<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 10, 1999
REGISTRATION NO. 333-86433
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
------------------------
AGENCY.COM LTD.
(Exact Name of Registrant as Specified in its Charter)
<TABLE>
<S> <C> <C>
DELAWARE 7379 13-3808969
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer Identification Number)
Incorporation or Organization) Classification Code Number)
</TABLE>
------------------------
665 BROADWAY, 9TH FLOOR
NEW YORK, NEW YORK 10012
(212) 358-8220
(Address, Including Zip Code, and Telephone Number,
Including Area Code, of Registrant's Principal Executive Offices)
------------------------------
MR. CHAN SUH
CHAIRMAN, CHIEF EXECUTIVE OFFICER AND PRESIDENT
AGENCY.COM LTD.
665 BROADWAY, 9TH FLOOR
NEW YORK, NEW YORK 10012
(212) 358-8220
(Name, Address, Including Zip Code, and Telephone Number,
Including Area Code, of Agent for Service)
------------------------------
Copies to:
<TABLE>
<S> <C>
ALEXANDER D. LYNCH, ESQ. KEITH F. HIGGINS, ESQ.
SCOTT L. KAUFMAN, ESQ. JANE D. GOLDSTEIN, ESQ.
BROBECK, PHLEGER & HARRISON LLP ROPES & GRAY
1633 BROADWAY, 47(TH) FLOOR ONE INTERNATIONAL PLACE
NEW YORK, NEW YORK 10019 BOSTON, MASSACHUSETTS 02110
(212) 581-1600 (617) 951-7000
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
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, 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 statement number of the earlier effective registration statement
for the same offering. / / ___________________________
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / / ___________________________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. / /
------------------------------
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 SECTION 8(A), MAY
DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
SUBJECT TO COMPLETION. DATED NOVEMBER 10, 1999.
THE INFORMATION IN THIS PRELIMINARY PROSPECTUS IS NOT COMPLETE AND MAY BE
CHANGED. THESE SECURITIES MAY NOT BE SOLD UNTIL THE REGISTRATION STATEMENT FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PRELIMINARY
PROSPECTUS IS NOT AN OFFER TO SELL NOR DOES IT SEEK AN OFFER TO BUY THESE
SECURITIES IN ANY JURISDICTION WHERE THE OFFER OR SALE IS NOT PERMITTED.
<PAGE>
5,900,000 Shares
[LOGO]
Common Stock
-------------
This is an initial public offering of shares of common stock of
AGENCY.COM Ltd. All of the 5,900,000 shares of common stock are being sold by
AGENCY.COM.
Before this offering, there has been no public market for the common stock.
AGENCY.COM currently anticipates that the initial public offering price will be
between $10.00 and $12.00 per share. The common stock has been approved for
quotation on the Nasdaq National Market under the symbol "ACOM", subject to
official notice of issuance.
SEE "RISK FACTORS" BEGINNING ON PAGE 8 TO READ ABOUT FACTORS YOU SHOULD
CONSIDER BEFORE BUYING SHARES OF THE COMMON STOCK.
------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER REGULATORY BODY
HAS APPROVED OR DISAPPROVED THESE SECURITIES OR PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
------------------
<TABLE>
<CAPTION>
Per Share Total
--------- -----
<S> <C> <C>
Initial public offering price............................... $ $
Underwriting discount....................................... $ $
Proceeds, before expenses, to AGENCY.COM.................... $ $
</TABLE>
To the extent that the underwriters sell more than 5,900,000 shares of
common stock, the underwriters have the option to purchase up to an additional
885,000 shares from AGENCY.COM at the initial public offering price less the
underwriting discount.
------------------
The underwriters expect to deliver the shares against payment in New York,
New York on , 1999.
GOLDMAN, SACHS & CO. SALOMON SMITH BARNEY
HAMBRECHT & QUIST
------------
Prospectus dated , 1999.
<PAGE>
[Front Inside Cover--AGENCY.COM logo located at the top of the page. Below the
caption is a vertical column of text captioned "Our Values". Below the caption
"Our Values" is the following text: We succeed only when our clients benefit
from our work. We deliver excellence with the highest standards of integrity. We
honor the dignity and value of individuals working as a team. We celebrate
diversity of people, ideas and cultures. We seek to grow through learning and
knowledge gathering. We embrace change and encourage innovation.
Gatefold--Located in the left of the page is the AGENCY.COM logo with the
words "We are an Internet professional services company" beneath the logo. Below
the words "We are an Internet professional services company" is the following
text: We help our clients in four key areas of online business--Branding,
Content, Electronic Commerce and Customer Service. For example, we have
delivered these services to British Airways since 1996 and continue to work with
British Airways, developing strategies and fulfilling its needs for Internet
services around the world.
Across the top of the page are four photographs of a computer monitor
showing different Web pages from the British Airways Website, with the captions
"Branding", "Content", "Electronic Commerce", and "Customer Service" underneath
one photograph each from left to right.
Located in the bottom left is the Company's Integrated Capabilities graphic.
Next to the graphic is a caption "Integrated Capabilities". Below the caption
"Integrated Capabilities" is the following text: We deliver services through
teams of professionals who have expertise in strategy, creative and technology
disciplines, supported by project management and client services staff. Located
in the bottom right is a graphic depicting the Company's Compass Methodology.
Next to the graphic is a caption "Compass-TM- Methodology." Below the caption
"Compass Methodology" is the following text: Our Compass-TM- methodology
provides a common way of delivering services to clients across all our offices.
Located along the bottom right of the page is the following text: For the
first nine months of 1999, British Airways represented 13.5% of our actual
revenues.
Located in the upper right is a map of the world. Next to the map is the
caption "International Scale". Below the caption is the following text: With
offices in the U.S. and Europe and resources in Asia as well as a structure that
allows cross-office collaboration we provide local service to our global
clients.]
<PAGE>
PROSPECTUS SUMMARY
YOU SHOULD READ THE FOLLOWING SUMMARY TOGETHER WITH THE MORE DETAILED
INFORMATION AND OUR CONSOLIDATED FINANCIAL STATEMENTS AND THE NOTES TO THOSE
STATEMENTS APPEARING ELSEWHERE IN THIS PROSPECTUS. UNLESS OTHERWISE INDICATED,
THE INFORMATION IN THIS PROSPECTUS ASSUMES THAT THE UNDERWRITERS DO NOT EXERCISE
THE OPTION WE HAVE GRANTED TO THEM TO PURCHASE ADDITIONAL SHARES IN THIS
OFFERING. PLEASE SEE "UNDERWRITING".
AGENCY.COM
OUR COMPANY
AGENCY.COM is an international Internet professional services firm. We
provide our clients with an integrated set of strategy, creative and technology
services that take them from concept to launch and operation of their Internet
businesses.
Our strategy services include advising clients on business models for their
online businesses, devising strategies so that clients can open new online
distribution and sales channels, identifying opportunities to achieve
operational efficiencies by pursuing online initiatives, and planning for the
operations and organization necessary to support an online business. Our
creative services include advising clients on how to effectively bring their
brands online, developing graphic designs and Web site structure for client Web
sites, and coordinating online marketing campaigns with clients' traditional
advertising agencies. Our technology services include technical architecture and
design, integration between Internet and older information technology systems,
and implementation of electronic commerce systems to enable online sales,
support and communication.
We seek to empower our clients to gain competitive advantage by using the
Internet to create and enhance interactive relationships with their customers,
staff, business partners and suppliers. We accomplish this by enabling more
timely, convenient and efficient communications and transactions between a
company and these constituents. Since our founding in 1995, we have focused
exclusively on Internet technologies and their implications for businesses. We
serve a broad and diversified client base in a variety of industries, including
emerging Internet-focused businesses and businesses comprising Business Week
magazine's "Global 1000" list of companies with the largest market
capitalizations worldwide. We have worked with more than 200 companies to help
them develop and implement their Internet businesses. Our five largest clients
during the nine months ended September 30, 1999, on an actual basis, were
British Airways, Compaq, FT Group, Sprint and Unilever. We currently employ more
than 1,000 people in 10 offices in the United States and one office each in
Amsterdam, Copenhagen, London and Paris.
OUR MARKET OPPORTUNITY
Based on our experience, we believe many companies outsource some or all of
their growing Internet businesses, creating a large and expanding market for
providers of Internet professional services. Worldwide demand for Internet
professional services is expected to grow from $7.8 billion in 1998 to $78.5
billion in 2003 according to a report by International Data Corporation ("IDC"),
a technology and Internet research and consulting company, titled "Worldwide
Internet Services Market and Trends Forecast, 1998-2003", published in
May 1999.
3
<PAGE>
A new breed of professional services firm devoted to the Internet has
emerged to provide companies with strategy, planning, design, development and
deployment services for their Internet resources. We believe these Internet
professional services providers must be able to serve their clients on an
international basis and offer integrated strategy, creative and technology
services.
RISK FACTORS
There are many risk factors associated with an investment in our common
stock. The market for Internet professional services is intensely competitive,
highly fragmented and subject to rapid technological change. Many of our
competitors have advantages over us. There are no substantial barriers to entry
into our business. We expect that competition will intensify and increase over
time. We have incurred significant losses since we were formed and have an
accumulated deficit of approximately $7.5 million as of September 30, 1999. We
incurred net losses of $6.6 million for the nine months ended September 30, 1999
on an actual basis and $16.7 million on a pro forma basis giving effect to our
recent acquisitions. Our directors, executive officers and affiliates will
beneficially own approximately 75% of our common stock after the offering which
will limit the ability of unaffiliated stockholders to influence corporate
matters. Our largest stockholder has significant ownership positions in some of
our direct competitors and one of our directors is also a director of one of our
direct competitors. This ownership and directorship may create conflicts of
interests. These and other risks are addressed under the caption "Risk Factors"
beginning on page 8 of this prospectus.
OUR HISTORY
We were incorporated in New York on February 10, 1995. We reincorporated in
Delaware on August 30, 1999. Our principal executive offices are located at 665
Broadway, 9th Floor, New York, New York 10012 and our telephone number is
(212) 358-8220. Our Web site is WWW.AGENCY.COM. The information on our Web site
is not a part of this prospectus.
OUR TRADEMARK
AGENCY.COM is our registered trademark. All other trademarks and service
marks used in this prospectus are the property of their respective owners.
4
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Shares offered by AGENCY.COM................. 5,900,000 shares
Shares to be outstanding after this
offering................................... 33,674,562 shares
Proposed Nasdaq National Market symbol....... ACOM
Use of proceeds.............................. To repay amounts borrowed under our credit
facility, expand our operations and for
general corporate purposes, including working
capital. We may also use a portion of the
proceeds for strategic investments or
acquisitions. Please see "Use of Proceeds".
</TABLE>
This information is based on our shares of common stock outstanding as of
November 4, 1999. This information does not include:
- 5,513,563 shares subject to options outstanding as of November 4, 1999 at
a weighted average exercise price of $2.64 per share;
- 5,722,698 additional shares that could be issued under our stock option
plans; and
- 7,400,000 shares subject to warrants to purchase our common stock at an
exercise price of $0.005 per share.
5
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
The following tables summarize the financial data for our business. You
should read this information with the discussion in "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and our consolidated
financial statements and notes to those statements included elsewhere in this
prospectus. The pro forma data for the year ended December 31, 1998 and the nine
months ended September 30, 1998 give effect to the following acquisitions as if
each of these acquisitions had occurred on January 1, 1998:
- Ketchum Interactive, which was completed in August 1998;
- The Primary Group, which was completed in August 1998;
- Interactive Solutions, which was completed in April 1999;
- Eagle River Interactive, which was completed in April 1999;
- Digital Vision, which was completed in May 1999;
- Twinspark Interactive People, which was completed in July 1999;
- Interactive Traffic, known as I-traffic, which was completed in
October 1999; and
- Visionik, which was completed in November 1999.
The pro forma data for the nine months ended September 30, 1999 give effect to
the acquisitions of Interactive Solutions, Eagle River Interactive, Digital
Vision, Twinspark Interactive People, I-traffic and Visionik as if each had
occurred on January 1, 1999.
<TABLE>
<CAPTION>
PERIOD FROM
FEBRUARY 10,
1995
(INCEPTION) TO
DECEMBER 31, YEAR ENDED DECEMBER 31,
1995 -------------------------------------------
-------------- 1996 1997 1998 1998
ACTUAL ACTUAL ACTUAL ACTUAL PRO FORMA
-------------- -------- -------- -------- ----------
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Revenues...................... $ 2,162 $6,095 $12,975 $26,452 $ 76,130
Gross profit.................. 1,511 3,878 6,775 10,522 32,112
Income (loss) from
operations.................. 868 2,862 2,056 (3,052) (20,199)
Net income (loss)............. 791 1,502 1,182 (2,481) (20,900)
Minority interest............. -- -- 167 (282) (282)
EBITDA(1)..................... 874 2,924 2,433 (1,018) (4,097)
Basic net income (loss) per
common share................ $ 439.47 $ 0.32 $ 0.07 $ (0.15) $ (0.78)
Diluted net income (loss) per
common share................ $ 439.47 $ 0.31 $ 0.07 $ (0.15) $ (0.78)
Weighted average shares
outstanding used in basic
net income (loss) per common
share calculation........... 2 4,750 16,200 16,854 26,865
Weighted average shares
outstanding used in diluted
net income (loss) per common
share calculation........... 2 4,797 16,297 16,854 26,865
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
--------------------------------------------------
1998 1999 1998 1999
ACTUAL ACTUAL PRO FORMA PRO FORMA
-------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Revenues...................... $18,956 $ 56,499 $ 55,962 $ 74,808
Gross profit.................. 8,601 27,715 24,403 33,617
Income (loss) from
operations.................. (796) (4,251) (12,996) (14,025)
Net income (loss)............. (942) (6,615) (14,147) (16,748)
Minority interest............. (282) -- (282) 51
EBITDA(1)..................... (559) 3,472 (1,159) (590)
Basic net income (loss) per
common share................ $ (0.06) $ (0.29) $ (0.53) $ (0.57)
Diluted net income (loss) per
common share................ $ (0.06) $ (0.29) $ (0.53) $ (0.57)
Weighted average shares
outstanding used in basic
net income (loss) per common
share calculation........... 16,587 23,187 26,597 29,242
Weighted average shares
outstanding used in diluted
net income (loss) per common
share calculation........... 16,587 23,187 26,597 29,242
</TABLE>
- ------------------------
(1) EBITDA represents earning or loss before other income and expense
(consisting of provision (benefit) from income taxes and net interest
expense), depreciation and amortization. We have provided EBITDA because it
is a measure of financial performance commonly used in the Internet
professional services industry and because management believes many
investors use EBITDA as a measure of a company's historical ability to
service its debt since EBITDA shows available cash before debt service and
before deducting non-cash charges, such as
6
<PAGE>
depreciation and amortization. Other companies may calculate EBITDA
differently from the way we do. EBITDA is not a measurement of financial
performance under GAAP. We believe you should not consider EBITDA as an
alternative to net income (loss) as an indicator of our operating
performance or as an alternative to cash flow as a measure of our liquidity.
You should be aware that items excluded from the calculation of EBITDA are
significant components in understanding and assessing our financial
performance. You should read the information in the table together with
information regarding our cash flows from operating, investing and financing
activities appearing on pages 39-40 of this prospectus, which is also an
important measure of our financial condition.
The following table is a summary of our balance sheet as of September 30,
1999. The pro forma data give effect to the acquisitions of I-traffic and
Visionik as if each had occurred on September 30, 1999. The pro forma as
adjusted data reflect the sale of 5,900,000 shares of common stock at an assumed
initial public offering price of $11.00 per share, after deducting the
underwriting discount and estimated offering expenses.
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1999
------------------------------------------------
<S> <C> <C> <C>
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
------- -------- --------
<CAPTION>
(IN THOUSANDS)
CONSOLIDATED BALANCE SHEET DATA:
<S> <C> <C> <C>
Cash and cash equivalents................................... $ 726 $ 3,117 $ 40,724
Working capital............................................. 17,873 19,197 56,804
Total assets................................................ 107,488 127,903 165,510
Notes payable, excluding current portion.................... 66,807 70,374 50,124
Capital leases, excluding current installments.............. 1,709 1,717 1,717
Total stockholders' equity.................................. 17,238 28,120 85,977
</TABLE>
7
<PAGE>
RISK FACTORS
THIS OFFERING INVOLVES A HIGH DEGREE OF RISK. YOU SHOULD CAREFULLY CONSIDER
THE RISKS DESCRIBED BELOW BEFORE YOU DECIDE TO BUY OUR COMMON STOCK. IF ANY OF
THE FOLLOWING RISKS ACTUALLY OCCUR, OUR BUSINESS, FINANCIAL CONDITION OR RESULTS
OF OPERATIONS WOULD LIKELY SUFFER. IN THIS CASE, THE TRADING PRICE OF OUR COMMON
STOCK COULD DECLINE, AND YOU MAY LOSE ALL OR PART OF YOUR INVESTMENT.
RISKS RELATED TO OUR FINANCIAL CONDITION AND BUSINESS MODEL
OUR FUTURE SUCCESS IS UNCERTAIN BECAUSE WE ARE AN EARLY-STAGE COMPANY
Because we are in an early stage of development, we are subject to the risks
that we will fail to implement our business model and strategy successfully or
to revise our business model and strategy should industry conditions and
competition change. These risks are even greater because we are operating in a
new and rapidly evolving market. We cannot assure you that we will be successful
in addressing these risks. If we are not, our business, results of operations
and financial condition will be materially adversely affected.
OUR REVENUES COULD BE AFFECTED BY THE LOSS OF A MAJOR CLIENT
A substantial portion of our revenue is generated from a limited number of
major clients. In particular, on a pro forma basis our ten largest clients
accounted for approximately 42% of our revenues for the nine months ended
September 30, 1999 and 36% of our revenues for the year ended December 31, 1998.
For the nine months ended September 30, 1999, and for the year ended
December 31, 1998, British Airways accounted for more than 10% of our revenues
on an actual basis. For the nine months ended September 30, 1999, each of
British Airways and Sprint accounted for more than 10% of our revenues on a pro
forma basis. If one of our major clients discontinues or reduces the use of our
services, our business, results of operations and financial condition could
materially suffer. We cannot assure you that our clients will continue to use
our services in the future. In addition, because a substantial portion of our
revenue is generated from a limited number of clients, the non-payment or late
payment of amounts due from a major client could have a material adverse effect
on our business, results of operations and financial condition.
IF CLIENTS PREMATURELY TERMINATE OR REDUCE THE SCOPE OF EXISTING CONTRACTS, OUR
REVENUES MAY DECLINE
Our services are often sold pursuant to short-term arrangements and most
clients can reduce or cancel their contracts for our services without penalty
and with little or no notice. These arrangements are in writing, are binding
contracts and typically range in term from three months to one year. If a major
client or a number of small clients were to terminate, significantly reduce or
modify their business relationships with us, then our business, results of
operations and financial condition would be materially adversely affected.
Consequently, you should not predict or anticipate our future revenue based upon
the number of clients we currently have or the number and size of our existing
projects.
OUR REVENUES ARE DIFFICULT TO PREDICT, WHICH COULD LEAD TO POOR OPERATING
RESULTS
We derive our revenues in part from fees for services generated on a
project-by-project basis. These projects vary in length and complexity, as well
as in the fee charged for our services. Our methods of recognizing revenue also
vary depending on whether we
8
<PAGE>
enter into a fixed fee, time-and-materials or retainer arrangement with the
client. As a result, there may be significant fluctuation in the amount of
revenue generated by a particular client in different periods. Aggregate
quarterly results may fluctuate as well. We may be unable to adjust our cost
structure quickly enough to offset unexpected revenue shortfalls due to the fact
that many of our costs are fixed or are associated with commitments which cannot
be immediately terminated, which could cause our operating results to suffer.
OUR RECENT ACQUISITIONS MAKE EVALUATING OUR BUSINESS DIFFICULT
In April 1999, we acquired all of the issued and outstanding stock of
Interactive Solutions Incorporated. Immediately prior to the acquisition,
Interactive Solutions acquired Quadris Consulting, Inc. The historical revenue
of Interactive Solutions and Quadris combined was $3.6 million for the three
months ended March 31, 1999 and was $15.3 million for the year ended
December 31, 1998. In April 1999, we acquired all of the issued and outstanding
stock of Eagle River Interactive Inc. The historical revenue of Eagle River was
$5.1 million for the three months ended March 31, 1999 and was $23.4 million for
the year ended December 31, 1998. In May 1999, we acquired Digital Vision
Communications Inc. The historical revenue for Digital Vision was $326,000 for
the six months ended June 30, 1999. In August 1999, we acquired Twinspark
Interactive People B.V. The historical revenue for Twinspark Interactive was
$2.4 million for the six months ended June 30, 1999 and was $2.7 million the
year ended December 31, 1998. In October 1999, we acquired all of the
outstanding stock of I-traffic, Inc. The historical revenue for I-traffic was
$4.3 million for the nine months ended September 30, 1999 and $3.5 million for
the year ended December 31, 1998. In November 1999, we acquired all of the
outstanding stock of Visionik A/S. The historical revenue for Visionik was $2.2
million for the nine months ended September 30, 1999 and $2.1 million for the
year ended December 31, 1998.
Our historical results of operations do not fully give effect to the
operations of the companies we have acquired and the pro forma financial
information included in this prospectus is based in part on the separate
pre-acquisition financial reports of these acquired companies. Consequently, our
historical results of operations and pro forma financial information may not
give you an accurate indication of how AGENCY.COM, together with these combined
entities, will perform in the future.
WE MAY NEED TO RAISE ADDITIONAL CAPITAL, WHICH MAY NOT BE AVAILABLE TO US AND
MAY LIMIT OUR GROWTH
Our future liquidity and capital requirements are difficult to predict as
they depend upon numerous factors, including the success of our existing and new
service offerings and competing technological and market developments. We may
need to raise additional funds in order to meet additional working capital
requirements, support additional capital expenditures or take advantage of
acquisition opportunities. Our ability to obtain additional financing will be
subject to a number of factors, including market conditions, our operating
performance and investor sentiment. These factors may make the timing, amount,
terms and conditions of additional financing unattractive for us. If we are
unable to raise additional funds when needed or the terms are not favorable, our
growth could be impeded.
IF WE FAIL TO ACCURATELY ESTIMATE COSTS OF FIXED-FEE PROJECTS, OUR OPERATING
RESULTS
MAY SUFFER
We derive our revenues from services performed under one of three pricing
arrangements: retainer, time-and-materials and fixed-fee. We assume greater
financial risks on a fixed-fee project than on a time-and-materials
9
<PAGE>
project. We did not typically utilize this pricing structure prior to our April
1999 acquisition of Interactive Solutions. However, as a result of the
acquisition we employ personnel who are experienced in estimating costs for
fixed-fee projects. If we miscalculate the resources or time we need for these
projects, the costs of completing these projects may exceed the fixed fee, which
could adversely affect our operating results. We recognize revenues from
fixed-fee projects based on our estimate of the percentage of each project
completed in a reporting period. To the extent our estimates of the costs
associated with each fixed-fee project are inaccurate, the revenues and
operating profits, if any, that we report for periods during which we are
working on that project may not accurately reflect the final results of the
project. In this case, we may be required to record an expense for the final
period in which we work on that project equal to the amount by which our
revenues were previously overstated. Interactive Solutions had revenue of
approximately $3.6 million during the three months ended March 31, 1999
RISKS RELATED TO OUR STRATEGY AND MARKET
FAILURE TO PROPERLY MANAGE OUR EXPANDING OPERATIONS MAY ADVERSELY IMPACT OUR
BUSINESS
Our rapid growth has placed a significant strain on our managerial and
operational resources. From January 1, 1997 to November 2, 1999, our staff
increased from approximately 60 to approximately 1,000 employees. If we cannot
effectively manage our expanding operations, we may not be able to continue to
grow, or may grow at a slower pace. To manage any future growth we must continue
to improve our financial and management controls, reporting systems and
procedures, and expand and train our work force. We cannot assure you that our
controls, systems or procedures will be able to support our expanding operations
or that we will be able to manage both internal and acquisition-based growth
effectively.
IF WE ARE UNABLE TO FIND SUITABLE ACQUISITION CANDIDATES, OUR GROWTH COULD BE
IMPEDED
Our ability to identify and invest in suitable acquisition and investment
candidates on acceptable terms is crucial to our strategy. We cannot assure you
that we will be able to continue to identify, acquire or make investments in
promising acquisition candidates on acceptable terms. Moreover, in pursuing
acquisition and investment opportunities, we may be in competition with other
companies having similar growth and investment strategies. Competition for these
acquisitions or investment targets could also result in increased acquisition or
investment prices and a diminished pool of businesses, technologies, services or
products available for acquisition or investment.
OUR ACQUISITION STRATEGY COULD SUBJECT US TO SIGNIFICANT RISKS, ANY OF WHICH
COULD HARM OUR BUSINESS
Acquisitions involve a number of risks and present financial, managerial and
operational challenges, including:
- adverse effects on our reported operating results due to the amortization
of goodwill associated with acquisitions;
- diversion of management attention from running our existing business;
- increased expenses, including compensation expenses resulting from
newly-hired employees; and
- potential disputes with the sellers of acquired businesses, technologies,
services or products.
10
<PAGE>
We may not be successful in integrating the technology, operations and
personnel of any acquired business. Client satisfaction or performance problems
with an acquired business, technology, service or product could also have a
material adverse impact on our reputation as a whole. In addition, any acquired
business, technology, service or product could significantly underperform
relative to our expectations. For all these reasons, our pursuit of an overall
acquisition and investment strategy or any individual acquisition or investment
could have a material adverse effect on our business, results of operations and
financial condition. In four of our nine acquisitions, we have acquired
companies owned or controlled by Omnicom Inc., our largest stockholder. In the
future, we expect to primarily acquire companies not owned or controlled by
Omnicom, which may make acquiring companies materially more difficult.
WE SOMETIMES AGREE NOT TO PERFORM SERVICES FOR OUR CLIENTS' COMPETITORS, WHICH
LIMITS OUR BUSINESS OPPORTUNITIES
We have agreed with approximately ten of our clients, including three of our
20 largest clients, to limit our right to enter into business relationships with
competitors of that client for a specific time period. These provisions
typically prohibit us from performing a broad range of our Internet professional
services which we might otherwise be willing to perform for potential clients.
These provisions are generally limited to six months and are sometimes further
limited by office location or apply only to specific employees. These provisions
may limit our ability to enter into engagements with new clients for specified
periods of time. This may adversely affect our business opportunities and our
revenues.
WE FACE INTENSE COMPETITION, WHICH COULD HARM OUR BUSINESS
Our market is new, intensely competitive, highly fragmented and subject to
rapid technological change. We expect competition to intensify and increase over
time because
- there are no substantial barriers to entering the Internet professional
services market;
- our industry is consolidating; and
- many of our competitors are forming cooperative relationships.
We compete against other Internet professional services firms, as well as a
number of different types of companies that are not exclusively in the Internet
professional services business. These competitors, which generally offer some of
the Internet professional services we offer, include:
- traditional strategic consulting firms;
- interactive advertising agencies;
- professional services groups of computer equipment companies;
- traditional systems integrators; and
- internal groups of current or potential clients.
Many of our competitors have longer operating histories, greater name
recognition, larger established client bases, longer client relationships and
significantly greater financial, technical, personnel and marketing resources
than we do. Such competitors may be able to undertake more extensive marketing
campaigns, adopt more aggressive pricing policies and make more attractive
offers to potential clients, employees and strategic partners. Further, our
competitors may perform Internet services that are equal or superior to our
services or that achieve greater market acceptance than our services. We have no
patented or other proprietary technology that
11
<PAGE>
would preclude or inhibit competitors from duplicating our services. We must
rely on the skills of our personnel and the quality of our client service.
Increased competition is likely to result in price reductions, reduced gross
margins and loss of market share, any of which would have a material adverse
effect on our business, results of operations and financial condition. We cannot
assure you that we will be able to compete successfully against existing or
future competitors.
IF WE ARE UNABLE TO IDENTIFY, HIRE, TRAIN AND RETAIN HIGHLY QUALIFIED INTERNET
PROFESSIONALS AND RETAIN CURRENT KEY PERSONNEL, OUR BUSINESS AND GROWTH WILL
SUFFER
Our success depends on our ability to identify, hire, train and retain
highly qualified Internet professionals. These individuals are in high demand
and we may not be able to attract and retain the number of highly qualified
Internet professionals that we need. Historically, we have experienced
significant employee turnover. If we cannot retain, attract and hire the
necessary Internet professionals, our ability to grow, complete existing
projects and bid for new projects would be adversely affected and our business,
results of operations and financial condition would suffer.
In addition, our future success depends, in part, upon the continued service
and performance of Chan Suh, our Chairman, Chief Executive Officer and
President, Kyle Shannon, our Chief Creative Officer, Kevin Rowe, our
President--North America and Eamonn Wilmott, our President--Europe. Particularly
in light of our relatively early stage of development, the fact that many of our
key personnel have worked together for only a short period of time and the
competitive nature of our industry, we cannot assure you that we will be able to
retain the services of our senior management and other key personnel. Losing the
services of any of these individuals at our current stage would impair our
ability to effectively deliver our services and manage our company. These
problems would negatively affect our business, results of operations and
financial condition, as well as our ability to grow.
OUR EFFORTS TO RAISE AWARENESS OF THE AGENCY.COM BRAND MAY NOT BE SUCCESSFUL,
WHICH MAY LIMIT OUR ABILITY TO EXPAND OUR CLIENT BASE AND ATTRACT ACQUISITION
CANDIDATES AND EMPLOYEES
We believe that building the AGENCY.COM brand is critical for attracting and
expanding our targeted client base and attracting acquisition candidates and
employees. If we do not continue to build the AGENCY.COM brand on a global
basis, we may not be able to effect our strategy. We also believe that
reputation and name recognition will grow in importance as the number of
companies competing in the market for Internet professional services increases.
Promotion and enhancement of our name will depend largely on our success in
continuing to provide high quality, reliable and cost-effective services. If
clients do not perceive our services as meeting their needs, or if we fail to
market our services effectively, we will be unsuccessful in maintaining and
strengthening our brand. If we fail to promote and maintain our brand, or incur
excessive expenses to do so, our business, results of operations and financial
condition will materially suffer.
OUR INTERNATIONAL EXPANSION STRATEGY COULD SUBJECT US TO SIGNIFICANT RISKS, MANY
OF WHICH COULD HARM OUR BUSINESS
We expect to expand our international operations and international sales and
marketing efforts. We commenced operations in Denmark in November 1999, the
Netherlands in July 1999, France in April 1999 and the United Kingdom in October
1997, and made minority investments in a company in Singapore in December 1998
and July 1999
12
<PAGE>
and in a company in Paris in October 1999. Our international offices offer
Internet professional services similar to our domestic offices. We have had
limited experience in marketing, selling and distributing our services
internationally, and we cannot assure you that we will be able to maintain and
expand our international operations or successfully market our services
internationally. Failure to do so may negatively affect our business, results of
operations and financial condition, as well as our ability to grow.
OUR BUSINESS MAY SUFFER IF WE FAIL TO ADAPT APPROPRIATELY TO THE DIFFERENCES
ASSOCIATED WITH OPERATING INTERNATIONALLY
Our international operations began in October 1997 and we are initially
focusing our international operations in Europe and Asia. We have no current
plans to expand to any specific location internationally. Operating
internationally may require us to modify the way we conduct our business and
deliver our services in these markets. If we do not appropriately anticipate
changes and adapt our practices, our business, results of operations and
financial condition could materially suffer. We anticipate that we will face the
following challenges internationally:
- the burden and expense of complying with a wide variety of foreign laws
and regulatory requirements;
- potentially adverse tax consequences;
- longer payment cycles and problems in collecting accounts receivable;
- technology export and import restrictions or prohibitions;
- tariffs and other trade barriers;
- difficulties in staffing and managing foreign operations;
- political and economic instability;
- cultural and language differences;
- fluctuations in currency exchange rates; and
- seasonal reductions in business activity, especially during the summer
months in Europe and certain other parts of the world.
IF WE DO NOT KEEP PACE WITH TECHNOLOGICAL CHANGES, OUR SERVICES MAY BECOME LESS
COMPETITIVE AND OUR BUSINESS COULD SUFFER
Our market is characterized by rapidly changing technologies, frequent new
product and service introductions, and evolving industry standards. If we cannot
keep pace with these changes our services could become less competitive and our
business will suffer. To achieve our goals, we need to provide strategic
business and Internet services that keep pace with continuing changes in
industry standards, information technology and client preferences. We may be
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 client requirements. This would materially
adversely affect our business, results of operations and financial condition.
THE MARKET FOR OUR SERVICES AND OUR REVENUE GROWTH DEPEND ON OUR CURRENT AND
POTENTIAL CLIENTS ACCEPTING AND EMPLOYING THE INTERNET
Since we expect to derive most of our revenues from providing Internet
professional services, our future success is dependent on the increased use of
the Internet. If the Internet fails to develop into a viable marketplace, or
develops more slowly than expected, our business, results of operations and
financial condition could materially suffer. Most of our current or potential
clients have limited experience with the Internet and may determine that the
Internet is not an effective method for expanding their businesses. We cannot
assure you that the market for Internet
13
<PAGE>
professional services will continue to grow or become sustainable.
The Internet may not develop into a viable commercial marketplace because of
many factors, including:
- the inadequate development of the necessary infrastructure;
- a lack of development of complementary products (such as high speed modems
and high speed communication lines); and
- delays in the development or adoption of new standards and protocols
required to handle increased levels of Internet activity.
The Internet has experienced, and is expected to continue to experience,
significant growth in the number of users and volume of traffic. We cannot
assure you that the Internet infrastructure will be able to support the demands
placed on it by this continued growth. In addition to the Internet's uncertain
ability to expand to accommodate increasing traffic, critical issues concerning
the use of the Internet (including security, reliability, cost, ease of
deployment and administration and quality of service) remain unresolved. For
example, a number of states have recently permitted telephone companies to
charge increased rates for consumers connecting to the Internet. Concerns
regarding these issues may affect the growth of the use of Internet technologies
to solve business problems.
YEAR 2000 PROBLEMS MAY DISRUPT OUR BUSINESS AND SUBJECT US TO INCREASED EXPENSES
The Year 2000 problem is the potential for system and processing failures of
date-related data. Many currently installed computer systems and software
products are coded to accept or recognize only two-digit entries in the date
code field. These systems may mistakenly interpret a date entered as "00" as the
year 1900 rather than the year 2000. As a result, it is necessary to update the
computer systems and/or software used by many companies and governmental
agencies to comply with Year 2000 requirements. Companies that do not update
their systems and/or software risk system failure or miscalculation that could
cause disruptions of normal business activity.
Year 2000 problems could require us, or our clients, to incur delays and
unanticipated expenses. We, and many of our clients, rely on third party vendors
for service and equipment. A significant Year 2000 disruption of these services
or equipment could require us to seek alternative providers. We may not be able
to immediately find alternative providers and we may not be able to enter into
commercially reasonable agreements with these providers. Similarly, our clients
may face the same obstacles. If our clients are not able to find alternative
providers for their normal business activities, they will likely not seek to
expand their business or utilize the Internet. This could decrease their demand
for our services.
Our failure to correct a material Year 2000 problem could have a material
adverse effect on our business, results of operations and financial condition.
We may experience operations difficulties because of undetected errors or
defects in the technology we use in our internal systems. Additionally, clients'
and future clients' purchasing patterns, especially in the fourth quarter of
1999, may be affected by Year 2000 issues as companies expend significant
resources to correct or replace their current systems for Year 2000 compliance.
The services we provide to our clients integrate software and other
technology from different providers. If there is a Year 2000 problem with
respect to a service performed by us, it may be difficult to determine whether
the problem relates to services which we have performed or is due to the
software, technology or services of other providers.
14
<PAGE>
Furthermore, we have entered into a few contracts, including contracts with some
of our largest clients, which have express or implied warranties with respect to
Year 2000 readiness without limitation as to liability. We may be subjected to
Year 2000-related lawsuits, whether or not the services that we have performed
are Year 2000 compliant. We cannot be certain what the outcomes of these types
of lawsuits may be.
Failure to provide to our clients services that are Year 2000 compliant,
whether or not in violation of any warranty, could have a material adverse
effect on our business, results of operations and financial condition.
RISKS RELATED TO LEGAL UNCERTAINTY
GOVERNMENTAL REGULATIONS REGARDING THE INTERNET MAY BE ENACTED WHICH COULD
IMPEDE OUR BUSINESS
To date, governmental regulations have not materially restricted the use of
the Internet by our clients in their markets. However, the legal and regulatory
environment that pertains to the Internet may change. New laws and regulations,
or new interpretations of existing laws and regulations, could impact us
directly, by regulating our operations or imposing additional taxes on the
services we provide, which could adversely impact our results and operations.
These regulations could restrict our ability to provide our services or increase
our costs of doing business.
In addition, new laws could impact us indirectly by preventing our clients
from delivering products and services over the Internet or slowing the growth of
the Internet. In particular, our business may be indirectly affected if new laws
inhibit the growth of the Internet. New laws relating to sales and other taxes,
user privacy, pricing controls, consumer protection and international commerce
may dampen the growth of the Internet as a communications and commercial medium.
For example, a number of proposals have been made at the federal, state and
local levels and by foreign governments that could impose taxes on the online
sales of goods and services and other Internet activities. In addition,
unfavorable judicial interpretation of existing laws, and the adoption of new
laws, regarding liability for libel and defamation and copyright, trademark and
patent infringement may extend liability to Web site owners. If these new laws
decrease the acceptance of e-commerce and other aspects of the Internet, our
clients may be harmed and, as a consequence, our revenue growth and growth in
demand for our services would be limited and our business, results of operations
and financial condition would be adversely affected.
WE MAY BECOME SUBJECT TO CLAIMS REGARDING FOREIGN LAWS AND REGULATIONS, WHICH
COULD SUBJECT US TO INCREASED EXPENSES
Because we have employees, property and business operations in the United
States, Denmark, France, the Netherlands, Singapore and the United Kingdom, we
are subject to the laws and the court systems of multiple jurisdictions. We may
become subject to claims in foreign jurisdictions for violations of their laws.
In addition, these laws may change or new laws may be enacted in the future.
International litigation is often expensive, time-consuming and distracting, and
could have a material adverse effect on our business, financial condition and
results of operations.
UNAUTHORIZED USE OF OUR INTELLECTUAL PROPERTY BY THIRD PARTIES MAY DAMAGE OUR
BRAND
Unauthorized use of our intellectual property by third parties may damage
our brand and our reputation. We do not have any patents or patent applications
pending and existing trade secret, trademark and copyright laws afford us only
limited protection. It may
15
<PAGE>
be possible for third parties to obtain and use our intellectual property
without our authorization. Furthermore, the validity, enforceability and scope
of protection of intellectual property in Internet-related industries is
uncertain and still evolving. The laws of some foreign jurisdictions may not
protect our intellectual property rights to the same extent as do the laws of
the United States.
DEFENDING AGAINST INTELLECTUAL PROPERTY INFRINGEMENT CLAIMS COULD BE EXPENSIVE
AND DISRUPTIVE TO OUR BUSINESS
We cannot be certain that our services, the finished products that we
deliver or materials provided to us by our clients for use in our finished
products do not or will not infringe valid patents, copyrights or other
intellectual property rights held by third parties. We may be subject to legal
proceedings and claims from time to time relating to the intellectual property
of others in the ordinary course of our business. Intellectual property
litigation is expensive and time consuming and successful infringement claims
against us may result in substantial monetary liability or may materially
disrupt the conduct of our business.
IF WE FAIL TO DELIVER QUALITY SERVICES OR FULFILL CLIENT NEEDS, OR IF OUR
SERVICES HARM OUR CLIENTS' BUSINESSES, WE MAY FACE ADDITIONAL EXPENSES, LOSSES
OR NEGATIVE PUBLICITY
Many of our engagements involve projects that are critical to the operations
of our clients' businesses. If we cannot complete engagements to our clients'
expectations, we could materially harm our clients' operations. This could
damage our reputation, subject us to increased risk of litigation or force us to
redesign the project. Any of these events could have a material adverse effect
on our business, results of operations and financial condition. While our
agreements with clients often limit our liability for damages arising from our
rendering of services, we cannot assure you that these provisions will be
enforceable in all instances or would otherwise protect us from liability.
Although we carry general liability insurance coverage, our insurance may not
cover all potential claims to which we are exposed or may not be adequate to
indemnify us for all liability that may be imposed. The successful assertion of
one or more significant claims against us could have a material adverse effect
on our business, results of operations and financial condition.
WE MAY BE SUBJECT TO CLAIMS FOR PAST ACTS OF THE COMPANIES THAT WE ACQUIRE,
WHICH MAY SUBJECT US TO INCREASED EXPENSES
We could experience financial or other setbacks if any of the businesses
that we acquire had problems in the past of which we are not aware. We are not
aware of any material legal liabilities of the companies we have acquired to
date. However, to the extent any client or other third party asserts any legal
claim against any of the companies we have acquired, our business, results of
operations and financial condition could be materially adversely affected.
RISKS RELATED TO THIS OFFERING
MANAGEMENT MAY USE THE PROCEEDS OF THIS OFFERING IN WAYS WITH WHICH
YOU DO NOT AGREE
Our management will have significant flexibility in applying the net
proceeds of this offering and may use the proceeds in ways with which
stockholders disagree. If we do not apply the funds we receive effectively, our
accumulated deficit may increase and we may lose significant business
opportunities.
16
<PAGE>
AS AN INTERNET-RELATED COMPANY, OUR STOCK PRICE IS LIKELY TO BE HIGHLY VOLATILE
AND COULD DROP UNEXPECTEDLY
Following this offering, the price at which our common stock will trade is
likely to be highly volatile and may fluctuate substantially. As a result,
investors in our common stock may experience a decrease in the value of their
common stock regardless of our operating performance or prospects. In addition,
the stock market has from time to time experienced significant price and volume
fluctuations that have affected the market prices for the securities of
technology companies, particularly Internet companies. In the past, following
periods of volatility in the market price of a particular company's securities,
securities class action litigation was often brought against that company. Many
technology-related companies have been subject to this type of litigation. We
may also become involved in this type of litigation. Litigation is often
expensive and diverts management's attention and resources, which could have a
material adverse effect upon our business, financial condition and results of
operations.
OUR DIRECTORS, EXECUTIVE OFFICERS AND AFFILIATES OWN ENOUGH OF OUR SHARES TO
CONTROL AGENCY.COM, WHICH WILL LIMIT YOUR ABILITY TO INFLUENCE CORPORATE MATTERS
Our directors, executive officers and affiliates currently beneficially own
approximately 86% of our common stock, and after the offering will beneficially
own approximately 75% of our common stock. Accordingly, these stockholders could
control the outcome of any corporate transaction or other matter submitted to
the stockholders for approval, including mergers, consolidations and the sale of
all or substantially all of our assets, and also could prevent or cause a change
in control. Third parties may be discouraged from making a tender offer or bid
to acquire us because of this concentration of ownership. The interests of these
stockholders may differ from the interests of the other stockholders. Omnicom,
together with its wholly-owned subsidiary Communicade, currently beneficially
own 49.9% of our common stock. Omnicom's and Communicade's beneficial ownership
of our common stock will only slightly decrease after the offering due to their
ability to purchase additional shares underlying their warrants and will be
approximately 46.6%, permitting them effectively to control AGENCY.COM.
OUR STOCKHOLDERS COULD BE ADVERSELY AFFECTED AS A RESULT OF OMNICOM'S AND ITS
TWO DESIGNATED DIRECTORS' POTENTIAL CONFLICTS OF INTERESTS
Under a stockholders agreement that terminates upon the closing of this
offering, Communicade has the right to designate two of our five directors.
In addition, Omnicom has significant ownership positions in some of our
direct competitors. These ownership positions may create conflicts of interest
for Omnicom and its director nominees as a result of their access to information
and business opportunities possibly useful to us and to these competitors.
ONE OF OUR DIRECTORS IS ALSO A DIRECTOR OF ONE OF OUR DIRECT COMPETITORS
John D. Wren, one of Communicade's nominees to our Board of Directors, is
also a director of Razorfish, Inc., one of our direct competitors. This
directorship may create actual and perceived conflicts of interest for Mr. Wren
as a result of his access to information and business opportunities possibly
useful to us and this competitor.
17
<PAGE>
OMNICOM HAS PROVIDED US WITH FINANCING AND IT HAS NO OBLIGATION TO RENEW OUR
CREDIT FACILITY BEYOND ITS TERMINATION DATE
We have received significant benefits from our relationship with Omnicom,
our largest shareholder. To date, our working capital and many of our
acquisitions have been financed on favorable terms by lines of credit advanced
by Omnicom. We currently have $73 million outstanding under our credit facility
provided by Omnicom. We are required to use 35% of the net proceeds of this
offering, up to a maximum of $25.0 million, to repay amounts borrowed under the
term loan portion of the credit facility. This credit facility provides for a
$25.0 million term loan facility, a $54.0 million revolving credit line and a
real property lease credit support facility providing letters of credit and/or
guarantees up to $6.0 million in the aggregate. The credit facility bears
interest at Omnicom's commercial paper rate, which was 5.3% on November 4, 1999,
plus 1.25%. The credit facility places restrictions on the conduct of our
business that stockholders may not consider favorable, including our ability to
pay dividends and incur additional debt. Omnicom is not obligated to extend this
credit facility beyond September 30, 2001. We cannot assure you that upon
termination of this facility we will be able to obtain any additional financing.
As a result, our financial condition might suffer.
SHARES ELIGIBLE FOR PUBLIC SALE AFTER THIS OFFERING COULD ADVERSELY AFFECT OUR
STOCK PRICE
Based on shares outstanding on November 4, 1999, from time to time after
this offering, a total of 27,774,562 additional shares of common stock may be
sold in the public market by existing stockholders. The market price of our
common stock could decline as a result of sales by these existing stockholders
of their shares of common stock in the market after this offering, or the
perception that these sales could occur. These sales also might make it
difficult for us to sell equity securities in the future at a time and at a
price that we deem appropriate. In addition, Omnicom and Communicade together
hold warrants to purchase an aggregate of 5.9 million shares of our common
stock. If they exercise these warrants and sell the underlying shares of common
stock in the market, the market price of our common stock could decline.
OUR CHARTER DOCUMENTS AND DELAWARE LAW MAY INHIBIT A TAKEOVER THAT STOCKHOLDERS
MAY CONSIDER FAVORABLE
Provisions in our charter and bylaws, including those that provide for a
classfied board of directors, authorized but unissued shares of common and
preferred stock and notice requirements for stockholder meetings, and Delaware
law, regarding the ability to conduct specific types of mergers within specified
time periods, may have the effect of delaying or preventing a change of control
or changes in our management that stockholders may consider favorable or
beneficial or that would provide stockholders with a premium to the market price
of their common stock. A classified board of directors may inhibit acquisitions
in general and a tender offer not endorsed by our board in particular since only
one-third of our directors are reelected annually, thereby requiring two annual
meetings before a majority of the directors could be replaced. The authorization
of undesignated preferred stock gives our board the ability to issue preferred
stock with voting or other rights or preferences that could impede the success
of any attempt to change control of the company. If a change of control or
change in management is delayed or prevented, this premium may not be realized
or the market price of our common stock could decline.
18
<PAGE>
YOU WILL INCUR IMMEDIATE AND SUBSTANTIAL DILUTION
The initial public offering price per share will significantly exceed the
net tangible book value per share. Accordingly, investors purchasing shares in
this offering will suffer immediate dilution of their investment equal to $10.25
per share.
FORWARD-LOOKING STATEMENTS
Many statements made in this prospectus under the captions "Prospectus
Summary", "Risk Factors", "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business" and elsewhere are
forward-looking statements that are not based on historical facts. Because these
forward looking-statements involve risks and uncertainties, there are important
factors that could cause actual results to differ materially from those
expressed or implied by these forward-looking statements, including those
discussed under "Risk Factors".
The forward-looking statements made in this prospectus relate only to events
as of the date on which the statements are made. We undertake no obligation
except as required by law, to update any forward-looking statement to reflect
events or circumstances after the date on which the statement is made or to
reflect the occurrence of unanticipated events.
19
<PAGE>
USE OF PROCEEDS
The net proceeds we will receive from the sale of the shares of common stock
offered by us are estimated to be $57.9 million, assuming an initial public
offering price of $11.00 per share and after deducting the underwriting discount
and estimated offering expenses. If the underwriters' over-allotment option is
exercised in full, we estimate that the net proceeds will be $66.9 million.
We have agreed under our credit facility to use 35% of the net proceeds from
this offering, up to a maximum of $25.0 million, to repay amounts borrowed under
the term loan portion of this credit facility. This credit facility bears
interest at Omnicom's commercial paper rate plus 1.25% and terminates on
September 30, 2001. As of November 4, 1999, Omnicom's commercial paper rate was
5.3%. We currently have approximately $73 million outstanding under this credit
facility, of which $25 million consists of term loans.
As of the date of this prospectus, we have not made any specific plans with
respect to the remaining proceeds of the offering.
However, we currently intend to use the remaining net proceeds of this
offering over time:
- to expand our operations;
- for general corporate purposes, including working capital; and
- to expand through strategic investments or acquisitions.
Pending any use, the net proceeds of this offering will be invested in
short-term, interest-bearing securities.
We cannot specify with certainty the particular uses for the net proceeds to
be received upon completion of this offering. Accordingly our management will
have significant flexibility in applying the net proceeds of this offering.
The principal purposes of this offering are to increase our working capital,
to create a public market for our common stock, to facilitate future access to
the public capital markets and to increase our visibility in the marketplace.
Although we engage in discussions with potential acquisition candidates from
time to time, we have no present commitments with respect to any acquisition. In
addition, as part of our overall acquisition strategy, we are currently engaged
in discussions with respect to the possible acquisition of a U.S. based
interactive direct marketing company.
DIVIDEND POLICY
We have not declared or paid any cash dividends on our common stock other than a
distribution to our stockholders prior to the September 1996 termination of our
status as an S-corporation. We currently intend to retain future earnings, if
any, to finance the expansion of our business. As a result, we do not intend to
pay cash dividends in the foreseeable future. Furthermore, our credit facility
prohibits us and our subsidiaries from paying cash dividends.
20
<PAGE>
CAPITALIZATION
The following table sets forth our capitalization as of September 30, 1999:
- on an actual basis;
- on a pro forma basis to reflect the acquisitions of I-traffic, which was
completed in October 1999, and Visionik, which was completed in November
1999; and
- on a pro forma as adjusted basis to reflect our sale of shares of common
stock at an assumed initial public offering price of $11.00 per share,
after deducting the underwriting discount and estimated offering expenses
payable by us. Please see "Use of Proceeds".
You should read this information together with our consolidated financial
statements and the notes to those statements appearing elsewhere in this
prospectus.
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1999
---------------------------------
<S> <C> <C> <C>
PRO FORMA
AS
ACTUAL PRO FORMA ADJUSTED
------- -------- --------
<CAPTION>
(IN THOUSANDS)
Long-term debt, excluding current portion. $ 66,807 $ 70,374 $ 50,124
<S> <C> <C> <C>
------- -------- --------
Capital lease obligations under capital leases, excluding
current portion.......................................... 1,709 1,717 1,717
------- -------- --------
Stockholders' equity:
Preferred stock, $.001 par value, 10,000,000 shares
authorized; no shares issued and outstanding (actual,
pro forma and pro forma as adjusted)...................
Common stock, $.001 par value, 200,000,000 shares
authorized; 26,789,538 shares issued and 26,666,164
shares outstanding (actual); 27,830,858 shares issued
and 27,707,484 shares outstanding (pro forma);
33,730,858 shares issued and 33,607,484 shares
outstanding (pro forma as adjusted).................... 26 27 33
Additional paid-in capital................................. 25,302 36,183 94,034
Accumulated deficit........................................ (7,461) (7,461) (7,461)
Deferred compensation...................................... (585) (585) (585)
Cumulative foreign currency translation.................... (44) (44) (44)
------- -------- --------
Total stockholders' equity................................. 17,238 28,120 85,977
------- -------- --------
Total capitalization................................... $85,754 $100,211 $137,818
======= ======== ========
</TABLE>
The number of shares of common stock to be outstanding after this offering
is based on the number of shares outstanding as of September 30, 1999. It does
not include:
- The following shares issued or to be issued in the merger with I-traffic:
- 160,680 shares underlying assumed stock options;
- 60,000 shares subject to newly-granted options at an exercise price of
$8.50; and
- 320,000 shares which may be issued on the first anniversary of closing
the I-traffic merger if I-traffic's business achieves specified revenue
and profitability targets;
21
<PAGE>
- 67,078 shares issued upon option exercises between October 1, 1999 and
November 4, 1999;
- 5,513,563 shares subject to options outstanding as of November 4, 1999 at
a weighted average exercise price of $2.64 per share and any exercises
since this date;
- 5,722,698 additional shares that could be issued under our stock option
plans; and
- 7,400,000 shares subject to warrants to purchase our common stock at an
exercise price of $0.005 per share.
22
<PAGE>
DILUTION
Giving effect to our acquisition of I-traffic and Visionik, our pro forma
net tangible book value as of September 30, 1999 was approximately
$(32.7) million, or $(1.18) per share of common stock. Pro forma net tangible
book value per share is determined by dividing the amount of our total tangible
assets less total liabilities by the pro forma number of shares of common stock
outstanding at that date. Dilution in net tangible book value per share
represents the difference between the amount per share paid by purchasers of
shares of common stock in this offering and the net tangible book value per
share of common stock immediately after the completion of this offering.
After giving effect to the issuance and sale of the shares of common stock
offered by us and after deducting the underwriting discount and estimated
offering expenses payable by us, our pro forma net tangible book value as of
September 30, 1999 would have been $25.2 million, or $0.75 per share. This
represents an immediate increase in pro forma net tangible book value of $1.93
per share to existing stockholders and an immediate dilution of $10.25 per share
to new investors purchasing shares in this offering. If the initial public
offering price is higher or lower, the dilution to the new investors will be
greater or less, respectively. The following table illustrates this per share
dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $11.00
Pro forma net tangible book value per share at
September 30, 1999...................................... $(1.18)
Increase in pro forma net tangible book value per share
attributable to this offering........................... 1.93
------
Pro forma net tangible book value per share after this
offering.................................................. 0.75
------
Dilution per share to new investors......................... $10.25
======
</TABLE>
------------------------
The following table summarizes, on a pro forma basis giving effect to our
acquisition of I-traffic and Visionik, as of September 30, 1999, the differences
between the number of shares of common stock purchased from us, the aggregate
cash consideration paid to us and the average price per share paid by existing
stockholders and new investors purchasing shares of common stock in this
offering. The calculation below is based on an assumed initial public offering
price of $11.00 per share, before deducting the underwriting discount and
estimated offering expenses payable by us:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
--------------------- ---------------------- AVERAGE PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
---------- -------- ----------- -------- -----------------
<S> <C> <C> <C> <C> <C>
Existing stockholders............ 27,707,484 82% $26,060,552 29% $ 0.94
New investors.................... 5,900,000 18 64,900,000 71 $11.00
---------- ----- ----------- -----
Total.......................... 33,607,484 100% $90,960,552 100%
========== ===== =========== =====
</TABLE>
This discussion and table assume no exercise of any stock options
outstanding as of September 30, 1999 and exclude 7,400,000 shares subject to
warrants to purchase our common stock at an exercise price of $0.005 per share.
As of September 30, 1999, there were options outstanding to purchase a total of
4,923,239 shares of common stock with a weighted average exercise price of $1.94
per share. The discussion and table also exclude 160,680 shares underlying stock
options assumed in the I-traffic merger and 60,000 shares subject to
newly-granted options issued to I-traffic employees. To the extent that any of
these options are exercised, there will be further dilution to new investors.
Please see "Capitalization".
23
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated balance sheet data as of December 31, 1997 and
1998 and the selected consolidated statement of operations data for the years
ended December 31, 1996, 1997 and 1998 have been derived from our audited
consolidated financial statements included elsewhere in this prospectus. The
selected consolidated balance sheet data as of December 31, 1996 is derived from
our consolidated audited financial statements not included in this prospectus
and the selected consolidated balance sheet as of December 31, 1995 and the
selected consolidated statement of operations data for the period from
February 10, 1995 (inception) to December 31, 1995 are derived from our
unaudited consolidated financial statements not included in this prospectus.
The selected actual and pro forma consolidated balance sheet data as of
September 30, 1999 and the pro forma consolidated statement of operations data
for the year ended December 31, 1998 and the actual and pro forma consolidated
statement of operations data for the nine months ended September 30, 1998 and
1999 have been derived from unaudited consolidated financial statements included
elsewhere in this prospectus. The pro forma consolidated balance sheet data give
effect to the acquisitions of I-traffic and Visionik, which were completed in
October and November 1999, respectively, as if these acquisitions had occurred
on September 30, 1999. The pro forma consolidated statement of operations data
for the year ended December 31, 1998 and the nine months ended September 30,
1998 give effect to the acquisitions of Ketchum Interactive, which was completed
in August 1998, The Primary Group, which was completed in August 1998,
Interactive Solutions, which was completed in April 1999, Eagle River
Interactive, which was completed in April 1999, Digital Vision, which was
completed in May 1999, Twinspark Interactive People, which was completed in
July 1999, I-traffic, which was completed in October 1999 and Visionik, which
was completed in November 1999 as if the acquisitions had occurred on
January 1, 1998. The pro forma consolidated statement of operations data for the
nine months ended September 30, 1999 give effect to the acquisition of Eagle
River Interactive, Interactive Solutions, Digital Vision, Twinspark Interactive
People, I-traffic and Visionik as if these acquisitions had occurred on
January 1, 1998.
The unaudited consolidated financial statements include all adjustments,
consisting only of normal recurring adjustments, which, in the opinion of
management, are necessary for the fair presentation of our consolidated
financial position and the consolidated results of operations for those periods.
Results of operations for the nine months ended September 30, 1999 are not
necessarily indicative of the results that may be expected for the entire year
or for any future period.
You should read the following discussion of our financial condition and
results of operations in conjunction with "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and the AGENCY.COM audited
consolidated financial statements and unaudited pro forma condensed consolidated
financial statements, the Interactive Solutions, Quadris Consulting, Eagle River
Interactive, Twinspark Interactive People, I-traffic and Visionik audited
financial statements, and the notes to those statements included elsewhere in
this prospectus.
24
<PAGE>
<TABLE>
<CAPTION>
PERIOD FROM
FEBRUARY 10,
1995
(INCEPTION) TO YEAR ENDED DECEMBER 31,
DECEMBER 31, ---------------------------------------------------
1995 1996 1997 1998 1998
ACTUAL ACTUAL ACTUAL ACTUAL PRO FORMA
-------------- ---------- ----------- ----------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Revenues.................. $ 2,162 $ 6,095 $ 12,975 $ 26,452 $ 76,130
Direct salaries and
costs................... 651 2,217 6,200 15,930 44,018
------- ---------- ----------- ----------- --------
Gross profit.............. 1,511 3,878 6,775 10,522 32,112
Operating Expenses:
General and
administrative........ 519 955 3,815 10,944 32,390
Sales and marketing..... 118 -- 528 596 3,819
Amortization of
intangibles........... -- -- 72 893 14,480
Depreciation and
amortization.......... 6 61 304 1,141 1,622
------- ---------- ----------- ----------- --------
Total operating
expenses................ 643 1,016 4,719 3,574 52,311
------- ---------- ----------- ----------- --------
Income (loss) from
operations.............. 868 2,862 2,103 (3,052) (20,199)
Other income (expense),
net..................... (77) (1,360) (938) 571 (701)
------- ---------- ----------- ----------- --------
Net income (loss)......... $ 791 $ 1,502 $ 1,182 $ (2,481) $(20,900)
======= ========== =========== =========== ========
Minority interest......... -- -- 167 (282) (282)
EBITDA(1)................. $ 874 $ 2,923 $ 2,433 $ (1,018) $ (4,097)
======= ========== =========== =========== ========
Basic net income (loss)
per common share(2)..... $439.47 $ 0.32 $ 0.07 $ (0.15) $ (0.78)
Diluted net income (loss)
per common share(2)..... $439.47 $ 0.31 $ 0.07 $ (0.15) $ (0.78)
======= ========== =========== =========== ========
Weighted average shares
outstanding used in
basic net income (loss)
per common share
calculation............. 2 4,750 16,200 16,854 26,865
======= ========== =========== =========== ========
Weighted average shares
outstanding used in
diluted net income
(loss) per common share
calculation............. 2 4,797 16,297 16,854 26,685
======= ========== =========== =========== ========
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
----------------------------------------------
1998 1999 1998 1999
ACTUAL ACTUAL PRO FORMA PRO FORMA
-------- --------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Revenues.................. $18,956 $ 56,499 $ 55,962 $ 74,808
Direct salaries and
costs................... 10,355 28,789 31,559 41,192
------- -------- -------- --------
Gross profit.............. 8,601 27,715 24,403 33,616
Operating Expenses:
General and
administrative........ 7,744 21,652 22,904 30,117
Sales and marketing..... 298 2,591 2,658 4,090
Amortization of
intangibles........... 583 4,574 10,707 10,067
Depreciation and
amortization.......... 772 3,149 1,130 3,367
------- -------- -------- --------
Total operating
expenses................ 9,397 31,966 37,399 47,641
------- -------- -------- --------
Income (loss) from
operations.............. (796) (4,251) (12,996) (14,025)
Other income (expense),
net..................... (146) (2,364) (2,273) (2,723)
------- -------- -------- --------
Net income (loss)......... $ (942) $ (6,615) $(14,147) $(16,748)
======= ======== ======== ========
Minority interest......... (282) -- (282) 51
EBITDA(1)................. $ 559 $ 3,472 $ (1,159) $ (591)
======= ======== ======== ========
Basic net income (loss)
per common share(2)..... $ (0.06) $ (0.29) $ (0.53) $ (0.57)
Diluted net income (loss)
per common share(2)..... $ (0.06) $ (0.29) $ (0.53) $ (0.57)
======= ======== ======== ========
Weighted average shares
outstanding used in
basic net income (loss)
per common share
calculation............. 16,587 23,187 26,597 29,242
======= ======== ======== ========
Weighted average shares
outstanding used in
diluted net income
(loss) per common share
calculation............. 16,587 23,187 26,597 29,242
======= ======== ======== ========
</TABLE>
- ------------------------
(1) EBITDA represents earning or loss before other income and expense
(consisting of provision (benefit) from income taxes and net interest
expense), depreciation and amortization. We have provided EBITDA because it
is a measure of financial performance commonly used in the Internet
professional services industry and because management believes many
investors use EBITDA as a measure of a company's historical ability to
service its debt since EBITDA shows available cash before debt service and
before deducting non-cash changes, such as depreciation and amortization.
Other companies may calculate EBITDA differently from the way we do. EBITDA
is not a measurement of financial performance under
25
<PAGE>
GAAP. We believe you should not consider EBITDA as an alternative to net
income (loss) as an indicator of our operating performance or as an
alternative to cash flow as a measure of our liquidity. You should be aware
that items excluded from the calculation of EBITDA are significant
components in understanding and assessing our financial performance. You
should read the information in the table together with information regarding
our cash flows from operating, investing and financing activities appearing
on pages 39-40 of this prospectus, which is also an important measure of our
financial condition.
(2) The number of shares used to calculate basic and diluted net income or loss
per share was calculated in accordance with the treasury stock method. The
treasury stock method is a method for calculating outstanding shares that
adds to the actual number of shares outstanding additional shares issuable
upon the exercise of stock options and warrants based on a calculation that
assumes that any proceeds that could be obtained upon the exercise of
outstanding stock options and warrants during the applicable period would be
used to purchase common stock at the average market price during the period.
The following balance sheet data are presented:
- on an actual basis;
- on a pro forma basis to reflect the acquisitions of I-traffic and
Visionik; and
- on a pro forma as adjusted basis as of September 30, 1999 to give effect
to the sale of 5,900,000 shares in this offering after deducting the
underwriting discount and estimated offering expenses payable by us,
assuming an initial public offering price of $11.00 per share.
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1999
AS OF DECEMBER 31, --------------------------------------
----------------------------------------- PRO FORMA
1995 1996 1997 1998 ACTUAL PRO FORMA AS ADJUSTED
-------- -------- -------- -------- ---------- ---------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents.................... $ 58 $ 513 $ 388 $ 769 $ 726 $ 3,117 $ 40,724
Working capital.............................. 734 1,633 4,353 1,327 17,873 19,197 56,804
Total assets................................. 1,083 4,100 11,291 24,860 107,488 127,903 165,510
Notes payable, excluding current portion..... -- -- 2,425 11,989 66,807 70,379 50,124
Capital leases, excluding current
installments............................... -- -- 116 848 1,709 1,717 1,717
Total stockholders' equity................... 791 2,260 3,449 2,060 17,238 28,120 85,977
</TABLE>
26
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
YOU SHOULD READ THE FOLLOWING DISCUSSION OF OUR FINANCIAL CONDITION AND
RESULTS OF OPERATIONS IN CONJUNCTION WITH "SELECTED CONSOLIDATED FINANCIAL
DATA", THE AGENCY.COM CONSOLIDATED FINANCIAL STATEMENTS AND UNAUDITED PRO FORMA
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, THE INTERACTIVE SOLUTIONS, QUADRIS
CONSULTING, EAGLE RIVER INTERACTIVE, TWINSPARK INTERACTIVE PEOPLE, I-TRAFFIC AND
VISIONIK FINANCIAL STATEMENTS, AND THE NOTES TO THOSE STATEMENTS APPEARING
ELSEWHERE IN THIS PROSPECTUS.
OVERVIEW
AGENCY.COM is an international Internet professional services firm. Our
revenues have grown from $2.2 million in 1995 to $26.5 million in 1998 on an
actual basis, and to $76.1 million in 1998 on a pro forma basis giving effect to
our acquisitions. We achieved this growth through significant long-term
relationships with multiple clients; six of our top 10 clients for the first
nine months of 1999 have been clients since 1997 or before. At the same time, we
have not been overly dependent on any single client. No client represented more
than approximately 7% of our overall revenues on a pro forma basis in 1998, and,
other than British Airways, no client accounted for more than 10% of our
revenues on an actual basis in 1998. For the nine months ended September 30,
1999, British Airways, Compaq and Sprint accounted for approximately 14%, 9% and
9% of our revenues, respectively, on an actual basis. We have grown organically
and through strategic acquisitions. We have acquired 11 companies while
expanding our geographic reach to 12 cities in the United States and Europe and
have made minority investments in a company based in Singapore and a company
based in France. Please see note 9 to the AGENCY.COM consolidated financial
statements for a summary of our operations by geographic area.
We derive our revenues from services performed under one of three pricing
arrangements: retainer, time-and-materials and fixed-price. The services
performed under any of these arrangements are substantially identical.
We bill and recognize revenues from retainer agreements on a monthly basis
while the agreement is in effect. We believe that retainer arrangements are
indicative of our strong, long-term relationships with clients which yield
significant benefits both to our clients and to us. We believe that we will
achieve greater predictability of revenues and higher revenue growth with
clients who engage us in retainer-based relationships. Retainer agreements are
generally one year in length and include a renewal clause. Typically, retainer
relationships with clients result in additional fixed-price and
time-and-materials projects since retainer arrangements may not cover the full
cost of specific projects. Retainer fees represented approximately 5.4% of our
revenues for the nine months ended September 30, 1999. Revenue from clients with
whom we have retainer relationships represented approximately 40.7% of our
revenues during this period. Consistent with our focus on long-term
relationships, our goal is to increase our number of retainer-based
arrangements.
We bill and recognize revenues from time-and-materials projects on the basis
of costs incurred in the period. We estimate these costs according to an
internally developed process. This process takes into account the type and
overall complexity of the project, the anticipated number of personnel of
various skill sets needed and their associated billing rates, and the estimated
duration of and risks associated with the project. Management personnel familiar
with the production process evaluate and price all project proposals.
27
<PAGE>
We recognize revenues from fixed-price projects using the
percentage-of-completion method based on the ratio of costs incurred to the
total estimated project costs. Fees are billed to the client over the course of
the project. We estimate the price for fixed-price projects using the same
methodology as time-and-materials projects. All fixed-price proposals must first
be approved by a member of our senior management team.
For the nine month period ended September 30, 1999, we incurred a loss of
$6.6 million. As a result of these losses, our accumulated deficit was $7.4
million at September 30, 1999. These losses resulted primarily from amortization
of intangibles of $4.5 million associated with our most recent acquisitions,
increased costs due to an increase in the number of employees as a result of our
decision to continue to build our infrastructure, and an increase in
depreciation and amortization expense due to significant capital expenditures.
Provisions for estimated losses on all three types of contracts are made
during the period in which such losses become probable and can be reasonably
estimated. To date, such losses have not been significant. We report revenue net
of reimbursable expenses.
Our revenues and earnings are affected by a number of factors, including:
- the amount of business developed from existing relationships;
- our ability to meet the changing needs of the marketplace;
- employee retention;
- billing rates;
- our ability to deliver complex projects on time; and
- efficient utilization of our employees.
Many of our business initiatives, including our acquisition strategy, are aimed
at enhancing these factors. Further, we believe that our focus on retainer-based
arrangements will continue to improve the predictability of our
quarter-to-quarter results.
Our expenses include direct salaries and costs, sales and marketing, general
and administrative, depreciation and amortization of tangible assets, and
amortization of goodwill. Direct salaries and costs includes salaries, benefits
and incentive compensation of billable employees. Billable employees are full
time employees whose time spent working on client projects is charged to that
client at agreed upon rates. Billable employees are our primary source of
revenue. Direct costs and salaries also include other direct costs associated
with revenue generation. Sales and marketing expenses include promotion and new
business generation expenses and the salary and benefit costs of personnel in
these functions. General and administrative expenses include the salaries and
benefits costs of management and other non-billable employees, rent, accounting,
legal and human resources costs. Depreciation and amortization expenses
primarily include depreciation of technology equipment, furniture and fixtures,
and leasehold improvements. Amortization of goodwill expenses include charges
for the excess of purchase price over net tangible book value of acquired
companies. Personnel compensation and facilities costs represent a high
percentage of our operating expenses and are relatively fixed in advance of each
quarter.
We disclose EBITDA because it is a measure of financial performance commonly
used in the Internet professional services industry. EBITDA shows available cash
before debt service and before deducting non-cash charges, such as depreciation
and amortization. We believe that EBITDA is a useful measure for analyzing the
company's financial results because it shows our historical ability to service
our debt. EBITDA on a pro forma and an actual basis for the nine months ended
September 30, 1999 was approximately $(591,000) and $3.5 million, respectively,
28
<PAGE>
compared to $(1.2) million and $559,000, respectively, for the same period in
the prior year. We believe that the increase in EBITDA will continue as revenues
continue to increase, our margins continue to increase as a result of increased
utilization of billable employees and our fixed costs continue to decrease as a
percentage of our revenue.
We have achieved growth in revenues by pursuing a strategy of increasing
revenues from existing lines of businesses and through augmenting existing lines
of business with acquisitions.
Revenue from our international operations was $824,000 in 1997 and increased
to $7.5 million in 1998, an increase of 810%. Net loss from international
operations was $68,000 in 1997 versus $113,000 in 1998, an increase of 66%.
Revenue from our international operations was $11.9 million for the nine month
period ended September 30, 1999, compared to $5.6 for the nine month period
ended September 30, 1998. This represents an increase of 112% for the nine month
period. Net loss from international operations was $100,000 for the nine month
period ended September 30, 1999 compared to $(85,000) for the nine month period
ended September 30, 1998. This represents an increase of 17.6% for the nine
month period. The increased international revenue for the nine month period over
the prior year is primarily due to our focus on growing our international
operations as evidenced by our acquisitions of Twinspark, Visionik and our
investment in Pictoris. We expect the trend of increased international revenue
to continue as we continue to expand our international base.
To date, we have experienced success in organically growing the size and
scale of our business by attracting new clients, attracting new professional
staff and expanding the range and complexity of the services that we offer. We
seek to organically grow our existing offices and lines of business on an
ongoing basis.
ACQUISITIONS AND INVESTMENTS
In addition to organic growth, a key component of our overall growth
strategy is the acquisition of, or investment in, complementary businesses,
technologies, services and products. We have acquired 11 companies since
inception and intend to continue acquiring similar businesses. We acquired
Spiral Media, Online Magic, Ketchum Interactive, The Primary Group, Interactive
Solutions, Quadris Consulting (Quadris became a wholly owned subsidiary of
Interactive Solutions immediately prior to our acquisition of Interactive
Solutions), Eagle River Interactive, Digital Vision, Twinspark Interactive
People, I-traffic and Visionik. We have also purchased a minority interest in
both The Edge Consultants, a technology and services company based in Singapore,
and Pictoris Interactive, a Paris-based Internet professional services firm
company. We are also in discussions with respect to a possible acquisition of a
U.S. based interactive direct marketing company.
All of the companies and businesses in which we have acquired a 100%
ownership interest have been incorporated into our operations or, with respect
to our two most recent acquisitions, are being incorporated into our operations.
In July 1997, we acquired 51% of Spiral Media, Inc., and in July 1998, we
acquired the remaining 49%. The total consideration for the acquisition was
approximately $6.2 million, consisting of a cash payment of $5.5 million,
relinquishment of debt due from Spiral Media stockholders of $128,000 and the
issuance of 480,626 shares of our common stock valued at $1.12 per share. Spiral
Media created new media services for businesses and consumers by offering
Internet-based and digital media communications strategies and development for
clients.
In October 1997, we acquired 42.5% of Online Magic Limited and acquired the
remaining equity interest in two steps in
29
<PAGE>
May 1998 and July 1998. The total consideration for the acquisition was
$2.2 million. The consideration was comprised of a cash payment of $1.6 million
and the issuance of 498,434 share of our common stock valued at $1.20 per share.
Online Magic designed, built and managed web sites for their clients.
In August 1998, we acquired assets from Ketchum Advertising Inc. The
consideration consisted of a cash payment of approximately $643,000. Ketchum
Interactive was an interactive marketing and branding agency, which developed
interactive communications for clients by utilizing strategic consulting, design
and production.
In August 1998, we acquired assets from Web Partners (doing business as The
Primary Group Inc). In consideration of the assets acquired, we paid
approximately $53,220 in cash. The Primary Group focused on online marketing
needs for luxury and style brands.
In December 1998, we entered into an agreement to acquire up to 60% of The
Edge Consultants PTE. LTD. in a staged transaction. In December 1998, we
acquired 12% of Edge's outstanding shares and in July 1999, acquired an
additional 18%. The total cash consideration for the 30% investment was
$3.1 million. The remaining 30% must be purchased prior to January 2002 or our
option will expire. The Edge offers strategic, creative and technology services
to its clients. Its core businesses include Internet and electronic commerce
applications and wireless/mobile services. The Edge is a separate legal entity
and will be accounted for under the equity method of accounting.
In April 1999, we acquired Interactive Solutions Incorporated through a
merger in exchange for an aggregate of 4,176,846 shares of our common stock and
a warrant to purchase 3,071,248 shares of our common stock at a purchase price
of $0.005 per share. The total consideration of the acquisition was
approximately $8.2 million. Interactive Solutions created digital communications
strategies to help its clients increase sales, improve communications and create
brand identities.
In April 1999, we acquired Eagle River Interactive Inc. through a merger in
exchange for an aggregate of 3,659,538 shares of our common stock and a warrant
to purchase 4,328,752 shares of our common stock at a purchase price of $0.005
per share. The total consideration of the acquisition was approximately
$8.1 million. Eagle River created, developed and deployed online marketing
strategies to assist a variety of companies, primarily in the United States, in
communicating effectively with their targeted audiences.
In May 1999, we purchased all of the issued and outstanding shares of
capital stock of Digital Vision Communications Inc. for $1.1 million in cash.
Digital Vision was an interactive securities firm that provided web site design
and development.
In July 1999, we purchased all of the issued and outstanding shares of
capital stock of Twinspark Interactive People B.V. for $700,000 in cash and
1,057,226 shares of our common stock valued at $5.95 per share, of which
1,047,226 shares were issued to the shareholders of Twinspark Interactive People
and 10,000 shares were issued to former employees of Twinspark Interactive
People, for a total aggregate purchase price of $6.3 million. Twinspark
delivered Internet strategies to global organizations including electronic
commerce and strategic consultancy, building and maintenance of Web sites,
Intranet and Extranet and enterprise Web site management systems.
In October 1999, we acquired a 5% equity interest in Pictoris Interactive
from its existing shareholders for $500,000. We have an option to purchase the
remaining 95% which expires October 1, 2000. Pictoris' existing shareholders
have the right, subject to conditions, to require us to purchase all of their
shares. The total value of the transaction could be as high as
30
<PAGE>
$13.5 million, which includes a 10% contingent payment payable upon Pictoris'
achieving operating targets. Pictoris consults with its clients to develop their
overall Internet strategy and helps them implement that strategy through design,
programming and production of Internet sites.
In October 1999, we acquired Interactive Traffic, Inc., known as as
"I-traffic", through a merger. The consideration paid to the stockholders of
I-traffic could total $14.9 million, which includes $3.0 million in cash paid at
closing, $1.0 million to be paid on December 31, 1999, 469,320 shares of our
common stock, the assumption of options to purchase 160,680 shares of our common
stock and the issuance of newly-granted options to purchase 60,000 shares of our
common stock. The total consideration to be paid also includes performance-based
payments consisting of $2.0 million to be paid in four quarterly payments
starting in the fourth quarter of 1999 and 320,000 shares to be issued one year
from closing. I-traffic is a full service online direct marketing company
headquartered in New York with an office in San Francisco. They provide
strategic marketing services through media planning, development, tracking and
the creation of affiliation programs.
In November 1999, we acquired all of the issued and outstanding equity of
Visionik, a company based in Denmark. The total consideration for the
acquisition was $5.9 million, consisting of $500,000 in cash and 572,000 shares
of our common stock. Visionik is located in Copenhagen, Denmark and concentrates
on providing complete interactive television and Internet services to its
clients.
We believe our acquisitions have supported our ability to grow rapidly while
continually enhancing the quality of services we offer our clients. Our
acquisitions have allowed us to rapidly build our base of professionals in the
context of a tight labor market for experienced technical and creative
professionals. From January 1, 1997, to November 4, 1999, our staff increased
from approximately 60 to over 1,000 employees. The acquired entities
collectively employed approximately 650 individuals at the time we acquired
them. Broadening our geographic coverage, both within the United States and
internationally, allows us to better meet the needs of our global clients and to
attract new clients who seek integrated services across diverse geographic
areas. We have also been able to expand our service offerings through the
acquisition of companies with complementary products and skill sets.
Additionally, we expect to achieve cost synergies by consolidating management
and back-office operations, and sharing technical infrastructure. Please see
"Business--AGENCY.COM Strategy" and "--Acquisition and Integration".
We evaluate acquisitions based on numerous quantitative and qualitative
factors. Quantitative factors include historical and projected revenues and
profitability, geographic coverage and backlog of projects under contract.
Qualitative factors include strategic and cultural fit, management skills,
customer relationships and technical proficiency. We used cash as the primary
consideration for our early acquisitions but, more recently, have used our
common stock as the primary consideration. We anticipate that we will use common
stock as the primary form of consideration for future acquisitions.
We fully integrate all acquired companies into our operating organization.
This integration includes business development, delivery of services, managerial
and administrative support, benefits, purchasing and all other areas.
A significant differentiating factor in our growth strategy is that we
manage regional locations based on key success factors rather than traditional
profit-loss statements. In order to facilitate cooperation across our company
31
<PAGE>
and prevent territorial conflicts, we evaluate Regional Presidents on the basis
of key success factors, including project profitability, utilization, retention,
client satisfaction and revenue per billable employee. We believe that managing
by these key success factors enables our offices to function more effectively as
a team and to jointly take advantage of greater opportunities for synergies and
additional revenues.
All of our acquisitions have been accounted for using the purchase method.
Under the purchase method, the financial data of the acquired entities are
consolidated with our financial results from the effective dates of their
acquisition. For each acquisition, a portion of the purchase price is allocated
to the tangible and identifiable intangible assets acquired and liabilities
assumed based on their respective fair market values on the acquisition date.
The remaining unallocated portion of the purchase price of each of the
acquisitions is allocated to intangible assets, primarily goodwill, and
amortized on a straight-line basis over the estimated period of benefit, which
ranges from three to seven years. We evaluate the period of benefit on a
company-by-company basis. For the year ended December 31, 1998 and the nine
months ended September 30, 1999, amortization of intangibles expense was
$0.9 million and $4.6 million, respectively. We expect to incur amortization
expense on currently recorded intangibles of $2.8 million for the three months
ending December 31, 1999 and $11.2 million for the year ending December 31,
2000. In addition, we expect to incur additional acquisition-related
amortization expenses as a result of our acquisition program. Investments where
we own less than 20% of a company's equity have been accounted for using the
cost method and investments greater than 20% but less than 50% of a company's
equity have been accounted for using the equity method.
32
<PAGE>
HISTORICAL RESULTS OF OPERATIONS
The following table sets forth the percentage of revenues of certain items
included in our statement of operations for the periods indicated:
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------------ ----------------------
1996 1997 1998 1998 1999
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PERCENTAGE DATA)
Revenues................................................. 100% 100% 100% 100% 100%
Direct salaries and costs................................ 36 48 60 55 51
--- --- --- --- ---
Gross profit............................................. 64 52 40 45 49
Operating Expenses:
General and administrative............................. 16 30 42 41 38
Sales and marketing.................................... -- 4 2 2 5
Amortization of intangibles............................ -- -- 1 1 8
Depreciation and amortization.......................... 1 2 4 4 6
--- --- --- --- ---
Total operating expenses................................. 17 36 49 48 57
--- --- --- --- ---
Income (loss) from operations............................ 47 16 (9) (2) (8)
Interest income (expense), net........................... -- -- (2) (2) (3)
Minority interest........................................ -- (2) (1) (1) --
--- --- --- --- ---
Income (loss) before provision for (benefit from) income
taxes.................................................. 47 18 (12) (5) (11)
Provision (benefit) for income taxes..................... 22 9 (5) (2) --
--- --- --- --- ---
Net income (loss)........................................ 25% 9% (7)% (3)% (11)%
=== === === === ===
EBITDA (1)............................................... 48% 19% (5)% 1% 6%
=== === === === ===
</TABLE>
- ------------------------
(1) EBITDA represents earning or loss before other income and expense
(consisting of provision (benefit) from income taxes and net interest
expense), depreciation and amortization. We have provided EBITDA because it
is a measure of financial performance commonly used in the Internet
professional services industry and because management believes many
investors use EBITDA as a measure of a company's historical ability to
service its debt since EBITDA shows available cash before debt service and
before deducting non-cash charges, such as depreciation and amortization.
Other companies may calculate EBITDA differently from the way we do. EBITDA
is not a measurement of financial performance under GAAP. We believe you
should not consider EBITDA as an alternative to net income (loss) as an
indicator of our operating performance or as an alternative to cash flow as
a measure of our liquidity. You should be aware that items excluded from the
calculation of EBITDA are significant components in understanding and
assessing our financial performance. You should read the information in the
table together with information regarding our cash flows from operating,
investing and financing activities appearing on pages 39-40 of this
prospectus, which is also an important measure of our financial condition.
33
<PAGE>
COMPARISON OF THE FISCAL YEARS 1996, 1997 AND 1998
The following discussion relates to our actual operating results for the
periods noted. The operating results discussed include the operations of
acquired companies from the effective dates of their acquisitions. Given that
each year includes revenues and expenses from new acquisitions, we believe that
the operating results for 1998 are not directly comparable to the operating
results for 1997, and, similarly, that 1997 results are not directly comparable
to those for 1996.
REVENUES. Revenues were $6.1 million in 1996 and grew to $13.0 million in
1997, an increase of 113%. Revenues were $26.5 million in 1998, an increase of
104% compared to 1997 revenue. The increase in revenues reflected growing demand
for Internet professional services, increases in the number of our client
relationships, the addition of revenues from the businesses we acquired in each
period, the size of our relationships with existing clients, billing rates, and
number of billable professionals, and the introduction of new strategic,
creative, and technological services to the marketplace.
DIRECT SALARIES AND COSTS. Direct salaries and costs were $6.2 million in
1997 and grew to $15.9 million in 1998, an increase of 156%. Direct salaries and
costs were $2.2 million in 1996. Direct salaries and costs represented 60%, 48%
and 36% of revenues in 1998, 1997 and 1996, respectively. For the years ended
December 31, 1996, 1997 and 1998, there were approximately 45, 90 and 160
employees, respectively, included in direct salaries and costs. The increase in
direct salaries and costs as a percentage of revenues in 1998 compared to 1997
was primarily due to the planned investment in additional employees in
anticipation of future growth. In the future, we expect direct salaries and
costs to increase in absolute dollar terms but to decrease as a percentage of
revenues due to our improved scale and the utilization of billable
professionals. Increases in utilization result in increased revenues with no
corresponding increase in salaries, which are fixed. Therefore, direct salaries
and costs as a percentage of revenues decreases as employee utilization
increases.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
were $3.8 million in 1997 and grew to $10.9 million in 1998, an increase of
187%. General and administrative expenses were $1.0 million in 1996. General and
administrative expenses represented 42% of revenues in 1998, 30% in 1997 and 16%
in 1996. The increase in general and administrative expenses in absolute dollar
terms and as a percentage of revenues in 1998 compared to 1997 was the result of
the expansion of the senior management team, an increase in the number of other
non-billable employees and in salary rates, and increases in many other types of
general and administrative expenses in anticipation of future growth and
increasing international reach. This included rent and other expenses incurred
in opening additional offices and hiring additional employees. In the future, we
expect general and administrative expenses to increase in absolute dollars but
to decrease as a percentage of revenues due to our improved scale, utilization
of billable professionals, increased efficiency of non-billable staff and higher
overall revenues.
SALES AND MARKETING EXPENSES. Sales and marketing expenses were $527,000 in
1997 and grew to $596,000 in 1998, an increase of 13%. We did not incur sales
and marketing expenses in 1996. Sales and marketing expenses represented 2% of
revenues in 1998 and 4% in 1997. The decrease in sales and marketing expenses as
a percentage of revenues from 1997 to 1998 was primarily due to higher overall
revenues. The increase of sales and marketing expenses in absolute dollar terms
from 1997 to 1998 was attributable to the increase in the number of sales
personnel and an overall increase in our marketing and branding efforts. We
expect sales and marketing expenses to increase in absolute dollar terms as we
continue to invest in building our brand. We do not anticipate that sales and
marketing expenses will increase significantly as a percentage of revenue in
future periods.
34
<PAGE>
AMORTIZATION OF INTANGIBLES. Amortization of goodwill was approximately
$72,000 in 1997 and grew to $893,000 in 1998. There was no amortization of
goodwill in 1996. Amortization of goodwill represented approximately 3% of
revenues in 1998 and less than 1% of revenues in 1997. The increase in
amortization of goodwill was due to the goodwill resulting from Spiral Media,
Online Magic, The Primary Group and Ketchum acquisitions, all of which were
completed during 1998. Goodwill generated from these acquisitions is being
amortized over a seven year period. We expect amortization of goodwill to
increase in absolute dollar terms as we acquire additional companies.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expenses were
$304,000 in 1997 and grew to $1.1 million in 1998, an increase of 262%.
Depreciation and amortization was $61,000 in 1996. Depreciation and amortization
expenses represented 4% of revenues in 1998, 2% of revenues in 1997 and 1% in
1996. The increases in absolute dollar terms from year to year were related to
the investment in, and related depreciation of, technology equipment, furniture
and fixtures, and leasehold improvements, and the depreciation of the assets of
the companies we acquired. We expect these expenses to continue to grow in
absolute dollar terms as we continue to invest in growth and technology and
training to yield more efficient operations.
NET INCOME (LOSS). Net loss for 1998 was $2.5 million compared to net
income of $1.2 million in 1997 and $1.5 million in 1996. The decrease in net
income from period to period was primarily caused by increased direct salaries
and costs, general and administrative expenses and depreciation and
amortization, which together increased at a greater rate than our increase in
revenues, all of which are discussed above.
COMPARISON OF THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND SEPTEMBER 30, 1999
REVENUES. Revenues were $19.0 million for the nine months ended
September 30, 1998 and grew to $56.5 million for the nine months ended
September 30, 1999, an increase of 198.1%. The increase in revenues reflected
our acquisitions over the period, growing demand for Internet professional
services, addition of new client relationships, expansion of existing client
relationships, increases in billing rates and the number of billable
professionals, and the introduction of new strategy, creative and technology
services to the marketplace.
DIRECT SALARIES AND COSTS. Direct salaries and costs were $10.4 million for
the nine months ended September 30, 1998 and grew to $28.8 million for the nine
months ended September 30, 1999, an increase of 178%. As a percentage of
revenues, direct salaries and costs decreased from 55% for the nine months ended
September 30, 1998 to 51% for the nine months ended September 30, 1999. For the
nine months ended September 30, 1998 and 1999, there were approximately 220 and
670 employees, respectively, included in direct salaries and costs. The increase
in absolute dollars was primarily attributable to increases in salary rates and
the hiring of additional employees.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
were $7.7 million for the nine months ended September 30, 1998 and grew to
$21.7 million for the nine months ended September 30, 1999, an increase of 182%.
As a percentage of revenues, general and administrative expenses decreased from
41% for the nine months ended September 30, 1998 to 38% for the nine months
ended September 30, 1999. The decrease in percentage terms was primarily
attributable to improved scale. The increase in general and administrative
expenses in absolute dollar terms was the result of an increase in salary rates,
an increase in the number of non-billable employees as we expanded our
infrastructure to
35
<PAGE>
support growth and all other types of general and administrative expenses.
SALES AND MARKETING EXPENSES. Sales and marketing expenses were $298,000
for the nine months ended September 30, 1998 and grew to $2.6 million for the
nine months ended September 30, 1999, an increase of 772%. As a percentage of
revenues, sales and marketing expenses increased from 2% for the nine months
ended September 30, 1998 to 5% for the nine months ended September 30, 1999.
Sales and marketing expenses increased in absolute dollar terms and as a
percentage of revenues primarily as a result of the increase in the number of
sales personnel and an overall increase in our marketing and branding efforts.
AMORTIZATION OF GOODWILL. Amortization of goodwill was $582,000 for the
nine months ended September 30, 1998 and grew to $4.5 million for the nine
months ended September 30, 1999, an increase of 685%. As a percentage of
revenues, amortization of goodwill represented 2% of revenues in the first nine
months of 1998 and 8% of revenues in the first nine months of 1999. The increase
was due to the acquisitions of Eagle River Interactive, Interactive Solutions
(including Quadris), Twinspark and Digital Vision, the remainder of stock of
Spiral Media and Online Magic and the acquisition of all of the assets of
Ketchum Interactive and The Primary Group.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expenses were
$772,000 for the nine months ended September 30, 1998 and grew to $3.1 million
for the nine months ended September 30, 1999, an increase of 308%. As a
percentage of revenues, depreciation and amortization represented 4% of revenues
in the nine months ended September 30, 1998 and 6% of revenues in the nine
months ended September 30, 1999. The increases in absolute dollar terms from
year to year resulted from depreciation of growth related infrastructure
investments, including technology equipment, furniture and fixtures and
leasehold improvements and the depreciation of the assets of the companies that
we acquired.
NET INCOME (LOSS). Net loss for the nine months ended September 30, 1999
was $(6.6 million) compared to $(942,000) for the same period in 1998. The
decrease in net loss between the periods was primarily caused by increased
direct salaries and costs, general and administrative expenses, sales and
marketing expenses, and depreciation and amortization, which together increased
at a greater rate than our increase in revenues, all of which are discussed
above.
QUARTERLY PRO FORMA RESULTS OF OPERATIONS
The following selected unaudited pro forma results of operations data gives
effect to our acquisitions since January 1, 1998 as if they had occurred on
January 1, 1998. We have included this table and the discussion below to assist
investors in evaluating our financial performance.
The pro forma financial statements do not purport to represent what the
results of our operations or financial condition would actually have been had
the acquisitions in fact occurred on January 1, 1998. The pro forma quarterly
results of operations should not be construed as being representative of future
results of operations. These pro forma amounts include the same adjustments that
are reflected in the pro forma consolidated statement of operations. The
unaudited pro forma consolidated financial data are based upon currently
available information, assumptions and estimates which our management believes
are reasonable. These assumptions and estimates, however, are subject to change,
including adjustments for potential cost savings or other synergies arising from
acquisitions we have made.
Investors should read these pro forma results of operations with the
unaudited pro forma condensed consolidated statement of operations and the
AGENCY.COM consolidated financial statements and unaudited pro forma condensed
consolidated financial statements, the Interactive Solutions, Quadris
Consulting, Eagle River Interactive, Twinspark Interactive People, I-traffic and
Visionik financial statements, and the notes to those statements appearing
elsewhere in this prospectus.
36
<PAGE>
PRO FORMA RESULTS OF OPERATIONS
The following tables set forth pro forma dollar amounts and percentage of
pro forma revenues of certain items included in our statement of operations for
the periods indicated.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30,
1998 1998 1998 1998 1999 1999 1999
---------- --------- --------- -------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PERCENTAGE DATA)
Revenues................................ $16,572 $19,853 $19,538 $20,167 $20,505 $ 25,048 $ 29,256
Direct salaries and costs............... 9,365 10,356 11,838 12,459 11,766 13,345 16,081
------- ------- ------- ------- ------- -------- --------
Gross profit............................ 7,207 9,497 7,700 7,708 8,739 11,703 13,175
Operating expenses:
General and administrative............ 717 937 1,004 1,161 1,190 1,344 1,556
Sales and marketing................... 7,234 8,126 7,544 9,486 8,015 9,765 12,337
Amortization of goodwill.............. 3,247 3,686 3,774 3,773 4,436 2,857 2,774
Depreciation and amortization......... 373 405 354 491 1,231 963 1,174
------- ------- ------- ------- ------- -------- --------
Total operating expenses................ (4,364) (3,657) (4,976) (7,203) (6,133) (3,226) (4,666)
------- ------- ------- ------- ------- -------- --------
Loss from operations.................... 673 712 888 775 901 921 1,143
Interest expense, net................... 211 70 -- -- -- 51 --
Minority interest....................... (9) (10) --
------- ------- ------- ------- ------- -------- --------
Loss before benefit from income taxes... (5,248) (4,439) 5,864) (7,987) (7,034) (4,106) (5,809)
Provision for (benefit from) income
taxes................................. (299) (158) (948) (1,233) (487) 52 234
------- ------- ------- ------- ------- -------- --------
Net (loss).............................. $(4,949) $(4,281) $(4,916) $(6,754) $(6,547) $ (4,158) $ (6,043)
======= ======= ======= ======= ======= ======== ========
EBITDA (1).............................. $ (744) $ 434 $ (849) $(2,938) $ (466) $ 593 $ (718)
======= ======= ======= ======= ======= ======== ========
Revenues................................ 100% 100% 100% 100% 100% 100% 100%
Direct salaries and costs............... 57 52 61 62 57 53 55
------- ------- ------- ------- ------- -------- --------
Gross profit............................ 43 48 39 38 43 47 45
Operating expenses:
General and administrative............ 4 5 5 6 6 5 5
Sales and marketing................... 44 41 39 47 39 39 42
Amortization of goodwill.............. 20 19 19 19 22 11 9
Depreciation and amortization......... 2 2 2 2 6 4 4
------- ------- ------- ------- ------- -------- --------
Total operating expenses................ (26) (18) (25) (36) (30) (13) (16)
------- ------- ------- ------- ------- -------- --------
Loss from operations.................... 4 4 5 4 4 4 4
Interest expense, net................... 1 0 0 0 0 0 0
Minority interest....................... 0 0
------- ------- ------- ------- ------- -------- --------
Loss before benefit from income taxes... (32) (22) (30) (40) (34) (17) (20)
Benefit from income taxes............... (2) (1) (5) (6) (2) 0 1
------- ------- ------- ------- ------- -------- --------
Net (loss).............................. (30%) (22%) (25%) (33%) (32%) (17%) (21%)
======= ======= ======= ======= ======= ======== ========
EBITDA (1).............................. (4%) 2% (4%) (15%) (2%) 2% (2%)
======= ======= ======= ======= ======= ======== ========
</TABLE>
- ------------------------
(1) EBITDA represents earning or loss before other income and expense
(consisting of provision (benefit) from income taxes and net interest
expense), depreciation and amortization. We have provided EBITDA because it
is a measure of financial performance commonly used in the Internet
professional services industry and because management believes many
investors use EBITDA as a measure of a company's historical ability to
service its debt since EBITDA shows available cash before debt service and
before deducting non-cash charges, such as depreciation and amortization.
37
<PAGE>
Other companies may calculate EBITDA differently from the way we do. EBITDA
is not a measurement of financial performance under GAAP. We believe you
should not consider EBITDA as an alternative to net income (loss), as a
measure of our operating performance or as an alternative to cash flow as a
measure of our liquidity. You should be aware that items excluded from the
calculation of EBITDA are significant components in understanding and
assessing our financial performance. You should read the information in the
table together with information regarding our cash flows from operating,
investing and financing activities appearing on pages 39-40 of this
prospectus, which is also an important measure of our financial condition.
As a result of our limited operating history, rapid growth and the emerging
nature of the markets in which we compete, we believe that quarter-to-quarter
comparisons of results of operations are not necessarily meaningful. Investors
should not rely on the results of any one quarter as an indication of our future
performance. Additionally, quarterly results of operations may fluctuate
significantly in the future as a result of a variety of factors, many of which
are outside of our control.
COMPARISON OF 1998 AND 1999 QUARTERLY PRO FORMA RESULTS OF OPERATIONS
REVENUES. Pro forma revenues increased by 15% in the third quarter of 1999
compared to the prior quarter and 33% for the nine month period ended
September 30, 1999 compared to the same period for 1998. This increase primarily
reflects the benefits achieved following the completion of our integration of
Spiral Media, Online Magic, Ketchum, Primary Group, Interactive Solutions, Eagle
River, I-traffic and Visionik. The increase also reflects the following:
- growing demand for Internet professional services in our target market;
- the addition of new client relationships;
- expansion of existing client relationships, increases in billing rates and
the number of billable professionals and their utilization; and
- the introduction of new strategy, creative and technology services to the
marketplace.
Revenues for the quarters ended June 30, 1998, September 30, 1998, December 31,
1998 and March 31, 1999 quarters were relatively stable due to our focus on the
full integration of our acquisitions.
DIRECT SALARIES AND COSTS. Pro forma direct salaries and costs increased in
absolute dollar terms from the quarter ended March 31, 1998, through the quarter
ended December 31, 1998. This reflected our planned investment in additional
employees from approximately 190 employees as of March 31, 1998 to over 500 as
of December 31, 1998. The increase in pro forma direct salaries and costs in
absolute dollar terms and as a percentage of pro forma revenues in the quarter
ended December 31, 1998 was due to increased costs associated with one-time
charges of approximately $690,000 related to the Interactive Solutions merger.
These charges related primarily to one time payments made for accrued vacation,
special bonuses, travel bonuses and fringe benefits. Approximately $300,000 of
these charges were included in general and administrative expenses. The decrease
in these costs as a percentage of revenues from the first three quarters of 1998
to the first three quarters of 1999 was due to cost savings and efficiencies
achieved upon integration of operations and management. Year-over-year third
quarter direct salaries and costs decreased as a percentage of revenue primarily
because of an increase in billable employee utilization.
GENERAL AND ADMINISTRATIVE EXPENSES. The overall increase in pro forma
general and administrative expenses was primarily
38
<PAGE>
attributable to an increase in the number of non-billable employees, from 60 as
of March 31, 1998 to 228 as of September 30, 1999, an increase in their salary
rates and the expansion of management infrastructure necessary to support the
growth in operations, including the Spiral Media, Online Magic, Ketchum
Interactive and The Primary Group Twingate, I-traffic and Visionik acquisitions.
The significant increase in pro forma general and administrative expenses for
the quarter ended December 31, 1998 compared to the quarter ended September 30,
1998 was due to an increase in bad debt expense of $600,000 primarily
attributable to accounts of clients of Eagle River, one-time charges related to
reconciliation of employee benefits in connection with acquisitions, including
payments made for accrued vacation, special bonus, travel bonus and fringe
benefits, and charges associated with additional staffing.
The significant increase in pro forma general and administrative expenses
for the quarter ended September 30, 1999 compared to June 30, 1999 was primarily
due to the Twinspark acquisition and an increase in recruiting expenses due to
an increased use of outside employment agencies to recruit new employees.
SALES AND MARKETING EXPENSES. The overall increase in pro forma sales and
marketing expenses in absolute dollar terms through the third quarter of 1999
was primarily a result of the increase in the number of sales and marketing
personnel from 17 at March 31, 1998 to approximately 25 at September 30, 1999,
and an overall increase in our marketing and branding efforts.
AMORTIZATION OF INTANGIBLES. Pro forma amortization of goodwill expense
increased in absolute dollar terms through the quarter ended March 31, 1999 due
to goodwill recorded in connection with the Spiral Media, Online Magic, Ketchum
and Primary Group acquisitions. As a percentage of revenues, amortization of
goodwill remained relatively constant through the quarter ended March 31, 1999
as acquired companies contributed revenues constant with acquired goodwill. Pro
forma amortization of goodwill at September 30, 1999 decreased significantly
compared to the same quarter in the prior year due to the Eagle River and
Interactive Solutions goodwill being fully amortized as of March 31, 1999.
DEPRECIATION AND AMORTIZATION. Pro forma depreciation and amortization
generally increased over the period reflecting growth-related infrastructure
investment. On a year-over-year basis, third quarter depreciation and
amortization expenses increased as a percentage of revenue.
NET INCOME (LOSS). Net loss increased for the quarter ended September 30,
1999 compared to the same quarter for the prior year on a pro forma basis
primarily due to increased direct salaries and costs, general and administrative
expenses, sales and marketing expenses and depreciation and amortization, which
together increased at a greater rate than our increase in revenues, all of which
are discussed above.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, we have funded our operations and investments in property
and equipment primarily through cash from operations, borrowings from Omnicom,
and capital leases.
At year end our cash and cash equivalents were $513,000 in 1996, $388,000 in
1997 and $769,000 in 1998, and our cash balance was approximately $726,000 at
September 30, 1999.
Cash provided by operating activities was $902,000 in 1998 compared to cash
provided by operating activities of $632,000 in 1997 and cash provided by
operating activities of $952,000 in 1996. Cash provided by operating
39
<PAGE>
activities in 1998 was primarily due to depreciation and amortization of
$1.5 million and an increase in accounts payable and accrued expenses of
$3.2 million offset by a net loss of $1.8 million, deferred taxes of
$1.7 million and an increase in unbilled charges of $1.6 million. Cash provided
by operating activities in 1997 was primarily due to net income of $1.2 million
and an increase in accounts payable and accrued expenses of $1.2 million offset
by a decrease in accounts receivable of $3.0 million. Cash provided by operating
activities in 1996 was primarily due to net income of $1.5 million and deferred
taxes of $1.2 million offset by an increase in accounts receivable of
$1.6 million.
Cash used in operating activities was $7.6 million for the nine months ended
September 30, 1999 compared to $602,000 for the nine months ended September 30,
1998. Cash used in operating activities for the nine months ended September 30,
1999 was primarily due to an increase in accounts receivable of $17.3 million
and an increase in prepaid and other charges of $2.5 million offset by an
increase in accounts payable and accrued expenses of $3.2 million and an
increase in depreciation and amortization of $7.4 million. This was primarily a
result of the acquisitions of Eagle River and Interactive Solutions. Cash used
in operating activities for the nine months ended September 30, 1998 was
affected by a decrease in accounts receivable and unbilled charges of
$3.0 million and deferred income taxes of $1.2 million offset by an increase in
accounts payable and accrued expenses of $1.2 million.
Cash used in investing activities was $9.6 million in 1998 compared to
$3.2 million in 1997 and $515,000 in 1996. Cash used in investing activities in
1998 was primarily the result of capital expenditures of $1.9 million and
acquisitions of $7.7 million. Cash used in investing activities in 1997 was
primarily the result of capital expenditures of $1.6 million and acquisitions of
$1.5 million. Cash used in investing activities in 1996 was primarily the result
of capital expenditures of $515,000.
Cash used in investing activities was $5.8 million for the nine months ended
September 30, 1999 compared to $6.5 million for the nine months ended
September 30, 1998, and was primarily due to capital expenditures, additional
investment in The Edge and acquisitions.
Cash provided by financing activities was $9.1 million in 1998 compared to
$2.4 million in 1997 and $18,000 in 1996. Cash provided by financing activities
in 1998 was primarily the result of an increase in borrowings from Omnicom of
$9.6 million. Cash provided by financing activities in 1997 was primarily the
result of an increase in borrowings from Omnicom of $2.4 million. Cash provided
by financing activities in 1996 was primarily the result of the repayment of
shareholder advances offset by a capital distribution.
Cash provided by financing activities was $17.8 million for the nine months
ended September 30, 1999 compared to cash provided by financing activities of
$7.1 million for the nine months ended September 30, 1998. Cash provided by
financing activities for the nine months ended September 30, 1998 and 1999 was
primarily the result of an increase in borrowings from Omnicom of $19.2 million
and $7.7 million, respectively.
On November 4, 1999, we entered into an $85.0 million credit facility with
Omnicom Finance, a wholly owned subsidiary of Omnicom, to replace our revolving
credit line and consolidate all of our previously outstanding indebtedness due
to Omnicom Finance. As of September 30, 1999, we had approximately
$66.8 million due to Omnicom Finance. The new credit facility, which terminates
on September 30, 2001, provides for a $25.0 million term loan facility, a
$54.0 million revolving credit line and a real property lease credit support
facility providing letters of credit and/or guarantees up to
40
<PAGE>
$6.0 million in the aggregate. We are required by the credit facility to use 35%
of the net proceeds from this offering, up to a maximum of $25.0 million, to
repay amounts borrowed under the term loan portion of the new credit facility.
This credit facility bears interest at Omnicom's commercial paper rate plus
1.25%. As of November 4, 1999, Omnicom's commercial paper rate was 5.3%. The
credit facility is secured by substantially all of our assets, including the
shares of our subsidiaries, is guaranteed by our domestic subsidiaries and
prohibits us and our subsidiaries from paying dividends other than in shares of
our stock. The credit facility requires compliance with a number of covenants,
including restrictions on asset sales, liens, the incurrence of debt, making of
loans and the repurchase, redemption or other acquisition of our stock.
As of December 31, 1998 unbilled charges were $2.3 million compared to
$6.7 million as of September 30, 1999. As a percentage of revenue, unbilled
charges increased from approximately 8.8% to 11.8% as of the same dates.
Unbilled charges represent labor costs incurred and estimated earnings
production and other client reimbursable costs that have not yet been invoiced
to our clients. This significant increase in unbilled charges from the prior
year reflected our acquisitions completed in 1999, which have resulted in a
significant increase in projects. The increase in unbilled charges was funded
partially from operations and borrowings from Omnicom. This impacted our
liquidity by reducing available borrowings under our credit facility and
increasing our interest expense. Unbilled charges decreased from $17.3 million
at June 30, 1999 to $6.7 million at September 30, 1999 as a result of continued
focus by management on timely billing.
To date, our main sources of liquidity have been cash from operations and
borrowings from Omnicom. We believe that on a short-term basis we will continue
to fund our working capital and capital expenditures through cash flow from
operations and additional borrowings from Omnicom. We believe that on a
long-term basis our liquidity will be funded from operations and, if necessary,
equity financings or borrowings from Omnicom. We believe that our current cash,
cash equivalents and short-term investments, available borrowings under our
credit facility and the net proceeds from this offering will be sufficient to
meet our working capital and capital expenditure requirements for at least the
next 12 months. However, we cannot assure you that we will not require
additional financing within this time frame or that such additional financing,
if needed, will be available on terms acceptable to us, if at all.
MARKET RISK
INTEREST RATE RISK. To date, we have not utilized derivative financial
instruments or derivative commodity instruments. We invest our cash in money
market funds, which are subject to minimal credit and market risk. We believe
the market risks associated with these financial instruments are immaterial.
FOREIGN CURRENCY RISK. We face foreign currency risks primarily as a result
of the revenues we receive from services delivered through our foreign
subsidiaries. These subsidiaries incur most of their expenses in the local
currency. Accordingly, our foreign subsidiaries use the local currency as their
functional currency.
We are also exposed to foreign exchange rate fluctuations, primarily with
respect to the British Pound and the Euro, as the financial results of foreign
subsidiaries are translated into United States dollars for consolidation. As
exchange rates vary, these results, when translated, may vary from expectations
and adversely impact net income (loss) and overall profitability. The effect of
foreign exchange rate fluctuation for the year ended December 31, 1998 was not
material.
41
<PAGE>
YEAR 2000 READINESS DISCLOSURE
Many currently installed computer systems and software products are coded to
accept or recognize only two-digit entries in the date code field. These systems
may recognize a date using "00" as the year 1900 rather than the year 2000. As a
result, it is necessary to update the computer systems and/or software used by
many companies and governmental agencies to comply with Year 2000 requirements
or risk system failure or miscalculations causing disruptions of normal business
activities.
We are exposed to the risk that the systems on which we depend to conduct
our operations are not Year 2000 compliant.
STATE OF READINESS
We have completed a preliminary assessment of our Year 2000 readiness and
are conducting ongoing testing and implementation of any necessary upgrades in
order to become Year 2000 compliant. Our assessment and testing has focused on
four areas as follows:
- MISSION CRITICAL SYSTEMS. Our mission critical systems are used for
timekeeping, accounting, and the production of financial statements.
Testing of this system is ongoing and final testing will be completed by
November 1999. We have received a Year 2000 warranty from the vendor who
licenses the mission critical systems to us, however monetary liability
may be limited.
- CRITICAL SYSTEMS. Our critical systems consist of Domain Name Services
(DNS), email, routers and switches, telephone, voice mail systems, and
desktop computers. All critical infrastructure machines have been verified
by their vendors as Year 2000 compliant. In addition, we are testing all
of our desktop computer systems and will install upgrades if appropriate.
Domain Name Services allow computers to find one another on the Internet
by matching alpha-numeric domain names to exact computer network
addresses.
- EXTERNAL AGENTS. Our external agents include vendors and licensors of
other material hardware and software utilized by us. We are in the process
of contacting these vendors and licensors to request the status of Year
2000 readiness for those products. We will continue to attempt to obtain
verification from all remaining distributors, suppliers, and vendors that
their systems are Year 2000 compliant. If we do not receive verification
that the systems are compliant, we will upgrade to compliant products.
- INTERNALLY DEVELOPED PROPRIETARY SOFTWARE. Our internally developed
proprietary software consists of our software and hardware and includes
date-dependent code. We have evaluated and tested proprietary systems used
by us and believe that all material files and systems are Year 2000
compliant. Although we believe that substantially all of the software
developed by us is Year 2000 compliant, we have only performed compliancy
evaluation and testing for the clients that have requested us to do so.
We intend to complete our testing and replace or remediate any non-Year 2000
compliant technologies by the end of November 1999.
In addition, we face non-information technology Year 2000 related risks,
both internally and externally based. Internal non-information technology risks
include disruption to our security and mailing systems, mail room facilities,
fire and backup generator systems. External non-information technology risks
42
<PAGE>
include the possible interruption of electrical power, water, sewage,
telecommunications, mass transportation and garbage collection. If a disruption
in either internal or external non-information technology systems occurs, we
could experience a material disruption in our business similar to other
businesses in our geographic locations.
COSTS
We estimate that the total cost for our Year 2000 compliance efforts will be
approximately $250,000. Most of these expenses relate to the operating costs
associated with time spent by our employees in Year 2000 compliance matters. If
we encounter unexpected difficulties, or we are unable to obtain compliance
information from material third parties, we may need to spend additional amounts
to ensure that our systems are Year 2000 compliant.
RISKS
Although we have received compliance information from many of our material
third-party vendors, we have not received compliance information from all of our
third-party vendors. In addition, it is possible that our third-party vendors
were mistaken in certifying that their systems are Year 2000 compliant. We will
not conduct an end-to-end critical system test until November 1999. If we fail
to fix our internal systems or to fix or replace material third-party software,
hardware or services on a timely basis, we may suffer lost revenues, increased
operating costs and other business interruptions, any of which could have a
material adverse effect on our business, results of operations and financial
condition. Moreover, if we fail to adequately address Year 2000 compliance
issues, we may be subject to claims of mismanagement and related litigation,
which would be costly and time-consuming to defend. Furthermore, if services we
provided a client cause damage or injury to that client because the service was
not Year 2000 compliant, we could be liable to the client for breach of
warranty.
In addition, we cannot assure you that governmental agencies, utility
companies, Internet access companies, third-party service providers and others
outside our control will be Year 2000 compliant. If those entities fail to be
Year 2000 compliant, there may be a systemic failure beyond our control, such as
a prolonged Internet, telecommunications or electrical failure, which could have
a material adverse effect on our business, results of operations and financial
condition.
CONTINGENCY PLAN
We are engaged in an ongoing Year 2000 testing and have developed a
contingency plan to address the worst-case scenario that might occur if critical
technologies we depend upon actually are not Year 2000 compliant.
FORWARD-LOOKING STATEMENTS
The Year 2000 discussion above is provided as a "Year 2000 Readiness
Disclosure" as defined in the Year 2000 Information and Readiness Disclosure Act
of 1998 (Public Law 105-271, 112 Stat. 2386) enacted on October 19, 1998 and
contains forward-looking statements. These statements are based on management's
best current estimates, which were derived from a number of assumptions about
future events, including the continued availability of resources,
representations received from third parties and other factors. However, we
cannot assure you that these estimates will be achieved, and our actual results
could differ materially from those anticipated. Specific factors that might
cause material differences include:
- the ability to identify and remediate all relevant systems;
- results of Year 2000 testing;
- adequate resolution of Year 2000 issues by governmental agencies,
businesses
43
<PAGE>
and other third parties who are our outsourcing service providers,
suppliers, and vendors;
- unanticipated system costs; and
- our ability to implement adequate contingency plans.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 130, "Reporting
Comprehensive Income". This statement establishes standards for reporting and
display of comprehensive income and its components (revenues, expenses, gains
and losses) in a full set of general-purpose financial statements. SFAS No. 130
offers alternatives for presentation of disclosures required by the standard. We
adopted this statement in 1998 and the adoption of this statement did not have
an impact on our financial position or results of operations.
In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of
an Enterprise and Related Information." This statement establishes standards for
the way public business enterprises report information about operating segments
in annual financial statements and requires that those enterprises report
selected information about operating segments in interim financial reports
issued to shareholders. The statement also establishes standards for related
disclosure about products and services, geographic areas and major customers.
This statement is effective for financial statements for periods beginning after
December 15, 1997 and need not be applied to interim periods in the initial year
of application. Comparative information for earlier years presented is to be
restated. We currently believe that we operate in one segment and that the
adoption of SFAS No. 131 will not materially affect our current disclosure of
geographic information.
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"), which 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. SOP 98-1 is effective for fiscal years
beginning after December 31, 1998. We adopted SOP 98-1 in 1999 and there has not
been any material effect on our consolidated financial statements.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivatives and
Hedging Activities," which establishes accounting and reporting standards of
derivative instruments, including certain derivative instruments embedded in
other contrats, and for hedging activities. We do not currently engage in
derivative activity and do not expect the adoption of this standard to have a
material effect on our results of consolidated operations, financial position or
cash flows.
In July 1999, the FASB approved SFAS No. 137, "Accounting for Derivative
Instruments and Hedging Activities--Deferral of the Effective Date of FASB
Statement No. 133", which amends SFAS No. 133 to be effective for all fiscal
quarters of all fiscal years beginning after June 15, 2000.
44
<PAGE>
BUSINESS
OVERVIEW
OUR COMPANY
AGENCY.COM is an international Internet professional services firm. We
provide our clients with an integrated set of strategy, creative and technology
services that take them from concept to launch and operation of their Internet
business. We deliver our services through our multidisciplinary teams of
strategy, creative and technology specialists. These services help our clients
create and enhance relationships with their customers, staff, business partners
and suppliers.
Our strategy services include advising clients on business models for their
online businesses, devising strategies so that clients can open new online
distribution and sales channels, identifying opportunities to achieve
operational efficiencies by pursuing online initiatives, and planning for the
operations and organization necessary to support an online business. Our
creative services include advising clients on how to effectively bring their
brands online, developing graphic designs and Web site structure for client Web
sites, and coordinating online marketing campaigns with clients' traditional
advertising agencies. Our technology services include technical architecture and
design, integration between Internet and older information technology systems,
and implementation of electronic commerce systems to enable online sales,
support and communication.
We believe that our experience in providing Internet professional services
enhances our ability to meet the needs of clients. Since our inception in 1995,
we have provided services to more than 200 clients. Our five largest clients
during the nine months ended September 30, 1999, on an actual basis, were
British Airways, Compaq, FT Group, Sprint and Unilever. Five of our top 10
clients for the first nine months of 1999 have been clients since 1997 or
before. These six clients continue to seek our expertise for additional
projects. We believe that our focus on long-term relationships with clients
allows us to provide a broader and more effective range of services.
We have complemented our organic growth with targeted acquisitions. Since
1997, we have acquired 11 companies and integrated them and now deliver our
services through ten offices located in the United States (including I-traffic's
New York and San Francisco offices which will be combined with our existing
offices in these cities next year) and one office each in Amsterdam, Copenhagen,
Paris and London. We also have minority investments in a technology company in
Singapore and an Internet professional services company in Paris.
We believe the Internet is particularly effective when used to extend and
enhance the relationship that exists between a company and its customers, staff,
partners and suppliers. We intend to be the Internet professional services firm
of choice for companies comprising Business Week magazine's Global 1000, which
includes companies with the largest market capitalizations worldwide.
INDUSTRY BACKGROUND
The Internet is becoming an integral part of many people's lives.
Individuals and businesses are increasingly using the Internet to find
information, communicate and conduct business. In a report by IDC titled "The
Global Market Forecast for Internet Usage and Commerce: Based on Internet
Commerce Market Model-TM-, Version 5" published in June 1999, IDC estimates that
the number of Internet users worldwide will grow from an estimated 142 million
at the end of 1998 to approximately 500 million at the end of 2003. Also
according to IDC in this same report,
45
<PAGE>
worldwide commerce conducted over the Internet totaled approximately
$50 billion in 1998, with the business to business market accounting for
$35 billion and the consumer market accounting for $15 billion. IDC projects the
overall market to exceed $1.3 trillion by the end of 2003.
The increasing acceptance of the Internet has created numerous opportunities
for companies that seek to grow and are challenged by highly competitive and
rapidly changing markets, and demands for increased efficiencies. Already,
companies are taking advantage of the Internet's opportunities to strengthen
customer relationships, improve operational efficiency and spur product
innovation. Initially, companies developed "read-only," or brochure-ware, Web
sites that lowered marketing and service costs and that increased customer
awareness. Companies later added transaction and commerce capabilities to their
online resources to enable two-way sharing of data and information among
businesses and their constituents, including end-customers, suppliers, business
partners and employees. These transaction and commerce capabilities have changed
the business landscape by introducing new channels, catalyzing competition and
prompting new customer needs.
Today, many companies realize that the Internet is no longer an adjunct to
their operations and is redefining all aspects of their businesses, including
the way they interact with their customers. The Internet enables consumers,
business partners, suppliers and employees to transact on a one-to-one basis
with companies at any time and from any location.
We believe that companies have found that merely enabling online
transactions and commerce does not ensure success in doing business on the
Internet. Consumers want more than the mechanical ability to transact with a
company online. They want to interact with a company that not only markets to
them but is responsive to their needs. By successfully satisfying these needs,
we believe that businesses can build a long-lasting, ongoing interactive
relationship that fosters customer loyalty, increases margins and enables new
markets.
Developing successful Internet businesses that promote interactive
relationships requires a special set of capabilities. Developers of these
businesses must provide integrated strategy, creative and technology services.
In addition, developers must have the ability to understand the needs of
customers and fulfill them. Few companies possess this multi-disciplinary
expertise as it is usually divided into separate information technology,
marketing and planning groups. Further, companies lack the management and
technical infrastructure required to develop and support Internet services.
Therefore, companies seeking to do business on the Internet are increasingly
engaging Internet professional services firms to provide integrated strategy,
creative and technology services. We believe that companies are best served by
firms that have overcome the cultural and operational challenges of integrating
strategy, creative and technology services into a single offering and that have
a proven methodology centered on the needs of customers.
AGENCY.COM APPROACH
AGENCY.COM provides a broad range of integrated services that enable
businesses to use the Internet and Internet technologies to develop and enhance
long-term interactive relationships with their customers. AGENCY.COM's approach
includes the following key elements:
INTEGRATED FULL-SERVICE OFFERING
We provide integrated strategy, creative and technology services in a
seamless package. We start from the initial assessment of a client's positioning
and needs and work
46
<PAGE>
through post-implementation analysis and development. We believe that our
comprehensive integrated service offering results in time and cost savings for
our clients and also increases the likelihood that their projects will be
completed successfully.
INTERNET FOCUS AND EXPERIENCE
Since our founding in 1995, we have focused exclusively on Internet
technologies and their implications for businesses. Our Internet focus allows us
to best fulfill our clients' needs and continuously refine our services by
staying at the forefront of the Internet's rapid evolution.
CUSTOMER DRIVEN
In planning, designing and deploying Internet services and strategies, we
base our work on the needs of our clients' customers. We focus on our clients'
customers because these individuals ultimately determine the success of our
clients' Internet businesses. Our approach enables us to establish a solid and
effective base from which our clients may develop their interactive
relationships. We work with our clients to analyze their customers' needs to
create Internet strategies best-suited for the client and these customers. This
analysis includes usability studies.
RELATIONSHIPS WITH CLIENTS
We seek to develop long-term relationships with our clients. We become
familiar with their businesses and work closely with senior management to
understand, predict and address our clients' evolving strategic business needs.
Upon engagement, we assign to the client a dedicated multi-disciplinary team of
professionals which works with our client during each phase of the initial
project and on future projects. We share our experience and knowledge with our
clients to enhance their familiarity with the Internet and its capabilities. We
also establish extranets with our clients to improve the exchange of information
on all ongoing projects.
AGENCY.COM CULTURE
Our culture is based on the principles of honoring the value of individuals
working as a team, growing through learning and knowledge-gathering, embracing
change and encouraging innovation. We recognize that we succeed as a firm only
when clients benefit from our work. We believe that nurturing our culture and
values enables us to deliver innovative solutions and attract and retain top
professionals. Our management and operational infrastructure foster our culture.
For example, substantially all of our employees have an equity stake in the
company through our stock option plan, and we have developed and put into
practice a number of internal mentoring and learning programs.
AGENCY.COM STRATEGY
AGENCY.COM's goal is to build upon our position as an international provider
of Internet professional services. To achieve this goal, we are pursuing the
following strategies:
CONTINUE TO BUILD LONG-TERM RELATIONSHIPS WITH OUR CLIENTS AND OTHER
INTERNATIONAL COMPANIES
We believe that strong, long-term relationships with clients yield
significant benefits both to our clients and to our business. The depth and
breadth of our client relationships are demonstrated by our integral involvement
in developing Internet strategies, including the planning and budgeting process,
for a number of our large clients. In addition, we have retainer-based
relationships with a number of these clients and plan to increase the number of
clients on retainer. We believe that our record of client satisfaction has
contributed to an increase in the amount, scope and complexity of services
requested by many of our clients. As an indication of our
47
<PAGE>
success, 18 of our top 20 clients in 1998 continued to engage us in 1999.
FURTHER ENHANCE OUR MULTI-DISCIPLINARY TEAM APPROACH
Because our work requires expert knowledge of multiple disciplines, we
believe that Internet professional services are most effective when delivered
through integrated, multi-disciplinary client teams. We provide all our services
through client-centered teams that include strategy, creative, technology,
project management and client services professionals. Our client teams, and the
culture of teamwork that they enforce, shape the overall structure and operation
of our company. In order to deliver to our clients a broad range of
sophisticated services on an international basis, all of our offices operate
together as a single, unified organization rather than a set of competing
entities. We will continue to invest in and nurture our team-based organization
in order to better fulfill our clients' needs.
DEVELOP STRONG POSITIONS IN SERVICES TO BENEFIT OUR CLIENTS
We will continue to build strong positions in services such as Internet
advisory, consulting and planning services, Internet commerce and communication
services, and online branding and marketing services. We believe that these
services provide opportunities for strong growth, and help differentiate us from
our competitors. We have developed, and will continue to develop, new
interactive strategies as our clients' needs evolve and as new technologies
emerge. As with our current offerings, any new service that we offer to our
clients will incorporate a mix of our strategy, creative and technology
capabilities. We are currently working with many emerging technologies and stay
current with industry developments through our dedicated team of technical
specialists who continually evaluate new technologies and develop innovative
strategies. Our future strategies may incorporate technologies such as wireless
devices and devices suited to high bandwidth Internet connections for
transmission of voice, video, data and fax, known as broadband network devices.
COMPLEMENT OUR ORGANIC GROWTH WITH TARGETED ACQUISITIONS
We believe that expanding our skill set, geographic locations and industry
reach through acquisitions will enable us to better serve our existing clients,
attract new clients and take advantage of new markets for our services. We
integrate each acquired company into our operations and culture. All of our
acquisitions have met some or all of the following characteristics:
- cultural fit;
- quality management;
- highly motivated and skilled staff;
- market leadership position in complementary skills and/or in a
strategically important location;
- ability to provide service to a strong client base; and
- strong future revenue growth and profitability.
We have successfully acquired 11 companies over the last two years and made
minority investments in a company based in Paris and a company based in
Singapore.
EXTEND OUR GEOGRAPHIC REACH
We believe that significant opportunities exist for our services beyond our
current locations, including serving existing and new clients in other markets.
We have expanded, and intend to continue to expand, our geographic presence in
key locations based on our clients' needs and market opportunities. We will
continue to expand through a combination of organic growth and acquisitions.
Extending our geographic reach allows us to better serve our multi-national
48
<PAGE>
clients by providing services locally through our regional offices while taking
advantage of our international resources and knowledge base. We believe our
ability to provide Internet professional services internationally provides us
with a competitive advantage. We currently have offices located in the United
States and Europe, and have resources in additional locations through our
minority investments.
ATTRACT AND RETAIN THE HIGHEST QUALITY PROFESSIONALS AND FACILITATE EMPLOYEE
DEVELOPMENT THROUGH TRAINING, CULTURE AND SUPPORT
We believe that attracting and retaining high quality professionals is
critical to our success. Our culture is an integral part of our ability to
attract and retain quality professionals. We provide a stimulating and nurturing
work environment to increase employee satisfaction. We will continue to invest
in knowledge transfer, training and staff development resources for our
employees. In addition, we offer a competitive compensation package, including
broad-based equity ownership through our stock option plan.
ENHANCE AWARENESS OF AGENCY.COM AS AN INTERNATIONAL PROVIDER OF INTERNET
PROFESSIONAL SERVICES
AGENCY.COM has built a recognized brand in the Internet professional
services market. Our internal marketing and corporate communications teams
promote our brand through speaking engagements, event sponsorships, interviews
and industry conferences. We receive additional promotion from media coverage
and from the numerous awards we have received for our work. Our brand enables us
to more effectively attract clients, employees and acquisition candidates. We
seek to be the most recognized Internet professional services firm and to be
among the few firms that the Global 1000 consider when choosing an Internet
professional services provider.
AGENCY.COM SERVICES
We provide fully integrated Internet professional services to our clients
that enhance the development of their interactive relationships. We conceive and
implement Internet services and strategies that add value to our clients'
businesses. We deliver to our clients services that include strategic business
planning, Web site content development, graphic design and computer programming.
Each client benefits from our fully integrated service offering delivered by a
team of strategy, creative and technology professionals. Each engagement has a
project manager who coordinates and oversees the team. The project manager
reports to the relationship manager who has direct responsibility for the client
relationship. The following is a description of the primary components of our
service offerings:
STRATEGIC SERVICES
AGENCY.COM helps clients translate their corporate goals and objectives into
Internet strategies. We work closely with our clients to understand and analyze
their businesses. We help our clients formulate and execute their Internet
strategies in the context of their business and marketing goals, operational
methods and success criteria. Our strategic services include assisting our
clients in:
- establishing the operational guidelines and management structure necessary
to execute their Internet strategies;
- helping clients to formulate Internet strategies to reach new customers;
- reducing the costs of serving existing customers;
- improving the efficiency of internal operations; and
- promoting customer loyalty and designing appropriate and innovative ways
to extend our clients' brands on the Internet.
49
<PAGE>
INTERNET COMMERCE AND COMMUNICATION SERVICES
We help our clients use the Internet as an effective means of communicating
and transacting with customers. We create Internet resources such as Web sites
for our clients that encompasses the entire customer relationship, including:
- introducing relevant, customized information, products and services;
- demonstrating the benefits of their products and services and gaining
customer acceptance;
- facilitating transactions; and
- providing ongoing service tailored to the needs of and based on the
feedback from each customer.
SYSTEMS INTEGRATION
We design, develop and implement the technical architecture and systems that
support our clients' Internet strategies. We provide the data integration and
transaction processing systems required for functional transaction and
commerce-focused resources. We often integrate Internet-based technologies with
our clients' older information technology systems, such as legacy and
client-server systems. We also adapt and develop custom software solutions and
build add-on components to our clients' existing software applications. Systems
integration projects have included the integration of sales systems, accounting
systems and inventory systems to function over the Internet.
EMERGING AND OTHER TECHNOLOGIES
The Internet is constantly changing. AGENCY.COM employs emerging
technologies and capitalizes on new media developments to provide services that
improve its clients' businesses. For example, we provide our clients with
broadband and multimedia capabilities through our dedicated film, audio and
video (FAV) group, and provide clients with interactive television services
through our dedicated iTV group. These applications include live, realtime
Internet-based video broadcasts, known as Web-casting, motion graphics, music
and streaming media. We work with many emerging technologies and stay current
with industry developments through our dedicated team of technical specialists
who continually evaluate new technologies and develop innovative services.
AGENCY.COM COMPASS METHODOLOGY
[GRAPHIC DEPICTING THE AGENCY.COM COMPASS METHODOLOGY]
Our "Compass" methodology guides project management and execution. We
believe this methodology enables us to provide consistent quality on all
engagements and maximizes the value we deliver to our clients. Compass can be
employed on projects of all types, sizes and geographic boundaries. Our process
follows four distinct phases: DISCOVERY, DESIGN, PRODUCTION AND DEPLOYMENT.
Within any phase of our methodology, we incorporate a series of steps--Check,
Adjust and Assess--that ensure that our client's expectations for quality are
met in each stage. We refine our methods within Compass's four phases based on
input from clients and client teams. We also integrate the best practices of the
companies we acquire into Compass.
DISCOVERY
During the Discovery phase, we assess the client's positioning and needs,
with an emphasis on the client's customers, and analyze the tasks and resources
required to deliver an effective Internet strategy. Based on
50
<PAGE>
this understanding, we develop an initial plan for designing and completing the
project. AGENCY.COM works closely with the client to formulate and finalize the
strategy and services to be provided.
DESIGN
During the Design phase, we define the creative components, technical design
and information architecture. These components are integrated and represented in
a detailed Design document, which is reviewed by the client at numerous stages.
We build a prototype and conduct usability testing during this phase to ensure
that the design is best suited to the client's needs. The final design document
serves as a blueprint for the ensuing phases.
PRODUCTION
During the Production phase, we develop and integrate all of the creative,
technical and information components. We then test the system jointly with the
client and optimize the performance of the hardware and software. At the end of
this phase, we deliver to our client a product that is ready for deployment.
DEPLOYMENT
During the Deployment phase, we formally "launch" the client's Internet
system following all final testing and acceptance. We also educate and train our
client to use and maintain the finished application and, where appropriate,
transfer full control of the product to our client. We finish projects with a
post-implementation evaluation, including measurement against initial benchmarks
and a client evaluation of AGENCY.COM's work. Following the completion of a
project, we document non-proprietary knowledge and experiences, such as revised
work plans or enhanced knowledge of a particular technology, through
post-engagement, internal reviews. This information is then disseminated to our
employees both through our internal intranet and specific training sessions. By
broadening our professionals' knowledge base and improving their understanding
of their field, we are able to assist them in better serving client needs.
Following the completion of the Deployment phase, at the request of the
client, the AGENCY.COM client team often returns to the Discovery phase in order
to further develop and evolve our client's Internet business.
PEOPLE AND CULTURE
We believe that our people and culture represent a significant competitive
advantage and that our ability to scale innovation and creativity is at the core
of our success to date. To successfully compete in the future, we must continue
to identify, recruit, hire and retain outstanding professionals. We continually
nurture, develop and evolve a culture that supports innovation and creativity.
RECRUITING, RETAINING AND GROWING
We promote and support each employee's personal growth through a variety of
career development programs. Internal knowledge management resources gather the
collective experience of client teams and individuals. Informal, internal
educational programs expose staff to new experiences. Examples include InspireU,
a collection of employee-led training courses, and URBAN DESIRES, an online
magazine owned by our founders that is used to explore advanced and artistic
interactive experiences. More formal programs, involving internal and external
resources, focus growth along specific career tracks. Examples include seminars
with outside experts and multi-day training workshops.
Recruiting and training are important to us. A dedicated recruitment group
works with management to fulfill staffing objectives on a regional and
international basis. New hires are commonly obtained through referrals from
current and former staff as well as from recruiters and self-initiated
referrals.
51
<PAGE>
Once we have hired an employee, our focus shifts to retention. In addition
to offering competitive compensation, we believe that we retain employees by
offering them a meaningful career path. Each employee is assigned a career
manager who provides regular coaching and helps the employee to establish goals
and objectives and to achieve them. Employees are reviewed by supervisors,
co-workers and employees they supervise in a 360-degree review process that is
integral to our team approach.
SCALING INNOVATION AND CREATIVITY
We believe that possessing a single, unified culture in all offices
internationally is critical to fulfilling our business objectives. We pursue a
number of initiatives to emphasize and reinforce our culture and values. We
encourage regional managers to share resources across offices. Our client teams
combine individuals with experience in a variety of backgrounds to collaborate,
innovate and deliver services as a single unit. We instill and maintain our
culture throughout our company by promoting our core values:
- - We succeed only when our clients benefit from our work
- - We deliver excellence with the highest standards of integrity
- - We honor the dignity and value of individuals working as a team
- - We celebrate diversity of people, ideas and cultures
- - We seek to grow through learning and knowledge gathering
- - We embrace change and encourage innovation
CLIENTS AND CASE STUDIES
We provide Internet professional services to a variety of clients in a range
of industries. We focus on long-term relationships with Global 1000 companies.
For the year ended December 31, 1998, our two largest clients each provided
approximately 7% of our revenues on a pro forma basis, and our top ten clients
provided approximately 36% of our revenues on a pro forma basis. For the nine
months ended September 30, 1999, our top ten clients provided approximately 48%
of our revenues on a pro forma basis and 51% on an actual basis. For the nine
months ended September 30, 1999, each of British Airways and Sprint accounted
for more than more than 10% of our revenues on a pro forma basis. For the nine
months ended September 30, 1999 and year ended December 31, 1998, British
Airways accounted for more than 10% of our revenues on an actual basis. The
following lists companies that, in terms of pro forma revenues, were among our
largest 25 clients in 1998 and/or 1999:
<TABLE>
<S> <C> <C>
3M Countrywide SmithKline-Beecham
British Airways DIRECTV Sprint
Colgate-Palmolive FT Group (Financial Times) Texaco
Compaq Enron Unilever
</TABLE>
52
<PAGE>
BRITISH AIRWAYS: COMPREHENSIVE SERVICES
We began our relationship with British Airways in 1996 with a redesign and
redevelopment of its existing Web site. From that initial project, this
relationship has evolved to now include advising on the strategic, operational,
management, technological and creative elements of British Airways' Internet
strategy. We work with British Airways out of our New York and London offices,
as well as a number of other locations. We have expanded British Airways' online
commerce efforts, united its broad product range and global sales channels, and
extended its customer service operations online in a manner consistent with its
high-quality reputation.
[GRAPHIC DEPICTING SCREENSHOTS OF
BRITISH AIRWAYS' WEB SITE]
<TABLE>
<S> <C> <C> <C>
ONLINE BRANDING SYSTEMS DEVELOPMENT E-COMMERCE RELATIONSHIP
ENHANCEMENT
Extend one of the Establish a transaction Create selling Enhance relationships
world's most respected infrastructure that experiences that open between British Airways
brands online enables sales, service new channels for and its customers with
and distribution purchasing, including realtime, personalized
online sales online customer support
</TABLE>
We have provided to British Airways a wide range of services. Illustrative
work includes:
- working with British Airways staff and senior management to devise and
execute an Internet strategy to increase online sales, operating
efficiencies, repeat business and customer satisfaction;
- creating strategies and processes for managing sales, distribution and
service for multiple channels;
- establishing companywide guidelines so that internal British Airways
groups can autonomously develop resources, such as email systems, Web
sites and foreign language content for themselves and their customers and
suppliers;
- enabling online customer service; and
53
<PAGE>
- introducing the use of interactive TV as a medium for sales, distribution
and service.
Today, British Airways customers have access to customer service, flight
information and ticket sales 24 hours a day, seven days a week. British Airways
believes its Internet initiatives have successfully extended its brand and
enhanced its reputation for superior customer service. In May, 1999, British
Airways was judged one of the 100 "hottest companies on the Net" by BUSINESS
2.0, a United States magazine that covers the Internet industry and new
technologies. British Airways has won numerous awards for its Internet presence,
including the designation by CIO Magazine as one of the top 50 Internet sites of
1999, the 1998 @d:tech Gold award for "Best Direct Marketing Web Site" and the
1997 Advertising Age award for "Best Interactive Site".
We continue to work with British Airways, developing strategies and
fulfilling its needs for Internet services around the world.
54
<PAGE>
DIRECTV: IMPROVING OPERATIONS WITH EASE
DIRECTV is one of the nation's leading providers of digital television
entertainment with more than 7 million customers, including customers
subscribing to the PRIMESTAR by DIRECTV medium-power digital broadcast service.
We began our relationship with DIRECTV by creating a floppy disk-based
client-server application for order processing. Working with DIRECTV, we have
developed further applications that have improved the quality and decreased the
operation costs of DIRECTV's computerized ordering systems.
[GRAPHIC DEPICTING SCREENSHOTS OF
DIRECTV'S WINDOWS-BASED PROGRAMS AND WEB SITE]
<TABLE>
<S> <C> <C> <C>
TECHNICAL ARCHITECTURE E-COMMERCE, PRE- WEB WEB-BASED SEAMLESS SALES
Design and implement a Create an e- commerce Provide a web interface Use computer system to
technical architecture dial up system for a to the system for automate cross- selling
that allows non- technical audience greater accessibility and up-selling for the
distribution and sales and lower costs sales force
through multiple
computer systems
</TABLE>
Our work for DIRECTV includes:
- creating a client-server application for then partner United States
Satellite Broadcasting, Inc. (USSB), to eliminate order processing
complications associated with its retailers' reliance on facsimile
transmission. Our solution to the often inaccurate and costly fax and data
entry method used by these companies was EASe, a client-server software
application which allowed retailers to enter orders and establish
subscriber accounts directly with USSB through a digital modem connection.
EASe provided automated customer sign-up and support functionalities
capable of guarding against fraudulent order entry. The system also
provided systematic feedback that enabled retailers to determine their
eligibility for commission credit;
- modifying the EASe system (prior to DIRECTV's merger with USSB in early
1999) to include business orders from DIRECTV, a significant
accomplishment given DIRECTV's presence in more than 26,000 retail
locations nationwide;
55
<PAGE>
- designing and developing a technical architecture that integrated the EASe
application with several enterprise systems. The integration allowed
DIRECTV to serve both its retail dealers and new customers more
efficiently by transmitting new customer accounts directly to DIRECTV's
billing system and thereby expediting the set-up process; and
- distributing the EASe software application to retailers over the Internet,
further cutting costs and facilitating business between DIRECTV and its
retailers.
Using EASe software from AGENCY.COM, DIRECTV dealers enjoyed a simplified
customer account set-up and benefited from fewer processing errors. As a result,
DIRECTV believes that it has achieved increased retailer loyalty and reduced
operating costs. Today, the majority of small-to-medium DIRECTV retailers and
franchise dealers use the EASe application to transmit new customer orders to
DIRECTV. One of our currently scheduled projects is to extend EASe to
Web-enabled access, which will allow dealers to work with the system on-line.
The projects illustrate the continuation of our successful relationship with
DIRECTV.
SPRINT: LEVERAGING THE INTERNET
In late 1997, Sprint first enlisted the help of AGENCY.COM to redesign its
existing web site. That initial relationship has expanded to include a range of
strategy, creative and technology services that support Sprint's online sales,
distribution, marketing and customer service efforts. We currently deliver
services to Sprint through client teams collaborating in three offices across
the United States. Through our relationship with Sprint, we have helped to
improve Sprint's ability to conduct business online, assisted in enabling Sprint
to present a consistent brand image across a diverse product range and begun the
process of helping Sprint to better fulfill the needs of customers online.
Sprint has enlisted the help of AGENCY.COM for a number of projects.
Illustrative work includes:
- redesigning the sprint.com Web site interface, information architecture
and branding to provide a more consistent and unified online experience
and to serve the needs of distinct customer groups across multiple Sprint
business units, as well as working with Sprint to maintain and update the
site;
- creating a set of Internet standards and guidelines for Sprint that allows
content and services to be added to Sprint's online presence in a
consistent manner;
- assisting Sprint in identifying and evaluating opportunities for
additional, enhanced interactions with customers and for increased
electronic commerce and customer service offerings for customers;
- participating in the Sprint steering organization that sets the strategic
Internet agenda across Sprint business units;
- developing an online strategy to support the launch of Sprint's ION
service, an integrated, broadband network that can support voice, video,
data, fax and Internet communications over a single connection; and
- enhancing online sales of Sprint products and services through online
media and marketing strategy and implementation.
As a result of this relationship, both Sprint and we believe that Sprint has
significantly improved its online presence and success in doing business on the
Internet. Both Sprint and we believe that Sprint has achieved substantial
increases in online sales, reduced cost of sales, more effective branding and a
56
<PAGE>
significant increase in customer satisfaction with Sprint's online services.
We continue to work with Sprint to anticipate the needs of its customers
online and to improve, extend and enhance its Internet presence.
SALES AND MARKETING
We seek to generate revenues from our existing and new clients. We continue
to work with many of our early clients. We target the Global 1000, top private
companies and new e-businesses.
EXISTING RELATIONSHIPS
We focus on long-term relationships with our clients. To facilitate this, we
assign a relationship manager to each of our clients. This relationship manager
leads the client engagement and proactively works with the client to refine and
further develop its Internet strategies. Our client team, led by a relationship
manager, identifies areas for potential business growth and positions AGENCY.COM
as the provider of these services.
NEW BUSINESS DEVELOPMENT
To target new clients, we have more than 20 New Business Development
professionals located in our regional offices who seek to develop relationships
with companies that have businesses that can benefit from Internet services and
strategies, are willing to make a significant commitment to pursuing interactive
opportunities and are located in the same geographic regions as our offices.
MARKETING EFFORTS
Our marketing program focuses on extending our brand, generating incremental
revenue and increasing our visibility. We supplement our marketing efforts with
our marketing and technology alliances. Marketing and technology alliances
provide mutually beneficial staff cross-training opportunities and business
development opportunities to enhance the services we provide to our clients and
to increase our technical awareness and internal capabilities.
ACQUISITIONS AND INTEGRATION
We evaluate potential acquisitions based on strategic and geographic fit.
After determining that an acquisition candidate meets one of these two criteria,
we then focus on its cultural fit. We target companies that will help us become
the leading global provider of Internet professional services. Acquired
companies benefit from our management expertise, international infrastructure,
long-term client focus, track record, brand awareness and brand strength.
ACQUISITIONS
Since our founding in 1995, we have acquired the following companies:
- Spiral Media, completed in July 1998;
- Online Magic, completed in July 1998;
- Ketchum Interactive, completed in August 1998;
- Web Partners, doing business as The Primary Group, completed in August
1998;
- Interactive Solutions, completed in April 1999;
- Quadris Consulting, completed in April 1999;
- Eagle River Interactive, completed in April 1999;
- Digital Vision, completed in May 1999;
- Twinspark Interactive People, completed in July 1999:
- I-traffic, completed in October 1999; and
- Visionik, completed in November 1999.
In addition to these acquisitions, we own 30% of The Edge Consultants and
have an option to acquire an additional 30% of its equity and own 5% of the
equity of Pictoris Interactive and have an option to acquire the remaining 95%.
INTEGRATION
We are able to provide the flexible, seamless service demanded by our
clients by
57
<PAGE>
fully integrating acquired companies, both operationally and culturally. One of
our key strengths is our ability to successfully instill our culture after we
acquire new companies. Our acquisition and integration approach includes the
following elements:
- MANAGEMENT INTEGRATION. We integrate members of the acquired company's
senior management into AGENCY.COM's management. This allows the senior
management of the acquired company to learn our culture, increases the
effectiveness of the acquired company's integration and increases loyalty
to the combined organization.
- STAFF INTEGRATION. We integrate the acquired company's staff into our
existing structure. Strategy, creative and technology personnel are
assigned, where geography permits, to existing client teams in order to
integrate new skill sets into our knowledge base. We also meld the sales
staff of the acquired company into our New Business Development
organization. Additionally, where appropriate, we transfer staff between
new and old offices to further allow staff to share experiences and learn
from one another.
- OPERATIONAL INTEGRATION. Our financial and information technology
infrastructure are designed so that new acquisitions of any size can be
efficiently integrated into our financial control, accounting structure
and technology systems. We integrate the phones, computers and other
technology into our existing infrastructure in order to provide a seamless
working environment between AGENCY.COM and the acquired company. This
fosters the feeling of one firm and one culture and enables collaboration
among offices.
- INTERNAL COMMUNICATION. We use internal publications, Web-casts, online
chats and intranet initiatives as well as frequent office visits by our
senior management to facilitate communication between older and newer
offices and to encourage camaraderie among our employees.
- METHODOLOGY INTEGRATION. We study the methodology and practices of the
acquired company and may incorporate them into our Compass methodology,
allowing us to use the best practices of the combined entity.
COMPETITION
We compete with other providers of Internet professional services. The
market for these services has grown dramatically in recent years as a result of
the increasing use of the Internet by businesses for communication, marketing
and information dissemination to their customers, suppliers, business partners
and employees. Our market is intensely competitive, highly fragmented and
subject to rapid technological change. We expect competition to persist and
intensify in the future. Our current and potential competitors include:
- Internet professional services firms, such as iXL, Organic Online,
Proxicom, Razorfish, Scient, USWeb/CKS and Viant;
- traditional strategic consulting firms, such as Booz-Allen & Hamilton,
Boston Consulting Group and McKinsey;
- interactive advertising agencies, such as Modem Media.Poppe Tyson and
OgilvyOne;
- professional services groups of computer equipment companies, such as
Hewlett-Packard and IBM;
- traditional systems integrators, such as Andersen Consulting, Cambridge
Technology Partners, EDS and Sapient; and
- internal resources of current or potential clients.
58
<PAGE>
We believe the principal competitive factors in our market are:
- breadth and integration of service offerings;
- cost and quality of service;
- client relationships;
- technical knowledge and creative skills;
- reliability;
- ability to attract and retain quality professionals;
- brand recognition;
- reputation; and
- vertical industry knowledge.
We believe that we compete favorably with respect to these factors, but we
cannot assure you that we will continue to do so in the future.
INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS
We regard our copyrights, service marks, trademarks, trade secrets and other
intellectual property as critical to our success. Unauthorized use of our
intellectual property by third parties may damage our brand and our reputation.
We rely on trademark and copyright law, trade secret protection and
confidentiality and/or license agreements with our employees, customers,
partners and others to protect our intellectual property rights. Despite our
precautions, it may be possible for third parties to obtain and use our
intellectual property without our authorization. Furthermore, the validity,
enforceability and scope of protection of intellectual property in
Internet-related industries is uncertain and still evolving. The laws of some
foreign countries do not protect intellectual property to the same extent as do
the laws of the United States.
We pursue the registration of our trademarks in the United States and
internationally in France, Germany, the Netherlands, Singapore and the United
Kingdom. We may not be able to secure adequate protection of our trademarks in
the United States and other countries. We currently hold trademark registrations
in the United States, France and Germany for the AGENCY.COM trademark and have
applied for the registration of "Interactive Relationship Management" in the
United States, the United Kingdom and Singapore. Effective trademark protection
may not be available in all the countries in which we conduct business.
