-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, BMq2peywT5jqpoYjqI86TgR4zy9hLFBP5T4bUJ4eJ4bPGAS7kzdOhfJQ+26g8eRF U1dAYMPATGygX15egGpQJA== 0000950146-98-000975.txt : 19980608 0000950146-98-000975.hdr.sgml : 19980608 ACCESSION NUMBER: 0000950146-98-000975 CONFORMED SUBMISSION TYPE: S-1 PUBLIC DOCUMENT COUNT: 19 FILED AS OF DATE: 19980604 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: 24/7 MEDIA INC CENTRAL INDEX KEY: 0001062195 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 133995672 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1 SEC ACT: SEC FILE NUMBER: 333-56085 FILM NUMBER: 98642691 BUSINESS ADDRESS: STREET 1: 1250 BROADWAY CITY: NEW YORK STATE: NY ZIP: 10001 BUSINESS PHONE: 2126294285 MAIL ADDRESS: STREET 1: 1250 BROADWAY CITY: NEW YORK STATE: NY ZIP: 10001 S-1 1 FORM S-1 Registration No. 333- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 --------------- FORM S-1 REGISTRATION STATEMENT Under THE SECURITIES ACT OF 1933 --------------- 24/7 MEDIA, INC. (Exact name of Registrant as specified in its charter) DELAWARE 7319 13-3995672 (State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer incorporation or organization) Classification Code Number) Identification No.)
1250 Broadway, New York, NY 10001 (212) 231-7100 (Address, including zip code, and telephone number, including area code, of Registrant's principal executive offices) --------------- DAVID J. MOORE Chief Executive Officer 24/7 Media, Inc. 1250 Broadway, New York, New York 10001 (212) 231-7100 Fax (212) 760-1774 (Name, address, including zip code, and telephone number, including area code, of agent for service) --------------- Copies of Communications to: Ronald R. Papa, Esq. Larry W. Sonsini, Esq. Proskauer Rose LLP David Drummond, Esq. 1585 Broadway Wilson Sonsini Goodrich & Rosati New York, New York 10036-8299 Professional Corporation (212) 969-3000 650 Page Mill Road Fax (212) 969-2900 Palo Alto, California 94304 (650) 493-9300 Fax (650) 493-6811
--------------- Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement becomes effective. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. - If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. - If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration number of the earlier effective registration statement for the same offering. - ------- If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. - CALCULATION OF REGISTRATION FEE - --------------------------------------------------------------------------------
Title of each class of Securities Proposed Maximum Aggregate Amount of Registration To Be Registered Offering Price (1)(2) Fee - ---------------------------------------- ---------------------------- ----------------------- Common Stock, par value $.01 per share $46,000,000 $13,570
(1) Includes $6,000,000 of Common Stock, par value $.01 per share (the "Common Stock") which the Underwriters have an option to purchase to cover over- allotments, if any. (2) Estimated pursuant to Rule 457(o) under the Securities Act of 1933, as amended, solely for the purpose of calculating the registration fee. --------------- The Registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SUBJECT TO COMPLETION PRELIMINARY PROSPECTUS DATED JUNE 4, 1998 PROSPECTUS Shares 24/7 Media, Inc. Common Stock ---------------- All of the shares of Common Stock, par value $.01 per share, (the "Common Stock") offered hereby (the "Offering") are being sold by 24/7 Media, Inc. ("24/7 Media" or the "Company"). Prior to the Offering, there has been no public market for the Common Stock. It is currently estimated that the initial public offering price for the Common Stock will be between $ and $ per share. See "Underwriting" for information relating to the factors considered in determining the initial public offering price of the Common Stock. Shares of Common Stock may be reserved for sale at the public offering price to the Company's employees, directors and other persons with relationships with the Company. Such employees, directors and other persons may purchase, in the aggregate, not more than 10% of the Common Stock offered hereby. See "Underwriting." The Company intends to apply for listing of the Common Stock on the Nasdaq National Market under the symbol "TFSM." See "Risk Factors" beginning on page 5 for a discussion of certain factors which should be considered by prospective purchasers of Common Stock offered hereby. ---------------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. ================================================================================
Price to Underwriting Proceeds to Public Discount (1) Company (2) ---------- -------------- ------------ Per Share......... $ $ $ - ------------------- ---------- -------------- ------------ Total (3) ......... $ $ $
================================================================================ (1) The Company has agreed to indemnify the several Underwriters against certain liabilities under the Securities Act of 1933, as amended. See "Underwriting." (2) Before deducting expenses payable by the Company estimated at $ . (3) The Company has granted the Underwriters an option to purchase up to an additional shares of Common Stock to cover over-allotments. If such option is exercised in full, the total Price to Public, Underwriting Discount and Proceeds to Company will be $ , $ , and $ , respectively. See "Underwriting." ---------------- The shares of Common Stock are offered by the several Underwriters, subject to prior sale, when, as and if accepted by them, subject to approval of certain legal matters by counsel for the Underwriters. The Underwriters reserve the right to withdraw, cancel or modify such offer and to reject orders in whole or in part. It is expected that delivery of the shares of Common Stock will be made in New York, New York, on or about , 1998. ---------------- Merrill Lynch & Co. Allen & Company Incorporated J.P. Morgan & Co. ---------------- The date of this Prospectus is , 1998. Information contained herein is subject to completion or amendment. A registration statement relating to these securities has been filed with the Securities and Exchange Commission. These securities may not be sold nor may offers to buy be accepted prior to the time the registration statement becomes effective. This prospectus shall not constitute an offer to sell or the solicitation of an offer to buy nor shall there be any sale of these securities in any State in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such State. CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK, INCLUDING OVER-ALLOTMENT, STABILIZING AND SHORT-COVERING TRANSACTIONS IN SUCH SECURITIES AND THE IMPOSITION OF A PENALTY BID IN CONNECTION WITH THE OFFERING. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING." PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information, including "Risk Factors" and the Consolidated Financial Statements (including the Notes thereto), appearing elsewhere in this Prospectus. The discussion in this prospectus contains forward looking statements that involve risks and uncertainties including, but not limited to, those specifically discussed in this Prospectus. 24/7 Media's actual results could differ materially from those discussed herein. The terms "24/7 Media" and "the Company" mean 24/7 Media, Inc. and its subsidiary and each of its predecessor entities. In addition, unless otherwise indicated, all information herein (i) assumes no exercise of the Underwriters' over-allotment option, (ii) reflects the automatic conversion of shares of the Company's Series A Preferred Stock into an aggregate of shares of Common Stock (the "Preferred Stock Conversion") to be effected simultaneously with the closing of the Offering, (iii) has not been adjusted to give effect to a 1-for- reverse split of the Company's Common Stock (the "Stock Split") to be effected prior to the closing of the Offering, and (iv) does not reflect the acquisition of CliqNow! as described under "Recent Developments" in this Prospectus Summary. The Company Overview 24/7 Media operates networks of Websites that enable both advertisers and Web publishers to capitalize on the many opportunities presented by Internet advertising, direct marketing and commerce. The Company generates revenues by delivering advertisements and promotions to Websites affiliated with the Company ("Affiliated Websites"). In particular, 24/7 Media: (i) operates the 24/7 Network (the "24/7 Network"), a network of over 80 high profile Websites to which the Company delivered an aggregate of over 325 million advertisements in April 1998; (ii) operates the ContentZone (the "ContentZone"), a network of over 2,000 small to medium-sized Websites to which the Company delivered an aggregate of over 40 million advertisements in April 1998; (iii) licenses its Adfinity[TM] advertising management system ("Adfinity[TM]") to independent Websites to manage and serve high-volume advertising and direct marketing campaigns; and (iv) markets its dbCommerce[TM] software ("db Commerce[TM]") to Web commerce companies ("e-commerce merchants") to enable the delivery of targeted promotions. The Company operates in the rapidly growing Internet advertising industry. International Data Corp. ("IDC") estimates that at the end of 1997 there were over 38 million users on the World Wide Web (the "Web") in the United States and over 68 million Web users worldwide, and that by the end of 2002 the number of Web users will increase to over 135 million in the United States and to over 319 million worldwide. Jupiter Communications projects that the dollar value of Internet advertising in the United States will increase from $940 million in 1997 to $7.7 billion in 2002. The Company believes that advertisers seek to place Internet ads in ways to maximize unduplicated "reach" (the breadth of user contacts on the Internet). During April 1998, the 365 million impressions generated by the Company's networks reached more than one third of all Internet users, according to a study prepared for the Company by Media Metrix. The Company believes that this reach figure is among the highest in the Internet advertising industry. The Company plans to aggressively recruit Websites of all sizes for its networks in order to further extend the Company's reach as well as to provide advertisers with a broad base of online content and Web pages viewed by Internet users ("page views"), and to improve the Company's brand awareness and visibility with media buyers. In addition, as online advertisers and direct marketers increase their use of the Internet, they seek solutions and technologies that allow them to efficiently deliver highly targeted messages. 24/7 Media's customized solutions allow advertisers and direct marketers to tailor their ad campaigns in order to reach desired audiences, while reducing costs, easing time pressures and alleviating the need to purchase a series of ad campaigns from numerous Web publishers. Advertisers and direct marketers can achieve their objectives by buying ad space on a specific Website, within a particular content channel or across an entire network. As Internet traffic grows, Web publishers increasingly seek to maximize the value of their online inventory. The Company's extensive sales and marketing experience enables Web publishers to access media buyers at large ad agencies and to sell advertisement space without incurring the costs and challenges associated with building and maintaining an ad sales force. Additionally, the ad serving and targeting capabilities of Adfinity[TM] effectively deliver advertisements to the Company's Affiliated Websites. 1 The recent addition of the Company's Adfinity[TM] and dbCommerce[TM] technologies allows 24/7 Media to provide comprehensive advertising solutions for advertisers, direct marketers and Web publishers. Adfinity[TM] is designed to target, deliver, and track advertisements and direct marketing promotions across the Company's networks. Adfinity[TM] can create a profile of an Internet user by integrating such user's online behavior with third party demographic and lifestyle data. These profiles can allow Adfinity[TM] to deliver targeted advertisements to the right person at the right time. dbCommerce[TM] software is designed to enable e-commerce merchants to deliver promotions and messages to targeted customer audiences by integrating database marketing techniques with customer transaction information and third party databases. The Company's senior management team includes several individuals with over fifteen years of experience in advertising sales in the television and proprietary online network industries. Other members of senior management contribute extensive knowledge of ad serving technology and database targeting. The Company leverages its media sales and technology expertise to maximize the value of ad campaigns for both advertisers and Affiliated Websites. Formation of the Company The Company was incorporated in Delaware on January 23, 1998 to consolidate three Internet advertising companies: (i) Petry Interactive, Inc. ("Petry"), a Delaware corporation which sold advertising for Websites organized in a network, (ii) Advercomm, Inc. ("Advercomm"), a newly-formed Delaware corporation which brought a number of high profile Websites to the 24/7 Network, and (iii) Interactive Imaginations, Inc. ("Interactive Imaginations"), a New York corporation which operated the ContentZone and Riddler.com. Subsequently, the Company acquired both Intelligent Interactions Corporation ("Intelligent Interactions"), a Delaware corporation that develops and licenses ad serving technology and e-commerce software, and the CliqNow! division ("CliqNow!") of K2 Design, Inc. The Company was formed as a wholly owned subsidiary of Interactive Imaginations. On February 24, 1998, the Company simultaneously consummated the merger of each of Petry and Advercomm with and into the Company (together with the concurrent investment of approximately $10 million by certain investors, the "Initial Merger"). On April 9, 1998, Interactive Imaginations was merged with and into the Company (together with the Initial Merger, the "Merger") . On April 13, 1998, the Company acquired Intelligent Interactions as a wholly-owned subsidiary of the Company (the "Acquisition"), and as of June 1, 1998, the Company acquired CliqNow!. The Company's principal executive offices are located at 1250 Broadway, New York, New York, 10001, and its telephone number at that location is (212) 231-7100. The Company's main Website address is www.247media.com. Recent Developments As of June 1, 1998, the Company acquired CliqNow! for $4,000,000, with $1,000,000 payable in cash and $3,000,000 payable in Series B Convertible Preferred Stock. The preferred stock converts to Common Stock automatically upon consummation of the Offering at a conversion price per share of Common Stock equal to the per share proceeds to the Company as set forth on the cover of this prospectus. CliqNow! is an Internet advertising network that generated revenues of $500,559 for the three months ended March 31, 1998 and $896,427 for the period from inception in April 1997 to December 31, 1997. CliqNow!'s network is comprised of approximately 80 medium to large Websites organized into eight topical channels: Financial, Golf, Tech, College, Travel, Sports, Home and Kids. The Company has also hired ten employees of CliqNow!, six of whom are principally engaged in sales. The Company intends to furnish CliqNow!'s audited financial statements within 60 days of the effective date of the acquisition pursuant to the requirements of Rule 3-05 of Regulation S-X of the Securities Act of 1933, as amended. 2 The Offering Common stock offered ........................... shares Common stock to be outstanding after the Offering ...................................... shares(1) Use of proceeds ................................ For general corporate purposes, including working capital, expansion of sales and marketing capabilities, and possible acquisitions. See "Use of Proceeds." Proposed Nasdaq National Market symbol ......... The Company intends to apply for a listing of the Common Stock on the Nasdaq National Market under the symbol "TFSM."
- ---------------- (1) Excludes approximately 3,733,951 shares of Common Stock issuable upon exercise of stock options outstanding at June 1, 1998 granted under the Company's 1998 Stock Incentive Plan (of which 675,931 are vested and exerciseable at June 1, 1998) and approximately 2,016,043 shares of Common Stock reserved for issuance pursuant to future grants under the 1998 Stock Incentive Plan. The outstanding stock options have a weighted average exercise price of $0.89 per share. Also excludes approximately 15,952,077 shares of Common Stock issuable upon exercise of outstanding warrants at June 1, 1998. Such warrants have a weighted average exercise price of $2.09 per share. Also excludes 3,000 shares of Series B Convertible Preferred Stock issued in connection with the acquisition of CliqNow!. See "Shares Eligible for Future Sale." 3 Summary Consolidated Financial Data
Three Months Ended Year Ended ----------------------------------------------------------------------------- December 31, March 31, June 30, Sept. 30, Dec. 31, March 31, 1997 1997 1997 1997 1997 1998 --------------- --------------- --------------- --------------- --------------- ------------- Pro Forma (1) - ------------------------------------ Consolidated Statement of Operations Data: Advertising revenue ............... $ 2,736,365 $ 399,688 $ 526,192 $ 649,036 $ 1,161,449 $ 1,846,748 Consulting and license fees ....... 1,746,896 805,245 639,588 244,890 57,173 88,362 Total revenue ................... 4,483,261 1,204,933 1,165,780 893,926 1,218,622 1,935,110 Gross profit ...................... 1,653,323 730,584 583,320 95,421 243,998 326,831 Operating loss (2) ................ (19,802,635) (8,034,181) (3,796,930) (5,144,072) (2,827,452) (3,849,659) Net loss .......................... (19,898,240) (8,020,039) (3,798,230) (5,174,674) (2,905,297) (4,028,351) Pro forma: Basic net loss per share (3) .................... Shares outstanding (3) ........... Historical - ------------------------------------- Consolidated Statement of Operations Data: Advertising revenue ............... $ 1,467,105 $ 388,892 $ 355,346 $ 315,697 $ 407,170 $ 1,076,250 Consulting and license fees ....... 1,681,464 805,245 630,588 233,130 12,501 -- Total revenue ................... 3,148,569 1,194,137 985,934 548,827 419,671 1,076,250 Gross profit ...................... 1,493,229 734,550 551,294 37,361 170,024 146,247 Operating loss .................... (5,209,362) (798,059) (1,423,535) (2,400,167) (587,601) (2,128,080) Net loss .......................... (5,305,828) (784,377) (1,427,594) (2,433,302) (660,555) (2,295,338) Cumulative dividends on mandatorily redeemable convertible preferred stock ...... -- -- -- -- -- (33,500) Net loss attributable to common stockholders ..................... $ (5,305,828) $ (784,377) $ (1,427,594) $ (2,433,302) $ (666,555) $ (2,328,838) Basic net loss per share (3) .................... Shares outstanding (3) ............ As of March 31, 1998 -------------------------------------------------- Pro Forma Actual Pro Forma (4) As Adjusted (5) ------------- --------------- ---------------- Consolidated Balance Sheet Data: Cash and cash equivalents .................................. $ 7,764,695 $ 7,768,370 Working capital ............................................ 6,317,136 6,033,480 Goodwill, net .............................................. 7,870,174 10,217,580 Total assets ............................................... 18,201,993 20,783,592 Long-term debt ............................................. 479,408 479,408 Mandatorily redeemable convertible preferred stock ......... 10,093,502 -- Total stockholders' equity ................................. $ 4,264,180 $16,550,883
- ---------------- (1) Pro forma consolidated statement of operations data reflects the consolidation of the results of operations of Petry, Advercomm and Intelligent Interactions as if each company had been acquired on January 1, 1997 (or inception, if later) and the conversion of all outstanding shares of mandatorily redeemable convertible preferred stock into shares of Common Stock, which will be converted immediately prior to the Offering as if it had occurred on January 1, 1997. (2) Includes acquisition related non-cash charges for amortization of goodwill and write-off of acquired in-process technology. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Pro Forma Consolidated Financial Information and the related Notes thereto. (3) See Note 1 to the Company's Consolidated Financial Statements for the determination of shares used in computing pro forma basic net loss per share. (4) Pro forma consolidated balance sheet data gives effect to (i) the acquisition of Intelligent Interactions which occurred after March 31, 1998, as if such acquisition occurred on March 31, 1988 and (ii) the conversion of all outstanding shares of mandatorily redeemable convertible preferred stock into 14,308,306 shares of Common Stock immediately prior to the closing of this Offering. (5) Adjusted to reflect the sale of shares of Common Stock by the Company at the assumed initial public offering price of $ per share and the application of the estimated net proceeds therefrom. See "Use of Proceeds." 4 RISK FACTORS In addition to the other information in this Prospectus, prospective investors should consider carefully the following risk factors in evaluating the Company and its business before purchasing the Common Stock offered hereby. This Prospectus contains forward-looking statements that are based largely on the Company's current expectations and that are subject to a number of risks and uncertainties, including those set forth below. The Company's actual results could differ materially from the results discussed in "Risk Factors," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and elsewhere in this Prospectus. Extremely Limited Operating History; History of Losses; Integration of Acquired Entities Because none of the predecessor companies that were combined to form 24/7 Media had an operating history of more than four years, the Company has an extremely limited operating history upon which an evaluation of the Company can be based. The Company and its prospects must be considered in light of the risks, expenses and difficulties encountered by companies with limited operating histories, particularly companies in the new and rapidly evolving Internet market. To address these risks, the Company must, among other things, effectively develop new relationships and maintain existing relationships with customers, business and technology partners and other third parties; further develop and upgrade its technology; improve its technical support and service; respond to competitive developments; implement and improve operational, financial and managerial information systems; and attract, retain and motivate qualified personnel. There can be no assurance that the Company will succeed in addressing such risks and the failure to do so could have a material adverse effect on the Company's business, results of operations and financial condition. Although the Company has experienced revenue growth in recent periods, such growth may not be sustained and is not necessarily indicative of future operating results. The Company incurred pro forma net losses of $19.9 million for the year ended December 31, 1997 and $4.0 million for the three months ended March 31, 1998. Each of the predecessors of the Company had net losses in each year since its inception. The Company anticipates that it will incur operating losses for the foreseeable future due to a high level of planned operating and capital expenditures. There can be no assurance that operating losses will not increase in the future or that the Company will ever achieve or sustain profitability. The Company's business, results of operations and financial condition may be materially and adversely affected if revenues do not grow at anticipated rates or if the Company is unable to adjust operating expenses to appropriate levels for revenue levels achieved. 24/7 Media did not conduct any substantial operations until February 1998. In February 1998, the Company closed a transaction pursuant to which Petry and Advercomm were merged into the Company. In April 1998, the Company completed two transactions pursuant to which Interactive Imaginations was merged into the Company and Intelligent Interactions became a wholly-owned subsidiary of the Company. In June 1998, the Company acquired the CliqNow! network of Websites. See "Prospectus Summary--Formation of the Company" and "--Recent Developments." In order to effectively integrate the previously independent operations, the Company must continue to integrate and improve its financial and management controls, ad serving technology, reporting systems and procedures, and expand, train and manage its work force. Completion of such integration may take a significant period of time and will require the dedication of management and other resources, which may distract management's attention from other operations of the Company. See "--Management of Growth; Risks Associated with Acquisitions; Risks of International Expansion." Potential Fluctuations in Quarterly Operating Results; Seasonality The Company's results of operations may fluctuate significantly in the future as a result of a variety of factors, many of which are beyond the Company's control. These factors include the addition of new or loss of current advertisers or Affiliated Websites, changes in fees paid by advertisers, changes in the level of user traffic and number of available impressions on the Websites in the Company's networks, changes in service fees payable by the Company to Web publishers, the introduction of new Internet advertising services by the Company or its competitors, variations in the levels of capital expenditures and other costs relating to the expansion of the Company's operations, and general economic conditions. Future revenues and results of operations of the Company may be difficult to forecast due to such factors. Management believes that its revenues are also subject to seasonal fluctuations because advertisers generally place fewer advertisements during the first and third calendar quarters of each year. Additional seasonal patterns in Internet advertising spending may emerge as the industry matures. Expenditures by advertisers tend to vary in cycles that reflect overall economic conditions as well as budgeting and buying patterns. The Company's business 5 could be materially adversely affected by a decline in the economic prospects of advertisers or the economy generally, which could alter current or prospective advertisers' spending priorities or budget cycles or extend the Company's sales cycle with respect to certain of its advertisers. The Company's current and future expense levels are based in large part on its investment plans and estimates of future revenues. In particular, the Company expects to significantly increase its operating expenses in order to expand its sales and marketing organization and to enhance its Adfinity[TM] technology. To the extent that such expenses precede or are not subsequently followed by increased revenues, the Company's business, results of operations and financial condition would be materially and adversely affected. The Company may be unable to, or may elect not to, adjust spending in a timely manner to compensate for any unexpected revenue shortfall. Therefore, any significant shortfall in revenues in relation to the Company's expectations would have a material adverse effect on the Company's business, results of operations and financial condition. Due to the foregoing factors, 24/7 Media believes that period-to-period comparisons of its results of operations may not be meaningful and should not be relied upon as indicators of future performance. Furthermore it is possible that in some future periods the Company's results of operations may fall below the expectations of securities analysts and investors. In such event, the trading price of the Common Stock would likely be materially and adversely affected. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." Developing Market; Unproven Effectiveness of Web Advertising and Online Direct Marketing In the new and rapidly evolving Internet advertising market, demand and market acceptance for products and services are subject to high levels of uncertainty, and a significant number of entrants continually seek to penetrate the market. Since 24/7 Media expects to derive substantially all of its revenues in the foreseeable future from Internet advertising, the future success of the Company is highly dependent on the increased use of the Internet as an advertising medium. The Internet as an advertising medium has not been in existence for a sufficient period of time in order to demonstrate its effectiveness as compared with traditional advertising media. Most of the Company's current or potential advertising customers have limited or no experience using the Internet as an advertising medium, have not devoted a significant portion of their advertising expenditures to Internet advertising and may not find Internet advertising to be effective for promoting their products and services relative to advertising across traditional media. Companies adopting Internet advertising, particularly those that use traditional media for advertising, must accept new ways of conducting business and exchanging information. In addition, most Web publishers have limited or no experience in generating revenues from the sale of advertising space on their Websites. There can be no assurance that the market for Internet advertising will continue to emerge or be sustainable. Online advertising must demonstrate a level of effectiveness necessary to justify a reallocation of resources from traditional forms of advertising to this developing medium. There are currently no widely accepted standards to measure the effectiveness of Internet advertising and there can be no assurance that such standards will develop to sufficiently support Internet advertising as a significant advertising medium. Advertisers may not accept the Company's or third-party measurements of impressions on Websites utilizing the Company's services or that such measurements will not contain errors. In addition, the effectiveness of Internet advertising is dependent upon the accuracy of information contained in the databases used to target advertisements. There can be no assurance that the information in the Company's database will be accurate or that advertisers will be willing to have advertisements targeted by any database containing such potential inaccuracies. Actual or perceived ineffectiveness of online advertising generally, or accuracy of measurements or database information in particular, could limit the long-term growth of online advertising which would have a material adverse effect on the Company's business, results of operations and financial condition. Banner advertising, from which the Company currently derives most of its revenues, may not be an effective advertising method in the future. There can be no assurance that any other forms of Internet advertising will be developed or accepted by the market and if so developed, that the Company would effectively transition to the marketing and sale of such other forms of online advertising. Moreover, "filter" software programs that limit advertising from being delivered to a Website are currently available. Failure to successfully develop alternative forms of online advertising or widespread adoption of filter software could have a material adverse effect upon the Internet advertising market and 24/7 Media's business, results of operations and financial condition. 6 Adoption of online direct marketing, particularly by those entities that have historically relied upon traditional means of direct marketing (such as telemarketing and direct mail), requires the broad acceptance of a new and substantially different approach to direct marketing. As with online advertising and other new markets, intensive marketing and sales efforts may be necessary to educate prospective advertisers regarding the uses and benefits of the Company's products and services in order to generate demand for the Company's services. Enterprises that have already invested substantial resources in other methods of conducting business may be reluctant or slow to adopt a new approach that may replace, limit, or compete with their existing systems. In addition, since online direct marketing is emerging as a new and distinct market apart from online advertising, potential adoptees of online direct marketing services will increasingly demand functionality tailored to their specific requirements. Reliance on a Limited Number of Web Publishers; Dependence on the 24/7 Network The Company expects to generate most of its revenues for the foreseeable future from advertisements delivered to Websites of a limited number of Web publishers on the 24/7 Network. For the year ended December 31, 1997 and for the three months ended March 31, 1998, approximately 70% and 66%, respectively, of the 24/7 Network's pro forma advertising revenues were derived from advertisements on the top ten Affiliated Websites on the 24/7 Network. The 24/7 Network consists of a limited number of Affiliated Websites that have contracted for the Company's services under agreements cancellable upon a specified notice period. Affiliated Websites generally measure satisfaction by acceptable revenue levels, adequate "click-thru rates" (the percentage of times users click on an advertisement), high levels of customer service and timely and accurate reporting. There can be no assurance that such Affiliated Websites will remain associated with the 24/7 Network, that the Affiliated Websites will maintain consistent or increasing levels of traffic over time, or that the Company would be able to replace any Affiliated Website with another Web publisher with comparable traffic patterns and user demographics. The loss or reduction in traffic of such Websites may cause advertisers or Web publishers to withdraw from the 24/7 Network, which, in turn, could materially adversely affect the Company's business, results of operations and financial condition. The failure of the Company to successfully market the 24/7 Network or the failure of Affiliated Websites to maintain consistent or increasing levels of traffic would have a material adverse effect on the Company's business, results of operations and financial condition. Reliance on a Limited Number of Advertisers and Ad Agencies The Company's revenues have been derived from a limited number of advertisers and ad agencies that purchase space on Affiliated Websites and the Company expects that a limited number of these entities may continue to account for a significant percentage of the Company's revenues for the foreseeable future. In particular, for the year ended December 31, 1997 and the three months ended March 31, 1998, the Company's top ten advertisers and ad agencies accounted for an aggregate of approximately 48% and 51%, respectively, of the 24/7 Network's pro forma advertising revenues. Advertisers and ad agencies typically purchase advertising pursuant to purchase order agreements that run for a limited time. There can be no assurance that current advertisers and ad agencies will continue to purchase advertising from the Company or that the Company will be able to successfully attract additional advertisers and ad agencies. The loss of one or more of the advertisers or ad agencies that represent a material portion of the revenues generated on the 24/7 Network or the ContentZone could have a material adverse effect on the Company's business, results of operations and financial condition. In addition, the non-payment or late payment of amounts to the Company due from a significant advertiser or ad agency could have a material adverse effect on the Company's business, results of operations and financial condition. Integration of Adfinity[TM] Technology; Dependence on Third Party Technology The Company currently utilizes the AdForce advertisement management service from IMGIS, Inc. to deliver its advertisements to the 24/7 Network. The Company intends to replace the AdForce service with the Company's Adfinity[TM] system, which is expected to become the technology platform for the Company's networks. The Company anticipates that Adfinity[TM] will enable it to deliver targeted advertisements based on demographic profiles and consumer behavior. There can be no assurance that the information required to develop user profiles will be available and, if available, that the utilization of such information will not be cost prohibitive. The Company's ability to deliver increased value to advertisers and Web publishers in the future is therefore based, in large part, on the successful integration of Adfinity[TM] as the technology platform for the Company's networks. In order to complete the transition to Adfinity[TM], the Company must, among other things, ensure scaleability of the Adfinity[TM] system, assimilate the Company's current sales and reporting functions into the Adfinity[TM] model, work with existing Affiliated Websites to re-tag such Websites, and install new computer hardware and software. Although the Company expects that the transition to Adfinity[TM] will be completed by the third quarter of 1998, there can be no 7 assurance that the Company will be able to integrate Adfinity[TM] on a timely basis. The failure of the Company to effect a successful transition to Adfinity[TM] could result in a loss of Affiliated Websites, a disruption in the Company's ability to effectively deliver advertisements and a negative impact on its business in general until Adfinity[TM] or an alternative advertisement management technology is integrated. If the Company is unable to successfully integrate the Adfinity[TM] technology on a timely basis, or if the Adfinity[TM] technology does not enable the Company to successfully target advertisements based on demographic profiles and consumer behavior, or if the information to develop user profiles is not available, the Company's business, results of operations and financial condition would be materially adversely affected. Until the integration of Adfinity[TM] is completed, the Company will be dependent upon AdForce to deliver its ads to the 24/7 Network. If the AdForce service becomes unavailable or if AdForce fails to effectively serve the Company's advertisements, the Company's business, results of operations and financial condition would be materially adversely affected. In addition to the delivery of advertisements, AdForce also produces frequent operational reports for use by the Company, advertisers and the Affiliated Websites. However, the AdForce system requires the Company to employ a significant amount of effort to prepare information for financial reporting. This causes difficulties in preparing financial statements and reporting information on a timely basis. The Company is in the process of upgrading its systems in order to integrate newly developed and/or purchased modules with its existing systems and with Adfinity[TM] in order to improve its accounting, control and reporting methods. The Company's inability to add additional software and hardware or to further develop and upgrade its existing technologies, systems or network infrastructure may cause unanticipated delays in delivering its customers' advertisements and providing timely reporting of accurate financial information. Competition The markets for Internet advertising and related products and services are intensely competitive and such competition is expected to increase. The Company believes that its ability to compete depends upon many factors both within and beyond its control, including the timing and market acceptance of new products and enhancements of existing services developed by the Company and its competitors; changing demands regarding customer service and support; shifts in sales and marketing efforts by the Company and its competitors; and the ease of use, performance, price and reliability of the Company's services and products. The Company competes for Internet advertising revenues with large Web publishers and Web search engine companies, such as America Online, Excite, Infoseek, Lycos and Yahoo. Further, the 24/7 Network competes with a variety of Internet advertising networks, including DoubleClick and Rainbow Interactive, a joint venture of Cablevision Systems Corp. and NBC. In marketing the Company's networks and its Adfinity[TM] service to Web publishers, the Company also competes with providers of advertisement software and related services, including NetGravity and Accipiter, a division of CMG Information Services, Inc. In marketing dbCommerce[TM], the Company competes with a variety of entities, including BroadVision. The Company also encounters competition from a number of other sources, including content aggregators, companies engaged in advertising sales networks, advertising agencies and other entities which facilitate Internet advertising. Many of the Company's existing competitors, as well as a number of potential new competitors, have longer operating histories, greater name recognition, larger customer bases and significantly greater financial, technical and marketing resources than the Company. There can be no assurance that the Company will be able to compete successfully against current or future competitors or that competitive pressures will not have a material adverse effect on the Company's business, results of operations and financial condition. In addition, the Internet, in general, and the Company, specifically, also must compete for a share of advertisers' total budgets with traditional advertising media, such as television, radio, cable and print. To the extent that the Internet is perceived to be a limited or ineffective advertising medium, advertisers may be reluctant to devote a significant portion of their advertising budgets to Internet advertising, which could limit the growth of Internet advertising and would have a material adverse effect on the Company's business, results of operations and financial condition. Technological Change The Internet market is characterized by rapidly changing technology, evolving industry standards, frequent new product announcements, introductions and enhancements, and changing customer demands. The introduction of new products and services embodying new technologies and the emergence of new industry standards and practices can render existing products and services obsolete and unmarketable or require unanticipated investments in research and development. These market characteristics are heightened by the emerging nature of the Internet industry. The Company's future success depends on its ability to adapt to rapidly changing technologies and to 8 improve the performance, features and reliability of its services and products in response to changing customer and industry demands. The failure of the Company to successfully adapt to such technological change could adversely affect its business, results of operations and financial condition. Furthermore, there can be no assurance that the Company will not experience difficulties that could delay or prevent the successful design, development, testing, introduction or marketing of services, or that any new services or enhancements to existing services will adequately meet the requirements of its current and prospective advertisers and Affiliated Websites and achieve any degree of significant market acceptance. If the Company is unable, for technological or other reasons, to develop and introduce new services or enhancements to existing services in a timely manner or in response to changing market conditions or customer requirements, or if its services or enhancements contain errors or do not achieve a significant degree of market acceptance, the Company's business, results of operations and financial condition would be materially and adversely affected. Dependence on the Web Infrastructure 24/7 Media's success depends upon, among other things, the continued expansion of, and reliance on, the Internet and the development and maintenance of a viable Web network infrastructure. The maintenance and improvement of this infrastructure will require timely development of products, such as high speed modems and communications equipment, in order to continue to provide reliable Web access and improved content. The current Web infrastructure may not be able to support an increased number of users or the increased bandwidth requirements of users, and, as such, the performance or reliability of the Web may be adversely affected. Furthermore, the Web has experienced certain outages and delays as a result of damage to portions of its infrastructure. Such outages and delays, including those resulting from Year 2000 problems, could adversely affect Websites and the level of traffic on the Company's networks. The effectiveness of the Web may decline due to delays in the development or adoption of new standards and protocols (for example, the next-generation Internet protocol) designed to support increased levels of activity. There can be no assurance that the infrastructure or products or services necessary to maintain the Web will be developed, or that the Web will be a viable commercial medium for advertisers. If the necessary infrastructure, standards, protocols, products, services or facilities are not developed , or if the Web does not become a viable commercial medium, 24/7 Media's business, results of operations and financial condition could be materially and adversely affected. Even if such infrastructure, standards or protocols or complementary products, services or facilities are developed, there can be no assurance that the Company will not be required to incur substantial expenditures in order to adapt its services to changing or emerging technologies, which could have a material adverse effect on the Company's business, results of operations and financial condition. Moreover, critical issues concerning the commercial use and government regulation of the Internet (including security, cost, ease of use and access, intellectual property ownership and other legal liability issues) remain unresolved and could materially and adversely impact both the growth of the Internet and the Company's business, results of operations and financial condition. Dependence on Third Party Systems; Risk of System Failure; Capacity Constraints A key to the Company's strategy is to generate a high volume of traffic for its products and services. In particular, the future success of the Company depends on the performance of Adfinity[TM] and third party service providers. Adfinity's computer hardware and software is housed at GlobalCenter, Inc. ("GlobalCenter"), a third party provider of Internet communication services. Any Adfinity[TM] or third party ad server system failure, including failures that delay the delivery of advertisements to Websites, could reduce customer satisfaction and result in a material adverse effect on the Company's business, results of operations and financial condition. In general, the Company's operations are dependent upon the proper operation of its own and third party computer systems. Any damage from fire, power loss, telecommunications failures, vandalism and other malicious acts, and similar unexpected events could adversely affect 24/7 Media's business, results of operations and financial condition. In addition, failure of the Company's telecommunications providers to provide the data communications capacity in the time frame required by the Company for any reason could cause interruptions in the services provided by the Company. Despite precautions taken by the Company, unanticipated problems affecting the Company's computer and telecommunications systems in the future could cause interruptions in the delivery of the Company's services. Any damage or failure that interrupts or delays the Company's operations could have a material adverse effect on the Company's business, results of operations and financial condition. Furthermore, large increases in the volume of advertising delivered through the Company's ad servers could strain the capacity of the software or hardware deployed by the Company, which could lead to slower response 9 time or system failures and could have a material adverse effect on the Company's business, results of operations and financial condition. Unproven Business Model Since the markets for online advertising and direct marketing are in the early stages of development, there can be no assurance that the Company's model for pricing its products and services will remain an acceptable model. The Company's business model is to generate revenues primarily by providing Internet advertising services to advertisers and Web publishers. The profit potential of the Company's business model is unproven. To be successful, the Company must develop and market services that are broadly accepted by advertisers and Web publishers. There can be no assurance that Internet advertising, in general, or that the Company's services, in particular, will achieve broad market acceptance. The Company's ability to generate significant revenues from advertisers will depend, in part, on the continued development of a large base of Web publishers that utilize the Company's services and have Websites with adequate available ad space inventory, and whose Websites generate sufficient user traffic with demographic characteristics that are attractive to such advertisers. A variety of related pricing models have developed in the Company's marketplace, making it difficult to project future levels of advertising revenues and applicable gross margins that can be sustained by the Company. A key component of the Company's strategy is to enhance the value of the ad inventory on its networks by seeking to sell 100% of its inventory of available page views and by increasing the breadth and depth of its content channels. The Company has limited experience in implementing and following such a strategy and there can be no assurance that such strategy will succeed or that the Company will be able to maintain sufficient gross margins. Management of Growth; Risks Associated with Acquisitions; Risks of International Expansion 24/7 Media has experienced rapid growth and expansion in operations that have placed a significant strain on the Company's managerial, operational and financial resources. The Company has grown from approximately 60 employees on a pro forma basis as of September 30, 1997 to approximately 100 employees as of May 31, 1998 and expects the number of employees to increase in the future. In order to successfully compete in the evolving Internet industry, 24/7 Media must continue to improve its financial and management controls, enhance its reporting systems and procedures, and expand, train and manage its work force. There can be no assurance that the Company's systems, procedures or controls will be adequate to support 24/7 Media's expanding operations, or that management will be able to respond effectively to such growth. The Company's future results of operations also depend on the expansion of its sales, marketing and customer support organizations. 24/7 Media's business, results of operations and financial condition could be materially adversely affected if growth is not managed effectively. 24/7 Media intends to pursue selective acquisitions of businesses, technologies and product lines as a key component of its growth strategy. 24/7 Media regularly seeks to identify and acquire companies or assets that will enhance 24/7 Media's revenue growth, operations and profitability. Any future acquisition may result in the use of significant amounts of cash, potentially dilutive issuances of equity securities, incurrence of debt and amortization expenses related to goodwill and other intangible assets, each of which could materially adversely affect the Company's business, results of operations or financial condition. In addition, acquisitions involve numerous risks, including the difficulties in the integration and assimilation of the operations technologies, products and personnel of any acquired business; the diversion of management's attention from other business concerns; the availability of favorable acquisition financing for future acquisitions; and the potential loss of key employees of any acquired business. In the event that an acquisition does occur, there can be no assurance that 24/7 Media will be able to successfully integrate the acquired business, and the failure to do so could have a material adverse effect on the Company's results of operations and financial position. See "--Integration of Adfinity[TM] Technology; Dependence on Third Party Technology." The Company may, in the future, operate in international markets and such an expansion would involve certain inherent risks, such as unexpected changes in regulatory requirements, potentially adverse tax consequences, general export restrictions and export controls relating to encryption technology, tariffs and other trade barriers, political instability and fluctuations in currency exchange rates, and seasonal reductions in business activity. Any of the above could have a material adverse effect on the success of the Company's future international initiatives. Dependence on Key Personnel The Company's success depends upon its senior management and its key sales and technical personnel, particularly David J. Moore, Chief Executive Officer, Jacob I. Friesel, Executive Vice President, and Yale R. Brown, 10 Executive Vice President. The loss of the services of one or more of these persons could materially adversely affect 24/7 Media's business, results of operations and financial condition. 24/7 Media's success also depends on its ability to attract and retain qualified technical, sales and marketing, customer support, financial and accounting, and managerial personnel. Competition for such personnel in the Internet industry is intense, and there can be no assurance that the Company will be able to retain its key personnel or that it can attract, assimilate or retain other highly qualified personnel in the future. The Company has experienced in the past, and may continue to experience in the future, difficulty in hiring and retaining candidates with appropriate qualifications, especially in sales and marketing positions. The failure by the Company to successfully hire and retain candidates with appropriate qualifications could have a material adverse effect on the Company's business, results of operations and financial condition. Trademarks, Patents and Proprietary Rights; Risk of Infringement; Privacy Concerns 24/7 Media relies upon patent, trademark, copyright and trade secret laws to protect its intellectual property. The Company seeks to protect its trademarks by registering them in the United States and internationally (where necessary) and has applied for registrations for trademarks in the United States. There can be no assurance that all of the Company's trademark registrations or patent applications will be approved or granted or that they will not be successfully challenged by others. Such patent, trademark, copyright and trade secret protection may not be available in every country in which the Company's services are distributed. In addition, 24/7 Media protects its proprietary rights through the use of confidentiality agreements with employees and affiliates. 24/7 Media also licenses certain proprietary rights to third parties. There can be no assurance that such agreements and licenses will provide adequate protection of 24/7 Media's proprietary rights; that the Company's employees and affiliates may not keep such information confidential; and such proprietary information may otherwise become known, or be independently developed by competitors. Legal standards relating to the validity, enforceability and scope of protection of certain proprietary rights in Internet-related industries are uncertain and still evolving, and no assurance can be given as to the future viability or value of any proprietary rights of the Company or other companies within the industry. There can be no assurance that the steps taken by the Company to protect its proprietary rights will be adequate or that third parties will not infringe or misappropriate the Company's proprietary rights. Any such infringement or misappropriation, should it occur, could have a material adverse effect on the Company's business, results of operations and financial condition. Furthermore, there can be no assurance that the Company's business activities will not infringe upon the proprietary rights of others, or that other parties will not assert infringement claims against the Company. The Company anticipates that it may be subject to claims in the ordinary course of its business, including claims of alleged infringement of the trademarks and other intellectual property rights of third parties by the Company and its business partners. Such claims and any resultant litigation, should it occur, could subject the Company to significant liability for damages and could result in invalidation of the Company's proprietary rights and, even if not meritorious, could be time-consuming and expensive to defend, and could result in the diversion of management time and attention, any of which could have a material adverse effect on the Company's business, results of operations and financial condition. The Company's Adfinity[TM] technology collects and utilizes data derived from user activity on the 24/7 Network and the Websites of independent Web publishers using the Company's services. There can be no assurance that any trade secret, copyright or other protection will be available for such data or that others will not claim rights to such data. 24/7 Media must also keep certain information regarding Web publishers confidential pursuant to its contracts with Web publishers. Adfinity[TM] enables the use of "cookies," in addition to other mechanisms, to deliver targeted advertising, to help compile demographic information, and to limit the frequency with which an advertisement is shown to the user. Cookies are bits of information keyed to a specific server, file pathway or directory location that are stored on a user's hard drive and passed to a Website's server through the user's browser software. Cookies are placed on the user's hard drive without the user's knowledge or consent, but can be removed by the user at any time through the modification of the user's browser settings. Due to privacy concerns, some Internet commentators, advocates and governmental bodies have suggested that the use of cookies be limited or eliminated. In addition, certain currently available Internet browsers allow a user to delete cookies or prevent cookies from being stored on the user's hard drive. Government Regulation Due to the increasing popularity and use of the Web, a number of laws and regulations may be adopted regarding user privacy, pricing, acceptable content, taxation and quality of products and services. Although there are currently few 11 laws or regulations directly governing access to or commerce on the Internet, any new legislation could inhibit the growth in use of the Web and decrease the acceptance of the Web as a communications and commercial medium which could have a material adverse effect on the Company's business, results of operations and financial condition. In addition, the growing use of the Web has burdened existing telecommunications infrastructure and has caused interruptions in phone service. Certain telephone carriers have petitioned the government to regulate and impose fees on Internet service providers and online service providers in a manner similar to long distance telephone carriers. Any such regulations could affect the costs of communicating on the Web and adversely affect the growth in use of the Web, which could in turn decrease the demand for the Company's products or otherwise have a material adverse effect on the Company's business, results of operations and financial condition. Further, due to the global nature of the Web, governments of states or foreign countries may attempt to regulate Internet transmissions or levy sales or other taxes relating to the Company's activities. There can be no assurance that violations of local laws will not be alleged by applicable governments, 24/7 Media may not violate such laws or new laws will not be enacted in the future. Moreover, the applicability to the Internet of existing laws governing issues such as property ownership, libel and personal privacy is uncertain. Any of the foregoing developments could have a material adverse effect on the Company's business, results of operations and financial condition. Year 2000 Compliance Beginning in the year 2000, the date fields coded in certain software products and computer systems will need to accept four digit entries in order to distinguish 21st century dates from 20th century dates. Significant uncertainty exists in the software industry concerning the potential effects associated with such compliance issues. The Company is currently taking steps to make its products Year 2000 compliant. However, there can be no assurance that the Company will be successful in making its products Year 2000 compliant. In addition, the Company's ad servers and certain of its customers may also be impacted by Year 2000 complications. Any failure by the Company or its ad servers or its customers to make their products Year 2000 compliant could result in a decrease in sales of the Company's products, an increase in the allocation of resources to address Year 2000 problems of the Company's customers without additional revenue commensurate with such dedication of resources, or an increase in litigation costs relating to losses suffered by the Company's customers due to such Year 2000 problems. The occurrence of any such event could have a material adverse effect on the Company's business, results of operations and financial condition. Control by Principal Stockholders, Officers and Directors After the Offering, the directors and executive officers and their affiliates will beneficially own approximately % of the outstanding Common Stock. As a result, these stockholders will be able to exercise control over all matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions. This concentration of ownership may have the effect of delaying or preventing a change in control of the Company. See "Management" and "Security Ownership of Certain Beneficial Owners and Management." Broad Discretion in Use of Proceeds The net proceeds of the offering will be added to the Company's working capital and will be available for general corporate purposes, including capital expenditures and potential future acquisitions. As of the date of this Prospectus, the Company cannot specify with certainty the particular uses for the net proceeds to be received upon completion of the offering. Accordingly, the Company's management will have broad discretion in the application of the net proceeds. See "Use of Proceeds." Shares Eligible for Future Sale Sales of significant amounts of Common Stock in the public market after the offering, or the perception that such sales will occur, could materially affect the market price of the Common Stock or the future ability of the Company to raise capital through an offering of its equity securities. The Company will have shares of Common Stock outstanding after the offering. The shares offered hereby will be eligible for immediate sale in the public market without restriction, except shares purchased by "affiliates" of the Company within the meaning of Rule 144 promulgated under the Securities Act. The remaining shares of Common Stock held by existing stockholders will be "restricted securities" within the meaning of Rule 144 under the Securities Act. Restricted securities may be sold in the public market only if registered or if they qualify for an exemption from registration under Rules 144, 144(k) or 701 promulgated under the Securities Act. The Company's directors and officers and certain of its stockholders have agreed that they will not sell, directly or indirectly, any Common Stock 12 without the prior consent of the representatives of the Underwriters for a period of 180 days from the date of this Prospectus. See "Underwriting." Subject to these lock-up agreements and the provisions of Rules 144, 144(k) and 701, additional shares will be available for sale in the public market (subject in the case of shares held by affiliates to compliance with certain volume restrictions) as follows: (i) shares will be eligible for sale 90 to 180 days after the date of this Prospectus, (ii) shares will be eligible for sale upon the expiration of lock-up agreements 180 days after the date of this Prospectus and (iii) shares will be eligible for sale immediately upon the date of this Prospectus. In addition, there are outstanding options to purchase shares of Common Stock and outstanding warrants to purchase shares of Common Stock which will be eligible for sale in the public market from time to time subject, in the case of options, to vesting and, in the case of certain options and warrants, the expiration of lock-up agreements. In addition, certain stockholders, representing approximately shares of Common Stock, and certain optionholders, with respect to an aggregate shares of Common Stock issuable upon the exercise of stock options, have the right, subject to certain conditions, to include their shares in future registration statements relating to the Company's securities and/or to cause the Company to register certain shares of Common Stock owned by them. See "Shares Eligible For Future Sale." Lack of Public Market for Common Stock; Possible Volatility of Stock Price Prior to the Offering, there has been no public market for the Common Stock. Accordingly, there can be no assurance that an active trading market for the Common Stock will develop or be sustained after the Offering or that the market price of the Common Stock will not decline below the initial public offering price. The initial public offering price will be determined by negotiations between the Company and the representatives of the Underwriters. See "Underwriting." The trading price of the Common Stock could be subject to wide fluctuations caused by, among other things, variations in quarterly results of operations, the gain or loss of significant advertisers or Affiliated Websites, changes in earning estimates of 24/7 Media by industry analysts, announcements of technological innovations or new services by 24/7 Media or its competitors, or general conditions in the economy in general or in Internet-related industries. In addition, the stock market in general has experienced extreme price and volume fluctuations which have affected the market price for many companies in industries similar or related to that of the Company and which have been unrelated to the operating performance of these companies. These market fluctuations may have a material adverse effect on the market price of the Company's Common Stock. Anti-takeover Effects of Certain Charter, Bylaws And Delaware Law Provisions; Possible Issuance of Preferred Stock After the Offering and upon receipt of the requisite stockholder approval, the Company's board of directors may issue up to 10,000,000 shares of preferred stock without any further vote or action by the stockholders, and determine the price, rights, preferences, privileges and restrictions, including voting rights of such shares. The preferred stock may be issued with voting, liquidation, dividend and other rights superior to those of the Common Stock. The issuance of preferred stock could make it difficult for a third party to acquire a majority of the outstanding voting stock of the Company. Further, certain provisions of the Company's certificate of incorporation, the Company's bylaws and Delaware law could have the effect of delaying or preventing a change in control of the Company. See "Description of Capital Stock--Delaware Anti-Takeover Law and Certain Charter Provisions." Dilution Investors purchasing shares of Common Stock in the offering will incur immediate and substantial dilution in net tangible book value per share. To the extent outstanding options or warrants to purchase Common Stock are exercised, there will be further dilution. See "Dilution." Litigation 24/7 Media has been subject to legal claims in the ordinary course of its business. Such claims have not had a material adverse effect on the Company's business, results of operations or financial condition. Nonetheless, these claims and future claims, if successful, could subject the Company to liability for damages, invalidate 24/7 Media's proprietary rights and/or divert management's time and attention, any of which could have a material adverse effect on the Company's business, results of operations and financial condition. 13 USE OF PROCEEDS The net proceeds to 24/7 Media from the sale of the shares of Common Stock offered pursuant to the Offering are estimated to be approximately $ million ($ million if the Underwriter's over-allotment option is exercised in full), assuming an initial offering price of $ per share and after deducting underwriting discounts and estimated offering expenses payable by 24/7 Media. The primary purposes of the Offering are to create a public market for the Common Stock, to facilitate the Company's future access to the public equity markets and to obtain additional working capital. The Company intends to use the net proceeds of the Offering for general corporate purposes, including working capital, and for the expansion of its operations and sales and marketing capabilities. In addition, the Company may use a portion of the net proceeds of the Offering to acquire or invest in complementary businesses, technologies, services or products, although there are no current agreements with respect to any such acquisitions, investments or other transactions. As of the date of this Prospectus, the Company cannot specify with certainty the particular uses for the net proceeds to be received upon completion of the Offering. Accordingly, the Company's management will have broad discretion in the application of the net proceeds. Pending such uses, the net proceeds will be primarily invested in short-term, investment grade instruments, certificates of deposit or direct or guaranteed obligations of the United States. DIVIDEND POLICY 24/7 Media has not declared or paid any dividends on its capital stock since inception and does not anticipate paying dividends in the foreseeable future. It is the present policy of the board of directors to retain earnings, if any, to finance the expansion of the Company's business. The future payment of dividends will depend on the results of operations, financial condition, capital expenditure plans and other factors deemed relevant by 24/7 Media and will be at the sole discretion of the board of directors. 14 CAPITALIZATION The following table sets forth the capitalization of 24/7 Media as of March 31, 1998 (i) on an actual basis, (ii) on a pro forma basis, giving effect to the Acquisition and the Preferred Stock Conversion and (iii) on a pro forma as adjusted basis to give effect to the sale by the Company of shares of Common Stock offered hereby at an assumed offering price of $ per share and the application by the Company of the estimated net proceeds therefrom, after deducting estimated underwriting discounts and offering expenses. See "Use of Proceeds." The capitalization information set forth in the table below is qualified by and should be read in conjunction with the more detailed Consolidated Financial Statements and Pro Forma Consolidated Financial Information and Notes thereto included elsewhere in this Prospectus.
March 31, 1998 ---------------------------------------------------- Pro Pro Forma Actual Forma As Adjusted ---------------- ---------------- -------------- Long-term debt .......................................... $ 479,408 $ 479,408 $ Mandatorily redeemable convertible preferred stock Series A; $.01 par value; 30,000,000 shares authorized; 10,060,002 shares outstanding .......................... 10,093,502 -- Stockholders' equity (1): Common stock, $.01 par value; 100,000,000 shares authorized; 27,481,201 shares issued and outstanding actual; 45,586,476 shares issued and outstanding on a pro forma basis and shares issued and outstanding on a pro forma as adjusted basis ......... 274,812 455,865 Additional paid-in-capital .............................. 19,623,624 37,206,555 Accumulated deficit ..................................... (15,634,256) (21,111,537) ------------- ------------- Total stockholders' equity ............................ 4,264,180 16,550,883 ------------- ------------- Total capitalization ................................. $ 14,837,090 $ 17,030,291 ============= =============
- ---------------- (1) Excludes approximately 3,733,951 shares of Common Stock issuable upon the exercise of stock options outstanding at June 1, 1998 granted under the Company's 1998 Stock Incentive Plan (of which 675,931 are vested and exerciseable at June 1, 1998) and approximately 2,016,043 shares of Common Stock reserved for issuance pursuant to future grants under the 1998 Stock Incentive Plan. The outstanding stock options have a weighted average exercise price of $0.89 per share. Also excludes approximately 15,952,077 shares of Common Stock issuable upon exercise of outstanding warrants at June 1, 1998. Such warrants have a weighted average exercise price of $2.09 per share. Also, excludes 3,000 shares of Series B Convertible Preferred Stock issued in connection with the acquisition of CliqNow!. See "Shares Eligible for Future Sale." 15 DILUTION As of March 31, 1998, the pro forma net tangible book value (deficit) of 24/7 Media was $ in the aggregate, or $ per share. Pro forma net tangible book value (deficit) per share represents 24/7 Media's total tangible assets less total liabilities, divided by the number of outstanding shares of Common Stock giving effect to the acquisition of Intelligent Interactions, the Preferred Stock Conversion and the Stock Split. Dilution per share represents the difference between the amount per share paid by investors in this offering of Common Stock and the net tangible book value (deficit) per share after the Offering. After giving effect to the sale of shares of Common Stock (at an assumed initial public offering price of $ per share) and after application by the Company of the estimated net proceeds from the Offering, the Company's pro forma net tangible book value as of March 31, 1998 would have been $ in the aggregate, or $ per share. This represents an immediate increase in pro forma net tangible book value of $ per share to existing shareholders and an immediate dilution in pro forma net tangible book value of $ per share to new investors purchasing shares of Common Stock in the Offering. If the initial public offering price is higher or lower, the dilution to the new investors will increase or decrease accordingly. The following table illustrates this per share dilution: Assumed initial public offering price per share ....................................... Pro forma net tangible book value (deficit) per share before the Offering ............ Pro forma increase in net tangible book value (deficit) per share attributable to new investors Pro forma net tangible book value (deficit) per share after the Offering .............. Pro forma dilution in net tangible book value per share to new investors ..............
The following table summarizes, on a pro forma basis as of March 31, 1998, after giving effect to the acquisition of Intelligent Interactions, the Preferred Stock Conversion and the Stock Split, the total number of shares of Common Stock purchased from the Company, the total consideration paid to the Company and the average price per share paid by existing shareholders and by new investors:
Shares Purchased Total Consideration Average -------------------- ----------------------- price per Number Percent Amount Percent share -------- --------- ----------- --------- ---------- Existing shareholders ......... % $ % $ New investors ................. Total ......................... % $ % $
The calculations in the above tables assume no exercise of the Underwriters' over-allotment option or exercise of any outstanding stock options or warrants. If such outstanding options or warrants are exercised, there will be further dilution to new investors. See "Management--1998 Stock Incentive Plan." 16 SELECTED PRO FORMA CONSOLIDATED FINANCIAL DATA The following pro forma consolidated statement of operations data reflect the Merger, the Acquisition and the Preferred Stock Conversion as if each had occurred on January 1, 1997 (or inception, if later). The pro forma consolidated balance sheet data reflect the Acquisition as if it occurred on March 31, 1998 and the Preferred Stock Conversion, which will take place immediately prior to the closing of this Offering. The pro forma financial data is presented for informational purposes only and may not be indicative of the results of operations had the mergers and acquisitions occurred on March 31, 1998 for balance sheet purposes and on January 1, 1997 for Statement of Operations Data purposes, nor do they purport to indicate the future results of operations of the Company. The following pro forma financial data should be read in conjunction with the Consolidated Financial Statements and Notes thereto and the Pro Forma Consolidated Financial Information and related Notes appearing elsewhere in this Prospectus. Management believes that all adjustments necessary to present fairly such pro forma financial data have been made.
Pro Forma Pro Forma Year Three Months Ended Ended ------------------------------------------------------------------------------- Dec. 31, March 31, June 30, Sept. 30, Dec. 31, March 31, 1997 1997 1997 1997 1997 1998 ---------------- --------------- --------------- --------------- --------------- --------------- Consolidated Statement of Operations Data: Revenues: Advertising ..................... $ 2,736,365 $ 399,688 $ 526,192 $ 649,036 $ 1,161,449 $ 1,846,748 Consulting and license fees ..... 1,746,896 805,245 639,588 244,890 57,173 88,362 -------------- ------------- ------------- ------------- ------------- ------------- Total revenues ................. 4,483,261 1,204,933 1,165,780 893,926 1,218,622 1,935,110 Cost of revenues ................. 2,829,938 474,349 582,460 798,505 974,624 1,608,279 -------------- ------------- ------------- ------------- ------------- ------------- Gross profit 1,653,323 730,584 583,320 95,421 243,998 326,831 Operating expenses: Sales and marketing ............. 4,653,418 923,062 1,397,203 1,443,764 889,389 1,178,438 General and administrative ...... 4,978,381 1,158,354 1,358,096 1,450,340 1,011,591 1,745,511 Product development ............. 1,745,745 469,309 542,683 521,708 212,045 66,738 Other expenses (1) .............. 989,099 -- 123,843 865,256 -- -- Amortization of goodwill (2) ................... 3,612,034 736,759 958,425 958,425 958,425 1,185,803 Write-off of acquired in-process technology (2) ................. 5,477,281 5,477,281 -- -- -- -- -------------- ------------- ------------- ------------- ------------- ------------- Total operating expenses ....... 21,455,958 8,764,765 4,380,250 5,239,493 3,071,450 4,176,490 -------------- ------------- ------------- ------------- ------------- ------------- Operating loss .................. (19,802,635) (8,034,181) (3,796,930) (5,144,072) (2,827,452) (3,849,659) Interest (expense) income, net .. (95,605) 14,142 (1,300) (30,602) (77,845) (178,692) -------------- ------------- ------------- ------------- ------------- ------------- Net loss ........................ (19,898,240) (8,020,039) (3,798,230) (5,174,674) (2,905,297) (4,028,351) ============== ============= ============= ============= ============= ============= Pro forma: Basic net loss per share (3) ... Shares outstanding (3) ......... As of March 31, 1998 --------------- Consolidated Balance Sheet Data: Cash and cash equivalents ....................... $ 7,768,370 Working capital ................................. 6,033,480 Goodwill, net ................................... 10,217,580 Total assets .................................... 20,783,592 Long-term debt .................................. 479,408 Mandatorily redeemable convertible preferred stock -- Total stockholders' equity ...................... $16,550,883
- ---------------- (1) Includes an aggregate of $232,304 in legal costs incurred in defending a class-action lawsuit filed by certain Affiliated Websites on the ContentZone, which defense resulted in grant of summary judgment in favor of the Company, and a net write-off of $756,795 of property and equipment that was deemed to have no future economic benefit. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Consolidated Financial Statements and the related Notes thereto. (2) Includes acquisition related non-cash charges for amortization of goodwill and write-off of acquired in-process technology. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Pro Forma Consolidated Financial Information and the related Notes thereto. (3) See Note 1 to the Company's Consolidated Financial Statements for the determination of shares used in computing pro forma basic net loss per share. 17 SELECTED CONSOLIDATED FINANCIAL DATA The selected consolidated financial data as of and for each of the years in the three-year period ended December 31, 1997 have been derived from the audited consolidated financial statements of the Company, which are included elsewhere in this Prospectus. The selected financial data for the period from September 1994 through December 31, 1994 have been derived from financial statements of Interactive Imaginations not included herein and the Company's accounting records. The selected consolidated financial data as of March 31, 1998 and for the three months ended March 31, 1997 and 1998 are derived from unaudited consolidated financial statements appearing herein. In the opinion of the Company, such unaudited data reflect all adjustments (consisting only of normal recurring adjustments) necessary for a fair statement of the financial data for such period. The results of operations for the three months ended March 31, 1998 are not necessarily indicative of results that may be expected for the full year. The selected consolidated financial data set forth below is qualified in its entirety by, and should be read in conjunction with, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Consolidated Financial Statements and the related Notes thereto included elsewhere in this Prospectus.
September 1994 (inception) Year Ended December 31, through December 31, ----------------------------------------------- 1994 (1) 1995 1996 1997 ---------------------- --------------- --------------- --------------- Consolidated Statement of Operations Data: Revenues: Advertising .................................... $ -- $ 151,750 $ 1,106,329 $ 1,467,105 Consulting and license fees .................... -- -- 435,834 1,681,464 --------- ------------ ------------ ------------ Total revenues ................................ -- 151,750 1,542,163 3,148,569 Cost of revenues ................................ -- 198,291 1,592,771 1,655,340 --------- ------------ ------------ ------------ Gross profit (loss) ............................ -- (46,541) (50,608) 1,493,229 Operating expenses: Sales and marketing ............................ -- 114,348 2,240,399 1,672,999 General and administrative ..................... (35,771) 581,069 3,010,009 2,622,743 Product development ............................ -- 426,187 1,460,928 1,417,750 Other expenses (2) ............................. -- -- -- 989,099 Amortization of goodwill (3) ................... -- -- -- -- --------- ------------ ------------ ------------ Total operating expenses ...................... (35,771) 1,121,604 6,711,336 6,702,591 --------- ------------ ------------ ------------ Operating loss .................................. (35,771) (1,168,145) (6,761,944) (5,209,362) Interest (expense) income, net .................. -- -- (33,731) (96,466) --------- ------------ ------------ ------------ Net loss ........................................ (35,771) (1,168,145) (6,795,675) (5,305,828) Cumulative dividends on mandatorily convertible preferred stock .................... -- -- -- -- Net loss attributable to common stockholders .... $ (35,771) $ (1,168,145) $ (6,795,675) $ (5,305,828) ========= ============ ============ ============ Basic net loss per share (4) .................... Shares outstanding (4) .......................... Three Months Ended ------------------------------ March 31, March 31, 1997 1998 ------------- --------------- Consolidated Statement of Operations Data: Revenues: Advertising .................................... $ 388,892 $ 1,076,250 Consulting and license fees .................... 805,245 -- ---------- ------------ Total revenues ................................ 1,194,137 1,076,250 Cost of revenues ................................ 459,587 930,003 ---------- ------------ Gross profit (loss) ............................ 734,550 146,247 Operating expenses: Sales and marketing ............................ 450,505 653,460 General and administrative ..................... 682,581 1,285,512 Product development ............................ 399,523 -- Other expenses (2) ............................. -- -- Amortization of goodwill (3) ................... -- 335,355 ---------- ------------ Total operating expenses ...................... 1,532,609 2,274,327 ---------- ------------ Operating loss .................................. (798,059) (2,128,080) Interest (expense) income, net .................. 13,682 (167,258) ---------- ------------ Net loss ........................................ (784,377) (2,295,338) Cumulative dividends on mandatorily convertible preferred stock .................... -- (33,500) Net loss attributable to common stockholders .... $ (784,377) $ (2,328,838) ========== ============ Basic net loss per share (4) .................... Shares outstanding (4) ..........................
As of December 31, ------------------------------------------------------ 1994 1995 1996 1997 ---------- ------------- ------------- --------------- Consolidated Balance Sheet Data: Cash and cash equivalents ........................ $ 10,722 $ -- $1,689,395 $ 93,945 Working capital (deficit) ........................ (9,278) (235,342) (6,493) (1,165,482) Goodwill, net .................................... -- -- -- -- Total assets ..................................... 29,229 497,165 3,950,790 1,038,941 Long-term debt ................................... -- -- -- 2,316,511 Mandatorily redeemable convertible preferred stock -- -- -- -- Total stockholders' equity (deficit) ............. $ 9,229 $ 202,573 $1,750,202 $ (2,727,967) As of March 31, 1998 ---------------------------------------------- Pro Forma Actual Pro Forma (5) As Adjusted (6) ------------- --------------- ---------------- Consolidated Balance Sheet Data: Cash and cash equivalents ........................ $ 7,764,695 $ 7,768,370 Working capital (deficit) ........................ 6,317,136 6,033,480 Goodwill, net .................................... 7,870,174 10,217,580 ----------- Total assets ..................................... 18,201,993 20,783,592 Long-term debt ................................... 479,408 479,408 Mandatorily redeemable convertible preferred stock 10,093,502 -- Total stockholders' equity (deficit) ............. $ 4,264,180 $16,550,883
- ---------------- (1) Interactive Imaginations was incorporated in September 1994 and had insignificant activities from inception through December 31, 1994. (2) Includes an aggregate of $232,304 in legal costs incurred in defending a class-action lawsuit filed by certain Affiliated Websites on the ContentZone, which defense resulted in grant of summary judgment in favor of the Company and a net write-off of approximately $756,795 of property and equipment that was deemed to have no future economic benefit. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Consolidated Financial Statements and the related Notes thereto. (3) Includes acquisition related non-cash charges for amortization of goodwill in connection with the Petry and Advercomm acquisitions. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Consolidated Financial Statements and the related Notes thereto. (4) See Note 1 to the Company's Consolidated Financial Statements for the determination of shares used in computing basic net loss per share. (5) Pro forma consolidated balance sheet data give effect to (i) the acquisition of Intelligent Interactions which occurred after March 31, 1998, as if such acquisition occurred on March 31, 1998 and (ii) the conversion of all outstanding shares of mandatorily redeemable convertible preferred stock into 14,308,306 shares of Common Stock immediately prior to the closing of this Offering. (6) Adjusted to reflect the sale of shares of Common Stock by the Company at the assumed initial public offering price of $ per share and the application of the estimated net proceeds therefrom. See "Use of Proceeds." 18 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis should be read in conjunction with the Consolidated Financial Statements and the related Notes thereto and the Pro Forma Consolidated Financial Information and related Notes thereto included elsewhere in this Prospectus. The following discussion contains forward-looking statements within the meaning of federal securities law. Such statements can be identified by the use of forward-looking terminology such as "may," "will," "expect," "anticipate," "estimate," "continue" or other similar words. These statements discuss future expectations, contain projections of results of operations or of financial condition or state other "forward-looking" information. Although management believes that the expectations reflected in such forward-looking statements are based on reasonable assumptions, certain factors such as rapid changes in the markets in which the Company competes or general economic conditions might cause a difference between actual results and such forward-looking statements. When considering such forward-looking statements, prospective investors should consider the "Risk Factors" and other cautionary statements in this Prospectus. General The Company operates networks of Websites that enable both advertisers and Web publishers to capitalize on the many opportunities presented by Internet advertising, direct marketing and commerce. In particular, 24/7 Media: (i) operates the 24/7 Network, a network of over 80 high profile Websites to which the Company delivered an aggregate of over 325 million advertisements in April 1998; (ii) operates the ContentZone, a network of over 2,000 small to medium-sized Websites to which the Company delivered an aggregate of over 40 million advertisements in April 1998; (iii) licenses its Adfinity[TM] advertising management system to independent Websites to manage and serve high-volume advertising and direct marketing campaigns; and (iv) markets its dbCommerce[TM] software to e-commerce merchants to enable the delivery of targeted promotions. The Company is the result of several recent mergers, and the combination of these predecessor entities has resulted in an integrated Internet advertising company with both media sales and technology expertise. See "Prospectus Summary--Formation of the Company." Petry established the network business model and contributed its network of Websites which became the foundation for the 24/7 Network. Advercomm folded several high profile Websites into the 24/7 Network, which increased the breadth of content available on the 24/7 Network and accelerated the Company's ability to organize its Affiliated Websites into channels. Interactive Imaginations' ContentZone provided the Company with the ability to offer advertising solutions for small to medium-sized Websites. Intelligent Interactions provided the Company with ad serving and targeting technology, which is expected to become the technology platform for the Company's networks. Management believes that the combination of these predecessor entities has enabled the Company to offer advertisers and Web publishers comprehensive advertising solutions and to pursue its objective of becoming the leading Internet advertising and direct marketing firm. The Company generates substantially all of its revenues by delivering advertisements and promotions to Affiliated Websites on the 24/7 Network and the ContentZone. The Company sells its products and services through its sales and marketing staff located in New York, Chicago, Dallas, Los Angeles, San Francisco, Seattle and the Washington, D.C. area. The pricing of ads is based on a variety of factors, including the gross dollar amount spent on the advertising campaign and whether the campaign is delivered on a specific Website basis, a channel basis or a run of network basis. The Company strives to sell 100% of its inventory through the combination of advertisements sold on a "CPM" basis (the cost to the advertiser to run 1,000 ads) and a "cost-per-action" basis (whereby revenues are generated if the user responds to the ad with an action, such as an inquiry or a purchase of the product advertised). Advertisements delivered by the Company are typically sold pursuant to purchase order agreements which are short-term in nature or subject to cancellation. The Company has recently started to sell sponsorship advertising, which involves a greater degree of coordination among the Company, the advertiser and Affiliated Websites. These sponsorships are generally priced based on the length of time that the sponsorship runs, rather than on a CPM basis. Advertising revenues are recognized in the period that the advertisement is delivered, provided that no significant obligations remain. In nearly all cases, the Company recognizes revenues generated from advertising sales, net of any commissions paid to advertising agencies on behalf of their clients. The Company pays its Affiliated Websites a service fee calculated as a percentage of revenues generated by advertisements run on the Website, which amount is included in cost of revenues. In addition, the Company is generally responsible for billing and collecting for advertisements 19 delivered to its networks. Revenues relating to sponsorship advertising are recognized ratably over the sponsorship period. In addition, the Company generates revenue from licensing its Adfinity[TM] technology to third party Web publishers. To date, revenue from licensing Adfinity[TM] to third parties has not comprised a significant percentage of the Company's total revenues. The Company expects to generate most of its revenues for the foreseeable future from advertisements delivered to Affiliated Websites on the 24/7 Network. The Company's strategy is to aggressively recruit Websites of all sizes for its networks in order to extend the Company's reach and to provide advertisers with a broad base of page views and online content. For the three months ended March 31, 1998 and for the year ended December 31, 1997, no Affiliated Website accounted for over 10% of the Company's total advertising revenue. For the three months ended March 31, 1998 and for the year ended December 31, 1997, the top ten Websites on the 24/7 Network accounted for approximately 66% and 70%, respectively, of the 24/7 Network's pro forma advertising revenue. If the Company were to lose one or more significant Affiliated Websites or if such Websites experienced a significant reduction in traffic, the Company's results of operations and financial condition could be materially and adversely affected. See "Risk Factors--Reliance on a Limited Number of Web Publishers; Dependence on the 24/7 Network." The Company believes that, due to the Merger and the Acquisition, the period-to-period comparisons of its historical operating results are not meaningful and should not be relied upon as indicative of future performance. The Company's prospects should be considered in light of the risks, expenses and difficulties encountered by companies in the early stages of development, particularly companies in the rapidly evolving Internet market. Although the Company has experienced revenue growth in recent periods, it anticipates that it will incur operating losses for the foreseeable future due to a high level of planned operating and capital expenditures. In particular, the Company expects to increase its operating expenses in order to expand its sales and marketing organization and to enhance its Adfinity[TM] technology. See "Risk Factors--Extremely Limited Operating History; History of Losses; Integration of Acquired Entities" and "--Potential Fluctuations in Quarterly Operating Results; Seasonality." Pro Forma Results of Operations The following tables present the Company's unaudited results of operations on a pro forma basis, both in dollar amounts and expressed as a percentage of the Company's total revenues for the periods indicated, as if the Merger, Acquisition and the Preferred Stock Conversion had been consummated as of January 1, 1997 (or inception, if later). As a result, amortization of goodwill has been recognized beginning in the first quarter of pro forma 1997 and a charge for acquired in-process technology has been recorded in the first quarter of pro forma 1997. For reporting purposes (i) amortization of goodwill will be recognized over a two year period from the respective dates of the Merger and the Acquisition, and (ii) write-off of in-process technology related to the Acquisition will be recognized in the second quarter of 1998, date of acquisition. The Company believes that all necessary adjustments, consisting of normal recurring adjustments, have been included in the amounts stated below. The operating results for any period are not necessarily indicative of results for any subsequent period. Because the Company has a limited operating history, the Company has included its results of operations on a pro forma basis in order to better understand the Company's business as a result of the combination of the businesses of Petry, Advercomm, Interactive Imaginations and Intelligent Interactions. See Pro Forma Consolidated Financial Information and the related Notes thereto and "Risk Factors--Potential Fluctuations in Quarterly Operating Results; Seasonality." 20
Pro Forma Pro Forma Year Three Months Ended Ended ------------------------------------------------------------------------------ Dec. 31, March 31, June 30, Sept. 30, Dec. 31, March 31, 1997 1997 1997 1997 1997 1998 ---------------- --------------- --------------- --------------- --------------- -------------- Consolidated Statement of Operations Data: Revenues: Advertising .................. $ 2,736,365 $ 399,688 $ 526,192 $ 649,036 $ 1,161,449 $ 1,846,748 Consulting and license fees 1,746,896 805,245 639,588 244,890 57,173 88,362 ------------ ----------- ----------- ----------- ----------- ----------- Total revenues .............. 4,483,261 1,204,933 1,165,780 893,926 1,218,622 1,935,110 Cost of revenues .............. 2,829,938 474,349 582,460 798,505 974,624 1,608,279 ------------ ----------- ----------- ----------- ----------- ----------- Gross profit 1,653,323 730,584 583,320 95,421 243,998 326,831 Operating expenses: Sales and marketing .......... 4,653,418 923,062 1,397,203 1,443,764 889,389 1,178,438 General and administrative 4,978,381 1,158,354 1,358,096 1,450,340 1,011,591 1,745,511 Product development .......... 1,745,745 469,309 542,683 521,708 212,045 66,738 Other expenses ............... 989,099 -- 123,843 865,256 -- -- Amortization of goodwill ..... 3,612,034 736,759 958,425 958,425 958,425 1,185,803 Write-off of acquired in-process technology ...... 5,477,281 5,477,281 -- -- -- -- ------------ ----------- ----------- ----------- ----------- ----------- Total operating expenses .................. 21,455,958 8,764,765 4,380,250 5,239,493 3,071,450 4,176,490 ------------ ----------- ----------- ----------- ----------- ----------- Operating loss ................ (19,802,635) (8,034,181) (3,796,930) (5,144,072) (2,827,452) (3,849,659) Interest (expense) income, net (95,605) 14,142 (1,300) (30,602) (77,845) (178,692) ------------ ----------- ----------- ----------- ----------- ----------- Net loss ...................... ($ 19,898,240) ($ 8,020,039) ($ 3,798,230) ($ 5,174,674) ($ 2,905,297) ($ 4,028,351) ============ =========== =========== =========== =========== ===========
Pro Forma Pro Forma Three Months Ended Year --------------------------------------------------------------------- Ended Dec. 31, March 31, June 30, Sept. 30, Dec. 31, March 31, 1997 1997 1997 1997 1997 1998 ------------- ------------- ------------- ------------- ------------- ------------- Consolidated Statement of Operations Data: Revenues: Advertising ...................... 61.0% 33.2% 45.1% 72.6% 95.3% 95.4% Consulting and license fees 39.0 66.8 54.9 27.4 4.7 4.6 ------ ------ ------ ------ ------ ------ Total revenues .................. 100.0 100.0 100.0 100.0 100.0 100.0 Cost of revenues .................. 63.1 39.4 50.0 89.3 80.0 83.1 ------ ------ ------ ------ ------ ------ Gross profit .................... 36.9 60.6 50.0 10.7 20.0 16.9 Operating expenses: Sales and marketing .............. 103.8 76.6 119.9 161.5 73.0 60.9 General and administrative........ 111.0 96.1 116.5 162.2 83.0 90.2 Product development .............. 38.9 38.9 46.6 58.4 17.4 3.4 Other expenses ................... 22.1 -- 10.6 96.8 -- -- Amortization of goodwill ......... 80.6 61.1 82.2 107.2 78.6 61.3 Write-off of acquired in-process technology .......... 122.2 454.6 -- -- -- -- ------ ------ ------ ------ ------ ------ Total operating expenses 478.6 727.4 375.7 586.1 252.2 215.8 ------ ------ ------ ------ ------ ------ Operating loss .................... (441.7) (666.8) (325.7) (575.4) (232.0) (198.9) Interest (expense) income, net ( 2.1) 1.2 ( 0.1) ( 3.4) ( 6.4) ( 9.2) ------ ------ ------ ------ ------ ------ Net loss .......................... (443.8)% (665.6)% (325.8)% (578.9)% (238.4)% (208.1)% ====== ====== ====== ====== ====== ======
21 Revenues Advertising Revenue. Advertising revenue primarily consists of cash advertising revenue and also includes barter and prize revenue. The Company's pro forma cash advertising revenue increased each quarter primarily due to an increase in the number of Websites on the 24/7 Network, the number of advertisers utilizing the Company's advertising solutions and the number of advertisements delivered to the 24/7 Network. Such increase was partially offset by a decline in cash advertising revenue generated by the ContentZone through the first three quarters of pro forma 1997. The Company expects the 24/7 Network to continue to account for a significant portion of the Company's total advertising revenue. Historically, the Company utilized barter transactions and prizes to drive traffic to its Affiliated Websites on the ContentZone and Riddler.com. Barter and prize revenue decreased sequentially from approximately 6.6% of total pro forma advertising revenue for the first quarter of pro forma 1997 to 0.0% in the first quarter of pro forma 1998. The Company believes that barter and prize revenue will continue to comprise an insignificant portion of the Company's total revenues in the future. Consulting and License Fees. Through the first three quarters of pro forma 1997, the Company derived consulting and license fees primarily from an agreement with SegaSoft, whereby SegaSoft licensed certain software from Interactive Imaginations. The Company does not expect to realize meaningful revenues from the SegaSoft license agreement in the future. Pro forma consulting and license fees in the fourth quarter of 1997 and the first quarter of 1998 consisted primarily of fees generated from licensing the Adfinity[TM] system to third parties. The Company expects to derive consulting and licensing fees in the future from the licensing of Adfinity[TM] and dbCommerce[TM] to third parties, but does not expect such revenues to comprise a significant portion of the Company's total revenues. Cost of Revenues and Gross Profit (Loss). Cost of revenues consists primarily of fees paid to Affiliated Websites, which are calculated as a percentage of revenues resulting from ads delivered on the Company's networks. Cost of revenues also includes third party ad serving costs, depreciation of the Company's ad serving system and Internet access costs. The general decline in gross profit over the five quarter period was caused by (i) the significant quarter-to-quarter decline in high margin consulting and license fees generated by the SegaSoft agreement; (ii) the significant growth in advertising revenue generated by the 24/7 Network, which typically pays higher fees to Affiliated Websites, at the same time that advertising revenue generated by the ContentZone declined; (iii) an increase in third party ad serving costs related to the growth of the 24/7 Network, as well as increased costs relating to ad serving capacity for the ContentZone for the first three quarters of pro forma 1997; and (iv) the temporary increase, which began late in the first quarter of pro forma 1998, in third party ad serving costs incurred by the Company in connection with the transition to Adfinity[TM]. Until the Company completes the transition to Adfinity[TM], it expects to incur ad serving costs that are significantly higher than historical levels. Thereafter, the Company expects gross margins to increase because third party ad serving fees will no longer be paid. Operating Expenses Each of sales and marketing expenses, general and administrative expenses and product development expenses increased over the first three quarters of pro forma 1997 as both Petry and Interactive Imaginations incurred expenses in connection with the growth of their respective businesses. All of such expense categories decreased in the fourth quarter of 1997 because (i) Petry's pro forma fourth quarter results no longer included expenses of its then-parent and (ii) Interactive Imaginations reduced its expense levels as it consolidated its operations in the third quarter of pro forma 1997. Beginning in the first quarter of pro forma 1998, all of such expense categories increased in anticipation of the Merger and the Acquisition and expected future growth. Sales and Marketing Expenses. Sales and marketing expenses consist primarily of sales force salaries and commissions, advertising expenditures and costs of trade shows, conventions and marketing materials. The Company expects sales and marketing expenses to increase as it continues to invest in sales and marketing personnel, expand into new markets and broaden the visibility of the Company. General and Administrative Expenses. General and administrative expenses consist primarily of compensation, facilities expenses and other overhead expenses incurred to support the growth of the business. Beginning in the second quarter of pro forma 1998, the Company expects general and administrative expenses to increase due to the additional ad serving personnel required to support Adfinity[TM]. In addition, the Company expects general and administrative expenses to increase as it incurs increased levels of expenses to support future growth. Product Development Expenses. Product development expenses consist primarily of compensation and related costs incurred to further develop the Company's ad serving capabilities. Product development expenses 22 declined in the fourth quarter of pro forma 1997 due to the consolidation of the operations of Interactive Imaginations, and such expenses were suspended in the first quarter of pro forma 1998 as the Company sought a more dynamic ad serving platform. The Company believes that continued investment in product development, particularly for its Adfinity[TM] system, is critical to its strategy of providing excellent service, and it expects to increase the future amounts spent on product development. Other Expenses. Other expenses in pro forma 1997 included an aggregate of $232,304 in legal costs incurred during the second and third quarters in defending a class-action lawsuit filed by certain Affiliated Websites on the ContentZone, which defense resulted in a grant of summary judgment in favor of the Company. During the third quarter of pro forma 1997, in connection with the consolidation of Interactive Imaginations, the Company recorded a net write-off of $756,795 of property and equipment that was deemed to have no future economic benefit. In connection with the development of its Adfinity[TM] and dbCommerce[TM] technologies, the pro forma impact of the cost of acquired in-process technology is shown in the first quarter of pro forma 1997. The Company recorded goodwill amortization expense beginning in the first quarter of pro forma 1997, which represents the excess purchase price over the fair value of net liabilities of the acquired businesses of Petry, Advercomm and Intelligent Interactions. Historical Results of Operations Years Ended December 31, 1997, 1996 and 1995 24/7 Media's historical results of operations for the fiscal years ended December 31, 1997, 1996 and 1995 include the results of Interactive Imaginations and do not reflect any of the operating results of Petry, Advercomm or Intelligent Interactions, or the pro forma adjusting entries resulting from the merger of these entities with and into the Company. The Company does not believe that the historical revenues or expenses as presented below are reliable or accurate indicators of the future performance of the combined Company. See "Selected Consolidated Financial Data" and the Company's Consolidated Financial Statements and related Notes thereto. Revenues. Total revenues were $3,148,569, $1,542,163 and $151,750 for the years ended December 31, 1997, 1996 and 1995, respectively. Year-to-year growth resulted from increases in (i) advertising revenue generated by the ContentZone and Riddler.com and (ii) consulting and license fees derived from the SegaSoft agreement, whereby SegaSoft licensed certain software from Interactive Imaginations. The Company does not expect to realize meaningful revenues from the SegaSoft agreement in the future. One customer (SegaSoft) accounted for 55% of Interactive Imaginations' total revenues during 1997, two customers (SegaSoft and Microsoft Corporation) accounted for 25% and 12% of total cash advertising revenues, respectively, during both 1997 and 1996, and four customers (Marion Foundation, AT&T, Coors and 20th Century) accounted for 33%, 21%, 20% and 13% of total cash advertising revenues, respectively, during 1995. Cost of Revenues and Gross Profit (Loss). Cost of revenues was $1,655,340, $1,592,771 and $198,291 for the years ended December 31, 1997, 1996 and 1995, respectively. The increase in cost of revenues in all years was due to the related growth in advertising revenue, and the smaller percentage increase from 1996 to 1997 was due to a significant increase in the percentage of total advertising revenue generated by Riddler.com, which does not entail payment of fees to Affiliated Websites. Gross profit increased from 1996 to 1997 primarily due to a significant increase in high margin revenues generated by the SegaSoft agreement. Operating Expenses. Total operating expenses were $6,702,591, $6,711,336 and $1,121,604 for the years ended December 31, 1997, 1996 and 1995, respectively. The increase from 1995 to 1996 was caused by increased expenditures incurred in anticipation of continued growth of the Company. The decrease from 1996 to 1997 was primarily due to the consolidation of the Interactive Imaginations business, offset by $989,099 in other expenses recorded in 1997. Other expenses included $232,304 of legal costs associated with the successful defense of a class-action lawsuit filed by certain Affiliated Websites on the ContentZone, as well as a net write-off of $756,795 of property and equipment that was deemed to have no future economic value. Three Months Ended March 31, 1998 and 1997 For the three months ended March 31, 1998, 24/7 Media's historical results of operations reflect the Merger as of February 24, 1998. For the three months ended March 31, 1997, 24/7 Media's historical results of operations only include the results of Interactive Imaginations. The Company does not believe that the historical revenues or expenses as presented below are reliable or accurate indicators of the future performance of the combined Company. See the Company's Consolidated Financial Statements and related Notes thereto. 23 Revenues. Total revenues were $1,076,250 for the three months ended March 31, 1998, as compared to $1,194,137 for the three months ended March 31, 1997. Such decrease was caused primarily by a decline in revenues generated by the SegaSoft Agreement, offset by a significant increase in advertising revenue. Cost of Revenues. Cost of revenues was $930,003 for the three months ended March 31, 1998 as compared to $459,587 for the three months ended March 31, 1997. Such increase primarily related to increases in third party ad serving costs which were caused by growth in advertising revenue and the temporary increase in costs in connection with the transition to Adfinity[TM]. Such increase was offset by reduced ContentZone ad serving costs. Operating Expenses. Total operating expenses were $2,274,327 for the three months ended March 31, 1998 as compared to $1,532,609 for the three months ended March 31, 1997. This increase was caused by higher sales and marketing and general and administrative expenses in anticipation of the Merger and future growth, as well as amortization of goodwill resulting from the acquisition of Petry and Advercomm. Such increase was offset by the significant reduction of product development expense prior to the acquisition of Intelligent Interactions. Liquidity and Capital Resources Historically, the Company financed its operations primarily from private placements of equity and convertible debt securities. Concurrently with the merger of Petry and Advercomm with and into 24/7 Media, the Company completed a private placement of preferred stock and warrants which resulted in net proceeds of $9,830,897. As of March 31, 1998, the Company had cash and cash equivalents of $7,764,695. In addition to funding on-going operations, the Company's principal commitments consist of various obligations under operating and capital leases. On June 1, 1996, the Company entered into an operating lease for the use of computer equipment with a fair market value of approximately $835,000. Rent expense for the operating lease was $42,421, $162,862, $559,748 and $381,313 for the three months ended March 31, 1998 and 1997 and the years ended 1997 and 1996, respectively. On May 14, 1998, the Company entered into an operating lease for computer equipment related to its Adfinity[TM] system, with a fair market value of approximately $717,000. Total rent expense for currently outstanding leases is expected to be approximately $115,000 per quarter. Net cash used in operating activities was $2,309,598, $1,384,894, $4,465,640, $4,933,106, and $995,194 for the three months ended March 31, 1998 and 1997 and for the years ended December 31, 1997, 1996 and 1995, respectively. Net cash used in operating activities resulted from the Company's net operating losses, adjusted for certain non-cash items, including: (i) a significant advance by SegaSoft in late 1996 for revenues that were primarily recognized during 1997; (ii) the write-off of property and equipment in 1997; and (iii) the amortization of goodwill in the first quarter of 1998 related to the Merger. Net cash used in operating activities also resulted from a high level of accounts receivables and related accrued liabilities due to the time lag between revenue recognition and receipt of payments from advertisers. To the extent the Company is able to improve the timeliness of its billing and collections processes as it completes the transition to Adfinity[TM], the Company expects its net working capital as a percentage of total revenues to improve. Net cash provided by (used in) investing activities was $71,175, $0, ($19,219), ($1,578,276), and ($464,016) for the three months ended March 31, 1998 and 1997 and the years ended December 31, 1997, 1996 and 1995, respectively. Net cash used in investing activities resulted primarily from capital expenditures relating to computer equipment. To the extent that the Company acquires significant ad serving hardware in the future, net cash used in investing activities will increase. Net cash provided by financing activities was $9,909,173, $500,011, $2,889,409, $8,200,777, and $1,448,488 for the three months ended March 31, 1998 and 1997 and the years ended December 31, 1997, 1996 and 1995, respectively. Net cash provided by financing activities for the three years ended December 31, 1997 included issuances of convertible notes, convertible preferred stock, common stock and warrants. Prior to March 31, 1998, all of the previously issued convertible notes, convertible preferred stock and warrants were converted or exercised into common stock, except for approximately $500,000 principal amount of convertible debt and warrants to purchase approximately 142,000 shares of Common Stock with an average exercise price of $0.70 per share. On February 24, 1998, the Company issued Series A Preferred Stock with detachable warrants at an average exercise price of $2.38. No provision for federal or state income taxes has been recorded as the Company incurred net operating losses for all periods presented. At December 31, 1997, the Company had approximately $13,394,000 of federal net 24 operating loss carryforwards available to offset future taxable income; such carryforwards expire in various years through 2012. As a result of various equity transactions during 1996, 1997 and 1998, management believes the Company has undergone an "ownership change" as defined by section 382 of the Internal Revenue Code. See Note 3 to the Company's Consolidated Financial Statements. Accordingly, the utilization of a portion of the net operating loss carryforward may be limited. Due to this limitation, and the uncertainty regarding the ultimate utilization of the net operating loss carryforward, no tax benefit for losses has been recorded by the Company and a valuation allowance has been recorded for the entire amount of the net deferred tax asset. In addition, certain events, including any sales by the Company of shares of its stock, including sales pursuant to this Offering, and/or transfers of a substantial number of shares of Common Stock by the current stockholders, may partially restrict the ability of the Company to utilize its net operating loss carryforwards. The Company believes that the net proceeds from this offering, combined with current cash and cash equivalent balances will be sufficient to fund its requirements for working capital and capital expenditures for at least the next 12 months. To the extent that the company encounters unanticipated opportunities. The Company may need to raise additional funds sooner in order to take advantage of unanticipated opportunities, in which case, the Company may sell additional equity or debt securities or borrow funds from banks. Sales of additional equity or convertible debt securities would result in additional dilution of the Company's stockholders. The Company recognizes the need to ensure that its operations will not be adversely impacted by Year 2000 software failures. The Company has established procedures for evaluating and managing the risks and costs associated with this problem and is currently taking steps to make its products and systems Year 2000 compliant. In addition, the Company's ad servers and certain of its customers may also be impacted by Year 2000 complications. Any failure by the Company, its ad servers or its customers to achieve Year 2000 compliance could have a material adverse effect on the Company's business, results of operations and financial condition. Recently Issued Accounting Principles The Company adopted the provisions of Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income" in the quarter ended March 31, 1998. SFAS No. 130 requires the Company to report in their financial statements, in addition to its net income (loss), comprehensive income (loss), which includes all changes in equity during a period from non-owner sources including, as applicable, foreign currency items, minimum pension liability adjustments and unrealized gains and losses on certain investments in debt and equity securities. There were no differences between the Company's comprehensive loss and its net loss as reported. In April 1998, the American Institute of Certified Public Accountants issued Statement of Position 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use" ("SOP 98-1"). SOP 98-1 provides guidance for determining whether computer software is internal-use software and on accounting for the proceeds of computer software originally developed or obtained for internal use and then subsequently sold to the public. It also provides guidance on capitalization of the costs incurred for computer software developed or obtained for internal use. The Company has not yet determined the impact, if any, of adopting SOP 98-1, which will be effective for the Company's year ending December 31, 1999. In June 1997, the FASB issued SFAS No. 131, Disclosure About Segments of an Enterprise and Related Information. SFAS No. 131 establishes standards for the way that public business enterprises report information about operating segments. It also establishes standards for related disclosures about products and services, geographic areas and major customers. SFAS No. 131 is effective for fiscal years beginning after December 15, 1997. The Company has determined that it does not have any separately reportable business segments. 25 BUSINESS Overview 24/7 Media operates networks of Websites that enable both advertisers and Web publishers to capitalize on the many opportunities presented by Internet advertising, direct marketing and commerce. The Company generates revenues by delivering advertisements and promotions to its Affiliated Websites. In particular, 24/7 Media: (i) operates the 24/7 Network, a network of over 80 high profile Websites to which the Company delivered an aggregate of over 325 million advertisements in April 1998; (ii) operates the ContentZone, a network of over 2,000 small to medium-sized Websites to which the Company delivered an aggregate of over 40 million advertisements in April 1998; (iii) licenses its Adfinity[TM] advertising management system to independent Websites to manage and serve high-volume advertising and direct marketing campaigns; and (iv) markets its dbCommerce[TM] software to e-commerce merchants to enable the delivery of targeted promotions. The Company operates in the rapidly growing Internet advertising industry. IDC estimates that at the end of 1997 there were over 38 million Web users in the United States and over 68 million Web users worldwide and that by the end of 2002 the number of Web users will increase to over 135 million in the United States and to over 319 million worldwide. Jupiter Communications projects that the dollar value of Internet advertising in the United States will increase from $940 million in 1997 to $7.7 billion in 2002. The Company believes that advertisers seek to place Internet ads in ways to maximize unduplicated reach. During April 1998, the 365 million impressions generated by the Company's networks reached more than one third of all Internet users, according to a study prepared for the Company by Media Metrix. The Company believes that this reach figure is among the highest in the Internet advertising industry. The Company plans to aggressively recruit Websites of all sizes for its networks in order to further extend the Company's reach as well as to provide advertisers with a broad base of online content and page views, and to improve the Company's brand awareness and visibility with media buyers. In addition, as online advertisers and direct marketers increase their use of the Internet, they seek solutions and technologies that allow them to efficiently deliver highly targeted messages. 24/7 Media's customized solutions allow advertisers and direct marketers to tailor their ad campaigns to reach desired audiences, while reducing costs, easing time pressures and alleviating the need to purchase a series of ad campaigns from numerous Web publishers. Advertisers and direct marketers can achieve their objectives by buying ad space on a specific Website, within a particular content channel or across an entire network. As Internet traffic grows, Web publishers increasingly seek to maximize the value of their online inventory. The Company's extensive sales and marketing experience enables Web publishers to access media buyers at large ad agencies and to sell advertisement space without incurring the costs and challenges associated with building and maintaining an ad sales force. Additionally, the ad serving and targeting capabilities of Adfinity[TM] effectively deliver advertisements to the Company's Affiliated Websites. The recent addition of the Company's Adfinity[TM] and dbCommerce[TM] technologies allows 24/7 Media to provide comprehensive advertising solutions for advertisers, direct marketers and Web publishers. Adfinity is designed to target, deliver, and track advertisements and direct marketing messages across the Company's networks. Adfinity can create a profile of an individual Internet user by integrating such user's online behavior with third party demographic and lifestyle data. These profiles can allow Adfinity to deliver targeted advertisements to the right person at the right time. dbCommerce[TM] software is designed to enable e-commerce merchants to deliver promotions and messages to targeted customer audiences by integrating database marketing techniques with customer transaction information and third party databases. The Company's senior management team includes several individuals with over fifteen years of experience in advertising sales in the television and proprietary online network industries. Other members of senior management contribute extensive knowledge of ad serving technology and database targeting. The Company leverages its media sales and technology expertise to maximize the value of ad campaigns for both advertisers and Affiliated Websites. 26 Industry Background Growth of the Internet and the Web The Internet and the Web are experiencing dramatic growth both in terms of the number of Web users and the number of Websites. IDC estimates that at the end of 1997 there were over 38 million Web users in the United States and over 68 million Web users worldwide, and that by the end of 2002 the number of Web users will increase to over 135 million in the United States and to over 319 million worldwide. In addition, Web users are spending an increasing amount of time on the Web, and a 1997 report by the U.S. Department of Commerce estimates that overall traffic on the Internet is doubling every 100 days. According to Network Solutions, the number of Internet domains (.com, .net and .org) had grown to over 2 million in May 1998. The growth in the number of Web users, the amount of time users spend on the Web and the increase in the number of Websites is being driven by the increasing importance of the Internet as a sales and distribution channel, a communications medium and an information resource. Growth of Online Commerce The Internet is dramatically affecting the methods by which consumers and businesses are buying and selling goods and services. The Web provides online merchants with the ability to reach a global audience and to operate with minimal infrastructure, reduced overhead and greater economies of scale, while providing consumers with a broad selection, increased pricing power and unparalleled convenience. As a result, a growing number of consumers are transacting business on the Web, including trading securities, buying consumer goods, paying bills and purchasing airline tickets. Jupiter Communications estimates that over 25% of adult Web users purchased goods or services over the Web in 1997 and that 50% of adult Web users will make online purchases in 2000. Jupiter Communications also estimates that retail consumer purchases of goods and services over the Internet will increase from $2.6 billion in 1997 to $37.5 billion in 2002. The Company believes that as electronic commerce expands, advertisers and direct marketers will increasingly use the Web to advertise products, drive traffic to their Websites, attract customers and facilitate transactions. Growth of Internet Advertising The Web is evolving into an important medium for advertisers due to its interactive nature, global reach, rapidly growing audience and the expected increase in online commerce. Unlike more traditional advertising methods, the Web gives advertisers the potential to target advertisements to broad audiences or to selected groups of users with specific interests and characteristics. The Web also allows advertisers and direct marketers to measure the effectiveness and response rates of advertisements and to track the demographic characteristics of Web users. The interactive nature of Web advertising enables advertisers to better understand potential customers, and to change messages rapidly and cost effectively in response to customer behavior and product availability. Additionally, the Web allows advertisers and direct marketers to reach users with attractive demographic profiles. A 1997 U.S. Department of Commerce study estimated that 48% of Web users have a college degree, 34% have a household income greater than $60,000, and their average age is approximately 35 years. The unique capabilities of online advertising, the growth in traffic on the Web and the favorable characteristics of Web users have led to a significant increase in online advertising. According to Jupiter Communications, the dollar value of online advertising in the United States is expected to increase from $940 million in 1997 to $7.7 billion in 2002, representing a 52% compounded annual growth rate. By comparison, in 1997 IDC estimated that $173 billion was spent on traditional media advertising (television, radio, cable and print) in the United States. Until recently, the leading Internet advertisers have been technology companies, search engines and Web publishers. However, many of the largest advertisers utilizing traditional media, including consumer products companies and automobile manufacturers, are expanding their use of online advertising. The Company believes that online advertising will continue to capture an increasing share of available advertising dollars and that this trend will drive demand for online ad inventory and for sophisticated Internet advertising solutions. Opportunities for Direct Marketing The Web also represents an attractive medium for direct marketing, which has traditionally been conducted through direct mail, telemarketing and televison infomercials. The interactive nature of the Web enables direct marketers to deliver targeted promotions to consumers at the point-of-sale. The success of a direct marketing campaign is measured by the response rate of consumers (e.g., number of leads, number of sales or transactions 27 as a percentage of promotions viewed). The Internet has the potential to enable direct marketers to increase consumer response rates and decrease costs-per-transaction by targeting and delivering direct marketing campaigns to particular consumers based on their demographic profile, self-selected interests and online behavioral characteristics. By providing a more cost-effective method to reach target customers, online advertising is expected to improve the direct marketer's return on investment. The Direct Marketing Association estimates that $153 billion was spent in 1997 on all forms of direct marketing in the United States, and Jupiter Communications estimates that expenditures on direct marketing over the Internet will exceed $1.3 billion in 2002. Challenges Facing Advertisers, Direct Marketers and Web Publishers While the Web offers numerous opportunities, most online advertisers, direct marketers and Web publishers face a number of significant challenges to realizing the potential of Internet advertising. As online advertisers, direct marketers and Web publishers increase their use of the Internet, they seek solutions and technologies which will allow them to deliver highly targeted messages, receive real-time feedback, benefit from business efficiencies and capitalize on other potential advantages of online advertising and direct marketing. Advertisers and Direct Marketers. For advertisers and direct marketers, large advertising campaigns can be time-consuming, expensive and difficult to manage and can require the use of media purchasers at advertising agencies to place advertisements. Given the breadth of content available on the Web, it is difficult for advertisers and direct marketers to justify the costs of transacting individually with a number of smaller, but desirable, sites in order to reach a large online audience. In addition, many advertisers and direct marketers lack the analytical tools to evaluate and optimize the effectiveness of advertising campaigns, target appropriate users, efficiently place advertisements and deliver content. Advertisers and direct marketers also find that individual Websites typically lack the technology to serve a variety of advertisements to a broad reach of Internet users. Web Publishers. Web publishers who seek to sell ad space on their Websites face an array of challenges. Most Web publishers have difficulty attracting and maintaining experienced personnel to sell ad space on their Websites and justifying the costs of establishing such a sales force. In addition, most Web publishers cannot afford, or lack the ability, to operate and maintain sophisticated ad servers and databases to provide effective ad serving, targeting and reporting to advertisers. Furthermore, for sales personnel at all but the largest Websites, it can be difficult to gain access to media buyers at large advertising agencies. As a result, online advertising spending is highly concentrated on large Websites. In its most recent report, Jupiter Communications estimated that, during August 1997, the top ten Websites on the Internet accounted for approximately 52% of all dollars spent on Internet advertising. The Company believes all but the largest Websites will continue to face challenges in capturing a share of the total advertising dollars spent on the Internet. The 24/7 Media Solution The Company operates the 24/7 Network and the ContentZone, which are networks of Websites that enable both advertisers and Web publishers to capitalize on the many opportunities presented by Internet advertising, direct marketing and commerce. The 24/7 Network is comprised of over 80 high profile Websites and the ContentZone is comprised of over 2,000 small to medium-sized Websites. The Company offers comprehensive advertising sales solutions for both emerging and mature Web publishers and provides advertisers and direct marketers with targeted ad delivery across the Company's networks. During April 1998, the 365 million impressions generated by the Company's networks reached more than one third of all Internet users, according to a study prepared for the Company by Media Metrix. The Company believes that this reach figure is among the highest in the Internet advertising industry. The Company's ability to deliver targeted advertisements has recently been enhanced by the addition of the Adfinity[TM] ad serving technology. Benefits to Advertisers and Direct Marketers 24/7 Media reduces costs and eases time pressures for advertisers and direct marketers by alleviating the need to purchase a series of ad campaigns from numerous Web publishers. The Company's networks provide advertisers and direct marketers with access to a wide variety of online content and a broad reach of Internet users. Advertisers and direct marketers can enhance the effectiveness of advertising and direct marketing campaigns by customizing their ad delivery on the Company's networks and buying ad space either on selected Affiliated Websites, within a particular content channel or across an entire network. The Company believes that its Adfinity[TM] technology will enable advertisers to optimize ad performance by reaching highly targeted audiences based on demographic profiles 28 and user behavior. In addition, the Company provides advertisers and direct marketers with comprehensive reporting services in order to monitor the effectiveness of ad delivery. Benefits to Web Publishers Membership on the Company's networks enables Web publishers to immediately generate advertising revenues by gaining access to advertisers and direct marketers without the costs and challenges associated with building and maintaining their own ad sales force and ad serving technology. Websites included on the Company's networks benefit from 24/7 Media's experienced management team, its extensive sales and marketing organization and its direct access to advertisers and agencies. The organization of the Company's networks into channels of Web publishers' content enhances the value of inventory on small to medium-sized Websites and enables such Websites to generate revenues by selling ad space within a channel that is attractive to advertisers. Furthermore, the Company believes that the targeting capabilities of the Company's Adfinity[TM] ad management system will increase the value of Web publishers' inventory. The Company also provides sophisticated tracking and reporting functions for its Affiliated Websites. For Web publishers with their own in-house ad sales forces, the Company licenses its Adfinity[TM] ad management system to serve advertisements and provide enhanced targeting and reporting capabilities. Strategy 24/7 Media's objective is to become the leading Internet advertising and direct marketing firm by providing superior turnkey advertising solutions for Web publishers and maximizing the effectiveness of advertisers' Internet advertising campaigns. The Company intends to reach its objective by implementing the following strategies: Expand the 24/7 Network and the ContentZone. The Company plans to aggressively recruit Websites for the 24/7 Network and the ContentZone in order to extend the Company's reach and to provide a broad base of page views and online content to advertisers. The Company believes that its approach to expansion is unique in that it recruits Websites of all sizes, including high-profile or larger to medium-sized Websites on the 24/7 Network and medium to smaller-sized Websites on the ContentZone. Such a collection of Websites of diverse sizes and content allows advertisers to target Internet users by interest and enhances the value of each Affiliated Website's inventory. An increased number of Affiliated Websites and an expanded breadth of available content will further enable advertisers to consolidate their ad purchases and will improve the Company's brand awareness and visibility with media buyers. Maximize Sales and Marketing Effectiveness. The Company believes that its sales and marketing organization is among the largest in the Internet advertising industry, providing the Company with a competitive advantage. The Company intends to leverage the substantial media sales experience of its management team in order to maximize the value of ad campaigns to benefit both advertisers and Affiliated Websites. 24/7 Media believes that advertiser awareness of the Company is critical to its success. Accordingly, the Company continually expands its services for advertisers and advertising agencies in order to establish and expand the recognition of its corporate identity. The Company also promotes its service offerings through its Website, trade publication advertisements, direct mail and promotional activities, trade shows and other media events. Enhance Capabilities of Ad Targeting Technology. The Company believes that its Adfinity[TM] ad management technology creates significant value for advertisers, direct marketers and Web publishers. Adfinity[TM] can create a profile of an individual Internet user by integrating such user's online behavior with third party demographic and lifestyle data. These profiles can enable Adfinity[TM] to deliver targeted advertisements to the right person at the right time. The Company intends to continue to enhance its targeting capabilities and technology through investment in research and development activities. Increase Value of Ad Inventory. The Company believes that click-thru rates will increase as its Adfinity[TM] technology delivers advertisements to a more highly targeted audience, resulting in more effective advertising campaigns and enabling the Company to charge higher CPM rates. Furthermore, the Company believes that as it increases the breadth and depth of its content channels, the sale of ads targeted to specific channels will increase, displacing lower CPM run of network campaigns, in which ads are delivered across the Websites in a network, and cost-per-action campaigns that generate revenues only if the user responds to the ad with an action, such as an inquiry or a purchase of the product advertised. The Company intends to further increase the value of its ad inventory by seeking to sell 100% of inventory through the sale of a combination of advertisements sold on a CPM 29 basis and a cost-per-action basis, by selling sponsorships on Affiliated Websites and by refining its management of ad space inventory. Provide Highest Level of Customer Service. The Company emphasizes high quality service for Web publishers and advertisers. For example, the Company employs techniques of benchmarking, statistical analysis and continuous process improvement to provide Web publishers and advertisers with "best of class" service. The Company continually surveys its Affiliated Websites and advertisers to monitor service levels and identify and resolve problems. In addition, the Company expects that Adfinity[TM] will offer enhanced reporting capabilities that allow Web publishers and advertisers to better assess the efficiency and performance of ad campaigns. 24/7 Media Products and Services 24/7 Media offers Internet advertisers, direct marketers and Web publishers comprehensive Internet advertising solutions. The Company also licenses its Adfinity[TM] ad serving technology and markets its dbCommerce[TM] software to third parties. Internet Advertising Networks The Company operates both the 24/7 Network and the ContentZone, which are collections of Websites with diverse online content organized into topical channels. The 24/7 Network. Through the 24/7 Network, the Company provides advertisement sales and delivery services and related functions to over 80 Affiliated Websites. The 24/7 Network aggregates large and medium-sized Websites that are attractive to advertisers, generate a high number of ad impressions and contribute a variety of online content to the network. No single Website on the 24/7 Network produced more than ten percent of the 24/7 Network's pro forma advertising revenues in the year ended December 31, 1997 or in the three months ended March 31, 1998, and the ten largest sites in the 24/7 Network produced approximately 70% and 66% of the 24/7 Network's pro forma advertising revenue in such periods, respectively. During the month of April 1998, the Company delivered over 325 million advertisements to the 24/7 Network. ContentZone. The ContentZone is a network of over 2,000 small to medium-sized Websites to which the Company can deliver targeted advertisements. Such Websites encompass a broad and diverse range of content that reflects the eclectic, grass-roots nature of the Web. The ContentZone provides one of the few advertising revenue opportunities for such small and emerging Websites. During the month of April 1998, the Company delivered over 40 million advertisements to the Affiliated Websites on the ContentZone. The Company created and operates the ContentZone Website (www.contentzone.com) to promote and generate traffic on its Affiliated Websites on the ContentZone. Channels on the Networks. The 24/7 Network's and the ContentZone's Affiliated Websites are currently organized into the following topical channels: [bullet] Automotive [bullet] Real Estate [bullet] Business/Financial [bullet] Search Directory/ISP [bullet] Entertainment [bullet] Sports [bullet] Games [bullet] Technology/Computers [bullet] International [bullet] Travel [bullet] News/Information [bullet] Women/Family
The Company is presently developing several new channels prompted by user and advertiser interests. The Company expects to expand into additional channels to respond to advertisers' needs. The Games channel of the 24/7 Network includes the Company's Riddler.com Website (www.riddler.com), a Website that offers a diverse number of single-player and multi-player games to over 700,000 registered subscribers, as well as to a number of unregistered users. Riddler.com offers free games and prizes as an incentive to consumers to supply the Riddler.com database with personal demographic and psychographic data. The Company delivers advertisements and sponsorship messages on Riddler.com that do not interrupt the game being played, but require the user to scroll through the advertisement in order to begin playing the game. Service Levels on the Networks. The Company offers different levels of service to the Affiliated Websites on its networks. 30 The Company offers full service to Affiliated Websites on the 24/7 Network. For such Websites, the Company appoints an account manager to oversee the relationship with the Website, sells the Website ad inventory directly to advertisers, solicits sponsorships specifically for such Website and integrates sales efforts with the Website. The Company recognizes revenues generated from advertising sales net of any ad agency commissions. For all other Websites on the 24/7 Network, the Company bundles advertisements as part of a channel or run of network package, pursuant to which the advertisement is delivered across Websites in one of the channels listed above or across the entire 24/7 Network. For example, an advertiser who buys an advertisement on the Automotive channel is guaranteed that such advertisement will run only on the Websites in the Automotive channel. The Company typically receives a minimum available inventory on such Websites, receives commissions only on the advertisements the Company sells and believes that it is generally the only third party that sells ads on such Websites. All Websites on the ContentZone receive service similar to the channel or run of network service on the 24/7 Network except that advertisement delivery is highly automated and ads are delivered across Websites included in specific channels on the ContentZone or across the entire ContentZone. Advertisers on the Networks. The Company maintains relationships with, and focuses its sales and marketing efforts on, the leading Internet and traditional advertisers and advertising agencies, many of which have utilized the Company's solutions. Advertisers and advertising agencies employ the Company in various ways. Based on its breadth of online content and its extensive reach, the Company has the ability to package personalized advertising solutions for advertisers and ad agencies. The Company's sales force works closely with advertisers to enhance the effectiveness of advertising campaigns by customizing ad delivery either on a specific Website, within a particular content channel, or across an entire network. Set forth below is a representative list of advertising agencies and advertisers that have delivered advertisements on the Company's networks during the four months ended April 30, 1998: Advertising Agencies [bullet] Agency.com [bullet] i-traffic [bullet] Ammirati Puris Lintas [bullet] J. Walter Thompson [bullet] Anderson & Lembke [bullet] Kirshenbaum Bond & Partners [bullet] Avalanche [bullet] LeftField [bullet] BBDO Interactive [bullet] The Lampshire Group [bullet] Boss Media [bullet] Media.com [bullet] CKS/Sitespecific [bullet] Mercury 7 [bullet] Dahlin Smith White [bullet] Modem Media [bullet] DMB&B [bullet] Ogilvy & Mather [bullet] Fallon McElligott [bullet] Planet U [bullet] Freeman [bullet] Strategic Interactive Group [bullet] Giant Step [bullet] Thunderhouse [bullet] GM Cyberworks [bullet] TBWA-Chiat Day [bullet] Grey [bullet] US Interactive [bullet] Hal Riney [bullet] Wolverine [bullet] iballs [bullet] Y&R Wunderman [bullet] ifrontier
31 Advertisers [bullet] Ace Hardware [bullet] General Motors [bullet] Amazon.com [bullet] Hewlett Packard [bullet] American Express [bullet] IBM [bullet] AT&T [bullet] Infoseek [bullet] Bell Atlantic [bullet] Intel [bullet] BellSouth [bullet] Investors Business Daily [bullet] Bloomberg [bullet] Mastercard [bullet] Broderbund [bullet] Metromail [bullet] Cardsecure [bullet] Microsoft [bullet] CDNow [bullet] The Mining Company [bullet] Charles Schwab [bullet] News Corp [bullet] Cendant [bullet] N2K [bullet] Cisco Systems [bullet] Pointcast [bullet] Citibank [bullet] Proctor & Gamble [bullet] Citizens Bank [bullet] Sony [bullet] Columbia House [bullet] Sprint [bullet] Compaq [bullet] Standard & Poor's [bullet] Discover Card [bullet] Time Life [bullet] Disney [bullet] Tripod [bullet] eBay [bullet] US West [bullet] Encyclopedia Britannica [bullet] Visa [bullet] Entrepreneur [bullet] Web Genesis [bullet] Ford [bullet] Ziff Davis [bullet] FTD
Admission to the Networks. Web publishers seeking to join the 24/7 Network must meet specified standards, such as quality content and brand name recognition, specified levels of existing and projected page views, attractive user demographics, and sponsorship opportunities. Any Web publisher possessing non-objectionable content on its Website can qualify for admission to the ContentZone. The Company expects to "graduate" ContentZone members to the 24/7 Network if they generate a sufficient number of ad impressions per month and satisfy the requisite standards. Adfinity[TM] Ad Serving Technology Adfinity[TM] ad serving technology is designed to allow Websites to target, deliver, and track a high volume of advertisements to Internet viewers without causing a slow down in the performance of the Website or a delay in ad delivery. 24/7 Media acquired Adfinity[TM] as part of its acquisition of Intelligent Interactions, and is currently integrating the Adfinity[TM] ad serving technology into the 24/7 Network. The Company expects Adfinity[TM] to serve as the Company's technology platform, delivering all of the advertisements to the 24/7 Network and the ContentZone. In addition, the Company currently licenses Adfinity[TM] to eight Websites, including The Motley Fool, MecklerMedia and RealNetworks. Adfinity[TM]'s targeting engine is designed to enable advertisers and direct marketers to target advertisements and Internet content to individuals or audience segments using flexible, advertiser-defined demographic profiles. Advertisers can control the advertisement delivered, the user targeted, and the frequency of ad delivery. Adfinity[TM] integrates information, such as a user's online response rate to advertisements, name, address, age, or e-mail address, with third-party databases to generate a comprehensive demographic profile of the Internet user. Using such user profile, the Company can serve advertisements and promotions specifically targeted to such user. Adfinity[TM] also utilizes database overlays from marketing firms or other third parties in order to create a comprehensive direct marketing model for the Company. Through Adfinity[TM], the Company provides Internet advertisers, direct marketers and Web publishers with comprehensive timely reports regarding the demographics of users receiving and responding to advertisements. If a selected audience does not respond well to an advertising message, then Adfinity[TM] allows Internet advertisers, 32 direct marketers and Web publishers to promptly change advertising messages or images, refine the targeted demographics and rebroadcast messages. dbCommerce[TM] Software 24/7 Media acquired dbCommerce[TM] software in connection with the acquisition of Intelligent Interactions. dbCommerce[TM] software is designed to enable e-commerce merchants to deliver targeted promotions and messages to distinct customer segments or specific customers by integrating database marketing techniques with customer transaction information and third party databases. dbCommerce[TM] is designed to track the effectiveness of promotional efforts by source code, page view, products shown and Internet response rates and to provide reports of this information to e-commerce merchants to improve the targeting of future promotions and messages. The Company's Intelligent Interactions subsidiary recently entered into an agreement pursuant to which IBM bundles the dbCommerce[TM] software with IBM's I-commerce server for database and Web marketing purposes. Furthermore, Intelligent Interactions and Open Market Inc. recently entered into an agreement to jointly market products that result from the integration of the dbCommerce[TM] software with Open Market's Transact commerce server, LiveCommerce's industrial cataloging software and SecureLink's development environment. To date, the Company has not realized any revenues from its dbCommerce[TM] software. Privacy Protection In utilizing its targeting technology and software, the Company adheres to the principles of the Direct Marketing Association regarding privacy concerns. To address privacy concerns, users are permitted, at their request, to "opt-out" of demographic profile targeting. When a subscriber objects to profile targeting, Adfinity[TM] and dbCommerce[TM] automatically deliver ads based only on site-defined page, location, or context. The Company generally does not depend on the use of "cookies", which are bits of information keyed to a specific server, file or directory location that are stored on a user's hard drive and passed to a Website's server through the user's browser software. The use of cookies on the Web has met with some resistance by Internet users. Ad serving systems can manage targeted advertising and control the frequency of ads delivered to users without using cookies through the use of a user login at each session, or with the user's permission, such systems can use a cookie to identify the user for future visits. Sales and Marketing The Company believes it maintains one of the largest Internet advertising sales organizations. The Company sells its services in the United States through a sales and marketing organization which included 37 salespeople as of May 31, 1998. These employees are located at the Company's headquarters in New York, and in the Company's offices in Chicago, Dallas, Los Angeles, San Francisco, Seattle and the Washington D.C. area. The Company believes that it has a competitive advantage due to the geographic breadth of its sales force and its ability to continually improve its sales and marketing capabilities. The Company continuously leverages the substantial media experience of its management team to maximize the value of ad campaigns for both advertisers and Affiliated Websites. The Company also employs a Website relationship department that surveys Affiliated Websites and monitors qualitative indicators of service levels in order to continuously improve its customer service. 24/7 Media believes that advertiser awareness of the Company and its services is critical to its success. As a result, the Company seeks to continually communicate with its advertisers and advertising agencies through its Website, trade publication advertisements, public relations, direct mail, ongoing customer communications programs, promotional activities, trade shows and online advertisements over the Company's networks and on third party Websites. Intellectual Property The Company regards its intellectual property as critical to its success, and relies upon patent, trademark, copyright and trade secret laws in the United States and other jurisdictions to protect its proprietary rights. The Company has filed applications with the United States Patent and Trademark Office to protect certain aspects of its Adfinity[TM] and dbCommerce[TM] technologies. The Company pursues the protection of its trademarks by applying to register the trademarks in the United States and (based upon anticipated use) internationally, and is the owner of a registration for the 24/7 Media trademark in the United States. There can be no assurance that any of the Company's trademark registrations or patent applications will be approved or granted and, if they are granted, that 33 they will not be successfully challenged by others or invalidated through administrative process or litigation. Further, if the Company's trademark registrations are not approved or granted due to the prior issuance of trademarks to third parties or for other reasons, there can be no assurance that the Company would be able to enter into arrangements with such third parties on commercially reasonable terms to allow the Company to continue to use such trademarks. Patent, trademark, copyright and trade secret protection may not be available in every country in which the Company's services are distributed or made available. In addition, the Company seeks to protect its proprietary rights through the use of confidentiality agreements with employees, consultants, advisors and others. There can be no assurance that such agreements will provide adequate protection for the Company's proprietary rights in the event of any unauthorized use or disclosure, that employees of the Company, consultants, advisors or others will maintain the confidentiality of such proprietary information, or that such proprietary information will not otherwise become known, or be independently developed, by competitors. The Company's Adfinity[TM] technology collects and utilizes data derived from user activity on the Company's networks and of the Websites of Web publishers using the Company's services. This data is used for advertisement targeting and for predicting advertisement performance. Although the Company believes that it has the right to use such data, there can be no assurance that any trade secret, copyright or other protection will be available for such information or that others will not claim rights to such information. Further, pursuant to its contracts with Web publishers using the Company's services, the Company is obligated to keep certain information regarding the Web publisher confidential. Legal standards relating to the validity, enforceability and scope of protection of certain proprietary rights in Internet-related industries are uncertain and currently evolving. The future viability or value of any proprietary rights of 24/7 Media is unknown. Steps taken by 24/7 Media to protect its proprietary rights may not be adequate and third parties may infringe or misappropriate the Company's proprietary rights. Any such infringement or misappropriation, should it occur, could have a material adverse effect on the Company's business, results of operations and financial condition. Furthermore, there can be no assurance that the Company's business activities will not infringe upon the proprietary rights of others, or that other parties will not assert infringement claims against the Company. Competition The markets for Internet advertising and related products and services are intensely competitive and such competition is expected to continue to increase. The Company believes that its ability to compete depends upon many factors within and beyond its control, including the timing and market acceptance of new services and enhancements to existing services developed by the Company and its competitors, customer service and support, sales and marketing efforts, and the ease of use, performance, price and reliability of the Company's products and services. The Company believes it has a competitive advantage due to the geographic breadth of its sales force and its ability to continually improve its sales and marketing capabilities. The Company competes for Internet advertising revenues with large Web publishers and Web search engine companies, such as America Online, Excite, Infoseek, Lycos and Yahoo. Further, the 24/7 Network competes with a variety of Internet advertising networks, including DoubleClick and Rainbow Interactive, a joint venture of Cablevision Systems Corp. and NBC. In marketing the Company's networks and its Adfinity[TM] system to Web publishers, the Company also competes with providers of advertisement servers and related services, including NetGravity and Accipiter, a division of CMG Information Services, Inc. In marketing dbCommerce[TM], the Company competes with BroadVision. The Company also encounters competition from a number of other sources, including content aggregators, companies engaged in advertising sales networks, advertising agencies, and other entities which facilitate Internet advertising. Many of the Company's existing competitors, as well as a number of potential new competitors, have longer operating histories, greater name recognition, larger customer bases and significantly greater financial, technical and marketing resources than the Company. See "Risk Factors--Competition." Employees As of May 31, 1998, the Company employed 100 persons, including 61 in sales, marketing and customer support, 24 in product development, and 15 in accounting, human resources and administration. The Company is not subject to any collective bargaining agreements and believes that it enjoys a good relationship with its employees. 34 Facilities and Systems The Company's principal executive offices are located at 1250 Broadway, New York, New York and consist of approximately 13,000 square feet under a lease that expires in October 2003; the Company has and expects to exercise in the next three months an option to lease an additional 13,000 square feet on an adjacent floor. The Company also leases office space at 915 Broadway, New York, New York. In addition, the Company leases office space for its sales, marketing and product development staff in Chicago, Dallas, Los Angeles, San Francisco and the Washington D.C. area. The Company believes that its existing facilities, including the additional space in the executive offices, will be sufficient for its purposes for the next 12 months. The Company's Adfinity[TM] ad serving software and hardware are housed at GlobalCenter in Herndon, Virginia. In the future, the Company may opt to utilize other GlobalCenter locations in New York and California. GlobalCenter provides the Company with a secure area to store and operate its computer systems, capacity communications links and Internet connectivity systems, and contractual protection against service interruptions. Legal Proceedings The Company is not a party to any material legal proceedings. 35 MANAGEMENT Executive Officers and Directors The following table sets forth certain information concerning the executive officers and directors of the Company:
Name Age Position and Offices - ---- --- -------------------- David J. Moore 45 President and Chief Executive Officer and a Director R. Theodore Ammon 48 Chairman of the Board Yale R. Brown 43 Executive Vice President--Technology and Operations and a Director Jacob I. Friesel 48 Executive Vice President--Sales and Marketing and a Director C. Andrew Johns 38 Executive Vice President, Treasurer & Chief Financial Officer David Chaney 27 Director Michael P. Paolucci 27 Director Jack L. Rivkin 57 Director Charles W. Stryker, Ph.D. 50 Director
David J. Moore has been President and Chief Executive Officer and a Director of the Company since February 1998. Mr. Moore was Chief Executive Officer of Petry Interactive from December 1995 to February 1998. From 1993 to 1994, Mr. Moore was President of Geomedica, an online service for physicians, which he sold to Reuters. From 1982 to 1992, Mr. Moore was a Group Vice President at Hearst/ABC-Viacom Entertainment Services, where he participated in the launch of Cable Health Network, Lifetime Television, Lifetime Medical Television, a service targeted to physicians, and HealthLink Television, a physician waiting room television service. From 1979 to 1982, Mr. Moore had a television advertising sales position with Turner Broadcasting. Mr. Moore received a B.A. degree in Communications from Northern Illinois University. R. Theodore Ammon, Chairman of the Board of the Company, has been Chairman of the Board of Big Flower Holdings, Inc. and its predecessor company, Big Flower Press Holdings, Inc. since 1993. From 1990 to 1992, Mr. Ammon was a General Partner of Kohlberg Kravis Roberts & Co., a New York and San Francisco-based investment firm, and an executive of such firm prior to 1990. Mr. Ammon also serves on the board of directors of each of Host Marriott Corporation, Culligan Water Technologies, Inc. and Samsonite Corporation. Mr. Ammon received a B.A. degree in Economics from Bucknell University. Yale R. Brown has been Executive Vice President--Technology and Operations and a Director since April 1998. Mr. Brown was Chief Executive Officer of Intelligent Interactions Corporation since February 1995. Mr. Brown held various positions with Oracle Corporation from 1990 through 1995, including Vice President of Emerging Technologies, Vice President of the Advanced Technologies Group of Oracle Consulting, and Vice President of Strategic Consulting Services for Oracle Complex Systems Corporation, Oracle's systems integration subsidiary. Mr. Brown was the Director of the Information Resources Management Practice of Coopers & Lybrand from 1987 to 1990. From 1981 to 1987, Mr. Brown was a consultant with Booz, Allen & Hamilton Inc. From 1978 to 1980, Mr. Brown was a Federal Reserve Examiner for the Board of Governors of the Federal Reserve System. Mr. Brown received a M.B.A. degree in Applied Economics and a B.A. degree in Political Science from The George Washington University. Jacob I. Friesel has been Executive Vice President--Sales and Marketing and a Director of the Company since February 1998. From 1997 to 1998, Mr. Friesel was President of Katz Millennium Marketing, the Internet media sales division of Katz Media Group, Inc. He was Vice President, Strategic Planning for the Katz Television Group from 1994 to 1997. From 1993 to 1994, he was a Vice President and General Sales Manager of Katz American Television, a leading advertising representative of major market television stations. He was Vice President, General Sales Manager of Katz Continental Television from 1991 through 1993, and was employed in various media advertising sales and management positions with the Katz Agency from 1976 to 1991. Mr. Friesel received a B.A. degree in Mass Communications from the City University of New York. 36 C. Andrew Johns has been Executive Vice President, Treasurer and Chief Financial Officer since April 1998. From 1996 to 1998, he was co-founder and Managing Director of Manufacturers Renaissance Network, Inc., which provides strategic consulting and investment banking services to small and medium-sized businesses. From 1990 to 1996, Mr. Johns was President and owner of Strathmore Hill Associates, Inc., an investment banking and strategic consulting firm. Mr. Johns received a M.B.A. degree from Stanford University Graduate School of Business and a B.S. degree in Commerce from The University of Virginia. Mr. Johns is a Chartered Financial Analyst. David Chaney, Director of the Company, has been an associate at Prospect Street NYC Discovery Fund, L.P. since July 1996, where he manages a portfolio of $125 million in funds related to venture capital projects. From June 1995 to July 1996, Mr. Chaney was an associate at UBS Securities involved in investment banking, and from June 1993 to June 1995, he was an analyst in the investment banking division of J.P. Morgan Securities Inc. Mr. Chaney received a B.A. degree in Psychology from Harvard University. Michael P. Paolucci, Director of the Company, has been a consultant to the Company in connection with mergers, acquisitions and other strategic initiatives since February 1998. Mr. Paolucci is a co-founder of Interactive Imaginations and was Chief Executive Officer of Interactive Imaginations from its incorporation in 1994 to February 1998. From 1992 to 1994, Mr. Paolucci was involved in communications, marketing and public relations for Jupiter Communications. Mr. Paolucci received a B.A. degree in Economics from Cornell University. Jack L. Rivkin, Director of the Company, has been Senior Vice President of the Investment Group of Travelers Group Inc. since October 1995, where he is responsible for the management of venture capital and public equity partnerships for various Travelers Insurance Companies. He is also a director and member of the investment committee of Greenwich Street Capital, a $625 million merchant banking fund affiliated with Travelers, and an adjunct professor at Columbia University Business School. From March 1993 to October 1995, Mr. Rivkin was vice chairman and director of Global Research at Smith Barney. From 1987 to 1992, Mr. Rivkin was director of the Equities Division and Director of Research of Lehman Brothers. From 1984 to 1987, Mr. Rivkin was President of PaineWebber Capital, Inc., the merchant banking arm of PaineWebber Group, and Chairman of Mitchell Hutchins Asset Management. Mr. Rivkin is also a director of HumaScan Inc., a medical device company, and PRT Group, Inc., an information technology company. Mr. Rivkin received a M.B.A. degree from Harvard Business School and a B.A. degree in Metallurgical Engineering from the Colorado School of Mines. Charles W. Stryker, Ph.D., Director of the Company, has been President of IntelliQuest Marketing Information Solutions, Inc. and President of Zona/Research since 1998. Dr. Stryker served as a Director of IntelliQuest Information Group Inc. from October 1997 to March 1998. From 1991 to 1997, he was President of each of MkIS User Forum and Information Technology Forum, companies providing marketing information, consulting and service products to executives and technology companies. Dr. Stryker received a B.S. degree and a M.S. degree in Electrical Engineering and a Ph.D. in Computer Science from New York University. Key Employees Mark A. Burchill has been Senior Vice President of Business Development and Marketing since February 1998 and was Senior Vice President and co-founder of Petry Interactive, Inc. from December 1995 to February 1998. In 1994, Mr. Burchill was Director of International Sales & Development for Petry Media Corp, a television rep firm. From 1992 to 1994, Mr. Burchill was a market consultant for the Los Angeles Rams and MTV Networks while also pursuing a graduate degree. From 1989 to 1992, Mr. Burchill was a Senior Media Planner in the media department of Young & Rubicam Advertising. Mr. Burchill received a M.B.A. degree from Anderson School of Management at the University of California at Los Angeles and a B.A. degree from Hobart College. Garrett P. Cecchini has been Senior Vice President of National Sales since February 1998. From February 1997 to February 1998, he was Vice President, General Manager of Katz Millennium Marketing. From December 1994 to February 1997, Mr. Cecchini was co-founder of Goodman Cecchini Media Design, a Website development concern, and US Cybersites, a commercial bandwidth reseller. From 1992 to 1994, Mr. Cecchini was Vice President, Director of Sales for Sony Pictures Entertainment's Columbia TriStar Television Division, a syndicator of television programming. From January 1991 to December 1992, Mr Cecchini was Senior Vice President, Director of Sales for Telemundo Group, Inc., a Spanish language television network. From 1989 to 1991, Mr. Cecchini was Vice President of Sales for WHDH-TV, then a CBS Network affiliate in the Boston television market. From 1982 to 1989, Mr Cecchini was Vice President and General Sales Manager for TeleRep Inc., a division of Cox 37 Communications. Prior to 1982, Mr. Cecchini was a Senior Account Executive with Petry Television Inc., a TV advertisement company. Mr. Cecchini received a B.S. degree in Accounting and Marketing from Manhattan College. Scott E. Cohen has been Senior Vice President--Sponsorships & Syndication, and General Manager of the ContentZone and Riddler.com since February 1998. Mr. Cohen was Senior Vice President of Sales for Petry Interactive from August 1997 to February 1998, and Vice President of Business Development at Petry Interactive from November 1996 to August 1997. From 1994 to 1996, Mr. Cohen was Manager, Business Development and Account Executive, Syndicated Television Sales for New World Communications and from 1992 to 1994, Mr. Cohen was Director of Real Estate at Revlon. From 1983 to 1992, Mr. Cohen was Chief Executive Officer and owner of SEC Enterprises, Inc., a real estate brokerage and investment company. From 1989 to 1990, Mr. Cohen was Manager of the Real Estate Consulting Services Group at Coopers & Lybrand. Mr. Cohen received a M.B.A. degree from the William E. Simon School of Business Administration at the University of Rochester. Geoff Judge has been Senior Vice President Technology & Operations since February 1998. Mr. Judge was President of Interactive Imaginations from September 1997 to February 1998 and was Executive Vice President, Marketing and Sales from May 1997 to September 1997. From 1995 to 1997, Mr. Judge was Vice President, Marketing for iMarket Inc., a software company. From 1994 to 1995, Mr. Judge was Vice President--Marketing at Doubleday Direct, where he managed the membership base of the company's nine book clubs. From 1985 to 1994, Mr. Judge was at American Express in numerous roles including Vice President and General Manager, Travel & Corporate Insurance Group, where he managed an operating group of over 70 people, and a $90 million portfolio of products that were direct marketed to cardmembers. Mr. Judge received a M.B.A. degree from the Columbia University Graduate School of Business and a B.A. degree in Economics from Northwestern University. Mark E. Moran has been Senior Vice President and General Counsel since April 1998. From June 1993 to April 1998, Mr. Moran was an associate attorney at Proskauer Rose LLP. From April 1986 to May 1993, Mr. Moran was a financial analyst in the Securities Processing Division of The Bank of New York. Mr. Moran received a J.D. degree from Fordham Law School, a M.B.A. degree in Finance from Fordham Graduate School of Business, and a B.A. degree in Economics from The University of Virginia. Stuart D. Shaw has been Senior Vice President of Finance & Administration since February 1998. He was Vice President and Chief Financial Officer of Petry Interactive, Inc. from October 1997 to February 1998. From 1991 to 1997, Mr. Shaw was Director of Financial Reporting, then Vice President of Customer Resources for Penguin Books, a trade publisher. From 1989 to 1991, Mr. Shaw was Controller for Warren, Gorham & Lamont, a publisher of professional resource literature. From 1983 to 1989, Mr. Shaw was an auditor with Arthur Andersen. Mr Shaw received a B.B.A. degree in Public Accounting from Pace University. Mr. Shaw is a Certified Public Accountant. Matthew B. Walker has been Senior Vice President and Chief Technology Officer since April 1998. Mr. Walker was co-founder and Senior Vice President of Intelligent Interactions Corporation from February 1995 to April 1998. From August 1990 to February 1995, Mr. Walker worked in a series of positions at Oracle Corporation including director of the Emerging Technologies Group, Manager of Design and Development of the interactive television trial system for Bell Atlantic Video Services, Inc., and director of Advanced Technologies. Mr. Walker received a M.B.A. degree from George Mason University and a B.S. degree in Systems Engineering and Economics from The University of Virginia. Committees of the Board of Directors Audit Committee. The Audit Committee, composed of Messrs. Ammon, Rivkin and Chaney, who are each independent directors who are not employees of the Company ("Independent Directors"), makes recommendations concerning the engagement of independent public accountants, reviews with the independent public accountants the plans and results of the audit engagement, approves professional services provided by the independent public accountants, reviews the independence of the independent public accountants, considers the range of audit and non-audit fees and reviews the adequacy of the Company's internal accounting controls. Compensation Committee. The Compensation Committee, composed of Messrs. Moore, Rivkin and Stryker, approves the salaries and other benefits of the executive officers of the Company and administers any non-stock based bonus or incentive compensation plans of the Company (excluding any cash awards intended to qualify for the exception for performance-based compensation under Section 162(m) of the Internal Revenue Code of 1986, 38 as amended (the "Code")). In addition, the Compensation Committee consults with the Company's management regarding pension and other benefit plans, and compensation policies and practices of the Company. Stock Option Committee. The Stock Option Committee, composed of Messrs. Ammon, Rivkin and Chaney, directors who qualify as outside directors under Section 162(m) of the Code and as non-employee directors under Rule 16b-3(c) of the Securities Exchange Act of 1934, as amended, (the "Exchange Act") administers any stock-based incentive plans of the Company, including the 1998 Stock Incentive Plan. In addition, the Stock Option Committee is responsible for granting any cash awards intended to qualify for the exception for performance-based compensation under Section 162(m) of the Code. Election of Directors Prior to the first annual meeting of the stockholders of the Company, the Company's Board of Directors will be divided into three classes. Directors of each class will be elected at the annual meeting of stockholders held in the year in which the term for such class expires and will serve thereafter for three years. No determination has been made as to which directors will be members of each class. See "Description of Capital Stock--Delaware Anti-Takeover Law and Certain Charter Provisions." Executive Compensation and Employment Agreements The Company has entered into employment agreements with its executive officers and several of its key employees providing for annual compensation in excess of $100,000. The material terms of such employment agreements generally are as follows: (i) the employment term runs through December 31, 1998 (except as set forth below) and is automatically renewable for successive one-year terms unless either party gives written notice to the other at least six months prior to the expiration of the then employment term; (ii) during the employment term and thereafter, the Company will indemnify the executive to the fullest extent permitted by law, in connection with any claim against such executive as a result of such executive serving as an officer or director of the Company or in any capacity at the request of the Company in or with regard to any other entity, employee benefit plan or enterprise; (iii) any dispute or controversy arising under or in connection with the employment agreement (other than injunctive relief) shall be settled exclusively by arbitration; (iv) the agreement may be terminated at any time by the Company with or without cause (as defined in the agreement) and, if an executive is terminated without cause (including the Company giving notice of non-renewal), he will receive severance pay in an amount generally equal to six months' base salary and bonus, plus continued medical benefits for a period equal to the severance period; and (v) if termination is the result of the executive's death or disability, the Company will pay to the executive or his estate an amount equal to six months' base salary at his then current rate of pay (reduced in the case of disability by his long-term disability policy payments). The agreement of David J. Moore extends through January 1, 2001. Mr. Moore's agreement provides for an annual base salary of $225,000 and a target bonus of $275,000, $300,000 and $325,000 for 1998, 1999, and 2000, respectively. Mr. Moore was also awarded 225,000 shares of restricted stock that vest over three years. Upon termination by the Company without cause, Mr. Moore shall be entitled to receive severance pay in an amount equal to two times base salary, plus the maximum bonus for which he is eligible during the fiscal year of termination. The agreements of the other executive officers of the Company provide for base salaries between $140,000 and $160,000 and incentives, based on attainment of corporate goals, between $45,000 and $121,000. The agreement of Yale R. Brown extends through December 31, 1999 and permits the executive to terminate the agreement and receive six months' salary and bonus if the executive is asked to increase his one way commute more than 25 miles. The agreement of C. Andrew Johns extends through December 31, 1999. 1998 Stock Incentive Plan Background; Purpose; Eligibility. On February 13, 1998, the Board of Directors and the stockholders of the Company approved the 1998 Stock Incentive Plan (the "Incentive Plan"). The Incentive Plan was subsequently amended and restated, effective as of February 13, 1998, to reflect certain changes. The following description of the Incentive Plan is intended only as a summary and is qualified in its entirety by reference to the Incentive Plan. The purpose of the Incentive Plan is to enhance the profitability and value of the Company and its affiliates for the benefit of their stockholders by enabling the Company (i) to offer employees of the Company stock based incentives and other equity interests in the Company, thereby creating a means to raise the level of stock ownership by employees in order to attract, retain and reward such employees and strengthen the mutuality of interests between 39 employees and the Company's stockholders, and (ii) to make equity based awards to non-employee directors thereby attracting, retaining and rewarding such non-employee directors and strengthening the mutuality of interests between non-employee directors and the stockholders. All employees of the Company and its subsidiaries that satisfy certain requirements are eligible to be granted awards under the Incentive Plan. In addition, non-employee directors of the Company will receive awards of non-qualified stock options under the Incentive Plan, but are not eligible for other awards thereunder. Administration. The Incentive Plan will be administered by the Stock Option Committee of the Board of Directors of the Company which, to the extent legally required, will be comprised solely of two or more directors qualifying as outside directors under Section 162(m) of the Code and satisfying any requirements of Rule 16b-3 of the Exchange Act. The Stock Option Committee will have full authority and discretion, subject to the terms of the Incentive Plan, to determine those individuals eligible to receive awards and the amount and type of awards. Terms and conditions of awards will be set forth in written grant agreements, the terms of which will be consistent with the terms of the Incentive Plan. Awards under the Incentive Plan may not be made on or after the tenth anniversary of the date of its adoption, but awards granted prior to such date may extend beyond that date. Available Shares and Other Units. A maximum of shares of Common Stock may be issued or used for reference purposes pursuant to the Incentive Plan. The maximum number of shares of Common Stock subject to each issue of stock options or stock appreciation rights that may be granted to any individual under the Incentive Plan is for each fiscal year of the Company during the term of the Incentive Plan. If a stock appreciation right is granted in tandem with a stock option, it shall apply against the individual limits for both stock options and stock appreciation rights, but only once against the maximum number of shares available under the Incentive Plan. In general, upon the cancellation or expiration of an award, the unissued shares of Common Stock subject to such awards will again be available for awards under the Incentive Plan, but will still count against the individual specified limits. The Stock Option Committee may make appropriate adjustments to the number of shares available for awards and the terms of outstanding awards under the Incentive Plan to reflect any change in the Company's capital stock, split-up, stock dividend, special distribution to stockholders, combination or reclassification with respect to any outstanding series or class of stock or consolidation, merger or sale of all or substantially all of the assets of the Company. Amendments. The Incentive Plan provides that it may be amended by the Board of Directors, except that no such amendment, without stockholder approval (to the extent such approval is required by Rule 16b-3 of the Exchange Act, the exception for performance-based compensation under Section 162(m) of the Code or, to the extent applicable to incentive stock options, under Section 422 of the Code), may increase the aggregate number of shares of Common Stock reserved for awards or the maximum individual limits for any fiscal year, change the classification of employees and non-employee directors eligible to receive awards, decrease the minimum option price of any option, extend the maximum option period under the Incentive Plan, change any rights with respect to non-employee directors or make any other change that requires stockholder approval under, to the extent applicable, Rule 16b-3 of the Exchange Act, the exception for performance-based compensation under Section 162(m) of the Code or, to the extent applicable to incentive stock options, Section 422 of the Code. The Incentive Plan may not be amended without the approval of the stockholders of the Company in accordance with the applicable laws or other requirements to (i) increase the aggregate number of shares of Common Stock that may be issued under the Incentive Plan, (ii) decrease the minimum option price of any option, or (iii) make any other amendment that would require stockholder approval under the rules of any exchange or system on which the Company's securities are listed or traded at the request of the Company. Types of Awards. The Incentive Plan provides for the grant of any or all of the following types of awards to eligible employees: (i) stock options, including incentive stock options and non-qualified stock options; (ii) stock appreciation rights, in tandem with stock options or freestanding; and (iii) restricted stock. In addition, the Incentive Plan provides for the one-time non-discretionary award of stock options to non-employee directors of the Company. Each of these types of awards is discussed in more detail below. Awards may be granted singly, in combination, or in tandem, as determined by the Stock Option Committee. 40 Stock Options. Under the Incentive Plan, the Stock Option Committee may grant awards in the form of options to purchase shares of Common Stock. Options may be in the form of incentive stock options or non-qualified stock options. The Stock Option Committee will, with regard to each stock option, determine the number of shares subject to the option, the term of the option (which shall not exceed ten years, provided, however, that the term of an incentive stock option granted to a ten percent stockholder of the Company shall not exceed five years), the exercise price per share of stock subject to the option, the vesting schedule (if any), and the other material terms of the option. No option may have an exercise price less than the fair market value of the Common Stock at the time of grant (or, in the case of an incentive stock option granted to a ten percent stockholder of the Company, 110% of fair market value), except that, in the case of certain modifications of the stock options that are deemed to be new issuances under the Code, the exercise price may continue to be the original exercise price. The option price upon exercise may, to the extent determined by the Stock Option Committee at or after the time of grant, be paid by a participant in cash, in shares of Common Stock owned by the participant (free and clear of any liens and encumbrances), in shares of restricted stock valued at fair market value on the payment date as determined by the Stock Option Committee (without regard to any forfeiture restrictions applicable to restricted stock), by a reduction in the number of shares of Common Stock issuable upon exercise of the option or by such other method as is approved by the Stock Option Committee. If an option is exercised by delivery of shares of restricted stock, the shares of Common Stock acquired pursuant to the exercise of the option will generally be subject to the same restrictions as were applicable to such restricted stock. All options may be made exerciseable in installments, and the exerciseability of options may be accelerated by the Stock Option Committee. The Stock Option Committee may at any time offer to buy an option previously granted on such terms and conditions as the Stock Option Committee shall establish. The Stock Option Committee may in its discretion reprice options or substitute options with lower exercise prices in exchange for outstanding options that are not incentive stock options, provided that the exercise price of substitute options or repriced options shall not be less than the fair market value at the time of such repricing or substitution. Options may also, at the discretion of the Stock Option Committee, provide for "reloads," whereby a new option is granted for the same number of shares as the number of shares of Common Stock or restricted stock used by the participant to pay the option price upon exercise. Restricted Stock. The Incentive Plan authorizes the Stock Option Committee to award shares of restricted stock. Upon the award of restricted stock, the recipient has all rights of a stockholder with respect to the shares, unless so specified by the Stock Option Committee at the time of grant, subject to the conditions and restrictions generally applicable to restricted stock or specifically set forth in the recipient's restricted stock award agreement. Unless otherwise determined by the Committee at grant, payment of dividends, if any, shall be deferred until the date that the relevant share of restricted stock vests. Recipients of restricted stock are required to enter into a restricted stock award agreement with the Company which states the restrictions to which the shares are subject and the date or dates or criteria on which such restrictions will lapse. Within the limits of the Incentive Plan, the Stock Option Committee may provide for the lapse of such restrictions in installments in whole or in part or may accelerate or waive such restrictions at any time. Stock Appreciation Rights ("SARs"). The Incentive Plan authorizes the Stock Option Committee to grant SARs either with a stock option ("Tandem SARs") or independent of a stock option ("Non-Tandem SARs"). A SAR is a right to receive a payment either in cash or Common Stock as the Stock Option Committee may determine, equal in value to the excess of the fair market value of a share of Common Stock on the date of exercise over the reference price per share of Common Stock established in connection with the grant of the SAR. The reference price per share covered by an SAR will be the per share exercise price of the related option in the case of a Tandem SAR and will be not less than the per share fair market value of the Common Stock on the date of grant (or any other date chosen by the Stock Option Committee) in the case of a Non-Tandem SAR subject to the same exception that applies to stock options. A Tandem SAR may be granted at the time of the grant of the related stock option or, if the related stock option is a non-qualified stock option, at any time thereafter during the term of the stock option. A Tandem SAR generally may be exercised only at the times and to the extent the related stock option is exercisable. A Tandem SAR is exercised by surrendering the same portion of the related option. A Tandem SAR expires upon the termination of the related stock option. 41 A Non-Tandem SAR will be exerciseable as provided by the Stock Option Committee and will have such other terms and conditions as the Stock Option Committee may determine. A Non-Tandem SAR may have a term no longer than ten years from its date of grant. A Non-Tandem SAR is subject to acceleration of vesting or immediate termination upon termination of employment in certain circumstances. The Stock Option Committee is also authorized to grant "limited SARs," either as Tandem SARs or Non-Tandem SARs. Limited SARs would become exercisable only upon the occurrence of a Change in Control (as defined in the Incentive Plan) or such other event as the Stock Option Committee may designate at the time of grant or thereafter. Change of Control. In the event of a merger of the Company, the sale of substantially all of its assets or securities representing 40% or more of the total combined voting power of the Company's then outstanding securities or upon certain changes in membership of the Board of Directors during any two-year period, then (i) each option and related SARs will be fully vested and immediately exerciseable, or each option may be repurchased by the Company for an amount of cash equal to the excess of the Change of Control Price (as defined in the Incentive Plan) over the exercise price, and (ii) the restrictions on shares of restricted stock shall lapse as if the applicable restriction period had ended. Awards to Non-employee Directors Directors of the Company do not receive cash compensation for their service as directors or committee members, but are reimbursed for their reasonable expenses in attending meetings of the Board of Directors or committees of the Board of Directors. The Incentive Plan provides for the grant, at the discretion of the Stock Option Committee, of non-qualified options to non-employee directors pursuant to the terms of the Incentive Plan. In February 1998, Charles W. Stryker was granted options to purchase shares of Common Stock in connection with his service on the Board of Directors. No other non-employee director has received any non-cash compensation for serving on the Board of Directors. 42 CERTAIN TRANSACTIONS Formation of the Company The Company was incorporated in Delaware on January 23, 1998. On February 24, 1998, the Company simultaneously consummated the merger of each of Advercomm and Petry with and into the Company, and on April 9, 1998, Interactive Imaginations was merged with and into the Company. On April 13, 1998, the Company acquired Intelligent Interactions as a wholly-owned subsidiary of the Company and as of June 1, 1998, the Company acquired CliqNow!. See "Prospectus Summary--The Company--Formation of the Company" and "--Recent Developments." For clarity of presentation, share numbers and per share prices for the transactions described below do not reflect the Preferred Stock Conversion to be effected at the closing of the Offering and have not been adjusted to give effect to the Stock Split to be effected prior to the closing of the Offering. In addition, the Company intends to file a restated certificate of incorporation immediately prior to the consummation of the Offering to decrease the number of authorized shares of common stock and preferred stock. Investments of the The Travelers Insurance Company prior to the Merger In January 1997, the Company entered into a Securities Purchase Agreement with certain investors, including The Travelers Insurance Company, for the sale and issuance of convertible perferred shares, subject to anti-dilution adjustment, for an aggregate purchase price of approximately $500,000. In addition, in 1997 and January 1998, the Company issued to The Travelers Insurance Company senior convertible notes in an aggregate principal amount of $1,400,000 and also issued warrants in connection therewith. Jack L. Rivkin, a director of the Company, is the Senior Vice President of the Investment Group of Travelers Group Inc. Merger of Petry, Advercomm and Interactive Imaginations into the Company Pursuant to an Agreement and Plan of Merger, dated February 2, 1998, among Interactive Imaginations, 24/7 Acquisitions Corp. (a wholly-owned subsidiary of Interactive Imaginations), Petry and Advercomm, each of Petry and Advercomm were merged with and into 24/7 Acquisitions Corp., and 24/7 Acquisitions Corp. changed its name to 24/7 Media, Inc. Upon consummation of the Initial Merger, each share of common stock of Petry was converted into 83,954.95 shares of Common Stock of the Company, and each share of common stock of Advercomm was converted into 1,049.44 shares of Common Stock of the Company. In connection with the Initial Merger, Interactive Imaginations entered into a Securities Purchase Agreement, dated February 25, 1998, with certain investors (including David J. Moore, the President and Chief Executive Officer of the Company), (the "Securities Purchase Agreement") for the sale and issuance of preferred shares and warrants in a private placement for total proceeds of $10,060,002. Also in connection with the Initial Merger, Interactive Imaginations entered into a Shareholders' Agreement, dated February 25, 1998, among The Travelers Insurance Company, Prospect Street NYC Discovery Fund, L.P., Big Flower Digital Services, Inc. and certain individual investors (the "Shareholders' Agreement"), which provided, among other things, the shareholders with a right to elect three members of the seven member board of directors of the Company and a right of first refusal with respect to transfers of Company securities. The Shareholders' Agreement will be terminated upon the consummation of this Offering. In connection with the Initial Merger, certain shareholders of the Company were granted registration rights with respect to their shares of Common Stock. See "Description of Capital Stock--Registration Rights." Petry Interactive entered into an oral consulting agreement with Manufacturers Renaissance Network, Inc. ("MRN"), a corporation of which C. Andrew Johns, the Executive Vice President, Treasurer and Chief Financial Officer of the Company, was an officer and a 50% stockholder, pursuant to which MRN was paid $75,000 and Class C Warrants to purchase 75,000 shares of Common Stock at an exercise price of $0.952 per share for consulting services rendered in connection with the Merger. 24/7 Media also paid MRN a consulting fee of approximately $33,000 for services rendered in connection with the acquisition of Intelligent Interactions. On February 24, 1998, Interactive Imaginations and Michael P. Paolucci, a director of the Company, entered into a Confidential Separation Agreement and General Release ("Separation Agreement") pursuant to which Mr. Paolucci's employment as an executive, but not as a Director, of Interactive Imaginations was terminated as of February 24, 1998. The terms of the Separation Agreement generally provide that Mr. Paolucci and Interactive Imaginations agreed to release and discharge the other party (and its successors and assigns) from all causes of 43 action, claims, judgments, obligations, damages or liabilities. Interactive Imaginations agreed to issue to Mr. Paolucci Class C Warrants to purchase up to 2,500,000 shares of Common Stock at an exercise price of $0.952 per share. In addition, Interactive Imaginations agreed to extend the term from January 31, 2000 to January 31, 2005 in respect of a fully vested option held by Mr. Paolucci to purchase 52,000 shares of Interactive Imaginations common stock at $0.43 per share. Interactive Imaginations also entered into a Consulting Agreement, dated as of January 1, 1998 with Neterprises, Inc. ("Consulting Agreement"), pursuant to which Mr. Paolucci, President and sole stockholder of Neterprises, Inc., agreed to provide management and consulting services to Interactive Imaginations for a term of up to one year in connection with the identification and evaluation of potential strategic relationships and potential acquisition targets. In return for such services, Mr. Paolucci received a lump sum payment of $180,000 and currently receives a monthly fee of $12,500. Intelligent Interactions Acquisition Pursuant to an Agreement and Plan of Merger, dated as of April 9, 1998, among 24/7 Media, Inc., Interactions Acquisition Corp. and Intelligent Interactions Corporation, Interactions Acquisition Corp., a wholly-owned subsidiary of the Company, was merged with and into Intelligent Interactions. Shareholders of Intelligent Interactions, including Yale R. Brown, Executive Vice President-Technology and Operations of the Company, and Trinity Ventures, received shares of capital stock of the Company. In connection with the acquisition of Intelligent Interactions, certain shareholders (i) entered into an amended and restated version of the Shareholders' Agreement and (ii) were granted registration rights with respect to their shares of Common Stock. See "Description of Capital Stock--Registration Rights." During 1995 and 1996, Intelligent Interactions borrowed $56,000 and $55,000, respectively, from Yale R. Brown, who was the founder and principal stockholder of Intelligent Interactions. All amounts outstanding at September 6, 1996, under these notes, plus accrued interest on those amounts were converted into one instrument in the amount of $113,856. During 1997, the full outstanding balance was paid on this obligation. Future Transactions The Board of Directors of the Company has adopted a policy that future transactions between the Company and its officers, directors, principal stockholders and their affiliates will be subject to approval of a majority of the Independent Directors, and will be on terms no less favorable to the Company than could be obtained from unaffiliated third parties. Other For information regarding the grant of stock options to executive officers and directors, see "Management-- Awards to Non-employee Directors", "--Executive Compensation and Employment Agreements", "--1998 Stock Incentive Plan" and "Security Ownership of Certain Beneficial Owners and Management." 44 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth information regarding beneficial ownership of the Common Stock as of May 31, 1998, by: (i) each person who the Company knows to own beneficially more than 5% of the Common Stock; (ii) each of 24/7 Media's directors and executive officers; and (iii) 24/7 Media's current directors and executive officers as a group.
