCCUPANCY......................................... 29
ARTICLE 13 ADJACENT EXCAVATION SHORING...................................... 29
ARTICLE 14 CONDEMNATION..................................................... 29
ARTICLE 15 ACCESS TO DEMISED PREMISES; CHANGES.............................. 31
ARTICLE 16 CONDITIONS OF LIMITATION......................................... 32
ARTICLE 17 RE-ENTRY BY LANDLORD, INJUNCTION................................. 34
ARTICLE 18 DAMAGES ......................................................... 35
ARTICLE 19 LANDLORD'S RIGHT TO PERFORM TENANT'S OBLIGATIONS................. 36
ARTICLE 20 QUIET ENJOYMENT.................................................. 37
ARTICLE 21 SERVICES AND EQUIPMENT........................................... 37
ARTICLE 22 DEFINITIONS...................................................... 39
ARTICLE 23 INVALIDITY OF ANY PROVISION...................................... 40
ARTICLE 24 BROKERAGE........................................................ 40
ARTICLE 25 SUBORDINATION.................................................... 41
ARTICLE 26 CERTIFICATES OF LANDLORD TENANT.................................. 42
ARTICLE 27 LEGAL PROCEEDINGS WAIVER OF JURY TRIAL........................... 43
ARTICLE 28 SURRENDER OF PREMISES............................................ 43
ARTICLE 29 RULES AND REGULATIONS............................................ 44
ARTICLE 30 CONSENTS AND APPROVALS........................................... 44
ARTICLE 31 NOTICES ......................................................... 45
ARTICLE 32 NO WAIVER........................................................ 45
ARTICLE 33 CAPTIONS......................................................... 46
ARTICLE 34 INABILITY TO PERFORM............................................. 46
ARTICLE 35 NO REPRESENTATIONS BY LANDLORD................................... 47
ARTICLE 36 NAME OF BUILDING................................................. 47
ARTICLE 37 RESTRICTIONS UPON USE............................................ 47
ARTICLE 38 ARBITRATION...................................................... 48
ARTICLE 39 INDEMNITY........................................................ 48
ARTICLE 40 MEMORANDUM OF LEASE.............................................. 48
i
<PAGE>
ARTICLE 41 SECURITY......................................................... 49
ARTICLE 42 MISCELLANEOUS.................................................... 51
ARTICLE 43 RIGHT OF FIRST REFUSAL........................................... 52
ARTICLE 44 WORK CREDIT...................................................... 57
SCHEDULES
A Floor Plan
B Rules and Regulations
C First Refusal Space
ii
<PAGE>
AGREEMENT OF LEASE made as of this 30th day of April, 1998 between
38-32 ASSOCIATES, a New York limited partnership, having an office at c/o Edward
S. Gordon Co., Inc., 200 Park Avenue, New York, New York 10166 (hereinafter
referred to as "Landlord") and 24/7 MEDIA, INC., a Delaware corporation, having
an address at 1290 Avenue of the Americas, 7th Floor, New York, New York 10104
(hereinafter referred to as "Tenant").
W I T N E S S E T H :
Landlord hereby leases and Tenant hereby hires from Landlord, in the
building (hereinafter referred to as the "Building") known as 1250 Broadway, New
York, New York, the following space: the entire twenty seventh (27th) floor as
shown hatched on the plan annexed hereto as Schedule A (which space is
hereinafter referred to as "the demised premises"); for a term of approximately
five (5) years and five (5) months, to commence on a date (hereinafter referred
to as the "Commencement Date") which shall be either (i) May 1, 1998 (subject to
postponement of such specific date as hereinafter set forth) or (ii) the date
Tenant or anyone claiming under or through Tenant first occupies the demised
premises for the conduct of its business, whichever occurs earlier and shall end
on September 30, 2003 (such date on which the term of the Lease expires is
hereinafter referred to as the "Expiration Date") or until such term shall
sooner cease and terminate as hereinafter provided.
The parties hereto, for themselves, their heirs, distributees,
executors, administrators, legal representatives, trustees, successors and
assigns, hereby covenant as follows:
ARTICLE 1
RENT
1.01. Tenant shall pay to Landlord a fixed annual rent
(hereinafter referred to as "fixed annual rent") at the annual rate of THREE
HUNDRED EIGHTY ONE THOUSAND THREE HUNDRED SEVENTY FIVE AND 00/100 ($381,375.00)
DOLLARS.
Tenant agrees to pay the fixed annual rent in lawful money of the
United States of America, in equal monthly installments in advance on the first
day of each calendar month during said term, at the office of Landlord or such
other place
<PAGE>
in the United States of America as Landlord may designate, without any setoff or
deduction whatsoever, except such deduction as may be occasioned by the
occurrence of any event permitting or requiring a deduction from or abatement of
rent as specifically set forth in this Lease. Should the obligation to pay fixed
annual rent commence on any day other than on the first day of a month, or end
on a date other than the last day of the month, then the fixed annual rent for
such month shall be prorated on a per diem basis.
The first month's installment of fixed annual rent due under this
Lease shall be paid by Tenant upon the execution of this Lease.
1.02. Tenant shall pay the fixed annual rent and additional rent
as above and as hereinafter provided, by good and sufficient check (subject to
collection) drawn on a New York City bank. All sums other than fixed annual rent
payable by Tenant hereunder shall be deemed additional rent (for default in the
payment of which Landlord shall have the same remedies as for a default in the
payment of fixed annual rent), and shall be payable twenty (20) days after
demand, unless other payment dates are hereinafter provided.
1.03. If Tenant shall fail to pay when due any installment of
fixed annual rent or any payment of additional rent for a period of nine (9)
days after such installment or payment shall have become due, Tenant shall pay
interest thereon at the Interest Rate (as such term is defined in Article 22
hereof), from the date when such installment or payment shall have become due to
the date of the payment thereof, and such interest shall be deemed additional
rent.
1.04. If any of the fixed annual rent or additional rent payable
under the terms and provisions of this Lease shall be or become uncollectible,
reduced or required to be refunded because of any Legal Requirement (as such
term is defined in Article 22 hereof) Tenant shall enter into such agreement(s)
and take such other steps (without additional expense to Tenant) as Landlord may
request and as may be legally permissible to permit Landlord to collect the
maximum rents which from time to time during the continuance of such legal rent
restriction may be legally permissible (and not in excess of the amounts
reserved therefor under this Lease). Upon the termination of such legal rent
restriction, (a) the rents shall become and thereafter be payable in accordance
with the amounts reserved herein for the periods following such termination and
(b) Tenant shall pay to Landlord, to the maximum extent legally permissible, an
amount
2
<PAGE>
equal to (i) the rents which would have been paid pursuant to this Lease but for
such legal rent restriction less (ii) the rents paid by Tenant during the period
such legal rent restriction was in effect.
1.05. Notwithstanding anything in subsection 1.01 to the contrary,
and provided that Tenant is not in default under any of the monetary terms,
covenants or provisions of this Lease beyond any applicable notice and grace
periods, the monthly installments of fixed annual rent (but not the portion
thereof constituting the ERIF) payable by Tenant hereunder shall be abated
during the period commencing on the Commencement Date and ending of September
30, 1998. The day following the expiration of the foregoing rent abatement
period (ie., October 1, 1998) is hereinafter sometimes referred to as the "Rent
Commencement Date".
ARTICLE 2
PREPARATION OF THE DEMISED PREMISES
2.01. Tenant has examined the demised premises and, subject to the
provisions of Article 7 of this Lease, agrees to accept the same in their
condition and state of repair existing as of the date hereof subject to normal
wear and tear and to the removal therefrom of the property of the existing
tenant or occupant thereof, if any, and understands and agrees that Landlord
shall not be required to perform any work, supply any materials or incur any
expense to prepare the demised premises for Tenant's occupancy.
2.02. If the Commencement Date is other than the specific date
hereinabove set forth, then Tenant shall at Landlord's request, execute a
written agreement confirming the Commencement Date. Any failure of the parties
to execute such written agreement shall not affect the validity of the
Commencement Date as fixed and determined by Landlord as aforesaid.
ARTICLE 3
ADJUSTMENTS OF RENT
3.01. For the purposes of this Article 3, the following
definitions shall apply:
3
<PAGE>
(a) The term "Base Tax" shall be deemed to mean the Taxes for
the Tax Year commencing July 1, 1998.
(b) The term "Tenant's Tax Proportionate Share" shall be deemed
to mean 2.18 (2.18%) percent.
(c) The term "Taxes" shall mean all real estate taxes,
assessments, governmental levies, business improvement district charges and
assessments, municipal taxes, county taxes or any other governmental charge,
general or special, ordinary or extraordinary, unforeseen as well as foreseen,
of any kind or nature whatsoever, which are or may be assessed, levied or
imposed upon all or any part of the Land, the Building and the sidewalks, plazas
or streets in front of or adjacent thereto, including any tax, excise or fee
measured by or payable with respect to any rent, and levied against Landlord
and/or the Land and/or Building, under the laws of the United States, the State
of New York, or any political subdivision thereof. If, due to a future change in
the method of taxation or in the taxing authority, a new or additional real
estate tax, or a franchise, income, transit, profit or other tax or governmental
imposition, however designated, shall be levied against Landlord, and/or the
Land and/or Building, in addition to, or in substitution in whole or in part for
any tax which would constitute "Taxes", or in lieu of additional Taxes, such tax
or imposition shall be deemed for the purposes hereof to be included within the
term "Taxes". Except as provided in the preceding sentence, Tenant shall not be
responsible to pay any gross receipts taxes, franchise taxes, capital stock
taxes, inheritance, estate, succession, transfer, gift or other tax which is
measured in any manner by income or profit of Landlord.
(d) The term "Tax Year" shall mean each period of twelve months,
commencing on the first day of July of each such period, in which occurs any
part of the term of this Lease or such other period of twelve months occurring
during the term of this Lease as hereafter may be duly adopted as the fiscal
year for real estate tax purposes of the City of New York.
(e) The term "Operating Year" shall mean the full calendar year
after 1998 in which the term of this Lease commences and each succeeding
calendar year thereafter.
(f) The term "Base Year" shall mean the calendar year 1998.
4
<PAGE>
(g) "Operating Expenses" shall mean the total of all the costs
and expenses incurred or borne by Landlord in connection with the operation and
maintenance of the Building, and the services provided tenants therein,
including all expenses incurred as a result of Landlord's compliance with any of
its obligations hereunder. Operating Expenses shall include, without being
limited thereto, the following: (i) salaries, wages, medical, surgical and
general welfare benefits (including group life insurance) and pension payments
of employees of the managing agent for the Building (or, in the event of a
successor Landlord or a change in the management practices of Landlord, the
employees of such managing agent or Landlord) engaged in the operation and
maintenance of the Building; (ii) payroll taxes, workmen's compensation,
uniforms and dry cleaning for the employees referred to in subdivision (i);
(iii) the cost of all charges for steam, heat, ventilation, air-conditioning and
water (including water and sewer rentals) furnished to the Building, (including
the Building including common areas thereof), together with any taxes on any
such utilities; (iv) the cost of all charges for rent, casualty, war risk (if
obtainable from the United States government), liability and other types of
insurance; (v) the cost of all building and cleaning supplies and charges for
telephone for the Building and cleaning of the Building, including common areas;
(vi) the cost of all charges for management, cleaning and service contracts for
any areas of the Building; (vii) the cost of Building electric current (for the
purposes of this clause (vii), the cost of Building electric current shall be
deemed to mean the cost of all electricity purchased, including any taxes
thereon or fuel or other adjustments in connection therewith, for use in the
Building other than that which is furnished to the demised space of other
tenants in the Building; the parties agree that fifty (50%) percent of the
Building's payment to the public utility for the purchase of electricity shall
be deemed to be payment for Building electric current); (viii) the cost relating
to the elevators and escalators; (ix) the cost relating to protection and
security; (x) the cost relating to lobby decorations and interior and exterior
landscape maintenance; (xi) repairs, replacements and improvements performed
after the Base Year which are appropriate for the continued operation of the
Building as a first class office building; (xii) painting of non-tenanted areas;
(xiii) professional and consulting fees; (xiv) association fees or dues and (xv)
the cost of capital expenditures made to the Building by reason of the laws and
requirements of any public authorities or the requirements of insurance bodies
which is incurred after the Base Year. The term "Operating Expenses", as used
and defined under this Subsection (g), shall not, however, include the following
items: (1) interest on and amortization of
5
<PAGE>
any mortgages encumbering the Land or the Building; (2) the cost of tenant
improvements made for new tenant(s) of the Building; (3) brokerage commissions;
(4) financing or refinancing costs; (5) Taxes; and (6) salaries and fringe
benefits for officers, employees and executives above the grade of building
manager; (7) all leasing and brokerage commissions, takeover obligations and
fees with respect to procuring tenants to rent space in the Building; (8)
salaries, the value of fringe benefits and compensation benefits of personnel
above the grade of building manager; (9) legal, arbitration, space planners,
accounting and other professional fees incurred in connection with any
preparation of, negotiation of, or dispute arising out of, any space lease,
lease amendments, lease terminations and lease extensions, in the Building or in
enforcing lease obligations (other than those which are common to substantially
all tenants and which relate to the management and operation of the Building),
including, without limitation, court costs; (10) the costs of any additions to
the Building which increase the leasable space thereof; (11) expenses incurred
by Landlord in connection with the transfer or disposition of the Land or
Building or any superior lease, including, without limitation, transfer, deed
and gains taxes and legal and accounting fees incurred in connection therewith;
(12) interest or penalties incurred by Landlord for late payment by Landlord;
(13) the costs of performing work or furnishing services to or for any tenant,
other than Tenant, at Landlord's expense to the extent that such work or service
is in excess of the work or services generally provided to tenants of the
Building at Landlord's expense; (14) cost of overtime HVAC for other tenants of
the Building; (15) the cost of any excess insurance premium to the extent that
Landlord is entitled to be reimbursed therefor by Tenant or any other tenant of
the Building other than pursuant to this Article or provisions in any such
Tenant's lease similar to this Article; (16) bad debt loss, rent loss or reserve
for either; (17) cost to acquire, lease or restore sculptures, paintings or
other objects of art located within or outside the Building; (18) costs, fines,
interest or penalties incurred by Landlord due to violations of any applicable
governmental law, requirement or order except to the extent the same shall be
due to the act or omission of Tenant, Tenant's agents, employees, invitees of
licensees; (19) costs associated with the operation of the business entity which
constitutes Landlord as the same is distinguished from the costs of operation of
the Building; (20) costs of financing, refinancing, mortgaging, selling,
syndicating or hypothecating Landlord's interest in the Building, including,
without limitation, legal and accounting fees in connection therewith; (21) the
value of lost income to Landlord of any office space in the Building which is
utilized for the management of
6
<PAGE>
the Building; (22) costs incurred in connection with services or utilities
furnished to any retail space in the Building; (23) costs, including, without
limitation, attorney's fees and disbursements in connection with any judgment,
settlement or arbitration award incurred by Landlord that result from Landlord's
tortious or willful misconduct; (24) any compensation paid to clerks, attendants
or other person in commercial concessions operated by Landlord; (25) costs
incurred in connection with the acquisition or sale of air rights, transferable
development rights easements of other real property interests which do not
directly or indirectly benefit the tenants of the Building.
If Landlord shall purchase any item of capital equipment or make any
capital expenditure designed to result in savings or reductions in Operating
Expenses, then the cost thereof shall be included in Operating Expenses. The
costs of capital equipment or capital expenditures are so to be included in
Operating Expenses for the Operating Year in which the costs are incurred and
subsequent Operating Years, on a straight line basis, to the extent that such
items are amortized over such period of time as reasonably can be estimated as
the time in which such savings or reductions in Operating Expenses are expected
to equal Landlord's costs for such capital equipment or capital expenditure,
with an interest factor equal to the Interest Rate at the time of Landlord's
having incurred said costs. If Landlord shall lease any such item of capital
equipment designed to result in savings or reductions in Operating Expenses,
then the rentals and other costs paid or incurred in connection with such
leasing shall be included in Operating Expenses for the Operating Year in which
they were incurred.
If during all or part of any Operating Year, including the Base Year,
Landlord shall not furnish any particular item(s) of work or service (which
would constitute an Operating Expense hereunder) to portions of the Building
(including without limitation the demised premises) due to the fact that such
portions are not occupied or leased, or because such item of work or service
which is otherwise offered on a building-wide basis is not required or desired
by the tenant (including without limitation Tenant) or such portion, or such
tenant is itself obtaining and providing such item of work of service, or for
any other reasons, then, for the purposes of computing the additional rent
payable hereunder pursuant to paragraphs A and B of Section 3.02 hereof, the
amount of the expenses for such item(s) for such period shall be deemed to be
increased by an amount equal to the additional operating and maintenance
expenses which would
7
<PAGE>
reasonably have been incurred during such period by Landlord if it had at its
own expense furnished such item(s) of work or services to such portion of the
Building.
(h) The term "Tenant's Proportionate Share" shall be deemed to
mean 2.25 (2.25%) percent.
(i) "Tenant's Proportionate Share of Increase" shall mean the
percentage set forth in Section 3.01(h) multiplied by the increase in Operating
Expenses for an Operating Year over Operating Expenses in the Base Year.
(j) "Tenant's Projected Share of Increase" shall mean Tenant's
Proportionate Share of Increase for the prior Operating Year and the reasonably
estimated increase in costs for the current Operating Year divided by twelve
(12) and payable monthly by Tenant to Landlord as additional rent. If, however,
Landlord shall furnish any such estimate for an Operating Year subsequent to the
commencement thereof, then (a) until the first day of the month following the
month in which such estimate is furnished to Tenant, Tenant shall pay to
Landlord on the first day of each month an amount equal to the monthly sum
payable by Tenant to Landlord under this Section in respect of the last month of
the preceding Operating Year; (b) promptly after such estimate is furnished to
Tenant, Landlord shall give notice to Tenant stating whether the installments of
Tenant's Projected Share of Increase previously made for such Operating Year
were greater or less than the installments of Tenant's Projected Share of
Increase to be made for such Operating Year in accordance with such estimate,
and (i) if there shall be a deficiency, Tenant shall pay the amount thereof
within twenty (20) days after demand therefor, or (ii) if there shall have been
an overpayment, Landlord shall promptly either refund to Tenant the amount
thereof or permit Tenant to credit the amount thereof against subsequent
payments under this Lease; and (c) on the first day of the month following the
month in which such estimate is furnished to Tenant, and monthly thereafter
throughout the remainder of such Operating Year, Tenant shall pay to Landlord an
amount equal to Tenant's Projected Share of Increase as shown on such estimate.
(k) The term "Escalation Statement" shall mean a statement
setting forth the amount payable by Tenant for a specified Tax Year or Operating
Year (as the case may be) pursuant to this Article 3.
3.02. A. After the expiration of the Base Year and any Operating
Year, Landlord shall furnish Tenant an
8
<PAGE>
Escalation Statement setting forth Tenant's Proportionate Share of Increase,
with respect to the Operating Expenses incurred for such Base Year or Operating
Year. Within thirty (30) days after receipt of such Escalation Statement for any
Operating Year, Tenant shall pay Tenant's Proportionate Share of Increase to
Landlord as additional rent.
B. Commencing with the first Operating Year for which
Landlord shall be entitled to receive Tenant's Proportionate Share of Increase,
Tenant shall pay to Landlord as additional rent for the then Operating Year,
Tenant's Projected Share of Increase. If the Escalation Statement furnished by
Landlord to Tenant pursuant to Section 3.02 (A) above at the end of the then
Operating Year shall indicate that Tenant's Projected Share of Increase exceeded
Tenant's Proportionate Share of Increase, Landlord shall forthwith either (i)
pay the amount of excess directly to Tenant concurrently with the notice or (ii)
permit Tenant to credit the amount of such excess against the subsequent
payments of rent due hereunder; if such statement furnished by Landlord to
Tenant hereunder shall indicate that Tenant's Proportionate Share of Increase
exceeded Tenant's Projected Share of Increase for the then Operating Year,
Tenant shall forthwith pay the amount of such excess to Landlord.
3.03. A. Tenant shall pay as additional rent for each Tax Year a
sum (hereinafter referred to as "Tenant's Tax Payment") equal to Tenant's Tax
Proportionate Share of the amount by which the Taxes for such Tax Year exceed
the Base Tax. Tenant's Tax Payment for each Tax Year shall be due and payable in
two (2) equal installments, in advance, on the first day of each June and
December during each Tax Year, based upon the Escalation Statement furnished
prior to the commencement of such Tax Year, until such time as a new Escalation
Statement for a subsequent Tax Year shall become effective. If an Escalation
Statement is furnished to Tenant after the commencement of a Tax Year in respect
of which such Escalation Statement is rendered, Tenant shall, within fifteen
(15) days thereafter, pay to Landlord an amount equal to the amount of any
underpayment of Tenant's Tax Payment with respect to such Tax Year and, in the
event of an overpayment, Landlord shall permit Tenant to credit against
subsequent payments under this Lease the amount of Tenant's overpayment. If
there shall be any increase in Taxes for any Tax Year, whether during or after
such Tax Year, Landlord shall furnish a revised Escalation Statement for such
Tax Year, and Tenant's Tax Payment for such Tax Year shall be adjusted and paid
substantially in the same manner as provided in the preceding sentence. If
during the term of this Lease, taxes are required to be paid (either to the
appropriate taxing authorities
9
<PAGE>
or as tax escrow payments to a superior mortgagee) in full or in monthly,
quarterly, or other installments, on any other date or dates than as presently
required, then at Landlord's option, Tenant's Tax Payments shall be
correspondingly accelerated or revised so that said Tenant's Tax Payments are
due at least 30 days prior to the date payments are due to the taxing
authorities or the superior mortgagee (but not less than twenty (20) days after
the Escalation Statement from Landlord is received by Tenant). The benefit of
any discount for any early payment or prepayment of Taxes shall accrue solely to
the benefit of Landlord and such discount shall not be subtracted from Taxes.
Notwithstanding the foregoing, in the event Landlord fails to deliver an
Escalation Statement for any period within two (2) years after the end of the
period as to which such Escalation Statement would have related, Landlord shall
be deemed to have waived the payment of any theretofore unpaid additional rent
as to which such Escalation Statement would have related.
B. If the real estate tax fiscal year of The City of New
York shall be changed during the term of this Lease, any Taxes for such fiscal
year, a part of which is included within a particular Tax Year and a part of
which is not so included, shall be apportioned on the basis of the number of
days in such fiscal year included in the particular Tax Year for the purpose of
making the computations under this Section 3.03.
C. If Landlord shall receive a refund of Taxes for any Tax
Year, Landlord shall permit Tenant to credit against subsequent payments under
this Lease, Tenant's Tax Proportionate Share of the refund (after deducting all
costs incurred by Landlord to obtain such refund which have not been previously
recovered); but not to exceed Tenant's Tax Payment paid for such Tax Year.
D. If the Base Tax is reduced as a result of a certiorari
proceeding or otherwise Landlord shall adjust the amounts previously paid by
Tenant pursuant to the provisions of Section 3.03 hereof, and Tenant shall pay
the amount of said adjustment within thirty (30) days after demand setting forth
the amount of said adjustment.
3.04. Tenant shall pay to the appropriate taxing authority
occupancy tax on all rental subject thereto (including occupancy tax on prepaid
rent paid pursuant to Section 1.01 hereof). Tenant shall pay to Landlord upon
demand, as additional rent, any occupancy tax or rent tax now in effect or
hereafter enacted with respect to the rent payable hereunder, if payable by
10
<PAGE>
Landlord in the first instance or hereafter required to be paid by Landlord.
3.05. In the event that the Commencement Date shall be other than
the first day of a Tax Year or an Operating Year or the date of the expiration
or other termination of this Lease shall be a day other than the last day of a
Tax Year or an Operating Year, then in such event in applying the provisions of
this Article 3 with respect to any Tax Year or Operating Year in which such
event shall have occurred, appropriate adjustments shall be made to reflect the
occurrence of such event on a basis consistent with the principles underlying
the provisions of this Article 3 taking into consideration the portion of such
Tax Year or Operating Year which shall have elapsed after the term hereof
commences in the case of the Commencement Date, and prior to the date of such
expiration or termination in the case of the Expiration Date or other
termination.
3.06. Payments shall be made pursuant to this Article 3
notwithstanding the fact that an Escalation Statement is furnished to Tenant
after the expiration of the term of this Lease.
3.07. In no event shall the fixed annual rent ever be reduced by
operation of this Article 3 and the rights and obligations of Landlord and
Tenant under the provisions of this Article 3 with respect to any additional
rent shall survive the termination of this Lease.
3.08. Landlord's failure to render an Escalation Statement with
respect to any Tax Year or Operating Year shall not prejudice Landlord's right
to thereafter render an Escalation Statement with respect thereto or with
respect to any subsequent Tax Year or Operating Year.
3.09. Each Escalation Statement shall be conclusive and binding
upon Tenant unless within one hundred eighty (180) days after receipt of such
Escalation Statement Tenant shall notify Landlord that it disputes the
correctness of such Escalation Statement, specifying the particular respects in
which such Escalation Statement is claimed to be incorrect. Any dispute relating
to any Escalation Statement, not resolved within ninety (90) days after the
giving of such Escalation Statement, may be submitted to arbitration by either
party pursuant to Article 38 hereof. Pending the determination of such dispute,
Tenant shall pay additional rent in accordance with the Escalation Statement
that Tenant is disputing, without prejudice to Tenant's position.
11
<PAGE>
3.10. Tenant, upon no less than five (5) days prior notice, may
elect to have Tenant's designated certified public accountant examine such of
Landlord's books and records (collectively, the "Records") that are directly
relevant to the Escalation Statement in questions, provided any such examination
shall be commenced within ninety (90) days after Tenant's receipt of an
Escalation Statement and concluded within thirty (30) days after the
commencement of such examination. In making such examination, Tenant agrees, and
shall cause its designated certified public accountant to agree, to keep
confidential any and all information contained in the Records.
3.11. If Landlord shall pay or incur any costs or expenses in
contesting any Taxes for any Tax Year (other than any such year for which such
Taxes comprise all or part of the Base Tax) or in connection with any challenge
to the assessed valuation of all or part of the Building or the parcel of land
on which the Building is constructed (the "Land") or otherwise in connection
with any endeavor to lower the Taxes for any Tax Year (other than any such year
for which such Taxes comprise all or part of the Base Tax) then, within twenty
(20) days after request by Landlord, Tenant shall pay to Landlord Tenant's Tax
Proportionate Share of the aggregate amounts of such costs and expenses so paid
or incurred by Landlord.
ARTICLE 4
ELECTRICITY
4.01. Landlord shall furnish to Tenant the electric energy which
Tenant requires in the demised premises, in an amount up to six (6) watts per
square foot, on a "rent inclusion" basis, through the presently installed
electrical facilities for Tenant's reasonable use in the demised premises for
lighting, light office equipment and the usual small business machines,
including Xerox or other copying machines. Subject to the following provisions
of this Article 4, there shall be no charge to Tenant therefor by way of
measuring the same on any meter or otherwise, electric current being included as
an additional service in the fixed annual rent payable hereunder. Landlord shall
not in anywise be liable or responsible to Tenant for any loss or damage or
expense which Tenant may sustain or incur if either the quantity or character of
electric service is changed or is no longer available or suitable for Tenant's
requirements.
12
<PAGE>
4.02. (a) Tenant acknowledges and agrees (i) that the fixed
annual rent hereinabove set forth in this Lease includes an Electricity Rent
Inclusion Factor (as hereinafter defined), of THIRTY SEVEN THOUSAND ONE HUNDRED
TWENTY FIVE AND 00/100 ($37,125.00) DOLLARS to compensate Landlord for the
electrical wiring and other installations necessary for, and for its obtaining
and redistribution of, electric current as an additional service; and (ii) that
said Electricity Rent Inclusion Factor (hereinafter called "ERIF"), which shall
be subject to periodic adjustments as herein provided, has been partially based
upon Tenant's estimated connected electrical load and hours of use thereof for
ordinary lighting and light office equipment, during ordinary business hours.
The "Electricity Rent Inclusion Factor" shall mean the amount determined by
applying the estimated connected electrical load and usage thereof in the
demised premises (as determined by the electrical consultant as hereinafter
provided) to the rate charged for such load and usage in the service
classification in effect on January 1, 1998, pursuant to which Landlord then
purchased electric current for the entire Building from the public utility
corporation. If the cost to Landlord of electricity shall have been, or shall
be, increased subsequent to January 1, 1998 (whether such increase occurs prior
to or during the term of this Lease), by change in Landlord's electric rates,
charges, fuel adjustment, or service classifications, or by taxes or charges of
any kind imposed thereon, or for any other such reason, then the aforesaid ERIF
portion of the fixed annual rent shall be increased in the same percentage and
the fixed annual rent provided herein shall be increased accordingly.
(b) Any such percentage increase in Landlord's cost due to
change in Landlord's electric rates, charges, etc., shall be computed by the
application of the average consumption (energy and demand) of electricity for
the entire Building for the twelve (12) full months immediately prior to the
rate change, other change in cost, or any changed methods of or rules on billing
for same, on a consistent basis to the new rate and/or service classifications
and to the immediately prior existing rate and/or service classifications. If
the average consumption of electricity for the entire Building for said prior
twelve (12) full months cannot reasonably be applied and used with respect to
changed methods of or rules on billing, then the percentage increase shall be
computed by the use of the average consumption (energy and demand) for the
entire Building for the first three (3) months under such changed methods of or
rules on billing, projected to a full twelve (12) months; and that same
consumption, so projected, shall be applied to the rate and/or service
classifications which existed immediately prior to the
13
<PAGE>
changed methods of or rules on billing. The parties acknowledge that they
understand that it is anticipated that existing electric rates, charges, etc.,
may be changed by virtue of time of day rates or other methods of billing, and
that the foregoing reference to changes in methods of or rules on billing is
intended to include any such change. The parties agree that a reputable,
independent electrical consultant, selected by Landlord ("Landlord's electrical
consultant") and paid equally by Landlord shall determine the percentage for the
changes in the ERIF based on changes in Landlord's electric rates, charges, etc.
4.03. (a) The parties agree that Landlord's electrical consultant
may from time to time make surveys in the demised premises covering the
electrical equipment and fixtures and use of current therein, and the connected
electrical load and usage portion of the ERIF shall be changed in accordance
with such survey, and the ERIF automatically redetermined, accordingly, by
Landlord's electrical consultant. The fixed annual rent shall be appropriately
adjusted effective as of the date of any such change in connected load and
usage, as disclosed by said survey. In no event, is the originally specified
ERIF portion of the fixed annual rent (as adjusted by any electricity cost
increases of Landlord after January 1, 1998) to be reduced.
(b) The determination of change in the ERIF by Landlord's
consultant shall be binding and conclusive on Landlord and on Tenant from and
after the delivery of copies of such determination to Landlord and Tenant,
unless within forty five (45) days after the delivery of such copies, Tenant
disputes such determination. If Tenant disputes the determination, it shall, at
its own expense, obtain from a reputable, independent electrical consultant its
own survey of Tenant's electrical lighting and power load and hours of use
thereof, and a determination of such change in the ERIF in accordance with the
provisions of this Article 4. Tenant's consultant and Landlord's consultant then
shall seek to agree on a finding of such determination of such change in the
ERIF. If they cannot agree, they shall choose a third reputable electrical
consultant whose cost shall be shared equally by Landlord and Tenant, to make a
similar survey, and the determination of such ERIF change by such third
electrical consultant shall be controlling. (If they cannot agree on such third
consultant, within ten (10) days, then either party may apply to the Supreme
Court in the County of New York for the appointment of such third consultant.)
However, pending such determination, Tenant shall pay to Landlord the amount of
ERIF as determined by Landlord's independent electrical consulting firm,
provided, however, if the amount of ERIF determined as aforesaid is different
from that determined by
14
<PAGE>
Landlord's electrical consulting firm, then Landlord and Tenant shall make
adjustment for any deficiency owed by Tenant or overage paid by Tenant pursuant
to the decision of Landlord's electrical consulting firm.
4.04. Landlord reserves the right to discontinue furnishing
electric energy to Tenant at any time upon sixty (60) days' written notice to
Tenant, provided Landlord previously or contemporaneously terminates the
electrical service to no less than seventy five (75%) percent of the tenants of
the Building, and from and after the effective date of such termination,
Landlord shall no longer be obligated to furnish Tenant with electric energy,
provided, however, that such termination date may be extended for a time
reasonably necessary for Tenant to make arrangements to obtain electric service
directly from the public utility company servicing the Building. If Landlord
exercises such right of termination, this Lease shall remain unaffected thereby
and shall continue in full force and effect; and thereafter Tenant shall
diligently arrange to obtain electric service directly from the public utility
company servicing the Building, and may utilize the then existing electric
feeders, risers and wiring serving the demised premises to the extent available
and safely capable of being used for such purpose and only to the extent of
Tenant's then authorized connected load. Landlord shall be obligated to pay no
part of any cost required for Tenant's direct electric service. Notwithstanding
the foregoing, in the event such discontinuance is required by any statute,
municipal law, regulatory agency or the electric utility then servicing the
Building, Tenant shall pay all costs and expenses incurred in connecting to and
obtaining electrical service from the electric utility servicing the Building.
If the discontinuance, however, shall be due solely to Landlord's decision to
discontinue service, Landlord shall pay all reasonable costs necessary to
directly connect Tenant to an electric utility servicing the Building.
Commencing with the date when Tenant receives such direct service, and as long
as Tenant shall continue to receive such service, the fixed annual rent payable
under this Lease shall be reduced to $344,250.00 per annum. The foregoing
assumes that the fixed annual rent originally set forth in this Lease has not
been increased or reduced pursuant to any of the provisions of this Lease other
than this Article 4. Should said original fixed annual rent be increased or
reduced by any of the provisions of this Lease other than this Article 4, then
the amount set forth above shall be increased or reduced by amounts equal to
such increases or reductions.
4.05. Tenant agrees not to connect any additional electrical
equipment of any type to the Building electric distribution system, other than
lamps, typewriters and other small office machines which consume comparable
amounts of electricity, without the Landlord's prior written consent, which
consent shall not be unreasonably withheld. Any additional risers, feeders, or
other equipment proper or necessary to supply Tenant's electrical requirements,
upon
15
<PAGE>
written request of Tenant, will be installed by Landlord, at the sole cost and
expense of Tenant, if, in Landlord's sole judgment, the same are necessary and
will not cause permanent damage or injury to the Building or the demised
premises, or cause or create a dangerous or hazardous condition or entail
excessive or unreasonable alterations, repair or expense or interfere with or
disturb other tenants or occupants.
4.06. In no event shall the fixed annual rent under this Lease be
reduced below the amount provided in Section 1.01 hereof by virtue of this
Article 4 except as set forth in Section 4.04 hereof.
ARTICLE 5
USE
5.01. The demised premises shall be used solely as and for
executive and general offices, and for no other purpose.
5.02. Tenant shall not use or permit the use of the demised
premises or any part thereof in any way which would violate any of the
covenants, agreements, terms, provisions and conditions of this Lease or for any
unlawful purposes or in any unlawful manner or in violation of the Certificate
of Occupancy for the demised premises or the Building, and Tenant shall not
suffer or permit the demised premises or any part thereof to be used in any
manner or anything to be done therein or anything to be brought into or kept
therein which, in the reasonable judgment of Landlord, shall in any way impair
the character, reputation or appearance of the Building as a high quality office
building, impair or interfere with any of the Building services or the proper
and economic heating, cleaning, air-conditioning or other servicing of the
Building or the demised premises, or impair or interfere with the use of any of
the other areas of the Building by, or occasion discomfort, inconvenience or
annoyance to, any of the other tenants or occupants of the Building. Tenant
shall not install any electrical or other equipment of any kind which, in the
reasonable judgment of Landlord, might cause any such impairment, interference,
discomfort, inconvenience or annoyance.
ARTICLE 6
ALTERATIONS AND INSTALLATIONS
6.01. Tenant shall make no alterations, installations, additions
or improvements in or to the demised premises without Landlord's prior written
consent which consent as to non-structural interior alterations which do not
adversely affect Building systems shall not be unreasonably withheld or delayed
and then only by contractors or mechanics first approved by Landlord which
approval shall not be unreasonably withheld or delayed provided, however, that
in connection with any alterations, installations or additions and improvement
which will affect
16
<PAGE>
any Building systems, Tenant shall use contractors or mechanics chosen from a
list to be supplied by Landlord, said list to contain no less than three (3)
firms in each trade("Landlord's Approved List"). All such work, alterations,
installations, additions and improvements shall be done at Tenant's sole expense
and at such times and in such manner as Landlord may from time to time
reasonably designate. Prior to commencement of such work, Tenant shall obtain
and deliver to Landlord written, unconditional waivers of mechanic's or other
liens on the real property in which the demised premises are located, signed by
all architects, engineers, contractors, mechanics and designers to become
involved in such work. Tenant shall also provide at Landlord's request such
financial security or proof of financial responsibility as Landlord shall
reasonably require to guarantee completion of Tenant's work and payment of all
contractors and suppliers utilized in connection therewith.
Any Tenant's work in the demised premises shall be effected solely in
accordance with plans and specifications first approved in writing by Landlord
provided Tenant need not prepare plans if same are not required to obtain a
building permit or are otherwise not required under applicable law. Tenant shall
reimburse Landlord promptly upon demand for any actual out-of-pocket costs and
expenses incurred by Landlord in connection with Landlord's review of such
Tenant's plans and specifications.
Any such approved alterations and improvements shall be performed in
accordance with the foregoing and the following provisions of this Article 6:
1. All work shall be done in a good and workmanlike manner.
2. (a) In the event Tenant shall employ any contractor to do in the
demised premises any work permitted by this Lease, such contractor and any
subcontractor shall agree to employ only such labor as will not result in
jurisdictional disputes or strikes or result in causing disharmony with other
workers employed at the Building. Tenant will inform Landlord in writing of the
names of any contractor or subcontractor Tenant proposes to use in the demised
premises at least ten (10) days prior to the beginning of work by such
contractor or subcontractor.
(b) Tenant covenants and agrees to pay to contractor, as the
work progresses, the entire cost of supplying the materials and performing the
work shown on Tenant's approved plans and specifications.
3. All such alterations shall be effected in compliance with all
applicable laws, ordinances, rules and regulations of governmental bodies having
or asserting jurisdiction in the demised premises and in accordance with
Landlord's Rules and Regulations with respect to alterations.
4. Tenant shall keep the Building and the demised premises free and
clear of all liens for any work or material claimed to have been furnished to
Tenant or to the demised
17
<PAGE>
premises on Tenant's behalf, and all work to be performed by Tenant shall be
done in a manner which will not unreasonably interfere with or disturb other
tenants or occupants of the Building.
5. During the progress of the work to be done by Tenant, said work
shall be subject to inspection by representatives of Landlord which shall be
permitted access and the opportunity to inspect, at all reasonable times, but
this provision shall not in any way whatsoever create any obligation on Landlord
to conduct such an inspection.
6. With respect to alteration or improvement work costing more than
$5,000, excluding Tenant's Work, Tenant agrees to pay to Landlord or its
managing agent, as additional rent, promptly upon being billed therefor, a sum
equal to ten (10%) percent of the cost of such work or alteration, for
Landlord's indirect costs, field supervision and coordination in connection with
such work. The provisions of the foregoing sentence shall not apply to the cost
of painting, installation of wall and floor coverings and other similar purely
decorative changes.
7. Prior to commencement of any work, Tenant shall furnish to
Landlord certificates evidencing the existence of:
(i) workmen's compensation insurance covering all persons
employed for such work; and
(ii) reasonable comprehensive general liability and property
damage insurance naming Landlord its managing agent, ground lessors, mortgagees
and Tenant as additional insureds, with coverage of at least $3,000,000 single
limit.
Notice is hereby given that Landlord shall not be liable for any labor or
materials furnished or to be furnished to Tenant upon credit, and that no
mechanic's or other lien for any such labor or materials shall attach to or
affect the reversion or other estate or interest of Landlord in and to the
demised premises.
6.02. Any mechanic's lien, filed against the demised premises or
the Building for work claimed to have been done for or materials claimed to have
been furnished to Tenant shall be discharged by Tenant at its expense within
thirty (30) days after notice to thereof, by payment, filing of the bond
required by law or otherwise.
6.03. All alterations, installations, additions and improvements
made and installed by Landlord, if any, shall be the property of Landlord and
shall remain upon and be surrendered with the demised premises as a part thereof
at the end of the term of this Lease.
6.04. All alterations, installations, additions and improvements
made and installed by Tenant, or at Tenant's expense, upon or in the demised
premises which are of a permanent nature and which cannot be removed without
damage to the demised premises or Building shall become and be the property of
Landlord, and shall remain upon and be
18
<PAGE>
surrendered with the demised premises as a part thereof at the end of the term
of this Lease, except that Landlord shall have the right and privilege at any
time up to six (6) months prior to the expiration of the term of the Lease to
serve notice upon Tenant that any of such alterations, installations, additions
and improvements of a non-building standard nature such as vaults, stairways,
bathrooms and other installations which are unusually difficult or costly to
remove, shall be removed and, in the event of service of such notice, Tenant
will, at Tenant's own cost and expense, remove the same in accordance with such
request, and restore the affected portions of the demised premises to their
original condition, ordinary wear and tear and casualty excepted.
6.05. Where furnished by or at the expense of Tenant all
furniture, furnishings and trade fixtures, including without limitation, murals,
business machines and equipment, counters, screens, grille work, special
panelled doors, cages, partitions, metal railings, closets, panelling, lighting
fixtures and equipment, drinking fountains, refrigeration and air-handling
equipment, and any other movable property shall remain the property of Tenant
which may at its option remove all or any part thereof at any time prior to the
expiration of the term of this Lease. In case Tenant shall decide not to remove
any part of such property, Tenant shall notify Landlord in writing not less than
three (3) months prior to the expiration of the term of this Lease, specifying
the items of property which it has decided not to remove. If, within thirty (30)
days after the service of such notice, Landlord shall request Tenant to remove
any of the said property, Tenant shall at its expense remove the same in
accordance with such request. As to such property which Landlord does not
request Tenant to remove, the same shall be, if left by Tenant, deemed abandoned
by Tenant and thereupon the same shall become the property of Landlord.
6.06. If any alterations, installations, additions, improvements
or other property which Tenant shall have the right to remove or be requested by
Landlord to remove as provided in Sections 6.04 and 6.05 hereof (herein in this
Section 6.06 called the "property") are not removed on or prior to the
expiration of the term of this Lease, Landlord shall have the right to remove
the property and to dispose of the same without accountability to Tenant and at
the sole cost and expense of Tenant. In case of any damage to the demised
premises or the Building resulting from the removal of the property Tenant shall
repair such damage or, in default thereof, shall reimburse Landlord for
Landlord's cost in repairing such damage. This obligation shall survive any
termination of this Lease.
6.07. Tenant shall keep records of Tenant's alterations,
installations, additions and improvements costing in excess of $5,000 and of the
cost thereof. Tenant shall, within forty-five (45) days after demand by
Landlord, furnish to Landlord copies of such records and cost if Landlord shall
require same in connection with any proceeding to reduce the assessed valuation
of the Building, or in connection with any proceeding instituted pursuant to
Article 14 hereof or for any other reason or purpose.
6.08. In the event that any asbestos or asbestos-containing
materials shall be discovered in the demised premises in connection with the
performance by Tenant of any alterations in accordance with the provisions of
this Lease, which asbestos or asbestos-containing
19
<PAGE>
materials are required by applicable Legal Requirements to be removed or
encapsulated in connection with such alterations, then provided that such
asbestos or asbestos-containing materials shall not have been introduced into
the demised premises by Tenant or its agents, contractors or employees, Landlord
shall, and Landlord's sole liability to Tenant shall be to, remove or
encapsulate the same in accordance with applicable Legal Requirements, at
Landlord's sole cost and expense. In no event shall the foregoing be deemed to
obligate Landlord to remove or otherwise dispose of or abate vinyl asbestos
tile, if any, in the demised premises.
ARTICLE 7
REPAIRS
7.01. (a) Tenant shall take good care of the demised premises and
the fixtures and appurtenances therein and at its sole cost and expense make all
repairs thereto as and when needed to preserve the same in good working order
and condition. With respect to the Building systems serving the demised premises
Tenant shall be responsible for (i) repair and maintenance of Tenant's internal
air-distribution system to the point at which the same connects to the main
distribution duct for the demised premises, (ii) repair and maintenance of the
internal electrical system to the panel box serving the demised premises, and
(iii) repair and maintenance of all plumbing fixtures and lines in and serving
the demised premises to the point at which the same join the main vertical
risers of the Building. All such repairs and maintenance with respect to such
Building system shall be performed by Tenant at Tenants cost and expense, by
contractors and mechanics listed on Landlord's Approved List. Except as
otherwise provided in Section 9.05 hereof, all damage or injury to the demised
premises and to its fixtures, appurtenances and equipment shall be repaired,
restored or replaced promptly by Tenant at its sole cost and expense, which
repairs, restorations and replacements shall be in quality and class equal to
the original work or installations. All damage or injury to the Building or to
its fixtures, appurtenances and equipment caused by Tenant moving property in or
out of the Building or by installation or removal of furniture, fixtures or
other property, or in any other manner caused by Tenant, its agents, servants or
contractors, shall be repaired, replaced or restored by Landlord at Tenant's
cost and expense and such expense shall be collectible as additional rent and
shall be paid by Tenant within fifteen (15) days after rendition of a bill
therefor. Notwithstanding anything to foregoing contained here, if Tenant fails
to make the repairs, restoration or replacements required under this Section
7.01 within twenty (20) days after notice thereof, same may be made by Landlord
at the expense of Tenant and such expense shall be collectible as additional
rent and shall be paid by Tenant within 15 days after rendition of a bill
therefor.
The exterior walls of the Building, the portions of any window sills
outside the windows, and the windows are not part of the premises demised by
this Lease and Landlord reserves all rights to such parts of the Building.
20
<PAGE>
7.01. (b) Landlord shall, at its sole cost and expense (except as
otherwise set forth herein), maintain and repair the structural portions of both
the Building and the demised premises and the portion of the Building systems
serving the demised premises for which Tenant is not responsible pursuant to
Paragraph (a) hereof and the common areas to the extent that same affect
Tenant's use and occupancy of, or access to, the demised premises. Tenant shall
promptly notify Landlord of all repairs required to be made within the demised
premises for which Landlord is responsible hereunder and Landlord shall perform
same at its sole cost and expense provided, however, if the necessity for any of
such repairs which are Landlord's obligation to perform shall have been
occasioned by any action, omission to act or negligence of Tenant or Tenant's
agents, employees or contractors, then Landlord shall make or cause to be made
all such repairs at Tenant's sole cost and expense, and Tenant shall pay to
Landlord as additional rent within ten (10) days of Landlord's demand therefor,
an amount equal to Landlord's cost thereof.
7.02. Tenant shall not place a load upon any floor of the demised
premises exceeding the floor load per square foot area which such floor was
designed to carry and which is allowed by law. If Tenant shall desire a floor
load in excess of that which the affected floors are designed to carry, Landlord
agrees (provided Landlord's architects, in their reasonable discretion, find
that the work necessary to increase such floor load does not adversely affect
the structure of the Building, and further provided that such work will not
interfere with the amount or availability of any space adjoining alongside,
above or below the demised premises, or interfere with the occupancy of other
tenants in the Building), to strengthen and reinforce the same so as to give the
live load desired, provided Tenant shall submit to Landlord the plans showing
the locations of and the desired floor live load for the areas in question and
provided further that Tenant shall agree to pay for or reimburse Landlord on
demand for the cost of such strengthening and reinforcement as well as any other
reasonable out-of-pocket costs to and expenses of Landlord occasioned by or
resulting from such strengthening or reinforcement.
7.03. Business machines and mechanical equipment used by Tenant
which cause vibration, noise, cold or heat that may be transmitted to the
Building structure or to any leased space to such a degree as to be
objectionable to Landlord or to any other tenant in the Building shall be placed
and maintained by Tenant at its expense in settings of cork, rubber or spring
type vibration eliminators sufficient to absorb and prevent such vibration or
noise, or prevent transmission of such cold or heat. The parties hereto
recognize that the operation of elevators, air-conditioning and heating
equipment will cause some vibration, noise, heat or cold which may be
transmitted to other parts of the Building and demised premises. Landlord shall
be under no obligation to endeavor to reduce such vibration, noise, heat or
cold.
7.04. Except as otherwise specifically provided in this Lease, there
shall be no allowance to Tenant for a diminution of rental value and no
liability on the part of Landlord by reason of inconvenience, annoyance or
injury to business arising from the making of any repairs, alterations,
additions or improvements in or to any portion of the Building or the demised
premises or in or to fixtures, appurtenances or equipment thereof. In performing
such repairs
21
<PAGE>
Landlord shall make a reasonable effort to minimize any inconvenience to Tenant
but nothing herein shall be deemed to obligate Landlord to perform same on an
overtime or premium basis.
ARTICLE 8
REQUIREMENTS OF LAW
8.01. Tenant, at Tenant's sole cost and expense, shall promptly
comply with all present and future laws, orders and regulations of all state,
federal, municipal and local governments, departments, commissions and boards
and any direction of any public officer pursuant to law, and all orders, rules
and regulations of the New York Board of Fire Underwriters, Insurance Services
Office, or any similar body which shall impose any violation, order or duty upon
Landlord or Tenant with respect to the demised premises, whether or not arising
out of Tenant's use or manner of use thereof (including Tenant's permitted use)
or, with respect to the Building if arising out of Tenant's use or manner or use
of the demised premises or the Building (including the use permitted under the
Lease). Nothing herein shall require Tenant to make structural repairs or
alterations or repairs or alterations to Building systems (unless Tenant has, by
its manner of use of the demised premises or method of operation therein,
violated any such laws, ordinances, orders, rules, regulations or requirements
with respect thereto).
8.02. Notwithstanding the provisions of Section 8.01 hereof, Tenant,
at its own cost and expense, may contest, in any manner permitted by law
(including appeals to a court, or governmental department or authority having
jurisdiction in the matter), the validity or the enforcement of any governmental
act, regulation or directive with which Tenant is required to comply pursuant to
this Lease, and may defer compliance therewith provided that:
(a) such noncompliance shall not subject Landlord to
criminal prosecution or subject the Land and/or Building to lien or sale;
(b) such noncompliance shall not be in violation of any fee
mortgage, or of any ground or underlying lease or any mortgage thereon;
(c) Tenant shall first deliver to Landlord a surety bond
issued by a surety company of recognized responsibility, or other security
reasonably satisfactory to Landlord, indemnifying and protecting Landlord
against any loss or injury by reason of such noncompliance; and
(d) Tenant shall promptly and diligently prosecute such
contest.
Landlord, without expense or liability to it, shall cooperate with
Tenant and execute any documents or pleadings required for such purpose,
provided that Landlord shall reasonably be satisfied that the facts set forth in
any such documents or pleadings are accurate.
22
<PAGE>
8.03. Landlord shall be responsible for compliance with Local Law 58
and the Americans With Disabilities Act of 1990 (collectively, the "Acts") with
respect to the bathrooms on the twenty seventh (27th) floor, provided, however,
if compliance with the Acts is required as a result of Tenant's alterations or
improvements to the demised premises, Tenant, at its sole cost and expense,
shall perform all work necessary to comply with the Acts.
ARTICLE 9
INSURANCE, LOSS, REIMBURSEMENT, LIABILITY
9.01. Tenant shall not do or permit to be done any act or thing upon
the demised premises, which will invalidate or be in conflict with New York
standard fire insurance policies covering the Building, and fixtures and
property therein, or which would increase the rate of fire insurance applicable
to the Building to an amount higher than it otherwise would be; and Tenant shall
neither do nor permit to be done at the demised premises any use or activity
which shall or might reasonably be expected to subject Landlord to any liability
or responsibility for injury to any person or persons or to property by reason
of any business or operation being carried on within the demised premises; but
nothing in this Section 9.01 shall prevent Tenant's use of the demised premises
for the purposes stated in Article 5 hereof.
9.02. If, as a result of any act or omission by Tenant or violation
of this Lease, the rate of fire insurance applicable to the Building shall be
increased to an amount higher that it otherwise would be, then in addition to
any other remedies which Landlord has hereunder for any such violations of the
terms of this Lease, Tenant shall reimburse Landlord for all increases of
Landlord's fire insurance premiums so caused; such reimbursement to be
additional rent payable upon the first day of the month following any outlay by
Landlord for such increased fire insurance premiums. In any action or proceeding
wherein Landlord and Tenant are parties, a schedule or "makeup" of rates for the
Building or demised premises issued by the body making fire insurance rates for
the demised premises, shall be presumptive evidence of the facts therein stated
and of the several items and charges in the fire insurance rate then applicable
to the demised premises.
9.03. Landlord or its agents shall not be liable for any injury or
damage to persons or property resulting from fire, explosion, falling plaster,
steam, gas, electricity, water, rain or snow or leaks from any part of the
Building, or from the pipes, appliances or plumbing works or from the roof,
street or subsurface or from any other place or by dampness or by any other
cause of whatsoever nature, unless any of the foregoing shall be caused by or
due to the negligence of Landlord, its agents, servants or employees.
9.04. Landlord or its agents shall not be liable for any damage
which Tenant may sustain, if at any time any window of the demised premises is
broken or temporarily or permanently (restricted to windows on a lot line, if
permanently) closed, darkened or bricked up
23
<PAGE>
for any reason whatsoever, except only Landlord's arbitrary acts if the result
is permanent, and Tenant shall not be entitled to any compensation therefor or
abatement of rent or to any release from any of Tenant's obligations under this
Lease, nor shall the same constitute an eviction. Tenant agrees that Landlord
shall be permitted at any time to install film on the inside of the windows of
the Building to reduce the usage of energy in the Building. Tenant consents to
such installation and agrees that in the event Landlord shall exercise its
option to install such film Landlord shall have no liability with respect to any
closing or darkening of the windows of the demised premises in connection
therewith.
9.05. Tenant shall reimburse Landlord for all expenses, damages or
fines incurred or suffered by Landlord, by reason of any breach, violation or
nonperformance by Tenant, or its agents, servants or employees, of any covenant
or provision of this Lease, or by reason of damage to persons or property caused
by moving property of or for Tenant in or out of the Building, or by the
installation or removal of furniture or other property of or for Tenant or by
reason of or arising out of the carelessness, negligence or improper conduct of
Tenant, or its agents, servants or employees, in the use or occupancy of the
demised premises. Subject to the provisions of Section 8.02 hereof, where
applicable, Tenant shall have the right, at Tenant's own cost and expense, to
participate in the defense of any action or proceeding brought against Landlord,
and in negotiations for settlement thereof if, pursuant to this Section 9.05,
Tenant would be obligated to reimburse Landlord for expenses, damages or fines
incurred or suffered by Landlord.
9.06. Tenant shall give Landlord notice in case of fire or accidents
in the demised premises promptly after Tenant is aware of such event.
9.07. Tenant agrees to look solely to Landlord's estate and interest
in the Land and Building, or the lease of the Building, or of the Land and
Building, and the demised premises, for the satisfaction of any right or remedy
of Tenant for the collection of a judgment (or other judicial process) requiring
the payment of money by Landlord, in the event of any liability by Landlord, and
no other property or assets of Landlord and no property of any partner,
shareholder or principal of Landlord shall be subject to levy, execution,
attachment, or other enforcement procedure for the satisfaction of Tenant's
remedies under or with respect to this Lease, the relationship of Landlord and
Tenant hereunder, or Tenant's use and occupancy of the demised premises, or any
other liability of Landlord to Tenant.
9.08. (a) Landlord agrees that, if obtainable, it will include in
its fire insurance policies appropriate clauses pursuant to which the insurance
companies (i) waive all right of subrogation against Tenant with respect to
losses payable under such policies and/or (ii) agree that such policies shall
not be invalidated should the insured waive in writing prior to a loss any or
all right of recovery against any party for losses covered by such policies. But
should any additional premiums be exacted for any such clause or clauses,
Landlord shall be released from the obligation hereby imposed unless Tenant
shall agree to pay such additional premium.
24
<PAGE>
(b) Tenant agrees to include, if obtainable, in its fire
insurance policy or policies on its furniture, furnishings, fixtures and other
property removable by Tenant under the provisions of this Lease appropriate
clauses pursuant to which the insurance company or companies (i) waive the right
of subrogation against Landlord and any tenant of space in the Building with
respect to losses payable under such policy or policies and/or (ii) agree that
such policy or policies shall not be invalidated should the insured waive in
writing prior to a loss any or all right of recovery against any party for
losses covered by such policy or policies. But should any additional premium be
exacted for any such clause or clauses, Tenant shall be released from the
obligation hereby imposed unless Landlord or the other tenants shall agree to
pay such additional premium.
(c) Provided that Landlord's right of full recovery under
its policy or policies aforesaid is not adversely affected or prejudiced
thereby, Landlord hereby waives any and all right of recovery which it might
otherwise have against Tenant, its servants, agents and employees, for loss or
damage occurring to the Building and the fixtures, appurtenances and equipment
therein, to the extent the same is covered by Landlord's insurance,
notwithstanding that such loss or damage may result from the negligence or fault
of Tenant, its servants, agents or employees. Provided that Tenant's right of
full recovery under its aforesaid policy or policies is not adversely affected
or prejudiced thereby, Tenant hereby waives any and all right of full recovery
which it might otherwise have against Landlord, its servants, agents and
employees, and against every other tenant in the Building who shall have
executed a similar waiver as set forth in this Section 9.08(c) for loss or
damage to, Tenant's furniture, furnishings, fixtures and other property
removable by Tenant under the provisions hereof to the extent that the same is
covered by Tenant's insurance, notwithstanding that such loss or damage may
result from the negligence or fault of Landlord, its servants, agents or
employees, or such other tenant and the servants, agents or employees thereof.
(d) Landlord and Tenant hereby agree to advise the other
promptly if the clauses to be included in their respective insurance policies
pursuant to subdivisions 9.08(a) and (b) hereof cannot be obtained. Landlord and
Tenant hereby also agree to notify the other promptly of any cancellation or
change of the terms of any such policy which would affect such clauses.
9.09. Tenant covenants and agrees to provide on or before the
Commencement Date and to keep in force during the term hereof for the benefit of
Landlord and Tenant a comprehensive general liability insurance policy
protecting Landlord and Tenant against any liability contained in the standard
extended coverage policy, occasioned by any occurrence on or about the demised
premises or any appurtenances thereto. Such policy is to be written by good and
solvent insurance companies reasonably satisfactory to Landlord, and shall be in
such limits as Landlord may reasonably require and as of the date of this Lease
Landlord reasonably requires limits of liability thereunder of not less than the
amount of Three Million ($3,000,000) Dollars single limit for bodily or personal
injury (including death) and in the amount of Three Hundred Thousand ($300,000)
Dollars in respect of property damage. Such insurance may be carried
25
<PAGE>
under a blanket policy covering the demised premises and other locations of
Tenant, if any. Prior to the time such insurance is first required to be carried
by Tenant and thereafter, at least fifteen (15) days prior to the effective date
of any such policy, Tenant agrees to deliver to Landlord either a duplicate
original of the aforesaid policy or a certificate evidencing such insurance.
Said policy or certificate, as the case may be, shall contain an endorsement
that such insurance may not be cancelled except upon ten (10) days' notice to
Landlord. Tenant's failure to provide and keep in force the aforementioned
insurance shall be regarded as a material default hereunder entitling Landlord
to exercise any or all of the remedies provided in this Lease in the event of
Tenant's default.
ARTICLE 10
DAMAGE BY FIRE OR OTHER CAUSE
10.01. If the Building or the demised premises shall be partially or
totally damaged or destroyed by fire or other cause, then whether or not the
damage or destruction shall have resulted from the fault or neglect of Tenant,
or its employees, agents, or visitors (and if this Lease shall not have been
terminated as in this Article 10 hereinafter provided), Landlord shall repair
the damage and restore and rebuild the Building and/or the demised premises, at
its expense (without limiting the rights of Landlord under any other provisions
of this Lease), with reasonable dispatch after notice to it of the damage or
destruction; provided, however, that Landlord shall not be required to repair or
replace any of Tenant's property.
10.02. If the Building or the demised premises shall be partially
damaged or partially destroyed by fire or other cause, then unless such fire or
damage shall have resulted from the negligence of Tenant, the rents payable
hereunder shall be abated to the extent that the demised premises shall have
been rendered untenantable for the period from the date of such damage or
destruction to the date the damage shall be repaired or restored.
If the demised premises or a major part thereof shall be totally
(which shall be deemed to include substantially totally) damaged or destroyed or
rendered completely (which shall be deemed to include substantially completely)
untenantable on account of fire or other cause, the rents shall abate as of the
date of the damage or destruction and until Landlord shall repair, restore and
rebuild the Building and the demised premises, provided, however, that should
Tenant reoccupy a portion of the demised premises during the period the
restoration work is taking place and prior to the date that the same are made
completely tenantable, rents allocable to such portion shall be payable by
Tenant from the date of such occupancy.
10.03. If the Building or the demised premises shall be totally
damaged or destroyed by fire or other cause, or if the Building shall be so
damaged or destroyed by fire or other cause (whether or not the demised premises
are damaged or destroyed) as to require a reasonably estimated expenditure of
more than forty (40%) per cent of the full insurable value of
26
<PAGE>
the Building immediately prior to the casualty, then in either such case
Landlord may terminate this Lease by giving Tenant notice to such effect within
one hundred eighty (180) days after the date of the casualty. If the demised
premises or any part thereof shall be damaged by fire or other casualty as set
forth in Article 10, and Landlord is required to or elects to repair and restore
the demised premises, Landlord shall, within 60 days after such damage or
destruction, provide Tenant with a written notice of the estimated date on which
the restoration of the demised premises shall be substantially completed. If
such estimated date is more than twelve (12) months after the date of such
damage or destruction, Tenant may terminate this Lease by notice to Landlord,
which notice shall be given within twenty (20) days after the date Landlord
provides the notice required by the preceding sentence, and such termination
shall be effective upon the giving of Tenant's notice. Failure by Tenant to
provide such notice within such twenty (20) day period shall be deemed an
election by Tenant not to terminate this Lease. If Tenant elects not to
terminate this Lease or is deemed to have so elected, and if Landlord has not
substantially completed the required repairs and restored the demised premises
within the period originally estimated by Landlord or within such period
thereafter (not to exceed 3 months) as shall equal the aggregate period Landlord
may have been delayed in doing so by adjustment of insurance, labor trouble,
governmental controls, act of god, or any other cause beyond Landlord's
reasonable control, then Tenant shall have the further right to elect to
terminate this Lease upon written notice to Landlord and such election shall be
effective upon the expiration of thirty (30) days after the date of such notice,
unless Landlord substantially completes such restoration within such thirty (30)
day period.
10.04. No damages, compensation or claim shall be payable by
Landlord for inconvenience, loss of business or annoyance arising from any
repair or restoration of any portion of the demised premises or of the Building
pursuant to this Article 10.
10.05. Notwithstanding any of the foregoing provisions of this
Article 10, if Landlord or the lessor of any superior lease or the holder of any
superior mortgage shall be unable to collect all of the insurance proceeds
(including rent insurance proceeds) applicable to damage or destruction of the
demised premises or the Building by fire or other cause, by reason of some
action or inaction on the part of Tenant or any of its employees, agents or
contractors, then, without prejudice to any other remedies which may be
available against Tenant, there shall be no abatement of Tenant's rents, but the
total amount of such rents not abated (which would otherwise have been abated)
shall not exceed the amount of uncollected insurance proceeds.
10.06. Landlord will not carry separate insurance of any kind on
Tenant's property, and, except as provided by law or by reason of its breach of
any of its obligations hereunder, shall not be obligated to repair any damage
thereto or replace the same. Tenant shall maintain insurance on Tenant's
property, and Landlord shall not be obligated to repair any damage thereto or
replace the same.
27
<PAGE>
10.07. The provisions of this Article 10 shall be considered an
express agreement governing any cause of damage or destruction of the demised
premises by fire or other casualty, and Section 227 of the Real Property Law of
the State of New York, providing for such a contingency in the absence of an
express agreement, and any other law of like import, now or hereafter in force,
shall have no application in such case.
ARTICLE 11
ASSIGNMENT, MORTGAGING, SUBLETTING, ETC.
11.01. Tenant shall not (a) assign or otherwise transfer this Lease
or the term and estate hereby granted, (b) sublet the demised premises or any
part thereof or allow the same to be used or occupied by others or in violation
of Article 5, (c) mortgage, pledge or encumber this Lease or the demised
premises or any part thereof in any manner by reason of any act or omission on
the part of Tenant, without, in each instance, obtaining the prior consent of
Landlord, except as otherwise expressly provided in this Article 11. For
purposes of this Article 11, (i) the transfer of a majority of the issued and
outstanding capital stock of any corporate tenant, or of a corporate subtenant,
or the transfer of a majority of the total interest in any partnership tenant or
subtenant, however accomplished, whether in a single transaction or in a series
of related or unrelated transactions, shall be deemed an assignment of this
Lease, or of such sublease, as the case may be, except that the transfer of the
outstanding capital stock of any corporate tenant, or subtenant, shall be deemed
not to include the sale of such stock by persons or parties, through the
"over-the-counter market" or through any recognized stock exchange, or in
connection with an initial public offering conducted in accordance with the
provisions of the Securities and Exchange Act of 1933 other than those deemed
"insiders" within the meaning of the Securities Exchange Act of 1934 as amended,
(ii) any person or legal representative of Tenant, to whom Tenant's interest
under this Lease passes by operation of law, or otherwise, shall be bound by the
provisions of this Article 11, and (iii) a modification, amendment or extension
of a sublease shall be deemed a sublease.
11.02. The provisions of Section 11.01 above shall not apply to an
assignment of this Lease to any corporation into or with which Tenant is merged
or consolidated or to any corporation which shall be an affiliate, subsidiary,
parent or successor of Tenant, provided and on condition that (i) such
transaction is for a bona fide business purpose and not, either directly or
indirectly, principally for the purpose of transferring the leasehold created
hereby, and (ii) the successor to the Tenant or transferee has a net worth
immediately following such transfer of not less than the greater of (x) the net
worth of Tenant as of the Commencement Date, or (y) the net worth of Tenant
immediately preceding such transfer, and proof thereof, reasonably satisfactory
to Landlord, shall have been delivered to Landlord at least ten (10) days prior
to the effective date of such transfer.
28
<PAGE>
For the purpose of this subparagraph (b), a "subsidiary" or "affiliate" or
"successor" of Tenant shall mean the following:
(i) An "affiliate" shall mean any corporation which, directly
or indirectly, controls or is controlled by or is under common
control with Tenant. For this purpose, "control" shall mean the
possession, directly or indirectly, of the power to direct or cause
the direction of the management and policies of such corporation,
whether through the ownership of voting securities or by contract or
otherwise.
(ii) A "subsidiary" shall mean any corporation not less than
50% of whose outstanding stock shall, at the time, be owned directly
or indirectly by Tenant. Any cessation of the affiliate or
subsidiary relationship between Tenant and the entity in question
shall constitute an assignment or subletting, as the case may be,
which shall be subject to all of the terms, provisions and
conditions of this Article.
(iii) A "successor" of Tenant shall mean (x) a corporation in
which or with which Tenant, its corporate successors or assigns, is
merged or consolidated, in accordance with applicable statutory
provisions for merger or consolidation of corporations, provided
that by operation of law or by effective provisions contained in the
instruments of merger or consolidation, the liabilities of the
corporations participating in such merger or consolidation are
assumed by the corporation surviving such merger or created by such
consolidation, or (y) a transferee of not less than 80% of the
issued and outstanding stock of Tenant, or (z) or the transfer of
all or substantially all of the assets of Tenant.
11.03. Any assignment or transfer, whether made with Landlord's
consent as required by Section 11.01 hereof or without Landlord's consent
pursuant to Section 11.02 hereof, shall be made only if, and shall not be
effective until, the assignee shall execute, acknowledge and deliver to Landlord
a recordable agreement, in form and substance reasonably satisfactory to
Landlord, whereby the assignee shall assume the obligations and performance of
this Lease and agree to be bound by and upon all of the covenants, agreements,
terms, provisions and conditions hereof on the part of Tenant to be performed or
observed from and after the effective date of such assignment and whereby the
assignee shall agree that the provisions of this Article 11 hereof shall,
notwithstanding such an assignment or transfer, continue to be binding upon it
in the future. Tenant covenants that, notwithstanding any assignment or
transfer, whether or not in violation of the provisions of this Lease, and
notwithstanding the acceptance of fixed annual rent by Landlord from an assignee
or transferee or any other party, Tenant shall remain fully and primarily liable
for the payment of the fixed annual rent due and to become due under this Lease
and for the performance of all of the covenants, agreements, terms, provisions
and conditions of this Lease on the part of Tenant to be performed or observed.
11.04. The liability of Tenant for the due performance by Tenant of
the obligations on its part to be performed under this Lease, shall not be
discharged, released or
29
<PAGE>
impaired in any respect by an agreement or stipulation made by Landlord or any
grantee or assignee of Landlord, by way of mortgage, or otherwise, extending the
time of or modifying any of the obligations contained in this Lease, or by any
waiver or failure of Landlord to enforce any of the obligations on Tenant's part
to be performed under this Lease, and Tenant shall continue liable hereunder. If
any such agreement or modification operates to increase the obligations of a
tenant under this Lease, the liability under this Section 11.04 of the tenant
named in the Lease or any of its successors in interest, (unless such party
shall have expressly consented in writing to such agreement or modification)
shall continue to be no greater than if such agreement or modification had not
been made. To charge Tenant named in this Lease and its successors in interest,
no demand or notice of any default shall be required; Tenant and each of its
successors in interest hereby expressly waives any such demand or notice.
11.05. Landlord shall not unreasonably withhold or delay its consent
to an assignment of this Lease or a subletting of the whole or a part of the
demised premises for substantially the remainder of the term of this Lease,
provided:
(a) Tenant shall furnish Landlord with the name and business
address of the proposed subtenant or assignee, information with respect to the
nature and character of the proposed subtenant's or assignee's business, or
activities, such references and current financial information with respect to
net worth, credit and financial responsibility as are reasonably satisfactory to
Landlord, and the documentation required in Section 11.06 (a) and (b) herein, as
the case may be;
(b) The proposed subtenant or assignee is a reputable party
whose financial net worth, credit and financial responsibility is, considering
the responsibilities involved, reasonably satisfactory to Landlord;
(c) The nature and character of the proposed subtenant or
assignee, its business or activities and intended use of the demised premises
is, in Landlord's reasonable judgment, in keeping with the standards of the
Building and the floor or floors on which the demised premises are located;
(d) The proposed subtenant or assignee is not then an
occupant of any part of the Building or a party who dealt with Landlord or
Landlord's agent (directly or through a broker) with respect to space in the
Building during the 6 months immediately preceding Tenant's request for
Landlord's consent;
(e) All costs incurred with respect to providing reasonably
appropriate means of ingress and egress from the sublet space or to separate the
sublet space from the remainder of the demised premises shall, subject to the
provisions of Article 6 with respect to alterations, installations, additions or
improvements, be borne by Tenant;
30
<PAGE>
(f) Each sublease shall specifically state that (i) it is
subject to all the terms, covenants, agreements, provisions, and conditions of
this Lease, (ii) the subtenant or assignee, as the case may be, will not have
the right to a further assignment thereof or sublease or assignment thereunder,
or to allow the demised premises to be used by others, without the consent of
Landlord in each instance;
(g) Tenant shall together with requesting Landlord's consent
hereunder, have paid Landlord any actual reasonable out-of-pocket attorney's
fees incurred by Landlord to review the proposed assignment or subletting
including attorneys fees incurred by Landlord;
(h) Tenant shall have complied with the provisions in
Section 11.06 and Landlord shall not have made any of the elections provided for
in Section 11.06;
(i) The proposed subtenant or assignee is not (i) a bank
trust company, safe deposit business, savings and loan association or loan
company; (ii) an employment or recruitment agency; (iii) a school, college,
university or educational institution whether or not for profit; (iv) a
government or any subdivision or agency thereof;
(j) In the case of a subletting of a portion of the demised
premises, the portion so sublet shall be regular in shape and suitable for
normal renting purposes;
(k) Tenant shall have granted to Landlord or Landlord's
agent the exclusive right to sublease the demised premises or such portion
thereof as Tenant proposes to sublet, or to assign this Lease as the case may
be; provided, however, if at the time of the proposed sublet or assignment there
are any other full floor spaces available for rent between and including the
twenty-seventh (27th) and thirty-eighth (38th) floors of the Building, the
provisions of this section 11.05(k) shall not apply; and
(l) The proposed assignment shall be for a consideration or
the proposed subletting shall be at a rental rate not less than eighty five
percent (85%) of the rental rates then being charged under leases being entered
into by Landlord for comparable space in the Building and for a comparable term
and in no event shall Tenant advertise or list with brokers at such lower rental
rate.
11.06. (a) Should Tenant agree to assign this Lease, other than by
an assignment contemplated by Section 11.02, Tenant shall deliver to Landlord
(i) a "term sheet" setting forth the terms of the proposed assignment and (ii) a
letter signed by the proposed assignee confirming that the provisions of the
"term sheet" represent a bona fide offer on the part of the proposed assignee to
enter into an assignment, not less than sixty (60) days prior to the effective
date of the contemplated assignment and Landlord shall than have the right to
elect, by notifying Tenant within thirty (30) days of such delivery, to (i)
terminate this Lease, as of such effective date as if it were the Expiration
Date set forth in this Lease or (ii) accept an assignment
31
<PAGE>
of this Lease from Tenant, and Tenant shall then promptly execute and deliver to
Landlord, or Landlord's designee if so elected by Landlord, in form reasonably
satisfactory to Landlord's counsel, an assignment which shall be effective as of
such effective date.
(b) Should Tenant agree to sublet the demised premises or
any portion thereof, other than by a sublease contemplated by Section 11.02,
Tenant shall deliver to Landlord (i) a "term sheet" setting forth the terms of
the proposed subletting and (ii) a letter signed by the proposed subtenant
confirming that the provisions of the "term sheet" represent a bona fide offer
on the part of the proposed subtenant to enter into a sublease, not less than
sixty (60) days prior to the effective date of the contemplated sublease, and
Landlord shall then have the right to elect, by notifying Tenant within thirty
(30) days of such delivery, to (i) terminate this Lease as to the portion of the
demised premises affected by such subletting or as to the entire demised
premises in the case of a subletting thereof, as of such effective date, (ii) in
the case of a proposed subletting of the entire demised premises accept an
assignment of this Lease from Tenant, and Tenant shall then promptly execute and
deliver to Landlord, or Landlord's designee if so elected by Landlord, in form
reasonably satisfactory to Landlord's counsel, an assignment which shall be
effective as of such effective date, (iii) accept a sublease from Tenant of the
portion of the demised premises affected by such proposed subletting or the
entire demised premises in the case of a proposed subletting thereof, and Tenant
shall then promptly execute and deliver a sublease to Landlord, or Landlord's
designee if so elected by Landlord, for the remainder of the demised term less
one day, commencing with such effective date, at (x) the rental terms reflected
in the proposed sublease or (y) the rental terms contained in this Lease on a
per rentable square foot basis, as elected by Landlord in such notice.
(c) If Landlord should elect to have Tenant execute and
deliver a sublease pursuant to any of the provisions of this Section 11.06, said
sublease shall be in a form reasonably satisfactory to Landlord's counsel and on
all the terms contained in this Lease, except that:
(i) The rental terms, if elected by Landlord, may be
either as provided in item (x) or item (y) of subsection
11.06(b) hereof.
(ii) The sublease shall not provide for any work to be
done for the subtenant or for any initial rent concessions or
contain provisions inapplicable to a sublease, except that in
the case of a subletting of a portion of the demised premises
Tenant shall reimburse subtenant for the cost of erecting such
demising walls as are necessary to separate the subleased
premises from the remainder of the demised premises and to
provide access thereto,
(iii) The subtenant thereunder shall have the right to
underlet the subleased premises, in whole or in part, without
Tenant's consent,
32
<PAGE>
(iv) The subtenant thereunder shall have the right to
make, or cause to be made, any changes, alterations,
decorations, additions and improvements that subtenant may
desire or authorize provided, however, that Tenant shall not
be responsible for the removal thereof or any restoration
which would otherwise be required as a result thereof under
Article 6,
(v) Such sublease shall expressly negate any intention
that any estate created by or under such sublease be merged
with any other estate held by either of the parties thereto,
(vi) Any consent required of Tenant, as lessor under
that sublease, shall be deemed granted if consent with respect
thereto is granted by Landlord,
(vii) There shall be no limitation as to the use of the
sublet premises by the subtenant thereunder,
(viii) Any failure of the subtenant thereunder to comply
with the provisions of said sublease, other than with respect
to the payment of rent to Tenant, shall not constitute a
default thereunder or hereunder if Landlord has consented to
such noncompliance, and
(ix) Such sublease shall provide that Tenant's
obligations with respect to vacating the demised premises and
removing any changes, alterations, decorations, additions or
improvements made in the subleased premises shall be limited
to those which accrued and related to such as were made prior
to the effective date of the sublease.
