EDGAR GRAPHIC-IMAGES DESCRIPTION:
INSIDE FRONT COVER
Graphic: Logo of Company
Language: 24/7 Media provides advertising solutions to advertisers and
websites by offering media expertise combined with sophisticated
technology. 24/7 Media more than 1/3 of the on line audience.
Source: Media Metrix study, 5/98 indicating that 24/7 Media
reached over 15 million users representing 35.7% of the online
audience.
INSIDE FRONT GATEFOLD
Title: 24/7 MEDIA AT A GLANCE
Caption 1: STRATEGIES FOR CONTINUED GROWTH. 24/7 Media's objective is to
provide superior turnkey advertising solutions for websites and by
maximizing the effectiveness of internet advertising campaigns.
- Expand the Company's networks of websites.
- Maximize sales and marketing effectiveness.
- Enhance capabilities of ad targeting technology.
- Increase value of ad inventory.
- Provide highest level of customer service.
Caption 2: BRAND NAME WEBSITES. 24/7 Media provides advertising sales
solutions for more than 150 high profile websites. (see inside
back cover for additional websites). Free EDGAR (logo); AT&T
WorldNet Service (logo); The Wire News from AP (logo); Comedy
Central (logo).
Caption 3: INDUSTRY GROWTH. Revenue from internet advertising and direct
marketing in the U.S. is estimated to increase from over $1
billion in 1997 to over $9 billion in 2002.
- Graphic bar chart depicting growth of industry.
- Source: Jupiter Communications 1998 Online Advertising Report
Caption 4: EXPERIENCED MANAGEMENT TEAM. 24/7 Media's senior managers have
extensive media sales and technology expertise. Combined: More
than 85 years experience in advertising sales and media; More than
30 years experience in technology and operations.
Caption 5: REACH. During May 1998, the 420 million impressions generated
by the Company's networks of websites reached more than one-third
of U.S. internet users.
- Graphic bar chart depicting reach statistics of Company and
other websites.
- Top Web Properties. Source: Media Metrix, 5/98.
*Based upon 24/7 Media's submitted list of site URL's to Media
Metrix.
Caption 6: ENHANCED TECHNOLOGY. More than ad serving - a technology
platform designed with database marketing in mind. Adfinity[TM]
and dbCommerce[TM] were developed to address the opportunities
presented by online database marketing.
<PAGE>
Adfinity's[TM] management system serves ads to and supports the
company's networks of websites.
Caption 7: PRESTIGIOUS ADVERTISERS. 24/7 Media maintains sales and
marketing relationships with leading internet and traditional
advertisers and advertising agencies. (see insider back cover for
additional advertisers).
- Amazon.com; American Express; Anderson & Lembke; Bell Atlantic;
Compaq; Disney; Ford; Grey Interactive; Hewlett Packard;
Microsoft; Ogilvy & Mather; Procter & Gamble; Sony.
INSIDE BACK COVER
Caption: 24/7 MEDIA.
Provides turnkey advertising sales solutions to top websites and
maintains sales and marketing relationships with leading
advertisers.
-(Advertisers:) Agency.com; Amazon.com; American
Express; Anderson & Lembke; BBDO Interactive; Bell Atlantic;
Bloomberg; CKS/Site Specific; Compaq; Disney; DMB&B; Ford; General
Motors; Grey Interactive; Hewlett Packard; Intel; J. Walter
Thompson; Left Field; Microsoft; Modem Media; Olgivy & Mather;
Procter & Gamble; Sony; US Interactive; Visa; Y&R Wunderman.
-(Websites:) Free EDGAR (logo); AT&T WorldNet Service (logo); The
Wire News from AP (logo); Comedy Central (logo); match.com (logo);
Accu Weather (logo); Thompson Investors Network (logo); Earthlink
(logo); Mapquest (logo); Headland (logo); Spinner.com (logo);
Delphi Forums (logo).
- This is a partial list of 24/7 Media's advertisers and websites.
<PAGE>
As filed with the Securities and Exchange Commission on July 24, 1998
Registration No. 333-56085
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
Amendment No. 1 to
FORM S-1
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
---------------
24/7 MEDIA, INC.
(Exact name of Registrant as specified in its charter)
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<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>
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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
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<TABLE>
<CAPTION>
Proposed Proposed Maximum
Title of each Class of Amount to be Offering Price Aggregate Amount of
Securities to be Registered Registered(1) per Share Offering Price Registration Fee
- ----------------------------- ------------------ ---------------- -------------------- ---------------------
<S> <C> <C> <C> <C>
Common Stock ................ 3,737,500 shares $ 14.00 $52,325,000(2) $1,866(2)(3)
</TABLE>
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(1) Includes up to 487,500 shares of Common Stock issuable by the registrant
upon exercise of the underwriters over-allotment option.
(2) Estimated solely for purposes of calculating the registration fee for the
additional shares being registered hereby pursuant to Rule 457 under the
Securities Act of 1933.
(3) The registration fee with respect to shares having a proposed maximum
aggregate offering price of $46,000,000 was paid at the time of the
initial filing. The registration fee for the additional shares has been
calculated based upon the maximum price in the estimated price range per
share of Common Stock.
---------------
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.
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<PAGE>
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED JULY 24, 1998
PROSPECTUS
3,250,000 Shares
[LOGO OF 24/7 MEDIA]
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 $12.00 and $14.00
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 has applied 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 the 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.
================================================================================
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<CAPTION>
Price to Underwriting Proceeds to
Public Discount (1) Company (2)
---------- -------------- ------------
<S> <C> <C> <C>
Per Share......... $ $ $
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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 $1,200,000.
(3) The Company has granted the Underwriters an option to purchase up to an
additional 487,500 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 13,621,507 shares of the Company's Series A
Preferred Stock into an aggregate of 3,577,081 shares of Common Stock and the
automatic conversion of 3,000 shares of the Company's Series B Preferred Stock
into an aggregate of 248,139 shares of Common Stock, each to be effected
simultaneously with the closing of the Offering (collectively, the "Preferred
Stock Conversion"), (iii) reflects the conversion of long-term debt of the
Company with a stated value of $500,000 and accrued interest thereon, into
77,450 shares of Common Stock (the "Senior Note Conversion") and (iv) has been
adjusted to give effect to a 1-for-4 reverse split of the Company's Common
Stock (the "Stock Split") effected on July 20, 1998.
The Company
Overview
24/7 Media, an Internet advertising and direct marketing firm, enables
both advertisers and Web publishers to capitalize on the many opportunities
presented by Internet advertising, direct marketing and electronic commerce.
The Company generates revenue by selling advertisements and promotions for
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 85 high profile Affiliated Websites to which the Company delivered an
aggregate of over 335 million advertisements in May 1998; (ii) operates the
CliqNow! network (the "CliqNow! network"), a network of over 75 medium to
large-sized Affiliated Websites to which an aggregate of over 45 million
advertisements were delivered in May 1998; (iii) operates the ContentZone (the
"ContentZone"), a network of over 2,000 small to medium-sized Affiliated
Websites to which the Company delivered an aggregate of over 40 million
advertisements in May 1998; (iv) licenses its Adfinity[TM] advertising
management system ("Adfinity[TM]") to independent Websites to manage and serve
high-volume Internet advertising and direct marketing campaigns; and (v)
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. There can be no assurance that such rapid
industry growth rates will be achieved or that the Company will experience
similar rates of growth.
The Company believes that advertisers seek to place Internet ads in ways
to maximize unduplicated "reach" (the number of unique Web users that visit a
Website or set of Websites at least once in the given month). The Company
delivered an aggregate of 420 million impressions in May 1998 and, according to
a study prepared for the Company by Media Metrix, the Company's networks
reached 35.7%, or more than one third, of all Internet users. The Company
believes that this reach figure is among the highest in the Internet
advertising industry. The Company plans to aggressively recruit Websites for
its networks in order to (i) further extend the Company's reach, (ii) provide
advertisers with a broad and diverse base of online content and Web pages
viewed by Internet users ("page views") and (iii) 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
deliver highly targeted messages efficiently. 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.
1
<PAGE>
As Internet traffic grows, Web publishers increasingly seek to maximize
the value of their online inventory. The Company's extensive sales and
marketing experience provides Web publishers access to media buyers at large ad
agencies and enables them to sell advertising 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 Company's Adfinity[TM] and dbCommerce[TM] technologies allow 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 seek 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 that sold advertising for Websites organized
in a network, (ii) Advercomm, Inc. ("Advercomm"), a newly-formed Delaware
corporation that brought a number of high profile Websites to the 24/7 Network,
and (iii) Interactive Imaginations, Inc. ("Interactive Imaginations"), a New
York corporation that 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., a network of over 75 medium to large-sized Websites.
The Company was formed as a wholly owned subsidiary of Interactive
Imaginations. On February 25, 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 third party
investors including an existing investor of Interactive Imaginations, the
"Initial Merger"). On April 9, 1998, Interactive Imaginations (24/7 Media's
then parent) was merged with and into the Company in a manner similar to a
pooling-of-interests (together with the Initial Merger, the "Merger"). As a
result, 24/7 Media's historical results of operations for all periods prior to
the Initial Merger represent those of Interactive Imaginations. 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! (collectively, the "Acquisitions").
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.
2
<PAGE>
The Offering
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<S> <C>
Common stock offered ........................... 3,250,000 shares
Common stock to be outstanding after the
Offering ...................................... 15,106,124 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 has applied for a listing of the Common
Stock on the Nasdaq National Market under the symbol
"TFSM."
</TABLE>
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(1) Excludes approximately 1,036,414 shares of Common Stock issuable upon
exercise of stock options outstanding at July 17, 1998 granted under the
Company's 1998 Stock Incentive Plan (of which 176,751 are vested and
exercisable at July 17, 1998) and approximately 1,891,871 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 $3.45 per share. Also excludes approximately 3,988,040
shares of Common Stock issuable upon exercise of outstanding warrants at
July 17, 1998. Such warrants have a weighted average exercise price of
$8.34 per share.
3
<PAGE>
Summary Consolidated Financial Data
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<CAPTION>
Year Ended
December 31,
1997
----------------
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Pro Forma (1)
- ------------------------------------
Consolidated Statement of Operations Data:
Advertising revenue ............... $ 3,632,793
Consulting and license fees ....... 1,746,896
Total revenue ................... 5,379,689
Gross profit ...................... 2,070,013
Operating loss (2) ................ (16,791,493)
Net loss .......................... (16,887,098)
Cumulative dividends on
mandatorily redeemable
convertible preferred stock ...... (134,000)
Net loss attributable to common
stockholders ..................... $ 17,021,098
==============
Pro forma:
Basic net loss
per share (6) .................... $ (3.81)
Shares outstanding (6) ........... 4,443,053
Historical
- -------------------------------------
Consolidated Statement of Operations Data:
Advertising revenue ............... $ 1,467,105
Consulting and license fees ....... 1,681,464
Total revenue ................... 3,148,569
Gross profit ...................... 1,493,229
Operating loss .................... (5,209,362)
Net loss .......................... (5,305,828)
Cumulative dividends on
mandatorily redeemable
convertible preferred stock ...... --
Net loss attributable to common
stockholders ..................... (5,305,828)
Basic net loss
per share (6) .................... $ (4.88)
Shares outstanding (6) ............ 1,086,614
<CAPTION>
Three Months Ended
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March 31, June 30, Sept. 30, Dec. 31, March 31,
1997 1997 1997 1997 1998
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<S> <C> <C> <C> <C> <C>
Pro Forma (1)
- -------------------------------------
Consolidated Statement of Operations
Data:
Advertising revenue ............... $ 414,983 $ 591,722 $ 806,543 $ 1,819,545 $ 2,347,307
Consulting and license fees ....... 805,245 639,588 244,890 57,173 88,362
Total revenue ................... 1,220,228 1,231,310 1,051,433 1,876,718 2,435,669
Gross profit ...................... 741,263 626,595 147,149 555,006 542,938
Operating loss (2) ................ (3,148,037) (4,431,798) (5,852,286) (3,359,372) (4,412,069)
Net loss .......................... (3,133,895) (4,433,098) (5,882,888) (3,437,217) (4,590,761)
Cumulative dividends on
mandatorily redeemable
convertible preferred stock ...... (33,500) (33,500) (33,500) (33,500) (33,500)
Net loss attributable to common
stockholders ..................... $ (3,167,395) $ (4,466,598) $ (5,916,388) $ (3,470,717) $ (4,624,261)
============= ============= ============= ============= =============
Pro forma:
Basic net loss
per share (6) .................... $ (0.84) $ (0.96) $ (1.27) $ (0.74) $ (0.73)
Shares outstanding (6) ........... 3,786,202 4,652,006 4,652,006 4,681,998 6,342,350
Historical
- -------------------------------------
Consolidated Statement of Operations
Data:
Advertising revenue ............... $ 388,892 $ 355,346 $ 315,697 $ 407,170 $ 1,076,250
Consulting and license fees ....... 805,245 630,588 233,130 12,501 --
Total revenue ................... 1,194,137 985,934 548,827 419,671 1,076,250
Gross profit ...................... 734,550 551,294 37,361 170,024 146,247
Operating loss .................... (798,059) (1,423,535) (2,400,167) (587,601) (2,130,580)
Net loss .......................... (784,377) (1,427,594) (2,433,302) (660,555) (2,297,838)
Cumulative dividends on
mandatorily redeemable
convertible preferred stock ...... -- -- -- -- (33,500)
Net loss attributable to common
stockholders ..................... (784,377) (1,427,594) (2,433,302) (660,555) (2,331,338)
Basic net loss
per share (6) .................... $ (0.73) $ (1.32) $ (2.25) $ (0.59) $ (0.76)
Shares outstanding (6) ............ 1,079,116 1,079,116 1,079,116 1,109,108 3,055,432
</TABLE>
<TABLE>
<CAPTION>
As of March 31, 1998
--------------------------------------------------
Pro Forma
Actual Pro Forma (4) As Adjusted (5)
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<S> <C> <C> <C>
Consolidated Balance Sheet Data:
Cash and cash equivalents .................................. $ 7,764,695 $ 6,473,103 $44,565,603
Working capital ............................................ 6,317,136 4,767,597 42,860,097
Goodwill, net .............................................. 7,870,174 14,992,403 14,992,403
Total assets ............................................... 18,201,993 24,946,615 63,039,115
Long-term debt ............................................. 479,408 -- --
Mandatorily redeemable convertible preferred stock ......... 10,093,502 -- --
Total stockholders' equity ................................. 4,264,180 20,575,805 58,668,305
</TABLE>
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(1) Pro forma consolidated statement of operations data reflects the
consolidation of the results of operations of Petry, Advercomm,
Intelligent Interactions and CliqNow! as if each entity had been acquired
on January 1, 1997 (or inception, if later) but does not give effect to
the Preferred Stock Conversion or Senior Note Conversion which will take
place immediately prior to the Offering.
(2) Includes acquisition related non-cash charges for amortization of goodwill.
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 F to the Company's Pro Forma Consolidated Financial Information
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
Acquisitions of Intelligent Interactions and CliqNow!, each of which
occurred after March 31, 1998, as if such Acquisitions occurred on March
31, 1998, (ii) an increase in accumulated deficit in connection with
Intelligent Interactions' write-off of acquired in-process technology of
$5,477,300 and (iii) the conversion of all outstanding shares of
mandatorily redeemable convertible preferred stock into 3,825,215 shares
of Common Stock and conversion of senior convertible notes payable into
77,450 shares of Common Stock prior to the closing of this Offering.
(5) Adjusted to reflect the sale of 3,250,000 shares of Common Stock by the
Company at the assumed initial public offering price of $13.00 per share
and the application of the estimated net proceeds therefrom. See "Use of
Proceeds."
(6) See Note 1 to the Company's Consolidated Financial Statements for the
determination of shares used in computing basic net loss per share.
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 $16.9 million
for the year ended December 31, 1997 and $4.6 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 CliqNow! See "Prospectus
Summary--Formation of the Company." In order to integrate effectively 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 could be materially adversely affected by a decline in the economic
prospects of advertisers or the economy
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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 increase significantly 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 support Internet advertising sufficiently
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 develop
successfully 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.
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
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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 adoptors 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. 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. For the three months
ended March 31, 1998 and for the year ended December 31, 1997, approximately
66% and 68%, 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 top ten Websites for the year ended December 31, 1997 included
AT&T WorldNet Service, Reuters, USA.NET, Columbia House, Comedy Central,
Reuters-MoneyNet, Maps on Us, Universal Media, FlashNet Communications and
FoxNews Internet. For the three months ended March 31, 1998, the top ten
Websites included AT&T WorldNet Service, Netscape Communications, Reuters,
Comedy Central, Maps on Us, Reuters-MoneyNet, Universal Media, Encompass, Inc.,
Columbia House and Fortune City Ltd. The Company from time to time experiences
turnover in its Affiliated Websites, and there can be no assurance that the
Websites named above remain or will remain associated with the Company.
Affiliated Websites generally measure satisfaction by acceptable revenue
levels, adequate "click-thru rates" (the number of times users click on an
advertisement as a percentage of page view), high levels of customer service
and timely and accurate reporting. There can be no assurance that the
Affiliated Websites will maintain consistent or increasing levels of traffic
over time, or that the Company would be able to replace any departed 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 market its
networks successfully 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 attract additional advertisers and ad agencies
successfully. The loss of one or more of the advertisers or ad agencies that
represent a material portion of the revenues generated on the Company's
networks 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 has utilized the AdForce advertisement management service from
IMGIS, Inc. to deliver its advertisements to the 24/7 Network. 24/7 Media is in
the process of replacing the AdForce service with the Company's Adfinity[TM]
system, which is expected to become the technology platform for all of 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.
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In order to complete the transition to Adfinity[TM], the Company must, among
other things, ensure scalability of the Adfinity[TM] system, assimilate the
Company's current sales and reporting functions into the Adfinity[TM] model and
work with certain existing Affiliated Websites to re-tag such Websites.
Although the Company expects that the transition to Adfinity[TM] will be
completed in the third quarter of 1998, there can be no assurance that the
Company will be able to complete the integration of 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 deliver advertisements effectively 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 integrate the
Adfinity[TM] technology successfully on a timely basis, or if the Adfinity[TM]
technology does not enable the Company to target advertisements effectively
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 may be
dependent upon AdForce to deliver ads to the 24/7 Network. If the AdForce
service becomes unavailable or if AdForce fails to serve the Company's
advertisements effectively, 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 develop
further 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 with large Web publishers and Web search engine
companies, such as America Online, Excite, GeoCities, Infoseek, Lycos and Yahoo,
for Internet advertising revenues. Further, the Company's networks compete with
a variety of Internet advertising networks, including DoubleClick and Link
Exchange. 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 that 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.
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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 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.
See "Business--Facilities and Systems." 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
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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 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 115 employees as of
June 30, 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 or invest in companies or assets
that will enhance 24/7 Media's revenue growth, operations and profitability.
Any future acquisition or investment 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 has entered into a number of international alliances. These
alliances involve certain inherent risks, such as unexpected changes in
regulatory requirements, potentially adverse tax consequences, general export
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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, 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. Although the
Company has not experienced any material impact from the difficulty in hiring
and retaining qualified employees, there can be no assurance that the Company
will not be materially impacted in the future from such hiring difficulties.
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
24/7 Media relies upon patent, trademark, copyright and trade secret laws
to protect its intellectual property. The Company has pursued the protection of
its trademarks by applying to register them (including the trademarks of
Adfinity[TM] and dbCommerce[TM] technologies) in the United States and
internationally (based on anticipated use). The Company is the owner of a
registration for the 24/7 Media trademark 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 or invalidated through administrative process of
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. Such 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, 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.
Privacy Concerns
The Company's Adfinity[TM] technology collects and utilizes data derived
from user activity on the Company's networks and the Websites of independent
Web publishers using the Company's services. There can be no assurance
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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
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
telephone 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 will
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 51.8% 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
12
<PAGE>
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; Registration Rights
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 15,106,124 shares of Common Stock outstanding after the
offering. The 3,250,000 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 11,856,124 shares of Common Stock held by
existing stockholders are "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 a majority of its stockholders have agreed
that they will not sell, directly or indirectly, any Common Stock without the
prior consent of the representatives of the Underwriters for a period of 180
days from the date of this Prospectus. See "Underwriting." As a result of
contractual restrictions and the provisions of Rules 144, 144(k) and 701,
additional shares will be available for sale in the public market as follows:
(i) 64,085 shares will be eligible for immediate sale on the date of this
Prospectus, (ii) 11,632,572 shares will be eligible for sale upon the
expiration of lock-up agreements 180 days after the date of this Prospectus and
(iii) 159,467 shares will be eligible for sale upon the later of 90 days after
the date of this Prospectus or the expiration of their respective one-year
holding periods. In addition, there are outstanding options to purchase
1,036,414 shares of Common Stock, 62,400 of which will, upon exercise, be
eligible for sale in the public market between 90 days and 180 days after the
date of this Prospectus and an additional 117,767 of which will be eligible for
sale in the public market 180 days after the date of this Prospectus. There are
also outstanding warrants to purchase 3,988,040 shares of Common Stock, none of
which will, upon exercise, be eligible for sale in the public market until
expiration of lock-up agreements 180 days after the date of this Prospectus. In
addition, certain stockholders, representing approximately 9,413,381 shares of
Common Stock, 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 that have affected the market price for many companies in
industries similar or related to that of the Company and that 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."
13
<PAGE>
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.
USE OF PROCEEDS
The net proceeds to 24/7 Media from the sale of the 3,250,000 shares of
Common Stock sold pursuant to the Offering are estimated to be approximately
$38,092,500 ($43,986,375 if the Underwriter's over-allotment option is
exercised in full), assuming an initial offering price of $13.00 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 of the Company.
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 Acquisitions, the Preferred Stock Conversion, the Senior Note Conversion
and the Stock Split and (iii) on a pro forma as adjusted basis to give effect
to the sale by the Company of 3,250,000 shares of Common Stock offered hereby
at an assumed offering price of $13.00 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 (1) ...................................... $ 479,408 $ -- $ --
Mandatorily redeemable convertible preferred stock Series
A and Series B; $.01 par value; 30,000,000 shares
authorized; 10,060,002 shares outstanding .............. 10,093,502 -- --
Stockholders' equity (1)(2):
Common stock, $.01 par value; 100,000,000 shares
authorized; 6,926,550 shares issued and outstanding
actual; 11,778,456 shares issued and outstanding on a
pro forma basis and 15,028,456 shares issued and
outstanding on a pro forma as adjusted basis ......... 69,267 117,785 150,285
Additional paid-in-capital .............................. 19,919,169 41,659,576 79,687,076
Deferred stock compensation ............................. (87,500) (87,500) (87,500)
Accumulated deficit ..................................... (15,636,756) (21,114,056) (21,114,056)
------------- ------------- -------------
Total stockholders' equity ............................ 4,264,180 20,575,805 58,635,805
------------- ------------- -------------
Total capitalization ................................. $ 14,837,090 $ 20,575,805 $ 58,635,805
============= ============= =============
</TABLE>
- ----------------
(1) All long-term debt was converted in July 1998. The long-term debt, with a
stated value of $500,000 and accrued interest thereon, was converted into
77,450 shares of Common Stock.
(2) Excludes approximately 1,036,414 shares of Common Stock issuable upon
exercise of stock options outstanding at July 17, 1998 granted under the
Company's 1998 Stock Incentive Plan (of which 176,751 are vested and
exercisable at July 17, 1998) and approximately 1,891,871 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 $3.45 per share. Also excludes approximately 3,988,040
shares of Common Stock issuable upon exercise of outstanding warrants at
July 17, 1998. Such warrants have a weighted average exercise price of
$8.34 per share.
15
<PAGE>
DILUTION
As of March 31, 1998, the pro forma net tangible book value of 24/7 Media
was $5,567,751 in the aggregate, or $0.47 per share. Pro forma net tangible
book value 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 Acquisitions, the Senior Note Conversion, 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 per share after the Offering. After giving
effect to the sale of shares of Common Stock (at an assumed initial public
offering price of $13.00 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 $43,660,251 in the aggregate,
or $2.91 per share. This represents an immediate increase in pro forma net
tangible book value of $2.44 per share to existing shareholders and an
immediate dilution in pro forma net tangible book value of $10.09 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> <C>
Assumed initial public offering price per share .............................. $ 13.00
Pro forma net tangible book value per share before the Offering ............. 0.47
Pro forma increase in net tangible book value per share attributable
to new investors .......................................................... 2.44
Pro forma net tangible book value per share after the Offering ............... 2.91
--------
Pro forma dilution in net tangible book value per share to new investors ..... $ 10.09
</TABLE>
The following table summarizes, on a pro forma basis as of March 31, 1998,
after giving effect to the Acquisitions, the Preferred Stock Conversion, the
Senior Note 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 ......... 11,778,456 78.4% $20,783,983 33.0% $ 1.76
New investors ................. 3,250,000 21.6 42,250,000 67.0 13.00
---------- ----- ----------- -----
Total ......................... 15,028,456 100.0% $63,033,983 100.0% 4.19
</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 and the Acquisitions, as if each had occurred on January 1, 1997 (or
inception, if later). The pro forma consolidated balance sheet data reflect the
Acquisitions as if they occurred on March 31, 1998, the Preferred Stock
Conversion, and the Senior Note Conversion, each of which will take place 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
Year
Ended
Dec. 31,
1997
----------------
<S> <C>
Consolidated Statement of Operations Data:
Revenues:
Advertising .................................. $ 3,632,793
Consulting and license fees .................. 1,746,896
--------------
Total revenues .............................. 5,379,689
Cost of revenues .............................. 3,309,676
--------------
Gross profit 2,070,013
Operating expenses:
Sales and marketing .......................... 5,070,513
General and administrative ................... 5,385,460
Product development .......................... 1,745,745
Other expenses (1) ........................... 989,099
Amortization of goodwill (2) ................. 5,670,689
--------------
Total operating expenses .................... 18,861,506
--------------
Operating loss ............................... (16,791,493)
Interest (expense) income:
Interest income ............................ 29,412
Interest expense ........................... (125,017)
--------------
Total interest (expense) income .............. (95,605)
Cumulative dividends on mandatorily
redeemable convertible preferred stock ...... (134,000)
Net loss attributable to common
stockholders ................................ $ (17,021,098)
==============
Pro forma:
Basic net loss
per share (6) ............................... (3.81)
Shares outstanding (6) ...................... 4,443,053
<CAPTION>
Pro Forma
Three Months Ended
--------------------------------------------------------------------------------
March 31, June 30, Sept. 30, Dec. 31, March 31,
1997 1997 1997 1997 1998
--------------- --------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Consolidated Statement of Operations Data:
Revenues:
Advertising .................................. $ 414,983 $ 591,722 $ 806,543 $ 1,819,545 $ 2,347,307
Consulting and license fees .................. 805,245 639,588 244,890 57,173 88,362
------------- ------------- ------------- ------------- -------------
Total revenues .............................. 1,220,228 1,231,310 1,051,433 1,876,718 2,435,669
Cost of revenues .............................. 478,965 604,715 904,284 1,321,712 1,892,731
------------- ------------- ------------- ------------- -------------
Gross profit 741,263 626,595 147,149 555,006 542,938
Operating expenses:
Sales and marketing .......................... 983,756 1,474,497 1,583,320 1,028,940 1,300,636
General and administrative ................... 1,185,545 1,444,037 1,555,818 1,200,060 1,888,876
Product development .......................... 469,309 542,683 521,708 212,045 66,738
Other expenses (1) ........................... -- 123,843 865,256 -- --
Amortization of goodwill (2) ................. 1,250,690 1,473,333 1,473,333 1,473,333 1,698,757
------------- ------------- ------------- ------------- -------------
Total operating expenses .................... 3,889,300 5,058,393 5,999,435 3,914,378 4,955,007
------------- ------------- ------------- ------------- -------------
Operating loss ............................... (3,148,037) (4,431,798) (5,852,286) (3,359,372) (4,412,069)
Interest (expense) income:
Interest income ............................ 16,070 6,939 3,954 2,449 25,504
Interest expense ........................... (1,928) (8,239) (34,556) (80,294) (204,196)
------------- ------------- ------------- ------------- -------------
Total interest (expense) income .............. 14,142 (1,300) (30,602) (77,845) (178,692)
Cumulative dividends on mandatorily
redeemable convertible preferred stock ...... (33,500) (33,500) (33,500) (33,500) (33,500)
Net loss attributable to common
stockholders ................................ $ (3,167,395) $ (4,466,598) $ (5,916,388) $ (3,470,717) $ (4,624,261)
============= ============= ============= ============= =============
Pro forma:
Basic net loss
per share (6) ............................... (.84) (.96) (1.27) (.74) (.73)
Shares outstanding (6) ...................... 3,786,202 4,652,006 4,652,006 4,681,998 6,342,350
</TABLE>
<TABLE>
<CAPTION>
As of
March 31, 1998
---------------
<S> <C>
Consolidated Balance Sheet Data:
Cash and cash equivalents ....................... $ 6,473,103
Working capital ................................. 4,767,597
Goodwill, net ................................... 14,992,403
Total assets .................................... 24,946,615
Long-term debt .................................. --
Mandatorily redeemable convertible preferred stock --
Total stockholders' equity ...................... 20,575,805
</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.
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.
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 F to the Company's Pro Forma Consolidated Financial Information
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) 581,068 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) 1,121,603 6,711,336 6,702,591
--------- ------------ ------------ ------------
Operating loss .................................. (35,771) (1,168,144) (6,761,944) (5,209,362)
Interest (expense) income, net .................. -- -- (33,731) (96,466)
--------- ------------ ------------ ------------
Net loss ........................................ (35,771) (1,168,144) (6,795,675) (5,305,828)
Cumulative dividends on mandatorily
convertible preferred stock .................... -- -- -- --
Net loss attributable to common stockholders .... $ (35,771) $ (1,168,144) $ (6,795,675) $ (5,305,828)
========= ============ ============ ============
Basic net loss per share (4) .................... $ (.14) $ (2.78) $ (6.48) $ (4.88)
--------- ------------ ------------ ------------
Shares outstanding (4) .......................... 250,000 420,908 1,049,432 1,086,614
--------- ------------ ------------ ------------
<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 1,288,012
Product development ............................ 399,523 --
Other expenses (2) ............................. -- --
Amortization of goodwill (3) ................... -- 335,355
---------- ------------
Total operating expenses ...................... 1,532,609 2,276,827
---------- ------------
Operating loss .................................. (798,059) (2,130,580)
Interest (expense) income, net .................. 13,682 (167,258)
---------- ------------
Net loss ........................................ (784,377) (2,297,838)
Cumulative dividends on mandatorily
convertible preferred stock .................... -- (33,500)
Net loss attributable to common stockholders .... $ (784,377) $ (2,331,338)
========== ============
Basic net loss per share (4) .................... $ (.73) $ (.76)
---------- ------------
Shares outstanding (4) .......................... 1,079,116 3,055,432
---------- ------------
</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 $ 6,473,103 $44,565,603
Working capital (deficit) ........................ 6,317,136 4,767,597 42,860,097
Goodwill, net .................................... 7,870,174 14,992,403 14,992,403
-----------
Total assets ..................................... 18,201,993 24,946,615 63,039,115
Long-term debt ................................... 479,408 -- --
Mandatorily redeemable convertible preferred stock 10,093,502 -- --
Total stockholders' equity (deficit) ............. 4,264,180 20,575,805 58,668,305
</TABLE>
- ----------------
(1) The Company 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
Acquisitions of Intelligent Interactions and CliqNow!, each of which
occurred after March 31, 1998, as if such Acquisitions occurred on March 31,
1998, (ii) an increase in accumulated deficit in connection with Intelligent
Interactions' write-off of acquired in-process technology of $5,477,300,
(iii) the conversion of all outstanding shares of mandatorily redeemable
convertible preferred stock into 3,825,215 shares of Common Stock and (iv)
the conversion of senior convertible notes payable into 77,450 shares of
Common Stock prior to the closing of this Offering.
(6) Adjusted to reflect the sale of 3,250,000 shares of Common Stock by the
Company at the assumed initial public offering price of $13.00 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 enables both advertisers and Web publishers to capitalize on
the many opportunities presented by Internet advertising, direct marketing and
electronic commerce. In particular, 24/7 Media: (i) operates the 24/7 Network,
a network of over 85 high profile Affiliated Websites to which the Company
delivered an aggregate of over 335 million advertisements in May 1998; (ii)
operates the CliqNow! network, a network of over 75 medium to large-sized
Affiliated Websites to which an aggregate of over 45 million advertisements
were delivered in May 1998; (iii) operates the ContentZone, a network of over
2,000 small to medium-sized Affiliated Websites to which the Company delivered
an aggregate of over 40 million advertisements in May 1998; (iv) licenses its
Adfinity[TM] advertising management system to independent Websites to manage
and serve high-volume advertising and direct marketing campaigns; and (v)
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 acquisitions 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. The acquisition of CliqNow! added a network of over 75
medium to large-sized Websites to the Company's diverse portfolio of Affiliated
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's products and services include (i) its comprehensive
advertising solutions for Internet advertisers, direct marketers and Affiliated
Websites and (ii) the licensing of its Adfinity[TM] ad serving technology and
dbCommerce[TM] software, which are marketed to third parties. For the three
months ended March 31, 1998, pro forma advertising revenue and pro forma
consulting and license fees accounted for 96.4% and 3.6% of total pro forma
revenues, respectively. 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 Company generates
substantially all of its revenues by delivering advertisements and promotions
to Affiliated Websites on its networks. Advertisements delivered by the Company
are typically sold pursuant to purchase order agreements which are short-term
in nature or subject to cancellation.
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). The Company has recently started to sell
sponsorship advertising, which involves a greater degree of coordination
19
<PAGE>
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 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 68%, respectively, of the 24/7 Network's pro forma
advertising revenue. The top ten Websites for the year ended December 31, 1997
included AT&T WorldNet Service, Reuters, USA.NET, Columbia House, Comedy
Central, Reuters-Moneynet, Maps on Us, Universal Media, FlashNet Communications
and FoxNews Internet. For the three months ended March 31, 1998, the top ten
Websites included AT&T WorldNet Service, Netscape Communications, Reuters,
Comedy Central, Maps on Us, Reuters-Moneynet, Universal Media, Encompass, Inc.,
Columbia House and Fortune City Ltd. The Company has lost, and may from time to
time lose, one or more significant Affiliated Websites. 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 Acquisitions, 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 and
Acquisitions 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. For reporting purposes (i) amortization of
goodwill will be recognized over a two year period from the respective dates of
the Merger and the Acquisitions, and (ii) a write-off of approximately $5.5
million related to the Intelligent Interactions acquisition will be recognized
in the second quarter of 1998, the 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, Intelligent Interactions and
CliqNow!. 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
Year
Ended
Dec. 31,
1997
----------------
<S> <C>
Consolidated Statement
of Operations Data:
Revenues:
Advertising .................... $ 3,632,793
Consulting and license fees 1,746,896
------------
Total revenues ................ 5,379,689
Cost of revenues ................ 3,309,676
------------
Gross profit 2,070,013
Operating expenses:
Sales and marketing ............ 5,070,513
General and administrative ..... 5,385,460
Product development ............ 1,745,745
Other expenses ................. 989,099
Amortization of goodwill ....... 5,670,689
------------
Total operating
expenses .................... 18,861,506
------------
Operating loss .................. (16,791,493)
Interest (expense) income ....... (95,605)
------------
Net loss ........................ ($ 16,887,098)
============
<CAPTION>
Pro Forma
Three Months Ended
--------------------------------------------------------------------------------
March 31, June 30, Sept. 30, Dec. 31, March 31,
1997 1997 1997 1997 1998
--------------- --------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Consolidated Statement
of Operations Data:
Revenues:
Advertising .................... $ 414,983 $ 591,722 $ 806,543 $ 1,819,545 $ 2,347,307
Consulting and license fees 805,245 639,588 244,890 57,173 88,362
----------- ----------- ----------- ----------- -----------
Total revenues ................ 1,220,228 1,231,310 1,051,433 1,876,718 2,435,669
Cost of revenues ................ 478,965 604,715 904,284 1,321,712 1,892,731
----------- ----------- ----------- ----------- -----------
Gross profit 741,263 626,595 147,149 555,006 542,938
Operating expenses:
Sales and marketing ............ 983,756 1,474,497 1,583,320 1,028,940 1,300,636
General and administrative ..... 1,185,545 1,444,037 1,555,818 1,200,060 1,888,876
Product development ............ 469,309 542,683 521,708 212,045 66,738
Other expenses ................. -- 123,843 865,256 -- --
Amortization of goodwill ....... 1,250,690 1,473,333 1,473,333 1,473,333 1,698,757
----------- ----------- ----------- ----------- -----------
Total operating
expenses .................... 3,889,300 5,058,393 5,999,435 3,914,378 4,955,007
----------- ----------- ----------- ----------- -----------
Operating loss .................. (3,148,037) (4,431,798) (5,852,286) (3,359,372) (4,412,069)
Interest (expense) income ....... 14,142 (1,300) (30,602) (77,845) (178,692)
----------- ----------- ----------- ----------- -----------
Net loss ........................ ($ 3,133,895) ($ 4,433,098) ($ 5,882,888) ($ 3,437,217) ($ 4,590,761)
=========== =========== =========== =========== ===========
</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 .................... 67.5% 34.0% 48.1% 76.7% 97.0% 96.4%
Consulting and license fees 32.5 66.0 51.9 23.3 3.0 3.6
------ ------ ------ ------ ------ ------
Total revenues ................ 100.0 100.0 100.0 100.0 100.0 100.0
Cost of revenues ................ 61.5 39.3 49.1 86.0 70.4 77.7
------ ------ ------ ------ ------ ------
Gross profit .................. 38.5 60.7 50.9 14.0 29.6 22.3
Operating expenses:
Sales and marketing ............ 94.3 80.6 119.8 150.6 54.8 53.4
General and administrative...... 100.1 97.2 117.3 148.0 63.9 77.6
Product development ............ 32.5 38.5 44.1 49.6 11.3 2.7
Other expenses ................. 18.4 -- 10.1 82.3 -- --
Amortization of goodwill ....... 105.4 102.5 119.7 140.1 78.5 69.7
------ ------ ------ ------ ------ ------
Total operating expenses 350.6 318.7 410.8 570.6 208.6 203.4
------ ------ ------ ------ ------ ------
Operating loss .................. (312.1) (258.0) (359.9) (556.6) (179.0) (181.1)
Interest (expense) income ....... ( 1.8) 1.2 ( 0.1) ( 2.9) ( 4.1) ( 7.3)
------ ------ ------ ------ ------ ------
Net loss ........................ (313.9)% (256.8)% (360.0)% (559.5)% (183.2)% (188.5)%
====== ====== ====== ====== ====== ======
</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 and the CliqNow!
network, the number of advertisers utilizing the Company's advertising
solutions and the number of advertisements delivered to the 24/7 Network and
the CliqNow! network. Such increase was partially offset by a decline in pro
forma cash advertising revenue generated by the ContentZone through the first
three quarters of 1997. The Company expects the 24/7 Network and the CliqNow!
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. Pro forma barter and prize revenue decreased sequentially from
approximately 15.4% of total pro forma advertising revenue for the first
quarter of 1997 to 0.0% in the first quarter of 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 1997, the
Company derived pro forma 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 pro forma 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 and the CliqNow! network,
which typically pay 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 and the
CliqNow! network, as well as increased costs relating to ad serving capacity
for the ContentZone for the first three quarters of 1997; and (iv) the
temporary increase, which began late in the first quarter of 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 pro forma sales and marketing expenses, general and administrative
expenses and product development expenses increased over the first three
quarters of 1997 as Petry, CliqNow! 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 1997. Beginning in the
first quarter of 1998, all of such expense categories increased in anticipation
of the Merger and the Acquisitions 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 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.
22
<PAGE>
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 declined in the
fourth quarter of 1997 due to the consolidation of the operations of
Interactive Imaginations, and such expenses were suspended in the first quarter
of 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. Pro forma other expenses in 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 1997, in connection with the
consolidation of Interactive Imaginations, the Company recorded a net write-off
of $756,795 of property and equipment. The Company recorded pro forma goodwill
amortization expense beginning in the first quarter of 1997, which represents
the excess purchase price over the fair value of net liabilities of the
acquired businesses of Petry, Advercomm, CliqNow! and Intelligent Interactions.
Historical Results of Operations
Years Ended December 31, 1997, 1996 and 1995
Interactive Imaginations (24/7 Media's then parent) was merged with and
into the Company on April 9, 1998 in a manner similar to a
pooling-of-interests. See "Prospectus Summary--Formation of the Company." As a
result, 24/7 Media's historical results of operations for the fiscal years
ended December 31, 1997, 1996 and 1995 represent the results of Interactive
Imaginations and do not reflect any of the operating results of Petry,
Advercomm, CliqNow! or Intelligent Interactions, or the pro forma adjusting
entries resulting from the merger of these entities with and into the Company
in 1998. 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, under which SegaSoft licensed certain software from Interactive
Imaginations. The Company does not expect to realize meaningful revenues from
the SegaSoft agreement in the future. Two customers (SegaSoft and Microsoft
Corporation) accounted for $326,707 and $157,019 of Interactive Imaginations'
total cash advertising revenues (excluding barter), respectively, during 1997,
two customers (SegaSoft and Microsoft Corporation) accounted for $211,936 and
$178,191 of total cash advertising revenues (excluding barter), respectively,
during 1996, and four customers (Marion Foundation, AT&T, Coors and 20th
Century) accounted for $50,000, $32,000, $30,000 and $20,000 of total cash
advertising revenues (excluding barter), 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 $1,121,603 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.
23
<PAGE>
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 25, 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.
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 $2,276,827 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 has 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 $852,000. The
operating lease, as amended, requires quarterly payments of $46,000 and expires
on November 30, 1998. Rent expense relating to this operating lease was
$42,641, $162,862, $611,637 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
and July 7, 1998, the Company entered into two operating leases for computer
equipment and software related to its Adfinity[TM] system, with a combined fair
market value of $849,488. The operating lease, as amended, requires monthly
payments and expires in November, 2000. Total rent expense for currently
outstanding leases is expected to be approximately $90,500 per quarter.
Furthermore, the Company expects to incur approximately $1 million in leasehold
improvements prior to moving into the additional leased office space at the
Company's headquarters in New York City. Further, in the aggregate, the
Company's annual lease expense for this office space will be approximately $1.2
million through 2003. See "Business--Facilities and Systems."
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.
24
<PAGE>
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
36,000 shares of Common Stock with an average exercise price of $2.81 per
share. On February 25, 1998, the Company issued Series A Preferred Stock with
detachable warrants at an average exercise price of $9.52.
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 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 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.
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<PAGE>
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including derivative
instruments embedded in other contracts, and for hedging activities. SFAS No.
133 is effective for all fiscal quarters of fiscal years beginning after June
15, 1999. This statement is not expected to affect the Company as the Company
currently does not have any derivative instruments or hedging activities.
26
<PAGE>
BUSINESS
Overview
24/7 Media, an Internet advertising and direct marketing firm, enables
both advertisers and Web publishers to capitalize on the many opportunities
presented by Internet advertising, direct marketing and electronic commerce.
The Company generates revenue by selling advertisements and promotions for its
Affiliated Websites. In particular, 24/7 Media: (i) operates the 24/7 Network,
a network of over 85 high profile Affiliated Websites to which the Company
delivered an aggregate of over 335 million advertisements in May 1998; (ii)
operates the CliqNow! network of over 75 medium to large-sized Affiliated
Websites to which an aggregate of over 45 million advertisements were delivered
in May 1998; (iii) operates the ContentZone, a network of over 2,000 small to
medium-sized Affiliated Websites to which the Company delivered an aggregate of
over 40 million advertisements in May 1998; (iv) licenses its Adfinity[TM]
advertising management system to independent Websites to manage and serve
high-volume Internet advertising and direct marketing campaigns; and (v)
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. There can be no assurance that such
rapid industry growth rates will be achieved or that the Company will
experience similar rates of growth. 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 Company delivered an aggregate of 420
million impressions in May 1998 and, according to a study prepared for the
Company by Media Metrix, the Company's networks reached 35.7%, or more than one
third, of all Internet users. The Company believes that this reach figure is
among the highest in the Internet advertising industry. The Company plans to
aggressively recruit Websites for its networks in order to (i) further extend
the Company's reach (ii) provide advertisers with a broad and diverse base of
online content and page views and (iii) 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
deliver highly targeted messages efficiently. 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 provides Web publishers access to media buyers at large ad
agencies and enables them 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 addition of the Adfinity[TM] and dbCommerce[TM] technologies in
connection with the acquisition of Intelligent Interactions in April 1998
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 seek to
maximize the value of ad campaigns for both advertisers and Affiliated
Websites.
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Formation of the Company
The Company is the result of several recent mergers and acquisitions, and
the combination of these predecessor entities has resulted in an integrated
Internet advertising company with both media sales and technology expertise.
The Company was incorporated in Delaware on January 23, 1998 to consolidate
three Internet advertising companies: (i) Petry, a Delaware corporation that
sold advertising for Websites organized in a network, (ii) Advercomm, a
newly-formed Delaware corporation that brought a number of high profile
Websites to the 24/7 Network, and (iii) Interactive Imaginations, a New York
corporation that operated the ContentZone and Riddler.com. Subsequently, the
Company acquired both Intelligent Interactions, a Delaware corporation that
develops and licenses ad serving technology and e-commerce software, and
CliqNow!, a network of over 75 medium to large-sized Websites.
The Company was formed as a wholly owned subsidiary of Interactive
Imaginations. On February 25, 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 third party
investors including an existing investor of Interactive Imaginations, the
"Initial Merger"). On April 9, 1998, Interactive Imaginations (24/7 Media's
then parent) was merged with and into the Company in a manner similar to a
pooling-of-interests (together with the Initial Merger, the "Merger"). As a
result, 24/7 Media's historical results of operations for all periods prior to
the Initial Merger represent those of Interactive Imaginations. 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! (collectively, the "Acquisitions"). See "Prospectus Summary--Formation
of the Company."
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; a 1997 U.S. Department of Commerce study estimated that
overall traffic on the Internet is doubling every 100 days. According to
Network Solutions, the number of paid active 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 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
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<PAGE>
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 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. Industry sources estimate that, during August
1997, the top nine portals (which represented 15% of total page views)
accounted for 59% 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.
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The 24/7 Media Solution
The Company operates the 24/7 Network, the CliqNow! network and the
ContentZone, each of 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 electronic commerce.
The 24/7 Network is comprised of over 85 high profile Websites; the CliqNow!
network is comprised of over 75 medium to large-sized 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. The Company delivered an
aggregate of 420 million impressions during May 1998 and, according to a study
prepared for the Company by Media Metrix, the Company's networks reached 35.7%,
or more than one third, of all Internet users. 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 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 provide superior turnkey advertising
solutions for Web publishers and maximize the effectiveness of advertisers'
Internet advertising campaigns. The Company intends to reach its objective by
implementing the following interconnected strategies:
Expand the Company's Networks of Websites. The Company plans to recruit
Websites aggressively for its networks 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 the CliqNow! network, as well as
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
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order to maximize the value of ad campaigns to benefit both advertisers and its
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 its Affiliated Websites. 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 seeks to increase click-thru
rates 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
Affiliated Websites' ad inventory by seeking to sell 100% of inventory through
the sale of a combination of advertisements sold on a CPM 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 its Affiliated Websites and advertisers. For example, the
Company employs techniques of benchmarking, statistical analysis and continuous
process improvement to provide its Affiliated Websites 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
The Company's products and services include (i) its comprehensive Internet
advertising solutions for Internet advertisers, direct marketers and Affiliated
Websites and (ii) the licensing of its Adfinity[TM] ad serving technology and
its dbCommerce[TM] software. For the three months ended March 31, 1998, pro
forma advertising revenue and pro forma consulting and license fees accounted
for 96.4% and 3.6% of total pro forma revenues, respectively.
Internet Advertising Networks
The Company operates the 24/7 Network, the CliqNow! network and the
ContentZone, each of which is a collection 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 85
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 68% and 66% of the 24/7 Network's pro forma
advertising revenue in such periods, respectively. During the month of May
1998, the Company delivered over 335 million advertisements to the 24/7
Network. The Websites on the 24/7 Network include, among others, the following
Websites:
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<TABLE>
<S> <C>
o AT&T Worldnet o FreeEdgar
o Accuweather o Ladies' Home Journal
o All Apartments o MapQuest
o Better Homes & Gardens o Match.com
o Blizzard o New York Magazine
o Channel One o Readers' Digest
o Comedy Central o Reuters' MoneyNet
o Currency Site o Reuters' Newswire
o Delphi o Soap Opera Digest
o Doonesbury o Spinner.com
o Earthlink o Talk City
o Encompass o Yacht World
</TABLE>
CliqNow! Network. The recent acquisition of CliqNow! furnished the Company
with a network of over 75 medium to large-sized Websites. Through the CliqNow!
network, the Company provides advertisement sales and delivery services and
related functions to the Affiliated Websites on the CliqNow! network. Over 45
million ad impressions were delivered to Affiliated Websites on the CliqNow!
network in May 1998. The Websites on the CliqNow! network include, among
others, the following Websites:
<TABLE>
<S> <C>
o The Associated Press--The Wire o Wall Street Sports
o fastWeb o Web Site Garage
o Horticulture Magazine o The Womens' Forum
o Thomson Financial Services
</TABLE>
ContentZone. The ContentZone is a network of over 2,000 small to
medium-sized Websites to which the Company provides advertisement sales and
delivery services and related functions. 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 May 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>
o Automotive o Music
o Business/Financial o News/Information
o Community/Directory o Real Estate
o Entertainment o Sports
o Games o Technology
o Health o Teen/College
o International o Travel/Dining
o ISP/Portal o Women/Family
</TABLE>
The CliqNow! network is organized into the following topical channels:
<TABLE>
<S> <C>
o College o Kids
o Financial o Sports
o Golf o Tech
o Home o Travel
</TABLE>
The Company is presently developing several new channels for its networks
prompted by user and advertiser interests. The Company expects to expand into
additional channels to respond to advertisers' needs. For example, the Company
is working with RealNetworks to create a channel of Websites from its portfolio
that will accept rich media advertising (audio-enhanced banners and streaming
audio-visual ads) in areas where online content utilizes rich media technology.
24/7 Media intends to promote rich media ad placement utilizing RealNetworks
streaming technology on 24/7 Media's networks of Websites, and RealNetworks
intends to promote 24/7 Media's rich media channel to its customers and
advertising agency affiliates.
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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.
The Company offers full service to certain Affiliated Websites on the 24/7
Network and the CliqNow! 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 and the CliqNow! 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 network. For example, an advertiser
who buys an advertisement on the Automotive channel on the 24/7 Network is
guaranteed that such advertisement will run only on the Websites on the 24/7
Network's 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.
Advertisers and ad agencies typically purchase advertising pursuant to written
purchase order agreements that run for a limited time. 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 five months ended May 31, 1998:
Advertising Agencies
<TABLE>
<S> <C>
o Agency.com o i-traffic
o Anderson & Lembke o J. Walter Thompson
o BBDO Interactive o Kirshenbaum Bond & Partners
o Black Dog Design o Left Field
o Catalina Marketing o McCann-Erikson
o CKS/Sitespecific o Media.com
o Dahlin Smith White o Mercury 7
o DMB&B o Modem Media
o Eagle River Interactive o Ogilvy & Mather
o Freeman o Planet U
o Giant Step o Rives Carlberg
o Grey Interactive o Thunderhouse
o Hal Riney o US Interactive
o iballs o Wolverine
o ifrontier o Y&R Wunderman
</TABLE>
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<PAGE>
Advertisers
<TABLE>
<S> <C>
o Amazon.com o Internet Shopping Network
o American Express o Mastercard
o AT&T o Metromail
o Bell Atlantic o Microsoft
o Bloomberg o The Mining Company
o Cardsecure o News Corp
o CDNow o N2K
o Charles Schwab o Pointcast
o Cendant o Procter & Gamble
o Citibank o Sony
o Columbia House o Sandals Resorts
o Compaq o Sprint
o Disney o Standard & Poor's
o eBay o Think New Ideas
o Encyclopedia Britannica o Tower Records
o Ford o US Web
o General Motors o US West
o Hewlett Packard o Visa
o IBM o Web Genesis
o Intel
</TABLE>
Admission to the Networks. Web publishers seeking to join the 24/7 Network
or the CliqNow! 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, and the Company expects to "graduate" ContentZone
members to the 24/7 Network or the CliqNow! 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 in April 1998, and is currently integrating the
Adfinity[TM] ad serving technology into the Company's networks. The Company
expects Adfinity[TM] to serve as the Company's technology platform, delivering
all of the advertisements to its networks. 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, direct marketers and Web publishers to promptly
change advertising messages or images, refine the targeted demographics and
rebroadcast messages.
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dbCommerce[TM] Software
24/7 Media acquired dbCommerce[TM] software in connection with the
acquisition of Intelligent Interactions in April 1998. 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 ad targeting services and 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. Although Adfinity
enables the use of "cookies" in addition to other mechanisms to deliver
targeted advertising, the Company generally does not, and will not in the
future, 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. See "Risk Factors--Privacy Concerns."
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 44 salespeople as of
June 30, 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.
Advertisers typically purchase advertising pursuant to written purchase
order agreements that run for a limited time. The Company believes that the
terms of its purchase order agreements are consistent with industry practice.
In addition to purchase order sales, the Company has recently started to sell
sponsorship advertising, which involves a greater degree of integration among
the Company, the advertiser and the Affiliated Websites.
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.
International
The Company's international strategy consists of entering into strategic
alliances with foreign internet advertising networks. The Company has an
agreement with ClickThrough Interactive ("ClickThrough") whereby ClickThrough
has the exclusive third party right to sell page views on the 24/7 Network when
such pages are
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accessed by Canadian Internet users, and the Company has the exclusive third
party right to sell page views on the ClickThrough network when accessed by
U.S. Internet users. The Company is not obligated to sell such pages to
ClickThrough below a certain CPM floor. The Company has entered into a similar
agreement with China Internet Company, which operates the China.com Website and
is developing an Asian Internet advertising network. The Company is currently
negotiating additional alliances in Europe. The Company does not expect to
realize materially significant revenues from these alliances for at least the
next 6 months.