Ownership After Offering Ownership Prior to Ownership After and Over-Allotment Offering Offering (2) Shares Option (3) ------------------------ ------------------------ Subject to ----------------------- Over- Number Number Allotment Number Beneficial Owner(1) of Shares Percentage of Shares Percentage Option of Shares Percentage - -------------------------- ----------- ------------ ----------- ------------ ----------- ----------- ----------- David J. Moore (4) (5) 8.5% R. Theodore Ammon (6) 14.3 Yale R. Brown (4) (7) 7.2 Jacob I. Friesel (4) 6.9 C. Andrew Johns (4) (8) * Garrett P. Cecchini (4) 6.9 Scott E. Cohen (4) 5.5 David Chaney (9) 14.3 Michael P. Paolucci (10) 7.3 Jack L. Rivkin (11) 21.0 Charles W. Stryker -- Trinity Ventures (12) 6.2 All directors and executive officers as a group (9 persons) 64.2%
- ---------------- * Represents less than 1% of the outstanding Common Stock. (1) Applicable percentage ownership is based on shares of Common Stock outstanding as of May 31, 1998 (which assumes full conversion of the Series A Preferred Stock). Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission and generally includes voting or investment power with respect to securities, subject to community property laws, where applicable. Shares of Common Stock subject to options or warrants that are presently exercisable within 60 days of May 31, 1998 and beneficially owned by the person holding such options and warrants are treated as outstanding for the purpose of computing the percentage ownership for such person are treated as outstanding, but are not treated as outstanding for the purpose of computing the percentage ownership of any other person. (2) Assumes that the Underwriters' over-allotment option to purchase up to shares is not exercised. (3) Assumes that the Underwriters' over-allotment option to purchase shares is exercised in full. (4) The address of Messrs. Moore, Brown, Friesel, Johns, Cecchini and Cohen is c/o 24/7 Media, Inc., 1250 Broadway, New York, New York 10001. (5) Represents shares, Class A warrants to purchase shares and Class B warrants to purchase shares. Includes shares of Common Stock owned by Mr. Moore's wife, as to which Mr. Moore expressly disclaims beneficial ownership. (6) Represents shares, Class A warrants to purchase shares and Class B warrants to purchase shares held by Big Flower Digital Services, Inc., an indirect subsidiary of Big Flower Holdings, Inc. Mr. Ammon is the Chairman of the Board of Directors of the Company and of Big Flower Holdings, Inc. Mr. Ammon does not own any shares of Common Stock of the Company in his individual capacity and expressly disclaims beneficial ownership of the shares held by Big Flower Digital Services, Inc. The address of each of these entities is c/o Big Flower Holdings, Inc., 3 East 54th Street, New York, New York 10022. (7) Represents shares, Class A warrants to purchase shares, Class B warrants to purchase shares and Class C warrants to purchase shares. (8) Represents Class C warrants to purchase shares. (9) Represents shares, Class A warrants to purchase shares and Class B warrants to purchase shares held by Prospect Street NYC Discovery Fund, L.P. and shares, Class A warrants to purchase shares and Class B warrants to purchase shares held by Prospect Street NYC Co-Investment Fund, L.P. Mr. Chaney is a director of the Company and is an associate of Prospect Street NYC Discovery Fund, L.P. Mr. Chaney does not own any shares of Common Stock of the Company in his individual 45 capacity and expressly disclaims beneficial ownership of the shares held by Prospect Street NYC Discovery Fund, L.P. and Prospect Street NYC Co-Investment Fund, L.P. The address of each of these entities is c/o Prospect Street NYC Discovery Fund, L.P., 250 Park Avenue, 17th floor, New York, New York 10177. (10) Represents shares and Class C warrants to purchase shares. Mr. Paolucci is a director of the Company and his address is c/o 24/7 Media, Inc., 1250 Broadway, New York, New York 10001. (11) Represents shares, Class A warrants to purchase shares and Class B warrants to purchase shares held by The Travelers Insurance Company, and shares held by Travelers Indemnity. Mr. Rivkin is a director of the Company and is Senior Vice President of the Investment Group of Travelers Group Inc., an affiliate of The Travelers Insurance Company and Travelers Indemnity. Mr. Rivkin does not own any shares of Common Stock of the Company in his individual capacity and expressly disclaims beneficial ownership of the shares held by The Travelers Insurance Company and Travelers Indemnity. The address of each of these entities is c/o Travelers Group Inc., 388 Greenwich Street, 36th floor, New York, New York 10013. (12) Represents shares, Class A warrants to purchase shares, Class B warrants to purchase shares and Class C warrants to purchase shares held by Trinity Ventures V, L.P., and shares, Class A warrants to purchase , Class B warrants to purchase shares and Class C warrants to purchase shares held by Trinity V Side-by-Side Fund, L.P. Trinity Ventures, L.P. is the general partner of each of these funds. The address of these entities is c/o Trinity Ventures, 3000 Sand Hill Road, Building 1, Suite 240, Menlo Park, California 94025. 46 DESCRIPTION OF CAPITAL STOCK The following description of 24/7 Media's capital stock is not complete and should be read in conjunction with (i) applicable provisions of Delaware law and (ii) the provisions of the Company's certificate of incorporation and by-laws, copies of which have been filed as exhibits to the registration statement of which this prospectus is a part. The Company intends to file an amended and restated certificate of incorporation ("Certificate of Incorporation") immediately prior to the consummation of the Offering. The following description of the Company's capital stock is based upon the amended and restated Certificate of Incorporation. The authorized capital stock of 24/7 Media consists of shares of Common Stock, par value $.01 per share, and shares of Preferred Stock, par value $.01 per share, which may be issued in one or more classes and series. Upon consummation of this offering, there will be shares of Common Stock and no shares of Preferred Stock issued and outstanding. Common Stock Each holder of Common Stock is entitled to one vote per share of record on all matters to be voted upon by the stockholders. Holders do not have cumulative voting rights. Stockholders casting a plurality of the votes of stockholders entitled to vote in an election of directors may elect all of the directors. Subject to the preferential rights of any Preferred Stock that may at the time be outstanding, each share of Common Stock will have an equal and ratable right to receive dividends when, if, and as declared from time to time by the board of directors. 24/7 Media may be subject to certain future agreements which restrict the payment of dividends. 24/7 Media does not anticipate paying cash dividends in the foreseeable future. See "Dividend Policy." If 24/7 Media is liquidated, dissolved or subject to winding up, then holders of Common Stock are entitled to an equal share of all assets remaining after payments to creditors and after satisfaction of any liquidation preference of shares of Preferred Stock that may at the time be outstanding. Holders of Common Stock have no preemptive, subscription, conversion or redemption rights and are not subject to further calls or assessments by 24/7 Media. The outstanding shares of Common Stock are validly issued, fully paid and nonassessable. The shares of Common Stock offered by 24/7 Media in this offering will also be, when issued and paid for, validly issued, fully paid and nonassessable. Preferred Stock The Company's Certificate of Incorporation authorizes the board of directors, without any vote or action by the stockholders (subject to applicable law, regulations and stock exchange rules) to issue up to shares of Preferred Stock in one or more classes and series and to fix the designations, preferences, rights, qualifications, limitations and restrictions thereof, including the voting rights, dividend rights, dividend rate, conversion rights, terms of redemption (including sinking fund provisions), redemption price or prices, liquidation preferences and number of shares constituting any series. Although it presently has no intention to do so, the Board of Directors could issue Preferred Stock with voting and conversion rights that could adversely affect the voting powers of the holders of the Common Stock and the market price of the Common Stock. The issuance of Preferred Stock may also have the effect of delaying, deferring or preventing a change of control of 24/7 Media without further action by the stockholders. Such issuance may also discourage bids for the Common Stock at a premium over the market price. Registration Rights Pursuant to the terms of the Registration Rights Agreement, dated as of April 9, 1998, among the Company and the investors named therein, after the closing of the Offering, the holders of shares of Common Stock will be entitled to certain registration rights with respect to the registration of such shares under the Securities Act. In addition, pursuant to certain stock purchase agreements, certain former shareholders of Interactive Imaginations holding approximately shares of Common Stock have registration rights with respect to the registration of such shares under the Securities Act. Pursuant to such Registration Rights Agreements, the holders of such shares are entitled to demand that the Company register their shares under the Securities Act, subject to certain limitations. Subject to limited exceptions, the Company is not required to effect more than two such registrations for certain investors and three such registrations for certain other investors pursuant to such demand registration rights. In addition, the holders of such shares of Common Stock will be entitled to certain piggyback registration rights with respect to the registration of such shares of Common Stock under the Securities Act. In the event that the Company proposes to register any shares of Common Stock under the Securities Act, either for its account or for the account 47 of other security holders, the holders of shares having piggyback registration rights are entitled to receive notice of such registration and are entitled to include their shares therein, subject to certain limitations. Further, at any time after the Company becomes eligible to file a registration statement on Form S-3, such holders may require the Company to file registration statements under the Securities Act on Form S-3 with respect to their shares of Common Stock. These registration rights are subject to certain conditions and limitations, among them the right of the underwriters of an offering to limit the number of shares of Common Stock held by security holders with registration rights to be included in such registration. The Company is generally required to bear all of the expenses of all such registrations, except underwriting discounts and commissions. Registration of any of the shares of Common Stock held by security holders with registration rights would result in such shares becoming freely tradeable without restriction under the Securities Act immediately upon effectiveness of such registration. Delaware Anti-Takeover Law and Certain Charter Provisions 24/7 Media is subject to Section 203 of the Delaware General Corporation Law ("Section 203") which generally prohibits a Delaware corporation from engaging in any business combination with any interested stockholder for a period of three years following the date that such stockholder became an interested stockholder. Section 203 applies unless: (i) prior to the date such stockholder became an interested stockholder, the board of directors of the corporation approved either the business combination or the transaction which resulted in the stockholder becoming an interested stockholder; (ii) upon consummation of the transaction which resulted in the stockholder becoming an interested stockholder, the interested stockholder owned at least 85% of the voting stock of the corporation outstanding at the time the transaction commenced (the number of shares outstanding excludes those shares owned (A) by persons who are both directors and officers, and (B) by employee stock plans in which participants do not have the right to determine confidentially whether shares held subject to the plan will be tendered in a tender or exchange offer); or (iii) on or after such date the stockholder became an interested stockholder, the business combination is approved by the board of directors and authorized at an annual or special meeting of stockholders (not by written consent) by the affirmative vote of at least 662/3% of the outstanding voting stock which is not owned by the interested stockholder. Section 203 defines a business combination to include: (i) any merger or consolidation involving the corporation and the interested stockholder; (ii) any sale, transfer, pledge or other disposition of 10% or more of the assets of the corporation involving the interested stockholder; (iii) certain transactions which result in the issuance or transfer by the corporation of any stock of the corporation to the interested stockholder; (iv) any transaction involving the corporation which increases the proportionate share of the stock of any class or series of the corporation beneficially owned by the interested stockholder; or (v) the receipt by the interested stockholder of any loans, advances, guarantees, pledges or other financial benefits provided through the corporation. In general, Section 203 defines an interested stockholder as any entity or person beneficially owning 15% or more of the outstanding voting stock of the corporation and any entity or person affiliated with or controlling or controlled by such entity or person. Certain provisions of the Company's Certificate of Incorporation and Delaware law may delay, defer or prevent a change in control of the Company and may adversely affect the voting and other rights of holders of common stock. In particular, the ability of the board of directors to issue Preferred Stock without stockholder approval may delay, defer or prevent a change in control of the Company and may adversely affect the voting and other rights of other holders of Common Stock. In addition, the Company's Certificate of Incorporation provides for a classified board of directors and the inability of stockholders to vote cumulatively for directors. Limitation on Directors' Liability and Indemnification Matters The Company's Certificate of Incorporation provides that, except to the extent prohibited by Delaware law, the Company's directors shall not be personally liable to the Company or its stockholders for monetary damages for any breach of fiduciary duty as directors of the Company. Under Delaware law, the directors have a fiduciary duty to the Company which is not eliminated by this provision of the certificate of incorporation and, in appropriate circumstances, equitable remedies such as injunctive or other forms of nonmonetary relief will remain available. In addition, each director will continue to be subject to liability under Delaware law for breach of the director's duty of loyalty to the Company, for acts or omissions which are found by a court of competent jurisdiction to be not in good faith or which involves intentional misconduct, or knowing violations of law, for actions leading to improper personal benefit to the director, and for payment of dividends or approval of stock repurchases or 48 redemptions that are prohibited by Delaware law. This provision also does not affect the directors' responsibilities under any other laws, such as the Federal securities laws or state or Federal environmental laws. The Company has obtained liability insurance for its senior officers and directors and has entered into indemnity agreements to indemnify its executive officers and directors in addition to the indemnification provided for in the Company's Certificate of Incorporation and bylaws. These agreements, among other things, indemnify the Company's directors and executive officers for certain expenses (including attorneys' fees and associated legal expenses), judgments and fines and amounts paid in settlement, actually and reasonably incurred by any such person in any action, suit or proceeding arising out of such person's services as a director or executive officer on behalf of the Company. The Company believes that these provisions and agreements are necessary to attract and retain qualified directors and officers. Certain Effects of Authorized but Unissued Stock Upon consummation of this Offering, there will be shares of Common Stock and shares of Preferred Stock available for issuance without stockholder approval, except as may be required by the Company's Certificate of Incorporation, by applicable law or regulatory agencies or by the rules of the Nasdaq National Market or any stock exchange on which the Common Stock may then be listed. The Company does not currently have plans to issue additional shares of capital stock. See "Shares Eligible for Future Sale." Stock Transfer Agent and Registrar The Stock Transfer Agent and Registrar for the Common Stock is The Bank of New York, located at 101 Barclay Street, 11E, New York, New York and its telephone number at such location is (800) 524-4458. 49 SHARES ELIGIBLE FOR FUTURE SALE Prior to this offering, there has been no market for the Common Stock. Future sales of substantial amounts of Common Stock in the public market could adversely affect market prices prevailing from time to time. Furthermore, since only a limited number of shares will be available for sale shortly after this offering because of certain contractual and legal restrictions on resale (as described below), sales of substantial amounts of Common Stock of the Company in the public market after the restrictions lapse could adversely affect the prevailing market price and the ability of the Company to raise equity capital in the future. Upon completion of this Offering, the Company will have outstanding an aggregate of shares of Common Stock, assuming no exercise of the Underwriters' over-allotment option and no exercise of outstanding options. Of these shares, the shares sold in this offering will be freely tradeable without restriction or further registration under the Securities Act of 1933, as amended (the "Securities Act"), unless such shares are purchased by "affiliates" of the Company as that term is defined in Rule 144 under the Securities Act (the "Affiliates"). The remaining shares of Common Stock held by existing stockholders are "restricted securities" as that term is defined in Rule 144 under the Securities Act ("Restricted Shares"). Restricted Shares may be sold in the public market only if registered or if they qualify for an exemption from registration under Rules 144, 144(k) or 701 promulgated under the Securities Act, which rules are summarized below. As a result of the contractual restrictions described below and the provisions of Rules 144, 144(k) and 701, additional shares will be available for sale in the public market as follows: (i) shares will be eligible for immediate sale on the date of this Prospectus, (ii) shares will be eligible for sale upon expiration of the lock-up agreements 180 days after the date of this Prospectus and (iii) shares will be eligible for sale upon expiration of their respective one-year holding periods. Upon completion of this offering, the holdings of shares of Common Stock, or their transferees, will be entitled to certain rights with respect to the registration of such shares under the Securities Act. See "Description of Capital Stock--Registration Rights." Registration of such shares under the Securities Act would result in such shares becoming freely tradeable without restriction under the Securities Act (except for shares purchased by Affiliates) immediately upon the effectiveness of such registration. In general, under Rule 144 as currently in effect, beginning 90 days after the date of this Prospectus, a person (or persons whose shares are aggregated) who has beneficially owned Restricted Shares for at least one year (including the holding period of any prior owner except an Affiliate) would be entitled to sell within any three-month period a number of shares that does not exceed the greater of: (i) one percent of the number of shares of Common Stock then outstanding (which will equal approximately shares immediately after this offering); or (ii) the average weekly trading volume of the Common Stock on the Nasdaq National Market during the four calendar weeks preceding the filing of a notice on Form 144 with respect to such sale. Sales under Rule 144 are also subject to certain manner of sale provisions and notice requirements and to the availability of current public information about the Company. Under Rule 144(k), a person who is not deemed to have been an Affiliate of the Company at any time during the 90 days preceding a sale, and who has beneficially owned the Restricted Shares for at least two years (including the holding period of any prior owner except an Affiliate), is entitled to sell such shares without complying with the manner of sale, public information, volume limitation or notice provisions of Rule 144; therefore, unless otherwise restricted, "144(k) shares" may be sold immediately upon the completion of this offering. In general, under Rule 701 of the Securities Act as currently in effect, any employee, consultant or advisor of the Company who purchased shares from the Company in connection with a compensatory stock or option plan or other written agreement is eligible to resell such shares 90 days after the effective date of this offering in reliance on Rule 144, but without compliance with certain restrictions, including the holding period, contained in Rule 144. The Company intends to file a registration statement on Form S-8 under the Securities Act covering shares of Common Stock reserved for issuance under the Company's 1998 Stock Incentive Plan. Such registration statement is expected to be filed and become effective as soon as practicable after the effective date of this offering. Accordingly, shares registered under such registration statement will, subject to Rule 144 volume limitations applicable to Affiliates, be available for sale in the open market, unless such shares are subject to vesting restrictions with the Company or the lock-up agreements described herein. 50 UNDERWRITING Subject to the terms and conditions set forth in the Purchase Agreement (the "Purchase Agreement") among the Company and each of the underwriters named below, the Company has agreed to sell to each of the Underwriters, and each of the Underwriters, for whom Merrill Lynch, Pierce, Fenner & Smith Incorporated, J.P. Morgan Securities Inc. and Allen & Company Incorporated are acting as the representatives (the "Representatives"), has agreed to purchase the number of shares of Common Stock set forth opposite its name below. In the Purchase Agreement, the several underwriters have agreed, subject to the terms and conditions set forth therein, to purchase all of the shares of Common Stock offered hereby, if any are purchased. In the event of default by an Underwriter, the Purchase Agreement provides that, in certain circumstances, purchase commitments of the non-defaulting Underwriters may be increased or the Purchase Agreement may be terminated.
Number Underwriter of Shares - ----------- --------- Merrill Lynch, Pierce, Fenner & Smith Incorporated ................. Allen & Company Incorporated ......... J.P. Morgan Securities Inc. .......... ---------- Total ......................... ==========
The Underwriters have advised the Company that they propose initially to offer the shares of Common Stock to the public at the initial public offering price set forth on the cover page of this Prospectus, and to certain dealers at such price less a concession not in excess of $ per share of Common Stock. The Underwriters may allow, and such dealers may reallow, a discount not in excess of $ per share of Common Stock on sales to certain other dealers. After the initial public offering, the public offering price, concession and discount may be changed. At the request of the Company, the Underwriters have reserved up to shares of Common Stock for sale at the initial public offering price to directors, officers, employees, associates and related persons of the Company and its affiliates. The number of shares of Common Stock available for sale to the general public will be reduced to the extent such persons purchase such reserved shares. Any reserved shares which are not so purchased will be offered by the Underwriters to the general public on the same basis as the other shares offered hereby. The Company has granted to the Underwriters an option exercisable for 30 days after the date of this Prospectus, to purchase up to an additional shares of Common Stock to cover over-allotments, if any, at the initial public offering price set forth on the cover page hereof, less the underwriting discount. If the Underwriters exercise this option, each Underwriter will have a firm commitment, subject to certain conditions, to purchase approximately the same percentage thereof that the number of shares of Common Stock to be purchased by it shown in the foregoing table is of the shares of Common Stock initially offered hereby. The Company has agreed, subject to certain exceptions, not to, directly or indirectly, (i) sell, grant any option to purchase or otherwise transfer or dispose of any shares of Common Stock or securities convertible into or exchangeable or exercisable for Common Stock or file a registration statement under the Securities Act with respect to the foregoing or (ii) enter into any swap or other agreement or transaction that transfers, in whole or in part, the economic consequence of ownership of the Common Stock, without the prior written consent of Merrill Lynch, for a period of 180 days after the date of this Prospectus. The foregoing does not prohibit the Company from issuing shares pursuant to the 1998 Stock Incentive Plan or upon exercise of outstanding warrants. The Company has agreed to indemnify the several Underwriters against certain liabilities under the Securities Act, or to contribute to payments the Underwriters may be required to make in respect thereof. The Underwriters have advised the Company that they do not intend to confirm sales of the Common Stock offered hereby to any accounts over which they exercise discretionary authority. Prior to this Offering, there has been no market for the Common Stock of the Company. The initial public offering price was determined through negotiations among the Company and the Underwriters. Among the factors 51 considered in determining the initial public offering price, in addition to prevailing market conditions, were the trading multiples of publicly traded companies that the Underwriters believe to be comparable to the Company, certain financial information of the Company, the history of, and the prospects for, the Company and the industry in which it competes, an assessment of the Company's management, its past and present operation, the prospects for, and timing of, future revenues of the Company, the present state of the Company's development, and the above factors in relation to market values and various valuation measures of other companies engaged in activities similar to the Company. There can be no assurance that an active trading market will develop for the Common Stock or that the Common Stock will trade in the public market subsequent to the Offering at or above the initial public offering price. The Company intends to apply for a listing of the Common Stock on the Nasdaq National Market under the symbol "TFSM." 52 LEGAL MATTERS The validity of the Common Stock offered hereby is being passed upon by Proskauer Rose LLP, New York, New York. Certain legal matters in connection with the Offering will be passed upon for the Underwriters by Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo Alto, California. EXPERTS The financial statements of 24/7 Media, Inc. as of December 31, 1996 and 1997 and for each of the years in the three-year period ended December 31, 1997 and the financial statements of Interactive Holdings, LLC as of December 31, 1997 and for the period from February 1, 1997 (inception) to September 28, 1997 (Predecessor) and the period from September 29, 1997 to December 31, 1997 (Successor), have been included in this Prospectus and elsewhere in the Registration Statement in reliance on the reports of KPMG Peat Marwick LLP, independent certified public accountants, appearing elsewhere herein and upon the authority of said firm as experts in auditing and accounting. The financial statements of Intelligent Interactions Corporation as of December 31, 1997 and 1996 and for the years ended December 31, 1997 and 1996 and the period from inception (February 28, 1995) to December 31, 1995 included in this Prospectus and elsewhere in the Registration Statement have been audited by Arthur Andersen LLP, independent public accountants, as indicated in their reports with respect thereto, and are included herein in reliance upon the authority of said firm as experts in giving said reports. AVAILABLE INFORMATION The Company has filed a registration statement on Form S-1 ("Registration Statement") relating to the Common Stock offered hereby with the Commission through the Electronic Data Gathering, Analysis and Retrieval System ("EDGAR"). This Prospectus is part of the Registration Statement and does not contain all of the information in the Registration Statement and its exhibits and schedules. For further information about the Company and the Common Stock, a copy of the Registration Statement and its exhibits and schedules may be inspected without charge and copied at the offices of the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and at the Commission's regional offices located at 7 World Trade Center, 13th Floor, New York, New York 10048; and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. You may also access Registration Statements filed through EDGAR at the Commission's Website at http://www.sec.gov. The Company's Common Stock is expected to be listed on the Nasdaq National Market. Reports and other information concerning the Company are available for inspection at the Nasdaq National Market at 1735 K Street, Washington D.C. 20006. After this Offering, the Company will have to file reports, proxy statements and other information with the Commission via EDGAR as required by the Exchange Act. The Company will furnish common stockholders with annual reports containing audited financial statements and quarterly reports containing unaudited financial statements. The Company will also furnish other reports as it determines or are required by law. Copies of such material may be inspected and copied at the Commission's offices and viewed electronically at the Commission's Website. ---------------- 24/7 Media, Intelligent Interactions, ContentZone, Riddler.com, CliqNow!, Adfinity and dbCommerce are trademarks of the Company or its subsidiary, Intelligent Interactions Corporation. This Prospectus contains other product names, tradenames and trademarks of the Company and of other entities, all of which are the property of their respective owners. 53 24/7 MEDIA, INC. (Successor Company to Interactive Imaginations, Inc.) INDEX TO FINANCIAL STATEMENTS Page ---- 24/7 MEDIA, INC. (Successor Company to Interactive Imaginations, Inc.) Independent Auditors' Report ........................................... F-2 Consolidated Balance Sheet ............................................. F-3 Consolidated Statements of Operations .................................. F-4 Consolidated Statements of Stockholders' Equity (Deficit) .............. F-5 Consolidated Statements of Cash Flows .................................. F-6 Notes to Financial Statements .......................................... F-7 PRO FORMA CONSOLIDATED FINANCIAL INFORMATION Overview ............................................................... F-24 Pro Forma Consolidated Statements of Operations ........................ F-26 Pro Forma Consolidated Balance Sheet ................................... F-27 Notes to Pro Forma Consolidated Financial Information .................. F-28 INTERACTIVE HOLDINGS, LLC (Successor Company to Petry Interactive, Inc.) Independent Auditors' Report ........................................... F-29 Balance Sheet .......................................................... F-30 Statements of Operations ............................................... F-31 Statements of Shareholder's/Members' Equity (Deficit) .................. F-32 Statements of Cash Flows ............................................... F-33 Notes to Financial Statements .......................................... F-34 INTELLIGENT INTERACTIONS CORPORATION Report of Independent Public Accountants ............................... F-38 Balance Sheets ......................................................... F-39 Statements of Operations ............................................... F-40 Statements of Stockholders' Equity ..................................... F-41 Statements of Cash Flows ............................................... F-42 Notes to Financial Statements .......................................... F-43
F-1 INDEPENDENT AUDITORS' REPORT The Board of Directors and Stockholders 24/7 Media, Inc. We have audited the accompanying balance sheets of 24/7 Media, Inc. (successor company to Interactive Imaginations, Inc.) as of December 31, 1996 and 1997, and the related statements of operations, stockholders' equity (deficit) and cash flows for each of the years in the three-year period ended December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of 24/7 Media, Inc. as of December 31, 1996 and 1997, and the results of its operations and its cash flows for each of the years in the three-years period ended December 31, 1997 in conformity with generally accepted accounting principles. KPMG PEAT MARWICK LLP New York, New York June 2, 1998 F-2 24/7 MEDIA, INC. (Successor Company to Interactive Imaginations, Inc.) CONSOLIDATED BALANCE SHEETS
December 31, ---------------------------------- March 31, 1996 1997 1998 --------------- ---------------- ---------------- (unaudited) ASSETS Current assets: Cash and cash equivalents .................................... $ 1,689,395 $ 93,945 $ 7,764,695 Accounts receivable, net of allowance for doubtful accounts of $66,000, $63,723 and $269,968, respectively ................................................ 267,173 176,034 1,818,899 Prepaid expenses and other current assets .................... 237,527 14,936 52,296 ------------ ------------- ------------- Total current assets ..................................... 2,194,095 284,915 9,635,890 ------------ ------------- ------------- Property and equipment, net ..................................... 1,677,936 591,337 630,652 Goodwill, net ................................................... -- -- 7,870,174 Deferred offering costs ......................................... -- 110,602 13,148 Intangible assets, net .......................................... 17,287 2,711 2,503 Deposits ........................................................ 61,472 49,376 49,626 ------------ ------------- ------------- Total assets ............................................. $ 3,950,790 $ 1,038,941 $ 18,201,993 ============ ============= ============= LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Current liabilities: Accounts payable ............................................. 136,523 882,696 813,518 Accrued liabilities .......................................... 514,355 471,205 2,180,969 Loans payable--related party ................................. -- -- 283,267 Deferred revenue ............................................. 1,549,710 96,496 41,000 ------------ ------------- ------------- Total current liabilities ................................ 2,200,588 1,450,397 3,318,754 ------------ ------------- ------------- Senior convertible notes payable--related parties, net of debt discount of $158,348 and $20,592, respectively.................. -- 2,316,511 479,408 Other liabilities ............................................... -- -- 46,149 Mandatorily redeemable convertible preferred stock, 10,060,002 shares authorized; 10,060,002 issued and outstanding entitled to a liquidation preference of $1 per share plus unpaid dividends; 4% per annum ($10,093,502 in the aggregate at March 31, 1998) ...................................................... -- -- 10,093,502 Stockholders' equity (deficit): Convertible preferred stock, $.01 par value; 500,000 shares authorized; 140,722, 158,144 and no shares issued and outstanding, respectively; with aggregate liquidation preference of $4,538,733 at December 31, 1997................ 1,407 1,581 -- Common stock, $.01 par value; 100,000,000 shares authorized; 4,316,463, 4,595,047 and 27,481,201 shares issued and outstanding, respectively ........................ 43,165 45,950 274,812 Additional paid-in capital ................................... 9,705,220 10,529,920 19,623,624 Accumulated deficit .......................................... (7,999,590) (13,305,418) (15,634,256) ------------ ------------- ------------- Total stockholders' equity (deficit) ..................... 1,750,202 (2,727,967) 4,264,180 ------------ ------------- ------------- Commitments and contingencies Total liabilities and stockholders' equity (deficit) ............................................... $ 3,950,790 1,038,941 18,201,993 ============ ============= =============
F-3 24/7 MEDIA, INC. (Successor Company to Interactive Imaginations, Inc.) CONSOLIDATED STATEMENTS OF OPERATIONS
Three months ended Years ended December 31, March 31, ----------------------------------------------- ---------------------------- 1995 1996 1997 1997 1998 --------------- --------------- --------------- ------------ --------------- Revenues: (unaudited) Advertising ..................................... $ 151,750 1,106,329 1,467,105 388,892 1,076,250 Consulting and license fees ..................... -- 435,834 1,681,464 805,245 -- ------------ --------- --------- ---------- --------- Total revenues .............................. 151,750 1,542,163 3,148,569 1,194,137 1,076,250 Cost of revenues ................................ 198,291 1,592,771 1,655,340 459,587 930,003 ------------ --------- --------- ---------- --------- Gross profit (loss) ......................... (46,541) (50,608) 1,493,229 734,550 146,247 ------------ --------- --------- ---------- --------- Operating expenses: Sales and marketing .......................... 114,348 2,240,399 1,672,999 450,505 653,460 General and administrative ................... 581,069 3,010,009 2,622,743 682,581 1,285,512 Product development .......................... 426,187 1,460,928 1,417,750 399,523 -- Write-off of property and equipment .......... -- -- 756,795 -- -- Legal costs in connection with claim ......... -- -- 232,304 -- -- Amortization of goodwill ..................... -- -- -- -- 335,355 ------------ --------- --------- ---------- --------- Total operating expenses ................. 1,121,604 6,711,336 6,702,591 1,532,609 2,274,327 ------------ --------- --------- ---------- --------- Loss from operations ..................... (1,168,145) (6,761,944) (5,209,362) (798,059) (2,128,080) Interest income ................................. -- 11,704 17,597 13,682 25,504 Interest expense, including amortization of debt discount of $17,900, $42,652 and $149,903 in 1996, 1997 and 1998, respectively ................................... -- (45,435) (114,063) -- (192,762) ------------ ---------- ---------- ---------- ---------- Net loss ................................. (1,168,145) (6,795,675) (5,305,828) (784,377) (2,295,338) Cumulative dividends on mandatorily convertible preferred stock .................... -- -- -- -- (33,500) ------------ ---------- ---------- ---------- ---------- Net loss attributable to common stockholders ................................... $ (1,168,145) (6,795,675) (5,305,828) (784,377) (2,328,838) Net loss per share--basic ....................... $ ============ ========== ========== ======== ========== Weighted average shares outstanding ............. ============ ========== ========== ======== ========== Pro forma basic net loss per share .............. $ ============ ========== ========== ======== ========== Weighted average shares used in pro forma basic net loss per share calculation ........... ============ ========== ========== ======== ==========
See accompanying notes to financial statements. F-4 24/7 MEDIA, INC. (Successor Company to Interactive Imaginations, Inc.) CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) Years Ended December 31, 1995, 1996 and 1997 and the Three Months Ended March 31, 1998 (unaudited)
Stockholders' (Equity) Deficit ------------------------------------------------- Convertible Common stock preferred stock voting ------------------------- ----------------------- Shares Amount Shares Amount ------------- ----------- ------------ ---------- Balance as of December 31, 1994 ....................... -- $ -- -- $ -- Issuance of Class B common stock subsequently converted to Class A ................................. -- -- -- -- Issuance of Class A common stock, net of $20,512 issuance costs ....................................... -- -- -- -- Net loss .............................................. -- -- -- -- ------- --------- --------- -------- Balance as of December 31, 1995 ....................... -- -- -- -- Issuance of Class A common stock, net of $39,125 issuance costs ....................................... -- -- -- -- Common stock Class A converted ........................ -- -- 4,308,130 43,081 Issuance of common stock to officer ................... -- -- 8,333 84 Issuance of warrants in connection with mandatory conversion subordinated notes.......... -- -- -- -- Notes converted to preferred stock .................... 52,262 523 -- -- Issuance of preferred stock, net of $236,820 issuance costs ....................................... 88,460 884 -- -- Net loss .............................................. -- -- -- -- ------ --------- --------- -------- Balance as of December 31, 1996 ....................... 140,722 1,407 4,316,463 43,165 Issuance of preferred stock ........................... 17,422 174 -- -- Issuance of common stock to officer ................... -- -- 41,847 418 Issuance of warrants in connection with senior convertible notes--related parties ....... -- -- -- -- Senior convertible notes payable--related parties converted into common stock .......................... -- -- 236,737 2,367 Net loss .............................................. -- -- -- -- ------- --------- --------- -------- Balance as of December 31, 1997 ....................... 158,144 1,581 4,595,047 45,950 Issuance of warrants in connection with senior convertible notes--related parties ................... -- -- -- -- Issuance of warrants to former officer ................ -- -- -- -- Issuance of warrants to consultant .................... -- -- -- -- Issuance of common stock for acquired businesses....... -- -- 17,315,701 173,157 Offering costs in connection with mandatorily redeemable convertible preferred stock ............... -- -- -- -- Senior convertible notes payable--related parties converted into common stock .......................... -- -- 3,002,344 30,023 Convertible preferred stock converted into common stock ......................................... (158,144) (1,581) 2,171,633 21,716 Conversion of warrants into common stock .............. -- -- 396,476 3,966 Imputed interest on loans payable--related parties -- -- -- -- Accrual of cumulative dividends on mandatorily redeemable convertible preferred stock ............... -- -- -- -- Net loss for the period ............................... -- -- -- -- -------- --------- ---------- -------- Balance as of March 31, 1998 (unaudited) .............. -- $ -- 27,481,201 $274,812 ======== ========= ========== ======== Stockholders' (Equity) Deficit -------------------------------------------------------------------------- Common stock Class A Additional Total ------------------------- paid-in Accumulated stockholders' Shares Amount capital deficit equity (deficit) ------------- ----------- -------------- --------------- ----------------- Balance as of December 31, 1994 ....................... 100,000 $ 1,000 44,000 (35,771) 9,229 Issuance of Class B common stock subsequently converted to Class A ................................. 62,707 627 92,373 -- 93,000 Issuance of Class A common stock, net of $20,512 issuance costs ....................................... 130,623 1,306 1,267,182 -- 1,268,488 Net loss .............................................. -- -- -- (1,168,144) (1,168,144) ------- --------- --------- ---------- ---------- Balance as of December 31, 1995 ....................... 293,330 2,933 1,403,555 (1,203,915) 202,573 Issuance of Class A common stock, net of $39,125 issuance costs ....................................... 137,483 1,375 4,484,500 -- 4,485,875 Common stock Class A converted ........................ (430,813) (4,308) (38,773) -- -- Issuance of common stock to officer ................... -- -- 37,543 -- 37,627 Issuance of warrants in connection with mandatory conversion subordinated notes.......... -- -- 17,900 -- 17,900 Notes converted to preferred stock .................... -- -- 1,499,477 -- 1,500,000 Issuance of preferred stock, net of $236,820 issuance costs ....................................... -- -- 2,301,018 -- 2,301,902 Net loss .............................................. -- -- -- (6,795,675) (6,795,675) -------- --------- --------- ---------- ---------- Balance as of December 31, 1996 ....................... -- -- 9,705,220 (7,999,590) 1,750,202 Issuance of preferred stock ........................... -- -- 499,837 -- 500,011 Issuance of common stock to officer ................... -- -- 31,473 -- 31,891 Issuance of warrants in connection with senior convertible notes--related parties ....... -- -- 201,000 -- 201,000 Senior convertible notes payable--related parties converted into common stock .......................... -- -- 92,390 -- 94,757 Net loss .............................................. -- -- -- (5,305,828) (5,305,828) -------- --------- --------- ---------- ---------- Balance as of December 31, 1997 ....................... -- -- 10,529,920 (13,305,418) (2,727,967) Issuance of warrants in connection with senior convertible notes--related parties ................... -- -- 12,156 -- 12,156 Issuance of warrants to former officer ................ -- -- 450,000 -- 450,000 Issuance of warrants to consultant .................... -- -- 20,240 -- 20,240 Issuance of common stock for acquired businesses....... -- -- 6,753,123 -- 6,926,280 Offering costs in connection with mandatorily redeemable convertible preferred stock ............... -- -- (229,105) -- (229,105) Senior convertible notes payable--related parties converted into common stock .......................... -- -- 2,102,391 -- 2,132,414 Convertible preferred stock converted into common stock ......................................... -- -- (20,135) -- -- Conversion of warrants into common stock .............. -- -- (3,966) -- -- Imputed interest on loans payable--related parties -- -- 9,000 -- 9,000 Accrual of cumulative dividends on mandatorily redeemable convertible preferred stock ............... -- -- -- (33,500) (33,500) Net loss for the period ............................... -- -- -- (2,295,338) (2,295,338) -------- --------- ---------- ----------- ---------- Balance as of March 31, 1998 (unaudited) .............. -- $ -- 19,623,624 (15,634,256) 4,264,180 ======== ========= ========== =========== ==========
See accompanying notes to financial statements. F-5 24/7 MEDIA, INC. (Successor Company to Interactive Imaginations, Inc.) CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, ------------------------------------------------ 1995 1996 1997 ---------------- --------------- --------------- Cash flows from operating activities: Net loss ................................................. $ (1,168,144) (6,795,675) (5,305,828) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization ........................... 59,196 305,050 364,607 Amortization of debt discount ........................... -- 17,900 42,652 Write-off of property and equipment ..................... -- -- 756,795 Accrued interest on senior convertible notes--related parties ................................................ -- -- 68,609 Imputed interest on note payable--related party ......... -- -- -- Provision for doubtful accounts ......................... 10,000 66,000 -- Amortization of intangible assets ....................... -- -- -- Non-cash compensation ................................... -- 37,627 31,891 Changes in operating assets and liabilities: Accounts receivable .................................... (69,250) (273,923) 91,139 Prepaid assets and other current assets ................ -- (237,527) 222,591 Deposits ............................................... (14,588) (45,554) 12,096 Accounts payable ....................................... 136,231 292 746,172 Accrued liabilities .................................... 51,361 442,994 (43,150) Deferred revenue ....................................... -- 1,549,710 (1,453,214) ------------ ---------- ---------- Net cash used in operating activities ................ (995,194) (4,933,106) (4,465,640) ------------ ---------- ---------- Cash flows from investing activities: Increase in intangible assets ............................ -- (41,205) -- Cash received from acquisitions .......................... -- -- -- Proceeds from sale of property and equipment ............. -- -- 22,850 Purchase of property and equipment ....................... (464,016) (1,537,071) (42,069) ------------ ---------- ---------- Net cash used in investing activities ................ (464,016) (1,578,276) (19,219) ------------ ---------- ---------- Cash flows from financing activities: Net proceeds from issuance of Mandatorily Redeemable Series A Preferred Stock ..................... -- -- -- Deferred offering costs .................................. -- -- (110,602) Proceeds from senior convertible notes payable-- related parties ......................................... -- -- 2,500,000 Proceeds from notes payable--related parties ............. 122,000 -- -- Repayment of notes payable--related parties .............. (35,000) (87,000) -- Proceeds from mandatory conversion subordinated notes payable ........................................... -- 1,500,000 -- Proceeds from issuance of common stock, net .............. 1,361,488 4,485,875 -- Proceeds from issuance of convertible preferred stock, net ..................................................... -- 2,301,902 500,011 ------------ ---------- ---------- Net cash provided by financing activities ............ 1,448,488 8,200,777 2,889,409 ------------ ---------- ---------- Net change in cash and cash equivalents .............. (10,722) 1,689,395 (1,595,450) Cash and cash equivalents at beginning of period ............ 10,722 -- 1,689,395 ------------ ---------- ---------- Cash and cash equivalents at end of period .................. $ -- 1,689,395 93,945 ============ ========== ========== Three Months Ended March 31, ------------------------------- 1997 1998 --------------- --------------- Cash flows from operating activities: Net loss ................................................. (784,377) (2,295,338) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization ........................... 104,220 58,349 Amortization of debt discount ........................... -- 149,903 Write-off of property and equipment ..................... -- -- Accrued interest on senior convertible notes--related parties ................................................ -- 7,555 Imputed interest on note payable--related party ......... -- 9,000 Provision for doubtful accounts ......................... 15,000 27,430 Amortization of intangible assets ....................... -- 335,355 Non-cash compensation ................................... 8,041 470,240 Changes in operating assets and liabilities: Accounts receivable .................................... 147,695 (579,518) Prepaid assets and other current assets ................ 131,463 (31,885) Deposits ............................................... -- (250) Accounts payable ....................................... 148,227 (82,075) Accrued liabilities .................................... (193,174) (322,868) Deferred revenue ....................................... (961,989) (55,496) -------- ---------- Net cash used in operating activities ................ (1,384,894) (2,309,598) ---------- ---------- Cash flows from investing activities: Increase in intangible assets ............................ -- -- Cash received from acquisitions .......................... -- 168,839 Proceeds from sale of property and equipment ............. -- -- Purchase of property and equipment ....................... -- (97,664) ---------- ---------- Net cash used in investing activities ................ -- 71,175 ---------- ---------- Cash flows from financing activities: Net proceeds from issuance of Mandatorily Redeemable Series A Preferred Stock ..................... -- 10,060,002 Deferred offering costs .................................. (288,651) Proceeds from senior convertible notes payable-- related parties ......................................... -- Proceeds from notes payable--related parties ............. 150,000 Repayment of notes payable--related parties .............. (12,178) Proceeds from mandatory conversion subordinated notes payable ........................................... -- Proceeds from issuance of common stock, net .............. -- Proceeds from issuance of convertible preferred stock, net ..................................................... 500,011 -- ---------- ---------- Net cash provided by financing activities ............ 500,011 9,909,173 ---------- ---------- Net change in cash and cash equivalents .............. (884,884) 7,670,750 Cash and cash equivalents at beginning of period ............ 1,689,395 93,945 ---------- ---------- Cash and cash equivalents at end of period .................. 804,511 7,764,695 ========== ==========
See accompanying notes to financial statements. F-6 24/7 MEDIA, INC. (Successor Company to Interactive Imaginations, Inc.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1996 and 1997 (All information subsequent to December 31, 1997 is Unaudited) (1) Summary of Operations and Significant Accounting Policies (a) Summary of Operations 24/7 Media, Inc. (successor company to Interactive Imaginations, Inc. ("Interactive Imaginations")) operates networks of Websites that enable both advertisers and Web publishers to capitalize on the many opportunities presented by Internet advertising, direct marketing and commerce. The Company generates revenues by delivering advertisements and promotions to Websites affiliated with the Company. Interactive Imaginations's properties include the ContentZone, which is a network of small to medium-sized Websites to which advertisements and promotions are served; and Riddler.com, an advertising supported Website that enables users to play intellectually challenging games for prizes and cash. Effective February 24, 1998, 24/7 Media commenced operations of the 24/7 Network, a network of high profile Websites to which advertisements are served. Inherent in the Company's business are various risks and uncertainties, including its limited operating history, unproven business model and the limited history of commerce on the Internet. The Company's success may depend in part upon the emergence of the Internet as a communications medium, prospective project development efforts, and the acceptance of the Company's solutions by the marketplace. Interactive Imaginations, Inc. was incorporated in the State of New York in September 1994 and first recognized revenue in June 1995. 24/7 Media, Inc. (the "Company") was incorporated in Delaware on January 23, 1998 to consolidate three Internet advertising companies: (i) Petry Interactive, Inc. ("Petry"), which sold advertising for Websites organized in a network (ii) Advercomm, Inc. ("Advercomm"), a newly formed corporation which brought a number of high profile Websites to the 24/7 Network, and (iii) Interactive Imaginations, Inc. Subsequently, the Company acquired both Intelligent Interactions Corporation ("Intelligent Interactions"), a corporation that develops and licenses ad serving technology and e-commerce software, and the CliqNow! network of Websites ("CliqNow!"). The Company was formed on January 23, 1998 as a wholly owned subsidiary of Interactive Imaginations. On February 24, 1998, the Company simultaneously consummated the merger of each of Petry and Advercomm with and into the Company (the mergers, together with the concurrent investment of approximately $10 million by certain investors, the "Initial Merger"). On April 9, 1998, Interactive Imaginations was merged with and into the Company. In addition, on April 13, 1998, the Company acquired Intelligent Interactions as a wholly-owned subsidiary of the Company and as of June 1, 1998, the Company acquired CliqNow! (see note 11). (b) Principles of Consolidation The Company's audited financial statements as of December 31, 1996 and 1997 and for each of the years in the three-year period ended December 31, 1997 include the historical results of Interactive Imaginations and do not reflect any of the operating results of Petry, Advercomm, Intelligent Interactions or CliqNow!. The Company's unaudited consolidated financial statements as of March 31, 1998 and the three months ended March 31, 1998, include the consolidated accounts of the Company, and Petry and Advercomm from February 24, 1998 (date of acquisition) through March 31, 1998, giving effect to the Initial Merger as of February 24, 1998. For the three months ended March 31, 1997, the Company's historical results of operations only include the results of Interactive Imaginations. All significant intercompany transactions and balances have been eliminated in consolidation. On February 24, 1998, the Company acquired all of the outstanding stock of Petry and Advercomm in separate transactions in exchange for 10,494,366 and 6,821,335 shares of the Company's Common Stock, respectively, for a total purchase price of $4,197,800 and $2,728,500, respectively, plus acquisition costs of $157,000. The acquisitions have been accounted for using the purchase method of accounting, and accordingly, the purchase price has been allocated to the tangible and identifiable intangible assets acquired and liabilities assumed F-7 24/7 MEDIA, INC. (Successor Company to Interactive Imaginations, Inc.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 1996 and 1997 (All information subsequent to December 31, 1997 is Unaudited) (1) Summary of Operations and Significant Accounting Policies --Continued on the basis of their fair values on the acquisition dates. Approximately ($1,122,200) of the aggregate purchase price was allocated to net tangible liabilities consisting primarily of cash, accounts receivable, property and equipment, accounts payable and accrued liabilities. The historical carrying amounts of such net liabilities approximated their fair values. The purchase price in excess of the fair value of identified tangible and intangible assets and liabilities assumed in the amount of $8,205,500 was allocated to goodwill and is being amortized over its estimated useful life of two years. The Petry and Advercomm acquisitions have been primarily structured as tax free exchanges of stock, therefore, the differences between the recognized fair value of the acquired assets, including intangible assets, and their historical tax bases is not deductible for income tax purposes. The fair value of the Company's Common Stock issued as consideration for the acquisitions was estimated to be $0.40 per share, determined primarily by reference to the Common Stock conversion price of $0.40 per share in connection with the Company's issuance of approximately $1,000,000 of senior convertible notes payable and detachable warrants during the period from September through November 1997. (c) Use of Estimates The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. (d) Cash and Cash Equivalents The Company considers all highly liquid securities, with original maturities of three months or less, to be cash equivalents. Cash equivalents at December 31, 1996 and 1997 and March 31, 1998 were $1,252,802, $0 and $6,018,521, respectively, which consisted of certificates of deposit. (e) Property and Equipment Property and equipment are stated at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the related assets, generally three to five years. Leasehold improvements are amortized using the straight-line method over the estimated useful lives of the assets or the term of the leases, whichever is shorter. (f) Intangible Assets Intangible assets including trademarks and licenses are being amortized using the straight-line method over one to five years. Goodwill resulting from the acquisition of Internet advertising businesses is estimated by management to be primarily associated with the acquired workforce, contracts and technological know how. As a result of the rapid technological changes occurring in the Internet industry and the intense competition for qualified Internet professionals and customers, recorded goodwill is amortized on the straight-line basis over the estimated periods of benefit, which is two years. At each balance sheet date, the Company assesses the value of recorded goodwill for possible impairment based upon a number of factors, including turnover of the acquired workforce and the undiscounted value of expected future operating cash flows in relation to its net investment in each subsidiary. To date, the Company has not recorded any provisions for possible impairment of intangible assets. (g) Income Taxes The Company accounts for income taxes using the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating F-8 24/7 MEDIA, INC. (Successor Company to Interactive Imaginations, Inc.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 1996 and 1997 (All information subsequent to December 31, 1997 is Unaudited) (1) Summary of Operations and Significant Accounting Policies --Continued loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in results of operation in the period that the tax change occurs. (h) Deferred Revenue Deferred revenue consists of a prepaid software license fee for use of the Company's proprietary technology and prepaid advertising fees, although the majority of the Company's advertising customers generally pay after the services have been provided. As of December 31, 1996 and 1997 and March 31, 1998, the Company had deferred revenue related to the software license $1,071,059, $0 and $0 and advertising agreements of $454,064, $96,496 and $41,000, respectively. (i) Revenue Recognition The Company's advertising revenues are derived principally from short-term advertising agreements in which the Company delivers advertising impressions or full-page advertisements for a fixed fee to third-party Websites comprising the 24/7 Network, the ContentZone and to a lesser extent its Riddler.com Website. Revenues from advertising are recognized in the period the advertising impressions are delivered, provided collection of the resulting receivables is probable. For the years ended December 31, 1996 and 1997 and the three months ended March 31, 1998, the Company recognized $436,476, $682,853, and $250,164, respectively, of cash advertising revenue related solely to the ContentZone. Websites affiliated with the Company ("Affiliated Websites") register web page(s) with the Company's networks and display advertising banners on those pages. The Company pays its Affiliated Websites a service fee for providing advertising space to the Company's networks. The Company becomes obligated to make payments to such Affiliated Websites, which have contracted with the Company to be part of the Company's networks, in the period the advertising impressions are delivered. Such expenses are classified as cost of revenues in the consolidated statements of operations. The Company's licensing revenues are derived principally from a software licensing fee and fees from maintenance, consulting and support of its software. Licensing fees are recognized as performance occurs under the terms of the applicable agreement. At December 31, 1997 and March 31, 1998, accounts receivable include approximately $56,000 and $1,242,700, respectively, of unbilled receivables. (j) Barter Transactions The Company trades advertisements on its Web properties in exchange for advertisements on the Internet sites of other companies. Barter revenues and expenses are recorded at the fair market value of services provided or received, whichever is more determinable in the circumstances. Revenue from barter transactions is recognized as income when advertisements are delivered on the Company's Web properties. Barter expense is recognized when the Company's advertisements are run on other companies' Web sites, which is typically, in the same period when the barter revenue is recognized. Advertising barter revenues and expenses were approximately $0, $55,000, $83,000 and $0 for the years ended 1995, 1996, 1997 and the three months ended March 31, 1998, respectively. The Company also receives payment for its advertising services in the form of goods that are used as prizes for the Riddler game site. Prize revenue and the corresponding prize expense is recorded at a discount from its estimated fair market value. Advertising prize revenues were approximately $0, $196,000, $86,000 and $0 for the years ended 1995, 1996 and 1997 and for the three months ended March 31, 1998, respectively. F-9 24/7 MEDIA, INC. (Successor Company to Interactive Imaginations, Inc.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 1996 and 1997 (All information subsequent to December 31, 1997 is Unaudited) (1) Summary of Operations and Significant Accounting Policies --Continued The Company expects that barter revenue will represent a significantly smaller percentage of total revenues in the future. (k) Product Development Costs Product development costs and enhancements to existing products are charged to operations as incurred. Software development costs are required to be capitalized when a product's technological feasibility has been established by completion of a working model of the product and ending when a product is available for general release to customers. To date, completion of a working model of the Company's products and general release have substantially coincided. As a result, the Company has not capitalized any software development costs since such costs have not been significant. (l) Deferred Offering Costs At December 31, 1997 and March 31, 1998 specific incremental costs directly attributable to the issuance of mandatorily redeemable convertible preferred stock and initial public offering ("IPO") transactions, respectively have been deferred. The December 31, 1997 costs have been charged against additional paid-in capital as a result of the Company's issuance of mandatorily redeemable convertible preferred stock during the three months ended March 31, 1998. The March 31, 1998 incremental costs incurred in connection with the Company's IPO will be charged against additional paid-in-capital in connection with this Offering. (m) Stock-Based Compensation The Company accounts for stock-based employee compensation arrangements in accordance with provisions of APB No. 25, "Accounting for Stock Issued to Employees," and complies with the disclosure provisions of SFAS No. 123, "Accounting for Stock-Based Compensation." Under APB No. 25, compensation cost is recognized based on the difference, if any, on the date of grant between the fair value of the Company's stock and the amount an employee must pay to acquire the stock. (n) Impairment of Long-Lived Assets The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceed the fair value of the assets. (o) Advertising Expenses The Company expenses the cost of advertising and promoting its services as incurred. Such costs are included in sales and marketing on the statements of operations and totaled $54,123, $514,637, $181,280 and $208,369 for the years ended December 31, 1995, 1996 and 1997 and the three months ended March 31, 1998, respectively. (p) Financial Instruments and Concentration of Risk Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities. At December 31, 1996 and 1997, the fair value of these instruments approximated their financial statement carrying amount. Substantially all of the Company's cash equivalents were invested in certificates of deposit. The Company has not experienced any significant credit losses to date. F-10 24/7 MEDIA, INC. (Successor Company to Interactive Imaginations, Inc.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 1996 and 1997 (All information subsequent to December 31, 1997 is Unaudited) (1) Summary of Operations and Significant Accounting Policies --Continued Revenues associated with major customers, as a percentage of total cash advertising revenues (excluding barter), are as follows:
Three Months Year Ended December Ended 31, March 31, -------------------- ------------ 1995 1996 1997 1997 1998 ------ ------ ------ ------ ----- Customer (unaudited) A ............. 33% -- -- 47% -- B ............. 21% -- -- -- -- C ............. 20% -- -- -- -- D ............. 13% -- -- -- -- E ............. -- 25% 25% -- -- F ............. -- 21% 12% -- -- G ............. -- -- -- -- 15%
Accounts receivable regarding significant advertising customers, as a percentage of total accounts receivable, are as follows:
December 31, --------------- March 31, 1996 1997 1998 ------ ------ ------------ Customer (unaudited) I ............... 28% -- -- II .............. 12% -- -- III ............. -- 13% -- IV .............. -- -- 52% V ............... -- -- 12%
To date, accounts receivable have been derived from advertising fees billed to advertisers located in the United States. The Company generally requires no collateral. The Company maintains reserves for potential credit losses; historically, such losses have been minor and within management's expectations. (q) Interim Results (Unaudited) The accompanying interim financial statements as of March 31, 1998 and for the three months ended March 31, 1997 and 1998 are unaudited. In the opinion of management, the unaudited interim financial statements have been prepared on the same basis as the annual financial statements and reflect all adjustments, which include only normal recurring adjustments, necessary to present fairly the financial position as of March 31, 1998 and the results of the Company's operations and its cash flows for the three months ended March 31, 1997 and 1998. The financial data and other information disclosed in these notes to condensed consolidated financial statements related to these periods are unaudited. The results for the three months ended March 31, 1998 are not necessarily indicative of the results to be expected for the year ending December 31, 1998. (r) Loss Per Share Loss per share is presented in accordance with the provisions of Statement of Financial Accounting Standards No. 128, Earnings Per Share, (SFAS 128). SFAS 128 replaced the presentation of primary and fully diluted earnings (loss) per share (EPS), with a presentation of basic EPS and diluted EPS. Under SFAS 128, basic EPS excludes dilution for common stock equivalents and is computed by dividing income or loss available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or F-11 24/7 MEDIA, INC. (Successor Company to Interactive Imaginations, Inc.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 1996 and 1997 (All information subsequent to December 31, 1997 is Unaudited) (1) Summary of Operations and Significant Accounting Policies --Continued converted into common stock and resulted in the issuance of common stock. Only basic EPS is presented as all common stock equivalents are antidilutive. Pro forma basic net loss per share is computed by dividing the net loss by the sum of the weighted average number of shares of common stock and the shares resulting from the assumed conversion of all outstanding shares of Mandatorily Redeemable Convertible Preferred Stock as though such conversion occurred at the beginning of the period or the date of issuance, if later. This data is unaudited. At December 31, 1997 and March 31, 1998, outstanding options to purchase shares of common stock, the outstanding Mandatorily Redeemable Convertible Preferred Stock and outstanding Warrants could potentially dilute basic earnings per share in the future and have not been included in the computation of diluted net loss per share because to do so would have been antidilutive for the periods presented. (s) Recent Accounting Pronouncements The Company adopted the provisions of Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income" in the quarter ended March 31, 1998. SFAS No. 130 requires the Company to report in their financial statements, in addition to its net income (loss), comprehensive income (loss), which includes all changes in equity during a period from non-owner sources including, as applicable, foreign currency items, minimum pension liability adjustments and unrealized gains and losses on certain investments in debt and equity securities. There were no difference between the Company's comprehensive loss and its net loss as reported. In April 1998, the American Institute of Certified Public Accountants issued Statement of Position 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use" ("SOP 98-1"). SOP 98-1 provides guidance for determining whether computer software is internal-use software and on accounting for the proceeds of computer software originally developed or obtained for internal use and then subsequently sold to the public. It also provides guidance on capitalization of the costs incurred for computer software developed or obtained for internal use. The Company has not yet determined the impact, if any, of adopting SOP 98-1, which will be effective for the Company's year ending December 31, 1999. In June 1997, the FASB issued SFAS No. 131, Disclosure About Segments of an Enterprise and Related Information. SFAS No. 131 establishes standards for the way that public business enterprises report information about operating segments. It also establishes standards for related disclosures about products and services, geographic areas and major customers. SFAS No. 131 is effective for fiscal years beginning after December 15, 1997. The Company has determined that it does not have any separately reportable business segments. F-12 24/7 MEDIA, INC. (Successor Company to Interactive Imaginations, Inc.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 1996 and 1997 (All information subsequent to December 31, 1997 is Unaudited) (2) Balance Sheet Components Prepaid Expenses and Other Current Assets
December 31, --------------------- March 31, 1996 1997 1998 ----------- --------- ------------ (unaudited) Prepaid operating lease ......... $108,946 $ -- $ -- Barter receivable ............... 85,358 -- -- Other prepaid ................... 43,223 14,936 52,296 -------- ------- ------- $237,527 $14,936 52,296 ======== ======= =======
Property and Equipment, Net
December 31, --------------------------- March 31, 1996 1997 1998 ------------- ------------- -------------- (unaudited) Computer equipment ..................................... $1,893,217 $972,283 $1,069,950 Furniture and fixtures ................................. 87,922 -- -- Leasehold improvements ................................. 33,517 -- -- ---------- -------- ---------- 2,014,656 972,283 1,069,950 Less accumulated depreciation and amortization ......... (336,720) (380,946) (439,298) ---------- -------- ---------- $1,677,936 $591,337 630,652 ========== ======== ==========
During 1997, in connection with a reduction in the Company's operations and personnel, the Company recorded a net write-off of approximately $756,795 of property and equipment that was deemed to have no future economic benefit. Intangible Assets
December 31, ------------------------ March 31, 1996 1997 1998 ------------ ----------- -------------- (unaudited) Licenses .............................. $ 37,040 $ -- $ -- Trademarks ............................ 4,165 4,165 4,165 --------- -------- ---------- 41,205 4,165 4,165 Less accumulated amortization ......... (23,918) (1,454) (1,662) --------- -------- ---------- $ 17,287 $ 2,711 $ 2,503 ========= ======== ========== Goodwill .............................. $ -- $ -- $8,205,529 Less accumulated amortization ......... -- -- (335,355) --------- -------- ---------- $ -- $ -- $7,870,174 ========= ======== ==========
F-13 24/7 MEDIA, INC. (Successor Company to Interactive Imaginations, Inc.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 1996 and 1997 (All information subsequent to December 31, 1997 is Unaudited) (2) Balance Sheet Components --Continued Accrued Liabilities
December 31, ----------------------- March 31, 1996 1997 1998 ----------- ----------- ------------ (unaudited) Professional fees ......................... $102,105 $225,691 $ 205,882 Employee commissions and expenses ......... -- -- 423,409 Ad management fees ........................ -- -- 258,435 Barter payable ............................ 85,358 -- -- Affiliate royalties ....................... 43,955 81,384 941,715 Prizes .................................... 68,474 -- -- Other ..................................... 214,463 164,130 351,528 -------- -------- ---------- $514,355 $471,205 $2,180,969 ======== ======== ==========
(3) Income Taxes No provision for federal or state income taxes has been recorded as the Company incurred net operating losses for all periods presented and has no carryback potential. At December 31, 1997, the Company had approximately $13,394,000 of federal net operating loss carryforwards available to offset future taxable income; such carryforwards expire in various years through 2012. As a result of various equity transactions during 1996 and 1997 as well as during 1998 (see notes 5 and 11), management believes the Company has undergone an "ownership change" as defined by section 382 of the Internal Revenue Code. Accordingly, the utilization of a portion of the net operating loss carryforward may be limited. Due to this limitation, and the uncertainty regarding the ultimate utilization of the net operating loss carryforwards, no tax benefit for losses has been recorded by the Company in 1995, 1996 and 1997, and a full valuation allowance has been recorded for the entire amount of the net deferred tax asset. The tax effects of temporary differences and tax loss carryforwards that give rise to significant portions of federal deferred tax assets and deferred tax liabilities at December 31, 1996 and 1997 are presented below.
1996 1997 --------------- --------------- Deferred tax assets: Net operating loss carryforwards ................................... $ 2,223,000 $ 4,554,000 Deferred revenues .................................................. 527,000 33,000 Accounts receivable principally due to allowance for doubtful accounts .......................................................... 22,000 22,000 Other .............................................................. 24,000 22,000 ------------ ------------ Gross deferred tax assets ............................................. 2,796,000 4,631,000 Less: valuation allowance ............................................. (2,698,000) (4,501,000) ------------ ------------ Net deferred tax assets ........................................ 98,000 130,000 ------------ ------------ Deferred tax liabilities: Plant and equipment, principally due to differences in depreciation (98,000) (130,000) ------------ ------------ Gross deferred tax liabilities ........................................ (98,000) (130,000) ------------ ------------ $ -- $ -- ============ ============
F-14 24/7 MEDIA, INC. (Successor Company to Interactive Imaginations, Inc.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 1996 and 1997 (All information subsequent to December 31, 1997 is Unaudited) (4) Notes Payable Notes Payable--Related Parties An officer and stockholder of the Company loaned the Company $80,000 in 1995 at an interest rate of 5.76%. The entire principal and accrued interest totaling $85,618 related to those loans were paid in full in 1996. Affiliates of this same stockholder loaned the Company $10,000 and $25,000 in 1995 at interest rates of 6.97% and 6.19%, respectively. The entire principal balance of $35,000 related to those loans was paid in full in 1995. In addition, an officer and stockholder of the Company loaned the Company $7,000 in 1995 at an interest rate of 6.60%. This loan was offset against certain personal expenses paid by the Company on behalf of this officer and stockholder. Mandatory Conversion Subordinated Notes In August, September and October 1996, the Company issued Mandatory Conversion Subordinated Notes ("Notes") in the aggregate principal amount of $1,500,000 and bearing an interest rate equal to 8% per annum. These Notes were converted into a total of 52,262 Convertible Preferred Shares ("Preferred Shares") in connection with the Company's November 1996 private placement, as required by the terms and conditions of such Notes. All accrued interest on these Notes, aggregating $21,919, was paid to the holders thereof in connection with the conversion to Convertible Preferred Shares. Senior Convertible Notes Payable--Related Parties During 1997, the Company received $2,500,000 in proceeds from the issuance of senior convertible notes payable primarily to affiliates of stockholders of the Company, bearing an interest rate of 8% compounded semi-annually. The notes, including interest thereon, are due on the earlier of prepayment, redemption, conversion of the notes into common stock or May 15, 1999, the maturity date. Each of the notes was issued with detachable warrants allowing such holders to purchase shares of the Company's common stock at prices ranging from $0.40 to $2.09 per share. The value attributed to the warrants of $201,000 has been recorded as debt discount and is being amortized to interest expense using the interest method over the term of the notes. The notes are convertible into common stock at conversion prices ranging from $0.40 to $2.09 per share upon occurrence of certain events. On December 22, 1997, $94,757 of the notes, including interest thereon, were converted into 236,737 shares of common stock at $0.40 per share. During 1997, the Company recorded $42,652 of interest expense in connection with the amortization of the debt discount and conversion of the aforementioned notes. During January 1998, the Company received $150,000 in proceeds from the issuance of senior convertible notes payable with terms similar to the notes issued during 1997. The notes are convertible into 173,282 shares of common stock at $0.87 per share. The value attributable to 17,240 warrants, to purchase shares of the Company's common stock at $0.87 per share, of $12,156 was recorded as debt discount. In connection with the Securities Purchase Agreement and the Merger, $2,056,250 of the Senior Convertible Notes Payable--Related Parties, plus accrued interest thereon, were converted into 3,002,344 shares of common stock, leaving approximately $500,000 of such notes, plus accrued interest thereon, outstanding as of June 2, 1998. Loan Payable--Related Party In connection with the Petry acquisition, Petry Media Corporation, a shareholder of the Company, agreed to lend an aggregate of $300,000 during the period September 29, 1997 to December 31, 1997. The loan is repaid through the payment of 5% of the gross commissions or other revenues received by the Company, after deducting advertising agency commissions and web-site royalties. At March 31, 1998, $283,267 of the loan was outstanding. In accordance with Staff Accounting Bulletin Topic 5:T, the Company has imputed an interest cost because these loans have no stated interest rate. The imputed interest rate used was based on a market rate of interest of 12%. F-15 24/7 MEDIA, INC. (Successor Company to Interactive Imaginations, Inc.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 1996 and 1997 (All information subsequent to December 31, 1997 is Unaudited) (4) Notes Payable --Continued Warrants In connection with the issuance of Mandatory Convertible Subordinated Notes in August 1996, in the principal amount of $500,000, the Company also issued to the note holder detachable warrants to purchase 26,132 of the Company's Common Shares at a price of $2.87. Such warrants expire no later than three years from the date of issuance. The value attributed to the warrants of $17,900 was recorded as debt discount and subsequently charged to interest expense in connection with the conversion of the aforementioned notes. On April 9, 1997, the Company granted warrants to purchase 17,500 of the Company's Common shares at an exercise price of $12.43 per share. The fair value of the warrants was insignificant on the date of grant. In connection with the issuance of Senior Convertible Notes Payable--Related Parties, warrants to purchase 677,264 and 17,240 Common shares at a price of $0.40 and $0.87 were outstanding as of December 31, 1997 and February 25, 1998, respectively, and such warrants expire no later than three years from the date of issuance. In connection with the February 25, 1998 Securities Purchase Agreement and Merger, 713,715 warrants to purchase common shares were exchanged for 396,476 shares of Common Stock. Accordingly, the Company charged the unamortized portion of the applicable debt discount to interest expense in connection with the conversion of the notes and warrants. On February 24, 1998, Interactive Imaginations and Michael P. Paolucci entered into a Confidential Separation Agreement and General Release ("Separation Agreement") pursuant to which Mr. Paolucci's employment as an executive, but not as a Director, of Interactive Imaginations was terminated as of February 24, 1998. The terms of the Separation Agreement generally provide that Mr. Paolucci and Interactive Imaginations agreed to release and discharge the other party (and its successors and assigns) from all causes of action, claims, judgments, obligations, damages or liabilities. Interactive Imaginations agreed to issue to Mr. Paolucci Class C Warrants to purchase up to 2,500,000 shares of Common Stock at an exercise price of $0.952 per share. In addition, Interactive Imaginations agreed to extend the term from January 31, 2000 to January 31, 2005 in respect of a fully vested option held by Mr. Paolucci to purchase 52,000 shares of Interactive Imaginations common stock at $0.43 per share. Accordingly, the Company recorded compensation expense of $450,000 during the three month period ended March 31, 1998. (5) Common Stock, Convertible Preferred Shares and Mandatorily Redeemable Convertible Preferred Stock Common Stock In connection with its formation in September 1994, the Company authorized 1,000,000 Common shares, par value $.01 per share, and immediately thereafter issued a total of 100,000 Common shares to its founders in exchange for approximately $30,000 worth of expenses, as well as $15,000 in cash. In February 1995, the Company amended its capital structure to eliminate the existing Common shares and create Common Stock Class A and Common Stock Class B. Accordingly, the Company amended its Certificate of Incorporation to provide for: (i) conversion of the 1,000,000 authorized Common shares (900,000 authorized but not issued; 100,000 issued and outstanding) into 1,000,000 Class A Common shares, par value $.01 per share; and (ii) authorization of 1,000 Class B Common shares, par value $.01 per share. In March 1995, the Company issued a total of 999 Class B Common shares in exchange for approximately $93,000 in cash, which were subsequently (in June 1995) converted to 62,707 Class A Common shares. During the remainder of 1995, the Company issued a total of 130,623 additional Class A Common shares in exchange for $1,289,000 in cash. As of December 31, 1995, the Company had authorized: (i) 1,000,000 Class A Common shares, of which 293,330 were issued and outstanding; and (ii) 1,000 Class B Common shares, of which none were outstanding. F-16 24/7 MEDIA, INC. (Successor Company to Interactive Imaginations, Inc.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 1996 and 1997 (All information subsequent to December 31, 1997 is Unaudited) (5) Common Stock, Convertible Preferred Shares and Mandatorily Redeemable Convertible Preferred Stock--Continued During 1996, the Company issued an additional 137,483 Class A Common shares in exchange for $4,525,000 in cash. In March 1996, the Company's shareholders approved a recapitalization plan which provided for: (i) conversion of the 1,000,000 authorized Class A Common Shares into 30,000,000 Common Shares, par value $.01 per share; (ii) conversion of each of the 430,813 issued and outstanding Class A Common shares into 10 of the new Common Shares (any remaining fractional shares could be purchased or sold by each shareholder in the conversion); and (iii) conversion of the 1,000 authorized Class B Common shares into 2,000,000 Preferred Shares, par value $.01 per share. Convertible Preferred Shares In November 1996, the Company designated 500,000 Convertible Preferred Shares, par value $.01 per share, out of the 2,000,000 Preferred Shares, which were authorized in March 1996, the rights and preferences of which are generally more senior to the Company's Common Shares and are more fully described in the Company's Amended Certificate of Incorporation (the "Amended Certificate"). Thereafter, the Company completed a private placement of 140,722 Preferred Shares for an aggregate price of $4,038,722. Such consideration consisted of the cancellation of outstanding Notes (described above) in the aggregate principal amount of $1,500,000 plus $2,538,722 in cash. Each Preferred Share is convertible into ten (10) Common Shares (subject to adjustment as set forth in the Amended Certificate) upon the occurrence of certain events in respect of the Company or the holders of Preferred Shares. In January 1997, the Company issued 17,422 shares of Preferred Stock for a payment of $500,011 in cash. As of December 31, 1996 and 1997, the 140,722 and 158,144 issued and outstanding Preferred Shares were convertible into 1,407,220 and 2,171,633 Common Shares, however, no Preferred Shares were converted as of that date (see note 11). The Company has reserved 5,000,000 authorized but unissued Common Shares for issuance in connection with the conversion of the Preferred Shares. These Preferred Shares, in the event of any voluntary or involuntary liquidation, dissolution or winding up of the Company, as defined, on a pari passu basis, are entitled to receive an amount equal to $28.70 per share, to be paid out of the assets of the Company available for distribution before any such payments shall be made on any shares of the Company's common shares or any other capital stock of the Company other than the Preferred Shares, plus any declared and unpaid dividends. The Preferred Shares are subject to mandatory conversion, and shall be automatically converted into common shares, as noted above, in the event: (i) the Company successfully consummates a firm commitment for an underwritten initial public offering of its equity securities for: (a) a gross per share price offered to the public of at least 200% of the then current per share conversion price, as defined; and (b) a total gross offering amount, as defined, of at least $20,000,000; or (ii) the holders of a majority of the Preferred Shares vote in favor of or consent to such conversion. For as long as the Preferred Shares are outstanding, the Company shall not, without the prior written consent or affirmative vote of the holders of at least 66 2/3 % of all of the outstanding Preferred Shares: (i) authorize or issue any other equity securities of the Company which rank superior to the Preferred Shares with respect to conversion, dividends, redemption, liquidation, antidilution or other preferences, designations, rights or powers; F-17 24/7 MEDIA, INC. (Successor Company to Interactive Imaginations, Inc.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 1996 and 1997 (All information subsequent to December 31, 1997 is Unaudited) (5) Common Stock, Convertible Preferred Shares and Mandatorily Redeemable Convertible Preferred Stock--Continued (ii) authorize or issue any securities of the Company which have voting rights superior to the Preferred Shares; or (iii) otherwise amend, alter or repeal the preferences, designations, rights or powers of the Preferred Shares or enter into any transaction that shall result in any such amendment, alterations, or repeal, which would have an adverse effect upon holders of such shares. Mandatorily Redeemable Convertible Preferred Stock On February 25, 1998, the Company entered into a Securities Purchase Agreement for the Sale and Issuance of 10,060,002 shares of Mandatorily Redeemable Convertible Preferred Stock--Series A ("Mandatorily Redeemable Convertible Preferred Stock" or "Series A"), par value $.01 per share, 5,283,616 Class A Warrants and 5,283,616 Class B Warrants in a private placement for total proceeds of $10,060,002. After giving effect to the Securities Purchase Agreement, including the Merger, the capital stock of the Company consists of: (i) 100,000,000 common shares, of which 27,481,201 shares are issued and outstanding, 10,060,002 shares are reserved for issuance upon conversion of issued and outstanding Mandatorily Redeemable Convertible Preferred Stock or "Series A," 5,283,616 shares are reserved for issuance upon exercise of issued and outstanding Class A Warrants, 5,283,616 shares are reserved for issuance upon exercise of issued and outstanding Class B Warrants, 2,575,000 are reserved for issuance upon exercise of issued and outstanding Class C Warrants, 142,421 are reserved for issuance upon exercise of issued and outstanding unclassified warrants, 251,028 (subject to adjustment) are reserved for issuance upon exercise of outstanding convertible debentures, and 5,750,000 shares are reserved for issuance to key employees, officers and directors of, and consultants to, the Company under stock incentives that have been granted or are available for grant by the Company pursuant to the 1998 Stock Incentive Plan; and (ii) 30,000,000 preferred shares, of which none are outstanding and of which 10,060,002 shares designated as Mandatorily Redeemable Convertible Preferred Stock or Series A shares, all of which are in a private placement. The Series A shares rank (i) prior to the Common Stock of the Company; (ii) with any Securities (as defined in the Securities Purchase Agreement); and (iii) junior to any Senior Securities, in each case as to dividends and other distribution of assets and upon liquidation, dissolution or winding up of the Company, whether voluntary or involuntary. The Series A shareholders are entitled to receive, when and as declared by the Board of Directors out of funds legally available, dividends at a rate of $0.04 per share per annum. Such dividends shall be cancelled pursuant to the Securities Purchase Agreement if the Company consummates an initial public offering (as defined) prior to January 1, 1999. Each share of Series A shall be convertible, at the option of the holder, at any time and without the payment of additional consideration into common stock determined by the sum of (i) the Payment Price of $0.952 per Series A share divided by the conversion price of $0.952 per common share (as adjusted), plus (ii) all accrued and unpaid dividends with respect to such share divided by the dividend conversion price of equal to twice the conversion price of $0.952. Each Series A share (and, as applicable, all accrued but unpaid dividends thereon), shall automatically be converted into common shares at the conversion price (and dividend conversion price) immediately upon the closing of a qualified public offering. In the event the Company has not completed a qualified public offering on the prior to the fifth anniversary of the original issue date, each shareholder of record of Series A shares will have the right to cause the Company to redeem at the option of the shareholder all or part of the shareholder's outstanding Series A shares by paying cash of $0.952 per share plus any dividends accrued. Additionally, if the Company fails to maintain at least $10 million of Key-Man Life Insurance on the President and Chief Executive Officer of the Company, each shareholder of record of Series A Shares will have the right to cause the company to redeem at the option of the shareholder F-18 24/7 MEDIA, INC. (Successor Company to Interactive Imaginations, Inc.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 1996 and 1997 (All information subsequent to December 31, 1997 is Unaudited) (5) Common Stock, Convertible Preferred Shares and Mandatorily Redeemable Convertible Preferred Stock--Continued all or part of the shareholder's outstanding Series A Shares by paying cash of $0.952 per share plus any dividends accrued. Series A shareholders have one vote for each full common share into which a Series A share would be convertible. In conjunction with the Securities Purchase Agreement, the Company issued both Class A Warrants and Class B Warrants to purchase 5,283,616 shares of the Company's common stock, par value $.01 per share, at $1.904 and $2.856 per share, respectively. Such warrants are immediately exerciseable and expire on February 25, 2003. (6) Stock Option Plan 1995 Stock Option Plan--amended During 1995, the Company established the 1995 Stock Option Plan, which was amended (the "Amended Plan") by the Board of Directors in December 1996. Under the Amended Plan, the Board of Directors may issue incentive stock options or non-qualified stock options to purchase up to 870,000 common shares. Incentive stock options may be granted to officers who are employees of the Company, Directors of the Company and other employees of the Company who are deemed to be "key employees." Incentive stock options must be issued at the fair market value of the Company's common stock at the date the option is issued. Non-qualified stock options may be granted to officers, directors, other employees, consultants and advisors of the Company. The option price for non-qualified stock options shall be at least 85% of the fair market value of the Company's common stock. The granted options under the amended plan shall be for periods not to exceed ten years. Options granted to shareholders who own greater than 10% of the outstanding stock must be issued at 110% of the fair market value of the stock on the date the options are granted. Subsequent to December 31, 1997, the Amended Plan was replaced by the 1998 Stock Incentive Plan (see below). The per share weighted-average fair value of stock options granted during 1995, 1996 and 1997 was $0.64, $2.32 and, $0.40, respectively, on the date of grant using the Black-Scholes method with the following weighted-average assumptions: 1995--risk-free interest rate 6.39%, and an expected life of two years; 1996--risk-free interest rate 6.18%, and an expected life of three years; and 1997--risk-free interest rate 5.64%, and an expected life of two years. The Company applies APB Opinion No. 25 in accounting for its Plan and, accordingly, no compensation cost has been recognized for its stock options in the accompanying financial statements. Had the Company determined compensation cost based on the fair value at the grant date for its stock options under SFAS No. 123, the Company's net income would have been reduced to the pro forma amounts indicated below:
1995 1996 1997 ---------------- --------------- --------------- Net loss: As reported ......... $ (1,168,144) (6,795,675) (5,305,828) Pro forma ........... $ (1,179,998) (6,838,920) (5,322,570) Net loss per share: As reported ......... $ Pro forma ........... $
F-19 24/7 MEDIA, INC. (Successor Company to Interactive Imaginations, Inc.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 1996 and 1997 (All information subsequent to December 31, 1997 is Unaudited) (6) Stock Option Plan--Continued Stock option activity during the periods indicated is as follows:
Weighted average Options exercise granted price ------------ --------- Outstanding at December 31, 1994 ............... -- Granted ........................................ 257,700 $ 0.77 Exercised ...................................... -- Canceled ....................................... -- ------- Outstanding at December 31, 1995 ............... 257,700 $ 0.77 Granted ........................................ 227,555 2.82 Exercised ...................................... -- Canceled ....................................... (52,068) 1.28 ------- ------- Outstanding at December 31, 1996 ............... 433,187 1.79 Granted (a) .................................... 831,188 0.40 Exercised ...................................... -- Canceled ....................................... (91,133) 1.61 ------- ------- Outstanding at December 31, 1997 ............... 1,173,242 0.93 ========= ======= Vested at December 31, 1997 .................... 529,493 ========= Options available at December 31, 1997 ......... -- =========
(a) At December 31, 1997, the total number of options outstanding for purchase of common shares under the Amended Plan exceeded the options available for issuance. Subsequent to December 31, 1997, the Company replaced the Amended Plan with the 1998 Stock Incentive Plan (see below) and increased the number of shares available under the plan to a maximum of 5,750,000. The following table summarizes information about stock options outstanding at December 31, 1997:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ----------------------------------- ----------------------------- WEIGHTED AVERAGE WEIGHTED WEIGHTED RANGE OF NUMBER REMAINING AVERAGE NUMBER AVERAGE EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE - ----------------- ------------- ------------------ ---------------- ------------- --------------- $0.40-0.43 1,059,671 7.1 years $ 0.40 420,922 $ 0.40 1.00-1.29 37,856 2.1 years 1.23 32,856 1.26 2.00-2.98 75,715 3.3 years 2.70 75,715 2.70 --------- ------- 1,173,242 529,493 ========= =======
1998 Stock Incentive Plan On February 13, 1998, the Board of Directors and stockholders of the Company approved the 1998 Stock Incentive Plan (the Plan). The following is a summary of the material features of the Plan. This Plan replaces the 1995 Stock Option Plan--Amended. All employees of and consultants to the Company are eligible under the Plan. Eligibility under the Plan shall be determined by the Stock Incentive Committee. The Plan provides for the grant of any or all of the following types of awards: (i) stock options, including incentive stock options and non-qualified stock options; (ii) stock appreciation rights, in tandem with stock options or free standing; and (iii) restricted stock. In addition, the Plan provides for the one-time non-discretionary award of stock options to non-employee directors of the Company. F-20 24/7 MEDIA, INC. (Successor Company to Interactive Imaginations, Inc.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 1996 and 1997 (All information subsequent to December 31, 1997 is Unaudited) (6) Stock Option Plan--Continued A maximum of 5,750,000 shares of Common Stock may be issued or used for reference purposes pursuant to the Plan. The maximum number of shares of Common Stock subject to each of stock options or stock appreciation rights that may be granted to any individual under the Plan is 250,000 for each fiscal year during the term of the Plan. If a stock appreciation right is granted in tandem with a stock option, it shall be applied against the individual limits for both stock options and stock appreciation rights, but only once against the maximum number of shares available under the Plan. Subsequent to December 31, 1997, the Company granted 2,248,096 and 504,116 options at $1.00 per share during March and April 1998, respectively. (7) Major Contracts In November 1996, the Company entered into an agreement with SegaSoft to license the rights to its registration-driven ad targeting software. The contract term was for two years from the earlier of the first commercial use of SegaSoft's Heat Network or August 1, 1997. The Company received a license fee of $1.8 million, of which $1.2 million was received by December 31, 1996. In addition, the Company received a $300,000 non-refundable consulting retainer fee in November 1996. This fee, plus an additional $100,000 credit, was applied against consulting service fees for design modifications to the software for the SegaSoft Heat Network, which were recognized as revenues as services were performed. The Company accounted for the majority of the license fee as performance occurred over the period during which the licensed software was transferred to SegaSoft and modified to perform to SegaSoft's specifications, with the remaining balance applied over the two-year term. For the years ended December 31, 1996 and 1997 and for the three months ended March 31, 1998, the Company recorded approximately $429,000, $1,681,000 and $0 in revenue, respectively. During 1996, the Company entered into an agreement with SegaSoft for advertising on the Company's ContentZone Websites and/or Riddler.com. The term of the contract was for one year from the date of signing. The Company received a prepayment in full for $540,000 in 1996. Revenue from the agreement was recognized ratably over the terms of the contracts. For the years ended December 31, 1996 and 1997, the Company recorded $212,000 and $326,000 in revenue, respectively. During 1996, the Company entered into an agreement with Microsoft Corporation for advertising on the Company's ContentZone Websites. The term of the contracts was for one year from the date of signing. The Company received a prepayment in full for $150,000 in 1996. Revenue from the agreement was recognized ratably over the terms of the contracts. For the years ended December 31, 1996 and 1997, the Company recorded $75,000 and $75,000 in revenue, respectively. (8) Supplemental Cash Flow Information Supplemental disclosure of cash flow information: During 1996, 1997 and 1998, the amount of cash paid for interest was $27,535, $0 and $0, respectively. Non-cash financing activities: During 1996, the Company converted $1.5 million of mandatory conversion subordinated notes into Preferred Shares. During 1997, the Company converted $94,757 of senior convertible notes into common stock. For the three months ended March 31, 1998, the Company converted 158,144 shares of convertible preferred stock into 2,171,633 shares of common stock, converted $2,056,250 of senior convertible notes payable--related parties, plus accrued interest, into 3,002,344 shares of Common Stock and outstanding warrants were converted F-21 24/7 MEDIA, INC. (Successor Company to Interactive Imaginations, Inc.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 1996 and 1997 (All information subsequent to December 31, 1997 is Unaudited) (8) Supplemental Cash Flow Information--Continued into 396,476 shares of Common Stock. Additionally, for the three month period ended March 31, 1998, the Company recorded imputed interest payable on loans payable--related party of $9,000. The Company issued 10,494,366 and 6,821,335 shares of common stock in connection with the Petry and Advercomm acquisitions respectively. In February 1998, the Company issued warrants to a former officer for $450,000 (see Note 4). (9) Commitments The Company leases its facilities and certain equipment under operating lease agreements. During May 1996, the Company converted its New York office lease agreements to a month-to-month basis for approximately 11,000 square feet of office space. Rental expense from operating leases amounted to $31,000, $175,000, $183,000 and $26,000 for the years ended 1995, 1996 and 1997 and for the three month period ended March 31, 1998, respectively. On June 1, 1996, the Company entered into an eighteen-month operating lease for the use of computer equipment with a fair market value of approximately $835,000. The lease requires six quarterly payments of $163,420 beginning on June 1, 1996. In October 1997, the lease agreement was modified and as a result the quarterly payments were adjusted to $45,935 through the extended term of the lease, November 30, 1998. Rent expense for the operating lease was $381,313 and $559,748 for the years ended 1996 and 1997, respectively. Future minimum payments under noncancelable operating leases at December 31, 1997 are as follows:
Operating Year ending December 31 leases - ------------------------------------------------ ---------- 1998 ........................................ $271,000 1999 ........................................ 128,000 2000 ........................................ 23,000 2001 ........................................ 1,000 -------- Total minimum payments required ......... $423,000 ========
Interactive Imaginations also entered into a Consulting Agreement, dated as of January 1, 1998 with Neterprises, Inc. ("Consulting Agreement"), pursuant to which Mr. Paolucci, President and sole stockholder of Neterprises, Inc., agreed to provide management and consulting services to Interactive Imaginations for a term of up to one year in connection with the identification and evaluation of potential strategic relationships and potential acquisition targets. In return for such services, Mr. Paolucci received a lump sum payment of $180,000 and currently receives a monthly fee of $12,500. In connection with the stock purchase agreement to acquire Petry, the Company is obligated to pay a related party a royalty of 5% of the gross commissions or other revenues received by the Company, after deducting advertising agency commissions and web-site royalties. Total royalties to be paid will not exceed $1,000,000. Payment of the royalty amount commences upon full repayment of the loan payable--related party (see note 4). As of March 31, 1998, the Company had accrued $46,149 in royalty payments which are included in other long-term liabilities. (10) Legal Proceedings The Company is involved in various claims and legal actions arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material effect on the Company's financial position, results of operation or liquidity. During 1997, the Company successfully defended claims against the Company; however, legal costs incurred in connection with such claims amounted to $232,304. F-22 24/7 MEDIA, INC. (Successor Company to Interactive Imaginations, Inc.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 1996 and 1997 (All information subsequent to December 31, 1997 is Unaudited) (11) Subsequent Events--Unaudited Intelligent Interactions Acquisition During April 1998, the Company entered into an Agreement and Plan of Merger (the "Merger") to acquire all of the outstanding stock of Intelligent Interactions. Upon consummation of the Merger, each share of common stock of Intelligent Interactions was converted into approximately 16.3 shares of common stock, 2.3 Class A Warrants, 2.3 Class B Warrants and 1.2 Class C Warrants of the Company. Each share of Preferred Stock, Series A Preferred Stock, Series AA Preferred Stock or Series AAA Preferred Stock of Intelligent Interactions was converted to approximately 18 shares of Mandatorily Redeemable Convertible Preferred Stock--Series A, par value $.01 per share, 2.7 Class A Warrants, 2.7 Class B Warrants and 1.4 Class C Warrants of the Company. The convertible note payable was also converted into Mandatorily Redeemable Convertible Preferred Stock--Series A and detachable warrants were terminated as a result of the merger. In addition, each option to purchase shares of common stock of Intelligent Interactions was converted into an option to purchase approximately 16 shares of common stock of the Company under the terms and pursuant to the conditions of the Company's 1998 Stock Incentive Plan. The acquisition will be accounted for using the purchase method of accounting, and accordingly, the total purchase price of $7,670,500 will be allocated to the tangible and identifiable intangible assets acquired and liabilities assumed on the basis of their fair values on the acquisition date. Approximately $(154,200) of the aggregate purchase price is expected to be allocated to net tangible liabilities consisting primarily of cash, accounts receivable, property and equipment, accounts payable and accrued liabilities. The historical carrying amounts of such net liabilities approximate their fair values. Approximately $5,477,300 is expected to be allocated to in-process technology and will be immediately charged to operations because such in-process technology have not reached the stage of technological feasibility at the acquisition dates and have no alternative future use. The purchase price in excess of identified tangible and intangible assets and liabilities assumed in the amount of $2,347,400 is expected to be allocated to goodwill and will be amortized over its estimated useful life of two years. CliqNow! Acquisitions As of June 1, 1998, the Company acquired the CliqNow! division of K2 Design, Inc., an Internet advertising network comprised of medium to large Websites organized into eight topical channels, for $4,000,000, with $1,000,000 payable in cash and $3,000,000 payable in Series B Convertible Redeemable Preferred Stock. The preferred stock converts to Common Stock automatically upon consummation of the Offering at a conversion price per share of Common Stock equal to the per share proceeds to the Company. The Company intends to furnish CliqNow!'s audited financial statements within 60 days of the effective date of the acquisition pursuant to the requirements of Rule 3-05 of Regulation S-X of the Securities Act of 1933, as amended. (12) Initial Public Offering and Related Transactions (Unaudited) The Company is offering shares of its common stock, par value $.01 per share in an initial public offering (the "Offering"). All pro forma amounts have been reflected to give effect of the Offering. F-23 24/7 MEDIA, INC. (Successor Company to Interactive Imaginations, Inc.) PRO FORMA CONSOLIDATED FINANCIAL INFORMATION OVERVIEW During the period from January 1, 1998 through April 13, 1998, the Company acquired three entities (the "Acquired Entities") in separate transactions in exchange for securities of the Company. The Acquired Entities are as follows:
EFFECTIVE EQUITY ACQUIRED ENTITY DATE CONSIDERATION(1) - ---------------------------------- ------------------- ----------------- Petry ............................ February 24, 1998 $ 4,292,800 Advercomm ........................ February 24, 1998 2,790,500 Intelligent Interactions ......... April 13, 1998 7,670,500 ----------- $14,753,800 ===========
- -------- (1) Includes acquisition costs of $157,000 The acquisitions have been accounted for using the purchase method of accounting, and accordingly, each purchase price has been or will be allocated to the tangible and identifiable intangible assets acquired and liabilities assumed on the basis of their fair values on the acquisition dates. Approximately $(1,276,400) of the aggregate recognized purchase price is expected to be allocated to identified net tangible liabilities consisting primarily of cash, accounts receivable, property and equipment, accounts payable and accrued liabilities. The historical carrying amounts of such assets and liabilities approximated their fair values. Approximately $5,477,300 of the aggregate purchase price is expected to be allocated to in-process technology. Because such in-process technology had not reached the stage of technological feasibility at the acquisition dates and had no alternative future use, these amounts were immediately charged to operations. The purchase price in excess of identified tangible and intangible assets in the amount of $10,552,900 is expected to be allocated to goodwill and is being amortized on an entity by entity basis over its estimated useful life of two years. The fair value of the Company's equity securities issued as consideration for the acquisitions was determined based upon a number of considerations. The fair value of the 17,315,701 aggregate shares of Common Stock issued in connection with the acquisition of Petry and Advercomm was estimated to be $0.40 per share, determined primarily by reference to the common stock conversion price of $0.40 per share in connection with the Company's issuance of approximately $1,000,000 senior convertible notes payable and detachable warrants during September and November 1997. The fair value of the Company's equity securities issued as consideration for the Intelligent Interactions acquisition was determined based upon a number of factors, including the sale of 10,060,002 shares of Mandatorily Convertible Redeemable Preferred Stock-Series A on February 25, 1998 (excluding detachable warrants) for $10,060,002 in cash. The fair value of the Company's Mandatorily Convertible Redeemable Preferred Stock was estimated to be $1.06 per share and its Common Stock $1.00 per share. The fair value of purchased existing and in-process technologies were determined by management using a risk-adjusted income valuation approach. The following unaudited pro forma consolidated statements of operations give effect to these acquisitions as if they had occurred on January 1, 1997 (or date of inception, if later) by consolidating the results of operations of the Acquired Entities with the results of operations of 24/7 Media for the year ended December 31, 1997 and the three months ended March 31, 1998. The pro forma adjustments include the elimination of all intercompany transactions. Advercomm was incorporated in November 1997 and had no operations in 1997; however, the operation of Advercomm's network based advertising services commenced on February 1, 1998; accordingly, Advercomm's pro forma results of operations are only included in the pro forma statement of operations for the two months of operations in the first quarter of 1998. The unaudited pro forma consolidated statements of operations also gives effect to the conversion of the Mandatorily Redeemable Preferred Stock into Common Stock which will be converted immediately prior to the Offering as if it had occurred on January 1, 1997. F-24 24/7 MEDIA, INC. (Successor Company to Interactive Imaginations, Inc.) PRO FORMA CONSOLIDATED FINANCIAL INFORMATION--Continued OVERVIEW--Continued The unaudited pro forma consolidated statements of operations are not necessarily indicative of the operating results that would have been achieved had the transactions been in effect as of the beginning of the periods presented and should not be construed as being representative of future operating results. The unaudited pro forma consolidated balance sheet gives effect to the acquisition of Intelligent Interactions as if the acquisition had occurred on March 31, 1998. The Company's historical consolidated balance sheet as of March 31, 1998 includes the February 24, 1998 acquisition of Petry and Advercomm. See Notes 1 and 12 to the Consolidated Financial Statements. The historical financial statements of the Company, Petry, and Intelligent Interactions are included elsewhere in this Prospectus and the unaudited pro forma consolidated financial information presented herein should be read in conjunction with those financial statements and related notes. F-25 24/7 MEDIA, INC. (Successor Company to Interactive Imaginations, Inc.) PRO FORMA CONSOLIDATED FINANCIAL INFORMATION PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS OVERVIEW--Continued
Year Ended December 31, 1997 --------------------------------------------------------------------------- 24/7 Media, Inc. (successor company Pro forma to Interactive Acquired Pro forma consolidated Imaginations, Inc.) Companies adjustments 24/7 Media, Inc. --------------------- --------------- ------------------ ------------------ Revenues: Advertising ........................... $ 1,467,105 $ 1,269,260 -- $ 2,736,365 Consulting and license fees ........... 1,681,464 65,432 -- 1,746,896 ------------ ------------ -- ------------- Total revenues ....................... 3,148,569 1,334,692 -- 4,483,261 Cost of revenues ....................... 1,655,340 1,174,598 -- 2,829,938 ------------ ------------ -- ------------- Gross profit 1,493,229 160,094 -- 1,653,323 ------------ ------------ -- ------------- Operating expenses: Sales and marketing ................... 1,672,999 2,980,419 -- 4,653,418 General and administrative ............ 2,622,743 2,355,638 -- 4,978,381 Product development ................... 1,417,750 327,995 -- 1,745,745 Other expenses ........................ 989,099 -- -- 989,099 Amortization of goodwill ............................. -- -- 3,612,034(B) 3,612,034 Write-off of acquired in-process technology ........................... -- -- 5,477,281(A) 5,477,281 ------------ ------------ --------- ------------- Total operating expenses ............. 6,702,591 5,664,052 9,089,315 21,455,958 ------------ ------------ --------- ------------- Operating loss ......................... (5,209,362) (5,503,958) (9,089,315) (19,802,635) Interest (expense) income, net ......... (96,466) 861 -- (95,605) Net loss .............................. $ (5,305,828) $ (5,503,097) $ (9,089,315) $ (19,898,240) ============ ============ ============ ============= Pro forma: Basic net loss per share (F) ......... Shares outstanding (F) ............... Three Months Ended March 31, 1998 ---------------------------------------------------------------------- 24/7 Media, Inc. (successor company Pro forma to Interactive Acquired Pro forma consolidated Imaginations, Inc.) Companies adjustments 24/7 Media, Inc. --------------------- ------------- ---------------- ----------------- Revenues: Advertising ........................... $ 1,076,250 $ 770,498 -- $ 1,846,748 Consulting and license fees ........... -- 88,362 -- 88,362 ------------ ---------- -- ------------ Total revenues ....................... 1,076,250 858,860 -- 1,935,110 Cost of revenues ....................... 930,003 678,276 -- 1,608,279 ------------ ---------- -- ------------ Gross profit 146,247 180,584 -- 326,831 ------------ ---------- -- ------------ Operating expenses: Sales and marketing ................... 653,460 524,978 -- 1,178,438 General and administrative ............ 1,285,512 459,999 -- 1,745,511 Product development ................... -- 66,738 -- 66,738 Other expenses ........................ -- -- -- -- Amortization of goodwill ............................. 335,355 -- 850,448(B) 1,185,803 Write-off of acquired in-process technology ........................... -- -- -- -- ------------ ---------- ------- ------------ Total operating expenses ............. 2,274,327 1,051,715 850,448 4,176,490 ------------ ---------- ------- ------------ Operating loss ......................... (2,128,080) (871,131) (850,448) (3,849,659 Interest (expense) income, net ......... (167,258) (11,434) -- (178,692) Net loss .............................. $ (2,295,338) $ (882,565) $ (850,448) $ (4,028,351) ============ ========== ========== ============ Pro forma: Basic net loss per share (F) ......... Shares outstanding (F) ...............