Our application to register the AGENCY.COM trademark in the United Kingdom
was initially denied. Although we have filed an appeal, the outcome of the
appeal is uncertain. We have also filed to register the AGENCY.COM trademark in
the United Kingdom together with our logo and believe that this registration
will be accepted. We have also filed applications to register the AGENCY.COM
trademark in Singapore and the Netherlands, however, we have not received any
responses to date. As we begin operations in new countries, it is our intention
to file trademark applications for the AGENCY.COM mark in these countries. We
cannot assure you that any of these applications will be accepted.
Policing unauthorized use of our marks is difficult and expensive. In
addition, it is possible that our competitors will adopt product or service
names similar to ours, thereby impeding our ability to build brand identity and
possibly leading to customer confusion.
We may be subject to legal proceedings and claims from time to time relating
to the intellectual property of others in the ordinary course of our business.
We may incur substantial expenses in defending against these third-party
infringement claims, regardless of their merit. Successful infringement claims
against us may result in substantial monetary liability or may materially
disrupt the conduct of our business.
EMPLOYEES
As of November 4, 1999, we had approximately 1,000 full-time employees. None
of our employees are represented by a labor union. We have experienced no work
stoppages and we believe our relationship with our employees is good.
59
<PAGE>
FACILITIES
Our principal executive offices are currently located in a leased facility
in New York, New York, consisting of an aggregate of approximately 37,000 square
feet. We expect to move our principal executive offices by January 2000 to
another leased facility in New York, New York, consisting of an aggregate of
approximately 100,000 square feet. The lease for this new office space expires
on April 15, 2014. We also lease space for our operations in California,
Colorado, Illinois, Massachusetts, New Jersey, Oregon and Texas, as well as in
Denmark, France, the Netherlands and the United Kingdom. While I-traffic
currently maintains offices in New York and San Francisco, we expect the
operations of I-traffic to be combined with our existing offices in these cities
in the second quarter of 2000. We believe that our existing facilities, together
with our newly-leased facilities, are adequate for our current needs and that
additional space will be available as needed.
LEGAL PROCEEDINGS
We are not a party to any material legal proceedings.
60
<PAGE>
MANAGEMENT
The following table sets forth the executive officers, directors, director
nominee and key employees of AGENCY.COM, their ages and the positions they hold:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- -------- ----------------------------------------------------------------------
<S> <C> <C>
Chan Suh.................. 38 Chairman of the Board, Chief Executive Officer and President
Kyle Shannon.............. 34 Chief Creative Officer and Director
Kenneth Trush............. 44 Executive Vice President, Treasurer and Director
Charles Dickson........... 45 Executive Vice President and Chief Financial Officer
Janet Ambrosi Wertman..... 37 Executive Vice President, General Counsel and Secretary
Kevin Rowe................ 40 President, North America
Eamonn Wilmott............ 38 President, Europe
Larry Krakauer............ 43 Chief Technology Officer
Gerald Bruce Redditt...... 48 Director
John D. Wren.............. 47 Director
Jeffrey Rayport........... 39 Director-Nominee
</TABLE>
CHAN SUH co-founded AGENCY.COM in February 1995 and has served as the President,
Chief Executive Officer and Chairman of the board of directors since that time.
From June 1992 to January 1995, Mr. Suh was with Time Inc., most recently as
Marketing Director of VIBE MAGAZINE, where he was involved in the
conceptualization and launching of Pathfinder, Time Warner's service on the
World Wide Web, and created Vibe Online, the online service for VIBE MAGAZINE.
Prior to joining Time Inc., Mr. Suh held various marketing positions at Conde
Nast and NewsCorp. In addition, since February 1995, Mr. Suh has been publisher
of URBAN DESIRES, one of the first online magazines for art and culture.
KYLE SHANNON co-founded AGENCY.COM in February 1995 and has served as Chief
Creative Officer and a director since that time. From April 1993 to
January 1995, Mr. Shannon served as Manager, Image Processing for YAR
Communications, a communications agency specializing in multicultural
advertising. With a B.F.A. in performance from Penn State University,
Mr. Shannon pursued a professional acting and screenwriting career from 1987 to
1995. In addition, in November 1994, Mr. Shannon launched URBAN DESIRES, one of
the first online magazines for art and culture, and founded the World Wide Web
Artists' Consortium, a group dedicated to exploring new media in New York City.
KENNETH TRUSH has served as AGENCY.COM's Executive Vice President and Treasurer
since July 1997 and has served as a director since September 1996. Mr. Trush was
appointed Executive Vice President for Corporate Development in November 1999.
From July 1997 until November 1999, Mr. Trush served as Chief Financial Officer.
From November 1984 to June 1997, Mr. Trush owned his own certified public
accounting firm. Before founding his own accounting firm, Mr. Trush was a
Supervisor at Ernst & Young LLP.
CHARLES DICKSON has served as Executive Vice President and Chief Financial
Officer since November 1999. From December 1997 until October 1999, Mr. Dickson
served as Executive Vice President and Chief Financial Officer at WinStar
Communications Inc., a provider of broadband communications services to business
customers. From January 1994 until November 1997, Mr. Dickson served as Chief
Financial Officer at General Instrument Corporation, a broadband equipment and
services provider. From April 1984 until
61
<PAGE>
December 1993, Mr. Dickson served as a senior financial executive of MCI
Communications Corporation, most recently as Vice President for Finance and
Administration, National Accounts.
JANET AMBROSI WERTMAN has served as Executive Vice President, General Counsel
and Secretary of AGENCY.COM since January 1998. From 1988 until August 1997,
Ms. Ambrosi Wertman was an attorney with the law firm of Davis & Gilbert, most
recently as a partner in the firm.
KEVIN ROWE has served as AGENCY.COM's President of North American operations
since April 1999 and has acted in this capacity since June 1998, presiding over
Eagle River Interactive, an interactive agency acquired by AGENCY.COM. From
December 1996 to April 1999, Mr. Rowe served as President of Eagle River
Interactive. From October 1991 to September 1996, Mr. Rowe was Executive Vice
President and General Manager of the Midwest Region of MCI Systemhouse Inc., a
division of MCI Communications Inc. Prior to joining MCI Systemhouse, Mr. Rowe
held various positions at Andersen Consulting, most recently as an Associate
Partner, and Ferrin Corporation.
EAMONN WILMOTT has served as President of European operations since June 1999
and acted as Managing Director of the London office of AGENCY.COM from May 1997
until June 1999. Prior to joining AGENCY.COM, Mr. Wilmott served as Director of
Online Magic Limited, an interactive agency that he founded in the United
Kingdom in 1994, which was acquired by AGENCY.COM in July 1998. Prior to
founding Online Magic, Mr. Wilmott founded, and served as President of Supernet
International, one of the world's first commercial Internet service.
LARRY KRAKAUER has served as Chief Technology Officer since April 1999 and has
acted in such capacity since July 1998, presiding over Quadris Consulting until
it was acquired by AGENCY.COM in April 1999. From January 1995 to April 1999,
Mr. Krakauer served as President of Quadris Consulting, which began as a
division of JYACC, Inc., an information technology consulting company and became
an independent company in 1998. From 1989 to 1995, Mr. Krakauer served in
various capacities at JYACC.
GERALD BRUCE REDDITT has served as a director of AGENCY.COM since January 1999.
Since May 1998, Mr. Redditt has served as Executive Vice President of Omnicom.
From 1995 to 1998, Mr. Redditt served as Head of Communications and Governmental
Relations at Sony Pictures Entertainment. Prior to 1995, Mr. Redditt served for
nine years in various capacities at GTE, a global telecommunications company,
most recently as Head of Corporate Communications. Mr. Redditt has been
nominated to our board of directors by Communicade, a subsidiary of Omnicom,
pursuant to a shareholders agreement.
JOHN D. WREN has served as a director of AGENCY.COM since September 1996.
Mr. Wren has served as Chief Executive Officer of Omnicom since January 1997 and
has also been President of Omnicom since September 1995. From May 1993 until
June 1998, he served as Chairman and Chief Executive Officer of the Diversified
Agency Services division of Omnicom. Mr. Wren was appointed to Omnicom's Board
of Directors in May 1993. Mr. Wren also serves on the Board of Directors of
Razorfish, Inc. Mr. Wren has been nominated to our board of directors by
Communicade, a subsidiary of Omnicom, pursuant to a shareholders agreement.
JEFFREY RAYPORT has agreed to serve as a director of AGENCY.COM upon the
completion of the initial public offering. Mr. Rayport has been an associate
professor of business administration in the Service Management Unit at the
Harvard Business School since September 1991. Mr. Rayport has developed a
specialized course on "Managing Marketspace
62
<PAGE>
Service Interfaces", which focuses on electronic commerce and
technology-mediated service channels. Mr. Rayport currently serves as director
on the boards of Global Sports, Be Free, edu.com and Andrews McMeel Universal.
CLASSIFIED BOARD OF DIRECTORS
We intend to add an additional independent director to our board of
directors. Upon the closing of this offering, our board of directors will be
divided into three classes of directors serving staggered three-year terms. As a
result, approximately one-third of the board of directors will be elected each
year. These provisions, when coupled with the provision of our amended and
restated certificate of incorporation authorizing the board of directors to fill
vacant directorships or increase the size of the board of directors, may delay a
stockholder from removing incumbent directors and simultaneously gaining control
of the board of directors by filling the vacancies with its own nominees. Mr.
Rayport and the director to be named will be Class I directors whose terms
expire at the 2000 annual meeting of shareholders; Messrs. Redditt, Trush and
Shannon will be class II directors whose terms expire at the 2001 annual meeting
of shareholders; and Messrs. Suh and Wren will be class III directors whose
terms expire at the 2002 annual meeting.
Messrs. Redditt and Wren had originally been elected to our board of
directors under an agreement we entered into with Communicade, a wholly-owned
subsidiary of Omnicom, in order for Omnicom as our majority stockholder to have
an active role in board decisions. The provision of the agreement providing
Communicade with the right to select two directors does not extend to future
elections.
BOARD COMMITTEES
The audit committee reports to the board regarding the appointment of our
independent public accountants, the scope and results of our annual audits,
compliance with our accounting and financial policies and management's
procedures and policies relative to the adequacy of our internal accounting
controls. Upon the completion of this offering, the audit committee will consist
of Jeffrey Rayport and a director to be determined later. In compliance with
Nasdaq National Market rules and regulations, our audit committee will consist
of at least two independent directors within 90 days of the closing of this
offering.
The compensation committee of the board of directors reviews and makes
recommendations to the board regarding our compensation policies and all forms
of compensation to be provided to our executive officers and directors. In
addition, the compensation committee reviews bonus and stock compensation
arrangements for all of our other employees. Upon the completion of this
offering, the members of the compensation committee will be Jeffrey Rayport and
a director to be determined later. No interlocking relationships exist between
our board of directors or compensation committee and the board of directors or
compensation committee of any other company, nor has any interlocking
relationship existed in the past. Our compensation committee will consist of at
least two directors, both of whom will be independent. This permits options
granted by the compensation committee to receive favorable treatment under
applicable federal securities and tax law.
DIRECTOR COMPENSATION
We do not currently compensate directors for attending meetings of the board
of directors or committee meetings of the board of directors, but we do
reimburse directors for their reasonable travel expenses incurred in connection
with attending these meetings.
Under the automatic option grant program of the 1999 Stock Option/Stock
Issuance Plan,
63
<PAGE>
which is described below under "--1999 Stock Option/Stock Issuance Plan", and
subject to the last sentence of this paragraph, each individual who is serving
as a non-employee member of the board of directors on the date the underwriting
agreement is executed and who has not previously been in our employ will receive
at that time an option to purchase 50,000 shares of common stock with an
exercise price equal to the public offering price set forth on the cover page of
this prospectus. Each individual who first joins the board of directors after
the completion of this offering as a non-employee member of the board of
directors will also receive an option grant for 50,000 shares of common stock at
the time of his or her commence of service on the board of directors, provided
such individual has not otherwise been in our prior employ and has not received
options to purchase, in the aggregate, more than 40,000 shares of common stock
in the last 12 months. In addition, at each annual meeting of stockholders,
beginning with the 2000 annual meeting, each individual who is to continue to
serve as a non-employee member of the board of directors will receive an option
to purchase 15,000 shares of common stock, provided such individual has served
as a non-employee board member for at least six months.
Mr. Rayport has agreed to be named as a director-nominee for this prospectus
and to serve as a director of AGENCY.COM upon the closing of this offering. Upon
agreeing to serve as a director, Mr. Rayport was issued options to purchase
50,000 shares of our common stock at an exercise price of $1.225 per share under
our 1999 Stock Option/Stock Issuance Plan. These options become exercisable at
the time Mr. Rayport is elected as a director of AGENCY.COM.
64
<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth the total compensation paid to our Chief
Executive Officer, Chief Creative Officer and our four most highly compensated
executive officers (collectively, the "named executive officers") during the
fiscal year ended December 31, 1998.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
ANNUAL COMPENSATION -----------------
--------------------- SHARES UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS OPTIONS COMPENSATION
- --------------------------- --------- --------- ----------------- --------------
<S> <C> <C> <C> <C>
Chan Suh........................... $ 75,000 $ -- -- $ 563(1)
Chief Executive Officer
Kyle Shannon....................... 75,000 -- -- 563(1)
Chief Creative Officer
Kenneth Trush...................... 150,000 2,000 -- 1,140(2)
Chief Financial Officer
Kevin Rowe (3)..................... 250,000 320,000 -- 12,685
President, North America
Eamonn Wilmott..................... 107,868(4) -- -- --
President, Europe
Larry Krakauer (5)................. 146,410 39,646 185,144 13,421
Chief Technology Officer
</TABLE>
- ------------------------
(1) AGENCY.COM paid $563 in matching 401(k) contributions to each of
Messrs. Suh and Shannon.
(2) Mr. Trush received $378 as payment for long-term disability premiums and
$762 as matching 401(k) contributions.
(3) Mr. Rowe was appointed AGENCY.COM's President, North America, in April 1999.
The amounts stated above were paid to Mr. Rowe by Eagle River Interactive.
Mr. Rowe received a car allowance of $7,800, a matching 401(k) contribution
of $2,000 and $2,885 for unused time off.
(4) Mr. Wilmott's annual salary was paid in pounds sterling (L). The dollar
amount reflects a conversion rate of 1.6595 dollars per pound sterling as of
December 31, 1998.
(5) Mr. Krakauer was appointed AGENCY.COM's Chief Technology Officer in April
1999. The amounts stated above were paid to Mr. Krakauer by Quadris
Consulting. Mr. Krakauer received a $3,316 matching 401(k) contribution and
$10,105 for unused time off.
65
<PAGE>
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth grants of stock options for the year ended
December 31, 1998 to each of the named executive officers. We have never granted
any stock appreciation rights. The potential realizable value is calculated
based on the term of the option at its time of grant. It is calculated assuming
that the fair market value of common stock on the date of grant appreciates at
the indicated annual rate compounded annually for the entire term of the option
and that the option is exercised and sold on the last day of its term for the
appreciated stock price. These numbers are calculated based on the requirements
of the Securities and Exchange Commission and do not reflect our estimate of
future stock price growth.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
POTENTIAL
PERCENT REALIZABLE VALUE
OF FAIR AT ASSUMED ANNUAL
TOTAL MARKET RATES
NUMBER OF OPTIONS VALUE OF STOCK PRICE
SECURITIES GRANTED EXERCISE PER APPRECIATION
UNDERLYING TO PRICE SHARE ON FOR OPTION TERM
OPTIONS EMPLOYEES PER DATE EXPIRATION -------------------
NAME GRANTED IN 1998 SHARE OF GRANT DATE 5% 10%
- ------------------------------ --------- --------- -------- -------- -------- -------- --------
Chan Suh...................... -- --% $ -- $ -- -- $ -- $ --
Kyle Shannon.................. -- -- -- -- -- -- --
Kenneth Trush................. -- -- -- -- -- -- --
Kevin Rowe.................... -- -- -- -- -- -- --
Eamonn Wilmott................ -- -- -- -- -- -- --
Larry Krakauer (1)............ 185,144 9.8 0.44 0.44 12/30/08 51,232 129,832
</TABLE>
(1) These represent options issued to Mr. Krakauer while he was an employee of
Quadris Consulting which converted into AGENCY.COM options upon the closing
of the acquisition.
FISCAL YEAR-END OPTION VALUES
The following table sets forth information concerning the number and value
of unexercised options held by each of the named executive officers at
December 31, 1998. There was no public trading market for the common stock as of
December 31, 1998. Accordingly, the values set forth below have been calculated
on the basis of an assumed initial public offering price of $11.00 per share,
less the applicable exercise price per share, multiplied by the number of shares
underlying the options.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS
FISCAL YEAR-END AT FISCAL YEAR-END
----------------------- ------------------------
<S> <C> <C> <C> <C>
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------------------------ ------- -------- ---------- --------
Chan Suh.................................. -- -- $ -- $ --
Kyle Shannon.............................. -- -- -- --
Kenneth Trush............................. 278,730 -- 2,745,491 --
Kevin Rowe................................ -- -- -- --
Eamonn Wilmott............................ -- -- -- --
Larry Krakauer............................ 185,144 -- 1,955,121 --
</TABLE>
66
<PAGE>
EMPLOYMENT AGREEMENTS
In April 1999, we entered into employment agreements with each of
Messrs. Suh, Shannon, Trush, Rowe, Wilmott and Krakauer and Ms. Ambrosi Wertman.
In October 1999, we entered into an employment agreement with Mr. Dickson.
Mr. Suh's employment agreement provides for an annual base salary of
$155,000. If Mr. Suh's employment agreement is terminated for reasons other than
for cause or if Mr. Suh should resign for good reason, he will be entitled to
receive his annual base salary payable through March 31, 2004 if the date of
termination occurs on or prior to March 31, 2003 or one year from the date of
termination, if such termination occurs after March 31, 2003. In addition, all
stock options that would vest during this period are accelerated to vest and
become exercisable prior to the date of termination. Mr. Suh's employment
agreement has a term ending in March 2004, but will continue indefinitely until
terminated on one year's notice by either party.
Mr. Shannon's employment agreement provides for an annual base salary of
$150,000. If Mr. Shannon's employment agreement is terminated for reasons other
than for cause or if Mr. Shannon should resign for good reason, he will be
entitled to receive his annual base salary payable through March 31, 2004 if the
date of termination occurs on or prior to December 31, 2003 or 90 days from the
date of termination, if such termination occurs after December 31, 2003. In
addition, all stock options that would vest during this period are accelerated
to vest and become exercisable prior to the date of termination. Mr. Shannon's
employment agreement has a term ending in March 2004, but will continue
indefinitely until terminated on 90 days' notice by either party.
Mr. Rowe's employment agreement provides for an annual base salary of
$150,000. Mr. Rowe is entitled to receive an annual bonus of $100,000. In
addition, based on criteria agreed to by Mr. Rowe and the chief executive
officer, Mr. Rowe will be eligible to receive an annual discretionary
performance-based bonus of up to $250,000. Mr. Rowe also receives an automobile
allowance of $600 per month. If Mr. Rowe's employment agreement is terminated
for reasons other than for cause or if Mr. Rowe should resign for good reason,
he will be entitled to receive his annual base salary payable through April 30,
2002 if the date of termination occurs on or prior to January 31, 2002 or
90 days from the date of termination, if such termination occurs after
January 31, 2002. In addition, all stock options that would vest during this
period are accelerated to vest and become exercisable prior to the date of
termination. Mr. Rowe's employment has a term ending in April 2002 but will
continue indefinitely until terminated on 90 days' notice by either party.
At the time that Mr. Rowe became an employee of AGENCY.COM, we made a
restricted stock grant to him of 80,690 shares of our common stock. Provided
Mr. Rowe remains in our continuous employ, 33 1/3% of the restricted shares will
automatically vest on each of the first three anniversaries of the date of
grant. If Mr. Rowe retires or his employment is involuntarily terminated prior
to any of the first three anniversaries, the pro rata portion of the number of
restricted shares that would have vested as of such termination date will vest.
The board of directors has sole discretion to increase the number of shares that
will vest on retirement or involuntary termination.
Messrs. Trush, Wilmott and Krakauer and Ms. Ambrosi Wertman have employment
agreements with substantially the same terms. Messrs. Trush and Krakauer receive
annual base salaries of $150,000 and Ms. Ambrosi Wertman receives an annual base
salary of $120,000. Mr. Wilmott receives an annual base salary of L93,050, which
is approximately $150,000. Each agreement has a term ending on March 31, 2002,
but will continue
67
<PAGE>
indefinitely until terminated on 90 days' notice by either party. If any of
these persons should resign for good reason or are terminated for reasons other
than for cause, all stock options which would have vested during the term of the
agreement will automatically vest. In addition, in cases of termination other
than for cause or resignation for good reason, he or she will be entitled to
receive his or her annual base salary payable through March 31, 2002 if the date
of termination occurs on or prior to December 31, 2001 or 90 days from the date
of termination, if termination occurs after December 31, 2001.
Mr. Dickson's employment agreement provides for an annual base salary of
$250,000, with a guaranteed annual bonus of $100,000 and a discretionary annual
bonus of up to $100,000. The agreement has a term ending on October 31, 2002,
but will be automatically renewed for successive three year terms unless either
party gives the other party written notice no more than nine and no less than
six months before the expiration of the term. If Mr. Dickson is terminated for
cause, he will be entitled to all unpaid salary compensation and a pro rata
share of the guaranteed bonus through the termination date. In addition,
Mr. Dickson would have the right to exercise any vested stock options, and the
vesting of any unvested options will be determined in accordance with the plan
under which the options were granted. If Mr. Dickson is terminated without
cause, he will be entitled to severance compensation equal to his then-
applicable base salary and a pro-rated guaranteed bonus for twelve months
following the date of termination. In addition, Mr. Dickson would have the right
to exercise any vested options in accordance with the terms of the plan under
which the options were granted, and all unvested options which would have vested
during the year following the date of termination would be accelerated to
precede the date of termination.
Each executive officer serves at the discretion of the Board of Directors
and holds office until his or her successor is elected and qualified or until
his or her earlier resignation or removal.
1999 STOCK OPTION/STOCK ISSUANCE PLAN
INTRODUCTION
The 1999 Amended and Restated Stock Option/Stock Issuance Plan is the
successor program to our 1996 Stock Option Plan and 1997 Stock Option Plan. The
1999 plan was initially adopted by our board of directors and our stockholders
in February 1999 and became effective as of that date. All outstanding options
under our 1996 Stock Option Plan and 1997 Stock Option Plan will be transferred
to the 1999 plan upon the closing of this offering, and no further option grants
will be made under the predecessor plans. The transferred options will continue
to be governed by their existing terms. All outstanding options currently under
our 1996 and 1997 plans are currently exercisable in full. Except as otherwise
noted, the transferred options have substantially the same terms as those for
grants to be made under the discretionary option grant program of the 1999 plan.
SHARE RESERVE
9,676,178 shares of our common stock have been authorized for issuance under
the 1999 plan. This share reserve consists of the number of shares carried over
from the 1996 and 1997 plans plus an additional increase of 8,823,266 shares,
for a total of 9,676,178 shares. The share reserve will automatically increase
on the first trading day in January each year, by an amount equal to 3% of the
total number of shares of common stock outstanding on the last trading day of
the prior year, but in no event will this annual increase exceed 1,500,000
shares. In addition, no participant in the 1999 plan may be granted stock
options, separately exercisable stock
68
<PAGE>
appreciation rights or direct stock issuances for more than 1,100,000 shares of
common stock in total in any calendar year.
PROGRAMS
The 1999 plan has three separate programs:
- the discretionary option grant program, under which our board or
compensation committee may grant eligible individuals in our service
(1) options to purchase shares of our common stock at an exercise price
determined by the plan administrator and (2) stock appreciation rights;
- the stock issuance program, under which eligible individuals may be issued
shares of common stock upon the attainment of performance milestones, upon
the completion of a period of service or as a bonus for past services; and
- the automatic option grant program, under which option grants will be made
at periodic intervals to eligible non-employee board members to purchase
shares of common stock at an exercise price equal to the fair market value
of those shares on the grant date.
The individuals eligible to participate in our 1999 plan include our
officers, employees, board members and consultants.
ADMINISTRATION
The discretionary option grant and stock issuance programs will be
administered by our compensation committee. This committee will determine which
eligible individuals are to receive option grants or stock issuances under those
programs, the time or times when the grants or issuances are to be made, the
number of shares subject to each grant or issuance, the status of any granted
option as either an incentive stock option or a nonstatutory stock option under
the federal tax laws, the vesting schedule to be in effect for the option grant
or stock issuance and the maximum term for which any granted option is to remain
outstanding. The administration of the automatic option grant program will be
self-executing in accordance with its terms.
PLAN FEATURES
The 1999 plan includes the following additional features:
- Options granted under the plan may be exercised by payment in cash or
(i) by payment of shares of our common stock valued at fair market value
on the exercise date or (ii) through a same-day sale program without any
cash outlay by the optionee.
- The compensation committee will have the authority to cancel outstanding
options with the consent of the holder under the discretionary option
grant program, including any transferred options from our 1996 and 1997
plans, in return for the grant of new options for the same or different
number of options shares with an exercise price per share based upon the
fair market value of our common stock on the new grant date.
- Stock appreciation rights will provide the holders with the election to
surrender their outstanding options for a payment from AGENCY.COM equal to
the fair market value of the shares subject to the surrendered options
less the exercise price payable for those shares. We may make the payment
in cash or in shares of our common stock.
- Limited stock appreciation rights will automatically be included as part
of each grant made under the automatic option grant program. Options with
this feature may be surrendered to us upon the successful completion of a
hostile tender offer for more than 50% of our outstanding voting stock or
a change in
69
<PAGE>
the majority of our board through one or more contested elections. In
return for the surrendered option, the optionee will be entitled to a cash
distribution from us in an amount per surrendered option share based upon
the fair market value per share upon the date of surrender or, if in
connection with a hostile tender offer, the highest price per share of our
common stock paid in that tender offer.
CHANGE IN CONTROL
The 1999 plan includes the following change in control provisions which may
result in the accelerated vesting of outstanding option grants and stock
issuances:
- In the event that we are acquired by merger or asset sale or a board-
approved sale of more than 50% of our stock, each outstanding option under
the discretionary option grant program which is not to be assumed or
continued by the successor corporation will immediately become exercisable
for all the option shares, and all outstanding unvested shares will
immediately vest, except to the extent our repurchase rights with respect
to those shares are assigned to the successor corporation.
- The compensation committee will have complete discretion to grant one or
more options which will become exercisable for all the option shares in
the event those options are assumed in the acquisition but the optionee's
service with AGENCY.COM or the acquiring entity is subsequently
terminated. The vesting of any outstanding shares under the stock issuance
program may be accelerated upon similar terms and conditions.
- The compensation committee may grant options and structure repurchase
rights so that the shares subject to those options or repurchase rights
will immediately vest in connection with a successful tender offer for
more than 50% of our outstanding voting stock or a change in the majority
of our board through one or more contested elections. Such accelerated
vesting may occur either at the time of such transaction or upon the
subsequent termination of the individual's service.
AUTOMATIC OPTION GRANT PROGRAM
Each eligible individual who is serving as a non-employee board member on
the date the underwriting agreement for this offering is executed will
automatically receive on such date an option to purchase 50,000 shares of our
common stock. Each eligible individual who first becomes a non-employee board
member at any time after this offering will automatically receive on the date of
his or her appointment, an option to purchase 50,000 shares of our common stock.
A non-employee board member will receive an option grant on the underwriting
agreement date for this offering or when he or she first joins the board only if
he or she (i) has not been in the prior employ of AGENCY.COM, (ii) had not
received options to purchase more than 40,000 shares of our common stock in the
12 month period preceding the underwriting agreement date for this offering or
the date of the initial appointment or election and (iii) is not a
representative of, or affiliated with, any of our shareholders who, directly or
indirectly, own 30% or more of our voting stock. On the date of each annual
stockholders meeting following this offering, each individual who is to continue
to serve as a non-employee board member will automatically be granted an option
to purchase 15,000 shares of our common stock, provided he or she has served on
the board for at least six months and is not a representative of, or affiliated
with, any of our shareholders who, directly or indirectly, own 30% or more of
our voting stock.
Each automatic grant will have a term of ten years, subject to earlier
termination
70
<PAGE>
following the optionee's cessation of board service. The option will be
immediately exercisable for all of the option shares; however, any unvested
shares purchased under the option will be subject to repurchase by us, at the
exercise price paid per share, should the optionee cease board service prior to
vesting of those shares. The shares subject to each 50,000 share initial
automatic option grant will vest over a four-year period in successive equal
annual installments upon the individual's completion of each year of board
service over the four-year period measured from the option grant date. Each
15,000 share subsequent automatic option grant will vest upon the individual's
completion of one year of board service measured from the option grant date.
However, the shares subject to each automatic grant will immediately vest in
full upon certain changes in control or ownership of AGENCY.COM or upon the
optionee's death or disability while a board member.
The board may amend or modify the 1999 plan at any time, subject to any
required stockholder approval. The 1999 plan will terminate no later than
January 31, 2009.
ASSUMED OPTION PLANS
Pursuant to the terms of the merger agreement between AGENCY.COM and
Interactive Solutions, we assumed the Quadris Consulting 1998 Equity Incentive
Plan and all outstanding options thereunder and the Interactive Solutions
Incorporated 1996 Stock Option Plan and all outstanding options thereunder. In
connection with the merger, the plans were terminated, however, the assumed
options outstanding at the time of such termination will continue to be governed
by their existing terms. 1,399,410 shares of AGENCY.COM common stock have been
reserved for issuance pursuant to the assumed options. The exercise price per
share under each plan was determined by the Quadris Consulting board or the
Interactive Solutions board in its discretion and was based upon the fair market
value of the stock at the time of grant. Incentive options granted under the
plans have an exercise price per share not less than 100% of the fair market
value at the time of grant. The exercise price for any options granted the plans
may be paid in cash or, after the initial public offering, in shares of our
common stock valued at fair market value on the exercise date. In the event that
we are acquired by merger or asset sale, each outstanding option under the plans
which is not assumed by the acquiring company will immediately become
exercisable for all the option shares, and all outstanding unvested shares will
immediately vest.
Pursuant to the terms of the merger agreement between AGENCY.COM and
I-traffic, all options outstanding at the effective time of the acquisition to
purchase I-traffic common stock were assumed and will be exercisable to purchase
an aggregate of 160,675 shares of AGENCY.COM common stock. In connection with
the acquisition, the I-traffic plan was terminated with respect to any future
option grants. However, the converted options will continue to be governed by
their existing terms. The exercise price of each I-traffic option under the plan
was based on the fair market value of the stock at the time of grant. Incentive
options granted under the plan have an exercise price of no less than 100% of
the fair market value at the time of grant. The exercise price for any options
granted under the plan may be paid in cash, or after the initial public
offering, in shares of our common stock valued at fair market value on the
exercise date. In the event we are acquired by merger or asset sale, each
outstanding option under the plan which is unvested will vest and shall be
terminated unless exercised at the effective time of any such transaction or
unless assumed by the successor corporation in connection with the transaction.
71
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
OMNICOM'S ORIGINAL INVESTMENT IN AGENCY.COM
In September 1996, Communicade, Inc. (formerly known as JWL Associates
Corp.), a wholly owned subsidiary of Omnicom, paid $11.7 million for an
aggregate of 6,272,278 shares of the then outstanding shares of our common stock
from the holders of our outstanding shares, Chan Suh, Kyle Shannon, Kenneth
Trush and Paul Galli. Communicade's interest in AGENCY.COM as a result of this
transaction was 40% of the outstanding common stock of AGENCY.COM. Communicade
also consented to the creation of a stock option plan, which provided AGENCY.COM
the ability to issue up to 10% of AGENCY.COM's equity in the form of stock
options.
Under a shareholders agreement entered into by these parties in connection
with Communicade's investment:
- these individuals granted Communicade options to purchase additional
shares sufficient to give Communicade 51% or 80% of AGENCY.COM's
outstanding shares, depending on the circumstances;
- the parties agreed to a board of five members, two of whom would be
designated by Communicade as long as it owned less than 50% of
AGENCY.COM's outstanding capital stock; and
- the parties agreed that as long as Communicade owned less than 51% of
AGENCY.COM's common stock, specified transactions would require
Communicade's prior consent.
This shareholders agreement with Communicade was superseded by a new
shareholders agreement entered into in April 1999 which will terminate on the
closing of this offering. Under this new agreement, Communicade's options to
acquire additional shares were removed and the working capital line was
increased to $10.0 million. The other material provisions of the 1996
shareholders agreement such as the acquisition line, the director nomination
rights and the size of the board, and Communicade's consent rights on specified
transactions were continued on similar terms. Messrs. Redditt and Wren, the
executive vice president and chief executive officer of Omnicom, respectively,
also serve as directors of AGENCY.COM.
OMNICOM FINANCING ARRANGEMENTS
In November 1999, we entered into a new $85.0 million credit facility with
Omnicom Finance, a wholly owned subsidiary of Omnicom, which replaced our
revolving credit line and consolidated all of our previously outstanding
indebtedness due to Omnicom Finance. The credit facility, which terminates on
September 30, 2001, provides for a $25.0 million term loan facility, a
$54.0 million revolving credit line and a real property lease credit support
facility providing letters of credit and/or guarantees up to $6.0 million in the
aggregate. We are required by the credit facility to use 35% of the net proceeds
from this offering, subject to a maximum of $25.0 million, to repay amounts
borrowed under the term loan portion of the new credit facility. This credit
facility bears interest at Omnicom's commercial paper rate, which on
November 4, 1999 was 5.3%, plus 1.25%. The credit facility is secured by
substantially all of our assets including the shares of our subsidiaries, is
guaranteed by our domestic subsidiaries and prohibits us and our subsidiaries
from paying dividends other than in shares of our stock. The credit facility
requires compliance with a number of covenants, including restrictions on asset
sales, liens, the incurrence of debt, making of loans and the repurchase,
redemption or other acquisition of our stock.
72
<PAGE>
Under the 1996 shareholders agreement with Communicade, Communicade agreed
that it, or Omnicom or its affiliates, would lend AGENCY.COM $1.0 million on a
revolving basis for its working capital needs. Substantially all of AGENCY.COM's
assets, including the shares of its subsidiaries, were pledged to secure this
working capital line. Communicade also agreed that it, or Omnicom or its
affiliates, would provide financing to AGENCY.COM to finance "new media"
acquisitions approved by Communicade or its designated directors. Interest on
the revolving credit line and the acquisition line accrued on a non-cash basis
and was payable when the line terminated. As discussed above, this agreement was
superceded in April 1999. The credit agreement provisions under the shareholders
agreement were terminated upon the effectiveness of the new credit facility.
ACQUISITION OF OMNICOM SUBSIDIARIES
In August 1998, AGENCY.COM purchased certain assets and assumed certain
liabilities from Ketchum Advertising Inc., a wholly owned subsidiary of Omnicom,
relating to its Ketchum Interactive business. The purchase price was $643,000 in
cash.
In December 1998, Communicade purchased 60% of Interactive Solutions' shares
from Interactive Solutions' former President for a purchase price of $1.6975 per
share, resulting in Communicade holding all of Interactive Solutions'
outstanding shares, other than a de minimis number of shares held by third
parties as a result of stock option exercises. Before the AGENCY.COM-Interactive
Solutions merger, Communicade sold to a group of AGENCY.COM employees, Quadris
employees and Eagle River Interactive employees, including all of AGENCY.COM's
executive officers, a portion of the Interactive Solutions shares purchased from
Interactive Solutions' former President aggregating 4.47% of Interactive
Solutions' outstanding shares. The purchase price was $1.6975 per share, for an
aggregate purchase price of $412,492.
In April 1999, Interactive Solutions merged with Quadris Consulting, a
company in which it held preferred stock. The transaction was valued at
$1.9 million. The Quadris preferred stock held by Interactive Solutions was
convertible into 60% of Quadris's outstanding common stock. Quadris's
stockholders, other than Interactive Solutions, received Interactive Solutions
shares in the merger. Immediately after this merger, Interactive Solutions
merged with AGENCY.COM.
AGENCY.COM acquired Interactive Solutions through a merger. Pursuant to this
merger, the Interactive Solutions stockholders other than Communicade received
an aggregate of 330,860 shares of AGENCY.COM common stock and the former Quadris
stockholders received an aggregate of 1,244,534 shares of AGENCY.COM common
stock. The aggregate value of these shares was approximately $1.9 million.
AGENCY.COM also assumed $12.7 million of indebtedness owed by Interactive
Solutions to Omnicom and assumed the Quadris and Interactive Solutions stock
option plans covering options now exercisable for an aggregate of 1,399,410
shares of AGENCY.COM common stock. In connection with this merger, Communicade
received 2,596,452 shares of common stock and a 20-year warrant to purchase
3,071,248 shares of AGENCY.COM common stock at an exercise price of $0.005 per
share. The transaction was valued at $9.5 million. Following the consummation of
this transaction, Communicade held 35.4% of our outstanding shares of common
stock, in addition to the shares of common stock underlying their warrants. The
warrant provides that if Communicade and Omnicom beneficially own in the
aggregate less than 50% of AGENCY.COM's outstanding shares of common stock at
the time of exercise, the warrant may be exercised only to the extent that the
number of shares of common stock
73
<PAGE>
beneficially owned after such exercise remains less than 50% of the outstanding
shares.
In April 1999, AGENCY.COM merged with Eagle River Interactive, a wholly
owned subsidiary of Omnicom. In connection with the merger, AGENCY.COM assumed
$17.4 million of indebtedness owed by Eagle River Interactive to Omnicom.
Pursuant to this merger, Omnicom received 3,659,548 shares of AGENCY.COM common
stock and a 20-year warrant to purchase 4,328,752 shares of AGENCY.COM common
stock at an exercise price of $0.005 per share. Following this transaction,
Omnicom, together with Communicade, held 49.9% of our outstanding shares of
common stock, in addition to shares of common stock underlying its and
Communicade's warrants. The transaction was valued at approximately
$9.8 million. This value was established in July 1998 at the time the
transaction was announced. Omnicom negotiated the merger with AGENCY.COM's
directors, other than Communicade's two nominees. As a result of these
negotiations, each company was valued based on a multiple of revenues, and a
discount was applied to Eagle River Interactive's value based on its losses. The
warrant issued to Omnicom provides that if Communicade and Omnicom beneficially
own in the aggregate less than 50% of AGENCY.COM's outstanding shares of common
stock at the time of exercise, the warrant may be exercised only to the extent
that the number of shares of common stock beneficially owned after such exercise
remains less than 50% of the outstanding shares. In September 1997, a wholly
owed subsidiary of Omnicom acquired Eagle River Interactive's assets for an
aggregate of $13.5 million, which includes cash paid at closing and additional
payments based on Eagle River Interactive's earnings.
At the time of the AGENCY.COM-Eagle River merger, Eagle River settled
obligations due by it under an earn-out provision from an earlier transaction
with certain employees, including Kevin Rowe. These obligations to Mr. Rowe were
settled by delivering 4,084 shares of AGENCY. COM common stock to Mr. Rowe. In
connection with this settlement, Rowe released Communicade, Omnicom, Eagle River
and any or their affiliates from any further obligations.
OMNICOM REGISTRATION RIGHTS
In November 1999, we entered into a registration rights agreement with
Omnicom. Under the registration rights agreement, from time to time after
180 days after the date of this prospectus, Omnicom and its affiliates may, on
up to three occasions, require us to register for sale under the securities laws
all or a portion of their shares of AGENCY.COM common stock. In addition, if at
any time we propose to file a registration statement under the securities laws
with respect to any class of equity securities, Omnicom and its affiliates may
require us to include in the registration as many shares as it shall request,
subject to reduction, based on the opinion of the managing underwriter of the
offering. The registration rights do not expire, but are not assignable. We may
not issue registration rights to any other person that are senior in right to
those of Omnicom under the registration rights agreement without Omnicom's
consent. We have agreed to bear all expenses associated with the registration of
Omnicom's and its affiliates' securities, other than underwriting discounts and
commissions and fees of Omnicom's counsel.
ACQUISITIONS AND INVESTMENTS FINANCED
BY OMNICOM
The table below sets forth the amount borrowed for each acquisition of or
investment in a "new media" company that AGENCY.COM funded with a loan from
Communicade or assumed in connection with an acquisition or investment:
74
<PAGE>
<TABLE>
<CAPTION>
ACQUISITION OR INVESTMENT AMOUNT BORROWED
- ------------------------- ---------------
(IN THOUSANDS)
<S> <C>
Spiral Media............................................... $ 5,480
Online Magic............................................... 1,450
Ketchum Interactive........................................ 643
The Primary Group.......................................... 53
The Edge Consultants....................................... 1,527
Eagle River Interactive (Omnicom debt assumed)............. 17,407
Interactive Solutions (Omnicom debt assumed)............... 12,691
Digital Vision............................................. 1,100
Twinspark Interactive People............................... 700
I-traffic.................................................. 3,000
Visionik................................................... 500
--------
Total................................................ $ 44,551
========
</TABLE>
AGREEMENT WITH UNDERWRITER
In the past, we provided Internet professional services to Salomon Smith
Barney pursuant to an agreement negotiated at arm's length. We entered into this
agreement prior to our selection of the underwriters for this offering. Our
revenues from this contract were $131,000 in 1998 and $110,000 for the nine
months ended September 30, 1999.
OTHER TRANSACTIONS
AGENCY.COM provides services on an informal basis to URBAN DESIRES, an
online magazine for art and culture. URBAN DESIRES was founded by Kyle Shannon,
our Chief Creative Officer and a director, and is owned by Mr. Shannon and Chan
Suh, our Chairman, Chief Executive Officer and President. We billed URBAN
DESIRES approximately $345,976, $244,219, $115,000 and $135,000 in 1996, 1997,
1998 and in the first nine months of 1999, respectively, for our services and
are providing services to URBAN DESIRES currently.
In September 1996, each of Messrs. Suh and Shannon agreed with Communicade
not to sell any portion of his interest in URBAN DESIRES to any competitor of
Communicade or Omnicom.
It is our current policy that all transactions with officers, directors, 5%
stockholders and their affiliates be entered into only if they are approved by a
majority of the disinterested independent directors, are on terms no less
favorable to us than could be obtained from unaffiliated parties and are
reasonably expected to benefit us.
75
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth information with respect to beneficial
ownership of our common stock, as of November 4, 1999 and as adjusted to reflect
the sale of common stock offered by us in this offering for:
- each person known by us to beneficially own more than 5% of our common
stock;
- each executive officer named in the Summary Compensation Table;
- each of our directors and our director-nominee; and
- all of our executive officers, directors, and director nominee as a group.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and includes voting or investment power with
respect to the securities. Unless otherwise indicated, the address for those
listed below is c/o AGENCY.COM Ltd., 665 Broadway, 9th Floor, New York, New York
10012. Except as indicated by footnote, and subject to applicable community
property laws, the persons named in the table have sole voting and investment
power with respect to all shares of common stock shown as beneficially owned by
them. The number of shares of common stock outstanding used in calculating the
percentage for each listed person includes the shares of common stock underlying
options held by such persons that are exercisable within 60 days of November 4,
1999, but excludes shares of common stock underlying options held by any other
person. Percentage of beneficial ownership is based on 27,774,562 shares of
common stock outstanding as of November 4, 1999, and 33,674,562 shares of common
stock outstanding after completion of this offering.
<TABLE>
<CAPTION>
PERCENTAGE OF
COMMON STOCK
BENEFICIALLY OWNED
--------------------
<S> <C> <C> <C>
SHARES BENEFICIALLY PRIOR TO AFTER
NAME OF BENEFICIAL OWNER OWNED OFFERING OFFERING(1)
- ------------------------------------------------- ---------- ---- ----
Chan Suh......................................... 4,755,902 17.1% 14.1%
Kyle Shannon (2)................................. 4,579,900 16.5 13.6
Kenneth Trush (3)................................ 599,856 2.1 1.8
Kevin Rowe (4)................................... 114,774 * *
Eamonn Wilmott (5)............................... 407,971 1.5 1.2
Larry Krakauer (6)............................... 934,692 3.3 2.7
Gerald Bruce Redditt (7)......................... 15,246,283 49.9 46.6
John D. Wren (8)................................. 15,246,283 49.9 46.6
Jeffrey Rayport (9).............................. -- * *
Communicade, Inc. (10)........................... 11,586,735 38.0 32.5
Omnicom Group Inc. (11).......................... 15,246,283 49.9 46.6
Development Ventures (Two) Inc. (12)............. 1,500,000 5.1 4.3
All directors, director-nominee and executive
officers as a group
(11 persons) (13).............................. 26,846,772 86.4 74.8
</TABLE>
- ------------------------
* Indicates less than one percent of the common stock.
76
<PAGE>
(1) Assumes that the underwriters' over-allotment option to purchase up to an
additional 960,000 shares from AGENCY.COM is not exercised.
(2) Includes 400,000 shares of common stock held by the Shannon Family Trust.
(3) Includes 278,730 shares of common stock issuable upon the exercise of stock
options that are exercisable within 60 days. Also includes 30,000 shares of
common stock held by The Daniel N. Trush 1999 Trust and 30,000 shares of
common stock held by The Michael J. Trush 1999 Trust.
(4) Includes 80,690 shares of restricted common stock subject to a Restricted
Stock Agreement, dated April 16, 1999 between AGENCY.COM and Mr. Rowe.
(5) Does not include 76,977.80 shares of common stock held in an escrow account,
which are eligible to be released pending the financial results of
AGENCY.COM for fiscal 1999. Mr. Wilmott does not have voting or dispositive
control over these shares while held in escrow.
(6) Includes 185,986 shares of common stock issuable upon the exercise of stock
options that are exercisable within 60 days and 2,500 shares held by
Mr. Krakauer's children.
(7) Includes 8,868,730 shares of common stock held by Communicade Inc. and
3,659,548 shares of common stock held by Omnicom. Shares beneficially owned
prior to the offering includes 2,718,005 shares of common stock issuable
upon the exercise of the currently exercisable portion of warrants to
purchase 2,828,752 shares of common stock held by Omnicom and warrants to
purchase 3,071,248 shares of common stock held by Communicade. Each warrant
provides that if Communicade and Omnicom beneficially own in the aggregate
less than 50% of our outstanding shares of common stock at the time of
exercise, it may be exercised only to the extent that the number of shares
of common stock beneficially owned by Communicade and Omnicom remains less
than 50% of the outstanding shares. Shares beneficially owned after the
offering will be 18,428,278, which includes all 5,900,000 shares of common
stock issuable upon the exercise of these warrants. Mr. Redditt serves as an
Executive Vice President of Omnicom. In this capacity, Mr. Redditt may be
deemed to be the beneficial owner of these shares, although he disclaims
beneficial ownership of these shares except to the extent of his pecuniary
interest. The address of Mr. Redditt is c/o Omnicom Group Inc., 437 Madison
Avenue, New York, New York 10022.
(8) Includes 8,868,730 shares of common stock held by Communicade Inc. and
3,659,548 shares of common stock held by Omnicom. Shares beneficially owned
prior to the offering includes 2,718,005 shares of common stock issuable
upon the exercise of warrants to purchase 2,828,752 shares of common stock
held by Omnicom and warrants to purchase 3,071,248 shares of common stock
held by Communicade. Each warrant provides that if Communicade and Omnicom
beneficially own in the aggregate less than 50% of our outstanding shares of
common stock at the time of exercise, it may be exercised only to the extent
that the number of shares of common stock beneficially owned by Communicade
and Omnicom remains less than 50% of the outstanding shares. Shares
beneficially owned after the offering will be 18,428,278, which includes
5,900,000 shares of common stock issuable upon the exercise of these
warrants. Mr. Wren serves as a Chief Executive Officer and President of
Omnicom. In this capacity, Mr. Wren may be deemed to be the beneficial owner
of these shares, although he disclaims ownership of these shares except to
the extent of his pecuniary interest. The address of Mr. Wren is c/o Omnicom
Group Inc., 437 Madison Avenue, New York, New York 10022.
77
<PAGE>
(9) Shares beneficially owned after the offering include 50,000 shares of common
stock issuable upon the exercise of stock options that are exercisable at
the time Mr. Rayport is elected as a director, which is expected to occur
upon the closing of this offering.
(10) Shares beneficially owned prior to the offering include 2,718,005 shares of
common stock issuable upon the exercise of the currently exercisable portion
of a warrant to purchase 3,071,248 shares of common stock held by
Communicade. The warrant provides that if Communicade and Omnicom
beneficially own in the aggregate less than 50% of our outstanding shares of
common stock at the time of exercise, the warrant may be exercised only to
the extent that the number of shares of common stock beneficially owned by
Communicade and Omnicom remains less than 50% of the outstanding shares.
Shares beneficially owned after the offering will be 11,939,978, which
includes all 3,071,248 shares of common stock issuable upon the exercise of
this warrant. The address of Communicade, Inc. is 437 Madison Avenue, New
York, New York 10022.
(11) Shares beneficially owned prior to the offering include 2,718,005 shares of
common stock issuable upon the exercise of the currently exercisable portion
of warrants to purchase 2,828,752 shares of common stock held by Omnicom and
warrants to purchase 3,071,248 shares of common stock held by Communicade.
Each warrant provides that if Communicade and Omnicom beneficially own in
the aggregate less than 50% of our outstanding shares of common stock at the
time of exercise, the warrant may be exercised only to the extent that the
number of shares of common stock beneficially owned by Communicade and
Omnicom does not exceed 50% of the outstanding shares. Shares beneficially
owned after the offering will be 18,428,278, which includes all 5,900,000
shares of common stock issuable upon the exercise of these warrants. The
address of Omnicom Group, Inc. is 437 Madison Avenue, New York, New York
10022.
(12) Represents shares issuable upon the exercise of warrants to purchase
1,500,000 shares of our common stock. The address of Development Ventures
(Two) Inc. is 51 Twin Pond Lane, New Haven, CT 06840.
(13) Shares beneficially owned prior to the offering includes 2,718,005 shares
of common stock issuable upon the exercise of currently exercisable portions
of the Omnicom and Communicade warrants. Also includes 100,000 shares of
common stock issuable upon the exercise of stock options granted to
Mr. Dickson that are exercisable within 60 days and 22,850 shares of common
stock issuable upon the exercise of stock options granted to
Ms. Ambrosi Wertman that are exercisable within 60 days. Shares beneficially
owned after the offering will be 30,078,766, which includes all 5,900,000
shares of common stock issuable upon the exercise of the warrants held by
Communicade and Omnicom described above.
78
<PAGE>
DESCRIPTION OF CAPITAL STOCK
GENERAL
AGENCY.COM's amended and restated certificate of incorporation, which will
become effective upon the closing of this offering, authorizes the issuance of
up to 200,000,000 shares of common stock, par value $.001 per share, and
10,000,000 shares of preferred stock, par value $.001 per share, the rights and
preferences of which may be established from time to time by our board of
directors. As of November 4, 1999, 27,774,562 shares of common stock were
outstanding and we had 328 stockholders of record.
COMMON STOCK
Under our amended and restated certificate of incorporation, holders of our
common stock are entitled to one vote for each share held of record on all
matters submitted to a vote of the stockholders, including the election of
directors. They do not have cumulative voting rights. Subject to preferences
that may be applicable to any then-outstanding preferred stock, holders of our
common stock are entitled to receive ratably dividends, if any, as may be
declared by the board of directors out of legally available funds. In case of a
liquidation, dissolution or winding up of AGENCY.COM, the holders of common
stock will be entitled to share ratably in the net assets legally available for
distribution to shareholders after payment of all of our liabilities and any
preferred stock then outstanding. Holders of common stock have no preemptive or
conversion rights or other subscription rights. There are no redemption or
sinking fund provisions applicable to the common stock. The rights, preferences
and privileges of holders of common stock are subject to the rights of the
holders of shares of any series of preferred stock that we may designate and
issue in the future. After the closing of this offering, there will be no shares
of preferred stock outstanding.
PREFERRED STOCK
Under our amended and restated certificate of incorporation, our board of
directors has the authority, without further action by the stockholders, to
issue from time to time, shares of preferred stock in one or more series. The
board of directors may fix the number of shares, designations, preferences,
powers and other special rights of the preferred stock. The preferences, powers,
rights and restrictions of different series of preferred stock may differ. The
issuance of preferred stock could decrease the amount of earnings and assets
available for distribution to holders of common stock or affect adversely the
rights and powers, including voting rights, of the holders of common stock. Such
issuance may also have the effect of delaying, deferring or preventing a change
in control of AGENCY.COM. We have no current plans to issue any shares of
preferred stock.
WARRANTS
As of the date of this prospectus, Communicade held a warrant to purchase
3,071,248 shares of our common stock at an exercise price of $0.005 per share,
Omnicom held a warrant to purchase 2,828,752 shares of our common stock at an
exercise price of $0.005 per share and another holder holds warrants to purchase
1,500,000 shares of our common stock at an exercise price of $0.005 per share.
The Omnicom and Communicade warrants provide that if Communicade and Omnicom
beneficially own in the aggregate less than 50% of our outstanding shares of
common stock at the time of exercise, the warrants may be exercised only to the
extent that the number of shares of common stock beneficially owned by
Communicade and Omnicom after such exercise remains less than 50% of the
outstanding shares. Each warrant expires on March 31, 2019.
79
<PAGE>
ANTI-TAKEOVER EFFECTS OF DELAWARE LAW AND OUR AMENDED AND RESTATED CERTIFICATE
OF INCORPORATION AND BYLAWS
Provisions of our amended and restated certificate of incorporation and
amended and restated bylaws, which are summarized in the following paragraphs,
may have an anti-takeover effect and may delay, defer or prevent a tender offer
or takeover attempt that a stockholder might consider in its best interest,
including those attempts that might result in a premium over the market price
for the shares held by stockholders.
CLASSIFIED BOARD OF DIRECTORS
Our board of directors is divided into three classes of directors serving
staggered three-year terms. As a result, approximately one-third of the board of
directors will be elected each year. These provisions, when coupled with the
provision of our amended and restated certificate of incorporation authorizing
the board of directors to fill vacant directorships or increase the size of the
board of directors, may delay a stockholder from removing incumbent directors
and simultaneously gaining control of the board of directors by filling the
vacancies created by such removal with its own nominees.
STOCKHOLDER ACTION; SPECIAL MEETING OF STOCKHOLDERS
Our amended and restated certificate of incorporation eliminates the ability
of stockholders to act by written consent. It further provides that special
meetings of our stockholders may be called only by the chairman of the board of
directors or a majority of the board of directors.
ADVANCE NOTICE REQUIREMENTS FOR STOCKHOLDER PROPOSALS AND DIRECTOR NOMINATIONS
Our amended and restated by-laws provide that stockholders seeking to bring
business before an annual meeting of stockholders, or to nominate candidates for
election as directors at an annual meeting of stockholders, must provide timely
notice thereof in writing. To be timely, a stockholder's notice must be received
at our principal executive offices not less than 60 days nor more than 90 days
prior to the anniversary date of the immediately preceding annual meeting of
stockholders. In the event that the annual meeting is called for a date that is
not within thirty (30) days before or after the anniversary date, in order to be
timely, notice from the stockholder must be received no later than the tenth day
following the date on which notice of the annual meeting was mailed to
stockholders or made public, whichever occurred earlier. In the case of a
special meeting of stockholders called for the purpose of electing directors,
notice by the stockholder in order to be timely must be received not later than
the close of business on the tenth day following the day on which notice was
mailed or public disclosure of the date of the special meeting was made,
whichever first occurs. Our amended and restated by-laws also specify certain
requirements as to the form and content of a stockholder's notice. These
provisions may preclude stockholders from bringing matters before an annual or
special meeting of stockholders or from making nominations for directors at
these meetings.
AUTHORIZED BUT UNISSUED SHARES
The authorized but unissued shares of common stock and preferred stock are
available for future issuance without stockholder approval. These additional
shares may be utilized for a variety of corporate purposes, including future
public offerings to raise additional capital, corporate acquisitions and
employee benefit plans. The existence of authorized but unissued shares of
common stock and preferred stock could render more difficult or discourage an
attempt to obtain control of us by means of a proxy contest, tender offer,
merger or otherwise.
80
<PAGE>
The Delaware General Corporation Law provides generally that the affirmative
vote of a majority of the shares entitled to vote on any matter is required to
amend a corporation's certificate of incorporation or bylaws, unless a
corporation's certificate of incorporation or bylaws, as the case may be,
requires a greater percentage. Our amended and restated certificate of
incorporation imposes a two-thirds supermajority vote requirement in connection
with various corporate governance actions and the amendment of various
provisions of our amended and restated certificate of incorporation and amended
and restated bylaws, including those provisions relating to the classified board
of directors, and special meetings of stockholders.
REGISTRATION RIGHTS
In November 1999, we entered into a registration rights agreement with
Omnicom. Under the registration rights agreement, from time to time after
180 days after the date of this prospectus, Omnicom and its affiliates may, on
up to three occasions, require us to register for sale under the securities laws
all or a portion of their shares of AGENCY.COM common stock. In addition, if at
any time we propose to file a registration statement under the securities laws
with respect to any class of equity securities, Omnicom and its affiliates may
require us to include in the registration as many shares as it shall request,
subject to reduction, based on the opinion of the managing underwriter of the
offering. The registration rights do not expire, but are not assignable. We may
not issue registration rights to any other person that are senior in right to
those of Omnicom under the registration rights agreement without Omnicom's
consent. We have agreed to bear all expenses associated with the registration of
Omnicom's and its affiliates' securities, other than underwriting discounts and
commissions and fees of Omnicom's counsel.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for AGENCY.COM's common stock will be
American Stock Transfer & Trust Company, New York, New York.
LISTING
Our common stock has been approved for quotation on the Nasdaq National
Market under the trading symbol "ACOM", subject to official notice of issuance.
81
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial amounts of our common stock in the public market could
adversely affect prevailing market prices of our common stock. Furthermore,
since no shares held by our existing stockholders will be available for sale
shortly after this offering because of the contractual and legal restrictions on
resale described below, sales of substantial amounts of common stock in the
public market after these restrictions lapse could adversely affect the
prevailing market price and our ability to raise equity capital in the future.
Upon completion of this offering, we will have outstanding an aggregate of
33,674,562 shares of our common stock, assuming no exercise of the Underwriters'
over-allotment option and no exercise of outstanding options. Of these shares,
all of the shares sold in this offering will be freely tradable without
restriction or further registration under the Securities Act, unless the shares
are purchased by "affiliates" as that term is defined in Rule 144 under the
Securities Act. The remaining 27,774,562 shares of common stock held by existing
stockholders are "restricted securities" as that term is defined in Rule 144
under the Securities Act. Restricted securities may be sold in the public market
following registration or pursuant to an exemption from registration under
Rule 144 promulgated under the Securities Act, which rules are summarized below.
LOCK-UP AGREEMENTS
All of our officers and directors and most of our stockholders, who together
hold an aggregate of at least 95% of our currently outstanding shares, have
signed lock-up agreements under which they agreed not to transfer or dispose of,
directly or indirectly, or hedge any shares of common stock or any securities
convertible into or exercisable or exchangeable for shares of common stock, for
a period of 180 days after the date of this prospectus. Transfers or
dispositions can be made sooner with the prior written consent of Goldman,
Sachs & Co.
As a result of these lock-up agreements and the provisions of Rules 144 and
701, additional shares will be available for sale in the public market as
follows:
- approximately 826,000 restricted securities will be eligible for sale
beginning 90 days after the date of this prospectus, subject in some cases
to compliance with Rule 144;
- approximately 24,760,000 additional restricted securities will be eligible
for sale beginning 180 days after the effective date of this offering upon
expiration of the lock-up agreements, subject in some cases to compliance
with Rule 144; and
- the remainder of the restricted securities will be eligible for sale from
time to time thereafter, subject in some cases to compliance with Rule
144.
RULE 144
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this prospectus, which is the minimum period that we must be subject
to the reporting requirements of the Exchange Act as specified by Rule 144, a
person who has beneficially owned shares of our common stock for at least one
year, including the holding period of any prior owner other than an affiliate,
would be entitled to sell within any three-month period a number of shares that
does not exceed the greater of:
- 1% of the number of shares of common stock then outstanding, which will
equal approximately 336,746 shares immediately after this offering; or
- the average weekly trading volume of the common stock on the Nasdaq
82
<PAGE>
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 us.
RULE 144(K)
Under Rule 144(k), a person who is not deemed to have been one of our
affiliates at anytime during the 90 days preceding a sale, and who has
beneficially owned the shares proposed to be sold for at least two years,
including the holding period of any prior owner other than an affiliate, is
entitled to sell those shares without complying with the manner of sale, public
information, volume limitation or notice provisions of Rule 144. Therefore,
unless otherwise restricted, "144(k) shares" may be sold immediately upon the
completion of this offering.
RULE 701
In general, under Rule 701 of the Securities Act as currently in effect,
each of our employees, consultants or advisors who purchases shares from us
pursuant to securities, prior to our public offering, issued under a
compensatory stock 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 some of the restrictions, including the
holding period, contained in Rule 144.
STOCK PLANS
Promptly after this offering, we intend to file a registration statement
under the Securities Act covering 11,236,261 shares of common stock consisting
of 9,676,178 shares reserved for issuance under our 1999 Plan and 1,560,083
shares reserved for issuance upon the exercise of outstanding stock options
assumed by us in connection with our Interactive Solutions and I-traffic
acquisitions. This registration statement is expected to be filed as soon as
practicable after the effective date of this offering.
At November 4, 1999, options to purchase 5,513,563 shares were issued and
outstanding under our plans and otherwise. Once this registration statement has
been filed, all of these shares will be eligible for sale in the public market
from time to time, subject to vesting provisions, Rule 144 volume limitations
applicable to our affiliates and, in the case of some of the options, the
expiration of lock-up agreements.
REGISTRATION RIGHTS
Beginning 180 days after this offering, Omnicom and its affiliates will be
entitled to require us to register their shares of AGENCY.COM common stock for
sale under the Securities Act. See "Description of Capital Stock--Registration
Rights".
VALIDITY OF COMMON STOCK
The validity of the shares of the common stock offered hereby will be passed
upon for AGENCY.COM by Brobeck, Phleger & Harrison LLP, New York, New York and
for the underwriters by Ropes & Gray, Boston, Massachusetts.
83
<PAGE>
EXPERTS
The audited financial statements and schedules included in this prospectus
and elsewhere in the registration statement other than for I-traffic and
Visionik have been audited by Arthur Andersen LLP, independent public
accountants, as indicated in their reports with respect thereto, and are
included herein in reliance upon the authority of said firm as experts in giving
said reports.
The audited financial statements of Interactive Traffic, Inc. presented in
this prospectus have been audited by PricewaterhouseCoopers LLP, independent
accountants, whose report thereon appears herein. Such financial statements have
been so included in reliance on the report of such independent accountants given
on the authority of said firm as experts in auditing and accounting.
The audited financial statements included in this prospectus and elsewhere
in the registration statement for Visionik have been audited by Moore Stephens,
Denmark, independent public accountants, as indicated in their reports with
respect thereto, and are included herein in reliance upon the authority of said
firm as experts in giving said reports.
CHANGE IN ACCOUNTANTS
In July 1998, we determined to replace Ernst & Young LLP and engaged Arthur
Andersen LLP as our independent accountants to audit our financial statements as
of, and for the period ended December 31, 1997. The decision to change
independent accountants from Ernst & Young LLP to Arthur Andersen LLP was
approved by our board of directors. We believe, and have been advised by
Ernst & Young LLP that it concurs in this belief, that, for the period from
January 1, 1996 through the date of dismissal (the entire period of its
engagement), AGENCY.COM and Ernst & Young LLP did not have any disagreement on
any matter of accounting principles or practices, financial statement disclosure
or auditing scope or procedure, that if not resolved to the satisfaction of
Ernst & Young LLP, would have caused it to make reference in connection with its
report on our financial statements to the subject matter of the disagreement.
Ernst & Young LLP's report on our financial statements for the period from
January 1, 1996 through December 31, 1996 did not contain an adverse opinion or
a disclaimer of opinion, and was not qualified or modified as to uncertainty,
audit scope or accounting principles. During that year there were no "reportable
events" within the meaning of Item 304(a)(1)(v)of Regulation S-K promulgated
under the Securities Act.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form S-1 (including exhibits and schedules thereto) under the
Securities Act with respect to the common stock to be sold in this offering.
This prospectus, which constitutes a part of the registration statement, does
not contain all of the information set forth in the registration statement or
the exhibits and schedules which are part of the registration statement. For
further information with respect to us and our common stock, reference is made
to the registration statement and the exhibits and schedules thereto.
You may read and copy all or any portion of the registration statement or
any reports, statements or other information in our files in the Commission's
public reference room at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C., 20549 and at the regional offices of the Commission located at
84
<PAGE>
Seven World Trade Center, 13th Floor, New York, New York 10048 and 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661. You can request copies of
these documents upon payment of a duplicating fee, by writing to the Commission.
Please call the Commission at 1-800-SEC-0330 for further information on the
operation of the public reference rooms. Our filings, including the registration
statement, will also be available to you on the Commission's Internet site
(www.sec.gov).
As a result of the offering, we will become subject to the information and
reporting requirements of the Securities Exchange Act of 1934, as amended, and,
in accordance with these requirements, will file periodic reports, proxy
statements and other information with the Securities and Exchange Commission.
Upon approval of the common stock for the quotation on the Nasdaq National
Market, these reports, proxy and information statements and other information
may also be inspected at the offices of Nasdaq Operations, 9801 Washingtonian
Boulevard, 5th Floor, Gaithersburg, MD, 20878.
We intend to furnish our stockholders with annual reports containing
financial statements audited by our independent auditors and to make available
to our stockholders quarterly reports containing unaudited financial data for
the first three quarters of each fiscal year.
85
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
AGENCY.COM AND SUBSIDIARIES
Report of Independent Public Accountants.................... F-4
Consolidated Balance Sheets as of December 31, 1997 and 1998
and September 30, 1999..................................... F-5
Consolidated Statements of Operations for the years ended
December 31, 1996, 1997 and 1998 and for the nine months
ended September 30, 1998 and 1999.......................... F-6
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1996, 1997 and 1998 and for the
nine months ended September 30, 1999....................... F-7
Consolidated Statements of Cash Flows for the years ended
December 31, 1996, 1997 and 1998 and for the nine months
ended September 30, 1998 and 1999.......................... F-8
Notes to Consolidated Financial Statements.................. F-9
EAGLE RIVER INTERACTIVE
Report of Independent Public Accountants.................... F-33
Report of Independent Public Accountants.................... F-34
Consolidated Balance Sheets as of December 31, 1997 and 1998
and March 31, 1999......................................... F-35
Combined/Consolidated Statements of Operations for the
predecessor company for the year ended December 31, 1996
and for the period ended September 26, 1997; and for the
successor company for the period from inception
(September 26, 1997) through December 31, 1997, for the
year ended December 31, 1998 and for the three months ended
March 31, 1998 and 1999.................................... F-36
Combined/Consolidated Statements of Divisional Deficit and
Stockholders' Deficit for the predecessor company for the
years ended December 31, 1995 and 1996 and for the period
between January 1, 1997 through September 26, 1997; and for
the successor company for the period from inception
(September 26, 1997) through December 31, 1997, for the
years ended December 31, 1998 and for the three months
ended March 31, 1999....................................... F-37
Combined/Consolidated Statements of Cash Flows for the
predecessor company for the year ended December 31, 1996
and for the period between January 1, 1997 through
September 26, 1997; and for the successor company for the
period from inception (September 26, 1997) through
December 31, 1997, for the year ended December 31, 1998 and
for the three months ended March 31, 1998 and 1999......... F-38
Notes to Combined/Consolidated Financial Statements......... F-39
INTERACTIVE SOLUTIONS, INC. AND SUBSIDIARY
Report of Independent Public Accountants.................... F-53
Consolidated Balance Sheets as of December 31, 1997 and 1998
and March 31, 1999......................................... F-54
Consolidated Statements of Operations for the years ended
December 31, 1996, 1997 and 1998 and for the three months
ended March 31, 1998 and 1999.............................. F-55
Consolidated Statements of Stockholders' Equity (Deficit)
for the years ended December 31, 1996, 1997 and 1998 and
for the three months ended March 31, 1999.................. F-56
Consolidated Statements of Cash Flows for the years ended
December 31, 1996, 1997 and 1998 and for the three months
ended March 31, 1998 and 1999.............................. F-57
Notes to Consolidated Financial Statements.................. F-58
</TABLE>
F-1
<PAGE>
<TABLE>
<S> <C>
QUADRIS CONSULTING
Report of Independent Public Accountants.................... F-74
Balance Sheets as of December 31, 1997 and March 15, 1998... F-75
Statements of Operations for the years ended December 31,
1996 and 1997 and for the period from January 1 to
March 15, 1998............................................. F-76
Statements of Divisional Equity for the years ended
December 31, 1996 and 1997 and for the period from
January 1 to March 15, 1998................................ F-77
Statements of Cash Flows for the years ended December 31,
1996 and 1997 and for the period from January 1 to
March 15, 1998............................................. F-78
Notes to Financial Statements............................... F-79
TWINSPARK INTERACTIVE PEOPLE B.V.
Report of Independent Public Accountants.................... F-85
Balance Sheets as of December 31, 1997 and 1998 and
June 30, 1999.............................................. F-86
Statements of Operations for the years ended December 31,
1997 and 1998 and for the six months ended June 30, 1998
and 1999................................................... F-87
Statements of Stockholders' Equity for the years ended
December 31, 1997 and 1998 and for the six months ended
June 30, 1999.............................................. F-88
Statements of Cash Flows for the years ended December 31,
1997 and 1998 and for the six months ended June 30, 1998
and 1999................................................... F-89
Notes to Financial Statements............................... F-90
INTERACTIVE TRAFFIC, INC.
Report of Independent Public Accountants.................... F-98
Balance Sheets as of December 31, 1998 and September 30,
1999....................................................... F-99
Statements of Operations for the year ended December 31,
1998 and for the nine months ended September 30, 1998 and
1999....................................................... F-100
Statements of Stockholders' Equity for the year ended
December 31, 1998 and for the nine months ended
September 30, 1999......................................... F-101
Statements of Cash Flows for the year ended December 31,
1998 and for the nine months ended September 30, 1998 and
1999....................................................... F-102
Notes to Financial Statements............................... F-103
VISIONIK A/S
Report of Independent Public Accountants.................... F-111
Balance Sheets as of December 31, 1997 and 1998 and
September 30, 1999......................................... F-112
Statements of Operations for the years ended December 31,
1997 and 1998 and for the nine months ended September 30,
1999....................................................... F-113
Statements of Stockholders' Equity for the years ended
December 31, 1997 and 1998 and for the nine months ended
September 30, 1999......................................... F-114
Statements of Cash Flows for the years ended December 31,
1997 and 1998 and for the nine months ended September 30,
1998 and 1999.............................................. F-115
Notes to Financial Statements............................... F-116
</TABLE>
F-2
<PAGE>
<TABLE>
<S> <C>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL
INFORMATION................................................ F-123
Pro Forma Condensed Consolidated Balance Sheet as of
September 30, 1999......................................... F-124
Notes to Pro Forma Condensed Consolidated Balance Sheet..... F-125
Pro Forma Condensed Consolidated Statement of Operations for
the nine months ended September 30, 1999................... F-128
Pro Forma Condensed Consolidated Statement of Operations for
the nine months ended September 30, 1998................... F-129
Pro Forma Condensed Consolidated Statement of Operations for
the year ended December 31, 1998........................... F-130
Notes to Pro Forma Condensed Consolidated Statements of
Operations................................................. F-131
</TABLE>
F-3
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To AGENCY.COM Ltd.:
We have audited the accompanying consolidated balance sheets of AGENCY.COM Ltd.
(a Delaware corporation) and subsidiaries, as of December 31, 1997 and 1998 and
the related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years ended December 31, 1998. 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 AGENCY.COM Ltd. and
subsidiaries as of December 31, 1997 and 1998 and the results of their
operations and their cash flows for each of the three years ended December 31,
1998 in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
New York, New York
November 10, 1999
F-4
<PAGE>
AGENCY.COM LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------- SEPTEMBER 30,
1997 1998 1999
----------- ----------- --------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents................................. $ 387,739 $ 769,358 $ 725,863
Accounts receivable, net of allowance for doubtful
accounts of $43,362, $825,576 and $5,327,125,
respectively............................................ 5,484,004 4,658,365 24,141,609
Unbilled charges.......................................... 700,060 2,345,752 6,682,710
Prepaid expenses and other current assets................. 218,931 193,060 3,579,670
Income tax receivable..................................... -- -- 2,130,945
Due from related parties.................................. 298,484 141,847 295,968
----------- ----------- ------------
Total current assets.............................. 7,089,218 8,108,382 37,556,765
Property and Equipment, net of accumulated depreciation and
amortization of $486,092, $1,627,397 and $7,928,884,
respectively.............................................. 2,032,008 4,215,128 11,653,923
Intangibles, net of accumulated amortization of $72,264,
$965,029 and $5,539,250, respectively..................... 1,502,338 7,827,717 52,631,655
Deferred Tax Assets......................................... 558,660 2,758,610 1,010,396
Investments and other assets................................ 108,629 1,950,035 4,635,757
----------- ----------- ------------
Total assets...................................... $11,290,853 $24,859,872 $107,488,496
=========== =========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses..................... $ 1,725,226 $ 4,879,775 $ 14,920,232
Line of credit............................................ 86,273 -- 177,000
Income taxes payable...................................... 202,528 194,631 1,061,458
Deferred revenue.......................................... 596,882 688,953 2,426,901
Current portion of capital lease obligations.............. 124,968 564,536 1,097,956
Due to related parties.................................... -- 453,408 --
----------- ----------- ------------
Total current liabilities......................... 2,735,877 6,781,303 19,683,547
----------- ----------- ------------
Long-Term Liabilities:
Due to Omnicom Group Inc.................................. 2,424,969 11,989,373 66,806,568
Deferred tax liabilities.................................. 2,418,790 2,967,008 458,498
Capital lease obligations................................. 115,599 848,321 1,709,425
Due to related parties.................................... -- -- 390,000
Other long-term liabilities............................... 146,806 213,786 1,202,042
----------- ----------- ------------
Total long-term liabilities....................... 5,106,164 16,018,488 70,566,533
----------- ----------- ------------
Total liabilities................................. 7,842,041 22,799,791 90,250,080
----------- ----------- ------------
Commitments And Contingencies (Note 10)
Stockholders' Equity (Note 8):
Common stock, $0.001 par value, 200,000,000 shares
authorized; 16,200,000, 17,425,810 and 26,789,538 shares
issued; and 16,200,000, 17,179,060 and 26,666,164 shares
outstanding at December 31, 1997, 1998 and
September 30, 1999 (unaudited), respectively............ 16,200 17,178 26,664
Additional paid-in capital................................ 1,797,691 2,898,270 25,302,044
Retained earnings (deficit)............................... 1,634,921 (846,059) (7,461,088)
Deferred compensation..................................... -- -- (585,070)
Cumulative foreign currency translation................... -- (9,308) (44,134)
----------- ----------- ------------
Total stockholders' equity........................ 3,448,812 2,060,081 17,238,416
----------- ----------- ------------
Total liabilities and stockholders' equity........ $11,290,853 $24,859,872 $107,488,496
=========== =========== ============
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-5
<PAGE>
AGENCY.COM LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED DECEMBER 31, ENDED SEPTEMBER 30,
-------------------------------------- -------------------------
1996 1997 1998 1998 1999
---------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues...................................... $6,094,784 $12,975,575 $26,452,191 $18,956,267 $56,499,289
Direct salaries and costs..................... 2,216,830 6,200,216 15,930,029 10,355,373 28,784,372
---------- ----------- ----------- ----------- -----------
Gross profit.............................. 3,877,954 6,775,359 10,522,162 8,600,894 27,714,917
General and administrative.................... 954,409 3,815,045 10,944,441 7,743,832 21,652,390
Sales and marketing........................... -- 527,432 595,886 297,942 2,590,637
Amortization of intangibles................... -- 72,264 892,765 582,855 4,574,221
Depreciation and amortization................. 61,356 304,491 1,141,305 772,094 3,149,130
---------- ----------- ----------- ----------- -----------
Income (loss) from operations............. 2,862,189 2,056,127 (3,052,235) (795,829) (4,251,461)
Interest income (expense), net................ 28,201 9,924 (359,761) (325,491) (2,124,962)
---------- ----------- ----------- ----------- -----------
Income (loss) before minority interest and
income taxes............................ 2,890,390 2,066,051 (3,411,996) (1,121,320) (6,376,423)
Minority interest............................. -- 167,468 (281,559) (281,559) --
---------- ----------- ----------- ----------- -----------
Income (loss) before provision (benefit)
for income taxes........................ 2,890,390 2,233,519 (3,693,555) (1,402,879) (6,376,423)
Provision (benefit) for income taxes.......... 1,388,000 1,051,373 (1,212,575) (460,565) 238,606
---------- ----------- ----------- ----------- -----------
Net income (loss)......................... $1,502,390 $ 1,182,146 $(2,480,980) $ (942,314) $(6,615,029)
========== =========== =========== =========== ===========
Per share information:
Net income (loss) per common share
Basic..................................... $ 0.32 $ 0.07 $ (0.15) $ (0.06) $ (0.29)
========== =========== =========== =========== ===========
Diluted................................... $ 0.31 $ 0.07 $ (0.15) $ (0.06) $ (0.29)
========== =========== =========== =========== ===========
Weighted average common shares used in
computing per share amounts:
Basic..................................... 4,750,313 16,200,000 16,854,499 16,586,538 23,186,818
========== =========== =========== =========== ===========
Diluted................................... 4,796,943 16,297,345 16,854,499 16,586,538 23,186,818
========== =========== =========== =========== ===========
Pro forma net income (loss) data (Unaudited)
(Note 7):
Net income (loss) before provision
(benefit) for income taxes.............. $2,890,390 $ 2,233,519 $(3,693,555) $(1,402,879) $(6,376,423)
Pro forma income tax provision
(benefit)............................... 1,405,577 1,051,373 (1,212,575) (460,565) 238,606
---------- ----------- ----------- ----------- -----------
Pro forma net income (loss)............... $1,484,813 $ 1,182,146 $(2,480,980) $ (942,314) $(6,615,029)
========== =========== =========== =========== ===========
Pro forma per share information (Unaudited)
(Note 7):
Pro forma net income (loss) per common
share:
Basic..................................... $ 0.31 $ 0.07 $ (0.15) $ (0.06) $ (0.29)
========== =========== =========== =========== ===========
Diluted................................... $ 0.31 $ 0.07 $ (0.15) $ (0.06) $ (0.29)
========== =========== =========== =========== ===========
Weighted average common shares used in
computing pro forma per share amounts:
Basic..................................... 4,750,313 16,200,000 16,854,499 16,586,538 23,186,818
========== =========== =========== =========== ===========
Diluted................................... 4,796,943 16,297,345 16,854,499 16,586,538 23,186,818
========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-6
<PAGE>
AGENCY.COM LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
CUMULATIVE
COMMON STOCK ADDITIONAL RETAINED FOREIGN TOTAL
--------------------- PAID-IN EARNINGS/ DEFERRED CURRENCY STOCKHOLDERS'
SHARES AMOUNT CAPITAL (DEFICIT) COMPENSATION TRANSLATION EQUITY
---------- -------- ----------- ----------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1996...... 1,800 $ 2 $ 98 $ 791,048 $ -- $ -- $ 791,148
Distribution to
shareholders.............. -- -- -- (42,205) -- -- (42,205)
Common stock issued upon S-
Corporation termination... 16,198,200 16,198 (7,298) -- -- -- 8,900
Termination of
S-Corporation............. -- -- 1,798,458 (1,798,458) -- -- --
Net income.................. -- -- -- 1,502,390 -- -- 1,502,390
---------- ------- ----------- ----------- --------- -------- ------------
Balance, December 31, 1996.... 16,200,000 16,200 1,791,258 452,775 -- -- 2,260,233
Capital contribution........ -- -- 6,433 -- -- -- 6,433
Net income.................. -- -- -- 1,182,146 -- -- 1,182,146
---------- ------- ----------- ----------- --------- -------- ------------
Balance, December 31, 1997.... 16,200,000 16,200 1,797,691 1,634,921 -- -- 3,448,812
Common stock issued in
connection with Spiral
Media Inc. acquisition.... 480,626 480 535,425 -- -- -- 535,905
Common stock issued in
connection with Online
Magic Ltd. acquisition.... 498,434 498 555,255 -- -- -- 555,753
Capital contribution........ -- -- 9,899 -- -- -- 9,899
Foreign currency translation
adjustment................ -- -- -- -- -- (9,308) (9,308)
Net loss.................... -- -- -- (2,480,980) -- -- (2,480,980)
---------- ------- ----------- ----------- --------- -------- ------------
Balance, December 31, 1998.... 17,179,060 17,178 2,898,270 (846,059) -- (9,308) 2,060,081
Common stock issued in
connection with Eagle
River Interactive
acquisition............... 3,740,238 3,740 4,497,584 -- -- -- 4,501,324
Warrants issued in
connection with Eagle
River Interactive
acquisition............... -- -- 3,428,471 -- -- -- 3,428,471
Common stock issued in
connection with
Interactive Solutions
acquisition............... 4,171,846 4,172 5,127,199 -- -- -- 5,131,371
Stock options issued in
connection with
Interactive Solutions
acquisition............... -- -- 722,191 -- -- -- 722,191
Warrants issued in
connection with
Interactive Solutions
acquisition............... -- -- 2,424,620 -- -- -- 2,424,620
Common stock issued in
connection with Twinspark
Interactive............... 1,057,226 1,057 4,296,567 -- -- -- 4,297,624
Common stock issued as
contingent consideration
in connection with Online
Magic Ltd. acquisition.... 123,376 123 917,794 -- -- -- 917,917
Foreign currency translation
adjustment................ -- -- -- -- -- (34,826) (34,826)
Deferred compensation....... -- -- 601,786 -- (585,070) -- 16,716
Exercise of stock options... 394,418 394 387,562 -- -- -- 387,956
Net loss (unaudited)........ -- -- -- (6,615,029) -- -- (6,615,029)
---------- ------- ----------- ----------- --------- -------- ------------
Balance, September 30, 1999
(unaudited)................. 26,666,164 $26,664 $25,302,044 $(7,461,088) $(585,070) $(44,134) $(17,238,416)
========== ======= =========== =========== ========= ======== ============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-7
<PAGE>
AGENCY.COM LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED DECEMBER 31, ENDED SEPTEMBER 30,
-------------------------------------- --------------------------
1996 1997 1998 1998 1999
---------- ----------- ----------- ----------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).................................. $1,502,390 $ 1,164,851 $(1,807,671) $ (655,109) $ (3,025,261)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities-
Allowance for doubtful accounts.................. 15,207 142,589 785,235 369,434 407,550
Depreciation and amortization.................... 61,356 329,783 1,457,819 2,038,630 7,428,657
Deferred income taxes............................ 1,198,000 594,130 (1,692,876) (1,336,380) (719,152)
Changes in operating assets and liabilities:
Accounts receivable.............................. (1,600,317) (3,030,333) 43,425 (577,634) (17,331,647)
Unbilled charges................................. -- (700,060) (1,645,692) (2,446,642) 2,081,197
Prepaid expenses and other current assets........ (73,120) (139,455) 25,871 89,881 (2,503,690)
Income tax receivable............................ -- -- -- -- 945,055
Due from related parties......................... (383,693) 99,999 156,637 174,695 --
Other assets..................................... (117,126) 8,704 (123,904) (174,174) 202,605
Accounts payable and accrued expenses............ 280,325 1,244,575 3,154,549 1,268,875 3,212,327
Deferred revenue................................. -- 596,882 92,072 (304,698) 634,367
Due to related parties........................... -- -- 453,408 225,614 (728,866)
Income taxes payable............................. 69,046 173,517 (63,811) 675,419 858,474
Other long-term liabilities...................... -- 146,806 66,980 50,235 988,256
---------- ----------- ----------- ----------- ------------
Net cash provided by (used in) operating
activities................................. 952,068 631,988 902,042 (601,854) (7,550,128)
---------- ----------- ----------- ----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures............................... (514,658) (1,578,515) (1,880,846) (464,733) (5,017,854)
Trademark costs.................................... -- (112,222) (3,024) -- --
Acquisitions, net of cash acquired................. -- (1,462,380) (7,698,689) (6,040,839) 693,775
Investment in Affiliate............................ -- -- -- -- (1,487,980)
---------- ----------- ----------- ----------- ------------
Net cash used in investing activities........ (514,658) (3,153,117) (9,582,559) (6,505,572) (5,812,059)
---------- ----------- ----------- ----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from note payable due to Omnicom.......... -- 2,424,969 9,564,404 7,713,039 19,231,187
Payments under capital lease obligations........... -- (122,066) (271,290) (491,078) (670,117)
Net proceeds (borrowings) under line of credit..... -- 86,273 (86,273) (86,273) 121,934
Repayments of shareholder advances................. 60,213 -- -- -- --
Deferred registration costs........................ -- -- (145,296) -- (1,297,720)
Capital (distribution) contribution................ (42,205) 6,433 9,899 -- --
Proceeds from exercise of stock options............ -- -- -- -- 387,956
---------- ----------- ----------- ----------- ------------
Net cash provided by financing activities.... 18,008 2,395,609 9,071,444 7,135,688 17,773,240
---------- ----------- ----------- ----------- ------------
EFFECT OF EXCHANGE RATE ON CASH AND CASH
EQUIVALENTS........................................ -- -- (9,308) 11,062 (4,454,548)
Net increase (decrease) in cash and cash
equivalents........................................ 455,418 (125,520) 381,619 39,324 (43,495)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD....... 57,841 513,259 387,739 387,739 769,358
---------- ----------- ----------- ----------- ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD............. $ 513,259 $ 387,739 $ 769,358 $ 427,063 $ 725,863
========== =========== =========== =========== ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Income taxes paid.................................. $ 96,722 $ 472,637 $ 315,449 $ 337,328 $ 564,917
========== =========== =========== =========== ============
Interest paid...................................... $ -- $ 2,000 $ 1,805 $ 1,805 $ 119,493
========== =========== =========== =========== ============
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING
ACTIVITIES:
Equipment acquired under capital leases............ $ -- $ 362,633 $ 1,443,579 $ 470,150 $ 2,064,641
========== =========== =========== =========== ============
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING
ACTIVITIES:
Common stock issued for acquisitions............... $ -- $ -- $ 1,091,658 $ -- $ 13,924,952
========== =========== =========== =========== ============
Warrants issued for acquisitions................... $ -- $ -- $ -- $ -- $ 5,853,091
========== =========== =========== =========== ============
Stock options issued for acquisitions.............. $ -- $ -- $ -- $ -- $ 722,191
========== =========== =========== =========== ============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-8
<PAGE>
AGENCY.COM LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS
AGENCY.COM Ltd. and subsidiaries (collectively the "Company" or
"AGENCY.COM") is an international Internet professional services firm. The
Company provides clients with an integrated set of strategy, creative and
technology services that take them from concept to launch and operation of their
Internet businesses. The Company's services include: advising, consulting and
planning on the strategic implications of the Internet for a company's business;
designing creative, content, interface and information architecture elements of
Internet resources such as Web sites; programming, technical architecture
development and systems integration to implement complex information technology
systems such as electronic commerce platforms; and planning and executing online
marketing strategies that build audiences and develop brand awareness of
Internet resources. In order to serve its global clients, AGENCY.COM has
completed nine acquisitions since 1997, and currently has offices in New York;
Avon, Colorado; Chicago; Dallas; Portland, Oregon; San Francisco; Cambridge,
Massachusetts; Woodbridge, New Jersey; London; Paris; and Amsterdam.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of all
majority-owned subsidiaries. All significant intercompany transactions have been
eliminated in consolidation.
The Company's investments in 20% to 50% owned companies in which it has the
ability to exercise significant influence over operating and financial policies
are accounted for using the equity method. Accordingly, the Company's share of
the earnings and losses of these companies is included in consolidated net
income (loss). As of December 31, 1998 and September 30, 1999, the Company had a
12% and 30% investment in an affiliate (Note 2) which was accounted for under
the cost method and the equity method, respectively.
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.
REVENUE RECOGNITION
Revenues are recognized for time-and-materials projects on the basis of
costs incurred in the period. Revenue from fixed-fee arrangements, which are
primarily three to twelve months in length, is recognized based on the ratio of
costs incurred to total costs, which are estimated by the Company. Unbilled
charges represent labor costs incurred and estimated earnings, production and
other client reimbursable costs. Provisions for estimated losses on uncompleted
contracts are made
F-9
<PAGE>
AGENCY.COM LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
in the period in which such losses are probable. Amounts billed, which are not
yet earned, are classified as deferred revenue in the accompanying consolidated
balance sheets.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt and equity instruments with an
original maturity of three months or less to be cash equivalents. Cash
equivalents include investments in money market funds and are stated at cost,
which approximates market value.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost, net of accumulated depreciation
and amortization. Property and equipment is depreciated on a straight-line basis
over their estimated useful lives of three to seven years. Leasehold
improvements and equipment held under capital leases are amortized utilizing the
straight-line method over the lesser of the estimated useful life of the asset
or the remaining term of the related lease.
INTANGIBLE ASSETS
Goodwill, which represents the excess of the purchase price over the fair
value of the net assets acquired, is included in intangible assets and is
presently being amortized over a period of seven years on a straight-line basis.
Customer base and workforce are being amortized over a period of five years and
three years, respectively, on a straight-line basis. The Company reviews its
intangible assets to be held and used for impairment whenever events or changes
in circumstances indicate that the carrying amount of the intangible asset
exceeds the fair value of the asset. If circumstances indicate that the carrying
amount of the intangible asset that the Company expects to hold and use may not
be recoverable, the Company will estimate the future cash flows expected to
result from the use of the asset and its eventual disposition. Future cash flows
are the future cash inflows expected to be generated by an asset less the future
cash outflows expected to be necessary to obtain those inflows. If the sum of
the expected future cash flows (undiscounted and without interest charges) is
less than the carrying amount of the asset, the Company will recognize an
impairment loss equal to the amount by which the carrying amount of the asset
exceeds the fair value of the asset. The fair value of the asset is the amount
at which the asset could be bought or sold in a current transaction between
willing parties or determined by calculating the present value of estimated
expected future cash flows using a discount rate commensurate with the risks
involved. Management has evaluated the amortization periods in the current
period and has determined that no impairment currently exists. These
amortization periods will be evaluated by management on a continuing basis, and
will be adjusted if the lives of the related intangible assets are impaired.
F-10
<PAGE>
AGENCY.COM LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ACCOUNTING FOR LONG-LIVED ASSETS
The Company follows the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed of." This statement establishes
financial accounting and reporting standards for the impairment of long-lived
assets, certain identifiable intangibles and goodwill related to those assets to
be held and used, and for long-lived assets and certain identifiable intangibles
to be disposed of. The Company reviews long-lived assets and certain
identifiable intangibles to be held and used for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset exceeds
the fair value of the asset. If other events or changes in circumstances
indicate that the carrying amount of an asset that the Company expects to hold
and use may not be recoverable, the company will estimate the future cash flows
expected to result from the use of the asset and its eventual disposition.
Management has performed a review of all long-lived assets and has determined
that no impairment of the respective carrying values has occurred as of
December 31, 1997 and 1998.
INCOME TAXES
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes." This statement requires an asset and liability
approach for measuring deferred taxes based on temporary differences between the
financial statement and income tax bases of assets and liabilities existing at
each balance sheet date using enacted tax rates for the years in which the taxes
are expected to be paid or recovered. The effect on deferred tax assets or
liabilities of a change in tax rates is recognized in the period in which the
tax change occurs. The Company has elected to file its income tax returns using
the cash basis of accounting. Subsequent to the year ending December 31, 1998,
the Company has elected to file its income tax returns using the accrual basis
of accounting.
FOREIGN CURRENCY TRANSLATION
All assets and liabilities of foreign subsidiaries are translated into U.S.
dollars at fiscal year-end exchange rates. Income and expense items are
translated at average exchange rates prevailing during the fiscal year. The
resulting translation adjustments are recorded as a component of stockholders'
equity in the accompanying consolidated financial statements.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash and cash equivalents, accounts receivable, due
from affiliate and accounts payable approximate fair value due to the short-term
maturity of these instruments. The carrying amounts of due to Omnicom
Group Inc. and capital lease obligations, including current portions,
approximate fair value.
F-11
<PAGE>
AGENCY.COM LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
BUSINESS CONCENTRATIONS AND CREDIT RISK
Financial instruments, which subject the Company to concentrations of credit
risk, consist primarily of cash and cash equivalents and trade accounts
receivable. The Company maintains cash and cash equivalents with various
financial institutions. The Company performs periodic evaluations of the
relative credit standing of these institutions. The Company's clients are
primarily concentrated in the United States and Europe. The Company performs
ongoing credit evaluations, generally does not require collateral, and
establishes an allowance for doubtful accounts based upon factors surrounding
the credit risk of customers, historical trends and other information.
For the year ended December 31, 1996, 4 clients accounted for 26%, 19%, 12%
and 12%, of total revenues.
For the year ended December 31, 1997, 4 clients accounted for 18%, 17%, 14%
and 10%, of total revenues.
For the year ended December 31, 1998, 1 client accounted for 16% of total
revenues.
For the nine months ended September 30, 1998 (unaudited), 1 client accounted
for 13%, of total revenues.
For the nine months ended September 30, 1999 (unaudited), 1 client accounted
for 13% of total revenues.
As of December 31, 1997, 2 clients accounted for 22% and 12%, of total
accounts receivable and unbilled charges.
As of December 31, 1998, 1 client accounted for 31% of total accounts
receivable and unbilled charges.
As of September 30, 1999 (unaudited), 2 clients accounted for 14% and 12% of
total accounts receivable and unbilled charges.
NET INCOME (LOSS) PER COMMON SHARE
The Company computes net income (loss) per common share in accordance with
SFAS No. 128, "Earnings Per Share" and SEC Staff Accounting Bulletin No. 98
("SAB No. 98"). Under the provisions of SFAS No. 128 and SAB No. 98, basic net
income (loss) per common share ("Basic EPS") is computed by dividing net income
(loss) by the weighted average number of common shares outstanding. Diluted net
income (loss) per common share ("Diluted EPS") is computed by dividing net
income (loss) by the weighted average number of common shares and
F-12
<PAGE>
AGENCY.COM LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
dilutive common share equivalents then outstanding. SFAS No. 128 requires the
presentation of both Basic EPS and Diluted EPS on the face of the consolidated
statements of operations.
A reconciliation between the numerator and denominator of Basic EPS and
Diluted EPS is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
--------------------------------------------
WEIGHTED NET INCOME PER
NET INCOME AVERAGE SHARES COMMON SHARE
---------- -------------- --------------
<S> <C> <C> <C>
Basic EPS:
Net income attributable to common stock.......... $1,502,390 4,750,313 $0.32
Stock options.................................... -- 46,630 (0.01)
---------- --------- -----
Diluted EPS........................................ $1,502,390 4,796,943 $0.31
========== ========= =====
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
--------------------------------------------
WEIGHTED NET INCOME PER
NET INCOME AVERAGE SHARES COMMON SHARE
---------- -------------- --------------
<S> <C> <C> <C>
Basic EPS:
Net income attributable to common stock.......... $1,182,146 16,200,000 $0.07
Stock options.................................... -- 97,345 --
---------- ---------- -----
Diluted EPS........................................ $1,182,146 16,297,345 $0.07
========== ========== =====
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998
---------------------------------------------
WEIGHTED NET (LOSS) PER
NET (LOSS) AVERAGE SHARES COMMON SHARE
----------- -------------- --------------
<S> <C> <C> <C>
Basic EPS:
Net (loss) attributable to common stock......... $(2,480,980) 16,854,499 $(0.15)
Stock options................................... -- -- --
----------- ---------- ------
Diluted EPS....................................... $(2,480,980) 16,854,499 $(0.15)
=========== ========== ======
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1998
(UNAUDITED)
--------------------------------------------
WEIGHTED NET (LOSS) PER
NET INCOME AVERAGE SHARES COMMON SHARE
---------- -------------- --------------
<S> <C> <C> <C>
Basic EPS:
Net income attributable to common stock.......... $(942,314) 16,586,538 $(0.06)
Stock options.................................... -- -- --
--------- ------------- ------
Diluted EPS........................................ $(942,314) 16,586,538 $(0.06)
========= ============= ======
</TABLE>
F-13
<PAGE>
AGENCY.COM LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1999
(UNAUDITED)
---------------------------------------------
WEIGHTED NET (LOSS) PER
NET (LOSS) AVERAGE SHARES COMMON SHARE
----------- -------------- --------------
<S> <C> <C> <C>
Basic EPS:
Net (loss) attributable to common stock......... $(6,615,029) 23,186,818 $(0.29)
Stock options................................... -- -- --
----------- ---------- ------
Diluted EPS....................................... $(6,615,029) 23,186,818 $(0.29)
=========== ========== ======
</TABLE>
Diluted EPS for the year ended December 31, 1998 and the nine months ended
September 30, 1998 and 1999 (unaudited), respectively, does not include the
impact of stock options then outstanding, as the effect of their inclusion would
be antidilutive.
STOCK-BASED COMPENSATION
In 1998, the Company adopted the provisions of SFAS No. 123, "Accounting for
Stock-Based Compensation," by continuing to apply the provisions of Accounting
Principles Board No. 25, "Accounting for Stock Issued to Employees," ("APB
No. 25") while providing the necessary pro forma disclosures as if the fair
value method had been applied (Note 8).
COMPREHENSIVE INCOME
During 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive
Income," which established standards for reporting and displaying comprehensive
income and its components in a financial statement that is displayed with the
same prominence as other financial statements. The components of comprehensive
income are as follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------- -----------------------
1996 1997 1998 1998 1999
---------- ---------- ----------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net income (loss)............. $1,502,390 $1,182,146 $(2,480,980) $(942,314) $(6,615,029)
Foreign currency translation
adjustment.................. -- -- (9,308) (6,981) (34,826)
---------- ---------- ----------- --------- -----------
Comprehensive income
(loss).................... $1,502,390 $1,182,146 $(2,490,288) $(949,295) $(6,649,855)
========== ========== =========== ========= ===========
</TABLE>
PROPOSED PUBLIC OFFERING
In connection with its contemplated initial public offering of Common Stock,
the Company has incurred approximately $145,000 and $1,281,000, respectively, in
registration related costs for the year ended December 31, 1998 and the nine
months ended September 30, 1999 (unaudited). These costs are being deferred
until the consummation of the offering, at which time they will be
F-14
<PAGE>
AGENCY.COM LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
charged against additional paid-in capital. If the offering is not consummated,
the deferred registration costs will be expensed. These amounts are included in
other assets in the accompanying consolidated balance sheets.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 131, "Disclosures About Segments of an Enterprise and Related Information."
This statement establishes standards for the way public business enterprises
report information about operating segments in annual financial statements and
requires that those enterprises report selected information about operating
segments in interim financial reports issued to shareholders. The statement also
establishes standards for related disclosure about products and services,
geographic areas and major customers. This statement is effective for financial
statements for periods beginning after December 15, 1997 and need not be applied
to interim periods in the initial year of application. Comparative information
for earlier years presented is to be restated. The Company currently believes
that it operates in one segment and that the adoption of SFAS No. 131 will not
materially affect the Company's current disclosure of geographic information
(Note 9).
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"), which 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. SOP 98-1 is effective for fiscal years
beginning after December 31, 1998. The Company does not expect the adoption of
SOP 98-1 to have a material effect on its financial statements.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivatives and
Hedging Activities," which establishes accounting and reporting standards of
derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities. The Company does not currently
engage in derivative activity and does not expect the adoption of this standard
to have a material effect on the Company's results of consolidated operations,
financial position or cash flows.
In July 1999, the FASB approved SFAS No. 137, "Accounting for Derivative
Instruments and Hedging Activities--Deferral of the Effective Date of FASB
Statement No. 133", which amends SFAS No. 133 to be effective for all fiscal
quarters of all fiscal years beginning after June 15, 2000.
UNAUDITED FINANCIAL STATEMENTS
The unaudited consolidated financial information included herein as of
September 30, 1999 for the nine months ended September 30, 1998 and 1999, have
been prepared in accordance with generally accepted accounting principles for
interim financial statements. In the opinion of the
F-15
<PAGE>
AGENCY.COM LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Company, these unaudited consolidated financial statements, reflect all
adjustments necessary, consisting of normal recurring adjustments, for a fair
presentation of such data on a basis consistent with that of the audited data
presented herein. The consolidated results for interim periods are not
necessarily indicative of the results expected for a full year.
2. ACQUISITIONS AND INVESTMENTS
SPIRAL MEDIA INC.
In July 1997, the Company purchased 51% of the outstanding shares of Spiral
Media Inc. ("Spiral Media"). The Company purchased the remaining portion of
outstanding shares in July 1998. The total consideration for all of the stock
acquired was $6,165,880. This consideration was comprised of a cash payment of
$5,501,766, relinquishment of debt due from Spiral Media stockholders totaling
$128,209 and the issuance of 480,626 shares of the Company's common stock valued
at $1.12 per share, which in management's opinion was the fair market value of
the common stock at the date of issuance. This acquisition has been accounted
for under the purchase method of accounting and, accordingly, the purchase price
has been allocated to the tangible and intangible assets acquired and
liabilities assumed on the basis of their respective fair values on the
respective acquisition dates. As a result of this acquisition, the Company has
recorded goodwill of approximately $6,111,199, which is the cost in excess of
net assets acquired and is being amortized over a period of seven years.
ONLINE MAGIC LIMITED
In October 1997, the Company purchased 42.5% of the outstanding shares of
Online Magic Limited ("Online Magic"), a United Kingdom company, which
represented the controlling interest in Online Magic. The outstanding shares
acquired were deemed to be a controlling interest as after the investment, the
Company had the ability to direct or cause the direction of the management and
operating and financing policies of Online Magic. In May 1998 and July 1998, the
Company acquired all of the remaining outstanding shares of Online Magic through
two separate purchase agreements. The total consideration paid was approximately
$2,196,905. The consideration is comprised of a cash payment of $1,641,152 and
the issuance of 498,434 shares of the Company's common stock value at $1.12 per
share, which in management's opinion was the fair market value of the common
stock at the date of issuance. This acquisition has been accounted for under the
purchase method of accounting and, accordingly, the purchase price has been
allocated to the tangible and intangible assets acquired and liabilities assumed
on the basis of their respective fair values on the respective acquisition
dates. As a result of this acquisition, the Company has recorded goodwill of
approximately $1,872,456, which is the cost in excess of net assets acquired and
is being amortized over a period of seven years. Furthermore, the purchase
agreements call for certain earn-out payments to former shareholders of Online
Magic based upon the achievement of targeted operating performance of Online
Magic through December 1999. These payments are payable in the form of 246,750
shares of the Company's common stock which are currently held in
F-16
<PAGE>
AGENCY.COM LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. ACQUISITIONS AND INVESTMENTS (CONTINUED)
escrow and are considered issued but not outstanding (Note 8). No earn-out
amounts have been earned as of December 31, 1998. Future payments, if any, will
be recorded as additional purchase price and, as such, an adjustment to
goodwill.
KETCHUM ADVERTISING INC.
In April 1998, the Company acquired certain assets and assumed certain
liabilities from Ketchum Advertising Inc. ("Ketchum"). Ketchum was a subsidiary
of the Omnicom Group Inc. ("Omnicom"), which is a significant shareholder of the
Company's common stock both directly and through a wholly owned subsidiary. In
consideration for the net assets acquired, the Company paid approximately
$643,000 in cash. This acquisition has been accounted for under the purchase
method of accounting and, accordingly, the purchase price has been allocated to
the tangible and intangible assets acquired and liabilities assumed on the basis
of their respective fair values on the acquisition date. As a result of this
acquisition, the Company has recorded goodwill of approximately $643,000, which
is being amortized over a period of seven years.
PRIMARY GROUP INC.
In August 1998, the Company acquired certain assets from Primary Group Inc.
("Primary Group") and assumed certain liabilities. In consideration for the net
assets acquired, the Company paid approximately $53,220 in cash. This
acquisition has been accounted for under the purchase method of accounting and,
accordingly, the purchase price has been allocated to the tangible and
intangible assets acquired and liabilities assumed on the basis of their
respective fair values on the acquisition date. As a result of this acquisition,
the Company has recorded goodwill of approximately $50,845, which is being
amortized over a period of seven years.
The acquisitions described were valued based on management's estimate of the
fair value of the net assets acquired at the date of acquisition. Costs in
excess of net assets acquired were recorded as intangible assets. Presented
below is the allocation of the purchase price among assets acquired, liabilities
assumed and intangible assets.
<TABLE>
<CAPTION>
SPIRAL MEDIA ONLINE MAGIC KETCHUM PRIMARY GROUP
------------ ------------ --------- -------------
<S> <C> <C> <C> <C>
Accounts receivable....................... $ 402,412 $ 1,079,719 $ -- $ --
Fixed assets.............................. 201,973 345,299 -- 2,375
Other assets.............................. 131,627 797,202 -- --
Intangible assets......................... 6,111,199 1,872,456 643,000 50,845
Current liabilities....................... (615,277) (1,313,073) -- --
Long-term liabilities..................... (66,054) (584,698) -- --
---------- ----------- -------- -------
Total purchase price.................... $6,165,880 $ 2,196,905 $643,000 $53,220
========== =========== ======== =======
</TABLE>
F-17
<PAGE>
AGENCY.COM LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. ACQUISITIONS AND INVESTMENTS (CONTINUED)
THE EDGE CONSULTANTS PTE. LTD.
In December 1998, the Company entered into an agreement to acquire 60% of
the outstanding shares of The Edge Consultants PTE. LTD. ("Edge") in a step
transaction. In accordance with the agreement, in December 1998, the Company
purchased 12% of the outstanding shares of Edge for $1,572,203 in cash. In
July 1999, the Company purchased an additional 18% under the agreement for a
cash payment of approximately $1,500,000 and will account for this investment
under the equity method of accounting in future periods. Prior to the additional
18% investment, the Company accounted for this investment under the cost method
of accounting. The Company may purchase an additional 30% for an amount that is
contingent upon the achievement of targeted operating performance goals by Edge.
INTERACTIVE SOLUTIONS INCORPORATED AND QUADRIS CONSULTING, INC.
In April 1999, the Company acquired all of the issued and outstanding shares
of capital stock of Interactive Solutions Incorporated ("ISI") from the ISI
shareholders (including Communicade Inc., a wholly owned subsidiary of Omnicom)
in exchange for an aggregate of 4,171,846 shares of the Company's common stock
and a warrant to purchase 3,071,248 shares of the Company's common stock at a
purchase price of $0.005 per share. Such warrant was valued at $0.80 per share
and the fair value of the Company's common stock on the date of purchase was
$1.23 per share, each as determined by an independent third-party valuation.
Immediately, prior to the acquisition of ISI, ISI acquired all of the issued
and outstanding shares of capital stock of Quadris Consulting, Inc. ("Quadris")
from the Quadris shareholders in exchange for an aggregate of 1,869,528 shares
of ISI common stock. Prior to both acquisitions, Communicade sold 485,999.64
shares of ISI common stock to certain of the Company's shareholders for an
aggregate price of $412,492.
Outstanding stock options under the stock option plans of Quadris and ISI
were converted into approximately 1,402,382 options to purchase the Company's
common stock. Included in these options were 558,820, 185,146 and 659,036
options which were converted at exercise prices of $0.41, $0.45 and $1.21,
respectively, which were lower than the fair market value of the Company's
common stock at the date of grant, which was $1.23. Accordingly, the Company has
recorded additional purchase price of approximately $623,000 for the difference
between the exercise price and the fair market value of the underlying common
shares relating to these options.
EAGLE RIVER INTERACTIVE INC.
In April 1999, the Company acquired all of the issued and outstanding shares
of capital stock of Eagle River Interactive Inc. ("ERI") from Omnicom, ERI's
sole shareholder, in exchange for an aggregate of 3,659,548 shares of the
Company's common stock and a warrant to purchase 4,328,752 shares of the
Company's common stock at a purchase price of $0.005 per share. Such warrant was
valued at $0.80 per share and the fair value of the Company's common stock on
the date of purchase was $1.23 per share, each as determined by an independent
third-party valuation.
F-18
<PAGE>
AGENCY.COM LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. ACQUISITIONS AND INVESTMENTS (CONTINUED)
In addition, 13,322 shares of the Company's common stock were issued to certain
participants of the ERI Key Executive Incentive Program in settlement of all
obligations due under the program and 80,690 shares were issued to an executive
of Eagle River Interactive in connection with his employment agreement (Note
10). These shares have been considered additional purchase price at $1.23 per
share, the then fair market value of the Company's common stock.
DIGITAL VISION COMMUNICATIONS INC.
In May 1999, the Company purchased all of the issued and outstanding shares
of capital stock of Digital Vision Communications Inc. ("Digital Vision") for
$1,100,000 in cash. This acquisition has been accounted for under the purchase
method of accounting and, accordingly, the purchase price has been allocated to
the tangible and intangible assets acquired and liabilities assumed on the basis
of their respective fair values on the acquisition date.
TWINSPARK INTERACTIVE PEOPLE B.V.
In August 1999, the Company purchased all of the issued and outstanding
shares of capital stock of Twinspark Interactive People B.V. ("Twinspark") for
$700,000 in cash and 1,057,226 shares of the Company's common stock valued at
$4.06 per share, of which 1,047,226 shares will be given to the shareholders of
Twinspark and 10,000 to former employees of Twinspark, for a total aggregate
purchase price of $4,997,624. The Company also granted 75,000 stock options to
former employees of Twinspark at an exercise price equal to the then fair market
value of the Company's common stock. This acquisition has been accounted for
under the purchase method of accounting and, accordingly, the purchase price has
been allocated to the tangible and intangible assets acquired and liabilities
assumed on the basis of their respective fair values on the acquisition date.
Furthermore, the purchase agreement calls for certain earn-out payments to the
former shareholders of Twinspark based upon the achievement of certain targeted
operating results of Twinspark through December 1999. These payments are payable
in the form of 168,066 shares of the Company's common stock which are currently
held in escrow. Future payments, if any, will be recorded as additional purchase
price and, accordingly, an adjustment to goodwill.
INTERACTIVE TRAFFIC, INC.
In October 1999, the Company purchased all of the issued and outstanding
shares of capital stock of Interactive Traffic, Inc. ("I-traffic") for
$3,000,000 in cash, a $1,000,000 short-term note payable due at the earlier of
December 31, 1999 or thirty days following the completion of the Company's
initial public offering, 469,320 shares of the Company's common stock valued at
$9.35 per share, the assumption of options to purchase 160,680 shares of the
Company's common stock at an average exercise price of $2.54 per share, and the
issuance of newly-granted options to purchase 60,000 shares of the Company's
common stock at an exercise price of $8.50 per share, which option were valued
at less than the fair market value of the Company's common stock on the date of
grant, valued at $1,145,231, for a total aggregate purchase price of $9,533,373.
This
F-19
<PAGE>
AGENCY.COM LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. ACQUISITIONS AND INVESTMENTS (CONTINUED)
acquisition has been accounted for under the purchase method of accounting and,
accordingly, the purchase price has been allocated to the tangible and
intangible assets acquired and liabilities assumed on the basis of their
respective fair value on the acquisition date. Furthermore, the purchase
agreement calls for certain earn-out payments to the former shareholders of
I-traffic based upon the achievement of certain future targeted operating
results of I-traffic one year from the date of the closing of the transaction.
These payments are payable in cash and additional shares of the Company's common
stock and future payments, if any, will be recorded as additional purchase price
and, accordingly, an adjustment to goodwill.
VISIONIK A/S
In November 1999, the Company purchased all of the issued and outstanding
shares of capital stock of Visionik A/S ("Visionik"), a Danish corporation, for
$500,000 in cash and 572,000 shares of the Company's common stock valued at
$9.35 per share for a total aggregate purchase price of $5,848,200. This
acquisition has been accounted for under the purchase method of accounting and,
accordingly, the purchase price has been allocated to the tangible and
intangible assets acquired and liabilities assumed on the basis of their
respective fair values on the acquisition date.
PRO FORMA RESULTS OF OPERATIONS (UNAUDITED)
The following unaudited pro forma consolidated statement of operations data
for the year ended December 31, 1998 and the nine months ended September 30,
1998 give effect to the acquisitions of Ketchum Interactive, The Primary Group,
Interactive Solutions, Eagle River Interactive, Digital Vision and Twinspark
Interactive People as if each of these acquisitions had occurred on January 1,
1998. The pro forma consolidated statement of operations data for the nine
months ended September 30, 1999 give effect to the acquisition of Twinspark
Interactive People as if it had occurred on January 1, 1999. All of the
following unaudited pro forma consolidated results of operations give effect to
purchase accounting adjustments. These pro forma results have been prepared for
comparative purposes only and do not purport to be indicative of what operating
results would have been had the acquisitions actually taken place on January 1,
1998 and January 1, 1999 and may not be indicative of future operating results.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
YEAR ENDED -----------------------
DECEMBER 31, 1998 1998 1999
------------------------- --------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Pro forma: Revenues...................... $ 76,130 $ 55,962 $ 74,808
Net loss...................... (20,900) (14,147) (16,748)
Basic net loss per share...... (0.77) (0.53) (0.61)
Diluted net loss per share.... (0.77) (0.53) (0.61)
</TABLE>
F-20
<PAGE>
AGENCY.COM LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. RELATED PARTY TRANSACTIONS
On September 12, 1996, the controlling shareholders of the Company entered
into a shareholder's agreement (the "Shareholders Agreement") with
Communicade Inc., a wholly owned subsidiary of Omnicom. The Shareholders
Agreement provided a line of credit for working capital purposes of up to
$1,000,000 (subsequently amended to $2,500,000) at the same interest rate
charged by Omnicom to its subsidiaries under the Omnicom cash management system,
which was approximately 6.50%. Borrowings were secured by a first priority lien
on all assets. In addition, the Shareholders Agreement provided for additional
financing to the Company for "new media" acquisitions at the same interest rate
charged by Omnicom to its subsidiaries under the Omnicom cash management system.
On April 28, 1999, the Company entered into a new shareholder's agreement
(the "New Agreement") with Omnicom. The New Agreement nullified and superseded
the previous Shareholders Agreement dated September 12, 1996. The New Agreement
provides a line of credit for working capital purposes of not less than
$10,000,000 at the same interest rate charged by Omnicom to its subsidiaries
under the Omnicom cash management system, which was approximately 5.89%.
Borrowings are secured by a first priority lien on all assets. In addition, the
New Agreement provides for additional financing to the Company for "new media"
acquisitions at the same interest rate charged by Omnicom to its subsidiaries
under the Omnicom cash management system. Interest on any such loans shall be
paid quarterly on the then outstanding principal balance. Principal shall be
repaid quarterly in equal installments over a five-to-ten-year period.
At December 31, 1997 and 1998 and September 30, 1999 (unaudited), there were
approximately $1.0 million, $2.5 million and $27.8 million outstanding,
respectively, on the working capital line of credit at an interest rate of 6%.
At December 31, 1997 and 1998 and September 30, 1999 (unaudited), there were
approximately $1.4 million, $9.5 million and $39.0 million outstanding,
respectively, on the acquisition loans at an average rate of 6%. The amounts
owed as of September 30, 1999, include amounts assumed in the Eagle River and
ISI acquisitions. Related interest expense under the financing arrangements was
$0, $34,106 and $377,086, respectively, for the three years ended December 31,
1998 and approximately $309,000 and $2,019,000, respectively, for the nine
months ended September 30, 1998 and 1999 (unaudited).
In November 1999, the Company entered into a new credit facility with
Omnicom (See Note 13).
F-21
<PAGE>
AGENCY.COM LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. RELATED PARTY TRANSACTIONS (CONTINUED)
DUE FROM/TO RELATED PARTIES
Due from related parties consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------- SEPTEMBER 30,
1997 1998 1999
--------- --------- -------------
<S> <C> <C> <C>
(UNAUDITED)
Urban Desires Inc........................ $272,322 $130,093 $266,871
ISI...................................... -- 11,754 --
Due from shareholders.................... 26,162 -- --
Other.................................... -- -- 29,097
-------- -------- --------
Due from related parties............. $298,484 $141,847 $295,968
======== ======== ========
</TABLE>
Certain of the primary shareholders of the Company own Urban Desires Inc.
The Company provides services at its normal rates to Urban Desires Inc. for
which the Company is reimbursed. The total amount billed to Urban Desires Inc.
was not material to the accompanying consolidated financial statements.
Due to related parties consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1998 1999
------------ -------------
(UNAUDITED)
<S> <C> <C>
Quadris.......................................... $252,680 $ --
Eagle River...................................... 33,987 --
Loan payable to shareholders..................... 166,741 --
Tridion BV....................................... -- 390,000
-------- --------
Due to related parties....................... $453,408 $390,000
======== ========
</TABLE>
There were no outstanding amounts to related parties as of December 31,
1997.
4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------- SEPTEMBER 30,
1997 1998 1999
---------- ---------- -------------
<S> <C> <C> <C>
(UNAUDITED)
Equipment under capital leases....... $ 362,633 $1,804,702 $ 2,807,381
Equipment............................ 936,711 801,932 1,734,262
Computer equipment................... 470,796 1,948,470 9,657,316
Furniture and fixtures............... 553,939 806,454 2,689,530
</TABLE>
F-22
<PAGE>
AGENCY.COM LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. PROPERTY AND EQUIPMENT (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------- SEPTEMBER 30,
1997 1998 1999
---------- ---------- -------------
<S> <C> <C> <C>
(UNAUDITED)
Leasehold improvements............... $ 194,021 $ 480,967 $ 2,694,318
---------- ---------- ------------
Total property and equipment..... 2,518,100 5,842,525 19,582,807
Less--Accumulated depreciation and
amortization....................... (486,092) (1,627,397) (7,928,884)
---------- ---------- ------------
Property and equipment, net...... $2,032,008 $4,215,128 $ 11,653,923
========== ========== ============
</TABLE>
Depreciation and amortization expense was $61,356, $304,491 and $1,141,305,
respectively, for the three years ended December 31, 1998 and $772,094 and
$3,149,130, respectively, for the nine months ended September 30, 1998 and
September 30, 1999 (unaudited).
5. INTANGIBLE ASSETS
Intangible assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------- SEPTEMBER 30,
1997 1998 1999
---------- ---------- -------------
<S> <C> <C> <C>
(UNAUDITED)
Goodwill.............................. $1,462,380 $8,677,500 $49,888,659
Customer base......................... -- -- 5,840,000
Workforce............................. -- -- 2,327,000
Trademark............................. 112,222 115,246 115,246
Less--Accumulated amortization.... (72,264) (965,029) (5,539,250)
---------- ---------- -----------
Intangible assets, net................ $1,502,338 $7,827,717 $52,631,655
========== ========== ===========
</TABLE>
Amortization expense was $0, $25,292 and $316,514, respectively, for the
three years ended December 31, 1998 and $99,576 and $727,161, respectively, for
the nine months ended September 30, 1998 and September 30, 1999 (unaudited).
6. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------- SEPTEMBER 30,
1997 1998 1999
---------- ---------- -------------
<S> <C> <C> <C>
(UNAUDITED)
Accounts payable...................... $1,130,815 $3,103,991 $10,253,054
Accrued expenses--other............... 467,716 1,370,289 4,564,579
Accrued professional fees............. 126,695 405,495 102,599
---------- ---------- -----------
$1,725,226 $4,879,775 $14,920,232
========== ========== ===========
</TABLE>
F-23
<PAGE>
AGENCY.COM LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. ACCOUNTS PAYABLE AND ACCRUED EXPENSES (CONTINUED)
There were no other individual items greater than 5% of current liabilities
as of December 31, 1997, December 31, 1998 and September 30, 1999 (unaudited).
7. INCOME TAXES
Income (loss) before income taxes and minority interest and the provision
(benefit) for taxes on income (loss) consisted of the following:
<TABLE>
<CAPTION>
NINE
YEAR ENDED DECEMBER 31, MONTHS ENDED
------------------------------------- SEPTEMBER 30,
1996 1997 1998 1999
---------- ---------- ----------- -------------
<S> <C> <C> <C> <C>
(UNAUDITED)
Income (loss) before income taxes and
minority interest:
Domestic............................... $2,890,390 $2,226,890 $(3,760,644) $(7,029,121)
International.......................... -- (160,839) 348,648 405,905
---------- ---------- ----------- -----------
$2,890,390 $2,066,051 $(3,411,996) $(6,623,216)
========== ========== =========== ===========
Provision (benefit) for taxes on income
(loss):
Current--
Federal.............................. $ 78,000 $ 257,568 $ 160,684 $ 1,106,589
State and local...................... 112,000 176,153 104,617 352,285
International........................ -- (56,294) 122,027 137,986
Deferred--
Federal.............................. 711,892 414,417 (971,405) (2,259,181)
State and local...................... 486,108 259,529 (628,498) (719,217)
International........................ -- -- -- --
---------- ---------- ----------- -----------
$1,388,000 $1,051,373 $(1,212,575) $(1,381,538)
========== ========== =========== ===========
</TABLE>
F-24
<PAGE>
AGENCY.COM LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. INCOME TAXES (CONTINUED)
A reconciliation of the difference between the statutory U.S. Federal Income
Tax Rate and the Company's effective tax rate is as follows:
<TABLE>
<CAPTION>
NINE
YEAR ENDED DECEMBER 31, MONTHS ENDED
------------------------------------- SEPTEMBER 30,
1996 1997 1998 1999
---------- ---------- ----------- -------------
<S> <C> <C> <C> <C>
(UNAUDITED)
Statutory federal income tax rate........ $1,011,636 $ 723,118 $(1,194,198) $(2,318,126)
State and local taxes on income, net of
federal income tax benefit............. 376,364 283,193 (340,523) (238,506)
Goodwill amortization.................... -- 25,292 286,449 1,109,998
Nondeductible expense.................... -- 19,770 30,595 69,177
Other.................................... -- -- 5,102 (4,081)
---------- ---------- ----------- -----------
Effective rate........................... $1,388,000 $1,051,373 $(1,212,575) $(1,381,538)
========== ========== =========== ===========
</TABLE>
The tax effects of temporary differences that give rise to a significant
portion of the deferred income taxes are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------ SEPTEMBER 30,
1997 1998 1999
----------- ---------- -------------
<S> <C> <C> <C>
(UNAUDITED)
Current deferred income tax assets
(liabilities) net:
Accrual to cash adjustments........ $ (489,087) $ (182,048) $ (156,807)
Allowance for doubtful accounts.... 14,939 386,701 3,507,666
Noncurrent deferred tax asset
(liabilities), net:
Accrual to cash adjustments........ (1,467,262) (546,144) (470,421)
Net operating loss................. 120,884 -- 967,463
Goodwill amortization.............. -- -- 302,266
Other.............................. (39,604) (21,700) 38,235
Valuation allowance................ -- -- --
----------- ---------- -----------
Total deferred income taxes,
net............................ $(1,860,130) $ (363,191) $ 4,188,402
=========== ========== ===========
</TABLE>
Deferred income taxes are provided for the temporary difference between the
financial reporting basis and tax basis of the Company's assets and liabilities.
Deferred tax assets result principally from recording certain expenses in the
financial statements, which are not currently deductible for tax purposes, and
differences between the tax and book basis of assets and liabilities recorded in
connection with the acquisitions. Deferred tax liabilities result principally
from expenses which are currently deductible for tax purposes, but have not yet
been expensed in the financial statements.
F-25
<PAGE>
AGENCY.COM LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. INCOME TAXES (CONTINUED)
The Company has concluded that it is probable that it will be able to
realize its deferred tax assets as of December 31, 1998, due to carryback
provisions, however a full valuation allowance has been recorded as of
September 30, 1999.
On September 12, 1996, pursuant to the Shareholder Agreement (Note 3), the
Company's S Corporation status was terminated and the Company began operations
as a C Corporation. Accordingly, the Company became subject to federal and state
income taxes and the retained deficit of the Company was transferred to
additional paid-in capital.
If the Company operated as a C corporation since its inception, the pro
forma income tax provision would have been $1,405,577 (unaudited), without
contemplating any applicable tax laws related to the utilization of net
operating losses. No pro forma adjustments are required for the years ended
December 31, 1997 and 1998 as the Company was operating as a C Corporation
during those years.
Management believes that amortization relating to certain goodwill generated
from international acquisitions is deductible under the Internal Revenue Code.
The Company may be restricted to the use of its net operating losses as a result
of the aforementioned acquisitions (Note 3).
8. STOCKHOLDERS' EQUITY
COMMON SHARES
In August 1999, the certificate of incorporation was amended to increase the
number of authorized shares of common stock, $0.001 par value, to 200,000,000.
STOCK SPLITS
On October 31, 1996, the Board of Directors authorized a 1.8 for 1 stock
split of the Company's common stock. On November 21, 1997, the Board of
Directors authorized a 5 for 1 stock split of the Company's common stock. On
July 15, 1998, the Board of Directors authorized a 1.8 for 1 stock split of the
Company's common stock. In June 1999, the Board of Directors authorized a 2 for
1 stock split of the Company's common stock. All share and per-share amounts in
the accompanying consolidated financial statements and footnotes have been
restated to give effect to these stock splits.
STOCK OPTIONS
On November 1, 1996, the Board of Directors adopted the 1996 Stock Option
Plan (the "1996 Plan"). The 1996 Plan authorizes the granting of awards, the
exercise of which would allow up to an aggregate of 1,800,000 shares of the
Company's common stock to be acquired by the holders of said awards, to key
employees.
On November 24, 1997, the Board of Directors adopted the 1997 Stock Option
Plan (the "1997 Plan"). The 1997 Plan authorizes the granting of awards, the
exercise of which would allow up to
F-26
<PAGE>
AGENCY.COM LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. STOCKHOLDERS' EQUITY (CONTINUED)
an aggregate of 2,078,730 shares of the Company's common stock to be acquired by
the holders of said awards, to key employees.
The awards under both plans take the form of nonqualified stock options and
expire five years from the date of grant. In the opinion of management, the
exercise price of options granted is equal to the fair market value of the
Company's common stock on the date of grant.
Options granted under the 1996 Plan and 1997 Plan vest upon the happening of
either an initial public offering of the common stock of the Company or a change
in control of the Company. Additionally, the 1997 Plan offers a discretionary
five-year vesting schedule in the event that either of the preceding events does
not occur, based upon the approval of the Board of Directors.
A summary of stock option activity for the 1996 Plan and 1997 Plan is as
follows:
<TABLE>
<CAPTION>
1996 PLAN 1997 PLAN
------------------------- -------------------------
<S> <C> <C> <C> <C>
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
SHARES PRICE SHARES PRICE
-------- ----- ------- -----
Balance at December 31, 1996................................ 154,800 $0.86 -- $ --
Granted................................................... 164,088 1.05 332,730 1.12
Exercised................................................. -- -- -- --
Canceled.................................................. (9,000) 0.86 -- --
-------- -------
Balance at December 31, 1997................................ 309,888 0.96 332,730 1.12
Granted................................................... 96,030 1.12 148,560 1.12
Exercised................................................. -- -- -- --
Canceled.................................................. (75,960) 0.99 (20,000) 1.12
-------- -------
Balance at December 31, 1998................................ 329,958 $1.00 461,290 $1.12
======== =======
</TABLE>
No options were exercisable at December 31, 1998. In the aggregate, at
December 31, 1998, there were 791,248 options outstanding. Of this amount,
149,688 were outstanding with an average remaining contractual life of
2.98 years, and a weighted average exercise price of $0.86, and 641,560 were
outstanding with an average remaining contractual life of 4.14 years, and a
weighted average exercise price of $1.12. At December 31, 1998, there were
1,470,042 options and 1,617,440 options available for future grant under the
1996 Plan and 1997 Plan, respectively.
The 1999 Stock Option/Stock Issuance Plan is the successor program to the
1996 Stock Option Plan and 1997 Stock Option Plan. The 1999 plan was adopted in
February 1999 and became effective as of that date. All outstanding options
under the 1996 Stock Option Plan and 1997 Stock Option Plan will be transferred
to the 1999 plan upon the closing of the Company's initial public offering, and
no further option grants will be made under the predecessor plans. The
transferred options will continue to be governed by their existing terms. Except
as otherwise noted, the transferred options have substantially the same terms as
those for grants to be made under the discretionary option grant program of the
1999 plan.
F-27
<PAGE>
AGENCY.COM LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. STOCKHOLDERS' EQUITY (CONTINUED)
9,601,178 shares of our common stock have been authorized for issuance under
the 1999 plan. This share reserve consists of the number of shares carried over
from the 1996 and 1997 plans plus an additional increase of 8,748,266 shares.
The share reserve will automatically increase on the first trading day in
January each year, by an amount equal to 3% of the total number of shares of
common stock outstanding on the last trading day of the prior year, but in no
event will this annual increase exceed 1,500,000 shares. In addition, no
participant in the 1999 plan may be granted stock options, separately
exercisable stock appreciation rights or direct stock issuances for more than
1,100,000 shares of common stock in total in any calendar year. Of the 9,601,178
shares 5,722,698 remained available for issuance at the close of business on
September 30, 1999.
The Company accounts for the stock option plans in accordance with APB
No. 25, under which no compensation has been recognized for stock options
granted. Had compensation for the stock option plans been determined consistent
with the provisions of SFAS No. 123, the effect on the Company's net income
(loss) and basic and diluted net income (loss) per common share would have been
the following:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-------------------------
<S> <C> <C>
1997 1998
---------- ------------
Net income (loss), as reported................... $1,182,146 $ (2,480,980)
Net income (loss), pro forma..................... 1,182,146 (2,480,980)
Basic income (loss) per share, as reported....... 0.07 (0.15)
Basic income (loss) per share, pro forma......... 0.07 (0.15)
Diluted income (loss) per share, as reported..... 0.07 (0.15)
Diluted income (loss) per share, pro forma....... 0.07 (0.15)
</TABLE>
The fair value of each option grant has been estimated on the date of grant
using the Black-Scholes option-pricing model with the following weighted average
assumptions:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-------------------
<S> <C> <C>
1997 1998
------- -------
Expected option lives..................................... 5 years 5 years
Risk-free interest rates.................................. 5.88% 5.04%
Expected volatility....................................... 99.89% 99.89%
Dividend yield............................................ 0% 0%
Fair value................................................ $0.85 $0.86
</TABLE>
On February 22, 1999, the Company's Board of Directors adopted and the
Company's shareholders approved the 1999 Stock Option/Stock Issuance Plan (the
"1999 Plan"). The 1999 Plan is divided into the following three separate equity
programs:
a) Discretionary Option Grant Program-under which eligible persons may, at
the discretion of the Plan Administrator, be granted options to purchase
shares of common stock.
F-28
<PAGE>
AGENCY.COM LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. STOCKHOLDERS' EQUITY (CONTINUED)
b) Stock Issuance Program-under which eligible persons may, at the
discretion of the Plan Administrator, be issued shares of common stock
directly, either through the immediate purchase of such shares or as a
bonus for services rendered.
c) Automatic Option Grant Program-under which eligible non-employee Board
members shall automatically receive options at periodic intervals to
purchase shares of common stock.
The maximum number of shares of common stock initially reserved for issuance
over the term of the 1999 Plan is 9,601,178 shares. The number of shares
available for issuance automatically increase on the first trading day of each
calendar year during the term of the 1999 Plan, beginning with the 2000 calendar
year (by an amount equal to 3% of the shares outstanding on the last trading day
of the preceding calendar year, but in no event shall any such annual increase
exceed 1,500,000 shares). No option shall have a term in excess of 10 years
measured from the option grant date.
In April 1999, the Company issued options to purchase 50,000 shares of
common stock at an exercise price of $1.225 per share, which was then the fair
market value of the Company's common stock, to an individual who agreed to serve
as a director of the Company upon the closing of the Company's initial public
offering. The options will only become exercisable at the time the director-
nominee is elected to serve as a director of the Company.
9. GEOGRAPHIC REPORTING
The Company began operations outside of the United States during 1997. A
summary of the Company's operations by geographical area as of December 31, 1997
and 1998 and for the years then ended is presented below:
As of and for the year ended December 31, 1997:
<TABLE>
<CAPTION>
UNITED STATES INTERNATIONAL CONSOLIDATED
------------- ------------- ------------
<S> <C> <C> <C>
Revenues............................ $12,151,636 $ 823,939 $12,975,575
Income (loss) from operations....... 2,263,938 (160,839) 2,103,099
Net income (loss)................... 1,233,208 (68,357) 1,164,851
Long--lived assets.................. 3,382,102 199,216 3,581,318
Current assets...................... 6,100,383 988,835 7,089,218
Other assets........................ 658,887 8,402 667,289
</TABLE>
F-29
<PAGE>
AGENCY.COM LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. GEOGRAPHIC REPORTING (CONTINUED)
As of and for the year ended December 31, 1998:
<TABLE>
<CAPTION>
UNITED STATES INTERNATIONAL CONSOLIDATED
------------- ------------- ------------
<S> <C> <C> <C>
Revenues............................ $18,936,199 $ 7,515,992 $26,452,191
Income (loss) from operations....... (2,562,168) 86,184 (2,475,984)
Net income (loss)................... (1,694,622) (113,049) (1,807,671)
Long--lived assets.................. 13,768,465 469,806 14,238,271
Current assets...................... 6,460,598 1,647,784 8,108,382
Other assets........................ 3,129,090 7,352 3,136,442
</TABLE>
As of and for the nine months ended September 30, 1999 (unaudited):
<TABLE>
<CAPTION>
Revenues. $43,276,409 $13,222,880 $56,499,289
<S> <C> <C> <C>
Income (loss) from operations....... (5,113,013) 861,552 (4,251,461)
Net income (loss)................... (7,426,931) 811,902 (6,615,029)
Long--lived assets.................. 62,803,362 1,482,216 64,285,578
Current assets...................... 31,512,175 6,044,590 37,556,765
Other assets........................ 4,426,054 209,703 4,635,757
</TABLE>
10. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
As of December 31, 1998 and September 30, 1999 (unaudited), respectively,
the Company was committed under operating leases, principally for office space
and equipment, expiring through 2003. Subsequent to December 31, 1998, the
Company entered into a a lease agreement for new office space for its
headquarters in New York and its Boston location. Certain leases are subject to
rent reviews and require payment of expenses under immaterial escalation
clauses. Rent expense was $71,000, $232,913 and $671,759, respectively, for the
three years ended December 31, 1998 and $503,819 and $2,134,000, respectively,
for the nine months ended September 30, 1998 and 1999 (unaudited). Future
minimum base rents under terms of noncancellable operating leases are as
follows:
<TABLE>
<S> <C>
Year ending December 31:
1999...................................................... $ 846,653
2000...................................................... 4,189,138
2001...................................................... 4,090,397
2002...................................................... 4,084,131
2003...................................................... 4,295,534
Thereafter................................................ 29,896,623
</TABLE>
F-30
<PAGE>
AGENCY.COM LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. COMMITMENTS AND CONTINGENCIES (CONTINUED)
EMPLOYMENT AGREEMENTS
In April 1999 the Company entered into employment agreements with Chan Suh,
Chief Executive Officer, and Kyle Shannon, Chief Creative Officer. Mr. Suh and
Mr. Shannon's agreements obligate the Company to pay an annual salary of
$155,000 and 150,000, respectively, through March 31, 2004. Under the provisions
of the agreements, if early termination occurs any options that would have
vested during this employment period are accelerated to vest and become
exercisable prior to the date of termination. The Company also has an employment
agreement with its President, North America whereby the executive receives an
annual salary of $150,000, entitled to receive an annual bonus of $100,000 and
is eligible for an annual discretionary bonus of up to $250,000. The Company
also made a restricted stock grant to this executive of 80,690 shares of common
stock in connection with the acquisition of ERI. These shares become
unrestricted in three equal amounts on each of the first three anniversaries of
the date of the grant. These shares have been considered additional purchase
price based upon a fair market value of $1.23 per share. In addition during
April 1999, the Company entered into employment agreements under similar terms
with five other key members of management that expire on various dates through
March 2004.
Future minimum compensation for all of these agreements is as follows.
<TABLE>
<S> <C>
Year ending December 31:
1999...................................................... $ 741,666
2000...................................................... 1,375,000
2001...................................................... 1,375,000
2002...................................................... 789,166
2003...................................................... 305,000
Thereafter................................................ 76,250
</TABLE>
LITIGATION
The Company, from time to time, becomes involved in various routine legal
proceedings in the ordinary course of its business. The Company believes that
the outcome of all pending legal proceedings and unasserted claims in the
aggregate will not have a material adverse effect on its consolidated results of
operations, consolidated financial position or liquidity.
11. CAPITAL LEASE OBLIGATIONS
At December 31, 1997 and 1998, the Company was committed under capital
leases, principally for computer equipment and office equipment, expiring
through 2003. The assets and liabilities under the capital leases are recorded
at the lower of the present value of minimum lease payments or the fair market
value of the assets. The assets are depreciated over their estimated useful
lives. The average interest rate on the capital leases is 5.6%.
F-31
<PAGE>
AGENCY.COM LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. CAPITAL LEASE OBLIGATIONS (CONTINUED)
Future minimum payments under the lease agreements are as follows:
<TABLE>
<S> <C>
Year ending December 31:
1999...................................................... $ 613,021
2000...................................................... 529,532
2001...................................................... 317,363
2002...................................................... 21,395
2003...................................................... 15,825
-----------
Total minimum lease payments.......................... 1,497,136
Less--Amounts representing interest....................... 84,279
Less--Current portion..................................... 564,536
-----------
Present value of net minimum lease payments........... $ 848,321
===========
</TABLE>
12. EMPLOYEE BENEFIT PLAN
The Company has a defined contribution plan covering all of its eligible
employees in the U.S. The Plan was effective from January 1, 1996 and is
qualified under Section 401(k) of the Internal Revenue Code. Employees may begin
participation on monthly enrollment dates provided that they have reached
21 years of age and 6 months of service. The Company may make matching and/or
profit sharing contributions to the plan at its discretion. Contribution expense
was $16,095 and $45,320, respectively, for the years ended December 31, 1997 and
1998 and $0 and $417,833, respectively, for each of the nine months ended
September 30, 1998 and 1999 (unaudited).
13. SUBSEQUENT EVENTS
The Company is pursuing an initial public offering of its securities. The
offering contemplates the sale of shares of common stock at an offering price of
$11.00 per share, before underwriting discounts and commissions and offering
expenses. The Company plans to use 35% of the net proceeds of this offering
subject to a maximum of $25 million to repay amounts borrowed under the term
loan portion of the new Omnicom credit facility (see below).
In November 1999, the Company entered into a new $85 million credit facility
with Omnicom Finance, a wholly owned subsidiary of Omnicom, which replaced the
Company's revolving credit lines and consolidates all of the Company's
previously outstanding indebtedness due to Omnicom. The credit facility provides
for a $25 million term loan, a $54 million revolving credit line and a
$6,000,000 lease credit support facility. Under the term sheet, the Company must
use 35% of the net proceeds from its initial public offering, up to a maximum of
$25 million, to repay amounts borrowed under the term loan. The remaining
amounts will be due in full on September 30, 2001. This credit facility bears
interest at the rate of Omnicom's commercial paper rate plus 1.25% and
terminates in September 2001.
F-32
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Eagle River Interactive:
We have audited the accompanying combined statements of operations, divisional
equity (deficit) and cash flows of Eagle River Interactive (formerly a division
of Mastering, Inc., the "Predecessor" see Note 1) for the year ended
December 31, 1996 and the period from January 1, 1997 through September 26,
1997. These financial statements are the responsibility of the management of
Eagle River Interactive Inc. 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 results of operations and cash flows of Eagle River
Interactive (formerly a division of Mastering, Inc.) for the year ended
December 31, 1996 and the period from January 1, 1997 through September 26, 1997
in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Denver, Colorado
July 19, 1999
F-33
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Eagle River Interactive Inc.:
We have audited the accompanying consolidated balance sheets of Eagle River
Interactive Inc. (a Delaware corporation) (the "Successor Company" see Note 1),
as of December 31, 1997 and 1998, and the related consolidated statements of
operations, stockholders' deficit and cash flows for the period from inception
(September 26, 1997) to December 31, 1997 and the year ended December 31, 1998.
These financial statements are the responsibility of the Companies' 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 Eagle River Interactive Inc. as
of December 31, 1997 and 1998, and the results of its operations and its cash
flows for the period from inception (September 26, 1997) to December 31, 1997
and the year ended December 31, 1998, in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
New York, New York
July 19, 1999
F-34
<PAGE>
EAGLE RIVER INTERACTIVE INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------- MARCH 31,
1997 1998 1999
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash...................................................... $ 632,000 $ 711,000 $ 683,000
Accounts receivable, net of allowance for doubtful
accounts of $184,000, $2,784,000 and $2,784,000
(unaudited), respectively............................... 3,600,000 4,525,000 521,000
Unbilled charges.......................................... 1,344,000 139,000 2,912,000
Prepaid expenses and other current assets................. 975,000 1,000 251,000
Due from affiliates....................................... -- 34,000 670,000
----------- ----------- -----------
Total current assets.................................. 6,551,000 5,410,000 5,037,000
Property and Equipment, net of accumulated depreciation and
amortization of $1,572,000, $2,888,000 and $3,280,000
(unaudited), respectively................................. 3,384,000 2,406,000 2,132,000
Goodwill, net of accumulated amortization of $1,076,000,
$5,398,000 and $6,479,000 (unaudited), respectively....... 11,889,000 7,567,000 6,486,000
Other Assets................................................ 64,000 52,000 43,000
----------- ----------- -----------
Total assets.......................................... $21,888,000 $15,435,000 $13,698,000
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities:
Accounts payable and accrued expenses..................... $ 4,966,000 $ 7,300,000 $ 4,139,000
Line of credit due to Omnicom............................. 3,128,000 2,160,000 5,162,000
Deferred revenue.......................................... 1,012,000 429,000 115,000
Current portion of capital lease obligations.............. 352,000 150,000 150,000
Management fee due to Omnicom Finance Inc................. -- 182,000 182,000
Due to affiliates......................................... -- 111,000 710,000
Other current liabilities................................. 208,000 259,000 414,000
----------- ----------- -----------
Total current liabilities............................. 9,666,000 10,591,000 10,872,000
Long-term Liabilities:
Due to Omnicom Finance Inc................................ 15,968,000 17,063,000 17,407,000
Capital lease obligations................................. 103,000 -- --
Other long-term liabilities............................... 81,000 -- --
----------- ----------- -----------
Total liabilities..................................... 25,818,000 27,654,000 28,279,000
----------- ----------- -----------
Commitments and Contingencies
Shareholders' Deficit:
Common stock, no par value, 1,500 shares authorized, 100
shares issued and outstanding, respectively............. -- -- --
Accumulated deficit....................................... (3,941,000) (12,194,000) (14,524,000)
Cumulative foreign currency translation................... 11,000 (25,000) (57,000)
----------- ----------- -----------
Total shareholders' deficit........................... (3,930,000) (12,219,000) (14,581,000)
----------- ----------- -----------
Total liabilities and shareholders' deficit........... $21,888,000 $15,435,000 $13,698,000
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-35
<PAGE>
EAGLE RIVER INTERACTIVE INC.
COMBINED/CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PREDECESSOR COMPANY SUCCESSOR COMPANY
------------------------------- ------------------------------------------------------------
PERIOD
PERIOD FROM FROM INCEPTION
JANUARY 1, (SEPTEMBER 26,
1997 1997) THREE MONTHS ENDED
YEAR ENDED THROUGH THROUGH YEAR ENDED MARCH 31,
DECEMBER 31, SEPTEMBER 26, DECEMBER 31, DECEMBER 31, -------------------------
1996 1997 1997 1998 1998 1999
-------------- -------------- --------------- -------------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Revenues................ $15,439,000 $ 12,927,000 $ 4,984,000 $23,442,000 $ 5,063,000 $ 5,072,000
Direct salaries and
costs................. 14,327,000 10,252,000 3,347,000 11,782,000 2,742,000 2,885,000
----------- ------------ ----------- ----------- ----------- -----------
Gross profit........ 1,112,000 2,675,000 1,637,000 11,660,000 2,321,000 2,187,000
General and
administrative........ 2,957,000 6,649,000 3,755,000 12,022,000 2,275,000 2,452,000
Sales and marketing..... 2,987,000 4,631,000 427,000 1,958,000 355,000 602,000
Amortization of
goodwill.............. -- -- 1,076,000 4,322,000 1,081,000 1,081,000
----------- ------------ ----------- ----------- ----------- -----------
Loss from
operations........ (4,832,000) (8,605,000) (3,621,000) (6,642,000) (1,390,000) (1,948,000)
Other expense, net...... 500,000 1,100,000 5,000 10,000 -- --
Interest expense net.... -- -- 315,000 1,601,000 368,000 382,000
----------- ------------ ----------- ----------- ----------- -----------
Loss before income
taxes............. (5,332,000) (9,705,000) (3,941,000) (8,253,000) (1,758,000) (2,330,000)
Benefit for income
taxes................. -- -- -- -- -- --
----------- ------------ ----------- ----------- ----------- -----------
Net loss............ ($5,332,000) ($ 9,705,000) ($3,941,000) ($8,253,000) ($1,758,000) ($2,330,000)
=========== ============ =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these combined/consolidated
statements.
F-36
<PAGE>
EAGLE RIVER INTERACTIVE INC.
COMBINED/CONSOLIDATED STATEMENTS OF DIVISIONAL EQUITY (DEFICIT)
AND STOCKHOLDERS' DEFICIT
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1996--
PREDECESSOR
COMPANY
------------
<S> <C>
Divisional Deficit, December 31, 1995....................... ($ 1,853,000)
Net loss for the period................................... (5,332,000)
Advances from Parent...................................... 13,664,000
------------
Divisional Equity, December 31, 1996........................ 6,479,000
Net loss for the period................................... (9,705,000)
Advances from Parent...................................... 5,140,000
------------
Divisional Equity, September 26, 1997....................... $ 1,914,000
============
</TABLE>
<TABLE>
<CAPTION>
PERIOD FROM INCEPTION (SEPTEMBER 26, 1997)
THROUGH DECEMBER 31, 1998--SUCCESSOR COMPANY
-------------------------------------------------------------------------
COMMON STOCK CUMULATIVE TOTAL
------------------- ACCUMULATED FOREIGN CURRENCY STOCKHOLDERS'
SHARES AMOUNT DEFICIT TRANSLATION DEFICIT
-------- -------- ------------- ----------------- ---------------
<S> <C> <C> <C> <C> <C>
Balance, September 26,
1997.................. -- $ -- $ -- $ -- $ --
Common stock issued in
connection with
acquisition........... 100 -- -- -- --
Foreign currency
translation
adjustment............ -- -- -- 11,000 11,000
Net loss.............. -- -- (3,941,000) -- (3,941,000)
--- ---- ------------ -------- ------------
Balance, December 31,
1997.................. 100 -- (3,941,000) 11,000 (3,930,000)
Foreign currency
translation
adjustment............ -- -- -- (36,000) (36,000)
Net loss.............. -- -- (8,253,000) -- (8,253,000)
--- ---- ------------ -------- ------------
Balance, December 31,
1998.................. 100 -- (12,194,000) (25,000) (12,219,000)
Foreign currency
translation
adjustment............ -- -- -- (32,000) (32,000)
Net loss
(unaudited)......... -- -- (2,330,000) -- (2,330,000)
--- ---- ------------ -------- ------------
Balance, March 31, 1999
(unaudited)........... 100 $ -- ($14,524,000) ($57,000) ($14,581,000)
=== ==== ============ ======== ============
</TABLE>
The accompanying notes are an integral part of these combined/consolidated
statements.
F-37
<PAGE>
EAGLE RIVER INTERACTIVE INC.