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 and
intellectual property. Although the Company does not currently have any
patents, it 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 has pursued the protection of its trademarks by
applying to register its trademarks, including the trademarks of Adfinity and
dbCommerce, 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 all of the
Company's trademark registrations or patent applications will be approved or
granted and, if they are granted, that 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 protects
its proprietary rights through the use of confidentiality agreements with
employees, consultants and affiliates. The Company also licenses certain
proprietary rights to third parties. There can be no assurance that such
agreements and licenses 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 or affiliates 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,
GeoCities, Infoseek, Lycos and Yahoo. Further, the Company's
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networks of Websites compete with a variety of Internet advertising networks,
including DoubleClick and Link Exchange. 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 June 30, 1998, the Company employed 117 persons, including 76 in
sales, marketing and customer support, 22 in product development, and 19 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.
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 2003; the Company has exercised an option to lease an
additional 26,000 square feet on two adjacent floors.
The lease with respect to the Company's headquarters runs through 2003 and
provides for total annual rent of approximately $1,200,000 (subject to increase
annually to reflect increases in operating expenses), and covers approximately
39,000 square feet on three floors. The Company also temporarily leases office
space at 120 Broad Street, New York, New York from K2 Design, Inc. for certain
employees associated with the CliqNow! network.
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. 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. The Master Services Agreement with GlobalCenter, Inc.
provides for Internet connectivity services, the lease of certain hardware, the
licensing of certain software, and the lease of secure space to store and
operate such equipment. Services and equipment are delivered by GlobalCenter
pursuant to Service Orders submitted from time to time by the Company. Service
orders currently in place, which expire in May 1999, require monthly payments
of $27,000. GlobalCenter may not increase prices or terminate services during
the pendency of any service order. The Master Services Agreement includes a
"99% Uptime Guarantee" with respect to the services provided. Downtime results
in certain returns of payment and gives rise to a right of termination by the
Company. In the future, the Company may opt to utilize other GlobalCenter
locations in New York and California.
Legal Proceedings
The Company is not a party to any material legal proceedings.
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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 46 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
John F. Barry III 46 Director
Michael P. Paolucci 27 Director
Jack L. Rivkin 57 Director
Arnie Semsky 52 Director
Charles W. Stryker, Ph.D. 51 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.
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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.
John F. Barry III, Director of the Company, is presently the Managing
General Partner of Prospect Street Ventures, a private equity and venture
capital firm, which he joined in 1990. From 1988 to 1989, he was the head of
investment banking at L.F. Rothschild & Co. From 1983 to 1988, he was a
corporate finance specialist at Merrill Lynch and from 1979 to 1983, he was a
securities attorney with Davis Polk & Wardwell. Mr. Barry serves on the boards
of directors of nine information technology companies, including Skyline
Multimedia, Inc. Mr. Barry is also the chairman of Bondnet Trading Systems,
Inc. Mr. Barry received a J.D. degree from Harvard Law School and a B.A. degree
in History from Princeton 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 various small
companies. Mr. Paolucci received a B.A. degree in Economics from Cornell
University.
Jack L. Rivkin, Director of the Company, has been a Senior Vice President
of Travelers Investment Group Inc. since January 1997, where he is responsible
for the management of venture capital and private equity partnerships for
various Travelers insurance companies. He is also a director and member of the
investment committee of Greenwich Street Capital Partners, L.P., a $460 million
merchant banking fund affiliated with Travelers, and an adjunct professor at
Columbia University Business School. From October 1995 to December 1996, he was
a Senior Vice President of the Investment Group of Travelers Group Inc. 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.
Arnie Semsky, Director of the Company, has been the Executive Vice
President, Worldwide Media Director of the BBDO Worldwide unit of Omnicom
Group. Mr. Semsky joined BBDO Worldwide in 1979 as Vice President and Associate
Director of Network Programming and he has served as a member of the board of
directors of BBDO Worldwide since 1991.
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
Joseph T. Apprendi has been Senior Vice President--Sponsorships and
Promotions of the Company since June 1998. From March 1998 to June 1998, Mr.
Apprendi was Executive Vice President of the CliqNow! Sales Group of K2 Design,
Inc. From February 1996 to March 1998, Mr. Apprendi was Senior Vice President
of Media and Promotion for K2 Design, Inc., from September 1995 to February
1996, Mr. Apprendi was an Account Executive with Harrington, Righter, and
Parson, Inc. and from June 1992 to September 1995, Mr. Apprendi was an Account
Executive with MMT Sales, Inc., a national broadcast advertising sales rep
firm. Mr. Apprendi received a B.A. degree in Economics from Oberlin College.
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
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<PAGE>
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 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--Direct Marketing, 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 of Affiliate Relations since
April 1998 from 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.
Scott Paternoster has been Senior Vice President and President of the
CliqNow! division of the Company since June 1998. From February 1996 to June
1998, Mr. Paternoster was Founder and President of the CliqNow! Sales Group of
K2 Design, Inc. and from 1989 to February 1996, Mr. Paternoster was the New
York Sales Manager and an Account Executive at MMT Sales, Inc., a national
broadcast advertising sales rep firm. Mr. Paternoster received a B.S. degree in
Economics and Management from Ithaca College.
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.
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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 Barry, 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, 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 Barry, 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."
Compensation of Directors
Directors do not receive salaries or cash fees for serving as directors
nor do they receive any cash compensation for serving on committees; however,
all members of the Board of Directors who are not employees of or consultants
to the Company ("Non-Employee Directors") are reimbursed for their expenses for
each meeting attended and are eligible to receive stock options pursuant to the
Incentive Plan. Under the Incentive Plan, each existing Non-Employee Director
has been granted a non-qualified option to purchase 18,750 shares of Common
Stock at the fair market value on the date of grant, and each new Non-Employee
Director upon the date of his or her election or appointment will be granted a
non-qualified option to purchase 18,750 shares of Common Stock at the fair
market value on the date of grant. Upon the date of each Annual Meeting of
Stockholders, each Non-Employee Director shall be granted a non-qualified
option to purchase 4,688 shares of Common Stock (or a pro rata portion thereof
if the director did not serve the entire year since the date of the last annual
meeting). All options granted to Non-Employee Directors will vest at the rate
of 25% on each of the first four anniversaries of the date of grant, assuming
the Non-Employee Director is a director on those dates, and all such options
generally will be exercisable for a period of ten years from the date of grant.
Upon a Change of Control (as defined in the Incentive Plan), all unvested
options (which have not yet expired) will automatically become 100% vested.
Directors who are employees of the Company will not be compensated for services
as a director. See "Management--1998 Stock Incentive Plan."
Executive Compensation and Employment Agreements
The Company has entered into employment agreements with its executive
officers and each of its key employees named herein 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
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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 56,250 shares of restricted stock that
vest over three years. In connection with this issuance, the Company is
recognizing compensation expense of $90,000 ratably over the three-year vesting
period. Upon termination by the Company without cause, Mr. Moore is 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 and named key employees of
the Company provide for base salaries between $100,000 and $180,000 and
incentives, based on attainment of corporate goals, between $35,000 and
$180,000. 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 July 20, 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 and consultants to 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
employees and the Company's stockholders, and (ii) to make stock-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 and consultants
to 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.
As of July 17, 1998, the Company has issued and outstanding pursuant to
the Plan stock options to purchase a total of 1,036,414 shares of common stock
at a weighted average price of $3.45. The number of options issued includes
285,661 options assumed from the 1995 stock option plan of Interactive
Imaginations, Inc., as well as 212,804 options assumed in connection with the
acquisition of Intelligent Interactions. David J. Moore, Chief Executive
Officer, has been granted 56,250 restricted shares under the Plan. C. Andrew
Johns, Chief Financial Officer, has been granted options to purchase 62,500
shares at $4.00 per share under the Plan. Michael A. Paolucci, director, has
been granted options to purchase 13,000 shares at $1.72 per share under the
Plan. Each of R. Theodore Ammon, John F. Barry III, Jack L. Rivkin and Arnie
Semsky has been granted options to purchase 18,750 shares at $6.00 per share
under the Plan and Charles W. Stryker has been granted options to purchase
18,750 shares at $4.00 per share under the Plan.
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
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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. All options granted under the Plan expire no
more than ten years from the date of grant.
Available Shares and Other Units. A maximum of 3,000,000 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 187,500 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.
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,
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<PAGE>
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 exercisable in installments, and the exercisability 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.
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.
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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
The Incentive Plan provides for an initial nondiscretionary award of
18,750 options to purchase Common Stock to each non-employee director and
subsequent nondiscretionary awards of 4,688 options to purchase Common Stock on
the date of each Annual Meeting of Stockholders. See "Management--Compensation
of Directors."
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CERTAIN TRANSACTIONS
Formation of the Company
The Company was incorporated in Delaware on January 23, 1998. The Company
was formed as a wholly owned subsidiary of Interactive Imaginations. On
February 25, 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 third party investors
including an existing investor of Interactive Imaginations, the "Initial
Merger"). On April 9, 1998, Interactive Imaginations (24/7 Media's then parent)
was merged with and into the Company in a manner similar to a
pooling-of-interests (together with the Initial Merger, the "Merger"). As a
result, 24/7 Media's historical results of operations for all periods prior to
the Initial Merger represent those of Interactive Imaginations. 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! (collectively, the "Acquisitions"). See "Prospectus Summary--Formation
of the Company."
For clarity of presentation, share numbers and per share prices for the
transactions described below reflect the Preferred Stock Conversion to be
effected at the closing of the Offering and have been adjusted to give effect
to the Stock Split effected on July 20, 1998. 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.
Each of the transactions set forth below was effected on terms no less
favorable to the Company than could be obtained from unaffiliated third
parties.
Investments by the The Travelers Insurance Company prior to the Merger
In November 1996, the Company entered into a Securities Purchase Agreement
with certain investors, including The Travelers Insurance Company, for the sale
and issuance of convertible preferred shares with an initial conversion price
of $11.48, subject to anti-dilution adjustment. Travelers' investment was
approximately $1,000,000 and was converted into 119,613 shares of Common Stock
in the Merger. 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 with initial conversion prices ranging from $1.60 per
share to $11.48 per share and also issued warrants in connection therewith. In
connection with the Merger, these securities were converted into approximately
642,401 shares of Common Stock. 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 Acquisition Corp., and 24/7 Acquisition 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 20,988.74 shares of
Common Stock of the Company, and each share of common stock of Advercomm was
converted into 262.36 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. For each $10,000 invested, the investors received
10,000 shares of Series A Preferred Stock, which is automatically convertible
into common stock at a conversion price of $3.81 upon consummation of the
Offering, and approximately 1,313 Class A Warrants, exercisable into Common
Stock at an exercise price of $7.62 per share, and approximately 1,313 Class B
Warrants, exercisable into Common Stock at an exercise price of $11.42 per
share. The Securities Purchase Agreement also contained other standard terms
and conditions, including covenants, representations and warranties, and mutual
indemnification. Also in connection with the Initial Merger, Interactive
Imaginations entered into a Shareholders' Agreement, dated February 25, 1998,
among The Travelers Insurance Company (an existing investor in Interactive
Imaginations), Prospect Street NYC Discovery Fund, L.P., Big Flower Digital
Services, Inc. and certain individual investors (the "Shareholders'
Agreement"), which included standard terms and conditions and provided these
shareholders with
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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 in its entirety 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 18,750 shares of Common
Stock at an exercise price of $3.81 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 each of 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 625,000 shares of Common Stock at an exercise price of $3.81 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 13,000 shares of Interactive Imaginations common
stock at $1.72 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."
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<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information regarding beneficial ownership
of the Common Stock as of June 30, 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 Prior to Ownership After Ownership After Offering
Offering (1) Offering (2) and Over-Allotment Option (3)
-------------------------- ----------------- ------------------------------
Number
Beneficial Owner of Shares Percentage Percentage Percentage
- ------------------------------ ----------- ------------ ----------------- ------------------------------
<S> <C> <C> <C> <C>
David J. Moore (4) (5) 1,032,258 8.7% 6.8% 6.6%
R. Theodore Ammon (6) 1,750,703 13.8 10.9 10.6
Yale R. Brown (4) (7) 856,759 7.1 5.6 5.4
Jacob I. Friesel (4) (8) 787,078 6.6 5.2 5.0
C. Andrew Johns (4) (9) 9,375 * * *
Garrett P. Cecchini (4) (10) 787,078 6.6 5.2 5.0
Scott E. Cohen (4) 629,662 5.3 4.2 4.0
John F. Barry III (11) 1,750,703 13.8 10.9 10.6
Michael P. Paolucci (12) 886,111 7.0 5.5 5.4
Jack L. Rivkin (13) 2,576,540 20.2 16.1 15.6
Arnie Semsky -- -- -- --
Charles W. Stryker -- -- -- --
Trinity Ventures (14) 720,590 6.0 4.7 4.6
All directors and
executive officers as
a group (10 persons) 9,649,527 62.8% 51.8% 50.6%
</TABLE>
- ----------------
* Represents less than 1% of the outstanding Common Stock.
(1) Applicable percentage ownership is based on 11,856,124 shares of Common
Stock outstanding as of June 30, 1998 (giving effect to full conversion of
the Series A Preferred Stock, Series B Preferred Stock and the Senior
Notes). 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 June 30, 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, 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
487,500 shares is not exercised.
(3) Assumes that the Underwriters' over-allotment option to purchase 487,500
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 1,000,743 shares, Class A warrants to purchase 7,879 shares and
Class B warrants to purchase 7,879 shares. Includes 62,500 unvested shares
of Common Stock issued pursuant to the Stock Incentive Plan and subject to
forfeiture pursuant thereto. Includes shares held by a family trust and
certain other trusts held for the benefit of family members. Mr. Moore's
wife is the trustee of each such trust.
(6) Represents 875,351 shares, Class A warrants to purchase 437,676 shares and
Class B warrants to purchase 437,676 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 636,611 shares, Class A warrants to purchase 87,534 shares,
Class B warrants to purchase 87,534 shares and Class C warrants to purchase
45,080 shares.
(8) Includes 262,360 shares held by a family trust.
(9) Represents Class C warrants to purchase 9,375 shares.
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<PAGE>
(10) Includes 175,000 shares held by a family trust.
(11) Represents 656,513 shares, Class A warrants to purchase 328,257 shares and
Class B warrants to purchase 328,257 shares held by Prospect Street NYC
Discovery Fund, L.P. and 218,838 shares, Class A warrants to purchase
109,419 shares and Class B warrants to purchase 109,419 shares held by
Prospect Street NYC Co-Investment Fund, L.P. Mr. Barry is a director of the
Company and is the Managing General Partner of Prospect Street NYC
Discovery Fund, L.P. Mr. Barry 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 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.
(12) Represents 248,111 shares, Class C warrants to purchase 625,000 shares and
stock options to acquire 13,000 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.
(13) Represents 1,666,829 shares, Class A warrants to purchase 437,676 shares
and Class B warrants to purchase 437,676 shares held by The Travelers
Insurance Company, and 34,359 shares held by The Travelers Indemnity
Company. Mr. Rivkin is a director of the Company and is Senior Vice
President of Travelers Investment Group Inc., an affiliate of The
Travelers Insurance Company and The Travelers Indemnity Company. 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 The Travelers Indemnity
Company. The address of each of these entities is c/o Travelers Group
Inc., 388 Greenwich Street, 36th floor, New York, New York 10013. None of
Travelers Group Inc., The Travelers Insurance Company, The Travelers
Indemnity Company or their respective affiliates has assumed or has any
responsibility for the management, business or operations of the Company,
or for the statements contained in this Prospectus or the registration
statement of which this Prospectus forms a part, other than the limited
information regarding securities ownership contained in this table.
(14) Represents 505,872 shares, Class A warrants to purchase 69,557 shares,
Class B warrants to purchase 69,557 shares and Class C warrants to
purchase 35,822 shares held by Trinity Ventures V, L.P., and 29,559
shares, Class A warrants to purchase 4,064, Class B warrants to purchase
4,064 shares and Class C warrants to purchase 2,093 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.
49
<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 70,000,000 shares
of Common Stock, par value $.01 per share, and 10,000,000 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 15,106,124 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 10,000,000
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 beneficial holders of 7,550,428 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 1,862,953 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 such investors except that The Travelers Insurance Company
may demand three such registrations 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
50
<PAGE>
Securities Act, either for its account or for the account 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
tradable without restriction under the Securities Act immediately upon
effectiveness of such registration. See "Risk Factors--Sales Eligible for
Future Sale; Registration Rights."
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 that 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 that 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 redemptions that are prohibited
by Delaware law. This provision also does not affect the directors'
responsibilities
51
<PAGE>
under any other laws, such as the Federal securities laws or state or Federal
environmental laws. Insofar as the indemnification for liabilities arising
under the Securities Act may be permitted to directors or officers of the
Company, the Company has been informed 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.
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 47,905,836 shares of
Common Stock (not including shares reserved for issuance upon the exercise of
outstanding warrants or reserved under the Incentive Plan) and 10,000,000
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; Registration Rights."
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.
52
<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. See "Risk Factors--Shares Eligible for Future Sale; Registration
Rights."
Upon completion of this Offering, the Company will have outstanding an
aggregate of 15,106,124 shares of Common Stock, assuming no exercise of the
Underwriters' over-allotment option and no exercise of outstanding options. Of
these shares, the 3,250,000 shares sold in this Offering will be freely
tradable 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 11,856,124 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. Holders of
11,632,572 shares of Common Stock, including all of the Company's directors and
officers, have agreed that they will not sell, directly or indirectly, any
Common Stock without the prior consent of the representatives of the
Underwriters for a period of 180 days from the date of this Prospectus. As a
result of these contractual restrictions and the provisions of Rules 144,
144(k) and 701, additional shares will be available for sale in the public
market as follows: (i) 64,085 shares will be eligible for immediate sale on the
date of this Prospectus, (ii) 11,632,572 shares will be eligible for sale upon
expiration of the lock-up agreements 180 days after the date of this Prospectus
and (iii) 159,467 shares will be eligible for sale upon the later of 90 days
after the date of this Prospectus or the expiration of their respective
one-year holding periods. In addition, there are outstanding options to
purchase 1,036,414 shares of Common Stock, 62,400 of which will, upon exercise,
be eligible for sale in the public market between 90 days and 180 days after
the date of this Prospectus and an additional 117,767 of which will, upon
exercise, be eligible for sale in the public market 180 days after the date of
this Prospectus. There are also outstanding warrants to purchase 3,988,040
shares of Common Stock, none of which will, upon exercise, be eligible for sale
in the public market until expiration of lock-up agreements 180 days after the
date of this Prospectus.
Upon completion of this Offering, certain holders 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 tradable 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 151,062 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 deemed not 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, such "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.
53
<PAGE>
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.
54
<PAGE>
UNDERWRITING
Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch"), J.P.
Morgan Securities Inc. and Allen & Company Incorporated are acting as
representatives (the "Representatives") of each of the underwriters named below
(the "Underwriters"). Subject to the terms and conditions set forth in the
Purchase Agreement (the "Purchase Agreement") among the Company and the
Underwriters, the Company has agreed to sell to each of the Underwriters, and
each of the Underwriters, severally and not jointly, has agreed to purchase
from the Company the number of shares of Common Stock set forth opposite its
name below.
<TABLE>
<CAPTION>
Number
Underwriter of Shares
- ----------------------------------------- ----------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith
Incorporated ..........................
J.P. Morgan Securities Inc. ..........
Allen & Company Incorporated .........
Total .................................
==========
</TABLE>
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 being sold pursuant to the Purchase Agreement if any shares of
Common Stock are purchased. Under certain circumstances, under the terms of the
Purchase Agreement, the commitments of the non-defaulting Underwriters may be
increased or the Purchase Agreement may be terminated.
The Representatives 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.
The Company has granted to the Underwriters an option exercisable for 30
days after the date of this Prospectus, to purchase up to an aggregate of an
additional 487,500 shares of Common Stock at the initial public offering price
set forth on the cover of this Prospectus, less the underwriting discount. The
Underwriters may exercise this option solely to cover over-allotments, if any,
made on the sale of the Common Stock offered hereby. To the extent that the
Underwriters exercise this option, each Underwriter will be obligated, subject
to certain conditions, to purchase a number of additional shares of Common
Stock proportionate to such Underwriter's initial amount reflected in the
foregoing table.
At the request of the Company, the Underwriters have reserved up to
325,000 shares of Common Stock for sale at the initial public offering price to
the Company's employees, directors and other persons with relationships with
the Company. 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 agreed, for a period of 180 days after the date of this
Prospectus, subject to certain exceptions, not to directly or indirectly (i)
offer, pledge, sell, contract to sell, sell any option or contract to purchase,
purchase any option or contract to sell, grant any option, right or warrant for
the sale of or otherwise dispose of or transfer any shares of Common Stock or
securities convertible into or exchangeable or exercisable for Common Stock,
whether now owned or thereafter acquired by the person executing the agreement
or with respect to which the person executing the agreement thereafter acquires
the power of disposition, or file any registration statement under the 1933 Act
with respect to any of the foregoing or (ii) enter into any swap or other
agreement or any other agreement that transfers, in whole or in part, directly
or indirectly, the economic consequence of ownership of the Common Stock
whether any such swap or transaction is to be settled by delivery of Common
Stock or other securities, in cash or otherwise, without the prior written
consent of Merrill Lynch on behalf of the Underwriters; provided that the
Company may at any time and from time to time (a) grant options to purchase
shares of Common Stock under the Company's 1998 Stock Incentive Plan and (b)
issue shares of Common Stock upon the exercise of outstanding warrants. See
"Shares Eligible for Future Sale."
55
<PAGE>
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
considered by the Company and the Representatives in determining the initial
public offering price of the Common Stock, in addition to prevailing market
conditions, are 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 operations, the prospects for, and timing of,
future revenues of the Company, the present state of the Company's development,
the percentage interest of the Company being sold as compared to the valuation
for the entire Company 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 has applied for a listing of the Common Stock on the Nasdaq
National Market under the symbol "TFSM."
The Underwriters have advised the Company that they do not expect sales to
accounts over which the Underwriters exercise discretionary authority to exceed
five percent of the total number of shares of Common Stock offered by them.
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.
Until the distribution of the Common Stock is completed, rules of the
Securities and Exchange Commission (the "Commission") may limit the ability of
the Underwriters and certain selling group members to bid for and purchase the
Common Stock. As an exception to these rules, the Representatives are permitted
to engage in certain transactions that stabilize the price of the Common Stock.
Such transactions consist of bids or purchases for the purpose of pegging,
fixing or maintaining the price of the Common Stock.
If the Underwriters create a short position in the Common Stock in
connection with the Offering, i.e., if they sell more shares of Common Stock
than are set forth on the cover page of this Prospectus, the Representatives
may reduce that short position by purchasing Common Stock in the open market.
The Representatives may also elect to reduce any short position by exercising
all or part of the over-allotment option described above.
The Representatives may also impose a penalty bid on certain Underwriters
and selling group members. This means that if the Representatives purchase
shares of Common Stock in the open market to reduce the Underwriters' short
position or to stabilize the price of the Common Stock, it may reclaim the
amount of the selling concession from the Underwriters and selling group
members who sold those shares as part of the Offering.
In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher than
it might be in the absence of such purchases. The imposition of a penalty bid
might also have an effect on the price of the Common Stock to the extent that
it discourages resales of the Common Stock.
Neither the Company nor any of the Underwriters makes any representation
or prediction as to the direction or magnitude of any effect that the
transactions described above may have on the price of the Common Stock. In
addition, neither the Company nor any of the Underwriters makes any
representation that the Representatives will engage in such transactions or
that such transactions, once commenced, will not be discontinued without
notice.
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<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 (i) 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 and (ii)
CliqNow!, a division of K2 Design, Inc., as of December 31, 1997 and for the
fiscal year ended December 31, 1997 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 their 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 has applied for a listing of the Common Stock on the Nasdaq National
Market.
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.
57
<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-26
Pro Forma Consolidated Statements of Operations ................................ F-28
Pro Forma Consolidated Balance Sheet ........................................... F-30
Notes to Pro Forma Consolidated Financial Information .......................... F-31
INTERACTIVE HOLDINGS, LLC (Successor to Petry Interactive, Inc.)
Independent Auditors' Report ................................................... F-32
Balance Sheet .................................................................. F-33
Statements of Operations ....................................................... F-34
Statement of Members' Deficit .................................................. F-35
Statements of Cash Flows ....................................................... F-36
Notes to Financial Statements .................................................. F-37
INTELLIGENT INTERACTIONS CORPORATION
Report of Independent Public Accountants ....................................... F-41
Balance Sheets ................................................................. F-42
Statements of Operations ....................................................... F-43
Statements of Stockholders' Equity ............................................. F-44
Statements of Cash Flows ....................................................... F-45
Notes to Financial Statements .................................................. F-46
CLIQNOW!
Report of Independent Public Accountants ....................................... F-53
Balance Sheet .................................................................. F-54
Statement of Operations and Changes in Parent Company's Investment and Advances F-55
Statement of Cash Flows ........................................................ F-56
Notes to Financial Statements .................................................. F-57
</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, except for note 13,
which is as of July 20, 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 $4,038,722 and $4,538,733 at December 31,
1996 and 1997, respectively ................................. 1,407 1,581 --
Common stock, $.01 par value; 100,000,000 shares
authorized; 1,079,116, 1,148,762 and 6,926,550 shares
issued and outstanding, respectively ........................ 10,791 11,488 69,267
Additional paid-in capital ................................... 9,737,594 10,564,382 19,919,169
Deferred stock compensation .................................. -- -- (87,500)
Accumulated deficit .......................................... (7,999,590) (13,305,418) (15,636,756)
------------ ------------- -------------
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 ................... 581,068 3,010,009 2,622,743 682,581 1,288,012
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 ................. 1,121,603 6,711,336 6,702,591 1,532,609 2,276,827
------------ --------- --------- ---------- ---------
Loss from operations ..................... (1,168,144) (6,761,944) (5,209,362) (798,059) (2,130,580)
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 ................................. (1,168,144) (6,795,675) (5,305,828) (784,377) (2,297,838)
Cumulative dividends on mandatorily
convertible preferred stock .................... -- -- -- -- (33,500)
------------ ---------- ---------- ---------- ----------
Net loss attributable to common
stockholders ................................... $ (1,168,144) (6,795,675) (5,305,828) (784,377) (2,331,338)
Net loss per share--basic ....................... $ (2.78) (6.48) (4.88) (0.73) (0.76)
============ ========== ========== ========== ==========
Weighted average shares outstanding ............. 420,908 1,049,432 1,086,614 1,079,116 3,055,432
============ ========== ========== ========== ==========
</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 Common stock
preferred stock voting Class A
------------------------- ----------------------- --------------------------
Shares Amount Shares Amount Shares Amount
------------- ----------- ------------ ---------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance as of December 31, 1994 ...................... -- $ -- -- $ -- 25,000 $ 250
Issuance of Class B common stock subsequently
converted to Class A ................................ -- -- -- -- 15,677 157
Issuance of Class A common stock, net of $20,512
issuance costs ...................................... -- -- -- -- 32,656 327
Net loss ............................................. -- -- -- -- -- --
------ --------- --------- ------- -------- ---------
Balance as of December 31, 1995 ...................... -- -- -- -- 73,333 734
Issuance of Class A common stock, net of $39,125
issuance costs ...................................... -- -- -- -- 34,371 343
Common stock Class A converted ....................... -- -- 1,077,033 10,770 (107,704) (1,077)
Issuance of common stock to officer .................. -- -- 2,083 21 -- --
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 1,079,116 10,791 -- --
Issuance of preferred stock .......................... 17,422 174 -- -- -- --
Issuance of common stock to officer .................. -- -- 10,462 105 -- --
Issuance of warrants in connection
with senior convertible notes--related parties ...... -- -- -- -- -- --
Senior convertible notes payable--related parties
converted into common stock ......................... -- -- 59,184 592 -- --
Net loss ............................................. -- -- -- -- -- --
------- --------- --------- ------- -------- ---------
Balance as of December 31, 1997 ...................... 158,144 1,581 1,148,762 11,488 -- --
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...... -- -- 4,328,925 43,289 -- --
Issuance of stock to officer ......................... -- -- 56,250 563 -- --
Offering costs in connection with mandatorily
redeemable convertible preferred stock .............. -- -- -- -- -- --
Senior convertible notes payable--related parties
converted into common stock ......................... -- -- 750,586 7,505 -- --
Convertible preferred stock converted into
common stock ........................................ (158,144) (1,581) 542,908 5,429 -- --
Conversion of warrants into common stock ............. -- -- 99,119 993 -- --
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) ............. -- $ -- 6,926,550 $69,267 -- $ --
======== ========= ========= ======= ======== =========
</TABLE>
<TABLE>
<CAPTION>
Stockholders' Equity (Deficit)
---------------------------------------------
Additional Deferred Total
paid-in Accumulated stock stockholders'
capital deficit compensation equity (deficit)
-------------- --------------- -------------- -----------------
<S> <C> <C> <C> <C>
Balance as of December 31, 1994 ...................... 44,750 (35,771) -- 9,229
Issuance of Class B common stock subsequently
converted to Class A ................................ 92,843 -- -- 93,000
Issuance of Class A common stock, net of $20,512
issuance costs ...................................... 1,268,161 -- -- 1,268,488
Net loss ............................................. -- (1,168,144) -- (1,168,144)
---------- ----------- ------- ----------
Balance as of December 31, 1995 ...................... 1,405,754 (1,203,915) -- 202,573
Issuance of Class A common stock, net of $39,125
issuance costs ...................................... 4,485,532 -- -- 4,485,875
Common stock Class A converted ....................... (9,693) -- -- --
Issuance of common stock to officer .................. 37,606 -- -- 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 ...................... 9,737,594 (7,999,590) -- 1,750,202
Issuance of preferred stock .......................... 499,837 -- -- 500,011
Issuance of common stock to officer .................. 31,786 -- -- 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 ......................... 94,165 -- -- 94,757
Net loss ............................................. -- (5,305,828) -- (5,305,828)
---------- ----------- ------- ----------
Balance as of December 31, 1997 ...................... 10,564,382 (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...... 6,882,991 -- -- 6,926,280
Issuance of stock to officer ......................... 89,437 -- (87,500) 2,500
Offering costs in connection with mandatorily
redeemable convertible preferred stock .............. (229,105) -- -- (229,105)
Senior convertible notes payable--related parties
converted into common stock ......................... 2,124,909 -- -- 2,132,414
Convertible preferred stock converted into
common stock ........................................ (3,848) -- -- --
Conversion of warrants into common stock ............. (993) -- -- --
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 .............................. -- (2,297,838) -- (2,297,838)
---------- ----------- ------- ----------
Balance as of March 31, 1998 (unaudited) ............. 19,919,169 (15,636,756) (87,500) 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) (2,297,838)
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 ................................... 8,041 472,740
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 .............. (884,883) 7,670,750
Cash and cash equivalents at beginning of period ............ 1,689,395 93,945
---------- ----------
Cash and cash equivalents at end of period .................. 804,512 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 25, 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 third party investors concurrent with an existing investor
of Interactive Imaginations, the "Initial Merger"). On April 9, 1998,
Interactive Imaginations (24/7 Media's then parent) was merged with and into
the Company in a manner similar to a pooling of interests. As a result, 24/7
Media's historical results of operations for all periods prior to the Initial
Merger represent those of Interactive Imaginations. 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).
Pursuant to the Agreement and Plan of Merger, certain conditions necessary
to cause the merger included the following: the Company was required to cause
(i) the conversion of all of the then outstanding shares of its Convertible
Preferred Stock into common stock, (ii) the conversion of substantially all of
the then outstanding senior convertible notes payable to related parties into
common stock, (iii) substantially all warrants exerciseable for common stock to
be surrendered in exchange for common stock, and (iv) the investment of at
least $10 million in the Company, pursuant to the Securities Purchase
Agreement.
(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!.
In connection with the Initial Merger, no single former shareholder group
obtained more than 50 percent of the outstanding shares of the Company
following the transaction. However, the Company's former common shareholder
interest group received the largest portion of the voting rights in the
combined entity and, therefore, was deemed to be the accounting acquirer in
connection with the Initial Merger.
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
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 25, 1998, the Company acquired all of the outstanding stock of
Petry and Advercomm in separate transactions in exchange for 2,623,591 and
1,705,334 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 fair value of the 4,328,925 aggregate shares of Common
Stock issued in connection with the acquisition of Petry and Advercomm was
estimated to be $1.60 per share, determined primarily by reference to the
common stock conversion price of $1.60 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 supported by an
independent valuation of the Company's Common Stock as of February 25, 1998.
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 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.
(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-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
(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 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
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 terms of the applicable agreement. Expenses from the Company's Licensing
Revenues are primarily payroll costs to deliver, modify and support the
software. These expenses are classified in cost of revenues in the Consolidated
Statements of Operations and were not material.
At December 31, 1997 and March 31, 1998, accounts receivable include
approximately $56,000 and $1,242,700, respectively, of unbilled receivables,
all of which have been subsequently billed.
(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 the estimated fair market value
of the prizes received. 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.
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.
The Company accounts for non-employee stock-based awards in which goods or
services are the consideration received for the equity instruments issued based
on the fair value of the consideration received or the fair value of the equity
instruments issued, whichever is more reliably measurable.
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
(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 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 because of the short term maturity of these
instruments. 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.
The fair value of the Senior Convertible Notes Payable was determined
based on an imputed market rate of interest which is equal to its carrying
amount on the balance sheet.
Total cash advertising revenues associated with major advertising
customers (excluding barter) are as follows:
<TABLE>
<CAPTION>
Three Months
Year Ended December 31, Ended March 31,
------------------------------------ ---------------------------
1995 1996 1997 1997 1998
---------- ---------- ---------- -------------- ----------
Customer(1) (unaudited)
<S> <C> <C> <C> <C> <C>
A ............. $50,000 -- -- $83,019 --
B ............. 32,000 -- -- 82,014 --
C ............. 30,000 -- -- -- --
D ............. 20,000 -- -- -- --
E ............. -- 211,936 326,707 -- --
F ............. -- 178,191 157,019 -- --
G ............. -- -- -- -- 161,618
</TABLE>
Accounts receivable regarding significant advertising customers are as
follows:
<TABLE>
<CAPTION>
December 31,
---------------------- March 31,
1996 1997 1998
---------- --------- ------------
Customer(1) (unaudited)
<S> <C> <C> <C>
H ............. $93,800 -- --
I ............. 41,000 -- --
J ............. -- 31,000 --
</TABLE>
(1) Each of the customers listed in the revenue and accounts receivable
tables are different.
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.
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
(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) and
the Securities and Exchange Commission Staff Accounting Bulletin No. 98. 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 converted into common stock
and resulted in the issuance of common stock. Only basic EPS is presented as
all common stock equivalents are anti-dilutive for each of the periods
presented. Anti-dilutive potential common shares outstanding were 64,425,
466,635, and 1,636,474 for the years ended December 31, 1995, 1996 and 1997,
respectively, and 458,803 and 3,115,346 for the three-month periods ended March
31, 1997 and 1998, respectively.
Net loss applicable to common stockholders for the three-month period
ended March 31, 1998 has been increased to give effect to $33,500 of cumulative
dividends on Mandatorily Convertible Preferred Stock.
(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.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including
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)
(1) Summary of Operations and Significant Accounting Policies --Continued
derivative instruments embedded in other contracts, and for hedging activities.
SFAS No. 133 is effective for all fiscal quarters of fiscal years beginning
after June 15, 1999. This statement is not expected to affect the Company as
the Company currently does not have any derivative instruments or hedging
activities.
(2) Balance Sheet Components
<TABLE>
<CAPTION>
Prepaid Expenses and Other Current Assets
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.
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 $1.60 to $8.36 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 imputed interest method over the term of the notes.
The notes are convertible into common stock at conversion prices ranging
from $1.60 to $8.36 per share upon occurrence of certain events. On December
22, 1997, $94,757 of the notes, including interest thereon, were converted into
59,184 shares of common stock at $1.60 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 43,321 shares of common
stock at $3.48 per share. The value attributable to 4,310 warrants, to purchase
shares of the Company's common stock at $3.48 per share, of $12,156 was
recorded as debt discount using the imputed interest method.
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 750,586 shares of common stock,
leaving approximately $500,000 of such notes, plus accrued interest thereon,
outstanding as of June 2, 1998.
Additionally, in connection with the Securities Purchase Agreement and the
Merger, the noteholders converted 178,429 warrants into 99,119 shares of Common
Stock in a non-cash transaction. Accordingly, the Company charged the
unamortized portion of the applicable debt discount of $146,000 to interest
expense in connection with the conversion of the Notes.
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
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
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%.
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 6,533 of the
Company's Common Shares at a price of $11.48. 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 using the imputed interest
method and subsequently charged to interest expense in connection with the
conversion of the aforementioned notes.
On April 9, 1997, the Company granted warrants to a consultant to purchase
4,375 of the Company's Common shares at an exercise price of $49.72 per share.
The fair value, using a Black Scholes model, of the warrants was deemed
insignificant on the date of grant.
In connection with the issuance of Senior Convertible Notes
Payable--Related Parties, warrants to purchase 169,316 and 4,310 Common shares
at a price of $1.60 and $3.48 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. The Company recorded an original issue debt
discount on such 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
625,000 shares of Common Stock at an exercise price of $3.81 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 13,000 shares of Interactive Imaginations common stock at
$1.72 per share. Accordingly, the Company recorded compensation expense of
$450,000 during the three month period ended March 31, 1998 in connection with
this transaction.
In February 1998, the Company issued to a consultant 28,750 warrants to
purchase common stock at an exercise price of $3.48 in exchange for services.
In connection with these warrants, the Company recorded compensation expense of
$20,240.
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)
(4) Notes Payable --Continued
Warrant activity during the periods indicated is as follows:
<TABLE>
<CAPTION>
Weighted
Average
Warrants Exercise
Granted Price
------------ -----------
<S> <C> <C>
Outstanding at December 31, 1995 ......... 0
Granted .................................. 6,533 $ 11.48
Exercised ................................ 0
Canceled ................................. 0
-----
Outstanding at December 31, 1996 ......... 6,533 11.48
Granted .................................. 178,031 3.08
Exercised ................................ 0
Canceled ................................. 0
-------
Outstanding at December 31, 1997 ......... 184,564 3.85
Granted .................................. 3,314,308 8.35
Exercised ................................ (178,429) 3.85
Canceled ................................. 0
---------
Outstanding at March 31, 1998 ............ 3,320,443 8.32
</TABLE>
Expiration dates on warrants granted is generally five years.
(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 25,000 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; 25,000 issued and outstanding) into 250,000 Class A
Common shares, par value $.01 per share; and (ii) authorization of 250 Class B
Common shares, par value $.01 per share.
In March 1995, the Company issued a total of 250 Class B Common shares in
exchange for approximately $93,000 in cash, which were subsequently (in June
1995) converted to 15,677 Class A Common shares. During the remainder of 1995,
the Company issued a total of 32,656 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 73,333 were issued
and outstanding; and (ii) 1,000 Class B Common shares, of which none were
outstanding.
During 1996, the Company issued an additional 34,371 Class A Common shares
in exchange for $4,525,000 in cash.
As part of an employment agreement, an officer of the Company was given
approximately 12,500 shares of common stock which were granted (at the fair
market value of the Company's common stock on the specific date of grant), over
a three year period beginning in July 1996, as additional compensation.
Accordingly, the Company recorded compensation expense at the time of each
grant. On October 31, 1997, the officer signed a termination
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
agreement with the Company whereby the officer received 8,333 of 12,500 shares.
As a result, for the years ended December 31, 1996 and 1997, the Company
recorded compensation expense of $37,627 and $31,891, respectively.
In March 1998, the Company awarded to the President 56,250 shares of
restricted common stock which vest over three years. In connection with this
issuance, the Company is recognizing compensation expense of $90,000 ratably
over a three year period. For the three month period ended March 31, 1998, the
Company recognized $2,500 in compensation expense.
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 107,703 issued and outstanding Class A Common shares into 2.5 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
anti-dilution 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. The Preferred share conversion feature is subject to
anti-dilution adjustment. 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 351,805 and 542,908 Common
Shares, however, no Preferred Shares were converted as of that date (see note
1(a)). 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.
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
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;
(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,
1,320,904 Class A Warrants and 1,320,904 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 6,870,300 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," 1,320,904 shares are
reserved for issuance upon exercise of issued and outstanding Class A Warrants,
1,320,904 shares are reserved for issuance upon exercise of issued and
outstanding Class B Warrants, 643,750 are reserved for issuance upon exercise
of issued and outstanding Class C Warrants, 35,605 are reserved for issuance
upon exercise of issued and outstanding unclassified warrants, 62,757 (subject
to adjustment) are reserved for issuance upon exercise of outstanding
convertible debentures, and 1,437,500 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 $3.81 per Series A
share divided by the conversion price of $3.81 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
$3.81.
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.
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)
(5) Common Stock, Convertible Preferred Shares and Mandatorily Redeemable
Convertible Preferred Stock --Continued
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 $3.81 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 all or part of the
shareholder's outstanding Series A Shares by paying cash of $3.81 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 1,320,904 shares of the
Company's common stock, par value $.01 per share, at $7.62 and $11.42 per
share, respectively. Such warrants are immediately exerciseable and expire on
February 25, 2003. No value has been attributed to the Class A and B warrants
based upon an independent valuation of the securities.
(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 217,500 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 $2.56, $9.28 and, $1.60, 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.
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
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 ......... $ (2.78) (6.48) (4.88)
Pro forma ........... $ (2.80) (6.52) (4.90)
</TABLE>
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 ........................................ 64,425 $ 3.08
Exercised ...................................... --
Canceled ....................................... --
------- -------
Outstanding at December 31, 1995 ............... 64,425 $ 3.08
Granted ........................................ 56,889 11.28
Exercised ...................................... --
Canceled ....................................... (13,017) 5.12
------- -------
Outstanding at December 31, 1996 ............... 108,297 7.16
Granted (a) .................................... 207,797 1.60
Exercised ...................................... --
Canceled ....................................... (22,783) 6.44
------- -------
Outstanding at December 31, 1997 ............... 293,311 3.72
======= =======
Vested at December 31, 1997 .................... 132,373
=======
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 3,000,000.
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>
$1.60-1.72 264,918 7.1 years $ 1.60 105,230 $ 1.60
4.00-5.16 9,464 2.1 years 4.92 8,214 5.04
8.00-11.92 18,929 3.3 years 10.80 18,929 10.80
------- -------
293,311 132,373
======= =======
</TABLE>
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)
(6) Stock Option Plan --Continued
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.
A maximum of 3,000,000 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 187,500 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 562,024 and 126,029
options at $4.00 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 accounted for the
SegaSoft agreement in accordance with Statement of Position 91-1," Software
Revenue Recognition. The Company received license fees 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, or $1.3 million, as
performance occurred over the period during which the licensed software was
transferred to SegaSoft and modified to perform to SegaSoft's specifications.
The period in which the fees associated with software license transfer and
consulting services both commenced in November 1996 and concluded in August
1997. 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, the cost of sales associated with the Segasoft
consulting and license fee were $9,800, and $57,400 and $0, respectively for
all periods presented.
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.
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)
(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 542,908 shares of common stock,
converted $2,056,250 of senior convertible notes payable--related parties, plus
accrued interest, into 750,586 shares of Common Stock and outstanding warrants
were converted into 99,119 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 2,623,591
and 1,705,334 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 $852,000. 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 $611,637 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.
F-23
<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)
(9) Commitments --Continued
In 1998, the Company entered into a lease agreement for space rental at
its new corporate headquarters for a period of 5 years. The Company's annual
lease expense for this office space will be approximately $1.2 million. The
Company expects to incur approximately $1 million in leasehold improvements in
connection with the new office space.
On May 14, 1998 and July 7, 1998, the Company entered into two operating
leases for computer equipment and software related to its Adfinity[TM] system,
with a combined fair market value of $849,488. The operating lease as, amended,
requires monthly payments and expires in September, 2001. Total rent expense
for currently outstanding leases is expected to be approximately $90,500 per
quarter.
On May 1, 1998 the Company entered into a one year operating lease for
space to house its Adfinity system, including leasing telephone equipment to
transmit data. Monthly rent expense is $27,000.
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.
(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.
Therefore, the Company issued 949,242 shares of common stock, 265,152 of Class
A Warrants, 265,152 of Class B Warrants and 136,553 of Class C Warrants. The
warrants have an exercise price ranging between $3.81 and $11.42 and expire in
five years. Additionally, the Company assumed 212,804 stock options for the
purchase of Common Stock in accordance with the Merger. The stock options have
an exercise price ranging from $0.16 to $0.48, as defined in the Merger
Agreement, and expire no later than 10 years.
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. Total Mandatorily
Redeemable Convertible Preferred Shares issued were 3,561,505 shares. Each
shareholder of record of the Mandatorily Redeemable Convertible Shares will
have the right to cause the Company to redeem at the option of shareholder or
part of the shareholder's outstanding shares by paying cash of $3.81 per share
plus accrued dividends no later than the fifth anniversary of the original
issue date. 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.
F-24
<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--Continued
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.
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 higher fair value attributable to the
Mandatorily Convertible Preferred Shares versus Common Shares is due to the
convertible feature of the Preferred Shares. The preliminary fair value of
purchased existing and in-process technologies were determined by management
using a risk-adjusted income valuation approach.
CliqNow! Acquisition
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 $4,295,000, with $1,295,000
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 equal to the per share
proceeds from the Offering to the Company which was deemed to be the fair value
of the securities.
(12) Initial Public Offering and Related Transactions (Unaudited)
The Company is offering 3,250,000 shares of its common stock, par value
$.01 per share in an initial public offering (the "Offering") at an estimated
offering price of $13.00 per share.
(13) Stock Split (Unaudited)
On July 20, 1998, the Company effected a 1-for-4 reverse stock split.
Accordingly, all references in the financial statements to the number of shares
and to per share amounts have been retroactively restated to reflect these
changes.
F-25
<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 June 1, 1998, the Company
acquired four entities (the "Acquired Entities") in separate transactions in
exchange for securities of the Company. The Acquired Entities are as follows:
<TABLE>
<CAPTION>
PRELIMINARY PURCHASE PRICE ALLOCATION
-----------------------------------------------
NET
TANGIBLE IN-PROCESS
EFFECTIVE ACQUISITION ASSETS RESEARCH AND INTANGIBLES/
ACQUIRED ENTITY DATE COSTS(1) (LIABILITIES)(2) DEVELOPMENT GOODWILL
- -------------------------- ------------------- ------------- ------------------ -------------- -------------
<S> <C> <C> <C> <C> <C>
Petry February 24, 1998 $ 4,292,800 $ (1,050,600) $ -- $ 5,343,400
Advercomm February 24, 1998 2,790,500 85,400 -- 2,705,100
Intelligent Interactions April 13, 1998 7,670,500 (154,200) 5,477,300 2,347,400
CliqNow! June 1, 1998 4,390,800 295,000 -- 4,095,800
----------- ------------ ---------- -----------
$19,144,600 $ (824,400) $5,477,300 $14,491,700
=========== ============ ========== ===========
</TABLE>
- ------------
(1) Includes acquisition costs of $253,000
(2) At the date of acquisition
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. The
preliminary allocation of the purchase price of the Acquired Entities may be
subject to change depending upon the final outcome of valuations and
appraisals. For pro forma purposes, the Company has assumed that the historical
carrying amounts of such assets and liabilities approximated their fair values.
The remaining purchase price of each of the Acquired Entities in excess of
identified tangible and intangible assets as noted above 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.
On February 25, 1998, the Company acquired all of the outstanding stock of
Petry and Advercomm in separate transactions in exchange for 2,623,591 and
1,705,334 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 fair value of the 4,328,925 aggregate shares of Common
Stock issued in connection with the acquisition of Petry and Advercomm was
estimated to be $1.60 per share, determined primarily by reference to the
common stock conversion price of $1.60 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 and supported by an
independent valuation of the Company's Common Stock as of February 25, 1998.
During April 1998, the Company entered into an Agreement and Plan of
Merger to acquire all of the outstanding stock of Intelligent Interactions.
Upon consummation of the merger, Intelligent Interactions outstanding Common
Stock was converted into approximately 949,242 shares of the Company's Common
Stock, 3,561,505 shares of Mandatorily Redeemable Convertible Preferred Shares
and 265,212, 265,212 and 136,553 of Class A, B and C Warrants, respectively, to
purchase Common Stock for a total purchase price of $7,670,500.
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 higher fair value attributable to the
Mandatorily Convertible Preferred Shares versus Common Shares is due to the
convertible and liquidation features of the Preferred Shares. Approximately
$5,477,300 of the purchase price of Intelligent Interactions 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 date and had
no
F-26
<PAGE>
24/7 MEDIA, INC.
(Successor Company to Interactive Imaginations, Inc.)
PRO FORMA CONSOLIDATED FINANCIAL INFORMATION--Continued
OVERVIEW --Continued
alternative future use, this amount will be immediately written-off by the
Company and has been reflected in the pro forma balance sheet as a charge to
stockholders' equity (deficit). The preliminary fair value of purchased
existing and in-process technologies were determined by management using a
risk-adjusted income valuation approach.
On June 1, 1998, the Company acquired CliqNow! for cash of $1,295,000 and
$3 million of the Company's Series B Preferred Stock which will convert into
248,139 shares of Common Stock in connection with the Offering (plus
acquisition costs of approximately $96,000) for a total price of $4,390,800.
The preferred stock converts to Common Stock automatically upon consummation of
the Offering at a conversion price equal to the per share proceeds from the
Offering which was deemed to be the fair value of the securities.
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 results of operations are
only included in the pro forma statement of operations for the period from
February 1, 1998 to February 24, 1998.
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
acquisitions of Intelligent Interactions and CliqNow! as if these acquisitions
had occurred on March 31, 1998. The Company's historical consolidated balance
sheet as of March 31, 1998 includes the February 25, 1998 acquisition of Petry
and Advercomm. See Notes 1 and 11 to the Consolidated Financial Statements.
The historical financial statements of the Company, Petry, Intelligent
Interactions and CliqNow! 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-27
<PAGE>
24/7 MEDIA, INC.
(Successor Company to Interactive Imaginations, Inc.)
PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended December 31, 1997
-----------------------------------------
24/7 Media, Inc.
(successor company
to Interactive Petry
Imaginations, Inc.) Interactive, Inc.
--------------------- -------------------
<S> <C> <C>
Revenues:
Advertising ....................................... $ 1,467,105 $ 1,269,261
Consulting and license fees ....................... 1,681,464 --
------------ ------------
Total revenues ................................... 3,148,569 1,269,261
Cost of revenues ................................... 1,655,340 1,174,594
------------ ------------
Gross profit 1,493,229 94,667
------------ ------------
Operating expenses:
Sales and marketing ............................... 1,672,999 1,730,511
General and administrative ........................ 2,622,743 1,245,373
Product development ............................... 1,417,750 --
Other expenses .................................... 989,099 --
Amortization of goodwill .......................... -- --
------------ ------------
Total operating expenses ......................... 6,702,591 2,975,884
------------ ------------
Operating loss ..................................... (5,209,362) (2,881,217)
Interest (expense) income, net ..................... (96,466) (6,000)
------------ ------------
Net loss .......................................... (5,305,828) (2,887,217)
Cumulative dividends on mandatorily convertible
preferred stock .................................. -- --
Net loss attributable to common stockholders ...... $ (5,305,828) $ (2,887,217)
============ ============
Pro forma:
Basic net loss per share (F) .....................
Shares outstanding (F) ...........................
<CAPTION>
Year Ended December 31, 1997
-----------------------------------------------------------------------
Pro forma Pro forma
Intelligent Acquisition consolidated
Interactions Corp. CliqNow! Adjustments 24/7 Media, Inc.
-------------------- ------------- ------------------ -----------------
<S> <C> <C> <C> <C>
Revenues:
Advertising ....................................... -- $ 896,427 -- $ 3,632,793
Consulting and license fees ....................... $ 65,432 -- -- 1,746,896
------------ ---------- --------- -------------
Total revenues ................................... 65,432 896,427 -- 5,379,689
Cost of revenues ................................... -- 479,742 -- 3,309,676
------------ ---------- --------- -------------
Gross profit 65,432 416,685 -- 2,070,013
------------ ---------- --------- -------------
Operating expenses:
Sales and marketing ............................... 1,249,910 417,093 -- 5,070,513
General and administrative ........................ 1,055,589 461,755 -- 5,385,460
Product development ............................... 327,995 -- -- 1,745,745
Other expenses .................................... -- -- -- 989,099
Amortization of goodwill .......................... -- -- 5,670,689(A) 5,670,689
------------ ---------- --------- -------------
Total operating expenses ......................... 2,633,494 878,848 5,670,689 18,861,506
------------ ---------- --------- -------------
Operating loss ..................................... (2,568,062) (462,163) (5,670,689) (16,791,493)
Interest (expense) income, net ..................... 6,861 -- -- (95,605)
------------ ---------- ---------- -------------
Net loss .......................................... (2,561,201) (462,163) (5,670,689) (16,887,098)
Cumulative dividends on mandatorily convertible
preferred stock .................................. -- -- (134,000)(C) (134,000)
Net loss attributable to common stockholders ...... $ (2,561,201) $ (462,163) $(5,804,689) $ (17,021,098)
============ ========== =========== =============
Pro forma:
Basic net loss per share (F) ..................... $ (3.81)
=============
Shares outstanding (F) ........................... 4,443,053
=============
</TABLE>
See accompanying notes to Pro Forma Consolidated Financial Information.
F-28
<PAGE>
24/7 MEDIA, INC.
(Successor Company to Interactive Imaginations, Inc.)
PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended March 31, 1998
--------------------------------------------------------------
24/7 Media, Inc.
(successor company
to Interactive Petry
Imaginations, Inc.) Interactive, Inc. Advercomm, Inc.(1)
--------------------- ------------------- --------------------
<S> <C> <C> <C>
Revenues:
Advertising ......................... $ 1,076,250 $ 747,059 $23,439
Consulting and license fees ......... -- -- --
------------ ---------- -------
Total revenues ..................... 1,076,250 747,059 23,439
Cost of revenues ..................... 930,003 650,030 15,046
------------ ---------- -------
Gross profit (deficit) ............. 146,247 97,029 8,393
------------ ---------- -------
Operating expenses:
Sales and marketing ................. 653,460 298,430 --
General and administrative .......... 1,288,012 233,205 3,126
Product development ................. -- -- --
Other expenses ...................... -- -- --
Amortization of goodwill ............ 335,355 -- --
------------ ---------- -------
Total operating expenses ........... 2,276,827 531,635 3,126
------------ ---------- -------
Operating loss ....................... (2,130,580) (434,606) 5,267
Interest (expense) income:
Interest income ..................... 25,504 -- --
Interest expense .................... (192,762) (6,000)
------------ ---------- -------
Total interest (expense) income (167,258) (6,000) --
------------ ---------- -------
Net loss ........................... (2,297,838) (440,606) 5,267
Cumulative dividends on
mandatorily convertible
preferred stock .................... -- -- --
------------ ---------- -------
Net loss attributable to common
stockholders ....................... $ (2,297,838) $ (440,606) $ 5,267
============ ========== =======
Pro forma:
Basic net loss per share (F) .......