See accompanying notes to Pro Forma Consolidated Financial Information. F-26 24/7 MEDIA, INC. (Successor Company to Interactive Imaginations, Inc.) PRO FORMA CONSOLIDATED BALANCE SHEET
March 31, 1998 March 31, 1998 --------------------------------------------------------------------------- 24/7 Media, Inc. (successor company Intelligent Pro Pro forma to Interactive Interactions Forma consolidated Imaginations, Inc.) Corp. Adjustments 24/7 Media, Inc. --------------------- ------------------------------------ ---------------- ASSETS Current assets: Cash and cash equivalents ............................... $ 7,764,695 3,675 -- 7,768,370 Accounts receivable, net ................................ 1,818,899 87,499 -- 1,906,398 Prepaid expenses and other current assets ............... 52,296 13,568 65,864 -------------- ---------- ----------- ----------- Total current assets ................................ 9,635,890 104,742 -- 9,740,632 Property and equipment, net ............................. 630,652 129,451 -- 760,103 Goodwill, net ........................................... 7,870,174 -- 2,347,406(C) 10,217,580 Deferred offering costs ................................. 13,148 -- -- 13,148 Intangible assets, net .................................. 2,503 -- -- 2,503 Deposits ................................................ 49,626 49,626 -------------- ---------- ----------- ----------- Total assets ........................................ $ 18,201,993 234,193 2,347,406 20,783,592 ============== ========== =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Current liabilities: Line of credit .......................................... -- 17,195 -- 17,195 Accounts payable ........................................ 813,518 121,801 66,300(C) 1,001,619 Accrued liabilities ..................................... 2,180,969 183,102 -- 2,364,071 Loans payable--related party ............................ 283,267 -- -- 283,267 Convertible note payable ................................ -- 450,000 (450,000)(E) -- Deferred revenue ........................................ 41,000 -- 41,000 -------------- ---------- ----------- ----------- Total current liabilities ........................... 3,318,754 772,098 (383,700) 3,707,152 Senior convertible notes payable--related parties, net of debt discount .......................................... 479,408 -- -- 479,408 Other liabilities ....................................... 46,149 -- -- 46,149 450,000(E) Mandatorily redeemable convertible preferred stock, ..... 10,093,502 3,454,481 (13,999,783)(D) -- Stockholders' equity (deficit): Convertible preferred stock ............................. -- -- -- -- Common stock ............................................ 274,812 2,412 178,641(D) 455,865 Additional paid-in capital .............................. 19,623,624 135,690 17,447,241(D) 37,206,555 Accumulated deficit ..................................... (15,634,256) (4,130,488) (1,346,793)(C) (21,111,537) -------------- ---------- ----------- ----------- Total stockholders' equity (deficit) ................ 4,264,180 (3,992,386) 16,279,089 16,550,883 -------------- ---------- ----------- ----------- Commitments and contingencies Total liabilities and stockholders' equity .......... 18,201,993 234,193 2,347,406 20,783,592 ============== ========== =========== ===========
See accompanying notes to Pro Forma Consolidated Financial Information. F-27 The following adjustments were applied to the Company's historical consolidated financial statements and the Acquired Entities to arrive at the pro forma consolidated financial information. (A) To record acquired in-process technology associated with the Intelligent Interactions acquisition in the amount of $5,477,300 which has been recognized on January 1, 1997. (B) To record amortization expense related to goodwill in the amount of $10,552,900, which is amortized on an entity by entity basis, as if each acquisition had occurred on January 1, 1997 (or inception, if later), over its estimated useful life of two years. (C) To record goodwill associated with the acquisition of Intelligent Interactions and record a reduction to accumulated deficit in connection with the related acquired in-process technology and to eliminate the historical stockholders' deficit as of the acquisition date using the purchase method of accounting. (D) To give effect to the conversion of all outstanding shares of 24/7 Media's mandatorily redeemable convertible preferred stock (included shares issued in connection with the Intelligent Interactions acquisition) into 14,308,306 shares of Common Stock immediately prior to the closing of this offering. (E) To give effect to conversion of Intelligent Interactions' $450,000 convertible note payable and $3,454,500 of manditorily redeemable convertible preferred stock into shares of 24/7 Media's mandatorily redeemable convertible preferred stock. (F) The Company computes net loss per share in accordance with the provisions of SFAS No. 128, "Earnings Per Share" and SEC Staff Accounting Bulletin No. 98. Under SFAS No. 128 and SAB No. 98, basic net loss per share is computed by dividing the net loss for the period by the weighted average number of common shares outstanding during the period. The weighted average shares used to compute basic net loss per share include outstanding shares of Common Stock from the date of issuance. The computation excludes (i) for the year ended December 31, 1997, _________ equivalent shares of Mandatorily Redeemable Convertible Preferred Stock Series A. In addition, the calculation of diluted net loss per share excludes Common Stock issuable upon exercise of employee stock options and upon exercise of outstanding warrants, as their effect in all periods presented is antidilutive. Pro forma net loss per share is computed on the basis described above and giving effect to the common shares issued to the acquired companies as if acquired on January 1, 1997. In future periods, the weighted average shares used to compute diluted earnings per share will include the incremental shares of Common Stock relating to outstanding options and warrants to the extent such incremental shares are dilutive. F-28 INDEPENDENT AUDITORS' REPORT The Members of Interactive Holdings, LLC (formerly Petry Interactive, Inc.) We have audited the accompanying balance sheet of Interactive Holdings, LLC (formerly Petry Interactive, Inc.) as of December 31, 1997 (Successor), and the related statement of operations and shareholder's/members' deficit and cash flows for the period from February 1, 1997 (inception) to September 28, 1997 (Predecessor) and the period from September 29, 1997 to December 31, 1997 (Successor). These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Interactive Holdings, LLC as of December 31, 1997 (Successor), and the results of its operations and its cash flows for the period February 1, 1997 (inception) to September 28, 1997 (Predecessor) and the period from September 29, 1997 to December 31, 1997 (Successor) in conformity with generally accepted accounting principles. As discussed in note 1 to the financial statements, on September 29, 1997, Interactive Holdings, LLC acquired Petry Interactive, Inc. As a result of the change in control, the financial information for the period after the change in control is presented on a different cost basis than that for the period before the change in control and, therefore, is not comparable. KPMG PEAT MARWICK LLP New York, New York June 2, 1998 F-29 INTERACTIVE HOLDINGS, LLC (FORMERLY PETRY INTERACTIVE, INC.) BALANCE SHEET
December 31, 1997 ------------- Successor ASSETS Current Assets: Cash ...................................................................... $ 117,849 Accounts receivable, net of allowance for doubtful accounts of $158,777 ... 803,089 Prepaid expenses and other current assets ................................. 6,449 ---------- Total current assets .................................................. 927,387 ---------- Other assets ................................................................. 5,000 ---------- Total assets .......................................................... $ 932,387 ---------- LIABILITIES AND MEMBERS' DEFICIT Current Liabilities: Loan payable--related party ............................................... 300,000 Accounts payable .......................................................... 8,875 Accrued liabilities ....................................................... 1,297,024 ---------- Total current liabilities ............................................. 1,605,899 ---------- Other long-term liabilities .................................................. 16,733 ---------- Total liabilities ............................................................ 1,622,632 ---------- Members' deficit: Common Stock; $0.01 par value, 200,000 shares authorized, 100 shares issued and outstanding .......................................................... 1 Paid in capital ........................................................... 6,000 Members' deficit .......................................................... (696,246) ---------- Total members' equity (deficit) ....................................... (690,245) ---------- Commitments and contingencies Total liabilities and members' deficit ................................ $ 932,387 ==========
See accompanying notes to financial statements. F-30 INTERACTIVE HOLDINGS, LLC (FORMERLY PETRY INTERACTIVE, INC.) STATEMENTS OF OPERATIONS
Period from February 1, 1997 Period from (inception) September 29, 1997 to to September 28, 1997 December 31, 1997 -------------------- ------------------- (Predecessor) (Successor) Advertising revenue ..................... $ 514,982 $ 754,279 Cost of revenues ........................ 449,621 724,973 ------------ ---------- Gross profit ..................... 65,361 29,306 ------------ ---------- Operating expenses: Sales and marketing .................. 1,306,125 424,386 General and administrative ........... 950,210 295,163 ------------ ---------- Total operating expenses ......... 2,256,335 719,549 Interest expense ..................... -- 6,000 ---------- Net loss ......................... $ (2,190,974) $ (696,243) ============ ==========
See accompanying notes to financial statements. F-31 INTERACTIVE HOLDINGS, LLC (FORMERLY PETRY INTERACTIVE, INC.) STATEMENTS OF SHAREHOLDER'S/MEMBERS' EQUITY (DEFICIT)
Total Common Paid-In Shareholder's Shareholder's Stock Capital Deficit Deficit -------- --------- --------------- -------------- Balance as of February 1, 1997 (inception) ......... $ 1 -- $ (1) -- Net loss for the period ............................ -- -- (2,190,974) (2,190,974) --- -- ------------ ---------- Balance as of September 28, 1997 ................... $ 1 -- (2,190,975) (2,190,974) === == ============ ==========
- --------------------------------------------------------------------------------
Tota l Common Paid-In Members' Members' Stock Capital Deficit Deficit ----- ------- ------- ------- Members' deficit subsequent to the change in control as of September 28, 1997 ...................................... $ 1 -- -- 1 ------ ------ --------- --------- Imputed interest on loan payable--related party .......... -- 6,000 -- 6,000 Net loss for the period .................................. -- -- (696,246) (696,246) ------ ------ --------- --------- Members' deficit as of December 31, 1997 ................. $ 1 6,000 (696,246) (690,245) ====== ====== ========= =========
See accompanying notes to financial statements. F-32 INTERACTIVE HOLDINGS, LLC (FORMERLY PETRY INTERACTIVE, INC.) STATEMENTS OF CASH FLOWS
Period from February 1, 1997 Period from (inception) September 29, 1997 to to September 28, 1997 December 31, 1997 -------------------- ------------------- (Predecessor) (Successor) Cash flows from operating activities: Net loss ........................................................ $ (2,190,974) (696,243) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation ................................................... 10,358 -- Provision for doubtful accounts ................................ 12,992 145,786 Imputed interest on loan payable--related party ................ 6,000 Changes in operating assets and liabilities, net of acquisition: Accounts receivable ........................................... (424,800) (410,861) Prepaid assets and other current assets ....................... (5,490) (960) Other assets .................................................. -- (5,000) Accounts payable .............................................. 15,000 (6,125) Accrued liabilities ........................................... 528,501 785,252 ------------ -------- Net cash used by operating activities ....................... (2,054,413) (182,151) ------------ -------- Cash flows from financing activities: Proceeds from loan payable--related party ....................... -- 300,000 Net cash transferred from--related party ........................ 2,180,617 -- ------------ -------- Net cash provided by financing activities ................... 2,180,617 300,000 ------------ -------- Net change in cash .......................................... 126,205 117,849 Cash at the beginning of period .................................... -- -- ------------ -------- Cash at end of period .............................................. $ 126,205 117,849 ============ ========
See accompanying notes to financial statements. F-33 INTERACTIVE HOLDINGS, LLC (FORMERLY PETRY INTERACTIVE, INC.) NOTES TO FINANCIAL STATEMENTS December 31, 1997 (All information subsequent to December 31, 1997 is Unaudited) (1) Summary of Operations and Significant Accounting Policies (a) Summary of Operations Interactive Holdings, LLC. (formerly Petry Interactive, Inc.) (the "Company") operates a network of Websites that enables both advertisers and Web publishers to capitalize on the many opportunities presented by Internet advertising, direct marketing and commerce. The Company generates revenues by delivering advertisements and promotions to Websites affiliated with the Company ("Affiliated Websites"). Inherent in the Company's business are various risks and uncertainties, including its limited operating history, unproven business model and the limited history of commerce on the Internet. The Company's success may depend in part upon the emergence of the Internet as a communications medium, prospective project development efforts, and the acceptance of the Company's solutions by the marketplace. On February 25, 1998, the Company simultaneously merged with Advercomm, Inc. and with and into 24/7 Media, Inc. (successor company to Interactive Imaginations, Inc.). (b) Basis of Presentation For the period February 1, 1997 (inception) to September 28, 1997, Petry Interactive, Inc. was a wholly owned subsidiary of Petry Media Corporation ("PMC") (Predecessor). On February 1, 1997, Petry Interactive commenced operations as a provider of Internet advertising solutions to a network of Websites. On September 29, 1997, the Company entered into a Stock Purchase Agreement whereby all of the outstanding shares of Petry Interactive, Inc. were purchased by the Company in exchange for $100 in cash plus a warrant to purchase 20% of the Company for $0.25. Accordingly, the statements of operations and cash flows for the period February 1, 1997 (inception) to September 28, 1997 reflect the operations of the Company as part of PMC (Predecessor), and the balance sheet as of December 31, 1997 and the statements of operations, members' deficit and cash flows for the period September 29, 1997 to December 31, 1997 reflect the operations and financial position under the ownership of the Company (Successor). As a result of the change in control, the financial information for the period after the change in control is presented on a different cost basis than that for the period before the change in control and, therefore, is not comparable. The accompanying financial statements include certain corporate general and administrative expenses incurred on a consolidated basis by PMC for the period February 1, 1997 (inception) to September 28, 1997 that have been allocated to the Company. Such allocations include corporate salaries, rent, professional services and depreciation and are included in general and administrative expenses in the Company's statement of operations. In management's opinion, the basis for the allocation of such costs is reasonable. However, the expenses allocated to the Company are not necessarily representative of what the Company would have incurred on a stand alone basis. Allocated costs are as follows:
Period from February 1, 1997 (inception) to September 28, 1997 ------------------- (Predecessor) Corporate salaries ............ $534,686 Rent .......................... 63,896 Professional services ......... 23,594 Depreciation .................. 10,358 -------- $632,534 ========
F-34 INTERACTIVE HOLDINGS, LLC (FORMERLY PETRY INTERACTIVE, INC.) NOTES TO FINANCIAL STATEMENTS--Continued December 31, 1997 (All information subsequent to December 31, 1997 is Unaudited) (1) Summary of Operations and Significant Accounting Policies --Continued The purchase of the Company by Interactive Holdings LLC was accounted for using the purchase method of accounting. The estimated fair value of the net assets acquired is as follows: Accounts receivable, net ...................... $538,013 Prepaid and other current assets .............. 5,490 Accounts payable and accrued expenses ......... 543,502
The estimated fair value of the net assets acquired was determined by management by reference to the fair value of these instruments at the date of purchase which approximated their financial statement carrying amount. (c) Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. (d) Income Taxes For the period February 1, 1997 (inception) to September 28, 1997, federal and state income taxes are provided as if the Company filed a separate tax return. On a stand alone basis, the Company owes no current taxes and has not been allocated any income tax expense (benefit) by PMC. For the period September 29, 1997 to December 31, 1997, for federal and state income tax purpose, the Company is treated as a partnership. The Company incurred a net operating loss of $696,243 for the period, accordingly, no provision has been made for income taxes, as income or loss is included in the tax returns of the members. (e) Revenue Recognition The Company's advertising revenues are derived principally from short-term advertising agreements in which the Company delivers advertising impressions or full-page deliveries for a fixed fee to third-party Websites comprising the Petry Network. For the period February 1, 1997 (inception) to September 28, 1997, revenues from advertising were recognized ratably over the term of the agreement as services were performed. For the period from September 29, 1997, to December 31, 1997, revenues from advertising are recognized in the period the advertising impressions are delivered provided collection of the resulting receivable is probable. Websites affiliated with the Company ("Affiliated Websites") register web page(s) with the Company's network and display advertising banners on those pages. The Company pays its Affiliated Websites a service fee for providing advertising space to the Petry Network. The Company becomes obligated to make payments to such Affiliated Websites, which have contracted with the Company to be part of the Petry Network, in the period the advertising impressions are delivered. Such expenses are classified as cost of revenues in the statements of operations. At December 31, 1997, accounts receivable include approximately $500,700 of unbilled receivables for which revenue was recognized in 1997. (f) Advertising Expenses The Company expenses the cost of advertising and promoting its services as incurred. Such costs are included in sales and marketing in the statement of operations and totaled $18,000 and $19,765 for the period February 1, 1997 (inception) to September 28, 1997 and for the period September 29, 1997 to December 31 1997, respectively. F-35 INTERACTIVE HOLDINGS, LLC (FORMERLY PETRY INTERACTIVE, INC.) NOTES TO FINANCIAL STATEMENTS--Continued December 31, 1997 (All information subsequent to December 31, 1997 is Unaudited) (1) Summary of Operations and Significant Accounting Policies --Continued (g) Financial Instruments and Concentration of Risk Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash, accounts receivable, accounts payable and accrued liabilities. At December 31, 1997 the fair value of these instruments approximated their financial statement carrying amount. Accounts receivable have been derived from advertising fees billed to advertisers located in the United States. The Company generally requires no collateral. The Company maintains reserves for potential credit losses. At December 31, 1997, one customer accounted for over 10% of the Company's accounts receivable, accounting for 12% of total receivables. (2) Balance Sheet Components Accrued Liabilities A summary of accrued liabilities follows:
December 31, 1997 ------------- Affiliate royalties .......... $ 684,532 Ad management fees ........... 219,120 Employee commissions ......... 203,729 Other ........................ 189,643 ---------- $1,297,024 ==========
(3) Loan Payable--Related Party In connection with the Stock Purchase Agreement with PMC, dated September 29, 1997, PMC agreed to lend an aggregate of $300,000 during the period September 29, 1997 to December 31, 1997. The loan is repaid at a rate of 5% of the gross commissions or other revenues received by the Company, after deducting advertising agency commissions and web-site royalties. The loan has no stated interest and is expected to be paid within the next year. In accordance with Staff Accounting Bulletin Topic 5:T, the Company has imputed an interest cost because these loans have no stated interest rate. The imputed interest rate used was based on a market rate of interest of 12%. For the three month period ended December 31, 1997, interest expense was $6,000. (4) Commitments In connection with the Stock Purchase Agreement dated September 29, 1997, the Company is obligated to pay PMC a royalty of 5% of the gross commissions or other revenues received by the Company, after deducting advertising agency commissions and web-site royalties. Total royalties to be paid will not exceed $1,000,000. Any payments of the royalty amount commences upon full repayment of the loan payable--related party (See note 3). As of December 31, 1997, the Company had accrued $16,733 in royalty payments to PMC which are included in other long-term liabilities. (5) Legal Proceedings The Company is involved in various other claims and legal actions arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material effect on the Company's financial position, results of operation or liquidity. F-36 INTERACTIVE HOLDINGS, LLC (FORMERLY PETRY INTERACTIVE, INC.) NOTES TO FINANCIAL STATEMENTS--Continued December 31, 1997 (All information subsequent to December 31, 1997 is Unaudited) (6) Warrants In connection with the Stock Purchase Agreement dated September 29, 1997, the Company issued to PMC a warrant for 25 shares of common stock, $.01 par value for $0.25. The warrant was exercised in connection with the February 1998 Plan of Merger and Securities Purchase Agreement (see Note 7). (7) Subsequent Event--Unaudited On February 24, 1998, the Company sold all of its issued and outstanding shares to 24/7 Media, Inc. in exchange for 10,494,366 shares of 24/7 Media Inc.'s common stock. F-37 Report of Independent Public Accountants To Intelligent Interactions Corporation: We have audited the accompanying balance sheets of Intelligent Interactions Corporation (a Delaware corporation in the development stage) as of December 31, 1996 and 1997, and the related statements of operations, stockholders' deficit and cash flows for the period from inception (February 28, 1995) to December 31, 1995 and the years ended December 31, 1996 and 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Intelligent Interactions Corporation as of December 31, 1996 and 1997, and the results of its operations and its cash flows for the period from inception to December 31, 1995 and the years ended December 31, 1996 and 1997, in conformity with generally accepted accounting principles. /s/ ARTHUR ANDERSEN LLP Washington, D.C. May 13, 1998 F-38 INTELLIGENT INTERACTIONS CORPORATION (A Development Stage Company) BALANCE SHEETS
December 31, March 31, ----------------------------- --------------- 1996 1997 1998 ------------- --------------- --------------- ASSETS (unaudited) Current assets: Cash and cash equivalents ......................................................... $ 531,100 $ 423,548 $ 3,675 Accounts receivable ............................................................... -- 23,768 87,499 Other current assets .............................................................. 100 7,169 13,568 ---------- ------------- ------------- Total current assets ............................................................ 531,200 454,485 104,742 ---------- ------------- ------------- Property and equipment, at cost: Computer equipment ................................................................ 93,243 151,163 151,163 Furniture and fixtures ............................................................ 2,329 16,648 16,648 Software .......................................................................... 2,656 22,714 22,714 ---------- ------------- ------------- 98,228 190,525 190,525 Less--Accumulated depreciation .................................................... (11,537) (46,073) (61,074) ---------- ------------- ------------- 86,691 144,452 129,451 ---------- ------------- ------------- Total assets .................................................................... $ 617,891 $ 598,937 $ 234,193 ========== ============= ============= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable .................................................................. 27,298 100,542 121,801 ---------- ------------- ------------- Accrued expenses .................................................................. 36,184 121,991 183,102 Line of credit .................................................................... $ -- $ 19,583 $ 17,195 Note payable to officer ........................................................... 86,446 -- -- Convertible notes payable ......................................................... -- 450,000 450,000 Total current liabilities ....................................................... 149,928 692,116 772,098 Commitments (Note 5) ................................................................ Convertible, redeemable preferred stock; $0.01 par value Series A; 71,870 shares authorized; 71,870 issued and outstanding in 1996, 1997 and 1998, respectively; entitled to liquidation preference of $16.42 per share plus unpaid dividends; 8% per annum ($1,209,075, $1,303,483 and $1,327,085 in the aggregate in 1996, 1997 and 1998, respectively) ........................... 1,209,075 1,303,483 1,327,085 Series A-1; 71,870 shares authorized; none issued or outstanding .................. -- -- -- Series AA; 54,150 shares authorized; 0 and 54,142 issued and outstanding in 1996 and in 1997 and 1998, respectively; entitled to liquidation preference of $18.47 per share plus unpaid dividends; 8% per annum ($1,056,447 and $1,076,447 in the aggregate in 1997 and 1998, respectively) .................................... -- 1,056,447 1,076,447 Series AA-1; 54,150 shares authorized; none issued or outstanding ................. -- -- -- Series AAA; 78,304 shares authorized; 0 and 48,712 issued and outstanding in 1996 and in 1997 and 1998, respectively; entitled to liquidation preference of $20.53 per share plus unpaid dividends; 8% per annum ($1,030,948 and $1,050,949 in 1997 and 1998, respectively in the aggregate)....................... -- 1,030,948 1,050,949 Series AAA-1; 78,304 shares authorized; none issued or outstanding ................ -- -- -- ---------- ------------- ------------- Total convertible, redeemable preferred stock value 1,209,075 3,390,878 3,454,481 ---------- ------------- ------------- Stockholders' deficit: Common stock; $0.01 par value; 930,000 shares authorized; 230,170 shares issued and outstanding in 1996, 1997, and 1998, respectively ............................ 2,412 2,412 2,412 Additional paid-in capital ........................................................ 142,290 142,290 142,290 Treasury stock .................................................................... (6,600) (6,600) (6,600) Deficit accumulated during the development stage .................................. (879,214) (3,622,159) (4,130,488) ---------- ------------- ------------- Total stockholders' deficit ..................................................... (741,112) (3,484,057) (3,992,386) ---------- ------------- ------------- Total liabilities and stockholders' deficit ..................................... $ 617,891 $ 598,937 $ 234,193 ========== ============= =============
The accompanying notes are an integral part of these balance sheets. F-39 INTELLIGENT INTERACTIONS CORPORATION (A Development Stage Company) STATEMENTS OF OPERATIONS
Period From Inception (February 28, 1995) To Year Ended Year Ended December 31, December 31, December 31, 1995 1996 1997 --------------- -------------- ---------------- Revenues: Consulting and license fees and support ............... $ -- $ -- $ 65,432 Cost of revenues ................ -- -- -- ---------- ---------- ------------ Gross profit ................. -- -- 65,432 Operating expenses: Sales and marketing ............. -- 254,515 1,249,910 Product development ............. 21,964 92,280 327,995 General and administrative ................. 133,238 350,368 1,055,589 ---------- ---------- ------------ Total operating expenses ......... 155,202 697,163 2,633,494 ---------- ---------- ------------ Loss from operations ............. (155,202) (697,163) (2,568,062) Interest income (expense), net ............................. 473 (1,438) 6,861 Other income ..................... -- 3,085 -- ---------- ---------- ------------ Net loss ......................... (154,729) (695,516) (2,561,201) Less dividends on preferred stock ................. -- (28,969) (181,744) ---------- ---------- ------------ Net loss applicable to common stock .................... $ (154,729) $ (724,485) $ (2,742,945) ========== ========== ============ Period From Inception (February 28, Quarter Ended Quarter Ended 1995) To March 31, March 31, March 31, 1997 1998 1998 --------------- --------------- ---------------- (unaudited) (unaudited) (unaudited) Revenues: Consulting and license fees and support ............... $ -- $ 88,362 $ 153,794 Cost of revenues ................ -- 13,200 13,200 ---------- ---------- ------------ Gross profit ................. -- 75,162 140,594 Operating expenses: Sales and marketing ............. 182,043 226,548 1,730,973 Product development ............. 91,386 66,738 508,977 General and administrative ................. 250,165 221,168 1,760,363 ---------- ---------- ------------ Total operating expenses ......... 523,594 514,454 4,000,313 ---------- ---------- ------------ Loss from operations ............. (523,594) (439,292) (3,859,719) Interest income (expense), net ............................. 460 (5,434) 462 Other income ..................... -- -- 3,085 ---------- ---------- ------------ Net loss ......................... (523,134) (444,726) (3,856,172) Less dividends on preferred stock ................. (23,602) (63,603) (274,316) ---------- ---------- ------------ Net loss applicable to common stock .................... $ (546,736) $ (508,329) $ (4,130,488) ========== ========== ============
The accompanying notes are an integral part of these balance sheets. F-40 INTELLIGENT INTERACTIONS CORPORATION (A Development Stage Company) STATEMENTS OF STOCKHOLDERS' EQUITY
Stockholders' Deficit ------------------- Preferred Stock Common Stock ----------------------- ------------------- Shares Amount Shares Amount ---------- ------------ ---------- -------- Inception, February 28, 1995 ....................... -- $ -- -- $ -- Sale of Common Stock to Founders at $0.60 per share, July, September, and December 1995 ........ -- -- 206,670 2,067 Stock issued to employees for services rendered valued at $0.60 per share, December 1995.......... -- -- 14,500 145 Net loss .......................................... -- -- -- -- ------ ---------- ------- ------ Balance, December 31, 1995 ......................... -- -- 221,170 2,212 Stock issued to employee for services rendered valued at $0.60 per share, February 1996.......... -- -- 20,000 200 Sale of Series A Preferred Stock to investors valued at $16.42 per share, September 1996........ 71,870 1,180,106 -- -- Repurchase of 11,000 of terminated employee's shares by the Company at $0.60 per share, November 1996 ..................................... -- -- -- -- Accrued dividends on Preferred Stock .............. -- 28,969 -- -- Net loss .......................................... -- -- -- -- ------ ---------- ------- ------ Balance, December 31, 1996 ......................... 71,870 1,209,075 241,170 2,412 Sale of Series AA Preferred Stock to investors valued at $18.47 per share, April 1997............ 54,142 1,000,002 -- -- Sale of Series AAA Preferred Stock to investors valued at $20.53 per share, August 1997........... 48,712 1,000,057 -- -- Accrued Dividends on Preferred Stock .............. -- 181,744 -- -- Net loss .......................................... -- -- -- -- ------ ---------- ------- ------ Balance, December 31, 1997 ......................... 174,724 3,390,878 241,170 2,412 Accrued dividends on Preferred Stock (unaudited) ...................................... -- 63,603 -- -- Net loss (unaudited) .............................. -- -- -- -- ------- ---------- ------- ------ Balance, March 31, 1998 (unaudited) ................ 174,724 $3,454,481 241,170 $2,412 ======= ========== ======= ====== Stockholders' Deficit ------------------------------------------ Deficit Accumulated Additional During the Paid-In Treasury Development Capital Stock Stage ------------ ------------- --------------- Inception, February 28, 1995 ....................... $ -- $ -- $ -- Sale of Common Stock to Founders at $0.60 per share, July, September, and December 1995 ........ 121,935 -- -- Stock issued to employees for services rendered valued at $0.60 per share, December 1995.......... 8,555 -- -- Net loss .......................................... -- -- (154,729) -------- --------- ------------ Balance, December 31, 1995 ......................... 130,490 -- (154,729) Stock issued to employee for services rendered valued at $0.60 per share, February 1996.......... 11,800 -- -- Sale of Series A Preferred Stock to investors valued at $16.42 per share, September 1996........ -- -- -- Repurchase of 11,000 of terminated employee's shares by the Company at $0.60 per share, November 1996 ..................................... -- (6,600) -- Accrued dividends on Preferred Stock .............. -- -- (28,969) Net loss .......................................... -- -- (695,516) -------- --------- ------------ Balance, December 31, 1996 ......................... 142,290 (6,600) (879,214) Sale of Series AA Preferred Stock to investors valued at $18.47 per share, April 1997............ -- -- -- Sale of Series AAA Preferred Stock to investors valued at $20.53 per share, August 1997........... -- -- -- Accrued Dividends on Preferred Stock .............. -- -- (181,744) Net loss .......................................... -- -- (2,561,201) -------- --------- ------------ Balance, December 31, 1997 ......................... 142,290 (6,600) (3,622,159) Accrued dividends on Preferred Stock (unaudited) ...................................... -- -- (63,603) Net loss (unaudited) .............................. -- -- (444,726) -------- --------- ------------ Balance, March 31, 1998 (unaudited) ................ $142,290 $ (6,600) $ (4,130,488) ======== ========= ============
The accompanying notes are an integral part of these statements. F-41 INTELLIGENT INTERACTIONS CORPORATION (A Development Stage Company) STATEMENTS OF CASH FLOWS
Period From Inception (February 28, 1995) To Year Ended Year Ended December 31, December 31, December 31, 1995 1996 1997 --------------- -------------- ---------------- Cash flows from operating activities: Net loss ............................................. $ (154,729) $ (695,516) $ (2,561,201) Adjustments to reconcile net loss to net cash used in operating activities-- ........................... Depreciation ........................................ 2,185 9,352 34,536 Compensation expense on stock grants ................ 8,700 12,000 -- Changes in operating assets and liabilities: Accounts receivable ................................ -- -- (23,768) Other current assets ............................... (1,000) 900 (7,069) Accounts payable and accrued expenses .............. 5,497 57,985 159,051 ---------- ----------- ------------ Net cash used in operating activities ............. (139,347) (615,279) (2,398,451) Cash flows from investing activities: Purchases of property and equipment .................. (13,109) (85,119) (92,297) ---------- ----------- ------------ Net cash used in investing activities ............. (13,109) (85,119) (92,297) Cash flows from financing activities: Proceeds from sale of common stock ................... 124,002 -- -- Proceeds from sale of preferred stock ................ -- 1,180,106 2,000,059 Purchase of treasury shares .......................... -- (6,600) -- Proceeds from note payable ........................... -- -- 450,000 Net proceeds from (payments on) line of credit ....... 10,000 (10,000) 19,583 Net proceeds from (payments on) note payable to officer ............................................. 56,000 30,446 (86,446) ---------- ----------- ------------ Net cash provided by financing activities ......... 190,002 1,193,952 2,383,196 ---------- ----------- ------------ Net increase (decrease) in cash ....................... 37,546 493,554 (107,552) Cash and cash equivalents, beginning of period ........ -- 37,546 531,100 ---------- ----------- ------------ Cash and cash equivalents, end of period .............. $ 37,546 $ 531,100 $ 423,548 ========== =========== ============ Supplemental cash flow information: Cash paid for interest ............................... $ -- $ 10,331 $ 15,284 ========== =========== ============ Period From Inception (February 28, Quarter Ended Quarter Ended 1995) To March 31, March 31, March 31, 1997 1998 1998 --------------- --------------- ---------------- (unaudited) (unaudited) (unaudited) Cash flows from operating activities: Net loss ............................................. $ (523,134) $ (444,726) $ (3,856,172) Adjustments to reconcile net loss to net cash used in operating activities-- ........................... Depreciation ........................................ 3,815 15,001 61,074 Compensation expense on stock grants ................ -- -- 20,700 Changes in operating assets and liabilities: Accounts receivable ................................ (100) (63,731) (87,499) Other current assets ............................... (19,192) (6,399) (13,568) Accounts payable and accrued expenses .............. 101,677 82,370 304,903 ---------- ---------- ------------ Net cash used in operating activities ............. (436,934) (417,485) (3,570,562) Cash flows from investing activities: Purchases of property and equipment .................. (50,749) -- (190,525) ---------- ---------- ------------ Net cash used in investing activities ............. (50,749) -- (190,525) Cash flows from financing activities: Proceeds from sale of common stock ................... -- -- 124,002 Proceeds from sale of preferred stock ................ -- -- 3,180,165 Purchase of treasury shares .......................... -- -- (6,600) Proceeds from note payable ........................... -- -- 450,000 Net proceeds from (payments on) line of credit ....... -- (2,388) 17,195 Net proceeds from (payments on) note payable to officer ............................................. (28,101) -- -- ---------- ---------- ------------ Net cash provided by financing activities ......... (28,101) (2,388) 3,764,762 ---------- ---------- ------------ Net increase (decrease) in cash ....................... (515,784) (419,873) 3,675 Cash and cash equivalents, beginning of period ........ 531,100 423,548 -- ---------- ---------- ------------ Cash and cash equivalents, end of period .............. $ 15,316 $ 3,675 $ 3,675 ========== ========== ============ Supplemental cash flow information: Cash paid for interest ............................... $ 1,928 $ 6,626 $ 32,241 ========== ========== ============
The accompanying notes are an integral part of these statements. F-42 INTELLIGENT INTERACTIONS CORPORATION NOTES TO FINANCIAL STATEMENTS As of December 31, 1997 and 1996 and As of March 31, 1998 (unaudited) (All information subsequent to December 31, 1997 is Unaudited) (1) Business Description and Risk Factors Intelligent Interactions Corporation (the "Company"), was incorporated on February 28, 1995, in the state of Delaware. The Company is developing the Intelligent Programming Engine (IPE[TM]), an enabling technology necessary to ensure the economic viability of the information super highway. The IPE[TM] provides targeted content delivery through interactive on-line networks. The Company is in the development stage and has a limited operating history, has incurred operating losses since its inception, and expects losses to continue and increase. Since its inception, the Company has been engaged in development and organizational efforts, including development of its IPE[TM] software technology; creation of development and deployment plans; and recruitment of administrative, technical, and business development staff. Many of the Company's current and potential competitors have substantially greater financial and technological resources, sales and marketing capabilities, and experience than the Company. The Company's success will depend on the continued service of its management team and technical personnel. There can be no assurance that the Company will be successful in the development or commercialization of its services. In April 1998, the Company was acquired by 24/7 Media, Inc. ("24/7 Media" See Note 8). 24/7 Media has committed to fund the future operations of Intelligent Interactions. Common Stock Split Pursuant to the amendment of its certificate of incorporation in 1996, the Company exchanged existing outstanding common stock for 241,170 shares of $0.01 par value common stock completing a 10 to 1 stock split. All amounts have been restated to reflect the 10 to 1 stock split and change in par value. (2) Summary of Significant Accounting Policies Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Cash and Cash Equivalents The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. Included in cash and cash equivalents are investments in a money market account. Property and Equipment Property and equipment are stated at cost. Depreciation is calculated using the straight-line method over a three-year period. Depreciation expense for 1996 and 1997 was $9,352 and $34,536, respectively. Income Taxes The Company accounts for income taxes under Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes," which requires recognition of deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the financial statements or income tax returns. Under this method, deferred tax liabilities and assets are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Management has established a valuation reserve against the net deferred tax asset related primarily to the Company's net operating loss carryforward. The Company, with the consent of its stockholders, had previously elected under the Internal Revenue Code to be an "S" corporation, effective February 28, 1995. In lieu of corporate income taxes, the stockholders of an F-43 INTELLIGENT INTERACTIONS CORPORATION NOTES TO FINANCIAL STATEMENTS--(Continued) As of December 31, 1997 and 1996 and As of March 31, 1998 (unaudited) (All information subsequent to December 31, 1997 is Unaudited) (2) Summary of Significant Accounting Policies --Continued "S" corporation are taxed on their proportionate shares of the Company's taxable income. No provision or liability for income taxes has been included in the financial statements for the period of time that the Company was a Subchapter "S" corporation. The Company terminated the Subchapter "S" election, by the admittance of a nonqualified stockholder, on September 10, 1996. Revenue Recognition Revenue from software licenses and software support agreements is recognized ratably over the term of the agreement. Revenue from consulting services is recognized as the services are provided. The American Institute of Certified Public Accountants (the "AICPA") has issued a Statement of Position (the "SOP") SOP-97-2, "Software Revenue Recognition," and is effective for fiscal years beginning after December 15, 1997. The Company adopted SOP-97-2 effective January 1, 1998 and the adoption did not have a material impact on the Company. Product Development Costs Product development costs and enhancements to existing products are charged to operations as incurred. Software development costs are required to be capitalized when a product's technological feasibility has been established by completion of a working model of the product and ending when a product is available for general release to customers. To date, completion of a working model of the Company's products and general release have substantially coincided. As a result, the Company has not capitalized any software development costs since such costs have not been significant. Unaudited Interim Financial Statements The accompanying balance sheet as of March 31, 1998 and the accompanying statements of operations stockholders' deficit and cash flows for the three months ended March 31, 1997 and 1998 included herein have been prepared by the Company and are unaudited. The information furnished in the unaudited financial statements referred to above includes all adjustments which are, in the opinion of management, necessary for a fair presentation of such financial statements. The results of operations for the three months ended March 31, 1998 are not necessarily indicative of the results to be expected for the entire fiscal year. Increase in Authorized Shares In March 1998, the Board of Directors increased the authorized stock of the company to consist of 930,000 shares of common stock, $0.01 par value, and 78,304 shares of Series AAA Preferred Stock, no par value. All share amounts in the accompanying financial statements reflect the increase in authorized shares. Reclassifications Certain reclassifications of prior year amounts have been made to conform to the December 31, 1997 presentation. (3) Line of Credit and Note Payable The Company maintains a line of credit with a bank in the amount of $50,000. The agreement with the bank provides for a floating interest rate of prime plus 2 percent, which was 10.25 and 10.50 percent as of December 31, 1996 and 1997, respectively. Borrowings are secured by government securities belonging to a founder of the Company. The line of credit expires in September 1998. There were no borrowings outstanding at December 31, 1996 and 1997. F-44 INTELLIGENT INTERACTIONS CORPORATION NOTES TO FINANCIAL STATEMENTS--(Continued) As of December 31, 1997 and 1996 and As of March 31, 1998 (unaudited) (All information subsequent to December 31, 1997 is Unaudited) (3) Line of Credit and Note Payable --Continued In January 1997, the Company obtained an additional line of credit with a bank in the amount of $400,000. The agreement with the bank provides for a floating interest rate of prime plus one and a half percent which was 10 percent at December 31, 1997. Borrowings are secured by all assets of the Company. The line of credit expires on July 31, 1998. As of December 31, 1997, borrowings of $19,583 were outstanding. The line was repaid and cancelled in April 1998. During 1995, the Company borrowed $56,000 from the Company's founder and principal stockholder. The note was originally due in December 1996 and accrued interest at an annual rate of 10 percent, which was to be paid quarterly. During 1996, the Company borrowed an additional $55,500 from the Company's founder and principal stockholder. All amounts outstanding at September 6, 1996, under these notes as well as the 1995 note, plus accrued interest on those amounts were converted into one instrument in the amount of $113,856. Principal and interest at the annual rate of 10 percent is due monthly over a 12 month period that began in October 1996. During 1996, the Company paid $27,410 and $7,052 in principal and interest, respectively, on this obligation. During 1997, the balance of $86,446 and $3,642 in principal and interest, respectively, was paid on this obligation. During 1997, the Company received an aggregate of $450,000 in proceeds from the issuance of convertible notes payable, bearing an interest rate of 9.5 percent per annum. The notes, and accrued interest, are due on June 29, 1998. The notes are convertible into any new series of preferred stock ("New Series") issued by the Company through June 29, 1998. If the Notes are not so converted within this period, thereafter, each holder of the notes will have the right to convert the principal and interest of its note into the Series AAA Preferred stock with a purchase price of $20.53. The Notes were converted as a result of the Merger (Note 8). (4) Stockholders' Equity Common Stock In September 1996, the Company amended its certificate of incorporation to increase the number of authorized shares of common stock from 25,000 to 900,000 shares, as well as to effect a 10 for 1 stock split. Common shares are subject to repurchase by the Company under certain circumstances. In the event a stockholder terminates employment with the Company, the Company may elect to repurchase any or all of the shares at the higher of the employee's original purchase price per share or fair market value. To the extent the employee's shares are not fully vested, the Company may elect to repurchase any or all of the unvested shares at the employee's original purchase price. The Company also has the right of first refusal to purchase a stockholder's shares for the price offered to the stockholder in the event a stockholder elects to sell his or her shares. This right of first refusal and repurchase upon termination expires in the event of an initial public offering of the Company's stock. Preferred Stock In 1996, the Company issued 71,870 shares of Series A Convertible, Redeemable and Voting Preferred Stock ("Series A Preferred Stock") at $16.42 per share. The Preferred Stock is redeemable at any time after September 10, 2003, upon written request from not less than 67 percent of the outstanding Preferred stockholders at the time of the request. The redemption price shall be paid in cash equal to the original issue price per share ($16.42) plus any accrued but unpaid dividends. Dividends are cumulative and accrue at the rate of 8 percent per share per annum. In April 1997, the Company issued 54,l42 shares of Series AA Convertible, Redeemable and Voting Preferred Stock ("Series AA Preferred Stock") at $18.47 per share. The Series AA Preferred Stock is redeemable at any time after April 16, 2004, upon written request from not less than 67 percent of the outstanding Preferred stockholders at the time of request. The redemption price shall be paid in cash equal to the original price per share ($18.47) plus any accrued but unpaid dividends. Dividends are cumulative and accrue at the rate of 8 percent per share per annum. F-45 INTELLIGENT INTERACTIONS CORPORATION NOTES TO FINANCIAL STATEMENTS--(Continued) As of December 31, 1997 and 1996 and As of March 31, 1998 (unaudited) (All information subsequent to December 31, 1997 is Unaudited) (4) Stockholders' Equity --Continued In August 1997, the Company issued 48,712 shares of Series AAA Convertible, Redeemable and Voting Preferred Stock ("Series AAA Preferred Stock") at $20.53 per share. The Series AAA Preferred Stock is redeemable at any time after August 11, 2004, upon written request from not less than 67 percent of the outstanding Preferred stockholders at the time of request. The redemption price shall be paid in cash equal to the original price per share ($20.53) plus any accrued but unpaid dividends. Dividends are cumulative and accrue at the rate of 8 percent per share per annum. The Series A, Series AA, and Series AAA (collectively, "Preferred Stock") automatically converts to common stock at an initial ratio of 1 to 1 upon a firm commitment of an underwritten public offering, at not less than $65.68 per share or $10,000,000 in aggregate proceeds. The conversion ratio is adjustable for certain future dilutive events. Conversion to common stock can also occur upon written request of 67 percent of the outstanding Preferred stockholders. In the event of liquidation, dissolution, or winding up of the Company, the holders of each share of Preferred Stock will be paid out prior to and in preference of holders of common stock in an amount equal to the original issue price ($16.42 for Series A, $18.47 for Series AA, and $20.53 for Series AAA) plus all declared but unpaid dividends. Warrants The convertible notes payable contained detachable warrants which can be exercised after the first to occur of the conversion of the notes into the New Series or June 29, 1998. If the Notes convert into the New Series, the warrants will be exercisable for the New Series at the same price as those received by the New Series. If the Notes do not convert into the New Series by June 29, 1998, the warrants will thereafter be exercisable for the Series AAA Preferred Stock at a purchase price of $20.53. Such warrants will expire within five years of the agreement. The aggregate purchase price payable upon full exercise of the warrants equals $157,500 and the number of shares issuable upon full exercise equals the aggregate purchase price divided by the purchase price per share under the warrants. The warrants were deemed to have no value and were terminated as a result of the Merger (Note 8). 1996 Stock Option Plan The Company has issued stock options to its employees under the 1996 Equity Incentive Plan. These options were issued at fair market value at the date of grant. These options are summarized as follows:
Weighted Average Option Number Exercise Price of Shares Price Per Share ----------- ---------- ----------------- Company inception ............................. -- $ -- $ -- Granted ....................................... 70,700 1.09 0.60 -- 1.65 Exercised ..................................... -- -- -- Forfeited ..................................... (10,000) 1.09 0.60 ------- ------ ------ Balance at December 31, 1996 .................. 60,700 1.09 0.60 -- 1.65 Granted ....................................... 22,500 1.77 1.65 -- 2.05 Exercised ..................................... -- -- -- Forfeited ..................................... (24,000) 1.65 1.65 ------- ------ ------ Balance at December 31, 1997 .................. 59,200 $ 1.20 $0.60 -- 2.05 Granted ....................................... 2,000 2.05 2.05 Exercised ..................................... -- -- -- Forfeited ..................................... (9,600) 1.65 1.65 ------- ------ ------ Balance at March 31, 1998 (unaudited) ......... 51,600 $ 1.15 $0.60 -- 2.05 ======= ====== ===============
F-46 INTELLIGENT INTERACTIONS CORPORATION NOTES TO FINANCIAL STATEMENTS--(Continued) As of December 31, 1997 and 1996 and As of March 31, 1998 (unaudited) (All information subsequent to December 31, 1997 is Unaudited) (4) Stockholders' Equity --Continued No options are exercisable at December 31, 1996 and 1997. The weighted average remaining life for options outstanding at December 31, 1996 and 1997, was 7.14 years and 6.47 years, respectively, and at March 31, 1998 was 6.11 years. In October 1995, the Financial Accounting Standards Board ("FASB") issued SFAS No. 123, "Accounting for Stock-Based Compensation." SFAS No. 123 defines a "fair value based method" of accounting for an employee stock option or similar equity instrument. Under the fair value based method, compensation cost is measured at the grant date based on the value of the award and is recognized over the service period. SFAS No. 123 allows an entity to continue to use the intrinsic value method as defined by APB Opinion No. 25, "Accounting for Stock Issued to Employees," and management has elected to do so. Under the intrinsic value method, compensation cost is the excess, if any, of the quoted market price of the stock at grant date or other measurement date over the amount an employee must pay to acquire the stock. However, entities electing to remain with the accounting in APB Opinion No. 25 must make pro forma disclosures of net income and earnings per share, as if the fair value based method of accounting had been applied. Accordingly, net loss would be as follows:
As Reported Pro Forma Year Ended Net Loss Net Loss - ----------------- --------------- -------------- 1996 ......... $ (695,516) $ (701,914) 1997 ......... (2,561,201) (2,564,751)
The fair value of each option is estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions used for grants in 1996 and 1997: no dividend yield, zero percent volatility, risk-free interest rates approximating 6 percent, and the estimated life of the option is the contractual term of the option. The weighted-average grant date fair value of the options outstanding at December 31, 1996 and 1997, was approximately $0.45 and $0.50, respectively. (5) Commitments In January 1997, the Company entered into a noncancelable operating lease for office space that expires April 30, 1998. Minimum lease payments required under this lease are $23,576 in 1998. Total rent paid in 1996 and 1997 was $27,086 and $69,000, respectively. (6) Income Taxes As of December 31, 1996 and 1997, the Company had net operating loss carryforwards for Federal income tax purposes of approximately $213,000 and $3,082,000, respectively, that begin expiring in 2011. Net operating loss carryforwards are subject to review and possible adjustment by the Internal Revenue Service and may be limited in the event of significant changes in the ownership of the Company. SFAS No. 109 requires that the tax benefit of financial reporting net operating losses and tax credits be recorded as an asset to the extent that management assesses the utilization of such net operating losses and tax credits to be "more likely than not." As of December 31, 1996 and 1997, the Company's net deferred tax assets were approximately $81,000 and $1,171,000, respectively, which consists primarily of the net operating loss carryforward and a valuation reserve was recorded against the entire amount. F-47 INTELLIGENT INTERACTIONS CORPORATION NOTES TO FINANCIAL STATEMENTS--(Continued) As of December 31, 1997 and 1996 and As of March 31, 1998 (unaudited) (All information subsequent to December 31, 1997 is Unaudited) (7) Accrued Expenses Accrued expenses consists of the following as of:
December 31, March 31, 1996 1997 1998 ---------- ---------- ------------ (unaudited) Vacation ..................... $13,808 $ 33,809 $ 23,685 Accrued Compensation ......... -- 20,000 26,000 Professional Fees ............ -- 36,000 73,000 Travel Expenses .............. -- 21,425 36,042 Other ........................ 22,376 10,757 24,375 ------- -------- -------- $36,184 $121,991 $183,102 ======= ======== ========
(8) Intelligent Interactions Acquisition During April 1998, 24/7 Media, Inc. ("24/7 Media") acquired all of the outstanding stock of Intelligent Interactions (the "Merger"). Upon consummation of the Merger, each share of common stock of Intelligent Interactions was converted into approximately 16.3 shares of common stock, 2.3 Class A Warrants, 2.3 Class B Warrants and 1.2 Class C Warrants of 24/7 Media. Each share of Preferred Stock, Series A Preferred Stock, Series AA Preferred Stock or Series AAA Preferred Stock of Intelligent Interactions was converted to approximately 18 shares of Mandatorily Redeemable Convertible Preferred Stock--Series A, par value $.01 per share, 2.7 Class A Warrants, 2.7 Class B Warrants and 1.4 Class C Warrants of 24/7 Media. The convertible note payable was also converted into Mandatorily Redeemable Convertible Preferred Stock--Series A and the detachable warrants were terminated as a result of the merger. In addition, each option to purchase shares of common stock of Intelligent Interactions was converted into an option to purchase approximately 16 shares of common stock of 24/7 Media under the terms and pursuant to the conditions of the 24/7 Media 1998 Stock Incentive Plan. F-48 ================================================================================ No dealer, salesperson or other individual has been authorized to give any information or make any representations not contained in this Prospectus. If given or made, such information or representations must not be relied upon as having been authorized by the Company or the Underwriters. This Prospectus does not constitute an offer to sell, or a solicitation of an offer to buy, the Common Stock in any jurisdiction where, or to any person to whom, it is unlawful to make such offer or solicitation. Neither the delivery of this Prospectus nor any sale made hereunder shall, under any circumstances, create any implication that there has not been any change in the facts set forth in this Prospectus or in the affairs of the Company since the date hereof. ---------------------------------- TABLE OF CONTENTS
Page ---------- Prospectus Summary ............................ 1 Risk Factors .................................. 5 Use of Proceeds ............................... 14 Dividend Policy ............................... 14 Capitalization ................................ 15 Dilution ...................................... 16 Selected Pro Forma Consolidated Financial Data ............................. 17 Selected Consolidated Financial Data .......... 18 Management's Discussion and Analysis of Financial Condition and Results of Operations ................................. 19 Business ...................................... 26 Management .................................... 36 Certain Transactions .......................... 43 Security Ownership of Certain Beneficial Owners and Management ........................ 45 Description of Capital Stock .................. 47 Shares Eligible For Future Sale ............... 50 Underwriting .................................. 51 Legal Matters ................................. 53 Experts ....................................... 53 Available Information ......................... 53 Index to Financial Statements ................. F-1
Until , 1998 (days after the commencement of this offering), all dealers that effect transactions in the Common Stock, whether or not participating in this offering, may be required to deliver a Prospectus. This requirement is in addition to the obligation of dealers to deliver a Prospectus when acting as Underwriters or with respect to their unsold allotments or subscriptions. ================================================================================ ================================================================================ Shares [LOGO] 24/7 Media, Inc. Common Stock ---------------------------------- P R O S P E C T U S ---------------------------------- Merrill Lynch & Co. Allen & Company Incorporated J.P. Morgan & Co. , 1998 ================================================================================ Part II INFORMATION NOT REQUIRED IN THE PROSPECTUS Item 13. Other Expenses of Issuance and Distribution. The following table sets forth the estimated expenses and costs (other than underwriting discounts and commissions) expected to be incurred by the Company in connection with the issuance and distribution of the securities being registered, all of which will be paid by the Registrant. SEC registration fee ...................... $ 13,570 NASD fee .................................. 7,000 Nasdaq Listing Fee ........................ 50,000 Legal fees and expenses ................... 300,000 Printing and engraving expenses ........... 175,000 Accounting fees and expenses .............. 300,000 Blue Sky fees and expenses ................ 15,000 Transfer agent and registrar fees ......... 5,000 Miscellaneous ............................. 59,430 ---------- Total ................................... $1,000,000 ==========
Item 14. Indemnification of Directors and Officers. The General Corporation Law of the State of Delaware ("DGCL") permits the Company and its stockholders to limit directors' exposure to liability for certain breaches of the directors' fiduciary duty, either in a suit on behalf of the Company or in an action by stockholders of the Company. The Certificate of Incorporation of the Company (the "Charter") eliminates the liability of directors to stockholders or the Company for monetary damages arising out of the directors' breach of their fiduciary duty of care. The Charter also authorizes the Company to indemnify its directors, officers, incorporators, employees, and agents with respect to certain costs, expenses, and amounts incurred in connection with an action, suit, or proceeding by reason of the fact that such person was serving as a director, officer, incorporator, employee, or agent of the Company. In addition, the Charter permits the Company to provide additional indemnification rights to its officers and directors and to indemnify them to the greatest extent possible under the DGCL. The Company has entered into indemnification agreements with each of its officers and directors and intends to enter into indemnification agreements with each of its future officers and directors. Pursuant to such indemnification agreements, the Company has agreed to indemnify its officers and directors against certain liabilities, including liabilities arising out of the offering made by this registration statement. The Company maintains a standard form of officers' and directors' liability insurance policy which provides coverage to the officers and directors of the Company for certain liabilities, including certain liabilities which may arise out of this registration statement. The Underwriting Agreement filed as Exhibit 1.1 hereto provides for reciprocal indemnification between the Company and its controlling persons, on the one hand, and the Underwriters and their controlling persons, on the other hand, against certain liabilities in connection with this offering, including liabilities under the Securities Act. Item 15. Recent Sales of Unregistered Securities The Registrant has sold and issued the following securities within the past three years. The below securities were offered and sold by the Registrant in reliance upon exemptions from registration pursuant to either (i) Section 4(2) of the Securities Act, as transactions not involving any public offering, or (ii) Rule 701 under the Securities Act. No underwriters were involved in connection with any sales referred to in this Item 15. During 1996, the Registrant issued 1,374,830 shares of common stock to certain investors, including Michael P. Paolucci and The Travelers Insurance Company for an aggregate purchase price of $4,525,000. In August 1996, the Registrant issued convertible subordinated notes in the principal amount of $500,000, convertible into common stock at a price of $2.87 per share and warrants to purchase 26,132 shares of common stock at a price of $2.87 per share. II-1 In November 1996, the Registrant completed a private placement of 140,722 shares of preferred stock, to a group of investors including The Travelers Insurance Company, convertible into common stock at a price of $2.87 per share, subject to anti-dilution adjustment, for an aggregate purchase price of $4,038,722. During 1997, the Registrant received $2,500,000 in proceeds from the issuance of senior convertible notes primarily to affiliates and stockholders of the Company, including The Travelers Insurance Company, bearing an interest rate of 8% compounded semiannually. Each of the notes was issued with detachable warrants allowing the holder to purchase shares of common stock at price ranges ranging from $.40 to $2.09 per share. In January 1997, the Registrant issued 17,422 shares of preferred stock, to a group of investors including The Travelers Insurance Company, convertible into common stock at a price of $2.87 per share, subject to anti-dilution adjustment, for an aggregate purchase price of $500,011. In April 1997, the Registrant granted warrants to purchase 17,500 shares of common stock at $12.43 per share. In January 1998, the Registrant issued $150,000 in senior convertible notes to The Travelers Insurance Company, convertible into 173,282 shares of common stock at $.87 per share. In January 1998, the Registrant granted warrants to purchase 115, 000 shares of common stock to a consultant of the Registrant in consideration of services rendered to the Registrant. In connection with the February 1998 merger of Petry Interactive, Inc and Advercomm. Inc. with and into the Registrant, (i) the Registrant issued 10,494,366 shares of common stock to former shareholders of Petry Interactive, Inc., including David J. Moore, Mark A. Burchill and Scott E. Cohen, and 6,821,335 shares of common stock to former shareholders of Advercomm, Inc., including Jacob I. Friesel and Garrett P. Cecchini; (ii) the Registrant granted a former employee (Michael P. Paolucci) warrants to purchase 2,500,000 shares of common stock at a purchase price of $.952 per share in connection with the termination of such employee's employment with the Registrant; (iii) the registrant issued to certain investors 10,060,002 shares of preferred stock for aggregate proceeds of $10,000,000; (iv) the Registrant granted certain investors warrants to purchase 5,283,614 shares of common stock at $1.904 per share and warrants to purchase 5,383,614 shares of common stock at $2.856 per share; (v) the Registrant granted to consultants warrants to purchase an aggregate of 37,500 shares of common stock at $.952 per share. In connection with the April 1998 acquisition of Intelligent Interactions, Corp., (i) the Registrant issued 3,796,969 shares of common stock to certain former shareholders of Intelligent Interactions Corp., including Yale R. Brown and Matthew B. Walker; (ii) the Registrant issued 3,561,505 shares of preferred stock to certain former shareholders of Intelligent Interactions Corp; (iii) the Registrant granted to certain former shareholders of Intelligent Interactions Corp., including Yale R. Brown and Matthew B. Walker, warrants to purchase 1,060,608 shares of common stock at a purchase price of $1.904 per share, warrants to purchase 1,060,608 shares of common stock at a purchase price of $2.856 per share and warrants to purchase 546,212 shares of common stock at a purchase price of $.952 per share. In April 1998, the Registrant issued 23,634 shares of common stock to consultants in consideration of services rendered to the Registrant. In June 1998, the Company issued to K2 Design, Inc. 3,000 shares of the Company's Series B Convertible Preferred Stock in connection with the acquisition of the CliqNow! division of K2 Design, Inc. The Registrant from time to time has granted stock options to employees in reliance upon an exemption under the Securities Act of 1933 pursuant to Rule 701 promulgated thereunder. From March 1995 through May 1998 an aggregate of 4,103,304 shares of common stock were issued pursuant to option exercises at exercise prices ranging from $0.40 to $2.98 to 139 employees, directors and consultants. II-2 Item 16. Exhibits and Financial Statement Schedule/Index 1.1 *Form of Underwriting Agreement. 3.1 *Amended and Restated Certificate of Incorporation of the Company. 3.2 *By-laws of the Company. 5.1 *Opinion of Proskauer Rose LLP. 10.1 1998 Stock Incentive Plan. 10.3 Lease Agreement, dated April 30, 1998, between the Company and 38-32 Associates. 10.4 Agreement and Plan of Merger dated February 2, 1998 by and among Interactive Imaginations, Inc., 24/7 Acquisition Corp., Petry Interactive, Inc. and Advercomm, Inc. 10.5 Agreement and Plan of Merger dated as of April 9, 1998 by and among 24/7 Media, Inc., Interactions Acquisition Corp. and Intelligent Interactions Corporation and the persons set forth on the signature pages thereto. 10.6 *Asset Purchase Agreement, dated as of June 1, 1998, by and between 24/7 Media, Inc. and K2 Design, Inc. 10.7 Securities Purchase Agreement, dated February 25, 1998, among Interactive Imaginations and certain investors named therein. 10.8 Registration Rights Agreement, dated April 9, 1998 by and among 24/7 Media, Inc., The Travelers Insurance Company, Prospect Street NYC Discovery Fund, L.P., Prospect Street NYC Co-Investment Fund, L.P. , Big Flower Digital Services, Inc., David Banks, Trinity Ventures V, L.P., Trinity V Side-By-Side Fund, L.P., Zero Stage Capital V Limited Partnership, and F&W Investments 1996. 10.9 Employment Agreement between David J. Moore and Interactive Imaginations, Inc., dated February 24, 1998. 10.10 Employment Agreement between Jacob I. Friesel and Interactive Imaginations, Inc., dated February 24, 1998. 10.11 Employment Agreement between Yale R. Brown and 24/7 Media, Inc., dated April 9, 1998. 10.12 Employment Agreement between C. Andrew Johns and 24/7 Media, Inc., dated April 20, 1998. 10.13 Consulting Agreement dated as of January 1, 1998 by and between Interactive Imaginations, Inc. and Neterprises, Inc. 10.14 Confidential Separation Agreement and General Release by and between Michael P. Paolucci and Interactive Imaginations, Inc., dated February 24, 1998. 10.15 Form of Indemnification Agreement. 11.1 *Statement regarding computation of per share earnings. 21.1 Subsidiaries of the Company. 23.1 Consent of KPMG Peat Marwick LLP. 23.2 Consent of Arthur Andersen LLP. 23.3 *Consent of Proskauer Rose LLP (included in Exhibit 5.1). 24.1 Powers of Attorney (included with signature page). 27.1 Financial Data Schedule.
- ---------------- * To be filed by amendment. II-3 Item 17. Undertakings The undersigned Registrant hereby undertakes to provide to the Underwriters at the closing specified in the Underwriting Agreement certificates in such denominations and registered in such names as required by the Underwriters to permit prompt delivery to each purchaser. The undersigned registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of a registrant pursuant to the provisions described in Item 14, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by a registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. II-4 SIGNATURES AND POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENT, that each person or entity whose signature appears below constitutes and appoints David J. Moore, C. Andrew Johns and Mark E. Moran, and each of them, its true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for it and in its name, place and stead, in any and all capacities, to sign any and all amendments, including post-effective amendments, to this Registration Statement on Form S-1 and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done, as fully to all intents and purposes as it might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or any of them, or their or his substitute or substitutes may lawfully do or cause to be done by virtue thereof. Pursuant to the requirements of the Securities Act of 1933, the Registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S-1 and has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the city of New York, State of New York on June 2, 1998. 24/7 MEDIA, INC. By: /s/ David J. Moore ---------------------- David J. Moore Chief Executive Officer Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed below on June 2, 1998 by the persons whose signatures appear below, which persons have signed such Registration Statement in the capacities indicated:
Signature Title - --------------------------- -------------------------------------------------- /s/ David J. Moore Chief Executive Officer and Director - ------------------------- (Principal Executive Officer) David J. Moore /s/ R. Theodore Ammon Chairman of the Board - ------------------------- R. Theodore Ammon /s/ Yale R. Brown Executive Vice President--Technology and Director - ------------------------- Yale R. Brown /s/ Jacob I. Friesel Executive Vice President and Director - ------------------------- Jacob I. Friesel /s/ David Chaney Director - ------------------------- David Chaney /s/ Michael P. Paolucci Director - ------------------------- Michael P. Paolucci /s/ Jack L. Rivkin Director - ------------------------- Jack L. Rivkin /s/ Charles Stryker Director - ------------------------- Charles Stryker /s/ C. Andrew Johns Executive Vice President, Treasurer & Chief - ------------------------- Financial Officer (Principal Financial Officer) C. Andrew Johns /s/ Stuart D. Shaw Controller (Principal Accounting Officer) - ------------------------- Stuart D. Shaw
II-5 Exhibits and Financial Statement Schedule/Index Item 16. Exhibits and Financial Statement Schedule/Index 1.1 *Form of Underwriting Agreement. 3.1 *Amended and Restated Certificate of Incorporation of the Company. 3.2 *By-laws of the Company. 5.1 *Opinion of Proskauer Rose LLP. 10.1 1998 Stock Incentive Plan. 10.2 Form of Stock Option Agreement. 10.3 Lease Agreement, dated April 30, 1998, between the Company and 38-32 Associates. 10.4 Agreement and Plan of Merger dated February 2, 1998 by and among Interactive Imaginations, Inc., 24/7 Acquisition Corp., Petry Interactive, Inc. and Advercomm, Inc. 10.5 Agreement and Plan of Merger dated as of April 9, 1998 by and among 24/7 Media, Inc., Interactions Acquisition Corp. and Intelligent Interactions Corporation and the persons set forth on the signature pages thereto. 10.6 *Asset Purchase Agreement, dated as of June 1, 1998, by and between 24/7 Media, Inc. and K2 Design, Inc. 10.7 Securities Purchase Agreement, dated February 25, 1998, among Interactive Imaginations and certain investors named therein. 10.8 Registration Rights Agreement, dated April 9, 1998 by and among 24/7 Media, Inc., The Travelers Insurance Company, Prospect Street NYC Discovery Fund, L.P., Prospect Street NYC Co-Investment Fund, L.P. , Big Flower Digital Services, Inc., David Banks, Trinity Ventures V, L.P., Trinity V Side-By-Side Fund, L.P., Zero Stage Capital V Limited Partnership, and F&W Investments 1996. 10.9 Employment Agreement between David J. Moore and Interactive Imaginations, Inc., dated February 24, 1998. 10.10 Employment Agreement between Jacob I. Friesel and Interactive Imaginations, Inc., dated February 24, 1998. 10.11 Employment Agreement between Yale R. Brown and 24/7 Media, Inc., dated April 9, 1998. 10.12 Employment Agreement between C. Andrew Johns and 24/7 Media, Inc., dated April 20, 1998. 10.13 Consulting Agreement dated as of January 1, 1998 by and between Interactive Imaginations, Inc. and Neterprises, Inc. 10.14 Confidential Separation Agreement and General Release by and between Michael P. Paolucci and Interactive Imaginations, Inc., dated February 24, 1998. 10.15 Form of Indemnification Agreement. 11.1 *Statement regarding computation of per share earnings. 21.1 Subsidiaries of the Company. 23.1 Consent of KPMG Peat Marwick LLP. 23.2 Consent of Arthur Andersen LLP. 23.3 *Consent of Proskauer Rose LLP (included in Exhibit 5.1). 24.1 Powers of Attorney (included with signature page). 27.1 Financial Data Schedule.
- ---------------- * To be filed by amendment. II-6 EX-10.1 2 1998 STOCK INCENTIVE PLAN 24/7 MEDIA, INC. 1998 STOCK INCENTIVE PLAN TABLE OF CONTENTS
Page ---- ARTICLE I. PURPOSE .......................................1 ARTICLE II. DEFINITIONS ...................................1 ARTICLE III. ADMINISTRATION ................................5 ARTICLE IV. SHARE AND OTHER LIMITATIONS ...................8 ARTICLE V. ELIGIBILITY ..................................10 ARTICLE VI. EMPLOYEE STOCK OPTION GRANTS .................10 ARTICLE VII. RESTRICTED STOCK AWARDS ......................15 ARTICLE VIII. STOCK APPRECIATION RIGHTS ....................17 ARTICLE IX. NON-EMPLOYEE DIRECTOR STOCK OPTION GRANTS ....21 ARTICLE X. NON-TRANSFERABILITY ..........................23 ARTICLE XI. CHANGE IN CONTROL PROVISIONS .................23 ARTICLE XII. TERMINATION OR AMENDMENT OF THE PLAN .........25 ARTICLE XIII. UNFUNDED PLAN ................................26 ARTICLE XIV. GENERAL PROVISIONS ...........................26 ARTICLE XV. TERM OF PLAN .................................29 ARTICLE XVI. NAME OF PLAN .................................29
i 24/7 MEDIA. INC. 1998 Stock Incentive Plan ARTICLE I. PURPOSE The purpose of this 24/7 Media, Inc. 1998 Stock Incentive Plan, (the "Plan"), is to enhance the profitability and value of 24/7 Media, Inc. (the "Company") for the benefit of its stockholders by enabling the Company (i) to offer employees and consultants of the Company and its Affiliates stock based incentives and other equity interests in the Company, thereby creating a means to raise the level of stock ownership by employees and consultants in order to attract, retain and reward such employees and consultants and strengthen the mutuality of interests between employees or consultants and the Company's stockholders and (ii) to offer equity based awards to non-employee directors thereby attracting, retaining and rewarding such non-employee directors and strengthening the mutuality of interests between non-employee directors and the Company's stockholders. This Plan subsumes and replaces in its entirety the Amended and Restated 1995 Stock Option Plan (the "1995 Plan") adopted by the Company's Board of Directors, and subsequently adopted by the Company's shareholders at the Company's Annual Meeting of Shareholders on March 8, 1996, and all Options granted under the 1995 Plan will continue to be outstanding Options under the Plan. The Plan was originally effective February 13, 1998. It has been amended and restated in the form set forth herein effective February 13, 1998, conditioned upon the approval of the Company's Board of Directors and the Company's stockholders within twelve (12) months of the effective date. ARTICLE II. DEFINITIONS For purposes of this Plan, the following terms shall have the following meanings: 2.1. "Affiliate" shall mean other than the Company, (i) any corporation in an unbroken chain of corporations beginning with the Company, or in the event the Company is a subsidiary within the meaning of Code Section 424(f), beginning with the Company's parent within the meaning of Code Section 424(e), which owns stock possessing fifty percent (50%) or more of the total combined voting power of all classes of stock in one of the other corporations in such chain; (ii) any corporation, trade or business (including, without limitation, a partnership or limited liability company) which is controlled fifty percent (50%) or more (whether by ownership of stock, assets or an equivalent ownership interest or voting interest) by the Company or one of its Affiliates; or (iii) any other entity, approved by the Committee as an Affiliate under the Plan, in which the Company or any of its Affiliates has a material equity interest. 2.2. " "Award" shall mean any award under this Plan of any Stock Option, Stock Appreciation Right or Restricted Stock. All Awards shall be confirmed by, and subject to the terms of, a written agreement executed by the Company and the Participant. 2.3. "Board" shall mean the Board of Directors of the Company. 2.4. "Cause" shall mean, with respect to a Participant's Termination of Employment or Termination of Consultancy, unless otherwise determined by the Committee at grant, or, if no rights of the Participant are reduced, thereafter, termination due to a Participant's dishonesty, fraud, insubordination, willful misconduct, refusal to perform services (for any reason other than illness or incapacity) or materially unsatisfactory performance of his or her duties for the Company as determined by the Committee in its sole discretion. With respect to a Participant's Termination of Directorship, Cause shall mean an act or failure to act that constitutes "cause" for removal of a director under applicable state corporate law. 2.5. "Change in Control" shall have the meaning set forth in Article XI. 2.6. "Code" shall mean the Internal Revenue Code of 1986, as amended. Any reference to any section of the Code shall also be a reference to any successor provision. 2.7. "Committee" shall mean a committee of the Board that may be appointed from time to time by the Board. To the extent determined appropriate by the Board, such committee shall consist of two or more non-employee directors, each of whom shall be a non-employee director as defined in Rule 16b-3 and an outside director as defined under Section 162(m) of the Code. To the extent that no Committee exists which has the authority to administer the Plan, the functions of the Committee shall be exercised by the Board. If for any reason the appointed Committee does not meet the requirements of Rule 16b-3 or Section 162(m) of the Code, such noncompliance with the requirements of Rule 16b-3 or Section 162(m) of the Code shall not affect the validity of the awards, grants, interpretations or other actions of the Committee. 2.8. "Common Stock" means the Common Shares, $.01 par value per share, of the Company. 2.9. "Consultant" shall mean any advisor or consultant to the Company or an Affiliate who is eligible pursuant to Article V to be granted Awards under this Plan. 2.10. "Disability" shall mean total and permanent disability, as defined in Section 22(e)(3) of the Code. 2.11. "Effective Date" shall mean February 13, 1998. 2.12. "Eligible Employees" shall mean the employees of the Company and its Subsidiaries who are eligible pursuant to Article V to be granted Awards under this Plan. Notwithstanding the foregoing, with respect to the grant of Incentive Stock Options, Eligible 2 Employees shall mean the employees of the Company, its Subsidiaries and its parent (within the meaning of Code Section 424(e)) who are eligible pursuant to Article V to be granted Stock Options under the Plan. 2.13. "Exchange Act" shall mean the Securities Exchange Act of 1934. 2.14. "Fair Market Value" for purposes of this Plan, unless otherwise required by any applicable provision of the Code or any regulations issued thereunder, shall mean, as of any date, the last sales price reported for the Common Stock on the applicable date (i) as reported by the principal national securities exchange in the United States on which it is then traded or the Nasdaq Stock Market, Inc., or (ii) if not traded on any such national securities exchange or the Nasdaq Stock Market, Inc., as quoted on an automated quotation system sponsored by the National Association of Securities Dealers. If the Common Stock is not readily tradable on a national securities exchange, the Nasdaq Stock Market, Inc. or any system sponsored by the National Association of Securities Dealers, its Fair Market Value shall be set in good faith by the Committee. For purposes of the grant of any Award, the applicable date shall be the date on which the Award is granted or, in the case of a Stock Appreciation Right, the date a notice of exercise is received by the Committee or, if the sale of Common Stock shall not have been reported or quoted on such date, the first day prior thereto on which the sale of Common Stock was reported or quoted. 2.15. "Good Reason" shall mean, with respect to a Participant's Termination of Employment or Termination of Consultancy unless otherwise determined by the Committee at grant, or, if no rights of the Participant are reduced, thereafter, a voluntary termination due to "good reason," as the Committee, in its sole discretion, decides to treat as a Good Reason termination. 2.16. "Incentive Stock Option" shall mean any Stock Option awarded under this Plan intended to be and designated as an "Incentive Stock Option" within the meaning of Section 422 of the Code. 2.17. "Non-Qualified Stock Option" shall mean any Stock Option awarded under this Plan that is not an Incentive Stock Option. 2.18. "Participant" shall mean the following persons to whom an Award has been made pursuant to this Plan: Eligible Employees of the Company and its Subsidiaries non-employee directors of the Company; provided, however, that non-employee directors shall be Participants for purposes of the Plan solely with respect to awards of Stock Options pursuant to Article IX. 2.19. "Restricted Stock" shall mean an award of shares of Common Stock under the Plan that is subject to restrictions under Article VII. 2.20. "Restriction Period" shall have the meaning set forth in Subsection 7.3(a) with respect to Restricted Stock for Eligible Employees. 3 2.21. "Retirement" with respect to a Participant's Termination of Employment or Termination of Consultancy, shall mean a Termination of Employment or Termination of Consultancy without Cause from the Company by a Participant who has attained (i) at least age sixty-five (65); or (ii) such earlier date after age fifty-five (55) as approved by the Committee with regard to such Participant. With respect to a Participant's Termination of Directorship, Retirement shall mean the failure to stand for reelection or the failure to be reelected after a Participant has attained age sixty-five (65). 2.22. "Rule 16b-3" shall mean Rule 16b-3 under Section 16(b) of the Exchange Act as then in effect or any successor provisions. 2.23. "Section 162(m) of the Code" shall mean the exception for performance-based compensation under Section 162(m) of the Code and any Treasury regulations thereunder. 2.24. "Stock Appreciation Right" shall mean the right pursuant to an Award granted under Article VIII. A Tandem Stock Appreciation Right shall mean the right to surrender to the Company all (or a portion) of a Stock Option in exchange for an amount in cash or stock equal to the excess of (i) the Fair Market Value, on the date such Stock Option (or such portion thereof) is surrendered, of the Common Stock covered by such Stock Option (or such portion thereof), over (ii) the aggregate exercise price of such Stock Option (or such portion thereof). A Non-Tandem Stock Appreciation Right shall mean the right to receive an amount in cash or stock equal to the excess of (x) the Fair Market Value of a share of Common Stock on of the date such right is exercised, over (y) the aggregate exercise price of such right, otherwise than on surrender of a Stock Option. 2.25. "Stock Option" or "Option" shall mean any Option to purchase shares of Common Stock granted to Eligible Employees pursuant to Article VI. 2.26. "Subsidiary" shall mean any corporation that is defined as a subsidiary corporation in Section 424(f) of the Code. 2.27. "Ten Percent Stockholder" shall mean a person owning Common Stock of the Company possessing more than ten percent (10%) of the total combined voting power of all classes of stock of the Company as defined in Section 422 of the Code. 2.28. "Termination of Consultancy" shall mean, with respect to an individual, that the individual is no longer acting as a Consultant to the Company or an Affiliate. In the event an entity shall cease to be an Affiliate, there shall be deemed a Termination of Consultancy of any individual who is not otherwise a Consultant of the Company or another Affiliate at the time the entity ceases to be an Affiliate. 2.29. "Termination of Directorship" shall mean, with respect to a non-employee director, that the non-employee director has ceased to be a director of the Company. 4 2.30. "Termination of Employment," except as provided in the next sentence, shall mean (i) a termination of service (for reasons other than a military or personal leave of absence granted by the Company) of a Participant from the Company and its Affiliates; or (ii) when an entity which is employing a Participant ceases to be an Affiliate, unless the Participant thereupon becomes employed by the Company or another Affiliate. The Committee may otherwise define Termination of Employment in the Option grant or, if no rights of the Participant are reduced, may otherwise define Termination of Employment thereafter, including, but not limited to, defining Termination of Employment with regard to entities controlling, under common control with or controlled by the Company rather than just the Company and its Affiliates and/or entities that provide substantial services to the Company or its Affiliates to which the Participant has transferred directly from the Company or its Affiliates at the request of the Company. 2.31. "Transfer" or "Transferred" shall mean anticipate, alienate, attach, sell, assign, pledge, encumber, charge or otherwise transfer. 2.32. "Withholding Election" shall have the meaning set forth in Section 14.4. ARTICLE III. ADMINISTRATION 3.1. The Committee. The Plan shall be administered and interpreted by the Committee. 3.2. Awards. The Committee shall have full authority to grant, pursuant to the terms of this Plan, (i) Stock Options, (ii) Stock Appreciation Rights, both Tandem and Non-Tandem and (iii) Restricted Stock to Eligible Employees and Consultants. Stock Options may be granted to non-employee directors of the Company pursuant to Article IX. In particular, the Committee shall have the authority: (a) to select the Eligible Employees and Consultants to whom Stock Options, Stock Appreciation Rights and Restricted Stock may from time to time be granted hereunder; (b) to determine whether and to what extent Stock Options, Stock Appreciation Rights and Restricted Stock or any combination thereof, are to be granted hereunder to one or more Eligible Employees or Consultants; (c) to determine, in accordance with the terms of this Plan, the number of shares of Common Stock to be covered by each Award to an Eligible Employee or Consultant granted hereunder; (d) to determine the terms and conditions, not inconsistent with the terms of this Plan, of any Award granted hereunder to an Eligible Employee or Consultant (including, but not limited to, the share price, any restriction or limitation, any vesting schedule or 5 acceleration thereof, or any forfeiture restrictions or waiver thereof, regarding any Stock Option or other Award, and the shares of Common Stock relating thereto, based on such factors, if any, as the Committee shall determine, in its sole discretion); (e) to determine whether and under what circumstances a Stock Option may be settled in cash, Common Stock and/or Restricted Stock under Subsection 6.3(d); (f) to determine whether, to what extent and under what circumstances to provide loans (which shall be on a recourse basis and shall bear a reasonable rate of interest) to Eligible Employees and Consultants in order to exercise Options under the Plan; (g) to modify, extend or renew a Stock Option, subject to Article XII hereof, provided, however, that if a Stock Option is modified, extended or renewed and thereby deemed to be the issuance of a new Stock Option under the Code or the applicable accounting rules, the exercise price of such Stock Option may continue to be the original exercise price even if less than the Fair Market Value of the Common Stock at the time of such modification, extension or renewal; (h) to determine whether a Stock Appreciation Right is Tandem or Non-Tandem; and (i) to determine whether to require an Eligible Employee or Consultant, as a condition of the granting of any Award, to not sell or otherwise dispose of shares acquired pursuant to the exercise of an Option or as an Award for a period of time as determined by the Committee, in its sole discretion, following the date of the acquisition of such Option or Award. 3.3. Guidelines. Subject to Article XII hereof, the Committee shall have the authority to adopt, alter and repeal such administrative rules, guidelines and practices governing this Plan and perform all acts, including the delegation of its administrative responsibilities, as it shall, from time to time, deem advisable; to construe and interpret the terms and provisions of this Plan and any Award issued under this Plan (and any agreements relating thereto); and to otherwise supervise the administration of this Plan. The Committee may correct any defect, supply any omission or reconcile any inconsistency in this Plan or in any agreement relating thereto in the manner and to the extent it shall deem necessary to carry this Plan into effect, but only to the extent any such action would be permitted under the applicable provisions of Rule 16b-3 (if any) and the applicable provisions of Section 162(m) of the Code (if any). The Committee may adopt special guidelines and provisions for persons who are residing in, or subject to, the taxes of, countries other than the United States to comply with applicable tax and securities laws. If and to the extent applicable, this Plan is intended to comply with Section 162(m) of the Code and the applicable requirements of Rule 16b-3 and shall be limited, construed and interpreted in a manner so as to comply therewith. 3.4. Decisions Final. Any decision, interpretation or other action made or taken in good faith by or at the direction of the Company, the Board, or the Committee (or any of its members) arising out of or in connection with the Plan shall be within the absolute discretion of all and each of them, 6 as the case may be, and shall be final, binding and conclusive on the Company and all employees and Participants and their respective heirs, executors, administrators, successors and assigns. 3.5. Reliance on Counsel. The Company, the Board or the Committee may consult with legal counsel, who may be counsel for the Company or other counsel, with respect to its obligations or duties hereunder, or with respect to any action or proceeding or any question of law, and shall not be liable with respect to any action taken or omitted by it in good faith pursuant to the advice of such counsel. 3.6. Procedures. If the Committee is appointed, the Board shall designate one of the members of the Committee as chairman and the Committee shall hold meetings, subject to the By-Laws of the Company, at such times and places as it shall deem advisable. A majority of the Committee members shall constitute a quorum. All determinations of the Committee shall be made by a majority of its members. Any decision or determination reduced to writing and signed by all Committee members in accordance with the By-Laws of the Company shall be fully effective as if it had been made by a vote at a meeting duly called and held. The Committee shall keep minutes of its meetings and shall make such rules and regulations for the conduct of its business as it shall deem advisable. 3.7. Designation of Consultants -- Liability. (a) The Committee may designate employees of the Company and professional advisors to assist the Committee in the administration of the Plan and may grant authority to employees to execute agreements or other documents on behalf of the Committee. (b) The Committee may employ such legal counsel, consultants and agents as it may deem desirable for the administration of the Plan and may rely upon any opinion received from any such counsel or consultant and any computation received from any such consultant or agent. Expenses incurred by the Committee or Board in the engagement of any such counsel, consultant or agent shall be paid by the Company. The Committee, its members and any person designated pursuant to paragraph (a) above shall not be liable for any action or determination made in good faith with respect to the Plan. To the maximum extent permitted by applicable law, no officer of the Company or member or former member of the Committee or of the Board shall be liable for any action or determination made in good faith with respect to the Plan or any Award granted under it. To the maximum extent permitted by applicable law and the Certificate of Incorporation and By-Laws of the Company and to the extent not covered by insurance, each officer and member or former member of the Committee or of the Board shall be indemnified and held harmless by the Company against any cost or expense (including reasonable fees of counsel reasonably acceptable to the Company) or liability (including any sum paid in settlement of a claim with the approval of the Company), and advanced amounts necessary to pay the foregoing at the earliest time and to the fullest extent permitted, arising out of any act or omission to act in connection with the Plan, except to the extent arising out of such officer's, member's or former member's own fraud or bad faith. Such indemnification shall be in addition to any rights of indemnification the officers, directors or members or former officers, directors or members may have under 7 applicable law or under the Certificate of Incorporation or By-Laws of the Company or Affiliate. Notwithstanding anything else herein, this indemnification will not apply to the actions or determi(b) nations made by an individual with regard to Awards granted to him or her under this Plan. ARTICLE IV. SHARE AND OTHER LIMITATIONS 4.1. Shares. (a) General Limitation. The aggregate number of shares of Common Stock which may be issued or used for reference purposes under this Plan or with respect to which other Awards may be granted shall not exceed 8,250,000 shares (subject to any increase or decrease pursuant to Section 4.2) which may be either authorized and unissued Common Stock or Common Stock held in or acquired for the treasury of the Company. If any Option or Stock Appreciation Right granted under this Plan expires, terminates or is canceled for any reason without having been exercised in full or, with respect to Options, the Company repurchases any Option pursuant to Section 6.3(f), the number of shares of Common Stock underlying the repurchased Option, and/or the number of shares of Common Stock underlying any unexercised Stock Appreciation Right or Option shall again be available for the purposes of Awards under the Plan. If a Tandem Stock Appreciation Right or a limited Stock Appreciation Right is granted in tandem with an Option, such grant shall only apply once against the maximum number of shares of Common Stock which may be issued under this Plan. (b) Individual Participant Limitations. (i) The maximum number of shares of Common Stock subject to any Option which may be granted under this Plan to each Participant shall not exceed 750,000 shares (subject to any increase or decrease pursuant to Section 4.2) during each fiscal year of the Company. (ii) There are no annual individual Participant limitations on Restricted Stock. (iii) The maximum number of shares of Common Stock subject to any Stock Appreciation Right which may be granted under this Plan to each Participant shall not exceed 750,000 shares (subject to any increase or decrease pursuant to Section 4.2) during each fiscal year of the Company. If a Tandem Stock Appreciation Right or limited Stock Appreciation Right is granted in tandem with an Option it shall apply against the Participant's individual share limitations for both Stock Appreciation Rights and Options. 4.2. Changes. 8 (a) The existence of the Plan and the Awards granted hereunder shall not affect in any way the right or power of the Board or the stockholders of the Company to make or authorize any adjustment, recapitalization, reorganization or other change in the Company's capital structure or its business, any merger or consolidation of the Company or its Affiliates, any issue of bonds, debentures, preferred or prior preference stock ahead of or affecting Common Stock, the dissolution or liquidation of the Company or its Affiliates, any sale or transfer of all or part of its assets or business or any other corporate act or proceeding. (b) In the event of any such change in the capital structure or business of the Company by reason of any stock dividend or distribution, stock split or reverse stock split, recapitalization, reorganization, merger, consolidation, split-up, combination or exchange of shares, distribution with respect to its outstanding Common Stock or capital stock other than Common Stock, sale or transfer of all or part of its assets or business, reclassification of its capital stock, or any similar change affecting the Company's capital structure or business and the Committee determines an adjustment is appropriate under the Plan, then the aggregate number and kind of shares which thereafter may be issued under this Plan, the number and kind of shares or other property (including cash) to be issued upon exercise of an outstanding Option or other Awards granted under this Plan and the purchase price thereof shall be appropriately adjusted consistent with such change in such manner as the Committee may deem equitable to prevent substantial dilution or enlargement of the rights granted to, or available for, Participants under this Plan or as otherwise necessary to reflect the change, and any such adjustment determined by the Committee shall be binding and conclusive on the Company and all Participants and employees and their respective heirs, executors, administrators, successors and assigns. (c) Fractional shares of Common Stock resulting from any adjustment in Options or Awards pursuant to Section 4.2(a) or (b) shall be aggregated until, and eliminated at, the time of exercise by rounding-down for fractions less than one-half (1/2) and rounding-up for fractions equal to or greater than one-half (1/2). No cash settlements shall be made with respect to fractional shares eliminated by rounding. Notice of any adjustment shall be given by the Committee to each Participant whose Option or Award has been adjusted and such adjustment (whether or not such notice is given) shall be effective and binding for all purposes of the Plan. (d) In the event of a merger or consolidation in which the Company is not the surviving entity or in the event of any transaction that results in the acquisition of substantially all of the Company's outstanding Common Stock by a single person or entity or by a group of persons and/or entities acting in concert, or in the event of the sale or transfer of all of the Company's assets (all of the foregoing being referred to as "Acquisition Events"), then the Committee may, in its sole discretion, terminate all outstanding Options and Stock Appreciation Rights of Eligible Employees and Consultants, effective as of the date of the Acquisition Event, by delivering notice of termination to each such Participant at least twenty (20) days prior to the date of consummation of the Acquisition Event; provided, that during the period from the date on which such notice of termination is delivered to the consummation of the Acquisition Event, each such Participant shall have the 9 right to exercise in full all of his or her Options and Stock Appreciation Rights that are then outstanding (without regard to any limitations on exercisability otherwise contained in the Option or Award Agreements) but contingent on occurrence of the Acquisition Event, and, provided that, if the Acquisition Event does not take place within a specified period after giving such notice for any reason whatsoever, the notice and exercise shall be null and void. If an Acquisition Event occurs, to the extent the Committee does not terminate the outstanding Options and Stock Appreciation Rights pursuant to this Section 4.2(d), then the provisions of Section 4.2(b) shall apply. 4.3. Purchase Price. Notwithstanding any provision of this Plan to the contrary, if authorized but previously unissued shares of Common Stock are issued under this Plan, such shares shall not be issued for a consideration which is less than as permitted under applicable law. ARTICLE V. ELIGIBILITY 5.1. All employees of and Consultants to the Company and its Affiliates are eligible to be granted Non-Qualified Stock Options, Stock Appreciation Rights and Restricted Stock under this Plan. All employees of the Company, its Subsidiaries and its parent (within the meaning of Code Section 424(e)) are eligible to be granted Incentive Stock Options under the Plan. Eligibility under this Plan shall be determined by the Committee. 5.2. Non-employee directors of the Company are only eligible to receive an Award of Stock Options in accordance with Article IX of the Plan. ARTICLE VI. EMPLOYEE STOCK OPTION GRANTS 6.1. Options. Each Stock Option granted hereunder shall be one of two types: (i) an Incentive Stock Option intended to satisfy the requirements of Section 422 of the Code or (ii) a Non-Qualified Stock Option. 6.2. Grants. The Committee shall have the authority to grant to any Eligible Employee one or more Incentive Stock Options, Non-Qualified Stock Options, or both types of Stock Options (in each case with or without Stock Appreciation Rights). The Committee shall have the authority to grant to any Consultant one or more Non-Qualified Stock Options (with or without Stock Appreciation Rights). To the extent that any Stock Option does not qualify as an Incentive Stock Option (whether because of its provisions or the time or manner of its exercise or otherwise), such Stock Option or the portion thereof which does not qualify, shall constitute a separate Non-Qualified Stock Option. 10 6.3. Terms of Options. Options granted under this Plan shall be subject to the following terms and conditions, shall be subject to Section 3.2 hereof and the other provisions of this Plan, and shall be in such form and contain such additional terms and conditions, not inconsistent with the terms of this Plan, as the Committee shall deem desirable: (a) Option Price. The option price per share of Common Stock purchasable under an Incentive Stock Option shall be determined by the Committee at the time of grant but shall not be less than 100% of the Fair Market Value of the share of Common Stock at the time of grant; provided, however, if an Incentive Stock Option is granted to a Ten Percent Stockholder, the purchase price shall be no less than 110% of the Fair Market Value of the Common Stock. The purchase price of shares of Common Stock subject to a Non-Qualified Stock Option shall be determined by the Committee but shall not be less than the 100% of the Fair Market Value of the Common Stock at the time of grant. Notwithstanding the foregoing, if an Option is modified, extended or renewed and, thereby, deemed to be the issuance of a new Option under the Code, the exercise price of an Option may continue to be the original exercise price even if less than the Fair Market Value of the Common Stock at the time of such modification, extension or renewal. (b) Option Term. The term of each Stock Option shall be fixed by the Committee, but no Stock Option shall be exercisable more than ten (10) years after the date the Option is granted, provided, however, the term of an Incentive Stock Option granted to a Ten Percent Stockholder may not exceed five (5) years. (c) Exercisability. Stock Options shall be exercisable at such time or times and subject to such terms and conditions as shall be determined by the Committee at grant. If the Committee provides, in its discretion, that any Stock Option is exercisable subject to certain limitations (including, without limitation, that it is exercisable only in installments or within certain time periods), the Committee may waive such limitations on the exercisability at any time at or after grant in whole or in part (including, without limitation, that the Committee may waive the installment exercise provisions or accelerate the time at which Options may be exercised), based on such factors, if any, as the Committee shall determine, in its sole discretion. (d) Method of Exercise. Subject to whatever installment exercise and waiting period provisions apply under subsection (c) above, Stock Options may be exercised in whole or in part at any time during the Option term, by giving written notice of exercise to the Company specifying the number of shares to be purchased. Such notice shall be accompanied by payment in full of the purchase price in such form, or such other arrangement for the satisfaction of the purchase price, as the Committee may accept. If and to the extent determined by the Committee in its sole discretion at or after grant, payment in full or in part may also be made in the form of Common Stock withheld from the shares to be received on the exercise of a Stock Option hereunder, Common Stock owned by the Participant (and for which the Participant has good title free and clear of any liens and encumbrances) or Restricted Stock based, in each case, on the Fair Market Value of the Common Stock on the payment date as determined by the Committee (without regard to any forfeiture restrictions 11 applicable to such Restricted Stock). No shares of Common Stock shall be issued until payment, as provided herein, therefor has been made or provided for. If payment in full or in part has been made in the form of Restricted Stock, an equivalent number of shares of Common Stock issued on exercise of the Option shall be subject to the same restrictions and conditions, during the remainder of the Restriction Period, applicable to the Restricted Stock surrendered therefor. (e) Incentive Stock Option Limitations. To the extent that the aggregate Fair Market Value (determined as of the time of grant) of the Common Stock with respect to which Incentive Stock Options are exercisable for the first time by an Eligible Employee during any calendar year under the Plan and/or any other stock option plan of the Company or any Subsidiary or parent corporation (within the meaning of Section 424(e) of the Code) exceeds $100,000, such Options shall be treated as Options which are not Incentive Stock Options. In addition, if an Eligible Employee does not remain employed by the Company, any Subsidiary or parent corporation (within the meaning of Section 424(e) of the Code) at all times from the time the Option is granted until three (3) months prior to the date of exercise (or such other period as required by applicable law), such Option shall be treated as an Option which is not an Incentive Stock Option. Should the foregoing provision not be necessary in order for the Stock Options to qualify as Incentive Stock Options, or should any additional provisions be required, the Committee may amend the Plan accordingly, without the necessity of obtaining the approval of the stockholders of the Company. (f) Buy Out and Settlement Provisions. The Committee may at any time on behalf of the Company offer to buy out an Option previously granted, based on such terms and conditions as the Committee shall establish and communicate to the Participant at the time that such offer is made. (g) Form, Modification, Extension and Renewal of Options. Subject to the terms and conditions and within the limitations of the Plan, an Option shall be evidenced by such form of agreement or grant as is approved by the Committee, and the Committee may modify, extend or renew outstanding Options granted under the Plan (provided that the rights of a Participant are not reduced without his consent), or accept the surrender of outstanding Options (up to the extent not theretofore exercised) and authorize the granting of new Options in substitution therefor (to the extent not theretofore exercised). (h) Other Terms and Conditions. Options may contain such other provisions, which shall not be inconsistent with any of the foregoing terms of the Plan, as the Committee shall deem appropriate including, without limitation, permitting "reloads" such that the same number of Options are granted as the number of Options exercised, shares used to pay for the exercise price of Options or shares used to pay withholding taxes ("Reloads"). With respect to Reloads, the exercise price of the new Stock Option shall be the Fair Market Value on the date of the "reload" and the term of the Stock Option shall be the same as the 12 remaining term of the Options that are exercised, if applicable, or such other exercise price and term as determined by the Committee. 6.4. Termination of Employment. The following rules apply with regard to Options upon the Termination of Employment or Termination of Consultancy of a Participant: (a) Termination by Reason of Death. If a Participant's Termination of Employment or Termination of Consultancy is by reason of death, any Stock Option held by such Participant, unless otherwise determined by the Committee at grant or, if no rights of the Participant's estate are reduced, thereafter, may be exercised, to the extent exercisable at the Participant's death, by the legal representative of the estate, at any time within a period of one (1) year from the date of such death, but in no event beyond the expiration of the stated term of such Stock Option. (b) Termination by Reason of Disability. If a Participant's Termination of Employment or Termination of Consultancy is by reason of Disability, any Stock Option held by such Participant, unless otherwise determined by the Committee at grant or, if no rights of the Participant are reduced, thereafter, may be exercised, to the extent exercisable at the Participant's termination, by the Participant (or the legal representative of the Participant's estate if the Participant dies after termination) at any time within a period of one (1) year from the date of such termination, but in no event beyond the expiration of the stated term of such Stock Option. (c) Termination by Reason of Retirement. If a Participant's Termination of Employment or Termination of Consultancy is by reason of Retirement, any Stock Option held by such Participant, unless otherwise determined by the Committee at grant, or, if no rights of the Participant are reduced, thereafter, shall be fully vested and may thereafter be exercised by the Participant at any time within a period of one (1) year from the date of such termination, but in no event beyond the expiration of the stated term of such Stock Option; provided, however, that, if the Participant dies within such exercise period, any unexercised Stock Option held by such Participant shall thereafter be exercisable, to the extent to which it was exercisable at the time of death, for a period of one (1) year (or such other period as the Committee may specify at grant or, if no rights of the Participant's estate are reduced, thereafter) from the date of such death, but in no event beyond the expiration of the stated term of such Stock Option. (d) Involuntary Termination Without Cause or Termination for Good Reason. If a Participant's Termination of Employment or Termination of Consultancy is by involuntary termination without Cause or for Good Reason, any Stock Option held by such Participant, unless otherwise determined by the Committee at grant or, if no rights of the Participant are reduced, thereafter, may be exercised, to the extent exercisable at termination, by the Participant at any time within a period of ninety (90) days from the date of such termination, but in no event beyond the expiration of the stated term of such Stock Option. 13 (e) Termination Without Good Reason. If a Participant's Termination of Employment or Termination of Consultancy is voluntary but without Good Reason and occurs prior to, or more than ninety (90) days after, the occurrence of an event which would be grounds for Termination of Employment or Termination of Consultancy by the Company for Cause (without regard to any notice or cure period requirements), any Stock Option held by such Participant, unless otherwise determined by the Committee at grant or, if no rights of the Participant are reduced, thereafter, may be exercised, to the extent exercisable at termination, by the Participant at any time within a period of thirty (30) days from the date of such termination, but in no event beyond the expiration of the stated term of such Stock Option. (f) Other Termination. Unless otherwise determined by the Committee at grant or, if no rights of the Participant are reduced, thereafter, if a Participant's Termination of Employment or Termination of Consultancy is for any reason other than death, Disability, Retirement, Good Reason, involuntary termination without Cause or voluntary termination as provided in subsection (e) above, any Stock Option held by such Participant shall thereupon terminate and expire as of the date of termination, provided that (unless the Committee determines a different period upon grant or, if, no rights of the Participant are reduced, thereafter) in the event the termination is for Cause or is a voluntary termination without Good Reason within ninety (90) days after occurrence of an event which would be grounds for Termination of Employment or Termination of Consultancy by the Company for Cause (without regard to any notice or cure period requirement), any Stock Option held by the Participant at the time of occurrence of the event which would be grounds for Termination of Employment or Termination of Consultancy by the Company for Cause shall be deemed to have terminated and expired upon occurrence of the event which would be grounds for Termination of Employment or Termination of Consultancy by the Company for Cause. ARTICLE VII. RESTRICTED STOCK AWARDS 7.1. Awards of Restricted Stock. Shares of Restricted Stock may be issued to Eligible Employees or Consultants either alone or in addition to other Awards granted under the Plan. The Committee shall determine the eligible persons to whom, and the time or times at which, grants of Restricted Stock will be made, the number of shares to be awarded, the price (if any) to be paid by the recipient (subject to Section 7.2), the time or times within which such Awards may be subject to forfeiture, the vesting schedule and rights to acceleration thereof, and all other terms and conditions of the Awards. 7.2. Awards and Certificates. The prospective Participant selected to receive a Restricted Stock Award shall not have any rights with respect to such Award, unless and until such Participant has delivered a fully executed copy of the Restricted Stock Award agreement evidencing the Award 14 to the Company and has otherwise complied with the applicable terms and conditions of such Award. Further, such Award shall be subject to the following conditions: (a) Purchase Price. The purchase price of Restricted Stock shall be fixed by the Committee. Subject to Section 4.3, the purchase price for shares of Restricted Stock may be zero to the extent permitted by applicable law, and, to the extent not so permitted, such purchase price may not be less than par value. (b) Acceptance. Awards of Restricted Stock must be accepted within a period of sixty (60) days (or such shorter period as the Committee may specify at grant) after the Award date, by executing a Restricted Stock Award agreement and by paying whatever price (if any) the Committee has designated thereunder. (c) Legend. Each Participant receiving a Restricted Stock Award shall be issued a stock certificate in respect of such shares of Restricted Stock, unless the Committee elects to use another system, such as book entries by the transfer agent, as evidencing ownership of a Restricted Stock Award. Such certificate shall be registered in the name of such Participant, and shall bear an appropriate legend referring to the terms, conditions, and restrictions applicable to such Award, substantially in the following form: "The anticipation, alienation, attachment, sale, transfer, assignment, pledge, encumbrance or charge of the shares of stock represented hereby are subject to the terms and conditions (including forfeiture) of the 24/7 Media, Inc. (the "Company") 1998 Stock Incentive Plan and an Agreement entered into between the registered owner and the Company, dated _____________, 19__. Copies of such Plan and Agreement are on file at the principal office of the Company." (d) Custody. The Committee may require that any stock certificates evidencing such shares be held in custody by the Company until the restrictions thereon shall have lapsed, and that, as a condition of any Restricted Stock Award, the Participant shall have delivered a duly signed stock power, endorsed in blank, relating to the Common Stock covered by such Award. 7.3. Restrictions and Conditions on Restricted Stock Awards. The shares of Restricted Stock awarded pursuant to this Plan shall be subject to Article X and the following restrictions and conditions: (a) Restriction Period; Vesting and Acceleration of Vesting. The Participant shall not be permitted to Transfer shares of Restricted Stock awarded under this Plan during a period set by the Committee (the "Restriction Period") commencing with the date of such Award, as set forth in the Restricted Stock Award agreement and such agreement shall set forth a vesting schedule and any events which would accelerate vesting of the shares of Restricted Stock. Within these limits, based on service, or other criteria determined by the Committee, the Committee may provide for the lapse of such restrictions in installments in 15 whole or in part, or may accelerate the vesting of all or any part of any Restricted Stock Award. (b) Rights as Stockholder. Except as provided in this subsection (b) and subsection (a) above and as otherwise determined by the Committee, the Participant shall have, with respect to the shares of Restricted Stock, all of the rights of a holder of shares of Common Stock of the Company including, without limitation, the right to receive any dividends, the right to vote such shares and, subject to and conditioned upon the full vesting of shares of Restricted Stock, the right to tender such shares. Notwithstanding the foregoing, the payment of dividends shall be deferred until, and conditioned upon, the expiration of the applicable Restriction Period, unless the Committee, in its sole discretion, specifies otherwise at the time of the Award. (c) Lapse of Restrictions. If and when the Restriction Period expires without a prior forfeiture of the Restricted Stock subject to such Restriction Period, the certificates for such shares shall be delivered to the Participant. All legends shall be removed from said certificates at the time of delivery to the Participant except as otherwise required by applicable law. 7.4. Termination of Employment or Termination of Consultancy for Restricted Stock. Subject to the applicable provisions of the Restricted Stock Award agreement and this Plan, upon a Participant's Termination of Employment or Termination of Consultancy for any reason during the relevant Restriction Period, all Restricted Stock still subject to restriction will vest or be forfeited in accordance with the terms and conditions established by the Committee at grant or thereafter. ARTICLE VIII. STOCK APPRECIATION RIGHTS 8.1. Tandem Stock Appreciation Rights. Stock Appreciation Rights may be granted in conjunction with all or part of any Stock Option (a "Reference Stock Option") granted under this Plan ("Tandem Stock Appreciation Rights"). In the case of a Non-Qualified Stock Option, such rights may be granted either at or after the time of the grant of such Reference Stock Option. In the case of an Incentive Stock Option, such rights may be granted only at the time of the grant of such Reference Stock Option. 8.2. Terms and Conditions of Tandem Stock Appreciation Rights. Tandem Stock Appreciation Rights shall be subject to such terms and conditions, not inconsistent with the provisions of this Plan, as shall be determined from time to time by the Committee, including Article X and the following: (a) Term. A Tandem Stock Appreciation Right or applicable portion thereof granted with respect to a Reference Stock Option shall terminate and no longer be exercisable upon the termination or exercise of the Reference Stock Option, except that, unless otherwise determined by the Committee, in its sole discretion, at the time of grant, a Tandem Stock 16 Appreciation Right granted with respect to less than the full number of shares covered by the Reference Stock Option shall not be reduced until and then only to the extent the exercise or termination of the Reference Stock Option causes the number of shares covered by the Tandem Stock Appreciation Right to exceed the number of shares remaining available and unexercised under the Reference Stock Option. (b) Exercisability. Tandem Stock Appreciation Rights shall be exercisable only at such time or times and to the extent that the Reference Stock Options to which they relate shall be exercisable in accordance with the provisions of Article VI and this Article VIII. (c) Method of Exercise. A Tandem Stock Appreciation Right may be exercised by an optionee by surrendering the applicable portion of the Reference Stock Option. Upon such exercise and surrender, the Participant shall be entitled to receive an amount determined in the manner prescribed in this Section 8.2. Stock Options which have been so surrendered, in whole or in part, shall no longer be exercisable to the extent the related Tandem Stock Appreciation Rights have been exercised. (d) Payment. Upon the exercise of a Tandem Stock Appreciation Right a Participant shall be entitled to receive up to, but no more than, an amount in cash and/or Common Stock (as chosen by the Committee in its sole discretion) equal in value to the excess of the Fair Market Value of one share of Common Stock over the option price per share specified in the Reference Stock Option multiplied by the number of shares in respect of which the Tandem Stock Appreciation Right shall have been exercised, with the Committee having the right to determine the form of payment. (e) Deemed Exercise of Reference Stock Option. Upon the exercise of a Tandem Stock Appreciation Right, the Reference Stock Option or part thereof to which such Stock Appreciation Right is related shall be deemed to have been exercised for the purpose of the limitation set forth in Article IV of the Plan on the number of shares of Common Stock to be issued under the Plan. 8.3. Non-Tandem Stock Appreciation Rights. Non-Tandem Stock Appreciation Rights may also be granted without reference to any Stock Options granted under this Plan. 8.4. Terms and Conditions of Non-Tandem Stock Appreciation Rights. Non-Tandem Stock Appreciation Rights shall be subject to such terms and conditions, not inconsistent with the provisions of this Plan, as shall be determined from time to time by the Committee, including Article X and the following: (a) Term. The term of each Non-Tandem Stock Appreciation Right shall be fixed by the Committee, but shall not be greater than ten (10) years after the date the right is granted. (b) Exercisability. Non-Tandem Stock Appreciation Rights shall be exercisable at such time or times and subject to such terms and conditions as shall be determined by the 17 Committee at grant. If the Committee provides, in its discretion, that any such right is exercisable subject to certain limitations (including, without limitation, that it is exercisable only in installments or within certain time periods), the Committee may waive such limitation on the exercisability at any time at or after grant in whole or in part (including, without limitation, that the Committee may waive the installment exercise provisions or accelerate the time at which rights may be exercised), based on such factors, if any, as the Committee shall determine, in its sole discretion. (c) Method of Exercise. Subject to whatever installment exercise and waiting period provisions apply under subsection (b) above, Non-Tandem Stock Appreciation Rights may be exercised in whole or in part at any time during the option term, by giving written notice of exercise to the Company specifying the number of Non-Tandem Stock Appreciation Rights to be exercised. (d) Payment. Upon the exercise of a Non-Tandem Stock Appreciation Right a Participant shall be entitled to receive, for each right exercised, up to, but no more than, an amount in cash and/or Common Stock (as chosen by the Committee in its sole discretion) equal in value to the excess of the Fair Market Value of one share of Common Stock on the date the right is exercised over the Fair Market Value of one (1) share of Common Stock on the date the right was awarded to the Participant. 8.5. Limited Stock Appreciation Rights. The Committee may, in its sole discretion, grant Tandem and Non-Tandem Stock Appreciation Rights either as a general Stock Appreciation Right or as a limited Stock Appreciation Right. Limited Stock Appreciation Rights may be exercised upon the occurrence of such event as the Committee may, in its sole discretion, designate at the time of grant or thereafter. Upon the exercise of limited Stock Appreciation Rights, except as otherwise provided in an Award agreement, the Participant shall receive in cash or Common Stock, as determined by the Committee, an amount equal to the amount (1) set forth in Section 8.2(d) with respect to Tandem Stock Appreciation Rights or (2) set forth in Section 8.4(d) with respect to Non-Tandem Stock Appreciation Rights. 8.6. Termination of Employment or Termination of Consultancy. The following rules apply with regard to Stock Appreciation Rights upon the Termination of Employment or Termination of Consultancy of a Participant. (a) Termination by Death. If a Participant's Termination of Employment or Termination of Consultancy is by reason of death, any Stock Appreciation Right held by such Participant, unless otherwise determined by the Committee at grant or if no rights of the Participant's estate are reduced, thereafter, may be exercised, to the extent exercisable at the Participant's death, by the legal representative of the estate, at any time within a period of one (1) year from the date of such death or until the expiration of the stated term of such Stock Appreciation Right, whichever period is the shorter. (b) Termination by Reason of Disability. If a Participant's Termination of Employment or Termination of Consultancy is by reason of Disability, any Stock 18 Appreciation Right held by such participant, unless otherwise determined by the Committee at grant or, if no rights of the Participant are reduced, thereafter, may be exercised, to the extent exercisable at the Participant's termination, by the Participant (or the legal representative of the Participant's estate if the Participant dies after termination) at any time within a period of one (1) year from the date of such termination or until the expiration of the stated term of such Stock Appreciation Right, whichever period is the shorter. (c) Termination by Reason of Retirement. If a Participant's Termination of Employment or Termination of Consultancy is by reason of Retirement, any Stock Appreciation Right held by such Participant, unless otherwise determined by the Committee at grant or, if no rights of the Participant are reduced, thereafter, shall be fully vested and may thereafter be exercised by the Participant at any time within a period of one (1) year from the date of such termination or until the expiration of the stated term of such right, whichever period is the shorter; provided, however, that, if the Participant dies within such one (1) year period, any unexercised Non-Tandem Stock Appreciation Right held by such Participant shall thereafter be exercisable, to the extent to which it was exercisable at the time of death, for a period of one (1) year (or such other period as the Committee may specify at grant or if no rights of the Participant are reduced, thereafter) from the date of such death or until the expiration of the stated term of such right, whichever period is the shorter. (d) Involuntary Termination Without Cause or Termination for Good Reason. If a Participant's Termination of Employment or Termination of Consultancy is by involuntary termination without Cause or for Good Reason, any Stock Appreciation Right held by such participant, unless otherwise determined by the Committee at grant or if no rights of the participant are reduced, thereafter, may be exercised, to the extent exercisable at termination, by the Participant at any time within a period of ninety (90) days from the date of such termination or until the expiration of the stated term of such right, whichever period is shorter. (e) Termination Without Good Reason. If a Participant's Termination of Employment or Termination of Consultancy is voluntary but without Good Reason and occurs prior to, or more than ninety (90) days after, the occurrence of an event which would be grounds for Termination of Employment or Termination of Consultancy by the Company for Cause (without regard to any notice or cure period requirements), any Stock Appreciation Right held by such Participant, unless greater or lesser exercise rights are provided by the Committee at the time of grant or, if no rights of the participant are reduced, thereafter, may be exercised, to the extent exercisable at termination, by the Participant at any time within a period of thirty (30) days from the date of such termination, but in no event beyond the expiration of the stated term of such Stock Appreciation Right. (f) Other Termination. Unless otherwise determined by the Committee at grant, or, if no rights of the Participant are reduced thereafter, if a Participant's Termination of Employment or Termination of Consultancy is for any reason other than death, Disability, Retirement, Good Reason, involuntary termination without Cause or voluntary termination as provided in subsection (e) above, any Stock Appreciation Right held by such Participant 19 shall thereupon terminate or expire as of the date of termination, provided, that (unless the Committee determines a different period upon grant, or, if no rights of the Participant are reduced, thereafter) in the event the termination is for Cause or is a voluntary termination as provided in subsection (e) above, within ninety (90) days after occurrence of an event which would be grounds for Termination of Employment or Termination of Consultancy by the Company for Cause (without regard to any notice or cure period requirement), any Stock Appreciation Right held by the Participant at the time of the occurrence of the event which would be grounds for Termination of Employment or Termination of Consultancy by the Company for Cause shall be deemed to have terminated and expired upon occurrence of the event which would be grounds for Termination of Employment or Termination of Consultancy by the Company for Cause. ARTICLE IX. NON-EMPLOYEE DIRECTOR STOCK OPTION GRANTS 9.1. Options. The terms of this Article IX shall apply only to Options granted to non-employee directors. 9.2. Grants. A Committee of the Board may in its discretion grant Options to non-employee directors of the Company, subject to all limitations set forth in the Plan. No Person who would be eligible to receive Options pursuant to this Article IX shall be a member of such Committee. 9.3. Non-Qualified Stock Options. Stock Options granted under this Article IX shall be Non-Qualified Stock Options. 9.4. Terms of Options. Options granted under this Article shall be subject to the following terms and conditions and shall be in such form and contain such additional terms and conditions, not inconsistent with terms of this Plan, as the Committee shall deem desirable: (a) Option Price. The purchase price per share deliverable upon the exercise of an Option granted pursuant to Section 9.2(a)(1) shall be the Price to the Public and the purchase price per share deliverable upon the exercise of an Option granted pursuant to Section 9.2(a)(2) shall be 100% of the Fair Market Value of such Common Stock at the time of the grant of the Option (the "Purchase Price"), or the par value of the Common Stock, whichever is greater. (b) Exercisability. Except as otherwise provided herein, twenty-five percent (25%) of any Option granted under this Article IX shall be exercisable on or after each of the four anniversaries following the date of grant. (c) Method for Exercise. A non-employee director electing to exercise one or more Options shall give written notice of exercise to the Company specifying the number of shares to be purchased. Common Stock purchased pursuant to the exercise of Options shall 20 be paid for at the time of exercise in cash or by delivery of unencumbered Common Stock owned by the non-employee director or a combination thereof or by such other method as approved by the Board. (d) Option Term. Except as otherwise provided herein, if not previously exercised each Option shall expire upon the tenth anniversary of the date of the grant thereof. 9.5. Termination of Directorship. The following rules apply with regard to Options upon the Termination of Directorship: (a) Death, Disability or Otherwise Ceasing to be a Director Other than for Cause. Except as otherwise provided herein, upon the Termination of Directorship, on account of Disability, death, Retirement, resignation, failure to stand for reelection or failure to be reelected or otherwise other than as set forth in (b) below, all outstanding Options then exercisable and not exercised by the Participant prior to such Termination of Directorship shall remain exercisable, to the extent exercisable at the Termination of Directorship, by the Participant or, in the case of death, by the Participant's estate or by the person given authority to exercise such Options by his or her will or by operation of law, for the remainder of the stated term of such Options. (b) Cause. Upon removal, failure to stand for reelection or failure to be renominated for Cause, or if the Company obtains or discovers information after Termination of Directorship that such Participant had engaged in conduct that would have justified a removal for Cause during such directorship, all outstanding Options of such Participant shall immediately terminate and shall be null and void. (c) Cancellation of Options. No Options that were not exercisable during the period such person serves as a director shall thereafter become exercisable upon a Termination of Directorship for any reason or no reason whatsoever, and such Options shall terminate and become null and void upon a Termination of Directorship. 9.6 (a) Changes. The Awards to a non-employee director shall be subject to Sections 4.2(a), (b) and (c) of the Plan and this Section 9.6, but shall not be subject to Section 4.2(d). (b) If the Company shall not be the surviving corporation in any merger or consolidation, or if the Company is to be dissolved or liquidated, then, unless the surviving corporation assumes the Options or substitutes new Options which are determined by the Board in its sole discretion to be substantially similar in nature and equivalent in terms and value for Options then outstanding, upon the effective date of such merger, consolidation, liquidation or dissolution, any unexercised Options shall expire without additional compensation to the holder thereof; provided, that, the Committee shall deliver notice to each non-employee director at least twenty (20) days prior to the date of consummation of such merger, consolidation, dissolution or liquidation which would result in the expiration of the Options and during the period from the date on which such notice of termination is delivered to the consummation of the merger, consolidation, dissolution or liquidation, such Participant 21 shall have the right to exercise in full effective as of such consummation all Options that are then outstanding (without regard to limitations on exercise otherwise contained in the Options) but contingent on occurrence of the merger, consolidation, dissolution or liquidation, and, provided that, if the contemplated transaction does not take place within a ninety (90) day period after giving such notice for any reason whatsoever, the notice, accelerated vesting and exercise shall be null and void and, if and when appropriate, new notice shall be given as aforesaid. ARTICLE X. NON-TRANSFERABILITY Except as provided in the last sentence of this Article X, no Stock Option or Stock Appreciation Right shall be Transferable by the Participant otherwise than by will or by the laws of descent and distribution. All Stock Options and all Stock Appreciation Rights shall be exercisable, during the Participant's lifetime, only by the Participant. Tandem Stock Appreciation Rights shall be Transferable, to the extent permitted above, only with the underlying Stock Option. Shares of Restricted Stock under Article VII may not be Transferred prior to the date on which shares are issued, or, if later, the date on which any applicable restriction lapses. No Award shall, except as otherwise specifically provided by law or herein, be Transferable in any manner, and any attempt to Transfer any such Award shall be void, and no such Award shall in any manner be liable for or subject to the debts, contracts, liabilities, engagements or torts of any person who shall be entitled to such Award, nor shall it be subject to attachment or legal process for or against such person. Notwithstanding the foregoing, the Committee may determine at the time of grant or thereafter, that a Stock Option, other than an Incentive Stock Option, that is otherwise not transferable pursuant to this Article X is transferable in whole or part and in such circumstances, and under such conditions, as specified by the Committee. ARTICLE XI. 11.1. Benefits. In the event of a Change in Control of the Company (as defined below), except as otherwise provided by the Committee upon the grant of an Award, each Participant shall have the following benefits: (a) All outstanding Options and the related Tandem Stock Appreciation Rights and Non-Tandem Stock Appreciation Rights of such Participant granted prior to the Change in Control shall be fully vested and immediately exercisable in their entirety. The Committee, in its sole discretion, may provide for the purchase of any such Stock Options by the Company for an amount of cash equal to the excess of the Change in Control price (as defined below) of the shares of Common Stock covered by such Stock Options, over the aggregate exercise price of such Stock Options. For purposes of this Section 11.1, Change 22 in Control price shall mean the higher of (i) the highest price per share of Common Stock paid in any transaction related to a Change in Control of the Company, or (ii) the highest Fair Market Value per share of Common Stock at any time during the sixty (60) day period preceding a Change in Control. (b) The restrictions to which any shares of Restricted Stock of such Participant granted prior to the Change in Control are subject shall lapse as if the applicable Restriction Period had ended upon such Change in Control. (c) Notwithstanding anything else herein, the Committee may, in its sole discretion, provide for accelerated vesting of an Award (other than a grant to a non-employee director pursuant to Article IX hereof), upon a Termination of Employment during the Pre-Change in Control Period. Unless otherwise determined by the Committee, the Pre-Change in Control Period shall be the one hundred eighty (180) day period prior to a Change in Control. 11.2. Change in Control. A "Change in Control" shall be deemed to have occurred: (a) upon any "person" as such term is used in Sections 13(d) and 14(d) of the Exchange Act (other than the Company, any trustee or other fiduciary holding securities under any employee benefit plan of the Company, or any company owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of Common Stock of the Company, becoming the owner (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing forty percent (40%) or more of the combined voting power of the Company's then outstanding securities (including, without limitation, securities owned at the time of any increase in ownership); (b) during any period of two consecutive years, individuals who at the beginning of such period constitute the Board of Directors, and any new director (other than a director designated by a person who has entered into an agreement with the Company to effect a transaction described in paragraph (a), (c), or (d) of this section) or a director whose initial assumption of office occurs as a result of either an actual or threatened election contest (as such terms are used in Rule 14a-11 of Regulation 14A promulgated under the Exchange Act) or other actual or threatened solicitation of proxies or consents by or on behalf of a person other than the Board of Directors of the Company whose election by the Board of Directors or nomination for election by the Company's stockholders was approved by a vote of at least two-thirds of the directors then still in office who either were directors at the beginning of the two-year period or whose election or nomination for election was previously so approved, cease for any reason to constitute at least a majority of the Board of Directors; (c) upon the merger or consolidation of the Company with any other corporation, other than a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity more than 23 fifty percent (50%) of the combined voting power of the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation; provided, however, that a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no person (other than those covered by the exceptions in (a) above) acquires more than forty percent (40%) of the combined voting power of the Company's then outstanding securities shall not constitute a Change in Control of the Company; or (d) upon the stockholder's of the Company approval of a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of all or substantially all of the Company's assets other than the sale of all or substantially all of the assets of the Company to a person or persons who beneficially own, directly or indirectly, at least fifty percent (50%) or more of the combined voting power of the outstanding voting securities of the Company at the time of the sale. ARTICLE XII. TERMINATION OR AMENDMENT OF THE PLAN 12.1. Termination or Amendment. Notwithstanding any other provision of this Plan, the Board may at any time, and from time to time, amend, in whole or in part, any or all of the provisions of the Plan, or suspend or terminate it entirely, retroactively or otherwise; provided, however, that, unless otherwise required by law or specifically provided herein, the rights of a Participant with respect to Awards granted prior to such amendment, suspension or termination, may not be impaired without the consent of such Participant and, provided further, without the approval of the stockholders of the Company, if and to the extent required by the applicable provisions of Rule 16b-3 or, if and to the extent required, under the applicable provisions of Section 162(m) of the Code, or with regard to Incentive Stock Options, Section 422 of the Code, no amendment may be made which would (i) increase the aggregate number of shares of Common Stock that may be issued under this Plan; (ii) increase the maximum individual Participant limitations for a fiscal year under Section 4.1(b); (iii) change the classification of employees, Consultants, and non-employee directors eligible to receive Awards under this Plan; (iv) decrease the minimum option price of any Stock Option; (v) extend the maximum option period under Section 6.3; (vi) change any rights under the Plan with regard to non-employee directors; or (vii) require stockholder approval in order for the Plan to continue to comply with the applicable provisions, if any, of Rule 16b-3, Section 162(m) of the Code, any applicable state law, or, with regard to Incentive Stock Options, Section 422 of the Code. In no event may the Plan be amended without the approval of the stockholders of the Company in accordance with the applicable laws or other requirements to increase the aggregate number of shares of Common Stock that may be issued under the Plan, decrease the minimum option price of any Stock Option, or to make any other amendment that would require stockholder approval under the rules of any exchange or system on which the Company's securities are listed or traded at the request of the Company. 24 The Committee may amend the terms of any Award theretofore granted, prospectively or retroactively, but, subject to Article IV above or as otherwise specifically provided herein, no such amendment or other action by the Committee shall impair the rights of any holder without the holder's consent. ARTICLE XIII. UNFUNDED PLAN 13.1. Unfunded Status of Plan. This Plan is intended to constitute an "unfunded" plan for incentive compensation. With respect to any payments as to which a Participant has a fixed and vested interest but which are not yet made to a Participant by the Company, nothing contained herein shall give any such Participant any rights that are greater than those of a general creditor of the Company. ARTICLE XIV. GENERAL PROVISIONS 14.1. Legend. The Committee may require each person receiving shares pursuant to an Award under the Plan to represent to and agree with the Company in writing that the Participant is acquiring the shares without a view to distribution thereof. In addition to any legend required by this Plan, the certificates for such shares may include any legend which the Committee deems appropriate to reflect any restrictions on Transfer. All certificates for shares of Common Stock delivered under the Plan shall be subject to such stock transfer orders and other restrictions as the Committee may deem advisable under the rules, regulations and other requirements of the Securities and Exchange Commission, any stock exchange upon which the Common Stock is then listed or any national securities association system upon whose system the Common Stock is then quoted, any applicable Federal or state securities law, and any applicable corporate law, and the Committee may cause a legend or legends to be put on any such certificates to make appropriate reference to such restrictions. 14.2. Other Plans. Nothing contained in this Plan shall prevent the Board from adopting other or additional compensation arrangements, subject to stockholder approval if such approval is required; and such arrangements may be either generally applicable or applicable only in specific cases. 14.3. No Right to Employment/Directorship. Neither this Plan nor the grant of any Award hereunder shall give any Participant or other employee any right with respect to continuance of employment by the Company or any Affiliate, nor shall they be a limitation in any way on the right of the Company or any Affiliate by which an employee is employed to terminate his employment at any time. Neither this Plan nor the grant of any Award hereunder shall impose any obligations on 25 the Company to retain any Participant as a director nor shall it impose on the part of any Participant any obligation to remain as a director of the Company. 14.4. Withholding of Taxes. The Company shall have the right to deduct from any payment to be made to a Participant, or to otherwise require, prior to the issuance or delivery of any shares of Common Stock or the payment of any cash hereunder, payment by the Participant of, any Federal, state or local taxes required by law to be withheld. Upon the vesting of Restricted Stock, or upon making an election under Code Section 83(b), a Participant shall pay all required withholding to the Company. The Committee may permit any such withholding obligation with regard to any Participant to be satisfied by reducing the number of shares of Common Stock otherwise deliverable or by delivering shares of Common Stock already owned. Any fraction of a share of Common Stock required to satisfy such tax obligations shall be disregarded and the amount due shall be paid instead in cash by the Participant. 14.5. Listing and Other Conditions. (a) As long as the Common Stock is listed on a national securities exchange or system sponsored by a national securities association, the issue of any shares of Common Stock pursuant to an Award shall be conditioned upon such shares being listed on such exchange or system. The Company shall have no obligation to issue such shares unless and until such shares are so listed, and the right to exercise any Option with respect to such shares shall be suspended until such listing has been effected. (b) If at any time counsel to the Company shall be of the opinion that any sale or delivery of shares of Common Stock pursuant to an Award is or may in the circumstances be unlawful or result in the imposition of excise taxes on the Company under the statutes, rules or regulations of any applicable jurisdiction, the Company shall have no obligation to make such sale or delivery, or to make any application or to effect or to maintain any qualification or registration under the Securities Act of 1933, as amended, or otherwise with respect to shares of Common Stock or Awards, and the right to exercise any Option shall be suspended until, in the opinion of said counsel, such sale or delivery shall be lawful or will not result in the imposition of excise taxes on the Company. (c) Upon termination of any period of suspension under this Section 14.5, any Award affected by such suspension which shall not then have expired or terminated shall be reinstated as to all shares available before such suspension and as to shares which would otherwise have become available during the period of such suspension, but no such suspension shall extend the term of any Option. 14.6. Governing Law. This Plan shall be governed and construed in accordance with the laws of the state of incorporation of the Company (regardless of the law that might otherwise govern under applicable principles of conflict of laws). 26 14.7. Construction. Wherever any words are used in this Plan in the masculine gender they shall be construed as though they were also used in the feminine gender in all cases where they would so apply, and wherever any words are used herein in the singular form they shall be construed as though they were also used in the plural form in all cases where they would so apply. To the extent applicable, the Plan shall be limited, construed and interpreted in a manner so as to comply with the applicable requirements of Rule 16b-3 and Section 162(m) of the Code; however, noncompliance with Rule 16b-3 or Section 162(m) of the Code shall have no impact on the effectiveness of a Stock Option granted under the Plan. 14.8. Other Benefits. No Award payment under this Plan shall be deemed compensation for purposes of computing benefits under any retirement plan of the Company or its subsidiaries nor affect any benefits under any other benefit plan now or subsequently in effect under which the availability or amount of benefits is related to the level of compensation. 14.9. Costs. The Company shall bear all expenses included in administering this Plan, including expenses of issuing Common Stock pursuant to any Awards hereunder. 14.10. No Right to Same Benefits. The provisions of Awards need not be the same with respect to each Participant, and such Awards to individual Participants need not be the same in subsequent years. 14.11. Death/Disability. The Committee may in its discretion require the transferee of a Participant to supply it with written notice of the Participant's death or Disability and to supply it with a copy of the will (in the case of the Participant's death) or such other evidence as the Committee deems necessary to establish the validity of the transfer of an Award. The Committee may also require that the agreement of the transferee to be bound by all of the terms and conditions of the Plan. 14.12. Section 16(b) of the Exchange Act. All elections and transactions under the Plan by persons subject to Section 16 of the Exchange Act involving shares of Common Stock are intended to comply with any applicable condition under Rule 16b-3. The Committee may establish and adopt written administrative guidelines, designed to facilitate compliance with Section 16(b) of the Exchange Act, as it may deem necessary or proper for the administration and operation of the Plan and the transaction of business thereunder. 14.13. Severability of Provisions. If any provision of the Plan shall be held invalid or unenforceable, such invalidity or unenforceability shall not affect any other provisions hereof, and the Plan shall be construed and enforced as if such provisions had not been included. 14.14. Headings and Captions. The headings and captions herein are provided for reference and convenience only, shall not be considered part of the Plan, and shall not be employed in the construction of the Plan. ARTICLE XV. 27 TERM OF PLAN No Award shall be granted pursuant to the Plan on or after the tenth anniversary of the earlier of the date the Plan is adopted or the date of stockholder approval, but Awards granted prior to such tenth anniversary may extend beyond that date. ARTICLE XVI. NAME OF PLAN This Plan shall be known as the 24/7 Media, Inc. 1998 Stock Incentive Plan. 28 EX-10.2 3 FORM OF STOCK OPTION AGREEMENT 24/7 MEDIA, INC. OPTION AGREEMENT PURSUANT TO THE 24/7 MEDIA, INC. 1998 STOCK INCENTIVE PLAN ------------------------- AGREEMENT, dated as of March 25, 1998 by and between 24/7 Media, Inc. (the "Company") and (the "Participant"). Preliminary Statement --------------------- The Stock Option Committee of the Board of Directors of the Company (the "Committee"), pursuant to the Company's 1998 Stock Incentive Plan, annexed hereto as Exhibit A (the "Plan"), has authorized the granting to the Participant, as an Eligible Employee, of an incentive stock option (the "Option") to purchase the number of shares ("Shares") of the Company's common stock, par value $.01 per share (the "Common Stock"), set forth below. The parties hereto desire to enter into this Agreement in order to set forth the terms of the Option. Accordingly, the parties hereto agree as follows: 1. Tax Matters. The Option granted hereby is intended to qualify as an "incentive stock option" under Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"). 2. Grant of Option. Subject in all respects to the Plan and the terms and conditions set forth herein and therein, the Participant is hereby granted the Option to purchase from the Company up to Shares, at a price per Share of $1.00, subject to adjustment in accordance with the Plan (the "Option Price"). 3. Vesting. The Option is exercisable in installments as provided below, which shall be cumulative. To the extent that the Option has become exercisable with respect to a percentage of the Shares as provided below, the Option may thereafter be exercised by the Participant, in whole or in part, at any time or from time to time prior to the expiration of the Option as provided herein. The following table indicates each date upon which the Participant shall be entitled to exercise the Option with respect to the percentage of Shares indicated beside that date:
Vesting Date Percentage of Shares ------------ -------------------- March 25, 1999 25% March 25, 2000 50% March 25, 2001 75% March 25, 2002 100%
4. Termination. Unless terminated as provided in Section 5 below or otherwise pursuant to the Plan, the Option shall expire on the tenth anniversary of this Agreement, or earlier as provided in the Plan upon a Termination of Employment of the Participant. 5. Restriction on Transfer of Option. The Option granted hereby is not transferable otherwise than by will or under the applicable laws of descent and distribution and during the lifetime of the Participant may be exercised only by the Participant or the Participant's guardian or legal representative. In addition, the Option shall not be assigned, negotiated, pledged or hypothecated in any way (whether by operation of law or otherwise), and the Option shall not be subject to execution, attachment or similar process. Upon any attempt to transfer, assign, negotiate, pledge or hypothecate the Option, or in the event of any levy upon the Option by reason of any execution, attachment or similar process contrary to the provisions hereof, the Option shall immediately become null and void. 6. Rights as a Stockholder. The Participant shall not have any rights as a stockholder with respect to any Shares covered by the Option until the Participant shall have become the holder of record of the Shares, and, no adjustments shall be made for dividends in cash or other property, distributions or other rights in respect of any such Shares, except as otherwise specifically provided for in the Plan. 7. Provisions of Plan Control. This Agreement is subject to all the terms, conditions and provisions of the Plan, including, without limitation, the amendment provisions thereof, and to such rules, regulations and interpretations relating to the Plan as may be adopted by the Committee and as may be in effect from time to time. Any capitalized term used but not defined herein shall have the meaning ascribed to such term in the Plan. The annexed copy of the Plan is incorporated herein by reference. If and to the extent that this Agreement conflicts or is inconsistent with the terms, conditions and provisions of the Plan, the Plan shall control, and this Agreement shall be deemed to be modified accordingly. 8. Notices. Any notice or communication given hereunder shall be in writing and shall be deemed to have been duly given when delivered in person, when dispatched by telegram or one business day after having been dispatched by a nationally recognized courier service or three business days after or by United States mail, to the appropriate party at the address set forth below (or such other address as the party shall from time to time specify by sending notice to the appropriate address set forth below). If to the Company, to: 24/7 Media, Inc. 1290 Avenue of the Americas New York, New York 10104 Attention: Secretary If to the Participant, to the most recent address furnished by the Participant to the Company. 2 9. No Obligation to Continue Employment. This Agreement does not guarantee that the Company or any Subsidiary will employ the Participant for any specific time period, nor does it modify in any respect the Company's or any Subsidiary's right to terminate or modify the Participant's employment or compensation. IN WITNESS WHEREOF, the parties have executed this Agreement on the date and year first above written. 24/7 MEDIA, INC. By: ----------------------------------- -------------------------------------- EX-10.3 4 AGREEMENT OF LEASE ****************************************************************************** AGREEMENT OF LEASE between 38-32 ASSOCIATES, Landlord, and 24/7 MEDIA INC. Tenant, Dated: April 30, 1998 PREMISES: 1250 Broadway Twenty-Seventh (27th) Floor New York, New York ****************************************************************************** TABLE OF CONTENTS Page ---- ARTICLE 1 RENT ............................................................ 1 ARTICLE 2 PREPARATION OF THE DEMISED PREMISES.............................. 3 ARTICLE 3 ADJUSTMENTS OF RENT.............................................. 3 ARTICLE 4 ELECTRICITY...................................................... 9 ARTICLE 5 USE ............................................................. 12 ARTICLE 6 ALTERATIONS AND INSTALLATIONS.................................... 12 ARTICLE 7 REPAIRS ......................................................... 15 ARTICLE 8 REQUIREMENTS OF LAW.............................................. 17 ARTICLE 9 INSURANCE, LOSS, REIMBURSEMENT, LIABILITY........................ 18 ARTICLE 10 DAMAGE BY FIRE OR OTHER CAUSE.................................... 21 ARTICLE 11 ASSIGNMENT, MORTGAGING, SUBLETTING, ETC.......................... 23 ARTICLE 12 CERTIFICATE OF OCCUPANCY......................................... 29 ARTICLE 13 ADJACENT EXCAVATION SHORING...................................... 29 ARTICLE 14 CONDEMNATION..................................................... 29 ARTICLE 15 ACCESS TO DEMISED PREMISES; CHANGES.............................. 31 ARTICLE 16 CONDITIONS OF LIMITATION......................................... 32 ARTICLE 17 RE-ENTRY BY LANDLORD, INJUNCTION................................. 34 ARTICLE 18 DAMAGES ......................................................... 35 ARTICLE 19 LANDLORD'S RIGHT TO PERFORM TENANT'S OBLIGATIONS................. 36 ARTICLE 20 QUIET ENJOYMENT.................................................. 37 ARTICLE 21 SERVICES AND EQUIPMENT........................................... 37 ARTICLE 22 DEFINITIONS...................................................... 39 ARTICLE 23 INVALIDITY OF ANY PROVISION...................................... 40 ARTICLE 24 BROKERAGE........................................................ 40 ARTICLE 25 SUBORDINATION.................................................... 41 ARTICLE 26 CERTIFICATES OF LANDLORD TENANT.................................. 42 ARTICLE 27 LEGAL PROCEEDINGS WAIVER OF JURY TRIAL........................... 43 ARTICLE 28 SURRENDER OF PREMISES............................................ 43 ARTICLE 29 RULES AND REGULATIONS............................................ 44 ARTICLE 30 CONSENTS AND APPROVALS........................................... 44 ARTICLE 31 NOTICES ......................................................... 45 ARTICLE 32 NO WAIVER........................................................ 45 ARTICLE 33 CAPTIONS......................................................... 46 ARTICLE 34 INABILITY TO PERFORM............................................. 46 ARTICLE 35 NO REPRESENTATIONS BY LANDLORD................................... 47 ARTICLE 36 NAME OF BUILDING................................................. 47 ARTICLE 37 RESTRICTIONS UPON USE............................................ 47 ARTICLE 38 ARBITRATION...................................................... 48 ARTICLE 39 INDEMNITY........................................................ 48 ARTICLE 40 MEMORANDUM OF LEASE.............................................. 48 i ARTICLE 41 SECURITY......................................................... 49 ARTICLE 42 MISCELLANEOUS.................................................... 51 ARTICLE 43 RIGHT OF FIRST REFUSAL........................................... 52 ARTICLE 44 WORK CREDIT...................................................... 57 SCHEDULES A Floor Plan B Rules and Regulations C First Refusal Space ii AGREEMENT OF LEASE made as of this 30th day of April, 1998 between 38-32 ASSOCIATES, a New York limited partnership, having an office at c/o Edward S. Gordon Co., Inc., 200 Park Avenue, New York, New York 10166 (hereinafter referred to as "Landlord") and 24/7 MEDIA, INC., a Delaware corporation, having an address at 1290 Avenue of the Americas, 7th Floor, New York, New York 10104 (hereinafter referred to as "Tenant"). W I T N E S S E T H : Landlord hereby leases and Tenant hereby hires from Landlord, in the building (hereinafter referred to as the "Building") known as 1250 Broadway, New York, New York, the following space: the entire twenty seventh (27th) floor as shown hatched on the plan annexed hereto as Schedule A (which space is hereinafter referred to as "the demised premises"); for a term of approximately five (5) years and five (5) months, to commence on a date (hereinafter referred to as the "Commencement Date") which shall be either (i) May 1, 1998 (subject to postponement of such specific date as hereinafter set forth) or (ii) the date Tenant or anyone claiming under or through Tenant first occupies the demised premises for the conduct of its business, whichever occurs earlier and shall end on September 30, 2003 (such date on which the term of the Lease expires is hereinafter referred to as the "Expiration Date") or until such term shall sooner cease and terminate as hereinafter provided. The parties hereto, for themselves, their heirs, distributees, executors, administrators, legal representatives, trustees, successors and assigns, hereby covenant as follows: ARTICLE 1 RENT 1.01. Tenant shall pay to Landlord a fixed annual rent (hereinafter referred to as "fixed annual rent") at the annual rate of THREE HUNDRED EIGHTY ONE THOUSAND THREE HUNDRED SEVENTY FIVE AND 00/100 ($381,375.00) DOLLARS. Tenant agrees to pay the fixed annual rent in lawful money of the United States of America, in equal monthly installments in advance on the first day of each calendar month during said term, at the office of Landlord or such other place in the United States of America as Landlord may designate, without any setoff or deduction whatsoever, except such deduction as may be occasioned by the occurrence of any event permitting or requiring a deduction from or abatement of rent as specifically set forth in this Lease. Should the obligation to pay fixed annual rent commence on any day other than on the first day of a month, or end on a date other than the last day of the month, then the fixed annual rent for such month shall be prorated on a per diem basis. The first month's installment of fixed annual rent due under this Lease shall be paid by Tenant upon the execution of this Lease. 1.02. Tenant shall pay the fixed annual rent and additional rent as above and as hereinafter provided, by good and sufficient check (subject to collection) drawn on a New York City bank. All sums other than fixed annual rent payable by Tenant hereunder shall be deemed additional rent (for default in the payment of which Landlord shall have the same remedies as for a default in the payment of fixed annual rent), and shall be payable twenty (20) days after demand, unless other payment dates are hereinafter provided. 1.03. If Tenant shall fail to pay when due any installment of fixed annual rent or any payment of additional rent for a period of nine (9) days after such installment or payment shall have become due, Tenant shall pay interest thereon at the Interest Rate (as such term is defined in Article 22 hereof), from the date when such installment or payment shall have become due to the date of the payment thereof, and such interest shall be deemed additional rent. 1.04. If any of the fixed annual rent or additional rent payable under the terms and provisions of this Lease shall be or become uncollectible, reduced or required to be refunded because of any Legal Requirement (as such term is defined in Article 22 hereof) Tenant shall enter into such agreement(s) and take such other steps (without additional expense to Tenant) as Landlord may request and as may be legally permissible to permit Landlord to collect the maximum rents which from time to time during the continuance of such legal rent restriction may be legally permissible (and not in excess of the amounts reserved therefor under this Lease). Upon the termination of such legal rent restriction, (a) the rents shall become and thereafter be payable in accordance with the amounts reserved herein for the periods following such termination and (b) Tenant shall pay to Landlord, to the maximum extent legally permissible, an amount 2 equal to (i) the rents which would have been paid pursuant to this Lease but for such legal rent restriction less (ii) the rents paid by Tenant during the period such legal rent restriction was in effect. 1.05. Notwithstanding anything in subsection 1.01 to the contrary, and provided that Tenant is not in default under any of the monetary terms, covenants or provisions of this Lease beyond any applicable notice and grace periods, the monthly installments of fixed annual rent (but not the portion thereof constituting the ERIF) payable by Tenant hereunder shall be abated during the period commencing on the Commencement Date and ending of September 30, 1998. The day following the expiration of the foregoing rent abatement period (ie., October 1, 1998) is hereinafter sometimes referred to as the "Rent Commencement Date". ARTICLE 2 PREPARATION OF THE DEMISED PREMISES 2.01. Tenant has examined the demised premises and, subject to the provisions of Article 7 of this Lease, agrees to accept the same in their condition and state of repair existing as of the date hereof subject to normal wear and tear and to the removal therefrom of the property of the existing tenant or occupant thereof, if any, and understands and agrees that Landlord shall not be required to perform any work, supply any materials or incur any expense to prepare the demised premises for Tenant's occupancy. 2.02. If the Commencement Date is other than the specific date hereinabove set forth, then Tenant shall at Landlord's request, execute a written agreement confirming the Commencement Date. Any failure of the parties to execute such written agreement shall not affect the validity of the Commencement Date as fixed and determined by Landlord as aforesaid. ARTICLE 3 ADJUSTMENTS OF RENT 3.01. For the purposes of this Article 3, the following definitions shall apply: 3 (a) The term "Base Tax" shall be deemed to mean the Taxes for the Tax Year commencing July 1, 1998. (b) The term "Tenant's Tax Proportionate Share" shall be deemed to mean 2.18 (2.18%) percent. (c) The term "Taxes" shall mean all real estate taxes, assessments, governmental levies, business improvement district charges and assessments, municipal taxes, county taxes or any other governmental charge, general or special, ordinary or extraordinary, unforeseen as well as foreseen, of any kind or nature whatsoever, which are or may be assessed, levied or imposed upon all or any part of the Land, the Building and the sidewalks, plazas or streets in front of or adjacent thereto, including any tax, excise or fee measured by or payable with respect to any rent, and levied against Landlord and/or the Land and/or Building, under the laws of the United States, the State of New York, or any political subdivision thereof. If, due to a future change in the method of taxation or in the taxing authority, a new or additional real estate tax, or a franchise, income, transit, profit or other tax or governmental imposition, however designated, shall be levied against Landlord, and/or the Land and/or Building, in addition to, or in substitution in whole or in part for any tax which would constitute "Taxes", or in lieu of additional Taxes, such tax or imposition shall be deemed for the purposes hereof to be included within the term "Taxes". Except as provided in the preceding sentence, Tenant shall not be responsible to pay any gross receipts taxes, franchise taxes, capital stock taxes, inheritance, estate, succession, transfer, gift or other tax which is measured in any manner by income or profit of Landlord. (d) The term "Tax Year" shall mean each period of twelve months, commencing on the first day of July of each such period, in which occurs any part of the term of this Lease or such other period of twelve months occurring during the term of this Lease as hereafter may be duly adopted as the fiscal year for real estate tax purposes of the City of New York. (e) The term "Operating Year" shall mean the full calendar year after 1998 in which the term of this Lease commences and each succeeding calendar year thereafter. (f) The term "Base Year" shall mean the calendar year 1998. 4 (g) "Operating Expenses" shall mean the total of all the costs and expenses incurred or borne by Landlord in connection with the operation and maintenance of the Building, and the services provided tenants therein, including all expenses incurred as a result of Landlord's compliance with any of its obligations hereunder. Operating Expenses shall include, without being limited thereto, the following: (i) salaries, wages, medical, surgical and general welfare benefits (including group life insurance) and pension payments of employees of the managing agent for the Building (or, in the event of a successor Landlord or a change in the management practices of Landlord, the employees of such managing agent or Landlord) engaged in the operation and maintenance of the Building; (ii) payroll taxes, workmen's compensation, uniforms and dry cleaning for the employees referred to in subdivision (i); (iii) the cost of all charges for steam, heat, ventilation, air-conditioning and water (including water and sewer rentals) furnished to the Building, (including the Building including common areas thereof), together with any taxes on any such utilities; (iv) the cost of all charges for rent, casualty, war risk (if obtainable from the United States government), liability and other types of insurance; (v) the cost of all building and cleaning supplies and charges for telephone for the Building and cleaning of the Building, including common areas; (vi) the cost of all charges for management, cleaning and service contracts for any areas of the Building; (vii) the cost of Building electric current (for the purposes of this clause (vii), the cost of Building electric current shall be deemed to mean the cost of all electricity purchased, including any taxes thereon or fuel or other adjustments in connection therewith, for use in the Building other than that which is furnished to the demised space of other tenants in the Building; the parties agree that fifty (50%) percent of the Building's payment to the public utility for the purchase of electricity shall be deemed to be payment for Building electric current); (viii) the cost relating to the elevators and escalators; (ix) the cost relating to protection and security; (x) the cost relating to lobby decorations and interior and exterior landscape maintenance; (xi) repairs, replacements and improvements performed after the Base Year which are appropriate for the continued operation of the Building as a first class office building; (xii) painting of non-tenanted areas; (xiii) professional and consulting fees; (xiv) association fees or dues and (xv) the cost of capital expenditures made to the Building by reason of the laws and requirements of any public authorities or the requirements of insurance bodies which is incurred after the Base Year. The term "Operating Expenses", as used and defined under this Subsection (g), shall not, however, include the following items: (1) interest on and amortization of 5 any mortgages encumbering the Land or the Building; (2) the cost of tenant improvements made for new tenant(s) of the Building; (3) brokerage commissions; (4) financing or refinancing costs; (5) Taxes; and (6) salaries and fringe benefits for officers, employees and executives above the grade of building manager; (7) all leasing and brokerage commissions, takeover obligations and fees with respect to procuring tenants to rent space in the Building; (8) salaries, the value of fringe benefits and compensation benefits of personnel above the grade of building manager; (9) legal, arbitration, space planners, accounting and other professional fees incurred in connection with any preparation of, negotiation of, or dispute arising out of, any space lease, lease amendments, lease terminations and lease extensions, in the Building or in enforcing lease obligations (other than those which are common to substantially all tenants and which relate to the management and operation of the Building), including, without limitation, court costs; (10) the costs of any additions to the Building which increase the leasable space thereof; (11) expenses incurred by Landlord in connection with the transfer or disposition of the Land or Building or any superior lease, including, without limitation, transfer, deed and gains taxes and legal and accounting fees incurred in connection therewith; (12) interest or penalties incurred by Landlord for late payment by Landlord; (13) the costs of performing work or furnishing services to or for any tenant, other than Tenant, at Landlord's expense to the extent that such work or service is in excess of the work or services generally provided to tenants of the Building at Landlord's expense; (14) cost of overtime HVAC for other tenants of the Building; (15) the cost of any excess insurance premium to the extent that Landlord is entitled to be reimbursed therefor by Tenant or any other tenant of the Building other than pursuant to this Article or provisions in any such Tenant's lease similar to this Article; (16) bad debt loss, rent loss or reserve for either; (17) cost to acquire, lease or restore sculptures, paintings or other objects of art located within or outside the Building; (18) costs, fines, interest or penalties incurred by Landlord due to violations of any applicable governmental law, requirement or order except to the extent the same shall be due to the act or omission of Tenant, Tenant's agents, employees, invitees of licensees; (19) costs associated with the operation of the business entity which constitutes Landlord as the same is distinguished from the costs of operation of the Building; (20) costs of financing, refinancing, mortgaging, selling, syndicating or hypothecating Landlord's interest in the Building, including, without limitation, legal and accounting fees in connection therewith; (21) the value of lost income to Landlord of any office space in the Building which is utilized for the management of 6 the Building; (22) costs incurred in connection with services or utilities furnished to any retail space in the Building; (23) costs, including, without limitation, attorney's fees and disbursements in connection with any judgment, settlement or arbitration award incurred by Landlord that result from Landlord's tortious or willful misconduct; (24) any compensation paid to clerks, attendants or other person in commercial concessions operated by Landlord; (25) costs incurred in connection with the acquisition or sale of air rights, transferable development rights easements of other real property interests which do not directly or indirectly benefit the tenants of the Building. If Landlord shall purchase any item of capital equipment or make any capital expenditure designed to result in savings or reductions in Operating Expenses, then the cost thereof shall be included in Operating Expenses. The costs of capital equipment or capital expenditures are so to be included in Operating Expenses for the Operating Year in which the costs are incurred and subsequent Operating Years, on a straight line basis, to the extent that such items are amortized over such period of time as reasonably can be estimated as the time in which such savings or reductions in Operating Expenses are expected to equal Landlord's costs for such capital equipment or capital expenditure, with an interest factor equal to the Interest Rate at the time of Landlord's having incurred said costs. If Landlord shall lease any such item of capital equipment designed to result in savings or reductions in Operating Expenses, then the rentals and other costs paid or incurred in connection with such leasing shall be included in Operating Expenses for the Operating Year in which they were incurred. If during all or part of any Operating Year, including the Base Year, Landlord shall not furnish any particular item(s) of work or service (which would constitute an Operating Expense hereunder) to portions of the Building (including without limitation the demised premises) due to the fact that such portions are not occupied or leased, or because such item of work or service which is otherwise offered on a building-wide basis is not required or desired by the tenant (including without limitation Tenant) or such portion, or such tenant is itself obtaining and providing such item of work of service, or for any other reasons, then, for the purposes of computing the additional rent payable hereunder pursuant to paragraphs A and B of Section 3.02 hereof, the amount of the expenses for such item(s) for such period shall be deemed to be increased by an amount equal to the additional operating and maintenance expenses which would 7 reasonably have been incurred during such period by Landlord if it had at its own expense furnished such item(s) of work or services to such portion of the Building. (h) The term "Tenant's Proportionate Share" shall be deemed to mean 2.25 (2.25%) percent. (i) "Tenant's Proportionate Share of Increase" shall mean the percentage set forth in Section 3.01(h) multiplied by the increase in Operating Expenses for an Operating Year over Operating Expenses in the Base Year. (j) "Tenant's Projected Share of Increase" shall mean Tenant's Proportionate Share of Increase for the prior Operating Year and the reasonably estimated increase in costs for the current Operating Year divided by twelve (12) and payable monthly by Tenant to Landlord as additional rent. If, however, Landlord shall furnish any such estimate for an Operating Year subsequent to the commencement thereof, then (a) until the first day of the month following the month in which such estimate is furnished to Tenant, Tenant shall pay to Landlord on the first day of each month an amount equal to the monthly sum payable by Tenant to Landlord under this Section in respect of the last month of the preceding Operating Year; (b) promptly after such estimate is furnished to Tenant, Landlord shall give notice to Tenant stating whether the installments of Tenant's Projected Share of Increase previously made for such Operating Year were greater or less than the installments of Tenant's Projected Share of Increase to be made for such Operating Year in accordance with such estimate, and (i) if there shall be a deficiency, Tenant shall pay the amount thereof within twenty (20) days after demand therefor, or (ii) if there shall have been an overpayment, Landlord shall promptly either refund to Tenant the amount thereof or permit Tenant to credit the amount thereof against subsequent payments under this Lease; and (c) on the first day of the month following the month in which such estimate is furnished to Tenant, and monthly thereafter throughout the remainder of such Operating Year, Tenant shall pay to Landlord an amount equal to Tenant's Projected Share of Increase as shown on such estimate. (k) The term "Escalation Statement" shall mean a statement setting forth the amount payable by Tenant for a specified Tax Year or Operating Year (as the case may be) pursuant to this Article 3. 3.02. A. After the expiration of the Base Year and any Operating Year, Landlord shall furnish Tenant an 8 Escalation Statement setting forth Tenant's Proportionate Share of Increase, with respect to the Operating Expenses incurred for such Base Year or Operating Year. Within thirty (30) days after receipt of such Escalation Statement for any Operating Year, Tenant shall pay Tenant's Proportionate Share of Increase to Landlord as additional rent. B. Commencing with the first Operating Year for which Landlord shall be entitled to receive Tenant's Proportionate Share of Increase, Tenant shall pay to Landlord as additional rent for the then Operating Year, Tenant's Projected Share of Increase. If the Escalation Statement furnished by Landlord to Tenant pursuant to Section 3.02 (A) above at the end of the then Operating Year shall indicate that Tenant's Projected Share of Increase exceeded Tenant's Proportionate Share of Increase, Landlord shall forthwith either (i) pay the amount of excess directly to Tenant concurrently with the notice or (ii) permit Tenant to credit the amount of such excess against the subsequent payments of rent due hereunder; if such statement furnished by Landlord to Tenant hereunder shall indicate that Tenant's Proportionate Share of Increase exceeded Tenant's Projected Share of Increase for the then Operating Year, Tenant shall forthwith pay the amount of such excess to Landlord. 3.03. A. Tenant shall pay as additional rent for each Tax Year a sum (hereinafter referred to as "Tenant's Tax Payment") equal to Tenant's Tax Proportionate Share of the amount by which the Taxes for such Tax Year exceed the Base Tax. Tenant's Tax Payment for each Tax Year shall be due and payable in two (2) equal installments, in advance, on the first day of each June and December during each Tax Year, based upon the Escalation Statement furnished prior to the commencement of such Tax Year, until such time as a new Escalation Statement for a subsequent Tax Year shall become effective. If an Escalation Statement is furnished to Tenant after the commencement of a Tax Year in respect of which such Escalation Statement is rendered, Tenant shall, within fifteen (15) days thereafter, pay to Landlord an amount equal to the amount of any underpayment of Tenant's Tax Payment with respect to such Tax Year and, in the event of an overpayment, Landlord shall permit Tenant to credit against subsequent payments under this Lease the amount of Tenant's overpayment. If there shall be any increase in Taxes for any Tax Year, whether during or after such Tax Year, Landlord shall furnish a revised Escalation Statement for such Tax Year, and Tenant's Tax Payment for such Tax Year shall be adjusted and paid substantially in the same manner as provided in the preceding sentence. If during the term of this Lease, taxes are required to be paid (either to the appropriate taxing authorities 9 or as tax escrow payments to a superior mortgagee) in full or in monthly, quarterly, or other installments, on any other date or dates than as presently required, then at Landlord's option, Tenant's Tax Payments shall be correspondingly accelerated or revised so that said Tenant's Tax Payments are due at least 30 days prior to the date payments are due to the taxing authorities or the superior mortgagee (but not less than twenty (20) days after the Escalation Statement from Landlord is received by Tenant). The benefit of any discount for any early payment or prepayment of Taxes shall accrue solely to the benefit of Landlord and such discount shall not be subtracted from Taxes. Notwithstanding the foregoing, in the event Landlord fails to deliver an Escalation Statement for any period within two (2) years after the end of the period as to which such Escalation Statement would have related, Landlord shall be deemed to have waived the payment of any theretofore unpaid additional rent as to which such Escalation Statement would have related. B. If the real estate tax fiscal year of The City of New York shall be changed during the term of this Lease, any Taxes for such fiscal year, a part of which is included within a particular Tax Year and a part of which is not so included, shall be apportioned on the basis of the number of days in such fiscal year included in the particular Tax Year for the purpose of making the computations under this Section 3.03. C. If Landlord shall receive a refund of Taxes for any Tax Year, Landlord shall permit Tenant to credit against subsequent payments under this Lease, Tenant's Tax Proportionate Share of the refund (after deducting all costs incurred by Landlord to obtain such refund which have not been previously recovered); but not to exceed Tenant's Tax Payment paid for such Tax Year. D. If the Base Tax is reduced as a result of a certiorari proceeding or otherwise Landlord shall adjust the amounts previously paid by Tenant pursuant to the provisions of Section 3.03 hereof, and Tenant shall pay the amount of said adjustment within thirty (30) days after demand setting forth the amount of said adjustment. 3.04. Tenant shall pay to the appropriate taxing authority occupancy tax on all rental subject thereto (including occupancy tax on prepaid rent paid pursuant to Section 1.01 hereof). Tenant shall pay to Landlord upon demand, as additional rent, any occupancy tax or rent tax now in effect or hereafter enacted with respect to the rent payable hereunder, if payable by 10 Landlord in the first instance or hereafter required to be paid by Landlord. 3.05. In the event that the Commencement Date shall be other than the first day of a Tax Year or an Operating Year or the date of the expiration or other termination of this Lease shall be a day other than the last day of a Tax Year or an Operating Year, then in such event in applying the provisions of this Article 3 with respect to any Tax Year or Operating Year in which such event shall have occurred, appropriate adjustments shall be made to reflect the occurrence of such event on a basis consistent with the principles underlying the provisions of this Article 3 taking into consideration the portion of such Tax Year or Operating Year which shall have elapsed after the term hereof commences in the case of the Commencement Date, and prior to the date of such expiration or termination in the case of the Expiration Date or other termination. 3.06. Payments shall be made pursuant to this Article 3 notwithstanding the fact that an Escalation Statement is furnished to Tenant after the expiration of the term of this Lease. 3.07. In no event shall the fixed annual rent ever be reduced by operation of this Article 3 and the rights and obligations of Landlord and Tenant under the provisions of this Article 3 with respect to any additional rent shall survive the termination of this Lease. 3.08. Landlord's failure to render an Escalation Statement with respect to any Tax Year or Operating Year shall not prejudice Landlord's right to thereafter render an Escalation Statement with respect thereto or with respect to any subsequent Tax Year or Operating Year. 3.09. Each Escalation Statement shall be conclusive and binding upon Tenant unless within one hundred eighty (180) days after receipt of such Escalation Statement Tenant shall notify Landlord that it disputes the correctness of such Escalation Statement, specifying the particular respects in which such Escalation Statement is claimed to be incorrect. Any dispute relating to any Escalation Statement, not resolved within ninety (90) days after the giving of such Escalation Statement, may be submitted to arbitration by either party pursuant to Article 38 hereof. Pending the determination of such dispute, Tenant shall pay additional rent in accordance with the Escalation Statement that Tenant is disputing, without prejudice to Tenant's position. 11 3.10. Tenant, upon no less than five (5) days prior notice, may elect to have Tenant's designated certified public accountant examine such of Landlord's books and records (collectively, the "Records") that are directly relevant to the Escalation Statement in questions, provided any such examination shall be commenced within ninety (90) days after Tenant's receipt of an Escalation Statement and concluded within thirty (30) days after the commencement of such examination. In making such examination, Tenant agrees, and shall cause its designated certified public accountant to agree, to keep confidential any and all information contained in the Records. 3.11. If Landlord shall pay or incur any costs or expenses in contesting any Taxes for any Tax Year (other than any such year for which such Taxes comprise all or part of the Base Tax) or in connection with any challenge to the assessed valuation of all or part of the Building or the parcel of land on which the Building is constructed (the "Land") or otherwise in connection with any endeavor to lower the Taxes for any Tax Year (other than any such year for which such Taxes comprise all or part of the Base Tax) then, within twenty (20) days after request by Landlord, Tenant shall pay to Landlord Tenant's Tax Proportionate Share of the aggregate amounts of such costs and expenses so paid or incurred by Landlord. ARTICLE 4 ELECTRICITY 4.01. Landlord shall furnish to Tenant the electric energy which Tenant requires in the demised premises, in an amount up to six (6) watts per square foot, on a "rent inclusion" basis, through the presently installed electrical facilities for Tenant's reasonable use in the demised premises for lighting, light office equipment and the usual small business machines, including Xerox or other copying machines. Subject to the following provisions of this Article 4, there shall be no charge to Tenant therefor by way of measuring the same on any meter or otherwise, electric current being included as an additional service in the fixed annual rent payable hereunder. Landlord shall not in anywise be liable or responsible to Tenant for any loss or damage or expense which Tenant may sustain or incur if either the quantity or character of electric service is changed or is no longer available or suitable for Tenant's requirements. 12 4.02. (a) Tenant acknowledges and agrees (i) that the fixed annual rent hereinabove set forth in this Lease includes an Electricity Rent Inclusion Factor (as hereinafter defined), of THIRTY SEVEN THOUSAND ONE HUNDRED TWENTY FIVE AND 00/100 ($37,125.00) DOLLARS to compensate Landlord for the electrical wiring and other installations necessary for, and for its obtaining and redistribution of, electric current as an additional service; and (ii) that said Electricity Rent Inclusion Factor (hereinafter called "ERIF"), which shall be subject to periodic adjustments as herein provided, has been partially based upon Tenant's estimated connected electrical load and hours of use thereof for ordinary lighting and light office equipment, during ordinary business hours. The "Electricity Rent Inclusion Factor" shall mean the amount determined by applying the estimated connected electrical load and usage thereof in the demised premises (as determined by the electrical consultant as hereinafter provided) to the rate charged for such load and usage in the service classification in effect on January 1, 1998, pursuant to which Landlord then purchased electric current for the entire Building from the public utility corporation. If the cost to Landlord of electricity shall have been, or shall be, increased subsequent to January 1, 1998 (whether such increase occurs prior to or during the term of this Lease), by change in Landlord's electric rates, charges, fuel adjustment, or service classifications, or by taxes or charges of any kind imposed thereon, or for any other such reason, then the aforesaid ERIF portion of the fixed annual rent shall be increased in the same percentage and the fixed annual rent provided herein shall be increased accordingly. (b) Any such percentage increase in Landlord's cost due to change in Landlord's electric rates, charges, etc., shall be computed by the application of the average consumption (energy and demand) of electricity for the entire Building for the twelve (12) full months immediately prior to the rate change, other change in cost, or any changed methods of or rules on billing for same, on a consistent basis to the new rate and/or service classifications and to the immediately prior existing rate and/or service classifications. If the average consumption of electricity for the entire Building for said prior twelve (12) full months cannot reasonably be applied and used with respect to changed methods of or rules on billing, then the percentage increase shall be computed by the use of the average consumption (energy and demand) for the entire Building for the first three (3) months under such changed methods of or rules on billing, projected to a full twelve (12) months; and that same consumption, so projected, shall be applied to the rate and/or service classifications which existed immediately prior to the 13 changed methods of or rules on billing. The parties acknowledge that they understand that it is anticipated that existing electric rates, charges, etc., may be changed by virtue of time of day rates or other methods of billing, and that the foregoing reference to changes in methods of or rules on billing is intended to include any such change. The parties agree that a reputable, independent electrical consultant, selected by Landlord ("Landlord's electrical consultant") and paid equally by Landlord shall determine the percentage for the changes in the ERIF based on changes in Landlord's electric rates, charges, etc. 4.03. (a) The parties agree that Landlord's electrical consultant may from time to time make surveys in the demised premises covering the electrical equipment and fixtures and use of current therein, and the connected electrical load and usage portion of the ERIF shall be changed in accordance with such survey, and the ERIF automatically redetermined, accordingly, by Landlord's electrical consultant. The fixed annual rent shall be appropriately adjusted effective as of the date of any such change in connected load and usage, as disclosed by said survey. In no event, is the originally specified ERIF portion of the fixed annual rent (as adjusted by any electricity cost increases of Landlord after January 1, 1998) to be reduced. (b) The determination of change in the ERIF by Landlord's consultant shall be binding and conclusive on Landlord and on Tenant from and after the delivery of copies of such determination to Landlord and Tenant, unless within forty five (45) days after the delivery of such copies, Tenant disputes such determination. If Tenant disputes the determination, it shall, at its own expense, obtain from a reputable, independent electrical consultant its own survey of Tenant's electrical lighting and power load and hours of use thereof, and a determination of such change in the ERIF in accordance with the provisions of this Article 4. Tenant's consultant and Landlord's consultant then shall seek to agree on a finding of such determination of such change in the ERIF. If they cannot agree, they shall choose a third reputable electrical consultant whose cost shall be shared equally by Landlord and Tenant, to make a similar survey, and the determination of such ERIF change by such third electrical consultant shall be controlling. (If they cannot agree on such third consultant, within ten (10) days, then either party may apply to the Supreme Court in the County of New York for the appointment of such third consultant.) However, pending such determination, Tenant shall pay to Landlord the amount of ERIF as determined by Landlord's independent electrical consulting firm, provided, however, if the amount of ERIF determined as aforesaid is different from that determined by 14 Landlord's electrical consulting firm, then Landlord and Tenant shall make adjustment for any deficiency owed by Tenant or overage paid by Tenant pursuant to the decision of Landlord's electrical consulting firm. 4.04. Landlord reserves the right to discontinue furnishing electric energy to Tenant at any time upon sixty (60) days' written notice to Tenant, provided Landlord previously or contemporaneously terminates the electrical service to no less than seventy five (75%) percent of the tenants of the Building, and from and after the effective date of such termination, Landlord shall no longer be obligated to furnish Tenant with electric energy, provided, however, that such termination date may be extended for a time reasonably necessary for Tenant to make arrangements to obtain electric service directly from the public utility company servicing the Building. If Landlord exercises such right of termination, this Lease shall remain unaffected thereby and shall continue in full force and effect; and thereafter Tenant shall diligently arrange to obtain electric service directly from the public utility company servicing the Building, and may utilize the then existing electric feeders, risers and wiring serving the demised premises to the extent available and safely capable of being used for such purpose and only to the extent of Tenant's then authorized connected load. Landlord shall be obligated to pay no part of any cost required for Tenant's direct electric service. Notwithstanding the foregoing, in the event such discontinuance is required by any statute, municipal law, regulatory agency or the electric utility then servicing the Building, Tenant shall pay all costs and expenses incurred in connecting to and obtaining electrical service from the electric utility servicing the Building. If the discontinuance, however, shall be due solely to Landlord's decision to discontinue service, Landlord shall pay all reasonable costs necessary to directly connect Tenant to an electric utility servicing the Building. Commencing with the date when Tenant receives such direct service, and as long as Tenant shall continue to receive such service, the fixed annual rent payable under this Lease shall be reduced to $344,250.00 per annum. The foregoing assumes that the fixed annual rent originally set forth in this Lease has not been increased or reduced pursuant to any of the provisions of this Lease other than this Article 4. Should said original fixed annual rent be increased or reduced by any of the provisions of this Lease other than this Article 4, then the amount set forth above shall be increased or reduced by amounts equal to such increases or reductions. 4.05. Tenant agrees not to connect any additional electrical equipment of any type to the Building electric distribution system, other than lamps, typewriters and other small office machines which consume comparable amounts of electricity, without the Landlord's prior written consent, which consent shall not be unreasonably withheld. Any additional risers, feeders, or other equipment proper or necessary to supply Tenant's electrical requirements, upon 15 written request of Tenant, will be installed by Landlord, at the sole cost and expense of Tenant, if, in Landlord's sole judgment, the same are necessary and will not cause permanent damage or injury to the Building or the demised premises, or cause or create a dangerous or hazardous condition or entail excessive or unreasonable alterations, repair or expense or interfere with or disturb other tenants or occupants. 4.06. In no event shall the fixed annual rent under this Lease be reduced below the amount provided in Section 1.01 hereof by virtue of this Article 4 except as set forth in Section 4.04 hereof. ARTICLE 5 USE 5.01. The demised premises shall be used solely as and for executive and general offices, and for no other purpose. 5.02. Tenant shall not use or permit the use of the demised premises or any part thereof in any way which would violate any of the covenants, agreements, terms, provisions and conditions of this Lease or for any unlawful purposes or in any unlawful manner or in violation of the Certificate of Occupancy for the demised premises or the Building, and Tenant shall not suffer or permit the demised premises or any part thereof to be used in any manner or anything to be done therein or anything to be brought into or kept therein which, in the reasonable judgment of Landlord, shall in any way impair the character, reputation or appearance of the Building as a high quality office building, impair or interfere with any of the Building services or the proper and economic heating, cleaning, air-conditioning or other servicing of the Building or the demised premises, or impair or interfere with the use of any of the other areas of the Building by, or occasion discomfort, inconvenience or annoyance to, any of the other tenants or occupants of the Building. Tenant shall not install any electrical or other equipment of any kind which, in the reasonable judgment of Landlord, might cause any such impairment, interference, discomfort, inconvenience or annoyance. ARTICLE 6 ALTERATIONS AND INSTALLATIONS 6.01. Tenant shall make no alterations, installations, additions or improvements in or to the demised premises without Landlord's prior written consent which consent as to non-structural interior alterations which do not adversely affect Building systems shall not be unreasonably withheld or delayed and then only by contractors or mechanics first approved by Landlord which approval shall not be unreasonably withheld or delayed provided, however, that in connection with any alterations, installations or additions and improvement which will affect 16 any Building systems, Tenant shall use contractors or mechanics chosen from a list to be supplied by Landlord, said list to contain no less than three (3) firms in each trade("Landlord's Approved List"). All such work, alterations, installations, additions and improvements shall be done at Tenant's sole expense and at such times and in such manner as Landlord may from time to time reasonably designate. Prior to commencement of such work, Tenant shall obtain and deliver to Landlord written, unconditional waivers of mechanic's or other liens on the real property in which the demised premises are located, signed by all architects, engineers, contractors, mechanics and designers to become involved in such work. Tenant shall also provide at Landlord's request such financial security or proof of financial responsibility as Landlord shall reasonably require to guarantee completion of Tenant's work and payment of all contractors and suppliers utilized in connection therewith. Any Tenant's work in the demised premises shall be effected solely in accordance with plans and specifications first approved in writing by Landlord provided Tenant need not prepare plans if same are not required to obtain a building permit or are otherwise not required under applicable law. Tenant shall reimburse Landlord promptly upon demand for any actual out-of-pocket costs and expenses incurred by Landlord in connection with Landlord's review of such Tenant's plans and specifications. Any such approved alterations and improvements shall be performed in accordance with the foregoing and the following provisions of this Article 6: 1. All work shall be done in a good and workmanlike manner. 2. (a) In the event Tenant shall employ any contractor to do in the demised premises any work permitted by this Lease, such contractor and any subcontractor shall agree to employ only such labor as will not result in jurisdictional disputes or strikes or result in causing disharmony with other workers employed at the Building. Tenant will inform Landlord in writing of the names of any contractor or subcontractor Tenant proposes to use in the demised premises at least ten (10) days prior to the beginning of work by such contractor or subcontractor. (b) Tenant covenants and agrees to pay to contractor, as the work progresses, the entire cost of supplying the materials and performing the work shown on Tenant's approved plans and specifications. 3. All such alterations shall be effected in compliance with all applicable laws, ordinances, rules and regulations of governmental bodies having or asserting jurisdiction in the demised premises and in accordance with Landlord's Rules and Regulations with respect to alterations. 4. Tenant shall keep the Building and the demised premises free and clear of all liens for any work or material claimed to have been furnished to Tenant or to the demised 17 premises on Tenant's behalf, and all work to be performed by Tenant shall be done in a manner which will not unreasonably interfere with or disturb other tenants or occupants of the Building. 5. During the progress of the work to be done by Tenant, said work shall be subject to inspection by representatives of Landlord which shall be permitted access and the opportunity to inspect, at all reasonable times, but this provision shall not in any way whatsoever create any obligation on Landlord to conduct such an inspection. 6. With respect to alteration or improvement work costing more than $5,000, excluding Tenant's Work, Tenant agrees to pay to Landlord or its managing agent, as additional rent, promptly upon being billed therefor, a sum equal to ten (10%) percent of the cost of such work or alteration, for Landlord's indirect costs, field supervision and coordination in connection with such work. The provisions of the foregoing sentence shall not apply to the cost of painting, installation of wall and floor coverings and other similar purely decorative changes. 7. Prior to commencement of any work, Tenant shall furnish to Landlord certificates evidencing the existence of: (i) workmen's compensation insurance covering all persons employed for such work; and (ii) reasonable comprehensive general liability and property damage insurance naming Landlord its managing agent, ground lessors, mortgagees and Tenant as additional insureds, with coverage of at least $3,000,000 single limit. Notice is hereby given that Landlord shall not be liable for any labor or materials furnished or to be furnished to Tenant upon credit, and that no mechanic's or other lien for any such labor or materials shall attach to or affect the reversion or other estate or interest of Landlord in and to the demised premises. 6.02. Any mechanic's lien, filed against the demised premises or the Building for work claimed to have been done for or materials claimed to have been furnished to Tenant shall be discharged by Tenant at its expense within thirty (30) days after notice to thereof, by payment, filing of the bond required by law or otherwise. 6.03. All alterations, installations, additions and improvements made and installed by Landlord, if any, shall be the property of Landlord and shall remain upon and be surrendered with the demised premises as a part thereof at the end of the term of this Lease. 6.04. All alterations, installations, additions and improvements made and installed by Tenant, or at Tenant's expense, upon or in the demised premises which are of a permanent nature and which cannot be removed without damage to the demised premises or Building shall become and be the property of Landlord, and shall remain upon and be 18 surrendered with the demised premises as a part thereof at the end of the term of this Lease, except that Landlord shall have the right and privilege at any time up to six (6) months prior to the expiration of the term of the Lease to serve notice upon Tenant that any of such alterations, installations, additions and improvements of a non-building standard nature such as vaults, stairways, bathrooms and other installations which are unusually difficult or costly to remove, shall be removed and, in the event of service of such notice, Tenant will, at Tenant's own cost and expense, remove the same in accordance with such request, and restore the affected portions of the demised premises to their original condition, ordinary wear and tear and casualty excepted. 6.05. Where furnished by or at the expense of Tenant all furniture, furnishings and trade fixtures, including without limitation, murals, business machines and equipment, counters, screens, grille work, special panelled doors, cages, partitions, metal railings, closets, panelling, lighting fixtures and equipment, drinking fountains, refrigeration and air-handling equipment, and any other movable property shall remain the property of Tenant which may at its option remove all or any part thereof at any time prior to the expiration of the term of this Lease. In case Tenant shall decide not to remove any part of such property, Tenant shall notify Landlord in writing not less than three (3) months prior to the expiration of the term of this Lease, specifying the items of property which it has decided not to remove. If, within thirty (30) days after the service of such notice, Landlord shall request Tenant to remove any of the said property, Tenant shall at its expense remove the same in accordance with such request. As to such property which Landlord does not request Tenant to remove, the same shall be, if left by Tenant, deemed abandoned by Tenant and thereupon the same shall become the property of Landlord. 6.06. If any alterations, installations, additions, improvements or other property which Tenant shall have the right to remove or be requested by Landlord to remove as provided in Sections 6.04 and 6.05 hereof (herein in this Section 6.06 called the "property") are not removed on or prior to the expiration of the term of this Lease, Landlord shall have the right to remove the property and to dispose of the same without accountability to Tenant and at the sole cost and expense of Tenant. In case of any damage to the demised premises or the Building resulting from the removal of the property Tenant shall repair such damage or, in default thereof, shall reimburse Landlord for Landlord's cost in repairing such damage. This obligation shall survive any termination of this Lease. 6.07. Tenant shall keep records of Tenant's alterations, installations, additions and improvements costing in excess of $5,000 and of the cost thereof. Tenant shall, within forty-five (45) days after demand by Landlord, furnish to Landlord copies of such records and cost if Landlord shall require same in connection with any proceeding to reduce the assessed valuation of the Building, or in connection with any proceeding instituted pursuant to Article 14 hereof or for any other reason or purpose. 6.08. In the event that any asbestos or asbestos-containing materials shall be discovered in the demised premises in connection with the performance by Tenant of any alterations in accordance with the provisions of this Lease, which asbestos or asbestos-containing 19 materials are required by applicable Legal Requirements to be removed or encapsulated in connection with such alterations, then provided that such asbestos or asbestos-containing materials shall not have been introduced into the demised premises by Tenant or its agents, contractors or employees, Landlord shall, and Landlord's sole liability to Tenant shall be to, remove or encapsulate the same in accordance with applicable Legal Requirements, at Landlord's sole cost and expense. In no event shall the foregoing be deemed to obligate Landlord to remove or otherwise dispose of or abate vinyl asbestos tile, if any, in the demised premises. ARTICLE 7 REPAIRS 7.01. (a) Tenant shall take good care of the demised premises and the fixtures and appurtenances therein and at its sole cost and expense make all repairs thereto as and when needed to preserve the same in good working order and condition. With respect to the Building systems serving the demised premises Tenant shall be responsible for (i) repair and maintenance of Tenant's internal air-distribution system to the point at which the same connects to the main distribution duct for the demised premises, (ii) repair and maintenance of the internal electrical system to the panel box serving the demised premises, and (iii) repair and maintenance of all plumbing fixtures and lines in and serving the demised premises to the point at which the same join the main vertical risers of the Building. All such repairs and maintenance with respect to such Building system shall be performed by Tenant at Tenants cost and expense, by contractors and mechanics listed on Landlord's Approved List. Except as otherwise provided in Section 9.05 hereof, all damage or injury to the demised premises and to its fixtures, appurtenances and equipment shall be repaired, restored or replaced promptly by Tenant at its sole cost and expense, which repairs, restorations and replacements shall be in quality and class equal to the original work or installations. All damage or injury to the Building or to its fixtures, appurtenances and equipment caused by Tenant moving property in or out of the Building or by installation or removal of furniture, fixtures or other property, or in any other manner caused by Tenant, its agents, servants or contractors, shall be repaired, replaced or restored by Landlord at Tenant's cost and expense and such expense shall be collectible as additional rent and shall be paid by Tenant within fifteen (15) days after rendition of a bill therefor. Notwithstanding anything to foregoing contained here, if Tenant fails to make the repairs, restoration or replacements required under this Section 7.01 within twenty (20) days after notice thereof, same may be made by Landlord at the expense of Tenant and such expense shall be collectible as additional rent and shall be paid by Tenant within 15 days after rendition of a bill therefor. The exterior walls of the Building, the portions of any window sills outside the windows, and the windows are not part of the premises demised by this Lease and Landlord reserves all rights to such parts of the Building. 20 7.01. (b) Landlord shall, at its sole cost and expense (except as otherwise set forth herein), maintain and repair the structural portions of both the Building and the demised premises and the portion of the Building systems serving the demised premises for which Tenant is not responsible pursuant to Paragraph (a) hereof and the common areas to the extent that same affect Tenant's use and occupancy of, or access to, the demised premises. Tenant shall promptly notify Landlord of all repairs required to be made within the demised premises for which Landlord is responsible hereunder and Landlord shall perform same at its sole cost and expense provided, however, if the necessity for any of such repairs which are Landlord's obligation to perform shall have been occasioned by any action, omission to act or negligence of Tenant or Tenant's agents, employees or contractors, then Landlord shall make or cause to be made all such repairs at Tenant's sole cost and expense, and Tenant shall pay to Landlord as additional rent within ten (10) days of Landlord's demand therefor, an amount equal to Landlord's cost thereof. 7.02. Tenant shall not place a load upon any floor of the demised premises exceeding the floor load per square foot area which such floor was designed to carry and which is allowed by law. If Tenant shall desire a floor load in excess of that which the affected floors are designed to carry, Landlord agrees (provided Landlord's architects, in their reasonable discretion, find that the work necessary to increase such floor load does not adversely affect the structure of the Building, and further provided that such work will not interfere with the amount or availability of any space adjoining alongside, above or below the demised premises, or interfere with the occupancy of other tenants in the Building), to strengthen and reinforce the same so as to give the live load desired, provided Tenant shall submit to Landlord the plans showing the locations of and the desired floor live load for the areas in question and provided further that Tenant shall agree to pay for or reimburse Landlord on demand for the cost of such strengthening and reinforcement as well as any other reasonable out-of-pocket costs to and expenses of Landlord occasioned by or resulting from such strengthening or reinforcement. 7.03. Business machines and mechanical equipment used by Tenant which cause vibration, noise, cold or heat that may be transmitted to the Building structure or to any leased space to such a degree as to be objectionable to Landlord or to any other tenant in the Building shall be placed and maintained by Tenant at its expense in settings of cork, rubber or spring type vibration eliminators sufficient to absorb and prevent such vibration or noise, or prevent transmission of such cold or heat. The parties hereto recognize that the operation of elevators, air-conditioning and heating equipment will cause some vibration, noise, heat or cold which may be transmitted to other parts of the Building and demised premises. Landlord shall be under no obligation to endeavor to reduce such vibration, noise, heat or cold. 7.04. Except as otherwise specifically provided in this Lease, there shall be no allowance to Tenant for a diminution of rental value and no liability on the part of Landlord by reason of inconvenience, annoyance or injury to business arising from the making of any repairs, alterations, additions or improvements in or to any portion of the Building or the demised premises or in or to fixtures, appurtenances or equipment thereof. In performing such repairs 21 Landlord shall make a reasonable effort to minimize any inconvenience to Tenant but nothing herein shall be deemed to obligate Landlord to perform same on an overtime or premium basis. ARTICLE 8 REQUIREMENTS OF LAW 8.01. Tenant, at Tenant's sole cost and expense, shall promptly comply with all present and future laws, orders and regulations of all state, federal, municipal and local governments, departments, commissions and boards and any direction of any public officer pursuant to law, and all orders, rules and regulations of the New York Board of Fire Underwriters, Insurance Services Office, or any similar body which shall impose any violation, order or duty upon Landlord or Tenant with respect to the demised premises, whether or not arising out of Tenant's use or manner of use thereof (including Tenant's permitted use) or, with respect to the Building if arising out of Tenant's use or manner or use of the demised premises or the Building (including the use permitted under the Lease). Nothing herein shall require Tenant to make structural repairs or alterations or repairs or alterations to Building systems (unless Tenant has, by its manner of use of the demised premises or method of operation therein, violated any such laws, ordinances, orders, rules, regulations or requirements with respect thereto). 8.02. Notwithstanding the provisions of Section 8.01 hereof, Tenant, at its own cost and expense, may contest, in any manner permitted by law (including appeals to a court, or governmental department or authority having jurisdiction in the matter), the validity or the enforcement of any governmental act, regulation or directive with which Tenant is required to comply pursuant to this Lease, and may defer compliance therewith provided that: (a) such noncompliance shall not subject Landlord to criminal prosecution or subject the Land and/or Building to lien or sale; (b) such noncompliance shall not be in violation of any fee mortgage, or of any ground or underlying lease or any mortgage thereon; (c) Tenant shall first deliver to Landlord a surety bond issued by a surety company of recognized responsibility, or other security reasonably satisfactory to Landlord, indemnifying and protecting Landlord against any loss or injury by reason of such noncompliance; and (d) Tenant shall promptly and diligently prosecute such contest. Landlord, without expense or liability to it, shall cooperate with Tenant and execute any documents or pleadings required for such purpose, provided that Landlord shall reasonably be satisfied that the facts set forth in any such documents or pleadings are accurate. 22 8.03. Landlord shall be responsible for compliance with Local Law 58 and the Americans With Disabilities Act of 1990 (collectively, the "Acts") with respect to the bathrooms on the twenty seventh (27th) floor, provided, however, if compliance with the Acts is required as a result of Tenant's alterations or improvements to the demised premises, Tenant, at its sole cost and expense, shall perform all work necessary to comply with the Acts. ARTICLE 9 INSURANCE, LOSS, REIMBURSEMENT, LIABILITY 9.01. Tenant shall not do or permit to be done any act or thing upon the demised premises, which will invalidate or be in conflict with New York standard fire insurance policies covering the Building, and fixtures and property therein, or which would increase the rate of fire insurance applicable to the Building to an amount higher than it otherwise would be; and Tenant shall neither do nor permit to be done at the demised premises any use or activity which shall or might reasonably be expected to subject Landlord to any liability or responsibility for injury to any person or persons or to property by reason of any business or operation being carried on within the demised premises; but nothing in this Section 9.01 shall prevent Tenant's use of the demised premises for the purposes stated in Article 5 hereof. 9.02. If, as a result of any act or omission by Tenant or violation of this Lease, the rate of fire insurance applicable to the Building shall be increased to an amount higher that it otherwise would be, then in addition to any other remedies which Landlord has hereunder for any such violations of the terms of this Lease, Tenant shall reimburse Landlord for all increases of Landlord's fire insurance premiums so caused; such reimbursement to be additional rent payable upon the first day of the month following any outlay by Landlord for such increased fire insurance premiums. In any action or proceeding wherein Landlord and Tenant are parties, a schedule or "makeup" of rates for the Building or demised premises issued by the body making fire insurance rates for the demised premises, shall be presumptive evidence of the facts therein stated and of the several items and charges in the fire insurance rate then applicable to the demised premises. 9.03. Landlord or its agents shall not be liable for any injury or damage to persons or property resulting from fire, explosion, falling plaster, steam, gas, electricity, water, rain or snow or leaks from any part of the Building, or from the pipes, appliances or plumbing works or from the roof, street or subsurface or from any other place or by dampness or by any other cause of whatsoever nature, unless any of the foregoing shall be caused by or due to the negligence of Landlord, its agents, servants or employees. 9.04. Landlord or its agents shall not be liable for any damage which Tenant may sustain, if at any time any window of the demised premises is broken or temporarily or permanently (restricted to windows on a lot line, if permanently) closed, darkened or bricked up 23 for any reason whatsoever, except only Landlord's arbitrary acts if the result is permanent, and Tenant shall not be entitled to any compensation therefor or abatement of rent or to any release from any of Tenant's obligations under this Lease, nor shall the same constitute an eviction. Tenant agrees that Landlord shall be permitted at any time to install film on the inside of the windows of the Building to reduce the usage of energy in the Building. Tenant consents to such installation and agrees that in the event Landlord shall exercise its option to install such film Landlord shall have no liability with respect to any closing or darkening of the windows of the demised premises in connection therewith. 9.05. Tenant shall reimburse Landlord for all expenses, damages or fines incurred or suffered by Landlord, by reason of any breach, violation or nonperformance by Tenant, or its agents, servants or employees, of any covenant or provision of this Lease, or by reason of damage to persons or property caused by moving property of or for Tenant in or out of the Building, or by the installation or removal of furniture or other property of or for Tenant or by reason of or arising out of the carelessness, negligence or improper conduct of Tenant, or its agents, servants or employees, in the use or occupancy of the demised premises. Subject to the provisions of Section 8.02 hereof, where applicable, Tenant shall have the right, at Tenant's own cost and expense, to participate in the defense of any action or proceeding brought against Landlord, and in negotiations for settlement thereof if, pursuant to this Section 9.05, Tenant would be obligated to reimburse Landlord for expenses, damages or fines incurred or suffered by Landlord. 9.06. Tenant shall give Landlord notice in case of fire or accidents in the demised premises promptly after Tenant is aware of such event. 9.07. Tenant agrees to look solely to Landlord's estate and interest in the Land and Building, or the lease of the Building, or of the Land and Building, and the demised premises, for the satisfaction of any right or remedy of Tenant for the collection of a judgment (or other judicial process) requiring the payment of money by Landlord, in the event of any liability by Landlord, and no other property or assets of Landlord and no property of any partner, shareholder or principal of Landlord shall be subject to levy, execution, attachment, or other enforcement procedure for the satisfaction of Tenant's remedies under or with respect to this Lease, the relationship of Landlord and Tenant hereunder, or Tenant's use and occupancy of the demised premises, or any other liability of Landlord to Tenant. 9.08. (a) Landlord agrees that, if obtainable, it will include in its fire insurance policies appropriate clauses pursuant to which the insurance companies (i) waive all right of subrogation against Tenant with respect to losses payable under such policies and/or (ii) agree that such policies shall not be invalidated should the insured waive in writing prior to a loss any or all right of recovery against any party for losses covered by such policies. But should any additional premiums be exacted for any such clause or clauses, Landlord shall be released from the obligation hereby imposed unless Tenant shall agree to pay such additional premium. 24 (b) Tenant agrees to include, if obtainable, in its fire insurance policy or policies on its furniture, furnishings, fixtures and other property removable by Tenant under the provisions of this Lease appropriate clauses pursuant to which the insurance company or companies (i) waive the right of subrogation against Landlord and any tenant of space in the Building with respect to losses payable under such policy or policies and/or (ii) agree that such policy or policies shall not be invalidated should the insured waive in writing prior to a loss any or all right of recovery against any party for losses covered by such policy or policies. But should any additional premium be exacted for any such clause or clauses, Tenant shall be released from the obligation hereby imposed unless Landlord or the other tenants shall agree to pay such additional premium. (c) Provided that Landlord's right of full recovery under its policy or policies aforesaid is not adversely affected or prejudiced thereby, Landlord hereby waives any and all right of recovery which it might otherwise have against Tenant, its servants, agents and employees, for loss or damage occurring to the Building and the fixtures, appurtenances and equipment therein, to the extent the same is covered by Landlord's insurance, notwithstanding that such loss or damage may result from the negligence or fault of Tenant, its servants, agents or employees. Provided that Tenant's right of full recovery under its aforesaid policy or policies is not adversely affected or prejudiced thereby, Tenant hereby waives any and all right of full recovery which it might otherwise have against Landlord, its servants, agents and employees, and against every other tenant in the Building who shall have executed a similar waiver as set forth in this Section 9.08(c) for loss or damage to, Tenant's furniture, furnishings, fixtures and other property removable by Tenant under the provisions hereof to the extent that the same is covered by Tenant's insurance, notwithstanding that such loss or damage may result from the negligence or fault of Landlord, its servants, agents or employees, or such other tenant and the servants, agents or employees thereof. (d) Landlord and Tenant hereby agree to advise the other promptly if the clauses to be included in their respective insurance policies pursuant to subdivisions 9.08(a) and (b) hereof cannot be obtained. Landlord and Tenant hereby also agree to notify the other promptly of any cancellation or change of the terms of any such policy which would affect such clauses. 9.09. Tenant covenants and agrees to provide on or before the Commencement Date and to keep in force during the term hereof for the benefit of Landlord and Tenant a comprehensive general liability insurance policy protecting Landlord and Tenant against any liability contained in the standard extended coverage policy, occasioned by any occurrence on or about the demised premises or any appurtenances thereto. Such policy is to be written by good and solvent insurance companies reasonably satisfactory to Landlord, and shall be in such limits as Landlord may reasonably require and as of the date of this Lease Landlord reasonably requires limits of liability thereunder of not less than the amount of Three Million ($3,000,000) Dollars single limit for bodily or personal injury (including death) and in the amount of Three Hundred Thousand ($300,000) Dollars in respect of property damage. Such insurance may be carried 25 under a blanket policy covering the demised premises and other locations of Tenant, if any. Prior to the time such insurance is first required to be carried by Tenant and thereafter, at least fifteen (15) days prior to the effective date of any such policy, Tenant agrees to deliver to Landlord either a duplicate original of the aforesaid policy or a certificate evidencing such insurance. Said policy or certificate, as the case may be, shall contain an endorsement that such insurance may not be cancelled except upon ten (10) days' notice to Landlord. Tenant's failure to provide and keep in force the aforementioned insurance shall be regarded as a material default hereunder entitling Landlord to exercise any or all of the remedies provided in this Lease in the event of Tenant's default. ARTICLE 10 DAMAGE BY FIRE OR OTHER CAUSE 10.01. If the Building or the demised premises shall be partially or totally damaged or destroyed by fire or other cause, then whether or not the damage or destruction shall have resulted from the fault or neglect of Tenant, or its employees, agents, or visitors (and if this Lease shall not have been terminated as in this Article 10 hereinafter provided), Landlord shall repair the damage and restore and rebuild the Building and/or the demised premises, at its expense (without limiting the rights of Landlord under any other provisions of this Lease), with reasonable dispatch after notice to it of the damage or destruction; provided, however, that Landlord shall not be required to repair or replace any of Tenant's property. 10.02. If the Building or the demised premises shall be partially damaged or partially destroyed by fire or other cause, then unless such fire or damage shall have resulted from the negligence of Tenant, the rents payable hereunder shall be abated to the extent that the demised premises shall have been rendered untenantable for the period from the date of such damage or destruction to the date the damage shall be repaired or restored. If the demised premises or a major part thereof shall be totally (which shall be deemed to include substantially totally) damaged or destroyed or rendered completely (which shall be deemed to include substantially completely) untenantable on account of fire or other cause, the rents shall abate as of the date of the damage or destruction and until Landlord shall repair, restore and rebuild the Building and the demised premises, provided, however, that should Tenant reoccupy a portion of the demised premises during the period the restoration work is taking place and prior to the date that the same are made completely tenantable, rents allocable to such portion shall be payable by Tenant from the date of such occupancy. 10.03. If the Building or the demised premises shall be totally damaged or destroyed by fire or other cause, or if the Building shall be so damaged or destroyed by fire or other cause (whether or not the demised premises are damaged or destroyed) as to require a reasonably estimated expenditure of more than forty (40%) per cent of the full insurable value of 26 the Building immediately prior to the casualty, then in either such case Landlord may terminate this Lease by giving Tenant notice to such effect within one hundred eighty (180) days after the date of the casualty. If the demised premises or any part thereof shall be damaged by fire or other casualty as set forth in Article 10, and Landlord is required to or elects to repair and restore the demised premises, Landlord shall, within 60 days after such damage or destruction, provide Tenant with a written notice of the estimated date on which the restoration of the demised premises shall be substantially completed. If such estimated date is more than twelve (12) months after the date of such damage or destruction, Tenant may terminate this Lease by notice to Landlord, which notice shall be given within twenty (20) days after the date Landlord provides the notice required by the preceding sentence, and such termination shall be effective upon the giving of Tenant's notice. Failure by Tenant to provide such notice within such twenty (20) day period shall be deemed an election by Tenant not to terminate this Lease. If Tenant elects not to terminate this Lease or is deemed to have so elected, and if Landlord has not substantially completed the required repairs and restored the demised premises within the period originally estimated by Landlord or within such period thereafter (not to exceed 3 months) as shall equal the aggregate period Landlord may have been delayed in doing so by adjustment of insurance, labor trouble, governmental controls, act of god, or any other cause beyond Landlord's reasonable control, then Tenant shall have the further right to elect to terminate this Lease upon written notice to Landlord and such election shall be effective upon the expiration of thirty (30) days after the date of such notice, unless Landlord substantially completes such restoration within such thirty (30) day period. 10.04. No damages, compensation or claim shall be payable by Landlord for inconvenience, loss of business or annoyance arising from any repair or restoration of any portion of the demised premises or of the Building pursuant to this Article 10. 10.05. Notwithstanding any of the foregoing provisions of this Article 10, if Landlord or the lessor of any superior lease or the holder of any superior mortgage shall be unable to collect all of the insurance proceeds (including rent insurance proceeds) applicable to damage or destruction of the demised premises or the Building by fire or other cause, by reason of some action or inaction on the part of Tenant or any of its employees, agents or contractors, then, without prejudice to any other remedies which may be available against Tenant, there shall be no abatement of Tenant's rents, but the total amount of such rents not abated (which would otherwise have been abated) shall not exceed the amount of uncollected insurance proceeds. 10.06. Landlord will not carry separate insurance of any kind on Tenant's property, and, except as provided by law or by reason of its breach of any of its obligations hereunder, shall not be obligated to repair any damage thereto or replace the same. Tenant shall maintain insurance on Tenant's property, and Landlord shall not be obligated to repair any damage thereto or replace the same. 27 10.07. The provisions of this Article 10 shall be considered an express agreement governing any cause of damage or destruction of the demised premises by fire or other casualty, and Section 227 of the Real Property Law of the State of New York, providing for such a contingency in the absence of an express agreement, and any other law of like import, now or hereafter in force, shall have no application in such case. ARTICLE 11 ASSIGNMENT, MORTGAGING, SUBLETTING, ETC. 11.01. Tenant shall not (a) assign or otherwise transfer this Lease or the term and estate hereby granted, (b) sublet the demised premises or any part thereof or allow the same to be used or occupied by others or in violation of Article 5, (c) mortgage, pledge or encumber this Lease or the demised premises or any part thereof in any manner by reason of any act or omission on the part of Tenant, without, in each instance, obtaining the prior consent of Landlord, except as otherwise expressly provided in this Article 11. For purposes of this Article 11, (i) the transfer of a majority of the issued and outstanding capital stock of any corporate tenant, or of a corporate subtenant, or the transfer of a majority of the total interest in any partnership tenant or subtenant, however accomplished, whether in a single transaction or in a series of related or unrelated transactions, shall be deemed an assignment of this Lease, or of such sublease, as the case may be, except that the transfer of the outstanding capital stock of any corporate tenant, or subtenant, shall be deemed not to include the sale of such stock by persons or parties, through the "over-the-counter market" or through any recognized stock exchange, or in connection with an initial public offering conducted in accordance with the provisions of the Securities and Exchange Act of 1933 other than those deemed "insiders" within the meaning of the Securities Exchange Act of 1934 as amended, (ii) any person or legal representative of Tenant, to whom Tenant's interest under this Lease passes by operation of law, or otherwise, shall be bound by the provisions of this Article 11, and (iii) a modification, amendment or extension of a sublease shall be deemed a sublease. 11.02. The provisions of Section 11.01 above shall not apply to an assignment of this Lease to any corporation into or with which Tenant is merged or consolidated or to any corporation which shall be an affiliate, subsidiary, parent or successor of Tenant, provided and on condition that (i) such transaction is for a bona fide business purpose and not, either directly or indirectly, principally for the purpose of transferring the leasehold created hereby, and (ii) the successor to the Tenant or transferee has a net worth immediately following such transfer of not less than the greater of (x) the net worth of Tenant as of the Commencement Date, or (y) the net worth of Tenant immediately preceding such transfer, and proof thereof, reasonably satisfactory to Landlord, shall have been delivered to Landlord at least ten (10) days prior to the effective date of such transfer. 28 For the purpose of this subparagraph (b), a "subsidiary" or "affiliate" or "successor" of Tenant shall mean the following: (i) An "affiliate" shall mean any corporation which, directly or indirectly, controls or is controlled by or is under common control with Tenant. For this purpose, "control" shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of such corporation, whether through the ownership of voting securities or by contract or otherwise. (ii) A "subsidiary" shall mean any corporation not less than 50% of whose outstanding stock shall, at the time, be owned directly or indirectly by Tenant. Any cessation of the affiliate or subsidiary relationship between Tenant and the entity in question shall constitute an assignment or subletting, as the case may be, which shall be subject to all of the terms, provisions and conditions of this Article. (iii) A "successor" of Tenant shall mean (x) a corporation in which or with which Tenant, its corporate successors or assigns, is merged or consolidated, in accordance with applicable statutory provisions for merger or consolidation of corporations, provided that by operation of law or by effective provisions contained in the instruments of merger or consolidation, the liabilities of the corporations participating in such merger or consolidation are assumed by the corporation surviving such merger or created by such consolidation, or (y) a transferee of not less than 80% of the issued and outstanding stock of Tenant, or (z) or the transfer of all or substantially all of the assets of Tenant. 11.03. Any assignment or transfer, whether made with Landlord's consent as required by Section 11.01 hereof or without Landlord's consent pursuant to Section 11.02 hereof, shall be made only if, and shall not be effective until, the assignee shall execute, acknowledge and deliver to Landlord a recordable agreement, in form and substance reasonably satisfactory to Landlord, whereby the assignee shall assume the obligations and performance of this Lease and agree to be bound by and upon all of the covenants, agreements, terms, provisions and conditions hereof on the part of Tenant to be performed or observed from and after the effective date of such assignment and whereby the assignee shall agree that the provisions of this Article 11 hereof shall, notwithstanding such an assignment or transfer, continue to be binding upon it in the future. Tenant covenants that, notwithstanding any assignment or transfer, whether or not in violation of the provisions of this Lease, and notwithstanding the acceptance of fixed annual rent by Landlord from an assignee or transferee or any other party, Tenant shall remain fully and primarily liable for the payment of the fixed annual rent due and to become due under this Lease and for the performance of all of the covenants, agreements, terms, provisions and conditions of this Lease on the part of Tenant to be performed or observed. 11.04. The liability of Tenant for the due performance by Tenant of the obligations on its part to be performed under this Lease, shall not be discharged, released or 29 impaired in any respect by an agreement or stipulation made by Landlord or any grantee or assignee of Landlord, by way of mortgage, or otherwise, extending the time of or modifying any of the obligations contained in this Lease, or by any waiver or failure of Landlord to enforce any of the obligations on Tenant's part to be performed under this Lease, and Tenant shall continue liable hereunder. If any such agreement or modification operates to increase the obligations of a tenant under this Lease, the liability under this Section 11.04 of the tenant named in the Lease or any of its successors in interest, (unless such party shall have expressly consented in writing to such agreement or modification) shall continue to be no greater than if such agreement or modification had not been made. To charge Tenant named in this Lease and its successors in interest, no demand or notice of any default shall be required; Tenant and each of its successors in interest hereby expressly waives any such demand or notice. 11.05. Landlord shall not unreasonably withhold or delay its consent to an assignment of this Lease or a subletting of the whole or a part of the demised premises for substantially the remainder of the term of this Lease, provided: (a) Tenant shall furnish Landlord with the name and business address of the proposed subtenant or assignee, information with respect to the nature and character of the proposed subtenant's or assignee's business, or activities, such references and current financial information with respect to net worth, credit and financial responsibility as are reasonably satisfactory to Landlord, and the documentation required in Section 11.06 (a) and (b) herein, as the case may be; (b) The proposed subtenant or assignee is a reputable party whose financial net worth, credit and financial responsibility is, considering the responsibilities involved, reasonably satisfactory to Landlord; (c) The nature and character of the proposed subtenant or assignee, its business or activities and intended use of the demised premises is, in Landlord's reasonable judgment, in keeping with the standards of the Building and the floor or floors on which the demised premises are located; (d) The proposed subtenant or assignee is not then an occupant of any part of the Building or a party who dealt with Landlord or Landlord's agent (directly or through a broker) with respect to space in the Building during the 6 months immediately preceding Tenant's request for Landlord's consent; (e) All costs incurred with respect to providing reasonably appropriate means of ingress and egress from the sublet space or to separate the sublet space from the remainder of the demised premises shall, subject to the provisions of Article 6 with respect to alterations, installations, additions or improvements, be borne by Tenant; 30 (f) Each sublease shall specifically state that (i) it is subject to all the terms, covenants, agreements, provisions, and conditions of this Lease, (ii) the subtenant or assignee, as the case may be, will not have the right to a further assignment thereof or sublease or assignment thereunder, or to allow the demised premises to be used by others, without the consent of Landlord in each instance; (g) Tenant shall together with requesting Landlord's consent hereunder, have paid Landlord any actual reasonable out-of-pocket attorney's fees incurred by Landlord to review the proposed assignment or subletting including attorneys fees incurred by Landlord; (h) Tenant shall have complied with the provisions in Section 11.06 and Landlord shall not have made any of the elections provided for in Section 11.06; (i) The proposed subtenant or assignee is not (i) a bank trust company, safe deposit business, savings and loan association or loan company; (ii) an employment or recruitment agency; (iii) a school, college, university or educational institution whether or not for profit; (iv) a government or any subdivision or agency thereof; (j) In the case of a subletting of a portion of the demised premises, the portion so sublet shall be regular in shape and suitable for normal renting purposes; (k) Tenant shall have granted to Landlord or Landlord's agent the exclusive right to sublease the demised premises or such portion thereof as Tenant proposes to sublet, or to assign this Lease as the case may be; provided, however, if at the time of the proposed sublet or assignment there are any other full floor spaces available for rent between and including the twenty-seventh (27th) and thirty-eighth (38th) floors of the Building, the provisions of this section 11.05(k) shall not apply; and (l) The proposed assignment shall be for a consideration or the proposed subletting shall be at a rental rate not less than eighty five percent (85%) of the rental rates then being charged under leases being entered into by Landlord for comparable space in the Building and for a comparable term and in no event shall Tenant advertise or list with brokers at such lower rental rate. 11.06. (a) Should Tenant agree to assign this Lease, other than by an assignment contemplated by Section 11.02, Tenant shall deliver to Landlord (i) a "term sheet" setting forth the terms of the proposed assignment and (ii) a letter signed by the proposed assignee confirming that the provisions of the "term sheet" represent a bona fide offer on the part of the proposed assignee to enter into an assignment, not less than sixty (60) days prior to the effective date of the contemplated assignment and Landlord shall than have the right to elect, by notifying Tenant within thirty (30) days of such delivery, to (i) terminate this Lease, as of such effective date as if it were the Expiration Date set forth in this Lease or (ii) accept an assignment 31 of this Lease from Tenant, and Tenant shall then promptly execute and deliver to Landlord, or Landlord's designee if so elected by Landlord, in form reasonably satisfactory to Landlord's counsel, an assignment which shall be effective as of such effective date. (b) Should Tenant agree to sublet the demised premises or any portion thereof, other than by a sublease contemplated by Section 11.02, Tenant shall deliver to Landlord (i) a "term sheet" setting forth the terms of the proposed subletting and (ii) a letter signed by the proposed subtenant confirming that the provisions of the "term sheet" represent a bona fide offer on the part of the proposed subtenant to enter into a sublease, not less than sixty (60) days prior to the effective date of the contemplated sublease, and Landlord shall then have the right to elect, by notifying Tenant within thirty (30) days of such delivery, to (i) terminate this Lease as to the portion of the demised premises affected by such subletting or as to the entire demised premises in the case of a subletting thereof, as of such effective date, (ii) in the case of a proposed subletting of the entire demised premises accept an assignment of this Lease from Tenant, and Tenant shall then promptly execute and deliver to Landlord, or Landlord's designee if so elected by Landlord, in form reasonably satisfactory to Landlord's counsel, an assignment which shall be effective as of such effective date, (iii) accept a sublease from Tenant of the portion of the demised premises affected by such proposed subletting or the entire demised premises in the case of a proposed subletting thereof, and Tenant shall then promptly execute and deliver a sublease to Landlord, or Landlord's designee if so elected by Landlord, for the remainder of the demised term less one day, commencing with such effective date, at (x) the rental terms reflected in the proposed sublease or (y) the rental terms contained in this Lease on a per rentable square foot basis, as elected by Landlord in such notice. (c) If Landlord should elect to have Tenant execute and deliver a sublease pursuant to any of the provisions of this Section 11.06, said sublease shall be in a form reasonably satisfactory to Landlord's counsel and on all the terms contained in this Lease, except that: (i) The rental terms, if elected by Landlord, may be either as provided in item (x) or item (y) of subsection 11.06(b) hereof. (ii) The sublease shall not provide for any work to be done for the subtenant or for any initial rent concessions or contain provisions inapplicable to a sublease, except that in the case of a subletting of a portion of the demised premises Tenant shall reimburse subtenant for the cost of erecting such demising walls as are necessary to separate the subleased premises from the remainder of the demised premises and to provide access thereto, (iii) The subtenant thereunder shall have the right to underlet the subleased premises, in whole or in part, without Tenant's consent, 32 (iv) The subtenant thereunder shall have the right to make, or cause to be made, any changes, alterations, decorations, additions and improvements that subtenant may desire or authorize provided, however, that Tenant shall not be responsible for the removal thereof or any restoration which would otherwise be required as a result thereof under Article 6, (v) Such sublease shall expressly negate any intention that any estate created by or under such sublease be merged with any other estate held by either of the parties thereto, (vi) Any consent required of Tenant, as lessor under that sublease, shall be deemed granted if consent with respect thereto is granted by Landlord, (vii) There shall be no limitation as to the use of the sublet premises by the subtenant thereunder, (viii) Any failure of the subtenant thereunder to comply with the provisions of said sublease, other than with respect to the payment of rent to Tenant, shall not constitute a default thereunder or hereunder if Landlord has consented to such noncompliance, and (ix) Such sublease shall provide that Tenant's obligations with respect to vacating the demised premises and removing any changes, alterations, decorations, additions or improvements made in the subleased premises shall be limited to those which accrued and related to such as were made prior to the effective date of the sublease. (d) If pursuant to the exercise of any of Landlord's options pursuant to Section 11.06 hereof this Lease is terminated as to only a portion of the demised premises, then the fixed annual rent payable hereunder and the additional rent payable pursuant to Article 3 and 4 hereof shall be adjusted in proportion to the portion of the demised premises affected by such termination. (e) If Landlord shall give its consent to any assignment of this Lease or to any sublease, Tenant shall in consideration therefor, pay to Landlord, as additional rent: (i) in the case of an assignment, an amount equal to fifty (50%) percent of the sums and other considerations paid to Tenant by the assignee for or by reason of such assignment (including, but not limited to, sums paid for the sale of Tenant's fixtures, leasehold improvements, equipment, furniture, furnishings or other personal property, less, in the 33 case of a sale of any of the foregoing other than leasehold improvements, the then net unamortized or undepreciated cost thereof determined on the basis of Tenant's federal income tax returns); and (ii) in the case of a sublease, fifty (50%) percent of the rents, additional charge or other consideration payable under the sublease to Tenant by the subtenant which is in excess of the fixed annual rent and additional rent accruing during the term of the sublease in respect of the subleased space (at the rate per square foot payable by Tenant hereunder) pursuant to the terms hereof (including, but not limited to, sums paid for the sale or rental of Tenant's fixtures, leasehold improvements, equipment, furniture or other personal property, less, in the case of the sale of any of the foregoing other than leasehold improvements, the then net unamortized or undepreciated cost thereof determined on the basis of Tenant's federal income tax returns). The sums payable under this subsection 11.06(e) shall be paid to Landlord as and when paid by the subtenant to Tenant. In calculating the amounts due Landlord, Tenant shall be allowed to deduct Tenants Costs with respect to the assignment or sublease in question. As used herein, the term "Tenant's Costs" shall mean: (x) the reasonable brokerage commissions, legal expenses and advertising expenses incurred by Tenant to third parties in connection with the subletting or assignment in question; and (y) the actual out-of-pocket cost to Tenant of performing commercially reasonable alterations to the demised premises to prepare same for occupancy by the subtenant or assignee in question, the foregoing costs and/or allowances to be amortized ratably over the term of the sublease in question. Tenant shall provide Landlord with evidence reasonably satisfactory to Landlord of Tenant's Costs within thirty (30) days after the effective date of the assignment of this Lease or commencement date of the sublease to which same apply. 11.07. Landlord's consent to any sublease or assignment shall not be deemed or construed to modify, amend or affect the terms and provisions of this Lease, or Tenant's obligations hereunder, which shall continue to apply to the occupants thereof, as if the sublease or assignment had not been made. Notwithstanding any assignment or sublease, Tenant shall remain fully liable for the payment of fixed annual rent and additional rents and for the other obligations of this Lease on the part of Tenant to be performed or observed. In the event that Tenant defaults in the payment of any rent, Landlord is authorized to collect any rents due or accruing from any assignee, subtenant or other occupant of the demised premises and to apply the net amounts collected to the fixed annual rent and additional rent reserved herein, and the 34 receipt of any such amounts by Landlord from an assignee or subtenant, or other occupant of any part of the demised premises, shall not be deemed or construed as releasing Tenant from Tenant's obligations hereunder or the acceptance of that party as a direct tenant. 11.08. Notwithstanding anything to the contrary contained herein, Tenant shall not be obligated to make the offer described in Section 11.06 hereof, and Tenant shall not be required to obtain Landlord's consent to the use of desk space in the demised premises by entities or individuals with whom Tenant has a continuing business relationship provided, however, that Tenant shall not (subject to the method of calculation provided below) permit the use of desk space involving more in the aggregate than twenty (20%) percent of the area of the demised premises. Permission to such persons to use the demised premises shall not create a tenancy or any other interest in the demised premises except a license revocable by Tenant at will which shall cease and expire in any event automatically without notice upon the expiration or termination of the letting under the Lease, and all acts, omissions and operations of such persons and/or their employees shall be deemed acts, omissions and operations of Tenant. Use of the demised premises pursuant hereto shall not be deemed to entitle any such occupant to the rights or privileges which Landlord has or may hereafter accord to lessees of space in the Building. For purposes of determining compliance with the foregoing limitation on the square foot area of the demised premises allocable to desk space, there shall be included (i.e., added) to the space devoted specifically to such purposes, an allocable share of reception, secretarial, file and other common areas comprising part of the demised premises. Any such desk space shall remain at all times a part of and shall not be separately demised or separated from the balance of the demised premises, and the occupants thereof shall at all times gain access to their space through reception and corridor areas shared with Tenant. ARTICLE 12 CERTIFICATE OF OCCUPANCY 12.01. Tenant will not at any time use or occupy the demised premises in violation of the Certificate of Occupancy issued for the Building. ARTICLE 13 ADJACENT EXCAVATION SHORING 13.01. If an excavation or other substructure work shall be made upon land adjacent to the demised premises, or shall be authorized to be made, Tenant shall afford to the person causing or authorized to cause such excavation, license to enter upon the demised premises for the purposes of doing such work as shall be necessary to preserve the wall of or the Building of which the demised premises form a part from injury or damage and to support the 35 same by proper foundations without any claim for damages or indemnity against Landlord, or diminution or abatement of rent. ARTICLE 14 CONDEMNATION 14.01. In the event that the whole of the demised premises shall be lawfully condemned or taken in any manner for any public or quasi-public use, this Lease and the term and estate hereby granted shall forthwith cease and terminate as of the date of vesting of title. In the event that only a part of the demised premises shall be so condemned or taken, then, effective as of the date of vesting of title, the fixed annual rent under Article 1 hereunder and additional rents under Articles 3 and 4 hereunder shall be abated in an amount thereof apportioned according to the area of the demised premises so condemned or taken. In the event that a material part of the Building shall be so condemned or taken, then (a) Landlord (whether or not the demised premises be affected) may, at Landlord's option, terminate this Lease and the term and estate hereby granted as of the date of such vesting of title by notifying Tenant in writing of such termination within sixty (60) days following the date on which Landlord shall have received notice of vesting of title, or (b) if such condemnation or taking shall be of a substantial part of the demised premises or of a substantial part of the means of access thereto, Tenant may, at Tenant's option, by delivery of notice in writing to Landlord within thirty (30) days following the date on which Tenant shall have received notice of vesting of title, terminate this Lease and the term and estate hereby granted as of the date of vesting of title, or (c) if neither Landlord nor Tenant elects to terminate this Lease, as aforesaid, this Lease shall be and remain unaffected by such condemnation or taking, except that the fixed annual rent payable under Article 1 and additional rents payable under Articles 3 and 4 hereof shall be abated to the extent hereinbefore provided in this Article 14. In the event that only a part of the demised premises shall be so condemned or taken and this Lease and the term and estate hereby granted with respect to the remaining portion of the demised premises are not terminated as hereinbefore provided, Landlord will, with reasonable diligence and at its expense, restore the remaining portion of the demised premises as nearly as practicable to the same condition as it was in prior to such condemnation or taking and to the extent reasonably practicable, make the demised premises a single architectural unit. 14.02. In the event of its termination in any of the cases hereinbefore provided, this Lease and the term and estate hereby granted shall expire as of the date of such termination with the same effect as if that were the Expiration Date, and the fixed annual rent and additional rents payable hereunder shall be apportioned as of such date. 14.03. In the event of any condemnation or taking hereinbefore mentioned of all or a part of the Building, Landlord shall be entitled to receive the entire award in the condemnation proceeding, including any award made for the value of the estate vested by this Lease in Tenant, and Tenant hereby expressly assigns to Landlord any and all right, title and 36 interest of Tenant now or hereafter arising in or to any such award or any part thereof, and Tenant shall be entitled to receive no part of such award. Tenant may make a claim for Tenant's relocation costs and the unamortized cost of any Tenant property taken thereby, provided that such claim shall not reduce or adversely affect Landlord's award. 14.04. It is expressly understood and agreed that the provisions of this Article 14 shall not be applicable to any condemnation or taking for governmental occupancy for a limited period. 14.05. In the event of any taking of less than the whole of the Building which does not result in a termination of this Lease, or in the event of a taking for a temporary use or occupancy of all or any part of the demised premises which does not result in a termination of this Lease, Landlord, at its expense, and whether or not any award or awards shall be sufficient for the purpose, shall proceed with reasonable diligence to repair, alter and restore the remaining parts of the Building and the demised premises and means of access thereto to substantially their former condition to the extent that the same may be feasible and so as to constitute a complete and tenantable Building and demised premises. 14.06. In the event any part of the demised premises be taken to effect compliance with any law or requirement of public authority other than in the manner hereinabove provided in this Article 14, then, (i) if such compliance is the obligation of Tenant under this Lease, Tenant shall not be entitled to any diminution or abatement of rent or other compensation from Landlord therefor, but (ii) if such compliance is the obligation of Landlord under this Lease, the fixed annual rent hereunder shall be reduced and additional rents under Article 3 hereof shall be adjusted in the same manner as is provided in Section 14.01 according to the reduction in rentable area of the demised premises resulting from such taking. ARTICLE 15 ACCESS TO DEMISED PREMISES; CHANGES 15.01. Tenant shall permit Landlord to erect, use and maintain pipes, ducts and conduits in and through the demised premises, provided the same are installed adjacent to or concealed behind walls and ceilings of the demised premises. Landlord shall to the extent reasonably practicable install such pipes, ducts and conduits by such methods and at such locations as will not materially interfere with or impair Tenant's layout or use of the demised premises. Landlord or its agents or designees shall have the right, upon reasonable advance notice (except in the case of emergency) to Tenant or any authorized employee of Tenant at the demised premises, to enter the demised premises, at reasonable times during business hours, for the making of such repairs or alterations as Landlord may deem necessary for the Building or which Landlord shall be required to or shall have the right to make by the provisions of this Lease or any other lease in the Building and, subject to the foregoing, shall also have the right to 37 enter the demised premises for the purpose of inspecting them or exhibiting them to prospective purchasers or lessees of the entire Building or to prospective mortgagees of the fee or of the Landlord's interest in the property of which the demised premises are a part or to prospective assignees of any such mortgages or to the holder of any mortgage on the Landlord's interest in the property, its agents or designees. Landlord shall be allowed to take all material into and upon the demised premises that may be required for the repairs or alterations above mentioned as the same is required for such purpose, without the same constituting an eviction of Tenant in whole or in part, and the rent reserved shall in no wise abate while said repairs or alterations are being made by reason of loss or interruption of the business of Tenant because of the prosecution of any such work. Landlord shall exercise reasonable diligence so as to minimize the disturbance but nothing contained herein shall be deemed to require Landlord to perform the same on an overtime or premium pay basis. Tenant agrees that Landlord shall have the right at any time to install in the Building on the inside of the windows thereof, a film to reduce the usage of energy in the Building. Tenant agrees that in the event Landlord shall exercise its option to install such film the foregoing provisions of this Section shall apply to the installation, maintenance or replacement of such film. 15.02. Landlord reserves the right, without the same constituting an eviction and without incurring liability to Tenant therefor, to change the arrangement and/or location of public entrances, passageways, doors, doorways, corridors, elevators, stairways, toilets or other public parts of the Building; provided, however, that access to the Building shall not be materially impaired and that there shall be no unreasonable obstruction of access to the demised premises or unreasonable interference with the use or enjoyment thereof. 15.03. Landlord reserves the right to light from time to time all or any portion of the demised premises at night for display purposes without paying Tenant therefor. 15.04. Landlord may, during the (12) months prior to expiration of the term of this Lease, exhibit the demised premises to prospective tenants upon advance notice (which may be given orally) to Tenant. 15.05. If Tenant shall not be personally present to open and permit an entry into the demised premises at any time when for any reason an entry therein shall be urgently necessary by reason of fire or other emergency, Landlord or Landlord's agents may forcibly enter the same without rendering Landlord or such agents liable therefor (if during such entry Landlord or Landlord's agents shall accord reasonable care to Tenant's property) and without in any manner affecting the obligations and covenants of this Lease. ARTICLE 16 CONDITIONS OF LIMITATION 38 16.01. This Lease and the term and estate hereby granted are subject to the limitation that whenever Tenant shall make an assignment of the property of Tenant for the benefit of creditors, or shall file a voluntary petition under any bankruptcy or insolvency law or any involuntary petition alleging an act of bankruptcy or insolvency shall be filed against Tenant under any bankruptcy or insolvency law, or whenever a petition shall be filed by or against Tenant under the reorganization provisions of the United States Bankruptcy Act or under the provisions of any law of like import, or whenever a petition shall be filed by Tenant under the arrangement provisions of the United States Bankruptcy Act or under the provisions of any law of like import, or whenever a permanent receiver of Tenant or of or for the property of Tenant shall be appointed, then, Landlord may, (a) at any time after receipt of such notice of the occurrence of any such event, or (b) if such event occurs without the acquiescence of Tenant, at any time after the event continues for ninety (90) days, give Tenant a notice of intention to end the term of this Lease at the expiration of five (5) days from the date of service of such notice of intention, and upon the expiration of said five (5) day period, this Lease and the term and estate hereby granted, whether or not the term shall theretofore have commenced, shall terminate with the same effect as if that day were the Expiration Date, but Tenant shall remain liable for damages as provided in Article 18 hereof. 16.02. This Lease and the term and estate hereby granted are subject to further limitation as follows: (a) whenever Tenant shall default in the payment of any installment of fixed annual rent, or in the payment of any additional rent or any other charge payable by Tenant to Landlord, on any day upon which same ought to be paid, and such default shall continue for five (5) days after Landlord shall have given Tenant a notice specifying such default, or (b) whenever Tenant shall do or permit anything to be done, whether by action or inaction, contrary to any of Tenant's obligations hereunder, and if such situation shall continue and shall not be remedied by Tenant within twenty (20) days after Landlord shall have given to Tenant a notice specifying the same, or, in the case of a happening or default which cannot with due diligence be cured within a period of twenty (20) days and the continuation of which for the period required for cure will not subject Landlord to the risk of criminal liability (as more particularly described in Article 8 hereof) or termination of any superior lease or foreclosure of any superior mortgage, if Tenant shall not, (i) within said twenty (20) day period advise Landlord of Tenant's intention to duly institute all steps necessary to remedy such situation, (ii) duly institute within said twenty (20) day period, and thereafter diligently and continuously prosecute to completion all steps necessary to remedy the same and (iii) complete such remedy within such time after the date of the giving of said notice of Landlord as shall reasonably be necessary, or (c) whenever any event shall occur or any contingency shall arise whereby this Lease or the estate hereby granted or the unexpired balance of the term hereof shall, 39 by operation of law or otherwise, devolve upon or pass to any person, firm or corporation other than Tenant, except as expressly permitted by Article 11 hereof, or (d) whenever Tenant shall vacate or abandon the demised premises (unless as a result of a casualty), or (e) whenever in case any other lease held by Tenant from Landlord shall expire and terminate (whether or not the term thereof shall then have commenced) as a result of the default of Tenant thereunder or of the occurrence of an event as therein provided (other than by expiration of the fixed term thereof or pursuant to a cancellation or termination option therein contained), or (f) whenever Tenant shall default in the due keeping, observing or performance of any covenant, agreement, provision or condition of Article 5 hereof on the part of Tenant to be kept, observed or performed and if such default shall continue and shall not be remedied by Tenant within 72 hours after Landlord shall have given to Tenant a notice specifying the same, then in any of said cases set forth in the foregoing Subsections (a), (b), (c), (d), (e) and (f) Landlord may give to Tenant a notice of intention to end the term of this Lease at the expiration of three (3) days from the date of the service of such notice of intention and upon the expiration of said three (3) days this Lease and the term and estate hereby granted, whether or not the term shall theretofore have commenced, shall terminate with the same effect as if that day were the Expiration Date, but Tenant shall remain liable for damages as provided in Article 18 hereof. ARTICLE 17 RE-ENTRY BY LANDLORD, INJUNCTION 17.01. If Tenant shall default in the payment of any installment of fixed annual rent, or of any additional rent, on any date upon which the same ought to be paid, and if such default shall continue for five (5) days after Landlord shall have given to Tenant a notice specifying such default, or if this Lease shall expire as in Article 16 hereof provided, Landlord or Landlord's agents and employees may immediately or at any time thereafter re-enter the demised premises, or any part thereof, either by summary dispossess proceedings or by any suitable action or proceeding at law, or by other legal means, without being liable to indictment, prosecution or damages therefrom, to the end that Landlord may have, hold and enjoy the demised premises again as and of its first estate and interest therein. The word re-enter, as herein used, is not restricted to its technical legal meaning. In the event of any termination of this Lease under the provisions of Article 16 hereof or if Landlord shall re-enter the demised premises under the provisions of this Article 17 or in the event of the termination of this Lease, or of re-entry, by or under any summary dispossess or other proceedings or action or any provision of law by reason of default hereunder on the part of Tenant, Tenant shall thereupon pay to Landlord the fixed 40 annual rent and additional rent payable by Tenant to Landlord up to the time of such termination of this Lease, or of such recovery of possession of the demised premises by Landlord, as the case may be, and shall also pay to Landlord damages as provided in Article 18 hereof. 17.02. In the event of a breach or threatened breach of Tenant of any of its obligations under this Lease, Landlord shall also have the right of injunction. The special remedies to which Landlord may resort hereunder are cumulative and are not intended to be exclusive of any other remedies or means of redress to which Landlord may lawfully be entitled at any time and Landlord may invoke any remedy allowed at law or in equity as if specific remedies were not provided for herein. 17.03. If this Lease shall terminate under the provisions of Article 16 hereof, or if Landlord shall re-enter the demised premises under the provisions of this Article 17, or in the event of the termination of this Lease, or of re-entry, by or under any summary dispossess or other proceeding or action or any provision of law by reason of default hereunder on the part of Tenant, Landlord shall be entitled to retain all moneys, if any, paid by Tenant to Landlord, whether as advance rent, security or otherwise, but such moneys shall be credited by Landlord against any fixed annual rent or additional rent due from Tenant at the time of such termination or re-entry or, at Landlord's option against any damages payable by Tenant under Articles 16 and 18 hereof or pursuant to law. 17.04. Tenant hereby expressly waives any and all rights of redemption granted by or under any present or future laws in the event of Tenant being evicted or dispossessed for any cause, or in the event of Landlord obtaining possession of the demised premises, by reason of the violation by Tenant of any of the covenants and conditions of this Lease or otherwise. ARTICLE 18 DAMAGES 18.01. If this Lease is terminated under the provisions of Article 16 hereof, or if Landlord shall re-enter the demised premises under the provisions of Article 17 hereof, or in the event of the termination of this Lease, or of re-entry, by or under any summary dispossess or other proceeding or action or any provision of law by reason of default hereunder on the part of Tenant, Tenant shall pay to Landlord as damages, at the election of Landlord, either: (a) a sum which at the time of such termination of this Lease or at the time of any such re-entry by Landlord, as the case may be, represents the then present value of the excess, if any, of (1) the aggregate of the fixed annual rent and the additional rent payable hereunder which would have been payable by Tenant 41 (conclusively presuming that additional rent on account of increases in Taxes, and Operating Expense shall increase at the average of the rates of increase thereof previously experienced by Landlord during the period (not to exceed 3 years) prior to such termination) for the period commencing with such earlier termination of this Lease or the date of any such re-entry, as the case may be, and ending with the Expiration Date, had this Lease not so terminated or had Landlord not so re-entered the demised premises, over (2) the aggregate rental value of the demised premises for the same period, or (b) sums equal to the fixed annual rent and the additional rent payable hereunder which would have been payable by Tenant had this Lease not so terminated, or had Landlord not so re-entered the demised premises, payable upon the due dates therefor specified herein following such termination or such re-entry and until the Expiration Date, provided, however, that if Landlord shall re-let the demised premises during said period, Landlord shall credit Tenant with the net rents received by Landlord from such re-letting, such net rents to be determined by first deducting from the gross rents as and when received by Landlord from such re-letting the expenses paid or incurred by Landlord in terminating this Lease or in re-entering the demised premises and in securing possession thereof, as well as the expenses of re-letting, including altering and preparing the demised premises for new tenants, brokers' commissions, and all other expenses properly chargeable against the demised premises and the rental thereof; it being understood that any such re-letting may be for a period shorter or longer than the remaining term of this Lease; but in no event shall Tenant be entitled to receive any excess of such net rents over the sums payable by Tenant to Landlord hereunder, or shall Tenant be entitled in any suit for the collection of damages pursuant to this subsection to a credit in respect of any net rents from a re-letting, except to the extent that such net rents are actually received by Landlord. If the demised premises or any part thereof should be re-let in combination with other space, then proper apportionment on a square foot basis shall be made of the rent received from such re-letting and of the expenses of re-letting. If the demised premises or any part thereof be re-let by Landlord for the unexpired portion of the term of this Lease, or any part thereof, before presentation of proof of such damages to any court, commission or tribunal, the amount of rent reserved upon such re-letting shall, prima facie, be the fair and reasonable rental value for the demised premises, or part thereof, so re-let during the term of the re-letting. 18.02. Suit or suits for the recovery of such damages, or any installments thereof, may be brought by Landlord from time to time at its election, and nothing contained herein shall be deemed to require Landlord to postpone suit until the date when the term of this Lease would have expired if it had not been so terminated under the provisions of Article 16, or under any provision of law, or had Landlord not re-entered the demised premises. Nothing herein 42 contained shall be construed to limit or preclude recovery by Landlord against Tenant of any sums or damages to which, in addition to the damages particularly provided above, Landlord may lawfully be entitled by reason of any default hereunder on the part of Tenant. Nothing herein contained shall be construed to limit or prejudice the right of Landlord to prove for and obtain as liquidated damages by reason of the termination of this Lease or re-entry of the demised premises for the default of Tenant under this Lease, an amount equal to the maximum allowed by any statute or rule of law in effect at the time when, and governing the proceedings in which such damages are to be proved whether or not such amount be greater, equal to, or less than any of the sums referred to in Section 18.01 hereof. ARTICLE 19 LANDLORD'S RIGHT TO PERFORM TENANT'S OBLIGATIONS 19.01. If Tenant shall default in the observance or performance of any term or covenant on Tenant's part to be observed or performed under or by virtue of any of the terms or provisions in any Article of this Lease and, except in case of emergency, such default shall continue after notice and beyond any applicable grace periods (a) Landlord may remedy such default for the account of Tenant, immediately and without notice in case of emergency, or in any other case only provided that Tenant shall fail to remedy such default with all reasonable dispatch after Landlord shall have notified Tenant in writing of such default and the applicable grace period for curing such default shall have expired; and (b) if Landlord makes any expenditures or incurs any obligations for the payment of money in connection with such default including, but not limited to, reasonable attorney's fees in instituting, prosecuting or defending any action or proceeding, such sums or obligations incurred, with interest at the Interest Rate, shall be deemed to be additional rent hereunder and shall be paid by Tenant to Landlord within twenty (20) days after rendition of a bill to Tenant therefor. Tenant shall be allowed (but not as a condition to its obligation to make the foregoing payment(s) in a timely manner) to review copies of invoices for all charges incurred by Landlord in connection with the preceding sentence provided Tenant requests to review said invoices within fifteen (15) days after the rendition of a bill therefor. ARTICLE 20 QUIET ENJOYMENT 20.01. Landlord covenants and agrees that subject to the terms and provisions of this Lease, if, and so long as, Tenant keeps and performs each and every covenant, agreement, term, provision and condition herein contained on the part or on behalf of Tenant to be kept or performed, then Tenant's right under this Lease shall not be cut off or ended before the expiration of the term of this Lease, subject however, to: (i) the obligations of this Lease, and (ii) as 43 provided in Article 25 hereof with respect to ground and underlying leases and mortgages which affect this Lease. ARTICLE 21 SERVICES AND EQUIPMENT 21.01. So long as Tenant is not in default under any of the covenants of this Lease, Landlord shall, at its cost and expense: (a) Provide necessary passenger elevator facilities on Business Days from 8:00 A.M. to 6:00 P.M. and shall have at least one elevator subject to call at all other times. At Landlord's option, the elevators shall be operated by automatic control or manual control, or by a combination of both of such methods. (b) Provide non-exclusive freight elevator facilities on Business days during usual hours of operation thereof. At all other times, Tenant shall be permitted by prearrangement on a first come first serve basis to schedule reserved freight elevator service. All such arrangements and use shall be subject to Landlord's Building rules therefor and union requirements and Tenant shall pay for the use of the freight elevator at Landlord's standard rates then in effect. Notwithstanding the foregoing, Tenant shall have the right to utilize the freight elevator facilities at no charge during (i) Tenant's Work (as defined herein) for an aggregate total amount of twenty (20) hours, and (ii) Tenant's initial move in ("Move In") for an aggregate total amount of eight (8) hours. During Tenant's Work and Move In, Tenant must reserve and utilize the freight elevator facilities for blocks of time consisting of a minimum of two (2) consecutive hours. Tenant shall pay for the use of the freight elevator facilities in excess of the time allotted in clauses (i) and (ii) above at the standard building rates then in effect. (b) Landlord shall furnish heat and air-conditioning through the Building systems when seasonably required on Business Days, from 8:00 A.M. to 6:00 P.M. Tenant shall in any event cause all of the windows in the demised premises to be kept closed and shall cause and keep entirely unobstructed all the vents, intakes, outlets and grilles, at all times and shall comply with and observe all regulations and requirements prescribed by Landlord for the proper functioning of the heating, ventilating and air-conditioning systems. In the event that Tenant shall require air-conditioning, or heating at such times as same are not furnished by Landlord, Tenant shall give Landlord reasonable advance notice of such requirement and, if same is furnished by Landlord, Tenant agrees to pay the Landlord's Building standard charges therefor as additional rent. (c) Provide cleaning and janitorial services on Business Days. Tenant shall pay to Landlord on demand the costs incurred by Landlord for (a) extra cleaning work in the 44 demised premises required because of (i) misuse or neglect on the part of Tenant or its employees or visitors, (ii) use of portions of the demised premises for preparation, serving or consumption of food or beverages, data processing, or reproducing operations, private lavatories or toilets or other special purposes requiring greater or more difficult cleaning work than office areas, (iii) unusual quantity of interior glass surfaces, (iv) non-building standard materials or finishes installed by Tenant or at its request and (b) removal from the demised premises and the Building of so much of any refuse and rubbish of Tenant as shall exceed that ordinarily accumulated daily in the routine of business office occupancy. Landlord, its cleaning contractor and their employees shall have After Hours access to the demised premises and the free use of light, power and water in the demised premises as reasonably required for the purpose of cleaning the demised premises in accordance with Landlord's obligations hereunder. (d) Furnish hot and cold water for lavatory and drinking, kitchenette and office cleaning purposes. If Tenant requires, uses or consumes water for any other purposes, Tenant agrees to Landlord installing a meter or meters or other means to measure Tenant's water consumption, and Tenant further agrees to reimburse Landlord for the cost of the meter or meters and the installation thereof, and to pay for the maintenance of said meter equipment and/or to pay Landlord's cost of other means of measuring such water consumption by Tenant. Tenant shall reimburse Landlord for the cost of all water consumed, as measured by said meter or meters or as otherwise measured, including sewer rents. 21.02. Landlord reserves the right without any liability whatsoever, or abatement of fixed annual rent, or additional rent, to stop the heating, air-conditioning, elevator, plumbing, electric and other systems when necessary by reason of accident or emergency or for repairs, alterations, replacements or improvements. If the demised premises shall be rendered untenantable for a period of thirty (30) consecutive days by reason Landlord's failure or inability to supply any service which it is obligated to supply under this Lease as provided that during such period of untenantability Tenant actually discontinues use of the demised premises for the conduct of its business, then unless such cessation of services is caused by the negligence or intentional or wrongful act or omission of Tenant, its agents, employees, contractors or invitees, the fixed annual rent and additional rent payable pursuant to Section 1.01 of this Lease shall abate for the remainder of any such period of untenantability or until such period as Tenant resumes the use of the demised premises. 21.03. It is expressly agreed that only Landlord or any one or more persons, firms or corporations authorized in writing by Landlord will be permitted to furnish laundry, linen towels, or other similar supplies and services to tenants and licensees in the Building. Landlord may fix, in its own absolute discretion, at any time and from time to time, the hours during which and the regulations under which such supplies and services are to be furnished. Landlord expressly reserves the right to act as or designate, at any time and from time to time, an exclusive supplier of all or any one or more of the said supplies and services, provided that the quality thereof and the charges therefor are reasonably comparable to that of other suppliers; and Landlord furthermore expressly reserves the right to exclude from the Building any person, firm 45 or corporation attempting to furnish any of said supplies or services but not so designated by Landlord. It is understood, however, that Tenant or regular office employees of Tenant who are not employed by any supplier of such food or beverages or by any person, firm or corporation engaged in the business of purveying such food or beverages, may personally bring food or beverages into the Building for consumption within the demised premises by employees of Tenant, but not for resale to or for consumption by any other tenant. Landlord may fix in its absolute discretion, at any time and from time to time, the hours during which, and the regulations under which, foods and beverages may be brought into the Building by persons other than the regular employees of Tenant. 21.04. Tenant agrees to employ such office maintenance contractors as Landlord may from time to time designate, for all waxing, polishing, lamp replacement, cleaning and maintenance work in the demised premises, provided that the quality thereof and the charges therefor are reasonably comparable to that of other contractors. Tenant shall not employ any other contractor without Landlord's prior written consent however, Tenant shall not require Landlord's consent to use Tenant's employees for the activities designated herein. 21.05. Landlord will not be required to furnish any other services, except as otherwise provided in this Lease. ARTICLE 22 DEFINITIONS 22.01. The term "Landlord" as used in this Lease means only the owner, or the mortgagee in possession, for the time being of the Land and Building (or the owner of a lease of the Building or of the Land and Building), so that in the event of any transfer of title to said Land and Building or said lease, or in the event of a lease of the Building, or of the Land and Building, upon notification to Tenant of such transfer or lease the said transferor Landlord shall be and hereby is entirely freed and relieved of all future covenants, obligations and liabilities of Landlord hereunder, and it shall be deemed and construed as a covenant running with the land without further agreement between the parties or their successors in interest, or between the parties and the transferee of title to said Land and Building or said lease, or the said lessee of the Building, or of the Land and Building, that the transferee or the lessee has assumed and agreed to carry out any and all such covenants, obligations and liabilities of Landlord hereunder. 22.02. The term "Business Days" as used in this Lease shall exclude Saturdays, Sundays and all days observed by the Federal, State or local government as legal holidays as well as all other days recognized as holidays under applicable union contracts. 22.03. "Interest Rate" shall mean a rate per annum equal to the lesser of (a) 2% above the commercial lending rate announced from time to time by The Chase Manhattan Bank 46 (New York, New York), as its prime rate for 90 day unsecured loans, or (b) the maximum applicable legal rate, if any. 22.04. "Legal Requirements" shall mean laws, statutes and ordinances (including building codes and zoning regulations, and ordinances) and the orders, rules, and regulations, directives and requirements of all federal, state, county, city and borough departments, bureaus, boards, agencies, offices, commissions and other subdivisions thereof, or of any official thereof, or of any other governmental public or quasi-public authority, whether now or hereafter in force, which may be applicable to the Land or Building or the demised premises or any part thereof, or the sidewalks, curbs or areas adjacent thereto and all requirements, obligations and conditions of all instruments of record on the date of this Lease. ARTICLE 23 INVALIDITY OF ANY PROVISION 23.01. If any term, covenant, condition or provision of this Lease or the application thereof to any circumstance or to any person, firm or corporation shall be invalid or unenforceable to any extent, the remaining terms, covenants, conditions and provisions of this Lease or the application thereof to any circumstances or to any person, firm or corporation other than those as to which any term, covenant, condition or provision is held invalid or unenforceable, shall not be affected thereby and each remaining term, covenant, condition and provision of this Lease shall be valid and shall be enforceable to the fullest extent permitted by law. ARTICLE 24 BROKERAGE 24.01. Tenant covenants, represents and warrants that Tenant has had no dealings or communications with any broker, or agent other than Insignia/Edward S. Gordon Company, Inc. (which is representing Landlord) and Julien J. Studley in connection with the consummation of this Lease, and Tenant covenants and agrees to pay, hold harmless and indemnify Landlord from and against any and all cost, expense (including reasonable attorneys' fees) or liability for any compensation, commissions or charges claimed by any broker or agent, other than the broker set forth in this Section 24.01, with respect to this Lease or the negotiation thereof. 24.02 Landlord represents and warrants to Tenant that Landlord has had no dealings or negotiations in connection with the consummation of this Lease with any broker purporting to represent Tenant other than Julien J. Studley Inc., and Landlord covenants and 47 agrees to pay, hold harmless and indemnify Tenant from and against any and all cost, expense or liability that Tenant shall incur as a result of a breach by Landlord of the foregoing representation. ARTICLE 25 SUBORDINATION 25.01. This Lease is and shall be subject and subordinate to all ground or underlying leases which may now or hereafter affect the real property of which the demised premises forms a part and to all mortgages which may now or hereafter affect such leases or such real property, and to all renewals, modifications, replacements and extensions thereof. The provisions of this Section 25.01 shall be self operative and no further instrument of subordination shall be required. In confirmation of such subordination, Tenant shall promptly execute and deliver at its own cost and expense any instrument, in recordable form if required, that Landlord, the lessor of the ground or underlying lease or the holder of any such mortgage or any of their respective successors in interest may request to evidence such subordination, and Tenant hereby constitutes and appoints Landlord or its successors in interest to be Tenant's attorney in fact, irrevocably and coupled with an interest, to execute and deliver any such instrument for and on behalf of Tenant. 25.02. In the event of a termination of any ground or underlying lease, or if the interests of Landlord under this Lease are transferred by reason of, or assigned in lieu of, foreclosure or other proceedings for enforcement of any mortgage, or if the holder of any mortgage acquires a lease in substitution therefor, then Tenant under this Lease will, at the option to be exercised in writing by the lessor under such ground or underlying lease or such mortgagee or purchaser, assignee or lessee, as the case may be, either (i) attorn to it and will perform for its benefit all the terms, covenants and conditions of this Lease on Tenant's part to be performed with the same force and effect as if said lessor, such mortgagee or purchaser, assignee or lessee, were the landlord originally named in this Lease, or (ii) enter into a new lease with said lessor or such mortgagee or purchaser, assignee or lessee, as landlord, for the remaining term of this Lease and otherwise on the same terms and conditions and with the same options, if any, then remaining. The foregoing provisions of clause (i) of this Section 25.02 shall enure to the benefit of such lessor, mortgagee, purchaser, assignee or lessee, shall be self operative upon the exercise of such option, and no further instrument shall be required to give effect to said provisions. Tenant, however, upon demand of any such lessor, mortgagee, purchaser, assignee or lessee agrees to execute, from time to time, instruments in confirmation of the foregoing provisions of this Section 25.02, reasonably satisfactory to any such lessor, mortgagee, purchaser, assignee or lessee, acknowledging such attornment and setting forth the terms and conditions of its tenancy. Tenant hereby constitutes and appoints Landlord or its successors in interest to be the Tenant's attorney in fact, irrevocably and coupled with an interest, to execute and deliver such instrument of attornment, or such new lease, if the Tenant refuses or fails to do so promptly upon request. 48 25.03. Anything herein contained to the contrary notwithstanding, under no circumstances shall the aforedescribed lessor under the ground lease or mortgagee or purchaser, assignee or lessee, as the case may be, whether or not it shall have succeeded to the interests of the landlord under this Lease, be (a) liable for any act, omission or default of any prior landlord; or (b) subject to any offsets, claims or defenses which Tenant might have against any prior landlord; or (c) bound by any rent or additional rent which Tenant might have paid to any prior landlord for more than one month in advance of the due date; or (d) bound by any modification, amendment or abridgment of the Lease, or any cancellation or surrender of the same, made without its prior written approval. 25.04 Landlord shall use its reasonable efforts to obtain from any mortgagee of superior Lessor, or from any future mortgagee or any future ground or superior lessor, a non-disturbance agreement with Tenant on such mortgagee's or lessor's standard form at no cost to Landlord. In the event any such mortgagee or ground or superior lessor shall fail to provide such a non-disturbance agreement to Tenant, Landlord shall have no liability to Tenant and this Lease shall not be affected. 