COMBINED/CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PREDECESSOR COMPANY SUCCESSOR COMPANY
---------------------------- ----------------------------------------------------------
PERIOD FROM
PERIOD FROM INCEPTION
JANUARY 1, (SEPTEMBER 26,
1997 1997) THREE MONTHS ENDED
YEAR ENDED THROUGH THROUGH YEAR ENDED MARCH 31,
DECEMBER 31, SEPTEMBER 26, DECEMBER 31, DECEMBER 31, -------------------------
1996 1997 1997 1998 1998 1999
------------ ------------- --------------- ------------ ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss............................ ($5,332,000) ($ 9,705,000) ($3,941,000) ($8,253,000) ($1,758,000) ($2,330,000)
Adjustments to reconcile net loss to
net cash provided by (used in)
operating activities:
Impairment of long-lived
assets........................ -- -- -- -- --
Loss on disposal of fixed
assets........................ -- -- 199,000 543,000 --
Write-off of software........... -- -- -- -- --
Write-off of prepaid expenses
and other current assets...... -- 344,000 -- -- -- --
Allowance for doubtful
accounts...................... -- 980,000 44,000 1,045,000 --
Amortization of goodwill........ -- -- 1,076,000 4,322,000 1,081,000 1,081,000
Depreciation and amortization... 1,096,000 1,086,000 234,000 1,686,000 391,000 393,000
Change in assets and
liabilities:
Increase (decrease) in
deferred revenue............ (60,000) 168,000 531,000 (583,000) 820,000 (314,000)
(Increase) decrease in
accounts receivable......... (2,444,000) 278,000 (846,000) (1,970,000) (1,283,000) 4,003,000
Increase (decrease) due
to/from affiliates.......... -- -- -- 77,000 -- (38,000)
(Increase) decrease in
unbilled charges............ (2,123,000) 219,000 330,000 1,205,000 (772,000) (2,774,000)
(Increase) decrease in prepaid
expenses and other current
assets...................... (143,000) 239,000 (814,000) 986,000 304,000 (238,000)
Increase (decrease) in other
current liabilities......... 58,000 (320,000) 77,000 233,000 82,000 155,000
Increase (decrease) in other
long-term liabilities....... -- -- (18,000) (81,000) (81,000) --
Increase (decrease) in
accounts payable and accrued
expenses.................... (599,000) 2,428,000 700,000 2,334,000 1,314,000 (3,161,000)
----------- ------------ ----------- ----------- ----------- -----------
Net cash (used in) provided
by operating activities... (9,547,000) (4,283,000) (2,428,000) 1,544,000 98,000 (3,223,000)
----------- ------------ ----------- ----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures................ (3,140,000) (677,000) (520,000) (1,251,000) (265,000) (119,000)
Acquisition of subsidiary........... (349,000) (26,000) -- -- -- --
Acquisition of software............. (241,000) -- -- -- -- --
----------- ------------ ----------- ----------- ----------- -----------
Net cash (used in) in
investing activities...... (3,730,000) (703,000) (520,000) (1,251,000) (265,000) (119,000)
----------- ------------ ----------- ----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments under capital lease
obligations....................... (117,000) (154,000) (34,000) (305,000) (142,000) --
Payments under note payable......... (270,000) -- -- -- -- --
Net change in due to/from
corporate......................... 13,664,000 5,140,000 -- -- -- --
Proceeds from issuance of long-term
debt and line of credit........... -- -- 3,596,000 19,451,000 3,033,000 8,005,000
Repayment of long-term debt and line
of credit......................... -- -- -- (19,324,000) (2,000,000) (4,660,000)
----------- ------------ ----------- ----------- ----------- -----------
Net cash provided by (used
in) financing
activities................ 13,277,000 4,986,000 3,562,000 (178,000) 891,000 3,345,000
----------- ------------ ----------- ----------- ----------- -----------
EFFECT OF EXCHANGE RATES ON CASH...... -- -- 11,000 (36,000) (34,000) (31,000)
----------- ------------ ----------- ----------- ----------- -----------
Net increase (decrease) in
cash...................... -- -- 625,000 79,000 690,000 (28,000)
----------- ------------ ----------- ----------- ----------- -----------
CASH AND CASH EQUIVALENTS, BEGINNING
OF PERIOD........................... -- -- 7,000 632,000 632,000 711,000
----------- ------------ ----------- ----------- ----------- -----------
CASH AND CASH EQUIVALENTS, END OF
PERIOD.............................. $ -- $ -- $ 632,000 $ 711,000 $ 1,322,000 $ 683,000
=========== ============ =========== =========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF NON CASH
INVESTING ACTIVITIES:
Equipment acquired under capital
leases............................ $ 452,000 -- -- -- -- --
</TABLE>
The accompanying notes are an integral part of these combined/consolidated
statements
F-38
<PAGE>
EAGLE RIVER INTERACTIVE INC.
NOTES TO COMBINED/CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
ORGANIZATION AND BUSINESS
Eagle River Interactive ("ERI") refers to the interactive marketing
solutions division of Eagle River Interactive, Inc., subsequently renamed
Mastering, Inc. ("Parent"). During 1996, the Parent completed a merger with
Graphic Media, Inc. ("GM"), which was accounted for as a pooling of interests.
In addition, during 1996, the Parent acquired SRC Localisation ("SRC"), a 99%
owned subsidiary, which is located in Paris, France. Collectively ERI, GM and
SRC are referred to as the "Predecessor." All significant intercompany accounts
and transactions have been eliminated in the accompanying financial statements.
For the year ended December 31, 1996, and for the period January 1, 1997
through September 26, 1997, the accompanying financial statements were derived
from the historical accounting records maintained by the Parent and were
prepared on the accrual basis of accounting. Historically, the Parent maintained
separate records of revenues of the Predecessor and direct expenses and costs
that were clearly identifiable for the Predecessor, were recorded as expenses of
the Predecessor. For purposes of the accompanying statements of operations, the
Predecessor has made an allocation of the expenses of centralized functions such
as human resources, in-house legal and other such shared services, based upon
the estimated expected usage of such services by the Predecessor. This
allocation was based on levels of relative employees, business activity and
similar measures, of the Predecessor as compared to the other businesses of the
Parent. No allocations of corporate expenses for corporate executives, corporate
functions and similar expenses were made. The results of operations for the
periods presented are not necessarily indicative of results to be expected in
the future.
The Predecessor created, developed and deployed interactive marketing
strategies to assist a variety of companies, primarily in the United States, in
communicating effectively with their targeted audiences. The Predecessor created
these strategies by combining its knowledge of leading technologies with its
creative expertise and strategic marketing experience.
On September 26, 1997, substantially all of the assets and liabilities of
the Predecessor were sold to a newly formed wholly-owned subsidiary of the
Omnicom Group Inc., which was subsequently renamed Eagle River
Interactive Inc., which will be referred to hereafter as the "Company" or
"Successor." The transaction was accounted for as a purchase transaction. The
purpose of the business and its operations remained the same after the
acquisition.
In April 1999, the Company was purchased by AGENCY.COM Ltd. ("AGENCY.COM")
under a merger agreement (Note 14).
All footnotes to follow for the year ended December 31, 1996, and for the
period from January 1, 1997 through September 26, 1997, will refer to the
Predecessor while the footnotes for the period from September 27, 1997 through
December 31, 1997, the year ended December 31, 1998 and the three months ended
March 31, 1998 and 1999 will refer to the Successor.
F-39
<PAGE>
EAGLE RIVER INTERACTIVE INC.
NOTES TO COMBINED/CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the operations of
Eagle River Interactive and its 99% owned subsidiary, SRC. All significant
intercompany accounts and transactions have been eliminated in consolidation.
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.
REVENUE RECOGNITION
Revenues are recognized as services are rendered on the
percentage-of-completion method of accounting based on the ratio of costs
incurred to total estimated costs. Unbilled charges represent labor costs
incurred and estimated earnings, production and other client reimbursable costs
in excess of related billings. Deferred revenues represent billings of
production and other client reimbursable out-of-pocket costs in excess of
revenues earned. Provisions for estimated losses on uncompleted contracts are
made in the period in which such losses are determined. Revenue from time and
material jobs is recognized on the basis of costs incurred during the period.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost or fair market value as determined
when acquired on September 26, 1997, net of accumulated depreciation and
amortization. Property and equipment are depreciated on a straight-line basis
over estimated useful lives of three to five years. Leasehold improvements and
equipment held under capital leases are amortized utilizing the straight-line
method over the lesser of the estimated useful life of the asset or the
remaining term of the related lease.
GOODWILL
Goodwill, which represents the excess of the purchase price over the fair
value of the net assets acquired on September 26, 1997, is presently being
amortized over a period of three years on a straight-line basis. Management has
evaluated the amortization period in the current period and has determined that
no impairment currently exists. This amortization period will be evaluated by
management on a continuing basis, and will be adjusted if the lives of the
related intangible assets are impaired.
F-40
<PAGE>
EAGLE RIVER INTERACTIVE INC.
NOTES TO COMBINED/CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
ACCOUNTING FOR LONG-LIVED ASSETS
The Predecessor and Successor account for long-lived assets under the
provisions of Statement of Financial Accounting Standards ("SFAS") No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of." This statement establishes financial accounting and reporting
standards for the impairment of long-lived assets, certain identifiable
intangibles, and goodwill related to those assets to be held and used, and for
long-lived assets and certain identifiable tangibles to be disposed of. The
Company reviews long-lived assets and certain identifiable intangibles to be
held and used for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset exceeds the fair value of the
asset. If other events or changes in circumstances indicate that the carrying
amount of an asset that the Company expects to hold and use may not be
recoverable, the Company will estimate the future cash flows expected to result
from the use of the asset and its eventual disposition. Future cash flows are
the future cash inflows expected to be generated by an asset less the future
cash outflows expected to be necessary to obtain those inflows. If the sum of
the expected future cash flows (undiscounted and without interest charges) is
less than the carrying amount of the asset, the Company will recognize an
impairment loss equal to the amount by which the carrying amount of the asset
exceeds the fair value of the asset. The fair value of the asset is the amount
at which the asset could be bought or sold in a current transaction between
willing parties or can be determined by calculating the present value of
estimated expected future cash flows using a discount rate commensurate with the
risks involved. Management has performed a review of all long-lived assets and
has determined that no impairment of the respective carrying value has occurred
at December 31, 1998 and March 31, 1999 (unaudited).
INCOME TAXES
As a division of Mastering, Inc., the Predecessor was not directly subject
to Federal, state and local income taxes. Provisions for deferred taxes were not
reflected on the Predecessor's books and records, but were reflected on
Mastering, Inc.'s books and records. Mastering, Inc. and its subsidiaries filed
a consolidated Federal income tax return. SRC filed a separate return in Paris.
The Predecessor's results of operations were combined with those of the
remainder of the Parent for tax reporting purposes. The Predecessor was
allocated a portion of the Parent's tax benefit or provision determined as if
the Predecessor was a separate tax paying entity. Because the Predecessor has
reported net losses since inception, no tax benefit or provision was recorded.
Beginning September 26, 1997, the Successor became fully subject to income
taxes in accordance with SFAS No. 109, "Accounting for Income Taxes." Under SFAS
No. 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 tax bases for
operating profit and tax liability carryforward. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those
F-41
<PAGE>
EAGLE RIVER INTERACTIVE INC.
NOTES TO COMBINED/CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
temporary differences are expected to be recovered or settled. The effect on
deferred tax assets or liabilities of a change in tax rates is recognized in the
period that the tax change occurs.
FOREIGN CURRENCY TRANSLATION
All assets and liabilities of the Company's foreign subsidiary are
translated into U.S. dollars at fiscal year-end exchange rates. Income and
expense items are translated at average exchange rates prevailing during the
fiscal year. The resulting translation adjustments are recorded as a component
of shareholders' deficit in the accompanying consolidated financial statements.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash, accounts receivable, due to/from affiliates,
accounts payable and the line of credit approximate fair value due to the
short-term maturity of these instruments. The carrying amounts of due to
Ominicom Finance Inc. and capital lease obligations approximate fair value.
BUSINESS CONCENTRATIONS AND CREDIT RISK
Financial instruments, which subject the Company to concentrations of credit
risk, consist primarily of cash and trade accounts receivable. The Company
maintains cash with various financial institutions. The Company performs
periodic evaluations of the relative credit standing of these institutions. The
Company's clients are primarily concentrated in the United States. The Company
performs ongoing credit evaluations, generally does not require collateral, and
establishes an allowance for doubtful accounts based upon factors surrounding
the credit risk of customers, historical trends and other information.
For the year ended December 31, 1996 and the period from January 1, 1997
through September 26, 1997 there were no customers whose revenues represented a
significant amount of total revenues.
For the period from September 27, 1997 through December 31, 1997, 1 client
accounted for 24% of total revenues.
For the year ended December 31, 1998, 1 client accounted for 21% of total
revenues.
For the three months ended March 31, 1998, 1 client accounted for 25% of
total revenues.
For the three months ended March 31, 1999, 2 clients accounted for 24% and
12%, respectively, of total revenues.
As of December 31, 1997, 1 client accounted for 24% of total accounts
receivable.
As of December 31, 1998, 3 clients accounted for 21%, 20% and 17%,
respectively, of total accounts receivable.
F-42
<PAGE>
EAGLE RIVER INTERACTIVE INC.
NOTES TO COMBINED/CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
As of March 31, 1999, 1 client accounted for 14% of total accounts
receivable.
COMPREHENSIVE INCOME
During 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive
Income," which established standards for reporting and displaying comprehensive
income and its components in a financial statement that is displayed with the
same prominence as other financial statements. The components of comprehensive
income are as follows:
<TABLE>
<CAPTION>
SUCCESSOR COMPANY
-------------------------------------------
PREDECESSOR COMPANY PERIOD FROM
---------------------------------------------- INCEPTION
YEAR ENDED PERIOD FROM (SEPTEMBER 26, 1997) YEAR ENDED
DECEMBER 31, JANUARY 1, 1997 THROUGH THROUGH DECEMBER 31, DECEMBER 31,
1996 SEPTEMBER 26, 1997 1997 1998
------------------ ------------------------- ---------------------- ------------------
<S> <C> <C> <C> <C>
Net loss................ $(5,332,000) $ (9,705,000) $(3,941,000) $(8,253,000)
Foreign currency
translation
adjustment............ -- -- 11,000 (36,000)
----------- ------------ ----------- -----------
Comprehensive loss.. $(5,332,000) $ (9,705,000) $(3,930,000) $(8,289,000)
=========== ============ =========== ===========
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------------
1998 1999
----------- ------------
(UNAUDITED)
<S> <C> <C>
Net loss.................................................... $(1,758,000) $ (2,330,000)
Foreign currency translation adjustment..................... (9,000) (32,000)
----------- ------------
Comprehensive loss...................................... $(1,767,000) $ (2,362,000)
=========== ============
</TABLE>
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 131, "Disclosures About Segments of an Enterprise and Related Information."
This statement establishes standards for the way public business enterprises
report information about operating segments in annual financial statements and
requires that those enterprises report selected information about operating
segments in interim financial reports issued to shareholders. The statement also
establishes standards for related disclosure about products and services,
geographic areas and major customers. This statement is effective for financial
statements for periods beginning after December 15, 1997 and need not be applied
to interim periods in the initial year of application. Comparative information
for earlier years presented is to be restated. The Company currently believes
that it operates in one segment and that the adoption of SFAS No. 131 will not
materially affect the Company's current disclosure of geographic information
(Note 9).
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
F-43
<PAGE>
EAGLE RIVER INTERACTIVE INC.
NOTES TO COMBINED/CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
Use" ("SOP 98-1"), which 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. SOP 98-1
is effective for fiscal years beginning after December 31, 1998. The Company
does not expect the adoption of SOP 98-1 to have a material effect on its
financial statements.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivatives and
Hedging Activities," which establishes accounting and reporting standards of
derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities. The Company does not currently
engage in derivative activity and does not expect the adoption of this standard
to have a material effect on the Company's results of consolidated operations,
financial position or cash flows.
In July 1999, the FASB approved SFAS No. 137, "Accounting for Derivative
Instruments and Hedging Activities--Deferral of the Effective Date of FASB
Statement No. 133", which amends SFAS No. 133 to be effective for all fiscal
quarters of all fiscal years beginning after June 15, 2000.
UNAUDITED FINANCIAL STATEMENTS
The unaudited consolidated financial information included herein as of
March 31, 1999 and for the three months ended March 31, 1998 and 1999, have been
prepared in accordance with generally accepted accounting principles for interim
financial statements. In the opinion of the Company, these unaudited
consolidated financial statements, reflect all adjustments necessary, consisting
of normal recurring adjustments, for a fair presentation of such data on a basis
consistent with that of the audited data presented herein. The consolidated
results for interim periods are not necessarily indicative of the results
expected for a full year.
2. MERGER
On June 21, 1996, pursuant to an Agreement and Plan of Merger, the Parent
completed a merger of a wholly-owned subsidiary with GM, an Oregon corporation.
As a result of the merger, GM became a wholly-owned subsidiary of the Parent and
a component of the Predecessor. The business combination was accounted for by
the Parent as a pooling of interests. The Parent incurred approximately $500,000
to complete the GM merger, which has been reflected as Other Expense in the
accompanying 1996 statement of operations.
The merger was accounted for as a pooling of interests and, accordingly, the
historical financial statements for the Parent and GM for periods prior to
consummation of the merger were restated as though the companies had been
combined for all periods reported. The Predecessor's financial statements have
been correspondingly restated.
F-44
<PAGE>
EAGLE RIVER INTERACTIVE INC.
NOTES TO COMBINED/CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. MERGER (CONTINUED)
The following table provides information about revenues and earnings
reported by the Predecessor prior to the merger for the six months ended
June 30, 1996:
<TABLE>
<CAPTION>
ERI GM TOTAL
---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C>
Revenues............................................... $6,971,000 $2,519,000 $9,490,000
---------- ---------- ----------
Net loss............................................... $ (14,000) $ (150,000) $ (164,000)
========== ========== ==========
</TABLE>
3. RELATED PARTY TRANSACTIONS
OMNICOM FINANCE INC.
In September 1997, Omnicom Finance Inc. ("OFI"), a wholly-owned subsidiary
of Omnicom, loaned the Company $15,500,000 to acquire the assets of the
interactive services business of Mastering, Inc., then known as Eagle River
Interactive. This amount bears interest at the rate charged by Omnicom to its
subsidiaries under Omnicom's cash management program ("the Applicable Rate"),
which was 6.85%, 6.00%, 6.63% and 5.93% as of December 31, 1997 and 1998, and
for the three months ended March 31, 1998 and 1999, respectively.
In September 1997, OFI agreed to provide a line of credit to the Company.
Amounts borrowed under the line of credit bear interest at the rate then in
effect charged by Omnicom to its subsidiaries under Omnicom's cash management
program which ranged from 6.63% to 6.85%, 6.00% to 6.70%, 6.6% to 6.65% and
5.91% to 5.95% for the years ended December 31, 1997 and 1998 and for the three
months ended March 31, 1998 and 1999, respectively. The Company had
approximately $3,128,000, $2,160,000 and $5,162,000 of the line of credit
outstanding at December 31, 1997 and 1998 and March 31, 1999 (unaudited),
respectively. All outstanding amounts are repayable on demand.
Interest expense on all amounts due OFI amounted to approximately $315,000
and $1,601,000 for the years ended December 31, 1997 and 1998, respectively, and
$368,000 and $382,000 for the three months ended March 31, 1998 and 1999,
respectively.
On May 15, 1998, Omnicom entered into a letter of credit guarantee, not to
exceed approximately $645,000 on behalf of the Company. Under the terms of the
agreement, Omnicom guarantees the payment of all sums under one of ERI's leases
for office space. The letter of credit expires on May 31, 2001.
DUE FROM/TO AFFILIATES
The Company provides and receives consulting services from/to affiliated
companies.
F-45
<PAGE>
EAGLE RIVER INTERACTIVE INC.
NOTES TO COMBINED/CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. RELATED PARTY TRANSACTIONS (CONTINUED)
Due from affiliates consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, 1998 MARCH 31, 1999
----------------- --------------
(UNAUDITED)
<S> <C> <C>
AGENCY.COM.................................................. $34,000 $ --
Online Magic Limited........................................ -- 366,000
Quadris Consulting, Inc..................................... -- 234,000
Other affiliates............................................ -- 70,000
------- --------
$34,000 $670,000
======= ========
</TABLE>
Due to affiliates consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, 1998 MARCH 31, 1999
----------------- --------------
(UNAUDITED)
<S> <C> <C>
Interactive Solutions Inc................................... $111,000 $ 51,000
AGENCY.COM.................................................. -- 659,000
-------- --------
$111,000 $710,000
======== ========
</TABLE>
There were no outstanding amounts due from/to related parties as of
December 31, 1997.
4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------- MARCH 31,
1997 1998 1999
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Software............................................. $ 793,000 $ 833,000 $ 870,000
Furniture and fixtures............................... 2,473,000 3,032,000 3,054,000
Leasehold improvements............................... 1,690,000 1,429,000 1,488,000
----------- ----------- -----------
Total property and equipment..................... 4,956,000 5,294,000 5,412,000
Less--Accumulated depreciation and amortization...... (1,572,000) (2,888,000) (3,280,000)
----------- ----------- -----------
Property and equipment, net...................... $ 3,384,000 $ 2,406,000 $ 2,132,000
=========== =========== ===========
</TABLE>
Depreciation and amortization expense was approximately $1,096,000 and
$1,086,000 for the year ended December 31, 1996 and for the period from
January 1, 1997 through September 26, 1997, respectively. Depreciation and
amortization expense was approximately $234,000, $1,686,000, $391,000 and
$393,000 for the period September 27, 1997 through December 31, 1997, the year
ended 1998 and for the three months ended March 31, 1998 and 1999 (unaudited),
respectively.
F-46
<PAGE>
EAGLE RIVER INTERACTIVE INC.
NOTES TO COMBINED/CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. GOODWILL
Goodwill consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------- MARCH 31,
1997 1998 1999
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Goodwill............................................ $12,965,000 $12,965,000 $12,965,000
Less--Accumulated amortization...................... (1,076,000) (5,398,000) (6,479,000)
----------- ----------- -----------
Goodwill, net................................... $11,889,000 $ 7,567,000 $ 6,486,000
=========== =========== ===========
</TABLE>
Amortization expense was approximately $1,076,000 and $4,322,000,
respectively, for the years ended December 31, 1997 and 1998 and $1,081,000 and
$1,081,000, respectively, for the three months ended March 31, 1998 and 1999.
The Predecessor did not have any goodwill or related amortization expense
prior to September 26, 1997.
6. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------ MARCH 31,
1997 1998 1999
----------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Accounts payable...................................... $ 376,000 $1,474,000 $ 429,000
Accrued stay bonuses.................................. 1,206,000 641,000 --
Accrued project costs................................. 327,000 561,000 --
Accrued merger expenses............................... 379,000 -- --
Accrued vacation...................................... 254,000 221,000 101,000
Accrued professional fees............................. -- 364,000 364,000
Accrued expenses...................................... 2,424,000 4,039,000 3,245,000
---------- ---------- ----------
Total............................................. $4,966,000 $7,300,000 $4,139,000
========== ========== ==========
</TABLE>
There were no other individual items greater than 5% of current liabilities
as of December 31, 1997, December 31, 1998 and March 31, 1999 (unaudited).
F-47
<PAGE>
EAGLE RIVER INTERACTIVE INC.
NOTES TO COMBINED/CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. INCOME TAXES
Loss before income taxes and the provision for (benefit from) income taxes
consisted of the amounts shown below:
<TABLE>
<CAPTION>
PERIOD
FROM INCEPTION
(SEPTEMBER 26, 1997) THREE MONTHS
THROUGH YEAR ENDED ENDED MARCH 31,
DECEMBER 31, DECEMBER 31, -------------------------
1997 1998 1998 1999
-------------------- ------------ ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Income (loss) before income taxes:
Domestic........................ $(3,773,000) $(8,201,000) $(1,794,000) $(2,338,000)
International................... (168,000) (52,000) 36,000 8,000
----------- ----------- ----------- -----------
$(3,941,000) $(8,253,000) $(1,758,000) $(2,330,000)
=========== =========== =========== ===========
(Benefit from) income taxes:
Current--Federal................ $ (770,000) $(1,798,000) $ (356,000) $ (508,000)
Deferred--Federal............... (539,000) (1,064,000) (267,000) (303,000)
Valuation allowance............. 1,309,000 2,862,000 623,000 811,000
----------- ----------- ----------- -----------
$ -- $ -- $ -- $ --
=========== =========== =========== ===========
</TABLE>
A reconciliation of the difference between the statutory U.S. Federal Income
Tax Rate and the Company's effective tax rate follows:
<TABLE>
<CAPTION>
PERIOD FROM INCEPTION
(SEPTEMBER 26, 1997) THREE MONTHS
THROUGH YEAR ENDED ENDED MARCH 31,
DECEMBER 31, DECEMBER 31, -------------------------
1997 1998 1998 1999
---------------------- ------------ ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Statutory Federal income
Tax Rate........................ $(1,380,000) $(2,889,000) $ (615,000) $ (816,000)
International operations........ 71,000 27,000 (8,000) 5,000
Valuation allowance............. 1,309,000 2,862,000 623,000 811,000
----------- ----------- ----------- -----------
Effective rate................ $ -- $ -- $ -- $ --
=========== =========== =========== ===========
</TABLE>
F-48
<PAGE>
EAGLE RIVER INTERACTIVE INC.
NOTES TO COMBINED/CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. INCOME TAXES (CONTINUED)
The tax effects of temporary differences that give rise to a significant
portion of the deferred income tax assets (liabilities), net, are as follows:
<TABLE>
<CAPTION>
PERIOD FROM INCEPTION
(SEPTEMBER 26, 1997)
THROUGH YEAR ENDED
DECEMBER 31, DECEMBER 31,
1997 1998 MARCH 31, 1999
---------------------- ------------ --------------
(UNAUDITED)
<S> <C> <C> <C>
Deferred tax assets:
Goodwill amortization...................... $298,000 $1,222,000 $1,525,000
Allowance for doubtful accounts............ 288,000 366,000 366,000
Other...................................... 15,000 15,000 15,000
-------- ---------- ----------
Total deferred tax assets.................... 601,000 1,603,000 1,906,000
-------- ---------- ----------
Deferred tax liabilities:
Other...................................... (62,000) -- --
-------- ---------- ----------
Total deferred tax liabilities............... (62,000) -- --
Less: Valuation allowance.................... (539,000) (1,603,000 (1,906,000)
-------- ---------- ----------
Net deferred tax asset....................... $ -- $ -- $ --
======== ========== ==========
</TABLE>
Deferred income taxes are provided for the temporary difference between the
financial reporting basis and tax basis of the Company's assets and liabilities.
Deferred tax assets result principally from recording certain expenses in the
financial statements, which are not currently deductible for tax purposes and
differences between the tax and book basis of assets and liabilities recorded in
connection with the acquisitions. Deferred tax liabilities result principally
from expenses which are currently deductible for tax purposes, but have not yet
been expensed in the financial statements.
The Company has concluded that it is probable that it will be able to
realize these net deferred tax assets in future periods.
8. STOCKHOLDERS' DEFICIT
The Company has 1,500 authorized shares of Common Stock, no par value, of
which 100 were issued and outstanding as of December 31, 1997 and 1998 and
March 31, 1999 (unaudited).
F-49
<PAGE>
EAGLE RIVER INTERACTIVE INC.
NOTES TO COMBINED/CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. GEOGRAPHIC REPORTING
The Company began operations outside of the United States during 1996. A
summary of the Company's operations and financial position by geographical area
is presented below:
For the period January 1, 1997 through September 26, 1997:
<TABLE>
<CAPTION>
UNITED STATES INTERNATIONAL CONSOLIDATED
------------- ------------- ------------
<S> <C> <C> <C>
Revenues........................................... $ 12,422,000 $ 505,000 $ 12,927,000
Income (loss) from operations...................... (10,415,000) (328,000) (10,743,000)
Net income (loss).................................. (11,850,000) 7,000 (11,843,000)
</TABLE>
For the period September 26, 1997 through December 31, 1997 and as of
December 31, 1997:
<TABLE>
<CAPTION>
UNITED STATES INTERNATIONAL CONSOLIDATED
------------- ------------- ------------
<S> <C> <C> <C>
Revenues........................................... $ 4,791,000 $ 193,000 $ 4,984,000
Income (loss) from operations...................... (3,459,000) (162,000) (3,621,000)
Net income (loss).................................. (3,773,000) (168,000) (3,941,000)
Long-lived assets.................................. 15,189,000 84,000 15,273,000
Current assets..................................... 6,322,000 229,000 6,551,000
Other assets....................................... 45,000 19,000 64,000
</TABLE>
As of and for the year ended December 31, 1998:
<TABLE>
<CAPTION>
UNITED STATES INTERNATIONAL CONSOLIDATED
------------- ------------- ------------
<S> <C> <C> <C>
Revenues........................................... $ 21,875,000 $1,567,000 $ 23,442,000
Income (loss) from operations...................... (6,601,000) (41,000) (6,642,000)
Net income (loss).................................. (8,201,000) (52,000) (8,253,000)
Long-lived assets.................................. 9,868,000 105,000 9,973,000
Current assets..................................... 4,947,000 463,000 5,410,000
Other assets....................................... 32,000 20,000 52,000
</TABLE>
As of and for the three months ended March 31, 1999 (unaudited):
<TABLE>
<CAPTION>
UNITED STATES INTERNATIONAL CONSOLIDATED
------------- ------------- ------------
<S> <C> <C> <C>
Revenues........................................... $ 4,575,000 $ 497,000 $ 5,072,000
Income (loss) from operations...................... (1,956,000) 8,000 (1,948,000)
Net income (loss).................................. (2,338,000) 8,000 (2,330,000)
Long-lived assets.................................. 8,501,000 117,000 8,618,000
Current assets..................................... 4,700,000 337,000 5,037,000
Other assets....................................... 26,000 17,000 43,000
</TABLE>
F-50
<PAGE>
EAGLE RIVER INTERACTIVE INC.
NOTES TO COMBINED/CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Company is committed under operating leases, principally for office
space. Certain leases are subject to rent reviews and require payment of
expenses under escalation clauses. Rent expense was approximately $281,000,
$1,070,000, $288,000 and $261,000 for the period from September 27, 1997 through
December 31, 1997, the year ended December 31, 1998 and for the three months
ended March 31, 1998 and 1999 (unaudited), respectively. Future minimum base
rents under terms of noncancelable operating leases are as follows:
<TABLE>
<S> <C>
1999........................................................ $1,244,000
2000........................................................ 1,259,000
2001........................................................ 984,000
2002........................................................ 688,000
2003........................................................ 634,000
Thereafter.................................................. 2,493,000
----------
$7,302,000
==========
</TABLE>
LITIGATION
The Company, from time to time, becomes involved in various routine legal
proceedings in the ordinary course of its business. The Company believes that
the outcome of all pending legal proceedings and unasserted claims in the
aggregate will not have a material adverse effect on its consolidated results of
operations, consolidated financial position or liquidity.
11. CAPITAL LEASE OBLIGATIONS
At December 31, 1998, the Company was committed under capital leases,
principally for computer equipment and office equipment. The assets and
liabilities under the capital leases are recorded at the lower of the present
value of minimum lease payments or the fair market value of the assets. The
assets are depreciated over their estimated useful lives. The interest rate on
the capital leases ranges from 5.00% to 10.25%.
Future minimum payments under the lease agreements are as follows:
<TABLE>
<S> <C>
Year ending December 31:
1999........................................................ $165,000
--------
Total minimum lease payments............................ 165,000
Less--Amounts representing interest......................... 15,000
--------
Present value of net minimum lease payments............. $150,000
========
</TABLE>
F-51
<PAGE>
EAGLE RIVER INTERACTIVE INC.
NOTES TO COMBINED/CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. EMPLOYEE BENEFIT PLAN
The Company has a defined contribution plan covering all of its eligible
employees in the U.S. The Plan became effective on October 1, 1997 and is
qualified under Section 401(k) of the Internal Revenue Code of 1996. Employees
may begin participation on monthly enrollment dates provided that they have
completed three months of service. The Company may make matching and/or profit
sharing contributions to the Plan at its discretion.
Contribution expense was $24,000, $225,000, $64,000, and $57,000 for the
period September 27, 1997 through December 31, 1997, the year ended
December 31, 1998 and for the three months ended March 31, 1998 and 1999
(unaudited), respectively.
13. ORGANIZATIONAL REALIGNMENT
In the second quarter of 1997 the Parent completed an organizational
realignment, which included moving the Parent's corporate office to Scottsdale,
Arizona and the Predecessor's headquarters to Chicago, Illinois. The Predecessor
incurred approximately $1.1 million of expenses in connection with the
realignment for severance charges, moving costs, and similar charges, which was
recorded in Other Expense in the accompanying statement of operations for the
period from January 1, 1997 through September 26, 1997. Substantially all of
this amount was disbursed prior to the sale to Omnicom Group on September 26,
1997.
14. SUBSEQUENT EVENT
Pursuant to an Agreement and Plan of Merger dated April 28, 1999, the
Company was acquired by AGENCY.COM effective April 1, 1999. As a result of the
sale, the separate existence of the Company ceased. Under the merger agreement,
the 100 outstanding shares of the Company's common stock was converted into
3,659,548 of AGENCY.COM common shares and a warrant to purchase 4,328,752
AGENCY.COM common shares.
F-52
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Interactive Solutions, Inc.:
We have audited the accompanying consolidated balance sheets of Interactive
Solutions, Inc. (a Massachusetts corporation) and subsidiary as of December 31,
1997 and 1998, and the related consolidated statements of operations,
stockholders' equity (deficit) and cash flows for each of the three years ended
December 31, 1998. 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 Interactive Solutions, Inc. and
subsidiary as of December 31, 1997 and 1998, and the results of their operations
and their cash flows for each of the three years ended December 31, 1998, in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
New York, New York
July 16, 1999
F-53
<PAGE>
INTERACTIVE SOLUTIONS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------ MARCH 31,
1997 1998 1999
---------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents.......................... $ 422,114 $ 880,663 $ 325,279
Accounts receivable, net of allowance for doubtful
accounts of $37,481, $310,000 and $310,000
(unaudited), respectively........................ 1,301,208 2,871,281 810,562
Unbilled charges................................... 206,277 219,228 3,281,020
Prepaid expenses and other current assets.......... 491 173,359 --
Due from affiliates................................ -- 351,770 --
Income tax receivable.............................. 54,262 147,992 147,992
---------- ----------- -----------
Total current assets........................... 1,984,352 4,644,293 4,564,853
Property And Equipment, net of accumulated
depreciation and amortization of $92,787,
$388,061 and $485,003 (unaudited),
respectively..................................... 357,539 1,109,914 1,026,136
Goodwill, net of accumulated amortization of $0,
$1,953,783 and $3,233,779 (unaudited),
respectively..................................... -- 5,450,026 14,446,736
Deferred Tax Assets.................................. 258,550 1,798,932 2,254,479
Other Assets......................................... -- 33,545 52,025
---------- ----------- -----------
Total assets................................... $2,600,441 $13,036,710 $22,344,229
========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Accounts payable and accrued expenses.............. $ 627,855 $ 2,186,909 $ 1,298,297
Due to Omnicom Finance Inc......................... -- 2,358,106 2,786,024
Deferred revenue................................... 618,440 519,320 828,745
Due to affiliates.................................. -- -- 305,316
Deferred tax liabilities........................... 157,987 94,893 96,938
---------- ----------- -----------
Total current liabilities...................... 1,404,282 5,159,228 5,315,320
========== =========== ===========
Due To Omnicom Finance Inc........................... 828,346 9,737,645 9,904,727
---------- ----------- -----------
Commitments and Contingencies
Stockholders' Equity (Deficit):
Common stock, $.01 par value, 7,000,000 shares
authorized, 4,500,000, 4,505,500 and 4,505,500
(unaudited) shares issued and outstanding,
respectively..................................... 45,000 45,055 45,055
Additional paid-in capital......................... 486,375 495,120 10,771,825
Accumulated deficit................................ (163,562) (2,400,338) (3,692,698)
---------- ----------- -----------
Total stockholders' equity (deficit)........... 367,813 (1,860,163) 7,124,182
---------- ----------- -----------
Total liabilities and shareholders' equity
(deficit).................................... $2,600,441 $13,036,710 $22,344,229
========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-54
<PAGE>
INTERACTIVE SOLUTIONS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
------------------------------------- ------------------------
1996 1997 1998 1998 1999
---------- ---------- ----------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues........................................ $1,513,027 $4,187,300 $15,370,470 $1,805,075 $ 3,598,106
Direct Salaries And Costs....................... 803,991 2,432,179 9,659,366 1,256,519 2,207,841
---------- ---------- ----------- ---------- -----------
Gross profit................................ 709,036 1,755,121 5,711,104 548,556 1,390,265
General And Administrative...................... 385,396 1,467,918 6,220,344 780,152 1,509,291
Sales And Marketing............................. 66,028 692,288 482,952 84,697 39,898
Amortization Of Goodwill........................ -- -- 1,953,783 102,771 1,279,996
Depreciation And Amortization................... 12,819 79,969 295,274 36,235 96,942
---------- ---------- ----------- ---------- -----------
Income (loss) from operations................. 244,793 (485,054) (3,241,249) (455,299) (1,535,862)
Interest Expense, net........................... -- 22,444 599,003 45,464 210,000
---------- ---------- ----------- ---------- -----------
Income (loss) before (provision) benefit for
income taxes................................ 244,793 (507,498) (3,840,252) (500,763) (1,745,862)
(Provision) Benefit For Income Taxes............ (100,192) 199,335 1,603,476 206,430 453,502
---------- ---------- ----------- ---------- -----------
Net income (loss)......................... $ 144,601 $ (308,163) $(2,236,776) $ (294,333) $(1,292,360)
========== ========== =========== ========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-55
<PAGE>
INTERACTIVE SOLUTIONS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
TOTAL
COMMON STOCK ADDITIONAL RETAINED STOCKHOLDERS'
-------------------- PAID-IN EARNINGS EQUITY
SHARES AMOUNT CAPITAL (DEFICIT) (DEFICIT)
--------- -------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1996....... 4,500,000 $45,000 $ (13,625) $ -- $ 31,375
Capital contribution......... -- -- 500,000 -- 500,000
Net income................... -- -- -- 144,601 144,601
--------- ------- ----------- ----------- -----------
Balance, December 31, 1996..... 4,500,000 45,000 486,375 144,601 675,976
Net income................... -- -- -- (308,163) (308,163)
--------- ------- ----------- ----------- -----------
Balance, December 31, 1997..... 4,500,000 45,000 486,375 (163,562) 367,813
Exercise of stock options.... 5,500 55 8,745 -- 8,800
Net loss..................... -- -- -- (2,236,776) (2,236,776)
--------- ------- ----------- ----------- -----------
Balance, December 31, 1998..... 4,505,500 45,055 495,120 (2,400,338) (1,860,163)
Allocation from parent of
costs over fair value of
assets acquired............ -- -- 10,276,705 -- 10,276,705
Net loss (unaudited)......... -- -- -- (1,292,360) (1,292,360)
--------- ------- ----------- ----------- -----------
Balance, March 31, 1999
(Unaudited).................. 4,505,500 $45,055 $10,771,825 $(3,692,698) $ 7,124,182
========= ======= =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-56
<PAGE>
INTERACTIVE SOLUTIONS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
----------------------------------- -------------------------
1996 1997 1998 1998 1999
--------- --------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)............................... $ 144,601 $(308,163) $(2,236,776) $ (294,333) $(1,292,360)
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities-
Amortization of goodwill........................ -- -- 1,953,783 102,771 1,279,996
Depreciation and amortization................... 12,819 79,969 295,274 36,235 96,942
Allowance for doubtful accounts................. 6,000 86,481 261,537 59,509 --
Changes in operating assets and liabilities:
Accounts receivable......................... (402,331) (730,680) (72,425) (611,044) 2,060,719
Unbilled charges............................ -- (206,277) 376,037 287,205 (3,061,792)
Prepaid expenses and other current assets... (557) 66 (172,868) (39,176) 173,359
Income tax receivable....................... (82,886) (54,262) (93,730) -- --
Due from affiliates......................... -- -- (351,770) -- 657,086
Deferred tax assets......................... -- (175,664) (1,041,037) (208,473) (455,547)
Other assets................................ (528) 836 35,566 35,866 (18,480)
Accounts payable and accrued expenses....... 66,634 561,221 929,954 281,316 (888,613)
Deferred revenue............................ 123,787 494,653 (485,975) 122,952 309,425
Deferred tax liabilities.................... 181,657 (23,670) (562,439) 2,044 2,045
--------- --------- ----------- ----------- -----------
Net cash provided by (used in) operating
activities...................................... 49,196 (275,490) (1,164,869) (225,128) (1,137,220)
--------- --------- ----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions, net of cash acquired.............. -- (300,000) (8,827,538) (8,827,538) --
Capital expenditures............................ (98,403) (281,635) (825,249) (111,999) (13,164)
--------- --------- ----------- ----------- -----------
Net cash used in investing activities..... (98,403) (581,635) (9,652,787) (8,939,537) (13,164)
--------- --------- ----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings from Omnicom Finance Inc.:........... -- 828,346 11,267,405 9,451,463 595,000
Proceeds from exercise of stock option.......... -- -- 8,800 --
Proceeds from capital contribution.............. 500,000 -- -- -- --
--------- --------- ----------- ----------- -----------
Net cash provided by financing activities..... 500,000 828,346 11,276,205 9,451,463 595,000
--------- --------- ----------- ----------- -----------
Net increase (decrease) in cash and cash
equivalents................................. 450,793 (28,779) 458,549 286,798 (555,384)
CASH AND CASH EQUIVALENTS, beginning of year...... 100 450,893 422,114 422,114 880,663
--------- --------- ----------- ----------- -----------
CASH AND CASH EQUIVALENTS, end of year............ $ 450,893 $ 422,114 $ 880,663 $ 708,912 $ 325,279
========= ========= =========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for-
Income taxes.................................. $ 160,400 $(104,620) $ 62,200 $ -- $ --
Interest...................................... -- -- 37,598 -- --
========= ========= =========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING
ACTIVITY:
Increase in goodwill resulting from allocation
from Parent of cost over fair value of assets
acquired........................................ $ -- $ -- $ -- $ -- $10,276,706
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-57
<PAGE>
INTERACTIVE SOLUTIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS
Interactive Solutions, Inc. and subsidiary (collectively known as the
"Company" or "Interactive") is a digital communications services provider. Prior
to December 31, 1998, Interactive was owned 60% by its majority shareholder and
40% by Communicade Inc. ("Communicade"), formerly known as JWL Associates,
Corp., a wholly-owned subsidiary of the Omnicom Group Inc. ("Omnicom")--See
Notes 3 and 12. The Company creates digital communications strategies to help
its clients increase sales, improve communications and create brand identities.
The Company's integrated service offering includes strategic consulting, design
of information architecture and end-user interfaces and customization and
implementation of enabling software technologies. The Company primarily uses
Internet-based technologies to create digital communications strategies and is
building capabilities in additional technologies.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
Interactive and its subsidiary, Quadris Consulting, Inc. ("Quadris"). The
Company had no subsidiary prior to March 16, 1998 (See Note 2). All significant
intercompany accounts and transactions have been eliminated in consolidation.
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.
REVENUE RECOGNITION
Revenue from contracts is recognized as services are rendered on the
percentage-of-completion method of accounting based on the ratio of costs
incurred to total estimated costs. Unbilled charges represent labor costs
incurred and estimated earnings, production and other client reimbursable costs
in excess of related billings. Deferred revenue represents billings of
production and other client reimbursable out-of-pocket costs in excess of
revenues earned. Provisions for estimated losses on uncompleted contracts are
made in the period in which such losses are determined. Revenue from time and
material jobs is recognized on the basis of costs incurred during the period.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.
F-58
<PAGE>
INTERACTIVE SOLUTIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, net of accumulated depreciation
and amortization. Property and equipment are depreciated on a straight-line
basis over estimated useful lives ranging from three to seven years. Leasehold
improvements are amortized utilizing the straight-line method over the lesser of
the estimated useful life of the asset or the remaining term of the related
lease.
GOODWILL
Goodwill, which represents the excess of the purchase price over the fair
value of the net assets acquired, is being amortized over a period of three
years on a straight-line basis. Management has evaluated the amortization period
in the current period and has determined that no impairment currently exists.
This amortization period will be evaluated by management on a continuing basis,
and will be adjusted if the life of the goodwill is impaired.
ACCOUNTING FOR LONG-LIVED ASSETS
The Company accounts for long-lived assets under the provisions of Statement
of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of."
This statement establishes financial accounting and reporting standards for the
impairment of long-lived assets, certain identifiable intangibles and goodwill
related to those assets to be held and used, and for long-lived assets and
certain identifiable tangibles to be disposed of. The Company reviews long-lived
assets and certain identifiable intangibles to be held and used for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset exceeds the fair value of the asset. If other events or changes in
circumstances indicate that the carrying amount of an asset that the Company
expects to hold and use may not be recoverable, the Company will estimate the
future cash flows expected to result from the use of the asset and its eventual
disposition. Future cash flows are the future cash inflows expected to be
generated by an asset less the future cash outflows expected to be necessary to
obtain those inflows. If the sum of the expected future cash flows (undiscounted
and without interest charges) is less than the carrying amount of the asset, the
Company will recognize an impairment loss equal to the amount by which the
carrying amount of the asset exceeds the fair value of the asset. The fair value
of the asset is the amount at which the asset could be bought or sold in a
current transaction between willing parties or can be determined by calculating
the present value of estimated expected future cash flows using a discount rate
commensurate with the risks involved. Management has performed a review of all
long-lived assets and has determined that no impairment of the respective
carrying value has occurred as of December 31, 1997 and 1998.
INCOME TAXES
The Company accounts for income taxes under the provisions of the SFAS
No. 109, "Accounting for Income Taxes." Under SFAS No. 109, deferred tax assets
and liabilities are
F-59
<PAGE>
INTERACTIVE SOLUTIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their tax bases for operating profit and tax liability carryforward. 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 or
liabilities of a change in tax rates is recognized in the period that the tax
change occurs.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash and cash equivalents, accounts receivable, due
from affiliates, accounts payable and due to Omnicom Finance Inc. approximate
fair value due to the short-term maturity of these instruments. The carrying
amount of due to Omnicom Group Inc. approximates fair value.
STOCK-BASED COMPENSATION
SFAS No. 123, "Accounting for Stock-Based Compensation," requires that stock
awards granted subsequent to January 1, 1995, be recognized as compensation
expense based on their fair value at the date of grant. Alternatively, a company
may use Accounting Principles Board ("APB") Opinion No. 25, "Accounting for
Stock Issued to Employees," and disclose pro forma income amounts which would
have resulted from recognizing such awards at their fair value. The Company has
elected to account for stock-based compensation expense under APB No. 25 and
make the required pro forma disclosures for compensation (See Note 8).
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 131, "Disclosures About Segments of an Enterprise and Related Information."
This statement establishes standards for the way public business enterprises
report information about operating segments in annual financial statements and
requires that those enterprises report selected information about operating
segments in interim financial reports issued to shareholders. The statement also
establishes standards for related disclosure about products and services,
geographic areas and major customers. This statement is effective for financial
statements for periods beginning after December 15, 1997 and need not be applied
to interim periods in the initial year of application. Comparative information
for earlier years presented is to be restated. The Company currently believes
that it operates in one segment and that the adoption of SFAS No. 131 will not
materially affect the Company's current disclosure of geographic information.
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"), which 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
F-60
<PAGE>
INTERACTIVE SOLUTIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
capitalization of the costs incurred for computer software developed or obtained
for internal use. SOP 98-1 is effective for fiscal years beginning after
December 31, 1998. The Company does not expect the adoption of SOP 98-1 to have
a material effect on its financial statements.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivatives and
Hedging Activities," which establishes accounting and reporting standards of
derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities. The Company does not currently
engage in derivative activity and does not expect the adoption of this standard
to have a material effect on the Company's results of consolidated operations,
financial position or cash flows.
In July 1999, the FASB approved SFAS No. 137, "Accounting for Derivative
Instruments and Hedging Activities--Deferral of the Effective Date of FASB
Statement No. 133", which amends SFAS No. 133 to be effective for all fiscal
quarters of all fiscal years beginning after June 15, 2000.
UNAUDITED FINANCIAL STATEMENTS
The unaudited consolidated financial information included herein as of
March 31, 1999 and for the three months ended March 31, 1998 and 1999, have been
prepared in accordance with generally accepted accounting principles for interim
financial statements. In the opinion of the Company, these unaudited
consolidated financial statements, reflect all adjustments necessary, consisting
of normal recurring adjustments, for a fair presentation of such data on a basis
consistent with that of the audited data presented herein. The consolidated
results for interim periods are not necessarily indicative of the results
expected for a full year.
2. ACQUISITIONS
QUADRIS CONSULTING, INC.
On March 16, 1998, the Company purchased 60% of the equity of a newly formed
corporation, Quadris. Concurrent with this transaction, Quadris acquired
substantially all of the assets and liabilities of the Quadris division of
JYACC, Inc. The total consideration for the net assets acquired was $8,827,538.
The remaining 40% of Quadris is owned by Quadris' management.
This acquisition was accounted for under the purchase method of accounting
and, accordingly, the purchase price has been allocated to the tangible and
intangible assets acquired and liabilities assumed on the basis of their
respective fair values on the acquisition date. As a result of this acquisition,
the Company has recorded goodwill of $7,403,809, which is the cost in excess of
net assets acquired and is being amortized over a period of three years.
ECHO STRATEGIES GROUP
On June 20, 1997, the Company purchased substantially all of the assets of
Echo Strategies Group ("Echo") for cash consideration of $300,000. This
acquisition was accounted for under the
F-61
<PAGE>
INTERACTIVE SOLUTIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. ACQUISITIONS (CONTINUED)
purchase method of accounting and, accordingly, the purchase price has been
allocated to the tangible and intangible assets acquired on the basis of their
respective fair values on the acquisition date. In conjunction with the purchase
of Echo, the Company signed employment contracts with two former Echo employees
and issued to them a total of 200,000 stock options with a five-year vesting
period, exercisable at $1.60 per share. These options vested and converted to
options to acquire AGENCY.COM LTD. ("AGENCY.COM") shares on April 28, 1999 (See
Note 12). As a result of the acquisition, the separate existence of the Company
ceased to exist.
The acquisitions described above were valued based on management's estimates
of the fair value of the assets and liabilities acquired at the date of
acquisition. An independent third party valuation corroborating management's
estimates for the Quadris acquisition was obtained. Assets and liabilities
acquired were recorded as follows:
<TABLE>
<CAPTION>
QUADRIS ECHO
---------------- ----------------
<S> <C> <C>
Accounts receivable..................................... $1,759,185 $229,403
Unbilled charges........................................ 388,988 --
Fixed assets............................................ 222,400 70,289
Other assets............................................ 69,111 308
Goodwill................................................ 7,403,809 --
Accounts payable and accrued expenses................... (385,986) --
Deferred revenue........................................ (386,855) --
Accrued loss on contracts............................... (243,114) --
---------- --------
Total purchase price.................................. $8,827,538 $300,000
========== ========
</TABLE>
The results of the acquired businesses have been included in the
consolidated financial statements from their respective acquisition dates.
PRO FORMA RESULTS OF OPERATIONS (UNAUDITED)
The following unaudited pro forma consolidated results of operations reflect
the results of operations as if Quadris had been acquired January 1, 1998 and
Echo had been acquired January 1, 1997, and after giving effect to purchase
accounting adjustments. These pro forma results have been prepared for
comparative purposes only and do not purport to be indicative of what operating
results would have been had the acquisitions actually taken place on January 1,
1998 and 1997, respectively, or of future operating results.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, THREE MONTHS
------------------------------ ENDED MARCH 31,
1997 1998 1998
---------- ----------- ---------------
<S> <C> <C> <C>
Pro forma:
Revenues............................... $4,777,217 $17,097,861 $3,602,466
Net loss............................... 277,671 2,107,423 164,980
</TABLE>
F-62
<PAGE>
INTERACTIVE SOLUTIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. RELATED PARTY TRANSACTIONS
COMMUNICADE, INC.
During December 1996, the Company entered into a shareholder agreement with
Communicade. The shareholder agreement stipulates that Omnicom Finance Inc., a
wholly owned subsidiary of Omnicom, provide the Company with a line of credit
for working capital purposes of up to $2.5 million and additional financing, in
connection with the Company's acquisition of "new media companies," as defined
in the shareholder agreement, provided that Communicade remains a shareholder of
the Company.
Amounts borrowed for working capital and acquisition funding under the line
of credit bear interest at the same rate charged by Omnicom Finance Inc. to
subsidiaries of Omnicom under a cash management program. The interest rates
ranged from 6.63% to 6.85%, 6.00% to 6.70%, for the years ended December 31,
1997 and 1998 and 6.60% to 6.65% and 5.91% to 5.95% for the three months ended
March 31, 1998 and 1999 (unaudited), respectively. Interest expense amounted to
$0, $22,444, $599,003 for the years ended December 31, 1996, 1997 and 1998 and
$45,464 and $210,000 for the three months ended March 31, 1998 and 1999
(unaudited), respectively. All outstanding amounts are secured by a priority
lien on all of the Company's assets.
At December 31, 1997 and 1998 and March 31, 1999, $528,346, $2,358,106 and
$2,786,024, respectively, were outstanding under the working capital line of
credit, repayable in full upon the closing of the initial public offering of
AGENCY.COM's common stock (See Note 12). In addition, the Company has $300,000,
$9,737,645 and $9,904,727 of acquisition funding outstanding as of December 31,
1997 and 1998 and March 31, 1999 (unaudited), respectively, in connection with
the acquisition of "new media companies" with repayments falling due in the
principal amount of $300,000 and $8,886,000 (unaudited) and accumulated interest
in the years 2003 and 2004, respectively.
AGENCY.COM
During the year ended December 31, 1998, the Company provided $240,928 of
consulting services to AGENCY.COM, an affiliated company. At December 31, 1998
and March 31, 1999, the Company had net receivables from and payables to
AGENCY.COM of $240,928 and $703,914 (unaudited), respectively.
EAGLE RIVER INTERACTIVE
During the year ended December 31, 1998, the Company provided $110,842 of
consulting services to Eagle River Interactive ("Eagle River"), an affiliated
company. At December 31, 1998, the Company had net receivables from Eagle River
of $110,842. At March 31, 1999 no amounts were due to or from Eagle River.
Prior to January 1, 1998, the Company had not provided any services to
AGENCY.COM and Eagle River and consequently, had no amounts receivable from
either company.
F-63
<PAGE>
INTERACTIVE SOLUTIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. RELATED PARTY TRANSACTIONS (CONTINUED)
For the three months ended March 31, 1998 and 1999, the Company had not
provided any consulting services to AGENCY.COM or Eagle River.
4. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------- MARCH 31,
1997 1998 1999
-------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Computer equipment..................................... $312,925 $1,008,289 $1,021,453
Furniture and fixtures................................. 120,977 422,508 422,508
Leasehold improvements................................. 16,424 67,178 67,178
-------- ---------- ----------
Total property and equipment..................... 450,326 1,497,975 1,511,139
Less--Accumulated depreciation and amortization........ 92,787 388,061 485,003
-------- ---------- ----------
Property and equipment, net...................... $357,539 $1,109,914 $1,026,136
======== ========== ==========
</TABLE>
Depreciation and amortization expense aggregated $12,819, $79,969 and
$295,274 for the years ended December 31, 1996, 1997 and 1998 and $36,235 and
$96,942 for the three months ended March 31, 1998 and 1999 (unaudited),
respectively.
5. GOODWILL
Goodwill consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1998 1999
------------ -----------
(UNAUDITED)
<S> <C> <C>
Goodwill.................................................... $7,403,809 $17,680,515
Less--Accumulated amortization............................ (1,953,783) (3,233,779)
---------- -----------
Goodwill, net........................................... $5,450,026 $14,446,736
========== ===========
</TABLE>
Amortization expense aggregated $1,953,783 and $1,279,996 for the year ended
December 31, 1998 and for the three months ended March 31, 1999 (unaudited),
respectively. The Company did not have any goodwill prior to March 15, 1998.
F-64
<PAGE>
INTERACTIVE SOLUTIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------- MARCH 31,
1997 1998 1999
--------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Accrued bonuses.......................................... $173,055 $ 700,687 $ 60,008
Accrued payroll.......................................... 84,508 554,081 --
Accrued expenses......................................... 52,556 176,749 525,289
Accrued professional fees................................ 109,623 518,981 471,500
Accounts payable......................................... 208,113 163,403 241,500
Accrued loss on contract................................. -- 73,008 --
-------- ---------- ----------
$627,855 $2,186,909 $1,298,297
======== ========== ==========
</TABLE>
There were no other individual items greater than 5% of current liabilities
as of December 31, 1997, December 31, 1998 and March 31, 1999 (unaudited).
7. INCOME TAXES
Income (loss) before (provision) benefit for income taxes and the
(provision) benefit for income taxes consisted of the following:
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
----------------------------------- -----------------------
1996 1997 1998 1998 1999
--------- --------- ----------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Income (loss) before income
taxes:........................ $ 244,793 $(507,498) $(3,840,252) $(500,763) $(1,745,862)
========= ========= =========== ========= ===========
(Provision for) benefit from
income taxes:
Current--
Federal................... $ (1,086) $ 155,794 $ 598,816 $ 93,665 $ 160,155
State and local........... (335) 48,328 164,536 26,779 43,274
Deferred--
Federal................... (75,470) (3,658) 643,203 65,784 191,476
State and local........... (23,301) (1,129) 196,921 20,202 58,597
--------- --------- ----------- --------- -----------
$(100,192) $ 199,335 $ 1,603,476 $ 206,430 $ 453,502
========= ========= =========== ========= ===========
</TABLE>
F-65
<PAGE>
INTERACTIVE SOLUTIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. INCOME TAXES (CONTINUED)
The differences between the tax (provision) benefit from continuing
operations reflected in the financial statements and the amounts calculated at
the federal statutory income tax rate of 34% are as follows:
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
---------------------------------- ---------------------
1996 1997 1998 1998 1999
--------- --------- ---------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Income tax (provision) benefit at
statutory rate.................... $ (83,230) $172,549 $1,305,686 $170,259 $593,593
State and local taxes on income, net
of federal tax (provision)
benefit........................... (15,600) 30,412 303,985 38,290 86,923
Other............................... (1,362) (3,626) (6,195) (2,119) (227,014)
--------- -------- ---------- -------- --------
$(100,192) $199,335 $1,603,476 $206,430 $453,502
========= ======== ========== ======== ========
</TABLE>
The tax effects of temporary differences that give rise to a significant
portion of the deferred income tax assets (liabilities), net, are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------- MARCH 31,
1997 1998 1999
---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Deferred tax assets:
Cash basis to accrual basis adjustment............. $ -- $ -- $
Goodwill amortization.............................. -- 628,502 826,976
Bad Debt........................................... 34,826 124,837 144,972
Net operating loss carryforward.................... 204,122 967,473 1,170,903
Others............................................. 19,602 78,120 111,628
---------- ---------- ----------
Total deferred tax assets.............................. 258,550 1,798,932 2,254,479
Less: valuation allowance.............................. -- -- --
---------- ---------- ----------
Net deferred tax assets................................ 258,550 1,798,932 2,254,479
---------- ---------- ----------
Deferred tax liabilities:
Cash basis to accrual basis adjustment............. (142,545) (71,273) (53,454)
Others............................................. (15,442) (23,620) (43,484)
---------- ---------- ----------
Total deferred tax liabilities......................... (157,987) (94,893) (96,938)
---------- ---------- ----------
Net deferred tax asset................................. $ 100,563 $1,704,039 $2,157,541
========== ========== ==========
</TABLE>
F-66
<PAGE>
INTERACTIVE SOLUTIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. INCOME TAXES (CONTINUED)
As of December 31, 1997 and 1998 and March 31, 1999, the Company has
$513,383, $2,418,683 and $2,927,258 (unaudited), respectively net operating loss
carryforwards available to offset future taxable income through 2012.
Deferred income taxes are provided for the temporary difference between the
financial reporting basis and tax basis of the Company's assets and liabilities.
Deferred tax assets result principally from recording certain expenses in the
financial statements, which are not currently deductible for tax purposes, and
differences between the tax and book bases of assets and liabilities recorded in
connection with the acquisitions. Deferred tax liabilities result principally
from expenses which are currently deductible for tax purposes but have not yet
been expensed in the financial statements.
Interactive has elected to file its income tax return using the accrual
basis of accounting for the year ended December 31, 1998. For the years ended
December 31, 1997 and 1996, the Company filed on the cash basis. Quadris has
elected to file its income tax return using the cash basis of accounting from
inception (March 16, 1998) to December 31, 1998.
8. STOCKHOLDERS' EQUITY (DEFICIT)
CAPITAL CONTRIBUTION
On December 6, 1996, the Company and Communicade entered into a Stock
Purchase Agreement (See Note 3) by which the Company received a $500,000 capital
contribution from Communicade, who had previously purchased shares of the
Company's common stock from the founder.
STOCK SPLITS
On January 10, 1996, the Company's Board of Directors authorized an 18 to 1
stock split of the Company's common stock effective immediately. This resulted
in the issuance of 170,000 additional shares of common stock.
On April 28, 1998, the Company's Board of Directors authorized a 25 to 1
stock split of its common stock effective immediately. This resulted in the
issuance of 4,320,000 additional shares of common stock.
All share amounts in the accompanying consolidated financial statements and
footnotes have been restated to give effect to these stock splits as of
December 31,1995.
STOCK OPTIONS
INTERACTIVE
Interactive has a Stock Option and Incentive Plan (the "Interactive Plan"),
that provides for the granting of stock options to employees. Pursuant to the
Interactive Plan, an aggregate of 500,000 shares of common stock has been
reserved for issuance. Under the Interactive Plan, the optionees
F-67
<PAGE>
INTERACTIVE SOLUTIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)
will receive options to purchase shares in Interactive if, and only if,
Interactive merges into AGENCY.COM (See Note 12).
A summary of the status of the Interactive Plan as of December 31, 1996,
1997, 1998 and March 31, 1999 and the changes during the periods then ended is
presented below:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------------------------
1996 1997 1998 MARCH 31, 1999
-------------------- -------------------- -------------------- ----------------------
WEIGHTED- WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
-------- --------- -------- --------- -------- --------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of
period........................ -- $ -- -- $ -- 420,000 $1.60 494,500 $1.60
Granted......................... -- -- 420,000 1.60 212,000 1.60 -- --
Exercised....................... -- -- -- -- (5,500) 1.60 -- --
Cancelled....................... -- -- -- -- (132,000) 1.60 -- --
---- ----- ------- ----- -------- ----- ------- -----
Outstanding at end of period.... -- $ -- 420,000 $1.60 494,500 $1.60 494,500 $1.60
==== ===== ======= ===== ======== ===== ======= =====
</TABLE>
The following table summarizes information on stock options outstanding and
exercisable under the Interactive Plan at December 31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------- --------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE REMAINING EXERCISE EXERCISE
PRICE NUMBER LIFE PRICE NUMBER PRICE
- -------- -------- --------- --------- -------- ---------
<S> <C> <C> <C> <C> <C>
$1.60..................................... 494,500 9 years $1.60 167,830 $1.60
</TABLE>
Options outstanding under the Interactive Plan have been granted at prices
above the fair market value of the stock on the date of grant.
The Company has elected, in accordance with the provisions of SFAS No. 123,
to apply the current accounting rules under APB Opinion No. 25. Accordingly, no
compensation cost has been recognized for the stock option plan.
Had compensation for those awards been determined based on the fair value at
the grant dates for those awards consistent with the method in SFAS No. 123, the
Company's net loss would have been increased to the pro forma amounts indicated
below. The pro forma effects of applying SFAS No. 123 are not indicative of
future amounts because this statement does not apply to
F-68
<PAGE>
INTERACTIVE SOLUTIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)
awards granted prior to fiscal year 1996. Additional stock option awards are
anticipated in future years.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
----------------------
1997 1998
--------- ----------
<S> <C> <C>
Net Loss
As reported............................................... $308,163 $2,236,776
Pro forma................................................. 308,458 2,237,366
</TABLE>
The plan was not in existence prior to December 31, 1997.
The Company used the Black-Scholes option-pricing model to determine the
fair value of grants made in 1997 and 1998. There were no grants made prior to
1997. The following assumptions were applied in determining the pro forma
compensation cost:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1997 1998
------------- -------------
<S> <C> <C>
Expected option life....................................... 9.5 years 9.3 years
Risk free interest rate.................................... 6.36% 5.25%
Expected stock price volatility............................ 0.00% 0.00%
Expected dividend yield.................................... 0.00% 0.00%
Fair value of options granted.............................. $ 0.02 $ --
</TABLE>
QUADRIS
Quadris has a Stock Option and Incentive Plan (the "Quadris' Plan") that
provides for the granting of 1,500,000 of options to employees of Quadris. These
options give the optionee the right to purchase common stock of Quadris. Under
the Quadris' Plan, the optionees will receive options to purchase shares in
Interactive if, and only if, Interactive merges into AGENCY.COM (See Note 12).
F-69
<PAGE>
INTERACTIVE SOLUTIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)
A summary of the status of the Quadris' Plan as of December 31, 1998 and
March 31, 1999 and the changes during the periods then ended is presented below:
<TABLE>
<CAPTION>
DECEMBER 31, 1998 MARCH 31, 1999
-------------------------- --------------------------
WEIGHTED- WEIGHTED-
AVERAGE AVERAGE
OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE
--------- -------------- --------- --------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Outstanding at beginning of period......... -- $ -- 1,500,000 $0.20
Granted.................................... 1,500,000 0.20 --
--------- ----- --------- -----
Outstanding at end of period............... 1,500,000 $0.20 1,500,000 $0.20
========= ===== ========= =====
</TABLE>
The plan was not in existence prior to 1998.
The following table summarizes information on stock options outstanding and
exercisable under the Quadris Plan at December 31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------- --------------------
WEIGHTED- WEIGHTED- WEIGHTED-
EXERCISE AVERAGE AVERAGE AVERAGE
PRICE REMAINING EXERCISE EXERCISE
RANGE NUMBER LIFE PRICE NUMBER PRICE
- -------- --------- --------- --------- -------- ---------
<S> <C> <C> <C> <C> <C>
$0.20-0.22............................... 1,500,000 10 years $0.20 -- $ --
</TABLE>
Options outstanding under the Quadris' Plan have been granted at prices at
or above the fair market value of the stock on the date of grant.
The Company has elected, in accordance with the provisions of SFAS No. 123,
to apply the current accounting rules under APB Opinion No. 25. Accordingly, no
compensation cost has been recognized for the stock option plan.
Had compensation for those awards been determined based on the fair value at
the grant dates for those awards consistent with the method in SFAS No. 123,
there would have been no impact on the Company's net loss for December 31, 1998
as the options were granted on December 31, 1998. The pro forma effects of
applying SFAS No. 123 are not indicative of future amounts because this
statement does not apply to awards granted prior to fiscal year 1996. Additional
stock option awards are anticipated in future years.
F-70
<PAGE>
INTERACTIVE SOLUTIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)
The Company used the Black-Scholes option-pricing model to determine the
fair value of grants made in 1998. There were no grants made prior to 1998. The
following assumptions were applied in determining the pro forma compensation
cost:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1998
------------
<S> <C>
Expected option life........................................ 10 years
Risk free interest rate..................................... 4.65%
Expected stock price volatility............................. 0.00%
Expected dividend yield..................................... 0.00%
Fair value of options granted............................... $0.06-0.07
</TABLE>
9. COMMITMENTS AND CONTINGENCIES
LEASES
The Company is committed under operating leases, principally for office
space and equipment. Certain leases are subject to rent reviews and require
payment of expenses under escalation clauses. Rent expense and equipment rental
were $48,099, $203,042, $1,064,650 for the years ended December 31, 1996, 1997
and 1998 and $125,509 and $360,046 for the three months ended March 31, 1998 and
1999, (unaudited) respectively. Future minimum base rents under terms of
non-cancelable operating leases are as follows:
<TABLE>
<CAPTION>
RENTAL
PAYMENTS
----------
<S> <C>
Years ending December 31:
1999........................................................ $ 726,861
2000........................................................ 598,735
2001........................................................ 603,968
2002........................................................ 603,968
2003........................................................ 298,401
Thereafter.................................................. 48,538
----------
$2,880,471
==========
</TABLE>
LITIGATION
The Company, from time to time, becomes involved in various routine legal
proceedings in the ordinary course of its business. The Company believes that
the outcome of all pending legal proceedings and unasserted claims in the
aggregate will not have a material adverse effect on its consolidated results of
operations, consolidated financial position or liquidity.
F-71
<PAGE>
INTERACTIVE SOLUTIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. EMPLOYEE BENEFIT PLAN
The Company has a defined contribution plan covering all of its eligible
employees. The Plan became effective on February 1, 1997 and is qualified under
Section 401(k) of the Internal Revenue Code of 1996. The Company matches
employee contributions to the plan at a rate of 50%, up to a total match of 3%
of the participating employee's salary. Expenses related to the Company's
contributions to the Plan amounted to $125,850 for the year ended December 31,
1998 and $35,956 and $87,071 for the three months ended March 31, 1998 and 1999
(unaudited), respectively. The Company started the matching program in 1998 and,
therefore, there are no contributions for 1996 and 1997.
This plan was terminated in May of 1999 and replaced with the AGENCY.COM
401K plan. Under the AGENCY.COM plan, participants are eligible for a
discretionary employer match equal to 50% of the first 6% of the participating
employee's compensation, with vesting in this match occurring over a five-year
period.
11. BUSINESS CONCENTRATIONS AND CREDIT RISK
Financial instruments which subject the Company to concentrations of credit
risk consisted primarily of cash and cash equivalents and trade accounts
receivable. The Company maintains cash and cash equivalents with various
financial institutions. The Company performs periodic evaluations of the
relative credit standing of these institutions. The Company's clients are
primarily concentrated in the United States. The Company performs ongoing credit
evaluations, generally does not require collateral, and establishes an allowance
for doubtful accounts based upon factors surrounding the credit risk of
customers, historical trends and other information. To date, such losses have
been within management's expectations.
For the year ended December 31, 1996, one client accounted for 69% of total
revenues.
For the year ended December 31, 1997, one client accounted for 68% of total
revenues.
For the year ended December 31, 1998, two clients accounted for 25% and 11%,
respectively, of total revenues.
For the three months ended March 31, 1998, two clients accounted 31% and
17%, (unaudited) respectively, of total revenues.
For the three months ended March 31, 1999, one client accounted for 12% of
total revenues.
As of December 31, 1997, two clients accounted for 48% and 18%,
respectively, of total accounts receivable.
As of December 31, 1998, two clients accounted for 26% and 17%, (unaudited)
respectively, of total accounts receivable.
As of March 31, 1999, four clients accounted for 25%, 20%, 16% and 11%,
(unaudited) respectively, of total accounts receivable.
F-72
<PAGE>
INTERACTIVE SOLUTIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. SUBSEQUENT EVENTS
On January 27, 1999, the majority shareholder of Interactive sold 2,700,000
shares of common stock (100% of his interest) to Communicade. Communicade paid
$3,000,000 in consideration for the shares. As part of the transaction,
Communicade also paid this stockholder $1,500,000 to settle the earnout
associated with Communicade's initial investment in the Company, as noted in the
stock purchase agreement dated December 6, 1996. As a result of the transaction,
Interactive became a wholly-owned subsidiary of Communicade. This transaction
was accounted for by Communicade under the purchase method of accounting and
resulted in Communicade recording $10,276,706 of costs over fair value of the
assets acquired. As a result, Communicade allocated these costs to the Company.
These costs are reflected in the accompanying March 31, 1999 financial
statements as goodwill (net of amortization expense for the period) and
additional paid-in capital.
Pursuant to an Agreement and Plan of Merger dated April 1, 1999, a merger
was consummated between AGENCY.COM and the Company. The stock-for-stock
transaction was approved by the shareholders of both companies after which the
Company was merged with and into AGENCY.COM, with AGENCY.COM continuing as the
surviving corporation in the merger. As a result of the merger, the separate
existence of the Company ceased. Under the merger agreement, the Company
received 24.6% of the outstanding shares in AGENCY.COM.
In conjunction, with the transaction, the Company issued 934,763 shares of
common stock and created 558,742 new options to acquire the minority interest of
Quadris (See Note 8).
As a result of Interactive being acquired by AGENCY.COM, the options granted
under both the Interactive Plan and the Quadris Plan convert to options to
acquire AGENCY.COM shares.
F-73
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Quadris Consulting:
We have audited the accompanying balance sheets of Quadris Consulting, a
division of JYACC, Inc. (a New York corporation) as of December 31, 1997 and
March 15, 1998, and the related statements of operations, divisional equity and
cash flows for each of the two years ended December 31, 1997 and the period from
January 1, 1998 to March 15, 1998. These financial statements are the
responsibility of the management of JYACC, Inc. 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 Quadris Consulting as of
December 31, 1997 and March 15, 1998, and the results of its operations and its
cash flows for each of the two years ended December 31, 1997 and the period from
January 1, 1998 to March 15, 1998 and, in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
New York, New York
July 16, 1999
F-74
<PAGE>
QUADRIS CONSULTING
(A DIVISION OF JYACC, INC.)
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 15,
1997 1998
------------ ----------
<S> <C> <C>
ASSETS
Current Assets:
Accounts receivable....................................... $1,823,385 $1,750,197
Unbilled charges.......................................... -- 385,094
Prepaid expenses and other current assets................. 4,822 35,866
---------- ----------
Total current assets.................................. 1,828,207 2,171,157
Property and Equipment, net of accumulated depreciation and
amortization of $670,287 and $693,941, respectively....... 291,330 270,247
Other Assets................................................ 39,941 33,245
---------- ----------
Total assets.......................................... $2,159,478 $2,474,649
========== ==========
LIABILITIES AND DIVISIONAL EQUITY
Current Liabilities:
Accounts payable and accrued expenses..................... $ 577,317 $ 385,986
Accrued loss on contract.................................. 249,277 243,113
Deferred revenue.......................................... 423,253 386,855
---------- ----------
Total current liabilities............................. 1,249,847 1,015,954
---------- ----------
Commitments and Contingencies (Note 6)
Divisional Equity........................................... 909,631 1,458,695
---------- ----------
Total liabilities and divisional equity............... $2,159,478 $2,474,649
========== ==========
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-75
<PAGE>
QUADRIS CONSULTING
(A DIVISION OF JYACC, INC.)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
YEAR ENDED DECEMBER 31, JANUARY 1 TO
------------------------------------------------- MARCH 15,
1996 1997 1998
----------------------- ----------------------- ------------
<S> <C> <C> <C>
Revenues......................................... $8,138,275 $8,914,995 $1,727,391
Direct Salaries and Costs........................ 4,634,533 6,050,616 1,144,664
---------- ---------- ----------
Gross profit................................. 3,503,742 2,864,379 582,727
Sales and Marketing.............................. 18,714 5,560 1,577
General and Administrative....................... 1,707,854 1,585,467 362,872
---------- ---------- ----------
Income from operations....................... 1,777,174 1,273,352 218,278
Interest Expense, net............................ -- -- 1,925
---------- ---------- ----------
Income before provision for income taxes..... 1,777,174 1,273,352 216,353
Provision for Income Taxes....................... 711,000 509,000 87,000
---------- ---------- ----------
Net income................................... $1,066,174 $ 764,352 $ 129,353
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-76
<PAGE>
QUADRIS CONSULTING
(A DIVISION OF JYACC, INC.)
STATEMENTS OF DIVISIONAL EQUITY
<TABLE>
<CAPTION>
PERIOD FROM
YEAR ENDED DECEMBER 31, JANUARY 1 TO
------------------------ MARCH 15,
1996 1997 1998
----------- ---------- ------------
<S> <C> <C> <C>
Divisional Equity, beginning of period.................. $ 722,626 $ 404,712 $ 909,631
Net income............................................ 1,066,174 764,352 129,353
Less-- Net (decrease) increase in investment with
JYACC, Inc.......................................... (1,384,088) (259,433) 419,711
---------- --------- ----------
Divisional Equity, end of period........................ $ 404,712 $ 909,631 $1,458,695
========== ========= ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-77
<PAGE>
QUADRIS CONSULTING
(A DIVISION OF JYACC, INC.)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED PERIOD FROM
DECEMBER 31, JANUARY 1 TO
----------------------- MARCH 15,
1996 1997 1998
---------- ---------- ------------
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net income........................................... $1,066,174 $ 764,352 $ 129,353
Adjustments to reconcile net income to net cash
provided by (used in) operating activities--
Depreciation and amortization.................... 122,680 123,749 23,654
Changes in assets and liabilities:
Accounts receivable............................ (573,616) (236,287) 73,188
Unbilled charges............................... -- -- (385,094)
Prepaid expenses and other current assets...... -- (4,822) (31,044)
Other assets................................... (3,250) (22,386) 6,696
Accounts payable and accrued expenses.......... 171,143 (143,765) (191,331)
Accrued loss on contracts...................... 406,769 (157,492) (6,164)
Deferred revenue............................... 299,439 123,814 (36,398)
---------- ---------- ---------
Net cash provided by (used in) operating
activities................................. 1,489,339 447,163 (417,140)
---------- ---------- ---------
Cash Flows From Investing Activities:
Capital expenditures................................. (105,251) (187,730) (2,571)
---------- ---------- ---------
Net cash received from (remitted to)
JYACC, Inc................................. $1,384,088 $ 259,433 $(419,711)
========== ========== =========
</TABLE>
The accompanying notes are an integral part of these statements.
F-78
<PAGE>
QUADRIS CONSULTING
(A DIVISION OF JYACC, INC.)
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS
Quadris Consulting ("Quadris" or the "Company") is a division of
JYACC, Inc. ("JYACC") and is not a separate legal entity. On March 16, 1998,
Quadris was acquired by Quadris Consulting, Inc. (a majority--owned subsidiary
of Interactive Solutions, Inc.--See Note 9). Interactive Solutions, Inc. is
owned 40% by Communicade, Inc., formerly known as JWL Associates Corp., a
wholly--owned subsidiary of the Omnicom Group Inc. ("Omnicom") and 60% by its
majority shareholder. Quadris is a systems integrator and developer of custom
software solutions. Quadris creates digital communications strategies to help
its clients increase sales and improve communications. Quadris' integrated
service offering includes strategic consulting, user requirements analysis,
technical and functional systems design, software development and systems
integration, quality assurance, documentation, and software deployment services.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash, accounts receivable and accounts payable
approximate fair value due to the short-term maturity of these instruments.
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. Quadris has
estimated that all accounts receivable are collectible and, therefore, has not
recorded an allowance for doubtful accounts.
DIVISIONAL EQUITY
Divisional equity as used in these financial statements represents a summary
of all intercompany activity between Quadris and JYACC as well as the
accumulation of earnings.
REVENUE RECOGNITION
Revenues from contracts are recognized as services are rendered on the
percentage-of-completion method of accounting based on the ratio of costs
incurred to total estimated costs. Unbilled charges represent labor costs
incurred and estimated earnings, production and other client reimbursable costs
in excess of billings. Deferred revenue represents billings of production and
other client reimbursable out-of-pocket costs in excess of revenues earned.
Provisions for estimated losses on uncompleted contracts are made in the period
in which such losses are determined. Revenue from time and material jobs is
recognized on the basis of costs incurred during the period.
F-79
<PAGE>
QUADRIS CONSULTING
(A DIVISION OF JYACC, INC.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, net of accumulated depreciation
and amortization. Property and equipment are depreciated on a straight-line
basis over the estimated useful lives of three to seven years. Leasehold
improvements are amortized utilizing the straight-line method over the lesser of
the estimated useful life of the asset or the remaining term of the related
lease.
ACCOUNTING FOR LONG-LIVED ASSETS
Quadris accounts for long-lived assets under the provisions of SFAS
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of." This statement establishes financial accounting and
reporting standards for the impairment of long-lived assets, certain
identifiable intangibles, and goodwill related to those assets to be held and
used, and for long-lived assets and certain identifiable tangibles to be
disposed of. The Company reviews long-lived assets and certain identifiable
intangibles to be held and used for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset exceeds the fair
value of the asset. If other events or changes in circumstances indicate that
the carrying amount of an asset that the Company expects to hold and use may not
be recoverable, the Company will estimate the future cash flows expected to
result from the use of the asset and its eventual disposition. Future cash flows
are the future cash inflows expected to be generated by an asset less the future
cash outflows expected to be necessary to obtain those inflows. If the sum of
the expected future cash flows (undiscounted and without interest charges) is
less than the carrying amount of the asset, the Company will recognize an
impairment loss equal to the amount by which the carrying amount of the asset
exceeds the fair value of the asset. The fair value of the asset is the amount
at which the asset could be bought or sold in a current transaction between
willing parties or can be determined by calculating the present value of
estimated expected future cash flows using a discount rate commensurate with the
risks involved. Management has performed a review of all long-lived assets and
has determined that no impairment of the respective carrying value has occurred
as of December 31, 1997 and March 15, 1998.
INCOME TAXES
As a division of JYACC, Quadris was not subject to federal, state and local
income taxes. The effective rate herein reflects the rate that would have been
applicable had Quadris been independent. Provisions for deferred taxes were not
reflected on Quadris' books, but were reflected on JYACC's books and records.
Going forward, Quadris will record deferred taxes in accordance with the
provisions of SFAS No. 109, "Accounting for Income Taxes."
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 131, "Disclosures About Segments of an Enterprise and Related Information."
This statement establishes
F-80
<PAGE>
QUADRIS CONSULTING
(A DIVISION OF JYACC, INC.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
standards for the way public business enterprises report information about
operating segments in annual financial statements and requires that those
enterprises report selected information about operating segments in interim
financial reports issued to shareholders. The statement also establishes
standards for related disclosure about products and services, geographic areas
and major customers. This statement is effective for financial statements for
periods beginning after December 15, 1997 and need not be applied to interim
periods in the initial year of application. Comparative information for earlier
years presented is to be restated. The Company currently believes that it
operates in one segment and that the adoption of SFAS No. 131 will not
materially affect the Company's current disclosure.
2. RELATED PARTY TRANSACTIONS
JYACC has provided services to Quadris including, but not limited to,
financial, systems and legal services, administration of benefit and insurance
programs, income tax management, cash management and treasury services. These
financial statements include an allocation of JYACC's administrative expenses.
The allocation was based on a percentage of the number of employees working for
Quadris in relation to the total number of employees of JYACC taken as a whole.
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 15,
1997 1998
------------ ---------
<S> <C> <C>
Computer equipment.................................. $731,974 $734,545
Furniture and fixtures.............................. 81,402 81,402
Computer software................................... 89,586 89,586
Leasehold improvements.............................. 58,655 58,655
-------- --------
Total property and equipment.................... 961,617 964,188
Less--Accumulated depreciation and amortization..... 670,287 693,941
-------- --------
Property and equipment, net..................... $291,330 $270,247
======== ========
</TABLE>
Depreciation and amortization aggregated $122,680, $123,749, and $23,654,
respectively, for the years ended December 31, 1996 and 1997 and the period from
January 1, 1998 to March 15, 1998, respectively.
F-81
<PAGE>
QUADRIS CONSULTING
(A DIVISION OF JYACC, INC.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 15,
1997 1998
------------ ---------
<S> <C> <C>
Accounts payable.................................... $ 77,855 $ 64,709
Accrued payroll..................................... 156,940 --
Accrued vacation.................................... 241,771 286,826
Accrued expenses--other............................. 100,751 34,451
-------- --------
$577,317 $385,986
======== ========
</TABLE>
5. INCOME TAXES
The financial statements reflect an effective tax rate of 40%, which
reasonably reflects what Quadris' tax rate would have been as a separate entity.
Deferred taxes are reflected as a component of divisional equity as JYACC is the
taxable legal entity. If Quadris were a separate taxable entity, the components
of the temporary differences would be primarily due to customer reserves and
allowances, unbilled charges, deferred revenue, depreciation, and accrued
vacation.
For the years ended December 31, 1996 and 1997 and the period from
January 1, 1998 to March 15, 1998, the following provisions for income taxes
were made:
<TABLE>
<CAPTION>
YEARS ENDED PERIOD
DECEMBER 31, FROM JANUARY 1
--------------------- TO MARCH 15,
1996 1997 1998
--------- --------- --------------
<S> <C> <C> <C>
Current:
Federal............................... $604,350 $432,650 $73,950
State................................. 106,650 76,350 13,050
-------- -------- -------
Provision for income taxes.......... $711,000 $509,000 $87,000
======== ======== =======
</TABLE>
F-82
<PAGE>
QUADRIS CONSULTING
(A DIVISION OF JYACC, INC.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. INCOME TAXES (CONTINUED)
The difference between Quadris' effective tax rate and the statutory federal
income tax rate is as follows:
<TABLE>
<CAPTION>
YEARS ENDED PERIOD
DECEMBER 31, FROM JANUARY 1
----------------------- TO MARCH 15,
1996 1997 1998
---------- ---------- --------------
<S> <C> <C> <C>
Provision for income taxes.......... $ 711,000 $ 509,000 $ 87,000
Income before taxes................. 1,777,174 1,273,352 216,353
Effective tax rate.................. 40% 40% 40%
Net state tax....................... 6% 6% 6%
Federal statutory rate.............. 34% 34% 34%
</TABLE>
6. COMMITMENTS AND CONTINGENCIES
Quadris is committed under operating leases, principally for office space
and equipment. Rent expense and equipment rental were $222,973, $323,860 and
$116,599, respectively, for the years ended December 31, 1996 and 1997 and the
period from January 1, 1998 to March 15, 1998. Future minimum base rents under
the terms of the noncancelable operating leases are as follows:
<TABLE>
<S> <C>
Period from March 16, 1998 to December 31, 1998............. $ 501,000
Year ending December 31:
1999...................................................... 636,000
2000...................................................... 616,000
2001...................................................... 604,000
2002...................................................... 604,000
Thereafter................................................ 347,000
----------
$3,308,000
==========
</TABLE>
LITIGATION
The Company, from time to time, becomes involved in various routine legal
proceedings in the ordinary course of its business. The Company believes that
the outcome of all pending legal proceedings and unasserted claims in the
aggregate will not have a material adverse effect on its consolidated results of
operations, consolidated financial position or liquidity.
7. EMPLOYEE BENEFIT PLAN
JYACC maintains a defined contribution plan covering all eligible employees,
which also covers Quadris employees. The plan is qualified under Section 401(k)
of the Internal Revenue Code. Under the plan, JYACC was required to make certain
matching contributions as defined.
F-83
<PAGE>
QUADRIS CONSULTING
(A DIVISION OF JYACC, INC.)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. EMPLOYEE BENEFIT PLAN (CONTINUED)
This plan was terminated in May of 1999 and replaced with the AGENCY.COM
401(k) plan. Under the AGENCY.COM plan participants are eligible for a
discretionary employer match equal to 50% of the first 6% of the participating
employees compensation.
8. BUSINESS CONCENTRATIONS AND CREDIT RISK
Financial instruments which subject Quadris to concentrations of credit risk
consist primarily of trade accounts receivable. Quadris' clients are primarily
concentrated in the United States. Quadris performs ongoing credit evaluations,
generally does not require collateral, and establishes an allowance for doubtful
accounts based upon factors surrounding the credit risk of customers, historical
trends and other information. To date, such losses have been within management's
expectations.
For the year ended December 31, 1996, two clients accounted for 39% and 29%,
respectively, of total revenues.
For the year ended December 31, 1997, two clients accounted for 47% and 21%,
respectively, of total revenues.
For the period from January 1, 1998 to March 15, 1998, two clients accounted
for 40% and 18%, respectively, of total revenues.
As of December 31, 1997, five clients accounted for 27%, 16%, 14%, 13% and
10%, respectively, of total accounts receivable.
As of March 15, 1998, four clients accounted for 27%, 19%, 15% and 14%,
respectively, of total accounts receivable.
9. SUBSEQUENT EVENT
On March 16, 1998, Quadris Consulting, Inc. (a majority--owned subsidiary of
Interactive Solutions, Inc.) purchased the remaining 60% of Quadris for
approximately $8,828,000.
F-84
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Twinspark Interactive People B.V.:
We have audited the accompanying balance sheets of Twinspark Interactive People
B.V. (a Dutch corporation), as of December 31, 1997 and 1998, and the related
statements of operations, stockholders' equity and cash flows for each of the
years ended December 31, 1997 and December 31, 1998. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these 1997 and 1998 financial statements based on our
audits.
We conducted our audits in accordance with United States 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 Twinspark Interactive People
B.V. as of December 31, 1997 and 1998, and the results of their operations and
their cash flows for each of the years then ended in conformity with United
States generally accepted accounting principles.
ARTHUR ANDERSEN
Rotterdam, The Netherlands
August 9, 1999
F-85
<PAGE>
TWINSPARK INTERACTIVE PEOPLE B.V.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
--------------------- -----------
1997 1998 1999
-------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents.............................. $ -- $ 97,946 $ --
Accounts receivable, net of allowance for doubtful
accounts of $0, $44,090 and $181,370 (unaudited),
respectively......................................... 318,042 1,583,016 1,040,445
Unbilled charges....................................... 43,595 110,123 156,426
Prepaid expenses and other current assets.............. 48,548 97,416 141,399
Due from affiliates.................................... -- 19,589 279,030
-------- ---------- ----------
Total current assets............................... 410,185 1,908,090 1,617,300
Property and Equipment, net of accumulated depreciation
and amortization of $121,370, $211,245 and $256,810
(unaudited), respectively.............................. 81,245 292,778 511,086
Intangibles, net of accumulated amortization of $9,908,
$21,178 and $30,534(unaudited), respectively........... 39,631 31,766 100,996
-------- ---------- ----------
Total assets....................................... $531,061 $2,232,634 $2,229,382
======== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses.................. $193,699 $ 819,568 $1,380,124
Line of credit......................................... 93,629 -- 537,392
Income taxes payable................................... -- 55,591 --
Deferred revenue....................................... -- 362,135 108,982
Due to affiliates...................................... 80,749 10,059 32,413
-------- ---------- ----------
Total current liabilities.......................... 368,077 1,247,353 2,058,911
-------- ---------- ----------
Long-term Liabilities:
Bank loans............................................. 49,539 63,532 52,142
-------- ---------- ----------
Total long-term liabilities........................ 49,539 63,532 52,142
-------- ---------- ----------
Total liabilities.................................. 417,616 1,310,885 2,111,053
-------- ---------- ----------
Commitments (Note 10)
Stockholders' Equity:
Common stock, $0.05 par value, 15,000,000 shares
authorized; 0, 15,000,000 and 15,000,000 (unaudited)
shares issued respectively........................... -- 755,705 755,705
Retained earnings (deficit)............................ 152,773 158,819 (546,076)
Cumulative translation adjustment...................... (39,328) 7,225 (91,300)
-------- ---------- ----------
Total stockholder's equity......................... 113,445 921,749 118,329
-------- ---------- ----------
Total liabilities and stockholders' equity......... $531,061 $2,232,634 $2,229,382
======== ========== ==========
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-86
<PAGE>
TWINSPARK INTERACTIVE PEOPLE B.V.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
----------------------- -------------------------
1997 1998 1998 1999
---------- ---------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Revenues................................... $1,287,802 $2,690,816 $ 746,270 $2,417,259
Direct salaries and costs.................. 1,020,127 1,771,878 582,120 1,467,849
---------- ---------- ---------- ----------
Gross profit............................. 267,675 918,938 164,150 949,410
General and administrative................. 360,646 469,545 150,920 1,524,269
Sales and marketing........................ -- -- -- 94,000
Depreciation and amortization.............. 73,049 91,189 34,300 79,659
---------- ---------- ---------- ----------
Income (loss) from operations............ (166,020) 358,204 (21,070) (748,518)
Interest expense........................... 8,173 12,091 6,370 6,164
---------- ---------- ---------- ----------
Income (loss) before (provision) benefit
for income taxes....................... (174,193) 346,113 (27,440) (754,682)
Provision for (benefit from) income
taxes.................................... -- 52,899 -- (49,787)
---------- ---------- ---------- ----------
Net income (loss)........................ $ (174,193) $ 293,214 $ (27,440) $ (704,895)
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-87
<PAGE>
TWINSPARK INTERACTIVE PEOPLE B.V.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
CUMULATIVE
COMMON STOCK ADDITIONAL FOREIGN
---------------------- PAID-IN RETAINED CURRENCY
SHARES AMOUNT CAPITAL EARNINGS/(DEFICIT) TRANSLATION TOTAL
---------- --------- ---------- ------------------ ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1997.... -- $ -- $ -- $ 326,966 $ -- $ 326,966
Translation adjustment.... -- -- -- -- (39,328) (39,328)
Net loss.................. -- -- -- (174,193) -- (174,193)
---------- -------- ----- ---------- -------- ---------
Balance, December 31, 1997.. -- -- -- 152,773 (39,328) 113,445
Translation adjustment.... -- -- -- -- 46,553 46,553
Issuance of shares........ 15,000,000 287,168 -- (287,168) -- --
Capital contribution...... -- 468,537 -- -- -- 468,537
Net income................ -- -- -- 293,214 -- 293,214
---------- -------- ----- ---------- -------- ---------
Balance, December 31, 1998.. 15,000,000 755,705 -- 158,819 7,225 921,749
Translation adjustment.... -- -- -- -- (98,525) (98,525)
Net loss (unaudited)...... -- -- -- (704,895) -- (704,895)
---------- -------- ----- ---------- -------- ---------
Balance, June 30, 1999
(unaudited)............... 15,000,000 $755,705 $ -- $ (546,076) $(91,300) $ 118,329
========== ======== ===== ========== ======== =========
</TABLE>
The accompanying notes are an integral part of these statements.
F-88
<PAGE>
TWINSPARK INTERACTIVE PEOPLE B.V.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX
YEAR ENDED MONTHS ENDED
DECEMBER 31, JUNE 30,
----------------------- -------------------------
1997 1998 1998 1999
--------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Cash Flows From Operating Activities:
Net income (loss)......................... $(174,193) $ 293,214 $ (27,440) $ (704,895)
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities--
Depreciation and amortization......... 73,049 91,189 34,300 79,659
Allowance for doubtful accounts....... -- 44,090 -- 132,780
Changes in operating assets and
liabilities:
(Increase) decrease in accounts
receivable.......................... (318,042) (1,309,064) (52,430) 405,291
(Increase) in unbilled charges........ (43,595) (66,528) (96,530) (46,303)
(Increase) decrease in prepaid
expenses and other current assets... (48,548) (48,868) 32,830 (43,983)
(Increase) in due from affiliates..... -- (19,589) -- (259,441)
Increase in accounts payable and
accrued expenses.................... 193,699 607,581 144,550 560,556
Increase (decrease) in deferred
revenue............................. -- 362,135 77,420 (253,153)
Increase in due to affiliates......... 80,749 (70,690) 19,600 22,354
Increase (decrease) in income taxes
payable............................. -- 55,591 -- (55,591)
--------- ----------- --------- ----------
Net cash provided by (used in)
operating activities.............. (236,881) (60,939) 132,300 (162,726)
--------- ----------- --------- ----------
Cash Flows From Investing Activities:
Capital expenditures, net................. 182,580 (277,092) (132,300) --
Acquisition of subsidiary, net of cash
acquired................................ (49,539) -- -- (362,697)
--------- ----------- --------- ----------
Net cash provided by (used in)
investing activities.............. 133,041 (277,092) (132,300) (362,697)
--------- ----------- --------- ----------
Cash Flows From Financing Activities:
Borrowings under bank loans, net.......... 49,539 13,993 -- (11,390)
Proceeds from capital contribution........ -- 468,537 -- --
Borrowings under line of credit........... 93,629 -- -- 537,392
--------- ----------- --------- ----------
Net cash provided by financing
activities........................ 143,168 482,530 -- 526,002
--------- ----------- --------- ----------
Net increase (decrease) in cash and cash
equivalents............................... 39,328 144,499 -- 579
Effect of Exchange Rates on Cash............ (39,328) (46,553) -- (98,525)
Cash and Cash Equivalents, beginning of
period.................................... -- -- -- 97,946
--------- ----------- --------- ----------
Cash and Cash Equivalents, end of period.... $ -- $ 97,946 $ -- $ --
========= =========== ========= ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-89
<PAGE>
TWINSPARK INTERACTIVE PEOPLE B.V.
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS
Twinspark Interactive People B.V. (the "Company" or "Twinspark") is an
Internet professional services firm. The Company provides a broad range of
interactive services that enable businesses to develop and implement interactive
media products.
Effective January 1, 1997, Topics Interactive factory B.V. (Topics)
contributed its business to Twinspark Interactive People B.V. i.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
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
Revenues are recognized for time and materials-based arrangements on the
basis of costs incurred in the period. Revenue from fixed-fee arrangements is
recognized on the percentage-of-completion method of accounting based on the
ratio of costs incurred to total estimated costs. Unbilled charges represent
labor costs incurred and estimated earnings, production and other client
reimbursable costs. Provisions for estimated losses on uncompleted contracts are
made in the period in which such losses are determined. Amounts billed, which
are not yet earned, are classified as deferred revenue in the accompanying
consolidated balance sheets.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt and equity instruments with an
original maturity of three months or less to be cash equivalents.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost, net of accumulated depreciation
and amortization. Property and equipment is depreciated on a straight-line basis
over their estimated useful lives of three to seven years. Leasehold
improvements and equipment held under capital leases are amortized utilizing the
straight-line method over the lesser of the estimated useful life of the asset
or the remaining term of the related lease.
INTANGIBLES
Goodwill, which represents the excess of the purchase price over the fair
value of the net assets acquired, is included in intangible assets and is
presently being amortized over a period of five years on a straight-line basis.
The Company reviews its intangible assets to be held and used for impairment
whenever events or changes in circumstances indicate that the carrying amount of
the intangible asset exceeds the fair value of the asset. If circumstances
indicate that the carrying
F-90
<PAGE>
TWINSPARK INTERACTIVE PEOPLE B.V.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
amount of the intangible asset that the Company expects to hold and use may not
be recoverable, the Company will estimate the future cash flows expected to
result from the use of the asset and its eventual disposition. Management has
evaluated the amortization periods in the current period and has determined that
no impairment currently exists. These amortization periods will be evaluated by
management on a continuing basis, and will be adjusted if the lives of the
related intangible assets are impaired.
ACCOUNTING FOR LONG-LIVED ASSETS
The Company follows the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed of." This statement establishes
financial accounting and reporting standards for the impairment of long-lived
assets, certain identifiable intangibles and goodwill related to those assets to
be held and used, and for long-lived assets and certain identifiable intangibles
to be disposed. The Company reviews long-lived assets and certain identifiable
intangibles to be held and used for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset exceeds the fair
value of the asset. If other events or changes in circumstances indicate that
the carrying amount of an asset that that the Company expects to hold and use
may not be recoverable, the Company will estimate the future cash flows expected
to result from the use of the asset and its eventual disposition. Future cash
flows are the future cash inflows expected to be generated by an asset less the
future cash outflows expected to be necessary to obtain those inflows. If the
sum of the expected future cash flows (undiscounted and without interest
charges) is less than the carrying amount of the asset, the Company will
recognize an impairment loss equal to the amount by which the carrying amount of
the asset exceeds the fair value of the asset. The fair value of the asset is
the amount at which the asset could be bought or sold in a current transaction
between willing parties or can be determined by calculating the present value of
estimated expected future cash flows using a discount rate commensurate with the
risks involved. Management has performed a review of all long-lived assets and
has determined that no impairment of the respective carrying values has occurred
as of December 31, 1998 and March 31, 1999 (unaudited).
INCOME TAXES
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes." This statement requires an asset and liability
approach for measuring deferred taxes based on temporary differences between the
financial statement and income tax bases of assets and liabilities existing at
each balance sheet date using enacted tax rates for the years in which the taxes
are expected to be paid or recovered. The effect on deferred tax assets or
liabilities of a change in tax rates is recognized in the period that the tax
change occurs. The Company has elected to file its income tax returns using the
cash basis of accounting.
F-91
<PAGE>
TWINSPARK INTERACTIVE PEOPLE B.V.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FOREIGN CURRENCY TRANSLATION
All assets and liabilities of foreign subsidiaries are translated into Dutch
guilders at fiscal year-end exchange rates. Income and expense items are
translated at average exchange rates prevailing during the fiscal year.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash and cash equivalents, accounts receivable, due
from/to affiliates and accounts payable approximate fair value due to the
short-term maturity of these instruments.
BUSINESS CONCENTRATIONS AND CREDIT RISK
Financial instruments, which subject the Company to concentrations of credit
risk, consist primarily of cash and cash equivalents and trade accounts
receivable. The Company maintains cash and cash equivalents with various
financial institutions. The Company performs periodic evaluations of the
relative credit standing of these institutions. The Company's clients are
primarily concentrated in The Netherlands. The Company performs ongoing credit
evaluations, generally does not require collateral, and establishes an allowance
for doubtful accounts based upon factors surrounding the credit risk of
customers, historical trends and other information.
For the year ended December 31, 1997, 2 clients accounted for 22% and 12%,
respectively, of total revenues.
For the year ended December 31, 1998, 3 clients accounted for 16%, 10% and
10% of total revenues.
As of December 31, 1997, 1 client accounted for 26% of total accounts
receivable and unbilled charges.
As of December 31, 1998, 2 clients accounted for 18% and 9% respectively of
total accounts receivable and unbilled charges.
COMPREHENSIVE INCOME
During 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive
Income," which established standards for reporting and displaying comprehensive
income and its components in a financial statement that is displayed with the
same prominence as other financial statements. The components of comprehensive
income are as follows:
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS
DECEMBER 31, ENDED JUNE 30,
--------------------- ---------------------
1997 1998 1998 1999
--------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C>
Net income (loss).............................. $(174,193) $293,214 $ (27,440) $(704,895)
Foreign currency translation adjustment........ (39,328) 46,553 23,276 (98,525)
--------- -------- --------- ---------
Comprehensive income (loss).................. $(213,521) $339,767 $ (4,164) $(803,420)
========= ======== ========= =========
</TABLE>
F-92
<PAGE>
TWINSPARK INTERACTIVE PEOPLE B.V.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 131, "Disclosures About Segments of an Enterprise and Related Information."
This statement establishes standards for the way public business enterprises
report information about operating segments in annual financial statements and
requires that those enterprises report selected information about operating
segments in interim financial reports issued to shareholders. The statement also
establishes standards for related disclosure about products and services,
geographic areas and major customers. This statement is effective for financial
statements for periods beginning after December 15, 1997 and need not be applied
to interim periods in the initial year of application. Comparative information
for earlier years presented is to be restated. The Company only has operations
in the Netherlands and currently believes that it operates in one segment,
therefore, the adoption of SFAS No. 131 will not materially affect the Company's
current disclosure.
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"), which 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. SOP 98-1 is effective for fiscal years
beginning after December 31, 1998. The Company does not expect the adoption of
SOP 98-1 to have a material effect on its financial statements.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivatives and
Hedging Activities," which establishes accounting and reporting standards of
derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities. The Company does not currently
engage in derivative activity and does not expect the adoption of this standard
to have a material effect on the Company's results of consolidated operations,
financial position or cash flows.
In July 1999, the FASB approved SFAS No. 137, "Accounting for Derivative
Instruments and Hedging Activities--Deferral of the Effective Date of FASB
Statement No. 133", which amends SFAS No. 133 to be effective for all fiscal
quarters of all fiscal years beginning after June 15, 2000.
UNAUDITED FINANCIAL STATEMENTS
The unaudited consolidated financial information included herein as of
June 30, 1999 and for the three months ended June 30, 1998 and 1999, have been
prepared in accordance with generally accepted accounting principles for interim
financial statements. In the opinion of the Company, these unaudited
consolidated financial statements, reflect all adjustments necessary, consisting
of normal recurring adjustments, for a fair presentation of such data on a basis
consistent with that of the audited data presented herein. The consolidated
results for interim periods are not necessarily indicative of the results
expected for a full year.
F-93
<PAGE>
TWINSPARK INTERACTIVE PEOPLE B.V.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. ACQUISITIONS
COOL B.V.
As of January 9, 1999 the Company signed a letter of intent to acquire all
activities of a Dutch entity called Cool B.V. The goodwill which will be paid
and included in the letter of intent is approximately $95,300. Per date of the
issuance of these financial statements, the acquisition is not completed.
3. RELATED PARTY TRANSACTIONS
Due from affiliates consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- JUNE 30,
1997 1998 1999
-------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
3WIS Beheer B.V............................................. $ -- $19,589 $ 17,850
Tridion B.V................................................. -- -- 261,180
----- ------- --------
Due from affiliates....................................... $ -- $19,589 $279,030
===== ======= ========
</TABLE>
Due to affiliates consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- JUNE 30,
1997 1998 1999
-------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
3WIS Beheer B.V............................................. $49,044 $ -- $ --
Topics Interactive Factory B.V.............................. 31,705 10,059 32,413
------- ------- -------
Due to affiliates......................................... $80,749 $10,059 $32,413
======= ======= =======
</TABLE>
4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------- JUNE 30,
1997 1998 1999
--------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Office equipment.......................................... $ 24,274 $ 87,886 $ 574,972
Computer equipment........................................ 153,076 374,312 111,658
Technical infrastructure.................................. 25,265 41,825 81,266
--------- --------- ---------
Total property and equipment............................ 202,615 504,023 767,896
Less--Accumulated depreciation and amortization........... (121,370) (211,245) (256,810)
--------- --------- ---------
Property and equipment, net............................. $ 81,245 $ 292,778 $ 511,086
========= ========= =========
</TABLE>
Depreciation expense was approximately $62,832, $81,112 and $45,565,
respectively, for the years ended December 31, 1997 and 1998 and period ending
June 30, 1999 (unaudited).
F-94
<PAGE>
TWINSPARK INTERACTIVE PEOPLE B.V.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. INTANGIBLES
Intangibles consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- JUNE 30,
1997 1998 1999
-------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Goodwill.................................................... $49,539 $52,944 $131,530
Less--Accumulated amortization.............................. (9,908) (21,178) (30,534)
------- ------- --------
Intangibles, net.......................................... $39,631 $31,766 $100,996
======= ======= ========
</TABLE>
Amortization expense was approximately $10,217, $10,076 and $9,356 for the
years ended December 31, 1997 and 1998 and the six months ended June 30, 1999
(unaudited), respectively.
6. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------- JUNE 30,
1997 1998 1999
--------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Accounts payable.......................................... $100,070 $360,546 $ 964,373
Accrued expenses--other................................... 85,703 441,021 401,659
Accrued professional fees................................. 7,926 18,001 14,092
-------- -------- ----------
$193,699 $819,568 $1,380,124
======== ======== ==========
</TABLE>
7. INCOME TAXES
The provision for income taxes is based upon the regular corporate Dutch tax
rate of 35%. The pre incorporation result (January 1, 1997--December 22, 1998)
of Twinspark Interactive People B.V. in corporation can be contributed to
Twinspark Interactive People B.V.
Income (loss) before income taxes and the provision (benefit) per taxes on
income (loss) consisted of the following:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, SIX MONTHS
--------------------- ENDED
1997 1998 JUNE 30, 1999
--------- --------- --------------
(UNAUDITED)
<S> <C> <C> <C>
Income (loss) before income taxes:
Domestic............................................... $ -- $ -- $ --
International.......................................... (174,193) 346,113 (754,682)
--------- -------- ---------
$(174,193) $346,113 $(754,682)
========= ======== =========
Provision (benefit) for taxes on income (loss):
Current--International................................. $ (65,437) $ 52,899 $ (49,787)
Deferred--International................................ -- -- --
--------- -------- ---------
$ (65,437) $ 52,899 $ (49,787)
========= ======== =========
</TABLE>
F-95
<PAGE>
TWINSPARK INTERACTIVE PEOPLE B.V.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. INCOME TAXES (CONTINUED)
A reconciliation of the difference between the statutory U.S. Federal Income
Tax Rate and the Company's effective tax rate is as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, SIX MONTHS
-------------------- ENDED
1997 1998 JUNE 30, 1999
-------- --------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Statutory federal income tax rate......................... $(59,226) $117,678 $(256,592)
Local taxes on income (additional Dutch rate)............. (1,742) 3,461 (7,547)
Other..................................................... 13,000 (12,000) --
Valuation allowance....................................... 47,968 (56,240) 214,352
-------- -------- ---------
Effective rate............................................ $ -- $ 52,899 $ (49,787)
======== ======== =========
</TABLE>
The tax effects of temporary differences that give rise to a significant
portion of the deferred income taxes are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- JUNE 30,
1997 1998 1999
-------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Current deferred income tax assets (liabilities) net:
Other..................................................... $ -- $ -- $ 7,547
Noncurrent deferred income tax assets (liabilities) net:
Net operating loss........................................ 47,968 256,592
Valuation allowance....................................... (47,968) (214,352)
-------- -------- ---------
Total deferred income taxes, net...................... $ -- $ $ 49,787
======== ======== =========
</TABLE>
Deferred income taxes are provided for the temporary difference between the
financial reporting basis and tax basis of the Company's assets and liabilities.
Deferred tax assets result principally from recording certain expenses in the
financial statements, which are not currently deductible for tax purposes, and
differences between the tax and book basis of assets and liabilities recorded in
connection with the acquisitions. Deferred tax liabilities result principally
from expenses which are currently deductible for tax purposes, but have not yet
been expensed in the financial statements.
8. STOCKHOLDERS' EQUITY
COMMON SHARES
The Company has 15,000,000 authorized shares of Common Stock, of which
15,000,000 shares were issued as of December 31, 1998 and June 30, 1999.
9. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES AND RENT COMMITMENTS
The Company is committed under operating leases, principally for office
space and cars expiring through 2002. As of December 31, 1998, the Company has a
total car lease commitment of $126,455.
F-96
<PAGE>
TWINSPARK INTERACTIVE PEOPLE B.V.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
9. COMMITMENTS AND CONTINGENCIES (CONTINUED)
In February 1999, the Company signed a letter of intent to rent an office
building in Diemen for a 10- year period. The rent will start between June 1,
2000 and August 31, 2000. The total rent commitment over the 10-year period is
$5,909,618.
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31:
- ------------------------
<S> <C>
1999........................................................ $ 30,000
2000........................................................ 305,000
2001........................................................ 581,000
2002........................................................ 581,000
2003........................................................ 551,000
Thereafter.................................................. 3,581,000
</TABLE>
CREDIT FACILITIES
The Company has credit facilities available for an amount of $156,683 and a
5 year loan agreement with the bank of $50,380 to be repaid in 20 quarter terms,
commencing January 1, 1998. The Company pledged its office equipment and
accounts receivable. In addition the payables of the Company to related parties
at any date are subordinated against the payables of the Company to the bank.
Finally, the bank requires that the equity of the Company is at least 30% of
balance sheet total.
11. EMPLOYEE BENEFIT PLAN
The Company has a defined contribution plan covering all of its eligible
employees in The Netherlands. The Plan is effective from March 18, 1999.
Employees may begin participation on monthly enrollment dates provided that they
have reached 25 years of age and permanent employment.
12. SUBSEQUENT EVENTS
Effective January 1, 1999, all assets and liabilities related to Interactive
Products Solutions will be transferred to a newly established company called
Tridion B.V. for approximately $100,000.
In August 1999, the Company was acquired by AGENCY.COM Ltd. ("AGENCY.COM")
for $700,000 in cash and 1,057,226 shares of AGENCY.COM's common stock valued at
$4.06 per share, of which 1,047,226 shares were given to the shareholders of the
Company and 10,000 shares to employees of the Company, for a total aggregate
purchase price of $4,997,624. Employees of the Company also received 75,000
stock options to purchase shares of AGENCY.COM's common stock. Furthermore, the
purchase agreement calls for certain earn-out payments to the former
shareholders of the Company based upon the achievement of certain targeted
operating results of the Company through December 1999. These payments are
payable in the form of 168,066 shares of AGENCY.COM's common stock which are
currently held in escrow.
F-97
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Interactive Traffic, Inc.
In our opinion, the accompanying balance sheets and the related statements
of operations, changes in stockholders' equity and of cash flows present fairly,
in all material respects, the financial position of Interactive Traffic, Inc. at
December 31, 1998, and the results of its operations and its cash flows for the
year then ended, in conformity with generally accepted accounting principles.
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 of these statements in accordance with
generally accepted auditing standards which 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audit provides a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers LLP
September 23, 1999, except for Note 12,
as to which the date is October 21, 1999
F-98
<PAGE>
INTERACTIVE TRAFFIC, INC.
BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1998 1999
------------ -------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 742,151 $ 2,037,391
Accounts receivable, net of allowance for doubtful
accounts of $18,300 and $0.............................. 601,401 1,369,228
Prepaid expenses and other current assets................. 45,353 96,495
---------- -----------
Total current assets.................................... 1,388,905 3,503,114
Property and equipment, net................................. 345,042 469,391
Security deposits........................................... 71,298 110,004
---------- -----------
Total assets............................................ $1,805,245 $ 4,082,509
========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses..................... $ 214,396 $ 395,077
Customer advances......................................... 1,088,025 2,450,329
Deferred revenues......................................... 259,500 677,276
Current portion of long-term debt......................... 36,217 41,151
Line of credit............................................ -- 200,000
Other..................................................... 41,710 26,710
Stockholder loans......................................... 42,475 84,064
---------- -----------
Total current liabilities............................... 1,682,323 3,874,607
Long-term debt.............................................. 69,495 67,204
---------- -----------
Total liabilities....................................... 1,751,818 3,941,811
========== ===========
Stockholders' equity:
Common stock, par value $.01, 300,000 and 500,000 shares
authorized in 1998 and 1999, respectively; 212,387 and
213,733 shares issued and outstanding in 1998 and 1999,
respectively............................................ 2,124 2,137
Series A Convertible Preferred stock, par value $.01, 0
and 37,041 shares authorized in 1998 and 1999,
respectively; 0 and 37,041 shares issued and outstanding
in 1998 and 1999, respectively.......................... -- 370
Stockholder receivable.................................... (26,461) (28,782)
Additional paid-in capital................................ 727,403 3,731,591
Deferred compensation..................................... -- (1,157,584)
Accumulated deficit....................................... (649,639) (2,407,034)
---------- -----------
Total stockholders' equity.............................. 53,427 140,698
---------- -----------
Total liabilities and stockholders' equity.............. $1,805,245 $ 4,082,509
========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-99
<PAGE>
INTERACTIVE TRAFFIC, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED -----------------------------
DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
1998 1998 1999
------------ ------------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Revenues............................................ $3,506,833 $2,309,796 $ 4,286,931
Cost of revenues.................................... 2,788,220 1,836,845 4,045,756
---------- ---------- -----------
Gross profit...................................... 718,613 472,951 241,175
Operating expenses:
General and administrative........................ 1,189,557 775,216 1,703,707
Sales and marketing............................... 218,604 143,575 318,556
---------- ---------- -----------
Total operating expenses........................ 1,408,161 918,791 2,022,263
Operating loss.................................. (689,548) (445,840) (1,781,088)
Other income (expense)
Interest income................................... 42,108 30,683 57,941
Interest expense.................................. (14,257) (10,040) (24,248)
Loss on disposal of equipment..................... (9,399) -- (10,000)
---------- ---------- -----------
18,452 20,643 23,693
---------- ---------- -----------
Net loss............................................ $ (671,096) $ (425,197) $(1,757,395)
========== ========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-100
<PAGE>
INTERACTIVE TRAFFIC, INC.
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1998 AND THE NINE MONTHS ENDED SEPTEMBER 30,
1999
<TABLE>
<CAPTION>
SERIES A
CONVERTIBLE
PREFERRED COMMON RETAINED
STOCK STOCK ADDITIONAL EARNINGS
------------------- ------------------- STOCKHOLDER PAID-IN DEFERRED (ACCUMULATED
SHARES AMOUNT SHARES AMOUNT RECEIVABLE CAPITAL COMPENSATION DEFICIT)
-------- -------- -------- -------- ------------ ---------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1997................... -- $ -- 195,523 $ 1,955 $(25,008) $ 181,947 $ -- $ 21,457
Issuance of common
stock.................. -- -- 9,009 90 -- 299,910 -- --
Stock-based compensation
on restricted shares... -- -- 7,855 79 -- 245,546 -- --
Advances to stockholder.. -- -- -- -- (1,453) -- -- --
Net loss................. -- -- -- -- -- -- -- (671,096)
------ ------- ------- ------- -------- ---------- ----------- -----------
Balance, December 31,
1998................... -- 212,387 2,124 (26,461) 727,403 -- (649,639)
Stock-based compensation
on restricted shares... -- -- 1,346 13 -- 175,766 -- --
Advances to stockholder.. -- -- -- -- (2,321) -- -- --
Issuance of preferred
stock.................. 37,041 370 -- -- -- 1,495,710 -- --
Issuance of stock
options................ -- -- -- -- -- 1,332,712 (1,332,712) --
Stock-based compensation
on stock options....... -- -- -- -- -- -- 175,128 --
Net loss................. -- -- -- -- -- -- -- (1,757,395)
------ ------- ------- ------- -------- ---------- ----------- -----------
Balance, September 30,
1999................... 37,041 $ 370 213,733 $ 2,137 $(28,782) $3,731,591 $(1,157,584) $(2,407,034)
====== ======= ======= ======= ======== ========== =========== ===========
<CAPTION>
TOTAL
STOCKHOLDERS'
EQUITY
--------------
<S> <C>
Balance, December 31,
1997................... $ 180,351
Issuance of common
stock.................. 300,000
Stock-based compensation
on restricted shares... 245,625
Advances to stockholder.. (1,453)
Net loss................. (671,096)
----------
Balance, December 31,
1998................... 53,427
Stock-based compensation
on restricted shares... 175,779
Advances to stockholder.. (2,321)
Issuance of preferred
stock.................. 1,496,080
Issuance of stock
options................ --
Stock-based compensation
on stock options....... 175,128
Net loss................. (1,757,395)
----------
Balance, September 30,
1999................... $ 140,698
==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-101
<PAGE>
INTERACTIVE TRAFFIC, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED -----------------------------
DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
1998 1998 1999
------------ ------------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss.......................................... $(671,096) $(425,197) $(1,757,395)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation.................................... 92,603 46,396 141,805
Provision for doubtful accounts................. (21,489) (39,789) (18,300)
Stock-based compensation........................ 245,625 151,327 350,907
Loss on disposal of equipment................... 9,399 -- 10,000
Changes in assets and liabilities:
Accounts receivable........................... (44,308) (66,271) (749,527)
Prepaid expenses and other.................... (15,026) (19,823) (41,046)
Accounts payable and accrued expenses......... 32,612 (607) 180,678
Customer advances............................. 543,479 401,933 1,362,305
Deferred revenues............................. 63,942 196,092 417,776
--------- --------- -----------
Net cash provided by (used in) operating
activities................................ 235,741 244,061 (102,797)
--------- --------- -----------
Cash flows from investing activities:
Purchases of fixed assets......................... (253,603) (199,157) (251,856)
Security deposits................................. (33,333) (13,703) (38,706)
--------- --------- -----------
Net cash used in investing activities....... (286,936) (212,860) (290,562)
--------- --------- -----------
Cash flows from financing activities:
Proceeds from bank borrowings..................... 39,016 29,638 210,746
Payments of bank borrowings....................... (63,280) (47,658) (28,747)
Proceeds from stockholder loans................... 13,507 12,039 56,089
Payments of stockholder loans..................... -- -- (14,500)
Payments of other loans........................... -- -- (15,000)
Payments of capital lease obligation.............. (11,754) (8,700) (13,748)
Advances to stockholder........................... (20,787) (17,978) (10,321)
Proceeds from stockholder receivable.............. 19,336 12,247 8,000
Issuance of preferred stock....................... -- -- 1,496,080
Issuance of common stock.......................... 300,000 300,000 --
--------- --------- -----------
Net cash provided by financing activities... 276,038 279,588 1,688,599
--------- --------- -----------
Net increase in cash and cash equivalents........... 224,843 310,789 1,295,240
Cash and cash equivalents, beginning of period...... 517,308 517,308 742,151
--------- --------- -----------
Cash and cash equivalents, end of period............ $ 742,151 $ 828,097 $ 2,037,391
========= ========= ===========
Supplemental disclosure of cash flow information
Cash paid during the period for interest.......... $ 14,030 $ 10,040 $ 18,159
Supplemental disclosure of non-cash investing and
financing activities:
Capitalized lease obligations incurred............ 13,321 13,327 34,393
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-102
<PAGE>
INTERACTIVE TRAFFIC, INC.
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND DESCRIPTION OF BUSINESS
Interactive Traffic, Inc. (the "Company") is an interactive direct marketing
agency and was organized as a Delaware corporation in July 1995 and commenced
operations on that date. The Company works with electronic commerce companies to
maximize the return on their investment in online marketing programs.
Inherent in the Company's business are various risks and uncertainties,
including its limited operating history, recent development of the Internet
advertising market and unproven acceptance and effectiveness of web advertising,
unproven business model, risks associated with technological change, 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
product development efforts, and the acceptance of the Company's solutions by
the marketplace.
2. SIGNIFICANT ACCOUNTING POLICIES
INTERIM BASIS OF PRESENTATION
The interim financial statements as of September 30, 1999 and for the nine
months ended September 30, 1998 and 1999 are unaudited and reflect adjustments,
consisting only of normal recurring accruals, which are, in the opinion of the
Company's management, necessary for a fair presentation of the financial
position and results of operations for the periods presented. Operating results
for any interim period are not necessarily indicative of the results for the
full year.
CASH AND CASH EQUIVALENTS
The Company considers all short-term investments with a maturity of three
months or less to be cash equivalents.
REVENUE RECOGNITION
Revenues are derived primarily from the delivery of services rendered to
clients. For these services the Company receives base fees. In addition to these
base fees, certain client agreements contain incentive fee schedules, whereby
the Company receives additional revenues based on increased sales levels that
its clients achieve from the direct result of services performed by the Company.
Revenues are recognized in the period in which the services are performed and
the period in which any incentives are earned.
DEFERRED REVENUES
The Company bills its customers for base fees at the beginning of a month
for services to be rendered during the following month. The Company defers these
revenues until the services are performed. The Company has recorded deferred
revenues of $259,500 and $677,276 for such billings as of December 31, 1998 and
September 30, 1999, respectively.
F-103
<PAGE>
INTERACTIVE TRAFFIC, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CUSTOMER ADVANCES
In connection with performing direct marketing consulting services for its
customers, the Company purchases advertising on Web sites on behalf of its
customers. The Company invoices its customers for the cost of media placements
and remits payments to the Web sites but does not assume any credit risk
associated with the transactions. The Company does not recognize any revenue or
expenses associated with the purchasing and re-invoicing of advertising
placements in its statement of operations. As of December 31, 1998 and
September 30, 1999, the Company received $1,088,025 and $2,450,329,
respectively, of cash advances from its customers for the purchase of
advertising on Web sites.
STOCK-BASED COMPENSATION
In October 1995, the Financial Accounting Standards Board (the "FASB")
issued Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("SFAS 123"). SFAS 123 allows companies which have
stock-based compensation arrangements with employees to adopt a new fair-value
basis of accounting for stock options and other equity instruments, or to
continue to apply the existing accounting required by Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"). The
Company has elected to account for its stock-based compensation arrangements for
employees under APB 25 and related interpretations. Under APB 25, compensation
is recorded on the date of grant to the extent the fair value of the underlying
stock exceeds the exercise price.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is provided using
the straight-line method over the estimated useful life of the assets. Leasehold
improvements are amortized over their estimated useful lives, or the term of the
leases, whichever is shorter.
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of cash and cash equivalents
and accounts receivable. The Company places its cash with high quality financial
institutions. The Company performs ongoing credit evaluations of its customers
and generally requires no collateral.
For the year ended December 31, 1998, five customers accounted for
approximately 69% of revenues, individually ranging from 10%--19%. Approximately
82% of accounts receivable at December 31, 1998 was due from five customers.
INCOME TAXES
The Company uses the asset and liability method of accounting for income
taxes. Under this method, deferred tax assets and liabilities are recognized for
the future tax consequences
F-104
<PAGE>
INTERACTIVE TRAFFIC, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and to operating
losses 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 the results of operations in the period that includes the
enactment date.
MANAGEMENT'S 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 amounts reported in the financial statements and
footnotes thereto. Actual results may differ from those estimates.
3. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
ESTIMATED DECEMBER 31, SEPTEMBER 30,
USEFUL LIFE 1998 1999
----------- ------------ -------------
(UNAUDITED)
<S> <C> <C> <C>
Computer equipment and purchased software............. 3 years $315,411 $426,736
Furniture and fixtures................................ 5 years 114,324 238,555
Leasehold improvements................................ 4-5 years 37,387 46,427
--------- -------- --------
467,122 711,718
Less accumulated depreciation and amortization........ (122,080) (242,327)
-------- --------
$345,042 $469,391
======== ========
</TABLE>
4. LEASE COMMITMENTS
The Company leases its facilities pursuant to noncancellable operating
leases. The future minimum lease payments under such leases at December 31, 1998
are as follows:
<TABLE>
<S> <C>
1999........................................................ $285,738
2000........................................................ 311,683
2001........................................................ 281,514
2002........................................................ 85,302
--------
$964,237
========
</TABLE>
F-105
<PAGE>
INTERACTIVE TRAFFIC, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. LEASE COMMITMENTS (CONTINUED)
Rent expense under operating leases for the year ended December 31, 1998 and
for the nine months ended September 30, 1998 and 1999 was approximately
$187,000, $131,000 and $321,000, respectively.
5. STOCKHOLDERS' EQUITY
In March 1999, the Board of Directors amended the Certificate of
Incorporation to effect an increase in the number of shares the Company has the
authority to issue to 537,041 shares, including 500,000 shares of Common Stock
and 37,041 shares of Series A Convertible Preferred Stock.
CONVERTIBLE PREFERRED STOCK
In March 1999, the Company issued 37,041 shares of Series A Convertible
Preferred Stock, (the "Series A shares") at a share price of $43.33. The
Series A shares were recorded at their fair value on the date of issuance of
approximately $1,605,000, net of related issuance costs of $108,920.
The principal terms of the Series A shares are as follows:
LIQUIDATION PREFERENCE
In the event of a liquidation of the Company, the holders of the Series A
shares are entitled to receive an amount equal to $43.33 per share, plus a
further amount per share equal to dividends, if any, then declared but unpaid on
the Series A shares, before any distribution or payment is made upon any shares
of Common Stock.
PARTICIPATION RIGHTS
In the event of a liquidation, dissolution, or winding up of the Company
(which includes a merger or acquisition where the Company is not the surviving
entity), the Series A stockholders initially receive the liquidation preference
noted above, and then any remaining amounts are distributed to all remaining
stockholders on a pro-rata basis after the Series A shares are converted to
common shares.
CONVERSION
The holders of the Series A shares have the right, at any time, to convert
such shares into common stock on a share-for-share basis. All outstanding
Series A shares shall automatically convert into common stock upon the
consummation of a firm commitment underwritten public offering of the Company's
common stock where the gross proceeds from the offering are not less than
$15 million.
F-106
<PAGE>
INTERACTIVE TRAFFIC, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. STOCKHOLDERS' EQUITY (CONTINUED)
DIVIDENDS
The Company may not pay dividends to the common stockholders unless a
dividend has been paid or set aside on account of all Series A shares. No
dividends have been declared on the Series A shares.
VOTING RIGHTS
The Series A stockholders will have one vote for each full share of common
stock, into which their respective Series A shares are convertible on the record
date for the vote.
PREEMPTIVE RIGHTS
The Company grants to each holder of Series A shares the right to purchase
such holder's pro rata share of any new securities which the Company may, from
time to time, propose to sell and issue.
BOARD OF DIRECTORS REPRESENTATION
The holders of Series A shares, voting together as a class, shall be
entitled to elect one director of the Company at each annual election of
directors.
6. STOCK INCENTIVE PLAN
From July 1995 to December 30, 1998, certain employees were granted
restricted shares of common stock. The restricted shares generally vested 25%
after one year of service and 18.75% each six month period of service
thereafter. If employment was terminated prior to vesting, unless otherwise
determined by the Company, any unvested shares were forfeited. On December 30,
1998, the Company entered into an agreement with its employees to cancel their
unvested shares and replace them with stock options, at a future date, in
accordance with a stock incentive plan which was being implemented by the
Company. As of December 30, 1998, all unvested shares were canceled by the
Company.
F-107
<PAGE>
INTERACTIVE TRAFFIC, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. STOCK INCENTIVE PLAN (CONTINUED)
The following table summarizes the restricted share awards activity during
1998:
STOCK INCENTIVE PLAN
<TABLE>
<CAPTION>
NUMBER OF
SHARES
---------
<S> <C>
Restricted share awards at December 31, 1997................ 17,984
Granted during 1998....................................... 55,320
Vested during 1998........................................ (7,855)
Forfeited during 1998..................................... (4,528)
Cancelled during 1998..................................... (60,921)
-------
Restricted share awards at December 31, 1998................ --
=======
</TABLE>
The Company continued to recognize compensation expense during the period
from December 31, 1998 through June 30, 1999, based on the terms of the original
restricted share awards.
In July 1999, the Company adopted the 1999 Stock Incentive Plan (the "Plan")
under which the Company may issue awards including shares, incentive stock
options or non-qualified stock options. The awards, other than incentive stock
options, may be granted to the Company's directors, employees and consultants.
Incentive stock options may only be granted to employees of the Company. The
maximum aggregate number of shares which may be issued pursuant to all awards is
200,000.
During July and August 1999, the Board granted 89,137 incentive stock
options to its employees, of which 87,937 have an exercise price of $4.33 and
1,200 have an exercise price of $10. The fair market value of the Company's
common stock, as determined by the Company's management, exceeded the exercise
price of the stock options on the date of grant, and accordingly the Company
recognized deferred compensation. The deferred compensation is being amortized
over the vesting period of the stock options. The options generally vest over a
three year period, 25% after one year and 18.75% each six month period
thereafter. In accordance with the plan, an option term will not be more than
10 years from the date of grant, with the exception of incentive stock options
in which the term will not exceed 5 years from the date of grant. Under certain
conditions, these options may vest on an accelerated basis.
In accordance with the Plan, all outstanding awards issued will become fully
vested and exercisable upon the consummation of a corporate transaction, as
defined in the Plan, which includes the acquisition of the Company.
F-108
<PAGE>
INTERACTIVE TRAFFIC, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. LONG TERM DEBT
Long term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1998 1999
------------ -------------
(UNAUDITED)
<S> <C> <C>
Note payable to bank, bearing interest at .75% above prime,
8.5% at December 31, 1998 and 9% at September 30, 1999,
maturing August 2002. The note requires certain members of
the Company's management to personally maintain a
compensating cash balance................................. $ 86,000 $ 68,000
Capitalized leases payable to various companies to be paid
ratably over periods of three years or less............... 19,712 40,355
-------- --------
105,712 108,355
Less current portion of note payable and capitalized
leases.................................................... (36,217) (41,151)
-------- --------
Total long-term debt........................................ $ 69,495 $ 67,204
======== ========
</TABLE>
8. LINE OF CREDIT
During February 1999, the Company entered into a line of credit agreement
with a financial institution in the amount of $200,000. The line of credit is
collateralized by the Company's assets and personally guaranteed by certain
members of the Company's management. Borrowings under the line bear interest at
1% above prime, 9.25% at September 30, 1999. The line is required to be repaid
once a year. Subsequent to repayment, the Company may not borrow against the
line for a period of thirty days.
9. RELATED PARTY TRANSACTIONS
STOCKHOLDER RECEIVABLE
The stockholder receivable reflected as a reduction in stockholders' equity
consists of advances made to an officer who is also a stockholder of the
Company. The advances are non-interest bearing and have no established payment
terms.
STOCKHOLDER LOANS
Stockholder loans consists of amounts due to two stockholders of the
Company. The amounts bear interest, at rates ranging from 6% to 13.5%, and are
due on demand.
10. INCOME TAXES
The Company accounts for income taxes under Statement of Financial
Accounting Standards No. 109 ("SFAS 109"), "Accounting for Income Taxes". Under
SFAS 109, deferred income tax assets and liabilities are based upon differences
between financial reporting and tax bases of
F-109
<PAGE>
INTERACTIVE TRAFFIC, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
10. INCOME TAXES (CONTINUED)
assets and liabilities and are measured using the enacted tax rates and laws
that will be in effect when the differences are expected to reverse.
Significant components of the Company's net deferred income taxes are as
follows:
INCOME TAXES
<TABLE>
<CAPTION>
DECEMBER 31,
1998
------------
<S> <C>
Deferred tax assets:
Net operating loss carryforward........................... $341,040
Deferred income........................................... 110,275
Other..................................................... 99,918
--------
Total deferred tax assets................................... 551,233
Deferred tax liabilities:
Accounts receivable....................................... 263,342
Other..................................................... 37,888
--------
Total deferred tax liabilities.............................. 301,230
Deferred Tax Asset.......................................... 250,003
Valuation Allowance......................................... 250,003
--------
Net Deferred Tax Asset...................................... $ --
========
</TABLE>
A valuation allowance is required to reduce the existing deferred tax
assets, if, based on the weight of all positive and negative evidence, it is
more likely than not that some portion or all of the deferred tax assets will
not be realized. Management of the Company has evaluated the available evidence
regarding the realizability of its deferred tax assets and concluded that it is
more likely than not that the Company will not realize these favorable tax
attributes and accordingly, has provided a valuation allowance for the net
deferred tax asset. The Company has a net operating loss carryforward equal to
approximately $802,000 as of December 31, 1998. Under current Federal income tax
law approximately $217,000 and $585,000 of such carryforwards will expire on
December 31, 2013 and 2018, respectively.
11. SUBSEQUENT EVENT
The Company was acquired by AGENCY.COM Ltd. on October 21, 1999.
F-110
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO VISIONIK A/S:
We have audited the accompanying consolidated balance sheets of Visionik A/S
(a Danish corporation) and subsidiaries, as of December 31, 1997 and 1998, and
the related statements of operations, stockholders' equity and cash flows for
the years ended December 31, 1997 and December 31, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these 1997 and 1998 financial
statements based on our audits.
We conducted our audits in accordance with United States 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 Visionik A/S and
subsidiaries as of December 31, 1997 and 1998, and the results of their
operations and their cash flows for the years then ended in conformity with
United States generally accepted accounting principles.
MOORE STEPHENS DENMARK
COPENHAGEN, DENMARK
November 2, 1999
F-111
<PAGE>
VISIONIK A/S AND SUSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
1997 1998 1999
------------ ------------ ---------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents......................... $273,757 $ 226,038 $ 354,221
Work in progress, net............................. 14,726 50,551 79,666
Accounts receivable............................... 205,526 544,288 686,486
Prepaid expenses and other current assets......... 19,231 31,296 128,614
Marketable securities available for sale.......... 111,553 122,424 66,690
-------- ---------- ---------------
Total current assets.......................... 624,793 974,597 1,315,677
======== ========== ===============
Property and Equipment, net of accumulated
amortization of $79,005, $77,046 and $35,439,
(unaudited) respectively.......................... 64,872 54,413 46,238
-------- ---------- ---------------
Total assets.................................. $689,665 $1,029,010 $ 1,361,915
======== ========== ===============
LIABILITIES AND STOCKHOLDERS EQUITY
Current Liabilities:
Subordinated debt................................. $ -- $ -- $ 287,203
Accounts payable and accrued expenses............. 311,912 508,029 465,201
Prepayments from customers........................ 54,016 103,934 33,698
Income taxes payable.............................. 73,949 93,778 177,981
Other current liabilites.......................... 12,818 7,829 107,701
-------- ---------- ---------------
Total current liabilities..................... 452,695 713,570 1,071,784
-------- ---------- ---------------
Long-term Liabilities:
Deferred tax...................................... -- 5,649 12,144
Other long-term liabilities....................... 19,294 14,994 7,504
-------- ---------- ---------------
Total long-term liabilities................... 19,294 20,643 19,648
-------- ---------- ---------------
Total liabilities............................. 471,989 734,213 1,091,432
-------- ---------- ---------------
Commitments (Note 7)
Stockholders' Equity:
Common stock, $168 par value, 500 shares
authorized, 500, 500 and 500 (unaudited) shares
issued and outstanding, respectively............ 84,055 84,055 84,055
Retained earnings................................. 162,183 216,448 220,894
Cumulative translation adjustment................. (28,562) (11,255) (40,352)
Unrealized gains on marketable securities......... -- 5,549 5,886
-------- ---------- ---------------
Total stockholders' equity.................... 217,676 294,797 270,483
-------- ---------- ---------------
Total liabilities and stockholders' equity.... $689,665 $1,029,010 $ 1,361,915
======== ========== ===============
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-112
<PAGE>
VISIONIK A/S AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED NINE MONTHS,
DECEMBER 31, DECEMBER 31, ENDED SEPTEMBER 30,
1997 1998 1999
------------ ------------ -------------------
(UNAUDITED)
<S> <C> <C> <C>
Revenues....................................... $1,811,295 $2,041,596 $2,242,049
Direct salaries and costs...................... 1,131,369 1,179,145 1,257,579
---------- ---------- ----------
Gross profit............................... 679,926 862,451 984,470
General and administrative..................... 371,427 436,873 492,561
Sales and marketing............................ 137,971 256,788 319,598
Depreciation and amortization.................. 79,005 77,046 39,653
---------- ---------- ----------
Income from operations..................... 91,523 91,744 132,658
Income from affiliated company................. -- -- 50,996
Interest income................................ 10,757 15,269 9,662
Interest expense............................... (3,813) (498) (17,243)
---------- ---------- ----------
Income before income taxes................. 98,467 106,515 176,073
Provision for income taxes..................... 35,716 38,872 63,589
---------- ---------- ----------
Net income................................. $ 62,751 $ 67,643 $ 112,484
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-113
<PAGE>
VISIONIK A/S AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
UNREALIZED
COMMON COMMON GAINS ON CUMMULATIVE
STOCK STOCK MARKETABLE RETAINED FOREIGN CURRENCY
SHARES AMOUNT SECURITIES EARNINGS TRANSLATION TOTAL
-------- -------- ---------- --------- ---------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1997......... 500 $84,055 $ -- $106,757 $ -- $190,812
Translation adjustment......... -- -- -- -- (28,562) (28,562)
Net Income..................... -- -- -- 62,751 -- 62,751
Dividend....................... -- -- -- (7,325) -- (7,325)
--- ------- ------ -------- -------- --------
Balance, December 31, 1997....... 500 84,055 -- 162,183 (28,562) 217,676
Translation adjustment......... -- -- -- -- 17,307 17,307
Net Income..................... -- -- 5,549 62,094 -- 67,643
Dividend....................... -- -- -- (7,829) -- (7,829)
--- ------- ------ -------- -------- --------
Balance, December 31, 1998....... 500 84,055 5,549 216,448 (11,255) 294,797
Translation adjustment......... -- -- -- -- (29,097) (29,097)
Net Income (unaudited)......... -- -- 337 112,147 -- 112,484
Dividend....................... -- -- -- (107,701) -- (107,701)
--- ------- ------ -------- -------- --------
Balance, September 30, 1999
(unaudited).................... 500 $84,055 $5,886 $220,894 $(40,352) $270,483
=== ======= ====== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-114
<PAGE>
VISIONIK A/S AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED YEAR ENDED ENDED
DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
1997 1998 1999
------------ --------------- -------------
(UNAUDITED)
<S> <C> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net Income........................................ $ 62,751 $ 67,643 $112,484
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization..................... 79,005 77,046 39,653
Dividend.......................................... (7,325) (7,829) (107,701)
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable........ (7,949) (338,762) (142,198)
(Increase) in work in progress.................... 222,598 (35,825) (29,115)
(Increase) decrease in prepaid expenses and other
current assets.................................. (8,344) 12,065 (97,318)
(Increase) in securities.......................... (42,219) (10,871) 55,734
Increase (decrease) in long-term liabilities...... (8,875) 1,349 (995)
Increase (decrease) in accounts payable and
accrued expenses................................ 136,939 196,117 (42,828)
Increase (decrease)in accounts prepayments from
customers....................................... (7,620) 49,918 (70,236)
Increase (decrease) in income taxes payable....... (5,335) 19,829 84,203
Increase (decrease) in dividend................... 4,412 (4,989) 99,872
-------- --------------- --------
Net cash provided by (used in) operating
activities.................................. 418,038 25,691 (98,445)
-------- --------------- --------
CASH FLOW FROM INVESTING ACTIVITIES:
Capital Expenditures, net......................... (79,875) (90,717) (31,478)
-------- --------------- --------
Net cash (used in) investing activities....... (79,875) (90,717) (31,478)
-------- --------------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in subordinated debt.......... (50,433) -- 287,203
-------- --------------- --------
Net cash provided by financing activities..... (50,433) -- 287,203
-------- --------------- --------
Net increase (decrease) in cash and cash
equivalents....................................... 287,730 (65,026) 157,280
Effect of Exchange Rates on Cash.................... (28,562) 17,307 (29,097)
CASH AND CASH EQUIVALENTS, beginning of period...... 14,589 273,757 226,038
-------- --------------- --------
CASH AND CASH EQUIVALENTS, end of period............ $273,757 $ 226,038 $354,221
======== =============== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for -
Income taxes.................................... $ 30,526 $ 20,527 $ --
======== =============== ========
Interest........................................ $ 6,944 $ 14,771 $ 7,581
======== =============== ========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-115
<PAGE>
VISIONIK A/S AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS
Visionik A/S and subsidiaries (collectively known as the "Company") is a
digital business development partner. The Company develops and drives
interactive digital channels across different platforms for its customers.
Visionik A/S is owned 75% by Visionik Holding ApS and 25% by Associated
Management Services A/S. The Visionik Group consist of the parent company
Visionik A/S and the 100% owned subsidiaries Visionik E-COM ApS and Visionik
Interactive TV A/S. Visionik E-COM ApS is developing professional internet
services for The Copenhagen Stock Exchange and a number of other customers in
Denmark. Visionik Interactive TV A/S is a developer of interactive services and
backend systems for digital TV. The Company is working for clients in
Scandinavia, England, Ireland, Holland, Germany and France among others.
ACCOUNTING PRINCIPLES IN GENERAL
The Company's financial statements have been prepared in accordance with US
GAAP.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
Visionik A/S and its subsidiaries, Visionik E-COM ApS and Visionik Interactive
TV A/S. All significant intercompany accounts and transactions have been
eliminated in consolidation.
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.
REVENUE RECOGNITION
Revenues are recognized for time and materials arrangements on the basis of
costs incurred in the period. Provisions for estimated losses on uncompleted
contracts are made in the period in which such losses are determined. Amounts
billed, which are not yet earned, are classified as deferred revenue in the
accompanying consolidated balance sheets.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt and equity instruments with an
original maturity of three months or less to be cash equivalents.
F-116
<PAGE>
VISIONIK A/S AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INVESTMENTS IN MARKETABLE SECURITIES
The Company accounts for investments in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain
Investments in Debt and Equity Securities". In accordance with this
pronouncement, the investment and debt securities held by the Company and
included in the accompanying consolidated balance sheets that may be sold in
response to changes in interest rates, prepayments, and other factors have been
classified as available-for-sale. Such securities are reported at fair value,
with unrealized gains and losses excluded from earnings and reported in a
separate component of shareholders' equity (on an after-tax basis). Gains and
losses on the disposition of securities are recognized on the specific
identification method in the period in which they occur.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost, net of accumulated depreciation
and amortization. Property and equipment is depreciated on a straight-line basis
over their estimated useful lives of two to five years. Leasehold improvements
and equipment held under capital leases are amortized utilizing the
straight-line method over the lesser of the estimated useful life of the asset
or the remaining term of the related lease.
ACCOUNTING FOR LONG-LIVED ASSETS
The Company follows the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed of." This statement establishes
financial accounting and reporting standards for the impairment of long-lived
assets, certain identifiable intangibles and goodwill related to those assets to
be held and used, and for long-lived assets and certain identifiable intangibles
to be disposed. Management has performed a review of all long-lived assets and
has determined that no impairment of the respective carrying values has occurred
as of December 31, 1998 and September 31, 1999 (unaudited).
INCOME TAXES
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes." This statement requires an asset and liability
approach for measuring deferred taxes based on temporary differences between the
financial statement and income tax bases of assets and liabilities existing at
each balance sheet date using enacted tax rates for the years in which the taxes
are expected to be paid or recovered. The effect on deferred tax assets or
liabilities of a change in tax rates is recognized in the period that the tax
change occurs.
F-117
<PAGE>
VISIONIK A/S AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FOREIGN CURRENCY TRANSLATION
All assets and liabilities of foreign subsidiaries are translated into
Danish kroner at fiscal year-end exchange rates. Income and expense items are
translated at average exchange rates during the fiscal year.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash and cash equivalents, accounts receivable and
accounts payable approximate fair value due to the short-term maturity of these
instruments.
BUSINESS CONCENTRATIONS AND CREDIT RISK
Financial instruments, which subject the Company to concentrations of credit
risk, consist primarily of cash and cash equivalents and trade accounts
receivable. The Company maintains cash and cash equivalents with various
financial institutions. The Company performs periodic evaluations of the
relative credit standing of these institutions. The Company's clients are
concentrated in Denmark and throughout Europe. The Company performs ongoing
credit evaluations, generally does not require collateral, and establishes an
allowance for doubtful accounts based upon factors surrounding the credit risk
of customers, historical trends and other information. There has been no
allowances for doubtful accounts in the periods presented.
COMPREHENSIVE INCOME
The components of comprehensive income are as follows:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, NINE MONTHS, ENDED
1997 1998 SEPTEMBER 30, 1999
------------ ------------ --------------------
(UNAUDITED)
<S> <C> <C> <C>
Net Income..................................... $ 62,751 $67,643 $112,484
Foreign currency translation adjustment........ (28,562) 17,307 (29,097)
Unrealized gains on marketable securities...... -- 5,549 337
-------- ------- --------
Comprehensive income......................... $ 34,189 $90,499 $ 83,724
======== ======= ========
</TABLE>
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 131, "Disclosures About Segments of an Enterprise and Related Information."
This statement establishes standards for the way public business enterprises
report information about operating segments in annual financial statements and
requires that those enterprises report selected information about operating
segments in interim financial reports issued to shareholders. The statement also
establishes standards for related disclosure about products and services,
geographic areas and
F-118
<PAGE>
VISIONIK A/S AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
major customers. This statement is effective for financial statements for
periods beginning after December 15, 1997 and need not be applied to interim
periods in the initial year of application. Comparative information for earlier
years presented is to be restated. The Company only has operations in the
Netherlands and currently believes that it operates in one segment, therefore,
the adoption of SFAS No. 131 will not materially affect the Company's current
disclosure.
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"), which 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. SOP 98-1 is effective for fiscal years
beginning after December 31, 1998. The Company does not expect the adoption of
SOP 98-1 to have a material effect on its financial statements.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivatives and
Hedging Activities," which establishes accounting and reporting standards of
derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities. The Company does not currently
engage in derivative activity and does not expect the adoption of this standard
to have a material effect on the Company's results of consolidated operations,
financial position or cash flows.
In July 1999, the FASB approved SFAS No. 137, "Accounting for Derivative
Instruments and Hedging Activities--Deferral of the Effective Date of FASB
Statement No. 133", which amends SFAS No. 133 to be effective for all fiscal
quarters of all fiscal years beginning after June 15, 2000.
UNAUDITED FINANCIAL STATEMENTS
The unaudited consolidated financial information included herein as of the
nine months ended September 30, 1999, have been prepared in accordance with
generally accepted accounting principles for interim financial statements. In
the opinion of the Company, these unaudited consolidated financial statements,
reflect all adjustments necessary, consisting of normal recurring adjustments,
for a fair presentation of such data on a basis consistent with that of the
audited data presented herein. The consolidated results for interim periods are
not necessarily indicative of the results expected for a full year.
2. SUBSIDIARIES
On July 1, 1998 the activity in Visionik A/S was transferred into two new
established 100% owned companies Visionik Interactive TV A/S (was established as
an ApS but has been changed to an A/S in 1999) and Visionik E-COM ApS by way of
a tax-free transfer of assets.
F-119
<PAGE>
VISIONIK A/S AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
1997 1998 1999
------------ ------------ -------------
(UNAUDITED)
<S> <C> <C> <C>
Office and computer equipment....................... $271,554 $338,141 $365,405
-------- -------- --------
Total property and equipment.................... 271,554 338,141 365,405
Less--Accumulated depreciation and amortization..... 206,682 283,728 319,167
-------- -------- --------
Proporty and equipment, net..................... $ 64,872 $ 54,413 $ 46,238
======== ======== ========
</TABLE>
Depreciation expense was approximately $79,005, $77,046 and $35,439,
respectively, for the years ended December 31, 1997 and 1998 and the nine months
ending September 30, 1999 (unaudited).
4. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
1997 1998 1999
------------ ------------ -------------
(UNAUDITED)
<S> <C> <C> <C>
Accounts payable.................... $ -- $ -- $ 93,158
Accrued expenses--other............. 311,912 508,029 372,043
-------- -------- --------
$311,912 $508,029 $465,201
======== ======== ========
</TABLE>
5. INCOME TAXES
Income before (provision) for income taxes and the (provision) for income
taxes consisted of the following:
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED YEAR ENDED ENDED
DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
1997 1998 1999
------------ ------------ -------------
(UNAUDITED)
<S> <C> <C> <C>
Income before income taxes:......... $ 98,467 $106,515 $176,073
======== ======== ========
(Provisions for) income taxes:
Current--State.................... $(35,716) $(33,223) $(56,627)
Deferred--State................... -- (5,649) (6,962)
-------- -------- --------
$(35,716) $(38,872) $(63,589)
======== ======== ========
</TABLE>
F-120
<PAGE>
VISIONIK A/S AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. INCOME TAXES (CONTINUED)
The tax effects of temporary differences that give rise to a significant
portion of the deferred income tax assets (liabilities), net, are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
1997 1998 1999
------------ ------------ -------------
(UNAUDITED)
<S> <C> <C> <C>
Deferred tax assets:
Property and equipment............................ $ -- $30,787 $ 15,910
-------- ------- --------
Total deferred tax assets........................... -- 30,787 15,910
-------- ------- --------
Net deferred tax assets............................. -- 30,787 15,910
-------- ------- --------
Deferred tax liabilities:
Cash basis to accrual basis adjustment............ -- (2,858) (7,275)
Work in progress.................................. -- (33,578) (20,779)
-------- ------- --------
Total deferred tax liabilities...................... -- (36,436) (28,054)
-------- ------- --------
Net deferred tax liabilities........................ $ -- $(5,649) $(12,144)
======== ======= ========
</TABLE>
Deferred income taxes are provided for the temporary difference between the
financial reporting basis and tax basis of the company's assets and liabilities.
Deferred tax assets result principally from recording certain expenses in the
financial statements, which are not currently deductible for tax purposes, and
differences between the tax and book bases of assets and liabilities recorded in
connection with the acquisitions. Deferred tax liabilities result principally
from expenses which are currently deductible for tax purposes but have not yet
been expensed in the financial statements.
6. STOCKHOLDERS' EQUITY
COMMON SHARES
The Company has 500 authorized shares of Common Stock.
7. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES AND RENT COMMITMENTS
The Company is committed under operating leases, principally for office
space and equipment expiring through 2002. As of December 31, 1998, the Company
has a total equipment lease commitment of $9,513.
F-121
<PAGE>
VISIONIK A/S AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. COMMITMENTS AND CONTINGENCIES (CONTINUED)
On November 1, 1999, the Company signed a contract to rent office space on a
new location in Copenhagen. There is 2 years security of tenure starting from
January 1, 2000, where the rent will start. The total rent commitment over the
2-year period is $254,796.
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31:
- ------------------------
<S> <C>
1999........................................................ $ 2,216
2000........................................................ 130,031
2001........................................................ 130,031
2002........................................................ 2,031
</TABLE>
8. CREDIT FACILITIES
The Company has an overdraft facility available for an amount of $42,500.
The interest rate on the overdraft is 6%.
9. SUBORDINATED DEBT
There is a subordinated debt of $287,203 obtained by the shareholders. As an
effect of the AGENCY.COM acquisition of the Company, the loan will be redeemed.
A payment of the subordinated debt will not have any tax consequences for the
companies in the group.
10. SUBSEQUENT EVENTS
In November 1999, the Company was acquired by AGENCY.COM Ltd. ("AGENCY.COM")
for 572,000 shares of AGENCY.COM's common stock valued at $9.35 per share, and
$500,000 in cash, for a total aggregate purchase price of $5,848,200. Employees
of the Company also received 68,000 stock options to purchase shares of
AGENCY.COM's common stock.
F-122
<PAGE>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The following unaudited pro forma condensed consolidated financial
statements as of September 30, 1999 and for the nine months ended September 30,
1998 and 1999 and the year ended December 31, 1998, have been derived from the
application of pro forma adjustments to the historical consolidated financial
statements of AGENCY.COM, Eagle River Interactive, Interactive Solutions,
Twinspark Interactive People, I-traffic and Visionik which are included
elsewhere in this prospectus and the historical financial statements of the
other acquisitions, which are not included in this prospectus. The unaudited pro
forma condensed consolidated balance sheet gives effect to the acquisition of
I-traffic and Visionik as if such transactions had occurred on September 30,
1999. The unaudited pro forma consolidated statement of operations information
for the nine months ended September 30, 1999 gives effect to the acquisitions
that AGENCY.COM completed in 1999 as if such transactions had occurred on
January 1, 1998. The unaudited pro forma consolidated statements of operations
information for the nine months ended September 30, 1998 and for the year ended
December 31, 1998, gives effect to the acquisitions that AGENCY.COM completed in
1998 and 1999 as if such transactions had occurred on January 1, 1998.
The unaudited pro forma condensed consolidated financial statements do not
purport to be indicative of what AGENCY.COM's actual results of operations or
financial condition would have been assuming the acquisitions that AGENCY.COM
completed in 1998 and 1999 had been completed on such dates, nor does it purport
to be indicative of results of operations or financial condition that may be
achieved in the future.
Each of the acquisitions that AGENCY.COM completed in 1998 and 1999 has been
accounted for using the purchase method of accounting. The purchase method of
accounting allocates the aggregate purchase price to the assets acquired and
liabilities assumed based upon their respective fair values. The excess purchase
price over the fair value of net assets acquired, which equals $18.507 million
for Eagle River Interactive, and $1.718 million for Interactive Solutions has
been allocated to workforce, customer base and goodwill and, $4.879 million for
Twinspark Interactive People, $9,393 million for I-traffic, $5,578 million for
Visionik and an aggregate of $2.129 million for the other acquisitions has been
allocated to goodwill. Management considers such estimates to be reasonable.
F-123
<PAGE>
AGENCY.COM LTD.
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
PRO FORMA
AGENCY.COM I-TRAFFIC VISIONIK ADJUSTMENTS PRO FORMA
------------- ---------- ---------- ------------ -------------
(A) (B)
<S> <C> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents.................... $ 725,863 $2,037,391 $ 354,221 $ -- $ 3,117,475
Accounts receivable, net..................... 24,141,609 1,369,228 686,486 -- 26,197,323
Unbilled charges............................. 6,682,710 -- 79,666 -- 6,762,376
Prepaid expenses and other current assets.... 3,579,670 96,495 128,614 -- 3,804,779
Income tax receivable........................ 2,130,945 -- -- -- 2,130,945
Due from related parties..................... 295,968 -- -- -- 295,968
------------ ---------- ---------- ----------- ------------
Total current assets....................... 37,556,765 3,503,114 1,248,987 -- 42,308,866
Property and Equipment, net.................... 11,653,923 469,391 46,238 -- 12,169,552
Intangibles, net (a) (b)....................... 52,631,655 -- 14,970,392 67,602,047
Deferred Tax Assets............................ 1,010,396 -- -- 1,010,396
Investments and Other Assets................... 4,635,757 110,004 66,690 -- 4,812,451
------------ ---------- ---------- ----------- ------------
Total assets............................... $107,488,496 $4,082,509 $1,361,915 $14,970,392 $127,903,312
============ ========== ========== =========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses........ $ 14,920,232 $ 395,077 $ 465,201 $ -- $ 15,780,510
Short-term debt.............................. 177,000 200,000 287,203 1,000,000 1,664,203
Income taxes payable......................... 1,061,458 -- 177,981 -- 1,239,439
Other current liabilities.................... -- 84,064 107,701 -- 191,765
Deferred revenue............................. 2,426,901 677,276 33,698 -- 3,137,875
Current portion of capital lease
obligations................................ 1,097,956 -- -- -- 1,097,956
------------ ---------- ---------- ----------- ------------
Total current liabilities.................. 19,683,547 1,356,417 1,071,784 1,000,000 23,111,748
Long-term Liabilities:
Due to Omnicom Group, Inc.................... 66,806,568 -- -- 3,500,000 70,306,568
Deferred tax liabilities..................... 458,498 -- 12,144 -- 470,642
Capital lease obligations.................... 1,709,425 -- 7,504 -- 1,716,929
Due to related parties....................... 390,000 -- -- -- 390,000
Bank loans................................... -- 67,204 -- -- 67,204
Other liabilities............................ 1,202,042 2,518,190 -- -- 3,720,232
------------ ---------- ---------- ----------- ------------
Total liabilities.......................... 90,250,080 3,941,811 1,091,432 4,500,000 99,783,323
------------ ---------- ---------- ----------- ------------
Stockholders' Equity (c):
Common stock................................. 26,664 2,137 84,055 (85,151) 27,705
Preferred stock.............................. -- 370 -- (370) --
Stockholder receivable....................... -- (28,782) -- 28,782 --
Additional paid-in capital................... 25,302,044 3,731,591 -- 7,148,941 36,182,576
Retained earnings (deficit).................. (7,461,088) (2,407,034) 220,894 2,186,140 (7,461,088)
Deferred compensation........................ (585,070) (1,157,584) 1,157,584 (585,070)
Unrealized gain on marketable securities..... 5,886 (5,886) --
Cumulative foreign translation adjustments... (44,134) (40,352) 40,352 (44,134)
------------ ---------- ---------- ----------- ------------
Total stockholders' equity................. 17,238,416 140,698 270,483 10,470,392 28,119,989
------------ ---------- ---------- ----------- ------------
Total liabilities and stockholders'
equity................................... $107,488,496 $4,082,509 $1,361,915 $14,970,392 $127,903,312
============ ========== ========== =========== ============
</TABLE>
The accompanying notes and management's assumptions to the unaudited pro forma
condensed consolidated financial statements are integral parts of this
statement.
F-124
<PAGE>
NOTES TO PRO FORMA CONDENSED CONSOLIDATED
BALANCE SHEET
(a) In October 1999, the Company purchased all of the issued and outstanding
shares of capital stock of Interactive Traffic, Inc. ("I-traffic") for
$3,000,000 in cash, a $1,000,000 short-term note payable due at the earlier
of December 31, 1999 or thirty days following the completion of the
Company's initial public offering, 469,320 shares of the Company's common
stock valued at $9.35 per share, the assumption of options to purchase
160,680 shares of the Company's common stock at an average exercise price of
$2.54 per share, and the issuance of newly-granted options to purchase
60,000 shares of the Company's common stock at an exercise price of $8.50
per share, which options were valued at less than the fair market value of
the Company's common stock on the date of grant, valued at $1,145,231, for a
total aggregate purchase price of $9,533,373. This acquisition has been
accounted for under the purchase method of accounting and, accordingly, the
purchase price has been allocated to the tangible and intangible assets
acquired and liabilities assumed on the basis of their respective fair
values on the acquisition date. Furthermore, the purchase agreement calls
for certain earn-out payments to the former shareholders of I-traffic based
upon the achievement of certain future targeted operating results for
I-traffic one year from the closing of the transaction. These payments are
payable in cash and additional shares of the Company's common stock and
future payments, if any, will be recorded as additional purchase price and,
accordingly, an adjustment to goodwill.
Set forth below is AGENCY.COM's allocation of the purchase price of the
I-traffic acquisition:
<TABLE>
<S> <C>
Aggregate purchase price.................................... $ 9,533,373
-----------
Less book value of net assets acquired.................... 140,698
-----------
Excess of cost over book value of net assets acquired....... $ 9,392,675
===========
Allocation of excess of cost over book value of assets
acquired:
Goodwill.................................................. $ 9,392,675
===========
</TABLE>
The allocation of excess cost over book value of net assets acquired to the
intangible assets relating to I-traffic will be amortized over a useful life of
seven years.
(b) In November 1999, the Company purchased all of the issued and outstanding
shares of capital stock of Visionik A/S ("Visionik"), a Danish corporation,
for $500,000 in cash and 572,000 shares of the Company's common stock valued
at $9.35 per share for a total aggregate purchase price of $5,848,200. This
acquisition has been accounted for under the purchase method of accounting
and, accordingly, the purchase price has been allocated to the tangible and
intangible assets acquired and liabilities assumed on the basis of their
respective fair values on the acquisition date.
F-125
<PAGE>
NOTES TO PRO FORMA CONDENSED CONSOLIDATED
BALANCE SHEET
Set forth below is AGENCY.COM's allocation of the purchase price of the
Visionik acquisition:
<TABLE>
<S> <C>
Aggregate purchase price.................................... $5,848,200
Less book value of net assets acquired.................... 270,483
----------
Excess of cost over book value of net assets acquired....... $5,577,717
==========
Allocation of excess of cost over book value of net assets
acquired.................................................. $5,577,717
==========
</TABLE>
The allocation of excess cost over book value of net assets acquired to the
intangible assets relating to Visionik will be amortized over a period of seven
years.
(c) Reflects the adjustments to shareholders' equity as follows:
<TABLE>
<CAPTION>
ACQUISITIONS
------------
<S> <C>
Common stock
Elimination of I-traffic Common Stock..................... $ (2,137)
Elimination of Visionik Common Stock...................... (84,055)
Issuance of Common Stock in connection with the
acquisition of: I-traffic and Visionik.................. 1,202
-----------
Subtotal.............................................. (84,990)
-----------
Preferred stock:
Elimination of I-traffic preferred stock.................. (370)
-----------
Additional paid-in capital:
Elimination of I-traffic additional paid-in capital....... (3,731,591)
Additional paid-in capital from issuance of Common Stock:
I-traffic and Visionik.................................. 10,880,531
-----------
Subtotal................................................ 7,148,940
-----------
Retained earnings (accumulated deficit):
Elimination of I-traffic historical accumulated deficit... 2,407,034
Elimination of Visionik historical retained earnings...... (220,894)
-----------
Subtotal................................................ 2,186,140
-----------
Elimination of I-traffic deferred compensation.............. 1,157,584
Elimination of I-traffic stockholder receivable............. 28,782
Elimination of Visionik unrealized gain on marketable
securities................................................ (5,886)
Elimination of Visionik historical cumulative foreign
translation adjustment.................................... 40,352
-----------
Total................................................... $10,470,552
===========
</TABLE>
F-126
<PAGE>
NOTES TO PRO FORMA CONDENSED CONSOLIDATED
BALANCE SHEET
The following summarizes how the amounts relating to the issuance of shares
in connection with the acquisitions described above were determined:
<TABLE>
<S> <C> <C>
I-traffic
Total Common Stock issued................................... 469,320
Fair market value of Common Stock per share................. $ 9.35
----------
Total value of Common Stock issued.......................... $4,388,142
Total Common Stock issued................................... 469,320
Par value of Common Stock................................... $ 0.001
----------
Adjustment to Common Stock.................................. (469)
----------
Adjustment to additional paid-in capital.................... $4,387,673
==========
Visionik
Total Common Stock issued................................... 572,000
Fair market value of Common Stock per share................. $ 9.35
----------
Total value of Common stock issued.......................... $5,348,200
Total Common Stock issued................................... 572,000
Par value of Common Stock................................... $ 0.001
----------
Adjustment to Common Stock.................................. (572)
----------
Adjustment to additional paid-in capital.................... $5,347,628
==========
</TABLE>
F-127
<PAGE>
AGENCY.COM LTD.
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
EAGLE RIVER INTERACTIVE OTHER PRO FORMA
AGENCY.COM INTERACTIVE SOLUTIONS I-TRAFFIC ACQUISITIONS ADJUSTMENTS
---------- ----------- ----------- ----------- ------------ ------------
(A) (B) (C) (D)(E)
<S> <C> <C> <C> <C> <C> <C>
Revenues.............................. $56,499,289 $5,072,000 $ 3,598,106 $ 4,286,931 $ 5,352,108 $ --
Direct salaries and costs............. 28,784,372 2,885,000 2,207,841 4,045,756 3,268,534 --
----------- ----------- ----------- ----------- ----------- -----------
Gross profit.......................... 27,714,917 2,187,000 1,390,265 241,175 2,083,574 --
General and administrative............ 21,652,390 2,452,000 1,509,291 1,703,707 2,800,030 --
Sales and marketing................... 2,590,637 602,000 39,898 318,556 538,706 --
Amortization of intangibles........... 4,574,221 1,081,000 1,279,996 -- -- 3,132,467 (h)
Depreciation and amortization......... 3,149,130 -- 96,942 -- 121,261 --
----------- ----------- ----------- ----------- ----------- -----------
Income (loss) from operations....... (4,251,461) (1,948,000) (1,535,862) (1,781,088) (1,376,423) (3,132,467)
Interest income (expense), net........ (2,124,962) (382,000) (210,000) 33,693 (51,425) (230,033)(k)
Minority interest..................... -- -- -- 50,996 --
Loss on disposal...................... -- -- 10,000 -- --
----------- ----------- ----------- ----------- ----------- -----------
Income (loss) before income taxes... (6,376,423) (2,330,000) (1,745,862) (1,757,395) (1,376,852) (3,362,500)
----------- ----------- ----------- ----------- ----------- -----------
Provision (benefit) for income
taxes............................... 238,606 (453,502) -- 13,802 --
----------- ----------- ----------- ----------- ----------- -----------
Net income (loss)................... $(6,615,029) $(2,330,000) $(1,292,360) $(1,757,395) $(1,390,654) $(3,362,500)
=========== =========== =========== =========== =========== ===========
Per share information:
Net loss per share--................
Basic................................. $ (0.29)
===========
Diluted............................... $ (0.29)
===========
Weighted average common shares
outstanding--.......................
Basic................................. 23,186,818
===========
Diluted............................... 23,186,818
===========
<CAPTION>
PRO FORMA
--------------
<S> <C>
Revenues.............................. $ 74,808,434
Direct salaries and costs............. 41,191,503
------------
Gross profit.......................... 33,616,931
General and administrative............ 30,117,418
Sales and marketing................... 4,089,797
Amortization of intangibles........... 10,067,684
Depreciation and amortization......... 3,367,333
------------
Income (loss) from operations....... (14,025,301)
Interest income (expense), net........ (2,964,727)
Minority interest..................... 50,996
Loss on disposal...................... 10,000
------------
Income (loss) before income taxes... (16,949,032)
------------
Provision (benefit) for income
taxes............................... (201,094)
------------
Net income (loss)................... $(16,747,938)
============
Per share information:
Net loss per share--................
Basic................................. $ (0.57)
============
Diluted............................... $ (0.57)
============
Weighted average common shares
outstanding--.......................
Basic................................. 29,241,541 (n)
============
Diluted............................... 29,241,541 (n)
============
</TABLE>
The accompanying notes and management's assumptions to the unaudited pro forma
condensed consolidated financial statements are integral parts of this
statement.
F-128
<PAGE>
AGENCY.COM LTD.
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
EAGLE RIVER INTERACTIVE OTHER PRO FORMA
AGENCY.COM INTERACTIVE SOLUTIONS I-TRAFFIC ACQUISITIONS ADJUSTMENTS
-------------- ----------- ----------- ----------- ------------ ------------
(A) (B) (C) (D)(F)
<S> <C> <C> <C> <C> <C> <C>
Revenues.............................. $18,956,267 $17,249,142 $10,869,920 $ 2,309,796 $6,577,369 $ --
Direct salaries and costs............. 10,355,373 8,525,789 6,891,620 1,836,845 3,949,469 --
----------- ----------- ----------- ----------- ---------- ------------
Gross profit.......................... 8,600,894 8,723,353 3,978,300 472,951 2,627,900 --
General and administrative............ 7,743,832 8,559,117 4,184,022 775,216 1,642,216 --
Sales and marketing................... 297,942 1,454,485 347,806 143,574 414,327 --
Amortization of intangibles........... 582,855 3,242,776 1,336,029 -- -- 5,545,345 (i)
Depreciation and amortization......... 772,094 -- 221,456 -- 136,468 --
----------- ----------- ----------- ----------- ---------- ------------
Income (loss) from operations....... (795,829) (4,533,025) (2,111,013) (445,839) 434,889 (5,545,345)
Interest income (expense), net........ (325,491) (1,137,424) (413,827) 20,642 (14,484) (402,693)(l)
Minority interests.................... 281,559 -- -- -- -- --
----------- ----------- ----------- ----------- ---------- ------------
Income (loss) before income taxes... (1,402,879) (5,670,449) (2,524,840) (425,197) 420,405 (5,948,038)
Provision (benefit) for income
taxes............................... (460,565) -- (1,058,916) -- 115,139 --
----------- ----------- ----------- ----------- ---------- ------------
Net income (loss)................... $ (942,314) $(5,670,449) $(1,465,924) $ (425,197) $ 305,266 $(5,948,038)
=========== =========== =========== =========== ========== ============
Per share information:
Net loss per share--
Basic................................. $ (0.06)
===========
Diluted............................... $ (0.06)
===========
Weighted average common shares
outstanding--.......................
Basic................................. 16,586,538
===========
Diluted............................... 16,586,538
===========
<CAPTION>
PRO FORMA
--------------
<S> <C>
Revenues.............................. $ 55,962,494
Direct salaries and costs............. 31,559,096
------------
Gross profit.......................... 24,403,398
General and administrative............ 22,904,403
Sales and marketing................... 2,658,134
Amortization of intangibles........... 10,707,005
Depreciation and amortization......... 1,130,018
------------
Income (loss) from operations....... (12,996,162)
Interest income (expense), net........ (2,273,277)
Minority interests.................... 281,559
------------
Income (loss) before income taxes... (15,550,998)
Provision (benefit) for income
taxes............................... (1,404,342)
------------
Net income (loss)................... $(14,146,656)
============
Per share information:
Net loss per share--
Basic................................. $ (0.53)
============
Diluted............................... $ (0.53)
============
Weighted average common shares
outstanding--.......................
Basic................................. 26,597,168 (o)
============
Diluted............................... 26,597,168 (o)
============
</TABLE>
The accompanying notes and management's assumptions to the unaudited pro forma
condensed consolidated financial statements are integral parts of this
statement.
F-129
<PAGE>
AGENCY.COM LTD.
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
EAGLE
RIVER INTERACTIVE OTHER PRO FORMA PRO
AGENCY.COM INTERACTIVE SOLUTIONS I-TRAFFIC ACQUISITIONS ADJUSTMENTS FORMA
-------------- ----------- ----------- ---------- ------------ ------------ ------------
(A) (B) (C) (D)(G)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues................... $26,452,191 $23,442,000 $15,370,470 $3,506,833 $8,706,557 $(1,348,436)(q) $ 76,129,615
Direct salaries and
costs.................... 15,930,029 11,782,000 9,659,366 2,788,220 5,206,710 (1,348,436)(q) 44,017,889
----------- ----------- ----------- ---------- ---------- ------------ ------------
Gross profit............... 10,522,162 11,660,000 5,711,104 718,613 3,499,847 -- 32,111,726
General and
administrative........... 10,944,441 12,022,000 6,220,344 1,189,557 2,013,958 -- 32,390,300
Sales and marketing........ 595,886 1,958,000 482,952 218,604 563,309 -- 3,818,751
Amortization of
intangibles.............. 892,765 4,322,000 1,953,783 -- -- 7,311,072(j) 14,479,620
Depreciation and
amortization............. 1,141,305 -- 295,274 -- 185,193 -- 1,621,772
----------- ----------- ----------- ---------- ---------- ------------ ------------
Income (loss) from
operations............... (3,052,235) (6,642,000) (3,241,249) (689,548) 737,387 (7,311,072) (20,198,717)
Interest income (expense),
net...................... (359,761) (1,611,000) (599,003) 27,851 (14,742) (491,167)(m) (3,047,822)
Minority interests......... 281,559 -- -- -- -- -- 281,559
Loss on disposal........... -- -- -- (9,399) -- -- (9,399)
----------- ----------- ----------- ---------- ---------- ------------ ------------
Income (loss) before income
taxes.................... (3,693,555) (8,253,000) (3,840,252) (671,096) 722,645 (7,802,239) (23,537,497)
Provision (benefit) for
income taxes............. (1,212,575) -- (1,603,476) 178,771 -- (2,637,280)
----------- ----------- ----------- ---------- ---------- ------------ ------------
Net income (loss).......... $(2,480,980) $(8,253,000) $(2,236,776) $(671,096) $ 543,874 $(7,802,239) $(20,900,217)
=========== =========== =========== ========== ========== ============ ============
Per share information:
Net loss per share--
Basic...................... $ (0.15) $ (0.78)
=========== ============
Diluted.................... $ (0.15) $ (0.78)
=========== ============
Weighted average common
shares outstanding--
Basic...................... 16,854,499 26,865,129(p)
=========== ============
Diluted.................... 16,854,499 26,865,129(p)
=========== ============
</TABLE>
The accompanying notes and management's assumptions to the unaudited pro forma
condensed consolidated financial statements are integral parts of this
statement.
F-130
<PAGE>
NOTES TO PRO FORMA CONDENSED CONSOLIDATED
STATEMENTS OF OPERATIONS
(a) EAGLE RIVER INTERACTIVE INC.
In April 1999, the Company acquired all of the issued and outstanding shares
of capital stock of Eagle River Interactive from the Eagle River Interactive
shareholder, Omnicom, in exchange for an aggregate of 3,659,548 shares of
AGENCY.COM's common stock and a warrant to purchase 4,328,752 shares of
AGENCY.COM's common stock at a purchase price of $0.005 per share. Such warrant
was valued at $0.80 per share and the fair value of the Company's common stock
on the date of purchase was $1.23 per share, each as determined by an
independent third-party valuation. In addition, 13,322 shares of AGENCY.COM's
common stock were issued to certain participants of the Eagle River Interactive
Key Executive Incentive Program in settlement of all obligations due under the
program and 80,690 shares were issued to an executive of Eagle River
Interactive. These shares have been considered additional purchase price. This
acquisition has been accounted for under the purchase method of accounting and,
accordingly, the purchase price has been allocated to the tangible and
intangible assets acquired and liabilities assumed on the basis of their
respective fair values on the acquisition date. The acquisition is effective as
of March 31, 1999, and accordingly, the operating results of Eagle River since
March 31, 1999 have been included in AGENCY.COM's consolidated financial
statements.
(b) INTERACTIVE SOLUTIONS INCORPORATED AND QUADRIS CONSULTING, INC.
In April 1999, the Company acquired all of the issued and outstanding shares
of capital stock of Interactive Solutions from the Interactive Solutions
shareholders (including Communicade Inc., a wholly owned subsidiary of Omnicom)
in exchange for an aggregate of 4,171,846 shares of AGENCY.COM's common stock
and a warrant to purchase 3,071,248 shares of AGENCY.COM's common stock at a
purchase price of $0.005 per share. Such warrant was valued at $0.80 per share
and the fair value of the AGENCY.COM's common stock on the date of purchase was
$1.23 per share, each as determined by an independent third-party valuation.
Immediately, prior to the acquisition of Interactive Solutions, Interactive
Solutions acquired all of the issued and outstanding shares of capital stock of
Quadris Consulting from the Quadris Consulting shareholders in exchange for an
aggregate of 1,869,528 shares of Interactive Solutions common stock. Prior to
both acquisitions, Communicade sold 485,999.64 shares of Interactive Solutions
common stock to certain of the AGENCY.COM's shareholders for an aggregate price
of $412,492.
Outstanding stock options under the stock option plans of Interactive
Solutions and Quadris Consulting were converted into approximately 1,402,382
options to purchase the AGENCY.COM's common stock. Certain of these options were
converted at excercise prices that were lower than the fair market value of the
Company's common stock at the date of grant. Accordingly, the Company has
recorded additional purchase price for the difference between the excercise
price and the fair market value of the underlying common shares relating to
these options.
These acquisitions have been accounted for under the purchase method of
accounting and, accordingly, the purchase price has been allocated to the
tangible and intangible assets acquired and liabilities assumed on the basis of
their respective fair values on the acquisition dates. These acquisitions are
effective as of March 31, 1999, and accordingly, the operating results of
Interactive since March 31, 1999 have been included in AGENCY.COM's consolidated
financial statements.
F-131
<PAGE>
NOTES TO PRO FORMA CONDENSED CONSOLIDATED
STATEMENTS OF OPERATIONS (CONTINUED)
(c) INTERACTIVE TRAFFIC, INC. In October 1999, the Company purchased all
of the issued and outstanding shares of capital stock of Interactive
Traffic, Inc. ("I-traffic") for $3,000,000 in cash, a $1,000,000 short-term note
payable due at the earlier of December 31, 1999 or thirty days following the
completion of the Company's initial public offering, 469,320 shares of the
Company's common stock valued at $9.35 per share, the assumption of options to
purchase 160,680 shares of the Company's common stock at an exercise price of
$2.54 per share, and the issuance of newly-granted options to purchase 60,000
shares of the Company's common stock at an exercise price of $8.50 per share
which options were valued at less than the fair market value of the Company's
common stock on the date of grant, valued at $1,145,231, for a total aggregate
purchase price of $9,533,373. This acquisition has been accounted for under the
purchase method of accounting and, accordingly, the purchase price has been
allocated to the tangible and intangible assets acquired and liabilities assumed
on the basis of their respective fair values on the acquisition date. Further
more, the purchase agreement calls for certain earn-out payments to the former
shareholders of I-traffic based upon the achievement of certain future targeted
operation results for I-traffic one-year from the date of the closing of the
transaction. These payments are payable in cash and additional shares of the
Company's common stock and future payments, if any, will be recorded as
additional purchase price and, accordingly, an adjustment to goodwill.
(d) OTHER ACQUISITIONS:
VISIONIK A/S
In November 1999, the Company purchased all of the issued and outstanding
shares of capital stock of Visionik A/S ("Visionik"), a Danish corporation, for
$500,000 in cash and 572,000 shares of the Company's common stock valued at
$9.35 per share for a total aggregate purchase price of $5,848,200. This
acquisition has been accounted for under the purchase method of accounting and,
accordingly, the purchase price has been allocated to the tangible and
intangible assets acquired and liabilities assumed on the basis of their
respective fair values on the acquisition date.
TWINSPARK INTERACTIVE
In August 1999, the Company purchased all of the issued and outstanding
shares of capital stock of Twinspark Interactive for $700,000 in cash and
1,057,226 shares of the AGENCY.COM's common stock valued at $4.06 per share, of
which 1,047,226 shares were given to the shareholders of Twinspark and 10,000
shares to former employees of Twinspark, for a total aggregate purchase price of
$4,997,624. The Company also granted 75,000 stock options to former employees of
Twinspark at an exercise price equal to the then fair market value of the
Company's common stock. This acquisition has been accounted for under the
purchase method of accounting and, accordingly, the purchase price has been
allocated to the tangible and intangible assets acquired and liabilities assumed
on the basis of their respective fair values on the acquisition date.
Furthermore, the purchase agreement calls for certain earn-out payments to the
former shareholders of Twinspark based upon the achievement of certain targeted
operating results of Twinspark through December 1999. These payments are payable
in the form of 168,066 shares of the Company's common stock which are currently
held in escrow. Future payments, if any, will be recorded as additional purchase
price and, accordingly, an adjustment to goodwill.
F-132
<PAGE>
NOTES TO PRO FORMA CONDENSED CONSOLIDATED
STATEMENTS OF OPERATIONS (CONTINUED)
DIGITAL VISION
On May 13, 1999, the Company purchased all of the issued and outstanding
shares of capital stock of Digital Vision for $1,100,000 in cash. This
acquisition has been accounted for under the purchase method of accounting and,
accordingly, the purchase price has been allocated to the tangible and
intangible assets acquired and liabilities assumed on the basis of their
respective fair values on the acquisition date. The acquisition is effective as
of May 31, 1999, and accordingly, the operating results of Digital Vision since
May 31, 1999 have been included in AGENCY.COM's consolidated financial
statements.
KETCHUM ADVERTISING
On April 1, 1998, the Company acquired certain assets and assumed certain
liabilities from Ketchum Advertising. Ketchum was a subsidiary of the Omnicom,
which is a significant shareholder of AGENCY.COM's common stock both directly
and through a wholly owned subsidiary. In consideration for the net assets
acquired, the AGENCY.COM paid approximately $643,000 in cash. This acquisition
has been accounted for under the purchase method of accounting and, accordingly,
the purchase price has been allocated to the tangible and intangible assets
acquired and liabilities assumed on the basis of their respective fair values on
the acquisition date. As a result of this acquisition, the AGENCY.COM has
recorded goodwill of approximately $643,000, which is being amortized over a
period of seven years. The acquisition is effective as of March 31, 1998, and
accordingly, the operating results of Ketchum Advertising since March 31, 1998
have been included in AGENCY.COM's consolidated financial statements.
PRIMARY GROUP
On August 31, 1998, AGENCY.COM acquired certain assets from Primary Group
and assumed certain liabilities. In consideration for the net assets acquired,
the Company paid approximately $53,220 in cash. This acquisition has been
accounted for under the purchase method of accounting and, accordingly, the
purchase price has been allocated to the tangible and intangible assets acquired
and liabilities assumed on the basis of their respective fair values on the
acquisition date. As a result of this acquisition, the Company has recorded
goodwill of approximately $50,845, which is being amortized over a period of
seven years. The acquisition is effective as of August 31, 1998, and
accordingly, the operating results of the Primary Group since August 31, 1998
have been included in AGENCY.COM's consolidated financial statements.
F-133
<PAGE>
NOTES TO PRO FORMA CONDENSED CONSOLIDATED
STATEMENTS OF OPERATIONS (CONTINUED)
(e) Set forth below are the unaudited results of operations of the other
acquisitions for the period of January 1, 1999 through September 30, 1999:
<TABLE>
<CAPTION>
DIGITAL TWINSPARK TOTAL OTHER
VISION INTERACTIVE VISIONIK ACQUISITIONS
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues............................. $ 325,800 $ 2,784,259 $ 2,242,049 $ 5,352,108
Direct salaries and costs............ 306,106 1,704,849 1,257,579 3,268,534
------------ ------------ ------------ ------------
Gross profit............... 19,694 1,079,410 984,470 2,083,574
General administrative............... 231,200 2,076,269 492,561 2,800,030
Sales and marketing.................. 125,108 94,000 319,598 538,706
Amortization of intangibles.......... -- -- -- --
Depreciation and amortization........ 5,949 75,659 39,653 121,261
Income (loss) from
operations................... (342,563) (1,166,518) 132,658 (1,376,423)
------------ ------------ ------------ ------------
Interest income (expense), net....... (17,680) (26,164) (7,581) (51,425)
Minority interests................... -- -- 50,996 50,996
------------ ------------ ------------ ------------
Income (loss) before income
taxes........................ (360,243) (1,192,682) 176,073 (1,376,852)
Provision (benefit) for income
taxes........................ -- (49,787) 63,589 13,802
------------ ------------ ------------ ------------
Net income (loss).......... $ (360,243) $ (1,142,895) $ 112,484 $ (1,390,654)
============ ============ ============ ============
</TABLE>
F-134
<PAGE>
NOTES TO PRO FORMA CONDENSED CONSOLIDATED
STATEMENTS OF OPERATIONS (CONTINUED)
(f) Set forth below are the unaudited results of operations of the other
acquisitions for the period of January 1, 1998 through September 30, 1998:
<TABLE>
<CAPTION>
QUADRIS KETCHUM PRIMARY DIGITAL TWINSPARK TOTAL OTHER
CONSULTING ADVERTISING GROUP VISION INTERACTIVE VISIONIK ACQUISITIONS
----------- ----------- ---------- ---------- ----------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues............. $1,727,391 $680,000 $ 167,057 $1,049,824 $1,458,770 $1,494,327 $6,577,369
Direct salaries and
costs.............. 1,144,664 353,600 131,790 458,454 1,018,120 842,841 3,949,469
---------- -------- ---------- ---------- ---------- ---------- ----------
Gross profit..... 582,727 326,400 35,267 591,370 440,650 651,486 2,627,900
General and
administrative..... 362,872 251,600 120,392 281,835 306,420 319,097 1,642,216
Sales and marketing.. 1,577 27 -- 221,442 -- 191,281 414,327
Amortization of
intangibles........ -- -- -- -- -- --
Depreciation and
amortization....... -- 14 3,869 12,059 56,800 63,726 136,468
---------- -------- ---------- ---------- ---------- ---------- ----------
Income (loss)
from
operations..... 218,278 74,759 (88,994) 76,034 77,430 77,382 434,889
Interest income
(expense), net..... (1,925) -- -- (14,136) (9,870) 11,447 (14,484)
Minority interests... -- -- -- -- -- -- --
---------- -------- ---------- ---------- ---------- ---------- ----------
Income (loss)
before income
taxes.......... 216,353 74,759 (88,994) 61,898 67,560 88,829 420,405
Provision (benefit)
for income
taxes............ 87,000 -- -- -- -- 28,139 115,139
---------- -------- ---------- ---------- ---------- ---------- ----------
Net income
(loss)......... $ 129,353 $ 74,759 $ (88,994) $ 61,898 $ 67,560 $ 60,690 $ 305,266
========== ======== ========== ========== ========== ========== ==========
</TABLE>
(g) Set forth below are the unaudited results of operations of the other
acquisitions for the period of January 1, 1998 through December 31, 1998:
<TABLE>
<CAPTION>
QUADRIS KETCHUM PRIMARY DIGITAL TWINSPARK TOTAL OTHER
CONSULTING ADVERTISING GROUP VISION INTERACTIVE VISIONIK ACQUISITIONS
----------- ----------- --------- ---------- ----------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues......................... $1,727,391 $680,000 $167,057 $1,399,697 $2,690,816 $2,041,596 $8,706,557
Direct salaries and costs........ 1,144,664 353,600 131,790 625,633 1,771,878 1,179,145 5,206,710
---------- -------- -------- ---------- ---------- ---------- ----------
Gross profit................. 582,727 326,400 35,267 774,064 918,938 862,451 3,499,847
General and administrative....... 362,872 251,600 120,392 372,676 469,545 436,873 2,013,958
Sales and marketing.............. 1,577 27 -- 304,917 256,788 563,309
Amortization of intangibles...... -- 14 3,869 13,075 91,189 77,046 185,193
Depreciation and amortization.... -- -- -- -- -- -- --
---------- -------- -------- ---------- ---------- ---------- ----------
Income (loss) from
operations................. 218,278 74,759 (88,994) 83,396 358,204 91,744 737,387
Interest income (expense), net... (1,925) -- -- (15,497) (12,091) 14,771 (14,742)
Minority interests............... -- -- -- -- -- -- --
---------- -------- -------- ---------- ---------- ---------- ----------
Income (loss) before income
taxes...................... 216,353 74,759 (88,994) 67,899 346,113 106,515 722,645
Provision (benefit) for income
taxes.......................... 87,000 -- -- -- 52,899 38,872 178,771
---------- -------- -------- ---------- ---------- ---------- ----------
Net income (loss)............ $ 129,353 $ 74,759 $(88,994) $ 67,899 $ 293,214 $ 67,643 $ 543,874
========== ======== ======== ========== ========== ========== ==========
</TABLE>
F-135
<PAGE>
NOTES TO PRO FORMA CONDENSED CONSOLIDATED
STATEMENTS OF OPERATIONS (CONTINUED)
(h) Amortization of intangibles for the nine months ended September 30, 1999,
for the following acquisitions, based upon a useful life of seven years for
goodwill, five years for customer base and three years for workforce:
<TABLE>
<S> <C>
Eagle River Interactive..................................... $ 768,759
Interactive Solutions....................................... 147,802
Twinspark Interactive....................................... 526,522
Digital Vision.............................................. 85,414
I-traffic................................................... 1,006,358
Visionik.................................................... 597,613
----------
Total pro forma intangible amortization adjustments..... $3,132,467
==========
</TABLE>
(i) Amortization of intangibles for the nine months ended September 30, 1998,
for the following acquisitions, based upon a useful life of seven years for
goodwill, five years for customer base and three years for workforce:
<TABLE>
<S> <C>
Eagle River Interactive..................................... $2,306,276
Interactive Solutions....................................... 443,407
Twinspark Interactive....................................... 789,784
Digital Vision.............................................. 153,745
Quadris Consulting.......................................... 220,351
Ketchum Advertising......................................... 22,964
Primary Group............................................... 4,847
I-traffic................................................... 1,006,358
Visionik.................................................... 597,613
----------
Total pro forma intangible amortization adjustments..... $5,545,345
==========
</TABLE>
(j) Amortization of intangibles for year ended December 31, 1998, for the
following acquisitions, based upon a useful life of seven years for
goodwill, five years for customer base and three years for workforce:
<TABLE>
<S> <C>
Eagle River Interactive..................................... $3,075,034
Interactive Solutions....................................... 591,209
Twinspark Interactive....................................... 1,053,045
Digital Vision.............................................. 204,993
Quadris Consulting.......................................... 220,351
Ketchum Advertising......................................... 22,964
Primary Group............................................... 4,848
I-traffic................................................... 1,341,811
Visionik.................................................... 796,817
----------
Total pro forma intangible amortization adjustments..... $7,311,072
==========
</TABLE>
F-136
<PAGE>
NOTES TO PRO FORMA CONDENSED CONSOLIDATED
STATEMENTS OF OPERATIONS (CONTINUED)
(k) Interest expense (income), net
The following reflects additional interest expense for AGENCY.COM for
borrowings made from Omnicom to fund acquisitions. The funding would have been
in accordance with AGENCY.COM's Shareholders Agreement with Omnicom whereby
AGENCY.COM is to receive funding for the acquisition of "new media" companies at
the same interest rate charged by Omnicom to its subsidiaries under the Omnicom
cash management system. Interest on such loans is payable quarterly in equal
installments over a five-to-ten-year period.
Additional interest expense to fund acquisitions for the nine months ended
September 30, 1999 based upon an average interest rate of 6%:
<TABLE>
<S> <C>
Twinspark Interactive....................................... $ 23,450
Digital Vision.............................................. 30,708
I-traffic................................................... 150,750
Visionik.................................................... 25,125
--------
Total pro forma interest expense adjustments............ $230,033
========
</TABLE>
(l) Interest expense (income), net
Additional interest expense to fund acquisitions for the nine months ended
September 30, 1998 based upon an average interest rate of 6%:
<TABLE>
<S> <C>
Ketchum Advertising......................................... $ 10,770
Primary Group............................................... 2,380
Quadris Consulting.......................................... 123,218
Twinspark Interactive....................................... 35,175
Digital Vision.............................................. 55,275
I-traffic................................................... 150,750
Visionik.................................................... 25,125
--------
Total pro forma interest expense adjustments............ $402,693
========
</TABLE>
F-137
<PAGE>
NOTES TO PRO FORMA CONDENSED CONSOLIDATED
STATEMENTS OF OPERATIONS (CONTINUED)
(m) Interest expense (income), net
Additional interest expense to fund acquistions for the year ended December
31, 1998 based upon an average interest rate of 6%:
<TABLE>
<S> <C>
Ketchum Advertising......................................... $ 10,770
Primary Group............................................... 2,380
Quadris Consulting.......................................... 123,218
Twinspark Interactive....................................... 46,900
Digital Vision.............................................. 73,399
I-traffic................................................... 201,000
Visionik.................................................... 33,500
--------
Total pro forma interest expense adjustments............ $491,167
========
</TABLE>
(n) Set forth below are the weighted average shares of Common Stock outstanding
during the periods for the basic and diluted computation for the nine months
ended September 30, 1999:
<TABLE>
<S> <C>
Basic:
Historical AGENCY.COM basic............................... 23,186,818
Shares issued in acquisition of Eagle River Interactive... 1,870,254
Shares issued in acquisition of Interactive Solutions..... 2,085,923
Shares issued in acquisition of Twinspark Interactive..... 1,057,226
Shares issued in acquisition of I-traffic................. 469,320
Shares issued in acquisition of Visionik.................. 572,000
----------
Pro forma basic......................................... 29,241,541
==========
Diluted:
Historical AGENCY.COM diluted............................. 23,186,818
Shares issued in acquisition of Eagle River Interactive... 1,870,254
Shares issued in acquisition of Interactive Solutions..... 2,085,923
Shares issued in acquisition of Twinspark Interactive..... 1,057,226
Shares issued in acquisition of I-traffic................. 469,320
Shares issued in acquisition of Visionik.................. 572,000
----------
Pro forma diluted....................................... 29,241,541
==========
</TABLE>
The historical AGENCY.COM diluted weighted average shares of Common stock
outstanding for the nine months ended September 30, 1999 does not include the
impact of stock options and warrants then outstanding, as the effect of their
inclusion would be antidilutive.
F-138
<PAGE>
NOTES TO PRO FORMA CONDENSED CONSOLIDATED
STATEMENTS OF OPERATIONS (CONTINUED)
(o) Set forth below are the weighted average shares of Common Stock outstanding
during the periods for the basic and diluted computation for the nine months
ended September 30, 1998:
<TABLE>
<S> <C>
Basic:
Historical AGENCY.COM basic............................... 16,586,538
Shares issued in acquisition of Eagle River Interactive... 3,740,238
Shares issued in acquisition of Interactive Solutions..... 4,171,846
Shares issued in acquisition of Twinspark Interactive..... 1,057,226
Shares issued in acquisition of I-traffic................. 469,320
Shares issued in acquisition of Visionik.................. 572,000
-----------
Pro forma basic......................................... 26,597,168
===========
Diluted:
Historical AGENCY.COM diluted............................. 16,586,538
Shares issued in acquisition of Eagle River Interactive... 3,740,238
Shares issued in acquisition of Interactive Solutions..... 4,171,846
Shares issued in acquisition of Twinspark Interactive..... 1,057,226
Shares issued in acquisition of I-traffic................. 469,320
Shares issued in acquisition of Visionik.................. 572,000
-----------
Pro forma diluted....................................... 26,597,168
===========
</TABLE>
The historical AGENCY.COM diluted weighted average shares of Common stock
outstanding for the nine months ended September 30, 1998 does not include the
impact of stock options then outstanding, as the effect of their inclusion would
be antidilutive.
F-139
<PAGE>
NOTES TO PRO FORMA CONDENSED CONSOLIDATED
STATEMENTS OF OPERATIONS (CONTINUED)
(p) Set forth below are the weighted average shares of Common Stock outstanding
during the periods for the basic and diluted computation for the year ended
December 31, 1998:
<TABLE>
<S> <C>
Basic:
Historical AGENCY.COM basic............................... 16,854,499
Shares issued in acquisition of Eagle River Interactive... 3,740,238
Shares issued in acquisition of Interactive Solutions..... 4,171,846
Shares issued in acquisition of Twinspark Interactive..... 1,057,226
Shares issued in acquisition of I-traffic................. 469,320
Shares issued in acquisition of Visionik.................. 572,000
-----------
Pro forma basic......................................... 26,865,129
===========
Diluted:
Historical AGENCY.COM diluted............................. 16,854,499
Shares issued in acquisition of Eagle River Interactive... 3,740,238
Shares issued in acquisition of Interactive Solutions..... 4,171,846
Shares issued in acquisition of Twinspark Interactive..... 1,057,226
Shares issued in acquisition of I-traffic................. 469,320
Shares issued in acquisition of Visionik.................. 572,000
-----------
Pro forma diluted....................................... 26,865,129
===========
</TABLE>
The historical AGENCY.COM diluted weighted average shares of Common stock
outstanding for the year ended December 31, 1998 does not include the impact of
stock options then outstanding, as the effect of their inclusion would be
antidilutive.
(q) Revenue/Direct salaries and costs
Reflects the elimination of revenues earned and costs incurred totaling
$996,666 between AGENCY.COM and Eagle River Interactive in the fourth quarter of
1998, totaling $240,928 between Interactive Solutions and AGENCY.COM for the
year ended December 31, 1998 and totaling $110,842 between Interactive Solutions
and Eagle River Interactive for the year ended December 31, 1998, respectively.
F-140
<PAGE>
UNDERWRITING
AGENCY.COM and the underwriters named below have entered into an
underwriting agreement with respect to the shares being offered. Subject to the
conditions in the underwriting agreement, each underwriter has severally agreed
to purchase the number of shares indicated in the following table. Goldman,
Sachs & Co., Salomon Smith Barney Inc. and Hambrecht & Quist LLC are the
representatives of the underwriters.
<TABLE>
<CAPTION>
Underwriters Number of Shares
------------ -----------------
<S> <C>
Goldman, Sachs & Co......................................
Salomon Smith Barney Inc. ...............................
Hambrecht & Quist LLC....................................
--------
Total.................................................. 5,900,000
========
</TABLE>
------------------
If the underwriters sell more shares than the total number set forth in the
table above, the underwriters have an option to buy up to an additional 885,000
shares from AGENCY.COM to cover such sales. They may exercise that option for
30 days. If any shares are purchased pursuant to this option, the underwriters
will severally purchase shares in approximately the same proportion as set forth
in the table above.
AGENCY.COM will sell the shares to the underwriters at a per share price of
$ , which represents a $ discount from the initial public offering price
set forth on the cover page of this prospectus. This discount is the
underwriters' compensation. The following table shows the per share and total
underwriting discounts to be paid to the underwriters by AGENCY.COM. Such
amounts are shown assuming both no exercise and full exercise of the
underwriters' option to purchase additional shares.
<TABLE>
<CAPTION>
Underwriters' Discount
--------------------------
<S> <C> <C>
Full
No Exercise Exercise
-------- --------
Underwriting Discount
Per Share.......... $ $
Total Underwriting
Discount........... $ $
</TABLE>
Shares sold by the underwriters to the public will initially be offered at
the initial public offering price set forth on the cover of this prospectus. Any
shares sold by the underwriters to securities dealers may be sold at a discount
of up to $ per share from the initial public offering price. Any such
securities dealers may resell any shares purchased from the underwriters to
certain other brokers or dealers at a discount of up to $ per share
from the initial public offering price. If all the shares are not sold at the
initial offering price, the representatives may from time to time reduce the
offering price and change the other selling terms.
AGENCY.COM and its directors, officers and holders of substantially all of
its common stock have agreed with the underwriters not to dispose of or hedge
any of their common stock or securities convertible into or exchangeable for
shares of common stock during the period from the date of this prospectus
continuing through the date 180 days after the date of this prospectus, except
with the prior written consent of the representatives. This agreement does not
apply to any existing employee benefit plans. Please see "Shares Eligible for
Future Sale" for a discussion of transfer restrictions.
At AGENCY.COM's request, the underwriters have reserved up to 413,000 shares
of the common stock offered by this
U-1
<PAGE>
prospectus for sale, at the initial public offering price, to certain of
AGENCY.COM's directors, employees and associates of AGENCY.COM through a
directed share program. The number of shares available for sale to the general
public will be reduced to the extent these persons purchase the reserved shares.
There can be no assurance that any of the reserved shares will be so purchased.
Any reserved shares not so purchased will be offered to the general public on
the same basis as the other shares offered by this prospectus.
Prior to the offering, there has been no public market for the shares. The
initial public offering price will be negotiated among AGENCY.COM and the
representatives. The primary factors to be considered in determining the initial
public offering price of the shares, in addition to prevailing market
conditions, will be AGENCY.COM's historical performance, estimates of the
business potential and earnings prospects of AGENCY.COM, an assessment of
AGENCY.COM's management and the consideration of the above factors in relation
to market valuation of companies in related businesses.
The common stock has been approved for quotation on the Nasdaq National
Market under the symbol "ACOM", subject to official notice of issuance.
AGENCY.COM has engaged Wasserstein & Perella & Co. to provide it with
financial advisory services for which it will pay $250,000 plus expenses.
In connection with the offering, the underwriters may purchase and sell
shares of common stock in the open market. These transactions may include short
sales, stabilizing transactions and purchases to cover positions created by
short sales. Short sales involve the sale by the underwriters of a greater
number of shares than they are required to purchase in the offering. Stabilizing
transactions consist of certain bids or purchases made for the purpose of
preventing or retarding a decline in the market price of the common stock while
the offering is in progress.
The representatives, on behalf of the underwriters, also may impose a
penalty bid. This occurs when a particular underwriter repays to the other
underwriters a portion of the underwriting discount received by it because the
representatives have repurchased shares sold by or for the account of such
underwriter in stabilizing or short covering transactions.
These activities by the underwriters may stabilize, maintain or otherwise
affect the market price of the common stock. As a result, the price of the
common stock may be higher than the price that otherwise might exist in the open
market. If these activities are commenced, they may be discontinued by the
underwriters at any time. These transactions may be effected on the Nasdaq
National Market, in the over-the-counter market or otherwise.
The underwriters do not expect sales to discretionary accounts to exceed
five percent of the total number of shares offered.
AGENCY.COM estimates that its share of the total expenses of the offering,
excluding underwriting discounts and commissions, will be approximately
$2,500,000.
AGENCY.COM has agreed to indemnify the several underwriters against various
liabilities, including liabilities under the Securities Act of 1933.
AGENCY.COM has in the past provided Internet professional services to
Salomon Smith Barney Inc., one of the Underwriters. Please see "Certain
Transactions--Agreement with underwriter".
U-2
<PAGE>
[Back Inside Cover--AGENCY.COM logo located in bottom right of the page with the
words "Our people are our power" located in the upper left of the page. In the
center of the page is a vertical column of photographs of 18 employees.]
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
No dealer, salesperson or other person is authorized to give any information
or to represent anything not contained in this prospectus. You must not rely on
any unauthorized information or representations. This prospected is an offer to
sell only the shares offered hereby, but only under circumstances and in
jurisdictions where it is lawful to do so. The information contained in this
prospectus is current only as of its date.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary................... 3
Risk Factors......................... 8
Forward Looking Statements........... 19
Use of Proceeds...................... 20
Dividend Policy...................... 20
Capitalization....................... 21
Dilution............................. 23
Selected Consolidated Financial
Data............................... 24
Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................... 27
Business............................. 45
Management........................... 61
Certain Relationships and Related
Party Transactions................. 72
Principal Stockholders............... 76
Description of Capital Stock......... 79
Shares Eligible for Future
Sale............................... 82
Validity of Common Stock............. 83
Experts.............................. 84
Changes in Accountants............... 84
Where You Can Find More Information.. 84
Index to Financial Statements........ F-1
Underwriting......................... U-1
</TABLE>
------------------
Through and including , 1999 (the 25(th) day after the date of this
prospectus), all dealers effecting transactions in these securities, whether or
not participating in this offering, may be required to deliver a prospectus.
This is in addition to a dealer's obligation to deliver a prospectus when acting
as an underwriter and with respect to an unsold allotment or subscription.
5,900,000 Shares
AGENCY.COM LTD.
Common Stock
-------------
[LOGO]
-------------
GOLDMAN, SACHS & CO.
SALOMON SMITH BARNEY
HAMBRECHT & QUIST
Representatives of the Underwriters
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than the
underwriting discounts and commissions, payable by the registrant in connection
with the issuance and distribution of the common stock being registered. All
amounts are estimates except the SEC registration fee, the NASD filing fee and
the Nasdaq National Market listing fee.
<TABLE>
<CAPTION>
AMOUNT TO
BE PAID
----------
<S> <C>
SEC registration fee........................................ $ 22,635
NASD filing fee............................................. 9,300
Nasdaq National Market listing fee.......................... 95,000
Legal fees and expenses..................................... 500,000
Accounting fees and expenses................................ 1,500,000
Printing and engraving...................................... 300,000
Blue sky fees and expenses (including legal fees)........... 15,000
Transfer Agent and Registrar fees and expenses.............. 15,000
Miscellaneous............................................... 43,065
----------
Total..................................................... $2,500,000
==========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Registrant's Amended and Restated Certificate of Incorporation in effect
as of the date hereof (the "Certificate") provides that, except to the extent
prohibited by the Delaware General Corporation Law, as amended (the "DGCL"), the
Registrant's directors shall not be personally liable to the Registrant or its
stockholders for monetary damages for any breach of fiduciary duty as directors
of the Registrant. Under the DGCL, the directors have a fiduciary duty to the
Registrant which is not eliminated by this provision of the Certificate 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 the DGCL for breach of the director's
duty of loyalty to the Registrant, for acts or omissions which are found by a
court of competent jurisdiction to be not in good faith or involving intentional
misconduct, for 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 the DGCL. This provision
also does not affect the directors' responsibilities under any other laws, such
as the Federal securities laws or state or Federal environmental laws. The
Registrant has applied for liability insurance for its officers and directors.
Section 145 of the DGCL empowers a corporation to indemnify its directors
and officers and to purchase insurance with respect to liability arising out of
their capacity or status as directors and officers, provided that this provision
shall not eliminate or limit the liability of a director: (i) for any breach of
the director's duty of loyalty to the corporation or its stockholders, (ii) for
acts or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) arising under Section 174 of the DGCL, or
(iv) for any transaction from which the director
II-1
<PAGE>
derived an improper personal benefit. The DGCL provides further that the
indemnification permitted thereunder shall not be deemed exclusive of any other
rights to which the directors and officers may be entitled under the
corporation's bylaws, any agreement, a vote of stockholders or otherwise. The
Certificate eliminates the personal liability of directors to the fullest extent
permitted by Section 102(b)(7) of the DGCL and provides that the Registrant may
fully indemnify any person who was or is a party or is threatened to be made a
party to any threatened, pending or completed action, suit or proceeding
(whether civil, criminal, administrative or investigative) by reason of the fact
that such person is or was a director or officer of the Registrant, or is or was
serving at the request of the Registrant as a director or officer of another
corporation, partnership, joint venture, trust, employee benefit plan or other
enterprise, against expenses (including attorney's fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by such person in
connection with such action, suit or proceeding.
At present, there is no pending litigation or proceeding involving any
director, officer, employee or agent as to which indemnification will be
required or permitted under the Certificate. The Registrant is not aware of any
threatened litigation or proceeding that may result in a claim for such
indemnification.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
The Registrant has sold and issued the following securities since July 1,
1996:
In July 1998, as a result of Online Magic acquisition, the Registrant issued
an aggregate of 745,185 shares of its common stock in exchange for all of the
outstanding shares of Online Magic to Eamonn Wilmott and Andrew Hobsbawm, of
which 246,750 shares are being held in escrow pending financial results for
1999. Such shares of common stock were sold in reliance upon an exemption from
registration under the Securities Act of 1933 pursuant to Section 4(2) thereof.
In July 1998, Spiral Media merged with and into the Registrant (the "Spiral
Media Merger"). As a result of the Spiral Media Merger, the Registrant issued an
aggregate of 480,625 shares of its common stock in exchange for all outstanding
shares of Spiral Media to Arthur Williams, Mitchell Golden, Bradford Justus,
Thomas Lanzetta, Ralph Seaman, Eric Vallinsky and Pall Walton. Such shares of
common stock were sold in reliance upon an exemption from registration under the
Securities Act of 1933 pursuant to Section 4(2) thereof.
In April 1999, Interactive Solutions Incorporation merged with and into the
Registrant (the "Interactive Solutions Merger"), the Registrant issued an
aggregate of 1,568,070 shares of common stock in exchange for all outstanding
shares of Interactive Solutions to Lawrence Krakauer, Andrew Kerr, Jeffrey
Richman, Michael Benyo, John Morgan, Barry Goldberg, David Janowski, Jerry
Newmark, Priya Ramanathan, James Ronan, David Seitelmen, Lee Tuttle, Ting Tang
Wu and Betsy January, Christian Leland, Thomas Rohrer, Chan Suh, Kyle Shannon,
Kenneth Trush, Eamonn Wilmott, Janet Ambrosi Wertman, David Krunnfusz, Arthur
Williams, Andrew Hobsbawm, Aaron Sugarman, Rosemary Haefner, Monica Fried and
Peter Kestenbaum. In addition, in connection with the mergers, the Registrant
issued to Communicade, 2,596,452 shares of common stock. Communicade also
received a 20-year warrant to purchase 3,071,248 shares of the Registrant's
common stock at an exercise price of $0.005 per share. Such shares of common
stock were sold in reliance upon an exemption from registration under the
Securities Act of 1933 pursuant to Section 4(2) thereof.
II-2
<PAGE>
In April 1999, Eagle River Interactive merged with and into the Registrant
(the "Eagle River Merger"), the Registrant issued an aggregate of 80,690 shares
of common stock to Kevin Rowe and 3,659,548 shares of common stock to Omnicom
and a 20-year warrant to purchase 4,328,752 shares of the Registrant's common
stock at an exercise price of $0.005 per share. Such shares of common stock were
sold in reliance upon an exemption from registration under the Securities Act of
1933 pursuant to Section 4(2) thereof.
In July 1999, Twinspark Interactive People B.V. merged with and into the
Registrant (the "Twinspark Merger"). As a result of the Twinspark Merger, the
Registrant issued 1,047,226 shares of its common stock to Topics Interactive
Factory B.V. and 10,000 shares of its common stock to former employees of
Twinspark Interactive in exchange for all outstanding shares of Twinspark
Interactive. Such shares of common stock were sold in reliance upon an exemption
from registration under the Securities Act of 1933 pursuant to Section 4(2)
thereof.
In October 1999, Interactive Traffic, Inc. merged with a wholly-owned
subsidiary of the Registrant (the "I-traffic Merger"). In connection with the
I-traffic Merger, the Registrant issued 469,320 shares of its common stock to
I-traffic's former stockholders, and issued 60,000 shares subject to stock
options to I-traffic employees. These securities were sold in reliance on an
exemption from registration under the Securities Act pursuant to Section 4(2)
thereof or Rule 701 promulgated under the Securities Act.
In November 1999, in connection with the Visionik A/S acquisition, the
Registrant issued 572,000 shares of common stock. Such securities were sold in
reliance upon an exemption from registration under the Securities Act pursuant
to Section 4(2) thereof.
OPTIONS. The Registrant from time to time has granted stock options to
employees in reliance upon exemption from registration pursuant to either
(i) Section 4(2) of the Securities Act of 1933, as amended (the "Securities
Act"), or (ii) Rule 701 promulgated under the Securities Act. The following
table sets forth certain information regarding such grants:
<TABLE>
<CAPTION>
NUMBER OF EXERCISE
SHARES PRICES
--------- ----------
<S> <C> <C>
January 1, 1996 to December 31, 1996................. 101,250 $0.86
January 1, 1997 to December 31, 1997................. 812,010 $0.86-1.21
January 1, 1998 to December 31, 1998................. 1,181,684 $0.41-1.67
January 1, 1999 to present........................... 3,878,313 $0.41-8.50
</TABLE>
No underwriters were involved in connection with the sales of securities
referred to in this Item 15.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits.
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
- ------ ------------------------------------------------------------
<S> <C>
1.1+ Form of underwriting agreement.
3.1+ Amended and restated certificate of incorporation.
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
- ------ ------------------------------------------------------------
<S> <C>
3.2* Form of amended and restated certificate of incorporation to
be in effect upon the closing of the offering.
3.3+ By-laws.
3.4* Form of amended and restated by-laws to be in effect upon
the closing of this offering.
4.1* Specimen common stock certificate.
4.2 See Exhibits 3.1, 3.2, 3.3 and 3.4 for provisions of the
Certificate of Incorporation and By-laws of the Registrant
defining the rights of holders of Common Stock of the
Registrant.
4.3+ Warrant Agreement, as amended, dated April 28, 1999, by and
between Omnicom Group Inc. and the Registrant.
4.4+ Warrant Agreement, as amended, dated April 28, 1999, by and
between Communicade, Inc. and the Registrant.
5.1* Opinion of Brobeck, Phleger & Harrison LLP.
10.1 1999 Stock Option/Stock Issuance Plan (as Amended Restated
on October 13, 1999).
10.2+ Interactive Solutions Incorporated 1996 Stock Option Plan.
10.3+ 1998 Quadris Consulting, Inc. Equity Incentive Plan.
10.4+ Employment Agreement, dated April 28, 1999, by and between
Chan Suh and the Registrant.
10.5+ Employment Agreement, dated April 28, 1999, by and between
Kyle Shannon and the Registrant.
10.6+ Employment Agreement, dated April 28, 1999, by and between
Kevin Rowe and the Registrant.
10.7+ Employment Agreement, dated April 28, 1999, by and between
Kenneth Trush and the Registrant.
10.8+ Employment Agreement, dated April 28, 1999, by and between
Eamonn Wilmott and the Registrant.
10.9+ Employment Agreement, dated April 28, 1999, by and between
Lawrence Krakauer and the Registrant.
10.10+ Employment Agreement, dated April 28, 1999, by and between
Janet Ambrosi Wertman and the Registrant.
10.11+ Restricted Stock Agreement, dated April 16, 1999, by and
between Kevin Rowe and the Registrant.
10.12 Credit Agreement dated as of November 4, 1999 between
Omnicom Finance Inc. and the Registrant and Subsidiary
Guarantors.
10.13+ Agreement and Plan of Merger, dated April 28, 1999, by and
between Interactive Solutions Incorporated and Quadris
Consulting, Inc.
10.14+ Agreement and Plan of Merger, dated April 28, 1999, by and
between Interactive Solutions Incorporated and the
Registrant.
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
- ------ ------------------------------------------------------------
<S> <C>
10.15+ Agreement and Plan of Merger, dated April 28, 1999, by and
between Eagle River Interactive Inc. and the Registrant.
10.16+ Agreement, dated April 27, 1999, by and between Jeffrey
Rayport and the Registrant.
10.17+ Stock Purchase Agreement, dated July 23, 1999, by and
between Topics Interactive Factory B.V. and the Registrant,
as amended.
10.18* Registration Rights Agreement, dated November , 1999, by
and among the Registrant and Omnicom.
10.19 Employment Agreement, dated October 28, 1999, by and between
Charles Dickson and the Registrant.
10.20 Agreement and Plan of Merger, dated October 21, 1999, by and
among the Registrant ITI Acquisition Inc., Interactive
Traffic, Inc., and the Stockholders listed therein.
10.21 Acquisition Agreement, dated October 23, 1999, by and
between the Registrant and the Stockholders listed therein
and In-Com.
10.22 Stock Exchange Agreement, dated November 3, 1999, by and
between the Registrant and Visionik Holding ApS, Associated
Management Services A/S and Jrgen Lembke and Sren
Hougaard-Hansen.
10.23 1999 Employee Stock Purchase Plan.
11.1 Statement re: Supplemental Net Loss Per Share.
16.1+ Letter from Ernst & Young LLP re Change in Certifying
Accountants.
21.1 Subsidiaries of the Registrant.
23.1 Consent of Arthur Andersen LLP--New York, New York.
23.2 Consent of Arthur Andersen LLP--Denver, Colorado.
23.3 Consent of Arthur Andersen--Rotterdam, The Netherlands.
23.4 Consent of PricewaterhouseCoopers LLP.
23.5 Consent of Moore Stephens Denmark.
23.6* Consent of Brobeck, Phleger & Harrison LLP (included in
Exhibit 5.1).
24.1+ Powers of attorney.
24.2 Power of attorney of Charles Dickson.
27.1 Financial Data Schedule.
99.1+ Consent of Director Nominee Jeffrey Rayport.
</TABLE>
- ------------------------
* To be supplied by amendment.
+ Previously filed.
II-5
<PAGE>
(b) Financial Statement Schedules.
<TABLE>
<S> <C>
Schedule II -- Schedule of Valuation and Qualifying Accounts (AGENCY.COM
Ltd. and Subsidiaries)
Schedule II -- Schedule of Valuation and Qualifying Accounts (Eagle
River Interactive)
Schedule II -- Schedule of Valuation and Qualifying Accounts (Eagle
River Interactive Inc.)
Schedule II -- Schedule of Valuation and Qualifying Accounts
(Interactive Solutions, Inc. and Subsidiary)
Schedule II -- Schedule of Valuation and Qualifying Accounts (Twinspark
Interactive People B.V.)
</TABLE>
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 of 1933, 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 this 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 the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act, and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the 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 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 Act and will be governed by the final adjudication of
such issue.
II-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Amendment No. 2 to the Registration Statement on
Form S-1 to be signed on its behalf by the undersigned, thereunto duly
authorized in the City of New York, State of New York, on this 10th day of
November, 1999.
<TABLE>
<S> <C> <C>
AGENCY.COM LTD.
By: /s/ Kenneth Trush
-----------------------------------------
Name: Kenneth Trush
Title: Executive Vice President, Treasurer
and Director
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Amendment No. 2 to the Registration Statement has been signed by the following
persons in the capacities indicated on November 10, 1999:
<TABLE>
<CAPTION>
SIGNATURE TITLE(S)
--------- --------
<C> <S>
* President and Chief Executive Officer, and
------------------------------------------- Chairman of the Board of Directors
Chan Suh (principal executive officer)
*
------------------------------------------- Chief Creative Officer and Director
Kyle Shannon
/s/ Kenneth Trush
------------------------------------------- Executive Vice President, Treasurer and
Kenneth Trush Director
/s/ Charles Dickson Executive Vice President and Chief Financial
------------------------------------------- Officer
Charles Dickson (principal financial and accounting officer)
*
------------------------------------------- Director
Gerald Bruce Redditt
*
------------------------------------------- Director
John D. Wren
</TABLE>
<TABLE>
<S> <C> <C> <C>
*By: /s/ Kenneth Trush
--------------------------------------
Kenneth Trush
Attorney-in-fact
</TABLE>
II-7
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To AGENCY.COM Ltd.:
We have audited in accordance with generally accepted auditing standards, the
consolidated financial statements of AGENCY.COM Ltd. and subsidiaries included
in this registration statement and have issued our report thereon dated
November 10, 1999. Our audit was made for the purpose of forming an opinion on
the basic financial statements taken as a whole. The schedule of valuation and
qualifying accounts is the responsibility of the Company's management and is
presented for purposes of complying with the Securities and Exchange Commissions
rules and is not part of the basic financial statements. This schedule has been
subjected to the auditing procedures applied in the audit of the basic financial
statements and, in our opinion, fairly states in all material respects the
financial data required to be set forth therein in relation to the basic
financial statements taken as a whole.
ARTHUR ANDERSEN LLP
New York, New York
November 10, 1999
S-1
<PAGE>
SCHEDULE II
AGENCY.COM LTD. AND SUBSIDIARIES
SCHEDULE OF VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE
AT CHARGED TO CHARGED TO
BEGINNING COSTS AND OTHER BALANCE AT
OF YEAR EXPENSES ACCOUNTS DEDUCTIONS END OF YEAR
--------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C>
For the fiscal year ended December 31, 1996
Allowance for doubtful accounts.......... $ -- $ 15 $ -- $ -- $ 15
==== ==== ==== ==== ====
For the fiscal year ended December 31, 1997
Allowance for doubtful accounts.......... $ 15 $143 $ -- $115 $ 43
==== ==== ==== ==== ====
For the fiscal year ended December 31, 1998
Allowance for doubtful accounts.......... $ 43 $785 $ -- $ 2 $826
==== ==== ==== ==== ====
</TABLE>
S-2
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Eagle River Interactive:
We have audited in accordance with generally accepted auditing standards,
the financial statements of Eagle River Interactive included in this
registration statement and have issued our report thereon dated July 19, 1999.
Our audit was made for the purpose of forming an opinion on the basic financial
statements taken as a whole. The schedule of valuation and qualifying accounts
is the responsibility of the management of Eagle River Interactive Inc. and is
presented for purposes of complying with the Securities and Exchange Commissions
rules and is not part of the basic financial statements. This schedule has been
subjected to the auditing procedures applied in the audit of the basic financial
statements and, in our opinion, fairly states in all material respects the
financial data required to be set forth therein in relation to the basic
financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Denver, Colorado
July 19, 1999
S-3
<PAGE>
EAGLE RIVER INTERACTIVE
SCHEDULE OF VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO CHARGED TO
BEGINNING COSTS AND OTHER BALANCE AT
OF YEAR EXPENSES ACCOUNTS DEDUCTIONS END OF YEAR
---------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C>
For the fiscal year ended December 31, 1996
Allowance for doubtful accounts.......... $ -- $ -- $ -- $ -- $ --
==== ==== ==== ==== ====
For the period January 1, 1997 through
September 26, 1997
Allowance for doubtful accounts.......... $ -- $980 $ -- $ -- $980
==== ==== ==== ==== ====
</TABLE>
S-4
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Eagle River Interactive Inc.:
We have audited in accordance with generally accepted auditing standards, the
financial statements of Eagle River Interactive Inc. included in this
registration statement and have issued our report thereon dated July 19, 1999.
Our audit was made for the purpose of forming an opinion on the basic financial
statements taken as a whole. The schedule of valuation and qualifying accounts
is the responsibility of the Company's management and is presented for purposes
of complying with the Securities and Exchange Commissions rules and is not part
of the basic financial statements. This schedule has been subjected to the
auditing procedures applied in the audit of the basic financial statements and,
in our opinion, fairly states in all material respects the financial data
required to be set forth therein in relation to the basic financial statements
taken as a whole.
ARTHUR ANDERSEN LLP
New York, New York
July 19, 1999
S-5
<PAGE>
SCHEDULE II
EAGLE RIVER INTERACTIVE INC.
SCHEDULE OF VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO CHARGED TO
BEGINNING COSTS AND OTHER BALANCE AT
OF YEAR EXPENSES ACCOUNTS DEDUCTIONS END OF YEAR
---------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C>
For the period from inception
(September 26, 1997) through
December 31, 1997
Allowance for doubtful accounts.......... $140 $ 44 $ -- $ -- $ 184
==== ====== ==== ==== ======
For the fiscal year ended December 31, 1998
Allowance for doubtful accounts.......... $184 $2,600 $ -- $ -- $2,784
==== ====== ==== ==== ======
</TABLE>
S-6
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Interactive Solutions, Inc. and Subsidiary:
We have audited in accordance with generally accepted auditing standards, the
consolidated financial statements of Interactive Solutions, Inc. and Subsidiary
included in this registration statement and have issued our report thereon dated
July 16, 1999. Our audit was made for the purpose of forming an opinion on the
basic financial statements taken as a whole. The schedule of valuation and
qualifying accounts is the responsibility of the Company's management and is
presented for purposes of complying with the Securities and Exchange Commissions
rules and is not part of the basic financial statements. This schedule has been
subjected to the auditing procedures applied in the audit of the basic financial
statements and, in our opinion, fairly states in all material respects the
financial data required to be set forth therein in relation to the basic
financial statements taken as a whole.
ARTHUR ANDERSEN LLP
New York, New York
July 16, 1999
S-7
<PAGE>
SCHEDULE II
INTERACTIVE SOLUTIONS, INC. AND SUBSIDIARY
SCHEDULE OF VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO CHARGED TO
BEGINNING COSTS AND OTHER BALANCE AT
OF YEAR EXPENSES ACCOUNTS DEDUCTIONS END OF YEAR
---------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C>
For the fiscal year ended December 31, 1996
Allowance for doubtful accounts.......... $ -- $ 6 $ -- $ -- $ 6
==== ==== ==== ==== ====
For the fiscal year ended December 31, 1997
Allowance for doubtful accounts.......... $ 6 $ 86 $ -- $ 55 $ 37
==== ==== ==== ==== ====
For the fiscal year ended December 31, 1998
Allowance for doubtful accounts.......... $ 37 $273 $ -- $ -- $310
==== ==== ==== ==== ====
</TABLE>
S-8
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Twinspark Interactive People B.V.:
We have audited in accordance with generally accepted auditing standards, the
financial statements of Twinspark Interactive People B.V. included in this
registration statement and have issued our report thereon dated August 9, 1999.
Our audit was made for the purpose of forming an opinion on the basic financial
statements taken as a whole. The schedule of valuation and qualifying accounts
is the responsibility of the Company's management and is presented for purposes
of complying with the Securities and Exchange Commissions rules and is not part
of the basic financial statements. This schedule has been subjected to the
auditing procedures applied in the audit of the basic financial statements and,
in our opinion, fairly states in all material respects the financial data
required to be set forth therein in relation to the basic financial statements
taken as a whole.
ARTHUR ANDERSEN
New York, New York
August 9, 1999
S-9
<PAGE>
SCHEDULE II
TWINSPARK INTERACTIVE PEOPLE B.V.
SCHEDULE OF VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO CHARGED TO
BEGINNING COSTS AND OTHER BALANCE AT
OF YEAR EXPENSES ACCOUNTS DEDUCTIONS END OF YEAR
---------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C>
For the fiscal year ended December 31, 1997
Allowance for doubtful accounts.......... $ -- $ -- $ -- $ -- $ --
==== ==== ==== ==== ====
For the fiscal year ended December 31, 1998
Allowance for doubtful accounts.......... $ -- $ 44 $ -- $ -- $ 44
==== ==== ==== ==== ====
</TABLE>
S-10
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
- ------ ------------------------------------------------------------
<S> <C>
1.1+ Form of underwriting agreement.
3.1+ Amended and restated certificate of incorporation.
3.2* Form of amended and restated certificate of incorporation to
be in effect upon the closing of the offering.
3.3+ By-laws.
3.4* Form of amended and restated by-laws to be in effect upon
the closing of this offering.
4.1* Specimen common stock certificate.
4.2 See Exhibits 3.1, 3.2, 3.3 and 3.4 for provisions of the
Certificate of Incorporation and By-laws of the Registrant
defining the rights of holders of Common Stock of the
Registrant.
4.3+ Warrant Agreement, as amended, dated April 28, 1999, by and
between Omnicom Group Inc. and the Registrant.
4.4+ Warrant Agreement, as amended, dated April 28, 1999, by and
between Communicade, Inc. and the Registrant.
5.1* Opinion of Brobeck, Phleger & Harrison LLP.
10.1 1999 Stock Option/Stock Issuance Plan (as Amended and
Restated on October 13, 1999).
10.2+ Interactive Solutions Incorporated 1996 Stock Option Plan.
10.3+ 1998 Quadris Consulting, Inc. Equity Incentive Plan.
10.4+ Employment Agreement, dated April 28, 1999, by and between
Chan Suh and the Registrant.
10.5+ Employment Agreement, dated April 28, 1999, by and between
Kyle Shannon and the Registrant.
10.6+ Employment Agreement, dated April 28, 1999, by and between
Kevin Rowe and the Registrant.
10.7+ Employment Agreement, dated April 28, 1999, by and between
Kenneth Trush and the Registrant.
10.8+ Employment Agreement, dated April 28, 1999, by and between
Eamonn Wilmott and the Registrant.
10.9+ Employment Agreement, dated April 28, 1999, by and between
Lawrence Krakauer and the Registrant.
10.10+ Employment Agreement, dated April 28, 1999, by and between
Janet Ambrosi Wertman and the Registrant.
10.11+ Restricted Stock Agreement, dated April 16, 1999, by and
between Kevin Rowe and the Registrant.
10.12 Credit Agreement dated as of November 4, 1999 between
Omnicom Finance Inc. and the Registrant and Subsidiary
Guarantors.
10.13+ Agreement and Plan of Merger, dated April 28, 1999, by and
between Interactive Solutions Incorporated and Quadris
Consulting, Inc.
10.14+ Agreement and Plan of Merger, dated April 28, 1999, by and
between Interactive Solutions Incorporated and the
Registrant.
10.15+ Agreement and Plan of Merger, dated April 28, 1999, by and
between Eagle River Interactive Inc. and the Registrant.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
- ------ ------------------------------------------------------------
<S> <C>
10.16+ Agreement, dated April 27, 1999, by and between Jeffrey
Rayport and the Registrant.
10.17+ Stock Purchase Agreement, dated July 23, 1999, by and
between Topics Interactive Factory B.V. and the Registrant,
as amended.
10.18* Registration Rights Agreement, dated November , 1999, by
and among the Registrant and Omnicom.
10.19 Employment Agreement, dated October 28, 1999, by and between
Charles Dickson and the Registrant.
10.20 Agreement and Plan of Merger, dated October 21, 1999, by and
among the Registrant ITI Acquisition Inc., Interactive
Traffic, Inc., and the Stockholders listed therein.
10.21 Acquisition Agreement, dated October 23, 1999, by and
between the Registrant and the Stockholders listed therein
and In-Com.
10.22 Stock Exchange Agreement, dated November 3, 1999, by and
between the Registrant and Visionik Holding ApS, Associated
Management Services A/S and Jrgen Lembke and Sren
Hougaard-Hansen.
10.23 1999 Employee Stock Purchase Plan
11.1 Statement re: Supplemental Net Loss Per Share.
16.1+ Letter from Ernst & Young LLP re Change in Certifying
Accountants.
21.1 Subsidiaries of the Registrant.
23.1 Consent of Arthur Andersen LLP--New York, New York.
23.2 Consent of Arthur Andersen LLP--Denver, Colorado.
23.3 Consent of Arthur Andersen--Rotterdam, The Netherlands.
23.4 Consent of PricewaterhouseCoopers LLP
23.5 Consent of Moore Stephens Denmark
23.6* Consent of Brobeck, Phleger & Harrison LLP (included in
Exhibit 5.1).
24.1+ Powers of attorney.
24.2 Power of attorney of Charles Dickson
27.1 Financial Data Schedule.
99.1+ Consent of Director Nominee Jeffrey Rayport.
</TABLE>
- ------------------------
* To be supplied by amendment.
+ Previously filed.
<PAGE>
Exhibit 10.1
AGENCY.COM, LTD.
1999 STOCK OPTION/STOCK ISSUANCE PLAN
(as Amended and Restated on October 13, 1999)
ARTICLE ONE
GENERAL PROVISIONS
I. PURPOSE OF THE PLAN
This 1999 Stock Option Plan is intended to promote the interests of
Agency.Com Ltd., a Delaware corporation, by providing eligible persons with the
opportunity to acquire a proprietary interest, or otherwise increase their
proprietary interest, in the Corporation as an incentive for them to remain in
the service of the Corporation.
Capitalized terms shall have the meanings assigned to such terms in
the attached Appendix.
II. STRUCTURE OF THE PLAN
A. The Plan shall be divided into three separate equity programs:
(i) the Discretionary Option Grant Program under which
eligible persons may, at the discretion of the Plan Administrator, be
granted options to purchase shares of Common Stock,
(ii) the Stock Issuance Program under which eligible persons
may, at the discretion of the Plan Administrator, be issued shares of
Common Stock directly, either through the immediate purchase of such
shares or as a bonus for services rendered the Corporation (or any Parent
or Subsidiary), and
(iii) the Automatic Option Grant Program under which eligible
non-employee Board members shall automatically receive options at periodic
intervals to purchase shares of Common Stock.
B. The provisions of Articles One and Five shall apply to all equity
programs under the Plan and shall govern the interests of all persons under the
Plan.
III. ADMINISTRATION OF THE PLAN
A. Prior to the Section 12 Registration Date, the Discretionary
Option Grant and Stock Issuance Programs shall be administered by the Board
unless otherwise determined by the Board. Beginning with the Section 12
Registration Date, the following provisions shall govern the administration of
the Plan:
<PAGE>
(i) The Board shall have the authority to administer the
Discretionary Option Grant and Stock Issuance Programs with respect to
Section 16 Insiders but may delegate such authority in whole or in part to
the Primary Committee.
(ii) Administration of the Discretionary Option Grant and
Stock Issuance Programs with respect to all other persons eligible to
participate in those programs may, at the Board's discretion, be vested in
the Primary Committee or a Secondary Committee, or the Board may retain
the power to administer those programs with respect to all such persons.
(iii) Administration of the Automatic Option Grant Program
shall be self-executing in accordance with the terms of that program.
B. Each Plan Administrator shall, within the scope of its
administrative jurisdiction under the Plan, have full power and authority
subject to the provisions of the Plan:
(i) to establish such rules as it may deem appropriate for
proper administration of the Plan, to make all factual determinations, to
construe and interpret the provisions of the Plan and the awards
thereunder and to resolve any and all ambiguities thereunder;
(ii) to determine, with respect to awards made under the
Discretionary Option Grant and Stock Issuance Programs, which eligible
persons are to receive such awards, the time or times when such awards are
to be made, the number of shares to be covered by each such award, the
vesting schedule (if any) applicable to the award, the status of a granted
option as either an Incentive Option or a Non-Statutory Option and the
maximum term for which the option is to remain outstanding;
(iii) to amend, modify or cancel any outstanding award with
the consent of the holder or accelerate the vesting of such award; and
(iv) to take such other discretionary actions as permitted
pursuant to the terms of the applicable program.
Decisions of each Plan Administrator within the scope of its administrative
functions under the Plan shall be final and binding on all parties.
C. Members of the Primary Committee or any Secondary Committee shall
serve for such period of time as the Board may determine and may be removed by
the Board at any time. The Board may also at any time terminate the functions of
any Secondary Committee and reassume all powers and authority previously
delegated to such committee.
D. Service on the Primary Committee or the Secondary Committee shall
constitute service as a Board member, and members of each such committee shall
accordingly be entitled to full indemnification and reimbursement as Board
members for their service on such committee. No member of the Primary Committee
or the Secondary Committee shall be liable
2.
<PAGE>
for any act or omission made in good faith with respect to the Plan or any
options or stock issuances under the Plan.
IV. ELIGIBILITY
A. The persons eligible to participate in the Discretionary Option
Grant and Stock Issuance Programs are as follows:
(i) Employees,
(ii) non-employee members of the Board or the board of
directors of any Parent or Subsidiary, and
(iii) consultants and other independent advisors who provide
services to the Corporation (or any Parent or Subsidiary).
B. Only non-employee Board members shall be eligible to participate
in the Automatic Option Grant Program.
V. STOCK SUBJECT TO THE PLAN
A. The stock issuable under the Plan shall be shares of authorized
but unissued or reacquired Common Stock, including shares repurchased by the
Corporation on the open market. The maximum number of shares of Common Stock
initially reserved for issuance over the term of the Plan shall not exceed
9,676,178(1) shares. Such authorized share reserve consists of (i) the number of
shares which remain available for issuance, as of the Plan Effective Date, under
the Predecessor Plans as last approved by the Corporation's stockholders,
including the shares subject to the outstanding options to be incorporated into
the Plan and the additional shares which would otherwise be available for future
grant, plus (ii) an increase of 8,478,266 shares authorized by the Board and
approved by the Corporation's stockholders on February 22, 1999, plus (iii) an
increase of 75,000 shares authorized by the Board on October 13, 1999 subject to
stockholder approval.
B. The number of shares of Common Stock available for issuance under
the Plan shall automatically increase on the first trading day of each calendar
year during the term of the Plan, beginning with the 2000 calendar year, by an
amount equal to three percent (3%) of the shares of Common Stock outstanding on
the last trading day of the immediately preceding calendar year, but in no event
shall any such annual increase exceed 1,500,000 shares.
C. No one person participating in the Plan may receive options,
separately exercisable stock appreciation rights and direct stock issuances for
more than 1,100,000 shares of Common Stock in the aggregate per calendar year,
beginning with the 1999 calendar year.
D. Shares of Common Stock subject to outstanding options (including
options incorporated into this Plan from the Predecessor Plans) shall be
available for subsequent
- ----------
(1) All share numbers reflect the two for one stock split effected on June 28,
1999.
3.
<PAGE>
issuance under the Plan to the extent those options expire, terminate or are
cancelled for any reason prior to exercise in full. Unvested shares issued under
the Plan and subsequently repurchased by the Corporation, at the original
exercise or issue price paid per share, pursuant to the Corporation's repurchase
rights under the Plan shall be added back to the number of shares of Common
Stock reserved for issuance under the Plan and shall accordingly be available
for reissuance through one or more subsequent options or direct stock issuances
under the Plan. However, should the exercise price of an option under the Plan
be paid with shares of Common Stock or should shares of Common Stock otherwise
issuable under the Plan be withheld by the Corporation in satisfaction of the
withholding taxes incurred in connection with the exercise of an option or the
vesting of a stock issuance under the Plan, then the number of shares of Common
Stock available for issuance under the Plan shall be reduced by the gross number
of shares for which the option is exercised or which vest under the stock
issuance, and not by the net number of shares of Common Stock issued to the
holder of such option or stock issuance. Shares of Common Stock underlying one
or more stock appreciation rights exercised under the Plan shall not be
available for subsequent issuance.
E. If any change is made to the Common Stock by reason of any stock
split, stock dividend, recapitalization, combination of shares, exchange of
shares or other change affecting the outstanding Common Stock as a class without
the Corporation's receipt of consideration, appropriate adjustments shall be
made to (i) the maximum number and/or class of securities issuable under the
Plan, (ii) the number and/or class of securities by which the share reserve is
to increase each calendar year pursuant to the automatic share increase
provisions of the Plan, (iii) the number and/or class of securities for which
any one person may be granted options, separately exercisable stock appreciation
rights and direct stock issuances under the Plan per calendar year, (iv) the
number and/or class of securities for which grants are subsequently to be made
under the Automatic Option Grant Program to new and continuing non-employee
Board members, (iv) the number and/or class of securities and the exercise price
per share in effect under each outstanding option under the Plan and (v) the
number and/or class of securities and price per share in effect under each
outstanding option incorporated into this Plan from the Predecessor Plans. Such
adjustments to the outstanding options are to be effected in a manner which
shall preclude the enlargement or dilution of rights and benefits under such
options. The adjustments determined by the Plan Administrator shall be final,
binding and conclusive.
4.
<PAGE>
ARTICLE TWO
DISCRETIONARY OPTION GRANT PROGRAM
I. OPTION TERMS
Each option shall be evidenced by one or more documents in the form
approved by the Plan Administrator; provided, however, that each such document
shall comply with the terms specified below. Each document evidencing an
Incentive Option shall, in addition, be subject to the provisions of the Plan
applicable to such options.
A. Exercise Price.
1. The exercise price per share shall be fixed by the Plan
Administrator at the time of the option grant.
2. The exercise price shall become immediately due upon
exercise of the option and shall, subject to the provisions of Section II of
Article Five and the documents evidencing the option, be payable in cash or
check made payable to the Corporation. Should the Common Stock be registered
under Section 12 of the 1934 Act at the time the option is exercised, then the
exercise price may also be paid as follows:
(i) shares of Common Stock held for the requisite period
necessary to avoid a charge to the Corporation's earnings for financial
reporting purposes and valued at Fair Market Value on the Exercise Date,
or
(ii) to the extent the option is exercised for vested
shares, through a special sale and remittance procedure pursuant to which
the Optionee shall concurrently provide irrevocable instructions to (a) a
Corporation-approved brokerage firm to effect the immediate sale of the
purchased shares and remit to the Corporation, out of the sale proceeds
available on the settlement date, sufficient funds to cover the aggregate
exercise price payable for the purchased shares plus all applicable
Federal, state and local income and employment taxes required to be
withheld by the Corporation by reason of such exercise and (b) the
Corporation to deliver the certificates for the purchased shares directly
to such brokerage firm in order to complete the sale.
Except to the extent such sale and remittance procedure is utilized,
payment of the exercise price for the purchased shares must be made on the
Exercise Date.
B. Exercise and Term of Options. Each option shall be exercisable at
such time or times, during such period and for such number of shares as shall be
determined by the Plan Administrator and set forth in the documents evidencing
the option. However, no option shall have a term in excess of ten (10) years
measured from the option grant date.
5.
<PAGE>
C. Cessation of Service.
1. The following provisions shall govern the exercise of any
options outstanding at the time of the Optionee's cessation of Service or death:
(i) Any option outstanding at the time of the Optionee's
cessation of Service for any reason shall remain exercisable for such
period of time thereafter as shall be determined by the Plan Administrator
and set forth in the documents evidencing the option, but no such option
shall be exercisable after the expiration of the option term.
(ii) Any option exercisable in whole or in part by the
Optionee at the time of death may be subsequently exercised by his or her
Beneficiary.
(iii) During the applicable post-Service exercise
period, the option may not be exercised in the aggregate for more than the
number of vested shares for which the option is exercisable on the date of
the Optionee's cessation of Service. Upon the expiration of the applicable
exercise period or (if earlier) upon the expiration of the option term,
the option shall terminate and cease to be outstanding for any vested
shares for which the option has not been exercised. However, the option
shall, immediately upon the Optionee's cessation of Service, terminate and
cease to be outstanding to the extent the option is not otherwise at that
time exercisable for vested shares.
(iv) Should the Optionee's Service be terminated for
Misconduct or should the Optionee engage in Misconduct while his or her
options are outstanding, then all such options shall terminate immediately
and cease to be outstanding.
2. The Plan Administrator shall have complete discretion,
exercisable either at the time an option is granted or at any time while the
option remains outstanding:
(i) to extend the period of time for which the option is
to remain exercisable following the Optionee's cessation of Service to
such period of time as the Plan Administrator shall deem appropriate, but
in no event beyond the expiration of the option term, and/or
(ii) to permit the option to be exercised, during the
applicable post-Service exercise period, for one or more additional
installments in which the Optionee would have vested had the Optionee
continued in Service.
D. Stockholder Rights. The holder of an option shall have no
stockholder rights with respect to the shares subject to the option until such
person shall have exercised the option, paid the exercise price and become a
holder of record of the purchased shares.
E. Repurchase Rights. The Plan Administrator shall have the
discretion to grant options which are exercisable for unvested shares of Common
Stock. Should the Optionee
6.
<PAGE>
cease Service while holding such unvested shares, the Corporation shall have the
right to repurchase, at the exercise price paid per share, any or all of those
unvested shares. The terms upon which such repurchase right shall be exercisable
(including the period and procedure for exercise and the appropriate vesting
schedule for the purchased shares) shall be established by the Plan
Administrator and set forth in the document evidencing such repurchase right.
F. Limited Transferability of Options. During the lifetime of the
Optionee, Incentive Options shall be exercisable only by the Optionee and shall
not be assignable or transferable other than by will or by the laws of descent
and distribution following the Optionee's death. Non-Statutory Options shall be
subject to the same restrictions, except that a Non-Statutory Option may, to the
extent permitted by the Plan Administrator, be assigned in whole or in part
during the Optionee's lifetime to one or more members of the Optionee's
immediate family or to a trust established exclusively for Optionee and/or one
or more such family members. The terms applicable to the assigned portion shall
be the same as those in effect for the option immediately prior to such
assignment and shall be set forth in such documents issued to the assignee as
the Plan Administrator may deem appropriate.
II. INCENTIVE OPTIONS
The terms specified below shall be applicable to all Incentive
Options. Except as modified by the provisions of this Section II, all the
provisions of Articles One, Two and Six shall be applicable to Incentive
Options. Options which are specifically designated as Non-Statutory Options when
issued under the Plan shall not be subject to the terms of this Section II.
A. Eligibility. Incentive Options may only be granted to Employees.
B. Exercise Price. The exercise price per share shall not be less
than one hundred percent (100%) of the Fair Market Value per share of Common
Stock on the option grant date.
C. Dollar Limitation. The aggregate Fair Market Value of the shares
of Common Stock (determined as of the respective date or dates of grant) for
which one or more options granted to any Employee under the Plan (or any other
option plan of the Corporation or any Parent or Subsidiary) may for the first
time become exercisable as Incentive Options during any one calendar year shall
not exceed the sum of One Hundred Thousand Dollars ($100,000). To the extent the
Employee holds two (2) or more such options which become exercisable for the
first time in the same calendar year, the foregoing limitation on the
exercisability of such options as Incentive Options shall be applied on the
basis of the order in which such options are granted.
D. 10% Stockholder. If any Employee to whom an Incentive Option is
granted is a 10% Stockholder, then the exercise price per share shall not be
less than one hundred ten percent (110%) of the Fair Market Value per share of
Common Stock on the option grant date, and the option term shall not exceed five
(5) years measured from the option grant date.
III. CHANGE IN CONTROL/HOSTILE TAKE-OVER
A. Each option outstanding at the time of a Change in Control but
not otherwise fully-vested shall automatically accelerate so that each such
option shall, immediately
7.
<PAGE>
prior to the effective date of the Change in Control, become exercisable for all
of the shares of Common Stock at the time subject to that option and may be
exercised for any or all of those shares as fully-vested shares of Common Stock.
However, an outstanding option shall not so accelerate if and to the extent: (i)
such option is, in connection with the Change in Control, assumed or otherwise
continued in full force and effect by the successor corporation (or parent
thereof) pursuant to the terms of the Change in Control, (ii) such option is
replaced with a cash incentive program of the successor corporation which
preserves the spread existing at the time of the Change in Control on the shares
of Common Stock for which the option is not otherwise at that time exercisable
and provides for subsequent payout in accordance with the same vesting schedule
applicable to those option shares or (iii) the acceleration of such option is
subject to other limitations imposed by the Plan Administrator at the time of
the option grant.
B. All outstanding repurchase rights shall also terminate
automatically, and the shares of Common Stock subject to those terminated rights
shall immediately vest in full, in the event of any Change in Control, except to
the extent: (i) those repurchase rights are assigned to the successor
corporation (or parent thereof) or otherwise continue in full force and effect
pursuant to the terms of the Change in Control or (ii) such accelerated vesting
is precluded by other limitations imposed by the Plan Administrator at the time
the repurchase right is issued.
C. Immediately following the consummation of the Change in Control,
all outstanding options shall terminate and cease to be outstanding, except to
the extent assumed by the successor corporation (or parent thereof) or otherwise
expressly continued in full force and effect pursuant to the terms of the Change
in Control.
D. Each option which is assumed in connection with a Change in
Control shall be appropriately adjusted, immediately after such Change in
Control, to apply to the number and class of securities which would have been
issuable to the Optionee in consummation of such Change in Control had the
option been exercised immediately prior to such Change in Control. Appropriate
adjustments to reflect such Change in Control shall also be made to (i) the
exercise price payable per share under each outstanding option, provided the
aggregate exercise price payable for such securities shall remain the same, (ii)
the maximum number and/or class of securities available for issuance over the
remaining term of the Plan and (iii) the maximum number and/or class of
securities for which any one person may be granted options, separately
exercisable stock appreciation rights and direct stock issuances under the Plan
per calendar year.
E. The Plan Administrator may at any time provide that one or more
options will automatically accelerate in connection with a Change in Control,
whether or not those options are assumed or otherwise continued in full force
and effect pursuant to the terms of the Change in Control. Any such option shall
accordingly become exercisable, immediately prior to the effective date of such
Change in Control, for all of the shares of Common Stock at the time subject to
that option and may be exercised for any or all of those shares as fully-vested
shares of Common Stock. In addition, the Plan Administrator may at any time
provide that one or more of the Corporation's repurchase rights shall not be
assignable in connection with such Change in Control and shall terminate upon
the consummation of such Change in Control.
F. The Plan Administrator may at any time provide that one or more
options will automatically accelerate upon an Involuntary Termination of the
Optionee's Service within a
8.
<PAGE>
designated period (not to exceed eighteen (18) months) following the effective
date of any Change in Control in which those options do not otherwise
accelerate. Any options so accelerated shall remain exercisable for fully-vested
shares until the earlier of (i) the expiration of the option term or (ii) the
expiration of the one (1) year period measured from the effective date of the
Involuntary Termination. In addition, the Plan Administrator may at any time
provide that one or more of the Corporation's repurchase rights shall
immediately terminate upon such Involuntary Termination.
G. The Plan Administrator may at any time provide that one or more
options will automatically accelerate in connection with a Hostile Take-Over.
Any such option shall become exercisable, immediately prior to the effective
date of such Hostile Take-Over, for all of the shares of Common Stock at the
time subject to that option and may be exercised for any or all of those shares
as fully-vested shares of Common Stock. In addition, the Plan Administrator may
at any time provide that one or more of the Corporation's repurchase rights
shall terminate automatically upon the consummation of such Hostile Take-Over.
Alternatively, the Plan Administrator may condition such automatic acceleration
and termination upon an Involuntary Termination of the Optionee's Service within
a designated period (not to exceed eighteen (18) months) following the effective
date of such Hostile Take-Over. Each option so accelerated shall remain
exercisable for fully-vested shares until the expiration or sooner termination
of the option term.
H. The portion of any Incentive Option accelerated in connection
with a Change in Control or Hostile Take Over shall remain exercisable as an
Incentive Option only to the extent the applicable One Hundred Thousand Dollar
($100,000) limitation is not exceeded. To the extent such dollar limitation is
exceeded, the accelerated portion of such option shall be exercisable as a
Non-Statutory Option under the Federal tax laws.
IV. STOCK APPRECIATION RIGHTS
The Plan Administrator may, subject to such conditions as it may
determine, grant to selected Optionees stock appreciation rights which will
allow the holders of those rights to elect between the exercise of the
underlying option for shares of Common Stock and the surrender of that option in
exchange for a distribution from the Corporation in an amount equal to the
excess of (a) the Option Surrender Value of the number of shares for which the
option is surrendered over (b) the aggregate exercise price payable for such
shares. The distribution may be made in shares of Common Stock valued at Fair
Market Value on the option surrender date, in cash, or partly in shares and
partly in cash, as the Plan Administrator shall in its sole discretion deem
appropriate.
9.
<PAGE>
ARTICLE THREE
STOCK ISSUANCE PROGRAM
I. STOCK ISSUANCE TERMS
Shares of Common Stock may be issued under the Stock Issuance
Program through direct and immediate issuances without any intervening options.
Shares of Common Stock may also be issued under the Stock Issuance Program
pursuant to share right awards which entitle the recipients to receive those
shares upon the attainment of designated performance goals or Service
requirements. Each such award shall be evidenced by one or more documents which
comply with the terms specified below.
A. Purchase Price.
1. The purchase price per share of Common Stock subject to
direct issuance shall be fixed by the Plan Administrator.
2. Subject to the provisions of Section II of Article Five,
shares of Common Stock may be issued under the Stock Issuance Program for any of
the following items of consideration which the Plan Administrator may deem
appropriate in each individual instance:
(i) cash or check made payable to the Corporation, or
(ii) past services rendered to the Corporation (or any
Parent or Subsidiary).
B. Vesting/Issuance Provisions.
1. The Plan Administrator may issue shares of Common Stock
which are fully and immediately vested upon issuance or which are to vest in one
or more installments over the Participant's period of Service or upon attainment
of specified performance objectives. Alternatively, the Plan Administrator may
issue share right awards which shall entitle the recipient to receive a
specified number of vested shares of Common Stock upon the attainment of one or
more performance goals or Service requirements established by the Plan
Administrator.
2. Any new, substituted or additional securities or other
property (including money paid other than as a regular cash dividend) which the
Participant may have the right to receive with respect to his or her unvested
shares of Common Stock by reason of any stock dividend, stock split,
recapitalization, combination of shares, exchange of shares or other change
affecting the outstanding Common Stock as a class without the Corporation's
receipt of consideration shall be issued subject to (i) the same vesting
requirements applicable to the Participant's unvested shares of Common Stock and
(ii) such escrow arrangements as the Plan Administrator shall deem appropriate.
3. The Participant shall have full stockholder rights with
respect to the issued shares of Common Stock, whether or not the Participant's
interest in those shares is
10.
<PAGE>
vested. Accordingly, the Participant shall have the right to vote such shares
and to receive any regular cash dividends paid on such shares.
4. Should the Participant cease to remain in Service while
holding one or more unvested shares of Common Stock, or should the performance
objectives not be attained with respect to one or more such unvested shares of
Common Stock, then those shares shall be immediately surrendered to the
Corporation for cancellation, and the Participant shall have no further
stockholder rights with respect to those shares. To the extent the surrendered
shares were previously issued to the Participant for consideration paid in cash
or cash equivalent (including the Participant's purchase-money indebtedness),
the Corporation shall repay to the Participant the cash consideration paid for
the surrendered shares and shall cancel the unpaid principal balance of any
outstanding purchase-money note of the Participant attributable to the
surrendered shares.
5. The Plan Administrator may waive the surrender and
cancellation of one or more unvested shares of Common Stock (or other assets
attributable thereto) which would otherwise occur upon the cessation of the
Participant's Service or the non-attainment of the performance objectives
applicable to those shares. Such waiver shall result in the immediate vesting of
the Participant's interest in the shares of Common Stock as to which the waiver
applies. Such waiver may be effected at any time, whether before or after the
Participant's cessation of Service or the attainment or non-attainment of the
applicable performance objectives.
6. Outstanding share right awards shall automatically
terminate, and no shares of Common Stock shall actually be issued in
satisfaction of those awards, if the performance goals or Service requirements
established for such awards are not attained. The Plan Administrator, however,
shall have the authority to issue shares of Common Stock in satisfaction of one
or more outstanding share right awards as to which the designated performance
goals or Service requirements are not attained.
II. CHANGE IN CONTROL/HOSTILE TAKE-OVER
A. All of the Corporation's outstanding repurchase rights shall
terminate automatically, and all the shares of Common Stock subject to those
terminated rights shall immediately vest in full, in the event of any Change in
Control, except to the extent (i) those repurchase rights are assigned to the
successor corporation (or parent thereof) or otherwise continue in full force
and effect pursuant to the terms of the Change in Control or (ii) such
accelerated vesting is precluded by other limitations imposed by the Plan
Administrator at the time the repurchase right is issued.
B. The Plan Administrator may at any time provide for the automatic
termination of one or more of those outstanding repurchase rights and the
immediate vesting of the shares of Common Stock subject to those terminated
rights upon (i) a Change in Control or Hostile Take-Over or (ii) an Involuntary
Termination of the Participant's Service within a designated period (not to
exceed eighteen (18) months) following the effective date of any Change in
Control or Hostile Take-Over in which those repurchase rights are assigned to
the successor corporation (or parent thereof) or otherwise continue in full
force and effect.
11.
<PAGE>
III. SHARE ESCROW/LEGENDS
Unvested shares may, in the Plan Administrator's discretion, be held
in escrow by the Corporation until the Participant's interest in such shares
vests or may be issued directly to the Participant with restrictive legends on
the certificates evidencing those unvested shares.
12.
<PAGE>
ARTICLE FOUR
AUTOMATIC OPTION GRANT PROGRAM
I. OPTION TERMS
A. Grant Dates. Options shall be made on the dates specified below:
1. Each individual serving as a non-employee Board member on
the Underwriting Date shall automatically be granted at that time a
Non-Statutory Option to purchase Fifty Thousand (50,000) shares of Common Stock,
provided that individual has not previously been in the employ of the
Corporation or any Parent or Subsidiary and provided further that such
individual has neither received options to purchase, in the aggregate, more than
Forty Thousand (40,000) shares of Common Stock in the twelve (12)-month period
preceding the Underwriting Date nor is a 30% Percent Stockholder.
2. Each individual who is first elected or appointed as a
non-employee Board member at any time after the Underwriting Date shall
automatically be granted, on the date of such initial election or appointment, a
Non-Statutory Option to Fifty Thousand (50,000) shares of Common Stock, provided
that individual has not previously been in the employ of the Corporation or any
Parent or Subsidiary, and provided that such individual has neither received
options to purchase, in the aggregate, more than Forty Thousand (40,000) shares
of Common Stock in the twelve (12)-month period preceding the Underwriting Date
nor is a 30% Percent Stockholder.
3. On the date of each Annual Stockholders Meeting held after
the Underwriting Date, each individual who is to continue to serve as a
non-employee Board member, whether or not that individual is standing for
re-election to the Board, shall automatically be granted a Non-Statutory Option
to purchase Fifteen Thousand (15,000) shares of Common Stock, provided such
individual has served as a non-employee Board member for at least six (6) months
and provided such individual is not a 30% Percent Stockholder or affiliate.
B. Exercise Price.
1. The exercise price per share shall be equal to one hundred
percent (100%) of the Fair Market Value per share of Common Stock on the option
grant date.
2. The exercise price shall be payable in one or more of the
alternative forms authorized under the Discretionary Option Grant Program.
Except to the extent the sale and remittance procedure specified thereunder is
utilized, payment of the exercise price for the purchased shares must be made on
the Exercise Date.
C. Option Term. Each option shall have a term of ten (10) years
measured from the option grant date.
D. Exercise and Vesting of Options. Each option shall be immediately
exercisable for any or all of the option shares. However, any shares purchased
under the option
13.
<PAGE>
shall be subject to repurchase by the Corporation, at the exercise price paid
per share, upon the Optionee's cessation of Board service prior to vesting in
those shares. Each initial Fifty Thousand (50,000) share option shall vest, and
the Corporation's repurchase right shall lapse, in a series of four (4)
successive equal annual installments upon the Optionee's completion of each year
of Board service over the four (4)-year period measured from the grant date.
Each annual Fifteen Thousand (15,000) share option shall vest, and the
Corporation's repurchase right shall lapse, upon the Optionee's completion of
one (1) year of Board service measured from the grant date.
E. Cessation of Board Service. The following provisions shall govern
the exercise of any options outstanding at the time of the Optionee's cessation
of Board service:
(i) Any option outstanding at the time of the Optionee's
cessation of Board service for any reason shall remain exercisable for a
twelve (12)-month period following the date of such cessation of Board
service, but in no event shall such option be exercisable after the
expiration of the option term.
(ii) Any option exercisable in whole or in part by the
Optionee at the time of death may be subsequently exercised by his or her
Beneficiary.
(iii) Following the Optionee's cessation of Board
service, the option may not be exercised in the aggregate for more than
the number of shares in which the Optionee was vested on the date of such
cessation of Board service. Upon the expiration of the applicable exercise
period or (if earlier) upon the expiration of the option term, the option
shall terminate and cease to be outstanding for any vested shares for
which the option has not been exercised. However, the option shall,
immediately upon the Optionee's cessation of Board service, terminate and
cease to be outstanding for any and all shares in which the Optionee is
not otherwise at that time vested.
(iv) However, should the Optionee cease to serve as a
Board member by reason of death or Permanent Disability, then all shares
at the time subject to the option shall immediately vest so that such
option may, during the twelve (12)-month exercise period following such
cessation of Board service, be exercised for all or any portion of those
shares as fully-vested shares of Common Stock.
II. CHANGE IN CONTROL/HOSTILE TAKE-OVER
A. In the event of any Change in Control or Hostile Take-Over, the
shares of Common Stock at the time subject to each outstanding option but not
otherwise vested shall automatically vest in full so that each such option may,
immediately prior to the effective date of such Change in Control the Hostile
Take-Over, be exercised for all or any portion of those shares as fully-vested
shares of Common Stock. Each such option accelerated in connection with a Change
in Control shall terminate upon the Change in Control, except to the extent
assumed by
14.
<PAGE>
the successor corporation (or parent thereof) or otherwise continued in full
force and effect pursuant to the terms of the Change in Control. Each such
option accelerated in connection with a Hostile Take-Over shall remain
exercisable until the expiration or sooner termination of the option term.
B. All outstanding repurchase rights shall also terminate
automatically, and the shares of Common Stock subject to those terminated rights
shall immediately vest in full, in the event of any Change in Control or Hostile
Take-Over.
C. Upon the occurrence of a Hostile Take-Over, the Optionee shall
have a thirty (30)-day period in which to surrender to the Corporation each of
his or her outstanding options. The Optionee shall in return be entitled to a
cash distribution from the Corporation in an amount equal to the excess of (i)
the Option Surrender Value of the shares of Common Stock at the time subject to
each surrendered option (whether or not the Optionee is otherwise at the time
vested in those shares) over (ii) the aggregate exercise price payable for such
shares. Such cash distribution shall be paid within five (5) days following the
surrender of the option to the Corporation.
D. Each option which is assumed in connection with a Change in
Control shall be appropriately adjusted to apply to the number and class of
securities which would have been issuable to the Optionee in consummation of
such Change in Control had the option been exercised immediately prior to such
Change in Control. Appropriate adjustments shall also be made to the exercise
price payable per share under each outstanding option, provided the aggregate
exercise price payable for such securities shall remain the same.
III. REMAINING TERMS
The remaining terms of each option granted under the Automatic
Option Grant Program shall be the same as the terms in effect for options made
under the Discretionary Option Grant Program.
15.
<PAGE>
ARTICLE FIVE
MISCELLANEOUS
I. NO IMPAIRMENT OF AUTHORITY
Outstanding awards shall in no way affect the right of the
Corporation to adjust, reclassify, reorganize or otherwise change its capital or
business structure or to merge, consolidate, dissolve, liquidate or sell or
transfer all or any part of its business or assets.
II. FINANCING
The Plan Administrator may permit any Optionee or Participant to pay
the option exercise price under the Discretionary Option Grant Program or the
purchase price of shares issued under the Stock Issuance Program by delivering a
full-recourse, interest bearing promissory note payable in one or more
installments. The terms of any such promissory note (including the interest rate
and the terms of repayment) shall be established by the Plan Administrator in
its sole discretion. In no event may the maximum credit available to the
Optionee or Participant exceed the sum of (i) the aggregate option exercise
price or purchase price payable for the purchased shares plus (ii) any Federal,
state and local income and employment tax liability incurred by the Optionee or
the Participant in connection with the option exercise or share purchase.
III. TAX WITHHOLDING
A. The Corporation's obligation to deliver shares of Common Stock
upon the exercise of options or the issuance or vesting of such shares under the
Plan shall be subject to the satisfaction of all applicable Federal, state and
local income and employment tax withholding requirements.
B. The Plan Administrator may, in its discretion, provide any or all
holders of Non-Statutory Options or unvested shares of Common Stock under the
Plan with the right to use shares of Common Stock in satisfaction of all or part
of the Taxes incurred by such holders in connection with the exercise of their
options or the vesting of their shares. Such right may be provided to any such
holder in either or both of the following formats:
Stock Withholding: The election to have the Corporation
withhold, from the shares of Common Stock otherwise issuable upon the exercise
of such Non-Statutory Option or the vesting of such shares, a portion of those
shares with an aggregate Fair Market Value equal to the percentage of the Taxes
(not to exceed one hundred percent (100%)) designated by the holder.
Stock Delivery: The election to deliver to the Corporation, at
the time the Non-Statutory Option is exercised or the shares vest, one or more
shares of Common Stock previously acquired by such holder (other than in
connection with the option exercise or share vesting triggering the Taxes) with
an aggregate Fair Market Value equal to the percentage of the Taxes (not to
exceed one hundred percent (100%)) designated by the holder.
16.
<PAGE>
IV. EFFECTIVE DATE AND TERM OF THE PLAN
A. The Plan became effective immediately upon the Plan Effective
Date and was approved by the stockholders on February 22, 1999. On June 17,
1999, the Corporation amended and restated the plan to limit the availability of
option grants under the Automatic Option Grant Program to those individuals who
are not a 30% Stockholder. On October 13, 1999 the Board amended and restated
the Plan to increase the number of shares available for issuance under the Plan
by 75,000 shares, subject to Stockholder approval. No options shall be granted
on the basis of the 75,000 share increase unless and until Stockholder approval
of the increase is obtained.
B. The Plan shall serve as the successor to the Predecessor Plans,
and no further options or direct stock issuances shall be made under the
Predecessor Plans after the Section 12 Registration Date. All options
outstanding under the Predecessor Plans on the Section 12 Registration Date
shall be incorporated into the Plan at that time and shall be treated as
outstanding options under the Plan. However, each outstanding option so
incorporated shall continue to be governed solely by the terms of the documents
evidencing such option, and no provision of the Plan shall be deemed to affect
or otherwise modify the rights or obligations of the holders of such
incorporated options with respect to their acquisition of shares of Common
Stock.
C. One or more provisions of the Plan, including (without
limitation) the option/vesting acceleration provisions of Article Two relating
to Changes in Control, may, in the Plan Administrator's discretion, be extended
to one or more options incorporated from the Predecessor Plans which do not
otherwise contain such provisions.
D. The Plan shall terminate upon the earliest of (i) January 31,
2009, (ii) the date on which all shares available for issuance under the Plan
shall have been issued as fully-vested shares or (iii) the termination of all
outstanding options in connection with a Change in Control. Upon such plan
termination, all outstanding options and unvested stock issuances shall
thereafter continue to have force and effect in accordance with the provisions
of the documents evidencing such grants or issuances.
V. AMENDMENT OF THE PLAN
A. The Board shall have complete and exclusive power and authority
to amend or modify the Plan in any or all respects. However, no such amendment
or modification shall adversely affect the rights and obligations with respect
to stock options or unvested stock issuances at the time outstanding under the
Plan unless the Optionee or the Participant consents to such amendment or
modification. In addition, certain amendments may require stockholder approval
pursuant to applicable laws or regulations.
B. Options to purchase shares of Common Stock may be granted under
the Discretionary Option Grant Program and shares of Common Stock may be issued
under the Stock Issuance Program that are in each instance in excess of the
number of shares then available for issuance under the Plan, provided any excess
shares actually issued under those programs
17.
<PAGE>
shall be held in escrow until there is obtained stockholder approval of an
amendment sufficiently increasing the number of shares of Common Stock available
for issuance under the Plan. If such stockholder approval is not obtained within
twelve (12) months after the date the first such excess issuances are made, then
(i) any unexercised options granted on the basis of such excess shares shall
terminate and cease to be outstanding and (ii) the Corporation shall promptly
refund to the Optionees and the Participants the exercise or purchase price paid
for any excess shares issued under the Plan and held in escrow, together with
interest (at the applicable Short Term Federal Rate) for the period the shares
were held in escrow, and such shares shall thereupon be automatically cancelled
and cease to be outstanding.
VI. USE OF PROCEEDS
Any cash proceeds received by the Corporation from the sale of
shares of Common Stock under the Plan shall be used for general corporate
purposes.
VII. REGULATORY APPROVALS
A. The implementation of the Plan, the granting of any stock option
under the Plan and the issuance of any shares of Common Stock (i) upon the
exercise of any granted option or (ii) under the Stock Issuance Program shall be
subject to the Corporation's procurement of all approvals and permits required
by regulatory authorities having jurisdiction over the Plan, the stock options
granted under it and the shares of Common Stock issued pursuant to it.
B. No shares of Common Stock or other assets shall be issued or
delivered under the Plan unless and until there shall have been compliance with
all applicable requirements of Federal and state securities laws, including the
filing and effectiveness of the Form S-8 registration statement for the shares
of Common Stock issuable under the Plan, and all applicable listing requirements
of any stock exchange (or the Nasdaq National Market, if applicable) on which
Common Stock is then listed for trading.
VIII. NO EMPLOYMENT/SERVICE RIGHTS
Nothing in the Plan shall confer upon the Optionee or the
Participant any right to continue in Service for any period of specific duration
or interfere with or otherwise restrict in any way the rights of the Corporation
(or any Parent or Subsidiary employing or retaining such person) or of the
Optionee or the Participant, which rights are hereby expressly reserved by each,
to terminate such person's Service at any time for any reason, with or without
cause.
18.
<PAGE>
APPENDIX
The following definitions shall be in effect under the Plan:
A. Automatic Option Grant Program shall mean the automatic option grant
program in effect under the Plan.
B. Beneficiary shall mean, in the event the Plan Administrator implements
a beneficiary designation procedure, the person designated by an Optionee or
Participant, pursuant to such procedure, to succeed to such person's rights
under any outstanding awards held by him or her at the time of death. In the
absence of such designation or procedure, the Beneficiary shall be the personal
representative of the estate of the Optionee or Participant or the person or
persons to whom the award is transferred by will or the laws of descent and
distribution.
C. Board shall mean the Corporation's Board of Directors.
D. Change in Control shall mean a change in ownership or control of the
Corporation effected through any of the following transactions:
(i) a merger, consolidation or reorganization approved by the
Corporation's stockholders, unless securities representing more than fifty
percent (50%) of the total combined voting power of the voting securities of the
successor corporation are immediately thereafter beneficially owned, directly or
indirectly and in substantially the same proportion, by the persons who
beneficially owned the Corporation's outstanding voting securities immediately
prior to such transaction,
(ii) any stockholder-approved transfer or other disposition of
all or substantially all of the Corporation's assets, or
(iii) the acquisition, directly or indirectly by any person or
related group of persons (other than the Corporation or a person that directly
or indirectly controls, is controlled by, or is under common control with, the
Corporation), of beneficial ownership (within the meaning of Rule 13d-3 of the
1934 Act) of securities possessing more than fifty percent (50%) of the total
combined voting power of the Corporation's outstanding securities pursuant to a
tender or exchange offer made directly to the Corporation's stockholders which
the Board recommends such stockholders accept.
E. Code shall mean the Internal Revenue Code of 1986, as amended.
F. Common Stock shall mean the Corporation's common stock.
G. Corporation shall mean Agency.com, Ltd., a Delaware corporation, and
its successors.
H. Discretionary Option Grant Program shall mean the discretionary option
grant program in effect under the Plan.
A-1.
<PAGE>
I. Employee shall mean an individual who is in the employ of the
Corporation (or any Parent or Subsidiary), subject to the control and direction
of the employer entity as to both the work to be performed and the manner and
method of performance.
J. Exercise Date shall mean the date on which the Corporation shall have
received written notice of the option exercise.
K. Fair Market Value per share of Common Stock on any relevant date shall
be determined in accordance with the following provisions:
(i) If the Common Stock is at the time traded on the Nasdaq National
Market, then the Fair Market Value shall be the closing selling price per share
of Common Stock on the date in question, as such price is reported on the Nasdaq
National Market or any successor system. If there is no closing selling price
for the Common Stock on the date in question, then the Fair Market Value shall
be the closing selling price on the last preceding date for which such quotation
exists.
(ii) If the Common Stock is at the time listed on any Stock
Exchange, then the Fair Market Value shall be the closing selling price per
share of Common Stock on the date in question on the Stock Exchange determined
by the Plan Administrator to be the primary market for the Common Stock, as such
price is officially quoted in the composite tape of transactions on such
exchange. If there is no closing selling price for the Common Stock on the date
in question, then the Fair Market Value shall be the closing selling price on
the last preceding date for which such quotation exists.
(iii) For purposes of any options made on the Underwriting Date, the
Fair Market Value shall be deemed to be equal to the price per share at which
the Common Stock is to be sold in the initial public offering pursuant to the
Underwriting Agreement.
(iv) For purposes of any options made prior to the Underwriting
Date, the Fair Market Value shall be determined by the Plan Administrator, after
taking into account such factors as it deems appropriate.
L. Hostile Take-Over shall mean:
(i) the acquisition, directly or indirectly, by any person or
related group of persons (other than the Corporation or a person that directly
or indirectly controls, is controlled by, or is under common control with, the
Corporation) of beneficial ownership (within the meaning of Rule 13d-3 of the
1934 Act) of securities possessing more than fifty percent (50%) of the total
combined voting power of the Corporation's outstanding securities pursuant to a
tender or exchange offer made directly to the Corporation's stockholders which
the Board does not recommend such stockholders to accept, or
(ii) a change in the composition of the Board over a period of
thirty-six (36) consecutive months or less such that a majority of the Board
members ceases, by reason of one or more contested elections for Board
membership, to be comprised of individuals who either (A) have been Board
members continuously since the beginning of such period or (B) have been elected
or nominated for election as Board members during such period by at least a
majority of
A-2.
<PAGE>
the Board members described in clause (A) who were still in office at the time
the Board approved such election or nomination.
M. Incentive Option shall mean an option which satisfies the requirements
of Code Section 422.
N. Involuntary Termination shall mean the termination of the Service of
any individual which occurs by reason of:
(i) such individual's involuntary dismissal or discharge by the
Corporation for reasons other than Misconduct, or
(ii) such individual's voluntary resignation following (A) a change
in his or her position with the Corporation or Parent or Subsidiary employing
the individual which materially reduces his or her duties and responsibilities
or the level of management to which he or she reports, (B) a reduction in his or
her level of compensation (including base salary, fringe benefits and target
bonus under any performance based bonus or incentive programs) by more than
fifteen percent (15%) or (C) a relocation of such individual's place of
employment by more than fifty (50) miles, provided and only if such change,
reduction or relocation is effected by the Corporation without the individual's
consent.
O. Misconduct shall mean the commission of any act of fraud, embezzlement
or dishonesty by the Optionee or Participant, any unauthorized use or disclosure
by such person of confidential information or trade secrets of the Corporation
(or any Parent or Subsidiary), or any intentional wrongdoing by such person,
whether by omission or commission, which adversely affects the business or
affairs of the Corporation (or any Parent or Subsidiary) in a material manner.
This shall not limit the grounds for the dismissal or discharge of any person in
the Service of the Corporation (or any Parent or Subsidiary).
P. 1934 Act shall mean the Securities Exchange Act of 1934, as amended.
Q. Non-Statutory Option shall mean an option not intended to satisfy the
requirements of Code Section 422.
R. Option Surrender Value shall mean the Fair Market Value per share of
Common Stock on the date the option is surrendered to the Corporation or, in the
event of a Hostile Take-Over, effected through a tender offer, the highest
reported price per share of Common Stock paid by the tender offeror in effecting
such Hostile Take-Over, if greater. However, if the surrendered option is an
Incentive Option, the Option Surrender Value shall not exceed the Fair Market
Value per share.
S. Optionee shall mean any person to whom an option is granted under the
Discretionary Option Grant, Salary Investment Option Grant or Automatic Option
Grant Program.
T. Parent shall mean any corporation (other than the Corporation) in an
unbroken chain of corporations ending with the Corporation, provided each
corporation in the unbroken chain (other than the Corporation) owns, at the time
of the determination, stock possessing fifty
A-3.
<PAGE>
percent (50%) or more of the total combined voting power of all classes of stock
in one of the other corporations in such chain.
U. Participant shall mean any person who is issued shares of Common Stock
under the Stock Issuance Program.
V. Permanent Disability or Permanently Disabled shall mean the inability
of the Optionee or the Participant to engage in any substantial gainful activity
by reason of any medically determinable physical or mental impairment expected
to result in death or to be of continuous duration of twelve (12) months or
more. However, solely for purposes of the Automatic Option Grant Program,
Permanent Disability or Permanently Disabled shall mean the inability of the
non-employee Board member to perform his or her usual duties as a Board member
by reason of any medically determinable physical or mental impairment expected
to result in death or to be of continuous duration of twelve (12) months or
more.
W. Plan shall mean the Corporation's 1999 Stock Option/Stock Issuance
Plan, as set forth in this document.
X. Plan Administrator shall mean the particular entity, whether the
Primary Committee, the Board or the Secondary Committee, which is authorized to
administer the Discretionary Option Grant and Stock Issuance Programs with
respect to one or more classes of eligible persons, to the extent such entity is
carrying out its administrative functions under those programs with respect to
the persons under its jurisdiction. However, the Primary Committee shall have
the plenary authority to make all factual determinations and to construe and
interpret any and all ambiguities under the Plan to the extent such authority is
not otherwise expressly delegated to any other Plan Administrator.
Y. Plan Effective Date shall mean February 19, 1999, the date on which the
Plan was adopted by the Board.
Z. Predecessor Plans shall mean the Corporation's pre-existing 1996 Stock
Option Plan and 1997 Stock Option Plan in effect immediately prior to the Plan
Effective Date hereunder.
AA. Primary Committee shall mean the committee of two (2) or more
non-employee Board members appointed by the Board to administer the
Discretionary Option Grant and Stock Issuance Programs with respect to Section
16 Insiders.
AB. Secondary Committee shall mean a committee of one (1) or more Board
members appointed by the Board to administer the Discretionary Option Grant and
Stock Issuance Programs with respect to eligible persons other than Section 16
Insiders.
AC. Section 12 Registration Date shall mean the date on which the Common
Stock is first registered under Section 12(g) of the 1934 Act.
AD. Section 16 Insider shall mean an officer or director of the
Corporation subject to the short-swing profit liabilities of Section 16 of the
1934 Act.
A-4.
<PAGE>
AE. Service shall mean the performance of services for the Corporation (or
any Parent or Subsidiary) by a person in the capacity of an Employee, a
non-employee member of the board of directors or a consultant or independent
advisor, except to the extent otherwise specifically provided in the documents
evidencing the option grant or stock issuance.
AF. Stock Exchange shall mean either the American Stock Exchange or the
New York Stock Exchange.
AG. Stock Issuance Program shall mean the stock issuance program in effect
under the Plan.
AH. Subsidiary shall mean any corporation (other than the Corporation) in
an unbroken chain of corporations beginning with the Corporation, provided each
corporation (other than the last corporation) in the unbroken chain owns, at the
time of the determination, 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.
AI. Taxes shall mean the Federal, state and local income and employment
tax liabilities incurred by the holder of Non-Statutory Options or unvested
shares of Common Stock in connection with the exercise of those options or the
vesting of those shares.
AJ. 10% Stockholder shall mean the owner of stock (as determined under
Code Section 424(d)) possessing more than ten percent (10%) of the total
combined voting power of all classes of stock of the Corporation (or any Parent
or Subsidiary).
AK. 30% Stockholder shall mean a non-employee Board member who, directly
or indirectly, owns stock (as determined under Code Section 424(d)) possessing
at least thirty percent (30%) of the total combined voting power of the
outstanding securities of the Corporation (or any Parent or Subsidiary) or is
affiliated with or is a representative of such a thirty percent (30%) or greater
stockholder.
AL. Underwriting Agreement shall mean the agreement between the
Corporation and the underwriter or underwriters managing the initial public
offering of the Common Stock.
AM. Underwriting Date shall mean the date on which the Underwriting
Agreement is executed and priced in connection with an initial public offering
of the Common Stock.
A-5.
<PAGE>
Exhibit 10.12
EXECUTION COPY
================================================================================
AGENCY.COM LTD.
and
SUBSIDIARY GUARANTORS
-----------------------------
CREDIT AGREEMENT
Dated as of November 4, 1999
-----------------------------
OMNICOM FINANCE INC.
as Lender
================================================================================
<PAGE>
TABLE OF CONTENTS
ARTICLE 1..................................................................1
DEFINITIONS AND ACCOUNTING MATTERS.........................................1
Section 1.1 Certain Defined Terms...................................1
Section 1.2 Accounting Terms and Determinations.....................11
Section 1.3 Classes of Loans........................................12
ARTICLE 2..................................................................13
COMMITMENTS, LOANS, NOTES; PREPAYMENTS AND GUARANTEES......................13
Section 2.1 Loans...................................................13
Section 2.2 Borrowings of Loans.....................................13
Section 2.3 Changes of Commitments..................................13
Section 2.4 Commitment Fee..........................................13
Section 2.5 Notes...................................................14
Section 2.6 Optional Prepayments....................................14
Section 2.7 Mandatory Prepayments and Reductions of Commitments.....14
Section 2.8 Guarantee Commitment....................................15
ARTICLE 3..................................................................18
PAYMENTS OF PRINCIPAL AND INTEREST.........................................18
Section 3.1 Repayment of Loans......................................18
Section 3.2 Interest................................................18
ARTICLE 4..................................................................19
PAYMENTS; PRO RATA TREATMENT; COMPUTATIONS; ETC............................19
Section 4.1 Payments................................................19
Section 4.2 Computations............................................19
Section 4.3 Minimum Amounts.........................................19
Section 4.4 Certain Notices.........................................19
ARTICLE 5..................................................................20
i
<PAGE>
YIELD PROTECTION, ETC......................................................20
Section 5.1 Additional Costs........................................20
Section 5.2 Substitute Basis........................................21
Section 5.3 Illegality..............................................21
Section 5.4 Compensation............................................21
Section 5.5 Taxes...................................................22
ARTICLE 6..................................................................23
GUARANTEES.................................................................23
Section 6.1 Guarantees..............................................23
Section 6.2 Obligations Unconditional...............................24
Section 6.3 Reinstatement...........................................25
Section 6.4 Subrogation.............................................25
Section 6.5 Remedies................................................25
Section 6.6 Continuing Guarantee....................................25
Section 6.7 Rights of Contribution..................................25
Section 6.8 Limitation on Guarantee Obligations.....................26
ARTICLE 7..................................................................26
CONDITIONS PRECEDENT.......................................................26
Section 7.1 Initial Extension of Credit.............................26
Section 7.2 Initial and Subsequent Extensions of Credit.............28
ARTICLE 8..................................................................28
REPRESENTATIONS AND WARRANTIES.............................................28
Section 8.1 Corporate Existence.....................................28
Section 8.2 Financial Condition.....................................28
Section 8.3 Litigation..............................................29
Section 8.4 No Breach...............................................29
Section 8.5 Action..................................................29
Section 8.6 Approvals...............................................29
Section 8.7 Use of Credit...........................................30
Section 8.8 ERISA...................................................30
Section 8.9 Taxes...................................................30
Section 8.10 Investment Company Act.................................30
Section 8.11 Material Agreements and Liens..........................30
ii
<PAGE>
Section 8.12 Environmental Matters..................................31
Section 8.13 Subsidiaries, Etc......................................31
Section 8.14 Title to Assets........................................32
Section 8.15 Intellectual Properties................................32
8.15.1 Definitions..........................................32
8.15.2 Representations......................................33
Section 8.16 Client Relations.......................................33
Section 8.17 True and Complete Disclosure...........................33
ARTICLE 9..................................................................34
COVENANTS OF THE COMPANY...................................................34
Section 9.1 Financial Statements, Etc...............................34
Section 9.2 Litigation..............................................37
Section 9.3 Existence, Etc..........................................37
Section 9.4 Insurance...............................................37
Section 9.5 Prohibition of Fundamental Changes......................38
Section 9.6 Limitation on Liens.....................................38
Section 9.7 Indebtedness............................................40
Section 9.8 Investments.............................................40
Section 9.9 Dividend Payments.......................................41
Section 9.10 Capital Expenditures...................................41
Section 9.11 Subordinated Indebtedness..............................41
Section 9.12 Lines of Business......................................41
Section 9.13 Transactions with Affiliates...........................41
Section 9.14 Use of Proceeds........................................42
Section 9.15 Certain Obligations Respecting Subsidiaries............42
Section 9.16 Additional Subsidiary Guarantors.......................42
Section 9.17 Payments in Kind.......................................43
ARTICLE 10.................................................................43
EVENTS OF DEFAULT..........................................................43
ARTICLE 11.................................................................46
MISCELLANEOUS..............................................................46
Section 11.1 Waiver.................................................46
Section 11.2 Notices................................................46
iii
<PAGE>
Section 11.3 Expenses, Etc..........................................46
Section 11.4 Amendments, Etc........................................47
Section 11.5 Successors and Assigns.................................47
Section 11.6 Assignments and Participations.........................47
Section 11.7 Survival...............................................48
Section 11.8 Captions...............................................48
Section 11.9 Counterparts...........................................48
Section 11.10 Governing Law; Submission to Jurisdiction.............48
Section 11.11 Waiver of Jury Trial..................................48
Section 11.12 Representations and Warranties of Lender..............49
iv
<PAGE>
SCHEDULES and EXHIBITS
SCHEDULE I - Material Agreements and Liens
SCHEDULE II - Hazardous Materials
SCHEDULE III - Subsidiaries and Investments
EXHIBIT A-1 - Form of Revolving Credit Note
EXHIBIT A-2 - Form of Term Loan Note
EXHIBIT B - Form of Security Agreement
EXHIBIT C - Form of Pledge Agreement
EXHIBIT D - Form of Opinion of Counsel to the Obligors
v
<PAGE>
CREDIT AGREEMENT dated as of November __, 1999, between AGENCY.COM
LTD., a corporation duly organized and validly existing under the laws of the
State of Delaware (the "Company"); each of the Subsidiaries of the Company
identified under the caption "SUBSIDIARY GUARANTORS" on the signature pages
hereto (individually, a "Subsidiary Guarantor" and, collectively, the
"Subsidiary Guarantors" and, together with the Company, the "Obligors") and
OMNICOM FINANCE INC., a corporation duly organized and validly existing under
the laws of the State of Delaware (the "Lender").
The Obligors have requested the Lender to extend credit to the
Company in an aggregate principal amount not exceeding $85,000,000 to provide
working capital for the operations of the Obligors, to refinance certain
existing indebtedness of the Obligors and to enable certain acquisitions and
capital expenditures by the Obligors, to provide certain guarantees in respect
of real property leases and for other purposes.
To induce the Lender to extend such credit, the Obligors and the
Lender propose to enter into this Agreement pursuant to which the Lender will
make loans to the Company, and each Subsidiary Guarantor will guarantee the
credit so extended to the Company and each of the Obligors will agree to execute
and deliver security agreements providing for security interests and liens to be
granted by the Obligors on substantially all of their respective Properties as
collateral security for the obligations of the Obligors to the Lender hereunder.
Each of the Obligors expects to derive benefit, directly or indirectly, from the
credit so extended to the Company, both in its separate capacity and as a member
of the integrated group, since the successful operation of each of the Obligors
is dependent on the continued successful performance of the functions of the
integrated group as a whole.
Accordingly, the parties hereto agree as follows:
ARTICLE 1
DEFINITIONS AND ACCOUNTING MATTERS.
Section 1.1 Certain Defined Terms. As used herein, the following terms
shall have the following meanings (all terms defined in this Section 1.1 or in
other provisions of this Agreement in the singular to have the same meanings
when used in the plural and vice versa):
"Affiliate" shall mean any Person that directly or indirectly
controls, or is under common control with, or is controlled by, the Company. As
used in this definition, "control" (including, with its correlative meanings,
"controlled by" and "under common control with") shall mean possession, directly
or indirectly, of power to direct or cause the direction of management or
policies (whether through ownership of securities or partnership or other
ownership interests, by contract or otherwise), provided that, in any event, any
Person that owns directly or indirectly securities having 5% or more of the
voting power for the election of directors or other governing body of a
corporation or 5% or more of the partnership or other ownership interests of any
other Person will be deemed to control such corporation or other Person.
Notwithstanding the foregoing,
<PAGE>
(a) no individual shall be an Affiliate solely by reason of his or her being a
director, officer or employee of the Company or any of its Subsidiaries and (b)
none of Omnicom Group Inc. and its subsidiaries shall be Affiliates.
"Applicable Margin" shall mean 1 1/4% per annum.
"Bankruptcy Code" shall mean the United States Bankruptcy Code.
"Base Rate" shall mean the CP Rate; provided, however, upon the
assignment of any of the Loans, Notes or the Commitment pursuant to Section
11.6, the Base Rate shall mean the LIBO Rate.
"Basic Documents" shall mean, collectively, this Agreement, the
Notes, and the Security Documents.
"Business Day" shall mean (a) any day on which commercial banks are
not authorized or required to close in New York City and (b) if such day relates
to a borrowing of, a payment or prepayment of principal of, or interest on, or
an Interest Period for, a Loan or a notice by the Company with respect to any
such borrowing, payment, prepayment, or Interest Period, any day on which
dealings in Dollar deposits are carried out in the London interbank market.
"Capital Expenditures" shall mean, for any period, expenditures
(excluding the aggregate amount of Capital Lease Obligations incurred during
such period) made by the Company or any of its Consolidated Subsidiaries to
acquire or construct fixed assets, plant and equipment (including renewals,
improvements and replacements, but excluding repairs) during such period
computed in accordance with GAAP.
"Capital Lease Obligations" shall mean, for any Person, all
obligations of such Person to pay rent or other amounts under a lease of (or
other agreement conveying the right to use) Property to the extent such
obligations are required to be classified and accounted for as a capital lease
on a balance sheet of such Person under GAAP, and, for purposes of this
Agreement, the amount of such obligations shall be the capitalized amount
thereof, determined in accordance with GAAP.
"Cash Collateral Account" shall have the meaning assigned to such
term in the Security Agreement.
"Casualty Event" shall mean, with respect to any Property of any
Person, any loss of or damage to, or any condemnation or other taking of, such
Property for which such Person or any of its Subsidiaries receives insurance
proceeds, or proceeds of a condemnation award or other compensation.
"Class" shall have the meaning assigned to such term in Section 1.3
hereof.
2
<PAGE>
"Closing Date" shall mean the date upon which the initial extension
of credit under the Term Loan is made and the Revolving Credit Loans are made
available to the Company.
"Code" shall mean the Internal Revenue Code of 1986, as amended from
time to time.
"Commitments" shall mean the Revolving Credit Commitments and the
Term Loan Commitment.
"Consolidated Subsidiary" shall mean, for any Person, each
Subsidiary of such Person (whether now existing or hereafter created or
acquired) the financial statements of which shall be (or should have been)
consolidated with the financial statements of such Person in accordance with
GAAP.
"Covered Taxes" shall mean all present and future income, franchise,
stamp, registration and other taxes and levies, imposts, deductions, charges and
withholdings whatsoever, and all interest, penalties or similar amounts with
respect thereto, now or hereafter imposed, assessed, levied or collected by any
governmental authority or any political subdivision or taxing authority thereof
or therein, on or in respect of any Basic Document, any Loan, or payment
thereunder, or the recording, registration, notarization or other formalization
of any thereof, other than any income, franchise or real property taxes imposed
on the Lender by the relevant taxing jurisdiction as a result of the Lender
being organized under the laws of such jurisdiction.
"CP Rate" shall mean the offered price on the relevant date of the Lender's
newly issued commercial paper as determined by the Lender generally for purposes
of loans by the lender to subsidiaries of the Lender.
"Default" shall mean an Event of Default or an event that with
notice or lapse of time or both would become an Event of Default.
"Disposition" shall mean any sale, assignment, transfer or other
disposition of any Property (whether now owned or hereafter acquired) by the
Company or any of its Subsidiaries to any Person excluding any sale, assignment,
transfer or other disposition of any Property sold or disposed of in the
ordinary course of business and on ordinary business terms.
"Dividend Payment" shall mean dividends (in cash, Property or
obligations) on, or other payments or distributions on account of, or the
setting apart of money for a sinking or other analogous fund for, or the
purchase, redemption, retirement or other acquisition of, any shares of any
class of stock of the Company or of any warrants, options or other rights to
acquire the same (or to make any payments to any Person, such as "phantom stock"
payments, where the amount thereof is calculated with reference to the fair
market or equity value of the Company or any of its Subsidiaries), but excluding
dividends payable solely in shares of common stock of the Company.
"Dollars" and "$" shall mean lawful money of the United States of
America.
3
<PAGE>
"Environmental Claim" shall mean, with respect to any Person, (a)
any written or oral notice, claim, demand or other communication (collectively,
a "claim") by any other Person alleging or asserting such Person's liability for
investigatory costs, cleanup costs, governmental response costs, damages to
natural resources or other Property, personal injuries, fines or penalties
arising out of, based on or resulting from (i) the presence, or Release into the
environment, of any Hazardous Material at any location, whether or not owned by
such Person, or (ii) circumstances forming the basis of any violation, or
alleged violation, of any Environmental Law. The term "Environmental Claim"
shall include, without limitation, any claim by any governmental authority for
enforcement, cleanup, removal, response, remedial or other actions or damages
pursuant to any applicable Environmental Law, and any claim by any third party
seeking damages, contribution, indemnification, cost recovery, compensation or
injunctive relief resulting from the presence of Hazardous Materials or arising
from alleged injury or threat of injury to health, safety or the environment.
"Environmental Laws" shall mean any and all present and future
Federal, state, local and foreign laws, rules or regulations, and any orders or
decrees, in each case as now or hereafter in effect, relating to the regulation
or protection of human health, safety or the environment or to emissions,
discharges, deposits, releases or threatened releases of pollutants,
contaminants, chemicals or toxic or hazardous substances or wastes into the
indoor or outdoor environment, including, without limitation, ambient air, soil,
surface water, ground water, wetlands, land or subsurface strata, or otherwise
relating to the manufacture, processing, distribution, use, treatment, storage,
disposal, transport or handling of pollutants, contaminants, chemicals or toxic
or hazardous substances or wastes.
"Equity Rights" shall mean, with respect to any Person, any
outstanding subscriptions, options, warrants, commitments, preemptive rights or
agreements of any kind (including, without limitation, any stockholders' or
voting trust agreements) for the issuance, sale, registration or voting of, or
outstanding securities convertible into, any additional shares of capital stock
of any class, or partnership or other ownership interests of any type in, such
Person.
"ERISA" shall mean the Employee Retirement Income Security Act of
1974, as amended from time to time. Section references to ERISA are to ERISA, as
in effect at the date of this Agreement, and to any subsequent provisions of
ERISA, amendatory thereof, supplemental thereto or substituted therefor.
"ERISA Affiliate" shall mean any corporation or trade or business
that is a member of any group of organizations (i) described in Section 414(b)
or (c) of the Code of which the Company is a member and (ii) solely for purposes
of potential liability under Section 302(c)(11) of ERISA and Section 412(c)(11)
of the Code and the lien created under Section 302(f) of ERISA and Section
412(n) of the Code, described in Section 414(m) or (o) of the Code of which the
Company is a member.
"Event of Default" shall have the meaning assigned to such term in
Section 10 hereof.
4
<PAGE>
"Foreign Subsidiary" shall mean any Subsidiary which is not
incorporated or organized under the laws of one of the States or other
jurisdictions of the United States.
"GAAP" shall mean generally accepted accounting principles applied
on a basis consistent with those which, in accordance with the last sentence of
Section 1.2(a) hereof, are to be used in making the calculations for purposes of
determining compliance with this Agreement.
"Guarantee" shall mean a guarantee, an endorsement, a surety
obligation, a contingent agreement to purchase or to furnish funds for the
payment or maintenance of, or otherwise to be or become contingently liable
under or with respect to, the Indebtedness, other obligations, net worth,
working capital or earnings of any Person, or a guarantee of the payment of
dividends or other distributions upon the stock or equity interests of any
Person, or an agreement to purchase, sell or lease (as lessee or lessor)
Property, products, materials, supplies or services primarily for the purpose of
enabling a debtor to make payment of such debtor's obligations or an agreement
to assure a creditor against loss, and including, without limitation, causing a
bank or other financial institution to issue a letter of credit or other similar
instrument for the benefit of another Person, but excluding endorsements for
collection or deposit in the ordinary course of business. The terms "Guarantee"
and "Guaranteed" used as a verb shall have a correlative meaning.
"Guarantee Commitment" shall mean the obligation of the Lender to
make or cause to be issued Lease Guaranties and/or Letters of Credit not to
exceed $6,000,000 in the aggregate (calculated in accordance with Section 2.8).
"Hazardous Material" shall mean, collectively, (a) any petroleum or
petroleum products, flammable explosives, radioactive materials, asbestos in any
form that is or could become friable, urea formaldehyde foam insulation, and
transformers or other equipment that contain dielectric fluid containing
polychlorinated biphenyls (PCB's), (b) any chemicals or other materials or
substances which are now or hereafter become defined as or included in the
definition of "hazardous substances", "hazardous wastes", "hazardous materials",
"extremely hazardous wastes", "restricted hazardous wastes", "toxic substances",
"toxic pollutants", "contaminants", "pollutants" or words of similar import
under any Environmental Law and (c) any other chemical or other material or
substance, including, without limitation, radio frequency transmissions,
exposure to which is now or hereafter prohibited, limited or regulated under any
Environmental Law.
"Inactive Subsidiary" shall mean, as at any date, any Subsidiary of
the Company that, as at the end of and for the quarterly accounting period
ending on or most recently ended prior to such date, shall have less than $1,000
in assets and less than $1,000 in gross revenues.
"Indebtedness" shall mean, for any Person: (a) obligations created,
issued or incurred by such Person for borrowed money (whether by loan, the
issuance and sale of debt securities or the sale of Property to another Person
subject to an understanding or agreement, contingent or otherwise, to repurchase
such Property from such Person); (b) obligations of such Person to pay the
deferred purchase or acquisition price of Property or services, other than trade
accounts payable (other than for borrowed money) arising, and accrued expenses
incurred, in the
5
<PAGE>
ordinary course of business so long as such trade accounts payable are payable
within 90 days of the date the respective goods are delivered or the respective
services are rendered; (c) Indebtedness of others secured by a Lien on the
Property of such Person, whether or not the respective indebtedness so secured
has been assumed by such Person; (d) obligations of such Person in respect of
letters of credit or similar instruments issued or accepted by banks and other
financial institutions for account of such Person; (e) Capital Lease Obligations
of such Person; and (f) Indebtedness of others Guaranteed by such Person.
"IPO" shall mean the initial sale of the capital stock of the
Company pursuant to an effective registration statement of the Company filed
with the Securities and Exchange Commission pursuant to the Securities Act of
1933, as amended.
"Interest Period" shall mean each period commencing on the date such
Loan is made or the last day of the next preceding Interest Period for such Loan
and ending on the numerically corresponding day in the first, second, third or
sixth calendar month thereafter, as the Company may select as provided in
Section 4.4 hereof, except that each Interest Period that commences on the last
Business Day of a calendar month (or on any day for which there is no
numerically corresponding day in the appropriate subsequent calendar month)
shall end on the last Business Day of the appropriate subsequent calendar month.
Notwithstanding the foregoing: (i) each Interest Period that would
otherwise end on a day which is not a Business Day shall end on the next
succeeding Business Day (or, if such next succeeding Business Day falls in the
next succeeding calendar month, on the next preceding Business Day); and (ii) no
Interest Period for any Loan shall have a duration of less than one calendar
month.
"Investment" shall mean, for any Person: (a) the acquisition
(whether for cash, Property, services or securities or otherwise) of capital
stock, bonds, notes, debentures, partnership or other ownership interests or
other securities of any other Person or any agreement to make any such
acquisition (including, without limitation, any "short sale" or any sale of any
securities at a time when such securities are not owned by the Person entering
into such short sale); (b) the making of any deposit with, or advance, loan or
other extension of credit to, any other Person (including the purchase of
Property from another Person subject to an understanding or agreement,
contingent or otherwise, to resell such Property to such Person, but excluding
any such advance, loan or extension of credit having a term not exceeding 90
days representing the purchase price of inventory or supplies sold by such
Person in the ordinary course of business); or (c) the entering into of any
Guarantee of, or other contingent obligation with respect to, Indebtedness or
other liability of any other Person and (without duplication) any amount
committed to be advanced, lent or extended to such Person.
"Lease Guaranty" shall have the meaning assigned to such term in
Section 2.8(a) hereof.
"Lessor" shall have the meaning assigned to such term in Section
2.8(a) hereof.
6
<PAGE>
"Letter of Credit" shall have the meaning assigned to such term in
Section 2.8(a) hereof.