Shares outstanding (F) .............
<CAPTION>
Three Months Ended March 31, 1998
----------------------------------------------------------------------
Pro forma Pro forma
Intelligent Acquisition consolidated
Interactions Corp. CliqNow! Adjustments 24/7 Media, Inc.
-------------------- ------------ ------------------ -----------------
<S> <C> <C> <C> <C>
Revenues:
Advertising ......................... -- $ 500,559 -- $ 2,347,307
Consulting and license fees ......... $ 88,362 -- -- 88,362
---------- --------- --------- ------------
Total revenues ..................... 88,362 500,559 -- 2,435,669
Cost of revenues ..................... 13,200 284,452 -- 1,892,731
---------- --------- --------- ------------
Gross profit (deficit) ............. 75,162 216,107 -- 542,938
---------- --------- --------- ------------
Operating expenses:
Sales and marketing ................. 226,548 122,198 -- 1,300,636
General and administrative .......... 221,168 143,365 -- 1,888,876
Product development ................. 66,738 -- -- 66,738
Other expenses ...................... -- -- -- --
Amortization of goodwill ............ -- -- 1,363,402(A) 1,698,757
---------- --------- --------- ------------
Total operating expenses ........... 514,454 265,563 1,363,402 4,955,007
---------- --------- --------- ------------
Operating loss ....................... (439,292) (49,456) (1,363,402) (4,412,069)
Interest (expense) income:
Interest income ..................... -- -- -- 25,504
Interest expense .................... (5,434) (204,196)
---------- --------- ---------- ------------
Total interest (expense) income (5,434) -- -- (178,692)
---------- --------- ---------- ------------
Net loss ........................... (444,726) (49,456) (1,363,402) (4,590,761)
Cumulative dividends on
mandatorily convertible
preferred stock .................... -- -- (33,500)(C) (33,500)
---------- --------- ---------- ------------
Net loss attributable to common
stockholders ....................... $ (444,726) $ (49,456) $(1,396,902) $ (4,624,261)
========== ========= =========== ============
Pro forma:
Basic net loss per share (F) ....... $ (0.73)
============
Shares outstanding (F) ............. 6,342,350
============
</TABLE>
(1) Represents Advercomm from February 1, 1998 (inception) to February 24, 1998
(date of merger).
See accompanying notes to Pro Forma Consolidated Financial Information.
F-29
<PAGE>
24/7 MEDIA, INC.
(Successor Company to Interactive Imaginations, Inc.)
PRO FORMA CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
March 31, 1998
-----------------------------------------------
24/7 Media, Inc.
(successor company Intelligent
to Interactive Interactions
Imaginations, Inc.) Corp. CliqNow!
--------------------- -------------- ----------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ......................... $ 7,764,695 3,675 --
Accounts receivable, net .......................... 1,818,899 87,499 634,643
Prepaid expenses and other current assets ......... 52,296 13,568 12,250
-------------- ------ -------
Total current assets .......................... 9,635,890 104,742 646,893
Property and equipment, net ....................... 630,652 129,451 36,574
Goodwill, net ..................................... 7,870,174 -- --
Deferred offering costs ........................... 13,148 -- --
Intangible assets, net ............................ 2,503 -- --
Deposits .......................................... 49,626 --
-------------- -------
Total assets .................................. $ 18,201,993 234,193 683,467
============== ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Line of credit .................................... -- 17,195 --
Accounts payable .................................. 813,518 121,801 183,051
Accrued liabilities ............................... 2,180,969 183,102 164,586
Loans payable--related party ...................... 283,267 -- --
Convertible note payable .......................... -- 450,000 --
Deferred revenue .................................. 41,000 -- 336,172
-------------- ------- -------
Total current liabilities ..................... 3,318,754 772,098 683,809
Senior convertible notes payable--related
parties, net of debt discount .................... 479,408 -- --
Other liabilities ................................. 46,149 -- --
Mandatorily redeemable convertible
preferred stock .................................. 10,093,502 3,454,481 --
Stockholders' equity (deficit):
Convertible preferred stock ....................... -- -- --
Common stock ...................................... 69,267 2,412 --
Additional paid-in capital ........................ 19,919,169 135,690 --
Deferred stock compensation ....................... (87,500) -- --
Accumulated deficit ............................... (15,636,756) (4,130,488) (342)
-------------- ---------- -------
Total stockholders' equity (deficit) .......... 4,264,180 (3,992,386) (342)
-------------- ---------- -------
Commitments and contingencies
Total liabilities and stockholders' equity 18,201,993 234,193 683,467
============== ========== =======
<CAPTION>
Pro forma
Acquisitions Pro forma
Adjustments 24/7 Media, Inc.
--------------------- ------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ......................... (1,295,267)(B) 6,473,103
Accounts receivable, net .......................... -- 2,541,041
Prepaid expenses and other current assets ......... -- 78,114
---------- ---------
Total current assets .......................... (1,295,267) 9,092,258
Property and equipment, net ....................... -- 796,677
Goodwill, net ..................................... 4,391,142(B) 14,992,403
2,731,087(C)
Deferred offering costs ........................... -- 13,148
Intangible assets, net ............................ -- 2,503
Deposits .......................................... -- 49,626
---------- ----------
Total assets .................................. 5,826,962 24,946,615
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Line of credit .................................... -- 17,195
Accounts payable .................................. -- 1,118,370
Accrued liabilities ............................... -- 2,528,657
Loans payable--related party ...................... -- 283,267
Convertible note payable .......................... (450,000)(C) --
Deferred revenue .................................. -- 377,172
---------- ----------
Total current liabilities ..................... (450,000) 4,324,661
Senior convertible notes payable--related
parties, net of debt discount .................... -- 479,408
Other liabilities ................................. -- 46,149
Mandatorily redeemable convertible
preferred stock .................................. 770,714 (C) 14,318,697
Stockholders' equity (deficit):
Convertible preferred stock ....................... 30 (B) 30
Common stock ...................................... 7,080 (C) 78,759
Additional paid-in capital ........................ 3,095,503 (B) 26,900,467
(135,690)(C)
3,885,795 (C)
Deferred stock compensation ....................... -- (87,500)
Accumulated deficit ............................... 342 (B) (21,114,056)
4,130,488 (C)
(5,477,300)(C)
----------
Total stockholders' equity (deficit) .......... 5,506,248 5,777,700
---------- -----------
Commitments and contingencies
Total liabilities and stockholders' equity 5,826,962 24,946,615
========== ===========
<CAPTION>
IPO Conversion Adjustments
-------------------------------------------
Conversion of
Mandatorily Pro forma
Redeemable, Conversion of 24/7 Media, Inc.
and Convertible Senior Convertible as adjusted
Preferred Stock Notes Payable for IPO Conversions
---------------------- -------------------- --------------------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ......................... 6,473,103
Accounts receivable, net .......................... 2,541,041
Prepaid expenses and other current assets ......... 78,114
----------- -------- -----------
Total current assets .......................... 9,092,258
Property and equipment, net ....................... 796,677
Goodwill, net ..................................... 14,992,403
Deferred offering costs ........................... 13,148
Intangible assets, net ............................ 2,503
Deposits .......................................... 49,626
----------- -------- -----------
Total assets .................................. 24,946,615
========== ======== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Line of credit .................................... 17,195
Accounts payable .................................. 1,118,370
Accrued liabilities ............................... 2,528,657
Loans payable--related party ...................... 283,267
Convertible note payable .......................... --
Deferred revenue .................................. 377,172
----------- -------- -----------
Total current liabilities ..................... 4,324,661
Senior convertible notes payable--related
parties, net of debt discount .................... (479,408)(E) --
Other liabilities ................................. 46,149
Mandatorily redeemable convertible
preferred stock .................................. (14,318,697)(D) --
Stockholders' equity (deficit):
Convertible preferred stock ....................... (30)(D) --
Common stock ...................................... 38,252 774 (E) 117,785
Additional paid-in capital ........................ 14,280,475 (D) 478,634 (E) 41,659,576
Deferred stock compensation ....................... (87,500)
Accumulated deficit ............................... (21,114,056)
----------- -------- -----------
Total stockholders' equity (deficit) .......... -- -- 20,575,805
----------- -------- -----------
Commitments and contingencies
Total liabilities and stockholders' equity 24,946,615
========== ======== ==========
</TABLE>
See accompanying notes to Pro Forma Consolidated Financial Information.
F-30
<PAGE>
24/7 MEDIA, INC.
(Successor Company to Interactive Imaginations, Inc.)
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
The following adjustments were applied to the historical financial
statements of the Company and the Acquired Entities to arrive at the pro forma
consolidated financial information.
(A) To record amortization expense related to goodwill of the Acquired
Entities, 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.
(B) To give effect to the reduction of cash and issuance of $3 million of
Series B Preferred Stock, plus acquisition costs of $95,533, associated with
the CliqNow! acquisition, to record goodwill associated with the acquisition,
as if the acquisition had occurred on March 31, 1998, and to eliminate
CliqNow!'s net deficit balance using the purchase method of accounting.
(C) To (i) record goodwill associated with the acquisition of Intelligent
Interactions, as if the acquisition had occurred on March 31, 1998, (ii) record
an increase in accumulated deficit in connection with Intelligent Interactions'
write-off of acquired in-process technology of $5,477,300, (iii) record the
issuance of Common Stock and Mandatorily Redeemable Convertible Preferred Stock
Series, plus warrants in exchange for Intelligent Interactions' $450,000
convertible note payable and all of its issued and outstanding shares of common
and preferred stock, (iv) give effect to the cumulative dividends on
Mandatorily Convertible Preferred Stock, as if it had been outstanding as of
January 1, 1997, and (v) to eliminate Intelligent Interactions' historical
stockholders' deficit 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 (3,577,077 shares)
(including shares issued in connection with the Intelligent Interactions
acquisition) and Series B Preferred Stock (issued in connection with the
CliqNow! acquisition) into 3,825,215 shares of Common Stock in the aggregate
immediately prior to the closing of this Offering.
(E) To give effect to the conversion of senior convertible notes payable
with a face value of $500,000, including interest thereon plus outstanding
warrants, for 77,450 shares of Common Stock in July 1998.
(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 pro forma basic net loss per share includes the shares of Common
Stock issued in connection with the acquisition of each of the Acquired
Companies from January 1, 1997 or inception of operations of the acquired
companies, if later. The computation does not give effect to the conversion of
the IPO Conversion Adjustments noted in (D) and (E) above for the year ended
December 31, 1997 and for the three months ended March 31, 1998. In addition,
diluted net loss per share is not presented as the inclusion of common stock
issuable upon exercise of employee stock options and upon exercise of
outstanding warrants is antidilutive.
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-31
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Members of Interactive Holdings, LLC
(successor to Petry Interactive, Inc.)
We have audited the accompanying balance sheet of Interactive Holdings,
LLC (successor to Petry Interactive, Inc.) as of December 31, 1997 (Successor),
and the related statements of operations and cash flows for the period from
February 1, 1997 (inception) to September 28, 1997 (Predecessor) and the
related statements of operations, members' deficit and cash flows for 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-32
<PAGE>
INTERACTIVE HOLDINGS, LLC
(SUCCESSOR TO 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-33
<PAGE>
INTERACTIVE HOLDINGS, LLC
(SUCCESSOR TO 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-34
<PAGE>
INTERACTIVE HOLDINGS, LLC
(SUCCESSOR TO PETRY INTERACTIVE, INC.)
STATEMENT OF MEMBERS' DEFICIT
For the period from September 28, 1997
(inception) to December 31, 1997
<TABLE>
<CAPTION>
Total
Common Paid-In Members' Members'
Stock Capital Deficit Deficit
-------- --------- ------------- -------------
<S> <C> <C> <C> <C>
Members' contribution ................................... $ 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-35
<PAGE>
INTERACTIVE HOLDINGS, LLC
(SUCCESSOR TO 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 .............................................. $ 126,204 117,849
============ ========
</TABLE>
See accompanying notes to financial statements.
F-36
<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. (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"). The Company was
formed on September 24, 1997, to acquire Petry Interactive, Inc., a wholly
owned subsidiary of Petry Media Corporation. The Company did not have any
operations prior to its acquisition of Petry Interactive, Inc. At the time of
its acquisition, Petry Interactive, Inc.'s operations consisted solely of a
network of Websites to which the Company delivered advertisements and
promotions.
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 24, 1998, the Company distributed all of the issued and
outstanding shares of Petry Interactive, Inc. to its members, and such shares
were exchanged by Interactive Holdings, LLC's members for 2,623,592 shares of
24/7 Media, Inc.'s stock under a Plan of Merger and Securities Purchase
Agreement.
(b) Basis of Presentation
On February 1, 1997, Petry Interactive commenced its Internet advertising
network solutions business (Predecessor). Predecessor financial statements
presented herein relate solely to that business. 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 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
and is based upon a proportionate allocation of actual costs incurred using an
estimate of the amount of time spent and equipment and space used. However, the
expenses allocated to the Company, although made on a basis management believes
to be reasonable, may not necessarily be 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-37
<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 Predecessor 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.
(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.
F-38
<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
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-39
<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 1).
F-40
<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-41
<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-42
<PAGE>
INTELLIGENT INTERACTIONS CORPORATION
(A Development Stage Company)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Period From Period From
Inception Inception
(February 28, (February 28,
1995) To Year Ended Year Ended Quarter Ended Quarter Ended 1995) To
December 31, December 31, December 31, March 31, March 31, March 31,
1995 1996 1997 1997 1998 1998
--------------- -------------- ---------------- --------------- --------------- ----------------
(unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Consulting and license
fees and support ............... $ -- $ -- $ 65,432 $ -- $ 88,362 $ 153,794
Cost of revenues ................ -- -- -- -- 13,200 13,200
---------- ---------- ------------ ---------- ---------- ------------
Gross profit ................. -- -- 65,432 -- 75,162 140,594
Operating expenses:
Sales and marketing ............. -- 254,515 1,249,910 182,043 226,548 1,730,973
Product development ............. 21,964 92,280 327,995 91,386 66,738 508,977
General and
administrative ................. 133,238 350,368 1,055,589 250,165 221,168 1,760,363
---------- ---------- ------------ ---------- ---------- ------------
Total operating expenses ......... 155,202 697,163 2,633,494 523,594 514,454 4,000,313
---------- ---------- ------------ ---------- ---------- ------------
Loss from operations ............. (155,202) (697,163) (2,568,062) (523,594) (439,292) (3,859,719)
Interest income (expense),
net ............................. 473 (1,438) 6,861 460 (5,434) 462
Other income ..................... -- 3,085 -- -- -- 3,085
---------- ---------- ------------ ---------- ---------- ------------
Net loss ......................... (154,729) (695,516) (2,561,201) (523,134) (444,726) (3,856,172)
Less dividends on
preferred stock ................. -- (28,969) (181,744) (23,602) (63,603) (274,316)
---------- ---------- ------------ ---------- ---------- ------------
Net loss applicable to
common stock .................... $ (154,729) $ (724,485) $ (2,742,945) $ (546,736) $ (508,329) $ (4,130,488)
========== ========== ============ ========== ========== ============
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-43
<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-44
<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-45
<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-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)
(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-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)
(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 at the same price at which the New
Series is issued. 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) at the same price at which the New Series is issued.
(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. The Company
recognized compensation expense on the shares of common stock issued to
employees in 1995 and 1996 for services rendered. Compensation expense was
$8,700 and $12,000 for the years ended December 31, 1995 and 1996,
respectively.
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
F-48
<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
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.
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>
Number Weighted Average Option Price
of Shares Exercise Price Per Share
----------- ------------------ -----------------
<S> <C> <C> <C>
Company inception ............................. -- $ -- $ --
Granted ....................................... 70,700 1.09 0.60 -- 1.65
Exercised ..................................... -- -- --
Forfeited ..................................... (10,000) .60 0.60
------- ------ ---------------
Balance at December 31, 1996 .................. 60,700 1.17 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-49
<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, March 31, 1997, December 31,
1997 and March 31, 1998, was approximately $0.45, $0.72, $0.81 and $0.89,
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-50
<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 4.1 shares of common stock, 0.6
Class A Warrants, 0.6 Class B Warrants and 0.3 Class C Warrants of 24/7 Media.
In the aggregate 949,243 shares of Common Stock, 3,561,505 shares of Series A
Preferred Stock, 265,152 Class A Warrants, 265,152 Class B Warrants and 136,553
Class C Warrants were issued in connection with the transaction. The Warrants
expire on April 10, 2003.
The Series A shares rank (i) prior to the Common Stock of 24/7 Media; (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 24/7
Media, 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 24/7 Media
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 $3.81 per Series A
share divided by the conversion price of $3.81 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
$3.81.
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 24/7 Media 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 24/7 Media to redeem
at the option of the shareholder all or part of the shareholder's outstanding
Series A shares by paying cash of $3.81 per share plus any dividends accrued.
Additionally, if 24/7 Media 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 all or part of the
shareholder's outstanding Series A Shares by paying cash of $3.81 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.
F-51
<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)
(8) Intelligent Interactions Acquisition --Continued
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
(exercise price of $7.62), 2.7 Class B Warrants (exercise price of $11.42) and
1.4 Class C Warrants (exercise price of $3.81) 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 4 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-52
<PAGE>
Report of Independent Public Accountants
To CliqNow!:
We have audited the accompanying balance sheet of CliqNow!, a division of
K2 Design, Inc. as of December 31, 1997 and the related statements of
operations and changes in parent company's investment and advances and cash
flows for the year then ended. 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 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 CliqNow! as of December 31,
1997, and the results of its operations and its cash flows for the year then
ended in conformity with generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
Roseland, New Jersey
June 12, 1998
F-53
<PAGE>
CLIQNOW!
(A Division of K2 Design, Inc.)
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, March 31,
1997 1998
-------------- ------------
ASSETS (unaudited)
<S> <C> <C>
Current Assets:
Cash ...................................................................... $ 0 $ 0
Accounts receivable, net of allowance for doubtful accounts of $21,000..... 535,708 634,643
Prepaid and other current assets .......................................... 52,960 12,250
-------- --------
Total current assets .................................................... 588,668 646,893
Fixed Assets, net of accumulated depreciation ............................... 30,936 36,574
-------- --------
Total assets ............................................................ $619,604 $683,467
-------- --------
LIABILITIES AND PARENT COMPANY'S INVESTMENT AND ADVANCES
Current Liabilities:
Accounts payable .......................................................... $165,337 $183,051
Accrued liabilities ....................................................... 189,297 164,586
Deferred revenue .......................................................... 25,607 336,172
-------- --------
Total current liabilities ............................................... 380,241 683,809
Parent Company's Investment and Net Advances ................................ 239,363 (342)
-------- --------
Total liabilities and parent company's investment and advances .......... $619,604 $683,467
-------- --------
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-54
<PAGE>
CLIQNOW!
(A Division of K2 Design, Inc.)
STATEMENTS OF OPERATIONS AND CHANGES IN
PARENT COMPANY'S INVESTMENT AND ADVANCES
<TABLE>
<CAPTION>
Year Ended Quarter Ended Quarter Ended
December 31, March 31, March 31,
1997 1997 1998
-------------- --------------- --------------
(unaudited) (unaudited)
<S> <C> <C> <C>
Advertising Revenues ........................ $ 896,427 $ 15,295 $ 500,559
Cost of Revenues ........................... 479,742 4,616 284,452
---------- ---------- ----------
Gross Profit ............................. 416,685 10,679 216,107
Operating Expenses:
Sales and Marketing ........................ 417,093 60,694 122,198
General and Administrative ................. 461,755 77,073 143,365
---------- ---------- ----------
Total Operating Expenses .................... 878,848 137,767 265,563
Loss from operations ........................ (462,163) (127,088) (49,456)
Provision for Income Taxes .................. -- -- --
---------- ---------- ----------
Net loss .................................... (462,163) (127,088) (49,456)
Parent Company's Investment and Net Advances,
beginning of the period .................... -- -- 239,363
Parent Company advances (payments) .......... 701,526 147,619 (190,249)
---------- ---------- ----------
Parent Company's Investment and Net Advances,
end of the period .......................... $ 239,363 $ 20,531 $ (342)
========== ========== ==========
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-55
<PAGE>
CLIQNOW!
(A Division of K2 Design, Inc.)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended Quarter Ended Quarter Ended
December 31, March 31, March 31,
1997 1997 1998
-------------- --------------- --------------
(unaudited) (unaudited)
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net loss .................................................. $ (462,163) $ (127,088) $ (49,456)
Adjustments to reconcile net loss to net cash provided
by (used in) operating activities:
Depreciation ............................................. 8,809 -- 3,806
Changes in operating assets and liabilities:
Accounts receivable ..................................... (535,708) (15,295) (98,935)
Prepaid and other current assets ........................ (52,960) -- 40,710
Accounts payable ........................................ 165,337 -- 17,714
Accrued liabilities ..................................... 189,297 10,514 (24,711)
Deferred revenue ........................................ 25,607 -- 310,565
---------- ---------- ----------
Net cash provided by (used in) operating
activities ............................................ (661,781) (131,869) 199,693
Cash Flows from Investing Activities:
Purchases of fixed assets ................................. (39,745) (15,750) (9,444)
Cash Flows from Financing Activities:
Increase (decrease) in due to parent company, net ......... 701,526 147,619 (190,249)
---------- ---------- ----------
Net increase in cash ................................... -- -- --
Cash, beginning of the period .............................. -- -- --
---------- ---------- ----------
Cash, end of the period .................................... $ -- $ -- $ --
========== ========== ==========
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-56
<PAGE>
CLIQNOW!
(A Division of K2 Design, Inc)
NOTES TO FINANCIAL STATEMENTS
As of December 31, 1997 and
As of March 31, 1998 (unaudited)
(1) Organization and Business
CliqNow! ("Cliq" or "the Company") is a division of K2 Design, Inc.
("K2"). The Company was established in 1996 with operations commencing in 1997.
The Company creates Website networks which are composed of individual,
homogenous websites joined by a link page. Each website network creates a
synergy yielding greater exposure for each website than could have been
achieved individually.
K2 is a full service interactive communications, design and technology
company, engaged primarily in the business of interactive advertising. K2 also
provides various other information delivery services. K2's customers are
primarily U.S.-based corporations operating in a wide variety of industries.
(2) Summary of Significant Accounting Policies
Use of Estimates in the Preparation of Financial Statements
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.
Revenue Recognition
The Company sells advertising space for banners on all webpages in the
network. The advertisers are pre-billed based on terms of the specific
agreements entered into. Revenue is earned progressively as adviews occur. At
the end of each reporting period all unearned revenue is deferred.
Each website is paid a commission based on the number of clicks on their
respective website.
Fixed Assets
Fixed assets are carried at cost and depreciated using the straight-line
method over the estimated useful lives. Fixed assets are primarily comprised of
computer equipment and are being depreciated over three years.
Income Taxes
K2 has elected to be treated as a C Corporation. As a result, K2 is
subject to Federal, New York state and city income taxes on K2's taxable
income. Cliq's operations are included in the consolidated tax return of K2.
Income taxes are calculated and provided for on a consolidated basis.
Accordingly, no provision for income taxes has been recorded for Cliq for the
year ended December 31, 1997.
Federal, state and city income taxes are provided in accordance with
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes" (SFAS 109). Under the asset and liability method of SFAS 109, 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. 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. Deferred taxes were not significant for
the year ended December 31, 1997.
Fair Value of Financial Instruments
The carrying amounts of the Company's cash, accounts receivable, and
accounts payable approximate fair market value based upon the relatively
short-term nature of these financial instruments.
Unaudited Interim Financial Statements
The accompanying balance sheet as of March 31, 1998 and the accompanying
statements of operations and changes in parent Company's investment and
advances, and cash flows for the three months ended March 31, 1997
F-57
<PAGE>
CLIQNOW!
(A Division of K2 Design, Inc.)
NOTES TO FINANCIAL STATEMENTS--(Continued)
As of December 31, 1997 and
As of March 31, 1998 (unaudited)
(2) Summary of Significant Accounting Policies --Continued
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.
Reclassifications
Certain expenses in the December 31, 1997 statement of operations of Cliq
have been classified on a basis different than those reported in the December
31, 1997 Form 10-K of K2.
(3) Parent Company's Investment and Advances
Operations of Cliq are funded through advances from K2. As of December 31,
1997, $701,526 of advances from K2 were outstanding. Those advances have no
defined repayment terms and will be repaid from the operations of Cliq. In
addition, the balance at December 31, 1997 also includes the accumulated losses
of Cliq from inception.
(4) Major Customers
During 1997, the Company had sales to 2 customers representing 23% and 11%
of revenues. The Company had accounts receivable from these customers amounting
to $307,501 as of December 31, 1997.
(5) Subsequent Event (unaudited)
In May 1998, K2 entered into an agreement with 24/7 Media, Inc. to sell
the Cliq division. K2 will receive $1 million in cash and $3 million in 24/7
Media, Inc. Series B Convertible Preferred Stock. A portion of this cash and
stock will be paid to executives of Cliq.
F-58
<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 ...................................... 27
Management .................................... 38
Certain Transactions .......................... 46
Security Ownership of Certain Beneficial
Owners and Management ........................ 48
Description of Capital Stock .................. 50
Shares Eligible For Future Sale ............... 53
Underwriting .................................. 55
Legal Matters ................................. 57
Experts ....................................... 57
Available Information ......................... 57
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.
3,250,000 Shares
[LOGO OF 24/7 MEDIA]
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 ...................... $ 16,750
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 .............. 500,000
Blue Sky fees and expenses ................ 15,000
Transfer agent and registrar fees ......... 5,000
Miscellaneous ............................. 131,150
----------
Total ................................... $1,200,000
==========
</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. None of the transactions set forth below involved any public
offering or any underwriter, and the Company believes that each transaction was
exempt from the registration requirements of the Securities Act by virtue of
Section 4(2) thereof, Regulation D promulgated thereunder, or Rule 701 pursuant
to compensatory benefit plans and contracts relating to compensation as
provided under such Rule 701, or, with respect to paragraph 13 below, in
reliance on Rule 145(a)(2) under the Securities Act. The recipients in each
transaction represented their intention to acquire the securities for
investment only and not with a view to or for sale in connection with any
distribution thereof, and appropriate legends were affixed to share
certificates and instruments issued in such transactions. All recipients had
adequate access, through their relationships with the Company, to information
about the Company. The shares of common stock set forth below reflect the one
for four reverse split of the Registrant's Common Stock to be effective prior
to the closing of the offering of common stock.
II-1
<PAGE>
(1) During 1996, the Registrant issued 858,988 shares of common stock to
certain members of senior management, including Michael P. Paolucci, immediate
family members of senior management, and certain sophisticated investors,
including The Travelers Insurance Company, for an aggregate purchase price of
$4,525,000. Each of the investors was sophisticated within the meaning of the
exemption provided for by Section 4(2) of the Securities Act.
(2) In August 1996, the Registrant issued convertible subordinated notes in
the principal amount of $500,000, convertible into common stock at a price of
$0.72 per share and warrants to purchase 6,533 shares of common stock at a
price of $0.72 per share. Each of the purchasers was sophisticated within the
meaning of the exemption provided for by Section 4(2) of the Securities Act.
(3) In November 1996 through January 1997, the Registrant completed a series
of private placements of 158,144 shares of preferred stock, to a group of
investors including The Travelers Insurance Company, convertible into common
stock at a price of $0.72 per share, subject to anti-dilution adjustment, for
an aggregate purchase price of $4,538,733. Each of the investors was
sophisticated within the meaning of the exemption provided for by Section 4(2)
of the Securities Act.
(4) During 1997, the Registrant received $2,400,000 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 $0.10 to $0.52 per share. Each of the investors was
sophisticated within the meaning of the exemption provided for by Section 4(2)
of the Securities Act. was sophisticated within the meaning of the exemption
provided for by Section 4(2) of the Securities Act.
(5) In April 1997, the Registrant granted warrants to purchase 4,375 shares of
common stock at $49.72 per share. The recipient was sophisticated within the
meaning of the exemption provided for by Section 4(2) of the Securities Act.
(6) In January 1998, the Registrant issued $150,000 in senior convertible
notes to The Travelers Insurance Company, convertible into 43,321 shares of
common stock at $0.22 per share. The purchaser was sophisticated within the
meaning of the exemption provided for by Section 4(2) of the Securities Act.
(7) In January 1998, the Registrant granted warrants to purchase 28,750 shares
of common stock to a consultant of the Registrant in consideration of services
rendered to the Registrant. The recipient was sophisticated within the meaning
of the exemption provided for by Section 4(2) of the Securities Act.
(8) In connection with the February 1998 merger of Petry Interactive, Inc. and
Advercomm, Inc. with and into the Registrant, (i) the Registrant issued
2,623,592 shares of common stock to former shareholders of Petry Interactive,
Inc., including David J. Moore, Mark A. Burchill and Scott E. Cohen, and
1,705,334 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 625,000 shares of
common stock at a purchase price of $3.81 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,
convertible into common stock at a conversion price of $3.81 per share, for
aggregate proceeds of $10,000,000; (iv) the Registrant granted certain
investors warrants to purchase 1,320,904 share of common stock at $7.61 per
share and warrants to purchase 1,320,904 shares of common stock at $11.42 per
share; (v) the Registrant granted to consultants warrants to purchase an
aggregate of 18,750 shares of common stock at $3.81 per share. Each of the
recipients of securities pursuant to the Merger Agreement was sophisticated
within the meaning of the exemption provided for by Section 4(2) of the
Securities Act.
(9) In connection with the April 1998 acquisition of Intelligent Interactions,
Corp., (i) the Registrant issued 949,243 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, convertible into common stock at a conversion price of $3.81 per share,
to certain former preferred 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 265,152 shares of common stock at a purchase price of $7.61 per share,
warrants to purchase 265,152 shares of common stock at a purchase price of
$11.42 per share and warrants to purchase 136,553 shares of common stock at a
purchase price of $3.81 per share.
II-2
<PAGE>
Each of the recipients of securities pursuant to the Merger Agreement was
sophisticated within the meaning of the exemption provided for by Section 4(2)
of the Securities Act.
(10) In April 1998, the Registrant issued 5,908 shares of common stock to
consultants in consideration of services rendered to the Registrant. The
recipient was sophisticated within the meaning of the exemption provided for by
Section 4(2) of the Securities Act.
(11) In June 1998, the Registrant issued to K2 Design, Inc. 3,000 shares of
the Registrant's Series B Convertible Preferred Stock, automatically
convertible into common stock upon consummation of the Offering at a conversion
price equal to the price per share to the Underwriters, in connection with the
acquisition of the CliqNow! division of K2 Design, Inc. The recipient was
sophisticated within the meaning of the exemption provided for by Section 4(2)
of the Securities Act.
(12) 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 January 1996 through July 1998 an aggregate of
1,235,826 shares of common stock were issued pursuant to option exercises at
exercise prices ranging from $0.16 to $11.92 to employees, directors and
consultants.
(13) In connection with the reincorporation of the Registrant from a New York
corporation to a Delaware corporation in March 1998, the Company issued shares
of its Common Stock and Series A Convertible Preferred Stock in exchange for
the issued and outstanding capital stock of its predecessor corporation. In
addition, in connection with such reincorporation, all options and warrants to
purchaser common shares of the predecessor were converted into options or
warrants to purchase shares of Common Stock.
II-3
<PAGE>
Item 16. Exhibits and Financial Statement Schedule/Index
<TABLE>
<S> <C>
1.1 Form of Underwriting Agreement.
1.2 Form of Lock Up 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.
10.3.1 +Lease Agreement, dated April 30, 1998, between the Company and 38-32 Associates.
10.3.2 Lease Option Notice, dated July 7, 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.
10.16 GlobalCenter Master Service Agreement, dated May 1, 1998.
10.17 Operating Lease agreement dated June 1, 1996 between Brentwood Credit Corporation, AT&T
Systems Leasing and Interactive Imaginations, Inc. (including amendments thereto).
10.18 Operating Lease agreement, dated May 18, 1998, as amended on July 7, 1998 between Sun
Microsystems and 24/7 Media, Inc. and as amended on July 7, 1998.
10.19 Pledge and Security Agreement, dated as of November 11, 1997, between Interactive
Imaginations, Inc. and The Travelers Insurance Company.
10.20 Senior Convertible Note with Warrants Purchase Agreement, dated as of June 11, 1997,
between Interactive Imaginations, Inc. and The Travelers Insurance Company.
</TABLE>
II-4
<PAGE>
<TABLE>
<S> <C>
10.21 Amended and Restated Stockholders' Agreement by and among 24/7 Media, Inc. and certain
investors named therein.
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 Arthur Andersen LLP.
23.4 Consent of Proskauer Rose LLP (included in Exhibit 5.1).
23.5 Consent of Media Metrix.
23.6 Consent of Jupiter Communications.
23.7 Consent of International Data Corporation.
23.8 Consent of Network Solutions.
23.9 Consent of Direct Marketing Association.
24.1 +Powers of Attorney (included with signature page).
27.1 +Financial Data Schedule.
</TABLE>
- ----------------
+ Previously filed.
* Re-filed herewith.
II-5
<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-6
<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 July 22, 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 July 22, 1998 by the following
persons 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
* Chairman of the Board
- -------------------------
R. Theodore Ammon
* Executive Vice President--Technology and Director
- -------------------------
Yale R. Brown
* Executive Vice President and Director
- -------------------------
Jacob I. Friesel
/s/ John F. Barry Director
- -------------------------
John F. Barry
* Director
- -------------------------
Michael P. Paolucci
* Director
- -------------------------
Jack L. Rivkin
/s/ Arnie Semsky Director
- -------------------------
Arnie Semsky
* Director
- -------------------------
Charles Stryker
/s/ C. Andrew Johns Executive Vice President, Treasurer & Chief
- ------------------------- Financial Officer (Principal Financial Officer)
C. Andrew Johns
* Controller (Principal Accounting Officer)
- -------------------------
Stuart D. Shaw
</TABLE>
*By: /s/ Mark E. Moran
----------------------------
Mark E. Moran
Attorney-in-Fact
II-7
<PAGE>
Exhibits and Financial Statement Schedule/Index
Item 16. Exhibits and Financial Statement Schedule/Index
<TABLE>
<S> <C>
1.1 Form of Underwriting Agreement.
1.2 Form of Lock Up 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.
10.3.1 +Lease Agreement, dated April 30, 1998, between the Company and 38-32 Associates.
10.3.2 Lease Option Notice, dated July 7, 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.
10.16 GlobalCenter Master Service Agreement, dated May 1, 1998.
10.17 Operating Lease agreement dated June 1, 1996 between Brentwood Credit Corporation, AT&T
Systems Leasing and Interactive Imaginations, Inc. (including amendments thereto).
10.18 Operating Lease agreement, dated May 18, 1998, as amended on July 7, 1998 between Sun
Microsystems and 24/7 Media, Inc. and as amended on July 7, 1998.
10.19 Pledge and Security Agreement, dated as of November 11, 1997, between Interactive
Imaginations, Inc. and The Travelers Insurance Company.
10.20 Senior Convertible Note with Warrants Purchase Agreement, dated as of June 11, 1997,
between Interactive Imaginations, Inc. and The Travelers Insurance Company.
</TABLE>
II-8
<PAGE>
<TABLE>
<S> <C>
10.21 Amended and Restated Stockholders' Agreement by and among 24/7 Media, Inc. and certain
investors named therein.
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 Arthur Andersen LLP.
23.4 Consent of Proskauer Rose LLP (included in Exhibit 5.1).
23.5 Consent of Media Metrix.
23.6 Consent of Jupiter Communications.
23.7 Consent of International Data Corporation.
23.8 Consent of Network Solutions.
23.9 Consent of Direct Marketing Association.
24.1 +Powers of Attorney (included with signature page).
27.1 +Financial Data Schedule.
</TABLE>
- ----------------
+ Previously filed.
* Re-filed herewith.
II-9
Draft of May 26, 1998
24/7 MEDIA, INC.
(a Delaware corporation)
__,000,000 Shares of Common Stock
(Par Value $__ Per Share)
PURCHASE AGREEMENT
June __, 1998
MERRILL LYNCH & CO.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
Allen & Company, Inc.
J. P. Morgan & Co.
c/o Merrill Lynch & Co.
Merrill Lynch, Pierce, Fenner & Smith,
Incorporated
North Tower
World Financial Center
New York, New York 10281-1209
Ladies and Gentlemen:
24/7 Media, Inc., a Delaware corporation (the "Company"), confirms its
agreement with Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("Merrill Lynch") and each of the other Underwriters named in
Schedule A hereto (collectively, the "Underwriters", which term shall also
include any underwriter substituted as hereinafter provided in Section 10
hereof), for whom Merrill Lynch, Allen & Company Incorporated and J.P. Morgan &
Co. are acting as Representatives (in such capacity, the "Representatives"),
with respect to the issue and sale by the Company and the purchase by the
Underwriters, acting severally and not jointly, of the respective numbers of
shares of Common Stock, par value $__ per share, of the Company ("Common Stock")
set forth in said Schedule A, and with respect to the grant by the Company to
the Underwriters, acting severally and not jointly, of the option described in
Section 2(b) hereof to purchase all or any part of __________ additional shares
of Common Stock to cover over-allotments, if any. The aforesaid ___________
shares of Common Stock (the "Initial Securities") to be purchased by the
Underwriters and all or any part of the _____________ shares of Common Stock
subject to the
<PAGE>
option described in Section 2(b) hereof (the "Option Securities") are
hereinafter called, collectively, the "Securities".
The Company understands that the Underwriters propose to make a public
offering of the Securities as soon as the Representatives deem advisable after
this Agreement has been executed and delivered.
The Company and the Underwriters agree that up to _______ shares of the
Securities to be purchased by the Underwriters (the "Reserved Securities") shall
be reserved for sale by the Underwriters to certain eligible employees and
persons having business relationships with the Company, as part of the
distribution of the Securities by the Underwriters, subject to the terms of this
Agreement, the applicable rules, regulations and interpretations of the National
Association of Securities Dealers, Inc. and all other applicable laws, rules and
regulations. To the extent that such Reserved Securities are not orally
confirmed for purchase by such eligible employees and persons having business
relationships with the Company by the end of the first business day after the
date of this Agreement, such Reserved Securities may be offered to the public as
part of the public offering contemplated hereby.
The Company has filed with the Securities and Exchange Commission (the
"Commission") a registration statement on Form S-1 (No. 333-_) covering the
registration of the Securities under the Securities Act of 1933, as amended (the
"1933 Act"), including the related preliminary prospectus or prospectuses.
Promptly after execution and delivery of this Agreement, the Company will either
(i) prepare and file a prospectus in accordance with the provisions of Rule 430A
("Rule 430A") of the rules and regulations of the Commission under the 1933 Act
(the "1933 Act Regulations") and paragraph (b) of Rule 424 ("Rule 424(b)") of
the 1933 Act Regulations or (ii) if the Company has elected to rely upon Rule
434 ("Rule 434") of the 1933 Act Regulations, prepare and file a term sheet (a
"Term Sheet") in accordance with the provisions of Rule 434 and Rule 424(b). The
information included in such prospectus or in such Term Sheet, as the case may
be, that was omitted from such registration statement at the time it became
effective but that is deemed to be part of such registration statement at the
time it became effective (a) pursuant to paragraph (b) of Rule 430A is referred
to as "Rule 430A Information" or (b) pursuant to paragraph (d) of Rule 434 is
referred to as "Rule 434 Information." Each prospectus used before such
registration statement became effective, and any prospectus that omitted, as
applicable, the Rule 430A Information or the Rule 434 Information, that was used
after such effectiveness and prior to the execution and delivery of this
Agreement, is herein called a "preliminary prospectus." Such registration
statement, including the exhibits thereto and schedules thereto at the time it
became effective and including the Rule 430A Information and the Rule 434
Information, as applicable, is herein called the "Registration Statement." Any
registration statement filed pursuant to Rule 462(b) of the 1933 Act Regulations
is herein referred to as the "Rule 462(b) Registration Statement," and after
such filing the term "Registration Statement" shall include the Rule 462(b)
Registration Statement. The final prospectus in the form first furnished to the
Underwriters for use in connection with the offering of the Securities is herein
called the "Prospectus." If Rule 434 is relied on, the term "Prospectus" shall
refer to the preliminary prospectus dated _____, 1998 together with the Term
Sheet and all references in this Agreement to the date of the Prospectus shall
mean the date of the Term Sheet. For purposes of this Agreement, all references
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to the Registration Statement, any preliminary prospectus, the Prospectus or any
Term Sheet or any amendment or supplement to any of the foregoing shall be
deemed to include the copy filed with the Commission pursuant to its Electronic
Data Gathering, Analysis and Retrieval system ("EDGAR").
SECTION 1. Representations and Warranties.
(a) Representations and Warranties by the Company. The Company represents
and warrants to each Underwriter as of the date hereof, as of the Closing Time
referred to in Section 2(c) hereof, and as of each Date of Delivery (if any)
referred to in Section 2(b) hereof, and agrees with each Underwriter, as
follows:
(i) Compliance with Registration Requirements. Each of the
Registration Statement and any Rule 462(b) Registration Statement has
become effective under the 1933 Act and no stop order suspending the
effectiveness of the Registration Statement or any Rule 462(b)
Registration Statement has been issued under the 1933 Act and no
proceedings for that purpose have been instituted or are pending or, to
the knowledge of the Company, are contemplated by the Commission, and any
request on the part of the Commission for additional information has been
complied with. At the respective times the Registration Statement, any
Rule 462(b) Registration Statement and any post-effective amendments
thereto became effective and at the Closing Time (and, if any Option
Securities are purchased, at the Date of Delivery), the Registration
Statement, the Rule 462(b) Registration Statement and any amendments and
supplements thereto complied and will comply in all material respects with
the requirements of the 1933 Act and the 1933 Act Regulations and did not
and will not contain an untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make
the statements therein not misleading, and the Prospectus, any preliminary
prospectus and any supplement thereto or prospectus wrapper prepared in
connection therewith, at their respective times of issuance and at the
Closing Time, complied and will comply in all material respects with any
applicable laws or regulations of foreign jurisdictions in which the
Prospectus and such preliminary prospectus, as amended or supplemented, if
applicable, are distributed in connection with the offer and sale of
Reserved Securities. Neither the Prospectus nor any amendments or
supplements thereto (including any prospectus wrapper), at the time the
Prospectus or any such amendment or supplement was issued and at the
Closing Time (and, if any Option Securities are purchased, at the Date of
Delivery), included or will include an untrue statement of a material fact
or omitted or will omit to state a material fact necessary in order to
make the statements therein, in the light of the circumstances under which
they were made, not misleading. If Rule 434 is used, the Company will
comply with the requirements of Rule 434 and the Prospectus shall not be
"materially different", as such term is used in Rule 434, from the
prospectus included in the Registration Statement at the time it became
effective. The representations and warranties in this subsection shall not
apply to statements in or omissions from the Registration Statement or
Prospectus made in reliance upon and in conformity with information
furnished to the Company in writing by any Underwriter through Merrill
Lynch expressly for use in the Registration Statement or Prospectus.
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Each preliminary prospectus and the prospectus filed as part of the
Registration Statement as originally filed or as part of any amendment
thereto, or filed pursuant to Rule 424 under the 1933 Act, complied when
so filed in all material respects with the 1933 Act Regulations and each
preliminary prospectus and the Prospectus delivered to the Underwriters
for use in connection with this offering was identical to the
electronically transmitted copies thereof filed with the Commission
pursuant to EDGAR, except to the extent permitted by Regulation S-T.
(ii) Independent Accountants. The accountants who certified the
financial statements and supporting schedules included in the Registration
Statement are independent public accountants as required by the 1933 Act
and the 1933 Act Regulations.
(iii) Financial Statements. The financial statements included in the
Registration Statement and the Prospectus, together with the related
schedules and notes, present fairly the financial position of the Company
and its consolidated subsidiaries at the dates indicated and the statement
of operations, stockholders' equity and cash flows of the Company and its
consolidated subsidiaries for the periods specified; said financial
statements have been prepared in conformity with generally accepted
accounting principles ("GAAP") applied on a consistent basis throughout
the periods involved. The supporting schedules included in the
Registration Statement present fairly in accordance with GAAP the
information required to be stated therein. The selected financial data and
the summary financial information included in the Prospectus present
fairly the information shown therein and have been compiled on a basis
consistent with that of the audited financial statements included in the
Registration Statement. The pro forma financial statements and the related
notes thereto included in the Registration Statement and the Prospectus
present fairly the information shown therein, have been prepared in
accordance with the Commission's rules and guidelines with respect to pro
forma financial statements and have been properly compiled on the bases
described therein, and the assumptions used in the preparation thereof are
reasonable and the adjustments used therein are appropriate to give effect
to the transactions and circumstances referred to therein.
(iv) No Material Adverse Change in Business. Since the respective
dates as of which information is given in the Registration Statement and
the Prospectus, except as otherwise stated therein, (A) there has been no
material adverse change in the condition, financial or otherwise, or in
the earnings, business affairs or business prospects of the Company and
its subsidiaries considered as one enterprise, whether or not arising in
the ordinary course of business (a "Material Adverse Effect"), (B) there
have been no transactions entered into by the Company or any of its
subsidiaries, other than those in the ordinary course of business, which
are material with respect to the Company and its subsidiaries considered
as one enterprise, and (C) there has been no dividend or distribution of
any kind declared, paid or made by the Company on any class of its capital
stock.
(v) Good Standing of the Company. The Company has been duly
organized and is validly existing as a corporation in good standing under
the laws of the State of Delaware
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and has corporate power and authority to own, lease and operate its
properties and to conduct its business as described in the Prospectus and
to enter into and perform its obligations under this Agreement; and the
Company is duly qualified as a foreign corporation to transact business
and is in good standing in each other jurisdiction in which such
qualification is required, whether by reason of the ownership or leasing
of property or the conduct of business, except where the failure so to
qualify or to be in good standing would not result in a Material Adverse
Effect.
(vi) Good Standing of Subsidiaries. Each "significant subsidiary" of
the Company (as such term is defined in Rule 1-02 of Regulation S-X) (each
a "Subsidiary" and, collectively, the "Subsidiaries") has been duly
organized and is validly existing as a corporation in good standing under
the laws of the jurisdiction of its incorporation, has corporate power and
authority to own, lease and operate its properties and to conduct its
business as described in the Prospectus and is duly qualified as a foreign
corporation to transact business and is in good standing in each
jurisdiction in which such qualification is required, whether by reason of
the ownership or leasing of property or the conduct of business, except
where the failure so to qualify or to be in good standing would not result
in a Material Adverse Effect; except as otherwise disclosed in the
Registration Statement, all of the issued and outstanding capital stock of
each such Subsidiary has been duly authorized and validly issued, is fully
paid and non-assessable and is owned by the Company, directly or through
subsidiaries, free and clear of any security interest, mortgage, pledge,
lien, encumbrance, claim or equity; none of the outstanding shares of
capital stock of any Subsidiary was issued in violation of the preemptive
or similar rights of any securityholder of such Subsidiary. The only
subsidiaries of the Company are (a) the subsidiaries listed on Exhibit 21
to the Registration Statement and (b) certain other subsidiaries which,
considered in the aggregate as a single Subsidiary, do not constitute a
Asignificant subsidiary" as defined in Rule 1-02 of Regulation S-X.
(vii) Capitalization. The authorized, issued and outstanding capital
stock of the Company is as set forth in the Prospectus in the column
entitled "Actual" under the caption "Capitalization" (except for
subsequent issuances, if any, pursuant to this Agreement, pursuant to
reservations, agreements or employee benefit plans referred to in the
Prospectus or pursuant to the exercise of convertible securities or
options referred to in the Prospectus). The shares of issued and
outstanding capital stock of the Company have been duly authorized and
validly issued and are fully paid and non-assessable; none of the
outstanding shares of capital stock of the Company was issued in violation
of the preemptive or other similar rights of any securityholder of the
Company.
(viii) Authorization of Agreement. This Agreement has been duly
authorized, executed and delivered by the Company.
(ix) Authorization and Description of Securities. The Securities
have been duly authorized for issuance and sale to the Underwriters
pursuant to this Agreement and, when issued and delivered by the Company
pursuant to this Agreement against payment of the
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<PAGE>
consideration set forth herein, will be validly issued and fully paid and
non-assessable; the Common Stock conforms to all statements relating
thereto contained in the Prospectus and such description conforms to the
rights set forth in the instruments defining the same; no holder of the
Securities will be subject to personal liability by reason of being such a
holder; and the issuance of the Securities is not subject to the
preemptive or other similar rights of any securityholder of the Company.
(x) Absence of Defaults and Conflicts. Neither the Company nor any
of its subsidiaries is in violation of its charter or by-laws or in
default in the performance or observance of any obligation, agreement,
covenant or condition contained in any contract, indenture, mortgage, deed
of trust, loan or credit agreement, note, lease or other agreement or
instrument to which the Company or any of its subsidiaries is a party or
by which it or any of them may be bound, or to which any of the property
or assets of the Company or any subsidiary is subject (collectively,
"Agreements and Instruments") except for such defaults that would not
result in a Material Adverse Effect; and the execution, delivery and
performance of this Agreement and the consummation of the transactions
contemplated herein and in the Registration Statement (including the
issuance and sale of the Securities and the use of the proceeds from the
sale of the Securities as described in the Prospectus under the caption
"Use of Proceeds") and compliance by the Company with its obligations
hereunder have been duly authorized by all necessary corporate action and
do not and will not, whether with or without the giving of notice or
passage of time or both, conflict with or constitute a breach of, or
default or Repayment Event (as defined below) under, or result in the
creation or imposition of any lien, charge or encumbrance upon any
property or assets of the Company or any subsidiary pursuant to, the
Agreements and Instruments (except for such conflicts, breaches or
defaults or liens, charges or encumbrances that would not result in a
Material Adverse Effect), nor will such action result in any violation of
the provisions of the charter or by-laws of the Company or any subsidiary
or any applicable law, statute, rule, regulation, judgment, order, writ or
decree of any government, government instrumentality or court, domestic or
foreign, having jurisdiction over the Company or any subsidiary or any of
their assets, properties or operations. As used herein, a "Repayment
Event" means any event or condition which gives the holder of any note,
debenture or other evidence of indebtedness (or any person acting on such
holder's behalf) the right to require the repurchase, redemption or
repayment of all or a portion of such indebtedness by the Company or any
subsidiary.
(xi) Absence of Labor Dispute. No labor dispute with the employees
of the Company or any subsidiary exists or, to the knowledge of the
Company, is imminent, and the Company is not aware of any existing or
imminent labor disturbance by the employees of any of its or any
subsidiary's principal suppliers, manufacturers, customers or contractors,
which, in either case, may reasonably be expected to result in a Material
Adverse Effect.
(xii) Absence of Proceedings. There is no action, suit, proceeding,
inquiry or investigation before or brought by any court or governmental
agency or body, domestic or foreign, now pending, or, to the knowledge of
the Company, threatened, against or affecting
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<PAGE>
the Company or any subsidiary, which is required to be disclosed in the
Registration Statement (other than as disclosed therein), or which might
reasonably be expected to result in a Material Adverse Effect, or which
might reasonably be expected to materially and adversely affect the
properties or assets thereof or the consummation of the transactions
contemplated in this Agreement or the performance by the Company of its
obligations hereunder; the aggregate of all pending legal or governmental
proceedings to which the Company or any subsidiary is a party or of which
any of their respective property or assets is the subject which are not
described in the Registration Statement, including ordinary routine
litigation incidental to the business, could not reasonably be expected to
result in a Material Adverse Effect.
(xiii) Accuracy of Exhibits. There are no contracts or documents
which are required to be described in the Registration Statement or the
Prospectus or to be filed as exhibits thereto which have not been so
described and filed as required.
(xiv) Possession of Intellectual Property. The Company and its
subsidiaries own or possess, or can acquire on reasonable terms, adequate
patents, patent rights, licenses, inventions, copyrights, know-how
(including trade secrets and other unpatented and/or unpatentable
proprietary or confidential information, systems or procedures),
trademarks, service marks, trade names or other intellectual property
(collectively, "Intellectual Property") necessary to carry on the business
now operated by them, and neither the Company nor any of its subsidiaries
has received any notice or is otherwise aware of any infringement of or
conflict with asserted rights of others with respect to any Intellectual
Property or of any facts or circumstances which would render any
Intellectual Property invalid or inadequate to protect the interest of the
Company or any of its subsidiaries therein, and which infringement or
conflict (if the subject of any unfavorable decision, ruling or finding)
or invalidity or inadequacy, singly or in the aggregate, would result in a
Material Adverse Effect.
(xv) Absence of Further Requirements. No filing with, or
authorization, approval, consent, license, order, registration,
qualification or decree of, any court or governmental authority or agency
is necessary or required for the performance by the Company of its
obligations hereunder, in connection with the offering, issuance or sale
of the Securities hereunder or the consummation of the transactions
contemplated by this Agreement, except (i) such as have been already
obtained or as may be required under the 1933 Act or the 1933 Act
Regulations or state securities laws and (ii) such as have been obtained
under the laws and regulations of jurisdictions outside the United States
in which the Reserved Securities are offered.
(xvi) Possession of Licenses and Permits. The Company and its
subsidiaries possess such permits, licenses, approvals, consents and other
authorizations (collectively, "Governmental Licenses") issued by the
appropriate federal, state, local or foreign regulatory agencies or bodies
necessary to conduct the business now operated by them; the Company and
its subsidiaries are in compliance with the terms and conditions of all
such Governmental Licenses, except where the failure so to comply would
not, singly or in the aggregate, have
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<PAGE>
a Material Adverse Effect; all of the Governmental Licenses are valid and
in full force and effect, except when the invalidity of such Governmental
Licenses or the failure of such Governmental Licenses to be in full force
and effect would not have a Material Adverse Effect; and neither the
Company nor any of its subsidiaries has received any notice of proceedings
relating to the revocation or modification of any such Governmental
Licenses which, singly or in the aggregate, if the subject of an
unfavorable decision, ruling or finding, would result in a Material
Adverse Effect.