25.05. If, in connection with the financing of the Building, the holder of any mortgage shall request reasonable modifications in this Lease as a condition of approval thereof, Tenant shall not unreasonably withhold, delay or defer making such modifications provided there is no change in the monetary obligations and no material changes in the terms of this Lease. ARTICLE 26 CERTIFICATES OF LANDLORD AND TENANT 26.01. Each party agrees, at any time and from time to time, as requested by the other party, upon not less than ten (10) days prior notice, to execute and deliver to the other a statement certifying that this Lease is unmodified and in full force and effect (or if there have been modifications, that the same is in full force and effect as modified and stating the modifications), certifying the dates to which the fixed annual rent and additional rent have been paid, and stating whether or not, to the best knowledge of the signer, the other party is in default in performance of any of its obligations under this Lease, and, if so, specifying each such default of which the signer may have knowledge, it being intended that any such statement delivered 49 pursuant hereto may be relied upon by others with whom the party requesting such certificate may be dealing. 26.02. Tenant agrees that, except for the first month's rent hereunder, it will pay no rent under this Lease more than thirty (30) days in advance of its due date, if so restricted by any existing or future ground lease or mortgage to which this Lease is subordinated or by an assignment of this Lease to the ground lessor or the holder of such mortgage, and, in the event of any act or omission by Landlord, Tenant will not exercise any right to terminate this Lease or to remedy the default and deduct the cost thereof from rent due hereunder until Tenant shall have given written notice of such act or omission to the ground lessor and to the holder of any mortgage on the fee or the ground lease who shall have furnished such lessor's or holder's last address to Tenant, and until a reasonable period for remedying such act or omission shall have elapsed following the giving of such notices, during which time such lessor or holder shall have the right, but shall not be obligated, to remedy or cause to be remedied such act or omission. Tenant shall not exercise any right pursuant to this Section 26.02 if the holder of any mortgage or such aforesaid lessor commences to cure such aforesaid act or omission within a reasonable time and diligently prosecutes such cure thereafter. ARTICLE 27 LEGAL PROCEEDINGS WAIVER OF JURY TRIAL 27.01. Landlord and Tenant do hereby waive trial by jury in any action, proceeding or counterclaim brought by either of the parties hereto against the other on any matters whatsoever arising out of or in any way connected with this Lease, the relationship of Landlord and Tenant, Tenant's use or occupancy of the demised premises, and/or any other claims (except claims for bodily injury or damage to physical property), and any emergency statutory or any other statutory remedy. It is further mutually agreed that in the event Landlord commences any summary proceeding, Tenant will not interpose and does hereby waive the right to interpose any counterclaim of whatever nature or description in any such proceeding other than a mandatory counterclaim. ARTICLE 28 SURRENDER OF PREMISES 28.01. Upon the expiration or other termination of the term of this Lease, Tenant shall quit and surrender to Landlord the demised premises, broom clean, in good order and condition, ordinary wear and tear and damage by fire, the elements or other casualty excepted, and Tenant shall remove all of its property as herein provided. Tenant's obligation to observe or perform this covenant shall survive the expiration or other termination of the term of this Lease. 50 28.02. In the event Tenant shall remain in possession of the demised premises after the expiration or other termination of the term of this Lease, such holding over shall not constitute a renewal or extension of this Lease. Landlord may, at its option, elect to treat Tenant as one who has not removed at the end of the term, and shall thereupon be entitled to all of the remedies against Tenant provided by law in that situation or Landlord may elect to construe such holding over as a tenancy from month-to-month, subject to all of the terms and conditions of this Lease, except as to the duration thereof, and the minimum rent or use and occupancy, as the case may be, shall be due, in either of such events, at a monthly rate equal to one and one-half (1.5) times the monthly installment of minimum rent which would otherwise be payable for such month, together with any and all additional rent. In addition to the foregoing, if the demised premises is not surrendered on the Expiration Date, Tenant shall indemnify Landlord against loss or liability resulting from the delay by Tenant in so surrendering the demised premises, including, without limitation, claims by any succeeding occupant founded on such delay and damages or loss which Landlord may incur by any lost leasing opportunity or transaction. ARTICLE 29 RULES AND REGULATIONS 29.01. Tenant and Tenant's servants, employees and agents shall observe faithfully and comply strictly with the Rules and Regulations set forth in Schedule B attached hereto and made part hereof, and the Alteration Rules and Regulations, collectively referred to herein as the entitled the "Rules and Regulations" and such other and further reasonable Rules and Regulations as Landlord or Landlord's agents may from time to time adopt provided, however, that in case of any conflict or inconsistency between the provisions of this Lease and of any of the Rules and Regulations as originally or as hereafter adopted, the provisions of this Lease shall control. Reasonable written notice of any additional Rules and Regulations shall be given to Tenant. Landlord shall not discriminate against Tenant in the enforcement of Rules and Regulations. Nothing in this Lease contained shall be construed to impose upon Landlord any duty or obligation to enforce the Rules and Regulations or the terms, covenants or conditions in any other lease, against any other tenant of the Building and Landlord shall not be liable to Tenant for violation of the same by any other tenant, its servants, employees, agents, visitors or licensees. ARTICLE 30 CONSENTS AND APPROVALS 51 30.01. Wherever in this Lease Landlord's consent or approval is required, if Landlord shall delay or refuse such consent or approval, Tenant in no event shall be entitled to make, nor shall Tenant make, any claim, and Tenant hereby waives any claim, for money damages (nor shall Tenant claim any money damages by way of setoff, counterclaim or defense) based upon any claim or assertion by Tenant that Landlord unreasonably withheld or unreasonably delayed its consent or approval. Tenant's sole remedy shall be an action or proceeding to enforce any such provision, for specific performance, injunction or declaratory judgment. ARTICLE 31 NOTICES 31.01. Any notice or demand, consent, approval or disapproval, or statement required to be given by the terms and provisions of this Lease, or by any law or governmental regulation, either by Landlord to Tenant or by Tenant to Landlord, shall be in writing. Unless otherwise required by such law or regulation, such notice or demand shall be given, and shall be deemed to have been served and given when such notice or demand is mailed by registered or certified mail return receipt requested deposited enclosed in a securely closed postpaid wrapper, in a United States Government general or branch post office, or official depository within the exclusive care and custody thereof, addressed to either party, at its address set forth on page 1 of this Lease provided any notice to Tenant shall be addressed to the attention of Jay Friesel, Executive Vice President, with a copy to be addressed to the attention of Mark Moran, General Counsel. After Tenant shall occupy the demised premises, the address of Tenant for notices, demands, consents, approvals or disapprovals shall be the Building. Either party may, by notice as aforesaid, designate a different address or addresses for notices, demands, consents, approvals or disapprovals. 31.02. In addition to the foregoing, either Landlord or Tenant may, from time to time, request in writing that the other party serve a copy of any notice or demand, consent, approval or disapproval, or statement, on one other person or entity designated in such request, such service to be effected as provided in Section 31.01 hereof. ARTICLE 32 NO WAIVER 32.01. No agreement to accept a surrender of this Lease shall be valid unless in writing signed by Landlord. No employee of Landlord or of Landlord's agents shall have any power to accept the keys of the demised premises prior to the termination of this Lease. The delivery of keys to any employee of Landlord or of Landlord's agent shall not operate as a 52 termination of this Lease or a surrender of the demised premises. In the event of Tenant at any time desiring to have Landlord sublet the demised premises for Tenant's account, Landlord or Landlord's agents are authorized to receive said keys for such purpose without releasing Tenant from any of the obligations under this Lease. The failure of Landlord or Tenant to seek redress for violation of, or to insist upon the strict performance of, any covenant or condition of this Lease or of Landlord to do so with respect to any of the Rules and Regulations set forth herein, or hereafter adopted by Landlord, shall not prevent a subsequent act, which would have originally constituted a violation from having all the force and effect of an original violation. The receipt by Landlord of rent with or without knowledge of the breach of any covenant of this Lease shall not be deemed a waiver of such breach. The failure of Landlord to enforce any of the Rules and Regulations set forth herein, or hereafter adopted, against Tenant and/or any other tenant in the Building shall not be deemed a waiver of any such Rules and Regulations. No provision of this Lease shall be deemed to have been waived by Landlord or Tenant, unless such waiver be in writing signed by the party to be charged therewith. No payment by Tenant or receipt by Landlord of a lesser amount than the monthly rent herein stipulated shall be deemed to be other than on the account of the earliest stipulated rent, nor shall any endorsement or payment of rent be deemed an accord and satisfaction, and Landlord may accept such check or payment without prejudice to Landlord's right to recover the balance of such rent or pursue any other remedy in this Lease provided. 32.02. This Lease contains the entire agreement between the parties, and any agreement hereafter made shall be ineffective to change, modify, discharge or effect an abandonment of it in whole or in part unless such agreement is in writing and signed by the party against whom enforcement of the change, modification, discharge or abandonment is sought. ARTICLE 33 CAPTIONS 33.01. The captions are inserted only as a matter of convenience and for reference, and in no way define, limit or describe the scope of this Lease nor the intent of any provision thereof. ARTICLE 34 INABILITY TO PERFORM 34.01. If, by reason of (1) strike, (2) labor troubles, (3) governmental preemption in connection with a national emergency, (4) any rule, order or regulation of any governmental agency, (5) conditions of supply or demand which are affected by war or other national, state or municipal emergency, or any other cause or (6) any cause beyond Landlord's reasonable control, Landlord shall be unable to fulfill its obligations under this Lease or shall be unable to supply any 53 service which Landlord is obligated to supply, Landlord shall have no liability in connection therewith and this Lease and Tenant's obligation to pay rent hereunder shall in no wise be affected, impaired or excused. ARTICLE 35 NO REPRESENTATIONS BY LANDLORD 35.01. Landlord or Landlord's agents have made no representations or promises with respect to the Building or demised premises except as herein expressly set forth. ARTICLE 36 NAME OF BUILDING 36.01. Landlord shall have the full right at any time to name and change the name of the Building and to change the designated address of the Building. The Building may be named after any person, firm, or otherwise, whether or not such name is, or resembles, the name of a tenant of the Building. 36.02 Landlord will, at the request of Tenant, maintain listings on the Building directory of the name of Tenant, and the name of any employees of Tenant provided the total number of such listings shall not exceed Tenant's Proportionate Share of the available spaces. The listing of any name other than that of Tenant, whether on the doors of the demised premises, on the Building directory, or otherwise, shall not operate to vest any right or interest in this lease or in the demised premises or be deemed to be the written consent of Landlord to the occupancy of any portion of the demised premises by such person, it being expressly understood that any such listing is a privilege extended by Landlord revocable at will by written notice to Tenant. ARTICLE 37 RESTRICTIONS UPON USE 37.01. It is expressly understood that no portion of the demised premises shall be used as, or for (i) a bank, trust company, savings bank, industrial bank, savings and loan association or personal loan bank (or any branch office or public accommodation office of any of the foregoing), or (ii) a public stenographer or typist, barber shop, beauty shop, beauty parlor or shop, telephone or telegraph agency, telephone or secretarial service, messenger service, travel or tourist agency, employment agency, public restaurant or bar, commercial document reproduction or offset printing service, public vending machines, retail, wholesale or discount shop for sale of 54 merchandise, retail service shop, labor union, school or classroom, governmental or quasi-governmental bureau, department or agency, including an autonomous governmental corporation, a firm whose principal business is real estate brokerage, or a company engaged in the business of renting office or desk space. ARTICLE 38 ARBITRATION 38.01. In each case specified in this Lease in which resort to arbitration shall be required, such arbitration (unless otherwise specifically provided in other Sections of this Lease) shall be in New York City in accordance with the Commercial Arbitration Rules of the American Arbitration Association and the provisions of this Lease. The decision and award of the arbitrators shall be in writing, shall be final and conclusive on the parties, and counterpart copies thereof shall be delivered to each of the parties. In rendering such decision and awards, the arbitrators shall not add to, subtract from or otherwise modify the provisions of this Lease. Judgment may be had on the decision and award of the arbitrators so rendered in any court of competent jurisdiction. 38.02 If, in connection with Articles 6 or 11 of this Lease, Landlord or Tenant desires to determine any dispute between Landlord and Tenant as to the reasonableness of the other's decision, such dispute shall, at either party's option, be settled and finally determined by arbitration in The City of New York in accordance with the following provisions of this Section. Within ten (10) business days next following the giving of any notice by Landlord or Tenant stating that it wishes such dispute to be so determined, Landlord and Tenant shall each give notice to the other setting forth the name and address of an arbitrator designated by the party giving such notice. If either party shall fail to give notice of such designation within said ten (10) business days, then the arbitrator chosen by the other side shall make the determination alone. If the two arbitrators shall fail to agree upon the designation of a third arbitrator within five (5) business days after the designation of the second arbitrator then either party may apply to the Chairman of the Management Division of the Real Estate Board of New York, Inc. for the designation of such arbitrator and if he is unable or refuses to act within ten (10) business days then either party may apply to the Supreme Court in New York County or to any other court having jurisdiction for the designation of such arbitrator. The three arbitrators shall conduct such hearings as they deem appropriate, making their determination in writing and giving notice to Landlord and Tenant of their determination as soon as practicable, and if possible, within five (5) business days after the designation of the third arbitrator; the concurrence of or, in the event no two of the arbitrators shall render a concurrent determination, then the determination of the third arbitrator designated shall be biding upon Landlord and Tenant. Judgment upon any decision rendered in any arbitration held pursuant to this Section shall be final and binding upon Landlord and Tenant, whether or not a judgment shall be entered in any court. Each party shall pay its own counsel fees and expenses, if any, in connection with any arbitration under this Section, including 55 the expenses and fees of any arbitrator selected by it in accordance with the provisions of this Section, and the parties shall share all other expenses and fees of any such arbitration. The arbitrators shall be bound by the provisions of this Lease, and shall not add to, subtract from or otherwise modify such provisions. The sole function of the arbitrators shall be to determine whether Landlord or Tenant, as the case may be, has acted reasonably and to require Landlord or Tenant, as the case may be, to grant such consent or approval or to take action, and they may not award damages or grant any other monetary award or relief in the proceeding. ARTICLE 39 INDEMNITY 39.01. Tenant shall indemnify, defend and save Landlord, its agents and employees and any mortgagee of Landlord's interest in the Land and/or the Building and any lessor under any superior lease harmless from and against any liability or expense arising from the use or occupation of the demised premises by Tenant or anyone in the demised premises with Tenant's permission, or from any breach of this Lease by Tenant. ARTICLE 40 MEMORANDUM OF LEASE 40.01. Tenant shall, at the request of Landlord execute and deliver a statutory form of memorandum of this Lease for the purpose of recording, but said memorandum of this Lease shall not in any circumstances be deemed to modify or to change any of the provisions of this Lease. In no event shall Tenant record this Lease. ARTICLE 41 SECURITY 41.01. Tenant has deposited with Landlord the sum of $95,343.75 as security for the faithful performance and observance by Tenant of the terms, provisions, covenants and conditions of this Lease; it is agreed that in the event Tenant defaults in respect of any of the terms, provisions, covenants and conditions of this Lease including, but not limited to, the payment of fixed annual rent and additional rent, Landlord may use, apply or retain the whole or any part of the security so deposited to the extent required for the payment of any fixed annual rent and additional rent or any other sum as to which Tenant is in default or for any sum which Landlord may expend or may be required to expend by reason of Tenant's default in respect of any of the terms, provisions, covenants and conditions of this Lease, including but not limited to, 56 any damages or deficiency accrued before or after summary proceedings or other re-entry by Landlord. In the event that Tenant shall fully and faithfully comply with all of the terms, provisions, covenants and conditions of this Lease, the security shall be returned to Tenant after the date fixed as the end of the Lease and after delivery of entire possession of the demised premises to Landlord. In the event of a sale of the Land and Building or leasing of the Building, of which the demised premises form a part, Landlord shall have the right to transfer the security to the vendee or lessee and Landlord shall thereupon be released by Tenant from all liability for the return of such security; and Tenant agrees to look solely to the new landlord for the return of said security; and it is agreed that the provisions hereof shall apply to every transfer or assignment made of the security to a new landlord. Tenant further covenants that it will not assign or encumber or attempt to assign or encumber the monies deposited herein as security and that neither Landlord nor its successors or assigns shall be bound by any such assignment, encumbrance, attempted assignment or attempted encumbrance. In the event Landlord applies or retains any portion or all of the security deposited, Tenant shall forthwith restore the amount so applied or retained so that at all times the amount deposited shall be $95,343.75. 41.02. (a) In lieu of the cash security deposit provided for in Section 41.01 hereof Tenant may at any time during the term hereof deliver to Landlord and, shall, except as otherwise provided herein, maintain in effect at all times during the term hereof, an irrevocable letter of credit, in form and substance satisfactory to Landlord in the amount of the security required pursuant to this Lease issued by a banking corporation satisfactory to Landlord and having its principal place of business or it duly licensed branch or agency in the State of New York. Such letter of credit shall have an expiration date no earlier than the first anniversary of the date of issuance thereof and shall be automatically renewed from year to year unless terminated by the issuer thereof by notice to Landlord given not less than 45 days prior to the expiration thereof. Except as otherwise provided herein, Tenant shall, throughout the term of this Lease deliver to Landlord, in the event of the termination of any such letter of credit, replacement letters of credit in lieu thereof (each such letter of credit and such extensions or replacements thereof, as the case may be, is hereinafter referred to as a "Security Letter") no later than 45 days prior to the expiration date of the preceding Security Letter. The term of each such Security Letter shall be not less than one year and shall be automatically renewable from year to year as aforesaid. If Tenant shall fail to obtain any replacement of a Security Letter within the time limits set forth in this Section 41.02(a), Landlord may draw down the full amount of the existing Security Letter and retain the same as security hereunder. (b) In the event Tenant defaults in respect to any of the terms, provisions, covenants and conditions of this Lease, including, but not limited to, the payment of rent and additional rent, Landlord may use, apply or retain the whole or any part of the security so deposited to the extent required for the payment of any rent and additional rent or any other sum as to which Tenant is in default or for any sum which Landlord may expend or may be required to expend by reason of Tenant's default in respect of any of the terms, provisions, covenants, and conditions of this Lease, including but not limited to, any damages or deficiency accrued before or after summary proceedings or other re-entry by Landlord. To insure that Landlord may utilize 57 the security represented by the Security Letter in the manner, for the purpose, and to the extent provided in this Article 41, each Security Letter shall provide that the full amount thereof may be drawn down by Landlord upon the presentation to the issuing bank of Landlord's draft drawn on the issuing bank without accompanying memoranda on statement of beneficiary. (c) In the event that Tenant defaults in respect of any of the terms, provisions, covenants and conditions of the Lease and Landlord utilizes all or any part of the security represented by the Security Letter but does not terminate this Lease as provided in Article 16 hereof, Landlord may, in addition to exercising its rights as provided in subsection 41.02(b) hereof, retain the unapplied and unused balance of the principal amount of the Security Letter as security for the faithful performance and observance by Tenant thereafter of the terms, provisions, and conditions of this Lease, and may use, apply, or retain the whole or any part of said balance to the extent required for payment of rent, additional rent, or any other sum as to which Tenant is in default or for any sum which Landlord may expend or be required to expend by reason of Tenant's default in respect of any of the terms, covenants, and conditions of this Lease. In the event Landlord applies or retains any portion or all of the security delivered hereunder, Tenant shall forthwith restore the amount so applied or retained so that at all times the amount deposited shall be not less than the security required by Section 41.01 hereof. (d) In the event that Tenant shall fully and faithfully comply with all of the terms, provisions, covenants and conditions of this Lease, the security shall be returned to Tenant after the date fixed as the end of the Lease and after delivery of entire possession of the demised premises to Landlord. In the event of a sale of the Land and Building or leasing of the Building, Landlord shall have the right to transfer any interest it may have in the Security Letter to the vendee or lessee and Landlord shall thereupon be released by Tenant from all liability for the return of such Security Letter, provided such vendee or lessee assumes any responsibilities of Landlord with respect to such Security Letter, and Tenant agrees to look solely to the new landlord for the return of said Security Letter; and it is agreed that the provisions hereof shall apply to every transfer or assignment made of the Security Letter to a new landlord. Tenant further covenants that it will not assign or encumber or attempt to assign or encumber the monies deposited herein as security and that neither Landlord nor its successors or assigns shall be bound by any such assignment, encumbrance, attempted assignment or attempted encumbrance. In the event of a sale of the Building Landlord shall have the right to require Tenant to deliver a replacement Security Letter naming the new landlord as beneficiary and, if Tenant shall fail to timely deliver the same, to draw down the existing Security Letter and retain the proceeds as security hereunder until a replacement Security Letter is delivered. ARTICLE 42 MISCELLANEOUS 58 42.01. Irrespective of the place of execution or performance, this Lease shall be governed by and construed in accordance with the laws of the State of New York. 42.02. This Lease shall be construed without regard to any presumption or other rule requiring construction against the party causing this Lease to be drafted. 42.03. Except as otherwise expressly provided in this Lease, each covenant, agreement, obligation or other provision of this Lease on Tenant's part to be performed shall be deemed and construed as a separate and independent covenant of Tenant, not dependent on any other provision of this Lease. 42.04. All terms and words used in this Lease, regardless of the number or gender in which they are used, shall be deemed to include any other number and any other gender as the context may require. 42.05. Time shall be of the essence with respect to the exercise of any option granted under this Lease. 42.06. Except as otherwise provided herein, whenever payment of interest is required by the terms hereof it shall be at the Interest Rate. 42.07. If the demised premises or any additional space to be included within the demised premises shall not be available for occupancy by Tenant on the specific date hereinbefore designated for the commencement of the term of this Lease or for the inclusion of such space for any reason whatsoever, then this Lease shall not be affected thereby but, in such case, said specific date shall be deemed to be postponed until the date when the demised premises or such additional space shall be available for occupancy by Tenant, and Tenant shall not be entitled to possession of the demised premises or such additional space until the same are available for occupancy by Tenant, provided, however, that Tenant shall have no claim against Landlord, and Landlord shall have no liability to Tenant by reason of any such postponement of said specific date, and the parties hereto further agree that any failure to have the demised premises or such additional space available for occupancy by Tenant on said specific date or on the Commencement Date shall in no wise affect the obligations of Tenant hereunder nor shall the same be construed in any wise to extend the term of this Lease and furthermore, this Section 42.07 shall be deemed to be an express provision to the contrary of Section 223a of the Real Property Law of the State of New York and any other law of like import now or hereafter in force. 42.08. In the event that Tenant is in arrears in payment of fixed annual rent or additional rent hereunder, Tenant waives Tenant's right, if any, to designate the items against which any payments made by Tenant are to be credited, and Tenant agrees that Landlord may apply any payments made by Tenant to any items it sees fit, irrespective of and notwithstanding 59 any designation or request by Tenant as to the items against which any such payments shall be credited. 42.09. Tenant shall not occupy any space in the Building (by assignment, sublease or otherwise) other than the demised premises, except with the prior written consent of Landlord in each instance. 42.10. This Lease shall not be binding upon Landlord unless and until it is signed by Landlord and a signed copy thereof is delivered by Landlord to Tenant. ARTICLE 43 RIGHT OF FIRST REFUSAL 43.01. (a) For purposes of this Lease, the term "First Refusal Option Space" shall mean the entire twenty-sixth (26th) and/or the entire twenty eight (28th) floors of the Building as shown hatched on the plan annexed hereto as Schedule C. (b) Provided Tenant is not in default under the terms and conditions of this Lease after notice and the expiration of applicable cure periods, either as of the date of the giving of the "First Refusal Notice", "Tenant's First Notice" or the "First Refusal Space Inclusion Date" (as such terms are hereinafter defined), and subject to the following limitation of an Outside Date, if Landlord shall receive an offer to let any portion of the First Refusal Option Space (the "First Refusal Space Offer") from any party ("Prospective Tenant") other than the current tenant or any subsidiary, affiliate, assignee or subtenant thereof (hereinafter called the "Current Tenant") then provided such offer contemplates occupancy of the First Refusal Option Space involved by no later than May 1, 2003 (the "Outside Date"), Tenant shall, subject to the provisions of this Article 43, have the right to include in the demised premises the First Refusal Option Space specified in the First Refusal Space Offer. The First Refusal Option Space so included in the demised premises shall be referred to herein as the "First Refusal Space". If the First Refusal Space Offer is for one-half or less of the floor and the balance of the floor is vacant and Tenant exercises its rights hereunder, Landlord may designate as the First Refusal Space to be included in the demised premises a unit of equal rentable area (plus or minus 500 feet) on the balance of the floor. If the First Refusal Space Offer is for the entire twenty-eighth (28th) floor or any portion thereof and the entire twenty-sixth (26th) floor or any portion thereof of equal rentable area (plus or minus 500 feet) to the portion specified in the First Refusal Space Offer is vacant, Landlord may designate as the First Refusal Space to be included in the demised premises to be either the entire twenty-sixth (26th) floor or the portion thereof of equal rentable area, as the case may be. For the purposes of this Section 43.01(b), the twenty-sixth (26th) floor shall be deemed to contain 13,100 rentable square feet and the twenty-eighth (28th) floor shall be deemed to contain 13,500 rentable square feet. (c) If Tenant exercises its rights under this Article 43, all the terms and conditions of this Lease (including the provisions of Article 3 hereof with the base year periods specified therein, but excluding Article 44 hereof) shall remain in full force and effect, except: 60 (i) if the First Refusal Space Inclusion Date shall be December 31, 1999 or earlier, (a) the fixed annual rent with respect to the First Refusal Space shall be at the same annual rate on a per square foot basis as the fixed annual rent for the demised premises as set forth in Section 1.01, (b) Tenant shall be entitled to a Work Credit for the First Refusal Space in the sum of $12.00 dollars per rentable square foot subject to the payment provisions and restrictions specified in Article 44 hereof, and (c) Tenant shall be entitled to an abatement of the fixed annual rent payable hereunder during a period commencing of the First Refusal Space Inclusion Date and ending on the one hundred and fiftieth day (150th) after the First Refusal Space Inclusion Date; (ii) if the First Refusal Space Inclusion Date shall be January 1, 2000 or later, the fixed annual rent with respect to the First Refusal Space shall be at the rate of 100% of the fair market rent for the First Refusal Space, as reasonably determined by Landlord, as of the date the First Refusal Notice is delivered to Tenant and shall be set forth in a written notice to Tenant, but in no event shall such fixed annual rent applicable to the First Refusal Space be less than the product obtained by multiplying (A) the monthly amount of fixed annual rent allocable to the demised premises (determined on a rentable square foot basis) for the last full calendar month prior to the First Refusal Space Inclusion Date (as hereinafter defined) computed on an annualized basis without giving effect to any abatement, credit or offset in effect, by (B) 12, and by (C) the amount of rentable square feet included within the First Refusal Space (hereinafter called the "First Refusal Space Escalated Rent"); (iii) Effective as of the First Refusal Space Inclusion Date for purposes of calculating the additional rent payable pursuant to Article 3 hereof allocable to the First Refusal Space, Tenant's Tax Proportionate Share and Tenant's Operating Expense Proportionate Share attributable to the First Refusal Space shall each be deemed to be the fraction, expressed as a percentage, the numerator of which shall be the number of rentable square feet included within the First Refusal Space, and the denominator of which shall be 619,000 as to Tenant's Tax Proportionate Share and 600,000 as to Tenant's Operating Expense Proportionate Share; and (iv) The term of this Lease shall be amended so that the Expiration Date shall be the last day of the calendar month in which occurs the day preceding the fifth (5th) anniversary of the First Refusal Space Inclusion Date (the "Amended Expiration Date"). from the First Inclusion Date until the Amended Expiration Date, Tenant shall pay fixed annual rent as follows: (i) for the demised premises, an amount equal to the fixed annual rent set forth in Section 1.01; and (ii) for the First Refusal Space, an amount as calculated pursuant to Section 43.01(c)(i) or Section 43.01(c)(ii), as the case may be. 61 (c) Such offer shall be made by Landlord to Tenant in a written notice (hereinafter called the "First Refusal Notice") which offer shall specify the fixed annual rent payable with respect to the First Refusal Space, determined in accordance with the provisions of Section 43.01(c) hereof. (d) Tenant may accept the offer set forth in the First Refusal Notice by delivering to Landlord an unconditional acceptance (hereinafter called "Tenant's First Notice") of such offer within seven (7) days after delivery by Landlord of the First Refusal Notice to Tenant. The First Refusal Space shall be added to and included in the demised premises on the later to occur (herein called the "First Refusal Space Inclusion Date") of (i) the day that Tenant delivers the First Notice to Landlord, or (ii) the date such First Refusal Space shall become available for Tenant's possession. Time shall be of the essence with respect to the giving of Tenant's First Notice. (e) If Tenant does not accept (or fails to timely accept) an offer made by Landlord pursuant to the provisions of this Article 43 with respect to the any floor comprising the First Refusal Option Space, then (i) Tenant shall have no further rights with respect to said floor, (ii) Landlord shall be under no further obligation to Tenant with respect to said floor, (iii) the provisions of this Article 43 as they apply to said floor shall be automatically deleted from this Lease, and (iv) Tenant shall have no further options or rights to said floor. (f) In the event that Tenant disputes the amount of the fair market rent specified in the First Refusal Notice, then at any time on or before the date occurring twenty (20) days after Tenant has received the First Refusal Notice, and provided that Tenant shall have given Tenant's First Notice, Tenant may initiate the arbitration process provided for herein by giving notice to that effect to Landlord, and, if Tenant so initiates the arbitration process, such notice shall specify the name and address of the person designated to act as an arbitrator on its behalf. Within thirty (30) days after the Landlord's receipt of notice of the designation of Tenant's arbitrator, Landlord shall give notice to Tenant specifying the name and address of the person designated to act as an arbitrator on its behalf. If Landlord fails to notify Tenant of the appointment of its arbitrator within the time above specified, then Tenant shall provide an additional notice to Landlord requiring Landlord's appointment of an arbitrator within twenty (20) days after Landlord's receipt thereof. If Landlord fails to notify Tenant of the appointment of its arbitrator within the time specified by the second notice, the appointment of the second arbitrator shall be made in the same manner as hereinafter provided for the appointment of a third arbitrator in a case where the two arbitrators appointed hereunder and the parties are unable to agree upon such appointment. The two arbitrators so chosen shall meet within ten (10) days after the second arbitrator is appointed, and if, within sixty (60) days after the second arbitrator is appointed, the two arbitrators shall not agree upon a determination of the fair market rent for the First Refusal Space, they shall together appoint a third arbitrator. In the event of their being unable to agree upon such appointment within eighty (80) days after the appointment of the second arbitrator, the third arbitrator shall be selected by the parties themselves if they can agree thereon within a further period of fifteen (15) days. If the parties do not so agree, then either 62 party, on behalf of both and on notice to the other, may request such appointment by the American Arbitration Association (or any organization successor thereto) in accordance with its rules then prevailing or if the American Arbitration Association (or such successor organization) shall fail to appoint said third arbitrator within fifteen (15) days after such request is made, then either party may apply, on notice to the other, to the Supreme Court, New York County, New York (or any other court having jurisdiction and exercising functions similar to those now exercised by said Court) for the appointment of such third arbitrator. The majority of the arbitrators shall determine the fair market rent for the First Refusal Space and render a written certified report of their determination to both Landlord and Tenant within sixty (60) days of the appointment of the first two arbitrators or sixty (60) days from the appointment of the third arbitrator, if such third arbitrator is appointed pursuant to this subparagraph (f), but in no event shall the fixed annual rent with respect to the First Refusal Space be less than the First Refusal Space Escalated Rent. The fair market rent shall reflect the base rent, work contribution, free rent and other terms and concessions available in the Midtown Manhattan office space market at the time of First Refusal Notice is sent to Tenant and shall base their determination of the fair market rent on the term at which Landlord could obtain the highest rental rate for the demised premises, even though such term may be different than the number of years remaining in the term of this Lease on the First Refusal Space Inclusion Date.. Each party shall pay the fees and expenses of the one of the two original arbitrators appointed by or for such party, and the fees and expenses of the third arbitrator and all other expenses (not including the attorneys fees, witness fees and similar expenses of the parties which shall be borne separately by each of the parties) of the arbitration shall be borne by the parties equally. Each of the arbitrators selected as herein provided shall have at least ten (10) years experience in the leasing and renting of office space on behalf of landlords in Midtown Manhattan. (g) If Tenant fails to initiate the arbitration process within the aforesaid twenty (20) day period, time being of the essence, then Landlord's determination of the fixed annual rent set forth in the First Refusal Notice shall be conclusive. In the event Landlord notifies Tenant that the fixed annual rent for the First Refusal Space shall be the First Refusal Space Escalated Rent, then the provisions of subparagraph (f) hereof shall be inapplicable. (h) In the event the Tenant initiates the aforesaid arbitration process and, as of the First Refusal Space Inclusion Date, the amount of the fair market rent has not been determined, Tenant shall pay the amount determined by Landlord to be the fair market rent for the First Refusal Space and when the determination has actually been made, an appropriate retroactive adjustment shall be made as of the First Refusal Space Inclusion Date. 63 (i) The provisions of this Article 43 shall be effective only if, on the date on which Tenant accepts possession of the First Refusal Space, the Tenant named herein and only such Tenant is in actual occupancy of 75% of the demised premises. (j) Tenant agrees to accept the First Refusal Space in its condition and state of repair existing as of the First Refusal Space Inclusion Date and understands and agrees that Landlord shall not be required to perform any work, supply any materials or incur any expense to prepare such space for Tenant's occupancy, except as otherwise provided in Section 43.01(c)(i), if applicable. (k) The right of first refusal granted pursuant to Section 43.01 hereof shall be subject and subordinate to (a) any option, right of first offer, right of first refusal, or other right to lease or occupy the First Refusal Space, or portion thereof, granted by Landlord to any tenant in the Building or any entity whatsoever other than Tenant on or before the date of this Lease, (b) the election of any Current Tenant of the First Refusal Space to extend the term of its lease with respect thereto, regardless of whether such election is made pursuant to any provision included within said lease, and any option or right to lease the First Refusal Space hereafter given by Landlord to any future lessee or occupant of any portion of the First Refusal Space which shall have previously been offered to Tenant pursuant to this Article 43 and as to which Tenant shall not have given Landlord Tenant's First Notice. (l) The termination of this Lease during the original term of this Lease shall also terminate and render void all of Tenant's options or elections under this Article 43, whether or not the same shall have been exercised; and nothing contained in this Article 43 shall prevent Landlord from exercising any right or action granted to or reserved by Landlord in this Lease to terminate this Lease. None of Tenant's options or elections set forth in this Article 43 may be severed from this Lease or separately sold, assigned or transferred. ARTICLE 44 WORK CREDIT 46.01. Landlord shall allow Tenant a credit not to exceed the amount of $162,000.00 (hereinafter called the "Work Credit"), which credit shall be applied solely against the cost and expense incurred in connection with the performance of Tenant's alterations and improvements to prepare the demised premises for Tenant's occupancy ("Tenant's Work"). A maximum of ten (10%) percent of the Work Credit may be applied toward architectural, engineering, and filing fees (hereinafter referred to as "Soft Costs"). The remaining portion of the Work Credit shall be solely applied against the cost and expense of the actual construction to be performed by Tenant in connection with the Tenant's Work including, without limitation, Class E installation costs. In the event that the cost and expense of the actual construction and 64 the Soft Costs included in Tenant's Work shall exceed the amount of the Work Credit, or in the event that the Soft Costs exceed ten (10%) percent of the Work Credit, Tenant shall be entirely responsible for such excess. In the event that the cost and expense of the actual construction and the Soft Costs included in Tenant's Work shall be less than the Work Credit, the Work Credit shall be adjusted accordingly. The Work Credit shall be payable to Tenant upon written requisition in installments as Tenant's Work progresses, but in no event more frequently than monthly. The amount of each installment of the Work Credit payable pursuant to any such requisition shall be an amount equal to the product obtained by multiplying the amount of the Work Credit by a fraction, the numerator of which is equal to the actual costs paid by Tenant for completed portions of Tenant's Work referenced in such requisition (as evidenced by the invoices delivered to Landlord in accordance with the next sentence), and the denominator of which is equal to the total estimated cost of Tenant's Work, which estimate shall be made, and certified to, by Tenant's architect in good faith based on the final plan. Prior to the payment of any such installment, Tenant shall deliver to Landlord such written requisition for disbursement which shall be accompanied by (1) invoices for the Tenant's Work performed since the last disbursement, (2) a certificate signed by Tenant's architect or an officer of Tenant certifying that the Tenant's Work represented by the aforesaid invoices has been satisfactorily completed in accordance with the final plan, (3) partial lien waivers by contractors, subcontractors and all materialmen for all such work or, if then unavailable, for work covered by the prior disbursement, and (4) with respect to the final disbursement of the Work Credit, all Building Department sign-offs, inspection certificates and any permits required to be issued by any governmental entities having jurisdiction thereover. Within fifteen (15) business days after final completion of the Tenant's Work, Tenant shall submit to Landlord a general release or final lien waivers from all contractors and subcontractors performing Tenant's Work releasing Tenant from all liability for any Tenant's Work. 46.02 At any and all times during the progress of Tenant's Work, representatives of Landlord shall have the right of access to the demised premises and inspection thereof and shall have the right to withhold all or any portion of the Work Credit as shall equal the cost of correcting any portions of Tenant's Work which shall not have been performed in a manner reasonably satisfactory to Landlord; provided, however, that Landlord shall incur no liability, obligation or responsibility to Tenant or any third party by reason of such access and inspection except to the extent of Landlord's negligence or wilful misconduct. IN WITNESS WHEREOF, Landlord and Tenant have respectively executed this Lease as of the day and year first above written. ATTEST: 38-32 ASSOCIATES, Landlord By: - ------------------------------------ ------------------------------------ 65 ATTEST: 24/7 MEDIA, INC., Tenant By: - ------------------------------------ ------------------------------------ Tenant's Federal Tax Identification Number is . ----------------------- 66 SCHEDULE A Floor Plan A-1 SCHEDULE B RULES AND REGULATIONS I. Tenant shall not: 1. Obstruct, encumber or use, or allow or permit any of its employees, agents, licensees or invitees to congregate in or on, the sidewalks, driveways, entrances, passages, courts, arcades, esplanade areas, plazas, elevators, vestibules, stairways, corridors or halls of the Building, outside of the demised premises, or use any of them for any purposes other than for ingress and egress to and from the demised premises. 2. Attach awnings or other projections to the outside walls of the Building or place bottles, parcels or other articles, or lettering visible from the exterior, on the windows, windowsills or peripheral air-conditioning enclosures. 3. Attach to, hang on, or use in connection with, any exterior window or entrance door of the demised premises, any blinds, shades or screens which are not of a quality, type, design and color, or which are not attached in a manner, approved by Landlord. 4. Place or leave any door mat or other floor covering in any area outside of the demised premises. 5. Exhibit, inscribe, paint or affix any sign, insignia, advertisement, object or other lettering in or on any windows, doors, walls or part of the outside or inside of the Building (exclusive of the inside of the demised premises), or in the demised premises if visible from the outside, without Landlord's approval, except that the name(s) of Tenant and any permitted sublessee may be displayed on the entrance doors of the premises occupied by each, subject to Landlord's reasonable approval of the size, color and design of such display and, if Landlord elects to perform such work, Tenant shall pay Landlord for the performance of such work. 6. Cover or obstruct the sashes, sash doors, skylights, windows and doors that reflect or admit light and air into the halls, passageways or other public areas of the Building. 7. Place in, attach to, put in front of, or affix to any part of the exterior of the Building, or any of its halls, doors, corridors or vestibules, outside of the demised premises, any lettering, signs, decorations, showcases, displays, display windows, packages, boxes or other articles. 8. Except in the normal decoration of the interior of the demised premises, mark, paint, drill into, or in any way deface, any part of the Building or the demised premises or cut, bore or string wires therein. B-1 9. Permit or allow bicycles, vehicles, animals, fish or birds of any kind to be brought into or kept on or about the Building or the demised premises. 10. Make, or permit or allow to be made, any unseemly or disturbing noises, whether by musical instruments, recordings, radio, talking machines, television, whistling, singing or in any other way, which might disturb other occupants in the Building or those having business with them or impair or interfere with the use or enjoyment by others of neighboring buildings or premises. 11. Bring into or keep on any part of the demised premises or the Building any inflammable, combustible, radioactive or explosive fluid, chemical or substance except materials normally and customarily used in the operation of Tenant's business. 12. Place upon any of the doors (other than closet or vault doors) or windows in the Building any locks or bolts which shall not be operable by the Grand Master Key for the Building, or make any changes in locks or the mechanisms thereof which shall make such locks inoperable by said Grand Master Key unless such change is approved by Landlord in which event Tenant shall give Landlord duplicate keys for such locks or bolts. 13. Remove, or carry into or out of the demised premises or the Building, any safes, freight, furniture, packages, boxes, crates or any bulky or heavy objects except during such hours and in such elevators as Landlord may reasonably determine from time to time. 14. Use any lighting in perimeter areas of the Building, other than that which is standard for the Building or approved by Landlord, so as to permit uniformity of appearance to those viewing the Building from the outside. 15. Engage or pay any employees on the demised premises except those actually working for Tenant in the demised premises, or advertise for laborers giving the demised premises as an address. 16. Obtain, permit or allow in the Building the purchase, or acceptance for use in the demised premises, by means of a service cart, vending machine or otherwise, of any ice, drinking water, food, tobacco in any form, beverage, towel, barbering, boot blackening, cleaning, floor polishing or other similar items or services from any persons, except such persons, during such hours, and at such places within the Building and under such requirements as may be determined by Landlord with respect to the furnishing of such items and services, provided that the charges for such items and services by such persons are not excessive. 17. Use, permit or allow any advertising or identifying sign which Landlord shall have notified Tenant tends, in Landlord's judgment, to impair the reputation of the Building or its desirability as a building for offices. B-2 18. Close and leave the demised premises at any time without closing all operable windows and, if requested by Landlord, turning out all lights. 19. Permit entrance doors to the demised premises to be left open at any time or unlocked when the demised premises are not in use. 20. Encourage canvassing, soliciting or peddling in any part of the Building or permit or allow the same in the demised premises. 21. Use, or permit or allow any of its employees, contractors, suppliers or invitees to use, any space or part of the Building, including the passenger elevators or public halls thereof, in the moving, delivery or receipt of safes, freight, furniture, packages, boxes, crates, paper, office material or any other matter or thing, any hand trucks, wagons or similar items which are not equipped with such rubber tires, side guards and other safeguards which shall have been approved by Landlord or use any such hand trucks, wagons or similar items in any of the passenger elevators. 22. Cause or permit any food odors or any other unusual or objectionable odors to exist in or emanate from the demised premises or permit any cooking or preparation of food except in areas approved by Landlord and in compliance with local ordinances. 23. Create or permit a public or private nuisance. 24. Throw or allow or permit to be thrown anything out of the doors, windows or skylights or down the passageways of the Building. 25. Lay vinyl asbestos tile or other similar floor covering so that the same shall come in direct contact with the floor or in a manner or by means of such pastes or other adhesives which shall not have been approved by Landlord, it being understood that if linoleum or other similar floor covering is desired to be used, an interlining of builder's deadening felt shall be first affixed to the floor, by a paste or other material which is soluble in water, the use of cement or other similar adhesive material being expressly prohibited. 26. Use, allow or permit the passenger elevators to be used by Tenant's working hands (persons in rough clothing handling packages, cartons and shipments of material or mail) or persons carrying bulky packages or by persons calling for or delivering mail or goods to or from the demised premises, and Tenant shall cooperate with Landlord in enforcing this Rule on those making deliveries to Tenant. 27. Request any of Landlord's agents, employees or contractors to perform any work, or do anything, outside of their regular duties, unless previously approved by the Building manager. 28. Invite to the demised premises or the Building, or permit the visit of, persons in such numbers or under such conditions as to unreasonably interfere with the use and B-3 enjoyment of any of the plazas, entrances, corridors, arcades, escalators, elevators or other facilities of the Building by other occupants thereof. 29. Use, permit or allow the use of any fire exits or stairways for any purpose other than emergency use. 30. Employ any firm, person or persons to move safes, machines or other heavy objects into or out of the Building, without prior approval of Landlord of such persons and the manner in which such items will be moved, which approval shall not be unreasonably withheld. 31. Install or use any machines or machinery of any kind whatsoever which may disturb any persons outside of the demised premises. 32. Use the water and wash closets or other plumbing fixtures for any purpose other than those for which they were constructed, or allow or permit sweepings, rubbish, rags, or other solid substances to be thrown therein. 33. Install any carpeting or drapes, or paneling, grounds or other decorative wood products, in the demised premises, other than those wood products considered furniture, which are not treated with fire retardant materials and, in such event, shall submit, to Landlord's reasonable satisfaction, proof or other reasonable certification of the materials reasonably satisfactory fire retardant characteristics. II. Tenant shall: 1. Pay Landlord for any damages, costs or expenses incurred by Landlord with respect to the breach of any of the Rules and Regulations contained in or provided by this Lease by Tenant, or any of its servants, agents, employees, licensees or invitees, or the misuse by Tenant, or any of the aforesaid, of any fixture or part of the demised premises or the Building and shall cause its servants, agents, employees, licensees and invitees to comply with the Rules and Regulations contained in or provided for by this Lease. 2. Upon the termination of this Lease, turn over to Landlord all keys either furnished to, or otherwise procured by, Tenant with respect to any locks used by Tenant in the demised premises or the Building and, in the event of the loss of such keys, pay to Landlord the cost of procuring same. 3. Subject to the provisions of Article 27 hereof, refrain from, and immediately upon receipt of notice thereof, discontinue any violation or breach of the Rules and Regulations contained in or provided for by this Lease. B-4 4. Request Landlord to furnish passes to persons whom Tenant desires to have access to the demised premises during times other than Business Hours and be responsible and liable to Landlord for all persons and acts of such persons for whom Tenant requests such passes. 5. Furnish artificial light and electrical energy (unless Landlord shall furnish electrical energy as a service included in the rent) at Tenant's expense for the employees of Landlord or Landlord's contractors while doing janitorial or other cleaning services or while making repairs or alterations in the demised premises. 6. Apply at the office of the Building's manager with respect to all matters and requirements of Tenant which require the attention of Landlord, its agents or any of its employees. 7. Pay Landlord's reasonable charges for the installation and replacement of ceiling tiles removed for Tenant by telephone installers or others in the demised premises and public corridors, if any. 8. Purchase from Landlord or Landlord's designee, at Landlord's option, all lighting tubes, lamps, bulbs and ballasts used in the demised premises and pay Landlord, or Landlord's designee, as the case may be, its reasonable charges for the purchase and installation thereof. 9. Pay Landlord's reasonable charges for the hiring or providing of security guards during times when Tenant, or any subtenant of Tenant, is moving into or out of portions of the demised premises or when significant quantities of furniture or other materials are being brought into or removed from the demised premises. III. Landlord shall: 1. Have the right to inspect all freight objects or bulky matter (except printed matter) brought into the Building and to exclude from the Building all objects and matter which violate any of the Rules and Regulations contained in or provided by this Lease. 2. Have the right to require any person leaving the demised premises with any package, or other object or matter, to submit a pass, listing such package or object or matter, from Tenant. 3. In no way be liable to Tenant or any other party for damages or loss arising from the admission, exclusion or rejection of any person or any property to or from the demised premises or the Building under the provisions of the Rules and Regulations contained in or provided for by this Lease. B-5 4. Have no liability or responsibility for the protection of any of Tenant's property as a result of damage or the unauthorized removal of any such property resulting wholly or in part from Landlord's failure to enforce, in any particular instance, or generally, any of Landlord's rights. 5. Have the right to require all persons entering or leaving the Building, during hours other than Business Hours, to sign a register and may also exclude from the Building, during such hours, all persons who do not present a pass to the Building signed by Landlord. 6. Furnish passes to persons for whom Tenant requests same. 7. Have the right to control and operate the public portions of the Building and the public facilities, as well as facilities furnished for the common use of other occupants, of the Building. 8. Have the right to remove any violation of Paragraph I items 2, 3, 4, 5, 6 or 7 of these Rules and Regulations without any right of Tenant to claim any liability against Landlord, and have the right to impose a reasonable charge against Tenant for removing any such violation or repairing any damages resulting therefrom. B-6 SCHEDULE C FIRST REFUSAL SPACE B-7 EX-10.4 5 AGREEMENT AND PLAN OF MERGER ------------------------------------------------------------------------ AGREEMENT AND PLAN OF MERGER Among INTERACTIVE IMAGINATIONS, INC., 24/7 ACQUISITION CORP., PETRY INTERACTIVE, INC. and ADVERCOMM, INC. Dated as of February 2, 1998 ------------------------------------------------------------------------ TABLE OF CONTENTS Section Page ARTICLE I THE MERGER......................................................... 1 SECTION 1.1. The Merger................................................ 1 SECTION 1.2. Effective Time............................................ 1 SECTION 1.3. Effect of the Merger...................................... 2 SECTION 1.4. Certificate of Incorporation; By-Laws..................... 2 SECTION 1.5. Directors and Officers.................................... 2 SECTION 1.6. Conversion of Securities.................................. 2 SECTION 1.7. Surrender and Payment..................................... 3 SECTION 1.8. Options and Restricted Shares............................. 3 SECTION 1.9. Closing................................................... 3 ARTICLE II REPRESENTATIONS AND WARRANTIES OF INTERACTIVE AND THE SUBSIDIARY ........................................ 4 SECTION 2.1. Corporate Organization, Good Standing and Qualification... 4 SECTION 2.2. Capitalization............................................ 4 SECTION 2.3 Authority; Execution and Delivery; Requisite Consents, Nonviolation............................................. 5 SECTION 2.4 Subsidiaries............................................. 6 SECTION 2.5 Financial Information.................................... 6 SECTION 2.6 Certain Changes or Events................................ 7 SECTION 2.7 Title to Assets.......................................... 7 SECTION 2.8 Contracts................................................ 8 SECTION 2.9 Intellectual Property.................................... 9 SECTION 2.10 Insurance................................................ 10 SECTION 2.11 Labor Union Activities; Employee Relations............... 10 SECTION 2.12 ERISA.................................................... 11 SECTION 2.13 Litigation............................................... 11 SECTION 2.14 Compliance with Laws; Permits............................ 11 SECTION 2.15 Taxes.................................................... 12 SECTION 2.16 Books and Records........................................ 12 SECTION 2.17 Environmental Matters.................................... 12 SECTION 2.18 Transactions with Affiliates............................. 13 SECTION 2.19 Registration Rights...................................... 13 SECTION 2.20 No Brokers or Finders.................................... 13 SECTION 2.21 Investment Company Act................................... 13 SECTION 2.22 Disclosure............................................... 13 SECTION 2.23 Public Announcements..................................... 14 SECTION 2.24. Board Recommendation..................................... 14 SECTION 2.25. Certificate of Incorporation and By-Laws................. 14 ARTICLE III REPRESENTATIONS AND WARRANTIES OF PETRY......................... 14 SECTION 3.1. Corporate Organization, Good Standing and Qualification.. 14 SECTION 3.2 Capitalization........................................... 14 SECTION 3.3. Authority; Execution and Delivery; Requisite Consents, Nonviolation............................................. 15 SECTION 3.4 Subsidiaries............................................. 16 i SECTION 3.5. Financial Information.................................... 16 SECTION 3.6. Certain Changes or Events................................ 16 SECTION 3.7 Title to Assets.......................................... 17 SECTION 3.8. Contracts................................................ 17 SECTION 3.11. Labor Union Activities; Employee Relations............... 19 SECTION 3.12. ERISA.................................................... 20 SECTION 3.13 Litigation............................................... 20 SECTION 3.14 Compliance with Laws; Permits............................ 20 SECTION 3.15. Taxes.................................................... 20 SECTION 3.16. Books and Records........................................ 21 SECTION 3.17. Environmental Matters.................................... 21 SECTION 3.18. Transactions with Affiliates............................. 21 SECTION 3.19. Registration Rights...................................... 21 SECTION 3.20. No Brokers or Finders.................................... 21 SECTION 3.21. Investment Company Act................................... 22 SECTION 3.22 Disclosure............................................... 22 SECTION 3.23 Public Announcements..................................... 22 SECTION 3.24. Board and Stockholders Recommendation.................... 22 SECTION 3.25. Certificate of Incorporation and By-Laws................. 22 ARTICLE IV REPRESENTATIONS AND WARRANTIES OF ADVERCOMM...................... 22 SECTION 4.1. Corporate Organization, Good Standing and Qualification.. 23 SECTION 4.2 Capitalization........................................... 23 SECTION 4.3. Authority; Execution and Delivery; Requisite Consents, Nonviolation............................................. 23 SECTION 4.4 Subsidiaries............................................. 24 SECTION 4.5. Financial Information.................................... 24 SECTION 4.6. Certain Changes or Events................................ 25 SECTION 4.7 Title to Assets.......................................... 25 SECTION 4.8. Contracts................................................ 26 SECTION 4.9. Intellectual Property.................................... 27 SECTION 4.11. Labor Union Activities; Employee Relations............... 28 SECTION 4.12. ERISA.................................................... 28 SECTION 4.13 Litigation............................................... 28 SECTION 4.14 Compliance with Laws; Permits............................ 28 SECTION 4.15. Taxes.................................................... 29 SECTION 4.16. Books and Records........................................ 29 SECTION 4.17. Environmental Matters.................................... 29 SECTION 4.18. Transactions with Affiliates............................. 30 SECTION 4.19. Registration Rights...................................... 30 SECTION 4.20. No Brokers or Finders.................................... 30 SECTION 4.21. Investment Company Act................................... 30 SECTION 4.22 Disclosure............................................... 30 SECTION 4.23 Public Announcements..................................... 30 SECTION 4.24. Board and Stockholders Recommendation.................... 31 SECTION 4.25. Certificate of Incorporation and By-Laws................. 31 ARTICLE V COVENANTS OF THE PARTIES.......................................... 31 SECTION 5.1 Conduct of Business by the Parties Pending the Merger.... 31 SECTION 5.2 No Solicitation of Transactions.......................... 33 SECTION 5.3 Option Plans, Convertible Debt, Options, and Warrants.... 34 ii SECTION 5.4 Consents and Approvals................................... 34 SECTION 5.5 Directors' and Officers' Indemnification................. 34 SECTION 5.6 Reincorporation in Delaware.............................. 34 SECTION 5.7 Approval of Shareholders................................. 34 ARTICLE VI ADDITIONAL AGREEMENTS OF THE PARTIES............................. 35 SECTION 6.1 Access to Information; Confidentiality................... 35 SECTION 6.2 Notification of Certain Matters.......................... 35 SECTION 6.3 Further Action........................................... 35 SECTION 6.4 Public Announcements..................................... 36 SECTION 6.5 Government Compliance.................................... 36 ARTICLE VII CONDITIONS OF THE MERGER........................................ 36 SECTION 7.1 Conditions to Obligations of Each Party to Effect the Merger........................................ 36 ARTICLE VIII TERMINATION, AMENDMENT, AND WAIVER............................. 38 SECTION 8.1 Termination.............................................. 38 SECTION 8.2 Effect of Termination.................................... 39 SECTION 8.3 Fees and Expenses........................................ 39 SECTION 8.4 Amendment................................................ 39 SECTION 8.5 Waiver................................................... 40 ARTICLE IX GENERAL PROVISIONS............................................... 40 SECTION 9.1 Survival of Representations, Warranties, and Agreements.. 40 SECTION 9.2 Notices.................................................. 40 SECTION 9.3 Headings................................................. 41 SECTION 9.4 Entire Agreement......................................... 41 SECTION 9.5 Parties in Interest; Assignment.......................... 41 SECTION 9.6 Governing Law............................................ 42 SECTION 9.7 Counterparts............................................. 42 SECTION 9.8 Severability............................................. 42 SECTION 9.9 Specific Performance..................................... 42 iii AGREEMENT AND PLAN OF MERGER AGREEMENT AND PLAN OF MERGER, dated as of February 2, 1998 (this "Agreement"), among Interactive Imaginations, Inc., a New York corporation ("Interactive"), 24/7 Acquisition Corp., a Delaware corporation and a wholly-owned subsidiary of Interactive (the "Subsidiary"), Petry Interactive, Inc., a Delaware corporation ("Petry") and Advercomm, Inc. ("Advercomm"), a Delaware corporation (each, a "Party," and collectively, the "Parties"). WHEREAS, the Boards of Directors of Interactive, the Subsidiary, Petry and Advercomm have each approved the merger (the "Merger") of Petry and Advercomm with and into the Subsidiary, in accordance with the General Corporation Law of the State of Delaware ("Delaware Law") and upon the terms and subject to the conditions set forth herein; and WHEREAS, for federal income tax purposes, it is intended that the Merger, as defined herein, shall qualify as a reorganization within the meaning of Section 368(c) of the Internal Revenue Code of 1986, as amended (the "Code"); NOW, THEREFORE, in consideration of the foregoing and the mutual covenants and agreements herein contained, and intending to be legally bound hereby, Interactive, the Subsidiary, Petry and Advercomm hereby agree as follows: ARTICLE I SECTION 1.1. The Merger At the Effective Time (as defined in Section 1.2) and subject to and upon the terms and conditions of this Agreement and Delaware Law, each of Petry and Advercomm shall be merged with and into the Subsidiary, the separate corporate existence of each of Petry and Advercomm shall cease, and the Subsidiary shall continue as the surviving corporation. The Subsidiary as the surviving corporation after the Merger is hereinafter sometimes referred to as the "Surviving Corporation." SECTION 1.2. Effective Time As promptly as practicable after the satisfaction or waiver of the conditions set forth in Article VII and after the Closing referred to in Section 1.8, the parties hereto shall cause the Merger to be consummated by delivering a Certificate of Merger (the "Certificate of Merger") to the Secretary of State of the State of Delaware, in such form as required by, and executed in accordance with the relevant provisions of, Delaware Law, for filing by the Secretary of State (the time of such filing being the "Effective Time"). 1 SECTION 1.3. Effect of the Merger At the Effective Time, the effect of the Merger shall be as provided in the applicable provisions of Delaware Law. Without limiting the generality of the foregoing, and subject thereto, at the Effective Time all the rights, privileges, powers, franchises, and property of Petry, Advercomm and the Subsidiary shall vest in the Surviving Corporation, and all restrictions, disabilities, duties, debts, and liabilities of Petry, Advercomm and the Subsidiary shall become the restrictions, disabilities, duties, debts, and liabilities of the Surviving Corporation. SECTION 1.4. Certificate of Incorporation; By-Laws At the Effective Time, the Certificate of Incorporation and By-Laws of the Subsidiary shall be the Certificate of Incorporation and By-Laws of the Surviving Corporation until thereafter amended, except that, effective as of the Effective Time, such Certificate of Incorporation will be amended in order to change the name of the Surviving Corporation to "24/7 Media, Inc." SECTION 1.5. Directors and Officers The directors of the Subsidiary immediately prior to the Effective Time shall be the directors of the Surviving Corporation and the officers of the Subsidiary immediately prior to the Effective Time shall be the officers of the Surviving Corporation, in each case until their respective successors are duly elected or appointed and qualified. The persons set forth on Schedule I.A. hereto shall become directors of Interactive at the Effective Time. The persons set forth on Schedule I.B. shall become the officers of Interactive at the Effective Time. SECTION 1.6. Conversion of Securities At the Effective Time, by virtue of the Merger and without any action on the part of the Subsidiary, Petry or Advercomm, or the holders of any of the following securities: (a) each share of common stock, par value $.01 per share, of Petry ("Petry Common Stock") then issued and outstanding shall be canceled and converted into and become the right to receive 83,954.95 shares of Common Stock, par value $.01 per share ("Interactive Common Stock"), of Interactive (an aggregate of 10,494,366 shares of Interactive Common Stock) (the "Petry Merger Consideration"); (b) each share of common stock, par value $.01 per share, of Advercomm ("Advercomm Common Stock") then issued and outstanding shall be canceled and converted into and become the right to receive 1,049.44 shares of Interactive Common Stock (an aggregate of 6,821,335 shares of Interactive Common Stock) (the "Advercomm Merger Consideration"); and (c) each share of common stock, par value $.01 per share, of the Subsidiary issued and outstanding immediately prior to the Effective Time shall be converted into and thereupon and thereafter shall represent one validly issued, fully paid, and nonassessable share of common stock, par value $.01 per share, of the Surviving Corporation. 2 SECTION 1.7. Surrender and Payment (a) Each holder of shares of common stock of Petry or Advercomm that have been converted into a right to receive the Petry Merger Consideration or Advercomm Merger Consideration, respectively, upon surrender at Closing of a certificate or certificates representing such shares of Petry Common Stock or Advercomm Common Stock, together with properly executed stock powers and stock transfer stamps covering such shares of Petry Common Stock or Advercomm Common Stock, will be entitled to receive the Petry or Advercomm Merger Consideration payable in respect of such shares, which Petry or Advercomm Merger Consideration shall be delivered at Closing. (b) After the Effective Time, there shall be no further registration or transfers of shares of Petry Common Stock or Advercomm Common Stock outstanding prior to the Effective Time. All certificates representing shares of Petry Common Stock or Advercomm Common Stock outstanding prior to the Effective Time shall be presented to the Surviving Corporation at the Closing and shall be cancelled and exchanged for the Petry Merger Consideration or Advercomm Merger Consideration provided for, and in accordance with the procedures set forth, in this Agreement. (c) No fractional shares of Interactive Common Stock shall be issued upon conversion of Petry Common Stock or Advercomm Common Stock into Interactive Common Stock. In lieu of any fractional share of Interactive Common Stock to which the holder of Petry Common Stock or Advercomm Common Stock would otherwise be entitled, Interactive shall round down to the nearest whole share of Interactive Common Stock. SECTION 1.8. Closing. The closing of the transactions contemplated by this Agreement (the "Closing") shall take place at the offices of Proskauer Rose LLP, 1585 Broadway, New York, New York, at 8:30 a.m., local time, on the day on which the conditions set forth in Article VII hereof are satisfied or waived, or at such other place and time and on such other date as Interactive, the Subsidiary, Petry and Advercomm shall agree (the "Closing Date"). SECTION 1.9. Related Agreements. Prior to, or simultaneously with, the Closing, the following agreements (the "Related Agreements") shall be executed and delivered by the parties: (a) Employment Agreements, substantially in the form attached hereto as Exhibit A, between Interactive and each of the executives listed on Schedule I.B. attached hereto; (b) A Termination/Separation Agreement, substantially in the form attached hereto as Exhibit B, between Interactive and Michael Paolucci; (c) A Consulting Agreement, substantially in the form attached hereto as Exhibit C, between Interactive and Neterprises, Inc.; (d) A Letter Agreement, substantially in the form attached hereto as Exhibit D, between Petry and Petry Media Corporation ("PMC"), setting forth the understanding and agreement of Petry and PMC with respect to the treatment and repayment of certain payments by Petry to PMC pursuant to Sections 5.4 and 5.6 of that certain Stock 3 Purchase Agreement, dated as of September 29, 1997, between PMC and Interactive Holdings, LLC. ARTICLE II REPRESENTATIONS AND WARRANTIES OF INTERACTIVE AND THE SUBSIDIARY Interactive and the Subsidiary hereby jointly and severally represent and warrant to Petry and Advercomm that, except as set forth on the Schedule of Exceptions attached hereto as Schedule II, specifically identifying the relevant subsection hereof, which exceptions shall be deemed to be representations and warranties as if made hereunder: SECTION 2.1. Corporate Organization, Good Standing and Qualification Interactive is a corporation duly organized, validly existing and in good standing under the laws of the State of New York. The Subsidiary is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware. Interactive and the Subsidiary each have all requisite power and authority to carry on its business as now conducted and as proposed to be conducted. The Subsidiary is a newly formed corporation which has not engaged in any business other than in connection with its organization and the transactions contemplated by this Agreement. Interactive and the Subsidiary each is duly qualified to transact business and in good standing in each jurisdiction in which the failure so to qualify could have a Material Adverse Effect on its business, properties, results of operations, earnings, assets, liabilities, condition (financial or otherwise) or prospects (collectively, "Condition"). The term "Material Adverse Effect," as used in this Agreement with respect to any Party, means any change or effect that is materially adverse to the Condition of such Party. SECTION 2.2. Capitalization Without giving effect to the transactions contemplated by this Agreement, the Stock Purchase Agreement, the Shareholders' Agreement, and the Registration Rights Agreement, each as hereinafter defined, the capital stock of Interactive, as authorized by its Certificate of Incorporation, consists of: (i) 30,000,000 shares of Common Stock, of which 4,595,047 shares are issued and outstanding, 1,142,642 shares are reserved for issuance to key employees, officers and directors of, and consultants to, Interactive under stock incentives that have been granted or are available for grant by Interactive (collectively, the "Stock Incentives"), 3,243,585 shares are reserved for issuance pursuant to convertible debt securities of Interactive; 2,171,633 shares are reserved for issuance pursuant to issued and outstanding Series A Stock (as hereinafter defined), 484,104 shares are reserved for issuance pursuant to warrants to purchase common stock of Interactive, and no other shares are reserved for any purpose; (ii) 2,000,000 shares of preferred stock, of which 500,000 shares have been designated as Series A Convertible Preferred Stock (the "Series A Stock"), 158,144 of which are outstanding. The rights, privileges and preferences of the Common Stock and Series A Stock are as stated in the Certificate of Incorporation. Neither this Agreement nor the transactions contemplated thereby will cause any anti-dilution adjustment or accelerated vesting of any options. Assuming receipt by Interactive of the consents, 4 approvals and agreements contemplated by Section 5.3 herein as of the Closing, Interactive will have 10,494,369 shares of Common Stock outstanding, and except for the Stock Incentives specified above and 2,500,000 Warrants to be issued in connection with the Termination Agreement contemplated by Section 1.9(b) above, will not (i) have outstanding any capital stock or other securities convertible into or exchangeable for any shares of its capital stock and no person will have any right to subscribe for or to purchase (including conversion or preemptive rights), or any options for the purchase of, or any agreements providing for the issuance (contingent or otherwise) of, any calls, commitments or other claims of any character relating to, any capital stock or any stock or securities convertible into or exchangeable for any capital stock of Interactive; (ii) have any capital stock, equity interests or other securities reserved for issuance for any purpose; or (iii) be subject to any obligation (contingent or otherwise) to repurchase or otherwise acquire or retire any shares of its capital stock or any convertible securities, rights or options of the type described in the preceding clause (i). All of the issued and outstanding shares of Common Stock have been duly and validly issued and, subject to Section 630 of the New York Business Corporation Law, are fully paid and nonassessable. To the best knowledge of Interactive, there are no agreements among Interactive's shareholders with respect to the voting or transfer of Interactive's capital stock. Part 2.2 of Schedule II includes a complete and correct list of the name of each of Interactive's shareholders and the number of shares of capital stock (and class or series) owned by such shareholder, the name of each holder of an outstanding stock option and/or warrant and the number of options and/or warrants to purchase capital stock owned by such holder and the exercise price at which such option(s) or warrants may be exercised, and the name of each holder of convertible debt securities of Interactive, the face amount of such securities, and the number of shares of Interactive Common Stock issuable upon conversion of such debt securities. The authorized capital stock of the Subsidiary consists of 1,000 shares of common stock, of which 100 are outstanding as of the date hereof. Interactive owns all of the issued and outstanding shares of the Subsidiary. SECTION 2.3 Authority; Execution and Delivery; Requisite Consents, Nonviolation Interactive and the Subsidiary have, and as of the Closing will have, all requisite power and authority to execute, deliver and perform this Agreement and each other document or instrument executed by them, or any of their officers, in connection herewith or pursuant hereto (this Agreement, together with all of the foregoing documents and instruments, are sometimes collectively referred to herein as the "Interactive Documents"), and to consummate the transactions contemplated hereby. The execution, delivery and performance of this Agreement and the other Interactive Documents and the consummation of the transactions contemplated hereby and thereby have been duly and validly authorized by all necessary action on the part of Interactive and the Subsidiary. This Agreement and each of the other Interactive Documents that has been executed as of the date hereof is, and each of the Interactive Documents will be as of the Closing, duly executed and delivered by Interactive and the Subsidiary, and constitute the legal, valid and binding obligation of Interactive and the Subsidiary, enforceable against Interactive and the Subsidiary in accordance with its terms, except as the enforceability thereof may be limited by bankruptcy, insolvency or other similar laws affecting the enforceability of creditors' rights in general or by general principles of equity. The execution, delivery and performance of this Agreement and the other Interactive Documents, and the consummation by Interactive and the Subsidiary of the transactions contemplated hereby and thereby will not (a) require the consent, license, permit, waiver, approval, authorization or other action of, by or with respect to, or registration, declaration or filing with, any court or governmental authority, 5 department, commission, board, arbitrator, bureau, agency or instrumentality, domestic or foreign ("Governmental Authority") or any other individual, partnership, corporation, unincorporated organization or association, limited liability company, trust or other entity (collectively, a "Person"); (b) violate or conflict with any provision of the Certificate of Incorporation or of the By-Laws of Interactive or the Subsidiary as in effect immediately prior to the execution and delivery of this Agreement; or (c) constitute a default under (with or without notice or lapse of time or both), violate or conflict with, give rise to a right of termination, cancellation, acceleration or modification under or result in a loss of a material benefit under, any Law (as defined in Section 2.14 below), Interactive Scheduled Contract (as defined in Section 2.8 below), rights relating to Intellectual Property (as defined in Section 2.9 below), Permit (as defined in Section 2.14 below) or Order (as defined in Section 2.13 below) to which Interactive or the Subsidiary is a party or by which Interactive, the Subsidiary, or their properties are bound. SECTION 2.4 Subsidiaries Interactive does not, and prior to the Closing will not, own or control, directly or indirectly, any partnership interests, stock or other equity interests in any partnership, corporation or other entity or any voting rights or right to control the policies and direction of any partnership, corporation or other entity, other than the Subsidiary. The Subsidiary does not, and prior to the Closing will not, own or control, directly or indirectly, any partnership interests, stock or other equity interests in any partnership, corporation or other entity or any voting rights or right to control the policies and direction of any partnership, corporation or other entity. SECTION 2.5 Fiancial Information Interactive has previously delivered to Petry and Advercomm its historical audited balance sheets as at December 31, 1996, and the historical audited statements of income, shareholders' equity and cash flows for the year then ended (collectively, the "Financial Statements"). Such Financial Statements have been prepared from the books and records of Interactive and present fairly the financial position and the results of operations and cash flows of Interactive as at and for the periods indicated, in each case in conformity with generally accepted accounting principles ("GAAP") consistently applied (except as described in such statements or the notes thereto). Interactive has previously delivered to Petry and Advercomm an historical unaudited balance sheet of Interactive as at September 30, 1997 and an historical unaudited statement of income, shareholders' equity and cash flows for the nine-month period then ended (the "Interim Financial Statements"). Such Interim Financial Statements have been prepared from the books and records of Interactive and, subject to customary year or period end adjustments and accruals and the absence of notes thereto, present fairly the financial position and the results of operations of Interactive as at and for the period indicated, in each case in conformity with GAAP (except as previously noted) consistently applied. Except as disclosed in the Financial Statements or Interim Financial Statements, Interactive has no material liabilities or obligations, absolute or contingent, except (i) obligations and liabilities incurred in the ordinary course of business, consistent with past practice, since the date of the Interim Financial Statements, and (ii) obligations which are not required to be reflected in the Financial Statements or such Interim Financial Statements and which would not be required under GAAP to be included in the notes to such Financial 6 Statements, which individually or in the aggregate are not material to the financial condition or operating results of Interactive. Except as disclosed in the Financial Statements or Interim Financial Statements, Interactive is not a Guarantor or Indemnitor of any Indebtedness of any other Person. Interactive maintains and will continue to maintain a standard system of accounting established and administered in accordance with GAAP. No representation is made hereunder with respect to any forecasts, projections or forward looking information provided in connection with the Financial Statements or the Interim Financial Statements or otherwise, except that Interactive represents that such forecasts, projections and forward looking information were prepared in good faith and that Interactive reasonably believes there is a reasonable basis for such forecasts, projections and forward looking information. SECTION 2.6 Certain Change or Events Other than transactions entered into in connection with this Merger, since October 1, 1997, the business of Interactive has been operated only in the ordinary course, consistent with past practice, and in addition to, and not in limitation of the foregoing: (i) there has been no change in the Condition of Interactive, except for changes in the ordinary course of business consistent with past practice which have not had, in the aggregate, a Material Adverse Effect to Interactive; (ii) there has been no revocation or change in any Contract or Permit or right to do business, and, to the best knowledge of Interactive, no change of Laws which has resulted, or could reasonably be expected to result, in a Material Adverse Effect on the Condition of Interactive; (iii) Interactive has not authorized or made any distributions of, or declared or paid any dividends, upon or with respect to any of its capital stock, or other equity interests, nor has Interactive redeemed, purchased or otherwise acquired, or issued or sold, any of its capital stock or other equity interests; (iv) Interactive has not entered into any material transaction, other than in the ordinary course of business and consistent with past practice; (v) Interactive has not incurred any indebtedness for borrowed money or made any loans or advances to any Person, except for Indebtedness incurred and intended to be converted to Common Shares of the Company on or prior to the Closing Date; (vi) there has been no waiver by Interactive of a valuable right or of a material debt owed to it; (vii) Interactive has not failed to satisfy or discharge any Lien (as defined in Section 2.7 below), except in the ordinary course of business and which is not material to the Condition of Interactive; (viii) there has not been any damage, destruction or loss, whether or not covered by insurance, resulting in a Material Adverse Effect on the Condition of Interactive (as such business is presently conducted and as it is proposed to be conducted); (ix) there has not been any material change in any compensation arrangement or agreement with any employee of Interactive; (x) there has not been any sale, assignment or transfer of any patents, trademarks, copyrights, trade secrets or other intangible assets of Interactive; (xi) there has not been any resignation or termination of employment of any key officer or employee of Interactive and Interactive, to the best of its knowledge, does not know of the impending resignation or termination of employment of any such officer or employee; (xii) there has been no receipt of notice that there has been a loss of, or material order cancellation by, any major customer of Interactive; (xiii) there has been no mortgage, pledge or transfer of a security interest in, or lien, created by Interactive with respect to any of its material properties or assets, except liens for taxes not yet due or payable; (xiv) there has been no loans or guarantees made by Interactive to or for the benefit of its employees, officers or directors, or any members of their immediate families, other than travel advances and other advances made in the ordinary course of its business; and (xv) there has been no agreement or commitment by Interactive to do or perform any of the acts described in this Section 2.6. 7 SECTION 2.7 Title to Assets Interactive and the Subsidiary have good and marketable title to all of their assets and properties, free and clear of any liens, pledges, assessments, leases, security interests, claims, encumbrances or other restrictions of any kind (collectively, "Liens"). With respect to any assets or properties they lease, Interactive and the Subsidiary hold a valid and subsisting leasehold interest therein, free and clear of any Liens, are in compliance, in all material respects, with the terms of the applicable lease, and enjoy peaceful and undisturbed possession under such lease. The assets and properties of Interactive and the Subsidiary that are material to the conduct of business as presently conducted or as proposed to be conducted by Interactive and the Subsidiary are on an overall basis in good operating condition and repair, subject to ordinary wear and tear. SECTION 2.8 Contracts Interactive and the Subsidiary are not parties to, nor is Interactive, the Subsidiary, or any of their assets or properties bound by, or subject to, any contracts, agreements, notes, instruments, franchises, leases, licenses, commitments, arrangements or understandings, written or oral (collectively, "Contracts") of the following types, except for those (the "Scheduled Contracts") listed in Part 2.8 of Schedule II hereto: (a) any Contracts pursuant to which Interactive or the Subsidiary, or another party thereto, is obligated to pay in excess of fifty thousand dollars ($50,000); (b) any Contracts pursuant to which Interactive or the Subsidiary acquired the right to use any Intellectual Property (as defined in Section 2.9 below) or information that is material to or necessary in the business of Interactive or the Subsidiary, or pursuant to which Interactive or the Subsidiary has granted to others the right to use, or which otherwise relates to, its Intellectual Property; (c) any Contracts (other than advances of expenses to employees in the ordinary course of business) involving loans, loan agreements, debt securities, mortgages, deeds of trust, security agreements, suretyships or guarantees; (d) any Contracts between Interactive, on the one hand, and any of its officers, directors, employees or any Persons that beneficially own in excess of 10.0% of the outstanding equity interest (each a "Principal Owner") of Interactive, or any Affiliate or relative, or Affiliate of a relative, of any of the foregoing, on the other; ("Affiliate" of a person means a person that directly or indirectly, through one or more intermediaries, controls, is controlled by, or is under common control with, the first mentioned person, and "control" means the possession, directly or indirectly or as trustee or executor, of the power to direct or cause the direction of the management policies of a person, whether through the ownership of stock, as trustee or executor, by contract or credit arrangement or otherwise); (e) any deferred compensation agreements, bonus, pension, profit sharing, stock option and incentive plans or arrangements, hospitalization, medical and insurance plans, agreements and policies, retirement and severance plans and other employee compensation policies and agreements affecting employees of Interactive or the Subsidiary; 8 (f) any Contracts with any labor union affecting employees of Interactive or the Subsidiary; (g) all partnership, joint venture, shareholders' or similar Contracts with any Person; (h) all Contracts that limit or contain restrictions on the ability of Interactive or the Subsidiary to declare or pay dividends, to make distributions in respect of or to issue or purchase, redeem or otherwise acquire any of its capital stock or require the Company or any Subsidiary to maintain specified financial ratios or levels of net worth or other indicia of financial condition; (i) any Contracts which restrict Interactive or the Subsidiary from freely engaging in business or competing anywhere; and (j) any Contracts which otherwise are material to the Condition of Interactive or the Subsidiary. True and correct copies of all Scheduled Contracts have been made available to Petry and Advercomm. All of the Scheduled Contracts are in full force and effect and constitute legal, valid and binding obligations of Interactive and the Subsidiary and, to the best knowledge of Interactive and the Subsidiary, the other parties thereto; to the best of Interactive's and the Subsidiary's knowledge, no circumstances exist which would give rise to an Action (as defined in Section 2.13) against or by Interactive or the Subsidiary in connection with any Scheduled Contract or any default thereunder; and the validity, effectiveness and continuation of all Scheduled Contracts will not be adversely affected by the transactions contemplated by this Agreement or require any third party consents. SECTION 2.9 Intellutual Property (i) With respect to any patents, trademarks, service marks, trade names, and any applications for any of the foregoing (collectively, the "Intellectual Property") of any kind in which Interactive has an interest or which is otherwise used in, or relates to the business of, Interactive, or any brand name, computer software or program, technology, know-how or process or registered copyright (collectively (including without limitation the Intellectual Property), the "Operating IP") or trade secret that is used in or that relates to its business, Interactive owns or has the right to use such Operating IP or trade secret in its business. Interactive owns or has the right to use all Operating IP and trade secrets that are necessary to its business. (ii) Each of the material licenses or agreements relating to the rights of Interactive to any of the Operating IP (defined above) or any trade secret material of Interactive (the "Intellectual Property Licenses") constitutes a legal, valid, binding and enforceable obligation in accordance with its terms against Interactive, and, to the best knowledge of Interactive, each other party thereto, and to the best knowledge of Interactive is in full force and effect. Interactive has performed all obligations required to have been performed by it under each of the Intellectual Property Licenses to which it is a party. Neither Interactive nor, to the best knowledge of Interactive, any other party thereto is in default thereunder, nor, to the best knowledge of Interactive, is there any event that with notice or lapse of time, or both, would constitute a default thereunder. Interactive has not received any notice that any other party to any of the Intellectual Property Licenses intends 9 to cancel, terminate or refuse to renew the same or to exercise or decline to exercise any option or other right thereunder (other than in the ordinary course of business). No licenses, sublicenses, covenants or agreements have been granted or entered into by Interactive in respect of any of the Operating IP or any material trade secret of Interactive, except the Intellectual Property Licenses. No director, officer, shareholder, employee or other Affiliate of Interactive owns, directly or indirectly, in whole or in part, any of the Operating IP or any trade secret material used by Interactive. To the best knowledge of Interactive, none of the officers, employees, consultants, distributors, agents, representatives or advisors of Interactive have entered into any agreement relating to Interactive's business regarding know-how, trade secrets, assignment of rights in inventions, or prohibition or restriction of competition or solicitation of customers, or any other similar restrictive agreement or covenant, whether written or oral, with any Person other than Interactive. (iii) The consummation of the transactions contemplated hereby will not alter or impair the rights of Interactive to any of the Operating IP, to any trade secret material to Interactive, or under any of the Intellectual Property Licenses. (iv) To the best knowledge of Interactive, no claim with respect to the Operating IP, any trade secret or any Intellectual Property License is currently pending or has been asserted or overtly threatened by any Person, nor does Interactive know of any grounds for any claim, (A) to the effect that any operation or activity of Interactive presently occurring or contemplated infringes or misappropriates any United States or foreign copyright, patent, trademark, service mark or trade secret; (B) to the effect that any other Person infringes on the Operating IP or misappropriates any trade secret or know-how or other proprietary rights of Interactive; (C) challenging the ownership, validity or effectiveness of any of the Operating IP or any trade secret of Interactive; or (D) challenging the license of Interactive to, or other legally enforceable right under, any Operating IP or the Intellectual Property Licenses. (v) Interactive is not aware of any presently existing United States or foreign patents or any patent applications which, if issued as patents, would be infringed by Interactive in connection with conducting its business in the usual course. SECTION 2.10 Insurance Interactive has in full force and effect fire and casualty insurance policies, with extended coverage, general liability insurance, and directors' and officers' insurance in amounts customary for companies similarly situated. Each insurance policy is valid and binding and in full force and effect, no premiums due thereunder have not been paid and neither Interactive, any Subsidiary nor the Person to whom such policy has been issued has received any notice of cancellation or termination in respect of any such policy or is in default thereunder. Such insurance policies are placed with financially sound and reputable insurers and, in light of the respective business, operations and assets and properties of Interactive, are in amounts and have coverages that are reasonable and customary for Persons engaged in such businesses and operations and having such assets and properties. Neither Interactive nor the Person to whom such policy has been issued has received notice that any insurer under any policy referred to in this Section is denying liability with respect to a claim thereunder or defending under a reservation of rights clause. 10 SECTION 2.11 Labor Union Activities: Employee Relations No employee of Interactive is represented by any labor union or covered by any collective bargaining agreement in connection with their employment with Interactive; nor, to the best knowledge of Interactive, has any labor union sought to represent any employee of Interactive. There is no strike or other labor dispute involving Interactive pending, or to the best knowledge of Interactive, threatened. To the best knowledge of Interactive, no officer or key employee of Interactive is a party to or bound by any Contract, or subject to any restrictions (including, without limitation, any non-competition restriction), which would restrict the right of such person to participate in the affairs of Interactive. SECTION 2.12 ERISA There are no employee benefit plans (as defined in Section 3(3) of the Employee Retirement Income Security Act of 1974 ("ERISA")) covering former or current employees of Interactive or the Subsidiary, or under which Interactive or the Subsidiary has any obligation or liability. Interactive and the Subsidiary have not incurred any liability under Title IV of ERISA, including any liability to the Pension Benefit Guaranty Corporation. Part 2.12 of Schedule II lists all material plans, contracts, bonus and commission arrangements, profit-sharing, savings, stock option plans, insurance, deferred compensation, or other similar fringe or employee benefits covering former or current employees of Interactive or under which Interactive has any obligation or liability (each, a "Benefit Arrangement"). The Benefit Arrangements are and have been administered in substantial compliance with their terms and with the requirements of applicable law. No unfair labor practice has been brought during the last three years against Interactive. SECTION 2.13 Litigation There is no action, suit, proceeding, audit, arbitration, investigation or governmental approval process (collectively, "Action") pending or, to the best knowledge of Interactive and the Subsidiary, threatened against, relating to or affecting Interactive or the Subsidiary or affecting any of the properties or assets of Interactive or the Subsidiary (including, without limitation, any of their Permits), nor, to the best knowledge of Interactive and the Subsidiary, is there any basis for any such Action. Neither Interactive and the Subsidiary nor any of their assets or properties are subject to any order, judgment, writ, injunction, decree, ruling or decision (collectively, an "Order") of any Governmental Authority which is material to the Condition of Interactive or the Subsidiary. There is no Action by Interactive or the Subsidiary currently pending or which Interactive or the Subsidiary intends to initiate. SECTION 2.14 Compliance with Laws; Permits Interactive and the Subsidiary have not violated or failed to comply with, in any material respect, any statute, law, ordinance, rule, regulation or policy of any Governmental Authority (collectively, "Laws") to which they or any of their properties or assets are subject. Interactive and the Subsidiary have all permits, licenses, orders, certificates, authorizations and approvals of any Governmental Authority (collectively, the "Permits") that are material to the conduct of their business as presently conducted and as proposed to be conducted. All such Permits are, and as of the Closing will be, in full force and effect. No violations or notices of failure to comply have been issued or recorded in respect of any such Permits. All applications, reports, notices and other documents required to be filed by Interactive or the 11 Subsidiary with all Governmental Authorities have been timely filed and are complete and correct in all material respects as filed or as amended prior to the date hereof. SECTION 2.15 Taxes All federal, state, city, county, local and foreign income, franchise, sales, use and value added tax returns and reports, and all other material tax returns and reports required to be filed by Interactive in those or in any other jurisdiction (collectively, "Returns") have been timely filed. All such Returns are true, correct and complete in all material respects. All taxes, assessments, fees, interest, penalties and other charges with respect thereto (collectively, "Taxes") due or claimed to be due from Interactive or the Subsidiary have been paid except to the extent reserved against on the Financial Statements or incurred in the ordinary course of business since the date of the Interim Financial Statements. No income tax return of Interactive has been audited by the applicable Governmental Authority, and there are in effect no waivers of the applicable statute of limitations for Taxes in any jurisdiction for Interactive or the Subsidiary for any period. The provision for taxes of Interactive as shown in the Interim Financial Statements is adequate for taxes due or accrued as of the date thereof. Neither Interactive nor the Subsidiary has elected pursuant to the Internal Revenue Code of 1986, as amended (the "Code"), to be treated as a Subchapter S corporation or a collapsible corporation pursuant to Section 1362(a) or Section 341(f) of the Code, nor have they made any other elections pursuant to the Code (other than elections that relate solely to methods of accounting, depreciation or amortization) that would have a Material Adverse Effect on the Condition of Interactive. Interactive has never had any tax deficiency proposed or assessed against it. Since the date of the Interim Statements, Interactive has made adequate provisions on its books of account for all taxes, assessments and governmental charges with respect to its business, properties and operations for such period. Interactive has withheld or collected from each payment made to each of its employees, the amount of all taxes (including, but not limited to, federal income taxes, Federal Insurance Contribution Act taxes and Federal Unemployment Tax Act taxes) required to be withheld or collected therefrom, and has paid the same to the proper tax receiving officers or authorized depositories. SECTION 2.16 Book and Records The books of account, ledgers and records of Interactive and the Subsidiary accurately and completely reflect in all material respects all information relating to their business; the nature, acquisition, maintenance, location and collection of their assets; and the nature of all transactions giving rise to their obligations or accounts receivable. The minutes and minute books of Interactive and the Subsidiary provided to Petry and Advercomm prior to the date hereof constitute a true, complete and correct copy of the entire minutes and minute books of Interactive and the Subsidiary. SECTION 2.17 Evironmental Matters The business, assets and properties of Interactive are and have been operated and maintained in compliance with all applicable federal, state, city, county and local environmental protection laws and regulations (collectively, the "Environmental Laws"). No event has occurred which, with or without the passage of time or the giving of notice, or both, would constitute a non-compliance by Interactive with, or a violation by Interactive of, the Environmental Laws. Neither Interactive nor any of its predecessor companies have caused or permitted to exist, as a result of an intentional or unintentional act or omission, a 12 disposal, discharge or release of solid wastes, pollutants or hazardous substances, on or from any site which currently is or formerly was owned, leased, occupied or used by Interactive or any predecessor company, except where such disposal, discharge or release was in compliance with the Environmental Laws. SECTION 2.18 Transaction with Affiliates Interactive and the Subsidiary do not have any direct or indirect dealings with any Principal Owner of Interactive or the Subsidiary or with any of his Affiliates, associates (as such term is defined in Rule 12b-2 under the Securities Exchange Act of 1934, as amended) or relatives (or Affiliates thereof). Interactive and the Subsidiary do not have any obligation to or claim against any Principal Owner of Interactive or the Subsidiary, or any of his or its Affiliates, associates or relatives, and no such Person has any obligation to or claim against Interactive or the Subsidiary. All products, services or benefits provided to Interactive or the Subsidiary by any such Person, or provided by Interactive or the Subsidiary to any such Person, are set forth on Part 2.18 of Schedule II and are provided at a charge equal to the fair market value of such products, services or benefits. To the best knowledge of Interactive and the Subsidiary, no Principal Owner of Interactive or the Subsidiary, nor any of his Affiliates, associates or relatives, has any direct or indirect interest of any kind in any business or entity which is competitive with Interactive or the Subsidiary. SECTION 2.19 Registration Rights No Person has, and as of the Closing no Person shall have, demand, "piggy-back," or other rights to cause Interactive or the Subsidiary to file any registration statement under the Securities Act of 1933, as amended (the "Securities Act") relating to any securities of Interactive or the Subsidiary. SECTION 2.20 No Brokers or Finders Neither Interactive and the Subsidiary nor any of their Affiliates have entered or will enter into any agreement pursuant to which Interactive, the Subsidiary, Petry or Advercomm will be liable, as a result of the transactions contemplated by this Agreement or any Interactive Documents, for any claim of any person for any commission, fee or other compensation as finder or broker. SECTION 2.21 Investment Company Act Neither Interactive nor the Subsidiary is an "investment company" nor is Interactive or the Subsidiary directly or indirectly controlled by or acting on behalf of any Person which is an "investment company" within the meaning of the Investment Company Act of 1940, as amended. SECTION 2.22 Disclosure In connection with this Agreement, Interactive and the Subsidiary have disclosed to Petry and Advercomm all material facts and information known to Interactive and the Subsidiary concerning Interactive and the Subsidiary and their respective Conditions, and have not made any untrue statement of a material fact or omitted to state any material fact necessary in order to make the statements contained herein or in any other Interactive Documents not misleading. 13 SECTION 2.23 Public Announcements. Except as otherwise required by law or by the rules of (or any agreement of the parties or their affiliates with) any stock exchange and except as have already been made by the parties prior to the date hereof, Interactive and the Subsidiary agree that there will prior to the Merger be no press releases or other statements with respect to this Agreement or the transactions contemplated hereby and that they will consult with Petry and Advercomm before issuing any press release or otherwise making any public statement with respect to this Agreement and the transactions contemplated hereby and that Interactive, the Subsidiary, Petry and Advercomm shall not issue any such press release or make any such public statement prior to such consultation and approval of any such release or statement by the other Parties. SECTION 2.24. Board Recommendation. Each of the Board of Directors of Interactive, by unanimous written consent dated February 2, 1998, and the Board of Directors of the Subsidiary by unanimous written consent dated January 29, 1998, approved and adopted this Agreement, the Merger, and the other transactions contemplated hereby. SECTION 2.25. Certificate of Incorporation and By-Laws. Interactive and the Subsidiary have heretofore furnished to Petry and Advercomm a complete and correct copy of their respective Certificates of Incorporation and By-Laws, each as amended to date. Such Certificates of Incorporation and By-Laws are in full force and effect. Neither Interactive nor the Subsidiary is in violation of any of the provisions of its Certificate of Incorporation or By-Laws. ARTICLE III REPRESENTATIONS AND WARRANTIES OF PETRY Petry hereby represents and warrants to Interactive, the Subsidiary and Advercomm that, except as set forth on the Schedule of Exceptions attached hereto as Schedule III, specifically identifying the relevant subsection hereof, which exceptions shall be deemed to be representations and warranties as if made hereunder: SECTION 3.1. Corporate Organization, Good Standing and Qualification. Petry is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware. Neither this Agreement nor the transactions contemplated thereby will cause any anti-dilution adjustment or accelerated vesting of any options. Petry has all requisite power and authority to carry on its business as now conducted and as proposed to be conducted. Petry is duly qualified to transact business and is in good standing in each jurisdiction in which the failure so to qualify could have a material adverse effect on its Condition. 14 SECTION 3.2 Capitalization. The capital stock of Petry, as authorized by its Certificate of Incorporation, consists of: (i) 200,000 shares of Petry Common Stock, of which 100 shares are issued and outstanding, 25 shares are reserved for issuance upon the exercise of currently outstanding warrants to purchase Petry Common Stock, and no other shares are reserved for issuance for any purpose. The rights, privileges and preferences of the Petry Common Stock are as stated in the Certificate of Incorporation. Petry as of the Closing will not (i) have outstanding any capital stock or other securities convertible into or exchangeable for any shares of its capital stock and no person will have any right to subscribe for or to purchase (including conversion or preemptive rights), or any options for the purchase of, or any agreements providing for the issuance (contingent or otherwise) of, any calls, commitments or other claims of any character relating to, any capital stock or any stock or securities convertible into or exchangeable for any capital stock of Petry; (ii) have any capital stock, equity interests or other securities reserved for issuance for any purpose; or (iii) be subject to any obligation (contingent or otherwise) to repurchase or otherwise acquire or retire any shares of its capital stock or any convertible securities, rights or options of the type described in the preceding clause (i). All of the issued and outstanding shares of Petry Common Stock have been duly and validly issued and are fully paid and nonassessable. To the best knowledge of Petry, there are no agreements among Petry's stockholders with respect to the voting or transfer of Petry's capital stock. Part 3.2 of Schedule III includes a complete and correct list of the name of each of Petry's stockholders and the number of shares of capital stock (and class or series) owned by such stockholder. SECTION 3.3. Authority; Execution and Delivery; Requisite Consents, Nonviolation. Petry has, and as of the Closing will have, all requisite power and authority to execute, deliver and perform this Agreement, and each other document or instrument executed by it, or any of its officers, in connection herewith or therewith or pursuant hereto or thereto (this Agreement, together with all of the foregoing documents and instruments, are sometimes collectively referred to herein as the "Petry Documents"), and to consummate the transactions contemplated hereby and thereby. The execution, delivery and performance of this Agreement and the other Petry Documents and the consummation of the transactions contemplated hereby and thereby have been duly and validly authorized by all necessary action on the part of Petry. This Agreement and each of the other Petry Documents that has been executed as of the date hereof is, and each of the Petry Documents will be as of the Closing, duly executed and delivered by Petry, and constitute the legal, valid and binding obligation of Petry, enforceable against Petry in accordance with its terms, except as the enforceability thereof may be limited by bankruptcy, insolvency or other similar laws affecting the enforceability of creditors' rights in general or by general principles of equity. The execution, delivery and performance of this Agreement and the other Petry Documents, and the consummation by Petry of the transactions contemplated hereby and thereby will not (a) require the consent, license, permit, waiver, approval, authorization or other action of, by or with respect to, or registration, declaration or filing with, any Governmental Authority or any other Person; (b) violate or conflict with any provision of the Certificate of Incorporation or of the By-Laws of Petry as in effect immediately prior to the execution and delivery of this Agreement; or (c) constitute a default under (with or without notice or lapse of time or both), violate or conflict with, give rise to a right of termination, cancellation, acceleration or modification under or result in a loss of a material benefit under, any Law, Petry Scheduled 15 Contract (as defined in Section 3.8 below), rights relating to Intellectual Property, Permit or Order to which Petry is a party or by which Petry or its properties are bound. SECTION 3.4 Subsidiaries. Petry does not, and prior to the Closing will not, own or control, directly or indirectly, any partnership interests, stock or other equity interests in any partnership, corporation or other entity or any voting rights or right to control the policies and direction of any partnership, corporation or other entity. SECTION 3.5. Financial Information. Petry has previously delivered to Interactive and Advercomm certain financial information (the "Petry Financial Information"), dated as of December 31, 1997. Such Petry Financial Information has been prepared from the books and records of Petry, and, subject to customary year or period end adjustments and accruals and the absence of notes thereto, presents fairly the financial position and the results of operations and cash flows of Petry as at and for the periods indicated. Except as disclosed in the Petry Financial Information, Petry has no material liabilities or obligations, absolute or contingent, except obligations and liabilities incurred in the ordinary course of business, consistent with past practice, since the date of the Petry Financial Information. Except as disclosed in the Petry Financial Information, Petry is not a Guarantor or Indemnitor of any Indebtedness of any other Person. No representation is made hereunder with respect to any forecasts, projections or forward looking information provided to Interactive, the Subsidiary or Advercomm in connection with the Petry Financial Information or otherwise, except that Petry represents that such forecasts, projections and forward looking information were prepared in good faith and that Petry reasonably believes there is a reasonable basis for such forecasts, projections and forward looking information. SECTION 3.6. Certain Changes or Events. Other than transactions entered into in connection with this Merger, since October 1, 1997, the business of Petry has been operated only in the ordinary course, consistent with past practice, and in addition to, and not in limitation of the foregoing: (i) there has been no change in the Condition of Petry, except for changes in the ordinary course of business consistent with past practice which have not had, in the aggregate, Materially Adverse Effect on the Condition of Petry; (ii) there has been no revocation or change in any Contract or Permit or right to do business, and, to the best knowledge of Petry, no change of Laws which has resulted, or could reasonably be expected to result, in a material adverse change in the Condition of Petry; (iii) Petry has not authorized or made any distributions of, or declared or paid any dividends, upon or with respect to any of its capital stock, or other equity interests, nor has Petry redeemed, purchased or otherwise acquired, or issued or sold, any of its capital stock or other equity interests; (iv) Petry has not entered into any material transaction, other than in the ordinary course of business and consistent with past practice; (v) Petry has not incurred any indebtedness for borrowed money or made any loans or advances to any Person; (vi) there has been no waiver by Petry of a valuable right or of a material debt owed to it; (vii) Petry has not failed to satisfy or discharge any Lien, except in the ordinary course of business and which is not material to the Condition of Petry (as such 16 business is presently conducted and as it is proposed to be conducted); (viii) there has not been any damage, destruction or loss, whether or not covered by insurance, resulting in a Material Adverse Effect on the condition of the assets, properties, financial condition, operating results, prospects or business of Petry; (ix) there has not been any material change in any compensation arrangement or agreement with any employee of Petry; (x) there has not been any sale, assignment or transfer of any patents, trademarks, copyrights, trade secrets or other intangible assets of Petry; (xi) there has not been any resignation or termination of employment of any key officer or employee of Petry and Petry, to the best of its knowledge, does not know of the impending resignation or termination of employment of any such officer or employee; (xii) there has been no receipt of notice that there has been a loss of, or material order cancellation by, any major customer of Petry; (xiii) there has been no mortgage, pledge or transfer of a security interest in, or lien, created by Petry with respect to any of its material properties or assets, except liens for taxes not yet due or payable; (xiv) there has been no loans or guarantees made by Petry to or for the benefit of its employees, officers or directors, or any members of their immediate families, other than travel advances and other advances made in the ordinary course of its business; and (xv) there has been no agreement or commitment by Petry to do or perform any of the acts described in this Section 3.6. SECTION 3.7 Title to Assets. Petry has good and marketable title to all of its assets and properties, free and clear of any Liens. With respect to any assets or properties it leases, Petry holds a valid and subsisting leasehold interest therein, free and clear of any Liens, is in compliance, in all material respects, with the terms of the applicable lease, and enjoys peaceful and undisturbed possession under such lease. The assets and properties of Petry that are material to the conduct of business as presently conducted or as proposed to be conducted by Petry are on an overall basis in good operating condition and repair, subject to ordinary wear and tear. SECTION 3.8. Contracts. Petry is not a party to, nor is Petry or any of its assets or properties bound by, or subject to, any Contracts of the following types, except for those (the "Petry Scheduled Contracts") listed in Part 3.8 of Schedule III hereto: (a) any Contracts pursuant to which Petry, or another party thereto, is obligated to pay in excess of fifty thousand dollars ($50,000); (b) any Contracts pursuant to which Petry acquired the right to use any Intellectual Property or information that is material to or necessary in the business of Petry, or pursuant to which Petry has granted to others the right to use, or which otherwise relates to, its Intellectual Property; (c) any Contracts (other than advances of expenses to employees in the ordinary course of business) involving loans, loan agreements, debt securities, mortgages, deeds of trust, security agreements, suretyships or guarantees; (d) any Contracts between Petry, on the one hand, and any of its Principal Owners, or any Affiliate or relative, or Affiliate of a relative, of any of the foregoing, on the other; 17 (e) any deferred compensation agreements, bonus, pension, profit sharing, stock option and incentive plans or arrangements, hospitalization, medical and insurance plans, agreements and policies, retirement and severance plans and other employee compensation policies and agreements affecting employees of Petry; (f) any Contracts with any labor union affecting employees of Petry; (g) all partnership, joint venture, shareholders' or similar Contracts with any Person; (h) all Contracts that limit or contain restrictions on the ability of Petry to declare or pay dividends, to make distributions in respect of or to issue or purchase, redeem or otherwise acquire any of its capital stock or require Petry to maintain specified financial ratios or levels of net worth or other indicia of financial condition; (i) any Contracts which restrict Petry from freely engaging in business or competing anywhere; and (j) any Contracts which otherwise are material to the Condition of Petry. True and correct copies of all Scheduled Contracts have been made available to Interactive, the Subsidiary and Advercomm. All of the Scheduled Contracts are in full force and effect and constitute legal, valid and binding obligations of Petry and, to the best knowledge of Petry, the other parties thereto; to the best of Petry's knowledge, no circumstances exist which would give rise to an Action against or by Petry in connection with any Scheduled Contract or any default thereunder; and the validity, effectiveness and continuation of all Scheduled Contracts will not be adversely affected by the transactions contemplated by this Agreement or require third party consent. SECTION 3.9. Intellectual Property. (i) With respect to any Intellectual Property of any kind in which Petry has an interest or which is otherwise used in, or relates to the business of, Petry, or any Operating IP or trade secret that is used in or that relates to its business, Petry owns or has the right to use such Operating IP or trade secret in its business. Petry owns or has the right to use all Operating IP and trade secrets that are necessary to its business. (ii) Each Intellectual Property License constitutes a legal, valid, binding and enforceable obligation in accordance with its terms against Petry, and, to the best knowledge of Petry, each other Person party thereto, and to the best knowledge of Petry is in full force and effect. Petry has performed all obligations required to have been performed by it under each of the Intellectual Property Licenses to which it is a party. Neither Petry nor, to the best knowledge of Petry, any other party thereto is in default thereunder, nor, to the best knowledge of Petry, is there any event that with notice or lapse of time, or both, would constitute a default thereunder. Petry has not received any notice that any other party to any of the Intellectual Property Licenses intends to cancel, terminate or refuse to renew the same or to exercise or decline to exercise any option or other right thereunder (other than in the ordinary course of business). No licenses, sublicenses, covenants or agreements have been 18 granted or entered into by Petry in respect of any of the Operating IP or any material trade secret of Petry, except the Intellectual Property Licenses. No director, officer, shareholder, employee or other Affiliate of Petry owns, directly or indirectly, in whole or in part, any of the Operating IP or any trade secret material used by Petry. None of the officers, employees, consultants, distributors, agents, representatives or advisors of Petry have entered into any agreement relating to Petry's business regarding know-how, trade secrets, assignment of rights in inventions, or prohibition or restriction of competition or solicitation of customers, or any other similar restrictive agreement or covenant, whether written or oral, with any Person other than Petry. (iii) The consummation of the transactions contemplated hereby will not alter or impair the rights of Petry to any of the Operating IP, to any trade secret material to Petry, or under any of the Intellectual Property Licenses. (iv) To the best knowledge of Petry, no claim with respect to the Operating IP, any trade secret or any Intellectual Property License is currently pending or has been asserted or overtly threatened by any Person, nor does Petry know of any grounds for any claim, (A) to the effect that any operation or activity of Petry presently occurring or contemplated infringes or misappropriates any United States or foreign copyright, patent, trademark, service mark or trade secret; (B) to the effect that any other Person infringes on the Operating IP or misappropriates any trade secret or know-how or other proprietary rights of Petry; (C) challenging the ownership, validity or effectiveness of any of the Operating IP or any trade secret of Petry; or (D) challenging the license of Petry to, or other legally enforceable right under, any Operating IP or the Intellectual Property Licenses. (v) Petry is not aware of any presently existing United States or foreign patents or any patent applications which, if issued as patents, would be infringed by any activity contemplated by Petry. SECTION 3.10. Insurance. Petry has in full force and effect fire and casualty insurance policies, with extended coverage, products liability insurance, general liability insurance, errors and omissions insurance, and directors' and officers' insurance in amounts customary for companies similarly situated. Each insurance policy is valid and binding and in full force and effect, no premiums due thereunder have not been paid and neither Petry, any Subsidiary nor the Person to whom such policy has been issued has received any notice of cancellation or termination in respect of any such policy or is in default thereunder. Such insurance policies are placed with financially sound and reputable insurers and, in light of the respective business, operations and assets and properties of Petry and the Subsidiary, are in amounts and have coverages that are reasonable and customary for Persons engaged in such businesses and operations and having such assets and properties. Neither Petry nor the Person to whom such policy has been issued has received notice that any insurer under any policy referred to in this Section is denying liability with respect to a claim thereunder or defending under a reservation of rights clause. SECTION 3.11. Labor Union Activities; Employee Relations. No employee of Petry is represented by any labor union or covered by any collective bargaining agreement; nor, to the best knowledge of Petry, has any labor union sought to represent any employee of Petry. There is no strike or other labor dispute involving Petry 19 pending, or to the best knowledge of Petry, threatened. To the best knowledge of Petry, no officer or key employee intends to terminate his employment with Petry. To the best knowledge of Petry, no officer or key employee of Petry is a party to or bound by any Contract, or subject to any restrictions (including, without limitation, any non-competition restriction), which would restrict the right of such person to participate in the affairs of Petry. SECTION 3.12. ERISA. There are no employee benefit plans (as defined in ERISA) covering former or current employees of Petry, or under which Petry has any obligation or liability. Petry has not incurred any liability under Title IV of ERISA, including any liability to the Pension Benefit Guaranty Corporation. Part 3.12 of Schedule III lists all material Benefit Arrangements. The Benefit Arrangements are and have been administered in substantial compliance with their terms and with the requirements of applicable law. No unfair labor practice has been brought during the last three years against Petry. SECTION 3.13 Litigation. There is no Action pending or, to the best knowledge of Petry, threatened against, relating to or affecting Petry or affecting any of the properties or assets of Petry (including, without limitation, any of their Permits), nor, to the best knowledge of Petry, is there any basis for any such Action. Neither Petry nor any of its assets or properties are subject to any Order of any Governmental Authority which is material to the Condition of Petry. There is no Action by Petry currently pending or which Petry intends to initiate. SECTION 3.14 Compliance with Laws; Permits. Petry has not violated or failed to comply with, in any material respect, any Laws to which it or any of its properties or assets are subject. Petry has all Permits that are material to the conduct of its business as presently conducted and as proposed to be conducted; all such Permits are, and as of the Closing will be, in full force and effect; no violations or notices of failure to comply have been issued or recorded in respect of any such Permits. All applications, reports, notices and other documents required to be filed by Petry with all Governmental Authorities have been timely filed and are complete and correct in all material respects as filed or as amended prior to the date hereof. SECTION 3.15. Taxes. All Returns have been timely filed. All such Returns are true, correct and complete in all material respects. All Taxes due or claimed to be due from Petry have been paid except to the extent reserved against in the Petry Financial Information. No income tax return of Petry has been audited by the applicable Governmental Authority, and there are in effect no waivers of the applicable statute of limitations for Taxes in any jurisdiction for Petry for any period. The provision for taxes for Petry as shown in the Petry Financial Information is adequate for taxes due or accrued as of the date thereof. Petry has not elected pursuant to the Internal Revenue Code of 1986, as amended (the "Code"), to be treated as a Subchapter S corporation or a collapsible corporation pursuant to Section 1362(a) or Section 341(f) of the Code, nor has it made any other elections pursuant to the Code (other than elections that relate solely to methods of accounting, depreciation or amortization) that would have a Material Adverse Effect on the Condition of Petry. Petry has never had any tax deficiency proposed or assessed against it. Since the date of the Petry Financial Information, Petry has 20 made adequate provisions on their books of account for, all taxes, assessments and governmental charges with respect to its business, properties and operations for such period. Petry has withheld or collected from each payment made to each of its employees, the amount of all taxes (including, but not limited to, federal income taxes, Federal Insurance Contribution Act taxes and Federal Unemployment Tax Act taxes) required to be withheld or collected therefrom, and has paid the same to the proper tax receiving officers or authorized depositories. SECTION 3.16. Books and Records. The books of account, ledgers and records of Petry accurately and completely reflect in all material respects all information relating to its business; the nature, acquisition, maintenance, location and collection of its assets; and the nature of all transactions giving rise to its obligations or accounts receivable. The minutes and minute books of Petry provided to Interactive, the Subsidiary and Advercomm prior to the date hereof constitute a true, complete and correct copy of the entire minutes and minute books of Petry. SECTION 3.17. Environmental Matters. The business, assets and properties of Petry are and have been operated and maintained in compliance with all Environmental Laws. No event has occurred which, with or without the passage of time or the giving of notice, or both, would constitute a non-compliance by Petry with, or a violation by Petry of, the Environmental Laws. Neither Petry nor any of its predecessor companies have caused or permitted to exist, as a result of an intentional or unintentional act or omission, a disposal, discharge or release of solid wastes, pollutants or hazardous substances, on or from any site which currently is or formerly was owned, leased, occupied or used by Petry or any predecessor company, except where such disposal, discharge or release was in compliance with the Environmental Laws. SECTION 3.18. Transactions with Affiliates. Petry has not had any direct or indirect dealings with any Principal Owner of Petry or with any of his Affiliates, associates (as such term is defined in Rule 12b-2 under the Securities Exchange Act of 1934, as amended) or relatives (or Affiliates thereof). Petry does not have any obligation to or claim against any Principal Owner of Petry, or any of his or its Affiliates, associates or relatives, and no such Person has any obligation to or claim against Petry. All products, services or benefits provided to Petry by any such Person, or provided by Petry to any such Person, are set forth on Part 3.18 of Schedule III and are provided at a charge equal to the fair market value of such products, services or benefits. To the best knowledge of Petry, no Principal Owner of Petry, nor any of his Affiliates, associates or relatives, has any direct or indirect interest of any kind in any business or entity which is competitive with Petry. SECTION 3.19. Registration Rights. No Person has, and as of the Closing no Person shall have, demand, "piggy-back," or other rights to cause Petry to file any registration statement under the Securities Act relating to any securities of Petry, or to participate in any such registration statement. 21 SECTION 3.20. No Brokers or Finders. Neither Petry nor any of its Affiliates have entered or will enter into any agreement pursuant to which Interactive, the Subsidiary, Petry or Advercomm will be liable, as a result of the transactions contemplated by this Agreement or any Petry Documents, for any claim of any person for any commission, fee or other compensation as finder or broker. SECTION 3.21. Investment Company Act. Petry is not an "investment company" nor is Petry directly or indirectly controlled by or acting on behalf of any Person which is an "investment company" within the meaning of the Investment Company Act of 1940, as amended. SECTION 3.22 Disclosure. In connection with this Agreement, Petry has disclosed to Interactive, the Subsidiary and Advercomm all material facts and information known to Petry concerning Petry and its Condition, and has not made any untrue statement of a material fact or omitted to state any material fact necessary in order to make the statements contained herein or in any other Petry Documents not misleading. SECTION 3.23 Public Announcements. Except as otherwise required by law or by the rules of (or any agreement of the parties or their affiliates with) any stock exchange and except as have already been made by the parties prior to the date hereof, Petry agrees that there will prior to the Merger be no press releases or other statements with respect to this Agreement or the transactions contemplated hereby and that they will consult with Interactive, the Subsidiary and Advercomm before issuing any press release or otherwise making any public statement with respect to this Agreement and the transactions contemplated hereby and that Interactive, the Subsidiary, Petry and Advercomm shall not issue any such press release or make any such public statement prior to such consultation and approval of any such release or statement by the other Parties. SECTION 3.24. Board and Stockholders Recommendation. The Board of Directors and Stockholders of Petry, each by unanimous written consent dated January 29, 1998, approved and adopted this Agreement, the Merger, and the other transactions contemplated hereby. Petry has heretofore furnished to Interactive, the Subsidiary and Advercomm a complete and correct copy of its Certificate of Incorporation and By-Laws, each as amended to date. Such Certificate of Incorporation and By-Laws are in full force and effect. Petry is not in violation of any of the provisions of its Certificate of Incorporation or By-Laws. 22 ARTICLE IV REPRESENTATIONS AND WARRANTIES OF ADVERCOMM Advercomm hereby represents and warrants to Interactive, the Subsidiary and Petry that, except as set forth on the Schedule of Exceptions attached hereto as Schedule IV, specifically identifying the relevant subsection hereof, which exceptions shall be deemed to be representations and warranties as if made hereunder: SECTION 4.1. Corporate Organization, Good Standing and Qualification. Advercomm is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware. Advercomm has all requisite power and authority to carry on its business as now conducted and as proposed to be conducted. Advercomm is duly qualified to transact business and is in good standing in each jurisdiction in which the failure so to qualify could have a material adverse effect on its Condition. SECTION 4.2 Capitalization. The capital stock of Advercomm, as authorized by its Certificate of Incorporation, consists of: (i) 10,000 shares of Advercomm Common Stock, of which 6,500 shares are issued and outstanding, and no shares are reserved for issuance for any purpose. The rights, privileges and preferences of the Advercomm Common Stock are as stated in the Certificate of Incorporation. Advercomm does not, and as of the Closing will not (i) have outstanding any capital stock or other securities convertible into or exchangeable for any shares of its capital stock and no person will have any right to subscribe for or to purchase (including conversion or preemptive rights), or any options for the purchase of, or any agreements providing for the issuance (contingent or otherwise) of, any calls, commitments or other claims of any character relating to, any capital stock or any stock or securities convertible into or exchangeable for any capital stock of Advercomm; (ii) have any capital stock, equity interests or other securities reserved for issuance for any purpose; or (iii) be subject to any obligation (contingent or otherwise) to repurchase or otherwise acquire or retire any shares of its capital stock or any convertible securities, rights or options of the type described in the preceding clause (i). All of the issued and outstanding shares of Advercomm Common Stock have been duly and validly issued and are fully paid and nonassessable. To the best knowledge of Advercomm, there are no agreements among Advercomm's stockholders with respect to the voting or transfer of Advercomm's capital stock. Part 4.2 of Schedule IV includes a complete and correct list of the name of each of Advercomm's stockholders and the number of shares of capital stock (and class or series) owned by such stockholder. SECTION 4.3. Authority; Execution and Delivery; Requisite Consents, Nonviolation. Advercomm has, and as of the Closing will have, all requisite power and authority to execute, deliver and perform this Agreement and each other document or instrument executed by it, or any of its officers, in connection herewith or therewith or pursuant hereto or thereto (this Agreement, together with all of the foregoing documents and instruments, are sometimes collectively referred to herein as the "Advercomm Documents"), and to consummate the transactions contemplated hereby and thereby. The execution, delivery and performance of this Agreement and the other Interactive Documents and the consummation 23 of the transactions contemplated hereby and thereby have been duly and validly authorized by all necessary action on the part of Advercomm. This Agreement and each of the other Advercomm Documents that has been executed as of the date hereof is, and each of the Advercomm Documents will be as of the Closing, duly executed and delivered by Advercomm, and constitute the legal, valid and binding obligation of Advercomm, enforceable against Advercomm in accordance with its terms, except as the enforceability thereof may be limited by bankruptcy, insolvency or other similar laws affecting the enforceability of creditors' rights in general or by general principles of equity. The execution, delivery and performance of this Agreement and the other Interactive Documents, the consummation by Advercomm of the transactions contemplated hereby and thereby will not (a) require the consent, license, permit, waiver, approval, authorization or other action of, by or with respect to, or registration, declaration or filing with, any Governmental Authority or any other Person; (b) violate or conflict with any provision of the Certificate of Incorporation or of the By-Laws of Advercomm as in effect immediately prior to the execution and delivery of this Agreement; or (c) constitute a default under (with or without notice or lapse of time or both), violate or conflict with, give rise to a right of termination, cancellation, acceleration or modification under or result in a loss of a material benefit under, any Law, Advercomm Scheduled Contract (as defined in Section 4.8 below), rights relating to Intellectual Property, Permit or Order to which Advercomm is a party or by which Advercomm or its properties are bound. SECTION 4.4 Subsidiaries. Advercomm, does not, and prior to the Closing will not, own or control, directly or indirectly, any partnership interests, stock or other equity interests in any partnership, corporation or other entity or any voting rights or right to control the policies and direction of any partnership, corporation or other entity. SECTION 4.5. Financial Information. Advercomm has previously delivered to Interactive and Petry certain financial information (the "Advercomm Financial Information"). Such Advercomm Financial Information has been prepared from the books and records of Advercomm, and, subject to customary year or period end adjustments and accruals and the absence of notes thereto, presents fairly the financial position and the results of operations of Advercomm as at and for the periods indicated. Except as disclosed in the Advercomm Financial Information, Advercomm has no material liabilities or obligations, absolute or contingent, except obligations and liabilities incurred in the ordinary course of business, consistent with past practice, since the date of the Advercomm Financial Information. Except as disclosed in the Advercomm Financial Information, Advercomm is not a Guarantor or Indemnitor of any Indebtedness of any other Person. No representation is made hereunder with respect to any forecasts, projections or forward looking information provided to Interactive, the Subsidiary or Petry in connection with the Advercomm Financial Information or otherwise, except that Advercomm represents that such forecasts, projections and forward looking information were prepared in good faith and that Advercomm reasonably believes there is a reasonable basis for such forecasts, projections and forward looking information. 24 SECTION 4.6. Certain Changes or Events. Other than transactions entered into in connection with this Merger, since October 1, 1997, the business of Advercomm has been operated only in the ordinary course, consistent with past practice, and in addition to, and not in limitation of the foregoing: (i) there has been no change in the Condition of Advercomm, except for changes in the ordinary course of business consistent with past practice which have not had, in the aggregate, a Material Adverse Effect on the Condition of Advercomm; (ii) there has been no revocation or change in any Contract or Permit or right to do business, and, to the best knowledge of Advercomm, no change of Laws which has resulted, or could reasonably be expected to result, in a material adverse change in the Condition of Advercomm; (iii) Advercomm has not authorized or made any distributions of, or declared or paid any dividends, upon or with respect to any of its capital stock, or other equity interests, nor has Advercomm redeemed, purchased or otherwise acquired, or issued or sold, any of its capital stock or other equity interests; (iv) Advercomm has not entered into any material transaction, other than in the ordinary course of business and consistent with past practice; (v) Advercomm has not incurred any indebtedness for borrowed money or made any loans or advances to any Person; (vi) there has been no waiver by Advercomm of a valuable right or of a material debt owed to it; (vii) Advercomm has not failed to satisfy or discharge any Lien, except in the ordinary course of business and which is not material to the Condition of Advercomm (as such business is presently conducted and as it is proposed to be conducted); (viii) there has not been any damage, destruction or loss, whether or not covered by insurance, resulting in a Material Adverse Effect on the Condition of Advercomm (as such business is presently conducted and as it is proposed to be conducted); (ix) there has not been any material change in any compensation arrangement or agreement with any employee of Advercomm; (x) there has not been any sale, assignment or transfer of any patents, trademarks, copyrights, trade secrets or other intangible assets of Advercomm; (xi) there has not been any resignation or termination of employment of any key officer or employee of Advercomm and Advercomm, to the best of its knowledge, does not know of the impending resignation or termination of employment of any such officer or employee; (xii) there has been no receipt of notice that there has been a loss of, or material order cancellation by, any major customer of Advercomm; (xiii) there has been no mortgage, pledge or transfer of a security interest in, or lien, created by Advercomm with respect to any of its material properties or assets, except liens for taxes not yet due or payable; (xiv) there has been no loans or guarantees made by Advercomm to or for the benefit of its employees, officers or directors, or any members of their immediate families, other than travel advances and other advances made in the ordinary course of its business; and (xv) there has been no agreement or commitment by Advercomm to do or perform any of the acts described in this Section 4.6. SECTION 4.7 Title to Assets. Advercomm has good and marketable title to all of its assets and properties, free and clear of any Liens, pledges. With respect to any assets or properties it leases, Advercomm holds a valid and subsisting leasehold interest therein, free and clear of any Liens, is in compliance, in all material respects, with the terms of the applicable lease, and enjoys peaceful and undisturbed possession under such lease. The assets and properties of Advercomm that are material to the conduct of business as presently conducted or as proposed to be conducted by Advercomm are on an overall basis in good operating condition and repair, subject to ordinary wear and tear. SECTION 4.8. Contracts. 