(d) If pursuant to the exercise of any of Landlord's options
pursuant to Section 11.06 hereof this Lease is terminated as to only a portion
of the demised premises, then the fixed annual rent payable hereunder and the
additional rent payable pursuant to Article 3 and 4 hereof shall be adjusted in
proportion to the portion of the demised premises affected by such termination.
(e) If Landlord shall give its consent to any assignment of
this Lease or to any sublease, Tenant shall in consideration therefor, pay to
Landlord, as additional rent:
(i) in the case of an assignment, an amount equal to
fifty (50%) percent of the sums and other considerations paid
to Tenant by the assignee for or by reason of such assignment
(including, but not limited to, sums paid for the sale of
Tenant's fixtures, leasehold improvements, equipment,
furniture, furnishings or other personal property, less, in
the
33
<PAGE>
case of a sale of any of the foregoing other than leasehold
improvements, the then net unamortized or undepreciated cost
thereof determined on the basis of Tenant's federal income tax
returns); and
(ii) in the case of a sublease, fifty (50%) percent of
the rents, additional charge or other consideration payable
under the sublease to Tenant by the subtenant which is in
excess of the fixed annual rent and additional rent accruing
during the term of the sublease in respect of the subleased
space (at the rate per square foot payable by Tenant
hereunder) pursuant to the terms hereof (including, but not
limited to, sums paid for the sale or rental of Tenant's
fixtures, leasehold improvements, equipment, furniture or
other personal property, less, in the case of the sale of any
of the foregoing other than leasehold improvements, the then
net unamortized or undepreciated cost thereof determined on
the basis of Tenant's federal income tax returns).
The sums payable under this subsection 11.06(e) shall be paid to Landlord as and
when paid by the subtenant to Tenant. In calculating the amounts due Landlord,
Tenant shall be allowed to deduct Tenants Costs with respect to the assignment
or sublease in question. As used herein, the term "Tenant's Costs" shall mean:
(x) the reasonable brokerage commissions, legal expenses and advertising
expenses incurred by Tenant to third parties in connection with the
subletting or assignment in question; and
(y) the actual out-of-pocket cost to Tenant of performing commercially
reasonable alterations to the demised premises to prepare same for
occupancy by the subtenant or assignee in question, the foregoing
costs and/or allowances to be amortized ratably over the term of the
sublease in question.
Tenant shall provide Landlord with evidence reasonably satisfactory to
Landlord of Tenant's Costs within thirty (30) days after the effective date of
the assignment of this Lease or commencement date of the sublease to which same
apply.
11.07. Landlord's consent to any sublease or assignment shall not be
deemed or construed to modify, amend or affect the terms and provisions of this
Lease, or Tenant's obligations hereunder, which shall continue to apply to the
occupants thereof, as if the sublease or assignment had not been made.
Notwithstanding any assignment or sublease, Tenant shall remain fully liable for
the payment of fixed annual rent and additional rents and for the other
obligations of this Lease on the part of Tenant to be performed or observed. In
the event that Tenant defaults in the payment of any rent, Landlord is
authorized to collect any rents due or accruing from any assignee, subtenant or
other occupant of the demised premises and to apply the net amounts collected to
the fixed annual rent and additional rent reserved herein, and the
34
<PAGE>
receipt of any such amounts by Landlord from an assignee or subtenant, or other
occupant of any part of the demised premises, shall not be deemed or construed
as releasing Tenant from Tenant's obligations hereunder or the acceptance of
that party as a direct tenant.
11.08. Notwithstanding anything to the contrary contained herein,
Tenant shall not be obligated to make the offer described in Section 11.06
hereof, and Tenant shall not be required to obtain Landlord's consent to the use
of desk space in the demised premises by entities or individuals with whom
Tenant has a continuing business relationship provided, however, that Tenant
shall not (subject to the method of calculation provided below) permit the use
of desk space involving more in the aggregate than twenty (20%) percent of the
area of the demised premises. Permission to such persons to use the demised
premises shall not create a tenancy or any other interest in the demised
premises except a license revocable by Tenant at will which shall cease and
expire in any event automatically without notice upon the expiration or
termination of the letting under the Lease, and all acts, omissions and
operations of such persons and/or their employees shall be deemed acts,
omissions and operations of Tenant. Use of the demised premises pursuant hereto
shall not be deemed to entitle any such occupant to the rights or privileges
which Landlord has or may hereafter accord to lessees of space in the Building.
For purposes of determining compliance with the foregoing limitation on the
square foot area of the demised premises allocable to desk space, there shall be
included (i.e., added) to the space devoted specifically to such purposes, an
allocable share of reception, secretarial, file and other common areas
comprising part of the demised premises. Any such desk space shall remain at all
times a part of and shall not be separately demised or separated from the
balance of the demised premises, and the occupants thereof shall at all times
gain access to their space through reception and corridor areas shared with
Tenant.
ARTICLE 12
CERTIFICATE OF OCCUPANCY
12.01. Tenant will not at any time use or occupy the demised
premises in violation of the Certificate of Occupancy issued for the Building.
ARTICLE 13
ADJACENT EXCAVATION SHORING
13.01. If an excavation or other substructure work shall be made
upon land adjacent to the demised premises, or shall be authorized to be made,
Tenant shall afford to the person causing or authorized to cause such
excavation, license to enter upon the demised premises for the purposes of doing
such work as shall be necessary to preserve the wall of or the Building of which
the demised premises form a part from injury or damage and to support the
35
<PAGE>
same by proper foundations without any claim for damages or indemnity against
Landlord, or diminution or abatement of rent.
ARTICLE 14
CONDEMNATION
14.01. In the event that the whole of the demised premises shall be
lawfully condemned or taken in any manner for any public or quasi-public use,
this Lease and the term and estate hereby granted shall forthwith cease and
terminate as of the date of vesting of title. In the event that only a part of
the demised premises shall be so condemned or taken, then, effective as of the
date of vesting of title, the fixed annual rent under Article 1 hereunder and
additional rents under Articles 3 and 4 hereunder shall be abated in an amount
thereof apportioned according to the area of the demised premises so condemned
or taken. In the event that a material part of the Building shall be so
condemned or taken, then (a) Landlord (whether or not the demised premises be
affected) may, at Landlord's option, terminate this Lease and the term and
estate hereby granted as of the date of such vesting of title by notifying
Tenant in writing of such termination within sixty (60) days following the date
on which Landlord shall have received notice of vesting of title, or (b) if such
condemnation or taking shall be of a substantial part of the demised premises or
of a substantial part of the means of access thereto, Tenant may, at Tenant's
option, by delivery of notice in writing to Landlord within thirty (30) days
following the date on which Tenant shall have received notice of vesting of
title, terminate this Lease and the term and estate hereby granted as of the
date of vesting of title, or (c) if neither Landlord nor Tenant elects to
terminate this Lease, as aforesaid, this Lease shall be and remain unaffected by
such condemnation or taking, except that the fixed annual rent payable under
Article 1 and additional rents payable under Articles 3 and 4 hereof shall be
abated to the extent hereinbefore provided in this Article 14. In the event that
only a part of the demised premises shall be so condemned or taken and this
Lease and the term and estate hereby granted with respect to the remaining
portion of the demised premises are not terminated as hereinbefore provided,
Landlord will, with reasonable diligence and at its expense, restore the
remaining portion of the demised premises as nearly as practicable to the same
condition as it was in prior to such condemnation or taking and to the extent
reasonably practicable, make the demised premises a single architectural unit.
14.02. In the event of its termination in any of the cases
hereinbefore provided, this Lease and the term and estate hereby granted shall
expire as of the date of such termination with the same effect as if that were
the Expiration Date, and the fixed annual rent and additional rents payable
hereunder shall be apportioned as of such date.
14.03. In the event of any condemnation or taking hereinbefore
mentioned of all or a part of the Building, Landlord shall be entitled to
receive the entire award in the condemnation proceeding, including any award
made for the value of the estate vested by this Lease in Tenant, and Tenant
hereby expressly assigns to Landlord any and all right, title and
36
<PAGE>
interest of Tenant now or hereafter arising in or to any such award or any part
thereof, and Tenant shall be entitled to receive no part of such award. Tenant
may make a claim for Tenant's relocation costs and the unamortized cost of any
Tenant property taken thereby, provided that such claim shall not reduce or
adversely affect Landlord's award.
14.04. It is expressly understood and agreed that the provisions of
this Article 14 shall not be applicable to any condemnation or taking for
governmental occupancy for a limited period.
14.05. In the event of any taking of less than the whole of the
Building which does not result in a termination of this Lease, or in the event
of a taking for a temporary use or occupancy of all or any part of the demised
premises which does not result in a termination of this Lease, Landlord, at its
expense, and whether or not any award or awards shall be sufficient for the
purpose, shall proceed with reasonable diligence to repair, alter and restore
the remaining parts of the Building and the demised premises and means of access
thereto to substantially their former condition to the extent that the same may
be feasible and so as to constitute a complete and tenantable Building and
demised premises.
14.06. In the event any part of the demised premises be taken to
effect compliance with any law or requirement of public authority other than in
the manner hereinabove provided in this Article 14, then, (i) if such compliance
is the obligation of Tenant under this Lease, Tenant shall not be entitled to
any diminution or abatement of rent or other compensation from Landlord
therefor, but (ii) if such compliance is the obligation of Landlord under this
Lease, the fixed annual rent hereunder shall be reduced and additional rents
under Article 3 hereof shall be adjusted in the same manner as is provided in
Section 14.01 according to the reduction in rentable area of the demised
premises resulting from such taking.
ARTICLE 15
ACCESS TO DEMISED PREMISES; CHANGES
15.01. Tenant shall permit Landlord to erect, use and maintain
pipes, ducts and conduits in and through the demised premises, provided the same
are installed adjacent to or concealed behind walls and ceilings of the demised
premises. Landlord shall to the extent reasonably practicable install such
pipes, ducts and conduits by such methods and at such locations as will not
materially interfere with or impair Tenant's layout or use of the demised
premises. Landlord or its agents or designees shall have the right, upon
reasonable advance notice (except in the case of emergency) to Tenant or any
authorized employee of Tenant at the demised premises, to enter the demised
premises, at reasonable times during business hours, for the making of such
repairs or alterations as Landlord may deem necessary for the Building or which
Landlord shall be required to or shall have the right to make by the provisions
of this Lease or any other lease in the Building and, subject to the foregoing,
shall also have the right to
37
<PAGE>
enter the demised premises for the purpose of inspecting them or exhibiting them
to prospective purchasers or lessees of the entire Building or to prospective
mortgagees of the fee or of the Landlord's interest in the property of which the
demised premises are a part or to prospective assignees of any such mortgages or
to the holder of any mortgage on the Landlord's interest in the property, its
agents or designees. Landlord shall be allowed to take all material into and
upon the demised premises that may be required for the repairs or alterations
above mentioned as the same is required for such purpose, without the same
constituting an eviction of Tenant in whole or in part, and the rent reserved
shall in no wise abate while said repairs or alterations are being made by
reason of loss or interruption of the business of Tenant because of the
prosecution of any such work. Landlord shall exercise reasonable diligence so as
to minimize the disturbance but nothing contained herein shall be deemed to
require Landlord to perform the same on an overtime or premium pay basis. Tenant
agrees that Landlord shall have the right at any time to install in the Building
on the inside of the windows thereof, a film to reduce the usage of energy in
the Building. Tenant agrees that in the event Landlord shall exercise its option
to install such film the foregoing provisions of this Section shall apply to the
installation, maintenance or replacement of such film.
15.02. Landlord reserves the right, without the same constituting an
eviction and without incurring liability to Tenant therefor, to change the
arrangement and/or location of public entrances, passageways, doors, doorways,
corridors, elevators, stairways, toilets or other public parts of the Building;
provided, however, that access to the Building shall not be materially impaired
and that there shall be no unreasonable obstruction of access to the demised
premises or unreasonable interference with the use or enjoyment thereof.
15.03. Landlord reserves the right to light from time to time all or
any portion of the demised premises at night for display purposes without paying
Tenant therefor.
15.04. Landlord may, during the (12) months prior to expiration of
the term of this Lease, exhibit the demised premises to prospective tenants upon
advance notice (which may be given orally) to Tenant.
15.05. If Tenant shall not be personally present to open and permit
an entry into the demised premises at any time when for any reason an entry
therein shall be urgently necessary by reason of fire or other emergency,
Landlord or Landlord's agents may forcibly enter the same without rendering
Landlord or such agents liable therefor (if during such entry Landlord or
Landlord's agents shall accord reasonable care to Tenant's property) and without
in any manner affecting the obligations and covenants of this Lease.
ARTICLE 16
CONDITIONS OF LIMITATION
38
<PAGE>
16.01. This Lease and the term and estate hereby granted are subject
to the limitation that whenever Tenant shall make an assignment of the property
of Tenant for the benefit of creditors, or shall file a voluntary petition under
any bankruptcy or insolvency law or any involuntary petition alleging an act of
bankruptcy or insolvency shall be filed against Tenant under any bankruptcy or
insolvency law, or whenever a petition shall be filed by or against Tenant under
the reorganization provisions of the United States Bankruptcy Act or under the
provisions of any law of like import, or whenever a petition shall be filed by
Tenant under the arrangement provisions of the United States Bankruptcy Act or
under the provisions of any law of like import, or whenever a permanent receiver
of Tenant or of or for the property of Tenant shall be appointed, then, Landlord
may, (a) at any time after receipt of such notice of the occurrence of any such
event, or (b) if such event occurs without the acquiescence of Tenant, at any
time after the event continues for ninety (90) days, give Tenant a notice of
intention to end the term of this Lease at the expiration of five (5) days from
the date of service of such notice of intention, and upon the expiration of said
five (5) day period, this Lease and the term and estate hereby granted, whether
or not the term shall theretofore have commenced, shall terminate with the same
effect as if that day were the Expiration Date, but Tenant shall remain liable
for damages as provided in Article 18 hereof.
16.02. This Lease and the term and estate hereby granted are subject
to further limitation as follows:
(a) whenever Tenant shall default in the payment of any
installment of fixed annual rent, or in the payment of any additional rent or
any other charge payable by Tenant to Landlord, on any day upon which same ought
to be paid, and such default shall continue for five (5) days after Landlord
shall have given Tenant a notice specifying such default, or
(b) whenever Tenant shall do or permit anything to be done,
whether by action or inaction, contrary to any of Tenant's obligations
hereunder, and if such situation shall continue and shall not be remedied by
Tenant within twenty (20) days after Landlord shall have given to Tenant a
notice specifying the same, or, in the case of a happening or default which
cannot with due diligence be cured within a period of twenty (20) days and the
continuation of which for the period required for cure will not subject Landlord
to the risk of criminal liability (as more particularly described in Article 8
hereof) or termination of any superior lease or foreclosure of any superior
mortgage, if Tenant shall not, (i) within said twenty (20) day period advise
Landlord of Tenant's intention to duly institute all steps necessary to remedy
such situation, (ii) duly institute within said twenty (20) day period, and
thereafter diligently and continuously prosecute to completion all steps
necessary to remedy the same and (iii) complete such remedy within such time
after the date of the giving of said notice of Landlord as shall reasonably be
necessary, or
(c) whenever any event shall occur or any contingency shall
arise whereby this Lease or the estate hereby granted or the unexpired balance
of the term hereof shall,
39
<PAGE>
by operation of law or otherwise, devolve upon or pass to any person, firm or
corporation other than Tenant, except as expressly permitted by Article 11
hereof, or
(d) whenever Tenant shall vacate or abandon the demised
premises (unless as a result of a casualty), or
(e) whenever in case any other lease held by Tenant from
Landlord shall expire and terminate (whether or not the term thereof shall then
have commenced) as a result of the default of Tenant thereunder or of the
occurrence of an event as therein provided (other than by expiration of the
fixed term thereof or pursuant to a cancellation or termination option therein
contained), or
(f) whenever Tenant shall default in the due keeping,
observing or performance of any covenant, agreement, provision or condition of
Article 5 hereof on the part of Tenant to be kept, observed or performed and if
such default shall continue and shall not be remedied by Tenant within 72 hours
after Landlord shall have given to Tenant a notice specifying the same,
then in any of said cases set forth in the foregoing Subsections (a), (b), (c),
(d), (e) and (f) Landlord may give to Tenant a notice of intention to end the
term of this Lease at the expiration of three (3) days from the date of the
service of such notice of intention and upon the expiration of said three (3)
days this Lease and the term and estate hereby granted, whether or not the term
shall theretofore have commenced, shall terminate with the same effect as if
that day were the Expiration Date, but Tenant shall remain liable for damages as
provided in Article 18 hereof.
ARTICLE 17
RE-ENTRY BY LANDLORD, INJUNCTION
17.01. If Tenant shall default in the payment of any installment of
fixed annual rent, or of any additional rent, on any date upon which the same
ought to be paid, and if such default shall continue for five (5) days after
Landlord shall have given to Tenant a notice specifying such default, or if this
Lease shall expire as in Article 16 hereof provided, Landlord or Landlord's
agents and employees may immediately or at any time thereafter re-enter the
demised premises, or any part thereof, either by summary dispossess proceedings
or by any suitable action or proceeding at law, or by other legal means, without
being liable to indictment, prosecution or damages therefrom, to the end that
Landlord may have, hold and enjoy the demised premises again as and of its first
estate and interest therein. The word re-enter, as herein used, is not
restricted to its technical legal meaning. In the event of any termination of
this Lease under the provisions of Article 16 hereof or if Landlord shall
re-enter the demised premises under the provisions of this Article 17 or in the
event of the termination of this Lease, or of re-entry, by or under any summary
dispossess or other proceedings or action or any provision of law by reason of
default hereunder on the part of Tenant, Tenant shall thereupon pay to Landlord
the fixed
40
<PAGE>
annual rent and additional rent payable by Tenant to Landlord up to the time of
such termination of this Lease, or of such recovery of possession of the demised
premises by Landlord, as the case may be, and shall also pay to Landlord damages
as provided in Article 18 hereof.
17.02. In the event of a breach or threatened breach of Tenant of
any of its obligations under this Lease, Landlord shall also have the right of
injunction. The special remedies to which Landlord may resort hereunder are
cumulative and are not intended to be exclusive of any other remedies or means
of redress to which Landlord may lawfully be entitled at any time and Landlord
may invoke any remedy allowed at law or in equity as if specific remedies were
not provided for herein.
17.03. If this Lease shall terminate under the provisions of Article
16 hereof, or if Landlord shall re-enter the demised premises under the
provisions of this Article 17, or in the event of the termination of this Lease,
or of re-entry, by or under any summary dispossess or other proceeding or action
or any provision of law by reason of default hereunder on the part of Tenant,
Landlord shall be entitled to retain all moneys, if any, paid by Tenant to
Landlord, whether as advance rent, security or otherwise, but such moneys shall
be credited by Landlord against any fixed annual rent or additional rent due
from Tenant at the time of such termination or re-entry or, at Landlord's option
against any damages payable by Tenant under Articles 16 and 18 hereof or
pursuant to law.
17.04. Tenant hereby expressly waives any and all rights of
redemption granted by or under any present or future laws in the event of Tenant
being evicted or dispossessed for any cause, or in the event of Landlord
obtaining possession of the demised premises, by reason of the violation by
Tenant of any of the covenants and conditions of this Lease or otherwise.
ARTICLE 18
DAMAGES
18.01. If this Lease is terminated under the provisions of Article
16 hereof, or if Landlord shall re-enter the demised premises under the
provisions of Article 17 hereof, or in the event of the termination of this
Lease, or of re-entry, by or under any summary dispossess or other proceeding or
action or any provision of law by reason of default hereunder on the part of
Tenant, Tenant shall pay to Landlord as damages, at the election of Landlord,
either:
(a) a sum which at the time of such termination of this
Lease or at the time of any such re-entry by Landlord, as the case may be,
represents the then present value of the excess, if any, of
(1) the aggregate of the fixed annual rent and the
additional rent payable hereunder which would have been
payable by Tenant
41
<PAGE>
(conclusively presuming that additional rent on account of
increases in Taxes, and Operating Expense shall increase at
the average of the rates of increase thereof previously
experienced by Landlord during the period (not to exceed 3
years) prior to such termination) for the period commencing
with such earlier termination of this Lease or the date of any
such re-entry, as the case may be, and ending with the
Expiration Date, had this Lease not so terminated or had
Landlord not so re-entered the demised premises, over
(2) the aggregate rental value of the demised premises
for the same period, or
(b) sums equal to the fixed annual rent and the additional
rent payable hereunder which would have been payable by Tenant had this Lease
not so terminated, or had Landlord not so re-entered the demised premises,
payable upon the due dates therefor specified herein following such termination
or such re-entry and until the Expiration Date, provided, however, that if
Landlord shall re-let the demised premises during said period, Landlord shall
credit Tenant with the net rents received by Landlord from such re-letting, such
net rents to be determined by first deducting from the gross rents as and when
received by Landlord from such re-letting the expenses paid or incurred by
Landlord in terminating this Lease or in re-entering the demised premises and in
securing possession thereof, as well as the expenses of re-letting, including
altering and preparing the demised premises for new tenants, brokers'
commissions, and all other expenses properly chargeable against the demised
premises and the rental thereof; it being understood that any such re-letting
may be for a period shorter or longer than the remaining term of this Lease; but
in no event shall Tenant be entitled to receive any excess of such net rents
over the sums payable by Tenant to Landlord hereunder, or shall Tenant be
entitled in any suit for the collection of damages pursuant to this subsection
to a credit in respect of any net rents from a re-letting, except to the extent
that such net rents are actually received by Landlord. If the demised premises
or any part thereof should be re-let in combination with other space, then
proper apportionment on a square foot basis shall be made of the rent received
from such re-letting and of the expenses of re-letting.
If the demised premises or any part thereof be re-let by Landlord for
the unexpired portion of the term of this Lease, or any part thereof, before
presentation of proof of such damages to any court, commission or tribunal, the
amount of rent reserved upon such re-letting shall, prima facie, be the fair and
reasonable rental value for the demised premises, or part thereof, so re-let
during the term of the re-letting.
18.02. Suit or suits for the recovery of such damages, or any
installments thereof, may be brought by Landlord from time to time at its
election, and nothing contained herein shall be deemed to require Landlord to
postpone suit until the date when the term of this Lease would have expired if
it had not been so terminated under the provisions of Article 16, or under any
provision of law, or had Landlord not re-entered the demised premises. Nothing
herein
42
<PAGE>
contained shall be construed to limit or preclude recovery by Landlord against
Tenant of any sums or damages to which, in addition to the damages particularly
provided above, Landlord may lawfully be entitled by reason of any default
hereunder on the part of Tenant. Nothing herein contained shall be construed to
limit or prejudice the right of Landlord to prove for and obtain as liquidated
damages by reason of the termination of this Lease or re-entry of the demised
premises for the default of Tenant under this Lease, an amount equal to the
maximum allowed by any statute or rule of law in effect at the time when, and
governing the proceedings in which such damages are to be proved whether or not
such amount be greater, equal to, or less than any of the sums referred to in
Section 18.01 hereof.
ARTICLE 19
LANDLORD'S RIGHT TO PERFORM TENANT'S OBLIGATIONS
19.01. If Tenant shall default in the observance or performance of
any term or covenant on Tenant's part to be observed or performed under or by
virtue of any of the terms or provisions in any Article of this Lease and,
except in case of emergency, such default shall continue after notice and beyond
any applicable grace periods (a) Landlord may remedy such default for the
account of Tenant, immediately and without notice in case of emergency, or in
any other case only provided that Tenant shall fail to remedy such default with
all reasonable dispatch after Landlord shall have notified Tenant in writing of
such default and the applicable grace period for curing such default shall have
expired; and (b) if Landlord makes any expenditures or incurs any obligations
for the payment of money in connection with such default including, but not
limited to, reasonable attorney's fees in instituting, prosecuting or defending
any action or proceeding, such sums or obligations incurred, with interest at
the Interest Rate, shall be deemed to be additional rent hereunder and shall be
paid by Tenant to Landlord within twenty (20) days after rendition of a bill to
Tenant therefor. Tenant shall be allowed (but not as a condition to its
obligation to make the foregoing payment(s) in a timely manner) to review copies
of invoices for all charges incurred by Landlord in connection with the
preceding sentence provided Tenant requests to review said invoices within
fifteen (15) days after the rendition of a bill therefor.
ARTICLE 20
QUIET ENJOYMENT
20.01. Landlord covenants and agrees that subject to the terms and
provisions of this Lease, if, and so long as, Tenant keeps and performs each and
every covenant, agreement, term, provision and condition herein contained on the
part or on behalf of Tenant to be kept or performed, then Tenant's right under
this Lease shall not be cut off or ended before the expiration of the term of
this Lease, subject however, to: (i) the obligations of this Lease, and (ii) as
43
<PAGE>
provided in Article 25 hereof with respect to ground and underlying leases and
mortgages which affect this Lease.
ARTICLE 21
SERVICES AND EQUIPMENT
21.01. So long as Tenant is not in default under any of the covenants
of this Lease, Landlord shall, at its cost and expense:
(a) Provide necessary passenger elevator facilities on
Business Days from 8:00 A.M. to 6:00 P.M. and shall have at least one elevator
subject to call at all other times. At Landlord's option, the elevators shall be
operated by automatic control or manual control, or by a combination of both of
such methods.
(b) Provide non-exclusive freight elevator facilities on
Business days during usual hours of operation thereof. At all other times,
Tenant shall be permitted by prearrangement on a first come first serve basis to
schedule reserved freight elevator service. All such arrangements and use shall
be subject to Landlord's Building rules therefor and union requirements and
Tenant shall pay for the use of the freight elevator at Landlord's standard
rates then in effect. Notwithstanding the foregoing, Tenant shall have the right
to utilize the freight elevator facilities at no charge during (i) Tenant's Work
(as defined herein) for an aggregate total amount of twenty (20) hours, and (ii)
Tenant's initial move in ("Move In") for an aggregate total amount of eight (8)
hours. During Tenant's Work and Move In, Tenant must reserve and utilize the
freight elevator facilities for blocks of time consisting of a minimum of two
(2) consecutive hours. Tenant shall pay for the use of the freight elevator
facilities in excess of the time allotted in clauses (i) and (ii) above at the
standard building rates then in effect.
(b) Landlord shall furnish heat and air-conditioning through
the Building systems when seasonably required on Business Days, from 8:00 A.M.
to 6:00 P.M. Tenant shall in any event cause all of the windows in the demised
premises to be kept closed and shall cause and keep entirely unobstructed all
the vents, intakes, outlets and grilles, at all times and shall comply with and
observe all regulations and requirements prescribed by Landlord for the proper
functioning of the heating, ventilating and air-conditioning systems. In the
event that Tenant shall require air-conditioning, or heating at such times as
same are not furnished by Landlord, Tenant shall give Landlord reasonable
advance notice of such requirement and, if same is furnished by Landlord, Tenant
agrees to pay the Landlord's Building standard charges therefor as additional
rent.
(c) Provide cleaning and janitorial services on Business
Days. Tenant shall pay to Landlord on demand the costs incurred by Landlord for
(a) extra cleaning work in the
44
<PAGE>
demised premises required because of (i) misuse or neglect on the part of Tenant
or its employees or visitors, (ii) use of portions of the demised premises for
preparation, serving or consumption of food or beverages, data processing, or
reproducing operations, private lavatories or toilets or other special purposes
requiring greater or more difficult cleaning work than office areas, (iii)
unusual quantity of interior glass surfaces, (iv) non-building standard
materials or finishes installed by Tenant or at its request and (b) removal from
the demised premises and the Building of so much of any refuse and rubbish of
Tenant as shall exceed that ordinarily accumulated daily in the routine of
business office occupancy. Landlord, its cleaning contractor and their employees
shall have After Hours access to the demised premises and the free use of light,
power and water in the demised premises as reasonably required for the purpose
of cleaning the demised premises in accordance with Landlord's obligations
hereunder.
(d) Furnish hot and cold water for lavatory and drinking,
kitchenette and office cleaning purposes. If Tenant requires, uses or consumes
water for any other purposes, Tenant agrees to Landlord installing a meter or
meters or other means to measure Tenant's water consumption, and Tenant further
agrees to reimburse Landlord for the cost of the meter or meters and the
installation thereof, and to pay for the maintenance of said meter equipment
and/or to pay Landlord's cost of other means of measuring such water consumption
by Tenant. Tenant shall reimburse Landlord for the cost of all water consumed,
as measured by said meter or meters or as otherwise measured, including sewer
rents.
21.02. Landlord reserves the right without any liability whatsoever,
or abatement of fixed annual rent, or additional rent, to stop the heating,
air-conditioning, elevator, plumbing, electric and other systems when necessary
by reason of accident or emergency or for repairs, alterations, replacements or
improvements. If the demised premises shall be rendered untenantable for a
period of thirty (30) consecutive days by reason Landlord's failure or inability
to supply any service which it is obligated to supply under this Lease as
provided that during such period of untenantability Tenant actually discontinues
use of the demised premises for the conduct of its business, then unless such
cessation of services is caused by the negligence or intentional or wrongful act
or omission of Tenant, its agents, employees, contractors or invitees, the fixed
annual rent and additional rent payable pursuant to Section 1.01 of this Lease
shall abate for the remainder of any such period of untenantability or until
such period as Tenant resumes the use of the demised premises.
21.03. It is expressly agreed that only Landlord or any one or more
persons, firms or corporations authorized in writing by Landlord will be
permitted to furnish laundry, linen towels, or other similar supplies and
services to tenants and licensees in the Building. Landlord may fix, in its own
absolute discretion, at any time and from time to time, the hours during which
and the regulations under which such supplies and services are to be furnished.
Landlord expressly reserves the right to act as or designate, at any time and
from time to time, an exclusive supplier of all or any one or more of the said
supplies and services, provided that the quality thereof and the charges
therefor are reasonably comparable to that of other suppliers; and Landlord
furthermore expressly reserves the right to exclude from the Building any
person, firm
45
<PAGE>
or corporation attempting to furnish any of said supplies or services but not so
designated by Landlord. It is understood, however, that Tenant or regular office
employees of Tenant who are not employed by any supplier of such food or
beverages or by any person, firm or corporation engaged in the business of
purveying such food or beverages, may personally bring food or beverages into
the Building for consumption within the demised premises by employees of Tenant,
but not for resale to or for consumption by any other tenant. Landlord may fix
in its absolute discretion, at any time and from time to time, the hours during
which, and the regulations under which, foods and beverages may be brought into
the Building by persons other than the regular employees of Tenant.
21.04. Tenant agrees to employ such office maintenance contractors as
Landlord may from time to time designate, for all waxing, polishing, lamp
replacement, cleaning and maintenance work in the demised premises, provided
that the quality thereof and the charges therefor are reasonably comparable to
that of other contractors. Tenant shall not employ any other contractor without
Landlord's prior written consent however, Tenant shall not require Landlord's
consent to use Tenant's employees for the activities designated herein.
21.05. Landlord will not be required to furnish any other services,
except as otherwise provided in this Lease.
ARTICLE 22
DEFINITIONS
22.01. The term "Landlord" as used in this Lease means only the
owner, or the mortgagee in possession, for the time being of the Land and
Building (or the owner of a lease of the Building or of the Land and Building),
so that in the event of any transfer of title to said Land and Building or said
lease, or in the event of a lease of the Building, or of the Land and Building,
upon notification to Tenant of such transfer or lease the said transferor
Landlord shall be and hereby is entirely freed and relieved of all future
covenants, obligations and liabilities of Landlord hereunder, and it shall be
deemed and construed as a covenant running with the land without further
agreement between the parties or their successors in interest, or between the
parties and the transferee of title to said Land and Building or said lease, or
the said lessee of the Building, or of the Land and Building, that the
transferee or the lessee has assumed and agreed to carry out any and all such
covenants, obligations and liabilities of Landlord hereunder.
22.02. The term "Business Days" as used in this Lease shall exclude
Saturdays, Sundays and all days observed by the Federal, State or local
government as legal holidays as well as all other days recognized as holidays
under applicable union contracts.
22.03. "Interest Rate" shall mean a rate per annum equal to the
lesser of (a) 2% above the commercial lending rate announced from time to time
by The Chase Manhattan Bank
46
<PAGE>
(New York, New York), as its prime rate for 90 day unsecured loans, or (b) the
maximum applicable legal rate, if any.
22.04. "Legal Requirements" shall mean laws, statutes and ordinances
(including building codes and zoning regulations, and ordinances) and the
orders, rules, and regulations, directives and requirements of all federal,
state, county, city and borough departments, bureaus, boards, agencies, offices,
commissions and other subdivisions thereof, or of any official thereof, or of
any other governmental public or quasi-public authority, whether now or
hereafter in force, which may be applicable to the Land or Building or the
demised premises or any part thereof, or the sidewalks, curbs or areas adjacent
thereto and all requirements, obligations and conditions of all instruments of
record on the date of this Lease.
ARTICLE 23
INVALIDITY OF ANY PROVISION
23.01. If any term, covenant, condition or provision of this Lease or
the application thereof to any circumstance or to any person, firm or
corporation shall be invalid or unenforceable to any extent, the remaining
terms, covenants, conditions and provisions of this Lease or the application
thereof to any circumstances or to any person, firm or corporation other than
those as to which any term, covenant, condition or provision is held invalid or
unenforceable, shall not be affected thereby and each remaining term, covenant,
condition and provision of this Lease shall be valid and shall be enforceable to
the fullest extent permitted by law.
ARTICLE 24
BROKERAGE
24.01. Tenant covenants, represents and warrants that Tenant has had
no dealings or communications with any broker, or agent other than
Insignia/Edward S. Gordon Company, Inc. (which is representing Landlord) and
Julien J. Studley in connection with the consummation of this Lease, and Tenant
covenants and agrees to pay, hold harmless and indemnify Landlord from and
against any and all cost, expense (including reasonable attorneys' fees) or
liability for any compensation, commissions or charges claimed by any broker or
agent, other than the broker set forth in this Section 24.01, with respect to
this Lease or the negotiation thereof.
24.02 Landlord represents and warrants to Tenant that Landlord has
had no dealings or negotiations in connection with the consummation of this
Lease with any broker purporting to represent Tenant other than Julien J.
Studley Inc., and Landlord covenants and
47
<PAGE>
agrees to pay, hold harmless and indemnify Tenant from and against any and all
cost, expense or liability that Tenant shall incur as a result of a breach by
Landlord of the foregoing representation.
ARTICLE 25
SUBORDINATION
25.01. This Lease is and shall be subject and subordinate to all
ground or underlying leases which may now or hereafter affect the real property
of which the demised premises forms a part and to all mortgages which may now or
hereafter affect such leases or such real property, and to all renewals,
modifications, replacements and extensions thereof. The provisions of this
Section 25.01 shall be self operative and no further instrument of subordination
shall be required. In confirmation of such subordination, Tenant shall promptly
execute and deliver at its own cost and expense any instrument, in recordable
form if required, that Landlord, the lessor of the ground or underlying lease or
the holder of any such mortgage or any of their respective successors in
interest may request to evidence such subordination, and Tenant hereby
constitutes and appoints Landlord or its successors in interest to be Tenant's
attorney in fact, irrevocably and coupled with an interest, to execute and
deliver any such instrument for and on behalf of Tenant.
25.02. In the event of a termination of any ground or underlying
lease, or if the interests of Landlord under this Lease are transferred by
reason of, or assigned in lieu of, foreclosure or other proceedings for
enforcement of any mortgage, or if the holder of any mortgage acquires a lease
in substitution therefor, then Tenant under this Lease will, at the option to be
exercised in writing by the lessor under such ground or underlying lease or such
mortgagee or purchaser, assignee or lessee, as the case may be, either (i)
attorn to it and will perform for its benefit all the terms, covenants and
conditions of this Lease on Tenant's part to be performed with the same force
and effect as if said lessor, such mortgagee or purchaser, assignee or lessee,
were the landlord originally named in this Lease, or (ii) enter into a new lease
with said lessor or such mortgagee or purchaser, assignee or lessee, as
landlord, for the remaining term of this Lease and otherwise on the same terms
and conditions and with the same options, if any, then remaining. The foregoing
provisions of clause (i) of this Section 25.02 shall enure to the benefit of
such lessor, mortgagee, purchaser, assignee or lessee, shall be self operative
upon the exercise of such option, and no further instrument shall be required to
give effect to said provisions. Tenant, however, upon demand of any such lessor,
mortgagee, purchaser, assignee or lessee agrees to execute, from time to time,
instruments in confirmation of the foregoing provisions of this Section 25.02,
reasonably satisfactory to any such lessor, mortgagee, purchaser, assignee or
lessee, acknowledging such attornment and setting forth the terms and conditions
of its tenancy. Tenant hereby constitutes and appoints Landlord or its
successors in interest to be the Tenant's attorney in fact, irrevocably and
coupled with an interest, to execute and deliver such instrument of attornment,
or such new lease, if the Tenant refuses or fails to do so promptly upon
request.
48
<PAGE>
25.03. Anything herein contained to the contrary notwithstanding,
under no circumstances shall the aforedescribed lessor under the ground lease or
mortgagee or purchaser, assignee or lessee, as the case may be, whether or not
it shall have succeeded to the interests of the landlord under this Lease, be
(a) liable for any act, omission or default of any prior
landlord; or
(b) subject to any offsets, claims or defenses which Tenant
might have against any prior landlord; or
(c) bound by any rent or additional rent which Tenant might
have paid to any prior landlord for more than one month in advance of the due
date; or
(d) bound by any modification, amendment or abridgment of
the Lease, or any cancellation or surrender of the same, made without its prior
written approval.
25.04 Landlord shall use its reasonable efforts to obtain from any
mortgagee of superior Lessor, or from any future mortgagee or any future ground
or superior lessor, a non-disturbance agreement with Tenant on such mortgagee's
or lessor's standard form at no cost to Landlord. In the event any such
mortgagee or ground or superior lessor shall fail to provide such a
non-disturbance agreement to Tenant, Landlord shall have no liability to Tenant
and this Lease shall not be affected.
25.05. If, in connection with the financing of the Building, the
holder of any mortgage shall request reasonable modifications in this Lease as a
condition of approval thereof, Tenant shall not unreasonably withhold, delay or
defer making such modifications provided there is no change in the monetary
obligations and no material changes in the terms of this Lease.
ARTICLE 26
CERTIFICATES OF LANDLORD AND TENANT
26.01. Each party agrees, at any time and from time to time, as
requested by the other party, upon not less than ten (10) days prior notice, to
execute and deliver to the other a statement certifying that this Lease is
unmodified and in full force and effect (or if there have been modifications,
that the same is in full force and effect as modified and stating the
modifications), certifying the dates to which the fixed annual rent and
additional rent have been paid, and stating whether or not, to the best
knowledge of the signer, the other party is in default in performance of any of
its obligations under this Lease, and, if so, specifying each such default of
which the signer may have knowledge, it being intended that any such statement
delivered
49
<PAGE>
pursuant hereto may be relied upon by others with whom the party requesting such
certificate may be dealing.
26.02. Tenant agrees that, except for the first month's rent
hereunder, it will pay no rent under this Lease more than thirty (30) days in
advance of its due date, if so restricted by any existing or future ground lease
or mortgage to which this Lease is subordinated or by an assignment of this
Lease to the ground lessor or the holder of such mortgage, and, in the event of
any act or omission by Landlord, Tenant will not exercise any right to terminate
this Lease or to remedy the default and deduct the cost thereof from rent due
hereunder until Tenant shall have given written notice of such act or omission
to the ground lessor and to the holder of any mortgage on the fee or the ground
lease who shall have furnished such lessor's or holder's last address to Tenant,
and until a reasonable period for remedying such act or omission shall have
elapsed following the giving of such notices, during which time such lessor or
holder shall have the right, but shall not be obligated, to remedy or cause to
be remedied such act or omission. Tenant shall not exercise any right pursuant
to this Section 26.02 if the holder of any mortgage or such aforesaid lessor
commences to cure such aforesaid act or omission within a reasonable time and
diligently prosecutes such cure thereafter.
ARTICLE 27
LEGAL PROCEEDINGS WAIVER OF JURY TRIAL
27.01. Landlord and Tenant do hereby waive trial by jury in any
action, proceeding or counterclaim brought by either of the parties hereto
against the other on any matters whatsoever arising out of or in any way
connected with this Lease, the relationship of Landlord and Tenant, Tenant's use
or occupancy of the demised premises, and/or any other claims (except claims for
bodily injury or damage to physical property), and any emergency statutory or
any other statutory remedy. It is further mutually agreed that in the event
Landlord commences any summary proceeding, Tenant will not interpose and does
hereby waive the right to interpose any counterclaim of whatever nature or
description in any such proceeding other than a mandatory counterclaim.
ARTICLE 28
SURRENDER OF PREMISES
28.01. Upon the expiration or other termination of the term of this
Lease, Tenant shall quit and surrender to Landlord the demised premises, broom
clean, in good order and condition, ordinary wear and tear and damage by fire,
the elements or other casualty excepted, and Tenant shall remove all of its
property as herein provided. Tenant's obligation to observe or perform this
covenant shall survive the expiration or other termination of the term of this
Lease.
50
<PAGE>
28.02. In the event Tenant shall remain in possession of the demised
premises after the expiration or other termination of the term of this Lease,
such holding over shall not constitute a renewal or extension of this Lease.
Landlord may, at its option, elect to treat Tenant as one who has not removed at
the end of the term, and shall thereupon be entitled to all of the remedies
against Tenant provided by law in that situation or Landlord may elect to
construe such holding over as a tenancy from month-to-month, subject to all of
the terms and conditions of this Lease, except as to the duration thereof, and
the minimum rent or use and occupancy, as the case may be, shall be due, in
either of such events, at a monthly rate equal to one and one-half (1.5) times
the monthly installment of minimum rent which would otherwise be payable for
such month, together with any and all additional rent. In addition to the
foregoing, if the demised premises is not surrendered on the Expiration Date,
Tenant shall indemnify Landlord against loss or liability resulting from the
delay by Tenant in so surrendering the demised premises, including, without
limitation, claims by any succeeding occupant founded on such delay and damages
or loss which Landlord may incur by any lost leasing opportunity or transaction.
ARTICLE 29
RULES AND REGULATIONS
29.01. Tenant and Tenant's servants, employees and agents shall
observe faithfully and comply strictly with the Rules and Regulations set forth
in Schedule B attached hereto and made part hereof, and the Alteration Rules and
Regulations, collectively referred to herein as the entitled the "Rules and
Regulations" and such other and further reasonable Rules and Regulations as
Landlord or Landlord's agents may from time to time adopt provided, however,
that in case of any conflict or inconsistency between the provisions of this
Lease and of any of the Rules and Regulations as originally or as hereafter
adopted, the provisions of this Lease shall control. Reasonable written notice
of any additional Rules and Regulations shall be given to Tenant. Landlord shall
not discriminate against Tenant in the enforcement of Rules and Regulations.
Nothing in this Lease contained shall be construed to impose upon
Landlord any duty or obligation to enforce the Rules and Regulations or the
terms, covenants or conditions in any other lease, against any other tenant of
the Building and Landlord shall not be liable to Tenant for violation of the
same by any other tenant, its servants, employees, agents, visitors or
licensees.
ARTICLE 30
CONSENTS AND APPROVALS
51
<PAGE>
30.01. Wherever in this Lease Landlord's consent or approval is
required, if Landlord shall delay or refuse such consent or approval, Tenant in
no event shall be entitled to make, nor shall Tenant make, any claim, and Tenant
hereby waives any claim, for money damages (nor shall Tenant claim any money
damages by way of setoff, counterclaim or defense) based upon any claim or
assertion by Tenant that Landlord unreasonably withheld or unreasonably delayed
its consent or approval. Tenant's sole remedy shall be an action or proceeding
to enforce any such provision, for specific performance, injunction or
declaratory judgment.
ARTICLE 31
NOTICES
31.01. Any notice or demand, consent, approval or disapproval, or
statement required to be given by the terms and provisions of this Lease, or by
any law or governmental regulation, either by Landlord to Tenant or by Tenant to
Landlord, shall be in writing. Unless otherwise required by such law or
regulation, such notice or demand shall be given, and shall be deemed to have
been served and given when such notice or demand is mailed by registered or
certified mail return receipt requested deposited enclosed in a securely closed
postpaid wrapper, in a United States Government general or branch post office,
or official depository within the exclusive care and custody thereof, addressed
to either party, at its address set forth on page 1 of this Lease provided any
notice to Tenant shall be addressed to the attention of Jay Friesel, Executive
Vice President, with a copy to be addressed to the attention of Mark Moran,
General Counsel. After Tenant shall occupy the demised premises, the address of
Tenant for notices, demands, consents, approvals or disapprovals shall be the
Building. Either party may, by notice as aforesaid, designate a different
address or addresses for notices, demands, consents, approvals or disapprovals.
31.02. In addition to the foregoing, either Landlord or Tenant may,
from time to time, request in writing that the other party serve a copy of any
notice or demand, consent, approval or disapproval, or statement, on one other
person or entity designated in such request, such service to be effected as
provided in Section 31.01 hereof.
ARTICLE 32
NO WAIVER
32.01. No agreement to accept a surrender of this Lease shall be
valid unless in writing signed by Landlord. No employee of Landlord or of
Landlord's agents shall have any power to accept the keys of the demised
premises prior to the termination of this Lease. The delivery of keys to any
employee of Landlord or of Landlord's agent shall not operate as a
52
<PAGE>
termination of this Lease or a surrender of the demised premises. In the event
of Tenant at any time desiring to have Landlord sublet the demised premises for
Tenant's account, Landlord or Landlord's agents are authorized to receive said
keys for such purpose without releasing Tenant from any of the obligations under
this Lease. The failure of Landlord or Tenant to seek redress for violation of,
or to insist upon the strict performance of, any covenant or condition of this
Lease or of Landlord to do so with respect to any of the Rules and Regulations
set forth herein, or hereafter adopted by Landlord, shall not prevent a
subsequent act, which would have originally constituted a violation from having
all the force and effect of an original violation. The receipt by Landlord of
rent with or without knowledge of the breach of any covenant of this Lease shall
not be deemed a waiver of such breach. The failure of Landlord to enforce any of
the Rules and Regulations set forth herein, or hereafter adopted, against Tenant
and/or any other tenant in the Building shall not be deemed a waiver of any such
Rules and Regulations. No provision of this Lease shall be deemed to have been
waived by Landlord or Tenant, unless such waiver be in writing signed by the
party to be charged therewith. No payment by Tenant or receipt by Landlord of a
lesser amount than the monthly rent herein stipulated shall be deemed to be
other than on the account of the earliest stipulated rent, nor shall any
endorsement or payment of rent be deemed an accord and satisfaction, and
Landlord may accept such check or payment without prejudice to Landlord's right
to recover the balance of such rent or pursue any other remedy in this Lease
provided.
32.02. This Lease contains the entire agreement between the parties,
and any agreement hereafter made shall be ineffective to change, modify,
discharge or effect an abandonment of it in whole or in part unless such
agreement is in writing and signed by the party against whom enforcement of the
change, modification, discharge or abandonment is sought.
ARTICLE 33
CAPTIONS
33.01. The captions are inserted only as a matter of convenience and
for reference, and in no way define, limit or describe the scope of this Lease
nor the intent of any provision thereof.
ARTICLE 34
INABILITY TO PERFORM
34.01. If, by reason of (1) strike, (2) labor troubles, (3)
governmental preemption in connection with a national emergency, (4) any rule,
order or regulation of any governmental agency, (5) conditions of supply or
demand which are affected by war or other national, state or municipal
emergency, or any other cause or (6) any cause beyond Landlord's reasonable
control, Landlord shall be unable to fulfill its obligations under this Lease or
shall be unable to supply any
53
<PAGE>
service which Landlord is obligated to supply, Landlord shall have no liability
in connection therewith and this Lease and Tenant's obligation to pay rent
hereunder shall in no wise be affected, impaired or excused.
ARTICLE 35
NO REPRESENTATIONS BY LANDLORD
35.01. Landlord or Landlord's agents have made no representations or
promises with respect to the Building or demised premises except as herein
expressly set forth.
ARTICLE 36
NAME OF BUILDING
36.01. Landlord shall have the full right at any time to name and
change the name of the Building and to change the designated address of the
Building. The Building may be named after any person, firm, or otherwise,
whether or not such name is, or resembles, the name of a tenant of the Building.
36.02 Landlord will, at the request of Tenant, maintain listings on
the Building directory of the name of Tenant, and the name of any employees of
Tenant provided the total number of such listings shall not exceed Tenant's
Proportionate Share of the available spaces. The listing of any name other than
that of Tenant, whether on the doors of the demised premises, on the Building
directory, or otherwise, shall not operate to vest any right or interest in this
lease or in the demised premises or be deemed to be the written consent of
Landlord to the occupancy of any portion of the demised premises by such person,
it being expressly understood that any such listing is a privilege extended by
Landlord revocable at will by written notice to Tenant.
ARTICLE 37
RESTRICTIONS UPON USE
37.01. It is expressly understood that no portion of the demised
premises shall be used as, or for (i) a bank, trust company, savings bank,
industrial bank, savings and loan association or personal loan bank (or any
branch office or public accommodation office of any of the foregoing), or (ii) a
public stenographer or typist, barber shop, beauty shop, beauty parlor or shop,
telephone or telegraph agency, telephone or secretarial service, messenger
service, travel or tourist agency, employment agency, public restaurant or bar,
commercial document reproduction or offset printing service, public vending
machines, retail, wholesale or discount shop for sale of
54
<PAGE>
merchandise, retail service shop, labor union, school or classroom, governmental
or quasi-governmental bureau, department or agency, including an autonomous
governmental corporation, a firm whose principal business is real estate
brokerage, or a company engaged in the business of renting office or desk space.
ARTICLE 38
ARBITRATION
38.01. In each case specified in this Lease in which resort to
arbitration shall be required, such arbitration (unless otherwise specifically
provided in other Sections of this Lease) shall be in New York City in
accordance with the Commercial Arbitration Rules of the American Arbitration
Association and the provisions of this Lease. The decision and award of the
arbitrators shall be in writing, shall be final and conclusive on the parties,
and counterpart copies thereof shall be delivered to each of the parties. In
rendering such decision and awards, the arbitrators shall not add to, subtract
from or otherwise modify the provisions of this Lease. Judgment may be had on
the decision and award of the arbitrators so rendered in any court of competent
jurisdiction.
38.02 If, in connection with Articles 6 or 11 of this Lease, Landlord
or Tenant desires to determine any dispute between Landlord and Tenant as to the
reasonableness of the other's decision, such dispute shall, at either party's
option, be settled and finally determined by arbitration in The City of New York
in accordance with the following provisions of this Section. Within ten (10)
business days next following the giving of any notice by Landlord or Tenant
stating that it wishes such dispute to be so determined, Landlord and Tenant
shall each give notice to the other setting forth the name and address of an
arbitrator designated by the party giving such notice. If either party shall
fail to give notice of such designation within said ten (10) business days, then
the arbitrator chosen by the other side shall make the determination alone. If
the two arbitrators shall fail to agree upon the designation of a third
arbitrator within five (5) business days after the designation of the second
arbitrator then either party may apply to the Chairman of the Management
Division of the Real Estate Board of New York, Inc. for the designation of such
arbitrator and if he is unable or refuses to act within ten (10) business days
then either party may apply to the Supreme Court in New York County or to any
other court having jurisdiction for the designation of such arbitrator. The
three arbitrators shall conduct such hearings as they deem appropriate, making
their determination in writing and giving notice to Landlord and Tenant of their
determination as soon as practicable, and if possible, within five (5) business
days after the designation of the third arbitrator; the concurrence of or, in
the event no two of the arbitrators shall render a concurrent determination,
then the determination of the third arbitrator designated shall be biding upon
Landlord and Tenant. Judgment upon any decision rendered in any arbitration held
pursuant to this Section shall be final and binding upon Landlord and Tenant,
whether or not a judgment shall be entered in any court. Each party shall pay
its own counsel fees and expenses, if any, in connection with any arbitration
under this Section, including
55
<PAGE>
the expenses and fees of any arbitrator selected by it in accordance with the
provisions of this Section, and the parties shall share all other expenses and
fees of any such arbitration. The arbitrators shall be bound by the provisions
of this Lease, and shall not add to, subtract from or otherwise modify such
provisions. The sole function of the arbitrators shall be to determine whether
Landlord or Tenant, as the case may be, has acted reasonably and to require
Landlord or Tenant, as the case may be, to grant such consent or approval or to
take action, and they may not award damages or grant any other monetary award or
relief in the proceeding.
ARTICLE 39
INDEMNITY
39.01. Tenant shall indemnify, defend and save Landlord, its agents
and employees and any mortgagee of Landlord's interest in the Land and/or the
Building and any lessor under any superior lease harmless from and against any
liability or expense arising from the use or occupation of the demised premises
by Tenant or anyone in the demised premises with Tenant's permission, or from
any breach of this Lease by Tenant.
ARTICLE 40
MEMORANDUM OF LEASE
40.01. Tenant shall, at the request of Landlord execute and deliver a
statutory form of memorandum of this Lease for the purpose of recording, but
said memorandum of this Lease shall not in any circumstances be deemed to modify
or to change any of the provisions of this Lease. In no event shall Tenant
record this Lease.
ARTICLE 41
SECURITY
41.01. Tenant has deposited with Landlord the sum of
$95,343.75 as security for the faithful performance and observance by Tenant of
the terms, provisions, covenants and conditions of this Lease; it is agreed that
in the event Tenant defaults in respect of any of the terms, provisions,
covenants and conditions of this Lease including, but not limited to, the
payment of fixed annual rent and additional rent, Landlord may use, apply or
retain the whole or any part of the security so deposited to the extent required
for the payment of any fixed annual rent and additional rent or any other sum as
to which Tenant is in default or for any sum which Landlord may expend or may be
required to expend by reason of Tenant's default in respect of any of the terms,
provisions, covenants and conditions of this Lease, including but not limited
to,
56
<PAGE>
any damages or deficiency accrued before or after summary proceedings or other
re-entry by Landlord. In the event that Tenant shall fully and faithfully comply
with all of the terms, provisions, covenants and conditions of this Lease, the
security shall be returned to Tenant after the date fixed as the end of the
Lease and after delivery of entire possession of the demised premises to
Landlord. In the event of a sale of the Land and Building or leasing of the
Building, of which the demised premises form a part, Landlord shall have the
right to transfer the security to the vendee or lessee and Landlord shall
thereupon be released by Tenant from all liability for the return of such
security; and Tenant agrees to look solely to the new landlord for the return of
said security; and it is agreed that the provisions hereof shall apply to every
transfer or assignment made of the security to a new landlord. Tenant further
covenants that it will not assign or encumber or attempt to assign or encumber
the monies deposited herein as security and that neither Landlord nor its
successors or assigns shall be bound by any such assignment, encumbrance,
attempted assignment or attempted encumbrance. In the event Landlord applies or
retains any portion or all of the security deposited, Tenant shall forthwith
restore the amount so applied or retained so that at all times the amount
deposited shall be $95,343.75.
41.02. (a) In lieu of the cash security deposit provided for in
Section 41.01 hereof Tenant may at any time during the term hereof deliver to
Landlord and, shall, except as otherwise provided herein, maintain in effect at
all times during the term hereof, an irrevocable letter of credit, in form and
substance satisfactory to Landlord in the amount of the security required
pursuant to this Lease issued by a banking corporation satisfactory to Landlord
and having its principal place of business or it duly licensed branch or agency
in the State of New York. Such letter of credit shall have an expiration date no
earlier than the first anniversary of the date of issuance thereof and shall be
automatically renewed from year to year unless terminated by the issuer thereof
by notice to Landlord given not less than 45 days prior to the expiration
thereof. Except as otherwise provided herein, Tenant shall, throughout the term
of this Lease deliver to Landlord, in the event of the termination of any such
letter of credit, replacement letters of credit in lieu thereof (each such
letter of credit and such extensions or replacements thereof, as the case may
be, is hereinafter referred to as a "Security Letter") no later than 45 days
prior to the expiration date of the preceding Security Letter. The term of each
such Security Letter shall be not less than one year and shall be automatically
renewable from year to year as aforesaid. If Tenant shall fail to obtain any
replacement of a Security Letter within the time limits set forth in this
Section 41.02(a), Landlord may draw down the full amount of the existing
Security Letter and retain the same as security hereunder.
(b) In the event Tenant defaults in respect to any of the
terms, provisions, covenants and conditions of this Lease, including, but not
limited to, the payment of rent and additional rent, Landlord may use, apply or
retain the whole or any part of the security so deposited to the extent required
for the payment of any rent and additional rent or any other sum as to which
Tenant is in default or for any sum which Landlord may expend or may be required
to expend by reason of Tenant's default in respect of any of the terms,
provisions, covenants, and conditions of this Lease, including but not limited
to, any damages or deficiency accrued before or after summary proceedings or
other re-entry by Landlord. To insure that Landlord may utilize
57
<PAGE>
the security represented by the Security Letter in the manner, for the purpose,
and to the extent provided in this Article 41, each Security Letter shall
provide that the full amount thereof may be drawn down by Landlord upon the
presentation to the issuing bank of Landlord's draft drawn on the issuing bank
without accompanying memoranda on statement of beneficiary.
(c) In the event that Tenant defaults in respect of any of
the terms, provisions, covenants and conditions of the Lease and Landlord
utilizes all or any part of the security represented by the Security Letter but
does not terminate this Lease as provided in Article 16 hereof, Landlord may, in
addition to exercising its rights as provided in subsection 41.02(b) hereof,
retain the unapplied and unused balance of the principal amount of the Security
Letter as security for the faithful performance and observance by Tenant
thereafter of the terms, provisions, and conditions of this Lease, and may use,
apply, or retain the whole or any part of said balance to the extent required
for payment of rent, additional rent, or any other sum as to which Tenant is in
default or for any sum which Landlord may expend or be required to expend by
reason of Tenant's default in respect of any of the terms, covenants, and
conditions of this Lease. In the event Landlord applies or retains any portion
or all of the security delivered hereunder, Tenant shall forthwith restore the
amount so applied or retained so that at all times the amount deposited shall be
not less than the security required by Section 41.01 hereof.
(d) In the event that Tenant shall fully and faithfully
comply with all of the terms, provisions, covenants and conditions of this
Lease, the security shall be returned to Tenant after the date fixed as the end
of the Lease and after delivery of entire possession of the demised premises to
Landlord. In the event of a sale of the Land and Building or leasing of the
Building, Landlord shall have the right to transfer any interest it may have in
the Security Letter to the vendee or lessee and Landlord shall thereupon be
released by Tenant from all liability for the return of such Security Letter,
provided such vendee or lessee assumes any responsibilities of Landlord with
respect to such Security Letter, and Tenant agrees to look solely to the new
landlord for the return of said Security Letter; and it is agreed that the
provisions hereof shall apply to every transfer or assignment made of the
Security Letter to a new landlord. Tenant further covenants that it will not
assign or encumber or attempt to assign or encumber the monies deposited herein
as security and that neither Landlord nor its successors or assigns shall be
bound by any such assignment, encumbrance, attempted assignment or attempted
encumbrance. In the event of a sale of the Building Landlord shall have the
right to require Tenant to deliver a replacement Security Letter naming the new
landlord as beneficiary and, if Tenant shall fail to timely deliver the same, to
draw down the existing Security Letter and retain the proceeds as security
hereunder until a replacement Security Letter is delivered.
ARTICLE 42
MISCELLANEOUS
58
<PAGE>
42.01. Irrespective of the place of execution or performance, this
Lease shall be governed by and construed in accordance with the laws of the
State of New York.
42.02. This Lease shall be construed without regard to any
presumption or other rule requiring construction against the party causing this
Lease to be drafted.
42.03. Except as otherwise expressly provided in this Lease, each
covenant, agreement, obligation or other provision of this Lease on Tenant's
part to be performed shall be deemed and construed as a separate and independent
covenant of Tenant, not dependent on any other provision of this Lease.
42.04. All terms and words used in this Lease, regardless of the
number or gender in which they are used, shall be deemed to include any other
number and any other gender as the context may require.
42.05. Time shall be of the essence with respect to the exercise of
any option granted under this Lease.
42.06. Except as otherwise provided herein, whenever payment of
interest is required by the terms hereof it shall be at the Interest Rate.
42.07. If the demised premises or any additional space to be included
within the demised premises shall not be available for occupancy by Tenant on
the specific date hereinbefore designated for the commencement of the term of
this Lease or for the inclusion of such space for any reason whatsoever, then
this Lease shall not be affected thereby but, in such case, said specific date
shall be deemed to be postponed until the date when the demised premises or such
additional space shall be available for occupancy by Tenant, and Tenant shall
not be entitled to possession of the demised premises or such additional space
until the same are available for occupancy by Tenant, provided, however, that
Tenant shall have no claim against Landlord, and Landlord shall have no
liability to Tenant by reason of any such postponement of said specific date,
and the parties hereto further agree that any failure to have the demised
premises or such additional space available for occupancy by Tenant on said
specific date or on the Commencement Date shall in no wise affect the
obligations of Tenant hereunder nor shall the same be construed in any wise to
extend the term of this Lease and furthermore, this Section 42.07 shall be
deemed to be an express provision to the contrary of Section 223a of the Real
Property Law of the State of New York and any other law of like import now or
hereafter in force.
42.08. In the event that Tenant is in arrears in payment of fixed
annual rent or additional rent hereunder, Tenant waives Tenant's right, if any,
to designate the items against which any payments made by Tenant are to be
credited, and Tenant agrees that Landlord may apply any payments made by Tenant
to any items it sees fit, irrespective of and notwithstanding
59
<PAGE>
any designation or request by Tenant as to the items against which any such
payments shall be credited.
42.09. Tenant shall not occupy any space in the Building (by
assignment, sublease or otherwise) other than the demised premises, except with
the prior written consent of Landlord in each instance.
42.10. This Lease shall not be binding upon Landlord unless and until
it is signed by Landlord and a signed copy thereof is delivered by Landlord to
Tenant.
ARTICLE 43
RIGHT OF FIRST REFUSAL
43.01. (a) For purposes of this Lease, the term "First Refusal Option
Space" shall mean the entire twenty-sixth (26th) and/or the entire twenty eight
(28th) floors of the Building as shown hatched on the plan annexed hereto as
Schedule C.
(b) Provided Tenant is not in default under the terms and
conditions of this Lease after notice and the expiration of applicable cure
periods, either as of the date of the giving of the "First Refusal Notice",
"Tenant's First Notice" or the "First Refusal Space Inclusion Date" (as such
terms are hereinafter defined), and subject to the following limitation of an
Outside Date, if Landlord shall receive an offer to let any portion of the First
Refusal Option Space (the "First Refusal Space Offer") from any party
("Prospective Tenant") other than the current tenant or any subsidiary,
affiliate, assignee or subtenant thereof (hereinafter called the "Current
Tenant") then provided such offer contemplates occupancy of the First Refusal
Option Space involved by no later than May 1, 2003 (the "Outside Date"), Tenant
shall, subject to the provisions of this Article 43, have the right to include
in the demised premises the First Refusal Option Space specified in the First
Refusal Space Offer. The First Refusal Option Space so included in the demised
premises shall be referred to herein as the "First Refusal Space". If the First
Refusal Space Offer is for one-half or less of the floor and the balance of the
floor is vacant and Tenant exercises its rights hereunder, Landlord may
designate as the First Refusal Space to be included in the demised premises a
unit of equal rentable area (plus or minus 500 feet) on the balance of the
floor. If the First Refusal Space Offer is for the entire twenty-eighth (28th)
floor or any portion thereof and the entire twenty-sixth (26th) floor or any
portion thereof of equal rentable area (plus or minus 500 feet) to the portion
specified in the First Refusal Space Offer is vacant, Landlord may designate as
the First Refusal Space to be included in the demised premises to be either the
entire twenty-sixth (26th) floor or the portion thereof of equal rentable area,
as the case may be. For the purposes of this Section 43.01(b), the twenty-sixth
(26th) floor shall be deemed to contain 13,100 rentable square feet and the
twenty-eighth (28th) floor shall be deemed to contain 13,500 rentable square
feet.
(c) If Tenant exercises its rights under this Article 43, all the
terms and conditions of this Lease (including the provisions of Article 3 hereof
with the base year periods specified therein, but excluding Article 44 hereof)
shall remain in full force and effect, except:
60
<PAGE>
(i) if the First Refusal Space Inclusion Date shall be
December 31, 1999 or earlier, (a) the fixed annual rent with respect to
the First Refusal Space shall be at the same annual rate on a per square
foot basis as the fixed annual rent for the demised premises as set forth
in Section 1.01, (b) Tenant shall be entitled to a Work Credit for the
First Refusal Space in the sum of $12.00 dollars per rentable square foot
subject to the payment provisions and restrictions specified in Article 44
hereof, and (c) Tenant shall be entitled to an abatement of the fixed
annual rent payable hereunder during a period commencing of the First
Refusal Space Inclusion Date and ending on the one hundred and fiftieth
day (150th) after the First Refusal Space Inclusion Date;
(ii) if the First Refusal Space Inclusion Date shall be
January 1, 2000 or later, the fixed annual rent with respect to the First
Refusal Space shall be at the rate of 100% of the fair market rent for the
First Refusal Space, as reasonably determined by Landlord, as of the date
the First Refusal Notice is delivered to Tenant and shall be set forth in
a written notice to Tenant, but in no event shall such fixed annual rent
applicable to the First Refusal Space be less than the product obtained by
multiplying (A) the monthly amount of fixed annual rent allocable to the
demised premises (determined on a rentable square foot basis) for the last
full calendar month prior to the First Refusal Space Inclusion Date (as
hereinafter defined) computed on an annualized basis without giving effect
to any abatement, credit or offset in effect, by (B) 12, and by (C) the
amount of rentable square feet included within the First Refusal Space
(hereinafter called the "First Refusal Space Escalated Rent");
(iii) Effective as of the First Refusal Space Inclusion Date
for purposes of calculating the additional rent payable pursuant to
Article 3 hereof allocable to the First Refusal Space, Tenant's Tax
Proportionate Share and Tenant's Operating Expense Proportionate Share
attributable to the First Refusal Space shall each be deemed to be the
fraction, expressed as a percentage, the numerator of which shall be the
number of rentable square feet included within the First Refusal Space,
and the denominator of which shall be 619,000 as to Tenant's Tax
Proportionate Share and 600,000 as to Tenant's Operating Expense
Proportionate Share; and
(iv) The term of this Lease shall be amended so that the
Expiration Date shall be the last day of the calendar month in which
occurs the day preceding the fifth (5th) anniversary of the First Refusal
Space Inclusion Date (the "Amended Expiration Date"). from the First
Inclusion Date until the Amended Expiration Date, Tenant shall pay fixed
annual rent as follows:
(i) for the demised premises, an amount equal to the fixed
annual rent set forth in Section 1.01; and
(ii) for the First Refusal Space, an amount as calculated
pursuant to Section 43.01(c)(i) or Section 43.01(c)(ii), as
the case may be.
61
<PAGE>
(c) Such offer shall be made by Landlord to Tenant in a written
notice (hereinafter called the "First Refusal Notice") which offer shall specify
the fixed annual rent payable with respect to the First Refusal Space,
determined in accordance with the provisions of Section 43.01(c) hereof.
(d) Tenant may accept the offer set forth in the First Refusal
Notice by delivering to Landlord an unconditional acceptance (hereinafter called
"Tenant's First Notice") of such offer within seven (7) days after delivery by
Landlord of the First Refusal Notice to Tenant. The First Refusal Space shall be
added to and included in the demised premises on the later to occur (herein
called the "First Refusal Space Inclusion Date") of (i) the day that Tenant
delivers the First Notice to Landlord, or (ii) the date such First Refusal Space
shall become available for Tenant's possession. Time shall be of the essence
with respect to the giving of Tenant's First Notice.
(e) If Tenant does not accept (or fails to timely accept) an offer
made by Landlord pursuant to the provisions of this Article 43 with respect to
the any floor comprising the First Refusal Option Space, then (i) Tenant shall
have no further rights with respect to said floor, (ii) Landlord shall be under
no further obligation to Tenant with respect to said floor, (iii) the provisions
of this Article 43 as they apply to said floor shall be automatically deleted
from this Lease, and (iv) Tenant shall have no further options or rights to said
floor.
(f) In the event that Tenant disputes the amount of the fair
market rent specified in the First Refusal Notice, then at any time on or before
the date occurring twenty (20) days after Tenant has received the First Refusal
Notice, and provided that Tenant shall have given Tenant's First Notice, Tenant
may initiate the arbitration process provided for herein by giving notice to
that effect to Landlord, and, if Tenant so initiates the arbitration process,
such notice shall specify the name and address of the person designated to act
as an arbitrator on its behalf. Within thirty (30) days after the Landlord's
receipt of notice of the designation of Tenant's arbitrator, Landlord shall give
notice to Tenant specifying the name and address of the person designated to act
as an arbitrator on its behalf. If Landlord fails to notify Tenant of the
appointment of its arbitrator within the time above specified, then Tenant shall
provide an additional notice to Landlord requiring Landlord's appointment of an
arbitrator within twenty (20) days after Landlord's receipt thereof. If Landlord
fails to notify Tenant of the appointment of its arbitrator within the time
specified by the second notice, the appointment of the second arbitrator shall
be made in the same manner as hereinafter provided for the appointment of a
third arbitrator in a case where the two arbitrators appointed hereunder and the
parties are unable to agree upon such appointment. The two arbitrators so chosen
shall meet within ten (10) days after the second arbitrator is appointed, and
if, within sixty (60) days after the second arbitrator is appointed, the two
arbitrators shall not agree upon a determination of the fair market rent for the
First Refusal Space, they shall together appoint a third arbitrator. In the
event of their being unable to agree upon such appointment within eighty (80)
days after the appointment of the second arbitrator, the third arbitrator shall
be selected by the parties themselves if they can agree thereon within a further
period of fifteen (15) days. If the parties do not so agree, then either
62
<PAGE>
party, on behalf of both and on notice to the other, may request such
appointment by the American Arbitration Association (or any organization
successor thereto) in accordance with its rules then prevailing or if the
American Arbitration Association (or such successor organization) shall fail to
appoint said third arbitrator within fifteen (15) days after such request is
made, then either party may apply, on notice to the other, to the Supreme Court,
New York County, New York (or any other court having jurisdiction and exercising
functions similar to those now exercised by said Court) for the appointment of
such third arbitrator. The majority of the arbitrators shall determine the fair
market rent for the First Refusal Space and render a written certified report of
their determination to both Landlord and Tenant within sixty (60) days of the
appointment of the first two arbitrators or sixty (60) days from the appointment
of the third arbitrator, if such third arbitrator is appointed pursuant to this
subparagraph (f), but in no event shall the fixed annual rent with respect to
the First Refusal Space be less than the First Refusal Space Escalated Rent. The
fair market rent shall reflect the base rent, work contribution, free rent and
other terms and concessions available in the Midtown Manhattan office space
market at the time of First Refusal Notice is sent to Tenant and shall base
their determination of the fair market rent on the term at which Landlord could
obtain the highest rental rate for the demised premises, even though such term
may be different than the number of years remaining in the term of this Lease on
the First Refusal Space Inclusion Date..
Each party shall pay the fees and expenses of the one of the two
original arbitrators appointed by or for such party, and the fees and expenses
of the third arbitrator and all other expenses (not including the attorneys
fees, witness fees and similar expenses of the parties which shall be borne
separately by each of the parties) of the arbitration shall be borne by the
parties equally.
Each of the arbitrators selected as herein provided shall have at
least ten (10) years experience in the leasing and renting of office space on
behalf of landlords in Midtown Manhattan.
(g) If Tenant fails to initiate the arbitration process within the
aforesaid twenty (20) day period, time being of the essence, then Landlord's
determination of the fixed annual rent set forth in the First Refusal Notice
shall be conclusive. In the event Landlord notifies Tenant that the fixed annual
rent for the First Refusal Space shall be the First Refusal Space Escalated
Rent, then the provisions of subparagraph (f) hereof shall be inapplicable.
(h) In the event the Tenant initiates the aforesaid arbitration
process and, as of the First Refusal Space Inclusion Date, the amount of the
fair market rent has not been determined, Tenant shall pay the amount determined
by Landlord to be the fair market rent for the First Refusal Space and when the
determination has actually been made, an appropriate retroactive adjustment
shall be made as of the First Refusal Space Inclusion Date.
63
<PAGE>
(i) The provisions of this Article 43 shall be effective only if,
on the date on which Tenant accepts possession of the First Refusal Space, the
Tenant named herein and only such Tenant is in actual occupancy of 75% of the
demised premises.
(j) Tenant agrees to accept the First Refusal Space in its
condition and state of repair existing as of the First Refusal Space Inclusion
Date and understands and agrees that Landlord shall not be required to perform
any work, supply any materials or incur any expense to prepare such space for
Tenant's occupancy, except as otherwise provided in Section 43.01(c)(i), if
applicable.
(k) The right of first refusal granted pursuant to Section 43.01
hereof shall be subject and subordinate to (a) any option, right of first offer,
right of first refusal, or other right to lease or occupy the First Refusal
Space, or portion thereof, granted by Landlord to any tenant in the Building or
any entity whatsoever other than Tenant on or before the date of this Lease, (b)
the election of any Current Tenant of the First Refusal Space to extend the term
of its lease with respect thereto, regardless of whether such election is made
pursuant to any provision included within said lease, and any option or right to
lease the First Refusal Space hereafter given by Landlord to any future lessee
or occupant of any portion of the First Refusal Space which shall have
previously been offered to Tenant pursuant to this Article 43 and as to which
Tenant shall not have given Landlord Tenant's First Notice.
(l) The termination of this Lease during the original term of this
Lease shall also terminate and render void all of Tenant's options or elections
under this Article 43, whether or not the same shall have been exercised; and
nothing contained in this Article 43 shall prevent Landlord from exercising any
right or action granted to or reserved by Landlord in this Lease to terminate
this Lease. None of Tenant's options or elections set forth in this Article 43
may be severed from this Lease or separately sold, assigned or transferred.
ARTICLE 44
WORK CREDIT
46.01. Landlord shall allow Tenant a credit not to exceed the amount
of $162,000.00 (hereinafter called the "Work Credit"), which credit shall be
applied solely against the cost and expense incurred in connection with the
performance of Tenant's alterations and improvements to prepare the demised
premises for Tenant's occupancy ("Tenant's Work"). A maximum of ten (10%)
percent of the Work Credit may be applied toward architectural, engineering, and
filing fees (hereinafter referred to as "Soft Costs"). The remaining portion of
the Work Credit shall be solely applied against the cost and expense of the
actual construction to be performed by Tenant in connection with the Tenant's
Work including, without limitation, Class E installation costs. In the event
that the cost and expense of the actual construction and
64
<PAGE>
the Soft Costs included in Tenant's Work shall exceed the amount of the Work
Credit, or in the event that the Soft Costs exceed ten (10%) percent of the Work
Credit, Tenant shall be entirely responsible for such excess. In the event that
the cost and expense of the actual construction and the Soft Costs included in
Tenant's Work shall be less than the Work Credit, the Work Credit shall be
adjusted accordingly. The Work Credit shall be payable to Tenant upon written
requisition in installments as Tenant's Work progresses, but in no event more
frequently than monthly. The amount of each installment of the Work Credit
payable pursuant to any such requisition shall be an amount equal to the product
obtained by multiplying the amount of the Work Credit by a fraction, the
numerator of which is equal to the actual costs paid by Tenant for completed
portions of Tenant's Work referenced in such requisition (as evidenced by the
invoices delivered to Landlord in accordance with the next sentence), and the
denominator of which is equal to the total estimated cost of Tenant's Work,
which estimate shall be made, and certified to, by Tenant's architect in good
faith based on the final plan. Prior to the payment of any such installment,
Tenant shall deliver to Landlord such written requisition for disbursement which
shall be accompanied by (1) invoices for the Tenant's Work performed since the
last disbursement, (2) a certificate signed by Tenant's architect or an officer
of Tenant certifying that the Tenant's Work represented by the aforesaid
invoices has been satisfactorily completed in accordance with the final plan,
(3) partial lien waivers by contractors, subcontractors and all materialmen for
all such work or, if then unavailable, for work covered by the prior
disbursement, and (4) with respect to the final disbursement of the Work Credit,
all Building Department sign-offs, inspection certificates and any permits
required to be issued by any governmental entities having jurisdiction
thereover. Within fifteen (15) business days after final completion of the
Tenant's Work, Tenant shall submit to Landlord a general release or final lien
waivers from all contractors and subcontractors performing Tenant's Work
releasing Tenant from all liability for any Tenant's Work.
46.02 At any and all times during the progress of Tenant's Work,
representatives of Landlord shall have the right of access to the demised
premises and inspection thereof and shall have the right to withhold all or any
portion of the Work Credit as shall equal the cost of correcting any portions of
Tenant's Work which shall not have been performed in a manner reasonably
satisfactory to Landlord; provided, however, that Landlord shall incur no
liability, obligation or responsibility to Tenant or any third party by reason
of such access and inspection except to the extent of Landlord's negligence or
wilful misconduct.