(xvii) Title to Property. The Company and its subsidiaries have good
and marketable title to all real property owned by the Company and its
subsidiaries and good title to all other properties owned by them, in each
case, free and clear of all mortgages, pledges, liens, security interests,
claims, restrictions or encumbrances of any kind except such as (a) are
described in the Prospectus or (b) do not, singly or in the aggregate,
materially affect the value of such property and do not interfere with the
use made and proposed to be made of such property by the Company or any of
its subsidiaries; and all of the leases and subleases material to the
business of the Company and its subsidiaries, considered as one
enterprise, and under which the Company or any of its subsidiaries holds
properties described in the Prospectus, are in full force and effect, and
neither the Company nor any subsidiary has any notice of any material
claim of any sort that has been asserted by anyone adverse to the rights
of the Company or any subsidiary under any of the leases or subleases
mentioned above, or affecting or questioning the rights of the Company or
such subsidiary to the continued possession of the leased or subleased
premises under any such lease or sublease.
(xviii) Compliance with Cuba Act. The Company has complied with, and
is and will be in compliance with, the provisions of that certain Florida
act relating to disclosure of doing business with Cuba, codified as
Section 517.075 of the Florida statutes, and the rules and regulations
thereunder (collectively, the "Cuba Act") or is exempt therefrom.
(xix) Investment Company Act. The Company is not, and upon the
issuance and sale of the Securities as herein contemplated and the
application of the net proceeds therefrom as described in the Prospectus
will not be, an "investment company" or an entity "controlled" by an
"investment company" as such terms are defined in the Investment Company
Act of 1940, as amended (the "1940 Act").
(xx) Environmental Laws. Except as described in the Registration
Statement and except as would not, singly or in the aggregate, result in a
Material Adverse Effect, (A) neither the Company nor any of its
subsidiaries is in violation of any federal, state, local or foreign
statute, law, rule, regulation, ordinance, code, policy or rule of common
law or any judicial or administrative interpretation thereof, including
any judicial or administrative order, consent, decree or judgment,
relating to pollution or protection of human health, the environment
(including, without limitation, ambient air, surface water, groundwater,
land surface or subsurface strata) or wildlife, including, without
limitation, laws and regulations relating to the release or threatened
release of chemicals, pollutants, contaminants, wastes, toxic substances,
hazardous substances, petroleum or petroleum products (collectively,
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<PAGE>
"Hazardous Materials") or to the manufacture, processing, distribution,
use, treatment, storage, disposal, transport or handling of Hazardous
Materials (collectively, "Environmental Laws"), (B) the Company and its
subsidiaries have all permits, authorizations and approvals required under
any applicable Environmental Laws and are each in compliance with their
requirements, (C) there are no pending or threatened administrative,
regulatory or judicial actions, suits, demands, demand letters, claims,
liens, notices of noncompliance or violation, investigation or proceedings
relating to any Environmental Law against the Company or any of its
subsidiaries and (D) there are no events or circumstances that might
reasonably be expected to form the basis of an order for clean-up or
remediation, or an action, suit or proceeding by any private party or
governmental body or agency, against or affecting the Company or any of
its subsidiaries relating to Hazardous Materials or any Environmental
Laws.
(xxi) Registration Rights. There are no persons with registration
rights or other similar rights to have any securities registered pursuant
to the Registration Statement or otherwise registered by the Company under
the 1933 Act.
(xxii) Year 2000 Compliance. All of the products and services of the
Company and each of its subsidiaries (including products and services
under development) will record, store, process, calculate and present
calendar dates falling on and after (and if applicable, spans of time
including) January 1, 2000, and will calculate any information dependent
on or relating to such dates in the same manner, and with the same
functionality, data integrity and performance, as the products record,
store, process calculate and present calendar dates on or before December
31, 1999, or calculate any information dependent on or relating to such
dates (collectively, "Year 2000 Compliant"). The Company's internal
computer and technology products, equipment and systems are Year 2000
Compliant.
(xxiii) Systems and Controls. The Company maintains a system of
internal accounting controls sufficient to provide reasonable assurance
that (i) transactions are executed in accordance with management's general
or specific authorizations; (ii) transactions are recorded as necessary to
permit timely preparation of financial statements in conformity with
generally accepted accounting principles and to maintain asset
accountability; (iii) access to assets is permitted only in accordance
with management's general or specific authorization; and (iv) the recorded
accountability for assets is compared with the existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences.
(b) Officer's Certificates. Any certificate signed by any officer of the
Company or any of its subsidiaries delivered to the Representatives or to
counsel for the Underwriters shall be deemed a representation and warranty by
the Company to each Underwriter as to the matters covered thereby.
SECTION 2. Sale and Delivery to Underwriters; Closing.
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(a) Initial Securities. On the basis of the representations and warranties
herein contained and subject to the terms and conditions herein set forth, the
Company agrees to sell to each Underwriter, severally and not jointly, and each
Underwriter, severally and not jointly, agrees to purchase from the Company, at
the price per share set forth in Schedule B, the number of Initial Securities
set forth in Schedule A opposite the name of such Underwriter, plus any
additional number of Initial Securities which such Underwriter may become
obligated to purchase pursuant to the provisions of Section 10 hereof.
(b) Option Securities. In addition, on the basis of the representations
and warranties herein contained and subject to the terms and conditions herein
set forth, the Company hereby grants an option to the Underwriters, severally
and not jointly, to purchase up to an additional ____________ shares of Common
Stock at the price per share set forth in Schedule B, less an amount per share
equal to any dividends or distributions declared by the Company and payable on
the Initial Securities but not payable on the Option Securities. The option
hereby granted will expire 30 days after the date hereof and may be exercised in
whole or in part from time to time only for the purpose of covering
over-allotments which may be made in connection with the offering and
distribution of the Initial Securities upon notice by the Representatives to the
Company setting forth the number of Option Securities as to which the several
Underwriters are then exercising the option and the time and date of payment and
delivery for such Option Securities. Any such time and date of delivery (a "Date
of Delivery") shall be determined by the Representatives, but shall not be later
than seven full business days after the exercise of said option, nor in any
event prior to the Closing Time, as hereinafter defined. If the option is
exercised as to all or any portion of the Option Securities, each of the
Underwriters, acting severally and not jointly, will purchase that proportion of
the total number of Option Securities then being purchased which the number of
Initial Securities set forth in Schedule A opposite the name of such Underwriter
bears to the total number of Initial Securities, subject in each case to such
adjustments as the Representatives in their discretion shall make to eliminate
any sales or purchases of fractional shares.
(c) Payment. Payment of the purchase price for, and delivery of
certificates for, the Initial Securities shall be made at the offices of
Proskauer Rose LLP, 1585 Broadway, New York, New York 10036-8299, or at such
other place as shall be agreed upon by the Representatives and the Company, at
9:00 A.M. (Eastern time) on the third (fourth, if the pricing occurs after 4:30
P.M. (Eastern time) on any given day) business day after the date hereof (unless
postponed in accordance with the provisions of Section 10), or such other time
not later than ten business days after such date as shall be agreed upon by the
Representatives and the Company (such time and date of payment and delivery
being herein called "Closing Time").
In addition, in the event that any or all of the Option Securities are
purchased by the Underwriters, payment of the purchase price for, and delivery
of certificates for, such Option Securities shall be made at the above-mentioned
offices, or at such other place as shall be agreed upon by the Representatives
and the Company, on each Date of Delivery as specified in the notice from the
Representatives to the Company.
Payment shall be made to the Company by wire transfer of immediately
available funds to a bank account designated by the Company, against delivery to
the Representatives for the respective
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accounts of the Underwriters of certificates for the Securities to be purchased
by them. It is understood that each Underwriter has authorized the
Representatives, for its account, to accept delivery of, receipt for, and make
payment of the purchase price for, the Initial Securities and the Option
Securities, if any, which it has agreed to purchase. Merrill Lynch, individually
and not as representative of the Underwriters, may (but shall not be obligated
to) make payment of the purchase price for the Initial Securities or the Option
Securities, if any, to be purchased by any Underwriter whose funds have not been
received by the Closing Time or the relevant Date of Delivery, as the case may
be, but such payment shall not relieve such Underwriter from its obligations
hereunder.
(d) Denominations; Registration. Certificates for the Initial Securities
and the Option Securities, if any, shall be in such denominations and registered
in such names as the Representatives may request in writing at least one full
business day before the Closing Time or the relevant Date of Delivery, as the
case may be. The certificates for the Initial Securities and the Option
Securities, if any, will be made available for examination and packaging by the
Representatives in The City of New York not later than 10:00 A.M. (Eastern time)
on the business day prior to the Closing Time or the relevant Date of Delivery,
as the case may be.
SECTION 3. Covenants of the Company. The Company covenants with each
Underwriter as follows:
(a) Compliance with Securities Regulations and Commission Requests. The
Company, subject to Section 3(b), will comply with the requirements of Rule 430A
or Rule 434, as applicable, and will notify the Representatives immediately, and
confirm the notice in writing, (i) when any post-effective amendment to the
Registration Statement shall become effective, or any supplement to the
Prospectus or any amended Prospectus shall have been filed, (ii) of the receipt
of any comments from the Commission, (iii) of any request by the Commission for
any amendment to the Registration Statement or any amendment or supplement to
the Prospectus or for additional information, and (iv) of the issuance by the
Commission of any stop order suspending the effectiveness of the Registration
Statement or of any order preventing or suspending the use of any preliminary
prospectus, or of the suspension of the qualification of the Securities for
offering or sale in any jurisdiction, or of the initiation or threatening of any
proceedings for any of such purposes. The Company will promptly effect the
filings necessary pursuant to Rule 424(b) and will take such steps as it deems
necessary to ascertain promptly whether the form of prospectus transmitted for
filing under Rule 424(b) was received for filing by the Commission and, in the
event that it was not, it will promptly file such prospectus. The Company will
make every reasonable effort to prevent the issuance of any stop order and, if
any stop order is issued, to obtain the lifting thereof at the earliest possible
moment.
(b) Filing of Amendments. The Company will give the Representatives notice
of its intention to file or prepare any amendment to the Registration Statement
(including any filing under Rule 462(b)), any Term Sheet or any amendment,
supplement or revision to either the prospectus included in the Registration
Statement at the time it became effective or to the Prospectus will furnish the
Representatives with copies of any such documents a reasonable amount of time
prior
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to such proposed filing or use, as the case may be, and will not file or use any
such document to which the Representatives or counsel for the Underwriters shall
object.
(c) Delivery of Registration Statements. The Company has furnished or will
deliver to the Representatives and counsel for the Underwriters, without charge,
signed copies of the Registration Statement as originally filed and of each
amendment thereto (including exhibits filed therewith or incorporated by
reference therein) and signed copies of all consents and certificates of
experts, and will also deliver to the Representatives, without charge, a
conformed copy of the Registration Statement as originally filed and of each
amendment thereto (without exhibits) for each of the Underwriters. The copies of
the Registration Statement and each amendment thereto furnished to the
Underwriters will be identical to the electronically transmitted copies thereof
filed with the Commission pursuant to EDGAR, except to the extent permitted by
Regulation S-T.
(d) Delivery of Prospectuses. The Company has delivered to each
Underwriter, without charge, as many copies of each preliminary prospectus as
such Underwriter reasonably requested, and the Company hereby consents to the
use of such copies for purposes permitted by the 1933 Act. The Company will
furnish to each Underwriter, without charge, during the period when the
Prospectus is required to be delivered under the 1933 Act or the Securities
Exchange Act of 1934 (the "1934 Act"), such number of copies of the Prospectus
(as amended or supplemented) as such Underwriter may reasonably request. The
Prospectus and any amendments or supplements thereto furnished to the
Underwriters will be identical to the electronically transmitted copies thereof
filed with the Commission pursuant to EDGAR, except to the extent permitted by
Regulation S-T.
(e) Continued Compliance with Securities Laws. The Company will comply
with the 1933 Act and the 1933 Act Regulations so as to permit the completion of
the distribution of the Securities as contemplated in this Agreement and in the
Prospectus. If at any time when a prospectus is required by the 1933 Act to be
delivered in connection with sales of the Securities, any event shall occur or
condition shall exist as a result of which it is necessary, in the opinion of
counsel for the Underwriters or for the Company, to amend the Registration
Statement or amend or supplement the Prospectus in order that the Prospectus
will not include any untrue statements of a material fact or omit to state a
material fact necessary in order to make the statements therein not misleading
in the light of the circumstances existing at the time it is delivered to a
purchaser, or if it shall be necessary, in the opinion of such counsel, at any
such time to amend the Registration Statement or amend or supplement the
Prospectus in order to comply with the requirements of the 1933 Act or the 1933
Act Regulations, the Company will promptly prepare and file with the Commission,
subject to Section 3(b), such amendment or supplement as may be necessary to
correct such statement or omission or to make the Registration Statement or the
Prospectus comply with such requirements, and the Company will furnish to the
Underwriters such number of copies of such amendment or supplement as the
Underwriters may reasonably request.
(f) Blue Sky Qualifications. The Company will use its best efforts, in
cooperation with the Underwriters, to qualify the Securities for offering and
sale under the applicable securities laws of such states and other jurisdictions
(domestic or foreign) as the Representatives may designate and to maintain such
qualifications in effect for a period of not less than one year from the later
of the
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effective date of the Registration Statement and any Rule 462(b) Registration
Statement; provided, however, that the Company shall not be obligated to file
any general consent to service of process or to qualify as a foreign corporation
or as a dealer in securities in any jurisdiction in which it is not so qualified
or to subject itself to taxation in respect of doing business in any
jurisdiction in which it is not otherwise so subject. In each jurisdiction in
which the Securities have been so qualified, the Company will file such
statements and reports as may be required by the laws of such jurisdiction to
continue such qualification in effect for a period of not less than one year
from the effective date of the Registration Statement and any Rule 462(b)
Registration Statement.
(g) Rule 158. The Company will timely file such reports pursuant to the
1934 Act as are necessary in order to make generally available to its
securityholders as soon as practicable an earnings statement for the purposes
of, and to provide the benefits contemplated by, the last paragraph of Section
11(a) of the 1933 Act.
(h) Use of Proceeds. The Company will use the net proceeds received by it
from the sale of the Securities in the manner specified in the Prospectus under
"Use of Proceeds".
(i) Listing. The Company will use its best efforts to effect and maintain
the quotation of the Securities on the Nasdaq National Market and will file with
the Nasdaq National Market all documents and notices required by the Nasdaq
National Market of companies that have securities that are traded in the
over-the-counter market and quotations for which are reported by the Nasdaq
National Market.
(j) Restriction on Sale of Securities. During a period of 180 days from
the date of the Prospectus, the Company will not, without the prior written
consent of Merrill Lynch, (i) directly or indirectly, offer, pledge, sell,
contract to sell, sell any option or contract to purchase, purchase any option
or contract to sell, grant any option, right or warrant to purchase or otherwise
transfer or dispose of any share of Common Stock or any securities convertible
into or exercisable or exchangeable for Common Stock or file any registration
statement under the 1933 Act with respect to any of the foregoing or (ii) enter
into any swap or any other agreement or any transaction that transfers, in whole
or in part, directly or indirectly, the economic consequence of ownership of the
Common Stock, whether any such swap or transaction described in clause (i) or
(ii) above is to be settled by delivery of Common Stock or such other
securities, in cash or otherwise. The foregoing sentence shall not apply to (A)
the Securities to be sold hereunder, (B) any shares of Common Stock issued by
the Company upon the exercise of an option or warrant or the conversion of a
security outstanding on the date hereof and referred to in the Prospectus, (C)
any shares of Common Stock issued or options to purchase Common Stock granted
pursuant to existing employee benefit plans of the Company referred to in the
Prospectus or (D) any shares of Common Stock issued pursuant to any non-employee
director stock plan or dividend reinvestment plan.
(k) Reporting Requirements. The Company, during the period when the
Prospectus is required to be delivered under the 1933 Act or the 1934 Act, will
file all documents required to be filed with the Commission pursuant to the 1934
Act within the time periods required by the 1934 Act and the rules and
regulations of the Commission thereunder.
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(l) Compliance with Rule 463. The Company will file with the Commission
such reports or take such other actions as may be required pursuant to Rule 463
of the 1933 Act Regulations.
SECTION 4. Payment of Expenses. (a) Expenses. The Company will pay all expenses
incident to the performance of its obligations under this Agreement, including
(i) the preparation, printing and filing of the Registration Statement
(including financial statements and exhibits) as originally filed and of each
amendment thereto, (ii) the preparation, printing and delivery to the
Underwriters of this Agreement, any Agreement among Underwriters and such other
documents as may be required in connection with the offering, purchase, sale,
issuance or delivery of the Securities, (iii) the preparation, issuance and
delivery of the certificates for the Securities to the Underwriters, including
any stock or other transfer taxes and any stamp or other duties payable upon the
sale, issuance or delivery of the Securities to the Underwriters, (iv) the fees
and disbursements of the Company's counsel, accountants and other advisors, (v)
the qualification of the Securities under securities laws in accordance with the
provisions of Section 3(f) hereof, including filing fees and the reasonable fees
and disbursements of counsel for the Underwriters in connection therewith and in
connection with the preparation of the Blue Sky Survey and any supplement
thereto, (vi) the printing and delivery to the Underwriters of copies of each
preliminary prospectus, any Term Sheets and of the Prospectus and any amendments
or supplements thereto, (vii) the preparation, printing and delivery to the
Underwriters of copies of the Blue Sky Survey and any supplement thereto, (viii)
the fees and expenses of any transfer agent or registrar for the Securities and
(ix) the filing fees incident to, and the reasonable fees and disbursements of
counsel to the Underwriters in connection with, the review by the National
Association of Securities Dealers, Inc. (the "NASD") of the terms of the sale of
the Securities, (x) the fees and expenses incurred in connection with the
inclusion of the Securities in the Nasdaq National Market and (xi) all costs and
expenses of the Underwriters, including the fees and disbursements of counsel
for the Underwriters, in connection with matters related to the Reserved
Securities which are designated by the Company for sale to employees and others
having a business relationship with the Company.
(b) Termination of Agreement. If this Agreement is terminated by the
Representatives in accordance with the provisions of Section 5 or Section
9(a)(i) hereof, the Company shall reimburse the Underwriters for all of their
out-of-pocket expenses, including the reasonable fees and disbursements of
counsel for the Underwriters.
SECTION 5. Conditions of Underwriters' Obligations. The obligations of the
several Underwriters hereunder are subject to the accuracy of the
representations and warranties of the Company contained in Section 1 hereof or
in certificates of any officer of the Company or any subsidiary of the Company
delivered pursuant to the provisions hereof, to the performance by the Company
of its covenants and other obligations hereunder, and to the following further
conditions:
(a) Effectiveness of Registration Statement. The Registration Statement,
including any Rule 462(b) Registration Statement, has become effective and at
Closing Time no stop order suspending the effectiveness of the Registration
Statement shall have been issued under the 1933 Act or proceedings therefor
initiated or threatened by the Commission, and any request on the part of the
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Commission for additional information shall have been complied with to the
reasonable satisfaction of counsel to the Underwriters. A prospectus containing
the Rule 430A Information shall have been filed with the Commission in
accordance with Rule 424(b) (or a post-effective amendment providing such
information shall have been filed and declared effective in accordance with the
requirements of Rule 430A) or, if the Company has elected to rely upon Rule 434,
a Term Sheet shall have been filed with the Commission in accordance with Rule
424(b).
(b) Opinion of Counsel for Company. At Closing Time, the Representatives
shall have received the favorable opinion, dated as of Closing Time, of
Proskauer Rose L.L.P., counsel for the Company, in form and substance
satisfactory to counsel for the Underwriters, together with signed or reproduced
copies of such letter for each of the other Underwriters to the effect set forth
in Exhibit A hereto and to such further effect as counsel to the Underwriters
may reasonably request.
(c) Opinion of Counsel for Underwriters. At Closing Time, the
Representatives shall have received the favorable opinion, dated as of Closing
Time, of Wilson Sonsini Goodrich & Rosati, Professional Corporation, counsel for
the Underwriters, together with signed or reproduced copies of such letter for
each of the other Underwriters with respect to the matters set forth in clauses
(i), (ii), (v), (vi) (solely as to preemptive or other similar rights arising by
operation of law or under the charter or by-laws of the Company), (viii) through
(x), inclusive, (xii), (xiv) (solely as to the information in the Prospectus
under "Description of Capital Stock--Common Stock") and the penultimate
paragraph of Exhibit A hereto. In giving such opinion such counsel may rely, as
to all matters governed by the laws of jurisdictions other than the law of the
State of New York, the federal law of the United States and the General
Corporation Law of the State of Delaware, upon the opinions of counsel
satisfactory to the Representatives. Such counsel may also state that, insofar
as such opinion involves factual matters, they have relied, to the extent they
deem proper, upon certificates of officers of the Company and its subsidiaries
and certificates of public officials.
(d) Officers' Certificate. At Closing Time, there shall not have been,
since the date hereof or since the respective dates as of which information is
given in the Prospectus, any material adverse change in the condition, financial
or otherwise, or in the earnings, business affairs or business prospects of the
Company and its subsidiaries considered as one enterprise, whether or not
arising in the ordinary course of business, and the Representatives shall have
received a certificate of the President or a Vice President of the Company and
of the chief financial or chief accounting officer of the Company, dated as of
Closing Time, to the effect that (i) there has been no such material adverse
change, (ii) the representations and warranties in Section 1(a) hereof are true
and correct with the same force and effect as though expressly made at and as of
Closing Time, (iii) the Company has complied with all agreements and satisfied
all conditions on its part to be performed or satisfied at or prior to Closing
Time, and (iv) no stop order suspending the effectiveness of the Registration
Statement has been issued and no proceedings for that purpose have been
instituted or are pending or are contemplated by the Commission.
(e) Accountant's Comfort Letter. At the time of the execution of this
Agreement, the Representatives shall have received from KPMG Peat Marwick a
letter dated such date, in form and substance satisfactory to the
Representatives, together with signed or reproduced copies of such letter
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for each of the other Underwriters containing statements and information of the
type ordinarily included in accountants' "comfort letters" to underwriters with
respect to the financial statements and certain financial information contained
in the Registration Statement and the Prospectus. Additionally, at the time of
the execution of this Agreement, the Representatives shall have received from
[Arthur Anderson] a letter dated such date, in form and substance satisfactory
to the Representatives, together with signed or reproduced copies of such letter
for each of the other Underwriters containing statements and information of the
type ordinarily included in accountants' "comfort letters" to underwriters with
respect to the financial statements and certain financial information
[pertaining to applicable subsidiary] contained in the Registration Statement
and the Prospectus.
(f) Bring-down Comfort Letter. At Closing Time, the Representatives shall
have received from each of KPMG Peat Marwick and [Arthur Anderson] a letter,
dated as of Closing Time, to the effect that they reaffirm the statements made
in the letters furnished pursuant to subsection (e) of this Section, except that
the specified date referred to shall be a date not more than three business days
prior to Closing Time.
(g) Approval of Listing. At Closing Time, the Securities shall have been
approved for inclusion in the Nasdaq National Market, subject only to official
notice of issuance.
(h) No Objection. The NASD has confirmed that it has not raised any
objection with respect to the fairness and reasonableness of the underwriting
terms and arrangements.
(i) Lock-up Agreements. At the date of this Agreement, the Representatives
shall have received an agreement substantially in the form of Exhibit B hereto
signed by the persons listed on Schedule C hereto.
(j) Conditions to Purchase of Option Securities. In the event that the
Underwriters exercise their option provided in Section 2(b) hereof to purchase
all or any portion of the Option Securities, the representations and warranties
of the Company contained herein and the statements in any certificates furnished
by the Company or any subsidiary of the Company hereunder shall be true and
correct as of each Date of Delivery and, at the relevant Date of Delivery, the
Representatives shall have received:
(i) Officers' Certificate. A certificate, dated such Date of
Delivery, of the President or a Vice President of the Company and of the
chief financial or chief accounting officer of the Company confirming that
the certificate delivered at the Closing Time pursuant to Section 5(d)
hereof remains true and correct as of such Date of Delivery.
(ii) Opinion of Counsel for Company. The favorable opinion of
Proskauer Rose L.L.P., counsel for the Company, in form and substance
satisfactory to counsel for the Underwriters, dated such Date of Delivery,
relating to the Option Securities to be purchased on such Date of Delivery
and otherwise to the same effect as the opinion required by Section 5(b)
hereof.
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(iii) Opinion of Counsel for Underwriters. The favorable opinion of
Wilson Sonsini Goodrich & Rosati, Professional Corporation, counsel for
the Underwriters, dated such Date of Delivery, relating to the Option
Securities to be purchased on such Date of Delivery and otherwise to the
same effect as the opinion required by Section 5(c) hereof.
(iv) Bring-down Comfort Letter. A letter from [each of KPMG Peat
Marwick and [Arthur Anderson]], in form and substance satisfactory to the
Representatives and dated such Date of Delivery, substantially in the same
form and substance as the letters furnished to the Representatives
pursuant to Section 5(f) hereof, except that the Aspecified date" in the
letter furnished pursuant to this paragraph shall be a date not more than
five days prior to such Date of Delivery.
(k) Additional Documents. At Closing Time and at each Date of Delivery,
counsel for the Underwriters shall have been furnished with such documents and
opinions as they may require for the purpose of enabling them to pass upon the
issuance and sale of the Securities as herein contemplated, or in order to
evidence the accuracy of any of the representations or warranties, or the
fulfillment of any of the conditions, herein contained; and all proceedings
taken by the Company in connection with the issuance and sale of the Securities
as herein contemplated shall be satisfactory in form and substance to the
Representatives and counsel for the Underwriters.
(l) Termination of Agreement. If any condition specified in this Section
shall not have been fulfilled when and as required to be fulfilled, this
Agreement, or, in the case of any condition to the purchase of Option
Securities, on a Date of Delivery which is after the Closing Time, the
obligations of the several Underwriters to purchase the relevant Option
Securities, may be terminated by the Representatives by notice to the Company at
any time at or prior to Closing Time or such Date of Delivery, as the case may
be, and such termination shall be without liability of any party to any other
party except as provided in Section 4 and except that Sections 1, 6, 7 and 8
shall survive any such termination and remain in full force and effect.
SECTION 6. Indemnification.
(a) Indemnification of Underwriters. The Company agrees to indemnify and
hold harmless each Underwriter and each person, if any, who controls any
Underwriter within the meaning of Section 15 of the 1933 Act or Section 20 of
the 1934 Act as follows:
(i) against any and all loss, liability, claim, damage and expense
whatsoever, as incurred, arising out of any untrue statement or alleged
untrue statement of a material fact contained in the Registration
Statement (or any amendment thereto), including the Rule 430A Information
and the Rule 434 Information, if applicable, or the omission or alleged
omission therefrom of a material fact required to be stated therein or
necessary to make the statements therein not misleading or arising out of
any untrue statement or alleged untrue statement of a material fact
included in any preliminary prospectus or the Prospectus (or any amendment
or supplement thereto), or the omission or alleged omission therefrom of a
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material fact necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not misleading;
(ii) against any and all loss, liability, claim, damage and expense
whatsoever, as incurred, arising out of (A) the violation of any
applicable laws or regulations of foreign jurisdictions where Reserved
Securities have been offered and (B) any untrue statement or alleged
untrue statement of a material fact included in the supplement or
prospectus wrapper material distributed in _______________ in connection
with the reservation and sale of the Reserved Securities to eligible
employees and ______________ of the Company or the omission or alleged
omission therefrom of a material fact necessary to make the statements
therein, when considered in conjunction with the Prospectus or preliminary
prospectus, not misleading;
(iii) against any and all loss, liability, claim, damage and expense
whatsoever, as incurred, to the extent of the aggregate amount paid in
settlement of any litigation, or any investigation or proceeding by any
governmental agency or body, commenced or threatened, or of any claim
whatsoever based upon any such untrue statement or omission, or any such
alleged untrue statement or omission or in connection with any violation
of the nature referred to in Section 6(a)(ii)(A) hereof; provided that
(subject to Section 6(d) below) any such settlement is effected with the
written consent of the Company; and
(iv) against any and all expense whatsoever, as incurred (including
the fees and disbursements of counsel chosen by Merrill Lynch), reasonably
incurred in investigating, preparing or defending against any litigation,
or any investigation or proceeding by any governmental agency or body,
commenced or threatened, or any claim whatsoever based upon any such
untrue statement or omission, or any such alleged untrue statement or
omission or in connection with any violation of the nature referred to in
Section 6(a)(ii)(A) hereof, to the extent that any such expense is not
paid under (i), (ii) or (iii) above;
provided, however, that this indemnity agreement shall not apply to any loss,
liability, claim, damage or expense to the extent arising out of any untrue
statement or omission or alleged untrue statement or omission made in reliance
upon and in conformity with written information furnished to the Company by any
Underwriter through Merrill Lynch expressly for use in the Registration
Statement (or any amendment thereto), including the Rule 430A Information and
the Rule 434 Information, if applicable, or any preliminary prospectus or the
Prospectus (or any amendment or supplement thereto).
(b) Indemnification of Company, Directors and Officers. Each Underwriter
severally agrees to indemnify and hold harmless the Company, its directors, each
of its officers who signed the Registration Statement, and each person, if any,
who controls the Company within the meaning of Section 15 of the 1933 Act or
Section 20 of the 1934 Act against any and all loss, liability, claim, damage
and expense described in the indemnity contained in subsection (a) of this
Section, as incurred, but only with respect to untrue statements or omissions,
or alleged untrue statements or omissions, made in the Registration Statement
(or any amendment thereto), including the Rule 430A
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Information and the Rule 434 Information, if applicable, or any preliminary
prospectus or the Prospectus (or any amendment or supplement thereto) in
reliance upon and in conformity with written information furnished to the
Company by such Underwriter through Merrill Lynch expressly for use in the
Registration Statement (or any amendment thereto) or such preliminary prospectus
or the Prospectus (or any amendment or supplement thereto).
(c) Actions against Parties; Notification. Each indemnified party shall
give notice as promptly as reasonably practicable to each indemnifying party of
any action commenced against it in respect of which indemnity may be sought
hereunder, but failure to so notify an indemnifying party shall not relieve such
indemnifying party from any liability hereunder to the extent it is not
materially prejudiced as a result thereof and in any event shall not relieve it
from any liability which it may have otherwise than on account of this indemnity
agreement. In the case of parties indemnified pursuant to Section 6(a) above,
counsel to the indemnified parties shall be selected by Merrill Lynch, and, in
the case of parties indemnified pursuant to Section 6(b) above, counsel to the
indemnified parties shall be selected by the Company. An indemnifying party may
participate at its own expense in the defense of any such action; provided,
however, that counsel to the indemnifying party shall not (except with the
consent of the indemnified party) also be counsel to the indemnified party. In
no event shall the indemnifying parties be liable for fees and expenses of more
than one counsel (in addition to any local counsel) separate from their own
counsel for all indemnified parties in connection with any one action or
separate but similar or related actions in the same jurisdiction arising out of
the same general allegations or circumstances. No indemnifying party shall,
without the prior written consent of the indemnified parties, settle or
compromise or consent to the entry of any judgment with respect to any
litigation, or any investigation or proceeding by any governmental agency or
body, commenced or threatened, or any claim whatsoever in respect of which
indemnification or contribution could be sought under this Section 6 or Section
7 hereof (whether or not the indemnified parties are actual or potential parties
thereto), unless such settlement, compromise or consent (i) includes an
unconditional release of each indemnified party from all liability arising out
of such litigation, investigation, proceeding or claim and (ii) does not include
a statement as to or an admission of fault, culpability or a failure to act by
or on behalf of any indemnified party.
(d) Settlement without Consent if Failure to Reimburse. If at any time an
indemnified party shall have requested an indemnifying party to reimburse the
indemnified party for fees and expenses of counsel, such indemnifying party
agrees that it shall be liable for any settlement of the nature contemplated by
Section 6(a)(ii) Section 6(a)(iii) effected without its written consent if (i)
such settlement is entered into more than 45 days after receipt by such
indemnifying party of the aforesaid request, (ii) such indemnifying party shall
have received notice of the terms of such settlement at least 30 days prior to
such settlement being entered into and (iii) such indemnifying party shall not
have reimbursed such indemnified party in accordance with such request prior to
the date of such settlement.
(e) Indemnification for Reserved Securities. In connection with the offer
and sale of the Reserved Securities, the Company agrees, promptly upon a request
in writing, to indemnify and hold harmless the Underwriters from and against any
and all losses, liabilities, claims, damages and
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expenses incurred by them as a result of the failure of employees and
_________________ of the Company to pay for and accept delivery of Reserved
Securities which, by the end of the first business day following the date of
this Agreement, were subject to a properly confirmed agreement to purchase.
SECTION 7. Contribution. If the indemnification provided for in Section 6 hereof
is for any reason unavailable to or insufficient to hold harmless an indemnified
party in respect of any losses, liabilities, claims, damages or expenses
referred to therein, then each indemnifying party shall contribute to the
aggregate amount of such losses, liabilities, claims, damages and expenses
incurred by such indemnified party, as incurred, (i) in such proportion as is
appropriate to reflect the relative benefits received by the Company on the one
hand and the Underwriters on the other hand from the offering of the Securities
pursuant to this Agreement or (ii) if the allocation provided by clause (i) is
not permitted by applicable law, in such proportion as is appropriate to reflect
not only the relative benefits referred to in clause (i) above but also the
relative fault of the Company on the one hand and of the Underwriters on the
other hand in connection with the statements or omissions, or in connection with
any violation of the nature referred to in Section 6(a)(ii)(A) hereof, which
resulted in such losses, liabilities, claims, damages or expenses, as well as
any other relevant equitable considerations.
The relative benefits received by the Company on the one hand and the
Underwriters on the other hand in connection with the offering of the Securities
pursuant to this Agreement shall be deemed to be in the same respective
proportions as the total net proceeds from the offering of the Securities
pursuant to this Agreement (before deducting expenses) received by the Company
and the total underwriting discount received by the Underwriters, in each case
as set forth on the cover of the Prospectus, or, if Rule 434 is used, the
corresponding location on the Term Sheet, bear to the aggregate initial public
offering price of the Securities as set forth on such cover.
The relative fault of the Company on the one hand and the Underwriters on
the other hand shall be determined by reference to, among other things, whether
any such untrue or alleged untrue statement of a material fact or omission or
alleged omission to state a material fact relates to information supplied by the
Company or by the Underwriters and the parties' relative intent, knowledge,
access to information and opportunity to correct or prevent such statement or
omission or any violation of the nature referred to in Section 6(a)(ii)(A)
hereof.
The Company and the Underwriters agree that it would not be just and
equitable if contribution pursuant to this Section 7 were determined by pro rata
allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation which does not take account of the
equitable considerations referred to above in this Section 7. The aggregate
amount of losses, liabilities, claims, damages and expenses incurred by an
indemnified party and referred to above in this Section 7 shall be deemed to
include any legal or other expenses reasonably incurred by such indemnified
party in investigating, preparing or defending against any litigation, or any
investigation or proceeding by any governmental agency or body, commenced or
threatened, or any claim whatsoever based upon any such untrue or alleged untrue
statement or omission or alleged omission.
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Notwithstanding the provisions of this Section 7, no Underwriter shall be
required to contribute any amount in excess of the amount by which the total
price at which the Securities underwritten by it and distributed to the public
were offered to the public exceeds the amount of any damages which such
Underwriter has otherwise been required to pay by reason of any such untrue or
alleged untrue statement or omission or alleged omission.
No person guilty of fraudulent misrepresentation (within the meaning of
Section 11(f) of the 1933 Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation.
For purposes of this Section 7, each person, if any, who controls an
Underwriter within the meaning of Section 15 of the 1933 Act or Section 20 of
the 1934 Act shall have the same rights to contribution as such Underwriter, and
each director of the Company, each officer of the Company who signed the
Registration Statement, and each person, if any, who controls the Company within
the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act shall
have the same rights to contribution as the Company. The Underwriters'
respective obligations to contribute pursuant to this Section 7 are several in
proportion to the number of Initial Securities set forth opposite their
respective names in Schedule A hereto and not joint.
SECTION 8. Representations, Warranties and Agreements to Survive Delivery. All
representations, warranties and agreements contained in this Agreement or in
certificates of officers of the Company or any of its subsidiaries submitted
pursuant hereto, shall remain operative and in full force and effect, regardless
of any investigation made by or on behalf of any Underwriter or controlling
person, or by or on behalf of the Company, and shall survive delivery of the
Securities to the Underwriters.
SECTION 9. Termination of Agreement.
(a) Termination; General. The Representatives may terminate this
Agreement, by notice to the Company, at any time at or prior to Closing Time (i)
if there has been, since the time of execution of this Agreement or since the
respective dates as of which information is given in the Prospectus, any
material adverse change in the condition, financial or otherwise, or in the
earnings, business affairs or business prospects of the Company and its
subsidiaries considered as one enterprise, whether or not arising in the
ordinary course of business, or (ii) if there has occurred any material adverse
change in the financial markets in the United States, any outbreak of
hostilities or escalation thereof or other calamity or crisis or any change or
development involving a prospective change in national or international
political, financial or economic conditions, in each case the effect of which is
such as to make it, in the judgment of the Representatives, impracticable to
market the Securities or to enforce contracts for the sale of the Securities, or
(iii) if trading in any securities of the Company has been suspended or
materially limited by the Commission or the Nasdaq National Market, or if
trading generally on the American Stock Exchange or the New York Stock Exchange
or in the Nasdaq National Market has been suspended or materially limited, or
minimum or maximum prices for trading have been fixed, or maximum ranges for
prices have been required, by
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any of said exchanges or by such system or by order of the Commission, the
National Association of Securities Dealers, Inc. or any other governmental
authority, or (iv) if a banking moratorium has been declared by either Federal
or New York authorities.
(b) Liabilities. If this Agreement is terminated pursuant to this Section,
such termination shall be without liability of any party to any other party
except as provided in Section 4 hereof, and provided further that Sections 1, 6,
7 and 8 shall survive such termination and remain in full force and effect.
SECTION 10. Default by One or More of the Underwriters. If one or more of the
Underwriters shall fail at Closing Time or a Date of Delivery to purchase the
Securities which it or they are obligated to purchase under this Agreement (the
"Defaulted Securities"), the Representatives shall have the right, within 24
hours thereafter, to make arrangements for one or more of the non-defaulting
Underwriters, or any other underwriters, to purchase all, but not less than all,
of the Defaulted Securities in such amounts as may be agreed upon and upon the
terms herein set forth; if, however, the Representatives shall not have
completed such arrangements within such 24-hour period, then:
(i) if the number of Defaulted Securities does not exceed 10% of the
number of Securities to be purchased on such date, each of the
non-defaulting Underwriters shall be obligated, severally and not jointly,
to purchase the full amount thereof in the proportions that their
respective underwriting obligations hereunder bear to the underwriting
obligations of all non-defaulting Underwriters, or
(ii) if the number of Defaulted Securities exceeds 10% of the number
of Securities to be purchased on such date, this Agreement or, with
respect to any Date of Delivery which occurs after the Closing Time, the
obligation of the Underwriters to purchase and of the Company to sell the
Option Securities to be purchased and sold on such Date of Delivery shall
terminate without liability on the part of any non-defaulting Underwriter.
No action taken pursuant to this Section shall relieve any defaulting
Underwriter from liability in respect of its default.
In the event of any such default which does not result in a termination of
this Agreement or, in the case of a Date of Delivery which is after the Closing
Time, which does not result in a termination of the obligation of the
Underwriters to purchase and the Company to sell the relevant Option Securities,
as the case may be, either the Representatives or the Company shall have the
right to postpone Closing Time or the relevant Date of Delivery, as the case may
be, for a period not exceeding seven days in order to effect any required
changes in the Registration Statement or Prospectus or in any other documents or
arrangements. As used herein, the term "Underwriter" includes any person
substituted for an Underwriter under this Section 10.
SECTION 11. Notices. All notices and other communications hereunder shall be in
writing and shall be deemed to have been duly given if mailed or transmitted by
any standard form of telecommunication. Notices to the Underwriters shall be
directed to the Representatives at North
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<PAGE>
Tower, World Financial Center, New York, New York 10281-1201, 101 California
Street, Suite 1420, San Francisco California 94111 / 10900 Wilshire Boulevard,
Suite 900, Los Angeles, California 90024, attention of ____; and notices to the
Company shall be directed to it at 24/7 Media, Inc., 1250 Broadway, New York,
New York, 10001, attention of Chief Executive Officer.
SECTION 12. Parties. This Agreement shall each inure to the benefit of and be
binding upon the Underwriters and the Company and their respective successors.
Nothing expressed or mentioned in this Agreement is intended or shall be
construed to give any person, firm or corporation, other than the Underwriters
and the Company and their respective successors and the controlling persons and
officers and directors referred to in Sections 6 and 7 and their heirs and legal
representatives, any legal or equitable right, remedy or claim under or in
respect of this Agreement or any provision herein contained. This Agreement and
all conditions and provisions hereof are intended to be for the sole and
exclusive benefit of the Underwriters and the Company and their respective
successors, and said controlling persons and officers and directors and their
heirs and legal representatives, and for the benefit of no other person, firm or
corporation. No purchaser of Securities from any Underwriter shall be deemed to
be a successor by reason merely of such purchase.
SECTION 13. GOVERNING LAW AND TIME. THIS AGREEMENT SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK. SPECIFIED
TIMES OF DAY REFER TO NEW YORK CITY TIME.
SECTION 14. Effect of Headings. The Article and Section headings herein and
the Table of Contents are for convenience only and shall not affect the
construction hereof.
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<PAGE>
If the foregoing is in accordance with your understanding of our
agreement, please sign and return to the Company a counterpart hereof, whereupon
this instrument, along with all counterparts, will become a binding agreement
between the Underwriters and the Company in accordance with its terms.
Very truly yours,
24/7 MEDIA, INC.
By____________________________
Title:
CONFIRMED AND ACCEPTED,
as of the date first above written:
MERRILL LYNCH & CO.
MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
J. P. MORGAN & CO.
ALLEN & COMPANY, INC.
By: MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
By____________________________
Authorized Signatory
For themselves and as Representatives of the other Underwriters named in
Schedule A hereto.
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24/7 Media, Inc.
Lock-Up Agreement
______________, 1998
MERRILL LYNCH & CO.
Merrill Lynch, Pierce, Fenner & Smith Incorporated
J.P. Morgan Securities Inc.
Allen & Company, Inc.
c/o Merrill Lynch, Pierce, Fenner & Smith Incorporated
North Tower
World Financial Tower
New York, New York 10281-1209
Re: Proposed Public Offering by 24/7 Media, Inc.
Dear Sirs and Madams:
The undersigned, a stockholder, officer or director of 24/7
Media, Inc. (the "Company"), understands that Merrill Lynch & Co. ("Merrill
Lynch"), Merrill Lynch, Pierce, Fenner & Smith Incorporated, J.P. Morgan
Securities Inc. and Allen & Company, Inc. propose to enter into a Purchase
Agreement (the "Purchase Agreement") with the Company providing for the public
offering of shares of the Company's common stock, par value $ .01 per share,
(the "Common Stock"). In recognition of the benefit that such offering will
confer upon the undersigned as a stockholder, officer or director of the
Company, and for other good and valuable consideration, the receipt of and
sufficiency of which are hereby acknowledged, the undersigned agrees with each
underwriter to be named in the Purchase Agreement that, during a period of 180
days from the date of the Purchase Agreement, the undersigned will not, without
the prior written consent of Merrill Lynch, directly or indirectly, (i) offer,
pledge, sell, contract to sell, sell any option or contract to purchase,
purchase any option or contract to sell, grant an option, right or warrant for
the sale of, or otherwise dispose of or transfer any shares of the Company's
Common Stock or any securities convertible into or exchangeable or exercisable
for the Common Stock, whether now or hereafter acquired by the undersigned or
with respect to which the undersigned has or hereafter acquires the power of
disposition, or file any registration statement under the Securities Act of
1933, as amended, with respect to any of the foregoing or (ii) enter into any
swap or any other agreement or transaction that transfers, in whole or in part,
directly or indirectly, the economic consequence of ownership of the Common
Stock, whether such swap or transaction is to be settled by the delivery of
Common Stock or some other securities, in cash or otherwise.
Notwithstanding the foregoing, the undersigned may transfer the
undersigned's shares of Common Stock (i) as a bona fide gift or gifts, provided
that the donee or donees thereof agree to
<PAGE>
be bound by the restrictions set forth herein, (ii) as a transfer to any trust
for the direct benefit of the undersigned or the immediate family of the
undersigned, provided that the trustee of the trust agrees to be bound by the
restrictions set forth herein, (iii) as a distribution to limited partners,
constituent members or shareholders of the undersigned, provided that such
partners, constituent members or shareholders agree to be bound by the
restrictions set forth herein or (iv) with the prior written consent of Merrill
Lynch & Co. on behalf of the underwriters named in the Purchase Agreement. For
purposes of this Lock-Up Agreement, the term "immediate family"shall mean any
relationship by blood, marriage or adoption, not more remote than first cousin.
The undersigned also agrees and consents to the entry of stop transfer
instructions with the Company's transfer agent and registrar against the
transfer of the shares of the Company's capital stock owned by the undersigned
except in compliance with the foregoing restrictions.
The undersigned understands that the Company and the Underwriters are
relying upon this agreement in proceeding toward consummation of the IPO. The
undersigned further understands and agrees that this agreement is irrevocable
and shall be binding upon the undersigned's heirs, legal representatives,
successors and assigns.
Very truly yours,
Signature: ___________________________
Print Name: ___________________________
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
24/7 MEDIA, INC.
24/7 MEDIA, INC. (the "Corporation"), a corporation incorporated in
the State of Delaware, hereby certifies that (a) the Corporation's present name
is 24/7 Media, Inc. and its previous corporate name was 24/7 Acquisition Corp.,
the name under which it was originally incorporated, (b) its Certificate of
Incorporation was originally filed with the Secretary of State on January 23,
1998, (c) this Restated Certificate of Incorporation has been duly adopted by
written consent of the Board of Directors and the holders of a majority of the
outstanding shares of Common Stock of the Corporation in accordance with the
provisions of Sections 228 and 245 of the General Corporation Law of the State
of Delaware, with written notice given to the remaining stockholders of the
Corporation as provided in Section 228(d) thereof, and (d) the Restated
Certificate of Incorporation of this Corporation, as amended to the date of
filing of this Restated Certificate of Incorporation and including amendments
set forth herein but not separately filed, is restated, integrated and amended
in full to read as follows:
FIRST: The name of the Corporation is 24/7 MEDIA, INC.
SECOND: The registered office of the Corporation is to be located at
1013 Centre Road, Wilmington, County of New Castle, Delaware 19805-1297. The
name of its registered agent at that address is The Corporation Service Company.
THIRD: The purpose of the Corporation is to engage in any lawful act
or activity for which corporations may be organized under the General
Corporation Law of Delaware.
FOURTH: The corporation shall have the authority to issue an
aggregate of 80,000,000 (eighty million) shares, consisting of 70,000,000
(seventy million) shares of common stock, par value $.01 per share, and
10,000,000 (ten million) shares of preferred stock, par value $.01 per share.
The board of directors may authorize, to the full extent now or hereafter
permitted by the laws of the State of Delaware, the issuance from time to time
of the preferred stock in one or more classes and/or series and with such
powers, designations, preferences, rights and qualifications, limitations or
restrictions (which may differ with respect to each class and/or series) as the
board may fix by resolution.
FIFTH: Unless, and except to the extent that, the bylaws of the
Corporation shall so require, the election of directors of the Corporation need
not be by written ballot.
<PAGE>
SIXTH: Directors shall be divided into three classes, as nearly
equal in number as possible, as determined by the board of directors. One class
shall hold office initially for a term expiring at the annual meeting of
stockholders to be held in 1999, another class shall hold office initially for a
term expiring at the annual meeting of stockholders to be held in 2000, and
another class shall hold office initially for a term expiring at the annual
meeting of stockholders to be held in 2001, and the members of each class shall
hold office until their successors are elected and qualified. At each annual
meeting of stockholders, the successors of the class of directors whose term
expires at that meeting shall be elected to hold office for a term expiring at
the annual meeting of stockholders held in the third year following the year of
their election.
SEVENTH: The Corporation hereby confers the power to adopt, amend or
repeal bylaws of the Corporation upon the board of directors.
EIGHTH: No director of the Corporation shall be liable to the
Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, to the fullest extent now or hereafter permitted by the laws
of the State of Delaware.
NINTH: Each person (and the heirs, executors or administrators of
such person) who was or is a party or is threatened to be made a party to, or is
involved in any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative, by reason of the fact
that such person is or was a director or officer of the Corporation or is or was
serving at the request of the Corporation as a director or officer of another
corporation, partnership, joint venture, trust or other enterprise, shall be
indemnified and held harmless by the Corporation to the fullest extent permitted
by Delaware Law. The right to indemnification conferred in this ARTICLE NINTH
shall also include the right to be paid by the Corporation the expenses incurred
in connection with any such proceeding in advance of its final disposition to
the fullest extent authorized by Delaware Law. The right to indemnification
conferred in this ARTICLE NINTH shall be a contract right. The rights and
authority conferred in this ARTICLE NINTH shall not be exclusive of any other
right which any person may otherwise have or hereafter acquire. Neither the
amendment nor repeal of ARTICLES EIGHTH and NINTH hereof, nor the adoption of
any provision of this Certificate of Incorporation or the bylaws of the
Corporation, nor, to the fullest extent permitted by Delaware Law, any
modification of law, shall eliminate or reduce the effect of ARTICLES EIGHTH or
NINTH hereof in respect of any acts or omissions occurring prior to such
amendment, repeal, adoption or modification.
<PAGE>
TENTH: Whenever a compromise or arrangement is proposed between the
Corporation and its creditors or any class of them and/or between the
Corporation and its stockholders or any class of them, any court of equitable
jurisdiction within the State of Delaware may, on the application in a summary
way of the Corporation or of any creditor or stockholder thereof or on the
application of any receiver or receivers appointed for the Corporation under the
provisions of ss.291 of Title 8 of the Delaware Code or on the application of
trustees in dissolution or of any receiver or receivers appointed for the
Corporation under the provisions of ss.279 of Title 8 of the Delaware Code order
a meeting of the creditors or class of creditors, and/or of the stockholders or
class of stockholders of the Corporation, as the case may be, to be summoned in
such manner as the said court directs. If a majority in number representing
three fourths in value of the creditors or class of creditors, and/or of the
stockholders or class of stockholders of the Corporation, as the case may be,
agree to any compromise or arrangement and to any reorganization of the
Corporation as a consequence of such compromise or arrangement, the said
compromise or arrangement and the said reorganization shall, if sanctioned by
the court to which the said application has been made, be binding on all the
creditors or class of creditors, and/or on all the stockholders or class of
stockholders, of the Corporation, as the case may be, and also on the
Corporation.
IN WITNESS WHEREOF, the undersigned has executed this Restated
Certificate of Incorporation of 24/7 MEDIA, INC., and acknowledges, under
penalties of perjury, that this instrument is the act and deed of the
Corporation and that the facts stated herein are true.
By:_______________________
Mark E. Moran
Senior Vice President
and Secretary
24/7 MEDIA, INC.
A Delaware Corporation
BY-LAWS
ARTICLE I
STOCKHOLDERS
Section 1.1 Annual Meeting.
An annual meeting of stockholders for the purpose of electing directors
and of transacting such other business as may come before it shall be held each
year at such date, time, and place, either within or without the State of
Delaware, as may be specified by the Board of Directors.
Section 1.2 Special Meetings.
Special meetings of stockholders for any purpose or purposes may be held
at any time upon call of the Chairman of the Board, the Vice Chairman, or the
President, at such time and place either within or without the State of Delaware
as may be stated in the notice. A special meeting of stockholders shall be
called by the President or the Secretary, stating time, place, and the purpose
or purposes of the meeting.
Section 1.3 Notice of Meetings.
Written notice of duly called meetings of the stockholders, stating the
place, date, and hour thereof shall be given by the Chairman of the Board, the
Vice Chairman of the Board or the President, to each stockholder entitled to
vote thereat at least ten days but not more than sixty days before the date of
the meeting, unless a different period is prescribed by law. The notice of an
annual meeting shall state that the meeting is called for the election of
directors and for the transaction of other business which may properly come
before the meeting, and shall, if any other action which could be taken at a
special meeting is to be taken at such annual meeting, state the nature of such
action. The notice of a special meeting shall in all instances state the purpose
or purposes for which the meeting is called.
<PAGE>
Section 1.4 Quorum.
Except as otherwise provided by law or in the Certificate of Incorporation or
these By-laws, at any meeting of stockholders, the holders of a majority of the
outstanding shares of each class of stock entitled to vote at the meeting shall
be present or represented by proxy in order to constitute a quorum for the
transaction of any business. In the absence of a quorum, a majority in voting
interest of the stockholders present or the chairman of the meeting may adjourn
the meeting from time to time in the manner provided in Section 1.5 of these
By-laws until a quorum shall be present.
Section 1.5 Adjournment.
Any meeting of stockholders, annual or special, may adjourn from time to
time to reconvene at the same or some other place, and notice need not be given
of any such adjourned meeting if the time and place thereof are announced at the
meeting at which the adjournment is taken. At any adjourned meeting at which a
quorum is present, any business may be transacted which might have been
transacted at the original meeting. If the adjournment is for more than thirty
days, or if after the adjournment a new record date is fixed for the adjourned
meeting, a notice of the adjourned meeting shall be given to each stockholder of
record entitled to vote at the meeting.
Section 1.6 Organization.
The Chairman of the Board, or in his or her absence the Vice Chairman of
the Board, or in their absence one of the following officers, the Chief
Executive Officer, the President, or a Vice President (in order of seniority),
shall call to order meetings of stockholders, and shall act as chairman of such
meetings. The Board of Directors or, if the Board fails to act, the
stockholders, may appoint any stockholder, director, or officer of the
Corporation to act as chairman of any meeting in the absence of the Chairman of
the Board, the Vice Chairman of the Board, the Chief Executive Officer, the
President, and all Vice Presidents. The Secretary of the Corporation shall act
as secretary of all meetings of stockholders, but, in the absence of the
Secretary, the chairman of the meeting may appoint any other person to act as
secretary of the meeting.