"LIBO Rate" shall mean, for any Interest Period, the offered rate
for deposits in Dollars equal to or nearest the number of days in such Interest
Period which appears on Telerate Page 3750; provided, that (i) if such rate or
rates do not appear on Telerate Page 3750, the "LIBO Rate" shall mean, with
respect to each day during each Interest Period, the offered rate for deposits
in Dollars equal to or nearest the number of days in such Interest Period which
appears on the Reuters Screen LIBO Page as of approximately 11:00 a.m. London
time on the date two Business Days prior to the first day of such Interest
Period, and (ii) if such rate or rates do not appear on either Telerate Page
3750 or the Reuters Screen LIBO Page, the "LIBO Rate" shall mean, with respect
to each day during the relevant Interest Period, the rate per annum equal to the
rate notified to the Lender by the Reference Banks as the rate at which Dollar
deposits are offered by the Reference Banks to prime banks in the London
interbank market at or about 11:00 a.m., London time, two Business Days prior to
the beginning of such Interest Period for delivery on the first day of such
Interest Period for a period approximately equal to the number of days in such
Interest Period and in an amount comparable to the aggregate principal amount of
the Loans.
"Lien" shall mean, with respect to any Property, any mortgage, lien,
pledge, charge, security interest or encumbrance of any kind in respect of such
Property. For purposes of this Agreement and the other Basic Documents, a Person
shall be deemed to own subject to a Lien any Property that it has acquired or
holds subject to the interest of a vendor, consignor, bailor or lessor under any
conditional sale agreement, capital lease or other title retention agreement
(other than an operating lease) relating to such Property.
"Loans" shall mean the Revolving Credit Loans and the Term Loan.
"Margin Stock" shall mean "margin stock" within the meaning of
Regulations U and X.
"Material Adverse Effect" shall mean a material adverse effect on
(a) the Property, business, operations, financial condition, prospects,
liabilities or capitalization of the Company and its Subsidiaries taken as a
whole, (b) the ability of any Obligor to perform its obligations under any of
the Basic Documents to which it is a party, (c) the validity or enforceability
of any of the Basic Documents, (d) the rights and remedies of the Lender under
any of the Basic Documents or (e) the timely payment of the principal of or
interest or expenses on the Loans or other amounts payable in connection
therewith.
"Multiemployer Plan" shall mean a multiemployer plan defined as such
in Section 3(37) of ERISA to which contributions have been made by the Company
or any ERISA Affiliate and which is covered by Title IV of ERISA.
"Net Available Proceeds" shall mean:
7
<PAGE>
(i) in the case of any Disposition, the amount of Net Cash Payments
received in connection with such Disposition;
(ii) in the case of any Casualty Event, the aggregate amount of
proceeds of insurance, condemnation awards and other compensation received by
the Company and its Subsidiaries in respect of such Casualty Event net of (A)
necessary and reasonable expenses incurred by the Company and its Subsidiaries
in connection therewith and (B) contractually required repayments of
Indebtedness to the extent secured by a Lien on such Property and any income and
transfer taxes payable by the Company or any of its Subsidiaries in respect of
such Casualty Event; and
(iii) in the case of an IPO, the aggregate amount of all cash
received by the Company in respect of such IPO net of necessary and reasonable
expenses, including underwriters fees, incurred by the Company in connection
therewith.
"Net Cash Payments" shall mean, with respect to any Disposition, the
aggregate amount of all cash payments, and the fair market value of any non-cash
consideration, received by the Company and its Subsidiaries directly or
indirectly in connection with such Disposition; provided that (a) Net Cash
Payments shall be net of (i) the amount of any legal, title and recording tax
expenses, commissions and other fees and expenses paid by the Company and its
Subsidiaries in connection with such Disposition and (ii) any Federal, state and
local income or other taxes estimated to be payable by the Company and its
Subsidiaries as a result of such Disposition (but only to the extent that such
estimated taxes are in fact paid to the relevant Federal, state or local
governmental authority within three months of date of such Disposition), (b) Net
Cash Payments shall not include any cash payment (or portion thereof) received
in any fiscal year of the Company to the extent that such cash payment (or
portion thereof), together with all cash payments with respect to Dispositions
theretofore received in such fiscal year, does not exceed $5,000,000 and which
has been revinvested and (c) Net Cash Payments shall be net of any repayments by
the Company or any of its Subsidiaries of Indebtedness to the extent that (i)
such Indebtedness is secured by a Lien on the Property that is the subject of
such Disposition and (ii) the transferee of (or holder of a Lien on) such
Property requires that such Indebtedness be repaid as a condition to the
purchase of such Property.
"Notes" shall mean the Revolving Credit and the Term Loan Notes.
"PBGC" shall mean the Pension Benefit Guaranty Corporation or any
entity succeeding to any or all of its functions under ERISA.
"Permitted Investments" shall mean: (a) short term, investment grade
money market instruments, in accordance with the Company's usual and customary
treasury management policies; and (b) any securities received by the Company for
services rendered by the Company to clients.
8
<PAGE>
"Person" shall mean any individual, corporation, company, voluntary
association, partnership, joint venture, trust, unincorporated organization or
government (or any agency, instrumentality or political subdivision thereof).
"Plan" shall mean an employee benefit or other plan established or
maintained by the Company or any ERISA Affiliate and that is covered by Title IV
of ERISA, other than a Multiemployer Plan.
"Pledge Agreement" shall mean a Pledge Agreement, substantially in
the form of Exhibit C hereto, between the Company and the Lender, as the same
shall be modified and supplemented and in effect from time to time.
"Post-Default Rate" shall mean, in respect of any principal of or
interest or expenses on any Loan or any other amount under this Agreement, any
Note or any other Basic Document that is not paid when due (whether at stated
maturity, by acceleration, by optional or mandatory prepayment or otherwise), a
rate per annum during the period from and including the due date to but
excluding the date on which such amount is paid in full equal to 2% plus the
Prime Rate.
"Prime Rate" shall mean the rate which the Reference Bank announces
from time to time as its prime lending rate, the Prime Rate to change when and
as such prime lending rate changes. The Prime Rate is a reference rate and does
not necessarily represent the lowest or best rate actually charged to the
Company. The Reference Bank (and the Lender) may make commercial loans or other
loans at rates of interest at, above or below the Prime Rate.
"Property" shall mean any right or interest in or to property of any
kind whatsoever, whether real, personal or mixed and whether tangible or
intangible.
"Quarterly Dates" shall mean the last day of March, June, September
and December in each year, the first of which shall be the first such day after
the date of this Agreement; provided that if any such day is not a Business Day,
then such Quarterly Date shall be the next succeeding Business Day (unless such
Business Day falls in a subsequent calendar month, in which event such Quarterly
Date shall be the next preceding Business Day).
"Real Property Lease" shall have the meaning assigned to such term
in Section 2.8(a) hereof.
"Reference Bank" shall mean Chase Manhattan Bank, at its
headquarters in New York City, New York.
"Regulations A, D, U and X" shall mean, respectively, Regulations A,
D, U and X of the Board of Governors of the Federal Reserve System (or any
successor), as the same may be modified and supplemented and in effect from time
to time.
"Release" shall mean any release, spill, emission, leaking, pumping,
injection, deposit, disposal, discharge, dispersal, leaching or migration into
the indoor or outdoor
9
<PAGE>
environment, including, without limitation, the movement of Hazardous Materials
through ambient air, soil, surface water, ground water, wetlands, land or
subsurface strata.
"Reuters Screen LIBO Page" shall mean the display designated as page
"LIBO" on the Reuters Monitor Money Rates Service or such other page as may
replace the "LIBO" page on that service for the purpose of displaying London
interbank offered rates of major banks.
"Revolving Credit Commitment" shall mean the agreement of the
Lender, in its sole discretion, and subject to the terms and conditions of this
Loan Agreement, to make Revolving Credit Loans in an aggregate principal amount
at any one time outstanding up to but not exceeding $54,000,000.
"Revolving Credit Loans" shall mean the loans provided for by
Section 2.1(a) hereof.
"Revolving Credit Note" shall mean the promissory note provided for
by Section 2.5(a) hereof and all promissory notes delivered in substitution or
exchange therefor, in each case as the same shall be modified and supplemented
and in effect from time to time.
"Revolving Credit Termination Date" shall mean the Quarterly Date
falling on or nearest to September 30, 2001.
"Security Agreement" shall mean a Security Agreement, substantially
in the form of Exhibit C hereto, between the Company and the Subsidiary
Guarantors and the Lender, as the same shall be modified and supplemented and in
effect from time to time.
"Security Documents" shall mean, collectively, the Security
Agreement, the Pledge Agreement and all Uniform Commercial Code financing
statements required by this Agreement, the Security Agreement and the Pledge
Agreement to be filed with respect to the security interests in personal
Property and fixtures created pursuant to the Security Agreement or, the Pledge
Agreement.
"Subordinated Indebtedness" shall mean any Indebtedness (i) for
which the Company is directly and primarily liable, (ii) in respect of which
none of its Subsidiaries is contingently or otherwise obligated and (iii) which
is subordinated to the obligations of the Company to pay principal of and
interest and expenses on the Loans and Notes hereunder on terms, and pursuant to
documentation containing other terms (including interest, amortization,
covenants and events of default), in form and substance satisfactory to the
Lender.
"Subsidiary" shall mean, for any Person, any corporation,
partnership or other entity of which at least a majority of the securities or
other ownership interests having by the terms thereof ordinary voting power to
elect a majority of the board of directors or other persons performing similar
functions of such corporation, partnership or other entity (irrespective of
whether or not at the time securities or other ownership interests of any other
class or classes of such corporation, partnership or other entity shall have or
might have voting power by reason of the
10
<PAGE>
happening of any contingency) is at the time directly or indirectly owned or
controlled by such Person or one or more Subsidiaries of such Person or by such
Person and one or more Subsidiaries of such Person. "Wholly Owned Subsidiary"
shall mean any such corporation, partnership or other entity of which all of the
equity securities or other ownership interests (other than, in the case of a
corporation, directors' qualifying shares) are so owned or controlled.
"Tangible Net Worth" shall mean, as at any date for any Person, the
sum for such Person and its Subsidiaries (determined on a consolidated basis
without duplication in accordance with GAAP), of the following:
(a) the amount of capital stock, plus
(b) the amount of surplus and retained earnings (or, in the case of
a surplus or retained earnings deficit, minus the amount of such deficit), minus
(c) the sum of the following: cost of treasury shares and the book
value of all assets which should be classified as intangibles (without
duplication of deductions in respect of items already deducted in arriving at
surplus and retained earnings) but in any event including goodwill, minority
interests, research and development costs, trademarks, trade names, copyrights,
patents and franchises, unamortized debt discount and expense, all reserves and
any write-up in the book value of assets resulting from a revaluation thereof
subsequent to June 30, 1999.
"Telerate Page 3750" shall mean display page 3750 on the Dow Jones
Markets (Telerate) Service or such other page as may replace page 3750 on that
service or such other service or services as may be nominated by the British
Bankers' Association for the purpose of displaying London interbank offered
rates for Dollar deposits.
"Term Loan" shall mean the loan provided for by Section 2.1(b)
hereof.
"Term Loan Commitment" shall mean the obligation of the Lender to
make a Term Loan in an amount up to but not exceeding $25,000,000.
"Term Loan Note" shall mean the promissory note provided for by
Section 2.5(b) hereof and all promissory notes delivered in substitution or
exchange therefor, in each case as the same shall be modified and supplemented
and in effect from time to time.
"Term Loan Termination Date" shall mean the Quarterly Date falling
on or nearest to September 30, 2001.
"Unrestricted Subsidiary" shall mean any direct or indirect Wholly
Owned Subsidiary of the Company which (i) was acquired by the Company or any of
its Subsidiaries for consideration consisting only of stock of the Company
and/or stock of any of its Subsidiaries and (ii) has no Indebtedness.
Section 1.2 Accounting Terms and Determinations.
11
<PAGE>
(a) Except as otherwise expressly provided herein, all accounting
terms used herein shall be interpreted, and all financial statements and
certificates and reports as to financial matters required to be delivered to the
Lender hereunder shall (unless otherwise disclosed to the Lender in writing at
the time of delivery thereof in the manner described in subsection (b) below) be
prepared, in accordance with generally accepted accounting principles applied on
a basis consistent with those used in the preparation of the latest financial
statements furnished to the Lender hereunder (which, prior to the delivery of
the first financial statements under Section 9.1 hereof, shall mean the audited
financial statements as at June 30, 1999 referred to in Section 8.2 hereof). All
calculations made for the purposes of determining compliance with this Agreement
shall (except as otherwise expressly provided herein) be made by application of
generally accepted accounting principles applied on a basis consistent with
those used in the preparation of the latest annual or quarterly financial
statements furnished to the Lender pursuant to Section 9.1 hereof (or, prior to
the delivery of the first financial statements under Section 9.1 hereof, used in
the preparation of the audited financial statements as at June 30, 1999 referred
to in Section 8.2 hereof) unless (i) the Company shall have objected to
determining such compliance on such basis at the time of delivery of such
financial statements or (ii) the Lender shall so object in writing within 30
days after delivery of such financial statements, in either of which events such
calculations shall be made on a basis consistent with those used in the
preparation of the latest financial statements as to which such objection shall
not have been made (which, if objection is made in respect of the first
financial statements delivered under Section 9.1 hereof, shall mean the
financial statements referred to in Section 8.2 hereof).
(b) Prior to an IPO, the Company shall deliver to the Lender at the
same time as the delivery of any annual or quarterly financial statement under
Section 9.1 hereof (i) a description in reasonable detail of any material
variation between the application of accounting principles employed in the
preparation of such statement and the application of accounting principles
employed in the preparation of the next preceding annual or quarterly financial
statements as to which no objection has been made in accordance with the last
sentence of subsection (a) above and (ii) reasonable estimates of the difference
between such statements arising as a consequence thereof. After an IPO, the
Company shall deliver to the Lender at the same time as the delivery of any
annual or quarterly financial statements under Section 9.1 hereof, copies of the
Company's "Management Discussion and Analysis of Financial Condition and Results
of Operations" sections of its annual report on Form 10-K and its quarterly
reports on Form 10-Q for the applicable period.
(c) To enable the ready and consistent determination of compliance
with the covenants set forth in Section 9 hereof, the Company will not change
the last day of its fiscal year from December 31 of each year, or the last days
of the first three fiscal quarters in each of its fiscal years from March 31,
June 30 and September 30 of each year, respectively.
Section 1.3 Classes of Loans. Loans hereunder are distinguished by
"Class". The "Class" of a Loan (or of a Commitment to make a Loan) refers to
whether such Loan is a Revolving Credit Loan, or a Term Loan, each of which
constitutes a Class.
12
<PAGE>
ARTICLE 2
COMMITMENTS, LOANS, NOTES; PREPAYMENTS AND GUARANTEES
Section 2.1 Loans.
(a) Revolving Credit Loans. The Lender agrees, on the terms and
conditions of this Agreement, in its sole discretion, to make loans to the
Company in Dollars during the period from and including the Closing Date to but
not including the Revolving Credit Termination Date in an aggregate principal
amount at any one time outstanding up to but not exceeding the amount of the
Revolving Credit Commitment, less the aggregate amount of Guarantee Liabilities,
as in effect from time to time (such Loans being herein called "Revolving Credit
Loans"). Subject to the terms and conditions of this Agreement, during such
period the Company may borrow, repay and reborrow the amount of the Revolving
Credit Commitments.
(b) Term Loan. The Lender agrees, on the terms and conditions of
this Agreement, to make a term loan to the Company in Dollars on the Closing
Date in an amount up to but not exceeding the amount of the Term Loan
Commitment.
Section 2.2 Borrowings of Loans. The Company shall give the Lender notice
of each borrowing hereunder as provided in Section 4.4 hereof. Not later than
12:00 p.m. New York time on the Business Day immediately prior to the date
specified for each borrowing of Loans hereunder, the Lender shall make available
the amount of the Loan or Loans to be made by it on such specified date to the
Company by depositing the same, in immediately available funds, in an account of
the Company maintained with Citibank N.A. at the office designated by the
Company.
Section 2.3 Changes of Commitments.
(a) The aggregate amount of the Revolving Credit Commitments shall
be automatically reduced to zero on the Revolving Credit Termination Date.
(b) The Company shall have the right at any time or from time to time in its
sole discretion (i) so long as no Revolving Credit Loans are outstanding, to
terminate the Revolving Credit Commitments, (ii) to reduce the aggregate unused
amount of the Revolving Credit Commitments, and (iii) to reserve the aggregate
amount of Guarantee Liabilities against the Revolving Credit Commitments;
provided that (x) the Company shall give notice of each such termination,
reduction or reserve as provided in Section 4.4 hereof and (y) each partial
reduction shall be in an aggregate amount at least equal to $1,000,000 or in
multiples of $1,000,000 in excess thereof.
(c) The Commitments once terminated or reduced may not be
reinstated.
Section 2.4 Commitment Fee. The Company shall pay to the Lender a
commitment fee on the daily average unused amount of the Revolving Credit
Commitment, for the period from and including the date of this Agreement to but
not including the earlier of the date such Revolving
13
<PAGE>
Credit Commitment is terminated and the Revolving Credit Termination Date, at a
rate per annum equal to 1/2 of 1%. Accrued commitment fees shall be payable on
each Quarterly Date and on the earlier of the date the relevant Commitments are
terminated and the Revolving Credit Termination Date.
Section 2.5 Notes.
(a) The Revolving Credit Loans made by the Lender shall be evidenced
by a single amended and restated promissory note of the Company, substantially
in the form of Exhibit A-1 hereto, dated the date hereof, payable to the Lender
in a principal amount equal to the amount of the Revolving Credit Commitment as
originally in effect and otherwise duly completed, which note amends and
restates a certain previously issued promissory note or notes.
(b) The Term Loan made by the Lender shall be evidenced by a single
amended and restated promissory note of the Company, substantially in the form
of Exhibit A-2 hereto, dated the date hereof, payable to the Lender in a
principal amount equal to the amount of the Term Loan Commitment as originally
in effect and otherwise duly completed, which note amends and restates a certain
previously issued promissory note or notes.
(c) The date, amount, interest rate and duration of the Interest
Period (if applicable) of each Loan of each Class made by the Lender to the
Company, and each payment made on account of the principal thereof, shall be
recorded by the Lender on its books and, prior to any transfer of the Note
evidencing the Loans of such Class held by it, endorsed by the Lender on the
schedule attached to such Note or any continuation thereof; provided that the
failure of the Lender to make any such recordation or endorsement shall not
affect the obligations of the Company to make a payment when due of any amount
owing hereunder or under such Note in respect of the Loans to be evidenced by
such Note.
Section 2.6 Optional Prepayments. Subject to Section 4.3 hereof, the
Company shall have the right to prepay Loans at any time or from time to time,
provided that: (a) the Company shall give the Lender notice of each such
prepayment as provided in Section 4.4 hereof (and, upon the date specified in
any such notice of prepayment, the amount to be prepaid shall become due and
payable hereunder); (b) Loans may be prepaid at any time and from time to time;
and (c) prepayments of the Term Loan shall be applied to the installments of the
Term Loan in the inverse order of their maturities, after application against
any interest or expenses due and owing.
Section 2.7 Mandatory Prepayments and Reductions of Commitments.
(a) Casualty Events. Upon the date two days following the receipt by
the Company of the proceeds of insurance, condemnation award or other
compensation in respect of any Casualty Event affecting any Property of the
Company or any of its Subsidiaries (or upon such earlier date as the Company or
such Subsidiary, as the case may be, shall have determined not to repair or
replace the Property affected by such Casualty Event), the Company shall prepay
the Loans and the Commitments shall be subject to automatic reduction, in an
aggregate amount, if any, equal to 100% of the Net Available Proceeds of such
Casualty Event not theretofore applied to the repair or
14
<PAGE>
replacement of such Property, such prepayment and reduction to be effected in
each case in the manner and to the extent specified in clause (d) of this
Section 2.7. Nothing in this clause (a) shall be deemed to limit any obligation
of the Company or any of its Subsidiaries pursuant to any of the Security
Documents to remit to a collateral or similar account (including, without
limitation, the Cash Collateral Account) maintained by the Lender pursuant to
any of the Security Documents the proceeds of insurance, condemnation award or
other compensation received in respect of any Casualty Event.
(b) IPO. Upon an IPO, the Company shall prepay the Term Loan, and
the Term Loan Commitment shall be subject to automatic reduction, in an
aggregate amount equal to 35% of the Net Available Proceeds thereof, up to a
maximum amount equal to the Term Loan Commitment, such prepayment and reduction
to be effected in each case in the manner and to the extent specified in clause
(d) of this Section 2.7.
(c) Sale of Assets. Without limiting the obligation of the Company
to obtain the consent of the Lender pursuant to Section 9.5 hereof to any
Disposition not otherwise permitted hereunder, no later than five Business Days
prior to the occurrence of any such Disposition, the Company will deliver to the
Lender a statement, certified by the chief financial officer of the Company, in
form and detail satisfactory to the Lender, of the amount of the Net Available
Proceeds of such Disposition and the Company will prepay the Loans, and the
Commitments shall be subject to automatic reduction, in an aggregate amount
equal to 100% of the Net Available Proceeds of such Disposition (together with
100% of the Net Available Proceeds of all prior Dispositions as to which a
prepayment has not yet been made under this Section 2.7(c)), such prepayment and
reduction to be effected in each case in the manner and to the extent specified
in clause (d) of this Section 2.7.
(d) Application. Prepayments and reductions of Commitments described
in the above clauses of this Section 2.7 (other than as specifically provided
above) shall be effected as follows:
(i) first, the amount of the prepayment specified in such
clauses shall be applied to the Term Loan in the inverse order of the maturities
of the installments of the Term Loan then outstanding (or, in the event the
Closing Date shall not yet have occurred, the Term Loan Commitment shall be
automatically reduced by an amount equal to the required prepayment); and
(ii) second, the Revolving Credit Commitment shall be
automatically reduced by an amount equal to any excess over the amount referred
to in the foregoing clause (i).
Section 2.8 Guarantee Commitment.
(a) Issuance of Letters of Credit and Lease Guaranties. In
connection with certain real property leases into which the Company may enter
from time to time (each a "Real Property Lease"), and upon the request of the
Company made at any time and from time to time on or after the Closing Date and
prior to the Revolving Credit Termination Date or the Term Loan Termination
Date, and subject to the availability of the Guarantee Commitment and the
satisfaction by the Company or waiver by Lender of the conditions precedent in
Section 7 of this
15
<PAGE>
Agreement, Lender shall, in accordance with the requirements of the lessor (the
"Lessor") under any such Real Property Lease, (i) execute and deliver a guaranty
agreement in favor of the Lessor (a "Lease Guaranty"), or (ii) cause standby
letters of credit to be issued by a bank or other legally authorized Person for
the account of Lender and the benefit of the Lessor (a "Letter of Credit"), in
each case to support the Company's obligations in favor of the Lessor under such
Real Property Lease. Such Lease Guaranty and/or Letter of Credit shall be
satisfactory to Lender in its reasonable discretion.
(b) Amount and Term. All outstanding obligations incurred by the
Lender pursuant to Section 2.8(a) in respect of the issuance of Letters of
Credit shall be referred to as the "Letter of Credit Obligations." All
outstanding obligations incurred by the Lender pursuant to Section 2.8(a) in
respect of the issuance of Lease Guaranties shall be referred to as the "Lease
Guaranty Obligations." The Letter of Credit Obligations and the Lease
Obligations shall collectively be referred to as the "L/C and Guaranty
Obligations." The aggregate amount of the L/C and Guaranty Obligations shall not
at any time exceed the Guarantee Commitment. The aggregate amount of the Lease
Guaranty Obligations shall, as of any date, be calculated individually with
respect to each Real Property Lease as the lesser of: (x) the aggregate stated
amount of the Lease Guaranty issued in respect of such Lease, or (y) the net
present value of all of the payments then due under such Lease during the
remaining term of such Lease at the time of any such determination using a
discount rate of six percent (6%). The Letter of Credit Obligations shall be
calculated as the aggregate face amount of the outstanding Letters of Credit
issued and unexpired at any time. If any Letter of Credit Obligations, whether
or not then due and payable, shall for any reason be outstanding on the
Revolving Credit Termination Date or the Term Loan Termination Date, the
Company, at its option, shall either (i) provide cash collateral therefor in an
amount equal to such Letter of Credit Obligations, (ii) cause all outstanding
Letters of Credit to be canceled and returned, or (iii) deliver a standby letter
of credit in guaranty of such Letter of Credit Obligations, which standby letter
of credit shall be of like tenor and duration, as and in an amount equal to such
Letter of Credit Obligations, and shall be issued by a Person, and shall be
subject to such terms and conditions, as are satisfactory to Lender in its
reasonable discretion. If any Lease Guaranty Obligations, whether or not then
due and payable, shall for any reason be outstanding on the Revolving Credit
Termination Date or the Term Loan Termination Date, the Company, at its option,
shall either (i) provide cash collateral therefor in an amount equal to such
Lease Guaranty Obligations, (ii) cause all outstanding Lease Guaranties to be
canceled and returned, or (iii) deliver a standby letter of credit in guaranty
of such Lease Guaranty Obligations, which standby letter of credit shall be of
like tenor and duration, as and in an amount equal to such Lease Guaranty
Obligations, and shall be issued by a Person, and shall be subject to such terms
and conditions, as are satisfactory to Lender in its reasonable discretion.
(c) Fees. The Company agrees to pay to Lender, (i) as compensation
for L/C and Guaranty Obligations incurred hereunder, on the last day of each
calendar quarter in arrears, for each quarter or portion thereof during which
any L/C and Guaranty Obligation shall remain outstanding, (x) with respect to
the Letter of Credit Obligations, a fee in an amount equal to 2.00% per annum
multiplied by the aggregate outstanding amount of such Letters of Credit
Obligations and (y) with respect to the Lease Guaranty Obligations, a fee in an
amount equal to 0.50% per annum multiplied by the aggregate outstanding amount
of such Lease Guaranty
16
<PAGE>
Obligations, in each case adjusted daily based on the total outstanding amount
of the respective obligations, and (ii) as reimbursement for all reasonable
out-of-pocket costs, taxes, fees, and expenses including, without limitation,
reasonable counsel fees (including, without limitation, in-house counsel and
related professionals and staff) incurred by Lender on account of such L/C and
Guaranty Obligations, the amount of all such costs, taxes, fees, and expenses so
incurred promptly, but in no event later than five (5) days after demand
therefor.
(d) Request for Issuance of a Lease Guaranty or Letter of Credit.
The Company shall give Lender at least two weeks prior notice requesting a Lease
Guaranty, and at least three weeks prior notice requesting a Letter of Credit,
specifying the date such Lease Guaranty or Letter of Credit is to be issued,
identifying the beneficiary to which such instrument relates, and summarizing
the terms and conditions of the Real Property Lease proposed to be supported
thereby. The Company shall also provide a copy of the Real Property Lease to
Lender. Lender will promptly cause such Lease Guaranty or Letter of Credit, as
the case may be, to be issued but in no event later than the last day of the
applicable notice period.
(e) L/C and Guaranty Obligations Under Revolving Credit Commitment.
In the event that the Lender shall make any payment on or pursuant to any Letter
of Credit or Lease Guaranty, the corresponding L/C and Guaranty Obligation shall
then be deemed automatically to be reduced by the amount of such payment and
such payment shall then be deemed automatically to constitute a Revolving Credit
Loan regardless of whether a Default shall have occurred and be continuing and
notwithstanding the Company's failure to satisfy the conditions precedent set
forth in Section 7 of this Agreement. The proceeds of such Revolving Credit Loan
shall be applied to reimburse Lender for the payment made by the Lender under
the Letter of Credit or Lease Guaranty, as applicable. In the event that a
Revolving Credit Loan shall be made to the Company hereunder, such Revolving
Credit Loan shall be deemed to have been made as of the date of the payment by
Lender with respect to the applicable Letter of Credit or Lease Guaranty and
interest shall accrue thereon at the rate as provided for under this Agreement.
(f) Obligations Absolute. The obligation of the Company to reimburse
the Lender for payments made under the Letters of Credit and Lease Guaranties
shall be absolute, unconditional and irrevocable, and shall be performed
strictly in accordance with the terms of this Agreement and such Letters of
Credit and Lease Guaranties, under all circumstances whatsoever, including,
without limitation, the following circumstances:
(i) Any lack of validity or enforceability of the Letter of
Credit or the Lease Guaranty, the obligation supported by the Letter of
Credit, Lease Guaranty or any other agreement or instrument relating
thereto (collectively, the "Related Documents");
(ii) Any amendment or waiver of or any consent to or departure
from all or any of the Related Documents;
(iii) The existence of any claim, set-off, defense or other
rights which the Company may have at any time against any beneficiary or
any transferee of the Letter of Credit or Lease Guaranty (or any persons
or entities for whom any such beneficiary or any such transferee may be
acting), the Lender, the Letter of Credit issuer or any other
17
<PAGE>
Person, whether in connection with the Basic Documents, the Related
Documents or any unrelated transaction;
(iv) Any breach of contract or other dispute between the
Company and any beneficiary or any transferee of the Letter of Credit or
the Lease Guaranty (or any persons or entities for whom such beneficiary
or any such transferee may be acting), the Lender or any other Person;
(v) Any draft, statement or any other document presented under
the Letter of Credit or the Lease Guaranty proving to be forged,
fraudulent, invalid or insufficient in any respect or any statement
therein being untrue or inaccurate in any respect whatsoever;
(vi) Any delay, extension of time, renewal, compromise or
other indulgence or modification granted or agreed to by the Letter of
Credit issuer or Lender with or without notice to or approval by the
Company in respect of any of the Company's indebtedness under this
Agreement; or
(vii) any error, omission, interruption or delay in
transmission, dispatch or delivery of any advice or message, however
transmitted, in connection with any Letter of Credit.
ARTICLE 3
PAYMENTS OF PRINCIPAL AND INTEREST
Section 3.1 Repayment of Loans.
(a) The Company hereby promises to pay to the Lender the entire
outstanding principal amount of the Revolving Credit Loans, and each Revolving
Credit Loan shall mature, on the Revolving Credit Termination Date.
(b) The Company hereby promises to pay to the Lender the entire
outstanding principal amount of the Term Loan and the Term Loan shall mature on
the Term Loan Termination Date.
Section 3.2 Interest. The Company hereby promises to pay to the Lender
interest on the unpaid principal amount of each Loan for the period from and
including the date of such Loan to but excluding the date such Loan shall be
paid in full, at the rate per annum equal to the Base Rate for such Loan for
such Interest Period plus the Applicable Margin. Notwithstanding the foregoing,
the Company hereby promises to pay to the Lender interest at the applicable
Post-Default Rate on any principal of any Loan made by the Lender and on any
other amount payable by the Company hereunder or under the Notes held by the
Lender, which shall not be paid in full when due (whether at stated maturity, by
acceleration, by mandatory prepayment or otherwise), for the period from and
including the due date thereof to but excluding the date the same is paid in
full.
18
<PAGE>
Accrued interest on each Loan shall be payable (i) on the last day of each
Interest Period therefor and, if such Interest Period is longer than three
months at three-month intervals, respectively, following the first day of such
Interest Period, and (ii) in the case of any Loan, upon the payment or
prepayment thereof, except that interest payable at the Post-Default Rate shall
be payable from time to time on demand. Promptly after the determination of any
interest rate provided for herein or any change therein, the Lender shall give
notice thereof to the Company.
ARTICLE 4
PAYMENTS; PRO RATA TREATMENT; COMPUTATIONS; ETC.
Section 4.1 Payments.
(a) Except to the extent otherwise provided herein, all payments of
principal, interest and other amounts to be made by the Company under this
Agreement and the Notes, and, except to the extent otherwise provided therein,
all payments to be made by the Obligors under any other Basic Document, shall be
made in Dollars, in immediately available funds, without deduction, set-off or
counterclaim, to the Lender at account number 9102595973 maintained by the
Lender with The Chase Manhattan Bank at One Chase Manhattan Plaza, New York, New
York 10005, not later than 1:00 p.m. New York time on the date on which such
payment shall become due (each such payment made after such time on such due
date to be deemed to have been made on the next succeeding Business Day).
(b) If the due date of any payment under this Agreement or any Note
would otherwise fall on a day that is not a Business Day, such date shall be
extended to the next succeeding Business Day, and interest shall be payable for
any principal so extended for the period of such extension.
Section 4.2 Computations. Interest on Loans and commitment fee shall be
computed on the basis of a year of 360 days and actual days elapsed (including
the first day but excluding the last day) occurring in the period for which
payable.
Section 4.3 Minimum Amounts. Except for mandatory prepayments made
pursuant to Section 2.7 hereof, each borrowing and partial prepayment of
principal of Loans shall be in an aggregate amount at least equal to $100,000 or
in multiples of $100,000 in excess thereof.
Section 4.4 Certain Notices. Notices by the Company to the Lender of
terminations or reductions of the Commitments, of borrowings, and optional
prepayments of Loans and of Classes of Loans, and of the duration of Interest
Periods shall be irrevocable and shall be effective only if received by the
Lender not later than 10:00 a.m. New York time, one Business Day prior to the
date of the relevant termination, reduction, borrowing or prepayment or the
first day of such Interest Period.
19
<PAGE>
Each such notice of termination or reduction shall specify the
amount and the Class of the Commitments to be terminated or reduced. Each such
notice of borrowing or optional prepayment shall specify the Class of Loans to
be borrowed or prepaid and the amount (subject to Section 4.3 hereof) and the
date of borrowing or optional prepayment (which shall be a Business Day). Each
such notice of the duration of an Interest Period shall specify the Loans to
which such Interest Period is to relate.
ARTICLE 5
YIELD PROTECTION, ETC.
Section 5.1 Additional Costs.
(a) The Company shall pay directly to the Lender from time to time
such amounts as the Lender may in good faith reasonably determine to be
necessary to compensate the Lender for any costs that the Lender in good faith
reasonably determines are attributable to its making or maintaining of any Loans
or its obligation to make any Loans hereunder, or any reduction in any amount
receivable by the Lender hereunder in respect of any of such Loans or such
obligation (such increases in costs and reductions in amounts receivable being
herein called "Additional Costs"), resulting from any increase in the cost to
the Lender of borrowing its funds.
If the Lender requests compensation from the Company under this
Section 5.1(a), the Company may, by notice to the Lender, suspend the obligation
of the Lender thereafter to make Loans with respect to which such compensation
is requested, until such increase in costs to the Lender giving rise to such
request ceases to be in effect, provided that such suspension shall not affect
the right of the Lender to receive the compensation so requested.
(b) Without limiting the effect of the foregoing provisions of this
Section 5.1 (but without duplication), the Company shall pay directly to the
Lender from time to time on request such amounts as the Lender may determine to
be necessary to compensate the Lender for any costs that it determines are
attributable to such increase in its cost to borrow funds.
(c) The Lender shall notify the Company of any event occurring after
the date of this Agreement entitling the Lender to compensation under paragraph
(a) or (b) of this Section 5.1 as promptly as practicable, but in any event
within 45 days, after the Lender obtains actual knowledge thereof; provided that
if the Lender fails to give such notice within 45 days after it obtains actual
knowledge of such an event, the Lender shall, with respect to compensation
payable pursuant to this Section 5.1 in respect of any costs resulting from such
event, only be entitled to payment under this Section 5.1 for costs incurred
from and after the date 45 days prior to the date that the Lender does give such
notice. The Lender will furnish to the Company a certificate describing in
reasonable detail such Additional Costs and setting forth the basis and amount
of each request by the Lender for compensation under paragraph (a) or (b) of
this Section 5.1. Determinations and allocations by the Lender for purposes of
this Section 5.1 of the effect of any increase in its borrowing costs pursuant
to paragraph (a) of this Section 5.1 or rate of return of
20
<PAGE>
maintaining Loans or its obligation to make Loans, or on amounts receivable by
it in respect of Loans, and of the amounts required to compensate the Lender
under this Section 5.1, shall be conclusive, provided that such determinations
and allocations are made on a reasonable basis.
Section 5.2 Substitute Basis. If, on or prior to the first day of any
Interest Period (an "Affected Interest Period"):
(a) the Lender determines that, by reason of circumstances affecting
the London interbank eurodollar market, the "LIBO Rate" cannot be determined
pursuant to the definition thereof, or
(b) the Lender determines that the relevant rates of interest
referred to in the definition of "LIBO Rate" in Section 1.01 hereof upon the
basis of which the rate of interest for Loans for such Affected Interest Period
is to be determined will not be adequate to cover the cost to the Lender of
making or maintaining their Loans for such Affected Interest Period, the Lender
shall give notice thereof (a "Rate Determination Notice") to the Company as soon
as practicable thereafter. If such notice is given, during the thirty-day period
following such Rate Determination Notice (the "Negotiation Period") the Lender
and the Company shall negotiate in good faith with a view to agreeing upon a
substitute interest rate basis for the Loans which shall reflect the cost to the
Lender of funding their Loans from alternative sources (a "Substitute Basis"),
and if such Substitute Basis is so agreed upon during the Negotiation Period,
such Substitute Basis shall apply in lieu of the LIBO Rate to all Interest
Periods commencing on or after the first day of the Affected Interest Period,
until the circumstances giving rise to such notice have ceased to apply. If a
Substitute Basis is not agreed upon during the Negotiation Period, the Company
may elect to prepay the Loans pursuant to Section 2.06 hereof; provided,
however, that if the Company does not elect so to prepay, the Lender shall
determine the rate basis reflecting the cost to the Lender of funding its Loan
for any Interest Period commencing on or after the first day of the Affected
Interest Period, until the circumstances giving rise to such notice have ceased
to apply, and such rate basis shall be binding upon the Company and the Lender
and shall apply in lieu of the LIBO Rate for the relevant Interest Periods.
Section 5.3 Illegality. Notwithstanding any other provision of this
Agreement, in the event that it becomes unlawful for the Lender to honor its
obligation to make or maintain Loans hereunder, then the Lender shall promptly
notify the Company thereof and the Lender's obligation to make Loans shall be
suspended until such time as the Lender may again make and maintain Loans, and
the Lender shall no longer be obligated to make any Loan that it has offered to
make. If required, the Loan shall be prepaid by the Company, together with
accrued and unpaid interest thereon and all other amounts payable by the Company
under this Agreement, on or before such date as shall be mandated; provided,
however, that if it is lawful for the Lender to maintain its Loan through the
last day of the current Interest Period, such payment shall be made on such
date.
Section 5.4 Compensation. The Company shall pay to the Lender upon the
request of Lender, such amount or amounts as shall be sufficient (in the
reasonable opinion of the Lender) to compensate it for any loss, cost or expense
that the Lender determines is attributable to:
21
<PAGE>
(a) any payment, mandatory or optional prepayment for any reason
(including, without limitation, the acceleration of the Loans pursuant to
Section 10 hereof) on a date other than the last day of the Interest Period for
such Loan; or
(b) any failure by the Company for any reason (including, without
limitation, the failure of any of the conditions precedent specified in Section
7 hereof to be satisfied) to borrow a Loan from the Lender on the date for such
borrowing specified in the relevant notice of borrowing given pursuant to
Section 2.2 hereof.
Without limiting the effect of the preceding sentence, such
compensation shall include an amount equal to the excess, if any, of (i) the
amount of interest that otherwise would have accrued on the principal amount so
paid, prepaid or not borrowed for the period from the date of such payment,
prepayment or failure to borrow to the last day of the then current Interest
Period for such Loan (or, in the case of a failure to borrow, the Interest
Period for such Loan that would have commenced on the date specified for such
borrowing) at the applicable rate of interest for such Loan provided for herein
over (ii) the amount of interest that otherwise would have accrued on such
principal amount at a rate per annum equal to the interest component of the
amount the Lender would have bid in the London interbank market for Dollar
deposits of leading banks in amounts comparable to such principal amount and
with maturities comparable to such period (as reasonably determined by the
Lender).
Section 5.5 Taxes.
(a) All payments on account of the principal of and interest on the
Loans, fees and all other amounts payable hereunder by or on account of the
Company to or for the account of the Lender, including, without limitation,
amounts payable under paragraph (b) of this Section 5.05, shall be made free and
clear of and without reduction or liability for Covered Taxes.
(b) The Company shall promptly indemnify and hold harmless the
Lender against, and reimburse the Lender on demand for, any Covered Taxes and
any loss, liability, claim, cost or expense, including interest, penalties and
reasonable legal fees and other costs of collection that the Lender may incur at
any time arising out of or in connection with any failure of the Company to make
any payment of Covered Taxes when due.
(c) In the event that the Company or any Person making a payment
hereunder on behalf of the Company shall be required by applicable law, decree
or regulation to deduct or withhold Covered Taxes from any amounts payable on,
under or in respect of this Agreement or the Loans, the Company shall promptly
pay (i) to the relevant taxing authorities the amount so deducted or withheld
and (ii) to the Person entitled to such amount such additional amounts as may be
required, after the deduction or withholding of Covered Taxes, to enable such
Person to receive from the Company on the due date thereof an amount equal to
the full amount stated to be payable to such Person under this Agreement.
(d) The Company shall furnish to the Lender, upon the request of the
Lender, original official tax receipts or certified copies thereof in respect of
each payment of Covered Taxes
22
<PAGE>
required under this Section 5.5, immediately after the date such payment is
made, and the Company shall promptly furnish to the Lender at its request any
other information, documents and receipts that the Lender may reasonably require
to establish to its satisfaction that full and timely payment has been made of
all Covered Taxes required to be paid under this Section 5.5.
(e) The Company agrees to pay all present and future stamp, court or
documentary taxes and any other excise taxes, charges or similar levies and any
related interest or penalties incidental thereto which arises from any payment
made by the Company hereunder or from the execution, delivery, enforcement or
registration of the Basic Documents, other than taxes which arise from an
assignment by the Lender of its Loans and Commitments pursuant to Section 12.06
(hereinafter referred to as "Other Applicable Taxes").
(f) Upon the reasonable request of the Company, the Lender agrees to
complete in good faith, execute and deliver to the Company such forms,
certificates, documents, applications, declarations or returns as are necessary
to establish the extent to which any payments to the Lender are exempt from, or
are entitled to a reduction of, withholding or deduction of any Covered Tax.
(g) The Company shall promptly take all actions (including, without
limitation, the completion of forms and the provision of information to the
appropriate taxing authorities) to secure the benefit of any exemption from, or
relief with respect to, Covered Taxes or Other Applicable Taxes in relation to
any amounts payable under this Agreement.
(h) If the Lender, in its sole discretion, determines that it has
finally and irrevocably received or been granted a refund in respect of any
Covered Taxes or Other Applicable Taxes as to which indemnification has been
paid by the Company pursuant to Section 5.5(a) or (b), it shall promptly remit
such refund (including any interest) to the Company, net of all out-of-pocket
expenses of the Lender; provided, however, that the Company, upon the request of
the Lender, agrees promptly to return such refund (plus any interest) to such
party in the event such party is required to repay such refund to the relevant
taxing authority. The Lender shall provide the Company with a copy of any notice
or assessment from the relevant taxing authority (deleting any confidential
information contained therein) requiring repayment of such refund. Nothing
contained herein shall impose an obligation on the Lender to apply for any
refund or to disclose to any party any information regarding their proprietary
information regarding tax affairs and computations.
ARTICLE 6
GUARANTEES
Section 6.1 Guarantees. The Subsidiary Guarantors hereby jointly and
severally guarantee to the Lender and their respective successors and assigns
the prompt payment in full when due (whether at stated maturity, by acceleration
or otherwise) of the principal of and interest and expenses on the Loans made by
the Lender to, and the Notes held by the Lender of, the Company and all other
amounts from time to time owing to the Lender by the Company under this
Agreement and under the Notes and by any Obligor under any of the other Basic
Documents, in
23
<PAGE>
each case strictly in accordance with the terms thereof (such obligations being
herein collectively called the "Guaranteed Obligations"). The Subsidiary
Guarantors hereby further jointly and severally agree that if the Company shall
fail to pay in full when due (whether at stated maturity, by acceleration or
otherwise) or perform any of the Guaranteed Obligations, the Subsidiary
Guarantors will promptly pay the same, without any demand or notice whatsoever,
and that in the case of any extension of time of payment or renewal of any of
the Guaranteed Obligations, the same will be promptly paid in full when due
(whether at extended maturity, by acceleration or otherwise) in accordance with
the terms of such extension or renewal.
Section 6.2 Obligations Unconditional. The obligations of the Subsidiary
Guarantors under Section 6.1 hereof are absolute and unconditional, joint and
several, irrespective of the value, genuineness, validity, regularity or
enforceability of the obligations of the Company under this Agreement, the Notes
or any other agreement or instrument referred to herein or therein, or any
substitution, release or exchange of any other guarantee of or security for any
of the Guaranteed Obligations, and, to the fullest extent permitted by
applicable law, irrespective of any other circumstance whatsoever which might
otherwise constitute a legal or equitable discharge or defense of a surety or
guarantor, it being the intent of this Section 6.2 that the obligations of the
Subsidiary Guarantors hereunder shall be absolute and unconditional, joint and
several, under any and all circumstances. Without limiting the generality of the
foregoing, it is agreed that the occurrence of any one or more of the following
shall not alter or impair the liability of the Subsidiary Guarantors hereunder
which shall remain absolute and unconditional as described above:
(i) at any time or from time to time, without notice to the
Subsidiary Guarantors, the time for any performance of or compliance with any of
the Guaranteed Obligations shall be extended, or such performance or compliance
shall be waived;
(ii) any of the acts mentioned in any of the provisions of
this Agreement or the Notes or any other agreement or instrument referred to
herein or therein shall be done or omitted;
(iii) the maturity of any of the Guaranteed Obligations shall
be accelerated, or any of the Guaranteed Obligations shall be modified,
supplemented or amended in any respect, or any right under this Agreement or the
Notes or any other agreement or instrument referred to herein or therein shall
be waived or any other guarantee of any of the Guaranteed Obligations or any
security therefor shall be released or exchanged in whole or in part or
otherwise dealt with; or
(iv) any lien or security interest granted to, or in favor of,
the Lender as security for any of the Guaranteed Obligations shall fail to be
perfected.
The Subsidiary Guarantors hereby expressly waive diligence,
presentment, demand of payment, protest and all notices whatsoever, and any
requirement that the Lender exhaust any right, power or remedy or proceed
against the Company under this Agreement or the Notes or any other agreement or
instrument referred to herein or therein, or against any other Person under any
other guarantee of, or security for, any of the Guaranteed Obligations.
24
<PAGE>
Section 6.3 Reinstatement. The obligations of the Subsidiary Guarantors
under this Section 6 shall be automatically reinstated if and to the extent that
for any reason any payment by or on behalf of the Company in respect of the
Guaranteed Obligations is rescinded or must be otherwise restored by any holder
of any of the Guaranteed Obligations, whether as a result of any proceedings in
bankruptcy or reorganization or otherwise and the Subsidiary Guarantors jointly
and severally agree that they will indemnify the Lender on demand for all
reasonable costs and expenses (including, without limitation, reasonable fees of
counsel) incurred by the Lender in connection with such rescission or
restoration, including any such costs and expenses incurred in defending against
any claim alleging that such payment constituted a preference, fraudulent
transfer or similar payment under any bankruptcy, insolvency or similar law.
Section 6.4 Subrogation. Each Subsidiary Guarantor hereby waives all
rights of subrogation or contribution, whether arising by contract or operation
of law (including, without limitation, any such right arising under the
Bankruptcy Code) or otherwise by reason of any payment by it pursuant to the
provisions of this Section 6 at any time that any Guaranteed Obligations remain
unpaid and outstanding.
Section 6.5 Remedies. The Subsidiary Guarantors jointly and severally
agree that, as between the Subsidiary Guarantors and the Lender, the obligations
of the Company under this Agreement and the Notes may be declared to be
forthwith due and payable as provided in Section 10 hereof (and shall be deemed
to have become automatically due and payable in the circumstances provided in
said Section 10) for purposes of Section 6.1 hereof notwithstanding any stay,
injunction or other prohibition preventing such declaration (or such obligations
from becoming automatically due and payable) as against the Company and that, in
the event of such declaration (or such obligations being deemed to have become
automatically due and payable), such obligations (whether or not due and payable
by the Company) shall forthwith become due and payable by the Subsidiary
Guarantors for purposes of said Section 6.1.
Section 6.6 Continuing Guarantee. The guarantee in this Section 6 is a
continuing guarantee, and shall apply to all Guaranteed Obligations whenever
arising.
Section 6.7 Rights of Contribution. The Subsidiary Guarantors hereby
agree, as between themselves, that if any Subsidiary Guarantor (an "Excess
Funding Guarantor") shall pay Guaranteed Obligations in excess of the Excess
Funding Guarantor's Pro Rata Share (as hereinafter defined) of such Guaranteed
Obligations, the other Subsidiary Guarantors shall, on demand (but subject to
the next sentence hereof), pay to the Excess Funding Guarantor an amount equal
to their respective Pro Rata Shares of such Excess Funding Guarantor's payment.
The payment obligation of any Subsidiary Guarantor to any Excess Funding
Guarantor under this Section 6.7 shall be subordinate and subject in right of
payment to the prior payment in full of the obligations of such Subsidiary
Guarantor under the other provisions of this Section 6 and such Excess Funding
Guarantor shall not exercise any right or remedy with respect to such excess
until payment and satisfaction in full of all of such obligations. For the
purposes hereof, "Pro Rata Share" shall mean, for any Subsidiary Guarantor, a
percentage equal to the percentage that such Subsidiary Guarantor's Tangible Net
Worth as at June 30 1999 (as reflected on the balance sheets referred to in
25
<PAGE>
Section 8.2 hereof) is of the aggregate Tangible Net Worth of all of the
Subsidiary Guarantors as at such date.
Section 6.8 Limitation on Guarantee Obligations. In any action or
proceeding involving any state corporate law, or any state or Federal
bankruptcy, insolvency, reorganization or other law affecting the rights of
creditors generally, if the obligations of any Subsidiary Guarantor under
Section 6.1 hereof would otherwise, taking into account the provisions of
Section 6.7 hereof, be held or determined to be void, invalid or unenforceable,
or subordinated to the claims of any other creditors, on account of the amount
of its liability under said Section 6.1, then, notwithstanding any other
provision hereof to the contrary, the amount of such liability shall, without
any further action by such Subsidiary Guarantor, the Lender, or any other
Person, be automatically limited and reduced to the highest amount which is
valid and enforceable and not subordinated to the claims of other creditors as
determined in such action or proceeding.
ARTICLE 7
CONDITIONS PRECEDENT
Section 7.1 Initial Extension of Credit. The agreement of the Lender to
make its initial extension of credit hereunder is subject to the receipt by the
Lender of the following documents, each of which shall be satisfactory to the
Lender in form and substance:
(a) Corporate Documents. The following documents, each certified as
indicated below:
(i) for each Obligor, a copy of the charter or articles of
organization, as amended and in effect, of such Obligor certified as of a recent
date by the Secretary of State of its jurisdiction of incorporation, and a
certificate from such Secretary of State dated as of a recent date as to the
good standing of and charter documents filed by such Obligor;
(ii) for each Obligor, a certificate of the Secretary or an
Assistant Secretary of such Obligor, dated the Closing Date and certifying (A)
that attached thereto is a true and complete copy of the by-laws of such Obligor
as amended and in effect at all times from the date on which the resolutions
referred to in clause (B) were adopted to and including the date of such
certificate, (B) that attached thereto is a true and complete copy of
resolutions duly adopted by the board of directors of such Obligor authorizing
the execution, delivery and performance of such of the Basic Documents to which
such Obligor is or is intended to be a party and the extensions of credit
hereunder, and that such resolutions have not been modified, rescinded or
amended and are in full force and effect, (C) that the charter of such Obligor
has not been amended since the date of the certification thereto furnished
pursuant to clause (i) above, and (D) as to the incumbency and specimen
signature of each officer of such Obligor executing such of the Basic Documents
to which such Obligor is intended to be a party and each other document to be
delivered by such Obligor from time to time in connection therewith (and the
Lender may conclusively rely on such certificate until it receives notice in
writing from such Obligor); and
26
<PAGE>
(iii) for each Obligor, a certificate of another officer of
such Obligor as to the incumbency and specimen signature of the Secretary or
Assistant Secretary, as the case may be, of such Obligor.
(b) Officer's Certificate. A certificate of a senior officer of the
Company, dated the Closing Date, to the effect set forth in the first sentence
of Section 7.2 hereof.
(c) Opinion of Counsel to the Obligors. An opinion, dated the
Closing Date, of Brobeck, Phleger & Harrison LLP, counsel to the Obligors,
substantially in the form of Exhibit D hereto, and covering such other matters
as the Lender may reasonably request.
(d) Notes. The Notes, duly completed and executed.
(e) Security Agreement. The Security Agreement, duly executed and
delivered by the Company and the Subsidiary Guarantors and the Lender. In
addition, the Company shall have taken such other action (including, without
limitation, delivering to the Lender, for filing, appropriately completed and
duly executed copies of Uniform Commercial Code financing statements) as the
Lender shall have requested in order to perfect the security interests created
pursuant to the Security Agreement.
(f) Pledge Agreement. The Pledge Agreement, duly executed and
delivered by the Company and the Lender and the certificates identified under
the name of the respective party thereto in Annex B thereto, in each case
accompanied by undated stock powers duly executed in blank. In addition, the
Company shall have taken such other action (including, without limitation,
delivering to the Lender, for filing, appropriately completed and duly executed
copies of Uniform Commercial Code financing statements) as the Lender shall have
requested in order to perfect the security interests created pursuant to the
Pledge Agreement.
(g) Insurance. The Company shall have delivered (i) a certificate of
the chief financial officer of the Company setting forth the insurance obtained
by it in accordance with the requirements of Section 9.4 and stating that such
insurance is in full force and effect and that all premiums then due and payable
thereon have been paid and (ii) a certificate of insurance from the Company's
insurance broker.
(h) Other Documents. Such other documents as the Lender may
reasonably request.
The obligation of the Lender to make its initial extension of credit
hereunder is also subject to the payment or delivery by the Company of such fees
and other consideration as the Company shall have agreed to pay or deliver to
the Lender in connection herewith, including, without limitation, the reasonable
fees and expenses of counsel to the Lender (including, without limitation,
in-house counsel and related professionals and staff) in connection with the
negotiation, preparation, execution and delivery of this Agreement and the Notes
and the other Basic
27
<PAGE>
Documents and the extensions of credit hereunder (to the extent that statements
for such fees and expenses have been delivered to the Company).
Section 7.2 Initial and Subsequent Extensions of Credit. The agreement of
the Lender to make any Loan or otherwise extend any credit to the Company
pursuant to a Letter of Credit or a Lease Guaranty upon the occasion of each
borrowing or such extension of credit hereunder is subject to the further
conditions precedent that, both immediately prior to the making of such Loan or
such extension of credit and also after giving effect thereto and to the
intended use thereof: (a) no Default shall have occurred and be continuing; and
(b) the representations and warranties made by the Company in Section 8 hereof,
and by each Obligor in each of the other Basic Documents to which it is a party,
shall be true and complete on and as of the date of the making of such Loan or
such extension of credit with the same force and effect as if made on and as of
such date (or, if any such representation or warranty is expressly stated to
have been made as of a specific date, as of such specific date). Each notice of
borrowing or request for a Lease Guaranty or a Letter of Credit by the Company
hereunder shall constitute a certification by the Company to the effect set
forth in the preceding sentence (both as of the date of such notice or request
and, unless the Company otherwise notifies the Lender prior to the date of such
borrowing or issuance, as of the date of such borrowing or issuance).
ARTICLE 8
REPRESENTATIONS AND WARRANTIES
The Company represents and warrants to the Lender that:
Section 8.1 Corporate Existence. Each of the Company and its Subsidiaries:
(a) is a corporation, partnership or other entity duly organized, validly
existing and in good standing under the laws of the jurisdiction of its
organization; (b) has all requisite corporate or other power, and has all
material governmental licenses, authorizations, consents and approvals necessary
to own its assets and carry on its business as now being or as proposed to be
conducted; and (c) is qualified to do business and is in good standing in all
jurisdictions in which the nature of the business conducted by it makes such
qualification necessary and where failure so to qualify could have a Material
Adverse Effect.
Section 8.2 Financial Condition. The Company has heretofore furnished to
the Lender consolidated and consolidating balance sheets of the Company and its
Consolidated Subsidiaries as at June 30, 1999 and the related consolidated and
consolidating statements of income, retained earnings and cash flow of the
Company and its Consolidated Subsidiaries for the fiscal year ended on said
date, with the opinion thereon (in the case of said consolidated balance sheet
and statements) of Arthur Andersen LLP. All such financial statements are
complete and correct and fairly present the consolidated financial condition of
the Company and its Consolidated Subsidiaries, and (in the case of said
consolidating financial statements) the respective unconsolidated financial
condition of the Company and of each of its Consolidated Subsidiaries, as at
said date and the consolidated and unconsolidated results of their operations
for the six month
28
<PAGE>
period ended on said date (subject to normal audit adjustments), all in
accordance with generally accepted accounting principles and practices applied
on a consistent basis. None of the Company nor any of its Subsidiaries has on
the date hereof any material contingent liabilities, liabilities for taxes,
unusual forward or long-term commitments or unrealized or anticipated losses
from any unfavorable commitments, except as referred to or reflected or provided
for in said balance sheet as at said date. Since June 30, 1999, there has been
no material adverse change in the consolidated financial condition, operations,
business or prospects taken as a whole of the Company and its Consolidated
Subsidiaries from that set forth in said financial statements as at said date.
Section 8.3 Litigation. Except as disclosed to the Lender, there are no
legal or arbitral proceedings, or any proceedings by or before any governmental
or regulatory authority or agency, or any investigation, now pending or (to the
knowledge of the Company) threatened against the Company or any of its
Subsidiaries which, if adversely determined could have a Material Adverse
Effect.
Section 8.4 No Breach. None of the execution and delivery of this
Agreement and the Notes and the other Basic Documents, the consummation of the
transactions herein and therein contemplated or compliance with the terms and
provisions hereof and thereof will conflict with or result in a breach of, or
require any consent under, the charter or by-laws of any Obligor, or any
applicable law or regulation, or any order, writ, injunction or decree of any
court or governmental authority or agency, or any agreement or instrument to
which the Company or any of its Subsidiaries is a party or by which any of them
or any of their Property is bound or to which any of them is subject, or
constitute a default under any such agreement or instrument, or (except for the
Liens created pursuant to the Security Documents) result in the creation or
imposition of any Lien upon any Property of the Company or any of its
Subsidiaries pursuant to the terms of any such agreement or instrument. None of
the Obligors is in breach of any agreement, instrument, contract or mortgage to
which the Company or any of its subsidiaries is a party or by which any of them
or any of their Property is bound or to which any of them is subject.
Section 8.5 Action. Each Obligor has all necessary corporate power,
authority and legal right to execute, deliver and perform its obligations under
each of the Basic Documents to which it is a party; the execution, delivery and
performance by each Obligor of each of the Basic Documents to which it is a
party have been duly authorized by all necessary corporate action on its part
(including, without limitation, any required shareholder approvals); and this
Agreement has been duly and validly executed and delivered by each Obligor and
constitutes, and each of the Notes and the other Basic Documents to which it is
a party when executed and delivered by such Obligor (in the case of the Notes,
for value) will constitute, its legal, valid and binding obligation, enforceable
against each Obligor in accordance with its terms, except as such enforceability
may be limited by (a) bankruptcy, insolvency, reorganization, moratorium or
similar laws of general applicability affecting the enforcement of creditors'
rights and (b) the application of general principles of equity (regardless of
whether such enforceability is considered in a proceeding in equity or at law).
Section 8.6 Approvals. No authorizations, approvals or consents of, and no
filings or registrations with, any governmental or regulatory authority or
agency, or any securities exchange, are necessary for the execution, delivery or
performance by any Obligor of the Basic Documents to
29
<PAGE>
which it is a party or for the legality, validity or enforceability hereof or
thereof, except for filings and recordings in respect of the Liens created
pursuant to the Security Documents.
Section 8.7 Use of Credit. Neither the Company nor any of its Subsidiaries
is engaged principally, or as one of its important activities, in the business
of extending credit for the purpose, whether immediate, incidental or ultimate,
of buying or carrying Margin Stock, and no part of the proceeds of any extension
of credit hereunder will be used to buy or carry any Margin Stock.
Section 8.8 ERISA. Each Plan, and, to the knowledge of the Company, each
Multiemployer Plan, is in compliance in all material respects with, and has been
administered in all material respects in compliance with, the applicable
provisions of ERISA, the Code and any other Federal or State law, and no event
or condition has occurred and is continuing as to which the Company would be
under an obligation to furnish a report to the Lender under Section 9.1(f)
hereof.
Section 8.9 Taxes. The Company and its Subsidiaries are members of an
affiliated group of corporations filing consolidated returns for Federal income
tax purposes, of which the Company is the "common parent" (within the meaning of
Section 1504 of the Code) of such group. There is no tax sharing, tax allocation
or similar agreement currently in effect providing for the manner in which tax
payments owing by the members of such affiliated group (whether in respect of
Federal or state income or other taxes) are allocated among the members of the
group. The Company and its Subsidiaries have filed (either directly, or
indirectly through the Company) all Federal income tax returns and all other
material tax returns that are required to be filed by them and have paid (either
directly, or indirectly through the Company) all taxes due pursuant to such
returns or pursuant to any assessment received by the Company or any of its
Subsidiaries. The charges, accruals and reserves on the books of the Company and
its Subsidiaries in respect of taxes and other governmental charges are, in the
opinion of the Company, adequate. The Company has not given or been requested to
give a waiver of the statute of limitations relating to the payment of Federal,
state, local and foreign taxes or other impositions.
Section 8.10 Investment Company Act. Neither the Company nor any of its
Subsidiaries is an "investment company", or a company "controlled" by an
"investment company", within the meaning of the Investment Company Act of 1940,
as amended.
Section 8.11 Material Agreements and Liens.
(a) Part A of Schedule I hereto is a complete and correct list, as
of the date of this Agreement, of each credit agreement, loan agreement,
indenture, purchase agreement, guarantee, letter of credit or other arrangement
providing for or otherwise relating to any Indebtedness or any extension of
credit (or commitment for any extension of credit) to, or guarantee by, the
Company or any of its Subsidiaries the aggregate principal or face amount of
which equals or exceeds (or may equal or exceed) $50,000, and the aggregate
principal or face amount outstanding or that may become outstanding under each
such arrangement is correctly described in Part A of said Schedule I.
30
<PAGE>
(b) Part B of Schedule I hereto is a complete and correct list, as
of the date of this Agreement, of each Lien securing Indebtedness of any Person
the aggregate principal or face amount of which equals or exceeds (or may equal
or exceed) $50,000 and covering any Property of the Company or any of its
Subsidiaries, and the aggregate Indebtedness secured (or which may be secured)
by each such Lien and the Property covered by each such Lien is correctly
described in Part B of said Schedule I.
Section 8.12 Environmental Matters. Each of the Company and its
Subsidiaries has obtained all environmental, health and safety permits, licenses
and other authorizations required under all Environmental Laws to carry on its
business as now being or as proposed to be conducted, except to the extent
failure to have any such permit, license or authorization would not have a
Material Adverse Effect. Each of such permits, licenses and authorizations is in
full force and effect and each of the Company and its Subsidiaries is in
compliance with the terms and conditions thereof, and is also in compliance with
all other limitations, restrictions, conditions, standards, prohibitions,
requirements, obligations, schedules and timetables contained in any applicable
Environmental Law or in any regulation, code, plan, order, decree, judgment,
injunction, notice or demand letter issued, entered, promulgated or approved
thereunder, except to the extent failure to comply therewith would not have a
Material Adverse Effect. In addition, no notice, notification, demand, request
for information, citation, summons or order has been issued, no complaint has
been filed, no penalty has been assessed and no investigation or review is
pending or threatened by any governmental or other entity with respect to any
alleged failure by the Company or any of its Subsidiaries to have any
environmental, health or safety permit, license or other authorization required
under any Environmental Law in connection with the conduct of the business of
the Company or any of its Subsidiaries or with respect to any generation,
treatment, storage, emission, recycling, transportation, discharge or disposal,
or any Release of any Hazardous Materials generated by the Company or any of its
Subsidiaries. There have been no environmental investigations, studies, audits,
tests, reviews or other analyses conducted by or that are in the possession of
the Company or any of its Subsidiaries in relation to any site or facility now
or previously owned, operated or leased by the Company or any of its
Subsidiaries which have not been made available to the Lender.
Section 8.13 Subsidiaries, Etc.
(a) Set forth in Part A of Schedule III hereto is a complete and
correct list, as of the date of this Agreement, of all of the Subsidiaries of
the Company, together with, for each such Subsidiary, (i) the jurisdiction of
organization of such Subsidiary, (ii) each Person holding ownership interests in
such Subsidiary and (iii) the nature of the ownership interests held by each
such Person and the percentage of ownership of such Subsidiary represented by
such ownership interests. Except as disclosed in Part A of Schedule III hereto,
(x) each of the Company and its Subsidiaries owns, free and clear of Liens
(other than Liens created pursuant to the Security Documents), and has the
unencumbered right to vote, all outstanding ownership interests in each Person
shown to be held by it in Part A of Schedule III hereto, (y) all of the issued
and outstanding capital stock of each such Person organized as a corporation is
validly issued, fully paid and nonassessable and (z) there are no outstanding
Equity Rights with respect to such Person.
31
<PAGE>
(b) Set forth in Part B of Schedule III hereto is a complete and
correct list, as of the date of this Agreement, of all Investments (other than
Investments disclosed in Part A of said Schedule III hereto) held by the Company
or any of its Subsidiaries in any Person and, for each such Investment, (x) the
identity of the Person or Persons holding such Investment and (y) the nature of
such Investment. Except as disclosed in Part B of Schedule III hereto, each of
the Company and its Subsidiaries owns, free and clear of all Liens (other than
Liens created pursuant to the Security Documents), all such Investments.
(c) None of the Subsidiaries of the Company is, on the date of this
Agreement, subject to any indenture, agreement, instrument or other arrangement
of the type described in the last sentence of 9.15 hereof.
Section 8.14 Title to Assets. The Company owns and has on the date hereof,
and will own and have on the Closing Date, good and marketable title (subject
only to Liens permitted by Section 9.6 hereof) to the Properties shown to be
owned in the most recent financial statements referred to in Section 8.2 hereof
(other than Properties disposed of in the ordinary course of business or
otherwise permitted to be disposed of pursuant to Section 9.5 hereof). The
Company owns and has on the date hereof, and will own and have on the Closing
Date, good and marketable title to, and enjoys on the date hereof, and will
enjoy on the Closing Date, peaceful and undisturbed possession of, all
Properties (subject only to Liens permitted by Section 9.6 hereof) that are
necessary for the operation and conduct of its businesses.
Section 8.15 Intellectual Properties.
8.15.1 Definitions. For purposes of this Agreement, the following terms
have the following definitions:
"Intellectual Property" shall include, without limitation, any or
all of the following and all rights associated therewith: (a) all domestic and
foreign patents and applications therefor and all reissues, divisions, renewals,
extensions, continuations and continuations-in-part thereof; (b) all inventions
(whether patentable or not), invention disclosures, improvements, trade secrets,
proprietary information, know how, technology, technical data and customer
lists, rights of privacy and publicity, and all documentation relating to any of
the foregoing; (c) all copyrights, copyright registrations and applications
therefor, and all other rights corresponding thereto throughout the world; (d)
all mask works, mask work registrations and applications therefor; (e) all
industrial designs and any registrations and applications therefor; (f) all
trade names, logos, common law trademarks and service marks; trademark and
service mark registrations and applications therefor and all goodwill associated
therewith; and (g) all computer software including all source code, object code,
firmware, development tools, files, records and data, all media on which any of
the foregoing is recorded, and all documentation related to any of the
foregoing.
"Intellectual Property of the Obligors" shall mean any Intellectual
Property that: (a) is owned by or exclusively licensed to the Obligors, or (b)
which is necessary to the operation of the Obligors, including the design,
manufacture and use of the products of the Obligors as they currently are
operated or are reasonably anticipated to be operated in the future, but shall
32
<PAGE>
specifically not include any rights in or to materials created for clients as
"work-made-for-hire" or which are subject to an exclusive assignment or license
in favor of clients of the Obligors.
8.15.2 Representations. The registrations of the Intellectual Property
listed on the Annexes to the Security Agreement are valid and subsisting, all
necessary registration and renewal fees in connection with such registrations
have been made and all necessary documents and certificates in connection with
such registrations have been filed with the relevant patent, copyrights and
trademark authorities in the United States or other jurisdiction for the
purposes of maintaining such Intellectual Property registrations. (a) no Person
has any rights to use any of the Intellectual Property of the Obligors; and (b)
the Obligors have not granted to any Person, nor authorized any Person to
retain, any rights in the Intellectual Property of the Obligors. Except for
"shrink wrap" and similar commercial end-user licenses, the Obligors own and
have good and exclusive title to each material item of Intellectual Property of
the Obligors, free and clear of any Lien; and the Obligors own, or have the
right, pursuant to a valid contract to use or operate under, all other material
Intellectual Property of the Obligors. To the knowledge of the Company, the
operation of the business of each of the Obligors as is currently conducted does
not infringe the Intellectual Property of any other Person. The Obligors have
not received notice from any Person that the operation of its business infringes
the Intellectual Property of any Person. There are no contracts between the
Obligors and any other Person with respect to the Intellectual Property of the
Obligors in respect of which there is any dispute known to the Obligors
regarding the scope of such agreement, or performance under such contract,
including with respect to any payments to be made or received by the Obligors.
To the knowledge of the Company, no Person is infringing or misappropriating any
of the Intellectual Property of the Obligors.
Section 8.16 Client Relations . No client of the Obligors representing
more than 5% of the consolidated revenues of the Company for the four previous
consecutive full fiscal quarters has advised the Obligors in writing that it is
(x) terminating or considering terminating the handling of its business by the
Obligors as a whole or in respect of any particular product, project or service
or (y) planning to reduce its future spending with the Obligors in any material
manner; and to the knowledge of the Company, no client has orally advised the
Obligors of any of the foregoing events.
Section 8.17 True and Complete Disclosure. The information, reports,
financial statements, exhibits and schedules furnished in writing by or on
behalf of the Obligors to the Lender in connection with the negotiation,
preparation or delivery of this Agreement and the other Basic Documents or
included herein or therein or delivered pursuant hereto or thereto, when taken
as a whole do not contain any untrue statement of material fact or omit to state
any material fact necessary to make the statements herein or therein, in light
of the circumstances under which they were made, not misleading. All written
information furnished after the date hereof by the Company and its Subsidiaries
to the Lender in connection with this Agreement and the other Basic Documents
and the transactions contemplated hereby and thereby will be true, complete and
accurate in every material respect, or (in the case of projections) based on
reasonable estimates, on the date as of which such information is stated or
certified. There is no fact known to the Company that could have a Material
Adverse Effect that has not been disclosed herein, in the other Basic
33
<PAGE>
Documents or in a report, financial statement, exhibit, schedule, disclosure
letter or other writing furnished to the Lender for use in connection with the
transactions contemplated hereby or thereby.
ARTICLE 9
COVENANTS OF THE COMPANY
The Company covenants and agrees with the Lender that, so long as
any Commitment or Loan is outstanding and until payment in full of all amounts
payable by the Company hereunder:
Section 9.1 Financial Statements, Etc. The Company shall deliver to the
Lender:
(a) as soon as available and in any event within 45 days after the
end of each quarterly fiscal period of each fiscal year of the Company,
consolidated and consolidating statements of income, retained earnings and cash
flow of the Company and its Consolidated Subsidiaries for such period and for
the period from the beginning of the respective fiscal year to the end of such
period, and the related consolidated and consolidating balance sheets of the
Company and its Consolidated Subsidiaries as at the end of such period, setting
forth in each case in comparative form the corresponding consolidated and
consolidating figures for the corresponding period in the preceding fiscal year,
accompanied by a certificate of a senior financial officer of the Company, which
certificate shall state that said consolidated financial statements fairly
present the consolidated financial condition and results of operations of the
Company and its Consolidated Subsidiaries, and said consolidating financial
statements fairly present the respective individual unconsolidated financial
condition and results of operations of the Company and of each of its
Consolidated Subsidiaries, in each case in accordance with generally accepted
accounting principles, consistently applied, as at the end of, and for, such
period (subject to normal year-end audit adjustments);
(b) as soon as available and in any event within 90 days after the
end of each fiscal year of the Company, consolidated and consolidating
statements of income, retained earnings and cash flow of the Company and its
Consolidated Subsidiaries for such fiscal year and the related consolidated and
consolidating balance sheets of the Company and its Consolidated Subsidiaries as
at the end of such fiscal year, setting forth in each case in comparative form
the corresponding consolidated and consolidating figures for the preceding
fiscal year, and accompanied (i) in the case of said consolidated statements and
balance sheet of the Company, by an opinion thereon of one of the five largest
accounting firms in the United States in terms of revenues, which opinion shall
state that said consolidated financial statements fairly present the
consolidated financial condition and results of operations of the Company and
its Consolidated Subsidiaries as at the end of, and for, such fiscal year in
accordance with generally accepted accounting principles, and (ii) in the case
of said consolidating statements and balance sheets, by a certificate of a
senior financial officer of the Company, which certificate shall state that said
consolidating financial statements fairly present the respective individual
unconsolidated financial condition and results of operations of the Company
34
<PAGE>
and of each of its Consolidated Subsidiaries, in each case in accordance with
generally accepted accounting principles, consistently applied, as at the end
of, and for, such fiscal year;
(c) if available, within 15 days after the end of each monthly
period of each fiscal year of the Company, consolidated and consolidating
statements of income, retained earnings and cash flow of the Company and its
Consolidated Subsidiaries for such period and for the period from the beginning
of the respective fiscal year to the end of such period, and the related
consolidated and consolidating balance sheets of the Company and its
Consolidated Subsidiaries as at the end of such period, setting forth in each
case in comparative form the corresponding consolidated and consolidating
figures for the corresponding period in the preceding fiscal year, accompanied
by a certificate of a senior financial officer of the Company, which certificate
shall state that said consolidated financial statements fairly present the
consolidated financial condition and results of operations of the Company and
its Consolidated Subsidiaries, and said consolidating financial statements
fairly present the respective individual unconsolidated financial condition and
results of operations of the Company and of each of its Consolidated
Subsidiaries, in each case in accordance with generally accepted accounting
principles, consistently applied, as at the end of, and for, such period
(subject to normal year-end audit adjustments);
(d) promptly upon their becoming available, copies of all
registration statements and regular periodic reports, if any, which the Company
shall have filed with the Securities and Exchange Commission (or any
governmental agency substituted therefor) or any national securities exchange;
(e) promptly upon the mailing thereof to the shareholders of the
Company generally, copies of all financial statements, reports and proxy
statements so mailed;
(f) as soon as possible, and in any event within ten days after the
Company knows or has reason to believe that any of the events or conditions
specified below with respect to any Plan or Multiemployer Plan has occurred or
exists, a statement signed by a senior financial officer of the Company setting
forth details respecting such event or condition and the action, if any, that
the Company or its ERISA Affiliate proposes to take with respect thereto (and a
copy of any report or notice required to be filed with or given to PBGC by the
Company or an ERISA Affiliate with respect to such event or condition):
(i) any reportable event, as defined in Section 4043(b) of
ERISA and the regulations issued thereunder, with respect to a Plan, as to which
PBGC has not by regulation waived the requirement of Section 4043(a) of ERISA
that it be notified within 30 days of the occurrence of such event (provided
that a failure to meet the minimum funding standard of Section 412 of the Code
or Section 302 of ERISA, including, without limitation, the failure to make on
or before its due date a required installment under Section 412(m) of the Code
or Section 302(e) of ERISA, shall be a reportable event regardless of the
issuance of any waivers in accordance with Section 412(d) of the Code); and any
request for a waiver under Section 412(d) of the Code for any Plan;
35
<PAGE>
(ii) the distribution under Section 4041 of ERISA of a notice
of intent to terminate any Plan or any action taken by the Company or an ERISA
Affiliate to terminate any Plan;
(iii) the institution by PBGC of proceedings under Section
4042 of ERISA for the termination of, or the appointment of a trustee to
administer, any Plan, or the receipt by the Company or any ERISA Affiliate of a
notice from a Multiemployer Plan that such action has been taken by PBGC with
respect to such Multiemployer Plan;
(iv) the complete or partial withdrawal from a Multiemployer
Plan by the Company or any ERISA Affiliate that results in liability under
Section 4201 or 4204 of ERISA (including the obligation to satisfy secondary
liability as a result of a purchaser default) or the receipt by the Company or
any ERISA Affiliate of notice from a Multiemployer Plan that it is in
reorganization or insolvency pursuant to Section 4241 or 4245 of ERISA or that
it intends to terminate or has terminated under Section 4041A of ERISA;
(v) the institution of a proceeding by a fiduciary of any
Multiemployer Plan against the Company or any ERISA Affiliate to enforce Section
515 of ERISA, which proceeding is not dismissed within 30 days; and
(vi) the adoption of an amendment to any Plan that, pursuant
to Section 401(a)(29) of the Code or Section 307 of ERISA, would result in the
loss of tax-exempt status of the trust of which such Plan is a part if the
Company or an ERISA Affiliate fails to timely provide security to the Plan in
accordance with the provisions of said Sections;
(g) promptly after the Company knows or has reason to believe that
any Default has occurred, a notice of such Default describing the same in
reasonable detail and, together with such notice or as soon thereafter as
possible, a description of the action that the Company has taken or proposes to
take with respect thereto; and
(h) from time to time such other information regarding the financial
condition, operations, business or prospects of the Company or any of its
Subsidiaries (including, without limitation, any Plan or Multiemployer Plan and
any reports or other information required to be filed under ERISA) as the Lender
may reasonably request.
The Company will furnish to the Lender, at the time it furnishes
each set of financial statements pursuant to paragraph (a) or (b) above, a
certificate of a senior financial officer of the Company (i) to the effect that
no Default has occurred and is continuing (or, if any Default has occurred and
is continuing, describing the same in reasonable detail and describing the
action that the Company has taken or proposes to take with respect thereto) and
(ii) setting forth in reasonable detail the computations necessary to determine
whether the Company is in compliance with Sections 9.7(c), 9.9 and 9.10, hereof
as of the end of the respective quarterly fiscal period or fiscal year.
36
<PAGE>
Section 9.2 Litigation. The Company will promptly give to the Lender
notice of all legal or arbitral proceedings, and of all proceedings and
investigations by or before any governmental or regulatory authority or agency,
and any material development in respect of such legal or other proceedings,
affecting the Company or any of its Subsidiaries, except proceedings which, if
adversely determined, would not have a Material Adverse Effect. Without limiting
the generality of the foregoing, the Company will give to the Lender notice of
the assertion of any Environmental Claim by any Person against, or with respect
to the activities of, the Company or any of its Subsidiaries and notice of any
alleged violation of or non-compliance with any Environmental Laws or any
permits, licenses or authorizations, other than any Environmental Claim or
alleged violation which, if adversely determined, would not have a Material
Adverse Effect.
Section 9.3 Existence, Etc. The Company will, and will cause each of its
Subsidiaries to:
(a) preserve and maintain its legal existence and all of its
material rights, privileges, licenses and franchises (provided that nothing in
this Section 9.3 shall prohibit any transaction expressly permitted under
Section 9.5 hereof);
(b) comply with the requirements of all applicable laws, rules,
regulations and orders of governmental or regulatory authorities if failure to
comply with such requirements could have a Material Adverse Effect;
(c) pay and discharge all taxes, assessments and governmental
charges or levies imposed on it or on its income or profits or on any of its
Property prior to the date on which penalties attach thereto, except for any
such tax, assessment, charge or levy the payment of which is being contested in
good faith and by proper proceedings and against which adequate reserves are
being maintained;
(d) maintain all of its Properties used or useful in its business in
good working order and condition, ordinary wear and tear excepted;
(e) keep adequate records and books of account, in which complete
entries will be made in accordance with generally accepted accounting principles
consistently applied; and
(f) permit representatives of the Lender, during normal business
hours, to examine, copy and make extracts from its books and records, to inspect
any of its Properties, and to discuss its business and affairs with its
officers, all to the extent reasonably requested by the Lender.
Section 9.4 Insurance. The Company will, and will cause each of its
Subsidiaries to, keep insured by financially sound and reputable insurers all
Property of a character usually insured by corporations engaged in the same or
similar business similarly situated against loss or damage of the kinds and in
the amounts customarily insured against by such corporations and carry such
other insurance as is usually carried by such corporations.
37
<PAGE>
Section 9.5 Prohibition of Fundamental Changes. The Company will not, nor
will it permit any of its Subsidiaries to, enter into any transaction of merger
or consolidation or amalgamation, or liquidate, wind up or dissolve itself (or
suffer any liquidation or dissolution). The Company will not, nor will it permit
any of its Subsidiaries to, acquire any business or Property from, or capital
stock of, or be a party to any acquisition of, any Person except for (i)
Unrestricted Subsidiaries, (ii) purchases of inventory and other Property to be
sold or used in the ordinary course of business, (iii) Investments permitted
under Section 9.8 hereof, (iv) and Capital Expenditures permitted under Section
9.10 hereof. The Company will not, nor will it permit any of its Subsidiaries
to, convey, sell, lease, transfer or otherwise dispose of, in one transaction or
a series of transactions, all or a substantial part of its business or Property,
whether now owned or hereafter acquired (including, without limitation,
receivables and leasehold interests) but excluding obsolete or worn-out
Property, tools or equipment no longer used or useful in its business so long as
the amount thereof sold in any single fiscal year by the Company and its
Subsidiaries shall not have a fair market value in excess of $5,000,000.
Notwithstanding the foregoing provisions of this Section 9.5:
(a) any Subsidiary of the Company may be merged or consolidated with
or into: (i) the Company if the Company shall be the continuing or surviving
corporation or (ii) any other Subsidiary; provided that (x) if any such
transaction shall be between a Subsidiary and a Wholly Owned Subsidiary, the
Wholly Owned Subsidiary shall be the continuing or surviving corporation and (y)
that if any such transaction shall be between a Subsidiary Guarantor and a
Subsidiary not a Subsidiary Guarantor, and such Subsidiary Guarantor is not the
continuing or surviving corporation, then the continuing or surviving
corporation shall have assumed all of the obligations of such Subsidiary
Guarantor hereunder; and
(b) any Subsidiary of the Company may sell, lease, transfer or
otherwise dispose of any or all of its Property (upon voluntary liquidation or
otherwise) to the Company or a Wholly Owned Subsidiary of the Company; provided
that if any such sale is by a Subsidiary Guarantor to a Subsidiary of the
Company not a Subsidiary Guarantor, then such Subsidiary shall have assumed all
of the obligations of such Subsidiary Guarantor hereunder; and
(c) the Company or any Subsidiary of the Company may merge or
consolidate with any other Person if (i) in the case of a merger or
consolidation of the Company, the Company is the surviving corporation and, in
any other case, the surviving corporation is a Wholly Owned Subsidiary of the
Company and (ii) after giving effect thereto no Default would exist hereunder.
Section 9.6 Limitation on Liens. The Company will not, nor will it permit
any of its Subsidiaries to, create, incur, assume or suffer to exist any Lien
upon any of its Property, whether now owned or hereafter acquired, except:
(a) Liens created pursuant to the Security Documents;
(b) Liens in existence on the date hereof and listed in Part B of
Schedule I hereto (excluding, however, following the making of the initial Loans
hereunder, Liens securing Indebtedness to be repaid with the proceeds of such
Loans, as indicated on said Schedule I);
38
<PAGE>
(c) Liens imposed by any governmental authority for taxes,
assessments or charges not yet due or which are being contested in good faith
and by appropriate proceedings if, unless the amount thereof is not material
with respect to it or its financial condition, adequate reserves with respect
thereto are maintained on the books of the Company or the affected Subsidiaries,
as the case may be, in accordance with GAAP;
(d) carriers', warehousemen's, mechanics', materialmen's,
repairmen's or other like Liens arising in the ordinary course of business which
are not overdue for a period of more than 30 days or which are being contested
in good faith and by appropriate proceedings and Liens securing judgments but
only to the extent for an amount and for a period not resulting in an Event of
Default under Section 10(h) hereof;
(e) pledges or deposits under worker's compensation, unemployment
insurance and other social security legislation;
(f) deposits to secure the performance of bids, trade contracts
(other than for borrowed money), leases, statutory obligations, surety and
appeal bonds, performance bonds and other obligations of a like nature incurred
in the ordinary course of business;
(g) easements, rights-of-way, restrictions and other similar
encumbrances incurred in the ordinary course of business and encumbrances
consisting of zoning restrictions, easements, licenses, restrictions on the use
of Property or minor imperfections in title thereto which, in the aggregate, are
not material in amount, and which do not in any case materially detract from the
value of the Property subject thereto or interfere with the ordinary conduct of
the business of the Company or any of its Subsidiaries;
(h) Liens on Property of any corporation which becomes a Subsidiary
of the Company after the date of this Agreement, provided that such Liens are in
existence at the time such corporation becomes a Subsidiary of the Company and
were not created in anticipation thereof;
(i) Liens upon real and/or tangible personal Property acquired after
the date hereof (by purchase, construction or otherwise) by the Company or any
of its Subsidiaries, each of which Liens either (A) existed on such Property
before the time of its acquisition and was not created in anticipation thereof,
or (B) was created solely for the purpose of securing Indebtedness representing,
or incurred to finance, refinance or refund, the cost (including the cost of
construction) of such Property; provided that no such Lien shall extend to or
cover any Property of the Company or such Subsidiary other than the Property so
acquired and improvements thereon; and provided, further, that the principal
amount of Indebtedness secured by any such Lien shall at no time exceed 80% of
the fair market value (as determined in good faith by a senior financial officer
of the Company) of such Property at the time it was acquired (by purchase,
construction or otherwise);
(j) any Liens specifically approved by the Lender in writing;
39
<PAGE>
(k) Liens upon the Property of any Unrestricted Subsidiaries;
(l) Liens incurred in connection with any Capital Lease Obligations, provided
that the aggregate Indebtedness secured thereby and incurred on and after the
date hereof shall not exceed $10,000,000 in the aggregate at any one time
outstanding;
(m) additional Liens upon real and/or personal Property created
after the date hereof, provided that the aggregate Indebtedness secured thereby
and incurred on and after the date hereof shall not exceed $500,000 in the
aggregate at any one time outstanding; and
(n) any extension, renewal or replacement of the foregoing,
provided, however, that the Liens permitted hereunder shall not be spread to
cover any additional Indebtedness or Property (other than a substitution of like
Property).
Section 9.7 Indebtedness. The Company will not, nor will it permit any of
its Subsidiaries to, create, incur or suffer to exist any Indebtedness except:
(a) Indebtedness to the Lender hereunder;
(b) Indebtedness outstanding on the date hereof and listed in Part A
of Schedule 1 hereto;
(c) Indebtedness of Subsidiaries of the Company to the Company or to
other Wholly Owned Subsidiaries of the Company; provided, however, in the case
of advances by the Company and its Subsidiaries to Subsidiaries of the Company
in the ordinary course of business, advances shall be limited such that the net
amount of such advances by the Company to any one of its Subsidiaries shall not
exceed $1,250,000 in the aggregate at any one time and the aggregate net amount
of such advances by the Company to its Subsidiaries as a whole shall not exceed
$5,000,000 in the aggregate at any one time;
(d) Indebtedness of the Company and its Subsidiaries with respect to
Capital Lease Obligations and obligations pursuant to clause (b) of the
definition of "Indebtedness" in Section 1.1 hereof, up to but not exceeding
$10,000,000 at any one time outstanding;
(e) Indebtedness of any Unrestricted Subsidiary;
(f) Additional Indebtedness of the Company up to but not exceeding
$100,000 at any one time outstanding; and
(g) Subordinated Indebtedness of the Company as provided in Section
9.11.
Section 9.8 Investments. The Company will not, nor will it permit any of
its Subsidiaries to, make or permit to remain outstanding any Investments
except:
40
<PAGE>
(a) Investments outstanding on the date hereof and identified in
Schedule III Part B hereto;
(b) operating deposit accounts with banks;
(c) Permitted Investments;
(d) Investments by the Company and its Subsidiaries in capital stock
of Subsidiaries of the Company to the extent outstanding on the date of the
financial statements of the Company and its Consolidated Subsidiaries referred
to in Section 8.2 hereof;
(e) Investments in an Unrestricted Subsidiary up to but not
exceeding $2,000,000; and
(f) additional Investments up to but not exceeding $10,000,000 in
the aggregate.
Section 9.9 Dividend Payments. The Company will not, nor will it permit
any of its Subsidiaries to, declare or make any Dividend Payment at any time.
Section 9.10 Capital Expenditures. The Company will not permit the
aggregate amount of Capital Expenditures by the Company and its Consolidated
Subsidiaries to exceed $25,000,000 for the term of this Agreement.
Section 9.11 Subordinated Indebtedness. Neither the Company nor any of its
Subsidiaries shall purchase, redeem, retire or otherwise acquire for value, or
set apart any money for a sinking, defeasance or other analogous fund for, the
purchase, redemption, retirement or other acquisition of, or make any voluntary
payment or prepayment of the principal of or interest on, or any other amount
owing in respect of, any Subordinated Indebtedness, except for regularly
scheduled payments of interest in respect thereof required pursuant to the
instruments evidencing such Subordinated Indebtedness not to exceed $3,000,000
in principal amount and which is unsecured.
Section 9.12 Lines of Business. Neither the Company nor any of its
Subsidiaries shall engage to any substantial extent in any line or lines of
business activity other than the business of interactive marketing and
professional services and any ancillary or complementary businesses.
Section 9.13 Transactions with Affiliates. Except as expressly permitted
by this Agreement, the Company will not, nor will it permit any of its
Subsidiaries to, directly or indirectly: (a) make any Investment in an
Affiliate; (b) transfer, sell, lease, assign or otherwise dispose of any
Property to an Affiliate; (c) merge into or consolidate with or purchase or
acquire Property from an Affiliate; or (d) enter into any other transaction
directly or indirectly with or for the benefit of an Affiliate (including,
without limitation, guarantees and assumptions of obligations of an Affiliate);
provided that (x) any Affiliate who is an individual may serve as a director,
officer or employee of the Company or any of its Subsidiaries and receive
reasonable compensation for his or her services in such capacity and (y) the
Company and its Subsidiaries may enter into
41
<PAGE>
transactions (other than extensions of credit by the Company or any of its
Subsidiaries to an Affiliate) providing for the leasing of Property, the
rendering or receipt of services or the purchase or sale of Property in the
ordinary course of business if the monetary or business consideration arising
therefrom would be substantially as advantageous to the Company and its
Subsidiaries as the monetary or business consideration which would obtain in a
comparable transaction with a Person not an Affiliate.
Section 9.14 Use of Proceeds. The Company will use the proceeds of the
Loans hereunder solely to refinance existing Indebtedness and for general
business purposes (in compliance with all applicable legal and regulatory
requirements). Extensions of credit under the Guaranty Commitment shall be used
only in respect of the Real Property Leases
Section 9.15 Certain Obligations Respecting Subsidiaries. The Company
will, and will cause each of its Subsidiaries to, take such action from time to
time as shall be necessary to ensure that the Company and each of its
Subsidiaries at all times owns (subject only to the Lien of the Security
Agreement) at least the same percentage of the issued and outstanding shares of
each class of stock of each of its Subsidiaries as is owned on the date hereof.
Without limiting the generality of the foregoing, none of the Company nor any of
its Subsidiaries shall sell, transfer or otherwise dispose of any shares of
stock in any Subsidiary owned by them, nor permit any Subsidiary to issue any
shares of stock of any class whatsoever to any Person (other than to the Company
or another Obligor). In the event that any such additional shares of stock shall
be issued by any Subsidiary, the respective Obligor agrees forthwith to deliver
to the Lender pursuant to the Security Agreement the certificates evidencing
such shares of stock, accompanied by undated stock powers executed in blank and
shall take such other action as the Lender shall request to perfect the security
interest created therein pursuant to the Security Agreement. The Company will
not permit any of its Subsidiaries to enter into, after the date of this
Agreement, any indenture, agreement, instrument or other arrangement that,
directly or indirectly, prohibits or restrains, or has the effect of prohibiting
or restraining, or imposes materially adverse conditions upon, the incurrence or
payment of Indebtedness, the granting of Liens, the declaration or payment of
dividends, the making of loans, advances or Investments or the sale, assignment,
transfer or other disposition of Property.
Section 9.16 Additional Subsidiary Guarantors. (a) Subject to the
provisions of Section 9.16(b) below, the Company will take such action, and will
cause each of its Subsidiaries to take such action, from time to time as shall
be necessary to ensure that all Subsidiaries of the Company (other than Inactive
Subsidiaries and Unrestricted Subsidiaries) are Subsidiary Guarantors and,
thereby, "Obligors" hereunder. Without limiting the generality of the foregoing,
in the event that the Company or any of its Subsidiaries shall form any new
Subsidiary after the date hereof which the Company or the respective Subsidiary
anticipates will not be an Inactive Subsidiary or an Unrestricted Subsidiary
(or, in the event that any Inactive Subsidiary or an Unrestricted Subsidiary
shall cease to be an Inactive Subsidiary or Unrestricted Subsidiary), the
Company or the respective Subsidiary will cause such new Subsidiary (or such
Inactive Subsidiary and/or Unrestricted Subsidiary which ceases to be an
Inactive Subsidiary and/or Unrestricted Subsidiary) to become a "Subsidiary
Guarantor" (and, thereby, an "Obligor") hereunder pursuant to a written
instrument in form and substance satisfactory to the Lender, and to deliver such
proof of corporate action, incumbency of officers, opinions of counsel and other
documents as is consistent with those
42
<PAGE>
delivered by each Obligor pursuant to Section 7.1 hereof upon the Closing Date
or as the Lender shall have requested.
(b) Notwithstanding any provisions of Section 9.16(a) above to the
contrary, within one month after a Foreign Subsidiary becomes an Obligor
hereunder in accordance with the terms of this Agreement and at or about the
time of the creation or acquisition of any future Foreign Subsidiary, and within
45 days prior to each fiscal year end of the Company (other than December 31,
1999) thereafter, at the request of the Company, Lender agrees to jointly
evaluate with the Company the risk of adverse tax consequences, if any, (after
taking into account any foreign tax credits) resulting from each respective
Foreign Subsidiary becoming an Obligor hereunder based on the documents and
materials described below, and the extent to which such adverse tax
consequences, if any, to the Company would outweigh the benefits to the Lender
of having such Foreign Subsidiary as an Obligor hereunder. If in the Lender's
reasonable judgment, such adverse tax consequences, if any, would outweigh such
benefits, in respect of (i) any existing Foreign Subsidiary being an Obligor or
(ii) any Foreign Subsidiary becoming an Obligor, the Lender will promptly
execute and deliver to the Company such documents and instruments as are
necessary or desirable (a) to release and terminate such Foreign Subsidiary from
being an Obligor hereunder and (b) to waive the requirement that such new
Foreign Subsidiary become an Obligor hereunder. In connection with performing
such evaluation, the Company agrees to provide the Lender, upon the Lender's
request, with supporting documents and materials (including any analyses and
projections prepared by an independent certificate public accountants of
nationally recognized standing (it being understood that the Company shall not
be obligated to have such analyses or projection prepared)) demonstrating such
adverse tax consequences. Notwithstanding anything contained herein to the
contrary, it is understood that in no event shall the Company pledge more than
65% of the capital stock of any of its Foreign Subsidiaries to the Lender
pursuant to the Pledge Agreement.
Section 9.17 Payments in Kind. The Company will take payments in kind for
services rendered to its clients only to the extent that such payments exceed
the allocated cost of the client project.
ARTICLE 10
EVENTS OF DEFAULT
If one or more of the following events (herein called "Events of
Default") shall occur and be continuing:
(a) The Company shall: (i) fail to pay any principal of any Loan
when due (whether at stated maturity or at mandatory or optional prepayment) or
(ii) fail to pay any interest on any Loan, any fee or expense or any other
amount payable by it hereunder or under any other Basic Document when due, and,
in each case, such default shall have continued unremedied for 10 or more days;
or
43
<PAGE>
(b) The Company or any of its Subsidiaries shall default in the
payment when due of any principal of or interest on any of its other
Indebtedness having an aggregate principal amount outstanding of at least
$500,000; or any event specified in any note, agreement, indenture or other
document evidencing or relating to any such Indebtedness shall occur if the
effect of such event is to cause, or (with the giving of any notice or the lapse
of time or both) to permit the holder or holders of such Indebtedness (or a
trustee or agent on behalf of such holder or holders) to cause, such
Indebtedness to become due, or to be prepaid in full (whether by redemption,
purchase, offer to purchase or otherwise), prior to its stated maturity or to
have the interest rate thereon reset to a level so that securities evidencing
such Indebtedness trade at a level specified in relation to the par value
thereof; or
(c) Any representation, warranty or certification made or deemed
made herein or in any other Basic Document (or in any modification or supplement
hereto or thereto) by any Obligor, or any certificate furnished to the Lender
pursuant to the provisions hereof or thereof, shall prove to have been false or
misleading as of the time made or furnished in any material respect; or
(d) The Company shall default in the performance of any of its
obligations under any of Sections 9.1(g), 9.5, 9.6, 9.7, 9.8, 9.9, 9.10, 9.11,
9.12, or 9.13, hereof or any Obligor shall default in the performance of any of
its obligations under the Security Agreement; or any Obligor shall default in
the performance of any of its other obligations in this Agreement or any other
Basic Document and such default shall continue unremedied for a period of thirty
days after notice thereof to the Company by the Lender; or
(e) The Company or any of its Subsidiaries shall admit in writing
its inability to, or be generally unable to, pay its debts as such debts become
due; or
(f) The Company or any of its Subsidiaries shall (i) apply for or
consent to the appointment of, or the taking of possession by, a receiver,
custodian, trustee, examiner or liquidator of itself or of all or a substantial
part of its Property, (ii) make a general assignment for the benefit of its
creditors, (iii) commence a voluntary case under the Bankruptcy Code, (iv) file
a petition seeking to take advantage of any other law relating to bankruptcy,
insolvency, reorganization, liquidation, dissolution, arrangement or winding-up,
or composition or readjustment of debts, (v) fail to controvert in a timely and
appropriate manner, or acquiesce in writing to, any petition filed against it in
an involuntary case under the Bankruptcy Code or (vi) take any corporate action
for the purpose of effecting any of the foregoing; or
(g) A proceeding or case shall be commenced, without the application
or consent of the Company or any of its Subsidiaries, in any court of competent
jurisdiction, seeking (i) its reorganization, liquidation, dissolution,
arrangement or winding-up, or the composition or readjustment of its debts, (ii)
the appointment of a receiver, custodian, trustee, examiner, liquidator or the
like of the Company or such Subsidiary or of all or any substantial part of its
Property, or (iii) similar relief in respect of the Company or such Subsidiary
under any law relating to bankruptcy, insolvency, reorganization, winding-up, or
composition or adjustment of debts, and such proceeding or case shall continue
undismissed, or an order, judgment or decree approving or ordering any of the
foregoing shall be entered and continue unstayed and in effect, for a period of
44
<PAGE>
60 or more days; or an order for relief against the Company or such Subsidiary
shall be entered in an involuntary case under the Bankruptcy Code; or
(h) A final judgment or judgments for the payment of money in excess
of $500,000 in the aggregate (exclusive of judgment amounts fully covered by
insurance where the insurer has admitted liability in respect of such judgment)
or in excess of $500,000 in the aggregate (regardless of insurance coverage)
shall be rendered by a one or more courts, administrative tribunals or other
bodies having jurisdiction against the Company or any of its Subsidiaries and
the same shall not be discharged (or provision shall not be made for such
discharge), or a stay of execution thereof shall not be procured, within 30 days
from the date of entry thereof and the Company or the relevant Subsidiary shall
not, within said period of 30 days, or such longer period during which execution
of the same shall have been stayed, appeal therefrom and cause the execution
thereof to be stayed during such appeal; or
(i) An event or condition specified in Section 9.1(f) hereof shall
occur or exist with respect to any Plan or Multiemployer Plan and, as a result
of such event or condition, together with all other such events or conditions,
the Company or any ERISA Affiliate shall incur or in the opinion of the Lender
shall be reasonably likely to incur a liability to a Plan, a Multiemployer Plan
or PBGC (or any combination of the foregoing) which would constitute, in the
determination of the Lender, a Material Adverse Effect; or
(j) A reasonable basis shall exist for the assertion against the
Company or any of its Subsidiaries of (or there shall have been asserted against
the Company or any of its Subsidiaries) claims or liabilities, whether accrued,
absolute or contingent, based on or arising from the generation, storage,
transport, handling or disposal of Hazardous Materials by the Company or any of
its Subsidiaries or Affiliates, or any predecessor in interest of the Company or
any of its Subsidiaries or Affiliates, or relating to any site or facility
owned, operated or leased by the Company or any of its Subsidiaries or
Affiliates, which claims or liabilities (insofar as they are payable by the
Company or any of its Subsidiaries but after deducting any portion thereof which
is reasonably expected to be paid by other creditworthy Persons jointly and
severally liable therefor), in the judgment of the Lender are reasonably likely
to be determined adversely to the Company or any of its Subsidiaries, and the
amount thereof is, singly or in the aggregate, reasonably likely to have a
Material Adverse Effect; or
(k) Except for expiration in accordance with its terms, any of the
Security Documents shall be terminated or shall cease to be in full force and
effect, for whatever reason;
THEREUPON: (1) in the case of an Event of Default other than one
referred to in clause (f) or (g) of this Section 10 with respect to any Obligor,
(A) the Lender may, by notice to the Company, terminate the Commitments and they
shall thereupon terminate, and (B) the Lender may by notice to the Company
declare the principal amount then outstanding of, and the accrued interest and
expenses on, the Loans, and all other amounts payable by the Obligors hereunder
and under the Notes (including, without limitation, any amounts payable under
Section 5.4 hereof) to be forthwith due and payable, whereupon such amounts
shall be immediately due and payable without presentment, demand, protest or
other formalities of any kind, all of which are hereby expressly
45
<PAGE>
waived by each Obligor; and (2) in the case of the occurrence of an Event of
Default referred to in clause (f) or (g) of this Section 10 with respect to any
Obligor, the Commitments shall automatically be terminated and the principal
amount then outstanding of, and the accrued interest on, the Loans and all other
amounts payable by the Obligors hereunder and under the Notes (including,
without limitation, any amounts payable under Section 5.4 hereof) shall
automatically become immediately due and payable without presentment, demand,
protest or other formalities of any kind, all of which are hereby expressly
waived by each Obligor, and in the Lender may proceed hereunder or under Article
6 with respect to the Guarantees.
ARTICLE 11
MISCELLANEOUS
Section 11.1 Waiver. No failure on the part of the Lender to exercise and
no delay in exercising, and no course of dealing with respect to, any right,
power or privilege under this Agreement or any Note shall operate as a waiver
thereof, nor shall any single or partial exercise of any right, power or
privilege under this Agreement or any Note preclude any other or further
exercise thereof or the exercise of any other right, power or privilege. The
remedies provided herein are cumulative and not exclusive of any remedies
provided by law.
Section 11.2 Notices. All notices, requests and other communications
provided for herein and under the Security Documents (including, without
limitation, any modifications of, or waivers or consents under, this Agreement)
shall be given or made in writing (including, without limitation, by telecopy)
to the intended recipient at the "Address for Notices" specified below its name
on the signature pages hereof (below the name of the Company, in the case of any
Subsidiary Guarantor); or, as to any party, at such other address as shall be
designated by such party in a notice to each other party. Except as otherwise
provided in this Agreement, all such communications shall be deemed to have been
duly given when transmitted by telecopier or personally delivered or, in the
case of a mailed notice, upon receipt, in each case given or addressed as
aforesaid.
Section 11.3 Expenses, Etc. The Company agrees to pay or reimburse the
Lender for paying: (a) all reasonable out-of-pocket costs and expenses of the
Lender (including, without limitation, the reasonable fees and expenses of
counsel to the Lender, including, without limitation, in-house counsel and other
related professionals and staff), in connection with (i) the negotiation,
preparation, execution and delivery of this Agreement and the other Basic
Documents and the extension of credit hereunder and (ii) any modification,
supplement or waiver of any of the terms of this Agreement or any of the other
Basic Documents; (b) all reasonable costs and expenses of the Lender (including,
without limitation, reasonable counsels' fees) in connection with (i) any
Default and any enforcement or collection proceedings resulting therefrom or in
connection with the negotiation of any restructuring or "work-out" (whether or
note consummated), or the obligations of the Company hereunder and (ii) the
enforcement of this Section 11.3; and (c) all transfer, stamp, documentary or
other similar taxes, assessments or charges levied by any governmental or
revenue authority in respect of this Agreement or any of the other Basic
Documents or any other document referred to herein or therein and all costs,
expenses, taxes, assessments and other charges incurred
46
<PAGE>
in connection with any filing, registration, recording or perfection of any
security interest contemplated by any Basic Document or any other document
referred to therein.
The Company hereby agrees (i) to promptly indemnify the Lender and
its directors, officers, employees, attorneys and agents from, and hold each of
them harmless against, any and all losses, liabilities, claims, damages or
expenses incurred by any of them arising out of or by reason of any
investigation or litigation or other proceedings (including any threatened
investigation or litigation or other proceedings) relating to the extensions of
credit hereunder or any actual or proposed use by the Company or any of its
Subsidiaries of the proceeds of any of the extensions of credit hereunder and
the Basic Documents, including, without limitation, the reasonable fees and
disbursements of counsel incurred in connection with any such investigation or
litigation or other proceedings (but excluding any such losses, liabilities,
claims, damages or expenses incurred by reason of the gross negligence or
willful misconduct of the Person to be indemnified) and (ii) not to assert any
claim against the Lender, any of its affiliates, or any of its respective
directors, officers, employees, attorneys and agents, on any theory of
liability, for special, indirect, consequential or punitive damages arising out
of or otherwise relating to any of the transactions contemplated herein or in
any other Basic Document. Without limiting the generality of the foregoing, the
Company will promptly indemnify the Lender from, and hold the Lender harmless
against, any losses, liabilities, claims, damages, costs or expenses described
in the preceding sentence (but excluding, as provided in the preceding sentence,
any loss, liability, claim, damage or expense incurred by reason of the gross
negligence or willful misconduct of the Person to be indemnified) arising under
any Environmental Law as a result of the past, present or future operations of
the Company or any of its Subsidiaries (or any predecessor in interest to the
Company or any of its Subsidiaries), or the past, present or future condition of
any site or facility owned, operated or leased by the Company or any of its
Subsidiaries (or any such predecessor in interest), or any Release or threatened
Release of any Hazardous Materials from any such site or facility, including any
such Release or threatened Release which shall occur during any period when the
Lender shall be in possession of any such site or facility following the
exercise by the Lender of any of its rights and remedies hereunder or under any
of the Security Documents.
Section 11.4 Amendments, Etc. Except as otherwise expressly provided in
this Agreement, any provision of this Agreement may be modified or supplemented
only by an instrument in writing signed by the Company and the Lender and any
provision of this Agreement may be waived by the Lender.
Section 11.5 Successors and Assigns. This Agreement shall be binding upon
and inure to the benefit of the parties hereto and their respective successors
and permitted assigns.
Section 11.6 Assignments and Participations.
(a) No Obligor may assign any of its rights or obligations hereunder
or under the Notes without the prior consent of all of the Lender.
(b) The Lender may, without the consent of the Company, assign any
of its Loans, its Notes, and its Commitments; provided, however, the Lender
shall not assign any of such Loans,
47
<PAGE>
Notes and/or Commitments to an assignee that is in a business which is
competitive with the business conducted by the Company. Upon execution and
delivery by the assignee to the Company and the Lender of an instrument in
writing pursuant to which such assignee agrees to become the Lender hereunder
having the Commitment(s) and Loans, specified in such instrument, the assignee
shall have, to the extent of such assignment, the obligations, rights and
benefits of the Lender hereunder holding the Commitment(s) and Loans (or
portions thereof) assigned to it and the Lender shall, to the extent of such
assignment, be released from the Commitment(s) (or portion(s) thereof) so
assigned.
(c) The Lender may furnish any information concerning the Company or
any of its Subsidiaries in the possession of the Lender from time to time to
assignees (including prospective assignees).
Section 11.7 Survival. The obligations of the Company under Sections 5.1,
5.4, 5.5 and 11.3 hereof shall survive the repayment of the Loans and the
termination of the Commitments. In addition, each representation and warranty
made, or deemed to be made by a notice of any extension of credit, herein or
pursuant hereto shall survive the making of such representation and warranty,
and the Lender shall not be deemed to have waived, by reason of making any
extension of credit hereunder, any Default which may arise by reason of such
representation or warranty proving to have been false or misleading,
notwithstanding that the Lender may have had notice or knowledge or reason to
believe that such representation or warranty was false or misleading at the time
such extension of credit was made.
Section 11.8 Captions. The table of contents and captions and section
headings appearing herein are included solely for convenience of reference and
are not intended to affect the interpretation of any provision of this
Agreement.
Section 11.9 Counterparts. This Agreement may be executed in any number of
counterparts, all of which taken together shall constitute one and the same
instrument and any of the parties hereto may execute this Agreement by signing
any such counterpart.
Section 11.10 Governing Law; Submission to Jurisdiction. This Agreement
and the Notes shall be governed by, and construed in accordance with, the law of
the State of New York. Each Obligor hereby submits to the nonexclusive
jurisdiction of the United States District Court for the Southern District of
New York and of any New York state court sitting in New York City for the
purposes of all legal proceedings arising out of or relating to this Agreement
or the transactions contemplated hereby. Each Obligor irrevocably waives, to the
fullest extent permitted by applicable law, any objection which it may now or
hereafter have to the laying of the venue of any such proceeding brought in such
a court and any claim that any such proceeding brought in such a court has been
brought in an inconvenient forum.
Section 11.11 Waiver of Jury Trial. EACH OF THE OBLIGORS AND THE LENDER
HEREBY IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW,
ANY AND ALL RIGHT TO TRIAL BY JURY IN
48
<PAGE>
ANY LEGAL PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE
TRANSACTIONS CONTEMPLATED HEREBY.
Section 11.12 Representations and Warranties of Lender Lender represents
and warrants to the Company that Lender: (i) will acquire each Note for its own
account for investment and (subject to the disposition of its property being at
all times within its control) not with a view to any resale or other
distribution of such Note in a transaction constituting a public offering or
otherwise requiring registration under the Securities Act of 1933, as amended
(the "Securities Act") or in a transaction that would result in noncompliance
with applicable state securities laws; (ii) has such knowledge and experience in
financial and business matters as to be capable of evaluating the merits and the
risks of its acquisition of any Note and credit extensions to the Company, (iii)
is an accredited investor as such term is defined in Rule 501 of Regulation D
under the Securities Act, and (iv) understands that such Note has not been, and
will not be, registered under the Securities Act or any State securities laws.
49
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed and delivered as of the day and year first above written.
AGENCY.COM LTD.
By: /s/ Janet Ambrosi Wertman
---------------------------------
Title: E.V.P, Secretary
Address for Notices:
665 Broadway
New York, New York 10012
Attention: Chief Financial Officer
Telecopier No.: (212) 358-8255
Telephone No.: (212) 358-8220
OMNICOM FINANCE INC.
By: /s/ Dennis E. Hewitt
---------------------------------
Title: Treasurer
Address for Notices:
437 Madison Avenue
New York, New York 10022
Attention: Chief Financial Officer
Telecopier No.: (212) 415-3600
Telephone No.: (212) 415-3530
50
<PAGE>
SUBSIDIARY GUARANTORS
AGENCY.COM LTD.
By: /s/ Janet Ambrosi Wertman
---------------------------------
Title: Executive Vice President,
Secretary
AGENCY.COM: AMSTERDAM B.V.
By: /s/ T.E.R. Slott
---------------------------------
Title: President
AGENCY INTERACTIVE MANAGEMENT INC.
By: /s/ Janet Ambrosi Wertman
---------------------------------
Title: Secretary
ITI ACQUISITION INC.
(to be known as Interactive Traffic
Inc.)
By: /s/ Janet Ambrosi Wertman
--------------------------------
Title: Secretary
51
<PAGE>
SCHEDULE I
Material Agreements and Liens
Part A - Material Agreements
None.
Part B - Liens
Lien held by Omnicom Finance Inc. filed with Secretary of State of New York,
File No. 182834
Lien held by Omnicom Finance Inc. filed with City Register of New York County
52
<PAGE>
SCHEDULE II
Hazardous Materials
None.
<PAGE>
SCHEDULE III
Subsidiaries and Investments
Part A - Subsidiaries
Agency.Com Ltd., a company incorporated in England and Wales under the
Companies Act 1985 as a limited company. Wholly-owned by the Company.
Agency.Com, Amsterdam B.V., a company incorporated under the laws of the
Kingdom of the Netherlands as a limited liability company (formerly
Twinspark Interactive People B.V.). Wholly-owned by the Company
Agency Interactive Management Inc., a corporation organized under the laws
of the Commonwealth of Massachusetts. Wholly-owned by the Company.
ITI Acquisition Inc. (to be known as Interactive Traffic Inc.), a
corporation organized under the laws of the State of Delaware.
Wholly-owned by the Company.
Part B - Investments
The Edge Consultants Pte. Ltd., a corporation organized under the laws of
Singapore. The Company owns a 30% interest.
Pictoris Interactive S.A., a corporation organized under the laws of France. The
Company owns a 5% interest; it has the right to acquire the remaining 95% of the
share capital.
<PAGE>
EXHIBIT A-1
[Form of Revolving Credit Note]
AMENDED AND RESTATED PROMISSORY NOTE
$_______________ [__________, ____]
New York, New York
FOR VALUE RECEIVED, AGENCY.COM LTD, a Delaware corporation (the
"Company"), hereby promises to pay to OMNICOM FINANCE INC. (the "Lender"), at
the principal office of the Lender, the principal sum of _______________ Dollars
(or such lesser amount as shall equal the aggregate unpaid principal amount of
the Revolving Credit Loans made by the Lender to the Company under the Credit
Agreement as determined on the books and records of the Lender which
determination shall be final and binding), in lawful money of the United States
of America and in immediately available funds, on the dates and in the principal
amounts provided in the Credit Agreement, and to pay interest on the unpaid
principal amount of each such Revolving Credit Loan, at such office, in like
money and funds, for the period commencing on the date of such Revolving Credit
Loan until such Revolving Credit Loan shall be paid in full, at the rates per
annum and on the dates provided in the Credit Agreement.
The date, amount, interest rate and duration of Interest Period (if
applicable) of each Revolving Credit Loan made by the Lender to the Company, and
each payment made on account of the principal thereof, shall be recorded by the
Lender on its books and, prior to any transfer of this Note, endorsed by the
Lender on the schedule attached hereto or any continuation thereof, provided
that the failure of the Lender to make any such recordation or endorsement shall
not affect the obligations of the Company to make a payment when due of any
amount owing under the Credit Agreement or hereunder in respect of the Revolving
Credit Loans made by the Lender.
This Note is one of the Revolving Credit Notes referred to in the
Credit Agreement dated as of [__________], 1999 (as modified and supplemented
and in effect from time to time, the "Credit Agreement") between the Company,
the Subsidiaries of the Company identified on the signature pages thereof under
the caption "SUBSIDIARY GUARANTORS", and the Lender, and evidences Revolving
Credit Loans made by the Lender thereunder. Terms used but not defined in this
Note have the respective meanings assigned to them in the Credit Agreement.
The Credit Agreement provides for the acceleration of the maturity
of this Note upon the occurrence of certain events and for prepayments of Loans
upon the terms and conditions specified therein.
<PAGE>
Except as permitted by Section 11.6(b) of the Credit Agreement, this
Note may not be assigned by the Lender to any other Person.
The Company hereby waives presentment, demand, protest or notice of
any kind in connection with this Note.
This Note shall be governed by, and construed in accordance with,
the law of the State of New York.
THIS AMENDED AND RESTATED PROMISSORY NOTE AMENDS, RESTATES AND
SUPERSEDES IN ALL RESPECTS AND IS ISSUED IN PLACE OF THE PROMISSORY NOTE DATED
AS OF THE DATE THEREOF BY AGENCY.COM LTD., AS MAKER, PAYABLE TO OMNICOM FINANCE
INC., AS PAYEE, IN THE OUTSTANDING PRINCIPAL AMOUNT OF $____________.
THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED, OR ANY OTHER APPLICABLE SECURITIES LAWS. IT MAY NOT BE SOLD OR
OTHERWISE TRANSFERRED UNDER CIRCUMSTANCES THAT WOULD RESULT IN A VIOLATION OF
THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT OF 1933 OR SUCH OTHER LAWS.
AGENCY.COM LTD.
By: ___________________________
Title:
<PAGE>
SCHEDULE OF REVOLVING CREDIT LOANS
This Note evidences Revolving Credit Loans made under the within-described
Credit Agreement to the Company, on the dates, in the principal amounts bearing
interest at the rates and having Interest Periods (if applicable) of the
durations set forth below, subject to the payments and prepayments of principal
set forth below:
Duration
Principal of Amount Unpaid
Amount of Interest Interest Paid or Principal Notation
Date Made Loan Rate Period Prepaid Amount Made By
- --------- ---- ---- ------ ------- ------ -------
<PAGE>
EXHIBIT A-2
[Form of Term Loan Note]
AMENDED AND RESTATED PROMISSORY NOTE
$_______________ [__________, ____]
New York, New York
FOR VALUE RECEIVED, AGENCY.COM LTD, a Delaware corporation (the
"Company"), hereby promises to pay to OMNICOM FINANCE INC. (the "Lender"), at
the principal office of the Lender, the principal sum of _______________
Dollars, in lawful money of the United States of America and in immediately
available funds, on the dates and in the principal amounts provided in the
Credit Agreement, and to pay interest on the unpaid principal amount of such
Term Loan, at such office, in like money and funds, for the period commencing on
the date of such Term Loan until such Term Loan shall be paid in full, at the
rates per annum and on the dates provided in the Credit Agreement.
The date, amount, interest rate and duration of Interest Period (if
applicable) of the Term Loan made by the Lender to the Company, and each payment
made on account of the principal thereof, shall be recorded by the Lender on its
books and, prior to any transfer of this Note, endorsed by the Lender on the
schedule attached hereto or any continuation thereof, provided that the failure
of the Lender to make any such recordation or endorsement shall not affect the
obligations of the Company to make a payment when due of any amount owing under
the Credit Agreement or hereunder in respect of the Term Loan made by the
Lender.
This Note is the Term Loan Note referred to in the Credit Agreement
dated as of [__________], 1999 (as modified and supplemented and in effect from
time to time, the "Credit Agreement") between the Company, the Subsidiaries of
the Company identified on the signature pages thereof under the caption
"SUBSIDIARY GUARANTORS", and the Lender, and evidences a Term Loan made by the
Lender thereunder. Terms used but not defined in this Note have the respective
meanings assigned to them in the Credit Agreement.
The Credit Agreement provides for the acceleration of the maturity
of this Note upon the occurrence of certain events and for prepayments of the
Term Loan upon the terms and conditions specified therein.
Except as permitted by Section 11.6(b) of the Credit Agreement, this
Note may not be assigned by the Lender to any other Person.
The Company hereby waives presentment, demand, protest or notice of
any kind in connection with this Note.
<PAGE>
This Note shall be governed by, and construed in accordance with,
the law of the State of New York.
THIS AMENDED AND RESTATED PROMISSORY NOTE AMENDS, RESTATES AND
SUPERSEDES IN ALL RESPECTS AND IS ISSUED IN PLACE OF CERTAIN PROMISSORY NOTES
EACH DATED AS OF THE DATE THEREOF BY AGENCY.COM LTD. AND INTERACTIVE SOLUTIONS
INC. (AS PREDECESSOR IN INTEREST TO AGENCY.COM LTD.), AS THE CASE MAY BE, AS
MAKER, PAYABLE TO OMNICOM FINANCE INC., AS PAYEE, IN THE AGGREGATE OUTSTANDING
PRINCIPAL AMOUNT OF $_____________.
THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED, OR ANY OTHER APPLICABLE SECURITIES LAWS. IT MAY NOT BE SOLD OR
OTHERWISE TRANSFERRED UNDER CIRCUMSTANCES THAT WOULD RESULT IN A VIOLATION OF
THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT OF 1933 OR SUCH OTHER LAWS.
AGENCY.COM LTD.
By: __________________________
Title:
<PAGE>
SCHEDULE OF TERM LOAN
This Note evidences the Term Loan made under the within-described Credit
Agreement to the Company, on the dates, in the principal amount, bearing
interest at the rate and having Interest Period (if applicable) of the duration
set forth below, subject to the payments and prepayments of principal set forth
below:
Duration
Principal of Amount Unpaid
Amount of Interest Interest Paid or Principal Notation
Date Made Loan Rate Period Prepaid Amount Made By
- --------- ---- ---- ------ ------- ------ -------
<PAGE>
EXECUTION COPY
================================================================================
SECURITY AGREEMENT
among
AGENCY.COM LTD.,
CERTAIN SUBSIDIARIES
OF AGENCY.COM LTD.
and
OMNICOM FINANCE INC.,
as Lender
Dated as of November 4, 1999
================================================================================
<PAGE>
TABLE OF CONTENTS
ARTICLE I
SECURITY INTERESTS
Section 1.1 Grant of Security Interests.......................................1
Section 1.2 Power of Attorney.................................................2
ARTICLE II
GENERAL REPRESENTATIONS, WARRANTIES AND COVENANTS
Section 2.1 Necessary Filings.................................................2
Section 2.2 No Liens..........................................................3
Section 2.3 Other Financing Statements........................................3
Section 2.4 Chief Executive Office: Records...................................3
Section 2.5 Location of Inventory and Equipment...............................4
Section 2.6 Recourse..........................................................4
Section 2.7 Trade Names: Change of Name.......................................4
ARTICLE III
SPECIAL PROVISIONS CONCERNING RECEIVABLES;
CONTRACT RIGHTS; INSTRUMENTS
Section 3.1 Additional Representations and Warranties.........................5
Section 3.2. Maintenance of Records...........................................5
Section 3.3 Direction to Account Debtors: Contracting Parties: Etc............5
Section 3.4 Modification of Terms: Etc........................................6
Section 3.5 Collection........................................................6
Section 3.6 Instruments.......................................................6
Section 3.7 Further Actions...................................................6
ARTICLE IV
SPECIAL PROVISIONS CONCERNING TRADEMARKS
Section 4.1 Additional Representations and Warranties.........................7
Section 4.2 Licenses and Assignments..........................................7
Section 4.3 Infringements.....................................................7
Section 4.4 Preservation of Marks.............................................8
Section 4.5 Maintenance of Registration.......................................8
Section 4.6 Future Registered Marks...........................................8
Section 4.7 Existing Domain Name Registration and Future Domain Name
Registration......................................................8
Section 4.8 Remedies..........................................................8
i
<PAGE>
ARTICLE V
SPECIAL PROVISIONS CONCERNING PATENTS,
COPYRIGHTS AND TRADE SECRETS
Section 5.1 Additional Representations and Warranties.........................9
Section 5.2 Licenses and Assignments.........................................10
Section 5.3 Infringements....................................................10
Section 5.4 Maintenance of Patents...........................................10
Section 5.5 Prosecution of Patent Application................................10
Section 5.6 Other Patents and Copyrights.....................................10
Section 5.7 Remedies.........................................................11
ARTICLE VI
PROVISIONS CONCERNING ALL COLLATERAL
Section 6.1 Protection of Lender's Security..................................11
Section 6.2 Warehouse Receipts Non-Negotiable................................12
Section 6.3 Further Actions..................................................12
Section 6.4 Financing Statements.............................................12
ARTICLE VII
REMEDIES UPON OCCURRENCE OF EVENT OF DEFAULT
Section 7.1 Remedies: Obtaining the Collateral Upon Default..................12
Section 7.2 Remedies: Disposition of the Collateral..........................13
Section 7.3 Waiver of Claims.................................................14
Section 7.4 Application of Proceeds..........................................15
Section 7.5 Remedies Cumulative..............................................15
Section 7.6 Discontinuance of Proceedings....................................16
ARTICLE VIII
INDEMNITY
Section 8.1 Indemnity........................................................16
Section 8.2 Indemnity Obligations Secured by Collateral: Survival............17
ARTICLE IX
DEFINITIONS
ARTICLE X
MISCELLANEOUS
Section 10.1 Notices.........................................................21
Section 10.2 Waiver: Amendment...............................................21
ii
<PAGE>
Section 10.3 Obligations Absolute............................................21
Section 10.4 Successors and Assigns..........................................22
Section 10.5 Headings Descriptive............................................22
Section 10.6 Governing Law...................................................22
Section 10.7 Assignor's Duties...............................................22
Section 10.8. Termination; Release...........................................22
Section 10.9 Counterparts....................................................23
Section 10.10 The Lender.....................................................23
iii
<PAGE>
EXECUTION COPY
SECURITY AGREEMENT
SECURITY AGREEMENT, dated as of November __, 1999, among each
of the undersigned (each, an "Assignor" and, together the "Assignors") and
Omnicom Finance Inc. (the "Lender"). Except as otherwise defined herein, terms
used herein and defined in the Credit Agreement (as defined below) shall be used
herein as therein defined.
W I T N E S S E T H:
WHEREAS, Agency.Com Ltd. (the "Company") and Lender have
entered into a Credit Agreement, dated the date hereof (as amended, modified or
supplemented from time to time, the "Credit Agreement"), providing for the
making of Loans to the Company as contemplated therein;
WHEREAS, pursuant to the Credit Agreement, each Assignor
(other than the Company) has jointly and severally guaranteed to the Lender the
payment when due of all debts, obligations and liabilities of the Company under
or with respect to the Loans, Notes and other Basic Documents;
WHEREAS, it is a condition precedent to the making of Loans to
the Company under the Credit Agreement that the Assignors shall have executed
and delivered to the Lender this Agreement; and
WHEREAS, each Assignor desires to execute this Agreement to
satisfy the conditions described in the preceding paragraph;
NOW, THEREFORE, in consideration of the benefits accruing to
each Assignor, the receipt and sufficiency of which are hereby acknowledged,
each Assignor hereby makes the following representations and warranties to the
Lender and hereby covenants and agrees with the Lender as follows:
ARTICLE I
SECURITY INTERESTS
Section 1.1 GRANT OF SECURITY INTERESTS. (a) As security for the
prompt and complete payment and performance when due of all of its Obligations,
each Assignor does hereby assign and transfer unto the Lender, and does hereby
pledge and grant to the Lender, a continuing security interest of first priority
in, and lien on, all of the right, title and interest of such Assignor in, to
and under all of the following, whether now existing or hereafter from
<PAGE>
time to time acquired: (i) each and every Receivable, (ii) all Contracts,
together with all Contract Rights arising thereunder (other than Contracts which
by their terms cannot be pledged), (iii) all Inventory, (iv) all Equipment, (v)
all Marks, together with the registrations and right to all renewals thereof,
and the goodwill of the business of such Assignor symbolized by the Marks, (vi)
all Patents and Copyrights, (vii) all computer programs of such Assignor and all
intellectual property rights therein and all other proprietary information of
such Assignor, including, but not limited to, trade secrets, (viii) all other
Goods, General Intangibles, Chattel Paper, Documents and Instruments, (ix) the
Cash Collateral Account and all monies, securities and instruments deposited or
required to be deposited in such Cash Collateral Account and (x) all Proceeds
and products of any and all of the foregoing (all of the above, collectively,
the "Collateral"). Notwithstanding the foregoing provisions of Section 1.1, to
the extent that any General Intangibles, not including any Receivables, included
in the term "Collateral" are not assignable or capable of being encumbered as a
matter of law or under the terms of the license, lease or other agreement
applicable thereto without the consent of the licensor or lessor thereof or
other applicable party thereto and such consent has not been obtained, such
General Intangibles shall not be included in the "Collateral"; provided,
however, upon obtaining any of such consents, such General Intangibles shall be
included in the "Collateral".
(b) The security interest of the Lender under this Agreement
extends to all Collateral of the kind which is the subject of this Agreement
which any Assignor may acquire at any time during the continuation of this
Agreement.
Section 1.2 POWER OF ATTORNEY. Each Assignor hereby constitutes and
appoints the Lender its true and lawful attorney, irrevocably, with full power
after the occurrence of and during the continuance of an Event of Default (in
the name of such Assignor or otherwise) to act, require, demand, receive,
compound and give acquittance for any and all monies and claims for monies due
or to become due to such Assignor under or arising out of the Collateral, to
endorse any checks or other instruments or orders in connection therewith and to
file any claims or take any action or institute any proceedings which the Lender
may deem to be reasonably necessary or advisable to protect its interests, which
appointment as attorney is coupled with an interest.
ARTICLE II
GENERAL REPRESENTATIONS, WARRANTIES AND COVENANTS
Each Assignor represents, warrants and covenants, which
representations, warranties and covenants shall survive execution and delivery
of this Agreement, as follows:
Section 2.1 NECESSARY FILINGS. All filings, registrations and
recordings necessary or appropriate to create, preserve and perfect the security
interest granted by such Assignor to the Lender hereby in respect of the
Collateral have been accomplished (or will have been accomplished on the
Business Day immediately following the date upon which the first Loan
2
<PAGE>
is incurred under the Credit Agreement) and the security interest granted to the
Lender pursuant to this Agreement in and to the Collateral creates a perfected
security interest therein prior to the rights of all other Persons therein and
subject to no other Liens (other than Liens permitted pursuant to Section 9.6 of
the Credit Agreement) and is entitled to all the rights, priorities and benefits
afforded by the Uniform Commercial Code or other relevant law as enacted in any
relevant jurisdiction to perfected security interests, in each case to the
extent that the Collateral consists of the type of property in which a security
interest may be perfected by filing a financing statement under the Uniform
Commercial Code as enacted in any relevant jurisdiction or in the United States
Patent and Trademark Office or United States Copyright Office.
Section 2.2 NO LIENS. Such Assignor is, and as to Collateral acquired
by it from time to time after the date hereof such Assignor will be, the owner
of, or has rights in, all Collateral free from any Lien, security interest,
encumbrance or other right, title or interest of any Person (other than Liens
permitted pursuant to Section 9.6 of the Credit Agreement), and such Assignor
shall defend the Collateral to the extent of its rights therein against all
claims and demands of all Persons at any time claiming the same or any interest
therein adverse to the Lender.
Section 2.3 OTHER FINANCING STATEMENTS. As of the date hereof, there is
no financing statement (or similar statement or instrument of registration under
the law of any jurisdiction) covering or purporting to cover any interest of any
kind in the Collateral (other than financing statements filed in respect of
Liens permitted pursuant to Section 9.06 of the Credit Agreement), and so long
as the Commitment has not been terminated or any Note remains unpaid or any of
the Obligations remain unpaid, such Assignor will not execute or authorize to be
filed in any public office any financing statement (or similar statement or
instrument of registration under the law of any jurisdiction) or statements
relating to the Collateral, except (a) financing statements filed or to be filed
in respect of and covering the security interests granted hereby by such
Assignor or as permitted by the Credit Agreement and (b) financing statements
with respect to Liens permitted pursuant to Section 9.6 of the Credit Agreement.
Section 2.4 CHIEF EXECUTIVE OFFICE; RECORDS. The chief executive office
of such Assignor is located at the address or addresses indicated on Annex A
hereto for such Assignor. Such Assignor will not move its chief executive office
except to such new location as such Assignor may establish in accordance with
the last sentence of this Section 2.4. The originals of all documents evidencing
all Receivables and Contract Rights of such Assignor and the only original books
of account and records of such Assignor relating thereto are, and will continue
to be, kept at such chief executive office, at one or more of the locations set
forth on Annex A hereto or at such new locations as such Assignor may establish
in accordance with the last sentence of this Section 2.4. All Receivables and
Contract Rights of such Assignor are, and will continue to be, maintained at,
and controlled and directed (including, without limitation, for general
accounting purposes) from, the office locations described above or such new
location established in accordance with the last sentence of this Section 2.4.
No Assignor shall establish new locations for such offices until it shall have
3
<PAGE>
given to the Lender notice of its intention to do so unless (i) such Assignor
shall give to the Lender written notice of any such relocation of its chief
executive office within 10 days following such relocation, clearly describing
such new location and providing such other information in connection therewith
as the Lender may reasonably request and (ii) with respect to such new location,
it shall take all action, reasonably satisfactory to the Lender, to maintain the
security interest of the Lender in the Collateral intended to be granted hereby
at all times fully perfected and in full force and effect.
Section 2.5 LOCATION OF INVENTORY AND EQUIPMENT. All Inventory and
Equipment held on the date hereof by each Assignor is located at one of the
locations shown on Annex B hereto for such Assignor (other than various spare
parts held for maintenance or repair of Equipment). Each Assignor agrees that
all Inventory and Equipment now held or subsequently acquired by it shall be
kept at (or shall be in transport to) any one of the locations shown on Annex B
hereto, or such new location as such Assignor may establish in accordance with
the last sentence of this Section 2.5 (other than (i) immaterial portions of
Inventory (x) sold on consignment or held on display for demonstration purposes
or (y) may be transferred to another location in connection with a sale of such
Inventory in the ordinary course of business, so long as such sale occurs within
30 days from the date of such transfer, or (ii) various spare parts held for
maintenance or repair of Equipment). Any Assignor may establish a new location
for Inventory and Equipment only if (i) it shall have given to the Lender
written notice within 10 days following any such relocation clearly describing
such new location and providing such other information in connection therewith
as the Lender may request and (ii) with respect to such new location, it shall
have taken all action reasonably satisfactory to the Lender to maintain the
security interest of the Lender in the Collateral intended to be granted hereby
at all times fully perfected and in full force and effect.
Section 2.6 RECOURSE. This Agreement is made with full recourse to each
Assignor and pursuant to and upon all the warranties, representations, covenants
and agreements on the part of such Assignor contained herein, in the Credit
Agreement and other Basic Documents, and otherwise in writing in connection
herewith or therewith.
Section 2.7 TRADE NAMES; CHANGE OF NAME. No Assignor has or operates in
any jurisdiction under, or in the preceding 12 months has had or has operated in
any jurisdiction under, any trade names, fictitious names or other names except
its legal name and such other trade or fictitious names as are listed on Annex C
hereto. No Assignor shall change its legal name or assume or operate in any
jurisdiction under any trade, fictitious or other name except those names listed
on Annex C hereto and new names established in accordance with the last sentence
of this Section 2.7. No Assignor shall assume or operate in any jurisdiction
under any new trade, fictitious or other name unless (i) it shall have given to
the Lender written notice within 10 days following any assumption of, or
operation under, such new name clearly describing such new name and the
jurisdictions in which such new name shall be used and providing such other
information in connection therewith as the Lender may reasonably request and
(ii) with respect to such new name, it shall have taken all action
4
<PAGE>
requested by the Lender, to maintain the security interest of the Lender in the
Collateral intended to be granted hereby at all times fully perfected and in
full force and effect.
ARTICLE III
SPECIAL PROVISIONS CONCERNING RECEIVABLES;
CONTRACT RIGHTS; INSTRUMENTS
Section 3.1 ADDITIONAL REPRESENTATIONS AND WARRANTIES. As of the time
when each of its Receivables arises, each Assignor shall be deemed to have
represented and warranted that such Receivable, and all records, papers and
documents relating thereto (if any) are what they purport to be, and that all
papers and documents (if any) relating thereto will be the only original
writings evidencing and embodying such obligation of the account debtor named
therein (other than copies created for general accounting purposes).
Section 3.2 MAINTENANCE OF RECORDS. Each Assignor will keep and
maintain at its own cost and expense accurate records of its Receivables and
Contracts, records of all payments received, all credits granted thereon, all
merchandise, returned and all other dealings therewith, and such Assignor will
make the same available on such Assignor's premises to the Lender for
inspection, at such Assignor's own cost and expense, at any and all reasonable
times upon prior notice to an authorized officer of such Assignor. Upon the
occurrence and during the continuance of an Event of Default and at the request
of the Lender, such Assignor shall, at its own cost and expense, deliver all
tangible evidence of its Receivables and Contract Rights (including, without
limitation, all documents evidencing the Receivables and all Contracts) and such
books and records to the Lender or to its representatives (copies of which
evidence and books and records may be retained by such Assignor). Upon the
occurrence and during the continuance of an Event of Default and if the Lender
so directs, such Assignor shall legend, in form and manner reasonably
satisfactory to the Lender, the Receivables and the Contracts, as well as books,
records and documents (if any) of such Assignor evidencing or pertaining to such
Receivables and Contracts with an appropriate reference to the fact that such
Receivables and Contracts have been assigned to the Lender and that the Lender
has a security interest therein.
Section 3.3 DIRECTION TO ACCOUNT DEBTORS; CONTRACTING PARTIES; ETC.
Upon the occurrence of an Event of Default, and if the Lender so directs any
Assignor, such Assignor agrees (x) to cause all payments on account of the
Receivables and Contracts to be made directly to the Cash Collateral Account,
(y) that the Lender may, at its option, directly notify the obligors with
respect to any Receivables and/or under any Contracts to make payments with
respect thereto as provided in the preceding clause (x) and (z) that the Lender
may enforce collection of any such Receivables and Contracts and may adjust,
settle or compromise the amount of payment thereof, in the same manner and to
the same extent as such Assignor. Without notice to or assent by any Assignor,
the Lender may apply any or all amounts then in, or thereafter deposited in, the
Cash Collateral Account which application shall be effected in the manner
provided in Section 7.4 of this Agreement. The costs and
5
<PAGE>
expenses (including reasonable attorneys' fees) of collection, whether incurred
by the Assignor or the Lender, shall be borne by the relevant Assignor. The
Lender shall deliver a copy of each notice referred to in the preceding clause
(y) to the relevant Assignor; PROVIDED, that the failure by the Lender to so
notify such Assignor shall not affect the effectiveness of such notice or the
other rights of the Lender created by this Section 3.3.
Section 3.4 MODIFICATION OF TERMS: ETC. No Assignor shall rescind or
cancel any indebtedness evidenced by any Receivable or under any Contract, or
modify in any material respect any term thereof or make any material adjustment
with respect thereto, or extend or renew the same, or compromise or settle any
material dispute, claim, suit or legal proceeding relating thereto, or sell any
Receivable or Contract, or interest therein, without the prior written consent
of the Lender, except as permitted by Section 3.5 hereof or in the Credit
Agreement. Each Assignor will duly fulfill all obligations on its part to be
fulfilled under or in connection with the Receivables and Contracts and will do
nothing to impair the rights of the Lender in the Receivables or Contracts.
Section 3.5 COLLECTION. Each Assignor shall endeavor in accordance with
reasonable business practices to cause to be collected from the account debtor
named in each of its Receivables or obligor under any Contract, as and when due
(including, without limitation, amounts which are delinquent, such amounts to be
collected in accordance with generally accepted lawful collection procedures)
any and all amounts owing under or on account of such Receivable or Contract,
and apply forthwith upon receipt thereof all such amounts as are so collected to
the outstanding balance of such Receivable or under such Contract, except that,
prior to the occurrence of an Event of Default, any Assignor may allow in the
ordinary course of business as adjustments to amounts owing under its
Receivables and Contracts (i) an extension or renewal of the time or times of
payment, or settlement for less than the total unpaid balance, which such
Assignor finds appropriate in accordance with reasonable business judgment and
(ii) a refund or credit due as a result of returned or damaged merchandise or
improperly performed services or for other reasons which such Assignor finds
appropriate in accordance with reasonable business judgment. The reasonable
costs and expenses (including, without limitation, attorneys' fees) of
collection, whether incurred by an Assignor or the Lender, shall be borne by the
relevant Assignor.
Section 3.6 INSTRUMENTS. If any Assignor owns or acquires any
Instrument constituting Collateral, such Assignor will within two Business Days
notify the Lender thereof, and upon request by the Lender will promptly deliver
such Instrument to the Lender appropriately endorsed to the order of the Lender
as further security hereunder.
Section 3.7 FURTHER ACTIONS. Each Assignor will, at its own expense,
make, execute, endorse, acknowledge, file and/or deliver to the Lender from time
to time such vouchers, invoices, schedules, confirmatory assignments,
conveyances, financing statements, transfer endorsements, powers of attorney,
certificates, reports and other assurances or instruments and take such further
steps relating to its Receivables, Contracts, Instruments and other property or
rights covered by the security interest hereby granted, as the Lender may
reasonably require.
6
<PAGE>
ARTICLE IV
SPECIAL PROVISIONS CONCERNING TRADEMARKS
Section 4.1 ADDITIONAL REPRESENTATIONS AND WARRANTIES. Each Assignor
represents and warrants that it is the true and lawful owner of or otherwise has
the right to use the registered Marks listed in Annex D hereto for such Assignor
and that said listed Marks constitute all the United States marks and
applications for United States marks registered in the United States Patent and
Trademark Office that such Assignor presently owns or uses in connection with
its business. Each Assignor represents and warrants that it owns, is licensed to
use or otherwise has the right to use all Marks that it uses. Each Assignor
further warrants that it has no knowledge of any third party claim that any
aspect of such Assignor's present or contemplated business operations infringes
or will infringe any trademark, service mark or trade name. Each Assignor
represents and warrants that it is the true and lawful owner of or otherwise has
the right to use all U.S. trademark registrations and applications listed in
Annex D hereto and that said registrations are valid, subsisting, have not been
cancelled and that such Assignor is not aware of any third-party claim that any
of said registrations is invalid or unenforceable, or is not aware that there is
any reason that any of said registrations is invalid or unenforceable, or is not
aware that there is any reason that any of said applications will not pass to
registration. Each Assignor represents and warrants that upon the recordation of
a Grant of Security Interest in United States Trademarks in the form of Annex G
hereto and a Grant of Security Interest in United States Patents in the form of
Annex H hereto in the United States Patent and Trademark Office, together with
filings on Form UCC-1 pursuant to this Agreement, all filings, registrations and
recordings necessary or appropriate to perfect the security interest granted to
the Lender in the United States Marks covered by this Agreement under federal
law will have been accomplished. Each Assignor agrees to execute such a Grant of
Security Interest in United States Trademark and a Grant of Security Interest in
United States Patents covering all right, title and interest in each United
States Mark, and the associated goodwill, of such Assignor, and to record the
same. Each Assignor hereby grants to the Lender an absolute power of attorney to
sign, upon the occurrence and during the continuance of an Event of Default, any
document which may be required by the United States Patent and Trademark Office
in order to effect an absolute assignment of all right, title and interest in
each Mark, and record the same.
Section 4.2 LICENSES AND ASSIGNMENTS. Except as otherwise permitted by
the Credit Agreement or this Agreement, each Assignor hereby agrees not to
divest itself of any right under any Mark absent prior written approval of the
Lender.
Section 4.3 INFRINGEMENTS. Each Assignor agrees, promptly upon learning
thereof, to notify the Lender in writing of the name and address of, and to
furnish such pertinent information that may be available with respect to, any
party who such Assignor believes is infringing or diluting or otherwise
violating in any material respect any of such Assignor's rights in and to any
Mark, or with respect to any party claiming that such Assignor's use of
7
<PAGE>
any Mark violates in any material respect any property right of that party. Each
Assignor further agrees, unless otherwise agreed by the Lender, to prosecute any
Person infringing any Mark in accordance with commercially reasonable business
practices.
Section 4.4 PRESERVATION OF MARKS. Each Assignor agrees to use its
Marks in interstate commerce during the time in which this Agreement is in
effect, sufficiently to preserve such Marks as trademarks or service marks under
the laws of the United States, PROVIDED, that, to the extent permitted by the
Credit Agreement, no Assignor shall be obligated to preserve any Mark in the
event such Assignor determines, in its reasonable business judgment, that the
preservation of such Mark is no longer desirable in the conduct of its business.
Section 4.5 MAINTENANCE OF REGISTRATION. Each Assignor shall, at its
own expense, diligently process all documents required by the Trademark Act of
1946, 15 U.S.C. ss.ss. 1051 ET seq. to maintain trademark registrations,
including but not limited to affidavits of use and applications for renewals of
registration in the United States Patent and Trademark Office for all of its
registered Marks pursuant to 15 U.S.C. ss.ss. 1058(a), 1059 and 1065 and to main
domain name registrations with Internic or other registers, and shall pay all
fees and disbursements in connection therewith and shall not abandon any such
filing of affidavit of use or any such application of renewal prior to the
exhaustion of all administrative and judicial remedies without prior written
consent of the Lender; provided, that no Assignor shall be obligated to maintain
registration of any Mark in the event that such Assignor determines, in its
reasonable business judgment, that such maintenance of such Mark is no longer
necessary or desirable in the conduct of its business. Each Assignor agrees to
notify the Lender three months prior to the dates on which the affidavits of use
or the applications for renewal registration are due with respect to any
registered Mark that the affidavits of use or the renewal is being processed or
being abandoned, as the case may be.
Section 4.6 FUTURE REGISTERED MARKS. If any Mark registration issues
hereafter to any Assignor as a result of any application now or hereafter
pending before the United States Patent and Trademark Office, within 30 days of
receipt of such certificate, such Assignor shall deliver to the Lender a copy of
such certificate, and a grant of security in such Mark, to the Lender and at the
expense of such Assignor, confirming the grant of security in such Mark to the
Lender hereunder, the form of such security to be substantially the same as the
form hereof or in such other form as may be reasonably satisfactory to the
Lender.
Section 4.7 EXISTING DOMAIN NAME REGISTRATION AND FUTURE DOMAIN NAME
REGISTRATION. Each of the Assignors hereby appoints the Lender as their
irrevocable agent to file all necessary documents, registrations and recordings
in the Lender's name with Internic or other domain name registers to perfect the
security interest granted to the Lender in the domain names covered by this
Agreement.
Section 4.8 REMEDIES. If an Event of Default shall occur and be
continuing, the Lender may, by written notice to the relevant Assignor, take any
or all of the following actions: (i) declare the entire right, title and
interest of such Assignor in and to each of the
8
<PAGE>
Marks, together with all trademark rights and rights of protection to the same,
vested in the Lender, in which event such rights, title and interest shall
immediately vest in the Lender, and the Lender shall be entitled to exercise the
power of attorney referred to in Section 4.1 and 4.7 hereof to execute, cause to
be acknowledged and notarized and record said absolute assignment with the
applicable agency; (ii) take and use or sell the Marks and the goodwill of such
Assignor's business symbolized by the Marks and the right to carry on the
business and use the assets of such Assignor in connection with which the Marks
have been used; and (iii) direct such Assignor to refrain, in which event such
Assignor shall refrain, from using the Marks in any manner whatsoever, directly
or indirectly, and, if requested by the Lender, change such Assignor's corporate
name to eliminate therefrom any use of any Mark and execute such other and
further documents that the Lender may request to further confirm this and to
transfer ownership of the Marks and registrations and any pending trademark
application in the United States Patent and Trademark Office to the Lender.
ARTICLE V
SPECIAL PROVISIONS CONCERNING PATENTS,
COPYRIGHTS AND TRADE SECRETS
Section 5.1 ADDITIONAL REPRESENTATIONS AND WARRANTIES. Each Assignor
represents and warrants that it is the true and lawful owner of or otherwise has
the right to use (i) all material United States trade secrets and proprietary
information necessary to operate the business of the Assignor (the "Trade Secret
Rights"), (ii) the Patents listed in Annex E hereto for such Assignor and that
said Patents constitute all the United States patents and applications for
United States patents that such Assignor now owns or uses and (iii) the
Copyrights listed in Annex F hereto for such Assignor and that said Copyrights
all registrations of United States copyrights and applications for United States
include copyright registrations that such Assignor now owns or uses. Each
Assignor further warrants that it has no knowledge of any third party claim that
any aspect of such Assignor's present or contemplated business operations
infringes or will infringe any patent or any copyright of such Assignor has
misappropriated any trade secret or proprietary information, except those claims
which in the aggregate could not be reasonably expected to have a Material
Adverse Effect. Each Assignor represents and warrants that upon the recordation
of a Grant of Security Interest in United States Patents in the form of Annex H
hereto in the United States Patent and Trademark Office and the recordation of a
Grant of Security Interest in United States Copyrights in the form of Annex I
hereto in the United States Copyright Office, together with filings on Form
UCC-1 pursuant to this Agreement, all filings, registrations and recordings
necessary or appropriate to perfect the security interest granted to the Lender
in the United States Patents and United States Copyrights covered by this
Agreement under federal law will have been accomplished. Each Assignor agrees to
execute such a Grant of Security Interest in United States Patents covering all
right, title and interest in each United States Patent of such Assignor and to
record the same, and to execute such a Grant of Security Interest in United
States Copyrights covering all right, title and interest in each United States
Copyright of such Assignor and to record the same. Each Assignor hereby
9
<PAGE>
grants to the Lender an absolute power of attorney to sign, upon the occurrence
and during the continuance of any Event of Default, any document which may be
required by the United States Patent and Trademark Office or the United States
Copyright Office in order to effect an absolute assignment of all right, title
and interest in each Patent and Copyright, and to record the same.