IN WITNESS WHEREOF, Landlord and Tenant have respectively executed
this Lease as of the day and year first above written.
ATTEST: 38-32 ASSOCIATES, Landlord
By:
- ------------------------------------ ------------------------------------
65
<PAGE>
ATTEST: 24/7 MEDIA, INC., Tenant
By:
- ------------------------------------ ------------------------------------
Tenant's Federal Tax Identification Number is .
-----------------------
66
<PAGE>
SCHEDULE A
Floor Plan
A-1
<PAGE>
SCHEDULE B
RULES AND REGULATIONS
I. Tenant shall not:
1. Obstruct, encumber or use, or allow or permit any of its
employees, agents, licensees or invitees to congregate in or on, the sidewalks,
driveways, entrances, passages, courts, arcades, esplanade areas, plazas,
elevators, vestibules, stairways, corridors or halls of the Building, outside of
the demised premises, or use any of them for any purposes other than for ingress
and egress to and from the demised premises.
2. Attach awnings or other projections to the outside walls of
the Building or place bottles, parcels or other articles, or lettering visible
from the exterior, on the windows, windowsills or peripheral air-conditioning
enclosures.
3. Attach to, hang on, or use in connection with, any exterior
window or entrance door of the demised premises, any blinds, shades or screens
which are not of a quality, type, design and color, or which are not attached in
a manner, approved by Landlord.
4. Place or leave any door mat or other floor covering in any
area outside of the demised premises.
5. Exhibit, inscribe, paint or affix any sign, insignia,
advertisement, object or other lettering in or on any windows, doors, walls or
part of the outside or inside of the Building (exclusive of the inside of the
demised premises), or in the demised premises if visible from the outside,
without Landlord's approval, except that the name(s) of Tenant and any permitted
sublessee may be displayed on the entrance doors of the premises occupied by
each, subject to Landlord's reasonable approval of the size, color and design of
such display and, if Landlord elects to perform such work, Tenant shall pay
Landlord for the performance of such work.
6. Cover or obstruct the sashes, sash doors, skylights, windows
and doors that reflect or admit light and air into the halls, passageways or
other public areas of the Building.
7. Place in, attach to, put in front of, or affix to any part of
the exterior of the Building, or any of its halls, doors, corridors or
vestibules, outside of the demised premises, any lettering, signs, decorations,
showcases, displays, display windows, packages, boxes or other articles.
8. Except in the normal decoration of the interior of the demised
premises, mark, paint, drill into, or in any way deface, any part of the
Building or the demised premises or cut, bore or string wires therein.
B-1
<PAGE>
9. Permit or allow bicycles, vehicles, animals, fish or birds of
any kind to be brought into or kept on or about the Building or the demised
premises.
10. Make, or permit or allow to be made, any unseemly or
disturbing noises, whether by musical instruments, recordings, radio, talking
machines, television, whistling, singing or in any other way, which might
disturb other occupants in the Building or those having business with them or
impair or interfere with the use or enjoyment by others of neighboring buildings
or premises.
11. Bring into or keep on any part of the demised premises or the
Building any inflammable, combustible, radioactive or explosive fluid, chemical
or substance except materials normally and customarily used in the operation of
Tenant's business.
12. Place upon any of the doors (other than closet or vault doors)
or windows in the Building any locks or bolts which shall not be operable by the
Grand Master Key for the Building, or make any changes in locks or the
mechanisms thereof which shall make such locks inoperable by said Grand Master
Key unless such change is approved by Landlord in which event Tenant shall give
Landlord duplicate keys for such locks or bolts.
13. Remove, or carry into or out of the demised premises or the
Building, any safes, freight, furniture, packages, boxes, crates or any bulky or
heavy objects except during such hours and in such elevators as Landlord may
reasonably determine from time to time.
14. Use any lighting in perimeter areas of the Building, other
than that which is standard for the Building or approved by Landlord, so as to
permit uniformity of appearance to those viewing the Building from the outside.
15. Engage or pay any employees on the demised premises except
those actually working for Tenant in the demised premises, or advertise for
laborers giving the demised premises as an address.
16. Obtain, permit or allow in the Building the purchase, or
acceptance for use in the demised premises, by means of a service cart, vending
machine or otherwise, of any ice, drinking water, food, tobacco in any form,
beverage, towel, barbering, boot blackening, cleaning, floor polishing or other
similar items or services from any persons, except such persons, during such
hours, and at such places within the Building and under such requirements as may
be determined by Landlord with respect to the furnishing of such items and
services, provided that the charges for such items and services by such persons
are not excessive.
17. Use, permit or allow any advertising or identifying sign which
Landlord shall have notified Tenant tends, in Landlord's judgment, to impair the
reputation of the Building or its desirability as a building for offices.
B-2
<PAGE>
18. Close and leave the demised premises at any time without
closing all operable windows and, if requested by Landlord, turning out all
lights.
19. Permit entrance doors to the demised premises to be left open
at any time or unlocked when the demised premises are not in use.
20. Encourage canvassing, soliciting or peddling in any part of
the Building or permit or allow the same in the demised premises.
21. Use, or permit or allow any of its employees, contractors,
suppliers or invitees to use, any space or part of the Building, including the
passenger elevators or public halls thereof, in the moving, delivery or receipt
of safes, freight, furniture, packages, boxes, crates, paper, office material or
any other matter or thing, any hand trucks, wagons or similar items which are
not equipped with such rubber tires, side guards and other safeguards which
shall have been approved by Landlord or use any such hand trucks, wagons or
similar items in any of the passenger elevators.
22. Cause or permit any food odors or any other unusual or
objectionable odors to exist in or emanate from the demised premises or permit
any cooking or preparation of food except in areas approved by Landlord and in
compliance with local ordinances.
23. Create or permit a public or private nuisance.
24. Throw or allow or permit to be thrown anything out of the
doors, windows or skylights or down the passageways of the Building.
25. Lay vinyl asbestos tile or other similar floor covering so
that the same shall come in direct contact with the floor or in a manner or by
means of such pastes or other adhesives which shall not have been approved by
Landlord, it being understood that if linoleum or other similar floor covering
is desired to be used, an interlining of builder's deadening felt shall be first
affixed to the floor, by a paste or other material which is soluble in water,
the use of cement or other similar adhesive material being expressly prohibited.
26. Use, allow or permit the passenger elevators to be used by
Tenant's working hands (persons in rough clothing handling packages, cartons and
shipments of material or mail) or persons carrying bulky packages or by persons
calling for or delivering mail or goods to or from the demised premises, and
Tenant shall cooperate with Landlord in enforcing this Rule on those making
deliveries to Tenant.
27. Request any of Landlord's agents, employees or contractors to
perform any work, or do anything, outside of their regular duties, unless
previously approved by the Building manager.
28. Invite to the demised premises or the Building, or permit the
visit of, persons in such numbers or under such conditions as to unreasonably
interfere with the use and
B-3
<PAGE>
enjoyment of any of the plazas, entrances, corridors, arcades, escalators,
elevators or other facilities of the Building by other occupants thereof.
29. Use, permit or allow the use of any fire exits or stairways
for any purpose other than emergency use.
30. Employ any firm, person or persons to move safes, machines or
other heavy objects into or out of the Building, without prior approval of
Landlord of such persons and the manner in which such items will be moved, which
approval shall not be unreasonably withheld.
31. Install or use any machines or machinery of any kind
whatsoever which may disturb any persons outside of the demised premises.
32. Use the water and wash closets or other plumbing fixtures for
any purpose other than those for which they were constructed, or allow or permit
sweepings, rubbish, rags, or other solid substances to be thrown therein.
33. Install any carpeting or drapes, or paneling, grounds or other
decorative wood products, in the demised premises, other than those wood
products considered furniture, which are not treated with fire retardant
materials and, in such event, shall submit, to Landlord's reasonable
satisfaction, proof or other reasonable certification of the materials
reasonably satisfactory fire retardant characteristics.
II. Tenant shall:
1. Pay Landlord for any damages, costs or expenses incurred by
Landlord with respect to the breach of any of the Rules and Regulations
contained in or provided by this Lease by Tenant, or any of its servants,
agents, employees, licensees or invitees, or the misuse by Tenant, or any of the
aforesaid, of any fixture or part of the demised premises or the Building and
shall cause its servants, agents, employees, licensees and invitees to comply
with the Rules and Regulations contained in or provided for by this Lease.
2. Upon the termination of this Lease, turn over to Landlord all
keys either furnished to, or otherwise procured by, Tenant with respect to any
locks used by Tenant in the demised premises or the Building and, in the event
of the loss of such keys, pay to Landlord the cost of procuring same.
3. Subject to the provisions of Article 27 hereof, refrain from,
and immediately upon receipt of notice thereof, discontinue any violation or
breach of the Rules and Regulations contained in or provided for by this Lease.
B-4
<PAGE>
4. Request Landlord to furnish passes to persons whom Tenant
desires to have access to the demised premises during times other than Business
Hours and be responsible and liable to Landlord for all persons and acts of such
persons for whom Tenant requests such passes.
5. Furnish artificial light and electrical energy (unless
Landlord shall furnish electrical energy as a service included in the rent) at
Tenant's expense for the employees of Landlord or Landlord's contractors while
doing janitorial or other cleaning services or while making repairs or
alterations in the demised premises.
6. Apply at the office of the Building's manager with respect to
all matters and requirements of Tenant which require the attention of Landlord,
its agents or any of its employees.
7. Pay Landlord's reasonable charges for the installation and
replacement of ceiling tiles removed for Tenant by telephone installers or
others in the demised premises and public corridors, if any.
8. Purchase from Landlord or Landlord's designee, at Landlord's
option, all lighting tubes, lamps, bulbs and ballasts used in the demised
premises and pay Landlord, or Landlord's designee, as the case may be, its
reasonable charges for the purchase and installation thereof.
9. Pay Landlord's reasonable charges for the hiring or providing
of security guards during times when Tenant, or any subtenant of Tenant, is
moving into or out of portions of the demised premises or when significant
quantities of furniture or other materials are being brought into or removed
from the demised premises.
III. Landlord shall:
1. Have the right to inspect all freight objects or bulky matter
(except printed matter) brought into the Building and to exclude from the
Building all objects and matter which violate any of the Rules and Regulations
contained in or provided by this Lease.
2. Have the right to require any person leaving the demised
premises with any package, or other object or matter, to submit a pass, listing
such package or object or matter, from Tenant.
3. In no way be liable to Tenant or any other party for damages
or loss arising from the admission, exclusion or rejection of any person or any
property to or from the demised premises or the Building under the provisions of
the Rules and Regulations contained in or provided for by this Lease.
B-5
<PAGE>
4. Have no liability or responsibility for the protection of any
of Tenant's property as a result of damage or the unauthorized removal of any
such property resulting wholly or in part from Landlord's failure to enforce, in
any particular instance, or generally, any of Landlord's rights.
5. Have the right to require all persons entering or leaving the
Building, during hours other than Business Hours, to sign a register and may
also exclude from the Building, during such hours, all persons who do not
present a pass to the Building signed by Landlord.
6. Furnish passes to persons for whom Tenant requests same.
7. Have the right to control and operate the public portions of
the Building and the public facilities, as well as facilities furnished for the
common use of other occupants, of the Building.
8. Have the right to remove any violation of Paragraph I items 2,
3, 4, 5, 6 or 7 of these Rules and Regulations without any right of Tenant to
claim any liability against Landlord, and have the right to impose a reasonable
charge against Tenant for removing any such violation or repairing any damages
resulting therefrom.
B-6
<PAGE>
SCHEDULE C
FIRST REFUSAL SPACE
B-7
------------------------------------------------------------------------
AGREEMENT AND PLAN OF MERGER
Among
INTERACTIVE IMAGINATIONS, INC.,
24/7 ACQUISITION CORP.,
PETRY INTERACTIVE, INC.
and
ADVERCOMM, INC.
Dated as of February 2, 1998
------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
Section Page
ARTICLE I THE MERGER......................................................... 1
SECTION 1.1. The Merger................................................ 1
SECTION 1.2. Effective Time............................................ 1
SECTION 1.3. Effect of the Merger...................................... 2
SECTION 1.4. Certificate of Incorporation; By-Laws..................... 2
SECTION 1.5. Directors and Officers.................................... 2
SECTION 1.6. Conversion of Securities.................................. 2
SECTION 1.7. Surrender and Payment..................................... 3
SECTION 1.8. Options and Restricted Shares............................. 3
SECTION 1.9. Closing................................................... 3
ARTICLE II REPRESENTATIONS AND WARRANTIES OF
INTERACTIVE AND THE SUBSIDIARY ........................................ 4
SECTION 2.1. Corporate Organization, Good Standing and Qualification... 4
SECTION 2.2. Capitalization............................................ 4
SECTION 2.3 Authority; Execution and Delivery; Requisite Consents,
Nonviolation............................................. 5
SECTION 2.4 Subsidiaries............................................. 6
SECTION 2.5 Financial Information.................................... 6
SECTION 2.6 Certain Changes or Events................................ 7
SECTION 2.7 Title to Assets.......................................... 7
SECTION 2.8 Contracts................................................ 8
SECTION 2.9 Intellectual Property.................................... 9
SECTION 2.10 Insurance................................................ 10
SECTION 2.11 Labor Union Activities; Employee Relations............... 10
SECTION 2.12 ERISA.................................................... 11
SECTION 2.13 Litigation............................................... 11
SECTION 2.14 Compliance with Laws; Permits............................ 11
SECTION 2.15 Taxes.................................................... 12
SECTION 2.16 Books and Records........................................ 12
SECTION 2.17 Environmental Matters.................................... 12
SECTION 2.18 Transactions with Affiliates............................. 13
SECTION 2.19 Registration Rights...................................... 13
SECTION 2.20 No Brokers or Finders.................................... 13
SECTION 2.21 Investment Company Act................................... 13
SECTION 2.22 Disclosure............................................... 13
SECTION 2.23 Public Announcements..................................... 14
SECTION 2.24. Board Recommendation..................................... 14
SECTION 2.25. Certificate of Incorporation and By-Laws................. 14
ARTICLE III REPRESENTATIONS AND WARRANTIES OF PETRY......................... 14
SECTION 3.1. Corporate Organization, Good Standing and Qualification.. 14
SECTION 3.2 Capitalization........................................... 14
SECTION 3.3. Authority; Execution and Delivery; Requisite Consents,
Nonviolation............................................. 15
SECTION 3.4 Subsidiaries............................................. 16
i
<PAGE>
SECTION 3.5. Financial Information.................................... 16
SECTION 3.6. Certain Changes or Events................................ 16
SECTION 3.7 Title to Assets.......................................... 17
SECTION 3.8. Contracts................................................ 17
SECTION 3.11. Labor Union Activities; Employee Relations............... 19
SECTION 3.12. ERISA.................................................... 20
SECTION 3.13 Litigation............................................... 20
SECTION 3.14 Compliance with Laws; Permits............................ 20
SECTION 3.15. Taxes.................................................... 20
SECTION 3.16. Books and Records........................................ 21
SECTION 3.17. Environmental Matters.................................... 21
SECTION 3.18. Transactions with Affiliates............................. 21
SECTION 3.19. Registration Rights...................................... 21
SECTION 3.20. No Brokers or Finders.................................... 21
SECTION 3.21. Investment Company Act................................... 22
SECTION 3.22 Disclosure............................................... 22
SECTION 3.23 Public Announcements..................................... 22
SECTION 3.24. Board and Stockholders Recommendation.................... 22
SECTION 3.25. Certificate of Incorporation and By-Laws................. 22
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF ADVERCOMM...................... 22
SECTION 4.1. Corporate Organization, Good Standing and Qualification.. 23
SECTION 4.2 Capitalization........................................... 23
SECTION 4.3. Authority; Execution and Delivery; Requisite Consents,
Nonviolation............................................. 23
SECTION 4.4 Subsidiaries............................................. 24
SECTION 4.5. Financial Information.................................... 24
SECTION 4.6. Certain Changes or Events................................ 25
SECTION 4.7 Title to Assets.......................................... 25
SECTION 4.8. Contracts................................................ 26
SECTION 4.9. Intellectual Property.................................... 27
SECTION 4.11. Labor Union Activities; Employee Relations............... 28
SECTION 4.12. ERISA.................................................... 28
SECTION 4.13 Litigation............................................... 28
SECTION 4.14 Compliance with Laws; Permits............................ 28
SECTION 4.15. Taxes.................................................... 29
SECTION 4.16. Books and Records........................................ 29
SECTION 4.17. Environmental Matters.................................... 29
SECTION 4.18. Transactions with Affiliates............................. 30
SECTION 4.19. Registration Rights...................................... 30
SECTION 4.20. No Brokers or Finders.................................... 30
SECTION 4.21. Investment Company Act................................... 30
SECTION 4.22 Disclosure............................................... 30
SECTION 4.23 Public Announcements..................................... 30
SECTION 4.24. Board and Stockholders Recommendation.................... 31
SECTION 4.25. Certificate of Incorporation and By-Laws................. 31
ARTICLE V COVENANTS OF THE PARTIES.......................................... 31
SECTION 5.1 Conduct of Business by the Parties Pending the Merger.... 31
SECTION 5.2 No Solicitation of Transactions.......................... 33
SECTION 5.3 Option Plans, Convertible Debt, Options, and Warrants.... 34
ii
<PAGE>
SECTION 5.4 Consents and Approvals................................... 34
SECTION 5.5 Directors' and Officers' Indemnification................. 34
SECTION 5.6 Reincorporation in Delaware.............................. 34
SECTION 5.7 Approval of Shareholders................................. 34
ARTICLE VI ADDITIONAL AGREEMENTS OF THE PARTIES............................. 35
SECTION 6.1 Access to Information; Confidentiality................... 35
SECTION 6.2 Notification of Certain Matters.......................... 35
SECTION 6.3 Further Action........................................... 35
SECTION 6.4 Public Announcements..................................... 36
SECTION 6.5 Government Compliance.................................... 36
ARTICLE VII CONDITIONS OF THE MERGER........................................ 36
SECTION 7.1 Conditions to Obligations of Each Party to
Effect the Merger........................................ 36
ARTICLE VIII TERMINATION, AMENDMENT, AND WAIVER............................. 38
SECTION 8.1 Termination.............................................. 38
SECTION 8.2 Effect of Termination.................................... 39
SECTION 8.3 Fees and Expenses........................................ 39
SECTION 8.4 Amendment................................................ 39
SECTION 8.5 Waiver................................................... 40
ARTICLE IX GENERAL PROVISIONS............................................... 40
SECTION 9.1 Survival of Representations, Warranties, and Agreements.. 40
SECTION 9.2 Notices.................................................. 40
SECTION 9.3 Headings................................................. 41
SECTION 9.4 Entire Agreement......................................... 41
SECTION 9.5 Parties in Interest; Assignment.......................... 41
SECTION 9.6 Governing Law............................................ 42
SECTION 9.7 Counterparts............................................. 42
SECTION 9.8 Severability............................................. 42
SECTION 9.9 Specific Performance..................................... 42
iii
<PAGE>
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER, dated as of February 2, 1998 (this
"Agreement"), among Interactive Imaginations, Inc., a New York corporation
("Interactive"), 24/7 Acquisition Corp., a Delaware corporation and a
wholly-owned subsidiary of Interactive (the "Subsidiary"), Petry Interactive,
Inc., a Delaware corporation ("Petry") and Advercomm, Inc. ("Advercomm"), a
Delaware corporation (each, a "Party," and collectively, the "Parties").
WHEREAS, the Boards of Directors of Interactive, the Subsidiary, Petry
and Advercomm have each approved the merger (the "Merger") of Petry and
Advercomm with and into the Subsidiary, in accordance with the General
Corporation Law of the State of Delaware ("Delaware Law") and upon the terms and
subject to the conditions set forth herein; and
WHEREAS, for federal income tax purposes, it is intended that the
Merger, as defined herein, shall qualify as a reorganization within the meaning
of Section 368(c) of the Internal Revenue Code of 1986, as amended (the "Code");
NOW, THEREFORE, in consideration of the foregoing and the mutual
covenants and agreements herein contained, and intending to be legally bound
hereby, Interactive, the Subsidiary, Petry and Advercomm hereby agree as
follows:
ARTICLE I
SECTION 1.1. The Merger
At the Effective Time (as defined in Section 1.2) and subject to and
upon the terms and conditions of this Agreement and Delaware Law, each of Petry
and Advercomm shall be merged with and into the Subsidiary, the separate
corporate existence of each of Petry and Advercomm shall cease, and the
Subsidiary shall continue as the surviving corporation. The Subsidiary as the
surviving corporation after the Merger is hereinafter sometimes referred to as
the "Surviving Corporation."
SECTION 1.2. Effective Time
As promptly as practicable after the satisfaction or waiver of the
conditions set forth in Article VII and after the Closing referred to in Section
1.8, the parties hereto shall cause the Merger to be consummated by delivering a
Certificate of Merger (the "Certificate of Merger") to the Secretary of State of
the State of Delaware, in such form as required by, and executed in accordance
with the relevant provisions of, Delaware Law, for filing by the Secretary of
State (the time of such filing being the "Effective Time").
1
<PAGE>
SECTION 1.3. Effect of the Merger
At the Effective Time, the effect of the Merger shall be as provided in
the applicable provisions of Delaware Law. Without limiting the generality of
the foregoing, and subject thereto, at the Effective Time all the rights,
privileges, powers, franchises, and property of Petry, Advercomm and the
Subsidiary shall vest in the Surviving Corporation, and all restrictions,
disabilities, duties, debts, and liabilities of Petry, Advercomm and the
Subsidiary shall become the restrictions, disabilities, duties, debts, and
liabilities of the Surviving Corporation.
SECTION 1.4. Certificate of Incorporation; By-Laws
At the Effective Time, the Certificate of Incorporation and By-Laws of
the Subsidiary shall be the Certificate of Incorporation and By-Laws of the
Surviving Corporation until thereafter amended, except that, effective as of the
Effective Time, such Certificate of Incorporation will be amended in order to
change the name of the Surviving Corporation to "24/7 Media, Inc."
SECTION 1.5. Directors and Officers
The directors of the Subsidiary immediately prior to the Effective Time
shall be the directors of the Surviving Corporation and the officers of the
Subsidiary immediately prior to the Effective Time shall be the officers of the
Surviving Corporation, in each case until their respective successors are duly
elected or appointed and qualified. The persons set forth on Schedule I.A.
hereto shall become directors of Interactive at the Effective Time. The persons
set forth on Schedule I.B. shall become the officers of Interactive at the
Effective Time.
SECTION 1.6. Conversion of Securities
At the Effective Time, by virtue of the Merger and without any action
on the part of the Subsidiary, Petry or Advercomm, or the holders of any of the
following securities:
(a) each share of common stock, par value $.01 per share, of Petry
("Petry Common Stock") then issued and outstanding shall be canceled and
converted into and become the right to receive 83,954.95 shares of Common Stock,
par value $.01 per share ("Interactive Common Stock"), of Interactive (an
aggregate of 10,494,366 shares of Interactive Common Stock) (the "Petry Merger
Consideration");
(b) each share of common stock, par value $.01 per share, of Advercomm
("Advercomm Common Stock") then issued and outstanding shall be canceled and
converted into and become the right to receive 1,049.44 shares of Interactive
Common Stock (an aggregate of 6,821,335 shares of Interactive Common Stock) (the
"Advercomm Merger Consideration"); and
(c) each share of common stock, par value $.01 per share, of the
Subsidiary issued and outstanding immediately prior to the Effective Time shall
be converted into and thereupon and thereafter shall represent one validly
issued, fully paid, and nonassessable share of common stock, par value $.01 per
share, of the Surviving Corporation.
2
<PAGE>
SECTION 1.7. Surrender and Payment
(a) Each holder of shares of common stock of Petry or Advercomm that
have been converted into a right to receive the Petry Merger Consideration or
Advercomm Merger Consideration, respectively, upon surrender at Closing of a
certificate or certificates representing such shares of Petry Common Stock or
Advercomm Common Stock, together with properly executed stock powers and stock
transfer stamps covering such shares of Petry Common Stock or Advercomm Common
Stock, will be entitled to receive the Petry or Advercomm Merger Consideration
payable in respect of such shares, which Petry or Advercomm Merger Consideration
shall be delivered at Closing.
(b) After the Effective Time, there shall be no further registration or
transfers of shares of Petry Common Stock or Advercomm Common Stock outstanding
prior to the Effective Time. All certificates representing shares of Petry
Common Stock or Advercomm Common Stock outstanding prior to the Effective Time
shall be presented to the Surviving Corporation at the Closing and shall be
cancelled and exchanged for the Petry Merger Consideration or Advercomm Merger
Consideration provided for, and in accordance with the procedures set forth, in
this Agreement.
(c) No fractional shares of Interactive Common Stock shall be issued
upon conversion of Petry Common Stock or Advercomm Common Stock into Interactive
Common Stock. In lieu of any fractional share of Interactive Common Stock to
which the holder of Petry Common Stock or Advercomm Common Stock would otherwise
be entitled, Interactive shall round down to the nearest whole share of
Interactive Common Stock.
SECTION 1.8. Closing.
The closing of the transactions contemplated by this Agreement (the
"Closing") shall take place at the offices of Proskauer Rose LLP, 1585 Broadway,
New York, New York, at 8:30 a.m., local time, on the day on which the conditions
set forth in Article VII hereof are satisfied or waived, or at such other place
and time and on such other date as Interactive, the Subsidiary, Petry and
Advercomm shall agree (the "Closing Date").
SECTION 1.9. Related Agreements. Prior to, or simultaneously with, the
Closing, the following agreements (the "Related Agreements") shall be executed
and delivered by the parties:
(a) Employment Agreements, substantially in the form attached hereto as
Exhibit A, between Interactive and each of the executives listed on Schedule
I.B. attached hereto;
(b) A Termination/Separation Agreement, substantially in the form
attached hereto as Exhibit B, between Interactive and Michael Paolucci;
(c) A Consulting Agreement, substantially in the form attached hereto
as Exhibit C, between Interactive and Neterprises, Inc.;
(d) A Letter Agreement, substantially in the form attached hereto as
Exhibit D, between Petry and Petry Media Corporation ("PMC"), setting forth the
understanding and agreement of Petry and PMC with respect to the treatment and
repayment of certain payments by Petry to PMC pursuant to Sections 5.4 and 5.6
of that certain Stock
3
<PAGE>
Purchase Agreement, dated as of September 29, 1997, between PMC and Interactive
Holdings, LLC.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF
INTERACTIVE AND THE SUBSIDIARY
Interactive and the Subsidiary hereby jointly and severally represent
and warrant to Petry and Advercomm that, except as set forth on the Schedule of
Exceptions attached hereto as Schedule II, specifically identifying the relevant
subsection hereof, which exceptions shall be deemed to be representations and
warranties as if made hereunder:
SECTION 2.1. Corporate Organization, Good Standing and Qualification
Interactive is a corporation duly organized, validly existing and in
good standing under the laws of the State of New York. The Subsidiary is a
corporation duly organized, validly existing and in good standing under the laws
of the State of Delaware. Interactive and the Subsidiary each have all requisite
power and authority to carry on its business as now conducted and as proposed to
be conducted. The Subsidiary is a newly formed corporation which has not engaged
in any business other than in connection with its organization and the
transactions contemplated by this Agreement. Interactive and the Subsidiary each
is duly qualified to transact business and in good standing in each jurisdiction
in which the failure so to qualify could have a Material Adverse Effect on its
business, properties, results of operations, earnings, assets, liabilities,
condition (financial or otherwise) or prospects (collectively, "Condition").
The term "Material Adverse Effect," as used in this Agreement with
respect to any Party, means any change or effect that is materially adverse to
the Condition of such Party.
SECTION 2.2. Capitalization
Without giving effect to the transactions contemplated by this
Agreement, the Stock Purchase Agreement, the Shareholders' Agreement, and the
Registration Rights Agreement, each as hereinafter defined, the capital stock of
Interactive, as authorized by its Certificate of Incorporation, consists of: (i)
30,000,000 shares of Common Stock, of which 4,595,047 shares are issued and
outstanding, 1,142,642 shares are reserved for issuance to key employees,
officers and directors of, and consultants to, Interactive under stock
incentives that have been granted or are available for grant by Interactive
(collectively, the "Stock Incentives"), 3,243,585 shares are reserved for
issuance pursuant to convertible debt securities of Interactive; 2,171,633
shares are reserved for issuance pursuant to issued and outstanding Series A
Stock (as hereinafter defined), 484,104 shares are reserved for issuance
pursuant to warrants to purchase common stock of Interactive, and no other
shares are reserved for any purpose; (ii) 2,000,000 shares of preferred stock,
of which 500,000 shares have been designated as Series A Convertible Preferred
Stock (the "Series A Stock"), 158,144 of which are outstanding. The rights,
privileges and preferences of the Common Stock and Series A Stock are as stated
in the Certificate of Incorporation. Neither this Agreement nor the transactions
contemplated thereby will cause any anti-dilution adjustment or accelerated
vesting of any options. Assuming receipt by Interactive of the consents,
4
<PAGE>
approvals and agreements contemplated by Section 5.3 herein as of the Closing,
Interactive will have 10,494,369 shares of Common Stock outstanding, and except
for the Stock Incentives specified above and 2,500,000 Warrants to be issued in
connection with the Termination Agreement contemplated by Section 1.9(b) above,
will not (i) have outstanding any capital stock or other securities convertible
into or exchangeable for any shares of its capital stock and no person will have
any right to subscribe for or to purchase (including conversion or preemptive
rights), or any options for the purchase of, or any agreements providing for the
issuance (contingent or otherwise) of, any calls, commitments or other claims of
any character relating to, any capital stock or any stock or securities
convertible into or exchangeable for any capital stock of Interactive; (ii) have
any capital stock, equity interests or other securities reserved for issuance
for any purpose; or (iii) be subject to any obligation (contingent or otherwise)
to repurchase or otherwise acquire or retire any shares of its capital stock or
any convertible securities, rights or options of the type described in the
preceding clause (i). All of the issued and outstanding shares of Common Stock
have been duly and validly issued and, subject to Section 630 of the New York
Business Corporation Law, are fully paid and nonassessable. To the best
knowledge of Interactive, there are no agreements among Interactive's
shareholders with respect to the voting or transfer of Interactive's capital
stock. Part 2.2 of Schedule II includes a complete and correct list of the name
of each of Interactive's shareholders and the number of shares of capital stock
(and class or series) owned by such shareholder, the name of each holder of an
outstanding stock option and/or warrant and the number of options and/or
warrants to purchase capital stock owned by such holder and the exercise price
at which such option(s) or warrants may be exercised, and the name of each
holder of convertible debt securities of Interactive, the face amount of such
securities, and the number of shares of Interactive Common Stock issuable upon
conversion of such debt securities. The authorized capital stock of the
Subsidiary consists of 1,000 shares of common stock, of which 100 are
outstanding as of the date hereof. Interactive owns all of the issued and
outstanding shares of the Subsidiary.
SECTION 2.3 Authority; Execution and Delivery; Requisite Consents,
Nonviolation
Interactive and the Subsidiary have, and as of the Closing will have,
all requisite power and authority to execute, deliver and perform this Agreement
and each other document or instrument executed by them, or any of their
officers, in connection herewith or pursuant hereto (this Agreement, together
with all of the foregoing documents and instruments, are sometimes collectively
referred to herein as the "Interactive Documents"), and to consummate the
transactions contemplated hereby. The execution, delivery and performance of
this Agreement and the other Interactive Documents and the consummation of the
transactions contemplated hereby and thereby have been duly and validly
authorized by all necessary action on the part of Interactive and the
Subsidiary. This Agreement and each of the other Interactive Documents that has
been executed as of the date hereof is, and each of the Interactive Documents
will be as of the Closing, duly executed and delivered by Interactive and the
Subsidiary, and constitute the legal, valid and binding obligation of
Interactive and the Subsidiary, enforceable against Interactive and the
Subsidiary in accordance with its terms, except as the enforceability thereof
may be limited by bankruptcy, insolvency or other similar laws affecting the
enforceability of creditors' rights in general or by general principles of
equity. The execution, delivery and performance of this Agreement and the other
Interactive Documents, and the consummation by Interactive and the Subsidiary of
the transactions contemplated hereby and thereby will not (a) require the
consent, license, permit, waiver, approval, authorization or other action of, by
or with respect to, or registration, declaration or filing with, any court or
governmental authority,
5
<PAGE>
department, commission, board, arbitrator, bureau, agency or instrumentality,
domestic or foreign ("Governmental Authority") or any other individual,
partnership, corporation, unincorporated organization or association, limited
liability company, trust or other entity (collectively, a "Person"); (b) violate
or conflict with any provision of the Certificate of Incorporation or of the
By-Laws of Interactive or the Subsidiary as in effect immediately prior to the
execution and delivery of this Agreement; or (c) constitute a default under
(with or without notice or lapse of time or both), violate or conflict with,
give rise to a right of termination, cancellation, acceleration or modification
under or result in a loss of a material benefit under, any Law (as defined in
Section 2.14 below), Interactive Scheduled Contract (as defined in Section 2.8
below), rights relating to Intellectual Property (as defined in Section 2.9
below), Permit (as defined in Section 2.14 below) or Order (as defined in
Section 2.13 below) to which Interactive or the Subsidiary is a party or by
which Interactive, the Subsidiary, or their properties are bound.
SECTION 2.4 Subsidiaries
Interactive does not, and prior to the Closing will not, own or
control, directly or indirectly, any partnership interests, stock or other
equity interests in any partnership, corporation or other entity or any voting
rights or right to control the policies and direction of any partnership,
corporation or other entity, other than the Subsidiary. The Subsidiary does not,
and prior to the Closing will not, own or control, directly or indirectly, any
partnership interests, stock or other equity interests in any partnership,
corporation or other entity or any voting rights or right to control the
policies and direction of any partnership, corporation or other entity.
SECTION 2.5 Fiancial Information
Interactive has previously delivered to Petry and Advercomm its
historical audited balance sheets as at December 31, 1996, and the historical
audited statements of income, shareholders' equity and cash flows for the year
then ended (collectively, the "Financial Statements"). Such Financial Statements
have been prepared from the books and records of Interactive and present fairly
the financial position and the results of operations and cash flows of
Interactive as at and for the periods indicated, in each case in conformity with
generally accepted accounting principles ("GAAP") consistently applied (except
as described in such statements or the notes thereto).
Interactive has previously delivered to Petry and Advercomm an
historical unaudited balance sheet of Interactive as at September 30, 1997 and
an historical unaudited statement of income, shareholders' equity and cash flows
for the nine-month period then ended (the "Interim Financial Statements"). Such
Interim Financial Statements have been prepared from the books and records of
Interactive and, subject to customary year or period end adjustments and
accruals and the absence of notes thereto, present fairly the financial position
and the results of operations of Interactive as at and for the period indicated,
in each case in conformity with GAAP (except as previously noted) consistently
applied.
Except as disclosed in the Financial Statements or Interim Financial
Statements, Interactive has no material liabilities or obligations, absolute or
contingent, except (i) obligations and liabilities incurred in the ordinary
course of business, consistent with past practice, since the date of the Interim
Financial Statements, and (ii) obligations which are not required to be
reflected in the Financial Statements or such Interim Financial Statements and
which would not be required under GAAP to be included in the notes to such
Financial
6
<PAGE>
Statements, which individually or in the aggregate are not material to the
financial condition or operating results of Interactive. Except as disclosed in
the Financial Statements or Interim Financial Statements, Interactive is not a
Guarantor or Indemnitor of any Indebtedness of any other Person. Interactive
maintains and will continue to maintain a standard system of accounting
established and administered in accordance with GAAP.
No representation is made hereunder with respect to any forecasts,
projections or forward looking information provided in connection with the
Financial Statements or the Interim Financial Statements or otherwise, except
that Interactive represents that such forecasts, projections and forward looking
information were prepared in good faith and that Interactive reasonably believes
there is a reasonable basis for such forecasts, projections and forward looking
information.
SECTION 2.6 Certain Change or Events
Other than transactions entered into in connection with this Merger,
since October 1, 1997, the business of Interactive has been operated only in the
ordinary course, consistent with past practice, and in addition to, and not in
limitation of the foregoing: (i) there has been no change in the Condition of
Interactive, except for changes in the ordinary course of business consistent
with past practice which have not had, in the aggregate, a Material Adverse
Effect to Interactive; (ii) there has been no revocation or change in any
Contract or Permit or right to do business, and, to the best knowledge of
Interactive, no change of Laws which has resulted, or could reasonably be
expected to result, in a Material Adverse Effect on the Condition of
Interactive; (iii) Interactive has not authorized or made any distributions of,
or declared or paid any dividends, upon or with respect to any of its capital
stock, or other equity interests, nor has Interactive redeemed, purchased or
otherwise acquired, or issued or sold, any of its capital stock or other equity
interests; (iv) Interactive has not entered into any material transaction, other
than in the ordinary course of business and consistent with past practice; (v)
Interactive has not incurred any indebtedness for borrowed money or made any
loans or advances to any Person, except for Indebtedness incurred and intended
to be converted to Common Shares of the Company on or prior to the Closing Date;
(vi) there has been no waiver by Interactive of a valuable right or of a
material debt owed to it; (vii) Interactive has not failed to satisfy or
discharge any Lien (as defined in Section 2.7 below), except in the ordinary
course of business and which is not material to the Condition of Interactive;
(viii) there has not been any damage, destruction or loss, whether or not
covered by insurance, resulting in a Material Adverse Effect on the Condition of
Interactive (as such business is presently conducted and as it is proposed to be
conducted); (ix) there has not been any material change in any compensation
arrangement or agreement with any employee of Interactive; (x) there has not
been any sale, assignment or transfer of any patents, trademarks, copyrights,
trade secrets or other intangible assets of Interactive; (xi) there has not been
any resignation or termination of employment of any key officer or employee of
Interactive and Interactive, to the best of its knowledge, does not know of the
impending resignation or termination of employment of any such officer or
employee; (xii) there has been no receipt of notice that there has been a loss
of, or material order cancellation by, any major customer of Interactive; (xiii)
there has been no mortgage, pledge or transfer of a security interest in, or
lien, created by Interactive with respect to any of its material properties or
assets, except liens for taxes not yet due or payable; (xiv) there has been no
loans or guarantees made by Interactive to or for the benefit of its employees,
officers or directors, or any members of their immediate families, other than
travel advances and other advances made in the ordinary course of its business;
and (xv) there has been no agreement or commitment by Interactive to do or
perform any of the acts described in this Section 2.6.
7
<PAGE>
SECTION 2.7 Title to Assets
Interactive and the Subsidiary have good and marketable title to all of
their assets and properties, free and clear of any liens, pledges, assessments,
leases, security interests, claims, encumbrances or other restrictions of any
kind (collectively, "Liens"). With respect to any assets or properties they
lease, Interactive and the Subsidiary hold a valid and subsisting leasehold
interest therein, free and clear of any Liens, are in compliance, in all
material respects, with the terms of the applicable lease, and enjoy peaceful
and undisturbed possession under such lease. The assets and properties of
Interactive and the Subsidiary that are material to the conduct of business as
presently conducted or as proposed to be conducted by Interactive and the
Subsidiary are on an overall basis in good operating condition and repair,
subject to ordinary wear and tear.
SECTION 2.8 Contracts
Interactive and the Subsidiary are not parties to, nor is Interactive,
the Subsidiary, or any of their assets or properties bound by, or subject to,
any contracts, agreements, notes, instruments, franchises, leases, licenses,
commitments, arrangements or understandings, written or oral (collectively,
"Contracts") of the following types, except for those (the "Scheduled
Contracts") listed in Part 2.8 of Schedule II hereto:
(a) any Contracts pursuant to which Interactive or the
Subsidiary, or another party thereto, is obligated to pay in excess of
fifty thousand dollars ($50,000);
(b) any Contracts pursuant to which Interactive or the
Subsidiary acquired the right to use any Intellectual Property (as
defined in Section 2.9 below) or information that is material to or
necessary in the business of Interactive or the Subsidiary, or pursuant
to which Interactive or the Subsidiary has granted to others the right
to use, or which otherwise relates to, its Intellectual Property;
(c) any Contracts (other than advances of expenses to
employees in the ordinary course of business) involving loans, loan
agreements, debt securities, mortgages, deeds of trust, security
agreements, suretyships or guarantees;
(d) any Contracts between Interactive, on the one hand, and
any of its officers, directors, employees or any Persons that
beneficially own in excess of 10.0% of the outstanding equity interest
(each a "Principal Owner") of Interactive, or any Affiliate or
relative, or Affiliate of a relative, of any of the foregoing, on the
other; ("Affiliate" of a person means a person that directly or
indirectly, through one or more intermediaries, controls, is controlled
by, or is under common control with, the first mentioned person, and
"control" means the possession, directly or indirectly or as trustee or
executor, of the power to direct or cause the direction of the
management policies of a person, whether through the ownership of
stock, as trustee or executor, by contract or credit arrangement or
otherwise);
(e) any deferred compensation agreements, bonus, pension,
profit sharing, stock option and incentive plans or arrangements,
hospitalization, medical and insurance plans, agreements and policies,
retirement and severance plans and other employee compensation policies
and agreements affecting employees of Interactive or the Subsidiary;
8
<PAGE>
(f) any Contracts with any labor union affecting employees of
Interactive or the Subsidiary;
(g) all partnership, joint venture, shareholders' or similar
Contracts with any Person;
(h) all Contracts that limit or contain restrictions on the
ability of Interactive or the Subsidiary to declare or pay dividends,
to make distributions in respect of or to issue or purchase, redeem or
otherwise acquire any of its capital stock or require the Company or
any Subsidiary to maintain specified financial ratios or levels of net
worth or other indicia of financial condition;
(i) any Contracts which restrict Interactive or the Subsidiary
from freely engaging in business or competing anywhere; and
(j) any Contracts which otherwise are material to the
Condition of Interactive or the Subsidiary.
True and correct copies of all Scheduled Contracts have been made
available to Petry and Advercomm. All of the Scheduled Contracts are in full
force and effect and constitute legal, valid and binding obligations of
Interactive and the Subsidiary and, to the best knowledge of Interactive and the
Subsidiary, the other parties thereto; to the best of Interactive's and the
Subsidiary's knowledge, no circumstances exist which would give rise to an
Action (as defined in Section 2.13) against or by Interactive or the Subsidiary
in connection with any Scheduled Contract or any default thereunder; and the
validity, effectiveness and continuation of all Scheduled Contracts will not be
adversely affected by the transactions contemplated by this Agreement or require
any third party consents.
SECTION 2.9 Intellutual Property
(i) With respect to any patents, trademarks, service marks, trade
names, and any applications for any of the foregoing (collectively, the
"Intellectual Property") of any kind in which Interactive has an interest or
which is otherwise used in, or relates to the business of, Interactive, or any
brand name, computer software or program, technology, know-how or process or
registered copyright (collectively (including without limitation the
Intellectual Property), the "Operating IP") or trade secret that is used in or
that relates to its business, Interactive owns or has the right to use such
Operating IP or trade secret in its business. Interactive owns or has the right
to use all Operating IP and trade secrets that are necessary to its business.
(ii) Each of the material licenses or agreements relating to the rights
of Interactive to any of the Operating IP (defined above) or any trade secret
material of Interactive (the "Intellectual Property Licenses") constitutes a
legal, valid, binding and enforceable obligation in accordance with its terms
against Interactive, and, to the best knowledge of Interactive, each other party
thereto, and to the best knowledge of Interactive is in full force and effect.
Interactive has performed all obligations required to have been performed by it
under each of the Intellectual Property Licenses to which it is a party. Neither
Interactive nor, to the best knowledge of Interactive, any other party thereto
is in default thereunder, nor, to the best knowledge of Interactive, is there
any event that with notice or lapse of time, or both, would constitute a default
thereunder. Interactive has not received any notice that any other party to any
of the Intellectual Property Licenses intends
9
<PAGE>
to cancel, terminate or refuse to renew the same or to exercise or decline to
exercise any option or other right thereunder (other than in the ordinary course
of business). No licenses, sublicenses, covenants or agreements have been
granted or entered into by Interactive in respect of any of the Operating IP or
any material trade secret of Interactive, except the Intellectual Property
Licenses. No director, officer, shareholder, employee or other Affiliate of
Interactive owns, directly or indirectly, in whole or in part, any of the
Operating IP or any trade secret material used by Interactive. To the best
knowledge of Interactive, none of the officers, employees, consultants,
distributors, agents, representatives or advisors of Interactive have entered
into any agreement relating to Interactive's business regarding know-how, trade
secrets, assignment of rights in inventions, or prohibition or restriction of
competition or solicitation of customers, or any other similar restrictive
agreement or covenant, whether written or oral, with any Person other than
Interactive.
(iii) The consummation of the transactions contemplated hereby will not
alter or impair the rights of Interactive to any of the Operating IP, to any
trade secret material to Interactive, or under any of the Intellectual Property
Licenses.
(iv) To the best knowledge of Interactive, no claim with respect to the
Operating IP, any trade secret or any Intellectual Property License is currently
pending or has been asserted or overtly threatened by any Person, nor does
Interactive know of any grounds for any claim, (A) to the effect that any
operation or activity of Interactive presently occurring or contemplated
infringes or misappropriates any United States or foreign copyright, patent,
trademark, service mark or trade secret; (B) to the effect that any other Person
infringes on the Operating IP or misappropriates any trade secret or know-how or
other proprietary rights of Interactive; (C) challenging the ownership, validity
or effectiveness of any of the Operating IP or any trade secret of Interactive;
or (D) challenging the license of Interactive to, or other legally enforceable
right under, any Operating IP or the Intellectual Property Licenses.
(v) Interactive is not aware of any presently existing United States or
foreign patents or any patent applications which, if issued as patents, would be
infringed by Interactive in connection with conducting its business in the usual
course.
SECTION 2.10 Insurance
Interactive has in full force and effect fire and casualty insurance
policies, with extended coverage, general liability insurance, and directors'
and officers' insurance in amounts customary for companies similarly situated.
Each insurance policy is valid and binding and in full force and effect, no
premiums due thereunder have not been paid and neither Interactive, any
Subsidiary nor the Person to whom such policy has been issued has received any
notice of cancellation or termination in respect of any such policy or is in
default thereunder. Such insurance policies are placed with financially sound
and reputable insurers and, in light of the respective business, operations and
assets and properties of Interactive, are in amounts and have coverages that are
reasonable and customary for Persons engaged in such businesses and operations
and having such assets and properties. Neither Interactive nor the Person to
whom such policy has been issued has received notice that any insurer under any
policy referred to in this Section is denying liability with respect to a claim
thereunder or defending under a reservation of rights clause.
10
<PAGE>
SECTION 2.11 Labor Union Activities: Employee Relations
No employee of Interactive is represented by any labor union or covered
by any collective bargaining agreement in connection with their employment with
Interactive; nor, to the best knowledge of Interactive, has any labor union
sought to represent any employee of Interactive. There is no strike or other
labor dispute involving Interactive pending, or to the best knowledge of
Interactive, threatened. To the best knowledge of Interactive, no officer or key
employee of Interactive is a party to or bound by any Contract, or subject to
any restrictions (including, without limitation, any non-competition
restriction), which would restrict the right of such person to participate in
the affairs of Interactive.
SECTION 2.12 ERISA
There are no employee benefit plans (as defined in Section 3(3) of the
Employee Retirement Income Security Act of 1974 ("ERISA")) covering former or
current employees of Interactive or the Subsidiary, or under which Interactive
or the Subsidiary has any obligation or liability. Interactive and the
Subsidiary have not incurred any liability under Title IV of ERISA, including
any liability to the Pension Benefit Guaranty Corporation. Part 2.12 of Schedule
II lists all material plans, contracts, bonus and commission arrangements,
profit-sharing, savings, stock option plans, insurance, deferred compensation,
or other similar fringe or employee benefits covering former or current
employees of Interactive or under which Interactive has any obligation or
liability (each, a "Benefit Arrangement"). The Benefit Arrangements are and have
been administered in substantial compliance with their terms and with the
requirements of applicable law. No unfair labor practice has been brought during
the last three years against Interactive.
SECTION 2.13 Litigation
There is no action, suit, proceeding, audit, arbitration, investigation
or governmental approval process (collectively, "Action") pending or, to the
best knowledge of Interactive and the Subsidiary, threatened against, relating
to or affecting Interactive or the Subsidiary or affecting any of the properties
or assets of Interactive or the Subsidiary (including, without limitation, any
of their Permits), nor, to the best knowledge of Interactive and the Subsidiary,
is there any basis for any such Action. Neither Interactive and the Subsidiary
nor any of their assets or properties are subject to any order, judgment, writ,
injunction, decree, ruling or decision (collectively, an "Order") of any
Governmental Authority which is material to the Condition of Interactive or the
Subsidiary. There is no Action by Interactive or the Subsidiary currently
pending or which Interactive or the Subsidiary intends to initiate.
SECTION 2.14 Compliance with Laws; Permits
Interactive and the Subsidiary have not violated or failed to comply
with, in any material respect, any statute, law, ordinance, rule, regulation or
policy of any Governmental Authority (collectively, "Laws") to which they or any
of their properties or assets are subject. Interactive and the Subsidiary have
all permits, licenses, orders, certificates, authorizations and approvals of any
Governmental Authority (collectively, the "Permits") that are material to the
conduct of their business as presently conducted and as proposed to be
conducted. All such Permits are, and as of the Closing will be, in full force
and effect. No violations or notices of failure to comply have been issued or
recorded in respect of any such Permits. All applications, reports, notices and
other documents required to be filed by Interactive or the
11
<PAGE>
Subsidiary with all Governmental Authorities have been timely filed and are
complete and correct in all material respects as filed or as amended prior to
the date hereof.
SECTION 2.15 Taxes
All federal, state, city, county, local and foreign income, franchise,
sales, use and value added tax returns and reports, and all other material tax
returns and reports required to be filed by Interactive in those or in any other
jurisdiction (collectively, "Returns") have been timely filed. All such Returns
are true, correct and complete in all material respects. All taxes, assessments,
fees, interest, penalties and other charges with respect thereto (collectively,
"Taxes") due or claimed to be due from Interactive or the Subsidiary have been
paid except to the extent reserved against on the Financial Statements or
incurred in the ordinary course of business since the date of the Interim
Financial Statements. No income tax return of Interactive has been audited by
the applicable Governmental Authority, and there are in effect no waivers of the
applicable statute of limitations for Taxes in any jurisdiction for Interactive
or the Subsidiary for any period. The provision for taxes of Interactive as
shown in the Interim Financial Statements is adequate for taxes due or accrued
as of the date thereof. Neither Interactive nor the Subsidiary has elected
pursuant to the Internal Revenue Code of 1986, as amended (the "Code"), to be
treated as a Subchapter S corporation or a collapsible corporation pursuant to
Section 1362(a) or Section 341(f) of the Code, nor have they made any other
elections pursuant to the Code (other than elections that relate solely to
methods of accounting, depreciation or amortization) that would have a Material
Adverse Effect on the Condition of Interactive. Interactive has never had any
tax deficiency proposed or assessed against it. Since the date of the Interim
Statements, Interactive has made adequate provisions on its books of account for
all taxes, assessments and governmental charges with respect to its business,
properties and operations for such period. Interactive has withheld or collected
from each payment made to each of its employees, the amount of all taxes
(including, but not limited to, federal income taxes, Federal Insurance
Contribution Act taxes and Federal Unemployment Tax Act taxes) required to be
withheld or collected therefrom, and has paid the same to the proper tax
receiving officers or authorized depositories.
SECTION 2.16 Book and Records
The books of account, ledgers and records of Interactive and the
Subsidiary accurately and completely reflect in all material respects all
information relating to their business; the nature, acquisition, maintenance,
location and collection of their assets; and the nature of all transactions
giving rise to their obligations or accounts receivable. The minutes and minute
books of Interactive and the Subsidiary provided to Petry and Advercomm prior to
the date hereof constitute a true, complete and correct copy of the entire
minutes and minute books of Interactive and the Subsidiary.
SECTION 2.17 Evironmental Matters
The business, assets and properties of Interactive are and have been
operated and maintained in compliance with all applicable federal, state, city,
county and local environmental protection laws and regulations (collectively,
the "Environmental Laws"). No event has occurred which, with or without the
passage of time or the giving of notice, or both, would constitute a
non-compliance by Interactive with, or a violation by Interactive of, the
Environmental Laws. Neither Interactive nor any of its predecessor companies
have caused or permitted to exist, as a result of an intentional or
unintentional act or omission, a
12
<PAGE>
disposal, discharge or release of solid wastes, pollutants or hazardous
substances, on or from any site which currently is or formerly was owned,
leased, occupied or used by Interactive or any predecessor company, except where
such disposal, discharge or release was in compliance with the Environmental
Laws.
SECTION 2.18 Transaction with Affiliates
Interactive and the Subsidiary do not have any direct or indirect
dealings with any Principal Owner of Interactive or the Subsidiary or with any
of his Affiliates, associates (as such term is defined in Rule 12b-2 under the
Securities Exchange Act of 1934, as amended) or relatives (or Affiliates
thereof). Interactive and the Subsidiary do not have any obligation to or claim
against any Principal Owner of Interactive or the Subsidiary, or any of his or
its Affiliates, associates or relatives, and no such Person has any obligation
to or claim against Interactive or the Subsidiary. All products, services or
benefits provided to Interactive or the Subsidiary by any such Person, or
provided by Interactive or the Subsidiary to any such Person, are set forth on
Part 2.18 of Schedule II and are provided at a charge equal to the fair market
value of such products, services or benefits. To the best knowledge of
Interactive and the Subsidiary, no Principal Owner of Interactive or the
Subsidiary, nor any of his Affiliates, associates or relatives, has any direct
or indirect interest of any kind in any business or entity which is competitive
with Interactive or the Subsidiary.
SECTION 2.19 Registration Rights
No Person has, and as of the Closing no Person shall have, demand,
"piggy-back," or other rights to cause Interactive or the Subsidiary to file any
registration statement under the Securities Act of 1933, as amended (the
"Securities Act") relating to any securities of Interactive or the Subsidiary.
SECTION 2.20 No Brokers or Finders
Neither Interactive and the Subsidiary nor any of their Affiliates have
entered or will enter into any agreement pursuant to which Interactive, the
Subsidiary, Petry or Advercomm will be liable, as a result of the transactions
contemplated by this Agreement or any Interactive Documents, for any claim of
any person for any commission, fee or other compensation as finder or broker.
SECTION 2.21 Investment Company Act
Neither Interactive nor the Subsidiary is an "investment company" nor
is Interactive or the Subsidiary directly or indirectly controlled by or acting
on behalf of any Person which is an "investment company" within the meaning of
the Investment Company Act of 1940, as amended.
SECTION 2.22 Disclosure
In connection with this Agreement, Interactive and the Subsidiary have
disclosed to Petry and Advercomm all material facts and information known to
Interactive and the Subsidiary concerning Interactive and the Subsidiary and
their respective Conditions, and have not made any untrue statement of a
material fact or omitted to state any material fact necessary in order to make
the statements contained herein or in any other Interactive Documents not
misleading.
13
<PAGE>
SECTION 2.23 Public Announcements.
Except as otherwise required by law or by the rules of (or any agreement of
the parties or their affiliates with) any stock exchange and except as have
already been made by the parties prior to the date hereof, Interactive and the
Subsidiary agree that there will prior to the Merger be no press releases or
other statements with respect to this Agreement or the transactions contemplated
hereby and that they will consult with Petry and Advercomm before issuing any
press release or otherwise making any public statement with respect to this
Agreement and the transactions contemplated hereby and that Interactive, the
Subsidiary, Petry and Advercomm shall not issue any such press release or make
any such public statement prior to such consultation and approval of any such
release or statement by the other Parties.
SECTION 2.24. Board Recommendation.
Each of the Board of Directors of Interactive, by unanimous written consent
dated February 2, 1998, and the Board of Directors of the Subsidiary by
unanimous written consent dated January 29, 1998, approved and adopted this
Agreement, the Merger, and the other transactions contemplated hereby.
SECTION 2.25. Certificate of Incorporation and By-Laws.
Interactive and the Subsidiary have heretofore furnished to Petry and
Advercomm a complete and correct copy of their respective Certificates of
Incorporation and By-Laws, each as amended to date. Such Certificates of
Incorporation and By-Laws are in full force and effect. Neither Interactive nor
the Subsidiary is in violation of any of the provisions of its Certificate of
Incorporation or By-Laws.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF PETRY
Petry hereby represents and warrants to Interactive, the Subsidiary and
Advercomm that, except as set forth on the Schedule of Exceptions attached
hereto as Schedule III, specifically identifying the relevant subsection hereof,
which exceptions shall be deemed to be representations and warranties as if made
hereunder:
SECTION 3.1. Corporate Organization, Good Standing and Qualification.
Petry is a corporation duly organized, validly existing and in good
standing under the laws of the State of Delaware. Neither this Agreement nor the
transactions contemplated thereby will cause any anti-dilution adjustment or
accelerated vesting of any options. Petry has all requisite power and authority
to carry on its business as now conducted and as proposed to be conducted. Petry
is duly qualified to transact business and is in good standing in each
jurisdiction in which the failure so to qualify could have a material adverse
effect on its Condition.
14
<PAGE>
SECTION 3.2 Capitalization.
The capital stock of Petry, as authorized by its Certificate of
Incorporation, consists of: (i) 200,000 shares of Petry Common Stock, of which
100 shares are issued and outstanding, 25 shares are reserved for issuance upon
the exercise of currently outstanding warrants to purchase Petry Common Stock,
and no other shares are reserved for issuance for any purpose. The rights,
privileges and preferences of the Petry Common Stock are as stated in the
Certificate of Incorporation. Petry as of the Closing will not (i) have
outstanding any capital stock or other securities convertible into or
exchangeable for any shares of its capital stock and no person will have any
right to subscribe for or to purchase (including conversion or preemptive
rights), or any options for the purchase of, or any agreements providing for the
issuance (contingent or otherwise) of, any calls, commitments or other claims of
any character relating to, any capital stock or any stock or securities
convertible into or exchangeable for any capital stock of Petry; (ii) have any
capital stock, equity interests or other securities reserved for issuance for
any purpose; or (iii) be subject to any obligation (contingent or otherwise) to
repurchase or otherwise acquire or retire any shares of its capital stock or any
convertible securities, rights or options of the type described in the preceding
clause (i). All of the issued and outstanding shares of Petry Common Stock have
been duly and validly issued and are fully paid and nonassessable. To the best
knowledge of Petry, there are no agreements among Petry's stockholders with
respect to the voting or transfer of Petry's capital stock. Part 3.2 of Schedule
III includes a complete and correct list of the name of each of Petry's
stockholders and the number of shares of capital stock (and class or series)
owned by such stockholder.
SECTION 3.3. Authority; Execution and Delivery; Requisite Consents,
Nonviolation.
Petry has, and as of the Closing will have, all requisite power and
authority to execute, deliver and perform this Agreement, and each other
document or instrument executed by it, or any of its officers, in connection
herewith or therewith or pursuant hereto or thereto (this Agreement, together
with all of the foregoing documents and instruments, are sometimes collectively
referred to herein as the "Petry Documents"), and to consummate the transactions
contemplated hereby and thereby. The execution, delivery and performance of this
Agreement and the other Petry Documents and the consummation of the transactions
contemplated hereby and thereby have been duly and validly authorized by all
necessary action on the part of Petry. This Agreement and each of the other
Petry Documents that has been executed as of the date hereof is, and each of the
Petry Documents will be as of the Closing, duly executed and delivered by Petry,
and constitute the legal, valid and binding obligation of Petry, enforceable
against Petry in accordance with its terms, except as the enforceability thereof
may be limited by bankruptcy, insolvency or other similar laws affecting the
enforceability of creditors' rights in general or by general principles of
equity. The execution, delivery and performance of this Agreement and the other
Petry Documents, and the consummation by Petry of the transactions contemplated
hereby and thereby will not (a) require the consent, license, permit, waiver,
approval, authorization or other action of, by or with respect to, or
registration, declaration or filing with, any Governmental Authority or any
other Person; (b) violate or conflict with any provision of the Certificate of
Incorporation or of the By-Laws of Petry as in effect immediately prior to the
execution and delivery of this Agreement; or (c) constitute a default under
(with or without notice or lapse of time or both), violate or conflict with,
give rise to a right of termination, cancellation, acceleration or modification
under or result in a loss of a material benefit under, any Law, Petry Scheduled
15
<PAGE>
Contract (as defined in Section 3.8 below), rights relating to Intellectual
Property, Permit or Order to which Petry is a party or by which Petry or its
properties are bound.
SECTION 3.4 Subsidiaries.
Petry does not, and prior to the Closing will not, own or control, directly
or indirectly, any partnership interests, stock or other equity interests in any
partnership, corporation or other entity or any voting rights or right to
control the policies and direction of any partnership, corporation or other
entity.
SECTION 3.5. Financial Information.
Petry has previously delivered to Interactive and Advercomm certain
financial information (the "Petry Financial Information"), dated as of December
31, 1997. Such Petry Financial Information has been prepared from the books and
records of Petry, and, subject to customary year or period end adjustments and
accruals and the absence of notes thereto, presents fairly the financial
position and the results of operations and cash flows of Petry as at and for the
periods indicated.
Except as disclosed in the Petry Financial Information, Petry has no
material liabilities or obligations, absolute or contingent, except obligations
and liabilities incurred in the ordinary course of business, consistent with
past practice, since the date of the Petry Financial Information. Except as
disclosed in the Petry Financial Information, Petry is not a Guarantor or
Indemnitor of any Indebtedness of any other Person.
No representation is made hereunder with respect to any forecasts,
projections or forward looking information provided to Interactive, the
Subsidiary or Advercomm in connection with the Petry Financial Information or
otherwise, except that Petry represents that such forecasts, projections and
forward looking information were prepared in good faith and that Petry
reasonably believes there is a reasonable basis for such forecasts, projections
and forward looking information.
SECTION 3.6. Certain Changes or Events.
Other than transactions entered into in connection with this Merger,
since October 1, 1997, the business of Petry has been operated only in the
ordinary course, consistent with past practice, and in addition to, and not in
limitation of the foregoing: (i) there has been no change in the Condition of
Petry, except for changes in the ordinary course of business consistent with
past practice which have not had, in the aggregate, Materially Adverse Effect on
the Condition of Petry; (ii) there has been no revocation or change in any
Contract or Permit or right to do business, and, to the best knowledge of Petry,
no change of Laws which has resulted, or could reasonably be expected to result,
in a material adverse change in the Condition of Petry; (iii) Petry has not
authorized or made any distributions of, or declared or paid any dividends, upon
or with respect to any of its capital stock, or other equity interests, nor has
Petry redeemed, purchased or otherwise acquired, or issued or sold, any of its
capital stock or other equity interests; (iv) Petry has not entered into any
material transaction, other than in the ordinary course of business and
consistent with past practice; (v) Petry has not incurred any indebtedness for
borrowed money or made any loans or advances to any Person; (vi) there has been
no waiver by Petry of a valuable right or of a material debt owed to it; (vii)
Petry has not failed to satisfy or discharge any Lien, except in the ordinary
course of business and which is not material to the Condition of Petry (as such
16
<PAGE>
business is presently conducted and as it is proposed to be conducted); (viii)
there has not been any damage, destruction or loss, whether or not covered by
insurance, resulting in a Material Adverse Effect on the condition of the
assets, properties, financial condition, operating results, prospects or
business of Petry; (ix) there has not been any material change in any
compensation arrangement or agreement with any employee of Petry; (x) there has
not been any sale, assignment or transfer of any patents, trademarks,
copyrights, trade secrets or other intangible assets of Petry; (xi) there has
not been any resignation or termination of employment of any key officer or
employee of Petry and Petry, to the best of its knowledge, does not know of the
impending resignation or termination of employment of any such officer or
employee; (xii) there has been no receipt of notice that there has been a loss
of, or material order cancellation by, any major customer of Petry; (xiii) there
has been no mortgage, pledge or transfer of a security interest in, or lien,
created by Petry with respect to any of its material properties or assets,
except liens for taxes not yet due or payable; (xiv) there has been no loans or
guarantees made by Petry to or for the benefit of its employees, officers or
directors, or any members of their immediate families, other than travel
advances and other advances made in the ordinary course of its business; and
(xv) there has been no agreement or commitment by Petry to do or perform any of
the acts described in this Section 3.6.
SECTION 3.7 Title to Assets.
Petry has good and marketable title to all of its assets and properties,
free and clear of any Liens. With respect to any assets or properties it leases,
Petry holds a valid and subsisting leasehold interest therein, free and clear of
any Liens, is in compliance, in all material respects, with the terms of the
applicable lease, and enjoys peaceful and undisturbed possession under such
lease. The assets and properties of Petry that are material to the conduct of
business as presently conducted or as proposed to be conducted by Petry are on
an overall basis in good operating condition and repair, subject to ordinary
wear and tear.
SECTION 3.8. Contracts.
Petry is not a party to, nor is Petry or any of its assets or properties
bound by, or subject to, any Contracts of the following types, except for those
(the "Petry Scheduled Contracts") listed in Part 3.8 of Schedule III hereto:
(a) any Contracts pursuant to which Petry, or another party
thereto, is obligated to pay in excess of fifty thousand dollars ($50,000);
(b) any Contracts pursuant to which Petry acquired the right to
use any Intellectual Property or information that is material to or
necessary in the business of Petry, or pursuant to which Petry has granted
to others the right to use, or which otherwise relates to, its Intellectual
Property;
(c) any Contracts (other than advances of expenses to employees
in the ordinary course of business) involving loans, loan agreements, debt
securities, mortgages, deeds of trust, security agreements, suretyships or
guarantees;
(d) any Contracts between Petry, on the one hand, and any of its
Principal Owners, or any Affiliate or relative, or Affiliate of a relative,
of any of the foregoing, on the other;
17
<PAGE>
(e) any deferred compensation agreements, bonus, pension, profit
sharing, stock option and incentive plans or arrangements, hospitalization,
medical and insurance plans, agreements and policies, retirement and
severance plans and other employee compensation policies and agreements
affecting employees of Petry;
(f) any Contracts with any labor union affecting employees of
Petry;
(g) all partnership, joint venture, shareholders' or similar
Contracts with any Person;
(h) all Contracts that limit or contain restrictions on the
ability of Petry to declare or pay dividends, to make distributions in
respect of or to issue or purchase, redeem or otherwise acquire any of its
capital stock or require Petry to maintain specified financial ratios or
levels of net worth or other indicia of financial condition;
(i) any Contracts which restrict Petry from freely engaging in
business or competing anywhere; and
(j) any Contracts which otherwise are material to the Condition
of Petry.
True and correct copies of all Scheduled Contracts have been made available
to Interactive, the Subsidiary and Advercomm. All of the Scheduled Contracts are
in full force and effect and constitute legal, valid and binding obligations of
Petry and, to the best knowledge of Petry, the other parties thereto; to the
best of Petry's knowledge, no circumstances exist which would give rise to an
Action against or by Petry in connection with any Scheduled Contract or any
default thereunder; and the validity, effectiveness and continuation of all
Scheduled Contracts will not be adversely affected by the transactions
contemplated by this Agreement or require third party consent.
SECTION 3.9. Intellectual Property.
(i) With respect to any Intellectual Property of any kind in which
Petry has an interest or which is otherwise used in, or relates to the business
of, Petry, or any Operating IP or trade secret that is used in or that relates
to its business, Petry owns or has the right to use such Operating IP or trade
secret in its business. Petry owns or has the right to use all Operating IP and
trade secrets that are necessary to its business.
(ii) Each Intellectual Property License constitutes a legal, valid,
binding and enforceable obligation in accordance with its terms against Petry,
and, to the best knowledge of Petry, each other Person party thereto, and to the
best knowledge of Petry is in full force and effect. Petry has performed all
obligations required to have been performed by it under each of the Intellectual
Property Licenses to which it is a party. Neither Petry nor, to the best
knowledge of Petry, any other party thereto is in default thereunder, nor, to
the best knowledge of Petry, is there any event that with notice or lapse of
time, or both, would constitute a default thereunder. Petry has not received any
notice that any other party to any of the Intellectual Property Licenses intends
to cancel, terminate or refuse to renew the same or to exercise or decline to
exercise any option or other right thereunder (other than in the ordinary course
of business). No licenses, sublicenses, covenants or agreements have been
18
<PAGE>
granted or entered into by Petry in respect of any of the Operating IP or any
material trade secret of Petry, except the Intellectual Property Licenses. No
director, officer, shareholder, employee or other Affiliate of Petry owns,
directly or indirectly, in whole or in part, any of the Operating IP or any
trade secret material used by Petry. None of the officers, employees,
consultants, distributors, agents, representatives or advisors of Petry have
entered into any agreement relating to Petry's business regarding know-how,
trade secrets, assignment of rights in inventions, or prohibition or restriction
of competition or solicitation of customers, or any other similar restrictive
agreement or covenant, whether written or oral, with any Person other than
Petry.
(iii) The consummation of the transactions contemplated hereby will not
alter or impair the rights of Petry to any of the Operating IP, to
any trade secret material to Petry, or under any of the Intellectual Property
Licenses.
(iv) To the best knowledge of Petry, no claim with respect to the
Operating IP, any trade secret or any Intellectual Property License is currently
pending or has been asserted or overtly threatened by any Person, nor does Petry
know of any grounds for any claim, (A) to the effect that any operation or
activity of Petry presently occurring or contemplated infringes or
misappropriates any United States or foreign copyright, patent, trademark,
service mark or trade secret; (B) to the effect that any other Person infringes
on the Operating IP or misappropriates any trade secret or know-how or other
proprietary rights of Petry; (C) challenging the ownership, validity or
effectiveness of any of the Operating IP or any trade secret of Petry; or (D)
challenging the license of Petry to, or other legally enforceable right under,
any Operating IP or the Intellectual Property Licenses.
(v) Petry is not aware of any presently existing United States or
foreign patents or any patent applications which, if issued as patents, would be
infringed by any activity contemplated by Petry.
SECTION 3.10. Insurance.
Petry has in full force and effect fire and casualty insurance policies,
with extended coverage, products liability insurance, general liability
insurance, errors and omissions insurance, and directors' and officers'
insurance in amounts customary for companies similarly situated. Each insurance
policy is valid and binding and in full force and effect, no premiums due
thereunder have not been paid and neither Petry, any Subsidiary nor the Person
to whom such policy has been issued has received any notice of cancellation or
termination in respect of any such policy or is in default thereunder. Such
insurance policies are placed with financially sound and reputable insurers and,
in light of the respective business, operations and assets and properties of
Petry and the Subsidiary, are in amounts and have coverages that are reasonable
and customary for Persons engaged in such businesses and operations and having
such assets and properties. Neither Petry nor the Person to whom such policy has
been issued has received notice that any insurer under any policy referred to in
this Section is denying liability with respect to a claim thereunder or
defending under a reservation of rights clause.
SECTION 3.11. Labor Union Activities; Employee Relations.
No employee of Petry is represented by any labor union or covered by any
collective bargaining agreement; nor, to the best knowledge of Petry, has any
labor union sought to represent any employee of Petry. There is no strike or
other labor dispute involving Petry
19
<PAGE>
pending, or to the best knowledge of Petry, threatened. To the best knowledge of
Petry, no officer or key employee intends to terminate his employment with
Petry. To the best knowledge of Petry, no officer or key employee of Petry is a
party to or bound by any Contract, or subject to any restrictions (including,
without limitation, any non-competition restriction), which would restrict the
right of such person to participate in the affairs of Petry.
SECTION 3.12. ERISA.
There are no employee benefit plans (as defined in ERISA) covering former
or current employees of Petry, or under which Petry has any obligation or
liability. Petry has not incurred any liability under Title IV of ERISA,
including any liability to the Pension Benefit Guaranty Corporation. Part 3.12
of Schedule III lists all material Benefit Arrangements. The Benefit
Arrangements are and have been administered in substantial compliance with their
terms and with the requirements of applicable law. No unfair labor practice has
been brought during the last three years against Petry.
SECTION 3.13 Litigation.
There is no Action pending or, to the best knowledge of Petry, threatened
against, relating to or affecting Petry or affecting any of the properties or
assets of Petry (including, without limitation, any of their Permits), nor, to
the best knowledge of Petry, is there any basis for any such Action. Neither
Petry nor any of its assets or properties are subject to any Order of any
Governmental Authority which is material to the Condition of Petry. There is no
Action by Petry currently pending or which Petry intends to initiate.
SECTION 3.14 Compliance with Laws; Permits.
Petry has not violated or failed to comply with, in any material respect,
any Laws to which it or any of its properties or assets are subject. Petry has
all Permits that are material to the conduct of its business as presently
conducted and as proposed to be conducted; all such Permits are, and as of the
Closing will be, in full force and effect; no violations or notices of failure
to comply have been issued or recorded in respect of any such Permits. All
applications, reports, notices and other documents required to be filed by Petry
with all Governmental Authorities have been timely filed and are complete and
correct in all material respects as filed or as amended prior to the date
hereof.
SECTION 3.15. Taxes.
All Returns have been timely filed. All such Returns are true, correct and
complete in all material respects. All Taxes due or claimed to be due from Petry
have been paid except to the extent reserved against in the Petry Financial
Information. No income tax return of Petry has been audited by the applicable
Governmental Authority, and there are in effect no waivers of the applicable
statute of limitations for Taxes in any jurisdiction for Petry for any period.
The provision for taxes for Petry as shown in the Petry Financial Information is
adequate for taxes due or accrued as of the date thereof. Petry has not elected
pursuant to the Internal Revenue Code of 1986, as amended (the "Code"), to be
treated as a Subchapter S corporation or a collapsible corporation pursuant to
Section 1362(a) or Section 341(f) of the Code, nor has it made any other
elections pursuant to the Code (other than elections that relate solely to
methods of accounting, depreciation or amortization) that would have a Material
Adverse Effect on the Condition of Petry. Petry has never had any tax deficiency
proposed or assessed against it. Since the date of the Petry Financial
Information, Petry has
20
<PAGE>
made adequate provisions on their books of account for, all taxes, assessments
and governmental charges with respect to its business, properties and operations
for such period. Petry has withheld or collected from each payment made to each
of its employees, the amount of all taxes (including, but not limited to,
federal income taxes, Federal Insurance Contribution Act taxes and Federal
Unemployment Tax Act taxes) required to be withheld or collected therefrom, and
has paid the same to the proper tax receiving officers or authorized
depositories.
SECTION 3.16. Books and Records.
The books of account, ledgers and records of Petry accurately and
completely reflect in all material respects all information relating to its
business; the nature, acquisition, maintenance, location and collection of its
assets; and the nature of all transactions giving rise to its obligations or
accounts receivable. The minutes and minute books of Petry provided to
Interactive, the Subsidiary and Advercomm prior to the date hereof constitute a
true, complete and correct copy of the entire minutes and minute books of Petry.
SECTION 3.17. Environmental Matters.
The business, assets and properties of Petry are and have been operated
and maintained in compliance with all Environmental Laws. No event has occurred
which, with or without the passage of time or the giving of notice, or both,
would constitute a non-compliance by Petry with, or a violation by Petry of, the
Environmental Laws. Neither Petry nor any of its predecessor companies have
caused or permitted to exist, as a result of an intentional or unintentional act
or omission, a disposal, discharge or release of solid wastes, pollutants or
hazardous substances, on or from any site which currently is or formerly was
owned, leased, occupied or used by Petry or any predecessor company, except
where such disposal, discharge or release was in compliance with the
Environmental Laws.
SECTION 3.18. Transactions with Affiliates.
Petry has not had any direct or indirect dealings with any Principal Owner
of Petry or with any of his Affiliates, associates (as such term is defined in
Rule 12b-2 under the Securities Exchange Act of 1934, as amended) or relatives
(or Affiliates thereof). Petry does not have any obligation to or claim against
any Principal Owner of Petry, or any of his or its Affiliates, associates or
relatives, and no such Person has any obligation to or claim against Petry. All
products, services or benefits provided to Petry by any such Person, or provided
by Petry to any such Person, are set forth on Part 3.18 of Schedule III and are
provided at a charge equal to the fair market value of such products, services
or benefits. To the best knowledge of Petry, no Principal Owner of Petry, nor
any of his Affiliates, associates or relatives, has any direct or indirect
interest of any kind in any business or entity which is competitive with Petry.
SECTION 3.19. Registration Rights.
No Person has, and as of the Closing no Person shall have, demand,
"piggy-back," or other rights to cause Petry to file any registration statement
under the Securities Act relating to any securities of Petry, or to participate
in any such registration statement.
21
<PAGE>
SECTION 3.20. No Brokers or Finders.
Neither Petry nor any of its Affiliates have entered or will enter into
any agreement pursuant to which Interactive, the Subsidiary, Petry or Advercomm
will be liable, as a result of the transactions contemplated by this Agreement
or any Petry Documents, for any claim of any person for any commission, fee or
other compensation as finder or broker.
SECTION 3.21. Investment Company Act.
Petry is not an "investment company" nor is Petry directly or indirectly
controlled by or acting on behalf of any Person which is an "investment company"
within the meaning of the Investment Company Act of 1940, as amended.