Section 1.7 Voting.
Except as otherwise provided by law or in the Certificate of Incorporation
or these By-laws, at any meeting duly called and held at which a quorum is
present, corporate action to be taken by stockholder vote, other than the
election of directors, shall be authorized by a majority of the votes cast at a
meeting of stockholders, except as otherwise provided by law. Directors shall be
elected at each annual meeting of stockholders by a plurality of the votes cast
and shall hold office until the third succeeding annual meeting of stockholders
and until the election and qualification of their respective successors.
Section 1.8 Action Without Meeting.
Any action required or permitted to be taken at any meeting of
stockholders may be taken without a meeting, without prior notice and without a
vote, if a consent in writing, setting forth the action so taken, shall be
signed by the holders of outstanding stock having not fewer than the minimum
number of votes that would be necessary to authorize or take such action at a
meeting at which all
<PAGE>
shares entitled to vote thereon were present and voting. Prompt notice of the
taking of any such action shall be given to those stockholders who did not
consent in writing.
Section 1.9 Proxy Representation.
Each stockholder entitled to vote at any meeting of stockholders or to
express consent to or dissent from corporate action in writing without a meeting
may authorize another person to act for him by proxy. No proxy shall be valid
after three years from its date, unless it provides otherwise.
Section 1.10 Stockholders.
At an annual meeting of the stockholders, only such business shall be
conducted as shall have been brought before the meeting (a) pursuant to the
Corporation's notice of meeting, (b) by or at the direction of the Board of
Directors or (c) by a stockholder of the Corporation who is a stockholder of
record at the time of giving of the notice provided for in this Section 1.10,
who shall be entitled to vote at such meeting and who complies with the notice
procedures set forth in this Section 1.10. For business to be properly brought
before an annual meeting by a stockholder pursuant to clause (c) above, the
stockholder must have given timely notice thereof in writing to the Secretary of
the Corporation. To be timely, a stockholder's notice must be delivered to or
mailed and received at the principal executive offices of the Corporation not
less than 60 days nor more than 90 days prior to the anniversary of the
preceding year's annual meeting; provided, however, that if the date of the
meeting is changed by more than 30 days from such anniversary date, notice by
the stockholder to be timely must be received no later than the close of
business on the earlier of the 10th day following the date on which notice of
the date of the meeting was mailed or a public announcement of the meeting was
made. A stockholder's notice to the Secretary shall set forth as to each matter
the stockholder proposes to bring before the meeting (a) a brief description of
the business desired to be brought before the meeting and the reasons for
conducting such business at the meeting, (b) the name and address, as they
appear on the Corporation's books of the stockholder proposing such business,
and the name and address of the beneficial owner, if any, on whose behalf the
proposal is made, (c) the class and number of shares of stock of the Corporation
which are owned beneficially and of record by such stockholder of record and by
the beneficial owner, if any, on whose behalf the proposal is made, and (d) any
material interest of such stockholder of record and the beneficial owner, if
any, on whose behalf the proposal is made, in such business. Notwithstanding
anything in this Section 1.10 to the contrary, no business shall be conducted at
an annual meeting except in accordance with the procedures set forth in this
Section 1.10. The chairman of the meeting shall, if the facts warrant, determine
and declare to the meeting whether or not business was properly brought before
the meeting in accordance with the procedures prescribed by these By-laws, and
if (s)he should so determine, (s)he shall so declare to the meeting and any such
business not properly brought before the meeting shall not be transacted.
Notwithstanding the foregoing provisions of this Section 1.10, a stockholder
also shall comply with all applicable requirements of the Securities Exchange
Act of 1934, as amended, and the rules and regulations thereunder, with respect
to the matters set forth in this Section 1.10.
<PAGE>
ARTICLE II
BOARD OF DIRECTORS
Section 2.1 Number and Term of Office.
The business, property, and affairs of the Corporation shall be managed by
or under the direction of the Board of Directors of the Corporation. The initial
number of directors which shall constitute the whole Board of Directors shall be
seven; provided, however, that the Board of Directors, by resolution adopted by
vote of a majority of the then authorized number of directors, shall have the
sole authority to increase or decrease the number of directors. No decrease in
the number of directors may shorten the term of any incumbent director.
Directors shall be divided into three classes, as nearly equal in number as
possible, as determined by the Board of Directors. Subject to the provisions of
Article IV of these By-laws, one class shall hold office initially for a term
expiring at the annual meeting of stockholders to be held in 1999, another class
shall hold office initially for a term expiring at the annual meeting of
stockholders to be held in 2000, and another class shall hold office initially
for a term expiring at the annual meeting of stockholders to be held in 2001,
and the members of each class shall hold office until their successors are
elected and qualified. At each annual meeting of stockholders, the successors of
the class of directors whose term expires at that meeting shall be elected to
hold office for a term expiring at the annual meeting of stockholders held in
the third year following the year of their election.
Section 2.2 Chairman and Vice Chairman of the Board.
The directors may elect a Chairman and a Vice Chairman of the Board of
Directors. The Chairman and Vice Chairman shall be executive officers of the
Corporation and shall be subject to the control of and may be removed by the
Board of Directors.
Section 2.3 Meetings.
Regular meetings of the Board of Directors may be held without notice at
such time and place as shall from time to time be determined by the Board.
Special meetings of the Board of Directors shall be held at such time and place
as shall be designated in the notice of the meeting whenever called by the
Chairman of the Board, the Vice Chairman, the Chief Executive Officer (if a
director), the President (if a director) or by a majority of the directors then
in office.
Section 2.4 Notice of Special Meetings.
The Secretary, or in his or her absence any other officer of the
Corporation, shall give each director notice of the time and place of holding of
special meetings of the Board of Directors by mail at least seven days before
the meeting, or by telecopy, telegram, cable, radiogram, or by certified mail
with return receipt requested, by a nationally recognized courier, or by
personal service at least two days before the meeting. Unless otherwise stated
in the notice thereof, any and all business may be transacted at any meeting
without specification of such business in the notice.
<PAGE>
Section 2.5 Quorum and Organization of Meetings.
Except as provided in Section 4.3 of these By-laws, a majority of the
total number of members of the Board of Directors as constituted from time to
time shall constitute a quorum for the transaction of business, but, if at any
meeting of the Board of Directors (whether or not adjourned from a previous
meeting) there shall be less than a quorum present, a majority of those present
may adjourn the meeting to another time and place, and the meeting may be held
as adjourned without further notice or waiver. Except as otherwise provided by
law or in the Certificate of Incorporation or these By-laws, a majority of the
directors present at any meeting at which a quorum is present may decide any
question brought before such meeting. Meetings shall be presided over by the
Chairman of the Board, or in his or her absence, by the Vice Chairman, the Chief
Executive Officer, the President, or such other person as the directors may
select. The Secretary of the Corporation shall act as secretary of the meeting,
but in his or her absence, the chairman of the meeting may appoint any person to
act as secretary of the meeting.
Section 2.6 Committees.
The Board of Directors may, by resolution adopted by a majority of the
whole Board, designate one or more committees, each committee to consist of one
or more of the directors of the Corporation; provided, that persons who are not
directors of the Corporation may also be members of such committees to the
extent provided in the resolution of the Board. The Board may designate one or
more directors as alternate members of any committee, who may replace any absent
or disqualified member at any meeting of the committee. In the absence or
disqualification of a member of a committee, the member or members thereof
present at any meeting and not disqualified from voting, whether or not they
constitute a quorum, may unanimously appoint another member of the Board of
Directors to act at the meeting in place of any such absent or disqualified
member. Any such committee, to the extent provided in the resolution of the
Board of Directors and permitted by law, shall have and may exercise all the
powers and authority of the Board of Directors in the management of the
business, property, and affairs of the Corporation, and may authorize the seal
of the Corporation to be affixed to all papers which may require it. Each
committee of the Board of Directors may fix its own rules and procedures. Notice
of meetings of committees, other than of regular meetings provided for by the
rules, shall be given to committee members. All action taken by committees shall
be recorded in minutes of the meetings.
Section 2.7 Action Without Meeting.
Nothing contained in these By-laws shall be deemed to restrict the power
of members of the Board of Directors or any committee designated by the Board to
take any action required or permitted to be taken by them without a meeting, if
all the members of the Board of Directors or committee, as the case may be,
consent in writing to the adoption, and the writing or writings are filed with
the minutes of proceedings of the Board or Committee.
Section 2.8 Telephone Meetings.
Nothing contained in these By-laws shall be deemed to restrict the power
of members of the Board of Directors, or any committee designated by the Board,
to participate in a meeting of the Board, or a committee thereof, by means of
conference telephone or similar communications equipment by means of which all
persons participating in the meeting can hear each other.
<PAGE>
ARTICLE III
OFFICERS
Section 3.1 Executive Officers.
The executive officers of the Corporation shall be the Chairman of the
Board, the Vice Chairman of the Board, the Chief Executive Officer, the
President, one or more Vice Presidents, the Treasurer, and the Secretary, each
of whom shall be elected by the Board of Directors. The Board of Directors may
elect or appoint such other officers (including a Controller and one or more
Assistant Treasurers and Assistant Secretaries) as it may deem necessary or
desirable. Each officer shall hold office for such term as may be prescribed by
the Board of Directors from time to time. Any person may hold at one time two or
more offices.
Section 3.2 Chairman of the Board.
The Chairman of the Board shall preside at all meetings of the
stockholders and of the Board of Directors.
Section 3.3 Vice Chairman of the Board.
The Vice Chairman of the Board shall, at the request, or in the absence or
disability, of the Chairman of the Board, perform the duties and exercise the
powers of such office.
Section 3.4 Chief Executive Officer.
The Chief Executive Officer of the Corporation shall have general
supervision of the business, affairs and property of the Corporation, and over
its several officers. In general, the Chief Executive Officer shall have all
authority incident to the office of Chief Executive Officer and shall have such
other authority and perform such other duties as may from time to time be
assigned by the Board of Directors or by any duly authorized committee of
directors. The Chief Executive Officer hall have the power to fix the
compensation of elected officers whose compensation is not fixed by the Board of
Directors or a committee thereof and also to engage, discharge, determine the
duties and fix the compensation of all employees and agents of the Corporation
necessary or proper for the transaction of the business of the Corporation. If
the Chief Executive Officer is not also the Chairman of the Board, then the
Chief Executive Officer shall report to the Chairman of the Board or the Vice
Chairman, as the case may be.
Section 3.5 President.
The President shall be the chief operating officer of the Corporation and,
subject to the direction of the Board of Directors, or any duly authorized
committee of directors, shall have general supervision of the operations of the
Corporation. In general, but subject to any contractual restriction, the
President shall have all authority incident to the office of President and chief
operating officer and shall have such other authority and perform such other
duties as may from time to time be assigned by the Board of Directors or by any
duly authorized committee of directors or by the Chairman of the Board of
Directors. The President shall, at the request or in the absence or disability
of the Chairman or Vice Chairman of the Board, or the Chief Executive Officer,
perform the duties and exercise the powers of such officer.
<PAGE>
Section 3.6 Vice Presidents.
Each vice president shall have such powers and duties as the Board, the
Chief Executive Officer or the President assigns to him or her.
Section 3.7 Treasurer.
The Treasurer of the Corporation shall be in charge of the corporation's
books and accounts. Subject to the control of the Board, (s)he shall have such
other powers and duties as the Board, the Chief Executive Officer or the
President assigns to him or her.
Section 3.8 Secretary.
The Secretary shall be the secretary of, and keep the minutes of, all
meetings of the Board and the stockholders, and shall have such other powers and
duties as the Board or the President assigns to him or her. In the absence of
the Secretary from any meeting, the minutes shall be kept by the person
appointed for that purpose by the chairman of the meeting.
ARTICLE IV
RESIGNATIONS, REMOVALS, AND VACANCIES
Section 4.1 Resignations.
Any director or officer of the Corporation, or any member of any
committee, may resign at any time by giving written notice to the Board of
Directors, the Chief Executive Officer, the President, or the Secretary of the
Corporation. Any such resignation shall take effect at the time specified
therein or, if the time be not specified therein, then upon receipt thereof. The
acceptance of such resignation shall not be necessary to make it effective.
Section 4.2 Removals.
The Board of Directors, by a vote of not less than a majority of the
entire Board, at any meeting thereof, or by written consent, at any time, may,
to the extent permitted by law, remove with or without cause from office or
terminate the employment of any officer or member of any committee and may, with
or without cause, disband any committee. Any director or the entire Board of
Directors may be removed, with or without cause, by the holders of a majority of
the shares entitled at the time to vote at an election of directors.
Section 4.3 Vacancies.
Any vacancy in the office of any director or officer through death,
resignation, removal, disqualification, or other cause, and any additional
directorship resulting from increase in the number of directors, shall be filled
at any time exclusively by a majority of the directors then in office (even
though less than a quorum remains) and, subject to the provisions of this
Article IV, the person so
<PAGE>
chosen shall hold office until his or her successor shall have been elected and
qualified; or, if the person so chosen is a director elected to fill a vacancy,
(s)he shall (subject to the provisions of this Article IV) hold office for the
unexpired term of his or her predecessor.
ARTICLE V
CAPITAL STOCK
Section 5.1 Stock Certificates.
The certificates for shares of the capital stock of the Corporation shall
be in such form as shall be prescribed by law and approved, from time to time,
by the Board of Directors. Each certificate shall be signed by the Chairman or
Vice Chairman of the Board of Directors, if any, or by the Chief Executive
Officer or the President and by the Treasurer or an Assistant Treasurer or the
Secretary or an Assistant Secretary of the Corporation. Any and all signatures
on any such certificates may be facsimiles. In case any officer, transfer agent,
or registrar who has signed or whose facsimile signature has been placed upon a
certificate shall have ceased to be such officer, transfer agent, or registrar
before such certificate issued, it may be issued by the Corporation with the
same effect as if (s)he were such officer, transfer agent, or registrar at the
date of issue.
Section 5.2 Transfer of Shares.
Upon compliance with provisions restricting the transfer or registration
of transfer of shares of capital stock, if any, shares of the capital stock of
the Corporation may be transferred on the books of the Corporation only by the
holder of such shares or by his or her duly authorized attorney, upon the
surrender to the Corporation or its transfer agent of the certificate
representing such stock properly endorsed and the payment of taxes due thereon.
Section 5.3 Fixing Record Date.
In order that the Corporation may determine the stockholders entitled to
notice of or to vote at any meeting of stockholders or any adjournment thereof
or to express consent to corporate action in writing without a meeting, or
entitled to receive payment of any dividend or other distribution or allotment
of any rights, or entitled to exercise any rights in respect of any change,
conversion, or exchange of stock, or for the purpose of any other lawful action,
the Board of Directors may fix, in advance, a record date, which, unless
otherwise provided by law, shall not be more than sixty nor less than ten days
before the date of such meeting, nor more than sixty days prior to any other
action.
Section 5.4 Lost Certificates.
The Board of Directors or any transfer agent of the Corporation may direct
one or more new certificate(s) representing stock of the Corporation to be
issued in place of any certificate or certificates theretofore issued by the
Corporation, alleged to have been lost, stolen, or destroyed, upon the making of
an affidavit of that fact by the person claiming the certificate to be lost,
stolen, or destroyed. When authorizing such issue of a new certificate or
certificates, the Board of Directors (or any transfer agent of
<PAGE>
the Corporation authorized to do so by a resolution of the Board of Directors)
may, in its discretion and as a condition precedent to the issuance thereof,
require the owner of such lost, stolen, or destroyed certificate or
certificates, or his legal representative, to give the Corporation a bond in
such sum as the Board of Directors (or any transfer agent so authorized) shall
direct to indemnify the Corporation against any claim that may be made against
the Corporation with respect to the certificate alleged to have been lost,
stolen, or destroyed or the issuance of such new certificates, and such
requirement may be general or confined to specific instances.
Section 5.5 Regulations.
The Board of Directors shall have power and authority to make all such
rules and regulations as it may deem expedient concerning the issue, transfer,
registration, cancellation, and replacement of certificates representing stock
of the Corporation.
ARTICLE VI
MISCELLANEOUS
Section 6.1 Corporate Seal.
The corporate seal shall have inscribed thereon the name of the
Corporation and shall be in such form as may be approved from time to time by
the Board of Directors.
Section 6.2 Fiscal Year.
The fiscal year of the Corporation shall be determined by resolution of
the Board of Directors.
Section 6.3 Notices and Waivers Thereof.
Whenever any notice is required to be given by law, the Certificate of
Incorporation, or these By-laws to be given to any stockholder, director, or
officer, such notice, except as otherwise provided by law, may be given
personally, or by mail, or, in the case of directors or officers, by telecopy,
telegram, cable, or radiogram, or by certified mail with return receipt
requested, by a nationally recognized courier, addressed to such address as
appears on the books of the Corporation. Any notice given by telecopy, telegram,
cable, radiogram, by certified mail with return receipt requested, or by a
nationally recognized courier shall be deemed to have been given when it shall
have been delivered for transmission and any notice given by mail shall be
deemed to have been given when it shall have been deposited in the United States
mail with postage thereon prepaid.
Whenever any notice is required to be given by law, the Certificate of
Incorporation, or these By-laws, a written waiver thereof, signed by the person
entitled to such notice, whether before or after the meeting or the time stated
therein, shall be deemed equivalent in all respects to such notice to the full
extent permitted by law.
<PAGE>
Section 6.4 Stock of Other Corporations or Other Interests.
Unless otherwise ordered by the Board of Directors, the Chairman of the
Board, the Vice Chairman of the Board, the Chief Executive Officer or the
President, and such attorneys or agents of the Corporation as may from time to
time be authorized by the Board of Directors or the Chairman of the Board shall
have full power and authority on behalf of this Corporation to attend and to act
and vote in person or by proxy at any meeting of the holders of securities of
any corporation or other entity in which this Corporation may own or hold shares
or other securities, and at such meetings shall possess and may exercise all the
rights and powers incident to the ownership of such shares or other securities
which this Corporation, as the owner or holder thereof, might have possessed and
exercised if present. The Chairman of the Board, the Vice Chairman of the Board,
the Chief Executive Officer or President, or such attorneys or agents, may also
execute and deliver on behalf of this Corporation powers of attorney, proxies,
consents, waivers, and other instruments relating to the shares or securities
owned or held by this Corporation.
ARTICLE VII
AMENDMENTS
The Board of Directors shall have the power to adopt, amend, or repeal
these By-Laws.
July 24, 1998
24/7 Media, Inc.
1250 Broadway
New York, New York 10001
Ladies and Gentlemen:
You have requested our opinion in connection with the filing
by 24/7 Media, Inc., a Delaware corporation (the "Company"), with the Securities
and Exchange Commission of a Registration Statement on Form S-1 (Registration
Statement No. 333- 56085) (the "Registration Statement") under the Securities
Act of 1933 (the "Securities Act") with respect to 3,737,500 shares of common
stock, $.01 par value, of the Company ("Common Stock"). The Registration
Statement relates to the proposed issuance and sale of 3,250,000 shares of
Common Stock by the Company (the "Firm Shares") and the proposed sale of up to
an additional 487,500 shares of Common Stock by the Company (the "Company Option
Shares").
We have examined such records, documents and other instruments
as we have deemed relevant and necessary as a basis for the opinions hereinafter
set forth. We have also assumed without investigation the authenticity of any
document submitted to us as an original, the conformity to originals of any
document submitted to us as a copy, the authenticity of the originals of such
latter documents, the genuineness of all signatures and the legal capacity of
natural persons signing such documents. We have also relied on certain matters
contained in certificates of public officials and officers of the Company.
Based upon the foregoing, we are of the opinion that the Firm
Shares and the Company Option Shares (to the extent issued and sold by the
Company) have been duly authorized and, when issued, delivered and paid for in
accordance with the
<PAGE>
24/7 Media, Inc.
July 24, 1998
Page 2
underwriting agreement as described in the Registration Statement, will be
validly issued, fully paid and non-assessable.
The foregoing opinion relates only to matters of the internal
law of the State of New York and to the General Corporation Law of the State of
Delaware and to the laws of the United States of America and does not purport to
express any opinion on the laws of any other jurisdiction.
We hereby consent to the filing of this opinion as an exhibit
to the Registration Statement and to the references to our firm under the
caption "Legal Matters" in the Prospectus contained in the Registration
Statement. In so doing, we do not admit that we are in the category of persons
whose consent is required under Section 7 of the Securities Act or the rules and
regulations of the Securities and Exchange Commission thereunder.
Very truly yours,
/s/Proskauer Rose LLP
24/7 MEDIA, INC.
1998 Stock Incentive Plan
As Amended and Restated as of July 20, 1998
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 July 20,
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:
"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>
"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.
"Board" shall mean the Board of Directors of the Company.
"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.
"Change in Control" shall have the meaning set forth in Article XI.
"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.
"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.
"Common Stock" means the Common Shares, $.01 par value per share, of the
Company.
"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.
"Disability" shall mean total and permanent disability, as defined in
Section 22(e)(3) of the Code.
"Effective Date" shall mean February 13, 1998.
"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 Employees shall mean the employees of the Company, its
Subsidiaries and its parent (within the meaning of Code
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Section 424(e)) who are eligible pursuant to Article V to be granted Stock
Options under the Plan.
"Exchange Act" shall mean the Securities Exchange Act of 1934.
"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.
"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.
"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.
"Non-Qualified Stock Option" shall mean any Stock Option awarded under
this Plan that is not an Incentive Stock Option.
"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.
"Restricted Stock" shall mean an award of shares of Common Stock under
the Plan that is subject to restrictions under Article VII.
"Restriction Period" shall have the meaning set forth in Subsection
7.3(a) with respect to Restricted Stock for Eligible Employees.
"Retirement" with respect to a Participant's Termination of Employment
or Termination of Consultancy, shall mean a Termination of Employment or
Termination of Consultancy
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<PAGE>
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).
"Rule 16b-3" shall mean Rule 16b-3 under Section 16(b) of the Exchange
Act as then in effect or any successor provisions.
"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.
"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 the date such right is exercised, over (y)
the aggregate exercise price of such right, other than on surrender of a Stock
Option.
"Stock Option" or "Option" shall mean any Option to purchase shares of
Common Stock granted to Eligible Employees pursuant to Article VI.
"Subsidiary" shall mean any corporation that is defined as a subsidiary
corporation in Section 424(f) of the Code.
"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.
"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.
"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.
"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
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<PAGE>
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.
"Transfer" or "Transferred" shall mean anticipate, alienate, attach,
sell, assign, pledge, encumber, charge or otherwise transfer.
"Withholding Election" shall have the meaning set forth in Section 14.4.
ARTICLE III.
ADMINISTRATION
1. The Committee. The Plan shall be administered and interpreted by the
Committee.
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 acceleration thereof,
or any forfeiture restrictions or waiver thereof, regarding any Stock
Option or other Award, and the shares of Common Stock relating
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<PAGE>
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. 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.
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
6
<PAGE>
members) arising out of or in connection with the Plan shall be within the
absolute discretion of all and each of them, 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.
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.
6. Procedures. If the Committee is appointed, the Board may 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.
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
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<PAGE>
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 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 determinations made by an individual with regard to
Awards granted to him or her under this Plan.
ARTICLE IV.
SHARE AND OTHER LIMITATIONS
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
3,000,000 shares (all share numbers set forth in the Plan give effect to a
1-for-4 reverse stock split effected July 20, 1998 and are 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. 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 187,500 shares (subject to any
increase or decrease pursuant to Section 4.2) during each fiscal year of
the Company.
There are no annual individual Participant limitations on Restricted
Stock.
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.
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2. Changes.
(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
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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 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.
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
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.
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.
STOCK OPTION GRANTS
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.
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
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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.
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 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
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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 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
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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 remaining term of the Options that are exercised,
if applicable, or such other exercise price and term as determined by the
Committee.
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
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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.
(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.
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ARTICLE VII.
RESTRICTED STOCK AWARDS
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.
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 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
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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.
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 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.
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.
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ARTICLE VIII.
STOCK APPRECIATION RIGHTS
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.
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
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.
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(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.
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.
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 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.
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
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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.
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 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
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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 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.
20
<PAGE>
ARTICLE IX.
NON-EMPLOYEE DIRECTOR STOCK OPTION GRANTS
1. Options. The terms of this Article IX shall apply only to Options
granted to non-employee directors.
2. Grants.
(a) Initial Grant. Subject to the terms of the Plan, each
non-employee director of the Company who, as of June 30, 1998, has not
previously been granted Options under the Plan shall be granted
non-qualified Options to purchase 18,750 shares of Common Stock as of June
30, 1998, or, if later, as of the date the non-employee director begins
service as a director on the Board.
(b) Subsequent Grants Upon the date of each Annual Meeting of
Stockholders, each non-employee director shall be granted a non-qualified
Options to purchase 4,688 shares of Common Stock (or a pro rata portion
thereof if the director did not serve the entire year since the date of
the last annual meeting). These options vest in full on the date of the
first Annual Meeting of Stockholders held following the date of the grant,
assuming the Non-Employer Director is a director on that date.
3. Non-Qualified Stock Options. Stock Options granted under this Article
IX shall be Non-Qualified Stock Options.
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 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 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.
21
<PAGE>
(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.
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.
6. 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).
7. 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 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
22
<PAGE>
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 granted to an Employee or Consultant 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 granted to
an Employee or Consultant 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.
All Stock Options granted to non-employee directors shall be Transferable solely
to such non-employee director's principal employer at the time of grant if the
terms of such non-employee director's employment so require. 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.
CHANGE IN CONTROL PROVISIONS
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
23
<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.
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
24
<PAGE>
(either by remaining outstanding or by being converted into voting
securities of the surviving entity) more than 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.
25
<PAGE>
ARTICLE XII.
TERMINATION OR AMENDMENT OF THE PLAN
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.
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
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.
26
<PAGE>
ARTICLE XIV.
GENERAL PROVISIONS
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.
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.
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
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.
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.
5. Listing and Other Conditions.
27
<PAGE>
(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.
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).
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.
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.
9. Costs. The Company shall bear all expenses included in administering
this Plan, including expenses of issuing Common Stock pursuant to any Awards
hereunder.
28
<PAGE>
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.
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 the agreement of the transferee to be bound by all of
the terms and conditions of the Plan.
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.
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. 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.
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.
29
38-32 ASSOCIATES
c/o Edward S. Gordon Co., Inc.
200 Park Avenue
New York, New York 10166
July 7, 1998
BY CERTIFIED MAIL,
RETURN RECEIPT REQUEST
- ----------------------
24/7 Media Inc.
1250 Broadway, 27th Floor
New York, New York 10001
Attention: Jay Friesel, Executive Vice President
Re: Lease (the "Lease") dated as of April 30, 1998 between 38-32
Associates ("Landlord") and 24/7 Media Inc. ("Tenant")
Premises: 27th Floor; 1250 Broadway, New York, New York (the "Premises")
------------------------------------------------------------------------
Dear Mr. Friesel:
All defined terms used herein shall have the meanings ascribed to them in
the Lease.
Pursuant to Section 43.01 of the Lease we hereby notify you that Landlord
has received an offer from a Prospective Tenant to let the entire 28th floor of
the Building (the "Refusal Space") and offers you the right to include the
Refusal Space within the Premises upon the terms and conditions as are set forth
in Article 43 of the Lease.
The fixed annual rent with respect to the Refusal Space shall be Three
Hundred Eighty One Thousand Three Hundred Seventy Five and 00/100 Dollars
($381,375.00) per annum.
Please sign in the appropriate place on the second page of this letter to
indicate whether you wish to exercise your right to lease the Refusal Space and
return this notice to the undersigned. Pursuant to Section 43.01(d) of the
Lease, you may accept this offer within seven (7) days. If Tenant fails to
accept Landlord's offer or to respond to this letter within such seven
<PAGE>
(7) day period, Landlord shall thereafter be free to lease the Refusal Space to
the Prospective Tenant and Tenant shall have no further options or rights with
respect to the Refusal Space.
Very truly yours,
38-32 ASSOCIATES
By:
----------------------------------
Name:
Title:
cc: Mark Moran, Esq., General Counsel
Tenant hereby rejects the offer of Tenant hereby accepts the offer of
the Offered Space this 7 day of the Offered Space this 14 day of
July, 1998. July, 1998.
24/7 MEDIA, INC. 24/7 MEDIA, INC,
By: By:
---------------------------------- ----------------------------------
JAY FRIESEL, EVP
<PAGE>
38-32 ASSOCIATES
c/o Edward S. Gordon Co., Inc.
200 Park Avenue
New York, New York 10166
July 7, 1998
BY CERTIFIED MAIL,
RETURN RECEIPT REQUESTED
- ------------------------
24/7 Media Inc.
1250 Broadway, 27th Floor
New York, New York 10001
Attention: Jay Friesel, Executive Vice President
Re: Lease (the "Lease") dated as of April 30, 1998 between 38-32
Associates ("Landlord") and 24/7 Media Inc. ("Tenant")
Premises: 27th Floor; 1250 Broadway, New York, New York (the "Premises")
------------------------------------------------------------------------
Dear Mr. Friesel:
All defined terms used herein shall have the meanings ascribed to them in
the Lease.
Pursuant to Section 43.01 of the Lease we hereby notify you that Landlord
has received an offer from a Prospective Tenant to let the entire 26th floor of
the Building (the "Refusal Space") and offers you the right to include the
Refusal Space within the Premises upon the terms and conditions as are set forth
in Article 43 of the Lease.
The fixed annual rent with respect to the Refusal Space shall be Three
Hundred Seventy Thousand Seventy Five and 00/100 Dollars ($370,075.00) per
annum.
Please sign in the appropriate place on the second page of this letter to
indicate whether you wish to exercise your right to lease the Refusal Space and
return this notice to the undersigned. Pursuant to Section 43.01(d) of the
Lease, you may accept this offer within seven (7) days. If Tenant fails to
accept Landlord's offer or to respond to this letter within such seven
<PAGE>
(7) day period, Landlord shall thereafter be free to lease the Refusal Space to
the Prospective Tenant and Tenant shall have no further options or rights with
respect to the Refusal Space.
Very truly yours,
38-32 ASSOCIATES
By:
----------------------------------
Name:
Title:
cc: Mark Moran, Esq., General Counsel
Tenant hereby rejects the offer of the Tenant hereby accepts the offer
Offered Space this 7 day of of the Offered Space this 14 day
July, 1998. of July, 1998.
24/7 MEDIA, INC. 24/7 MEDIA, INC.
By: By:
---------------------------------- ----------------------------------
JAY FRIESEL, EVP
ASSET PURCHASE AGREEMENT
between
K2 DESIGN, INC.,
Seller
and
24/7 MEDIA, INC.,
Purchaser
Dated as of June 1, 1998
<PAGE>
EXECUTION COPY
ASSET PURCHASE AGREEMENT (this "Agreement") dated as of June
1, 1998, among K2 DESIGN, INC., a Delaware corporation ("Seller"),
and 24/7 MEDIA, INC., a Delaware corporation ("Purchaser").
This Agreement sets forth the terms and conditions upon which Seller is
selling and Purchaser is purchasing all of the assets (other than Excluded
Assets, as defined below) and certain liabilities of Seller's CLIQNOW! division.
Accordingly, in consideration of the premises and the representations,
warranties and agreements herein contained, the parties hereto agree as follows:
ARTICLE I
DEFINITIONS
The following definitions shall apply for purposes of this Agreement
(such definitions to be equally applicable to both the singular and plural forms
of the terms defined):
1.1 "Business" means (i) media selling across web site advertising
networks; and (ii) the provision of promotion, marketing and sales services and
other ancillary activities relating to and provided in connection with the
foregoing.
1.2 "Certificate of Designations" means the certificate of designations
with respect to Series B Convertible Redeemable Preferred Stock of Purchaser in
the form attached hereto as Exhibit 1.2.
1.3 "Contracts" means those agreements listed on Schedule 1.3.
1.4 "Deferred Purchase Price" means $150,000.
1.5 "Encumbrances" means, to the extent applicable, all claims, liens
(including liens for taxes), mortgages, security interests, leases, options,
rights of first refusal or first offer, easements or other similar encumbrances.
1.6 "Intellectual Property" means the trade names listed on Schedule
1.6, and all registered trademarks and goodwill associated therewith.
1.7 "Knowledge", "to Seller's Knowledge" and variations thereof shall
mean that which is actually known by an executive officer of Seller and with no
requirement of due inquiry or that
<PAGE>
such officers "should have known."
1.8 "Leased Premises" shall mean that portion of office space located at
30 Broad Street, New York, New York presently utilized by the Transferred
Employees.
1.9 "Material Adverse Change" or "Material Adverse Effect" means, when
used with respect to Seller or Purchaser, as the case may be, any change or
effect that is or, so far as can be reasonably determined, is likely to be
materially adverse to the assets, properties, condition (financial or
otherwise), business (including, without limitation, the Business) or results of
operations of Seller or Purchaser, as the case may be, taken as a whole.
1.10 "Permitted Encumbrances" means Encumbrances that (a) are liens for
taxes not yet due and payable, (b) do not, individually or in the aggregate,
materially detract from the value of the assets to which they attach, (c) are
mechanics', carriers', materialmen's, landlords', workers' or other similar
liens incurred in the ordinary course of business or (d) relate to assets owned
by customers or third parties that are used by the Company in its operations.
1.11 "Post-Closing Financial Statements" means (i) audited financial
statements (balance sheets, statements of income and statements of cash flows)
for the Business for the year ended December 31, 1997, prepared by Seller's
regular independent auditors, and accompanied by an unqualified opinion of such
auditors, and (ii) unaudited balance sheet as of March 31, 1998 and unaudited
statement of income for the three months ended March 31, 1998.
1.12 "Registration Rights Agreement" means the registration rights
agreement dated the date hereof and in the form attached hereto as Exhibit 1.12.
1.13 "Royalty Rights" means all of Seller's right, title and interest in
and to any revenue derived from or arising out of the Business, including
royalties and similar payments, whether or not earned or payable on the date
hereof.
1.14 "Seller's Accounts Estimate" means $295,267, as adjusted pursuant to
Sections 1.15 and 1.16 hereof.
1.15 "Seller's Accounts Payable" means the accounts payable of Seller
relating to the Business as of the date hereof, as listed on Schedule 1.15,
which Schedule may be amended within 30 days from the date hereof (with
corresponding adjustments being made to the Seller's Accounts Estimate).
1.16 "Seller's Accounts Receivable" means the accounts receivable of
Seller relating to the Business as of the date hereof as listed on Schedule
1.16, which Schedule may be amended within 30 days from the date hereof (with
corresponding adjustments being made to the Seller's Accounts Estimate).
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1.17 "Transaction Documents" means, collectively, this Agreement, the
Certificate of Designations, the Employment Agreements and the Registration
Rights Agreement.
1.18 "Transferred Employees" means the individuals listed on Schedule
1.18.
ARTICLE II
THE ASSET PURCHASE
2.1 The Asset Purchase. (a) Upon the terms and subject to the
conditions of this Agreement, Seller hereby sells, conveys, assigns, transfers
and delivers to Purchaser free and clear of all Encumbrances (other than
Permitted Encumbrances and except as expressly provided herein), and Purchaser
hereby purchases from Seller, the Business and all the assets, properties and
rights owned or leased by Seller and constituting the Business (the "Purchased
Assets"), including without limitation:
(i) all of Seller's right, title and interest in and to the
Contracts, to the extent assignable;
(ii) Seller's Accounts Receivable;
(iii) all customer lists, sales data, brochures, catalogs,
mailing lists, art work, photographs and advertising
material that are used in the Business, whether in
electronic form or otherwise;
(iv) all of Seller's interest in governmental permits,
licenses, registrations, certificates, consents, orders
and approvals necessary for the continued operation of
the Business;
(v) all trade secrets, Royalty Rights, work notes, market
studies, consultant's reports and similar property,
tangible or intangible, used in the Business;
(vi) copies of all records of Seller material to the
operation of the Business, including property, tax and
marketing records and copies of personnel records of
Transferred Employees;
(vii) all right, title and interest in and to the goodwill
incident to the Business;
(viii) all prepaid expenses of, or for the benefit of, the
Business;
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(ix) subject to any license agreements regarding such
software, all software resident on computers used in
the Business (other than any software not useful in the
Business);
(x) all computers used in the Business, including all
laptop computers currently used by a Transferred
Employee; and
(xi) all other assets material to the operation of the
Business (including without limitation all causes of
action, contract rights and warranty and product
liability claims, whether or not in litigation on the
date hereof).
(b) The following assets (collectively, the "Excluded Assets")
shall be excluded from this Agreement, and shall not be assigned or transferred
to Purchaser:
(i) any right, title or interest in the names "K2" and "K2
Design" and any variants thereof containing "K2" and
any related logos, trademarks, trade names or service
marks incorporating such names, except as otherwise
specifically transferred to Purchaser by Seller;
(ii) cash and cash equivalents and similar type investments;
(iii) leases and contracts, other than those set forth on
Schedule 1.3 or otherwise specifically transferred
pursuant to the terms hereof;
(iv) assets constituting any pension funds or segregated
funds for the benefit of Transferred Employees;
(v) corporate minute books and stock books;
(vi) except as otherwise provided herein, all of Seller's
assets not associated with the Business;
(vii) trade show booths; and
(viii) all other furniture, fixtures and equipment.
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2.2 Purchase Price.
(a) In consideration of the transfer to Purchaser of the Assets
and of the assignment of the Intellectual Property, Purchaser agrees to deliver
to Seller or its designees the following: (i) $850,000 on the date hereof, by
wire transfer of immediately available funds, (ii) the Deferred Purchase Price
(subject to the terms of Section 2.2(b)), (iii) 3,000 shares of the Purchaser's
Series B Convertible Redeemable Preferred Stock, par value $.01 per share (the
"Shares"), and (iv) the Seller's Accounts Estimate, on the date hereof. The
amount of cash and Shares set forth in items (i) through (iv), above, as
adjusted pursuant to the terms hereof, is referred to herein as the "Purchase
Price".
(b) If the Post-Closing Financial Statements are delivered to
Purchaser within forty-five days after the date hereof, then Purchaser shall pay
to Seller the Deferred Purchase Price within three days after the date of such
delivery. Seller acknowledges that the Deferred Purchase Price shall not be
payable if the Post-Closing Financial Statements are not delivered on or before
such date.
2.3 Purchase Price Adjustments
(a) Schedule 2.3 sets forth a list of Seller's customers relating
to the Business as of April 30, 1998 (the "Existing Customers") together with a
true and complete list of the gross revenues of Seller derived from the Business
from the Existing Customers and booked on the accounts of Seller during the four
month period ended April 30, 1998 (in the aggregate and on a customer by
customer basis). In addition, Schedule 2.3 (as amended through June 30, 1998)
sets forth a list of customers ("New Customers") that have entered or will enter
into contracts with Seller and/or Purchaser relating to the Business in May or
June, 1998 (excluding renewals).
(b) On or before November 1, 1998 Purchaser shall deliver to
Seller a notice (the "Customer Notice") which shall include (i) a list of
Existing Customers that were parties to website agreements with Purchaser as of
September 1, 1998 and had not as of such date provided written notice of intent
to terminate such website agreement, (the "Retained Customers") and (ii) the
gross revenue generated from New Customers during the four months ending
September 30, 1998 (the "New Customer Revenue").
(c) The Customer Notice shall include the following calculations:
(i) the sum of the revenue percentages set forth on Schedule
2.3 for Retained Customers;
(ii) the New Customer Revenue, expressed as a percentage of
Seller's gross revenue attributable to the Business for
the four months ended April 30, 1998; and
(iii) the sum of the percentages determined pursuant to (i)
and (ii), above (such percentage, the "Retained Customer
Factor").
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(d) The Purchase Price shall be reduced (the "Purchase Price
Reduction") if at all, according to the following chart:
<TABLE>
<CAPTION>
Retained Customer Factor Purchase Price Reduction
------------------------ ------------------------
<S> <C>
greater than 70% 0
greater than 60% and less than
or equal to 70% $200,000
greater than 50% and less than
original or equal to 60% $400,000
50% $600,000
less than 50% $600,000 plus $40,000 times the
number of percentage points by
which 50% exceeds the Retained
Customer Factor
</TABLE>
(e) Notwithstanding anything to the contrary in this Section 2.3,
if Purchaser's gross revenue from Existing Customers and New Customers exceeds
$500,000 for the three months ended September 30, 1998, the Purchase Price
Reduction shall be zero. Purchaser agrees to use its best efforts to retain
Existing Customers and New Customers through September 30, 1998 and to keep all
website and advertising relationships intact through September 30, 1998 and
thereby avoid a Purchase Price Reduction.
(f) The Purchase Price Reduction shall be payable in cash or in
shares of Purchaser's capital stock, at the option of Seller. If all or a
portion of the Purchase Price Reduction is payable in Shares prior to the
Purchaser's initial public offering, the Shares shall be valued at $1,000 per
share. If all or a portion of the Purchase Price Reduction is payable after the
Purchaser's initial public offering, the Purchaser's common stock shall be
valued at the higher of (i) the price to the underwriters of the common stock in
the initial public offering or (ii) the average of the closing price per share
on the Nasdaq National Market for the five trading days immediately preceding
October 1, 1998.
(g) Purchaser agrees to use commercially reasonable efforts to
collect Seller's Accounts Receivable prior to November 1, 1998. On or before
November 1, 1998, Purchaser shall prepare and deliver to Seller a notice (the
"Accounts Notice" and, together with the Customer Notice, a "Notice") setting
forth the amount of Seller's Accounts Receivable collected by Purchaser between
the date hereof and November 1, 1998 (such amount, the "Post-Closing
Collections"). If the Post-Closing Collections are less than Seller's Accounts
Estimate, Seller shall, within 15 days after receipt of the Accounts Notice or
resolution of any dispute pursuant to Section 2.3(h), pay to Purchaser an amount
equal to such shortfall.
(h) During the 30-day period following Seller's receipt of a
Notice, Seller and its
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independent auditors will be permitted to review Purchaser's documentation
relating to such Notice (and Purchaser and its representatives will provide
reasonable cooperation in such review). Such Notice shall become final and
binding upon the parties on the thirtieth day following receipt thereof by
Seller unless Seller gives written notice of any disagreement ("Notice of
Disagreement") to Purchaser prior to such date. The Notice of Disagreement (if
any) shall specify in reasonable and sufficient detail the nature of any
disagreement so asserted. If a Notice of Disagreement is received by Purchaser
in a timely manner, then the Notice (as revised in accordance with clause (x) or
(y) below) shall become final and binding upon the parties on the earlier of (x)
the date the parties hereto resolve in writing any differences they have with
respect to any matter specified in the Notice of Disagreement or (y) the date
any disputed matters are finally resolved in writing by the Arbitrator (as
defined below). During the 30-day period following the delivery of a Notice of
Disagreement, Seller and Purchaser shall seek in good faith to resolve in
writing any differences which they may have with respect to any matter specified
in the Notice of Disagreement. If, at the end of such 30- day period, Seller and
Purchaser have not reached agreement on such matters, the matters which remain
in dispute shall be submitted to an arbitrator jointly selected by the parties
(the "Arbitrator") for review and resolution in accordance with the commercial
arbitration rules of the American Arbitration Association in New York City. The
Arbitrator shall render a decision resolving the matters in dispute within 30
days following their submission to the Arbitrator. The fees of the Arbitrator
shall be borne by the non-prevailing party.
2.4 Assumption of Liabilities; Employee Matters (a) General
Limitation on Assumption of Liabilities. Except for Permitted Encumbrances and
as otherwise provided in this Section 2.4, Seller shall transfer the Purchased
Assets to Purchaser free and clear of all Encumbrances, and Purchaser shall not,
by virtue of its purchase of the Purchased Assets, assume or become responsible
for any liabilities or obligations of Seller.
(b) Assumed Liabilities and Obligations. Purchaser hereby acquires
the Purchased Assets subject only to, and shall undertake, assume, perform and
otherwise pay, satisfy and discharge, and hold Seller harmless from, the
liabilities and obligations set forth therein or relating thereto and, in either
case, arising after the date hereof.
(c) Offer of Employment. Purchaser shall offer employment as of
the date hereof to all of the Transferred Employees. Purchaser shall keep on its
payroll all Transferred Employees who accept Purchaser's offer of employment
except for those Transferred Employees who may resign or be terminated for
cause, for at least 90 days after the Closing Date.
(d) Vacation Liability. Purchaser shall assume liability as of the
date hereof for the vacation entitlement that each Transferred Employee who
becomes an employee of Purchaser has accrued and is listed in Schedule 2.4.
Purchaser shall pay each Transferred Employee's wages or salary during such
vacation entitlement from Purchaser, when taken.
(e) Other Employee Benefits. Seller agrees that, with respect to
claims for workers' compensation arising out of events occurring prior to the
date hereof and all claims under
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Seller's employee benefit programs by, or in respect of, persons employed by
Seller arising out of events occurring prior to the date hereof, regardless of
whether such employment had terminated and regardless of whether such employee
is employed by Purchaser, whether reported or unreported as of the date hereof,
and whether insured or uninsured (including, but not limited to, workers'
compensation, life insurance, medical and disability programs), Seller shall, at
its own expense, honor, or cause its insurance carriers, if any, to honor, such
claims in accordance with the terms and conditions of such programs or
applicable workers' compensation statutes, including any construction of such
terms or conditions ultimately made by any court or administrative body having
jurisdiction thereover. Without limiting the scope of the preceding sentence,
Seller and its affiliates shall be responsible for any and all claims and
liabilities arising out of or relating to (i) Seller's employment of the
Transferred Employees or any former employees of Seller, (ii) the termination by
Seller of the employment of any such Transferred Employee, former employee,
consultant or other agent of Seller, and (iii) the provision by Seller of any
employee benefits to such Transferred Employees, former employees, retirees,
disabled employees, or agents of Seller (and their beneficiaries and eligible
dependents) attributable to their employment with, or their participation in any
plans or programs maintained or contributed to by, Seller or any of its
affiliates. Purchaser shall assume liability for all workers' compensation
claims for industrial injuries and illnesses, and any and all claims and
liabilities, occurring after the Closing Date in respect to the Transferred
Employees. Each Transferred Employee shall be eligible to participate in
Purchaser's benefit plans, subject to any limits or exclusions imposed by the
applicable insurance company, such as exclusions for pre-existing conditions.
2.5 Intellectual Property. Seller hereby assigns to Purchaser the
Intellectual Property and agrees to execute any additional forms or agreements
necessary to effect the foregoing.
2.6 Escrow of Shares. Seller hereby directs Purchaser to deliver
the Shares to Proskauer Rose LLP, as escrow agent, to be held and disbursed in
accordance with the terms of an escrow agreement to be agreed by such firm and
the parties hereto.
2.7 Further Assurances. From and after the date here of, upon
written request from Purchaser, Seller shall execute, acknowledge and deliver
all such further acts, assurances, deeds, assignments, transfers, conveyances
and other instruments and papers as may reasonably be required to sell, assign,
transfer, vest, convey and deliver full right, title and interest in, and
possession of, the Purchased Assets to Purchaser and to otherwise consummate the
transactions contemplated hereby.
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<PAGE>
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF SELLER
Seller represents and warrants to Purchaser as follows:
3.1. Organization. Seller is a corporation duly organized, validly
existing and in good standing under the laws of the jurisdiction of its
organization.
3.2. Authority. Seller has the full corporate power and authority
to execute and deliver the Transaction Documents to which it is a party and to
consummate the transactions contemplated hereby and thereby. All corporate acts
and other proceedings required to be taken by or on the part of Seller to
authorize such execution, delivery and consummation have been duly and properly
taken. The Transaction Documents have been duly executed and delivered by Seller
and constitute legal, valid and binding obligations of Seller enforceable
against Seller in accordance with their respective terms. The execution and
delivery by Seller of the Transaction Documents and the consummation of the
transactions contemplated hereby and thereby will not violate any applicable
law, or conflict with, result in any breach of, constitute a default (or an
event which with notice or lapse of time or both would become a default) under,
or result in the creation of an Encumbrance on any of the properties or assets
of Seller pursuant to, the corporate charter or by-laws of Seller or any
indenture, mortgage, lease, agreement or other instrument to which Seller is a
party or by which its properties or assets are bound. No material approval,
authorization, consent or other order or action of or filing with any person,
entity or court, administrative agency or other governmental body in the United
States of America is required for the execution and delivery by Seller of the
Transaction Documents to which it is a party or the consummation by Seller of
the transactions contemplated hereby or thereby.
3.3. Financial Statements. To its Knowledge, Seller does not have
any contingent or undisclosed obligations or liabilities relating to the
Business which would be required in accordance with GAAP to be reflected in a
currently prepared balance sheet, other than obligations or liabilities (i) that
are disclosed in this Agreement or the Schedules hereto, or(ii) that are not
material to the financial condition of the Business.
3.4. Retention of Customers. Except as set forth on Schedule 3.4,
to its Knowledge, Seller does not know of anything that might reasonably
indicate that any of the entities listed on Schedule 2.3 intends to cease
dealing with (or decline to deal with) the Purchaser, nor has any information
been brought to the attention of the Seller that might reasonably lead it to
believe any such customer intends to materially alter the amount of such
purchases or the extent of dealings with Purchaser (as compared to purchases and
dealings with Seller as of the date hereof).
3.5. Intangible Property Rights. Schedule 3.5 lists all the
trademarks, trade names, trade secrets and other intangible property rights,
including all registered trademarks and goodwill associated therewith, used in
connection with the Business (the "Intangible Property Rights").
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Except as otherwise disclosed in Schedule 3.5, (i) the Seller, to its Knowledge,
validly owns the Intangible Property Rights free and clear of all Encumbrances
other than Permitted Encumbrances and (ii) no action, claim, suit or proceeding
has been brought against the Seller or, to the Knowledge of Seller, has been
threatened against the Seller with respect to any material Intangible Property
Rights.
3.6. Litigation. Except as disclosed in Schedule 3.6, Seller is not
subject to any judgment, order, writ, injunction or decree of any court or any
Federal, state, local or other governmental department, commission, board,
bureau, agency or instrumentality, domestic or foreign, or any arbitrator that
materially affects the operation of the Business.
3.7. Contracts. To Seller's Knowledge, Schedule 1.3 sets forth a
list of all executory contracts of the Business. Except as disclosed in Schedule
1.3, to Seller's Knowledge, each of the Contracts listed in Schedule 1.3 is
valid and in full force and effect, each party to each such Contract has
performed all material obligations required to be performed by it thereunder,
and no other party to any such Contract has taken the position that such
Contract is not enforceable against any such other parties by Seller.
3.8. Benefit Plans. Purchaser shall not have liability under any
Benefit Plans, with respect to any employees of Seller or their beneficiaries.
"Benefit Plans" shall mean all material "employee pension benefit plans" (as
defined in Section 3(2) of the Employee Retirement Income Security Act of 1974,
as amended ("ERISA")), "employee welfare benefit plans" (as defined in Section
3(1) of ERISA), and any other material employee fringe benefit plans maintained,
or contributed to, by the Company.
3.9. Accuracy. To Seller's Knowledge, the required disclosures made
in this Agreement and the schedules attached hereto are complete and accurate in
all material respects, and the scheduled disclosures do not contain any untrue
statement of a material fact or omit to state any material fact necessary to
make the statements or facts contained therein, in light of the circumstances
under which they were made, not misleading.
3.10. Securities Act of 1933. The Shares purchased by Seller
pursuant to this Agreement are being acquired for investment only and not with a
view to any public distribution thereof, and Seller will not offer to sell or
otherwise dispose of the Shares so acquired by it in violation of the Securities
Act of 1933.
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<PAGE>
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF PURCHASER
Purchaser represents and warrants to Seller as follows:
4.1. Organization. Purchaser is a corporation duly organized,
validly existing and in good standing under the laws of the jurisdiction of its
organization.
4.2. Authority. Purchaser has the full corporate power and
authority to execute and deliver the Transaction Documents and to consummate the
transactions contemplated hereby and thereby. All corporate acts and other
proceedings required to be taken by or on the part of Purchaser to authorize
such execution, delivery and consummation have been duly and properly taken. The
Transaction Documents have been duly executed and delivered by Purchaser and
constitute legal, valid and binding obligations of Purchaser enforceable against
Purchaser in accordance with their respective terms. The execution and delivery
by Purchaser of the Transaction Documents and the consummation of the
transactions contemplated hereby and thereby will not violate any law, or
conflict with, result in any breach of, constitute a default (or an event which
with notice or lapse of time or both would become a default) under, or result in
the creation of an Encumbrance on any of the properties or assets of Purchaser
pursuant to, the corporate charter or by-laws of Purchaser or any indenture,
mortgage, lease, agreement or other instrument to which Purchaser is a party or
by which its properties or assets are bound. No material approval,
authorization, consent or other order or action of or filing with any person,
entity or court, administrative agency or other governmental body in the United
States of America is required for the execution and delivery by Purchaser of the
Transaction Documents or the consummation by Purchaser of the transactions
contemplated hereby or thereby.
4.3 Capital Stock of the Company. The authorized capital stock of
the Company consists of (i) 100,000,000 shares of Common Stock, par value $.01
per share (the "Common Stock"), and (ii) 30,000,000 shares of preferred stock,
par value $.01 per share, of which 13,621,507 have been designated as Series A
Convertible Voting Preferred Stock (the "Series A Preferred Stock") and, after
giving effect to the Certificate of Designations, 3,000 of which have been
designated Series B Convertible Redeemable Preferred Stock (the "Series B
Preferred Stock"). On the date hereof, 31,301,804 shares of Common Stock are
outstanding, 13,621,507 shares of the Series A Preferred Stock are outstanding
and 3,000 shares of the Series B Preferred Stock will be outstanding pursuant to
this Agreement. In addition, on the date hereof, there are outstanding
6,344,224, 6,344,224 and 3,121,212 Class A, Class B and Class C Warrants,
respectively, to purchase Common Stock of the Company. All of the outstanding
shares are duly authorized, validly issued and outstanding, fully paid and
non-assessable. The Shares have not been and will not be issued in violation of,
and are not subject to, any preemptive or subscription rights, other than such
rights that have been waived by the holders thereof.
4.4. No Legal Proceedings. Except as disclosed in Schedule 4.4,
there is no action,
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suit, investigation, order, judgment or proceeding pending or, to the knowledge
of Purchaser, threatened against or affecting Purchaser that, individually or
when aggregated with one or more other actions, suits, orders, judgments or
proceedings, has or might reasonably be expected to have a material adverse
effect on Purchaser's ability to perform any of its obligations hereunder or
under any of the Transaction Documents.