Section 5.2 LICENSES AND ASSIGNMENTS. Except as otherwise permitted by
the Credit Agreement or this Agreement, each Assignor hereby agrees not to
divest itself of any right under any Patent or Copyright absent prior written
approval of the Lender.
Section 5.3 INFRINGEMENTS. Each Assignor agrees, promptly upon learning
thereof, to furnish the Lender in writing with all pertinent information
available to such Assignor with respect to any infringement, contributing
infringement or active inducement to infringe any of such Assignor's rights in
and to in any Patent or Copyright or to any claim that such Assignor's practice
of any Patent or use of any Copyright violates any property right of a third
party, or with respect to any misappropriation of any Trade Secret Right or any
claim that such Assignor's practice of any Trade Secret Right violates any
property right of a third party. Each Assignor further agrees, absent direction
of the Lender to the contrary, diligently to prosecute any Person infringing any
Patent or Copyright or any Person misappropriating any Trade Secret Right in
accordance with commercially reasonable business practices.
Section 5.4 MAINTENANCE OF PATENTS. At its own expense, each Assignor
shall make timely payment of all post-issuance fees required pursuant to 35
U.S.C. ss. 41 to maintain in force rights under each Patent, absent prior
written consent of the Lender, PROVIDED, that, to the extent permitted by the
Credit Agreement, no Assignor shall be obligated to maintain any Patent in the
event such Assignor determines, in its reasonable business judgment, that the
maintenance of such Patent is no longer necessary or desirable in the conduct of
its business.
Section 5.5 PROSECUTION OF PATENT APPLICATION. At its own expense, each
Assignor shall diligently prosecute all applications for United States Patents
listed in Annex E hereto for such Assignor and shall not abandon any such
application prior to exhaustion of all administrative and judicial remedies,
absent written consent of the Lender, PROVIDED, that, to the extent permitted by
the Credit Agreement, no Assignor shall be obligated to prosecute any
application in the event such Assignor determines, in its reasonable business
judgment, that the prosecuting of such application is no longer necessary or
desirable in the conduct of its business.
Section 5.6 OTHER PATENTS AND COPYRIGHTS. Within 30 days of the
acquisition or issuance of a United States Patent, registration of a Copyright,
or acquisition of a registered Copyright, or of filing of an application for a
United States Patent or registration of Copyright, the relevant Assignor shall
deliver to the Lender a copy of said Copyright or certificate or registration
of, or application therefor, said Patents, as the case may be, with an
assignment for security as to such Patent or Copyright, as the case may be, to
the Lender and at the expense of such Assignor, confirming the assignment for
security, the form of such
10
<PAGE>
assignment for security to be substantially the same as the form hereof or in
such other form as may be reasonably satisfactory to the Lender.
Section 5.7 REMEDIES. If an Event of Default shall occur and be
continuing, the Lender may by written notice to the relevant Assignor, take any
or all of the following actions: (i) declare the entire right, title, and
interest of such Assignor in each of the Patents and Copyrights vested in the
Lender, in which event such right, title, and interest shall immediately vest in
the Lender, in which case the Lender shall be entitled to exercise the power of
attorney referred to in Section 5.1 hereof to execute, cause to be acknowledged
and notarized and to record said absolute assignment with the applicable agency;
(ii) take and practice or sell the Patents and Copyrights; and (iii) direct such
Assignor to refrain, in which event such Assignor shall refrain, from practicing
the Patents and using the Copyrights directly or indirectly, and such Assignor
shall execute such other and further documents as the Lender may request further
to confirm this and to transfer ownership of the Patents and Copyrights to the
Lender.
ARTICLE VI
PROVISIONS CONCERNING ALL COLLATERAL
Section 6.1 PROTECTION OF LENDER'S SECURITY. Each Assignor will do
nothing to impair the rights of the Lender in the Collateral except to the
extent such impairment shall be waived in accordance with the terms of Section
10.2 hereof. Each Assignor will at all times keep its Inventory and Equipment
insured in favor of the Lender, at such Assignor's own expense to the extent and
in the manner provided in the Credit Agreement; all policies or certificates
with respect to such insurance (and any other insurance maintained by such
Assignor) (i) shall be endorsed to the Lender's reasonable satisfaction for the
benefit of the Lender (including, without limitation, by naming the Lender as
additional insured and loss payee) and (ii) shall state that such insurance
policies shall not be cancelled or revised without 30 days' prior written notice
thereof by the insurer to the Lender; and certified copies of such policies or
certificates shall be deposited with the Lender. If any Assignor shall fail to
insure its Inventory and Equipment in accordance with the preceding sentence, or
if any Assignor shall fail to so endorse and deposit all policies or
certificates with respect thereto, the Lender shall have the right (but shall be
under no obligation) to procure such insurance and such Assignor agrees to
promptly reimburse the Lender for all costs and expenses of procuring such
insurance. Except as otherwise permitted to be retained by the relevant Assignor
pursuant to the Credit Agreement, the Lender shall, at the time such proceeds of
such insurance are distributed to the Lender, apply such proceeds in accordance
with Section 7.4 hereof. Each Assignor assumes all liability and responsibility
in connection with the Collateral acquired by it and the liability of such
Assignor to pay the Obligations shall in no way be affected or diminished by
reason of the fact that such Collateral may be lost, destroyed, stolen, damaged
or for any reason whatsoever unavailable to such Assignor.
11
<PAGE>
Section 6.2 WAREHOUSE RECEIPTS NON-NEGOTIABLE. Each Assignor agrees
that if any warehouse receipt or receipt in the nature of a warehouse receipt is
issued with respect to any of its Inventory, such warehouse receipt or receipt
in the nature thereof shall not be it negotiable" (as such term is used in
Section 7-104 of the Uniform Commercial Code as in effect in any relevant
jurisdiction or under other relevant law) or, if any warehouse receipt or any
receipt in the nature of a warehouse receipt is "negotiable" (as such term is
used in Section 7-04 of the Uniform Commercial Code as in effect in any relevant
jurisdiction or under other relevant law) then the respective Assignor shall
promptly take all action as may be required under the relevant jurisdiction to
grant a perfected security interest in such Collateral to the Lender.
Section 6.3 FURTHER ACTIONS. Each Assignor will, at its own expense,
make, execute, endorse, acknowledge, file and/or deliver to the Lender from time
to time such lists, descriptions and designations of its Collateral, warehouse
receipts, receipts in the nature of warehouse receipts, bills of lading,
documents of title, vouchers, invoices, schedules, confirmatory assignments,
conveyances, financing statements, transfer endorsements, powers of attorney,
certificates, reports and other assurances or instruments and take such further
steps relating to the Collateral and other property or rights covered by the
security interest hereby granted, which the Lender deems reasonably appropriate
or advisable to perfect, preserve or protect its security interest in the
Collateral.
Section 6.4 FINANCING STATEMENTS. Each Assignor agrees to execute and
deliver to the Lender such financing statements, in form reasonably acceptable
to the Lender, as the Lender may from time to time reasonably request or as are
necessary or desirable in the opinion of the Lender to establish and maintain a
valid, enforceable, first priority perfected security interest in the Collateral
as provided herein and the other rights and security contemplated hereby all in
accordance with the Uniform Commercial Code as enacted in any and all relevant
jurisdictions or any other relevant law. Each Assignor will pay any applicable
filing fees, recordation taxes and related expenses relating to its Collateral.
Each Assignor hereby authorizes the Lender to file any such financing statements
without the signature of such Assignor where permitted by law.
ARTICLE VII
REMEDIES UPON OCCURRENCE OF EVENT OF DEFAULT
Section 7.1 REMEDIES; OBTAINING THE COLLATERAL UPON DEFAULT. Each
Assignor agrees that, if any Event of Default shall have occurred and be
continuing, then and in every such case, the Lender, in addition to any rights
now or hereafter existing under applicable law, shall have all rights as a
secured creditor under the Uniform Commercial Code in all relevant jurisdictions
and may:
(i) personally, or by agents or attorneys, immediately take
possession of the Collateral or any part thereof, from such Assignor or any
other Person who then has
12
<PAGE>
possession of any part thereof with or without notice or process of law, and for
that purpose may enter upon such Assignor's premises where any of the Collateral
is located and remove the same and use in connection with such removal any and
all services, supplies, aids and other facilities of such Assignor,
(ii) instruct the obligor or obligors on any agreement,
instrument or other obligation (including, without limitation, the Receivables
and the Contracts) constituting the Collateral to make any payment required by
the terms of such agreement, instrument or other obligation directly to the
Lender,
(iii) withdraw all monies, securities and instruments in the
Cash Collateral Account for application to the Obligations in accordance with
Section 7.4 hereof,
(iv) sell, assign or otherwise liquidate any or all of the
Collateral or any part thereof in accordance with Section 7.2 hereof, or direct
the relevant Assignor to sell, assign or otherwise liquidate any or all of the
Collateral or any part thereof, and, in each case, take possession of the
proceeds of any such sale or liquidation,
(v) take possession of the Collateral or any part thereof, by
directing the relevant Assignor in writing to deliver the same to the Lender at
any place or places designated by the Lender, in which event such Assignor shall
at its own expense:
(x) forthwith cause the same to be moved to the
place or places so designated by the Lender and there delivered to the
Lender;
(y) store and keep any Collateral so delivered to the
Lender at such place or places pending further action by the Lender as
provided in Section 7.2 hereof, and
(z) while the Collateral shall be so stored and kept,
provide such guards and maintenance services as shall be necessary to
protect the same and to preserve and maintain them in good condition;
and
(vi) license or sublicense, whether on an exclusive or
nonexclusive basis, any Marks, Patents or Copyrights included in the Collateral
for such term and on such conditions and in such manner as the Lender shall in
its sole judgment determine (taking into account such provisions as may be
necessary to protect and preserve such Marks, Patents or Copyrights); it being
understood that each Assignor's obligation so to deliver the Collateral is of
the essence of this Agreement and that, accordingly, upon application to a court
of equity having jurisdiction, the Lender shall be entitled to a decree
requiring specific performance by such Assignor of said obligation.
Section 7.2 REMEDIES: DISPOSITION OF THE COLLATERAL. Any Collateral
repossessed by the Lender under or pursuant to Section 7.1 hereof and any other
Collateral whether or not so repossessed by the Lender, may be sold, assigned,
leased or otherwise disposed of under one
13
<PAGE>
or more contracts or as an entirety, and without the necessity of gathering at
the place of sale the property to be sold, and in general in such manner, at
such time or times, at such place or places and on such terms as the Lender may,
in compliance with any mandatory requirements of applicable law, determine to be
commercially reasonable. Any of the Collateral may be sold, leased or otherwise
disposed of, in the condition in which the same existed when taken by the Lender
or after any overhaul or repair at the expense of the relevant Assignor which
the Lender shall determine to be commercially reasonable. Any such disposition
which shall be a private sale or other private proceedings permitted by such
requirements shall be made upon not less than 10 days' written notice to the
relevant Assignor specifying the time at which such disposition is to be made
and the intended sale price or other consideration therefor, and shall be
subject, for the 10 days after the giving of such notice, to the right of the
relevant Assignor or any nominee of such Assignor to acquire the Collateral
involved at a price or for such other consideration at least equal to the
intended sale price or other consideration so specified. Any such disposition
which shall be a public sale permitted by such requirements shall be made upon
not less than 10 days' written notice to the relevant Assignor specifying the
time and place of such sale and, in the absence of applicable requirements of
law, shall be by public auction (which may, at the Lender's option, be subject
to reserve), after publication of notice of such auction not less than 10 days
prior thereto in two newspapers in general circulation in the City of New York.
To the extent permitted by any such requirement of law, the Lender may bid for
and become the purchaser of the Collateral or any item thereof, offered for sale
in accordance with this Section without accountability to the relevant Assignor.
If, under mandatory requirements of applicable law, the Lender shall be required
to make disposition of the Collateral within a period of time which does not
permit the giving of notice to the relevant Assignor as hereinabove specified,
the Lender need give such Assignor only such notice of disposition as shall be
reasonably practicable in view of such mandatory requirements of applicable law.
Section 7.3 WAIVER OF CLAIMS. Except as otherwise provided in this
Agreement, EACH ASSIGNOR HEREBY WAIVES, TO THE EXTENT PERMITTED BY APPLICABLE
LAW, NOTICE AND JUDICIAL HEARING IN CONNECTION WITH THE LENDER'S TAKING
POSSESSION OR THE LENDER'S DISPOSITION OF ANY OF THE COLLATERAL, INCLUDING,
WITHOUT LIMITATION, ANY AND ALL PRIOR NOTICE AND HEARING FOR ANY PREJUDGMENT
REMEDY OR REMEDIES AND ANY SUCH RIGHT WHICH SUCH ASSIGNOR WOULD OTHERWISE HAVE
UNDER THE CONSTITUTION OR ANY STATUTE OF THE UNITED STATES OR OF ANY STATE, and
each Assignor hereby further waives, to the extent permitted by law:
(i) all damages occasioned by such taking of possession except
any damages which are the direct result of the Lender's gross negligence or
willful misconduct;
(ii) all other requirements as to the time, place and terms of
sale or other requirements with respect to the enforcement of the Lender's
rights hereunder; and
14
<PAGE>
(iii) all rights of redemption, appraisement, valuation, stay,
extension or moratorium now or hereafter in force under any applicable law in
order to prevent or delay the enforcement of this Agreement or the absolute sale
of the Collateral or any portion thereof, and each Assignor, for itself and all
who may claim under it, insofar as it or they now or hereafter lawfully may,
hereby waives the benefit of all such laws.
Any sale of, or the grant of options to purchase, or any other realization upon,
any Collateral shall operate to divest all right, title, interest, claim and
demand, either at law or in equity, of the relevant Assignor therein and
thereto, and shall be a perpetual bar both at law and in equity against such
Assignor and against any and all Persons claiming or attempting to claim the
Collateral so sold, optioned or realized upon, or any part thereof, from,
through and under such Assignor.
Section 7.4 APPLICATION OF PROCEEDS. (a) All moneys collected by the
Lender (or, to the extent the Pledge Agreement requires proceeds of collateral
under such Security Documents to be applied in accordance with the provisions of
this Agreement, the Pledgee) upon any sale or other disposition of the
Collateral, together with all other moneys received by the Lender hereunder,
shall be applied as follows:
(i) first, to the payment of all Obligations owing
the Lender,
(ii) second, to the extent proceeds remain after the
application pursuant to the preceding clause (i) and following the termination
of this Agreement pursuant to Section 10.8 hereof, to the relevant Assignor or,
to the extent directed by such Assignor or a court of competent jurisdiction, to
whomever may be lawfully entitled to receive such surplus.
(b) It is understood that the Assignors shall remain jointly
and severally liable to the extent of any deficiency between the amount of the
proceeds of the Collateral and the aggregate amount of the sums referred to in
clause (a) of this Section 7.4 with respect to the relevant Assignor.
Section 7.5 REMEDIES CUMULATIVE. Each and every right, power and remedy
hereby specifically given to the Lender shall be in addition to every other
right, power and remedy specifically given under this Agreement, the Credit
Agreement, the other Basic Documents or now or hereafter existing at law, in
equity or by statute and each and every right, power and remedy whether
specifically herein given or otherwise existing may be exercised from time to
time or simultaneously and as often and in such order as may be deemed expedient
by the Lender. All such rights, powers and remedies shall be cumulative and the
exercise or the beginning of the exercise of one shall not be deemed a waiver of
the right to exercise any other or others. No delay or omission of the Lender in
the exercise of any such right, power or remedy and no renewal or extension of
any of the Obligations shall impair any such right, power or remedy or shall be
construed to be a waiver of any Default or an acquiescence therein. No notice to
or demand on any Assignor in any case shall entitle it to any other or further
notice or demand in similar or other circumstances or constitute a waiver of any
of
15
<PAGE>
the rights of the Lender to any other or further action in any circumstances
without notice or demand. In the event that the Lender shall bring any suit to
enforce any of its rights hereunder and shall be entitled to judgment, then in
such suit the Lender may recover reasonable expenses, including attorneys' fees,
and the amounts thereof shall be included in such judgment.
Section 7.6 DISCONTINUANCE OF PROCEEDINGS. In case the Lender shall
have instituted any proceeding to enforce any right, power or remedy under this
Agreement by foreclosure, sale, entry or otherwise, and such proceeding shall
have been discontinued or abandoned for any reason or shall have been determined
adversely to the Lender, then and in every such case the relevant Assignor and
the Lender shall be restored to their former positions and rights hereunder with
respect to the Collateral subject to the security interest created under this
Agreement, and all rights, remedies and powers of the Lender shall continue as
if no such proceeding had been instituted.
ARTICLE VIII
INDEMNITY
Section 8.1 INDEMNITY. (a) Each Assignor jointly and severally agrees
to promptly indemnify, reimburse and hold the Lender and its successors,
permitted assigns, employees, agents and servants (hereinafter in this Section
8.1 referred to individually as "Indemnitee," and collectively as "Indemnitees")
harmless from any and all liabilities, obligations, damages, injuries,
penalties, claims, demands, actions, suits, judgments and any and all costs,
expenses or disbursements (including reasonable attorneys' fees and expenses)
(for the purposes of this Section 8.1 the foregoing are collectively called
"expenses") of whatsoever kind and nature imposed on, asserted against or
incurred by any of, the Indemnitees in any way relating to or arising out of
this Agreement, the Credit Agreement or any other Basic Document or any other
document executed in connection herewith or therewith or in any other way
connected with the administration of the transactions contemplated hereby or
thereby or the enforcement of any of the terms of, or the preservation of any
rights under any thereof, or in any way relating to or arising out of the
manufacture, ownership, ordering, purchase, delivery, control, acceptance,
lease, financing, possession, operation, condition, sale, return or other
disposition, or use of the Collateral (including, without limitation, latent or
other defects, whether or not discoverable), the violation of the laws of any
country, state or other governmental body or unit, any tort (including, without
limitation, claims arising or imposed under the doctrine of strict liability, or
for or on account of injury to or the death of any Person (including any
Indemnitee), or property damage), or contract claim; provided that no Indemnitee
shall be indemnified pursuant to this Section 8.1(a) for losses, damages or
liabilities to the extent caused by the gross negligence or willful misconduct
of such Indemnitee. Each Assignor agrees that upon written notice by any
Indemnitee of the assertion of such a liability, obligation, damage, injury,
penalty, claim, demand, action, suit or judgment, the relevant Assignor shall
assume full responsibility for the defense thereof. Each Indemnitee agrees to
use its best efforts to promptly notify the relevant Assignor of any
16
<PAGE>
such assertion of which such Indemnitee has knowledge, but failure to so notify
the relevant Assignor shall not relieve such Assignor from any liability which
such Assignor may have to the Indemnitee..
(b) Without limiting the application of Section 8.1 (a)
hereof, each Assignor agrees, jointly and severally, to promptly pay, or
reimburse the Lender for any and all reasonable fees, costs and expenses of
whatever kind or nature incurred in connection with the creation, preservation
or protection of the Lender's Liens on, and security interest in, the
Collateral, including, without limitation, all fees and taxes in connection with
the recording or filing of instruments and documents in public offices, payment
or discharge of any taxes or Liens upon or in respect of the Collateral,
premiums for insurance with respect to the Collateral and all other fees, costs
and expenses in connection with protecting, maintaining or preserving the
Collateral and the Lender's interest therein, whether through judicial
proceedings or otherwise, or in defending or prosecuting any actions, suits or
proceedings arising out of or relating to the Collateral.
(c) Without limiting the application of Section 8.1 (a) or (b)
hereof, each Assignor agrees, jointly and severally, to promptly pay, indemnify
and hold each Indemnitee harmless from and against any loss, costs, damages and
expenses which such Indemnitee may suffer, expend or incur in consequence of or
growing out of any misrepresentation by any Assignor in this Agreement, the
Credit Agreement, any other Basic Document or in any writing contemplated by or
made or delivered pursuant to or in connection with this Agreement, the Credit
Agreement or any other Basic Document.
(d) If and to the extent that the obligations of any Assignor
under this Section 8.1 are unenforceable for any reason, such Assignor hereby
agrees to make the maximum contribution to the payment and satisfaction of such
obligations which is permissible under applicable law.
Section 8.2 INDEMNITY OBLIGATIONS SECURED BY COLLATERAL: SURVIVAL. Any
amounts paid by any Indemnitee as to which such Indemnitee has the right to
reimbursement shall constitute Obligations secured by the Collateral. The
indemnity obligations of each Assignor contained in this Article VIII shall
continue in full force and effect notwithstanding the full payment of all the
Notes issued under the Credit Agreement, and the payment of all other
Obligations and notwithstanding the discharge thereof.
ARTICLE IX
DEFINITIONS
The following terms shall have the meanings herein specified.
Such definitions shall be equally applicable to the singular and plural forms of
the terms defined.
17
<PAGE>
"Agreement" shall mean this Security Agreement as the same may be
modified, supplemented or amended from time to time in accordance with its
terms.
"Assignor" shall have the meaning provided in the first paragraph of
this Agreement.
"Cash Collateral Account" shall mean a cash collateral account
maintained with, and in the sole dominion and control of, the Lender.
"Chattel Paper" shall have the meaning provided in the Uniform
Commercial Code as in effect on the date hereof in the State of New York.
"Collateral" shall have the meaning provided in Section 1.1(a) of this
Agreement.
"Company" shall have the meaning provided in the recitals to this
Agreement.
"Contract Rights" shall mean all rights of any Assignor (including,
without limitation, all rights to payment) under each Contract.
"Contracts" shall mean all contracts between any Assignor and one or
more additional parties.
"Copyrights" shall mean any United States or foreign copyright owned by
any Assignor, including any registrations of any Copyrights, in the United
States Copyright Office or the equivalent thereof in any foreign country, other
than those countries outside the United States where the grant of a security
interest would invalidate such Copyrights, as well as any application for a
United States copyright registration now or hereafter made with the United
States Copyright Office by any Assignor.
"Credit Agreement" shall have the meaning provided in the recitals to
this Agreement.
"Credit Document Obligations" shall have the meaning provided in the
definition of "Obligations" in this Article IX.
"Documents" shall have the meaning provided in the Uniform Commercial
Code as in effect on the date hereof in the State of New York.
"Equipment" shall mean any "equipment," as such term is defined in the
Uniform Commercial Code as in effect on the date hereof in the State of New
York, now or hereafter owned by any Assignor and, in any event, shall include,
but shall not be limited to, all machinery, equipment, computers, furnishings,
movable trade fixtures and vehicles now or hereafter owned by any Assignor and
any and all additions, substitutions and replacements of any of the foregoing,
wherever located, together with all attachments, components, parts, equipment
and accessories installed thereon or affixed thereto.
18
<PAGE>
"General Intangibles" shall have the meaning provided in the Uniform
Commercial Code as in effect on the date hereof in the State of New York.
"Goods" shall have the meaning provided in the Uniform Commercial Code
as in effect on the date hereof in the State of New York.
"Indemnitee" shall have the meaning provided in Section 8.1 of this
Agreement.
"Instrument" shall have the meaning provided in the Uniform Commercial
Code as in effect on the date hereof in the State of New York.
"Inventory" shall mean merchandise, inventory and goods, and all
additions, substitutions and replacements thereof, wherever located, together
with all goods, supplies, incidentals, packaging materials, labels, materials
and any other items used or usable in manufacturing, processing, packaging or
shipping same; in all stages of production -- from raw materials through
work-in-process to finished goods -- and all products and proceeds of whatever
sort and wherever located and any portion thereof which may be returned,
rejected, reclaimed or repossessed by the Lender from any Assignor's customers,
and shall specifically include all "inventory" as such term is defined in the
Uniform Commercial Code as in effect on the date hereof in the State of New
York, now or hereafter owned by any Assignor.
"Lender" shall have the meaning provided in the recitals to this
Agreement.
"Liens" shall mean any security interest, mortgage, pledge, lien,
claim, charge, encumbrance, title retention agreement, lessor's interest in a
financing lease or analogous instrument, in, of, or on any Assignor's property.
"Marks" shall mean all right, title and interest in and to any United
States or foreign trademarks, service marks, trade names and domain name
registrations now held or hereafter acquired by any Assignor, including any
registration of any trademarks and service marks in the United States Patent and
Trademark Office, or the equivalent thereof in any foreign country, other than
those countries outside the United States, where the grant of a security
interest would invalidate such Marks, and any trade dress including logos and/or
designs used by any Assignor in the United States or any foreign country.
"Obligations" shall mean (i) the full and prompt payment when due
(whether at the stated maturity, by acceleration or otherwise) of all
obligations (including obligations which, but for the automatic stay under
Section 362(a) of the Bankruptcy Code, would become due) and liabilities of each
Assignor, now existing or hereafter incurred under, arising out of or in
connection with the Credit Agreement and any Basic Document to which such
Assignor is a party and the due performance and compliance by each Assignor with
the terms of the Credit Agreement and each such Basic Document (all such
obligations and liabilities under this clause (i) being herein collectively
called the "Credit Document Obligations"); (ii) any and all sums advanced by the
Lender in order to preserve the Collateral or preserve its security
19
<PAGE>
interest in the Collateral; (iii) in the event of any proceeding for the
collection or enforcement of any indebtedness, obligations, or liabilities of
each Assignor referred to in clause (i) after an Event of Default shall have
occurred and be continuing, the reasonable expenses of re-taking, holding,
preparing for sale or lease, selling or otherwise disposing of or realizing on
the Collateral, or of any exercise by the Lender of its rights hereunder,
together with reasonable attorneys' fees and court costs; and (iv) all amounts
paid by any Indemnitee as to which such Indemnitee has the right to
reimbursement under Section 8.1 of this Agreement.
"Patents" shall mean any United States or foreign patent to which any
Assignor now or hereafter has title and any divisions or continuations thereof,
as well as any application for a United States or foreign patent now or
hereafter made by any Assignor, except as to patents or patent applications in
those countries where the granting of a security interest in such patents is not
permissible under the laws of that country.
"Proceeds" shall have the meaning provided in the Uniform Commercial
Code as in effect in the State of New York on the date hereof or under other
relevant law and, in any event, shall include, but not be limited to, (i) any
and all proceeds of any insurance, indemnity, warranty or guaranty payable to
the Lender or any Assignor from time to time with respect to any of the
Collateral, (ii) any and all payments (in any form whatsoever) made or due and
payable to any Assignor from time to time in connection with any requisition,
confiscation, condemnation, seizure or forfeiture of all or any part of the
Collateral by any governmental authority (or any person acting under color of
governmental authority) and (iii) any and all other amounts from time to time
paid or payable under or in connection with any of the Collateral.
"Receivables" shall mean any "account" as such term is defined in the
Uniform Commercial Code as in effect on the date hereof in the State of New
York, now or hereafter owned by any Assignor and, in any event, shall include,
but shall not be limited to, all of such Assignor's rights to payment for goods
sold or leased or services performed by such Assignor, whether now in existence
or arising from time to time hereafter, including, without limitation, rights
evidenced by an account, note, contract, security agreement, chattel paper, or
other evidence of indebtedness or security, together with (a) all security
pledged, assigned, hypothecated or granted to or held by such Assignor to secure
the foregoing, (b) all of any Assignor's right, title and interest in and to any
goods, the sale of which gave rise thereto, (c) all guarantees, endorsements and
indemnifications on, or of, any of the foregoing, (d) all powers of attorney for
the execution of any evidence of indebtedness or security or other writing in
connection therewith, (e) all books, records, ledger cards, and invoices
relating thereto, (f) all evidences of the filing of financing statements and
other statements and the registration of other instruments in connection
therewith and amendments thereto, notices to other creditors or secured parties,
and certificates from filing or other registration officers, (g) all credit
information, reports and memoranda relating thereto and (h) all other writings
related in any way to the foregoing.
20
<PAGE>
"Termination Date" shall have the meaning provided in Section 10.8 of
this Agreement.
"Trade Secret Rights" shall have the meaning provided in Section 5.1 of
this Agreement.
ARTICLE X
MISCELLANEOUS
Section 10.1 NOTICES. Except as otherwise specified herein, all
notices, requests, demands or other communications to or upon the respective
parties hereto shall be deemed to have been duly given or made when delivered to
the party to which such notice, request, demand or other communication is
required or permitted to be given or made under this Agreement, addressed:
(a) if to any Assignor, at its address set forth opposite
its signature below;
(b) if to the Lender:
Omnicom Finance Inc.
437 Madison Avenue
New York, New York 10022
Attention: Chief Financial Officer
Telephone No.: (212) 415-3600
Facsimile No.: (212) 415-3530
with a copy to:
Davis & Gilbert LLP
1740 Broadway
New York, New York 10019
Attention: Michael D. Ditzian, Esq.
Telephone No.: (212) 468-4800
Facsimile No.: (212) 468-4888
or at such other address as shall have been furnished in writing by any Person
described above to the party required to give notice hereunder.
Section 10.2 WAIVER; AMENDMENT. None of the terms and conditions of
this Agreement may be changed, waived, modified or varied in any manner
whatsoever unless in writing duly signed by each Assignor directly affected
thereby and the Lender.
Section 10.3 OBLIGATIONS ABSOLUTE. The obligations of each Assignor
hereunder shall remain in full force and effect without regard to, and shall not
be impaired by, (a) any
21
<PAGE>
bankruptcy, insolvency, reorganization, arrangement, readjustment, composition,
liquidation or the like of such Assignor, (b) any exercise or non-exercise, or
any waiver of, any right, remedy, power or privilege under or in respect of this
Agreement, the Credit Agreement or any other Basic Document, or (c) any
amendment to or modification of the Credit Agreement, any Basic Document or any
security for any of the Obligations; whether or not any Assignor shall have
notice or knowledge of any of the foregoing.
Section 10.4 SUCCESSORS AND ASSIGNS. This Agreement shall be binding
upon each Assignor and its successors and assigns and shall inure to the benefit
of the Lender and its successors and assigns; PROVIDED, that no Assignor may
transfer or assign any or all of its rights or obligations hereunder without the
prior written consent of the Lender. All agreements, statements, representations
and warranties made by each Assignor herein or in any certificate or other
instrument delivered by such Assignor or on its behalf under this Agreement
shall be considered to have been relied upon by the Lender and shall survive the
execution and delivery of this Agreement, the Credit Agreement and the other
Basic Documents regardless of any investigation made by the Lender or on their
behalf.
Section 10.5 HEADINGS DESCRIPTIVE. The headings of the several sections
of this Agreement are inserted for convenience only and shall not in any way
affect the meaning or construction of any provision of this Agreement.
Section 10.6 GOVERNING LAW. THIS AGREEMENT AND THE RIGHTS AND
OBLIGATIONS OF THE PARTIES HEREUNDER SHALL BE CONSTRUED IN ACCORDANCE WITH AND
BE GOVERNED BY THE LAW OF THE STATE OF NEW YORK.
Section 10.7 ASSIGNOR'S DUTIES. It is expressly agreed, anything herein
contained to the contrary notwithstanding, that each Assignor shall remain
liable to perform all of the obligations, if any, assumed by it with respect to
the Collateral and the Lender shall not have any obligations or liabilities with
respect to any Collateral by reason of or arising out of this Agreement, nor
shall the Lender be required or obligated in any manner to perform or fulfill
any of the obligations of each Assignor under or with respect to any Collateral.
Section 10.8 TERMINATION; RELEASE. (a) After the Termination Date, this
Agreement shall terminate (provided that all indemnities set forth herein
including, without limitation, in Section 8.1 hereof shall survive such
termination) and the Lender, at the request and expense of the respective
Assignor, will promptly execute and deliver to such Assignor a proper instrument
or instruments (including Uniform Commercial Code termination statements on form
UCC-3) acknowledging the satisfaction and termination of this Agreement, and
will duly assign, transfer and deliver to such Assignor (without recourse and
without any representation or warranty) such of the Collateral as may be in the
possession of the Lender and as has not theretofore been sold or otherwise
applied or released pursuant to this Agreement. As used in this Agreement,
"Termination Date" shall mean the date upon which the Commitments have been
terminated, no Note is outstanding and all other Obligations
22
<PAGE>
(other than any indemnities described in Section 8.1 hereof and in Section 11.7
of the Credit Agreement which are not then due and payable) have been paid in
full.
(b) In the event that any part of the Collateral is sold or
otherwise disposed of in connection with a sale or other disposition permitted
by Section 9.5 of the Credit Agreement or is otherwise released at the direction
of the Lender, at the request and expense of such Assignor, will duly release
from the security interest created hereby and assign, transfer and deliver to
such Assignor (without recourse and without any representation or warranty) such
of the Collateral as is then being (or has been) so sold or released and as may
be in the possession of the Lender and has not theretofore been released
pursuant to this Agreement.
(c) At any time that the respective Assignor desires that
Collateral be released as provided in the foregoing Section 10.8(a) or (b), it
shall deliver to the Lender a certificate signed by an Authorized Officer
stating that the release of the respective Collateral is permitted pursuant to
Section 10.8(a) or (b) hereof.
Section 10.9 COUNTERPARTS. This Agreement may be executed in any number
of counterparts and by the different parties hereto on separate counterparts,
each of which when so executed and delivered shall be an original, but all of
which shall together constitute one and the same instrument. A set of
counterparts executed by all the parties hereto shall be lodged with the
Borrower and the Lender.
Section 10.10 THE LENDER. The Lender will hold in accordance with this
Agreement all items of the Collateral at any time received under this Agreement.
It is expressly understood and agreed that the obligations of the Lender as
holder of the Collateral and interests therein and with respect to the
disposition thereof, and otherwise under this Agreement, are only those
expressly set forth in this Agreement and as provided in the Uniform Commercial
Code in the State of New York.
23
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be executed and delivered by their duly authorized officers as of
the date first above written.
Address: AGENCY.COM LTD.,
665 Broadway as an Assignor
New York, New York 10012
Attention: Chief Financial Officer
By /s/ Janet Ambrosi Wertman
---------------------------------
Title: E.V.P., Secretary
AGENCY INTERACTIVE MANAGEMENT
Address: INC., as an Assignor
25 First Street
Cambridge, MA 02141
Attention: Chief Financial Officer By /s/ Janet Ambrosi Wertman
---------------------------------
Title: Secretary
Address: ITI ACQUISITION INC. (to be known as
375 West Broadway Interactive Traffic Inc.),
New York, NY 10012 as an Assignor
Attention: Chief Financial Officer
By /s/ Janet Ambrosi Wertman
---------------------------------
Title: Secretary
OMNICOM FINANCE INC.,
as Lender
By /s/ Dennis E. Hewitt
---------------------------------
Title: Treasurer
24
<PAGE>
ANNEX A
TO SECURITY AGREEMENT
CHIEF EXECUTIVE OFFICES AND OTHER RECORD LOCATIONS
- --------------------------------------------------------------------------------
CHIEF EXECUTIVE OFFICES
- --------------------------------------------------------------------------------
ASSIGNOR ADDRESS
- --------------------------------------------------------------------------------
665 Broadway
Agency.Com Ltd. New York, NY 10012
- --------------------------------------------------------------------------------
8 Crinan Street
Battlebridge Basin
Agency.Com Limited London, England N1 9SQ
- --------------------------------------------------------------------------------
Postbus 23447
1100 DX Amsterdam Z.O.
Agency.Com : Amsterdam B.V. The Netherlands
- --------------------------------------------------------------------------------
25 First Street
Agency Interactive Management Inc. Cambridge, MA 02141
- --------------------------------------------------------------------------------
375 West Broadway
Interactive Traffic Inc. New York, NY 10012
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
OTHER RECORD LOCATIONS
- --------------------------------------------------------------------------------
ASSIGNOR ADDRESS
- --------------------------------------------------------------------------------
None.
- --------------------------------------------------------------------------------
<PAGE>
ANNEX B
TO SECURITY AGREEMENT
EQUIPMENT AND EQUIPMENT LOCATIONS
- --------------------------------------------------------------------------------
ASSIGNOR ADDRESS
- --------------------------------------------------------------------------------
665 Broadway
Agency.Com Ltd. New York, NY 10012
- --------------------------------------------------------------------------------
Agency.Com : Avon
37347 Highway 6, Suite 110
P.O. Box 3600
Agency.Com Ltd. Avon, CO 81620
- --------------------------------------------------------------------------------
Agency.Com : Boston
25 First Street
Agency.Com Ltd. Cambridge, MA 02141
- --------------------------------------------------------------------------------
Agency.Com : Chicago
400 West Erie
Suite 504
Agency.Com Ltd. Chicago, IL 60610
- --------------------------------------------------------------------------------
Agency.Com : Dallas
1701N. Market Street
Suite 400
Agency.Com Ltd. Dallas, TX 75202
- --------------------------------------------------------------------------------
Agency.Com : Portland
411 S.W. Second Avenue
Agency.Com Ltd. Portland, OR 97204
- --------------------------------------------------------------------------------
Agency.Com : San Francisco
121 Second Street
Agency.Com Ltd. San Francisco, CA 94105
- --------------------------------------------------------------------------------
Agency.Com : Schaumberg
1821 Walden Office Square
Agency.Com Ltd. Schaumberg, IL 60173
- --------------------------------------------------------------------------------
Agency.Com : Woodbridge
100 Woodbridge Center Drive
Suite 102
Agency.Com Ltd. Woodbridge, NJ 07095
- --------------------------------------------------------------------------------
8 Crinan Street
Battlebridge Basin
Agency.Com Limited London, England N1 9SQ
- --------------------------------------------------------------------------------
Postbus 23447
1100 DX Amsterdam Z.O.
Agency.Com : Amsterdam B.V. The Netherlands
- --------------------------------------------------------------------------------
Agency Interactive Management Inc. 25 First Street
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
Cambridge, MA 02141
- --------------------------------------------------------------------------------
ITI Acquisition Inc. (to be known as 375 West Broadway
Interactive Traffic Inc.) New York, NY 10012
- --------------------------------------------------------------------------------
<PAGE>
ANNEX C
TO SECURITY AGREEMENT
TRADE AND FICTITIOUS NAMES
Within the past twelve months, Agency.Com Ltd. (including predecessors and
acquired companies) have operated under the following names:
Eagle River Interactive Inc.
Interactive Solutions Incorporated
Quadric Consulting Inc.
Digital Vision Communications
Within the past twelve months, Agency.Com Limited has operated under the name
Online Magic Ltd.
Within the past twelve months, Agency.Com : Amsterdam B.V. has operated under
the name Twinspark Interactive People B.V.
<PAGE>
ANNEX D
TO SECURITY AGREEMENT
LIST OF MARKS
REGISTERED TRADEMARKS
"AGENCY.COM"
US: Reg. No. 2,235,578
Issue Date March 30, 1999
France: Reg. No. 96 645 996
Issue Date April 15, 1997
Germany: Reg. No. 396 33 425
Issue Date October 21, 1997
Registered in the name of Quadris Consulting Inc. (which was merged into
AGENCY.COM pursuant to an Agreement and Plan of Merger dated April 28, 1999):
"Quadris Consulting"
Reg. No. 2,033,960
Issue Date January 28, 1997
Registered in the name of Eagle River Interactive Inc. (which was merged into
AGENCY.COM pursuant to an Agreement and Plan of Merger dated April 28, 1999):
"Eagle River Interactive"
Reg. No. 2,063,824
Issue Date May 20, 1997
"We Have Their Undivided Attention"
Reg. No. 2,067,673
Issue Date 6/2/97
"Ergoknowledge"
Re. No. 2,083,647
Issue Date July 29, 1997
<PAGE>
TRADEMARKS FOR WHICH
APPLICATION IS PENDING
"AGENCY.COM"
UK: App. No. 2197804, Filed May 18, 1999 (with Logo)
UK: App. No. 2112393 (without Logo) - denied, in appeal
Singapore: App. No. 2450/98 (Class 35) and 2451/98 (Class 42); filed
March 18, 1998
"INTERACTIVE RELATIONSHIP MANAGEMENT"
US: App. No. 75/601021, Filed December 7, 1998
UK: App. No. 2186727, Filed January 21, 1999
Singapore: App. No. 448/99, Filed January 15, 1999
2
<PAGE>
Common Law Trademarks
"Online Magic", which was the prior name of AGENCY.COM LTD. (UK)
"The Primary Group", acquired in connection with the acquisition of Web design
LLC, d/b/a The Primary Group, on 8/31/98
AGENCY.COM has common law copyright interests in the code it writes in
connection with those of its client contracts that reserve such rights.
3
<PAGE>
ANNEX E
TO SECURITY AGREEMENT
LIST OF PATENTS
None.
<PAGE>
ANNEX F
TO SECURITY AGREEMENT
LIST OF COPYRIGHTS
No filed copyrights.
However, Agency.Com Ltd., ITI Acquisition Inc. (to be known as Interactive
Traffic Inc.) and Agency Interactive Management Inc. have common law copyright
interests in the code it writes in connection with those of its client contracts
that reserve such rights.
<PAGE>
ANNEX G
GRANT OF SECURITY INTEREST
IN UNITED STATES TRADEMARKS
FOR GOOD AND VALUABLE CONSIDERATION, receipt sufficiency of
which are hereby acknowledged, [Name of Grantor], a ___________ corporation (the
"Grantor") with principal offices at _____________________, hereby grants to
Omnicom Finance Inc., as Lender, with principal offices 437 Madison Avenue, New
York, New York 10022 (the "Grantee"), a security interest in (i) all of the
Grantor's right, title and interest in and to the United States trademarks,
trademark registrations and trademark applications (the "Marks"), including
without limitation, the registered trademarks set forth on Schedule A attached
hereto, the trademarks for which an application is pending set forth on Schedule
B attached hereto and the common law trademarks set forth on Schedule C attached
hereto, in each case together with (ii) all Proceeds (as such term is defined in
the Security Agreement referred to below) and products of the Marks, (iii) the
goodwill of the businesses with which the Marks are associated and (iv) all
causes of action arising prior to or after the date hereof for infringement of
any of the Marks or unfair competition regarding the same.
THIS AGREEMENT is made to secure the satisfactory performance
and payment of all the Obligations of the Grantor, as such term is defined in
the Security Agreement among Grantor, the other assignors from time to time
party thereto and the Grantee, dated as of [____], 1999 (as amended from time to
time, the "Security Agreement"). Upon the occurrence of the Termination Date (as
defined in the Security Agreement), the
<PAGE>
Grantee shall, upon such satisfaction, execute, acknowledge, and deliver to the
Grantor an instrument in writing releasing the security interest in the Marks
acquired under this Agreement.
This Agreement has been granted in conjunction with the
security interest granted to the Grantee under the Security Agreement. The
rights and remedies of the Grantee with respect to the security interest granted
herein are without prejudice to, and are in addition to those set forth in the
Security Agreement, all terms and provisions of which are incorporated herein by
reference. In the event that any provisions of this Agreement are deemed to
conflict with the Security Agreement, the provisions of the Security Agreement
shall govern.
IN WITNESS WHEREOF, the undersigned have executed this
Agreement as of the ____ day of [_______, 1999.
[NAME OF GRANTOR],
as Grantor
By:
------------------------------
Title:
OMNICOM FINANCE INC.,
as Lender
By:
------------------------------
Title:
2
<PAGE>
STATE OF NEW YORK )
) ss.:
COUNTY OF NEW YORK )
On this _____ day of [_________], 1999, before me personally
came who, being by me duly sworn, did state as follows: that [s]he is _________
of [Name of Grantor], that [s]he is authorized to execute the foregoing
Agreement on behalf of said corporation and that [s1he did so by authority of
the Board of Directors of said corporation.
--------------------------
Notary Public
<PAGE>
ANNEX H
GRANT OF SECURITY INTEREST
IN UNITED STATES PATENTS
FOR GOOD AND VALUABLE CONSIDERATION, receipt sufficiency of
which are hereby acknowledged, [Name of Grantor], a ___________ corporation (the
"Grantor") with principal offices at _____________________, hereby grants to
Omnicom Finance Inc., as Lender, with principal offices 437 Madison Avenue, New
York, New York 10022 (the "Grantee"), a security interest in (i) all of the
Grantor's rights, title and interest in and to the United States patents (the
"Patents") including, without limitation, the registered patents set forth on
Schedule A attached hereto and the patentable inventions set forth on Schedule B
attached hereto, in each case together with (ii) all Proceeds (as such term is
defined in the Security Agreement referred to below) and products of the
Patents, (iii) the goodwill of the businesses with which the Patents are
associated and (iv) all causes of action arising prior to or after the date
hereof for infringement of any of the Patents or unfair competition regarding
the same.
THIS AGREEMENT is made to secure the satisfactory performance
and payment of all the Obligations of the Grantor, as such term is defined in
the Security Agreement among Grantor, the other assignors from time to time
party thereto and the Grantee, dated as of [____], 1999 (as amended from time to
time, the "Security Agreement"). Upon the occurrence of the Termination Date (as
defined in the Security Agreement), the Grantee shall, upon such satisfaction,
execute, acknowledge, and deliver to the Grantor an instrument in writing
releasing the security interest in the Marks acquired under this Agreement.
This Agreement has been granted in conjunction with the
security interest granted to the Grantee under the Security Agreement. The
rights and remedies of the Grantee with respect to the security interest granted
herein are without prejudice to, and are in addition to those set forth in the
Security Agreement, all terms and provisions of which are incorporated herein by
reference. In the event that any provisions of this Agreement are deemed to
conflict with the Security Agreement, the provisions of the Security Agreement
shall govern.
IN WITNESS WHEREOF, the undersigned have executed this
Agreement as of the ____ day of [_______], 1999.
[NAME OF GRANTOR],
as Grantor
By:
------------------------------
2
<PAGE>
Title:
OMNICOM FINANCE INC.,
as Lender
By:
------------------------------
Title:
3
<PAGE>
STATE OF NEW YORK )
) ss.:
COUNTY OF NEW YORK )
On this _____ day of [_________], 1999, before me personally
came who, being by me duly sworn, did state as follows: that [s]he is _________
of [Name of Grantor], that [s]he is authorized to execute the foregoing
Agreement on behalf of said corporation and that [s1he did so by authority of
the Board of Directors of said corporation.
-----------------------------
Notary Public
<PAGE>
ANNEX I
GRANT OF SECURITY INTEREST
IN UNITED STATES COPYRIGHTS
WHEREAS, [Name of Grantor], a _____________ corporation (the
"Grantor"), having its chief executive office at ________________________, is
the owner of all right, title and interest in and to the United States
copyrights and associated United States copyright registrations, applications
for registration and unregistered copyright material set forth in the Schedules
attached hereto;
WHEREAS, OMNICOM FINANCE LTD., as Lender, having its principal
offices at 437 Madison Avenue, New York, New York 10022 (the "Grantee"), desires
to acquire a security interest in said copyrights and copyright registrations,
applications and unregistered copyright material therefor; and
WHEREAS, the Grantor is willing to grant the Grantee a
security interest in and lien upon the copyrights and copyright registrations,
applications and unregistered copyright material therefor described above;
NOW THEREFORE, for good and valuable consideration, the
receipt of which is hereby acknowledged, and subject to the terms and conditions
of the Security Agreement, dated as of [________], 1999, made by the Grantor,
the other assignors from time to time party thereto and the Grantee (as amended
from time to time, the "Security Agreement"), the Grantor hereby grants to the
Grantee a security interest in the copyrights and copyright registrations set
forth in Schedule A attached hereto, the applications therefor set forth in
Schedule B attached hereto and the unregistered copyright material set forth in
Schedule C attached hererto.
This Agreement has been granted in conjunction with the
security interest granted to the Grantee under the Security Agreement. The
rights and remedies of the Grantee with respect to the security interest granted
herein are without prejudice to, and are in addition to those set forth in the
Security Agreement, all terms and provisions of which are incorporated herein by
reference. In the event that any provisions of this Agreement are deemed to
conflict with the Security Agreement, the provisions of the Security Agreement
shall govern.
<PAGE>
Executed at New York, New York, the ___ day of [________],
1999.
[NAME OF GRANTOR],
as Grantor
By:
------------------------------
Title:
OMNICOM FINANCE INC.,
as Lender
By:
------------------------------
Title:
2
<PAGE>
STATE OF NEW YORK )
) ss.:
COUNTY OF NEW YORK )
On this _____ day of [_________], 1999, before me personally
came who, being by me duly sworn, did state as follows: that [s]he is _________
of [Name of Grantor], that [s]he is authorized to execute the foregoing
Agreement on behalf of said corporation and that [s1he did so by authority of
the Board of Directors of said corporation.
----------------------------
Notary Public
<PAGE>
EXECUTION COPY
PLEDGE AGREEMENT
PLEDGE AGREEMENT, dated as of November 4, 1999 (as amended,
modified or supplemented from time to time, this "Agreement"), made by
AGENCY.COM LTD. (the "Pledgor"), in favor of OMNICOM FINANCE INC., (the
"Pledgee"), for the benefit of the Pledgee. Except as otherwise defined herein,
terms used herein and defined in the Credit Agreement (as defined below) shall
be used herein as therein defined.
W I T N E S S E T H:
WHEREAS, Pledgor and Pledgee have entered into a Credit
Agreement, dated as of the date hereof (as amended, modified or supplemented
from time to time, the "Credit Agreement"), providing for the making of Loans to
the Pledgor as contemplated therein;
WHEREAS, pursuant to the Credit Agreement, each Subsidiary
Guarantor has jointly and severally guaranteed to the Pledgee the payment when
due of all debts, obligations and liabilities of the Company under or with
respect to the Loans, Notes and other Basic Documents;
WHEREAS, it is a condition precedent to the making of Loans to
the Pledgor under the Credit Agreement that the Pledgor shall have executed and
delivered to the Pledgee this Agreement; and
WHEREAS, the Pledgor desires to execute this Agreement to
satisfy the conditions described in the preceding paragraph;
NOW, THEREFORE, in consideration of the benefits accruing to
the Pledgor, the receipt and sufficiency of which are hereby acknowledged, the
Pledgor hereby makes the following representations and warranties to the Pledgee
and hereby covenants and agrees with the Pledgee as follows:
1. SECURITY FOR OBLIGATIONS. This Agreement is made by the
Pledgor for the benefit of the Pledgee to secure:
(i) the full and prompt payment when due (whether at
the stated maturity, by acceleration or otherwise) of all obligations and
liabilities (including obligations which, but for the automatic stay under
Section 362(a) of the Bankruptcy Code, would become due) of the Pledgor, now
existing or hereafter incurred under, arising out of or in connection with the
Credit Agreement and any Basic Document to which the Pledgor is a party and the
due performance and compliance by the Pledgor with the terms of the Credit
Agreement and each such Basic Document;
<PAGE>
(ii) any and all sums advanced by the Pledgee in
order to preserve the Collateral (as hereinafter defined) or preserve its
security interest in the Collateral;
(iii) in the event of any proceeding for the
collection or enforcement of any indebtedness, obligations, or liabilities
referred to in clauses (i) and (ii) above, after an Event of Default on any of
the Obligations (as hereinafter defined)) shall have occurred and be continuing,
the reasonable expenses of retaking, holding, preparing for sale or lease,
selling or otherwise disposing or realizing on the Collateral, or of any
exercise by the Pledgee of its rights hereunder, together with reasonable
attorneys' fees and court costs; and
(iv) all amounts paid by the Pledgee as to which the
Pledgee has the right to indemnification or reimbursement under Section 11 of
this Agreement,
all such obligations, liabilities, sums and expenses set forth in clauses (i)
through (iv) of this Section 1 being herein collectively called the
"Obligations".
2. DEFINITION OF STOCK, NOTES, SECURITIES, ETC. As used
herein: (i) the term "Stock" shall mean (x) with respect to corporations
incorporated under the laws of the United States or any State or territory
thereof (each, a "Domestic Corporation"), all of the issued and outstanding
shares of capital stock of any Domestic Corporation at any time owned by the
Pledgor and (y) with respect to corporations not Domestic Corporations (each, a
"Foreign Corporation"), all of the issued and outstanding shares of capital
stock at any time directly owned by the Pledgor of any Foreign Corporation; (ii)
the term "Notes" shall mean all promissory notes from time to time issued to, or
held by, the Pledgor; and (iii) the term "Securities" shall mean all of the
Stock and Notes. The Pledgor represents and warrants that on the date hereof (i)
each Subsidiary of the Pledgor, and the direct ownership thereof, is listed in
Annex A hereto; (ii) the Stock held by the Pledgor consists of the number and
type of shares of the stock of the corporations as described in Annex B hereto;
(iii) such Stock constitutes that percentage of the issued and outstanding
capital stock of the issuing corporation as is set forth in Annex B hereto; (iv)
the Notes held by the Pledgor consist of the promissory notes described in Annex
C hereto where the Pledgor is listed as the lender; and (v) on the date hereof,
the Pledgor owns no other Securities.
3. PLEDGE OF SECURITIES, ETC.
3.1. PLEDGE. To secure the Obligations and for the purposes
set forth in Section 1 hereof, the Pledgor hereby: (i) grants to the Pledgee a
security interest in all of the Collateral (as hereinafter defined) owned by the
Pledgor; (ii) pledges and deposits as security with the Pledgee the Securities
owned by the Pledgor on the date hereof, and delivers to the Pledgee
certificates or instruments therefor, duly endorsed in blank in the case of
Notes and accompanied by undated stock powers duly executed in blank by the
Pledgor in the case of Stock, or such other instruments of transfer as are
acceptable to the Pledgee: and (iii) assigns, transfers, hypothecates,
mortgages, charges and sets over to the Pledgee all of the Pledgor's
2
<PAGE>
right, title and interest in and to such Securities (and in and to all
certificates or instruments evidencing such Securities), to be held by the
Pledgee, upon the terms and conditions set forth in this Agreement.
Notwithstanding anything contained herein to the contrary, it is understood that
in no event shall the Pledgor pledge more than 65% of the capital stock of any
Foreign Subsidiary (as defined in the Credit Agreement) to the Pledgee
hereunder.
3.2. SUBSEQUENTLY ACQUIRED SECURITIES. If the Pledgor shall
acquire (by purchase, stock dividend or otherwise) any additional Securities at
any time or from time to time after the date hereof, the Pledgor will forthwith
pledge and deposit such Securities (or certificates or instruments representing
such Securities) as security with the Pledgee and deliver to the Pledgee
certificates therefor or instruments thereof, duly endorsed in blank in the case
of Notes and accompanied by undated stock powers duly executed in blank in the
case of Stock, or such other instruments of transfer as are acceptable to the
Pledgee, and will promptly thereafter deliver to the Pledgee a certificate
executed by any authorized officer of the Pledgor describing such Securities and
certifying that the same have been duly pledged with the Pledgee hereunder. Such
additional Securities shall be deemed to be held in trust for the benefit of the
Pledgee and subject hereto until so delivered.
3.3. UNCERTIFICATED SECURITIES. Notwithstanding anything to
the contrary contained in Sections 3.1 and 3.2 hereof, if any Securities
(whether now owned or hereafter acquired) are uncertificated securities, the
Pledgor shall promptly notify the Pledgee thereof, and shall promptly take all
actions required to perfect the security interest of the Pledgee under
applicable law (including, in any event, under the applicable sections of the
New York UCC, if applicable). The Pledgor further agrees to take such actions as
the Pledgee deems reasonably necessary or desirable to effect the foregoing and
to permit the Pledgee to exercise any of its rights and remedies hereunder, and
agrees to provide an opinion of counsel reasonably satisfactory to the Pledgee
with respect to any such pledge of uncertificated Securities promptly upon
request of the Pledgee.
3.4. DEFINITION OF PLEDGED STOCK, PLEDGED NOTES, PLEDGED
SECURITIES AND COLLATERAL. All Stock at any time pledged or required to be
pledged hereunder is hereinafter called the "Pledged Stock," all Notes at any
time pledged or required to be pledged hereunder are hereinafter called the
"Pledged Notes," all of the Pledged Stock and Pledged Notes together are
hereinafter called the "Pledged Securities," which together with all dividends
and interest thereon, as the case may be, and all proceeds thereof, including
any securities and moneys received and at the time held by the Pledgee
hereunder, is hereinafter called the "Collateral."
4. APPOINTMENT OF SUB-AGENTS; ENDORSEMENTS, ETC. The Pledgee
shall have the right to appoint one or more sub-agents for the purpose of
retaining physical possession of the Pledged Securities, which may be held (in
the discretion of the Pledgee) in the name of the Pledgor, endorsed or assigned
in blank or in favor of the Pledgee or any nominee or nominees of the Pledgee or
a sub-agent appointed by the Pledgee. The Pledgee agrees to promptly notify the
Pledgor after the appointment" of any sub-agent; PROVIDED, HOWEVER, that the
failure to give such notice shall not affect the
3
<PAGE>
validity of such appointment.
5. VOTING, ETC., WHILE NO EVENT OF DEFAULT. Unless and until
(i) an Event of Default shall have occurred and be continuing and (ii) written
notice thereof shall have been given by the Pledgee to the Pledgor (PROVIDED,
that if an Event of Default specified in Section 10(f) or 10(g) of the Credit
Agreement shall occur, no such notice shall be required), the Pledgor shall be
entitled to exercise any and all voting and other consensual rights pertaining
to the Pledged Securities and to give all consents, waivers or ratifications in
respect thereof, PROVIDED, that no vote shall be cast or any consent, waiver or
ratification given or any action taken which would violate or be inconsistent
with any of the terms of this Agreement, the Credit Agreement or any other Basic
Document (collectively, the "Secured Debt Agreements"), or which would have the
effect of impairing the position or interests of the Pledgee, except to the
extent such violation, inconsistency or impairment shall be waived in accordance
with the terms of Section 19 hereof. All such rights of the Pledgor to vote and
to give consents, waivers and ratifications shall cease in case an Event of
Default shall occur and be continuing, and Section 7 hereof shall become
applicable.
6. DIVIDENDS AND OTHER DISTRIBUTIONS. Unless an Event of
Default shall have occurred and be continuing, all cash dividends payable in
respect of the Pledged Stock and all payments in respect of the Pledged Notes
shall be paid to the Pledgor; PROVIDED, that all cash dividends payable in
respect of the Pledged Stock which are determined by the Pledgee to represent in
whole or in part an extraordinary, liquidating or other distribution in return
of capital shall be paid, to the extent so determined to represent an
extraordinary, liquidating or other distribution in return of capital, to the
Pledgee and retained by it as part of the Collateral. Pledgee shall also be
entitled to receive directly, and to retain as part of the Collateral:
(i) all other or additional stock or other securities
or property (other than cash) paid or distributed by way of dividend or
otherwise in respect of the Pledged Stock;
(ii) all other or additional stock or other
securities or property (including cash) paid or distributed in respect of the
Pledged Stock by way of stock-split, spin-off, split-up, reclassification,
combination of shares or similar rearrangement; and
(iii) all other or additional stock or other
securities or property (including cash) which may be paid in respect of the
Collateral by reason of any consolidation, merger, exchange of stock, conveyance
of assets, liquidation or similar corporate reorganization.
7. REMEDIES IN CASE OF EVENT OF DEFAULT. In case an Event of
Default shall have occurred and be continuing, the Pledgee shall be entitled to
exercise all of the rights, powers and remedies (whether vested in it by this
Agreement or by any other Secured Debt Agreement or by law) for the protection
and enforcement of its rights in
4
<PAGE>
respect of the Collateral, and the Pledgee shall be entitled, without
limitation, to exercise the following rights, which the Pledgor hereby agrees to
be commercially reasonable:
(i) to receive all amounts payable in respect of the
Collateral payable to the Pledgor under Section 6 hereof;
(ii) to transfer all or any part of the Pledged
Securities into the Pledgee's name or the name of its nominee or nominees (the
Pledgee agrees to notify the Pledgor after such transfer; PROVIDED, HOWEVER,
that the failure to give such notice shall not affect the validity of such
transfer);
(iii) to accelerate any Pledged Note which may be
accelerated in accordance with its terms, and take any other action to collect
upon any Pledged Note (including, without limitation, to make any demand for
payment thereon),
(iv) subject to the giving of written notice to the
Pledgor in accordance with clause (ii) of Section 5 hereof (to the extent
required by such Section 5), to vote all or any part of the Pledged Stock
(whether or not transferred into the name of the Pledgee) and give all consents,
waivers and ratifications in respect of the Collateral and otherwise act with
respect thereto as though it were the outright owner thereof (the Pledgor hereby
irrevocably constituting and appointing the Pledgee the proxy and
attorney-in-fact of the Pledgor, with full power of substitution to do so); and
(v) at any time or from time to time to sell, assign
and deliver, or grant options to purchase, all or any part of the Collateral, or
any interest therein, at any public or private sale, without demand of
performance, advertisement or notice of intention to sell or of the time or
place of sale or adjournment thereof or to redeem or otherwise (all of which are
hereby waived by the Pledgor), for cash, on credit or for other property, for
immediate or future delivery without any assumption of credit risk, and for such
price or prices and on such terms as the Pledgee in its absolute discretion may
determine; PROVIDED, that at least 10 days' written notice of the time and place
of any such sale shall be given to the Pledgor. The Pledgor hereby waives and
releases to the fullest extent permitted by law any right or equity of
redemption with respect to the Collateral, whether before or after sale
hereunder, and all rights, if any, of marshalling the Collateral and any other
security for the Obligations or otherwise. At any such sale, unless prohibited
by applicable law, the Pledgee may bid for and purchase all or any part of the
Collateral so sold free from any such right or equity of redemption. The Pledgee
shall not be liable for failure to collect or realize upon any or all of the
Collateral or for any delay in so doing nor shall any of them be under any
obligation to take any action whatsoever with regard thereto.
8. REMEDIES, ETC., CUMULATIVE. Each right, power and remedy of
the Pledgee provided for in this Agreement or any other Secured Debt Agreement
or now or hereafter existing at law or in equity or by statute shall be
cumulative and concurrent and shall be in addition to every other such right,
power or remedy. The exercise or beginning of the exercise by the Pledgee of any
one or more of the rights, powers or remedies provided for
5
<PAGE>
in this Agreement or any other Secured Debt Agreement or now or hereafter
existing at law or in equity or by statute or otherwise shall not preclude the
simultaneous or later exercise by the Pledgee of all such other rights, powers
or remedies, and no failure or delay on the part of the Pledgee to exercise any
such right, power or remedy shall operate as a waiver thereof.
9. APPLICATION OF PROCEEDS. (a) All moneys collected by the
Pledgee upon any sale or other disposition of the Collateral pursuant to the
terms of this Agreement, together with all other moneys received by the Pledgee
hereunder, shall be applied in the manner provided in the Security Agreement.
(b) It is understood and agreed that the Pledgor shall remain
liable to the extent of any deficiency between the amount of the proceeds of the
Collateral hereunder and the aggregate amount of the Obligations.
10. PURCHASERS OF COLLATERAL. Upon any sale of the Collateral
by the Pledgee hereunder (whether by virtue of the power of sale herein granted,
pursuant to judicial process or otherwise), the receipt of the Pledgee or the
officer making the sale shall be a sufficient discharge to the purchaser or
purchasers of the Collateral so sold, and such purchaser or purchasers shall not
be obligated to see to the application of any part of the purchase money paid
over to the Pledgee or such officer or be answerable in any way for the
misapplication or nonapplication thereof.
11. INDEMNITY. The Pledgor agrees (i) to promptly indemnify
and hold harmless the Pledgee in such capacity from and against any and all
claims, demands, losses, judgments and liabilities of whatsoever kind or nature,
and (ii) to reimburse the Pledgee for all costs and expenses, including
attorneys' fees, growing out of or resulting from this Agreement or the exercise
by the Pledgee of any right or remedy granted to it hereunder or under any other
Secured Debt Agreement except, with respect to clauses (i) and (ii) above, for
those arising from the Pledgee's gross negligence or willful misconduct. In no
event shall the Pledgee be liable, in the absence of gross negligence or willful
misconduct on its part, for any matter or thing in connection with this
Agreement other than to account for moneys actually received by it in accordance
with the terms hereof. If and to the extent that the obligations of the Pledgor
under this Section 11 are unenforceable for any reason, the Pledgor hereby
agrees to make the maximum contribution to the payment and satisfaction of such
obligations which is permissible under applicable law.
12. FURTHER ASSURANCES. The Pledgor agrees that it will join
with the Pledgee in executing and, at the Pledgor's own expense, file and refile
under the applicable UCC or appropriate local equivalent, such financing
statements, continuation statements and other documents in such offices as the
Pledgee may deem reasonably necessary or appropriate and wherever required or
permitted by law in order to perfect and preserve the Pledgee's security
interest in the Collateral and hereby authorizes the Pledgee to file financing
statements and amendments thereto relative to all or any part of the Collateral
without the signature of the Pledgor where permitted by law, and agrees to do
such further acts and things and to execute and deliver to the Pledgee such
additional conveyances,
6
<PAGE>
assignments, agreements and instruments as the Pledgee may reasonably require or
deem advisable to carry into effect the purposes of this Agreement or to further
assure and confirm unto the Pledgee its rights, powers and remedies hereunder.
13. THE PLEDGEE AS AGENT. The Pledgee will hold in accordance
with this Agreement all items of the Collateral at any time received under this
Agreement. It is expressly understood and agreed that the obligations of the
Pledgee as holder of the Collateral and interests therein and with respect to
the disposition thereof, and otherwise under this Agreement, are only those
expressly set forth in this Agreement.
14. TRANSFER BY PLEDGOR. Except for sales or dispositions of
Collateral permitted pursuant to the Credit Agreement, the Pledgor will not sell
or otherwise dispose of, grant any option with respect to, or mortgage, pledge
or otherwise encumber any of the Collateral or any interest therein (except in
accordance with the terms of this Agreement).
15. REPRESENTATIONS, WARRANTIES AND COVENANTS OF PLEDGOR. The
Pledgor represents, warrants and covenants that (i) it is the legal, record and
beneficial owner of, and has good and marketable title to, all Securities
pledged by it hereunder, subject to no pledge, lien, mortgage, hypothecation,
security interest, charge, option or other encumbrance whatsoever, except the
liens and security interests created by this Agreement and liens permitted under
clause (c) of Section 9.6 of the Credit Agreement; (ii) it has full power,
authority and legal right to pledge all the Securities pledged by it pursuant to
this Agreement; (iii) this Agreement has been duly authorized, executed and
delivered by the Pledgor and constitutes a legal, valid and binding obligation
of the Pledgor enforceable in accordance with its terms, except to the extent
that the enforceability hereof may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium or other similar laws affecting
creditors' rights generally and by equitable principles (regardless of whether
enforcement is sought in equity or at law); (iv) no consent of any other party
(including, without limitation, any stockholder or creditor of the Pledgor or
any of its Subsidiaries) and no consent, license, permit, approval or
authorization of, exemption by, notice or report to, or registration, filing or
declaration with, any governmental authority is required to be obtained by the
Pledgor in connection with the execution, delivery or performance of this
Agreement, or in connection with the exercise of its rights and remedies
pursuant to this Agreement, except as may be required in connection with the
disposition of the Securities by laws affecting the offering and sale of
securities generally; (v) the execution, delivery and performance of this
Agreement by the Pledgor does not violate any provision of any applicable law or
regulation or of any order, judgment, writ, award or decree of any court,
arbitrator or governmental authority, domestic or foreign, or of the certificate
of incorporation or by-laws of the Pledgor or of any securities issued by the
Pledgor or any of its Subsidiaries, or of any mortgage, indenture, deed of
trust, loan agreement, credit agreement or any other agreement or material
instrument to which the Pledgor or any of its Subsidiaries is a party or which
purports to be binding upon the Pledgor or any of its Subsidiaries or upon any
of their respective assets and will not result in the creation or imposition of
any lien or encumbrance on any of the assets of the Pledgor or any
7
<PAGE>
of its Subsidiaries except as contemplated by this Agreement; (vi) each of the
Pledged Notes, when executed by the obligor thereof, will be the legal, valid
and binding obligation of such obligor, enforceable in accordance with its
terms, except to the extent that the enforceability thereof may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium or other similar
laws affecting creditors' rights generally and by equitable principles
(regardless of whether enforcement is sought in equity or at law); and (vii) the
pledge and assignment of the Securities pursuant to this Agreement, together
with the delivery of the Securities pursuant to this Agreement (which delivery
has been made), creates a valid and perfected first security interest in such
Securities and the proceeds thereof, subject to no prior lien or encumbrance or
to any agreement purporting to grant to any third party a lien or encumbrance on
the property or assets of the Pledgor which would include the Securities other
than liens permitted under clause (a) of Section 9.6 of the Credit Agreement.
The Pledgor covenants and agrees that it will defend the Pledgee's right, title
and security interest in and to the Securities and the proceeds thereof against
the claims and demands of all persons whomsoever; and the Pledgor covenants and
agrees that it will have like title to and right to pledge any other property at
any time hereafter pledged to the Pledgee as Collateral hereunder and will
likewise defend the right thereto and security interest therein of the Pledgee.
16. PLEDGORS' OBLIGATIONS ABSOLUTE, ETC. The obligations of
the Pledgor under this Agreement shall be absolute and unconditional and shall
remain in full force and effect without regard to, and shall not be released,
suspended, discharged, terminated or otherwise affected by, any circumstance or
occurrence whatsoever, including, without limitation: (i) any renewal,
extension, amendment or modification of or addition or supplement to or deletion
from any Secured Debt Agreement or any other instrument or agreement referred to
therein, or any assignment or transfer of any thereof; (ii) any waiver, consent,
extension, indulgence or other action or inaction under or in respect of any
such agreement or instrument or this Agreement; (iii) any furnishing of any
additional security to the Pledgee or its assignee or any acceptance thereof or
any release of any security by the Pledgee or its assignee; (iv) any limitation
on any party's liability or obligations under any such instrument or agreement
or any invalidity or unenforceability, in whole or in part, of any such
instrument or agreement or any term thereof; or (v) any bankruptcy, insolvency,
reorganization, composition, adjustment, dissolution, liquidation or other like
proceeding relating to the Pledgor or any Subsidiary of the Pledgor, or any
action taken with respect to this Agreement by any trustee or receiver, or by
any court, in any such proceeding, whether or not the Pledgor shall have notice
or knowledge of any of the foregoing.
17. TERMINATION, RELEASE. (a) After the Termination Date (as
defined below), this Agreement shall terminate (provided that all indemnities
set forth herein including, without limitation, in Section 11 hereof shall
survive any such termination) and the Pledgee, at the request and expense of the
Pledgor, will promptly execute and deliver to the Pledgor a proper instrument or
instruments acknowledging the satisfaction and termination of this Agreement,
and will duly release from the pledge and security interest created hereby and
assign, transfer and deliver to the Pledgor (without recourse and without any
representation or warranty) such of the Collateral as may be in the possession
of the
8
<PAGE>
Pledgee and as has not theretofore been sold or otherwise applied or released
pursuant to this Agreement. As used in this Agreement, "Termination Date" shall
mean the date upon which the Commitments have been terminated, no Note (as
defined in the Credit Agreement) is outstanding and all other Obligations (other
than indemnities described in Section 11 hereof and in Section 11.7 of the
Credit Agreement which are not then due and payable) have been paid in full.
(b) In the event that any part of the Collateral is
sold or otherwise disposed of in connection with a sale or other disposition
permitted by Section 9.5 of the Credit Agreement or is otherwise released at the
direction of the Pledgee, the Pledgee, at the request and expense of the Pledgor
will duly release from the security interest created hereby and assign, transfer
and deliver to the Pledgor (without recourse and without any representation or
warranty) such of the Collateral as is then being (or has been) so sold or
released and as may be in possession of the Pledgee and has not theretofore been
released pursuant to this Agreement.
(c) At any time that the Pledgor desires that
Collateral be released as provided in the foregoing Section 17(a) or (b), it
shall deliver to the Pledgee a certificate signed by an authorized officer of
the Pledgor stating that the release of the respective Collateral is permitted
pursuant to Section 17(a) or (b).
18. NOTICES, ETC. All notices and other communications
hereunder shall be in writing and shall be delivered or mailed by first class
mail, postage prepaid, addressed:
(a) if to the Pledgor, at;
Agency.Com Ltd.
665 Broadway
New York, New York 10012
Attention: Chief Financial Officer
Telephone No.: (212) 358-8255
Telecopier No.: (212) 358-8220
(b) if to the Pledgee, at:
Omnicom Finance Inc.
437 Madison Avenue
New York, New York 10022
Attention: Chief Financial Officer
Telephone No.: (212) 415-3600
Telecopier No.: (212) 415-3530
9
<PAGE>
With a copy to:
Davis & Gilbert LLP
1740 Broadway
New York, New York 10019
Attention: Michael D. Ditzian, Esq.
Telephone No.: (212) 468-4800
Telecopier No.: (212) 469-4888
or at such other address as shall have been furnished in writing by any Person
described above to the party required to give notice hereunder.
19. WAIVER, AMENDMENT. None of the terms and conditions of
this Agreement may be changed waived, modified or varied in any manner
whatsoever unless in writing duly signed by the Pledgor directly affected
thereby and the Pledgee.
20. MISCELLANEOUS. This Agreement shall be binding upon the
successors and assigns of the Pledgor and shall inure to the benefit of and be
enforceable by the Pledgee and its successors and assigns. THIS AGREEMENT SHALL
BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH AND GOVERNED BY THE LAW OF THE
STATE OF NEW YORK. The headings in this Agreement are for purposes of reference
only and shall not limit or define the meaning hereof. This Agreement may be
executed in any number of counterparts, each of which shall be an original, but
all of which shall constitute one instrument.
10
<PAGE>
IN WITNESS WHEREOF, the Pledgor and the Pledgee have caused
this Agreement to be executed by their duly elected officers duly authorized as
of the date first above written.
AGENCY.COM LTD., as Pledgor
By /s/ Janet Ambrosi Wertman
--------------------------------
Name: Janet Ambrosi Wertman
Title: E.V.P., Secretary
OMNICOM FINANCE INC., as Pledgee
By /s/ Dennis E. Hewitt
--------------------------------
Name: Dennis E. Hewitt
Title: Treasurer
11
<PAGE>
ANNEX A
TO PLEDGE AGREEMENT
LIST OF SUBSIDIARIES
Agency.Com Ltd., a company incorporated in England and Wales under the
Companies Act 1985 as a limited company. Wholly-owned by the Company.
Agency.Com, Amsterdam B.V., a company incorporated under the laws of
the Kingdom of the Netherlands as a limited liability company (formerly
Twinspark Interactive People B.V.). Wholly-owned by the Company
Agency Interactive Management Inc., a corporation organized under the
laws of the Commonwealth of Massachusetts. Wholly-owned by the Company.
ITI Acquisition Inc. (to be known as Interactive Traffic Inc.), a
corporation organized under the laws of the State of Delaware.
Wholly-owned by the Company.
12
<PAGE>
ANNEX B
TO PLEDGE AGREEMENT
LIST OF STOCK
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
NUMBER OF TYPE OF PERCENTAGE
STOCK HELD IN: ISSUED SHARES SHARES OF CLASS
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
574 Ordinary 100%
Agency.Com Ltd. 226 Non-Voting 100%
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Agency.Com: Amsterdam B.V. 15,000,000 Capital 100%
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Agency Interactive Management Inc. 100 shares Common 100%
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
ITI Acquisition Inc. (to be known as
Interactive Traffic Inc.) 100 shares Common 100%
- -------------------------------------------------------------------------------
</TABLE>
13
<PAGE>
ANNEX C
TO PLEDGE AGREEMENT
LIST OF NOTES
None.
14
<PAGE>
Exhibit 10.19
EMPLOYMENT AGREEMENT
AGREEMENT made this 28 day of October, 1999, by and between
AGENCY.COM LTD., a New York corporation (the "Company"), and CHARLES T. DICKSON
(the "Executive").
W I T N E S S E T H:
WHEREAS, the Company wishes to employ the Executive and the
Executive wishes to accept such employment upon the terms and conditions
hereinafter set forth.
NOW, THEREFORE, in consideration of the premises and other good and
valuable consideration, receipt of which is hereby acknowledged, the parties
hereto agree as follows:
1. Employment
The Company agrees to employ the Executive during the Term specified
in paragraph 2, and the Executive agrees to accept such employment, upon the
terms and conditions hereinafter set forth.
2. Term
Subject to paragraphs 6 and 7 below and the other terms and
conditions of this Agreement, the Executive's employment by the Company shall be
for a term commencing on November 1, 1999 and expiring on the close of business
on October 31, 2002 (the "Initial Term"); provided, however, that the term of
the Executive's employment by the Company shall be automatically renewed for
successive three-year periods thereafter (each, an "Additional Term") unless and
until either party shall give to the other no more than nine and no less than
six months advance written notice of expiration of the term (a "Notice of
Non-Renewal ") (the Initial Term and any Additional Terms are collectively
referred to as the "Term"). The Company shall have the right at any time during
such notice period (the "Notice Period"), to relieve the Executive of his
offices, duties and responsibilities and to place him on a paid leave-of-absence
status, provided that during such notice period the Executive shall remain a
full-time employee of the Company and shall continue to receive his salary
compensation and other benefits as provided in this Agreement. The effective
date of the termination of the Executive's employment with the Company,
regardless of the reason therefor (including without limitation death), is
referred to in this Agreement as the "Date of Termination".
<PAGE>
3. Duties and Responsibilities
(a) During the Term, the Executive shall have the position of Chief
Financial Officer of the Company. The Executive shall report to the Chief
Executive Officer of the Company (the "CEO"), at such times and in such detail
as he shall reasonably require.
(b) The Executive shall perform such executive and managerial duties
and responsibilities customary to his offices and as are reasonably necessary to
the operations of the Company and its subsidiaries and as may be assigned to him
from time to time by or under authority of the CEO, consistent with his
positions as designated in paragraph 3(a) above.
(c) The Executive (i) will use his best reasonable efforts to ensure
that the Company and its subsidiaries comply on a timely basis with all
budgetary and reporting requirements reasonably requested by the CEO and (ii)
will not incur obligations on behalf of the Company or any subsidiary other than
in the ordinary course of business or enter into any transaction on behalf of
the Company or any subsidiary not in the ordinary course of business without the
approval of the CEO.
(d) The Executive's employment by the Company shall be full-time and
exclusive, and during the Term, the Executive agrees that he will (i) devote all
of his business time and attention, his best efforts, and all of his skill and
ability to promote the interests of the Company and its subsidiaries, (ii) carry
out his duties in a competent and professional manner, and (iii) work with other
employees of the Company and its subsidiaries in a competent and professional
manner. Notwithstanding the foregoing, the Executive shall be permitted to
engage in charitable and civic activities, and manage his personal passive
investments, provided that such passive investments are not in a company which
transacts business with the Company or one of its subsidiaries or engages in
business competitive with that conducted by the Company or one of its
subsidiaries (or, if such company does transact business with the Company or a
subsidiary or does engage in a competitive business, it is a publicly held
corporation of which the Executive owns less than 1/4 of 1% of its outstanding
shares); provided, that such activities (individually or collectively) do not
materially interfere with the performance of the Executive's duties and
responsibilities under this Agreement.
(e) During the Term, the Executive's services hereunder shall be
performed at the offices of the Company in New York, New York, subject to
necessary travel requirements of his position and duties hereunder.
4. Compensation
(a) As compensation for his services hereunder and in consideration
of his non-solicitation/non-servicing and non-disclosure covenants as set forth
in paragraph 8 below, during the Term the Company shall pay the Executive in
accordance with its normal
2
<PAGE>
payroll practices an annualized base salary of $250,000. The Executive's base
salary may be increased (but not decreased) by or under the authority of the CEO
in accordance with the then salary review policy of the Company and within the
guidelines and budgetary procedures of the Company.
(b) In addition to the salary compensation set forth in clause (a),
during the Term the Executive shall be entitled to receive a guaranteed annual
bonus of $100,000, payable in quarterly installments on the last day of each
calendar quarter. The first installment, payable on December 31, 1999, shall be
in the amount of $16,667; subsequent installments during the Term shall be in
the amount of $25,000 each except for the final payment which will be in the
amount of $8,333.
(c) In addition to the guaranteed bonus compensation set forth in
clause (b), during the Term the Executive shall be eligible to receive
discretionary annual bonus compensation of up to $100,000. Such discretionary
bonus will be payable with the first payroll of each November during the Term
(except the discretionary bonus, if any, with respect to the final year of the
Term will be paid promptly following the expiration of the Term), and will be
based on the Executive's performance, measured against objectives agreed to by
the Executive and the Chief Executive Officer.
(d) The Executive shall be eligible to participate in the Company's
1999 Stock Option/Stock Issuance Program (or any successor plan) and to receive
awards thereunder. Award shall be at the discretion of the Compensation
Committee of the Company.
(e) The bonuses provided in this paragraph 2 for the Executive shall
be in lieu of participation by the Executive in any other Company-sponsored
bonus plans.
5. Expenses; Fringe Benefits
(a) The Company agrees to pay or to reimburse the Executive for all
reasonable, ordinary and necessary documented business or entertainment expenses
incurred during the Term in the performance of his services hereunder in
accordance with the policy of the Company as from time to time in effect. The
Executive, as a condition precedent to obtaining such payment or reimbursement,
shall provide to the Company any and all statements, bills or receipts
evidencing the travel or out-of-pocket expenses for which the Executive seeks
payment or reimbursement, and any other information or materials, as the Company
may from time to time reasonably require.
(b) During the Term, the Executive and, to the extent eligible, his
dependents, shall be entitled to participate in and receive all benefits under
any welfare benefit plans and programs made available generally to the Company's
senior executives or to its employees (including without limitation, medical,
disability and life insurance
3
<PAGE>
programs, accidental death and dismemberment protection and business travel
insurance), subject, however, to the generally applicable eligibility and other
provisions of the various plans and programs in effect from time to time.
(c) During the Term, the Executive shall be eligible to participate
in all retirement plans and programs (including without limitation any profit
sharing/401(k) plan) and stock option and restricted stock plans made available
generally to the Company's senior executives or to its employees generally,
subject, however, to the generally applicable eligibility and other provisions
of the various plans and programs in effect from time to time. In addition,
during the Term, the Executive shall be entitled to receive fringe benefits and
perquisites in accordance with the plans, practices, programs and policies of
the Company from time to time in effect which are made available generally to
the Company's senior executives or to its employees generally.
(d) The Executive shall be entitled to four weeks paid vacation
annually (on a non-cumulative basis, except as otherwise provided under standard
Company policy), to be taken at such time(s) as shall not, in the reasonable
judgment of the Board, materially interfere with the Executive's fulfillment of
his duties hereunder, and shall be entitled to as many holidays, sick days and
personal days as are in accordance with the Company's policy then in effect
generally for its employees.
6. Termination
(a) The Company, by direction of the CEO, shall be entitled to
terminate the Term and to discharge the Executive for "cause" effective upon the
giving of written notice. The term "cause" shall be limited to the following
grounds:
(i) the Executive's repeated failure or refusal to materially
perform his duties and responsibilities as set forth in paragraph 3
hereof other than by reason of his disability (as defined in
paragraph 7 below), or the failure of the Executive to devote his
attention exclusively to the business and affairs of the Company and
its subsidiaries in accordance with the terms hereof (other than by
reason of his disability), in each case if such failure or refusal
is not cured within 30 days after written notice thereof to the
Executive by the Company;
(ii) the willful misappropriation of the funds or property of
the Company or any subsidiary;
(iii) use of alcohol or illegal drugs, materially interfering
with the performance of the Executive's obligations under this
Agreement, continuing after written warning;
4
<PAGE>
(iv) conviction in a court of law of, or entering a plea of
guilty or no contest to, any felony or any crime involving moral
turpitude, dishonesty or theft;
(v) the material nonconformance with the Company's standard
business practices and policies, including without limitation, a
finding by the arbitrator appointed pursuant to paragraph 19 that
the Executive has violated the Company's policies against racial or
sexual discrimination or harassment, made known to the Executive,
which nonconformance is not cured (if curable) within 30 days after
written notice to the Executive by the Company;
(vi) the commission in bad faith by the Executive of any act
which injures or could reasonably be expected to injure the
reputation, business or business relationships of the Company or any
subsidiary; and
(vii) any material breach (not covered by any of the clauses
(i) through (vi) above) of any term, provision or condition of this
Agreement, if such breach is not cured (if curable) within 30 days
after written notice thereof to the Executive by the Company.
Any notice required to be given by the Company pursuant to clause (i), (v) or
(vii) above shall specify the specific nature of the claimed breach and the
manner in which the Company requires such breach to be cured (if curable). In
the event that the Executive is purportedly terminated for cause and the
arbitrator appointed pursuant to paragraph 19 below determines that "cause" as
defined herein was not present, then such purported termination for cause shall
be deemed a termination by the Company "without cause" pursuant to paragraph
6(d) below and the Executive's rights and remedies will be governed by paragraph
6(d) below, in full satisfaction and in lieu of any and all other or further
remedies the Executive may have.
(b) Provided that the Executive is not then otherwise in material
breach of this Agreement, the Executive shall be entitled to terminate this
Agreement and the Term hereunder for "Good Reason" at any time during the Term
by written notice to the Company. "Good Reason" shall be limited to a breach by
the Company of a material term of this Agreement, which breach remains uncured
for a period of 30 days after written notice of such breach from the Executive
to the Company (such notice to specify the specific nature of the claimed breach
and the manner in which the Executive requires such breach to be cured).
(c) In the event of the termination of the employment of the
Executive with the Company as a result of a termination pursuant to a Notice of
Non-Renewal under paragraph 2 above, a voluntary resignation by the Executive,
termination by the Company "with cause", or as a result of termination due to
death or disability, the Executive shall be entitled to the following payments
and benefits, subject to any appropriate offsets, as
5
<PAGE>
permitted by applicable law, for debts or money due to the Company or an
affiliate thereof (collectively, "Offsets"):
(i) unpaid salary compensation and any unused accrued vacation
only through, and any unpaid reimbursable expenses outstanding as
of, the Date of Termination;
(ii) a pro rata share of the guaranteed bonus payable to the
Executive under paragraph 4(b) above;
(ii) all benefits, if any, that had accrued to the Executive
through the Date of Termination under the plans and programs
described in paragraphs 5(b) and (c) above, or any other applicable
plans and programs in which he participated as an employee of the
Company, and all amounts earned, accrued or owing to the Executive
through the Date of Termination under any incentive compensation
plan or program in which he participated as an employee of the
Company, in the manner and in accordance with the terms of such
plans and programs; and
(iv) the right to exercise any vested option and the vesting
of any unvested option shall be determined in accordance with the
terms of the plan under which such option was granted (provided,
however, that if the termination is due to the death of the
Executive, the vesting of those options theretofore granted to the
Executive and which would have vested during the twelve-month period
following his death shall be accelerated to precede the Date of
Termination).
In the event of the termination of the Executive's employment as a result of a
termination pursuant to a Notice of Non-Renewal properly given under paragraph 2
above, a voluntary resignation by the Executive, termination by the Company
"with cause", death or disability, except as provided in this paragraph 6(c),
the Company shall have no further liability to the Executive or the Executive's
heirs, beneficiaries or estate for damages, compensation, benefits, severance,
indemnities or other amounts of whatever nature, directly or indirectly, arising
out of or otherwise related to this Agreement and the Executive's employment or
cessation of employment with the Company.
(d) The Company shall have the right at any time during the Term to
terminate the employment of the Executive "without cause" by giving written
notice to the Executive indicating that the Company has terminated the Agreement
"without cause" under this paragraph 6(d) and setting forth the Date of
Termination. It is understood and agreed that a termination pursuant to a Notice
of Non-Renewal properly given pursuant to paragraph 2 shall not be deemed to be
a termination "without cause". In the event of a termination by the Company
"without cause" or a termination by the Executive for "Good Reason", the
6
<PAGE>
Executive shall be entitled to continue to receive from the Company, subject to
any Offsets, the following:
(i) as severance compensation, his then applicable base salary
and pro-rated guaranteed bonus when otherwise payable for twelve
months following the Date of Termination;
(ii) any unpaid reimbursable expenses outstanding, and any
unused accrued vacation, as of the Date of Termination;
(iii) all benefits, if any, that had accrued to the Executive
through the Date of Termination under the plans and programs
described in paragraphs 5(b) and (c) above, or any other applicable
benefit plans and programs in which he participated as an employee
of the Company, and all amounts earned, accrued or owing to the
Executive through the Date of Termination under any incentive
compensation plan in which he participated as an employee of the
Company, in the manner and in accordance with the terms of such
plans and programs;
(iiv) continued participation on the same basis (including
without limitation, cost contributions) as the other senior
executives of the Company in all medical, dental, disability and
life insurance coverage (such benefits collectively called the
"Continued Plans") in which he was participating on the Date of
Termination (as such Continued Plans are from time to time in effect
at the Company) until the earlier of (x) the end of the period that
he receives severance compensation payments under clause (i) of this
paragraph 6(d) or (y) the date, or dates, he is entitled to receive
coverage and benefits under the same type of plan of a subsequent
employer; provided, however, if the Executive is precluded from
continuing his participation in any Continued Plan, the after-tax
economic equivalent of the benefits provided under the Continued
Plan in which he is unable to participate, for the period specified
above, it being understood that the economic equivalent of a benefit
foregone shall be deemed the lowest cost that would be incurred by
the Executive in obtaining such benefit himself on an individual
basis, and payment of such after-tax economic benefit shall be made
quarterly in advance; and
(v) the right to exercise any vested option shall be
determined in accordance with the terms of the plan under which such
option was granted; provided, however, that the vesting of those
options theretofore granted to the Executive and which would have
vested during the twelve-month period following the Date of
Termination as set forth in Section 6(d)(i), shall be accelerated to
precede the Date of Termination.
7
<PAGE>
In connection with a termination by the Company "without cause" or by the
Executive for "Good Reason", except as provided in this paragraph 6(d), (x) the
Company shall have no further liability to the Executive or the Executive's
heirs, beneficiaries or estate for damages, compensation, benefits, severance,
indemnities or other amounts of whatever nature, directly or indirectly, arising
out of or otherwise related to this Agreement and the Executive's employment or
cessation of employment with the Company, and (y) the Executive shall be under
no obligation to mitigate his damages or to seek other employment and if the
Executive obtains other employment, any compensation earned by the Executive
therefrom shall not reduce the Company's severance obligations under clause (i)
of this paragraph 6(d). The making of any severance payments and providing the
other benefits as provided in this paragraph 6(d) is conditioned upon the
Executive signing a general release of the Company and its subsidiaries and
affiliates, and its and their respective successors and assigns, officers
directors, employees, agents, attorneys and representatives, of any claims
(including claims of discrimination) relating to the Executive's employment with
the Company or the termination thereof; except such release shall preserve the
Executive's rights with respect to the payments and benefits to be received
pursuant to this paragraph 6(d) and the Executive's rights of indemnification
under the Company's organizational documents and any separate director or
officer indemnification agreement with the Company to which he may be a party.
Such release shall be in the form then being used by the Company in connection
with severance arrangements; it being understood, however that such release
shall not increase the Executive's non-solicitation/non-servicing and protection
of confidential information obligations to the Company beyond that set forth in
paragraph 8 of this Agreement. If the Executive breaches any provisions of such
release or the provisions of paragraph 8 of this Agreement, in addition to any
other remedies at law or in equity available to it, the Company may cease making
any further severance payments and providing the other benefits provided for in
this paragraph 6(d), without affecting its rights under this Agreement or the
release provided that it (x) promptly takes such action as may be required to
have the matter decided by the arbitrator appointed pursuant to paragraph 19,
and (y) pending any such determination, makes such payments into an escrow
account to be established in accordance with the rules and regulations of the
American Arbitration Association.
7. Disability; Death
In the event the Executive shall be unable to perform his duties
hereunder by virtue of illness or physical or mental incapacity or disability
(from any cause or causes whatsoever) in substantially the manner and to the
extent required hereunder prior to the commencement of such disability (all such
causes being herein referred to as "disability") and the Executive shall fail to
perform such duties for periods aggregating 270 days, whether or not continuous,
in any continuous period of 360 days, the Company shall have the right to
terminate the Executive's employment hereunder as at the end of any calendar
month during the continuance of such disability upon at least 30 days' prior
written notice to him. In the event of the Executive's death, the Date of
Termination shall be the date of such death.
8
<PAGE>
8. Non-Solicitation/Non-Servicing Agreement and Protection of Confidential
Information
(a) The Executive acknowledges (i) the highly competitive nature of
the Company's business and the industry in which the Company competes; (ii) that
as a key executive of the Company he has participated in and will continue to
participate in the servicing of current clients of the Company and/or the
solicitation of prospective clients of the Company, through which, among other
things, the Executive has obtained and will continue to obtain knowledge of the
"know-how" and business practices of the Company, in which matters the Company
has a substantial proprietary interest; (iii) that his employment hereunder
requires the performance of services which are special, unique, extraordinary
and intellectual in character, and his position with the Company placed and
places him in a position of confidence and trust with the clients and employees
of the Company; and (iv) that his rendering of services to the clients of the
Company necessarily requires the disclosure to the Executive of confidential
information (as defined in paragraph 8(b) below) of the Company. In the course
of the Executive's employment with the Company, the Executive has and will
continue to develop a personal relationship with the clients of the Company and
a knowledge of those clients' affairs and requirements, and that the
relationship of the Company with its established clientele has been and will
continue to be placed in the Executive's hands in confidence and trust. The
Executive consequently agrees that it is reasonable and necessary for the
protection of the confidential information, goodwill and business of the Company
that the Executive make the covenants contained herein and that the Company
would not have entered into this Agreement unless the covenants set forth in
this paragraph 8 were contained in this Agreement. Accordingly, the Executive
agrees that during the period that he is employed by the Company and thereafter
through the later of (x) October 31, 2002 and (y) two years after the Date of
Termination, he shall not, as an individual, consultant, partner, shareholder,
employee or in any other capacity whatsoever, or in association with any other
person, business or enterprise, except on behalf of the Company, directly or
indirectly, and regardless of the reason for his ceasing to be employed by the
Company:
(i) attempt in any manner to solicit or accept from any client
business of the type performed by the Company or to persuade any
client to cease to do business or to reduce the amount of business
which any such client has customarily done or is reasonably expected
to do with the Company, whether or not the relationship between the
Company and such client was originally established in whole or in
part through his efforts; or
(ii) employ as an employee or retain as a consultant any
person who is then or at any time during the preceding twelve months
was an employee of or exclusive consultant to the Company, or
persuade or attempt to persuade any employee of or exclusive
consultant to the Company to leave the employ of the Company or to
become employed as an employee or retained as a
9
<PAGE>
consultant by anyone other than the Company; or
(iii) render to or for any client any services of the type
rendered by the Company.
As used in this paragraph 8, the term "Company" shall mean the Company and each
of its subsidiaries and the term "client" shall mean (1) anyone who is a client
of the Company on the Date of Termination or, if the Executive's employment
shall not have terminated, at the time of the alleged prohibited conduct (any
such applicable date being called the "Determination Date"); (2) anyone who was
a client of the Company at any time during the one year period immediately
preceding the Determination Date; (3) any prospective client to whom the Company
had made a new business presentation (or similar offering of services) at any
time during the one year period immediately preceding the Determination Date;
and (4) any prospective client to whom the Company made a new business
presentation (or similar offering of services) at any time within six months
after the Date of Termination (but only if the initial discussions between the
Company and such prospective client relating to the rendering of services
occurred prior to the Date of Termination, and only if the Executive
participated in or supervised such discussions). For purposes of this clause, it
is agreed that a "new business presentation or similar offering of services" or
a "discussion" does not include general mailings, telephone solicitations,
unsolicited credentials presentations not responding to requests for proposals
or incidental contacts. In addition, if the client is part of a group of
companies which conducts business through more than one entity, division or
operating unit, whether or not separately incorporated (a "Client Group"), the
term "client" as used herein shall include each entity, division and operating
unit of the Client Group where the same management group of the Client Group has
the decision making authority with respect to contracting for services of the
type rendered by the Company, but shall not include any part of the Client Group
where the management group is not the same management group that has the
decision making authority or significant influence with respect to contracting
for services of the type rendered by the Company. Finally, it is understood and
agreed that nothing contained herein shall restrict the ability of the Executive
to serve as chief financial officer or otherwise render strictly financial
services to any entity.
Notwithstanding anything to the contrary contained in this paragraph 8(a), if
the Company defaults in the payment to the Executive of any severance
compensation when due under the provisions of paragraph 6(d)(i) above, which
default is not cured within 30 days after written notice thereof to the Company
by the Executive, the restrictions set forth in this paragraph 8(a) shall
terminate unless the Company pays the Executive all amounts then due to the
Executive as determined by the arbitration panel, in which case such
restrictions shall remain in full force and effect. During the pendency of any
dispute as to whether the Company is justified in ceasing to make such severance
payments as permitted under the provisions of paragraph 6(d) above, the
restrictions set forth in this paragraph 8(a) shall remain in full force and
effect and the Company shall make all such payments promptly as they become
10
<PAGE>
due into an escrow account to be established in accordance with the rules and
regulations of the American Arbitration Association. .
(b) In the course of the Executive's employment with the Company he
will acquire and have access to confidential or proprietary information about
the Company and/or its clients, including but not limited to, trade secrets,
methods, models, passwords, access to computer files, financial information and
records, computer software programs, agreements and/or contracts between the
Company and its clients, client contacts, the marketing and/or creative policies
and ideas, advertising campaigns, media plans and budgets, practices, concepts,
strategies, and methods of operations, financial or business projections of the
Company, and information about or received from clients and other companies with
which the Company does business. The foregoing shall be collectively referred to
as "confidential information". The Executive is aware that the confidential
information is not readily available to the public and accordingly, the
Executive also agrees that he will not at any time (whether during the Term or
after termination of this Agreement), disclose to anyone any confidential
information, or utilize such confidential information for his own benefit, or
for the benefit of third parties. The Executive agrees that the foregoing
restrictions shall apply whether or not any such information is marked
"confidential". The term "confidential information" does not include information
which (i) becomes generally available to the public other than by breach of this
provision or (ii) the Executive learns from a third party who is not under an
obligation of confidence to the Company or a client of the Company or (iii) the
Executive's personnel files or personal materials. In the event that the
Executive becomes legally required to disclose any confidential information, he
will provide the Company with prompt notice thereof so that the Company may seek
a protective order or other appropriate remedy and/or waive compliance with the
provisions of this paragraph 8(b) to permit a particular disclosure. In the
event that such protective order or other remedy is not obtained, or that the
Company waives compliance with the provisions of this paragraph 8(b) to permit a
particular disclosure, the Executive will furnish only that portion of the
confidential information which he is legally required to disclose and, at the
Company's expense, will cooperate with the efforts of the Company to obtain a
protective order or other reliable assurance that confidential treatment will be
accorded the confidential information. The Executive further agrees that all
memoranda, disks, files, notes, records or other documents, whether in
electronic form or hard copy (collectively, the "material") compiled by him or
made available to him during his employment with the Company (whether or not the
material contains confidential information) shall be the property of the Company
and shall be delivered to the Company on the termination of the Executive's
employment with the Company or at any other time upon request. Except in
connection with the Executive's employment with the Company, the Executive
agrees that he will not make or retain copies or excerpts of the material.
(c) If the Executive commits a breach or is about to commit a
breach, of
11
<PAGE>
any of the provisions of paragraphs 8(a) or (b) above, the Company shall have
the right to have the provisions of this Agreement specifically enforced by the
arbitrator appointed under paragraph 19 or by any court having equity
jurisdiction without being required to post bond or other security and without
having to prove the inadequacy of the available remedies at law, it being
acknowledged and agreed that any such breach or threatened breach will cause
irreparable injury to the Company and that money damages will not provide an
adequate remedy to the Company. In addition, the Company may take all such other
actions and remedies available to it under law or in equity and shall be
entitled to such damages as it can show they have sustained by reason of such
breach. If the Company commences such an action and it is concluded that the
Executive has not breached or attempted to breach the provisions of paragraphs
(a) or (b), the Company shall reimburse the Executive the reasonable legal fees
incurred in defending such an action; if it is concluded that the Executive has
breached or attempted to breach the provisions of paragraphs (a) or (b), the
Executive shall reimburse the Company the reasonable legal fees incurred in
prosecuting such an action.
(d) The parties acknowledge that (i) the type and periods of
restriction imposed in the provisions of paragraphs 8(a) and (b) above are fair
and reasonable and are reasonably required in order to protect and maintain the
proprietary interests of the Company described above, other legitimate business
interests of the Company and the goodwill associated with the business of the
Company, (ii) that the business of the Company currently extends throughout the
United States and other areas of the world, and that the Executive will engage
in such business pursuant to the terms of this Agreement throughout the United
States and other areas of the world, and (iii) that the time, scope, geographic
area and other provisions of this paragraph 8 have been specifically negotiated
by sophisticated commercial parties. It is further understood and agreed that
the clients of the Company may be serviced from any location and accordingly it
is reasonable that the covenants set forth herein are not limited by narrow
geographic area but instead by the location of such clients and potential
clients. The Executive specifically acknowledges that his being restricted from
soliciting and servicing clients and prospective clients as contemplated by this
Agreement will not prevent him from being employed or earning a livelihood in
the type of business conducted by the Company. If any of the covenants contained
in paragraphs 8(a) or (b), or any part thereof, is held to be unenforceable by
reason of its extending for too great a period of time or over too great a
geographic area or by reason of its being too extensive in any other respect,
the parties agree (x) such covenant shall be interpreted to extend only over the
maximum period of time for which it may be enforceable and/or over the maximum
geographic areas as to which it may be enforceable and/or to the maximum extent
in all other respects as to which it may be enforceable, all as determined by
the court or arbitration panel making such determination and (y) in its reduced
form, such covenant shall then be enforceable, but such reduced form of
agreement shall only apply with respect to the operation of this paragraph 8 in
the particular jurisdiction in which such adjudication is made.
12
<PAGE>
9. Intellectual Property
During the Term, the Executive will disclose to the Company all
ideas, inventions and business plans developed by him during such period which
relate directly or indirectly to the business of the Company and its
subsidiaries, including without limitation, any design, logo, slogan,
advertising campaign or any process, operation, product or improvement which may
be patentable or copyrightable. The Executive agrees that all patents, licenses,
copyrights, tradenames, trademarks, service marks, planning, marketing and/or
creative policies, advertising campaigns, media campaigns, and budgets,
practices, concepts, strategies, and methods of operations, financial or
business projections, designs, logos, slogans and business plans developed or
created by the Executive in the course of his employment hereunder, either
individually or in collaboration with others, will be deemed works for hire and
the sole and absolute property of the Company. The Executive agrees, that at the
Company's request and expense, he will take all steps necessary to secure the
rights thereto to the Company by patent, copyright or otherwise.
10. Enforceability
The failure of any party at any time to require performance by
another party of any provision hereunder shall in no way affect the right of
that party thereafter to enforce the same, nor shall it affect any other party's
right to enforce the same, or to enforce any of the other provisions in this
Agreement; nor shall the waiver by any party of the breach of any provision
hereof be taken or held to be a waiver of any subsequent breach of such
provision or as a waiver of the provision itself.
11. Assignment
This Agreement is a personal contract and the Executive's rights and
obligations hereunder may not be sold, transferred, assigned, pledged or
hypothecated by the Executive. The rights and obligations of the Company
hereunder shall be binding upon and run in favor of the successors and assigns
of the Company.
12. Modification
This Agreement may not be orally canceled, changed, modified or
amended, and no cancellation, change, modification or amendment shall be
effective or binding, unless in writing and signed by the parties to this
Agreement.
13. Severability; Survival
In the event any provision or portion of this Agreement is
determined to be invalid or unenforceable for any reason, in whole or in part,
the remaining provisions of this Agreement shall nevertheless be binding upon
the parties with the same effect as though the
13
<PAGE>
invalid or unenforceable part had been severed and deleted. The respective
rights and obligations of the parties hereunder shall survive the termination of
the Executive's employment to the extent necessary to the intended preservation
of such rights and obligations.
14. Life Insurance
The Executive agrees that the Company shall have the right to obtain
life insurance on the Executive's life, at the sole expense of the Company, as
the case may be, and with the Company as the sole beneficiary thereof. The
Executive shall (a) cooperate fully in obtaining such life insurance, (b) sign
any necessary consents, applications and other related forms or documents and
(c) at the Company's expense, take any reasonably required medical examinations.
15. Notice
Any notice, request, instruction or other document to be given
hereunder by any party hereto to another party shall be in writing and shall be
deemed effective (a) upon personal delivery, if delivered by hand, or (b) three
days after the date of deposit in the mails, postage prepaid if mailed by
certified or registered mail, or (c) on the next business day, if sent by
facsimile transmission (if electronically confirmed) or prepaid overnight
courier service, and in each case, addressed as follows:
If to the Executive:
Charles T. Dickson
Agency.Com Ltd.
665 Broadway
New York, NY 10012
with a copy to:
J. Vincent Reppert
Reppert Kelly & Wohlgemuth
Fleet Bank Center
105 Elm Street
Westfield, NJ 07090
Fax: (908) 317-9242
If to the Company:
14
<PAGE>
Agency.Com Ltd.
665 Broadway
New York, NY 10012
Attention: Chief Executive Officer
Fax: (212) 358-8259
with a copy to:
Janet Ambrosi Wertman, Esq.
1111 Chautauqua Blvd.
Pacific Palisades, CA 90272
Fax: (310) 230-6936
Any party may change the address to which notices are to be sent by giving
notice of such change of address to the other party in the manner herein
provided for giving notice.
16. Applicable Law
This Agreement shall be governed by and construed in accordance with
the laws of the State of New York without application of conflict of law
provisions applicable therein.
17. No Conflict
The Executive represents and warrants that he is not subject to any
agreement, instrument, order, judgment or decree of any kind, or any other
restrictive agreement of any character, which would prevent him from entering
into this Agreement or which would be breached by the Executive upon his
performance of his duties pursuant to this Agreement.
18. Entire Agreement
This Agreement represents the entire agreement between the Company
and the Executive with respect to the subject matter hereof, and all prior
agreements, plans and arrangements relating to the employment of the Executive
by the Company are nullified and superseded hereby .
19. Arbitration
(a) If any dispute arises between the Executive and the Company that
the parties cannot resolve themselves, including any dispute over the
application, validity, construction, or interpretation of this Agreement,
arbitration in accordance with the then-applicable rules of the American
Arbitration Association shall provide the exclusive remedy for resolving any
such dispute, regardless of its nature; provided, however, that the Company
15
<PAGE>
may enforce the Executive's obligations under paragraphs 8 and 9 hereof by an
action for injunctive relief and damages in a court of competent jurisdiction at
any time prior or subsequent to the commencement of an arbitration proceeding as
herein provided.
(b) This paragraph 19 shall apply to claims arising under state and
federal statutes, local ordinances, and the common law. The arbitrator shall
apply the same substantive law that a court with jurisdiction over the parties
and their dispute would apply under the terms of this Agreement. The
arbitrator's remedial authority shall equal the remedial power that a court with
jurisdiction over the parties and their dispute would have, including the right
to award punitive damages. The arbitrator shall, upon an appropriate motion,
dismiss any claim brought in arbitration if he or she determines that the claim
could not properly have been pursued through court litigation. If the
then-applicable rules of the American Arbitration Association conflict with the
procedures of this paragraph 19, the latter shall apply.
(c) If the parties cannot agree upon an arbitrator, the parties
shall select a single arbitrator from a list of seven arbitrators provided by
the New York, New York office of the American Arbitration Association. All seven
listed arbitrators shall be retired judges experienced in employment law and/or
persons actively involved in hearing private cases. If the parties cannot agree
on selecting an arbitrator from that list, then the parties shall alternately
strike names from the list, with the first party to strike being determined by
lot. After each party has used three strikes, the remaining name on the list
shall be the arbitrator.
(d) Each party may be represented by counsel or by another
representative of the party's choice, and each party shall pay and its own
filing or administrative fees. The non-prevailing party (as determined by the
arbitrator) shall bear the fees and costs of the arbitrator as well as the
reasonable fees and costs of counsel to the prevailing party. In determining
which party is the prevailing party in the context of an action taken to enforce
rights under paragraph 8, it is understood that if it is concluded that the
Executive has not breached or attempted to breach the provisions of paragraph
8(a) or 8(b), the Executive shall be deemed to have prevailed, and if it is
concluded that the Executive has breached or attempted to breach the provisions
of paragraph 8(a) or (b), the Company shall be deemed to have prevailed.
(e) The arbitrator shall render an award and opinion in the form
typical of those rendered in labor arbitrations, and that award shall be final
and binding and non-appealable. To the extent that any part of this paragraph 19
is found to be legally unenforceable for any reason, that part shall be modified
or deleted in such a manner as to render this paragraph 19 (or the remainder of
this paragraph) legally enforceable and as to ensure that except as provided in
clause (b) of this paragraph 19, all conflicts between the Company and the
Executive shall be resolved by neutral, binding arbitration. The remainder of
this paragraph 19 shall not be affected by any such modification or deletion but
shall be construed as severable and independent. If a court finds that the
arbitration procedures of
16
<PAGE>
this paragraph 19 are not absolutely binding, then the parties intend any
arbitration decision to be fully admissible in evidence, given great weight by
any finder of fact, and treated as determinative to the maximum extent permitted
by law.
(f) Unless the parties agree otherwise, any arbitration shall take
place in New York, New York in such location as agreed to by the Company and the
Executive. If the parties cannot agree upon a location for the arbitration, the
arbitrator shall determine the location within New York, New York.
(g) The Executive has read and understands this paragraph 19 which
discusses arbitration. The Executive understands that by signing this Agreement,
the Executive agrees to submit any claims arising out of, relating to, or in
connection with this Agreement, or the interpretation, validity, construction,
performance, breach or termination thereof, or his employment or the termination
thereof, to binding arbitration, and that this arbitration provision constitutes
a waiver of the Executive's right to a jury trial and relates to the resolution
of all disputes relating to all aspects of the employer/employee relationship,
including but not limited to the following:
(i) Any and all claims for wrongful discharge of employment,
breach of contract, both express and implied; breach of the covenant
of good faith and fair dealing, both express and implied; negligent
or intentional infliction of emotional distress; negligent or
intentional misrepresentation; negligent or intentional interference
with contract or prospective economic advantage; and defamation;
(ii) Any and all claims for violation of any federal. state or
municipal statute, including, without limitation, Title VII of the
Civil Rights Act of 1964, as amended, the Civil Rights Act of 1991,
the Equal Pay Act, the Employee Retirement Income Security Act, as
amended, the Age Discrimination in Employment Act of 1967, the
Americans with Disabilities Act of 1990, the Family and Medical
Leave Act of 1993, the Fair Labor Standards Act and the New York
Human Rights Law; and
(iii) Any and all claims arising out of any other federal,
state or local laws or regulations relating to employment or
employment discrimination.
20. Headings
The headings contained in this Agreement are for reference purposes
only, and shall not affect the meaning or interpretation of this Agreement.
17
<PAGE>
21. Miscellaneous
(a) The Company may withhold from any amounts payable under this
Agreement such federal, state or local taxes as shall be required to be withheld
pursuant to any applicable law or regulation.
(b) Following the date hereof and regardless of any dispute that may
arise in the future, the Executive will not disparage the Company; and the
Company will not disparage the Executive.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the day
and year first above written.
AGENCY.COM LTD.
By: /s/ Kenneth Trush
------------------------------------
Name: Kenneth Trush
Title: Executive Vice President,
Corporate Development
/s/ Charles T. Dickson
----------------------------------------
Charles T. Dickson
18
<PAGE>
Exhibit 10.20
- --------------------------------------------------------------------------------
AGREEMENT AND PLAN OF MERGER
by and among
AGENCY.COM LTD.,
ITT ACQUISITION INC.
INTERACTIVE TRAFFIC INC.,
and
THE STOCKHOLDERS LISTED ON ANNEX I
- --------------------------------------------------------------------------------
Dated as of October 21, 1999
<PAGE>
TABLE OF CONTENTS
ARTICLE I ................................................................... 2
THE MERGER .................................................................. 2
Section 1.1 The Merger ................................................... 2
Section 1.2 Effective Time ............................................... 2
Section 1.3 Certificate of Incorporation and By-Laws of the
Surviving Corporation ........................................ 2
1.3.1 Certificate of Incorporation ................................. 2
1.3.2 By-Laws ...................................................... 2
Section 1.4 Directors and Officers of the Surviving Corporation .......... 3
1.4.1 Directors of the Surviving Corporation ....................... 3
1.4.2 Officers of the Surviving Corporation ........................ 3
ARTICLE II .................................................................. 3
CONVERSION OF STOCK AND COMMON STOCK ........................................ 3
Section 2.1 Definitions .................................................. 3
Section 2.2 Conversion of Shares ......................................... 4
2.2.1 MergerSub Common Stock ....................................... 4
2.2.2 Preferred Stock .............................................. 4
2.2.3 Company Common and Preferred Stock ........................... 5
2.2.4 Calculation of Revenues and PBT .............................. 7
2.2.5 Accounting/Dispute Procedures ................................ 8
2.2.6 Examination of Books and Records ............................. 8
2.2.78 Earn-Out Consideration ....................................... 9
2.2.8 Acceleration of Certain Payments ............................. 9
2.2.9 Company Treasury Stock ....................................... 9
Section 2.3 Stock Options ................................................ 9
2.3.1 Conversion of Outstanding Options ............................ 9
2.3.2 Agency Action ................................................ 10
Section 2.4 Surrender of Stock Certificates .............................. 10
2.4.1 Preferred Stock .............................................. 10
2.4.2 Company Common and Preferred Stock ........................... 11
2.4.3 Additional Cash Payment ...................................... 11
Section 2.5 Tangible Net Worth Adjustment ................................ 11
2.5.1 Payment of Reconciled Purchase Price ......................... 11
2.5.2 Other Definitions ............................................ 12
2.5.3 Accounting Procedures ........................................ 12
2.5.4 Examination of Books and Records ............................. 13
Section 2.6 Payment of the Purchase Price ................................ 13
2.6.1 Purchase Price ............................................... 13
<PAGE>
2.6.2 No Fractional Shares ......................................... 14
Section 2.7 Indemnity Escrow ............................................. 14
Section 2.8 Closing ...................................................... 14
Section 2.9 Appointment of Representative ................................ 14
2.9.1 Appointment of Representative ................................ 14
2.9.2 Indemnification of Representative ............................ 15
ARTICLE III ................................................................. 15
REPRESENTATIONS OF THE STOCKHOLDERS AND THE COMPANY ......................... 15
Section 3.1 Execution and Validity of Agreements; Restrictive Documents .. 15
3.1.1 Execution and Validity ....................................... 15
3.1.2 No Restrictions .............................................. 16
3.1.3 Non-Contravention ............................................ 16
3.1.4 Approvals and Consents ....................................... 16
Section 3.2 Execution and Validity of Agreement; Existence and
Good Standing ................................................ 17
Section 3.3 Subsidiaries and Investments; Capital Stock .................. 17
3.3.1 Subsidiaries and Investments ................................. 17
3.3.2 Capital Stock; Options ....................................... 17
Section 3.4 Financial Statements and No Material Changes ................. 18
Section 3.5 Books and Records ............................................ 18
Section 3.6 Title to Properties; Encumbrances ............................ 18
Section 3.7 Real Property ................................................ 19
3.7.1 Owned Real Property .......................................... 19
3.7.2 Leased Real Property ......................................... 19
Section 3.8 Contracts .................................................... 20
Section 3.9 Non-Contravention; Approvals and Consents .................... 21
3.9.1 Non-Contravention ............................................ 21
3.9.2 Approvals and Consents ....................................... 21
Section 3.10 Litigation ................................................... 21
Section 3.11 Taxes ........................................................ 22
Section 3.12 Liabilities .................................................. 23
Section 3.13 Insurance .................................................... 23
Section 3.14 Intellectual Properties ...................................... 23
3.14.1 Definitions .................................................. 23
3.14.2 Registrations ................................................ 24
Section 3.15 Compliance with Laws; Licenses and Permits ................... 24
3.15.1 Compliance ................................................... 24
3.15.2 Licenses ..................................................... 25
Section 3.16 Client Relations ............................................. 25
Section 3.17 Accounts Receivable; Work-in-Process; Accounts Payable ....... 25
Section 3.18 Employment Relations ......................................... 26
Section 3.19 Employee Benefit Matters ..................................... 26
ii
<PAGE>
3.19.1 List of Plans ................................................ 26
3.19.2 Severance .................................................... 27
3.19.3 Multi-Employer Plans ......................................... 27
3.19.4 Welfare Benefit Plans ........................................ 27
3.19.5 Administrative Compliance .................................... 27
3.19.6 Tax-Qualification ............................................ 28
3.19.7 Funding; Excise Taxes ........................................ 28
3.19.8 Tax Deductions ............................................... 28
Section 3.20 Interests in Customers, Suppliers, Etc........................ 29
Section 3.21 Bank Accounts; Powers of Attorney; Authority of
Representative ............................................... 29
Section 3.22 Compensation of Employees .................................... 29
Section 3.23 No Changes Since the Balance Sheet Date ...................... 30
Section 3.24 Corporate Controls ........................................... 31
Section 3.25 Disclosure ................................................... 31
Section 3.26 Brokers ...................................................... 31
Section 3.27 Year 2000 Compliant .......................................... 32
3.27.1 Definition ................................................... 32
3.27.2 Computer Systems ............................................. 32
3.27.3 Other Products and Services .................................. 32
Section 3.28 Copies of Documents .......................................... 33
ARTICLE IV .................................................................. 33
REPRESENTATIONS OF MERGERSUB AND PARENT ..................................... 33
Section 4.1 Existence and Good Standing .................................. 33
Section 4.2 Execution and Validity of Agreements ......................... 33
Section 4.3 Non-Contravention; Approvals and Consents .................... 34
4.3.1 Non-Contravention ............................................ 34
4.3.2 Approvals and Consents ....................................... 34
Section 4.4 Agency Shares ................................................ 34
Section 4.5 MergerSub .................................................... 34
Section 4.6 Brokers ...................................................... 35
Section 4.7 Litigation ................................................... 35
Section 4.8 Disclosure ................................................... 35
ARTICLE V ................................................................... 35
ACTIONS AT CLOSING BY THE COMPANY AND THE STOCKHOLDERS ...................... 35
Section 5.1 Required Approvals and Consents .............................. 35
Section 5.2 Regulatory Consents and Approvals ............................ 36
Section 5.3 Good Standing Certificates ................................... 36
Section 5.4 Certified Resolutions ........................................ 36
Section 5.5 Employment Agreements ........................................ 36
iii
<PAGE>
Section 5.6 Non-Solicitation/Non-Servicing Agreement ..................... 36
Section 5.7 Opinion of Counsel ........................................... 36
Section 5.8 Investment Representation Certificate ........................ 37
Section 5.9 Lockup Agreement ............................................. 37
Section 5.10 Repayment of Loans ........................................... 37
Section 5.11 Appointment of Representative ................................ 37
Section 5.12 Optionholder Forbearance Agreements .......................... 37
Section 5.13 Indemnity and Escrow Agreement ............................... 37
Section 5.14 Proceedings .................................................. 37
ARTICLE VI .................................................................. 37
ACTIONS AT CLOSING BY PARENT AND MERGERSUB .................................. 37
Section 6.1 Required Approvals, Notices and Consents ..................... 38
Section 6.2 Regulatory Consents and Approvals ............................ 38
Section 6.3 Certified Resolutions ........................................ 38
Section 6.4 Opinion of Counsel ........................................... 38
Section 6.5 Employment Agreements ........................................ 38
Section 6.6 Non-Solicitation/Non-Servicing Agreements .................... 38
Section 6.7 Agency.Com Options ........................................... 38
Section 6.8 Indemnity and Escrow Agreement ............................... 39
Section 6.9 Proceedings .................................................. 39
ARTICLE VII ................................................................. 39
OTHER AGREEMENTS ............................................................ 39
Section 7.1 Separate Subsidiary .......................................... 39
Section 7.2 Management of the Surviving Corporation ...................... 39
Section 7.3 Private Placement and Registration and Listing ............... 39
Section 7.4 Release of Stockholder Guarantees ............................ 39
Section 7.5 Autonomy ..................................................... 40
ARTICLE VIII ................................................................ 42
SURVIVAL; INDEMNITY ......................................................... 42
Section 8.1 Survival ..................................................... 42
Section 8.2 Obligation of the Company and the Stockholders to Indemnify .. 42
8.2.1 General Indemnity ............................................ 42
8.2.2 Special Indemnity ............................................ 43
8.2.3 Clarification of the term .................................... 43
iv
<PAGE>
Section 8.3 Obligation of Parent to Indemnify ............................ 44
Section 8.4 Indemnification Procedure for Third Party Claims ............. 44
Section 8.6 Limitations on and Other Matters Regarding Indemnification ... 46
8.6.1 Indemnity Cushion and Cap .................................... 46
8.6.2 Termination of Indemnification Obligations of the
Stockholders ................................................. 47
8.6.3 Termination of Indemnification Obligations of Parent ......... 47
8.6.4 Treatment .................................................... 47
8.6.5 Exceptions ................................................... 47
ARTICLE IX .................................................................. 48
MISCELLANEOUS ............................................................... 48
Section 9.1 Expenses ..................................................... 48
Section 9.2 Governing Law ................................................ 48
Section 9.3 "Person" Defined ............................................. 48
Section 9.4 "Knowledge" Defined .......................................... 49
Section 9.5 "Affiliate" Defined .......................................... 49
Section 9.6 Material Adverse Effect Defined .............................. 49
Section 9.7 Captions ..................................................... 49
Section 9.8 Publicity .................................................... 49
Section 9.9 Notices ...................................................... 49
Section 9.10 Parties in Interest .......................................... 50
Section 9.11 Severability ................................................. 51
Section 9.12 Counterparts ................................................. 51
Section 9.13 Entire Agreement ............................................. 51
Section 9.14 Amendments ................................................... 51
Section 9.15 Third Party Beneficiaries .................................... 51
Section 9.16 Use of Terms ................................................. 51
v
<PAGE>
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER (the "Agreement") dated as of October 21,
1999 by and among AGENCY.COM LTD., a Delaware corporation ("Parent"), ITI
ACQUISITION INC., a Delaware corporation and wholly-owned subsidiary of Parent
("MergerSub"), INTERACTIVE TRAFFIC, INC., a Delaware corporation (the
"Company"), and the PERSONS LISTED ON ANNEX I hereto, (individually, a
"Stockholder," and collectively, the "Stockholders").
WITNESSETH:
WHEREAS, the authorized capital stock of the Company consists of 500,000
shares of common stock, par value $.01 per share, of which 213,483.32 shares are
issued and outstanding, and 37,041 shares of Series A Convertible preferred
stock, $.01 par value per share, all of which are issued and outstanding, and
there are outstanding options to acquire 93,116 shares of common stock of the
Company pursuant to the Company's option plan;
WHEREAS, the authorized capital stock of MergerSub consists of 1,000
shares of common stock, $01 par value, of which 100 shares are issued and
outstanding;
WHEREAS, the Boards of Directors of Parent, MergerSub and the Company each
have determined that it is advisable and in the best interests of the
corporations and their respective shareholders to consummate, and have approved
the business combination transaction provided for herein, in which the Company
would merge with and into MergerSub (the "Merger") upon the terms and subject to
the conditions of this Agreement; and
WHEREAS, Parent, MergerSub, the Company and the Stockholders desire to
make certain representations, warranties, covenants and agreements in connection
with the Merger.
NOW, THEREFORE, in consideration of the mutual representations,
warranties, covenants and agreements set forth herein, Parent, MergerSub, the
Company and the Stockholders hereby agree as follows:
<PAGE>
ARTICLE I
THE MERGER
Section 1.1 The Merger. Subject to the terms and conditions of this
Agreement, at the Effective Time (as defined in Section 1.2), the Company shall
be merged with and into MergerSub and the separate corporate existence of the
Company shall thereupon cease. MergerSub (i) shall be the successor or surviving
corporation in the Merger (sometimes herein referred to as the "Surviving
Corporation"), (ii) shall continue to be governed by the laws of the State of
Delaware, and (iii) the separate corporate existence of MergerSub with all its
rights, privileges, immunities, powers and franchises shall continue unaffected
by the Merger. The Merger shall have the effects of Section 259 of the Delaware
General Corporation Law.
Section 1.2 Effective Time. Parent, MergerSub, and the Company will cause
an executed original of an appropriate Certificate of Merger (the "Certificate
of Merger") to be filed on the Closing Date (as defined in Section 2.8) with the
Secretary of State of the State of Delaware. The Merger shall become effective
on the date on which the Certificate of Merger has been duly filed with the
Secretary of State of Delaware, and such time is hereinafter referred to as the
"Effective Time." Notwithstanding the Effective Time, it is agreed that the
economic effort of the merger, for purposes of Parent's and Surviving
Corporation's internal accounting and recordkeeping purposes, will be deemed to
be October 1, 1999.
Section 1.3 Certificate of Incorporation and By-Laws of the Surviving
Corporation.
1.3.1 Certificate of Incorporation. The Certificate of Incorporation of
the Surviving Corporation in the form of Exhibit A hereto shall be at and as of
the Effective Time the Certificate of Incorporation of MergerSub immediately
prior to the Effective Time (except that the name of the Surviving Corporation
shall be changed to "Interactive Traffic Inc.").
1.3.2 By-Laws. The By-Laws of the Surviving Corporation in the form of
Exhibit B hereto shall be at and as of the Effective Time the By-Laws of
MergerSub immediately prior to the Effective Time.
Section 1.4 Directors and Officers of the Surviving Corporation.
1.4.1 Directors of the Surviving Corporation. The directors of the
Surviving Corporation at the Effective Time shall, from and after the Effective
Time, be the Persons (as defined in Section 9.3 below) listed on Schedule 1.4.1
until their successors have been duly elected or appointed and qualified or
until their earlier death, resignation or removal in accordance with the
Surviving Corporation's Certificate of Incorporation and By-Laws.
2
<PAGE>
1.4.2 Officers of the Surviving Corporation. The officers of the Surviving
Corporation shall, from and after the Effective Time, be the Persons listed on
Schedule 1.4.2 until their successors have been duly elected or appointed and
qualified or until their death, resignation or removal in accordance with the
Surviving Corporation's Certificate of Incorporation and By-Laws.
ARTICLE II
CONVERSION OF PREFERRED STOCK AND COMMON STOCK
Section 2.1 Definitions. For purposes of this Agreement, the following
terms shall have the following meanings:
(a) "Agency Shares" shall mean shares of common stock, par value $.001 per
share, of Parent.
(b) "Company Common Stock" shall mean each issued and outstanding share of
common stock, par value $.01 per share, of the Company.
(c) "Indemnity Escrow" shall mean an aggregate of 236,250 of the Agency
Shares otherwise payable to the holders of Company Common and Preferred
Stock pursuant to Section 2.2.3(i) hereof and 37.5% of the Agency Shares
(allocated in accordance with Schedule I to the Indemnity and Escrow
Agreement) payable pursuant to Section 2.2.3(iv) to the holders of Company
Common and Preferred Stock and (following exercise of the converted ITI
Options pursuant to Section 2.3.1 hereof), to holders of ITI Options, to
be held by Parent in escrow, in accordance with Section 2.7 hereof
(d) "Payment Acceleration Event" shall mean the occurrence, prior to
December 31, 2000 of (i) a merger, consolidation, combination,
reorganization or other transaction involving MergerSub that results in
less than 80% of the combined voting power of the surviving or resulting
entity being owned directly or indirectly by Parent, or the sale, transfer
or other disposition of all or substantially all of the assets or business
of MergerSub other than to Parent or a controlled affiliate of Parent;
(ii) the acquisition (whether by merger, consolidation, combination,
reorganization or other transaction) by Parent or any controlled affiliate
of Parent of any company engaged in the internet traffic-driving business
and having annualized revenues from such activity (based upon such
acquired company's actual revenues during the calendar quarter immediately
preceding such acquisition) of $5 million or more; or (iii) the breach by
Parent of its obligations under Section 7.1 hereof
(e) "Preferred Stock" shall mean each issued and outstanding share of
Series A Preferred Stock, par value $.01 per share, of the Company.
3
<PAGE>
(f) "Securities Act" means the Securities act of 1933, as amended, or any
similar or successor statute, and the rules and regulations of the
Securities and Exchange Commission promulgated thereunder, all as the same
shall be in effect at the time.
(g) "Representative" shall have the meaning set forth in Section 2.9.1
below.
Section 2.2 Conversion of Shares. At the Effective Time, by virtue of the
Merger and without any action on the part of the holder thereof
2.2.1 MergerSub Common Stock. Each issued and outstanding share of the
common stock, par value $0.01 per share, of MergerSub ("MergerSub Common Stock")
shall be unchanged and remain as one fully paid and non-assessable share of
common stock, $0.01 par value per share, of the Surviving Corporation
("Surviving Corporation Common Stock"). Each certificate representing
outstanding shares of MergerSub Common Stock shall at the Effective Time
represent an equal number of shares of the Surviving Corporation Common Stock.
2.2.2 Preferred Stock. Each issued and outstanding share of Preferred
Stock shall be canceled and converted into and shall represent the following:
(i) a right to receive, at the Closing, a cash payment of $32.33 and
one (1) Agency Share, collectively representing the per share liquidation
preference of the Preferred Stock; provided however, that none of such
Agency Shares shall be issued or delivered to a stockholder of the Company
unless and until such stockholder shall have executed and delivered to
Parent a Lock-up Agreement and Certificate of Investment Representation in
the forms of Exhibits G and F hereto respectively; and
(ii) a right to receive the Agency Shares and cash amounts set forth
in 2.2.3 below.
2.2.3 Company Common and Preferred Stock. Each issued and outstanding
share of Company Common Stock and Preferred Stock shall be converted into and
shall represent the following:
(i) subject to the Indemnity Escrow, a right to receive, at the
Closing, payment of 1.725522 Agency Shares in accordance with Section
2.4.2; provided however, that none of such Agency Shares shall be issued
or delivered to a stockholder of the Company unless and until such
stockholder shall have executed and delivered to Parent a Lock-up
Agreement and Certificate of Investment Representation in the forms of
Exhibits G and F hereto respectively;
4
<PAGE>
(ii) together with each outstanding ITI Option to acquire shares of
Company common Stock, a right to receive, a cash payment of the Reconciled
Purchase Price, subject to and in accordance with Section 2.5.
(iii) together with each outstanding ITI Option to acquire shares of
Company common Stock, a right to receive, upon the earlier of (A) 30
business days after the Parent has closed its firm commitment underwritten
initial public offering of Agency Shares pursuant to an effective
registration statement under the Securities Act, and (B) March 31, 2000, a
payment of cash equal to $2.91, in accordance with Section 2.4.
(iv) together with each outstanding ITI Option to acquire shares of
Company common Stock, the contingent right to receive, within 5 business
days after the Determination shall have become final and subject to the
Indemnity Escrow, such stockholder's proportional amount of that number of
Agency Shares determined as follows:
Schedule 2.2.3 sets forth a certain revenue target (the "Revenue Target")
and a certain profit before tax target (the "PBT Target") in respect of
the operations of the Company for the period commencing October 1, 1999
and ending September 30, 2000 (the "Measuring Period"). Subject to the
Surviving Corporation's achievement of the Revenue Target and the PBT
Target, Parent will deliver certificates registered in the name of the
respective Company stockholders and holders of ITI Options representing an
aggregate of 320,000 additional Agency Shares or such lesser number of
Agency Shares determined as follows (to such Persons and to Escrow Agent
for deposit as part of the Indemnity Escrow pursuant to Section 2.7
hereof):
(a) if both the Revenue Target and the PBT Target are achieved,
320,000 Agency Shares;
(b) if Revenues are less than 80% of the Revenue Target and/or PBT
is less than 80% of the PBT Target, 0 (none) Agency Shares;
(c) if the Revenue Target is met and PBT is at least 80% of the PBT
Target, then a number of Agency Shares determined under the following
formula:
(the average of (x) 100% and (y) PBT divided by the PBT Target)
times 320,000;
(d) if the PBT Target is met and Revenues are less than the Revenue
Target but at least 80% of the Revenue Target, then a number of Agency
Shares determined under the following formula:
5
<PAGE>
(the average of (x) 100% and (y) Revenues divided by the Revenue
Target) times 320,000;
(e) If Revenues are less than the Revenue Target but at least 80% of
the Revenue Target and PBT is less than the PBT Target but at least 80% of
the PBT Target, then a number of Agency Shares determined under the
following formula:
(the average of (x) Revenues divided by the Revenue Target and (y)
PBT divided by the PBT Target) times 320,000.
For example, if Revenues are 85 and Revenue Target is 100 and PBT is
95 and PBT Target is 100:
Revenues = 85 = .85
Revenue Target 100
PBT = 95 = .95
PBT Target 100
(.85 + .95) x 320,000 = 288,000 shares
---------------------
2
2.2.4 Calculation of Revenues and PBT.
(i) For the purpose of determining the Surviving Corporation's
revenues and profitability, the following terms shall have the meanings
assigned to them in this clause 2.4.4:
"Revenues" shall mean the commissions and fees, mark-ups and hourly
charges earned by the Surviving Corporation (excluding pass-through
expenses) during the measuring period for work generated or performed by
employees or contractors and charged to clients, determined in accordance
with U.S. generally accepted accounting principles ("GAAP");
"PBT" shall mean the net income (loss) of the Surviving Corporation
before provision for all income-based taxes determined in accordance with
GAAP; provided that in making such determinations:
(i) neither the proceeds from nor any dividends or refunds xvith
respect to, nor any increases in the cash surrender value of, any life
insurance policy under which the Surviving Corporation is the named
beneficiary or otherwise entitled to recovery, shall be included as
income, and the premium
6
<PAGE>
expense related to any such life insurance policy shall not be included as
an expense;
(ii) any write-off or amortization of goodwill arising out of the
merger of the Company shall not be treated as an expense;
(iii) intercompany management fees charged by Parent to the
Surviving Corporation shall not be treated as an expense;
(iv) any Losses (as defined in Section 8.2.3) of Parent and/or the
Surviving Corporation which give rise to an indemnity payment pursuant to
the indemnification provisions of Section 8.2 and which are assumed by one
or more of the Stockholders or as to which Parent and/or the Surviving
Corporation has been reimbursed, shall not be treated as an expense, and
there shall be excluded from income any amount received by the Surviving
Corporation pursuant thereto;
(v) any expenses of the Company prior to the Closing incurred in
connection with the negotiation, preparation and execution of this
Agreement and the other documents to be delivered at the Closing hereunder
(including without limitation the fees and disbursements of their
respective attorneys and accountants and any brokers or finders fees)
shall not be treated as an expense;
(vi) any stock or stock option based compensation shall not be
treated as an expense;
(vii) any indemnity payments made by a Parent Indemnifying Party to
any Stockholder Indemnified Party shall not be treated as income;
(viii) any costs and expenses incurred by the Stockholders in
contesting the Determination or in pursuing any indemnity claim under
Section 8.3 shall not be treated as an expense.
2.2.5 Accounting/Dispute Procedures. On or prior to November 15, 2000,
Parent shall deliver to the Representative a report setting forth the Revenues
and PBT of the Surviving Corporation for the Measuring Period, together with a
calculation of the payment due under Section 2.2.3(iii) (the "Determination").
If the Stockholders do not agree that the Determination correctly states the
Revenues or Profit Margin for the Measuring Period, or properly calculates the
payment due under Section 2.2.3(iii), the Representative shall promptly (but not
later than 15 days after the delivery of the Determination) give written notice
to Parent of any exceptions thereto (in reasonable detail describing the nature
of the disagreement asserted). If the Representative and Parent reconcile their
differences, the determination shall be adjusted accordingly and shall thereupon
become binding, final and conclusive upon all of
7
<PAGE>
the parties hereto and enforceable in a court of law. If the Representative and
Parent are unable to reconcile their differences in writing within 30 days after
written notice of exceptions is delivered to Parent, the items in dispute shall
be submitted to the New York City office of a mutually-acceptable accounting
firm selected from among the six largest accounting firms in the United States
in terms of gross revenues (the "Independent Auditors") for final determination,
and the Determination shall be deemed adjusted in accordance with the findings
of the Independent Auditors and shall become final and conclusive upon all of
the parties hereto and enforceable in a court of law. The Independent Auditors
shall consider only the items in dispute and shall be instructed to act within
20 days (or such longer period as the Representative and Parent may agree) to
resolve all items in dispute. If the Representative does not give notice of any
exception within 15 days after the delivery of the Determination, or if the
Representative gives written notification of the Stockholders' acceptance of the
Determination prior to the end of such 15-day period, the amounts set forth in
the Determination shall thereupon become binding, final and conclusive upon all
of the parties hereto and enforceable in a court of law.
2.2.6 Examination of Books and Records. The books and records of the
Surviving Corporation shall be made available during normal business hours upon
reasonable advance notice at the principal office of the Surviving Corporation
to the parties hereto, and the Independent Auditors to the extent required to
make the calculations required under Section 2.2.5. The parties hereto shall
cause the Surviving Corporation to make arrangements to make available to the
Independent Auditors and the Representative any back-up materials generated by
the Surviving Corporation, Parent and/or their respective representatives in
preparing the Determination and/or to support a position which is contrary to
the decision taken by the other party with respect to the Determination.
2.2.7 Earn-Out Consideration. Provided that the Company achieves certain
agreed-upon key success factors (employee retention, utilization and monthly
revenue per billable head for each of the quarterly periods referred to below)
described on Schedule 2.2.7, Parent will pay to the holders of Company Common
Stock, the holders of options to purchase Company Common Stock and the holders
of Preferred Stock, pro rata in accordance with their respective interests, up
to an aggregate of $500,000 in respect of each of the four calendar quarters
(commencing October 1, 1999) that the Company shall achieve such quarterly
targets up to a maximum aggregate amount of $2,000,000. Payment of such earn-out
amounts will be made within 30 days following the audited close of the calendar
quarter to which such payment relates.
2.2.8 Acceleration of Certain Payments. Upon the occurrence of a Payment
Acceleration Event, each of the Revenue Target and the PBT Target will be deemed
to have been achieved and each of the key success factors described on Schedule
2.2.7 for the calendar quarter in which such Payment Acceleration Event occurs
and each subsequent quarter, will be deemed to have been achieved, and all
amounts due to the Company stockholders and holders of ITI Options (subject to
the Indemnity Escrow) as a result thereof,
8
<PAGE>
will be paid to them by Parent within 30 days following the completion of the
transaction constituting the Payment Acceleration Event.
2.2.9 Company Treasury Stock. Each share of Company Common Stock or
Preferred Stock that is owned by the Company as treasury stock shall be canceled
and retired and shall cease to exist and no consideration shall be delivered in
exchange therefor.
Section 2.3 Stock Options.
2.3.1 Conversion of Outstanding Options. Options to purchase shares of
Company Stock that have been issued by the Company and which are outstanding at
the Effective Time (each, an "ITT Option") pursuant to the ITI 1999 Stock
Incentive Plan (the "ITI Option Plan") shall be automatically converted into
options to purchase Agency Shares as follows:
(a) in the case of each holder of outstanding and unexercised ITI
Options at the Effective Time, the aggregate number of Agency Shares issuable
upon the exercise of the converted ITI Options after the Effective Time shall be
equal to the product of 1.725522 multiplied by the number of shares of the
Company Common Stock issuable upon exercise of the ITI Options immediately prior
to the Effective Time, such product to be rounded down to the nearest whole
share of Agency Shares; and
(b) the exercise price per share of each converted ITI Option shall
be equal to the quotient of the exercise price of each such ITI Option at the
Effective Time divided by 1.725522, such quotient to be rounded up to the
nearest whole cent;
PROVIDED, however, that, in the case of any ITI Option that is intended to
qualify as an incentive stock option under Section 422 of the Code, the number
of Agency Shares issuable upon exercise of and the exercise price per share for
such converted ITI Option determined in the manner provided above shall be
further adjusted as necessary to conform to the requirements of Section 424(b)
of the Code. Options to purchase Agency Shares that arise from the operation of
this Section 2.3.1 shall be referred to as the "Converted Options." All
Converted Options shall be exercisable for the same period and otherwise have
the same terms and conditions applicable to the ITI Options which they replace,
as provided under the current terms of the ITI Options. Prior to the Effective
Time, Agency shall take, or cause to be taken, all necessary action to effect
the intent of the provisions set forth in this Section 2.3.1.
(c) a right to receive the Agency Shares and cash amounts set forth
in 2.2.3 (ii) and (iv) above.
2.3.2 Agency Action. Agency shall, prior to the Effective Time, take all
corporate action necessary to reserve for future issuance a sufficient
additional number of Agency Shares to provide for the satisfaction of its
obligations with respect to the Converted Options.
9
<PAGE>
As soon as practicable following the effective time of Agency's pending
Registration (S-1) Statement with the Securities and Exchange Commission, Agency
shall file a registration statement on Form S-8 of the Securities and Exchange
Commission (or any successor or other appropriate form) with respect to the
Agency Shares issuable upon exercise of the Converted Options to persons who
become employees of the Surviving Corporation at the Effective Time.
Section 2.4 Surrender of Stock Certificates. At the Closing (as defined in
Section 2.8 below):
2.4.1 Preferred Stock. Each holder of Preferred Stock shall surrender the
certificate(s) representing his/her shares of Preferred Stock, and in exchange
therefor he/she shall receive the cash payment and that number of Agency Shares
set forth in Section 2.2.2 and 2.2.3, as applicable.
2.4.2 Company Common and Preferred Stock. Each holder of Company Common
Stock shall surrender the certificate(s), if any, representing his/her shares of
Company Stock, and in exchange therefor and together with each holder of
Preferred Stock he/she shall receive the cash payment and that number of Agency
Shares set forth in Section 2.2.3, as applicable, subject to the Indemnity
Escrow.
2.4.3 Additional Cash Payment. Upon the earlier of (i) 30 business days
after Parent shall have closed its firm commitment underwritten initial public
offering referred to in Section 2.2.3(iii), and (ii) March 31, 2000, the holders
of the Company Common Stock, the holders of Preferred Stock and holders of ITI
Options, shall receive the cash payment referred to therein.
Section 2.5 Tangible Net Worth Adjustment. If the Tangible Net Worth is a
positive number, the purchase price payable to the holders of Company Common
Stock, the holders of Preferred Stock and holders of ITI Options pursuant to
Section 2.2.3(ii) in the aggregate shall be $1,802,464.50 (the "Net Worth
Amount"). If the Tangible Net Worth is a negative number, the Net Worth Amount
will be reduced by the amount of such negative Tangible Net Worth (as so
adjusted, the "Adjusted Net Worth Amount"). The Net Worth Amount or the Adjusted
Net Worth Amount, whichever is applicable, divided by 343,640.32 (is referred to
herein as the "Reconciled Purchase Price").
2.5.1 Payment of Reconciled Purchase Price.
(i) On the Closing Date, the Stockholders shall deliver to Parent
and MergerSub an estimated balance sheet of the Company immediately prior
to the Effective Time (the "Estimated Closing Balance Sheet") and,
provided that the Tangible Net Worth reflected on the Estimated Closing
Balance Sheet is a positive number, Parent shall pay, at Closing, to the
holders of Company Common Stock, the
10
<PAGE>
holders of Preferred Stock and holders of ITI Options, the aggregate
amount of $1,400,000 as an advance against the aggregate Reconciled
Purchase Price.
(ii) Within 10 days following the Special Determination, Parent
shall pay to the holders of Company Common Stock, the holders of Preferred
Stock and holders of ITI Options, the remainder, if any, of the aggregate
Reconciled Purchase Price, provided, however, that if the aggregate
Reconciled Purchase Price shall be less than $1,400,000, the Stockholders
shall immediately pay over to Parent, in cash, the full amount of such
shortfall.
2.5.2 Other Definitions. "Tangible Net Worth" shall mean the combined
stockholders' equity (deficit) of the Company (exclusive of goodwill and other
like intangibles) immediately prior to the Effective Time, prepared in
accordance with GAAP and as finally determined pursuant to Section 2.5.2 below.
11
<PAGE>
2.5.3 Accounting Procedures.
(i) Parent shall cause Arthur Andersen LLP, or another independent
accounting firm chosen by Parent (the "Accountants") as soon as practicable
after the Closing, to prepare in accordance with GAAP, a report containing an
audited balance sheet of the Company immediately prior to the Effective Time
(the "Closing Balance Sheet"), together with a statement of the Accountants
based upon such report and stating that it was prepared in accordance with this
Agreement and setting forth the Tangible Net Worth and all adjustments required
to be made to such audited balance sheet in order to make the calculations
required by this Section 2.5 (the "Special Determination"). If the Stockholders
do not agree that the Special Determination correctly states the Tangible Net
Worth, the Representative shall promptly (but not later than 45 days after the
delivery to them of the Special Determination) give written notice to Parent of
any exceptions thereto (in reasonable detail describing the nature of the
disagreement asserted). If the Representative and Parent reconcile their
differences, the Tangible Net Worth calculation shall be adjusted accordingly
and shall thereupon become binding, final and conclusive upon all of the parties
hereto and enforceable in a court of law. If the Representative and Parent are
unable to reconcile their differences in writing within 20 days after written
notice of exceptions is delivered to Parent (the "Reconciliation Period"), the
items in dispute shall be submitted to a mutually acceptable accounting firm
(other than the Accountants) selected from any of the five largest accounting
firms in the United States in terms of gross revenues (the "Independent
Auditors") for final determination, and the Tangible Net Worth calculation shall
be deemed adjusted in accordance with the determination of the Independent
Auditors and shall become binding, final and conclusive upon all of the parties
hereto and enforceable in a court of law. The Independent Auditors shall
consider only the items in dispute and shall be instructed to act within 20 days
(or such longer period as the Stockholders and Parent may agree) to resolve all
items in dispute. If the Representative does not give notice of any exception
within 45 days after the delivery to them of the Special Determination or if the
Representative gives written notification of the Stockholders' acceptance of the
Tangible Net Worth prior to the end of such 45 day period, the Tangible Net
Worth set forth in the Special Determination shall thereupon become binding,
final and conclusive upon all the parties hereto and enforceable in a court of
law.
(ii) In the event the Independent Auditors are for any reason unable or
unwilling to perform the services required of it under this Section 2.5, then
Parent and the Representative agree to select another accounting firm from among
the five largest accounting firms in the United States in terms of gross
revenues to perform the services to be performed under this Section 2.5.3 by the
Independent Auditors. If Parent and the Representative fail to select the
Independent Auditors as required by clause (i) above within seven days after the
expiration of the Reconciliation Period or fail to select another accounting
firm within seven days after it is determined that the Independent Auditors will
not perform the services required, either Parent or the Representative may
request the American Arbitration Association in New York, New York to appoint an
independent firm of certified public accountants to perform the services
required under this Section 2.5 by the Independent Auditors. The fees of the
American
12
<PAGE>
Arbitration Association shall be shared equally by Parent, on the one hand, and
the Stockholders on the other hand. For purposes of this Section 2.5 the term
"Independent Auditors" shall include such other accounting firm chosen in
accordance with this clause (ii).
(iii) The Independent Auditors shall determine the party (i.e., Parent or
the Stockholders, as the case may be) whose asserted position as to the amount
of Purchase Price payment for the period under examination before the
Independent Auditors is furthest from the determination of the Reconciled
Purchase Price payment by the Independent Auditors, which non-prevailing party
shall pay the fees and expenses of the Independent Auditors.
2.5.4 Examination of Books and Records. The books and records of the
Surviving Corporation and its subsidiaries (if any) shall be made available
during normal business hours upon reasonable advance notice at the principal
office of the Surviving Corporation, to the parties, the Accountants and the
Independent Auditors to the extent required to determine the calculations
required under this Section 2.5. The parties hereto shall cause the Surviving
Corporation to make reasonable arrangements to make available to Parent, the
Representative and their representatives (including auditors) any back-up
materials generated by the Surviving Corporation or the Accountants, as the case
may be, with respect to any adjustments made by them to the financial statements
in the process of preparing the Special Determination. In addition, the
Representative, on the one hand, and Parent, on the other hand, shall make
available to the other party and their representatives (including auditors) any
back-up materials generated by them to support a position which is contrary to
the position taken by the other party.
Section 2.6 Payment of the Purchase Price.
2.6.1 Purchase Price. Payment of each cash component of the Purchase Price
under Section 2.4 or 2.5, shall be made by Parent in cash by direct wire
transfer (of immediately available funds) to one or more accounts of the
Stockholders as set forth on Schedule 2.6 hereto, or as the Stockholders may
otherwise direct. The Stockholders assume responsibility for distribution of the
cash component of Purchase Price among the stockholders and option holders of
the Company.
2.6.2 No Fractional Shares. No fractional shares of Agency Stock shall be
issued, but in lieu thereof each Stockholder will be paid in cash the value of
any such fractional shares of Agency Stock such Stockholder would have otherwise
be entitled to receive based on a stipulated value of $10.00 per share.
Section 2.7 Indemnity Escrow. Solely to fund and secure the payment
obligations of the Stockholders to a Parent Indemnified Party (as defined in
Section 8.2.1), the Stockholders shall deliver to the corporate secretary and
general counsel of Parent as Escrow Agent, an aggregate of 236,250 of the Agency
Shares issuable to Company stockholders at Closing, and 37.5% of the Agency
Shares payable to Company stockholders and holders of ITI
13
<PAGE>
Options pursuant to Section 2.2.3(iv), in accordance with and subject to the
terms of the Indemnity and Escrow Agreement among Parent, MergerSub, the Company
and the Company stockholders and holders of ITI Options in the form annexed
hereto as Exhibit K.