SECTION 3.22 Disclosure.
In connection with this Agreement, Petry has disclosed to Interactive, the
Subsidiary and Advercomm all material facts and information known to Petry
concerning Petry and its Condition, and has not made any untrue statement of a
material fact or omitted to state any material fact necessary in order to make
the statements contained herein or in any other Petry Documents not misleading.
SECTION 3.23 Public Announcements.
Except as otherwise required by law or by the rules of (or any agreement
of the parties or their affiliates with) any stock exchange and except as have
already been made by the parties prior to the date hereof, Petry agrees that
there will prior to the Merger be no press releases or other statements with
respect to this Agreement or the transactions contemplated hereby and that they
will consult with Interactive, the Subsidiary and Advercomm before issuing any
press release or otherwise making any public statement with respect to this
Agreement and the transactions contemplated hereby and that Interactive, the
Subsidiary, Petry and Advercomm shall not issue any such press release or make
any such public statement prior to such consultation and approval of any such
release or statement by the other Parties.
SECTION 3.24. Board and Stockholders Recommendation.
The Board of Directors and Stockholders of Petry, each by unanimous
written consent dated January 29, 1998, approved and adopted this Agreement, the
Merger, and the other transactions contemplated hereby.
Petry has heretofore furnished to Interactive, the Subsidiary and
Advercomm a complete and correct copy of its Certificate of Incorporation and
By-Laws, each as amended to date. Such Certificate of Incorporation and By-Laws
are in full force and effect. Petry is not in violation of any of the provisions
of its Certificate of Incorporation or By-Laws.
22
<PAGE>
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF ADVERCOMM
Advercomm hereby represents and warrants to Interactive, the
Subsidiary and Petry that, except as set forth on the Schedule of Exceptions
attached hereto as Schedule IV, specifically identifying the relevant subsection
hereof, which exceptions shall be deemed to be representations and warranties as
if made hereunder:
SECTION 4.1. Corporate Organization, Good Standing and
Qualification.
Advercomm is a corporation duly organized, validly existing and in good
standing under the laws of the State of Delaware. Advercomm has all requisite
power and authority to carry on its business as now conducted and as proposed to
be conducted. Advercomm is duly qualified to transact business and is in good
standing in each jurisdiction in which the failure so to qualify could have a
material adverse effect on its Condition.
SECTION 4.2 Capitalization.
The capital stock of Advercomm, as authorized by its Certificate of
Incorporation, consists of: (i) 10,000 shares of Advercomm Common Stock, of
which 6,500 shares are issued and outstanding, and no shares are reserved for
issuance for any purpose. The rights, privileges and preferences of the
Advercomm Common Stock are as stated in the Certificate of Incorporation.
Advercomm does not, and as of the Closing will not (i) have outstanding any
capital stock or other securities convertible into or exchangeable for any
shares of its capital stock and no person will have any right to subscribe for
or to purchase (including conversion or preemptive rights), or any options for
the purchase of, or any agreements providing for the issuance (contingent or
otherwise) of, any calls, commitments or other claims of any character relating
to, any capital stock or any stock or securities convertible into or
exchangeable for any capital stock of Advercomm; (ii) have any capital stock,
equity interests or other securities reserved for issuance for any purpose; or
(iii) be subject to any obligation (contingent or otherwise) to repurchase or
otherwise acquire or retire any shares of its capital stock or any convertible
securities, rights or options of the type described in the preceding clause (i).
All of the issued and outstanding shares of Advercomm Common Stock have been
duly and validly issued and are fully paid and nonassessable. To the best
knowledge of Advercomm, there are no agreements among Advercomm's stockholders
with respect to the voting or transfer of Advercomm's capital stock. Part 4.2 of
Schedule IV includes a complete and correct list of the name of each of
Advercomm's stockholders and the number of shares of capital stock (and class or
series) owned by such stockholder.
SECTION 4.3. Authority; Execution and Delivery; Requisite Consents,
Nonviolation.
Advercomm has, and as of the Closing will have, all requisite power and
authority to execute, deliver and perform this Agreement and each other document
or instrument executed by it, or any of its officers, in connection herewith or
therewith or pursuant hereto or thereto (this Agreement, together with all of
the foregoing documents and instruments, are sometimes collectively referred to
herein as the "Advercomm Documents"), and to consummate the transactions
contemplated hereby and thereby. The execution, delivery and performance of this
Agreement and the other Interactive Documents and the consummation
23
<PAGE>
of the transactions contemplated hereby and thereby have been duly and validly
authorized by all necessary action on the part of Advercomm. This Agreement and
each of the other Advercomm Documents that has been executed as of the date
hereof is, and each of the Advercomm Documents will be as of the Closing, duly
executed and delivered by Advercomm, and constitute the legal, valid and binding
obligation of Advercomm, enforceable against Advercomm in accordance with its
terms, except as the enforceability thereof may be limited by bankruptcy,
insolvency or other similar laws affecting the enforceability of creditors'
rights in general or by general principles of equity. The execution, delivery
and performance of this Agreement and the other Interactive Documents, the
consummation by Advercomm of the transactions contemplated hereby and thereby
will not (a) require the consent, license, permit, waiver, approval,
authorization or other action of, by or with respect to, or registration,
declaration or filing with, any Governmental Authority or any other Person; (b)
violate or conflict with any provision of the Certificate of Incorporation or of
the By-Laws of Advercomm as in effect immediately prior to the execution and
delivery of this Agreement; or (c) constitute a default under (with or without
notice or lapse of time or both), violate or conflict with, give rise to a right
of termination, cancellation, acceleration or modification under or result in a
loss of a material benefit under, any Law, Advercomm Scheduled Contract (as
defined in Section 4.8 below), rights relating to Intellectual Property, Permit
or Order to which Advercomm is a party or by which Advercomm or its properties
are bound.
SECTION 4.4 Subsidiaries.
Advercomm, does not, and prior to the Closing will not, own or control,
directly or indirectly, any partnership interests, stock or other equity
interests in any partnership, corporation or other entity or any voting rights
or right to control the policies and direction of any partnership, corporation
or other entity.
SECTION 4.5. Financial Information.
Advercomm has previously delivered to Interactive and Petry certain
financial information (the "Advercomm Financial Information"). Such Advercomm
Financial Information has been prepared from the books and records of Advercomm,
and, subject to customary year or period end adjustments and accruals and the
absence of notes thereto, presents fairly the financial position and the results
of operations of Advercomm as at and for the periods indicated.
Except as disclosed in the Advercomm Financial Information, Advercomm has
no material liabilities or obligations, absolute or contingent, except
obligations and liabilities incurred in the ordinary course of business,
consistent with past practice, since the date of the Advercomm Financial
Information. Except as disclosed in the Advercomm Financial Information,
Advercomm is not a Guarantor or Indemnitor of any Indebtedness of any other
Person.
No representation is made hereunder with respect to any forecasts,
projections or forward looking information provided to Interactive, the
Subsidiary or Petry in connection with the Advercomm Financial Information or
otherwise, except that Advercomm represents that such forecasts, projections and
forward looking information were prepared in good faith and that Advercomm
reasonably believes there is a reasonable basis for such forecasts, projections
and forward looking information.
24
<PAGE>
SECTION 4.6. Certain Changes or Events.
Other than transactions entered into in connection with this Merger, since
October 1, 1997, the business of Advercomm has been operated only in the
ordinary course, consistent with past practice, and in addition to, and not in
limitation of the foregoing: (i) there has been no change in the Condition of
Advercomm, except for changes in the ordinary course of business consistent with
past practice which have not had, in the aggregate, a Material Adverse Effect on
the Condition of Advercomm; (ii) there has been no revocation or change in any
Contract or Permit or right to do business, and, to the best knowledge of
Advercomm, no change of Laws which has resulted, or could reasonably be expected
to result, in a material adverse change in the Condition of Advercomm; (iii)
Advercomm has not authorized or made any distributions of, or declared or paid
any dividends, upon or with respect to any of its capital stock, or other equity
interests, nor has Advercomm redeemed, purchased or otherwise acquired, or
issued or sold, any of its capital stock or other equity interests; (iv)
Advercomm has not entered into any material transaction, other than in the
ordinary course of business and consistent with past practice; (v) Advercomm has
not incurred any indebtedness for borrowed money or made any loans or advances
to any Person; (vi) there has been no waiver by Advercomm of a valuable right or
of a material debt owed to it; (vii) Advercomm has not failed to satisfy or
discharge any Lien, except in the ordinary course of business and which is not
material to the Condition of Advercomm (as such business is presently conducted
and as it is proposed to be conducted); (viii) there has not been any damage,
destruction or loss, whether or not covered by insurance, resulting in a
Material Adverse Effect on the Condition of Advercomm (as such business is
presently conducted and as it is proposed to be conducted); (ix) there has not
been any material change in any compensation arrangement or agreement with any
employee of Advercomm; (x) there has not been any sale, assignment or transfer
of any patents, trademarks, copyrights, trade secrets or other intangible assets
of Advercomm; (xi) there has not been any resignation or termination of
employment of any key officer or employee of Advercomm and Advercomm, to the
best of its knowledge, does not know of the impending resignation or termination
of employment of any such officer or employee; (xii) there has been no receipt
of notice that there has been a loss of, or material order cancellation by, any
major customer of Advercomm; (xiii) there has been no mortgage, pledge or
transfer of a security interest in, or lien, created by Advercomm with respect
to any of its material properties or assets, except liens for taxes not yet due
or payable; (xiv) there has been no loans or guarantees made by Advercomm to or
for the benefit of its employees, officers or directors, or any members of their
immediate families, other than travel advances and other advances made in the
ordinary course of its business; and (xv) there has been no agreement or
commitment by Advercomm to do or perform any of the acts described in this
Section 4.6.
SECTION 4.7 Title to Assets.
Advercomm has good and marketable title to all of its assets and
properties, free and clear of any Liens, pledges. With respect to any assets or
properties it leases, Advercomm holds a valid and subsisting leasehold interest
therein, free and clear of any Liens, is in compliance, in all material
respects, with the terms of the applicable lease, and enjoys peaceful and
undisturbed possession under such lease. The assets and properties of Advercomm
that are material to the conduct of business as presently conducted or as
proposed to be conducted by Advercomm are on an overall basis in good operating
condition and repair, subject to ordinary wear and tear.
SECTION 4.8. Contracts.
25
<PAGE>
Advercomm is not a party to, nor is Advercomm or any of its assets or
properties bound by, or subject to, any Contracts of the following types, except
for those (the "Advercomm Scheduled Contracts") listed in Part 4.8 of Schedule
IV hereto:
(a) any Contracts pursuant to which Advercomm, or another
party thereto, is obligated to pay in excess of fifty thousand dollars
($50,000);
(b) any Contracts pursuant to which Advercomm acquired the
right to use any Intellectual Property or information that is material to
or necessary in the business of Advercomm, or pursuant to which Advercomm
has granted to others the right to use, or which otherwise relates to, its
Intellectual Property;
(c) any Contracts (other than advances of expenses to
employees in the ordinary course of business) involving loans, loan
agreements, debt securities, mortgages, deeds of trust, security
agreements, suretyships or guarantees;
(d) any Contracts between Advercomm, on the one hand, and
any of its Principal Owners, or any Affiliate or relative, or Affiliate of
a relative, of any of the foregoing, on the other;
(e) any deferred compensation agreements, bonus, pension,
profit sharing, stock option and incentive plans or arrangements,
hospitalization, medical and insurance plans, agreements and policies,
retirement and severance plans and other employee compensation policies
and agreements affecting employees of Advercomm;
(f) any Contracts with any labor union affecting employees
of Advercomm;
(g) all partnership, joint venture, shareholders' or similar
Contracts with any Person;
(h) all Contracts that limit or contain restrictions on the
ability of Advercomm to declare or pay dividends, to make distributions in
respect of or to issue or purchase, redeem or otherwise acquire any of its
capital stock or require Advercomm to maintain specified financial ratios
or levels of net worth or other indicia of financial condition;
(i) any Contracts which restrict Advercomm from freely
engaging in business or competing anywhere; and
(j) any Contracts which otherwise are material to the
Condition of Advercomm.
True and correct copies of all Scheduled Contracts have been made
available to Interactive, the Subsidiary and Petry. All of the Scheduled
Contracts are in full force and effect and constitute legal, valid and binding
obligations of Advercomm and, to the best knowledge of Advercomm, the other
parties thereto; to the best of Advercomm's knowledge, no circumstances exist
which would give rise to an Action against or by Advercomm in connection with
any Scheduled Contract or any default thereunder; and the validity,
26
<PAGE>
effectiveness and continuation of all Scheduled Contracts will not be adversely
affected by the transactions contemplated by this Agreement or require third
party consents.
SECTION 4.9. Intellectual Property.
(i) With respect to any Intellectual Property of any kind in which
Advercomm has an interest or which is otherwise used in, or relates to the
business of, Advercomm, or any Operating IP of Advercomm or trade secret that is
used in or that relates to its business, Advercomm owns or has the right to use
such Operating IP or trade secret in its business. Advercomm owns or has the
right to use all Operating IP and trade secrets that are necessary to its
business.
(iii) Each Intellectual Property License of Advercomm constitutes a
legal, valid, binding and enforceable obligation in accordance with its terms
against Advercomm, and, to the best knowledge of Advercomm, each other Person
party thereto, and to the best knowledge of Advercomm is in full force and
effect. Advercomm has performed all obligations required to have been performed
by it under each of the Intellectual Property Licenses to which it is a party.
Neither Advercomm nor, to the best knowledge of Advercomm, any other party
thereto is in default thereunder, nor, to the best knowledge of Advercomm, is
there any event that with notice or lapse of time, or both, would constitute a
default thereunder. Advercomm has not received any notice that any other party
to any of the Intellectual Property Licenses intends to cancel, terminate or
refuse to renew the same or to exercise or decline to exercise any option or
other right thereunder (other than in the ordinary course of business). No
licenses, sublicenses, covenants or agreements have been granted or entered into
by Advercomm in respect of any of the Operating IP or any material trade secret
of Advercomm, except the Intellectual Property Licenses. No director, officer,
shareholder, employee or other Affiliate of Advercomm owns, directly or
indirectly, in whole or in part, any of the Operating IP or any trade secret
material used by Advercomm. None of the officers, employees, consultants,
distributors, agents, representatives or advisors of Advercomm have entered into
any agreement relating to Advercomm's business regarding know-how, trade
secrets, assignment of rights in inventions, or prohibition or restriction of
competition or solicitation of customers, or any other similar restrictive
agreement or covenant, whether written or oral, with any Person other than
Advercomm.
(iv) The consummation of the transactions contemplated hereby will
not alter or impair the rights of Advercomm to any of the Operating IP, to any
trade secret material to Advercomm, or under any of the Intellectual Property
Licenses.
(v) To the best knowledge of Advercomm, no claim with respect to
the Operating IP, any trade secret or any Intellectual Property License is
currently pending or has been asserted or overtly threatened by any Person, nor
does Advercomm know of any grounds for any claim, (A) to the effect that any
operation or activity of Advercomm presently occurring or contemplated infringes
or misappropriates any United States or foreign copyright, patent, trademark,
service mark or trade secret; (B) to the effect that any other Person infringes
on the Operating IP or misappropriates any trade secret or know-how or other
proprietary rights of Advercomm; (C) challenging the ownership, validity or
effectiveness of any of the Operating IP or any trade secret of Advercomm; or
(D) challenging the license of Advercomm to, or other legally enforceable right
under, any Operating IP or the Intellectual Property Licenses.
27
<PAGE>
(vi) Advercomm is not aware of any presently existing United States
or foreign patents or any patent applications which, if issued as patents, would
be infringed by any activity contemplated by Advercomm.
SECTION 4.10. Insurance.
Advercomm does not maintain any insurance policies.
SECTION 4.11. Labor Union Activities; Employee Relations.
No employee of Advercomm is represented by any labor union or covered by
any collective bargaining agreement; nor, to the best knowledge of Advercomm,
has any labor union sought to represent any employee of Advercomm. There is no
strike or other labor dispute involving Advercomm pending, or to the best
knowledge of Advercomm, threatened. To the best knowledge of Advercomm, no
officer or key employee intends to terminate his employment with Advercomm. To
the best knowledge of Advercomm, no officer or key employee of Advercomm is a
party to or bound by any Contract, or subject to any restrictions (including,
without limitation, any non-competition restriction), which would restrict the
right of such person to participate in the affairs of Advercomm.
SECTION 4.12. ERISA.
There are no employee benefit plans (as defined in ERISA) covering former
or current employees of Advercomm, or under which Advercomm has any obligation
or liability. Advercomm has not incurred any liability under Title IV of ERISA,
including any liability to the Pension Benefit Guaranty Corporation. Advercomm
maintains no material Benefit Arrangements. No unfair labor practice has been
brought during the last three years against Advercomm.
SECTION 4.13 Litigation.
There is no Action pending or, to the best knowledge of Advercomm,
threatened against, relating to or affecting Advercomm or affecting any of the
properties or assets of Advercomm (including, without limitation, any of their
Permits), nor, to the best knowledge of Advercomm, is there any basis for any
such Action. Neither Advercomm nor any of its assets or properties are subject
to any Order of any Governmental Authority which is material to the Condition of
Advercomm. There is no Action by Advercomm currently pending or which Advercomm
intends to initiate.
SECTION 4.14 Compliance with Laws; Permits.
Advercomm has not violated or failed to comply with, in any material
respect, any Laws to which it or any of its properties or assets are subject.
Advercomm has all Permits that are material to the conduct of its business as
presently conducted and as proposed to be conducted; all such Permits are, and
as of the Closing will be, in full force and effect; no violations or notices of
failure to comply have been issued or recorded in respect of any such Permits.
All applications, reports, notices and other documents required to be filed by
Advercomm with all Governmental Authorities have been timely filed and are
complete and correct in all material respects as filed or as amended prior to
the date hereof. Advercomm has not violated or failed to comply with its
certificate of incorporation or by-laws.
28
<PAGE>
SECTION 4.15. Taxes.
All Returns have been timely filed. All such Returns are true, correct and
complete in all material respects. All Taxes due or claimed to be due from
Advercomm have been paid except to the extent reserved against in the Advercomm
Financial Information. No income tax return of Advercomm has been audited by the
applicable Governmental Authority, and there are in effect no waivers of the
applicable statute of limitations for Taxes in any jurisdiction for Advercomm
for any period. The provision for taxes for Advercomm as shown in the Advercomm
Financial Information is adequate for taxes due or accrued as of the date
thereof. Advercomm has not elected pursuant to the Internal Revenue Code of
1986, as amended (the "Code"), to be treated as a Subchapter S corporation or a
collapsible corporation pursuant to Section 1362(a) or Section 341(f) of the
Code, nor has it made any other elections pursuant to the Code (other than
elections that relate solely to methods of accounting, depreciation or
amortization) that would have a material effect on Advercomm, its financial
condition, its business as presently conducted or proposed to be conducted or
any of their properties or material assets. Advercomm has never had any tax
deficiency proposed or assessed against it and has not executed any waiver of
any statute of limitations on the assessment or collection of any tax or
governmental charge. Since the date of the Advercomm Financial Information,
Advercomm has made adequate provisions on their books of account for, all taxes,
assessments and governmental charges with respect to its business, properties
and operations for such period. Advercomm has withheld or collected from each
payment made to each of its employees, the amount of all taxes (including, but
not limited to, federal income taxes, Federal Insurance Contribution Act taxes
and Federal Unemployment Tax Act taxes) required to be withheld or collected
therefrom, and has paid the same to the proper tax receiving officers or
authorized depositories.
SECTION 4.16. Books and Records.
The books of account, ledgers and records of Advercomm accurately and
completely reflect in all material respects all information relating to its
business; the nature, acquisition, maintenance, location and collection of its
assets; and the nature of all transactions giving rise to its obligations or
accounts receivable. The minutes and minute books of Advercomm provided to
Interactive, the Subsidiary and Petry prior to the date hereof constitute a
true, complete and correct copy of the entire minutes and minute books of
Advercomm.
SECTION 4.17. Environmental Matters.
The business, assets and properties of Advercomm are and have been
operated and maintained in compliance with all Environmental Laws. No event has
occurred which, with or without the passage of time or the giving of notice, or
both, would constitute a non-compliance by Advercomm with, or a violation by
Advercomm of, the Environmental Laws. Neither Advercomm nor any of its
predecessor companies have caused or permitted to exist, as a result of an
intentional or unintentional act or omission, a disposal, discharge or release
of solid wastes, pollutants or hazardous substances, on or from any site which
currently is or formerly was owned, leased, occupied or used by Advercomm or any
predecessor company, except where such disposal, discharge or release was in
compliance with the Environmental Laws.
29
<PAGE>
SECTION 4.18. Transactions with Affiliates.
Advercomm has not had any direct or indirect dealings with any Principal
Owner of Advercomm or with any of his Affiliates, associates (as such term is
defined in Rule 12b-2 under the Securities Exchange Act of 1934, as amended) or
relatives (or Affiliates thereof). Advercomm does not have any obligation to or
claim against any Principal Owner of Advercomm, or any of his or its Affiliates,
associates or relatives, and no such Person has any obligation to or claim
against Advercomm. All products, services or benefits provided to Advercomm by
any such Person, or provided by Advercomm to any such Person, are set forth on
Part 4.18 of Schedule IV and are provided at a charge equal to the fair market
value of such products, services or benefits. To the best knowledge of
Advercomm, no Principal Owner of Advercomm, nor any of his Affiliates,
associates or relatives, has any direct or indirect interest of any kind in any
business or entity which is competitive with Advercomm.
SECTION 4.19. Registration Rights.
No Person has, and as of the Closing no Person shall have, demand,
"piggy-back," or other rights to cause Advercomm to file any registration
statement under the Securities Act relating to any securities of Advercomm, or
to participate in any such registration statement.
SECTION 4.20. No Brokers or Finders.
Neither Advercomm nor any of its Affiliates have entered or will enter
into any agreement pursuant to which Interactive, the Subsidiary, Petry or
Advercomm will be liable, as a result of the transactions contemplated by this
Agreement or any Advercomm Documents, for any claim of any person for any
commission, fee or other compensation as finder or broker.
SECTION 4.21. Investment Company Act.
Advercomm is not an "investment company" nor is Advercomm directly or
indirectly controlled by or acting on behalf of any Person which is an
"investment company" within the meaning of the Investment Company Act of 1940,
as amended.
SECTION 4.22 Disclosure.
In connection with this Agreement, Advercomm has disclosed to Interactive,
the Subsidiary and Petry all material facts and information known to Advercomm
concerning Advercomm and its Condition, and has not made any untrue statement of
a material fact or omitted to state any material fact necessary in order to make
the statements contained herein or in any other Advercomm Documents not
misleading.
SECTION 4.23 Public Announcements.
Except as otherwise required by law or by the rules of (or any agreement
of the parties or their affiliates with) any stock exchange and except as have
already been made by the parties prior to the date hereof, Advercomm agrees that
there will prior to the Merger be no press releases or other statements with
respect to this Agreement or the transactions contemplated hereby and that it
will consult with Interactive, the Subsidiary and Petry before issuing any press
release or otherwise making any public statement with respect to this Agreement
and the transactions contemplated hereby and that Interactive, the Subsidiary,
30
<PAGE>
Petry and Advercomm shall not issue any such press release or make any such
public statement prior to such consultation and approval of any such release or
statement by the other parties.
SECTION 4.24. Board and Stockholders Recommendation.
The Board of Directors and Stockholders of Advercomm, each by unanimous
written consent dated February 2, 1998, approved and adopted this Agreement, the
Merger, and the other transactions contemplated hereby.
SECTION 4.25. Certificate of Incorporation and By-Laws.
Advercomm has heretofore furnished to Interactive, the Subsidiary and
Petry a complete and correct copy of its Certificate of Incorporation and
By-Laws, each as amended to date. Such Certificate of Incorporation and By-Laws
are in full force and effect. Advercomm is not in violation of any of the
provisions of its Certificate of Incorporation or By-Laws.
ARTICLE V
COVENANTS OF THE PARTIES
SECTION 5.1 Conduct of Business by the Parties Pending the Merger.
The Parties covenant and agree that, between the date of this
Agreement and the Effective Time, except as otherwise contemplated by this
Agreement or unless the other Parties shall otherwise give their prior written
consent, the business of each Party shall be conducted only in, and each Party
shall not take any action except in, the ordinary course of business and in a
manner consistent with past practice (including financial and other controls of
each Party instituted since the commencement of the current fiscal year); each
Party will use its commercially reasonable efforts to continue its business
development activities, to maintain in effect all licenses, approvals, and
authorizations, to preserve intact its business organization and to maintain
existing relationships with licensors, licensees, suppliers, contractors,
distributors, customers, and others having business relationships with it; and
each Party agrees to cooperate reasonably with each other Party in connection
with the foregoing. By way of amplification and not limitation, except as
contemplated by this Agreement, no Party shall, between the date of this
Agreement and the Effective Time, do or agree to do any of the following without
the prior written consent of each other Party:
(a) amend or otherwise change its Certificate of Incorporation or
By-Laws;
(b) issue, sell, pledge, dispose of, encumber, or authorize the
issuance, sale, pledge, disposition, or encumbrance of (i) any shares of capital
stock of any class, or any options, warrants, convertible securities,
subscriptions, or other rights of any kind to acquire any shares of capital
stock, or any other ownership interest or equity equivalent, of such Party or
any other securities in respect of, in lieu of, or in substitution for any
outstanding shares (other than, in the case of Interactive, shares of
Interactive Common Stock issuable pursuant to the exercise of outstanding
convertible preferred stock, convertible debt,
31
<PAGE>
warrants, or Options as set forth in Part 2.2 of Schedule II) or grant or
accelerate any right to convert or exercise or otherwise amend in any respect
any such outstanding convertible debt, warrants, or Options or (ii) any material
assets of such Party, except for sales of goods or services in the ordinary
course of business and in a manner consistent with past practice;
(c) declare, set aside, make, or pay any dividend or other
distribution, payable in cash, stock, property, or otherwise, with respect to
any of its capital stock, any other ownership interest or equity equivalent, or
any other securities, or reclassify, combine, split, subdivide, redeem,
purchase, or otherwise acquire, directly or indirectly, any such capital stock,
ownership interest, equity equivalent, or other securities, or adopt a plan of
complete or partial liquidation or resolutions providing for or authorizing such
liquidation or a dissolution, restructuring, recapitalization, or other
reorganization or, except to the extent required by fiduciary obligations under
applicable law, a merger or consolidation;
(d) (i) except in the ordinary course of business and consistent
with past practice, issue any debt securities or assume, guarantee, or endorse
the obligations of any other person, except for immaterial amounts; (ii) except
in the ordinary course of business and consistent with past practice, make any
loans, advances, or capital contributions to, or investments in, any other
person; (iii) pledge or otherwise encumber shares of capital stock of or other
ownership interests or equity equivalents in such Party; or (iv) except in the
ordinary course of business and consistent with past practice, mortgage or
pledge any of their material assets, tangible or intangible, or create or suffer
to exist any material lien thereupon;
(e) enter into, adopt, establish, or (except as may be required by
law) amend or terminate any collective bargaining agreement, bonus, profit
sharing, thrift, compensation, severance, termination, stock option, stock
appreciation right, restricted stock, performance unit, stock equivalent, stock
purchase agreement, pension, retirement, deferred compensation, employment, or
other employee benefit agreement, trust, plan, fund, or other arrangement for
the benefit or welfare of any director, officer, or employee, or (except for
normal increases in the ordinary course of business consistent with past
practice that, in the aggregate, do not result in a material increase in
benefits or compensation expenses) increase in any manner the compensation or
benefits of any director, officer, or employee or pay any benefit not required
by any plan or arrangement as in effect as of the date hereof (including,
without limitation, the granting of stock appreciation rights or performance
units), or increase the amount or change in any material respect the terms of
any insurance covering directors or officers;
(f) acquire, sell, license, lease, or dispose of any assets
outside the ordinary course of business which in the aggregate are material to
such Party or enter into any commitment or transaction outside the ordinary
course of business consistent with past practice;
(g) change any of the accounting principles or practices used by
such Party;
(h) (i) acquire (by merger, consolidation, or acquisition of stock
or assets) any corporation, partnership, or other business organization or
division thereof or any interest therein; (ii) enter into any partnership, joint
venture, or similar agreement or arrangement or any contract or agreement other
than in the ordinary course of business consistent with past practice; (iii)
authorize any new capital expenditure(s) which, individually, is in excess of
$10,000 or, in the aggregate, are in excess of $50,000; or (iv) amend or modify
any material
32
<PAGE>
existing agreement, arrangement, or understanding which would increase the
obligations or impair or diminish the rights of such Party in any material
respect;
(i) make any tax election or settlement or compromise any income
tax liability material to such Party; or take any action which would jeopardize
qualification of the Merger as a reorganization within the meaning of Section
368(a) of the Code.
(j) pay, discharge, or satisfy any claims, liabilities, or
obligations (absolute, accrued, asserted, or unasserted, contingent or
otherwise), other than the pay ment, discharge, or satisfaction in the ordinary
course of business consistent with past practice or in accordance with their
terms, of liabilities reflected or reserved against in, or contemplated by, the
consolidated financial statements (or the notes thereto) of such Party or
incurred in the ordinary course of business consistent with past practice,
except for fees and expenses (including legal fees and expenses) incurred in
connection with this Agreement, the Stock Purchase Agreement of even date
herewith and the transactions contemplated hereby and thereby and except as
required by applicable law;
(k) enter into (in writing or otherwise) any contract, agreement,
commitment, arrangement, or understanding to do any of the foregoing; or
(l) take, or agree to take, any action which would make any
representation or warranty untrue or incorrect in any material respect.
SECTION 5.2 No Solicitation of Transactions.
From and after the date hereof through the earlier to occur of the
Effective Date and the date of termination of this Agreement, each Party shall
not, directly or indirectly, through any officer, director, agent, or otherwise,
solicit, initiate, or encourage submission of, proposals or offers from any
person relating to any acquisition or purchase of all or a substantial portion
of the assets of, or any equity interest in, such Party or any business
combination with such Party or participate in any negotiations regarding, or
furnish to any other person any information with respect to, or encourage, any
effort or attempt by any other person to do or seek any of the foregoing;
provided, however, that nothing contained in this Section 5.2 shall prohibit any
Party or its Board of Directors from making disclosures to such Party's
stockholders which, in the judgment of the Board of Directors with advice of
counsel, may be required under applicable law. Each Party will immediately cease
and cause to be terminated any existing activities, discussions, or negotiations
with any parties conducted heretofore with respect to any of the foregoing, and
shall immediately demand the return or destruction of any non-public information
concerning such Party distributed to other persons for the purpose of soliciting
or encouraging any of the foregoing.
SECTION 5.3 Option Plans, Convertible Debt, Options, and Warrants.
Interactive shall use its best efforts to cause all outstanding shares of
Series A Stock and all outstanding debt securities convertible into common stock
to be converted into Interactive Common Stock and shall use its best efforts to
cause all warrants exercisable for Interactive Common Stock to be surrendered in
exchange for Interactive Common Stock. Petry shall use its best efforts to cause
all outstanding warrants exercisable for Petry Common stock to be surrendered in
exchange for Petry Common Stock.
33
<PAGE>
SECTION 5.4 Consents and Approvals.
Each Party shall use commercially reasonable efforts to obtain all
consents and approvals required with respect to this Agreement and the
transactions contemplated thereby.
SECTION 5.5 Directors' and Officers' Indemnification.
From and after the Effective Time, Interactive and the Surviving
Corporation shall jointly and severally indemnify, defend, and hold harmless the
present officers and directors (the "Indemnified Parties") of each of Petry and
Advercomm against all losses, claims, damages, or liabilities ("Claims") arising
out of actions or omissions occurring at or prior to the Effective Time that are
based on or arising out of the fact that such person is or was a director or
officer of Petry or Advercomm prior to the Effective Time, including, without
limitation, any Claim arising out of this Agreement or the transactions
contemplated hereby and thereby, to the greatest extent permissible under
applicable law.
SECTION 5.6 Reincorporation in Delaware
As soon as practicable after the Effective Time, Interactive shall
take all such steps as may be required under applicable law for Interactive to
reincorporate in the State of Delaware.
SECTION 5.7 Approval of Shareholders.
Interactive shall as promptly as reasonably practicable take all
action necessary in accordance with New York Law and its Certificate of
Incorporation and By-Laws duly to call, convene, and hold a meeting of its
shareholders. Interactive shall use reasonable efforts to solicit from
Interactive shareholders proxies in favor of (i) the Merger, (ii) an increase in
the number of authorized shares of capital stock to 100,000,000 Common Shares,
par value $.01 per share, and 30,000,000 Preferred Shares, par value $.01 per
share (the "Amendment Proposal"), (iii) adoption of the 1998 Interactive
Imaginations, Inc. Stock Incentive Plan, and (iv) the election of the six
nominees for director set forth on Schedule I.A hereto, and shall take such
other action as is reasonably necessary to secure the vote of stockholders
required by New York Law to effect the Merger and the transactions contemplated
thereby.
ARTICLE VI
ADDITIONAL AGREEMENTS OF THE PARTIES
SECTION 6.1 Access to Information; Confidentiality.
(a) Subject to applicable law, from the date hereof to the
Effective Time, each Party shall afford the officers, employees, and authorized
agents of each other Party reasonable access, during normal business hours and
upon reasonable notice, to their respective officers, employees, authorized
agents, properties, offices, books, and records and shall furnish each other
Party with its financial and operating data and other information
34
<PAGE>
regarding their assets, properties, goodwill, and business as such other Parties
may from time to time reasonably request.
(b) In the event of the termination of this Agreement (under
Section 8.1 below), each Party shall, and shall cause their respective
affiliates and their officers, directors, employees, and agents to (i) return
promptly every document furnished to them by any other Party or any of its
officers, directors, employees, and agents in connection with the transactions
contemplated hereby and any copies thereof, and shall use its best efforts to
cause others to whom such documents may have been furnished promptly to return
such documents and any copies thereof any of them may have made, and (ii)
destroy promptly all documents created by them from any data, information, or
document furnished by any other Party or any of its officers, directors,
employees, and agents in connection with the transactions contemplated hereby
and any copies thereof, and shall use its best efforts to cause others to whom
such documents may have been furnished promptly to destroy the same and any
copies thereof, other than documents created from data, information or documents
otherwise publicly available.
(c) No investigation pursuant to this Section 6.1 or other
investigation shall affect any representations or warranties of the parties
herein or the conditions to the obligations of the parties hereto.
SECTION 6.2 Notification of Certain Matters.
Each Party shall give prompt notice to each of the other Parties of
(i) the occurrence, or non-occurrence, of any event, the occurrence or
non-occurrence of which would be likely to cause any representation or warranty
of such Party contained in this Agreement to be untrue or inaccurate at or prior
to the Effective Time and (ii) any failure of a Party to comply with or satisfy
any covenant, condition or agreement to be complied with or satisfied by it
hereunder; provided, however, that the delivery of any notice pursuant to this
Section 6.2 shall not limit or otherwise affect the remedies available here
under to the Party receiving such notice.
SECTION 6.3 Further Action.
Upon the terms and subject to the conditions hereof, and subject to
the exercise by the Boards of Directors of each Party of their fiduciary
obligations, each of the Parties hereto shall use all reasonable efforts to
take, or cause to be taken, all actions and to do, or cause to be done, all
other things necessary, proper, or advisable to consummate and make effective as
promptly as practicable the transactions contemplated by this Agreement and to
obtain in a timely manner all necessary waivers, consents, and approvals and to
effect all necessary registrations and filings, including, but not limited to:
(i) reasonable efforts to lift or rescind any injunction or restraining order or
other order which may be entered; (ii) cooperation in reasonable tax planning
measures in light of the transactions contemplated hereby so long as no action
shall be required to be taken which would result in adverse tax consequences to
the stockholders of the Parties or, if the Merger does not occur, to the
Parties; and (iii) reasonable cooperation in respect of any filings to be made
in connection with the Merger and the transactions contemplated hereby.
35
<PAGE>
SECTION 6.4 Public Announcements.
Each Party shall consult with the others before issuing any further
press release or otherwise making any public statements with respect to the
Merger and neither shall issue any such press release or make any such public
statement, except as may be required by law, without the prior consent of the
others, which consent shall not be unreasonably withheld or delayed.
SECTION 6.5 Government Compliance.
Each Party agrees promptly to effect all necessary registrations,
filings, applications, and submissions of information requested by governmental
authorities.
ARTICLE VII
CONDITIONS OF THE MERGER
SECTION 7.1 Conditions to Obligations of Each Party to Effect the
Merger.
The respective obligations of each party to effect the Merger shall
be subject to the fulfillment at or prior to the Effective Time of the following
conditions:
(a) The shareholders of Interactive shall have approved and
adopted: (i) this Agreement; (ii) the Amendment Proposal; and (iii) the election
of the six nominees for director set forth on Schedule I.A hereto, in each case
by the requisite vote of the shareholders of Interactive in accordance with its
Certificate of Incorporation and New York state law.
(b) Each Party shall have received evidence, in form and substance
reasonably satisfactory to each other Party, that such licenses, permits,
consents, approvals, authorizations, qualifications, orders of governmental
authorities, and third parties as are required in connection with the
consummation of the transactions contemplated hereby or necessary to conduct the
business of each Party as presently conducted have been obtained and are in full
force and effect other than those which, if not obtained, would not, either
individually or in the aggregate, have a Material Adverse Effect on such Party.
(c) At the Effective Time, there shall be no effective injunction,
writ, or preliminary restraining order or any order of any nature issued by a
court or governmental agency of competent jurisdiction directing that the
transactions provided for herein not be consummated as herein provided.
(d) Each Party shall in all material respects have performed each
obligation to be performed by it hereunder on or prior to the Effective Time.
(e) The representations and warranties of each Party set forth in
this Agreement shall be true and correct in all material respects at and as of
the Effective Time as if made at and as of such time, except for changes
contemplated by this Agreement and by the Disclosure Schedule and except to the
extent that any such representation or warranty is made as of a specified date,
in which case such representation or warranty
36
<PAGE>
shall have been true and correct in all material respects as of such date.
(f) Each Party shall have received an opinion from counsel to each
other Party, dated the Closing Date, in form and substance reasonably
satisfactory to such Party, as to (i) the valid existence and good standing of
such Party in its jurisdiction of incorporation, (ii) the corporate power and
authority of such Party to own its properties and to conduct its business, (iii)
the corporate power and authority of such Party to execute and deliver this
Agreement and the due authorization thereof, (iv) the due execution and delivery
and enforceability of this Agreement, (v) the absence of conflicts with the
charter, bylaws or material agreements of such Party, (vi) the absence of
material consents or approvals required to consummate the transactions
contemplated by this Agreement, and (vii) the absence of litigation regarding
the transaction.
(g) All actions, proceedings, instruments, and documents required
to carry out the transactions contemplated hereby or incidental hereto and all
other related legal matters shall have been reasonably satisfactory to and
approved by counsel for each Party and such counsel shall have been furnished
with such certified copies of such corporate actions and proceedings and such
other instruments and documents as it shall have reasonably requested.
(h) There shall not have been any action taken, or any statute,
rule, regulation, or order enacted, promulgated, or issued or deemed applicable
to the Merger by any Federal or state government or governmental authority or
court, which would (i) prohibit the Surviving Corporation's or Interactive's
ownership or operation of all or a material portion of Petry's or Advercomm's
business or assets, or compel the Surviving Corporation or Interactive to
dispose of or hold separate all or a material portion of Petry's or Advercomm's
business or assets, as a result of the Merger; (ii) render the Subsidiary unable
to consummate the Merger; (iii) make such consummation illegal; or (iv) impose
or confirm material limitations on the ability of Interactive effectively to
exercise full rights of ownership of shares of the capital stock of the
Surviving Corporation, including without limitation, the right to vote any such
shares on all matters properly presented to the stockholders of the Surviving
Corporation, and no such action shall have been taken or any such statute, rule,
regulation, or order enacted, promulgated, issued, or deemed applicable to the
Merger which in the reasonable judgment of Interactive will produce such result.
(i) Interactive shall have obtained the approval, agreement and/or
consent of its security holders as contemplated by Section 5.3 and all shares of
Series A Stock, all outstanding debt securities of Interactive and all warrants
exercisable for Interactive Common Stock shall have been converted or exercised
or shall be subject to mandatory conversion or exercise into a number of shares
of Interactive Common Stock less than or equal to 5,899,322 shares.
(j) All warrants to purchase shares of Petry Common Stock shall
have been exercised.
(k) Each Party shall have obtained change of control waivers from
of its employees that are party to an employment contract that provides for
benefits upon the occurrence of a change in control.
37
<PAGE>
(l) The investment of at least $10,000,000 in the securities of
Interactive, pursuant to the Securities Purchase Agreement, a draft of which is
attached hereto as Exhibit E, shall have been consummated substantially on the
terms set forth in such securities purchase agreement, in the draft Restated
Certificate of Incorporation attached hereto as Exhibit F, and in the form of
Warrant attached hereto as Exhibit G, and the Shareholders' Agreement and
Registration Rights Agreement attached hereto as Exhibit H and Exhibit I shall
have been duly executed by all parties thereto substantially in the form
attached hereto;
(m) Petry and Advercomm shall have obtained from each of their
stockholders a letter agreement in the form attached as Exhibit J hereto,
relating to certain tax matters.
(n) The Related Agreements contemplated by Section 1.9 shall have
been executed and delivered by the parties thereto;
(o) Each Party shall have received a certificate of each other
Party, dated the Closing Date, signed by the Chief Executive Officer of such
Party, to the effect that, to the best of the knowledge, information, and belief
of such officer, all of the conditions set forth above have been fulfilled.
(p) Each Party shall have received a certificate of each other
Party, dated the Closing Date, signed by the Chief Executive Officer of such
Party, as to such other matters as may be reasonably requested by the Parties,
including, but not limited to, certificates with respect to the Party's
Certificate of Incorporation, By-laws, Board of Directors' resolutions relating
to the transactions contemplated hereby and the incumbency and signatures of
each of the officers of the Party who shall execute on behalf of the Party any
document delivered on the Closing Date.
ARTICLE VIII
TERMINATION, AMENDMENT, AND WAIVER
SECTION 8.1 Termination.
This Agreement may be terminated at any time prior to the Effective
Time, whether prior to or after approval hereof by the stockholders of the
Parties:
(i) By mutual written consent duly authorized by the Boards of
Directors of each Party;
(ii) By any Party if the Board of Directors of any other Party
shall have withdrawn or modified its approval or recommendation of this
Agreement or the Merger or shall have approved or recommended another offer or
proposal;
(iii) By any Party if Interactive shall not have obtained the
consents and approvals of its security holders and caused to be effected the
conversion or exercise of all Series A Stock, convertible debt securities and
warrants as contemplated by Section 5.3 and 7.1(i);
38
<PAGE>
(iv) By any Party if the Merger shall not have been consummated by
February 20, 1998, unless the absence of such consummation shall be due to the
failure of the Party seeking to terminate this Agreement (or its affiliates) to
perform its obligations under this Agreement required to be performed by it at
or prior to the Effective Time;
(v) By any Party, if the stockholders of Interactive fail to
approve and adopt this Agreement and the Merger;
(vi) By any Party if a United States or state governmental
authority, agency, or commission or United States or state court of competent
jurisdiction shall have issued an order, decree, or ruling or taken any other
action (which order, decree, ruling, or action the Parties hereto shall use
their best efforts to lift), in each case permanently restraining, enjoining, or
otherwise prohibiting the Merger, and such order, decree, ruling, or action
shall have become final and non-appealable; or
(vii) By any Party if any other Party shall breach or fail to
perform in any material respect any of its material covenants or agreements
contained herein.
SECTION 8.2 Effect of Termination.
In the event of termination of this Agreement as provided in Section
8.1, (i) there shall be no liability or further obligation on the part of any
Party hereto except as set forth in Sections 8.3 and 9.1 hereof and (ii) nothing
herein shall relieve any Party from liability for any breach of this Agreement.
SECTION 8.3 Fees and Expenses.
All costs and expenses incurred in connection with this Agreement
and the transactions contemplated hereby shall be paid by the Party incurring
such expenses. No Party shall incur liability to its stockholders for any such
fees and expenses.
SECTION 8.4 Amendment.
This Agreement may be amended by the parties hereto by action taken
by or on behalf of their respective Boards of Directors at any time prior to the
Effective Time; provided, however, that, after approval of the Merger by the
stockholders of the Parties, no amendment may be made which would change the
Petry Merger Consideration or the Advercomm Merger Consideration. This Agreement
may not be amended except by an instrument in writing signed by the Parties
hereto.
SECTION 8.5 Waiver.
At any time prior to the Effective Time, any party hereto may (a)
extend the time for the performance of any of the obligations or other acts of
the other parties hereto, (b) waive any inaccuracies in the representations and
warranties contained herein or in any document delivered pursuant hereto, and
(c) waive compliance with any of the agreements or conditions contained herein.
Any such extension or waiver shall be valid if set forth in an instrument in
writing signed by the parties hereto. The failure of any party hereto to assert
any of its rights hereunder shall not constitute a waiver of such rights.
39
<PAGE>
ARTICLE IX
GENERAL PROVISIONS
SECTION 9.1 Survival of Representations, Warranties, and Agreements.
The representations, warranties, and agreements in this Agreement
shall terminate at the Effective Time or upon the termination of this Agreement
pursuant to Section 8.1, as the case may be, except that the agreements set
forth in Sections 1.6 and 1.7 and 6.5 shall survive the Effective Time
indefinitely and those set forth in 6.1(b) and 6.4 shall survive termination
indefinitely.
SECTION 9.2 Notices.
All notices and other communications given or made pursuant hereto
shall be in writing and shall be deemed to have been duly given or made as of
the date delivered, if delivered personally or mailed by registered or certified
mail (postage prepaid, return receipt requested) or sent by Federal Express or
similar overnight delivery or courier service or by telecopy to the parties at
the following addresses (or at such other address for a party as shall be
specified by like notice):
(a) if to Interactive or the Subsidiary:
915 Broadway, Suite 1608
New York, New York 10010
Attention: Michael P. Paolucci
with a copy to:
Carter Ledyard & Milburn
Two Wall Street
New York, NY 10005
Attention: David McDonald, Esq.
40
<PAGE>
(b) if to Petry:
1290 Avenue of the Americas
New York, New York 10104
Attention: David J. Moore
with a copy to:
Proskauer Rose LLP
1585 Broadway
New York, New York 10036
Attention: Mark E. Moran, Esq.
(c) if to Advercomm:
125 E. 55th Street
New York, New York 10019
Attention: Jay Friesel
with a copy to:
Duquette & Tipton LLP
405 Lexington Avenue, Suite 4500
New York, New York 10174
Attention: David Duquette, Esq.
SECTION 9.3 Headings.
The headings contained in this Agreement and the Disclosure
Schedules are for reference purposes only and shall not affect in any way the
meaning or interpretation of this Agreement or the Disclosure Schedule.
SECTION 9.4 Entire Agreement.
This Agreement constitutes the entire agreement and supersedes all
prior agreements and undertakings, both written and oral, among the parties, or
any of them, with respect to the subject matter hereof and, except as otherwise
expressly provided herein, is not intended to confer upon any other person any
rights or remedies hereunder.
SECTION 9.5 Parties in Interest; Assignment.
This Agreement shall not be assigned by operation of law or
otherwise. This Agreement shall be binding upon and inure solely to the benefit
of each party hereto, and nothing in this Agreement, express or implied, is
intended to confer upon any other person any rights or remedies of any nature
whatsoever under this Agreement, except that any of the Indemnified Parties
shall be entitled after the Effective Time to enforce the provisions of Section
6.1.
SECTION 9.6 Governing Law.
This Agreement shall be governed by, and construed in accordance
with, the laws of the State of New York applicable to contracts executed in and
to be performed in that State, without regard to conflicts of laws, except that
Delaware Law shall apply to the Merger.
SECTION 9.7 Counterparts.
This Agreement may be executed in one or more counterparts, and by
the different parties hereto in separate counterparts, each of which when
executed shall be deemed to be an original but all of which taken together shall
constitute one and the same agreement.
41
<PAGE>
SECTION 9.8 Severability.
If any provision of this Agreement is invalid, illegal, or
unenforceable, the balance of this Agreement shall remain in effect, and if any
provision is inapplicable to any person or circumstance, it shall nevertheless
remain applicable to all other persons and circumstances.
SECTION 9.9 Specific Performance.
Since a breach of the provisions of this Agreement could not
adequately be compensated by money damages, any Party shall be entitled, in
addition to any other right or remedy available to it, to an injunction
restraining such breach or a threatened breach and to specific performance of
any such provision of this Agreement, and in either case no bond or other
security shall be required in connection therewith, and the parties hereby
consent to the issuance of such injunction and to the ordering of specific
performance.
42
<PAGE>
IN WITNESS WHEREOF, Interactive, the Subsidiary, Petry and Advercomm
have caused this Agreement to be executed as of the date first written above by
their respective officers thereunto duly authorized.
INTERACTIVE IMAGINATIONS, INC.
By: /s/ Michael P. Paolucci
--------------------------------
Michael P. Paolucci
Chairman and Chief Executive Officer
24/7 ACQUISITION CORP.
By: /s/ David J. Moore
--------------------------------
David J. Moore
Chief Executive Officer
PETRY INTERACTIVE, INC.
By: /s/ David J. Moore
--------------------------------
David J. Moore
Chairman and Chief Executive Officer
ADVERCOMM, INC.
By: /s/ Jacob I. Freisel
--------------------------------
Jacob I. Friesel
Chairman and Chief Executive Officer
43
<PAGE>
SCHEDULE IA.
David J. Moore
Michael P. Paolucci
Jacob I. Friesel
Jack Rivkin
Ronald Celmer
Kristopher Wood
44
<PAGE>
SCHEDULE IB.
David J. Moore Chief Executive Officer
Jacob I. Friesel Executive Vice President
Gary Cecchini Senior Vice President
Scott Cohen Senior Vice President
Mark Burchill Senior Vice President
Geoffrey Judge Senior Vice President
45
AGREEMENT AND PLAN OF MERGER
By and Among
24/7 Media, Inc.,
Interactions Acquisition Corp.
and
Intelligent Interactions Corporation
<PAGE>
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER, dated as of April 9, 1998 (this
"Agreement"), among 24/7 Media, Inc., a Delaware corporation ("24/7"),
Interactions Acquisition Corp., a Delaware corporation and a wholly-owned
subsidiary of 24/7 (the "Subsidiary"), and Intelligent Interactions Corporation
("the Company"), a Delaware corporation, and each of the stockholders of the
Company set forth on the signature pages hereto (each, a "Seller").
WHEREAS, the Boards of Directors of 24/7, the Subsidiary, and the
Company have each approved the merger (the "Merger") of the Subsidiary with and
into the Company, in accordance with the General Corporation Law of the State of
Delaware ("Delaware Law") and upon the terms and subject to the conditions set
forth herein; and
WHEREAS, for federal income tax purposes, it is intended that the
Merger, as defined herein, shall qualify as a reorganization within the meaning
of Section 368(c) of the Internal Revenue Code of 1986, as amended (the "Code");
WHEREAS, each Seller is the owner of such number and class(es) of
shares of capital stock (the "Shares") of the Company as is set forth on the
Ownership Table following the signatures pages hereto ("Ownership Table"), such
Shares collectively constituting all of the issued and outstanding shares of
capital stock of the Company; and
NOW, THEREFORE, in consideration of the foregoing and the mutual
covenants and agreements herein contained, and intending to be legally bound
hereby, 24/7, the Subsidiary, the Company and the Sellers hereby agree as
follows:
1. The Merger.
(a) The Merger At the Effective Time (as defined in subparagraph
1(b) and subject to and upon the terms and conditions of this Agreement and
Delaware Law, the Subsidiary shall be merged with and into the Company, the
separate corporate existence of the Subsidiary shall cease, and the Company
shall continue as the surviving corporation. The Company as the surviving
corporation after the Merger is hereinafter sometimes referred to as the
"Surviving Corporation."
(b) Effective Time. As promptly as practicable after the
satisfaction or waiver of the conditions set forth in Article VII and after the
Closing referred to in subparagraph 1(g), the parties hereto shall cause the
Merger to be consummated by delivering a Certificate of Merger (the "Certificate
of Merger") to the Secretary of State of the State of Delaware, in such form as
required by, and executed in accordance with the relevant provisions of,
Delaware Law, for filing by the Secretary of State (the time of such filing
being the "Effective Time").
i
<PAGE>
(c) Effect of the Merger. At the Effective Time, the effect of
the Merger shall be as provided in the applicable provisions of Delaware Law.
Without limiting the generality of the foregoing, and subject thereto, at the
Effective Time all the rights, privileges, powers, franchises, and property of
the Subsidiary shall vest in the Surviving Corporation, and all restrictions,
disabilities, duties, debts, and liabilities of the Subsidiary shall become the
restrictions, disabilities, duties, debts, and liabilities of the Surviving
Corporation.
(d) Certificate of Incorporation; By-Laws. At the Effective Time,
the Certificate of Incorporation and By-Laws of the Subsidiary shall be the
Certificate of Incorporation and By-Laws of the Surviving Corporation until
thereafter amended.
(e) Directors and Officers. The directors of the Subsidiary
immediately prior to the Effective Time shall be the directors of the Surviving
Corporation and the officers of the Company immediately prior to the Effective
Time shall be the officers of the Surviving Corporation, in each case until
their respective successors are duly elected or appointed and qualified.
(f) Conversion of Securities. At the Effective Time, by virtue of
the Merger and without any action on the part of 24/7, the Subsidiary or the
Company, or the Sellers, each share of capital stock of the Company shall be
exchanged for shares of capital stock of 24/7 (the "Merger Consideration") as
follows:
(i) For each share of common stock, par value $.01 per
share, of the Company owned by a Seller and delivered to 24/7, 24/7 shall issue
to such Seller 16.253539 shares of common stock, par value $.01 per share,
2.303962 Class A Warrants, 2.303962 Class B Warrants and 1.18654 Class C
Warrants of 24/7;
(ii) for each share of Preferred Stock, Series A Preferred
Stock, Series AA Preferred Stock or Series AAA Preferred Stock of the Company
owned by a Seller, 24/7 shall issue to such Seller 18.0644 shares of Series A
Convertible Voting Preferred Stock, par value $.01 per share (the "Series A
Stock"), which Series A Stock shall have the terms and provisions as are set
forth in 24/7's Certificate of Incorporation, as amended, a copy of which has
been provided to Seller, and 2.68891 Class A Warrants, 2.68891 Class B Warrants
and 1.384778 Class C Warrants of 24/7; provided, however, that the Sellers agree
to contribute a pro-rata portion of such Class A, B and C Warrants to
Interactive Capital Partners LLC as more fully described in Section 10 hereof,
with the result that Sellers shall receive the number of shares and warrants
indicated by the Ownership Table; and
(iii) In addition, each option to purchase shares of Common
Stock of the Company issued pursuant to the Company's 1996 Equity Incentive Plan
shall be converted into an option to purchase 16.4964 shares of common stock of
24/7, under the terms and pursuant to the conditions of the 24/7 Media, Inc.
1998 Stock Incentive Plan, the exercise price per share of
2
<PAGE>
such options shall be proportionately decreased, and all such options shall vest
in accordance with their existing vesting schedules.
(iv) The shares of common stock, par value $.01 per share of
the Subsidiary issued and outstanding immediately prior to the Effective Time
shall, by virtue of the Merger and without any action on the part of the holder
thereof, be converted into and become at the Effective Time 100 shares of common
stock, par value $.01 per share, of the Company.
(g) Surrender and Payment.
(i) Each holder of Shares that have been converted into a
right to receive the Merger Consideration, upon surrender at Closing of a
certificate or certificates representing such shares, together with properly
executed stock powers and stock transfer stamps covering such shares, will be
entitled to receive the Merger Consideration payable in respect of such shares,
which Merger Consideration shall be delivered at Closing.
(ii) After the Effective Time, there shall be no further
registration or transfers of Shares outstanding prior to the Effective Time. All
certificates representing Shares outstanding prior to the Effective Time shall
be presented to 24/7 at the Closing and shall be canceled and exchanged for the
Merger Consideration provided for, and in accordance with the procedures set
forth, in this Agreement.
(iii) No fractional shares of 24/7 capital stock or
fractional warrants shall be issued upon conversion of Shares. In lieu of any
fractional share of 24/7 capital stock or fractional warrant to which the holder
of Shares would otherwise be entitled, 24/7 shall round to the nearest whole
share of 24/7 capital stock or nearest whole warrant.
(h) Closing. The Closing of the transactions contemplated by this
Agreement (the "Closing"), shall be held at the offices of Proskauer Rose LLP,
1585 Broadway, New York, New York 10036, at 11:00 A.M., New York time, on a date
designated by 24/7 upon two business days' prior notice (the "Closing Date"),
but in no event later than April 15, 1998, unless the parties shall agree upon a
later date.
2. Representations and Warranties of the Company and the Sellers. The
Company and each Seller severally and not jointly represents, warrants and
agrees (as to itself only with respect to such Seller's ownership of the Shares
and its authority to enter into this Agreement) that:
(a) Ownership and Delivery of the Shares and Execution and Effect
of Agreement. Each Seller is, and immediately prior to the Closing will be, the
record and beneficial owner of the number and class(es) of Shares set forth
below such Seller's name on the signature pages hereto, free and clear of any
and all liens, pledges, security interests, options, encumbrances, charges,
agreements or claims of any kind whatsoever ("claims"), other than those
agreements described in subparagraph 4(d) hereof, which agreements each Seller
agrees to cause
3
<PAGE>
to be terminated upon consummation of the Closing. Each of the Company and the
Seller has the full right, power and authority to enter into and to perform this
Agreement and all other agreements, certificates and documents executed or
delivered, or to be executed or delivered, by the Company and such Seller in
connection herewith including the Stockholders' Agreement and the Registration
Rights Agreement (each defined in subparagraph 7(h) hereof) (collectively, with
this Agreement, the "Company Documents"). Neither the authorization, execution,
delivery nor performance of any of the Company's Documents will violate,
conflict with, result in a breach of, constitute a default under, or require any
notice, consent, approval or order under the Company's organizational documents,
or, if Seller is an entity, under such Seller's organizational documents. On the
Closing Date, each Seller will have the full right, power and authority to
assign, transfer and deliver such Seller's Shares as provided in this Agreement,
and such delivery will convey to 24/7 lawful, valid and marketable title to such
Shares, free and clear of any and all claims. This Agreement has been duly
authorized, executed and delivered by the Company and the Seller, and the
Company's Documents are (or when executed and delivered will be) legal, valid
and binding obligations of the Company and the Seller, enforceable in accordance
with their respective terms, subject to equitable considerations which may be
applicable to specific performance.
(b) Organization, Good Standing, Authority. The Company is a
corporation duly organized, validly existing and in good standing under the laws
of the State of Delaware and has full power and authority to own and lease its
assets and properties and to conduct its business as it is now being conducted.
The Company is duly qualified or licensed to do business and is in good standing
as a foreign corporation under the laws of those jurisdictions listed on
Schedule 1 hereto, constituting each jurisdiction in which the conduct of its
business or the ownership or leasing of its assets requires such qualification
except for jurisdictions in which the failure to so qualify would not have a
material adverse effect on the business and operations of the Company taken as a
whole. The copies of the Company's Certificate of Incorporation, as amended
(certified by the Secretary of State of Delaware), and By-Laws (certified by the
Secretary of the Company) which have been previously delivered to 24/7 are
correct and complete.
(c) Capitalization. Immediately prior to the Closing, the
authorized capital stock of the Company will consist of the following:
(i) Common Stock: 930,000 shares of common stock, $.01 par
value, of which 230,170 shares will be issued and outstanding.
(ii) Preferred Stock: a total of 408,648 shares of Preferred
Stock, $0.01 par value per share, of which 71,870 shares have been designated
Series A Preferred Stock, 71,870 shares have been designated Series A-1
Preferred Stock, 54,150 shares have been designated Series AA Preferred Stock,
54,150 shares have been designated Series AA-1 Preferred Stock, 78,304 shares
have been designated Series AAA Stock and 78,304 shares have been designated
Series AAA-1 Preferred Stock. Of all of the authorized shares of Preferred Stock
listed above, only 71,870 shares of Series A Preferred Stock, 54,142 shares of
Series AA Preferred Stock, and 71,210 shares of Series AAA Preferred Stock are
issued and outstanding.
4
<PAGE>
All of the outstanding shares of capital stock of the Company are duly
authorized, validly issued and outstanding, fully paid and nonassessable. Except
as set forth in this Subparagraph 2(c), there are no outstanding shares of
capital stock or other equity or debt securities of the Company.
(iii) Options, Warrants, Reserved Shares. Options to
purchase 51,600 shares of common stock of the Company, all issued to employees
of the Company pursuant to the Company's 1996 Equity Incentive Plan, are
outstanding. All convertible promissory notes of the Company issued in December
1997 have been converted to Series AAA Preferred Stock, the shares issuable upon
such conversion are reflected in the share numbers set forth above, and all
stock purchase warrants issued in connection with such convertible promissory
notes have been canceled. Except as set forth in this Subparagraph 2(c) and in
Schedule 1, as of the Closing Date there will be no existing option, warrant,
call, commitment or other agreement requiring the issuance or sale of any
additional shares of stock or other equity or debt securities of the Company and
no shares of stock or other equity or debt securities of the Company are
reserved for issuance for any purpose, and there will be no agreements,
commitments or restrictions relating to ownership or voting of any shares of
stock or other securities of the Company, other than those agreements addressed
in Subparagraph 4(d).
(d) Subsidiaries and Affiliates. The term "affiliate" shall mean
any entity which the Company owns or controls. The Company has no subsidiaries
or affiliates and has no equity interest in any corporation, partnership, joint
venture or other entity. The Company has conducted its business only through the
Company.
(e) Financial Statements.
(i) The Company has previously delivered to 24/7 (x) the
balance sheets of the Company as at December 31, 1995 and December 31, 1996, and
the related audited statements of operations and retained earnings and changes
in financial position for the fiscal years then ended, as examined by Arthur
Andersen LLP; the Company's balance sheet as at December 31, 1996 is hereinafter
referred to as the "Audited Balance Sheet" and, together with the related
statements of operations and retained earnings and changes in financial position
for the fiscal year then ended, the "Audited Financials") and (y) the unaudited
balance sheet of the Company as at February 28, 1998 (the "Unaudited Balance
Sheet"), and the related unaudited statements of operations and retained
earnings for the fourteen months then ended (together with the Unaudited Balance
Sheet, the "Unaudited Financials"). Each of the foregoing financial state ments
is complete and correct, is in accordance with the Company's books and records,
has been prepared in accordance with generally accepted accounting principles
applied on a consistent basis, and presents fairly the financial position,
results of operations and changes in financial position of the Company as at the
dates and for the fiscal years indicated, subject, in the case of the Unaudited
Balance Sheet, to year-end adjustments and notes required by generally accepted
accounting principles.
5
<PAGE>
(ii) 24/7 and its accountants shall be entitled to review
the Company's preparation of the Unaudited Financials, including the related
work papers of the Company's accountants, at all reasonable times in advance of
and after the delivery thereof to 24/7.
(f) Liabilities. All liabilities of the Company (whether accrued,
unmatured, contingent, or otherwise and whether due or to become due, but not
including the Company's obligations to perform under contracts other than by the
payment of money) are set forth or ade quately reserved against on the face of
the Audited Balance Sheet and the Unaudited Balance Sheet, in each case in
accordance with generally accepted accounting principles consistently applied,
except for liabilities incurred since December 31, 1996 (with respect to the
Audited Balance Sheet), or since February 28, 1998 (with respect to the
Unaudited Balance Sheet) in the ordinary course of business as theretofore
conducted, which are not materially adverse to the operations or prospects of
the Company's business. Neither the Company nor any Seller knows of any basis
for the assertion against the Company of any other liability or loss
contingency.
(g) No Adverse Change. To Seller's best knowledge, since December
31, 1996, the Company has operated its business consistent with ordinary
commercial business practices and only in the ordinary course of business as
theretofore conducted, and consistent with a development stage company, there
has been no: (i) material adverse change in the business, properties, assets,
liabilities, commitments, earnings, financial condition or prospects of the
Company; (ii) property damage or destruction resulting in a loss or cost to the
Company of more than $50,000 in the aggregate, whether or not covered by
insurance; or (iii) act or omission which, if taken or omitted after the date of
this Agreement and before the Closing would conflict with Subparagraph 6(b)
below.
(h) Taxes. To Seller's best knowledge, the Company has properly
filed all fed eral, foreign, state, local and other tax returns and reports
which are required to be filed by it, all of the foregoing are true, correct and
complete, and all taxes, interest and penalties due and payable as shown on such
returns or claimed to be due by any taxing authority have been timely paid. All
unpaid federal, foreign, state, local and other taxes, fees, assessments, duties
and other similar governmental charges payable by the Company or which will,
with the passage of time, become payable by the Company (including interest and
penalties) whether or not disputed (x) with respect to any period prior to
December 31, 1996, have been adequately reserved against in accordance with
generally accepted accounting principles on the face of the Audited Balance
Sheet, and (y) with respect to any period prior to February 28, 1998, have been
adequately reserved against in accordance with generally accepted accounting
principles on the face of the Unaudited Balance Sheet. There are no outstanding
waivers or extensions of time with respect to the assessment or audit of any tax
or tax return of the Company, or claims now pending or matters under discussion
with any taxing authority in respect of any tax of the Company. The Company has
furnished to 24/7 true copies of the federal, foreign, state and local tax
returns of the Company for the fiscal years ended on December 31 for the years
1995 through 1996. Such federal, foreign, state and local income tax returns
have been examined by the relevant taxing authorities for the fiscal years ended
on for the years 1995 and 1996, respectively. The Company has not at any time
consented to have the provisions of Section 341(f)(2) of the Code apply to it.
6
<PAGE>
(i) Title to Properties; Absence of Encumbrances. The Company has
good and marketable title to or, in the case of leases and licenses, valid and
subsisting leasehold interests or licenses in, all of its properties and assets
of whatever kind (whether real or personal, tangible or intangible), including,
without limitation, all properties and assets that are shown on the Audited
Balance Sheet or the Unaudited Balance Sheet (except for assets sold in the
ordinary course of business since December 31, 1996, and February 28, 1998,
respectively) and to properties and assets that are shown on any schedule
hereto, in each case free and clear of any and all liens, mortgages, pledges,
security interests, restrictions, prior assignments, claims and encum brances of
any kind whatsoever, except as may be set forth in Schedule 2 hereto and except
for liens for current taxes and assessments not yet due and payable (which the
Company will promptly pay when due if due prior to the Closing Date). All
assets, properties and rights relating to the Company's business are held by,
and all agreements, obligations and transactions relating to the Company's
business have been entered into, incurred and conducted by, the Company.
(j) Real and Personal Property. Schedule 3 hereto contains a
complete and correct list of all real property (including buildings and
structures) owned or leased by the Company and all interests therein (including
a brief description of the property, the record title holder, the location and
the improvements thereon). To the Company and the Seller's best knowledge, all
such real property, buildings and structures, and the equipment therein, and the
operations and maintenance thereof, comply with any applicable agreements and
restrictive covenants and conform to all applicable legal requirements including
those relating to the environment, health and safety, land use and zoning, and
all work required to be done by the Company as landlord or tenant has been duly
performed. No condemnation or other proceeding is pending or, to the knowledge
of any Seller, after due investigation, threatened, which would affect the use
of any such property by the Company. Schedule 3 hereto contains a complete and
correct list and brief description of all equipment, machinery, computers,
furniture, leasehold improvements, vehicles and other personal property owned or
leased by the Company and all interests therein. The Company's buildings and
other structures, equipment and other assets (whether leased or owned) are in
good operating condition and repair, subject to ordinary wear and tear.
(k) Patents, Trademarks and Copyrights. A list and brief
description of all trademarks, service marks, trade names, brands, copyrights
and patents which are presently being used or have since December 31, 1995, been
used in the Company's business, all applications for registration and
registrations for such trademarks, copyrights, patents, patent applications,
moral rights, mask works, trade secrets, confidential and proprietary
information, compositions of matter, formulas, designs, proprietary rights,
know-how and processes (all of the foregoing collectively hereinafter referred
to as the "Proprietary Assets") and all licenses, contracts, rights and
arrangements with respect to the foregoing, are set forth in Schedule 4 hereto.
The Company has furnished to 24/7 true and complete copies of each of the
foregoing. Except as set forth in Schedule 4, the Company owns the entire,
unencumbered right, title and interest to all such properties free and clear of
all claims, and, except as set forth in Schedule 4, no rights or licenses to
others have been granted with respect to any of such properties. Except as set
forth in Schedule 4, all filings and other action necessary to perfect the full
legal right of the Company in
7
<PAGE>
the United States to the foregoing have been effected. Except as set forth in
Schedule 4, the Company owns or possesses the right to use all the trademarks,
service marks, trade names, brands, copyrights, patents, franchises, permits and
licenses, and rights with respect to the foregoing, necessary for the conduct of
its business as now conducted, without any conflict with or infringement of the
rights of others. Except as set forth in Schedule 4, the Company has not
received notice of any claimed conflict with respect to any of the foregoing.
Neither the Company nor any Seller has any knowledge of any default or alleged
default or state of facts which with notice or lapse of time or both would
constitute a default on the part of any party in the perform ance of any
obligation to be performed or paid by any party under any licenses, contracts,
agreements or arrangements referred to in or submitted as a part of Schedule 4,
the Company has taken, and until the Closing Date, the Company will use its best
efforts to take, all steps reasonably necessary to preserve its legal rights in,
and the secrecy of, all its Proprietary Assets, except those for which
disclosure is required for legitimate business or legal reasons. All
intellectual property rights to all processes, systems and techniques used by
the Company which were developed by any employee of the Company engaged in
research or product development while such employee was employed by the Company
have, by virtue of an invention assignment agreement, been assigned to the
Company. In addition, all intellectual property rights to all processes, systems
and techniques used by the Company or which the Company intends to use in its
proposed business which were developed by Yale Brown, Matthew Walker, John
Gonzalez and Robert Lippmann at any time have been assigned by them to the
Company.
(l) Contracts, Leases and Commitments. The Company has furnished
to 24/7 true copies of the material contracts, leases and commitments listed in
Schedule 5 hereto, includ ing summaries of the terms of any unwritten
commitments. Except as set forth in that Schedule: (1) the Company (and to the
best knowledge of the Company and each Seller, the other parties thereto) have
complied in all material respects with such contracts, leases and commitments,
all of which are valid and enforceable; (2) such contracts, leases and
commitments are in full force and effect and there exists no event or condition
which with or without notice or lapse of time would be a default thereunder,
give rise to a right to accelerate or terminate any provision thereof or give
rise to any lien, claim, encumbrance or restriction on any of the assets or
properties of the Company; and (3) all of such contracts, leases and commitments
have been entered into on an arm's-length basis, and none is materially
burdensome to the Company's business. The Company is not a party, nor is any of
its assets or business subject, to any contract, lease or commitment not listed
in such Schedule (including without limitation purchase or sales commitments,
financing or security agreements or guaranties, repurchase agreements, agency
agreements, manufacturers representative agreements, commission agreements,
employment or collective bargaining agree ments, pension, bonus or
profit-sharing agreements, group insurance, medical or other fringe benefit
plans, and leases of real or personal property), other than contracts terminable
without penalty on not more than 30 days' notice that do not involve,
individually or in the aggregate, the receipt or expenditure of more than
$50,000 in any one year. The Company is engaged in no material disputes with
customers or suppliers. To the best knowledge of the Company and each Seller, no
customer or supplier is considering termination, non-renewal or any adverse
modification of its arrangements with the Company, and the transactions
contemplated by this
8
<PAGE>
Agreement will not have a material adverse effect on the Company's relationship
with any of its suppliers or customers.
(m) Permits; Compliance with Laws. The Company holds the
governmental licenses, permits and authorizations listed in Schedule 6 hereto
which, except as set forth in that Schedule, are valid and unimpaired, will be
unaffected by a transfer of all of the shares of the Company to 24/7, and
constitute all of the licenses, permits and authorizations required for the
ownership or occupancy of its properties and assets and the operation of its
business. The Company's business is and has been operated in compliance
therewith and all laws and regulations (federal, state, local and foreign)
applicable to it, and all required reports and filings with govern mental
authorities have been properly made. The consummation of the transactions
contemplated by this Agreement will not give rise to any liability of the
Company for severance pay or term ination pay.
(n) Employees. Schedule 7 hereto contains a list of the names,
office locations, compensation and years of credited service for severance,
vacation and pension plan purposes of all full- and part-time employees of the
Company as at March 31, 1998; a list of all pension, re tirement,
profit-sharing, deferred compensation, option, bonus, medical, insurance and
other benefit or incentive plans covering such employees; a description of all
employee "perks" or other benefit practices not set forth in such plans or in
agreements; and a description of the Company's severance pay policy. Neither the
Company nor any Seller knows of any efforts within the last three years to
attempt to organize the Company's employees, and no strike or labor dispute
involving the Company has occurred during the last three years or, to the best
knowledge of the Company and each Seller, is threatened. No key employee of the
Company has indicated that he is considering terminating his employment. The
Company has complied with applicable wage and hour, equal employment, safety and
other legal requirements relating to its employees. Neither the Company nor any
member of any affiliated group of which the Company was at any time a member,
has ever maintained or currently maintains any "employee benefit plan" subject
to the Employee Retirement Income Security Act of 1974, as amended ("ERISA").
Neither the Company nor its predecessors has ever contributed to or otherwise
participated in or has been required to contribute to or otherwise participate
in any "multi-employer plan", as defined in Section 4001(a)(3) of ERISA. The
Company has not withdrawn from any such employee benefit plan or multi-employer
plan prior to the date hereof.
(o) Employee Benefit Plans. The Company is not, and never has
been, subject to any pension, profit sharing or other similar plan which is
subject to ERISA, or, to the extent the Company is or has been subject to any of
the requirements of ERISA, it has fully complied with all such requirements.
(p) Insurance. The Company has in full force and effect fire and
casualty insurance policies, with extended coverage, sufficient in amount
(subject to reasonable deductibles) to allow it to replace any of its properties
that might be damaged or destroyed and liability insurance providing coverage in
such amounts as is customary in the industry for a similar company.
9
<PAGE>
(q) Litigation. Schedule 8 hereto contains a complete and correct
list of all actions, suits, proceedings, claims or governmental investigations
pending or, to the best knowledge of the Company and each Seller, threatened
against, the Company or any of its assets, or, in connection with the Company's
business, any Seller or any of the Company's officers, directors or employees.
Except as set forth on Schedule 8 hereto, neither the Company nor, in connection
with the Company's business, any Seller or any of the Company's officers,
directors or employees is subject or party to any judgment, order, or other
direction of or stipulation with any court or other governmental authority or
tribunal, or in violation of any other legal require ments (as defined below),
and neither the Company nor any Seller knows of any reasonable basis for a claim
that such a violation exists. Neither the Company nor any Seller is aware of any
proposed legal requirement that might adversely affect in any material respect
the operation or prospects of the Company's business.
(r) Environmental Matters. The Company's business, assets and
properties are and have been operated and maintained in compliance with all
applicable federal, state and local environmental protection laws and
regulations (the "Environmental Laws"). No event has occurred which, with or
without the passage of time or the giving of notice, or both, would constitute a
non-compliance by the Company with, or a violation by the Company of, the
Environmental Laws. To the Company's and the Seller's best knowledge, no real
property owned, leased, occupied or used by the Company contains any underground
storage tanks, asbestos, polychlorinated biphenyls, solid wastes or other
hazardous substances, as such terms are defined in the Environmental Laws. To
the Company's and the Seller's best knowledge, neither the Company nor any of
its predecessor companies has caused or permitted to exist, as a result of an
intentional or unintentional act or omission, a disposal, discharge or release
of solid wastes, pollutants or hazardous substances, as such terms are defined
in the Environmental Laws, on or from any site which currently is or formerly
was owned, leased, occupied or used by the Company or any predecessor company,
except where such disposal, discharge or release was pursuant to and in
compliance with the conditions of a permit issued by the appropriate federal,
state and/or local governmental agency.
(s) Restrictions. The authorization, execution, delivery and
performance of the Company's Documents and the consummation of the transactions
contemplated hereby and thereby do not and will not violate, conflict with,
result in a breach of or constitute a default under, require any notice or
consent under, give rise to a right of termination of, or accelerate the
performance required by, any terms or provisions of any agreement, instrument or
writing of any nature to which the Company or such Seller is a party or is
bound, or any of their assets or business is subject.