4.5 Certificate of Designations. The Certificate of Designations
has been duly filed with the Secretary of State of the State of Delaware. The
certificate of incorporation of Purchaser has been duly amended by the filing of
the Certificate of Designations.
4.6 Brokers. No broker, investment banker or other person is
entitled to any broker's, finder's or similar fee or commission in connection
with the transactions contemplated by this Agreement based upon arrangements
made by or on behalf of Purchaser.
4.7 Accuracy. To Purchaser's knowledge, the required disclosures
made in this Agreement and the schedules attached hereto are complete and
accurate in all material respects, and the scheduled disclosures do not contain
any untrue statement of a material fact or omit to state any material fact
necessary to make the statements or facts contained therein, in light of the
circumstances under which they were made, not misleading.
4.8 Registration Statement. Purchaser's draft S-1 registration
statement dated June 2, 1998, a copy of which has been delivered to Seller,
complies as to form in all material respects with the requirements of the
Securities Act of 1933 and all applicable rules and regulations thereunder, and
does not contain any false or misleading statement of a material fact or omit to
state any material fact required to be stated therein or necessary in order to
make the statements made therein not misleading.
ARTICLE V
FURTHER COVENANTS AND AGREEMENTS
5.1. Security Arrangements. To secure Seller's obligations under
Sections 2.3(d) and (f) hereof until the Purchase Price Reduction is paid in
full or is finally determined to be zero, Seller shall (i) not dispose of its
Shares of Series B Preferred Stock or (ii) retain the proceeds from the sale of
such Shares in escrow pursuant to an escrow agreement acceptable to Purchaser.
5.2. Access; Information; Confidentiality. (a) Each party,
covenants and agrees, and shall cause each of its officers, employees,
attorneys, accountants and other authorized representatives, to treat all
information obtained or developed by them concerning the other party in strict
confidence. Each party also covenants and agrees to comply with all other
confidentiality undertakings heretofore agreed to between Purchaser and Seller
or their representatives relating to the parties or the transactions
contemplated by this Agreement.
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(b) If at any time it is necessary that a party be furnished
with additional information, documents or records relating to the Purchased
Assets or the Business in order properly to prepare or support its tax returns
or other documents or reports required to be filed with governmental authorities
or any securities exchanges or otherwise for any purpose in connection with the
performance or discharge by the parties of their obligations hereunder, and such
information, documents or records are in the possession or control of the other
party, such other party agrees to use all reasonable efforts to furnish or make
available such information, documents or records (or copies thereof).
5.3. Financial Statements. Seller covenants and agrees to prepare
and deliver the Post-Closing Financial Statements.
5.4. Fees and Expenses. Each party shall bear its own expenses
incurred in connection with the transactions contemplated hereby, except that
Purchaser shall reimburse Seller for up to $45,000 of Seller's reasonable fees
and expenses incurred in connection with the transactions contemplated hereby
and the preparation of the Post-Closing Financial Statements within 30 days
after receipt of the Post-Closing Financial Statements.
5.5. Accounts Receivable. Seller agrees to promptly remit to
Purchaser the amount of any payments received by Seller relating to Seller's
Accounts Receivable.
5.6. Indemnification. (a) Each of Seller and Purchaser shall
indemnify and hold the other harmless against and in respect of all actions,
suits, demands, judgments, costs and expenses (including reasonable attorneys'
fees) (collectively, "Damages") relating to any misrepresentation, breach of any
representation or warranty or non-fulfillment of any agreement on the part of
such party in any Transaction Document.
(b) Purchaser shall indemnify and hold Seller harmless in
respect of Damages relating to the Transferred Employees and the Business, in
each case arising on or after the date hereof. Seller shall indemnify and hold
Purchaser harmless in respect of Damages relating to the Transferred Employees
and the Business, in each case arising prior to the date hereof.
(c) The indemnification provided for in this Section 5.6
shall terminate and be of no further force and effect one year from the date
hereof, except as to any representation or warranty as to which a written notice
of claim for indemnification has been given to the indemnifying party prior to
the expiration of such one-year period. Neither party shall be liable pursuant
to this Section for any amounts which in the aggregate exceed the Purchase
Price.
5.7. Public Announcements. Unless otherwise required by law or the
rules and regulations of the Securities and Exchange Commission, none of the
parties shall issue any press release or make any public statement with respect
to this Agreement and the transaction contemplated hereby except for the agreed
upon press release to be issued by the parties on the date
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hereof.
5.8. Sales and Transfer Taxes. Seller shall pay all sales, use,
excise and/or transfer taxes due with respect to the Business, provided that any
property taxes relating to the Leased Premises shall be prorated between the
parties based on their respective periods of occupancy during the applicable
taxing period.
5.9. Noncompetition Agreement of Seller. For a period of five years
following the date hereof, Seller shall not, directly or indirectly, as
principal, investor, or in any similar capacity (i) engage in the Business
anywhere in the world, (ii) own, manage, operate or control, or participate in
the ownership, management, operation or control of, any business which directly
or indirectly competes with the Business anywhere in the world, or (iii) with
respect to the Business interfere with, disrupt or attempt to disrupt any
present or prospective relationship, contractual or otherwise, between Purchaser
and any of its licensors, licensees, clients, customers, suppliers, employees or
other related parties, or employ, solicit or induce for hire any Transferred
Employee, or any of the employees, agents, consultants or advisors of Purchaser
or any employee who has left the employment of Purchaser within six months of
the termination of said employee's employment with Purchaser, provided that
nothing herein shall preclude Seller from beneficially owning less than five
percent of the stock of any publicly traded company or merging with any other
entity.
5.10. Non-Solicitation Agreement of Purchaser. For a period of five
years following the date hereof, Purchaser shall not employ, solicit or induce
for employment, directly or indirectly, any employees of Seller or any
individual who has left the employment of Seller during the preceding six
months.
5.11. Cross-Referrals. (a) Purchaser agrees to direct to Seller any
inquiries received by Purchaser within two years after the date hereof regarding
web site development services. In addition, Purchaser will provide Seller with
the opportunity to bid for the enhancement of Purchaser's web site, provided
that Purchaser retains the right in its sole discretion to select any party (or
no party) to perform such services.
(b) Seller agrees to direct to Purchaser any inquiries received by
Seller within two years after the date hereof regarding the Business.
5.12. Use of Leased Premises. Seller agrees to permit Purchaser to
use the Leased Premises for a period not to exceed four (4) months, commencing
on the date hereof. Purchaser agrees to reimburse Seller at the rate of $10,000
per month during the period of Purchaser's occupancy thereof, such amount to be
deemed to include rent, taxes and insurance (which Seller agrees to maintain at
its current levels).
5.13. Post-Closing Financial Statements. When delivered, the
Post-Closing Financial Statements will have been prepared in accordance with
generally accepted accounting principles, consistently applied ("GAAP"), and
will constitute fair and reasonable presentations of
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the financial position and results of operations of the Business, in all
material respects, as of the dates and for the periods set forth therein.
ARTICLE VI
GENERAL PROVISIONS
6.1 Notices. All notices and other communications hereunder shall
be in writing and shall be deemed given if delivered personally, sent by
overnight courier or telecopied (with a confirmatory copy sent by overnight
courier) 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 Purchaser, to:
24/7 Media, Inc.
1250 Broadway
New York, NY 10001
Attention: David J. Moore
Title: Chief Executive Officer
Facsimile: (212) 760-7144
Telephone: (212) 629-7173
with a copy to:
Roberts, Sheridan & Kotel,
a professional corporation
Tower 49
12 East 49th Street, 30th Floor
New York, NY 10017
Attention: L. Kevin Sheridan, Esq.
Facsimile: (212) 299-8686
Telephone: (212) 299-8600
(b) If to Seller:
K2 Design, Inc.
30 Broad Street, 16th Floor
New York, NY 10004
Attention: Robert Burke
Title: Chief Operating Officer
Facsimile: (212) 301-8801
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Telephone: (212) 301-8800
with a copy to:
Proskauer Rose LLP
1585 Broadway
New York, NY 10036
Attention: Neil Belloff, Esq.
Facsimile: (212) 969-2900
Telephone: (212) 969-3000
6.2 Interpretation. When a reference is made in this Agreement of
a Section, such reference shall be to a Section of this Agreement unless
otherwise indicated, and the words "hereof," "herein" and "hereunder" and
similar terms refer to this Agreement as a whole and not to any particular
provision of this Agreement, unless the context otherwise requires. The table of
contents and headings contained in this Agreement are for reference purposes
only and shall not affect in any way the meaning or interpretation of this
Agreement. Whenever the words "include," "includes" or "including" are used in
this Agreement, they shall be deemed to be followed by the words "without
limitation."
6.3 Counterparts. This Agreement may be executed in counterparts,
all of which shall be considered one and the same agreement and shall become
effective when one or more counterparts have been signed by each of the parties
and delivered to the other parties.
6.4 Entire Agreement; No Third-Party Beneficiaries. This
Agreement, including the documents and instruments referred to herein, (i)
understandings, both written and oral, among the parties with respect to the
subject matter hereof and (ii) is not intended to confer upon any person other
than the parties any rights or remedies hereunder.
6.5 Governing Law. This Agreement shall be governed by, and
construed in accordance with, the laws of the State of New York, regardless of
the laws that might otherwise govern under applicable principles of conflicts of
laws thereof.
6.6 Assignment. Neither this Agreement nor any of the rights,
interests or obligations hereunder shall be assigned by any of the parties
without the prior written consent of the other parties. Subject to the preceding
sentence, this Agreement shall be binding upon, inure to the befit of, and be
enforceable by, the parties and their respective successors and assigns.
6.7 Severability. If any term or other provision of this Agreement
is invalid, illegal or incapable of being enforced by any rule of law, or public
policy, all other conditions and provisions of this agreement shall nevertheless
remain in full force and effect so long as the economic or legal substance of
the transactions contemplated hereby are not affected in any manner materially
adverse to any party. Upon such determination that any term or other provision
is invalid,
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illegal or incapable of being enforced, the parties shall negotiate in good
faith to modify this Agreement so as to effect the original intent of the
parties as closely as possible in a mutually acceptable manner in order that the
transactions be consummated as originally contemplated to the fullest extent
possible.
6.8 Enforcement of this Agreement. The parties agree that
irreparable damage would occur in the event that any of the provisions of this
Agreement were not performed in accordance with their specific terms or were
otherwise breached. It is accordingly agreed that the parties shall be entitled
to an injunction or injunctions to prevent breaches of this Agreement and to
enforce specifically the terms and provisions hereof in any court of the United
States or any state having jurisdiction, this being in addition to any other
remedy to which they are entitled at law or in equity.
6.9 Consent to Jurisdiction. In the event that any legal
proceedings are commenced in any court with respect to any matter arising under
this Agreement, the parties hereto specifically consent and agree that the
courts of the State of New York and/or the Federal Courts located in the State
of New York shall have jurisdiction over each of the parties hereto and over the
subject matter of any such proceedings, and the venue of any such action shall
be in New York County, New York and/or the U.S. District Court for the Southern
District of New York.
IN WITNESS WHEREOF, Purchaser and Seller have executed this
Agreement as of the date first written above.
K2 DESIGN, INC.
By:
--------------------------------
Name:
Title:
24/7 MEDIA, INC.
By:
--------------------------------
Name:
Title:
17
GLOBALCENTER MASTER SERVICE AGREEMENT
This Master Services Agreement (this "Agreement") is entered into as the
1 day of May, 1998 ("Effective Date") by and between the entity indicated on the
Services Order Form attached hereto, with an office at the address listed on the
Services Order Form ("Client"), and GlobalCenter, Inc., a corporation with
offices at 88 Pine Street, New York, New York ("GlobalCenter"), and describes
the terms and conditions pursuant to which GlobalCenter shall license to Client
certain Software and provide certain Services (as defined below).
In consideration of the mutual promises and upon the terms and
conditions set forth below, the parties agree as follows:
1. NATURE OF AGREEMENT. This is an Agreement for the provision by GlobalCenter
of Internet connectivity services (the "Bandwidth"), the lease of equipment to
provide such services (the "Hardware"), the availability of space to store and
operate such Hardware ("Space") and the licensing of software to provide such
Services (the "Software"), together comprising an Internet connectivity and
collocation package to be provided by GlobalCenter under this Agreement
(together, the "Services").
2. SERVICE ORDERS
2.1. Orders. Client may issue one or more service orders describing the
Bandwidth, Space, Hardware, and Software that Client desires ("Service Order").
Each Service Order will set forth the prices, initial term of Services and other
information in the form set forth in the Service Order Form. No Service Order
shall be effective until accepted by GlobalCenter. All Service Orders will be
subject to the terms and conditions of this Agreement, and the terms of this
Agreement shall supersede any terms and conditions which may appear on Client's
order form, or purchase order.
2.2. Cancellation. In the event that Client cancels or terminates a Service
Order at any time for any reason whatsoever other than expiration of a Service
Order or a Service Interruption (as defined below), Client agrees to pay
GlobalCenter as a cancellation fee all Monthly Recurring Charges specified in
the Service Order for the balance of the term therefor, which shall become due
and owing as of the effective date of cancellation or termination.
2.3. IP Addresses. GlobalCenter may assign on a temporary basis a reasonable
number of Internet Protocol Addresses ("IP Addresses") from the address space
assigned to the GlobalCenter by InterNIC. Client acknowledges that the IP
Addresses are the sole property of GlobalCenter, are assigned to Client as part
of the Service, and are not "portable," as such term is used by InterNIC.
GlobalCenter reserves the right to change the IP Address assignments at any
time; however, GlobalCenter shall use reasonable efforts to avoid any disruption
to Client resulting from such renumbering requirement. GlobalCenter will give
Client reasonable notice of any such renumbering. Client agrees that it will
have no right to IP Addresses upon termination of this Agreement, and that any
renumbering required of Client after termination shall be the sole
responsibility of Client.
3. SOFTWARE LICENSE AND RIGHTS
<PAGE>
3.1. License. During the term of the applicable Service Order, GlobalCenter
grants Client a non-transferable, nonexclusive license to use the Software in
object code form only, solely on the Hardware in conjunction with the Services.
3.2. Proprietary Rights. This Agreement transfers to Client neither title nor
any proprietary or intellectual property rights to the Software, Hardware,
documentation, or any copyrights, patents, or trademarks, embodied or used in
connection therewith, except for the rights expressly granted herein.
3.3. License Restrictions. Client agrees that it will not itself, or through any
parent, subsidiary, affiliate, agent or other third party:
3.3.1. copy of the Software except as expressly allowed under this Agreement. In
the event Client makes any copies of the Software, Client shall reproduce all
proprietary notices of GlobalCenter on any such copies:
3.3.2. reverse engineer, decompile, disassemble, or otherwise attempt to derive
source code from the Software;
3.3.3. sell, lease, license or sublicense the Software or the documentation;
3.3.4. write or develop any derivative software or any other software program
based upon the Software or any Confidential Information (as defined below); or
3.3.5. use the Software to provide processing services to third parties, or
otherwise use the Software on a 'service bureau' basis.
4. HARDWARE TERMS AND CONDITIONS
4.1. Installation. GlobalCenter will use commercially reasonable efforts to
install the Hardware as the Hardware is shipped to GlobalCenter. At Client's
request, GlobalCenter will work with the Client on an installation plan to
define installation time frame and requirements.
4.2. Purchase and Title of Hardware. If so indicated on the Service Order,
Client shall purchase the Hardware and deliver, at Client's expense, the
Hardware to the Space. Client agrees that the Hardware shall reside at the Space
during the term of this Agreement.
4.3. Lease of Hardware. If so indicated on the Service Order, Client shall lease
the Hardware, and GlobalCenter shall obtain and deliver to the Space the
Hardware. In the event Client leases the Hardware, the following terms and
conditions shall apply: The Hardware is and shall remain the property of
GlobalCenter. Client shall not have taken, or attempt to take, any right, title
or interest therein or permit any third party to take any interest therein,
Client will not transfer, sell, assign, sublicense, pledge, or otherwise dispose
of, encumber or suffer a lien of encumbrance upon or against the Hardware or any
interest in Hardware. Client will use the Hardware only at the Space. Client
will not move the Hardware from that facility without GlobalCenter's prior
written permission. Client shall be responsible for any damage to the Hardware.
Client will use the Hardware only for the purpose of exercising its rights under
this Agreement.
4.4. Rent to Own. If so indicated on the Service Order, Client shall lease the
Hardware on "rent to own" plan. In such event, all of the terms and conditions
in Section 4.3 shall apply, and the following terms and conditions shall also
apply. At the end of the term of the Service Order, providing Client is not in
breach of this Agreement, Client shall have the option
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to purchase the Hardware. The purchase price shall be as indicated on the
Service Order. Upon payment by Client of the purchase price, title in the
Hardware shall pass to Client at the Space. Unless the Service Order is extended
by mutual agreement, Client shall immediately delete, or shall allow
GlobalCenter to delete, all copies of the Software, associated documentation, or
any other materials of GlobalCenter resident on the Hardware.
5. SPACE.
5.1. License to Occupy. GlobalCenter grants to Client a non-exclusive license to
occupy the Space. Client acknowledges that it has been granted only a license to
occupy the Space and that it has not been granted any real property interests in
the Space. In the event, however, that this arrangement shall be construed by
the owner of the building in which the Space is situated to be such a grant and
if the landlord of the building asserts such a grant to be a violation of the
lease under which GlobalCenter occupies its premises, GlobalCenter agrees to
cooperate with Client in obtaining the approvals Client may need to obtain from
the landlord.
5.2. Material and Changes. Client shall not make any construction changes or
material alterations to the interior or exterior portions of the Space,
including any cabling or power supplies for the Hardware, without obtaining
GlobalCenter's prior written approval for Client to have the work performed.
Alternatively, Client may request GlobalCenter to perform the work. GlobalCenter
reserves the right to perform and manage any construction or alterations within
the Space areas at rates to be negotiated between the Parties hereto. Client
agrees not to erect any signs or devices to the exterior portion of the Space
without submitting the request to GlobalCenter and obtaining GlobalCenter's
advance written approval.
5.3. Damage. Client agrees to reimburse GlobalCenter for all reasonable repair
or restoration costs associated with damage or destruction caused by Client's
personnel, Client's agents, Client's suppliers/contractors, or Client's visitors
during the term or as a consequence of Client's removal of the Hardware or
property installed in the Space.
5.4. Insurance. Unless otherwise agreed, Client agrees to maintain, at Client's
expense, (i) Comprehensive General Liability Insurance in an amount not less
than One Million Dollars ($1,000,000) per occurrence for bodily injury or
property damage, (ii) Employer's Liability in an amount not less than Five
Hundred Thousand Dollars ($500,000) per occurrence, and (iii) Worker's
Compensation in an amount not less than that prescribed by statutory limits.
Prior to taking occupancy of the Collocation Space, Client shall furnish
GlobalCenter with certificates of insurance which evidence the minimum levels of
insurance set forth herein. Client shall also maintain insurance covering
Hardware or property owned or leased by Client against loss or physical damage.
5.5. Regulations. Client shall comply with and not violate all of GlobalCenter's
safety, health and operational rules and regulations, which may be amended by
GlobalCenter from time to time. Client's failure to comply with GlobalCenter's
rules and regulations shall constitute a material default under this Agreement.
GlobalCenter may, in its sole discretion, limit Client's access to a reasonable
number of authorized Client employees or designees. Client shall not interfere
with any other clients of GlobalCenter or such other clients' use of the Space.
5.6. Disclaimer. GlobalCenter does not make any representation or warranty
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whatsoever as to the fitness of the Space for Client's use. Client hereby
assumes any and all risks associated with Client, its agents or employees' use
of the Space and shall indemnify, defend and hold harmless GlobalCenter from any
and all claims, liabilities, judgments, causes of action, damages, costs, and
expenses (including reasonable attorneys' and experts' fees), caused by or
arising in connection with such use.
6. SERVICE INTERRUPTIONS
6.1. 99% Uptime Guarantee. In the event of Downtime (as defined below),
the monthly fee payable for the Services shall be reduced as follows:
6.1.1. If the Total Downtime in the calendar month is more than seven
and seven and two-tenths (7.2) hours, but does not exceed fourteen and
four-tenths (14.4) hours, the monthly fee for that month shall be
reduced by one-third (33.3%);
6.1.2. If the total Downtime in the calendar month is more than fourteen
and four-tenths (14.4) hours, but does not exceed twenty-one and six
tenths (21.6) hours, the monthly fee for that month shall be reduced by
two-thirds (66.6%); and
6.1.3. If the total Downtime in the calendar month is more than
twenty-one and six-tenths (21.6) hours, the monthly fee for that month
shall be waived.
For the purposes of this Section, Downtime shall mean any interruption of one
(1) minute or more in the availability to users of any Web site residing on the
Hardware and made available through the Services, only if such interruption is
due to either (i) failure by GlobalCenter to manage a server anomaly so as to
avoid interruption in Web availability, or (ii) a disruption in the connection
between any such server and the Internet. For purposes of this Section, the
Internet is deemed to consist of services that commence where GlobalCenter
transmits a Client's content to GlobalCenter's carrier(s) at the GlobalCenter
border router port(s). Such carriers provide GlobalCenter with private and
dedicated bandwidth. GlobalCenter undertakes no obligation for the circuit or
link between GlobalCenter's facilities and such carrier's services. If router
packet loss is excess of seventy percent (70%) and is sustained for sixty (60)
seconds or more, GlobalCenter will classify this an "outage." If an "outage"
continues for a time period of more than two (2) minutes, then such outage will
be deemed Downtime.
6.2. Investigation of Service Interruptions. At Client's request, GlobalCenter
will investigate any report of Downtime, and attempt to remedy any Downtime
expeditiously. GlobalCenter reasonably determines that all facilities, systems
and equipment furnished by GlobalCenter are functioning properly, and that
Downtime arose from some other cause, GlobalCenter reserves the right to recover
labor and materials cost for services actually performed at the usual and
customary rates for similar services provided by GlobalCenter to clients in the
same locality.
6.3. Termination. Client may terminate a Service Order in the event of Downtime
of either twenty-four (24) hours of cumulative time during any continuous twelve
(12) month period, or any continuous Downtime of eight (8) hours or more.
6.4. Sole Remedy. The terms and conditions of this Section 6 shall Client's sole
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remedy and GlobalCenter's sole obligation for any Downtime.
7. USER CONTENT. Client is solely responsible for the content of any postings,
data or transmissions using the Services ("Content"), or any other use of the
Services by Client or by any person or entity Client permits to access the
Services (a "User"). Client represents and warrants that it and any User will
not use the services for unlawful purposes (including without limitation
infringement of copyright or trademark, misappropriation of trade secrets, wire
fraud, invasion of privacy, pornography, obscenity and libel), or to interfere
with or disrupt other network users, network services or network equipment.
Disruptions include without limitation distribution of unsolicited advertising
or chain letters, repeated harassment of other network users, wrongly
impersonating another such user, falsifying one's network identity for improper
or illegal purposes, sending unsolicited mass e-mailings, propagation of
computer worms and viruses and using the network to make unauthorized entry to
any other machine accessible via the network. If GlobalCenter has reasonable
grounds to believe that Client or a User is utilizing the Services for any such
illegal or disruptive purpose, GlobalCenter may suspend or terminate Services
immediately upon notice to Client. Client shall defend, indemnify, hold harmless
GlobalCenter from and against all liabilities and costs (including reasonable
attorney's fees) arising from any and all claims by any person arising out of
Client's use of the Services, including without limitation any content.
8. PRICING AND PAYMENT TERMS
8.1. Payment Terms. Client shall pay the fees set forth in the Services Order
Form according to the terms set forth therein. Client agrees to pay a late
charge of two percent (2%) above the prime rate as reported by the Wall Street
Journal at the time of assessment or the maximum lawful rate, whichever is less,
for all undisputed amounts not paid within thirty (30) days of receipt of
invoice.
8.2. Late Payments. In the event of non-payment by Client of sums over-due
hereunder for more than sixty (60) days, GlobalCenter may upon written notice to
Client either retain any equipment or other assets of Client then in
GlobalCenter's possession and sell them in partial satisfaction of such unpaid
sums, or request Client to remove equipment from GlobalCenter's premises within
ten (10) days. If Client fails to so remove, GlobalCenter may deliver the
equipment to Client at the latter's address for notices at Client's expense for
shipment and insurance, and Client shall be obligated to accept such delivery.
8.3. Price Increases. GlobalCenter shall not increase the prices for services
during the initial term of any Service Order, but may thereafter change prices
upon sixty (60) days written notice.
9. MAINTENANCE AND SUPPORT. GlobalCenter shall provide Client with maintenance
and support of the Software and Hardware, if any ("Maintenance and Support") as
specified in the Service Specification.
9.1. Exclusions. Maintenance and Support shall not include services for problems
arising out of (a) modification, alteration or addition or attempted
modification, alteration or addition of the Hardware or Software undertaken by
persons other than GlobalCenter or GlobalCenter's authorized representatives; or
(b) programs or hardware supplied by Client.
9.2. Client Duties. Client shall document
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and promptly report all errors or malfunctions of the Hardware or Software to
GlobalCenter. Client shall take all steps necessary to carry out procedures for
the rectification of errors or malfunctions within a reasonable time after such
procedures have been received from GlobalCenter. Client shall maintain a current
backup copy of all programs and data. Client shall properly train its personnel
in the use and application of the Hardware and Software.
10. TERM AND TERMINATION
10.1. Term. The term of this Agreement shall commence on the Effective Date and
continue indefinitely terminated in accordance with this Section 10. The term of
each Service Order shall be as indicated therein. The term of any Service Order
may be extended upon mutual agreement.
10.2. Termination Upon Default. Either party may terminate this Agreement in the
event that the other party materially defaults in performing any obligation
under this Agreement and such default continues unremedied for a period of
thirty (30) days following written notice of default. In the event this
Agreement is terminated due to GlobalCenter's breach, GlobalCenter shall refund
to Client any Services fees on a straight line prorated basis.
10.3. Termination Upon Insolvency. This Agreement shall terminate, effective
upon delivery of written notice by a party, (i) upon the institution of
insolvency, receivership or bankruptcy proceedings or any other proceedings for
the settlement of debts of the other party; (ii) upon the making of an
assignment for the benefit of creditors by the other party; or (iii) upon the
dissolution of the other party.
10.4. Effect of Termination. The provisions of Sections 1, 23, 3.2, 3.3, 7,
10.4, 11, 12, 13 and 14 shall survive termination of this Agreement. All other
rights and obligations of the parties shall cease upon termination of this
Agreement. The term of any license granted hereunder shall expire upon
expiration or termination of this Agreement.
11. CONFIDENTIAL INFORMATION. All information identified disclosed by either
party ("Disclosing Party") to the other party ("Receiving Party"), if disclosed
in writing, labeled as proprietary or confidential, or if disclosed orally,
reduced to writing within thirty (30) days and labeled as proprietary or
confidential ("Confidential Information") shall remain the property of
Disclosing Party. Except for the specific rights granted by this Agreement,
Receiving Party shall not use any Confidential Information of Disclosing Party
for its own account. Receiving Party shall use the highest commercially
reasonable degree of care to protect Disclosing Party's Confidential
Information. Receiving Party shall not disclose Confidential Information to any
third party without the express written consent of Disclosing Party (except
solely for Receiving Party's internal business needs, to employees or
consultants who are bound by a written agreement with Receiving Party to
maintain the confidentiality of such Confidential Information in a manner
consistent with this Agreement). Confidential Information shall exclude
information (i) available to the public other than by a breach of this
Agreement; (ii) rightfully received from a third party not in breach of an
obligation of confidentiality; (iii) independently developed by Receiving Party
without access to Confidential Information; (iv) known to Receiving Party at the
time of disclosure; or (v) produced in compliance with applicable law or a court
order, provided Disclosing Party if given reasonable notice of such law or order
and an opportunity to attempt to preclude or limit such
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production. Subject to the above, Receiving Party agrees to cease using any and
all materials embodying Confidential Information and to promptly return such
materials to Disclosing Party upon request.
12. LIMITATION OF LIABILITY. GLOBALCENTER'S LIABILITY FOR ALL CLAIMS ARISING OUT
OF THIS AGREEMENT SHALL BE LIMITED TO THE AMOUNT OF FEES PAID BY CLIENT TO
GLOBALCENTER UNDER THIS AGREEMENT. IN NO EVENT SHALL GLOBALCENTER BE LIABLE FOR
ANY LOSS OF DATA, LOSS OF PROFITS, COST OF COVER OR OTHER SPECIAL, INCIDENTAL,
CONSEQUENTIAL OR INDIRECT DAMAGES ARISING FROM OR IN RELATION TO THIS AGREEMENT
OR THE USE OF THE SERVICES, HOWEVER CAUSED AND REGARDLESS OF THEORY OF
LIABILITY. THIS LIMITATION WILL APPLY EVEN IF GLOBALCENTER HAS BEEN ADVISED OR
IS AWARE OF THE POSSIBILITY OF SUCH DAMAGES.
13. DISCLAIMER OF WARRANTIES. GLOBALCENTER SPECIFICALLY DISCLAIMS ALL WARRANTIES
EXPRESS OR IMPLIED, INCLUDING BUT NOT LIMITED TO, THE IMPLIED WARRANTIES OF
MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, AND NON-INFRINGEMENT OF THE
SYSTEM OR SERVICES PROVIDED BY GLOBALCENTER HEREUNDER.
14. MISCELLANEOUS.
14.1. Independent Contractor. The relationship of GlobalCenter and Client
established by this Agreement is that of independent contractors, and nothing
contained in this Agreement shall be construed to (i) give either party the
power to direct and control the day-to-day activities of the other; (ii)
constitute the parties as partners, joint ventures, co-owners or otherwise as
participants in a joint undertaking; or (iii) allow either party to create or
assume any obligation on behalf of the other party for any purpose whatsoever.
14.2. Notices. Any notice required or permitted hereunder shall be in writing
and shall be given by registered or certified mail addressed to the addresses
first written above. Such notice shall be deemed to be given upon the earlier of
actual receipt or three (3) days after it has been sent, properly addressed and
with postage prepaid. Either party may change its address for notice by means of
notice to the other party given in accordance with this Section.
14.3. Assignment. Client may not assign this Agreement, in whole or in part,
either voluntarily or by operation of law, and any attempt to do so shall be a
material default of this Agreement and shall be void.
14.4. Governing Law. This Agreement shall be interpreted according to
the laws of the State of California without regard to application of
choice-of-law rules or principles. The parties hereby agree to the exclusive
jurisdiction of the state and federal courts located in Santa Clara County,
California.
14.5. Entire Agreement and Waiver. This Agreement shall constitute the
entire agreement between GlobalCenter and Client with respect to the subject
matter hereof and all prior agreements, representations, and statement with
respect to such subject matter are superseded hereby, including without
limitation any non-disclosure agreement previously executed between the parties.
This Agreement may be changed only by written agreement
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signed by both GlobalCenter and Client. No failure of either party to exercise
or enforce any of its rights under this Agreement shall act as a waiver of
subsequent breaches; and the waiver of any breach shall not act as a waiver of
subsequent breaches.
14.6. Severability. In the event any provision of this Agreement is held by a
court or other tribunal of competent jurisdiction to be unenforceable, that
provision will be enforced to the maximum extent permissible under applicable
law, and the other provisions of this Agreement will remain in full force and
effect.
14.7. Non-Solicitation. During the term of this agreement and for a period of
one (1) year thereafter, Client shall not solicit, nor attempt to solicit the
services, of any employee or subcontractor of GlobalCenter without the prior
written consent of GlobalCenter.
14.8. Substitution. GlobalCenter may substitute, change or modify the Software
or Hardware at any time, but shall not thereby alter the technical parameters of
the Services.
8
Exhibit 10.17
BRENTWOOD CREDIT CORPORATION
SCHEDULE NO. 01
TO EQUIPMENT LEASE NO. III-1000-100
DATED June 1, 1996
LESSEE Interactive Imaginations, Inc.
SCHEDULE TOTAL: $852,325.00
Equipment Data:
QUANTITY TYPE MODEL & DESCRIPTION
- -------- ---- -------------------
See attached for breakdown of equipment.
Location of Equipment 915 Broadway, Suite 1605
New York, NY 10010
Term of Schedule: 6 quarters commencing on June 1, 1996 up to and including
November 30, 1997.
Rental Payments: $150,965.00 per quarter in advance plus applicable sales tax.
Brentwood Credit Corporation, (Lessor) hereby agrees to lease to the
Lessee named below, and Lessee hereby agrees to lease and rent from Lessor the
equipment listed above, for the term and rental payments specified, all subject
to the terms and conditions set forth in such equipment lease.
Lessor: BRENTWOOD CREDIT Lessee: INTERACTIVE IMAGINATIONS,
CORPORATION INC.
By: s/s Michael J. Budzinski By: /w/ Jeff Mart
------------------------ ------------------------
Title: CFO Title: VP, Finance
------------------------ ------------------------
Date: June 1, 1996 Date: June 1, 1996
------------------------ ------------------------
1620 26th Street 915 Broadway, Suite 1605
Suite #290-S New York, NY 10010
(310) 828-1199
<PAGE>
Thursday, 10/9/97
Mr. Ross Goldstein
EVP, Finance & CFO
Interactive Imaginations, Inc.
915 Broadway, Suite 1608
New York, NY 10010
Dear Ross:
Brentwood Credit Corporation (BCC) and AT&T Systems Leasing agree to offer
Interative Imaginations, Inc. (III) extended payment terms for the deferred
quarterly lease obligation originally due on 9/1/97. These terms will consist of
one payment due 10/15/97 of $45,000 (plus cable tax), in addition to the
following equipment return & extension agreement:
<TABLE>
<CAPTION>
Server Type Return/Extended Effective 1-Year Lease*
- ----------- --------------- --------- -------------
<S> <C> <C> <C>
(1) Challenge XL Returned on or before 10/20/97
(1) Challenge DM Returned " "
(2) Challenge S Returned " "
(1) Challenge L Deskside Extended 12/1/97 $21,525/qtr
(2) Challenge S Servers Extended 12/1/97 $2,060/qtr/ea
-------------
$25,645/quarter**
o Extension Period = 12 months (12/01/97 - 11/30/98)
** Quarterly invoices due 3/1/98, 6/1/98 & 9/1/98 are $45,935 (plus applicable tax)
per quarter to reflect the deferral in the 10/15/97 payment.
</TABLE>
Countersigned receipt of your signature below serves as notification to accept
these terms & conditions - which remain valid through end-of-day tomorrow,
10/10/97. Contact myself or Mike Budzinski (CFO) immediately with questions
(310/828-1199). Please instruct your technical team to prepare the four
returning assets for shipment on or before Monday, 10/20/97, configured
identical to their original condition as listed on the Attachment to Lease
Schedule #1.
Regards, Agreed to & Accepted by:
/s/ Jay Axelson
Jay Axelson Name: /s/ Michael Paolucci
Director, Sales ------------------------
Brentwood Credit Corporation Title: Chairman
------------------------
Date: 10/10/97
------------------------
Interactive Imaginations, Inc.
Brentwood Credit Corporation
1620 26th Street, Suite 290-S, Santa Monica, California 90404 310-828-1199
fax: 310-828-7781
<PAGE>
INTERACTIVE IMAGINATIONS, INC.
SCHEDULE 01 TO MASTER LEASE III-1000-100
EQUIPMENT ATTACHMENT
PAGE 1
<TABLE>
<CAPTION>
QTY EQUIPMENT DESCRIPTION
- --- ---------------------
<S> <C>
SILICON GRAPHICS COMPUTER SYSTEMS
1 CHALLENGE L DESKSIDE SERVER, 8x250MHZ R4400w/4MB
SECONDARY CACHE, 64MB MEMORY, 1 IMB, 2GB SYS DISK
1 FIRST 512MB SUPER DENS MEM, 2 WAY INTERLEAVE, 1 IMB FOR
CHALLENGE AND ONYX SYSTEMS
1 2GB SCSI-2 FAST, WIDE DIFFERENTIAL SYSTEM DISK FOR ALL
CHALLENGE AND ONXY SYSTEMS
</TABLE>
<PAGE>
INTERACTIVE IMAGINATIONS, INC.
SCHEDULE 01 TO MASTER LEASE III-1000-100
EQUIPMENT ATTACHMENT
PAGE 2
<TABLE>
<S> <C>
1 RACKMOUNT RAID ENCLOSURE WITH 1 CONTROLLER, 2 POWER
SUPPLIES, FIVE 4.3GB DISK DRIVES
3 FIVE 4.3GB DISK DRIVES FOR INSTALLATION IN RAID CABINET ONLY
1 SECOND RAID CONTROLLER W/64MB MIRRORED CACHE (128MB
TOTAL) AND BBU
1 THIRD POWER SUPPLY FOR INSTALLATION IN RAID CABINET FOR
TWO CONTROLLER CONFIGURATIONS
1 DESTINATION KIT FOR STAND-ALONE PERIPHERALS 91 (110V)
1 SCSI-2 10 MHZ/16-BIT DIFFERENTIAL MEZZANINE CARD FOR
CHALLENGE AND ONYX SYSTEMS
1 IRIX 5.3 OPERATING SYSTEM SOFTWARE AND MANUALS FOR
SERVERS (NOT R800 SYSTEMS). CD-ROM MEDIA
1 FDDI 2 PORT SINGLE ATTACHED HIO INTERFACE FOR CHALLENGE
DM/L/XL, ONYX (IRIX 5.3.6.1 AND 6.2)
1 DESTINATION KIT FOR L SERIES, ONYX RE2, VTX, EX DESKSIDE
REALITY STATION, 110V
2 CD-ROM UPDATE MEDIA REQUIREMENTS - FOR SUPPORT ONLY
</TABLE>
<PAGE>
INTERACTIVE IMAGINATIONS, INC.
SCHEDULE 01 TO MASTER LEASE III-1000-100
EQUIPMENT ATTACHMENT
PAGE 3
<TABLE>
<S> <C>
4 64MB MEMORY UPGRADE FOR INDIGO2 POWER INDIGO2, INDY,
CHALLENGE S, CHALLENGE M, & POWER CHALLENGE M
1 EXTERNAL 4x CD ROM SCSI DRIVE
4 FDDI, SINGLE ATTACH INTERFACE FOR INDY, CD AND MANUAL KIT
(IRIX 5.1)
4 CD-ROM UPDATE MEDIA REQUIREMENTS - FOR SUPPORT ONLY
1 FULL EXTENDED WARRANTY
</TABLE>
[Letterhead of Sun Microsystems]
CONFIRMATION OF AMENDMENT
Dated as of July 7, 1998
This Amendment is executed pursuant to and in connection with Lease Schedule
No. 01 to Master Lease Agreement No. SL2890 between Sun Microsystems Finance
(the "Lessor") and 24/7 Media, Inc. (the "Lessee").
Lessor hereby agrees to lease to Lessee, and Lessee hereby agrees to lease
from Lessor the additional Product as described below. These lease of such
additional components shall be pursuant to the Lease Agreement listed above
and the terms thereof are hereby amended as follows:
I. PRODUCT ADDITIONS
Additional Product -- As described in Data Systems Marketing Corp.
Quotation No. iiups2.sun totaling $158,806.83 attached hereto for
informational purposes only. Any terms and conditions on the Quotations
which are in conflict or inconsistent with this lease shall not apply.
II. RENTAL AND LEASE TERM ADJUSTMENTS
Current Monthly Rental: $24,388.91
New Monthly Rental: $30,139.31
Effective Date: August 01, 1998
Lessor: Lessee:
Sun Microsystems Finance 24/7 Media, Inc.
A Sun Microsystems, Inc. Business
By: /s/ Carrie A. Halvorson By: /s/ Yale Brown
------------------------------ -----------------------------
Carrie A. Halvorson
Title: Sun Programs Manager Title: Executive Vice-President
--------------------------- ---------------------------
Date: 7/7/98 Date: 7/7/98
---------------------------- ---------------------------
<PAGE>
[Letterhead of Sun Microsystems]
July 7, 1998
Mr. Yale Brown
24/7 Media, Inc.
201 North Union Street
Alexandria, VA 22314
Re: SunLease Account #64301933 Purchase Order No. 41
Please note that your SunLease is being processed and is subject to the changes
below. Please review these changes and, if requested, sign and return this
letter to the address above. These changes will become part of your lease
documentation as reflected in the Terms and Conditions thereof.
[ X ] The Rental Terms of your lease have been changed.
[ X ] The Equipment Configuration of your lease has changed.
OLD TERMS NEW TERMS
Term: 30 Months Remaining Term: 29 Months
Effective Date: 07/01/98 Effective Date: 08/01/98
Monthly Payment: $24,388.91 Monthly Payment: $30,139.31
Purchase Option: Fair Market Value Purchase Option: Fair Market Value
Equipment Amount: $690,681.27 Equipment Amount: $849,488.1
Reason for Change: You are adding equipment per the attached Data Systems
Marketing Corp. Quotation # iiups2.sun dated 24-June-98. This now becomes
part of your lease agreement.
[ X ] PLEASE SIGN AND RETURN THIS NOTICE AS SOON AS POSSIBLE ALONG WITH AN
ORIGINAL PURCHASE ORDER FOR THE NEW EQUIPMENT AMOUNT.
[ ] THIS CHANGE WILL OCCUR AUTOMATICALLY. NO NEED TO RETURN THIS NOTICE.
THANK YOU FOR CHOOSING SUN MICROSYSTEMS FINANCE. WE LOOK FORWARD TO
SERVING YOU AGAIN.
Sincerely [X] Accepted and Acknowledged
/s/ Dean Jo Paul Signature: Yale Brown
- --------------- ---------------
Dean Jo Paul
Lease Process Coordinator Title: EVP Date: 7/7/98
<PAGE>
[Letterhead of Sun Microsystems]
July 7, 1998
Mr. Yale Brown
24/7 Media, Inc.
201 North Union Street
Alexandria, VA 22314
Re: SunLease Account #64301933
Please note that your SunLease is being processed and is subject to the changes
below. Please review these changes and, if requested, sign and return this
letter to the address above. These changes will become part of your lease
documentation as reflected in the Terms and Conditions thereof.
[X] The Rental Terms of your lease have been changed.
[X] The Equipment Configuration of your lease has changed.
- --------------------------------------------------------------------------------
OLD TERMS NEW TERMS
Term: 30 Months Remaining Term: 30 Months
Effective Date: 07/01/98 Effective Date: 07/01/98
Monthly Payment: $24,089.41 Monthly Payment: $24,388.91
Purchase Option: Fair Market Value Purchase Option: Fair Market Value
Equipment Amount: $682,122.64 Equipment Amount: $690,681.27
- --------------------------------------------------------------------------------
Reason for Change: Data Systems Marketing Corp. Quote #intellinter.xls has been
modified as of May 26, 1998 and 24/7 Media, Inc. Purchase Order number 24 is
replaced with Purchase Order number 32. This now becomes part of your lease
agreement.
- --------------------------------------------------------------------------------
[X] PLEASE SIGN AND RETURN THIS NOTICE AS SOON AS POSSIBLE ALONG WITH AN
ORIGINAL PURCHASE ORDER FOR THE NEW EQUIPMENT AMOUNT.
[ ] THIS CHANGE WILL OCCUR AUTOMATICALLY. NO NEED TO RETURN THIS NOTICE.
THANK YOU FOR CHOOSING SUN MICROSYSTEMS FINANCE. WE LOOK
FORWARD TO SERVING YOU AGAIN.
- --------------------------------------------------------------------------------
Sincerely [X] Accepted and Acknowledged
Signature: Yale R. Brown
/s/ Dean Jo Paul
Dean Jo Paul
Lease Process Coordinator Title: EVP Date: 7/7/98
<PAGE>
ADDITIONAL TERMS FOR SMCC PRODUCTS
The following additional terms and conditions shall govern the use of SMCC
Products leased hereunder.
1.0 USE OF SOFTWARE
Lessee's use of any software Products ("Software") provided under this Schedule
shall be governed by the object code license accompanying such Software.
2.0 WARRANTY
Product warranties may vary depending on the specific SMCC Product leased.
Applicable terms and conditions are as set out in the then current U.S. End User
Price List. Software is warranted to conform to published specifications for a
period of ninety (90) days from the date of delivery. SMCC does not warrant
that: (i) operation of any Software will be uninterrupted or error free; or (ii)
functions contained in Software will operate in combinations which may be
selected for use by the licensee or meet the licensee's requirements. These
warranties extend only to Lessee as an original Lessee.
Lessee's exclusive remedy and SMCC's entire liability under these warranties
will be (i) with respect to Product, repair or at SMCC's option, replacement;
and (ii) with respect to Software, use its best efforts to correct such Software
as soon as practical after licensee has notified SMCC of Software's
nonconformance. If such repair, replacement or correction is not reasonably
achievable, SMCC will refund the rental fee/license fee. Unless Lessee has
executed an on-site service agreement, repair or replacement will be undertaken
at a service location authorized by SMCC.
All Software customization is provided "AS IS", without a warranty of any kind.
No SMCC warranty shall apply to any Software that is modified without SMCC's
written consent or any Product or Software which has been misused, altered,
repaired or used with equipment or software not supplied or expressly approved
by SMCC.
SMCC reserves the right to change these warranties at any time upon Notice and
without liability to Lessee or third parties.
EXCEPT AS SPECIFIED IN THIS AGREEMENT, ALL EXPRESS OR IMPLIED REPRESENTATIONS
AND WARRANTIES, INCLUDING ANY IMPLIED WARRANTY OF MERCHANTABILITY, FITNESS FOR A
PARTICULAR PURPOSE OR NON-INFRINGEMENT, ARE HEREBY DISCLAIMED.
3.0 TRADEMARKS AND OTHER PROPRIETARY RIGHTS
"Trademarks" means all company names, products' names, marks, logos, designs,
trade dress and other designations or brands used by Sun Microsystems, Inc., its
subsidiaries and affiliates ("Sun") in connection with Products, including, Sun,
Sun Microsystems, the Sun logo, SPARCstation, SPARCserver, and all Sun product
designs.
Lessee is granted no right, title, license or interest in the Trademarks. Lessee
acknowledges Sun's rights in the Trademarks and agrees that any and all use of
the Trademarks by Lessee shall inure to the sole benefit of Sun.
4.0 HIGH RISK ACTIVITIES
PRODUCTS ARE NOT FAULT-TOLERANT AND ARE NOT DESIGNED, MANUFACTURED OR INTENDED
FOR USE OR RESALE AS ON-LINE CONTROL EQUIPMENT IN HAZARDOUS ENVIRONMENTS
REQUIRING FAIL-SAFE PERFORMANCE, SUCH AS IN THE OPERATION OF NUCLEAR FACILITIES,
AIRCRAFT NAVIGATION OR COMMUNICATION SYSTEMS, AIR TRAFFIC CONTROL, DIRECT LIFE
SUPPORT, OR WEAPONS SYSTEMS IN WHICH THE FAILURE OF PRODUCTS COULD LEAD DIRECTLY
TO DEATH, PERSONAL INJURY, OR SEVERE PHYSICAL OR ENVIRONMENTAL DAMAGE ("HIGH
RISK ACTIVITIES"). SMCC SPECIFICALLY DISCLAIMS ANY EXPRESS OR IMPLIED WARRANTY
OF FITNESS FOR HIGH RISK ACTIVITIES.
Lessee represents and warrants that it will not use, distribute or resell
Products (including Software) for High Risk Activities and that it will ensure
that its end-users or customers of Product are provided with a copy of the
notice in the previous paragraph.
<PAGE>
[Letterhead of Sun Microsystems]
SUN MICROSYSTEMS FINANCE
MASTER LEASE AGREEMENT
Master Lease # SL2890
Lessor agrees to lease to Lessee and Lessee agrees to lease from Lessor, subject
to the following terms of this Master Lease Agreement ("Master Lease") and any
Lease Schedule ("Schedule"), collectively referred to as the Lease ("Lease"),
the personal property described in any Schedule together with all attachments,
replacements, parts, substitutions, additions, upgrades, accessories, software
licenses and operating manuals (the "Product"). Each Schedule shall constitute a
separate, distinct, and independent Lease and contractual obligation of Lessee.
1. Commencement Date And Term
The initial lease term ("Initial Term") and Lessee's rental obligations shall
begin on the Commencement Date and continue for the number of Rental Periods
specified in the Lease as set forth in Section 2 below and shall renew
automatically thereafter until terminated by either party upon not less than
ninety (90) days prior written notice. The Commencement Date with respect to
each item of Product shall be the 16th day after date of shipment to Lessee.
2. Rent and Rental Period
All rental payments and any other amounts payable under a Lease are collectively
referred to as "Rent". The Rental Period shall mean the rental payment period of
either calendar months, quarters, or as otherwise specified in each Schedule.
Rent for the specified Rental Period is due and payable in advance, to the
address specified in Lessor's invoice, on the first day of each Rental Period
during the Initial Term and any extension (collectively, the "Lease Term"),
provided, however, that Rent for the period of time (if any) from the
Commencement Date to the first day of the first Rental Period shall begin to
accrue on the Commencement Date. If any Rent is not paid when due, Lessee will
pay a service fee equal to five percent (5%) of the overdue amount plus interest
at the rate of one and one half percent (1.5%) per month or the maximum legal
interest rate, whichever is less.
3. Net Lease, Taxes and Fees
Each Schedule shall constitute a net lease and payment of Rent shall be absolute
and unconditional, and shall not be subject to any abatement, reduction, set
off, defense, counterclaim, interruption, deferment or recoupment for any reason
whatsoever. Lessee agrees to pay Lessor when due shipping charges, fees,
assessments and all taxes (municipal, state and federal) imposed upon a Lease
or the Product or its ownership, leasing, renting, possession or use except for
taxes based on Lessor's income.
4. Title
Product shall always remain personal property. Lessee shall have no right or
interest in the Product except as provided in this Master Lease and the
applicable Schedule and shall hold the Product subject and subordinate to the
rights of Lessor. Lessee agrees to execute UCC financing statements as and when
requested by Lessor and hereby appoints Lessor as its attorney-in-fact to
execute such financing statements. Lessor may file a photocopy of any Lease as a
financing statement.
Lessee will, at its expense, keep the Product free and clear from any liens or
encumbrances of any kind (except any caused by Lessor) and will indemnify and
hold Lessor harmless from and against any loss or expense caused by Lessee's
failure to do so. Lessee shall give Lessor immediate written notice of any
attachment or judicial process affecting the Product or Lessor's ownership. If
requested, Lessee will label the Product as the property of Lessor and shall
allow, subject to Lessee's reasonable security requirements, the inspection of
the Product during regular business hours.
5. Use, Maintenance And Repair
Lessee, at its own expense, shall keep the Product in good repair, appearance
and condition, other than normal wear and tear and shall obtain and keep in
effect throughout the term of the Schedule's hardware and software maintenance
agreement with the manufacturer or other party acceptable to Lessor. All parts
furnished in connection with such repair and maintenance shall be manufacturer
authorized parts and shall immediately become components of the Product and the
property of Lessor. Lessee shall use the Product in compliance with the
manufacturer's or supplier's suggested guidelines.
6. Delivery and Return of Product
Lessee assumes the full expense of transportation, insurance, and installation
to Lessee's site. Upon termination of each Schedule, Lessee will provide Lessor
a letter from the manufacturer certifying that the Product is in good operating
condition and is eligible for continued maintenance and that the operating
system is at the then current level, unless under a Sun service contract during
the Lease Term. Lessee, at its expense, shall deinstall, pack and ship the
Product to the U.S. location identified by Lessor. Lessee shall remain obligated
to pay Rent on the Product until the Product and certification are received by
Lessor.
7. Assignment And Relocation
Lessee may sublease or assign its rights under this agreement with lessor's
prior written consent, which consent shall not be unreasonably withheld,
subject, however, to any terms and conditions which Lessor may require. No
permitted assignment or sublease shall relieve Lessee of any of its obligations
hereunder.
Lessee acknowledges Lessor may sell and/or assign its interest or grant a
security interest in each Lease and/or the Product to an assignee ("Lessor's
Assignee"), so long as Lessee is not in default hereunder. Lessor or Lessor's
Assignee shall not interfere with Lessee's right of quiet enjoyment and use of
the Product. Upon the assignment of each Lease, Lessor's Assignee shall have any
and all discretions, rights and remedies of Lessor and all references to Lessor
shall mean Lessor's Assignee. In no event shall any assignee of Lessor be
obligated to perform any duty, covenant or condition under this Lease and Lessee
agrees it shall pay such assignee without any defense, rights of set-off or
counterclaims and shall not hold or attempt to hold such assignee liable for any
of Lessor's obligations hereunder.
Lessee, at its expense, may relocate Product (after packing it for shipment in
accordance with the manufacturer's instructions) in a different address with
thirty (30) days prior written notice to Lessor. The Product shall at all times
be used solely within the United States.
8. Upgrades And Additions
Lessee may affix or install any accessory, addition, upgrade, equipment or
device on the Product ("Additions") provided that such Additions (i) can be
removed without causing material damage to the Product, (ii) do not reduce the
value of the Product and (iii) are obtained from or approved by Sun
Microsystems Computer Corporation and are not subject to the interest of any
third party other than Lessor. Any other Additions may not be installed without
Lessor's prior written consent. At the end of the Schedule Term, Lessee shall
remove any Additions which (i) were not leased by Lessor and (ii) are readily
removable without causing material damage or impairment of the intended
function, use, or value of the Product and restore the Product to its original
configuration. Any Additions which are not so removable will become the
Lessor's property (lien free).
9. Lease End Options
Upon written notice given at least ninety (90) days prior to expiration of the
Lease Term, and provided Lessee is not in default under any Schedule, Lessee may
(i) exercise any purchase option set forth on the Schedule, or (ii) renew the
Schedule for a minimum extension period of twelve (12) months, or (iii) return
and Product to Lessor at the expiration date of the Schedule pursuant to Section
6 above.
10. Insurance, Loss Or Damage
Effective upon shipment of Product to Lessee and until Product is received by
Lessor, Lessee shall provide at its expense (i) insurance against the loss or
theft or damage to the Product for the full replacement value, and (ii)
insurance against public liability and property damage. Lessee shall provide a
certificate of insurance that such coverage is in effect, upon request by
Lessor, naming Lessor as loss payee and/or additional insured, as may be
required.