25 Advercomm is not a party to, nor is Advercomm or any of its assets or properties bound by, or subject to, any Contracts of the following types, except for those (the "Advercomm Scheduled Contracts") listed in Part 4.8 of Schedule IV hereto: (a) any Contracts pursuant to which Advercomm, or another party thereto, is obligated to pay in excess of fifty thousand dollars ($50,000); (b) any Contracts pursuant to which Advercomm acquired the right to use any Intellectual Property or information that is material to or necessary in the business of Advercomm, or pursuant to which Advercomm has granted to others the right to use, or which otherwise relates to, its Intellectual Property; (c) any Contracts (other than advances of expenses to employees in the ordinary course of business) involving loans, loan agreements, debt securities, mortgages, deeds of trust, security agreements, suretyships or guarantees; (d) any Contracts between Advercomm, on the one hand, and any of its Principal Owners, or any Affiliate or relative, or Affiliate of a relative, of any of the foregoing, on the other; (e) any deferred compensation agreements, bonus, pension, profit sharing, stock option and incentive plans or arrangements, hospitalization, medical and insurance plans, agreements and policies, retirement and severance plans and other employee compensation policies and agreements affecting employees of Advercomm; (f) any Contracts with any labor union affecting employees of Advercomm; (g) all partnership, joint venture, shareholders' or similar Contracts with any Person; (h) all Contracts that limit or contain restrictions on the ability of Advercomm to declare or pay dividends, to make distributions in respect of or to issue or purchase, redeem or otherwise acquire any of its capital stock or require Advercomm to maintain specified financial ratios or levels of net worth or other indicia of financial condition; (i) any Contracts which restrict Advercomm from freely engaging in business or competing anywhere; and (j) any Contracts which otherwise are material to the Condition of Advercomm. True and correct copies of all Scheduled Contracts have been made available to Interactive, the Subsidiary and Petry. All of the Scheduled Contracts are in full force and effect and constitute legal, valid and binding obligations of Advercomm and, to the best knowledge of Advercomm, the other parties thereto; to the best of Advercomm's knowledge, no circumstances exist which would give rise to an Action against or by Advercomm in connection with any Scheduled Contract or any default thereunder; and the validity, 26 effectiveness and continuation of all Scheduled Contracts will not be adversely affected by the transactions contemplated by this Agreement or require third party consents. SECTION 4.9. Intellectual Property. (i) With respect to any Intellectual Property of any kind in which Advercomm has an interest or which is otherwise used in, or relates to the business of, Advercomm, or any Operating IP of Advercomm or trade secret that is used in or that relates to its business, Advercomm owns or has the right to use such Operating IP or trade secret in its business. Advercomm owns or has the right to use all Operating IP and trade secrets that are necessary to its business. (iii) Each Intellectual Property License of Advercomm constitutes a legal, valid, binding and enforceable obligation in accordance with its terms against Advercomm, and, to the best knowledge of Advercomm, each other Person party thereto, and to the best knowledge of Advercomm is in full force and effect. Advercomm has performed all obligations required to have been performed by it under each of the Intellectual Property Licenses to which it is a party. Neither Advercomm nor, to the best knowledge of Advercomm, any other party thereto is in default thereunder, nor, to the best knowledge of Advercomm, is there any event that with notice or lapse of time, or both, would constitute a default thereunder. Advercomm has not received any notice that any other party to any of the Intellectual Property Licenses intends to cancel, terminate or refuse to renew the same or to exercise or decline to exercise any option or other right thereunder (other than in the ordinary course of business). No licenses, sublicenses, covenants or agreements have been granted or entered into by Advercomm in respect of any of the Operating IP or any material trade secret of Advercomm, except the Intellectual Property Licenses. No director, officer, shareholder, employee or other Affiliate of Advercomm owns, directly or indirectly, in whole or in part, any of the Operating IP or any trade secret material used by Advercomm. None of the officers, employees, consultants, distributors, agents, representatives or advisors of Advercomm have entered into any agreement relating to Advercomm's business regarding know-how, trade secrets, assignment of rights in inventions, or prohibition or restriction of competition or solicitation of customers, or any other similar restrictive agreement or covenant, whether written or oral, with any Person other than Advercomm. (iv) The consummation of the transactions contemplated hereby will not alter or impair the rights of Advercomm to any of the Operating IP, to any trade secret material to Advercomm, or under any of the Intellectual Property Licenses. (v) To the best knowledge of Advercomm, no claim with respect to the Operating IP, any trade secret or any Intellectual Property License is currently pending or has been asserted or overtly threatened by any Person, nor does Advercomm know of any grounds for any claim, (A) to the effect that any operation or activity of Advercomm presently occurring or contemplated infringes or misappropriates any United States or foreign copyright, patent, trademark, service mark or trade secret; (B) to the effect that any other Person infringes on the Operating IP or misappropriates any trade secret or know-how or other proprietary rights of Advercomm; (C) challenging the ownership, validity or effectiveness of any of the Operating IP or any trade secret of Advercomm; or (D) challenging the license of Advercomm to, or other legally enforceable right under, any Operating IP or the Intellectual Property Licenses. 27 (vi) Advercomm is not aware of any presently existing United States or foreign patents or any patent applications which, if issued as patents, would be infringed by any activity contemplated by Advercomm. SECTION 4.10. Insurance. Advercomm does not maintain any insurance policies. SECTION 4.11. Labor Union Activities; Employee Relations. No employee of Advercomm is represented by any labor union or covered by any collective bargaining agreement; nor, to the best knowledge of Advercomm, has any labor union sought to represent any employee of Advercomm. There is no strike or other labor dispute involving Advercomm pending, or to the best knowledge of Advercomm, threatened. To the best knowledge of Advercomm, no officer or key employee intends to terminate his employment with Advercomm. To the best knowledge of Advercomm, no officer or key employee of Advercomm is a party to or bound by any Contract, or subject to any restrictions (including, without limitation, any non-competition restriction), which would restrict the right of such person to participate in the affairs of Advercomm. SECTION 4.12. ERISA. There are no employee benefit plans (as defined in ERISA) covering former or current employees of Advercomm, or under which Advercomm has any obligation or liability. Advercomm has not incurred any liability under Title IV of ERISA, including any liability to the Pension Benefit Guaranty Corporation. Advercomm maintains no material Benefit Arrangements. No unfair labor practice has been brought during the last three years against Advercomm. SECTION 4.13 Litigation. There is no Action pending or, to the best knowledge of Advercomm, threatened against, relating to or affecting Advercomm or affecting any of the properties or assets of Advercomm (including, without limitation, any of their Permits), nor, to the best knowledge of Advercomm, is there any basis for any such Action. Neither Advercomm nor any of its assets or properties are subject to any Order of any Governmental Authority which is material to the Condition of Advercomm. There is no Action by Advercomm currently pending or which Advercomm intends to initiate. SECTION 4.14 Compliance with Laws; Permits. Advercomm has not violated or failed to comply with, in any material respect, any Laws to which it or any of its properties or assets are subject. Advercomm has all Permits that are material to the conduct of its business as presently conducted and as proposed to be conducted; all such Permits are, and as of the Closing will be, in full force and effect; no violations or notices of failure to comply have been issued or recorded in respect of any such Permits. All applications, reports, notices and other documents required to be filed by Advercomm with all Governmental Authorities have been timely filed and are complete and correct in all material respects as filed or as amended prior to the date hereof. Advercomm has not violated or failed to comply with its certificate of incorporation or by-laws. 28 SECTION 4.15. Taxes. All Returns have been timely filed. All such Returns are true, correct and complete in all material respects. All Taxes due or claimed to be due from Advercomm have been paid except to the extent reserved against in the Advercomm Financial Information. No income tax return of Advercomm has been audited by the applicable Governmental Authority, and there are in effect no waivers of the applicable statute of limitations for Taxes in any jurisdiction for Advercomm for any period. The provision for taxes for Advercomm as shown in the Advercomm Financial Information is adequate for taxes due or accrued as of the date thereof. Advercomm has not elected pursuant to the Internal Revenue Code of 1986, as amended (the "Code"), to be treated as a Subchapter S corporation or a collapsible corporation pursuant to Section 1362(a) or Section 341(f) of the Code, nor has it made any other elections pursuant to the Code (other than elections that relate solely to methods of accounting, depreciation or amortization) that would have a material effect on Advercomm, its financial condition, its business as presently conducted or proposed to be conducted or any of their properties or material assets. Advercomm has never had any tax deficiency proposed or assessed against it and has not executed any waiver of any statute of limitations on the assessment or collection of any tax or governmental charge. Since the date of the Advercomm Financial Information, Advercomm has made adequate provisions on their books of account for, all taxes, assessments and governmental charges with respect to its business, properties and operations for such period. Advercomm has withheld or collected from each payment made to each of its employees, the amount of all taxes (including, but not limited to, federal income taxes, Federal Insurance Contribution Act taxes and Federal Unemployment Tax Act taxes) required to be withheld or collected therefrom, and has paid the same to the proper tax receiving officers or authorized depositories. SECTION 4.16. Books and Records. The books of account, ledgers and records of Advercomm accurately and completely reflect in all material respects all information relating to its business; the nature, acquisition, maintenance, location and collection of its assets; and the nature of all transactions giving rise to its obligations or accounts receivable. The minutes and minute books of Advercomm provided to Interactive, the Subsidiary and Petry prior to the date hereof constitute a true, complete and correct copy of the entire minutes and minute books of Advercomm. SECTION 4.17. Environmental Matters. The business, assets and properties of Advercomm are and have been operated and maintained in compliance with all Environmental Laws. No event has occurred which, with or without the passage of time or the giving of notice, or both, would constitute a non-compliance by Advercomm with, or a violation by Advercomm of, the Environmental Laws. Neither Advercomm nor any of its predecessor companies have caused or permitted to exist, as a result of an intentional or unintentional act or omission, a disposal, discharge or release of solid wastes, pollutants or hazardous substances, on or from any site which currently is or formerly was owned, leased, occupied or used by Advercomm or any predecessor company, except where such disposal, discharge or release was in compliance with the Environmental Laws. 29 SECTION 4.18. Transactions with Affiliates. Advercomm has not had any direct or indirect dealings with any Principal Owner of Advercomm or with any of his Affiliates, associates (as such term is defined in Rule 12b-2 under the Securities Exchange Act of 1934, as amended) or relatives (or Affiliates thereof). Advercomm does not have any obligation to or claim against any Principal Owner of Advercomm, or any of his or its Affiliates, associates or relatives, and no such Person has any obligation to or claim against Advercomm. All products, services or benefits provided to Advercomm by any such Person, or provided by Advercomm to any such Person, are set forth on Part 4.18 of Schedule IV and are provided at a charge equal to the fair market value of such products, services or benefits. To the best knowledge of Advercomm, no Principal Owner of Advercomm, nor any of his Affiliates, associates or relatives, has any direct or indirect interest of any kind in any business or entity which is competitive with Advercomm. SECTION 4.19. Registration Rights. No Person has, and as of the Closing no Person shall have, demand, "piggy-back," or other rights to cause Advercomm to file any registration statement under the Securities Act relating to any securities of Advercomm, or to participate in any such registration statement. SECTION 4.20. No Brokers or Finders. Neither Advercomm nor any of its Affiliates have entered or will enter into any agreement pursuant to which Interactive, the Subsidiary, Petry or Advercomm will be liable, as a result of the transactions contemplated by this Agreement or any Advercomm Documents, for any claim of any person for any commission, fee or other compensation as finder or broker. SECTION 4.21. Investment Company Act. Advercomm is not an "investment company" nor is Advercomm directly or indirectly controlled by or acting on behalf of any Person which is an "investment company" within the meaning of the Investment Company Act of 1940, as amended. SECTION 4.22 Disclosure. In connection with this Agreement, Advercomm has disclosed to Interactive, the Subsidiary and Petry all material facts and information known to Advercomm concerning Advercomm and its Condition, and has not made any untrue statement of a material fact or omitted to state any material fact necessary in order to make the statements contained herein or in any other Advercomm Documents not misleading. SECTION 4.23 Public Announcements. Except as otherwise required by law or by the rules of (or any agreement of the parties or their affiliates with) any stock exchange and except as have already been made by the parties prior to the date hereof, Advercomm agrees that there will prior to the Merger be no press releases or other statements with respect to this Agreement or the transactions contemplated hereby and that it will consult with Interactive, the Subsidiary and Petry before issuing any press release or otherwise making any public statement with respect to this Agreement and the transactions contemplated hereby and that Interactive, the Subsidiary, 30 Petry and Advercomm shall not issue any such press release or make any such public statement prior to such consultation and approval of any such release or statement by the other parties. SECTION 4.24. Board and Stockholders Recommendation. The Board of Directors and Stockholders of Advercomm, each by unanimous written consent dated February 2, 1998, approved and adopted this Agreement, the Merger, and the other transactions contemplated hereby. SECTION 4.25. Certificate of Incorporation and By-Laws. Advercomm has heretofore furnished to Interactive, the Subsidiary and Petry a complete and correct copy of its Certificate of Incorporation and By-Laws, each as amended to date. Such Certificate of Incorporation and By-Laws are in full force and effect. Advercomm is not in violation of any of the provisions of its Certificate of Incorporation or By-Laws. ARTICLE V COVENANTS OF THE PARTIES SECTION 5.1 Conduct of Business by the Parties Pending the Merger. The Parties covenant and agree that, between the date of this Agreement and the Effective Time, except as otherwise contemplated by this Agreement or unless the other Parties shall otherwise give their prior written consent, the business of each Party shall be conducted only in, and each Party shall not take any action except in, the ordinary course of business and in a manner consistent with past practice (including financial and other controls of each Party instituted since the commencement of the current fiscal year); each Party will use its commercially reasonable efforts to continue its business development activities, to maintain in effect all licenses, approvals, and authorizations, to preserve intact its business organization and to maintain existing relationships with licensors, licensees, suppliers, contractors, distributors, customers, and others having business relationships with it; and each Party agrees to cooperate reasonably with each other Party in connection with the foregoing. By way of amplification and not limitation, except as contemplated by this Agreement, no Party shall, between the date of this Agreement and the Effective Time, do or agree to do any of the following without the prior written consent of each other Party: (a) amend or otherwise change its Certificate of Incorporation or By-Laws; (b) issue, sell, pledge, dispose of, encumber, or authorize the issuance, sale, pledge, disposition, or encumbrance of (i) any shares of capital stock of any class, or any options, warrants, convertible securities, subscriptions, or other rights of any kind to acquire any shares of capital stock, or any other ownership interest or equity equivalent, of such Party or any other securities in respect of, in lieu of, or in substitution for any outstanding shares (other than, in the case of Interactive, shares of Interactive Common Stock issuable pursuant to the exercise of outstanding convertible preferred stock, convertible debt, 31 warrants, or Options as set forth in Part 2.2 of Schedule II) or grant or accelerate any right to convert or exercise or otherwise amend in any respect any such outstanding convertible debt, warrants, or Options or (ii) any material assets of such Party, except for sales of goods or services in the ordinary course of business and in a manner consistent with past practice; (c) declare, set aside, make, or pay any dividend or other distribution, payable in cash, stock, property, or otherwise, with respect to any of its capital stock, any other ownership interest or equity equivalent, or any other securities, or reclassify, combine, split, subdivide, redeem, purchase, or otherwise acquire, directly or indirectly, any such capital stock, ownership interest, equity equivalent, or other securities, or adopt a plan of complete or partial liquidation or resolutions providing for or authorizing such liquidation or a dissolution, restructuring, recapitalization, or other reorganization or, except to the extent required by fiduciary obligations under applicable law, a merger or consolidation; (d) (i) except in the ordinary course of business and consistent with past practice, issue any debt securities or assume, guarantee, or endorse the obligations of any other person, except for immaterial amounts; (ii) except in the ordinary course of business and consistent with past practice, make any loans, advances, or capital contributions to, or investments in, any other person; (iii) pledge or otherwise encumber shares of capital stock of or other ownership interests or equity equivalents in such Party; or (iv) except in the ordinary course of business and consistent with past practice, mortgage or pledge any of their material assets, tangible or intangible, or create or suffer to exist any material lien thereupon; (e) enter into, adopt, establish, or (except as may be required by law) amend or terminate any collective bargaining agreement, bonus, profit sharing, thrift, compensation, severance, termination, stock option, stock appreciation right, restricted stock, performance unit, stock equivalent, stock purchase agreement, pension, retirement, deferred compensation, employment, or other employee benefit agreement, trust, plan, fund, or other arrangement for the benefit or welfare of any director, officer, or employee, or (except for normal increases in the ordinary course of business consistent with past practice that, in the aggregate, do not result in a material increase in benefits or compensation expenses) increase in any manner the compensation or benefits of any director, officer, or employee or pay any benefit not required by any plan or arrangement as in effect as of the date hereof (including, without limitation, the granting of stock appreciation rights or performance units), or increase the amount or change in any material respect the terms of any insurance covering directors or officers; (f) acquire, sell, license, lease, or dispose of any assets outside the ordinary course of business which in the aggregate are material to such Party or enter into any commitment or transaction outside the ordinary course of business consistent with past practice; (g) change any of the accounting principles or practices used by such Party; (h) (i) acquire (by merger, consolidation, or acquisition of stock or assets) any corporation, partnership, or other business organization or division thereof or any interest therein; (ii) enter into any partnership, joint venture, or similar agreement or arrangement or any contract or agreement other than in the ordinary course of business consistent with past practice; (iii) authorize any new capital expenditure(s) which, individually, is in excess of $10,000 or, in the aggregate, are in excess of $50,000; or (iv) amend or modify any material 32 existing agreement, arrangement, or understanding which would increase the obligations or impair or diminish the rights of such Party in any material respect; (i) make any tax election or settlement or compromise any income tax liability material to such Party; or take any action which would jeopardize qualification of the Merger as a reorganization within the meaning of Section 368(a) of the Code. (j) pay, discharge, or satisfy any claims, liabilities, or obligations (absolute, accrued, asserted, or unasserted, contingent or otherwise), other than the pay ment, discharge, or satisfaction in the ordinary course of business consistent with past practice or in accordance with their terms, of liabilities reflected or reserved against in, or contemplated by, the consolidated financial statements (or the notes thereto) of such Party or incurred in the ordinary course of business consistent with past practice, except for fees and expenses (including legal fees and expenses) incurred in connection with this Agreement, the Stock Purchase Agreement of even date herewith and the transactions contemplated hereby and thereby and except as required by applicable law; (k) enter into (in writing or otherwise) any contract, agreement, commitment, arrangement, or understanding to do any of the foregoing; or (l) take, or agree to take, any action which would make any representation or warranty untrue or incorrect in any material respect. SECTION 5.2 No Solicitation of Transactions. From and after the date hereof through the earlier to occur of the Effective Date and the date of termination of this Agreement, each Party shall not, directly or indirectly, through any officer, director, agent, or otherwise, solicit, initiate, or encourage submission of, proposals or offers from any person relating to any acquisition or purchase of all or a substantial portion of the assets of, or any equity interest in, such Party or any business combination with such Party or participate in any negotiations regarding, or furnish to any other person any information with respect to, or encourage, any effort or attempt by any other person to do or seek any of the foregoing; provided, however, that nothing contained in this Section 5.2 shall prohibit any Party or its Board of Directors from making disclosures to such Party's stockholders which, in the judgment of the Board of Directors with advice of counsel, may be required under applicable law. Each Party will immediately cease and cause to be terminated any existing activities, discussions, or negotiations with any parties conducted heretofore with respect to any of the foregoing, and shall immediately demand the return or destruction of any non-public information concerning such Party distributed to other persons for the purpose of soliciting or encouraging any of the foregoing. SECTION 5.3 Option Plans, Convertible Debt, Options, and Warrants. Interactive shall use its best efforts to cause all outstanding shares of Series A Stock and all outstanding debt securities convertible into common stock to be converted into Interactive Common Stock and shall use its best efforts to cause all warrants exercisable for Interactive Common Stock to be surrendered in exchange for Interactive Common Stock. Petry shall use its best efforts to cause all outstanding warrants exercisable for Petry Common stock to be surrendered in exchange for Petry Common Stock. 33 SECTION 5.4 Consents and Approvals. Each Party shall use commercially reasonable efforts to obtain all consents and approvals required with respect to this Agreement and the transactions contemplated thereby. SECTION 5.5 Directors' and Officers' Indemnification. From and after the Effective Time, Interactive and the Surviving Corporation shall jointly and severally indemnify, defend, and hold harmless the present officers and directors (the "Indemnified Parties") of each of Petry and Advercomm against all losses, claims, damages, or liabilities ("Claims") arising out of actions or omissions occurring at or prior to the Effective Time that are based on or arising out of the fact that such person is or was a director or officer of Petry or Advercomm prior to the Effective Time, including, without limitation, any Claim arising out of this Agreement or the transactions contemplated hereby and thereby, to the greatest extent permissible under applicable law. SECTION 5.6 Reincorporation in Delaware As soon as practicable after the Effective Time, Interactive shall take all such steps as may be required under applicable law for Interactive to reincorporate in the State of Delaware. SECTION 5.7 Approval of Shareholders. Interactive shall as promptly as reasonably practicable take all action necessary in accordance with New York Law and its Certificate of Incorporation and By-Laws duly to call, convene, and hold a meeting of its shareholders. Interactive shall use reasonable efforts to solicit from Interactive shareholders proxies in favor of (i) the Merger, (ii) an increase in the number of authorized shares of capital stock to 100,000,000 Common Shares, par value $.01 per share, and 30,000,000 Preferred Shares, par value $.01 per share (the "Amendment Proposal"), (iii) adoption of the 1998 Interactive Imaginations, Inc. Stock Incentive Plan, and (iv) the election of the six nominees for director set forth on Schedule I.A hereto, and shall take such other action as is reasonably necessary to secure the vote of stockholders required by New York Law to effect the Merger and the transactions contemplated thereby. ARTICLE VI ADDITIONAL AGREEMENTS OF THE PARTIES SECTION 6.1 Access to Information; Confidentiality. (a) Subject to applicable law, from the date hereof to the Effective Time, each Party shall afford the officers, employees, and authorized agents of each other Party reasonable access, during normal business hours and upon reasonable notice, to their respective officers, employees, authorized agents, properties, offices, books, and records and shall furnish each other Party with its financial and operating data and other information 34 regarding their assets, properties, goodwill, and business as such other Parties may from time to time reasonably request. (b) In the event of the termination of this Agreement (under Section 8.1 below), each Party shall, and shall cause their respective affiliates and their officers, directors, employees, and agents to (i) return promptly every document furnished to them by any other Party or any of its officers, directors, employees, and agents in connection with the transactions contemplated hereby and any copies thereof, and shall use its best efforts to cause others to whom such documents may have been furnished promptly to return such documents and any copies thereof any of them may have made, and (ii) destroy promptly all documents created by them from any data, information, or document furnished by any other Party or any of its officers, directors, employees, and agents in connection with the transactions contemplated hereby and any copies thereof, and shall use its best efforts to cause others to whom such documents may have been furnished promptly to destroy the same and any copies thereof, other than documents created from data, information or documents otherwise publicly available. (c) No investigation pursuant to this Section 6.1 or other investigation shall affect any representations or warranties of the parties herein or the conditions to the obligations of the parties hereto. SECTION 6.2 Notification of Certain Matters. Each Party shall give prompt notice to each of the other Parties of (i) the occurrence, or non-occurrence, of any event, the occurrence or non-occurrence of which would be likely to cause any representation or warranty of such Party contained in this Agreement to be untrue or inaccurate at or prior to the Effective Time and (ii) any failure of a Party to comply with or satisfy any covenant, condition or agreement to be complied with or satisfied by it hereunder; provided, however, that the delivery of any notice pursuant to this Section 6.2 shall not limit or otherwise affect the remedies available here under to the Party receiving such notice. SECTION 6.3 Further Action. Upon the terms and subject to the conditions hereof, and subject to the exercise by the Boards of Directors of each Party of their fiduciary obligations, each of the Parties hereto shall use all reasonable efforts to take, or cause to be taken, all actions and to do, or cause to be done, all other things necessary, proper, or advisable to consummate and make effective as promptly as practicable the transactions contemplated by this Agreement and to obtain in a timely manner all necessary waivers, consents, and approvals and to effect all necessary registrations and filings, including, but not limited to: (i) reasonable efforts to lift or rescind any injunction or restraining order or other order which may be entered; (ii) cooperation in reasonable tax planning measures in light of the transactions contemplated hereby so long as no action shall be required to be taken which would result in adverse tax consequences to the stockholders of the Parties or, if the Merger does not occur, to the Parties; and (iii) reasonable cooperation in respect of any filings to be made in connection with the Merger and the transactions contemplated hereby. 35 SECTION 6.4 Public Announcements. Each Party shall consult with the others before issuing any further press release or otherwise making any public statements with respect to the Merger and neither shall issue any such press release or make any such public statement, except as may be required by law, without the prior consent of the others, which consent shall not be unreasonably withheld or delayed. SECTION 6.5 Government Compliance. Each Party agrees promptly to effect all necessary registrations, filings, applications, and submissions of information requested by governmental authorities. ARTICLE VII CONDITIONS OF THE MERGER SECTION 7.1 Conditions to Obligations of Each Party to Effect the Merger. The respective obligations of each party to effect the Merger shall be subject to the fulfillment at or prior to the Effective Time of the following conditions: (a) The shareholders of Interactive shall have approved and adopted: (i) this Agreement; (ii) the Amendment Proposal; and (iii) the election of the six nominees for director set forth on Schedule I.A hereto, in each case by the requisite vote of the shareholders of Interactive in accordance with its Certificate of Incorporation and New York state law. (b) Each Party shall have received evidence, in form and substance reasonably satisfactory to each other Party, that such licenses, permits, consents, approvals, authorizations, qualifications, orders of governmental authorities, and third parties as are required in connection with the consummation of the transactions contemplated hereby or necessary to conduct the business of each Party as presently conducted have been obtained and are in full force and effect other than those which, if not obtained, would not, either individually or in the aggregate, have a Material Adverse Effect on such Party. (c) At the Effective Time, there shall be no effective injunction, writ, or preliminary restraining order or any order of any nature issued by a court or governmental agency of competent jurisdiction directing that the transactions provided for herein not be consummated as herein provided. (d) Each Party shall in all material respects have performed each obligation to be performed by it hereunder on or prior to the Effective Time. (e) The representations and warranties of each Party set forth in this Agreement shall be true and correct in all material respects at and as of the Effective Time as if made at and as of such time, except for changes contemplated by this Agreement and by the Disclosure Schedule and except to the extent that any such representation or warranty is made as of a specified date, in which case such representation or warranty 36 shall have been true and correct in all material respects as of such date. (f) Each Party shall have received an opinion from counsel to each other Party, dated the Closing Date, in form and substance reasonably satisfactory to such Party, as to (i) the valid existence and good standing of such Party in its jurisdiction of incorporation, (ii) the corporate power and authority of such Party to own its properties and to conduct its business, (iii) the corporate power and authority of such Party to execute and deliver this Agreement and the due authorization thereof, (iv) the due execution and delivery and enforceability of this Agreement, (v) the absence of conflicts with the charter, bylaws or material agreements of such Party, (vi) the absence of material consents or approvals required to consummate the transactions contemplated by this Agreement, and (vii) the absence of litigation regarding the transaction. (g) All actions, proceedings, instruments, and documents required to carry out the transactions contemplated hereby or incidental hereto and all other related legal matters shall have been reasonably satisfactory to and approved by counsel for each Party and such counsel shall have been furnished with such certified copies of such corporate actions and proceedings and such other instruments and documents as it shall have reasonably requested. (h) There shall not have been any action taken, or any statute, rule, regulation, or order enacted, promulgated, or issued or deemed applicable to the Merger by any Federal or state government or governmental authority or court, which would (i) prohibit the Surviving Corporation's or Interactive's ownership or operation of all or a material portion of Petry's or Advercomm's business or assets, or compel the Surviving Corporation or Interactive to dispose of or hold separate all or a material portion of Petry's or Advercomm's business or assets, as a result of the Merger; (ii) render the Subsidiary unable to consummate the Merger; (iii) make such consummation illegal; or (iv) impose or confirm material limitations on the ability of Interactive effectively to exercise full rights of ownership of shares of the capital stock of the Surviving Corporation, including without limitation, the right to vote any such shares on all matters properly presented to the stockholders of the Surviving Corporation, and no such action shall have been taken or any such statute, rule, regulation, or order enacted, promulgated, issued, or deemed applicable to the Merger which in the reasonable judgment of Interactive will produce such result. (i) Interactive shall have obtained the approval, agreement and/or consent of its security holders as contemplated by Section 5.3 and all shares of Series A Stock, all outstanding debt securities of Interactive and all warrants exercisable for Interactive Common Stock shall have been converted or exercised or shall be subject to mandatory conversion or exercise into a number of shares of Interactive Common Stock less than or equal to 5,899,322 shares. (j) All warrants to purchase shares of Petry Common Stock shall have been exercised. (k) Each Party shall have obtained change of control waivers from of its employees that are party to an employment contract that provides for benefits upon the occurrence of a change in control. 37 (l) The investment of at least $10,000,000 in the securities of Interactive, pursuant to the Securities Purchase Agreement, a draft of which is attached hereto as Exhibit E, shall have been consummated substantially on the terms set forth in such securities purchase agreement, in the draft Restated Certificate of Incorporation attached hereto as Exhibit F, and in the form of Warrant attached hereto as Exhibit G, and the Shareholders' Agreement and Registration Rights Agreement attached hereto as Exhibit H and Exhibit I shall have been duly executed by all parties thereto substantially in the form attached hereto; (m) Petry and Advercomm shall have obtained from each of their stockholders a letter agreement in the form attached as Exhibit J hereto, relating to certain tax matters. (n) The Related Agreements contemplated by Section 1.9 shall have been executed and delivered by the parties thereto; (o) Each Party shall have received a certificate of each other Party, dated the Closing Date, signed by the Chief Executive Officer of such Party, to the effect that, to the best of the knowledge, information, and belief of such officer, all of the conditions set forth above have been fulfilled. (p) Each Party shall have received a certificate of each other Party, dated the Closing Date, signed by the Chief Executive Officer of such Party, as to such other matters as may be reasonably requested by the Parties, including, but not limited to, certificates with respect to the Party's Certificate of Incorporation, By-laws, Board of Directors' resolutions relating to the transactions contemplated hereby and the incumbency and signatures of each of the officers of the Party who shall execute on behalf of the Party any document delivered on the Closing Date. ARTICLE VIII TERMINATION, AMENDMENT, AND WAIVER SECTION 8.1 Termination. This Agreement may be terminated at any time prior to the Effective Time, whether prior to or after approval hereof by the stockholders of the Parties: (i) By mutual written consent duly authorized by the Boards of Directors of each Party; (ii) By any Party if the Board of Directors of any other Party shall have withdrawn or modified its approval or recommendation of this Agreement or the Merger or shall have approved or recommended another offer or proposal; (iii) By any Party if Interactive shall not have obtained the consents and approvals of its security holders and caused to be effected the conversion or exercise of all Series A Stock, convertible debt securities and warrants as contemplated by Section 5.3 and 7.1(i); 38 (iv) By any Party if the Merger shall not have been consummated by February 20, 1998, unless the absence of such consummation shall be due to the failure of the Party seeking to terminate this Agreement (or its affiliates) to perform its obligations under this Agreement required to be performed by it at or prior to the Effective Time; (v) By any Party, if the stockholders of Interactive fail to approve and adopt this Agreement and the Merger; (vi) By any Party if a United States or state governmental authority, agency, or commission or United States or state court of competent jurisdiction shall have issued an order, decree, or ruling or taken any other action (which order, decree, ruling, or action the Parties hereto shall use their best efforts to lift), in each case permanently restraining, enjoining, or otherwise prohibiting the Merger, and such order, decree, ruling, or action shall have become final and non-appealable; or (vii) By any Party if any other Party shall breach or fail to perform in any material respect any of its material covenants or agreements contained herein. SECTION 8.2 Effect of Termination. In the event of termination of this Agreement as provided in Section 8.1, (i) there shall be no liability or further obligation on the part of any Party hereto except as set forth in Sections 8.3 and 9.1 hereof and (ii) nothing herein shall relieve any Party from liability for any breach of this Agreement. SECTION 8.3 Fees and Expenses. All costs and expenses incurred in connection with this Agreement and the transactions contemplated hereby shall be paid by the Party incurring such expenses. No Party shall incur liability to its stockholders for any such fees and expenses. SECTION 8.4 Amendment. This Agreement may be amended by the parties hereto by action taken by or on behalf of their respective Boards of Directors at any time prior to the Effective Time; provided, however, that, after approval of the Merger by the stockholders of the Parties, no amendment may be made which would change the Petry Merger Consideration or the Advercomm Merger Consideration. This Agreement may not be amended except by an instrument in writing signed by the Parties hereto. SECTION 8.5 Waiver. At any time prior to the Effective Time, any party hereto may (a) extend the time for the performance of any of the obligations or other acts of the other parties hereto, (b) waive any inaccuracies in the representations and warranties contained herein or in any document delivered pursuant hereto, and (c) waive compliance with any of the agreements or conditions contained herein. Any such extension or waiver shall be valid if set forth in an instrument in writing signed by the parties hereto. The failure of any party hereto to assert any of its rights hereunder shall not constitute a waiver of such rights. 39 ARTICLE IX GENERAL PROVISIONS SECTION 9.1 Survival of Representations, Warranties, and Agreements. The representations, warranties, and agreements in this Agreement shall terminate at the Effective Time or upon the termination of this Agreement pursuant to Section 8.1, as the case may be, except that the agreements set forth in Sections 1.6 and 1.7 and 6.5 shall survive the Effective Time indefinitely and those set forth in 6.1(b) and 6.4 shall survive termination indefinitely. SECTION 9.2 Notices. All notices and other communications given or made pursuant hereto shall be in writing and shall be deemed to have been duly given or made as of the date delivered, if delivered personally or mailed by registered or certified mail (postage prepaid, return receipt requested) or sent by Federal Express or similar overnight delivery or courier service or by telecopy to the parties at the following addresses (or at such other address for a party as shall be specified by like notice): (a) if to Interactive or the Subsidiary: 915 Broadway, Suite 1608 New York, New York 10010 Attention: Michael P. Paolucci with a copy to: Carter Ledyard & Milburn Two Wall Street New York, NY 10005 Attention: David McDonald, Esq. 40 (b) if to Petry: 1290 Avenue of the Americas New York, New York 10104 Attention: David J. Moore with a copy to: Proskauer Rose LLP 1585 Broadway New York, New York 10036 Attention: Mark E. Moran, Esq. (c) if to Advercomm: 125 E. 55th Street New York, New York 10019 Attention: Jay Friesel with a copy to: Duquette & Tipton LLP 405 Lexington Avenue, Suite 4500 New York, New York 10174 Attention: David Duquette, Esq. SECTION 9.3 Headings. The headings contained in this Agreement and the Disclosure Schedules are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement or the Disclosure Schedule. SECTION 9.4 Entire Agreement. This Agreement constitutes the entire agreement and supersedes all prior agreements and undertakings, both written and oral, among the parties, or any of them, with respect to the subject matter hereof and, except as otherwise expressly provided herein, is not intended to confer upon any other person any rights or remedies hereunder. SECTION 9.5 Parties in Interest; Assignment. This Agreement shall not be assigned by operation of law or otherwise. This Agreement shall be binding upon and inure solely to the benefit of each party hereto, and nothing in this Agreement, express or implied, is intended to confer upon any other person any rights or remedies of any nature whatsoever under this Agreement, except that any of the Indemnified Parties shall be entitled after the Effective Time to enforce the provisions of Section 6.1. SECTION 9.6 Governing Law. This Agreement shall be governed by, and construed in accordance with, the laws of the State of New York applicable to contracts executed in and to be performed in that State, without regard to conflicts of laws, except that Delaware Law shall apply to the Merger. SECTION 9.7 Counterparts. This Agreement may be executed in one or more counterparts, and by the different parties hereto in separate counterparts, each of which when executed shall be deemed to be an original but all of which taken together shall constitute one and the same agreement. 41 SECTION 9.8 Severability. If any provision of this Agreement is invalid, illegal, or unenforceable, the balance of this Agreement shall remain in effect, and if any provision is inapplicable to any person or circumstance, it shall nevertheless remain applicable to all other persons and circumstances. SECTION 9.9 Specific Performance. Since a breach of the provisions of this Agreement could not adequately be compensated by money damages, any Party shall be entitled, in addition to any other right or remedy available to it, to an injunction restraining such breach or a threatened breach and to specific performance of any such provision of this Agreement, and in either case no bond or other security shall be required in connection therewith, and the parties hereby consent to the issuance of such injunction and to the ordering of specific performance. 42 IN WITNESS WHEREOF, Interactive, the Subsidiary, Petry and Advercomm have caused this Agreement to be executed as of the date first written above by their respective officers thereunto duly authorized. INTERACTIVE IMAGINATIONS, INC. By: /s/ Michael P. Paolucci -------------------------------- Michael P. Paolucci Chairman and Chief Executive Officer 24/7 ACQUISITION CORP. By: /s/ David J. Moore -------------------------------- David J. Moore Chief Executive Officer PETRY INTERACTIVE, INC. By: /s/ David J. Moore -------------------------------- David J. Moore Chairman and Chief Executive Officer ADVERCOMM, INC. By: /s/ Jacob I. Freisel -------------------------------- Jacob I. Friesel Chairman and Chief Executive Officer 43 SCHEDULE IA. David J. Moore Michael P. Paolucci Jacob I. Friesel Jack Rivkin Ronald Celmer Kristopher Wood 44 SCHEDULE IB. David J. Moore Chief Executive Officer Jacob I. Friesel Executive Vice President Gary Cecchini Senior Vice President Scott Cohen Senior Vice President Mark Burchill Senior Vice President Geoffrey Judge Senior Vice President 45 EX-10.5 6 AGREEMENT AND PLAN OF MERGER AGREEMENT AND PLAN OF MERGER By and Among 24/7 Media, Inc., Interactions Acquisition Corp. and Intelligent Interactions Corporation AGREEMENT AND PLAN OF MERGER AGREEMENT AND PLAN OF MERGER, dated as of April 9, 1998 (this "Agreement"), among 24/7 Media, Inc., a Delaware corporation ("24/7"), Interactions Acquisition Corp., a Delaware corporation and a wholly-owned subsidiary of 24/7 (the "Subsidiary"), and Intelligent Interactions Corporation ("the Company"), a Delaware corporation, and each of the stockholders of the Company set forth on the signature pages hereto (each, a "Seller"). WHEREAS, the Boards of Directors of 24/7, the Subsidiary, and the Company have each approved the merger (the "Merger") of the Subsidiary with and into the Company, in accordance with the General Corporation Law of the State of Delaware ("Delaware Law") and upon the terms and subject to the conditions set forth herein; and WHEREAS, for federal income tax purposes, it is intended that the Merger, as defined herein, shall qualify as a reorganization within the meaning of Section 368(c) of the Internal Revenue Code of 1986, as amended (the "Code"); WHEREAS, each Seller is the owner of such number and class(es) of shares of capital stock (the "Shares") of the Company as is set forth on the Ownership Table following the signatures pages hereto ("Ownership Table"), such Shares collectively constituting all of the issued and outstanding shares of capital stock of the Company; and NOW, THEREFORE, in consideration of the foregoing and the mutual covenants and agreements herein contained, and intending to be legally bound hereby, 24/7, the Subsidiary, the Company and the Sellers hereby agree as follows: 1. The Merger. (a) The Merger At the Effective Time (as defined in subparagraph 1(b) and subject to and upon the terms and conditions of this Agreement and Delaware Law, the Subsidiary shall be merged with and into the Company, the separate corporate existence of the Subsidiary shall cease, and the Company shall continue as the surviving corporation. The Company as the surviving corporation after the Merger is hereinafter sometimes referred to as the "Surviving Corporation." (b) Effective Time. As promptly as practicable after the satisfaction or waiver of the conditions set forth in Article VII and after the Closing referred to in subparagraph 1(g), the parties hereto shall cause the Merger to be consummated by delivering a Certificate of Merger (the "Certificate of Merger") to the Secretary of State of the State of Delaware, in such form as required by, and executed in accordance with the relevant provisions of, Delaware Law, for filing by the Secretary of State (the time of such filing being the "Effective Time"). i (c) Effect of the Merger. At the Effective Time, the effect of the Merger shall be as provided in the applicable provisions of Delaware Law. Without limiting the generality of the foregoing, and subject thereto, at the Effective Time all the rights, privileges, powers, franchises, and property of the Subsidiary shall vest in the Surviving Corporation, and all restrictions, disabilities, duties, debts, and liabilities of the Subsidiary shall become the restrictions, disabilities, duties, debts, and liabilities of the Surviving Corporation. (d) Certificate of Incorporation; By-Laws. At the Effective Time, the Certificate of Incorporation and By-Laws of the Subsidiary shall be the Certificate of Incorporation and By-Laws of the Surviving Corporation until thereafter amended. (e) Directors and Officers. The directors of the Subsidiary immediately prior to the Effective Time shall be the directors of the Surviving Corporation and the officers of the Company immediately prior to the Effective Time shall be the officers of the Surviving Corporation, in each case until their respective successors are duly elected or appointed and qualified. (f) Conversion of Securities. At the Effective Time, by virtue of the Merger and without any action on the part of 24/7, the Subsidiary or the Company, or the Sellers, each share of capital stock of the Company shall be exchanged for shares of capital stock of 24/7 (the "Merger Consideration") as follows: (i) For each share of common stock, par value $.01 per share, of the Company owned by a Seller and delivered to 24/7, 24/7 shall issue to such Seller 16.253539 shares of common stock, par value $.01 per share, 2.303962 Class A Warrants, 2.303962 Class B Warrants and 1.18654 Class C Warrants of 24/7; (ii) for each share of Preferred Stock, Series A Preferred Stock, Series AA Preferred Stock or Series AAA Preferred Stock of the Company owned by a Seller, 24/7 shall issue to such Seller 18.0644 shares of Series A Convertible Voting Preferred Stock, par value $.01 per share (the "Series A Stock"), which Series A Stock shall have the terms and provisions as are set forth in 24/7's Certificate of Incorporation, as amended, a copy of which has been provided to Seller, and 2.68891 Class A Warrants, 2.68891 Class B Warrants and 1.384778 Class C Warrants of 24/7; provided, however, that the Sellers agree to contribute a pro-rata portion of such Class A, B and C Warrants to Interactive Capital Partners LLC as more fully described in Section 10 hereof, with the result that Sellers shall receive the number of shares and warrants indicated by the Ownership Table; and (iii) In addition, each option to purchase shares of Common Stock of the Company issued pursuant to the Company's 1996 Equity Incentive Plan shall be converted into an option to purchase 16.4964 shares of common stock of 24/7, under the terms and pursuant to the conditions of the 24/7 Media, Inc. 1998 Stock Incentive Plan, the exercise price per share of 2 such options shall be proportionately decreased, and all such options shall vest in accordance with their existing vesting schedules. (iv) The shares of common stock, par value $.01 per share of the Subsidiary issued and outstanding immediately prior to the Effective Time shall, by virtue of the Merger and without any action on the part of the holder thereof, be converted into and become at the Effective Time 100 shares of common stock, par value $.01 per share, of the Company. (g) Surrender and Payment. (i) Each holder of Shares that have been converted into a right to receive the Merger Consideration, upon surrender at Closing of a certificate or certificates representing such shares, together with properly executed stock powers and stock transfer stamps covering such shares, will be entitled to receive the Merger Consideration payable in respect of such shares, which Merger Consideration shall be delivered at Closing. (ii) After the Effective Time, there shall be no further registration or transfers of Shares outstanding prior to the Effective Time. All certificates representing Shares outstanding prior to the Effective Time shall be presented to 24/7 at the Closing and shall be canceled and exchanged for the Merger Consideration provided for, and in accordance with the procedures set forth, in this Agreement. (iii) No fractional shares of 24/7 capital stock or fractional warrants shall be issued upon conversion of Shares. In lieu of any fractional share of 24/7 capital stock or fractional warrant to which the holder of Shares would otherwise be entitled, 24/7 shall round to the nearest whole share of 24/7 capital stock or nearest whole warrant. (h) Closing. The Closing of the transactions contemplated by this Agreement (the "Closing"), shall be held at the offices of Proskauer Rose LLP, 1585 Broadway, New York, New York 10036, at 11:00 A.M., New York time, on a date designated by 24/7 upon two business days' prior notice (the "Closing Date"), but in no event later than April 15, 1998, unless the parties shall agree upon a later date. 2. Representations and Warranties of the Company and the Sellers. The Company and each Seller severally and not jointly represents, warrants and agrees (as to itself only with respect to such Seller's ownership of the Shares and its authority to enter into this Agreement) that: (a) Ownership and Delivery of the Shares and Execution and Effect of Agreement. Each Seller is, and immediately prior to the Closing will be, the record and beneficial owner of the number and class(es) of Shares set forth below such Seller's name on the signature pages hereto, free and clear of any and all liens, pledges, security interests, options, encumbrances, charges, agreements or claims of any kind whatsoever ("claims"), other than those agreements described in subparagraph 4(d) hereof, which agreements each Seller agrees to cause 3 to be terminated upon consummation of the Closing. Each of the Company and the Seller has the full right, power and authority to enter into and to perform this Agreement and all other agreements, certificates and documents executed or delivered, or to be executed or delivered, by the Company and such Seller in connection herewith including the Stockholders' Agreement and the Registration Rights Agreement (each defined in subparagraph 7(h) hereof) (collectively, with this Agreement, the "Company Documents"). Neither the authorization, execution, delivery nor performance of any of the Company's Documents will violate, conflict with, result in a breach of, constitute a default under, or require any notice, consent, approval or order under the Company's organizational documents, or, if Seller is an entity, under such Seller's organizational documents. On the Closing Date, each Seller will have the full right, power and authority to assign, transfer and deliver such Seller's Shares as provided in this Agreement, and such delivery will convey to 24/7 lawful, valid and marketable title to such Shares, free and clear of any and all claims. This Agreement has been duly authorized, executed and delivered by the Company and the Seller, and the Company's Documents are (or when executed and delivered will be) legal, valid and binding obligations of the Company and the Seller, enforceable in accordance with their respective terms, subject to equitable considerations which may be applicable to specific performance. (b) Organization, Good Standing, Authority. The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and has full power and authority to own and lease its assets and properties and to conduct its business as it is now being conducted. The Company is duly qualified or licensed to do business and is in good standing as a foreign corporation under the laws of those jurisdictions listed on Schedule 1 hereto, constituting each jurisdiction in which the conduct of its business or the ownership or leasing of its assets requires such qualification except for jurisdictions in which the failure to so qualify would not have a material adverse effect on the business and operations of the Company taken as a whole. The copies of the Company's Certificate of Incorporation, as amended (certified by the Secretary of State of Delaware), and By-Laws (certified by the Secretary of the Company) which have been previously delivered to 24/7 are correct and complete. (c) Capitalization. Immediately prior to the Closing, the authorized capital stock of the Company will consist of the following: (i) Common Stock: 930,000 shares of common stock, $.01 par value, of which 230,170 shares will be issued and outstanding. (ii) Preferred Stock: a total of 408,648 shares of Preferred Stock, $0.01 par value per share, of which 71,870 shares have been designated Series A Preferred Stock, 71,870 shares have been designated Series A-1 Preferred Stock, 54,150 shares have been designated Series AA Preferred Stock, 54,150 shares have been designated Series AA-1 Preferred Stock, 78,304 shares have been designated Series AAA Stock and 78,304 shares have been designated Series AAA-1 Preferred Stock. Of all of the authorized shares of Preferred Stock listed above, only 71,870 shares of Series A Preferred Stock, 54,142 shares of Series AA Preferred Stock, and 71,210 shares of Series AAA Preferred Stock are issued and outstanding. 4 All of the outstanding shares of capital stock of the Company are duly authorized, validly issued and outstanding, fully paid and nonassessable. Except as set forth in this Subparagraph 2(c), there are no outstanding shares of capital stock or other equity or debt securities of the Company. (iii) Options, Warrants, Reserved Shares. Options to purchase 51,600 shares of common stock of the Company, all issued to employees of the Company pursuant to the Company's 1996 Equity Incentive Plan, are outstanding. All convertible promissory notes of the Company issued in December 1997 have been converted to Series AAA Preferred Stock, the shares issuable upon such conversion are reflected in the share numbers set forth above, and all stock purchase warrants issued in connection with such convertible promissory notes have been canceled. Except as set forth in this Subparagraph 2(c) and in Schedule 1, as of the Closing Date there will be no existing option, warrant, call, commitment or other agreement requiring the issuance or sale of any additional shares of stock or other equity or debt securities of the Company and no shares of stock or other equity or debt securities of the Company are reserved for issuance for any purpose, and there will be no agreements, commitments or restrictions relating to ownership or voting of any shares of stock or other securities of the Company, other than those agreements addressed in Subparagraph 4(d). (d) Subsidiaries and Affiliates. The term "affiliate" shall mean any entity which the Company owns or controls. The Company has no subsidiaries or affiliates and has no equity interest in any corporation, partnership, joint venture or other entity. The Company has conducted its business only through the Company. (e) Financial Statements. (i) The Company has previously delivered to 24/7 (x) the balance sheets of the Company as at December 31, 1995 and December 31, 1996, and the related audited statements of operations and retained earnings and changes in financial position for the fiscal years then ended, as examined by Arthur Andersen LLP; the Company's balance sheet as at December 31, 1996 is hereinafter referred to as the "Audited Balance Sheet" and, together with the related statements of operations and retained earnings and changes in financial position for the fiscal year then ended, the "Audited Financials") and (y) the unaudited balance sheet of the Company as at February 28, 1998 (the "Unaudited Balance Sheet"), and the related unaudited statements of operations and retained earnings for the fourteen months then ended (together with the Unaudited Balance Sheet, the "Unaudited Financials"). Each of the foregoing financial state ments is complete and correct, is in accordance with the Company's books and records, has been prepared in accordance with generally accepted accounting principles applied on a consistent basis, and presents fairly the financial position, results of operations and changes in financial position of the Company as at the dates and for the fiscal years indicated, subject, in the case of the Unaudited Balance Sheet, to year-end adjustments and notes required by generally accepted accounting principles. 5 (ii) 24/7 and its accountants shall be entitled to review the Company's preparation of the Unaudited Financials, including the related work papers of the Company's accountants, at all reasonable times in advance of and after the delivery thereof to 24/7. (f) Liabilities. All liabilities of the Company (whether accrued, unmatured, contingent, or otherwise and whether due or to become due, but not including the Company's obligations to perform under contracts other than by the payment of money) are set forth or ade quately reserved against on the face of the Audited Balance Sheet and the Unaudited Balance Sheet, in each case in accordance with generally accepted accounting principles consistently applied, except for liabilities incurred since December 31, 1996 (with respect to the Audited Balance Sheet), or since February 28, 1998 (with respect to the Unaudited Balance Sheet) in the ordinary course of business as theretofore conducted, which are not materially adverse to the operations or prospects of the Company's business. Neither the Company nor any Seller knows of any basis for the assertion against the Company of any other liability or loss contingency. (g) No Adverse Change. To Seller's best knowledge, since December 31, 1996, the Company has operated its business consistent with ordinary commercial business practices and only in the ordinary course of business as theretofore conducted, and consistent with a development stage company, there has been no: (i) material adverse change in the business, properties, assets, liabilities, commitments, earnings, financial condition or prospects of the Company; (ii) property damage or destruction resulting in a loss or cost to the Company of more than $50,000 in the aggregate, whether or not covered by insurance; or (iii) act or omission which, if taken or omitted after the date of this Agreement and before the Closing would conflict with Subparagraph 6(b) below. (h) Taxes. To Seller's best knowledge, the Company has properly filed all fed eral, foreign, state, local and other tax returns and reports which are required to be filed by it, all of the foregoing are true, correct and complete, and all taxes, interest and penalties due and payable as shown on such returns or claimed to be due by any taxing authority have been timely paid. All unpaid federal, foreign, state, local and other taxes, fees, assessments, duties and other similar governmental charges payable by the Company or which will, with the passage of time, become payable by the Company (including interest and penalties) whether or not disputed (x) with respect to any period prior to December 31, 1996, have been adequately reserved against in accordance with generally accepted accounting principles on the face of the Audited Balance Sheet, and (y) with respect to any period prior to February 28, 1998, have been adequately reserved against in accordance with generally accepted accounting principles on the face of the Unaudited Balance Sheet. There are no outstanding waivers or extensions of time with respect to the assessment or audit of any tax or tax return of the Company, or claims now pending or matters under discussion with any taxing authority in respect of any tax of the Company. The Company has furnished to 24/7 true copies of the federal, foreign, state and local tax returns of the Company for the fiscal years ended on December 31 for the years 1995 through 1996. Such federal, foreign, state and local income tax returns have been examined by the relevant taxing authorities for the fiscal years ended on for the years 1995 and 1996, respectively. The Company has not at any time consented to have the provisions of Section 341(f)(2) of the Code apply to it. 6 (i) Title to Properties; Absence of Encumbrances. The Company has good and marketable title to or, in the case of leases and licenses, valid and subsisting leasehold interests or licenses in, all of its properties and assets of whatever kind (whether real or personal, tangible or intangible), including, without limitation, all properties and assets that are shown on the Audited Balance Sheet or the Unaudited Balance Sheet (except for assets sold in the ordinary course of business since December 31, 1996, and February 28, 1998, respectively) and to properties and assets that are shown on any schedule hereto, in each case free and clear of any and all liens, mortgages, pledges, security interests, restrictions, prior assignments, claims and encum brances of any kind whatsoever, except as may be set forth in Schedule 2 hereto and except for liens for current taxes and assessments not yet due and payable (which the Company will promptly pay when due if due prior to the Closing Date). All assets, properties and rights relating to the Company's business are held by, and all agreements, obligations and transactions relating to the Company's business have been entered into, incurred and conducted by, the Company. (j) Real and Personal Property. Schedule 3 hereto contains a complete and correct list of all real property (including buildings and structures) owned or leased by the Company and all interests therein (including a brief description of the property, the record title holder, the location and the improvements thereon). To the Company and the Seller's best knowledge, all such real property, buildings and structures, and the equipment therein, and the operations and maintenance thereof, comply with any applicable agreements and restrictive covenants and conform to all applicable legal requirements including those relating to the environment, health and safety, land use and zoning, and all work required to be done by the Company as landlord or tenant has been duly performed. No condemnation or other proceeding is pending or, to the knowledge of any Seller, after due investigation, threatened, which would affect the use of any such property by the Company. Schedule 3 hereto contains a complete and correct list and brief description of all equipment, machinery, computers, furniture, leasehold improvements, vehicles and other personal property owned or leased by the Company and all interests therein. The Company's buildings and other structures, equipment and other assets (whether leased or owned) are in good operating condition and repair, subject to ordinary wear and tear. (k) Patents, Trademarks and Copyrights. A list and brief description of all trademarks, service marks, trade names, brands, copyrights and patents which are presently being used or have since December 31, 1995, been used in the Company's business, all applications for registration and registrations for such trademarks, copyrights, patents, patent applications, moral rights, mask works, trade secrets, confidential and proprietary information, compositions of matter, formulas, designs, proprietary rights, know-how and processes (all of the foregoing collectively hereinafter referred to as the "Proprietary Assets") and all licenses, contracts, rights and arrangements with respect to the foregoing, are set forth in Schedule 4 hereto. The Company has furnished to 24/7 true and complete copies of each of the foregoing. Except as set forth in Schedule 4, the Company owns the entire, unencumbered right, title and interest to all such properties free and clear of all claims, and, except as set forth in Schedule 4, no rights or licenses to others have been granted with respect to any of such properties. Except as set forth in Schedule 4, all filings and other action necessary to perfect the full legal right of the Company in 7 the United States to the foregoing have been effected. Except as set forth in Schedule 4, the Company owns or possesses the right to use all the trademarks, service marks, trade names, brands, copyrights, patents, franchises, permits and licenses, and rights with respect to the foregoing, necessary for the conduct of its business as now conducted, without any conflict with or infringement of the rights of others. Except as set forth in Schedule 4, the Company has not received notice of any claimed conflict with respect to any of the foregoing. Neither the Company nor any Seller has any knowledge of any default or alleged default or state of facts which with notice or lapse of time or both would constitute a default on the part of any party in the perform ance of any obligation to be performed or paid by any party under any licenses, contracts, agreements or arrangements referred to in or submitted as a part of Schedule 4, the Company has taken, and until the Closing Date, the Company will use its best efforts to take, all steps reasonably necessary to preserve its legal rights in, and the secrecy of, all its Proprietary Assets, except those for which disclosure is required for legitimate business or legal reasons. All intellectual property rights to all processes, systems and techniques used by the Company which were developed by any employee of the Company engaged in research or product development while such employee was employed by the Company have, by virtue of an invention assignment agreement, been assigned to the Company. In addition, all intellectual property rights to all processes, systems and techniques used by the Company or which the Company intends to use in its proposed business which were developed by Yale Brown, Matthew Walker, John Gonzalez and Robert Lippmann at any time have been assigned by them to the Company. (l) Contracts, Leases and Commitments. The Company has furnished to 24/7 true copies of the material contracts, leases and commitments listed in Schedule 5 hereto, includ ing summaries of the terms of any unwritten commitments. Except as set forth in that Schedule: (1) the Company (and to the best knowledge of the Company and each Seller, the other parties thereto) have complied in all material respects with such contracts, leases and commitments, all of which are valid and enforceable; (2) such contracts, leases and commitments are in full force and effect and there exists no event or condition which with or without notice or lapse of time would be a default thereunder, give rise to a right to accelerate or terminate any provision thereof or give rise to any lien, claim, encumbrance or restriction on any of the assets or properties of the Company; and (3) all of such contracts, leases and commitments have been entered into on an arm's-length basis, and none is materially burdensome to the Company's business. The Company is not a party, nor is any of its assets or business subject, to any contract, lease or commitment not listed in such Schedule (including without limitation purchase or sales commitments, financing or security agreements or guaranties, repurchase agreements, agency agreements, manufacturers representative agreements, commission agreements, employment or collective bargaining agree ments, pension, bonus or profit-sharing agreements, group insurance, medical or other fringe benefit plans, and leases of real or personal property), other than contracts terminable without penalty on not more than 30 days' notice that do not involve, individually or in the aggregate, the receipt or expenditure of more than $50,000 in any one year. The Company is engaged in no material disputes with customers or suppliers. To the best knowledge of the Company and each Seller, no customer or supplier is considering termination, non-renewal or any adverse modification of its arrangements with the Company, and the transactions contemplated by this 8 Agreement will not have a material adverse effect on the Company's relationship with any of its suppliers or customers. (m) Permits; Compliance with Laws. The Company holds the governmental licenses, permits and authorizations listed in Schedule 6 hereto which, except as set forth in that Schedule, are valid and unimpaired, will be unaffected by a transfer of all of the shares of the Company to 24/7, and constitute all of the licenses, permits and authorizations required for the ownership or occupancy of its properties and assets and the operation of its business. The Company's business is and has been operated in compliance therewith and all laws and regulations (federal, state, local and foreign) applicable to it, and all required reports and filings with govern mental authorities have been properly made. The consummation of the transactions contemplated by this Agreement will not give rise to any liability of the Company for severance pay or term ination pay. (n) Employees. Schedule 7 hereto contains a list of the names, office locations, compensation and years of credited service for severance, vacation and pension plan purposes of all full- and part-time employees of the Company as at March 31, 1998; a list of all pension, re tirement, profit-sharing, deferred compensation, option, bonus, medical, insurance and other benefit or incentive plans covering such employees; a description of all employee "perks" or other benefit practices not set forth in such plans or in agreements; and a description of the Company's severance pay policy. Neither the Company nor any Seller knows of any efforts within the last three years to attempt to organize the Company's employees, and no strike or labor dispute involving the Company has occurred during the last three years or, to the best knowledge of the Company and each Seller, is threatened. No key employee of the Company has indicated that he is considering terminating his employment. The Company has complied with applicable wage and hour, equal employment, safety and other legal requirements relating to its employees. Neither the Company nor any member of any affiliated group of which the Company was at any time a member, has ever maintained or currently maintains any "employee benefit plan" subject to the Employee Retirement Income Security Act of 1974, as amended ("ERISA"). Neither the Company nor its predecessors has ever contributed to or otherwise participated in or has been required to contribute to or otherwise participate in any "multi-employer plan", as defined in Section 4001(a)(3) of ERISA. The Company has not withdrawn from any such employee benefit plan or multi-employer plan prior to the date hereof. (o) Employee Benefit Plans. The Company is not, and never has been, subject to any pension, profit sharing or other similar plan which is subject to ERISA, or, to the extent the Company is or has been subject to any of the requirements of ERISA, it has fully complied with all such requirements. (p) Insurance. The Company has in full force and effect fire and casualty insurance policies, with extended coverage, sufficient in amount (subject to reasonable deductibles) to allow it to replace any of its properties that might be damaged or destroyed and liability insurance providing coverage in such amounts as is customary in the industry for a similar company. 9 (q) Litigation. Schedule 8 hereto contains a complete and correct list of all actions, suits, proceedings, claims or governmental investigations pending or, to the best knowledge of the Company and each Seller, threatened against, the Company or any of its assets, or, in connection with the Company's business, any Seller or any of the Company's officers, directors or employees. Except as set forth on Schedule 8 hereto, neither the Company nor, in connection with the Company's business, any Seller or any of the Company's officers, directors or employees is subject or party to any judgment, order, or other direction of or stipulation with any court or other governmental authority or tribunal, or in violation of any other legal require ments (as defined below), and neither the Company nor any Seller knows of any reasonable basis for a claim that such a violation exists. Neither the Company nor any Seller is aware of any proposed legal requirement that might adversely affect in any material respect the operation or prospects of the Company's business. (r) Environmental Matters. The Company's business, assets and properties are and have been operated and maintained in compliance with all applicable federal, state and local environmental protection laws and regulations (the "Environmental Laws"). No event has occurred which, with or without the passage of time or the giving of notice, or both, would constitute a non-compliance by the Company with, or a violation by the Company of, the Environmental Laws. To the Company's and the Seller's best knowledge, no real property owned, leased, occupied or used by the Company contains any underground storage tanks, asbestos, polychlorinated biphenyls, solid wastes or other hazardous substances, as such terms are defined in the Environmental Laws. To the Company's and the Seller's best knowledge, neither the Company nor any of its predecessor companies has caused or permitted to exist, as a result of an intentional or unintentional act or omission, a disposal, discharge or release of solid wastes, pollutants or hazardous substances, as such terms are defined in the Environmental Laws, on or from any site which currently is or formerly was owned, leased, occupied or used by the Company or any predecessor company, except where such disposal, discharge or release was pursuant to and in compliance with the conditions of a permit issued by the appropriate federal, state and/or local governmental agency. (s) Restrictions. The authorization, execution, delivery and performance of the Company's Documents and the consummation of the transactions contemplated hereby and thereby do not and will not violate, conflict with, result in a breach of or constitute a default under, require any notice or consent under, give rise to a right of termination of, or accelerate the performance required by, any terms or provisions of any agreement, instrument or writing of any nature to which the Company or such Seller is a party or is bound, or any of their assets or business is subject. (t) Transactions with Affiliates. Except as set forth in Schedule 9 hereto and except for ordinary dealings with its employees, since December 31, 1996, the Company has had no direct or indirect dealings with any Seller or with any other key employee of the Company or with any of their affiliates, associates or relatives. Except as set forth in Schedule 9 and except for employment arrangements with its employees, the Company has no obligation to or claim against any Seller or any other key employee of the Company, or any of their affiliates, associates 10 or relatives, and no such person or entity has any obligation to or claim against the Company. Schedule 9 reasonably describes the nature and extent of any products, services or benefits pro vided to the Company by any such person or entity without a corresponding charge equal to the fair market value of such products, services or benefits. Neither of Sellers, any other key employee of the Company, nor any of their affiliates, associates or relatives has any direct or in direct interest of any kind in any business or entity which is competitive with the Company. (u) Books and Records. The books and records of the Company are complete and correct in all material respects and have been maintained in accordance with good business practices. The minute books of the Company, as previously made available to 24/7, contain com plete and accurate records of all meetings and accurately reflect all other corporate action of the shareholders and board of directors of the Company. (v) Improper Payments. The Company and its officers and agents have not made any illegal or improper payments to, or provided any illegal or improper benefit or inducement for, any governmental official, supplier, customer or other person, in an attempt to influence any such person to take or to refrain from taking any action relating to the Company. The Company's employees may from time to time have made customary holiday gifts of nominal value to suppliers or customers. (w) Officers and Directors; Bank Accounts, etc. Schedule 10 hereto lists all officers, directors and fiduciaries of the Company; all bank accounts and safe deposit boxes maintained by the Company and all authorized signatories therefor, specifying their respective authority; and all credit cards under which employees of the Company may incur liability, and the persons holding such cards. No person or entity holds any general or special power of at torney from the Company. (x) Disclosure. No representation, warranty or other statement by the Company or Seller herein or in any other of the Company's Documents or made in connection with the Company's Documents, contains or will contain an untrue statement of a material fact, or omits or will omit to state a material fact necessary to make the statements contained herein or therein not misleading. Neither the Company nor any Seller is aware of any matter that could reasonably be expected to have a materially adverse effect on the Company's business or prospects that has not been disclosed in writing to 24/7. (y) Legends. (i) Each Seller understands that the certificates evidencing the Merger Consideration will bear the following legends: "THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR ANY STATE SECURITIES LAWS AND NEITHER SUCH SECURITIES NOR ANY INTEREST THEREIN MAY BE TRANSFERRED IN THE ABSENCE OF 11 SUCH REGISTRATION OR AN EXEMPTION THEREFROM UNDER SUCH ACT OR SUCH LAWS AND THE RULES AND REGULATIONS THEREUNDER." "TRANSFER OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE IS RESTRICTED BY AN AGREEMENT, DATED APRIL _, 1998, A COPY OF WHICH IS ON FILE AT THE OFFICE OF THE CORPORATION. ANY PURPORTED TRANSFER IN VIOLATION OF THIS AGREEMENT IS VOID AND WILL NOT BE RECOGNIZED BY THE CORPORATION OR ITS TRANSFER AGENT." (ii) The certificates shall not be required to bear such legends if an opinion of counsel reasonably satisfactory to 24/7 is delivered to 24/7 to the effect that neither the legends nor the restrictions on transfer contained in this Agreement are required to insure compliance with the Act. Whenever, pursuant to the preceding sentence, any certificate for any of the Securities is no longer required to bear the foregoing legend, 24/7 may, and if requested by the holder thereof, shall, issue to the holder, at 24/7's expense, a new certificate not bearing the foregoing legends. (c) Any and all shares of Common Stock issued prior to January 31, 1999 or which 24/7 is obligated to issue as a result of events occurring prior to such date, in each case upon conversion of Series A Stock as a result of accrued dividends with respect to such Series A Stock shall be canceled and cease to exist without further action by 24/7 or any other person upon the closing of a Qualified Public Offering prior to January 31, 1999, and shall bear a legend to such effect. 3. Representations and Warranties of 24/7. 24/7 represents, warrants and agrees that: (a) Capitalization. Immediately prior to the Closing, the capital stock of 24/7, as authorized by its Certificate of Incorporation, as amended, will consist of: (i) 100,000,000 shares of Common Stock, of which 27,481,201 shares will be issued and outstanding, 10,567,229 shares will be reserved for issuance upon conversion of issued and outstanding Shares, 5,283,615 shares will be reserved for issuance upon exercise of issued and outstanding Class A Warrants, 5,283,615 shares will be reserved for issuance upon exercise of issued and outstanding Class B Warrants, 2,575,000 will be reserved for issuance upon exercise of issued and outstanding Class C Warrants, 142,421 will be reserved for issuance upon exercise of issued and outstanding unclassified warrants, approximately 275,000 (subject to adjustment) will be reserved for issuance upon exercise of issued and outstanding convertible debentures, and 5,750,000 shares will be reserved for issuance to key employees, officers and directors of, and consultants to, 24/7 under stock incentives that have been granted or are available for grant by 24/7 pursuant to 24/7's 1998 Stock Incentive Plan; and (ii) 30,000,000 preferred shares, of which 10,060,002 will be outstanding and have been designated as Series A Convertible Voting Preferred Stock ("Series A Stock"). The rights, privileges and preferences of the Common Stock and Series A Stock are as stated in the Certificate of Incorporation of 24/7. Except for the Stock Incentives specified above, the conversion rights of issued and outstanding Series A Stock, the conversion rights of 12 outstanding convertible debentures specified above, and the exercise rights of issued and outstanding Class A, Class B, Class C Warrants and unclassified warrants specified above, as of the Closing, 24/7 will not (i) have outstanding any capital stock or other securities convertible into or exchangeable for any shares of its capital stock and, except for the preemptive rights contained in this Agreement, no person will have any right to subscribe for or to purchase (including conversion or preemptive rights), or any Options for the purchase of, or any agreements providing for the issuance (contingent or otherwise) of, any calls, commitments or other claims of any character relating to, any capital stock or any stock or securities convertible into or exchangeable for any capital stock of 24/7; (ii) have any capital stock, equity interests or other securities reserved for issuance for any purpose; or (iii) be subject to any obligation (contingent or otherwise) to repurchase or otherwise acquire or retire any shares of its capital stock or any convertible securities, rights or options of the type described in the preceding clause (i). "Option" with respect to any person means any security, right, subscription, warrant, option, "phantom" stock right or other Contract that gives the right directly or indirectly to (i) purchase or otherwise receive or be issued any shares of capital stock of such person or any security of any kind convertible into or exchangeable or exercisable for any shares of capital stock of such person or (ii) receive or exercise any benefits or rights similar to any rights enjoyed by or accruing to the holder of shares of capital stock of such person, including any rights to participate in the equity or income of such person or to participate in or direct the election of any directors or officers of such person or the manner in which any shares of capital stock of such person are voted. Neither this Agreement nor the transactions contemplated hereby or by the Merger will cause any anti-dilution adjustment or accelerated vesting of any Options. All issued and outstanding shares of Common Stock are duly and validly issued and are fully paid and nonassessable and were issued in accordance with the registration or qualification provisions of the Securities Act and any applicable state securities laws or pursuant to valid exemptions therefrom, and all shares of Common Stock, when issued as contemplated hereby, will be duly and validly issued and fully paid and nonassessable and issued in accordance with the registration or qualification provisions of the Securities Act and any applicable state securities laws or pursuant to valid exemptions therefrom. All of the issued and outstanding Series A Stock (and shares of Common Stock issuable upon conversion thereof), are validly issued and fully paid and nonassessable and were issued in accordance with the registration or qualification provisions of the Securities Act and any applicable state securities laws or pursuant to valid exemptions therefrom, and all of the Series A Stock (and shares of Common Stock issuable upon conversion thereof), when issued as contemplated hereby and pursuant to the terms of the Certificate of Incorporation, will be validly issued and fully paid and nonassessable and will be issued in accordance with the registration or qualification provisions of the Securities Act and any applicable state securities laws or pursuant to valid exemptions therefrom. The delivery of a certificate or certificates at the Closing representing the Shares and the Warrants will transfer to each Seller good and valid title to the Shares and the Warrants, respectively, free and clear of all liens, pledges, assessments, leases, security interests, claims, encumbrances, or other restrictions of any kind (collectively, "Liens"). To the best knowledge of 24/7, there are no agreements among 24/7's shareholders with respect to the voting or transfer of 24/7's capital stock, other than the agreements relating to transfer contained in the Stockholders' Agreement and the Registration Rights Agreement. The authorized capital stock of the Subsidiary consists of 10,000 shares of common stock, par value $.01 per 13 share, of which 100 are outstanding as of the date hereof, and 1,000 shares of preferred stock, par value $.01 per share, none of which are outstanding as of the date hereof. 24/7 owns, beneficially and of record, all of the issued and outstanding shares of capital stock of the Subsidiary, free and clear of all Liens. All of the issued and outstanding shares of capital stock of the Subsidiary have been duly and validly issued and are fully paid and nonassessable and were issued in accordance with the registration or qualification provisions of the Securities Act and any relevant state securities laws or pursuant to valid exemptions therefrom. There are no outstanding Options with respect to the Subsidiary. (b) Organization, Good Standing, Authority. Each of 24/7 and the Subsidiary is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and has full power and authority to own and lease its assets and properties and to conduct its business as it is now being conducted. Each of 24/7 and the Subsidiary is duly qualified or licensed to do business and is in good standing as a foreign corporation under the laws of each jurisdiction in which the conduct of its business or the ownership or leasing of its assets requires such qualification. The Subsidiary is newly-formed and has not conducted any business or owned any assets prior to the date hereof. The copies of 24/7's Certificate of Incorporation, as amended (certified by the Secretary of State of Delaware), and By-Laws, as amended (certified by the Secretary of 24/7) which have been previously delivered to the Company are correct and complete. The copies of the Subsidiary's Certificate of Incorporation, as amended (certified by the Secretary of State of Delaware), and By-Laws, as amended (certified by the Secretary of the Subsidiary) which have been previously delivered to the Company are correct and complete. (c) Subsidiaries and Affiliates. The term "affiliate" shall mean any entity which 24/7 owns or controls. Other than the Subsidiary, 24/7 has no subsidiaries or affiliates and has no equity interest in any corporation, partnership, joint venture or other entity. 24/7 has conducted its business only through 24/7. (d) Unaudited Pro Forma Balance Sheet. (i) 24/7 has previously delivered to the Company an unaudited pro forma balance sheet (the "Balance Sheet") of 24/7 as at December 31, 1997. The Balance Sheet is in accordance with the Company's books and records and has been prepared in good faith. All liabilities of the Company (whether accrued, unmatured, contingent, or otherwise and whether due or to become due) are set forth or adequately reserved against on the face of the Balance Sheet except for liabilities incurred since December 31, 1997 in the ordinary course of business as theretofore conducted, which are not materially adverse to the operations or prospects of 24/7's business. 24/7 does not know of any basis for the assertion against 24/7 of any other liability or loss contingency. Since December 31, 1997, 24/7 has operated its business consistent with ordinary commercial business practices and only in the ordinary course of business as theretofore conducted, and there has been no: (i) material adverse change in the business, properties, assets, liabilities, commitments, earnings, financial condition or prospects of the Company; or (ii) prop erty damage or destruction resulting in a loss or cost to the Company of more than $50,000 in the aggregate, whether or not covered by insurance. 14 (e) Taxes. 24/7 has properly filed all federal, foreign, state, local and other tax returns and reports which are required to be filed by it, all of the foregoing are true, correct and complete, and all taxes, interest and penalties due and payable as shown on such returns or claimed to be due by any taxing authority have been timely paid. 24/7 has not at any time consented to have the provisions of Section 341(f)(2) of the Code apply to it. (f) Title to Properties; Absence of Encumbrances. 24/7 has good and marketable title to or, in the case of leases and licenses, valid and subsisting leasehold interests or licenses in, all of its properties and assets of whatever kind (whether real or personal, tangible or intangible), free and clear of any and all liens, mortgages, pledges, security interests, restric tions, prior assignments, claims and encumbrances of any kind whatsoever, except for liens for current taxes and assessments not yet due and payable. All assets, properties and rights relating to 24/7's business are held by, and all agreements, obligations and transactions relating to 24/7's business have been entered into, incurred and conducted by, 24/7 rather than any of its affiliates. (g) Real and Personal Property. All real property (including buildings and structures) owned or leased by 24/7 and all interests therein and the equipment therein, and the operations and maintenance thereof, comply with any applicable agreements and restrictive covenants and conform to all applicable legal requirements including those relating to the environment, health and safety, land use and zoning, and all work required to be done by 24/7 as landlord or tenant has been duly performed. No condemnation or other proceeding is pending or, to the knowledge of any Seller, after due investigation, threatened, which would affect the use of any such property by 24/7. 24/7's buildings and other structures, equipment and other assets (whether leased or owned) are in good operating condition and repair, subject to ordinary wear and tear. (h) Patents, Trademarks and Copyrights. 24/7 owns the entire, unencumbered right, title and interest to all trademarks, service marks, trade names, brands, copyrights and patents which are presently being used or have since December 31, 1995, been used in 24/7's business, all applications for registration and registrations for such trademarks, copyrights, patents, patent applications, moral rights, mask works, trade secrets, confidential and proprietary information, compositions of matter, formulas, designs, proprietary rights, know-how and processes (all of the foregoing collectively hereinafter referred to as the "Proprietary Assets") and all licenses, contracts, rights and arrangements with respect to the foregoing, free and clear of all claims, and no rights or licenses to others have been granted with respect to any of such prop erties. All filings and other action necessary to perfect the full legal right of 24/7 in the United States to the foregoing have been effected. 24/7 owns or possesses the right to use all the trademarks, service marks, trade names, brands, copyrights, patents, franchises, permits and licenses, and rights with respect to the foregoing, necessary for the conduct of its business as now conducted, without any conflict with or infringement of the rights of others. 24/7 has not received notice of any claimed conflict with respect to any of the foregoing. 24/7 has no knowledge of any default or alleged default or state of facts which with notice or lapse of time or both would con stitute a default on the part of any party in the performance of any obligation to be performed or paid by any party under any licenses, contracts, agreements or arrangements referred to above. 15 24/7 has taken, and in the future 24/7 will use its best efforts to take, all steps reasonably necessary to preserve its legal rights in, and the secrecy of, all its Proprietary Assets, except those for which disclosure is required for legitimate business or legal reasons. All intellectual property rights to all processes, systems and techniques used by 24/7 which were developed by any employee of 24/7 engaged in research or product development while such employee was employed by 24/7 have, by virtue of an invention assignment agreement, been assigned to 24/7. In addition, all intellectual property rights to all processes, systems and techniques used by 24/7 or which 24/7 intends to use in its proposed business which were developed by its employees at any time have been assigned by them to 24/7. (i) Contracts, Leases and Commitments. 24/7 and the other parties thereto have complied in all material respects with all material contracts, leases and commitments of 24/7, all of which are valid and enforceable; (2) all material contracts, leases and commitments of 24/7 are in full force and effect and there exists no event or condition which with or without notice or lapse of time would be a default thereunder, give rise to a right to accelerate or terminate any provision thereof or give rise to any lien, claim, encumbrance or restriction on any of the assets or properties of 24/7; and (3) all material contracts, leases and commitments of 24/7 have been entered into on an arm's-length basis, and none is materially burdensome to 24/7's business. 24/7 is engaged in no material disputes with customers or suppliers. To the best knowledge of 24/7, no customer or supplier is considering termination, non-renewal or any adverse modification of its arrangements with 24/7, and the transactions contemplated by this Agreement will not have a material adverse effect on 24/7's relationship with any of its suppliers or customers. (j) Permits; Compliance with Laws. The governmental licenses, permits and authorizations held by 24/7 are valid and unimpaired, will be unaffected by a transfer of all of the shares of 24/7 to 24/7, and constitute all of the licenses, permits and authorizations required for the ownership or occupancy of its properties and assets and the operation of its business. 24/7's business is and has been operated in compliance therewith and all laws and regulations (federal, state, local and foreign) applicable to it, and all required reports and filings with governmental authorities have been properly made. The consummation of the transactions contemplated by this Agreement will not give rise to any liability of 24/7 for severance pay or termination pay. (k) Employees. 24/7 knows of any efforts within the last three years to attempt to organize 24/7's employees, and no strike or labor dispute involving 24/7 has occurred during the last three years or, to the best knowledge of 24/7, is threatened. No key employee of 24/7 has indicated that he is considering terminating his employment. 24/7 has complied with applic able wage and hour, equal employment, safety and other legal requirements relating to its employ ees. Neither 24/7 nor any member of any affiliated group of which 24/7 was at any time a member, has ever maintained or currently maintains any "employee benefit plan" subject to the Employee Retirement Income Security Act of 1974, as amended ("ERISA"). Neither 24/7 nor its predecessors has ever contributed to or otherwise participated in or has been required to contribute to or otherwise participate in any "multi-employer plan", as defined in Section 4001(a)(3) of ERISA. 24/7 has not withdrawn from any such employee benefit plan or multi-employer plan prior to the date hereof. 16 (l) Employee Benefit Plans. 24/7 is not, and never has been, subject to any pension, profit sharing or other similar plan which is subject to ERISA, or, to the extent 24/7 is or has been subject to any of the requirements of ERISA, it has fully complied with all such requirements. (m) Insurance. 24/7 has in full force and effect fire and casualty insurance policies, with extended coverage, sufficient in amount (subject to reasonable deductibles) to allow it to replace any of its properties that might be damaged or destroyed and liability insurance providing coverage in such amounts as is customary in the industry for a similar company. (n) Litigation. Neither 24/7 nor, in connection with 24/7's business, any of 24/7's officers, directors or employees is subject or party to any judgment, order, or other direction of or stipulation with any court or other governmental authority or tribunal, or in violation of any other legal requirements, and 24/7 knows of no reasonable basis for a claim that such a violation exists. 24/7 is not aware of any proposed legal requirement that might adversely affect in any material respect the operation or prospects of 24/7's business. (o) Environmental Matters. 24/7's business, assets and properties are and have been operated and maintained in compliance with all applicable federal, state and local environmental protection laws and regulations (the "Environmental Laws"). No event has occurred which, with or without the passage of time or the giving of notice, or both, would constitute a non-compliance by 24/7 with, or a violation by 24/7 of, the Environmental Laws. No real property owned, leased, occupied or used by 24/7 contains any underground storage tanks, asbestos, polychlorinated biphenyls, solid wastes or other hazardous substances, as such terms are defined in the Environmental Laws. Neither 24/7 nor any of its predecessor companies has caused or permitted to exist, as a result of an intentional or unintentional act or omission, a disposal, discharge or release of solid wastes, pollutants or hazardous substances, as such terms are defined in the Environmental Laws, on or from any site which currently is or formerly was owned, leased, occupied or used by 24/7 or any predecessor company, except where such disposal, discharge or release was pursuant to and in compliance with the conditions of a permit issued by the appropriate federal, state and/or local governmental agency. (p) Restrictions. The authorization, execution, delivery and performance of 24/7's Documents and the consummation of the transactions contemplated hereby and thereby do not and will not violate, conflict with, result in a breach of or constitute a default under, require any notice or consent under, give rise to a right of termination of, or accelerate the performance required by, any terms or provisions of any agreement, instrument or writing of any nature to which 24/7 is a party or is bound, or any of their assets or business is subject. (q) Transactions with Affiliates. 24/7 has not had any direct or indirect dealings with any principal owner of 24/7 or with any of its affiliates, associates or relatives (or affiliates thereof) nor does 24/7 beneficially own, directly or indirectly, any investment assets of any such current or former principal owner of 24/7 or any of their respective Affiliates, associates or relatives (or Affiliates thereof). 24/7 does not have any obligation to or claim against any 17 principal owner of 24/7, or any of his or its affiliates, associates or relatives, and no such person has any obligation to or claim against 24/7. All products, services or benefits provided to 24/7 by any such person, or provided by 24/7 to any such person, are provided at a charge equal to the fair market value of such products, services or benefits. To the best knowledge of 24/7, no principal owner of 24/7, nor any of its affiliates, associates or relatives, has any direct or indirect interest of any kind in any business or entity which is competitive with 24/7 or with which 24/7 has a business relationship. (r) Books and Records. The books and records of 24/7 are complete and correct in all material respects and have been maintained in accordance with good business practices. The minute books of 24/7 contain complete and accurate records of all meetings and accurately reflect all other corporate action of the shareholders and board of directors of 24/7. (s) Improper Payments. 24/7 and its officers and agents have not made any illegal or improper payments to, or provided any illegal or improper benefit or inducement for, any governmental official, supplier, customer or other person, in an attempt to influence any such person to take or to refrain from taking any action relating to 24/7. 24/7's employees may from time to time have made customary holiday gifts of nominal value to suppliers or customers. (t) Disclosure. No representation, warranty or other statement by 24/7 or the Subsidiary herein or in any other of 24/7's Documents or made in connection with 24/7's Documents, contains or will contain an untrue statement of a material fact, or omits or will omit to state a material fact necessary to make the statements contained herein or therein not misleading. 24/7 is not aware of any matter that could reasonably be expected to have a materi ally adverse effect on 24/7's business or prospects that has not been disclosed in writing to the Company. 4. Covenants of the Company and the Sellers. The Company and the Sellers severally and not jointly covenant and agree as to itself and only as to the covenants affecting itself) that between the date hereof and the Closing: (a) Actions. The Company and Sellers will not voluntarily take any action which would cause any of the representations and warranties made by it in the Company's Documents not to be true and correct in all material respects on and as of the Closing Date with the same force and effect as if such representations and warranties had been made on and as of the Closing Date. (b) Access by 24/7. 24/7 and its representatives and advisers shall have free and full access during normal business hours to the Company's assets, premises, books and records, key employees and accountants, including the audit work papers of Arthur Andersen LLP and the work papers of the Company's accountants relating to the Audited Financials and the Unaudited Financials, respectively, and the Company and Sellers shall furnish 24/7 with such information and copies of such documents as 24/7 may reasonably request. Sellers shall promptly furnish to 24/7 all financial statements of the Company that are prepared in the ordinary course 18 of business, including without limitation monthly reports of sales, revenue and cash flow and quarterly balance sheets. (c) Conduct of Business. The business of the Company shall be conducted only in the ordinary course, consistent with the present conduct of its business, and the Company and Sellers shall use commercially reasonable efforts to maintain, preserve and protect the assets and goodwill of the Company. The Company shall not, without the prior written consent of 24/7, take or commit to take any of following actions: (i) amend its By-Laws or Certificate of Incorporation, (ii) issue any additional shares of capital stock or issue, sell or grant any option or right to acquire or otherwise dispose of any of its authorized but unissued capital stock or other corporate securities, (iii) declare or pay any dividends or make any other distribution in cash or property on its capital stock, (iv) repurchase or redeem any shares of its capital stock, (v) incur, or perform, pay or otherwise discharge, any obligation or liability (absolute or contingent), except for current obligations and liabilities incurred in the ordinary course of business consistent with past practice, (vi) enter into any employment agreement with, or become liable for any bonus, profit-sharing or incentive payment to, or increase the compensation or benefits of, any of its officers, directors or employees, except pursuant to presently existing plans, arrangements or agreements disclosed herein or in a schedule hereto, (vii) sell, transfer or acquire any properties or assets, tangible or intangible, other than in the ordinary course of business, (viii) make any material changes in its customary method of operations, including marketing, selling and pricing policies and maintenance of business premises, fixtures, furniture and equipment, (ix) modify, amend or cancel any of its existing leases or enter into any contracts, agreements, leases or understandings other than in the ordinary course of business or enter into any loan agreements, (x) make any investments other than in certificates of deposit or short-term commercial paper, (xi) make any payments or incur any liability in connection with expenses incident to the negotiation or preparation of the Company's Documents, or (xii) take any other action which would cause any of the representations and warranties made by any Seller in the Company's Documents not to be true and correct in all material respects on and as of the Closing Date with the same force and effect as if such representations and warranties had been made on and as of the Closing Date. (d) Supplements. If any representation, warranty or statement of any Seller, or any schedule delivered to 24/7, shall be or become incorrect, Sellers shall deliver to 24/7 a supplement in order that said representation, warranty, statement, or schedule, as so supple mented, shall be true and correct. It is understood and agreed that the delivery of such a supple ment to 24/7 shall not in any manner constitute a waiver by 24/7 of any of its rights under this Agreement. (e) Termination of Agreements. Sellers shall cause all provisions of all purchase agreements, stockholder agreements, registration rights agreements, investors' rights agreements, co-sale agreements, rights of first refusal, and similar agreements between Sellers and the Company to terminate and be of no further force and effect upon consummation of the Closing. 19 (f) "Market-Stand Off" Agreement. Each Seller hereby agrees that it shall not, to the extent requested by 24/7 or an underwriter of securities of 24/7, sell or otherwise transfer or dispose of any Registrable Securities or other shares of stock of 24/7 then owned by such Seller (other than to donees or partners of the Seller who agree to be similarly bound) for up to ninety (90) days following the effective date of a registration statement of 24/7 filed under the Securities Act; provided, however, that all executive officers and directors and employees of 24/7 then holding Common Stock of 24/7 and all other persons or entities holding at least five percent (5%) of the outstanding Common Stock of 24/7 enter into similar agreements. In order to enforce the foregoing covenant, 24/7 shall have the right to place restrictive legends on the certificates representing the shares subject to this Subparagraph and to impose stop transfer instructions with respect to such shares(and the shares or securities of every other person subject to the foregoing restriction) until the end of such period. (g) Further Action. Upon the terms and subject to the conditions hereof, and subject to the exercise by the Boards of Directors of the Company of their fiduciary obligations, each of the Sellers and the Company hereto shall use all reasonable efforts to take, or cause to be taken, all actions and to do, or cause to be done, all other things necessary, proper, or advisable to consummate and make effective as promptly as practicable the transactions contemplated by this Agreement and to obtain in a timely manner all necessary waivers, consents, and approvals and to effect all necessary registrations and filings, including, but not limited to: (i) reasonable efforts to lift or rescind any injunction or restraining order or other order which may be entered; (ii) cooperation in reasonable tax planning measures in light of the transactions contemplated hereby so long as no action shall be required to be taken which would result in adverse tax consequences to the stockholders of the Company or, if the Merger does not occur, to the Company; and (iii) reasonable cooperation in respect of any filings to be made in connection with the Merger and the transactions contemplated hereby. (h) Public Announcements. The Company and the Sellers shall consult with 24/7 before issuing any further press release or otherwise making any public statements with respect to the Merger and neither shall issue any such press release or make any such public state ment, except as may be required by law, without the prior consent of 24/7. (i) Government Compliance. The Company and the Sellers agree promptly to effect all necessary registrations, filings, applications, and submissions of information requested by governmental authorities. 5. Covenants of 24/7. (a) Actions. 24/7 each covenants and agrees that between the date hereof and the Closing 24/7 will not take any action which would cause any of the representations and warranties made by it in 24/7's Documents not to be true and correct in all material respects on 20 and as of the Closing Date with the same force and effect as if such representations and warranties had been made on and as of the Closing Date. (b) Supplements. If any representation, warranty or statement of 24/7 or any schedule delivered by 24/7, shall be or become incorrect, 24/7 shall deliver to the Company a supplement in order that said representation, warranty, statement, or schedule, as so supple mented, shall be true and correct. It is understood and agreed that the delivery of such a supple ment to the Company shall not in any manner constitute a waiver by the Company of any of its rights under this Agreement. (c) Further Action. Upon the terms and subject to the conditions hereof, and subject to the exercise by the Boards of Directors of 24/7 of their fiduciary obligations, 24/7 shall use all reasonable efforts to take, or cause to be taken, all actions and to do, or cause to be done, all other things necessary, proper, or advisable to consummate and make effective as promptly as practicable the transactions contemplated by this Agreement and to obtain in a timely manner all necessary waivers, consents, and approvals and to effect all necessary registrations and filings, including, but not limited to: (i) reasonable efforts to lift or rescind any injunction or restraining order or other order which may be entered; (ii) cooperation in reasonable tax planning measures in light of the transactions contemplated hereby so long as no action shall be required to be taken which would result in adverse tax consequences to the stockholders of 24/7 or, if the Merger does not occur, to 24/7; and (iii) reasonable cooperation in respect of any filings to be made in connection with the Merger and the transactions contemplated hereby. (d) Public Announcements. 24/7 shall consult with the Company before issuing any further press release or otherwise making any public statements with respect to the Merger and neither shall issue any such press release or make any such public statement, except as may be required by law, without the prior consent of the Company. (e) Government Compliance. 24/7 agrees promptly to effect all necessary registrations, filings, applications, and submissions of information requested by governmental authorities. (f) Information Rights (i) Monthly and Quarterly Statements. 24/7 shall deliver to each Seller, as soon as practicable, and in any event within 30 days after the close of each month of each fiscal year of 24/7 in the case of monthly statements and 45 days after the close of each of the first three fiscal quarters of each fiscal year of 24/7 in the case of quarterly statements, true and complete copies of the consolidated balance sheets, and the related consolidated statements of income, stockholders' equity and cash flows of 24/7 and its subsidiaries (which shall include all affiliates controlled by 24/7 directly or indirectly through one or more intermediaries including, without limitation, any person in which 24/7, directly or indirectly, through a subsidiary or otherwise, beneficially owns more than fifty percent (50%) of either the equity interest in, or the voting control of such persons, whether or not existing on the date hereof) as at the close of such month or quarter 21 and covering operations for such month or quarter, as the case may be, and the portion of 24/7's fiscal year ending on the last day of such month or quarter, setting forth in each case in comparative form the figures for the comparable period of the previous fiscal year and accompanied by a narrative description of 24/7's business and results of operations for such month or quarter. All such financial statements shall be prepared in accordance with GAAP (except for the omission of normal year-end adjustments and footnote disclosures) consistently applied throughout the periods involved, shall be true and correct in all material respects and shall fairly present the financial condition, income, changes in stockholders' equity and cash flow of 24/7 on a consolidated basis, as applicable, as of the respective dates thereof and for the respective periods covered thereby. Each financial statement delivered by 24/7 shall be certified by 24/7's chief executive officer, president, treasurer or chief financial officer. (ii) Annual Statements. 24/7 shall deliver to each Seller, as soon as practicable after the end of each fiscal year of 24/7, and in any event within 90 days thereafter, true and complete copies of the consolidated and consolidating balance sheets of 24/7 and its Subsidiary at the end of such year and the consolidated and consolidating statements of income, stockholders' equity and cash flows of 24/7 and its Subsidiary for such year, setting forth in each case in comparative form the figures for the previous fiscal year, all in reasonable detail and accompanied by an opinion thereon of a firm of independent certified public accountants of recognized national standing selected by 24/7 and reasonably acceptable to the Sellers, which opinion shall state that such financial statements fairly present the financial condition, income, changes in stockholders' equity and cash flow of 24/7 and its Subsidiary on a consolidated basis, as applicable, and have been prepared in accordance with GAAP and that the examination of such accountants in connection with such financial statements has been made in accordance with generally accepted auditing standards, and accordingly included such tests of the accounting records and such other auditing procedures as were considered necessary in the circumstances. Each financial statement delivered by 24/7 shall be certified by 24/7's chief executive officer, president, treasurer or chief financial officer. (iii) Audit Reports. 24/7 shall deliver to each Seller, promptly upon receipt thereof, one copy of each other financial report and internal control letter submitted to 24/7 by independent accountants in connection with any annual, interim or special audit made by them of the books of 24/7 and its Subsidiary, as applicable, as well as any responses of 24/7 thereto. (iv) Other Reports. 24/7 shall deliver to each Seller, promptly upon their becoming available, one copy of each financial statement, report, notice or proxy statement sent by 24/7 to stockholders generally, of each financial statement, report, notice or proxy statement sent by 24/7 or any of its Subsidiaries to the SEC or any successor agency, if applicable, of each regular or periodic report and any registration statement, prospectus or written communication (other than transmittal letters) in respect thereof filed by 24/7 or any of its subsidiaries with, or received by such person in connection therewith from, any securities exchange or the SEC or any successor agency, of any press release issued by 24/7 or any of its subsidiaries, and of any material of any nature whatsoever prepared by the SEC or any successor agency thereto or any state blue sky or securities law commission which relates to or affects in any way 24/7 or any of its subsidiaries. 22 (v) Requested Information. 24/7 shall deliver to each Seller, with reasonable promptness, such other documents, reports, data and information as from time to time may be reasonably requested by such Seller. (vi) Access. 24/7 shall permit, and shall cause its subsidiaries to permit, representatives designated by any Seller, upon reasonable prior notice to 24/7 and at the such Seller's expense, to visit and inspect each of 24/7's and its subsidiaries' properties, to examine their respective corporate and financial records (and make copies thereof or extracts therefrom), to discuss their respective affairs, finances and accounts with 24/7's and its subsidiaries' directors, officers, key employees and accountants, all at such reasonable times as may be requested by such Seller. (vii) Other Information. 24/7 shall provide, from time to time, such additional information regarding 24/7 or its Subsidiaries as any Seller reasonably may request, including without limitation, any information or reports required by reason of reporting or regulatory requirements to which any Seller, its general partner (if applicable), or any person having an interest in such Seller is subject. 6. Conditions Precedent to Obligations of 24/7 and the Subsidiary. The obligations of 24/7 and the Subsidiary to consummate the transactions contemplated by this Agreement are subject to the fulfillment, at or before the Closing, of each of the following conditions, any of which may be waived by 24/7 and the Subsidiary in writing, and the Company and Sellers shall use commercially reasonable efforts to cause such conditions to be fulfilled: (a) Representations and Warranties. Each of the representations and warranties of the Company and the Sellers in the Company's Documents shall be true and correct in all ma terial respects on and as of the Closing Date with the same force and effect as though made on and as of the Closing Date. (b) Termination of Agreements. The Company and the Sellers shall have complied with their covenant set forth in Subparagraph 4(d) hereof. (c) Execution of Stockholders' Agreement. All Sellers shall have executed the Stockholders' Agreement substantially in the form attached hereto as Exhibit A. (d) Performance of the Company and the Sellers. The Company and the Sellers shall have performed and complied in all material respects with all agreements, covenants and conditions required by the Company's Documents to be performed or complied with by any Seller at or before the Closing. (e) Delivery of Shares. All of the issued and outstanding Shares shall have been delivered to 24/7 for purchase by it on the Closing Date. (f) Employment Agreements. Yale Brown and Matthew Walker each shall have entered into an employment agreement and Non-Competition and Non-Disclosure Agreement (the 23 "Employment Agreements") with 24/7 in the form of Exhibit B hereto and each other employee of the Company shall have entered into a Non-Disclosure and Non-Competition Agreement in the form attached hereto as Exhibit C. (g) Key Man Life Insurance. The Company and the Sellers shall have delivered to 24/7 evidence reasonably satisfactory to 24/7 that there is in force a key man life insurance policy, owned by the Company and under which the Company (and any financial institution designated by 24/7) is the beneficiary, insuring the life of Yale Brown in the amount of $1,000,000. (h) Opinion of Counsel to the Company and the Sellers. The Company and the Sellers shall have delivered to 24/7 an opinion of Fenwick & West LLP, counsel to the Company and the Sellers, dated the Closing Date, in the form of Exhibit D hereto. (i) Certificate. 24/7 shall have received a certificate executed by the Company dated the Closing Date, certifying, in such detail as 24/7 may reasonably request, as to the fulfillment of the conditions set forth in subparagraphs (a), (b) and (d). (j) Consents. The Company and the Sellers shall have obtained or, to the reasonable satisfaction of 24/7 obviated the need to obtain, all consents, approvals or waivers from regulatory authorities and third parties necessary for the execution, delivery and performance of the Company's Documents and the transactions contemplated thereby, all without cost or other adverse consequences to the Company. (k) Litigation. No action or proceeding shall be pending or threatened before any court, tribunal or governmental body, and no claim or demand shall have been made against 24/7, any Seller or the Company, seeking to restrain or prohibit or to obtain damages or other relief in connection with the consummation of the transactions contemplated by the Company's Documents or 24/7's Documents, or which might materially affect the business of the Company, which in the reasonably exercised opinion of 24/7 makes it inadvisable to consummate such transactions. (l) Stockholder Approval. The stockholders of the Company shall have approved and adopted this Agreement by the unanimous written consent in accordance with its Certificate of Incorporation, By-laws and Delaware General Corporation Law. (m) Proceedings. All actions, proceedings, instruments, and documents required to carry out the transactions contemplated hereby or incidental hereto and all other related legal matters shall have been reasonably satisfactory to and approved by counsel of 24/7 and such counsel shall have been furnished with such certified copies of such corporate actions and proceedings and such other instruments and documents as it shall have reasonably requested. (n) No Violation. There shall not have been any action taken, or any statute, rule, regulation, or order enacted, promulgated, or issued or deemed applicable to the Merger by 24 any Federal or state government or governmental authority or court, which would (i) prohibit the Surviving Corporation's ownership or operation of all or a material portion the Subsidiary's business or assets, or compel the Surviving Corporation or Subsidiary to dispose of or hold separate all or a material portion of the Subsidiary's business or assets, as a result of the Merger; (ii) render the Subsidiary unable to consummate the Merger; (iii) make such consummation illegal; or (iv) impose or confirm material limitations on the ability of 24/7 effectively to exercise full rights of ownership of shares of the capital stock of the Surviving Corporation, including without limitation, the right to vote any such shares on all matters properly presented to the stockholders of the Surviving Corporation, and no such action shall have been taken or any such statute, rule, regulation, or order enacted, promulgated, issued, or deemed applicable to the Merger which in the reasonable judgment of 24/7 will produce such result. (o) Certificate. 24/7 shall have received a certificate of the Company, dated the Closing Date, signed by the Chief Executive Officer of the Company, as to such other matters as may be reasonably requested by 24/7, including, but not limited to, certificates with respect to the Company's Certificate of Incorporation, By-laws, Board of Directors' resolutions relating to the transactions contemplated hereby and the incumbency and signatures of each of the officers of the Company who shall execute on behalf of the Company any document delivered on the Closing Date. (p) Escrow Agreement. Each Seller shall have entered into an escrow agreement in substantially the form annexed hereto as Exhibit G and, pursuant thereto, shall have delivered to the Escrow Agent thereunder, the portion of the Merger Consideration referred to therein. 7. Conditions Precedent to Obligations of the Company and each Seller . The obligations of the Company and each Seller to consummate the transactions contemplated by this Agreement are subject to the fulfillment, at or before the Closing, of each of the following conditions, any of which may be waived by the Company and the Sellers in writing, and 24/7 and the Subsidiary shall use their best efforts to cause such conditions to be fulfilled: (a) Representations and Warranties. The representations and warranties of 24/7 and the Subsidiary in 24/7's Documents shall be true and correct in all material respects on and as of the Closing Date with the same force and effect as though the same had been made on and as of the Closing Date. (b) Performance by 24/7 and the Subsidiary. 24/7 and the Subsidiary shall have performed and complied in all material respects with the agreements, covenants and conditions required by 24/7's Documents to be performed or complied with by them at or before the Closing. (c) Merger Consideration. The Merger Consideration shall have been paid as provided in subparagraphs 1(g) and (f) above. 25 (d) Employment Agreements. 24/7 shall have entered into the Employment Agreements. (e) Opinion of 24/7's Counsel. 24/7 and the Subsidiary shall have delivered to the Company and the Sellers an opinion of Proskauer Rose LLP, counsel to 24/7 and the Subsidiary, dated the Closing Date, in the form of Exhibit E hereto. (f) Certificate. The Company and the Sellers shall have received a certificate executed by 24/7, dated the Closing Date, certifying, in such detail as the Company and the Sellers may reasonably request, as to the fulfillment of the conditions set forth in subparagraphs (a) and (b). (g) Litigation. No action or proceeding shall be pending or threatened before any court, tribunal or governmental body, and no claim or demand shall have been made against 24/7, the Subsidiary, the Sellers or the Company, seeking to restrain or prohibit or to obtain damages or other relief in connection with the consummation of the transactions contemplated by 24/7's Documents or the Company's Documents which in the reasonably exercised opinion of Sellers makes it inadvisable to consummate such transaction. (h) Execution of Related Agreements. 24/7 and Seller shall have entered into the Stockholders' Agreement and Registration Rights Agreement in the form attached hereto as Exhibits A and F respectively. 8. Closing Deliveries. (a) Deliveries of the Company and the Sellers. At the Closing, the Company and the Sellers shall deliver, or shall cause to be delivered, to 24/7 and the Subsidiary the following: (i) Certificates representing the Shares, as 24/7 may designate, with any required stock transfer tax stamps affixed and canceled and all taxes on such transfer, if any, paid in full, all at the expense of Sellers. Such Shares shall be delivered to 24/7 free and clear of all claims; (ii) Where a Seller is an entity: appropriate documentary evidence establishing the capacity and authority of such Seller to sell, assign, transfer and deliver the Shares hereunder and to enter into this Agreement; (iii) The Employment Agreements; (iv) The evidence as to Key Man Life Insurance; (v) The opinion of Fenwick & West LLP, counsel to Sellers; 26 (vi) The certificate referred to in subparagraph 6(i) hereof, duly executed by each Seller; (vii) Copies of the consents, approvals or waivers referred to in subparagraph 6(j) hereof; (viii) duly executed resignations of such directors and fiduciaries of the Company as 24/7 shall designate. (b) 24/7 and Subsidiary Deliveries. At the Closing, 24/7 and the Subsidiary shall deliver or cause to be delivered to the Company and the Sellers the following: (i) Certificates representing shares of capital stock of 24/7 and warrants in payment of the Merger Consideration. (ii) The Employment Agreements; (iii) The opinion of Proskauer Rose LLP, counsel to 24/7 and the Subsidiary; (iv) The certificate referred to in subparagraph 7(f) hereof; (v) The agreements referenced in Subparagraph 7(h) hereof. 9. Restrictive Covenant. (a) Confidentiality. The Company and the Sellers shall never use or divulge any trade secrets, customer or supplier lists, pricing information, marketing arrangements or strategies, business plans, internal performance statistics, training manuals or other information concerning 24/7 or the Company or its affiliates that is competitively sensitive or confidential. Because the breach or attempted or threatened breach of this restrictive covenant will result in immediate and irreparable injury to 24/7 for which 24/7 will not have an adequate remedy at law, 24/7 shall be entitled, in addition to all other remedies, to a decree of specific performance of this covenant and to a temporary and permanent injunction enjoining such breach, without posting bond or furnishing similar security. The provisions of this paragraph 9 are in addition to and in dependent of any agreements or covenants contained in any employment, consulting or other agreement between 24/7 or the Company and any Seller. (b) Non-public Information. From and after the consummation of an initial public offering, if any, of 24/7's securities, to the extent that any of the information furnished pursuant to Section 5(f) hereof would constitute material, nonpublic information for purposes of the Securities Exchange Act of 1934, as amended, each Seller covenants that it will not engage in any purchase or sale of 24/7's securities while in possession of such information and prior to the time that such information is made generally known to the public and that each Seller shall 27 inform its agents and representatives, who have been given access to such material, nonpublic information, of such requirements. The obligations in this subparagraph 9(b) shall survive termination of this Agreement. 10. Brokers. Each party represents to the other that it has had no dealings with any broker or finder in connection with the transactions contemplated by this Agreement other than Interactive Capital Partners LLC. The Company acknowledges and agrees that any commission or other fee that may be due to Interactive Capital Partners LLC is its responsibility and shall be paid on the Closing Date in accordance with the terms of a letter dated March 15, 1998 which has been furnished to 24/7. Should any other claim be made for a broker's, finder's or similar fee, on account of any actions or dealings by a party or its agents, such party shall indemnify and hold the other party harmless from and against any and all liability and expenses, including reasonable attorneys' fees incurred by reason of any claim made by such broker. 11. Indemnification by Sellers. Each Seller shall severally and not jointly and only in proportion to such Seller's pro-rata share of ownership of the Company immediately preceding the Closing Date indemnify, defend and hold harmless 24/7 and its affiliates (including the Subsidiary and the Company), promptly upon demand at any time and from time to time, against any and all losses, liabilities, claims, actions, damages and expenses, including without limitation reasonable attorneys' fees and disbursements exceeding in the aggregate more than $50,000 (collectively, "Losses"), arising out of or in connection with any of the following: (a) any material misrepresentation or breach of any warranty made by such Seller in any of the Company's Documents; (b) any material breach or nonfulfillment of any covenant or agreement made by such Seller in any of the Company's Documents; (c) the claims of any broker or finder engaged by any Seller other than Interactive Capital Partners LLC; (d) any customer claims relating to services provided prior to the Closing, to the extent not covered by insurance or reserved against in the Unaudited Balance Sheet; and (e) without in any manner limiting the foregoing, any liabilities or obligations of, or claims or causes of action against, the Company which arise with respect to or relate to any period or periods on or prior to the Closing Date, except for those which are set forth or reserved against in the Unaudited Balance Sheet or are set forth in a schedule hereto, or were incurred subsequent to February 28, 1998, in the ordinary course of business as theretofore conducted and are not materially adverse to the operations or prospects of the Company's business. In no event shall the total of any Seller's liability under this paragraph 11 be greater than the portion of the Merger Consideration deposited with the Escrow Agent pursuant to the Escrow Agreement, as provided by subparagraph 13(d), and as shown on Exhibit A to the Escrow Agreement. 12. Indemnification By 24/7. 24/7 shall indemnify, defend and hold harmless Sellers, promptly upon demand at any time and from time to time, against any and all Losses arising out of or in connection with any of the following: (a) any misrepresentation or breach of any warranty made by 24/7 in any of 24/7's Documents; (b) any breach or nonfulfillment of any covenant or agreement made by 24/7 in 24/7's Documents; and (c) the claims of any broker or finder engaged by 24/7. 28 13. Further Provisions Regarding Indemnification. (a) Survival. All representations, warranties, indemnities, covenants and agreements made by the Company or the Sellers and 24/7 in the Company's or 24/7's Documents shall survive the Closing, notwithstanding any examination or investigation made by or for any party. (b) Limitations. Notwithstanding the foregoing, neither the Company nor any Seller, on the one hand, nor 24/7, on the other (Sellers, on the one hand, and 24/7 on the other, each is sometimes hereinafter referred to in this paragraph 13 as a "party") shall be entitled to indemnification for Losses arising out of matters referred to in subparagraphs 11(a) or 12(a), as applicable, unless it shall have given written notice to the other party, setting forth its claim for indemnification in reasonable detail, within two years after the Closing Date; provided, however, that the foregoing limitations on each party's indemnification obligation shall not apply to Losses arising out of or in connection with any material misrepresentation made in subparagraphs 2(a) and 2(c)and paragraph 10 . (c) Defense. An indemnified party shall promptly give written notice to the indemnifying party after the indemnified party has knowledge that any legal proceeding has been instituted or any claim has been asserted in respect of which indemnification may be sought under the provisions of paragraph 11 or 12. If the indemnifying party, within 10 days after the indemnified party has given such notice (or within such shorter period of time as an answer or other responsive motion may be required), shall have acknowledged in writing his or its obligation to indemnify and shall have furnished to the indemnified party a bond, letter of credit, escrow or similar arrangement in an amount equal to the total amount demanded in such claim or proceed ing, then the indemnifying party shall have the right to control the defense of such claim or proceeding, and the indemnified party shall not settle or compromise such claim or proceeding without the written consent of the indemnifying party. The indemnified party may in any event participate in any such defense with his or its own counsel and at his or its own expense. (d) Escrow of Shares of 24/7 Capital Stock. Upon receipt of the Merger Consideration pursuant to Paragraph 2 of this Agreement, Sellers shall deliver to the Escrow Agent, pursuant to the Escrow Agreement, a number of shares of 24/7 capital stock and warrants equal to 30% of the Merger Consideration, with each Seller to deliver its share of the Merger Consideration specified in Exhibit A to the Escrow Agreement. The shares of 24/7 capital stock and warrants together with any earnings on or accretions thereto shall be held by the Escrow Agent pursuant to the terms of the Escrow Agreement. Except for shares of 24/7 capital stock declared as dividends or distributions on the escrowed shares in connection with a stock split or other reorganization of 24/7, all earnings on or accretions to the Merger Consideration held by the Escrow Agent pursuant to the terms of the Escrow Agreement shall be for the benefit of Seller. The Escrow Agreement shall provide the Sellerswith the power to direct the sale of escrowed shares (but not the distribution or release of the net monetary proceeds therefrom), to invest the net proceeds from such sales in U.S. government securities or investment grade debt securities and to receive monthly payments of the interest from such investments. All interest or other income to such investments shall be for the 29 benefit of the Seller. 24/7 shall be entitled to delivery from the Escrow Agent of such number of shares of 24/7 capital stock as shall have a value equal to the amount due 24/7 pursuant to Paragraph 11 (or an equivalent amount in cash), and the Sellers shall give the Escrow Agent all such notices as shall be necessary to obtain such delivery from the Escrow Agent. Subject to any demand hereunder that may be pending at such time, each Sellers shall be entitled to delivery from the Escrow Agent of one-half of its share of the escrow fund as set forth on Exhibit A to the Escrow Agreement (after giving effect to the delivery, if any, of shares of 24/7 capital stock and earnings on and accretions thereto pursuant to the preceding sentence) on the first anniversary of the Effective Time and the balance of its share of the escrow fund upon the second anniversary of the Effective Time. 14. Further Assurances. The parties shall cooperate and take such actions, and execute such other documents, at the Closing or subsequently, as either may reasonably request in order to carry out the provisions or purpose of this Agreement. 15. Notices. All notices or other communications in connection with this Agreement shall be in writing and shall be considered given when personally delivered or when mailed by registered or certified mail, postage prepaid, return receipt requested, or by overnight courier as follows: If to a Seller at the address set forth with respect to such Seller on the signature page hereto. With a copy to: Fenwick & West LLP 1920 N. Street N.W., Suite 650 Washington, DC 20036 Attn: J.T. Westermeier, Esq. If to 24/7: 24/7 Media, Inc. 1290 Avenue of the Americas New York, NY 10104 Attn: Chief Executive Officer With a copy to: Proskauer Rose LLP 1585 Broadway New York, New York 10036 Attn: Ronald R. Papa, Esq. 30 16. Entire Agreement. This Agreement (which includes the schedules and exhibits hereto) sets forth the parties' final and entire agreement with respect to its subject matter and supersedes any and all prior understandings and agreements. This Agreement can be amended, supplemented or changed, and any provision hereof can be waived, only by a written instrument making specific reference to this Agreement signed by the party against whom enforcement of any such amendment, supplement, change or waiver is sought. 17. Successors. This Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective heirs, executors, administrators, personal representatives, successors and assigns; provided, however, that neither this Agreement nor any right or obligation hereunder may be assigned or transferred, except that 24/7 may assign this Agreement and its rights hereunder to any direct or indirect wholly-owned subsidiary of 24/7. 18. Paragraph Headings. The paragraph headings in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. 19. Other Discussions. Unless this Agreement shall have been terminated, neither the Company nor any Seller shall consider or entertain any other offers for, or hold discussions with any person regarding, the acquisition of any assets or capital stock of the Company. 20. Legal Fees and Expenses. If the Closing occurs, up to $40,000 of legal costs, fees or expenses incurred by Sellers and the Company shall be borne by 24/7. 21. Severability. If any provision of this Agreement shall be held by any court of competent jurisdiction to be illegal, invalid or unenforceable, such provision shall be construed and enforced as if it had been more narrowly drawn so as not to be illegal, invalid or unenforce able, and such illegality, invalidity or unenforceability shall have no effect upon and shall not impair the enforceability of any other provision of this Agreement. 22. Governing Law and Consent to Jurisdiction. This Agreement shall be gov erned by and construed and interpreted in accordance with the internal law of the State of New York (without reference to its rules as to conflicts of law). The state courts of the State of New York in the New York County and, if the jurisdictional prerequisites exist at the time, the United States District Court for the Southern District of New York, shall have sole and exclusive jurisdictions to hear and determine any dispute or controversy arising under or concerning this Agreement. In any action or proceeding concerning such dispute or controversy, the parties consent to jurisdiction and waive personal service of any summons, complaint or other process; a summons or complaint in any such action or proceeding may be served by mail in accordance with paragraph 15. 31 23. Counterparts. This Agreement may be executed by facsimile and in one or more counterparts, each of which shall be deemed an original, but all of which taken together shall constitute one and the same instrument. 32 IN WITNESS WHEREOF, the parties have duly executed this Agreement on the date first above written. 24/7 MEDIA, INC. By: /s/ David J. Moore ------------------------------ Name: David J. Moore Title: Chief Executive Officer INTERACTIONS ACQUISITION CORP. By: /s/ David J. Moore ------------------------------ Name: David J. Moore Title: Chief Executive Officer INTELLIGENT INTERACTIONS CORPORATION By: /s/ Yale R. Brown ------------------------------ Name: Yale R. Brown Title: Chief Executive Officer Sellers:
/s/ Yale R. Brown /s/ John N. Gonzalez - ----------------------------------- ----------------------------------------- Yale Brown John N. Gonzalez Address: 201 N. Union Street Address: Versant Object Technology Suite 110 1380 Willow Rd., Suite 210 Alexandria, VA 22314 Menlo Park, CA 94025 /s/ Robert Lippmann /s/ Alison Lynch - ----------------------------------- ----------------------------------------- Robert Lippmann Alison Lynch Address: 201 N. Union Street Address: 201 N. Union Street Suite 110 Suite 110 Alexandria, VA 22314 Alexandria, VA 22314 33 /s/ Matthew B. Walker /s/ David Banks - ----------------------------------- ----------------------------------------- Matthew B. Walker David Banks Address: 201 N. Union Street Address: Versant Object Technology Suite 110 1380 Willow Rd., Suite 210 Alexandria, VA 22314 Menlo Park, CA 94025
Trinity Ventures V, L.P. A California Limited Partnership By: Trinity TVL Partners V, L.P. A California Limited Partnership, its General Partner By: /s/ Trinity TVL Partners V, L.P. -------------------------------- Name: A General Partner Address: 300 Sand Hill Road Building 1, Suite 240 Menlo Park, CA 94025 Attn: Noel Fenton Trinity V Side-By-Side Fund, L.P. By: Trinity TVL Partners V, L.P. A California Limited Partnership, its General Partner By: /s/ Trinity TVL Partners V, L.P. -------------------------------- Name: A General Partner Address: 300 Sand Hill Road Building 1, Suite 240 Menlo Park, CA 94025 Attn: Noel Fenton 34 Zero Stage Capital V Limited Partnership By: Zero Stage Capital Associates Limited Partnership, General Partner By: /s/ Zero Stage Capital Associates Limited Partnership ----------------------------------------------------- Name: Address: 101 Main Street, 17th fl Kendall Square Cambridge, MA 02142-1519 Attn: Stanley Fung F&W Investments 1996 A California Partnership By: /s/ F&W Investments ------------------------------ A General Partner Address: Two Palo Alto Square Palo Alto, CA 94306 Attn: Laird Simons 35 EX-10.7 7 SECURITIES PURCHASE AGREEMENT INTERACTIVE IMAGINATIONS, INC. SECURITIES PURCHASE AGREEMENT February 25, 1998