(t) Transactions with Affiliates. Except as set forth in Schedule
9 hereto and except for ordinary dealings with its employees, since December 31,
1996, the Company has had no direct or indirect dealings with any Seller or with
any other key employee of the Company or with any of their affiliates,
associates or relatives. Except as set forth in Schedule 9 and except for
employment arrangements with its employees, the Company has no obligation to or
claim against any Seller or any other key employee of the Company, or any of
their affiliates, associates
10
<PAGE>
or relatives, and no such person or entity has any obligation to or claim
against the Company. Schedule 9 reasonably describes the nature and extent of
any products, services or benefits pro vided to the Company by any such person
or entity without a corresponding charge equal to the fair market value of such
products, services or benefits. Neither of Sellers, any other key employee of
the Company, nor any of their affiliates, associates or relatives has any direct
or in direct interest of any kind in any business or entity which is competitive
with the Company.
(u) Books and Records. The books and records of the Company are
complete and correct in all material respects and have been maintained in
accordance with good business practices. The minute books of the Company, as
previously made available to 24/7, contain com plete and accurate records of all
meetings and accurately reflect all other corporate action of the shareholders
and board of directors of the Company.
(v) Improper Payments. The Company and its officers and agents
have not made any illegal or improper payments to, or provided any illegal or
improper benefit or inducement for, any governmental official, supplier,
customer or other person, in an attempt to influence any such person to take or
to refrain from taking any action relating to the Company. The Company's
employees may from time to time have made customary holiday gifts of nominal
value to suppliers or customers.
(w) Officers and Directors; Bank Accounts, etc. Schedule 10
hereto lists all officers, directors and fiduciaries of the Company; all bank
accounts and safe deposit boxes maintained by the Company and all authorized
signatories therefor, specifying their respective authority; and all credit
cards under which employees of the Company may incur liability, and the persons
holding such cards. No person or entity holds any general or special power of at
torney from the Company.
(x) Disclosure. No representation, warranty or other statement by
the Company or Seller herein or in any other of the Company's Documents or made
in connection with the Company's Documents, contains or will contain an untrue
statement of a material fact, or omits or will omit to state a material fact
necessary to make the statements contained herein or therein not misleading.
Neither the Company nor any Seller is aware of any matter that could reasonably
be expected to have a materially adverse effect on the Company's business or
prospects that has not been disclosed in writing to 24/7.
(y) Legends.
(i) Each Seller understands that the certificates evidencing
the Merger Consideration will bear the following legends:
"THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR ANY STATE
SECURITIES LAWS AND NEITHER SUCH SECURITIES NOR ANY INTEREST THEREIN MAY
BE TRANSFERRED IN THE ABSENCE OF
11
<PAGE>
SUCH REGISTRATION OR AN EXEMPTION THEREFROM UNDER SUCH ACT OR SUCH LAWS
AND THE RULES AND REGULATIONS THEREUNDER."
"TRANSFER OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE IS
RESTRICTED BY AN AGREEMENT, DATED APRIL _, 1998, A COPY OF WHICH IS ON
FILE AT THE OFFICE OF THE CORPORATION. ANY PURPORTED TRANSFER IN
VIOLATION OF THIS AGREEMENT IS VOID AND WILL NOT BE RECOGNIZED BY THE
CORPORATION OR ITS TRANSFER AGENT."
(ii) The certificates shall not be required to bear such
legends if an opinion of counsel reasonably satisfactory to 24/7 is delivered to
24/7 to the effect that neither the legends nor the restrictions on transfer
contained in this Agreement are required to insure compliance with the Act.
Whenever, pursuant to the preceding sentence, any certificate for any of the
Securities is no longer required to bear the foregoing legend, 24/7 may, and if
requested by the holder thereof, shall, issue to the holder, at 24/7's expense,
a new certificate not bearing the foregoing legends.
(c) Any and all shares of Common Stock issued prior to
January 31, 1999 or which 24/7 is obligated to issue as a result of events
occurring prior to such date, in each case upon conversion of Series A Stock as
a result of accrued dividends with respect to such Series A Stock shall be
canceled and cease to exist without further action by 24/7 or any other person
upon the closing of a Qualified Public Offering prior to January 31, 1999, and
shall bear a legend to such effect.
3. Representations and Warranties of 24/7. 24/7 represents,
warrants and agrees that:
(a) Capitalization. Immediately prior to the Closing, the capital
stock of 24/7, as authorized by its Certificate of Incorporation, as amended,
will consist of: (i) 100,000,000 shares of Common Stock, of which 27,481,201
shares will be issued and outstanding, 10,567,229 shares will be reserved for
issuance upon conversion of issued and outstanding Shares, 5,283,615 shares will
be reserved for issuance upon exercise of issued and outstanding Class A
Warrants, 5,283,615 shares will be reserved for issuance upon exercise of issued
and outstanding Class B Warrants, 2,575,000 will be reserved for issuance upon
exercise of issued and outstanding Class C Warrants, 142,421 will be reserved
for issuance upon exercise of issued and outstanding unclassified warrants,
approximately 275,000 (subject to adjustment) will be reserved for issuance upon
exercise of issued and outstanding convertible debentures, and 5,750,000 shares
will be reserved for issuance to key employees, officers and directors of, and
consultants to, 24/7 under stock incentives that have been granted or are
available for grant by 24/7 pursuant to 24/7's 1998 Stock Incentive Plan; and
(ii) 30,000,000 preferred shares, of which 10,060,002 will be outstanding and
have been designated as Series A Convertible Voting Preferred Stock ("Series A
Stock"). The rights, privileges and preferences of the Common Stock and Series A
Stock are as stated in the Certificate of Incorporation of 24/7. Except for the
Stock Incentives specified above, the conversion rights of issued and
outstanding Series A Stock, the conversion rights of
12
<PAGE>
outstanding convertible debentures specified above, and the exercise rights of
issued and outstanding Class A, Class B, Class C Warrants and unclassified
warrants specified above, as of the Closing, 24/7 will not (i) have outstanding
any capital stock or other securities convertible into or exchangeable for any
shares of its capital stock and, except for the preemptive rights contained in
this Agreement, no person will have any right to subscribe for or to purchase
(including conversion or preemptive rights), or any Options for the purchase of,
or any agreements providing for the issuance (contingent or otherwise) of, any
calls, commitments or other claims of any character relating to, any capital
stock or any stock or securities convertible into or exchangeable for any
capital stock of 24/7; (ii) have any capital stock, equity interests or other
securities reserved for issuance for any purpose; or (iii) be subject to any
obligation (contingent or otherwise) to repurchase or otherwise acquire or
retire any shares of its capital stock or any convertible securities, rights or
options of the type described in the preceding clause (i). "Option" with respect
to any person means any security, right, subscription, warrant, option,
"phantom" stock right or other Contract that gives the right directly or
indirectly to (i) purchase or otherwise receive or be issued any shares of
capital stock of such person or any security of any kind convertible into or
exchangeable or exercisable for any shares of capital stock of such person or
(ii) receive or exercise any benefits or rights similar to any rights enjoyed by
or accruing to the holder of shares of capital stock of such person, including
any rights to participate in the equity or income of such person or to
participate in or direct the election of any directors or officers of such
person or the manner in which any shares of capital stock of such person are
voted. Neither this Agreement nor the transactions contemplated hereby or by the
Merger will cause any anti-dilution adjustment or accelerated vesting of any
Options. All issued and outstanding shares of Common Stock are duly and validly
issued and are fully paid and nonassessable and were issued in accordance with
the registration or qualification provisions of the Securities Act and any
applicable state securities laws or pursuant to valid exemptions therefrom, and
all shares of Common Stock, when issued as contemplated hereby, will be duly and
validly issued and fully paid and nonassessable and issued in accordance with
the registration or qualification provisions of the Securities Act and any
applicable state securities laws or pursuant to valid exemptions therefrom. All
of the issued and outstanding Series A Stock (and shares of Common Stock
issuable upon conversion thereof), are validly issued and fully paid and
nonassessable and were issued in accordance with the registration or
qualification provisions of the Securities Act and any applicable state
securities laws or pursuant to valid exemptions therefrom, and all of the Series
A Stock (and shares of Common Stock issuable upon conversion thereof), when
issued as contemplated hereby and pursuant to the terms of the Certificate of
Incorporation, will be validly issued and fully paid and nonassessable and will
be issued in accordance with the registration or qualification provisions of the
Securities Act and any applicable state securities laws or pursuant to valid
exemptions therefrom. The delivery of a certificate or certificates at the
Closing representing the Shares and the Warrants will transfer to each Seller
good and valid title to the Shares and the Warrants, respectively, free and
clear of all liens, pledges, assessments, leases, security interests, claims,
encumbrances, or other restrictions of any kind (collectively, "Liens"). To the
best knowledge of 24/7, there are no agreements among 24/7's shareholders with
respect to the voting or transfer of 24/7's capital stock, other than the
agreements relating to transfer contained in the Stockholders' Agreement and the
Registration Rights Agreement. The authorized capital stock of the Subsidiary
consists of 10,000 shares of common stock, par value $.01 per
13
<PAGE>
share, of which 100 are outstanding as of the date hereof, and 1,000 shares of
preferred stock, par value $.01 per share, none of which are outstanding as of
the date hereof. 24/7 owns, beneficially and of record, all of the issued and
outstanding shares of capital stock of the Subsidiary, free and clear of all
Liens. All of the issued and outstanding shares of capital stock of the
Subsidiary have been duly and validly issued and are fully paid and
nonassessable and were issued in accordance with the registration or
qualification provisions of the Securities Act and any relevant state securities
laws or pursuant to valid exemptions therefrom. There are no outstanding Options
with respect to the Subsidiary.
(b) Organization, Good Standing, Authority. Each of 24/7 and the
Subsidiary is a corporation duly organized, validly existing and in good
standing under the laws of the State of Delaware and has full power and
authority to own and lease its assets and properties and to conduct its business
as it is now being conducted. Each of 24/7 and the Subsidiary is duly qualified
or licensed to do business and is in good standing as a foreign corporation
under the laws of each jurisdiction in which the conduct of its business or the
ownership or leasing of its assets requires such qualification. The Subsidiary
is newly-formed and has not conducted any business or owned any assets prior to
the date hereof. The copies of 24/7's Certificate of Incorporation, as amended
(certified by the Secretary of State of Delaware), and By-Laws, as amended
(certified by the Secretary of 24/7) which have been previously delivered to the
Company are correct and complete. The copies of the Subsidiary's Certificate of
Incorporation, as amended (certified by the Secretary of State of Delaware), and
By-Laws, as amended (certified by the Secretary of the Subsidiary) which have
been previously delivered to the Company are correct and complete.
(c) Subsidiaries and Affiliates. The term "affiliate" shall mean
any entity which 24/7 owns or controls. Other than the Subsidiary, 24/7 has no
subsidiaries or affiliates and has no equity interest in any corporation,
partnership, joint venture or other entity. 24/7 has conducted its business only
through 24/7.
(d) Unaudited Pro Forma Balance Sheet.
(i) 24/7 has previously delivered to the Company an
unaudited pro forma balance sheet (the "Balance Sheet") of 24/7 as at December
31, 1997. The Balance Sheet is in accordance with the Company's books and
records and has been prepared in good faith. All liabilities of the Company
(whether accrued, unmatured, contingent, or otherwise and whether due or to
become due) are set forth or adequately reserved against on the face of the
Balance Sheet except for liabilities incurred since December 31, 1997 in the
ordinary course of business as theretofore conducted, which are not materially
adverse to the operations or prospects of 24/7's business. 24/7 does not know of
any basis for the assertion against 24/7 of any other liability or loss
contingency. Since December 31, 1997, 24/7 has operated its business consistent
with ordinary commercial business practices and only in the ordinary course of
business as theretofore conducted, and there has been no: (i) material adverse
change in the business, properties, assets, liabilities, commitments, earnings,
financial condition or prospects of the Company; or (ii) prop erty damage or
destruction resulting in a loss or cost to the Company of more than $50,000 in
the aggregate, whether or not covered by insurance.
14
<PAGE>
(e) Taxes. 24/7 has properly filed all federal, foreign, state,
local and other tax returns and reports which are required to be filed by it,
all of the foregoing are true, correct and complete, and all taxes, interest and
penalties due and payable as shown on such returns or claimed to be due by any
taxing authority have been timely paid. 24/7 has not at any time consented to
have the provisions of Section 341(f)(2) of the Code apply to it.
(f) Title to Properties; Absence of Encumbrances. 24/7 has good
and marketable title to or, in the case of leases and licenses, valid and
subsisting leasehold interests or licenses in, all of its properties and assets
of whatever kind (whether real or personal, tangible or intangible), free and
clear of any and all liens, mortgages, pledges, security interests, restric
tions, prior assignments, claims and encumbrances of any kind whatsoever, except
for liens for current taxes and assessments not yet due and payable. All assets,
properties and rights relating to 24/7's business are held by, and all
agreements, obligations and transactions relating to 24/7's business have been
entered into, incurred and conducted by, 24/7 rather than any of its affiliates.
(g) Real and Personal Property. All real property (including
buildings and structures) owned or leased by 24/7 and all interests therein and
the equipment therein, and the operations and maintenance thereof, comply with
any applicable agreements and restrictive covenants and conform to all
applicable legal requirements including those relating to the environment,
health and safety, land use and zoning, and all work required to be done by 24/7
as landlord or tenant has been duly performed. No condemnation or other
proceeding is pending or, to the knowledge of any Seller, after due
investigation, threatened, which would affect the use of any such property by
24/7. 24/7's buildings and other structures, equipment and other assets (whether
leased or owned) are in good operating condition and repair, subject to ordinary
wear and tear.
(h) Patents, Trademarks and Copyrights. 24/7 owns the entire,
unencumbered right, title and interest to all trademarks, service marks, trade
names, brands, copyrights and patents which are presently being used or have
since December 31, 1995, been used in 24/7's business, all applications for
registration and registrations for such trademarks, copyrights, patents, patent
applications, moral rights, mask works, trade secrets, confidential and
proprietary information, compositions of matter, formulas, designs, proprietary
rights, know-how and processes (all of the foregoing collectively hereinafter
referred to as the "Proprietary Assets") and all licenses, contracts, rights and
arrangements with respect to the foregoing, free and clear of all claims, and no
rights or licenses to others have been granted with respect to any of such prop
erties. All filings and other action necessary to perfect the full legal right
of 24/7 in the United States to the foregoing have been effected. 24/7 owns or
possesses the right to use all the trademarks, service marks, trade names,
brands, copyrights, patents, franchises, permits and licenses, and rights with
respect to the foregoing, necessary for the conduct of its business as now
conducted, without any conflict with or infringement of the rights of others.
24/7 has not received notice of any claimed conflict with respect to any of the
foregoing. 24/7 has no knowledge of any default or alleged default or state of
facts which with notice or lapse of time or both would con stitute a default on
the part of any party in the performance of any obligation to be performed or
paid by any party under any licenses, contracts, agreements or arrangements
referred to above.
15
<PAGE>
24/7 has taken, and in the future 24/7 will use its best efforts to take, all
steps reasonably necessary to preserve its legal rights in, and the secrecy of,
all its Proprietary Assets, except those for which disclosure is required for
legitimate business or legal reasons. All intellectual property rights to all
processes, systems and techniques used by 24/7 which were developed by any
employee of 24/7 engaged in research or product development while such employee
was employed by 24/7 have, by virtue of an invention assignment agreement, been
assigned to 24/7. In addition, all intellectual property rights to all
processes, systems and techniques used by 24/7 or which 24/7 intends to use in
its proposed business which were developed by its employees at any time have
been assigned by them to 24/7.
(i) Contracts, Leases and Commitments. 24/7 and the other parties
thereto have complied in all material respects with all material contracts,
leases and commitments of 24/7, all of which are valid and enforceable; (2) all
material contracts, leases and commitments of 24/7 are in full force and effect
and there exists no event or condition which with or without notice or lapse of
time would be a default thereunder, give rise to a right to accelerate or
terminate any provision thereof or give rise to any lien, claim, encumbrance or
restriction on any of the assets or properties of 24/7; and (3) all material
contracts, leases and commitments of 24/7 have been entered into on an
arm's-length basis, and none is materially burdensome to 24/7's business. 24/7
is engaged in no material disputes with customers or suppliers. To the best
knowledge of 24/7, no customer or supplier is considering termination,
non-renewal or any adverse modification of its arrangements with 24/7, and the
transactions contemplated by this Agreement will not have a material adverse
effect on 24/7's relationship with any of its suppliers or customers.
(j) Permits; Compliance with Laws. The governmental licenses,
permits and authorizations held by 24/7 are valid and unimpaired, will be
unaffected by a transfer of all of the shares of 24/7 to 24/7, and constitute
all of the licenses, permits and authorizations required for the ownership or
occupancy of its properties and assets and the operation of its business. 24/7's
business is and has been operated in compliance therewith and all laws and
regulations (federal, state, local and foreign) applicable to it, and all
required reports and filings with governmental authorities have been properly
made. The consummation of the transactions contemplated by this Agreement will
not give rise to any liability of 24/7 for severance pay or termination pay.
(k) Employees. 24/7 knows of any efforts within the last three
years to attempt to organize 24/7's employees, and no strike or labor dispute
involving 24/7 has occurred during the last three years or, to the best
knowledge of 24/7, is threatened. No key employee of 24/7 has indicated that he
is considering terminating his employment. 24/7 has complied with applic able
wage and hour, equal employment, safety and other legal requirements relating to
its employ ees. Neither 24/7 nor any member of any affiliated group of which
24/7 was at any time a member, has ever maintained or currently maintains any
"employee benefit plan" subject to the Employee Retirement Income Security Act
of 1974, as amended ("ERISA"). Neither 24/7 nor its predecessors has ever
contributed to or otherwise participated in or has been required to contribute
to or otherwise participate in any "multi-employer plan", as defined in Section
4001(a)(3) of ERISA. 24/7 has not withdrawn from any such employee benefit plan
or multi-employer plan prior to the date hereof.
16
<PAGE>
(l) Employee Benefit Plans. 24/7 is not, and never has been,
subject to any pension, profit sharing or other similar plan which is subject to
ERISA, or, to the extent 24/7 is or has been subject to any of the requirements
of ERISA, it has fully complied with all such requirements.
(m) Insurance. 24/7 has in full force and effect fire and
casualty insurance policies, with extended coverage, sufficient in amount
(subject to reasonable deductibles) to allow it to replace any of its properties
that might be damaged or destroyed and liability insurance providing coverage in
such amounts as is customary in the industry for a similar company.
(n) Litigation. Neither 24/7 nor, in connection with 24/7's
business, any of 24/7's officers, directors or employees is subject or party to
any judgment, order, or other direction of or stipulation with any court or
other governmental authority or tribunal, or in violation of any other legal
requirements, and 24/7 knows of no reasonable basis for a claim that such a
violation exists. 24/7 is not aware of any proposed legal requirement that might
adversely affect in any material respect the operation or prospects of 24/7's
business.
(o) Environmental Matters. 24/7's business, assets and properties
are and have been operated and maintained in compliance with all applicable
federal, state and local environmental protection laws and regulations (the
"Environmental Laws"). No event has occurred which, with or without the passage
of time or the giving of notice, or both, would constitute a non-compliance by
24/7 with, or a violation by 24/7 of, the Environmental Laws. No real property
owned, leased, occupied or used by 24/7 contains any underground storage tanks,
asbestos, polychlorinated biphenyls, solid wastes or other hazardous substances,
as such terms are defined in the Environmental Laws. Neither 24/7 nor any of its
predecessor companies has caused or permitted to exist, as a result of an
intentional or unintentional act or omission, a disposal, discharge or release
of solid wastes, pollutants or hazardous substances, as such terms are defined
in the Environmental Laws, on or from any site which currently is or formerly
was owned, leased, occupied or used by 24/7 or any predecessor company, except
where such disposal, discharge or release was pursuant to and in compliance with
the conditions of a permit issued by the appropriate federal, state and/or local
governmental agency.
(p) Restrictions. The authorization, execution, delivery and
performance of 24/7's Documents and the consummation of the transactions
contemplated hereby and thereby do not and will not violate, conflict with,
result in a breach of or constitute a default under, require any notice or
consent under, give rise to a right of termination of, or accelerate the
performance required by, any terms or provisions of any agreement, instrument or
writing of any nature to which 24/7 is a party or is bound, or any of their
assets or business is subject.
(q) Transactions with Affiliates. 24/7 has not had any direct or
indirect dealings with any principal owner of 24/7 or with any of its
affiliates, associates or relatives (or affiliates thereof) nor does 24/7
beneficially own, directly or indirectly, any investment assets of any such
current or former principal owner of 24/7 or any of their respective Affiliates,
associates or relatives (or Affiliates thereof). 24/7 does not have any
obligation to or claim against any
17
<PAGE>
principal owner of 24/7, or any of his or its affiliates, associates or
relatives, and no such person has any obligation to or claim against 24/7. All
products, services or benefits provided to 24/7 by any such person, or provided
by 24/7 to any such person, are provided at a charge equal to the fair market
value of such products, services or benefits. To the best knowledge of 24/7, no
principal owner of 24/7, nor any of its affiliates, associates or relatives, has
any direct or indirect interest of any kind in any business or entity which is
competitive with 24/7 or with which 24/7 has a business relationship.
(r) Books and Records. The books and records of 24/7 are complete
and correct in all material respects and have been maintained in accordance with
good business practices. The minute books of 24/7 contain complete and accurate
records of all meetings and accurately reflect all other corporate action of the
shareholders and board of directors of 24/7.
(s) Improper Payments. 24/7 and its officers and agents have not
made any illegal or improper payments to, or provided any illegal or improper
benefit or inducement for, any governmental official, supplier, customer or
other person, in an attempt to influence any such person to take or to refrain
from taking any action relating to 24/7. 24/7's employees may from time to time
have made customary holiday gifts of nominal value to suppliers or customers.
(t) Disclosure. No representation, warranty or other statement by
24/7 or the Subsidiary herein or in any other of 24/7's Documents or made in
connection with 24/7's Documents, contains or will contain an untrue statement
of a material fact, or omits or will omit to state a material fact necessary to
make the statements contained herein or therein not misleading. 24/7 is not
aware of any matter that could reasonably be expected to have a materi ally
adverse effect on 24/7's business or prospects that has not been disclosed in
writing to the Company.
4. Covenants of the Company and the Sellers. The Company and the
Sellers severally and not jointly covenant and agree as to itself and only as to
the covenants affecting itself) that between the date hereof and the Closing:
(a) Actions. The Company and Sellers will not voluntarily take
any action which would cause any of the representations and warranties made by
it in the Company's Documents not to be true and correct in all material
respects on and as of the Closing Date with the same force and effect as if such
representations and warranties had been made on and as of the Closing Date.
(b) Access by 24/7. 24/7 and its representatives and advisers
shall have free and full access during normal business hours to the Company's
assets, premises, books and records, key employees and accountants, including
the audit work papers of Arthur Andersen LLP and the work papers of the
Company's accountants relating to the Audited Financials and the Unaudited
Financials, respectively, and the Company and Sellers shall furnish 24/7 with
such information and copies of such documents as 24/7 may reasonably request.
Sellers shall promptly furnish to 24/7 all financial statements of the Company
that are prepared in the ordinary course
18
<PAGE>
of business, including without limitation monthly reports of sales, revenue and
cash flow and quarterly balance sheets.
(c) Conduct of Business. The business of the Company shall be
conducted only in the ordinary course, consistent with the present conduct of
its business, and the Company and Sellers shall use commercially reasonable
efforts to maintain, preserve and protect the assets and goodwill of the
Company. The Company shall not, without the prior written consent of 24/7, take
or commit to take any of following actions: (i) amend its By-Laws or Certificate
of Incorporation, (ii) issue any additional shares of capital stock or issue,
sell or grant any option or right to acquire or otherwise dispose of any of its
authorized but unissued capital stock or other corporate securities, (iii)
declare or pay any dividends or make any other distribution in cash or property
on its capital stock, (iv) repurchase or redeem any shares of its capital stock,
(v) incur, or perform, pay or otherwise discharge, any obligation or liability
(absolute or contingent), except for current obligations and liabilities
incurred in the ordinary course of business consistent with past practice, (vi)
enter into any employment agreement with, or become liable for any bonus,
profit-sharing or incentive payment to, or increase the compensation or benefits
of, any of its officers, directors or employees, except pursuant to presently
existing plans, arrangements or agreements disclosed herein or in a schedule
hereto, (vii) sell, transfer or acquire any properties or assets, tangible or
intangible, other than in the ordinary course of business, (viii) make any
material changes in its customary method of operations, including marketing,
selling and pricing policies and maintenance of business premises, fixtures,
furniture and equipment, (ix) modify, amend or cancel any of its existing leases
or enter into any contracts, agreements, leases or understandings other than in
the ordinary course of business or enter into any loan agreements, (x) make any
investments other than in certificates of deposit or short-term commercial
paper, (xi) make any payments or incur any liability in connection with expenses
incident to the negotiation or preparation of the Company's Documents, or (xii)
take any other action which would cause any of the representations and
warranties made by any Seller in the Company's Documents not to be true and
correct in all material respects on and as of the Closing Date with the same
force and effect as if such representations and warranties had been made on and
as of the Closing Date.
(d) Supplements. If any representation, warranty or statement of
any Seller, or any schedule delivered to 24/7, shall be or become incorrect,
Sellers shall deliver to 24/7 a supplement in order that said representation,
warranty, statement, or schedule, as so supple mented, shall be true and
correct. It is understood and agreed that the delivery of such a supple ment to
24/7 shall not in any manner constitute a waiver by 24/7 of any of its rights
under this Agreement.
(e) Termination of Agreements. Sellers shall cause all provisions
of all purchase agreements, stockholder agreements, registration rights
agreements, investors' rights agreements, co-sale agreements, rights of first
refusal, and similar agreements between Sellers and the Company to terminate and
be of no further force and effect upon consummation of the Closing.
19
<PAGE>
(f) "Market-Stand Off" Agreement. Each Seller hereby agrees that
it shall not, to the extent requested by 24/7 or an underwriter of securities of
24/7, sell or otherwise transfer or dispose of any Registrable Securities or
other shares of stock of 24/7 then owned by such Seller (other than to donees or
partners of the Seller who agree to be similarly bound) for up to ninety (90)
days following the effective date of a registration statement of 24/7 filed
under the Securities Act; provided, however, that all executive officers and
directors and employees of 24/7 then holding Common Stock of 24/7 and all other
persons or entities holding at least five percent (5%) of the outstanding Common
Stock of 24/7 enter into similar agreements. In order to enforce the foregoing
covenant, 24/7 shall have the right to place restrictive legends on the
certificates representing the shares subject to this Subparagraph and to impose
stop transfer instructions with respect to such shares(and the shares or
securities of every other person subject to the foregoing restriction) until the
end of such period.
(g) Further Action. Upon the terms and subject to the conditions
hereof, and subject to the exercise by the Boards of Directors of the Company of
their fiduciary obligations, each of the Sellers and the Company hereto shall
use all reasonable efforts to take, or cause to be taken, all actions and to do,
or cause to be done, all other things necessary, proper, or advisable to
consummate and make effective as promptly as practicable the transactions
contemplated by this Agreement and to obtain in a timely manner all necessary
waivers, consents, and approvals and to effect all necessary registrations and
filings, including, but not limited to: (i) reasonable efforts to lift or
rescind any injunction or restraining order or other order which may be entered;
(ii) cooperation in reasonable tax planning measures in light of the
transactions contemplated hereby so long as no action shall be required to be
taken which would result in adverse tax consequences to the stockholders of the
Company or, if the Merger does not occur, to the Company; and (iii) reasonable
cooperation in respect of any filings to be made in connection with the Merger
and the transactions contemplated hereby.
(h) Public Announcements. The Company and the Sellers shall
consult with 24/7 before issuing any further press release or otherwise making
any public statements with respect to the Merger and neither shall issue any
such press release or make any such public state ment, except as may be required
by law, without the prior consent of 24/7.
(i) Government Compliance. The Company and the Sellers agree
promptly to effect all necessary registrations, filings, applications, and
submissions of information requested by governmental authorities.
5. Covenants of 24/7.
(a) Actions. 24/7 each covenants and agrees that between the date
hereof and the Closing 24/7 will not take any action which would cause any of
the representations and warranties made by it in 24/7's Documents not to be true
and correct in all material respects on
20
<PAGE>
and as of the Closing Date with the same force and effect as if such
representations and warranties had been made on and as of the Closing Date.
(b) Supplements. If any representation, warranty or statement of
24/7 or any schedule delivered by 24/7, shall be or become incorrect, 24/7 shall
deliver to the Company a supplement in order that said representation, warranty,
statement, or schedule, as so supple mented, shall be true and correct. It is
understood and agreed that the delivery of such a supple ment to the Company
shall not in any manner constitute a waiver by the Company of any of its rights
under this Agreement.
(c) Further Action. Upon the terms and subject to the conditions
hereof, and subject to the exercise by the Boards of Directors of 24/7 of their
fiduciary obligations, 24/7 shall use all reasonable efforts to take, or cause
to be taken, all actions and to do, or cause to be done, all other things
necessary, proper, or advisable to consummate and make effective as promptly as
practicable the transactions contemplated by this Agreement and to obtain in a
timely manner all necessary waivers, consents, and approvals and to effect all
necessary registrations and filings, including, but not limited to: (i)
reasonable efforts to lift or rescind any injunction or restraining order or
other order which may be entered; (ii) cooperation in reasonable tax planning
measures in light of the transactions contemplated hereby so long as no action
shall be required to be taken which would result in adverse tax consequences to
the stockholders of 24/7 or, if the Merger does not occur, to 24/7; and (iii)
reasonable cooperation in respect of any filings to be made in connection with
the Merger and the transactions contemplated hereby.
(d) Public Announcements. 24/7 shall consult with the Company
before issuing any further press release or otherwise making any public
statements with respect to the Merger and neither shall issue any such press
release or make any such public statement, except as may be required by law,
without the prior consent of the Company.
(e) Government Compliance. 24/7 agrees promptly to effect all
necessary registrations, filings, applications, and submissions of information
requested by governmental authorities.
(f) Information Rights
(i) Monthly and Quarterly Statements. 24/7 shall deliver to
each Seller, as soon as practicable, and in any event within 30 days after the
close of each month of each fiscal year of 24/7 in the case of monthly
statements and 45 days after the close of each of the first three fiscal
quarters of each fiscal year of 24/7 in the case of quarterly statements, true
and complete copies of the consolidated balance sheets, and the related
consolidated statements of income, stockholders' equity and cash flows of 24/7
and its subsidiaries (which shall include all affiliates controlled by 24/7
directly or indirectly through one or more intermediaries including, without
limitation, any person in which 24/7, directly or indirectly, through a
subsidiary or otherwise, beneficially owns more than fifty percent (50%) of
either the equity interest in, or the voting control of such persons, whether or
not existing on the date hereof) as at the close of such month or quarter
21
<PAGE>
and covering operations for such month or quarter, as the case may be, and the
portion of 24/7's fiscal year ending on the last day of such month or quarter,
setting forth in each case in comparative form the figures for the comparable
period of the previous fiscal year and accompanied by a narrative description of
24/7's business and results of operations for such month or quarter. All such
financial statements shall be prepared in accordance with GAAP (except for the
omission of normal year-end adjustments and footnote disclosures) consistently
applied throughout the periods involved, shall be true and correct in all
material respects and shall fairly present the financial condition, income,
changes in stockholders' equity and cash flow of 24/7 on a consolidated basis,
as applicable, as of the respective dates thereof and for the respective periods
covered thereby. Each financial statement delivered by 24/7 shall be certified
by 24/7's chief executive officer, president, treasurer or chief financial
officer.
(ii) Annual Statements. 24/7 shall deliver to each Seller,
as soon as practicable after the end of each fiscal year of 24/7, and in any
event within 90 days thereafter, true and complete copies of the consolidated
and consolidating balance sheets of 24/7 and its Subsidiary at the end of such
year and the consolidated and consolidating statements of income, stockholders'
equity and cash flows of 24/7 and its Subsidiary for such year, setting forth in
each case in comparative form the figures for the previous fiscal year, all in
reasonable detail and accompanied by an opinion thereon of a firm of independent
certified public accountants of recognized national standing selected by 24/7
and reasonably acceptable to the Sellers, which opinion shall state that such
financial statements fairly present the financial condition, income, changes in
stockholders' equity and cash flow of 24/7 and its Subsidiary on a consolidated
basis, as applicable, and have been prepared in accordance with GAAP and that
the examination of such accountants in connection with such financial statements
has been made in accordance with generally accepted auditing standards, and
accordingly included such tests of the accounting records and such other
auditing procedures as were considered necessary in the circumstances. Each
financial statement delivered by 24/7 shall be certified by 24/7's chief
executive officer, president, treasurer or chief financial officer.
(iii) Audit Reports. 24/7 shall deliver to each Seller,
promptly upon receipt thereof, one copy of each other financial report and
internal control letter submitted to 24/7 by independent accountants in
connection with any annual, interim or special audit made by them of the books
of 24/7 and its Subsidiary, as applicable, as well as any responses of 24/7
thereto.
(iv) Other Reports. 24/7 shall deliver to each Seller,
promptly upon their becoming available, one copy of each financial statement,
report, notice or proxy statement sent by 24/7 to stockholders generally, of
each financial statement, report, notice or proxy statement sent by 24/7 or any
of its Subsidiaries to the SEC or any successor agency, if applicable, of each
regular or periodic report and any registration statement, prospectus or written
communication (other than transmittal letters) in respect thereof filed by 24/7
or any of its subsidiaries with, or received by such person in connection
therewith from, any securities exchange or the SEC or any successor agency, of
any press release issued by 24/7 or any of its subsidiaries, and of any material
of any nature whatsoever prepared by the SEC or any successor agency thereto or
any state blue sky or securities law commission which relates to or affects in
any way 24/7 or any of its subsidiaries.
22
<PAGE>
(v) Requested Information. 24/7 shall deliver to each
Seller, with reasonable promptness, such other documents, reports, data and
information as from time to time may be reasonably requested by such Seller.
(vi) Access. 24/7 shall permit, and shall cause its
subsidiaries to permit, representatives designated by any Seller, upon
reasonable prior notice to 24/7 and at the such Seller's expense, to visit and
inspect each of 24/7's and its subsidiaries' properties, to examine their
respective corporate and financial records (and make copies thereof or extracts
therefrom), to discuss their respective affairs, finances and accounts with
24/7's and its subsidiaries' directors, officers, key employees and accountants,
all at such reasonable times as may be requested by such Seller.
(vii) Other Information. 24/7 shall provide, from time to
time, such additional information regarding 24/7 or its Subsidiaries as any
Seller reasonably may request, including without limitation, any information or
reports required by reason of reporting or regulatory requirements to which any
Seller, its general partner (if applicable), or any person having an interest in
such Seller is subject.
6. Conditions Precedent to Obligations of 24/7 and the
Subsidiary. The obligations of 24/7 and the Subsidiary to consummate the
transactions contemplated by this Agreement are subject to the fulfillment, at
or before the Closing, of each of the following conditions, any of which may be
waived by 24/7 and the Subsidiary in writing, and the Company and Sellers shall
use commercially reasonable efforts to cause such conditions to be fulfilled:
(a) Representations and Warranties. Each of the representations
and warranties of the Company and the Sellers in the Company's Documents shall
be true and correct in all ma terial respects on and as of the Closing Date with
the same force and effect as though made on and as of the Closing Date.
(b) Termination of Agreements. The Company and the Sellers shall
have complied with their covenant set forth in Subparagraph 4(d) hereof.
(c) Execution of Stockholders' Agreement. All Sellers shall have
executed the Stockholders' Agreement substantially in the form attached hereto
as Exhibit A.
(d) Performance of the Company and the Sellers. The Company and
the Sellers shall have performed and complied in all material respects with all
agreements, covenants and conditions required by the Company's Documents to be
performed or complied with by any Seller at or before the Closing.
(e) Delivery of Shares. All of the issued and outstanding Shares
shall have been delivered to 24/7 for purchase by it on the Closing Date.
(f) Employment Agreements. Yale Brown and Matthew Walker each
shall have entered into an employment agreement and Non-Competition and
Non-Disclosure Agreement (the
23
<PAGE>
"Employment Agreements") with 24/7 in the form of Exhibit B hereto and each
other employee of the Company shall have entered into a Non-Disclosure and
Non-Competition Agreement in the form attached hereto as Exhibit C.
(g) Key Man Life Insurance. The Company and the Sellers shall
have delivered to 24/7 evidence reasonably satisfactory to 24/7 that there is in
force a key man life insurance policy, owned by the Company and under which the
Company (and any financial institution designated by 24/7) is the beneficiary,
insuring the life of Yale Brown in the amount of $1,000,000.
(h) Opinion of Counsel to the Company and the Sellers. The
Company and the Sellers shall have delivered to 24/7 an opinion of Fenwick &
West LLP, counsel to the Company and the Sellers, dated the Closing Date, in the
form of Exhibit D hereto.
(i) Certificate. 24/7 shall have received a certificate executed
by the Company dated the Closing Date, certifying, in such detail as 24/7 may
reasonably request, as to the fulfillment of the conditions set forth in
subparagraphs (a), (b) and (d).
(j) Consents. The Company and the Sellers shall have obtained or,
to the reasonable satisfaction of 24/7 obviated the need to obtain, all
consents, approvals or waivers from regulatory authorities and third parties
necessary for the execution, delivery and performance of the Company's Documents
and the transactions contemplated thereby, all without cost or other adverse
consequences to the Company.
(k) Litigation. No action or proceeding shall be pending or
threatened before any court, tribunal or governmental body, and no claim or
demand shall have been made against 24/7, any Seller or the Company, seeking to
restrain or prohibit or to obtain damages or other relief in connection with the
consummation of the transactions contemplated by the Company's Documents or
24/7's Documents, or which might materially affect the business of the Company,
which in the reasonably exercised opinion of 24/7 makes it inadvisable to
consummate such transactions.
(l) Stockholder Approval. The stockholders of the Company shall
have approved and adopted this Agreement by the unanimous written consent in
accordance with its Certificate of Incorporation, By-laws and Delaware General
Corporation Law.
(m) Proceedings. All actions, proceedings, instruments, and
documents required to carry out the transactions contemplated hereby or
incidental hereto and all other related legal matters shall have been reasonably
satisfactory to and approved by counsel of 24/7 and such counsel shall have been
furnished with such certified copies of such corporate actions and proceedings
and such other instruments and documents as it shall have reasonably requested.
(n) No Violation. There shall not have been any action taken, or
any statute, rule, regulation, or order enacted, promulgated, or issued or
deemed applicable to the Merger by
24
<PAGE>
any Federal or state government or governmental authority or court, which would
(i) prohibit the Surviving Corporation's ownership or operation of all or a
material portion the Subsidiary's business or assets, or compel the Surviving
Corporation or Subsidiary to dispose of or hold separate all or a material
portion of the Subsidiary's business or assets, as a result of the Merger; (ii)
render the Subsidiary unable to consummate the Merger; (iii) make such
consummation illegal; or (iv) impose or confirm material limitations on the
ability of 24/7 effectively to exercise full rights of ownership of shares of
the capital stock of the Surviving Corporation, including without limitation,
the right to vote any such shares on all matters properly presented to the
stockholders of the Surviving Corporation, and no such action shall have been
taken or any such statute, rule, regulation, or order enacted, promulgated,
issued, or deemed applicable to the Merger which in the reasonable judgment of
24/7 will produce such result.
(o) Certificate. 24/7 shall have received a certificate of the
Company, dated the Closing Date, signed by the Chief Executive Officer of the
Company, as to such other matters as may be reasonably requested by 24/7,
including, but not limited to, certificates with respect to the Company's
Certificate of Incorporation, By-laws, Board of Directors' resolutions relating
to the transactions contemplated hereby and the incumbency and signatures of
each of the officers of the Company who shall execute on behalf of the Company
any document delivered on the Closing Date.
(p) Escrow Agreement. Each Seller shall have entered into an
escrow agreement in substantially the form annexed hereto as Exhibit G and,
pursuant thereto, shall have delivered to the Escrow Agent thereunder, the
portion of the Merger Consideration referred to therein.
7. Conditions Precedent to Obligations of the Company and each
Seller . The obligations of the Company and each Seller to consummate the
transactions contemplated by this Agreement are subject to the fulfillment, at
or before the Closing, of each of the following conditions, any of which may be
waived by the Company and the Sellers in writing, and 24/7 and the Subsidiary
shall use their best efforts to cause such conditions to be fulfilled:
(a) Representations and Warranties. The representations and
warranties of 24/7 and the Subsidiary in 24/7's Documents shall be true and
correct in all material respects on and as of the Closing Date with the same
force and effect as though the same had been made on and as of the Closing Date.
(b) Performance by 24/7 and the Subsidiary. 24/7 and the
Subsidiary shall have performed and complied in all material respects with the
agreements, covenants and conditions required by 24/7's Documents to be
performed or complied with by them at or before the Closing.
(c) Merger Consideration. The Merger Consideration shall have
been paid as provided in subparagraphs 1(g) and (f) above.
25
<PAGE>
(d) Employment Agreements. 24/7 shall have entered into the
Employment Agreements.
(e) Opinion of 24/7's Counsel. 24/7 and the Subsidiary shall have
delivered to the Company and the Sellers an opinion of Proskauer Rose LLP,
counsel to 24/7 and the Subsidiary, dated the Closing Date, in the form of
Exhibit E hereto.
(f) Certificate. The Company and the Sellers shall have received
a certificate executed by 24/7, dated the Closing Date, certifying, in such
detail as the Company and the Sellers may reasonably request, as to the
fulfillment of the conditions set forth in subparagraphs (a) and (b).
(g) Litigation. No action or proceeding shall be pending or
threatened before any court, tribunal or governmental body, and no claim or
demand shall have been made against 24/7, the Subsidiary, the Sellers or the
Company, seeking to restrain or prohibit or to obtain damages or other relief in
connection with the consummation of the transactions contemplated by 24/7's
Documents or the Company's Documents which in the reasonably exercised opinion
of Sellers makes it inadvisable to consummate such transaction.
(h) Execution of Related Agreements. 24/7 and Seller shall have
entered into the Stockholders' Agreement and Registration Rights Agreement in
the form attached hereto as Exhibits A and F respectively.
8. Closing Deliveries.
(a) Deliveries of the Company and the Sellers. At the Closing,
the Company and the Sellers shall deliver, or shall cause to be delivered, to
24/7 and the Subsidiary the following:
(i) Certificates representing the Shares, as 24/7 may
designate, with any required stock transfer tax stamps affixed and canceled and
all taxes on such transfer, if any, paid in full, all at the expense of Sellers.
Such Shares shall be delivered to 24/7 free and clear of all claims;
(ii) Where a Seller is an entity: appropriate documentary
evidence establishing the capacity and authority of such Seller to sell, assign,
transfer and deliver the Shares hereunder and to enter into this Agreement;
(iii) The Employment Agreements;
(iv) The evidence as to Key Man Life Insurance;
(v) The opinion of Fenwick & West LLP, counsel to Sellers;
26
<PAGE>
(vi) The certificate referred to in subparagraph 6(i)
hereof, duly executed by each Seller;
(vii) Copies of the consents, approvals or waivers referred
to in subparagraph 6(j) hereof;
(viii) duly executed resignations of such directors and
fiduciaries of the Company as 24/7 shall designate.
(b) 24/7 and Subsidiary Deliveries. At the Closing, 24/7 and the
Subsidiary shall deliver or cause to be delivered to the Company and the Sellers
the following:
(i) Certificates representing shares of capital stock of
24/7 and warrants in payment of the Merger Consideration.
(ii) The Employment Agreements;
(iii) The opinion of Proskauer Rose LLP, counsel to 24/7 and
the Subsidiary;
(iv) The certificate referred to in subparagraph 7(f)
hereof;
(v) The agreements referenced in Subparagraph 7(h) hereof.
9. Restrictive Covenant.
(a) Confidentiality. The Company and the Sellers shall never use
or divulge any trade secrets, customer or supplier lists, pricing information,
marketing arrangements or strategies, business plans, internal performance
statistics, training manuals or other information concerning 24/7 or the Company
or its affiliates that is competitively sensitive or confidential. Because the
breach or attempted or threatened breach of this restrictive covenant will
result in immediate and irreparable injury to 24/7 for which 24/7 will not have
an adequate remedy at law, 24/7 shall be entitled, in addition to all other
remedies, to a decree of specific performance of this covenant and to a
temporary and permanent injunction enjoining such breach, without posting bond
or furnishing similar security. The provisions of this paragraph 9 are in
addition to and in dependent of any agreements or covenants contained in any
employment, consulting or other agreement between 24/7 or the Company and any
Seller.
(b) Non-public Information. From and after the consummation of an
initial public offering, if any, of 24/7's securities, to the extent that any of
the information furnished pursuant to Section 5(f) hereof would constitute
material, nonpublic information for purposes of the Securities Exchange Act of
1934, as amended, each Seller covenants that it will not engage in any purchase
or sale of 24/7's securities while in possession of such information and prior
to the time that such information is made generally known to the public and that
each Seller shall
27
<PAGE>
inform its agents and representatives, who have been given access to such
material, nonpublic information, of such requirements. The obligations in this
subparagraph 9(b) shall survive termination of this Agreement.
10. Brokers. Each party represents to the other that it has had
no dealings with any broker or finder in connection with the transactions
contemplated by this Agreement other than Interactive Capital Partners LLC. The
Company acknowledges and agrees that any commission or other fee that may be due
to Interactive Capital Partners LLC is its responsibility and shall be paid on
the Closing Date in accordance with the terms of a letter dated March 15, 1998
which has been furnished to 24/7. Should any other claim be made for a broker's,
finder's or similar fee, on account of any actions or dealings by a party or its
agents, such party shall indemnify and hold the other party harmless from and
against any and all liability and expenses, including reasonable attorneys' fees
incurred by reason of any claim made by such broker.
11. Indemnification by Sellers. Each Seller shall severally and
not jointly and only in proportion to such Seller's pro-rata share of ownership
of the Company immediately preceding the Closing Date indemnify, defend and hold
harmless 24/7 and its affiliates (including the Subsidiary and the Company),
promptly upon demand at any time and from time to time, against any and all
losses, liabilities, claims, actions, damages and expenses, including without
limitation reasonable attorneys' fees and disbursements exceeding in the
aggregate more than $50,000 (collectively, "Losses"), arising out of or in
connection with any of the following: (a) any material misrepresentation or
breach of any warranty made by such Seller in any of the Company's Documents;
(b) any material breach or nonfulfillment of any covenant or agreement made by
such Seller in any of the Company's Documents; (c) the claims of any broker or
finder engaged by any Seller other than Interactive Capital Partners LLC; (d)
any customer claims relating to services provided prior to the Closing, to the
extent not covered by insurance or reserved against in the Unaudited Balance
Sheet; and (e) without in any manner limiting the foregoing, any liabilities or
obligations of, or claims or causes of action against, the Company which arise
with respect to or relate to any period or periods on or prior to the Closing
Date, except for those which are set forth or reserved against in the Unaudited
Balance Sheet or are set forth in a schedule hereto, or were incurred subsequent
to February 28, 1998, in the ordinary course of business as theretofore
conducted and are not materially adverse to the operations or prospects of the
Company's business. In no event shall the total of any Seller's liability under
this paragraph 11 be greater than the portion of the Merger Consideration
deposited with the Escrow Agent pursuant to the Escrow Agreement, as provided by
subparagraph 13(d), and as shown on Exhibit A to the Escrow Agreement.
12. Indemnification By 24/7. 24/7 shall indemnify, defend and
hold harmless Sellers, promptly upon demand at any time and from time to time,
against any and all Losses arising out of or in connection with any of the
following: (a) any misrepresentation or breach of any warranty made by 24/7 in
any of 24/7's Documents; (b) any breach or nonfulfillment of any covenant or
agreement made by 24/7 in 24/7's Documents; and (c) the claims of any broker or
finder engaged by 24/7.
28
<PAGE>
13. Further Provisions Regarding Indemnification.
(a) Survival. All representations, warranties, indemnities,
covenants and agreements made by the Company or the Sellers and 24/7 in the
Company's or 24/7's Documents shall survive the Closing, notwithstanding any
examination or investigation made by or for any party.
(b) Limitations. Notwithstanding the foregoing, neither the
Company nor any Seller, on the one hand, nor 24/7, on the other (Sellers, on the
one hand, and 24/7 on the other, each is sometimes hereinafter referred to in
this paragraph 13 as a "party") shall be entitled to indemnification for Losses
arising out of matters referred to in subparagraphs 11(a) or 12(a), as
applicable, unless it shall have given written notice to the other party,
setting forth its claim for indemnification in reasonable detail, within two
years after the Closing Date; provided, however, that the foregoing limitations
on each party's indemnification obligation shall not apply to Losses arising out
of or in connection with any material misrepresentation made in subparagraphs
2(a) and 2(c)and paragraph 10 .
(c) Defense. An indemnified party shall promptly give written
notice to the indemnifying party after the indemnified party has knowledge that
any legal proceeding has been instituted or any claim has been asserted in
respect of which indemnification may be sought under the provisions of paragraph
11 or 12. If the indemnifying party, within 10 days after the indemnified party
has given such notice (or within such shorter period of time as an answer or
other responsive motion may be required), shall have acknowledged in writing his
or its obligation to indemnify and shall have furnished to the indemnified party
a bond, letter of credit, escrow or similar arrangement in an amount equal to
the total amount demanded in such claim or proceed ing, then the indemnifying
party shall have the right to control the defense of such claim or proceeding,
and the indemnified party shall not settle or compromise such claim or
proceeding without the written consent of the indemnifying party. The
indemnified party may in any event participate in any such defense with his or
its own counsel and at his or its own expense.
(d) Escrow of Shares of 24/7 Capital Stock. Upon receipt of the
Merger Consideration pursuant to Paragraph 2 of this Agreement, Sellers shall
deliver to the Escrow Agent, pursuant to the Escrow Agreement, a number of
shares of 24/7 capital stock and warrants equal to 30% of the Merger
Consideration, with each Seller to deliver its share of the Merger Consideration
specified in Exhibit A to the Escrow Agreement. The shares of 24/7 capital stock
and warrants together with any earnings on or accretions thereto shall be held
by the Escrow Agent pursuant to the terms of the Escrow Agreement. Except for
shares of 24/7 capital stock declared as dividends or distributions on the
escrowed shares in connection with a stock split or other reorganization of
24/7, all earnings on or accretions to the Merger Consideration held by the
Escrow Agent pursuant to the terms of the Escrow Agreement shall be for the
benefit of Seller. The Escrow Agreement shall provide the Sellerswith the power
to direct the sale of escrowed shares (but not the distribution or release of
the net monetary proceeds therefrom), to invest the net proceeds from such sales
in U.S. government securities or investment grade debt securities and to receive
monthly payments of the interest from such investments. All interest or other
income to such investments shall be for the
29
<PAGE>
benefit of the Seller. 24/7 shall be entitled to delivery from the Escrow Agent
of such number of shares of 24/7 capital stock as shall have a value equal to
the amount due 24/7 pursuant to Paragraph 11 (or an equivalent amount in cash),
and the Sellers shall give the Escrow Agent all such notices as shall be
necessary to obtain such delivery from the Escrow Agent. Subject to any demand
hereunder that may be pending at such time, each Sellers shall be entitled to
delivery from the Escrow Agent of one-half of its share of the escrow fund as
set forth on Exhibit A to the Escrow Agreement (after giving effect to the
delivery, if any, of shares of 24/7 capital stock and earnings on and accretions
thereto pursuant to the preceding sentence) on the first anniversary of the
Effective Time and the balance of its share of the escrow fund upon the second
anniversary of the Effective Time.
14. Further Assurances. The parties shall cooperate and take such
actions, and execute such other documents, at the Closing or subsequently, as
either may reasonably request in order to carry out the provisions or purpose of
this Agreement.
15. Notices. All notices or other communications in connection
with this Agreement shall be in writing and shall be considered given when
personally delivered or when mailed by registered or certified mail, postage
prepaid, return receipt requested, or by overnight courier as follows:
If to a Seller at the address set forth with respect to such Seller on
the signature page hereto.
With a copy to:
Fenwick & West LLP
1920 N. Street N.W., Suite 650
Washington, DC 20036
Attn: J.T. Westermeier, Esq.
If to 24/7:
24/7 Media, Inc.
1290 Avenue of the Americas
New York, NY 10104
Attn: Chief Executive Officer
With a copy to:
Proskauer Rose LLP
1585 Broadway
New York, New York 10036
Attn: Ronald R. Papa, Esq.
30
<PAGE>
16. Entire Agreement. This Agreement (which includes the
schedules and exhibits hereto) sets forth the parties' final and entire
agreement with respect to its subject matter and supersedes any and all prior
understandings and agreements. This Agreement can be amended, supplemented or
changed, and any provision hereof can be waived, only by a written instrument
making specific reference to this Agreement signed by the party against whom
enforcement of any such amendment, supplement, change or waiver is sought.
17. Successors. This Agreement shall be binding upon and shall
inure to the benefit of the parties hereto and their respective heirs,
executors, administrators, personal representatives, successors and assigns;
provided, however, that neither this Agreement nor any right or obligation
hereunder may be assigned or transferred, except that 24/7 may assign this
Agreement and its rights hereunder to any direct or indirect wholly-owned
subsidiary of 24/7.
18. Paragraph Headings. The paragraph headings in this Agreement
are for reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
19. Other Discussions. Unless this Agreement shall have been
terminated, neither the Company nor any Seller shall consider or entertain any
other offers for, or hold discussions with any person regarding, the acquisition
of any assets or capital stock of the Company.
20. Legal Fees and Expenses. If the Closing occurs, up to $40,000
of legal costs, fees or expenses incurred by Sellers and the Company shall be
borne by 24/7.
21. Severability. If any provision of this Agreement shall be
held by any court of competent jurisdiction to be illegal, invalid or
unenforceable, such provision shall be construed and enforced as if it had been
more narrowly drawn so as not to be illegal, invalid or unenforce able, and such
illegality, invalidity or unenforceability shall have no effect upon and shall
not impair the enforceability of any other provision of this Agreement.
22. Governing Law and Consent to Jurisdiction. This Agreement
shall be gov erned by and construed and interpreted in accordance with the
internal law of the State of New York (without reference to its rules as to
conflicts of law). The state courts of the State of New York in the New York
County and, if the jurisdictional prerequisites exist at the time, the United
States District Court for the Southern District of New York, shall have sole and
exclusive jurisdictions to hear and determine any dispute or controversy arising
under or concerning this Agreement. In any action or proceeding concerning such
dispute or controversy, the parties consent to jurisdiction and waive personal
service of any summons, complaint or other process; a summons or complaint in
any such action or proceeding may be served by mail in accordance with paragraph
15.
31
<PAGE>
23. Counterparts. This Agreement may be executed by facsimile and
in one or more counterparts, each of which shall be deemed an original, but all
of which taken together shall constitute one and the same instrument.
32
<PAGE>
IN WITNESS WHEREOF, the parties have duly executed this Agreement
on the date first above written.
24/7 MEDIA, INC.
By: /s/ David J. Moore
------------------------------
Name: David J. Moore
Title: Chief Executive Officer
INTERACTIONS ACQUISITION CORP.
By: /s/ David J. Moore
------------------------------
Name: David J. Moore
Title: Chief Executive Officer
INTELLIGENT INTERACTIONS CORPORATION
By: /s/ Yale R. Brown
------------------------------
Name: Yale R. Brown
Title: Chief Executive Officer
Sellers:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
/s/ Yale R. Brown /s/ John N. Gonzalez
- ----------------------------------- -----------------------------------------
Yale Brown John N. Gonzalez
Address: 201 N. Union Street Address: Versant Object Technology
Suite 110 1380 Willow Rd., Suite 210
Alexandria, VA 22314 Menlo Park, CA 94025
/s/ Robert Lippmann /s/ Alison Lynch
- ----------------------------------- -----------------------------------------
Robert Lippmann Alison Lynch
Address: 201 N. Union Street Address: 201 N. Union Street
Suite 110 Suite 110
Alexandria, VA 22314 Alexandria, VA 22314
33
<PAGE>
/s/ Matthew B. Walker /s/ David Banks
- ----------------------------------- -----------------------------------------
Matthew B. Walker David Banks
Address: 201 N. Union Street Address: Versant Object Technology
Suite 110 1380 Willow Rd., Suite 210
Alexandria, VA 22314 Menlo Park, CA 94025
</TABLE>
Trinity Ventures V, L.P.
A California Limited Partnership
By: Trinity TVL Partners V, L.P.
A California Limited Partnership, its General Partner
By: /s/ Trinity TVL Partners V, L.P.
--------------------------------
Name:
A General Partner
Address: 300 Sand Hill Road
Building 1, Suite 240
Menlo Park, CA 94025
Attn: Noel Fenton
Trinity V Side-By-Side Fund, L.P.
By: Trinity TVL Partners V, L.P.
A California Limited Partnership, its General Partner
By: /s/ Trinity TVL Partners V, L.P.
--------------------------------
Name:
A General Partner
Address: 300 Sand Hill Road
Building 1, Suite 240
Menlo Park, CA 94025
Attn: Noel Fenton
34
<PAGE>
Zero Stage Capital V Limited Partnership
By: Zero Stage Capital Associates Limited Partnership, General Partner
By: /s/ Zero Stage Capital Associates Limited Partnership
-----------------------------------------------------
Name:
Address: 101 Main Street, 17th fl
Kendall Square
Cambridge, MA 02142-1519
Attn: Stanley Fung
F&W Investments 1996
A California Partnership
By: /s/ F&W Investments
------------------------------
A General Partner
Address: Two Palo Alto Square
Palo Alto, CA 94306
Attn: Laird Simons
35
INTERACTIVE IMAGINATIONS, INC.
SECURITIES PURCHASE AGREEMENT
February 25, 1998
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Section Page
<S> <C> <C>
1. Purchase and Sale of Preferred Shares and Warrants...................................1
1.1 Sale and Issuance.............................................................1
1.2 Use of Proceeds From Investment...............................................1
1.3 Closing.......................................................................1
2. Representations and Warranties of the Company........................................2
2.1 Organization, Good Standing and Qualification.................................2
2.2 Capitalization................................................................2
2.3 Authority; Execution and Delivery; Requisite Consents, Nonviolation...........4
2.4 Subsidiaries..................................................................5
2.5 Financial Information.........................................................5
2.6 Certain Changes or Events.....................................................6
2.7 Tangible Personal Property....................................................7
2.8 Real Property.................................................................7
2.9 Contracts.....................................................................8
2.10 Intellectual Property.........................................................9
2.11 Insurance....................................................................11
2.12 Labor Union Activities; Employee Relations...................................11
2.13 ERISA........................................................................11
2.14 Litigation...................................................................12
2.15 Compliance with Laws; Permits................................................12
2.16 Taxes........................................................................12
2.17 Books and Records............................................................13
2.18 Environmental Matters........................................................13
2.19 Transactions with Affiliates.................................................14
2.20 Registration Rights..........................................................14
2.21 No Brokers or Finders........................................................15
2.22 Investment Company Act.......................................................15
2.23 Disclosure...................................................................15
2.24 Simultaneous Merger..........................................................15
2.25 Public Announcements.........................................................16
2.26 Proprietary Information and Employee Issues..................................16
2.27 Business Plan................................................................16
2.28 Real Property Holding Company................................................16
2.29 Substantial Customers and Suppliers..........................................16
2.30 Accounts Receivable..........................................................17
2.31 Small Business Matters.......................................................17
2.32 Exemption from Registration; Restrictions on Offer and Sale of Same or Similar
Securities...................................................................17
2.33 Series B Shares..............................................................18
i
<PAGE>
3. Representations, Warranties, and Covenants of the Investors.........................18
3.1 Organization.................................................................18
3.2 Authorization................................................................18
3.3 Offering Exemption...........................................................18
3.4 Knowledge and Experience; Ability to Bear Economic Risks.....................19
3.5 Limitations on Disposition...................................................19
3.6 No Intended Resale...........................................................19
3.7 Legends......................................................................20
3.8 Confidentiality..............................................................20
3.9 Public Announcements.........................................................21
4. Conditions of Investors' Obligations at Closing.....................................22
4.1 Representations and Warranties...............................................22
4.2 Performance..................................................................22
4.3 Stock Certificates, Etc......................................................22
4.4 No Material Adverse Change...................................................22
4.5 Consents.....................................................................22
4.6 No Litigation................................................................22
4.7 Opinion of Counsel...........................................................23
4.8 Compliance Certificate.......................................................23
4.9 Directors....................................................................23
4.10 Related Agreements...........................................................23
4.11 Proceedings and Documents....................................................23
4.12 Secretary's Certificate......................................................23
4.13 Qualification of Securities..................................................23
4.14 Filing of Restated Certificate...............................................24
4.15 Purchase By Other Investors..................................................24
4.16 Payment of Investor Expenses.................................................24
5. Conditions of the Company's Obligations at Closing..................................24
5.1 Representations and Warranties...............................................24
5.2 Payment of Purchase Price....................................................24
5.3 No Litigation................................................................24
5.4 Proceedings and Documents....................................................24
6. Certain Covenants...................................................................25
6.1 Financial and Business Information...........................................25
6.2 Exemption from Investment Company Act........................................27
6.3 Accounting and Reserves......................................................27
6.4 Rights to Purchase Additional Securities.....................................27
6.5 Confidentiality..............................................................29
6.6 Ordinary Course Obligations..................................................29
6.7 Taxes Relating to this Agreement.............................................30
6.8 Replacement of Instruments...................................................30
ii
<PAGE>
6.9 Reincorporation in Delaware..................................................31
6.10 SBA Forms; Inspection........................................................31
6.11 Corporate Existence; Approvals...............................................31
6.12 Taxes........................................................................31
6.13 Insurance....................................................................31
6.14 Notice of Certain Events.....................................................32
6.15 Maintenance of Properties....................................................32
6.16 Reservation of Shares........................................................32
6.17 Venture Capital Operating Company Status.....................................32
6.18 Director and Officer Insurance...............................................32
6.19 Further Assurances...........................................................33
6.20 Use of Proceeds..............................................................33
6.21 Reports Under the Exchange Act...............................................33
6.22 Actions Requiring Written Consent of Investors...............................33
7. Miscellaneous................................................................36
7.1 Expenses.....................................................................36
7.2 Taxes........................................................................36
7.3 Replacement of Instruments...................................................36
7.4 Use of Investors' Names......................................................36
7.5 Indemnification..............................................................37
7.6 Right to Rely................................................................37
7.7 Survival.....................................................................37
7.8 Successors and Assigns.......................................................38
7.9 Entire Agreement; Amendment and Waiver.......................................38
7.10 Applicable Law...............................................................38
7.11 Notices......................................................................38
7.12 Brokerage....................................................................38
7.13 Severability.................................................................39
7.14 Descriptive Headings.........................................................39
7.15 Counterparts; Signatures by Facsimile........................................39
7.16 Understanding Among Investors................................................39
7.17 Further Assurances...........................................................39
7.18 Knowledge....................................................................39
</TABLE>
iii
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT LIST
<S> <C>
Exhibit A Restated Certificate of Incorporation
Exhibit B 1 Form of Class A Warrant
Exhibit B 2 Form of Class B Warrant
Exhibit C Business Plan
Exhibit D ByLaws of the Company
Exhibit E Certificate of Incorporation of the Subsidiary
Exhibit F ByLaws of the Subsidiary
Exhibit G Shareholders' Agreement
Exhibit H Registration Rights Agreement
Exhibit I Opinion of Proskauer Rose LLP
Exhibit J NonCompetition Agreement
Exhibit K NonDisclosure and Developments Agreement
Exhibit L SBA Certificate
Exhibit M 1998 Stock Incentive Plan
Exhibit N Other Financial Information
SCHEDULE LIST
Schedule 1 Schedule of Exceptions
Schedule 2 Names of Shareholders and Holders of Options and/or
Warrants, etc.
Schedule 3 Directors
</TABLE>
iv
<PAGE>
<TABLE>
<CAPTION>
Cross References to Selected Definitions
Term Section Location
<S> <C>
Action ss. 2.14
Advercomm ss. 2.5(c)
Agreement Prefatory Language
Business Combination ss. 2.9(k)
Business Plan ss. 1.2
Closing ss. 1.3
Code ss. 2.16
Common Shares ss. 1.1
Company Prefatory Language
Company Documents ss. 2.3
Contracts ss. 2.9
Conversion Shares ss. 1.1
Environmental Laws ss. 2.18
ERISA ss. 2.13
Financial Statements ss. 2.5(a)
GAAP ss. 2.5(a)
Governmental Authority ss. 2.3
Indebtedness ss. 2.5(d)
Intellectual Property ss. 2.10
Interim Financial Statements ss. 2.5(b)
Investors Prefatory Language
Laws ss. 2.2
Liens ss. 2.2
Merger ss. 2.24
New Securities ss. 6.4(b)
Operating IP ss. 2.10
Option ss. 2.2
Order ss. 2.14
Other Financial Information ss. 2.5(c)
Permits ss. 2.15
Person ss. 2.3
Petry ss. 2.5(c)
Principal Owner ss. 2.9(d)
Qualified Public Offering ss. 6.4(f)
Registration Rights Agreement ss. 2.2
Related Agreements ss. 4.10
Required Holders ss. 6.22
Restated Certificate ss. 1.1
Returns ss. 2.16
Rule 144 ss. 3.5
SBA ss. 2.31
SBA Act ss. 2.31
SBA Regulation ss. 2.31
SBIC ss. 2.31
Scheduled Contracts ss. 2.9
Securities ss. 1.1
</TABLE>
v
<PAGE>
<TABLE>
<CAPTION>
Term Section Location
<S> <C>
Securities Act ss. 2.20
Series B Shares ss. 1.1
Shareholders' Agreement ss. 2.2
Shares ss. 1.1
Stock Incentive Plan ss. 6.22(b)
Stock Incentives ss. 2.2
Subsidiary ss. 2.1
Taxes ss. 2.16
VCOC ss. 6.17
Warrants ss. 1.1
</TABLE>
vi
<PAGE>
EXECUTION COPY
SECURITIES PURCHASE AGREEMENT
This Securities Purchase Agreement (this "Agreement") is made as of this
25th day of February, 1998 by and between Interactive Imaginations, Inc., a New
York corporation (the "Company"), and each of the persons identified on the
signature pages hereto as an "Investor" (such persons collectively, the
"Investors").
THE PARTIES HEREBY AGREE AS FOLLOWS:
1. Purchase and Sale of Preferred Shares and Warrants.
1.1 Sale and Issuance. Subject to the terms and conditions of
this Agreement, each Investor, severally and not jointly, agrees to purchase at
the Closing (as hereinafter defined), and the Company agrees to sell and issue
to each Investor, severally and not jointly, the number of Series B Convertible
Voting Preferred Shares, par value $.01 per share (the "Series B Shares"), of
the Company and the number of Class A Warrants and Class B Warrants set forth on
the signature page hereto of such Investor, all at the aggregate purchase price
set forth on such signature page.
The Series B Shares shall have the powers, rights, preferences
and privileges set forth in the Restated Certificate of Incorporation of the
Company attached hereto as Exhibit A (the "Restated Certificate"). The Class A
and Class B Warrants shall be in the forms of warrant attached hereto as Exhibit
B-1 and B-2, respectively.
The Series B Shares sold to the Investors pursuant to this
Agreement are sometimes hereinafter referred to as the "Shares"; the Class A
Warrants and Class B Warrants sold to the Investors pursuant to this Agreement
are sometimes hereinafter referred to as the "Warrants"; the common shares, par
value $0.01 per share, of the Company (the "Common Shares") issuable upon
conversion of the Shares or exercise of the Warrants are sometimes hereinafter
referred to as the "Conversion Shares". The Shares, the Warrants and the
Conversion Shares are sometimes hereinafter collectively referred to as the
"Securities".
1.2 Use of Proceeds From Investment. The proceeds from the sale
of the Shares and the Warrants will be used to conduct the business of the
Company in accordance with the approved business plan (the "Business Plan")
attached hereto as Exhibit C.
1.3 Closing. The purchase and sale of the Securities shall take
place at the offices of Proskauer Rose LLP, 1585 Broadway, New York, New York
10036, at 9:00 a.m., on February 25, 1998, or at such other time and place as
the Company and the Investors purchasing a majority of the Securities mutually
agree (which time and place are designated as the "Closing"). At the Closing,
the Company shall deliver to each Investor a certificate representing the Shares
to be purchased by such Investor, together with the Warrants to be purchased by
such Investor, in each case registered
<PAGE>
in the name of such Investor as it appears on the signature pages hereto against
delivery to the Company by such Investor of a wire transfer in the amount of the
aggregate purchase price therefor.
2. Representations and Warranties of the Company. The Company (which,
for purposes of this Article 2, includes 24/7 Media, Inc., a Delaware
corporation (the "Subsidiary"), except where the context clearly indicates
otherwise) and the Subsidiary (which, for the purposes of this Article 2,
includes 24/7 Media, Inc., Petry Interactive, Inc., a Delaware corporation, and
Advercomm, Inc., a Delaware corporation, including all of their respective
assets and liabilities, except where the context clearly indicates otherwise)
jointly and severally hereby represent and warrant to, and agree with the
Investors except as set forth on the Schedule of Exceptions furnished to the
Investors and attached hereto as Schedule 1, specifically identifying the
relevant subsection hereof with respect to which an exception is being made,
which exceptions shall be deemed to be representations and warranties as if made
hereunder, as follows:
2.1 Organization, Good Standing and Qualification. The Company is
a corporation duly organized, validly existing and in good standing under the
laws of the State of New York. The Subsidiary is a corporation duly organized,
validly existing and in good standing under the laws of the State of Delaware.
The Company and the Subsidiary each have all requisite power and authority to
carry on their respective businesses as now conducted and as proposed to be
conducted. The Company and the Subsidiary each are duly qualified to transact
business and are in good standing in each jurisdiction in which the failure so
to qualify can in the aggregate be eliminated without material cost or expense
by the Company or the Subsidiary. The Subsidiary is a newly formed corporation
which has not engaged in any business other than in connection with its
organization and the transactions contemplated by the Agreement and Plan of
Merger in connection with the Merger (as defined in Section 2.24). Annexed
hereto as Exhibit D, Exhibit E and Exhibit F, respectively, are true and
complete copies of the By-Laws of the Company, the Certificate of Incorporation
of the Subsidiary, and the By-Laws of the Subsidiary, each as amended through
the date hereof.
2.2 Capitalization. After giving effect to the transactions
contemplated by this Agreement, including the Merger (as defined in Section
2.24), and immediately after the Closing, the capital stock of the Company, as
authorized by the Restated Certificate, will consist of: (i) 100,000,000 Common
Shares, of which 27,481,201 shares will be issued and outstanding, 10,060,002
shares will be reserved for issuance upon conversion of issued and outstanding
Shares, 5,000,000 shares will be reserved for issuance upon exercise of issued
and outstanding Class A Warrants, 5,000,000 shares will be reserved for issuance
upon exercise of issued and outstanding Class B Warrants, 2,575,000 will be
reserved for issuance upon exercise of issued and outstanding Class C Warrants,
142,421 will be reserved for issuance upon exercise of issued and outstanding
unclassified warrants, 251,028 (subject to adjustment) will be reserved for
issuance upon exercise of issued and outstanding convertible debentures, and
5,750,000 shares will be reserved for issuance to key employees, officers and
directors of, and consultants to, the Company under stock incentives that have
been granted or are available for grant by the Company pursuant to the Stock
Incentive Plan (as defined in Section 6.22(b)) (collectively, the "Stock
Incentives"); and (ii) 30,000,000 preferred shares, of which none are
outstanding and of which 10,060,002 shares have been designated as Series B
Shares, all of which are being issued to the Investors hereunder. The rights,
2
<PAGE>
privileges and preferences of the Common Shares and Series B Shares are as
stated in the Restated Certificate. Except for the Stock Incentives specified
above, the conversion rights of issued and outstanding Series B Shares, the
conversion rights of outstanding convertible debentures specified above, and the
exercise rights of issued and outstanding Class A, Class B, Class C Warrants and
unclassified warrants specified above, as of the Closing, the Company will not
(i) have outstanding any capital stock or other securities convertible into or
exchangeable for any shares of its capital stock and, except for the preemptive
rights contained in this Agreement, no Person will have any right to subscribe
for or to purchase (including conversion or preemptive rights), or any Options
for the purchase of, or any agreements providing for the issuance (contingent or
otherwise) of, any calls, commitments or other claims of any character relating
to, any capital stock or any stock or securities convertible into or
exchangeable for any capital stock of the Company; (ii) have any capital stock,
equity interests or other securities reserved for issuance for any purpose; or
(iii) be subject to any obligation (contingent or otherwise) to repurchase or
otherwise acquire or retire any shares of its capital stock or any convertible
securities, rights or options of the type described in the preceding clause (i).
"Option" with respect to any Person means any security, right, subscription,
warrant, option, "phantom" stock right or other Contract that gives the right
directly or indirectly to (i) purchase or otherwise receive or be issued any
shares of capital stock of such Person or any security of any kind convertible
into or exchangeable or exercisable for any shares of capital stock of such
Person or (ii) receive or exercise any benefits or rights similar to any rights
enjoyed by or accruing to the holder of shares of capital stock of such Person,
including any rights to participate in the equity or income of such Person or to
participate in or direct the election of any directors or officers of such
Person or the manner in which any shares of capital stock of such Person are
voted. Neither this Agreement nor the transactions contemplated hereby or by the
Merger will cause any anti-dilution adjustment or accelerated vesting of any
Options. All issued and outstanding Common Shares have been duly and validly
issued and subject to Section 630 of the New York Business Corporation Law, are
fully paid and nonassessable and were issued in accordance with the registration
or qualification provisions of the Securities Act and any applicable state
securities laws or pursuant to valid exemptions therefrom. All of the Series B
Shares and Conversion Shares, when issued as contemplated hereby, will be
validly issued and, subject to Section 630 of the New York Business Corporation
Law, fully paid and nonassessable and will be issued in accordance with the
registration or qualification provisions of the Securities Act and any
applicable state securities laws or pursuant to valid exemptions therefrom. The
delivery of a certificate or certificates at the Closing representing the Shares
and the Warrants in the manner provided in Section 1.3 will transfer to each
Investor good and valid title to the Shares and the Warrants, respectively, free
and clear of all liens, pledges, assessments, leases, security interests,
claims, encumbrances, or other restrictions of any kind (collectively, "Liens").
To the best knowledge of the Company, there are no agreements among the
Company's shareholders with respect to the voting or transfer of the Company's
capital stock, other than the agreements relating to transfer contained in the
Shareholders' Agreement in the form of Exhibit G attached hereto (the
"Shareholders' Agreement"), and the Registration Rights Agreement in the form of
Exhibit H attached hereto (the "Registration Rights Agreement"). Schedule 2
includes a complete and correct list of the name of each of the Company's
investors and shareholders and the number of shares of capital stock (and class
or series) owned by such Person, and the name of each holder of an outstanding
Option and the number of Options to purchase capital stock owned by such holder
and the exercise price at which, and the period during which, such Option(s) may
be exercised and the vesting schedule thereof, if any. The authorized capital
stock
3
<PAGE>
of the Subsidiary consists of 1,000 common shares, par value $.01 per share, of
which 100 are outstanding as of the date hereof. The Company owns, beneficially
and of record, all of the issued and outstanding shares of capital stock of the
Subsidiary, free and clear of all Liens. All of the issued and outstanding
shares of capital stock of the Subsidiary have been duly and validly issued and
are fully paid and nonassessable and were issued in accordance with the
registration or qualification provisions of the Securities Act and any relevant
state securities laws or pursuant to valid exemptions therefrom. There are no
outstanding Options with respect to the Subsidiary.
2.3 Authority; Execution and Delivery; Requisite Consents,
Nonviolation. The Company has, and as of the Closing will have, all requisite
power and authority to execute, deliver and perform this Agreement, the
Shareholders' Agreement, the Registration Rights Agreement, Restated
Certificate, Warrants, Securities and each other document or instrument executed
by it, or any of its officers, in connection herewith or therewith or pursuant
hereto or thereto (this Agreement, together with all of the foregoing documents
and instruments, are sometimes collectively referred to herein as the "Company
Documents"), and to consummate the transactions contemplated hereby and thereby.