Lessee shall bear the entire risk of loss, theft, destruction of or damage to
any item of Product. No loss or damage shall relieve Lessee of the obligation to
pay Rent or any other obligation under the Schedule. In the event of loss or
damage, Lessee shall promptly notify Lessor and shall, at Lessor's option (i)
place the Product in good condition and repair, or (ii) replace the Product
with lien free Product of the same model, type and configuration in which case
the relevant Schedule shall continue in full force and effect and clear title in
such Product shall automatically vest in Lessor, or (iii) pay Lessor the present
value of remaining Rent plus the buyout purchase option price provided for in
the applicable Schedule.
11. Selection, Warranties and Limitation Of Liability
Lessee acknowledges that it has selected the Product and disclaims any reliance
upon statements made by Lessor. Lessee acknowledges and agrees that use and
possession of the Product by Lessee shall be subject to and controlled by the
terms of any manufacturer's or, if appropriate, supplier's warranty, and Lessee
agrees to look solely to the manufacturer or, if appropriate, supplier with
respect to all mechanical, service and other claims, and the right to enforce
all warranties made by said manufacturer are hereby assigned to Lessee for the
term of the Schedule.
EXCEPT AS SPECIFICALLY PROVIDED HEREIN, LESSOR HAS NOT MADE AND DOES NOT MAKE
ANY REPRESENTATIONS OR WARRANTIES, EITHER EXPRESS OR IMPLIED, AS TO ANY MATTER
WHATSOEVER, INCLUDING, WITHOUT LIMITATION, NON-INFRINGEMENT, THE DESIGN,
QUALITY, CAPACITY OR CONDITION
<PAGE>
OF THE PRODUCT, ITS MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE. IT
BEING AGREED THAT AS THE LESSEE SELECTED BOTH THE PRODUCT AND THE SUPPLIER, NO
DEFECT, EITHER PATENT OR LATENT SHALL RELIEVE LESSEE OF ITS OBLIGATION
HEREUNDER. LESSEE AGREES THAT LESSOR SHALL NOT BE LIABLE FOR SPECIFIC
PERFORMANCE OR ANY LIABILITY, LOSS, DAMAGE OR EXPENSE OF ANY KIND INCLUDING,
WITHOUT LIMITATION, INDIRECT, INCIDENTAL, CONSEQUENTIAL OR SPECIAL DAMAGES OF
ANY NATURE, DAMAGES ARISING FROM THE LOSS OF USE OF PRODUCT, LOST DATA, LOST
PROFITS, OR FOR ANY CLAIM OR DEMAND.
12. Indemnity
Lessee shall indemnify and hold harmless Lessor and Lessor's Assignee from and
against any and all claims, actions, suits, proceedings, liabilities, damages,
penalties, costs and expenses (including reasonable attorneys' fees), arising
out of the use, operation, possession, ownership (for strict liability in tort
only), selection, leasing, maintenance, delivery or return of any item of
Product.
13. Default And Remedies
Lessee shall be in default of any Lease if (i) Lessee fails to pay Rent within
ten (10) days of due date; (ii) Lessee fails to perform or observe or breaches
any covenant or condition or any representation or warranty in such Lease, and
such failure or breach continues unpermitted for a period of ten (10) days
after written notice from Lessor; (iii) Lessee, except as expressly permitted
in the Lease, attempts to move, sell, transfer, encumber, or sublet without
consent any item of Product leased under such Lease; (iv) Lessee files or has
filed against it a petition in bankruptcy or becomes insolvent or makes an
assignment for the benefit of creditors or consents to the appointment of a
trustee or receiver or either shall be appointed for Lessee or for a substantial
part of its property without its consent; or (v) Lessee or any guarantor of
Lessee is declared legally deceased or if Lessee shall terminate its existence
by merger, consolidation, sale of substantially all of its assets or otherwise.
Upon default, Lessor may, at its option, take one or more of the following
actions, (i) declare all sums due and to become due under the Schedule
immediately due and payable, (ii) require Lessee to return immediately all
Product leased under such Schedule to Lessor in accordance with Paragraph 6
hereof, (iii) without breach of the peace take immediate possession of and
remove the Product; (iv) sell any or all of the Product at public or private
sale or otherwise dispose of, hold, use or lease to others, or; (v) exercise any
right or remedy which may be available to Lessor under applicable law, including
the right to recover damages for the breach of the Schedule. In addition, Lessee
shall be liable for reasonable attorney's fees, other costs and expenses
resulting from any default, or the exercise of Lessor's remedies, including
placing such Product in the condition required by Paragraph 6 hereof. Each
remedy shall be cumulative and in addition to any other remedy otherwise
available to Lessor at law or in equity. No express or implied waiver of any
default shall constitute a waiver of any of Lessor's other rights.
14. Lessee's Representations
Lessee represents and warrants for this Master Lease and each Schedule that the
execution, delivery and performance by Lessee have been duly authorized by all
necessary corporate action; the individual executing was duly authorized to do
so; the Master Lease and each Schedule constitute valid, binding agreements of
the Lessee enforceable in accordance with their terms; that all information
supplied by Lessee, including but not limited to the credit application and
other financial information concerning Lessee, is accurate in all material
respects as of the date provided; and if there is any material change in such
information prior to manufacturer's or, if appropriate, supplier's shipment of
Product under the Schedule, Lessee will advise Lessor of such change in writing.
15. Applicable Law
This Master Lease and each Schedule shall in all respects be governed by and
construed in accordance with the laws of the state of California without giving
effect to the principles of conflict of laws.
16. Miscellaneous
Lessee agrees to execute and deliver to Lessor such further documents,
including, but not limited to, financing statements, assignments, and financial
reports and take such further action as Lessor may reasonably request to protect
Lessor's interest in the Product.
The performance of any act or payment by Lessor shall not be deemed a waiver of
any obligation or default on the part of Lessee. Lessor's failure to require
strict performance by Lessee of any of the provisions of this Master Lease shall
not be a waiver thereof. No rights or remedies referred to in Article 2A of the
Uniform Commercial Code will be conferred on Lessee unless expressly granted in
this Master Lease.
This Master Lease together with any Schedule constitutes the entire
understanding between the parties and supersedes any previous representations or
agreements whether verbal or written with respect to the use, possession and
lease of the Product described in the Schedule. In the event of a conflict, the
terms of the Schedule shall prevail over the Master Lease.
No amendment or change of any of the terms or conditions herein shall be binding
upon either party unless they are made in writing and are signed by an
authorized representative of each party. Each Schedule is non-cancellable for
the full term specified and each Schedule shall be binding upon and shall inure
to the benefit of Lessor, Lessee, and their respective successors, legal
representatives and permitted assigns.
All agreements, representations and warranties contained herein shall be for the
benefit of Lessor and shall survive the execution, delivery and termination of
this Master Lease, any Schedule or related document.
Any provision of this Master Agreement and/or each Schedule which is
unenforceable shall not cause any other remaining provision to be ineffective or
invalid. The captions set forth herein are for convenience only and shall not
define or limit any of the terms hereof. Any notices or demands in connection
with any Schedule shall be given in writing by regular or certified mail at the
address indicated in the Schedule, or to any other address specified.
THIS MASTER LEASE SHALL BECOME EFFECTIVE ON THE DATE
ACCEPTED BY LESSOR.
LESSOR: SUN MICROSYSTEMS FINANCE
A Sun Microsystems, Inc. Business
BY: /s/ Gregg E. Gerst
------------------------------------------------------------------------
(Authorized Signature)
NAME: Gregg E. Gerst
------------------------------------------------------------------------
TITLE: Manager, U.S. Leasing Programs
------------------------------------------------------------------------
DATE: 5/18/98
------------------------------------------------------------------------
LESSEE: 24/7 Media, Inc.
------------------------------------------------------------------------
(Full legal name of Lessee) (Business Entity)
BY: Yale R. Brown
------------------------------------------------------------------------
(Authorized Signature)
NAME: Yale R. Brown
------------------------------------------------------------------------
TITLE: EVP
------------------------------------------------------------------------
DATE: 5/18/98
------------------------------------------------------------------------
<PAGE>
[Letterhead of Sun Microsystems]
<TABLE>
<CAPTION>
Lease Schedule ("Schedule") No. 01
To Master Lease Agreement ("Master Lease") No. SL2890
======================================================================================================|
<S> <C>
NAME: 24/7 Media Inc. | SUN MICROSYSTEMS FINANCE |
- --------------------------------------------| A SUN MICROSYSTEMS, INC. BUSINESS |
ADDRESS: 201 North Union Street | 2550 GARCIA AVENUE |
Alexandria, VA 22314 | MOUNTAINVIEW, CA 94043 |
- --------------------------------------------| |
ADMIN. CONTACT: Mr. Yale Brown | |
- --------------------------------------------|---------------------------------------------------------|
PHONE NO.: 703-706-9500 | PHONE NO.: 800-786-3366 FAX NO.: 612-513-3299 |
============================================|=========================================================|
| LEASE TERM: 30 MONTHS |
|---------------------------------------------------------|
Same as above | RENTAL: $24,089.41* PER MONTH |
|---------------------------------------------------------|
| *Payments to be made with Automatic Bank Withdrawal |
- --------------------------------------------|---------------------------------------------------------|
LEASSEE PURCHASE ORDER NO.: | SALES/USE TAX: Payment amount may be increased to |
- --------------------------------------------|---------------------------------------------------------|
CONTACT: | include applicable sales/use tax. |
- --------------------------------------------|---------------------------------------------------------|
PHONE NO.: | |
============================================|=========================================================|
| | X | FMV PURCHASE OR RENEWAL |
| |---|---------------------------------------------------|
Same as above | | | $1 PURCHASE OPTION |
| |---|---------------------------------------------------|
| | | 10% PURCHASE OPTION |
| |---|---------------------------------------------------|
| | | OTHER: |
- --------------------------------------------| --- |
CONTACT: | |
- --------------------------------------------| |
PHONE NO.: | |
- ------------------------------------------------------------------------------------------------------|
</TABLE>
- --------------------------------------------------------------------------------
PRODUCT DESCRIPTION AS DESCRIBED IN DATA SYSYTEMS MARKETING QUOTATION NO'S,
intellinter.xls, intellserv01.xls, intellinter04.xls, intellinter07.xls
& intellserv01.xls ATTACHED HERETO.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
MASTER AGREEMENT: This Schedule is issued and effective this date set forth
below pursuant to the Master Lease identified above. All of the terms,
conditions, representations and warranties of the Master Lease are hereby
incorporated herein and made a part hereof as if they were expressly set forth
in this Schedule and this Schedule constitutes a separately enforceable,
complete and independent lease with respect to the Product described herein. By
their execution and delivery of this Schedule, the parties hereby affirm all of
the terms, conditions, representations and warranties of the Master Lease.
The additional terms set forth and the reverse side hereof are made a part of
this Schedule.
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
AGREED AND ACCEPTED BY: AGREED AND ACCEPTED BY:
SUN MICROSYSTEMS FINANCE LESSEE 24/7 Media, Inc.
A Sun Microsystems, Inc. Business
BY: /s/ Gregg E. Gerst BY: /s/ Yale R. Brown
-------------------------------------- --------------------------------------
NAME: Gregg E. Gerst NAME: /s/ Yale R. Brown
-------------------------------------- --------------------------------------
TITLE: Manager, U.S. Leasing Programs TITLE: EVP
-------------------------------------- --------------------------------------
DATE: 5/18/98 DATE: 5/18/98
-------------------------------------- --------------------------------------
</TABLE>
May 15, 1998
Exhibit 10.19
PLEDGE AND SECURITY AGREEMENT
PLEDGE AND SECURITY AGREEMENT, made and entered into as of the 12th day of
November, 1997 (this "Agreement"), between Interactive Imaginations, Inc., a New
York corporation ("Grantor"), and The Travelers Insurance Company (the "Secured
Party").
RECITALS
WHEREAS, Grantor and Secured Party have entered into a Senior Convertible
Note (the "Note") with Warrants Purchase Agreement, dated as of November 12,
1997 (such agreement, as it may hereafter be amended, restated, supplemented or
otherwise modified from time to time, being the "Note Purchase Agreement"),
pursuant to which the Grantor has agreed to grant, assign and pledge to the
Secured Party a first priority security interest in and to certain of its
rights, properties and assets, to secure its obligations to the Secured Party
under the Note Purchase Agreement and the Note.
WHEREAS, as a condition precedent to making the loan (the "Loan") to
Grantor pursuant to the Note Purchase Agreement, the Secured Party has required
Grantor, and Grantor has agreed, to grant to the Secured Party a continuing
first and prior security interest in certain property and interests in Grantor's
"Riddler Asset," to secure all such obligations of the Grantor, including, but
not limited to, all of its right, title, and interest in and to all computer
source code, trademarks, copyrights, data base information and other proprietary
information owned by Grantor and comprising the Riddler Property and related
assets of the Grantor (as more fully described in Section 1 herein), and all
proceeds thereof (collectively, the "Collateral"), and to grant to the Secured
Party a power of attorney to foreclose upon and sell Grantor's interests in the
Collateral under the circumstances set forth in this Agreement.
NOW, THEREFORE, Grantor, intending to be bound hereby, in consideration of
the premises hereof, in order to induce Secured Party to enter into the Note
Purchase Agreement and to induce the Secured Party to make a loan to the
Grantor, and in consideration of such loan being made by the Secured Party to or
for the account of the Grantor, pursuant to the Note Purchase Agreement, and for
$1.00 and other good and valuable consideration, receipt of which is hereby
acknowledged, hereby agrees with, and for the benefit of, the Secured Party, as
follows:
AGREEMENT
SECTION 1. Security for Liabilities.
(a) This Agreement secures the full and prompt payment and performance of
(i) all obligations and liabilities of the Grantor to the Secured Party now or
hereafter existing under the Note Purchase Agreement, whether for principal,
interest, fees, indemnification, or otherwise, and (ii) all obligations and
liabilities of Grantor to the Secured Party now or hereafter existing under this
Agreement (such obligations and liabilities being collectively referred to as
the "Liabilities"). Grantor and the Secured Party agree that they intend the
security interest hereby granted to attach upon the execution and delivery of
this Agreement.
(b) To secure the payment and performance of all of the Liabilities,
Grantor hereby grants to the Secured Party a first and valid security interest
in all of Grantor's right, title and interest, in the United States and
throughout the world, in and to all of its now owned and hereafter acquired (i)
computer source and run-time coding and software employed to operate Grantor's
"Riddler" property on the World Wide Web in a manner substantially similar to
the current operation of Riddler, and any and all future upgrades and revisions
thereto (the "Riddler Software"), and (ii) all games and content (the "Content,"
and together with the Riddler Software, the "Riddler Property") used in
conjunction with Riddler and controlled by the Riddler Software. The elements of
the Riddler Software are more fully described on Exhibit A hereto.
Notwithstanding the foregoing, the Secured Party acknowledges that the security
interest set forth herein shall be subject to all the rights in respect of the
Riddler Software granted by Grantor by a License Agreement, dated as of November
22, 1996, to SegaSoft, Inc.
<PAGE>
(c) To secure the payment and performance of all of the Liabilities,
Grantor hereby grants to the Secured Party a first and valid security interest
in all of Grantor's right, title and interest, in the United States and
throughout the world, in and to all of its now owned and hereafter acquired
computer hardware employed to serve and display Grantor's Riddler Property on
the World Wide Web in a manner substantially similar to the current operation of
Riddler, such hardware fully described on Exhibit B hereto, and as may be
amended from time to time pursuant to this Agreement.
(d) To secure the payment and performance of all of the Liabilities,
Grantor hereby grants to the Secured Party a first and valid security interest
in all of Grantor's right, title and interest, in the United States and
throughout the world, in and to all of its now owned and hereafter acquired
proprietary data and information related to or generated from the Riddler
Property, including without limitation, subject to the rights of Riddler players
as set forth in the Privacy Policy Statement posted on the Riddler Property, the
registration information of Riddler players collected by Grantor through the
Riddler Property.
(e) To secure the payment and performance of all of the Liabilities,
Grantor hereby grants to the Secured Party a first and valid security interest
in all of Grantor's right, title and interest, in the United States and
throughout the world, in and to all of its now owned and hereafter acquired
intellectual property rights, as more fully described on Exhibit C hereto,
including copyrights, trademarks, trade names, service marks and the like, which
are or were solely and directly related to or used in conjunction with the
Grantor's Riddler Property, including without limitation, all Web pages
comprising the Riddler Property, the "Ridman" logo and all other marks denoting
the Riddler Property or games, artwork, trivia, and puzzles available thereon,
and all registrations and applications to register same, and all renewals
thereof and all proceeds thereof.
(f) In addition to the security interests set forth in this Section 1,
subject to the provisions of subsection 3(c), Grantor hereby further grants to
the Secured Party a first and valid security interest in all of Grantor's right,
title and interest in and to all income, royalties, damages and payments now and
hereafter due and/or payable in respect of the Collateral and, subject to the
provisions of subsection 3(c), in and to all rights during the term of this
Agreement to sue, collect and retain for its own benefit damages and payments
for past or future infringements on the Collateral.
SECTION 2. Grantor Remains Liable.
Anything contained herein to the contrary notwithstanding, (a) Grantor
shall remain liable under any contracts and agreements included in the
Collateral, to the extent set forth therein, to perform all of its duties and
obligations thereunder to the same extent as if this Agreement had not been
executed, (b) the exercise by Secured Party of any of its rights hereunder shall
not release Grantor from any of its duties or obligations under any contracts
and agreements included in the Collateral, and (c) Secured Party shall not have
any obligation or liability under any contracts and agreements included in the
Collateral by reason of this Agreement, nor shall Secured Party be obligated to
perform any of the obligations or duties of Grantor thereunder or to take any
action to collect or enforce any claim for payment assigned hereunder.
SECTION 3. Representations, Warranties and Covenants of Grantor.
(a) Except as otherwise set forth herein, none of the Collateral is or
shall become subject to any lien, security interest or other encumbrance other
than that of the Secured Party granted hereby, and Grantor agrees that it shall
not transfer, convey or encumber any interest in or to the Collateral without
the prior express written consent of the Secured Party, except in accordance
with the terms of the Note Purchase Agreement.
2
<PAGE>
Notwithstanding the foregoing, the Secured Party agrees that Grantor shall
be permitted to license all and any part of the Content in the ordinary course
of business in connection with distribution of the Content through third party
web sites. It is expressly understood that portions of the Riddler Software may
be necessary to accomplish any such Content distribution, but at no time is any
Riddler Software licensed in a stand-alone manner for any use other than
distributing the Content. Any such license of the Content granted by Grantor
(any "License") shall be in writing and shall reserve all rights in Grantor
except those reasonably necessary to effectuate the transaction in the ordinary
course of business.
(b) Grantor shall not take any action, or permit any action to be taken by
others subject to Grantor's control, including licensees, or fail to take any
action, or permit others subject to Grantor's control, including licensees, to
fail to take any action, which would, in the case of any such actions or
failures to act taken singly or together, materially adversely affect the
validity, grant and enforceability of the Collateral herein.
(c) During the term of this Agreement, all income, royalties, payments and
damages due and payable to Grantor under the Collateral shall be paid to, and
shall remain the property of, Grantor. Notwithstanding the foregoing, upon the
occurrence and during the continuance of an Event of Default under and as
defined in this Agreement or the Note Purchase Agreement, all income, royalty
payments and damages, if any, received thereafter shall, on the demand of the
Secured Party, be paid directly to the Secured Party and shall be applied by the
Secured Party on account of the Liabilities of Grantor. The Secured Party shall
have the right to notify payors to make their payments directly to the Secured
Party upon the occurrence and during the continuance of an Event of Default
under the Note Purchase Agreement.
(d) Grantor agrees, upon the reasonable request by the Secured Party
during the term of this Agreement, to execute, acknowledge and deliver any and
all additional instruments and documents which may be necessary or desirable to
effect the purposes of this Agreement, such instruments and documents to be in a
form reasonably acceptable to counsel for Grantor and the Secured Party.
(e) Grantor shall promptly notify the Secured Party, in writing, of any
suit, action, proceeding or counterclaim brought against Grantor relating to,
concerned with, or materially adversely affecting the Collateral, and shall, on
request, deliver to the Secured Party a copy of all pleadings, papers, orders or
decrees theretofore and thereafter filed in any such suit, action or proceeding,
and shall keep the Secured Party duly advised in writing of the progress of any
such suit.
(f) Grantor shall use its commercially reasonable efforts to take such
action, or to direct action to be taken by others subject to Grantor's control,
in order to maintain insurance coverage on the tangible Collateral, and to
maintain all Collateral in good working order in order to prevent harm to the
Collateral which may materially adversely affect the validity, grant and
enforceability of the Secured Party's interest in the Collateral granted herein.
(g) Grantor represents and warrants to the Secured Party that (i) the
Grantor's principle place of business is located at 915 Broadway, Suite 1608,
New York, NY 10010 and (ii) the Collateral set forth on Exhibit B hereto is
physically present at Grantor's principle place of business; and (iii) the
Collateral will not be moved from that location without notice to the Secured
Party and appropriate filings.
SECTION 4. Indemnity.
Grantor agrees to indemnify the Secured Party from and against any and
all claims, losses and liabilities growing out of or resulting from this
Agreement (including, without limitation, enforcement of this Agreement and any
actions taken pursuant to Section 8 or any failure to act thereunder). In such
event, the Liabilities of Grantor shall include the amount of any reasonable
expenses, including the reasonable fees and disbursements of its counsel, which
Secured Party may incur in connection with (i) the custody, preservation, or the
sale of, collection from or other realization upon, any of the Collateral,
3
<PAGE>
(ii) the exercise or enforcement by Secured Party of any of its rights or powers
hereunder, or (iii) any failure by Grantor to perform or observe any of the
provisions hereof.
SECTION 5. Default. The following shall each constitute an "Event of Default"
hereunder:
(a) The failure of the Grantor to observe or perform any term, covenant or
agreement set forth in Section 3 of this Agreement; or
(b) The failure of the Grantor to observe or perform any term, covenant or
agreement set forth in this Agreement (other than Section 3) and such failure
shall have continued unremedied for a period in excess of 15 days after Grantor
is aware of such failure; or
(c) Any representation or warranty of the Grantor made in this Agreement,
or in any certificate, report, opinion or other document delivered or to be
delivered pursuant hereto, shall prove to have been incorrect or misleading
(whether because of misstatement or omission) in any material respect when made;
or
(d) The occurrence of any material loss, theft, damage or destruction of
the Collateral, and such Collateral is not replaced, recovered or repaired
within 7 days of the occurrence of such loss, theft damage or destruction; or
(e) The issuance or making of any levy, seizure, attachment execution or
similar authorized legal process on any of the Collateral; or
(f) The occurrence of an Event of Default under and as defined in the Note
Purchase Agreement.
SECTION 6. Rights and Remedies Upon Default.
Upon the occurrence of an Event of Default and at any time thereafter
(such Event of Default not having previously been cured), the Secured Party, in
addition to any rights set forth herein or in the Note Purchase Agreement, shall
have all the rights and remedies of a secured party under the Uniform Commercial
Code and shall further have, in addition to all other rights and remedies
provided herein or by law, the right to take possession of the Collateral and
from time to time to sell, assign or otherwise dispose of the Collateral, at
public or private sale or otherwise, at the option of the Secured Party, for
cash or on credit, upon such terms and conditions as the Secured Party may deem
proper, all without (except as shall be required by applicable statute and which
cannot be waived) advertisement or demand upon or notice to Grantor or right of
redemption of Grantor, which are hereby expressly waived to the fullest extent
permitted by law and any transferee with respect to the Collateral (including
the Secured Party) shall acquire the same absolutely free from any right or
claim of any kind, including without limitation any equity of redemption which,
together with all rights of redemption, stay or appraisal which Grantor may have
under any rule or statute which Grantor hereby specifically and unconditionally
waives to the fullest extent permitted by law; and, in connection with the
foregoing:
(a) The Secured Party may, unless prohibited by applicable statute which
cannot be waived, purchase the Collateral, or any part thereof, free from and
discharged of all trusts, claims, right of redemption and equities of Grantor,
which are hereby waived and released; and
(b) The Secured Party shall apply all proceeds received by Secured Party
in respect of any sale, assignment or other disposition of, collection from or
other realization upon the Collateral in whole or in part against all or any
part of the Liabilities in such order as the Secured Party shall elect, in its
discretion; any surplus of such proceeds held by the Secured Party and remaining
after payment in full of all of the Liabilities shall be paid over to Grantor or
to whomsoever may be lawfully entitled to receive such surplus; and Grantor
shall at all times remain liable for any deficiency on the Liabilities.
4
<PAGE>
SECTION 7. Remedies Cumulative.
All options, powers and rights granted to the Secured Party hereunder,
under the Note Purchase Agreement shall be cumulative and shall be in addition
to any other options, powers and rights of the Secured Party under other
applicable law or otherwise. Grantor shall at all times remain liable for any
deficiency on the Liabilities.
SECTION 8. Power of Attorney.
Grantor hereby irrevocably appoints the Secured Party, and any officer or
agent of the Secured Party, with full power of substitution, its true and lawful
attorneys-in-fact with full, irrevocable power and authority in Grantor's place,
stead, name and behalf, or in the Secured Party's own names, from time to time
and at any time in the Secured Party's absolute discretion, after an Event of
Default which is continuing, to do any and all things required to be done to
carry out the terms or to accomplish the purposes of this Agreement as fully and
effectually as Grantor could do but for this appointment, including without
limitation, the power (i) to sign Grantor's name to, and to file, Financing
Statements or other instruments reasonably required by the Secured Party to
protect or perfect any security interest given hereunder, (ii) to execute, in
connection with any sale, transfer or other disposition, any endorsements,
assignments or other instruments of conveyance or transfer with respect to the
Collateral, (iii) to notify and direct the United States Post Office authorities
by notice given in the name of Grantor and signed by the Secured Party on behalf
of Grantor to change the address for delivery of all mail addressed to Grantor
relating to the Collateral to an address to be designated by the Secured Party,
and to cause such mail to be delivered to such designated address where the
Secured Party may open all such mail and remove therefrom any notes, checks,
acceptances, drafts, money orders or other instruments included in the
Collateral, (iv) to endorse the name of Grantor upon any notes, checks,
acceptances, drafts, money orders, instruments or other documents relating to
the Collateral and to effect the deposit and collection thereof, and (v) to
endorse the name of Grantor on any other documents relating to the Collateral.
Grantor hereby ratifies all actions taken by or on behalf of the Secured
Party pursuant to this power of attorney or otherwise as provided in this
Agreement and neither the Secured Party nor any of their officers or agents
shall be liable for any acts or omissions or mistake of fact or law in its or
their capacity as such attorney-in-fact. This power of attorney is coupled with
an interest and shall be irrevocable until all of the Liabilities are paid in
full and this Agreement is terminated. The powers conferred upon the Secured
Party hereunder are solely to protect its interests and shall not impose any
duty upon it to exercise any of such powers.
SECTION 9. Termination and Release.
Upon full and complete payment and performance of the Liabilities, this
Agreement and the power of attorney granted at Section 8 shall automatically
terminate and the Secured Party shall release the Collateral from this
Agreement, and shall execute and deliver all documents as may be reasonably
necessary to render the Collateral free and clear of any security interest
created pursuant to this Agreement.
SECTION 10. Continuing Security Interest; Assignment.
This Agreement shall create a continuing security interest in the
Collateral and shall remain in full force and effect until payment in full of
the Liabilities. If at any time or times, by sale, assignment, negotiation,
pledge or otherwise, the Secured Party transfers any of the Liabilities in
accordance with the Note Purchase Agreement, such transfer shall carry with it
the Secured Party's rights, powers and remedies under this Agreement with
respect to the obligation transferred, and the transferee shall become
5
<PAGE>
vested with such rights and remedies whether or not they are specifically
referred to in the transfer, unless, and then only to the extent, that the terms
of such transfer otherwise provide. The Secured Party agrees to give Grantor
prior notice of its intention to transfer any of its rights, powers and remedies
under this Agreement, provided however, that the Secured Party's failure to do
so shall not result in any liability other than damages incurred directly by
Grantor as a result of such failure to give notice. If and to the extent the
Secured Party retains any of the Liabilities, the Secured Party shall continue
to have the rights, powers and remedies herein set forth with respect thereto.
Grantor shall not assign this Agreement except with the prior consent of the
Secured Party.
SECTION 11. Enforceability and Construction.
Should any part or provision of this Agreement be held unenforceable or
conflicting with the law of any jurisdiction, the validity of the remaining
parts or provisions hereof shall not be affected thereby. Should any part or
provision of this Agreement be deemed by a court or other governmental authority
of competent jurisdiction to be an assignment of any trademark so as to result
in Grantor's abandonment thereof, such part or provision (but no other) shall be
construed as providing for a security interest and not an assignment, all in
order to preclude such abandonment and, if such construction shall not be
accepted by such court or other governmental authority such part or provision
(but no other) shall be deemed null and void as to such trademark in the
jurisdiction where abandonment might otherwise result.
SECTION 12. Miscellaneous.
This Agreement alone fully and completely expresses the agreement of the
parties hereto with respect to the subject matter hereof. This Agreement shall
be binding upon and shall inure to the benefit of the parties hereto and their
respective successors and assigns. No failure or delay on the part of any party
in exercising any right, power or privilege hereunder or under the Note Purchase
Agreement, the other Loan Documents or any other agreement or instrument in
connection herewith or therewith shall operate as a waiver thereof or preclude
any other or further exercise thereof or of any other right, power or privilege.
No amendment or waiver of any provision of this Agreement, nor consent to any
departure herefrom, shall in any event be effective unless the same shall be in
writing and signed by the waiving or consenting party, and then such waiver or
consent shall be effective only in the specific instance and for the specific
purpose for which given.
SECTION 13. Notices, etc.
Any notice, demand, consent, approval or other thing required or desired
to be served, given or delivered hereunder shall be in writing and shall, except
as otherwise herein expressly provided, be deemed to have been validly served,
given or delivered upon delivery, if personally delivered (including delivery by
overnight private courier service), or upon transmission by telex, telegram or
telecopier or three (3) Business Days after deposit of same in the United States
mail by registered or certified mail, postage prepaid.
SECTION 14. Governing law.
This Agreement has been made and executed and is to be performed in the
State of New York. This Agreement and of all transactions provided for herein
shall be governed by, interpreted and construed under the laws of the State of
New York without regard to the conflict of laws principles thereof.
6
<PAGE>
SECTION 15. Counterparts.
This Agreement may be executed in one or more counterparts and by
different parties hereto in separate counterparts, each of which when so
executed and delivered shall be deemed an original, but all such counterparts
together shall constitute but one and the same instrument; signature pages may
be detached from multiple separate counterparts and attached to a single
counterpart so that all signature pages are physically attached to the same
document.
* * * * *
IN WITNESS WHEREOF, the parties hereto have executed this Agreement by
causing these presents to be signed by their respective duly authorized officers
as of the date first written above.
INTERACTIVE IMAGINATIONS, INC.
By:_____________________________
Name: Michael P. Paolucci
Title: Chief Executive Officer
THE TRAVELERS INSURANCE COMPANY
By:__________________________________
Name:
Title:
7
<PAGE>
Exhibit A
INTERACTIVE IMAGINATIONS, INC.
RIDDLER PROPRIETARY SOFTWARE
The components of the Riddler Software detailed in this Exhibit consist of CGI
C++ executables, system C++ executables and the Ridmark Data System, which data
system is based upon Oracle stored procedures and tables.
Name and Description of Riddler Software Sub-Systems:
Registration: Enables forms and functions for user to enter demographic
information, which information is stored in the Ridmark Data System and
utilized by the "Ad Delivery" sub-system.
TicketBooth: Enables game play selections for users.
Ad Delivery: Enables delivery and display of full-page advertisements to users
prior to game launch; functionally utilizing a delivery algorithm which weights
several variables in determining which advertisement is displayed, including the
required circulation of the promotions, end date of promotions, as well as
player and demographic data acquired by "Registration." The Ad Delivery sub
system also utilizes weighted algorithms to create 'deals' of coins/caps for a
user (i.e. - determines the type and number of points the user will receive for
winning the game chosen through the "TicketBooth" subsystem) .
Game Launch: Enables a user to begin and play the game chosen through the
"TicketBooth" sub-system. For multi-user games, Game Launch includes IRC chat
functions allowing users to communicate prior to beginning a game.
Game Close: After the completion of a game, this sub-system closes a game,
informs the user of the results, and depending on a win or a loss, credits a
user's inventory with the value of the `deal' determined by the Ad Delivery
sub-system. "Game Close" also delivers additional a final advertising impression
(banner ad) associated with the promotion determined and displayed by the "Ad
Delivery" sub-system.
Caps Exchange and Inventory: Enables users to (i) `purchase' points (CAPS)
toward particular prizes using generic points (Riddlets) or (ii) exchange points
for a particular prize into points for another prize or generic points, and
(iii) track their progress toward each live prize competition. Along with the
'deal' created by the "Ad Delivery" sub-system, the Caps Exchange and Inventory
sub-systems are the basis of the Riddler economy which controls point
acquisition system wide and ensuring the desired duration of specific prize
promotions.
Leaderboard: Tracks game activity and displays, by individual game, a list of
users ranked in descending order beginning with the user credited with winning
that particular game the greatest number of times.
System Operations: Primarily manages loading Web-activity logs and data into the
Ridmark Data System tables, as well as managing interactions between other
system functions.
The following two pages of this Exhibit A specify each Riddler sub-system, the
"executable" files within the sub-system, and the file names containing the
source code comprising of the Riddler Software.
8
<PAGE>
EXHIBIT B
Riddler Hardware
<TABLE>
<CAPTION>
Equipment Serial # Description Riddler Network Name
--------- -------- ----------- --------------------
<S> <C> <C> <C>
Silicon Graphics 080069097ADF Single Processor Web Server Mozart
Challenge S - 200MHz
128 MB RAM
Silicon Graphics 0800690A41C3 Single Processor Web Server Old-Phobos
Challenge S - 200MHz
128 MB RAM
Silicon Graphics 0800690A46E6 Single Processor Web Server Liszt
Challenge S - 200MHz
128 MB RAM
Silicon Graphics 0800690A36E4 Single Processor Web Server Vesta
Challenge S - 200MHz
128 MB RAM
Silicon Graphics 080069097AE2 Single Processor Web Server Halley
Challenge S - 200MHz
128 MB RAM
Sun Sparc 4 606F0109 Saturn
Cisco FDDI Concentrator FDDI concentrator Cisco-Conc
Silicon Graphics Indy 080069097989 Development workstation Mercury
Sun Ultra 1 621F0451 Development workstation Phoebe
</TABLE>
9
Exhibit 10.20
================================================================================
SENIOR CONVERTIBLE NOTE PURCHASE AGREEMENT
dated as of June 11, 1997
between
INTERACTIVE IMAGINATIONS, INC.
and
THE TRAVELERS INSURANCE COMPANY
<PAGE>
================================================================================
SENIOR CONVERTIBLE NOTE PURCHASE AGREEMENT
SENIOR CONVERTIBLE NOTE PURCHASE AGREEMENT dated as of June 11, 1997
between INTERACTIVE IMAGINATIONS, INC., a New York corporation (the "Company"),
and THE TRAVELERS INSURANCE COMPANY (the "Purchaser").
WHEREAS, the Company wishes to sell, and the Purchaser wishes to
purchase, a senior note of the Company in the principal amount of $170,000,
substantially in the form of Exhibit A hereto (the "Note"), upon the terms and
subject to the conditions herein set forth;
NOW, THEREFORE, in consideration of the foregoing and other valuable
consideration, the receipt and sufficiency of which are acknowledged, the
parties hereto agree as follows:
ARTICLE I
DEFINITIONS AND USAGE
Section1.01. Definitions. As used herein:
"Act" means the Securities Act of 1933, as amended, and the rules
and regulations promulgated thereunder.
"Bankruptcy Code" means Title 11 of the United States Code entitled
"Bankruptcy," as now and hereafter in effect, or any successor statute.
"Business Day" means any day which is not a Saturday, Sunday or day
on which banking institutions in either the State or City of New York are
required or authorized by law to close.
"Closing Date" means the date hereof.
"Common Stock" means the common stock, par value $0.01 per
share, of the Company.
"Company" has the meaning given such term in the first paragraph
hereof.
"Conversion Price" has the meaning given such term in Section
5.01.
"Default" means an event which, with the giving of notice or lapse
of time, or both, would constitute an Event of Default.
"Event of Default" has the meaning given such term in Section
7.01.
Financing Lease" means any lease of property, real or personal, the
obligations of the lessee in respect of which are required in accordance with
generally accepted accounting principles to be capitalized on a balance sheet of
the lessee.
<PAGE>
"Guarantee" means, with respect to any Person, any obligation,
contingent or otherwise, of such Person guaranteeing or having the economic
effect of guaranteeing any Indebtedness of any other Person (the "primary
obligor") in any matter, whether directly or indirectly, and including any
obligation of such Person, direct or indirect, (i) to purchase or pay (or
advance or supply funds for the purchase or payment of) such Indebtedness or to
purchase (or to advance or supply funds for the purchase of) any security for
the payment of such Indebtedness, (ii) to purchase or lease property, securities
or services for the purpose of assuring the owner of such Indebtedness of the
payment of such Indebtedness or (iii) to maintain working capital, equity
capital or any other financial statement condition or liquidity of the primary
obligor so as to enable the primary obligor to pay such Indebtedness; provided
however, that the term "Guarantee" shall not include endorsements for collection
or deposit in the ordinary course of business.
"Indebtedness" means with respect to any Person at any date (i) all
indebtedness of such Person for borrowed money or for the deferred purchase
price of property or services, excluding any trade payables and other accrued
current liabilities incurred in the ordinary course of business, (ii) any other
indebtedness of such Person which is evidenced by a note, bond, debenture,
letter of credit or similar instrument, (iii) all obligations of such Person
with respect to Guarantees, (iv) all obligations of such Person under Financing
Leases, (v) all obligations of such Person in respect of reimbursement
obligations under letters of credit, (vii) all liabilities of the type referred
to in clauses (i) through (v) above that are secured by any lien, charge,
security interest or encumbrance on any property owned by such Person even
though such Person has not assumed or otherwise become liable for the payment
thereof.
"Maturity Date" means May 15, 1999.
"Net Cash Proceeds" has the meaning given such term in Section
4.01.
"Note" has the meaning given such term in the second paragraph
hereof.
"Notes" means the senior notes of the Company of even date herewith
in the aggregate amount of $510,000, including the Note.
"Obligations" means all obligations, liabilities and indebtedness
now or hereafter owing to the Purchaser by the Company under this Agreement or
the Note.
"Person" means an individual, corporation, partnership, association,
joint stock company, limited liability company, governmental entity, business
trust, unincorporated organization, or other legal entity.
"Purchaser" has the meaning given such term in the first
paragraph hereof.
"Securities" has the meaning given such term in Section 6.03
hereof.
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"including" and correlative words shall be deemed to be followed by
"without limitation" whether or not followed by such words or words of like
import.
Section 1.02. References to Articles, Sections and Exhibits are to
sections hereof and exhibits and schedules hereto, references to a Person are
also references to its successors and assigns, and references to a document are
to it as amended, waived and otherwise modified from time to time. The
definitions set forth in Section 1.01 are equally applicable both to the
singular and plural forms and the feminine, masculine and neuter forms of the
terms defined. The headings of Articles and Sections and the table of contents
relating hereto have been included solely for convenience of reference and shall
not have any effect on the construction hereof.
ARTICLE II
THE NOTE; PAYMENT TERMS
Section 2.01. The Note. The Note is a senior unsecured
obligation of the Company in the initial aggregate principal amount of
$170,000.
Section 2.02. Principal. On the Closing Date, the Company shall
deliver to the Purchaser the Note, substantially in the form of Exhibit A, which
shall have an initial aggregate principal amount of $170,000 as of the date
hereof and which shall be issued in the name "Tral & Co." as designated by the
Purchaser. The Company shall repay the then outstanding aggregate principal
amount of the Note, including any additional principal amount of the Note paid
as interest as set forth in Section 2.03, on May 15, 1999.
Section 2.03. Interest. Interest on the outstanding and unpaid
principal amount of the Note shall accrue at a rate of 8% per annum, compounded
semiannually following the date hereof. Accrued interest shall be paid in
additional principal amount of the Note upon the earlier of prepayment of the
Note in accordance with Article III hereof, redemption of the Note in accordance
with Article IV hereof, conversion of the Note in accordance with Article V
hereof, or at the Maturity Date. All interest due and owing hereunder shall
continue to accrue until all payments due hereunder and under the Note are fully
and finally paid.
Section 2.04. Payments Generally. (a) All payments of
principal and interest in respect of this Agreement and the Note shall be
made by the Company to such account or accounts as the Purchaser may
designate from time to time in writing to the Company.
(b) Whenever any payment hereunder or under the Note shall be due on
a day other than a Business Day, such payment shall be made on the next
succeeding Business Day.
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ARTICLE III
PREPAYMENT OPTION
Section 3.01. Prepayment. The Note may not be redeemed or prepaid by
the Company prior to May 16, 1998. On or after May 16, 1998, the Note will be
redeemable, in whole or in part, at the option of the Company upon at least 30
days notice at the redemption prices set forth below, in each case together with
accrued and unpaid interest to the date of redemption:
Beginning May 16, 1998 104%
Beginning November 15, 1998 102%
On May 15, 1999 100%
All prepayments pursuant to this Section 3.01 shall be applied in reduction of
the Obligations, first toward payment of all interest then due and payable with
respect to the Obligations and second toward the then principal portion of the
Obligations (but excluding the portion of such redemption price constituting
premium).
ARTICLE IV
REDEMPTION AT OPTION OF PURCHASER
Section 4.01. Optional Redemption. (a) If, at any time prior to May
15, 1999, the Company receives cash proceeds from either (i) the sale or sales
of any material assets, including its Riddler or Commonwealth businesses (or the
sale or a series of sales of any consideration received in such a sale), or (ii)
the sale or sales of any Company securities to investors, in both cases after
subtraction of any taxes or transaction fees resulting from such sale (the "Net
Cash Proceeds"), each Purchaser shall have the right, at such Purchaser's
option, to require the Company to redeem all of such Purchaser's Notes or
portions thereof together with accrued interest on the date that is 30 days
after the date of the Company's notice of receipt of such Net Cash Proceeds. If
the Net Cash Proceeds from any such sale by the Company do not exceed or equal
the total principal amount of the Notes together with accrued interest presented
to the Company for redemption, then the Net Cash Proceeds will be used to redeem
an amount of each Purchaser's Notes presented for redemption in proportion to
the total principal amount of the Notes together with accrued interest presented
to the Company for redemption.
(b) In addition, in the event that, prior to the Obligations being
paid in full, the Company enters into any merger or consolidation where the
Company is not the surviving Person or the Person formed by or surviving any
such consolidation or merger, or liquidates, winds up or dissolves (or suffers
any liquidation or dissolution), or conveys, leases, sells, assigns, transfers
or otherwise disposes of, in one transaction or series of transactions, all or
substantially all the Company's business or property, whether now or hereafter
acquired, each Purchaser shall have the right, at such Purchaser's option, to
require the Company or any successor thereto to redeem all the outstanding
principal amount of, and any accrued interest under, such Purchaser's Note prior
to the consummation of such transaction or series of transactions.
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ARTICLE V
CONVERSION AT OPTION OF PURCHASER
Section 5.01. Optional Conversion. The Note is convertible in
whole or in part at the option of the Purchaser, unless previously redeemed,
into shares of Common Stock at any time prior to the Obligations being paid
in full at a conversion price of $2.87 per share, subject to adjustment as
described in Section 5.02. (the "Conversion Price").
Section 5.02. Conversion Price Adjustment. The Conversion Price
shall and may be adjusted and readjusted from time to time as provided below,
and as so adjusted or readjusted, shall remain in effect until a further
adjustment or readjustment thereof is required or deemed appropriate as set
forth below.
(a) Mandatory Adjustment. (1) In case the Company shall, from the
date of the Note's issuance to its maturity on May 15, 1999 (i) pay a dividend
on its outstanding Common Stock in shares of Common Stock or make a distribution
to all holders of its outstanding Common Stock in shares of Common Stock, (ii)
subdivide its outstanding shares of Common Stock, (iii) combine its outstanding
shares of Common Stock into a smaller number of shares of Common Stock, or (iv)
issue by reclassification of its shares of Common Stock other securities of the
Company (including any such reclassification in connection with a consolidation
or merger in which the Company is the surviving corporation), the Conversion
Price shall be adjusted so that the holder hereof upon exercise hereof shall be
entitled to receive the kind and number of such shares or other securities of
the Company which such holder would have owned or have been entitled to receive
had the Note been converted immediately prior to the happening of any event
described above or any record date with respect thereto. An adjustment made
pursuant to this subparagraph (a) shall become effective on the date of the
dividend payment, subdivision, combination or issuance retroactive to the record
date with respect to the record date with respect thereto, if any, for such
event. Such adjustment shall be made successively whenever such an issuance is
made.
(A) No adjustment in the Conversion Price shall be required
unless such adjustment would require an increase or
decrease of at least one percent (1%) in the number of
shares of Common Stock for which the Note shall be
converted; provided, however, that any adjustment which by
reason of this subparagraph (A) is not required to be made
shall be carried forward and taken into account in any
subsequent adjustments or at conversion. All calculations
shall be made to the nearest one-thousandth of a share.
(B) In the event that at any time, as a result of an adjustment
made pursuant to subparagraph (1) above, the holder hereof
shall become entitled to purchase any securities other than
shares of Common Stock, thereafter the number of such other
securities so purchasable upon conversion of each Note and
the purchase price of such securities shall be subject to
adjustment from time to time in a manner and on the terms
as nearly equivalent as practicable to the provisions of
this purchase price adjustment provision with respect to
the shares of Common Stock for which the Note shall be
converted.
(2) If the Company shall ever issue or grant Common Stock, or
options (other than stock options under the Company's Amended and
Restated 1995 Stock
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Option Plan, or any successor plan), warrants, rights or
subscriptions to purchase directly or indirectly Common Stock or
securities convertible into Common Stock for a per share
consideration less than $2.87 per share, or without consideration,
then, and thereafter successively upon each such issuance or sale,
the per share Conversion Price in effect immediately prior to each
such issuance or sale shall forthwith be reduced to a per share
Conversion Price determined by dividing: (i) an amount equal to (v)
the total number of Common Stock outstanding immediately prior to
such issuance or sale multiplied by the per share conversion price
in effect immediately prior to such issuance or sale, plus (w) the
consideration, if any, received by the Company upon such issuance or
sale, by (ii) the total number of Common Stock outstanding
immediately after such issuance or sale.
Upon each adjustment of the per share Conversion Price as a
result of the adjustments made pursuant to this Subsection (2), the
number of shares of Common Stock issuable upon conversion shall
thereupon be changed to a number of shares of Common Stock (issuable
at the adjusted per share Conversion Price) obtained by (1)
multiplying (x) the number of outstanding shares of Common Stock
prior to the adjustment to the per share Conversion Price required
by the foregoing provisions by (y) the per share conversion price in
effect prior to such adjustment of the per share conversion price
and (2) dividing the product so obtained by the per share Conversion
Price in effect after such adjustment of the per share conversion
price.
For purposes of this Subsection 2 and, in particular,
determining the number of issued and outstanding shares of any class
of Common Stock of the Company in connection with computing
adjustments to the per share conversion price pursuant to this
Subsection 5.02(a)(2), the following provisions (A), (B) and (C)
shall also be applicable.
(A) Options. If at any time there shall exist or otherwise be
outstanding any valid and unexercised rights to subscribe
for or to purchase, or any option or warrant for the
purchase of, (A) Common Stock or (B) a security directly or
indirectly convertible or exchangeable for Common Stock
(such convertible or exchangeable securities being
hereinafter referred to as "Convertible Securities")
granted or issued by the Company, then the total maximum
number of shares of Common Stock directly or indirectly
issuable pursuant to exercise of such rights, options or
warrants or upon conversion or exchange of the total
maximum amount of such Convertible Securities or issuable
upon the exercise of such options or warrants shall be
deemed to be fully issued and outstanding at such time.
(B) Convertible Securities. If at any time there shall be
outstanding any Convertible Securities (other than
Convertible Securities otherwise taken into account under
paragraph (x) above), then the total maximum number of
shares of Common Stock directly or indirectly issuable upon
conversion or exchange of all such Convertible Securities
shall be deemed to be issued and outstanding at any such
time.
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(C) Treasury Shares. Shares of Common Stock or other equity
securities that as of a specified time are owned directly or
indirectly by the Company shall as of such time not be deemed
outstanding.
(b) Voluntary Adjustment by the Company. The Company may, at its option
and in its sole discretion, at any time or from time to time during the term of
the Note, reduce the then current Conversion Price to an amount deemed
appropriate by the Company; provided, however, that if the Company elects to so
reduce the then current Conversion Price, such reduction shall remain in effect
for at least a 30-day period, after which time the Company may, at its option,
reinstate the Conversion Price in effect prior to such reduction.
(c) Other Adjustments to Per Share Conversion Price. The number and
kind of securities purchasable upon conversion of the Notes shall be subject to
adjustment from time to time as follows:
(1) Reclassification, Reorganization or Merger. In case of any
reclassification or capital reorganization of the outstanding
shares of Common Stock of the Company (other than a change in
par value, or from par value to no par value, or from no par
value to par value), or in case of any consolidation or merger
of the Company with or into another corporation or entity
(other than a merger in which the Company is the continuing
corporation and which does not result in any reclassification
or capital reorganization of outstanding Common Stock) or in
case of any sale or conveyance to another corporation or
entity of all or substantially all of the assets of the
Company, the Company shall cause effective provision to be
made so that each holder of the Notes shall have the right
thereafter, by converting the Notes represented hereby, to
receive the kind and amount of shares of stock and other
securities and property receivable upon such reclassification,
capital reorganization, consolidation, merger, sale or
conveyance as would be equivalent to the number of shares of
equity securities issuable upon conversion of the Notes owned
by such holder at such time had the holder converted such
Notes immediately prior to the occurrence of such events. Any
such provision shall be as nearly equivalent as may be
practicable to the adjustments provided for herein.
(2) Shares Split or Reverse Shares Split. In case the Company
shall at any time subdivide its outstanding Common Stock into
a greater number of shares, the number of shares of Common
Stock into which the Notes is convertible immediately prior to
such subdivision shall be proportionately increased, and
conversely, in case the outstanding shares of Common Stock of
the Company shall be combined into a smaller number of shares,
the number of shares of Common Stock into which the Notes are
convertible immediately prior to such combination shall be
proportionately decreased.
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(d) Certificate as to Adjustments. Upon the occurrence of each adjustment
or readjustment of the per share conversion price pursuant to Section 5.02(a)
hereof, the Company at its expense shall promptly compute such adjustment or
readjustment in accordance with the terms hereof and as promptly as practicable
furnish to each holder of Notes a certificate executed and verified by an
officer of the Company setting forth such adjustment or readjustment and showing
in detail the facts upon which such adjustment or readjustment is based.
ARTICLE VI
COVENANTS; REPRESENTATIONS AND WARRANTIES
Section 6.01. Covenants. (a) The Company covenants and agrees so
long as any amount under the Note is outstanding and until the Obligations are
paid in full that the Company will not, without the consent of not less than a
majority in aggregate principal amount of outstanding Notes, issue one or more
additional Notes (or other Indebtedness of the Company that is pari passu in
right of payment to the Notes), except as set forth in subparagraph (b) hereof.
(b) The Company may, at any time and from time to time, without the
consent of any Purchaser, issue one or more additional Notes (or other
Indebtedness of the Company that is pari passu in right of payment to the Notes)
up to a total aggregate principal amount of $3 million (which total shall
include the principal amount the Notes issued hereunder).
Section 6.02. Representations and Warranties of Company. The
Company hereby represents and warrants to the Purchaser that as of the
Closing Date:
(a) Existence and Power. The Company is a corporation duly
organized, validly existing and in good standing under the laws of the State of
New York. The Company has all requisite corporate power to own its properties
and to carry on its business as now being conducted and as proposed to be
conducted, and to execute, deliver and perform its obligations under this
Agreement and to engage in the respective transactions contemplated hereby.
(b) Authority. The execution, delivery and performance by the
Company of this Agreement have been duly authorized by all necessary corporate
action on the part of the Company.
(c) Binding Effect. This Agreement is the legal, valid and binding
obligation of the Company, enforceable against the Company in accordance with
its respective terms, except to the extent that enforcement thereof may be
limited by bankruptcy, insolvency, reorganization, moratorium, fraudulent
conveyance and similar laws and court decisions now or hereafter in effect
relating to or affecting creditors' rights and remedies generally and general
principles of equity.
The shares of Common Stock issuable upon conversion of the Note are
and will be validly authorized, validly issued, fully paid and non-assessable,
and have not and will not have been issued, and when issued, will not be owned
or held in violation of any rights of first refusal, preemptive rights or the
rights of shareholders. A sufficient number of shares of the Company's Common
Stock will at all times be reserved so as to permit conversion of the Note.
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(d) Non-Contravention. The execution, delivery and performance of
this Agreement does not violate the charter, by-laws, or any material agreement
of the Company.
(e) No Material Adverse Change. Since the date of its last audited
financial statements, there has been no material adverse change in the Company's
business, results of operation, financial condition, or prospects, other than as
disclosed to the Purchaser.
Section 6.03. Representations and Warranties of Purchaser.
The Purchaser hereby represents and warrants to the Company as follows:
(a) Investment Intent. The Purchaser is acquiring the Note from the
Company, and any shares of Common Stock that may be acquired as a result of the
conversion of the Note in accordance with Section 5.01 hereof (collectively with
the Note, the "Securities"), for its own account for investment without any
present intention of selling or distributing all or any part thereof; and no one
other than the Purchaser has any beneficial interest therein;
(b) Information. The Purchaser acknowledges that it (or its
representatives) (i) has received the opportunity to ask any and all questions
and receive any and all answers from the Company and its officers concerning the
Securities and the business of the Company, (ii) has received access to the kind
of information required by Regulation D promulgated under the Act, and (iii) is
sophisticated and able to assess the risks of an investment in the Securities
and is able to bear the loss of its entire investment therein;
(c) Registration. The Purchaser acknowledges that the Securities are
not registered under the Act, that they may not be offered, sold or transferred
except in compliance with the Act and the rules and regulations adopted pursuant
thereto, that the Securities must be held indefinitely unless they are
subsequently registered under such Act or an exemption from such registration is
available, that except as otherwise provided herein the Company is under no
obligation to register the Securities or to supply the information necessary for
the applicability of certain of such exemptions, that any such exemptions may
only be applicable in certain limited circumstances and that any routine public
sales of securities made in reliance upon Rule 144 promulgated under the Act can
be made only in limited amounts in accordance with the terms and conditions of
that Rule and that in the event the provisions of such Rule are not applicable
to the proposed public sale of the Securities, compliance with Regulation A or
some other applicable exemption will be required;
(d) Stop Transfer Order. The Purchaser consents to the placing of a
"stop transfer" order against the Securities on the records of the Company and
its transfer agent to the general effect stated in the legend set forth in
Section 8.02 hereof.