Section 2.8 Closing. The Closing under this Agreement (the "Closing") is
taking place simultaneously with the execution and delivery of this Agreement at
10:00 A.M. on October 20, 1999, at the offices of Davis & Gilbert LLP, 1740
Broadway, New York, New York 10019, or such other date and place as agreed to
the parties hereto. Such date is herein referred to as the "Closing Date".
Section 2.9 Appointment of Representative.
2.9.1 Appointment of Representative. The approval by the shareholders of
the Company of this Agreement and the transactions contemplated hereby shall
include the approval of Scott Heiferman as representative and agent (the
"Representative") to act on behalf of all of the stockholders of the Company in
the matters, and in the manner, described in this Section 2.9. The
Representative shall act as representative for and agent of the stockholders of
the Company, and shall use his best efforts to carry out his duties under this
Agreement, with respect to the following: (i) responding to and making
determinations in respect of the assertion of any and all claims for
indemnification by the stockholders of the Company; (ii) giving and receiving
notices and communications with respect to the provisions of this Agreement, and
negotiating, agreeing to, and entering into settlements or compromises of
matters arising under this Agreement; and (iii) taking all such other actions as
may be necessary or desirable on behalf of the stockholders of the Company,
including hiring advisors, accountants or attorneys, and asserting claims or
defenses through judicial proceedings, as agent for the stockholders of the
Company in respect of this Agreement. No party dealing with the Representative
hereunder need inquire concerning such approval and such party shall be entitled
to rely exclusively upon the decisions, notices or other acts of the
Representative as being the fully authorized acts of the Representative under
this Agreement. By execution of this Agreement, the Representative agrees to
accept his appointment upon and effective as of the subsequent approval of this
Agreement by appropriate stockholder action.
Section 2.9.2 Indemnification of Representative. Nothing in this Agreement
is intended, and nothing in this Agreement shall be interpreted as, imposing
upon the Representative, as Representative, any personal liability, personal
economic obligation, or personal guarantee in favor of any party to this
Agreement or any third party. The stockholders of the Company, by approving this
Agreement and the transactions contemplated hereby, agree to severally indemnify
and hold the Representative harmless against any loss, liability or expense
incurred without gross negligence or willful misconduct on the part of
Representative, arising out of or in connection with carrying out his duties
hereunder, including the costs and expenses of defending himself against any
claim of
14
<PAGE>
liability in connection with the exercise or performance of any of his powers or
duties hereunder (including reasonable fees, expenses and disbursements of his
counsel).
ARTICLE III
REPRESENTATIONS OF THE STOCKHOLDERS AND THE COMPANY
A. Each of the Stockholders severally, and not jointly, represents and
warrants to MergerSub and Parent as follows:
Section 3.1 Execution and Validity of Agreements; Restrictive Documents.
3.1.1 Execution and Validity. The Stockholder has the legal right and
capacity to enter into this Agreement and to perform his/her obligations
hereunder. This Agreement has been duly and validly executed and delivered by
such Stockholder and, assuming due authorization, execution and delivery by
MergerSub and Parent, constitutes a legal, valid and binding obligation of such
Stockholder, enforceable against such Stockholder in accordance with its terms,
in each case, except as enforceability may be limited by bankruptcy, insolvency
reorganization, moratorium and other laws affecting creditors' rights generally,
or by general equitable principles (regardless of whether enforcement is sought
in a proceeding at law or in equity), and to the extent any indemnification or
contribution provisions thereof may be limited by applicable federal, state or
securities laws.
3.1.2 No Restrictions. There is no suit, action, claim, investigation or
inquiry by any Governmental or Regulatory Authority (as defined in Section
3.1.3), and no legal, administrative or arbitration proceeding pending or, to
such Stockholder's knowledge, threatened against such Stockholder or any of such
Stockholder's properties or assets, with respect to the execution, delivery and
performance of this Agreement or the transactions contemplated hereby or any
other agreement entered into by such Stockholder in connection with the
transactions contemplated hereby.
3.1.3 Non-Contravention. The execution, delivery and performance by such
Stockholder of his/her obligations hereunder and the consummation of the
transactions contemplated hereby, will not (a) result in the violation by such
Stockholder of any statute, law, rule, regulation or ordinance (collectively,
"Laws"), or any judgment, decree, order, writ, permit or license (collectively,
"Orders"), of any court, tribunal, arbitrator, authority, agency, commission,
official or other instrumentality of the United States, any foreign country or
any domestic or foreign state, county, city or other political subdivision (a
"Governmental or Regulatory Authority"), applicable to such Stockholder or any
of his/her assets or properties, or (b) conflict with, result in a violation or
material breach of, constitute (with or without notice or lapse of time or both)
a default under, or require such Stockholder to obtain any consent, approval or
action of, make any filing with or give any
15
<PAGE>
notice to, or result in or give to any Person any right of payment or
reimbursement, termination, cancellation, modification or acceleration of, or
result in the creation or imposition of any Lien upon any of the Company stock
held by such Stockholder under any of the terms, conditions or provisions of any
agreement, commitment, lease, license, evidence of indebtedness, note, bond,
mortgage, security agreement, indenture, franchise, permit, concession,
contract, or other instrument, obligation or agreement of any kind
(collectively, "Contracts") or license, permit and other governmental
certificate, authorization and approval, including applications therefor
(collectively, "Licenses") to which such Stockholder is a party or by which such
Stockholder or any of the Company stock held by such Stockholder is bound.
3.1.4 Approvals and Consents. No consent, approval or action of, filing
with or notice to any Governmental or Regulatory Authority or other Person is
necessary or required under any of the terms, conditions or provisions of any
Law or Order of any Governmental or Regulatory Authority or any Contract to
which such Stockholder is a party or his/her assets or properties are bound for
the execution and delivery of this Agreement by such Stockholder, the
performance by such Stockholder of his/her obligations hereunder or the
consummation by such Stockholder of the transactions contemplated hereby.
B. Each of the Stockholders and the Company, jointly and severally,
represents and warrants to MergerSub and Parent, as follows:
Section 3.2 Execution and Validity of Agreement; Existence and Good
Standing. The Company has the full corporate power and authority to enter into
this Agreement and to perform its obligations hereunder. The execution and
delivery of this Agreement by the Company and the consummation by the Company of
the transactions contemplated hereby have been duly authorized by the Board of
Directors of the Company and the Company stockholders, and no other corporate
proceedings on the part of the Company or its stockholders are necessary to
authorize the execution, delivery and performance of this Agreement by the
Company and the consummation by the Company of the transactions contemplated
hereby. This Agreement has been duly and validly executed and delivered by the
Company and, assuming due authorization, execution and delivery by MergerSub and
Parent, constitutes the legal, valid and binding obligations of the Company
enforceable against it in accordance with its terms, in each case, except as
enforceability may be limited by bankruptcy, insolvency reorganization,
moratorium and other laws affecting creditors' rights generally, or by general
equitable principles (regardless of whether enforcement is sought in a
proceeding at law or in equity), and to the extent any indemnification or
contribution provisions thereof may be limited by applicable federal, state or
securities laws. The Company is duly organized and validly existing and in good
standing under the laws of the State of Delaware, with the full corporate power
and authority to own its property and to carry on its business as such business
is now being conducted. Schedule 3.2 sets forth each jurisdiction in which the
Company is qualified to do business. Except as set forth on Schedule 3.2, there
is no jurisdiction in which the character of the property owned or leased by the
Company or the nature of its business
16
<PAGE>
activities requires qualification of the Company in such jurisdiction, except
where such failure to qualify would not reasonably be expected to have a
Material Adverse Effect.
Section 3.3 Subsidiaries and Investments; Capital Stock.
3.3.1 Subsidiaries and Investments. The Company does not own any capital
stock or other equity or ownership or proprietary interest in any Person, other
than investments in publicly traded debt or equity securities held for
investment.
3.3.2 Capital Stock; Options. The Company has an authorized capitalization
consisting of 500,000 shares of common stock, par value $.0l per share, of which
213,483.32 shares were issued and outstanding, and 37,041 shares of Series A
Convertible preferred stock, $.01 par value per share, all of which are issued
and outstanding. No other classes of capital stock of the Company are authorized
or outstanding. There are 93,116 options to acquire shares of Company Common
Stock outstanding pursuant to the ITI Option Plan. Except as set forth on
Schedule 3.3.2, there are no outstanding subscriptions, options, warrants,
rights (including "phantom stock rights"), calls, commitments, understandings,
conversion rights, rights of exchange, plans or other Contracts of any kind
providing for the purchase, issuance or sale of any shares of the capital stock
of the Company by the Company.
Section 3.4 Financial Statements and No Material Changes. Schedule 3.4
sets forth the following: (a) unaudited balance sheet of the Company as at
December 31, 1997 and audited balance sheet of the Company as at December 31,
1998 and the related combined statements of income, stockholders' equity and
cash flows for the year then ended, as reported on by PriceWaterhouse Coopers
Certified Public Accountants, and (b) an unaudited combined balance sheet of the
Company as at June 30, 1999 (the "Balance Sheet"), and the related unaudited
combined statements of income, stockholders' equity and cash flows for the nine
months then ended. Such financial statements have been prepared in accordance
with GAAP throughout the periods indicated except as set forth on Schedule
3.4.1. Each balance sheet fairly presents the combined financial condition of
the Company at the respective date thereof and reflects all claims against and
all debts and liabilities of the Company, fixed or contingent, as at the date
thereof, required to be shown thereon under GAAP and the related combined
statements of income, stockholders' equity and cash flows fairly present the
results of operations, stockholders' equity and cash flows of the Company for
the respective periods indicated. Since June 30, 1999 (the "Balance Sheet
Date"), there has been no material adverse change in the assets or liabilities,
or in the business or condition, financial or otherwise, or in the results of
operations of the Company.
Section 3.5 Books and Records. All accounts, books, ledgers and official
and other records material to the Company have been properly and accurately kept
and are complete in all material respects, and there are no material
inaccuracies or discrepancies of any kind contained or reflected therein. Except
as set forth on Schedule 3.5, the Company's records, systems, controls, data or
information recorded, stored, maintained, operated, or otherwise wholly or
17
<PAGE>
partly dependent on or held by any means (including any electronic, mechanical
or photographic process, whether computerized or not) which (including all means
of access thereto and therefrom) are under the exclusive ownership and
possession of the Company.
Section 3.6 Title to Properties: Encumbrances. The Company has good and
valid title to, or enforceable leasehold interests in, or valid rights under
contract to use, all the properties and assets owned or used by it (real and
personal, tangible and intangible), including, without limitation (a) all the
properties and assets reflected in the Balance Sheet, and (b) all the properties
and assets purchased or otherwise contracted for by the Company since the
Balance Sheet Date (except for properties and assets reflected in the Balance
Sheet or acquired or otherwise contracted for since the Balance Sheet Date, that
have been sold or otherwise disposed of in the ordinary course of business), in
each case free and clear of all Liens, except for Liens set forth on Schedule
3.6, and except for those Liens, which individually or in the aggregate, would
not reasonably be expected to have a Material Adverse Effect. The property,
plant and equipment owned or otherwise contracted for by the Company are in a
state of good maintenance and repair (ordinary wear and tear excepted) and are
adequate and suitable for the purposes for which they are presently being used.
"Liens" shall mean and include security interests, mortgages, liens, pledges,
guarantees, easements, reservations, restrictions, clouds, equities, rights of
way, options, rights of first refusal and all other encumbrances, whether or not
relating to the extension of credit or the borrowing of money, except for any of
the foregoing for (i) which taxes or other charges are not due and payable, (ii)
which workmen's, repairmen's or other similar Liens (inchoate or otherwise) have
arisen or been incurred in the ordinary course of business, and (iii) minor
title defects, easements or other Liens affecting real property, which do not
materially impair the continued use, occupancy, value or marketability of title
of the real property to which they relate.
Section 3.7 Real Property.
3.7.1 Owned Real Property. The Company does not own any real property
including ground leases) or hold any option or right of first refusal or first
offer to acquire any real property, and the Company is not obligated by Contract
or otherwise to purchase any real property.
3.7.2 Leased Real Property. Schedule 3.7.2 contains an accurate and
complete list of all real property leases to which the Company is a party ("Real
Property Leases"), including without limitation, any modification, amendment or
supplement thereto and any other related document or agreement executed or
entered into by the Company (including without limitation, any Real Property
Lease which the Company has subleased or assigned to another Person and as to
which the Company remains liable). With respect to each Real Property Lease set
forth on Schedule 3.7.2 (or required to be set forth on Schedule 3.7.2): (a) the
Real Property Lease is valid, binding and in full force and effect; (b) all
rents and additional rents and other sums, expenses and charges due to date have
been paid; (c) the lessee has been in peaceable possession since the
commencement of the original term thereon (d) no waiver, indulgence or
18
<PAGE>
postponement of the lessee's obligations thereunder has been granted by the
lessor; (e) there exists no default or event of default by the Company or to the
knowledge of the Company and the Stockholders, by any other party thereto; (f)
there exists no occurrence, condition or act (including the transactions
contemplated hereunder) which, with the giving of notice, the lapse of time or
the happening of any further event or condition, would become a default or event
of default by the Company thereunder; and (g) there are no outstanding claims of
breach or indemnification or notice of default or termination thereunder. The
Company holds the leasehold estate on all Real Property Leases, free and clear
of all Liens, except as set forth on Schedule 3.6 and the liens of mortgagees of
the real property in which such leasehold estate is located. The real property
leased by the Company is adequate and suitable for the purposes for which it is
presently being used, and there are no material repair or restoration works
likely to be required in connection with any of the leased real properties. The
Company is in physical possession and actual and exclusive occupation of the
whole of each of its leased properties. The Company does not owe any brokerage
commission with respect to any Real Property Lease.
Section 3.8 Contracts. Schedule 3.8 hereto contains an accurate and
complete list of the following Contracts of the Company: (a) all Plans (as such
term is defined in Section 3.19); (b) any personal property lease with a fixed
annual rental of $10,000 or more; (c) any Contract relating to capital
expenditures which involves payments of $25,000 or more in any single
transaction or series of related transactions; (d) any Contract relating to the
making of a loan or advance to, or investment in, any other Person, which loan
or investment exceeds $10,000; (e) any Contract evidencing or relating in any
way to indebtedness for money borrowed or to be borrowed, whether directly or
indirectly, by way of loan, purchase money obligation, guarantee (other than the
endorsement of negotiable instruments for collection in the ordinary course of
business), conditional sale, purchase or otherwise; (f) any management service,
employment, consulting or similar type of Contract which is not cancelable by
the Company without significant (i.e., in excess of $5000) penalty or other
financial obligation within 30 days; (g) any Contract limiting the freedom of
the Company party thereto to engage in any line of business or to compete with
any other Person, including agreements limiting the ability of the Company or
any of its affiliates to service competitive accounts during or after the term
thereof; (h) any collective bargaining or union agreement; (i) any Contract with
any of its officers or directors or the Stockholders not covered by subsection
(f) above (including indemnification agreements); (j) any secrecy or
confidentiality agreement (other than standard confidentiality agreements in
computer software license agreements or agreements with clients entered into in
the ordinary course of business and other than the Company's standard employee
confidentiality agreement which has been signed by each of the Company's
employees and directors, unless otherwise disclosed under this Agreement); (k)
any Contract with respect to any Intellectual Property of the Company (as
defined in Section 3.14 below), other than "shrink-wrap" and similar end-user
licenses; (1) any agreement with a client which generates annual revenues of
$25,000 or more; (m) any joint venture agreement involving a sharing of profits
not covered by clauses (a) through (1) above; and (n) any Contract (not covered
by another subsection of this Section 3.8) which involves $25,000 or more over
the
19
<PAGE>
unexpired term thereof and is not cancelable by the Company without significant
penalty or other financial obligation within 30 days. Notwithstanding the
foregoing, (x) commitments to media and production expenses which are fully
reimbursable from clients, and (y) estimates or purchase orders given in the
ordinary course of business relating to the execution of projects, do not have
to be set forth on Schedule 3.8. Each Contract to which a Company is a party,
including, but not limited to those set forth on Schedule 3.8, is in full force
and effect, and there exists no default or event of default by the Company or to
the knowledge of the Stockholders and the Company, by any other Person, or
occurrence, condition, or act (including the Merger) which, with the giving of
notice, the lapse of time or the happening of any other event or condition,
would become a default or event of default thereunder by the Company, and there
are no outstanding claims of breach or indemnification or notice of default or
termination of any such Contract.
Section 3.9 Non-Contravention; Approvals and Consents.
3.9.1 Non-Contravention. The execution, delivery and performance by the
Company of its obligations hereunder and the consummation of the transactions
contemplated hereby, will not (a) violate, conflict with or result in the breach
of any provision of the certificate or articles of incorporation or by-laws (or
other comparable corporate charter documents) of the Company, or (b) result in
the violation by the Company of any Laws or Orders of any Governmental or
Regulatory Authority, applicable to the Company or any of its assets or
properties, or (c) if the consents and notices set forth on Schedule 3.9.2 are
obtained, given or waived, conflict with, result in a violation or breach of,
constitute (with or without notice or lapse of time or both) a default under, or
(except as set forth on Schedule 3.9.2) require the Company to obtain any
consent, approval or action of, make any filing with or give any notice to, or
result in or give to any Person any right of payment or reimbursement,
termination, cancellation, modification or acceleration of, or result in the
creation or imposition of any Lien upon any of the assets or properties of the
Company, under any of the terms, conditions or provisions of any Contract to
which the Company is a party or by which the Company or any of its assets or
properties are bound, except where such violation, conflict, breach, default or
failure would not reasonably be expected to have a Material Adverse Effect.
3.9.2 Approvals and Consents. Except as disclosed on Schedule 3.9.2, no
consent, approval or action of, filing with or notice to any Governmental or
Regulatory Authority or other Person is necessary or required under any of the
terms, conditions or provisions of any Law or Order of any Governmental or
Regulatory Authority or any Contract to which the Company is a party or by which
its assets or properties are bound for the execution and delivery of this
Agreement by the Company, the performance by the Company of its obligations
hereunder or the consummation by the Company of the transactions contemplated
hereby.
Section 3.10 Litigation. Except as set forth on Schedule 3.10, there is no
action, suit, proceeding at law or in equity by any Person, or any arbitration
or any administrative or other
20
<PAGE>
proceeding by or before (or to the knowledge of the Company and the
Stockholders, any investigation by) any Governmental or Regulatory Authority,
pending or, to the knowledge of the Company and the Stockholders, threatened
against the Company with respect to this Agreement or the transactions
contemplated hereby, or against or affecting the Company or its properties or
assets; and, to the knowledge of the Company or the Stockholders, no acts,
facts, circumstances, events or conditions occurred or exist which are a basis
for any such action, proceeding or investigation. Schedule 3.10 also sets forth
with respect to each pending or threatened action, suit or proceeding listed
thereon, the amount of costs, expenses or damages the Company has incurred to
date and reasonably expects to incur through conclusion thereof. The Company is
not subject to any Order entered in any lawsuit or proceeding.
Section 3.11 Taxes. The Company has timely filed, or caused to be filed,
taking into account any valid extensions of due dates, completely and
accurately, all federal, state, local and foreign tax or information returns
(including estimated tax returns) required under the statutes, rules or
regulations of such jurisdictions to be filed by such Company. The term "Taxes"
means taxes, duties, charges or levies of any nature imposed by any taxing or
other Governmental or Regulatory Authority, including without limitation income,
gains, capital gains, surtax, capital, franchise, capital stock, value-added
taxes, taxes required to be deducted from payments made by the payor and
accounted for to any tax authority, employees' income withholding, back-up
withholding, withholding on payments to foreign Persons, social security,
national insurance, unemployment, worker's compensation, payroll, disability,
real property, personal property, sales, use, goods and services or other
commodity taxes, business, occupancy, excise, customs and import duties,
transfer, stamp, and other taxes (including interest, penalties or additions to
tax in respect of the foregoing), and includes all taxes payable by the Company
pursuant to Treasury Regulations ss. 1.1502-6 or any similar provision of state,
local or foreign law. All Taxes shown on said returns to be due and all
additional assessments received prior to the date hereof have been paid or are
being contested in good faith, in which case, such contested assessments are set
forth on Schedule 3.11. The Company has collected all sales, use, goods and
services or other commodity Taxes required to be collected and remitted or will
remit the same to the appropriate taxing authority within the prescribed time
periods. The Company has withheld all amounts required to be withheld on account
of Taxes from amounts paid to employees, former employees, directors, officers,
residents and non-residents and remitted or will remit the same to the
appropriate taxing authorities within the prescribed time periods. The amount
set up as an accrual for Taxes on the Balance Sheet is sufficient for the
payment of all unpaid Taxes of the Company, whether or not disputed, for all
periods ended on and prior to the date thereof. Since the Balance Sheet Date,
the Company has not incurred any liabilities for Taxes other than in the
ordinary course of business. The Company has delivered to Parent correct and
complete copies of all federal income tax returns filed with respect to the
Company for all taxable periods beginning on or after January 1, 1996. None of
the Federal, state or local income tax returns of the Company have ever been
audited by the Internal Revenue Service or any other Governmental or Regulatory
Authority. No examination of any return of the Company is currently in progress,
and the Company has not received notice of any proposed audit or examination.
21
<PAGE>
No deficiency in the payment of Taxes by the Company for any period has been
asserted in writing by any taxing authority and remains unsettled at the date of
this Agreement. The Company has not made any agreement, waiver or other
arrangement providing for an extension of time with respect to the assessment or
collection of any Taxes against it. The Company has not been a member of an
affiliated group filing consolidated Federal income tax returns nor has it been
included in any combined, consolidated or unitary state or local income tax
return.
Section 3.12 Liabilities. Except as set forth in the Balance Sheet, the
Company has no outstanding claims, liabilities or indebtedness of any nature
whatsoever (collectively in this Section 3.12, "Liabilities"), whether accrued,
absolute or contingent, determined or undetermined, asserted or unasserted, and
whether due or to become due, other than (i) Liabilities specifically disclosed
in any Schedule hereto; (ii) Liabilities under Contracts of the type required to
be disclosed by the Company and the Stockholders on any Schedule and so
disclosed or which because of the dollar amount or other qualifications are not
required to be listed on such Schedule; and (iii) Liabilities incurred in the
ordinary course of business and consistent with past practice since the Balance
Sheet Date not involving borrowings by the Company.
Section 3.13 Insurance. Schedule 3.13 is a schedule of all insurance
policies (including life insurance) or binders maintained by the Company. All
such policies are in full force and effect and all premiums that have become due
have been currently paid. None of such policies shall lapse or terminate by
reasons of the Merger. The Company has not received any notice of cancellation
of any such policy or binder. Except as set forth on Schedule 3.13, within the
last two years the Company has not filed for any claims exceeding $25,000
against any of its insurance policies, exclusive of automobile policies.
Section 3.14 Intellectual Properties.
3.14.1 Definitions. For purposes of this Agreement, the following terms
have the following definitions:
"Intellectual Property" shall include, without limitation, any or
all of the following and all rights associated therewith: (a) all domestic and
foreign patents and applications therefor and all reissues, divisions, renewals,
extensions, continuations and continuations-in-part thereof; (b) all inventions
(whether patentable or not), invention disclosures, improvements, trade secrets,
proprietary information, know how, technology, technical data and customer
lists, rights of privacy and publicity, and all documentation relating to any of
the foregoing; (c) all copyrights, copyright registrations and applications
therefor, and all other rights corresponding thereto throughout the world; (d)
all mask works, mask work registrations and applications therefor; (e) all
industrial designs and any registrations and applications therefor; (f) all
trade names, logos, common law trademarks and service marks; trademark and
service mark registrations and applications therefor and all goodwill associated
22
<PAGE>
therewith; and (g) all computer software including all source code, object code,
firmware, development tools, files, records and data, all media on which any of
the foregoing is recorded, and all documentation related to any of the
foregoing.
"Intellectual Property of the Company" shall mean any Intellectual
Property that: (a) is owned by or exclusively licensed to the Company, or (b)
which is necessary to the operation of the Company, including the design,
manufacture and use of the products of the Company as it currently is operated
or is reasonably anticipated to be operated in the future, but shall
specifically not include any rights in or to materials created for clients as
"work-made-for-hire" or which are subject to an exclusive assignment or license
in favor of clients of the Company.
3.14.2 Registrations. The registrations of the Intellectual Property
listed on Schedule 3.14 are valid and subsisting, all necessary registration and
renewal fees in connection with such registrations have been made and all
necessary documents and certificates in connection with such registrations have
been filed with the relevant patent, copyrights and trademark authorities in the
United States or other jurisdiction for the purposes of maintaining such
Intellectual Property registrations, except such filings as will not result in
the loss of any such registration, abandonment of any mark or proprietary right,
or the assessment of any significant (i.e., in excess of $5,000) penalty or
charge. Except as set forth in Schedule 3.14 (a) no Person has any rights to use
any of the Intellectual Property of the Company; and (b) the Company has not
granted to any Person, nor authorized any Person to retain, any rights in the
Intellectual Property of the Company. Except as set forth on Schedule 3.14 and
for "shrink wrap" and similar commercial end-user licenses, the Company Owns and
has good and exclusive title to each item of Intellectual Property of the
Company, free and clear of any Lien; and the Company owns, or has the right,
pursuant to a valid Contract to use or operate under, all other Intellectual
Property of the Company. To the knowledge of the Company and the Stockholders,
the operation of the businesses of the Company as it is currently conducted does
not infringe the Intellectual Property of any other Person. The Company has not
received notice from any Person that the operation of its business infringes the
Intellectual Property of any Person. There are no Contracts between the Company
and any other Person with respect to the Intellectual Property of the Company in
respect of which there is any dispute known to the Company or the Stockholders
regarding the scope of such agreement, or performance under such Contract,
including with respect to any payments to be made or received by the Company. To
the knowledge of the Company and the Stockholders, no Person is infringing or
misappropriating any of the Intellectual Property of the Company.
Section 3.15 Compliance with Laws; Licenses and Permits.
3.15.1 Compliance. The Company is, and its business has been conducted, in
compliance with all applicable Laws and Orders, except in each case (other than
with respect to compliance with Laws and Orders relating to the regulation or
protection of the environment; "Environmental Laws and Orders") where the
failure to so comply would not reasonably be
23
<PAGE>
expected to have a Material Adverse Effect, including without limitation: (a)
all Laws and Orders promulgated by the Federal Trade Commission or any other
Governmental or Regulatory Authority; (b) all Environmental Laws and Orders; and
(c) all Laws and Orders relating to labor, civil rights, and occupational safety
and health laws, worker's compensation, employment and wages, hours and
vacations, or pay equity. The Company has not been charged with, or, to the
knowledge of the Company and the Stockholders, threatened with or under any
investigation with respect to, any charge concerning any violation of any Laws
or Orders.
3.15.2 Licenses. The Company has all Licenses required by any Governmental
or Regulatory Authority for the operation of its business and the use of its
assets and properties as presently operated or used, except where the failure to
have such Licenses would not reasonably be expected to have a Material Adverse
Effect. All of the Licenses are in full force and effect and no action or claim
is pending, nor to the knowledge of the Company and the Stockholders is
threatened, to revoke or terminate any of such Licenses or declare any such
License invalid in any material respect.
Section 3.16 Client Relations. Schedule 3.16 sets forth for the Company
(a) the 10 largest clients (measured by revenues), and the revenues from each
such client and from all clients (in the aggregate) for the calendar year ended
December 31, 1998 and the nine months ended September 30, 1999 and (b) the
clients projected to be the 10 largest clients (measured by revenues) based on
the current profit plans of the Company for the twelve months ending December
31, 1999, together with the estimated revenues from each such client and all
clients (in the aggregate) for such period. The Stockholders and the Company do
not warrant that the estimated revenues set forth on Schedule 3.16 will prove to
be accurate; provided, however, the Stockholders and the Company do represent
that they were made in good faith and on a reasonable basis. Except as set forth
on Schedule 3.16, no client of the Company has advised the Company or the
Stockholders in writing that it is (x) terminating or considering terminating
the handling of its business by the Company as a whole or in respect of any
particular product, project or service or (y) planning to reduce its future
spending with the Company in any material manner; and to the knowledge of the
Company and the Stockholders (without making any special inquiry of any
clients), no client has orally advised the Company, the Stockholders or any of
the Company's executive or other employees at or above the Account Director
level of any of the foregoing events.
Section 3.17 Accounts Receivable; Work-in-Process: Accounts Payable. The
amount of all work-in-process, accounts receivable, unbilled invoices (including
without limitation unbilled invoices for services and out-of-pocket expenses)
and other debts due or recorded in the records and books of account of the
Company as being due to the Company and reflected on the Balance Sheet or the
Closing Balance Sheet represent or will represent valid obligations arising from
sales actually made or services actually performed in the ordinary course of
business and are or will be good and collectible in full (less the amount of any
provision, reserve or similar adjustment therefor reflected on the Balance Sheet
or the Closing
24
<PAGE>
Balance Sheet) in the ordinary course of business, and none of the accounts
receivable or other debts (or accounts receivable arising from any such
work-in-process or unbilled invoices) is or will be subject to any counterclaim
or set-off except to the extent of any such provision, reserve or adjustment.
There has been no material adverse change since the Balance Sheet Date in the
amount or aging of the work-in-process, accounts receivable, unbilled invoices,
or other debts due to the Company, or the reserves with respect thereto, or
accounts payable of the Company.
Section 3.18 Employment Relations. (a) To the knowledge of the Company and
the Stockholders, the Company is not engaged in any unfair labor practice; (b)
no unfair labor practice complaint against the Company is pending before any
Governmental or Regulatory Authority; (c) there is no organized labor strike,
dispute, slowdown or stoppage actually pending or to the knowledge of the
Company and the Stockholders threatened against or involving the Company; (d)
there are no labor unions representing or, to the knowledge of the Company and
the Stockholders, attempting to represent the employees of the Company; (e) no
claim or grievance nor any arbitration proceeding arising out of or under any
collective bargaining agreement is pending and to the knowledge of the Company
and the Stockholders, no such claim or grievance has been threatened; (f) no
collective bargaining agreement is currently being negotiated by the Company;
and (g) the Company has not experienced any work stoppage or similar organized
labor dispute during the last three years. There is no legal action, suit,
proceeding or claim pending or, to the knowledge of the Company and the
Stockholders, threatened between the Company and any of its employees, former
employees, agents, former agents, job applicants or any association or group of
any of its employees, except as set forth on Schedule 3.10.
Section 3.19 Employee Benefit Matters.
3.19.1 List of Plans. Schedule 3.8 to this Agreement lists all employee
benefit plans (as defined in Section 3(3) of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA")) and all bonus, incentive, deferred
compensation, retiree medical or life insurance, supplemental retirement,
severance or other benefit plans, programs or arrangements, and all termination,
severance or other Contracts, whether covering one Person or more than one
Person, and whether or not subject to any of the provisions of ERISA, which are
or have been maintained, contributed to or sponsored by the Company or any ERISA
Affiliate (as defined in Section 3.19.3 below) for the benefit of any employee
(each item listed on Schedule 3.8 being referred to herein individually, as a
"Plan" and collectively, as the "Plans"). The Company has made available to
Parent, to the extent applicable, a complete and accurate copy of (a) each
written Plan and descriptions of any unwritten Plan (including all amendments
thereto whether or not such amendments are currently effective); (b) each
summary plan description and summary of material modifications relating to a
Plan; (c) each trust agreement or other funding arrangement with respect to each
Plan, including insurance contracts; (d) the most recently filed Internal
Revenue Service Form 5500 relating to each Plan; (e) the most recently received
Internal Revenue Service determination letter for each Plan; and (f) the three
most recently prepared actuarial reports and financial statements in connection
25
<PAGE>
[ILLEGIBLE] ch Plan. Except as set forth on Schedule 3.19.1, neither the
Stockholders nor any [ILLEGIBLE] has made any commitment, (i) to create or cause
to exist any Plan not set forth on [ILLEGIBLE] le 3.8 & (ii) to modify, change
or terminate any Plan. [ILLEGIBLE]
3.19.2 Severance. Except as set forth on Schedule 3.19.2, none of the Plans, or
any [ILLEGIBLE] ment agreement or other Contract to which the Company is a party
or bound, (a) [ILLEGIBLE] s for the payment of or obligates the Company to pay
separation, severance, termination [ILLEGIBLE] lar-type benefits to any Person;
or (b) obligates the Company to pay separation, [ILLEGIBLE] ze, termination or
similar-type benefits solely as a result of any transaction [ILLEGIBLE] Aated by
this Agreement or as a result of a "change in control," within the meaning of
[ILLEGIBLE] m under Section 280G of the Code.
[ILLEGIBLE] 3.19.3 Multi-Employer Plans. Neither the Company nor any ERISA
Affiliate (as [ILLEGIBLE] fter defined) has maintained, contributed to or
participated in a multi-employer plan [ILLEGIBLE] the meaning of Section 3(37)
or 4001(a)(3) of ERISA) or a multiple employer plan [ILLEGIBLE] to Sections 4063
and 4064 of ERISA, nor has any obligations or liabilities, including [ILLEGIBLE]
wal or successor liabilities, regarding any such plan. As used herein, the term
"ERISA [ILLEGIBLE] e" means any Person that, together with the Company, is
considered a "single [ILLEGIBLE] er" pursuant to Section 4001(b) of ERISA.
[ILLEGIBLE] 3.19.4 Welfare Benefit Plans. The Company has expressly reserved the
right, in all [ILLEGIBLE] ocuments relating to welfare benefits provided to
employees, former employees, [ILLEGIBLE] , directors and other participants and
beneficiaries, to amend, modify or terminate at [ILLEGIBLE] ne the Plans which
provide for welfare benefits, and the Company and the [ILLEGIBLE] lders are not
aware of any fact, event or condition that could reasonably be expected
[ILLEGIBLE] ct or impair such right.
[ILLEGIBLE] 3.19.5 Administrative Compliance. Each Plan is now and has been
operated in all [ILLEGIBLE] 1 respects in accordance with the requirements of
all applicable Laws, including, [ILLEGIBLE] limitation, ERISA, the Health
Insurance Portability and Accountability Act of 1996 [ILLEGIBLE] Code, and the
regulations and authorities published thereunder. The Company has [ILLEGIBLE] ed
all material obligations required to be performed by it under, is not in any
respect [ILLEGIBLE] At under or in violation of, and neither the Company nor the
Stockholders have [ILLEGIBLE] dge of any default or violation by any Person to,
any Plan. Except as set forth on [ILLEGIBLE] le 3.10, no legal action, suit,
audit, investigation or claim is pending or, to the [ILLEGIBLE] dge of the
Company and the Stockholders threatened with respect to any Plan (other
[ILLEGIBLE] urns for benefits in the ordinary course), and no fact, event or
condition exists that [ILLEGIBLE] be reasonably likely to provide a legal basis
for any such action, suit, audit, [ILLEGIBLE] ation or claim. All reports,
disclosures, notices and filings with respect to such Plans [ILLEGIBLE] d to be
made to employees, participants, beneficiaries, alternate payees and any
[ILLEGIBLE] mental or Regulatory Authority have been timely made or an extension
has been obtained.
26
<PAGE>
Section 3.20 Interests in Customers, Suppliers, Etc. Except as set forth
on Schedule 3.20, (x) no Stockholder nor any Person controlled by a Stockholder
nor (y) to the knowledge of the Company and the Stockholders (without making any
inquiry of any member of the Related Group, as hereinafter defined), any
officer, director, or employee of the Company, (collectively, the "Related
Group"), or any entity controlled by anyone in the Related Group:
(i) owns, directly or indirectly, any interest in (excepting for
ownership, directly or indirectly, of less than 2% of the issued and
outstanding shares of any class of securities of a publicly held and
traded company) or received or has any right to receive payments from, or
is an officer, director, employee or consultant of, any Person which is,
or is engaged in business as, a competitor, lessor, lessee, supplier,
distributor, sales agent, customer or client of the Company;
(ii) owns, directly or indirectly (other than by virtue of their ownership
of stock of the Company), in whole or in part, any tangible or intangible
property (including, but not limited to Intellectual Property) that the
Company uses in the conduct of the business of such Company, other than
immaterial personal items owned and used by employees at their work
stations; or
(iii) has any significant cause of action or other claim whatsoever
against, or owes any amount to, the Company, except for claims in the
ordinary course of business such as for accrued vacation pay, accrued
benefits under employee benefit plans, and similar matters and agreements
existing on the date hereof
Section 3.21 Bank Accounts; Powers of Attorney: Authority of
Representative. Set forth in Schedule 3.21 is an accurate and complete list
showing (a) the name of each bank in which the Company has an account, credit
line or safe deposit box and the names of all Persons authorized to draw thereon
or to have access thereto, and (b) the names of all Persons, if any, holding
powers of attorney from the Company and a summary statement of the terms thereof
The Representative is duly authorized and empowered to act on behalf of each of
the Stockholders and each of the other holders of Common and Preferred Stock and
options to acquire common stock of the Company pursuant to the ITI Option Plan,
as set forth in Section 2.9.1 hereof.
Section 3.22 Compensation of Employees. Schedule 3.22 is an accurate and
complete list showing (a) the names and positions of all employees and exclusive
consultants who are currently employed by the Company, together with a statement
of the current annual salary, and the annual salary, bonus and incentive
compensation paid or payable with respect to calendar years 1997 and 1998, and
the material fringe benefits of such employees and exclusive consultants not
generally available to all employees of the Company, if any; (b) all bonus and
incentive compensation paid or payable (whether by agreement, custom or
understanding) to
28
<PAGE>
any employee of the Company not listed in clause (a) above for services rendered
during calendar years 1997 and 1998; (c) the names of all retired employees, if
any, of the Company who are receiving or entitled to receive any healthcare or
life insurance benefits or any payments from the Company not covered by any
pension plan to which the Company is a party, their ages and current unfunded
pension rate, if any; and (d) a description of the current severance and
vacation policy of the Company. The Company has not, because of past practices
or previous commitments with respect to its employees, established any rights on
the part of any of its employees to additional compensation (including grant of
options) with respect to any period after the Closing Date (other than wage
increases in the ordinary course of business).
Section 3.23 No Changes Since the Balance Sheet Date. Since the Balance
Sheet Date, except as specifically stated on Schedule 3.23, the Company has not
(a) incurred any liability or obligation of any nature (whether accrued,
absolute, contingent or otherwise), except in the ordinary course of business;
(b) permitted any of its assets to be subjected to any Lien; (c) sold,
transferred or otherwise disposed of any of its assets except in the ordinary
course of business; (d) made any capital expenditure or commitment therefor
which individually or in the aggregate exceeded $25,000; (e) declared or paid
any dividends or made any distributions on any shares of its capital stock, or
redeemed, purchased or otherwise acquired any shares of its capital stock or any
option, warrant or other right to purchase or acquire any such shares; (f) made
any bonus or profit sharing distribution; (g) increased or prepaid its
indebtedness for borrowed money, except current borrowings under credit lines
listed on Schedule 3.8, or made any loan to any Person other than to any
employee for normal travel and expense advances; (h) written down the value of
any work-in-process, or written off as uncollectible any notes or accounts
receivable, except write-downs and write-offs in the ordinary course of
business, none of which, individually or in the aggregate, is material to the
Company; (i) granted any increase in the rate of wages, salaries, bonuses or
other remuneration of any employee who, whether as a result of such increase or
prior thereto, receives aggregate compensation from the Company at an annual
rate of $50,000 or more, or except in the ordinary course of business to any
other employees; (j) entered into an employment or exclusive consultant
agreement which is not cancelable without significant penalty or other financial
obligation within 30 days; (k) canceled or waived any claims or rights of
material value; (1) made any change in any method of accounting procedures; (m)
otherwise conducted its business or entered into any transaction, except in the
usual and ordinary manner and in the ordinary course of its business; (n)
amended or terminated any agreement which is material to its business; (o)
renewed, extended or modified any Real Property Lease or except in the ordinary
course of business, any lease of personal property; (p) adopted, amended or
terminated any Plan; or (q) agreed, whether or not in writing, to do any of the
actions set forth in any of the above clauses.
Section 3.24 Corporate Controls. None of the Stockholders, nor, to the
knowledge of the Company and the Stockholders, any officer, authorized agent,
employee or any other Person while acting on behalf of the Company, has,
directly or indirectly: used any corporate fund for unlawful contributions,
gifts, or other unlawful expenses relating to political activity;
29
<PAGE>
made any unlawful payment to foreign or domestic government officials or
employees or to foreign or domestic political parties or campaigns from
corporate funds; established or maintained any unlawful or unrecorded fund of
corporate monies or other assets; made any false or fictitious entry on its
books or records; made any bribe, rebate, payoff, influence payment, kickback,
or other unlawful payment, or other payment of a similar or comparable nature,
to any Person, whether in money, property, or services, to obtain favorable
treatment in securing business or to obtain special concessions, or to pay for
favorable treatment for business secured or for special concessions already
obtained, and the Company has not participated in any illegal boycott or other
similar illegal practices affecting any of its actual or potential customers.
Section 3.25 Disclosure. No representation or warranty of the Company or
the Stockholders contained in this Agreement, and no statement contained in any
Schedule or in any certificate, list or other writing furnished to Parent by the
Company or the Stockholders pursuant to any provision of this Agreement
(including without limitation any financial statements), contains any untrue
statement of a material fact or omits to state a material fact necessary in
order to make the statements herein or therein, in the light of the
circumstances under which they were made, not misleading.
Section 3.26 Brokers. Except as set forth on Schedule 3.26, no broker,
finder, agent or similar intermediary has acted on behalf of the Company or the
Stockholders in connection with this Agreement or the transactions contemplated
hereby, and no brokerage commissions, finder's fees or similar fees or
commissions are payable by the Company or the Stockholders in connection
therewith based on any agreement, arrangement or understanding with any of them.
Section 3.27 Year 2000 Compliant.
3.27.1 Definition. The term "Year 2000 Compliant" shall mean:
(i) the functions, calculations and other computer processes of all
computer hardware, software and systems, including but not limited to
internal and outsourced MIS systems and embedded computer features within
other systems of the Company (collectively, "Processes"), perform properly
in a consistent manner regardless of the date in time on which the
Processes are actually performed and regardless of the date of input to
the software, whether before, on or after January 1, 2000 and whether or
not the dates are affected by leap years;
(ii) the computer hardware, software and systems accept, calculate,
compare, sort, extract, sequence and otherwise process data inputs and
date values, and return and display date values, in a consistent manner
regardless of the dates used, whether before, on or after January 1, 2000;
and
30
<PAGE>
(iii) the computer hardware, software and systems will function
properly without interruptions or extraordinary manual intervention caused
by the date in time on which the Processes are actually performed or by
the date of input to the software, whether before, on or after January 1,
2000.
3.27.2 Computer Systems. The Company has used its reasonable commercial
efforts so that, to the knowledge of the Company and the Stockholders, current
computer hardware, software and systems, and accompanying documentation, of such
Company will be Year 2000 Compliant in a full production version, with
accompanying documentation, in all material respects, on or before November 1,
1999. The Company has used its reasonable commercial efforts so that, to the
knowledge of the Company and the Stockholders, receipt of Year 2000 Compliant
computer hardware, software and systems will be provided to the Company in a
timely manner under current supplier contracts or standard maintenance and
support plans without additional fee or charge of any kind (including any
installation, freight, or other costs or fees) to the Company.
3.27.3 Other Products and Services. The Company has used its reasonable
commercial efforts so that, to the knowledge of the Company and the
Stockholders, the products of the Company will be delivered and its services
will be scheduled and performed in a timely manner without interruptions caused
by the date in time on which the product is ordered or is actually delivered or
the services are scheduled or actually performed under normal procedures in the
ordinary course, whether before, on or after January 1, 2000. The Company has
used its reasonable commercial efforts so that, to the knowledge of the Company
and the Stockholders, the essential suppliers of products and services of the
Company, including the suppliers of its infrastructure systems, have Year 2000
Compliant programs in place to avoid interruptions in the supplier-customer
trading relationship which could have a Material Adverse Effect, whether before,
on or after January 1, 2000, except as set forth on Schedule 3.27.
Section 3.28 Copies of Documents. The Company has caused to be made
available for inspection and copying by Parent and its advisers, complete and
correct copies of all documents referred to in this Article III or in any
Schedule. Summaries of all oral contracts contained in Schedule 3.8 are complete
and accurate in all material respects.
ARTICLE IV
REPRESENTATIONS OF MERGERSUB AND PARENT
Parent and MergerSub, jointly and severally, represent and warrant to the
Company and the Stockholders as follows:
31
<PAGE>
Section 4.1 Existence and Good Standing. Parent is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware. MergerSub is a corporation duly organized and validly existing and in
good standing under the laws of the State of Delaware. Each of Parent and
MergerSub has all requisite corporate power and authority to own its assets and
to carry on its business as presently conducted.
Section 4.2 Execution and Validity of Agreements. Each of Parent and
MergerSub has the full corporate power and authority to enter into this
Agreement, to perform its respective obligations hereunder and to consummate the
transactions contemplated hereby. The execution, delivery and performance of
this Agreement by Parent and MergerSub and the consummation of the transactions
contemplated hereby have been duly and validly authorized by all required
corporate action on behalf of Parent and MergerSub. This Agreement has been duly
and validly executed and delivered by Parent and MergerSub and, assuming due
authorization, execution and delivery by the Company and the Stockholders,
constitutes the legal, valid and binding obligation of Parent and MergerSub,
enforceable against each of them in accordance with its terms in each case,
except as enforceability may be limited by bankruptcy, insolvency
reorganization, moratorium and other laws affecting creditors' rights generally,
or by general equitable principles (regardless of whether enforcement is sought
in a proceeding at law or in equity), and to the extent any indemnification or
contribution provisions thereof may be limited by applicable federal state or
securities laws.
Section 4.3 Non-Contravention; Approvals and Consents.
4.3.1 Non-Contravention. The execution, delivery and performance by Parent
and MergerSub of their obligations hereunder and the consummation of the
transactions contemplated hereby will not conflict with, result in a violation
or breach of, constitute (with or without notice or lapse of time or both) a
default under, or require Parent or MergerSub to obtain any consent, approval or
action of, make any filing with or give any notice to, or result in or give to
any Person any right of payment or reimbursement, termination, cancellation,
modification or acceleration of, or result in the creation or imposition of any
Lien upon any of the assets or properties of Parent or MergerSub, under any of
the terms, conditions or provisions of (a) the certificate of incorporation or
by-laws of Parent or MergerSub, or (b) subject to the taking of the actions
described in Section 4.3.2, (i) any Laws or Orders of any Governmental or
Regulatory Authority applicable to Parent or MergerSub or any of their assets or
properties, or (ii) any Contract to which Parent or MergerSub is a party or by
which Parent or MergerSub or any of its assets or properties are bound.
4.3.2 Approvals and Consents. Except for (a) the filing of the Certificate
of Merger with the Secretary of State of Delaware and any other appropriate
documents with the relevant authorities of other states in which the Company
and/or MergerSub is qualified to do business, and (b) as described on Schedule
4.3.2, no consent, approval or action of, filing with or notice to any
Governmental or Regulatory Authority or other Person is necessary or required
under any of the terms, conditions or provisions of any Law or Order of any
Governmental or
32
<PAGE>
Regulatory Authority or any Contract to which Parent or MergerSub is a party or
by which Parent or MergerSub or any of their respective assets or properties are
bound for the execution and delivery of this Agreement by Parent or MergerSub,
the performance by Parent and MergerSub of their respective obligations
hereunder or the consummation of the transactions contemplated hereby.
Section 4.4 Agency Shares. The Agency Shares to be delivered to the
Stockholders pursuant to this Agreement have been duly authorized for issuance
by all requisite corporate action by Parent, and when delivered as provided
herein, will be validly issued and outstanding shares of voting common stock of
Parent, fully paid and non-assessable, and will not be subject to preemptive
rights of any Person.
Section 4.5 MergerSub. MergerSub was formed solely for the purpose of the
Merger and engaging in the transactions contemplated hereby. As of the date
hereof and the Effective Time, the capital stock of MergerSub is and will be
directly owned 100% by Parent. Further, there are not as of the date hereof and
there will not be at the Effective Time any outstanding or authorized options,
warrants, calls, rights, commitments or any other Contracts requiring MergerSub
to issue, transfer, sell, purchase, redeem or acquire any shares of capital
stock. As of the date hereof and the Effective Time, MergerSub has not and will
not have incurred any obligations or liabilities or engaged in any business or
activities of any type of kind whatsoever or entered into any Contract with any
Person.
Section 4.6 Brokers. No broker, finder, agent or similar intermediary has
acted on behalf of Parent or MergerSub or their affiliates in connection with
this Agreement or the transactions contemplated thereby, and no brokerage
commissions, finders' fees or similar fees or commissions are payable by Parent
or MergerSub or their affiliates in connection therewith based on any Contract
or understanding with either of them.
Section 4.7 Litigation. There is no action, suit, proceeding at law or in
equity by any Person, or any arbitration or any administrative or other
proceeding by or before (or to the knowledge of Parent or MergerSub any
investigation by) any Governmental or Regulatory Authority, pending or, to the
knowledge of Parent or MergerSub threatened against Parent or MergerSub with
respect to this Agreement or the transactions contemplated hereby, or against or
affecting Parent or MergerSub the properties or assets of either of them; and,
to the knowledge of Parent or MergerSub, no acts, facts, circumstances, events
or conditions occurred or exist which are a basis for any such action,
proceeding or investigation.
Section 4.8 Disclosure. No representation or warranty of Parent or
MergerSub contained in this Agreement, and no statement contained in any
Schedule or in any certificate, list or other writing furnished by Parent or
MergerSub to the Company and the Stockholders pursuant to any provision of this
Agreement, contains any untrue statement of a material fact or omits to state a
material fact necessary in order to make the statements herein or therein, in
the light of the circumstances under which they were made, not misleading.
33
<PAGE>
ARTICLE V
ACTIONS AT CLOSING BY THE COMPANY AND THE STOCKHOLDERS
Simultaneously herewith:
Section 5.1 Required Approvals and Consents. The Stockholders and the
Company shall have obtained or given, at no expense to Parent or MergerSub, and
there shall not have been withdrawn or modified, any consents or approvals or
other actions listed on Schedule 3.9.2 hereof (including without limitation, all
consents, approvals and/or waivers required under the Contracts listed on
Schedule 3.8 in order to permit the consummation of the transactions
contemplated by this Agreement without causing or resulting in a default, event
of default, acceleration event or termination event under any of such documents
and without entitling any party to any of such documents to exercise any other
right or remedy adverse to the interests of Parent or MergerSub or the Company
thereunder). Each such consent or approval shall be in form satisfactory to
counsel for Parent and MergerSub.
Section 5.2 Regulatory Consents and Approvals. All consents, approvals and
actions of, filings with and notices to any Governmental or Regulatory Authority
necessary to permit the Company and the Stockholders to perform their respective
obligations under this Agreement and to consummate the transactions contemplated
thereby shall have been duly obtained, made or given and shall be in full force
and effect, and all waiting periods imposed by any Governmental or Regulatory
Authority necessary for the consummation of the transactions contemplated by
this Agreement, shall have terminated or expired.
Section 5.3 Good Standing Certificates. The Company shall have delivered
to Parent and MergerSub: a copy of the Company's certificate of incorporation
(or other comparable corporate charter documents), including all amendments,
certified by the Secretary of State of the State of Delaware and a certificate
from the Secretary of State in each state in which the Company is qualified as a
foreign corporation to do business to the effect that such Company is in good
standing in such state (in each case together with the applicable tax status
certificate).
Section 5.4 Certified Resolutions. The Company shall have delivered to
Parent and MergerSub a copy of resolutions of the Board of Directors and the
stockholders of the Company authorizing the execution, delivery and performance
of this Agreement and the transactions contemplated hereby, certified by an
officer of the Company as of the Closing Date.
Section 5.5 Employment Agreements. Each of Scott Heiferman, Ron Kovas, Ed
Dintrone and Peter Meluso shall have entered into an Employment Agreement with
MergerSub in the form of Exhibit C hereto.
34
<PAGE>
Section 5.6 Non-Solicitation/Non-Servicing Agreement. Each of Scott
Heiferman, Ron Kovas, Ed Dintrone and Peter Meluso shall have entered into a
Non-Solicitation/Non-Servicing Agreement with Parent and MergerSub in the form
of Exhibit D hereto.
Section 5.7 Opinion of Counsel. MergerSub shall have received the opinion
of Morrison & Foerster LLP, counsel to the Company and the Stockholders, dated
the Closing Date, substantially in the form and to the effect of Exhibit E
hereto.
Section 5.8 Investment Representation Certificate. Each of the holders of
Company Common Stock shall have executed and delivered an Investment
Representation Certificate in the form of Exhibit F hereto.
Section 5.9 Lockup Agreement. Each of the holders of Company Common Stock
and each Optionholder under the ITI Option Plan shall have entered into a Lockup
Agreement with Parent in the form of Exhibit G hereto.
Section 5.10 Repayment of Loans. All indebtedness of the Company
stockholders to the Company shall have been repaid in full, and each of the
stockholders shall have delivered to Parent and MergerSub a certificate in the
form of Exhibit H hereto.
Section 5.11 Appointment of Representative. The Stockholders shall have
appointed Scott Heiferman, to act as the Representative.
Section 5.12 Optionholder Forbearance Agreements. Each holder of
outstanding and unexercised ITI Options at the Effective Time shall have entered
into an Optionholder Forbearance Agreement in the form annexed as Exhibit I.
Section 5.13 Indemnity and Escrow Agreement. Each of the Stockholders and
the Company shall have entered into the Indemnity and Escrow Agreement in the
form and to the effect of Exhibit K hereto.
Section 5.14 Proceedings. All proceedings to be taken in connection with
the transactions contemplated by this Agreement and all documents incident
thereto must be reasonably satisfactory in form and substance to Parent and
MergerSub and their counsel, and Parent and MergerSub shall have received copies
of all such documents and other evidences as it or its counsel reasonably
requested in order to establish the consummation of such transactions and the
taking of all proceedings in connection therewith.
ARTICLE VI
ACTIONS AT CLOSING BY PARENT AND MERGERSUB
35
<PAGE>
Simultaneously herewith:
Section. 6.1 Required Approvals, Notices and Consents. Parent and
MergerSub shall have obtained or given, at no expense to the Company and the
Stockholders, and there shall not have been withdrawn or modified any notices,
consents, approvals or other actions listed on Schedules 4.3.2 hereof. Each such
consent or approval shall be in form reasonably satisfactory to counsel for the
Company and the Stockholders.
Section 6.2 Regulatory Consents and Approvals. All consents, approvals and
actions of, filings with and notices to any Governmental or Regulatory Authority
necessary to permit Parent and MergerSub to perform their respective obligations
under this Agreement and to consummate the transactions contemplated thereby
shall have been duly obtained, made or given and shall be in full force and
effect, and all waiting periods imposed by any Governmental or Regulatory
Authority necessary for the consummation of the transactions contemplated by
each of the Transaction Documents, shall have terminated or expired.
Section 6.3 Certified Resolutions. Each of Parent and MergerSub shall have
delivered to the Stockholders a copy of the resolutions of their respective
Boards of Directors authorizing the execution, delivery and performance this
Agreement and the transactions and other agreements contemplated thereby,
certified to by an officer of Parent or MergerSub, as the case may be.
Section 6.4 Opinions of Counsel. The Company and the Stockholders shall
have received the opinion of Davis & Gilbert LLP, counsel to Parent and
MergerSub, and of Janet Ambrosi-Wertinan, general counsel of Parent, each dated
the Closing Date, substantially in the form and to the effect of Exhibits J-1
and J-2.
Section 6.5 Employment Agreements. MergerSub shall have entered into an
Employment Agreement with each of Scott Heiferman, Ron Kovas, Ed Dintrone and
Peter Meluso in the form of Exhibit C hereto.
Section 6.6 Non-Solicitation/Non-Servicing Agreements. MergerSub and
Parent shall have entered into a Non-Solicitation/Non-Servicing Agreement with
each of Scott Heiferman, Ron Kovas, Ed Dintrone and Peter Meluso, in the form of
Exhibit D hereto.
Section 6.7 Agency.Com Options. Parent shall have granted options pursuant
to the Agency.Com Option Plan in the amounts and to the several Company
employees listed on Schedule 6.7 hereto.
Section 6.8 Indemnity and Escrow Agreement. Parent shall have entered into
the Indemnity and Escrow Agreement in the form and to the effect of Exhibit K.
36
<PAGE>
Section 6.9 Proceedings. All proceedings to be taken in connection with
the transactions contemplated by this Agreement, and all documents incident
thereto must be reasonably satisfactory in form and substance to the
Stockholders, the Company and their counsel and the Stockholders shall have
received copies of all such documents and other evidences as they or their
counsel may reasonably request in order to establish the consummation of such
transaction and the taking of all proceedings in connection therewith.
ARTICLE VII
OTHER AGREEMENTS
Section 7.1 Separate Subsidiary. Parent and the Stockholders agree that
from and after the Closing Date through September 30, 2000 (the "Earn-Out
Period"), Parent shall cause the operations of the Surviving Corporation to be
conducted and managed as a separate subsidiary, in substantially the same manner
(except as modified by the provisions of Section 7.2 below) as the operations of
the Company were conducted prior to the Closing Date.
Section 7.2 Management of the Surviving Corporation. The operations of the
Surviving Corporation shall be conducted to: (i) participate in Parent's overall
cash management program and abide by Parent's dividend and management fee
policies as from time to time in effect; (ii) comply on a timely basis with the
financial reporting and budgeting procedures of Parent as from time to time in
effect, which procedures require the approval of profit and capital expenditure
plans; and (iii) comply with Agency.Com's general business procedures for its
operating units.
Section 7.3 Private Placement and Registration and Listing. The Agency
Shares to be issued to the Stockholders will not be registered under the
Securities Act based upon the "private offering exemption" under the Securities
Act, in reliance on the Letters of Investment Intent to be delivered by
Stockholders at the Closing.
Section 7.4 Release of Stockholder Guarantees. Parent agrees that promptly
following the Closing, Parent will use its best efforts to execute any and all
documents reasonably necessary to fully discharge any and all Stockholders from
any and all personal guarantees or assurances made by such Stockholder(s) in
respect of any indebtedness or other obligations of the Company, to the extent
that such indebtedness or other obligation is reflected in the Balance Sheet or
otherwise disclosed in this Agreement.
Section 7.5 Autonomy.
(a) From the Closing Date through September 30, 2000 (the "Autonomy
Period"), the business of the Surviving Corporation shall be operated by the
Persons listed on Schedule 1.4.2 (for so long as they shall remain employees of
the Surviving Corporation or Parent, as the case may be), reporting to and
subject to the authority of the President, North America of
37
<PAGE>
Parent and Boards of Directors of the Surviving Corporation and Parent.
Notwithstanding the foregoing, none of the Stockholders, individually and
collectively, shall have the power or authority to authorize any of the
following actions, and such actions shall require the affirmative authorization
of the President, North America of Parent or the Board of Directors of Parent or
such other Person as may be designated from time to time by the Chief Executive
Officer of Parent:
(i) any merger, consolidation, or acquisition of or with any other
business enterprise, or the dissolution of the Surviving Corporation;
(ii) the establishment or dissolution of any subsidiary,
partnership, corporation or any other business enterprise or the entering
into of any joint ventures;
(iii) the incurrence of any expenditure, including any capital
expenditure, in excess of amounts budgeted for such expenditure or any
aggregate expenditures in excess of amounts budgeted for such aggregate
expenditures, in budgets of the Surviving Corporation having received the
prior approval of the Board of Directors of Parent (the "Budget");
(iv) the sale of all or any substantial portion of the assets of the
Surviving Corporation
(v) the issuance or sale of capital stock of the Surviving
Corporation or any securities or instruments convertible into or
exercisable for capital stock of the Surviving Corporation;
(vi) the borrowing of funds or the issuance of bonds or other
evidence of indebtedness or the making of guarantees or the lending of
funds, but excluding travel and other advances to employees made in the
ordinary course of business;
(vii) the pledge of assets other than to secure office equipment
lease obligations or office equipment purchase money indebtedness not in
excess of the amount budgeted therefor in the Budget;
(viii) any material changes in business activities or of any changes
in place of business;
(ix) the making in any fiscal year of any commitment or the entering
into of any contract (other than employment contracts) which conflicts
with the Budget for that fiscal year or which provides for expenditures in
any future fiscal year;
(x) the leasing or purchase of any real property;
38
<PAGE>
(xi) the making of any employment contract which has not been
approved by corporate counsel;
(xii) the amendment of the Certificate of Incorporation or the
Bylaws of the Surviving Corporation;
(xiii) providing any services to or purchasing any materials or
services from an Affiliate of any Stockholder;
(xiv) the commencement of settlement of any claims, suits or
proceedings without the approval of the general counsel of Parent;
provided that they shall be authorized to settle any dispute relating to
collections in the ordinary course of business that do not exceed $10,000
as to which no legal proceeding has commenced;
(xv) taking any action outside the ordinary course of business; and
(xvi) agreeing to do any of the foregoing.
(b) Notwithstanding anything contained in this Section 7.5 to the
contrary, Parent shall have the right in its sole discretion to cause the
business of the Surviving Corporation to be integrated into the business and
operations of Parent, subject to the provisions of Section 2.2.8 hereof and the
terms of the Stockholders' individual Employment Agreements, as applicable and
in such case the provisions of Section 7.5(a) will cease to apply.
(c) Notwithstanding anything to the contrary, during the Autonomy Period,
the President, North America of Parent and the Board of Directors of Parent or
such other Person as may be designated from time to time by the Chief Executive
Officer of Parent, acting separately, shall each have the right to terminate the
employment of any of the Surviving Corporation's employees (other than the
Stockholders whose employment will be governed by the terms of their individual
Employment Agreements) for "cause" and to cause the Surviving Corporation to
resign any account due to a conflict.
(i) For the purposes of this Section 7.5(c), the term "cause" shall
be deemed to mean and include the failure of an employee, in the judgment
of the President, North America, of Parent or other person specified
above, to adequately perform the duties, responsibilities and/or
obligations of his employment continuing for more than 15 days after
warning; dishonesty, theft, conviction of a crime, drunkenness, unethical
business conduct, nonconformance with the Surviving Corporation's or
Parent's standard business practices and policies, including without
limitation, policies against racial or sexual discrimination or
harassment, or the commission in bad faith of any act which injures or
could reasonably be expected to injure the reputation, business or
business relationships of the Surviving Corporation and/or Parent.
39
<PAGE>
(ii) In the event that during the Measuring Period, Parent shall
require the Surviving Corporation to resign any account due to a conflict
with any client or account of Parent or any Affiliate of Parent, then the
Revenue and PBT Targets set forth on Schedule 2.2.3 and the key success
factors set forth on Schedule 2.2.7 shall be adjusted, as appropriate upon
the mutual good faith agreement of Parent and the Representative, taking
into account, historical and anticipated results in respect of such
resigned client during the remainder of the Measuring Period; provided,
however, that any such Revenues, PBT or KSF amounts attributable to such
resigned client shall be offset and reduced by the Revenue, PBT or key
success factors derived during the Measuring Period from any client or
account contributed or referred to the Surviving Corporation by Parent or
any Affiliate of Parent (other than the Surviving Corporation).
ARTICLE VIII
SURVIVAL: INDEMNITY
Section 8.1 Survival. Notwithstanding any right of any party hereto fully
to investigate the affairs of any other party, and notwithstanding any knowledge
of facts determined or determinable pursuant to such investigation or right of
investigation, each party hereto shall have the right to rely fully upon the
representations, warranties, covenants and agreements of the other parties
contained in this Agreement and the Schedules, if any, furnished by any other
party pursuant to this Agreement, or in any certificate delivered at the Closing
by any other party. Subject to the limitations set forth in Sections 8.6.2,
8.6.3 and 8.6.5, the respective representations, warranties, covenants and
agreements of the Company, the Stockholders, Parent and MergerSub contained in
this Agreement shall survive the Closing, as provided in Sections 8.6.2 and
8.6.3.
Section 8.2 Obligation of the Stockholders to Indemnify
8.2.1 General Indemnity Subject to the limitations contained in Sections
8.6.1 and 8.6.2, each of the Stockholders hereby agree, jointly and severally,
to indemnify Parent, the Surviving Corporation and their respective affiliates,
shareholders, officers, directors, employees, agents, representatives and
successors, permitted assignees (individually an "Parent Indemnified Party" and
collectively, the "Parent Indemnified Parties") against, and to protect, save
and keep harmless Parent Indemnified Parties from, and to pay on behalf of or
reimburse Parent Indemnified Parties as and when incurred for, any and all
liabilities (including liabilities for Taxes), obligations, losses, damages,
penalties, demands, claims, actions, suits, judgments, settlements, penalties,
interest, out-of-pocket costs, expenses and disbursements (including reasonable
costs of investigation, and reasonable attorneys', accountants' and expert
witnesses' fees) of whatever kind and nature (collectively, "Losses"), that may
be imposed on or incurred by any Parent Indemnified Party as a consequence of,
in connection with, incident to, resulting from or arising out of or in any way
40
<PAGE>
related to or by virtue of (a) any misrepresentation, inaccuracy or breach of
any warranty or representation contained in Article III.B hereof or in any
certificate delivered by the Company or either Stockholder at the Closing; (b)
any action, demand, proceeding, investigation or claim by any third party
(including any Governmental or Regulatory Authority) against or affecting any
Parent Indemnified Party which may give rise to or evidence the existence of or
relate to a misrepresentation or breach of any of the representations and
warranties of the Company or the Stockholders contained in Article III.B hereof
or in any certificate delivered by the Company or either Stockholders at the
Closing; or (c) any breach or failure by the Company or the Stockholders to
comply with perform or discharge any obligation, agreement or covenant by the
Company or the Stockholders contained in this Agreement.
8.2.2 Special Indemnity. Subject to the limitations contained in Sections
8.6.1 and 8.6.2, each of the Stockholders hereby severally and not jointly
agrees to indemnify Parent Indemnified Parties against, and to protect, save and
keep harmless Parent Indemnified Parties from, and to assume liability for, the
payment of all Losses that may be imposed on or incurred by any Parent
Indemnified Party as a consequence of or in connection with, incident to,
resulting from or arising out of or in any way related to or by virtue of: (a)
any misrepresentation, inaccuracy or breach of a representation or warranty by
any Stockholder contained in Article III.A hereof; and (b) any action, demand,
proceeding, investigation or claim by any third party (including any
Governmental or Regulatory Authority) against or affecting any Parent
Indemnified Party which may give rise to or evidence the existence of or relate
to a misrepresentation or breach of any of the representations and warranties of
any Stockholder contained in Article III.A hereof or in any certificate
delivered by any Stockholder at the Closing. Any claim for indemnity made under
this Section 8.2.2 shall not be construed as a claim under Section 8.2.1 hereof
even if an Parent Indemnified Party could have made a claim under Section 8.2.1
hereof in respect of the same matters.
8.2.3 Clarification of the term "Losses". The term "Losses" as used in
this Agreement is not limited to matters asserted by third parties against an
Parent Indemnified Party, but includes Losses incurred or sustained by an Parent
Indemnified Party in the absence of third party claims. For purposes of
clarification, any liabilities (including liabilities for Taxes), obligations,
losses, damages, penalties, demands, claims, actions, suits, judgments,
settlements, penalties, interest, out-of-pocket costs, expenses and
disbursements (including reasonable costs of investigation, and reasonable
attorneys', accountants' and expert witnesses' fees) of whatever kind and nature
suffered by the Surviving Corporation by virtue of a state of facts which
constitutes a misrepresentation, inaccuracy or breach of a warranty or
representation by the Company or any Stockholder shall be deemed to have been
suffered by Parent.
Section 8.3 Obligation of Parent to Indemnify. Subject to the limitations
set forth in Section 8.6.3 hereof, Parent hereby agrees to indemnify the
Stockholders against, and to protect, save and keep harmless the Stockholders
from, and to pay on behalf of or reimburse the
41
<PAGE>
Stockholders as and when incurred for, any and all Losses that may be imposed on
or incurred by either Stockholder as a consequence of, in connection with,
incident to, resulting from or arising out of or in any way related to or by
virtue of: (a) any misrepresentation, inaccuracy or breach of any warranty or
representation contained in Article IV hereof or in any certificate delivered by
MergerSub or Parent at the Closing; (b) any action, demand, proceeding,
investigation or claim by any third party (including any Governmental or
Regulatory Authority) against or affecting any Stockholder which may give rise
to or evidence the existence of or relate to a misrepresentation or breach of
any of the representations and warranties contained in Article IV hereof or in
any certificate delivered by MergerSub or Parent at the Closing; or (c) any
breach or failure by MergerSub or Parent to comply with, perform or discharge
any obligation, agreement or covenant by MergerSub or Parent contained in this
Agreement.
Section 8.4 Indemnification Procedure for Claims. In the event that any
Person entitled to indemnification under this Agreement (an "Indemnified Party")
asserts a claim for indemnification or receives notice of the assertion of any
claim or of the commencement of any action or proceeding by any Person who is
not a party to this Agreement or an affiliate of a party to this Agreement (a
"Third Party Claim") against such Indemnified Party, against which a party to
this Agreement is required to provide indemnification under this Agreement (an
"Indemnifying Party"), the Indemnified Party shall give written notice together
with a statement of any available information regarding such claim to the
Indemnifying Party within 30 days after learning of such claim (or within such
shorter time as may be necessary to give the Indemnifying Party a reasonable
opportunity to respond to such claim). The Indemnifying Party shall have the
right, upon written notice to the Indemnified Party (the "Defense Notice")
within 15 days after receipt from the Indemnified Party of notice of such claim,
which notice by the Indemnifying Party shall specify the counsel it will appoint
to defend such claim ("Defense Counsel"), to conduct at its expense the defense
against such claim in its own name, or if necessary in the name of the
Indemnified Party; provided, however, that the Indemnified Party shall have the
right to approve the Defense Counsel, which approval shall not be unreasonably
withheld or delayed, and in the event the Indemnifying Party and the Indemnified
Party cannot agree upon such counsel within 10 days after the Defense Notice is
provided, then the Indemnifying Party shall propose an alternate Defense
Counsel, which shall be subject again to the Indemnified Party's approval which
approval shall not be unreasonably withheld or delayed. If the parties still
fail to agree on the Defense Counsel, then, at such time, they shall mutually
agree in good faith on a procedure to determine the Defense Counsel.
(a) In the event that the Indemnifying Party shall fail to give the
Defense Notice within such 15 day period, it shall be deemed to have
elected not to conduct the defense of the subject claim, and in such event
the Indemnified Party shall have the right to conduct the defense and to
compromise and settle the claim with prior consent of the Indemnifying
Party, which consent shall not be unreasonably withheld or delayed, and
the Indemnifying Party will be liable for all reasonable costs,
42
<PAGE>
expenses, settlement amounts or other Losses paid or incurred in
connection therewith.
(b) In the event that the Indemnifying Party does deliver a Defense
Notice and thereby elects to conduct the defense of the subject claim, the
Indemnifying Party shall be entitled to have the exclusive control over
the defense and settlement of the subject claim and the Indemnified Party
will cooperate with and make available to the Indemnifying Party such
assistance and materials as it may reasonably request, all at the expense
of the Indemnifying Party; the Indemnified Party shall have the right at
its expense to participate in the defense assisted by counsel of its own
choosing. In such an event, the Indemnifying Party will not settle the
subject claim without the prior written consent of the Indemnified Party,
which consent will not be unreasonably withheld or delayed.
(c) Without the prior written consent of the Indemnified Party, the
Indemnifying Party will not enter into any settlement of any Third Party
Claim or cease to defend against such claim, if pursuant to or as a result
of such settlement or cessation, (i) injunctive relief or specific
performance would be imposed against the Indemnified Party, or (ii) such
settlement or cessation would lead to liability or create any financial or
other obligation on the part of the Indemnified Party for which the
Indemnified Party is not entitled to indemnification hereunder.
(d) If an Indemnified Party refuses to consent to a bona fide offer
of settlement which provides for a full release of the Indemnified Party
and its affiliates and solely for a monetary payment which the
Indemnifying Party wishes to accept, the Indemnified Party may continue to
pursue such matter, free of any participation by the Indemnifying Party,
at the sole expense of the Indemnified Party. In such an event, the
obligation of the Indemnifying Party shall be limited to the amount of the
offer of settlement which the Indemnified Party refused to accept plus the
costs and expenses of the Indemnified Party incurred prior to the date the
Indemnifying Party notified the Indemnified Party of the offer of
settlement.
(e) Notwithstanding clause (b) above, the Indemnifying Party shall
not be entitled to control, but may participate in, and the Indemnified
Party shall be entitled to have sole control over, the defense or
settlement of any claim (i) that seeks a temporary restraining order, a
preliminary or permanent injunction or specific performance against the
Indemnified Party, (ii) to the extent such claim involves criminal
allegations against the Indemnified Party, (iii) that if unsuccessful,
would set a precedent that would materially interfere with, or have a
material adverse effect on, the business or financial condition of the
Indemnified Party or (iv) if such claim would impose liability on the part
of the Indemnified Party for which the Indemnified Party is not entitled
to indemnification hereunder. In such an event, the Indemnifying Party
will still have all of its obligations hereunder provided that the
Indemnified
43
<PAGE>
Party will not settle the subject claim without the prior written consent
of the Indemnifying Party, which consent will not be unreasonably withheld
or delayed.
(f) Any final judgment entered or settlement agreed upon in the
manner provided herein shall be binding upon the Indemnifying Party, and
shall conclusively be deemed to be an obligation with respect to which the
Indemnified Party is entitled to prompt indemnification hereunder.
(g) A failure by an Indemnified Party to give timely, complete or
accurate notice as provided in this Section 8.4 will not affect the rights
or obligations of any party hereunder except and only to the extent that,
as a result of such failure, any party entitled to receive such notice was
deprived of its right to recover any payment under its applicable
insurance coverage or was otherwise directly and materially damaged as a
result of such failure to give timely notice.
[Section 8.5 Intentionally omitted.]
Section 8.6 Limitations on and Other Matters Regarding Indemnification.
8.6.1 Indemnity Cushion and Cap. Subject to Section 8.6.5 below, the
Stockholders shall have no liability to any Parent Indemnified Party with
respect to Losses arising out of any of the matters referred to in Sections
8.2.1 or 8.2.2 until such time as the amount of such liability shall exceed
$70,000 in the aggregate (in which case the Stockholders shall be liable for all
Losses up to and in excess of $70,000); provided, however, that this Section
8.6.1 shall not apply to Losses relating to a breach of a representation or
warranty contained in Section 3.26 or 3.2.7 (for which there is no cushion).
Subject to Section 8.6.5 below, the maximum liability of the Stockholders for
indemnity payments under Sections 8.2.1 and 8.2.2 shall be limited to and shall
be paid solely from the Escrow Fund in accordance with the terms and provisions
of the Indemnity and Escrow Agreement.
8.6.2 Termination of Indemnification Obligations of the Stockholders. The
obligation of the Stockholders to indemnify under Section 8.2 hereof shall
terminate on April 30, 2001, except (a) as to matters as to which Parent
Indemnified Party has made a claim for indemnification on or prior to such date
and (b) with respect to any claim for Losses pertaining to a misrepresentation
or a breach of representation or warranty under Sections 3.11 or 3.19 or any
other Section of Article III of this Agreement relating to Taxes. The obligation
to indemnify referred to in:
(i) the preceding clause (a) shall survive the expiration of such period
until such claim for indemnification is finally resolved and any
obligations with respect thereto are fully satisfied; and
44
<PAGE>
(ii) the preceding clause (b) shall terminate 120 days after the
expiration of the relevant Federal, state or local statute of limitations
(taking into account any extensions or waivers thereof), except as to
matters as to which any Indemnified Party has made a claim for
indemnification on or prior to such date, in which case the right to
indemnification with respect thereto shall survive the expiration of any
such period until such claim for indemnification is finally resolved and
any obligations with respect thereto are fully satisfied.
8.6.3 Termination of Indemnification Obligations of Parent . The
obligations of Parent to indemnify under Section 8.3 hereof shall terminate on
April 30, 2001, except as to matters as to which a Stockholder has made a claim
for indemnification on or prior to such date, in which case the right to
indemnification with respect thereto shall survive such period until such claim
for indemnification is resolved and any obligations with respect thereto are
fully satisfied.
8.6.4 Treatment. Any indemnity payments by an Indemnifying Party to an
Indemnified Party under this Article VIII shall be treated by the parties as an
adjustment to the Purchase Price.
8.6.5 Exceptions. Each of the limitations set forth above in this Section
8.6 shall in no event (a) apply to any Losses incurred by a Parent Indemnified
Party which relate, directly or indirectly, to (i) any fraudulent acts committed
by the Company or the Stockholders (including without limitation, fraud in
connection with the transaction contemplated hereby and any fraudulent acts by
any officer, director, employee, agent or stockholder of the Company); (ii) any
indemnification obligation under Section 8.2.1(c); and (iii) the Company's and
the Stockholders' obligations set forth in Section 9.1 to pay certain expenses;
(iv) the claims and potential claims by Modem Media set forth on Schedule 3.10,
for which Losses the Stockholders shall be jointly and severally liable and
shall not be paid from the Escrow Fund; (v) the 2Q1998 tax penalty and any
payroll taxes or related amounts owed with respect to the Company's 1998 stock
incentive plan as described on Schedule 3.11, for which Losses the Stockholders
shall be jointly and severally liable and shall not be paid from the Escrow
Fund; or (b) apply to any Losses incurred by a Stockholder which relate,
directly or indirectly, to (i) any indemnification obligation under Section
8.3(c); and (ii) Parent's and MergerSub's obligations set forth in Section 9.1
to pay certain expenses.
45
<PAGE>
such entity and unless otherwise stated, such knowledge that would have been
discovered by such executive officers after reasonable inquiry.
Section 9.5 "Affiliate" Defined. As used in this Agreement, an "affiliate"
or "Affiliate" of any Person, shall mean any Person that directly, or indirectly
through one or more intermediaries, controls, or is controlled by, or is under
common control with such Person.
Section 9.6 "Material Adverse Effect" Defined. For purposes of this
Agreement, "Material Adverse Effect" shall mean any material and adverse effect
on the financial condition, results of operations, assets, properties, prospects
or business of the Company.
Section 9.7 Captions. The Article and Section captions used herein are for
reference purposes only, and shall not in any way affect the meaning or
interpretation of this Agreement.
Section 9.8 Publicity. Subject to the provisions of the next sentence, no
party to this Agreement shall, and the Stockholders shall insure that no
representative of the Company shall, issue any press release or other public
document or make any public statement relating to this Agreement or the matters
contained herein without obtaining the prior approval of Parent and the
Stockholders. Notwithstanding the foregoing, the foregoing provision shall not
apply to the extent that Parent is required to make any announcement relating to
or arising out of this Agreement by virtue of the federal securities laws of the
United States or the rules and regulations promulgated thereunder, or rules of
any stock exchange, or any announcement by any party or the Company pursuant to
applicable law or regulations.
Section 9.9 Notices. Unless otherwise provided herein, any notice,
request, instruction or other document to be given hereunder by any party to any
other party shall be in writing and shall be deemed to have been given (a) upon
personal delivery, if delivered by hand or courier, (b) three days after the
date of deposit in the mails, postage prepaid, if mailed by certified or
registered mail, or (c) the next business day if sent by facsimile transmission
(if receipt is electronically confirmed) or by a prepaid overnight courier
service, and in each case at the respective addresses or numbers set forth below
or such other address or number as such party may have fixed by notice:
If to Parent or MergerSub, addressed to:
Agency.Com, Ltd.
665 Broadway
New York, New York 10012
Attention: Chief Financial Officer
Fax:(212) 358-8256
47
<PAGE>
with a copy to:
Janet Ambrosi-Wertman
Agency.Com Ltd.
1111 Chautauqua Boulevard
Pacific Palisades, California 90272
Fax:(310) 230-6936
If to the Stockholders or to the Company, addressed to the Representative:
Scott Heiferman
c/o i-traffic
375 West Broadway
New York, New York 10012
Fax:(212) 219-3434
with a copy to:
Morrison & Foerster LLP
1290 Avenue of the Americas
New York, New York 10104-0050
Attention: Michael J. W. Rennock, Esq.
Fax:(212) 468-7900
Section 9.10 Parties in Interest. This Agreement may not be transferred,
assigned, pledged or hypothecated by any party hereto, other than by operation
of law. Any purported such transfer, assignment, pledge, or hypothecation (other
than by operation of law) shall be void and ineffective. This Agreement shall be
binding upon and shall inure to the benefit of the parties hereto and their
respective heirs, executors, administrators, successors and permitted assigns.
Section 9.11 Severability. In the event any provision of this Agreement is
found to be void and unenforceable by a court of competent jurisdiction, the
remaining provisions of this Agreement shall nevertheless be binding upon the
parties with the same effect as though the void or unenforceable part had been
severed and deleted.
Section 9.12 Counterparts. This Agreement may be executed in two or more
counterparts, all of which taken together shall constitute one instrument.
Section 9.13 Entire Agreement. This Agreement, including the other
documents referred to herein and the Exhibits and Schedules hereto which form a
part hereof, contains the entire understanding of the parties hereto with
respect to the subject matter contained herein
48
<PAGE>
and therein. This Agreement supersedes all prior agreements and understandings
between the parties with respect to such subject matter.
Section 9.14 Amendments. This Agreement may not be amended, supplemented
or modified orally, but only by an agreement in writing signed by each of the
parties hereto.
Section 9.15 Third Party Beneficiaries. Each party hereto intends that
this Agreement shall not benefit or create any right or cause of action in or on
behalf of any Person other than the parties hereto and their respective
successors and assigns as permitted under Section 9.9.
Section 9.16 Use of Terms. Whenever the context so requires or permits,
all references to the masculine herein shall include the feminine and neuter,
all references to the neuter herein shall include the masculine and feminine,
all references to the plural shall include the singular and all references to
the singular shall include the plural.
49
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement under
seal, on the day and year first above written.
AGENCY.COM LTD.
By: /s/ Jonathan P. Tann
-----------------------------------
Name: Jonathan P. Tann
Title:
ITI ACQUISITION INC.
By: /s/ Jonathan P. Tann
-----------------------------------
Name: Jonathan P. Tann
Title:
INTERACTIVE TRAFFIC, INC.
By: /s/ Scott Heiferman
-----------------------------------
Name: Scott Heiferman
Title: CEO
THE STOCKHOLDERS:
/s/ Edward Dintrone
--------------------------------------
Ed Dintrone
/s/ Scott Heiferman
--------------------------------------
Scott Heiferman
/s/ Ron Kovas
--------------------------------------
Ron Kovas
/s/ Peter Meluso
--------------------------------------
Peter Meluso
50
<PAGE>
ANNEX I
Ed Dintrone
247 East 50th Street, Apt. 2
New York, New York 10022
Scott Heiferman
301 Elizabeth Avenue, Apt. 9J
New York, New York 10012
Ron Kovas
269 Oak Grove
Atherton, California 94027
Peter Meluso
3229 B Glennon Place
Bronx, New York 10465
<PAGE>
INDEX OF DEFINED TERMS
A
Accountants ............................................................ 11
Adjusted Net Worth Amount .............................................. 10
Affiliate .............................................................. 46
Agency Shares .......................................................... 3
Agreement .............................................................. 1
B
Balance Sheet .......................................................... 16
Balance Sheet Date ..................................................... 17
C
cause .................................................................. 39
Certificate of Merger .................................................. 2
Closing ................................................................ 13
Closing Balance Sheet .................................................. 11
Closing Date ........................................................... 13
Company ................................................................ 1
Company Common Stock ................................................... 3
Contracts .............................................................. 15
Convened Options ....................................................... 9
D
Defense Counsel ........................................................ 42
Defense Notice ......................................................... 41
Determination .......................................................... 7
E
Earn-Out Period ........................................................ 36
Effective Time ......................................................... 2
Environmental Laws and Orders .......................................... 23
ERISA .................................................................. 24
ERISA Affiliate ........................................................ 25
Estimated Closing Balance Sheet ........................................ 10
G
GAAP ................................................................... 6
Governmental or Regulatory Authority ................................... 15
I
Indemnified Party ...................................................... 41
Indemnifying Party ..................................................... 41
Indemnity Escrow ....................................................... 3
Independent Auditors ................................................... 7, 11
Intellectual Property .................................................. 22
Intellectual Property of the Companies ................................. 22
ITI Option ............................................................. 9
ITI Option Plan ........................................................ 9
ii
<PAGE>
K
Knowledge .............................................................. 46
L
Laws ................................................................... 15
Liabilities ............................................................ 21
Licenses ............................................................... 15
Liens .................................................................. 17
Losses ................................................................. 40
M
Material Adverse Effect ................................................ 46
Measuring Period ....................................................... 5
Merger ................................................................. 1
MergerSub .............................................................. 1
MergerSub Common Stock ................................................. 4
N
Net Worth Amount ....................................................... 10
0
Orders ................................................................. 15
P
Parent ................................................................. 1
Parent Indemnified Parties ............................................. 40
Payment Acceleration Event ............................................. 3
PBGC ................................................................... 26
PBT .................................................................... 6
PBT Target ............................................................. 5
Person ................................................................. 45
Plan ................................................................... 25
Preferred Stock ........................................................ 3
Processes .............................................................. 30
R
Real Property Leases ................................................... 18
Reconciled Purchase Price .............................................. 10
Reconciliation Period .................................................. 11
Related Group .......................................................... 27
Representative ......................................................... 4,13
Revenue Target ......................................................... 5
Revenues ............................................................... 6
S
Securities Act ......................................................... 3
Special Determination .................................................. 11
Stockholder ............................................................ 1
Surviving Corporation .................................................. 2
Surviving Corporation Common Stock ..................................... 4
T
Tangible Net Worth ..................................................... 11
ii
<PAGE>
Taxes .................................................................. 20
Third Party Claim ...................................................... 41
Title IV Plan .......................................................... 26
Transaction Expenses ................................................... 45
Y
Year 2000 Compliant .................................................... 30
iii
<PAGE>
EXHIBITS AND SCHEDULES
Exhibits
- --------
Exhibit A Certificate of Incorporation of the Surviving Corporation
Exhibit B By-Laws of the Surviving Corporation
Exhibit C Form of Executive Employment Agreement with MergerSub
Exhibit D Form of Non-Solicitation/Non-Servicing Agreement
Exhibit E Opinion of Morrison & Foerster LLP, counsel to the Company and the
Stockholders
Exhibit F Investment Representation Certificate
Exhibit G Lockup Agreement with Parent signed by each of the Company
Stockholders and Optionholders
Exhibit H Certificate of Repayment of Stockholder Indebtedness
Exhibit I Optionholder Forbearance Agreement
Exhibits J-1 and J-2 Opinions of counsel to Parent and MergerSub.
Exhibit K Indemnity and Escrow Agreement
<PAGE>
Schedules
- ---------
Schedule 1.4.1 Directors of Surviving Corporation
Schedule 1.4.2 Officers of Surviving Corporation
Schedule 2.2.3 Revenue and Profit Targets
Schedule 2.2.7 Key Success Factors
Schedule 2.6 Wire Transfer Instructions
Schedule 3.2 List of Jurisdictions
Schedule 3.3.2 Options and Rights
Schedule 3.4 Financial Statements and No Material Changes.
Schedule 3.4.1 Exceptions to GAAP
Schedule 3.5 Books and Records
Schedule 3.6 Liens
Schedule 3.7.2 Real Property Leases
Schedule 3.8 Contracts
Schedule 3.9.2 Approvals and Consents
Schedule 3.10 Litigation
Schedule 3.11 Taxes
Schedule 3.13 Insurance
Schedule 3.14 Registrations
Schedule 3.16 Clients
Schedule 3.19.1 List of Plans
Schedule 3.19.2 Severance
Schedule 3.20 Interests in Customers, Suppliers
Schedule 3.21 Bank Accounts and Powers of Attorney
Schedule 3.22 Compensation of Employees
Schedule 3.23 Changes since Balance Sheet Date
Schedule 3.26 Brokers
Schedule 3.27 Year 2000 Compliance
Schedule 4.3.2 Approvals and Consents
Schedule 6.7 Agency.Com Options
<PAGE>
Exhibit 10.21
[LOGO] PICTORIS ACQUISITION AGREEMENT
Pictoris Interactive Acquisition Agreement (hereinafter referred to as "this
AGREEMENT") dated October 23, 1999
by and between
AGENCY.COM LTD. (hereinafter referred to as the "PURCHASER"), a corporation
organized under the laws of the State of Delaware, whose head office is located
665, Broadway NEW YORK, NEW YORK 10012, represented by Johnathan P. TANN,
Vice-President;
and
Frederic PIE, a French national, born on December 14, 1964 in L'Hay-les-Roses
(F-9424O) and residing at 116, rue de Rennes 75006 PARIS,
Carine BARBELIVIEN, a French national, born on March 13, 1967 in Caen (F-14000)
and residing at 5 rue du Faubourg Poissonaiere 75009 PARIS,
Francis MELEARD, a French national, born on February 2, 1968 in Nogent-sur-Marne
(F-94130) and residing at 5 rue du Faubourg Poissonniere 75009 PARIS,
(Frederic PIE, Carine BARBELIVIEN and Francis MELEARD are hereinafter
collectively referred to as the "NON CORPORATE SELLERS"),
and
IN-COM, a joint stock company established under French law, with shareholder's
equity totaling 128,756,200 French Francs, with its head office located at Tour
Maine Montparnasse, 33 avenue du Maine, 75755 PARIS CEDEX 15, registered with
the Paris R.C.S. (registration number B 335 040 838), and represented by
Christophe VIET TRIEM TONG, who is duly empowered to enter into this AGREEMENT,
GALILEO PARTNERS, (hereinafter referred to as "Galileo") acting on behalf of the
venture capital investment fund F. C. P. R. Galileo II, a joint stock company
established under French law, with shareholder's equity totaling 1,850,000
French Francs, with its head office located at 89, rue Taitbout 75009 PARIS,
registered with the Paris R.C.S. (registration number B 419 765 128), and
represented by Christophe VIET TRIEM TONG, who is duly empowered to enter into
this AGREEMENT,
(IN-COM and GALILEO are hereinafter collectively referred to as the "CORPORATE
SELLERS"; the CORPORATE SELLERS are acting severally -- sans solidarite entre
eux, ni solidarite avec les NON CORPORATE SELLERS -- unless hereinafter
otherwise stipulated).
AGENCY.COM Frederic PIE Carine BARBELIVIEN
/s/ ST /s/ FP /s/ CB
Francis MELEARD IN-COM GALILEO
/s/ MF /s/ [Illegible] /s/ [Illegible]
<PAGE>
Witnesseth:
Whereas Pictoris Interactive is a joint stock company established under
French law, with shareholder's equity totaling 1,547,000 French Francs, with its
head office located at 60/62, rue d'Hauteville 75010 PARIS, registered with the
Paris R.C.S. (registration number B 404 135 709) (hereinafter referred to as the
"COMPANY").
Whereas, at the date of execution of this AGREEMENT, the NON CORPORATE
SELLERS are the owners of all of the outstanding Category "1" shares of the
COMPANY, and the CORPORATE SELLERS are the owners of all of the outstanding
Category "2" shares of the COMPANY;
Whereas, the NON CORPORATE SELLERS and the CORPORATE SELLERS (hereinafter
collectively referred to as the "SELLERS" and individually as a "SELLER") desire
to have the right to sell all of the shareholders equity of the COMPANY, and the
PURCHASER desires to purchase a small percentage of the shares of the COMPANY at
the date of execution of this AGREEMENT, and wishes to have the right to acquire
the entirety of the shares of the COMPANY;
Whereas, the SELLERS and the PURCHASER are convinced that the ultimate
control of the COMPANY by the PURCHASER is in the COMPANY'S best interest, as
the combined resources of the two corporations will create a high potential for
expansion for the COMPANY;
Whereas, S. R. C. LOCALISATION a subsidiary of the PURCHASER (hereafter
referred to as "Agency.Com : Paris"), and the COMPANY had already, prior to the
signing of this AGREEMENT, taken concrete steps to commence their cooperation;
Whereas, at the time of the CLOSING DATE, AGENCY.COM : PARIS is in the
process of being restructured;
Now, therefore, in consideration of the mutual covenants and agreements
set forth in this AGREEMENT, and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties do hereby
agree as follows:
AGENCY.COM Frederic PIE Carine BARBELIVIEN
/s/ ST /s/ FP /s/ CB
Francis MELEARD IN-COM GALILEO
/s/ MF /s/ [Illegible] /s/ [Illegible]
[LOGO] PICTORIS ACQUISITION AGREEMENT
<PAGE>
PRELIMINARY ARTICLE
DEFINITIONS
As used in this Agreement, the following terms shall have the meanings set forth
below. Unless the context indicates otherwise, the use of the singular shall
include the plural, and vice versa; the use of the word any shall include and
encompass the word all and vice versa; the use of any gender includes all other
genders.
Section 0.1 AFFILIATES shall mean and include all PERSONS (as defined in Section
0.41) that directly or indirectly through one or more intermediaries, control,
or are controlled by, or are under common control with another PERSON.
Section 0.2 AFFILIATION SHARES shall mean 11,146 shares of the COMPANY STOCK (as
defined in Section 0.18).
Section 0.3 AFFILIATION SHARES CALL RIGHT (promesse unilaterale de vente des
AFFILIATION SHARES) shall mean an irrevocable promise on the part of the
PURCHASER to sell the AFFILIATION SHARES to the SELLERS, under the provisions of
Part III of this AGREEMENT.
Section 0.4 AFFILIATION SHARES PURCHASE PRICE shall mean the price paid in full
consideration for the purchase or the buy-back of the AFFILIATION SHARES.
Section 0.5 AFFILIATION SHARES PUT RIGHT (promesse unilaterale d'achat des
AFFILIATION SHARES) shall mean an irrevocable promise on the part of the SELLERS
to acquire the AFFILIATION SHARES from the PURCHASER, under the provisions of
Part Ill of this AGREEMENT.
Section 0.6 ASSERTED LIABILITIES shall mean all LIABILITIES (as defined in
Section 0.32), demands, claims and circumstances which (i) an INDEMNIFIED PARTY
(as defined in Section 0.27) reasonably believes give rise, or (ii), in good
faith, with the lapse of time would or might give rise to a claim or the
commencement (or threatened commencement) of any action, proceeding or
investigation that may result in any Loss (as defined in Section 0.35).
Section 0.7 BALANCE SHARES shall mean the COMPANY STOCK minus the AFFILIATION
SHARES and minus the 12,090 shares which correspond to the employee's purchase
rights under the stock option plan (B.S.P.C.E.) agreed upon by the shareholders
of the COMPANY.
AGENCY.COM Frederic PIE Carine BARBELIVIEN
/s/ ST /s/ FP /s/ CB
Francis MELEARD IN-COM GALILEO
/s/ MF /s/ [Illegible] /s/ [Illegible]
[LOGO] PICTORIS ACQUISITION AGREEMENT
<PAGE>
Section 0.8 BALANCE SHARES CALL RIGHT (promesse unilaterale de vent des BALANCE
SHARES) shall mean an irrevocable promise on the part of all of the SELLERS to
sell the BALANCE SHARES to the PURCHASER, under the provisions of Part II of
this AGREEMENT.
Section 0.9 BALANCE SHARES EXERCISE NOTICE shall mean the notice by the SELLERS,
ACTING TOGETHER, to the PURCHASER of the exercise of the BALANCE SHARES PUT
RIGHT or the notice by the PURCHASER to all of the SELLERS of the exercise of
the BALANCE SHARES CALL RIGHT.
Section 0.10 BALANCE SHARES PURCHASE PRICE shall mean the price to be paid by
the PURCHASER in full consideration for the purchase of the BALANCE SHARES, in
two installments, the FIRST INSTALLMENT and the FINAL INSTALLMENT (as defined in
Sections 0.24 and 0.23).
Section 0.11 BALANCE SHARES PUT RIGHT (promesse unilaterale d'achat des BALANCE
SHARES) shall mean an irrevocable promise on the part of the PURCHASER to
acquire the BALANCE SHARES from all of the SELLERS, under the provisions of Part
II of this AGREEMENT.
Section 0.12 BUY-BACK EXERCISE NOTICE shall mean the notice by the SELLERS,
ACTING TOGETHER, to the PURCHASER of the exercise of the AFFILIATION SHARES CALL
RIGHT or the notice by the PURCHASER to all the SELLERS of the exercise of the
AFFILIATION SHARES PUT RIGHT.
Section 0.13 CALL RIGHT (promesse unilaterale de vente) shall mean an
irrevocable promise to sell shares of the stock of the COMPANY, which may not be
withdrawn, reneged, retracted nor repudiated. Upon the execution of this
AGREEMENT, all parties shall consider each and every CALL RIGHT as a promise and
accept them as such.
Section 0.14 CLAIMS NOTICE shall mean the notice to an INDEMNIFYING PARTY (as
defined in Section 0.28), given by an INDEMNIFIED PARTY, of an ASSERTED
LIABILITY.
Section 0.15 CLOSING shall mean the closing of this AGREEMENT.
Section 0.16 CLOSING DATE shall mean the date on which the CLOSING takes place.
Section 0.17 CLOSING PRICE PER SHARE shall mean, for each day, the last reported
sales price regular way for the SHARES OF PURCHASER STOCK on the national
securities exchange on which the greatest number of said shares
AGENCY.COM Frederic PIE Carine BARBELIVIEN
/s/ ST /s/ FP /s/ CB
Francis MELEARD IN-COM GALILEO
/s/ MF /s/ [Illegible] /s/ [Illegible]
[LOGO] PICTORIS ACQUISITION AGREEMENT
<PAGE>
has been traded during 30 (thirty) consecutive business days or, if there is no
transaction on any such day, the average of the bid and asked prices regular way
on such day.
Section 0.18 COMPANY STOCK shall mean the aggregate of the 154,700 existing
shares of the COMPANY at the CLOSING DATE and the 56,126 shares soon to be
issued to the bearers of the bonds redeemable in shares issued by the COMPANY
(or said 1J30 bonds insofar as they will not have been timely redeemed in
shares) and the 12090 shares which correspond to the employee's purchase rights
under the stock option plans (B.S.P.C.E.) agreed upon by the shareholders of the
COMPANY.
Section 0.19 CONFIDENTIAL INFORMATION shall mean and include any confidential or
proprietary information about any party, its AFFILIATES or their clients,
including but not limited to, trade secrets, methods, models) passwords, access
to computer files, financial information and records, computer software
programs, agreements or contracts between any party and its clients or between
any party's AFFILIATES and their clients, the party's or the parts AFFILIATES'
client contacts, the party's or the party's AFFILIATES' planning, marketing or
creative policies, research and polling techniques, methods, formats and
results, and budgets, practices, concepts, strategies, and methods of
operations, financial or business projections, and information about or received
from clients and other companies with which any party or its AFFILIATES does
business, whether any indication of confidentiality is given or not. The term
"CONFIDENTIAL INFORMATION" docs not include information which becomes generally
available to the public other than by breach of this AGREEMENT.
Section 0.20 DETERMINATION shall mean a report containing an audited balance
sheet of the COMPANY, and a related audited statement of income of the COMPANY
for calendar year 1999, together with a statement from the reporting auditor
(the COMPANY'S auditors (commissaire aux comptes) or the FRENCH INDEPENDANT
AUDITOR, as the case may be) which confirms that said balance sheet and
statement of income has been prepared in accordance with FRENCH GAAP and in
accordance with this AGREEMENT and provides, for calendar year 1999, the
calculation of REVENUE and all other adjustments to be made to such audited
financial statements, in accordance with FRENCH GAAP and in accordance with this
AGREEMENT, in order to determine whether or not the COMPANY has met the REVENUE
TARGET 1999 and/or the PERFORMANCE TARGET 1999.
Section 0.21 EXERCISE shall mean the exercise of either a put right or a call
right originating in this AGREEMENT, as applicable.
Section 0.22 EXERCISE DATE shall mean the date of an Exercise.
AGENCY.COM Frederic PIE Carine BARBELIVIEN
/s/ ST /s/ FP /s/ CB
Francis MELEARD IN-COM GALILEO
/s/ MF /s/ [Illegible] /s/ [Illegible]
[LOGO] PICTORIS ACQUISITION AGREEMENT
<PAGE>
Section 0.23 FINAL INSTALLMENT shall mean the portion of the BALANCE SHARES
PURCHASE PRICE the SELLERS will be entitled to, in addition to the FIRST
INSTALLMENT, depending on whether or not the COMPANY has met the PERFORMANCE
TARGET 1999, if either the BALANCE SHARES CALL RIGHT or the BALANCE SHARES PUT
RIGHT is exercised.
Section 0.24 FIRST INSTALLMENT shall mean the portion of the BALANCE SHARES
PURCHASE PRICE the SELLERS will be entitled to, irrespective of whether or not
the COMPANY has met the PERFORMANCE TARGET 1999, if either the BALANCE SHARES
CALL RIGHT or the BALANCE SHARES PUT RIGHT is exercised.
Section 0.25 FRENCH GAAP shall mean and include all generally accepted
accounting principles consistently applied in France.
Section 0.26 FRENCH INDEPENDENT AUDITORS shall mean a certified public
accountant agreed upon by the parties or, failing such agreement, a certified
public accountant appointed by the President of the Paris Commercial Court
(President du tribunal de commerce etc Paris) upon request of the most
expeditious party.
Section 0.27 INDEMNIFIED PARTIES shall mean the party or parties entitled to
receive any amount in respect of LOSSES.
Section 0.28 INDEMNIFYING PARTY shall mean the party or parties required to pay
any amount in respect of LOSSES.
Section 0.29 INSTRUMENTS shall mean and include all notes, bonds, mortgages,
security agreements, indentures, licenses, franchises, permits, concessions,
contracts, leases and other instruments, obligations or agreements of any kind.
Section 0.30 KNOWLEDGE shall mean the knowledge that a party would have had, had
it made such due and diligent inquiry as to the matters that are the subject of
any representation or warranty contained in this AGREEMENT as was reasonable
under the circumstances, in light of said representations or warranties.
Whatever the case may be, any information provided to the COMPANY in writing is
deemed to be known by the NON CORPORATE SELLERS.
Section 0.31 LAWS shall mean and include any statute, law, rule, regulation or
ordinance.
AGENCY.COM Frederic PIE Carine BARBELIVIEN
/s/ ST /s/ FP /s/ CB
Francis MELEARD IN-COM GALILEO
/s/ MF /s/ [Illegible] /s/ [Illegible]
[LOGO] PICTORIS ACQUISITION AGREEMENT
<PAGE>
Section 0.32 LIABILITIES shall mean and include all outstanding claims,
liabilities -- including, but not limited to, liabilities for TAXES (as defined
in Section 0.49) -- or indebtedness of any nature whatsoever, whether accrued,
fixed, absolute or contingent, determined or undetermined, asserted or
unasserted, and whether due or to become due.
Section 0.33 LICENSES shall mean and include all licenses and permits and other
governmental certificates, authorizations and approvals.
Section 0.34 LIENS shall mean and include all mortgages, liens, security
interests, encumbrances, claims, charges and restrictions of any kind or
character.
Section 0.35 LOSSES shall mean payments of any or all LIABILITIES, obligations,
losses, damages, penalties, claims, actions, suits, judgments, settlements,
out-of-pocket costs, reasonable expenses and disbursements (including, but not
limited to, reasonable costs of investigation, and reasonable attorneys',
accountants' and expert witnesses' fees) of whatever kind and nature, to the
extent not covered by insurance, the benefits of which will inure to the
appropriate INDEMNIFIED PARTIES. As used in this AGREEMENT, "LOSSES" is not
limited to matters asserted by third parties against the PURCHASER or the
COMPANY but includes LOSSES incurred or sustained by the PURCHASER or the
COMPANY in the absence of third party claims.
Section 0.36 MATERIAL ADVERSE EFFECT shall mean a material adverse effect on the
financial condition, assets, property or business of the COMPANY.
Section 0.37 OPTIONS shall mean and include all outstanding options, warrants,
rights, calls, commitments or arrangements of any kind, conversion, swap, or
exchange rights, plans or other agreements of any character.
Section 0.38 ORDERS shall mean and include any judgment, decree, order, writ,
permit or license.
Section 0.39 PAYMENT DATE shall mean a date on which a payment is due under this
Agreement as a result of an Exercise.
Section 0.40 PERFORMANCE TARGET 1999 shall mean a Revenue of 25,000,000 (twenty
five million French Francs) for calendar year 1999.
Section 0.41 PERSONS shall mean and include all individuals, companies, joint
ventures, corporations, limited liability companies, limited liability
partnerships, trusts, unincorporated organizations, or REGULATORY AUTHORITIES.
AGENCY.COM Frederic PIE Carine BARBELIVIEN
/s/ ST /s/ FP /s/ CB
Francis MELEARD IN-COM GALILEO
/s/ MF /s/ [Illegible] /s/ [Illegible]
[LOGO] PICTORIS ACQUISITION AGREEMENT
<PAGE>
Section 0.42 PURCHASE PRICE shall mean the aggregate of the AFFILIATION SHARES
PURCHASE PRICE and the BALANCE SHARES PURCHASE PRICE.
Section 0.43 PUT RIGHT (promesse unilaterale d'achat) shall mean an irrevocable
promise to acquire shares of the stock of the COMPANY, which may not be
withdrawn, reneged, retracted nor repudiated. Upon the execution of this
AGREEMENT, all parties shall consider each and every PUT RIGHT as a promise and
accept them as such.
Section 0.44 REGULATORY AUTHORITIES shall mean and include all governmental, non
governmental, international, regulatory or other authorities, including but not
limited to courts, tribunals, arbitrators, agencies, departments, commissions,
official and other instrumentalities or bodies of the United States of America,
France, the European Union or foreign countries and all domestic and foreign
states, counties, cities and other political subdivisions.
Section 0.45 REVENUE TARGET 1999 shall mean a Revenue of FF 20,000,000 (twenty
million French Francs) for calendar year 1999.
Section 0.46 REVENUE shall mean the revenue of the COMPANY that must be declared
on line FL of form 2052 of the annual tax return package (liasse fiscale), along
with the revenue of AGENCY.COM: PARIS, calculated according to FRENCH GAAP with
the exception of revenue derived from AGENCY.COM : PARIS' localization work
during the first three quarters of 1999 (but including such revenue earned
during the last quarter of 1999).
Section 0.47 SHARES OP PURCHASER STOCK shall mean shares of the PURCHASERS
common stock, at a par value of US$ 0,001 per share.
Section 0.48 SELLERS, ACTING TOGETHER, shall mean the most diligent among
Frederic PIE (acting on his behalf and in the name of Carine BARBELIVIEN and
Francis MELEARD), Galileo and In-Com, each one acting on behalf and in the name
of all the other SELLERS, each one being duly and irrevocably empowered to
represent all the other SELLERS, all of them being bound severally
(conjointement, et non solidairement); that being the case, a revocation of the
powers of attorney so given, in breach of Section 0.48 hereunder shall only be
effective for the PURCHASER following notification to it thereof;
Section 0.49 TAXES shall mean and include all taxes, duties, charges or levies
of any nature imposed by any REGULATORY AUTHORITY including, but not limited to,
income, gains, capital gains, surtax, capital, franchise, capital stock,
value-added taxes, taxes required to be deducted from payments made by the payor
and accounted for to any tax authority, employees' income withholding, back-up
withholding, withholding on payments to third parties, social security, national
insurance, unemployment, worker's compensation, payroll, disability, real
property, personal property, sales, use, goods and services or
AGENCY.COM Frederic PIE Carine BARBELIVIEN
/s/ ST /s/ FP /s/ CB
Francis MELEARD IN-COM GALILEO
/s/ MF /s/ [Illegible] /s/ [Illegible]
[LOGO] PICTORIS ACQUISITION AGREEMENT
<PAGE>
other commodity taxes, business, occupancy, excise, customs and import duties,
transfer, stamp and other taxes (including, but not limited to, interest,
penalties or additions to tax in respect of the foregoing), and includes all
taxes payable by the COMPANY pursuant to any applicable provision of French,
European Union or any other LAWS or ORDERS.
Section 0.50 US GAAP shall mean all generally accepted accounting principles
consistently applied and as applied in the United States of America.
Section 0.51 US INDEPENDENT AUDITORS shall mean a US certified public accountant
agreed upon by the parties or, failing such agreement, the largest accounting
firm in the United States of America in terms of gross revenue, willing to
perform said services, excluding ARTHUR ANDERSEN LLP.
AGENCY.COM Frederic PIE Carine BARBELIVIEN
/s/ ST /s/ FP /s/ CB
Francis MELEARD IN-COM GALILEO
/s/ MF /s/ [Illegible] /s/ [Illegible]
[LOGO] PICTORIS ACQUISITION AGREEMENT
<PAGE>
PART I
AFFILIATION SHARES PURCHASE
AGENCY.COM Frederic PIE Carine BARBELIVIEN
/s/ ST /s/ FP /s/ CB
Francis MELEARD IN-COM GALILEO
/s/ MF /s/ [Illegible] /s/ [Illegible]
[LOGO] PICTORIS ACQUISITION AGREEMENT
<PAGE>
ARTICLE I
PURCHASE OF THE AFFILIATION SHARES
Section 1.1 Sale of the AFFILIATION SHARES. Subject to the terms and conditions
herein stated, each SELLER agrees to sell, assign, transfer and deliver to the
PURCHASER on the CLOSING DATE, and the PURCHASER agrees to purchase from the
SELLERS on the CLOSING DATE, 11,146 shares of the stock of the COMPANY, broken
down as follows:
7,306 Category "1" shares
Frederic PIE ..................................................... 3,942 shares
Carine BARBELIVIEN ............................................... 1,687 shares
Francis MELEARD .................................................. 1,677 shares
3,840 Category "2" shares
GALILEO .......................................................... 2,285 shares
IN-COM ........................................................... 1,555 shares
Section 1.2 Property Transfer. The payment of the AFFILIATION SHARES PURCHASE
PRICE shall give rise to the immediate and automatic transfer of ownership of
the AFFILATION SHARES to the PURCHASER.
Section 1.3 Transfer Recording. The presentation to the COMPANY of both a copy
of this AGREEMENT and the PURCHASER'S bank's confirmation of the transfer of the
AFFILIATION SHARES PURCHASE PRICE to the SELLERS shall be deemed tantamount to a
transfer instruction in order to record the change in ownership of the
AFFILIATION SHARES in the stock transfer ledger of the COMPANY.
AGENCY.COM Frederic PIE Carine BARBELIVIEN
/s/ ST /s/ FP /s/ CB
Francis MELEARD IN-COM GALILEO
/s/ MF /s/ [Illegible] /s/ [Illegible]
[LOGO] PICTORIS ACQUISITION AGREEMENT
<PAGE>
ARTICLE II
AFFILIATION SHARES PURCHASE PRICE AND CLOSING
Section 2.1 Purchase Price. The AFFILIATION SHARES PURCHASE PRICE shall be an
aggregate of US$ 500,000 (five hundred thousand U.S. Dollars).
Section 2.2 PURCHASE PRICE Allocation. The AFFILIATION SHARES PURCHASE PRICE
shall be allocated and paid among the SELLERS as set forth below:
Frederic PIE ..................................................... US$ 176,835
Carine BARBELIVIEN ............................................... US$ 75,677
Francis MELEARD .................................................. US$ 75,229
GALILEO .......................................................... US$ 102,503
IN-COM ........................................................... US$ 69,756
Section 2.3 Payment. The AFFILIATION SHARES PURCHASE PRICE shall be paid by an
irrevocable order, made on the CLOSING DATE, for a bank transfer. The PURCHASER
shall wire US$ 500,000 in the aggregate, to be converted to French Francs at the
conversion rate at the date of the transfer.
Section 2.4 Closing. The CLOSING is taking place simultaneously with the
execution and delivery of this AGREEMENT, in Paris, France.
Section 2.5 Registration. This AGREEMENT must be registered in accordance with
French law, which gives rise to transfer taxes set at a rate of 1% of the
acquisition price (or a maximum of 20,000 French Francs) for each transaction,
to be borne by the PURCHASER.
AGENCY.COM Frederic PIE Carine BARBELIVIEN
/s/ ST /s/ FP /s/ CB
Francis MELEARD IN-COM GALILEO
/s/ MF /s/ [Illegible] /s/ [Illegible]
[LOGO] PICTORIS ACQUISITION AGREEMENT
<PAGE>
PART II
BALANCE SHARES PURCHASE
AGENCY.COM Frederic PIE Carine BARBELIVIEN
/s/ ST /s/ FP /s/ CB
Francis MELEARD IN-COM GALILEO
/s/ MF /s/ [Illegible] /s/ [Illegible]
[LOGO] PICTORIS ACQUISITION AGREEMENT
<PAGE>
ARTICLE III
OPTIONAL PURCHASE OF THE BALANCE SHARES
Section 3.1 BALANCE SHARES CALL RIGHT. The PURCHASER shall have the
unconditional right, until October 15, 2000, to exercise a BALANCE SHARES CALL
RIGHT and thereby demand the delivery by the SELLERS of the BALANCE SHARES,
provided that such exercise shall encompass all of the BALANCE SHARES.
Section 3.2 BALANCE SHARES PUT RIGHT. The SELLERS, ACTING TOGETHER, shall have
the right, until October 15, 2000 to exercise a BALANCE SHARES PUT RIGHT and
thereby demand the payment by the PURCHASER of the BALANCE SHARES PURCHASE
PRICE, provided that the COMPANY has met the REVENUE TARGET 1999 and provided
that such exercise shall encompass all of the BALANCE SHARES.
Section 3.3 DETERMINATION. In order to determine whether or not the REVENUE
TARGET 1999 has been met, (a) the amount of AGENCY.COM : PARIS' revenues from
non-localization work during the first three quarters of 1999, used for the
calculation of the 1999 revenue, shall be either (i) FF 800,000 (eight hundred
thousand French Francs) if the actual revenue is lower than this amount, or (ii)
the actual revenue, if it is greater than or equal to FF 800,000 (eight hundred
thousand French Francs) and (b) the amount of AGENCY.COM : PARIS' revenues from
localization work as well as from non-localization work during the last quarter
of 1999 used for the calculation of the 1999 revenue shall be either (i) FF
3,360,000 (three million three hundred and sixty thousand French Francs) if the
actual revenue is lower than this amount, or (ii) the actual revenue, if it is
greater than or equal to FF 3,360,000 (three million three hundred and sixty
thousand French Francs). An internal DETERMINATION shall be notified to the
parties by the COMPANY'S Auditors no later than June 30, 2000. If (a) the
COMPANY'S Auditors refuse to establish the DETERMINATION, (b) the COMPANY'S
Auditors fail to provide the DETERMINATION before June 30, 2000, or (c) either
the SELLERS, ACTING TOGETHER, or the PURCHASER do not agree that this internal
DETERMINATION correctly states whether or not the REVENUE TARGET 1999 has been
met, the SELLERS, ACTING TOGETHER, or the PURCHASER, as the case may be, may,
within 45 (forty five) days of (a) said refusal, (b) June 30, 2000 or (c) the
notification of the internal DETERMINATION, as the case may be, request an
external DETERMINATION from the FRENCH INDEPENDANT AUDITORS, based on the
principles mentioned hereabove regarding the amounts of FF 800,000 (eight
hundred thousand French Francs) and FF 3,360,000 (three million three hundred
and sixty thousand French Francs). The FRENCH INDEPENDENT AUDITORS will
determine which of the parties has asserted REVENUE figures for the period being
examined by the FRENCH INDEPENDANT AUDITORS, which are closest to those in the
external DETERMINATION established by the latter. The non-prevailing party shall
be liable for all of the FRENCH INDEPENDANT AUDITORS' fees and expenses (in the
case in which the SELLERS are the non prevailing
AGENCY.COM Frederic PIE Carine BARBELIVIEN
/s/ ST /s/ FP /s/ CB
Francis MELEARD IN-COM GALILEO
/s/ MF /s/ [Illegible] /s/ [Illegible]
[LOGO] PICTORIS ACQUISITION AGREEMENT
<PAGE>
party, such fees and expenses shall be divided amongst them on a pro rata
basis). In the event that the reporting auditors are unable to establish the
amount of AGENCY.COM : PARIS' revenues from non-localization work during the
first three quarters of 1999 or the amount of AGENCY.COM : PARIS' revenues from
localization work as well as non-localization work during the last quarter of
1999, and if this were to prevent the reporting auditors from delivering their
DETERMINATION, the SELLERS may choose to use the amounts of FF 800,000 (eight
hundred thousand French Francs) and FF 3,360,000 (three million three hundred
and sixty thousand French Francs) stipulated hereabove.
Section 3.4 Property Transfer. The payment of the BALANCE SHARES PURCHASE PRICE
following a BALANCE SHARES EXERCISE NOTICE given in accordance with the
provisions of this AGREEMENT shall give rise to the immediate and automatic
transfer of ownership of the BALANCE SHARES to the PURCHASER.
Section 3.5 Transfer Recording. The presentation to the COMPANY of both a copy
of a BALANCE SHARES EXERCISE NOTICE and the PURCHASER'S bank's confirmation of
the transfer of the BALANCE SHARES PURCHASE PRICE to the SELLERS shall be deemed
tantamount to a transfer instruction in order to record the change in ownership
of the BALANCE SHARES in the stock transfer ledger of the COMPANY.
Section 3.6 Registration. The BALANCE SHARES EXERCISE NOTICE must be registered
in accordance with French law, which gives rise to transfer taxes to be borne by
the exercising party.
Section 3.7 FIRST INSTALLMENT. The FIRST INSTALLMENT shall be an aggregate of
US$ 11,650,000 (eleven million six hundred fifty thousand U.S. Dollars).
Section 3.8 FIRST INSTALLMENT Allocation. The FIRST INSTALLMENT shall be
allocated and paid among the SELLERS based on an agreement among them notified
to the PURCHASER on the payment date at the very latest and, failing such
notification, as a prorata of the shares registered to the SELLERS in the stock
transfer ledger of the COMPANY as it stands on any day within the last 5 (five)
business days prior to the payment date and at the time that the PURCHASER
consults said ledger. If the PURCHASER is unable to consult the ledger for
reasons beyond his control, it will have the option of paying the PURCHASE PRICE
to the CAISSE DES DEPOTS ET CONSIGNATIONS, in full performance of its
obligations.
Section 3.9 FINAL INSTALLMENT (Earn Out). The FINAL INSTALLMENT, shall be an
aggregate amount of US$ 1,350,000 (one million three hundred and fifty thousand
U.S. Dollars) if (i) the COMPANY meets the PERFORMANCE
AGENCY.COM Frederic PIE Carine BARBELIVIEN
/s/ ST /s/ FP /s/ CB
Francis MELEARD IN-COM GALILEO
/s/ MF /s/ [Illegible] /s/ [Illegible]
[LOGO] PICTORIS ACQUISITION AGREEMENT
<PAGE>
TARGET 1999, or (ii) the PURCHASER, after the EXERCISE of the BALANCE SHARES
CALL RIGHT or the EXERCISE of the BALANCE SHARES PUT RIGHT and before January 1,
2000, removes the President of the COMPANY from office without any wrongdoing on
the part of the latter to justify such removal. Otherwise, the FINAL INSTALLMENT
shall be nil.
Section 3.10 FINAL INSTALLMENT Allocation. Except for the case in which the
FINAL INSTALLMENT is nil, it shall be allocated and paid to the SELLERS based on
an agreement among them notified to the PURCHASER on the payment date at the
very latest and, failing such notification, as a prorata of the shares
registered to the SELLERS in the stock transfer ledger of the COMPANY as it
stands on any day within the last 5 (five) business days prior to the payment
date and at the time that the PURCHASER consults said ledger. If the PURCHASER
is unable to consult the ledger for reasons beyond his control, it will have the
option of paying the PURCHASE PRICE to the CAISSE DES DEPOTS ET CONSIGNATIONS,
in full performance of its obligations.
ARTICLE IV
BALANCE SHARES PURCHASE PRICE PAYMENT
Section 4.1 SELLERS Prerogative. If, on the date of the EXERCISE of the BALANCE
SHARES CALL RIGHT or the date of the EXERCISE of the BALANCE SHARES PUT RIGHT,
as applicable, the SHARES OF PURCHASER STOCK (a) have been publicly traded for
more than a month before said date, the CORPORATE SELLERS shall have the
possibility to give notice to the PURCHASER of their wish (to be expressed in US
Dollars and not as a percentage of shares) to have their allocated share of the
BALANCE SHARES PURCHASE PRICE paid partially or fully in cash or in SHARES OF
PURCHASER STOCK and their choice shall be binding upon the PURCHASER, or (b)
have not been publicly traded for more than a month before said date, the
CORPORATE SELLERS shall have the possibility to give notice to the PURCHASER of
their wish (to be expressed in US Dollars and not as a percentage of shares) to
have their allocated share of the BALANCE SHARES PURCHASE PRICE paid partially
or fully in cash or in SHARES OF PURCHASER STOCK and their choice shall be
binding upon the PURCHASER, the only limitation being the percentage of the
price that the PURCHASER is willing to pay in SHARES OF PURCHASER STOCK insofar
as the PURCHASER cannot be obliged to pay a higher amount than it is willing in
stock; in any event, the CORPORATE SELLERS may demand a full cash payment. If on
the date of the EXERCISE of the BALANCE SHARES CALL RIGHT or the date of the
EXERCISE of the BALANCE SHARES PUT RIGHT, as applicable, the SHARES OF PURCHASER
STOCK (a) have been publicly traded for more than a month before said date, the
NON CORPORATE SELLERS shall have the possibility to give notice to the PURCHASER
of their wish to receive payment for up to 75% (seventy five percent) of the
total amount of their allocated share of the BALANCE SHARES PURCHASE PRICE in
cash or in SHARES OF
AGENCY.COM Frederic PIE Carine BARBELIVIEN
/s/ ST /s/ FP /s/ CB
Francis MELEARD IN-COM GALILEO
/s/ MF /s/ [Illegible] /s/ [Illegible]
[LOGO] PICTORIS ACQUISITION AGREEMENT
<PAGE>
PURCHASER STOCK and their choice shall be binding upon the PURCHASER, or (b)
have not been publicly traded for more than a month before said date, the NON
CORPORATE SELLERS shall have the possibility to give notice to the PURCHASER of
their wish to receive payment for up to 75% (seventy five percent) of the total
amount of their allocated share of the BALANCE SHARES PURCHASE PRICE in cash or
in SHARES OF PURCHASER STOCK and their choice shall be binding upon the
PURCHASER, the only limitation being the percentage of the price that the
PURCHASER is willing to pay in SHARES OF PURCHASER STOCK, insofar as the
PURCHASER cannot be obliged to pay a higher amount than it is willing in stock;
in any event, the NON CORPORATES SELLERS may demand up to 75% (seventy five
percent) of the payment in cash.
Section 4.2 Investment Letter. Each SELLER shall execute an Investment Letter as
exhibited in Schedule 4.2 relating to the SHARES OF PURCHASER STOCK which may be
issuable to him, her or it, if necessary. An Investment letter is set forth in
Exhibit F to this AGREEMENT, along with an excerpt of the PURCHASER'S S1
describing rule 144 as well as short memorandum from Janet AMBROSI WERTMAN,
General Counsel of the Purchaser, on the same subject.
Section 4.3 Lock-Up Letter. The SELLERS agree that they will not sell any of the
SHARES OF PURCHASER STOCK that they have received, be it under the FIRST
INSTALLMENT or under the FINAL INSTALLMENT, for a period of six months following
the date of an IPO for the PURCHASER, and shall each submit a Lock-Up Letter to
the PURCHASER so stating.
Section 4.4 DETERMINATION. In order to determine whether or not the PERFORMANCE
TARGET 1999 has been met, (a) the amount of AGENCY.COM : PARIS'S revenues from
non-localization work during the first three quarters of 1999, used for the
calculation of the 1999 revenue, shall be either (i) FF 1,000,000 (one million
French Francs) if the actual revenue is lower than this amount, or (ii) the
actual revenue, if it is greater than or equal to FF 1,000,000 (one million
French Francs) and (b) the amount of AGENCY.COM : PARIS' revenues from
localization work as well as from non-localization work during the last quarter
of 1999 used for the calculation of the 1999 revenue shall be either (i) FF
4,200,000 (four million two hundred thousand French Francs) if the actual
revenue is lower than this amount, or (ii) the actual revenue, if it is greater
than or equal to FF 4,200,000 (four million two hundred thousand French Francs).
An internal DETERMINATION shall be notified to the parties by the COMPANY'S
Auditors no later than June 30, 2000. If (a) the COMPANY'S Auditors refuse to
establish the DETERMINATION, (b) the COMPANY'S Auditors fail to provide the
DETERMINATION before June 30, 2000, or (c) either the Sellers, Acting Together,
or the PURCHASER do not agree that this internal DETERMINATION correctly states
whether or not the PERFORMANCE TARGET 1999 has been met, the Sellers, Acting
Together, or the PURCHASER, as the case may be, may, within 45 (forty five) days
of (a) said refusal, (b) June 30, 2000 or (c) the notification of the internal
DETERMINATION, as the case may be, request an external DETERMINATION
AGENCY.COM Frederic PIE Carine BARBELIVIEN
/s/ ST /s/ FP /s/ CB
Francis MELEARD IN-COM GALILEO
/s/ MF /s/ [Illegible] /s/ [Illegible]
[LOGO] PICTORIS ACQUISITION AGREEMENT
<PAGE>
from the FRENCH INDEPENDANT AUDITORS, based on the principles mentioned
hereabove regarding the amounts of FF 1,000,000 (one million French Francs) and
FF 4,200,000 (four million two hundred thousand French Francs). The FRENCH
INDEPENDENT AUDITORS will determine which of the parties has asserted REVENUE
figures for the period being examined by the FRENCH INDEPENDANT AUDITORS, which
are closest to those in the external DETERMINATION established by the latter.
The non-prevailing party shall be liable for all of the FRENCH INDEPENDANT
AUDITORS' fees and expenses (in the case in which the SELLERS are the non
prevailing party, such fees and expenses shall be divided amongst them on a
prorata basis). In the event that the reporting auditors are unable to establish
the amount of AGENCY.COM : PARIS' revenues from non-localization work during the
first three quarters of 1999 or the amount of AGENCY.COM : PARIS' revenues from
localization work as well as non-localization work during the last quarter of
1999, and if this were to prevent the reporting auditors from delivering their
DETERMINATION, the SELLERS may choose to use the amounts of FF 1,000,000 (one
million French Francs) and FF 4,200,000 (four million two hundred thousand
French Francs) stipulated hereabove.
Section 4.5 First Valuation. If, on the date of the EXERCISE of the BALANCE
SHARES CALL RIGHT or the date of the EXERCISE of the BALANCE SHARES PUT RIGHT,
as applicable, the SHARES OF PURCHASER STOCK (i) have been publicly traded for
more than a month before said date, the SHARES OF PURCHASER STOCK shall be
valued at 90% (ninety percent) of the average of the CLOSING PRICES PER SHARE
for the 30 (thirty) consecutive trading days ending said date or (ii) have not
been publicly traded for more than a month before said date, in which case the
price of the SHARES OF PURCHASER STOCK shall be set by the PURCHASER, within one
month (of the EXERCISE DATE), if it were to decide that the payment of the FIRST
INSTALLMENT might not be made entirely in cash, the PURCHASER shall notify the
SELLERS of the allocation of such payment between cash and SHARES OF PURCHASER
STOCK (subject to the SELLERS prerogative contained in Section 4.1) and shall
provide the SELLERS with all of the information that a public corporation is
required to make available to the public, in accordance with US Stock Market
regulations; if the SELLERS are not satisfied with the price proposed by the
PURCHASER, and unless the PURCHASER has received a formal valuation from an
independant third party in the 3 (three) months preceding the EXERCISE DATE, in
which case the PURCHASER shall have the right to rely on said valuation, the
SELLERS may, within a period of 2 (two) weeks (from the notification of the
price of the SHARES OF PURCHASER STOCK set by the PURCHASER), request the US
INDEPENDANT AUDITORS to calculate, within a 30 (thirty) day deadline, the value
of the SHARES OF PURCHASER STOCK on the date of the EXERCISE of the BALANCE
SHARES CALL RIGHT or the date of the EXERCISE of the BALANCE SHARES PUT RIGHT,
as applicable.
Section 4.6 Final Valuation. If, on the date the DETERMINATION mentioned in
Section 4.4 has become final, the SHARES OF PURCHASER STOCK (i) have been
publicly traded for more than a month before said date, the SHARES OF PURCHASER
STOCK shall be valued at 90% (ninety percent) of the average of the CLOSING
PRICES PER SHARE for the 30 (thirty) consecutive
AGENCY.COM Frederic PIE Carine BARBELIVIEN
/s/ ST /s/ FP /s/ CB
Francis MELEARD IN-COM GALILEO
/s/ MF /s/ [Illegible] /s/ [Illegible]
[LOGO] PICTORIS ACQUISITION AGREEMENT
<PAGE>
trading days ending said date or (ii) have not been publicly traded for more
than a month before said date, in which case the price of the SHARES OF
PURCHASER STOCK shall be set by the PURCHASER, within one month (of the date the
DETERMINATION has become final), if it were to decide that the payment of the
FINAL INSTALLMENT might not be made entirely in cash, the PURCHASER shall notify
the SELLERS of the allocation of such payment between cash and SHARES OF
PURCHASER STOCK (subject to the SELLERS prerogative contained in Section 4.1)
and shall provide the SELLERS with all of the information that a public
corporation is required to make available to the public, in accordance with US
Stock Market regulations; if the SELLERS are not satisfied with the price
proposed by the PURCHASER, and unless the PURCHASER has received a formal
valuation from an independant third party in the 3 (three) months preceding the
date the DETERMINATION has become final, in which case the PURCHASER shall have
the right to rely on said valuation, the SELLERS may, within a period of 2 (two)
weeks (from the notification of the price of the SHARES OF PURCHASER STOCK set
by the PURCHASER), request the US INDEPENDANT AUDITORS to calculate, within a 30
(thirty) day deadline, the value of the SHARES OF PURCHASER STOCK on the date
the DETERMINATION has become final.
Section 4.7 Sellers Prerogative Exercise. The SELLERS Prerogative shall be
exercised within 5 (five) business days after the BALANCE SHARES EXERCISE NOTICE
or the DETERMINATION referred to in Section 4.4 has become final, as applicable.
Failing such notice, the payment shall be made entirely in cash to the CORPORATE
SELLERS and for 75% to the NON CORPORATE SELLERS.
Section 4.8 FIRST INSTALLMENT Payment Date. The FIRST INSTALLMENT shall be paid
by the PURCHASER to the SELLERS on a date agreed upon by the parties and,
failing such agreement (a) no later than 20 (twenty) business days after the
date of the BALANCE SHARES EXERCISE NOTICE, if the SHARES OF PURCHASER STOCK
have been publicly traded for more than a month before said date or (b)
otherwise, no later than 30 (thirty) business days after the date on which the
first valuation has become final. Nevertheless, the CORPORATE SELLERS shall have
the right, if the SHARES OF PURCHASER STOCK have not been publicly traded for
more than a month before said date, to receive the portion of cash they are
entitled to within 30 (thirty) business days after the BALANCE SHARES EXERCISE
NOTICE.
Section 4.9 FINAL INSTALLMENT Payment Date. The FINAL INSTALLMENT shall be paid
by the PURCHASER to the SELLERS on a date agreed upon by the parties and,
failing such agreement (a) no later than 20 (twenty) business days after the
date of the BALANCE SHARES EXERCISE NOTICE, if the SHARES OF PURCHASER STOCK
have been publicly traded for more than a month before said date or (b)
otherwise, no later than 30 (thirty) business days after the date on which the
final valuation has become final. Nevertheless, the CORPORATE SELLERS shall have
the right, if the
AGENCY.COM Frederic PIE Carine BARBELIVIEN
/s/ ST /s/ FP /s/ CB
Francis MELEARD IN-COM GALILEO
/s/ MF /s/ [Illegible] /s/ [Illegible]
[LOGO] PICTORIS ACQUISITION AGREEMENT
<PAGE>
SHARES OF PURCHASER STOCK have not been publicly traded for more than a month
before said date, to receive the portion of cash they are entitled to within 30
(thirty) business days after the BALANCE SHARES EXERCISE NOTICE.
Section 4.10 Restricted Shares program to employees. Upon the BALANCE SHARES
EXERCISE NOTICE, employees of Pictoris will receive restricted SHARES OF
PURCHASER STOCK (common stock), issued on a fully diluted basis of Pictoris
common stock, bonds and B. S. P. C. E. as a prorata of their participation in
the 5.43 percent that the COMPANY board has approved. The valuation of said
restricted SHARES OF PURCHASER STOCK shall be same as that used the Balance
Shares under Section 4.5 of this AGREEMENT. The vesting period for the vast
majority of employees will be 1/3 six months after issuance, 1/3 eighteen months
after issuance and the final 1/3 thirty months after issuance. The vesting
period for Christine LAURENS and Luc SAINT ELIE will be 1/3 six months after
issuance, 1/3 twelve months after issuance and the final 1/3 twenty four months
after issuance. In the event that an employee leaves prior to the vesting period
being completed, their shares will return to the pool to be redistributed to the
remaining employees.
AGENCY.COM Frederic PIE Carine BARBELIVIEN
/s/ ST /s/ FP /s/ CB
Francis MELEARD IN-COM GALILEO
/s/ MF /s/ [Illegible] /s/ [Illegible]
[LOGO] PICTORIS ACQUISITION AGREEMENT
<PAGE>
PART III
AFFILIATION SHARES BUY-BACK
AGENCY.COM Frederic PIE Carine BARBELIVIEN
/s/ ST /s/ FP /s/ CB
Francis MELEARD IN-COM GALILEO
/s/ MF /s/ [Illegible] /s/ [Illegible]
[LOGO] PICTORIS ACQUISITION AGREEMENT
<PAGE>
ARTICLE V
CONDITIONAL BUY-BACK OF THE AFFILIATION SHARES
Section 5.1 AFFILIATION SHARES CALL RIGHT. In the event that neither the
PURCHASER nor the SELLERS exercise their respective BALANCE SHARES CALL RIGHT or
BALANCE SHARES PUT RIGHT prior to the expiration of these rights, then the
Sellers, Acting Together, shall have the right, exercisable as of October 16,
2000 and no later than March 31, 2001, to exercise an AFFILIATION SHARES CALL
RIGHT, provided that such exercise shall encompass all of the AFFILIATION
SHARES.
Section 5.2 AFFILIATION SHARES PUT RIGHT. In the event that neither the
PURCHASER nor the SELLERS exercise their respective BALANCE SHARES CALL RIGHT or
BALANCE SHARES PUT RIGHT prior to the expiration of these rights, then the
PURCHASER shall have the right, exercisable as of October 16, 2000 and no later
than March 31, 2001, to exercise an AFFILIATION SHARES PUT RIGHT, provided that
such exercise shall encompass all of the AFFILIATION SHARES.
Section 5.3 Pro rata Buy-back. The PURCHASER shall deliver to each of the
SELLERS both his, hers or its pro rata share of the AFFILIATION SHARES and the
related transfer order and each of the SELLERS shall pay to the PURCHASER its
pro rata share of the AFFILIATION SHARES PURCHASE PRICE, as set forth in Article
I and II of this AGREEMENT, unless otherwise specified in writing by the
Sellers, Acting Together.
Section 5.4 Substitution. In the event that one or more of the SELLERS fails to
pay his, her or its pro rata share of the AFFILIATION SHARES PURCHASE PRICE, the
other SELLERS shall have the right to pay, on a pro rata basis, the remainder of
the AFFILIATION SHARES PURCHASE PRICE and receive accordingly the shares of the
defaulting Seller, in order to enable the other Sellers to exercise such right,
the PURCHASER gives notice of the fact that one or more of the SELLERS hasn't
paid his, her or its share of the AFFILIATION SHARES PURCHASE PRICE. Within 15
(fifteen) days of said notice, the other SELLERS may notify to the PURCHASER
their whish to buy and pay the remainder of the AFFILIATION SHARES. The
allocation between the Sellers whishing to buy the shares shall be determined by
a common agreement and failing such agreement, on a pro rata basis.
Section 5.5 Buy-back Exercise Notice. The AFFILIATION SHARES PUT RIGHT may be
exercised by the PURCHASER by giving an Exercise Notice to the SELLERS. The
AFFILIATION SHARES CALL RIGHT may be exercised by the SELLERS by giving an
Exercise Notice to the PURCHASER.
AGENCY.COM Frederic PIE Carine BARBELIVIEN
/s/ ST /s/ FP /s/ CB
Francis MELEARD IN-COM GALILEO
/s/ MF /s/ [Illegible] /s/ [Illegible]
[LOGO] PICTORIS ACQUISITION AGREEMENT
<PAGE>
Section 5.6 Property Transfer. The payment of the AFFILIATION SHARES PURCHASE
PRICE following a BUY-BACK EXERCISE NOTICE given in accordance with the
provisions of this AGREEMENT shall give rise to the immediate and automatic
retransfer of ownership of the AFFILATION SHARES to the SELLERS.
Section 5.7 Transfert recording. The presentation to the COMPANY of both a copy
of a BUY-BACK EXERCISE NOTICE and the SELLERS' banks' confirmation of the
transfer of the AFFILIATION SHARES PURCHASE PRICE to the PURCHASER shall be
deemed tantamount to a transfer instruction in order to record the change in
ownership of the AFFILIATION SHARES in the stock transfer ledger of the COMPANY.
Section 5.8 Registration. A BUY-BACK EXERCISE NOTICE must be registered in
accordance with French law, which gives rise to transfer taxes to be borne by
the exercising party.
Section 5.9 Buy-back price of the AFFILIATION SHARES. The aggregate purchase
price to be paid to the PURCHASER upon the exercise of the AFFILIATION SHARES
PUT RIGHT or the AFFILIATION SHARES CALL RIGHT shall be an amount equal to US$
500,000 (five hundred thousand US Dollars) paid by the SELLERS according to the
same breakdown set forth in Section 2.2, subject to the provisions of Section
5.4.
Section 5.10 Payment date. The payment date for the buy-back of the AFFILIATION
SHARES under the provisions of this Article shall be within 30 (thirty) business
days following the exercise of the AFFILIATION SHARES PUT RIGHT or the
AFFILIATION SHARES CALL RIGHT. At that date, the SELLERS shall pay the
AFFILIATION SHARES PURCHASE PRICE in full, and the obligation of the NON
CORPORATE SELLERS to make such payment shall be joint.
AGENCY.COM Frederic PIE Carine BARBELIVIEN
/s/ ST /s/ FP /s/ CB
Francis MELEARD IN-COM GALILEO
/s/ MF /s/ [Illegible] /s/ [Illegible]
[LOGO] PICTORIS ACQUISITION AGREEMENT
<PAGE>
PART IV
TRANSFORMATION OF THE COMPANY
AGENCY.COM Frederic PIE Carine BARBELIVIEN
/s/ ST /s/ FP /s/ CB
Francis MELEARD IN-COM GALILEO
/s/ MF /s/ [Illegible] /s/ [Illegible]
[LOGO] PICTORIS ACQUISITION AGREEMENT
<PAGE>
ARTICLE VI
AMENDMENT OF THE CHARTER DOCUMENTS
Section 6.1 Societe par actions simplifiee. The PURCHASER and the SELLERS
undertake to amend the charter documents of the COMPANY in order to transform,
within 35 (thirty five) business days from the date of this AGREEMENT, the
COMPANY into a societe par actions simplifiee, governed by the specific
provisions set out in Sections 6.2 to 6.6 below, as well as, but only insofar
they are compatible with said provisions, (i) by the provisions of law governing
joint stock corporations, (societe anonyme et societe par actions simplifiee)
including particularly Articles 89 to 177-1 of Law no. 66-537 of July 24, 1966
(ii) by the provisions of the by-laws that are presently in force and (iii) by
the provisions of the shareholder's covenants executed November 26, 1998. It is
understood and agreed between the parties that, (i) upon the execution of this
AGREEMENT; the provisions under Article I (preemptive right--droit de
preemption) of said shareholder's covenants shall now be limited to transfers of
shares of COMPANY STOCK in favor of third parties (ii) the provisions of said
shareholder's covenants not integrated in the by-laws of the COMPANY shall
remain in full force.
Section 6.2 President. The COMPANY's by-laws shall stipulate that the latter
shall be managed and represented by its President. The President shall be
nominated by the shareholders unanimously. The President may be either a
shareholder or an employee of the COMPANY or both. The President may be removed
from office, but only on valid grounds, by the unanimous decision of the
shareholders, or, in the event that the President is himself a shareholder, by
the unanimous decision of the other shareholders.
Section 6.3 Board of Directors. The COMPANY'S by-laws shall provide for the
creation of a Board of Directors (conseil de direction). The maximum number of
Directors shall be equal to the number of shareholders in the COMPANY (or one
less, if the President is a shareholder himself), each shareholder (except the
President if he is a shareholder himself) having the right to freely nominate
one member of the Board and to freely remove the same.
Section 6.4 Unanimous Decisions by Shareholders. The COMPANY'S by-laws shall
stipulate that, in addition to those decisions for which unanimous agreement is
required by law, the following decisions, depending on whether they fall under
the authority of the COMPANY's Shareholders' Meetings or its President, shall
require either (a) the unanimous agreement of the shareholders, all of whom must
be present or represented, or (b) the unanimous agreement of the Board of
Directors: (i) the sale, lease or other disposition of all or substantially all
of the COMPANY's assets or business; (ii) the creation of, or the modification
of any of the terms of, any of the following financial arrangements: any
security interest on any of the COMPANY's material assets or property other than
in the ordinary course of the COMPANY'S business and in the ordinary and usual
manner; any guarantee by the COMPANY of the
AGENCY.COM Frederic PIE Carine BARBELIVIEN
/s/ ST /s/ FP /s/ CB
Francis MELEARD IN-COM GALILEO
/s/ MF /s/ [Illegible] /s/ [Illegible]
[LOGO] PICTORIS ACQUISITION AGREEMENT
<PAGE>
obligations of any third party, whether a shareholder, a director or employee of
the COMPANY or otherwise; or any indebtedness for borrowed money except
indebtedness incurred in the ordinary course of the Company's business and in
the ordinary and usual manner and not in excess of FF 600,000 (six hundred
thousand French Francs); (iii) entering into any business other than, or into
any transaction outside, the normal business activities of the COMPANY and
related activities, provided that the normal business activities of the COMPANY
are understood to include, but not be limited to, communications, marketing and
related activities in any media whatsoever; (iv) the amendment of the COMPANY's
charter documents, except amendments required by the reimbursement of already
issued bonds; (v) any increase or decrease in the capitalization of the COMPANY,
including any creation of or increase in the COMPANY's bond indebtedness but
with the exception of the 1,330 bonds redeemable in shares mentioned in Section
0.20; (vi) any acquisition by the COMPANY of the stock, assets or business of
another corporation or entity or any investment by the COMPANY of corporate
funds in another corporation or entity, with the exception of investments of a
purely financial nature and made in order to ensure appropriate cash management
in the ordinary course of business and in the ordinary and usual manner,
consistent with past practice; (vii) the merger, consolidation or amalgamation
of the COMPANY with and into another corporation or entity, or of any other
corporation or entity with and into the COMPANY; (viii) the adoption of the
annual profit and capital expenditure plans (ix) any capital expenditure
relating to property, plant, equipment and intangibles, or commitment therefor,
involving an amount in excess of FF 300,000 (three hundred thousand French
Francs) for each related expenditure or commitment, or aggregating more than FF
1,500,000 (one million five hundred thousand French Francs) during any calendar
year, except when said expenditures or commitments do not exceed the levels set
forth in the annual profit and capital expenditure plan; (x) the liquidation or
dissolution of the COMPANY; (xi) the making of any loans by the COMPANY
exceeding FF 150,000 (one hundred and fifty thousand French Francs) to any
employee, other than travel and business expense advances to employees in the
ordinary course of business and in the ordinary and usual manner, up to a total
of FF 600,000 (six hundred thousand French Francs) in such loans outstanding at
any time; (xii) with the exception of the Employment Agreements executed on the
same date as, and in connection with, this AGREEMENT and hereby attached,
entering into any transaction with any shareholder who beneficially owns,
directly or indirectly, 10% or more of the COMPANY STOCK or any entity
controlled by any shareholder who beneficially owns, directly or indirectly, 10%
or more of the COMPANY STOCK, or any other officer or director of the COMPANY;
(xiii) any increase in the compensation payable to any shareholder who
beneficially owns, directly or indirectly, 10% or more of the COMPANY STOCK or
to any other executive officer or director of the COMPANY, as well as the
adoption or amendment of any profit sharing or other employee benefit plan other
than as included in an annual profit or capital expenditure plan previously;
(xiv) any termination of employment of a manager of the COMPANY.
AGENCY.COM Frederic PIE Carine BARBELIVIEN
/s/ ST /s/ FP /s/ CB
Francis MELEARD IN-COM GALILEO
/s/ MF /s/ [Illegible] /s/ [Illegible]
[LOGO] PICTORIS ACQUISITION AGREEMENT
<PAGE>
Section 6.5 Restrictions on Stock Transfers. THE COMPANY's by-laws shall provide
that, as long as transfer of the tide of the BALANCE SHARES under the provisions
of this AGREEMENT is enforceable, the shares of COMPANY'S stock shall be
non-transferable to third parties, except in cases in which a waiver is
unanimously given by the shareholders. Any transfers of such stock to the
PURCHASER other than those stipulated in this AGREEMENT are prohibited.
Section 6.6 Financial reports The COMPANY's by-laws shall stipulate the
COMPANY's obligation to complete US financial reporting packages on a quarterly
basis and to comply with the US reporting procedures and practices (the
PURCHASER agrees, in order to enable the COMPANY to comply with the US financial
reporting requirements, to provide the COMPANY with all of the accounting tools
and explanations that are necessary).
Section 6.7 Shareholders' convention. The provisions in Sections 6.3 to 6.6
hereabove shall be binding upon the parties as of the CLOSING DATE and shall
immediately take effect; thus, they shall govern all relationships between the
parties on any and all matters relating to the COMPANY, as applicable. The above
mentioned provisions shall be binding even during the period before the
transformation of the COMPANY has become legally effective. In the interim, the
provisions applicable to the conseil de direction under Section 6.3 shall be
applicable, mutatis mutandis, to the conseil de administration of the COMPANY
and the PURCHASER shall have a seat thereon as from the date of this AGREEMENT.
Section 6.8 Return to Status Quo Ante. The COMPANY by-laws shall provide that,
failing EXERCISE of a BALANCE SHARES CALL RIGHT or a BALANCE SHARES Put RIGHT as
of October 15, 2000, the President of the COMPANY shall be removable ad nutum
upon a decision of a simple majority of the shareholders and that the decisions
mentioned in section 6.4. hereabove shall be subject to the majority rules as
applicable before the execution of this AGREEMENT, notably as provided for under
the shareholder's covenants and the by-laws in force before the transformation
of the COMPANY. The Purchaser agrees that, on the date of transfer of all the
AFFILIATION SHARES to the Sellers, it shall resign from its position on the
Board of Directors.
AGENCY.COM Frederic PIE Carine BARBELIVIEN
/s/ ST /s/ FP /s/ CB
Francis MELEARD IN-COM GALILEO
/s/ MF /s/ [Illegible] /s/ [Illegible]
[LOGO] PICTORIS ACQUISITION AGREEMENT
<PAGE>
PART V
REPRESENTATIONS & WARRANTIES
AGENCY.COM Frederic PIE Carine BARBELIVIEN
/s/ ST /s/ FP /s/ CB
Francis MELEARD IN-COM GALILEO
/s/ MF /s/ [Illegible] /s/ [Illegible]
[LOGO] PICTORIS ACQUISITION AGREEMENT
<PAGE>
ARTICLE VII
REPRESENTATIONS OF THE SELLERS
The SELLERS, severally (conjointement, et non solidairement), and each one
individually acting on his, hers or its own behalf hereby represent, warrant and
agree to and with the PURCHASER as follows:
Section 7.1 Capital Stock. At the CLOSING DATE, to the Knowledge of the Sellers,
the COMPANY has shareholder's equity of 1,547,000 French Francs, consisting of
154,700 fully paid shares, owned by the SELLERS. To the Knowledge of the
Sellers, all shares of COMPANY STOCK which have been issued and are outstanding
have been validly issued and have not been issued in violation of any preemptive
rights of any stockholder. To the Knowledge of the Sellers, all issued and
outstanding category "I" shares and all issued and outstanding category "2"
shares are fully paid and no other class of capital stock of the COMPANY is
authorized or outstanding, excluding the shares to which the employee should be
entitled under the Stock option plan (B. S. P. C. E.). To the Knowledge of the
Sellers, with the exception of the bonds redeemable in shares mentioned in
Section 0.18 and whith the exception of the shares to which the employee should
be entitled under the Stock option plan (B. S. P. C. E.) there are no OPTIONS
providing for the purchase, issuance or sale of any shares of the capital stock
of the COMPANY to the benefit of third parties. To the KNOWLEDGE of the SELLERS,
all repurchases or redemptions of shares of the capital stock of the COMPANY
were properly completed in compliance with all applicable regulations and
corporate requirements; and no further monies or other obligations will be due
by the COMPANY in respect thereof with the exception of the bonds redeemable in
shares mentioned in Section 0.18 and whith the exception of the shares to which
the employee should be entitled under the Stock option plan (B. S. P. C. E.).