The name of each officer and director of the Company and of the Subsidiary on
the date hereof, and the position with the Company held by each, are listed on
Part 2.3 of Schedule 1 hereto. The execution, delivery and performance of this
Agreement and the other Company Documents and the consummation of the
transactions contemplated hereby and thereby have been duly and validly
authorized by all necessary action on the part of the Company and its
shareholders. This Agreement and each of the other Company Documents that has
been executed as of the date hereof is, and each of the Company Documents will
be as of the Closing, duly and validly executed and delivered by the Company and
constitute the legal, valid and binding obligation of the Company, enforceable
against the Company in accordance with its terms, except as the enforceability
thereof may be limited by bankruptcy, insolvency or other similar laws affecting
the enforceability of creditors' rights in general or by general principles of
equity. The execution, delivery and performance of this Agreement and the other
Company Documents (including, without limitation, the Shareholders' Agreement,
the Registration Rights Agreement, the Restated Certificate and the Warrants),
the consummation by the Company of the transactions contemplated hereby and
thereby (including, without limitation, the offer, sale and delivery by the
Company of the Securities) will not (a) require the consent, license, permit,
waiver, approval, authorization or other action of, by or with respect to, or
registration, declaration or filing with, any court or governmental authority,
department, commission, board, arbitrator, bureau, agency or instrumentality, or
other political subdivision, domestic or foreign ("Governmental Authority") or
any other individual, partnership, corporation, unincorporated organization or
association, limited liability company, trust or other entity (collectively, a
"Person"); (b) violate or conflict with any provision of the Restated
Certificate, the Certificate of Incorporation or of the By-Laws of the Company
or Subsidiary as in effect immediately prior to and immediately after the
execution and delivery of this Agreement; or (c) constitute a default under
(with or without notice or lapse of time or both), violate or conflict with,
give rise to a right of termination, cancellation, acceleration or modification
under or result in a loss of a material benefit under, any Law (as defined in
Section 2.15 below), Scheduled Contract (as defined in Section 2.9 below),
rights relating to Intellectual Property (as defined in Section 2.10 below),
Permit (as defined in Section 2.15 below) or Order (as defined in Section 2.14
below) to which the Company or the Subsidiary is a party or by which the Company
or its properties or the Subsidiary or its properties are bound or give to any
Person any additional rights or entitlements to increased,
4
<PAGE>
additional, accelerated or guaranteed payments under or result in creation or
imposition of any Lien upon the Company or the Subsidiary or any of its
respective assets and properties.
2.4 Subsidiaries.
The Company does not, and prior to the Closing will not, own or
control, directly or indirectly, any partnership interests, stock or other
equity interests in any partnership, corporation or other entity or Person or
any voting rights or right to control the policies and direction of any
partnership, corporation or other entity, other than the Subsidiary.
2.5 Financial Information.
(a) The Company has previously delivered to the Investors its
historical audited balance sheets as at December 31, 1996, and the historical
audited statements of income, shareholders' equity and cash flows for the year
then ended (collectively, the "Financial Statements"). Such Financial Statements
have been prepared from the books and records of the Company and present fairly
the financial position and the results of operations and cash flows of the
Company as at and for the periods indicated, in each case in conformity with
generally accepted accounting principles ("GAAP") consistently applied (except
as described in such statements or the notes thereto).
(b) The Company has previously delivered to the Investors an
historical unaudited balance sheet of the Company as at December 31, 1997 and an
historical unaudited statement of income, shareholders' equity and cash flows
for the twelve-month period then ended (the "Interim Financial Statements").
Such Interim Financial Statements have been prepared from the books and records
of the Company and present fairly the financial position and the results of
operations of the Company as at and for the period indicated, in each case in
conformity with GAAP, subject to customary year or period end audit adjustments
and accruals and the absence of notes thereto, (except as previously noted)
consistently applied.
(c) The Company has previously delivered to the Investors
unaudited balance sheets as of December 31, 1997 and certain historical
statements of operations regarding Petry Interactive, Inc. ("Petry") and
Advercomm, Inc. ("Advercomm") (the "Other Financial Information"), attached
hereto as Exhibit N. Such Other Financial Information has been prepared from the
books and records of Petry and Advercomm, respectively, and present fairly the
financial position and the results of operations of Petry and Advercomm in each
case in accordance with GAAP, subject to customary year or period end
adjustments and accruals and the absence of notes thereto, as at and for the
periods indicated.
(d) Except as disclosed in the Interim Financial Statements
or Other Financial Information, neither the Company nor the Subsidiary has any
liabilities or obligations, absolute or contingent, except (i) obligations and
liabilities incurred in the ordinary course of business, consistent with past
practice, since the date of the Interim Financial Statements or Other Financial
Information, (ii) obligations which are not required to be reflected in the
Financial Statements or such Interim Financial Statements and which would not be
required under GAAP to
5
<PAGE>
be included in the notes to such Financial Statements, which individually and in
the aggregate are not material to the financial condition or operating results
of the Company or the Subsidiary. Except as disclosed in the Interim Financial
Statements or Other Financial Information, the Company is not a guarantor or
indemnitor of any obligations of any Person (i) for borrowed money, (ii)
evidenced by notes, bonds, debentures or similar instruments, (iii) for the
deferred purchase price of goods or services (other than trade payables or
accruals incurred in the ordinary course of business), (iv) under capital leases
and (v) in the nature of guarantees of the obligations described in clauses (i)
through (iv) ("Indebtedness") of any other Person. The Company and the
Subsidiary maintain and will continue to maintain a standard system of
accounting established and administered in accordance with GAAP.
(e) No representation is made hereunder with respect to any
forecasts, projections or forward looking information provided to the Investors
in connection with the Financial Statements, the Interim Financial Statements,
Other Financial Information or otherwise, except that the Company represents
that any such forecasts, projections and forward looking information were
prepared in good faith and that the Company reasonably believes there is a
reasonable basis for such forecasts, projections and forward looking
information.
2.6 Certain Changes or Events. Other than transactions entered
into in connection with the Merger (as defined in Section 2.24), since December
31, 1996 the business of the Company has been operated only in the ordinary
course, consistent with past practice, and in addition to, and not in limitation
of the foregoing: (i) there has been no change in the Condition of the Company,
except for changes in the ordinary course of business consistent with past
practice which have not been, in the aggregate, materially adverse to the
Company; (ii) there has been no revocation or change in any Contract or Permit
or right to do business, and, to the best knowledge of the Company, no change of
Laws which has resulted, or could reasonably be expected to result, in a
material adverse change in the Condition of the Company; (iii) the Company has
not authorized or made any distributions of, or declared or paid any dividends,
upon or with respect to any of the capital stock of the Company or the
Subsidiary, or other equity interests, nor has the Company redeemed, purchased
or otherwise acquired, or issued or sold, any of its capital stock or other
equity interests; (iv) the Company has not entered into any transaction with a
value in excess of $50,000 or other material transaction, other than in the
ordinary course of business and consistent with past practice; (v) the Company
has not incurred any Indebtedness for borrowed money or made any loans or
advances to any Person except for convertible debentures incurred and
subsequently converted to Common Shares of the Company on or prior to the date
hereof; (vi) there has been no waiver by the Company of a valuable right or of a
material debt owed to it, including any right or Indebtedness with a value in
excess of $50,000; (vii) the Company has not failed to satisfy or discharge any
Lien (as defined in Section 2.7 below); (viii) there has not been any damage,
destruction or loss, whether or not covered by insurance, materially and
adversely affecting the assets, properties, financial condition, operating
results, prospects or business of the Company (as such business is presently
conducted and as it is proposed to be conducted); (ix) there has not been any
material change in any compensation arrangement (including, without limitation,
benefits) or agreement with any employee or consultant of the Company; (x) there
has not been any sale, assignment or transfer of any patents, trademarks,
copyrights, trade secrets or other intangible assets of the Company; (xi) there
has not been any resignation or termination of employment of any key officer or
employee or consultant of
6
<PAGE>
the Company and the Company, to the best of its knowledge, does not know of the
impending resignation or termination of employment of any such officer, employee
or consultant; (xii) there has been no receipt of notice that there has been a
loss of, or material order cancellation by, any major customer of the Company;
(xiii) there has been no mortgage, pledge or transfer of a security interest in,
or lien, created or suffered to exist by the Company with respect to any of its
material properties or assets, except Liens for taxes not yet due or payable;
(xiv) there have been no loans or guarantees made by the Company to or for the
benefit of its employees, officers or directors, or any members of their
immediate families, other than travel advances and other advances made in the
ordinary course of its business consistent with past practice; (xv) any change
in the accounting, pricing, inventory, credit, financial reporting or tax
methods or procedures of the Company or Subsidiary or any other transaction
involving or development affecting the Company or Subsidiary outside the
ordinary course of business consistent with past practice; and (xvi) there has
been no agreement or commitment by the Company to do or perform any of the acts
described in this Section 2.6.
2.7 Tangible Personal Property. The Company and the Subsidiary,
respectively, are in possession of and have good and marketable title to or has
valid leasehold interests in or valid rights under Contract to use, all tangible
personal property used in the conduct of its business, including all tangible
personal property reflected on the Financial Statements for the period ended
December 31, 1996, the Interim Financial Statements for the period ended
December 31, 1997 and Other Financial Information for the period ended December
31, 1997 and tangible personal property acquired since each such date other than
property disposed of since such date in the ordinary course of business
consistent with past practice and the terms of this Agreement and the Company
Documents. All such tangible personal property is free and clear of all Liens,
and is adequate and suitable for the conduct by the Company and the Subsidiary,
respectively, of the business presently conducted and presently proposed to be
conducted by it, and is in good working order and condition, ordinary wear and
tear excepted, and its use complies in all material respects with all applicable
Laws.
2.8 Real Property. (a) Part 2.8 of Schedule 1 contains a true and
correct list of (i) each parcel of real property leased by the Company or the
Subsidiary (as lessor or lessee) and (ii) all Liens relating to or affecting any
parcel of real property referred to in clause (i).
(b) Neither the Company nor the Subsidiary owns any real
property.
(c) The Company and the Subsidiary have a valid and subsisting
leasehold estate in and the right to quiet enjoyment of the real
properties leased by them, respectively, for the full term of the
lease thereof. Each lease referred to in clause (i) of paragraph (a)
above is a legal, valid and binding agreement, enforceable in
accordance with its terms, of the Company, of the Subsidiary and of
each other Person that is a party thereto, and except as set forth
in Part 2.8 of Schedule I hereto, there is no, and neither the
Company nor the Subsidiary has received notice of any, default (or
any condition or event which, after notice or lapse of time or both,
would constitute a default) thereunder. Neither the Company nor the
Subsidiary owes any brokerage commissions or finders fees with
respect to any such leased space.
7
<PAGE>
(d) The Company and the Subsidiary have delivered to the
Investors prior to the execution of this Agreement true and complete
copies of all leases (including any amendments and renewal letters).
(e) Except as disclosed in Part 2.8 of Schedule 1 hereto, the
improvements on the real property identified in Part 2.8 of Schedule
1 hereto are in good operating condition and in a state of good
maintenance and repair, ordinary wear and tear excepted, are
adequate and suitable for the purposes for which they are presently
being used and, to the knowledge of the Company and the Subsidiary,
there are no condemnation or appropriation proceedings pending or
threatened against any of such real property or the improvements
thereon.
2.9 Contracts. The Company and the Subsidiary are not a party to,
nor is the Company or the Subsidiary or any of their respective assets or
properties bound by, or subject to, any contracts, agreements, notes,
instruments, franchises, leases, licenses, commitments, arrangements or
understandings, written or oral (collectively, "Contracts") of the following
types, except for those (the "Scheduled Contracts") listed in Part 2.9 of
Schedule 1 hereto:
(a) any Contracts pursuant to which the Company, the
Subsidiary, or another party thereto, is obligated to pay in excess of
fifty thousand dollars ($50,000);
(b) any Contracts pursuant to which the Company or any
Subsidiary acquired the right to use any Intellectual Property or
information that is material to or necessary in the business of the
Company, or pursuant to which the Company has granted to others the
right to use, or which otherwise relates to, its Intellectual Property;
(c) any Contracts (other than advances of expenses to
employees in the ordinary course of business) involving Indebtedness,
loans, loan agreements, debt securities, mortgages, deeds of trust,
security agreements, suretyships or guarantees;
(d) any Contracts between the Company or any Subsidiary,
on the one hand, and any of its officers, directors, employees,
stockholders or any direct or indirect Affiliates or Associates thereof
(each, a "Principal Owner"), on the other;
(e) any deferred compensation agreements, bonus, pension,
profit sharing, stock option and incentive plans or arrangements,
hospitalization, medical and insurance plans, agreements and policies,
retirement and severance plans and other employee compensation policies
and agreements affecting employees or consultants of the Company;
(f) any Contracts with any labor union;
(g) all partnership, joint venture, shareholders' or
similar Contracts with any Person;
8
<PAGE>
(h) all Contracts that limit or contain restrictions on
the ability of the Company or any Subsidiary to declare or pay
dividends, to make distributions in respect of or to issue or purchase,
redeem or otherwise acquire any of its capital stock or require the
Company or any Subsidiary to maintain specified financial ratios or
levels of net worth or other indicia of financial condition;
(i) any Contracts which restrict the Company or any
Subsidiary from freely engaging in business, disclosing confidential or
proprietary information, or competing anywhere;
(j) any Contracts which otherwise are material to the
Condition of the Company or any Subsidiary;
(k) all Contracts related to (A) the future disposition or
acquisition of any assets or properties other than dispositions or
acquisitions in the ordinary course of business consistent with past
practice and the provisions of this Agreement and the Company Documents,
and (B) any (i) merger, consolidation or combination to which such
Person is a party, (ii) any sale, dividend, split or other disposition
of any capital stock or other equity interests of such Person, (iii) any
tender offer (including without limitation a self-tender), exchange
offer, recapitalization, liquidation, dissolution or similar
transaction, (iv) any sale, dividend or other disposition of all or a
material portion of the assets and properties of such Person, (v) any
sale, transfer or other disposition of any securities of the Company by
any Stockholder or (vi) the entering into of any agreement or
understanding, or the granting of any rights or options, with respect to
any of the foregoing ("Business Combination").
True, correct and complete copies of all Scheduled Contracts have
been made available to the Investors. All of the Scheduled Contracts are in full
force and effect and constitute legal, valid and binding obligations of the
Company or the Subsidiary and, to the best knowledge of the Company or the
Subsidiary, the other parties thereto; to the best of the knowledge of the
Company and the Subsidiary, no circumstances exist which would give rise to an
Action (as defined in Section 2.14) against or by the Company or the Subsidiary
in connection with any Scheduled Contract or any default thereunder; and the
validity, effectiveness and continuation of all Scheduled Contracts will not be
adversely affected by the transactions contemplated by this Agreement or require
third party consents or notices.
2.10 Intellectual Property.
(i) Set forth on Part 2.10 of Schedule 1 hereto is a true,
correct and complete list of all patents, patent applications,
trademarks, service marks, tradenames, trademark registrations,
service mark registrations, copyrights and licenses trade names, and
any applications or registrations for any of the foregoing
(collectively, the "Intellectual Property") of any kind in which the
Company has an interest or which is otherwise used in, or relates to
the business of, the Company. Part 2.10 of Schedule 1 hereto contains
a true, correct and complete list of all material licenses or
agreements (other than the Company's standard form of web site
affiliate agreements) relating to the rights of the Company to any
9
<PAGE>
of the Operating IP (defined below) or any trade secret material of
the Company (the "Intellectual Property Licenses").
(ii) With respect to any Intellectual Property, brand name,
computer software or program, technology, know-how or process or
copyright (collectively (including without limitation the Intellectual
Property), the "Operating IP") or trade secret that is used in or that
relates to its business, the Company owns or has the exclusive right
to use such Operating IP or trade secret in its business free and
clear of all Liens. The Company owns or has the exclusive right to use
all Operating IP and trade secrets that are necessary to its business
as now conducted or proposed to be conducted.
(iii) Each of the Intellectual Property Licenses constitutes
a legal, valid, binding and enforceable obligation in accordance with
its terms against the Company, and, to the best knowledge of the
Company, each other Person party thereto, and to the best knowledge of
the Company is in full force and effect. The Company has performed all
obligations required to have been performed by it under each of the
Intellectual Property Licenses to which it is a party. Neither the
Company nor, to the best knowledge of the Company, any other party
thereto is in default thereunder, nor, to the best knowledge of the
Company, is there any event that with notice or lapse of time, or
both, would constitute a default thereunder. The Company has not
received any notice that any other party to any of the Intellectual
Property Licenses intends to cancel, terminate or refuse to renew the
same or to exercise or decline to exercise any option or other right
thereunder (other than in the ordinary course of business). No
licenses, sublicenses, covenants or agreements have been granted or
entered into by the Company in respect of any of the Operating IP or
any trade secret of the Company, except the Intellectual Property
Licenses. No director, officer, shareholder, employee or other
Affiliate of the Company owns, directly or indirectly, in whole or in
part, any of the Operating IP or any trade secret used by or relating
to the Company. None of the officers, employees, consultants,
distributors, agents, representatives or advisors of the Company have
entered into any agreement relating to the Company's business
regarding know-how, trade secrets, assignment of rights in inventions,
or prohibition or restriction of competition or solicitation of
customers, or any other similar restrictive agreement or covenant,
whether written or oral, with any Person other than the Company. There
are no restrictions on the direct or indirect transfer of any
Intellectual Property or license to use the Intellectual Property, or
any interest therein, held by the Company or the Subsidiary of such
Intellectual Property.
(iv) The consummation of the transactions contemplated
hereby will not alter or impair the rights of the Company to any of
the Operating IP, to any trade secret material to the Company, or
under any of the Intellectual Property Licenses.
(v) No claim with respect to the Operating IP, any trade
secret or any Intellectual Property License is currently pending or
has been asserted or overtly threatened by any Person, nor does the
Company know of any grounds for any claim, (A) to the effect that any
operation or activity of the Company presently occurring or
contemplated infringes or misappropriates any United States or foreign
copyright, patent, trademark, service mark
10
<PAGE>
or trade secret; (B) to the effect that any other Person infringes on
the Operating IP or misappropriates any trade secret or know-how or
other proprietary rights of the Company; (C) challenging the
ownership, validity or effectiveness of any of the Operating IP or any
trade secret of the Company; or (D) challenging the license of the
Company to, or other legally enforceable right under, any Operating IP
or the Intellectual Property Licenses.
(vi) The Company is not aware of any presently existing
United States or foreign patents or any patent applications which, if
issued as patents, would be infringed by any activity contemplated by
the Company.
2.11 Insurance. The Company has in full force and effect fire and
casualty insurance policies, with extended coverage, products liability
insurance, general liability insurance, errors and omissions insurance, and
directors' and officers' insurance in amounts customary for companies similarly
situated. None of such insurance coverage will terminate or lapse by reason of
this Agreement or the transactions contemplated hereby. Each insurance policy is
valid and binding and in full force and effect, no premiums due thereunder have
not been paid and neither the Company, any Subsidiary nor the Person to whom
such policy has been issued has received any notice of cancellation or
termination in respect of any such policy or is in default thereunder. Such
insurance policies are placed with financially sound and reputable insurers and,
in light of the respective business, operations and assets and properties of the
Company and the Subsidiary, are in amounts and have coverages that are
reasonable and customary for Persons engaged in such businesses and operations
and having such assets and properties. Neither the Company nor the Person to
whom such policy has been issued has received notice that any insurer under any
policy referred to in this Section is denying liability with respect to a claim
thereunder or defending under a reservation of rights clause.
2.12 Labor Union Activities; Employee Relations. No employee of
the Company is represented by any labor union or covered by any collective
bargaining agreement with the Company; nor, to the best knowledge of the
Company, has any labor union sought to represent any employee of the Company.
There is no strike or other labor dispute involving the Company pending, or to
the best knowledge of the Company, threatened. To the best knowledge of the
Company, no officer or key employee intends to terminate his employment with the
Company. To the best knowledge of the Company, no officer or key employee of the
Company is a party to or bound by any Contract, or subject to any restrictions
(including, without limitation, any non-competition restriction), which would
restrict the right of such person to participate in the affairs of the Company.
The Company has complied in all material respects with all applicable Laws
relating to the employment of labor, including without limitation, those
relating to wages, hours and collective bargaining. No unfair labor practice
complaint or sex or age discrimination claim had been brought against the
Company before the National Labor Relations Board or any other Governmental
Authority.
2.13 ERISA. There are no employee benefit plans (as defined in
Section 3(3) of the Employee Retirement Income Security Act of 1974 ("ERISA"))
covering former or current employees of the Company, or under which the Company
has any obligation or liability. The Company has not incurred any liability
under Title IV of ERISA, including any liability to the
11
<PAGE>
Pension Benefit Guaranty Corporation. Part 2.13 of Schedule 1 lists all material
plans, contracts, bonus and commission arrangements, profit-sharing, savings,
stock option plans, insurance, deferred compensation, or other similar fringe or
employee benefits covering former or current employees of the Company or under
which the Company has any obligation or liability (each, a "Benefit
Arrangement"). The Benefit Arrangements are and have been administered in
substantial compliance with their terms and with the requirements of applicable
law.
2.14 Litigation. There is no action, suit, proceeding,
investigation, audit, arbitration or governmental approval process
(collectively, "Action") pending or, to the best knowledge of the Company,
threatened against, relating to or affecting the Company or any of the
properties or assets of the Company (including, without limitation, any of its
Permits), nor, to the best knowledge of the Company, is there any basis for any
such Action. Neither the Company nor any of its assets or properties is subject
to any order, judgment, writ, injunction, decree, ruling or decision
(collectively, an "Order") of any Governmental Authority. There is no Action by
the Company currently pending or which the Company intends to initiate.
2.15 Compliance with Laws; Permits. The Company has not violated
or failed to comply with, in any material respect, any statute, law, ordinance,
rule, regulation or policy of any Governmental Authority (collectively, "Laws")
to which it or any of its properties or assets is subject. The Company has all
permits, licenses, orders, certificates, authorizations, registrations,
franchises, and approvals of any Governmental Authority (collectively, the
"Permits") that are material to the conduct of its business as presently
conducted and as proposed to be conducted, including without limitation, those
required by Environmental Laws; all such Permits are, and as of the Closing will
be, valid, binding and in full force and effect; no violations or notices of
failure to comply have been issued or recorded in respect of any such Permits.
The Company is in compliance in all material respects with the terms and
conditions of all such Permits. All applications, reports, notices and other
documents required to be filed by the Company with all Governmental Authorities
have been timely filed and are complete and correct in all material respects as
filed or as amended prior to the date hereof. The Company and the Subsidiary
have not violated or failed to comply with their certificates of incorporation
or by-laws.
2.16 Taxes. All federal, state, city, county, local and foreign
income, franchise, sales, use and value added tax returns and reports, and all
other material tax returns and reports required to be filed by the Company in
those or in any other jurisdiction (collectively, "Returns")
have been timely filed. All such Returns are true, correct and complete in all
material respects. All taxes, assessments, fees, interest, penalties and other
charges with respect thereto (collectively, "Taxes") due or claimed to be due
from the Company have been paid except to the extent reserved against on the
Interim Financial Statements or the Other Financial Information. No income tax
return of the Company has been audited by the applicable Governmental Authority,
and there are in effect no waivers of the applicable statute of limitations for
Taxes in any jurisdiction for the Company for any period. The provision for
taxes of the Company as shown in the Interim Financial Statements and the
provision for taxes for Petry and Advercomm as shown in the Other Financial
Information are adequate for taxes due or accrued as of the date thereof. Each
of the Company, Petry, Advercomm and the Subsidiary has not elected pursuant to
the Internal Revenue Code of 1986, as amended (the "Code"), to be treated as a
Subchapter S corporation or a collapsible
12
<PAGE>
corporation pursuant to Section 1362(a) or Section 341(f) of the Code, nor have
they made any other elections pursuant to the Code (other than elections that
relate solely to methods of accounting, depreciation or amortization) that would
have a material effect on the Company, Petry, Advercomm or the Subsidiary, their
financial condition, their business as presently conducted or proposed to be
conducted or any of their properties or material assets. The Company, Petry,
Advercomm and the Subsidiary have never had any tax deficiency proposed or
assessed against it and has not executed any waiver of any statute of
limitations on the assessment or collection of any tax or governmental charge.
Since the date of the Interim Statements, the Company has made adequate
provisions on its books of account for, and since the date of the Other
Financial Information, Petry, Advercomm and the Subsidiary have made adequate
provisions on their books of account for, all taxes, assessments and
governmental charges with respect to its business, properties and operations for
such period. The Company, Petry, Advercomm and the Subsidiary have withheld or
collected from each payment made to each of its employees, the amount of all
taxes (including, but not limited to, federal income taxes, Federal Insurance
Contribution Act taxes and Federal Unemployment Tax Act taxes) required to be
withheld or collected therefrom, and has paid the same to the proper tax
receiving officers or authorized depositories.
2.17 Books and Records. The books of account, ledgers and records
of the Company as made available to the Investors prior to the execution of this
Agreement are maintained in accordance with sound business practices and
accurately and completely reflect in all material respects all information
relating to its business; the nature, acquisition, maintenance, location and
collection of its assets; and the nature of all transactions giving rise to its
obligations or accounts receivable. The minutes and minute books of the Company
provided to the Investors prior to the date hereof constitute a true, complete
and correct copy of the entire minutes and minute books of the Company and
contain a true and complete record of all actions taken at all meetings and by
all written consents in lieu of meetings of stockholders, the boards of
directors and committees of the board of directors of the Company and the
Subsidiary. Neither the Company nor any Subsidiary has any of its books and
records recorded, stored, maintained or operated or otherwise wholly or partly
dependent upon or held by any means which are not under the exclusive ownership
and direct control of the Company or the Subsidiary.
2.18 Environmental Matters. The business, assets and properties
of the Company are and have been operated and maintained in compliance with all
applicable federal, state, city, county and local environmental protection laws
and regulations and occupational health and safety laws and regulations
(collectively, the "Environmental Laws"). No event has occurred which, with or
without the passage of time or the giving of notice, or both, would constitute a
non-compliance by the Company with, or a violation by the Company of, the
Environmental Laws. Neither the Company nor any of its predecessor companies has
caused or permitted to exist, as a result of an intentional or unintentional act
or omission, a disposal, discharge or release of solid wastes, pollutants or
hazardous substances, on or from any site which currently is or formerly was
owned, leased, occupied or used by the Company or any predecessor company,
except where such disposal, discharge or release was in compliance with the
Environmental Laws. No material expenditures are or will be necessary for the
Company to comply with any such existing Environmental Laws. No Order has been
issued, no claim of any kind under any Environmental Law has been filed, no
penalty has been assessed and no investigation or review is pending or, to the
knowledge of the Company
13
<PAGE>
or the Subsidiary, threatened by any Governmental Authority with respect to any
generation, treatment, storage, recycling, transportation, discharge, disposal
or release of any hazardous material (as the same is or may be defined under any
Environmental Law) generated by the Company or any Subsidiary, and to the
knowledge of the Company or the Subsidiary, there are no facts or circumstances
in existence which could reasonably be expected to form the basis for any such
Order, or claim of any kind under any Environmental Law, penalty or
investigation. Neither the Company nor any Subsidiary nor any prior owner or
lessee of any property now or previously owned or leased by either the Company
or any Subsidiary has transported or arranged for the transportation of any
hazardous material (as the same is or may be defined under any Environmental
Law) to any location that is (i) listed on the NPL under CERCLA, (ii) listed for
possible inclusion on the NPL by the Environmental Protection Agency in CERCLIS
or on any similar state or local list or (iii) the subject of enforcement
actions by federal, state or local Governmental Authorities that may lead to
claims of any kind under any Environmental Law against the Company or any
Subsidiary. No hazardous material (as the same is or may be defined under any
Environmental Law) generated by the Company or any Subsidiary or any prior owner
or lessee of any property now or previously owned or leased by either the
Company or any Subsidiary has been recycled, treated, stored, disposed of or
released by the Company or any Subsidiary at any location. There have been no
environmental investigations, studies, audits, tests, reviews or other analyses
conducted by, or that are in the possession of, the Company or any Subsidiary in
relation to any site or facility now or previously owned, operated or leased by
the Company or any Subsidiary which have not been delivered to the Investors
prior to the execution of this Agreement. The Company and the Subsidiary have
obtained all Licenses which are required of its respective business, operations
or assets and properties under applicable Environmental Laws.
2.19 Transactions with Affiliates. The Company has not had any
direct or indirect dealings with any Principal Owner of the Company or with any
of his Affiliates, associates (as such term is defined in Rule 12b-2 under the
Securities Exchange Act of 1934, as amended) or relatives (or Affiliates
thereof) nor does either the Company nor the Subsidiary beneficially own,
directly or indirectly, any investment assets of any such current or former
Principal Owner of either the Company or the Subsidiary or any of their
respective Affiliates, associates or relatives (or Affiliates thereof). The
Company does not have any obligation to or claim against any Principal Owner of
the Company, or any of his or its Affiliates, associates or relatives, and no
such Person has any obligation to or claim against the Company. All products,
services or benefits provided to the Company by any such Person, or provided by
the Company to any such Person, are set forth on Part 2.19 of Schedule 1 and are
provided at a charge equal to the fair market value of such products, services
or benefits. To the best knowledge of the Company, no Principal Owner of the
Company, nor any of its Affiliates, associates or relatives, has any direct or
indirect interest of any kind in any business or entity which is competitive
with the Company or with which the Company has a business relationship.
2.20 Registration Rights. Except as provided in the Registration
Rights Agree ment, no Person has, and as of the Closing no Person shall have,
demand, "piggy-back," or other rights to cause the Company to file any
registration statement under the Securities Act of 1933, as amended (the
"Securities Act") relating to any securities of the Company.
14
<PAGE>
2.21 No Brokers or Finders. Neither the Company nor the
Subsidiary nor any of their respective Affiliates (nor any investment banker,
financial advisor, attorney, accountant or other Person retained by or acting
for or on behalf of the Company or the Subsidiary or any such Affiliate)
(i) has entered into any agreement that conflicts with any of the transactions
contemplated by this Agreement or any of the Company Documents, or (ii) has
entered into any agreement or had any discussions with any third party regarding
any transaction involving the Company or the Subsidiary which could result in
any Investor or its general partner or any limited partner or any officer,
director, manager, employee, agent or Affiliate of any of them being subject to
any claim for liability to said third party as a result of entering into this
Agreement or the Company Documents or consummating the transactions contemplated
hereby or thereby. No agent, broker, finder, investment banker, financial
advisor or other similar Person will be entitled to any fee, commission or other
compensation in connection with any of the transactions contemplated by this
Agreement or the Company Documents on the basis of any act or statement made or
alleged to have been made by the Company or the Subsidiary, any of their
respective Affiliates, or any investment banker, financial advisor, attorney,
accountant or other Person retained by or acting for or on behalf of the Company
or the Subsidiary or any such Affiliate.
2.22 Investment Company Act. The Company is not an "investment
company" nor is the Company directly or indirectly controlled by or acting on
behalf of any Person which is an "investment company" within the meaning of the
Investment Company Act of 1940, as amended.
2.23 Disclosure. In connection with the purchase of the
Securities by the Investors as contemplated hereby, the Company has disclosed to
the Investors all material facts and information known to the Company concerning
the Company, its Condition and the Securities, and in this Agreement or
otherwise has not made any untrue statement of a material fact or omitted to
state any material fact necessary in order to make the statements contained
herein or in any other Company Documents not misleading.
2.24 Simultaneous Merger. Immediately prior to the Closing each
of Petry and Advercomm were merged with and into the Subsidiary (the "Merger").
Upon consummation of the Merger, each shareholder of Petry and Advercomm
received Common Shares upon surrender of all shares of Petry and Advercomm
capital stock held by such shareholder. All agreements between Petry and
Advercomm and/or any of the shareholders of Petry and Advercomm have been
terminated and are of no further force or effect. All representations and
warranties in this Article 2 give effect to the consummation of the Merger. All
third party and Governmental Authority consents, notices and filings needed to
effectuate the Merger or prevent any breach (with or without notice, lapse of
time or both) have been obtained or made and are in full force and effect. The
representations and warranties of the Company, the Subsidiary, Petry and
Advercomm set forth in the Agreement and Plan of Merger dated February 2, 1998,
together with the Schedules of Exceptions thereto, are incorporated herein by
reference, shall be deemed to be representations and warranties to the Investors
hereunder and shall survive the Merger and Closing hereunder, without giving
effect to any provisions limiting or terminating survival thereunder.
15
<PAGE>
2.25 Public Announcements. Except as otherwise required by law or
by the rules of (or any agreement of the parties or their affiliates with) any
stock exchange, the Company agrees that there will prior to the Closing be no
press releases or other statements with respect to this Agreement or the
transactions contemplated hereby and that it will consult with the Investors
before issuing any press release or otherwise making any public statement with
respect to this Agreement and the transactions contemplated hereby and that
neither the Company nor the Investors shall issue any such press release or make
any such public statement prior to such consultation.
2.26 Proprietary Information and Employee Issues. The Company,
after reasonable investigation, is not aware that any of its employees, officers
or consultants are in violation of the form of Non-Disclosure and Developments
Agreement in the form attached hereto as Exhibit K, and the Company will use its
best efforts to prevent any such violation. The Company is not aware that any of
its employees is obligated under any Contract (including licenses, covenants or
commitments of any nature) or other agreement, or subject to any judgment,
decree or Order of any court or Governmental Authority, that would interfere
with the use of his or her best efforts to promote the interests of the Company
or that would conflict with the Company's business as proposed to be conducted.
Neither the execution nor delivery of the Company Documents, nor the carrying on
of the Company business by the employees or consultants to the Company or the
Subsidiary, nor the conduct of the Company's or the Subsidiary's business as
proposed, will, to the best of the Company's knowledge, conflict with or result
in a breach of the terms, conditions or provisions of, or constitute a default
under, any Contract, covenant or instrument under which any of such employees or
consultants is now obligated. The Company does not believe it is or will be
necessary for it or the Subsidiary to utilize any inventions of any of its or
the Subsidiary's employees or consultants (or people it or the Subsidiary
currently intends to hire or engage) made prior to their employment by the
Company or the Subsidiary.
2.27 Business Plan. The Business Plan has been prepared in good
faith by the Company and does not contain any untrue statement of a material
fact nor does it omit to state a material fact necessary to make the statements
made therein not misleading, except that with respect to projections contained
in the Business Plan, the Company represents only that such projections were
prepared in good faith and that the Company reasonably believes there is a
reasonable basis for such projections.
2.28 Real Property Holding Company. The Company and the
Subsidiary are not real property holding companies within the meaning of Section
897 of the Code.
2.29 Substantial Customers. Part 2.29(a) of Schedule 1 lists the
fifteen (15) largest customers of the Company and the Subsidiary on the basis of
revenues for goods sold or services provided for the most recent fiscal year.
Except as disclosed in Part 2.29(b) of Schedule 1, no such customer or supplier
has ceased or materially reduced its purchases from or sales or provision of
services to the Company and the Subsidiary since October 1, 1997 or, to the
knowledge of the Company and the Subsidiary, has threatened to cease or
materially reduce such purchases or sales or provision of services after the
date hereof. Except as disclosed in Part 2.29(c) of Schedule 1 to the knowledge
of the Company and the Subsidiary, no such customer or supplier is threatened
with bankruptcy or insolvency.
16
<PAGE>
2.30 Accounts Receivable. Except as set forth in Part 2.30 of
Schedule 1, the accounts and notes receivable of the Company and the Subsidiary
reflected on the balance sheet included in the Financial Statements for the
period ended December 31, 1996, the Interim Financial Statements, and the Other
Financial Information, and all accounts and notes receivable arising subsequent
to December 31, 1996, (i) arose from bona fide sales transactions in the
ordinary course of business consistent with past practice and are payable on
ordinary trade terms, (ii) are legal, valid and binding obligations of the
respective debtors enforceable in accordance with their respective terms, (iii)
are not subject to any valid set-off or counterclaim, (iv) do not represent
obligations for goods sold on consignment, on approval or on a sale-or-return
basis or subject to any other repurchase or return arrangement, (v) are
collectible in the ordinary course of business consistent with past practice in
the aggregate recorded amounts thereof, net of any applicable reserve reflected
in the balance sheet included in Financial Statements for the period ended
December 31, 1996, the Interim Financial Statements and the Other Financial
Information, and (vi) are not the subject of any Actions or Proceedings brought
by or on behalf of the Company or the Subsidiary. Part 2.30 of Schedule 1 sets
forth a description of any security arrangements and collateral securing the
repayment or other satisfaction of receivables of the Company and the
Subsidiary. All steps necessary to render all such security arrangements legal,
valid, binding and enforceable, and to give and maintain for the Company and the
Subsidiary a perfected security interest in the related collateral, have been
taken.
2.31 Small Business Matters. The Company and the Subsidiary
acknowledge that they are aware that Prospect Street NYC Discovery Fund, L.P. is
a Federal Licensee under the Small Business Act of 1953, as amended, and the
Small Business Investment Act of 1958, as amended (collectively, the "SBA Act").
The Company, together with their respective "affiliates" (as that term is
defined in 13 CFR, ss.121.103, such term to have such meaning throughout this
section), is a "Small Business" within the meaning of the rules and regulations
of the U.S. Small Business Administration (the "SBA") promulgated under the SBA
Act (13 CFR 107 et seq.; and 13 CFR 121 et seq., collectively the "SBA
Regulations"), including 13 CFR ss.121.301. The information regarding the
Company and their respective affiliates set forth in SBA Form 480, Form 652 and
Section A of Form 1031 is accurate and complete. Copies of such forms shall have
been completed by the Company and delivered to Prospect Street NYC Discovery
Fund, L.P. at the Closing. The Company and the Subsidiary do not presently
engage in, and shall not hereafter engage in, any activities for which a Small
Business Investment Company licensed by the SBA under Section 301(c) of the
Small Business Investment Act of 1958, as amended (an "SBIC") is prohibited from
providing funds by SBA Regulations, including 13 CFR ss.107.720. The Company and
the Subsidiary have not received any "Financing" (as defined in the SBA
Regulations) from any SBIC.
2.32 Exemption from Registration; Restrictions on Offer and Sale
of Same or Similar Securities. Assuming the representations and warranties of
the Investors set forth in Sections 3.3, 3.4, and 3.6 hereof are true and
correct in all material respects, the offer and sale to the Investors of the
Securities is exempt from the registration requirements of the Securities Act.
Neither the Company nor the Subsidiary nor any Person authorized to act on
behalf of the Company or the Subsidiary has, in connection with the offer and
sale of the Securities engaged in (A) any form of general solicitation or
general advertising (as those terms are used within the meaning of Rule 501(c)
under the Securities Act), (B) any action involving a public offering within the
meaning
17
<PAGE>
of section 4(2) of the Securities Act, or (C) any action that would require the
registration under the Securities Act of the offering and sale of the Securities
pursuant to this Agreement and the Company Documents or that would violate
applicable state securities or "blue sky" laws. Neither the Company nor the
Subsidiary has made and will not prior to the Closing make, directly or
indirectly, any offer or sale of the Securities or of securities of the same or
a similar class as the Securities if as a result thereof the Securities could
fail to be entitled to exemption from the registration requirements of the
Securities Act. As used herein, the terms "offer" and "sale" have the meanings
specified in Section 2(3) of the Securities Act.
2.33 Series B Shares. The Series B Shares shall have the powers,
rights, preferences and privileges set forth in the Restated Certificate.
3. Representations, Warranties, and Covenants of the Investors. Each
Investor, severally and not jointly, hereby represents and warrants, in each
case with respect to itself and not with respect to any other Investor, to the
Company as follows:
3.1 Organization. If such Investor is a legal entity, such
Investor is, and as of the Closing will be, duly organized, validly existing and
in good standing under the laws of its jurisdiction of organization.
3.2 Authorization. Such Investor has, and as of the Closing will
have, all requisite power and authority to execute, deliver and perform this
Agreement, the Shareholders' Agreement and the Registration Rights Agreement and
to consummate the transactions of such Investor contemplated hereby and thereby.
The execution, delivery and performance of this Agreement, the Shareholders'
Agreement and the Registration Rights Agreement, and the consummation by such
Investor of the transactions contemplated hereby and thereby, have been duly and
validly authorized by all necessary action on the part of such Investor. This
Agreement, the Shareholders' Agreement and the Registration Rights Agreement
have been duly executed and delivered by such Investor and constitutes its
legal, valid and binding obligation, enforceable against such Investor in
accordance with its terms, except as the enforceability thereof may be limited
by bankruptcy, insolvency or other similar laws affecting the enforceability of
creditors' rights in general or by general principles of equity.
3.3 Offering Exemption. Such Investor understands that the
Securities of the Company being purchased hereunder have not been registered
under the Securities Act, nor qualified under any foreign or state securities
laws, and that they are being offered and sold pursuant to an exemption from
such registration and qualification based in part upon the representations of
such Investor contained herein.
3.4 Knowledge and Experience; Ability to Bear Economic Risks.
Such Investor has such knowledge and experience in financial and business
matters such that it is capable of evaluating the merits and risks of the
investment contemplated by this Agreement and such Investor is able to bear the
economic risk of its investment in the Company (including a complete loss of its
investment). Such Investor represents it is an "accredited investor" as that
term is defined in Regulation D promulgated under the Securities Act. During
negotiation of the transactions
18
<PAGE>
contemplated herein, such Investor and its representative have been afforded
full and free access to corporate books, financial statements, records,
contracts, documents and other information concerning the Company and have been
afforded the opportunity to ask questions of the Company's officers and
directors concerning the Company's business, operations, financial condition,
assets and liabilities and other relevant matters as they have deemed necessary
or desirable and each Investor believes that it has been provided with all such
information as has been requested. The foregoing does not limit or modify the
representations or warranties made by the Company in Article 2 hereof or the
right of the Investors to rely thereon.
3.5 Limitations on Disposition. Such Investor recognizes that no
public market exists for the Securities of the Company to be sold hereunder, and
no representation has been made to such Investor that any such public market
will exist in the future. Such Investor understands that it must bear the
economic risk of this investment indefinitely unless the Company's Securities
are registered pursuant to the Securities Act or an exemption from such
registration is available, and unless the disposition of such Securities is
qualified under applicable state or foreign securities laws or an exemption from
such qualification is available, and that, except as provided in this Agreement
or the Registration Rights Agreement, the Company has no obligation or present
intention of so registering the Securities. Such Investor understands that there
is no assurance that any exemption from the Securities Act will be available,
or, if available, that such exemption will allow it to dispose of or otherwise
transfer any or all of its Securities, in the amounts or at the times any such
Investor might desire. Such Investor understands that at the present time Rule
144 (other than Rule 144(k)) promulgated under the Securities Act by the
Securities and Exchange Commission ("Rule 144") is not applicable to sales of
any such Securities because such Securities are not registered under Section 12
of the Exchange Act, and there is not publicly available the information
concerning the Company specified in Rule 144. Such Investor acknowledges that
the Company is not presently under any obligation to register under Section 12
of the Exchange Act or to make publicly available the information specified in
Rule 144 and that it may never be required to do so, except in each case to the
extent provided herein or in the Registration Rights Agreement.
3.6 No Intended Resale. Such Investor is acquiring the Securities
of the Company purchased hereunder for its own account for investment and not
with a view towards the resale, transfer or distribution thereof, nor with any
present intention of distributing such Securities, in each case in violation of
the Securities Act. Such Investor has not agreed to give any Person any interest
or right in the Securities. The Securities are being acquired by such Investor
for investment for its own account and not with a view to the resale or
distribution thereof in violation of applicable securities laws.
3.7 Legends.
(a) Such Investor understands that the certificates evidencing
the Securities will bear the following legends:
"THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
"ACT"), OR ANY STATE SECURITIES LAWS AND NEITHER SUCH
19
<PAGE>
SECURITIES NOR ANY INTEREST THEREIN MAY BE TRANSFERRED IN
THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM UNDER
SUCH ACT OR SUCH LAWS AND THE RULES AND REGULATIONS THEREUNDER."
"TRANSFER OF THE SECURITIES REPRESENTED BY THIS
CERTIFICATE IS RESTRICTED BY AN AGREEMENT, DATED FEBRUARY 25,
1998, A COPY OF WHICH IS ON FILE AT THE OFFICE OF THE
CORPORATION. ANY PURPORTED TRANSFER IN VIOLATION OF THIS
AGREEMENT IS VOID AND WILL NOT BE RECOGNIZED BY THE CORPORATION
OR ITS TRANSFER AGENT."
(b) The Securities shall not be required to bear such legends if
an opinion of counsel reasonably satisfactory to the Company is delivered to the
Company to the effect that neither the legends nor the restrictions on transfer
contained in this Agreement are required to insure compliance with the Act.
Whenever, pursuant to the preceding sentence, any certificate for any of the
Securities is no longer required to bear the foregoing legend, the Company may,
and if requested by the holder thereof, shall, issue to the holder, at the
Company's expense, a new certificate not bearing the foregoing legends.
(c) Any and all Common Shares issued prior to January 31, 1999 or
which the Company is obligated to issue as a result of events occurring prior to
such date, in each case upon conversion of Series B Shares as a result of
accrued dividends with respect to such Series B Shares shall be cancelled and
cease to exist without further action by the Company or any other person upon
the closing of a Qualified Public Offering (as defined in Section 6.4(f)) prior
to January 31, 1999, and shall bear a legend to such effect.
3.8 Confidentiality. Such Investor agrees to maintain, and to
cause its agents and representatives to maintain, procedures reasonably designed
to preserve the confidentiality of the terms and conditions of this Agreement
and the Related Agreements (as defined in 4.10 below) and all documents or
information executed and/or delivered in connection with the transactions
contemplated by this Agreement and the Related Agreements (whether furnished
before, on or after the date hereof) and to use such information and documents
only in connection with evaluating and/or monitoring the Investors' investment
in the Company. The provisions of this subsection shall not apply to information
or to particular conditions or terms of the above referenced documents (i) if
the party seeking to make such disclosure shall have obtained the prior written
consent of the other party to the disclosure of such information, conditions or
terms, (ii) that are required to be disclosed during the course of any
litigation or arbitration which may be brought by any party related to the
provisions of any of the above referenced documents, (iii) that are or become
generally available to the public other than as a result of actions taken by the
party seeking to make such disclosure or its agents and representatives in
violation of this Agreement, (iv) that are required to be disclosed pursuant to
and in accordance with any law, rule or regulation applicable to the party
seeking to make such disclosure, (v) if such information becomes available to
the Investor from another source which the Investor reasonably believes is
entitled to disclose it, (vi) if such information was known by Investor on a
non-confidential basis prior to disclosure by the Company or one of its
20
<PAGE>
representatives, (vii) that are disclosed to the Investors' directors, officers,
employees and agents, and representatives of the Investors' advisors who need to
know the information for the purpose of evaluating a possible transaction and
who agree to keep the information confidential, (viii) that are reasonably
necessary to be disclosed in connection with any transfer of securities or (ix)
in connection with a disclosure to any shareholder or any direct or indirect
officers, directors, employees, members, managers, partners, Affiliates or
associates of such Investor.
Notwithstanding the foregoing, if a party is requested or
required (by oral questions, interrogatories, requests for information or
document subpoena, arbitration, civil investigative demand or similar process)
to disclose any of the above-referenced information or documents, such party
will promptly notify the other party of such request so that such other party
may seek an appropriate protective order or waive compliance with the provisions
hereof. If, in the absence of a protective order or the receipt of a waiver
hereunder, a party is nonetheless, in the opinion of its counsel, legally
required to disclose any terms or conditions of the above-referenced information
or documents to any tribunal, such party may disclose such information to such
tribunal without liability hereunder.
From and after the consummation of the Qualified Public Offering,
if any, of the Company's securities, to the extent that any of the information
furnished pursuant to Section 6.1 hereof would constitute material, nonpublic
information for purposes of the Securities Exchange Act of 1934, as amended,
such Investor covenants that it will not engage in any purchase or sale of the
Securities while in possession of such information and prior to the time that
such information is made generally known to the public and that such Investor
shall inform its agents and representatives, who have been given access to such
material, nonpublic information, of such requirements. The obligations in this
Section 3.8 shall survive termination of this Agreement.
3.9 Public Announcements. Except as otherwise required by law or
by the applicable rules of (or any agreement of the parties or their affiliates
with) the SEC, any stock exchange or the Nasdaq Stock Market, the Investors
agree that there will prior to the Closing be no press releases or other
statements with respect to this Agreement or the transactions contemplated
hereby and that they will consult with the Company before issuing any press
release or otherwise making any public statement with respect to this Agreement
and the transactions contemplated hereby.
4. Conditions of Investors' Obligations at Closing. The obligation of
each Investor to purchase the Securities to be purchased by it at the Closing is
subject to the fulfillment to each such Investor's satisfaction, in its sole
discretion, prior to or at the Closing, of each of the following conditions
(each of which may be waived in whole or in part by each Investor in its sole
discretion):
4.1 Representations and Warranties. Each of the representations
and warranties made by the Company and the Subsidiary in this Agreement shall be
true and correct in all material respects (if not qualified by materiality) and
in all respects (if qualified by materiality) on and as of the date of the
Closing as though such representation or warranty was made on and as of the date
of the Closing, and any representation or warranty made as of a specified date
earlier than the date of
21
<PAGE>
the Closing shall also have been true and correct in all material respects on
and as of such earlier date.
4.2 Performance. The Company and the Subsidiary shall have
performed and complied with all agreements, covenants, and conditions required
by this Agreement and the other Company Documents to be performed or complied
with by it prior to or at the Closing.
4.3 Stock Certificates, Etc. At the Closing, the Company shall
have tendered to each Investor certificates representing the Shares, in genuine
and unaltered form, duly endorsed in blank, with requisite stock transfer tax
stamps, if any, attached as well as the Warrants, in accordance with Sections
1.1 and 1.3 hereof, all in form and substance satisfactory to such Investor and
sufficient to transfer to and vest in such Investor good and valid title to the
Shares and the Warrants, free and clear of any Lien.
4.4 No Material Adverse Change. There shall not have occurred any
material adverse change in the Condition of the Company or the Subsidiary.
4.5 Consents. The Company shall have obtained all consents,
approvals or waivers from Governmental Authorities and third Persons (including,
without limitation, those with respect to Scheduled Contracts) necessary for the
execution, delivery and performance of this Agreement and the other Company
Documents and the transactions contemplated hereby and thereby, each of which
shall be in full force and effect, in form and substance satisfactory to each
Investor and shall not impose any limitations or restrictions on any Investor.
Without limiting the generality of the foregoing, each of the Company's existing
shareholders shall have waived any preemptive right, right of first offer and
any similar rights any such shareholder may have to purchase any of the
Securities.
4.6 No Litigation. There shall not be any Action of or before any
Governmental Authority or other Person pending or threatened with respect to
this Agreement, the other Company Documents or the transactions contemplated
hereby or thereby or which might materially adversely affect the Condition of
the Company or which could reasonably be expected to otherwise result in a
material diminution of the benefits of the transactions contemplated by this
Agreement or any of the Related Agreements (as defined below) to such Investor.
4.7 Opinion of Counsel. The Investors shall have received from
Proskauer Rose LLP, an opinion dated as of the Closing, in the form attached
hereto as Exhibit I.
4.8 Compliance Certificate. The Investors shall have received
certificates dated as of the day of the Closing executed by the Chief Executive
Officer of the Company certifying that the conditions specified in Sections 4.1,
4.2, 4.4 through 4.6, and 4.9 have been fulfilled.
4.9 Directors. Those persons listed on Schedule 3 hereto shall
have been duly elected and qualified as directors of the Company and at the
Closing shall constitute the entire Board of Directors of the Company.
22
<PAGE>
4.10 Related Agreements. The Company Documents and the
Non-Competition Agreements in the form attached hereto as Exhibit J
(collectively, the "Related Agreements") shall have been executed and delivered
by each of the parties thereto and shall be in full force and effect.
4.11 Proceedings and Documents. All proceedings in connection
with the transactions contemplated hereby and all documents and instruments
incident to such transactions shall be satisfactory in substance and form to the
Investors and their counsel, and the Investors shall have received all such
counterpart originals or certified or other copies of such documents as the
Investors may reasonably request.
4.12 Secretary's Certificate. The Company shall have delivered to
the Investors a certificate of the Secretary of each of the Company and the
Subsidiary certifying as to (i) the Restated Certificate and the By-laws of each
of the Company and the Subsidiary as in effect as of the Closing; (ii) the
resolutions of the Board of Directors and, to the extent required, the
shareholders of the Company, authorizing and approving all matters in connection
with this Agreement, the Registration Rights Agreement, the Restated Certificate
and the Shareholders' Agreement, and the transactions contemplated hereby and
thereby; (iii) the duly elected officers of the Company and the incumbency of
such officers, and attaching a certificate as to the legal existence and good
standing of the Company issued by the Department of State of the State of New
York, and as to the legal existence and good standing of the Subsidiary issued
by the Secretary of State of the State of Delaware; and (iv) a certificate from
the Department of State or other appropriate official in each jurisdiction in
which each of the Company and the Subsidiary are qualified or admitted to do
business to the effect that each of the Company and the Subsidiary are duly
qualified or admitted and in good standing in such jurisdiction.
4.13 Qualification of Securities. The Company shall have caused
the Securities to be registered or qualified under applicable blue sky laws of
such jurisdictions in the United States as shall be reasonably required to
comply with all applicable laws in connection with the transactions contemplated
hereby.
4.14 Filing of Restated Certificate. The Restated Certificate
shall have been filed with and accepted by the Department of State of the State
of New York.
4.15 Purchase By Other Investors. Each Investor shall have
purchased and paid for the Securities to be purchased by it in accordance with
this Agreement.
4.16 Payment of Investor Expenses. The Company shall have paid
the expenses of the Investors in accordance with Section 7.1 hereof.
If at the Closing the Company fails to tender to the Investors
the documents specified herein which are required to be delivered to the
Investors at the Closing or if at the Closing any of the conditions specified in
this Section 4 shall not have been fulfilled to each Investor's satisfaction,
such Investor shall, at its election, be relieved of all further obligations
under this Agreement except those set forth in Section 3.8.
23
<PAGE>
5. Conditions of the Company's Obligations at Closing. The obligations
of the Company to each Investor under this Agreement are subject to the
fulfillment, prior to or at the Closing, of each of the following conditions,
each of which may be waived in whole or in part by the Company in its sole
discretion:
5.1 Representations and Warranties. The representations and
warranties of such Investor contained in this Agreement shall be true and
correct in all material respects on and as of the date of the Closing as if made
on and as of such date.
5.2 Payment of Purchase Price. Such Investor shall have delivered
to the Company the purchase price specified in Section 1.1 hereof.
5.3 No Litigation. There shall not be any Action of or before any
Governmental Authority or other Person pending or threatened with respect to
this Agreement or the transactions contemplated hereby.
5.4 Proceedings and Documents. All proceedings in connection with
the transactions contemplated hereby and all documents and instruments incident
to such transactions shall be reasonably satisfactory in substance and form to
the Company and its counsel, and the Company shall have received all such
counterpart originals or certified or other copies of such documents as it may
reasonably request.
If at the Closing an Investor fails to tender to the Company the
payment or documents specified herein which are required to be delivered to the
Company at the Closing by such Investor or if at the Closing any of the
conditions with respect to an Investor specified in this Section 5 shall not
have been fulfilled to the Company's satisfaction, provided the Company is not
in breach hereunder, the Company shall, at its election, be relieved of all
further obligations to such Investor under this Agreement.
6. Certain Covenants.
6.1 Financial and Business Information.
(a) Monthly and Quarterly Statements. The Company shall
deliver to each Investor, as soon as practicable, and in any event within 30
days after the close of each month of each fiscal year of the Company in the
case of monthly statements and 45 days after the close of each of the first
three fiscal quarters of each fiscal year of the Company in the case of
quarterly statements, true and complete copies of the consolidated balance
sheets, and the related consolidated statements of income, stockholders' equity
and cash flows of the Company and its Subsidiaries (which, for purposes of this
Article 6, shall include all affiliates controlled by the Company directly or
indirectly through one or more intermediaries including, without limitation, any
Person in which the Company, directly or indirectly, through a Subsidiary or
otherwise, beneficially owns more than fifty percent (50%) of either the equity
interest in, or the voting control of such Persons, whether or not existing on
the date hereof) as at the close of such month or quarter and covering
operations for such month or quarter, as the case may be, and the portion of the
Company's fiscal year ending on the last day
24
<PAGE>
of such month or quarter, setting forth in each case in comparative form the
figures for the comparable period of the previous fiscal year and accompanied by
a narrative description of the Company's business and results of operations for
such month or quarter. All such financial statements shall be prepared in
accordance with GAAP (except for the omission of normal year-end adjustments and
footnote disclosures) consistently applied throughout the periods involved,
shall be true and correct in all material respects and shall fairly present the
financial condition, income, changes in stockholders' equity and cash flow of
the Company on a consolidated basis, as applicable, as of the respective dates
thereof and for the respective periods covered thereby. Each financial statement
delivered by the Company pursuant to this Section 6.1(a) shall be certified by
the Company's chief executive officer, president, treasurer or chief financial
officer.
(b) Annual Statements. The Company shall deliver to each
Investor, as soon as practicable after the end of each fiscal year of the
Company, and in any event within 90 days thereafter, true and complete copies of
the consolidated and consolidating balance sheets of the Company and its
Subsidiary at the end of such year and the consolidated and consolidating
statements of income, stockholders' equity and cash flows of the Company and its
Subsidiary for such year, setting forth in each case in comparative form the
figures for the previous fiscal year, all in reasonable detail and accompanied
by an opinion thereon of a firm of independent certified public accountants of
recognized national standing selected by the Company and reasonably acceptable
to the Investors, which opinion shall state that such financial statements
fairly present the financial condition, income, changes in stockholders' equity
and cash flow of the Company and its Subsidiary on a consolidated basis, as
applicable, and have been prepared in accordance with GAAP and that the
examination of such accountants in connection with such financial statements has
been made in accordance with generally accepted auditing standards, and
accordingly included such tests of the accounting records and such other
auditing procedures as were considered necessary in the circumstances. Each
financial statement delivered by the Company pursuant to this Section 6.1(b)
shall be certified by the Company's chief executive officer, president,
treasurer or chief financial officer.
(c) Certificate of No Default. Simultaneously with the
delivery of the Financial Statements referred to in Section 6.1(a) and (b), the
Company shall deliver to each Investor a certificate of the Company's Chief
Executive and Chief Financial Officer certifying that no default,
misrepresentation or breach or event which with notice or lapse of time or both
would become a default, misrepresentation or breach under any Scheduled Contract
or other material Contract, including without limitation under this Agreement or
any Company Document, has occurred or is continuing or if any such event has
occurred and is continuing a full description thereof.
(d) Audit Reports. The Company shall deliver to each
Investor, promptly upon receipt thereof, one copy of each other financial report
and internal control letter submitted to the Company by independent accountants
in connection with any annual, interim or special audit made by them of the
books of the Company and its Subsidiary, as applicable, as well as any responses
of the Company thereto.
(e) Other Reports. The Company shall deliver to each
Investor, promptly upon their becoming available, one copy of each financial
statement, report, notice or proxy
25
<PAGE>
statement sent by the Company to stockholders generally, of each financial
statement, report, notice or proxy statement sent by the Company or any of its
Subsidiaries to the SEC or any successor agency, if applicable, of each regular
or periodic report and any registration statement, prospectus or written
communication (other than transmittal letters) in respect thereof filed by the
Company or any of its Subsidiaries with, or received by such Person in
connection therewith from, any securities exchange or the SEC or any successor
agency, of any press release issued by the Company or any of its Subsidiaries,
and of any material of any nature whatsoever prepared by the SEC or any
successor agency thereto or any state blue sky or securities law commission
which relates to or affects in any way the Company or any of its Subsidiaries.
(f) Requested Information. The Company shall deliver to each
Investor, with reasonable promptness, such other documents, reports, data and
information as from time to time may be reasonably requested by such Investor.
(g) Economic Impact Information. As soon as practicable after
the end of each fiscal year (but in any event prior to January 31 of each year)
the Company shall deliver to Prospect Street NYC Discovery Fund, L.P. a written
assessment of the economic impact of Prospect Street NYC Discovery Fund, L.P.'s
investment in the Company, specifying the full-time equivalent jobs created or
retained in connection with the investment, the impact of such investment on the
business of the Company in terms of revenue and profits of the Company's
business and on Taxes paid by the Company and its employees.
(h) Update of Information. Within 120 days after the end of
each fiscal year, the Company will furnish Prospect Street NYC Discovery Fund,
L.P. with the following information certified by the Company's chief executive
officer, president, treasurer or chief financial officer: (i) information
reasonably requested by Prospect Street NYC Discovery Fund, L.P. to determine
the Company's continuing eligibility for "Financing" under and as defined in the
SBIC Regulations and (ii) a statement verifying the use of the proceeds received
by the Company from Prospect Street NYC Discovery Fund, L.P. hereunder
(including the intended use of any such unused proceeds as of the date of such
certification), until all of the proceeds received by the Company from Prospect
Street NYC Discovery Fund, L.P. hereunder have been used by the Company. The
Company will also notify Fund I (a) at least 15 days prior to taking any action
which would result in a change in the number of record holders of the Company's
voting stock from fewer than 50 to 50 or more or from 50 or more to fewer than
50 and (b) of any other action or occurrence which increased or decreased or
would increase or decrease the number of record holders of the Company's voting
stock from fewer than 50 to 50 or more or from 50 or more to fewer than 50, as
soon as practicable after the Company becomes aware that such other action or
occurrence has occurred or is proposed.
(i) Access. The Company shall permit, and shall cause its
Subsidiaries to permit, representatives designated by an any Investor, upon
reasonable prior notice to the Company and at the such Investor's expense, to
visit and inspect each of the Company's and its subsidiaries' properties, to
examine their respective corporate and financial records (and make copies
thereof or extracts therefrom), to discuss their respective affairs, finances
and accounts with the
26
<PAGE>
Company's and its subsidiaries' directors, officers, key employees and
accountants, all at such reasonable times as may be requested by such Investor.
(j) Other Information. The Company shall provide, from time
to time, such additional information regarding the Company or its Subsidiaries
as any Investor reasonably may request, including without limitation, any
information or reports required by reason of reporting or regulatory
requirements to which an Investor, its general partner (if applicable), or any
Person having an interest in such Investor is subject.
6.2 Exemption from Investment Company Act. The Company shall
conduct its business so that neither the Company nor any of its Subsidiaries
shall become an "investment company" within the meaning of the Investment
Company Act of 1940, as amended.
6.3 Accounting and Reserves. The Company shall, and the Company
shall cause each of its Subsidiaries to, maintain a standard and uniform system
of accounting and shall keep proper books and records and accounts in which
full, true and correct entries shall be made of its transactions, all in
accordance with generally accepted accounting principles applied on a consistent
basis through all periods, and shall set aside on such books for each fiscal
year all such proper reserves for depreciation, obsolescence, amortization, bad
debts and other purposes in connection with its operations as are required by
such principles so applied.
6.4 Rights to Purchase Additional Securities.
(a) The Company hereby grants to each Investor a right to
purchase up to such Investor's "pro rata share" (as hereinafter defined) of any
New Securities (as hereinafter defined) which the Company may, from time to
time, propose to sell and issue. A "pro rata share", for purposes hereof, is the
ratio that (x) the aggregate number of Common Shares held by such Investor and
its Affiliates as of such date (assuming the exercise, conversion or exchange of
all Options, Warrants or convertible securities held by such Investor upon
conversion of, including the Series B Shares and Warrants) bears to (y) the sum
of (i) the total number of Common Shares then outstanding as of such date and
(ii) the total number of such shares issuable upon exercise, conversion of
Series B Shares or exchange of all Options, Warrants and convertible securities
held by all Investors as of such date.
(b) Except as set forth below, "New Securities" shall mean
any shares of capital stock of the Company, including Common Shares and
preferred shares, whether now authorized or not, and rights, options, warrants
or any other agreements to purchase such shares of capital stock, and securities
of any type whatsoever. Notwithstanding the foregoing, New Securities does not
include: (i) securities issuable upon exercise or conversion of rights, options,
warrants or other securities which are outstanding as of the date hereof and set
forth on Schedule 1; (ii) securities offered to the public generally pursuant to
an underwritten public offering and an effective registration statement under
the Act; (iii) securities issued pursuant to the acquisition of another Person
by the Company which is not an Affiliate of the Company by means of a merger,
purchase of shares, purchase of substantially all of the assets or other
reorganization; (iv) up to 5,750,000 Common Share securities issued to
employees, officers and directors of, and consultants to, the
27
<PAGE>
Company, with the approval of the Board of Directors of the Company pursuant to
the Stock Incentive Plan; (v) stock issued pursuant to any rights or agreements
including, without limitation, convertible securities, options and warrants,
provided that the preemptive rights established hereby apply with respect to the
initial sale or grant by the Company of such rights or agreements; and (vi)
securities issued in connection with any strategic partnership or joint venture,
the primary purpose of which is not to raise equity capital.
(c) In the event the Company proposes to undertake an
issuance of New Securities, it shall give each Investor written notice of its
intention, describing the type of New Securities, and the price and general
terms upon which the Company proposes to issue the same. Each Investor shall
have twenty (20) business days from the date any such notice is given (the
"Preemption Period") to agree to purchase all or any part of its pro rata share
of such New Securities for the price and upon the general terms specified in the
notice, by giving written notice to the Company and stating therein the quantity
of New Securities to be purchased.
(d) If any Investor fails so to notify the Company, then all
rights of such Investor to purchase New Securities under the offer and notice in
question shall terminate. If any Investor elects not to purchase all of its pro
rata share of the New Securities or fails to notify the Company of its intent to
purchase such New Securities prior to the expiration of the Preemption Period,
the Company shall promptly notify the remaining Investors that such New
Securities are available for purchase by the remaining Investors, on a "pro rata
share" basis, in accordance herewith. In such event, each of the remaining
Investors shall have five (5) business days after receipt of such notice to
determine whether to purchase any of such New Securities.
(e) In the event the Investors have not in the aggregate
elected to purchase all of such New Securities which are being offered, the
Company shall have ninety (90) days from the date of expiration of the
Preemption Period to sell the New Securities not elected to be purchased by the
Investors at the price and upon general terms not materially no more favorable
to the third party purchaser(s) of such New Securities than specified in the
notice given by the Company. In the event the Company has not sold the New
Securities within such ninety (90) day period, the Company shall not thereafter
issue or sell any New Securities, without first offering such securities in the
manner provided above.
(f) The preemptive right granted under this Agreement shall
expire upon the consummation of Qualified Public Offering, which shall mean a
sale of Common Shares by the Company that satisfies each of the following
conditions: (i) the sale of the Common Shares is effected in an underwritten
public offering pursuant to an effective registration statement under the
Securities Act of 1933, as amended, other than a registration relating solely to
a transaction under Rule 145 under such Act (or any successor thereto) or to an
employee benefit plan of the Company; (ii) such Common Shares upon issuance are
listed on the New York Stock Exchange or included for trading in the Nasdaq
National Market System; (iii) the offering price to the public is not less than
$1.904 per Common Share, adjusted for stock splits, stock dividends, other stock
combinations or other like events; and (iv) the sales of Common Shares results
in at least $20,000,000 of gross proceeds to the Company, or, when considered
together with all previous underwritten public
28
<PAGE>
offerings of the Company satisfying clauses (i), (ii) and (iii) above, at least
$30,000,000 of aggregate gross proceeds to the Company.
6.5 Confidentiality. The Company agrees to maintain, and to cause
its agents and representatives to maintain, the confidentiality of the terms and
conditions of this Agreement and the Related Agreements (as defined in 4.10) and
all documents or information executed and/or delivered in connection with the
transactions contemplated by this Agreement and the Related Agreements (whether
furnished before, on or after the date hereof) and to use such information and
documents only in connection with evaluating and/or monitoring the Investors'
investment in the Company. The provisions of this subsection shall not apply to
information or to particular conditions or terms of the above referenced
documents (i) if the party seeking to make such disclosure shall have obtained
the prior written consent of the other party to the disclosure of such
information, conditions or terms, (ii) that are required to be disclosed during
the course of any litigation or arbitration which may be brought by either party
related to the provisions of any of the above referenced documents, (iii) that
are or become generally available to the public other than as a result of
actions taken by the party seeking to make such disclosure or its agents and
representatives, (iv) that are required to be disclosed pursuant to and in
accordance with any law, rule or regulation applicable to the party seeking to
make such disclosure, or (v) that are disclosed to the Company's directors,
officers, employees and agents, and representatives of the Company's advisors
who need to know the information for the purpose of evaluating a possible
transaction and who agree to keep the information confidential.
Notwithstanding the foregoing, if a party is requested or
required (by oral questions, interrogatories, requests for information or
document subpoena, civil investigative demand or similar process) to disclose
any of the above-referenced information or documents, such party will promptly
notify the other party of such request so that such other party may seek an
appropriate protective order or waive compliance with the provisions hereof. If,
in the absence of a protective order or the receipt of a waiver hereunder, a
party is nonetheless, in the opinion of its counsel, compelled to disclose any
terms or conditions of the above-references information or documents to any
tribunal or else stand liable for contempt or suffer other censure or penalty,
such party may disclose such information to such tribunal without liability
hereunder.
The obligations in this Section 6.5 shall survive termination of
this Agreement.
6.6 Ordinary Course Obligations. As long as any Series B Shares
is outstanding, the Company agrees, and agrees to cause its subsidiaries to
(a) Promptly pay and discharge, or cause to be paid and
discharged when due and payable, all lawful taxes, assessments, and governmental
charges or levies imposed upon the income, profits, property or business of the
Company or its subsidiaries; provided, however, that any such tax, assessment,
charge or levy need not be paid if the validity thereof shall currently be
contested in good faith by appropriate proceedings and if the Company shall have
set aside on its books adequate reserves with respect thereof and provided
further, that the Company will pay all such taxes, assessments, charges or
levies forthwith upon the commencement of proceedings to foreclose any Lien that
may have attached as security therefor. The Company and its subsidiaries
29
<PAGE>
will promptly pay or cause to be paid when due, or in conformance with customary
trade terms, all other Indebtedness, defined earlier, incident to the operations
of the Company or its subsidiaries;
(b) Keep its properties in good repair, working order and
condition, reasonable wear and tear excepted, and from time to time make all
needful and proper repairs, renewals, replacements, and additions and
improvements thereto; and the Company and its subsidiaries will at all times
comply with the provisions of all material leases and Scheduled Contracts and
other material Contracts to which any of them is a party or under which any of
them occupies property so as to prevent any loss or forfeiture thereof or
thereunder;
(c) Duly observe and conform to all valid requirements of
governmental authorities Governmental Authorities relating to the conduct of
their business or to their property or assets;
(d) Maintain in full force and effect its corporate
existence, rights and franchises and all licenses and other rights to use
patents, processes, licenses, trademarks, trade names, or copyrights owned or
possessed by it and deemed by the Company to be necessary material to the
conduct of its business;
(e) Cause each employee, officer or consultant to enter into
a Non-Disclosure and Developments Agreement;
(f) Keep true records and books of accounts in which full,
true and correct entries will be made of all dealings or transactions in
relation to its business and affairs in accordance with generally accepted
accounting principles applied on a consistent basis.
6.7 Taxes Relating to this Agreement. The Company will pay all
Taxes (other than Federal, State or local income taxes) which may be payable in
connection with the execution and delivery of this Agreement or the issuance of
the Securities and the initial sale of the Securities hereunder or in connection
with any modification of the Securities and will save the Investors harmless
without limitation as to time against any and all liabilities with respect to
all such Taxes. The obligations of the Company under this paragraph shall
survive any redemption, repurchase or acquisition of Securities by the Company
and the termination of this Agreement.
6.8 Replacement of Instruments. Upon receipt by the Company of
evidence reasonably satisfactory to it of the ownership of and the loss, theft,
destruction or mutilation of any certificate or instrument evidencing any of the
Securities, and (a) in the case of loss, theft or destruction, of indemnity
reasonably satisfactory to it (provided that, if the owner of the same is an
institutional investor, its own agreement of indemnity shall be deemed to be
satisfactory), or (b) in the case of mutilation, upon surrender and cancellation
thereof, the Company, at its expense, will execute, register and deliver, in
lieu thereof, a new certificate or instrument for an equal number of Securities.
30
<PAGE>
6.9 Reincorporation in Delaware. As soon as practicable after the
date hereof, the Company shall take all such steps as may be required to
reincorporate in the State of Delaware.
6.10 SBA Forms; Inspection. Prior to the Closing, the Company
shall deliver to Prospect Street NYC Discovery Fund, L.P. any documentation
required pursuant to the SBA Act or the SBA Regulations, including, but not
limited to: SBA Forms 480, 652 and 1031 and the SBA Certificate dated as of the
Closing and executed by the chief executive officer or president of the Company,
substantially in the form and to the effect of Exhibit L hereto. At the request
of Prospect Street NYC Discovery Fund, L.P., the Company shall permit Prospect
Street NYC Discovery Fund, L.P. and/or the SBA and/or any Person designated by
Prospect Street NYC Discovery Fund, L.P. to inspect any of the properties,
corporate books and financial records of the Company, if any, to discuss their
respective affairs and finances with the officers and employees of the Company
and to make extracts from the copies of such books and records, all at such time
as Prospect Street NYC Discovery Fund, L.P. may reasonably request, including,
but not limited to, for purposes of verifying information provided to Prospect
Street NYC Discovery Fund, L.P. and required by the SBA.
6.11 Corporate Existence; Approvals. The Company and the
Subsidiary shall cause to be done all things necessary to preserve and keep in
full force and effect the corporate existence of the Company and the Subsidiary
and any of their respective subsidiaries and all necessary approvals and
licenses of any Governmental Authority and comply with all Laws applicable to
the Company or any such subsidiary and comply with all agreements to which the
Company or any such Subsidiary is a party, the violation of which could
reasonably be expected to result in a material adverse change in the business or
Condition, the Subsidiary or any of their respective subsidiaries.
6.12 Taxes. The Company shall cause to be paid and discharged all
obligations when due and all Taxes imposed upon the Company, the Subsidiary or
any of their respective subsidiaries or upon their respective assets and
properties or upon any part thereof, before the same shall become in default and
before late or default charges accrue, as well as all lawful claims for labor,
materials and supplies which, if unpaid, might become a Lien upon such property
or any part thereof, provided, however, that neither the Company nor such
Subsidiary shall be required to cause to be paid and discharged any such
obligation, Tax or claim so long as the validity thereof shall be contested in
good faith by appropriate proceedings and the Company or such subsidiary, as the
case may be, shall set aside on its books adequate reserves, in accordance with
GAAP, with respect to such obligation, Tax or claim so contested and provides
that the applicable property is not at risk of being forfeited or foreclosed.
6.13 Insurance. The Company shall keep adequately insured by duly
licensed insurers all assets and properties of the Company and any Subsidiary of
the Company, and also keep the Company and each such Subsidiary adequately
insured at all times with responsible insurance carriers against liability on
account of damage to persons or property and under all applicable workers'
compensation laws. All such insurance shall be in such amounts and with such
coverage as is consistent with coverage usually carried by corporations of a
similar size engaged in the same or similar business similarly situated and as
is satisfactory to each Investor.
31
<PAGE>
6.14 Notice of Certain Events. The Company shall promptly notify
each Investor in writing of the commencement of any action or proceeding to
which the Company, the Subsidiary or any of their respective subsidiaries is a
party where the amount in controversy is in excess of $50,000, singularly or
cumulatively, for all claims arising from a single incident, to which the
Company or any such Subsidiary may be a party and (ii) of any default under any
Indebtedness with a principal amount of at least $50,000 or event or condition
which, with notice or lapse of time or both, would constitute such a Default
under any such Indebtedness, specifying the nature and extent thereof and the
action (if any) which is proposed to be taken with respect thereto.
6.15 Maintenance of Properties. The Company shall maintain and
preserve all of the assets and properties of the Company and any Subsidiary of
the Company necessary or useful in the proper conduct of its business in good
working order and condition, ordinary wear and tear excepted.
6.16 Reservation of Shares. The Company will, for so long as any
Investor has any rights to exercise the Warrants keep reserved the full number
of shares of Common Shares issuable upon exercise of the Warrants.
6.17 Venture Capital Operating Company Status. Each Investor
shall have the right to consult with and advise the management of the Company
and to receive all materials provided to members of the board of directors of
the Company so long as may be required to enable each Investor to qualify as a
"venture capital operating company" within the meaning of Section 2510.3-101 of
the plan asset regulations promulgated by the United States Department of Labor
("VCOC"). In addition, in the event that (i) any Investor is not entitled to
designate at least one (1) member for election to the Board of Directors of the
Company, or (ii) the United States Department of Labor through formal or
informal rules, regulations or interpretations provides, or it is otherwise
established through governmental or court action, that such representation does
not constitute the exercise of management rights of the kind necessary to enable
such Investor to continue to qualify as a VCOC, then the Company and such
Investor shall in good faith negotiate provisions to enable such Investor, at
all times that such Investor holds securities of the Company, exercise the
minimum amount of such management rights in order to continue to qualify as a
VCOC.
6.18 Director and Officer Insurance. The Company shall keep in
effect all provisions in its certificate of incorporation and by-laws providing
for exculpation of director and officer liability and indemnification of
directors and officers of the Company to the fullest extent permitted by
applicable Law, which provisions shall not be amended except as required by
applicable law or except as approved by the Board of Directors of the Company.
At all times that the Stockholders Agreement is in effect, the Company shall
cause to be maintained director's and officer's liability insurance covering the
directors and officers of the Company on terms substantially no less
advantageous to the directors and officers of the Company than such insurance in
effect on the date hereof.
6.19 Further Assurances. The Company shall take such further
actions and otherwise assist and cooperate with the Investors required to make
any filings or obtain any
32
<PAGE>
approvals with or from any Governmental Authority, including obtaining any
approval as may be necessary in order to effect the exercise of the Warrants.
6.20 Use of Proceeds. The Company shall not, directly or
indirectly, use any of the proceeds received from the Investors hereunder to
engage in any activities with respect to which an SBIC is prohibited from
providing funds by SBA Regulations, including without limitation 13 CFR ss.