TABLE OF CONTENTS Section Page 1. Purchase and Sale of Preferred Shares and Warrants...................................1 1.1 Sale and Issuance.............................................................1 1.2 Use of Proceeds From Investment...............................................1 1.3 Closing.......................................................................1 2. Representations and Warranties of the Company........................................2 2.1 Organization, Good Standing and Qualification.................................2 2.2 Capitalization................................................................2 2.3 Authority; Execution and Delivery; Requisite Consents, Nonviolation...........4 2.4 Subsidiaries..................................................................5 2.5 Financial Information.........................................................5 2.6 Certain Changes or Events.....................................................6 2.7 Tangible Personal Property....................................................7 2.8 Real Property.................................................................7 2.9 Contracts.....................................................................8 2.10 Intellectual Property.........................................................9 2.11 Insurance....................................................................11 2.12 Labor Union Activities; Employee Relations...................................11 2.13 ERISA........................................................................11 2.14 Litigation...................................................................12 2.15 Compliance with Laws; Permits................................................12 2.16 Taxes........................................................................12 2.17 Books and Records............................................................13 2.18 Environmental Matters........................................................13 2.19 Transactions with Affiliates.................................................14 2.20 Registration Rights..........................................................14 2.21 No Brokers or Finders........................................................15 2.22 Investment Company Act.......................................................15 2.23 Disclosure...................................................................15 2.24 Simultaneous Merger..........................................................15 2.25 Public Announcements.........................................................16 2.26 Proprietary Information and Employee Issues..................................16 2.27 Business Plan................................................................16 2.28 Real Property Holding Company................................................16 2.29 Substantial Customers and Suppliers..........................................16 2.30 Accounts Receivable..........................................................17 2.31 Small Business Matters.......................................................17 2.32 Exemption from Registration; Restrictions on Offer and Sale of Same or Similar Securities...................................................................17 2.33 Series B Shares..............................................................18 i 3. Representations, Warranties, and Covenants of the Investors.........................18 3.1 Organization.................................................................18 3.2 Authorization................................................................18 3.3 Offering Exemption...........................................................18 3.4 Knowledge and Experience; Ability to Bear Economic Risks.....................19 3.5 Limitations on Disposition...................................................19 3.6 No Intended Resale...........................................................19 3.7 Legends......................................................................20 3.8 Confidentiality..............................................................20 3.9 Public Announcements.........................................................21 4. Conditions of Investors' Obligations at Closing.....................................22 4.1 Representations and Warranties...............................................22 4.2 Performance..................................................................22 4.3 Stock Certificates, Etc......................................................22 4.4 No Material Adverse Change...................................................22 4.5 Consents.....................................................................22 4.6 No Litigation................................................................22 4.7 Opinion of Counsel...........................................................23 4.8 Compliance Certificate.......................................................23 4.9 Directors....................................................................23 4.10 Related Agreements...........................................................23 4.11 Proceedings and Documents....................................................23 4.12 Secretary's Certificate......................................................23 4.13 Qualification of Securities..................................................23 4.14 Filing of Restated Certificate...............................................24 4.15 Purchase By Other Investors..................................................24 4.16 Payment of Investor Expenses.................................................24 5. Conditions of the Company's Obligations at Closing..................................24 5.1 Representations and Warranties...............................................24 5.2 Payment of Purchase Price....................................................24 5.3 No Litigation................................................................24 5.4 Proceedings and Documents....................................................24 6. Certain Covenants...................................................................25 6.1 Financial and Business Information...........................................25 6.2 Exemption from Investment Company Act........................................27 6.3 Accounting and Reserves......................................................27 6.4 Rights to Purchase Additional Securities.....................................27 6.5 Confidentiality..............................................................29 6.6 Ordinary Course Obligations..................................................29 6.7 Taxes Relating to this Agreement.............................................30 6.8 Replacement of Instruments...................................................30 ii 6.9 Reincorporation in Delaware..................................................31 6.10 SBA Forms; Inspection........................................................31 6.11 Corporate Existence; Approvals...............................................31 6.12 Taxes........................................................................31 6.13 Insurance....................................................................31 6.14 Notice of Certain Events.....................................................32 6.15 Maintenance of Properties....................................................32 6.16 Reservation of Shares........................................................32 6.17 Venture Capital Operating Company Status.....................................32 6.18 Director and Officer Insurance...............................................32 6.19 Further Assurances...........................................................33 6.20 Use of Proceeds..............................................................33 6.21 Reports Under the Exchange Act...............................................33 6.22 Actions Requiring Written Consent of Investors...............................33 7. Miscellaneous................................................................36 7.1 Expenses.....................................................................36 7.2 Taxes........................................................................36 7.3 Replacement of Instruments...................................................36 7.4 Use of Investors' Names......................................................36 7.5 Indemnification..............................................................37 7.6 Right to Rely................................................................37 7.7 Survival.....................................................................37 7.8 Successors and Assigns.......................................................38 7.9 Entire Agreement; Amendment and Waiver.......................................38 7.10 Applicable Law...............................................................38 7.11 Notices......................................................................38 7.12 Brokerage....................................................................38 7.13 Severability.................................................................39 7.14 Descriptive Headings.........................................................39 7.15 Counterparts; Signatures by Facsimile........................................39 7.16 Understanding Among Investors................................................39 7.17 Further Assurances...........................................................39 7.18 Knowledge....................................................................39
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EXHIBIT LIST Exhibit A Restated Certificate of Incorporation Exhibit B 1 Form of Class A Warrant Exhibit B 2 Form of Class B Warrant Exhibit C Business Plan Exhibit D ByLaws of the Company Exhibit E Certificate of Incorporation of the Subsidiary Exhibit F ByLaws of the Subsidiary Exhibit G Shareholders' Agreement Exhibit H Registration Rights Agreement Exhibit I Opinion of Proskauer Rose LLP Exhibit J NonCompetition Agreement Exhibit K NonDisclosure and Developments Agreement Exhibit L SBA Certificate Exhibit M 1998 Stock Incentive Plan Exhibit N Other Financial Information SCHEDULE LIST Schedule 1 Schedule of Exceptions Schedule 2 Names of Shareholders and Holders of Options and/or Warrants, etc. Schedule 3 Directors
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Cross References to Selected Definitions Term Section Location Action ss. 2.14 Advercomm ss. 2.5(c) Agreement Prefatory Language Business Combination ss. 2.9(k) Business Plan ss. 1.2 Closing ss. 1.3 Code ss. 2.16 Common Shares ss. 1.1 Company Prefatory Language Company Documents ss. 2.3 Contracts ss. 2.9 Conversion Shares ss. 1.1 Environmental Laws ss. 2.18 ERISA ss. 2.13 Financial Statements ss. 2.5(a) GAAP ss. 2.5(a) Governmental Authority ss. 2.3 Indebtedness ss. 2.5(d) Intellectual Property ss. 2.10 Interim Financial Statements ss. 2.5(b) Investors Prefatory Language Laws ss. 2.2 Liens ss. 2.2 Merger ss. 2.24 New Securities ss. 6.4(b) Operating IP ss. 2.10 Option ss. 2.2 Order ss. 2.14 Other Financial Information ss. 2.5(c) Permits ss. 2.15 Person ss. 2.3 Petry ss. 2.5(c) Principal Owner ss. 2.9(d) Qualified Public Offering ss. 6.4(f) Registration Rights Agreement ss. 2.2 Related Agreements ss. 4.10 Required Holders ss. 6.22 Restated Certificate ss. 1.1 Returns ss. 2.16 Rule 144 ss. 3.5 SBA ss. 2.31 SBA Act ss. 2.31 SBA Regulation ss. 2.31 SBIC ss. 2.31 Scheduled Contracts ss. 2.9 Securities ss. 1.1
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Term Section Location Securities Act ss. 2.20 Series B Shares ss. 1.1 Shareholders' Agreement ss. 2.2 Shares ss. 1.1 Stock Incentive Plan ss. 6.22(b) Stock Incentives ss. 2.2 Subsidiary ss. 2.1 Taxes ss. 2.16 VCOC ss. 6.17 Warrants ss. 1.1
vi EXECUTION COPY SECURITIES PURCHASE AGREEMENT This Securities Purchase Agreement (this "Agreement") is made as of this 25th day of February, 1998 by and between Interactive Imaginations, Inc., a New York corporation (the "Company"), and each of the persons identified on the signature pages hereto as an "Investor" (such persons collectively, the "Investors"). THE PARTIES HEREBY AGREE AS FOLLOWS: 1. Purchase and Sale of Preferred Shares and Warrants. 1.1 Sale and Issuance. Subject to the terms and conditions of this Agreement, each Investor, severally and not jointly, agrees to purchase at the Closing (as hereinafter defined), and the Company agrees to sell and issue to each Investor, severally and not jointly, the number of Series B Convertible Voting Preferred Shares, par value $.01 per share (the "Series B Shares"), of the Company and the number of Class A Warrants and Class B Warrants set forth on the signature page hereto of such Investor, all at the aggregate purchase price set forth on such signature page. The Series B Shares shall have the powers, rights, preferences and privileges set forth in the Restated Certificate of Incorporation of the Company attached hereto as Exhibit A (the "Restated Certificate"). The Class A and Class B Warrants shall be in the forms of warrant attached hereto as Exhibit B-1 and B-2, respectively. The Series B Shares sold to the Investors pursuant to this Agreement are sometimes hereinafter referred to as the "Shares"; the Class A Warrants and Class B Warrants sold to the Investors pursuant to this Agreement are sometimes hereinafter referred to as the "Warrants"; the common shares, par value $0.01 per share, of the Company (the "Common Shares") issuable upon conversion of the Shares or exercise of the Warrants are sometimes hereinafter referred to as the "Conversion Shares". The Shares, the Warrants and the Conversion Shares are sometimes hereinafter collectively referred to as the "Securities". 1.2 Use of Proceeds From Investment. The proceeds from the sale of the Shares and the Warrants will be used to conduct the business of the Company in accordance with the approved business plan (the "Business Plan") attached hereto as Exhibit C. 1.3 Closing. The purchase and sale of the Securities shall take place at the offices of Proskauer Rose LLP, 1585 Broadway, New York, New York 10036, at 9:00 a.m., on February 25, 1998, or at such other time and place as the Company and the Investors purchasing a majority of the Securities mutually agree (which time and place are designated as the "Closing"). At the Closing, the Company shall deliver to each Investor a certificate representing the Shares to be purchased by such Investor, together with the Warrants to be purchased by such Investor, in each case registered in the name of such Investor as it appears on the signature pages hereto against delivery to the Company by such Investor of a wire transfer in the amount of the aggregate purchase price therefor. 2. Representations and Warranties of the Company. The Company (which, for purposes of this Article 2, includes 24/7 Media, Inc., a Delaware corporation (the "Subsidiary"), except where the context clearly indicates otherwise) and the Subsidiary (which, for the purposes of this Article 2, includes 24/7 Media, Inc., Petry Interactive, Inc., a Delaware corporation, and Advercomm, Inc., a Delaware corporation, including all of their respective assets and liabilities, except where the context clearly indicates otherwise) jointly and severally hereby represent and warrant to, and agree with the Investors except as set forth on the Schedule of Exceptions furnished to the Investors and attached hereto as Schedule 1, specifically identifying the relevant subsection hereof with respect to which an exception is being made, which exceptions shall be deemed to be representations and warranties as if made hereunder, as follows: 2.1 Organization, Good Standing and Qualification. The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of New York. The Subsidiary is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware. The Company and the Subsidiary each have all requisite power and authority to carry on their respective businesses as now conducted and as proposed to be conducted. The Company and the Subsidiary each are duly qualified to transact business and are in good standing in each jurisdiction in which the failure so to qualify can in the aggregate be eliminated without material cost or expense by the Company or the Subsidiary. The Subsidiary is a newly formed corporation which has not engaged in any business other than in connection with its organization and the transactions contemplated by the Agreement and Plan of Merger in connection with the Merger (as defined in Section 2.24). Annexed hereto as Exhibit D, Exhibit E and Exhibit F, respectively, are true and complete copies of the By-Laws of the Company, the Certificate of Incorporation of the Subsidiary, and the By-Laws of the Subsidiary, each as amended through the date hereof. 2.2 Capitalization. After giving effect to the transactions contemplated by this Agreement, including the Merger (as defined in Section 2.24), and immediately after the Closing, the capital stock of the Company, as authorized by the Restated Certificate, will consist of: (i) 100,000,000 Common Shares, of which 27,481,201 shares will be issued and outstanding, 10,060,002 shares will be reserved for issuance upon conversion of issued and outstanding Shares, 5,000,000 shares will be reserved for issuance upon exercise of issued and outstanding Class A Warrants, 5,000,000 shares will be reserved for issuance upon exercise of issued and outstanding Class B Warrants, 2,575,000 will be reserved for issuance upon exercise of issued and outstanding Class C Warrants, 142,421 will be reserved for issuance upon exercise of issued and outstanding unclassified warrants, 251,028 (subject to adjustment) will be reserved for issuance upon exercise of issued and outstanding convertible debentures, and 5,750,000 shares will be reserved for issuance to key employees, officers and directors of, and consultants to, the Company under stock incentives that have been granted or are available for grant by the Company pursuant to the Stock Incentive Plan (as defined in Section 6.22(b)) (collectively, the "Stock Incentives"); and (ii) 30,000,000 preferred shares, of which none are outstanding and of which 10,060,002 shares have been designated as Series B Shares, all of which are being issued to the Investors hereunder. The rights, 2 privileges and preferences of the Common Shares and Series B Shares are as stated in the Restated Certificate. Except for the Stock Incentives specified above, the conversion rights of issued and outstanding Series B Shares, the conversion rights of outstanding convertible debentures specified above, and the exercise rights of issued and outstanding Class A, Class B, Class C Warrants and unclassified warrants specified above, as of the Closing, the Company will not (i) have outstanding any capital stock or other securities convertible into or exchangeable for any shares of its capital stock and, except for the preemptive rights contained in this Agreement, no Person will have any right to subscribe for or to purchase (including conversion or preemptive rights), or any Options for the purchase of, or any agreements providing for the issuance (contingent or otherwise) of, any calls, commitments or other claims of any character relating to, any capital stock or any stock or securities convertible into or exchangeable for any capital stock of the Company; (ii) have any capital stock, equity interests or other securities reserved for issuance for any purpose; or (iii) be subject to any obligation (contingent or otherwise) to repurchase or otherwise acquire or retire any shares of its capital stock or any convertible securities, rights or options of the type described in the preceding clause (i). "Option" with respect to any Person means any security, right, subscription, warrant, option, "phantom" stock right or other Contract that gives the right directly or indirectly to (i) purchase or otherwise receive or be issued any shares of capital stock of such Person or any security of any kind convertible into or exchangeable or exercisable for any shares of capital stock of such Person or (ii) receive or exercise any benefits or rights similar to any rights enjoyed by or accruing to the holder of shares of capital stock of such Person, including any rights to participate in the equity or income of such Person or to participate in or direct the election of any directors or officers of such Person or the manner in which any shares of capital stock of such Person are voted. Neither this Agreement nor the transactions contemplated hereby or by the Merger will cause any anti-dilution adjustment or accelerated vesting of any Options. All issued and outstanding Common Shares have been duly and validly issued and subject to Section 630 of the New York Business Corporation Law, are fully paid and nonassessable and were issued in accordance with the registration or qualification provisions of the Securities Act and any applicable state securities laws or pursuant to valid exemptions therefrom. All of the Series B Shares and Conversion Shares, when issued as contemplated hereby, will be validly issued and, subject to Section 630 of the New York Business Corporation Law, fully paid and nonassessable and will be issued in accordance with the registration or qualification provisions of the Securities Act and any applicable state securities laws or pursuant to valid exemptions therefrom. The delivery of a certificate or certificates at the Closing representing the Shares and the Warrants in the manner provided in Section 1.3 will transfer to each Investor good and valid title to the Shares and the Warrants, respectively, free and clear of all liens, pledges, assessments, leases, security interests, claims, encumbrances, or other restrictions of any kind (collectively, "Liens"). To the best knowledge of the Company, there are no agreements among the Company's shareholders with respect to the voting or transfer of the Company's capital stock, other than the agreements relating to transfer contained in the Shareholders' Agreement in the form of Exhibit G attached hereto (the "Shareholders' Agreement"), and the Registration Rights Agreement in the form of Exhibit H attached hereto (the "Registration Rights Agreement"). Schedule 2 includes a complete and correct list of the name of each of the Company's investors and shareholders and the number of shares of capital stock (and class or series) owned by such Person, and the name of each holder of an outstanding Option and the number of Options to purchase capital stock owned by such holder and the exercise price at which, and the period during which, such Option(s) may be exercised and the vesting schedule thereof, if any. The authorized capital stock 3 of the Subsidiary consists of 1,000 common shares, par value $.01 per share, of which 100 are outstanding as of the date hereof. The Company owns, beneficially and of record, all of the issued and outstanding shares of capital stock of the Subsidiary, free and clear of all Liens. All of the issued and outstanding shares of capital stock of the Subsidiary have been duly and validly issued and are fully paid and nonassessable and were issued in accordance with the registration or qualification provisions of the Securities Act and any relevant state securities laws or pursuant to valid exemptions therefrom. There are no outstanding Options with respect to the Subsidiary. 2.3 Authority; Execution and Delivery; Requisite Consents, Nonviolation. The Company has, and as of the Closing will have, all requisite power and authority to execute, deliver and perform this Agreement, the Shareholders' Agreement, the Registration Rights Agreement, Restated Certificate, Warrants, Securities and each other document or instrument executed by it, or any of its officers, in connection herewith or therewith or pursuant hereto or thereto (this Agreement, together with all of the foregoing documents and instruments, are sometimes collectively referred to herein as the "Company Documents"), and to consummate the transactions contemplated hereby and thereby. The name of each officer and director of the Company and of the Subsidiary on the date hereof, and the position with the Company held by each, are listed on Part 2.3 of Schedule 1 hereto. The execution, delivery and performance of this Agreement and the other Company Documents and the consummation of the transactions contemplated hereby and thereby have been duly and validly authorized by all necessary action on the part of the Company and its shareholders. This Agreement and each of the other Company Documents that has been executed as of the date hereof is, and each of the Company Documents will be as of the Closing, duly and validly executed and delivered by the Company and constitute the legal, valid and binding obligation of the Company, enforceable against the Company in accordance with its terms, except as the enforceability thereof may be limited by bankruptcy, insolvency or other similar laws affecting the enforceability of creditors' rights in general or by general principles of equity. The execution, delivery and performance of this Agreement and the other Company Documents (including, without limitation, the Shareholders' Agreement, the Registration Rights Agreement, the Restated Certificate and the Warrants), the consummation by the Company of the transactions contemplated hereby and thereby (including, without limitation, the offer, sale and delivery by the Company of the Securities) will not (a) require the consent, license, permit, waiver, approval, authorization or other action of, by or with respect to, or registration, declaration or filing with, any court or governmental authority, department, commission, board, arbitrator, bureau, agency or instrumentality, or other political subdivision, domestic or foreign ("Governmental Authority") or any other individual, partnership, corporation, unincorporated organization or association, limited liability company, trust or other entity (collectively, a "Person"); (b) violate or conflict with any provision of the Restated Certificate, the Certificate of Incorporation or of the By-Laws of the Company or Subsidiary as in effect immediately prior to and immediately after the execution and delivery of this Agreement; or (c) constitute a default under (with or without notice or lapse of time or both), violate or conflict with, give rise to a right of termination, cancellation, acceleration or modification under or result in a loss of a material benefit under, any Law (as defined in Section 2.15 below), Scheduled Contract (as defined in Section 2.9 below), rights relating to Intellectual Property (as defined in Section 2.10 below), Permit (as defined in Section 2.15 below) or Order (as defined in Section 2.14 below) to which the Company or the Subsidiary is a party or by which the Company or its properties or the Subsidiary or its properties are bound or give to any Person any additional rights or entitlements to increased, 4 additional, accelerated or guaranteed payments under or result in creation or imposition of any Lien upon the Company or the Subsidiary or any of its respective assets and properties. 2.4 Subsidiaries. The Company does not, and prior to the Closing will not, own or control, directly or indirectly, any partnership interests, stock or other equity interests in any partnership, corporation or other entity or Person or any voting rights or right to control the policies and direction of any partnership, corporation or other entity, other than the Subsidiary. 2.5 Financial Information. (a) The Company has previously delivered to the Investors its historical audited balance sheets as at December 31, 1996, and the historical audited statements of income, shareholders' equity and cash flows for the year then ended (collectively, the "Financial Statements"). Such Financial Statements have been prepared from the books and records of the Company and present fairly the financial position and the results of operations and cash flows of the Company as at and for the periods indicated, in each case in conformity with generally accepted accounting principles ("GAAP") consistently applied (except as described in such statements or the notes thereto). (b) The Company has previously delivered to the Investors an historical unaudited balance sheet of the Company as at December 31, 1997 and an historical unaudited statement of income, shareholders' equity and cash flows for the twelve-month period then ended (the "Interim Financial Statements"). Such Interim Financial Statements have been prepared from the books and records of the Company and present fairly the financial position and the results of operations of the Company as at and for the period indicated, in each case in conformity with GAAP, subject to customary year or period end audit adjustments and accruals and the absence of notes thereto, (except as previously noted) consistently applied. (c) The Company has previously delivered to the Investors unaudited balance sheets as of December 31, 1997 and certain historical statements of operations regarding Petry Interactive, Inc. ("Petry") and Advercomm, Inc. ("Advercomm") (the "Other Financial Information"), attached hereto as Exhibit N. Such Other Financial Information has been prepared from the books and records of Petry and Advercomm, respectively, and present fairly the financial position and the results of operations of Petry and Advercomm in each case in accordance with GAAP, subject to customary year or period end adjustments and accruals and the absence of notes thereto, as at and for the periods indicated. (d) Except as disclosed in the Interim Financial Statements or Other Financial Information, neither the Company nor the Subsidiary has any liabilities or obligations, absolute or contingent, except (i) obligations and liabilities incurred in the ordinary course of business, consistent with past practice, since the date of the Interim Financial Statements or Other Financial Information, (ii) obligations which are not required to be reflected in the Financial Statements or such Interim Financial Statements and which would not be required under GAAP to 5 be included in the notes to such Financial Statements, which individually and in the aggregate are not material to the financial condition or operating results of the Company or the Subsidiary. Except as disclosed in the Interim Financial Statements or Other Financial Information, the Company is not a guarantor or indemnitor of any obligations of any Person (i) for borrowed money, (ii) evidenced by notes, bonds, debentures or similar instruments, (iii) for the deferred purchase price of goods or services (other than trade payables or accruals incurred in the ordinary course of business), (iv) under capital leases and (v) in the nature of guarantees of the obligations described in clauses (i) through (iv) ("Indebtedness") of any other Person. The Company and the Subsidiary maintain and will continue to maintain a standard system of accounting established and administered in accordance with GAAP. (e) No representation is made hereunder with respect to any forecasts, projections or forward looking information provided to the Investors in connection with the Financial Statements, the Interim Financial Statements, Other Financial Information or otherwise, except that the Company represents that any such forecasts, projections and forward looking information were prepared in good faith and that the Company reasonably believes there is a reasonable basis for such forecasts, projections and forward looking information. 2.6 Certain Changes or Events. Other than transactions entered into in connection with the Merger (as defined in Section 2.24), since December 31, 1996 the business of the Company has been operated only in the ordinary course, consistent with past practice, and in addition to, and not in limitation of the foregoing: (i) there has been no change in the Condition of the Company, except for changes in the ordinary course of business consistent with past practice which have not been, in the aggregate, materially adverse to the Company; (ii) there has been no revocation or change in any Contract or Permit or right to do business, and, to the best knowledge of the Company, no change of Laws which has resulted, or could reasonably be expected to result, in a material adverse change in the Condition of the Company; (iii) the Company has not authorized or made any distributions of, or declared or paid any dividends, upon or with respect to any of the capital stock of the Company or the Subsidiary, or other equity interests, nor has the Company redeemed, purchased or otherwise acquired, or issued or sold, any of its capital stock or other equity interests; (iv) the Company has not entered into any transaction with a value in excess of $50,000 or other material transaction, other than in the ordinary course of business and consistent with past practice; (v) the Company has not incurred any Indebtedness for borrowed money or made any loans or advances to any Person except for convertible debentures incurred and subsequently converted to Common Shares of the Company on or prior to the date hereof; (vi) there has been no waiver by the Company of a valuable right or of a material debt owed to it, including any right or Indebtedness with a value in excess of $50,000; (vii) the Company has not failed to satisfy or discharge any Lien (as defined in Section 2.7 below); (viii) there has not been any damage, destruction or loss, whether or not covered by insurance, materially and adversely affecting the assets, properties, financial condition, operating results, prospects or business of the Company (as such business is presently conducted and as it is proposed to be conducted); (ix) there has not been any material change in any compensation arrangement (including, without limitation, benefits) or agreement with any employee or consultant of the Company; (x) there has not been any sale, assignment or transfer of any patents, trademarks, copyrights, trade secrets or other intangible assets of the Company; (xi) there has not been any resignation or termination of employment of any key officer or employee or consultant of 6 the Company and the Company, to the best of its knowledge, does not know of the impending resignation or termination of employment of any such officer, employee or consultant; (xii) there has been no receipt of notice that there has been a loss of, or material order cancellation by, any major customer of the Company; (xiii) there has been no mortgage, pledge or transfer of a security interest in, or lien, created or suffered to exist by the Company with respect to any of its material properties or assets, except Liens for taxes not yet due or payable; (xiv) there have been no loans or guarantees made by the Company to or for the benefit of its employees, officers or directors, or any members of their immediate families, other than travel advances and other advances made in the ordinary course of its business consistent with past practice; (xv) any change in the accounting, pricing, inventory, credit, financial reporting or tax methods or procedures of the Company or Subsidiary or any other transaction involving or development affecting the Company or Subsidiary outside the ordinary course of business consistent with past practice; and (xvi) there has been no agreement or commitment by the Company to do or perform any of the acts described in this Section 2.6. 2.7 Tangible Personal Property. The Company and the Subsidiary, respectively, are in possession of and have good and marketable title to or has valid leasehold interests in or valid rights under Contract to use, all tangible personal property used in the conduct of its business, including all tangible personal property reflected on the Financial Statements for the period ended December 31, 1996, the Interim Financial Statements for the period ended December 31, 1997 and Other Financial Information for the period ended December 31, 1997 and tangible personal property acquired since each such date other than property disposed of since such date in the ordinary course of business consistent with past practice and the terms of this Agreement and the Company Documents. All such tangible personal property is free and clear of all Liens, and is adequate and suitable for the conduct by the Company and the Subsidiary, respectively, of the business presently conducted and presently proposed to be conducted by it, and is in good working order and condition, ordinary wear and tear excepted, and its use complies in all material respects with all applicable Laws. 2.8 Real Property. (a) Part 2.8 of Schedule 1 contains a true and correct list of (i) each parcel of real property leased by the Company or the Subsidiary (as lessor or lessee) and (ii) all Liens relating to or affecting any parcel of real property referred to in clause (i). (b) Neither the Company nor the Subsidiary owns any real property. (c) The Company and the Subsidiary have a valid and subsisting leasehold estate in and the right to quiet enjoyment of the real properties leased by them, respectively, for the full term of the lease thereof. Each lease referred to in clause (i) of paragraph (a) above is a legal, valid and binding agreement, enforceable in accordance with its terms, of the Company, of the Subsidiary and of each other Person that is a party thereto, and except as set forth in Part 2.8 of Schedule I hereto, there is no, and neither the Company nor the Subsidiary has received notice of any, default (or any condition or event which, after notice or lapse of time or both, would constitute a default) thereunder. Neither the Company nor the Subsidiary owes any brokerage commissions or finders fees with respect to any such leased space. 7 (d) The Company and the Subsidiary have delivered to the Investors prior to the execution of this Agreement true and complete copies of all leases (including any amendments and renewal letters). (e) Except as disclosed in Part 2.8 of Schedule 1 hereto, the improvements on the real property identified in Part 2.8 of Schedule 1 hereto are in good operating condition and in a state of good maintenance and repair, ordinary wear and tear excepted, are adequate and suitable for the purposes for which they are presently being used and, to the knowledge of the Company and the Subsidiary, there are no condemnation or appropriation proceedings pending or threatened against any of such real property or the improvements thereon. 2.9 Contracts. The Company and the Subsidiary are not a party to, nor is the Company or the Subsidiary or any of their respective assets or properties bound by, or subject to, any contracts, agreements, notes, instruments, franchises, leases, licenses, commitments, arrangements or understandings, written or oral (collectively, "Contracts") of the following types, except for those (the "Scheduled Contracts") listed in Part 2.9 of Schedule 1 hereto: (a) any Contracts pursuant to which the Company, the Subsidiary, or another party thereto, is obligated to pay in excess of fifty thousand dollars ($50,000); (b) any Contracts pursuant to which the Company or any Subsidiary acquired the right to use any Intellectual Property or information that is material to or necessary in the business of the Company, or pursuant to which the Company has granted to others the right to use, or which otherwise relates to, its Intellectual Property; (c) any Contracts (other than advances of expenses to employees in the ordinary course of business) involving Indebtedness, loans, loan agreements, debt securities, mortgages, deeds of trust, security agreements, suretyships or guarantees; (d) any Contracts between the Company or any Subsidiary, on the one hand, and any of its officers, directors, employees, stockholders or any direct or indirect Affiliates or Associates thereof (each, a "Principal Owner"), on the other; (e) any deferred compensation agreements, bonus, pension, profit sharing, stock option and incentive plans or arrangements, hospitalization, medical and insurance plans, agreements and policies, retirement and severance plans and other employee compensation policies and agreements affecting employees or consultants of the Company; (f) any Contracts with any labor union; (g) all partnership, joint venture, shareholders' or similar Contracts with any Person; 8 (h) all Contracts that limit or contain restrictions on the ability of the Company or any Subsidiary to declare or pay dividends, to make distributions in respect of or to issue or purchase, redeem or otherwise acquire any of its capital stock or require the Company or any Subsidiary to maintain specified financial ratios or levels of net worth or other indicia of financial condition; (i) any Contracts which restrict the Company or any Subsidiary from freely engaging in business, disclosing confidential or proprietary information, or competing anywhere; (j) any Contracts which otherwise are material to the Condition of the Company or any Subsidiary; (k) all Contracts related to (A) the future disposition or acquisition of any assets or properties other than dispositions or acquisitions in the ordinary course of business consistent with past practice and the provisions of this Agreement and the Company Documents, and (B) any (i) merger, consolidation or combination to which such Person is a party, (ii) any sale, dividend, split or other disposition of any capital stock or other equity interests of such Person, (iii) any tender offer (including without limitation a self-tender), exchange offer, recapitalization, liquidation, dissolution or similar transaction, (iv) any sale, dividend or other disposition of all or a material portion of the assets and properties of such Person, (v) any sale, transfer or other disposition of any securities of the Company by any Stockholder or (vi) the entering into of any agreement or understanding, or the granting of any rights or options, with respect to any of the foregoing ("Business Combination"). True, correct and complete copies of all Scheduled Contracts have been made available to the Investors. All of the Scheduled Contracts are in full force and effect and constitute legal, valid and binding obligations of the Company or the Subsidiary and, to the best knowledge of the Company or the Subsidiary, the other parties thereto; to the best of the knowledge of the Company and the Subsidiary, no circumstances exist which would give rise to an Action (as defined in Section 2.14) against or by the Company or the Subsidiary in connection with any Scheduled Contract or any default thereunder; and the validity, effectiveness and continuation of all Scheduled Contracts will not be adversely affected by the transactions contemplated by this Agreement or require third party consents or notices. 2.10 Intellectual Property. (i) Set forth on Part 2.10 of Schedule 1 hereto is a true, correct and complete list of all patents, patent applications, trademarks, service marks, tradenames, trademark registrations, service mark registrations, copyrights and licenses trade names, and any applications or registrations for any of the foregoing (collectively, the "Intellectual Property") of any kind in which the Company has an interest or which is otherwise used in, or relates to the business of, the Company. Part 2.10 of Schedule 1 hereto contains a true, correct and complete list of all material licenses or agreements (other than the Company's standard form of web site affiliate agreements) relating to the rights of the Company to any 9 of the Operating IP (defined below) or any trade secret material of the Company (the "Intellectual Property Licenses"). (ii) With respect to any Intellectual Property, brand name, computer software or program, technology, know-how or process or copyright (collectively (including without limitation the Intellectual Property), the "Operating IP") or trade secret that is used in or that relates to its business, the Company owns or has the exclusive right to use such Operating IP or trade secret in its business free and clear of all Liens. The Company owns or has the exclusive right to use all Operating IP and trade secrets that are necessary to its business as now conducted or proposed to be conducted. (iii) Each of the Intellectual Property Licenses constitutes a legal, valid, binding and enforceable obligation in accordance with its terms against the Company, and, to the best knowledge of the Company, each other Person party thereto, and to the best knowledge of the Company is in full force and effect. The Company has performed all obligations required to have been performed by it under each of the Intellectual Property Licenses to which it is a party. Neither the Company nor, to the best knowledge of the Company, any other party thereto is in default thereunder, nor, to the best knowledge of the Company, is there any event that with notice or lapse of time, or both, would constitute a default thereunder. The Company has not received any notice that any other party to any of the Intellectual Property Licenses intends to cancel, terminate or refuse to renew the same or to exercise or decline to exercise any option or other right thereunder (other than in the ordinary course of business). No licenses, sublicenses, covenants or agreements have been granted or entered into by the Company in respect of any of the Operating IP or any trade secret of the Company, except the Intellectual Property Licenses. No director, officer, shareholder, employee or other Affiliate of the Company owns, directly or indirectly, in whole or in part, any of the Operating IP or any trade secret used by or relating to the Company. None of the officers, employees, consultants, distributors, agents, representatives or advisors of the Company have entered into any agreement relating to the Company's business regarding know-how, trade secrets, assignment of rights in inventions, or prohibition or restriction of competition or solicitation of customers, or any other similar restrictive agreement or covenant, whether written or oral, with any Person other than the Company. There are no restrictions on the direct or indirect transfer of any Intellectual Property or license to use the Intellectual Property, or any interest therein, held by the Company or the Subsidiary of such Intellectual Property. (iv) The consummation of the transactions contemplated hereby will not alter or impair the rights of the Company to any of the Operating IP, to any trade secret material to the Company, or under any of the Intellectual Property Licenses. (v) No claim with respect to the Operating IP, any trade secret or any Intellectual Property License is currently pending or has been asserted or overtly threatened by any Person, nor does the Company know of any grounds for any claim, (A) to the effect that any operation or activity of the Company presently occurring or contemplated infringes or misappropriates any United States or foreign copyright, patent, trademark, service mark 10 or trade secret; (B) to the effect that any other Person infringes on the Operating IP or misappropriates any trade secret or know-how or other proprietary rights of the Company; (C) challenging the ownership, validity or effectiveness of any of the Operating IP or any trade secret of the Company; or (D) challenging the license of the Company to, or other legally enforceable right under, any Operating IP or the Intellectual Property Licenses. (vi) The Company is not aware of any presently existing United States or foreign patents or any patent applications which, if issued as patents, would be infringed by any activity contemplated by the Company. 2.11 Insurance. The Company has in full force and effect fire and casualty insurance policies, with extended coverage, products liability insurance, general liability insurance, errors and omissions insurance, and directors' and officers' insurance in amounts customary for companies similarly situated. None of such insurance coverage will terminate or lapse by reason of this Agreement or the transactions contemplated hereby. Each insurance policy is valid and binding and in full force and effect, no premiums due thereunder have not been paid and neither the Company, any Subsidiary nor the Person to whom such policy has been issued has received any notice of cancellation or termination in respect of any such policy or is in default thereunder. Such insurance policies are placed with financially sound and reputable insurers and, in light of the respective business, operations and assets and properties of the Company and the Subsidiary, are in amounts and have coverages that are reasonable and customary for Persons engaged in such businesses and operations and having such assets and properties. Neither the Company nor the Person to whom such policy has been issued has received notice that any insurer under any policy referred to in this Section is denying liability with respect to a claim thereunder or defending under a reservation of rights clause. 2.12 Labor Union Activities; Employee Relations. No employee of the Company is represented by any labor union or covered by any collective bargaining agreement with the Company; nor, to the best knowledge of the Company, has any labor union sought to represent any employee of the Company. There is no strike or other labor dispute involving the Company pending, or to the best knowledge of the Company, threatened. To the best knowledge of the Company, no officer or key employee intends to terminate his employment with the Company. To the best knowledge of the Company, no officer or key employee of the Company is a party to or bound by any Contract, or subject to any restrictions (including, without limitation, any non-competition restriction), which would restrict the right of such person to participate in the affairs of the Company. The Company has complied in all material respects with all applicable Laws relating to the employment of labor, including without limitation, those relating to wages, hours and collective bargaining. No unfair labor practice complaint or sex or age discrimination claim had been brought against the Company before the National Labor Relations Board or any other Governmental Authority. 2.13 ERISA. There are no employee benefit plans (as defined in Section 3(3) of the Employee Retirement Income Security Act of 1974 ("ERISA")) covering former or current employees of the Company, or under which the Company has any obligation or liability. The Company has not incurred any liability under Title IV of ERISA, including any liability to the 11 Pension Benefit Guaranty Corporation. Part 2.13 of Schedule 1 lists all material plans, contracts, bonus and commission arrangements, profit-sharing, savings, stock option plans, insurance, deferred compensation, or other similar fringe or employee benefits covering former or current employees of the Company or under which the Company has any obligation or liability (each, a "Benefit Arrangement"). The Benefit Arrangements are and have been administered in substantial compliance with their terms and with the requirements of applicable law. 2.14 Litigation. There is no action, suit, proceeding, investigation, audit, arbitration or governmental approval process (collectively, "Action") pending or, to the best knowledge of the Company, threatened against, relating to or affecting the Company or any of the properties or assets of the Company (including, without limitation, any of its Permits), nor, to the best knowledge of the Company, is there any basis for any such Action. Neither the Company nor any of its assets or properties is subject to any order, judgment, writ, injunction, decree, ruling or decision (collectively, an "Order") of any Governmental Authority. There is no Action by the Company currently pending or which the Company intends to initiate. 2.15 Compliance with Laws; Permits. The Company has not violated or failed to comply with, in any material respect, any statute, law, ordinance, rule, regulation or policy of any Governmental Authority (collectively, "Laws") to which it or any of its properties or assets is subject. The Company has all permits, licenses, orders, certificates, authorizations, registrations, franchises, and approvals of any Governmental Authority (collectively, the "Permits") that are material to the conduct of its business as presently conducted and as proposed to be conducted, including without limitation, those required by Environmental Laws; all such Permits are, and as of the Closing will be, valid, binding and in full force and effect; no violations or notices of failure to comply have been issued or recorded in respect of any such Permits. The Company is in compliance in all material respects with the terms and conditions of all such Permits. All applications, reports, notices and other documents required to be filed by the Company with all Governmental Authorities have been timely filed and are complete and correct in all material respects as filed or as amended prior to the date hereof. The Company and the Subsidiary have not violated or failed to comply with their certificates of incorporation or by-laws. 2.16 Taxes. All federal, state, city, county, local and foreign income, franchise, sales, use and value added tax returns and reports, and all other material tax returns and reports required to be filed by the Company in those or in any other jurisdiction (collectively, "Returns") have been timely filed. All such Returns are true, correct and complete in all material respects. All taxes, assessments, fees, interest, penalties and other charges with respect thereto (collectively, "Taxes") due or claimed to be due from the Company have been paid except to the extent reserved against on the Interim Financial Statements or the Other Financial Information. No income tax return of the Company has been audited by the applicable Governmental Authority, and there are in effect no waivers of the applicable statute of limitations for Taxes in any jurisdiction for the Company for any period. The provision for taxes of the Company as shown in the Interim Financial Statements and the provision for taxes for Petry and Advercomm as shown in the Other Financial Information are adequate for taxes due or accrued as of the date thereof. Each of the Company, Petry, Advercomm and the Subsidiary has not elected pursuant to the Internal Revenue Code of 1986, as amended (the "Code"), to be treated as a Subchapter S corporation or a collapsible 12 corporation pursuant to Section 1362(a) or Section 341(f) of the Code, nor have they made any other elections pursuant to the Code (other than elections that relate solely to methods of accounting, depreciation or amortization) that would have a material effect on the Company, Petry, Advercomm or the Subsidiary, their financial condition, their business as presently conducted or proposed to be conducted or any of their properties or material assets. The Company, Petry, Advercomm and the Subsidiary have never had any tax deficiency proposed or assessed against it and has not executed any waiver of any statute of limitations on the assessment or collection of any tax or governmental charge. Since the date of the Interim Statements, the Company has made adequate provisions on its books of account for, and since the date of the Other Financial Information, Petry, Advercomm and the Subsidiary have made adequate provisions on their books of account for, all taxes, assessments and governmental charges with respect to its business, properties and operations for such period. The Company, Petry, Advercomm and the Subsidiary have withheld or collected from each payment made to each of its employees, the amount of all taxes (including, but not limited to, federal income taxes, Federal Insurance Contribution Act taxes and Federal Unemployment Tax Act taxes) required to be withheld or collected therefrom, and has paid the same to the proper tax receiving officers or authorized depositories. 2.17 Books and Records. The books of account, ledgers and records of the Company as made available to the Investors prior to the execution of this Agreement are maintained in accordance with sound business practices and accurately and completely reflect in all material respects all information relating to its business; the nature, acquisition, maintenance, location and collection of its assets; and the nature of all transactions giving rise to its obligations or accounts receivable. The minutes and minute books of the Company provided to the Investors prior to the date hereof constitute a true, complete and correct copy of the entire minutes and minute books of the Company and contain a true and complete record of all actions taken at all meetings and by all written consents in lieu of meetings of stockholders, the boards of directors and committees of the board of directors of the Company and the Subsidiary. Neither the Company nor any Subsidiary has any of its books and records recorded, stored, maintained or operated or otherwise wholly or partly dependent upon or held by any means which are not under the exclusive ownership and direct control of the Company or the Subsidiary. 2.18 Environmental Matters. The business, assets and properties of the Company are and have been operated and maintained in compliance with all applicable federal, state, city, county and local environmental protection laws and regulations and occupational health and safety laws and regulations (collectively, the "Environmental Laws"). No event has occurred which, with or without the passage of time or the giving of notice, or both, would constitute a non-compliance by the Company with, or a violation by the Company of, the Environmental Laws. Neither the Company nor any of its predecessor companies has caused or permitted to exist, as a result of an intentional or unintentional act or omission, a disposal, discharge or release of solid wastes, pollutants or hazardous substances, on or from any site which currently is or formerly was owned, leased, occupied or used by the Company or any predecessor company, except where such disposal, discharge or release was in compliance with the Environmental Laws. No material expenditures are or will be necessary for the Company to comply with any such existing Environmental Laws. No Order has been issued, no claim of any kind under any Environmental Law has been filed, no penalty has been assessed and no investigation or review is pending or, to the knowledge of the Company 13 or the Subsidiary, threatened by any Governmental Authority with respect to any generation, treatment, storage, recycling, transportation, discharge, disposal or release of any hazardous material (as the same is or may be defined under any Environmental Law) generated by the Company or any Subsidiary, and to the knowledge of the Company or the Subsidiary, there are no facts or circumstances in existence which could reasonably be expected to form the basis for any such Order, or claim of any kind under any Environmental Law, penalty or investigation. Neither the Company nor any Subsidiary nor any prior owner or lessee of any property now or previously owned or leased by either the Company or any Subsidiary has transported or arranged for the transportation of any hazardous material (as the same is or may be defined under any Environmental Law) to any location that is (i) listed on the NPL under CERCLA, (ii) listed for possible inclusion on the NPL by the Environmental Protection Agency in CERCLIS or on any similar state or local list or (iii) the subject of enforcement actions by federal, state or local Governmental Authorities that may lead to claims of any kind under any Environmental Law against the Company or any Subsidiary. No hazardous material (as the same is or may be defined under any Environmental Law) generated by the Company or any Subsidiary or any prior owner or lessee of any property now or previously owned or leased by either the Company or any Subsidiary has been recycled, treated, stored, disposed of or released by the Company or any Subsidiary at any location. There have been no environmental investigations, studies, audits, tests, reviews or other analyses conducted by, or that are in the possession of, the Company or any Subsidiary in relation to any site or facility now or previously owned, operated or leased by the Company or any Subsidiary which have not been delivered to the Investors prior to the execution of this Agreement. The Company and the Subsidiary have obtained all Licenses which are required of its respective business, operations or assets and properties under applicable Environmental Laws. 2.19 Transactions with Affiliates. The Company has not had any direct or indirect dealings with any Principal Owner of the Company or with any of his Affiliates, associates (as such term is defined in Rule 12b-2 under the Securities Exchange Act of 1934, as amended) or relatives (or Affiliates thereof) nor does either the Company nor the Subsidiary beneficially own, directly or indirectly, any investment assets of any such current or former Principal Owner of either the Company or the Subsidiary or any of their respective Affiliates, associates or relatives (or Affiliates thereof). The Company does not have any obligation to or claim against any Principal Owner of the Company, or any of his or its Affiliates, associates or relatives, and no such Person has any obligation to or claim against the Company. All products, services or benefits provided to the Company by any such Person, or provided by the Company to any such Person, are set forth on Part 2.19 of Schedule 1 and are provided at a charge equal to the fair market value of such products, services or benefits. To the best knowledge of the Company, no Principal Owner of the Company, nor any of its Affiliates, associates or relatives, has any direct or indirect interest of any kind in any business or entity which is competitive with the Company or with which the Company has a business relationship. 2.20 Registration Rights. Except as provided in the Registration Rights Agree ment, no Person has, and as of the Closing no Person shall have, demand, "piggy-back," or other rights to cause the Company to file any registration statement under the Securities Act of 1933, as amended (the "Securities Act") relating to any securities of the Company. 14 2.21 No Brokers or Finders. Neither the Company nor the Subsidiary nor any of their respective Affiliates (nor any investment banker, financial advisor, attorney, accountant or other Person retained by or acting for or on behalf of the Company or the Subsidiary or any such Affiliate) (i) has entered into any agreement that conflicts with any of the transactions contemplated by this Agreement or any of the Company Documents, or (ii) has entered into any agreement or had any discussions with any third party regarding any transaction involving the Company or the Subsidiary which could result in any Investor or its general partner or any limited partner or any officer, director, manager, employee, agent or Affiliate of any of them being subject to any claim for liability to said third party as a result of entering into this Agreement or the Company Documents or consummating the transactions contemplated hereby or thereby. No agent, broker, finder, investment banker, financial advisor or other similar Person will be entitled to any fee, commission or other compensation in connection with any of the transactions contemplated by this Agreement or the Company Documents on the basis of any act or statement made or alleged to have been made by the Company or the Subsidiary, any of their respective Affiliates, or any investment banker, financial advisor, attorney, accountant or other Person retained by or acting for or on behalf of the Company or the Subsidiary or any such Affiliate. 2.22 Investment Company Act. The Company is not an "investment company" nor is the Company directly or indirectly controlled by or acting on behalf of any Person which is an "investment company" within the meaning of the Investment Company Act of 1940, as amended. 2.23 Disclosure. In connection with the purchase of the Securities by the Investors as contemplated hereby, the Company has disclosed to the Investors all material facts and information known to the Company concerning the Company, its Condition and the Securities, and in this Agreement or otherwise has not made any untrue statement of a material fact or omitted to state any material fact necessary in order to make the statements contained herein or in any other Company Documents not misleading. 2.24 Simultaneous Merger. Immediately prior to the Closing each of Petry and Advercomm were merged with and into the Subsidiary (the "Merger"). Upon consummation of the Merger, each shareholder of Petry and Advercomm received Common Shares upon surrender of all shares of Petry and Advercomm capital stock held by such shareholder. All agreements between Petry and Advercomm and/or any of the shareholders of Petry and Advercomm have been terminated and are of no further force or effect. All representations and warranties in this Article 2 give effect to the consummation of the Merger. All third party and Governmental Authority consents, notices and filings needed to effectuate the Merger or prevent any breach (with or without notice, lapse of time or both) have been obtained or made and are in full force and effect. The representations and warranties of the Company, the Subsidiary, Petry and Advercomm set forth in the Agreement and Plan of Merger dated February 2, 1998, together with the Schedules of Exceptions thereto, are incorporated herein by reference, shall be deemed to be representations and warranties to the Investors hereunder and shall survive the Merger and Closing hereunder, without giving effect to any provisions limiting or terminating survival thereunder. 15 2.25 Public Announcements. Except as otherwise required by law or by the rules of (or any agreement of the parties or their affiliates with) any stock exchange, the Company agrees that there will prior to the Closing be no press releases or other statements with respect to this Agreement or the transactions contemplated hereby and that it will consult with the Investors before issuing any press release or otherwise making any public statement with respect to this Agreement and the transactions contemplated hereby and that neither the Company nor the Investors shall issue any such press release or make any such public statement prior to such consultation. 2.26 Proprietary Information and Employee Issues. The Company, after reasonable investigation, is not aware that any of its employees, officers or consultants are in violation of the form of Non-Disclosure and Developments Agreement in the form attached hereto as Exhibit K, and the Company will use its best efforts to prevent any such violation. The Company is not aware that any of its employees is obligated under any Contract (including licenses, covenants or commitments of any nature) or other agreement, or subject to any judgment, decree or Order of any court or Governmental Authority, that would interfere with the use of his or her best efforts to promote the interests of the Company or that would conflict with the Company's business as proposed to be conducted. Neither the execution nor delivery of the Company Documents, nor the carrying on of the Company business by the employees or consultants to the Company or the Subsidiary, nor the conduct of the Company's or the Subsidiary's business as proposed, will, to the best of the Company's knowledge, conflict with or result in a breach of the terms, conditions or provisions of, or constitute a default under, any Contract, covenant or instrument under which any of such employees or consultants is now obligated. The Company does not believe it is or will be necessary for it or the Subsidiary to utilize any inventions of any of its or the Subsidiary's employees or consultants (or people it or the Subsidiary currently intends to hire or engage) made prior to their employment by the Company or the Subsidiary. 2.27 Business Plan. The Business Plan has been prepared in good faith by the Company and does not contain any untrue statement of a material fact nor does it omit to state a material fact necessary to make the statements made therein not misleading, except that with respect to projections contained in the Business Plan, the Company represents only that such projections were prepared in good faith and that the Company reasonably believes there is a reasonable basis for such projections. 2.28 Real Property Holding Company. The Company and the Subsidiary are not real property holding companies within the meaning of Section 897 of the Code. 2.29 Substantial Customers. Part 2.29(a) of Schedule 1 lists the fifteen (15) largest customers of the Company and the Subsidiary on the basis of revenues for goods sold or services provided for the most recent fiscal year. Except as disclosed in Part 2.29(b) of Schedule 1, no such customer or supplier has ceased or materially reduced its purchases from or sales or provision of services to the Company and the Subsidiary since October 1, 1997 or, to the knowledge of the Company and the Subsidiary, has threatened to cease or materially reduce such purchases or sales or provision of services after the date hereof. Except as disclosed in Part 2.29(c) of Schedule 1 to the knowledge of the Company and the Subsidiary, no such customer or supplier is threatened with bankruptcy or insolvency. 16 2.30 Accounts Receivable. Except as set forth in Part 2.30 of Schedule 1, the accounts and notes receivable of the Company and the Subsidiary reflected on the balance sheet included in the Financial Statements for the period ended December 31, 1996, the Interim Financial Statements, and the Other Financial Information, and all accounts and notes receivable arising subsequent to December 31, 1996, (i) arose from bona fide sales transactions in the ordinary course of business consistent with past practice and are payable on ordinary trade terms, (ii) are legal, valid and binding obligations of the respective debtors enforceable in accordance with their respective terms, (iii) are not subject to any valid set-off or counterclaim, (iv) do not represent obligations for goods sold on consignment, on approval or on a sale-or-return basis or subject to any other repurchase or return arrangement, (v) are collectible in the ordinary course of business consistent with past practice in the aggregate recorded amounts thereof, net of any applicable reserve reflected in the balance sheet included in Financial Statements for the period ended December 31, 1996, the Interim Financial Statements and the Other Financial Information, and (vi) are not the subject of any Actions or Proceedings brought by or on behalf of the Company or the Subsidiary. Part 2.30 of Schedule 1 sets forth a description of any security arrangements and collateral securing the repayment or other satisfaction of receivables of the Company and the Subsidiary. All steps necessary to render all such security arrangements legal, valid, binding and enforceable, and to give and maintain for the Company and the Subsidiary a perfected security interest in the related collateral, have been taken. 2.31 Small Business Matters. The Company and the Subsidiary acknowledge that they are aware that Prospect Street NYC Discovery Fund, L.P. is a Federal Licensee under the Small Business Act of 1953, as amended, and the Small Business Investment Act of 1958, as amended (collectively, the "SBA Act"). The Company, together with their respective "affiliates" (as that term is defined in 13 CFR, ss.121.103, such term to have such meaning throughout this section), is a "Small Business" within the meaning of the rules and regulations of the U.S. Small Business Administration (the "SBA") promulgated under the SBA Act (13 CFR 107 et seq.; and 13 CFR 121 et seq., collectively the "SBA Regulations"), including 13 CFR ss.121.301. The information regarding the Company and their respective affiliates set forth in SBA Form 480, Form 652 and Section A of Form 1031 is accurate and complete. Copies of such forms shall have been completed by the Company and delivered to Prospect Street NYC Discovery Fund, L.P. at the Closing. The Company and the Subsidiary do not presently engage in, and shall not hereafter engage in, any activities for which a Small Business Investment Company licensed by the SBA under Section 301(c) of the Small Business Investment Act of 1958, as amended (an "SBIC") is prohibited from providing funds by SBA Regulations, including 13 CFR ss.107.720. The Company and the Subsidiary have not received any "Financing" (as defined in the SBA Regulations) from any SBIC. 2.32 Exemption from Registration; Restrictions on Offer and Sale of Same or Similar Securities. Assuming the representations and warranties of the Investors set forth in Sections 3.3, 3.4, and 3.6 hereof are true and correct in all material respects, the offer and sale to the Investors of the Securities is exempt from the registration requirements of the Securities Act. Neither the Company nor the Subsidiary nor any Person authorized to act on behalf of the Company or the Subsidiary has, in connection with the offer and sale of the Securities engaged in (A) any form of general solicitation or general advertising (as those terms are used within the meaning of Rule 501(c) under the Securities Act), (B) any action involving a public offering within the meaning 17 of section 4(2) of the Securities Act, or (C) any action that would require the registration under the Securities Act of the offering and sale of the Securities pursuant to this Agreement and the Company Documents or that would violate applicable state securities or "blue sky" laws. Neither the Company nor the Subsidiary has made and will not prior to the Closing make, directly or indirectly, any offer or sale of the Securities or of securities of the same or a similar class as the Securities if as a result thereof the Securities could fail to be entitled to exemption from the registration requirements of the Securities Act. As used herein, the terms "offer" and "sale" have the meanings specified in Section 2(3) of the Securities Act. 2.33 Series B Shares. The Series B Shares shall have the powers, rights, preferences and privileges set forth in the Restated Certificate. 3. Representations, Warranties, and Covenants of the Investors. Each Investor, severally and not jointly, hereby represents and warrants, in each case with respect to itself and not with respect to any other Investor, to the Company as follows: 3.1 Organization. If such Investor is a legal entity, such Investor is, and as of the Closing will be, duly organized, validly existing and in good standing under the laws of its jurisdiction of organization. 3.2 Authorization. Such Investor has, and as of the Closing will have, all requisite power and authority to execute, deliver and perform this Agreement, the Shareholders' Agreement and the Registration Rights Agreement and to consummate the transactions of such Investor contemplated hereby and thereby. The execution, delivery and performance of this Agreement, the Shareholders' Agreement and the Registration Rights Agreement, and the consummation by such Investor of the transactions contemplated hereby and thereby, have been duly and validly authorized by all necessary action on the part of such Investor. This Agreement, the Shareholders' Agreement and the Registration Rights Agreement have been duly executed and delivered by such Investor and constitutes its legal, valid and binding obligation, enforceable against such Investor in accordance with its terms, except as the enforceability thereof may be limited by bankruptcy, insolvency or other similar laws affecting the enforceability of creditors' rights in general or by general principles of equity. 3.3 Offering Exemption. Such Investor understands that the Securities of the Company being purchased hereunder have not been registered under the Securities Act, nor qualified under any foreign or state securities laws, and that they are being offered and sold pursuant to an exemption from such registration and qualification based in part upon the representations of such Investor contained herein. 3.4 Knowledge and Experience; Ability to Bear Economic Risks. Such Investor has such knowledge and experience in financial and business matters such that it is capable of evaluating the merits and risks of the investment contemplated by this Agreement and such Investor is able to bear the economic risk of its investment in the Company (including a complete loss of its investment). Such Investor represents it is an "accredited investor" as that term is defined in Regulation D promulgated under the Securities Act. During negotiation of the transactions 18 contemplated herein, such Investor and its representative have been afforded full and free access to corporate books, financial statements, records, contracts, documents and other information concerning the Company and have been afforded the opportunity to ask questions of the Company's officers and directors concerning the Company's business, operations, financial condition, assets and liabilities and other relevant matters as they have deemed necessary or desirable and each Investor believes that it has been provided with all such information as has been requested. The foregoing does not limit or modify the representations or warranties made by the Company in Article 2 hereof or the right of the Investors to rely thereon. 3.5 Limitations on Disposition. Such Investor recognizes that no public market exists for the Securities of the Company to be sold hereunder, and no representation has been made to such Investor that any such public market will exist in the future. Such Investor understands that it must bear the economic risk of this investment indefinitely unless the Company's Securities are registered pursuant to the Securities Act or an exemption from such registration is available, and unless the disposition of such Securities is qualified under applicable state or foreign securities laws or an exemption from such qualification is available, and that, except as provided in this Agreement or the Registration Rights Agreement, the Company has no obligation or present intention of so registering the Securities. Such Investor understands that there is no assurance that any exemption from the Securities Act will be available, or, if available, that such exemption will allow it to dispose of or otherwise transfer any or all of its Securities, in the amounts or at the times any such Investor might desire. Such Investor understands that at the present time Rule 144 (other than Rule 144(k)) promulgated under the Securities Act by the Securities and Exchange Commission ("Rule 144") is not applicable to sales of any such Securities because such Securities are not registered under Section 12 of the Exchange Act, and there is not publicly available the information concerning the Company specified in Rule 144. Such Investor acknowledges that the Company is not presently under any obligation to register under Section 12 of the Exchange Act or to make publicly available the information specified in Rule 144 and that it may never be required to do so, except in each case to the extent provided herein or in the Registration Rights Agreement. 3.6 No Intended Resale. Such Investor is acquiring the Securities of the Company purchased hereunder for its own account for investment and not with a view towards the resale, transfer or distribution thereof, nor with any present intention of distributing such Securities, in each case in violation of the Securities Act. Such Investor has not agreed to give any Person any interest or right in the Securities. The Securities are being acquired by such Investor for investment for its own account and not with a view to the resale or distribution thereof in violation of applicable securities laws. 3.7 Legends. (a) Such Investor understands that the certificates evidencing the Securities will bear the following legends: "THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR ANY STATE SECURITIES LAWS AND NEITHER SUCH 19 SECURITIES NOR ANY INTEREST THEREIN MAY BE TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM UNDER SUCH ACT OR SUCH LAWS AND THE RULES AND REGULATIONS THEREUNDER." "TRANSFER OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE IS RESTRICTED BY AN AGREEMENT, DATED FEBRUARY 25, 1998, A COPY OF WHICH IS ON FILE AT THE OFFICE OF THE CORPORATION. ANY PURPORTED TRANSFER IN VIOLATION OF THIS AGREEMENT IS VOID AND WILL NOT BE RECOGNIZED BY THE CORPORATION OR ITS TRANSFER AGENT." (b) The Securities shall not be required to bear such legends if an opinion of counsel reasonably satisfactory to the Company is delivered to the Company to the effect that neither the legends nor the restrictions on transfer contained in this Agreement are required to insure compliance with the Act. Whenever, pursuant to the preceding sentence, any certificate for any of the Securities is no longer required to bear the foregoing legend, the Company may, and if requested by the holder thereof, shall, issue to the holder, at the Company's expense, a new certificate not bearing the foregoing legends. (c) Any and all Common Shares issued prior to January 31, 1999 or which the Company is obligated to issue as a result of events occurring prior to such date, in each case upon conversion of Series B Shares as a result of accrued dividends with respect to such Series B Shares shall be cancelled and cease to exist without further action by the Company or any other person upon the closing of a Qualified Public Offering (as defined in Section 6.4(f)) prior to January 31, 1999, and shall bear a legend to such effect. 3.8 Confidentiality. Such Investor agrees to maintain, and to cause its agents and representatives to maintain, procedures reasonably designed to preserve the confidentiality of the terms and conditions of this Agreement and the Related Agreements (as defined in 4.10 below) and all documents or information executed and/or delivered in connection with the transactions contemplated by this Agreement and the Related Agreements (whether furnished before, on or after the date hereof) and to use such information and documents only in connection with evaluating and/or monitoring the Investors' investment in the Company. The provisions of this subsection shall not apply to information or to particular conditions or terms of the above referenced documents (i) if the party seeking to make such disclosure shall have obtained the prior written consent of the other party to the disclosure of such information, conditions or terms, (ii) that are required to be disclosed during the course of any litigation or arbitration which may be brought by any party related to the provisions of any of the above referenced documents, (iii) that are or become generally available to the public other than as a result of actions taken by the party seeking to make such disclosure or its agents and representatives in violation of this Agreement, (iv) that are required to be disclosed pursuant to and in accordance with any law, rule or regulation applicable to the party seeking to make such disclosure, (v) if such information becomes available to the Investor from another source which the Investor reasonably believes is entitled to disclose it, (vi) if such information was known by Investor on a non-confidential basis prior to disclosure by the Company or one of its 20 representatives, (vii) that are disclosed to the Investors' directors, officers, employees and agents, and representatives of the Investors' advisors who need to know the information for the purpose of evaluating a possible transaction and who agree to keep the information confidential, (viii) that are reasonably necessary to be disclosed in connection with any transfer of securities or (ix) in connection with a disclosure to any shareholder or any direct or indirect officers, directors, employees, members, managers, partners, Affiliates or associates of such Investor. Notwithstanding the foregoing, if a party is requested or required (by oral questions, interrogatories, requests for information or document subpoena, arbitration, civil investigative demand or similar process) to disclose any of the above-referenced information or documents, such party will promptly notify the other party of such request so that such other party may seek an appropriate protective order or waive compliance with the provisions hereof. If, in the absence of a protective order or the receipt of a waiver hereunder, a party is nonetheless, in the opinion of its counsel, legally required to disclose any terms or conditions of the above-referenced information or documents to any tribunal, such party may disclose such information to such tribunal without liability hereunder. From and after the consummation of the Qualified Public Offering, if any, of the Company's securities, to the extent that any of the information furnished pursuant to Section 6.1 hereof would constitute material, nonpublic information for purposes of the Securities Exchange Act of 1934, as amended, such Investor covenants that it will not engage in any purchase or sale of the Securities while in possession of such information and prior to the time that such information is made generally known to the public and that such Investor shall inform its agents and representatives, who have been given access to such material, nonpublic information, of such requirements. The obligations in this Section 3.8 shall survive termination of this Agreement. 3.9 Public Announcements. Except as otherwise required by law or by the applicable rules of (or any agreement of the parties or their affiliates with) the SEC, any stock exchange or the Nasdaq Stock Market, the Investors agree that there will prior to the Closing be no press releases or other statements with respect to this Agreement or the transactions contemplated hereby and that they will consult with the Company before issuing any press release or otherwise making any public statement with respect to this Agreement and the transactions contemplated hereby. 4. Conditions of Investors' Obligations at Closing. The obligation of each Investor to purchase the Securities to be purchased by it at the Closing is subject to the fulfillment to each such Investor's satisfaction, in its sole discretion, prior to or at the Closing, of each of the following conditions (each of which may be waived in whole or in part by each Investor in its sole discretion): 4.1 Representations and Warranties. Each of the representations and warranties made by the Company and the Subsidiary in this Agreement shall be true and correct in all material respects (if not qualified by materiality) and in all respects (if qualified by materiality) on and as of the date of the Closing as though such representation or warranty was made on and as of the date of the Closing, and any representation or warranty made as of a specified date earlier than the date of 21 the Closing shall also have been true and correct in all material respects on and as of such earlier date. 4.2 Performance. The Company and the Subsidiary shall have performed and complied with all agreements, covenants, and conditions required by this Agreement and the other Company Documents to be performed or complied with by it prior to or at the Closing. 4.3 Stock Certificates, Etc. At the Closing, the Company shall have tendered to each Investor certificates representing the Shares, in genuine and unaltered form, duly endorsed in blank, with requisite stock transfer tax stamps, if any, attached as well as the Warrants, in accordance with Sections 1.1 and 1.3 hereof, all in form and substance satisfactory to such Investor and sufficient to transfer to and vest in such Investor good and valid title to the Shares and the Warrants, free and clear of any Lien. 4.4 No Material Adverse Change. There shall not have occurred any material adverse change in the Condition of the Company or the Subsidiary. 4.5 Consents. The Company shall have obtained all consents, approvals or waivers from Governmental Authorities and third Persons (including, without limitation, those with respect to Scheduled Contracts) necessary for the execution, delivery and performance of this Agreement and the other Company Documents and the transactions contemplated hereby and thereby, each of which shall be in full force and effect, in form and substance satisfactory to each Investor and shall not impose any limitations or restrictions on any Investor. Without limiting the generality of the foregoing, each of the Company's existing shareholders shall have waived any preemptive right, right of first offer and any similar rights any such shareholder may have to purchase any of the Securities. 4.6 No Litigation. There shall not be any Action of or before any Governmental Authority or other Person pending or threatened with respect to this Agreement, the other Company Documents or the transactions contemplated hereby or thereby or which might materially adversely affect the Condition of the Company or which could reasonably be expected to otherwise result in a material diminution of the benefits of the transactions contemplated by this Agreement or any of the Related Agreements (as defined below) to such Investor. 4.7 Opinion of Counsel. The Investors shall have received from Proskauer Rose LLP, an opinion dated as of the Closing, in the form attached hereto as Exhibit I. 4.8 Compliance Certificate. The Investors shall have received certificates dated as of the day of the Closing executed by the Chief Executive Officer of the Company certifying that the conditions specified in Sections 4.1, 4.2, 4.4 through 4.6, and 4.9 have been fulfilled. 4.9 Directors. Those persons listed on Schedule 3 hereto shall have been duly elected and qualified as directors of the Company and at the Closing shall constitute the entire Board of Directors of the Company. 22 4.10 Related Agreements. The Company Documents and the Non-Competition Agreements in the form attached hereto as Exhibit J (collectively, the "Related Agreements") shall have been executed and delivered by each of the parties thereto and shall be in full force and effect. 4.11 Proceedings and Documents. All proceedings in connection with the transactions contemplated hereby and all documents and instruments incident to such transactions shall be satisfactory in substance and form to the Investors and their counsel, and the Investors shall have received all such counterpart originals or certified or other copies of such documents as the Investors may reasonably request. 4.12 Secretary's Certificate. The Company shall have delivered to the Investors a certificate of the Secretary of each of the Company and the Subsidiary certifying as to (i) the Restated Certificate and the By-laws of each of the Company and the Subsidiary as in effect as of the Closing; (ii) the resolutions of the Board of Directors and, to the extent required, the shareholders of the Company, authorizing and approving all matters in connection with this Agreement, the Registration Rights Agreement, the Restated Certificate and the Shareholders' Agreement, and the transactions contemplated hereby and thereby; (iii) the duly elected officers of the Company and the incumbency of such officers, and attaching a certificate as to the legal existence and good standing of the Company issued by the Department of State of the State of New York, and as to the legal existence and good standing of the Subsidiary issued by the Secretary of State of the State of Delaware; and (iv) a certificate from the Department of State or other appropriate official in each jurisdiction in which each of the Company and the Subsidiary are qualified or admitted to do business to the effect that each of the Company and the Subsidiary are duly qualified or admitted and in good standing in such jurisdiction. 4.13 Qualification of Securities. The Company shall have caused the Securities to be registered or qualified under applicable blue sky laws of such jurisdictions in the United States as shall be reasonably required to comply with all applicable laws in connection with the transactions contemplated hereby. 4.14 Filing of Restated Certificate. The Restated Certificate shall have been filed with and accepted by the Department of State of the State of New York. 4.15 Purchase By Other Investors. Each Investor shall have purchased and paid for the Securities to be purchased by it in accordance with this Agreement. 4.16 Payment of Investor Expenses. The Company shall have paid the expenses of the Investors in accordance with Section 7.1 hereof. If at the Closing the Company fails to tender to the Investors the documents specified herein which are required to be delivered to the Investors at the Closing or if at the Closing any of the conditions specified in this Section 4 shall not have been fulfilled to each Investor's satisfaction, such Investor shall, at its election, be relieved of all further obligations under this Agreement except those set forth in Section 3.8. 23 5. Conditions of the Company's Obligations at Closing. The obligations of the Company to each Investor under this Agreement are subject to the fulfillment, prior to or at the Closing, of each of the following conditions, each of which may be waived in whole or in part by the Company in its sole discretion: 5.1 Representations and Warranties. The representations and warranties of such Investor contained in this Agreement shall be true and correct in all material respects on and as of the date of the Closing as if made on and as of such date. 5.2 Payment of Purchase Price. Such Investor shall have delivered to the Company the purchase price specified in Section 1.1 hereof. 5.3 No Litigation. There shall not be any Action of or before any Governmental Authority or other Person pending or threatened with respect to this Agreement or the transactions contemplated hereby. 5.4 Proceedings and Documents. All proceedings in connection with the transactions contemplated hereby and all documents and instruments incident to such transactions shall be reasonably satisfactory in substance and form to the Company and its counsel, and the Company shall have received all such counterpart originals or certified or other copies of such documents as it may reasonably request. If at the Closing an Investor fails to tender to the Company the payment or documents specified herein which are required to be delivered to the Company at the Closing by such Investor or if at the Closing any of the conditions with respect to an Investor specified in this Section 5 shall not have been fulfilled to the Company's satisfaction, provided the Company is not in breach hereunder, the Company shall, at its election, be relieved of all further obligations to such Investor under this Agreement. 6. Certain Covenants. 6.1 Financial and Business Information. (a) Monthly and Quarterly Statements. The Company shall deliver to each Investor, as soon as practicable, and in any event within 30 days after the close of each month of each fiscal year of the Company in the case of monthly statements and 45 days after the close of each of the first three fiscal quarters of each fiscal year of the Company in the case of quarterly statements, true and complete copies of the consolidated balance sheets, and the related consolidated statements of income, stockholders' equity and cash flows of the Company and its Subsidiaries (which, for purposes of this Article 6, shall include all affiliates controlled by the Company directly or indirectly through one or more intermediaries including, without limitation, any Person in which the Company, directly or indirectly, through a Subsidiary or otherwise, beneficially owns more than fifty percent (50%) of either the equity interest in, or the voting control of such Persons, whether or not existing on the date hereof) as at the close of such month or quarter and covering operations for such month or quarter, as the case may be, and the portion of the Company's fiscal year ending on the last day 24 of such month or quarter, setting forth in each case in comparative form the figures for the comparable period of the previous fiscal year and accompanied by a narrative description of the Company's business and results of operations for such month or quarter. All such financial statements shall be prepared in accordance with GAAP (except for the omission of normal year-end adjustments and footnote disclosures) consistently applied throughout the periods involved, shall be true and correct in all material respects and shall fairly present the financial condition, income, changes in stockholders' equity and cash flow of the Company on a consolidated basis, as applicable, as of the respective dates thereof and for the respective periods covered thereby. Each financial statement delivered by the Company pursuant to this Section 6.1(a) shall be certified by the Company's chief executive officer, president, treasurer or chief financial officer. (b) Annual Statements. The Company shall deliver to each Investor, as soon as practicable after the end of each fiscal year of the Company, and in any event within 90 days thereafter, true and complete copies of the consolidated and consolidating balance sheets of the Company and its Subsidiary at the end of such year and the consolidated and consolidating statements of income, stockholders' equity and cash flows of the Company and its Subsidiary for such year, setting forth in each case in comparative form the figures for the previous fiscal year, all in reasonable detail and accompanied by an opinion thereon of a firm of independent certified public accountants of recognized national standing selected by the Company and reasonably acceptable to the Investors, which opinion shall state that such financial statements fairly present the financial condition, income, changes in stockholders' equity and cash flow of the Company and its Subsidiary on a consolidated basis, as applicable, and have been prepared in accordance with GAAP and that the examination of such accountants in connection with such financial statements has been made in accordance with generally accepted auditing standards, and accordingly included such tests of the accounting records and such other auditing procedures as were considered necessary in the circumstances. Each financial statement delivered by the Company pursuant to this Section 6.1(b) shall be certified by the Company's chief executive officer, president, treasurer or chief financial officer. (c) Certificate of No Default. Simultaneously with the delivery of the Financial Statements referred to in Section 6.1(a) and (b), the Company shall deliver to each Investor a certificate of the Company's Chief Executive and Chief Financial Officer certifying that no default, misrepresentation or breach or event which with notice or lapse of time or both would become a default, misrepresentation or breach under any Scheduled Contract or other material Contract, including without limitation under this Agreement or any Company Document, has occurred or is continuing or if any such event has occurred and is continuing a full description thereof. (d) Audit Reports. The Company shall deliver to each Investor, promptly upon receipt thereof, one copy of each other financial report and internal control letter submitted to the Company by independent accountants in connection with any annual, interim or special audit made by them of the books of the Company and its Subsidiary, as applicable, as well as any responses of the Company thereto. (e) Other Reports. The Company shall deliver to each Investor, promptly upon their becoming available, one copy of each financial statement, report, notice or proxy 25 statement sent by the Company to stockholders generally, of each financial statement, report, notice or proxy statement sent by the Company or any of its Subsidiaries to the SEC or any successor agency, if applicable, of each regular or periodic report and any registration statement, prospectus or written communication (other than transmittal letters) in respect thereof filed by the Company or any of its Subsidiaries with, or received by such Person in connection therewith from, any securities exchange or the SEC or any successor agency, of any press release issued by the Company or any of its Subsidiaries, and of any material of any nature whatsoever prepared by the SEC or any successor agency thereto or any state blue sky or securities law commission which relates to or affects in any way the Company or any of its Subsidiaries. (f) Requested Information. The Company shall deliver to each Investor, with reasonable promptness, such other documents, reports, data and information as from time to time may be reasonably requested by such Investor. (g) Economic Impact Information. As soon as practicable after the end of each fiscal year (but in any event prior to January 31 of each year) the Company shall deliver to Prospect Street NYC Discovery Fund, L.P. a written assessment of the economic impact of Prospect Street NYC Discovery Fund, L.P.'s investment in the Company, specifying the full-time equivalent jobs created or retained in connection with the investment, the impact of such investment on the business of the Company in terms of revenue and profits of the Company's business and on Taxes paid by the Company and its employees. (h) Update of Information. Within 120 days after the end of each fiscal year, the Company will furnish Prospect Street NYC Discovery Fund, L.P. with the following information certified by the Company's chief executive officer, president, treasurer or chief financial officer: (i) information reasonably requested by Prospect Street NYC Discovery Fund, L.P. to determine the Company's continuing eligibility for "Financing" under and as defined in the SBIC Regulations and (ii) a statement verifying the use of the proceeds received by the Company from Prospect Street NYC Discovery Fund, L.P. hereunder (including the intended use of any such unused proceeds as of the date of such certification), until all of the proceeds received by the Company from Prospect Street NYC Discovery Fund, L.P. hereunder have been used by the Company. The Company will also notify Fund I (a) at least 15 days prior to taking any action which would result in a change in the number of record holders of the Company's voting stock from fewer than 50 to 50 or more or from 50 or more to fewer than 50 and (b) of any other action or occurrence which increased or decreased or would increase or decrease the number of record holders of the Company's voting stock from fewer than 50 to 50 or more or from 50 or more to fewer than 50, as soon as practicable after the Company becomes aware that such other action or occurrence has occurred or is proposed. (i) Access. The Company shall permit, and shall cause its Subsidiaries to permit, representatives designated by an any Investor, upon reasonable prior notice to the Company and at the such Investor's expense, to visit and inspect each of the Company's and its subsidiaries' properties, to examine their respective corporate and financial records (and make copies thereof or extracts therefrom), to discuss their respective affairs, finances and accounts with the 26 Company's and its subsidiaries' directors, officers, key employees and accountants, all at such reasonable times as may be requested by such Investor. (j) Other Information. The Company shall provide, from time to time, such additional information regarding the Company or its Subsidiaries as any Investor reasonably may request, including without limitation, any information or reports required by reason of reporting or regulatory requirements to which an Investor, its general partner (if applicable), or any Person having an interest in such Investor is subject. 6.2 Exemption from Investment Company Act. The Company shall conduct its business so that neither the Company nor any of its Subsidiaries shall become an "investment company" within the meaning of the Investment Company Act of 1940, as amended. 6.3 Accounting and Reserves. The Company shall, and the Company shall cause each of its Subsidiaries to, maintain a standard and uniform system of accounting and shall keep proper books and records and accounts in which full, true and correct entries shall be made of its transactions, all in accordance with generally accepted accounting principles applied on a consistent basis through all periods, and shall set aside on such books for each fiscal year all such proper reserves for depreciation, obsolescence, amortization, bad debts and other purposes in connection with its operations as are required by such principles so applied. 6.4 Rights to Purchase Additional Securities. (a) The Company hereby grants to each Investor a right to purchase up to such Investor's "pro rata share" (as hereinafter defined) of any New Securities (as hereinafter defined) which the Company may, from time to time, propose to sell and issue. A "pro rata share", for purposes hereof, is the ratio that (x) the aggregate number of Common Shares held by such Investor and its Affiliates as of such date (assuming the exercise, conversion or exchange of all Options, Warrants or convertible securities held by such Investor upon conversion of, including the Series B Shares and Warrants) bears to (y) the sum of (i) the total number of Common Shares then outstanding as of such date and (ii) the total number of such shares issuable upon exercise, conversion of Series B Shares or exchange of all Options, Warrants and convertible securities held by all Investors as of such date. (b) Except as set forth below, "New Securities" shall mean any shares of capital stock of the Company, including Common Shares and preferred shares, whether now authorized or not, and rights, options, warrants or any other agreements to purchase such shares of capital stock, and securities of any type whatsoever. Notwithstanding the foregoing, New Securities does not include: (i) securities issuable upon exercise or conversion of rights, options, warrants or other securities which are outstanding as of the date hereof and set forth on Schedule 1; (ii) securities offered to the public generally pursuant to an underwritten public offering and an effective registration statement under the Act; (iii) securities issued pursuant to the acquisition of another Person by the Company which is not an Affiliate of the Company by means of a merger, purchase of shares, purchase of substantially all of the assets or other reorganization; (iv) up to 5,750,000 Common Share securities issued to employees, officers and directors of, and consultants to, the 27 Company, with the approval of the Board of Directors of the Company pursuant to the Stock Incentive Plan; (v) stock issued pursuant to any rights or agreements including, without limitation, convertible securities, options and warrants, provided that the preemptive rights established hereby apply with respect to the initial sale or grant by the Company of such rights or agreements; and (vi) securities issued in connection with any strategic partnership or joint venture, the primary purpose of which is not to raise equity capital. (c) In the event the Company proposes to undertake an issuance of New Securities, it shall give each Investor written notice of its intention, describing the type of New Securities, and the price and general terms upon which the Company proposes to issue the same. Each Investor shall have twenty (20) business days from the date any such notice is given (the "Preemption Period") to agree to purchase all or any part of its pro rata share of such New Securities for the price and upon the general terms specified in the notice, by giving written notice to the Company and stating therein the quantity of New Securities to be purchased. (d) If any Investor fails so to notify the Company, then all rights of such Investor to purchase New Securities under the offer and notice in question shall terminate. If any Investor elects not to purchase all of its pro rata share of the New Securities or fails to notify the Company of its intent to purchase such New Securities prior to the expiration of the Preemption Period, the Company shall promptly notify the remaining Investors that such New Securities are available for purchase by the remaining Investors, on a "pro rata share" basis, in accordance herewith. In such event, each of the remaining Investors shall have five (5) business days after receipt of such notice to determine whether to purchase any of such New Securities. (e) In the event the Investors have not in the aggregate elected to purchase all of such New Securities which are being offered, the Company shall have ninety (90) days from the date of expiration of the Preemption Period to sell the New Securities not elected to be purchased by the Investors at the price and upon general terms not materially no more favorable to the third party purchaser(s) of such New Securities than specified in the notice given by the Company. In the event the Company has not sold the New Securities within such ninety (90) day period, the Company shall not thereafter issue or sell any New Securities, without first offering such securities in the manner provided above. (f) The preemptive right granted under this Agreement shall expire upon the consummation of Qualified Public Offering, which shall mean a sale of Common Shares by the Company that satisfies each of the following conditions: (i) the sale of the Common Shares is effected in an underwritten public offering pursuant to an effective registration statement under the Securities Act of 1933, as amended, other than a registration relating solely to a transaction under Rule 145 under such Act (or any successor thereto) or to an employee benefit plan of the Company; (ii) such Common Shares upon issuance are listed on the New York Stock Exchange or included for trading in the Nasdaq National Market System; (iii) the offering price to the public is not less than $1.904 per Common Share, adjusted for stock splits, stock dividends, other stock combinations or other like events; and (iv) the sales of Common Shares results in at least $20,000,000 of gross proceeds to the Company, or, when considered together with all previous underwritten public 28 offerings of the Company satisfying clauses (i), (ii) and (iii) above, at least $30,000,000 of aggregate gross proceeds to the Company. 6.5 Confidentiality. The Company agrees to maintain, and to cause its agents and representatives to maintain, the confidentiality of the terms and conditions of this Agreement and the Related Agreements (as defined in 4.10) and all documents or information executed and/or delivered in connection with the transactions contemplated by this Agreement and the Related Agreements (whether furnished before, on or after the date hereof) and to use such information and documents only in connection with evaluating and/or monitoring the Investors' investment in the Company. The provisions of this subsection shall not apply to information or to particular conditions or terms of the above referenced documents (i) if the party seeking to make such disclosure shall have obtained the prior written consent of the other party to the disclosure of such information, conditions or terms, (ii) that are required to be disclosed during the course of any litigation or arbitration which may be brought by either party related to the provisions of any of the above referenced documents, (iii) that are or become generally available to the public other than as a result of actions taken by the party seeking to make such disclosure or its agents and representatives, (iv) that are required to be disclosed pursuant to and in accordance with any law, rule or regulation applicable to the party seeking to make such disclosure, or (v) that are disclosed to the Company's directors, officers, employees and agents, and representatives of the Company's advisors who need to know the information for the purpose of evaluating a possible transaction and who agree to keep the information confidential. Notwithstanding the foregoing, if a party is requested or required (by oral questions, interrogatories, requests for information or document subpoena, civil investigative demand or similar process) to disclose any of the above-referenced information or documents, such party will promptly notify the other party of such request so that such other party may seek an appropriate protective order or waive compliance with the provisions hereof. If, in the absence of a protective order or the receipt of a waiver hereunder, a party is nonetheless, in the opinion of its counsel, compelled to disclose any terms or conditions of the above-references information or documents to any tribunal or else stand liable for contempt or suffer other censure or penalty, such party may disclose such information to such tribunal without liability hereunder. The obligations in this Section 6.5 shall survive termination of this Agreement. 6.6 Ordinary Course Obligations. As long as any Series B Shares is outstanding, the Company agrees, and agrees to cause its subsidiaries to (a) Promptly pay and discharge, or cause to be paid and discharged when due and payable, all lawful taxes, assessments, and governmental charges or levies imposed upon the income, profits, property or business of the Company or its subsidiaries; provided, however, that any such tax, assessment, charge or levy need not be paid if the validity thereof shall currently be contested in good faith by appropriate proceedings and if the Company shall have set aside on its books adequate reserves with respect thereof and provided further, that the Company will pay all such taxes, assessments, charges or levies forthwith upon the commencement of proceedings to foreclose any Lien that may have attached as security therefor. The Company and its subsidiaries 29 will promptly pay or cause to be paid when due, or in conformance with customary trade terms, all other Indebtedness, defined earlier, incident to the operations of the Company or its subsidiaries; (b) Keep its properties in good repair, working order and condition, reasonable wear and tear excepted, and from time to time make all needful and proper repairs, renewals, replacements, and additions and improvements thereto; and the Company and its subsidiaries will at all times comply with the provisions of all material leases and Scheduled Contracts and other material Contracts to which any of them is a party or under which any of them occupies property so as to prevent any loss or forfeiture thereof or thereunder; (c) Duly observe and conform to all valid requirements of governmental authorities Governmental Authorities relating to the conduct of their business or to their property or assets; (d) Maintain in full force and effect its corporate existence, rights and franchises and all licenses and other rights to use patents, processes, licenses, trademarks, trade names, or copyrights owned or possessed by it and deemed by the Company to be necessary material to the conduct of its business; (e) Cause each employee, officer or consultant to enter into a Non-Disclosure and Developments Agreement; (f) Keep true records and books of accounts in which full, true and correct entries will be made of all dealings or transactions in relation to its business and affairs in accordance with generally accepted accounting principles applied on a consistent basis. 6.7 Taxes Relating to this Agreement. The Company will pay all Taxes (other than Federal, State or local income taxes) which may be payable in connection with the execution and delivery of this Agreement or the issuance of the Securities and the initial sale of the Securities hereunder or in connection with any modification of the Securities and will save the Investors harmless without limitation as to time against any and all liabilities with respect to all such Taxes. The obligations of the Company under this paragraph shall survive any redemption, repurchase or acquisition of Securities by the Company and the termination of this Agreement. 6.8 Replacement of Instruments. Upon receipt by the Company of evidence reasonably satisfactory to it of the ownership of and the loss, theft, destruction or mutilation of any certificate or instrument evidencing any of the Securities, and (a) in the case of loss, theft or destruction, of indemnity reasonably satisfactory to it (provided that, if the owner of the same is an institutional investor, its own agreement of indemnity shall be deemed to be satisfactory), or (b) in the case of mutilation, upon surrender and cancellation thereof, the Company, at its expense, will execute, register and deliver, in lieu thereof, a new certificate or instrument for an equal number of Securities. 30 6.9 Reincorporation in Delaware. As soon as practicable after the date hereof, the Company shall take all such steps as may be required to reincorporate in the State of Delaware. 6.10 SBA Forms; Inspection. Prior to the Closing, the Company shall deliver to Prospect Street NYC Discovery Fund, L.P. any documentation required pursuant to the SBA Act or the SBA Regulations, including, but not limited to: SBA Forms 480, 652 and 1031 and the SBA Certificate dated as of the Closing and executed by the chief executive officer or president of the Company, substantially in the form and to the effect of Exhibit L hereto. At the request of Prospect Street NYC Discovery Fund, L.P., the Company shall permit Prospect Street NYC Discovery Fund, L.P. and/or the SBA and/or any Person designated by Prospect Street NYC Discovery Fund, L.P. to inspect any of the properties, corporate books and financial records of the Company, if any, to discuss their respective affairs and finances with the officers and employees of the Company and to make extracts from the copies of such books and records, all at such time as Prospect Street NYC Discovery Fund, L.P. may reasonably request, including, but not limited to, for purposes of verifying information provided to Prospect Street NYC Discovery Fund, L.P. and required by the SBA. 6.11 Corporate Existence; Approvals. The Company and the Subsidiary shall cause to be done all things necessary to preserve and keep in full force and effect the corporate existence of the Company and the Subsidiary and any of their respective subsidiaries and all necessary approvals and licenses of any Governmental Authority and comply with all Laws applicable to the Company or any such subsidiary and comply with all agreements to which the Company or any such Subsidiary is a party, the violation of which could reasonably be expected to result in a material adverse change in the business or Condition, the Subsidiary or any of their respective subsidiaries. 6.12 Taxes. The Company shall cause to be paid and discharged all obligations when due and all Taxes imposed upon the Company, the Subsidiary or any of their respective subsidiaries or upon their respective assets and properties or upon any part thereof, before the same shall become in default and before late or default charges accrue, as well as all lawful claims for labor, materials and supplies which, if unpaid, might become a Lien upon such property or any part thereof, provided, however, that neither the Company nor such Subsidiary shall be required to cause to be paid and discharged any such obligation, Tax or claim so long as the validity thereof shall be contested in good faith by appropriate proceedings and the Company or such subsidiary, as the case may be, shall set aside on its books adequate reserves, in accordance with GAAP, with respect to such obligation, Tax or claim so contested and provides that the applicable property is not at risk of being forfeited or foreclosed. 6.13 Insurance. The Company shall keep adequately insured by duly licensed insurers all assets and properties of the Company and any Subsidiary of the Company, and also keep the Company and each such Subsidiary adequately insured at all times with responsible insurance carriers against liability on account of damage to persons or property and under all applicable workers' compensation laws. All such insurance shall be in such amounts and with such coverage as is consistent with coverage usually carried by corporations of a similar size engaged in the same or similar business similarly situated and as is satisfactory to each Investor. 31 6.14 Notice of Certain Events. The Company shall promptly notify each Investor in writing of the commencement of any action or proceeding to which the Company, the Subsidiary or any of their respective subsidiaries is a party where the amount in controversy is in excess of $50,000, singularly or cumulatively, for all claims arising from a single incident, to which the Company or any such Subsidiary may be a party and (ii) of any default under any Indebtedness with a principal amount of at least $50,000 or event or condition which, with notice or lapse of time or both, would constitute such a Default under any such Indebtedness, specifying the nature and extent thereof and the action (if any) which is proposed to be taken with respect thereto. 6.15 Maintenance of Properties. The Company shall maintain and preserve all of the assets and properties of the Company and any Subsidiary of the Company necessary or useful in the proper conduct of its business in good working order and condition, ordinary wear and tear excepted. 6.16 Reservation of Shares. The Company will, for so long as any Investor has any rights to exercise the Warrants keep reserved the full number of shares of Common Shares issuable upon exercise of the Warrants. 6.17 Venture Capital Operating Company Status. Each Investor shall have the right to consult with and advise the management of the Company and to receive all materials provided to members of the board of directors of the Company so long as may be required to enable each Investor to qualify as a "venture capital operating company" within the meaning of Section 2510.3-101 of the plan asset regulations promulgated by the United States Department of Labor ("VCOC"). In addition, in the event that (i) any Investor is not entitled to designate at least one (1) member for election to the Board of Directors of the Company, or (ii) the United States Department of Labor through formal or informal rules, regulations or interpretations provides, or it is otherwise established through governmental or court action, that such representation does not constitute the exercise of management rights of the kind necessary to enable such Investor to continue to qualify as a VCOC, then the Company and such Investor shall in good faith negotiate provisions to enable such Investor, at all times that such Investor holds securities of the Company, exercise the minimum amount of such management rights in order to continue to qualify as a VCOC. 6.18 Director and Officer Insurance. The Company shall keep in effect all provisions in its certificate of incorporation and by-laws providing for exculpation of director and officer liability and indemnification of directors and officers of the Company to the fullest extent permitted by applicable Law, which provisions shall not be amended except as required by applicable law or except as approved by the Board of Directors of the Company. At all times that the Stockholders Agreement is in effect, the Company shall cause to be maintained director's and officer's liability insurance covering the directors and officers of the Company on terms substantially no less advantageous to the directors and officers of the Company than such insurance in effect on the date hereof. 6.19 Further Assurances. The Company shall take such further actions and otherwise assist and cooperate with the Investors required to make any filings or obtain any 32 approvals with or from any Governmental Authority, including obtaining any approval as may be necessary in order to effect the exercise of the Warrants. 6.20 Use of Proceeds. The Company shall not, directly or indirectly, use any of the proceeds received from the Investors hereunder to engage in any activities with respect to which an SBIC is prohibited from providing funds by SBA Regulations, including without limitation 13 CFR ss. 107.720. 6.21 Reports Under the Exchange Act. With a view to making available to the Investors the benefits of Rule 144 under the Securities Act and any other rule or regulation of the Securities and Exchange Commission that may at any time permit an Investor to sell securities of the Company to the public without registration or pursuant to a registration on Form S-3, the Company agrees to: (a) make and keep public information available, as those terms are understood and defined in Rule 144 under the Securities Act, at all times after the effective date of the first registration statement filed by the Company for the offering of its securities to the general public; (b) take such action as is necessary to enable the Investors to utilize Form S-3 for the sale of their Registrable Securities; (c) file with the SEC in a timely manner all reports and other documents required of the Company under the Securities Act and the Exchange Act; and (d) furnish to any Investor, so long as the Investor owns any Registrable Securities, forthwith upon request (i) a written statement by the Company that it has complied with the reporting requirements of Rule 144 under the Securities Act (at any time after the effective date of the first registration statement filed by the Company) and the Securities Act and Exchange Act (at any time after it has become subject to such reporting requirements) or that it qualifies as a registrant whose securities may be resold pursuant to Form S-3 (at any time it so qualifies), (ii) a copy of the most recent annual or quarterly report of the Company and such other reports and documents so filed by the Company, and (iii) such other information as may be reasonably requested in availing any Investor of any rule or regulation of the SEC which permits the selling of any such securities without registration or pursuant to such form. 6.22 Actions Requiring Written Consent of Investors. Until the consummation of a Qualified Public Offering, the Company shall not effect any of the following actions set forth in this Section 6.22 without prior written consent of, at any time of determination thereof, the holders of Securities representing at least 60% of the aggregate number of Conversion Shares then outstanding or issuable upon conversion of the Shares or exercise of the Warrants (the "Required Holders"): (a) Capital Expenditures. The Company shall not invest in fixed assets and leasehold improvements or other capital expenditures (including, without limitation, capital 33 leases) during (i) any calendar quarter (including any capital expenditures incurred in 1998 prior to the date of the Closing) in excess of the lower of (i) $250,000 or (ii) 5% of shareholders' equity (subject to a minimum permissible amount of $100,000) in the aggregate or (ii) during a 12 month period (including capital expenditures incurred in 1998 prior to the date of the Closing) in excess of $1,000,000, in the aggregate, in each case with respect to the Company and any Subsidiary. (b) Issuance of Capital Stock and Options. Other than pursuant to the Interactive Imaginations, Inc. 1998 Stock Incentive Plan (as amended from time to time thereafter in accordance therewith, the "Stock Incentive Plan"), attached hereto as Exhibit M, or the issuance of securities to those holding any warrants, options, or convertible securities issued and outstanding as of the date hereof and set forth on Schedule 1 hereto, the Company shall not issue, or enter into any agreement to issue, to any third party, employee, officer or director of, or consultant to, the Company, any capital stock or any options, warrants or other rights (contingent or otherwise) to acquire capital stock (or securities directly or indirectly convertible into or exchangeable for capital stock) of the Company. (c) Indebtedness. The Company shall not, nor shall it permit any Subsidiary to, incur, create, permit to exist or assume directly or indirectly any Indebtedness, other than (i) as set forth in Part 6.22(c) of Schedule 1 and other than Indebtedness constituting capital lease obligations permitted under Section 6.22(a) above and (ii) as an endorser of negotiable instruments for the payment of money deposited with the Company or any such Subsidiary's bank account for collection in the ordinary course of business. (d) Liens, Etc. The Company shall not, nor shall it permit any Subsidiary to, mortgage, pledge, assign or otherwise encumber or permit to be encumbered any of the Company's or any of such Subsidiary's assets and properties, whether now owned or hereafter acquired, or acquire or agree to acquire any property or assets upon conditional sale or other title retention agreement, except for purchase money liens or otherwise in the ordinary course of business and liens with respect to Indebtedness permitted under Section 6.22(c). (e) Change in Nature of Business. The Company shall not, nor shall it permit any Subsidiary to, engage in any business described in the approved Business Plan. (f) Dividends, Etc. The Company shall not declare or pay any cash or asset dividend on any of its shares or make any other distribution or disposition of assets to stockholders in respect of its shares (or otherwise), or make, or commit to make, any payment on account of the purchase, redemption or other retirement of any of its shares or warrants or options therefor (except for the repurchase of shares held by employees of the Company upon termination of such employment as provided in the Stockholders Agreement in an amount not to exceed $100,000 in the aggregate with respect to the Company and any Subsidiary of the Company). (g) Charter Documents, Directors. The Company shall not amend the certificate of incorporation or by-laws of the Company as in effect on the date of Closing or permit the Company's Board of Directors to be increased to more or decreased to fewer than seven directors. 34 (h) Transactions with Affiliates. The Company shall not, nor shall it permit any Subsidiary to, except for employment arrangements with full-time employees and transactions in effect on the date hereof and listed on Part 2.9 of Schedule 1, directly or indirectly purchase, acquire or lease any property from, or sell, transfer or lease any property to, or otherwise deal with, any current or former officer, director, stockholder, Affiliate or Associate of the Company or such Subsidiary or any Associate of any such officer, director, stockholder or Affiliate on terms less favorable to the Company than the terms which would apply in a similar transaction with a Person who is not enumerated above. (i) Conflicting Agreements. The Company shall not, nor shall it permit any Subsidiary to, enter into any agreements or arrangements which by their terms or reasonably foreseeable effect restricts or adversely affects the Company's or such Subsidiary's right and ability to meet its obligations to any Investor hereunder or under any of the Company Documents to which it is a party. (j) Merger, Consolidation, Sale of Assets. The Company will not, nor will it permit any of its Subsidiaries to, voluntarily liquidate or dissolve, or consolidate or merge with or into any other Person, or permit any other Person to consolidate with or merge with or into it or participate in a share exchange with or sell, lease, transfer, contribute or otherwise dispose of any of its assets to any other Person (other than sales of inventory and worn out and obsolete assets in the ordinary course of business as such business is conducted in compliance with Section 6.22(e)), except that, subject in any event to compliance with the last paragraph of this Section: (i) any Subsidiary of the Company may consolidate with or merge into the Company or any wholly owned Subsidiary of the Company if the Company or such wholly owned Subsidiary shall be the continuing or surviving corporation. (ii) any Subsidiary of the Company may sell, lease, transfer, contribute or otherwise dispose of its assets in whole or in part to the Company or any wholly owned Subsidiary of the Company, and may, following any such disposition in whole, liquidate and dissolve. (k) Redemption. The Company shall not acquire any securities of the Company except upon redemption of the Preferred Shares or from terminated employees pursuant to the terms of an agreement approved by the Board of Directors. (l) Employee Plans. The Company shall not adopt, or permit any Subsidiary to adopt, any employee benefit, bonus, stock or option plan, other than the Stock Incentive Plan, or materially modify the Stock Incentive Plan. (m) Disposal of Assets. The Company shall not dispose of assets of the Company, the Subsidiary or any of their respective subsidiaries with a value (a) in excess of the greater of (i) 5% of the Company's capital (subject to a minimum permissible amount of $100,000) or (ii) $250,000 or (b) in excess of, in the aggregate, $1,000,000 in any 12-month period. 35 (n) Auditors. The Company shall not appoint, reappoint or change the Company's auditors. 6.23 Non-Disclosure and Developments Agreements. The Company shall cause each of its employees and consultants to enter into Non-Disclosure and Developments Agreement in the form attached hereto as Exhibit K, and shall condition the participation of any employee or consultant in the Incentive Plan on such employee's or consultant's execution of such agreement. 7. Miscellaneous. 7.1 Expenses. The Company shall pay all stamp, documentary and other taxes which may be payable in connection with the execution, delivery and performance of this Agreement, and the purchase and sale of the Securities. In addition, at the Closing, the Company shall pay up to $100,000 towards reasonable out-of-pocket fees and expenses incurred by the Investors in connection with this Agreement and the transactions contemplated hereby including, without limitation, the reasonable fees and expenses of counsel for the Investors, including any legal fees and expenses relating to any future waiver, consent or amendment (whether or not any such future action is given or consummated). Upon the surrender by any Investor of any certificate for Series B Shares, Warrants or Conversion Shares to the Company or a transfer agent of the Company for exchange for instruments of other denominations or registered in another name or names, the Company will cause such new instruments to be issued and will pay the cost of delivering to or from the office of such Investor from or to the Company or its transfer agent, duly insured, the surrendered instrument and any new instruments issued in substitution or replacement for the surrendered instrument. 7.2 Taxes. The Company will pay all taxes (other than Federal, State or local income taxes) which may be payable in connection with the execution and delivery of this Agreement or the issuance of the Securities and the initial sale of the Securities hereunder or in connection with any modification of the Securities and will save you harmless without limitation as to time against any and all liabilities with respect to all such taxes. The obligations of the Company under this paragraph shall survive any redemption, repurchase or acquisition of Securities by the Company and the termination of this Agreement. 7.3 Replacement of Instruments. Upon receipt by the Company of evidence reasonably satisfactory to it of the ownership of and the loss, theft, destruction or mutilation of any certificate or instrument evidencing any Series B Shares, Warrants or Conversion Shares, and (a) in the case of loss, theft or destruction, of indemnity reasonably satisfactory to it (provided that, if the owner of the same is an institutional lender or investor, its own agreement of indemnity shall be deemed to be satisfactory), or (b) in the case of mutilation, upon surrender and cancellation thereof, the Company, at its expense, will execute, register and deliver, in lieu thereof, a new certificate or instrument for (or covering the purchase of) an equal number of Series B Shares, Warrants or Conversion Shares. 36 7.4 Use of Investors' Names. The Company agrees and acknowledges that the Investors do not have responsibility for managing the business of the Company. The Company shall not, except as required by law, use the name of any Investor in any publicly available or otherwise widely disseminated document or communication without the prior written consent of the Investor whose name is to be disclosed, which consent shall not be unreasonably withheld. 7.5 Indemnification. The Company agrees to indemnify each Investor and each officer, director, employee, agent, partner, shareholder and Affiliate of each Investor (collectively, the "Indemnified Parties") for, and hold each Indemnified Party harmless from and against, any and all damages, fines, fees, penalties, diminution of value, deficiencies, losses and expenses, (collectively, "Losses") including, without limitation, interest, reasonable expenses of investigation, court costs, reasonable fees and expenses of attorneys, accountants and other experts or other expenses of litigation or other proceedings or of any claim, default or assessment (such fees and expenses to include without limitation, all fees and expenses of attorneys, incurred in connection with (i) the investigation or defense of any claims by any Person who is not party to this Agreement (a "Third Party") or (ii) asserting or disputing any rights under this Agreement against any party hereto or otherwise) arising out of or suffered or incurred in connection with any of the following, whether involving a claim by a Person that is a party hereto or a Third Party: (a) any misrepre sentation or any breach of any warranty made by the Company herein or in any of the other Company Documents or by any constituent corporation in the Merger Documents, (b) any breach or non-fulfillment of any covenant or agreement made by the Company herein or in any of the other Company Documents, (c) the status of each Investor as a holder of securities of the Company, or (d) any claim relating to or arising out of a violation of applicable federal or state securities laws by the Company in connection with the sale or issuance of the Securities by the Company to the Investors; provided, however, that the indemnification shall not be required unless and until the total amount otherwise subject to indemnification hereunder exceeds thirty thousand dollars ($30,000) in the aggregate, in which event the Indemnified Parties will be entitled to indemnification for the full amount of their Losses. 7.6 Right to Rely. Notwithstanding any right of the Investors (whether or not exercised) to investigate the affairs of the Company or any right of any party (whether or not exercised) to investigate the accuracy of the representations and warranties of the other party contained in this Agreement or the waiver of any condition to Closing, the Company, on the one hand, and each Investor, on the other, have the right to rely fully upon the representations, warranties, covenants and agreements of the other contained in this Agreement. 7.7 Survival. All representations, warranties, covenants and agreements contained in or made pursuant to this Agreement or contained in any certificate delivered pursuant to this Agreement, shall remain operative and in full force and effect, regardless of any investigation made by or on behalf of any party hereto, and shall survive the transfer and payment for the Securities and the consummation of the transactions contemplated hereby. 7.8 Successors and Assigns. This Agreement shall inure to the benefit of and be binding upon the successors and assigns of each of the parties hereto. 37 7.9 Entire Agreement; Amendment and Waiver. This Agreement and the documents referred to herein, including, without limitation, the Company Documents, constitute the entire understanding of the parties hereto and supersedes all prior letters of intent, agreements or understandings among such parties relating to the subject matter hereof. 7.10 Applicable Law. The laws of the State of New York shall govern the interpretation, validity and performance of the terms of this Agreement, regardless of the law that might be applied under its principles of conflicts of law. 7.11 Notices. All notices and other communications provided for herein shall be dated and in writing and shall be deemed to have been duly given (x) on the date of delivery, if delivered personally or by telecopier, receipt confirmed, (y) on the second following business day, if delivered by a recognized overnight courier service, or (z) seven days after mailing, if sent by registered or certified mail, return receipt requested, postage prepaid, in each case, to the party to whom it is directed at the following address (or at such other address as any party hereto shall hereafter specify by notice in writing to the other parties hereto): (i) If to the Company, to it at the following address: Interactive Imaginations, Inc. c/o 24/7 Media, Inc. 1290 Avenue of the Americas New York, NY 10104 Attn: Chief Executive Officer (ii) If to any Investor, to it at the address set forth below its name on the signature page hereto. (iii) If to Prospect Street NYC Discovery Fund, L.P. or Prospect Street NYC Co-Investment Fund, L.P., copies to the following address: Morgan, Lewis & Bockius, LLP 101 Park Avenue New York, NY 10178 Attn: Ira White, Esq. 7.12 Brokerage. Each party hereto will indemnify and hold harmless each Investor and each officer, director, employee, agent, partner, shareholder and Affiliate of each of the foregoing against and in respect of any claim for brokerage, finders' fees or other commissions relative to this Agreement or to the transactions contemplated hereby, based in any way on agreements, arrangements or understandings made or claimed to have been made by such party with any third party. 38 7.13 Severability. Each provision of this Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement is held to be prohibited or invalid under applicable law, such provision will be ineffective only to the extent of such prohibition or invalidity, without invalidating the remainder of this Agreement. 7.14 Descriptive Headings. The section and other headings contained in this Agreement are for convenience of reference only and shall not affect the meaning or interpretation of this Agreement. 7.15 Counterparts; Signatures by Facsimile. This Agreement may be executed in two or more counterparts, each of which when so executed and delivered shall be deemed to be an original and all of which together shall be deemed to be considered one and the same agreement and shall become effective when counterparts have been signed by each party and delivered to the other party. This Agreement, once executed by a party, may be delivered to the other parties hereto by facsimile transmission of a copy of this Agreement bearing the signature of the parties so delivering this Agreement. 7.16 Understanding Among Investors. The decision of each Investor to purchase Securities pursuant to this Agreement has been made by such Investor independently of any other Investor and independently of any statements or opinions as to the Condition of the Company which may have been made or given by any other Investor or by any agent or employee of any other Investor. Each Investor acknowledges that no other Investor has acted as agent for such Investor in connection with making its investment hereunder and that no other Investor will be acting as agent of such Investor in connection with monitoring its investment hereunder. 7.17 Further Assurances. Each party shall do and perform, or cause to be done and performed, all such further acts and things, and shall execute and deliver all such other agreements, certificates, instruments and documents, as the other party may reasonably request both before and after the Closing in order to carry out the intent and accomplish the purposes of this Agreement and the consummation of the transactions contemplated hereby. 7.18 Knowledge. When used herein, the phrase "to the knowledge of" any Person, "to the best knowledge of" any Person, "known" to any Person or any similar phrase, means (i) with respect to any Person who is an individual, the actual knowledge of such Person, and (ii) with respect to any other Person, the actual knowledge of any of the directors, officers, members, general partners, stockholders or other similar Persons in a similar position or having similar powers and duties; and, in the case of each of (i) and (ii), the knowledge of facts that such individuals should have known after reasonable inquiry. 39 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. THE COMPANY: INTERACTIVE IMAGINATIONS, INC. By: /s/ David J. Moore ---------------------------------- David J. Moore Chief Executive Officer 40 INVESTOR: The Travelers Insurance Company By: /s/ John W. Petchler -------------------------------- Name: John W. Petchler Title: Senior Vice President Address: One Tower Square Hartford, CT 06183-2030 Number of Series B Shares: 3,333,334 Number of Class A Warrants: 1,666,667 Number of Class B Warrants: 1,666,667 Aggregate Purchase Price: $3,333,334 41 INVESTOR: Prospect Street NYC Discovery Fund, L.P. By: Prospect Street Discovery Fund, Inc. its General Partner By: /s/ John Barry --------------------------------------- Name: John Barry Address: 250 Park Avenue, 17th Floor New York, New York 10177 Number of Series B Shares: 2,500,000 Number of Class A Warrants: 1,250,000 Number of Class B Warrants: 1,250,000 Aggregate Purchase Price: $2,500,000 43 Prospect Street NYC Co-Investment Fund, L.P. By: Prospect Street Co-Investment Fund, LLC, its General Partner By: /s/ John Barry -------------------------------- Name: John Barry Address: 250 Park Avenue, 17th Floor New York, New York 10177 Number of Series B Shares: 833,334 Number of Class A Warrants: 416,667 Number of Class B Warrants: 416,667 Aggregate Purchase Price: $833,334 42 INVESTOR: Big Flower Digital Services, Inc. By: /s/ Mark A. Angelson --------------------------------------- Name: Mark A. Angelson Title: Executive Vice President Address: c/o Big Flower Holdings, Inc. 3 E. 54th Street New York, New York 10022 Attn: Associate General Counsel Number of Series B Shares: 3,333,334 Number of Class A Warrants: 1,666,667 Number of Class B Warrants: 1,666,667 Aggregate Purchase Price: $3,333,334 44 INVESTOR: /s/ David J. Moore --------------------------------- David J. Moore Address: c/o 24/7 Media, Inc. 1290 Avenue of the Americas New York, New York 10104 Number of Series B Shares: 60,000 Number of Class A Warrants: 30,000 Number of Class B Warrants: 30,000 Aggregate Purchase Price: $60,000 45 EX-10.8 8 REGISTRATION RIGHTS AGREEMENT REGISTRATION RIGHTS AGREEMENT This Registration Rights Agreement is made as of this 9th day of April, 1998, by and among 24/7 Media, Inc., a Delaware corporation (the "Company"), The Travelers Insurance Company, a Connecticut corporation ("Travelers"), Prospect Street NYC Discovery Fund, L.P., a Delaware limited partnership ("Prospect I"), Prospect Street NYC Co-Investment Fund, L.P., a Delaware limited partnership ("Prospect II") Big Flower Digital Services, Inc., a Delaware corporation ("Big Flower") (Travelers, Prospect I, Prospect II, and Big Flower collectively, together with their respective affiliates, assigns or permitted transferees, the "Old Investors"), David Banks ("Banks"), Trinity Ventures V, L.P. ("Trinity I"), Trinity V Side-By-Side Fund, L.P. ("Trinity II"), Zero Stage Capital V Limited Partnership ("Zero"), F&W Investments 1996 ("FW") (Banks, Trinity I, Trinity II, Zero, and FW collectively, together with their respective affiliates, assigns or permitted transferees, the "New Investors", and, together with the Old Investors, the "Investors"). RECITALS: WHEREAS, pursuant to a Securities Purchase Agreement dated February 25, 1998, the Old Investors acquired from Interactive Imaginations, Inc. (the "Former Parent"), a New York corporation, shares of its Series B Convertible Voting Preferred Shares, par value $.01 per share ("Series B Shares") and Class A and Class B Warrants to purchase Common Shares, par value $.01 per share ("Common Shares") of the Former Parent (the "Purchase Agreement"); and WHEREAS, in connection with the Purchase Agreement, the Former Parent and the Old Investors entered into a Registration Rights Agreement dated February 25, 1998 (the "Old Agreement"); and WHEREAS, Former Parent has been merged with and into the Company, and the Company has adopted the Old Agreement, the Common Shares have been exchanged for Common Stock, par value $.01 per share ("Common Stock"), of the Company, and the Series B Shares have been exchanged for Series A Convertible Preferred Stock, par value $.01 per share ("Series A Stock"), of the Company, and the Class A, Class B and Class C Warrants of the Former Parent have become Class A, Class B and Class C Warrants (collectively, "Warrants") to purchase Common Stock; and WHEREAS, concurrently with this Agreement, the New Investors are entering into a Merger Agreement with the Company whereby they are acquiring from the Company shares of its Common Stock, Series A Stock and Class A, Class B and Class C Warrants to purchase Common Stock, pursuant to the Securities Purchase Agreement of even date herewith (the "Merger Agreement"); and NOW, THEREFORE, in consideration of the foregoing, the mutual covenants and agreements contained herein and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, it is agreed as follows: 1. Definitions. For purposes of this Agreement: (a) "Common Stock" means the common stock, par value $.01 per share, of the Company. (b) "Exchange Act" means the Securities Exchange Act of 1934, as amended. (c) "Form S-3" means such form under the Securities Act as in effect on the date hereof or any registration form under the Securities Act subsequently adopted by the SEC which permits inclusion or incorporation of substantial information by reference to other documents filed by the Company with the SEC. (d) "Holder" means any Person owning or having the right to acquire Registrable Securities, or any assignee thereof in accordance with Section 14. (e) "Initiating Holders" means the Holder(s) initiating a registration request under Section 2. (f) "Investor" means any of the Old Investors or the New Investors. (g) "majority in interest of the Initiating Holders" means as of any date Initiating Holders holding a majority of the Registrable Securities held as of such date by all Initiating Holders. (h) "Person" means any individual, partnership, limited liability company, joint venture, corporation, association, trust or any other entity or organization. (i) "Priority Registrable Securities" means (x) any shares of Common Stock issuable conversion of the Series A Stock or exercise of the Warrants and (y) any shares of Common Stock purchased by an Investor pursuant to the Stockholders' Agreement. (j) "Qualifying Request" means a request from any Investor pursuant to which such Investor requests registration of Registrable Securities. (k) "Register," "registered," and "registration" refer to a registration effected by preparing and filing a registration statement or similar document in compliance with the Securities Act, and the declaration or ordering of effectiveness of such registration statement or document. (l) "Registrable Securities" means any Shares of Common Stock held by, issuable to, or subsequently acquired by, any Investor and any Shares of Common Stock issued or issuable with respect to any such Shares of Common Stock by way of stock dividend or stock split, or in connection with a combination of shares, recapitalization, merger, consolidation, or other reorganization, or otherwise; provided, however, that any Registrable Securities sold by a Holder in a transaction in which such Holder's rights under this Agreement are not assigned pursuant to Section 14 below shall cease to be Registrable Securities from and after the time of such sale. (m) "SEC" means the Securities and Exchange Commission. (n) "Securities Act" means the Securities Act of 1933, as amended. (o) "Series A Stock" means the Series A Convertible Voting Preferred Stock, par value $.01 per share, of the Company. (p) "Stockholders' Agreement" means that certain Amended and Restated Stockholders' Agreement of even date herewith by and among the Company, the Investors and certain stockholders identified on the signature pages thereto. (q) "Violation" means any of the following statements, omissions or violations: (i) any untrue statement or alleged untrue statement of a material fact contained in a registration statement under this Agreement, including any preliminary prospectus or final prospectus contained therein or any amendments or supplements thereto or any documents filed under state securities or "blue sky" laws in connection therewith, (ii) the omission or alleged omission to state in any of the foregoing a material fact required to be stated therein, or necessary to make the statements therein not misleading, or (iii) any violation or alleged violation by the Company of the Securities Act, the Exchange Act, any other federal, state or common law or any rule or regulation promulgated under the Securities Act, the Exchange Act or any state securities law. 2. Request for Registration. (a) If, after the earlier of (i) the third anniversary of the date of this Agreement or (ii) ninety (90) days after the initial public offering of the Company's securities, the Company shall receive a written Qualifying Request that the Company file a registration statement under the Securities Act, then the Company shall, within ten (10) days of the receipt thereof, give written notice of such request to all Holders and shall, subject to the limitations of Section 2(b) below, use its best efforts to effect as soon as practicable (but in any event within 60 days of receipt of the Qualifying Request), the registration under the Securities Act of all Registrable Securities which the Holders request to be registered within twenty (20) days of receipt by such Holder of such notice in accordance with Section 22 below; provided that the Company shall not be obligated to file a registration statement relating to a registration request under this Section 2 within a period of six months after the effective date of any other registration statement filed by the Company pursuant to this Section 2. (b) If Initiating Holders intend to distribute the Registrable Securities covered by their request by means of an underwriting, they shall so advise the Company as a part of their request made pursuant to this Section 2 and the Company shall include such information in the written notice referred to in Section 2(a). In such event, the right of any Holder to include such Holder's Registrable Securities in such registration shall be conditioned upon such Holder's participation in such underwriting and the inclusion of such Holder's Registrable Securities in the underwriting (unless otherwise mutually agreed by a majority in interest of the Initiating Holders and such Holder) to the extent provided herein. A majority in interest of the Initiating Holders shall select the managing underwriter or underwriters in such underwriting, such underwriter(s) to be reasonably satisfactory to the Company. All Holders proposing to distribute their securities through such underwriting shall (together with the Company as provided in Section 4(f)) enter into an underwriting agreement in customary form with the underwriter or underwriters so selected for such underwriting by a majority in interest of the Initiating Holders, which underwriting agreement shall provide that each Holder may participate in any overallotment option on a pro rata basis, provided, however, that (i) no Investor shall be required to make any representations, warranties or indemnities except as they relate to such Holder's ownership of shares and authority to enter into the underwriting agreement and such Holder's intended method of distribution, (ii) the liability of such Holder shall be limited to an amount equal to the net proceeds from the offering received by such Holder, and (iii) any Holder may withdraw its Registrable Securities from a Registration Statement prior to entering into the underwriting agreement. Notwithstanding any other provision of this Section 2, if the underwriter advises the Initiating Holders that marketing factors require a limitation of the number of shares to be underwritten, then the Initiating Holders shall so advise the Company and the Company shall so advise all Holders of Registrable Securities which would otherwise be underwritten pursuant hereto, and the number of shares of Registrable Securities that may be included in the underwriting shall be allocated among the Holders of Registrable Securities that have elected to participate in such underwritten offering, including the Initiating Holders, in proportion (as nearly as practicable) to the total amount of Registrable Securities owned by each such Holder; provided, however, that any Registrable Securities acquired by Travelers that are not Priority Registrable Securities shall be excluded from a registration statement prior to the exclusion of any Priority Registrable Securities and no Registrable Securities which are not Priority Registrable Securities shall be registered and sold by Travelers (or any successor or transferee thereof) unless prior thereto all Priority Registrable Securities which are Shares of Common Stock are registered and sold by Travelers (and its successors and transferees). Without the consent of a majority in interest of the Initiating Holders, no securities other than Registrable Securities shall be covered by such registration if the inclusion of such other securities would result in a reduction of the number of Registrable Securities covered by such registration or included in any underwriting. (c) The Company shall be obligated to effect, pursuant to this Section 2, not more than: two (2) registrations for Big Flower; two (2) registrations for Prospect I and/or Prospect II; two (2) registrations for the New Investors collectively, and three (3) registrations for Travelers (an offering which is not consummated shall not be counted for this purpose); provided, however, that any Investor may assign its right to any one or more demand registrations to another Investor; and provided, further, that the Company shall be obligated to effect as many registrations, including unrestricted shelf registrations pursuant to Rule 415 of the Securities Act, as may be requested by Holders pursuant to any request of a Holder in the event and so long as (x) a registration pursuant to Form S-3 or any similar "short-form" registration statement is available to the Company and (y) the Holders propose to sell Registrable Securities in a non-underwritten public offering at an aggregate price to the public of more than $3,000,000. In addition, if not all Registrable Securities requested in a demand by any Investor initiating such demand are included in the registration statement and subsequently sold pursuant thereto, such Investor shall not be deemed to have delivered such Qualifying Request and shall retain all of such Investor's rights as if such Qualifying Request had never been delivered or made by such Investor. (d) Notwithstanding the foregoing, if the Company shall furnish to Holders requesting a registration statement pursuant to this Section 2, a certificate signed by the Chief Executive Officer of the Company stating that in the good faith judgment of the Board of Directors of the Company, it would be seriously detrimental to the Company and its shareholders for such registration statement to be filed by reason of a material pending transaction and it is therefore essential to defer the filing of such registration statement, the Company shall have the right to defer such filing for a period of not more than ninety (90) days after receipt of the request of the Initiating Holders; provided that the Company may not defer filing pursuant to this Section 2(d) more than one time in any twelve-month period. 