(e) Legend. The Purchaser understands and agrees that the
certificates representing the Securities will bear the legend set forth in
Section 8.02 hereof.
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ARTICLE VII
EVENTS OF DEFAULT
Section 7.01 Events of Default. Any of the following
events, occurring for any reason, shall be an "Event of Default":
(a) the Company fails to perform, keep or observe any term,
provision, condition, covenant, warranty or representation contained in this
Agreement, which is required to be performed, kept or observed by the Company
and the same is not cured within 15 days after the receipt of written notice
thereof from the Purchaser to the Company;
(b) the Company fails to repay any installment of interest on the
Note, in each case within five Business Days of the date on which such
installment becomes due and payable;
(c) a petition under any section or chapter of the Bankruptcy Code
or any similar law or regulation is filed by the Company or the Company makes an
assignment for the benefit of its creditors or any case or proceeding is filed
by the Company for its dissolution or liquidation;
(d) a petition under any section or chapter of the Bankruptcy Code
or any similar law or regulation is filed against the Company or any case or
proceeding is filed against the Company for its dissolution or liquidation and
such petition, case or proceeding is not dismissed or stayed within 60 days
after the entry or filing thereof;
(e) an event of default occurs and is continuing under any
Indebtedness of the Company and, as a result thereof, the Indebtedness is
accelerated; provided, however, that in the event the holders of such
Indebtedness elect to waive such event of default or to otherwise de-accelerate
such Indebtedness, no Default shall subsist hereunder.
Section 7.02. Remedies. If any Event of Default shall occur and be
continuing, the Purchaser may, by notice to the Company, declare the outstanding
principal of the Note, all interest thereon and all other amounts payable
hereunder and under the Note to be forthwith due and payable, whereupon the
Note, all such principal and interest and all such other amounts shall become
and be forthwith due and payable, without presentment, demand, protest or
further notice of any kind, all of which are hereby expressly waived by the
Company; provided, however, that, in the case of an Event of Default referred to
in Section 7.01(c) or (d), the outstanding principal of the Note and all
interest thereon and all other amounts payable under this Agreement shall be
immediately due and payable without presentment, demand, protest or any notice
of any kind, all of which are hereby expressly waived by the Company.
Upon and during the continuance of an Event of Default, the
Purchaser, in its sole discretion, may:
(i) exercise any one or more of the rights and remedies
accruing to a creditor under applicable law upon default by a debtor; and
(ii) exercise any other right or remedy granted to it under
this Agreement.
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ARTICLE VIII
TRANSFER AND ASSIGNMENT
Section 8.01. Transfers and Assignments. Prior to the occurrence of
an Event of Default (but subject to the prohibitions set forth in Section 8.02),
the Purchaser shall not assign or transfer, or sell participation in, any or all
of its rights and interests hereunder to any Person, other than to an affiliate,
without the consent of the Company.
Section 8.02. Restrictive Legend on Certificates. The
Purchaser understands and agrees that the Company shall place the following
legend on the certificates representing the Note:
THIS NOTE AND ANY SHARES ISSUABLE UPON THE CONVERSION OF THIS NOTE
HAVE BEEN ISSUED WITHOUT REGISTRATION OR QUALIFICATION UNDER THE
SECURITIES ACT OF 1933 OR UNDER ANY STATE BLUE SKY OR SECURITIES
LAWS IN RELIANCE UPON EXEMPTIONS FROM THE REGISTRATION REQUIREMENTS
OF THE SECURITIES ACT AND BLUE SKY LAWS AND MAY NOT BE SOLD,
TRANSFERRED, ASSIGNED, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF
SUCH REGISTRATION OR QUALIFICATION, OR AN EXEMPTION FROM THE
REGISTRATION OR QUALIFICATION REQUIREMENTS OF SUCH ACT OR LAWS, OR
UNLESS SUCH ACT OR LAWS DO NOT APPLY. THIS NOTE AND EACH SUCH SHARES
ARE SUBJECT TO THE PROVISIONS OF THE SENIOR CONVERTIBLE NOTE
PURCHASE AGREEMENT DATED AS OF JUNE 11, 1997 BETWEEN THE COMPANY AND
THE ORIGINAL PURCHASER OF THIS NOTE. SUCH AGREEMENT CONTAINS
PROVISIONS RESTRICTING THE TRANSFER OF THIS NOTE AND SUCH SHARES IN
CERTAIN CIRCUMSTANCES. A COPY OF SUCH AGREEMENT MAY BE OBTAINED FROM
THE COMPANY WITHOUT CHARGE.
The Company shall, upon the request of the Purchaser issue a new
Note without the first sentence of the foregoing legend if the transfer of the
Note or the shares evidenced by such certificate has been effectively registered
under the Act and such Note or shares shall have been sold by the Purchaser in
accordance with such registration.
ARTICLE IX
MISCELLANEOUS
Section 9.01. Amendments and Waivers. No amendment or waiver of any
provision of this Agreement or the Note, nor consent to any departure by the
Company herefrom, shall in any event be effective unless the same shall be in
writing and signed by the Purchaser or the assignee(s) of its interest in the
Note. The Purchaser by notice to the Company may waive as to itself an existing
Default and its consequences.
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Section 9.02. Notices. All notices and other communications provided
for hereunder shall be in writing (including telecopier, telegraphic, telex or
cable communication) and mailed, telecopied, telegraphed, cabled or delivered,
if to the Company, at its address at 915 Broadway, New York, NY 10010 Attention:
Chief Financial Officer, Telecopier No. (212) 995-2394; and if to the Purchaser,
at the registered address of the Purchaser as kept at the principal office of
the Company; or, as to each party, at such other address as shall be designated
by such party in a written notice to the other party.
Section 9.03. No Waiver; Remedies. No failure on the part of any
party to exercise, and no delay in exercising, any right hereunder shall operate
as a waiver thereof; nor shall any single or partial exercise of any right
hereunder preclude any other or further exercise thereof or the exercise of any
other right. The remedies herein provided are cumulative and not exclusive of
any remedies provided by law.
Section 9.04. Presentment. The Company and any endorser hereof, and
each of them hereby waive, except to the extent otherwise provided herein or in
any other agreement, presentment for payment, notice of dishonor, protest and
notice of protest and other notices of every kind in connection with this
Agreement or the Note.
Section 9.05. Successors and Assigns. This Agreement and the Note
shall be binding upon and inure to the benefit of the Company and the Purchaser
and their respective successors and permitted assigns pursuant to Section 8.01.
Section 9.07. Governing Law. This Agreement shall be governed by,
and construed in accordance with, the internal laws of the State of New York,
without giving effect to principles governing conflicts of law. Any action
arising out of, resulting from or in any way relating to this Agreement or any
alleged breach hereof or default hereunder shall be brought in the state courts
in the State of New York in New York County or in the United States District
Court for the Southern District of New York, and the parties hereto agree that
such courts shall have the sole and exclusive jurisdiction over any dispute or
controversy related to this Agreement.
Section 9.08. Execution in Counterparts. This Agreement may be
executed in any number of counterparts and by different parties hereto in
separate counterparts, each of which when so executed shall be deemed to be an
original and all of which taken together shall constitute one and the same
agreement. One or more counterparts of this Agreement (or portions hereof) may
be delivered via telecopier, with the intention that they shall have the same
effect as an original counterpart hereof (or such portions hereof). All
signature pages need not be on the same counterpart.
Section 9.09. Entire Agreement; Severability of Provisions. This
Agreement and the Note contain the entire agreement of the parties hereto and
supersede all prior agreements and understandings, oral or otherwise, among the
parties hereto with respect to the matters contained in this Agreement and the
Note. If any provision of this Agreement or the application thereof to any
Person or circumstance is invalid or unenforceable, or contravenes any law,
regulation or
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document applicable to such Person, such provision or application shall be
deemed ineffective ab initio, but the remainder of this Agreement and the
application of such provision to other Persons or circumstances shall not be
affected thereby, and the provisions of this Agreement shall be severable in any
such instances.
Anything herein to the contrary notwithstanding, the obligations of
the Company under this Agreement and the Note shall be subject to the limitation
that payments of interest shall not be required to the extent that receipt of
any such payment by Purchaser would be contrary to provisions of law applicable
to Purchaser limiting the maximum rate of interest that may be charged or
collected by Purchaser.
* * * *
THE REMAINDER OF THIS PAGE INTENDED TO BE BLANK
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed, as of the date first above written.
INTERACTIVE IMAGINATIONS, INC.
By:_______________________________
Name:
Title:
THE TRAVELERS INSURANCE COMPANY
By:_______________________________
Name:
Title:
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EXHIBIT A
FORM OF
SENIOR CONVERTIBLE NOTE
THIS NOTE AND ANY SHARES ISSUABLE UPON THE CONVERSION OF THIS NOTE
HAVE BEEN ISSUED WITHOUT REGISTRATION OR QUALIFICATION UNDER THE
SECURITIES ACT OF 1933 OR UNDER ANY BLUE SKY OR SECURITIES LAWS IN
RELIANCE UPON EXEMPTIONS FROM THE REGISTRATION REQUIREMENTS OF THE
SECURITIES ACT AND BLUE SKY LAWS AND MAY NOT BE SOLD, TRANSFERRED,
ASSIGNED, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF SUCH
REGISTRATION OR QUALIFICATION, OR AN EXEMPTION FROM THE REGISTRATION
OR QUALIFICATION REQUIREMENTS OF SUCH ACT OR LAW, OR UNLESS SUCH ACT
OR LAWS DO NOT APPLY. THIS NOTE AND SUCH SHARES ARE SUBJECT TO THE
PROVISIONS OF THE SENIOR CONVERTIBLE NOTE PURCHASE AGREEMENT DATED
AS OF JUNE , 1997, AS AMENDED, BETWEEN THE COMPANY AND THE ORIGINAL
PURCHASER OF THIS NOTE. SUCH AGREEMENT CONTAINS PROVISIONS
RESTRICTING THE TRANSFER OF THIS NOTE AND SUCH SHARES IN CERTAIN
CIRCUMSTANCES. A COPY OF SUCH AGREEMENT MAY BE OBTAINED FROM THE
COMPANY WITHOUT CHARGE.
$____________ New York, New York
_________, 199_
FOR VALUE RECEIVED, INTERACTIVE IMAGINATIONS, INC., a New York
corporation (the "Company"), HEREBY PROMISES TO PAY to the order of
________________, a ________________ (the "Purchaser"), or permitted assigns,
the principal sum of ________________________________ AND NO/100 DOLLARS
($____________), together with interest on any and all outstanding and unpaid
principal amounts hereunder from the date hereof until such principal amount is
paid in full, payable upon prepayment, redemption, or conversion of the Note or
at the Maturity Date at an interest rate equal at all times to 8% per annum
compounded semiannually following the date hereof. Interest payable on any of
the foregoing dates shall be paid to the Purchaser or its permitted assigns. All
interest due and owing hereunder shall be paid in additional principal amount of
this Note and shall continue to accrue until all payments due hereunder are
fully and finally paid.
This Senior Convertible Note is the Note referred to in, and is
entitled to the benefits of, the Senior Convertible Note Purchase Agreement
dated as of June , 1997 (the "Agreement") between the Company and
. Terms used herein without definition
A-1
<PAGE>
have the meanings assigned to them in the Agreement. THIS NOTE IS SUBJECT TO THE
TERMS AND CONDITIONS CONTAINED IN THE AGREEMENT.
This Note is a senior unsecured obligation of the Company.
The provisions of this Note shall be governed by, and construed in
accordance with, the internal laws of the State of New York, without giving
effect to principles governing conflicts of law. Any action arising out of,
resulting from or in any way relating to this Agreement or any alleged breach
hereof or default hereunder shall be brought in the state courts in the State of
New York in New York County or in the United States District Court for the
Southern District of New York, and the parties hereto agree that such courts
shall have the sole and exclusive jurisdiction over any dispute or controversy
related to this Agreement.
INTERACTIVE IMAGINATIONS, INC.
By:__________________________
Name:
Title:
A-2
<PAGE>
SENIOR CONVERTIBLE NOTE
THIS NOTE AND ANY SHARES ISSUABLE UPON THE CONVERSION OF THIS NOTE
HAVE BEEN ISSUED WITHOUT REGISTRATION OR QUALIFICATION UNDER THE
SECURITIES ACT OF 1933 OR UNDER ANY BLUE SKY OR SECURITIES LAWS IN
RELIANCE UPON EXEMPTIONS FROM THE REGISTRATION REQUIREMENTS OF THE
SECURITIES ACT AND BLUE SKY LAWS AND MAY NOT BE SOLD, TRANSFERRED,
ASSIGNED, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF SUCH
REGISTRATION OR QUALIFICATION, OR AN EXEMPTION FROM THE REGISTRATION
OR QUALIFICATION REQUIREMENTS OF SUCH ACT OR LAW, OR UNLESS SUCH ACT
OR LAWS DO NOT APPLY. THIS NOTE AND SUCH SHARES ARE SUBJECT TO THE
PROVISIONS OF THE SENIOR CONVERTIBLE NOTE PURCHASE AGREEMENT DATED
AS OF JUNE 11, 1997, AS AMENDED, BETWEEN THE COMPANY AND THE
ORIGINAL PURCHASER OF THIS NOTE. SUCH AGREEMENT CONTAINS PROVISIONS
RESTRICTING THE TRANSFER OF THIS NOTE AND SUCH SHARES IN CERTAIN
CIRCUMSTANCES. A COPY OF SUCH AGREEMENT MAY BE OBTAINED FROM THE
COMPANY WITHOUT CHARGE.
$170,000 New York, New York
June 11, 1997
FOR VALUE RECEIVED, INTERACTIVE IMAGINATIONS, INC., a New York
corporation (the "Company"), HEREBY PROMISES TO PAY to the order of TRAL & CO.
or its registered assigns (the "Purchaser"), the principal sum of ONE HUNDRED
SEVENTY THOUSAND AND NO/100 DOLLARS ($170,000), together with interest on any
and all outstanding and unpaid principal amounts hereunder from the date hereof
until such principal amount is paid in full, payable upon prepayment,
redemption, or conversion of the Note or at the Maturity Date at an interest
rate equal at all times to 8% per annum compounded semiannually following the
date hereof. Interest payable on any of the foregoing dates shall be paid to the
Purchaser or its permitted assigns. All interest due and owing hereunder shall
be paid in additional principal amount of this Note and shall continue to accrue
until all payments due hereunder are fully and finally paid.
This Senior Convertible Note is the Note referred to in, and is
entitled to the benefits of, the Senior Convertible Note Purchase Agreement
dated as of June 11, 1997 (the "Agreement") between the Company and The
Travelers Insurance Company. Terms used herein
A-3
<PAGE>
without definition have the meanings assigned to them in the Agreement. THIS
NOTE IS SUBJECT TO THE TERMS AND CONDITIONS CONTAINED IN THE AGREEMENT.
This Note is a senior unsecured obligation of the Company.
The provisions of this Note shall be governed by, and construed in
accordance with, the internal laws of the State of New York, without giving
effect to principles governing conflicts of law. Any action arising out of,
resulting from or in any way relating to this Agreement or any alleged breach
hereof or default hereunder shall be brought in the state courts in the State of
New York in New York County or in the United States District Court for the
Southern District of New York, and the parties hereto agree that such courts
shall have the sole and exclusive jurisdiction over any dispute or controversy
related to this Agreement.
INTERACTIVE IMAGINATIONS, INC.
By:__________________________
Name:
Title:
A-4
AMENDED AND RESTATED
STOCKHOLDERS' AGREEMENT
This Amended and Restated Stockholders' Agreement (this "Agreement")
is made and entered into 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 New York limited partnership ("Prospect I"), Prospect Street NYC
Co-Investment Fund, L.P., a New York 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") and those persons listed on Schedules 1, 2, 3, and 4 hereto.
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, the Old Investors and those persons listed on Schedules 1, 2, and 3
hereto entered into a Shareholders' 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
converted into 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 Preferred"), 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, those persons listed on
Schedule 4 hereto are entering into a Merger Agreement (the "Merger Agreement")
of even date herewith 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; and
<PAGE>
WHEREAS, those persons listed on Schedules 1, 2 and 3 hereto
(collectively, the "Existing Stockholders") are the legal and beneficial owners
of outstanding Common Stock, Series A Preferred, and Warrants; and
WHEREAS, those persons listed on Schedule 5 hereto (collectively,
the "Executives") are executives of, and key consultants to, the Company and/or
its subsidiary, Intelligent Interactions, Inc.; and
WHEREAS, the Existing Stockholders, the Investors, the Executives,
and the Company desire to enter into this Agreement.
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:
Section 1. Definitions
As used herein, the following terms, unless the context clearly
indicates otherwise, shall have the following meanings:
"Act" shall mean the Securities Act of 1933, as amended.
"Affiliate" shall mean with respect to any Person, any other Person
which directly or indirectly, by itself or through one or more intermediaries,
controls, or is controlled by, or is under direct or indirect common control
with, such Person. The term "control" means the possession, direct or indirect,
of the power to direct or cause the direction of the management and policies of
a Person, whether through the ownership of voting securities, by contract or
otherwise.
"Business Days" shall mean any day which is not a Saturday, Sunday
or day on which banks are authorized by law to be closed in the State of New
York.
"Common Stock" shall mean the Company's Common Stock, par value $.01
per share.
"Diluted Basis" shall mean with respect to the calculation of the
number of shares of Common Stock, (i) all Common Stock issued and outstanding at
the time of the determination and (ii) all Common Stock issuable upon the
exercise, conversion or exchange of any security of the Company which by its
terms, is or may be exercisable, convertible or exchangeable for or into Common
Stock.
"Permitted Transfer" shall mean a transfer to any of the following
Persons, in each case who agrees in writing to be bound by the terms of this
Agreement: (i) as to any Stockholder who is a natural person, the spouse or any
lineal descendant (including by adoption) of such Stockholder, or any trust of
which such Stockholder is the trustee and which is established solely
2
<PAGE>
for the benefit of any of the foregoing individuals and whose terms are not
inconsistent with the terms of this Agreement or any partnership, the general
partner(s) and limited partner(s) (if any) of which are one or more persons
identified in this clause (i); (ii) as to any Investor, any director, officer,
employee, representative, general partner, limited partner, associate or
Affiliate of such Investor; any director, manager, officer, employee,
representative, Stockholder, member, general partner or limited partner of any
such Affiliate; and any trust, a majority in interest of the beneficiaries of
which, or corporation, limited liability company or partnership, a majority in
interest of the Stockholders, members or limited partners of which, or
partnership or limited liability company, the managing general partner or
manager of which, are (or is) one or more of the persons identified in this
clause (ii), the spouse of any such person and/or such person's lineal
descendants (including by adoption); or any other person in order to avoid a
regulatory problem; and (iii) as to any third party or buyer that becomes a
Stockholder and that is not a natural Person, any Affiliate of such Stockholder.
"Person" shall mean any individual, partnership, corporation,
unincorporated organization or association, limited liability company, trust or
other entity.
"Qualified Public Offering" shall mean a sale of Common Stock by the
Company that satisfies each of the following conditions: (i) the sale of the
Common Stock 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 Stock upon issuance is 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 $2.00 per share of Common Stock,
adjusted for stock splits, stock dividends, other stock combinations or other
like events; and (iv) the sale of Common Stock results in at least $20,000,000
of gross proceeds to the Company, or, when considered together with all previous
underwritten public offerings of the Company satisfying clauses (i), (ii) and
(iii) above, at least $30,000,000 of aggregate gross proceeds to the Company.
"Security, Securities" shall have the meanings ascribed thereto in
Section 2(l) of the Act.
"Series A Stock" shall mean the Series A Convertible Voting
Preferred Stock, par value $.01 per share, of the Company.
"Stockholder" or "Stockholders" shall mean collectively the
Investors, the Existing Stockholders and the Executives.
3
<PAGE>
Section 2. Governance
2.1 Board Nominees.
(a) The parties hereto shall take all such actions, including,
without limitation, calling, or causing the Company and the appropriate officers
and directors of the Company to call, Stockholder meetings and to vote all
shares of capital stock of the Company owned or controlled by such party, and to
take all actions by written consent in lieu of any such meeting, as shall be
necessary to ensure that (i) the Board of Directors (the "Board") of the Company
shall consist of eight members, and (ii) that there shall be designated as
members of the Board three individuals elected by the Old Investors, one of whom
shall be designated by Travelers, one of whom shall be designated by Prospect I,
and one of whom shall be designated by Big Flower.
(b) The holders of Series A Preferred and the holders of the
Common Stock shall be entitled to elect five members of the Company's board of
directors. The Stockholders listed on Schedule 1 hereto by majority vote shall
have the right to nominate one member of the Board. The Stockholders listed on
Schedule 2 hereto by majority vote shall have the right to nominate one member
of the Board. The Stockholders listed on Schedule 3 hereto by majority vote
shall have the right to nominate one member of the Board. The Stockholders
listed on Schedule 4 hereto by majority vote shall have the right to nominate
one member of the Board. The parties hereto shall take all such actions as are
described in Section 2.1(a) above as shall be necessary to ensure that an
individual designated by the Stockholders listed on Schedule 1 hereto is elected
as a member of the Board. The parties hereto shall take all such actions as are
described in Section 2.1(a) above as shall be necessary to ensure that an
individual designated by the Stockholders listed on Schedule 2 hereto is elected
as a member of the Board. The parties hereto shall take all such actions as are
described in Section 2.1(a) above as shall be necessary to ensure that an
individual designated by the Stockholders listed on Schedule 3 hereto is elected
as a member of the Board. The parties hereto shall take all such actions as are
described in Section 2.1(a) above as shall be necessary to ensure that an
individual designated by the Stockholders listed on Schedule 4 hereto is elected
as a member of the Board. Immediately following the closing of the Merger
Agreement, the directors of the Company shall be as follows: Jack Rivkin, the
Travelers designee; Kristopher Wood, the Big Flower designee; David Chaney, the
Prospect I designee; David J. Moore, the Schedule 1 Stockholder designee;
Michael P. Paolucci, the Schedule 2 Stockholder designee; Jacob I. Friesel, the
Schedule 3 Stockholder designee; Yale R. Brown, the Schedule 4 Stockholder
designee; and Dr. Charles Stryker.
(c) If a director is designated and elected pursuant to Section
2.1(a) and, during such director's term as a director, the party or parties
designating such director requests that such director be removed by written
notice to all other Stockholders, each Stockholder hereby agrees to vote all
Series A Stock and Common Stock owned or held by it, or to take action by
written consent, to effect such request. Each Stockholder will not otherwise
vote in favor of the removal of such director unless such removal shall be for
cause. For the purposes of this Section 2.1, "cause" shall mean the commission
by a director of a felony, the willful commission by a director of a dishonest
act affecting the Company or any subsidiary thereof, or the commission by a
4
<PAGE>
director of an act of gross negligence in connection with the director's duties
to the Company which causes a financial loss for the Company or any subsidiary.
(d) Subject to Section 706 of the New York Business Corporation
Law, any director who shall have been elected by the Stockholders pursuant to
Section 2.1(b) above may be removed during the aforesaid term of office, either
for or without cause, by, and only by, the affirmative vote of the holders of
voting securities of the Company given at a meeting of Stockholders duly called
or by an action by written consent for that purpose.
2.2 Replacement Directors.
In the event that any director (a "Withdrawing Director") nominated
in the manner set forth in Section 2.1 hereof is unable to serve, or once having
commenced to serve, is removed or withdraws from the Board of Directors, such
Withdrawing Director's replacement (the "Substitute Director") will be nominated
and elected in the same manner in which such Withdrawing Director was nominated
and elected.
2.3 Board Meetings. The parties hereto shall take such action as
is necessary to cause the Company to hold meetings of the Board at least once
every three months and will not hold any meetings of the Board on fewer than ten
(10) days prior written notice unless all directors are present at such meeting
or such notice is waived in writing by any member(s) of the Board not present at
such meeting on or prior to the date of such meeting. If at any time an Old
Investor chooses not to nominate a director, the Company shall permit such Old
Investor to send a representative (without voting rights) to each meeting of the
Board and all committees of such Board, except in emergencies, in which case
each such holder shall be provided with (i) notice of such meeting at the same
time that notice is provided to all directors of the Company, and (ii) all
materials provided to directors of the Company. Any such Old Investor exercising
its rights under this Section, and its representatives, shall maintain the
confidentiality of, and act in a fiduciary manner with respect to, all
financial, confidential and proprietary information of the Company acquired in
exercising such rights. For so long as he is an employee of the Company and a
holder of at least 2,000,000 shares of Common Stock (adjusted for stock splits,
dividends, recapitalizations, and similar events), Garret P. Cecchini shall be
permitted to attend (without voting rights) each meeting of the Board of
Directors of the Company, except in emergencies, and shall be provided with
notice of such meetings at the same time that notice is provided to all
directors of the Company. Furthermore, for so long as Prospect I shall have a
right to designate a director, Prospect I shall also have the right to designate
a person who shall be permitted to attend (without voting rights) each meeting
of the Board of Directors of the Company, and shall be provided with notice of
such meetings and copies of all materials provided to all directors of the
Company at the same time that notice or such materials, as applicable, is
provided to all directors of the Company. In addition, for so long as the
persons on Schedule 4 hereto shall have a right to designate a director, the New
Investors shall also have the right to designate a person (or two persons who
shall be permitted to attend alternating meetings) who shall be permitted to
attend (without voting rights) each meeting of the Board of Directors of the
Company, and shall be provided with notice of such meetings and copies of all
materials provided to all directors of
5
<PAGE>
the Company at the same time that notice or such materials, as applicable, is
provided to all directors of the Company
2.4 Proxy. If any Stockholder shall refuse to vote his or its
shares as provided in this Section 2 at any meeting of Stockholders of the
Company, or shall refuse to give its written consent in lieu of a meeting as
provided in this Section 2, thereupon, without further action by such
Stockholder, the Chief Executive Officer of the Company shall be, and hereby is,
irrevocably constituted the attorney-in-fact and proxy of such Stockholder for
the purpose of voting, and shall vote such shares at such meeting as provided in
this Section 2 or give such consent as provided in this Section 2, as the case
may be.
2.5 No Other Proxies. Each Stockholder covenants and agrees that,
except as a result of Permitted Transfers, such Stockholder will have sole
voting power with respect to such Stockholder's Common Stock or Series A Stock
and will not grant any proxy with respect to such Common Stock or Series A
Stock, enter into any voting trust or other voting agreement or arrangement with
respect to such Common Stock or Series A Stock, or grant any other rights to
vote such Common Stock or Series A Stock other than this Agreement.
Section 3. Transfers Of Stock
3.1 First Offer Rights.
(a) Except for (i) Permitted Transfers or (ii) sales to the public
in a registered public offering of the Common Stock pursuant to the Act, a
Stockholder may sell or otherwise transfer Common Stock, Series A Stock and
Warrants only in compliance with the provisions of this Section 3.1.
(b) A Stockholder desiring to sell or otherwise transfer Common
Stock, Series A Stock or Warrants in compliance with this Section 3.1 (a
"Selling Stockholder") shall first deliver written notice to the Company, the
Investors and the Executives (hereinafter referred to as the "Notice of Offer")
which Notice of Offer shall specify (i) the number of shares of Common Stock,
Series A Stock or Warrants owned by the Selling Stockholder which such Selling
Stockholder wishes to sell (the "Offered Shares"); (ii) the proposed cash
purchase price per share for the Offered Shares (the "Offer Price"); and (iii)
all other terms and conditions of the offer. The Notice of Offer shall
constitute an irrevocable offer by the Selling Stockholder to sell to the
Investors and the Executives (the "Remaining Stockholders") and the Company the
Offered Shares at the Offer Price, as hereinafter provided. Within five business
days of its receipt of the Notice of Offer, the Company shall send a copy of
such Notice to each of the Remaining Stockholders.
(c) Within 30 days following the Company's receipt of the Notice
of Offer, (i) each Remaining Stockholder shall notify the Company and the
Selling Stockholder as to the number of Offered Shares, if any, it is electing
to purchase (such notification is hereinafter referred to as the "Stockholder's
Acceptance" and such Stockholder electing to purchase Offered Shares, an
"Accepting Stockholder") and (ii) the Company shall notify the Selling
Stockholder as to the
6
<PAGE>
number of Offered Shares, if any, that it is electing to purchase (such
notification is hereinafter referred to as the "Company's Acceptance" and,
together with the Stockholder's Acceptance, as an "Acceptance"); provided,
however, that the Company shall not be entitled to purchase Offered Shares (and
the Company's Acceptance shall be appropriately limited) if, and to the extent
that, such purchase would be prohibited by the Certificate of Incorporation or
state law. If any Remaining Stockholder does not provide a Stockholder's
Acceptance to the Company and the Selling Stockholder, or if the Company does
not deliver a Company Acceptance to the Selling Stockholder, within such period,
such Remaining Stockholder or the Company, as applicable, shall be deemed to
have declined to purchase any of the Offered Shares. A Stockholder's Acceptance
and the Company's Acceptance each shall be deemed to be an irrevocable
commitment to purchase from the Selling Stockholder the number of Offered Shares
which the Stockholder or the Company has elected to purchase pursuant to its
Acceptance, subject to allocation of the Offered Shares among Stockholders
accepting the Notice of Offer, and the Company if it has accepted the Notice of
Offer, as hereinafter provided. The election by the Company to purchase Offered
Shares shall be made on behalf of the Company by a majority of those members of
the Board of Directors of the Company who have not been designated by, and are
not affiliated or associated with, the Selling Stockholder.
(d) If the Remaining Stockholders and the Company have elected to
purchase a number of Offered Shares that in the aggregate exceeds the total
number of Offered Shares, the Offered Shares shall be allocated among the
Accepting Stockholders, if any, and the Company, (i) first, entirely among the
Investors who are Accepting Stockholders, on a pro rata basis in proportion to
the number of shares of Common Stock held by each Investor on a Diluted Basis,
if the Investors have elected to purchase a number of Offered Shares that in the
aggregate exceeds the total number of Offered Shares; (ii) second, among the
Executives who are Accepting Stockholders on a pro rata basis; and (iii) third,
to the Company (subject to the limitations on purchases by the Company set forth
in Section 3.1(c)).
(e) This Section 3.1 shall be construed and given effect in such
manner that no Stockholder nor the Company shall be required or entitled to
purchase a number of Offered Shares greater than the number set forth in its
Stockholder Acceptance or Company Acceptance, as applicable. The Company shall
promptly notify each Accepting Stockholder, if any, of the number of shares
allocated to it, and each such Accepting Stockholder shall be obligated to
purchase at the Offer Price such shares, and the Company shall be obligated to
purchase at the Offer Price the number of shares allocated to it in accordance
with the foregoing provisions, at a closing as set forth in Section 3.1(g).
(f) If the Accepting Stockholders and the Company do not elect to
purchase all of the Offered Shares available for purchase under this Section
3.1, the Selling Stockholder (a) shall be under no obligation to sell any of the
Offered Shares to any other Stockholder or the Company, unless the Selling
Stockholder so elects, and (b) may, within a period of ninety (90) days from the
date of the Notice of Offer, subject to the provisions of Section 3.2 if
applicable, and subject to the approval of the Board of Directors of the Company
as described below, sell the Offered Shares to one or more third parties (each a
"Third Party Transferee") for cash at a price per share not less
7
<PAGE>
than the Offer Price, and on such other terms and conditions as are no more
favorable to the proposed Third Party Transferee than those specified in the
Notice of Offer. Upon any such sale, the Third Party Transferee of such Offered
Shares shall execute an agreement in form and substance reasonably satisfactory
to the Company and the Stockholders pursuant to which such Third Party
Transferee agrees that the Offered Shares it acquired from the Selling
Stockholder are subject to the provisions of this Agreement. Any Third Party
Transferee to whom Offered Shares are transferred pursuant to and in compliance
with this Section 3.1(f) shall, with respect to such shares upon consummation of
such transfer, be deemed a Stockholder. If the Selling Stockholder does not
complete the sale of the Offered Shares within such ninety (90) day period, the
provisions of this Section 3.1 shall again apply, and no sale of such Offered
Shares by the Selling Stockholder shall be made otherwise than in accordance
with the terms of this Agreement.
(g) The closing of purchases of Offered Shares by the Company
and/or other Stockholders pursuant to this Section 3.1 shall take place no later
than 60 days after the date of the Notice of Offer, at 10:00 A.M. local time at
the principal offices of the Company, or at such other date, time or place as
the parties to the sale may agree. At least five (5) business days prior to such
closing, the Company shall notify the Selling Stockholder(s) in writing of the
names of purchasers and the portion of the Offered Shares to be purchased by
each. At such closing, the Selling Stockholder(s) shall sell, transfer and
deliver to each purchaser full right, title and interest in and to the Offered
Shares so purchased by such purchaser, free and clear of all liens, security
interests, adverse claims or restrictions of any kind and nature (except as
otherwise set forth in this Agreement), and shall deliver to each purchaser a
certificate or certificates representing the Offered Shares sold to such
purchaser, in each case duly endorsed for transfer or accompanied by appropriate
stock transfer powers duly endorsed with signatures guaranteed by a commercial
bank, trust company or registered broker dealer and any other documents
necessary for transfer. Simultaneously with delivery of such certificates, each
purchaser of the Offered Shares shall deliver to the Selling Stockholder(s), by
wire transfer of immediately available funds to such bank account as the Selling
Stockholder(s) shall designate, a cash amount equal to the product of the Offer
Price and the number of Offered Shares being acquired by such purchaser, in full
payment of the purchase price of the Offered Shares purchased.
3.2 Right to Join in Sale.
(a) If any one or more Stockholders (the "Selling Stockholders")
proposes to transfer Common Stock, Series A Stock or Warrants, as the case may
be (a "Transaction"), including, without limitation, pursuant to Section 3.1,
then the Selling Stockholders shall refrain from effecting a Transaction unless,
prior to the consummation thereof, each Executive (in the case of transfers by
Existing Stockholders) or each Investor (in the case of transfers by Investors
or Existing Stockholders) other than the Selling Stockholders, shall have been
afforded the opportunity to join in such transfer on a pro rata basis, as
hereinafter provided. Any purported transfer subject to this Section 3.2 not
made in compliance with this Section 3.2 shall be void and shall not be
consummated upon the books and records of the Company.
8
<PAGE>
(b) Prior to the consummation of any Transaction, the Selling
Stockholders shall cause each person or persons that propose to acquire Common
Stock, Series A Stock or Warrants in the Transaction (the "Proposed Purchasers")
to offer (the "Purchase Offer") in writing to each Executive and each Investor
(in the case of transfers by Existing Stockholders) or each Investor (in the
case of transfers by Investors) to purchase that number of shares of Common
Stock, Series A Stock or Warrants from each such other Stockholder that
constitutes the same percentage of the aggregate Common Stock, Series A Stock,
or Warrants held by such other Stockholder as the percentage determined by
dividing the number of shares of Common Stock, Series A Stock, or Warrants to be
purchased from the Selling Stockholders by the aggregate number of shares of
Common Stock, Series A Stock, or Warrants held by the Selling Stockholders, at
the same price per share (the "Joining Price"), and on such other terms and
conditions (the "Joining Terms"), as the Proposed Purchaser has offered to
purchase Common Stock, Series A Stock, or Warrants, as the case may be, to be
sold by the Selling Stockholders. Notwithstanding the foregoing, if the Proposed
Purchasers are acquiring Common Stock, Series A Stock or Warrants in a series of
related transactions, or in a single transaction or series of related
transactions from multiple Selling Stockholders, (i) the Joining Price shall be
the highest of the prices offered by any Proposed Purchaser to any Selling
Stockholder in any one of such transactions, and (ii) the Joining Terms shall be
those terms offered by any Proposed Purchaser to any Selling Stockholder in any
one of such transactions which are most favorable to the offeree. Each Executive
or Investor shall have at least 30 days from the receipt of the Purchase Offer
in which to accept the Purchase Offer and, to the extent any such Stockholder
accepts such Purchase Offer in accordance with the terms hereof, the number of
shares of Common Stock, Series A Stock or Warrants, as the case may be, to be
sold by the Selling Stockholders shall be reduced.
(c) The provisions of this Section 3.2 shall not apply to (w) a
sale of shares in a public offering, (x) any redemption of shares of Preferred
Stock by the Company in accordance with the Certificate of Incorporation or (y)
Permitted Transfer. In the event that a transfer subject to this Section 3.4 is
proposed to be made to a Person other than a Stockholder or the Company, the
Selling Stockholders shall notify such Person that the transfer is subject to
this Agreement and shall ensure that no transfer is consummated without
compliance with this Section 3.2.
3.3 Bring Along Rights. Anything in this Agreement to the contrary
notwithstanding, if any Stockholder or group of Stockholders proposes, in a
single transaction, to sell, dispose of or otherwise transfer for consideration
all of the Stockholders, then outstanding Securities of the Company (other than
a transfer to a Stockholder or Permitted Transferee), then such selling
Stockholders may require each of the other Stockholders to sell all of the
Securities owned by such other Stockholders for the same consideration, at the
same price per Common Share and on terms and conditions no less favorable to the
other Stockholders than those obtained by such selling Stockholder(s); provided,
however, that no Stockholder shall be required under this Section 3.3 to sell
any Securities owned by it unless such transaction is approved by (i)
Stockholders owning at least 50% of the Common Stock (on a Diluted Basis) then
outstanding and (ii) each of the Investors.
3.4 Transfer of Stock.
9
<PAGE>
(a) Each Stockholder agrees not to transfer any of his or its
shares of capital stock of the Company (including warrants) (i) except in
accordance with the terms of this Agreement, (ii) unless and until the
transferee agrees in writing to be bound by the terms and conditions of this
Agreement and executes a counterpart of this Agreement, and (iii) unless such
Stockholder has complied with all applicable laws in connection with such
transfer.
(b) Each Executive agrees not to transfer any of his shares of
capital stock of the Company (including warrants) until the consummation of a
Qualified Public Offering, except (i) in connection with a Permitted Transfer,
or (ii) with the consent of each of the Investors.
(c) Any purported disposition in violation of any provision of
this Agreement will be void and the Company shall not transfer upon its books
and records any Common Stock, Series A Stock or Warrants purported to be
transferred to any Person in violation of this Agreement. If any Stockholder
acquires additional Securities of the Company on and after the date of this
Agreement, such Securities so acquired shall be subject to all of the terms and
provisions of this Agreement.
3.5 Regulatory Compliance Cooperation. (a) Before the Company
redeems, purchases or otherwise acquires, directly or indirectly, or converts or
takes any action with respect to the voting rights of, any shares of any class
of its capital stock or any securities convertible, exchangeable or exercisable
for or into any shares of any class of its capital stock, the Company will give
written notice of such pending action to Prospect I. Upon the written request of
any Stockholders of Prospect I made within twenty (20) days after its receipt of
any such notice, stating that after giving effect to such action such
Stockholders of Prospect I would have a Regulatory Problem (as defined below),
the Company will defer taking such action for such period (not to extend beyond
forty-five (45) days after such Stockholders of Prospect I's receipt of the
Company's original notice) as such Stockholders of Prospect I requests to permit
it and its Affiliates to reduce the quantity of securities owned by them in
order to avoid the Regulatory Problem. In the event the Company or any
Stockholders of Prospect I is precluded from taking any action under this
Agreement within any allotted period of time as a consequence of this Section,
such period of time shall be extended by the number of days during which the
Company or such Stockholders of Prospect I is precluded from acting.
(b) In the event that Prospect I determines that it has a
Regulatory Problem, the Company agrees to take all such actions as are
reasonably requested by Prospect I in order to (i) effectuate and facilitate any
transfer by the Stockholders of Prospect I or any of Prospect I's Affiliates of
any securities of the Company then held by the Stockholders of Prospect I or
such Affiliates to any Person designated by Prospect I, (ii) permit the
Stockholders of Prospect I (or any of their affiliates) to exchange all or a
portion of any voting security then held by them on a share-for-share basis for
shares of a nonvoting security of the Company, which nonvoting security shall be
identical in all respects to the voting security exchanged for it, except that
it shall be nonvoting and shall be convertible into a voting security on such
terms as are requested by the Prospect I Stockholders in light of regulatory
considerations then prevailing, and (iii) continue and preserve the respective
allocation of the voting interests with respect to the Company provided for
herein,
10
<PAGE>
and with respect to Prospect I's and its Affiliates' ownership of the Company's
securities. Such actions may include, but shall not necessarily be limited to,
entering into such additional agreements, adopting such amendments to the
Certificate of Incorporation and by-laws of the Company and taking such
additional actions as are reasonably requested by Prospect I in order to
effectuate the intent of the foregoing.
(c) In addition, the Company will not be a party to any merger,
consolidation, recapitalization or other action pursuant to which Prospect I or
any of it Affiliates would be required to take any voting securities, or any
securities convertible, exchangeable or exercisable for or into voting
securities, which might reasonably be expected to cause Prospect I to have a
Regulatory Problem. For purposes of this Agreement, "Regulatory Problem" means
any set of facts or circumstances wherein it has been asserted by any
governmental agency or other authority or Prospect I reasonably believes that,
such Person and such Person's Affiliates own, control or have power over a
greater quantity of securities of any kind issued by the Company than are
permitted under any requirement of any governmental authority.
Section 4. Additional Investors.
As a condition precedent to the future sale of any Securities of the
Company to any Person who is not then a party to this Agreement, such Person
shall execute a counterpart of this Agreement and thereafter shall be deemed to
be an "Existing Stockholder" for all purposes of this Agreement.
Section 5. Termination of Rights.
This Agreement shall expire upon the closing of a Qualified Public
Offering, unless sooner terminated in accordance with Section 10.
Section 6. Legends.
The Company and the Stockholders agree that certificates evidencing
Common Stock, Series A Stock or Warrants held by any Stockholder will bear the
following legends, in addition to those set forth in Section 3.7 of the Purchase
Agreement and in the Merger Agreement:
"TRANSFER OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE IS
RESTRICTED BY AN AGREEMENT, DATED APRIL 9, 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."
11
<PAGE>
The Common Stock, Series A Stock or Warrants shall not be required
to bear such legends after such time as they are no longer subject to this
Agreement. 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.
Section 7. Notices.
All notices, instructions or other communications required or
permitted to be given hereunder or necessary in connection herewith shall be in
writing and shall be deemed to have been duly delivered upon the delivery
thereof, if delivered personally, upon the transmission thereof, if sent by
facsimile transmission, on the second Business Day after delivery to an air
courier company for express delivery, or on the seventh Business Day after
mailing, if mailed, postage prepaid, registered or certified mail, to the
Company and to each Stockholder at such address as the Company may have
furnished to each Stockholder in writing or as the Stockholders may have
furnished to the Company in writing.
Section 8. Assignment.
This Agreement shall be binding on and inure to the benefit of the
parties hereto and their respective legal representatives, successors and
assigns. The rights and obligations arising from this Agreement shall be
transferred in connection with the transfer by a Stockholder to any Person of
any Common Stock, Series A Stock or Warrants in compliance with this Agreement,
other than in a registered public offering, and any such Person shall
conclusively be deemed to have agreed to be bound by this Agreement.
Notwithstanding the foregoing, if any Existing Stockholder shall transfer Common
Stock other than as a Permitted Transfer, the right to designate a director
under the provisions of Section 2 hereof shall not be transferable.
Section 9. Specific Performance.
The parties hereby declare that it is impossible to measure in money
the damages which will accrue to a party hereto by reason of a failure to
perform any of the obligations under this Agreement. Therefore, all parties
hereto shall have the right to specific performance of the obligations of the
other parties under this Agreement, and if any party hereto shall institute any
action or proceeding to enforce the provisions hereof, any person (including the
Company) against whom such action or proceeding is brought hereby waives the
claim or defense therein that such party has or have an adequate remedy at law,
and such person shall not urge in any such action or proceeding the claim or
defense that such remedy at law exists.
Section 10. Modification.
This Agreement contains the entire agreement between the parties
hereto with respect to the transactions contemplated herein and shall not be
modified or amended or terminated
12
<PAGE>
except by an instrument in writing signed by or on behalf of each of the
Investors and at least a majority in interest of the Existing Stockholders.
Section 11. Prior Agreements.
This Agreement supersedes any and all previously executed
Stockholders' agreements (including the Old Agreement), letters of intent or
other communications among the parties hereto relating to the subject matter
hereof; but shall not be deemed to supersede any terms or provisions of the
Purchase Agreement or the Merger Agreement or the documents entered into in
connection therewith relating to the rights or obligations of the Investors.
Section 12. Governing Law.
The General Corporation Law of the state of Delaware shall govern
all issues concerning the relative rights of the Company and its Stockholders.
All other questions concerning this Agreement shall be governed by, and
construed and enforced in accordance with, the domestic laws of the State of New
York without giving effect to any choice of law or conflict of law provision or
rule (whether of the State of New York, or any other jurisdiction) that would
cause the application of the laws of any jurisdiction other than the State of
New York.
Section 13. Counterparts.
This Agreement may be executed in any number of counterparts, each
of which shall be deemed an original, but all of which together shall constitute
one and the same instrument.
Section 14. Section Headings.
The Section headings in this Agreement are for convenience of
reference only and shall not be deemed to alter or affect any provisions hereof.
References to numbered Sections and subsections refer to Sections and
subsections of this Agreement.
Section 15. 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.
13
<PAGE>
Section 16. Recapitalizations, Exchanges, etc.
The provisions of this Agreement shall apply, to the full extent set
forth herein with respect to the Common Stock or Series A Stock, 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,
Common Stock or Series A Stock, and shall be appropriately adjusted for any
stock dividends, splits, reverse splits, combinations, reclassifications and the
like occurring after the date hereof.
Section 17. 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.
Section 18. Further Assurances.
Each party hereto 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 any other
party hereto reasonably may request in order to carry out the intent and
accomplish the purposes of this Agreement and the consummation of the
transactions contemplated hereby.
14
<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:
----------------------------------------------
David J. Moore
Chief Executive Officer
The Travelers Insurance Company
By:
----------------------------------------------
Name:
Title:
Prospect Street NYC Discovery Fund, L.P.
By: Prospect Street Discovery Fund, Inc.
its General Partner
By:
----------------------------------------------
Name:
Title:
Prospect Street NYC Co-Investment Fund, L.P.
By: Prospect Street Co-Investment Fund, LLC,
its General Partner
By:
----------------------------------------------
Name:
Title:
Big Flower Digital Services, Inc.
By:
----------------------------------------------
Name:
Title:
15
<PAGE>
- ------------------------------------ ------------------------------------
David J. Moore Scott E. Cohen
- -----------------------------------
Mark A. Burchill
PETRY MEDIA CORP.
By:---------------------------------
Thomas F. Burchill
Chief Executive Officer
- ------------------------------------ ------------------------------------
Michael P. Paolucci Ronald V. Paolucci
- ------------------------------------ ------------------------------------
Patrick Paolucci Porridge Partners II
- -----------------------------------
John G. Waller
- ------------------------------------ ------------------------------------
Jacob I. Friesel Garret P. Cecchini
- ------------------------------------ ------------------------------------
Bruce W. Mello Gregory T. O'Brien
- ------------------------------------ ------------------------------------
Edward L. Newhouse David Meister
- -----------------------------------
Jason Drago
16
<PAGE>
- ------------------------------------ ------------------------------------
Yale Brown John N. Gonzalez
- ------------------------------------ ------------------------------------
Robert Lippmann Alison Lynch
- ------------------------------------ ------------------------------------
Matthew B. Walker 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:
--------------------------------
Name:
A General Partner
Trinity V Side-By-Side Fund, L.P.
By: Trinity TVL Partners V, L.P.
A California Limited Partnership, its General Partner
By:
--------------------------------
Name:
A General Partner
Zero Stage Capital V Limited Partnership
By: Zero Stage Capital Associates Limited Partnership, General Partner
By:
--------------------------------
A General Partner
F&W Investments 1996
A California Partnership
By:
--------------------------------
A General Partner
17
<PAGE>
Schedule 1
----------
David J. Moore Mark A. Burchill
Scott E. Cohen Petry Media Corp.
Schedule 2
----------
Michael P. Paolucci Porridge Partners II
John G. Waller Ronald V. Paolucci
Patrick Paolucci
Schedule 3
----------
Jacob I. Friesel Edward L. Newhouse
Garret P. Cecchini David Meister
Bruce W. Mello Jason Drago
Gregory T. O'Brien
Schedule 4
----------
Yale Brown Robert Lippmann
Alison Lynch Matthew B. Walker
David Banks John Gonzalez
Trinity Ventures V, L.P. Trinity V Side-By-Side Fund, L.P.
Zero Stage Capital V F&W Investments 1996
Limited Partnership
18
<PAGE>
Schedule 5
----------
David J. Moore Mark A. Burchill
Scott E. Cohen Michael P. Paolucci
Jacob I. Friesel Edward L. Newhouse
Garret P. Cecchini David Meister
Bruce W. Mello Jason Drago
Gregory T. O'Brien Yale Brown
Robert Lippmann Alison Lynch
Matthew B. Walker
Exhibit 11.1
Computation of loss per share
<TABLE>
<CAPTION>
Three months ended
Years ended December 31, March 31,
1995 1996 1997 1997 1998
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Basic:
New loss (1,168,144) (6,795,675) (5,305,828) (784,377) (2,297,838)
Cumulative Dividends on manditorily
convertible preferred stock 0 0 0 0 (33,500)
---------- ---------- ---------- ---------- ----------
Net loss applicable to common
stockholders (1,168,144) (6,795,675) (5,305,828) (784,377) (2,331,338)
========== ========== ========== ========== ==========
Basic weighted average shares
outstanding 420,908 1,049,432 1,086,614 1,079,116 3,055,432
Basic loss per common share (2.78) (6.48) (4.88) (0.73) (0.76)
Diluted:
Net loss applicable to common
stockholders (1,168,144) (6,795,675) (5,305,828) (784,377) (2,331,338)
========== ========== ========== ========== ==========
Basic weighted average shares
outstanding 420,908 1,049,432 1,086,614 1,079,116 3,055,432
Net effect of dilutive securities 0 0 0 0 0
---------- ---------- ---------- ---------- ----------
Diluted weighted average shares
outstanding 420,908 1,049,432 1,086,614 1,079,116 3,055,432
========== ========== ========== ========== ==========
Diluted loss per common share (2.78) (6.48) (4.88) (0.73) (0.76)
========== ========== ========== ========== ==========
</TABLE>
Exhibit 23.1
ACCOUNTANTS' CONSENT AND REPORT ON SCHEDULE
The Board of Directors
24/7 Media, Inc.:
The audits referred to in our report dated June 2, 1998, except for Note
13, which is as of July 20, 1998, included the related financial statement
schedule of 24/7 Media, Inc. as of December 31, 1997, and for each of the years
in the three-year period ended December 31, 1997, included in the Registration
Statement. This financial statement schedule is the responsibility of the
Company's management. Our responsibility is to express an opinion on this
financial statement schedule based on our audits. In our opinion, such financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
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 to Petry Interactive, Inc.) and to the
reference to our firm under the heading "Experts" in the prospectus.
KPMG Peat Marwick LLP
New York, New York
July 24, 1998
<PAGE>
SCHEDULE
24/7 MEDIA, INC.
VALUATION AND QUALIFYING ACCOUNTS--
ALLOWANCE FOR DOUBTFUL ACCOUNTS
<TABLE>
<CAPTION>
BALANCE AT ADDITIONS BALANCE AT
BEGINNING CHARGED END
OF PERIOD TO EXPENSE DEDUCTIONS OF PERIOD
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Year ended December 31, 1995 $0 $10,000 $--- $10,000
Year ended December 31, 1996 $10,000 $66,000 $10,000 $66,000
Year ended December 31, 1997 $66,000 $--- $2,277 $63,723
</TABLE>
S-2
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 (File No. 333-56085).
Arthur Andersen LLP
Washington, D.C.
July 20, 1998
Consent of Independent Public Accountants
As independent public accountants, we hereby consent to the use of our
report dated June 12, 1998 on the CliqNow! division of K2 Design, Inc. 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
Roseland, NJ
July 23, 1998
Exhibit 23.5
[LETTERHEAD OF MEDIA METRIX]
July 20, 1998
The undersigned hereby consents to the references to the undersigned included in
the Registration Statement on Form S-1 of 24/7 Media, Inc. and any amendment
thereto.
/s/ S.D. McFarland
Name: S.D. McFarland
Title: Sr. VP/GM
Date: July 20, 1998
Exhibit 23.6
[LETTERHEAD OF JUPITER COMMUNICATIONS]
July 20, 1998
TO:
Mr. Jay Friesel
24/7 Media
The undersigned hereby consents to the references to the undersigned included in
the Registration Statement on Form S-1 of 24/7 Media, Inc. and any amendment
thereto.
/s/ Ken Male
Ken Male
Vice President of Global Sales
Exhibit 23.7
[LETTERHEAD OF INTERNATIONAL DATA CORPORATION]
The undersigned hereby consents to the references to the undersigned included in
the Registration Statement on Form S-1 of 24/7 Media, Inc. and any amendment
thereto.
/s/ John Gantz
- ---------------------
John Gantz
Senior Vice President
International Data Corporation
July 20, 1998
Exhibit 23.8
[LETTERHEAD OF NETWORK SOLUTIONS]
July 20, 1998
The undersigned hereby consents to the references to the undersigned included in
the Registration Statement on Form S-1 of 24/7 Media, Inc. and any amendment
thereto, with noted edit.
/s/ John C. Clough
- ------------------
John C. Clough
Director, Corporate Communications
Network Solutions, Inc.
Exhibit 23.9
[LETTERHEAD OF DIRECT MARKETING ASSOCIATION]
July 20, 1998
The undersigned hereby consents to the references to the undersigned included in
the Registration Statement on Form S-1 of 24/7 Media, Inc. and any amendment
thereto.
Sincerely,
/s/ Kenneth P. Eberling
- -----------------------
Kenneth P. Eberling
Director, Membership Development