107.720.
6.21 Reports Under the Exchange Act. With a view to making
available to the Investors the benefits of Rule 144 under the Securities Act and
any other rule or regulation of the Securities and Exchange Commission that may
at any time permit an Investor to sell securities of the Company to the public
without registration or pursuant to a registration on Form S-3, the Company
agrees to:
(a) make and keep public information available, as those
terms are understood and defined in Rule 144 under the Securities Act, at all
times after the effective date of the first registration statement filed by the
Company for the offering of its securities to the general public;
(b) take such action as is necessary to enable the Investors
to utilize Form S-3 for the sale of their Registrable Securities;
(c) file with the SEC in a timely manner all reports and
other documents required of the Company under the Securities Act and the
Exchange Act; and
(d) furnish to any Investor, so long as the Investor owns any
Registrable Securities, forthwith upon request (i) a written statement by the
Company that it has complied with the reporting requirements of Rule 144 under
the Securities Act (at any time after the effective date of the first
registration statement filed by the Company) and the Securities Act and Exchange
Act (at any time after it has become subject to such reporting requirements) or
that it qualifies as a registrant whose securities may be resold pursuant to
Form S-3 (at any time it so qualifies), (ii) a copy of the most recent annual or
quarterly report of the Company and such other reports and documents so filed by
the Company, and (iii) such other information as may be reasonably requested in
availing any Investor of any rule or regulation of the SEC which permits the
selling of any such securities without registration or pursuant to such form.
6.22 Actions Requiring Written Consent of Investors. Until the
consummation of a Qualified Public Offering, the Company shall not effect any of
the following actions set forth in this Section 6.22 without prior written
consent of, at any time of determination thereof, the holders of Securities
representing at least 60% of the aggregate number of Conversion Shares then
outstanding or issuable upon conversion of the Shares or exercise of the
Warrants (the "Required Holders"):
(a) Capital Expenditures. The Company shall not invest in
fixed assets and leasehold improvements or other capital expenditures
(including, without limitation, capital
33
<PAGE>
leases) during (i) any calendar quarter (including any capital expenditures
incurred in 1998 prior to the date of the Closing) in excess of the lower of (i)
$250,000 or (ii) 5% of shareholders' equity (subject to a minimum permissible
amount of $100,000) in the aggregate or (ii) during a 12 month period (including
capital expenditures incurred in 1998 prior to the date of the Closing) in
excess of $1,000,000, in the aggregate, in each case with respect to the Company
and any Subsidiary.
(b) Issuance of Capital Stock and Options. Other than
pursuant to the Interactive Imaginations, Inc. 1998 Stock Incentive Plan (as
amended from time to time thereafter in accordance therewith, the "Stock
Incentive Plan"), attached hereto as Exhibit M, or the issuance of securities to
those holding any warrants, options, or convertible securities issued and
outstanding as of the date hereof and set forth on Schedule 1 hereto, the
Company shall not issue, or enter into any agreement to issue, to any third
party, employee, officer or director of, or consultant to, the Company, any
capital stock or any options, warrants or other rights (contingent or otherwise)
to acquire capital stock (or securities directly or indirectly convertible into
or exchangeable for capital stock) of the Company.
(c) Indebtedness. The Company shall not, nor shall it permit
any Subsidiary to, incur, create, permit to exist or assume directly or
indirectly any Indebtedness, other than (i) as set forth in Part 6.22(c) of
Schedule 1 and other than Indebtedness constituting capital lease obligations
permitted under Section 6.22(a) above and (ii) as an endorser of negotiable
instruments for the payment of money deposited with the Company or any such
Subsidiary's bank account for collection in the ordinary course of business.
(d) Liens, Etc. The Company shall not, nor shall it permit
any Subsidiary to, mortgage, pledge, assign or otherwise encumber or permit to
be encumbered any of the Company's or any of such Subsidiary's assets and
properties, whether now owned or hereafter acquired, or acquire or agree to
acquire any property or assets upon conditional sale or other title retention
agreement, except for purchase money liens or otherwise in the ordinary course
of business and liens with respect to Indebtedness permitted under Section
6.22(c).
(e) Change in Nature of Business. The Company shall not, nor
shall it permit any Subsidiary to, engage in any business described in the
approved Business Plan.
(f) Dividends, Etc. The Company shall not declare or pay any
cash or asset dividend on any of its shares or make any other distribution or
disposition of assets to stockholders in respect of its shares (or otherwise),
or make, or commit to make, any payment on account of the purchase, redemption
or other retirement of any of its shares or warrants or options therefor (except
for the repurchase of shares held by employees of the Company upon termination
of such employment as provided in the Stockholders Agreement in an amount not to
exceed $100,000 in the aggregate with respect to the Company and any Subsidiary
of the Company).
(g) Charter Documents, Directors. The Company shall not amend
the certificate of incorporation or by-laws of the Company as in effect on the
date of Closing or permit the Company's Board of Directors to be increased to
more or decreased to fewer than seven directors.
34
<PAGE>
(h) Transactions with Affiliates. The Company shall not, nor
shall it permit any Subsidiary to, except for employment arrangements with
full-time employees and transactions in effect on the date hereof and listed on
Part 2.9 of Schedule 1, directly or indirectly purchase, acquire or lease any
property from, or sell, transfer or lease any property to, or otherwise deal
with, any current or former officer, director, stockholder, Affiliate or
Associate of the Company or such Subsidiary or any Associate of any such
officer, director, stockholder or Affiliate on terms less favorable to the
Company than the terms which would apply in a similar transaction with a Person
who is not enumerated above.
(i) Conflicting Agreements. The Company shall not, nor shall
it permit any Subsidiary to, enter into any agreements or arrangements which by
their terms or reasonably foreseeable effect restricts or adversely affects the
Company's or such Subsidiary's right and ability to meet its obligations to any
Investor hereunder or under any of the Company Documents to which it is a party.
(j) Merger, Consolidation, Sale of Assets. The Company will
not, nor will it permit any of its Subsidiaries to, voluntarily liquidate or
dissolve, or consolidate or merge with or into any other Person, or permit any
other Person to consolidate with or merge with or into it or participate in a
share exchange with or sell, lease, transfer, contribute or otherwise dispose of
any of its assets to any other Person (other than sales of inventory and worn
out and obsolete assets in the ordinary course of business as such business is
conducted in compliance with Section 6.22(e)), except that, subject in any event
to compliance with the last paragraph of this Section:
(i) any Subsidiary of the Company may consolidate
with or merge into the Company or any wholly owned Subsidiary of
the Company if the Company or such wholly owned Subsidiary shall
be the continuing or surviving corporation.
(ii) any Subsidiary of the Company may sell, lease,
transfer, contribute or otherwise dispose of its assets in whole
or in part to the Company or any wholly owned Subsidiary of the
Company, and may, following any such disposition in whole,
liquidate and dissolve.
(k) Redemption. The Company shall not acquire any securities
of the Company except upon redemption of the Preferred Shares or from terminated
employees pursuant to the terms of an agreement approved by the Board of
Directors.
(l) Employee Plans. The Company shall not adopt, or permit
any Subsidiary to adopt, any employee benefit, bonus, stock or option plan,
other than the Stock Incentive Plan, or materially modify the Stock Incentive
Plan.
(m) Disposal of Assets. The Company shall not dispose of
assets of the Company, the Subsidiary or any of their respective subsidiaries
with a value (a) in excess of the greater of (i) 5% of the Company's capital
(subject to a minimum permissible amount of $100,000) or (ii) $250,000 or (b) in
excess of, in the aggregate, $1,000,000 in any 12-month period.
35
<PAGE>
(n) Auditors. The Company shall not appoint, reappoint or
change the Company's auditors.
6.23 Non-Disclosure and Developments Agreements. The Company
shall cause each of its employees and consultants to enter into Non-Disclosure
and Developments Agreement in the form attached hereto as Exhibit K, and shall
condition the participation of any employee or consultant in the Incentive Plan
on such employee's or consultant's execution of such agreement.
7. Miscellaneous.
7.1 Expenses. The Company shall pay all stamp, documentary and
other taxes which may be payable in connection with the execution, delivery and
performance of this Agreement, and the purchase and sale of the Securities. In
addition, at the Closing, the Company shall pay up to $100,000 towards
reasonable out-of-pocket fees and expenses incurred by the Investors in
connection with this Agreement and the transactions contemplated hereby
including, without limitation, the reasonable fees and expenses of counsel for
the Investors, including any legal fees and expenses relating to any future
waiver, consent or amendment (whether or not any such future action is given or
consummated). Upon the surrender by any Investor of any certificate for Series B
Shares, Warrants or Conversion Shares to the Company or a transfer agent of the
Company for exchange for instruments of other denominations or registered in
another name or names, the Company will cause such new instruments to be issued
and will pay the cost of delivering to or from the office of such Investor from
or to the Company or its transfer agent, duly insured, the surrendered
instrument and any new instruments issued in substitution or replacement for the
surrendered instrument.
7.2 Taxes. The Company will pay all taxes (other than Federal,
State or local income taxes) which may be payable in connection with the
execution and delivery of this Agreement or the issuance of the Securities and
the initial sale of the Securities hereunder or in connection with any
modification of the Securities and will save you harmless without limitation as
to time against any and all liabilities with respect to all such taxes. The
obligations of the Company under this paragraph shall survive any redemption,
repurchase or acquisition of Securities by the Company and the termination of
this Agreement.
7.3 Replacement of Instruments. Upon receipt by the Company of
evidence reasonably satisfactory to it of the ownership of and the loss, theft,
destruction or mutilation of any certificate or instrument evidencing any Series
B Shares, Warrants or Conversion Shares, and
(a) in the case of loss, theft or destruction, of indemnity
reasonably satisfactory to it (provided that, if the owner of the same is an
institutional lender or investor, its own agreement of indemnity shall be deemed
to be satisfactory), or
(b) in the case of mutilation, upon surrender and
cancellation thereof, the Company, at its expense, will execute, register and
deliver, in lieu thereof, a new certificate or instrument for (or covering the
purchase of) an equal number of Series B Shares, Warrants or Conversion Shares.
36
<PAGE>
7.4 Use of Investors' Names. The Company agrees and acknowledges
that the Investors do not have responsibility for managing the business of the
Company. The Company shall not, except as required by law, use the name of any
Investor in any publicly available or otherwise widely disseminated document or
communication without the prior written consent of the Investor whose name is to
be disclosed, which consent shall not be unreasonably withheld.
7.5 Indemnification. The Company agrees to indemnify each
Investor and each officer, director, employee, agent, partner, shareholder and
Affiliate of each Investor (collectively, the "Indemnified Parties") for, and
hold each Indemnified Party harmless from and against, any and all damages,
fines, fees, penalties, diminution of value, deficiencies, losses and expenses,
(collectively, "Losses") including, without limitation, interest, reasonable
expenses of investigation, court costs, reasonable fees and expenses of
attorneys, accountants and other experts or other expenses of litigation or
other proceedings or of any claim, default or assessment (such fees and expenses
to include without limitation, all fees and expenses of attorneys, incurred in
connection with (i) the investigation or defense of any claims by any Person who
is not party to this Agreement (a "Third Party") or (ii) asserting or disputing
any rights under this Agreement against any party hereto or otherwise) arising
out of or suffered or incurred in connection with any of the following, whether
involving a claim by a Person that is a party hereto or a Third Party: (a) any
misrepre sentation or any breach of any warranty made by the Company herein or
in any of the other Company Documents or by any constituent corporation in the
Merger Documents, (b) any breach or non-fulfillment of any covenant or agreement
made by the Company herein or in any of the other Company Documents, (c) the
status of each Investor as a holder of securities of the Company, or (d) any
claim relating to or arising out of a violation of applicable federal or state
securities laws by the Company in connection with the sale or issuance of the
Securities by the Company to the Investors; provided, however, that the
indemnification shall not be required unless and until the total amount
otherwise subject to indemnification hereunder exceeds thirty thousand dollars
($30,000) in the aggregate, in which event the Indemnified Parties will be
entitled to indemnification for the full amount of their Losses.
7.6 Right to Rely. Notwithstanding any right of the Investors
(whether or not exercised) to investigate the affairs of the Company or any
right of any party (whether or not exercised) to investigate the accuracy of the
representations and warranties of the other party contained in this Agreement or
the waiver of any condition to Closing, the Company, on the one hand, and each
Investor, on the other, have the right to rely fully upon the representations,
warranties, covenants and agreements of the other contained in this Agreement.
7.7 Survival. All representations, warranties, covenants and
agreements contained in or made pursuant to this Agreement or contained in any
certificate delivered pursuant to this Agreement, shall remain operative and in
full force and effect, regardless of any investigation made by or on behalf of
any party hereto, and shall survive the transfer and payment for the Securities
and the consummation of the transactions contemplated hereby.
7.8 Successors and Assigns. This Agreement shall inure to the
benefit of and be binding upon the successors and assigns of each of the parties
hereto.
37
<PAGE>
7.9 Entire Agreement; Amendment and Waiver. This Agreement and
the documents referred to herein, including, without limitation, the Company
Documents, constitute the entire understanding of the parties hereto and
supersedes all prior letters of intent, agreements or understandings among such
parties relating to the subject matter hereof.
7.10 Applicable Law. The laws of the State of New York shall
govern the interpretation, validity and performance of the terms of this
Agreement, regardless of the law that might be applied under its principles of
conflicts of law.
7.11 Notices. All notices and other communications provided for
herein shall be dated and in writing and shall be deemed to have been duly given
(x) on the date of delivery, if delivered personally or by telecopier, receipt
confirmed, (y) on the second following business day, if delivered by a
recognized overnight courier service, or (z) seven days after mailing, if sent
by registered or certified mail, return receipt requested, postage prepaid, in
each case, to the party to whom it is directed at the following address (or at
such other address as any party hereto shall hereafter specify by notice in
writing to the other parties hereto):
(i) If to the Company, to it at the following address:
Interactive Imaginations, Inc.
c/o 24/7 Media, Inc.
1290 Avenue of the Americas
New York, NY 10104
Attn: Chief Executive Officer
(ii) If to any Investor, to it at the address set forth
below its name on the signature page hereto.
(iii) If to Prospect Street NYC Discovery Fund, L.P. or
Prospect Street NYC Co-Investment Fund, L.P., copies to the following
address:
Morgan, Lewis & Bockius, LLP
101 Park Avenue
New York, NY 10178
Attn: Ira White, Esq.
7.12 Brokerage. Each party hereto will indemnify and hold
harmless each Investor and each officer, director, employee, agent, partner,
shareholder and Affiliate of each of the foregoing against and in respect of any
claim for brokerage, finders' fees or other commissions relative to this
Agreement or to the transactions contemplated hereby, based in any way on
agreements, arrangements or understandings made or claimed to have been made by
such party with any third party.
38
<PAGE>
7.13 Severability. Each provision of this Agreement shall be
interpreted in such manner as to be effective and valid under applicable law,
but if any provision of this Agreement is held to be prohibited or invalid under
applicable law, such provision will be ineffective only to the extent of such
prohibition or invalidity, without invalidating the remainder of this Agreement.
7.14 Descriptive Headings. The section and other headings
contained in this Agreement are for convenience of reference only and shall not
affect the meaning or interpretation of this Agreement.
7.15 Counterparts; Signatures by Facsimile. This Agreement may be
executed in two or more counterparts, each of which when so executed and
delivered shall be deemed to be an original and all of which together shall be
deemed to be considered one and the same agreement and shall become effective
when counterparts have been signed by each party and delivered to the other
party. This Agreement, once executed by a party, may be delivered to the other
parties hereto by facsimile transmission of a copy of this Agreement bearing the
signature of the parties so delivering this Agreement.
7.16 Understanding Among Investors. The decision of each Investor
to purchase Securities pursuant to this Agreement has been made by such Investor
independently of any other Investor and independently of any statements or
opinions as to the Condition of the Company which may have been made or given by
any other Investor or by any agent or employee of any other Investor. Each
Investor acknowledges that no other Investor has acted as agent for such
Investor in connection with making its investment hereunder and that no other
Investor will be acting as agent of such Investor in connection with monitoring
its investment hereunder.
7.17 Further Assurances. Each party shall do and perform, or
cause to be done and performed, all such further acts and things, and shall
execute and deliver all such other agreements, certificates, instruments and
documents, as the other party may reasonably request both before and after the
Closing in order to carry out the intent and accomplish the purposes of this
Agreement and the consummation of the transactions contemplated hereby.
7.18 Knowledge. When used herein, the phrase "to the knowledge
of" any Person, "to the best knowledge of" any Person, "known" to any Person or
any similar phrase, means (i) with respect to any Person who is an individual,
the actual knowledge of such Person, and (ii) with respect to any other Person,
the actual knowledge of any of the directors, officers, members, general
partners, stockholders or other similar Persons in a similar position or having
similar powers and duties; and, in the case of each of (i) and (ii), the
knowledge of facts that such individuals should have known after reasonable
inquiry.
39
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as
of the date first above written.
THE COMPANY:
INTERACTIVE IMAGINATIONS, INC.
By: /s/ David J. Moore
----------------------------------
David J. Moore
Chief Executive Officer
40
<PAGE>
INVESTOR:
The Travelers Insurance Company
By: /s/ John W. Petchler
--------------------------------
Name: John W. Petchler
Title: Senior Vice President
Address: One Tower Square
Hartford, CT 06183-2030
Number of Series B Shares: 3,333,334
Number of Class A Warrants: 1,666,667
Number of Class B Warrants: 1,666,667
Aggregate Purchase Price: $3,333,334
41
<PAGE>
INVESTOR:
Prospect Street NYC Discovery Fund, L.P.
By: Prospect Street Discovery Fund, Inc.
its General Partner
By: /s/ John Barry
---------------------------------------
Name: John Barry
Address: 250 Park Avenue, 17th Floor
New York, New York 10177
Number of Series B Shares: 2,500,000
Number of Class A Warrants: 1,250,000
Number of Class B Warrants: 1,250,000
Aggregate Purchase Price: $2,500,000
43
<PAGE>
Prospect Street NYC Co-Investment Fund, L.P.
By: Prospect Street Co-Investment Fund, LLC,
its General Partner
By: /s/ John Barry
--------------------------------
Name: John Barry
Address: 250 Park Avenue, 17th Floor
New York, New York 10177
Number of Series B Shares: 833,334
Number of Class A Warrants: 416,667
Number of Class B Warrants: 416,667
Aggregate Purchase Price: $833,334
42
<PAGE>
INVESTOR:
Big Flower Digital Services, Inc.
By: /s/ Mark A. Angelson
---------------------------------------
Name: Mark A. Angelson
Title: Executive Vice President
Address: c/o Big Flower Holdings, Inc.
3 E. 54th Street
New York, New York 10022
Attn: Associate General Counsel
Number of Series B Shares: 3,333,334
Number of Class A Warrants: 1,666,667
Number of Class B Warrants: 1,666,667
Aggregate Purchase Price: $3,333,334
44
<PAGE>
INVESTOR:
/s/ David J. Moore
---------------------------------
David J. Moore
Address: c/o 24/7 Media, Inc.
1290 Avenue of the Americas
New York, New York 10104
Number of Series B Shares: 60,000
Number of Class A Warrants: 30,000
Number of Class B Warrants: 30,000
Aggregate Purchase Price: $60,000
45
REGISTRATION RIGHTS AGREEMENT
This Registration Rights Agreement is made as of this 9th day of April,
1998, by and among 24/7 Media, Inc., a Delaware corporation (the "Company"), The
Travelers Insurance Company, a Connecticut corporation ("Travelers"), Prospect
Street NYC Discovery Fund, L.P., a Delaware limited partnership ("Prospect I"),
Prospect Street NYC Co-Investment Fund, L.P., a Delaware limited partnership
("Prospect II") Big Flower Digital Services, Inc., a Delaware corporation ("Big
Flower") (Travelers, Prospect I, Prospect II, and Big Flower collectively,
together with their respective affiliates, assigns or permitted transferees, the
"Old Investors"), David Banks ("Banks"), Trinity Ventures V, L.P. ("Trinity I"),
Trinity V Side-By-Side Fund, L.P. ("Trinity II"), Zero Stage Capital V Limited
Partnership ("Zero"), F&W Investments 1996 ("FW") (Banks, Trinity I, Trinity II,
Zero, and FW collectively, together with their respective affiliates, assigns or
permitted transferees, the "New Investors", and, together with the Old
Investors, the "Investors").
RECITALS:
WHEREAS, pursuant to a Securities Purchase Agreement dated February 25,
1998, the Old Investors acquired from Interactive Imaginations, Inc. (the
"Former Parent"), a New York corporation, shares of its Series B Convertible
Voting Preferred Shares, par value $.01 per share ("Series B Shares") and Class
A and Class B Warrants to purchase Common Shares, par value $.01 per share
("Common Shares") of the Former Parent (the "Purchase Agreement"); and
WHEREAS, in connection with the Purchase Agreement, the Former Parent and
the Old Investors entered into a Registration Rights Agreement dated February
25, 1998 (the "Old Agreement"); and
WHEREAS, Former Parent has been merged with and into the Company, and the
Company has adopted the Old Agreement, the Common Shares have been exchanged for
Common Stock, par value $.01 per share ("Common Stock"), of the Company, and the
Series B Shares have been exchanged for Series A Convertible Preferred Stock,
par value $.01 per share ("Series A Stock"), of the Company, and the Class A,
Class B and Class C Warrants of the Former Parent have become Class A, Class B
and Class C Warrants (collectively, "Warrants") to purchase Common Stock; and
WHEREAS, concurrently with this Agreement, the New Investors are entering
into a Merger Agreement with the Company whereby they are acquiring from the
Company shares of its Common Stock, Series A Stock and Class A, Class B and
Class C Warrants to purchase Common Stock, pursuant to the Securities Purchase
Agreement of even date herewith (the "Merger Agreement"); and
NOW, THEREFORE, in consideration of the foregoing, the mutual covenants and
agreements contained herein and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, it is agreed as
follows:
<PAGE>
1. Definitions. For purposes of this Agreement:
(a) "Common Stock" means the common stock, par value $.01 per share, of the
Company.
(b) "Exchange Act" means the Securities Exchange Act of 1934, as amended.
(c) "Form S-3" means such form under the Securities Act as in effect on the
date hereof or any registration form under the Securities Act subsequently
adopted by the SEC which permits inclusion or incorporation of substantial
information by reference to other documents filed by the Company with the SEC.
(d) "Holder" means any Person owning or having the right to acquire
Registrable Securities, or any assignee thereof in accordance with Section 14.
(e) "Initiating Holders" means the Holder(s) initiating a registration
request under Section 2.
(f) "Investor" means any of the Old Investors or the New Investors.
(g) "majority in interest of the Initiating Holders" means as of any date
Initiating Holders holding a majority of the Registrable Securities held as of
such date by all Initiating Holders.
(h) "Person" means any individual, partnership, limited liability company,
joint venture, corporation, association, trust or any other entity or
organization.
(i) "Priority Registrable Securities" means (x) any shares of Common Stock
issuable conversion of the Series A Stock or exercise of the Warrants and (y)
any shares of Common Stock purchased by an Investor pursuant to the
Stockholders' Agreement.
(j) "Qualifying Request" means a request from any Investor pursuant to
which such Investor requests registration of Registrable Securities.
(k) "Register," "registered," and "registration" refer to a registration
effected by preparing and filing a registration statement or similar document in
compliance with the Securities Act, and the declaration or ordering of
effectiveness of such registration statement or document.
(l) "Registrable Securities" means any Shares of Common Stock held by,
issuable to, or subsequently acquired by, any Investor and any Shares of Common
Stock issued or issuable with respect to any such Shares of Common Stock by way
of stock dividend or stock split, or in connection with a combination of shares,
recapitalization, merger, consolidation, or other reorganization, or otherwise;
provided, however, that any Registrable Securities sold by a Holder in a
transaction in which such Holder's rights under this Agreement are not assigned
pursuant to Section 14 below shall cease to be Registrable Securities from and
after the time of such sale.
(m) "SEC" means the Securities and Exchange Commission.
<PAGE>
(n) "Securities Act" means the Securities Act of 1933, as amended.
(o) "Series A Stock" means the Series A Convertible Voting Preferred Stock,
par value $.01 per share, of the Company.
(p) "Stockholders' Agreement" means that certain Amended and Restated
Stockholders' Agreement of even date herewith by and among the Company, the
Investors and certain stockholders identified on the signature pages thereto.
(q) "Violation" means any of the following statements, omissions or
violations: (i) any untrue statement or alleged untrue statement of a material
fact contained in a registration statement under this Agreement, including any
preliminary prospectus or final prospectus contained therein or any amendments
or supplements thereto or any documents filed under state securities or "blue
sky" laws in connection therewith, (ii) the omission or alleged omission to
state in any of the foregoing a material fact required to be stated therein, or
necessary to make the statements therein not misleading, or (iii) any violation
or alleged violation by the Company of the Securities Act, the Exchange Act, any
other federal, state or common law or any rule or regulation promulgated under
the Securities Act, the Exchange Act or any state securities law.
2. Request for Registration.
(a) If, after the earlier of (i) the third anniversary of the date of this
Agreement or (ii) ninety (90) days after the initial public offering of the
Company's securities, the Company shall receive a written Qualifying Request
that the Company file a registration statement under the Securities Act, then
the Company shall, within ten (10) days of the receipt thereof, give written
notice of such request to all Holders and shall, subject to the limitations of
Section 2(b) below, use its best efforts to effect as soon as practicable (but
in any event within 60 days of receipt of the Qualifying Request), the
registration under the Securities Act of all Registrable Securities which the
Holders request to be registered within twenty (20) days of receipt by such
Holder of such notice in accordance with Section 22 below; provided that the
Company shall not be obligated to file a registration statement relating to a
registration request under this Section 2 within a period of six months after
the effective date of any other registration statement filed by the Company
pursuant to this Section 2.
(b) If Initiating Holders intend to distribute the Registrable Securities
covered by their request by means of an underwriting, they shall so advise the
Company as a part of their request made pursuant to this Section 2 and the
Company shall include such information in the written notice referred to in
Section 2(a). In such event, the right of any Holder to include such Holder's
Registrable Securities in such registration shall be conditioned upon such
Holder's participation in such underwriting and the inclusion of such Holder's
Registrable Securities in the underwriting (unless otherwise mutually agreed by
a majority in interest of the Initiating Holders and such Holder) to the extent
provided herein. A majority in interest of the Initiating Holders shall select
the managing underwriter or underwriters in such underwriting, such
underwriter(s) to be reasonably satisfactory to the Company. All Holders
proposing to distribute their securities through such underwriting shall
(together with the Company as provided in Section 4(f)) enter into an
underwriting agreement in customary form with the underwriter or underwriters so
selected for such
<PAGE>
underwriting by a majority in interest of the Initiating Holders, which
underwriting agreement shall provide that each Holder may participate in any
overallotment option on a pro rata basis, provided, however, that (i) no
Investor shall be required to make any representations, warranties or
indemnities except as they relate to such Holder's ownership of shares and
authority to enter into the underwriting agreement and such Holder's intended
method of distribution, (ii) the liability of such Holder shall be limited to an
amount equal to the net proceeds from the offering received by such Holder, and
(iii) any Holder may withdraw its Registrable Securities from a Registration
Statement prior to entering into the underwriting agreement. Notwithstanding any
other provision of this Section 2, if the underwriter advises the Initiating
Holders that marketing factors require a limitation of the number of shares to
be underwritten, then the Initiating Holders shall so advise the Company and the
Company shall so advise all Holders of Registrable Securities which would
otherwise be underwritten pursuant hereto, and the number of shares of
Registrable Securities that may be included in the underwriting shall be
allocated among the Holders of Registrable Securities that have elected to
participate in such underwritten offering, including the Initiating Holders, in
proportion (as nearly as practicable) to the total amount of Registrable
Securities owned by each such Holder; provided, however, that any Registrable
Securities acquired by Travelers that are not Priority Registrable Securities
shall be excluded from a registration statement prior to the exclusion of any
Priority Registrable Securities and no Registrable Securities which are not
Priority Registrable Securities shall be registered and sold by Travelers (or
any successor or transferee thereof) unless prior thereto all Priority
Registrable Securities which are Shares of Common Stock are registered and sold
by Travelers (and its successors and transferees). Without the consent of a
majority in interest of the Initiating Holders, no securities other than
Registrable Securities shall be covered by such registration if the inclusion of
such other securities would result in a reduction of the number of Registrable
Securities covered by such registration or included in any underwriting.
(c) The Company shall be obligated to effect, pursuant to this Section 2,
not more than: two (2) registrations for Big Flower; two (2) registrations for
Prospect I and/or Prospect II; two (2) registrations for the New Investors
collectively, and three (3) registrations for Travelers (an offering which is
not consummated shall not be counted for this purpose); provided, however, that
any Investor may assign its right to any one or more demand registrations to
another Investor; and provided, further, that the Company shall be obligated to
effect as many registrations, including unrestricted shelf registrations
pursuant to Rule 415 of the Securities Act, as may be requested by Holders
pursuant to any request of a Holder in the event and so long as (x) a
registration pursuant to Form S-3 or any similar "short-form" registration
statement is available to the Company and (y) the Holders propose to sell
Registrable Securities in a non-underwritten public offering at an aggregate
price to the public of more than $3,000,000.
In addition, if not all Registrable Securities requested in a demand by any
Investor initiating such demand are included in the registration statement and
subsequently sold pursuant thereto, such Investor shall not be deemed to have
delivered such Qualifying Request and shall retain all of such Investor's rights
as if such Qualifying Request had never been delivered or made by such Investor.
(d) Notwithstanding the foregoing, if the Company shall furnish to Holders
requesting a registration statement pursuant to this Section 2, a certificate
signed by the Chief Executive Officer of the Company stating that in the good
faith judgment of the Board of Directors of the Company,
<PAGE>
it would be seriously detrimental to the Company and its shareholders for such
registration statement to be filed by reason of a material pending transaction
and it is therefore essential to defer the filing of such registration
statement, the Company shall have the right to defer such filing for a period of
not more than ninety (90) days after receipt of the request of the Initiating
Holders; provided that the Company may not defer filing pursuant to this Section
2(d) more than one time in any twelve-month period.
3. Company Registration. If (but without any obligation to do so) at any
time the Company proposes to register (including for this purpose a registration
effected by the Company for shareholders other than the Holders) any of its
stock or other securities under the Securities Act in connection with the public
offering of such securities solely for cash (other than a registration on Form
S-8 relating solely to the sale of securities to participants in a Company Stock
Plan or to other compensatory arrangements to the extent includible on Form S-8,
or a registration on Form S-4), the Company shall, at such time, promptly give
each Holder written notice of such registration. Upon the written request of
each Holder given within thirty (30) days after receipt by such Holder of such
notice by the Company in accordance with Section 22, the Company shall, subject
to the provisions of Section 11, use its best efforts to cause to be registered
under the Securities Act all of the Registrable Securities that each such Holder
has requested to be registered. The Company shall have no obligation under this
Section 3 to make any offering of its securities, or to complete an offering of
its securities that it proposes to make, and shall incur no liability to any
Holder for its failure to do so. No registration effected under this Section 3
shall relieve the Company of any of its obligators to effect registrations upon
request under Section 2.
4. Obligations of the Company. Whenever required under this Agreement to
effect the registration of any Registrable Securities, the Company shall, as
expeditiously as reasonably possible:
(a) Prepare and file with the SEC a registration statement with
respect to such Registrable Securities and use its best efforts to cause such
registration statement to become effective, and, upon the request of the Holders
of a majority of the Registrable Securities being registered thereunder, keep
such registration statement effective for up to one hundred eighty (180) days or
until the Holders have completed the distribution referred to in such
registration statement, whichever occurs first (but in any event for at least
any period required under the Securities Act); provided that before filing such
registration statement or any amendments thereto, the Company will furnish to
the Holders copies of all such documents proposed to be filed.
(b) Prepare and file with the SEC such amendments and supplements to
such registration statement and the prospectus used in connection with such
registration statement as may be necessary to comply with the provisions of the
Securities Act with respect to the disposition of all securities covered by such
registration statement.
(c) Furnish (at no cost) to the Holders such number of copies of such
registration statement and of each amendment and supplement thereto (in each
case including all exhibits), such number of copies of the prospectus contained
in such registration statement (including each preliminary prospectus and any
summary prospectus) and any other prospectus filed under Rule 424 under the
<PAGE>
Securities Act, in conformity with the requirements of the Securities Act, and
such other documents incorporated by reference in the registration statement and
such other documents as Holders or underwriters may reasonably request in order
to facilitate the disposition of Registrable Securities owned by them.
(d) Use its best efforts to register and qualify the securities
covered by such registration statement under such other securities or "blue sky"
laws of such states or jurisdictions as shall be reasonably requested by the
Holders or underwriters and do any and all other acts and things which may be
reasonably necessary to enable each participating Holder to consummate the
disposition of the Registrable Securities owned by it in such jurisdiction;
provided that the Company shall not be required in connection therewith or as a
condition thereto (i) to qualify to do business in any state or jurisdiction
where it would not otherwise be required to qualify but for the requirements of
this clause (d), or (ii) to file a general consent to service of process in any
such state or jurisdiction.
(e) Use its best efforts to cause all Registrable Securities covered
by such registration statement to be registered with or approved by such other
governmental agencies or authorities as may be necessary by virtue of the
Company's business or operations to enable the seller or sellers thereof to
consummate the disposition of such Registrable Securities.
(f) In the event of any underwritten public offering, enter into and
perform its obligations under an underwriting agreement, in usual and customary
form, with the managing underwriter of such offering.
(g) Immediately notify each Holder of Registrable Securities covered
by such registration statement at any time when a prospectus relating thereto is
required to be delivered under the Securities Act of the happening of any event
as a result of which the prospectus included in such registration statement, as
then in effect, includes an untrue statement of a material fact or omits to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading in the light of the circumstances then
existing and if it is necessary to amend or supplement such prospectus to comply
with law, and at the request of any other Holder or managing underwriter,
prepare and furnish, at no cost, to such Holder and the underwriters a
reasonable number of copies of a supplement to or an amendment of such
prospectus as may be necessary so that, as thereafter delivered to the
purchasers of Shares of Common Stock, such prospectus shall not include any
untrue statement of a material fact or omit to state any material fact required
to be stated therein or necessary to make the statements therein, in the light
of the circumstances then existing, not misleading and so that such prospectus,
as amended or supplemented, will comply with law.
(h) Immediately notify each Holder of Registrable Securities covered
by such registration statement and such Holder's underwriters, if any, and
confirm such advice in writing: (i) when the registration statement has become
effective, (ii) when any post-effective amendment to the registration statement
becomes effective and (iii) of any request by the SEC for any amendment or
supplement to the registration statement or prospectus or for additional
information.
(i) Notify each Holder of Registrable Securities if at any time the
SEC or any state securities commission or other regulatory authority should
institute or threaten to institute any proceedings for
<PAGE>
the purpose of issuing, or should issue, a stop order suspending the
effectiveness of the Registration Statement. Upon the occurrence of any of the
events mentioned in the preceding sentence, the Company will use its best
efforts to prevent the issuance of any such stop order or to obtain the
withdrawal thereof as soon as possible. The Company will advise each Holder of
Registrable Securities promptly of any order or communication of any public
board or body addressed to the Company suspending or threatening to suspend the
qualification of any Registrable Securities for sale in any jurisdiction.
(j) Furnish (at no cost), at the request of any Holder requesting
registration of Registrable Securities pursuant to this Agreement, to each
Holder participating in the offering and to each underwriter, (i) on the date
that such Registrable Securities are delivered to the underwriters for sale in
connection with a registration pursuant to this Agreement, if such securities
are being sold through underwriters, or, if such securities are not being sold
through underwriters, on the date that the registration statement with respect
to such securities becomes effective, an opinion, dated such date, of the
counsel representing the Company for the purposes of such registration, in form
and substance as is customarily given to underwriters in an underwritten public
offering, addressed to the underwriters, if any, and to the Holders
participating in such offering and (ii) on the date that the registration
statement with respect to such securities becomes effective, a "comfort" letter
dated such date, from the independent certified public accountants of the
Company, in form and substance as is customarily given by independent certified
public accountants to underwriters in an underwritten public offering, addressed
to the underwriters, if any, and to the Holders participating in such offering,
and, if such securities are being sold through underwriters, a reaffirmation of
such letter on the date that such Registrable Securities are delivered to the
underwriters for sale.
(k) As soon as practicable after the effective date of the
registration statement, and in any event within sixteen (16) months thereafter,
have "made generally available to its security holders" (within the meaning of
Rule 158 under the Securities Act) an earning statement (which need not be
audited) covering a period of at least twelve (12) months beginning after the
effective date of the registration statement and otherwise complying with
Section 11(a) of the Securities Act.
(l) Cause all Registrable Securities registered pursuant hereto on a
Registration Statement for resale by a Holder to be listed on each securities
exchange or included for trading in such automated quotation system on or in
which the Shares of Common Stock of the Company are then listed or included.
(m) Provide a transfer agent and registrar for all Registrable
Securities registered pursuant hereto on a Registration Statement for resale by
a Holder, and a CUSIP number for the Shares of Common Stock, in each case not
later than the effective date of such Registration Statement.
5. Other Compliance With Law. Otherwise use its best efforts in its
performance of its obligations hereunder to comply with all applicable rules and
regulations of the SEC and of state securities commissions and any stock
exchange or automated quotation system.
<PAGE>
6. Stock Certificates. Issue to any underwriter to which any Holder sells
Shares of Common Stock, pursuant to an underwritten offering effected pursuant
hereto, share certificates in appropriate denominations evidencing the shares of
Shares of Common Stock so sold.
7. Correspondence with the Commission. Deliver promptly to the managing
underwriter and, upon request, to any Holder participating in the offering
copies of all correspondence between the Commission and the Company, its counsel
or auditors and all memoranda relating to discussions with the Commission or its
staff with respect to the registration statement; permit each Holder and
underwriter, and counsel for each Holder and underwriter, to participate in the
preparation of such registration statement, each prospectus included therein or
filed with the Commission, and each amendment thereof or supplement thereto; and
give each Holder and underwriter, and counsel for each Holder and underwriter,
access to the Company's books, records and properties and such opportunities to
discuss the business of the Company with its officers and independent public
accountants as shall be necessary, in the opinion of each Holder and underwriter
and their respective counsel, to conduct a reasonable investigation within the
meaning of the Securities Act.
8. Furnish Information. It shall be a condition precedent to the
obligations of the Company to take any action pursuant to this Agreement with
respect to the Registrable Securities of any selling Holder that such Holder
shall furnish to the Company such information regarding itself, the Registrable
Securities held by it, and the intended method of disposition of such securities
as shall be required to effect the registration of such Holder's Registrable
Securities. If any registration statement or comparable statement under the
Securities Act refers to an Investor or any of its affiliates, by name or
otherwise, as the holder of any securities of the Company then, unless counsel
to the Company advises the Company that the Securities Act requires that such
reference be included in any such statement, each such holder shall have the
right to require the deletion of such reference to itself and its affiliates.
9. Expenses of Demand Registration. All expenses, other than underwriting
discounts and commissions relating to Registrable Securities, incurred in
connection with up to nine registrations, filings or qualifications pursuant to
Section 2, including without limitation all registration, filing and
qualification fees, printers' and accounting fees, transfer agent expenses,
registrar expenses, fees and disbursements of counsel for the Company, and the
reasonable fees and disbursements of one counsel (selected by a majority in
interest of the Initiating Holders) for the selling Holders shall be borne by
the Company; provided, however, that the Company shall not be required to pay
any of such expenses for the Holders in connection with any registration begun
pursuant to Section 2 if the registration request is subsequently withdrawn at
the request of the Holders of a majority of the Registrable Securities to be
registered (in which case all participating Holders shall bear such expenses pro
rata), unless the Holders of a majority of Registrable Securities then
outstanding agree to forfeit one (1) demand registration right pursuant to
Section 2; provided further, that if prior to the time of such withdrawal, the
Holders have learned of a material adverse change in the condition (financial or
otherwise), or business of the Company from the time of the initial request,
then the Holders shall not be required to pay any of such expenses (and the
Company shall pay such expenses) and the Holders shall retain their rights
pursuant to Section 2.
<PAGE>
10. Expenses of Company Registration. The Company shall bear and pay all
expenses incurred in connection with any registration, filing or qualification
of Registrable Securities with respect to the registrations pursuant to Section
3 for each Holder, including without limitation all registration, filing and
qualification fees, printers' and accounting fees relating or apportionable
thereto and the fees and disbursements of one counsel for the selling Holders
(selected by the Holders of a majority of the Registrable Securities being
registered), but excluding underwriting discounts and commissions relating to
Registrable Securities.
11. Underwriting Requirements. In connection with any offering involving an
underwriting of shares being issued by the Company, the Company shall not be
required under Section 3 to include any Holder's securities in such underwriting
unless such Holder accepts the terms of the underwriting as agreed upon between
the Company and the underwriters selected by the Company (with the approval of
Holders of a majority of the Registrable Securities), and then only in such
quantity as will not, in the opinion of the underwriters, jeopardize the success
of the offering by the Company; provided, however, that (i) no Holder
participating in such underwriting shall be required to make any
representations, warranties or indemnities except as they relate to such
Holder's ownership of shares and authority to enter into the underwriting
agreement and such Holder's intended method of distribution, and (ii) the
liability of such Holder shall be limited to an amount equal to the net proceeds
from the offering received by such Holder. If the total amount of securities,
including Registrable Securities, requested by shareholders to be included in
any offering referred to in Section 3 exceeds the amount of securities sold
other than by the Company that the underwriters reasonably believe compatible
with the success of the offering, then the Company shall be required to include
in the offering only that number of such securities, including Registrable
Securities, which the underwriters believe will not jeopardize the success of
the offering (the securities so included to be apportioned pro rata among the
selling shareholders according to the total amount of securities requested to be
included therein then owned by each selling shareholder or in such other
proportions as shall mutually be agreed to by such selling shareholders).
12. Indemnification. In the event any Registrable Securities are included
in a registration statement under this Agreement:
(a) The Company will indemnify and hold harmless each Holder, its heirs,
personal representatives and assigns, and each of such Holder's partners,
members, stockholders, managers, agents, officers, directors, employees and
affiliates, any underwriter (as defined in the Securities Act) for such Holder
and each Person, if any, who controls such Holder or underwriter within the
meaning of the Securities Act or the Exchange Act against any losses, claims,
damages or liabilities (joint or several) to which they may become subject under
the Securities Act, the Exchange Act or other federal or state law, insofar as
such losses, claims, damages or liabilities (or actions in respect thereof)
arise out of or are based upon a Violation; and the Company will pay to each
such indemnified party, as incurred, any legal or other expenses reasonably
incurred by them in connection with investigating or defending any such loss,
claim, damage, liability, or action; provided, however, that the indemnity
agreement contained in this Section 12(a) shall not apply to amounts paid in
settlement of any such loss, claim, damage, liability or action if such
settlement is effected without the consent of the Company (which consent shall
not be unreasonably withheld), nor shall the Company be liable in any such case
to a particular indemnified party for any such loss,
<PAGE>
claim, damage, liability or action to the extent that it arises out of or is
based upon a Violation which occurs in reliance upon and in conformity with
written information furnished expressly for use in connection with such
registration by such indemnified party.
(b) Each selling Holder will indemnify and hold harmless the Company, each
of its directors, each of its officers who has signed the registration
statement, each Person, if any, who controls the Company within the meaning of
the Securities Act, any underwriter, any other Holder selling securities in such
registration statement and any controlling Person of any such underwriter or
other Holder, against any losses, claims, damages or liabilities (joint or
several) to which any of the foregoing Persons may become subject, under the
Securities Act, the Exchange Act or other federal or state law, insofar as such
losses, claims, damages or liabilities (or actions in respect thereto) arise out
of or are based upon any Violation, in each case to the extent (and only to the
extent) that such Violation occurs in reliance upon and in conformity with
written information furnished by or on behalf of such Holder expressly for use
in connection with such registration; and each such Holder will pay, as
incurred, any legal or other expenses reasonably incurred by any Person intended
to be indemnified pursuant to this Section 12(b), in connection with
investigating or defending any such loss, claim, damage, liability, or action;
provided, however, that the indemnity agreement contained in this Section 12(b)
shall not apply to amounts paid in settlement of any such loss, claim, damage,
liability or action if such settlement is effected without the consent of the
Holder, which consent shall not be unreasonably withheld; and provided further,
that, in no event shall the liability of any Holder under this Section 12(b)
exceed the net proceeds from the offering received by such Holder.
(c) Promptly after receipt by an indemnified party under this Section 12 of
written notice of the commencement of any action (including any governmental
action) involving a claim referred to in Section 12(a) or 12(b) of this
Agreement, such indemnified party will, if a claim in respect thereof is to be
made against any indemnifying party under this Section 12, deliver to the
indemnifying party a written notice of the commencement thereof and the
indemnifying party shall have the right to participate in, and, to the extent
the indemnifying party so desires, jointly with any other indemnifying party
similarly noticed, to assume the defense thereof with counsel mutually
satisfactory to the parties; provided, however, that an indemnified party shall
have the right to retain its own counsel, with the fees and expenses to be paid
by the indemnifying party, if representation of such indemnified party by the
counsel retained by the indemnifying party would be inappropriate due to actual
or potential differing interests between such indemnified party and any other
party represented by such counsel in such proceeding. The failure to deliver
written notice to the indemnifying party within a reasonable time of the
commencement of any such action shall not relieve such indemnifying party of any
liability to the indemnified party under this Section 12 except if, and only to
the extent that, the indemnifying party is actually prejudiced thereby; and such
failure to deliver written notice to the indemnifying party will not relieve it
of any liability that it may have to any indemnified party otherwise than under
this Section 12. The indemnifying party will not, without the prior written
consent of each indemnified party, settle or compromise or consent to the entry
of any judgment in any pending or threatened claim, action, suit or proceeding
in respect of which indemnification may be sought hereunder (whether or not such
indemnified party or any person who controls such indemnified party is a party
to such claim, action, suit or proceeding), unless such settlement, compromise
or consent includes an unconditional release of such indemnified party from all
liability arising out of such claim, action suit or proceeding and such
<PAGE>
settlement, compromise or consent involves only the payment of money and such
money is actually paid by the indemnifying party. Whether or not the defense of
any claim or action is assumed by the indemnifying party, such indemnifying
party will not be subject to any liability for any settlement made without its
consent, which consent will not be unreasonably withheld.
(d) The obligations of the Company and Holders under this Section 12 shall
survive the completion of any offering of Registrable Securities in a
registration statement under this Agreement, and otherwise.
(e) Any indemnity agreements contained herein shall be in addition to any
other rights to indemnification or contribution which any indemnified party may
have pursuant to law or contract and shall remain operative and in full force
and effect regardless of any investigation made or omitted by or on behalf of
any indemnified party.
(f) If for any reason the foregoing indemnity is unavailable, then the
indemnifying party shall contribute to the amount paid or payable by the
indemnified party as a result of such losses, claims, damages, liabilities or
expenses (i) in such proportion as is appropriate to reflect the relative
benefits received by the indemnifying party on the one hand and the indemnified
party on the other (taking into consideration, among other things, the fact that
the provision of the registration rights and indemnification hereunder is a
material inducement to the Investors to purchase Registrable Securities pursuant
to the Purchase Agreement) or (ii) if the allocation provided by clause (i)
above is not permitted by applicable law or provides a lesser sum to the
indemnified party than the amount hereinafter calculated, in such proportion as
is appropriate to reflect not only the relative benefits received by the
indemnifying party on the one hand and the indemnified party on the other
(taking into consideration, among other things, the fact that the provision of
the registration rights and indemnification hereunder is a material inducement
to the Investors to purchase Registrable Securities pursuant to the Purchase
Agreement) but also the relative fault of the indemnifying party and the
indemnified party as well as any other relevant equitable considerations. The
relative fault shall be determined by reference to, among other things, whether
the untrue or alleged untrue statement of a material fact or the omission or
alleged omission to state a material fact relates to information supplied by or
on behalf of the indemnifying party or the indemnified party and the parties'
relative intent, knowledge, access to information and opportunity to correct or
prevent such untrue statement or omission. No Person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities Act)
shall be entitled to contribution from any Person who was not guilty of such
fraudulent misrepresentation. Notwithstanding anything to the contrary in this
Section 12, no Holder shall be required, pursuant to this Section 12, to
contribute any amount in excess of the net proceeds received by such
indemnifying party from the sale of Shares of Common Stock in the offering to
which the losses, claims, damages, liabilities or expenses of the indemnified
party relate.
13. Reports Under the Exchange Act. With a view to making available to the
Holders the benefits of Rule 144 under the Securities Act and any other rule or
regulation of the SEC that may at any time permit a Holder to sell securities of
the Company to the public without registration or pursuant to a registration on
Form S-3, the Company agrees to:
<PAGE>
(a) make and keep public information available, as those terms are
understood and defined in Rule 144 under the Securities Act, at all times after
the effective date of the first registration statement filed by the Company for
the offering of its securities to the general public;
(b) take such action as is necessary to enable the Holders to utilize Form
S-3 for the sale of their Registrable Securities;
(c) file with the SEC in a timely manner all reports and other documents
required of the Company under the Securities Act and the Exchange Act; and
(d) furnish to any Holder, so long as the Holder owns any Registrable
Securities, forthwith upon request (i) a written statement by the Company that
it has complied with the reporting requirements of Rule 144 under the Securities
Act (at any time after the effective date of the first registration statement
filed by the Company) and the Securities Act and Exchange Act (at any time after
it has become subject to such reporting requirements) or that it qualifies as a
registrant whose securities may be resold pursuant to Form S-3 (at any time it
so qualifies), (ii) a copy of the most recent annual or quarterly report of the
Company and such other reports and documents so filed by the Company, and (iii)
such other information as may be reasonably requested in availing any Holder of
any rule or regulation of the SEC which permits the selling of any such
securities without registration or pursuant to such form.
14. Assignment of Registration Rights. The rights to cause the Company to
register Registrable Securities pursuant to this Agreement may be assigned in
whole or in part by a Holder to one or more of its partners or affiliates or to
one or more transferees or assignees of Registrable Securities acquired by the
Holder, provided that such transferee or assignee delivers to the Company a
written instrument by which such transferee or assignee agrees to be bound by
the obligations imposed on Holders under this Agreement to the same extent as if
such transferee or assignee was a party hereto.
15. Existing Registration Rights; Limitations on Subsequent Registration
Rights. This agreement supersedes all prior agreements regarding registration
rights and any of the parties hereto and all such prior agreements are deemed
terminated hereby. Except as disclosed in Part 2.20 of Schedule 1 of the
Purchase Agreement, the Company represents and warrants to the Holders that no
other "registration rights" relating to securities of the Company exist on the
date hereof. From and after the date of this Agreement, the Company shall not,
without the prior written consent of each of the Investors who on the date such
consent is sought continues to own at least 50% of the Priority Registrable
Securities that such Investor owns on the date hereof, enter into any agreement
with any holder or prospective holder of any securities of the Company which
would allow such holder or prospective holder (a) to include such securities in
any registration filed under this Agreement, 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 such holder's
securities will not reduce the amount of the Registrable Securities of the
Holders which is included therein or (b) to request a registration.
<PAGE>
16. "Market Stand-Off" Agreement. Each Holder hereby agrees that, during
the period of ninety (90) days following the effective date of a registration
statement of the Company filed under the Securities Act in connection with an
underwritten offering, it shall not, to the extent requested by the Company and
such underwriter, sell or otherwise transfer or dispose of (other than to donees
or partners who agree to be similarly bound) any Shares of Common Stock or any
securities of the Company convertible into Shares of Common Stock held by it
except Shares of Common Stock included in such registration; provided, however,
that:
(a) such agreement shall be applicable only to a registration
statement (i) requested pursuant to Section 2 hereof or (ii) initiated by the
Company which covers Shares of Common Stock (or other securities) to be sold on
its behalf to the public in an underwritten offering;
(b) all officers, directors and employees of the Company and all other
Persons with registration rights (whether or not pursuant to this Agreement)
shall enter into similar agreements; and
(c) there shall be excluded from the provisions of such agreement
customary exceptions for transfers to affiliates.
In order to enforce the foregoing covenant, the Company may impose
stop-transfer instructions with respect to the Registrable Securities of each
Investor (and the shares or securities of every other person subject to the
foregoing restriction) until the end of such period.
17. Amendment; Waiver. Any provision of this Agreement may be amended only
with the written consent of the Company and each of the Investors and the
observance of any provision of this Agreement may be waived (either generally or
in a particular instance and either retroactively or prospectively) only with
the written consent of the party to be charged, provided that the Holders of 60%
of the Registrable Securities then outstanding may act on behalf of all such
Holders of Registrable Securities; provided, however, that no amendment or
waiver shall affect the rights of an Investor under Section 2(c) without the
consent of that Investor. Any amendment or waiver effected in accordance with
this Section 17 shall be binding upon each Holder of Registrable Securities at
the time outstanding, each future Holder of all such securities, and the
Company.
18. Changes in Registrable Securities, Series A Stock or Warrants. If, and
as often as, there are any changes in the Registrable Securities, Series A Stock
or Warrants by way of stock split, stock dividend, combination or
reclassification, or through merger, consolidation, reorganization or
recapitalization, or by any other means, appropriate adjustment shall be made in
the provisions of this Agreement, as may be required, so that the rights and
privileges granted hereby shall continue with respect to the Registrable
Securities as so changed. Without limiting the generality of the foregoing, the
Company will require any successor by merger or consolidation to assume and
agree to be bound by the terms of this Agreement, as a condition to any such
merger or consolidation.
19. Entire Agreement. This Agreement (together with the Purchase Agreement)
constitutes the full and entire understanding and agreement among the parties
with regard to the subject matter hereof. Nothing in this Agreement, express or
implied, is intended to confer upon any Person, other
<PAGE>
than the parties hereto and their respective successors and assigns, any rights,
remedies, obligations, or liabilities under or by reason of this Agreement,
except as expressly provided herein.
20. Governing Law. This Agreement shall be governed in all respects by the
laws of the State of New York as such laws are applied to agreements between New
York residents entered into and to be performed entirely within New York,
whether or not all parties hereto are residents of New York.
21. Successors and Assigns. The provisions hereof shall inure to the
benefit of, and be binding upon, the successors, permitted assigns (as provided
in Section 14), heirs, executors and administrators of the parties hereto.
22. Notices. All notices and other communications provided for herein shall
be dated and in writing and shall be deemed to have been duly given (i) on the
date of delivery, if delivered personally or by telecopier, receipt confirmed,
(ii) on the second following business day, if delivered by a recognized
overnight courier service, or (iii) seven days after mailing, if sent by
registered or certified mail, return receipt requested, postage prepaid, in each
case, to the party to whom it is directed at the following address (or at such
other address as any party hereto shall hereafter specify by notice in writing
to the other parties hereto):
(i) If to the Company, to it at the following address:
24/7 Media, Inc.
1290 Avenue of the Americas
New York, NY 10104
Attn: Chief Executive Officer
(ii) If to any Investor, to it at the address set forth below its name on
the signature page hereto.
(iii) If to Prospect Street NYC Discovery Fund, L.P. or Prospect Street NYC
Co-Investment Fund, L.P., copies to the following address:
Morgan, Lewis & Bockius, LLP
101 Park Avenue
New York, NY 10178
Attn: Ira White
23. Severability. Any invalidity, illegality or limitation on the
enforceability of this Agreement or any part thereof, by any party, whether
arising by reason of the law of the respective party's domicile or otherwise,
shall in no way affect or impair the validity, legality or enforceability of
this Agreement with respect to other parties. If any provision of this Agreement
shall be judicially determined to be invalid, illegal or unenforceable, the
validity, legality and enforceability of the remaining provisions shall not in
any way be affected or impaired thereby.
<PAGE>
24. Titles and Subtitles. The titles of the Sections of this Agreement are
for convenience of reference only and are not to be considered in construing
this Agreement.
25. Delays or Omissions; Remedies Cumulative. It is agreed that no delay or
omission to exercise any right, power or remedy accruing to the parties, upon
any breach or default of the Company under this Agreement, shall impair any such
right, power or remedy, nor shall it be construed to be a waiver of any such
breach or default, or any acquiescence therein, or of any similar breach or
default thereafter occurring; nor shall any waiver of any single breach or
default be deemed a waiver of any other breach or default theretofore or
thereafter occurring. It is further agreed that any waiver, permit, consent or
approval of any kind or character by a party of any breach or default under this
Agreement, or any waiver by a party of any provisions or conditions of this
Agreement must be in writing and shall be effective only to the extent
specifically set forth in writing and that all remedies, either under this
Agreement, or by law or otherwise afforded to a party, shall be cumulative and
not alternative.
26. Attorneys' Fees. If any action at law or in equity is necessary to
enforce or interpret the terms of this Agreement, the prevailing party shall be
entitled to reasonable attorney's fees, costs and necessary disbursements in
addition to any other relief to which such party may be entitled.
27. Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be an original, but all of which together
shall constitute one instrument.
28. Further Assurances. Each party shall do and perform, or cause to be
done and performed, all such further acts and things, and shall execute and
deliver all such other agreements, certificates, instruments and documents, as
the other party may reasonably request in order to carry out the intent and
accomplish the purposes of this Agreement and the consummation of the
transactions contemplated hereby.
29. Remedies. In the event of a breach by any party to this Agreement of
its obligations under this Agreement, any party injured by such breach, in
addition to being entitled to exercise all rights granted by law, including
recovery of damages and costs (including reasonable attorneys' fees), will be
entitled to specific performance of its rights under this Agreement. The parties
agree that the provisions of this Agreement shall be specifically enforceable,
it being agreed by the parties that the remedy at law, including monetary
damages, for breach of any such provision will be inadequate compensation for
any loss and that any defense in any action for specific performance that a
remedy at law would be adequate is waived.
30. Recapitalizations, Exchanges, Etc. The provisions of this Agreement
shall apply, to the full extent set forth herein, to any and all shares of the
Company capital stock or any successor or assign of the Company (whether by
merger, consolidation, sale of assets, or otherwise, including shares issued by
a parent corporation in connection with a triangular merger) which may be issued
in respect of, in exchange for, or in substitution of, shares of Common Stock or
Series A Stock or Warrants, and shall be appropriately adjusted for any stock
dividends, splits, reverse splits, combinations, reclassifications and the like
occurring after the date hereof.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as
of the date and year first above written.
24/7 MEDIA, INC.
By: /s/ David J. Moore
--------------------------------------
David J. Moore
Chief Executive Officer
THE TRAVELERS INSURANCE COMPANY
By: /s/ John W. Petchler
----------------------------------------
Name: John W. Petchler
Title: Senior Vice President
Prospect Street NYC Discovery Fund, L.P.
By: Prospect Street Discovery Fund, Inc.
its General Partner
By: /s/ John Barry
----------------------------------------
Name: John Barry
Prospect Street NYC Co-Investment Fund, L.P.
By: Prospect Street Co-Investment Fund, LLC,
its General Partner
By: /s/ John Barry
----------------------------------------
Name: John Barry
Big Flower Digital Services, Inc.
By: /s/ Mark A. Angelson
----------------------------------------
Name: Mark A. Angelson
Title: Executive Vice President
/s/ David Banks
----------------------------------------
Name: David Banks
Trinity Ventures V, L.P.
A California Limited Partnership
By: Trinity TVL Partners V, L.P.
A California Limited Partnership, its General Partner
By: /s/ Noel Fenton
----------------------------------------
A General Partner
Trinity V Side-By-Side Fund, L.P
By: Trinity TVL Partners V, L.P.
A California Limited Partership, its General Partner
By: /s/ Noel Fenton
----------------------------------------
A General Partner
Zero Stage Capital V Limited Partnership
By: Zero Stage Capital Associates Limtied Partnership,
General Partner
By: /s/ Stanley Fung
-----------------------------------------
A General Partner
FRW Investments 1996
A California Partnership
By: /s/ Joel Keller
------------------------------------------
A General Partner
EMPLOYMENT AGREEMENT
Employment Agreement made as of February 24, 1998, by and between
Interactive Imaginations, Inc., a New York corporation, with its principal place
of business at 1290 Avenue of the Americas, New York, New York 10104 (the
"Company"), and David J. Moore ("Executive").
W I T N E S S E T H :
WHEREAS, the Company desires to employ Executive as its Chief
Executive Officer and President, and Executive is willing to serve in such
capacities; and
WHEREAS, the Company and Executive desire to set forth the terms and
conditions of such employment.
NOW, THEREFORE, in consideration of the premises and of the mutual
covenants and agreements herein contained and for other good and valuable
consideration, the receipt and adequacy of which are hereby acknowledged, the
Company and Executive agree as follows:
1. EMPLOYMENT.
(a) The Company hereby agrees to employ Executive, and Executive
agrees to be employed by the Company, on the terms and conditions herein
contained as its Chief Executive Officer and President. Executive shall report
to the Board of Directors of the Company (the "Board") and shall have such
duties, authority and responsibilities commensurate with Executive's position
for similarly sized companies in the industry.
(b) Executive shall devote all of his business time, energy, skill and
efforts to the performance of his duties hereunder and shall faithfully and
diligently serve the Company. The foregoing shall not prevent Executive from
participating in not-for-profit activities or from managing his passive personal
investments, provided that these activities do not materially interfere with
Executive's obligations hereunder.
(c) Upon the request of the Board, Executive shall also serve as a
director or officer of subsidiaries in positions commensurate with his position
with the Company without additional compensation. If any compensation is paid
Executive by such subsidiaries, they shall be a credit against amounts due
hereunder.
2. TERM OF EMPLOYMENT.
(a) Except for earlier termination as provided in Section 7 hereof or
as extended in this Section 2, Executive's employment under this Agreement (the
"Employment Term") shall commence on the date hereof (the "Commencement Date")
and continue through January 1, 2001. The Employment Term shall be automatically
renewed for successive one-year terms unless either party gives written notice
to the other at least six months prior to the expiration of the then
1
<PAGE>
Employment Term, of such party's intention to terminate Executive's employment
hereunder at the end of the then current Employment Term.
(b) Notwithstanding anything else herein, the provisions of Sections 8
and 9 hereof shall survive and remain in effect notwithstanding the termination
of the Employment Term or a breach by the Company or Executive of this Agreement
or any of its terms.
3. COMPENSATION.
(a) As compensation for his services under this Agreement, the Company
shall pay Executive a base salary (the "Base Salary") as set forth on Exhibit A
hereto. Payment of the Base Salary shall be made in equal installments twice a
month.
(b) In addition to the Base Salary, the Company shall pay Executive a
bonus in accordance with the schedule set forth on Exhibit A hereto. Such
schedule may be revised from year to year by agreement of the parties hereto.
4. BENEFITS AND FRINGES.
(a) During the Employment Term, Executive shall be entitled to such
benefits and fringes, if any, as are generally provided from time to time by the
Company to its executive officers, including pension, retirement, savings,
welfare (including life and health insurance) and other employee benefit plans
and arrangements.
(b) Except as otherwise specifically provided herein, the Executive
shall be responsible for the tax consequences of all benefits and fringes.
5. EXPENSES. The Company shall reimburse Executive in accordance with
its expense reimbursement policy as in effect from time to time for all
reasonable expenses incurred by Executive in connection with the performance of
his duties under this Agreement upon the presentation by Executive of an
itemized account of such expenses and appropriate receipts and otherwise in
compliance with such rules relating thereto as the Company may, from time to
time, adopt.
6. VACATION. During the Employment Term, Executive shall be entitled
to vacation in accordance with the Company's practices.
2
<PAGE>
7. TERMINATION.
(a) Executive's employment under this Agreement and the Employment
Term shall terminate upon any of the following events:
(i) Automatically on the date of Executive's death.
(ii) Upon written notice given by the Company to Executive if
Executive is unable to substantially perform his material duties hereunder for
one hundred eighty (180) continuous days during any period of three hundred
sixty (360) consecutive days by reason of physical or mental incapacity.
(iii) Upon written notice by the Company to Executive for Cause.
Cause shall mean (a) Executive being convicted of (or pleading nolo contendere
to) a felony (other than a traffic violation) or a crime involving fraud,
misappropriation, or embezzlement; (b) refusal of the Executive to attempt to
properly perform his obligations under this Agreement, or follow any direction
of the Board consistent with this Agreement, which in either case is not
remedied within ten (10) business days after receipt by Executive of written
notice from the Company specifying the details thereof, provided the refusal to
follow a direction shall not be Cause if Executive in good faith reasonably
believes that such direction is not legal, ethical or moral and promptly
notifies the Board in writing of such belief; (c) Executive's gross negligence
with regard to his duties or willful misconduct with regard to the business,
assets or employees of the Company; or (d) any other breach by Executive of a
material provision of this Agreement that remains uncured for twenty (20)
business days after written notice thereof is given to Executive or such longer
period as may reasonably be required to remedy the default, provided that the
Executive endeavors in good faith to remedy the default.
(iv) Upon written notice by the Company without Cause.
(b) Upon termination of the Employment Term, Executive shall be
promptly paid any unpaid salary and accrued vacation through his date of
termination and reimbursement for any expenses incurred in connection with the
official business of the Company prior to his date of termination which he would
be otherwise entitled to reimbursement for in accordance with the Company's
policies on the reimbursement of business expenses and any benefits or amounts
under any benefit or equity plan in accordance with the terms of said plan and
any fringe benefits due for the period prior to such termination. In addition,
he shall be paid any declared, but unpaid, bonus.
(c) If Executive's termination is pursuant to subsection (a)(i) above,
Executive's Beneficiary (as defined in the next sentence) shall continue to
receive payments of Executive's Base Salary, at the same time such amounts would
have been paid if Executive was still an employee of the Company for a period of
six (6) months following Executive's death. For purposes of this provision,
Executive's Beneficiary shall be Executive's spouse; if Executive is not married
on his date of death, Executive's children, per stirpes; and otherwise,
Executive's estate.
3
<PAGE>
(d) If Executive's termination is pursuant to subsection (a)(ii)
above, Executive shall be entitled to receive for six (6) months following the
termination of Executive's employment, at the same time as it would have been
paid if he was an employee of the Company, his Base Salary less any amounts
actually received by him pursuant to long term disability coverage, if any,
provided for by the Company for the matching pay period. After such six (6)
months, Executive shall only be entitled to any amounts due him under the long
term disability coverage, if any.
(e) If Executive's termination is pursuant to subsection (a)(iv)
above, Executive shall receive:
(i) severance pay in an amount equal to two (2) times the sum of
(a) Executive's Base Salary on the date of his termination, and (b) the maximum
bonus for which Executive is eligible during the fiscal year of termination of
Executive's employment, which shall be payable in a lump sum within thirty (30)
days after such termination; and
(ii) continued medical coverage for a period of two (2) years
following termination of Executive's employment.
(f) All amounts payable pursuant to this Section 7 shall be subject to
required withholding. The Company shall have no other obligations to Executive
as a result of his termination.
8. CONFIDENTIAL INFORMATION AND NON-COMPETITION.
Executive has entered into a Non-Competition and Non-Disclosure and
Developments agreement of even date herewith, which agreement is attached
hereto and made a part hereof as though fully set forth herein.
9. INDEMNIFICATION. During the Employment Term and thereafter, the
Company shall indemnify Executive to the fullest extent permitted by law against
any judgments, fines, amounts paid in settlement and reasonable expenses
(including attorneys' fees), and advance amounts necessary to pay the foregoing
at the earliest time and to the fullest extent permitted by law, in connection
with any claim, action or proceeding (whether civil or criminal) against
Executive (other than a claim brought by the Company) as a result of Executive
serving as an officer or director of the Company or in any capacity at the
request of the Company, in or with regard to any other entity, employee benefit
plan or enterprise. This indemnification shall be in addition to, and not in
lieu of, any other indemnification Executive shall be entitled to pursuant to
the Company's Certificate of Incorporation or By-laws or otherwise. Following
Executive's termination of employment, the Company shall continue to cover
Executive under the Company's directors and officers insurance for the period
during which Executive may be subject to potential liability for any claim,
action or proceeding (whether civil or criminal) as a result of his service as
an officer or director of the Company or in any capacity at the request of the
Company, at the highest level then maintained for any then or former officer or
director.
4
<PAGE>
10. EXECUTIVE REPRESENTATION. Executive represents and warrants that
he is not limited under any contractual or other provision from entering into
this Agreement and performing his obligations hereunder.
11. ENTIRE AGREEMENT; MODIFICATION. This Agreement constitutes the
full and complete understanding of the parties hereto and will supersede all
prior agreements and understandings, oral or written, with respect to the
subject matter hereof. Each party to this Agreement acknowledges that no
representations, inducements, promises or agreements, oral or otherwise, have
been made by either party, or anyone acting on behalf of either party, which are
not embodied herein and that no other agreement, statement or promise not
contained in this Agreement shall be valid or binding. This Agreement may not be
modified or amended except by an instrument in writing signed by the party
against whom or which enforcement may be sought.
12. SEVERABILITY. Any term or provision of this Agreement which is
invalid or unenforceable in any jurisdiction shall, as to such jurisdiction, be
ineffective to the extent of such invalidity or unenforceability without
rendering invalid or unenforceable the remaining terms and provisions of this
Agreement or affecting the validity or enforceability of any of the terms or
provisions of this Agreement in any other jurisdiction.
13. WAIVER OF BREACH. The waiver by any party of a breach of any
provisions of this Agreement, which waiver must be in writing to be effective,
shall not operate as or be construed as a waiver of any subsequent breach.
14. NOTICES. All notices hereunder shall be in writing and shall be
deemed to have been duly given when delivered by hand, or one (1) day after
sending by United States Postal Service express mail or other "overnight mail
service," or three (3) days after sending by certified or registered mail,
postage prepaid, return receipt requested. Notice shall be sent as follows: if
to Executive, to his home address as listed in the Company's records; and if to
the Company, at its office as set forth at the head of this Agreement. Either
party may change the notice address by notice given as aforesaid.
15. ASSIGNABILITY; BINDING EFFECT. This Agreement shall be binding
upon and inure to the benefit of Executive and Executive's legal
representatives, heirs and distributees, and shall be binding upon and inure to
the benefit of the Company, its successors and assigns. This Agreement may not
be assigned by Executive. This Agreement may not be assigned by the Company
except in connection with a merger or a sale by the Company of all or
substantially all of its assets, and then only provided that the assignee
specifically assumes in writing all of the Company's obligations hereunder.
16. ARBITRATION. Any dispute or controversy arising under or in
connection with this Agreement, other than injunctive relief under Section 8
(provided that Executive may bring an arbitration to recover legal fees in
connection with such injunctive activities under the last sentence of this
Section 16) shall be settled exclusively by arbitration, conducted before a
panel of three arbitrators in New York, New York, in accordance with the rules
of the American Arbitration Association then in effect, and judgment may be
entered on the arbitrators' award in any court having
5
<PAGE>
jurisdiction. The decision of the arbitrator shall be final and binding on the
parties. The parties shall equally divide all costs of the American Arbitration
Association and the arbitrator, except that the arbitrator shall direct the
Company to reimburse Executive's portion of the cost on the same basis as set
forth in the next sentence with regard to legal fees. Each party shall bear its
own legal fees in any dispute except that, in the event the Executive prevails
on any material issue, the arbitrator shall award the Executive his legal fees
attributable to all matters other than frivolous positions taken by the
Executive (as determined by the arbitrator).
17. GOVERNING LAW. All issues pertaining to the validity,
construction, execution and performance of this Agreement shall be construed and
governed in accordance with the laws of the State of New York, without giving
effect to the conflict or choice of law provisions thereof.
18. HEADINGS. The headings in this Agreement are intended solely for
convenience or reference and shall be given no effect in the construction or
interpretation of this Agreement.
19. COUNTERPARTS. This Agreement may be executed in several
counterparts, each of which shall be deemed to be an original but all of which
together shall constitute one and the same instrument.
6
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Agreement to be duly
executed and Executive has hereunto set his hand as of the date first set forth
above.
INTERACTIVE IMAGINATIONS, INC.
By: /s/ Jacob I. Friesel
---------------------------------------------------
Jacob I. Friesel
Executive Vice President
By: /s/ David J. Moore
---------------------------------------------------
David J. Moore
7
<PAGE>
EXHIBIT A
Base Salary
The Company shall pay Executive a base salary at a rate of $225,000 per annum
from the date hereof through January 1, 2001. In the event that the Employment
Agreement is renewed automatically pursuant to Section 2(a) and the parties do
not mutually agree otherwise, the Base Salary shall be increased by 10% on
January 2, 2001 and 3% on the first date of each successive one-year term
thereafter, if any. Executive shall also receive on the date hereof 225,000
restricted Common Shares of the Company. Such shares shall vest in three equal
increments on January 1, 1999, January 1, 2000 and January 1, 2001. The grant of
such shares is pursuant to, and is governed by, the Company's 1998 Stock
Incentive Plan.
Incentive
In addition, Executive shall be eligible to receive a target bonus of $275,000
(one-half of which shall be Revenue Incentive and one-half of which shall be
Profit/Loss Incentive) in accordance with the 24/7 Media 1998 Senior Management
Incentive Plan, a copy of which is attached hereto. Executive shall be eligible
to receive a target bonus of $300,000 and $325,000 in 1999 and 2000
respectively, in accordance with incentive plans to be agreed upon in good faith
by the Board and Executive.
EMPLOYMENT AGREEMENT
Employment Agreement made as of February 24, 1998, by and between
Interactive Imaginations, Inc., a New York corporation, with its principal place
of business at 1290 Avenue of the Americas, New York, New York 10104 (the
"Company"), and Jacob I. Friesel ("Executive").
W I T N E S S E T H :
WHEREAS, the Company desires to employ Executive as its Executive Vice
President, and Executive is willing to serve in such capacity; and
WHEREAS, the Company and Executive desire to set forth the terms and
conditions of such employment.
NOW, THEREFORE, in consideration of the premises and of the mutual
covenants and agreements herein contained and for other good and valuable
consideration, the receipt and adequacy of which are hereby acknowledged, the
Company and Executive agree as follows:
1. EMPLOYMENT.
(a) The Company hereby agrees to employ Executive, and Executive
agrees to be employed by the Company, on the terms and conditions herein
contained as its Executive Vice President or in such other executive managerial
position or positions with the Company or its subsidiaries or affiliates as
shall hereafter be designated by the Board of Directors of the Company.
Executive shall report to the Chief Executive Officer of the Company (the "CEO")
and shall have such duties, authority and responsibilities commensurate with
Executive's position for similarly sized companies in the industry.
(b) Executive shall devote all of his business time, energy, skill and
efforts to the performance of his duties hereunder and shall faithfully and
diligently serve the Company. The foregoing shall not prevent Executive from
participating in not-for-profit activities or from managing his passive personal
investments, provided that these activities do not materially interfere with
Executive's obligations hereunder.
(c) Upon the request of the Board, Executive shall also serve as a
director or officer of subsidiaries in positions commensurate with his position
with the Company without additional compensation. If any compensation is paid
Executive by such subsidiaries, they shall be a credit against amounts due
hereunder.
2. TERM OF EMPLOYMENT.
(a) Except for earlier termination as provided in Section 7 hereof or
as extended in this Section 2, Executive's employment under this Agreement (the
"Employment Term") shall commence on the date hereof (the "Commencement Date")
and continue through December 31, 1998. The Employment Term shall be
automatically renewed for successive one-year terms
1
<PAGE>
unless either party gives written notice to the other at least six months prior
to the expiration of the then Employment Term, of such party's intention to
terminate Executive's employment hereunder at the end of the then current
Employment Term.
(b) Notwithstanding anything else herein, the provisions of Sections 8
and 9 hereof shall survive and remain in effect notwithstanding the termination
of the Employment Term or a breach by the Company or Executive of this Agreement
or any of its terms.
3. COMPENSATION.
(a) As compensation for his services under this Agreement, the Company
shall pay Executive a base salary (the "Base Salary") as set forth on Exhibit A
hereto. Payment of the Base Salary shall be made in equal installments twice a
month.
(b) In addition to the Base Salary, the Company shall pay Executive a
bonus in accordance with the schedule set forth on Exhibit A hereto. Such
schedule may be revised from year to year by agreement of the parties hereto.
4. BENEFITS AND FRINGES.
(a) During the Employment Term, Executive shall be entitled to such
benefits and fringes, if any, as are generally provided from time to time by the
Company to its executive officers, including pension, retirement, savings,
welfare (including life and health insurance) and other employee benefit plans
and arrangements.
(b) Except as otherwise specifically provided herein, the Executive
shall be responsible for the tax consequences of all benefits and fringes.
5. EXPENSES. The Company shall reimburse Executive in accordance with
its expense reimbursement policy as in effect from time to time for all
reasonable expenses incurred by Executive in connection with the performance of
his duties under this Agreement upon the presentation by Executive of an
itemized account of such expenses and appropriate receipts and otherwise in
compliance with such rules relating thereto as the Company may, from time to
time, adopt.
6. VACATION. During the Employment Term, Executive shall be entitled
to vacation in accordance with the Company's practices.