3. Company Registration. If (but without any obligation to do so) at any time the Company proposes to register (including for this purpose a registration effected by the Company for shareholders other than the Holders) any of its stock or other securities under the Securities Act in connection with the public offering of such securities solely for cash (other than a registration on Form S-8 relating solely to the sale of securities to participants in a Company Stock Plan or to other compensatory arrangements to the extent includible on Form S-8, or a registration on Form S-4), the Company shall, at such time, promptly give each Holder written notice of such registration. Upon the written request of each Holder given within thirty (30) days after receipt by such Holder of such notice by the Company in accordance with Section 22, the Company shall, subject to the provisions of Section 11, use its best efforts to cause to be registered under the Securities Act all of the Registrable Securities that each such Holder has requested to be registered. The Company shall have no obligation under this Section 3 to make any offering of its securities, or to complete an offering of its securities that it proposes to make, and shall incur no liability to any Holder for its failure to do so. No registration effected under this Section 3 shall relieve the Company of any of its obligators to effect registrations upon request under Section 2. 4. Obligations of the Company. Whenever required under this Agreement to effect the registration of any Registrable Securities, the Company shall, as expeditiously as reasonably possible: (a) Prepare and file with the SEC a registration statement with respect to such Registrable Securities and use its best efforts to cause such registration statement to become effective, and, upon the request of the Holders of a majority of the Registrable Securities being registered thereunder, keep such registration statement effective for up to one hundred eighty (180) days or until the Holders have completed the distribution referred to in such registration statement, whichever occurs first (but in any event for at least any period required under the Securities Act); provided that before filing such registration statement or any amendments thereto, the Company will furnish to the Holders copies of all such documents proposed to be filed. (b) Prepare and file with the SEC such amendments and supplements to such registration statement and the prospectus used in connection with such registration statement as may be necessary to comply with the provisions of the Securities Act with respect to the disposition of all securities covered by such registration statement. (c) Furnish (at no cost) to the Holders such number of copies of such registration statement and of each amendment and supplement thereto (in each case including all exhibits), such number of copies of the prospectus contained in such registration statement (including each preliminary prospectus and any summary prospectus) and any other prospectus filed under Rule 424 under the Securities Act, in conformity with the requirements of the Securities Act, and such other documents incorporated by reference in the registration statement and such other documents as Holders or underwriters may reasonably request in order to facilitate the disposition of Registrable Securities owned by them. (d) Use its best efforts to register and qualify the securities covered by such registration statement under such other securities or "blue sky" laws of such states or jurisdictions as shall be reasonably requested by the Holders or underwriters and do any and all other acts and things which may be reasonably necessary to enable each participating Holder to consummate the disposition of the Registrable Securities owned by it in such jurisdiction; provided that the Company shall not be required in connection therewith or as a condition thereto (i) to qualify to do business in any state or jurisdiction where it would not otherwise be required to qualify but for the requirements of this clause (d), or (ii) to file a general consent to service of process in any such state or jurisdiction. (e) Use its best efforts to cause all Registrable Securities covered by such registration statement to be registered with or approved by such other governmental agencies or authorities as may be necessary by virtue of the Company's business or operations to enable the seller or sellers thereof to consummate the disposition of such Registrable Securities. (f) In the event of any underwritten public offering, enter into and perform its obligations under an underwriting agreement, in usual and customary form, with the managing underwriter of such offering. (g) Immediately notify each Holder of Registrable Securities covered by such registration statement at any time when a prospectus relating thereto is required to be delivered under the Securities Act of the happening of any event as a result of which the prospectus included in such registration statement, as then in effect, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances then existing and if it is necessary to amend or supplement such prospectus to comply with law, and at the request of any other Holder or managing underwriter, prepare and furnish, at no cost, to such Holder and the underwriters a reasonable number of copies of a supplement to or an amendment of such prospectus as may be necessary so that, as thereafter delivered to the purchasers of Shares of Common Stock, such prospectus shall not include any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances then existing, not misleading and so that such prospectus, as amended or supplemented, will comply with law. (h) Immediately notify each Holder of Registrable Securities covered by such registration statement and such Holder's underwriters, if any, and confirm such advice in writing: (i) when the registration statement has become effective, (ii) when any post-effective amendment to the registration statement becomes effective and (iii) of any request by the SEC for any amendment or supplement to the registration statement or prospectus or for additional information. (i) Notify each Holder of Registrable Securities if at any time the SEC or any state securities commission or other regulatory authority should institute or threaten to institute any proceedings for the purpose of issuing, or should issue, a stop order suspending the effectiveness of the Registration Statement. Upon the occurrence of any of the events mentioned in the preceding sentence, the Company will use its best efforts to prevent the issuance of any such stop order or to obtain the withdrawal thereof as soon as possible. The Company will advise each Holder of Registrable Securities promptly of any order or communication of any public board or body addressed to the Company suspending or threatening to suspend the qualification of any Registrable Securities for sale in any jurisdiction. (j) Furnish (at no cost), at the request of any Holder requesting registration of Registrable Securities pursuant to this Agreement, to each Holder participating in the offering and to each underwriter, (i) on the date that such Registrable Securities are delivered to the underwriters for sale in connection with a registration pursuant to this Agreement, if such securities are being sold through underwriters, or, if such securities are not being sold through underwriters, on the date that the registration statement with respect to such securities becomes effective, an opinion, dated such date, of the counsel representing the Company for the purposes of such registration, in form and substance as is customarily given to underwriters in an underwritten public offering, addressed to the underwriters, if any, and to the Holders participating in such offering and (ii) on the date that the registration statement with respect to such securities becomes effective, a "comfort" letter dated such date, from the independent certified public accountants of the Company, in form and substance as is customarily given by independent certified public accountants to underwriters in an underwritten public offering, addressed to the underwriters, if any, and to the Holders participating in such offering, and, if such securities are being sold through underwriters, a reaffirmation of such letter on the date that such Registrable Securities are delivered to the underwriters for sale. (k) As soon as practicable after the effective date of the registration statement, and in any event within sixteen (16) months thereafter, have "made generally available to its security holders" (within the meaning of Rule 158 under the Securities Act) an earning statement (which need not be audited) covering a period of at least twelve (12) months beginning after the effective date of the registration statement and otherwise complying with Section 11(a) of the Securities Act. (l) Cause all Registrable Securities registered pursuant hereto on a Registration Statement for resale by a Holder to be listed on each securities exchange or included for trading in such automated quotation system on or in which the Shares of Common Stock of the Company are then listed or included. (m) Provide a transfer agent and registrar for all Registrable Securities registered pursuant hereto on a Registration Statement for resale by a Holder, and a CUSIP number for the Shares of Common Stock, in each case not later than the effective date of such Registration Statement. 5. Other Compliance With Law. Otherwise use its best efforts in its performance of its obligations hereunder to comply with all applicable rules and regulations of the SEC and of state securities commissions and any stock exchange or automated quotation system. 6. Stock Certificates. Issue to any underwriter to which any Holder sells Shares of Common Stock, pursuant to an underwritten offering effected pursuant hereto, share certificates in appropriate denominations evidencing the shares of Shares of Common Stock so sold. 7. Correspondence with the Commission. Deliver promptly to the managing underwriter and, upon request, to any Holder participating in the offering copies of all correspondence between the Commission and the Company, its counsel or auditors and all memoranda relating to discussions with the Commission or its staff with respect to the registration statement; permit each Holder and underwriter, and counsel for each Holder and underwriter, to participate in the preparation of such registration statement, each prospectus included therein or filed with the Commission, and each amendment thereof or supplement thereto; and give each Holder and underwriter, and counsel for each Holder and underwriter, access to the Company's books, records and properties and such opportunities to discuss the business of the Company with its officers and independent public accountants as shall be necessary, in the opinion of each Holder and underwriter and their respective counsel, to conduct a reasonable investigation within the meaning of the Securities Act. 8. Furnish Information. It shall be a condition precedent to the obligations of the Company to take any action pursuant to this Agreement with respect to the Registrable Securities of any selling Holder that such Holder shall furnish to the Company such information regarding itself, the Registrable Securities held by it, and the intended method of disposition of such securities as shall be required to effect the registration of such Holder's Registrable Securities. If any registration statement or comparable statement under the Securities Act refers to an Investor or any of its affiliates, by name or otherwise, as the holder of any securities of the Company then, unless counsel to the Company advises the Company that the Securities Act requires that such reference be included in any such statement, each such holder shall have the right to require the deletion of such reference to itself and its affiliates. 9. Expenses of Demand Registration. All expenses, other than underwriting discounts and commissions relating to Registrable Securities, incurred in connection with up to nine registrations, filings or qualifications pursuant to Section 2, including without limitation all registration, filing and qualification fees, printers' and accounting fees, transfer agent expenses, registrar expenses, fees and disbursements of counsel for the Company, and the reasonable fees and disbursements of one counsel (selected by a majority in interest of the Initiating Holders) for the selling Holders shall be borne by the Company; provided, however, that the Company shall not be required to pay any of such expenses for the Holders in connection with any registration begun pursuant to Section 2 if the registration request is subsequently withdrawn at the request of the Holders of a majority of the Registrable Securities to be registered (in which case all participating Holders shall bear such expenses pro rata), unless the Holders of a majority of Registrable Securities then outstanding agree to forfeit one (1) demand registration right pursuant to Section 2; provided further, that if prior to the time of such withdrawal, the Holders have learned of a material adverse change in the condition (financial or otherwise), or business of the Company from the time of the initial request, then the Holders shall not be required to pay any of such expenses (and the Company shall pay such expenses) and the Holders shall retain their rights pursuant to Section 2. 10. Expenses of Company Registration. The Company shall bear and pay all expenses incurred in connection with any registration, filing or qualification of Registrable Securities with respect to the registrations pursuant to Section 3 for each Holder, including without limitation all registration, filing and qualification fees, printers' and accounting fees relating or apportionable thereto and the fees and disbursements of one counsel for the selling Holders (selected by the Holders of a majority of the Registrable Securities being registered), but excluding underwriting discounts and commissions relating to Registrable Securities. 11. Underwriting Requirements. In connection with any offering involving an underwriting of shares being issued by the Company, the Company shall not be required under Section 3 to include any Holder's securities in such underwriting unless such Holder accepts the terms of the underwriting as agreed upon between the Company and the underwriters selected by the Company (with the approval of Holders of a majority of the Registrable Securities), and then only in such quantity as will not, in the opinion of the underwriters, jeopardize the success of the offering by the Company; provided, however, that (i) no Holder participating in such underwriting shall be required to make any representations, warranties or indemnities except as they relate to such Holder's ownership of shares and authority to enter into the underwriting agreement and such Holder's intended method of distribution, and (ii) the liability of such Holder shall be limited to an amount equal to the net proceeds from the offering received by such Holder. If the total amount of securities, including Registrable Securities, requested by shareholders to be included in any offering referred to in Section 3 exceeds the amount of securities sold other than by the Company that the underwriters reasonably believe compatible with the success of the offering, then the Company shall be required to include in the offering only that number of such securities, including Registrable Securities, which the underwriters believe will not jeopardize the success of the offering (the securities so included to be apportioned pro rata among the selling shareholders according to the total amount of securities requested to be included therein then owned by each selling shareholder or in such other proportions as shall mutually be agreed to by such selling shareholders). 12. Indemnification. In the event any Registrable Securities are included in a registration statement under this Agreement: (a) The Company will indemnify and hold harmless each Holder, its heirs, personal representatives and assigns, and each of such Holder's partners, members, stockholders, managers, agents, officers, directors, employees and affiliates, any underwriter (as defined in the Securities Act) for such Holder and each Person, if any, who controls such Holder or underwriter within the meaning of the Securities Act or the Exchange Act against any losses, claims, damages or liabilities (joint or several) to which they may become subject under the Securities Act, the Exchange Act or other federal or state law, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon a Violation; and the Company will pay to each such indemnified party, as incurred, any legal or other expenses reasonably incurred by them in connection with investigating or defending any such loss, claim, damage, liability, or action; provided, however, that the indemnity agreement contained in this Section 12(a) shall not apply to amounts paid in settlement of any such loss, claim, damage, liability or action if such settlement is effected without the consent of the Company (which consent shall not be unreasonably withheld), nor shall the Company be liable in any such case to a particular indemnified party for any such loss, claim, damage, liability or action to the extent that it arises out of or is based upon a Violation which occurs in reliance upon and in conformity with written information furnished expressly for use in connection with such registration by such indemnified party. (b) Each selling Holder will indemnify and hold harmless the Company, each of its directors, each of its officers who has signed the registration statement, each Person, if any, who controls the Company within the meaning of the Securities Act, any underwriter, any other Holder selling securities in such registration statement and any controlling Person of any such underwriter or other Holder, against any losses, claims, damages or liabilities (joint or several) to which any of the foregoing Persons may become subject, under the Securities Act, the Exchange Act or other federal or state law, insofar as such losses, claims, damages or liabilities (or actions in respect thereto) arise out of or are based upon any Violation, in each case to the extent (and only to the extent) that such Violation occurs in reliance upon and in conformity with written information furnished by or on behalf of such Holder expressly for use in connection with such registration; and each such Holder will pay, as incurred, any legal or other expenses reasonably incurred by any Person intended to be indemnified pursuant to this Section 12(b), in connection with investigating or defending any such loss, claim, damage, liability, or action; provided, however, that the indemnity agreement contained in this Section 12(b) shall not apply to amounts paid in settlement of any such loss, claim, damage, liability or action if such settlement is effected without the consent of the Holder, which consent shall not be unreasonably withheld; and provided further, that, in no event shall the liability of any Holder under this Section 12(b) exceed the net proceeds from the offering received by such Holder. (c) Promptly after receipt by an indemnified party under this Section 12 of written notice of the commencement of any action (including any governmental action) involving a claim referred to in Section 12(a) or 12(b) of this Agreement, such indemnified party will, if a claim in respect thereof is to be made against any indemnifying party under this Section 12, deliver to the indemnifying party a written notice of the commencement thereof and the indemnifying party shall have the right to participate in, and, to the extent the indemnifying party so desires, jointly with any other indemnifying party similarly noticed, to assume the defense thereof with counsel mutually satisfactory to the parties; provided, however, that an indemnified party shall have the right to retain its own counsel, with the fees and expenses to be paid by the indemnifying party, if representation of such indemnified party by the counsel retained by the indemnifying party would be inappropriate due to actual or potential differing interests between such indemnified party and any other party represented by such counsel in such proceeding. The failure to deliver written notice to the indemnifying party within a reasonable time of the commencement of any such action shall not relieve such indemnifying party of any liability to the indemnified party under this Section 12 except if, and only to the extent that, the indemnifying party is actually prejudiced thereby; and such failure to deliver written notice to the indemnifying party will not relieve it of any liability that it may have to any indemnified party otherwise than under this Section 12. The indemnifying party will not, without the prior written consent of each indemnified party, settle or compromise or consent to the entry of any judgment in any pending or threatened claim, action, suit or proceeding in respect of which indemnification may be sought hereunder (whether or not such indemnified party or any person who controls such indemnified party is a party to such claim, action, suit or proceeding), unless such settlement, compromise or consent includes an unconditional release of such indemnified party from all liability arising out of such claim, action suit or proceeding and such settlement, compromise or consent involves only the payment of money and such money is actually paid by the indemnifying party. Whether or not the defense of any claim or action is assumed by the indemnifying party, such indemnifying party will not be subject to any liability for any settlement made without its consent, which consent will not be unreasonably withheld. (d) The obligations of the Company and Holders under this Section 12 shall survive the completion of any offering of Registrable Securities in a registration statement under this Agreement, and otherwise. (e) Any indemnity agreements contained herein shall be in addition to any other rights to indemnification or contribution which any indemnified party may have pursuant to law or contract and shall remain operative and in full force and effect regardless of any investigation made or omitted by or on behalf of any indemnified party. (f) If for any reason the foregoing indemnity is unavailable, then the indemnifying party shall contribute to the amount paid or payable by the indemnified party as a result of such losses, claims, damages, liabilities or expenses (i) in such proportion as is appropriate to reflect the relative benefits received by the indemnifying party on the one hand and the indemnified party on the other (taking into consideration, among other things, the fact that the provision of the registration rights and indemnification hereunder is a material inducement to the Investors to purchase Registrable Securities pursuant to the Purchase Agreement) or (ii) if the allocation provided by clause (i) above is not permitted by applicable law or provides a lesser sum to the indemnified party than the amount hereinafter calculated, in such proportion as is appropriate to reflect not only the relative benefits received by the indemnifying party on the one hand and the indemnified party on the other (taking into consideration, among other things, the fact that the provision of the registration rights and indemnification hereunder is a material inducement to the Investors to purchase Registrable Securities pursuant to the Purchase Agreement) but also the relative fault of the indemnifying party and the indemnified party as well as any other relevant equitable considerations. The relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by or on behalf of the indemnifying party or the indemnified party and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such untrue statement or omission. No Person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any Person who was not guilty of such fraudulent misrepresentation. Notwithstanding anything to the contrary in this Section 12, no Holder shall be required, pursuant to this Section 12, to contribute any amount in excess of the net proceeds received by such indemnifying party from the sale of Shares of Common Stock in the offering to which the losses, claims, damages, liabilities or expenses of the indemnified party relate. 13. Reports Under the Exchange Act. With a view to making available to the Holders the benefits of Rule 144 under the Securities Act and any other rule or regulation of the SEC that may at any time permit a Holder to sell securities of the Company to the public without registration or pursuant to a registration on Form S-3, the Company agrees to: (a) make and keep public information available, as those terms are understood and defined in Rule 144 under the Securities Act, at all times after the effective date of the first registration statement filed by the Company for the offering of its securities to the general public; (b) take such action as is necessary to enable the Holders to utilize Form S-3 for the sale of their Registrable Securities; (c) file with the SEC in a timely manner all reports and other documents required of the Company under the Securities Act and the Exchange Act; and (d) furnish to any Holder, so long as the Holder owns any Registrable Securities, forthwith upon request (i) a written statement by the Company that it has complied with the reporting requirements of Rule 144 under the Securities Act (at any time after the effective date of the first registration statement filed by the Company) and the Securities Act and Exchange Act (at any time after it has become subject to such reporting requirements) or that it qualifies as a registrant whose securities may be resold pursuant to Form S-3 (at any time it so qualifies), (ii) a copy of the most recent annual or quarterly report of the Company and such other reports and documents so filed by the Company, and (iii) such other information as may be reasonably requested in availing any Holder of any rule or regulation of the SEC which permits the selling of any such securities without registration or pursuant to such form. 14. Assignment of Registration Rights. The rights to cause the Company to register Registrable Securities pursuant to this Agreement may be assigned in whole or in part by a Holder to one or more of its partners or affiliates or to one or more transferees or assignees of Registrable Securities acquired by the Holder, provided that such transferee or assignee delivers to the Company a written instrument by which such transferee or assignee agrees to be bound by the obligations imposed on Holders under this Agreement to the same extent as if such transferee or assignee was a party hereto. 15. Existing Registration Rights; Limitations on Subsequent Registration Rights. This agreement supersedes all prior agreements regarding registration rights and any of the parties hereto and all such prior agreements are deemed terminated hereby. Except as disclosed in Part 2.20 of Schedule 1 of the Purchase Agreement, the Company represents and warrants to the Holders that no other "registration rights" relating to securities of the Company exist on the date hereof. From and after the date of this Agreement, the Company shall not, without the prior written consent of each of the Investors who on the date such consent is sought continues to own at least 50% of the Priority Registrable Securities that such Investor owns on the date hereof, enter into any agreement with any holder or prospective holder of any securities of the Company which would allow such holder or prospective holder (a) to include such securities in any registration filed under this Agreement, unless under the terms of such agreement such holder or prospective holder may include such securities in any such registration only to the extent that the inclusion of such holder's securities will not reduce the amount of the Registrable Securities of the Holders which is included therein or (b) to request a registration. 16. "Market Stand-Off" Agreement. Each Holder hereby agrees that, during the period of ninety (90) days following the effective date of a registration statement of the Company filed under the Securities Act in connection with an underwritten offering, it shall not, to the extent requested by the Company and such underwriter, sell or otherwise transfer or dispose of (other than to donees or partners who agree to be similarly bound) any Shares of Common Stock or any securities of the Company convertible into Shares of Common Stock held by it except Shares of Common Stock included in such registration; provided, however, that: (a) such agreement shall be applicable only to a registration statement (i) requested pursuant to Section 2 hereof or (ii) initiated by the Company which covers Shares of Common Stock (or other securities) to be sold on its behalf to the public in an underwritten offering; (b) all officers, directors and employees of the Company and all other Persons with registration rights (whether or not pursuant to this Agreement) shall enter into similar agreements; and (c) there shall be excluded from the provisions of such agreement customary exceptions for transfers to affiliates. In order to enforce the foregoing covenant, the Company may impose stop-transfer instructions with respect to the Registrable Securities of each Investor (and the shares or securities of every other person subject to the foregoing restriction) until the end of such period. 17. Amendment; Waiver. Any provision of this Agreement may be amended only with the written consent of the Company and each of the Investors and the observance of any provision of this Agreement may be waived (either generally or in a particular instance and either retroactively or prospectively) only with the written consent of the party to be charged, provided that the Holders of 60% of the Registrable Securities then outstanding may act on behalf of all such Holders of Registrable Securities; provided, however, that no amendment or waiver shall affect the rights of an Investor under Section 2(c) without the consent of that Investor. Any amendment or waiver effected in accordance with this Section 17 shall be binding upon each Holder of Registrable Securities at the time outstanding, each future Holder of all such securities, and the Company. 18. Changes in Registrable Securities, Series A Stock or Warrants. If, and as often as, there are any changes in the Registrable Securities, Series A Stock or Warrants by way of stock split, stock dividend, combination or reclassification, or through merger, consolidation, reorganization or recapitalization, or by any other means, appropriate adjustment shall be made in the provisions of this Agreement, as may be required, so that the rights and privileges granted hereby shall continue with respect to the Registrable Securities as so changed. Without limiting the generality of the foregoing, the Company will require any successor by merger or consolidation to assume and agree to be bound by the terms of this Agreement, as a condition to any such merger or consolidation. 19. Entire Agreement. This Agreement (together with the Purchase Agreement) constitutes the full and entire understanding and agreement among the parties with regard to the subject matter hereof. Nothing in this Agreement, express or implied, is intended to confer upon any Person, other than the parties hereto and their respective successors and assigns, any rights, remedies, obligations, or liabilities under or by reason of this Agreement, except as expressly provided herein. 20. Governing Law. This Agreement shall be governed in all respects by the laws of the State of New York as such laws are applied to agreements between New York residents entered into and to be performed entirely within New York, whether or not all parties hereto are residents of New York. 21. Successors and Assigns. The provisions hereof shall inure to the benefit of, and be binding upon, the successors, permitted assigns (as provided in Section 14), heirs, executors and administrators of the parties hereto. 22. Notices. All notices and other communications provided for herein shall be dated and in writing and shall be deemed to have been duly given (i) on the date of delivery, if delivered personally or by telecopier, receipt confirmed, (ii) on the second following business day, if delivered by a recognized overnight courier service, or (iii) seven days after mailing, if sent by registered or certified mail, return receipt requested, postage prepaid, in each case, to the party to whom it is directed at the following address (or at such other address as any party hereto shall hereafter specify by notice in writing to the other parties hereto): (i) If to the Company, to it at the following address: 24/7 Media, Inc. 1290 Avenue of the Americas New York, NY 10104 Attn: Chief Executive Officer (ii) If to any Investor, to it at the address set forth below its name on the signature page hereto. (iii) If to Prospect Street NYC Discovery Fund, L.P. or Prospect Street NYC Co-Investment Fund, L.P., copies to the following address: Morgan, Lewis & Bockius, LLP 101 Park Avenue New York, NY 10178 Attn: Ira White 23. Severability. Any invalidity, illegality or limitation on the enforceability of this Agreement or any part thereof, by any party, whether arising by reason of the law of the respective party's domicile or otherwise, shall in no way affect or impair the validity, legality or enforceability of this Agreement with respect to other parties. If any provision of this Agreement shall be judicially determined to be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. 24. Titles and Subtitles. The titles of the Sections of this Agreement are for convenience of reference only and are not to be considered in construing this Agreement. 25. Delays or Omissions; Remedies Cumulative. It is agreed that no delay or omission to exercise any right, power or remedy accruing to the parties, upon any breach or default of the Company under this Agreement, shall impair any such right, power or remedy, nor shall it be construed to be a waiver of any such breach or default, or any acquiescence therein, or of any similar breach or default thereafter occurring; nor shall any waiver of any single breach or default be deemed a waiver of any other breach or default theretofore or thereafter occurring. It is further agreed that any waiver, permit, consent or approval of any kind or character by a party of any breach or default under this Agreement, or any waiver by a party of any provisions or conditions of this Agreement must be in writing and shall be effective only to the extent specifically set forth in writing and that all remedies, either under this Agreement, or by law or otherwise afforded to a party, shall be cumulative and not alternative. 26. Attorneys' Fees. If any action at law or in equity is necessary to enforce or interpret the terms of this Agreement, the prevailing party shall be entitled to reasonable attorney's fees, costs and necessary disbursements in addition to any other relief to which such party may be entitled. 27. Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be an original, but all of which together shall constitute one instrument. 28. Further Assurances. Each party shall do and perform, or cause to be done and performed, all such further acts and things, and shall execute and deliver all such other agreements, certificates, instruments and documents, as the other party may reasonably request in order to carry out the intent and accomplish the purposes of this Agreement and the consummation of the transactions contemplated hereby. 29. Remedies. In the event of a breach by any party to this Agreement of its obligations under this Agreement, any party injured by such breach, in addition to being entitled to exercise all rights granted by law, including recovery of damages and costs (including reasonable attorneys' fees), will be entitled to specific performance of its rights under this Agreement. The parties agree that the provisions of this Agreement shall be specifically enforceable, it being agreed by the parties that the remedy at law, including monetary damages, for breach of any such provision will be inadequate compensation for any loss and that any defense in any action for specific performance that a remedy at law would be adequate is waived. 30. Recapitalizations, Exchanges, Etc. The provisions of this Agreement shall apply, to the full extent set forth herein, to any and all shares of the Company capital stock or any successor or assign of the Company (whether by merger, consolidation, sale of assets, or otherwise, including shares issued by a parent corporation in connection with a triangular merger) which may be issued in respect of, in exchange for, or in substitution of, shares of Common Stock or Series A Stock or Warrants, and shall be appropriately adjusted for any stock dividends, splits, reverse splits, combinations, reclassifications and the like occurring after the date hereof. IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the date and year first above written. 24/7 MEDIA, INC. By: /s/ David J. Moore -------------------------------------- David J. Moore Chief Executive Officer THE TRAVELERS INSURANCE COMPANY By: /s/ John W. Petchler ---------------------------------------- Name: John W. Petchler Title: Senior Vice President Prospect Street NYC Discovery Fund, L.P. By: Prospect Street Discovery Fund, Inc. its General Partner By: /s/ John Barry ---------------------------------------- Name: John Barry Prospect Street NYC Co-Investment Fund, L.P. By: Prospect Street Co-Investment Fund, LLC, its General Partner By: /s/ John Barry ---------------------------------------- Name: John Barry Big Flower Digital Services, Inc. By: /s/ Mark A. Angelson ---------------------------------------- Name: Mark A. Angelson Title: Executive Vice President /s/ David Banks ---------------------------------------- Name: David Banks Trinity Ventures V, L.P. A California Limited Partnership By: Trinity TVL Partners V, L.P. A California Limited Partnership, its General Partner By: /s/ Noel Fenton ---------------------------------------- A General Partner Trinity V Side-By-Side Fund, L.P By: Trinity TVL Partners V, L.P. A California Limited Partership, its General Partner By: /s/ Noel Fenton ---------------------------------------- A General Partner Zero Stage Capital V Limited Partnership By: Zero Stage Capital Associates Limtied Partnership, General Partner By: /s/ Stanley Fung ----------------------------------------- A General Partner FRW Investments 1996 A California Partnership By: /s/ Joel Keller ------------------------------------------ A General Partner EX-10.9 9 EMPLOYMENT AGREEMENT EMPLOYMENT AGREEMENT Employment Agreement made as of February 24, 1998, by and between Interactive Imaginations, Inc., a New York corporation, with its principal place of business at 1290 Avenue of the Americas, New York, New York 10104 (the "Company"), and David J. Moore ("Executive"). W I T N E S S E T H : WHEREAS, the Company desires to employ Executive as its Chief Executive Officer and President, and Executive is willing to serve in such capacities; and WHEREAS, the Company and Executive desire to set forth the terms and conditions of such employment. NOW, THEREFORE, in consideration of the premises and of the mutual covenants and agreements herein contained and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the Company and Executive agree as follows: 1. EMPLOYMENT. (a) The Company hereby agrees to employ Executive, and Executive agrees to be employed by the Company, on the terms and conditions herein contained as its Chief Executive Officer and President. Executive shall report to the Board of Directors of the Company (the "Board") and shall have such duties, authority and responsibilities commensurate with Executive's position for similarly sized companies in the industry. (b) Executive shall devote all of his business time, energy, skill and efforts to the performance of his duties hereunder and shall faithfully and diligently serve the Company. The foregoing shall not prevent Executive from participating in not-for-profit activities or from managing his passive personal investments, provided that these activities do not materially interfere with Executive's obligations hereunder. (c) Upon the request of the Board, Executive shall also serve as a director or officer of subsidiaries in positions commensurate with his position with the Company without additional compensation. If any compensation is paid Executive by such subsidiaries, they shall be a credit against amounts due hereunder. 2. TERM OF EMPLOYMENT. (a) Except for earlier termination as provided in Section 7 hereof or as extended in this Section 2, Executive's employment under this Agreement (the "Employment Term") shall commence on the date hereof (the "Commencement Date") and continue through January 1, 2001. The Employment Term shall be automatically renewed for successive one-year terms unless either party gives written notice to the other at least six months prior to the expiration of the then 1 Employment Term, of such party's intention to terminate Executive's employment hereunder at the end of the then current Employment Term. (b) Notwithstanding anything else herein, the provisions of Sections 8 and 9 hereof shall survive and remain in effect notwithstanding the termination of the Employment Term or a breach by the Company or Executive of this Agreement or any of its terms. 3. COMPENSATION. (a) As compensation for his services under this Agreement, the Company shall pay Executive a base salary (the "Base Salary") as set forth on Exhibit A hereto. Payment of the Base Salary shall be made in equal installments twice a month. (b) In addition to the Base Salary, the Company shall pay Executive a bonus in accordance with the schedule set forth on Exhibit A hereto. Such schedule may be revised from year to year by agreement of the parties hereto. 4. BENEFITS AND FRINGES. (a) During the Employment Term, Executive shall be entitled to such benefits and fringes, if any, as are generally provided from time to time by the Company to its executive officers, including pension, retirement, savings, welfare (including life and health insurance) and other employee benefit plans and arrangements. (b) Except as otherwise specifically provided herein, the Executive shall be responsible for the tax consequences of all benefits and fringes. 5. EXPENSES. The Company shall reimburse Executive in accordance with its expense reimbursement policy as in effect from time to time for all reasonable expenses incurred by Executive in connection with the performance of his duties under this Agreement upon the presentation by Executive of an itemized account of such expenses and appropriate receipts and otherwise in compliance with such rules relating thereto as the Company may, from time to time, adopt. 6. VACATION. During the Employment Term, Executive shall be entitled to vacation in accordance with the Company's practices. 2 7. TERMINATION. (a) Executive's employment under this Agreement and the Employment Term shall terminate upon any of the following events: (i) Automatically on the date of Executive's death. (ii) Upon written notice given by the Company to Executive if Executive is unable to substantially perform his material duties hereunder for one hundred eighty (180) continuous days during any period of three hundred sixty (360) consecutive days by reason of physical or mental incapacity. (iii) Upon written notice by the Company to Executive for Cause. Cause shall mean (a) Executive being convicted of (or pleading nolo contendere to) a felony (other than a traffic violation) or a crime involving fraud, misappropriation, or embezzlement; (b) refusal of the Executive to attempt to properly perform his obligations under this Agreement, or follow any direction of the Board consistent with this Agreement, which in either case is not remedied within ten (10) business days after receipt by Executive of written notice from the Company specifying the details thereof, provided the refusal to follow a direction shall not be Cause if Executive in good faith reasonably believes that such direction is not legal, ethical or moral and promptly notifies the Board in writing of such belief; (c) Executive's gross negligence with regard to his duties or willful misconduct with regard to the business, assets or employees of the Company; or (d) any other breach by Executive of a material provision of this Agreement that remains uncured for twenty (20) business days after written notice thereof is given to Executive or such longer period as may reasonably be required to remedy the default, provided that the Executive endeavors in good faith to remedy the default. (iv) Upon written notice by the Company without Cause. (b) Upon termination of the Employment Term, Executive shall be promptly paid any unpaid salary and accrued vacation through his date of termination and reimbursement for any expenses incurred in connection with the official business of the Company prior to his date of termination which he would be otherwise entitled to reimbursement for in accordance with the Company's policies on the reimbursement of business expenses and any benefits or amounts under any benefit or equity plan in accordance with the terms of said plan and any fringe benefits due for the period prior to such termination. In addition, he shall be paid any declared, but unpaid, bonus. (c) If Executive's termination is pursuant to subsection (a)(i) above, Executive's Beneficiary (as defined in the next sentence) shall continue to receive payments of Executive's Base Salary, at the same time such amounts would have been paid if Executive was still an employee of the Company for a period of six (6) months following Executive's death. For purposes of this provision, Executive's Beneficiary shall be Executive's spouse; if Executive is not married on his date of death, Executive's children, per stirpes; and otherwise, Executive's estate. 3 (d) If Executive's termination is pursuant to subsection (a)(ii) above, Executive shall be entitled to receive for six (6) months following the termination of Executive's employment, at the same time as it would have been paid if he was an employee of the Company, his Base Salary less any amounts actually received by him pursuant to long term disability coverage, if any, provided for by the Company for the matching pay period. After such six (6) months, Executive shall only be entitled to any amounts due him under the long term disability coverage, if any. (e) If Executive's termination is pursuant to subsection (a)(iv) above, Executive shall receive: (i) severance pay in an amount equal to two (2) times the sum of (a) Executive's Base Salary on the date of his termination, and (b) the maximum bonus for which Executive is eligible during the fiscal year of termination of Executive's employment, which shall be payable in a lump sum within thirty (30) days after such termination; and (ii) continued medical coverage for a period of two (2) years following termination of Executive's employment. (f) All amounts payable pursuant to this Section 7 shall be subject to required withholding. The Company shall have no other obligations to Executive as a result of his termination. 8. CONFIDENTIAL INFORMATION AND NON-COMPETITION. Executive has entered into a Non-Competition and Non-Disclosure and Developments agreement of even date herewith, which agreement is attached hereto and made a part hereof as though fully set forth herein. 9. INDEMNIFICATION. During the Employment Term and thereafter, the Company shall indemnify Executive to the fullest extent permitted by law against any judgments, fines, amounts paid in settlement and reasonable expenses (including attorneys' fees), and advance amounts necessary to pay the foregoing at the earliest time and to the fullest extent permitted by law, in connection with any claim, action or proceeding (whether civil or criminal) against Executive (other than a claim brought by the Company) as a result of Executive serving as an officer or director of the Company or in any capacity at the request of the Company, in or with regard to any other entity, employee benefit plan or enterprise. This indemnification shall be in addition to, and not in lieu of, any other indemnification Executive shall be entitled to pursuant to the Company's Certificate of Incorporation or By-laws or otherwise. Following Executive's termination of employment, the Company shall continue to cover Executive under the Company's directors and officers insurance for the period during which Executive may be subject to potential liability for any claim, action or proceeding (whether civil or criminal) as a result of his service as an officer or director of the Company or in any capacity at the request of the Company, at the highest level then maintained for any then or former officer or director. 4 10. EXECUTIVE REPRESENTATION. Executive represents and warrants that he is not limited under any contractual or other provision from entering into this Agreement and performing his obligations hereunder. 11. ENTIRE AGREEMENT; MODIFICATION. This Agreement constitutes the full and complete understanding of the parties hereto and will supersede all prior agreements and understandings, oral or written, with respect to the subject matter hereof. Each party to this Agreement acknowledges that no representations, inducements, promises or agreements, oral or otherwise, have been made by either party, or anyone acting on behalf of either party, which are not embodied herein and that no other agreement, statement or promise not contained in this Agreement shall be valid or binding. This Agreement may not be modified or amended except by an instrument in writing signed by the party against whom or which enforcement may be sought. 12. SEVERABILITY. Any term or provision of this Agreement which is invalid or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such invalidity or unenforceability without rendering invalid or unenforceable the remaining terms and provisions of this Agreement or affecting the validity or enforceability of any of the terms or provisions of this Agreement in any other jurisdiction. 13. WAIVER OF BREACH. The waiver by any party of a breach of any provisions of this Agreement, which waiver must be in writing to be effective, shall not operate as or be construed as a waiver of any subsequent breach. 14. NOTICES. All notices hereunder shall be in writing and shall be deemed to have been duly given when delivered by hand, or one (1) day after sending by United States Postal Service express mail or other "overnight mail service," or three (3) days after sending by certified or registered mail, postage prepaid, return receipt requested. Notice shall be sent as follows: if to Executive, to his home address as listed in the Company's records; and if to the Company, at its office as set forth at the head of this Agreement. Either party may change the notice address by notice given as aforesaid. 15. ASSIGNABILITY; BINDING EFFECT. This Agreement shall be binding upon and inure to the benefit of Executive and Executive's legal representatives, heirs and distributees, and shall be binding upon and inure to the benefit of the Company, its successors and assigns. This Agreement may not be assigned by Executive. This Agreement may not be assigned by the Company except in connection with a merger or a sale by the Company of all or substantially all of its assets, and then only provided that the assignee specifically assumes in writing all of the Company's obligations hereunder. 16. ARBITRATION. Any dispute or controversy arising under or in connection with this Agreement, other than injunctive relief under Section 8 (provided that Executive may bring an arbitration to recover legal fees in connection with such injunctive activities under the last sentence of this Section 16) shall be settled exclusively by arbitration, conducted before a panel of three arbitrators in New York, New York, in accordance with the rules of the American Arbitration Association then in effect, and judgment may be entered on the arbitrators' award in any court having 5 jurisdiction. The decision of the arbitrator shall be final and binding on the parties. The parties shall equally divide all costs of the American Arbitration Association and the arbitrator, except that the arbitrator shall direct the Company to reimburse Executive's portion of the cost on the same basis as set forth in the next sentence with regard to legal fees. Each party shall bear its own legal fees in any dispute except that, in the event the Executive prevails on any material issue, the arbitrator shall award the Executive his legal fees attributable to all matters other than frivolous positions taken by the Executive (as determined by the arbitrator). 17. GOVERNING LAW. All issues pertaining to the validity, construction, execution and performance of this Agreement shall be construed and governed in accordance with the laws of the State of New York, without giving effect to the conflict or choice of law provisions thereof. 18. HEADINGS. The headings in this Agreement are intended solely for convenience or reference and shall be given no effect in the construction or interpretation of this Agreement. 19. COUNTERPARTS. This Agreement may be executed in several counterparts, each of which shall be deemed to be an original but all of which together shall constitute one and the same instrument. 6 IN WITNESS WHEREOF, the Company has caused this Agreement to be duly executed and Executive has hereunto set his hand as of the date first set forth above. INTERACTIVE IMAGINATIONS, INC. By: /s/ Jacob I. Friesel --------------------------------------------------- Jacob I. Friesel Executive Vice President By: /s/ David J. Moore --------------------------------------------------- David J. Moore 7 EXHIBIT A Base Salary The Company shall pay Executive a base salary at a rate of $225,000 per annum from the date hereof through January 1, 2001. In the event that the Employment Agreement is renewed automatically pursuant to Section 2(a) and the parties do not mutually agree otherwise, the Base Salary shall be increased by 10% on January 2, 2001 and 3% on the first date of each successive one-year term thereafter, if any. Executive shall also receive on the date hereof 225,000 restricted Common Shares of the Company. Such shares shall vest in three equal increments on January 1, 1999, January 1, 2000 and January 1, 2001. The grant of such shares is pursuant to, and is governed by, the Company's 1998 Stock Incentive Plan. Incentive In addition, Executive shall be eligible to receive a target bonus of $275,000 (one-half of which shall be Revenue Incentive and one-half of which shall be Profit/Loss Incentive) in accordance with the 24/7 Media 1998 Senior Management Incentive Plan, a copy of which is attached hereto. Executive shall be eligible to receive a target bonus of $300,000 and $325,000 in 1999 and 2000 respectively, in accordance with incentive plans to be agreed upon in good faith by the Board and Executive. EX-10.10 10 EMPLOYMENT AGREEMENT EMPLOYMENT AGREEMENT Employment Agreement made as of February 24, 1998, by and between Interactive Imaginations, Inc., a New York corporation, with its principal place of business at 1290 Avenue of the Americas, New York, New York 10104 (the "Company"), and Jacob I. Friesel ("Executive"). W I T N E S S E T H : WHEREAS, the Company desires to employ Executive as its Executive Vice President, and Executive is willing to serve in such capacity; and WHEREAS, the Company and Executive desire to set forth the terms and conditions of such employment. NOW, THEREFORE, in consideration of the premises and of the mutual covenants and agreements herein contained and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the Company and Executive agree as follows: 1. EMPLOYMENT. (a) The Company hereby agrees to employ Executive, and Executive agrees to be employed by the Company, on the terms and conditions herein contained as its Executive Vice President or in such other executive managerial position or positions with the Company or its subsidiaries or affiliates as shall hereafter be designated by the Board of Directors of the Company. Executive shall report to the Chief Executive Officer of the Company (the "CEO") and shall have such duties, authority and responsibilities commensurate with Executive's position for similarly sized companies in the industry. (b) Executive shall devote all of his business time, energy, skill and efforts to the performance of his duties hereunder and shall faithfully and diligently serve the Company. The foregoing shall not prevent Executive from participating in not-for-profit activities or from managing his passive personal investments, provided that these activities do not materially interfere with Executive's obligations hereunder. (c) Upon the request of the Board, Executive shall also serve as a director or officer of subsidiaries in positions commensurate with his position with the Company without additional compensation. If any compensation is paid Executive by such subsidiaries, they shall be a credit against amounts due hereunder. 2. TERM OF EMPLOYMENT. (a) Except for earlier termination as provided in Section 7 hereof or as extended in this Section 2, Executive's employment under this Agreement (the "Employment Term") shall commence on the date hereof (the "Commencement Date") and continue through December 31, 1998. The Employment Term shall be automatically renewed for successive one-year terms 1 unless either party gives written notice to the other at least six months prior to the expiration of the then Employment Term, of such party's intention to terminate Executive's employment hereunder at the end of the then current Employment Term. (b) Notwithstanding anything else herein, the provisions of Sections 8 and 9 hereof shall survive and remain in effect notwithstanding the termination of the Employment Term or a breach by the Company or Executive of this Agreement or any of its terms. 3. COMPENSATION. (a) As compensation for his services under this Agreement, the Company shall pay Executive a base salary (the "Base Salary") as set forth on Exhibit A hereto. Payment of the Base Salary shall be made in equal installments twice a month. (b) In addition to the Base Salary, the Company shall pay Executive a bonus in accordance with the schedule set forth on Exhibit A hereto. Such schedule may be revised from year to year by agreement of the parties hereto. 4. BENEFITS AND FRINGES. (a) During the Employment Term, Executive shall be entitled to such benefits and fringes, if any, as are generally provided from time to time by the Company to its executive officers, including pension, retirement, savings, welfare (including life and health insurance) and other employee benefit plans and arrangements. (b) Except as otherwise specifically provided herein, the Executive shall be responsible for the tax consequences of all benefits and fringes. 5. EXPENSES. The Company shall reimburse Executive in accordance with its expense reimbursement policy as in effect from time to time for all reasonable expenses incurred by Executive in connection with the performance of his duties under this Agreement upon the presentation by Executive of an itemized account of such expenses and appropriate receipts and otherwise in compliance with such rules relating thereto as the Company may, from time to time, adopt. 6. VACATION. During the Employment Term, Executive shall be entitled to vacation in accordance with the Company's practices. 7. TERMINATION. (a) Executive's employment under this Agreement and the Employment Term shall terminate upon any of the following events: (i) Automatically on the date of Executive's death; 2 (ii) Upon written notice given by the Company to Executive if Executive is unable to substantially perform his material duties hereunder for one hundred eighty (180) continuous days during any period of three hundred sixty (360) consecutive days by reason of physical or mental incapacity; (iii) Upon written notice by the Company to Executive for Cause. Cause shall mean (a) Executive being convicted of (or pleading nolo contendere to) a felony (other than a traffic violation) or a crime involving fraud, misappropriation, or embezzlement; (b) refusal of the Executive to attempt to properly perform his obligations under this Agreement, or follow any direction of the CEO consistent with this Agreement, which in either case is not remedied within ten (10) business days after receipt by Executive of written notice from the Company specifying the details thereof, provided the refusal to follow a direction shall not be Cause if Executive in good faith reasonably believes that such direction is not legal, ethical or moral and promptly notifies the CEO in writing of such belief; (c) Executive's gross negligence with regard to his duties or willful misconduct with regard to the business, assets or employees of the Company; or (d) any other breach by Executive of a material provision of this Agreement that remains uncured for twenty (20) business days after written notice thereof is given to Executive or such longer period as may reasonably be required to remedy the default, provided that the Executive endeavors in good faith to remedy the default; or (iv) Upon written notice by the Company without Cause. (b) Upon termination of the Employment Term, Executive shall be promptly paid any unpaid salary and accrued vacation through his date of termination and reimbursement for any expenses incurred in connection with the official business of the Company prior to his date of termination which he would be otherwise entitled to reimbursement for in accordance with the Company's policies on the reimbursement of business expenses and any benefits or amounts under any benefit or equity plan in accordance with the terms of said plan and any fringe benefits due for the period prior to such termination. In addition, he shall be paid any declared, but unpaid, bonus. (c) If Executive's termination is pursuant to subsection (a)(i) above, Executive's Beneficiary (as defined in the next sentence) shall continue to receive payments of Executive's Base Salary, at the same time such amounts would have been paid if Executive was still an employee of the Company for a period of six (6) months following Executive's death. For purposes of this provision, Executive's Beneficiary shall be Executive's spouse; if Executive is not married on his date of death, Executive's children, per stirpes; and otherwise, Executive's estate. (d) If Executive's termination is pursuant to subsection (a)(ii) above, Executive shall be entitled to receive for six (6) months following the termination of Executive's employment, at the same time as it would have been paid if he was an employee of the Company, his Base Salary less any amounts actually received by him pursuant to long term disability coverage, if any, provided for by the Company for the matching pay period. After such six (6) months, Executive shall only be entitled to any amounts due him under the long term disability coverage, if any. 3 (e) If Executive's termination is pursuant to subsection (a)(iv) above, or if Executive receives a notice of non-renewal from the Company pursuant to Section 2(a), Executive shall receive: (i) for six (6) months following the termination of Executive's employment, at the same time as it would have been paid if he were an employee of the Company, his Base Salary; and (ii) at the end of such six (6) month period, an amount equal to one- half (1/2) of the maximum Bonus for which Executive was eligible during the fiscal year of termination of Executive's employment, which amount shall be payable in a lump sum on the six month anniversary of such termination; and (iii) continued medical coverage for a period of six months following termination of Executive's employment. (f) All amounts payable pursuant to this Section 7 shall be subject to required withholding. The Company shall have no other obligations to Executive as a result of his termination. 8. CONFIDENTIAL INFORMATION AND NON-COMPETITION. Executive has entered into a Non-Competition and Non-Disclosure and Developments agreement of even date herewith, which agreement is attached hereto and made a part hereof as though fully set forth herein. 9. INDEMNIFICATION. During the Employment Term and thereafter, the Company shall indemnify Executive to the fullest extent permitted by law against any judgments, fines, amounts paid in settlement and reasonable expenses (including attorneys' fees), and advance amounts necessary to pay the foregoing at the earliest time and to the fullest extent permitted by law, in connection with any claim, action or proceeding (whether civil or criminal) against Executive (other than a claim brought by the Company) as a result of Executive serving as an officer or director of the Company or in any capacity at the request of the Company, in or with regard to any other entity, employee benefit plan or enterprise. This indemnification shall be in addition to, and not in lieu of, any other indemnification Executive shall be entitled to pursuant to the Company's Certificate of Incorporation or By-laws or otherwise. Following Executive's termination of employment, the Company shall continue to cover Executive under the Company's directors and officers insurance for the period during which Executive may be subject to potential liability for any claim, action or proceeding (whether civil or criminal) as a result of his service as an officer or director of the Company or in any capacity at the request of the Company, at the highest level then maintained for any then or former officer or director. 4 10. EXECUTIVE REPRESENTATION. Executive represents and warrants that he is not limited under any contractual or other provision from entering into this Agreement and performing his obligations hereunder. 11. ENTIRE AGREEMENT; MODIFICATION. This Agreement constitutes the full and complete understanding of the parties hereto and will supersede all prior agreements and understandings, oral or written, with respect to the subject matter hereof. Each party to this Agreement acknowledges that no representations, inducements, promises or agreements, oral or otherwise, have been made by either party, or anyone acting on behalf of either party, which are not embodied herein and that no other agreement, statement or promise not contained in this Agreement shall be valid or binding. This Agreement may not be modified or amended except by an instrument in writing signed by the party against whom or which enforcement may be sought. 12. SEVERABILITY. Any term or provision of this Agreement which is invalid or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such invalidity or unenforceability without rendering invalid or unenforceable the remaining terms and provisions of this Agreement or affecting the validity or enforceability of any of the terms or provisions of this Agreement in any other jurisdiction. 13. WAIVER OF BREACH. The waiver by any party of a breach of any provisions of this Agreement, which waiver must be in writing to be effective, shall not operate as or be construed as a waiver of any subsequent breach. 14. NOTICES. All notices hereunder shall be in writing and shall be deemed to have been duly given when delivered by hand, or one (1) day after sending by United States Postal Service express mail or other "overnight mail service," or three (3) days after sending by certified or registered mail, postage prepaid, return receipt requested. Notice shall be sent as follows: if to Executive, to his home address as listed in the Company's records; and if to the Company, at its office as set forth at the head of this Agreement. Either party may change the notice address by notice given as aforesaid. 15. ASSIGNABILITY; BINDING EFFECT. This Agreement shall be binding upon and inure to the benefit of Executive and Executive's legal representatives, heirs and distributees, and shall be binding upon and inure to the benefit of the Company, its successors and assigns. This Agreement may not be assigned by Executive. This Agreement may not be assigned by the Company except in connection with a merger or a sale by the Company of all or substantially all of its assets, and then only provided that the assignee specifically assumes in writing all of the Company's obligations hereunder. 16. ARBITRATION. Any dispute or controversy arising under or in connection with this Agreement, other than injunctive relief under Section 8 (provided that Executive may bring an arbitration to recover legal fees in connection with such injunctive activities under the last sentence of this Section 16) shall be settled exclusively by arbitration, conducted before a panel of three arbitrators in New York, New York, in accordance with the rules of the American Arbitration Association then in effect, and judgment may be entered on the arbitrators' award in any court having 5 jurisdiction. The decision of the arbitrator shall be final and binding on the parties. The parties shall equally divide all costs of the American Arbitration Association and the arbitrator, except that the arbitrator shall direct the Company to reimburse Executive's portion of the cost on the same basis as set forth in the next sentence with regard to legal fees. Each party shall bear its own legal fees in any dispute except that, in the event the Executive prevails on any material issue, the arbitrator shall award the Executive his legal fees attributable to all matters other than frivolous positions taken by the Executive (as determined by the arbitrator). 17. GOVERNING LAW. All issues pertaining to the validity, construction, execution and performance of this Agreement shall be construed and governed in accordance with the laws of the State of New York, without giving effect to the conflict or choice of law provisions thereof. 18. HEADINGS. The headings in this Agreement are intended solely for convenience or reference and shall be given no effect in the construction or interpretation of this Agreement. 19. COUNTERPARTS. This Agreement may be executed in several counterparts, each of which shall be deemed to be an original but all of which together shall constitute one and the same instrument. 6 IN WITNESS WHEREOF, the Company has caused this Agreement to be duly executed and Executive has hereunto set his hand as of the date first set forth above. INTERACTIVE IMAGINATIONS, INC. By: /s/ David J. Moore ----------------------------------- David J. Moore Chief Executive Officer /s/ Jacob I. Friesel ----------------------------------- Jacob I. Friesel 7 EXHIBIT A Base Salary The Company shall pay Executive a base salary at a rate of $160,417 per annum from the date hereof through December 31,1998. In the event that the Employment Agreement is renewed automatically pursuant to Section 2(a) and the parties do not mutually agree otherwise, the Base Salary shall be increased by 3% on January 1, 1999 and on the first date of each successive one-year term thereafter, if any. Incentive In addition, Executive shall be eligible to receive a target bonus of $120,313 (one-half of which shall be Revenue Incentive and one-half of which shall be Profit/Loss Incentive) in accordance with the 24/7 Media 1998 Senior Management Incentive Plan, a copy of which is attached hereto. EX-10.11 11 EMPLOYMENT AGREEMENT EMPLOYMENT AGREEMENT Employment Agreement made as of April 9, 1998, by and between 24/7 Media, Inc., a Delaware corporation, with its principal place of business at 1290 Avenue of the Americas, New York, New York 10104 (the "Company"), and Yale R. Brown ("Executive"). W I T N E S S E T H : WHEREAS, the Company desires to employ Executive as its Executive Vice President - Technology and Operations, and President of the Company's subsidiary, Intelligent Interactions, Inc., and Executive is willing to serve in such capacities; and WHEREAS, the Company and Executive desire to set forth the terms and conditions of such employment. NOW, THEREFORE, in consideration of the premises and of the mutual covenants and agreements herein contained and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the Company and Executive agree as follows: 1. EMPLOYMENT. (a) The Company hereby agrees to employ Executive, and Executive agrees to be employed by the Company, on the terms and conditions herein contained as its Executive Vice President - Technology and Operations and as President of Intelligent Interactions, Inc., or in such other executive managerial position or positions with the Company or its subsidiaries or affiliates as shall hereafter be designated by the Board of Directors of the Company. Executive shall report to the Chief Executive Officer of the Company (the "CEO") and shall have such duties, authority and responsibilities commensurate with Executive's position for similarly sized companies in the industry. (b) Executive shall devote all of his business time, energy, skill and efforts to the performance of his duties hereunder and shall faithfully and diligently serve the Company. The foregoing shall not prevent Executive from participating in not-for-profit activities or from managing his passive personal investments or from providing incidental assistance to family members on matters of family business or from serving as principal of Intelligent Management Service Corporation, provided that these activities do not materially interfere with Executive's obligations hereunder; (c) Upon the request of the Board, Executive shall also serve as a director or officer of subsidiaries in positions commensurate with his position with the Company without additional compensation. If any compensation is paid Executive by such subsidiaries, they shall be a credit against amounts due hereunder. 2. TERM OF EMPLOYMENT. (a) Except for earlier termination as provided in Section 7 hereof or as extended in this Section 2, Executive's employment under this Agreement (the "Employment Term") shall commence on the date hereof (the "Commencement Date") and continue through December 31, 1999. The Employment Term shall be automatically renewed for successive one-year terms unless either party gives written notice to the other at least six months prior to the expiration of the then Employment Term, of such party's intention to terminate Executive's employment hereunder at the end of the then current Employment Term. (b) Notwithstanding anything else herein, the provisions of Sections 8 and 9 hereof shall survive and remain in effect notwithstanding the termination of the Employment Term or a breach by the Company or Executive of this Agreement or any of its terms. 3. COMPENSATION. (a) As compensation for his services under this Agreement, the Company shall pay Executive a base salary (the "Base Salary") as set forth on Exhibit A hereto. Payment of the Base Salary shall be made in equal installments twice a month. (b) In addition to the Base Salary, the Company shall pay Executive a bonus in accordance with the schedule set forth on Exhibit A hereto. Such schedule may be revised from year to year by agreement of the parties hereto. 4. BENEFITS AND FRINGES. (a) During the Employment Term, Executive shall be entitled to such benefits and fringes, if any, as are generally provided from time to time by the Company to its executive officers, including pension, retirement, savings, welfare (including life and health insurance) and other employee benefit plans and arrangements. (b) Except as otherwise specifically provided herein, the Executive shall be responsible for the tax consequences of all benefits and fringes. 5. EXPENSES. The Company shall reimburse Executive in accordance with its expense reimbursement policy as in effect from time to time for all reasonable expenses incurred by Executive in connection with the performance of his duties under this Agreement upon the presentation by Executive of an itemized account of such expenses and appropriate receipts and otherwise in compliance with such rules relating thereto as the Company may, from time to time, adopt. 6. VACATION. During the Employment Term, Executive shall be entitled to vacation in accordance with the Company's practices. 7. TERMINATION. (a) Executive's employment under this Agreement and the Employment Term shall terminate upon any of the following events: (i) Automatically on the date of Executive's death; (ii) Upon written notice given by the Company to Executive if Executive is unable to substantially perform his material duties hereunder for one hundred eighty (180) continuous days during any period of three hundred sixty (360) consecutive days by reason of physical or mental incapacity; (iii) Upon written notice by the Company to Executive for Cause. Cause shall mean (a) Executive being convicted of (or pleading nolo contendere to) a felony (other than a traffic violation) or a crime involving fraud, misappropriation, or embezzlement; (b) refusal of the Executive to attempt to properly perform his obligations under this Agreement, or follow any direction of the CEO consistent with this Agreement, which in either case is not remedied within ten (10) business days after receipt by Executive of written notice from the Company specifying the details thereof, provided the refusal to follow a direction shall not be Cause if Executive in good faith reasonably believes that such direction is not legal, ethical or moral and promptly notifies the CEO in writing of such belief; (c) Executive's gross negligence with regard to his duties or willful misconduct with regard to the business, assets or employees of the Company; or (d) any other breach by Executive of a material provision of this Agreement that remains uncured for twenty (20) business days after written notice thereof is given to Executive or such longer period as may reasonably be required to remedy the default, provided that the Executive endeavors in good faith to remedy the default; (iv) Upon written notice by the Company without Cause; or (v) Upon the effective date of Executive's written notice sent to the company stating Executive's determination made in good faith of his "Constructive Termination" by the Company. "Constructive Termination" shall mean a requirement that Executive relocate to an office that would increase Executive's one-way commute distance by more than twenty five (25) miles. (b) Upon termination of the Employment Term, Executive shall be promptly paid any unpaid salary and accrued vacation through his date of termination and reimbursement for any expenses incurred in connection with the official business of the Company prior to his date of termination which he would be otherwise entitled to reimbursement for in accordance with the Company's policies on the reimbursement of business expenses and any benefits or amounts under any benefit or equity plan in accordance with the terms of said plan and any fringe benefits due for the period prior to such termination. In addition, he shall be paid any declared, but unpaid, bonus. (c) If Executive's termination is pursuant to subsection (a)(i) above, Executive's Beneficiary (as defined in the next sentence) shall continue to receive payments of Executive's Base Salary, at the same time such amounts would have been paid if Executive was still an employee of the Company for a period of six (6) months following Executive's death. For purposes of this provision, Executive's Beneficiary shall be Executive's spouse; if Executive is not married on his date of death, Executive's children, per stirpes; and otherwise, Executive's estate. (d) If Executive's termination is pursuant to subsection (a)(ii) above, Executive shall be entitled to receive for six (6) months following the termination of Executive's employment, at the same time as it would have been paid if he was an employee of the Company, his Base Salary less any amounts actually received by him pursuant to long term disability coverage, if any, provided for by the Company for the matching pay period. After such six (6) months, Executive shall only be entitled to any amounts due him under the long term disability coverage, if any. (e) If Executive's termination is pursuant to subsection (a)(iv) or (a)(v) above, or if Executive receives a notice of non-renewal from the Company pursuant to Section 2(a), Executive shall receive: (i) for six (6) months following the termination of Executive's employment, at the same time as it would have been paid if he were an employee of the Company, his Base Salary; and (ii) at the end of such six (6) month period, an amount equal to one-half (1/2) of the maximum Bonus for which Executive was eligible during the fiscal year of termination of Executive's employment, which amount shall be payable in a lump sum on the six month anniversary of such termination; and (iii) continued medical coverage for a period of six months following termination of Executive's employment. (f) All amounts payable pursuant to this Section 7 shall be subject to required withholding. The Company shall have no other obligations to Executive as a result of his termination. 8. CONFIDENTIAL INFORMATION AND NON-COMPETITION. Executive has entered into a Non-Competition and Non-Disclosure and Developments agreement of even date herewith, which agreement is attached hereto and made a part hereof as though fully set forth herein. 9. INDEMNIFICATION. During the Employment Term and thereafter, the Company shall indemnify Executive to the fullest extent permitted by law against any judgments, fines, amounts paid in settlement and reasonable expenses (including attorneys' fees), and advance amounts necessary to pay the foregoing at the earliest time and to the fullest extent permitted by law, in connection with any claim, action or proceeding (whether civil or criminal) against Executive (other than a claim brought by the Company) as a result of Executive serving as an officer or director of the Company or in any capacity at the request of the Company, in or with regard to any other entity, employee benefit plan or enterprise. This indemnification shall be in addition to, and not in lieu of, any other indemnification Executive shall be entitled to pursuant to the Company's Certificate of Incorporation or By-laws or otherwise. Following Executive's termination of employment, the Company shall continue to cover Executive under the Company's directors and officers insurance for the period during which Executive may be subject to potential liability for any claim, action or proceeding (whether civil or criminal) as a result of his service as an officer or director of the Company or in any capacity at the request of the Company, at the highest level then maintained for any then or former officer or director. 10. EXECUTIVE REPRESENTATION. Executive represents and warrants that he is not limited under any contractual or other provision from entering into this Agreement and performing his obligations hereunder. 11. ENTIRE AGREEMENT; MODIFICATION. This Agreement constitutes the full and complete understanding of the parties hereto and will supersede all prior agreements and understandings, oral or written, with respect to the subject matter hereof. Each party to this Agreement acknowledges that no representations, inducements, promises or agreements, oral or otherwise, have been made by either party, or anyone acting on behalf of either party, which are not embodied herein and that no other agreement, statement or promise not contained in this Agreement shall be valid or binding. This Agreement may not be modified or amended except by an instrument in writing signed by the party against whom or which enforcement may be sought. 12. SEVERABILITY. Any term or provision of this Agreement which is invalid or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such invalidity or unenforceability without rendering invalid or unenforceable the remaining terms and provisions of this Agreement or affecting the validity or enforceability of any of the terms or provisions of this Agreement in any other jurisdiction. 13. WAIVER OF BREACH. The waiver by any party of a breach of any provisions of this Agreement, which waiver must be in writing to be effective, shall not operate as or be construed as a waiver of any subsequent breach. 14. NOTICES. All notices hereunder shall be in writing and shall be deemed to have been duly given when delivered by hand, or one (1) day after sending by United States Postal Service express mail or other "overnight mail service," or three (3) days after sending by certified or registered mail, postage prepaid, return receipt requested. Notice shall be sent as follows: if to Executive, to his home address as listed in the Company's records; and if to the Company, at its office as set forth at the head of this Agreement. Either party may change the notice address by notice given as aforesaid. 15. ASSIGNABILITY; BINDING EFFECT. This Agreement shall be binding upon and inure to the benefit of Executive and Executive's legal representatives, heirs and distributees, and shall be binding upon and inure to the benefit of the Company, its successors and assigns. This Agreement may not be assigned by Executive. This Agreement may not be assigned by the Company except in connection with a merger or a sale by the Company of all or substantially all of its assets, and then only provided that the assignee specifically assumes in writing all of the Company's obligations hereunder. 16. ARBITRATION. Any dispute or controversy arising under or in connection with this Agreement, other than injunctive relief under Section 8 (provided that Executive may bring an arbitration to recover legal fees in connection with such injunctive activities under the last sentence of this Section 16) shall be settled exclusively by arbitration, conducted before a panel of three arbitrators in New York, New York, in accordance with the rules of the American Arbitration Association then in effect, and judgment may be entered on the arbitrators' award in any court having jurisdiction. The decision of the arbitrator shall be final and binding on the parties. The parties shall equally divide all costs of the American Arbitration Association and the arbitrator, except that the arbitrator shall direct the Company to reimburse Executive's portion of the cost on the same basis as set forth in the next sentence with regard to legal fees. Each party shall bear its own legal fees in any dispute except that, in the event the Executive prevails on any material issue, the arbitrator shall award the Executive his legal fees attributable to all matters other than frivolous positions taken by the Executive (as determined by the arbitrator). 17. GOVERNING LAW. All issues pertaining to the validity, construction, execution and performance of this Agreement shall be construed and governed in accordance with the laws of the State of New York, without giving effect to the conflict or choice of law provisions thereof. 18. HEADINGS. The headings in this Agreement are intended solely for convenience or reference and shall be given no effect in the construction or interpretation of this Agreement. 19. COUNTERPARTS. This Agreement may be executed in several counterparts, each of which shall be deemed to be an original but all of which together shall constitute one and the same instrument. IN WITNESS WHEREOF, the Company has caused this Agreement to be duly executed and Executive has hereunto set his hand as of the date first set forth above. 24/7 MEDIA, INC. By: /s/ David J. Moore ----------------------------------- David J. Moore Chief Executive Officer /s/ Yale R. Brown ----------------------------------- Yale R. Brown EXHIBIT A Base Salary The Company shall pay Executive a base salary at a rate of $140,000 per annum from the date hereof through December 31, 1999 (it being understood that Executive shall be paid solely by Intelligent Interactions Corporation through April 15, 1998). In the event that the Employment Agreement is renewed automatically pursuant to Section 2(a) and the parties do not mutually agree otherwise, the Base Salary shall be increased by 3% on January 1, 2000 and on the first date of each successive one-year term thereafter, if any. Incentive In addition, for the remainder of the calendar year 1998, Executive shall be eligible to receive a target bonus of $45,000 (one-half of which shall be Revenue Incentive and one-half of which shall be Profit/Loss Incentive) in accordance with the 24/7 Media 1998 Senior Management Incentive Plan, a copy of which is attached hereto. For the calendar year 1999, Executive shall be eligible to receive a target bonus of $60,000 (one-half of which shall be Revenue Incentive and one-half of which shall be Profit/Loss Incentive) in accordance with an incentive plan to be agreed upon in good faith by the Board and Executive. EX-10.12 12 EMPLOYMENT AGREEMENT EMPLOYMENT AGREEMENT Employment Agreement made as of April 20, 1998, by and between 24/7 Media, Inc., a Delaware corporation, with its principal place of business at 1290 Avenue of the Americas, New York, New York 10104 (the "Company"), and C. Andrew Johns ("Executive"). W I T N E S S E T H : WHEREAS, the Company desires to employ Executive as its Executive Vice President, Chief Financial Officer and Treasurer, and Executive is willing to serve in such capacity; and WHEREAS, the Company and Executive desire to set forth the terms and conditions of such employment. NOW, THEREFORE, in consideration of the premises and of the mutual covenants and agreements herein contained and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the Company and Executive agree as follows: 1. EMPLOYMENT. (a) Effective as of the date hereof, the Company hereby agrees to employ Executive, and Executive agrees to be employed by the Company, on the terms and conditions herein contained as its Executive Vice President, Chief Financial Officer and Treasurer, or in such other executive managerial position or positions with the Company or its subsidiaries or affiliates as shall hereafter be designated by the Board of Directors of the Company. Executive shall report to the Chief Executive Officer of the Company (the "CEO") and shall have such duties, authority and responsibilities commensurate with Executive's position for similarly sized companies in the industry. (b) Executive shall devote all of his business time, energy, skill and efforts to the performance of his duties hereunder and shall faithfully and diligently serve the Company. The foregoing shall not prevent Executive from participating in not-for-profit activities or from managing his passive personal investments, provided that these activities do not materially interfere with Executive's obligations hereunder. (c) Upon the request of the Board, Executive shall also serve as a director or officer of subsidiaries in positions commensurate with his position with the Company without additional compensation. If any compensation is paid Executive by such subsidiaries, they shall be a credit against amounts due hereunder. 2. TERM OF EMPLOYMENT. (a) Except for earlier termination as provided in Section 7 hereof or as extended in this Section 2, Executive's employment under this Agreement (the "Employment Term") 1 shall commence on the date hereof (the "Commencement Date") and continue through December 31, 1999. The Employment Term shall be automatically renewed for successive one-year terms unless either party gives written notice to the other at least 45 days prior to the expiration of the then Employment Term, of such party's intention to terminate Executive's employment hereunder at the end of the then current Employment Term. (b) Notwithstanding anything else herein, the provisions of Sections 8 and 9 hereof shall survive and remain in effect notwithstanding the termination of the Employment Term or a breach by the Company or Executive of this Agreement or any of its terms. 3. COMPENSATION. (a) As compensation for his services under this Agreement, the Company shall pay Executive a base salary (the "Base Salary") as set forth on Exhibit A hereto. Payment of the Base Salary shall be made in equal installments twice a month. (b) In addition to the Base Salary, the Company shall pay Executive a bonus in accordance with the schedule set forth on Exhibit A hereto. Such schedule may be revised from year to year by agreement of the parties hereto. 4. BENEFITS AND FRINGES. (a) During the Employment Term, Executive shall be entitled to such benefits and fringes, if any, as are generally provided from time to time by the Company to its executive officers, including pension, retirement, savings, welfare (including life and health insurance) and other employee benefit plans and arrangements. (b) Except as otherwise specifically provided herein, the Executive shall be responsible for the tax consequences of all benefits and fringes. 5. EXPENSES. The Company shall reimburse Executive in accordance with its expense reimbursement policy as in effect from time to time for all reasonable expenses incurred by Executive in connection with the performance of his duties under this Agreement upon the presentation by Executive of an itemized account of such expenses and appropriate receipts and otherwise in compliance with such rules relating thereto as the Company may, from time to time, adopt. 6. VACATION. During the Employment Term, Executive shall be entitled to vacation in accordance with the Company's practices. 2 7. TERMINATION. (a) Executive's employment under this Agreement and the Employment Term shall terminate upon any of the following events: (i) Automatically on the date of Executive's death; (ii) Upon written notice given by the Company to Executive if Executive is unable to substantially perform his material duties hereunder for one hundred eighty (180) continuous days during any period of three hundred sixty (360) consecutive days by reason of physical or mental incapacity; (iii) Upon written notice by the Company to Executive for Cause. Cause shall mean (a) Executive being convicted of (or pleading nolo contendere to) a felony (other than a traffic violation) or a crime involving fraud, misappropriation, or embezzlement; (b) refusal of the Executive to attempt to properly perform his obligations under this Agreement, or follow any direction of the CEO consistent with this Agreement, which in either case is not remedied within ten (10) business days after receipt by Executive of written notice from the Company specifying the details thereof, provided the refusal to follow a direction shall not be Cause if Executive in good faith reasonably believes that such direction is not legal, ethical or moral and promptly notifies the CEO in writing of such belief; (c) Executive's gross negligence with regard to his duties or willful misconduct with regard to the business, assets or employees of the Company; or (d) any other breach by Executive of a material provision of this Agreement that remains uncured for twenty (20) business days after written notice thereof is given to Executive or such longer period as may reasonably be required to remedy the default, provided that the Executive endeavors in good faith to remedy the default; or (iv) Upon written notice by the Company without Cause. (b) Upon termination of the Employment Term, Executive shall be promptly paid any unpaid salary and accrued vacation through his date of termination and reimbursement for any expenses incurred in connection with the official business of the Company prior to his date of termination which he would be otherwise entitled to reimbursement for in accordance with the Company's policies on the reimbursement of business expenses and any benefits or amounts under any benefit or equity plan in accordance with the terms of said plan and any fringe benefits due for the period prior to such termination. In addition, he shall be paid any earned, but unpaid, bonus. (c) If Executive's termination is pursuant to subsection (a)(i) above, Executive's Beneficiary (as defined in the next sentence) shall continue to receive payments of Executive's Base Salary, at the same time such amounts would have been paid if Executive was still an employee of the Company for a period of six (6) months following Executive's death. For purposes of this provision, Executive's Beneficiary shall be Executive's spouse; if Executive is not married on his date of death, Executive's children, per stirpes; and otherwise, Executive's estate. 3 (d) If Executive's termination is pursuant to subsection (a)(ii) above, Executive shall be entitled to receive for six (6) months following the termination of Executive's employment, at the same time as it would have been paid if he was an employee of the Company, his Base Salary less any amounts actually received by him pursuant to long term disability coverage, if any, provided for by the Company for the matching pay period. After such six (6) months, Executive shall only be entitled to any amounts due him under the long term disability coverage, if any. (e) If Executive's termination is pursuant to subsection (a)(iv) above, or if Executive receives a notice of non-renewal from the Company pursuant to Section 2(a), Executive shall receive: (i) for nine (9) months following the termination of Executive's employment, at the same time as it would have been paid if he were an employee of the Company, his Base Salary; and (ii) at the end of such nine (9) month period, an amount equal to three- quarters (3/4) of the maximum Bonus for which Executive was eligible during the fiscal year of termination of Executive's employment, which amount shall be payable in a lump sum on the nine month anniversary of such termination; and (iii) continued medical coverage for a period of nine months following termination of Executive's employment. (f) All amounts payable pursuant to this Section 7 shall be subject to required withholding. The Company shall have no other obligations to Executive as a result of his termination. 8. CONFIDENTIAL INFORMATION AND NON-COMPETITION. Executive has entered into a Non-Competition and Non-Disclosure and Developments agreement of even date herewith, which agreement is attached hereto and made a part hereof as though fully set forth herein. 9. INDEMNIFICATION. During the Employment Term and thereafter, the Company shall indemnify Executive to the fullest extent permitted by law against any judgments, fines, amounts paid in settlement and reasonable expenses (including attorneys' fees), and advance amounts necessary to pay the foregoing at the earliest time and to the fullest extent permitted by law, in connection with any claim, action or proceeding (whether civil or criminal) against Executive (other than a claim brought by the Company) as a result of Executive serving as an officer or director of the Company or in any capacity at the request of the Company, in or with regard to any other entity, employee benefit plan or enterprise. This indemnification shall be in addition to, and not in lieu of, any other indemnification Executive shall be entitled to pursuant to the Company's Certificate of Incorporation or By-laws or otherwise. Following Executive's termination of employment, the Company shall continue to cover Executive under the Company's directors and officers insurance for the period during which Executive may be subject to potential liability for any 4 claim, action or proceeding (whether civil or criminal) as a result of his service as an officer or director of the Company or in any capacity at the request of the Company, at the highest level then maintained for any then or former officer or director. 10. EXECUTIVE REPRESENTATION. Executive represents and warrants that he is not limited under any contractual or other provision from entering into this Agreement and performing his obligations hereunder. 11. ENTIRE AGREEMENT; MODIFICATION. This Agreement constitutes the full and complete understanding of the parties hereto and will supersede all prior agreements and understandings, oral or written, with respect to the subject matter hereof. Each party to this Agreement acknowledges that no representations, inducements, promises or agreements, oral or otherwise, have been made by either party, or anyone acting on behalf of either party, which are not embodied herein and that no other agreement, statement or promise not contained in this Agreement shall be valid or binding. This Agreement may not be modified or amended except by an instrument in writing signed by the party against whom or which enforcement may be sought. 12. SEVERABILITY. Any term or provision of this Agreement which is invalid or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such invalidity or unenforceability without rendering invalid or unenforceable the remaining terms and provisions of this Agreement or affecting the validity or enforceability of any of the terms or provisions of this Agreement in any other jurisdiction. 13. WAIVER OF BREACH. The waiver by any party of a breach of any provisions of this Agreement, which waiver must be in writing to be effective, shall not operate as or be construed as a waiver of any subsequent breach. 14. NOTICES. All notices hereunder shall be in writing and shall be deemed to have been duly given when delivered by hand, or one (1) day after sending by United States Postal Service express mail or other "overnight mail service," or three (3) days after sending by certified or registered mail, postage prepaid, return receipt requested. Notice shall be sent as follows: if to Executive, to his home address as listed in the Company's records; and if to the Company, at its office as set forth at the head of this Agreement. Either party may change the notice address by notice given as aforesaid. 15. ASSIGNABILITY; BINDING EFFECT. This Agreement shall be binding upon and inure to the benefit of Executive and Executive's legal representatives, heirs and distributees, and shall be binding upon and inure to the benefit of the Company, its successors and assigns. This Agreement may not be assigned by Executive. This Agreement may not be assigned by the Company except in connection with a merger or a sale by the Company of all or substantially all of its assets, and then only provided that the assignee specifically assumes in writing all of the Company's obligations hereunder. 16. ARBITRATION. Any dispute or controversy arising under or in connection with this Agreement, other than injunctive relief under Section 8 (provided that Executive may bring 5 an arbitration to recover legal fees in connection with such injunctive activities under the last sentence of this Section 16) shall be settled exclusively by arbitration, conducted before a panel of three arbitrators in New York, New York, in accordance with the rules of the American Arbitration Association then in effect, and judgment may be entered on the arbitrators' award in any court having jurisdiction. The decision of the arbitrators shall be final and binding on the parties. The parties shall equally divide all costs of the American Arbitration Association and the arbitrator, except that the arbitrators shall direct the Company to reimburse Executive's portion of the cost on the same basis as set forth in the next sentence with regard to legal fees. Each party shall bear its own legal fees in any dispute except that, in the event the Executive prevails on any material issue, the arbitrators shall award the Executive his legal fees attributable to all matters other than frivolous positions taken by the Executive (as determined by the arbitrator). 17. GOVERNING LAW. All issues pertaining to the validity, construction, execution and performance of this Agreement shall be construed and governed in accordance with the laws of the State of New York, without giving effect to the conflict or choice of law provisions thereof. 18. HEADINGS. The headings in this Agreement are intended solely for convenience or reference and shall be given no effect in the construction or interpretation of this Agreement. 19. COUNTERPARTS. This Agreement may be executed in several counterparts, each of which shall be deemed to be an original but all of which together shall constitute one and the same instrument. IN WITNESS WHEREOF, the Company has caused this Agreement to be duly executed and Executive has hereunto set his hand as of the date first set forth above. 24/7 MEDIA, INC. By: /s/ David J. Moore ----------------------------------- David J. Moore Chief Executive Officer /s/ C. Andrew Johns ----------------------------------- C. Andrew Johns 6 EXHIBIT A Base Salary The Company shall pay Executive a base salary at a rate of $150,000 per annum from the date hereof through December 31, 1999. In the event that the Employment Agreement is renewed automatically pursuant to Section 2(a) and the parties do not mutually agree otherwise, the Base Salary shall be increased by 6% on January 1, 2000 and by 3% on the first date of each successive one-year term thereafter, if any. Incentive In addition, for 1998 Executive shall be eligible to receive a target bonus of $53,365 (one-half of which shall be Revenue Incentive and one-half of which shall be Profit/Loss Incentive) in accordance with the 24/7 Media 1998 Senior Management Incentive Plan, a copy of which is attached hereto. Executive shall be eligible to receive a target bonus of $90,000 in 1999 in accordance with an incentive plan to be agreed upon in good faith by the Board and Executive. EX-10.13 13 CONSULTING AGREEMENT CONSULTING AGREEMENT This Agreement (the "Agreement"), dated as of January 1, 1998, is made by and between Interactive Imaginations, Inc., a New York corporation ("Interactive"), and Neterprises, Inc., a Delaware corporation (the "Consultant"). WHEREAS, Interactive and the Consultant desire to enter into an agreement whereby the Consultant will provide certain management consulting services for Interactive on the terms and conditions hereinafter set forth; and WHEREAS, the Consultant is willing to provide such management consulting services for Interactive. NOW, THEREFORE, the parties hereto agree as follows: 1. Engagement. The Consultant hereby agrees to provide such management consulting services for Interactive as may be reasonably requested by the Board of Directors of Interactive in connection with the identification and evaluation of potential strategic relationships and potential acquisition targets for Interactive. 2. Extent of Services. The Consultant agrees to perform such services to the best of its ability and in a diligent and conscientious manner and to devote appropriate time, energies and skill to those duties called for hereunder during the term of this Agreement and in connection with the performance of such duties to act in a manner consistent with the primary objective of maximizing the profitability of Interactive. The Consultant agrees to devote such time as is reasonably required to fulfill his duties hereunder. 3. Term. The engagement of the Consultant hereunder by Interactive shall commence as of the date hereof and shall continue through December 31, 1998, unless earlier terminated pursuant to Section 6 hereof. 4. Compensation. (a) As compensation for the services contemplated herein and for performance rendered by the Consultant of its duties and obligations hereunder, Interactive shall pay to the Consultant an aggregate fee equal to $150,000 (the "Consulting Fee"), earned and payable in 24 equal installments of $12,500 on the 15th day and the last day of each calendar month during the Term set forth in Section 3. In addition to, and notwithstanding the foregoing, at the Effective Time contemplated by the Agreement and Plan of Merger, dated as of February 2, 1998, among the Interactive, Petry Interactive, Inc. and Advercomm, Inc., Interactive shall pay Consultant the sum of $180,000 (the "Lump Sum Payment"). -1- (b) Interactive's sole obligation shall be to pay to the Consultant the amounts described in Section 4(a) of this Agreement, and the Consultant is not and shall not be deemed an employee of Interactive for any purpose. 5. Reimbursement for Expenses. Interactive shall pay or reimburse the Consultant for all expenses reasonably incurred by it in furtherance of its duties hereunder including, without limitation, expenses for traveling, meals, hotel accommodations, telephone charges and the like, provided however, such expenses (other than for telephone charges for calls to Interactive executives and advisors) shall have been authorized by Interactive prior to the date on which they are incurred by the Consultant, which authorization may be withheld by Interactive in its sole discretion. Interactive shall be under no obligation to pay or reimburse any expense of the Consultant which has not been authorized by Interactive in accordance with the terms of this Section 5. Interactive will make reimbursement for authorized expenses within fourteen days of presentation by the Consultant from time to time of appropriate documentation evidencing such expenditures. 6. Termination. This Agreement shall be terminated as follows: (a) 30 days after written notice of termination is given by either party at any time after June 15, 1998, provided however, that if Interactive shall terminate this Agreement pursuant to this Section 6(a) for any reason other than Consultant's material breach of this Agreement (having given prior notice of, and reasonable opportunity for Consultant to cure, any such breach), Interactive shall pay to consultant in one lump sum an amount equal to that portion of the aggregate Consulting Fee which has not been paid to Consultant as of the effective date of such termination. (b) On such date as is mutually agreed by the parties in writing. (c) Upon expiration of the Term as set forth in Section 3. Upon termination of this Agreement pursuant to this Section 6, except as contemplated by Section 6(a) in the event Interactive terminates this Agreement in the absence of continuing material breach hereof by Consultant, Consultant shall be entitled to payment of only that portion of the Consulting Fee earned through the effective date of such termination and any portion of the Lump Sum Payment which has not be paid to Consultant as of the effective date of such termination. 7. Confidential Information. The Consultant shall not, at any time during or following expiration or termination of its engagement hereunder (regardless of the manner, reason, time or cause thereof) directly or indirectly disclose or furnish to any person not entitled to receive the same for the immediate benefit of Interactive any trade secrets or confidential information including, without limitation, information as to the business methods, operations and affairs of Interactive or its affiliates, the names, addresses or requirements of any of its customers and suppliers, or the credit and other terms extended by and to Interactive. All such trade secrets and confidential information including, without limitation, information as to the names, addresses or requirements of any of Interactive's customers and suppliers, or the credit and other terms extended -2- by and to Interactive, acquired or compiled by Interactive or the Consultant during the term of this Agreement shall be the exclusive property of Interactive. 8. Covenants. Consultant agrees to (a) faithfully and diligently do and perform the acts and duties required in connection with its engagement hereunder, and (b) not engage in any activity which is or likely is contrary to the welfare, interest or benefit of the business now or hereafter conducted by Interactive. 9. Binding Effect. This Agreement will inure to the benefit of and shall be binding upon the parties hereto and their respective successors or assigns (whether resulting from any re organization, consolidation or merger of either of the parties or any assignment to a business to which all or substantially all of the assets of either party are sold). 10. Entire Agreement. This Agreement contains the entire agreement and understanding of the parties with respect to the subject matter hereof, supersedes all prior agreements and understandings with respect thereto and cannot be modified, amended, waived or terminated, in whole or in part, except in writing signed by the party to be charged. 11. Construction. While the parties hereto believe that the terms hereof are fair, reasonable and enforceable in all respects, it is agreed that any provision of this Agreement which is held to be prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. In addition to any other remedy which Interactive may have at law or in equity, Interactive shall be entitled to injunctive relief for a breach of Sections 7 and 8 (b) of this Agreement by the Consultant. 12. Notices. All notices required to be given under the terms of this Agreement or which any of the parties desires to give hereunder shall be in writing and personally delivered or sent by registered or certified mail, return receipt requested, or sent by facsimile transmission, addressed as follows: -3- (a) To the Consultant. If to the Consultant addressed to: Neterprises, Inc. 233 West 77th Street, #12F New York, New York 10024 Attn: Michael P. Paolucci (b) To Interactive. If to Interactive addressed to: Interactive Imaginations, Inc. 915 Broadway, Suite 1608 New York, New York 10010 Attention: Mr. David J. Moore Chief Executive Officer Facsimile Transmission No.: (212) 995-2394 Any party may designate a change of address at any time by giving written notice thereof to the other parties. 13. Miscellaneous. This Agreement: (a) shall be binding upon and inure to the benefit of the parties hereto and their respective successors and permitted assigns; (b) may not (except as provided in Section 9 hereof) be assigned by either party hereto without the prior written consent of the other party (any purported assignment hereof in violation of this provision being null and void); (c) may be executed in any number of counterparts, and by any party on separate counterparts, each of which as so executed and delivered shall be deemed an original but all of which together shall constitute one and the same instrument, and it shall not be necessary in making proof of this Agreement as to any party hereto to produce or account for more than one such counterpart executed and delivered by such party; (d) may be amended, modified or supplemented only by a written instrument executed by all of the parties hereto; (e) embodies the entire agreement and understanding of the parties hereto in respect of the transactions contemplated hereby and supersedes all prior agreements and understand ings among the parties with respect thereto; and (f) shall be governed by and construed in accordance with the laws of the State of New York without regard to the conflict of laws principles thereof. -4- IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. INTERACTIVE IMAGINATIONS, INC. By: /s/ David J. Moore --------------------------------------------------- David J. Moore, Chief Executive Officer NETERPRISES, INC. By: /s/ Michael P. Paolucci --------------------------------------------------- Michael P. Paolucci, President -5- EX-10.14 14 CONFIDENTIAL SEPARATION AGREE. AND GENERAL RELEASE CONFIDENTIAL SEPARATION AGREEMENT AND GENERAL RELEASE This Confidential Separation Agreement and General Release ("Agreement") is made and entered into by and between Michael P. Paolucci on behalf of himself and his agents, heirs, executors, assigns and any other person or entity acting with him or on his behalf ("Paolucci"), on the one hand, and Interactive Imaginations, Inc. on behalf of itself, its present and former principals, owners, agents, officers, employees, directors, subsidiaries, affiliated divisions and companies, parent companies, successors and assigns ("Interactive"), on the other hand. It is made pursuant to the following terms and conditions. Effective at the close of business (Eastern Standard Time) on February 24, 1998, Paolucci's employment with Interactive shall have ceased and all agreements regarding the employment of Paolucci as an executive of Interactive are terminated, except as otherwise set forth herein. Paolucci continues to serve as a Director of Interactive. 1. Pending and Future Legal or Administrative Actions - Covenant Not to Sue. Paolucci shall neither assist, participate or be represented in, nor institute, submit or file, or permit to be instituted, submitted or filed on his behalf, any lawsuit, charge, claim, complaint, or other proceeding, by Paolucci or on his behalf with any administrative agency, court or other forum, under any federal, state or local laws or regulations including, but not limited to, (a) under the Fair Labor Standards Act; the Employee Retirement Income Security Act of 1974; Title VII of the Civil Rights Act of 1964; the Civil Rights Act of 1991; the Agent Discrimination in Employment Act of 1967 as amended by the Older Workers Benefit Protection Act; the Equal Pay Act of 1963; the Consolidated Omnibus Budget Reconciliation Act of 1985; or any other federal, state, or local insurance, human rights, civil rights, wage-hour, pension, or labor laws, rules and/or regulations, public policy, contract or tort laws, or (b) any claim of retaliation under such laws, or (c) any claim arising under common law, including, but not limited to, causes of action for wrongful termination, tortious wrongful termination in violation of public policy; discrimination or harassment on the basis of age, sex, race, or national origin; intentional infliction of emotional distress; negligent infliction of emotional distress; fraudulent misrepresentation; negligent misrepresentation; fraud; conspiracy to commit any act mentioned herein; breach of contract (whether express or implied, oral or written); breach of the implied covenant of good faith and fair dealing; interference with business advantage; defamation; interference with prospective economic advantage; interference with contractual relationship; violation of any national, state or local statute, law, or ordinance, or (d) any other action whether cognizable in law or in equity, against Interactive based upon any conduct up to and including the date of this Confidential Separation Agreement and shall not, from any source or proceeding, seek or accept any award or settlement therefrom. The provisions of this Section 1 shall not apply to any obligations of Interactive pursuant to this Agreement. 1 2. Releases of Claims; Continuing Indemnification. 2.1 Paolucci Release. It is understood and agreed by and between each of the parties to this Agreement that in consideration for Interactive's promise to pay to Paolucci the sums and benefits set forth in Paragraph 3 of this Agreement, and Interactive's release of Paolucci contained in Section 2.2 of this Agreement, and the other promises contained herein and other good and valuable consideration the receipt of which is hereby acknowledged, Paolucci completely releases and forever discharges Interactive and any present or former officers, agents, employees, subsidiaries, affiliated companies, parent companies, successors and assigns of Interactive from all causes of action, claims, judgments, obligations, damages, or liabilities of whatever kind and character, including, but not limited to, those arising under the Fair Labor Standards Act; the Employee Retirement Income Security Act of 1974; Title VII of the Civil Rights Act of 1964; the Civil Rights Act of 1991; the Age Discrimination in Employment Act of 1967; the Equal Pay Act of 1963; the Consolidated Omnibus Budget Reconciliation Act of 1985; or any other federal, state, or local insurance, human rights, civil rights, wage-hour, pension, or labor laws, rules and/or regulations, public policy, contract or tort laws, or any claim of retaliation under such laws, or any claim arising under common law, including but not limited to, causes of action for wrongful termination; tortious wrongful termination in violation of public policy; discrimination or harassment on the basis of age, sex, race, or national origin; intentional infliction of emotional distress; negligent infliction of emotional distress; fraudulent misrepresentation; negligent misrepresentation; fraud; conspiracy to commit any act mentioned herein; breach of contract (whether express or implied, oral or written); breach of the implied covenant of good faith and fair dealing; interference with business advantage; defamation; interference with prospective economic advantage; interference with contractual relationship; violation of any national, state or local statute, law, or ordinance; or any other action whether cognizable in law or in equity, and agrees that he will not, from any source or proceeding, seek or accept any award or settlement therefrom. The provisions of this Section 2.1 shall not apply to any obligations of Interactive pursuant to this Agreement. 2.2 Interactive Release. It is understood and agreed by and between each of the parties to this Agreement that in consideration of Paolucci's release contained in Section 2.1 hereof and the other promises contained herein and other good and valuable consideration the receipt of which is hereby acknowledged, Interactive completely releases and forever discharges Paolucci and his heirs, personal representatives, successors and assigns from all causes of action, claims, judgments, obligations, damages, or liabilities of whatever kind and character which relate to Paolucci's employment with Interactive or the cessation of such employment or to his acting as an officer or Director of Interactive or any of its affiliates, including, without limitation, any and all tax claims, expense account claims and any other claims related to any conduct taken or not taken by Paolucci on behalf of, or in his official capacities for the Company prior to the date of this Agreement. The provisions of this Section 2.2 shall not apply to any obligations of Paolucci pursuant to this Agreement, nor to any claims arising from Paolucci's willful misconduct in his official capacities for the Company prior to the date of this Agreement. 2.3 Notwithstanding any other provision hereof, the Company hereby confirms that it agrees to maintain and continue in place all indemnification obligations, and any agreements entered into by the Company for the provision therefor, provided for Paolucci in the Company's 2 Certificate of Incorporation and By-Laws, each as amended, and any and all indemnification agreements executed by and between the Company and Paolucci. In connection herewith, Interactive shall maintain officers' and directors' liability insurance covering Paolucci for the period that he served as an officer and director of Interactive, in an amount equal to that in effect on the date hereof. 2.4 Now and in the future, upon reasonable notice, as necessary or reasonably requested by Interactive, Paolucci agrees to: (i) provide cooperation, including, but not limited to, his appearance at interviews and/or depositions, in all regulatory and litigation matters relating to his reasonable employment, or area of responsibility at Interactive, whether or not such matters have already been commenced and through the conclusion of such matters or proceedings, and (ii) to provide Interactive's counsel with all documents in his possession or control relating to such regulatory or litigation matters, provided, however, that Interactive will reimburse Paolucci for all reasonable travel expenses, including lodging and meals. Performance under this Section 2.4 shall not be a condition to the performance of any obligation of Interactive hereunder. 3. Settlement Sums and Other Consideration 3.1 Pursuant to the other terms and conditions contained in this Agreement, Interactive will issue to Paolucci a Common Stock Purchase Warrant, substantially in the form of Exhibit A attached hereto (the "Warrant"), which Warrant shall entitle Paolucci to purchase up to two million five hundred thousand (2,500,000) shares of Interactive's Common Stock, par value $.01 per share, at an exercise price equal to $0.952 per share. 3.2 Paolucci acknowledges that he has received notification of his COBRA continuation rights as of the date hereof. As further consideration for this Agreement, Interactive shall continue to pay for one year of health benefit continuation coverage under Interactive's group policy through February, 1999. Paolucci understands that Interactive's payment of these premiums will not elongate Paolucci's 18 month COBRA continuation period. 3.3 Paolucci acknowledges and understand that, in connection with the execution of this Agreement, the option to purchase 250,000 shares of Interactive's Common Stock granted (subject to shareholder approval of increasing the number of shares available under the Amended and Restated 1995 Employee Stock Option Plan) by Interactive's Stock Option Committee as of November 1, 1997 shall be cancelled in its entirety, whether or not any portion thereof is vested, and Paolucci shall not be entitled to purchase any common shares of Interactive pursuant to the option referred to in this Section 3.3. 3.4 Interactive acknowledges that Paolucci cuurently holds an option (which is fully vested in Paolucci) to purchase 52,000 shares of Interactive's Common Stock, at an exercise price of $0.43 per share (the "Vested Option"), and agrees in connection herewith to extend the expiration date of such option (originally January 31, 2000) by five years such that Paolucci's Vested Option shall remain exercisable in full until it expires on January 31, 2005. 3 4. Denial of Liability. Each party expressly recognizes that the making of this Agreement does not in any way constitute an admission or concession of wrongdoing on the part of the other party. 5. Confidentiality and Non-Disclosure 5.1 Except as noted elsewhere in Paragraph 5 of this Agreement, the parties shall keep the terms and conditions of this Agreement completely and strictly confidential. Neither the terms nor conditions of this Agreement nor the fact of its existence shall be disclosed to any person or body. 5.2 The only exceptions to Paragraph 5.1 are as follows: 5.2.1 If the terms or conditions of this Agreement must be disclosed as required by law, regulation or stock exchange rules, or upon order of any court of competent jurisdiction in any action in which Paolucci or Interactive are parties, or Paolucci is subpoenaed as a witness, to agencies, individuals, or entities, including but not limited to state or federal employment or taxing entities; or 5.2.2 If the terms or conditions must be disclosed to Paolucci's tax, legal or financial advisors, on the further condition that Paolucci advise such individuals in advance of disclosure that the terms and conditions of the Agreement are strictly confidential; or 5.2.3 If the terms or conditions of this Agreement must be disclosed in order to remedy a breach of any term or condition herein. 5.3 If disclosure is to be made pursuant to Paragraph 5.2.1, the party or the party's representative making the disclosure shall immediately, but in no event more than five (5) business days from receipt of a request or order for such disclosure, and prior to any such disclosure, notify the other party and shall not produce or otherwise disclose the existence or terms of this Agreement unless and until the nondisclosing party has given written permission to do so, or the nondisclosing party has had an opportunity to seek appropriate relief from a court or tribunal of competent jurisdiction. 5.4 The parties agree that Interactive shall be permitted to disclose the terms of the Agreement to its directors, officers, attorneys, accountants or as otherwise expressly required or compelled by law, regulation or stock exchange rules. 5.5 Neither Paolucci nor the officers or members of the Board of Directors of Interactive shall speak disparagingly of the other regarding Paolucci's directorship, employment or cessation of employment with Interactive or, on the other hand, regarding the business or operations of Interactive or any of its affiliates. 4 5.6 Performance under this Section 5 shall not be a condition to the performance of any obligation of Interactive hereunder. 6. Severability. If any provision of this Agreement is declared illegal or unenforceable by any arbitrator or by any court of competent jurisdiction and cannot be modified to be enforceable (the parties hereby agreeing that such modification shall be made without further action on the part of the parties), that provision will immediately become null and void, leaving the remainder of this Agreement in full force and effect. 7. Construction. Each party and counsel for each party have reviewed this Agreement (and Paolucci hereby acknowledges that Interactive advised him to consult with an attorney regarding this Agreement). This Agreement is entered into in the State of New York and shall be construed and interpreted in accordance with its laws. 8. Integration. This Agreement represents the complete understanding between the parties. No other promises or agreements shall be binding or shall modify this Agreement unless signed by the parties hereto, provided, however, that the parties agree that Section 5 of the Employment Agreement dated as of January 1, 1995 between Interactive and Paolucci which by its terms survives the termination of Paolucci's employment shall continue in full force and effect and be binding on the parties. 9. Acceptance and Revocation. Paolucci understands that he has the right to consider the terms and conditions of this Agreement for a period of twenty-one (21) days. Paolucci further understands that he may revoke this Agreement within seven (7) days of signing it. Paolucci further represents that he has been given all satisfactory periods within which to consider the release of claims contained herein prior to signing this Agreement. To revoke this Agreement, Paolucci must send a written letter to: David J. Moore, Interactive Imaginations, Inc., 915 Broadway, Suite 1608, New York, New York 10010, stating, "I hereby revoke my acceptance of our Confidential Separation Agreement and General Release." If Paolucci revokes this Agreement, he will not be entitled to receive the severance payment, the continuation of medical benefits, or any other consideration described in paragraph 3 above. Paolucci represents that Interactive has advised him of his right to consult with an attorney regarding this Agreement. 5 10. THE SIGNATORIES HAVE CAREFULLY READ THIS ENTIRE AGREEMENT AND RELEASE. ITS CONTENTS HAVE BEEN FULLY EXPLAINED TO THEM BY THEIR ATTORNEYS. THE SIGNATORIES FULLY UNDERSTAND THE FINAL AND BINDING EFFECT OF THIS AGREEMENT. THE ONLY PROMISES OR REPRESENTATIONS MADE TO ANY SIGNATORY ABOUT THIS AGREEMENT, AND TO SIGN THE AGREEMENT, ARE CONTAINED IN THIS AGREEMENT. THE SIGNATORIES ARE SIGNING THIS AGREEMENT VOLUNTARILY. Dated: as of February 24, 1998 /s/ Michael P. Paolucci ----------------------------------- Michael P. Paolucci INTERACTIVE IMAGINATIONS, INC. Dated: as of February 24, 1998 By: /s/ David J. Moore ------------------------------- Name: David J. Moore Title: Chief Executive Officer 6 EX-10.15 15 INDEMNIFICATION AGREEMENT INDEMNIFICATION AGREEMENT This INDEMNIFICATION AGREEMENT made and entered into this 28th day of May, 1998 (the "Agreement"), by and between 24/7 MEDIA, INC., a Delaware corporation (together with its affiliates, as defined in the federal securities laws, the "Company"), and (the "Indemnitee"): WHEREAS, highly competent persons are becoming more reluctant to serve publicly-held corporations as officers or in other capacities unless they are provided with adequate protection through insurance and indemnification against inordinate risks of claims and actions against them arising out of their service to and activities on behalf of the corporation; and WHEREAS, the current difficulties or virtual impossibility of obtaining adequate insurance and uncertainties relating to indemnification have increased the difficulty of attracting and retaining such persons; and WHEREAS, the Board of Directors of the Company has determined that the inability to attract and retain such persons is detrimental to the best interests of the Company's stockholders and that the Company should act to assure such persons that there will be increased certainty of such protection in the future; and WHEREAS, it is reasonable, prudent and necessary for the Company contractually to obligate itself to indemnify such persons to the fullest extent permitted by applicable law so that they will serve or continue to serve the Company free from undue concern that they will not be so indemnified; and WHEREAS, the Indemnitee is willing to serve, continue to serve and to take on additional service for or on behalf of the Company on the condition that he be so indemnified; NOW, THEREFORE, in consideration of the premises and the covenants contained herein, the Company and the Indemnitee do hereby covenant and agree as follows: Section 1. Services by Indemnitee. The Indemnitee agrees to serve as a director of the Company. The Indemnitee may at any time and for any reason resign from such position (subject to any other contractual obligation or other obligation imposed by operation of law). Section 2. Indemnification. The Company shall indemnify the Indemnitee to the fullest extent permitted by applicable law in effect on the date hereof or as such laws may from time to time be amended. Without diminishing the scope of the indemnification provided by this Section 2, the rights of indemnification of the Indemnitee provided hereunder shall include but shall not be limited to those rights set forth hereinafter, except to the extent expressly prohibited by applicable law. Section 3. Action or Proceeding Other Than an Action by or in the Right of the Company. The Indemnitee shall be entitled to the indemnification rights provided in this Section 3 if he is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative in nature, other than an action by or in the right of the Company, by reason of the fact that he is or was a director, officer, employee, agent, partner or fiduciary of the Company or is or was serving at the request of the Company as a director, officer, employee, agent, partner or fiduciary of any other entity or by reason of anything done or not done by him in any such capacity. Pursuant to this Section 3, the Indemnitee shall be indemnified against all expenses (including attorneys' fees), costs, judgments, penalties, fines and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding (including, but not limited to, the investigation, defense or appeal thereof), if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Company, and, with respect to any criminal action or proceeding, he had no reasonable cause to believe his conduct was unlawful. Section 4. Actions by or in the Right of the Company. The Indemnitee shall be entitled to the indemnification rights provided in this Section 4 if he is a person who was or is made a party or is threatened to be made a party to any threatened, pending or completed action or suit brought by or in the right of the Company to procure a judgment in its favor by reason of the fact that he is or was a director, officer, employee, agent, partner or fiduciary of the Company or is or was serving at the request of the Company as a director, officer, employee, agent, partner or fiduciary of any other entity by reason of anything done or not done by him in any such capacity. Pursuant to this Section 4, the Indemnitee shall be indemnified against all expenses (including attorneys' fees) and costs actually and reasonably incurred by him in connection with such action or suit (including, but not limited to, the investigation, defense, settlement or appeal thereof) if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Company; provided, however, that no such indemnification shall be made in respect of any claim, issue or matter as to which applicable law expressly prohibits such indemnification by reason of an adjudication of liability of the Indemnitee to the Company, unless, and only to the extent that, the Court of Chancery of the State of Delaware or the court in which such action or suit was brought shall determine upon application that, despite such adjudication of liability but in view of all the circumstances of the case, the Indemnitee is fairly and reasonably entitled to indemnification for such expenses and costs as such court shall deem proper. Section 5. Indemnification for Costs, Charges and Expenses of Successful Party. Notwithstanding the other provisions of this Agreement and in addition to the rights to indemnification set forth in Sections 3 and 4 hereof, to the extent that the -2- Indemnitee has served as a witness on behalf of the Company or has been successful on the merits or otherwise, including, without limitation, the dismissal of an action without prejudice, in defense of any action, suit or proceeding referred to in Sections 3 and 4 hereof, or in defense of any claim, issue or matter therein, he shall be indemnified against all costs, charges and expenses (including attorneys' fees) actually and reasonably incurred by him or on his behalf in connection therewith. Section 6. Partial Indemnification. In addition to the rights to indemnification set forth in Sections 3 and 4 hereof, if the Indemnitee is only partially successful in the defense, investigation, settlement or appeal of any action, suit, investigation or proceeding described in Section 3 or 4 hereof, and as a result is not entitled under Section 3, 4 or 5 hereof to indemnification by the Company for the total amount of the expenses (including attorneys' fees), costs, judgments, penalties, fines, and amounts paid in settlement actually and reasonably incurred by him, the Company shall nevertheless indemnify the Indemnitee, as a matter of right pursuant to Section 5 hereof, to the extent that the Indemnitee has been partially successful. Section 7. Determination of Entitlement to Indemnification. Upon written request by the Indemnitee for indemnification pursuant to Section 3 or 4 hereof, the entitlement of the Indemnitee to indemnification pursuant to the terms of this Agreement shall be determined by the following person or persons who shall be empowered to make such determination: (a) the Board of Directors of the Company by a majority vote of a quorum consisting of Disinterested Directors (as hereinafter defined); or (b) if such a quorum is not obtainable or, even if obtainable, if the Board of Directors by the majority vote of Disinterested Directors so directs, by Independent Counsel (as hereinafter defined) in a written opinion to the Board of Directors, a copy of which shall be delivered to the Indemnitee; or (c) by the stockholders of the Company. Independent Counsel shall be selected by the Board of Directors and approved by the Indemnitee. Upon failure of the Board so to select Independent Counsel or upon failure of the Indemnitee so to approve Independent Counsel, Independent Counsel shall be selected by the Chancellor of the State of Delaware or such other person as the Chancellor shall designate to make such selection. Such determination of entitlement to indemnification shall be made not later than 60 days after receipt by the Company of a written request for indemnification. Such request shall include documentation or information which is necessary for such determination and which is reasonably available to the Indemnitee. Any costs or expenses (including attorneys' fees) incurred by the Indemnitee in connection with his request for indemnification hereunder shall be borne by the Company. The Company hereby indemnifies and agrees to hold the Indemnitee harmless therefrom irrespective of the outcome of the determination of the Indemnitee's entitlement to indemnification. If the person making such determination shall determine that the Indemnitee is entitled to indemnification as to part (but not all) of the application for indemnification, such person shall reasonably prorate such partial indemnification among such claims, issues or matters. -3- Section 8. Presumptions and Effect of Certain Proceedings. The Secretary of the Company shall, promptly upon receipt of the Indemnitee's request for indemnification, advise in writing the Board of Directors or such other person or persons empowered to make the determination as provided in Section 7 that the Indemnitee has made such request for indemnification. Upon making such request for indemnification, the Indemnitee shall be presumed to be entitled to indemnification hereunder and the Company shall have the burden of proof in the making of any determination contrary to such presumption. If the person or persons so empowered to make such determination shall have failed to make the requested indemnification within 60 days after receipt by the Company of such request, the requisite determination of entitlement to indemnification shall be deemed to have been made and the Indemnitee shall be absolutely entitled to such indemnification, absent actual and material fraud in the request for indemnification. The termination of any action, suit, investigation or proceeding described in Section 3 or 4 hereof by judgment, order, settlement or conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself: (a) create a presumption that the Indemnitee did not act in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the Company, and, with respect to any criminal action or proceeding, that the Indemnitee had reasonable cause to believe that his conduct was unlawful; or (b) otherwise adversely affect the rights of the Indemnitee to indemnification except as may be provided herein. Section 9. Advancement of Expenses and Costs. All reasonable expenses and costs incurred by the Indemnitee (including attorneys' fees, retainers and advances of disbursements required of the Indemnitee) shall be paid by the Company in advance of the final disposition of such action, suit or proceeding at the request of the Indemnitee within 20 days after the receipt by the Company of a statement or statements from the Indemnitee requesting such advance or advances from time to time. The Indemnitee's entitlement to such expenses shall include those incurred in connection with any proceeding by the Indemnitee seeking an adjudication or award in arbitration pursuant to this Agreement. Such statement or statements shall reasonably evidence the expenses and costs incurred by him in connection therewith and shall include or be accompanied by an undertaking by or on behalf of the Indemnitee to repay such amount if it is ultimately determined that the Indemnitee is not entitled to be indemnified against such expenses and costs by the Company as provided by this Agreement or otherwise. Section 10. Remedies of Indemnitee in Cases of Determination not to Indemnify or to Advance Expenses. In the event that a determination is made that the Indemnitee is not entitled to indemnification hereunder or if payment has not been timely made following a determination of entitlement to indemnification pursuant to Sections 7 and 8, or if expenses are not advanced pursuant to Section 9, the Indemnitee shall be entitled to a final adjudication in an appropriate court of the State of Delaware or any other court of competent jurisdiction of his entitlement to such indemnification or advance. Alternatively, the Indemnitee at his option may seek an award in arbitration to be conducted by a single arbitrator pursuant to the rules of the American Arbitration -4- Association, such award to be made within 60 days following the filing of the demand for arbitration. The Company shall not oppose the Indemnitee's right to seek any such adjudication or award in arbitration or any other claim, but may oppose the Indemnitee's right to indemnification. Such judicial proceeding or arbitration shall be made de novo and the Indemnitee shall not be prejudiced by reason of a determination (if so made) pursuant to Sections 7 and 8 that he is not entitled to indemnification. If a determination is made or deemed to have been made pursuant to the terms of Section 7 or Section 8 hereof that the Indemnitee is entitled to indemnification, the Company shall be bound by such determination and is precluded from asserting that such determination has not been made or that the procedure by which such determination was made is not valid, binding and enforceable. The Company further agrees to stipulate in any such court or before any such arbitrator that the Company is bound by all the provisions of this Agreement and is precluded from making any assertion to the contrary. If the court or arbitrator shall determine that the Indemnitee is entitled to any indemnification hereunder, the Company shall pay all reasonable expenses (including attorneys' fees) and costs actually incurred by the Indemnitee in connection with such adjudication or award in arbitration (including, but not limited to, any appellate proceedings). Section 11. Other Rights to Indemnification. The indemnification and advancement of expenses (including attorneys' fees) and costs provided by this Agreement shall not be deemed exclusive of any other rights to which the Indemnitee may now or in the future be entitled under any provision of the by-laws, agreement, provision of the Certificate of Incorporation, vote of stockholders or disinterested directors, provision of law or otherwise. Section 12. Attorneys' Fees and Other Expenses To Enforce Agreement. In the event that the Indemnitee is subject to or intervenes in any proceeding in which the validity or enforceability of this Agreement is at issue or seeks an adjudication or award in arbitration to enforce his rights under, or to recover damages for breach of, this Agreement, the Indemnitee, if he prevails in whole or in part in such action, shall be entitled to recover from the Company and shall be indemnified by the Company against, any actual expenses for attorneys' fees and disbursements reasonably incurred by him. Section 13. Duration of Agreement. This Agreement shall continue until and terminate upon the later of: (a) 10 years after the Indemnitee has ceased to occupy any of the positions or have any of the relationships described in Sections 3 and 4 of this Agreement; and (b) the final termination of all pending or threatened actions, suits, proceedings or investigations with respect to the Indemnitee. This Agreement shall be binding upon the Company and its successors and assigns and shall inure to the benefit the Indemnitee and his spouse, assigns, heirs, devises, executors, administrators or other legal representatives. Section 14. Severability. If any provision or provisions of this Agreement shall be held to be invalid, illegal or unenforceable for any reason whatsoever: (a) the -5- validity, legality and enforceability of the remaining provisions of this Agreement (including, without limitation, all portions of any paragraphs of this Agreement containing any such provision held to be invalid, illegal or unenforceable, that are not themselves invalid, illegal or unenforceable) shall not in any way be affected or impaired thereby; and (b) to the fullest extent possible, the provisions of this Agreement (including, without limitation, all portions of any paragraph of this Agreement containing any such provision held to be invalid, illegal or unenforceable, that are not themselves invalid, illegal or unenforceable) shall be construed so as to give effect to the intent manifested by the provision held invalid, illegal or unenforceable. Section 15. Identical Counterparts. This Agreement may be executed in one or more counterparts, each of which shall for all purposes be deemed to be an original but all of which together shall constitute one and the same Agreement. Only one such counterpart signed by the party against whom enforceability is sought needs to be produced to evidence the existence of this Agreement. Section 16. Headings. The headings of the Sections of this Agreement are inserted for convenience only and shall not be deemed to constitute part of this Agreement or to affect the construction thereof. Section 17. Definitions. For purposes of this Agreement: (a) "Disinterested Director" shall mean a director of the Company who is not or was not a party to the action, suit, investigation or proceeding in respect of which indemnification is being sought by the Indemnitee. (b) "Independent Counsel" shall mean a law firm or a member of a law firm that neither is presently nor in the past five years has been retained to represent: (i) the Company or the Indemnitee in any matter material to either such party, or (ii) any other party to the action, suit, investigation or proceeding giving rise to a claim for indemnification hereunder. Notwithstanding the foregoing, the term "Independent Counsel" shall not include any person who, under the applicable standards of professional conduct then prevailing, would have a conflict of interest in representing either the Company or the Indemnitee in an action to determine the Indemnitee's right to indemnification under this Agreement. Section 18. Modification and Waiver. No supplement, modification or amendment of this Agreement shall be binding unless executed in writing by both of the parties hereto. No waiver of any of the provisions of this Agreement shall be deemed or shall constitute a waiver of any other provisions hereof (whether or not similar) nor shall such waiver constitute a continuing waiver. Section 19. Notice by the Indemnitee. The Indemnitee agrees promptly to notify the Company in writing upon being served with any summons, citation, subpoena, -6- complaint, indictment, information or other document relating to any matter which may be subject to indemnification covered hereunder, either civil, criminal or investigative. Section 20. Notices. All notices, requests, demands and other communications hereunder shall be in writing and shall be deemed to have been duly given if (i) delivered by hand and receipted for by the party to whom said notice or other communication shall have been directed or if (ii) mailed by certified or registered mail with postage prepaid, on the third business day after the date on which it is so mailed: (a) If to the Indemnitee, to the address written on the signature page hereto or such other address as the Indemnitee may furnish in writing. (b) If to the Company to: 24/7 MEDIA, INC. 1250 Broadway New York, NY 10001 Attn: Chief Executive Officer or to such other address as may have been furnished to the Indemnitee by the Company or to the Company by the Indemnitee, as the case may be. Section 21. Governing Law. The parties agree that this Agreement shall be governed by, and construed and enforced in accordance with, the laws of the State of Delaware, without giving effect to the conflict of laws. -7- IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the day and year first above written. 24/7 MEDIA, INC. By: ------------------------------- ------------------------------- Name: Address: ------------------------------- ------------------------------- ------------------------------- ------------------------------- -8- EX-21.1 16 SUBSIDIARIES OF 24/7 MEDIA, INC. EXHIBIT 21.1. Subsidiaries of 24/7 Media, Inc. Intelligent Interactions Corporation EX-23.1 17 CONSENT OF KPMG PEAK MARWICK LLP Independent Auditor's Consent The Board of Directors 24/7 Media, Inc.: We consent to the use of our reports included herein related to the audits of 24/7 Media, Inc. (successor company to Interactive Imaginations, Inc.) and Interactive Holdings, LLC (successor company to Petry Interactive, Inc.) and to the reference to our firm under the heading "Experts" in the prospectus. /s/ KPMG Peat Marwick LLP ------------------------- KPMG Peat Marwick LLP New York, New York June 4, 1998 EX-23.2 18 CONSENT OF ARTHUR ANDERSEN LLP Consent of Independent Public Accountants As independent public accountants, we hereby consent to the use of our report dated May 13, 1998 on the Intelligent Interactions Corporation financial statements and to all references to our Firm included in or made a part of this 24/7 Media, Inc. Form S-1 registration statement. Arthur Andersen LLP Washington, D.C. June 1, 1998 EX-27 19 WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
5 This Schedule contains summary financial information extracted from the consolidated balance sheet as of March 31, 1998 and December 31, 1997 and the consolidated statement of operations for the three months ended March 31, 1998 and the year ended December 31, 1997. 1,000 1,000 3-MOS 12-MOS DEC-31-1998 DEC-31-1997 JAN-01-1998 JAN-01-1997 MAR-31-1998 DEC-31-1998 7,765 94 0 0 1,819 176 270 64 0 0 9,636 285 631 591 0 0 18,202 1,039 3,319 1,450 479 2,317 10,094 0 0 0 275 46 4,264 (2,727) 18,045 1,039 1,076 1,467 1,076 3,149 930 1,655 2,274 6,703 0 0 0 0 193 114 (2,295) (5,306) 0 0 (2,295) (5,306) 0 0 0 0 0 0 (2,295) (5,306) 0 0 0 0
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