Section 7.2 Stock Ownership. The SELLERS are, at the CLOSING DATE, the true and
lawful owners of the COMPANY STOCK and, to the Knowledge of the Sellers, the
COMPANY STOCK has been duly and validly authorized and issued and fully paid.
Section 7.3 NO LIENS. The shares of the COMPANY's stock held by the SELLERS are
free of preemptive rights and options to the benefit of third parties, with no
personal liability attaching to the ownership thereof, and such ownership is
free and clear of any mortgages, liens, security interests, emcumbrances or
claims and free of any charges and restrictions of any kind or character to the
benefit of third parties.
Section 7.4 NO OPTIONS. This AGREEMENT notwithstanding, and with the exception
of 1,330 bonds redeemable in shares owned by the CORPORATE SELLERS, and with the
exception of the shares to which the employee should be entitled under the Stock
option plan (B. S. P. C. E.), there
AGENCY.COM Frederic PIE Carine BARBELIVIEN
/s/ ST /s/ FP /s/ CB
Francis MELEARD IN-COM GALILEO
/s/ MF /s/ [Illegible] /s/ [Illegible]
[LOGO] PICTORIS ACQUISITION AGREEMENT
<PAGE>
are no OPTIONS to the benefit of third parties to acquire any of the shares of
the COMPANY's stock held by the SELLERS and there are no agreements or
understandings with respect to the sale or transfer of any of the shares of the
COMPANY's stock held by the SELLERS to the benefit of third parties.
Section 7.5 Execution and Validity. Each of the NON CORPORATE SELLERS has the
full power and capacity and each of the CORPORATE SELLERS has the full corporate
power and authority to enter into this AGREEMENT and to perform its obligations
hereunder. The execution and delivery of this AGREEMENT and the performance of
the transactions contemplated hereby have been duly authorized by all required
corporate action on behalf of each of the CORPORATE SELLERS. This AGREEMENT has
been duly and validly executed and delivered by each SELLER and, assuming due
authorization, execution and delivery by the PURCHASER, constitutes a legal,
valid and binding obligation upon each of the SELLERS, enforceable against each
of them in accordance with its terms.
Section 7.6 Non-Contravention. The execution, delivery and performance by the
SELLERS of their respective obligations hereunder and the consummation of the
transactions contemplated hereby, will not (a) violate, conflict with or result
in the breach of any provision of the by-laws or other corporate charter
documents of the CORPORATE SELLERS (b) result in the violation by any SELLER of
any LAW or ORDER of any French or European Union REGULATORY AUTHORITY applicable
to any SELLER, (c) to the KNOWLEDGE of the SELLERS, result in the violation by
any SELLER of any LAW or ORDER of any foreign REGULATORY AUTHORITY applicable to
any SELLER.
Section 7.7 Approvals and Consents. All consents, approvals or actions of,
filing with or notices to any REGULATORY AUTHORITY or any PERSON necessary or
required under any of the terms, conditions or provisions of any LAW or ORDER of
any REGULATORY AUTHORITY or any INSTRUMENT to which any SELLER is a party for
the execution and delivery of this AGREEMENT by the SELLERS, the performance by
the SELLERS of their obligations hereunder or the consummation of the
transactions contemplated hereby, if any, have been obtained or given by the
SELLERS, at no expense to the PURCHASER, and none has been withdrawn or
modified.
Section 7.8 No Restrictions. There is no suit, action, claim, investigation or
inquiry by any REGULATORY AUTHORITY, and no legal, administrative or arbitration
proceeding pending or, to the KNOWLEDGE of the SELLERS, threatened against the
SELLERS, with respect to the execution, delivery and performance of this
AGREEMENT by the SELLERS or the transactions contemplated hereby or any other
agreement entered into by the SELLERS in connection with the transactions
contemplated hereby.
AGENCY.COM Frederic PIE Carine BARBELIVIEN
/s/ ST /s/ FP /s/ CB
Francis MELEARD IN-COM GALILEO
/s/ MF /s/ [Illegible] /s/ [Illegible]
[LOGO] PICTORIS ACQUISITION AGREEMENT
<PAGE>
Section 7.9 No Litigation. There are no actions, suits, proceedings at law or in
equity by any PERSON, or any arbitrations or any administrative or other
proceedings by or before (or to the KNOWLEDGE of the SELLERS, any investigations
by) any REGULATORY AUTHORITY, pending or, to the KNOWLEDGE of the SELLERS,
threatened, against any of the SELLERS with respect to this AGREEMENT or the
transactions contemplated hereby.
Section 7.10 No Brokers. No broker, finder, agent or similar intermediary has
acted on behalf of the SELLERS or the COMPANY in connection with this AGREEMENT
or the transactions contemplated hereby, and no brokerage commissions, finder's
fees or similar fees, commissions or payments are due by the COMPANY or the
SELLERS in connection therewith based on any agreement, arrangement or
understanding with any of them.
ARTICLE VIII
REPRESENTATIONS OF THE PURCHASER
The PURCHASER, represents, warrants and agrees to and with the SELLERS as
follows:
Section 8.1 Existence and Good Standing. The PURCHASER is a corporation duly
organized, validly existing under and in good standing with the laws of the
State of Delaware, with full corporate power and authority to own its property
and to carry on its business, all as and in the places where such property are
now owned or operated or such business is now being conducted.
Section 8.2 Execution and Validity. The PURCHASER his the full corporate power
and authority to enter into this AGREEMENT and to perform its obligations
hereunder. The execution and delivery of this AGREEMENT and the performance of
the transactions contemplated hereby have been duly authorized by all required
corporate action on behalf of the PURCHASER. This AGREEMENT has been duly and
validly executed and delivered by the PURCHASER and, assuming due authorization,
execution and delivery by the SELLERS, constitutes a legal, valid and binding
obligation of the PURCHASER, enforceable against it in accordance with its
terms.
Section 8.3 Non-Contravention. The execution, delivery and performance by the
PURCHASER of its obligations hereunder and the consummation of the transactions
contemplated hereby, will not (a) violate, conflict with or result in the breach
of any provision of the certificate of incorporation or by-laws or other
corporate charter documents of the PURCHASER (b) result in the violation by the
PURCHASER of any LAW or ORDER of any United States REGULATORY AUTHORITY
applicable to the PURCHASER, (c) to the
AGENCY.COM Frederic PIE Carine BARBELIVIEN
/s/ ST /s/ FP /s/ CB
Francis MELEARD IN-COM GALILEO
/s/ MF /s/ [Illegible] /s/ [Illegible]
[LOGO] PICTORIS ACQUISITION AGREEMENT
<PAGE>
KNOWLEDGE of the PURCHASER, result in the violation by the PURCHASER of any LAW
or ORDER of any foreign REGULATORY AUTHORITY applicable to the PURCHASER.
Section 8.4 Approvals and Consents. All consents, approvals or actions of,
filing with or notices to any REGULATORY AUTHORITY or any PERSON, necessary or
required under any of the terms, conditions or provisions of any LAW or ORDER of
any REGULATORY AUTHORITY or any INSTRUMENT to which the PURCHASER is a party or
by which any of the assets or the property of the PURCHASER is bound, for the
execution and delivery of this AGREEMENT by the PURCHASER, the performance by
the PURCHASER of its obligations hereunder or the consummation of the
transactions contemplated hereby, if any, have been obtained or given by the
PURCHASER, at no expense to the SELLERS, and none has been withdrawn or
modified.
Section 8.5 No Restrictions. There is no suit, action, claim, investigation or
inquiry by any REGULATORY AUTHORITY, and no legal, administrative or arbitration
proceeding pending or, to the KNOWLEDGE of the PURCHASER, threatened against the
PURCHASER, with respect to the execution, delivery and performance of this
AGREEMENT or the transactions contemplated hereby or any other agreement entered
into by the PURCHASER in connection with the transactions contemplated hereby.
Section 8.6 No Litigation. At the CLOSING DATE, there are no actions, suits,
proceedings at law or in equity by any PERSON, or any arbitrations or any
administrative or other proceedings by or before (or to the KNOWLEDGE of the
PURCHASER, any investigations by) any REGULATORY AUTHORITY, pending or, to the
KNOWLEDGE of the PURCHASER, threatened, against the PURCHASER with respect to
this AGREEMENT or the transactions contemplated hereby.
Section 8.7 No Brokers. No broker, finder, agent or similar intermediary has
acted on behalf of the Purchaser or its Affiliates in connection with this
Agreement or the transactions contemplated hereby, and no brokerage commissions,
finders' fees or similar fees, commissions or payments are due by the Purchaser
or its Affliates in connection therewith based on any agreement, arrangement or
understanding with any of them.
ARTICLE IX
WARRANTY
Section 9.1 Reliability. Notwithstanding any right that the PURCHASER may have
to fully investigate the affairs of any SELLER, and notwithstanding any
knowledge of facts determined or determinable pursuant to such investigation or
right of investigation, the PURCHASER shall have the right
AGENCY.COM Frederic PIE Carine BARBELIVIEN
/s/ ST /s/ FP /s/ CB
Francis MELEARD IN-COM GALILEO
/s/ MF /s/ [Illegible] /s/ [Illegible]
[LOGO] PICTORIS ACQUISITION AGREEMENT
<PAGE>
to rely fully upon the representations, warranties, covenants and agreements of
any SELLER contained in this AGREEMENT. Notwithstanding any right that any
SELLER may have to fully investigate the affairs of the PURCHASER, and
notwithstanding any knowledge of facts determined or determinable pursuant to
such investigation or right of investigation, each SELLER shall have the right
to rely fully upon the representations, warranties, covenants and agreements of
the PURCHASER contained in this AGREEMENT and the Schedules furnished by the
PURCHASER pursuant to this AGREEMENT, or in any certificate delivered at the
CLOSING by the PURCHASER.
Section 9.2 Sellers' Indemnification Obligations. Subject to the limitations
contained in Section 9.6 hereof, the Sellers hereby agree to indemnify severally
(conjointement) the Purchaser for) to protect, save and keep harmless the
Purchaser from, and to assume liability for any Losses that may be imposed on or
incurred by the Purchaser or the Company as a consequence of or in connection
with (i) any inaccuracy or breach of any representations or warranties contained
in ARTICLE VII herein or (ii) any breach of or failure by him, her or it to
comply with or perform any agreement, covenant and obligation contained in this
Agreement.
Section 9.3 PURCHASER'S Indemnification Obligations. Subject to the limitations
set forth in Section 9.6 hereof, the PURCHASER hereby agrees to indemnify the
SELLERS for, to protect, save and keep harmless the SELLERS from and to assume
liability for any LOSSES that may be imposed on or incurred by the SELLERS as a
consequence of or in connection with (i) any inaccuracy or breach of any
representations or warranties contained in ARTICLE VIII herein or (ii) any
breach of or failure by the PURCHASER to comply with or perform any agreement,
covenant and obligation contained or referred to in this AGREEMENT.
Section 9.4 Tax benefit. In the event of a Loss, the evaluation thereof shall be
net of any tax benefit actually realized by the INDEMNIFIED PARTY (it being
understood that any such benefit shall be paid in the first instance by the
INDEMNIFYING PARTY and reimbursed by the INDEMNIFIED PARTY upon the realization
of the benefit). Notwithstanding the general nature of the foregoing, it is
understood and agreed that (a) any VAT reassessment shall be paid by the
INDEMNIFYING PARTY only to the extent that the amount resulting from such
reassessment shall not be deductible or reimbursable the following month; (b)
any VAT reassessment shall be paid by the INDEMNIFYING PARTY and, if the amount
of such reassessment can be collected from a third parties or otherwise
reimbursed, shall be refunded by the INDEMNIFIED PARTY (c) any tax reassessment
which represent a mere rescheduling of the amount due (such as reversal of
provision or capitalization of overhead or administrative costs) shall not be
included in the Loss, provided that said tax reassessment gives rise to an
equivalent tax cut for the following fiscal year or years. Any amounts due by
the Indemnifying Party to the Indemnified Party shall be paid in the first
instance by the former to the latter under this AGREEMENT and should such
amounts be covered under an insurance policy or any other
AGENCY.COM Frederic PIE Carine BARBELIVIEN
/s/ ST /s/ FP /s/ CB
Francis MELEARD IN-COM GALILEO
/s/ MF /s/ [Illegible] /s/ [Illegible]
[LOGO] PICTORIS ACQUISITION AGREEMENT
<PAGE>
guarantee granted by a third party, the INDEMNIFIED PARTY shall, after having
actually received such amounts, reimburse the INDEMNIFYING PARTY. In all cases
in which the INDEMNIFYING PARTY makes a prior payment to the INDEMNIFIED PARTY
which is to be later reimbursed, the rights of the latter shall enure to the
former under the principle of subrogation (paiement subrogatoire). In addition,
any and all amounts due by the INDEMNIFYING PARTY to the INDEMNIFIED PARTY under
this AGREEMENT shall be set off against any and all amounts resulting out of any
decrease in the liabilities or any increase in the assets of the COMPANY as
shown in the accounts of the COMPANY at the time of the CLAIMS NOTICE.
Section 9.5 Indemnification Procedures.
9.5.1 Notice of Asserted Liability. The INDEMNIFIED PARTY shall
promptly and within 45 (forty five) days, give a CLAIMS NOTICE which shall
describe the ASSERTED LIABILITY in reasonable detail and indicate the amount
(estimated, if necessary, and to the extent feasible) of the LOSSES that have
been or may be suffered by said INDEMNIFIED PARTY.
9.5.2 Defense of Asserted Liability. The INDEMNIFYING PARTY may elect to
compromise, settle or defend, at its own expense and through its own counsel
(said counsel to be reasonably satisfactory to the INDEMNIFIED PARTY), any
ASSERTED LIABILITY. If the INDEMNIFYING PARTY elects to compromise, settle or
defend such ASSERTED LIABILITY it shall within 30 days (thirty days) from the
CLAIMS NOTICE (or sooner, if the nature of the ASSERTED LIABILITY so requires),
notify the INDEMNIFIED PARTY in writing of its intent to do so and the
INDEMNIFIED PARTY shall cooperate, at the request and expense of the
INDEMNIFYING PARTY (the disbursement shall be made in advance by the INDEMNIFIED
PARTY to be later reimbursed, a posteriori, by the INDEMNIFYING PARTY if calling
the warranty was justified and to the extent that such disbursment does not
exceed reasonable fees), in the settlement or compromise of, or defense against,
such ASSERTED LIABILITY. If the INDEMNIFYING PARTY elects not to compromise,
settle or defend the ASSERTED LIABILITY, or fails to notify the INDEMNIFIED
PARTY of its election as herein provided, the INDEMNIFIED PARTY may pay,
compromise, settle or defend said ASSERTED LIABILITY at the expense of the
INDEMNIFYING PARTY (the disbursment shall be made in advance by the INDEMNIFIED
PARTY to be later reimbursed, a posteriori, by the INDEMNIFYING PARTY if calling
the warranty was justified and to the extent that such disbursement does nor
exceed reasonable fees) and the INDEMNIFYING PARTY shall be bound by the results
obtained by the INDEMNIFIED PARTY with respect to said ASSERTED LIABILITY.
Notwithstanding the foregoing, the INDEMNIFYING PARTY may not settle or
compromise any ASSERTED LIABILITY without the prior written consent of the
INDEMNIFIED PARTY, if such settlement or compromise does not include an
unconditional release from all liability without future obligation or
prohibition on the part of the INDEMNIFIED PARTY. If an INDEMNIFIED PARTY
objects to a bona fide settlement offer which provides solely for a monetary
payment and includes an unconditional release from all liability without future
obligation or prohibition on the part of the INDEMNIFIED PARTY, which the
INDEMNIFYING PARTY
AGENCY.COM Frederic PIE Carine BARBELIVIEN
/s/ ST /s/ FP /s/ CB
Francis MELEARD IN-COM GALILEO
/s/ MF /s/ [Illegible] /s/ [Illegible]
[LOGO] PICTORIS ACQUISITION AGREEMENT
<PAGE>
wishes to accept, the INDEMNIFIED PARTY may continue to pursue the matter, free
of any participation by the INDEMNIFYING PARTY, at the expense of the
INDEMNIFIED PARTY. Were this to occur, the obligation of the INDEMNIFYING PARTY
would be limited to the amount of the settlement offer which the INDEMNIFIED
PARTY refused to accept plus the costs and expenses of the INDEMNIFIED PARTY
incurred prior to the date on which the INDEMNIFYING PARTY notified the
INDEMNIFIED PARTY of the settlement offer. Whatever the case may be, the
INDEMNIFIED PARTY shall have the right to employ its own counsel with respect to
an ASSERTED LIABILITY--the fees and expenses of said counsel shall be borne by
the INDEMNIFIED PARTY unless the employment of such counsel has been authorized
in writing by the INDEMNIFYING PARTY in connection with the defense of such
action--and the INDEMNIFYING PARTY shall not have the right to effect the
defense of such action on behalf of the INDEMNIFIED PARTY. If the INDEMNIFYING
PARTY chooses to defend any ASSERTED LIABILITY, the INDEMNIFIED PARTY shall make
available to the INDEMNIFYING PARTY any books, records or other documents within
its control that are necessary or appropriate for such defense. The parties
hereto agree to cooperate fully with one another in the defense, compromise or
settlement of any ASSERTED LIABILITY. The disbursment shall be made in advance
by the INDEMNIFIED PARTY to be later reimbursed, a posteriori, by the
INDEMNIFYING PARTY if calling the warranty was justified.
Section 9.6 Limitations on Indemnification.
9.6.1 Termination of the SELLERS' Indemnification Obligations. The
obligation of the SELLERS to indemnify under ARTICLE II hereof shall terminate
on October 15, 2002 except for matters regarding which the PURCHASER has made a
claim for indemnification or given a CLAIMS NOTICE on or prior to this date, in
which case the right to indemnification with respect thereto shall survive until
the related claim for indemnification has been finally resolved and all
obligations with respect thereto are fully satisfied.
9.6.2 Termination of the PURCHASER'S Indemnification Obligations.
The obligation of the PURCHASER to indemnify under Section 4.1 hereof shall
terminate on October 15, 2001 except for matters regarding which any SELLER has
made a claim for indemnification or given a CLAIMS NOTICE on or prior to this
date, in which case the right to indemnification with respect thereto shall
survive until the related claim for indemnification has been finally resolved
and all obligations with respect thereto are fully satisfied.
Section 9.7 Treatment. Indemnity payments by an INDEMNIFYING PARTY
to an INDEMNIFIED PARTY under this Article IX shall be treated by the parties as
an adjustment to the PURCHASE PRICE.
Section 9.8 Survival. The representations made by the SELLERS in
this AGREEMENT reflect the situation of the COMPANY at the time of the CLOSING
and shall continue to do so until the time of the
AGENCY.COM Frederic PIE Carine BARBELIVIEN
/s/ ST /s/ FP /s/ CB
Francis MELEARD IN-COM GALILEO
/s/ MF /s/ [Illegible] /s/ [Illegible]
[LOGO] PICTORIS ACQUISITION AGREEMENT
<PAGE>
BALANCE SHARES EXERCISE NOTICE, subject to the provisions hereafter. The
warranties, covenants and agreements of the SELLERS and the PURCHASER contained
in this AGREEMENT shall survive the BALANCE SHARES EXERCISE NOTICE subject to
the provisions of Sections 9.6.1 and 9.6.2. Nevertheless, no event occuring
after the CLOSING DATE in the ordinary course of business or with the approval
of the PURCHASER or contained within a representation which expressly reflects
the situation of the COMPANY at the CLOSING DATE, may be used as a ground for
the enforcement of the indemnification obligations of the parties. If, before
the EXERCISE of the BALANCE SHARES CALL RIGHT an event occurs which might cause
the warranty to become enforceable, the latter may send a NOTICE to the
PURCHASER on this matter. The PURCHASER shall not invoke the warranty for any
event of which he had received notice before the EXERCISE of the BALANCE SHARES
CALL RIGHT. If the event notified to the PURCHASER does not have a MATERIAL
ADVERSE EFFECT, the PURCHASER shall not invoke the warranty for said event, even
if the BALANCE SHARES PUT RIGHT has been exercised.
AGENCY.COM Frederic PIE Carine BARBELIVIEN
/s/ ST /s/ FP /s/ CB
Francis MELEARD IN-COM GALILEO
/s/ MF /s/ [Illegible] /s/ [Illegible]
[LOGO] PICTORIS ACQUISITION AGREEMENT
<PAGE>
PART VI
MISCELLANOUS
AGENCY.COM Frederic PIE Carine BARBELIVIEN
/s/ ST /s/ FP /s/ CB
Francis MELEARD IN-COM GALILEO
/s/ MF /s/ [Illegible] /s/ [Illegible]
[LOGO] PICTORIS ACQUISITION AGREEMENT
<PAGE>
ARTICLE X
MISCELLANEOUS
Section 10.1 Expenses. The parties hereto shall pay all of their own expenses
relating to the transactions contemplated by this AGREEMENT, including, but not
limited to, the fees and expenses of their respective legal counsel and
financial advisers.
Section 10.2 Publication. Subject to the provisions of the next sentence, no
party to this AGREEMENT will, and the SELLERS shall insure that no
representative of the COMPANY shall, issue any press release or other public
document or make any public statement or give any information to any third party
relating to this AGREEMENT or the matters contained herein without obtaining the
prior approval of the PURCHASER, the COMPANY and the SELLERS. Notwithstanding
the above-mentioned, the foregoing provision shall not apply to the extent that
the PURCHASER is required to make any announcement relating to or arising out of
this AGREEMENT by virtue of the federal securities laws of the United States of
America or the rules and regulations promulgated thereunder or other rules of
the National Association of Securities Dealers or other stock exchanges on which
the securities of the PURCHASER may then be traded, or any announcement by any
party or the COMPANY pursuant to applicable law or regulations.
Section 10.3 Confidentiality. The parties agree that they will not, at any time,
disclose to any PERSON whomsoever any CONFIDENTIAL INFORMATION, or utilize such
CONFIDENTIAL INFORMATION for their own benefit (except as absolutely necessary
in order to fully enjoy the rights bestowed upon them by this AGREEMENT), nor
for the benefit of third parties (except the PURCHASER'S AFFILIATES). In the
event that a parry becomes legally required to disclose any CONFIDENTIAL
INFORMATION, it shall provide the other parties with prompt notice thereof so
that they may seek a protective order or other appropriate remedy, or waive
compliance with the provisions of this Section to permit a particular
disclosure. In the event that such protective order or other remedy is not
obtained, or that compliance with the provisions of this Section is waived to
permit a particular disclosure, the disclosing party will furnish only that
portion of the CONFIDENTIAL INFORMATION which it is legally required to disclose
and, at the other party's expense, will cooperate with the efforts of that other
party to obtain a protective order or other reliable assurance that confidential
treatment will be accorded to the CONFIDENTIAL INFORMATION. Notwithstanding the
foregoing, the parties agree to take all necessary and appropriate measures to
ensure that third parties (except the PURCHASER'S AFFILIATES) are barred access
to the CONFIDENTIAL INFORMATION; in particular, they shall make certain that
said CONFIDENTIAL INFORMATION be accessible exclusively to their directors and
officers, employees, or legal counsel or financial advisors who are (i) directly
involved in the business relations between the parties and (ii) are bound to
secrecy in
AGENCY.COM Frederic PIE Carine BARBELIVIEN
/s/ ST /s/ FP /s/ CB
Francis MELEARD IN-COM GALILEO
/s/ MF /s/ [Illegible] /s/ [Illegible]
[LOGO] PICTORIS ACQUISITION AGREEMENT
<PAGE>
accordance with all of the legal or contractual provisions, to which they are
subject, and this even in the event that they cease to be in the employment of
their company.
Section 10.4 Notices. Unless otherwise provided herein, any notice, request,
instruction or other document to be given hereunder by any party to any other
party shall be in writing and shall be deemed to have been given (a) upon
personal delivery, if delivered by hand, (b) five days after the date of deposit
in the mail, postage prepaid, if mailed by certified or registered mail, or (c)
the next business day (i) if sent by facsimile transmission with electronic
confirmation of receipt -- provided that a reconfirmation is then sent in
writing by a prepaid overnight courier -- or (ii) by a prepaid overnight courier
service, and in each case at the respective addresses or numbers set forth below
or in the preamble or any other address or number as declared and notified by
the party:
If to the PURCHASER, at the following addresses:
AGENCY.COM LTD.
665 Broadway
New York, NEW YORK 10012
Attention: Chief Financial Officer
Fax: (212) 358-8256
with a copy to:
Janet Ambrosi Wertman
AGENCY.COM LTD.
1111 Chautauqua Boulevard
Pacific Palisades, CALIFORNIA 90272
Fax: (310) 230-6936
Section 10.5 Restrictions to Transfer. This AGREEMENT may not be transferred,
assigned, pledged or hypothecated by any of the SELLERS, other than by operation
of law. The PURCHASER shall have the right to assign its rights and/or
obligations pursuant to this AGREEMENT to a wholly owned subsidiary, provided
that the SELLER'S prerogative set forth in Section 4.1 of this AGREEMENT is
unaffected by said transfer, provided that the PURCHASER remains jointly bound
by the terms of this AGREEMENT and provided that such subsidiary shall be deemed
to be included within the defined term "PURCHASER" for the purpose of this
AGREEMENT. This AGREEMENT shall be binding upon and shall inure to the benefit
of the parties hereto and their respective heirs, executors, administrators,
successors and assigns.
Section 10.6 No Waiver. No waiver of any breach or default under this AGREEMENT
shall be considered valid unless in writing, and no such waiver shall be deemed
a waiver of any subsequent breach or default of the same or similar nature.
AGENCY.COM Frederic PIE Carine BARBELIVIEN
/s/ ST /s/ FP /s/ CB
Francis MELEARD IN-COM GALILEO
/s/ MF /s/ [Illegible] /s/ [Illegible]
[LOGO] PICTORIS ACQUISITION AGREEMENT
<PAGE>
Section 10.7 Cooperation. Each party to this AGREEMENT shall cooperate and take
such further action and shall execute and deliver such further documents as may
be reasonably requested by any other party in order to carry out the provisions
of this AGREEMENT.
Section 10.8 Severability. In the event that any provision of this AGREEMENT is
found to be void or unenforceable by an arbitrator or a court of competent
jurisdiction, the remaining provisions of this AGREEMENT shall nevertheless be
binding upon the parties with the same effect as if the void or unenforceable
part had been severed and deleted. Were any provision of this AGREEMENT to be
void or unenforceable, the parties agree to make all necessary and bona fide
efforts to replace it with a valid provision having an equivalent economic
result. However, in the event that the parties are unable to reach an agreement
on a replacement provision and provided that the void or unenforceable provision
is an essential one, the defendant in the initial action for rescission may
request that the AGREEMENT in its entirety be declared null and void.
Section 10.9 Indivisibility of the Entire agreement. The NON CORPORATE SELLERS
and the PURCHASER have concluded a separate Warranty Agreement; both this
AGREEMENT and the Warranty Agreement, including all documents and Schedules
referred to in either, contain the entire understanding of the NON CORPORATE
SELLERS and the PURCHASER with respect to the subject matter contained herein
and therein and this AGREEMENT, including all documents and Schedules referred
to in it, contain the entire understanding of the CORPORATE SELLERS and the
PURCHASER with respect to the subject matter contained herein. This AGREEMENT
and the Warranty Agreement supersede all prior agreements and understandings
between the parties with respect to such subject matter. This AGREEMENT and the
Warranty Agreement are indivisible; should one of them become void or
unenforceable, the other shall be deemed null and void. Notwithstanding, if the
request for rescision or premature termination of the Warranty Agreement is made
by the PURCHASER, then the PURCHASER shall not invoke the indivisible nature of
the AGREEMENTS. In all other cases, the rescission or premature termination of
the Warranty Agreement will automatically cause the termination of this
AGREEMENT, except between the PURCHASER and the CORPORATE SELLERS, whereby the
rescission or premature termination of the Warranty Agreement will not cause the
termination of this AGREEMENT.
Section 10.10 Amendments. This AGREEMENT may not be amended, supplemented or
modified orally, but only by an agreement in writing, signed by the PURCHASER
and the SELLERS.
Section 10.11 Captions. The Article, Section and Subsection captions used herein
are for reference purposes only, and shall not in any way affect the meaning or
interpretation of this AGREEMENT.
AGENCY.COM Frederic PIE Carine BARBELIVIEN
/s/ ST /s/ FP /s/ CB
Francis MELEARD IN-COM GALILEO
/s/ MF /s/ [Illegible] /s/ [Illegible]
[LOGO] PICTORIS ACQUISITION AGREEMENT
<PAGE>
Section 10.12 Governing Law. The interpretation and construction of this
AGREEMENT and all matters relating thereto, shall be governed by the laws of
France, without reference to its conflict of laws provisions.
Section 10.13 Arbitration. Any controversy or claim arising out of or relating
to this AGREEMENT, or any breach thereof, shall be settled by arbitration.
Notwithstanding, no party to this AGREEMENT shall be precluded from applying to
a proper court for injunctive relief by reason of the prior or subsequent
commencement of an arbitration proceeding as herein provided. The sole
arbitrator shall be nominated by mutual consent of the parties to the
arbitration. In the event that this arbitrator has not been nominated within a
month following notice, by any one party to the other party or parties against
whom the claim is being lodged, of its intention to commence arbitration
proceedings, the arbitrator shall be appointed by the Chief Justice of the
Higher Court of Paris (president du tribunal de grande instance de Paris) upon
request of the most expeditious party; the arbitrator so appointed shall be a
Professor of French Law, independent from the parties, both English and French
speaking, and have already served as an arbitrator on a prior occasion. The
determination of the arbitrator shall be final and binding upon the parties to
the arbitration without the right of appeal. The arbitration shall be held in
Paris, France, according to the rules of procedure applicable to actions brought
before the Commercial Courts (tribunaux de commerce). The applicable law for the
merits of the dispute shall be French law. The fees and expenses of the
arbitrator shall be advanced, if need be, by the parties, on a prorata basis on
3/4 for the claimant or claimants and 1/4 for the defendant or defendants, and
definitively paid and/or reimbursed by the non-prevailing party or parties. The
duration of the arbitration proceedings including the rendering of the award
shall not exceed 8 months (eight months). The award shall be final and binding
upon the parties to the arbitration without the right of appeal.
In witness whereof, the parties hereto have executed this AGREEMENT, in
seven counterparts, on the day and year first above written.
AGENCY.COM
By: Johnathan P. Taun /s/ Johnathan P. Taun
Frederic PIE Carine BARBELIVIEN Francis MELEARD
/s/ FP /s/ Barbelivien /s/ FM
IN-COM
By: /s/ [Illegible]
GALILEO
By: /s/ [Illegible]
[LOGO] PICTORIS ACQUISITION AGREEMENT
<PAGE>
Exhibit F
(Pictoris Acquisition)
INVESTMENT REPRESENTATION CERTIFICATE
Pursuant to an Acquisition Agreement of even date herewith (the
"Acquisition Agreement") entered into by and among AGENCY.COM Ltd., a Delaware
corporation ("Purchaser") and the shareholders of Pictoris Interactive S.A.
("the Company"), Purchaser has purchased 5% of the outstanding shares of the
Company. In addition, Purchaser has acquired the right to purchase the remaining
shares of the Company, and the Sellers have acquired the right, exercisable
under certain circumstances, to require the Purchaser to purchase the remaining
shares of the Company. In the event that either of these two rights is
exercised, the Purchaser will issue shares of its common stock ("Purchaser
Shares") to the Sellers as set forth in the Acquisition Agreement. Unless
otherwise indicated, capitalized terms not defined herein have the meanings set
forth in the Acquisition Agreement.
The undersigned ("Seller") understands that the execution of this
Certificate is a condition precedent to Purchaser's obligation to enter into the
Acquisition Agreement.
Seller hereby represents and warrants as follows:
1. Investment Representations.
(a) The Purchaser Shares which may be issued to Seller pursuant to
the Acquisition Agreement will be acquired for investment for Seller's own
account, not as a nominee or agent, and not with a view to the sale or
distribution of any part thereof, and Seller has no present intention of
selling, granting any participation in, or otherwise distributing such Purchaser
Shares. By executing this Investment Representation Certificate, Seller further
represents that it has no present contract, undertaking, agreement or
arrangement with anyone to sell, transfer or grant participations with respect
to any of the Purchaser Shares.
(b) Seller understands and acknowledges that the issuance of the
Purchaser Shares pursuant to the Acquisition Agreement is being effected on the
basis that the issuance of such securities is exempt from registration pursuant
to Section 4(2) of the Securities Act of 1933, as amended (the "1933 Act") and
that Purchaser's reliance upon such exemption is predicated upon Seller's
representations. (Notwithstanding the foregoing, it is understood and agreed
that Seller may also rely upon an alternative exemption from registration, such
as that provided pursuant to Regulation 5, without notice to the Seller).
(c) Seller further represents that he/she/it: (i) is not a U.S.
person (as such term is defined in Regulation S), and is not acquiring the
Purchaser Shares for the account or benefit of any U.S. person, (ii) has such
knowledge and experience in financial and business
<PAGE>
matters as to be capable of evaluating the merits and risks of its prospective
investment in the Purchaser Shares; (iii) has received all the information
he/she/it has requested from Purchaser that he/she/it considers necessary or
appropriate for deciding whether to accept the Purchaser Shares; (iv) has the
ability to bear the economic risks of his/her/its prospective investment; (v) is
able, without materially impairing its financial condition, to hold the
Purchaser Shares for an indefinite period of time and to suffer complete loss on
his/her/its investment.
(d) Each certificate representing Purchaser Shares issued pursuant
hereto to Seller and any shares issued or issuable in respect of any such
Purchaser Shares upon any stock split, stock dividend, recapitalization, or
similar event, shall be stamped or otherwise imprinted with legends in the
following form (in addition to any legend required under applicable state
securities laws):
THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED FOR
INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE UNITED STATES
SECURITIES ACT OF 1933, AS AMENDED. THESE SHARES MAY NOT BE OFFERED,
SOLD, PLEDGED OR OTHERWISE TRANSFERRED EXCEPT PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT, IN ACCORDANCE WITH REGULATION S OR
PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT.
(e) The certificates evidencing the Purchaser Shares shall also bear
any legend required pursuant to any state, local or foreign law governing such
securities.
(f) Seller understands and acknowledges that the Purchaser Shares
have not been registered under the 1933 Act and that the Purchaser Shares may
not be offered, sold, pledged or otherwise transferred except pursuant to an
effective registration statement, in accordance with Regulation S or pursuant to
an exemption from registration under the 1933 Act, and the Seller may not engage
in hedging transactions with regard to the Purchaser Shares unless in compliance
with the 1933 Act.
(g) Seller acknowledges that the Purchaser Shares shall not be
transferable except upon the conditions specified in this Certificate. Seller
will cause any proposed transferee of the Purchaser Shares held by him/her to
agree to take and hold such Purchaser Shares subject to the provisions and upon
the conditions specified in this Certificate.
(h) Prior to any proposed transfer of any Purchaser Shares, unless
there is in effect a registration statement under the 1933 Act covering the
proposed transfer, Seller shall give written notice to Purchaser of his/her
intention to effect such transfer. Each such notice shall describe the manner
and circumstances of the proposed transfer in sufficient detail, and shall, if
Purchaser so requests, be accompanied (except in transactions in compliance with
Rule 144 promulgated under the 1933 Act) by either (i) a written opinion of
legal counsel reasonably
2
<PAGE>
satisfactory to Purchaser, addressed to Purchaser at its then headquarters
office, to the effect that the proposed transfer of Purchaser Shares may be
effected without registration under the 1933 Act; or (ii) a "No Action" letter
from the Securities and Exchange Commission (the "Commission") to the effect
that the transfer of such securities without registration will not result in a
recommendation by the staff of the Commission that action be taken with respect
thereto, whereupon the holder of such Purchaser Shares shall be entitled to
transfer such Purchaser Shares in accordance with the terms of the notice
delivered by the holder to Purchaser. Each certificate evidencing the Purchaser
Shares transferred as above provided shall bear the appropriate restrictive
legend set forth in clause (d) above, except that such certificate shall not
bear such restrictive legend if in the opinion of counsel for Purchaser such
legend is not required in order to establish compliance with any provisions of
the 1933 Act, which opinion will not be unreasonably withheld.
2. Parties in Interest.
This Certificate shall inure to the benefit of, and be binding upon,
the parties hereto and their respective successors and assigns.
3. Governing Law.
This Certificate shall be construed in accordance with the laws of
the State of New York, without application of conflict of laws provisions
applicable therein.
3
<PAGE>
IN WITNESS WHEREOF, Seller has executed this Certificate as of the
day and year first above written.
________________________________________
[Name]
Agreed to and Accepted:
AGENCY.COM LTD.
By: /s/ Jonathan P. Tann
--------------------------------
Name: Jonathan P. Tann
Title: VP Corporate Development
4
<PAGE>
Exhibit 10.22
- --------------------------------------------------------------------------------
STOCK EXCHANGE AGREEMENT
by and between
AGENCY.COM LTD.
and
VISIONIK HOLDING ApS
ASSOCIATED MANAGEMENT SERVICES A/S
(Shareholders of Visionik A/S)
and
J0RGEN LEMBKE
S0REN HOUGAARD-HANSEN
- --------------------------------------------------------------------------------
Dated November 3, 1999
<PAGE>
STOCK EXCHANGE AGREEMENT
STOCK EXCHANGE AGREEMENT (the "Agreement") dated November 3, 1999 by and
between AGENCY.COM LTD., a corporation organized under the laws of the State of
Delaware (the "Purchaser"); VISIONIK HOLDING ApS, a corporation organized under
the laws of Denmark ("VH") and its sole shareholder J0RGEN LEMBKE ("Lembke"),
ASSOCIATED MANAGEMENT SERVICES A/S, a corporation organized under the laws of
Denmark ("AMS") and S0REN HOUGAARD-HANSEN ("Hougaard") who is a shareholder of
AMS. VH, Lembke, AMS and Hougaard are hereinafter collectively referred to as
the "Stockholders" and each as a "Stockholder").
W I T N E S S E T H :
WHEREAS, the Stockholders are the owners of all of the outstanding shares
(the "Shares") of VISIONIK A/S, a corporation organized under the laws of
Denmark (the "Company");
WHEREAS, the Stockholders desires to sell, and the Purchaser desires to
purchase 100% of the Shares, pursuant to the provisions of this Agreement;
NOW, THEREFORE, in consideration of the mutual covenants and agreements
set forth in this Agreement, and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties do hereby
agree as follows:
ARTICLE Error! Unknown switch argument.
SALE OF STOCK
Section Error! Unknown switch argument..Error! Unknown switch argument.
Sale of the Shares. Subject to the terms and conditions herein stated, each of
VH and AMS agrees to sell, assign, transfer and deliver to the Purchaser on the
Closing Date (as defined in Section 2.2), and the Purchaser agrees to purchase
from such Stockholder on the Closing Date, the number of Shares set forth
opposite such Stockholder's name on Exhibit A hereto. Share certificates have
not been issued by Visionik A/S, and therefore the transfer of all shares from
the Stockholders to the Purchaser shall be notified to Visionik A /S in the form
set out on Exhibit A-1 hereto, which shall be accepted by Visionik A/S at
closing.
ARTICLE Error! Unknown switch argument.
PURCHASE PRICE AND CLOSING
Section Error! Unknown switch argument..Error! Unknown switch argument.
Purchase Price. In full consideration for the purchase by the Purchaser of
the Shares,
1
<PAGE>
the purchase price (the "Purchase Price") shall be paid by the Purchaser to VH
and AMS as follows, in each case allocated between VH and AMS as set forth on
Exhibit A hereto:
Error! Unknown switch argument..Error! Unknown switch argument..Error!
Unknown switch argument. Closing Payment. At closing, certificates, registered
in the name of the respective Stockholders representing an aggregate of 572,000
shares of Purchaser's Common Stock, par value $0.001 per share (the "Purchaser
Stock") will be delivered by the Purchaser to VH and AMS.
Section Error! Unknown switch argument..2 Closing. The Closing under this
Agreement (the "Closing") is taking place simultaneously with the execution and
delivery of this Agreement, at the offices of Plesner & Gronborg, 34 Esplanaden,
1263 Copenhagen K, DENMARK. Such date is herein referred to as the "Closing
Date".
ARTICLE Error! Unknown switch argument.
REPRESENTATIONS OF THE STOCKHOLDERS
The Stockholders, jointly and severally, hereby represent, warrant and
agree to and with the Purchaser as follows:
Section Error! Unknown switch argument..Error! Unknown switch argument.
Execution and Validity of Agreements; Restrictive Documents.
Error! Unknown switch argument..Error! Unknown switch argument..Error!
Unknown switch argument. Execution and Validity. Each Stockholder has the full
power and capacity, or the full corporate power and authority, as the case may
be, to enter into this Agreement and to perform its obligations hereunder. The
execution and delivery of this Agreement and the performance of the transactions
contemplated hereby have been duly authorized by all required corporate action
on the part of the corporate Stockholders. This Agreement has been duly and
validly executed and delivered by each Stockholder and, assuming due
authorization, execution and delivery by the Purchaser, constitutes a legal,
valid and binding obligation of each of the Stockholders, enforceable against
each of them in accordance with its terms.
Error! Unknown switch argument..Error! Unknown switch argument..Error!
Unknown switch argument. Stock Ownership. VH and AMS are the true and lawful
owner of all of the Shares and all of such Shares have been duly and validly
authorized and issued and are fully paid, nonassessable and free of preemptive
rights, with no personal liability attaching to the ownership thereof, and such
ownership is free and clear of all mortgages, liens, security interests,
encumbrances, claims, charges and restrictions of any kind or character
(collectively, "Liens").
Error! Unknown switch argument..Error! Unknown switch argument..Error!
2
<PAGE>
Unknown switch argument. No Options. Except as set forth on Schedule 3.1.3
hereto, there are no outstanding subscriptions, options, rights, warrants,
calls, commitments or arrangements of any kind to acquire any Shares owned by
the Stockholders and there are no agreements or understandings with respect to
the sale or transfer of such Shares.
Error! Unknown switch argument..Error! Unknown switch argument..Error!
Unknown switch argument. No Restrictions. There is no suit, action, claim,
investigation or inquiry by any administrative agency or governmental body, and
no legal, administrative or arbitration proceeding pending or, to the knowledge
of the Stockholders, threatened against the Stockholders or any of the Shares,
with respect to the execution, delivery and performance of this Agreement or the
transactions contemplated hereby or any other agreement entered into by the
Stockholders in connection with the transactions contemplated hereby.
Error! Unknown switch argument..Error! Unknown switch argument..Error!
Unknown switch argument. Non-Contravention. The execution, delivery and
performance by the Stockholders of their respective obligations hereunder and
the consummation of the transactions contemplated hereby, will not (a) result in
the violation by any Stockholder of any statute, law, rule, regulation or
ordinance (collectively, "Laws"), or any judgment, decree, order, writ, permit
or license (collectively, "Orders"), of any court, tribunal, arbitrator,
authority, agency, commission, official or other instrumentality of the United
States or Denmark, any foreign country or any domestic or foreign state, county,
city or other political subdivision (a "Governmental or Regulatory Authority"),
applicable to the Stockholders or any of the Shares, or (b) if the consents and
notices set forth in Schedule 3.1.6 are obtained or given, conflict with, result
in a violation or breach of, constitute (with or without notice or lapse of time
or both) a default under, or (except as set forth in Schedule 3.1.6) require the
Stockholders to obtain any consent, approval or action of, make any filing with
or give any notice to, or result in or give to any Person any right of payment
or reimbursement, termination, cancellation, modification or acceleration of, or
result in the creation or imposition of any lien upon any of the Shares, under
any of the terms, conditions or provisions of any note, bond, mortgage, security
agreement, indenture, license, franchise, permit, concession, contract, lease or
other instrument, obligation or agreement of any kind (collectively,
"Instruments") to which any Stockholder is a party or by which any Stockholder
or any of the Shares is bound.
Error! Unknown switch argument..Error! Unknown switch argument..Error!
Unknown switch argument. Approvals and Consents. Except as disclosed on Schedule
3.1.6, no consent, approval or action of, filing with or notice to any
Governmental or Regulatory Authority or other public or private third party is
necessary or required under any of the terms, conditions or provisions of any
Law or Order of any Governmental or Regulatory Authority or any Instrument to
which any Stockholder is a party or by which any of the Shares is bound for the
execution and delivery of this Agreement by the Stockholders, the performance by
the Stockholders of their obligations hereunder or the consummation of the
transactions contemplated hereby.
3
<PAGE>
Section Error! Unknown switch argument..Error! Unknown switch argument.
Existence and Good Standing. The Company is duly organized, validly
existing and in good standing under the laws of Denmark, with the full corporate
power and authority to own its property and to carry on its business all as and
in the places where such properties are now owned or operated or such business
is now being conducted. The Company is duly qualified, licensed or admitted to
do business and is in good standing in those jurisdictions set forth on Schedule
3.2, which are the only jurisdictions in which the ownership, use or leasing of
its assets and properties, or the conduct or nature of its business, makes such
qualification, licensing or admission necessary, except for those jurisdictions
in which a failure by the Company to be qualified, licensed or admitted and in
good standing can in the aggregate be corrected without material cost or expense
by the Company.
Section Error! Unknown switch argument..Error! Unknown switch argument.
Subsidiaries and Investments; Capital Stock.
Error! Unknown switch argument..Error! Unknown switch argument..Error!
Unknown switch argument. Subsidiaries and Investments. The term "Subsidiary" as
used in this Agreement in the case of the Company, shall mean any Person in
which the Company, directly or indirectly through subsidiaries or otherwise,
beneficially owns or controls fifty percent or more of either the equity
interests in, or the voting control of, such Person. Schedule 3.3 contains a
true and complete list of all of the Company's Subsidiaries. Except as set forth
in Schedule 3.3, neither the Company nor any Subsidiary owns any capital stock
or other equity or ownership or proprietary interest in any Person (other than
investments of publicly traded debt and equity securities held for investment).
Schedule 3.3 also sets forth the name, jurisdiction of organization and number
of outstanding shares of each of the Subsidiaries, and a list of all of the
shareholders of each Subsidiary (indicating the number of shares owned by each
such shareholder). The Company owns of record and beneficially and has valid
title to that percentage of the issued and outstanding shares of capital stock
of each Subsidiary as set forth on Schedule 3.3, free and clear of any Liens.
Each Subsidiary is a corporation and is duly incorporated or formed and
organized, validly existing and in good corporate and tax standing under the
laws of its jurisdiction of organization, with the full corporate power and
authority to own its properties and to carry on its business all as and in the
places where such properties are now owned or operated or such business is now
being conducted. Schedule 3.3 sets forth the jurisdictions in which each
Subsidiary is duly qualified, licensed or admitted to do business, which are the
only jurisdictions in which the ownership, use or leasing of its assets or
properties, or the conduct or nature of its business, makes such qualification,
licensing or admission necessary. Each Subsidiary is in good standing in each
state, or other jurisdiction, in which it is qualified to do business as a
foreign corporation or foreign branch as set forth on Schedule 3.3. Except as
set forth on Schedule 3.3, neither the Company nor any Subsidiary has a branch,
agency, place of business or permanent establishment outside of Denmark. All of
the outstanding shares of capital stock of or equity interest in each Subsidiary
have been duly authorized and validly issued and are fully paid and
non-assessable, and have not been issued in violation of any preemptive rights
of shareholders or other equity interest holders. Except as set forth on
Schedule 3.3.1, there are no (a) outstanding Options obligating the Company or
any
4
<PAGE>
Subsidiary to purchase, issue or sell any shares of the capital stock of any
Subsidiary or other entity in which the Company or one of its Subsidiaries owns
an equity interest or outstanding agreement or commitment to grant, extend or
enter into any Option with respect thereto or (b) voting trusts, proxies or
other commitments, understandings, restrictions or arrangements in favor of any
Person other than the Company or a Subsidiary with respect to the voting of or
the right to participate in dividends or other earnings on any capital stock of,
or any other equity interest in, any Subsidiary.
Error! Unknown switch argument..Error! Unknown switch argument..Error!
Unknown switch argument. Capital Stock. The Company has an authorized capital of
500,000 Danish kroner consisting of 500 shares in the amount of 1,000 Danish
kroner or multiples hereof, of which all shares (the "Shares") have been issued
and are outstanding and owned by the Stockholders. All of the Shares which are
issued and outstanding have been validly issued and have not been issued in
violation of any preemptive rights of stockholders. All issued and outstanding
Ordinary Shares are fully paid up and no other class of capital stock of the
Company is authorized or outstanding. Except as set forth on Schedule 3.3.1,
there are no outstanding options, warrants, rights, calls, commitments,
conversion rights, rights of exchange, plans or other agreements of any
character (collectively "Options") providing for the purchase, issuance or sale
of any shares of the capital stock of the Company or the Subsidiaries. All
repurchases or redemptions of shares of capital stock of the Company or the
Subsidiaries were properly completed in compliance with all applicable
regulations and corporate requirements; and no further monies or other
obligations will be due by the Company, the Subsidiaries or the Stockholders in
respect thereof.
Section Error! Unknown switch argument..Error! Unknown switch argument.
Financial Statement and No Material Changes. Schedule 3.4 sets forth (a)
audited balance sheets of the Company and its Subsidiaries as at December 31,
1997 and December 31, 1998 and the related consolidated and consolidating
audited statements of income, retained earnings and cash flow for the calendar
year then ended according to GAAP, as reported on by Moore Stephens Danmark,
certified public accountants, and (b) a reviewed balance sheet of the Company
and its Subsidiaries as at September 30, 1999 (the "Balance Sheet") and the
related unaudited consolidated and consolidating statements of income, retained
earnings and cash flow for the 9 months then ended, according to GAAP, and (c)
audited balance sheets of the Company and its subsidiaries as at June 30, 1999
and the related consolidated and consolidating audited statements of income,
retained earnings and cash flow for the fiscal year then ended, as reported on
by Moore Stephens Danmark, certified public accountants, in accordance with
generally accepted accounting principles consistently applied and as applied in
Denmark ("Danish GAAP") throughout the periods indicated. The Balance Sheet
fairly presents the financial condition of the Company and its Subsidiaries at
the date thereof and fairly presents all claims against and all debts and
liabilities of the Company and its Subsidiaries, fixed or contingent, as at the
date thereof, required to be shown thereon under GAAP, and the related
statements of income, retained earnings and cash flow accurately present the
results of operations of the Company and its Subsidiaries, retained earnings and
the cash flow for the period indicated. Except as set forth on Schedule 3.23,
since September 30, 1999 (the "Balance Sheet Date"), there has been no material
adverse change in the properties,
5
<PAGE>
financial condition, business or results of operation of the Company and its
Subsidiaries taken as a whole.
Section Error! Unknown switch argument..Error! Unknown switch argument.
Books and Records. All accounts, books, ledgers and official and other records
material to the business of the Company and its Subsidiaries have been properly
and accurately kept and completed in all material respects, and there are no
material inaccuracies or discrepancies of any kind contained or reflected
therein. Except as set forth on Schedule 3.5, neither the Company nor any of its
Subsidiaries has any of its records, systems, controls, data or information
recorded, stored, maintained, operated or otherwise wholly or partly dependent
on or held by any means (including any electronic, mechanical or photographic
process, whether computerized or not) which (including all means of access
thereto and therefrom) are not under the exclusive ownership and possession of
the Company or such Subsidiary. The Stockholders have delivered to the Purchaser
complete and correct copies of the Articles of Incorporation and By-Laws of the
Company and each Subsidiary, with all amendments thereto, currently in effect,
and its minute book and stock transfer records.
Section Error! Unknown switch argument..Error! Unknown switch argument.
Tangible Personal Property; Encumbrances. Except as set forth on Schedule
3.6, the Company and each of its Subsidiaries has good and valid title to, or
enforceable leasehold interests in or valid rights under contract to use all the
properties and assets owned or used by it (real and personal, tangible and
intangible), including, without limitation (a) all the properties and assets
reflected in the Balance Sheet, and (b) all the properties and assets purchased
or otherwise contracted for by the Company and such Subsidiary since the Balance
Sheet Date (except for properties and assets reflected in the Balance Sheet or
acquired or otherwise contracted for since the Balance Sheet Date that have been
sold or otherwise disposed of in the ordinary course of business), except for
those properties and assets which, individually and in the aggregate, are not
material to the business of the Company and its Subsidiaries, in each case free
and clear of all Liens, except for Liens set forth on Schedule 3.6. The
property, plant and equipment owned or otherwise contracted for by the Company
and each of its Subsidiaries are in a state of good maintenance and repair
(ordinary wear and tear excepted) and are adequate and suitable in all material
respects for the purposes for which they are presently being used.
Section Error! Unknown switch argument..Error! Unknown switch argument.
Real Property.
Error! Unknown switch argument..Error! Unknown switch argument..Error!
Unknown switch argument. Owned Real Property. Neither the Company nor any of its
Subsidiaries owns any real property or any option or right of first refusal or
first offer to acquire real property, and neither the Company nor any of its
Subsidiaries is obligated by contract or otherwise to purchase any real
property.
Error! Unknown switch argument..Error! Unknown switch argument..Error!
Unknown switch argument. Leased Real Property. Schedule 3.7.2 contains an
6
<PAGE>
accurate and complete list of all real property leases to which the Company or
any of its Subsidiaries is a party (as lessee, lessor, sublessee or sublessor),
including, without limitation, leases which the Company has subleased or
assigned to a third party and as to which the Company remains liable. Each real
property lease set forth on Schedule 3.7.2 (or required to be set forth on
Schedule 3.7.2) (a) is valid, binding and in full force and effect; (b) all
rents and additional rents and other sums, expenses and charges due on each such
lease have been paid; (c) the lessee has been in peaceable possession since the
commencement of its original possession under such lease; (d) no waiver,
indulgence or postponement of the lessee's obligations thereunder has been
granted by or is required from the lessor; (e) there exists no default or event
of default by the Company or any of its Subsidiaries or, to the knowledge of the
Stockholders, by any other party; (f) there exists no occurrence, condition or
act (including the purchase of the Shares hereunder) which, with the giving of
notice, the lapse of time or the happening of any further event or condition,
would become a default or event of default by the Company or any of its
Subsidiaries; and (g) there are no outstanding claims of breach or
indemnification or notice of default or termination. Except as set forth on
Schedule 3.7.2, (h) the Company or its Subsidiary, as the case may be, holds the
leasehold estate in all the real property leases free and clear of all Liens,
(i) the Company or such Subsidiary is in physical possession and actual and
exclusive occupation of the whole of each of its leased properties. Except as
clearly set forth on Schedule 3.7.2, the Company or its Subsidiary(ies) utilizes
all real property leases in full compliance with law, including building
permits, fire protection legislation, planning law and workers environment
legislation. Neither the Company nor any of its Subsidiaries owes any brokerage
commission with respect to any such real property leases.
Section Error! Unknown switch argument..Error! Unknown switch argument.
Contracts. Schedule 3.8 hereto contains an accurate and complete list of
the following agreements to which the Company or any of its Subsidiaries is a
party or by or to which the Company is bound: (a) all employee benefit plans;
(b) any personal property lease with a fixed annual rental of $20,000 or more;
(c) any contract relating to capital expenditures which involve payments of
$30,000 or more in any single transaction or series of related transactions; (d)
any contract relating to the making of a loan or advance to, or investment in,
any other Person in an amount exceeding $10,000; (e) any contract evidencing or
relating in any way to indebtedness for money borrowed or to be borrowed,
whether directly or indirectly, by way of loan, purchase money obligation,
guarantee (other than the endorsement of negotiable instruments for collection
in the ordinary course of business), conditional sale, purchase or otherwise,
which in any case involves $10,000 or more; (f) any management service,
employment, consulting or any other similar type of contract which is not
cancelable by the Company or such Subsidiary without penalty or other financial
obligation within 30 days, (g) any contract limiting its freedom to engage in
any line of business or to compete with any other Person, including agreements
limiting the ability of the Company, its Subsidiaries or any of its affiliates
to take on competitive accounts during or after the term thereof; (h) any
collective bargaining or union agreement, (i) any contract with any of its
officers or directors (including indemnification agreements), provided that
provisions contained in the Company's or such Subsidiary's charter documents or
by-laws do not need to be set forth on Schedule 3.8, (j) any secrecy or
confidentiality agreement (other than standard confidentiality agreements in
7
<PAGE>
computer software license agreements or agreements with clients entered into in
the ordinary course of business), (k) any contract or license with respect to
Intellectual Property (as defined in Section 3.14 below), other than "shrink
wrap" and similar end-user licenses; (l) any agreement with a client which
generates annual revenues of $20,000 or more; and (m) any joint venture
agreement involving a sharing of profits not covered by (a) through (l) above;
and (n) any contract (not covered by another subsection of this Section 3.8)
which is material to the business of the Company or its Subsidiaries or which
involves $20,000 or more over the unexpired term thereof and is not cancelable
by the Company or such Subsidiary without penalty or other financial obligation
within 30 days. Notwithstanding the foregoing, (x) commitments to media and
production expenses which are fully reimbursable from clients, and (y) estimates
or purchase orders given in the ordinary course of business relating to the
execution of projects, do not have to be set forth on Schedule 3.8. Each
contract set forth on Schedule 3.8 (or required to be set forth on Schedule 3.8)
is in full force and effect, and there exists no default or event of default by
the Company or its Subsidiary, as the case may be, or to the knowledge of the
Stockholders, by any other party, or occurrence, condition, or act (including
the purchase and/or transfer of the Shares hereunder) which, with the giving of
notice, the lapse of time or the happening of any other event or condition,
would become a default or event of default thereunder by the Company or its
Subsidiary, as the case may be, or would be a cause for premature termination,
and there are no outstanding claims of breach or indemnification or notice of
default or termination of any such contracts.
Section Error! Unknown switch argument..Error! Unknown switch argument.
Non-Contravention; Approvals and Consents.
Error! Unknown switch argument..Error! Unknown switch argument..Error!
Unknown switch argument. Non-Contravention. The execution, delivery and
performance by the Stockholders of its obligations hereunder and the
consummation of the transactions contemplated hereby, will not (a) violate,
conflict with or result in the breach of any provision of the Articles of
Incorporation or By-Laws (or other comparable corporate charter documents) of
the Company or any Subsidiary, or (b) result in the violation by the Company or
any Subsidiary of any Laws, or Orders, of any Governmental or Regulatory
Authority, applicable to the Company or such Subsidiary or any of its assets or
properties, or (c) if the consents and notices set forth in Schedule 3.9.2 are
obtained or given, conflict with, result in a violation or breach of, constitute
(with or without notice or lapse of time or both) a default under, or (except as
set forth in Schedule 3.9.2) require the Company or any Subsidiary to obtain any
consent, approval or action of, make any filing with or give any notice to, or
result in or give to any Person any right of payment or reimbursement,
termination, cancellation, modification or acceleration of, or result in the
creation or imposition of any lien upon any of the assets or properties of the
Company or any of its Subsidiaries, under any of the terms, conditions or
provisions of any Instruments to which the Company is a party or by which the
Company or any of Subsidiaries or any of its/their assets or properties is
bound.
Error! Unknown switch argument..Error! Unknown switch argument..Error!
Unknown switch argument. Approvals and Consents. Except as disclosed on
8
<PAGE>
Schedule 3.9.2, no consent, approval or action of, filing with or notice to any
Governmental or Regulatory Authority or other Person is required under any of
the terms, conditions or provisions of any Law or Order of any Governmental or
Regulatory Authority or any Instrument to which the Company or any of its
Subsidiaries is a party or its assets or properties are bound for the execution
and delivery of this Agreement by the Stockholders, the performance by the
Stockholders of their obligations hereunder or the consummation of the
transactions contemplated hereby.
Section Error! Unknown switch argument..Error! Unknown switch argument.
Litigation. Except as set forth on Schedule 3.10, there is no action,
suit, proceeding at law or in equity by any Person, or any arbitration or any
administrative or other proceeding by or before (or to the knowledge of the
Stockholders, any investigation by) any governmental or other instrumentality or
agency, pending or, to the knowledge of the Stockholders, threatened, against
the Company or any of its Subsidiaries with respect to this Agreement or the
transactions contemplated hereby, or against or affecting the Company or any of
its Subsidiaries or its/their properties or rights; and no acts, facts,
circumstances, events or conditions occurred or exist which are a basis for any
such action, proceeding or investigation. Neither the Company nor any of its
Subsidiaries is subject to any Order entered in any lawsuit or proceeding.
Section Error! Unknown switch argument..Error! Unknown switch argument.
Taxes. The Company and its Subsidiaries have timely filed, or caused to be
filed, taking into account any valid extensions of due dates, completely and
accurately, all federal, state, local and foreign tax or information returns
(including estimated tax returns) required under the statutes, rules or
regulations of such jurisdictions to be filed by the Company and/or such
Subsidiaries. The term "Taxes" means taxes, duties, charges or levies of any
nature imposed by any Governmental or Regulatory Authority, including without
limitation income, gains, capital gains, surtax, capital, franchise, capital
stock, value-added taxes, taxes required to be deducted from payments made by
the payor and accounted for to any tax authority, employees' income withholding,
back-up withholding, withholding on payments to foreign Persons, social
security, national insurance, unemployment, worker's compensation, payroll,
disability, real property, personal property, sales, use, goods and services or
other commodity taxes, business, occupancy, excise, customs and import duties,
transfer, stamp and other taxes (including interest, penalties or additions to
tax in respect of the foregoing), and includes all taxes payable by the Company
and/or its Subsidiaries pursuant to joint taxation arrangements or any similar
provisions of state, local or foreign law. All Taxes shown on said returns to be
due and all additional assessments received prior to the date hereof have been
paid or are being contested in good faith, in which case, such contested
assessments are set forth on Schedule 3.11. The Company and its Subsidiaries
have collected all sales, use, goods and services or other commodity Taxes
required to be collected, and have withheld all amounts required to be withheld
on account of Taxes for amounts paid to employees, directors, officers and
residents and non-residents; and in each case has remitted or will remit the
same to the appropriate taxing authority within the prescribed time periods. The
amount set up as an accrual for Taxes on the Balance Sheet is sufficient for the
payment of all unpaid Taxes of the Company and its Subsidiaries, whether or not
disputed, for all periods ended on and prior to the date thereof.
9
<PAGE>
Since the Balance Sheet Date, neither the Company nor any of its Subsidiaries
has incurred any liabilities for Taxes other than in the ordinary course of
business. The Stockholders have delivered to the Purchaser correct and complete
copies of all income tax returns filed with respect to the Company and its
Subsidiaries for all taxable periods since its inception. None of the tax
returns of the Company has ever been audited by any Governmental or Regulatory
Authority. Neither the Company nor its Subsidiaries has received notice of any
audit or examination currently in progress, or of any proposed audit or
examination. No deficiency in the payment of Taxes by the Company for any period
has been asserted in writing by any taxing authority and remains unsettled at
the date of this Agreement. Neither the Company nor any of its Subsidiaries is a
party to any tax allocation or tax sharing agreement nor does it have any
contractual obligation to indemnify any other person with respect to Taxes.
Neither the Company nor its Subsidiaries will be required as a result of a
change in accounting method for any period ending on or before the Closing Date
to include any adjustment in income for any period ending after the Closing
Date.
Section Error! Unknown switch argument..Error! Unknown switch argument.
Liabilities. Except as set forth in the Balance Sheet or reflected in the
notes thereto, neither the Company nor any of its Subsidiaries has any
outstanding claims, liabilities or indebtedness of any nature whatsoever
(collectively in this Section 3.12, "Liabilities"), whether accrued, absolute or
contingent, determined or undetermined, asserted or unasserted, and whether due
or to become due, other than (a) Liabilities specifically disclosed in any
Schedule hereto; (b) Liabilities under contracts, purchase orders and other
agreements, arrangements and commitments of the type required to be disclosed by
the Stockholders on any Schedule but because of the dollar amount or other
qualifications are not required to be listed on such Schedule; (c) Liabilities
incurred in the ordinary course of business and consistent with past practice
since the Balance Sheet Date and (d) liabilities to the extent covered by
insurance maintained by the Company and/or its Subsidiaries. Schedule 3.8 sets
forth a list of all current arrangements of the Company and its Subsidiaries for
borrowed money and all outstanding balances as of the date hereof with respect
thereto. Except as set forth on Schedule 3.12, neither the Company nor any of
its Subsidiaries is in default in respect of the terms or conditions of any
borrowings.
Section Error! Unknown switch argument..Error! Unknown switch argument.
Insurance. Schedule 3.13 is a schedule of all insurance policies
(including life insurance) or binders maintained by the Company and/or its
Subsidiaries. All such policies are in full force and effect and all premiums
that have become due have been currently paid. Neither the Company nor any of
its Subsidiaries has received any notice of cancellation or non-renewal of any
such policy or binder. Except as set forth on Schedule 3.13, within the last two
years neither the Company nor any of its Subsidiaries has filed for any claims
exceeding USD $15,000 against any of its insurance policies, exclusive of
automobile policies.
Section Error! Unknown switch argument..Error! Unknown switch argument.
Intellectual Properties.
10
<PAGE>
3.14.1. Representations. The registrations of Intellectual Property listed
on Schedule 3.14 are valid and subsisting, all necessary registration or renewal
fees in connection with such registrations have been made and all necessary
documents and certificates in connection with such registrations have been filed
with the relevant patent, copyright and trademark authorities for the purposes
of maintaining such registrations. Except as set forth on Schedule 3.14, (a) no
Person has any rights to use any Intellectual Property of the Company or any of
its Subsidiaries; (b) the Company has not granted to any Person, nor authorized
any Person to retain, any rights in any Intellectual Property of the Company or
any of its Subsidiaries. Except as set forth on Schedule 3.14 and except for
"shrink wrap" and similar commercial end-user licenses, the Company and each of
its Subsidiaries owns and has exclusive title to each item of Intellectual
Property of the Company to use or operate under, all other Intellectual Property
of the Company. To the knowledge of the Stockholders, the operation of the
business of the Company as it is currently conducted does not infringe the
Intellectual Property of any other Person and neither the Company nor any of its
Subsidiaries has received notice from any Person that the operation of its
business infringes the Intellectual Property of any Person. There are no
contracts or agreements between the Company or any of its Subsidiaries and any
other Person with respect to Intellectual Property of the Company or any of its
Subsidiaries in respect of which there is any dispute known to the Stockholders
regarding the scope of such agreement, or performance under such contract,
including with respect to any payments to be made or received by the Company or
any of its Subsidiaries. To the knowledge of the Stockholders, no Person is
infringing or misappropriating any of the Intellectual Property of the Company
or any of its Subsidiaries. Except as disclosed on Schedule 3.14, all employees,
agents, consultants or contractors who have contributed to or participated in
the creation or development of any copyrightable, patentable or trade secret
material on behalf of the Company, any Subsidiary, or any predecessor in
interest thereto, either: (i) is a party to a "work-for-hire" agreement under
which the Company or such Subsidiary (or predecessor in interest), as
applicable, is deemed to be the original owner/author of all property rights
therein; or (ii) has executed a valid assignment or agreement to assign in favor
of the Company or Subsidiary (or predecessor in interest), as applicable, all
right, title and interest in such material.
3.14.2 Definitions. For purposes of this Agreement, the term "Intellectual
Property" shall mean any or all of the following and all rights associated
therewith: (a) all patents and applications therefor and all reissues,
divisions, renewals, extensions, continuations and continuations-in-part
thereof; (b) all inventions (whether patentable or not), invention disclosures,
improvements, trade secrets proprietary information, know-how, technology,
technical data and customer lists, rights of privacy and publicity, and all
documentation relating to any of the foregoing; (c) all copyrights, copyright
registrations and applications therefor and other rights corresponding thereto;
(d) all mask works, mask work registrations and applications therefor; (e) all
industrial designs and any registrations and applications therefor; (f) all
trade names, logos, common law trademarks and service marks; trademark and
service mark registrations and applications therefor and all goodwill associated
therewith; and (g) all computer software including all source code, object code,
firmware, development tools, files, records and data, all media on which any of
the foregoing is recorded and all documentation related to any of the foregoing.
"Intellectual Property of the Company" shall
11
<PAGE>
mean any Intellectual Property (h) that is owned by, or exclusively licensed to,
the Company or any of its Subsidiaries; or (i) which is necessary to the
operation of the Company or any of its Subsidiaries, including the design,
manufacture, use and sale of the products or delivery of the services of the
Company as it is currently operated or is reasonably anticipated to be operated
in the future and all Intellectual Property currently owned by the Company or
any of its Subsidiaries, but shall specifically not include any rights in or to
materials created for clients as "work-for-hire" or which are subject to an
exclusive assignment or license in favor of clients of the Company or any of its
Subsidiaries.
3.14.2 With respect to the trademark "Visionik", this trademark
belongs to the Company, and upon closing the Stockholders will cease to use this
trademark. Within 10 days after closing date, the name of VH will be changed
with the authorities.
Section Error! Unknown switch argument..Error! Unknown switch argument.
Compliance with Laws; Licenses and Permits.
Error! Unknown switch argument..Error! Unknown switch argument..Error!
Unknown switch argument. Compliance. The Company and each of its Subsidiaries
is, and its business has been conducted, in compliance with all applicable Laws
and Orders, except in each case where the failure to so comply would not
reasonably be expected to have a material adverse effect on the financial
condition, results of operations, assets, properties or business of the Company
and its Subsidiaries taken as a whole (a "Material Adverse Effect"), including
without limitation, (a) all Laws and Orders promulgated by any Governmental or
Regulatory Authority; (b) all environmental Laws and Orders; and (c) all Laws
and Orders relating to labor, civil rights, and occupational safety and health
laws, worker's compensation, employment and wages, hours and vacations, or pay
equity. Neither the Company nor any of its Subsidiaries has been charged with,
or, to the knowledge of the Stockholders threatened with or under any
investigation with respect to, any charge concerning any violation of any Laws
or Orders.
Error! Unknown switch argument..Error! Unknown switch argument..Error!
Unknown switch argument. Licenses. The Company and each of its Subsidiaries has
all licenses and permits and other governmental certificates, authorizations and
approvals (collectively, "Licenses") required by a Governmental or Regulatory
Authority for the operation of its business and the use of its properties as
presently operated or used, except where the failure to have such Licenses would
not reasonably be expected to have a Material Adverse Effect. All of the
Licenses are in full force and effect and no action or claim is pending, nor to
the knowledge of the Stockholders is threatened, to revoke or terminate any of
such Licenses or declare any such License invalid in any material respect.
Section Error! Unknown switch argument..Error! Unknown switch argument.
Client Relations. Schedule 3.16 sets forth for the Company and each of its
Subsidiaries (a) the twenty largest clients (measured by fees generated) as at
December 31, 1998 and the fees from each such client and from all clients (in
the aggregate) for the year ended December 31, 1998 and (b) the clients
projected to be the twenty largest clients (measured by fees) based on the
12
<PAGE>
Company's and each of its Subsidiary's current 1999 profit plan for the year
ending December 31, 1999, together with the estimated fees for each such client
and all clients (in the aggregate) for such fiscal year. Except as set forth in
Schedule 3.16, no client of the Company or any of its Subsidiaries has advised
the Company, such Subsidiary or any Stockholder (a) that it is prematurely
terminating or considering the premature termination of the handling of its
business by the Company or such Subsidiary, as a whole or in respect of any
particular product, project or service or (b) that it will not use the Company's
services in the future.
Section Error! Unknown switch argument..Error! Unknown switch argument.
Accounts Receivable; Work-in-Process; Accounts Payable. The amount of all
work-in-process, accounts receivable, unbilled invoices recorded on the books of
account of the Company or any of its Subsidiaries and reflected on the Balance
Sheet (including without limitation unbilled invoices for services and
out-of-pocket expenses) and other debts due or recorded in the records and books
of account of the Company or such Subsidiary as being due to the Company or such
Subsidiary and reflected on the Balance Sheet will be good and collectible in
full (less the amount of any provision, reserve or similar adjustment therefor
reflected on the Balance Sheet). Except as set forth on Schedule 3.17, there has
been no material adverse change since the Balance Sheet Date in the amount or
aging of the work-in-process, accounts receivable or other debts due to the
Company or any of its Subsidiaries or the reserves with respect thereto, or
accounts payable of the Company or any of its Subsidiaries.
Section Error! Unknown switch argument..Error! Unknown switch argument.
Employment Relations. (a) Neither the Company nor any of its subsidiaries
is engaged in any unfair labor practice; (b) no unfair labor practice complaint
against the Company is pending before any Governmental or Regulatory Authority;
(c) there is no organized labor strike, dispute, slowdown or stoppage actually
pending or to the knowledge of the Stockholders threatened against or involving
the Company or any of its Subsidiaries; (d) there are no labor unions
representing or, to the knowledge of the Stockholders, attempting to represent
the employees of the Company or any of its Subsidiaries; (e) no claim or
grievance nor any arbitration proceeding arising out of or under any collective
bargaining agreement is pending and to the knowledge of the Stockholders, no
such claim or grievance has been threatened; (f) no collective bargaining
agreement is currently being negotiated by the Company or any of its
Subsidiaries; (g) neither the Company nor any of its Subsidiaries has
experienced any work stoppage or similar organized labor dispute during the last
three years; and (h) all employees of the Company and each of the Subsidiaries
is party to an employment contract or employment certificate complying with
Danish law. There is no legal action, suit, proceeding or claim pending or, to
the knowledge of the Stockholders, threatened between the Company or any of its
Subsidiaries and any of its employees, former employees, agents, former agents,
job applicants or any association or group of any of their employees, except as
set forth on Schedule 3.10.
13
<PAGE>
Section Error! Unknown switch argument..Error! Unknown switch argument.
[Intentionally left blank]
Section Error! Unknown switch argument..Error! Unknown switch argument.
Interests in Customers, Suppliers, Etc. Except as set forth on Schedule
3.20, neither (x) the Stockholders nor (y) to the knowledge of the Stockholders
(without making any special inquiry of the Related Group, as hereinafter
defined), any officer, director, or employee of the Company or any of its
Subsidiaries (collectively, the "Related Group"),:
(Error! Unknown switch argument.) owns, directly or indirectly, any
interest in (excepting less than 1% stock holdings for investment purposes
in securities of publicly held and traded companies), or received payments
from, or is an officer, director, employee or consultant of, any Person
which is, or is engaged in business as, a competitor, lessor, lessee,
supplier, distributor, sales agent, customer or client of the Company;
(Error! Unknown switch argument.) owns, directly or indirectly (other than
through the ownership of stock or other securities of the Company), in
whole or in part, any tangible or intangible property (including, but not
limited to Intellectual Property) that the Company or any of its
Subsidiaries uses in the conduct of business; or
(Error! Unknown switch argument.) has any cause of action or other claim
whatsoever against, or owes any amount to, the Company or any of its
Subsidiaries, except for claims in the ordinary course of business such as
for accrued vacation pay, accrued benefits under employee benefit plans,
and similar matters and agreements existing on the date hereof (including
but not limited to loans and accrued interest thereon made by the
Stockholders or such Stockholders to the Company or any of its
Subsidiaries as reflected in the books and records of the Company).
Section Error! Unknown switch argument..Error! Unknown switch argument.
Bank Accounts and Powers of Attorney. Set forth in Schedule 3.21 is an accurate
and complete list showing (a) the name of each bank in which the Company or any
of its Subsidiaries has an account, credit line or safe deposit box and the
names of all Persons authorized to draw thereon or to have access thereto, and
(b) the names of all Persons, if any, holding powers of attorney from the
Company or any of its Subsidiaries and a summary statement of the terms thereof.
Section Error! Unknown switch argument..Error! Unknown switch argument.
Compensation of Employees. Schedule 3.22 is an accurate and complete list
showing (a) the names and positions of all salaried employees of and exclusive
consultants to the Company or any of its Subsidiaries, together with a statement
of the current annual salary or fees, and the bonus and incentive compensation
paid or payable with respect to calendar years 1998 and 1999, and any material
fringe benefits of such employees or exclusive consultants; (b) the names of all
retired employees, if any, of the Company and each of its Subsidiaries who are
receiving or entitled to receive any healthcare or life insurance benefits or
any payments from the Company or any Subsidiary not covered by any pension plan
to which the
14
<PAGE>
Company or such Subsidiary is a party, their ages and current unfunded pension
rate, if any; and (c) a description of the normal severance benefits of the
Company and each of its Subsidiaries. With respect to exclusive consultants, the
list is limited to physical persons, who have undertaken work for the Company
for more than 15 hours per week.
Section Error! Unknown switch argument..Error! Unknown switch argument. No
Changes Since the Balance Sheet Date. Since the Balance Sheet Date except as
specifically stated on Schedule 3.23 neither the Company nor any of its
Subsidiaries has (i) incurred any liability or obligation of any nature (whether
accrued, absolute, contingent or otherwise), except in the ordinary course of
business, (ii) permitted any of its assets to be subjected to any lien, (iii)
sold, transferred or otherwise disposed of any assets except in the ordinary
course of business, (iv) made any capital expenditure or commitment therefor
which individually or in the aggregate exceeded $20,000, (v) declared or paid
any dividends or made any distributions on any shares of its capital stock, or
redeemed, purchased or otherwise acquired any shares of its capital stock or any
option, warrant or other right to purchase or acquire any such shares, (vi) made
any bonus or profit sharing distribution, (vii) increased or prepaid its
indebtedness for borrowed money, except current borrowings under credit lines
listed on Schedule 3.8 from banks in the ordinary course of business or made any
loan to any Person, (viii) written down the value of any work-in-process, or
written off as uncollectible any notes or accounts receivable, except
write-downs and writeoffs in the ordinary course of business, none of which
individually or in the aggregate, is material to the Company and its
Subsidiaries, taken as a whole, (ix) except as set forth on Schedule 3.22,
granted any increase in the rate of wages, salaries, bonuses or other
remuneration of any employee who, whether as a result of such increase or prior
thereto, receives aggregate compensation from the Company or any of its
Subsidiaries at an annual rate of USD $40,000 or more, or except in the ordinary
course of business to any other employees, (x) canceled or waived any claims or
rights of material value, (xi) made any change in any method of accounting
procedures, (xii) otherwise conducted its business or entered into any
transaction, except in the usual and ordinary manner and in the ordinary course
of its business, (xiii) amended in any material respect or terminated any
agreement which is material to its business, (xiv) renewed, extended or modified
any lease of real property or except in the ordinary course of business any
lease of personal property, (xv) adopted, amended or terminated any Plan or
(xvi) agreed, whether or not in writing, to do any of the foregoing.
Section Error! Unknown switch argument..Error! Unknown switch argument.
Corporate Controls. Neither the Company, any of its Subsidiaries, or the
Stockholders, or, to the knowledge of the Stockholders, any officer, authorized
agent, employee or any other Person while acting on behalf of the Company or any
of its Subsidiaries, has, within the period covered by any applicable statute of
limitations, directly or indirectly: used any corporate fund for unlawful
contributions, gifts, or other unlawful expenses relating to political activity;
made any unlawful payment to foreign or domestic government officials or
employees or to foreign or domestic political parties or campaigns from
corporate funds; established or maintained any unlawful or unrecorded fund of
corporate monies or other assets; made any false or fictitious entry on its
books or records; made any bribe, rebate, payoff, influence payment, kickback,
or other unlawful payment, or other
15
<PAGE>
payment of a similar or comparable nature, to any Person, private or public,
regardless of form, whether in money, property, or services, to obtain favorable
treatment in securing business or to obtain special concessions, or to pay for
favorable treatment for business secured or for special concessions already
obtained, and neither the Company nor any of its Subsidiaries has participated
in any illegal boycott or other similar illegal practices affecting any of its
actual or potential customers.
Section 3.25 Year 2000 Compliance.
3.25.1. Definition. The term "Y2K Compliant" shall mean: (a) the
functions, calculations and other computer processes of all computer hardware,
software and systems, including but not limited to internal and outsourced
management information systems and embedded computer features within other
systems of the Company or any of its Subsidiaries (collectively, "Processes"),
perform properly in a consistent manner regardless of the date in time on which
the Processes are actually performed and regardless of the date of input to the
software, whether before, on or after January 1, 2000 and whether or not the
dates are affected by leap years; (b) the computer hardware, software and
systems accept, calculate, compare, sort, extract, sequence and otherwise
process data inputs and date values, and return and display date values, in a
consistent manner regardless of the dates used, whether before, on or after
January 1, 2000; (c) the computer hardware, software and systems will function
properly without interruptions or extraordinary manual intervention caused by
the date in time on which the Processes are actually performed or by the date of
input to the software, whether before, on or after January 1, 2000; (d) the
computer hardware, software and systems accept and respond to two-digit year
data input in the Processes in a manner that resolves any ambiguities as to the
century in a defined, predetermined and appropriate manner; and (e) the computer
hardware, software and systems store and display data in the Processes in ways
that are unambiguous as to the determination of the century.
3.25.2. Computer Systems. The Company and each of its Subsidiaries has
used its reasonable commercial efforts so that, to its knowledge, the current
computer hardware, software and systems, and accompanying documentation, of the
Company and each of its Subsidiaries will be Y2K Compliant, in a full production
version, with accompanying documentation, no later than December 15, 1999. The
Company and each of its Subsidiaries has and will continue to use its reasonable
commercial efforts so that, to its knowledge, the receipt of Y2K Compliant
computer hardware, software, and systems will be provided to the Company and
each of its Subsidiaries in a timely manner under current supplier contracts or
standard maintenance and support plans without additional fee or charge of any
kind (including any installation, freight, or other costs or fees) to the
Company and each of its Subsidiaries.
3.25.3 Other Products and Services. The Company and each of its
Subsidiaries has and will continue to use its reasonable commercial efforts so
that, to its knowledge, (a) its products will be delivered and its services will
be scheduled and performed in a timely manner without material interruptions
caused by the date in time on which the product is ordered or is actually
delivered or the services are scheduled or actually performed under normal
procedures in the ordinary course, whether before, on or after January 1, 2000,
and (b) its essential
16
<PAGE>
suppliers of products and services, including the suppliers of its
infrastructure systems, have Y2K compliance programs in place to avoid
interruptions in the supplier-customer trading relationship which could have a
Material Adverse Effect whether before, on or after January 1, 2000.
Section Error! Unknown switch argument..26 Brokers. No broker, finder,
agent or similar intermediary has acted on behalf of the Stockholders or the
Company or any of the Subsidiaries in connection with this Agreement or the
transactions contemplated hereby, and no brokerage commissions, finder's fees or
similar fees or commissions are payable by the Company, any of its Subsidiaries,
or the Stockholders in connection therewith based on any agreement, arrangement
or understanding with any of them.
Section Error! Unknown switch argument..27 Copies of Documents. The
Stockholders have caused to be made available for inspection and copying by the
Purchaser and its advisers, true, complete and correct copies of all documents
referred to in this Article III or in any Schedule. Summaries of all material
oral contracts contained in Schedule 3.8 are complete and accurate in all
material respects.
ARTICLE Error! Unknown switch argument.
REPRESENTATIONS OF THE PURCHASER
The Purchaser, represents, warrants and agrees to and with the
Stockholders as follows:
Section Error! Unknown switch argument..Error! Unknown switch argument.
Existence and Good Standing. The Purchaser is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware, with full corporate power and authority to own its property and to
carry on its business all as and in the places where such properties are now
owned or operated or such business is now being conducted.
Section Error! Unknown switch argument..Error! Unknown switch argument.
Execution and Validity of Agreement. The Purchaser has the full corporate
power and authority to make, execute, deliver and perform this Agreement and the
transactions contemplated hereby. The execution and delivery of this Agreement
by the Purchaser and the consummation of the transactions contemplated hereby
have been duly authorized by all required corporate action on behalf of the
Purchaser and this Agreement has been duly and validly executed and delivered by
the Purchaser and assuming due authorization, execution and delivery by the
Stockholders constitutes a legal, valid and binding obligation of the Purchaser,
enforceable against it in accordance with its terms.
Section Error! Unknown switch argument..Error! Unknown switch argument.
Non-Contravention; Approvals and Consents.
17
<PAGE>
Error! Unknown switch argument..Error! Unknown switch argument..Error!
Unknown switch argument. Non-Contravention. The execution, delivery and
performance by the Purchaser of its obligations hereunder and the consummation
of the transactions contemplated hereby, will not (a) violate, conflict with or
result in the breach of any provision of the certificate of incorporation or
by-laws (or other comparable corporate charter documents) of the Purchaser, or
(b) result in the violation by the Purchaser of any Laws or Orders of any
Governmental or Regulatory Authority, applicable to the Purchaser or any of its
assets or properties, except as would not reasonably be expected to have a
Material Adverse Effect, or (c) conflict with, result in a violation or breach
of, constitute (with or without notice or lapse of time or both) a default
under, or require the Purchaser to obtain any consent, approval or action of,
make any filing with or give any notice to, or result in or give to any Person
any right of payment or reimbursement, termination, cancellation, modification
or acceleration of, or result in the creation or imposition of any Lien upon any
of the assets or properties of the Purchaser, under any of the terms, conditions
or provisions of any Instruments to which the Purchaser is a party or by which
the Purchaser or any of its assets or properties are bound.
Error! Unknown switch argument..Error! Unknown switch argument..Error!
Unknown switch argument. Approvals and Consents. Except as set forth on Schedule
4.3.2, no consent, approval or action of, filing with or notice to any
Governmental or Regulatory Authority or other public or private third party is
necessary or required under any of the terms, conditions or provisions of any
Law or Order of any Governmental or Regulatory Authority or any Instrument to
which the Purchaser is a party or by which the Purchaser or any of its assets or
properties is bound for the execution and delivery of this Agreement by the
Purchaser, the performance by the Purchaser of its obligations hereunder or the
consummation of the transactions contemplated hereby.
Section 4.4 Financial Statements. Schedule 4.4 sets forth (a) an audited
balance sheet of the Purchaser as at December 31, 1998 and the related audited
statements of income, retained earnings and cash flow for the year then ended,
as reported on by Arthur Andersen LLP, independent public accountants, and (b)
an unaudited balance sheet of the Purchaser as at September 30, 1999 and the
related unaudited statements of income, retained earnings and cash flow for the
three months then ended, and (c) an unaudited pro forma balance sheet of the
Purchaser as at September 30, 1999 (the "Purchaser Balance Sheet") to give
effect to the acquisitions by Purchaser of Interactive Solutions Incorporated,
Eagle River Interactive Inc. and Twinspark Interactive People B.V. as if each of
these acquisitions had occurred on January 1, 1999 and the related unaudited pro
forma statements of income, retained earnings and cash flow for the 9 months
then ended. Except as indicated on Schedule 4.4.1 hereto, such financial
statements, including (in the case of the audited statements) the footnotes
thereto, have been prepared in accordance with U.S. GAAP throughout the periods
indicated. The Purchaser Balance Sheet fairly presents in all material respects
the pro forma financial condition of the Purchaser at the date thereof and
fairly presents in all material respects all pro forma claims against and all
pro forma debts and liabilities of the Purchaser, fixed or contingent, as at the
date thereof, required to be shown thereon under U.S. GAAP, and the related pro
forma statements of income, retained earnings and cash flow fairly present in
all
18
<PAGE>
material respects the pro forma results of operation of the Purchaser. Except as
set forth on Schedule 4.4.2, since September 30, 1999 (the "Purchaser Balance
Sheet Date") there has been no material adverse change in the properties,
financial condition, business or results of operations of the Purchaser.
Section Error! Unknown switch argument..5 Brokers. No broker, finder,
agent or similar intermediary has acted on behalf of the Purchaser or its
affiliates in connection with this Agreement or the transactions contemplated
hereby, and no brokerage commissions, finders' fees or similar fees or
commissions are payable by the Purchaser or its affiliates in connection
therewith based on any agreement, arrangement or understanding with any of them.
Section 4.6 Capitalization. As of October 30, 1999 the Purchaser has an
authorized capitalization consisting of [ ] shares of common stock, $0.001 par
value per share, of which as of the Closing Date [ ] shares are issued and
outstanding, an aggregate of [ ] shares are allocated to the 1999 Agency.Com
Stock Option/Stock Issuance Plan., and an aggregate of 7,400,000 shares are
subject to issuance upon the exercise of certain warrants; in addition, there
are [ ] shares subject to the issuance of options under the Interactive
Solutions and Quadris Option Plans which were assumed by the Purchaser in April
1999. No other class of capital stock or series of any class of capital stock or
securities convertible into capital stock of Purchaser is authorized or
outstanding. There are no (a) outstanding subscriptions, options, warrants,
rights (including "phantom" stock rights), calls preemptive rights, or other
contracts, commitments, understandings or arrangements, including any right of
conversion or exchange under any outstanding security, instrument, plan or
agreement (collectively, "Options"), obligating Purchaser to issue or sell any
shares of the capital stock of Purchaser, or to grant, extend or enter into any
Option with respect thereto, or (b) outstanding Options providing for settlement
in cash.
Section 4.7 Purchaser's Common Stock. The shares of Purchaser's Common
Stock, when issued and delivered to the Stockholders pursuant to the provisions
of this Agreement, will be validly issued and outstanding, fully-paid and
non-assessable, free and clear of all liens other than restrictions on resale
arising by the lock-up agreement, exhibit E, or by virtue of Federal and state
securities laws of the United States (and to the extent applicable the
provisions of the Investment Representation Certificate to be delivered by VH
and AMS at the Closing), and will not be subject to any preemptive right of
shareholders of Purchaser. The shares of Purchaser's Common Stock issued to the
Stockholders together with 68,000 additional shares of Purchaser's Common Stock
to be included in the Option Program described in Schedule 3.1.3, represent
[1.8%] of the Applicable Purchaser Shares, as calculated and defined in Schedule
4.7 hereto (the "Stockholders Closing Percentage").
ARTICLE Error! Unknown switch argument.
ACTIONS AT CLOSING BY THE STOCKHOLDERS
Simultaneously herewith:
19
<PAGE>
Section Error! Unknown switch argument..Error! Unknown switch argument.
Required Approvals, Notices and Consents. The Stockholders have obtained
or given, at no expense to the Purchaser and there have not been withdrawn or
modified, any notices, consents, approvals or other actions listed on Schedules
3.1.6 or 3.9.2 hereof (including without limitation, obtaining all consents,
approvals and/or waivers required under the contracts listed on Schedule 3.8 in
order to permit the consummation of the transactions contemplated by this
Agreement without causing or resulting in a default, event of default,
acceleration event or termination event under any of such documents and without
entitling any party to any of such documents to exercise any other right or
remedy adverse to the interests of the Purchaser or the Company thereunder).
Each such consent or approval was in form reasonably satisfactory to counsel for
the Purchaser. The same applies to the approval required pursuant to section 7.3
herein.
Section Error! Unknown switch argument..Error! Unknown switch argument.
Good Standing Certificates. The Stockholders delivered to the Purchaser: (a) a
copy of the Company's and the Subsidiaries' Articles of Incorporation, including
all amendments, certified by attorney Hans Madsen; (b) a certificate from the
Erhvervs- og Selskabsstyrelsen to the effect that the Company and the
subsidiaries are in good standing.
Section Error! Unknown switch argument..Error! Unknown switch argument.
Surrender of Certificates, Stock Records and Protocols. The Stockholders
delivered to the Purchaser such other documents and instruments, if any, as may
be necessary to permit the Purchaser to acquire the Shares free and clear of any
and all Liens or voting or other restrictions of any kind whatsoever adverse to
the Purchaser. The Stockholders further delivered the stockholder book
(Aktiebog), the General Assembly Protocol (generalforsamlingsprotokollen), the
Board Meeting Protocol (bestyrelsesprotokollen) and the Auditors Protocol
(revisionsprotokollen) of the Company and each Subsidiary. The closing is also
conditional upon the Stockholders and Visionik A/S's signing of Exhibit A-1.
Section Error! Unknown switch argument..Error! Unknown switch argument.
Employment Agreements. Lembke has entered into an Employment Agreement
with the Company, in the form and to the effect of Exhibit B-1 hereto.
Section 5.5 [Intentionally left blank]
Section Error! Unknown switch argument..Error! Unknown switch argument.
Non-Solicitation Agreements. Each of Lembke and Hougaard have entered into a
Non-Solicitation Agreement with the Company, in the form and to the effect of
Exhibit C-1 and Exhibit C-2 hereto.
20
<PAGE>
Section Error! Unknown switch argument..Error! Unknown switch argument.
Certified Resolutions. The Stockholders delivered to the Purchaser a copy
of the resolutions of the General Assembly of AMS authorizing the execution,
delivery and performance of the Agreement.
Section Error! Unknown switch argument..Error! Unknown switch argument.
Investment Representation Certificate. Each of the Stockholders executed
and delivered to the Purchaser and Investment Representation Certificate as to
the Shares in the form and to the effect of Exhibit D hereto.
Section Error! Unknown switch argument..Error! Unknown switch argument.
Lockup Agreement. Each of the Stockholders shall have entered into a
Lockup Agreement with Purchaser in the form of Exhibit E hereto.
Section Error! Unknown switch argument..Error! Unknown switch argument.
Repayment of Loans. All indebtedness of the Stockholders to the Company,
together with interest thereon from the date of inception, was repaid in full,
other than routine travel expense advances in the ordinary course of business
and consistent in amount with past practice, and the Stockholders delivered to
Purchaser a certificate, dated the Closing Date, to such effect.
Section Error! Unknown switch argument..Error! Unknown switch argument.
Proceedings. All proceedings to be taken in connection with the
transactions contemplated by this Agreement and all documents incident thereto
were reasonably satisfactory in form and substance to the Purchaser and its
counsel, and the Purchaser received copies of all such documents and other
evidences as it or its counsel may reasonably request in order to establish the
consummation of such transactions and the taking of all proceedings in
connection therewith.
ARTICLE Error! Unknown switch argument.
ACTIONS AT CLOSING BY THE PURCHASER
Simultaneously herewith:
Section Error! Unknown switch argument..Error! Unknown switch argument.
Certified Resolutions. The Purchaser delivered to the Stockholders a copy
of the resolutions of the Board of Directors of the Purchaser authorizing the
execution, delivery and performance of this Agreement and the transactions and
other agreements contemplated hereby, certified to by an officer of the
Purchaser.
Section Error! Unknown switch argument..2 Proceedings. All proceedings to
be taken in connection with the transactions contemplated by this Agreement, and
all documents incident thereto were reasonably satisfactory in form and
substance to the Stockholders, the
21
<PAGE>
Company and their counsel and the Company received copies of all such documents
and other evidences as it or its counsel may reasonably request in order to
establish the consummation of such transaction and the taking of all proceedings
in connection therewith.
ARTICLE Error! Unknown switch argument.
OTHER AGREEMENTS
Section 7.1 Holding Period of Purchased Shares. Purchaser agrees that it
will not, prior to the third anniversary of the Closing Date, sell, assign,
transfer or otherwise dispose of the purchased Shares (a "Prohibited Transfer"),
except that a Prohibited Transfer shall not be deemed to occur upon the sale or
public offering of the capital stock of Purchaser or upon any (i) merger or
consolidation of Purchaser with or into another Company; (ii) sale, transfer or
disposition of the purchased Shares to an Affiliate; or (iii) sale or transfer
or other disposition of all or any portion of the capital stock, business or
assets of the Subsidiaries or either of them provided, however, that prior to
carrying out any of the transactions listed under (i), (ii) and (iii) above
prior to the third anniversary of the Closing, the Purchaser will in cooperation
with VH use best endeavors to obtain the approval of the Danish tax authorities,
if necessary for VH to maintain the qualifications of this Stock Exchange
Agreement as a tax-free exchange of shares, and, in this connection, the
Purchaser will favorably consider any proposals from VH to restructure or amend
any transaction then being contemplated, and further provided, that until the
first anniversary of the Closing, the Purchaser undertakes to indemnify VH for
USD 750,000 of the taxes incurred, if any, as a result of such transaction,
unless the transaction is beyond the control of the Purchaser.
Section Error! Unknown switch argument..Error! Unknown switch argument.
Nomenclature/Branding.
Immediately after close, the company will be renamed "AGENCY.COM : Copenhagen,"
or such other name as shall be accepted by the Danish Commerce and Companies
register if said name is unavailable. The Company maintains all rights to the
name "Visionik".
Section Error! Unknown switch argument..Error! Unknown switch argument. IT
Plus Reorganization. The Purchaser acknowledges and agrees that the Stockholders
have acquired the shares of IT+ A/S previously held by the Company for a price
of DKK 660,000. This will result in a taxable gain of the Company in the amount
of approximately DKK 100,000. The shareholders will at closing present
documentation to the effect that the other shareholder in IT+ A/S accept this
transfer.
Section 7.4 Employee Stock Option Program. Certificates representing
options to acquire an aggregate of 68,000 shares of Purchaser's Common Stock
will issued by Purchaser pursuant to the Option Program described in Schedule
3.1.3 within two weeks after closing.
22
<PAGE>
ARTICLE Error! Unknown switch argument.
SURVIVAL; INDEMNITY
Section Error! Unknown switch argument..Error! Unknown switch argument.
Survival. Notwithstanding any right of any party hereto fully to
investigate the affairs of any other party, and notwithstanding any knowledge of
facts determined or determinable pursuant to such investigation or right of
investigation, each party hereto shall have the right to rely fully upon the
representations, warranties, covenants and agreements of the other parties
contained in this Agreement and the Schedules, if any, furnished by any other
party pursuant to this Agreement, or in any certificate delivered at the Closing
by any other party. Subject to the limitations set forth in Section 8.5, the
respective representations, warranties, covenants and agreements of the
Stockholders and the Purchaser contained in this Agreement shall survive the
Closing.
Section Error! Unknown switch argument..Error! Unknown switch argument.
Obligation of the Stockholders to Indemnify.
Error! Unknown switch argument..Error! Unknown switch argument..Error!
Unknown switch argument. General Indemnity. Subject to the limitations contained
in Section 8.5 the Stockholders hereby agree, jointly and severally, to
indemnify the Purchaser and its officers, directors, employees, agents and its
affiliates (individually a "Purchaser Indemnified Party" and collectively, the
"Purchaser Indemnified Parties") against, and to protect, save and keep harmless
the Purchaser Indemnified Parties from, and to assume liability for, payments of
all liabilities (including liabilities for Taxes), obligations, losses, damages,
penalties, claims, actions, suits, judgments, settlements, out-of-pocket costs,
expenses and disbursements (including reasonable costs of investigation, and
reasonable attorneys', accountants' and expert witnesses' fees) of whatever kind
and nature, net of any tax benefit actually realized by the Indemnified Party
(it being understood that any such benefit shall be paid in the first instance
by Indemnifying Parties and refunded by the Indemnified Party upon the
realization of the benefit) to the extent not covered by insurance the benefits
of which will inure to the applicable Indemnified Parties (as defined below)
(collectively, "Losses"), that may be imposed on or incurred by any Purchaser
Indemnified Party or the Company (collectively, the "Group") as a consequence of
or in connection with (i) any inaccuracy or breach of any representation or
warranty contained in Article III hereof or (ii) any breach of or failure by any
Stockholder to comply with or perform any agreement or covenant contained in
this Agreement. The term "Losses" as used herein is not limited to matters
asserted by third parties against the Group but includes Losses incurred or
sustained by the Group in the absence of third party claims.
Error! Unknown switch argument..Error! Unknown switch argument..Error!
Unknown switch argument. Special Indemnity. Prior to the Closing, the Company
will enter into an obligation to pay an amount not to exceed DKK 3,500,000 to
Lembke and Hougaard in accordance with Exhibits C-1 and C-2. The amount will be
paid to Lembke and Hougaard two weeks after the closing in consideration of
their covenants given pursuant
23
<PAGE>
to their Non-Solicitation/Non-Servicing Agreements being entered into
simultaneously herewith, as well as in consideration of the untimely termination
of Lembke's employment contract. However, subject to withholding taxes, the
amount will be taxed as personal income under Danish tax law. It is the parties'
intent that the Company's obligations with respect to any third party loan
obtained to enable the Company to pay the amount, shall be limited solely to the
repayment thereof to the third-party lender, and that any additional Losses that
may be imposed or incurred by Purchaser or the Company with respect thereto,
including, without limitation, the disallowance by any tax authority of said
consideration to Lembke and Hougaard as a deductible business expense of the
Company, shall be fully indemnified by the Stockholders and shall not be subject
to the limitations contained in Section 8.5 below.
Section Error! Unknown switch argument..Error! Unknown switch argument.
Obligation of the Purchaser to Indemnify. Subject to the limitations set
forth in Section 8.5 hereof, the Purchaser hereby agrees to indemnify the
Stockholders and their respective officers, directors, employees and agents
(individually a "Stockholder Indemnified Party" and collectively the
"Stockholder Indemnified Parties"; the Purchaser Indemnified Parties and the
Stockholders Indemnified Parties are sometimes collectively referred to as the
"Indemnified Parties") against, and to protect, save and keep harmless the
Stockholder Indemnified Parties from and to assume liability for any and all
Losses that may be imposed on or incurred by the Stockholder Indemnified Parties
as a consequence of or in connection with (i) any inaccuracy or breach of any
representation or warranty contained in Article IV hereof or (ii) any breach of
or failure by the Purchaser to comply with or perform any agreement or covenant
by the Purchaser contained in this Agreement.
Section Error! Unknown switch argument..4 Indemnification Procedures.
Error! Unknown switch argument..4.Error! Unknown switch argument. Notice
of Asserted Liability. The Indemnified Party shall promptly give notice (the
"Claims Notice") to the party or parties required to pay any amount in respect
of Losses under Section 8.2 or 8.3 (collectively, the "Indemnifying Party"), of
any demand, claim or circumstances which in good faith it believes gives rise,
or with the lapse of time would or might give rise to a claim or the
commencement (or threatened commencement) of any action, proceeding or
investigation that may result in any Losses (an "Asserted Liability") without
regard to the limitations on indemnification set forth in Section 8.5 below. The
Claims Notice shall describe the Asserted Liability in reasonable detail, shall
indicate the amount (estimated, if necessary, and to the extent feasible) of the
Losses that have been or may be suffered by an Indemnified Party.
Error! Unknown switch argument..4.Error! Unknown switch argument.
Defense of Asserted Liability. The Indemnifying Party may elect to
compromise, settle or defend, at its own expense and by its own counsel (such
counsel to be reasonably satisfactory to the Indemnified Party), any Asserted
Liability. If the Indemnifying Party elects to compromise, settle or defend such
Asserted Liability, it shall within 30 days (or sooner, if the nature of the
Asserted Liability so requires) notify the Indemnified Party in writing of its
intent to do so and the Indemnified Party shall cooperate, at the request and
expense of the
24
<PAGE>
Indemnifying Party, in the settlement or compromise of, or defense against, such
Asserted Liability. If the Indemnifying Party elects not to compromise, settle
or defend the Asserted Liability, or fails to notify the Indemnified Party of
its election as herein provided, the Indemnified Party may pay, compromise,
settle or defend such Asserted Liability at the expense of the Indemnifying
Party and the Indemnifying Party shall be bound by the results obtained by the
Indemnified Party with respect to such third party claim. Notwithstanding the
foregoing, the Indemnifying Party may not settle or compromise any claim without
the prior written consent of the Indemnified Party, if such settlement or
compromise does not include an unconditional release from all liability without
future obligation or prohibition on the part of the Indemnified Party. If an
Indemnified Party objects to a bona fide offer of settlement which provides
solely for a monetary payment and includes an unconditional release from all
liability without future obligation or prohibition on the part of the
Indemnified Party, which the Indemnifying Party wishes to accept, the
Indemnified Party may continue to pursue such matter, free of any participation
by the Indemnifying Party, at the expense of the Indemnified Party. In such
event, the obligation of the Indemnifying Party shall be limited to the amount
of the offer of settlement which the Indemnified Party refused to accept plus
the costs and expenses of the Indemnified Party incurred prior to the date the
Indemnifying Party notified the Indemnified Party of the offer of settlement.
The Indemnified Party shall have the right to employ its own counsel in any case
with respect to an Asserted Liability, but the fees and expenses of such counsel
shall be at the expense of such Indemnified Party unless (a) the employment of
such counsel shall have been authorized in writing by the Indemnifying Party in
connection with the defense of such action, (b) such Indemnifying Party shall
not have, as provided above, promptly employed counsel reasonably satisfactory
to such Indemnified Party to take charge of the defense of such action, or (c)
such Indemnified Party shall have reasonably concluded that there may be one or
more legal defenses available to it which are different from or additional to
those available to such Indemnifying Party, in any of which events such
reasonable fees and expenses shall be borne by the Indemnifying Party and the
Indemnifying Party shall not have the right to direct the defense of such action
on behalf of the Indemnified Party in respect of such different or additional
defenses. If the Indemnifying Party chooses to defend any claim, the Indemnified
Party shall make available to the Indemnifying Party any books, records or other
documents within its control that are necessary or appropriate for such defense.
The parties hereto agree to cooperate fully with one another in the defense,
compromise or settlement of any Asserted Liability.
Error! Unknown switch argument..4.Error! Unknown switch argument.
Control by the Purchaser. All decisions and determinations to be made by
the Purchaser and/or a Purchaser Indemnified Party under this Article VIII shall
be made by the Purchaser in the name of and on behalf of the Purchaser or such
other Purchaser Indemnified Party and all such decisions and determinations
shall be binding upon the parties hereto and such Purchaser Indemnified Party.
25
<PAGE>
Section Error! Unknown switch argument..5 Limitations on Indemnification.
Error! Unknown switch argument..5.Error! Unknown switch argument.
Indemnity Cushion. No claim, action or other Asserted Liability with
respect to Losses arising out of any of the matters referred to in clause (i) of
Section 8.2 may be asserted until such time as claims, actions or other Asserted
Liabilities with respect to Losses arising out of any of the matters referred to
in clause (i) of Section 8.2 shall exceed $40,000 in the aggregate (in which
case the Stockholders shall be liable for all Losses in excess of $40,000);
provided, however, that this Section 8.5.1 shall not apply to Losses relating to
a breach of a representation or warranty contained in Section 3.26, or pursuant
to Section 8.2.2.
Error! Unknown switch argument..5.Error! Unknown switch argument.
Termination of Indemnification Obligations of the Stockholders.
(a) The obligation of the Stockholders to indemnify under Section
8.2.1 hereof shall terminate on June 30, 2002 except (i) as to matters as to
which the Purchaser Indemnified Party has made a claim for indemnification or
given a Claims Notice under Section 8.4 hereof on or prior to such date and,
(ii) with respect to any claim for Losses pertaining to a misrepresentation or a
breach of representation or warranty under Section 3.11 or any other Section of
Article III of this Agreement relating to Taxes or pursuant to Section 8.2.2
hereof. The obligation to indemnify referred to in:
(A) the preceding clause (i) shall survive the expiration of such
period until such claims are finally resolved and any obligations with
respect thereto are fully satisfied; and
(B) the preceding clause (ii) shall terminate 60 days after the
expiration of the relevant statute of limitations, except as to matters as
to which any Indemnified Party has made a claim for indemnification or
given a Claims Notice under Section 8.4 on or prior to such date, in which
case the right to indemnification with respect thereto shall survive the
expiration of any such period until such claim is finally resolved and any
obligations with respect thereto are fully satisfied.
Error! Unknown switch argument..5.Error! Unknown switch argument.
Termination of Indemnification Obligations of the Purchaser. The
obligation of the Purchaser to indemnify under clause (i) of Section 8.3 hereof
shall terminate on June 30, 2002 except as to matters as to which any
Stockholders Indemnified Party has made a claim for indemnification or given a
Claims Notice under Section 8.4 hereof on or prior to such date, in which case
the right to indemnification with respect thereto shall survive until the
related claim for indemnification has been finally resolved and any obligations
with respect thereto are fully satisfied.
Error! Unknown switch argument..5.4 Treatment. Any indemnity payments by
an Indemnifying Party to an Indemnified Party under this Article VIII shall be
treated by the parties as an adjustment to the Purchase Price.
26
<PAGE>
8.5.5 Cap on indemnification. The liability of each of the Stockholders
with respect to losses arising out of any of the matters in this Agreement shall
not exceed (a) 100% of the Purchaser's shares of Common Stock issued to such
Stockholder pursuant to Section 2.1.1, or (b) USD 4,500,000 with respect to VH
and Lembke and USD 1,500,000 with respect to AMS and Hougaard, whichever the
lower. The Stockholders are jointly and severally liable up till the
aforementioned pro rata liability. As of June 30, 2001, the liability shall be
reduced to 50% of the shares or amounts mentioned. The Stockholders shall have
the option as to whether to satisfy its indemnification obligations in cash, in
shares of Purchaser's Common Stock, or in a combination thereof, and each share
of Purchaser's Common Stock shall be valued at its then-current value.
.ARTICLE Error! Unknown switch argument.
MISCELLANEOUS
Section Error! Unknown switch argument..Error! Unknown switch argument.
Expenses. The parties hereto shall pay all of their own expenses relating
to the transactions contemplated by this Agreement, including, without
limitation, the fees and expenses of their respective counsel and financial
advisers.
Section Error! Unknown switch argument..Error! Unknown switch argument.
Governing Law. The interpretation and construction of this Agreement, and
all matters relating hereto, shall be governed by the laws of Denmark without
reference to its conflict of laws provisions.
Section Error! Unknown switch argument..Error! Unknown switch argument.
"Person" Defined. "Person" shall mean and include an individual, a
company, a joint venture, a corporation, a limited liability company, a limited
liability partnership, a trust, an unincorporated organization and a government
or other department or agency thereof.
Section Error! Unknown switch argument..Error! Unknown switch argument.
"Knowledge" Defined. Where any representation and warranty contained in
this Agreement is expressly qualified by reference to the knowledge of a party,
such party confirms that it has made such due and diligent inquiry as to the
matters that are the subject of such representations and warranties as shall be
reasonable under the circumstances.
Section Error! Unknown switch argument..Error! Unknown switch argument.
"Affiliate" Defined. As used in this Agreement, an "affiliate" of any
Person, shall mean any Person that directly, or indirectly through one or more
intermediaries, controls, or is controlled by, or is under common control with
such Person.
27
<PAGE>
Section Error! Unknown switch argument..Error! Unknown switch argument.
Captions. The Article and Section captions used herein are for reference
purposes only, and shall not in any way affect the meaning or interpretation of
this Agreement.
Section Error! Unknown switch argument..Error! Unknown switch argument.
Publicity. Subject to the provisions of the next sentence, no party to
this Agreement shall, and the Stockholders shall insure that no representative
of the Company shall, issue any press release or other public document or make
any public statement relating to this Agreement or the matters contained herein
without obtaining the prior approval of the Purchaser, the Company and the
Stockholders. Notwithstanding the foregoing, the foregoing provision shall not
apply to the extent that Purchaser is required to make any announcement relating
to or arising out of this Agreement by virtue of the federal securities laws of
the United States or the rules and regulations promulgated thereunder or other
rules of the National Association of Securities Dealers or other stock exchange
on which the securities of the Purchaser may then be traded, or any announcement
by any party or the Company pursuant to applicable law or regulations.
Section Error! Unknown switch argument..Error! Unknown switch argument.
Notices. Unless otherwise provided herein, any notice, request,
instruction or other document to be given hereunder by any party to any other
party shall be in writing and shall be deemed to have been given (a) upon
personal delivery, if delivered by hand, (b) three days after the date of
deposit in the mails, postage prepaid, if mailed by certified or registered
mail, or (c) the next business day if sent by facsimile transmission (if receipt
is electronically confirmed) or by a prepaid overnight courier service, and in
each case at the respective addresses or numbers set forth below or such other
address or number as such party may have fixed by notice:
If to the Purchaser, addressed to:
Agency.Com Ltd.
665 Broadway
New York, New York 10012
Attention: Chief Financial Officer
Fax: (212) 358-8256
with a copy to:
Janet Ambrosi Wertman
Agency.Com Ltd.
1111 Chautauqua Boulevard
Pacific Palisades, California 90272
Fax: (310) 230-6936
If to the Stockholders to the address set forth on Exhibit A;
28
<PAGE>
Section Error! Unknown switch argument..Error! Unknown switch argument.
Parties in Interest. This Agreement may not be transferred, assigned, pledged or
hypothecated by any party hereto, other than by operation of law. This Agreement
shall be binding upon and shall inure to the benefit of the parties hereto and
their respective heirs, executors, administrators, successors and assigns.
Section Error! Unknown switch argument..Error! Unknown switch argument.
Severability. In the event any provision of this Agreement is found to be void
and unenforceable by a court of competent jurisdiction, the remaining provisions
of this Agreement shall nevertheless be binding upon the parties with the same
effect as though the void or unenforceable part had been severed and deleted.
Section Error! Unknown switch argument..Error! Unknown switch argument.
Counterparts. This Agreement may be executed in two or more counterparts, all of
which taken together shall constitute one instrument.
Section Error! Unknown switch argument..Error! Unknown switch argument.
Entire Agreement. This Agreement, including the other documents referred to
herein and the Exhibits and Schedules hereto which form a part hereof, contains
the entire understanding of the parties hereto with respect to the subject
matter contained herein and therein. This Agreement supersedes all prior
agreements and understandings between the parties with respect to such subject
matter.
Section Error! Unknown switch argument..Error! Unknown switch argument.
Amendments. This Agreement may not be amended, supplemented or modified orally,
but only by an agreement in writing signed by the Purchaser and the
Stockholders.
Section Error! Unknown switch argument..Error! Unknown switch argument.
Third Party Beneficiaries. Each party hereto intends that this Agreement shall
not benefit or create any right or cause of action in or on behalf of any person
other than the parties hereto and their respective successors and assigns as
permitted under Section 9.9.
Section Error! Unknown switch argument..16 Arbitration. Any controversy or
claim arising out of or relating to this Agreement, or any breach hereof, shall
be settled by arbitration in accordance with Danish law, including the Danish
Arbitration Act (Voldgiftsloven). The arbitration panel shall consist of three
arbitrators, one nominated by Purchaser, one nominated by the Stockholders and
the third to be selected by the other two. In the event the three arbitrators
shall not have been nominated within 30 days following a notice by either
Purchaser or the Stockholders to the other(s) of its intention to arbitrate, an
arbitrator for the party who has not nominated an arbitrator (if applicable) and
the third arbitrator shall be chosen by the Det Danske Voldgiftsinstitut (the
Danish Arbitration Institute) pursuant to its rules and regulations. The
determination of the arbitrators shall be not inconsistent with the terms of
this Agreement and shall be final and binding upon the parties to the
arbitration without the right of appeal. The arbitration shall be held in
Copenhagen, Denmark in the
29
<PAGE>
English language. The costs and expenses of the arbitrators shall be paid by the
non-prevailing party or parties to the arbitration proceeding. No party to this
Agreement shall be precluded from applying to a proper court for injunctive
relief by reason of the prior or subsequent commencement of an arbitration
proceeding as herein provided.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement, on
the day and year first above written.
AGENCY.COM LTD.
By: /s/ Johnathan Tann
------------------------------------
Name: Johnathan Tann
Title: Vice President
THE CORPORATE STOCKHOLDERS
VISIONIK HOLDING ApS
By: /s/ Jorgen Lembke
------------------------------------
ASSOCIATED MANAGEMENT SERVICES A/S
In pursuance of General Assembly
resolution:
By: /s/ Soren Hougaard-Hansen
------------------------------------
/s/ Jorgen Lembke
----------------------------------------
Jorgen Lembke
/s/ Soren Hougaard-Hansen
----------------------------------------
Soren Hougaard-Hansen
30
<PAGE>
Exhibits
Exhibit A: Shares; Addresses; Allocation of Purchase Price
Exhibit A-1: Notification signed by Visionik A/S concerning share exchange
Exhibit B1-1: Employment Agreement
Exhibit C-1: Non-Solicitation Agreement with Lembke
Exhibit C-2: Non-Solicitation Agreement with Hougaard
Exhibit D-1: Investment Representation Certificate with Lembke
Exhibit D-2: Investment Representation Certificate with Hougaard
Exhibit E-1: Lockup Agreement with Lembke
Exhibit E-2: Lockup Agreement with Hougaard
Schedules
- --------------------------------------------------------------------------------
Schedule 3.1.3 Description of Employee Option Scheme
- --------------------------------------------------------------------------------
Schedule 3.1.6 List of Consents and Approvals
- --------------------------------------------------------------------------------
Schedule 3.2 List of Jurisdictions of business
- --------------------------------------------------------------------------------
Schedule 3.3. List of the Visionik A/S's Subsidiaries
- --------------------------------------------------------------------------------
Schedule 3.3.1 Description of outstanding Options etc.
- --------------------------------------------------------------------------------
Schedule 3.4. Copies of Balance Sheets
- --------------------------------------------------------------------------------
Schedule 3.5 List of Information not in the possession of Visionik A/S
- --------------------------------------------------------------------------------
Schedule 3.6 List of Liens on Tangible Personal Property
- --------------------------------------------------------------------------------
Schedule 3.7.2 List of Real Property Leases
- --------------------------------------------------------------------------------
Schedule 3.8 List of Contracts, including current money arrangements etc.
- --------------------------------------------------------------------------------
Schedule 3.9.2 List of Consents and approvals
- --------------------------------------------------------------------------------
Schedule 3.10 List of litigation, claims and administrative proceedings
- --------------------------------------------------------------------------------
Schedule 3.11 List of contested tax assessments
- --------------------------------------------------------------------------------
Schedule 3.12 List of defaults in respect of borrowed money
- --------------------------------------------------------------------------------
Schedule 3.13 List of insurance policies
- --------------------------------------------------------------------------------
Schedule 3.14 Lists of registrations of Intellectual Property and Licenses
- --------------------------------------------------------------------------------
Schedule 3.16 List of the largest clients
- --------------------------------------------------------------------------------
Schedule 3.17 List of Material adverse changes after September 30, 1999
- --------------------------------------------------------------------------------
Schedule 3.20 Lists of interest in Customers, suppliers etc.
- --------------------------------------------------------------------------------
Schedule 3.21 List of Bank Accounts and Powers of Attorney etc.
- --------------------------------------------------------------------------------
Schedule 3.22 List of Compensation of Employees and exclusive consultants
- --------------------------------------------------------------------------------
Schedule 3.23 List of Material adverse changes after September 30, 1999
- --------------------------------------------------------------------------------
Schedule 4.3.2 List of Consents and Approvals
- --------------------------------------------------------------------------------
Schedule 4.4 Financial Statements of Purchaser
- --------------------------------------------------------------------------------
Schedule 4.4.1 US GAAP
- --------------------------------------------------------------------------------
Schedule 4.4.2 List of Material adverse changes with respect to Purchaser
- --------------------------------------------------------------------------------
Schedule 4.7 Stockholders Closing Percentage
- --------------------------------------------------------------------------------
31
<PAGE>
EXHIBIT A
Shares; addresses; allocation of purchase price
Visionik Holding ApS (registration no. ApS 240920 -- SE no. 20483288),
Hollaendervej 17, 3. th., DK-1855 Frederiksberg C, disposes of 375 shares in the
Company of a nominal value of DKK 375,000, and receives 429,000 shares of
Purchaser Common Stock.
Associated Management Services A/S (registration no. A/S 156640 -- SE no.
73684919), Lovvaenget 3, DK-2960 Rungsted Kyst, disposes of 125 shares in the
Company at a nominal value of DKK 125,000, and receives 143,000 shares of
Purchaser Common Stock.
Error! Unknown switch argument.
<PAGE>
EXHIBIT A-1
Notification signed by Visionik A/S concerning share exchange
In accordance with Article 25(b) of the Companies Act (Aktieselskabsloven) it is
hereby notified that the ownership to all shares issued by Visionik A/S (DKK
375,000 held by Visionik Holding ApS and DKK 125,000 held by Associated
Management Services A/S) have been transferred irrevocably to Agency.Com Ltd.,
665 Broadway, New York, New York 10012, USA, as of this date.
Copenhagen, November 3, 1999
Visionik Holding ApS:
by:
- ----------------------------------
Jorgen Lembke
Associated Management Services A/S:
by:
- ----------------------------------
Soren Hougaard-Hansen
Agency.Com Ltd.:
by:
- ----------------------------------
Johnathan Tann
***
<PAGE>
Visionik A/S hereby acknowledges that we have been informed of the above
transfer on November 3, 1999.
Visionik A/S:
by:
- ----------------------------------
Jorgen Lembke
- ----------------------------------
Soren Hougaard-Hansen
The authenticity and authority as well as the date of the signatures above on
behalf of Visionik Holding ApS, Associated Management Services A/S and Visionik
A/S are hereby certified.
by:
- ----------------------------------
Hans Madsen
Attorney of law,
Copenhagen
Error! Unknown switch argument.
2
<PAGE>
Exhibit 10.23
AGENCY.COM, LTD.
1999 EMPLOYEE STOCK PURCHASE PLAN
I. PURPOSE OF THE PLAN
This Employee Stock Purchase Plan is intended to promote the
interests of Agency.com, Ltd., a Delaware corporation, by providing eligible
employees with the opportunity to acquire a proprietary interest in the
Corporation through participation in a payroll-deduction based employee stock
purchase plan designed to qualify under Section 423 of the Code.
Capitalized terms herein shall have the meanings assigned to such
terms in the attached Appendix.
II. ADMINISTRATION OF THE PLAN
The Plan Administrator shall have full authority to interpret and
construe any provision of the Plan and to adopt such rules and regulations for
administering the Plan as it may deem necessary in order to comply with the
requirements of Code Section 423. Decisions of the Plan Administrator shall be
final and binding on all parties having an interest in the Plan.
III. STOCK SUBJECT TO PLAN
A. The stock purchasable under the Plan shall be shares of
authorized but unissued or reacquired Common Stock, including shares of Common
Stock purchased on the open market. The maximum number of shares of Common Stock
which may be issued in the aggregate under the Plan shall initially be limited
to One Million (1,000,000) shares.
B. On the first business day of each calendar year, beginning with
the year 2000, the share reserve shall be automatically increased by the number
of shares of Common Stock issued under the Plan in the immediately preceding
calendar year; however, in no event shall such annual increases exceed Two
Hundred Thousand (200,000) shares.
C. Should any change be made to the Common Stock by reason of any
stock split, stock dividend, recapitalization, combination of shares, exchange
of shares or other change affecting the outstanding Common Stock as a class
without the Corporation's receipt of consideration, appropriate adjustments
shall be made to (i) the maximum number and class of securities issuable under
the Plan, (ii) the maximum number and class of securities by which the share
reserve is to increase automatically each year, (iii) the maximum number and
class of securities purchasable per Participant on any one Purchase Date and
(iv) the number and class of securities and the price per share in effect under
each outstanding purchase right in order to prevent the dilution or enlargement
of benefits thereunder.
<PAGE>
IV. PURCHASE PERIODS
A. Shares of Common Stock shall be offered for purchase under the
Plan through a series of successive purchase periods until such time as (i) the
maximum number of shares of Common Stock available for issuance under the Plan
shall have been purchased or (ii) the Plan shall have been sooner terminated.
B. Each purchase period shall have a duration of six (6) months.
Purchase periods shall run from the first business day in May to the last
business day in October each year and from the first business day in November to
the last business day in April of the following year. However, the first
purchase period shall commence at the Effective Time and terminate on the last
business day in April 2000.
V. ELIGIBILITY
A. Each individual who is an Eligible Employee at the Effective Time
may enter a purchase period under the Plan on the start date of such period,
provided he or she is an Eligible Employee on that date.
B. Each individual who becomes an Eligible Employee after the
Effective Time may join the Plan on the start date of any purchase period
provided such individual has completed at least six (6) months of service as an
employee to the Corporation or any Corporate Affiliate prior to such start date
and is an Eligible Employee on such date.
C. To participate in the Plan for a particular purchase period, the
Eligible Employee must complete the enrollment forms prescribed by the Plan
Administrator (including a stock purchase agreement and a payroll deduction
authorization) and file such forms with the Plan Administrator (or its
designate) on or before the start date of the purchase period.
VI. PAYROLL DEDUCTIONS
A. The payroll deduction authorized by the Participant for purposes
of acquiring shares of Common Stock under the Plan may be any multiple of one
percent (1%) of the Cash Earnings paid to the Participant during each purchase
period, up to a maximum of fifteen percent (15%). The deduction rate so
authorized shall continue in effect from purchase period to purchase period,
except to the extent changed by the Participant. The Participant may not
increase his or her rate of payroll deduction during a purchase period. However,
the Participant may, at any time during the purchase period, reduce his or her
rate of payroll deduction to become effective as soon as possible after filing
the appropriate form with the Plan Administrator. The Participant may not,
however, effect more than one (1) such reduction per purchase period.
B. Payroll deductions shall begin on the first pay day following the
start date of the purchase period and shall (unless sooner terminated by the
Participant) continue through the pay day ending with or immediately prior to
the last day of the purchase period. The amounts so collected shall be credited
to the Participant's book account under the Plan, but no
2
<PAGE>
interest shall be paid on the balance from time to time outstanding in such
account. The amounts collected from the Participant shall not be required to be
held in any segregated account or trust fund and may be commingled with the
general assets of the Corporation and used for general corporate purposes.
C. Payroll deductions shall automatically cease upon the termination
of the Participant's purchase right in accordance with the provisions of the
Plan.
D. The Participant's acquisition of Common Stock under the Plan on
any Purchase Date shall neither limit nor require the Participant's acquisition
of Common Stock on any subsequent Purchase Date.
VII. PURCHASE RIGHTS
A. Grant of Purchase Right. A Participant shall be granted a
separate purchase right on the start date of each purchase period in which he or
she participates. The purchase right shall provide the Participant with the
right to purchase shares of Common Stock on the Purchase Date upon the terms set
forth below. The Participant shall execute a stock purchase agreement embodying
such terms and such other provisions (not inconsistent with the Plan) as the
Plan Administrator may deem advisable.
Under no circumstances shall purchase rights be granted under the
Plan to any Eligible Employee if such individual would, immediately after the
grant, own (within the meaning of Code Section 424(d)) or hold outstanding
options or other rights to purchase, stock possessing five percent (5%) or more
of the total combined voting power or value of all classes of stock of the
Corporation or any Corporate Affiliate.
B. Exercise of the Purchase Right. Each purchase right shall be
automatically exercised on the Purchase Date, and shares of Common Stock shall
accordingly be purchased on behalf of each Participant (other than Participants
whose payroll deductions have previously been refunded pursuant to the
Termination of Purchase Right provisions below) on each such Purchase Date. The
purchase shall be effected by applying the Participant's payroll deductions for
the purchase period ending on such Purchase Date to the purchase of whole shares
of Common Stock at the purchase price in effect for that purchase period.
C. Purchase Price. The purchase price per share at which Common
Stock will be purchased on the Participant's behalf on each Purchase Date shall
be equal to eighty-five percent (85%) of the lower of (i) the Fair Market Value
per share of Common Stock on the start date of the purchase period or (ii) the
Fair Market Value per share of Common Stock on that Purchase Date.
D. Number of Purchasable Shares. The number of shares of Common
Stock purchasable by a Participant on each Purchase Date shall be the number of
whole shares obtained by dividing the amount collected from the Participant
through payroll deductions during the purchase period ending with that Purchase
Date by the purchase price in effect for the
3
<PAGE>
Participant for that Purchase Date. However, the maximum number of shares of
Common Stock purchasable per Participant on any one Purchase Date shall not
exceed 1,000 shares.
E. Excess Payroll Deductions. Any payroll deductions not applied to
the purchase of shares of Common Stock on any Purchase Date because they are not
sufficient to purchase a whole share of Common Stock shall be held for the
purchase of Common Stock on the next Purchase Date. However, any payroll
deductions not applied to the purchase of Common Stock by reason of the
limitation on the maximum number of shares purchasable by the Participant on the
Purchase Date shall be promptly refunded.
F. Termination of Purchase Right. The following provisions shall
govern the termination of outstanding purchase rights:
(i) A Participant may, at any time prior to the last day of
the purchase period, terminate his or her outstanding purchase right by
filing the appropriate form with the Plan Administrator (or its
designate), and no further payroll deductions shall be collected from the
Participant with respect to the terminated purchase right. Any payroll
deductions collected during the purchase period in which such termination
occurs shall be refunded as soon as possible.
(ii) The termination of such purchase right shall be
irrevocable, and the Participant may not subsequently rejoin the purchase
period for which the terminated purchase right was granted. In order to
resume participation in any subsequent purchase period, such individual
must re-enroll in the Plan (by making a timely filing of the prescribed
enrollment forms) on or before the start date of the new purchase period.
(iii) Should the Participant cease to remain an Eligible
Employee for any reason (including death, disability or change in status)
while his or her purchase right remains outstanding, then that purchase
right shall immediately terminate, and all of the Participant's payroll
deductions for the purchase period in which the purchase right so
terminates shall be immediately refunded. However, should the Participant
cease to remain in active service by reason of an approved unpaid leave of
absence, then the Participant shall have the right, exercisable up until
the last business day of the purchase period in which such leave
commences, to (a) withdraw all of the payroll deductions collected to date
on his or her behalf for that purchase period or (b) have such funds held
for the purchase of shares on his or her behalf on the next scheduled
Purchase Date. In no event shall any further payroll deductions be
collected on the Participant's behalf during such leave. Upon the
Participant's return to active service (i) within ninety (90) days
following the commencement of such leave or, (ii) prior to the expiration
of any longer period for which such Participant's right to reemployment
with the Corporation is guaranteed by either statute or contract, his or
her payroll deductions under the Plan shall automatically resume at the
rate in effect at the time the leave began. However, should the
Participant's leave of absence exceed ninety (90) days and his or her
re-employment rights not be
4
<PAGE>
guaranteed by either statute or contract, then the Participant's status as
an Eligible Employee will be deemed to terminate on the ninety-first
(91st) day of that leave, and such Participant's purchase right for the
purchase period in which that leave began shall thereupon terminate. An
individual who returns to active employment following such a leave shall
be treated as a new Employee for purposes of the Plan and must, in order
to resume participation in the Plan, re-enroll in the Plan (by making a
timely filing of the prescribed enrollment forms) on or before the start
date of the new purchase period.
G. Change in Control. Each outstanding purchase right shall
automatically be exercised, immediately prior to the effective date of any
Change in Control by applying the payroll deductions of each Participant for the
purchase period in which such Change in Control occurs to the purchase of whole
shares of Common Stock at a purchase price per share equal to eighty-five
percent (85%) of the lower of (i) the Fair Market Value per share of Common
Stock on the start date of the purchase period in which such Change in Control
occurs or (ii) the Fair Market Value per share of Common Stock immediately prior
to the effective date of such Change in Control. However, the applicable
limitation on the number of shares of Common Stock purchasable per Participant
shall continue to apply to any such purchase.
The Corporation shall use its best efforts to provide at least ten
(10)-days prior written notice of the occurrence of any Change in Control, and
Participants shall, following the receipt of such notice, have the right to
terminate their outstanding purchase rights prior to the effective date of the
Change in Control.
H. Proration of Purchase Rights. Should the total number of shares
of Common Stock to be purchased pursuant to outstanding purchase rights on any
particular date exceed the number of shares then available for issuance under
the Plan, the Plan Administrator shall make a pro-rata allocation of the
available shares on a uniform and nondiscriminatory basis, and the payroll
deductions of each Participant, to the extent in excess of the aggregate
purchase price payable for the Common Stock pro-rated to such individual, shall
be refunded.
I. Assignability. The purchase right shall be exercisable only by
the Participant and shall not be assignable or transferable by the Participant.
J. Stockholder Rights. A Participant shall have no stockholder
rights with respect to the shares subject to his or her outstanding purchase
right until the shares are purchased on the Participant's behalf in accordance
with the provisions of the Plan and the Participant has become a holder of
record of the purchased shares.
VIII. ACCRUAL LIMITATIONS
A. No Participant shall be entitled to accrue rights to acquire
Common Stock pursuant to any purchase right outstanding under this Plan if and
to the extent such accrual, when aggregated with (i) rights to purchase Common
Stock accrued under any other purchase right granted under this Plan and (ii)
similar rights accrued under other employee stock purchase plans (within the
meaning of Code Section 423) of the Corporation or any Corporate Affiliate,
would
5
<PAGE>
otherwise permit such Participant to purchase more than Twenty-Five Thousand
Dollars ($25,000) worth of stock of the Corporation or any Corporate Affiliate
(determined on the basis of the Fair Market Value per share on the date or dates
such rights are granted) for each calendar year such rights are at any time
outstanding.
B. For purposes of applying such accrual limitations to the purchase
rights granted under the Plan, the following provisions shall be in effect:
(i) The right to acquire Common Stock under each outstanding
purchase right shall accrue on the Purchase Date in effect for the period
on which such right is granted.
(ii) No right to acquire Common Stock under any outstanding
purchase right shall accrue to the extent the Participant has already
accrued in the same calendar year the right to acquire Common Stock under
one (1) or more other purchase rights at a rate equal to Twenty-Five
Thousand Dollars ($25,000) worth of Common Stock (determined on the basis
of the Fair Market Value per share on the date or dates of grant) for each
calendar year such rights were at any time outstanding.
C. If by reason of such accrual limitations, any purchase right of a
Participant does not accrue for a particular purchase period, then the payroll
deductions which the Participant made during that purchase period with respect
to such purchase right shall be promptly refunded.
D. In the event there is any conflict between the provisions of this
Article and one or more provisions of the Plan or any instrument issued
thereunder, the provisions of this Article shall be controlling.
IX. EFFECTIVE DATE AND TERM OF THE PLAN
A. The Plan was adopted by the Board on October 13, 1999 and shall
become effective on the Effective Date, provided no purchase rights granted
under the Plan shall be exercised, and no shares of Common Stock shall be issued
hereunder, until (i) the Plan shall have been approved by the stockholders of
the Corporation and (ii) the Corporation shall have complied with all applicable
requirements of the 1933 Act (including the registration of the shares of Common
Stock issuable under the Plan on a Form S-8 registration statement filed with
the Securities and Exchange Commission), all applicable listing requirements of
any stock exchange (or the Nasdaq National Market, if applicable) on which the
Common Stock is listed for trading and all other applicable requirements
established by law or regulation. In the event such stockholder approval is not
obtained, or such compliance is not effected, within twelve (12) months after
the date on which the Plan is adopted by the Board, the Plan shall terminate and
have no further force or effect, and all sums collected from Participants during
the initial purchase period hereunder shall be refunded.
6
<PAGE>
B. Unless sooner terminated by the Board, the Plan shall terminate
upon the earliest of (i) the last business day in October 2009, (ii) the date on
which all shares available for issuance under the Plan shall have been sold
pursuant to purchase rights exercised under the Plan or (iii) the date on which
all purchase rights are exercised in connection with a Corporate Transaction. No
further purchase rights shall be granted or exercised, and no further payroll
deductions shall be collected, under the Plan following such termination.
X. AMENDMENT/TERMINATION OF THE PLAN
A. The Board may alter, amend, suspend or terminate the Plan at any
time to become effective immediately following the close of any purchase period.
However, the Plan may be amended or terminated immediately upon Board action, if
and to the extent necessary to assure that the Corporation will not recognize,
for financial reporting purposes, any compensation expense in connection with
the shares of Common Stock offered for purchase under the Plan, should the
financial accounting rules applicable to the Plan at the Effective Time be
subsequently revised so as to require the recognition of compensation expense in
the absence of such amendment or termination.
B. In no event may the Board effect any of the following amendments
or revisions to the Plan without the approval of the Corporation's stockholders:
(i) increase the number of shares of Common Stock issuable under the Plan or the
maximum number of shares purchasable per Participant on any one Purchase Date,
except for permissible adjustments in the event of certain changes in the
Corporation's capitalization, (ii) alter the purchase price formula so as to
reduce the purchase price payable for the shares of Common Stock purchasable
under the Plan or (iii) modify eligibility requirements for participation in the
Plan.
XI. GENERAL PROVISIONS
A. Nothing in the Plan shall confer upon the Participant any right
to continue in the employ of the Corporation or any Corporate Affiliate for any
period of specific duration or interfere with or otherwise restrict in any way
the rights of the Corporation (or any Corporate Affiliate employing such person)
or of the Participant, which rights are hereby expressly reserved by each, to
terminate such person's employment at any time for any reason, with or without
cause.
B. All costs and expenses incurred in the administration of the Plan
shall be paid by the Corporation; however, each Plan Participant shall bear all
costs and expenses incurred by such individual in the sale or other disposition
of any shares purchased under the Plan.
C. The provisions of the Plan shall be governed by the laws of the
State of New York without resort to that State's conflict-of-laws rules.
7
<PAGE>
Schedule A
Corporations Participating in
Employee Stock Purchase Plan
As of the Effective Time
AGENCY.COM, LTD.
AGENCY.COM, LTD.
AGENCY.COM LIMITED
AGENCY.COM : PARIS S.A. (formerly SRC Localisation)
AGENCY.COM : AMSTERDAM B.V. (formerly Twinspark
Interactive People B.V.)
INTERACTIVE TRAFFIC INC.
AGENCY INTERACTIVE MANAGEMENT INC.
<PAGE>
APPENDIX
The following definitions shall be in effect under the Plan:
A. Board shall mean the Corporation's Board of Directors.
B. Cash Earnings shall mean the (i) regular base salary paid to a
Participant by one or more Participating Companies during such individual's
period of participation in one or more offering periods under the Plan plus (ii)
all overtime payments, bonuses, profit-sharing distributions and other
incentive-type payments received during such period. Such Cash Earnings shall be
calculated before deduction of (A) any income or employment tax withholdings or
(B) any and all contributions made by the Participant to any Code Section 401(k)
salary deferral plan or Code Section 125 cafeteria benefit program now or
hereafter established by the Corporation or any Corporate Affiliate. However,
Cash Earnings shall not include any contributions made on the Participant's
behalf by the Corporation or any Corporate Affiliate to any employee benefit or
welfare plan now or hereafter established (other than Code Section 401(k) or
Code Section 125 contributions).
C. Change in Control shall mean any of the following transactions
effecting a change in ownership or control of the Corporation:
(i) a merger or consolidation in which securities possessing
more than fifty percent (50%) of the total combined voting power of the
Corporation's outstanding securities are transferred to a person or
persons different from the persons holding those securities immediately
prior to such transaction,
(ii) the sale, transfer or other disposition of all or
substantially all of the assets of the Corporation in complete liquidation
or dissolution of the Corporation, or
(iii) the acquisition, directly or indirectly, by any person
or related group of persons (other than the Corporation or a person that
directly or indirectly controls, is controlled by, or is under common
control with, the Corporation), of beneficial ownership (within the
meaning of Rule 13d-3 of the 1934 Act) of securities possessing more than
fifty percent (50%) of the total combined voting power of the
Corporation's outstanding securities pursuant to a tender or exchange
offer made directly to the Corporation's stockholders.
D. Code shall mean the Internal Revenue Code of 1986, as amended.
E. Common Stock shall mean the Corporation's common stock.
A-1
<PAGE>
F. Corporate Affiliate shall mean any parent or subsidiary
corporation of the Corporation (as determined in accordance with Code Section
424), whether now existing or subsequently established.
G. Corporation shall mean Agency.com, Ltd., a Delaware corporation,
and any corporate successor to all or substantially all of the assets or voting
stock Agency.com, Ltd. which shall by appropriate action adopt the Plan.
H. Effective Time shall mean the time at which the Underwriting
Agreement is executed and the Common Stock priced for the initial public
offering. Any Corporate Affiliate which becomes a Participating Corporation
after such Effective Time shall designate a subsequent Effective Time with
respect to its employee-Participants.
I. Eligible Employee shall mean any person who is employed by a
Participating Corporation on a basis under which he or she is regularly expected
to render more than twenty (20) hours of service per week for more than five (5)
months per calendar year for earnings considered wages under Code Section
3401(a).
J. Fair Market Value per share of Common Stock on any relevant date
shall be determined in accordance with the following provisions:
(i) If the Common Stock is at the time traded on the Nasdaq
National Market, then the Fair Market Value shall be the closing selling
price per share of Common Stock on the date in question, as such price is
reported by the National Association of Securities Dealers on the Nasdaq
National Market or any successor system. If there is no closing selling
price for the Common Stock on the date in question, then the Fair Market
Value shall be the closing selling price on the last preceding date for
which such quotation exists.
(ii) If the Common Stock is at the time listed on any Stock
Exchange, then the Fair Market Value shall be the closing selling price
per share of Common Stock on the date in question on the Stock Exchange
determined by the Plan Administrator to be the primary market for the
Common Stock, as such price is officially quoted in the composite tape of
transactions on such exchange. If there is no closing selling price for
the Common Stock on the date in question, then the Fair Market Value shall
be the closing selling price on the last preceding date for which such
quotation exists.
(iii) For purposes of the initial purchase period which begins
at the Effective Time, the Fair Market Value shall be deemed to be equal
to the price per share at which the Common Stock is sold in the initial
public offering.
K. 1933 Act shall mean the Securities Act of 1933, as amended.
L. 1934 Act shall mean the Securities Exchange Act of 1934, as
amended.
A-2
<PAGE>
M. Participant shall mean any Eligible Employee of a Participating
Corporation who is actively participating in the Plan.
N. Participating Corporation shall mean the Corporation and such
Corporate Affiliate or Affiliates as may be authorized from time to time by the
Board to extend the benefits of the Plan to their Eligible Employees. The
Participating Corporations in the Plan are listed in attached Schedule A.
0. Plan shall mean the Corporation's 1999 Employee Stock Purchase
Plan, as set forth in this document.
P. Plan Administrator shall mean the committee of two (2) or more
Board members appointed by the Board to administer the Plan.
Q. Purchase Date shall mean the last business day of each purchase
period. The initial Purchase Date shall be April 28, 2000.
R. Stock Exchange shall mean either the American Stock Exchange or
the New York Stock Exchange.
A-3
<PAGE>
Exhibit 11.1
AGENCY.COM LTD
SUPPLEMENTAL BASIC AND DILUTED NET LOSS
PER COMMON SHARE COMPUTATION
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1999
------------------------
(UNAUDITED)
<S> <C>
CALCULATION OF SUPPLEMENTAL SHARES OUTSTANDING:
Debt to be repaid by offering proceeds....................................... $ 20,250,000
Proceeds per share........................................................... 11.00
--------------------
Additional shares assumed outstanding........................................ 1,840,909
-------------------
Additional weighted average common shares outstanding........................ 1,840,909
Weighted average common shares outstanding................................... 23,186,818
-------------------
Supplemental weighted average common shares outstanding...................... 25,027,727
-------------------
-------------------
SUPPLEMENTAL BASIC AND DILUTED NET LOSS PER SHARE:
Net loss..................................................................... $ (6,615,029)
Pro forma impact of use of proceeds on interest expense...................... 987,188
-------------------
Supplemental basic and diluted net loss...................................... (5,627,842)
Supplemental weighted average common shares outstanding...................... (2,502,772)
-------------------
Supplemental basic and diluted net loss per common share..................... $ (0.22)
-------------------
-------------------
</TABLE>
<PAGE>
Exhibit 21.1
Subsidiary
----------
Agency.Com Ltd., a company incorporated in England and Wales under the
Companies Act 1985 as a limited company.
Agency.Com, Amsterdamn B.V., a company incorporated under the laws of the
Kingdom of the Netherlands as a limited liability company (formerly Twinspark
Interactive People B.V.).
Agency Interactive Management Inc., a corporation organized under the laws of
the Commonwealth of Massachusetts.
ITI Acquisition Inc. (to be known as Interactive Traffic Inc.), a corporation
organized under the laws of the State of Delaware.
AGENCY.COM Paris SA, a company established under French law.
Visionik A/S, a company incorporated under the laws of the state of Denmark
as a limited liability company.
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
reports dated November 9, 1999 for AGENCY.COM Ltd. and subsidiaries, July 19,
1999 for Eagle River Interactive Inc., July 16, 1999 for Interactive Solutions,
Inc., July 16, 1999 for Quadris Consulting included in or made a part of this
registration statement.
ARTHUR ANDERSEN LLP
New York, New York
November 9, 1999
<PAGE>
Exhibit 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
report July 19, 1999 for Eagle River Interactive included in or made a
part of this registration statement.
ARTHUR ANDERSEN LLP
Denver, Colorado
November 9, 1999
<PAGE>
Exhibit 23.3
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
report August 9, 1999 for Twinspark Interactive People B.V. included in
or made a part of this registration statement.
ARTHUR ANDERSEN
Rotterdam, The Netherlands
November 9, 1999
<PAGE>
Exhibit 23.4
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the AGENCY.COM Ltd. Registration Statement on
Form S-1 Amendment No. 2 of our report dated September 23, 1999, except for
Note 12, as to which the date is October 21, 1999, relating to the financial
statements and financial statement schedules of Interactive Traffic, Inc.,
which appear in such Registration Statement. We also consent to the reference
to us under the heading "Experts" in such Registration Statement.
PricewaterhouseCoopers LLP
New York, NY
November 9, 1999
<PAGE>
Exhibit 23.5
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
report dated November 2, 1999 for Visionik A/S and Subsidiaries included in
or made a part of this registration statement.
Moore Stephens, Denmark
/s/ Arne Nabe Poulsen
Arne Nabe Poulsen
State Authorized Public Accountant
Copenhagen, Denmark
November 9, 1999
<PAGE>
Exhibit 24.2
POWER OF ATTORNEY
I, the undersigned officer of AGENCY.COM Ltd. (the "Company"), hereby
constitute and appoint Chan Suh, President and Chief Executive Officer, and
Kenneth Trush, Executive Vice President, and each of them individually, with
full powers of substitution and resubstitution, my true and lawful attorneys,
with full powers to them and each of them to sign for me, in my name and in
my capacity as Executive Vice President and Chief Financial Officer, the
Registration Statement on Form S-1 filed with the Securities and Exchange
Commission, and any and all amendments to said Registration Statment
(including post-effective amendments), and any registration statement filed
pursuant to Rule 462(b) under the Securities Act of 1933, as amended, in
connection with the registration under the Securities Act of 1933, as
amended, of equity securities of the Company, and to file or cause to be
filed the same, with all exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys, and each of them, full power and authority to do and perform
therewith, as fully to all intents and purposes as each of them might or
could do in person, and hereby ratifying and confirming all that said
attorneys, and each of them, or their substitute or substitutes, shall do or
cause to be done by virture of this Power of Attorney.
/s/ Charles Dickson Executive Vice President, Chief Financial
- -------------------------------- Officer
Charles Dickson (principal financial and accounting officer)
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE AUDITED
CONSOLIDATED FINANCIAL STATEMENTS OF AGENCY.COM LTD. AND SUBSIDIARIES AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> YEAR 6-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1999
<PERIOD-START> JAN-01-1998 JAN-01-1999
<PERIOD-END> DEC-31-1998 SEP-30-1999
<CASH> 769,358 725,863
<SECURITIES> 0 0
<RECEIVABLES> 5,483,941 29,468,734
<ALLOWANCES> 825,576 5,327,125
<INVENTORY> 0 0
<CURRENT-ASSETS> 8,108,382 37,556,765
<PP&E> 5,842,525 19,582,807
<DEPRECIATION> 1,627,397 7,928,884
<TOTAL-ASSETS> 25,483,095 107,488,496
<CURRENT-LIABILITIES> 6,789,656 19,683,547
<BONDS> 0 0
0 0
0 0
<COMMON> 17,178 26,664
<OTHER-SE> 2,698,917 17,211,752
<TOTAL-LIABILITY-AND-EQUITY> 25,483,095 107,488,496
<SALES> 26,452,191 56,499,289
<TOTAL-REVENUES> 26,452,191 56,499,289
<CGS> 15,930,029 28,784,372
<TOTAL-COSTS> 15,930,029 28,784,372
<OTHER-EXPENSES> 13,574,397 31,966,378
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 359,761 2,124,962
<INCOME-PRETAX> (3,117,304) (6,376,423)
<INCOME-TAX> (1,212,575) 238,606
<INCOME-CONTINUING> (2,480,980) (6,615,029)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (2,480,980) (6,615,029)
<EPS-BASIC> (0.15) (0.29)
<EPS-DILUTED> (0.15) (0.29)
</TABLE>