7. TERMINATION.
(a) Executive's employment under this Agreement and the Employment
Term shall terminate upon any of the following events:
(i) Automatically on the date of Executive's death;
2
<PAGE>
(ii) Upon written notice given by the Company to Executive if
Executive is unable to substantially perform his material duties hereunder for
one hundred eighty (180) continuous days during any period of three hundred
sixty (360) consecutive days by reason of physical or mental incapacity;
(iii) Upon written notice by the Company to Executive for Cause.
Cause shall mean (a) Executive being convicted of (or pleading nolo contendere
to) a felony (other than a traffic violation) or a crime involving fraud,
misappropriation, or embezzlement; (b) refusal of the Executive to attempt to
properly perform his obligations under this Agreement, or follow any direction
of the CEO consistent with this Agreement, which in either case is not remedied
within ten (10) business days after receipt by Executive of written notice from
the Company specifying the details thereof, provided the refusal to follow a
direction shall not be Cause if Executive in good faith reasonably believes that
such direction is not legal, ethical or moral and promptly notifies the CEO in
writing of such belief; (c) Executive's gross negligence with regard to his
duties or willful misconduct with regard to the business, assets or employees of
the Company; or (d) any other breach by Executive of a material provision of
this Agreement that remains uncured for twenty (20) business days after written
notice thereof is given to Executive or such longer period as may reasonably be
required to remedy the default, provided that the Executive endeavors in good
faith to remedy the default; or
(iv) Upon written notice by the Company without Cause.
(b) Upon termination of the Employment Term, Executive shall be
promptly paid any unpaid salary and accrued vacation through his date of
termination and reimbursement for any expenses incurred in connection with the
official business of the Company prior to his date of termination which he would
be otherwise entitled to reimbursement for in accordance with the Company's
policies on the reimbursement of business expenses and any benefits or amounts
under any benefit or equity plan in accordance with the terms of said plan and
any fringe benefits due for the period prior to such termination. In addition,
he shall be paid any declared, but unpaid, bonus.
(c) If Executive's termination is pursuant to subsection (a)(i) above,
Executive's Beneficiary (as defined in the next sentence) shall continue to
receive payments of Executive's Base Salary, at the same time such amounts would
have been paid if Executive was still an employee of the Company for a period of
six (6) months following Executive's death. For purposes of this provision,
Executive's Beneficiary shall be Executive's spouse; if Executive is not married
on his date of death, Executive's children, per stirpes; and otherwise,
Executive's estate.
(d) If Executive's termination is pursuant to subsection (a)(ii)
above, Executive shall be entitled to receive for six (6) months following the
termination of Executive's employment, at the same time as it would have been
paid if he was an employee of the Company, his Base Salary less any amounts
actually received by him pursuant to long term disability coverage, if any,
provided for by the Company for the matching pay period. After such six (6)
months, Executive shall only be entitled to any amounts due him under the long
term disability coverage, if any.
3
<PAGE>
(e) If Executive's termination is pursuant to subsection (a)(iv)
above, or if Executive receives a notice of non-renewal from the Company
pursuant to Section 2(a), Executive shall receive:
(i) for six (6) months following the termination of Executive's
employment, at the same time as it would have been paid if he were an employee
of the Company, his Base Salary; and
(ii) at the end of such six (6) month period, an amount equal to
one- half (1/2) of the maximum Bonus for which Executive was eligible during the
fiscal year of termination of Executive's employment, which amount shall be
payable in a lump sum on the six month anniversary of such termination; and
(iii) continued medical coverage for a period of six months
following termination of Executive's employment.
(f) All amounts payable pursuant to this Section 7 shall be subject to
required withholding. The Company shall have no other obligations to Executive
as a result of his termination.
8. CONFIDENTIAL INFORMATION AND NON-COMPETITION.
Executive has entered into a Non-Competition and Non-Disclosure and
Developments agreement of even date herewith, which agreement is attached hereto
and made a part hereof as though fully set forth herein.
9. INDEMNIFICATION. During the Employment Term and thereafter, the
Company shall indemnify Executive to the fullest extent permitted by law against
any judgments, fines, amounts paid in settlement and reasonable expenses
(including attorneys' fees), and advance amounts necessary to pay the foregoing
at the earliest time and to the fullest extent permitted by law, in connection
with any claim, action or proceeding (whether civil or criminal) against
Executive (other than a claim brought by the Company) as a result of Executive
serving as an officer or director of the Company or in any capacity at the
request of the Company, in or with regard to any other entity, employee benefit
plan or enterprise. This indemnification shall be in addition to, and not in
lieu of, any other indemnification Executive shall be entitled to pursuant to
the Company's Certificate of Incorporation or By-laws or otherwise. Following
Executive's termination of employment, the Company shall continue to cover
Executive under the Company's directors and officers insurance for the period
during which Executive may be subject to potential liability for any claim,
action or proceeding (whether civil or criminal) as a result of his service as
an officer or director of the Company or in any capacity at the request of the
Company, at the highest level then maintained for any then or former officer or
director.
4
<PAGE>
10. EXECUTIVE REPRESENTATION. Executive represents and warrants that
he is not limited under any contractual or other provision from entering into
this Agreement and performing his obligations hereunder.
11. ENTIRE AGREEMENT; MODIFICATION. This Agreement constitutes the
full and complete understanding of the parties hereto and will supersede all
prior agreements and understandings, oral or written, with respect to the
subject matter hereof. Each party to this Agreement acknowledges that no
representations, inducements, promises or agreements, oral or otherwise, have
been made by either party, or anyone acting on behalf of either party, which are
not embodied herein and that no other agreement, statement or promise not
contained in this Agreement shall be valid or binding. This Agreement may not be
modified or amended except by an instrument in writing signed by the party
against whom or which enforcement may be sought.
12. SEVERABILITY. Any term or provision of this Agreement which is
invalid or unenforceable in any jurisdiction shall, as to such jurisdiction, be
ineffective to the extent of such invalidity or unenforceability without
rendering invalid or unenforceable the remaining terms and provisions of this
Agreement or affecting the validity or enforceability of any of the terms or
provisions of this Agreement in any other jurisdiction.
13. WAIVER OF BREACH. The waiver by any party of a breach of any
provisions of this Agreement, which waiver must be in writing to be effective,
shall not operate as or be construed as a waiver of any subsequent breach.
14. NOTICES. All notices hereunder shall be in writing and shall be
deemed to have been duly given when delivered by hand, or one (1) day after
sending by United States Postal Service express mail or other "overnight mail
service," or three (3) days after sending by certified or registered mail,
postage prepaid, return receipt requested. Notice shall be sent as follows: if
to Executive, to his home address as listed in the Company's records; and if to
the Company, at its office as set forth at the head of this Agreement. Either
party may change the notice address by notice given as aforesaid.
15. ASSIGNABILITY; BINDING EFFECT. This Agreement shall be binding
upon and inure to the benefit of Executive and Executive's legal
representatives, heirs and distributees, and shall be binding upon and inure to
the benefit of the Company, its successors and assigns. This Agreement may not
be assigned by Executive. This Agreement may not be assigned by the Company
except in connection with a merger or a sale by the Company of all or
substantially all of its assets, and then only provided that the assignee
specifically assumes in writing all of the Company's obligations hereunder.
16. ARBITRATION. Any dispute or controversy arising under or in
connection with this Agreement, other than injunctive relief under Section 8
(provided that Executive may bring an arbitration to recover legal fees in
connection with such injunctive activities under the last sentence of this
Section 16) shall be settled exclusively by arbitration, conducted before a
panel of three arbitrators in New York, New York, in accordance with the rules
of the American Arbitration Association then in effect, and judgment may be
entered on the arbitrators' award in any court having
5
<PAGE>
jurisdiction. The decision of the arbitrator shall be final and binding on the
parties. The parties shall equally divide all costs of the American Arbitration
Association and the arbitrator, except that the arbitrator shall direct the
Company to reimburse Executive's portion of the cost on the same basis as set
forth in the next sentence with regard to legal fees. Each party shall bear its
own legal fees in any dispute except that, in the event the Executive prevails
on any material issue, the arbitrator shall award the Executive his legal fees
attributable to all matters other than frivolous positions taken by the
Executive (as determined by the arbitrator).
17. GOVERNING LAW. All issues pertaining to the validity,
construction, execution and performance of this Agreement shall be construed and
governed in accordance with the laws of the State of New York, without giving
effect to the conflict or choice of law provisions thereof.
18. HEADINGS. The headings in this Agreement are intended solely for
convenience or reference and shall be given no effect in the construction or
interpretation of this Agreement.
19. COUNTERPARTS. This Agreement may be executed in several
counterparts, each of which shall be deemed to be an original but all of which
together shall constitute one and the same instrument.
6
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Agreement to be duly
executed and Executive has hereunto set his hand as of the date first set forth
above.
INTERACTIVE IMAGINATIONS, INC.
By: /s/ David J. Moore
-----------------------------------
David J. Moore
Chief Executive Officer
/s/ Jacob I. Friesel
-----------------------------------
Jacob I. Friesel
7
<PAGE>
EXHIBIT A
Base Salary
The Company shall pay Executive a base salary at a rate of $160,417 per annum
from the date hereof through December 31,1998. In the event that the Employment
Agreement is renewed automatically pursuant to Section 2(a) and the parties do
not mutually agree otherwise, the Base Salary shall be increased by 3% on
January 1, 1999 and on the first date of each successive one-year term
thereafter, if any.
Incentive
In addition, Executive shall be eligible to receive a target bonus of $120,313
(one-half of which shall be Revenue Incentive and one-half of which shall be
Profit/Loss Incentive) in accordance with the 24/7 Media 1998 Senior Management
Incentive Plan, a copy of which is attached hereto.
EMPLOYMENT AGREEMENT
Employment Agreement made as of April 9, 1998, by and between 24/7
Media, Inc., a Delaware corporation, with its principal place of business at
1290 Avenue of the Americas, New York, New York 10104 (the "Company"), and Yale
R. Brown ("Executive").
W I T N E S S E T H :
WHEREAS, the Company desires to employ Executive as its Executive Vice
President - Technology and Operations, and President of the Company's
subsidiary, Intelligent Interactions, Inc., and Executive is willing to serve in
such capacities; and
WHEREAS, the Company and Executive desire to set forth the terms and
conditions of such employment.
NOW, THEREFORE, in consideration of the premises and of the mutual
covenants and agreements herein contained and for other good and valuable
consideration, the receipt and adequacy of which are hereby acknowledged, the
Company and Executive agree as follows:
1. EMPLOYMENT.
(a) The Company hereby agrees to employ Executive, and Executive
agrees to be employed by the Company, on the terms and conditions herein
contained as its Executive Vice President - Technology and Operations and as
President of Intelligent Interactions, Inc., or in such other executive
managerial position or positions with the Company or its subsidiaries or
affiliates as shall hereafter be designated by the Board of Directors of the
Company. Executive shall report to the Chief Executive Officer of the Company
(the "CEO") and shall have such duties, authority and responsibilities
commensurate with Executive's position for similarly sized companies in the
industry.
(b) Executive shall devote all of his business time, energy, skill and
efforts to the performance of his duties hereunder and shall faithfully and
diligently serve the Company. The foregoing shall not prevent Executive from
participating in not-for-profit activities or from managing his passive personal
investments or from providing incidental assistance to family members on matters
of family business or from serving as principal of Intelligent Management
Service Corporation, provided that these activities do not materially interfere
with Executive's obligations hereunder;
(c) Upon the request of the Board, Executive shall also serve as a
director or officer of subsidiaries in positions commensurate with his position
with the Company without additional compensation. If any compensation is paid
Executive by such subsidiaries, they shall be a credit against amounts due
hereunder.
<PAGE>
2. TERM OF EMPLOYMENT.
(a) Except for earlier termination as provided in Section 7 hereof or
as extended in this Section 2, Executive's employment under this Agreement (the
"Employment Term") shall commence on the date hereof (the "Commencement Date")
and continue through December 31, 1999. The Employment Term shall be
automatically renewed for successive one-year terms unless either party gives
written notice to the other at least six months prior to the expiration of the
then Employment Term, of such party's intention to terminate Executive's
employment hereunder at the end of the then current Employment Term.
(b) Notwithstanding anything else herein, the provisions of Sections 8
and 9 hereof shall survive and remain in effect notwithstanding the termination
of the Employment Term or a breach by the Company or Executive of this Agreement
or any of its terms.
3. COMPENSATION.
(a) As compensation for his services under this Agreement, the Company
shall pay Executive a base salary (the "Base Salary") as set forth on Exhibit A
hereto. Payment of the Base Salary shall be made in equal installments twice a
month.
(b) In addition to the Base Salary, the Company shall pay Executive a
bonus in accordance with the schedule set forth on Exhibit A hereto. Such
schedule may be revised from year to year by agreement of the parties hereto.
4. BENEFITS AND FRINGES.
(a) During the Employment Term, Executive shall be entitled to such
benefits and fringes, if any, as are generally provided from time to time by the
Company to its executive officers, including pension, retirement, savings,
welfare (including life and health insurance) and other employee benefit plans
and arrangements.
(b) Except as otherwise specifically provided herein, the Executive
shall be responsible for the tax consequences of all benefits and fringes.
5. EXPENSES. The Company shall reimburse Executive in accordance with
its expense reimbursement policy as in effect from time to time for all
reasonable expenses incurred by Executive in connection with the performance of
his duties under this Agreement upon the presentation by Executive of an
itemized account of such expenses and appropriate receipts and otherwise in
compliance with such rules relating thereto as the Company may, from time to
time, adopt.
6. VACATION. During the Employment Term, Executive shall be entitled
to vacation in accordance with the Company's practices.
<PAGE>
7. TERMINATION.
(a) Executive's employment under this Agreement and the Employment
Term shall terminate upon any of the following events:
(i) Automatically on the date of Executive's death;
(ii) Upon written notice given by the Company to Executive if
Executive is unable to substantially perform his material duties hereunder for
one hundred eighty (180) continuous days during any period of three hundred
sixty (360) consecutive days by reason of physical or mental incapacity;
(iii) Upon written notice by the Company to Executive for Cause.
Cause shall mean (a) Executive being convicted of (or pleading nolo contendere
to) a felony (other than a traffic violation) or a crime involving fraud,
misappropriation, or embezzlement; (b) refusal of the Executive to attempt to
properly perform his obligations under this Agreement, or follow any direction
of the CEO consistent with this Agreement, which in either case is not remedied
within ten (10) business days after receipt by Executive of written notice from
the Company specifying the details thereof, provided the refusal to follow a
direction shall not be Cause if Executive in good faith reasonably believes that
such direction is not legal, ethical or moral and promptly notifies the CEO in
writing of such belief; (c) Executive's gross negligence with regard to his
duties or willful misconduct with regard to the business, assets or employees of
the Company; or (d) any other breach by Executive of a material provision of
this Agreement that remains uncured for twenty (20) business days after written
notice thereof is given to Executive or such longer period as may reasonably be
required to remedy the default, provided that the Executive endeavors in good
faith to remedy the default;
(iv) Upon written notice by the Company without Cause; or
(v) Upon the effective date of Executive's written notice sent to the
company stating Executive's determination made in good faith of his
"Constructive Termination" by the Company. "Constructive Termination" shall mean
a requirement that Executive relocate to an office that would increase
Executive's one-way commute distance by more than twenty five (25) miles.
(b) Upon termination of the Employment Term, Executive shall be
promptly paid any unpaid salary and accrued vacation through his date of
termination and reimbursement for any expenses incurred in connection with the
official business of the Company prior to his date of termination which he would
be otherwise entitled to reimbursement for in accordance with the Company's
policies on the reimbursement of business expenses and any benefits or amounts
under any benefit or equity plan in accordance with the terms of said plan and
any fringe benefits due for the period prior to such termination. In addition,
he shall be paid any declared, but unpaid, bonus.
(c) If Executive's termination is pursuant to subsection (a)(i) above,
Executive's Beneficiary (as defined in the next sentence) shall continue to
receive payments of Executive's Base Salary, at the same time such amounts would
have been paid if Executive was still an employee of the Company for a period of
six (6) months following Executive's death. For purposes of this
<PAGE>
provision, Executive's Beneficiary shall be Executive's spouse; if Executive is
not married on his date of death, Executive's children, per stirpes; and
otherwise, Executive's estate.
(d) If Executive's termination is pursuant to subsection (a)(ii)
above, Executive shall be entitled to receive for six (6) months following the
termination of Executive's employment, at the same time as it would have been
paid if he was an employee of the Company, his Base Salary less any amounts
actually received by him pursuant to long term disability coverage, if any,
provided for by the Company for the matching pay period. After such six (6)
months, Executive shall only be entitled to any amounts due him under the long
term disability coverage, if any.
(e) If Executive's termination is pursuant to subsection (a)(iv) or
(a)(v) above, or if Executive receives a notice of non-renewal from the Company
pursuant to Section 2(a), Executive shall receive:
(i) for six (6) months following the termination of Executive's
employment, at the same time as it would have been paid if he were an employee
of the Company, his Base Salary; and
(ii) at the end of such six (6) month period, an amount equal to
one-half (1/2) of the maximum Bonus for which Executive was eligible during the
fiscal year of termination of Executive's employment, which amount shall be
payable in a lump sum on the six month anniversary of such termination; and
(iii) continued medical coverage for a period of six months
following termination of Executive's employment.
(f) All amounts payable pursuant to this Section 7 shall be subject to
required withholding. The Company shall have no other obligations to Executive
as a result of his termination.
<PAGE>
8. CONFIDENTIAL INFORMATION AND NON-COMPETITION.
Executive has entered into a Non-Competition and Non-Disclosure and
Developments agreement of even date herewith, which agreement is attached hereto
and made a part hereof as though fully set forth herein.
9. INDEMNIFICATION. During the Employment Term and thereafter, the
Company shall indemnify Executive to the fullest extent permitted by law against
any judgments, fines, amounts paid in settlement and reasonable expenses
(including attorneys' fees), and advance amounts necessary to pay the foregoing
at the earliest time and to the fullest extent permitted by law, in connection
with any claim, action or proceeding (whether civil or criminal) against
Executive (other than a claim brought by the Company) as a result of Executive
serving as an officer or director of the Company or in any capacity at the
request of the Company, in or with regard to any other entity, employee benefit
plan or enterprise. This indemnification shall be in addition to, and not in
lieu of, any other indemnification Executive shall be entitled to pursuant to
the Company's Certificate of Incorporation or By-laws or otherwise. Following
Executive's termination of employment, the Company shall continue to cover
Executive under the Company's directors and officers insurance for the period
during which Executive may be subject to potential liability for any claim,
action or proceeding (whether civil or criminal) as a result of his service as
an officer or director of the Company or in any capacity at the request of the
Company, at the highest level then maintained for any then or former officer or
director.
10. EXECUTIVE REPRESENTATION. Executive represents and warrants that
he is not limited under any contractual or other provision from entering into
this Agreement and performing his obligations hereunder.
11. ENTIRE AGREEMENT; MODIFICATION. This Agreement constitutes the
full and complete understanding of the parties hereto and will supersede all
prior agreements and understandings, oral or written, with respect to the
subject matter hereof. Each party to this Agreement acknowledges that no
representations, inducements, promises or agreements, oral or otherwise, have
been made by either party, or anyone acting on behalf of either party, which are
not embodied herein and that no other agreement, statement or promise not
contained in this Agreement shall be valid or binding. This Agreement may not be
modified or amended except by an instrument in writing signed by the party
against whom or which enforcement may be sought.
12. SEVERABILITY. Any term or provision of this Agreement which is
invalid or unenforceable in any jurisdiction shall, as to such jurisdiction, be
ineffective to the extent of such invalidity or unenforceability without
rendering invalid or unenforceable the remaining terms and provisions of this
Agreement or affecting the validity or enforceability of any of the terms or
provisions of this Agreement in any other jurisdiction.
<PAGE>
13. WAIVER OF BREACH. The waiver by any party of a breach of any
provisions of this Agreement, which waiver must be in writing to be effective,
shall not operate as or be construed as a waiver of any subsequent breach.
14. NOTICES. All notices hereunder shall be in writing and shall be
deemed to have been duly given when delivered by hand, or one (1) day after
sending by United States Postal Service express mail or other "overnight mail
service," or three (3) days after sending by certified or registered mail,
postage prepaid, return receipt requested. Notice shall be sent as follows: if
to Executive, to his home address as listed in the Company's records; and if to
the Company, at its office as set forth at the head of this Agreement. Either
party may change the notice address by notice given as aforesaid.
15. ASSIGNABILITY; BINDING EFFECT. This Agreement shall be binding
upon and inure to the benefit of Executive and Executive's legal
representatives, heirs and distributees, and shall be binding upon and inure to
the benefit of the Company, its successors and assigns. This Agreement may not
be assigned by Executive. This Agreement may not be assigned by the Company
except in connection with a merger or a sale by the Company of all or
substantially all of its assets, and then only provided that the assignee
specifically assumes in writing all of the Company's obligations hereunder.
16. ARBITRATION. Any dispute or controversy arising under or in
connection with this Agreement, other than injunctive relief under Section 8
(provided that Executive may bring an arbitration to recover legal fees in
connection with such injunctive activities under the last sentence of this
Section 16) shall be settled exclusively by arbitration, conducted before a
panel of three arbitrators in New York, New York, in accordance with the rules
of the American Arbitration Association then in effect, and judgment may be
entered on the arbitrators' award in any court having jurisdiction. The decision
of the arbitrator shall be final and binding on the parties. The parties shall
equally divide all costs of the American Arbitration Association and the
arbitrator, except that the arbitrator shall direct the Company to reimburse
Executive's portion of the cost on the same basis as set forth in the next
sentence with regard to legal fees. Each party shall bear its own legal fees in
any dispute except that, in the event the Executive prevails on any material
issue, the arbitrator shall award the Executive his legal fees attributable to
all matters other than frivolous positions taken by the Executive (as determined
by the arbitrator).
17. GOVERNING LAW. All issues pertaining to the validity,
construction, execution and performance of this Agreement shall be construed and
governed in accordance with the laws of the State of New York, without giving
effect to the conflict or choice of law provisions thereof.
18. HEADINGS. The headings in this Agreement are intended solely for
convenience or reference and shall be given no effect in the construction or
interpretation of this Agreement.
19. COUNTERPARTS. This Agreement may be executed in several
counterparts, each of which shall be deemed to be an original but all of which
together shall constitute one and the same instrument.
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Agreement to be duly
executed and Executive has hereunto set his hand as of the date first set forth
above.
24/7 MEDIA, INC.
By: /s/ David J. Moore
-----------------------------------
David J. Moore
Chief Executive Officer
/s/ Yale R. Brown
-----------------------------------
Yale R. Brown
<PAGE>
EXHIBIT A
Base Salary
The Company shall pay Executive a base salary at a rate of $140,000 per annum
from the date hereof through December 31, 1999 (it being understood that
Executive shall be paid solely by Intelligent Interactions Corporation through
April 15, 1998). In the event that the Employment Agreement is renewed
automatically pursuant to Section 2(a) and the parties do not mutually agree
otherwise, the Base Salary shall be increased by 3% on January 1, 2000 and on
the first date of each successive one-year term thereafter, if any.
Incentive
In addition, for the remainder of the calendar year 1998, Executive shall be
eligible to receive a target bonus of $45,000 (one-half of which shall be
Revenue Incentive and one-half of which shall be Profit/Loss Incentive) in
accordance with the 24/7 Media 1998 Senior Management Incentive Plan, a copy of
which is attached hereto. For the calendar year 1999, Executive shall be
eligible to receive a target bonus of $60,000 (one-half of which shall be
Revenue Incentive and one-half of which shall be Profit/Loss Incentive) in
accordance with an incentive plan to be agreed upon in good faith by the Board
and Executive.
EMPLOYMENT AGREEMENT
Employment Agreement made as of April 20, 1998, by and between 24/7
Media, Inc., a Delaware corporation, with its principal place of business at
1290 Avenue of the Americas, New York, New York 10104 (the "Company"), and C.
Andrew Johns ("Executive").
W I T N E S S E T H :
WHEREAS, the Company desires to employ Executive as its Executive Vice
President, Chief Financial Officer and Treasurer, and Executive is willing to
serve in such capacity; and
WHEREAS, the Company and Executive desire to set forth the terms and
conditions of such employment.
NOW, THEREFORE, in consideration of the premises and of the mutual
covenants and agreements herein contained and for other good and valuable
consideration, the receipt and adequacy of which are hereby acknowledged, the
Company and Executive agree as follows:
1. EMPLOYMENT.
(a) Effective as of the date hereof, the Company hereby agrees to
employ Executive, and Executive agrees to be employed by the Company, on the
terms and conditions herein contained as its Executive Vice President, Chief
Financial Officer and Treasurer, or in such other executive managerial position
or positions with the Company or its subsidiaries or affiliates as shall
hereafter be designated by the Board of Directors of the Company. Executive
shall report to the Chief Executive Officer of the Company (the "CEO") and shall
have such duties, authority and responsibilities commensurate with Executive's
position for similarly sized companies in the industry.
(b) Executive shall devote all of his business time, energy, skill and
efforts to the performance of his duties hereunder and shall faithfully and
diligently serve the Company. The foregoing shall not prevent Executive from
participating in not-for-profit activities or from managing his passive personal
investments, provided that these activities do not materially interfere with
Executive's obligations hereunder.
(c) Upon the request of the Board, Executive shall also serve as a
director or officer of subsidiaries in positions commensurate with his position
with the Company without additional compensation. If any compensation is paid
Executive by such subsidiaries, they shall be a credit against amounts due
hereunder.
2. TERM OF EMPLOYMENT.
(a) Except for earlier termination as provided in Section 7 hereof or
as extended in this Section 2, Executive's employment under this Agreement (the
"Employment Term")
1
<PAGE>
shall commence on the date hereof (the "Commencement Date") and continue through
December 31, 1999. The Employment Term shall be automatically renewed for
successive one-year terms unless either party gives written notice to the other
at least 45 days prior to the expiration of the then Employment Term, of such
party's intention to terminate Executive's employment hereunder at the end of
the then current Employment Term.
(b) Notwithstanding anything else herein, the provisions of Sections 8
and 9 hereof shall survive and remain in effect notwithstanding the termination
of the Employment Term or a breach by the Company or Executive of this Agreement
or any of its terms.
3. COMPENSATION.
(a) As compensation for his services under this Agreement, the Company
shall pay Executive a base salary (the "Base Salary") as set forth on Exhibit A
hereto. Payment of the Base Salary shall be made in equal installments twice a
month.
(b) In addition to the Base Salary, the Company shall pay Executive a
bonus in accordance with the schedule set forth on Exhibit A hereto. Such
schedule may be revised from year to year by agreement of the parties hereto.
4. BENEFITS AND FRINGES.
(a) During the Employment Term, Executive shall be entitled to such
benefits and fringes, if any, as are generally provided from time to time by the
Company to its executive officers, including pension, retirement, savings,
welfare (including life and health insurance) and other employee benefit plans
and arrangements.
(b) Except as otherwise specifically provided herein, the Executive
shall be responsible for the tax consequences of all benefits and fringes.
5. EXPENSES. The Company shall reimburse Executive in accordance with
its expense reimbursement policy as in effect from time to time for all
reasonable expenses incurred by Executive in connection with the performance of
his duties under this Agreement upon the presentation by Executive of an
itemized account of such expenses and appropriate receipts and otherwise in
compliance with such rules relating thereto as the Company may, from time to
time, adopt.
6. VACATION. During the Employment Term, Executive shall be entitled
to vacation in accordance with the Company's practices.
2
<PAGE>
7. TERMINATION.
(a) Executive's employment under this Agreement and the Employment
Term shall terminate upon any of the following events:
(i) Automatically on the date of Executive's death;
(ii) Upon written notice given by the Company to Executive if
Executive is unable to substantially perform his material duties hereunder for
one hundred eighty (180) continuous days during any period of three hundred
sixty (360) consecutive days by reason of physical or mental incapacity;
(iii) Upon written notice by the Company to Executive for Cause.
Cause shall mean (a) Executive being convicted of (or pleading nolo contendere
to) a felony (other than a traffic violation) or a crime involving fraud,
misappropriation, or embezzlement; (b) refusal of the Executive to attempt to
properly perform his obligations under this Agreement, or follow any direction
of the CEO consistent with this Agreement, which in either case is not remedied
within ten (10) business days after receipt by Executive of written notice from
the Company specifying the details thereof, provided the refusal to follow a
direction shall not be Cause if Executive in good faith reasonably believes that
such direction is not legal, ethical or moral and promptly notifies the CEO in
writing of such belief; (c) Executive's gross negligence with regard to his
duties or willful misconduct with regard to the business, assets or employees of
the Company; or (d) any other breach by Executive of a material provision of
this Agreement that remains uncured for twenty (20) business days after written
notice thereof is given to Executive or such longer period as may reasonably be
required to remedy the default, provided that the Executive endeavors in good
faith to remedy the default; or
(iv) Upon written notice by the Company without Cause.
(b) Upon termination of the Employment Term, Executive shall be
promptly paid any unpaid salary and accrued vacation through his date of
termination and reimbursement for any expenses incurred in connection with the
official business of the Company prior to his date of termination which he would
be otherwise entitled to reimbursement for in accordance with the Company's
policies on the reimbursement of business expenses and any benefits or amounts
under any benefit or equity plan in accordance with the terms of said plan and
any fringe benefits due for the period prior to such termination. In addition,
he shall be paid any earned, but unpaid, bonus.
(c) If Executive's termination is pursuant to subsection (a)(i) above,
Executive's Beneficiary (as defined in the next sentence) shall continue to
receive payments of Executive's Base Salary, at the same time such amounts would
have been paid if Executive was still an employee of the Company for a period of
six (6) months following Executive's death. For purposes of this provision,
Executive's Beneficiary shall be Executive's spouse; if Executive is not married
on his date of death, Executive's children, per stirpes; and otherwise,
Executive's estate.
3
<PAGE>
(d) If Executive's termination is pursuant to subsection (a)(ii)
above, Executive shall be entitled to receive for six (6) months following the
termination of Executive's employment, at the same time as it would have been
paid if he was an employee of the Company, his Base Salary less any amounts
actually received by him pursuant to long term disability coverage, if any,
provided for by the Company for the matching pay period. After such six (6)
months, Executive shall only be entitled to any amounts due him under the long
term disability coverage, if any.
(e) If Executive's termination is pursuant to subsection (a)(iv)
above, or if Executive receives a notice of non-renewal from the Company
pursuant to Section 2(a), Executive shall receive:
(i) for nine (9) months following the termination of Executive's
employment, at the same time as it would have been paid if he were an employee
of the Company, his Base Salary; and
(ii) at the end of such nine (9) month period, an amount equal to
three- quarters (3/4) of the maximum Bonus for which Executive was eligible
during the fiscal year of termination of Executive's employment, which amount
shall be payable in a lump sum on the nine month anniversary of such
termination; and
(iii) continued medical coverage for a period of nine months
following termination of Executive's employment.
(f) All amounts payable pursuant to this Section 7 shall be subject to
required withholding. The Company shall have no other obligations to Executive
as a result of his termination.
8. CONFIDENTIAL INFORMATION AND NON-COMPETITION. Executive has entered
into a Non-Competition and Non-Disclosure and Developments agreement of even
date herewith, which agreement is attached hereto and made a part hereof as
though fully set forth herein.
9. INDEMNIFICATION. During the Employment Term and thereafter, the
Company shall indemnify Executive to the fullest extent permitted by law against
any judgments, fines, amounts paid in settlement and reasonable expenses
(including attorneys' fees), and advance amounts necessary to pay the foregoing
at the earliest time and to the fullest extent permitted by law, in connection
with any claim, action or proceeding (whether civil or criminal) against
Executive (other than a claim brought by the Company) as a result of Executive
serving as an officer or director of the Company or in any capacity at the
request of the Company, in or with regard to any other entity, employee benefit
plan or enterprise. This indemnification shall be in addition to, and not in
lieu of, any other indemnification Executive shall be entitled to pursuant to
the Company's Certificate of Incorporation or By-laws or otherwise. Following
Executive's termination of employment, the Company shall continue to cover
Executive under the Company's directors and officers insurance for the period
during which Executive may be subject to potential liability for any
4
<PAGE>
claim, action or proceeding (whether civil or criminal) as a result of his
service as an officer or director of the Company or in any capacity at the
request of the Company, at the highest level then maintained for any then or
former officer or director.
10. EXECUTIVE REPRESENTATION. Executive represents and warrants that
he is not limited under any contractual or other provision from entering into
this Agreement and performing his obligations hereunder.
11. ENTIRE AGREEMENT; MODIFICATION. This Agreement constitutes the
full and complete understanding of the parties hereto and will supersede all
prior agreements and understandings, oral or written, with respect to the
subject matter hereof. Each party to this Agreement acknowledges that no
representations, inducements, promises or agreements, oral or otherwise, have
been made by either party, or anyone acting on behalf of either party, which are
not embodied herein and that no other agreement, statement or promise not
contained in this Agreement shall be valid or binding. This Agreement may not be
modified or amended except by an instrument in writing signed by the party
against whom or which enforcement may be sought.
12. SEVERABILITY. Any term or provision of this Agreement which is
invalid or unenforceable in any jurisdiction shall, as to such jurisdiction, be
ineffective to the extent of such invalidity or unenforceability without
rendering invalid or unenforceable the remaining terms and provisions of this
Agreement or affecting the validity or enforceability of any of the terms or
provisions of this Agreement in any other jurisdiction.
13. WAIVER OF BREACH. The waiver by any party of a breach of any
provisions of this Agreement, which waiver must be in writing to be effective,
shall not operate as or be construed as a waiver of any subsequent breach.
14. NOTICES. All notices hereunder shall be in writing and shall be
deemed to have been duly given when delivered by hand, or one (1) day after
sending by United States Postal Service express mail or other "overnight mail
service," or three (3) days after sending by certified or registered mail,
postage prepaid, return receipt requested. Notice shall be sent as follows: if
to Executive, to his home address as listed in the Company's records; and if to
the Company, at its office as set forth at the head of this Agreement. Either
party may change the notice address by notice given as aforesaid.
15. ASSIGNABILITY; BINDING EFFECT. This Agreement shall be binding
upon and inure to the benefit of Executive and Executive's legal
representatives, heirs and distributees, and shall be binding upon and inure to
the benefit of the Company, its successors and assigns. This Agreement may not
be assigned by Executive. This Agreement may not be assigned by the Company
except in connection with a merger or a sale by the Company of all or
substantially all of its assets, and then only provided that the assignee
specifically assumes in writing all of the Company's obligations hereunder.
16. ARBITRATION. Any dispute or controversy arising under or in
connection with this Agreement, other than injunctive relief under Section 8
(provided that Executive may bring
5
<PAGE>
an arbitration to recover legal fees in connection with such injunctive
activities under the last sentence of this Section 16) shall be settled
exclusively by arbitration, conducted before a panel of three arbitrators in New
York, New York, in accordance with the rules of the American Arbitration
Association then in effect, and judgment may be entered on the arbitrators'
award in any court having jurisdiction. The decision of the arbitrators shall be
final and binding on the parties. The parties shall equally divide all costs of
the American Arbitration Association and the arbitrator, except that the
arbitrators shall direct the Company to reimburse Executive's portion of the
cost on the same basis as set forth in the next sentence with regard to legal
fees. Each party shall bear its own legal fees in any dispute except that, in
the event the Executive prevails on any material issue, the arbitrators shall
award the Executive his legal fees attributable to all matters other than
frivolous positions taken by the Executive (as determined by the arbitrator).
17. GOVERNING LAW. All issues pertaining to the validity,
construction, execution and performance of this Agreement shall be construed and
governed in accordance with the laws of the State of New York, without giving
effect to the conflict or choice of law provisions thereof.
18. HEADINGS. The headings in this Agreement are intended solely for
convenience or reference and shall be given no effect in the construction or
interpretation of this Agreement.
19. COUNTERPARTS. This Agreement may be executed in several
counterparts, each of which shall be deemed to be an original but all of which
together shall constitute one and the same instrument.
IN WITNESS WHEREOF, the Company has caused this Agreement to be duly
executed and Executive has hereunto set his hand as of the date first set forth
above.
24/7 MEDIA, INC.
By: /s/ David J. Moore
-----------------------------------
David J. Moore
Chief Executive Officer
/s/ C. Andrew Johns
-----------------------------------
C. Andrew Johns
6
<PAGE>
EXHIBIT A
Base Salary
The Company shall pay Executive a base salary at a rate of $150,000 per annum
from the date hereof through December 31, 1999. In the event that the Employment
Agreement is renewed automatically pursuant to Section 2(a) and the parties do
not mutually agree otherwise, the Base Salary shall be increased by 6% on
January 1, 2000 and by 3% on the first date of each successive one-year term
thereafter, if any.
Incentive
In addition, for 1998 Executive shall be eligible to receive a target bonus of
$53,365 (one-half of which shall be Revenue Incentive and one-half of which
shall be Profit/Loss Incentive) in accordance with the 24/7 Media 1998 Senior
Management Incentive Plan, a copy of which is attached hereto. Executive shall
be eligible to receive a target bonus of $90,000 in 1999 in accordance with an
incentive plan to be agreed upon in good faith by the Board and Executive.
CONSULTING AGREEMENT
This Agreement (the "Agreement"), dated as of January 1, 1998, is made
by and between Interactive Imaginations, Inc., a New York corporation
("Interactive"), and Neterprises, Inc., a Delaware corporation (the
"Consultant").
WHEREAS, Interactive and the Consultant desire to enter into an
agreement whereby the Consultant will provide certain management consulting
services for Interactive on the terms and conditions hereinafter set forth; and
WHEREAS, the Consultant is willing to provide such management
consulting services for Interactive.
NOW, THEREFORE, the parties hereto agree as follows:
1. Engagement. The Consultant hereby agrees to provide such management
consulting services for Interactive as may be reasonably requested by the Board
of Directors of Interactive in connection with the identification and evaluation
of potential strategic relationships and potential acquisition targets for
Interactive.
2. Extent of Services. The Consultant agrees to perform such services
to the best of its ability and in a diligent and conscientious manner and to
devote appropriate time, energies and skill to those duties called for hereunder
during the term of this Agreement and in connection with the performance of such
duties to act in a manner consistent with the primary objective of maximizing
the profitability of Interactive. The Consultant agrees to devote such time as
is reasonably required to fulfill his duties hereunder.
3. Term. The engagement of the Consultant hereunder by Interactive
shall commence as of the date hereof and shall continue through December 31,
1998, unless earlier terminated pursuant to Section 6 hereof.
4. Compensation.
(a) As compensation for the services contemplated herein and for
performance rendered by the Consultant of its duties and obligations hereunder,
Interactive shall pay to the Consultant an aggregate fee equal to $150,000 (the
"Consulting Fee"), earned and payable in 24 equal installments of $12,500 on the
15th day and the last day of each calendar month during the Term set forth in
Section 3. In addition to, and notwithstanding the foregoing, at the Effective
Time contemplated by the Agreement and Plan of Merger, dated as of February 2,
1998, among the Interactive, Petry Interactive, Inc. and Advercomm, Inc.,
Interactive shall pay Consultant the sum of $180,000 (the "Lump Sum Payment").
-1-
<PAGE>
(b) Interactive's sole obligation shall be to pay to the Consultant
the amounts described in Section 4(a) of this Agreement, and the Consultant is
not and shall not be deemed an employee of Interactive for any purpose.
5. Reimbursement for Expenses. Interactive shall pay or reimburse the
Consultant for all expenses reasonably incurred by it in furtherance of its
duties hereunder including, without limitation, expenses for traveling, meals,
hotel accommodations, telephone charges and the like, provided however, such
expenses (other than for telephone charges for calls to Interactive executives
and advisors) shall have been authorized by Interactive prior to the date on
which they are incurred by the Consultant, which authorization may be withheld
by Interactive in its sole discretion. Interactive shall be under no obligation
to pay or reimburse any expense of the Consultant which has not been authorized
by Interactive in accordance with the terms of this Section 5. Interactive will
make reimbursement for authorized expenses within fourteen days of presentation
by the Consultant from time to time of appropriate documentation evidencing such
expenditures.
6. Termination. This Agreement shall be terminated as follows:
(a) 30 days after written notice of termination is given by either
party at any time after June 15, 1998, provided however, that if Interactive
shall terminate this Agreement pursuant to this Section 6(a) for any reason
other than Consultant's material breach of this Agreement (having given prior
notice of, and reasonable opportunity for Consultant to cure, any such breach),
Interactive shall pay to consultant in one lump sum an amount equal to that
portion of the aggregate Consulting Fee which has not been paid to Consultant as
of the effective date of such termination.
(b) On such date as is mutually agreed by the parties in writing.
(c) Upon expiration of the Term as set forth in Section 3.
Upon termination of this Agreement pursuant to this Section 6, except as
contemplated by Section 6(a) in the event Interactive terminates this Agreement
in the absence of continuing material breach hereof by Consultant, Consultant
shall be entitled to payment of only that portion of the Consulting Fee earned
through the effective date of such termination and any portion of the Lump Sum
Payment which has not be paid to Consultant as of the effective date of such
termination.
7. Confidential Information. The Consultant shall not, at any time
during or following expiration or termination of its engagement hereunder
(regardless of the manner, reason, time or cause thereof) directly or indirectly
disclose or furnish to any person not entitled to receive the same for the
immediate benefit of Interactive any trade secrets or confidential information
including, without limitation, information as to the business methods,
operations and affairs of Interactive or its affiliates, the names, addresses or
requirements of any of its customers and suppliers, or the credit and other
terms extended by and to Interactive. All such trade secrets and confidential
information including, without limitation, information as to the names,
addresses or requirements of any of Interactive's customers and suppliers, or
the credit and other terms extended
-2-
<PAGE>
by and to Interactive, acquired or compiled by Interactive or the Consultant
during the term of this Agreement shall be the exclusive property of
Interactive.
8. Covenants. Consultant agrees to (a) faithfully and diligently do
and perform the acts and duties required in connection with its engagement
hereunder, and (b) not engage in any activity which is or likely is contrary to
the welfare, interest or benefit of the business now or hereafter conducted by
Interactive.
9. Binding Effect. This Agreement will inure to the benefit of and
shall be binding upon the parties hereto and their respective successors or
assigns (whether resulting from any re organization, consolidation or merger of
either of the parties or any assignment to a business to which all or
substantially all of the assets of either party are sold).
10. Entire Agreement. This Agreement contains the entire agreement and
understanding of the parties with respect to the subject matter hereof,
supersedes all prior agreements and understandings with respect thereto and
cannot be modified, amended, waived or terminated, in whole or in part, except
in writing signed by the party to be charged.
11. Construction. While the parties hereto believe that the terms
hereof are fair, reasonable and enforceable in all respects, it is agreed that
any provision of this Agreement which is held to be prohibited or unenforceable
in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent
of such prohibition or unenforceability without invalidating the remaining
provisions hereof, and any such prohibition or unenforceability in any
jurisdiction shall not invalidate or render unenforceable such provision in any
other jurisdiction. In addition to any other remedy which Interactive may have
at law or in equity, Interactive shall be entitled to injunctive relief for a
breach of Sections 7 and 8 (b) of this Agreement by the Consultant.
12. Notices. All notices required to be given under the terms of this
Agreement or which any of the parties desires to give hereunder shall be in
writing and personally delivered or sent by registered or certified mail, return
receipt requested, or sent by facsimile transmission, addressed as follows:
-3-
<PAGE>
(a) To the Consultant. If to the Consultant addressed to:
Neterprises, Inc.
233 West 77th Street, #12F
New York, New York 10024
Attn: Michael P. Paolucci
(b) To Interactive. If to Interactive addressed to:
Interactive Imaginations, Inc.
915 Broadway, Suite 1608
New York, New York 10010
Attention: Mr. David J. Moore
Chief Executive Officer
Facsimile Transmission No.: (212) 995-2394
Any party may designate a change of address at any time by giving
written notice thereof to the other parties.
13. Miscellaneous. This Agreement:
(a) shall be binding upon and inure to the benefit of the parties
hereto and their respective successors and permitted assigns;
(b) may not (except as provided in Section 9 hereof) be assigned
by either party hereto without the prior written consent of the other party (any
purported assignment hereof in violation of this provision being null and void);
(c) may be executed in any number of counterparts, and by any
party on separate counterparts, each of which as so executed and delivered shall
be deemed an original but all of which together shall constitute one and the
same instrument, and it shall not be necessary in making proof of this Agreement
as to any party hereto to produce or account for more than one such counterpart
executed and delivered by such party;
(d) may be amended, modified or supplemented only by a written
instrument executed by all of the parties hereto;
(e) embodies the entire agreement and understanding of the
parties hereto in respect of the transactions contemplated hereby and supersedes
all prior agreements and understand ings among the parties with respect thereto;
and
(f) shall be governed by and construed in accordance with the
laws of the State of New York without regard to the conflict of laws principles
thereof.
-4-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first above written.
INTERACTIVE IMAGINATIONS, INC.
By: /s/ David J. Moore
---------------------------------------------------
David J. Moore, Chief Executive Officer
NETERPRISES, INC.
By: /s/ Michael P. Paolucci
---------------------------------------------------
Michael P. Paolucci, President
-5-
CONFIDENTIAL SEPARATION AGREEMENT
AND GENERAL RELEASE
This Confidential Separation Agreement and General Release ("Agreement") is
made and entered into by and between Michael P. Paolucci on behalf of himself
and his agents, heirs, executors, assigns and any other person or entity acting
with him or on his behalf ("Paolucci"), on the one hand, and Interactive
Imaginations, Inc. on behalf of itself, its present and former principals,
owners, agents, officers, employees, directors, subsidiaries, affiliated
divisions and companies, parent companies, successors and assigns
("Interactive"), on the other hand. It is made pursuant to the following terms
and conditions.
Effective at the close of business (Eastern Standard Time) on February 24,
1998, Paolucci's employment with Interactive shall have ceased and all
agreements regarding the employment of Paolucci as an executive of Interactive
are terminated, except as otherwise set forth herein. Paolucci continues to
serve as a Director of Interactive.
1. Pending and Future Legal or Administrative Actions - Covenant Not to
Sue.
Paolucci shall neither assist, participate or be represented in, nor
institute, submit or file, or permit to be instituted, submitted or filed on his
behalf, any lawsuit, charge, claim, complaint, or other proceeding, by Paolucci
or on his behalf with any administrative agency, court or other forum, under any
federal, state or local laws or regulations including, but not limited to, (a)
under the Fair Labor Standards Act; the Employee Retirement Income Security Act
of 1974; Title VII of the Civil Rights Act of 1964; the Civil Rights Act of
1991; the Agent Discrimination in Employment Act of 1967 as amended by the Older
Workers Benefit Protection Act; the Equal Pay Act of 1963; the Consolidated
Omnibus Budget Reconciliation Act of 1985; or any other federal, state, or local
insurance, human rights, civil rights, wage-hour, pension, or labor laws, rules
and/or regulations, public policy, contract or tort laws, or (b) any claim of
retaliation under such laws, or (c) any claim arising under common law,
including, but not limited to, causes of action for wrongful termination,
tortious wrongful termination in violation of public policy; discrimination or
harassment on the basis of age, sex, race, or national origin; intentional
infliction of emotional distress; negligent infliction of emotional distress;
fraudulent misrepresentation; negligent misrepresentation; fraud; conspiracy to
commit any act mentioned herein; breach of contract (whether express or implied,
oral or written); breach of the implied covenant of good faith and fair dealing;
interference with business advantage; defamation; interference with prospective
economic advantage; interference with contractual relationship; violation of any
national, state or local statute, law, or ordinance, or (d) any other action
whether cognizable in law or in equity, against Interactive based upon any
conduct up to and including the date of this Confidential Separation Agreement
and shall not, from any source or proceeding, seek or accept any award or
settlement therefrom. The provisions of this Section 1 shall not apply to any
obligations of Interactive pursuant to this Agreement.
1
<PAGE>
2. Releases of Claims; Continuing Indemnification.
2.1 Paolucci Release. It is understood and agreed by and between each
of the parties to this Agreement that in consideration for Interactive's promise
to pay to Paolucci the sums and benefits set forth in Paragraph 3 of this
Agreement, and Interactive's release of Paolucci contained in Section 2.2 of
this Agreement, and the other promises contained herein and other good and
valuable consideration the receipt of which is hereby acknowledged, Paolucci
completely releases and forever discharges Interactive and any present or former
officers, agents, employees, subsidiaries, affiliated companies, parent
companies, successors and assigns of Interactive from all causes of action,
claims, judgments, obligations, damages, or liabilities of whatever kind and
character, including, but not limited to, those arising under the Fair Labor
Standards Act; the Employee Retirement Income Security Act of 1974; Title VII of
the Civil Rights Act of 1964; the Civil Rights Act of 1991; the Age
Discrimination in Employment Act of 1967; the Equal Pay Act of 1963; the
Consolidated Omnibus Budget Reconciliation Act of 1985; or any other federal,
state, or local insurance, human rights, civil rights, wage-hour, pension, or
labor laws, rules and/or regulations, public policy, contract or tort laws, or
any claim of retaliation under such laws, or any claim arising under common law,
including but not limited to, causes of action for wrongful termination;
tortious wrongful termination in violation of public policy; discrimination or
harassment on the basis of age, sex, race, or national origin; intentional
infliction of emotional distress; negligent infliction of emotional distress;
fraudulent misrepresentation; negligent misrepresentation; fraud; conspiracy to
commit any act mentioned herein; breach of contract (whether express or implied,
oral or written); breach of the implied covenant of good faith and fair dealing;
interference with business advantage; defamation; interference with prospective
economic advantage; interference with contractual relationship; violation of any
national, state or local statute, law, or ordinance; or any other action whether
cognizable in law or in equity, and agrees that he will not, from any source or
proceeding, seek or accept any award or settlement therefrom. The provisions of
this Section 2.1 shall not apply to any obligations of Interactive pursuant to
this Agreement.
2.2 Interactive Release. It is understood and agreed by and between
each of the parties to this Agreement that in consideration of Paolucci's
release contained in Section 2.1 hereof and the other promises contained herein
and other good and valuable consideration the receipt of which is hereby
acknowledged, Interactive completely releases and forever discharges Paolucci
and his heirs, personal representatives, successors and assigns from all causes
of action, claims, judgments, obligations, damages, or liabilities of whatever
kind and character which relate to Paolucci's employment with Interactive or the
cessation of such employment or to his acting as an officer or Director of
Interactive or any of its affiliates, including, without limitation, any and all
tax claims, expense account claims and any other claims related to any conduct
taken or not taken by Paolucci on behalf of, or in his official capacities for
the Company prior to the date of this Agreement. The provisions of this Section
2.2 shall not apply to any obligations of Paolucci pursuant to this Agreement,
nor to any claims arising from Paolucci's willful misconduct in his official
capacities for the Company prior to the date of this Agreement.
2.3 Notwithstanding any other provision hereof, the Company hereby
confirms that it agrees to maintain and continue in place all indemnification
obligations, and any agreements entered into by the Company for the provision
therefor, provided for Paolucci in the Company's
2
<PAGE>
Certificate of Incorporation and By-Laws, each as amended, and any and all
indemnification agreements executed by and between the Company and Paolucci. In
connection herewith, Interactive shall maintain officers' and directors'
liability insurance covering Paolucci for the period that he served as an
officer and director of Interactive, in an amount equal to that in effect on the
date hereof.
2.4 Now and in the future, upon reasonable notice, as necessary or
reasonably requested by Interactive, Paolucci agrees to: (i) provide
cooperation, including, but not limited to, his appearance at interviews and/or
depositions, in all regulatory and litigation matters relating to his reasonable
employment, or area of responsibility at Interactive, whether or not such
matters have already been commenced and through the conclusion of such matters
or proceedings, and (ii) to provide Interactive's counsel with all documents in
his possession or control relating to such regulatory or litigation matters,
provided, however, that Interactive will reimburse Paolucci for all reasonable
travel expenses, including lodging and meals. Performance under this Section 2.4
shall not be a condition to the performance of any obligation of Interactive
hereunder.
3. Settlement Sums and Other Consideration
3.1 Pursuant to the other terms and conditions contained in this
Agreement, Interactive will issue to Paolucci a Common Stock Purchase Warrant,
substantially in the form of Exhibit A attached hereto (the "Warrant"), which
Warrant shall entitle Paolucci to purchase up to two million five hundred
thousand (2,500,000) shares of Interactive's Common Stock, par value $.01 per
share, at an exercise price equal to $0.952 per share.
3.2 Paolucci acknowledges that he has received notification of his
COBRA continuation rights as of the date hereof. As further consideration for
this Agreement, Interactive shall continue to pay for one year of health benefit
continuation coverage under Interactive's group policy through February, 1999.
Paolucci understands that Interactive's payment of these premiums will not
elongate Paolucci's 18 month COBRA continuation period.
3.3 Paolucci acknowledges and understand that, in connection with the
execution of this Agreement, the option to purchase 250,000 shares of
Interactive's Common Stock granted (subject to shareholder approval of
increasing the number of shares available under the Amended and Restated 1995
Employee Stock Option Plan) by Interactive's Stock Option Committee as of
November 1, 1997 shall be cancelled in its entirety, whether or not any portion
thereof is vested, and Paolucci shall not be entitled to purchase any common
shares of Interactive pursuant to the option referred to in this Section 3.3.
3.4 Interactive acknowledges that Paolucci cuurently holds an option
(which is fully vested in Paolucci) to purchase 52,000 shares of Interactive's
Common Stock, at an exercise price of $0.43 per share (the "Vested Option"), and
agrees in connection herewith to extend the expiration date of such option
(originally January 31, 2000) by five years such that Paolucci's Vested Option
shall remain exercisable in full until it expires on January 31, 2005.
3
<PAGE>
4. Denial of Liability.
Each party expressly recognizes that the making of this Agreement does
not in any way constitute an admission or concession of wrongdoing on the part
of the other party.
5. Confidentiality and Non-Disclosure
5.1 Except as noted elsewhere in Paragraph 5 of this Agreement, the
parties shall keep the terms and conditions of this Agreement completely and
strictly confidential. Neither the terms nor conditions of this Agreement nor
the fact of its existence shall be disclosed to any person or body.
5.2 The only exceptions to Paragraph 5.1 are as follows:
5.2.1 If the terms or conditions of this Agreement must be
disclosed as required by law, regulation or stock exchange rules, or upon order
of any court of competent jurisdiction in any action in which Paolucci or
Interactive are parties, or Paolucci is subpoenaed as a witness, to agencies,
individuals, or entities, including but not limited to state or federal
employment or taxing entities; or
5.2.2 If the terms or conditions must be disclosed to Paolucci's
tax, legal or financial advisors, on the further condition that Paolucci advise
such individuals in advance of disclosure that the terms and conditions of the
Agreement are strictly confidential; or
5.2.3 If the terms or conditions of this Agreement must be
disclosed in order to remedy a breach of any term or condition herein.
5.3 If disclosure is to be made pursuant to Paragraph 5.2.1, the party
or the party's representative making the disclosure shall immediately, but in no
event more than five (5) business days from receipt of a request or order for
such disclosure, and prior to any such disclosure, notify the other party and
shall not produce or otherwise disclose the existence or terms of this Agreement
unless and until the nondisclosing party has given written permission to do so,
or the nondisclosing party has had an opportunity to seek appropriate relief
from a court or tribunal of competent jurisdiction.
5.4 The parties agree that Interactive shall be permitted to disclose
the terms of the Agreement to its directors, officers, attorneys, accountants or
as otherwise expressly required or compelled by law, regulation or stock
exchange rules.
5.5 Neither Paolucci nor the officers or members of the Board of
Directors of Interactive shall speak disparagingly of the other regarding
Paolucci's directorship, employment or cessation of employment with Interactive
or, on the other hand, regarding the business or operations of Interactive or
any of its affiliates.
4
<PAGE>
5.6 Performance under this Section 5 shall not be a condition to the
performance of any obligation of Interactive hereunder.
6. Severability.
If any provision of this Agreement is declared illegal or
unenforceable by any arbitrator or by any court of competent jurisdiction and
cannot be modified to be enforceable (the parties hereby agreeing that such
modification shall be made without further action on the part of the parties),
that provision will immediately become null and void, leaving the remainder of
this Agreement in full force and effect.
7. Construction.
Each party and counsel for each party have reviewed this Agreement
(and Paolucci hereby acknowledges that Interactive advised him to consult with
an attorney regarding this Agreement). This Agreement is entered into in the
State of New York and shall be construed and interpreted in accordance with its
laws.
8. Integration.
This Agreement represents the complete understanding between the
parties. No other promises or agreements shall be binding or shall modify this
Agreement unless signed by the parties hereto, provided, however, that the
parties agree that Section 5 of the Employment Agreement dated as of January 1,
1995 between Interactive and Paolucci which by its terms survives the
termination of Paolucci's employment shall continue in full force and effect and
be binding on the parties.
9. Acceptance and Revocation.
Paolucci understands that he has the right to consider the terms and
conditions of this Agreement for a period of twenty-one (21) days. Paolucci
further understands that he may revoke this Agreement within seven (7) days of
signing it. Paolucci further represents that he has been given all satisfactory
periods within which to consider the release of claims contained herein prior to
signing this Agreement. To revoke this Agreement, Paolucci must send a written
letter to: David J. Moore, Interactive Imaginations, Inc., 915 Broadway, Suite
1608, New York, New York 10010, stating, "I hereby revoke my acceptance of our
Confidential Separation Agreement and General Release." If Paolucci revokes this
Agreement, he will not be entitled to receive the severance payment, the
continuation of medical benefits, or any other consideration described in
paragraph 3 above. Paolucci represents that Interactive has advised him of his
right to consult with an attorney regarding this Agreement.
5
<PAGE>
10. THE SIGNATORIES HAVE CAREFULLY READ THIS ENTIRE AGREEMENT AND RELEASE.
ITS CONTENTS HAVE BEEN FULLY EXPLAINED TO THEM BY THEIR ATTORNEYS. THE
SIGNATORIES FULLY UNDERSTAND THE FINAL AND BINDING EFFECT OF THIS AGREEMENT. THE
ONLY PROMISES OR REPRESENTATIONS MADE TO ANY SIGNATORY ABOUT THIS AGREEMENT, AND
TO SIGN THE AGREEMENT, ARE CONTAINED IN THIS AGREEMENT. THE SIGNATORIES ARE
SIGNING THIS AGREEMENT VOLUNTARILY.
Dated: as of February 24, 1998 /s/ Michael P. Paolucci
-----------------------------------
Michael P. Paolucci
INTERACTIVE IMAGINATIONS, INC.
Dated: as of February 24, 1998 By: /s/ David J. Moore
-------------------------------
Name: David J. Moore
Title: Chief Executive Officer
6
INDEMNIFICATION AGREEMENT
This INDEMNIFICATION AGREEMENT made and entered into this 28th day
of May, 1998 (the "Agreement"), by and between 24/7 MEDIA, INC., a Delaware
corporation (together with its affiliates, as defined in the federal securities
laws, the "Company"), and (the "Indemnitee"):
WHEREAS, highly competent persons are becoming more reluctant to
serve publicly-held corporations as officers or in other capacities unless they
are provided with adequate protection through insurance and indemnification
against inordinate risks of claims and actions against them arising out of their
service to and activities on behalf of the corporation; and
WHEREAS, the current difficulties or virtual impossibility of
obtaining adequate insurance and uncertainties relating to indemnification have
increased the difficulty of attracting and retaining such persons; and
WHEREAS, the Board of Directors of the Company has determined that
the inability to attract and retain such persons is detrimental to the best
interests of the Company's stockholders and that the Company should act to
assure such persons that there will be increased certainty of such protection in
the future; and
WHEREAS, it is reasonable, prudent and necessary for the Company
contractually to obligate itself to indemnify such persons to the fullest extent
permitted by applicable law so that they will serve or continue to serve the
Company free from undue concern that they will not be so indemnified; and
WHEREAS, the Indemnitee is willing to serve, continue to serve and
to take on additional service for or on behalf of the Company on the condition
that he be so indemnified;
NOW, THEREFORE, in consideration of the premises and the covenants
contained herein, the Company and the Indemnitee do hereby covenant and agree as
follows:
Section 1. Services by Indemnitee. The Indemnitee agrees to serve as
a director of the Company. The Indemnitee may at any time and for any reason
resign from such position (subject to any other contractual obligation or other
obligation imposed by operation of law).
Section 2. Indemnification. The Company shall indemnify the
Indemnitee to the fullest extent permitted by applicable law in effect on the
date hereof or as such laws may from time to time be amended. Without
diminishing the scope of the indemnification provided by this Section 2, the
rights of indemnification of the
<PAGE>
Indemnitee provided hereunder shall include but shall not be limited to those
rights set forth hereinafter, except to the extent expressly prohibited by
applicable law.
Section 3. Action or Proceeding Other Than an Action by or in the
Right of the Company. The Indemnitee shall be entitled to the indemnification
rights provided in this Section 3 if he 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 in nature, other than
an action by or in the right of the Company, by reason of the fact that he is or
was a director, officer, employee, agent, partner or fiduciary of the Company or
is or was serving at the request of the Company as a director, officer,
employee, agent, partner or fiduciary of any other entity or by reason of
anything done or not done by him in any such capacity. Pursuant to this Section
3, the Indemnitee shall be indemnified against all expenses (including
attorneys' fees), costs, judgments, penalties, fines and amounts paid in
settlement actually and reasonably incurred by him in connection with such
action, suit or proceeding (including, but not limited to, the investigation,
defense or appeal thereof), if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
Company, and, with respect to any criminal action or proceeding, he had no
reasonable cause to believe his conduct was unlawful.
Section 4. Actions by or in the Right of the Company. The Indemnitee
shall be entitled to the indemnification rights provided in this Section 4 if he
is a person who was or is made a party or is threatened to be made a party to
any threatened, pending or completed action or suit brought by or in the right
of the Company to procure a judgment in its favor by reason of the fact that he
is or was a director, officer, employee, agent, partner or fiduciary of the
Company or is or was serving at the request of the Company as a director,
officer, employee, agent, partner or fiduciary of any other entity by reason of
anything done or not done by him in any such capacity. Pursuant to this Section
4, the Indemnitee shall be indemnified against all expenses (including
attorneys' fees) and costs actually and reasonably incurred by him in connection
with such action or suit (including, but not limited to, the investigation,
defense, settlement or appeal thereof) if he acted in good faith and in a manner
he reasonably believed to be in or not opposed to the best interests of the
Company; provided, however, that no such indemnification shall be made in
respect of any claim, issue or matter as to which applicable law expressly
prohibits such indemnification by reason of an adjudication of liability of the
Indemnitee to the Company, unless, and only to the extent that, the Court of
Chancery of the State of Delaware or the court in which such action or suit was
brought shall determine upon application that, despite such adjudication of
liability but in view of all the circumstances of the case, the Indemnitee is
fairly and reasonably entitled to indemnification for such expenses and costs as
such court shall deem proper.
Section 5. Indemnification for Costs, Charges and Expenses of
Successful Party. Notwithstanding the other provisions of this Agreement and in
addition to the rights to indemnification set forth in Sections 3 and 4 hereof,
to the extent that the
-2-
<PAGE>
Indemnitee has served as a witness on behalf of the Company or has been
successful on the merits or otherwise, including, without limitation, the
dismissal of an action without prejudice, in defense of any action, suit or
proceeding referred to in Sections 3 and 4 hereof, or in defense of any claim,
issue or matter therein, he shall be indemnified against all costs, charges and
expenses (including attorneys' fees) actually and reasonably incurred by him or
on his behalf in connection therewith.
Section 6. Partial Indemnification. In addition to the rights to
indemnification set forth in Sections 3 and 4 hereof, if the Indemnitee is only
partially successful in the defense, investigation, settlement or appeal of any
action, suit, investigation or proceeding described in Section 3 or 4 hereof,
and as a result is not entitled under Section 3, 4 or 5 hereof to
indemnification by the Company for the total amount of the expenses (including
attorneys' fees), costs, judgments, penalties, fines, and amounts paid in
settlement actually and reasonably incurred by him, the Company shall
nevertheless indemnify the Indemnitee, as a matter of right pursuant to Section
5 hereof, to the extent that the Indemnitee has been partially successful.
Section 7. Determination of Entitlement to Indemnification. Upon
written request by the Indemnitee for indemnification pursuant to Section 3 or 4
hereof, the entitlement of the Indemnitee to indemnification pursuant to the
terms of this Agreement shall be determined by the following person or persons
who shall be empowered to make such determination: (a) the Board of Directors of
the Company by a majority vote of a quorum consisting of Disinterested Directors
(as hereinafter defined); or (b) if such a quorum is not obtainable or, even if
obtainable, if the Board of Directors by the majority vote of Disinterested
Directors so directs, by Independent Counsel (as hereinafter defined) in a
written opinion to the Board of Directors, a copy of which shall be delivered to
the Indemnitee; or (c) by the stockholders of the Company. Independent Counsel
shall be selected by the Board of Directors and approved by the Indemnitee. Upon
failure of the Board so to select Independent Counsel or upon failure of the
Indemnitee so to approve Independent Counsel, Independent Counsel shall be
selected by the Chancellor of the State of Delaware or such other person as the
Chancellor shall designate to make such selection. Such determination of
entitlement to indemnification shall be made not later than 60 days after
receipt by the Company of a written request for indemnification. Such request
shall include documentation or information which is necessary for such
determination and which is reasonably available to the Indemnitee. Any costs or
expenses (including attorneys' fees) incurred by the Indemnitee in connection
with his request for indemnification hereunder shall be borne by the Company.
The Company hereby indemnifies and agrees to hold the Indemnitee harmless
therefrom irrespective of the outcome of the determination of the Indemnitee's
entitlement to indemnification. If the person making such determination shall
determine that the Indemnitee is entitled to indemnification as to part (but not
all) of the application for indemnification, such person shall reasonably
prorate such partial indemnification among such claims, issues or matters.
-3-
<PAGE>
Section 8. Presumptions and Effect of Certain Proceedings. The
Secretary of the Company shall, promptly upon receipt of the Indemnitee's
request for indemnification, advise in writing the Board of Directors or such
other person or persons empowered to make the determination as provided in
Section 7 that the Indemnitee has made such request for indemnification. Upon
making such request for indemnification, the Indemnitee shall be presumed to be
entitled to indemnification hereunder and the Company shall have the burden of
proof in the making of any determination contrary to such presumption. If the
person or persons so empowered to make such determination shall have failed to
make the requested indemnification within 60 days after receipt by the Company
of such request, the requisite determination of entitlement to indemnification
shall be deemed to have been made and the Indemnitee shall be absolutely
entitled to such indemnification, absent actual and material fraud in the
request for indemnification. The termination of any action, suit, investigation
or proceeding described in Section 3 or 4 hereof by judgment, order, settlement
or conviction, or upon a plea of nolo contendere or its equivalent, shall not,
of itself: (a) create a presumption that the Indemnitee did not act in good
faith and in a manner which he reasonably believed to be in or not opposed to
the best interests of the Company, and, with respect to any criminal action or
proceeding, that the Indemnitee had reasonable cause to believe that his conduct
was unlawful; or (b) otherwise adversely affect the rights of the Indemnitee to
indemnification except as may be provided herein.
Section 9. Advancement of Expenses and Costs. All reasonable
expenses and costs incurred by the Indemnitee (including attorneys' fees,
retainers and advances of disbursements required of the Indemnitee) shall be
paid by the Company in advance of the final disposition of such action, suit or
proceeding at the request of the Indemnitee within 20 days after the receipt by
the Company of a statement or statements from the Indemnitee requesting such
advance or advances from time to time. The Indemnitee's entitlement to such
expenses shall include those incurred in connection with any proceeding by the
Indemnitee seeking an adjudication or award in arbitration pursuant to this
Agreement. Such statement or statements shall reasonably evidence the expenses
and costs incurred by him in connection therewith and shall include or be
accompanied by an undertaking by or on behalf of the Indemnitee to repay such
amount if it is ultimately determined that the Indemnitee is not entitled to be
indemnified against such expenses and costs by the Company as provided by this
Agreement or otherwise.
Section 10. Remedies of Indemnitee in Cases of Determination not to
Indemnify or to Advance Expenses. In the event that a determination is made that
the Indemnitee is not entitled to indemnification hereunder or if payment has
not been timely made following a determination of entitlement to indemnification
pursuant to Sections 7 and 8, or if expenses are not advanced pursuant to
Section 9, the Indemnitee shall be entitled to a final adjudication in an
appropriate court of the State of Delaware or any other court of competent
jurisdiction of his entitlement to such indemnification or advance.
Alternatively, the Indemnitee at his option may seek an award in arbitration to
be conducted by a single arbitrator pursuant to the rules of the American
Arbitration
-4-
<PAGE>
Association, such award to be made within 60 days following the filing of the
demand for arbitration. The Company shall not oppose the Indemnitee's right to
seek any such adjudication or award in arbitration or any other claim, but may
oppose the Indemnitee's right to indemnification. Such judicial proceeding or
arbitration shall be made de novo and the Indemnitee shall not be prejudiced by
reason of a determination (if so made) pursuant to Sections 7 and 8 that he is
not entitled to indemnification. If a determination is made or deemed to have
been made pursuant to the terms of Section 7 or Section 8 hereof that the
Indemnitee is entitled to indemnification, the Company shall be bound by such
determination and is precluded from asserting that such determination has not
been made or that the procedure by which such determination was made is not
valid, binding and enforceable. The Company further agrees to stipulate in any
such court or before any such arbitrator that the Company is bound by all the
provisions of this Agreement and is precluded from making any assertion to the
contrary. If the court or arbitrator shall determine that the Indemnitee is
entitled to any indemnification hereunder, the Company shall pay all reasonable
expenses (including attorneys' fees) and costs actually incurred by the
Indemnitee in connection with such adjudication or award in arbitration
(including, but not limited to, any appellate proceedings).
Section 11. Other Rights to Indemnification. The indemnification and
advancement of expenses (including attorneys' fees) and costs provided by this
Agreement shall not be deemed exclusive of any other rights to which the
Indemnitee may now or in the future be entitled under any provision of the
by-laws, agreement, provision of the Certificate of Incorporation, vote of
stockholders or disinterested directors, provision of law or otherwise.
Section 12. Attorneys' Fees and Other Expenses To Enforce Agreement.
In the event that the Indemnitee is subject to or intervenes in any proceeding
in which the validity or enforceability of this Agreement is at issue or seeks
an adjudication or award in arbitration to enforce his rights under, or to
recover damages for breach of, this Agreement, the Indemnitee, if he prevails in
whole or in part in such action, shall be entitled to recover from the Company
and shall be indemnified by the Company against, any actual expenses for
attorneys' fees and disbursements reasonably incurred by him.
Section 13. Duration of Agreement. This Agreement shall continue
until and terminate upon the later of: (a) 10 years after the Indemnitee has
ceased to occupy any of the positions or have any of the relationships described
in Sections 3 and 4 of this Agreement; and (b) the final termination of all
pending or threatened actions, suits, proceedings or investigations with respect
to the Indemnitee. This Agreement shall be binding upon the Company and its
successors and assigns and shall inure to the benefit the Indemnitee and his
spouse, assigns, heirs, devises, executors, administrators or other legal
representatives.
Section 14. Severability. If any provision or provisions of this
Agreement shall be held to be invalid, illegal or unenforceable for any reason
whatsoever: (a) the
-5-
<PAGE>
validity, legality and enforceability of the remaining provisions of this
Agreement (including, without limitation, all portions of any paragraphs of this
Agreement containing any such provision held to be invalid, illegal or
unenforceable, that are not themselves invalid, illegal or unenforceable) shall
not in any way be affected or impaired thereby; and (b) to the fullest extent
possible, the provisions of this Agreement (including, without limitation, all
portions of any paragraph of this Agreement containing any such provision held
to be invalid, illegal or unenforceable, that are not themselves invalid,
illegal or unenforceable) shall be construed so as to give effect to the intent
manifested by the provision held invalid, illegal or unenforceable.
Section 15. Identical Counterparts. This Agreement may be executed
in one or more counterparts, each of which shall for all purposes be deemed to
be an original but all of which together shall constitute one and the same
Agreement. Only one such counterpart signed by the party against whom
enforceability is sought needs to be produced to evidence the existence of this
Agreement.
Section 16. Headings. The headings of the Sections of this Agreement
are inserted for convenience only and shall not be deemed to constitute part of
this Agreement or to affect the construction thereof.
Section 17. Definitions. For purposes of this Agreement:
(a) "Disinterested Director" shall mean a director of the
Company who is not or was not a party to the action, suit, investigation or
proceeding in respect of which indemnification is being sought by the
Indemnitee.
(b) "Independent Counsel" shall mean a law firm or a member
of a law firm that neither is presently nor in the past five years has been
retained to represent: (i) the Company or the Indemnitee in any matter material
to either such party, or (ii) any other party to the action, suit, investigation
or proceeding giving rise to a claim for indemnification hereunder.
Notwithstanding the foregoing, the term "Independent Counsel" shall not include
any person who, under the applicable standards of professional conduct then
prevailing, would have a conflict of interest in representing either the Company
or the Indemnitee in an action to determine the Indemnitee's right to
indemnification under this Agreement.
Section 18. Modification and Waiver. No supplement, modification or
amendment of this Agreement shall be binding unless executed in writing by both
of the parties hereto. No waiver of any of the provisions of this Agreement
shall be deemed or shall constitute a waiver of any other provisions hereof
(whether or not similar) nor shall such waiver constitute a continuing waiver.
Section 19. Notice by the Indemnitee. The Indemnitee agrees promptly
to notify the Company in writing upon being served with any summons, citation,
subpoena,
-6-
<PAGE>
complaint, indictment, information or other document relating to any matter
which may be subject to indemnification covered hereunder, either civil,
criminal or investigative.
Section 20. Notices. All notices, requests, demands and other
communications hereunder shall be in writing and shall be deemed to have been
duly given if (i) delivered by hand and receipted for by the party to whom said
notice or other communication shall have been directed or if (ii) mailed by
certified or registered mail with postage prepaid, on the third business day
after the date on which it is so mailed:
(a) If to the Indemnitee, to the address written on the
signature page hereto or such other address as the Indemnitee may furnish in
writing.
(b) If to the Company to:
24/7 MEDIA, INC.
1250 Broadway
New York, NY 10001
Attn: Chief Executive Officer
or to such other address as may have been furnished to the Indemnitee by the
Company or to the Company by the Indemnitee, as the case may be.
Section 21. Governing Law. The parties agree that this Agreement
shall be governed by, and construed and enforced in accordance with, the laws of
the State of Delaware, without giving effect to the conflict of laws.
-7-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement
on the day and year first above written.
24/7 MEDIA, INC.
By:
-------------------------------
-------------------------------
Name:
Address:
-------------------------------
-------------------------------
-------------------------------
-------------------------------
-8-
EXHIBIT 21.1.
Subsidiaries
of
24/7 Media, Inc.
Intelligent Interactions Corporation
Independent Auditor's Consent
The Board of Directors
24/7 Media, Inc.:
We consent to the use of our reports included herein related to the audits of
24/7 Media, Inc. (successor company to Interactive Imaginations, Inc.)
and Interactive Holdings, LLC (successor company to Petry Interactive, Inc.)
and to the reference to our firm under the heading "Experts" in the prospectus.
/s/ KPMG Peat Marwick LLP
-------------------------
KPMG Peat Marwick LLP
New York, New York
June 4, 1998
Consent of Independent Public Accountants
As independent public accountants, we hereby consent to the use of our
report dated May 13, 1998 on the Intelligent Interactions Corporation financial
statements and to all references to our Firm included in or made a part of this
24/7 Media, Inc. Form S-1 registration statement.
Arthur Andersen LLP
Washington, D.C.
June 1, 1998
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This Schedule contains summary financial information extracted
from the consolidated balance sheet as of March 31, 1998 and
December 31, 1997 and the consolidated statement of operations
for the three months ended March 31, 1998 and the year ended
December 31, 1997.
</LEGEND>
<MULTIPLIER> 1,000 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997
<PERIOD-START> JAN-01-1998 JAN-01-1997
<PERIOD-END> MAR-31-1998 DEC-31-1998
<CASH> 7,765 94
<SECURITIES> 0 0
<RECEIVABLES> 1,819 176
<ALLOWANCES> 270 64
<INVENTORY> 0 0
<CURRENT-ASSETS> 9,636 285
<PP&E> 631 591
<DEPRECIATION> 0 0
<TOTAL-ASSETS> 18,202 1,039
<CURRENT-LIABILITIES> 3,319 1,450
<BONDS> 479 2,317
10,094 0
0 0
<COMMON> 275 46
<OTHER-SE> 4,264 (2,727)
<TOTAL-LIABILITY-AND-EQUITY> 18,045 1,039
<SALES> 1,076 1,467
<TOTAL-REVENUES> 1,076 3,149
<CGS> 930 1,655
<TOTAL-COSTS> 2,274 6,703
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 193 114
<INCOME-PRETAX> (2,295) (5,306)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (2,295) (5,306)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (2,295) (5,306)
<EPS-PRIMARY> 0 0
<EPS-DILUTED> 0 0
</TABLE>
